-----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, Qe2CuP1ZJzU4zi9IE3+KZIBx/xDy0ykU3uADvVFgxKPLsUB4rC+vhyEsdWF0DxJW 9wFPfxf9xkBMWn1EWBwcuA== 0000950134-02-003011.txt : 20020415 0000950134-02-003011.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950134-02-003011 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FELCOR LODGING TRUST INC CENTRAL INDEX KEY: 0000923603 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 752541756 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14236 FILM NUMBER: 02594879 BUSINESS ADDRESS: STREET 1: 545 E JOHN CARPENTER FREEWAY STREET 2: SUITE 1300 CITY: IRVING STATE: TX ZIP: 75062 BUSINESS PHONE: 9724444900 MAIL ADDRESS: STREET 1: 545 E JOHN CARPENTER FREEWAY STREET 2: SUITE 1300 CITY: IRVING STATE: TX ZIP: 75062 FORMER COMPANY: FORMER CONFORMED NAME: FELCOR SUITE HOTELS INC DATE OF NAME CHANGE: 19940523 10-K 1 d95331e10-k.txt FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-14236 FelCor Lodging Trust Incorporated (Exact name of registrant as specified in its charter) MARYLAND 75-2541756 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 545 E. JOHN CARPENTER FRWY., SUITE 1300, IRVING, TEXAS 75062 (Address of principal executive offices) (Zip Code) (972) 444-4900 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK NEW YORK STOCK EXCHANGE, INC. $1.95 SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK NEW YORK STOCK EXCHANGE, INC. DEPOSITARY SHARES REPRESENTING 9% SERIES B CUMULATIVE REDEEMABLE PREFERRED STOCK NEW YORK STOCK EXCHANGE, INC.
Securities registered pursuant to Section 12(g) of the Act: NONE (Title of class) Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the common equity securities of the registrant held by non-affiliates of the registrant, as of March 18, 2002, was approximately $980 million. As of March 18, 2002, the registrant had issued and outstanding 53,042,778 shares of common stock. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's definitive Proxy Statement pertaining to the 2001 Annual Meeting of Stockholders (the "Proxy Statement") and filed or to be filed not later than 120 days after the end of the fiscal year pursuant to Regulation 14A is incorporated herein by reference into Part III. ================================================================================ FELCOR LODGING TRUST INCORPORATED INDEX
FORM 10-K REPORT ITEM NO. PAGE - -------- --------- PART I 1. Business............................................................................................1 2. Properties.........................................................................................16 3. Legal Proceedings..................................................................................25 4. Submission of Matters to a Vote of Security Holders................................................25 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters..............................26 6. Selected Financial Data............................................................................28 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............29 7A. Quantitative and Qualitative Disclosures About Market Risk.........................................48 8. Financial Statements and Supplementary Data........................................................48 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure...............48 PART III 10. Directors and Executive Officers of the Company....................................................49 11. Executive Compensation.............................................................................49 12. Security Ownership of Certain Beneficial Owners and Management.....................................49 13. Certain Relationships and Related Transactions.....................................................49 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................50
This Annual Report on Form 10-K contains registered trademarks owned or licensed by companies other than us, including but not limited to Bristol House(R), Conrad(R), Courtyard by Marriott(R), Crown Sterling Suites(R) Crowne Plaza(R), Disney(R), Doubletree(R), Doubletree Guest Suites(R), Embassy Suites Hotels(R), Fairfield Inn(R), Hampton Inn(R), Harvey Hotel(R), Hilton(R), Hilton Suites(R), Holiday Inn(R), Holiday Inn Express(R), Holiday Inn Select(R), Homewood Suites(R) by Hilton, Inter-Continental(R), Marriott(R), Sheraton(R), Sheraton Suites(R), Walt Disney World(R) and Westin(R). PART I ITEM 1. BUSINESS FelCor Lodging Trust Incorporated ("FelCor"), a Maryland corporation, is one of the nation's largest hotel real estate investment trusts, or REITs. As the sole general partner of, and the owner of greater than 85% partnership interest in, FelCor Lodging Limited Partnership ("FelCor LP"), we had ownership interests in 183 hotels at December 31, 2001, with nearly 50,000 rooms and suites. All of our operations are conducted solely through FelCor LP or its subsidiaries. At December 31, 2001, we owned a 100% interest in 150 hotels, a 90% or greater interest in entities owning seven hotels, a 60% interest in an entity owning two hotels and a 50% interest in separate unconsolidated entities that own 24 hotels. Our hotels are located in the United States (35 states) and Canada, with concentrations in Texas (41 hotels), California (19 hotels), Florida (17 hotels) and Georgia (14 hotels). We own the largest number of Embassy Suites Hotels, Crowne Plaza, Holiday Inn and independently owned Doubletree-branded hotels in the world. Thirteen of our hotels were designated as held for sale at December 31, 2001. We seek to increase operating cash flow through both internal growth and selective acquisitions, while maintaining a flexible and conservative capital structure. In addition to renovating, redeveloping and repositioning our acquired hotels, we may seek to acquire new hotel properties that will benefit from affiliation with one of the premium brands available to us through our strategic brand owner and manager relationships with Hilton Hotels Corporation ("Hilton"), Six Continents Hotels and Starwood Hotels & Resorts Worldwide Inc. ("Starwood"). In support of this strategy, on July 28, 1998, we merged Bristol Hotel Company into FelCor, acquiring its 107 primarily full-service hotels. These hotels added more than 28,000 rooms and suites to our portfolio, more than doubling our size. The merger also provided diversification, both geographically and by asset class, by adding hotels in many key markets and broadening our portfolio in the full-service, upscale and midscale hotel markets. On May 9, 2001, we entered into a merger agreement with MeriStar Hospitality Corporation ("MeriStar"), which owned 113 primarily upscale, full-service hotels. Under the terms of the merger agreement, MeriStar was to have been merged with and into us. Before the merger could be completed, MeriStar and we jointly terminated the merger on September 21, 2001. The decision to terminate the merger resulted from the September 11, 2001 terrorist attacks and their subsequent adverse impact on the financial markets in general and on the lodging industry. As a result of the merger termination in 2001, we recorded expenses of $19.9 million associated with the merger and $5.5 million of merger financing costs. REIT Modernization Act On January 1, 2001, the provisions of the REIT Modernization Act became effective. These provisions, among other things, reduced the distribution requirement for REITs from 95% of taxable income to 90% of taxable income for taxable years after 2000. In addition, these provisions allow REITs, subject to certain limitations, to own, directly or indirectly, up to 100% of the stock of a taxable REIT subsidiary ("TRS") that can engage in businesses previously prohibited to a REIT. In particular, these provisions permit hotel REITs to own a TRS that leases hotels from the REIT, rather than requiring the lessee to be a separate, unaffiliated party. However, hotels leased to a TRS still must be managed by an unaffiliated third party. The TRS provisions are complex and impose several conditions on the use of TRSs, generally to assure that TRSs are subject to an appropriate level of corporate taxation. Further, no more than 20% of a REIT's assets may consist of securities of TRSs, and no more than 25% of a REIT's assets may consist of non-qualifying assets, including securities of TRSs and other taxable subsidiaries. In addition, the TRS legislation provides that a REIT may not own more than 10% of the voting power or value of a taxable subsidiary that is not treated as a TRS. Although the TRS provisions became effective on January 1, 2001, a taxable subsidiary in existence on July 12, 1999 is grandfathered under the new provisions unless and until (1) it engages in a new line of business or acquires a substantial new asset or (2) the owning REIT acquires additional stock in the taxable subsidiary. Such existing taxable subsidiaries can be 1 converted into TRSs on a tax-free basis at any time before January 1, 2004. As a result of the TRS provisions, we were able to form or acquire one or more TRSs to own all of our existing hotel leases and to serve as the lessee for any additional hotels that we acquire. Any "profit" from leases held by one of our TRSs, after payment of the applicable corporate tax, will be available for distribution to us in the form of dividends. As a result of the passage of the REIT Modernization Act, effective January 1, 2001 we acquired 100% of DJONT Operations, L.L.C. ("DJONT"), which owned leases on 85 of our hotels, and contributed it to a TRS. In consideration, we issued 416,667 FelCor LP units, valued at approximately $10 million, and assumed DJONT's accumulated stockholders' deficit of $24.5 million. On January 1, 2001, we acquired from Six Continents Hotels the leases covering 11 hotels, terminated one additional lease in connection with the sale of the related hotel and terminated the 12 related management agreements in exchange for 413,585 shares of FelCor common stock valued at approximately $10 million. We acquired the remaining 88 hotel leases held by Six Continents Hotels on July 1, 2001. In consideration for the acquisition of these leases, we entered into long term management agreements with Six Continents Hotels with regard to these hotels, and FelCor issued to Six Continents Hotels 100 shares of common stock. Our business is conducted in one reportable segment, which is hospitality. Additional information on our business can be found in the Notes to Consolidated Financial Statements located elsewhere in this Annual Report on Form 10-K. THE INDUSTRY The United States hotel industry profitability improved each year from 1992 to 2000, its longest sustained growth in history. According to PricewaterhouseCoopers LLP's 1999 Lodging Industry Briefing and April 10, 2001 U.S. Lodging Industry Update, after a period of extended unprofitability in the late 1980's and early 1990's, during which time the increase in the supply of new hotel rooms significantly outpaced growth in room demand, lodging industry profit increased every year from 1992 through 2000. The percentage growth in room demand exceeded percentage growth in new room supply from 1992 through 1996. While 1997 and 1998 experienced the highest number of new room starts in the prior 10 years, 1999 and 2000 showed declines in new room starts of 9.2% and 17.2%, respectively, from the prior year level. According to PricewaterhouseCoopers L.L.P.'s Lodging Industry Briefing, from March 1, 2002, in 2001, supply growth slowed to 2.0% as room demand declined by 350 basis points. The nation's hotel occupancy rates declined significantly from 63.7% in 2000 to 60.3% in 2001. In 2001, the lodging industry experienced the first profit decline since 1991. However, despite the significant decline in demand in 2001, the industry still remained profitable. According to PricewaterhouseCoopers, the industry earned $16.7 billion, and that figure is expected to increase in 2002. The nation's economy slowed during the first eight months of 2001 and the lodging industry started to see a significant reduction in corporate travel. This economic decline that began in the spring of 2001 was exacerbated by the events of September 11, 2001, where aircraft hijacked by terrorists destroyed the World Trade Center Towers in New York City and damaged the Pentagon in northern Virginia. In 2001, the lodging industry experienced an unprecedented decline in business caused by a reduction in both business and leisure travel. The events of 2001 produced the hotel industry's first decline in year over year revenue per available room ("RevPAR"), since 1991. We currently expect that this decline in year over year operating levels will continue through mid-2002. We expect positive RevPAR, compared to 2001, in the second half of 2002. Smith Travel Research, a leading provider of industry data, classifies hotel chains into five distinct categories: Upper Upscale, Upscale, Midscale With Food & Beverage, Midscale Without Food & Beverage, and Economy. We remain focused on properties in the Upper Upscale (including Doubletree Guest Suites, Embassy Suites Hotels, Sheraton and Westin hotels), Upscale (including Crowne Plaza, Doubletree hotels and Homewood Suites), and Midscale With Food & Beverage (including Harvey, Holiday Inn and Holiday Inn Select hotels) categories, from which we derived approximately 97% of our revenues in 2001. 2 Smith Travel Research also categorizes hotels based upon their relative market positions, as measured by average daily rate ("ADR"), as Luxury, Upscale, Midprice, Economy and Budget. The following table contains information with respect to average occupancy, (determined by dividing occupied rooms by available rooms), ADR and RevPAR for our hotels, as well as all Upscale U.S. hotels, all Midprice U.S. hotels and all U.S. hotels as reported by Smith Travel Research for the periods indicated.
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- NUMBER OF FELCOR HOTELS .......... 183 186 188 193 73 OCCUPANCY: FelCor hotels(1) ............... 63.9% 70.4% 68.2% 68.3% 73.2% All Upscale U.S. hotels(2) ..... 61.8 65.1 64.9 65.9 67.9 All Midprice U.S. hotels(3) .... 58.4 61.7 61.1 62.0 64.9 All U.S. hotels ................ 60.1 63.7 63.1 63.8 64.5 ADR: FelCor hotels(1) ............... $ 102.18 $ 104.42 $ 100.72 $ 96.62 $ 112.47 All Upscale U.S. hotels(2) ..... 92.84 94.07 87.45 85.33 88.25 All Midprice U.S. hotels(3) .... 69.60 69.22 64.89 62.15 67.67 All U.S. hotels ................ 84.85 86.04 81.29 78.15 75.31 REVPAR: FelCor hotels(1) ............... $ 65.34 $ 73.73 $ 68.93 $ 66.02 $ 82.37 All Upscale U.S. hotels(2) ..... 57.38 69.24 56.76 56.23 59.92 All Midprice U.S. hotels(3) .... 40.65 42.71 39.65 38.53 43.91 All U.S. hotels ................ 50.99 54.81 51.29 49.86 48.44
- ---------- (1) Information is historical, including periods prior to ownership by FelCor. (2) This category includes hotels in the "upscale price level," defined as hotels with ADRs in the 70th to 85th percentiles in their respective markets. (3) This category includes hotels in the "midprice level," defined as hotels with ADRs in the 40th to 70th percentiles in their respective markets. BUSINESS STRATEGY In the current operating environment, where the lodging industry is experiencing a sharp decline in RevPAR compared to the prior year, we intend to focus on conserving capital, maximizing operating cash flow by actively overseeing the operation of our hotels by our managers, maintaining a strong balance sheet and placing ourselves in the best position possible to take advantage of opportunities that may arise in the future. We have established, and intend to maintain, strong strategic relationships with our brand owners and managers and have successfully demonstrated our ability to apply our asset management expertise to the renovation, redevelopment and rebranding of our hotels. Maintenance of Financial Flexibility During the challenging economic environment following September 11, 2001, we committed ourselves to conserving capital, maximizing operating cash flow from our hotels, maintaining a strong balance sheet and maintaining the financial flexibility to take advantage of opportunities that may arise in the future. In 2002 we have seen improving revenue trends, however, in the near term, we intend to limit our dividends and distributions to equity holders generally to not more than available cash flow after debt service and maintenance capital expenditures, to suspend the previously authorized repurchase of FelCor common stock and to restrict discretionary capital expenditures. We are in a position to repay our line of credit entirely should the need arise and have scheduled debt maturities of $13 million in 2002 and $35 million in 2003. We intend to continue to actively pursue the sale of the hotels previously designated as held for sale. Maintenance of Strong Strategic Relationships We benefit from strategic brand owner and manager relationships with Hilton (Embassy Suites Hotels, Hilton and Doubletree), Six Continents Hotels (Crowne Plaza and Holiday Inn) and Starwood (Sheraton and Westin). These relationships enable us to work effectively with our managers to maintain operating margins and maximize operating cash flow from our hotels. 3 o Hilton, which acquired Promus Hotel Corporation in 1999, has a hotel system of approximately 1,900 hotels with more than 315,000 guest rooms worldwide, and is now the largest operator of full-service, all-suite hotels in the United States. In addition to its Hilton and Conrad-branded hotels, Hilton also owns the Embassy Suites Hotels, Doubletree and Doubletree Guest Suites brands. Subsidiaries of Hilton managed 71 of our hotels at December 31, 2001. As a result of its acquisition of Promus, Hilton acquired an equity interest in us having an aggregate value of approximately $17 million at December 31, 2001, and it became a 50% partner in joint ventures with us in the ownership of 12 hotels and the holder of a 10% equity interest in certain of our consolidated subsidiaries owning six hotels. The relationship with Promus and its Embassy Suites Hotels brand provided the foundation for our initial growth. o Six Continents Hotels is the world's largest hotel company. Six Continents Hotels owns, operates or franchises more than 3,200 hotels with more than 500,000 guest rooms in nearly 100 countries around the world. Among the brands owned by Six Continents Hotels are Crowne Plaza, Holiday Inn, Holiday Inn Select, Holiday Inn Express and Inter-Continental. Subsidiaries of Six Continents Hotels, which acquired Bristol Hotels & Resorts in March 2000, managed 89 of our hotels at December 31, 2001. Six Continents Hotels also owns FelCor common stock and FelCor LP units aggregating approximately 16% of our outstanding common stock and units. o Starwood is one of the world's largest hotel operating companies. Directly and through subsidiaries, Starwood owns, leases, manages or franchises 750 properties in more than 80 countries. Our strategic alliance with Starwood, coupled with the purchase of seven Sheraton hotels in 1997, provided us with our initial entry into the upscale, full-service, non-suite hotel market. Subsidiaries of Starwood managed 11 of our hotels at December 31, 2001, is a 40% joint venture partner with us in the ownership of two hotels and a 50% joint venture partner with us in the ownership of one hotel. Hotel Renovation, Redevelopment and Rebranding We expect to continue to differentiate ourselves from many of our competitors by: o our success in upgrading, renovating and/or redeveloping our hotels to enhance their competitive position, and, in certain instances, rebranding them to improve their revenue generating capacity; and o our ongoing program for the maintenance of our upgraded hotel assets, which generally includes: -- contribution of approximately 4% of total annual room and suite revenue to a capital reserve for routine capital replacements and improvements; and -- adherence to a rigorous maintenance and repair program, resulting in the expenditure of approximately 4% of annual hotel revenues on maintenance of the hotels. We have demonstrated our ability to successfully execute renovations. Our renovation and rebranding of the 18 Crown Sterling Suites hotels, which were acquired during 1996 and 1997, achieved an overall RevPAR increase of 47.7% between 1996 and 2000. The largest single renovation project that we have completed was the Allerton Crowne Plaza hotel in Chicago, which reopened in July 1999, after having been closed for more than a year. This project received numerous awards, including Lodging Hospitality magazine's Year's Best Design competition in two categories, Bass Hotels & Resorts 1999 Newcomer of the Year award, and Chicago's Greater North Michigan Avenue Association 1999 Avenue Enhancement award. During 1998, 1999 and 2000, an aggregate of approximately $550 million in capital improvements and other capital expenditures were made to our hotels, with approximately 3% of total hotel room nights being lost in 1998, 2% in 1999 and 1% in 2000, due to renovations. We believe that our historical capital expenditures should limit the need for future major renovation expenditures. During 2001, we made capital expenditures aggregating approximately $65 million and we currently anticipate 2002 maintenance capital expenditures of between $40 and $50 million, depending upon the pace of the anticipated economic recovery. 4 HOTELS HELD FOR SALE In the second quarter of 2000, we identified 25 hotels that were considered non-strategic and announced our intention to hold these assets for sale. These hotels included most of our limited service hotels, a number of our small market Holiday Inn hotels and all of our Marriott-branded hotels. These hotels represented 8.3% of our total rooms, but only 4.2% of our total revenues at the time they were identified. Our management believes the sale of these non-strategic hotels will allow us and our brand managers to focus our efforts on our upscale and full service hotels in more strategic markets. In 2000, our board of directors approved recognition of a $63.0 million loss on assets held for sale, to reflect the difference between our book value and the estimated fair market value for these hotels. We recognized an additional $7 million loss in the fourth quarter of 2001 to reflect the deterioration of the market value for these hotels. Through December 31, 2001, we had completed the sale of four of the hotels held for sale. There was a gain of approximately $135,000 recognized on the sale of one hotel and realized no gain or loss on the sale of the other three hotels. In addition, in March 2001, we contributed eight of the hotels held for sale to a joint venture in which we retain a 50% equity interest, and an affiliate of Interstate Hotels Corporation, holds the other 50% equity interest. We contributed hotels with a book value of approximately $77 million, and received net cash proceeds of approximately $52 million. We retained a common equity interest of approximately $8 million and a $17 million preferred equity interest in the acquiring venture. As a result of these transactions, at December 31, 2001, we had 13 hotels that we continued to hold for sale. COMPETITION The hotel industry is highly competitive. Each of our hotels is located in a developed area that includes other hotel properties and competes for guests primarily with other full and limited service hotels in its immediate vicinity and secondarily with other hotel properties in its geographic market. We believe that brand recognition, location, the quality of the hotel and services provided, and price are the principal competitive factors affecting our hotels. ENVIRONMENTAL MATTERS We customarily obtain a Phase I environmental survey from an independent environmental consultant before acquiring a hotel. The principal purpose of a Phase I survey is to identify indications of potential environmental contamination for which a property owner may have liability and, secondarily, to assess, to a limited extent, the potential for environmental regulatory compliance liabilities. The Phase I surveys of our hotels were designed to meet the requirements of the then current industry standards governing Phase I surveys, and consistent with those requirements, none of the surveys involved testing of groundwater, soil or air. Accordingly, they do not represent evaluations of conditions at the studied sites that would be revealed only through such testing. In addition, their assessment of environmental regulatory compliance issues was general in scope and was not a detailed determination of the hotel's complete environmental compliance status. Similarly, the surveys did not involve comprehensive analysis of potential offsite liability. The Phase I survey reports did not reveal any environmental liability that we believe would have a material adverse effect on our business, assets or results of operations, nor are we aware of any such liability. Nevertheless, it is possible that these reports do not reveal or accurately assess all environmental liabilities and that there are material environmental liabilities of which we are unaware. We believe that our hotels are in compliance, in all material respects, with all federal, state, local and foreign laws and regulations regarding hazardous substances and other environmental matters, the violation of which would have a material adverse effect on us. We have not been notified by any governmental authority or private party of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of our current or former properties. However, obligations for compliance with environmental laws that arise or are discovered in the future may adversely affect our financial condition. 5 TAX STATUS We elected to be taxed as a REIT under the federal income tax laws, commencing with our initial taxable year ended December 31, 1994. As a REIT, we generally are not subject to federal income taxation at the corporate level on our taxable income that is distributed to our stockholders. We may, however, be subject to certain state and local taxes on our income and property. A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distribute annually at least 90% of its taxable income. In connection with our election to be taxed as a REIT, our charter imposes restrictions on the ownership and transfer of shares of our common stock. FelCor LP expects to make distributions on its units sufficient to enable us to meet our distribution obligations as a REIT. We have adopted the calendar year as our taxable year. EMPLOYEES Mr. Thomas J. Corcoran, Jr. is our President and Chief Executive Officer, and entered into an employment agreement with us in 1994 that continues in effect until December 31, 2002, and automatically renews for successive one-year terms unless terminated by either party. None of our other executive officers has an employment agreement with us. In addition to Mr. Corcoran, we had 60 other full-time employees at December 31, 2001. All persons employed in the day-to-day operation of our hotels are employees of the management companies engaged by us, and are not our employees. CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS Certain statements and analyses contained in this Annual Report on Form 10-K, in our 2001 Annual Report to Stockholders, or that may in the future be made by, or be attributable to, us, may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, and can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. All of such forward-looking statements are based upon present expectations and assumptions that may or may not actually occur. The following factors constitute cautionary statements identifying important factors, including material risks and uncertainties, with respect to such forward-looking statements that could cause actual results to differ materially from those reflected in such forward-looking statements or in our historical results. Each of the following factors, among others, could adversely affect our ability to meet the current expectations of management. TERRORIST ACTIVITIES HAVE ADVERSELY AFFECTED AND CREATED UNCERTAINTY IN OUR BUSINESS The terrorist attacks of September 11, 2001, caused a significant disruption in travel-related businesses in the United States. Consistent with the rest of the lodging industry, we have experienced substantial declines in occupancy and ADR due to the decline in travel. In 2002, we have seen improving revenue trends, however we are unable to predict with certainty when or if travel and lodging demand will be fully restored to normal levels. Military actions against terrorists, new terrorist attacks, actual or threatened, and other political events may cause a lengthy period of uncertainty that could continue to adversely affect the lodging industry, including us, as a result of customer reluctance to travel. WE HAVE A SUBSTANTIAL AMOUNT OF DEBT THAT COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION We have a substantial amount of debt. At December 31, 2001, our consolidated debt of $1.9 billion equaled 60.7% of our total market capitalization and 42.8% of our investment in hotel assets, at cost. Our decline in revenues and earnings during 2001 has adversely affected our public debt ratings and may limit our access to additional debt capital. We have incurred debt for acquisitions and to fund our renovation, redevelopment and rebranding program and our share repurchase program. 6 The share repurchase program authorizes repurchases of up to an aggregate maximum of $300 million, but was suspended in March 2001. Through December 31, 2001, we repurchased approximately 10.5 million shares of common stock under this program at an aggregate cost of approximately $189.1 million. We have not repurchased any shares of common stock in the open market since March 27, 2001. At December 31, 2001: o we had approximately $1.9 billion in consolidated debt, of which approximately $696 million was secured by mortgages or capital leases; o we had a ratio of consolidated debt (net of cash) to market capitalization of 60.7%; o we had a ratio of consolidated debt (net of cash) to investment in hotels, as defined by us, of 42.8%; and o our ratio of EBITDA to interest expense, including interest expense from unconsolidated entities, for the year then ended was 2.3-to-1. The recent economic slowdown, which began in early 2001 and which was exacerbated by the terrorist attacks of September 11, 2001, has resulted in a decline in RevPAR, compared to the prior year period. If the economic slowdown and the reduced RevPAR experienced in 2001 worsen or continue for a protracted period of time, they could have a material adverse effect on our operations and earnings, including our ability to pay dividends and service our debt. Changes in economic conditions could result in higher interest rates, thereby increasing our interest expense on our floating rate debt, which totaled $225 million at December 31, 2001 and reducing funds available for debt reduction, capital expenditures and distributions. In addition, as a consequence of the economic slowdown and the impact of the terrorist attacks on our business and the travel and lodging industries generally, the rating agencies lowered their ratings on our $1.2 billion in senior unsecured debt one level to BB- (Standard & Poor's) and Ba3 (Moody's). If the rating agencies were to lower our senior unsecured debt ratings below the current level, the interest rate on $900 million of our outstanding senior unsecured debt would increase by 50 basis points, resulting in an increase in our interest expense. Our leverage could have important consequences. For example, it could: o limit our ability to obtain additional financing, if we need it, for working capital, our renovation, redevelopment and rebranding plans, acquisitions, debt service requirements or other purposes; o require us to agree to additional restrictions and limitations on our business operations and capital structure to obtain additional or continued financing; o increase our vulnerability to adverse economic and industry conditions as well as fluctuations in interest rates; o require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations, future business opportunities, payment of dividends or other purposes; o limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and o place us at a competitive disadvantage compared to our competitors that have less debt. 7 WE MAY BE UNABLE TO REALIZE THE ANTICIPATED BENEFITS OF OUR RENOVATIONS The majority of our hotels recently have been substantially renovated, redeveloped and, in some cases, rebranded. The recently completed improvements may not achieve the results anticipated when we made the decision to invest in the improvements. CONFLICTS OF INTEREST COULD ADVERSELY AFFECT OUR BUSINESS Certain FelCor directors. Six Continents Hotels currently manages 89 of our hotels. Richard C. North, who joined FelCor's board during 1998, is the Group Finance Director of Six Continents plc, formerly Bass plc, which is the parent of Six Continents Hotels and, together with its affiliates, owns FelCor common stock and FelCor LP units aggregating approximately 16% of our outstanding common stock and units. Issues may arise under the franchise agreements and management contracts, and in the allocation of acquisition and management opportunities, that present conflicts of interest due to the relationship of Mr. North to the companies with which he is associated. As an example, in the event we enter into new or additional hotel management contracts or other transactions with Six Continents Hotels, the interests of Mr. North, by virtue of his relationship with Six Continents plc, may conflict with our interests. Any increase in management fees payable to Six Continents Hotels may decrease our profits to the benefit of Six Continents Hotels. Also, in the selection of franchises under which our hotels will be operated, Mr. North, by virtue of his relationship with Six Continents plc, may have interests that conflict with our interests. We anticipate that any director who has a conflict of interest with respect to an issue presented to the FelCor board will abstain from voting upon that issue, although he or she will have no legal obligation to do so. We have no provisions in our bylaws or charter that require an interested director to abstain from voting upon an issue. We do not expect to add provisions in our charter and bylaws to this effect. Although each director has a fiduciary duty of loyalty to us, there is a risk that, should an interested director vote upon an issue in which he or one of his affiliates has an interest, his vote may reflect a bias that could be contrary to our best interests. In addition, even if an interested director abstains from voting, the director's participation in the meeting and discussion of an issue in which he or companies with which he is associated have an interest could influence the votes of other directors regarding the issue. Acquisition of lessees. As a result of the passage of the REIT Modernization Act, beginning January 1, 2001,we were able to form or acquire TRSs to acquire or hold the lessee's interest in our existing hotel leases and to serve as lessees for any hotels acquired in the future. A TRS is a fully taxable corporation that may be owned 100% by a REIT. A TRS generally is permitted to engage in businesses, own assets and earn income that, if engaged in, owned or earned by the REIT, might jeopardize the REIT's tax status or result in the imposition of penalty taxes on the REIT. A TRS is permitted to lease hotels from the related REIT as long as it does not directly or indirectly operate or manage hotels, except through an independent hotel management company that satisfies applicable requirements under the federal income tax laws. A TRS generally is not allowed to act as a licensor or a franchisor of any brand name under which any hotel is operated. The acquisition of DJONT, one of our primary lessees, was completed effective January 1, 2001. In consideration for the acquisition of DJONT, FelCor LP issued 416,667 units of limited partnership interest valued at approximately $10 million. The acquisition of DJONT required negotiations between us and the owners of DJONT, including Mr. Corcoran and the children of Charles N. Mathewson, a director of FelCor. The interests of Mr. Corcoran and Mr. Mathewson were in direct conflict with our interests in these negotiations and, accordingly, they abstained from participation in our board's discussion and vote on this matter In December 2000, we sold one hotel and, effective January 1, 2001, completed the acquisition of leases with respect to 12 hotels that had been leased to and operated by Six Continents Hotels. In consideration for the acquisition of such leases and termination of the related management agreements, we issued 413,585 shares of our common stock valued at approximately $10 million, to Six Continents Hotels. We acquired the remaining 88 leases held by Six Continents Hotels, effective July 1, 2001. We have contributed these 8 leases to our TRSs. In consideration for these 88 leases, we issued 100 shares of our common stock and caused our subsidiaries to agree to new long-term management agreements with subsidiaries of Six Continents Hotels to manage these hotels. The acquisition of the leases held by Six Continents Hotels involved negotiations between us and Six Continents Hotels. Richard C. North, a director of FelCor, is the Group Finance Director of Six Continents plc, the parent of Six Continents Hotels and, together with its affiliates, the owner of approximately 16% of our outstanding shares and units. The interest of Six Continents plc in those negotiations was in direct conflict with our interests. Mr. North abstained from participating in any discussion or vote by our board relating to these transactions. For information regarding the management agreements entered into by us with Six Continents Hotels and others, reference is made to the description of these agreements under the caption "Management Agreements" in Item 2 to this Annual Report on Form 10-K. Adverse tax consequences to some affiliates on a sale of some hotels. Messrs. Corcoran and Mathewson may incur additional tax liability if we sell our investments in six hotels that we acquired in July 1994 from partnerships controlled by these individuals. Consequently, our interests could differ from Messrs. Corcoran's and Mathewson's interests in the event that we consider a sale of any of these hotels. Decisions regarding a sale of any of these six hotels must be made by a majority of the independent directors. WE HAVE RESTRICTIVE DEBT COVENANTS THAT COULD ADVERSELY AFFECT OUR ABILITY TO RUN OUR BUSINESS The indentures governing our existing notes and the agreements governing our line of credit contain various restrictive covenants including, among others, provisions restricting us from: o incurring indebtedness; o making distributions; o making investments; o engaging in transactions with affiliates; o incurring liens; o merging or consolidating with another person; o disposing of all or substantially all of our assets; or o permitting limitations on the ability of our subsidiaries to make payments to us. These restrictions may adversely affect our ability to finance our operations or engage in other business activities that may be in our best interest. For example, under the most restrictive of these covenants we would be limited to not more than $50 million of additional hotel acquisitions unless we meet certain other requirements. In addition, some of these agreements require us to maintain certain specified financial ratios. Our ability to comply with such ratios may be affected by events beyond our control. On November 8, 2001, we amended our unsecured line of credit. Although we were in compliance with our existing covenants prior to the amendment, it was necessary to amend the line of credit in anticipation of a continued negative RevPAR environment. The amendment allows for the relaxation of certain financial covenants through September 30, 2002, including the unsecured interest coverage, fixed charge coverage, and total leverage tests. The interest rate remains on the same floating rate basis with a tiered spread based on our debt leverage ratio, but with added tiers to reflect the higher permitted leverage. The lenders' commitments under the line of credit remain at $615 million, and we had approximately $50 million outstanding under the facility at December 31, 2001. 9 Unless our business has recovered sufficiently from the sharp declines in RevPAR experienced following the September 11 terrorist attacks, upon expiration of the relaxation in financial covenants provided by the November amendment to our line of credit, we may be unable to satisfy the original covenant requirements. In such an event, we may need to obtain further amendments from our lenders on the line of credit. We are not certain whether, to what extent, or upon what terms the lenders may be willing to continue a relaxation of the covenants. Further amendments to our line of credit may result in additional restrictions on us and may adversely affect our ability to run our business and financial affairs. These covenants and limitations under our line of credit restrict our ability to make distributions to our stockholders and to engage in certain transactions. The breach of any of these covenants and limitations could result in the acceleration of amounts outstanding under our line of credit. Our failure to satisfy any accelerated indebtedness, if in the amount of $10 million or more, could result in the acceleration of most of our other indebtedness. We may not be able to refinance or repay our debt in full under those circumstances. WE WILL ENCOUNTER INDUSTRY RELATED RISKS THAT MAY ADVERSELY AFFECT OUR BUSINESS The recent economic slowdown has had a significant adverse effect on our RevPAR performance and earnings. If it worsens or continues, the effects on our financial condition could be material. We experienced declines in RevPAR beginning in March 2001. A sharper than anticipated decline in business travel was the primary cause of the decline, which was principally reflected in decreased occupancies. This decline was exacerbated by the terrorist attacks. On a national basis, the hotel industry experienced a RevPAR decline of 7.0% for the year ended December 31, 2001. The decline in occupancy has also resulted in declines in room rates as hotels compete more aggressively for guests, both of which have had a significant adverse effect on our RevPAR and operating performance. If the economic slowdown worsens or continues for a protracted period of time, it could have a material adverse effect on our operations, earnings and financial condition. Investing in hotel assets involves special risks. We have invested in hotel-related assets, and our hotels are subject to all of the risks common to the hotel industry. These risks could adversely affect hotel occupancy and the rates that can be charged for hotel rooms, and generally include: o competition from other hotels; o construction of more hotel rooms in a particular area than needed to meet demand; o increases in energy costs and other travel expenses that reduce business and leisure travel; o adverse effects of declines in general and local economic activity; o fluctuations in our revenue caused by the seasonal nature of the hotel industry; o adverse effects of a downturn in the hotel industry; and o risks generally associated with the ownership of hotels and real estate, as discussed below. We face reduced coverages and increased costs of insurance. Following the events of September 11, 2001, certain types of coverage, such as for acts of terrorism, are unavailable or are only available at a cost that is prohibitive. In an effort to keep our cost of insurance within reasonable limits, we have not purchased terrorism insurance at the current prohibitive prices. We have also increased our deductible amounts under policies of flood, wind and general liability insurance, which increases our risk of incurring losses that are uninsured or not fully insured. Should such uninsured or not fully insured losses be substantial, they could have a material adverse impact on our operating results and cash flows. It is possible that lenders under certain of our secured loans could assert that the absence of terrorism insurance constitutes a default on our part under the loan agreements. Although we do not believe any such assertion to be justified, if a lender was successful in proving such a default, we may be required to either provide the terrorism insurance or repay the loan. 10 We have geographic concentrations that may create risks from regional economic and weather conditions. Approximately 54.4% of our hotel room revenues for the year ended December 31, 2001 were generated from hotels located in four states: California, Florida, Texas and Georgia. Additionally, we have concentrations in four major metropolitan areas, San Francisco/San Jose, Dallas, Orlando and Houston, which represent approximately 26.6% of our hotel room revenues for the year ended December 31, 2001. Therefore, adverse economic or weather conditions in these states will have a greater effect on us than similar conditions in other states. We could face increased competition. Each of our hotels competes with other hotels in its geographic area. A number of additional hotel rooms have been or may be built in a number of the geographic areas in which our hotels are located, which could adversely affect the results of operations of these hotels. An oversupply of hotel rooms could adversely affect both occupancy and rates in the markets in which our hotels are located. A significant increase in the supply of midprice, upscale and upper upscale hotel rooms and suites, if demand fails to increase proportionately, could have a severe adverse effect on our business, financial condition and results of operations. Acquisition growth opportunities have decreased. There has been substantial consolidation in, and capital allocated to, the U.S. lodging industry since the early 1990's. This generally has resulted in higher prices for hotels. The uncertainties resulting from the September 11, 2001 attacks and the resulting sharp decline in hotel occupancies, have significantly reduced the prices that buyers, generally, are currently willing to pay for hotels to less than sellers, generally, are willing to accept. In addition, the market price of our common stock during the latter part of 2001 made cost of equity capital relatively high. These conditions have resulted in fewer attractive acquisition opportunities. An important part of our historical growth strategy has been the acquisition and, in many instances, the renovation and repositioning, of hotels at less than replacement cost. Continued industry consolidation and competition for acquisitions could adversely affect our growth prospects. Currently, our line of credit covenants limit the amount we can spend on hotel purchases unless we meet certain requirements. We compete for hotel investment opportunities with other companies, some of which have greater financial or other resources than we have. Certain competitors may have a lower cost of capital and may be able to pay higher prices or assume greater risks than would be prudent for us to pay or assume. We are subject to possible adverse effects of franchise and licensing agreement requirements. Substantially all of our hotels are operated under existing franchise or license agreements with nationally recognized hotel brands. Each license agreement requires that the licensed hotel be maintained and operated in accordance with specific standards and restrictions in order to maintain uniformity within the franchisor system. Compliance with these standards could require a franchisee to incur significant expenses or capital expenditures, which could adversely affect our results of operations and ability to make payments on indebtedness. Also, changes to these standards could conflict with a hotel's specific business plan or limit our ability to make improvements or modifications to a hotel without the consent of the franchisor. If a franchise license terminates due to our failure to make required improvements, we may be liable to the franchisor for a termination payment. These termination payments vary by franchise agreement and hotel. The loss of a substantial number of franchise licenses and the related termination payments could have a material adverse effect on our business because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. The franchise agreements could also expire or terminate, with specified renewal rights, at various times. As a condition to renew, the franchise agreements could involve a renewal application process that would require substantial capital improvements, for which we would be responsible, to be made to the hotels. We are subject to the risks of brand concentration. We are subject to the potential risks associated with concentration of our hotels under a limited number of brands. A negative public image or other adverse event that becomes associated with the brand could adversely affect hotels operated under that brand. The following percentages of our hotels' room revenues are expected to be generated by hotels operated under each of the indicated brands, based on room revenues for the year ended December 31, 2001: o Embassy Suites Hotels 40.1% o Holiday Inn-branded hotels 28.6% o Crowne Plaza 11.5% 11 Should any of these brands suffer a significant decline in popularity with the traveling public, it could affect our revenues and profitability. We are subject to the risks of hotel operations. Prior to January 1, 2001, substantially all of our hotels were leased to Six Continents Hotels or DJONT under leases providing for the payment of rent based, in part, upon revenues from the hotels. Accordingly, our operating risks were essentially limited to changes in hotel revenues and to the lessees' ability to pay the rent due under the leases. As a result of the acquisition of DJONT and the leases from Six Continents Hotels, we became subject to the risk of fluctuating hotel operating expenses at our hotels, including but not limited to: o wage and benefit costs; o repair and maintenance expenses; o the costs of gas and electricity; o the costs of liability insurance; and o other operating expenses. These operating expenses are more difficult to predict and control than revenue, resulting in an increased risk of volatility in our results of operations. The lodging business is seasonal in nature. Generally, hotel revenues are greater in the second and third calendar quarters than in the first and fourth calendar quarters, although this may not be true for hotels in major tourist destinations. Revenues for hotels in tourist areas generally are substantially greater during tourist season than other times of the year. Seasonal variations in revenue at our hotels can be expected to cause quarterly fluctuations in our revenues. Quarterly earnings also may be adversely affected by events beyond our control, such as extreme weather conditions, economic factors and other considerations affecting travel. We lack control over the management and operations of our hotels. We are dependent on the ability of unaffiliated third party managers to operate and manage our hotels. In order to maintain REIT status, we cannot operate our hotels or any subsequently acquired hotels. As a result, we are unable to directly implement strategic business decisions for the operation and marketing of our hotels, such as decisions with respect to the setting of room rates, food and beverage operations and similar matters. OUR ABILITY TO GROW MAY BE LIMITED BY OUR ABILITY TO ATTRACT DEBT OR EQUITY FINANCING AND WE MAY HAVE DIFFICULTY ACCESSING CAPITAL ON ATTRACTIVE TERMS Recently, we have focused on our internal growth strategy, which includes the renovation, redevelopment and rebranding of our hotels to achieve improved revenue performance. We may not be able to fund growth solely from cash provided from operating activities because we must distribute at least 90% of our taxable income each year to maintain our status as a REIT. Consequently, we rely upon the availability of debt or equity capital to fund hotel acquisitions and discretionary capital improvements and we may be dependent upon our ability to attract debt financing from public or institutional lenders. The capital markets have been adversely affected by the occurrence of recent events, including the September 11, 2001, terrorist attacks, the ongoing war against terrorism by the United States and the bankruptcy of Enron Corp. These events, or an escalation in the anti-terrorism war or new terrorist attacks or bankruptcies in the future, could adversely affect the availability and cost of capital for our business. We cannot assure you that we will be successful in attracting sufficient debt or equity financing to fund future growth at an acceptable cost, or at all. In addition, we currently have a policy of limiting our consolidated debt to not more than 55% of our investment in hotel assets, as defined by us. This policy is a board policy only and not a requirement contained in our organizational documents. Accordingly, the policy may be modified or waived by the board at any time. Unless further waived or modified by our board of directors, this limitation could also limit our ability to incur 12 additional debt to fund our continued growth. At December 31, 2001, our consolidated debt represented approximately 42.8% of our investment in hotels, as defined by us. WE OWN AND MAY ACQUIRE INTERESTS IN HOTEL VENTURES WITH THIRD PARTIES THAT EXPOSE US TO SOME RISK OF ADDITIONAL LIABILITIES. We own, through our subsidiaries, interests in several real estate ventures with third parties. Those ventures that are not consolidated into our financial statements own a total of 24 hotels, in which we have an aggregate investment of approximately $151 million. None of our directors or officers hold any interest in any of these ventures. The ventures and hotels are subject to non-recourse mortgage loans aggregating approximately $266 million and one venture also had a full recourse loan outstanding of $440,000 at December 31, 2001, which we have guaranteed. These loans to our unconsolidated ventures are not reflected as liabilities on our consolidated balance sheet, but are summarized in Note 5 of the notes to our consolidated financial statements. The personal liability of our subsidiaries under the non-recourse loans is generally limited to the guaranty of the borrowing ventures' personal obligations to pay for the lender's losses caused by misconduct, fraud or misappropriation of funds by the ventures and other typical exceptions from the non-recourse covenants in the mortgages, such as those relating to environmental liability. We may invest in other ventures in the future that own hotels and have recourse or non-recourse debt financing. If a venture defaults under its mortgage loan, the lender may accelerate the loan and demand payment in full before taking action to foreclose on the hotel. As a partner or member in any of these ventures, our subsidiary may be exposed to liability for claims asserted against the venture, and the venture may not have sufficient assets or insurance to discharge the liability. Our subsidiaries may not legally be able to control decisions being made regarding these ventures and their hotels. In addition, the hotels in a venture may perform at levels below expectations, resulting in the potential for insolvency of the venture unless the partners or members provide additional funds. In some ventures, the partners or members may be required to make additional capital contributions. In many of the foregoing events, we may be faced with the choice of losing our investment in the venture or investing more capital in it with no guaranty of receiving a return on that investment. WE ARE SUBJECT TO POTENTIAL TAX RISKS The federal income tax laws governing REITs are complex. We have operated and intend to continue to operate in a manner that is intended to enable us to qualify as a REIT under the federal income tax laws. The REIT qualification requirements are extremely complicated, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Accordingly, we cannot be certain that we have been or will continue to be successful in operating so as to qualify as a REIT. At any time, new laws, interpretations or court decisions may change the federal tax laws relating to, or the federal income tax consequences of, qualification as a REIT. Failure to make required distributions would subject us to tax. Each year, a REIT must pay out to its stockholders at least 90% of its taxable income, other than any net capital gain. To the extent that we satisfy the applicable distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible tax if the actual amount we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws. Our only source of funds to make such distributions comes from distributions to us from FelCor LP. Accordingly, we may be required to borrow money or sell assets to make distributions sufficient to pay out enough of our taxable income to satisfy the applicable distribution requirement and to avoid corporate income tax and the 4% tax in a particular year. Failure to qualify as a REIT would subject us to federal income tax. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income. We might need to borrow money or sell hotels in order to pay any such tax. If we cease to be a REIT, we no longer would be required to distribute most of our taxable income to our stockholders. Unless our failure to qualify as a REIT were excused under federal income tax laws, we could not re-elect REIT status until the fifth calendar year following the year in which we failed to qualify. 13 Failure to have distributed earnings and profits of Bristol Hotel Company in 1998 could cause us to fail to qualify as a REIT. At the end of any taxable year, a REIT may not have any accumulated earnings and profits, described generally for federal income tax purposes as cumulative undistributed net income, from a non-REIT corporation. In connection with the merger of Bristol Hotel Company, or Bristol, with and into us in 1998, Arthur Andersen LLP prepared and provided to us its computation of Bristol's accumulated earnings and profits through the date of the merger, and we made a corresponding special distribution to our stockholders. However, the determination of accumulated earnings and profits for federal income tax purposes is extremely complex and the computations by Arthur Andersen LLP are not binding upon the Internal Revenue Service. Should the Internal Revenue Service successfully assert that Bristol's accumulated earnings and profits were greater than the amount so distributed by us, we may fail to qualify as a REIT. Alternatively, the Internal Revenue Service may permit FelCor to avoid losing its REIT status by paying a deficiency dividend to eliminate any remaining accumulated earnings and profits of Bristol. There can be no assurance, however, that we would be able to make any such required distribution or that the Internal Revenue Service would not assert loss of REIT status as the penalty for failing to distribute any accumulated earnings and profits of Bristol in 1998. A sale of assets acquired from Bristol within ten years after the merger may result in corporate income tax. If we sell any asset acquired from Bristol within ten years after our merger with Bristol, and we recognize a taxable gain on the sale, we will be taxed at the highest corporate rate on an amount equal to the lesser of: o the amount of gain that we recognize at the time of the sale; or o the amount of gain that we would have recognized if we had sold the asset at the time of the Bristol merger for its then fair market value. The sales of Bristol hotels that have been made to date have not resulted in any material amount of tax liability. If we are successful in selling the remaining hotels shown as hotels held for sale, we could incur corporate income tax with respect to the related built in gain, the amount of which cannot yet be determined. DEPARTURE OF KEY PERSONNEL, INCLUDING MR. CORCORAN, COULD ADVERSELY AFFECT OUR FUTURE OPERATING RESULTS WE WILL ENCOUNTER RISKS THAT MAY ADVERSELY AFFECT REAL ESTATE OWNERSHIP General Risks. Our investments in hotels are subject to the numerous risks generally associated with owning real estate, including among others: o adverse changes in general or local economic or real estate market conditions; o changes in zoning laws; o changes in traffic patterns and neighborhood characteristics; o increases in assessed valuation and real estate tax rates; o increases in the cost of property insurance; o governmental regulations and fiscal policies; o the potential for uninsured or underinsured property losses; o the impact of environmental laws and regulations; and o other circumstances beyond our control. Moreover, real estate investments are relatively illiquid, and we may not be able to vary our portfolio in response to changes in economic and other conditions. 14 Compliance with environmental laws may adversely affect our financial condition. Owners of real estate are subject to numerous federal, state, local and foreign environmental laws and regulations. Under these laws and regulations, a current or former owner of real estate may be liable for the costs of remediating hazardous substances found on its property, whether or not it was responsible for their presence. In addition, if an owner of real property arranges for the disposal of hazardous substances at another site, it may also be liable for the costs of remediating the disposal site, even if it did not own or operate the disposal site. Such liability may be imposed without regard to fault or the legality of a party's conduct and may, in certain circumstances, be joint and several. A property owner may also be liable to third parties for personal injuries or property damage sustained as a result of its release of hazardous or toxic substances, including asbestos-containing materials, into the environment. Environmental laws and regulations may require us to incur substantial expenses and limit the use of our properties. We could have substantial liability for a failure to comply with applicable environmental laws and regulations, which may be enforced by the government or, in certain instances, by private parties. The existence of hazardous substances on a property can also adversely affect the value of, and the owner's ability to use, sell or borrow against, the property. We cannot provide assurances that future or amended laws or regulations, or more stringent interpretations or enforcement of existing environmental requirements, will not impose any material environmental liability, or that the environmental condition or liability relating to the hotels will not be affected by new information or changed circumstances, by the condition of properties in the vicinity of such hotels, such as the presence of leaking underground storage tanks, or by the actions of unrelated third parties. Compliance with the Americans with Disabilities Act may adversely affect our financial condition. Under the Americans with Disabilities Act of 1990, all public accommodations, including hotels, are required to meet certain federal requirements for access and use by disabled persons. We believe that our hotels substantially comply with the requirements of the Americans with Disabilities Act. However, a determination that the hotels are not in compliance with that Act could result in liability for both governmental fines and payments to private parties. If we were required to make unanticipated major modifications to the hotels to comply with the requirements of the Americans with Disabilities Act, it could adversely affect our ability to pay our obligations. OUR CHARTER CONTAINS LIMITATIONS ON OWNERSHIP AND TRANSFER OF SHARES OF OUR STOCK THAT COULD ADVERSELY AFFECT ATTEMPTED TRANSFERS OF OUR COMMON STOCK. To maintain our status as a REIT, no more than 50% in value of our outstanding stock may be owned, actually or constructively, under the applicable tax rules, by five or fewer persons during the last half of any taxable year. Our charter prohibits, subject to some exceptions, any person from owning more than 9.9%, as determined in accordance with the Internal Revenue Code and the Exchange Act, of the number of outstanding shares of any class of our stock. Our charter also prohibits any transfer of our stock that would result in a violation of the 9.9% ownership limit, reduce the number of stockholders below 100 or otherwise result in us failing to qualify as a REIT. Any attempted transfer of shares in violation of the charter prohibitions will be void, and the intended transferee will not acquire any right in those shares. We have the right to take any lawful action that we believe necessary or advisable to ensure compliance with these ownership and transfer restrictions and to preserve our status as a REIT, including refusing to recognize any transfer of stock in violation of our charter. SOME PROVISIONS IN OUR CHARTER AND BYLAWS AND MARYLAND LAW MAKE A TAKEOVER OF US MORE DIFFICULT. Ownership Limit. The ownership and transfer restrictions of our charter may have the effect of discouraging or preventing a third party from attempting to gain control of us without the approval of our board of directors. Accordingly, it is less likely that a change in control, even if beneficial to stockholders, could be effected without the approval of our board. Staggered Board. Our board of directors is divided into three classes. Directors in each class are elected for terms of three years. As a result, the ability of stockholders to effect a change in control of us through the election of new directors is limited by the inability of stockholders to elect a majority of our board at any particular meeting. 15 Authority to Issue Additional Shares. Under our charter, our board of directors may issue preferred stock without stockholder action. The preferred stock may be issued, in one or more series, with the preferences and other terms designated by our board that may delay or prevent a change in control of us, even if the change is in the best interests of stockholders. We currently have outstanding 5,980,475 shares of our $1.95 Series A Cumulative Convertible Preferred Stock and 57,500 shares, representing 5,750,000 depository receipts, of our 9% Series B Cumulative Redeemable Preferred Stock. The preferred stock reduces the amount of dividends available, and has dividend, liquidation and other rights superior, to the holders of our common stock. Maryland Takeover Statutes. As a Maryland corporation, we are subject to various provisions under the Maryland General Corporation Law, including the Maryland business combination statute, that may have the effect of delaying or preventing a transaction or a change in control that might involve a premium price for the stock or otherwise be in the best interests of stockholders. Under the Maryland business combination statute, some "business combinations," including some issuances of equity securities, between a Maryland corporation and an "interested stockholder," which is any person who beneficially owns 10% or more of the voting power of the corporation's shares, or an affiliate of that stockholder, are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. Any of these business combinations must be approved by a stockholder vote meeting two separate super majority requirements unless, among other conditions, the corporation's common stockholders receive a minimum price, as defined in the statute, for their shares and the consideration is received in cash or in the same form as previously paid by the interested stockholder for its common shares. Our charter currently provides that the Maryland control share statute will not apply to any of our existing or future stock. That statute may deny voting rights to shares involved in an acquisition of one-tenth or more of the voting stock of a Maryland corporation. To the extent these or other laws are applicable to us, they may have the effect of delaying or preventing a change in control of us even though beneficial to our stockholders. ITEM 2. PROPERTIES We are the only lodging REIT that owns a diversified portfolio of nationally branded, upscale and full-service hotels managed by its strategic brand managers, which are Hilton, Six Continents Hotels, and Starwood. We are competitively positioned to deliver superior stockholder returns through a strong management team, strategic brand manager alliances, diversified upscale and full-service hotels, and value creation expertise. We consider our hotels to be premier lodging properties with respect to desirability of location, size, facilities, physical condition, quality and variety of services offered in the markets in which they are located. Our hotels are designed to appeal to a broad range of hotel customers, including frequent business travelers, groups and conventions, as well as leisure travelers. The hotels generally feature comfortable, modern guest rooms, extensive meeting and convention facilities and full-service restaurant and catering facilities. Our 183 hotels are located in 35 states and Canada, and are situated primarily in major markets near airport, suburban or downtown areas. The hotels are located in geographically diverse major markets with more than 50% of our room revenues being derived from hotels located in Texas, California, Florida and Georgia. The following table illustrates the distribution of hotels in these states. SELECTED STATE DISTRIBUTION
NUMBER OF NUMBER PERCENTAGE OF HOTELS OF ROOMS ROOM REVENUE --------- -------- ------------- Texas 41 11,139 18.2% California 19 6,033 17.3 Florida 17 5,513 11.2 Georgia 14 3,867 7.7 -- ------ ---- Total for four states 91 26,552 54.4% == ====== ====
16 Our hotels have an average of approximately 265 rooms, with eight of them having more than 500 rooms. Although obsolescence arising from age and condition of facilities can adversely effect our hotels, we have invested in excess of $600 million, in the aggregate, during the past four years to upgrade, renovate and/or redevelop our hotels to enhance their competitive position. We are committed to maintaining the high standards of our hotels and spend at least 4% of hotel revenues for maintenance and repair programs in addition to necessary capital. HOTEL BRANDS A key part of our business strategy is to have our hotels managed by one of our strategic brand-managers. Our hotels are operated under some of the nation's most recognized and respected hotel brands. We maintain strategic relationships with brand owners who also manage substantially all of our hotels. We are the owner of the largest number of Embassy Suites Hotels, Crowne Plaza, and Holiday Inn and independently owned Doubletree-branded hotels. The following tables illustrate the distribution and operating statistics of our hotels among these premier brands. BRAND DISTRIBUTION
NUMBER OF NUMBER PERCENTAGE OF HOTELS OF ROOMS ROOM REVENUE --------- -------- ------------- Embassy Suites Hotels 59 14,853 40.1 Holiday Inn-branded hotels 59 16,888 28.6 Crowne Plaza 18 5,943 11.5 Doubletree-branded hotels 13 2,657 5.7 Sheraton-branded 10 3,269 7.0 Other hotels 24 4,845 7.1 --- ------ ----- Total 183 48,465 100.0 === ====== =====
17 HOTEL OPERATING STATISTICS The following table sets forth historical occupancy, ADR and RevPAR at December 31, 2001 and 2000, and the percentage changes therein between the periods presented for the hotels in which we had an ownership interest at December 31, 2001:
OCCUPANCY (%) ---------------------------------- YEARS ENDED DECEMBER 31, ---------------------------------- % 2001 2000 VARIANCE ---- ---- -------- Embassy Suites Hotels 67.0 74.1 (9.6) Holiday Inn-branded hotels 64.3 69.0 (6.9) Crowne Plaza hotels 60.1 70.9 (15.1) Doubletree-branded hotels 65.0 70.3 (7.4) Sheraton-branded hotels 62.2 71.4 (12.9) Other hotels 58.7 63.3 (7.4) Total hotels 63.9 70.5 (9.2)
ADR (DOLLARS) ----------------------------------- YEARS ENDED DECEMBER 31, ----------------------------------- % 2001 2000 VARIANCE ---- ---- -------- Embassy Suites Hotels 127.90 127.96 0.0 Holiday Inn-branded hotels 83.41 86.44 (3.5) Crowne Plaza hotels 101.62 106.00 (4.1) Doubletree-branded hotels 104.38 105.69 (1.2) Sheraton-branded hotels 109.14 112.47 (3.0) Other hotels 78.36 81.66 (4.0) Total hotels 102.18 104.64 (2.4)
REVPAR (DOLLARS) ----------------------------------- YEARS ENDED DECEMBER 31, ----------------------------------- % 2001 2000 VARIANCE ---- ---- -------- Embassy Suites Hotels 85.66 94.78 (9.6) Holiday Inn-branded hotels 53.64 59.68 (10.1) Crowne Plaza hotels 61.12 75.13 (18.6) Doubletree-branded hotels 67.88 74.26 (8.6) Sheraton-branded hotels 67.92 80.35 (15.5) Other hotels 45.97 51.72 (11.1) Total hotels 65.34 73.73 (11.4)
Embassy Suites Hotels Embassy Suites Hotels are upscale, full-service, all suite hotels designed to attract frequent business travelers, leisure travelers and weekend guests. Embassy Suites Hotels typically offer numerous services and amenities, such as: o two-room suites, containing two telephones, a mini-refrigerator, coffee maker, microwave oven, wet bar, and two color televisions; o complimentary, cooked-to-order breakfast; o complimentary cocktails during two hours every evening, subject to local laws and regulations, in an atrium environment; and o business centers equipped with fax and copy machines. 18 Holiday Inn and Holiday Inn Select Hotels The Holiday Inn brand is positioned to attract the business and leisure traveler seeking up-to-date products and features, value and friendly service. Holiday Inn hotels typically offer a full-service restaurant and lounge, swimming pool, meeting and banquet facilities, optional fitness center and electronic locks. In-room amenities generally include a hair dryer, coffee maker and iron. The Holiday Inn name is recognized around the world, with more than 1,500 hotels currently being operated under this brand. The Holiday Inn Select hotels are focused on the business traveler. Each room offers a residential decor with a well-lit work area, including a dataport and voicemail, and in-room coffee makers. Amenities offered at the Holiday Inn Select hotels generally include full business services such as photocopying and telecopying, meeting capabilities for small to mid-size groups, exercise facilities and full-service restaurant and lounge. The Holiday Inn, Holiday Inn Select and Crowne Plaza brands are part of the family of brands owned, operated and franchised by Six Continents Hotels. Six Continents Hotels owns, operates or franchises more than 3,200 hotels with more than 500,000 guest rooms in nearly 100 countries around the world. Crowne Plaza Hotels Crowne Plaza hotels offer upscale accommodations for business and leisure travelers looking for a full range of services. Guests receive personalized attention through a wide variety of premium guest service offerings which typically include: fully appointed guest rooms with ample work areas, a full complement of business services, excellent dining choices, quality fitness facilities and comprehensive meeting capabilities. There are currently more than 150 Crowne Plaza hotels in 40 countries around the world. Doubletree and Doubletree Guest Suites Hotels Doubletree hotels and Doubletree Guest Suites are part of an upscale, full-service hotel chain which primarily serves major metropolitan areas and leisure destinations. Each property attempts to reflect the local or regional environment in its design. Typical properties offer a full-service restaurant and lounge, room service, swimming pool, health club, complete meeting and banquet facilities, oversized guest rooms and luxury amenities. Sheraton and Sheraton Suites Sheraton hotels, including Sheraton Suites, are part of Starwood, which owns the Sheraton, Westin and other brand names. There are currently more than 400 Sheraton hotels and resorts in over 70 countries. Sheraton hotels typically offer a wide variety of on-site business services, a full range of amenities and rooms that feature generous work spaces. In more than 150 locations, Sheraton Smart Rooms feature ergonomically designed chairs, ample task lighting, modem hookups and personalized voice mail, as well as printing, copying and faxing capabilities. Starwood owns, leases, manages or franchises 750 properties in over 80 countries. Other Hotels As of December 31, 2001, 29 of our hotels are operated under other brands, as follows: o Hampton Inn (7 hotels); o Holiday Inn Express (5 hotels); o Fairfield Inn (5 hotels); o Harvey Hotel (4 hotels); o Hilton Suites (1 hotel); o Courtyard by Marriott (2 hotels); o Homewood Suites (1 hotel); o Westin (1 hotel); and o Independents (3 hotels). 19 HOTEL PORTFOLIO The following table sets forth certain descriptive information regarding our hotels at December 31, 2001: Held for Investment
LOCATION FRANCHISE BRAND ROOMS/SUITES - -------- --------------- ------------ Birmingham, AL(1)........................................... Embassy Suites Hotels 242 Montgomery (East I-85), AL.................................. Holiday Inn 213 Texarkana (I-30), AR(2)..................................... Holiday Inn 210 Flagstaff, AZ............................................... Embassy Suites Hotels 119 Phoenix (Airport-44th St.), AZ.............................. Embassy Suites Hotels 229 Phoenix (Camelback), AZ..................................... Embassy Suites Hotels 233 Phoenix (Crescent), AZ(1)................................... Sheraton 342 Scottsdale (Downtown), AZ(1)(2)(3).......................... Fairfield Inn 218 Tempe (ASU), AZ(1).......................................... Embassy Suites Hotels 224 Anaheim (Disney Area), CA(1)................................ Embassy Suites Hotels 222 Burlingame (SF Airport So), CA(2)........................... Embassy Suites Hotels 339 Covina (I-10), CA(1)(3)..................................... Embassy Suites Hotels 264 Dana Point, CA.............................................. Doubletree Guest Suites 198 El Segundo (LAX Airport South), CA.......................... Embassy Suites Hotels 350 Irvine (Orange County Airport), CA.......................... Crowne Plaza 335 Milpitas, CA(1)............................................. Embassy Suites Hotels 267 Milpitas (San Jose North), CA............................... Crowne Plaza 305 Napa, CA(1)................................................. Embassy Suites Hotels 205 Oxnard (Mandalay Beach), CA................................. Embassy Suites Hotels 249 Palm Desert, CA(1).......................................... Embassy Suites Hotels 198 Pleasanton, CA.............................................. Crowne Plaza 244 Santa Barbara, CA(1)........................................ Holiday Inn 160 San Diego (On the Bay), CA(2)............................... Holiday Inn 600 San Francisco (Financial District), CA(2)................... Holiday Inn 566 San Francisco (Fisherman's Wharf), CA(2).................... Holiday Inn 584 San Francisco (Union Square), CA............................ Crowne Plaza 400 San Rafael (Marin Co.), CA(1)(3)............................ Embassy Suites Hotels 235 South San Francisco (SF Airport North), CA(1)............... Embassy Suites Hotels 312 Aurora (Denver Southeast), CO(6)............................ Doubletree 248 Avon (Beaver Creek Resort), CO.............................. Independent 72 Hartford (Downtown), CT..................................... Crowne Plaza 342 Stamford, CT(2)............................................. Holiday Inn Select 383 Wilmington, DE(6)........................................... Doubletree 244 Boca Raton, FL.............................................. Embassy Suites Hotels 263 Cocoa Beach (Oceanfront Resort), FL......................... Holiday Inn 500 Deerfield Beach, FL(1)...................................... Embassy Suites Hotels 244 Ft. Lauderdale, FL(1)....................................... Embassy Suites Hotels 359 Ft. Lauderdale (Cypress Creek), FL(1)....................... Sheraton Suites 253 Jacksonville, FL............................................ Embassy Suites Hotels 277 Kissimmee (Nikki Bird Resort), FL(2)........................ Holiday Inn 529 Lake Buena Vista (Walt Disney World), FL(2)................. Doubletree Guest Suites 229 Miami (Airport), FL(2)...................................... Crowne Plaza 304 Miami (Airport), FL(1)...................................... Embassy Suites Hotels 314 Orlando (North), FL......................................... Embassy Suites Hotels 277 Orlando (South), FL(1)...................................... Embassy Suites Hotels 244 Orlando (International Drive Resort), FL.................... Holiday Inn 652 Orlando (Airport), FL....................................... Holiday Inn Select 288 Tampa (Rocky Point), FL..................................... Doubletree Guest Suites 203 Tampa (Near Busch Gardens), FL(2)........................... Holiday Inn 395 Atlanta (Downtown), GA(1)(3)................................ Courtyard by Marriott 211 Atlanta (Airport), GA....................................... Crowne Plaza 378 Atlanta (Powers Ferry), GA(1)............................... Crowne Plaza 296 Atlanta (Buckhead), GA(1)................................... Embassy Suites Hotels 317
20
LOCATION FRANCHISE BRAND ROOMS/SUITES - -------- --------------- ------------ Atlanta (Airport), GA....................................... Embassy Suites Hotels 233 Atlanta (Perimeter Center), GA(1)(3)........................ Embassy Suites Hotels 241 Atlanta (Downtown), GA(1)(3)................................ Fairfield Inn 242 Atlanta (Airport North), GA(1).............................. Holiday Inn 493 Atlanta (Jonesboro South), GA(1)............................ Holiday Inn 180 Atlanta (Perimeter Dunwoody), GA(1)......................... Holiday Inn Select 250 Atlanta (Airport Gateway), GA............................... Sheraton 395 Atlanta (Galleria), GA(1)................................... Sheraton Suites 278 Brunswick, GA............................................... Embassy Suites Hotels 130 Columbus (Airport North), GA(2)............................. Holiday Inn 223 Chicago (Allerton), IL...................................... Crowne Plaza 443 Chicago (Lombard), IL(1)(3)................................. Embassy Suites Hotels 262 Chicago (O'Hare), IL(1)..................................... Sheraton Suites 297 Deerfield, IL(1)............................................ Embassy Suites Hotels 237 Indianapolis (North), IN(1)(3).............................. Embassy Suites Hotels 222 Overland Park, KS(1)(3)..................................... Embassy Suites Hotels 199 Lexington, KY............................................... Hilton Suites 174 Lexington, KY(1)............................................ Sheraton Suites 155 Baton Rouge, LA(1).......................................... Embassy Suites Hotels 224 New Orleans, LA(1).......................................... Embassy Suites Hotels 372 New Orleans (Chateau LeMoyne), LA(1)(2)(3).................. Holiday Inn 171 New Orleans (French Quarter), LA(1)(2)...................... Holiday Inn 374 Boston (Marlborough), MA(1)................................. Embassy Suites Hotels 229 Boston (Government Center), MA(2)........................... Holiday Inn Select 303 Baltimore (BWI), MD(6)...................................... Embassy Suites Hotels 251 Troy, MI(6)................................................. Embassy Suites Hotels 251 Bloomington, MN............................................. Embassy Suites Hotels 219 Minneapolis (Airport), MN(1)................................ Embassy Suites Hotels 311 Minneapolis (Downtown), MN.................................. Embassy Suites Hotels 218 St. Paul, MN(4)............................................. Embassy Suites Hotels 210 Kansas City (Country Club Plaza), MO(1)(2)(3)............... Embassy Suites Hotels 266 Kansas City (Northeast), MO................................. Holiday Inn 167 St. Louis (Downtown), MO.................................... Embassy Suites Hotels 297 St. Louis (Westport), MO(1)................................. Holiday Inn 318 Jackson (Downtown), MS(1)................................... Crowne Plaza 354 Jackson (North), MS(1)...................................... Holiday Inn Hotel & Suites 224 Olive Branch (Whispering Woods Hotel and Conference Center), MS............................................... Independent 179 Charlotte, NC(1)(3)......................................... Embassy Suites Hotels 274 Raleigh/Durham, NC.......................................... Doubletree Guest Suites 203 Raleigh, NC(1)(3)........................................... Embassy Suites Hotels 225 Omaha, NE................................................... Doubletree Guest Suites 189 Omaha (Central), NE......................................... Hampton Inn 132 Omaha (Southwest), NE....................................... Hampton Inn 131 Omaha (I-80), NE............................................ Holiday Inn 383 Omaha (Old Mill Northwest), NE.............................. Crowne Plaza 213 Omaha (Southwest), NE....................................... Holiday Inn Express Hotel & Suites 78 Omaha (Southwest), NE....................................... Homewood Suites 108 Parsippany, NJ(1)(3)........................................ Embassy Suites Hotels 274 Piscataway, NJ(1)........................................... Embassy Suites Hotels 225 Secaucus (Meadowlands), NJ(2)(3)............................ Embassy Suites Hotels 261 Secaucus (Meadowlands), NJ.................................. Crowne Plaza 301 Albuquerque (Mountain View), NM............................. Holiday Inn 360 Syracuse, NY................................................ Embassy Suites Hotels 215 Cleveland, OH............................................... Embassy Suites Hotels 268 Columbus, OH................................................ Doubletree Guest Suites 194 Dayton, OH(1)............................................... Doubletree Guest Suites 138 Tulsa, OK................................................... Embassy Suites Hotels 240
21
LOCATION FRANCHISE BRAND ROOMS/SUITES - -------- --------------- ------------ Philadelphia (Center City), PA(1)........................... Crowne Plaza 445 Philadelphia (Independence Mall), PA(1)..................... Holiday Inn 364 Philadelphia (Society Hill), PA(1).......................... Sheraton 365 Pittsburgh, PA(1)(2)........................................ Holiday Inn Select 251 Charleston (Mills House), SC................................ Holiday Inn 214 Greenville (Roper), SC...................................... Crowne Plaza 208 Myrtle Beach (Kingston Plantation), SC...................... Embassy Suites Hotels 255 Knoxville (Central), TN(2).................................. Holiday Inn 242 Nashville, TN............................................... Embassy Suites Hotels 296 Nashville (Opryland/Airport), TN(2)......................... Holiday Inn Select 385 Addison (North Dallas), TX(1)............................... Crowne Plaza 429 Amarillo (I-40), TX(2)...................................... Holiday Inn 247 Austin (Downtown), TX(6).................................... Doubletree Guest Suites 189 Austin (Airport North), TX(1)(3)............................ Embassy Suites Hotels 261 Austin (Town Lake), TX...................................... Holiday Inn 320 Beaumont (Midtown I-10), TX................................. Holiday Inn 190 Corpus Christi, TX(1)....................................... Embassy Suites Hotels 150 Dallas (Alpha Road), TX..................................... Bristol House 114 Dallas (Market Center), TX(1)............................... Crowne Plaza 354 Dallas (Park Central), TX(1)................................ Crowne Plaza Suites 295 Dallas (Campbell Centre), TX(6)............................. Doubletree 302 Dallas (DFW Airport South), TX.............................. Embassy Suites Hotels 305 Dallas (Love Field), TX(1).................................. Embassy Suites Hotels 248 Dallas (Market Center), TX(1)............................... Embassy Suites Hotels 244 Dallas (Park Central), TX................................... Embassy Suites Hotels 279 Dallas (Regal Row), TX(1)(3)................................ Fairfield Inn 204 Dallas (Downtown West End), TX.............................. Hampton Inn 311 Dallas, TX(1)............................................... Harvey Hotel 313 Dallas (Park Central), TX(5)................................ Sheraton 438 Dallas (Park Central), TX(5)................................ Westin 545 Houston (Near the Galleria), TX(1)(3)....................... Courtyard by Marriott 209 Houston (Medical Center), TX(1)............................. Crowne Plaza 297 Houston (Near the Galleria), TX(1)(3)....................... Fairfield Inn 107 Houston (I-10 East), TX(1)(3)............................... Fairfield Inn 160 Houston (I-10 East), TX(1)(3)............................... Hampton Inn 90 Houston (Medical Center), TX(1)(2).......................... Holiday Inn Hotel & Suites 285 Houston (International Airport), TX(1)...................... Holiday Inn 401 Houston (I-10 West), TX..................................... Holiday Inn Select 345 Houston (Near Greenway Plaza), TX(1)........................ Holiday Inn Select 355 Irving (DFW Airport North), TX(1)........................... Harvey Hotel 506 Irving (DFW Airport North), TX(1)........................... Harvey Suites 164 Midland (Country Villa), TX................................. Holiday Inn 250 Odessa (Parkway Blvd), TX................................... Holiday Inn Express Hotel & Suites 186 Odessa (Centre), TX......................................... Holiday Inn Hotel & Suites 245 Plano, TX(1)................................................ Harvey Hotel 279 Plano, TX................................................... Holiday Inn 161 San Antonio (Airport), TX(1)(2)(3).......................... Embassy Suites Hotels 261 San Antonio (Northwest), TX(1)(3)........................... Embassy Suites Hotels 217 San Antonio (Downtown), TX(2)............................... Holiday Inn 315 San Antonio (International Airport), TX..................... Holiday Inn Select 397 Waco (I-35), TX............................................. Holiday Inn 171 Salt Lake City (Airport), UT(2)............................. Holiday Inn 191 Tyson's Corner, VA (1)(3)................................... Sheraton 437 Burlington, VT(1)........................................... Sheraton 309 Cambridge, Canada........................................... Holiday Inn 139 Kitchener (Waterloo), Canada................................ Holiday Inn 182 Peterborough (Waterfront), Canada........................... Holiday Inn 155 Sarnia, Canada.............................................. Holiday Inn 151
22
LOCATION FRANCHISE BRAND ROOMS/SUITES - -------- --------------- ------------ Toronto (Yorkdale), Canada.................................. Holiday Inn 370 Toronto (Airport), Canada................................... Holiday Inn Select 444
Held for Sale
LOCATION FRANCHISE BRAND ROOMS/SUITES - -------- --------------- ------------ Boca Raton, FL.............................................. Doubletree Guest Suites 182 Davenport, IA............................................... Hampton Inn 132 Davenport, IA............................................... Holiday Inn 279 Moline, IL.................................................. Hampton Inn 138 Moline (Airport), IL........................................ Holiday Inn 216 Moline (Airport), IL........................................ Holiday Inn Express 111 Colby, KS................................................... Holiday Inn Express 72 Great Bend, KS.............................................. Holiday Inn 175 Hays, KS.................................................... Hampton Inn 116 Hays, KS.................................................... Holiday Inn 190 Salina, KS.................................................. Holiday Inn 192 Salina (I-70), KS(2)........................................ Holiday Inn Express Hotel & Suites 93 Nashville (Airport), TN..................................... Doubletree Guest Suites 138
- ---------- (1) Encumbered by mortgage debt. (2) Situated on land leased under a long-term ground lease. (3) This hotel is one of 24 hotels owned by unconsolidated entities in which we own a 50% equity interest. (4) Owned subject to a capitalized industrial revenue bond lease that expires in 2011 and permits us to purchase the fee interest at expiration for a nominal amount. (5) This hotel is one of 2 hotels owned by a joint venture in which we own a 60% equity interest. (6) This hotel is one of 6 hotels in which we own a 90% equity interest. MANAGEMENT AGREEMENTS In July 2001, we acquired the leasehold interests in 88 hotels from Six Continents Hotels. In connection with this acquisition, Six Continents Hotels assigned the leases to those hotels to our TRSs, and the TRSs executed new management agreements with Six Continents Hotels for each of the 88 hotels that was previously leased. Additionally, as a result of our acquisition of DJONT, our TRSs became parties to management agreements with subsidiaries of Hilton, including Promus Hotels, Inc. and its affiliates, DT Management, Inc. and its affiliates, and subsidiaries of Starwood, including Sheraton Operating Corporation and its affiliates. The management agreements governing the operation of 100 of our hotels that are (i) managed by Six Continents Hotels or Starwood under brands owned by them, or (ii) managed by Hilton under the Doubletree brand, contain the right and license to operate the hotels under the specified brands. No separate franchise agreements are required for the operation of these hotels. Management Fees and Performance Standards. Under the management agreements with Six Continents Hotels, the TRS lessees generally pay Six Continents Hotels a basic management fee for each hotel equal to 2% of adjusted gross revenues of the hotel plus 5% of the room revenue of the hotel for each fiscal month during the initial term and any renewal term. The basic management fees owed under the other management agreements are generally as follows: o Doubletree -- between 2% and 3% of the hotel's total sales per month; o Sheraton -- 2% of the hotel's total revenue per accounting period; and o Embassy Suites Hotels -- 2% of adjusted gross income payable monthly. 23 Under the management agreements with Six Continents Hotels, the TRS lessees are required to pay an incentive management fee based on the performance of all the managed hotels, considered in the aggregate. The incentive management fee is computed as a percentage of hotel profits in excess of specified returns to us based on our investment in the managed hotels. The management agreements with the other managers generally provide for an incentive management fee based on a percentage of the TRS lessee's net income before overhead on a hotel by hotel basis. Term and Termination. The management agreements with Six Continents Hotels generally have initial terms of 12 to 17 years. Six Continents Hotels may renew the management agreements for one additional 5-year term on mutually acceptable terms and conditions, provided the hotel meets certain performance standards. The TRSs may elect not to continue to operate the hotels under the brand beyond the expiration of the initial term, however such election will give Six Continents Hotels the right to force us to sell such hotel to it at an appraised value. The management agreements with the other managers generally have initial terms of between 10 and 20 years, and the agreements are generally renewable beyond the initial term for a period or periods of between 5 and 10 years only upon the mutual written agreement of the parties. The management agreements are generally terminable upon the occurrence of standard events of default or if the hotel subject to the agreement fails to meet certain financial expectations. Upon termination by either party for any reason the TRSs generally will pay all amounts due and owing under the management agreement through the effective date of such termination. Under the Six Continents Hotels management agreements, if we sell any individual hotel, including 11 of the 13 hotels held for sale by us, we may be required to pay Six Continents Hotels a monthly replacement management fee equal to the existing fee structure for up to one year. In addition, if a TRS breaches the agreement, resulting in a default and termination thereof, or otherwise causes or suffers a termination for any reason other than an event of default by Six Continents Hotels, the TRS may be liable for liquidated damages under the terms of the management agreement. However, if the termination results from the sale of a hotel, no such liquidated damages will be owed if the net proceeds of the sold hotel are reinvested in one or more hotels licensed by Six Continents Hotels within one year from the sale of the hotel. Assignment. Generally, neither party to the management agreements has the right to sell, assign or transfer the agreements to a third party without the prior written consent of the other party to the agreement, which consent shall not be unreasonably withheld. A change in control of either party will generally require the other's consent, which shall not be unreasonably withheld. FRANCHISE AGREEMENTS With the exception of our 100 hotels whose rights to use a brand name are contained in the management agreement governing their operations and our seven hotels that do not operate under a nationally recognized brand name, each of our hotels operates under a franchise or license agreement. Of our 76 hotels that are operated under a franchise or license agreements, 59 are operated under the Embassy Suites Hotels brand. The Embassy Suites Hotels franchise license agreements to which we are a party grant us the right to the use of the Embassy Suites Hotels name, system and marks with respect to specified hotels and established various management, operational, record-keeping, accounting, reporting and marketing standards and procedures with which the licensed hotel must comply. In addition, the franchisor establishes requirements for the quality and condition of the hotel and its furnishings, furniture and equipment and we are obligated to expend such funds as may be required to maintain the hotel in compliance with those requirements. Typically, our Embassy Suites Hotels franchise license agreements provide for payment to the franchisor of a license fee or royalty of 4% of suite revenues. In addition, we pay approximately 3.5% of suite revenues as marketing and reservation system contributions for the systemwide benefit of Embassy Suites Hotels. 24 Our typical Embassy Suites Hotels franchise license agreement provides for a term of 20 years, but we have right to terminate the license for any particular hotel on the 10th or 15th anniversary of the agreement upon payment by us of an amount equal to the fees paid to the franchisor with respect to that hotel during the two preceding years. The agreements provide us with no renewal or extension rights. The agreements are not assignable by us and a change in control of the franchisee will constitute a default on our part. In the event we breach one of these agreements, in addition to losing the right to use the Embassy Suites Hotels name for the operation of the applicable hotel, we may be liable, under, under certain circumstances, for liquidated damages equal to the fees paid to the franchisor with respect to that hotel during the three preceding years. ITEM 3. LEGAL PROCEEDINGS There is no litigation pending or known to be threatened against us or affecting any of our hotels, other than claims arising in the ordinary course of business or which are not considered to be material. Furthermore, most of these claims are substantially covered by insurance. We do not believe that any claims known to us, individually or in the aggregate, will have a material adverse effect on us, without regard to any potential recoveries from insurers or other third parties. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 25 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Our common stock is traded on the New York Stock Exchange under the symbol "FCH." The following table sets forth for the indicated periods the high and low sale prices for our common stock, as traded on that exchange.
HIGH LOW ---- --- 2000 First quarter............................................... $18.75 $16.50 Second quarter.............................................. 22.06 17.69 Third quarter............................................... 23.75 19.69 Fourth quarter.............................................. 24.50 21.50 2001 First quarter............................................... 24.94 22.14 Second quarter.............................................. 24.75 20.90 Third quarter............................................... 24.23 11.90 Fourth quarter.............................................. 17.20 12.80
STOCKHOLDER INFORMATION At March 18, 2002, we had approximately 530 holders of record of our common stock and approximately 50 holders of record of our $1.95 Series A Cumulative Convertible Preferred Stock (which is convertible into common stock). It is estimated that there were approximately 23,500 beneficial owners, in the aggregate, of our common stock and Series A Preferred Stock at that date. IN ORDER TO COMPLY WITH CERTAIN REQUIREMENTS RELATED TO OUR QUALIFICATION AS A REIT, OUR CHARTER LIMITS THE NUMBER OF SHARES OF COMMON STOCK THAT MAY BE OWNED BY ANY SINGLE PERSON OR AFFILIATED GROUP TO 9.9% OF THE OUTSTANDING COMMON STOCK. DISTRIBUTION INFORMATION We have adopted a policy of paying regular quarterly distributions on our common stock, and cash distributions have been paid on our common stock with respect to each quarter since our inception. For the fourth quarter of 2001 we reduced our dividend to $0.05 from $0.55, paid in the previous quarter. This reduction resulted from the weakness in the economy, the events of September 11 and the decline in lodging demand. The following table sets forth information regarding the declaration and payment of distributions by FelCor on its common stock during 2000 and 2001.
QUARTER TO DISTRIBUTION DISTRIBUTION PER SHARE WHICH DISTRIBUTION RECORD PAYMENT DISTRIBUTION RELATES DATE DATE AMOUNT ------------------ ------------ ------------ ------------ 2000 First quarter.................................................. 4/14/00 4/28/00 $0.55 Second quarter................................................. 7/14/00 7/31/00 $0.55 Third quarter.................................................. 10/16/00 10/31/00 $0.55 Fourth quarter................................................. 12/29/00 1/31/01 $0.55 2001 First quarter.................................................. 4/13/01 4/30/01 $0.55 Second quarter................................................. 7/13/01 7/31/01 $0.55 Third quarter.................................................. 10/15/01 10/31/01 $0.55 Fourth quarter................................................. 12/31/01 1/31/02 $0.05
26 The foregoing distributions represent approximately a 45% return of capital in 2001 and no return of capital in 2000. In order to maintain our qualification as a REIT, we must make annual distributions to our stockholders of at least 90% (95% prior to January 1, 2001) of our taxable income (which does not include net capital gains). For the years ended December 31, 2001 and December 31, 2000, we had annual distributions totaling $1.70 and $2.20 per common share, respectively, of which only $0.94 and $2.09 per share, respectively, were required to satisfy the 90% and 95% REIT distribution tests in the respective years. Under certain circumstances we may be required to make distributions in excess of cash available for distribution in order to meet these REIT distribution requirements. In that event, we presently would expect to borrow funds, or to sell assets for cash, to the extent necessary to obtain cash sufficient to make the distributions required to retain our qualification as a REIT for federal income tax purposes. We currently expect to determine the amount of each quarterly dividend based upon the operating results of that quarter, economic conditions and other operating trends. Our management currently believes that we should be able to pay an aggregate of $1.00 in dividends per common share for 2002, based upon the low end of our previously announced FFO estimates for 2002 of $147 to $174 million. However, our decision to pay common dividends will be determined each quarter, based upon the operating results of that quarter, economic conditions and other operating trends. Future distributions, if any, paid by us will be at the discretion of our board of directors and will depend on our actual cash flow, financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and such other factors as our board of directors deems relevant. ISSUANCES OF UNREGISTERED SECURITIES Effective January 1, 2001, FelCor LP issued 416,667 units of limited partnership interest valued at approximately $10 million to the equity owners of DJONT in consideration for the acquisition of DJONT. These limited partnership units are redeemable, subject to certain conditions, for shares of our common stock on a one-for-one basis. Also effective January 1, 2001, we issued 413,585 shares of our common stock valued at approximately $10 million to Six Continents Hotels in consideration for the acquisition of leases with respect to 12 hotels that had been leased to and operated by Six Continents Hotels and the termination of the related management agreements. Effective July 1, 2001, we issued 100 shares of our common stock to Six Continents Hotels in partial consideration for the acquisition of leases with respect to 88 hotels that had been leased to and operated by Six Continents Hotels. During the year ended December 31, 2001, we issued an aggregate of 6,227 shares of our common stock to holders of FelCor LP units upon redemption of a like number of units. For each of the foregoing issuances of partnership units by FelCor LP and shares of common stock by us, we relied upon the exemption from registration provided by Section 4(2) of the Securities Act as each was a transaction not involving a public offering. 27 ITEM 6. SELECTED FINANCIAL DATA The following tables set forth selected financial data for us for the years ended December 31, 2001, 2000, 1999, 1998 and 1997 that has been derived from our financial statements and the notes thereto, audited by PricewaterhouseCoopers LLP, independent accountants. This data should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 14(a), the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------- 2001(1) 2000(2) 1999 1998(3) 1997 ------------ ------------ ------------ ------------ ------------ STATEMENT OF OPERATIONS DATA: Total revenues ............................ $ 1,200,971 $ 539,964 $ 493,087 $ 332,600 $ 169,688 Net income (loss) ......................... $ (39,276) $ 61,699 $ 131,080 $ 114,839 $ 63,650 Net income (loss) applicable to common stockholders .................... $ (63,876) $ 37,017 $ 106,345 $ 93,416 $ 51,853 DILUTED EARNINGS PER SHARE: Net income (loss) applicable to common stockholders before extraordinary charge ................... $ (1.19) $ 0.74 $ 1.59 $ 1.92 $ 1.65 Net income (loss) applicable to common stockholders .................... $ (1.21) $ 0.67 $ 1.57 $ 1.86 $ 1.64 OTHER DATA: Cash distributions per common share(4) ................................ $ 1.70 $ 2.20 $ 2.20 $ 2.545 $ 2.10 Funds From Operations (5) ................. $ 183,657 $ 288,636 $ 286,895 $ 217,363 $ 129,815 EBITDA(5) ................................. $ 369,591 $ 470,861 $ 432,689 $ 306,361 $ 165,613 BALANCE SHEET DATA (AT END OF PERIOD): Total assets .............................. $ 4,088,929 $ 4,103,603 $ 4,255,751 $ 4,175,383 $ 1,673,364 Total debt, net of discount ............... $ 1,938,408 $ 1,838,241 $ 1,833,954 $ 1,594,734 $ 476,819
- ---------- (1) Includes hotel revenues and expenses with respect to 96 hotels that were leased to either DJONT or subsidiaries of Six Continents Hotels prior to January 1, 2001 and 88 hotels that were leased to Six Continents Hotels prior to July 1, 2001. Prior to the acquisition of the leases, our revenues were comprised mainly of percentage lease revenues. Accordingly, revenues, expenses and operating results for the year ended December 31, 2001, are not directly comparable to the same period in 2000. Additionally, for the year ended December 31, 2001, we recorded approximately $78 million of expenses, including lease termination costs of $36.6 million, merger termination costs of $19.9 million, merger related financing costs of $5.5 million, swap termination costs of $7.0 million, loss on hotels held for sale of $7.0 million, extraordinary loss from the write-off of deferred loan costs of $1.3 million, and abandoned project write-offs of $837,000. (2) In the second quarter of 2000, we recorded a $63.0 million loss to reflect the difference between our book value and the expected realizable value of 25 hotels in connection with our decision to sell these non-strategic hotel assets, and an extraordinary charge of $3.9 million for the write-off of deferred loan costs associated with debt retired in 2000, prior to its maturity. (3) On July 28, 1998, we completed the merger of Bristol Hotel Company's real estate holdings with and into FelCor. The merger resulted in the net acquisition of 107 primarily full-service hotels in return for approximately 31 million shares of newly issued common stock. We subsequently contributed all assets and liabilities acquired in the merger to FelCor LP, in exchange for approximately 31 million of its common units. (4) In the fourth quarter of 2001, we paid a common dividend of $0.05 per share. This reduction from the $0.55 per share quarterly dividend that we had paid since the third quarter of 1997 was prompted by the decrease in revenues resulting from the events of September 11, 2001, and the general economic downturn. In 1998, we declared a special distribution of accumulated but undistributed earnings and profits as a result of Bristol Hotel Company merging with and into FelCor, in addition to the aggregate quarterly dividends of $2.20 per common share. The amount of the distribution was $0.345 per common share. (5) A more detailed description and computation of FFO and EBITDA is contained in the "Funds From Operations and EBITDA" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 below. 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL For background information relating to us and the definitions of certain capitalized terms used herein, reference is made to the Notes to Consolidated Financial Statements of FelCor Lodging Trust Incorporated appearing elsewhere in this Annual Report on Form 10-K. The economic downturn, which started in early 2001, and the aftermath of the terrorist attacks on September 11, resulted in a sharp decline in lodging demand for 2001 and had an adverse effect on our operating results for the year. In 2001 the lodging industry experienced the worst decline in demand in the past 30 years. For the year ended December 31, 2001, our hotels' revenue per available room ("RevPAR") decreased by 11.4% compared to 2000. This decline resulted in lower revenues from our hotels and a reduction in our operating income. Other items that affected our results of operations in 2001 were the termination of the planned merger with MeriStar and the acquisition of our hotel leases. The MeriStar merger was terminated as a result of the adverse impact on the financial markets of the September 11 terrorist attacks. The acquisition of our hotel leases was made possible by the REIT Modernization Act, which became effective on January 1, 2001. We raised a net total of $500 million in new capital during 2001, through the issuance of unsecured senior notes, and reduced our borrowings under our line of credit to approximately $50 million at December 31, 2001. On November 8, 2001, we amended our unsecured line of credit. Although we were in compliance with our existing covenants prior to the amendment, it was necessary to amend the line of credit in anticipation of a continued negative RevPAR environment. The amendment allows for the relaxation of certain financial covenants through December 31, 2002, with a step-up in existing covenants on September 30, 2002, but imposes additional limitations on our ability to invest in hotels and make distributions to stockholders. FINANCIAL COMPARISON
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- % CHANGE % CHANGE 2001 2000 2001-2000 1999 2000-1999 --------- --------- --------- --------- --------- (IN MILLIONS, EXCEPT REVPAR) Revenue Per Available Room ("RevPAR").......................... $ 65.34 $ 73.73 (11.4)% $ 68.93 6.9% Funds From Operations ("FFO") .......... $ 183.7 $ 288.6 (36.3) $ 286.9 0.6 Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") .......................... $ 369.6 $ 470.9 (21.5) $ 432.7 8.9 Net income (loss) ...................... $ (39.3)(1) $ 61.7(2) (163.7) $ 131.1 (52.9)
(1) The net loss for the year ended December 31, 2001, includes $78 million of expenses consisting of merger termination costs of $20 million, merger related financing costs of $6 million, lease termination costs of $37 million, swap termination costs of $7 million, a loss on assets held for sale of $7 million, abandoned project write-offs of $837,000, and an extraordinary loss of $1 million from the write-off of deferred loan costs. (2) The net income for the year ended December 31, 2000, was reduced by a $63 million loss recognized to reflect the difference between our book value and the estimated realizable value of 25 non-strategic hotel assets that we decided to sell, and a $4 million extraordinary loss from the write-off of deferred loan costs. 29 REVPAR DECLINE Room revenues at our hotels decreased during 2001 as a result of the economic recession and the sharp decline in travel following the terrorist attacks on September 11, 2001. For the year to date period prior to September 11, 2001, our RevPAR decreased 5.1% due to a decrease in the number of occupied rooms as a percentage of available rooms ("occupancy") of 4.1 percentage points to 68.0% partially offset by the slight increase of 0.6% in average daily rate ("ADR") to $104.88. During the four week period following the tragic events of September 11, 2001, our hotels recorded average occupancy rates as low as 33.9%. During that period, we experienced a substantial number of group cancellations, resulting in a significant loss of revenue, primarily affecting our larger hotels. For the 16 weeks from September 11, 2001 to December 31, 2001, our RevPAR decreased 26.3% compared to the same period of 2000. As a result of this decline in revenue, our results from operations for the fourth quarter were significantly reduced. In response, we are actively working with the managers of our hotels to reduce operating costs as well as to provide economic incentives to individuals and business travelers in selected markets to increase demand. In addition, based on our assessment of the current operating environment and in order to conserve capital, future non-essential capital expenditure projects will be approved only as adequate funds become available. As a result of a gradual recovery in the level of travel, we have begun to see modest improvements in occupancy and ADR, though they remain below prior year levels. However, our fourth quarter results were significantly lower than the prior year period. Accordingly, we reduced the fourth quarter dividend on our common stock to $0.05 per share, resulting in aggregate dividends of $1.70 per share for the year ended December 31, 2001. For the first quarter of 2002, we currently anticipate our portfolio RevPAR will be 16% to 18% below the comparable period of the prior year. FFO is expected to be within the range of $27 to $30 million for the first quarter of 2002, and EBITDA is expected to be within the range of $74 million to $78 million for the same period. We currently anticipate that our hotel portfolio RevPAR for 2002, compared to 2001, will be flat to negative 3%. The terrorist attacks of September 11, 2001, were unprecedented. We are unable to predict with certainty if or when lodging demand and rates will return to pre-September 11 levels. We believe that the uncertainty associated with the war on terrorism and possible future terrorist attacks will continue to hamper the travel and lodging industries during much of 2002. Any additional terrorist attack may have a similar or worse effect on the lodging industry than that experienced as a result of the September 11 attacks. MERGER TERMINATION On May 9, 2001, we entered into a merger agreement with MeriStar. On September 21, 2001, MeriStar and we jointly announced the termination of the merger. The decision to terminate the merger resulted from the September 11 terrorist attacks and their subsequent adverse impact on the financial markets. As a result of the merger termination, we expensed $19.9 million associated with the merger and $5.5 million in merger financing costs for the year ended December 31, 2001. ACQUISITION OF HOTEL LEASES Under the REIT Modernization Act that became effective January 1, 2001, we are permitted to lease our hotels to our wholly-owned TRS lessees, provided that the TRS lessees engage third-party management companies to manage the hotels. We completed the acquisition of DJONT (which leased 85 of our hotels) effective January 1, 2001. In consideration for the acquisition, FelCor LP issued approximately 417,000 units of limited partnership interest, valued at approximately $10 million which, together with DJONT's accumulated deficit of $24.5 million, was recorded as a lease termination cost in the first quarter of 2001. 30 On January 1, 2001, we also acquired the leases of 12 of our hotels, together with the associated management contracts, from Six Continents Hotels, for 413,585 shares of common stock valued at approximately $10 million, of which $1.7 million was included in lease termination costs and the remainder had been previously accrued for in the loss related to hotels held for sale. Of these hotels, three have been sold, eight have been contributed to a joint venture with Interstate Hotels Corporation, or IHC, and one will be retained. Effective July 1, 2001, we acquired the remaining 88 of our hotel leases held by Six Continents Hotels in exchange for long-term management agreements. In exchange for the assignment of the leases to our wholly-owned TRS, FelCor issued 100 shares of its common stock and we entered into long-term management agreements with Six Continents Hotels covering the 88 hotels. The management fees payable to Six Continents Hotels under the new management agreements on the 88 hotels were structured so that the historical cash flows for the year ended December 31, 2000, for both FelCor and Six Continents Hotels, would have been approximately the same had the management agreements replaced the leases on January 1, 2000. These management fees, which are higher than those paid by us to other managers for comparable services, include compensation to Six Continents Hotels for both management services and the acquisition of the 88 leases. Unlike the leases, where the rent payable to us would vary only as a result of changes in hotel revenues, under the management agreements our cash flow and net income also will vary as a result of changes in the operating margins of the hotels. We entered into the transactions to acquire the leases and DJONT based upon our management's belief that, in the long term, lodging demand will exceed new supply and that operational efficiencies will increase industry-wide for a variety of reasons, including the impact of new technologies allowing lower-cost delivery of services and providing new revenue sources that are not labor-intensive, such as in-room entertainment and direct and in-room marketing to guests. In addition, we believe that our ownership of the lessees on our hotels eliminates a potential divergence of interest between the lessor, who benefits from having management maximize revenues, even at the expense of profits, and the lessee, who benefits from having management maximize profits, even at the expense of revenues. We acquired DJONT from entities controlled by Mr. Corcoran and the children of Mr. Mathewson. Because of the conflict between our interests and those of Messrs. Corcoran and Mathewson in connection with our acquisition of DJONT, our board of directors appointed a special committee of three independent directors who, with the assistance of an investment advisor, determined the price to be paid for DJONT and concluded that the transaction was fair to us from a financial point of view. Neither Mr. Corcoran nor Mr. Mathewson participated in any discussion or vote of the board of directors regarding this transaction. The acquisition of leases from Six Continents Hotels was negotiated, on an arms-length basis, by our senior management with the officers of Six Continents Hotels. Each party was represented by separate counsel. Because of his position with Six Continents plc, Mr. North abstained from participating in any discussion or vote by our board of directors relating to the acquisition of leases from Six Continents Hotels. The recent economic slowdown combined with the sharp reduction in travel following the terrorist attacks of September 11, have resulted in declines in RevPAR and in an erosion in operating margins during the year ended December 31, 2001, as compared to the same periods of 2000. So long as the operating margins for our hotels remain below the levels experienced during 2000, we expect the hotel operating results to be generally less favorable to us than the leases would have been. INSURANCE Following the events of September 11, 2001, certain types of insurance coverage, such as for acts of terrorism, are unavailable or are only available at a cost that is prohibitive. In an effort to keep our cost of insurance within reasonable limits, we have not purchased terrorism insurance at the current prohibitive prices. We have also increased our deductible amounts under policies of flood, wind and general liability insurance, which increases our risk of incurring losses that are uninsured or not fully insured. Should losses that are uninsured or not fully insured be substantial, they could have a material adverse impact on our operating results and cash flows. 31 RESULTS OF OPERATIONS THE COMPANY -- ACTUAL Comparison of the Years Ended December 31, 2001 and 2000 Prior to December 31, 2000, we leased 184 hotels to either DJONT or Six Continents Hotels and reported the lease revenue from the percentage lease agreements. Our historical revenues for 2000 represented principally rental income on leases. Expenses during this period represented specific ownership costs including real estate and property taxes, property insurance and ground leases. Effective January 1, 2001, through our TRSs, we acquired 96 of these hotel leases and, effective July 1, 2001, acquired the leases on our remaining 88 hotels, assuming all operating risks and rewards of these 184 hotels. As a result of acquiring these leases, we reported hotel operating revenues and expenses. Our expenses included all hotel operating costs including management fees, salary expenses, hotel marketing, utilities, and food and beverage costs, in addition to ownership costs. Accordingly, operating results for the year ended December 31, 2001, are not directly comparable to the same period in 2000. For the year ended December 31, 2001, we recorded total revenues of $1.2 billion compared to $540 million for the year ended December 31, 2000. The increase in total revenues of $661 million is principally associated with reporting hotel operating revenues in 2001 rather than percentage lease revenue reported in the previous year. The 96 hotels acquired from DJONT contributed approximately $788 million in hotel operating revenue in 2001, compared to $277 million in percentage lease revenue for 2000. The 88 hotels acquired July 1, 2001 from Six Continents Hotels contributed approximately $115 million in percentage lease revenue and $295 million in hotel operating revenue, following the acquisition of these leases, compared to $260 million in percentage lease revenue for these same hotels in 2000. Total operating expense increased $814 million for the year ended December 31, 2001, over the same period in 2000, primarily as a result of the inclusion of hotel operating expenses, management fees and other property related costs of $711 million, which were not included in the same period of 2000 prior to our acquisition of the hotel leases. Also included in total operating expenses for 2001 are lease termination costs; merger termination costs; depreciation; taxes, insurance and lease expense; and corporate expenses. Taxes, insurance and lease expense increased by $49 million for year ended December 31, 2001, over 2000. The majority of this increase is related to percentage lease expense paid to unconsolidated ventures owning hotels whose operations were acquired with the acquisition of DJONT. We included in operating expenses $37 million of costs associated with the acquisition of DJONT and the Six Continents Hotels leases, and $20 million of expenses associated with the termination of the MeriStar merger. We also incurred $6 million in merger related financing costs related to the $300 million in senior debt that was repaid in October as a result of the termination of the MeriStar merger. In connection with the issuance of favorably priced fixed rate debt, and the prepayment of floating rate debt, we terminated $250 million of interest rate swaps, resulting in a $7 million swap termination cost. In June 2000, we announced our intention to sell 25 non-strategic hotels and, in 2000, recorded an expense of $63 million representing the difference between the net book value of these hotels and their estimated net proceeds from sale. In 2001, an additional $7 million loss provision was recorded related to the remaining 13 hotels held for sale. We continue to actively market the remaining hotels held for sale. Equity in income from unconsolidated entities decreased $8 million in 2001, compared to 2000. The principal reasons for the decrease in 2001 were a gain of $4 million recorded in 2000 from the development and sale of condominiums by an entity in which we own a 50% equity interest and a decline in percentage lease revenue in 2001 from these unconsolidated entities related to a 11.2% decline in RevPAR for the hotels owned by them. 32 Minority interests decreased $16 million in 2001, compared to 2000. This decrease in minority interest principally reflects FelCor LP's partners' share of our net loss of $64 million in 2001. We recorded a net loss applicable to common stockholders of $64 million in 2001, compared to a net income of $37 million in 2000. The principal components of the loss in 2001 were the decrease in hotel RevPAR of 11.4%, contraction of hotel operating margins principally associated with the decline in RevPAR, costs of terminating the MeriStar merger of $20 million, merger financing costs of $6 million, lease termination costs of $37 million associated with acquiring hotel leases, swap termination costs of $7 million associated with repayment of variable rate debt, and a loss on assets held for sale of $7 million. Comparison of the pro forma years ended December 31, 2001 and 2000 Between January 1 and July 1, 2001, we acquired the operating leases covering all of our hotels and contributed them to our TRSs. As the leases were acquired, we began receiving and recording direct hotel revenues and expenses, rather than percentage lease revenue. Consequently, a comparison of historical results for the year ended December 31, 2001 to the year ended December 31, 2000 may not be as meaningful as a discussion of pro forma results. Accordingly, we have included a discussion of the comparison of the pro forma results of operations. The pro forma results of operations for the years ended December 31, 2001 and 2000 assumes that the following occurred on January 1, 2000: o Our acquisition of DJONT for 416,667 units of limited partnership interest in FelCor LP valued at approximately $10 million; o Our acquisition of 12 hotel leases, together with their associated management contracts, from Six Continents Hotels for 413,585 shares of our common stock valued at approximately $10 million; and o Our acquisition of the remaining 88 hotel leases held by Six Continents Hotels. FELCOR LODGING TRUST INCORPORATED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 (UNAUDITED, IN THOUSANDS)
PRO FORMA PRO FORMA 2001 2000 ------------ ------------ Total revenues ......................................................... $ 1,442,974 $ 1,667,270 Total operating expenses ............................................... 1,261,163 1,402,018 Merger termination costs ............................................... 19,919 ------------ ------------ Operating income ....................................................... 161,892 265,252 Interest expense, net: Recurring financing ................................................. 158,343 156,712 Merger related financing ............................................ 5,486 Swap termination expense ............................................... 7,049 Loss on assets held for sale ........................................... 7,000 63,000 ------------ ------------ Income (loss) before equity in income from unconsolidated entities, minority interests, gain on sale of assets and extraordinary items .. (15,986) 45,540 Equity in income from unconsolidated entities .......................... 7,346 11,484 Minority interests .................................................. 1,457 (7,469) Gain on sale of assets .............................................. 3,417 4,388 ------------ ------------ Net income (loss) before extraordinary items ........................... (3,766) 53,943 Preferred dividends .................................................... (24,600) (24,682) ------------ ------------ Net income (loss) applicable to common shareholders before extraordinary items ............................................... $ (28,366) $ 29,261 ============ ============
33 FELCOR LODGING TRUST INCORPORATED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 (UNAUDITED, IN THOUSANDS)
FELCOR HISTORICAL PRO FORMA 2001 ADJUSTMENTS 2001 ------------ ------------ ------------ Total revenues ......................................................... $ 1,200,971 $ 242,003(a) $ 1,442,974 Total operating expenses ............................................... 1,059,226 201,937(b) 1,261,163 Merger termination costs ............................................... 19,919 19,919 ------------ ------------ ------------ Operating income ....................................................... 121,826 40,066 161,892 Interest expense, net: Recurring financing ................................................. 158,343 158,343 Merger related financing ............................................ 5,486 5,486 Swap termination expense ............................................... 7,049 7,049 Loss on assets held for sale ........................................... 7,000 7,000 ------------ ------------ ------------ Income (loss) before equity in income from unconsolidated entities, minority interests, gain on sale of assets and extraordinary items .. (56,052) 40,066 (15,986) Equity in income from unconsolidated entities .......................... 7,346 7,346 Minority interests .................................................. 7,283 (5,826)(c) 1,457 Gain on sale of assets .............................................. 3,417 3,417 ------------ ------------ ------------ Net income (loss) before extraordinary items ........................... (38,006) 34,240 (3,766) Preferred dividends .................................................... (24,600) (24,600) ------------ ------------ ------------ Net income (loss) applicable to common shareholders before extraordinary items ............................................... $ (62,606) $ 34,240 $ (28,366) ============ ============ ============
34 FELCOR LODGING TRUST INCORPORATED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 (UNAUDITED, IN THOUSANDS)
FELCOR HISTORICAL PRO FORMA 2000 ADJUSTMENTS 2000 ------------ ------------- ------------- Total revenues ......................................................... $ 539,964 $ 1,127,306(a) $ 1,667,270 Total operating expenses ............................................... 265,634 1,136,384(b) 1,402,018 ------------ ------------- ------------- Merger termination costs Operating income ....................................................... 274,330 (9,078) 265,252 Interest expense, net: Recurring financing ................................................. 156,712 156,712 Merger related financing Swap termination expense Loss on assets held for sale ........................................... 63,000 63,000 ------------ ------------- ------------- Income (loss) before equity in income from unconsolidated entities, minority interests, gain on sale of assets and extraordinary items .. 54,618 (9,078) 45,540 Equity in income from unconsolidated entities .......................... 14,820 (3,336)(d) 11,484 Minority interests .................................................. (8,262) 793(c) (7,469) Gain on sale of assets .............................................. 4,388 4,388 ------------ ------------- ------------- Net income (loss) before extraordinary items ........................... 65,564 (11,621) 53,943 Preferred dividends .................................................... (24,682) (24,682) ------------ ------------- ------------- Net income (loss) applicable to common shareholders before extraordinary items ............................................... $ 40,882 $ (11,621) $ 29,261 ============ ============= =============
35 Pro forma numbers presented represent our historical revenues and expenses, except as described by pro forma changes below. Pro forma adjustments: (a) Total revenue adjustments consist of the changes in our historical revenue from the elimination of historical percentage lease revenue and the addition of historical hotel operating revenues. (b) Total operating expense adjustments consist of the changes in our historical operating expense from the elimination of historical lease termination costs in 2001, the addition of historical hotel operating expenses and the elimination of percentage lease expense. Additionally, for the 88 hotels managed by Six Continents Hotels, the adjustments record management fees at their new contractual rates and the elimination of historical franchise fees, which are included in management fees. (c) Represents FelCor LP's minority interest holders' share of revenue and expense adjustments. (d) Equity in income from unconsolidated entities represents historical equity in income from unconsolidated entities after the elimination in 2000 of $3 million related to minority interest expense on DJONT. Pro forma revenues decreased $224 million in 2001, primarily as a result of the continuing economic recession and disruptions in business and leisure travel patterns following the terrorist attacks on September 11, 2001. As a result of these events, both business and leisure travel declined significantly during the year ending December 31, 2001, compared to the same pro forma period in 2000. During 2001 our hotels' RevPAR decreased 11.4%, comprised of a decrease in occupancy of 6.6 percentage points to 63.9% and a decline in ADR of 2.4% to $102.18. During the four-week period following the terrorist attacks on September 11, 2001, our hotels recorded average occupancy rates as low as 33.9%. However, our Hotel RevPAR performance improved throughout the fourth quarter, with RevPAR decreases compared to the prior year periods, of 25.2% in October, 23.6% in November, and 18.8% in December. We continue to see improvements in both occupancy and ADR, although they remain below prior year levels. Pro forma operating expenses decreased $141 million in 2001 compared to 2000 but pro forma operating expense as a percentage of total revenue increased from 84% to 89%. The principal reason for the increased operating expense as a percentage of total revenue was a 260 basis point drop in hotel operating margins (gross operating profit less franchise and management fees). This margin compression primarily relates to increased labor costs, the cost of frequent guest programs and utility costs as a percentage of total revenue. The pro forma increase in costs as a percentage of pro forma revenue is principally related to the decrease in hotel revenue previously discussed. We have been actively working with our managers to implement cost cutting programs at the hotels to stabilize the hotel operating profits. These measures include reducing labor costs, streamlining staffing, and consolidating operations by closing unused floors in hotels when possible. Pro forma interest expense net of interest income increased $7 million. The principal reason for the increase is $6 million of merger related financing costs. Pro forma equity in income from unconsolidated entities decreased $4 million, principally as the result of the decreased hotel revenues previously discussed. Pro forma minority interest expense was reduced by $8 million. This principally represents the allocation of the pro forma 2001 losses to our minority interest holders in FelCor LP. Comparison of the Years Ended December 31, 2000 and 1999 For the year ended December 31, 2000, we recorded net income of $62 million compared to $131 million for the year ended December 31, 1999. Included in expense for the year ended December 31, 2000, is an expense of $63 million related to 25 non-strategic hotels that we identified as held for sale. The expense represents the difference between the net book value of the hotels and their estimated net realizable value. Net income excluding the reserve would have been $125 million. 36 Our total revenues increased $47 million to $540 million for the year ended December 31, 2000, compared to $493 million for the year ended December 31, 1999. This increase is principally from increased percentage lease revenues of $46 million, which increased to $537 million from $491 million in the prior year. Changes in our hotels' room and suite revenues significantly affect us because our principal source of revenue historically has been rent payments from the lessees under the percentage leases. The percentage leases provide for rent based on a percentage of room and suite revenue, food and beverage revenue, food and beverage rents, and in some instances, other hotel revenues. During 2000 and 1999, percentage lease revenue derived from room and suite revenue represented 90% and 91% of total percentage lease revenue, respectively. RevPAR, which is a measure of room and suite revenue, increased by 7.0% in 2000 for all of our hotels. This increase in RevPAR resulted from increases in both occupancy and ADR. For the year ended December 31, 2000, ADR increased by 3.7% over the prior year and Occupancy increased by 2.2 percentage points. Our ability to achieve increases in room and suite revenue and RevPAR at our hotels is affected, among other things, by overall demand in the marketplace, room supply and the success of our renovation, redevelopment and rebranding program. We had 59 hotels that had undergone renovation, redevelopment or rebranding in either 1999 or 2000, that are identified by us as non-comparable hotels. The non-comparable hotels reflected increases in RevPAR of 10.1%, which was greater than the results for hotels that had not recently undergone renovation. The Company generally seeks to improve those hotels that management believes can achieve increases in room and suite revenue and RevPAR as a result of renovation, redevelopment and rebranding. Since the beginning of 1998 through 2000, we had spent nearly $550 million in capital improvements to our hotels. Management attributes much of the improvement in RevPAR to these capital improvements. Operating expenses increased $26 million in the year ended December 31, 2000, to $266 million from $239 million in 1999. The principal components of the increase in operating expense were taxes, insurance and lease expense and depreciation expense. Taxes, insurance and lease expense increased by $16 million in 2000, compared to the prior year, and increased as a percentage of total revenue from 15.6% to 17.2%. This increase in expenses was principally from increases in real estate and personal property taxes. Our real estate and personal property taxes increased from higher assessed values generally resulting from the major renovations completed over the past three years. Depreciation expense increased by $8 million in 2000, compared to the prior year, and decreased as a percentage of total revenue from 31.0% to 29.8%. Depreciation expense increased principally as a result of additional depreciation related to fixed asset additions of $95 million in 2000 and $222 million in 1999. Interest expense, net increased by $34 million for the year ended December 31, 2000, compared to 1999, and increased as a percentage of total revenue from 24.9% to 29.0%. This increase is principally the result of the following items: o Our average debt outstanding increased in 2000 by approximately $197 million over the prior year. The increase in average debt resulted principally from stock repurchases in 2000 of approximately $87 million and capital expenditures in 2000 totaling approximately $101 million. o The average interest rate on our indebtedness increased from about 7% in 1999 to nearly 8% in 2000. o We capitalized interest related to major renovations of approximately $5 million in 1999 but, because of reduced renovation activity in 2000, we had only $1 million of interest capitalized in 2000. In 2000 we recorded a loss on assets held for sale of $63 million. We identified for sale 25 non-strategic hotels and recorded a loss representing the difference between the net book value of these hotels compared to the anticipated net sales proceeds. 37 Equity in income from unconsolidated entities increased by $6.3 million in 2000 compared to 1999. The principal reasons for this increase in 2000 were a $3.7 million gain recorded in 2000 from the development and sale of the Brighton Beach condominiums at Kingston Plantation in Myrtle Beach, South Carolina, by an entity in which we own a 50% equity interest and the operations of a hotel in which we acquired a 50% equity interest in the fourth quarter of 1999. We also recorded gains on the sale of two hotels of $2.6 million and $1.8 million for the sale of excess land during the year ended December 31, 2000 and an extraordinary charge of $3.9 million for the write-off of deferred loan costs associated with debt that was retired in 2000, prior to its maturity. Funds From Operations and EBITDA We consider FFO and EBITDA to be key measures of a REIT's performance and should be considered along with, but not as an alternative to, net income and cash flow as a measure of our operating performance and liquidity. The White Paper on Funds From Operations approved by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") defines FFO as net income or loss (computed in accordance with GAAP), excluding gains or losses from extraordinary items and sales of properties, plus real estate related depreciation and amortization, after comparable adjustments for the applicable portion of these items related to unconsolidated entities and joint ventures. We believe that FFO and EBITDA are helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating activities, financing activities and investing activities, they provide investors with an indication of the ability of the REIT to incur and service debt, to make capital expenditures, to pay dividends and to fund other cash needs. We compute FFO in accordance with standards established by NAREIT, except that we add back lease termination costs, merger termination costs, merger financing costs, abandoned projects, provision for losses on hotels held for sale and interest rate swap termination expense to derive FFO. This may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition, that interpret the current NAREIT definition differently than we do or that do not adjust FFO for lease termination costs, merger termination costs, merger financing costs, abandoned projects, provision for losses on hotels held for sale and interest rate swap termination expense. FFO and EBITDA do not represent cash generated from operating activities as determined by GAAP, and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor does it necessarily reflect the funds available to fund our cash needs, including our ability to make cash distributions. FFO and EBITDA may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions, and other commitments and uncertainties. 38 The following table details the computation of FFO (in thousands):
YEARS ENDED DECEMBER 31, ---------------------------------------- 2001 2000 1999 ---------- ---------- ---------- FUNDS FROM OPERATIONS (FFO): Net income (loss) ............................................................ $ (39,276) $ 61,699 $ 131,080 Gain on sale of hotel ................................................... (2,595) Extraordinary charge from write-off of deferred financing fees ...................................................... 1,270 3,865 1,113 Provision for losses on hotels held for sale ............................ 7,000 63,000 Abandoned projects ...................................................... 837 Swap termination expense ................................................ 7,049 Lease termination costs ................................................. 36,604 Merger costs: Termination costs .................................................. 19,919 Financing costs .................................................... 5,486 Series B preferred dividends ............................................ (12,937) (12,937) (12,937) Depreciation ............................................................ 157,692 160,745 152,948 Depreciation from unconsolidated entities ............................... 10,881 10,167 9,995 Minority interest in FelCor LP. ......................................... (10,868) 4,692 4,696 ---------- ---------- ---------- FFO .......................................................................... $ 183,657 $ 288,636 $ 286,895 ========== ========== ========== Weighted average common shares and units outstanding (1) ....................................................... 66,675 67,239 75,251 ========== ========== ==========
The following table details the computation of EBITDA (in thousands):
YEARS ENDED DECEMBER 31, ---------------------------------------- 2001 2000 1999 ---------- ---------- ---------- EBITDA: Funds from Operations ........................................................... $ 183,657 $ 288,636 $ 286,895 Interest expense ........................................................... 161,226 158,620 125,435 Interest expense of unconsolidated entities ................................ 9,678 9,188 6,729 Amortization expense ....................................................... 2,093 1,480 693 Series B preferred dividends ............................................... 12,937 12,937 12,937 ---------- ---------- ---------- EBITDA .......................................................................... $ 369,591 $ 470,861 $ 432,689 ========== ========== ==========
(1) Weighted average common shares and units outstanding are computed including dilutive options, unvested stock grants, and assuming conversion of Series A preferred stock to common stock. 39 LIQUIDITY AND CAPITAL RESOURCES Our principal source of cash to meet our cash requirements, including distributions to stockholders and repayments of indebtedness, is from the results of operations of our hotels. For the year ended December 31, 2001, net cash flow provided by operating activities, consisting primarily of hotel operations, was $131 million and FFO was $184 million. We currently expect that our operating cash flow will be sufficient to fund our continuing operations, including our required capital expenditures, debt service obligations and distributions to shareholders required to maintain our REIT status. However, due to the sharp reduction in travel following the terrorist attacks of September 11 and the resultant drop in RevPAR and profits from our hotel operations, we plan to limit distributions to holders of our common stock to our available cash flow. Accordingly, distributions to holders of common stock may be significantly reduced or possibly eliminated in future periods. Recent events, including the terrorist attacks of September 11, 2001, the ongoing war against terrorism by the United States and the bankruptcy of Enron Corp., have had an adverse impact on certain capital markets. These events, an escalation in the anti-terrorism war, new terrorist attacks or additional bankruptcies could further adversely affect the availability and cost of capital for our business. In addition, should the anticipated recovery of the overall economy, and of the lodging industry, fail to occur or be delayed significantly, that too could adversely affect our operating cash flow and the availability and cost of capital for our business. For example, should any such events result in a reduction in our current debt ratings by Moody's and Standard & Poor's, the interest rates payable under $900 million of our outstanding unsecured senior notes would be increased by 50 basis points. Prior to January 1, 2001, substantially all of our hotels were leased to third parties under leases providing for the payment of rent based, in part, upon revenues from the hotels. Accordingly, our risks were essentially limited to changes in hotel revenues and to the lessees' ability to pay the rent due under the leases. On January 1, 2001, we acquired the leaseholds of 96 of our hotels and on July 1, 2001, we acquired our remaining 88 hotel leases. As a result of these acquisitions, we also became subject to the risks of fluctuating hotel operating margins at our hotels, including but not limited to wage and benefit costs, repair and maintenance expenses, utilities, liability insurance, and other operating expenses which can fluctuate disproportionately to revenues. These operating expenses are more difficult to predict and control than percentage lease revenue, resulting in an increased risk of volatility in our results of operations. The recent economic slowdown and the sharp drop in occupancy following the terrorist attacks of September 11 resulted both in declines in RevPAR and an erosion in operating margins during the year ended December 31, 2001, compared to 2000. If the declines in hotel RevPAR and/or operating margins worsen or continue for a protracted time, they could have a material adverse effect on our operations and earnings. On May 9, 2001, we entered into a merger agreement with MeriStar. On September 21, 2001, MeriStar and we jointly announced the termination of the merger. The decision to terminate the merger resulted from the September 11 terrorist attacks and the subsequent disruption in the financial markets. As the result of the merger termination, we recorded expenses aggregating $19.9 million associated with the merger and recognized $5.5 million of merger financing costs. On January 11, 2001, we completed the private placement of $100 million in 9 1/2% senior unsecured notes that mature in September 2008. These notes were issued at a premium to yield an effective rate of 9 1/8%. The proceeds were used initially to pay down our line of credit. In October 2001, we exchanged the $100 million of privately placed senior notes for notes with identical terms that were registered under the Securities Act of 1933. In March 2001, we contributed eight of our hotels held for sale to a joint venture in which one of our subsidiaries holds a 50% equity interest, and a subsidiary of IHC holds the other 50% equity interest. Another subsidiary of IHC manages these hotels. Pursuant to the joint venture agreement, IHC contributed $8.1 million to the new venture. The venture closed on a non-recourse mortgage loan of approximately $52 million with cash proceeds going to us. In addition to our 50% equity interest, we retained a preferred interest of approximately $17 million in the venture and also made a loan of approximately $4.2 million to IHC, secured by its interest in the venture. 40 On June 4, 2001, we completed the private placement of $600 million in 8 1/2% senior unsecured notes that mature in 2011. Approximately $315 million of the proceeds were placed in escrow, pending the closing or termination of the merger with MeriStar. In October 2001, as the result of the merger termination, in accordance with the requirements of the indenture governing the notes, we redeemed $300 million in principal amount of these notes. The redemption price was 101% of the principal amount redeemed plus accrued interest and was paid out of the $315 million in escrowed funds. In October 2001, we exchanged the remaining privately placed notes for notes with identical terms that were registered under the Securities Act of 1933. In June 2001, in connection with the issuance of fixed rate senior notes and the subsequent prepayment of floating rate debt, we terminated $200 million of interest rate swaps, resulting in a $4.8 million swap termination cost recorded in the second quarter. On December 3, 2001, we completed the private placement of $100 million in 9 1/2% senior unsecured notes that mature in September 2008. These notes were issued at a discount to yield 9.6%. The proceeds were used initially to pay down our line of credit. In connection with the issuance of these notes and the prepayment of floating rate debt, we terminated $50 million of interest rate swaps resulting in a $2.2 million swap termination cost recorded in the fourth quarter. On July 26, 2001, we entered into an amended and restated credit agreement, pursuant to which we obtained an increase in our line of credit from $600 million to $615 million. The maturity of the line of credit was also extended from August 1, 2003, to October 31, 2004, but we have the right to extend the maturity date for two consecutive one-year periods, subject to certain conditions. On November 8, 2001, we further amended our unsecured line of credit. Although we were in compliance with our existing covenants prior to the amendment, it was necessary to amend the line of credit in anticipation of a continued negative RevPAR environment. The amendment allows for the relaxation of certain financial covenants through December 31, 2002, with a step-up in covenants in September 30, 2002, including the unsecured interest coverage, fixed charge coverage, and total leverage tests. The interest rate remains on the same floating rate basis with a tiered spread based on our debt leverage ratio, but with added tiers to reflect the higher permitted leverage. The lenders' commitments under the line of credit remain at $615 million, and we had approximately $50 million outstanding under the facility at December 31, 2001. In addition to the financial covenants, our line of credit includes certain other affirmative and negative covenants, including: restrictions on our ability to create or acquire wholly-owned subsidiaries, restrictions on the operation/ownership of our hotels, limitations on our ability to lease property or guarantee leases of other persons, limitations on our ability to make restricted payments, limitations on our ability to merge or consolidate with other persons, issue stock of our subsidiaries and sell all or substantially all of our assets, restrictions on our ability to construct new hotels or acquire hotels under construction, limitations on our ability to change the nature of our business, limitations on our ability to modify certain instruments, limitations on our ability to create liens, limitations on our ability to enter into transactions with affiliates and limitations on our ability to enter into joint ventures. Under the most recent amendment to our line of credit, we agreed to certain more stringent limitations through September 30, 2002. After January 1, 2002, we may acquire hotel properties and make joint venture investments, subject to compliance with debt limitations, but with flexibility to make at least $50 million of acquisitions and $20 million of joint venture investments, subject to increases under certain circumstances. Also, we may be limited in making discretionary capital expenditures through September 30, 2002, except for the expansion or renovation of our existing hotels in an aggregate amount of $20 million, subject to an increase under certain circumstances. At December 31 2001, we were in compliance with all of these covenants. Unless our business has recovered sufficiently from the sharp declines in RevPAR experienced following the September 11 terrorist attacks, upon expiration of the relaxation in financial covenants provided by the November amendment to our line of credit, we may be unable to satisfy the original covenant requirements. In such an event, we may need to obtain further amendments from our lenders on the line of credit. We are not certain whether, to what extent, or upon what terms the lenders may be willing to continue a relaxation of the covenants. Further amendments to our line of credit may result in additional restrictions on 41 us and may adversely affect our ability to run our business and financial affairs. At December 31, 2001, we had, and currently have, sufficient cash on hand to repay our line of credit borrowings in full. Failure to satisfy any of the financial or other covenants under our line of credit would constitute an event of default, notwithstanding our ability to meet our debt service obligations. Other events of default under our line of credit include, without limitation, a default in the payment of other indebtedness of $10 million or more, bankruptcy and a change of control. Our management currently anticipates that we will meet our financial covenants under the RevPAR guidance provided by us at our fourth quarter earnings conference call on February 1, 2002. For the first quarter of 2002, we currently anticipate that our portfolio RevPAR will be 16% to 18% below the comparable period of the prior year. FFO is expected to be within the range of $27 to $30 million for the first quarter of 2002, and EBITDA is expected to be within the range of $74 million to $78 million for the same period. The RevPAR decline for 2002 compared to the same period in 2001, was approximately 21.5% for January 2002, 15.5% for February 2002, and was 13.5% for the first 21 days of March 2002. Our other borrowings contain affirmative and negative covenants that are generally equal to or less restrictive than those in the line of credit. Most of our mortgage debt is nonrecourse to us and contains provisions allowing for the substitution of collateral upon satisfaction of certain conditions. Most of the mortgage debt is prepayable, subject, however, to various prepayment penalties, yield maintenance, or defeasance obligations. We currently anticipate that full year 2002 hotel portfolio RevPAR, compared to 2001, will be flat to negative 3%. RevPAR changes by quarter for 2002, compared to 2001, are currently expected to fall within the following ranges:
First quarter (16)% to (18)% Second quarter (4)% to (7)% Third quarter 6% to 9% Fourth quarter 13% to 16%
FFO for 2002 is anticipated to be within the range of $147 to $174 million and EBITDA to be within the range of $340 to $360 million. We are currently anticipating 2002 maintenance capital expenditures of between $40 and $50 million depending upon the pace of the anticipated economic recovery. Our decision to pay a quarterly common dividend will be determined each quarter based upon the operating results of that quarter, economic conditions, and other operating trends. We currently anticipate that we should be able to pay an aggregate of $1.00 in dividends per common share during 2002, based on the low end of our current FFO estimates. On December 31, 2001, our line of credit represented approximately 2.6% of our total debt, with $50 million outstanding. We also maintain flexibility in working with our lenders, as a result of our $129 million of cash and equivalents on hand, $2.8 billion of unencumbered assets, and a breakeven portfolio hotel occupancy, after debt service and preferred equity distributions, of approximately 50%. The $565 million of capacity under our line of credit is expected to remain available to take advantage of opportunities that may present themselves as the industry begins to recover in late 2002 and 2003. We may incur indebtedness to make property acquisitions, to purchase shares of our capital stock, or to meet distribution requirements imposed on a REIT under the Internal Revenue Code, to the extent that working capital and cash flow from our investments are insufficient for such purposes. The board of directors has authorized us to repurchase up to $300 million of our outstanding common shares. Stock repurchases may, at the discretion of our management, be made from time to time at prevailing prices in the open market or through privately negotiated transactions. Beginning in January 2001, through March 27, 2001, we repurchased approximately 179,000 shares of our outstanding common stock on the open 42 market for approximately $4 million. The stock repurchase program has been suspended, and since March 27, 2001, we have not repurchased any additional shares of our common stock in the open market. At December 31, 2001, we had $129 million of cash and cash equivalents. Certain significant credit and debt statistics at December 31, 2001, are as follows: o Interest coverage ratio of 2.3x for the twelve month period ended December 31, 2001 o Borrowing capacity of $565.2 million under our line of credit o Consolidated debt equal to 42.8% of our investment in hotels, at cost o Fixed interest rate debt equal to 88% of our total debt o Weighted average maturity of fixed interest rate debt of approximately 6.8 years o Mortgage debt to total assets of 16.8% o Debt of approximately $13 million maturing in 2002 o Debt of approximately $35 million maturing in 2003 o Debt of approximately $239 million maturing in 2004 The following details our debt outstanding at December 31, 2001 and 2000 (in thousands):
DECEMBER 31, 2001 DECEMBER DECEMBER 31, COLLATERAL INTEREST RATE MATURITY DATE 2001 2000 ---------- ------------- ------------- -------- ------------ FLOATING RATE DEBT: Line of credit None 4.48% October 2004 $ 49,674 $ 112,000 Mortgage debt 3 hotels February 2003 61,909 Publicly-traded term notes-swapped None 5.40 October 2004 174,633 Promissory note None 3.88 June 2016 650 650 ---- ----------- ----------- Total floating rate debt 5.19 224,957 174,559 ----------- ----------- FIXED RATE DEBT: Line of credit - swapped None October 2004 250,000 Publicly-traded term notes None October 2004 174,505 Publicly-traded term notes None 7.63 October 2007 124,419 124,320 Publicly-traded term notes None 9.50 September 2008 595,525 394,731 Publicly-traded term notes None 8.50 June 2011 297,655 Mortgage debt 15 hotels 7.24 November 2007 137,541 140,148 Mortgage debt 7 hotels 7.54 April 2009 95,997 97,604 Mortgage debt 6 hotels 7.55 June 2009 72,209 73,389 Mortgage debt 7 hotels 8.73 May 2010 142,254 144,032 Mortgage debt 8 hotels 8.70 May 2010 182,802 184,829 Other 13 hotels 6.96 2000 - 2005 65,049 80,124 ---- ----------- ----------- Total fixed rate debt 8.59 1,713,451 1,663,682 ---- ----------- ----------- Total debt 8.19% $ 1,938,408 $ 1,838,241 ==== =========== ===========
All of our floating rate debt at December 31, 2001, was based upon LIBOR. One month LIBOR at December 31, 2001 was 1.876%. We had approximately $2.8 billion of unencumbered assets at December 31, 2001. At December 31, 2001, we had $175 million of publicly traded term notes due October 2004 that were matched with interest rate swap agreements which effectively convert the fixed interest rate on the notes to a variable interest rate. These interest rate swap agreements were entered into during the fourth quarter of 2001 and have a maturity date of October 2004, coinciding with the maturity date of the publicly traded term notes. We entered into six separate interest rate swap agreements with three different financial institutions. Under these agreements, we receive a fixed rate of 7.375% and pay the six-month LIBOR rate plus a spread ranging from 2.57% to 3.54%. The weighted average spread over LIBOR is 3.20%. The credit ratings for the financial institutions that are the counter-parties on the interest rate swap agreements range from A- to AA. We spent approximately $65 million on upgrading and renovating our hotels during the year ended December 31, 2001. Notwithstanding the current significant economic downturn, we believe that our hotels will continue to benefit from our extensive capital expenditure programs in previous years. We currently 43 anticipate 2002 maintenance capital expenditures of between $40 and $50 million, depending upon the pace of the anticipated economic recovery. Contractual Obligations We have obligations and commitments to make future payments under debt and operating land lease contracts. The following schedule details these obligations at December 31, 2001 (in thousands).
LESS THAN 1 - 3 4 - 5 AFTER TOTAL 1 YEAR YEARS YEARS 5 YEARS ------------ ------------ ------------ ------------ ------------ Debt $ 1,946,176 $ 12,922 $ 273,807 $ 56,851 $ 1,602,596 Discount accretion over term of debt (7,768) Operating leases 168,038 4,736 9,491 9,164 144,647 ------------ ------------ ------------ ------------ ------------ Total contractual obligations $ 2,106,446 $ 17,658 $ 283,298 $ 66,015 $ 1,747,243 ============ ============ ============ ============ ============
We have guaranteed the payment of a full recourse loan for one of our 50% owned unconsolidated ventures. The following schedule details this obligation at December 31, 2001 (in thousands):
TOTAL AMOUNTS LESS THAN 1 - 3 4 - 5 OVER COMMITTED 1 YEAR YEARS YEARS 5 YEARS ------------- ------------ ------------ ------------ ------------ Guarantee $ 440 $ 143 $ 285 $ 12
Investments in Unconsolidated Entities At December 31, 2001, we had unconsolidated 50% investments in ventures that own an aggregate of 24 hotels. None of our directors, officers or employees owns any interest in any of these joint ventures. These ventures had approximately $266 million of non-recourse mortgage debt relating to 15 of the hotels. This debt is not reflected as a liability on our consolidated balance sheet. The liability of our subsidiaries that are members or partners in these ventures is generally limited to the guarantee of the borrowing venture's personal obligations to pay for the lender's losses caused by misconduct, fraud or misappropriation of funds by the venture and other typical exceptions from the nonrecourse provisions in the mortgages, such as for environmental liabilities. One real estate joint venture had a full recourse loan outstanding of $440,000 at December 31, 2001. We have guaranteed the payments of the full recourse loan. Capital expenditures on the hotels owned by these ventures are generally paid from the capital reserve account, which is funded from income from operations of these ventures. However if the venture has insufficient cash to make necessary capital improvements, the venture may make a capital call upon the venture members or partners to fund such necessary improvements. It is possible that in the event of a capital call the other joint venture member or partner may be unwilling or unable to make necessary capital contributions. Under such circumstances, we may elect to make the other party's contribution as a loan to the venture or as an additional capital contribution by us. Under certain circumstances, a capital contribution by us may increase our investment equity to greater than 50% and may require that we consolidate the ventures financial statements, including all of the assets and liabilities of the venture, into our consolidated financial statements. With respect to those ventures that are partnerships, any of our subsidiaries that serve as a general partner will be liable for all of the recourse obligations of the venture, to the extent that the venture does not have sufficient assets or insurance to satisfy the obligations. In addition, the hotels owned by these ventures could perform below expectations and result in the insolvency of the ventures and the acceleration of their debts unless the members or partners provide additional capital. In some ventures the members or partners may be required to make additional capital contributions or have their interest in the venture be reduced or offset for the benefit of any party making the required investment on their behalf. In the foregoing and other circumstances, we may be faced with the choice of losing our investment in a venture or investing additional capital under circumstances that do not assure a return on that investment. 44 Quantitative and Qualitative Disclosures About Market Risk At December 31, 2001 approximately 88% of our consolidated debt had fixed interest rates. Currently, market rates of interest are below the rates we are obligated to pay on our fixed-rate debt. The following table provides information about our financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations. For debt obligations at December 31, 2001, the table presents scheduled maturities and weighted average interest rates, by maturity dates. For each interest rate swap, the table presents the notional amount and weighted average interest rate, by contractual maturity dates. Weighted average variable rates are based on implied forward rates in the yield curve as of December 31, 2001. The fair value of our fixed rate debt indicates the estimated principal amount of debt having the same debt service requirements that could have been borrowed at December 31, 2001, at then current market interest rates. The fair value of our variable to fixed interest rate swaps indicates the estimated amount that would have been paid by us had the swaps been terminated at December 31, 2001. EXPECTED MATURITY DATE (DOLLARS IN THOUSANDS)
2002 2003 2004 2005 2006 THEREAFTER TOTAL FAIR VALUE LIABILITIES Debt: Fixed rate $12,922 $34,904 $189,229 $42,635 $14,216 $ 1,601,946 $ 1,895,852 $ 1,664,696 Average interest rate 7.88% 7.43% 7.41% 7.46% 8.04% 8.66% 8.48% Floating rate $ 49,674 $ 650 $ 50,324 $ 50,324 Average interest rate (a) 7.10% 8.26% 7.11% Discount accretion $ (7,768) Total debt $ 1,938,408 INTEREST RATE SWAPS: Fixed to floating $175,000 $ 175,000 $ (1,466) Average pay rate 5.08% Average receive rate 7.38%
(a) The average floating rate of interest represents the projected forward rate at December 31, 2001. Swap contracts, such as described above, contain a credit risk, in that the counterparties may be unable to fulfill the terms of the agreement. We minimize that risk by evaluating the creditworthiness of our counterparties, who are limited to major banks and financial institutions, and we do not anticipate nonperformance by the counterparties. The credit ratings for the financial institutions that are counterparties to the interest rate swap agreements range from A- to AA. INFLATION Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Competitive pressures may, however, require us to reduce room rates in the near term and may limit our ability to raise room rates in the future. SEASONALITY The lodging business is seasonal in nature. Generally, hotel revenues are greater in the second and third calendar quarters than in the first and fourth calendar quarters, although this may not be true for hotels in major tourist destinations. Revenues for hotels in tourist areas generally are substantially greater during tourist season than other times of the year. Seasonal variations in revenue at our hotels can be expected to cause quarterly fluctuations in our revenues. Quarterly earnings also may be adversely affected by events beyond our 45 control, such as extreme weather conditions, economic factors and other considerations affecting travel. Historically, to the extent that cash flow from operations has been insufficient during any quarter, due to temporary or seasonal fluctuations in revenues, we have utilized cash on hand or borrowings under our line of credit to make distributions to our equity holders. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, carrying value of investments in hotels, litigation, and other contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements. o At December 31, 2001, we had 13 non-strategic hotels held for sale. We regularly review the carrying value of these assets to determine that they are carried at the lower of cost or market. The carrying value of these hotels held for sale was reduced in the fourth quarter of 2001 by establishing a provision for loss of $7 million. Future adverse changes in market conditions or poor operating results of the underlying investments could require an additional impairment charge to further reduce the carrying value of these hotels held for sale. o We are required by generally accepted accounting principles to record an impairment charge when we believe that an investment in one or more of our hotels has been impaired such that future undiscounted cash flows would not recover the book basis, or net book value, of the investment. We test for impairment when one or more of the following events occur; projected cash flows are significantly less than recent historical cash flows; significant changes in legal factors or actions by a regulator that could affect the value of our hotels; and events that could cause changes or uncertainty in travel patterns. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in the investment's current carrying value, thereby requiring an impairment charge in the future. We do not currently believe that the value of any of our hotels held for investment is permanently impaired and, accordingly, no impairment charge was recorded at December 31, 2001. o We adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" effective January 1, 2001, which establishes accounting and reporting standards for derivative instruments. In accordance with this pronouncement, our interest rate swap agreements outstanding at December 31, 2001, were designated as fair value hedges. These instruments are marked to market through the income statement but are offset by the change in fair value of our swapped fixed rate debt. At December 31, 2001, the estimated unrealized net loss on these instruments was approximately $1.5 million and represents the amount that we would pay to terminate these instruments based on current market rates. o We have recorded a valuation allowance equal to 100% of our $13 million deferred tax asset related to our TRSs because of the uncertainty of realizing the benefit of the deferred tax asset. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to 46 determine that we would be able to realize all or a portion of our deferred tax assets in the future, an adjustment to the deferred tax asset would increase income in the period such determination was made. RECENT ACCOUNTING ANNOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") approved SFAS 141, "Business Combinations", and SFAS 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 142 will be effective for fiscal years beginning after December 15, 2001 and will require (1) intangible assets (as defined in SFAS 141) to be reclassified into goodwill, (2) goodwill amortization to cease, and (3) the testing of goodwill for impairment at transition and at interim periods (if an event or circumstance would result in an impairment). As the result of implementation of SFAS 142, we will stop the amortization of the difference between the our cost in unconsolidated entities and our proportionate share of the book value of the underlying net assets at the date of acquisition. At December 31, 2001, we included in investment in unconsolidated entities an asset of $73.4 million representing the unamortized cost in excess of our proportionate share of the underlying assets at the date of acquisition. The Company amortized excess cost of $2.5, $2.1 and $2.1 million in 2001, 2000 and 1999, respectively. The Company does not believe that SFAS 142 will have a material impact on the Company's results of operations and financial position. On August 15, 2001 the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations." SFAS 143 requires that the fair value of the liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS 143 will be effective for financial statements issued for fiscal years beginning after June 15, 2002 and interim periods within those fiscal years. We are not currently affected by the Statement's requirement. On October 3, 2001 the FASB issued SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121 by removing goodwill from its scope, by defining a probability-weighted cash flow estimation approach and establishing a "primary-asset" approach to determine the cash flow estimation period for a group of assets. It also replaces the provisions of APB Opinion 30, "Reporting the Effects of Disposal of a Segment of a Business" for the disposal of segments of a business. SFAS 144 will be effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. We are not currently affected by the Statement's requirement. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS Portions of this Annual Report on Form 10-K include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be achieved. A number of important factors which, among others, could adversely affect our ability to meet our current expectations are disclosed in conjunction with the forward-looking statements and under "Cautionary Factors That May Affect Future Results" in Item 1 of our Annual Report on Form 10-K ("Cautionary Statements"). Subsequent written and oral forward-looking statements made by or attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements. 47 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information and disclosures regarding market risks applicable to us are incorporated herein by reference to the discussion under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" contained elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2001. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Included herein beginning at page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 48 PART III. -- OTHER INFORMATION ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information called for by this Item is contained in our definitive Proxy Statement for our 2002 Annual Meeting of Stockholders, and incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information called for by this Item is contained in our definitive Proxy Statement for our 2002 Annual Meeting of Stockholders, and incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by this Item is contained in our definitive Proxy Statement for our 2002 Annual Meeting of Stockholders, and incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by this Item is contained in our definitive Proxy Statement for our 2002 Annual Meeting of Stockholders, and incorporated herein by reference. 49 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements Included herein at pages F-1 through F-28. 2. Financial Statement Schedules The following financial statement schedule is included herein at page F-29. Schedule III - Real Estate and Accumulated Depreciation for FelCor Lodging Trust Incorporated All other schedules for which provision is made in Regulation S-X are either not required to be included herein under the related instructions or are inapplicable or the related information is included in the footnotes to the applicable financial statement and, therefore, have been omitted. 3. Exhibits The following exhibits are filed as part of this Annual Report on Form 10-K:
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 3.1 - Articles of Amendment and Restatement dated June 22, 1995, amending and restating the Charter of FelCor Lodging Trust Incorporated ("FelCor"), as amended or supplemented by Articles of Merger dated June 23, 1995, Articles Supplementary dated April 30, 1996, Articles of Amendment dated August 8, 1996, Articles of Amendment dated June 16, 1997, Articles of Amendment dated October 30, 1997, Articles Supplementary dated May 6, 1998, Articles of Merger and Articles of Amendment dated July 27, 1998, and Certificate of Correction dated March 11, 1999 (filed as Exhibit 3.1 to FelCor's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (the "1998 10-K") and incorporated herein by reference). 3.1.1 - Certificate of Correction to the Articles of Merger between FelCor and Bristol Hotel Company, dated August 31, 1999 (filed as Exhibit 3.1.1 to FelCor's Form 10-Q for the quarter ended September 30, 1999 (the "September 1999 10-Q") and incorporated herein by reference). 3.2 - Bylaws of FelCor, as amended (filed as Exhibit 3.2 to FelCor's Registration Statement on Form S-11 (file no. 333-98332) and incorporated herein by reference). 4.1 - Form of Share Certificate for Common Stock (filed as Exhibit 4.1 to FelCor's Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference). 4.2 - Form of Share Certificate for $1.95 Series A Cumulative Convertible Preferred Stock (filed as Exhibit 4.4 to FelCor's Form 8-K dated May 1, 1996, and incorporated herein by reference).
50
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 4.3 - Form of Share Certificate for 9% Series B Cumulative Redeemable Preferred Stock (filed as Exhibit 4.5 to FelCor's Form 8-K dated May 29, 1998, and incorporated herein by reference). 4.4 - Deposit Agreement dated April 30, 1998, between FelCor and SunTrust Bank, Atlanta, as preferred share depositary (filed as Exhibit 4.6 to FelCor's Form 8-K dated May 29, 1998, and incorporated herein by reference). 4.5 - Form of Depositary Receipt evidencing the Depositary Shares (filed as Exhibit 4.7 to FelCor's Form 8-K dated May 29, 1998, and incorporated herein by reference). 4.6 - Indenture dated as of April 22, 1996 by and between FelCor and SunTrust Bank, Atlanta, Georgia, as Trustee (filed as Exhibit 4.2 to FelCor's Form 8-K dated May 1, 1996 and incorporated herein by reference). 4.7 - Indenture dated as of October 1, 1997 by and among FelCor Lodging Limited Partnership, formerly FelCor Suites Limited Partnership ("FelCor LP"), FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, Atlanta, Georgia, as Trustee (filed as Exhibit 4.1 to the Registration Statement on Form S-4 (file no. 333-39595) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.7.1 - First Amendment to Indenture dated as of February 5, 1998 by and among FelCor, FelCor LP, the Subsidiary Guarantors named therein and SunTrust Bank, Atlanta, Georgia, as Trustee (filed as Exhibit 4.2 to the Registration Statement on Form S-4 (file no. 333-39595) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.7.2 - Second Amendment to Indenture and First Supplemental Indenture dated as of December 30, 1998, by and among FelCor, FelCor LP, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.7.2 to the 1998 10-K and incorporated herein by reference). 4.7.3 - Third Amendment to Indenture dated as of March 30, 1999 by and among FelCor, FelCor LP, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.7.3 to FelCor's Form 10-Q for the quarter ended March 31, 1999 (the "March 1999 10-Q") and incorporated herein by reference). 4.7.4 - Second Supplemental Indenture dated as of August 1, 2000, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein, who are signatories thereto, and SunTrust Bank, as Trustee (filed as Exhibit 4.2.4 to the Registration Statement on Form S-4 (file no. 333-47506) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.7.5 - Third Supplemental Indenture dated as of July 26, 2001, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein, who are signatories thereto, and SunTrust Bank, as Trustee (filed as Exhibit 4.2.5 to the Registration Statement on Form S-4 (file no. 333-63092) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.8 - Indenture dated as of September 15, 2000, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein, and SunTrust Bank, as Trustee (filed as Exhibit 4.3 to the Registration Statement on Form S-4 (file no. 333-47506) of FelCor LP and the other co-registrants named therein and incorporated herein by reference).
51
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 4.8.1 - First Supplemental Indenture dated as of July 26, 2001, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein, who are signatories thereto, and SunTrust Bank, as Trustee (filed as Exhibit 4.3.1 to the Registration Statement on Form S-4 (file no. 333-63092) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.9 - Indenture dated as of June 4, 2001, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein, and SunTrust Bank, as Trustee (filed as Exhibit 4.9 to FelCor's Form 8-K dated as of June 4, 2001 and filed June 14, 2001, and incorporated herein by reference). 4.9.1 - First Supplemental Indenture dated as of July 26, 2001, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein, who are signatories thereto, and SunTrust Bank, as Trustee (filed as Exhibit 4.4.1 to the Registration Statement on Form S-4 (file no. 333-63092) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 10.1* - Second Amended and Restated Agreement of Limited Partnership of FelCor LP dated as of December 31, 2001. 10.2 - Contribution Agreement dated as of January 1, 2001, by and among FelCor, FelCor LP, FelCor, Inc., RGC and DJONT Operations, L.L.C. (filed as Exhibit 10.27 to FelCor's Form 10-Q for the quarter ended March 31, 2001 (the "March 2001 10-Q"), and incorporated herein by reference). 10.3 - Leasehold Acquisition Agreement dated as of March 30, 2001, by and among Bass (U.S.A.) Incorporated, in its individual capacity and on behalf of its subsidiaries and affiliates, and FelCor, in its individual capacity and on behalf of its subsidiaries and affiliates, including as an exhibit thereto the form of Management Agreement for Six Continents-branded hotels (filed as Exhibit 10.28 to the March 2001 10-Q and incorporated herein by reference). 10.4 - Form of Management Agreement between subsidiaries of FelCor, as owner, and a subsidiary of Six Continents Hotels, as manager, with respect to FelCor's Six Continents-branded hotels (included as an exhibit to the Leasehold Acquisition Agreement filed as Exhibit 10.3 above). 10.5* - Form of Management Agreement between subsidiaries of FelCor, as owner, and a subsidiary of Hilton Hotels Corporation, as manager, with respect to FelCor's Embassy Suites Hotels, including the form of Embassy Suites Hotels License Agreement attached as an exhibit thereto. 10.6* - Form of Management Agreement between subsidiaries of FelCor, as owner, and a subsidiary of Hilton Hotels Corporation, as manager, with respect to FelCor's Doubletree and Doubletree Guest Suites hotels. 10.7* - Form of Management Agreement between subsidiaries of FelCor, as owner, and a subsidiary of Starwood Hotels & Resorts, Inc., as manager, with respect to FelCor's Sheraton and Westin hotels. 10.8 - Employment Agreement dated as of July 28, 1994 between FelCor and Thomas J. Corcoran, Jr. (filed as Exhibit 10.8 to FelCor's Annual Report on Form 10-K/A Amendment No. 1 for the fiscal year ended December 31, 1994 (the "1994 10-K/A") and incorporated herein by reference).
52
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.9 - Restricted Stock and Stock Option Plan of FelCor (filed as Exhibit 10.9 to the 1994 10- K/A and incorporated herein by reference). 10.10* - Savings and Investment Plan of FelCor. 10.11 - 1995 Restricted Stock and Stock Option Plan of FelCor (filed as Exhibit 10.9.2 to FelCor's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "1995 10-K") and incorporated herein by reference). 10.12 - Non-Qualified Deferred Compensation Plan, as amended and restated July 1999 (filed as Exhibit 10.9 to the September 1999 10-Q and incorporated herein by reference). 10.13 - 1998 Restricted Stock and Stock Option Plan (filed as Exhibit 4.2 to FelCor's Registration Statement on Form S-8 (file no. 333-66041) and incorporated herein by reference). 10.14 - Second Amended and Restated 1995 Equity Incentive Plan (filed as Exhibit 99.1 to FelCor's Post-Effective Amendment on Form S-3 to Form S-4 Registration Statement (file no. 333-50509) and incorporated herein by reference). 10.15 - Amended and Restated Stock Option Plan for Non-Employee Directors (filed as Exhibit 99.2 to FelCor's Post-Effective Amendment on Form S-3 to Form S-4 Registration Statement (file no. 333-50509) and incorporated herein by reference). 10.16 - Form of Severance Agreement for executive officers and certain key employees of FelCor (filed as Exhibit 10.13 to the 1998 10-K and incorporated herein by reference). 10.17 - Stockholders' and Registration Rights Agreement dated as of July 27, 1998 by and among FelCor, Bass America, Inc., Holiday Corporation, Bass plc, United/Harvey Investors I, L.P., United/Harvey Investors II, L.P., United/Harvey Investors III, L.P., United/Harvey Investors IV, L.P., and United/Harvey Investors V, L.P. (filed as Exhibit 10.18 to FelCor's Form 8-K dated August 10, 1998, and incorporated herein by reference). 10.18 - Seventh Amended and Restated Credit Agreement dated as of July 26, 2001, among the FelCor, FelCor LP and FelCor Canada Co., as Borrowers, the Lenders party thereto, The Chase Manhattan Bank and The Chase Manhattan Bank of Canada, as Administrative Agents, Bankers Trust Company, as Syndication Agent, J.P. Morgan Securities Inc. and Deutsche Banc Alex. Brown, Inc., as Co-Lead Arrangers and Joint Bookrunners, and Bank of America, N.A. and Salomon Smith Barney, Inc., as Document Agents (filed as Exhibit 10.17 to FelCor's Form 10-Q for the quarter ended June 30, 2001, and incorporated herein by reference). 10.18.1 - First Amendment dated as of November 6, 2001, among FelCor, FelCor LP and FelCor Canada Co., as borrowers, the lenders party thereto, The Chase Manhattan Bank and The Chase Manhattan Bank of Canada, as Administrative Agents, and Bankers Trust Company, as Syndication Agent (filed as Exhibit 10.17.1 to FelCor's Form 10-Q for the quarter ended September 30, 2001 (the "September 2001 10-Q") and incorporated herein by reference). 10.19 - Loan Agreement dated as of October 10, 1997 among Bristol Lodging Company, Bristol Lodging Holding Company, Nomura Asset Capital Corporation, as administrative agent and collateral agent for Lenders, and Bankers Trust Company, as co-agent for Lenders (filed as
53
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- Exhibit 10.10 to the Bristol Hotel Company Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and incorporated herein by reference). 10.19.1 - First Amendment to Loan Agreement and Ancillary Loan Documents made as of May 28, 1999, among FelCor Lodging Company, L.L.C., FelCor Lodging Holding Company, L.L.C. and LaSalle National Bank, as Trustee for Nomura Asset Securities Corporation Commercial Pass-Through Certificates Series 1998-D6, as administrative agent and collateral agent (filed as Exhibit 10.19.1 to FelCor's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "1999 10-K") and incorporated herein by reference). 10.20 - Form of Mortgage, Security Agreement and Fixture Filing by and between FelCor/CSS Holdings, L.P. as Mortgagor and The Prudential Insurance Company of America, as Mortgagee (filed as Exhibit 10.23 to the March 1999 10-Q and incorporated herein by reference). 10.20.1 - Promissory Note dated April 1, 1999, in the original principal amount of $100,000,000 made by FelCor/CSS Holdings, Ltd., payable to the order of The Prudential Insurance Company of America (filed as Exhibit 10.23.1 to FelCor's Form 10-Q for the quarter ended June 30, 1999 (the "June 1999 10-Q") and incorporated herein by reference). 10.21 - Form of Deed of Trust, Security Agreement and Fixture Filing, each dated as of May 12, 1999, from FelCor/MM Holdings, L.P., as Borrower, in favor of Fidelity National Title Insurance Company, as Trustee, and Massachusetts Mutual Life Insurance Company, as Beneficiary, each covering a separate hotel and securing one of the separate Promissory Notes described in Exhibit 10.21.1, also executed by FelCor/CSS Holdings, L.P. with respect to the Embassy Suites Hotels-Anaheim and Embassy Suites Hotels-Deerfield Beach, and by FelCor LP with respect to the Embassy Suites Hotels-Palm Desert (filed as Exhibit 10.24.2 to the June 1999 10-Q and incorporated herein by reference). 10.21.1 - Form of six separate Promissory Notes each dated May 12, 1999, made by FelCor/MM Holdings, L.P. payable to the order of Massachusetts Mutual Life Insurance Company in the respective original principal amounts of $12,500,000 (Embassy Suites Hotels-Dallas Market Center), $14,000,000 (Embassy Suites Hotels-Dallas Love Field), $12,450,000 (Embassy Suites Hotels-Tempe), $11,550,000 (Embassy Suites Hotels-Anaheim), $8,900,000 (Embassy Suites Hotels-Palm Desert), $15,600,000 (Embassy Suites Hotels-Deerfield Beach) (filed as Exhibit 10.24.1 to the June 1999 10-Q and incorporated herein by reference). 10.22 - Form Deed of Trust and Security Agreement and Fixture Filing with Assignment of Leases and Rents, each dated as of April 20, 2000, from FelCor/MM S-7 Holdings, L.P., as Mortgagor, in favor of Massachusetts Mutual Life Insurance Company and Teachers Insurance and Annuity Association of America, as Mortgagee, each covering a separate hotel and securing one of the separate Promissory Notes described in Exhibit 10.22.2 (filed as Exhibit 10.24 to FelCor's Form 10-Q for the quarter ended June 30, 2000 (the "June 2000 10-Q") and incorporated herein by reference). 10.22.1 - Form of Accommodation Cross-Collateralization Mortgage and Security Agreement, each dated as of April 20, 2000, executed by FelCor/MM S-7 Holdings, L.P., in favor of Massachusetts Mutual Life Insurance Company and Teachers Insurance and Annuity Association of America (filed as Exhibit 10.24.1 to the June 2000 10-Q and incorporated herein by reference).
54
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.22.2 - Form of fourteen separate Promissory Notes each dated April 20, 2000, each made by FelCor/MM S-7 Holdings, L.P., each separately payable to the order of Massachusetts Mutual Life Insurance Company and Teachers Insurance and Annuity Association of America, respectively, in the respective original principal amounts of $13,500,000 (Phoenix (Crescent), Arizona), $13,500,000 (Phoenix (Crescent), Arizona), $6,500,000 (Cypress Creek/Ft. Lauderdale, Florida), $6,500,000 (Cypress Creek/Ft. Lauderdale, Florida), $9,000,000 (Atlanta Galleria, Georgia), $9,000,000 (Atlanta Galleria, Georgia), $12,500,000 (Chicago O'Hare Airport, Illinois), $12,500,000 (Chicago O'Hare Airport, Illinois), $3,500,000 (Lexington, Kentucky), $3,500,000 (Lexington, Kentucky), $17,000,000 (Philadelphia Society Hill, Philadelphia), $17,000,000 (Philadelphia Society Hill, Philadelphia), $10,500,000 (South Burlington, Vermont), and, $10,500,000 (South Burlington, Vermont) (filed as Exhibit 10.24.2 to the June 2000 10-Q and incorporated herein by reference). 10.23 - Form Deed of Trust and Security Agreement, each dated as of May 2, 2000, from each of FelCor/CMB Buckhead Hotel, L.L.C., FelCor/CMB Marlborough Hotel, L.L.C., FelCor/CMB Deerfield Hotel, L.L.C., FelCor/CMB Corpus Holdings, L.P., FelCor/CMB Orsouth Holdings, L.P., FelCor/CMB New Orleans Hotel, L.L.C., FelCor/CMB Piscataway Hotel, L.L.C., and FelCor/CMB SSF Holdings, L.P., each as Borrower, in favor of The Chase Manhattan Bank, as Beneficiary, each covering a separate hotel and securing one of the separate Promissory Notes described in Exhibit 10.23.1 (filed as Exhibit 10.25 to the June 2000 10-Q and incorporated herein by reference). 10.23.1 - Form of eight separate Promissory Notes, each dated May 2, 2000, made by FelCor/CMB Buckhead Hotel, L.L.C., FelCor/CMB Marlborough Hotel, L.L.C., FelCor/CMB Deerfield Hotel, L.L.C., FelCor/CMB Corpus Holdings, L.P., FelCor/CMB Orsouth Holdings, L.P., FelCor/CMB New Orleans Hotel, L.L.C., FelCor/CMB Piscataway Hotel, L.L.C., and FelCor/CMB SSF Holdings, L.P., each separately payable to the order of The Chase Manhattan Bank in the respective original principal amounts of $38,250,000 (Atlanta Buckhead, Georgia), $20,500,000 (Boston Marlborough, Massachusetts), $16,575,000 (Chicago Deerfield, Illinois), $5,338,000 (Corpus Christi, Texas), $25,583,000 (Orlando South, Florida), $32,650,000 (New Orleans, Louisiana), $20,728,000 (Piscataway, New Jersey), and $26,268,000 (South San Francisco, California) (filed as Exhibit 10.25.1 to the June 2000 10-Q and incorporated herein by reference). 10.24 - Registration Rights Agreement dated as of September 8, 2000 among FelCor, FelCor LP, Deutsche Banc Securities Inc., Chase Securities Inc., Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, Banc One Capital Markets, Inc., Credit Lyonnais Securities (USA) Inc., and Scotia Capital (USA) Inc. (filed as Exhibit 10.26 to the Registration Statement on Form S-4 (file no. 333-47506) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 10.25 - Registration Rights Agreement dated as of January 11, 2001, among FelCor, FelCor LP and Deutsche Bank Securities Inc (filed as Exhibit 10.26 to FelCor's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference). 10.26 - Registration Rights Agreement dated as of June 4, 2001, by and among FelCor LP, FelCor, and Deutsche Banc Alex. Brown Inc., in its individual capacity and on behalf of J.P. Morgan Securities Inc., Banc of America Securities LLC, Salomon Smith Barney Inc., Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, SG Cowen Securities Corporation, Credit Lyonnais Securities (USA) Inc., Scotia Capital (USA) Inc., BMO Nesbitt Burns Corp., Fleet Securities, Inc., PNC Capital Markets, Inc. and Wells Fargo Brokerage Services, LLC (filed as Exhibit 10.29 to FelCor's Form 8-K dated June 4, 2001 and filed June 14, 2001, and incorporated herein by reference).
55
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.27* - Registration Rights Agreement dated as of December 3, 2001, by and among FelCor, FelCor LP, Deutsche Banc Alex. Brown, J.P. Morgan Securities Inc., Banc of America Securities LLC, Morgan Stanley & Co. Incorporated and Salomon Smith Barney Inc. 21* - List of Subsidiaries of FelCor. 23.1* - Consent of PricewaterhouseCoopers LLP.
- ---------- * Indicates that the document is filed herewith. b) Reports on Form 8-K No current reports on Form 8-K were filed by FelCor during the three months ended December 31, 2001, other than a current report on Form 8-K that was filed on October 5, 2001, which is described in the FelCor's Form 10-Q for the quarter ended September 30, 2001. 56 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FELCOR LODGING TRUST INCORPORATED By: /s/ Lawrence D. Robinson -------------------------------- Lawrence D. Robinson Executive Vice President Date: March 29, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
DATE SIGNATURE ---- --------- March 25, 2002 /s/ Donald J. McNamara ----------------------------------------------------- Donald J. McNamara Chairman of the Board and Director March 29, 2002 /s/ Thomas J. Corcoran, Jr. ----------------------------------------------------- Thomas J. Corcoran, Jr. President and Director (Chief Executive Officer) March 29, 2002 /s/ Richard J. O'Brien ----------------------------------------------------- Richard J. O'Brien Executive Vice President and Chief Financial Officer (Principal Financial Officer) March 29, 2002 /s/ Lester C. Johnson ----------------------------------------------------- Lester C. Johnson Senior Vice President and Controller (Principal Accounting Officer) March 25, 2002 /s/ Melinda J. Bush ----------------------------------------------------- Melinda J. Bush, Director March 25, 2002 /s/ Richard S. Ellwood ----------------------------------------------------- Richard S. Ellwood, Director March 25, 2002 /s/ Richard O. Jacobson ----------------------------------------------------- Richard O. Jacobson, Director March 28, 2002 /s/ Charles A. Ledsinger, Jr. ----------------------------------------------------- Charles A. Ledsinger, Jr., Director March 26, 2002 /s/ Robert H. Lutz, Jr. ----------------------------------------------------- Robert H. Lutz, Jr., Director March 26, 2002 /s/ Charles N. Mathewson ----------------------------------------------------- Charles N. Mathewson, Director March , 2002 ----------------------------------------------------- Thomas A. McChristy, Director March 26, 2002 /s/ Richard C. North ----------------------------------------------------- Richard C. North, Director March 25, 2002 /s/ Michael D. Rose ----------------------------------------------------- Michael D. Rose, Director
57 FELCOR LODGING TRUST INCORPORATED INDEX TO FINANCIAL STATEMENTS PART I - FINANCIAL INFORMATION Report of Independent Accountants...........................................F-2 Consolidated Balance Sheets - December 31, 2001 and 2000....................F-3 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999..........................................F-4 Consolidated Statements of Comprehensive Income.............................F-5 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999..........................................F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999..........................................F-7 Notes to Consolidated Financial Statements..................................F-8 Report of Independent Accounts on Financial Statement Schedule.............F-29 Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2001........................................................F-30
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of FelCor Lodging Trust Incorporated In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows present fairly, in all material respects, the financial position of FelCor Lodging Trust Incorporated at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 2 to the financial statements, effective January 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standard 133, "Accounting for Derivative Instruments and Hedging Activities". PricewaterhouseCoopers LLP Dallas, Texas February 6, 2002 F-2 FELCOR LODGING TRUST INCORPORATED CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000 (IN THOUSANDS)
ASSETS 2001 2000 ----------- ----------- Investment in hotels, net of accumulated depreciation of $630,962 in 2001 and $473,101 in 2000 ........................................... $ 3,664,712 $ 3,750,275 Investment in unconsolidated entities ................................................ 151,047 128,593 Hotels held for sale ................................................................. 38,937 129,294 Cash and cash equivalents ............................................................ 128,742 26,060 Accounts receivable, net of allowance for doubtful accounts of $1,404 in 2001 ........ 53,836 31,241 Note receivable from unconsolidated entity ........................................... 7,695 Deferred expenses, net of accumulated amortization of $10,672 in 2001 and $7,146 in 2000 .............................................. 31,249 23,944 Other assets ......................................................................... 20,406 6,501 ----------- ----------- Total assets ............................................................... $ 4,088,929 $ 4,103,603 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Debt, net of discount of $7,768 in 2001 and $6,443 in 2000 ........................... $ 1,938,408 $ 1,838,241 Distributions declared but unpaid .................................................... 8,172 33,957 Accrued expenses and other liabilities ............................................... 173,496 94,232 Minority interest in FelCor LP, 9,005 and 8,597 units issued and outstanding at December 31, 2001 and 2000, respectively ......................... 236,100 252,294 Minority interest in other partnerships .............................................. 49,559 50,774 ----------- ----------- Total liabilities .......................................................... 2,405,735 2,269,498 ----------- ----------- Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value, 20,000 shares authorized: Series A Cumulative Preferred Stock, 5,981 shares issued and outstanding ........ 149,515 149,515 Series B Redeemable Preferred Stock, 58 shares issued and outstanding ........... 143,750 143,750 Common stock, $.01 par value, 200,000 shares authorized 69,418 and 69,415 shares issued, including shares in treasury, at December 31, 2001 and 2000, respectively .................................................................... 694 694 Additional paid-in capital ........................................................... 2,059,448 2,064,909 Accumulated other comprehensive income ............................................... (376) Distributions in excess of earnings .................................................. (355,391) (201,598) Less: Common stock in treasury, at cost, 16,421 and 16,906 shares at December 31, 2001 and 2000, respectively ..................................... (314,446) (323,165) ----------- ----------- Total stockholders' equity ................................................. 1,683,194 1,834,105 ----------- ----------- Total liabilities and stockholders' equity ................................. $ 4,088,929 $ 4,103,603 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-3 FELCOR LODGING TRUST INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
2001 2000 1999 ----------- ----------- ----------- Revenues: Hotel operating revenue: Room ........................................................ $ 866,101 Food and beverage ........................................... 157,812 Other operating departments ................................. 58,931 Percentage lease revenue ...................................... 115,137 $ 536,907 $ 490,893 ----------- ----------- ----------- Retail space rental and other revenue ......................... 2,990 3,057 2,194 ----------- ----------- ----------- Total revenues ................................................... 1,200,971 539,964 493,087 ----------- ----------- ----------- Expenses: Hotel operating expenses: Room ........................................................ 212,857 Food and beverage ........................................... 122,999 Other operating departments ................................. 26,789 Other property operating costs ................................ 290,247 Management and franchise fees ................................. 57,739 Taxes, insurance and lease expense ............................ 141,621 92,633 77,130 Corporate expenses ............................................ 12,678 12,256 9,122 Depreciation .................................................. 157,692 160,745 152,948 Lease termination costs ....................................... 36,604 Merger termination costs ...................................... 19,919 ----------- ----------- ----------- Total operating expenses ......................................... 1,079,145 265,634 239,200 ----------- ----------- ----------- Operating income ................................................. 121,826 274,330 253,887 Interest expense, net: Recurring financing ........................................... 158,343 156,712 123,005 Merger related financing ...................................... 5,486 Swap termination expense ......................................... 7,049 Loss on assets held for sale ..................................... 7,000 63,000 ----------- ----------- ----------- Income (loss) before equity in income from unconsolidated entities, minority interests, gain on sale of assets, and extraordinary items ............ (56,052) 54,618 130,882 Equity in income from unconsolidated entities ................. 7,346 14,820 8,484 Minority interests ............................................ 7,283 (8,262) (7,409) Gain on sale of assets ........................................ 3,417 4,388 236 ----------- ----------- ----------- Income (loss) before extraordinary items ......................... (38,006) 65,564 132,193 Extraordinary charge from write off of deferred financing fees ............................................. (1,270) (3,865) (1,113) ----------- ----------- ----------- Net income (loss) ................................................ (39,276) 61,699 131,080 Preferred dividends ........................................... (24,600) (24,682) (24,735) ----------- ----------- ----------- Net income (loss) applicable to common stockholders .............. $ (63,876) $ 37,017 $ 106,345 =========== =========== =========== Per share data: Basic Net income (loss) applicable to common stockholders ......... $ (1.21) $ 0.67 $ 1.57 =========== =========== =========== Weighted average common shares outstanding .................. 52,622 55,264 67,392 Diluted Net income (loss) applicable to common stockholders ......... (1.21) 0.67 $ 1.57 =========== =========== =========== Weighted average common shares outstanding .................. 52,622 55,519 67,581
The accompanying notes are an integral part of these consolidated financial statements. F-4 FELCOR LODGING TRUST INCORPORATED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS)
2001 2000 1999 -------- -------- -------- Net income (loss) ................................................. $(39,276) $ 61,699 $131,080 Cumulative transition adjustment from interest rate swaps ......... 248 Unrealized holding losses from interest rate swaps ................ (7,297) Losses realized on interest rate swap terminations ................ 7,049 Foreign currency translation adjustment ........................... (376) -------- -------- -------- Comprehensive income (loss) .................................. $(39,652) $ 61,699 $131,080 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 FELCOR LODGING TRUST INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (IN THOUSANDS)
COMMON STOCK ------------------------ ACCUMULATED NUMBER ADDITIONAL OTHER DISTRIBUTIONS PREFERRED OF PAID-IN COMPREHENSIVE IN EXCESS OF STOCK SHARES AMOUNT CAPITAL INCOME (LOSS) EARNINGS ------------ ------------ ------------ ------------ -------------- ------------ BALANCE AT DECEMBER 31, 1998 $ 295,000 69,284 $ 693 $ 2,142,250 $ (78,839) Issuance of common shares 7 5 Repurchase of common shares Allocation to minority interest (3,778) Distributions/dividends declared: $2.20 per common share (146,891) $1.95 per Series A preferred share (11,797) $2.25 per Series B depositary preferred share (12,938) Net income 131,080 ------------ ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1999 295,000 69,291 693 2,138,477 (119,385) Issuance of common shares 124 1 (890) Conversion of Series A preferred stock (1,735) 811 Repurchase of common shares Purchase of options (1,861) Contribution of shares in exchange for operating partnership units Allocation to minority interest (71,628) Distributions/dividends declared: $2.20 per common share (119,230) $1.95 per Series A preferred share (11,744) $2.25 per Series B depositary preferred share (12,938) Net income 61,699 ------------ ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 2000 293,265 69,415 694 2,064,909 (201,598) Foreign exchange translation $ (376) Issuance of common shares 3 (370) Repurchase of common shares Allocation to minority interest (5,091) Distributions/dividends declared: $1.70 per common share (89,917) $1.95 per Series A preferred share (11,662) $2.25 per Series B depositary preferred share (12,938) Net loss (39,276) ------------ ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 2001 $ 293,265 69,418 $ 694 $ 2,059,448 $ (376) $ (355,391) ============ ============ ============ ============ ============ ============ TOTAL TREASURY STOCKHOLDERS' STOCK EQUITY ------------ ------------ BALANCE AT DECEMBER 31, 1998 $ (41,487) $ 2,317,617 Issuance of common shares 5 Repurchase of common shares (98,387) (98,387) Allocation to minority interest (3,778) Distributions/dividends declared: $2.20 per common share (146,891) $1.95 per Series A preferred share (11,797) $2.25 per Series B depositary preferred share (12,938) Net income 131,080 ------------ ------------ BALANCE AT DECEMBER 31, 1999 (139,874) 2,174,911 Issuance of common shares 4,340 3,451 Conversion of Series A preferred stock 924 Repurchase of common shares (86,681) (86,681) Purchase of options (1,861) Contribution of shares in exchange for operating partnership units (101,874) (101,874) Allocation to minority interest (71,628) Distributions/dividends declared: $2.20 per common share (119,230) $1.95 per Series A preferred share (11,744) $2.25 per Series B depositary preferred share (12,938) Net income 61,699 ------------ ------------ BALANCE AT DECEMBER 31, 2000 (323,165) 1,834,105 Foreign exchange translation (376) Issuance of common shares 12,846 12,476 Repurchase of common shares (4,127) (4,127) Allocation to minority interest (5,091) Distributions/dividends declared: $1.70 per common share (89,917) $1.95 per Series A preferred share (11,662) $2.25 per Series B depositary preferred share (12,938) Net loss (39,276) ------------ ------------ BALANCE AT DECEMBER 31, 2001 $ (314,446) $ 1,683,194 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-6 FELCOR LODGING TRUST INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (IN THOUSANDS)
2001 2000 1999 ----------- ----------- ----------- Cash flows from operating activities: Net income (loss) ........................................................... $ (39,276) $ 61,699 $ 131,080 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation ...................................................... 157,692 160,745 152,948 Gain on sale of assets ............................................ (3,417) (4,388) (236) Amortization of deferred financing fees ........................... 5,292 4,628 2,768 Accretion of debt ................................................. 17 (692) (952) Amortization of unearned officers' and directors' compensation..... 2,093 1,478 652 Equity in income from unconsolidated entities ..................... (7,346) (14,820) (8,484) Extraordinary write off of deferred financing fees ................ 1,270 3,865 1,113 Lease termination costs ........................................... 36,604 Loss on assets held for sale ...................................... 7,000 63,000 Minority interests ................................................ (7,283) 8,262 7,409 Changes in assets and liabilities: Accounts receivable ............................................... 6,645 (9,664) 574 Deferred expenses ................................................. (13,801) (16,964) (9,313) Other assets ...................................................... 2,018 (5,339) (282) Accrued expenses and other liabilities ............................ (16,543) 25,494 5,088 ----------- ----------- ----------- Net cash flow provided by operating activities .......... 130,965 277,304 282,365 ----------- ----------- ----------- Cash flows provided by (used in) investing activities: Acquisition of hotels ....................................................... (10,802) Acquisition of unconsolidated entities ...................................... (7,452) Improvements and additions to hotels ........................................ (65,446) (95,235) (222,320) Operating cash received in acquisition of lessees ........................... 29,731 Proceeds from sale of assets ................................................ 66,330 35,111 15,476 Cash distributions from unconsolidated entities ............................. 8,132 25,358 19,581 ----------- ----------- ----------- Net cash flow provided by (used in) investing activities ............................................ 38,747 (34,766) (205,517) ----------- ----------- ----------- Cash flows used in financing activities: Proceeds from borrowings .................................................... 1,122,172 997,424 1,034,667 Repayment of borrowings ..................................................... (1,020,290) (992,635) (804,915) Purchase of treasury stock .................................................. (4,127) (86,681) (98,387) Proceeds from exercise of stock options ..................................... 678 8 Buyback of assumed stock options ............................................ (1,861) Distributions paid to other partnerships' minority interests ................ (4,799) (5,229) Distributions paid to FelCor LP limited partners ............................ (20,211) (14,190) (7,559) Distributions paid to preferred stockholders ................................ (24,600) (24,691) (25,987) Distributions paid to common stockholders ................................... (115,883) (124,738) (173,244) ----------- ----------- ----------- Net cash flow used in financing activities .............. (67,060) (252,601) (75,417) ----------- ----------- ----------- Effect of exchange rate changes on cash ............................................... 30 Net change in cash and cash equivalents ............................................... 102,682 (10,063) 1,431 Cash and cash equivalents at beginning of periods ..................................... 26,060 36,123 34,692 ----------- ----------- ----------- Cash and cash equivalents at end of periods ........................................... $ 128,742 $ 26,060 $ 36,123 =========== =========== =========== Supplemental cash flow information -- Interest paid ............................................................... $ 164,261 $ 143,594 $ 125,085 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-7 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION FelCor Lodging Trust Incorporated ("FelCor"), a Maryland corporation, is one of the nation's largest hotel real estate investment trusts, or REITs, and is the sole general partner of, and the owner of a greater than 85% partnership interest in, FelCor Lodging Limited Partnership ("FelCor LP"). FelCor, FelCor LP and their subsidiaries are referred to, collectively, as the "Company". The Company had ownership interests in 183 hotels at December 31, 2001, with nearly 50,000 rooms and suites. All of the Company's operations are conducted solely through FelCor LP or its subsidiaries. At December 31, 2001, the Company owned a 100% interest in 150 hotels, a 90% or greater interest in entities owning seven hotels, a 60% interest in an entity owning two hotels and a 50% interest in separate unconsolidated entities that own 24 hotels. Thirteen of the Company's hotels were designated as held for sale at December 31, 2001. On May 9, 2001, the Company entered into a merger agreement with MeriStar Hospitality Corporation ("MeriStar"). On September 21, 2001, the Company and MeriStar jointly announced the termination of the merger. The decision to terminate the merger resulted from the September 11 terrorist attacks and their subsequent adverse impact on the financial markets. As a result of the merger termination, the Company expensed $19.9 million associated with the merger and $5.5 million in merger financing costs for the year ended December 31, 2001. On January 1, 2001, the REIT Modernization Act ("RMA") went into effect. Among other things, the RMA permits a REIT to form taxable subsidiaries ("TRS") that lease hotels from the REIT, provided that the hotels continue to be managed by unrelated third parties. Effective January 1, 2001, the Company completed transactions that resulted in its newly formed TRSs acquiring leases for 96 hotels that were leased to either DJONT Operations, L.L.C. and its consolidated subsidiaries (collectively "DJONT") or subsidiaries of Six Continents Hotels. Effective July 1, 2001, the Company acquired the remaining 88 hotel leases held by Six Continents Hotels. By acquiring these leases through its TRSs, the Company acquired the economic benefits and risks of the operations of these hotels and began reporting hotel revenues and expenses rather than percentage lease revenues. The following table provides a schedule of the Company's hotels by brand at December 31, 2001:
BRAND ----- Hilton Hotels Corporation ("Hilton") brands: Embassy Suites Hotels(R).................................................. 59 Doubletree(R) and Doubletree Guest Suites(R).............................. 13 Hampton Inn(R)............................................................ 7 Hilton Suites(R).......................................................... 1 Homewood Suites(R)........................................................ 1 Six Continents Hotels brands: Holiday Inn(R)............................................................ 44 Crowne Plaza(R) and Crowne Plaza Suites(R)................................ 18 Holiday Inn Select(R)..................................................... 10 Holiday Inn Express(R).................................................... 5 Starwood Hotels & Resorts Worldwide Inc. ("Starwood") brands: Sheraton(R) and Sheraton Suites(R)........................................ 10 Westin(R)................................................................. 1 Other brands................................................................... 14 --- Total hotels................................................................... 183 ===
F-8 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. ORGANIZATION -- (CONTINUED) The Company's hotels are located in the United States (35 states) and Canada, with a concentration in Texas (41 hotels), California (19 hotels), Florida (17 hotels) and Georgia (14 hotels). Approximately 54% of the Company's hotel room revenues were generated from hotels in these four states. At December 31, 2001 of the Company's 183 hotels, (i) subsidiaries of Six Continents Hotels managed 89, (ii) subsidiaries of Hilton managed 71, (iii) subsidiaries of Starwood managed 11, (iv) subsidiaries of Interstate Hotels Corporation ("IHC") managed eight and (v) three independent management companies managed four. Certain reclassifications have been made to prior period financial information to conform to the current period's presentation with no effect to previously reported net income or stockholder's equity. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation -- The accompanying consolidated financial statements of the Company include the assets, liabilities, revenues and expenses of all majority-owned subsidiaries over which the Company exercises control, and for which control is other than temporary. Intercompany transactions and balances are eliminated in consolidation. Investments in unconsolidated entities (50 percent owned ventures) are accounted for by the equity method. Use of Estimates -- The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Investment in Hotels -- The Company's hotels are stated at cost and are depreciated using the straight-line method over estimated useful lives ranging from 31 to 40 years for buildings and improvements and three to seven years for furniture, fixtures, and equipment. The Company periodically reviews the carrying value of each of its hotels to determine if circumstances exist indicating an impairment in the carrying value of the investment in the hotel or that depreciation periods should be modified. If facts or circumstances support the possibility of impairment, the Company will prepare a projection of the undiscounted future cash flows, without interest charges, of the specific hotel and determine if the investment in such hotel is recoverable based on the undiscounted future cash flows. If impairment is indicated, an adjustment will be made to the carrying value of the hotel based on discounted future cash flows. The Company has not recorded any loss for impairment of any investments in its hotels except as established for the hotels held for sale. Maintenance and repairs are expensed and major renewals and betterments are capitalized. Upon the sale or disposition of a fixed asset, the asset and related accumulated depreciation are removed from the accounts and the related gain or loss is included in operations. Investment in Unconsolidated Entities --The Company owns a 50% interest in various real estate ventures in which the partners or members jointly make all material decisions concerning the business affairs and operations, additionally, the Company owns a preferred equity interest in one of these real estate ventures. Accordingly, the Company does not control these entities and carries its investment in unconsolidated entities at cost, plus its equity in net earnings, less distributions received since the date of acquisition. Equity in net earnings is adjusted for the straight-line amortization, over the lower of 40 years or the remaining life of the venture, of the difference between the Company's cost and its proportionate share of the underlying net assets at the date of acquisition. F-9 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Hotels Held for Sale -- The Company classifies hotels it expects to sell within the next 12 months as held for sale. Operations for these hotels are included in operating income; however, no depreciation expense is recorded on these hotels. The carrying values of these hotels are reviewed periodically and marked to the lower of cost or estimated net sales proceeds, with the corresponding adjustment taken to expense. Cash and Cash Equivalents -- All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. Included in cash and cash equivalents is $13.2 million and $15.6 million in 2001 and 2000, respectively which is held in escrow under certain of our debt agreements. The Company places cash deposits at major banks. The Company's bank account balances may exceed the Federal Depository Insurance Limits of $100,000; however, management believes the credit risk related to these deposits is minimal. Deferred Expenses -- Deferred expenses, consisting primarily of loan costs, are recorded at cost. Amortization is computed using a method that approximates the interest method over the maturity of the related debt. Other Assets -- Other assets consist primarily of hotel operating inventories, prepaid expenses and deposits. Revenue Recognition -- Prior to January 2001, the Company's principal source of revenue was from percentage lease revenue. Percentage lease revenue was comprised of fixed base rent and percentage rent which was based on room revenues above certain annual thresholds. All annual thresholds were based on periods ending December 31. Base rent was recognized as income on the straight-line basis and percentage rent was recognized as income when annual thresholds were met. At December 31, 2001, the Company had no hotels leased to third parties. Beginning in January 2001, in conjunction with the effectiveness of the RMA, the Company started acquiring its lessees and leases and began to earn room revenue, food and beverage revenue and other revenue through the operations of its hotels. The Company recognizes these revenues as the hotel services are performed. Foreign Currency Translation -- Results of operations for the Company's Canadian hotels are maintained in Canadian dollars and translated using the average exchange rates during the period. Assets and liabilities are translated to U.S. dollars using the exchange rate in effect at the balance sheet date. Resulting translation adjustments are reflected in accumulated other comprehensive income. Capitalized Interest -- The Company capitalizes interest and certain other costs relating to hotels undergoing major renovations and redevelopments. Such costs capitalized in 2001, 2000, and 1999 were approximately $1.2 million, $2.0 million and $7.4 million, respectively. Net Income Per Common Share -- Basic earnings per share have been computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share have been computed by dividing net income available to common stockholders by the weighted average number of common shares and equivalents outstanding. Common stock equivalents represent shares issuable upon exercise of stock options and unvested officers' restricted stock grants. At December 31, 2001, 2000, and 1999, the Company's Series A Cumulative Preferred Stock ("Series A preferred stock"), if converted to common shares, would be antidilutive; accordingly the Series A preferred stock is not assumed to be converted in the computation of diluted earnings per share. At December 31, 2001, the majority of stock options granted are antidilutive and are not included in the computation of diluted earnings per share. F-10 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Derivatives -- On January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments. Specifically, SFAS 133 requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either stockholders' equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and the nature of the hedging activity. Upon adoption of SFAS 133, on January 1, 2001, the Company recorded the fair value of its interest rate swap agreements, having a notional value of $250 million, as an asset of $248,000 with a corresponding credit to accumulated other comprehensive income reported in stockholders' equity. Segment Information -- SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," requires the disclosure of selected information about operating segments. Based on the guidance provided in the standard, the Company has determined its business is conducted in one operating segment. Distributions and Dividends -- FelCor and FelCor LP pay regular quarterly distributions on their common stock and partnership units. Additionally, the Company pays regular quarterly dividends on preferred stock in accordance with its preferred stock dividend requirements. FelCor's ability to make distributions is dependent on its receipt of quarterly distributions from FelCor LP. For 2001, FelCor paid common dividends of $1.70 per common share, $1.95 per share of its Series A preferred stock, and $2.25 per depositary share evidencing its 9% Series B Redeemable Preferred Stock ("Series B preferred stock"). Minority Interests -- Minority interests in FelCor LP and other consolidated subsidiaries represents the proportionate share of the equity in FelCor LP and other consolidated subsidiaries not owned by FelCor. Income and loss is allocated to minority interest based on the weighted average percentage ownership throughout the year. Income Taxes -- The Company has elected to be treated as a REIT under Sections 856 to 860 of the Internal Revenue Code. Prior to January 1, 2001, the Company, as a REIT, was not subject to federal income taxes. Under the RMA that became effective January 1, 2001, the Company leases its hotels to wholly-owned TRSs that are subject to federal and state income taxes. The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") 109. Under SFAS 109, the Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 3. ACQUISITION OF HOTEL LEASES As a result of the passage of the RMA, effective January 1, 2001 the Company acquired 100% of DJONT, which owned leases on 85 of our hotels, and contributed it to a TRS. In consideration, FelCor LP issued 416,667 of its units, valued at approximately $10 million, and the Company assumed DJONT's accumulated stockholders' deficit of $25 million, which was expensed as lease termination cost in 2001. On January 1, 2001, the Company acquired from Six Continents Hotels the leases covering 11 hotels, terminated one additional lease in connection with the sale of the related hotel and terminated the 12 related management agreements in exchange for 413,585 shares of FelCor common stock valued at approximately $10 million. Of this $10 million in consideration, approximately $2 million was expensed as lease termination costs in 2001 and $8 million was expensed in 2000, in connection with the designation of certain of these hotels as held for sale. Of the 11 hotels, two have been sold, eight have been contributed to a joint venture with IHC, and one will be retained. F-11 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. ACQUISITION OF HOTEL LEASES -- (CONTINUED) The Company purchased certain assets and assumed certain liabilities in connection with the acquisition of the leases on these 96 hotels. The fair values of the acquired assets and liabilities at January 1, 2001, are as follows (in thousands): Cash and cash equivalents..................................... $ 25,300 Accounts receivable........................................... 30,214 Other assets.................................................. 17,318 --------- Total assets acquired......................................... 72,832 --------- Accounts payable.............................................. 18,656 Due to FelCor Lodging Trust................................... 30,687 Accrued expenses and other liabilities........................ 40,372 --------- Total liabilities assumed..................................... 89,715 --------- Liabilities assumed in excess of assets acquired.............. 16,883 Value of common stock and FelCor LP units issued.............. 19,721 --------- Lease termination costs.................................. $ 36,604 =========
The Company acquired the remaining 88 hotel leases held by Six Continents Hotels on July 1, 2001. In consideration for the acquisition of these leases, the Company entered into long term management agreements with Six Continents Hotels with regard to these hotels, and FelCor issued to Six Continents Hotels 100 shares of common stock. The management fees payable to Six Continents Hotels include compensation to Six Continents Hotels for both management services and the acquisition of the 88 leases and, as such, are higher than those paid by the Company to other managers for comparable services. Management fees under these management contracts will be expensed as incurred. The Company purchased certain assets and acquired certain liabilities with the acquisition of the 88 hotel leases. The fair value of the assets and liabilities assumed at July 1, 2001 are as follows (in thousands): Cash and cash equivalents.............................. $ 4,431 Accounts receivable.................................... 30,964 Other assets........................................... 6,941 ------- Total assets acquired........................ $42,336 ======= Accounts payable....................................... $ 7,660 Accrued expenses and liabilities....................... 34,676 ------- Total liabilities assumed.................... $42,336 =======
4. INVESTMENT IN HOTELS Investment in hotels at December 31, 2001 and 2000, consists of the following (in thousands):
2001 2000 ---------- ---------- Land.................................................... $ 322,010 $ 321,994 Building and improvements............................... 3,512,442 3,477,006 Furniture, fixtures and equipment....................... 447,429 409,011 Construction in progress................................ 13,793 15,365 ---------- ---------- 4,295,674 4,223,376 Accumulated depreciation................................ (630,962) (473,101) ---------- ---------- $3,664,712 $3,750,275 ========== ==========
F-12 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. INVESTMENT IN UNCONSOLIDATED ENTITIES The Company owned 50% interests in joint venture entities that owned 24 hotels at December 31, 2001, and 16 hotels at December 31, 2000. The Company also owned a 50% interest in entities that owned an undeveloped parcel of land, provided condominium management services, leased eight hotels and developed and sold condominiums in Myrtle Beach, South Carolina. The Company accounts for its investments in these unconsolidated entities under the equity method. Summarized unaudited combined financial information for 100% of these unconsolidated entities is as follows (in thousands):
DECEMBER 31, --------------------- 2001 2000 -------- -------- Balance sheet information: Investment in hotels.............................. $365,802 $294,941 Debt(a)........................................... $266,238 $225,302 Equity............................................ $116,032 $ 82,986
YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 ------- ------- ------- Statements of operations information: Total revenues.................................... $87,795 $80,761 $69,146 Net income........................................ $17,498 $30,729 $21,726 Net income attributable to the Company............ $ 8,749 $16,962 $10,626 Preferred equity distribution..................... 1,103 Amortization of cost in excess of book value...... (2,506) (2,142) (2,142) ------- ------- ------- Equity in income from unconsolidated entities..... $ 7,346 $14,820 $ 8,484 ======= ======= =======
(a) Debt consists of $266 million of non-recourse mortgage debt and $440 thousand of full-recourse debt guaranteed by the Company. 6. HOTELS HELD FOR SALE In 2000, the Company identified 25 hotels that it considered non-strategic and announced its intention to sell such hotels. In connection with the decision to sell these hotels, in 2000 the Company recorded an expense of $63 million representing the difference between the net book value and estimated fair market value of these hotels. In 2001 the Company recognized an additional $7 million expense to reflect the deterioration of the market value of the remaining 13 hotels held for sale. No depreciation expense has been recorded on these hotels since June 30, 2000. During 2000, one of these hotels was sold and the Company recognized a gain of approximately $135,000. In March 2001, the Company contributed eight of the hotels held for sale to a joint venture in which the Company retains a 50% equity interest and an affiliate of IHC holds the other 50% equity interest. The Company contributed hotels with a book value of approximately $77 million, and received net cash proceeds of approximately $52 million. The Company retained an $8 million common equity interest and a $17 million preferred equity interest paying 9%. No gain or loss was recorded in connection with this transaction. The Company also made a loan of approximately $4 million to IHC, secured by its interest in the venture. F-13 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. HOTELS HELD FOR SALE -- (CONTINUED) In June 2001, the Company sold the 140-room Hampton Inn located in Marietta, Georgia, for a net sales price of $7 million. In September 2001, the Company sold the 119-room Hampton Inn located in Jackson, Mississippi for a net sales price of $4 million. In November 2001, the Company sold the 129-room Doubletree Hotel located in Tampa, Florida for a net sales price of $3 million. No gain or loss from these sales were recorded. The Company is actively marketing the remaining 13 hotels held for sale. Revenues related to the hotels held for sale, less costs associated with those assets, were included in the Company's results of operations for the year ended December 31, 2001 and 2000, and represented income of approximately $11 million and $16 million (net of $3 million in depreciation expense for 2000), respectively. 7. DEBT Debt at December 31, 2001 and 2000, consists of the following (in thousands):
DECEMBER 31, 2001 DECEMBER DECEMBER 31, COLLATERAL(b) INTEREST RATE MATURITY DATE 2001 2000 -------------- ------------- ------------- ---------- ----------- FLOATING RATE DEBT: Line of credit None 4.48% October 2004 $ 49,674 $ 112,000 Mortgage debt 3 hotels -- February 2003 61,909 Publicly-traded term notes-swapped None 5.40 October 2004 174,633 Promissory note None 3.88 June 2016 650 650 ----- ---------- ---------- Total floating rate debt 5.19 224,957 174,559 ---------- ---------- FIXED RATE DEBT: Line of credit - swapped None -- October 2004 250,000 Publicly-traded term notes None -- October 2004 174,505 Publicly-traded term notes None 7.63 October 2007 124,419 124,320 Publicly-traded term notes None 9.50 September 2008 595,525 394,731 Publicly-traded term notes None 8.50 June 2011 297,655 Mortgage debt 15 hotels 7.24 November 2007 137,541 140,148 Mortgage debt 7 hotels 7.54 April 2009 95,997 97,604 Mortgage debt 6 hotels 7.55 June 2009 72,209 73,389 Mortgage debt 7 hotels 8.73 May 2010 142,254 144,032 Mortgage debt 8 hotels 8.70 May 2010 182,802 184,829 Other 6 hotels 6.96 2000 - 2005 65,049 80,124 ----- ---------- ---------- Total fixed rate debt 8.59 1,713,451 1,663,682 ----- ---------- ---------- Total debt 8.19% $1,938,408 $1,838,241 ===== ========== ==========
(a) At December 31, 2001, the Company's $175 million publicly-traded notes due October 2004 were matched with interest rate swap agreements, which effectively convert the fixed interest rate on the notes to a variable interest rate tied to LIBOR. The interest rate swap agreements also have a maturity of October 2004. The differences to be paid or received by the Company under the terms of the interest rate swap agreements are accrued as interest rates change and recognized as an adjustment to interest expense. (b) At December 31, 2001, the Company had unencumbered investments in hotels with a net book value totaling $2.8 billion. All of the Company's floating rate debt at December 31, 2001, was based upon LIBOR. One month LIBOR at December 31, 2001 was 1.876%. If the rating agencies were to lower our senior unsecured debt ratings below the current level, the interest rate on $900 million of our outstanding senior unsecured debt would increase by 50 basis points, resulting in an increase in our interest expense. F-14 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. DEBT -- (CONTINUED) The Company's interest rate swap agreements at December 31, 2001, were entered into during the fourth quarter of 2001 and have a maturity date of October 2004, coinciding with the maturity date of $175 million of our publicly traded term notes. We entered into six separate interest rate swap agreements with three different financial institutions with a total notional value of $175 million. Under these agreements, we receive a fixed rate of 7.375% and pay the six-month LIBOR rate plus a spread ranging from 2.57% to 3.54%. The weighted average spread over LIBOR is 3.20%. The credit ratings for the financial institutions that are the counter-parties on the interest rate swap agreements range from A- to AA. Interest expense is reported net of interest income of $2.9 million, $1.9 million and $2.4 million for the year ended December 31, 2001, 2000, and 1999, respectively, and capitalized interest of $811,000, $1.1 million and $5.2 million, respectively. Interest expense associated with the terminated merger was $5.5 million and is presented net of $2.9 million of interest income from the proceeds of the senior notes held in escrow during the year ended December 31, 2001. On January 11, 2001, the Company completed the private placement of $100 million in 9 1/2% senior unsecured notes that mature in September 2008. These notes were issued at a premium to yield an effective rate of 91/8%. The proceeds were used initially to pay down the Company's line of credit. In October 2001, the Company exchanged the $100 million in privately placed senior notes for notes with identical terms that are registered under the Securities Act of 1933. On June 4, 2001, the Company completed the private placement of $600 million in 8 1/2% senior unsecured notes that mature in 2011. Approximately $315 million of the proceeds were placed in escrow, pending the closing or termination of the merger with MeriStar. In October 2001, as the result of the merger termination, in accordance with the requirements of the indenture governing these notes, the Company redeemed $300 million in principal amount of these notes. The redemption price was 101% of the principal amount redeemed plus accrued interest and was paid out of the $315 million in escrowed funds. In October 2001, the Company exchanged the remaining privately placed notes for notes with identical terms that were registered under the Securities Act of 1933. In June 2001, in connection with the issuance of fixed rate senior notes and the subsequent prepayment of floating rate debt, the Company terminated $200 million of interest rate swaps, resulting in a $4.8 million swap termination cost recorded in the second quarter. An extraordinary charge of $225,000 was recorded to write-off unamortized deferred financing costs associated with the prepayment of the floating rate debt. On December 3, 2001, the Company completed the private placement of $100 million in 9 1/2% senior unsecured notes that mature in September 2008. These notes were issued at a discount to yield 9.6%. The proceeds were used initially to pay down the Company's line of credit. In connection with the issuance of these notes and the prepayment of floating rate debt, the Company terminated $50 million of interest rate swaps resulting in a $2.2 million swap termination cost during the fourth quarter of 2001. On July 26, 2001, the Company entered into an amended and restated credit agreement, pursuant to which it obtained an increase in its line of credit from $600 million to $615 million. The maturity of the line of credit was also extended from August 1, 2003, to October 31, 2004, but the Company has the right to extend the maturity date for two consecutive one-year periods, subject to certain conditions. An extraordinary charge of $1 million was recorded to write-off unamortized deferred financing costs associated with the renewal of the Company's line of credit. F-15 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. DEBT -- (CONTINUED) On November 8, 2001, the Company further amended its unsecured line of credit. Although the Company was in compliance with its existing covenants prior to the amendment, it was necessary to amend the line of credit in anticipation of a continued negative RevPAR environment. The amendment allows for the relaxation of certain financial covenants through September 30, 2002, including the unsecured interest coverage, fixed charge coverage, and total leverage tests. The interest rate remains on the same floating rate basis with a tiered spread based on the Company's debt leverage ratio, but with added tiers to reflect the higher permitted leverage. The lenders' commitments under the line of credit remain at $615 million. In addition to the financial covenants, the Company's line of credit includes certain other affirmative and negative covenants, including limitations on total indebtedness, total secured indebtedness, restricted payments (such as stock repurchases and cash distributions), as well as the obligation to maintain certain minimum tangible net worth and certain minimum interest and debt service coverage ratios. Under the amendment to the line of credit in November 2001, we agreed to certain more stringent limitations through September 30, 2002. After January 1, 2002, we may acquire hotel properties and make joint venture investments, subject to compliance with debt limitations, but with flexibility to make at least $50 million of acquisitions and $20 million of joint venture investments without specific lender approval, under certain circumstances. Also, we may be limited in making discretionary capital expenditures through September 30, 2002, other than discretionary capital expenditures for the expansion or renovation of existing hotels in an aggregate amount of $20 million, subject to an increase under certain circumstances. At December 31, 2001 the Company was in compliance with all of these covenants. The Company's other borrowings contain affirmative and negative covenants that are generally equal to or less restrictive than the line of credit. Our failure to satisfy any accelerated indebtedness, if in the amount of $10 million or more, could result in the acceleration of most of our other indebtedness. Most of the mortgage debt is non-recourse to the Company and contains provisions allowing for the substitution of collateral upon satisfaction of certain conditions. Most of the mortgage debt is prepayable, subject to various prepayment penalties, yield maintenance, or defeasance obligations. Future scheduled principal payments on debt obligations at December 31, 2001, are as follows (in thousands):
YEAR ---- 2002....................................................... $ 12,922 2003....................................................... 34,904 2004....................................................... 238,903 2005....................................................... 42,635 2006....................................................... 14,216 2007 and thereafter........................................ 1,602,596 ---------- 1,946,176 Discount accretion over term............................... (7,768) ---------- $1,938,408 ==========
8. DERIVATIVES On the date the Company enters into a derivative contract, it designates the derivative as a hedge to the exposure to changes in the fair value of a recognized asset or liability or a firm commitment (referred to as a fair value hedge), or the exposure to variable cash flows of a forecasted transaction (referred to as a cash flow hedge). The Company has entered into both types of derivative contracts. For a fair value hedge the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. The effect of that accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value. For a cash flow hedge the effective portion of the derivative's gain or loss is initially reported as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or specific firm commitments. The Company also formally assesses (both at the hedge's inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows or fair values of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, the Company discontinues hedge accounting prospectively, as discussed below. The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); the derivative expires or is sold, terminated, or exercised; it is no longer probable that the forecasted transaction will occur; a hedged firm commitment no longer meets the definition of a firm commitment; or management determines that designating the derivative as a hedging instrument is no longer appropriate. When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, the gain or loss on the derivative remains in accumulated other comprehensive income and is reclassified into earnings when the forecasted transaction affects earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were accumulated in other comprehensive income will be recognized immediately in earnings. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its fair value on the balance sheet, recognizing changes in the fair value in current-period earnings. In the normal course of business, the Company is exposed to the effect of interest rate changes. The Company limits these risks by following established risk management policies and procedures including the use of derivatives. It is the objective of the Company to use interest rate hedges to manage its fixed and floating interest rate position and not to be engaged in the speculation of interest rates. FelCor manages interest rate risk based on the varying circumstances of anticipated borrowings, and existing floating and fixed rate debt, including the Company's revolving line of credit. FelCor will generally seek to pursue F-16 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. DERIVATIVES -- (CONTINUED) interest rate risk mitigation strategies that will result in the least amount of reported earnings volatility under generally accepted accounting principles, while still meeting strategic economic objectives and maintaining adequate liquidity and flexibility. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. To manage the relative mix of its debt between fixed and variable rate instruments, at December 31, 2001, the Company had entered into interest rate swap agreements with three financial institutions with a notional value of $175 million. These interest rate swap agreements modify a portion of the interest characteristics of the Company's outstanding fixed rate debt without an exchange of the underlying principal amount and effectively convert fixed rate debt to a variable rate. The differences to be paid or received by the Company under the terms of the interest rate swap agreements are accrued as interest rates change and are recognized as an adjustment to interest expense by the Company, pursuant to the terms of its interest rate swap agreement, and will have a corresponding effect on its future cash flows. Under interest rate swaps then in force the Company paid $522,000 during 2001, received $1.8 million in 2000 and paid $1.7 million during 1999. To determine the fair values of its derivative instruments, the Company uses a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized. The interest rate swap agreements held at December 31, 2001, are designated as fair value hedges, are marked to market through the income statement, but are offset by the change in fair value of the Company's swapped outstanding fixed rate debt. The estimated unrealized net loss on these interest rate swaps agreements was approximately $1.5 million at December 31, 2001 and represents the amount the Company would either pay or receive to terminate the agreements based on current market rates. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards 107 requires disclosures about the fair value for all financial instruments, whether or not recognized for financial statement purposes. Disclosures about fair value of financial instruments are based on pertinent information available to management as of December 31, 2001. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Management's estimates of the fair value of (i) accounts receivable, accounts payable and accrued expenses approximate carrying value due to the relatively short maturity of these instruments; (ii) notes receivable approximate carrying value based upon effective borrowing rates for issuance of debt with similar terms and remaining maturities; (iii) the borrowings under the Line of Credit and interest rate swap agreements approximate carrying value because these borrowings accrue interest at floating interest rates based on market. The estimated fair value of the Company's fixed rate debt of $1.9 billion is $1.7 billion at December 31, 2001, based on current market interest rates estimated by the Company for similar debt with similar maturities. F-17 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. INCOME TAXES The Company has elected to be taxed as a REIT under the Internal Revenue Code. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its taxable income to its stockholders. It is management's current intention to adhere to these requirements and maintain the Company's REIT status. As a REIT, the Company generally will not be subject to corporate level federal income taxes on net income it distributes to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not qualify as a REIT for subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed taxable income. In addition, taxable income from non-REIT activities managed through TRSs is subject to federal, state and local taxes. Under the RMA, which became effective January 1, 2001, the Company generally leases its hotels to wholly-owned TRSs that are subject to federal and state income taxes. The Company accounts for income taxes in accordance with the provisions of SFAS 109, "Accounting for Income Taxes." Under SFAS 109, the Company accounts for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. At December 31, 2001, the Company's TRS had a deferred tax asset of approximately $12.8 million, prior to any valuation allowance, relating to losses of the TRS during the year ended December 31, 2001. Management has provided a 100% valuation allowance against this asset due to the uncertainty of realization and, accordingly, no provision or benefit for income taxes is reflected in the accompanying Consolidated Statements of Operations. Reconciliation between GAAP net income or loss and taxable income: The following table reconciles GAAP net income or loss to taxable income for the years ended December 31, 2001, 2000 and 1999 (in thousands):
2001 2000 1999 --------- --------- --------- GAAP net income (loss) ................................................. $ (39,276) $ 61,699 $ 131,080 Add GAAP net loss/(income) of taxable subsidiaries included above(a) ..................................................... 33,212 (3,243) 535 --------- --------- --------- GAAP net income (loss) from REIT operations(b) ......................... (6,064) 58,456 131,615 Book/tax differences in depreciation and amortization(c) ............. 34,746 (4,091) 251 Book/tax differences in minority interests ........................... (18,680) (8,894) (1,197) Other book/tax differences, net: Gains (losses) from capital transactions ............................ (4,849) 842 (4,242) Lease termination costs not deductible for tax ...................... 36,604 Loss for assets held for sale not deductible for tax ................ 7,000 63,000 Other ............................................................... 2,751 9,626 4,996 --------- --------- --------- Taxable income before adjustments ...................................... 51,508 118,939 131,423 Capital gains ........................................................ (1,672) --------- --------- --------- Adjusted taxable income subject to distribution requirement(d) ......... $ 51,508 $ 117,267 $ 131,423 ========= ========= =========
(a) 1999 and 2000 reflect the net income or loss of the Company's qualified REIT subsidiary, while 2001 reflects a net loss from the Company's TRSs. (b) All adjustments to "GAAP net income (loss) from REIT operations" are net of amounts attributable to minority interest, TRSs and qualified REIT subsidiaries. (c) The changes in book/tax differences in depreciation and amortization for 2001 are principally resulting from book and tax basis differences, differences in depreciable lives, and accelerated depreciation methods used for tax. (d) The dividend distribution requirement was 90% in 2001 and 95% for 1999 and 2000. F-18 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. INCOME TAXES -- (CONTINUED) Characterization of distributions: For income tax purposes, distributions paid consist of ordinary income, capital gains, return of capital or a combination thereof. For the years ended December 31, 2001, 2000 and 1999 distributions paid per share were characterized as follows:
2001 2000 1999 -------------------- ----------------- ----------------- Amount Mix Amount Mix Amount Mix ------- ------ ------ ----- ------ ---- COMMON STOCK Ordinary income......................... $0.935 55.01% $2.20 100% $2.20 100% Return of capital....................... 0.765 44.99 ------ ------ ----- --- ----- --- $1.700 100.00% $2.20 100% $2.20 100% ====== ====== ===== === ===== === PREFERRED STOCK - SERIES A Ordinary income......................... $1.95 100.00% $1.95 100% $1.95 100% ===== ====== ===== === ===== === PREFERRED STOCK - SERIES B Ordinary income......................... $2.25 100.00% $2.25 100% $2.25 100% ===== ====== ===== === ===== ===
At December 31, 2001 the Company had six Canadian hotels and was subject to Canadian federal and provincial taxes. For the years ended December 31, 2001, 2000, and 1999, the Company incurred liabilities of approximately $1.2 million, $490,000 and $422,000 for Canadian taxes. 11. CAPITAL STOCK As of December 31, 2001, the Company had approximately $946 million of common stock, preferred stock, debt securities, and/or common stock warrants available for offerings under shelf registration statements previously declared effective. Preferred Stock FelCor's board of directors is authorized to provide for the issuance of up to 20,000,000 shares of preferred stock in one or more series, to establish the number of shares in each series, to fix the designation, powers preferences and rights of each such series, and the qualifications, limitations or restrictions thereof. In 1996, the Company issued 6.1 million shares of its Series A preferred stock at $25 per share. The Series A preferred stock bears an annual dividend equal to the greater of $1.95 per share or the cash distributions declared or paid for the corresponding period on the number of shares of common stock into which the Series A preferred stock is then convertible. Each share of the Series A preferred stock is convertible at the stockholder's option to 0.7752 shares of common stock, subject to certain adjustments, and could not be redeemed by the Company before April 30, 2001. During 2000, holders of 69,400 shares of Series A preferred stock converted their shares to 53,798 common shares, which were issued from treasury shares. On May 1, 1998, the Company issued 5.75 million depositary shares, representing 57,500 shares of its Series B preferred stock, at $25 per depositary share. The Series B preferred stock and the corresponding depositary shares may be called by FelCor at par on or after May 7, 2003, have no stated maturity, sinking fund or mandatory redemption, and are not convertible into any other securities of FelCor. The Series B preferred stock has a liquidation preference of $2,500 per share (equivalent to $25 per depositary share) and is entitled to annual dividends at the rate of 9% of the liquidation preference (equivalent to $2.25 annually per depositary share). F-19 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. CAPITAL STOCK -- (CONTINUED) At December 31, 2001, all dividends then payable on the Series A and Series B preferred stock had been paid. FelCor LP Units FelCor is the sole general partner of FelCor LP and is obligated to contribute the net proceeds from any issuance of its equity securities to FelCor LP in exchange for units of partnership interest ("Units") corresponding in number and terms to the equity securities issued by it. Units of limited partner interest may also be issued by FelCor LP to third parties in exchange for cash or property, and Units so issued to third parties are redeemable at the option of the holders thereof for a like number of shares of FelCor common stock or, at the option of FelCor, for the cash equivalent thereof. During 2001, 6,227 Units were exchanged for a like number of shares of FelCor common stock, which were issued from treasury stock, and 2,491 Units were redeemed during 2001 for $34,000 in cash. In consideration for the acquisition of all the equity interests in DJONT, FelCor LP issued 416,667 Units on January 1, 2001. This transaction reduced FelCor's ownership of limited partnership interests in FelCor LP from approximately 86% to approximately 85%, which increased the minority interest liability related to FelCor LP by approximately $10 million at December 31, 2001. Treasury Stock Repurchase Program FelCor's board of directors has authorized the repurchase of up to $300 million of its outstanding common shares. Stock repurchases may, at the discretion of management, be made from time to time at prevailing prices in the open market or through privately negotiated transactions. Beginning in January 2001, through March 27, 2001, FelCor repurchased approximately 179,000 shares of its outstanding common stock on the open market for approximately $4 million. Through December 31, 2001, FelCor repurchased approximately 10.5 million shares of common stock at an aggregate of approximately $189 million. The stock repurchase program has been suspended and, since March 27, 2001, the Company has not repurchased any additional shares of our common stock in the open market. In consideration for the acquisition of 12 leases that were held by Six Continents Hotels, the Company issued to Six Continents Hotels in January of 2001, 413,585 shares of FelCor common stock previously held in treasury. In July 2001, the Company issued 100 shares of FelCor common stock from treasury to Six Continents Hotels to acquire the remaining 88 leases still held by Six Continents Hotels. Other activity during 2001 included the issuance of 226,000 shares under restricted stock grants to employees and directors, offset by the forfeiture of 25,300 shares under restricted stock grants and the exercise of 48,806 stock options. 12. OTHER PROPERTY OPERATING COSTS Other property operating costs is comprised of the following for the year ended December 31, 2001 (in thousands): Hotel general administrative expense....................................... $93,652 Marketing.................................................................. 87,042 Repair and maintenance..................................................... 54,603 Utilities.................................................................. 49,561 Other...................................................................... 5,389 -------- Total other property operating costs............................ $290,247 ========
F-20 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. TAXES, INSURANCE AND LEASE EXPENSE Taxes, insurance and lease expense is comprised of the following for the years ended December 31, 2001, 2000, and 1999 (in thousands):
2001 2000 1999 -------- ------- ------- Real estate and personal property taxes ................................... $56,587 $63,207 $52,118 Percentage lease expense(a)................................................ 55,722 Property and general liability insurance................................... 11,525 4,065 3,481 State franchise and Canadian income taxes.................................. 1,193 3,376 3,973 Land lease expense......................................................... 15,757 21,985 17,558 Other...................................................................... 837 -------- ------- ------- Total taxes, insurance, and lease expense....................... $141,621 $92,633 $77,130 ======== ======= =======
(a) Represents percentage lease expense associated with the hotels owned by unconsolidated entities. 14. LAND LEASES The Company leases land occupied by certain hotels from third parties under various operating leases. Certain leases contain contingent rent features based on gross revenue at the respective hotels. Future minimum lease payments under the Company's land lease obligations at December 31, 2001, are as follows (in thousands):
YEAR ---- 2002 $ 4,736 2003 4,712 2004 4,779 2005 4,578 2006 4,586 2007 and thereafter 144,647 -------- $168,038 ========
15. GAIN ON SALE OF ASSETS In 2001, the Company received $3.9 million from the condemnation of three parcels of land and recorded a gain of $2.9 million. In 2001, the Company sold an undeveloped parcel of land adjacent to one of its hotels in Atlanta and recorded a gain of $462,000. In 2000, the Company sold two hotels for $33.8 million, recognizing a gain of $2.6 million, and vacant excess land and a billboard for $2.3 million recognizing a gain of $1.8 million. F-21 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2001, 2000 and 1999 (in thousands, except per share data):
2001 2000 1999 --------- --------- --------- Numerator: Income (loss) before extraordinary items ....................... $ (38,006) $ 65,564 $ 132,193 Less: Preferred dividends ................................... (24,600) (24,682) (24,735) --------- --------- --------- Income (loss) applicable to common stockholders before extraordinary items ......................................... (62,606) 40,882 107,458 Extraordinary items ......................................... (1,270) (3,865) (1,113) --------- --------- --------- Net income (loss) applicable to common stockholders ................................................ $ (63,876) $ 37,017 $ 106,345 ========= ========= ========= Denominator: Denominator for basic earnings per share - weighted average shares ...................................... 52,622 55,264 67,392 Effect of dilutive securities: Stock options .................................................. 27 166 Restricted shares .............................................. 228 23 --------- --------- --------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions .................................................. 52,622 55,519 67,581 ========= ========= ========= Earnings (loss) per share data: Basic Net income (loss) before extraordinary items ................... $ (1.19) $ 0.74 $ 1.59 Extraordinary items ............................................ (0.02) (0.07) (0.02) --------- --------- --------- Net income (loss) .............................................. $ (1.21) $ 0.67 $ 1.57 ========= ========= ========= Diluted Net income (loss) before extraordinary items ................... $ (1.19) $ 0.74 $ 1.59 Extraordinary items ............................................ (0.02) (0.07) (0.02) --------- --------- --------- Net income (loss) .............................................. $ (1.21) $ 0.67 $ 1.57 ========= ========= =========
The Series A preferred shares and the majority of stock options granted are anti-dilutive and are not included in the calculation of diluted earnings per share. F-22 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. COMMITMENTS AND RELATED PARTY TRANSACTIONS The acquisition of DJONT, one of the Company's primary lessees, was completed effective January 1, 2001. In consideration for the acquisition of DJONT, FelCor LP issued 416,667 units of limited partnership interest valued at approximately $10 million. The acquisition of DJONT required negotiations between the Company and the owners of DJONT, including Thomas J. Corcoran, Jr., the President, Chief Executive Officer, and director of FelCor and the children of Charles N. Mathewson, a director of FelCor. The interests of Mr. Corcoran and Mr. Mathewson were in direct conflict with the Company's interests in these negotiations and, accordingly, they abstained from participation in the FelCor board of directors' discussion and vote on this matter. Prior to the acquisition of DJONT, which was effective January 1, 2001, the Company shared the executive offices and certain employees with FelCor, Inc., and DJONT, (both companies were controlled by Thomas J. Corcoran, Jr., President and CEO) and each company paid its share of the costs thereof, including an allocated portion of the rent, compensation of certain personnel, office supplies, telephones, and depreciation of office furniture, fixtures, and equipment. Any such allocation of shared expenses to the Company is required to be approved by a majority of FelCor's independent directors. At December 31, 2001, FelCor Inc. had a 10% ownership interest in one hotel and limited other investments. During 2000 and 1999, the Company paid approximately $7.5 million (approximately 89.4%) and $5.7 million (approximately 89.5%), respectively, of the allocable expenses under this arrangement. Following the acquisition of DJONT, FelCor, Inc. continued to share certain overhead costs. FelCor, Inc. paid $45,000 for shared office costs in 2001. In December 2002, the Company sold one hotel and, effective January 1, 2001, completed the acquisition of leases with respect to 12 hotels that had been leased to and operated by Six Continents Hotels. In consideration for the acquisition of such leases and termination of the related management agreements, FelCor issued 413,585 shares of its common stock valued at approximately $10 million, to Six Continents Hotels. The Company acquired the remaining leases held by Six Continents Hotels, effective July 1, 2001. The Company contributed these leases to its TRSs. In consideration for these 88 leases, FelCor issued 100 shares of its common stock and caused their subsidiaries to agree to new long-term management agreements with subsidiaries of Six Continents Hotels to manage these hotels. The acquisition of the leases held by Six Continents Hotels involved negotiations between the Company and Six Continents Hotels. Richard C. North, a director of FelCor, is the Group Finance Director of Six Continents plc, the parent of Six Continents Hotels and, together with its affiliates, the owner of approximately 16% of our outstanding shares and units. The interest of Six Continents plc in those negotiations was in direct conflict with the Company's interests. Mr. North abstained from participating in any discussion or vote by FelCor's board relating to these transactions. Following the events of September 11, 2001, certain types of coverage, such as for acts of terrorism, are unavailable or are only available at a cost that is prohibitive. In an effort to keep our cost of insurance within reasonable limits, we have not purchased terrorism insurance at the current prohibitive prices. We have also increased our deductible amounts under policies of flood, wind and general liability insurance, which increases our risk of incurring losses that are uninsured or not fully insured. Should such uninsured or not fully insured losses be substantial, they could have a material adverse impact on our operating results and cash flows. There is no litigation pending or known to be threatened against us or affecting any of our hotels, other than claims arising in the ordinary course of business or which are not considered to be material. Furthermore, most of these claims are substantially covered by insurance. We do not believe that any claims known to us, individually or in the aggregate, will have a material adverse effect on us, without regard to any potential recoveries from insurers or other third parties. F-23 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED) The Company's hotels are operated under various management agreements that call for base management fees, which range from 2% to 7% of hotel room revenue and generally have an incentive provision related to the hotel's profitability. The management agreements have terms from 10 to 20 years and generally have renewal options. With the exception of 100 hotels whose rights to use a brand name are contained in the management agreement governing their operations and seven of the Company's hotels that do not operate under a nationally recognized brand name, each of the Company's hotels operates under a franchise or license agreement. Typically, our franchise or license agreements provide for a royalty fee of 4% of room revenues to be paid to the franchisor. 18. SUPPLEMENTAL CASH FLOW DISCLOSURE During 1999, the Company purchased the land related to three hotels, which previously had been leased. These purchases were recorded under the purchase method of accounting. The fair values of the acquired assets and liabilities recorded at the date of acquisition are as follows (in thousands):
1999 ------- Assets acquired................................................... $19,776 Liabilities assumed............................................... (7,800) Common Stock and Units issued..................................... (1,174) ------- Net cash paid.......................................... $10,802 =======
Approximately $8.0 million, $34.0 million, and $39.7 million of aggregate preferred stock dividends, common stock and FelCor LP unit distributions had been declared as of December 31, 2001, 2000, and 1999, respectively. These amounts were paid in the following January of each year. In 2001, 2000 and 1999, the Company allocated $5 million, $71.6 million and $3.8 million, respectively, to minority interest from additional paid in capital. 19. STOCK BASED COMPENSATION PLANS FelCor sponsors three restricted stock and stock option plans (the "FelCor Plans"). In addition, upon completion of the merger with Bristol Hotel Company (the "Merger") in 1998, FelCor assumed two stock option plans previously sponsored by Bristol Hotel Company (the "Bristol Plans"). FelCor was initially obligated to issue up to 1,271,103 shares of its common stock pursuant to the Bristol Plans. No additional options may be awarded under the Bristol Plans. The FelCor Plans and the Bristol Plans are referred to collectively as the "Plans". The Company applies APB Opinion 25 and related interpretations in accounting for the Plans. In 1995 the Financial Accounting Standards Board SFAS Statement 123, "Accounting for Stock-Based Compensation" ("SFAS 123") which, if fully adopted by the Company, would change the methods the Company applies in recognizing the cost of the Plans. Adoption of the cost recognition provisions of SFAS 123 is optional and the Company has decided not to adopt the provisions of SFAS 123. However, pro forma disclosures, as if the Company had adopted the cost recognition provisions of SFAS 123, are required by SFAS 123 and are presented below. F-24 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 19. STOCK BASED COMPENSATION PLANS -- (CONTINUED) Stock Options FelCor is authorized to issue 2,950,000 shares of common stock under the FelCor Plans pursuant to awards granted in the form of incentive stock options, non-qualified stock options, and restricted stock. All options have 10-year contractual terms and vest either over five equal annual installments (20% per year), beginning in the year following the date of grant or 100% at the end of a four year vesting term. Under the FelCor plans there were 460,260 shares available for grant at December 31, 2001. The options outstanding under the Bristol Plans generally vest either in four equal annual installments (25% per year) beginning in the second year following the original date of award, in five equal annual installments (20% per year) beginning in the year following the original date of award, or on a single date that is three to five years following the original date of the award. Options covering 111,247 shares were outstanding under the Bristol Plans at December 31, 2001. A summary of the status of FelCor's non-qualified stock options under the Plans as of December 31, 2001, 2000, and 1999, and the changes during the years are presented below:
2001 2000 1999 ---- ---- ---- WEIGHTED WEIGHTED WEIGHTED NO. SHARES OF AVERAGE NO. SHARES OF AVERAGE NO. SHARES OF AVERAGE UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES ------------- -------- ------------- -------- ------------- -------- Outstanding at beginning of the year ......... 1,900,780 $23.33 2,496,773 $22.32 2,540,466 $22.53 Granted ...................................... 300,000 $17.94 69,000 $19.50 9,750 $22.13 Exercised .................................... (48,806) $10.33 (760) $10.33 Retired (a) .................................. (349,443) $12.28 Forfeited .................................... (110,762) $23.33 (315,550) $26.75 (52,683) $32.41 --------- --------- --------- Outstanding at end of year ................... 2,041,212 $22.85 1,900,780 $23.33 2,496,773 $22.32 ========= ========= ========= Exercisable at end of year ................... 1,546,913 $23.84 804,066 $24.64 906,675 $24.58
(a) In the second quarter of 2000, the Company purchased options covering an aggregate of 349,443 shares of FelCor's common stock for approximately $1.9 million. These options were held by employees of Bristol and were issued in substitution for stock options previously granted by Bristol Hotel Company that were outstanding at the time of its merger with FelCor in 1998. These options so purchased and retired had exercise prices ranging from $10.33 to $16.95 per share and the majority of these options were scheduled to vest in the third quarter of 2000. The purchase price was recorded as a reduction in additional paid in capital.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------ ----------------------------- NUMBER WGTD. AVG. NUMBER RANGE OF OUTSTANDING REMAINING WGTD AVG. EXERCISABLE WGTD. AVG. EXERCISE PRICES AT 12/31/01 LIFE EXERCISE PRICE AT 12/31/01 EXERCISE PRICE --------------- ------------ --------- -------------- ----------- -------------- $10.33 to $29.92 1,884,836 6.14 $21.83 1,400,386 $22.64 $30.28 to $36.63 156,376 5.46 $35.24 146,527 $35.35 --------- --------- $10.33 to $36.63 2,041,212 6.08 $22.85 1,546,913 $23.84 ========= =========
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 12.44%; risk free interest rates are different for each grant and range from 4.33% to 6.58%; the expected lives of options are six years; and volatility of 21.04% for 2001 grants, 18.22% for 2000 grants and 18.44% for grants issued in 1999. The weighted average fair value of options granted during 2001, 2000, and 1999 was $0.85, $0.90, and $1.07 per share, respectively. F-25 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 19. STOCK BASED COMPENSATION PLANS -- (CONTINUED) Restricted Stock A summary of the status of the Company's restricted stock grants as of December 31, 2001, 2000, and 1999 and the changes during the years are presented below:
2001 2000 1999 ------------------------ ------------------------- ----------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE FAIR MARKET FAIR MARKET FAIR MARKET VALUE VALUE VALUE NO. SHARES AT GRANT NO. SHARES AT GRANT NO. SHARES AT GRANT ---------- ----------- ---------- ------------ ---------- ----------- Outstanding at beginning of the year ......... 335,375 $25.55 125,375 $28.97 125,375 $28.97 Granted: With 5-year pro rata vesting .............. 214,000 $22.89 210,000 $23.50 Forfeited .................................... (25,300) $20.23 ------- ------- ------- Outstanding at end of year ................... 524,075 $24.72 335,375 $25.55 125,375 $28.97 ======= ======= ======= Vested at end of year ........................ 161,895 $25.03 107,975 $28.77 83,575 $28.35
Pro Forma Net Income and Net Income Per Common Share Had the compensation cost for the Company's stock-based compensation plans been determined in accordance with SFAS 123, the Company's net income or loss and net income or loss per common share for 2001, 2000, and 1999 would approximate the pro forma amounts below (in thousands, except per share data):
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999 ---------------------- ---------------------- ---------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA ----------- --------- ----------- --------- ----------- --------- SFAS 123 charge ......................... $ 2,365 $ 1,636 $ 1,606 APB 25 charge ........................... $ 2,093 $ 1,478 $ 652 Net income (loss) applicable to common stockholders .................. $(63,876) $(64,148) $ 37,017 $ 36,859 $106,345 $105,391 Diluted net income (loss) applicable to common stockholder per common share ................................ $ (1.21) $ (1.22) $ 0.67 $ 0.66 $ 1.57 $ 1.56
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. 20. EMPLOYEE BENEFITS The Company offers a 401(k) plan, health insurance benefits and a deferred compensation plan to its employees. In 2001 the Company's matching contribution to its 401(k) plan was $489,000 and the cost of health insurance benefits were $485,000. The deferred compensation plan offered by the Company is available only to directors and employees making in excess of $100,000 annually. The Company makes no matching or other contributions to the deferred compensation plan other than the payment of its operating and administrative expenses. 21. SEGMENT INFORMATION SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," requires the disclosure of selected information about operating segments. Based on the guidance provided in the standard, the Company has determined that its business is conducted in one operating segment. F-26 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 21. SEGMENT INFORMATION -- (CONTINUED) The following table sets forth revenues for and investment in hotel assets represented by the following geographical areas as of and for the years ended December 31, 2001, 2000 and 1999 (in thousands):
REVENUE(a) INVESTMENT IN HOTEL ASSETS -------------------------------------- -------------------------------------------- 2001 2000 1999 2001 2000 1999 ---- ---- ---- ---- ---- ---- California............ $ 195,376 $118,857 $97,283 $691,724 $ 681,714 $ 698,942 Texas................. 206,766 97,274 94,898 869,369 862,199 891,626 Florida............... 130,402 66,014 61,516 541,231 530,933 542,298 Georgia............... 89,487 40,183 39,247 319,038 316,267 355,519 Other states.......... 552,964 203,776 188,326 1,797,119 1,752,303 1,802,220 Canada................ 25,976 13,860 11,817 77,193 79,960 75,294 ---------- -------- -------- ---------- ---------- ---------- Total...... $1,200,971 $539,964 $493,087 $4,295,674 $4,223,376 $4,365,899 ========== ======== ======== ========== ========== ==========
a) Prior to January 1, 2001, all of the revenues that the Company derived from hotel assets consisted of percentage lease revenue. Effective January 1, 2001, the Company acquired 96 hotel leases and effective July 1, 2001 acquired the remaining 88 hotel leases. Upon acquisition of these leases, the Company's revenue derived from hotel assets became hotel operating revenues, including room revenues, food and beverage revenue and other hotel operating revenue. 22. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") approved SFAS 141, "Business Combinations", and SFAS 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 142 will be effective for fiscal years beginning after December 15, 2001 and will require (1) intangible assets (as defined in SFAS 141) to be reclassified into goodwill, (2) goodwill amortization to cease, and (3) the testing of goodwill for impairment at transition and at interim periods (if an event or circumstance would result in an impairment). As the result of implementation of SFAS 142, the Company will stop the amortization of the difference between the Company's cost in unconsolidated entities and its proportionate share of the underlying net assets at the date of acquisition. At December 31, 2001, the Company included in investment in unconsolidated entities an asset of $73.4 million representing the unamortized cost in excess of its proportionate share of the underlying assets at the date of acquisition. The Company amortized excess cost of $2.5, $2.1 and $2.1 million in 2001, 2000 and 1999, respectively. The Company does not believe that SFAS 142 will have a material impact on the Company's results of operations and financial position. On August 15, 2001 the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations." SFAS 143 requires that the fair value of the liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS 143 will be effective for financial statements issued for fiscal years beginning after June 15, 2002 and interim periods within those fiscal years. The Company is not currently affected by the Statement's requirement. On October 3, 2001 the FASB issued SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121 by removing goodwill from its scope, by defining a probability-weighted cash flow estimation approach and establishing a "primary-asset" approach to determine the cash flow estimation period for a group of assets. It also replaces the provisions of APB Opinion 30, "Reporting the Effects of Disposal of a Segment of a Business" for the disposal of segments of a business. SFAS 144 will be effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company is not currently affected by the Statement's requirement. F-27 FELCOR LODGING TRUST INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 23. QUARTERLY OPERATING RESULTS (UNAUDITED) The Company's unaudited consolidated quarterly operating data for the years ended December 31, 2001 and 2000, follows (in thousands, except per share data). In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of quarterly results have been reflected in the data. It is also management's opinion, however, that quarterly operating data for hotel enterprises are not indicative of results to be achieved in succeeding quarters or years. In order to obtain a more accurate indication of performance, there should be a review of operating results, changes in stockholders' equity and cash flows for a period of several years.
FIRST SECOND THIRD FOURTH 2001 QUARTER QUARTER QUARTER QUARTER ---- ------- ------- ------- ------- Total revenues ................................................... $ 285,653 $ 274,649 $ 337,759 $ 302,910 Income (loss) before extraordinary items ......................... $ (6,806) $ 22,784 $ (24,717) $ (29,267) Net income (loss) applicable to common stockholders .............. $ (12,956) $ 16,409 $ (31,912) $ (35,417) Diluted per common share data: Net income (loss) applicable to common stockholders ......... $ (0.25) $ 0.31 $ (0.60) $ (0.67) Weighted average common shares outstanding .................. 52,595 53,046 52,634 52,639
FIRST SECOND THIRD FOURTH 2000 QUARTER QUARTER QUARTER QUARTER ---- ------- ------- ------- ------- Total revenues ................................................... $ 124,502 $ 133,657 $ 132,842 $ 148,963 Income (loss) before extraordinary items ......................... $ 18,927 $ (28,900) $ 34,231 $ 41,306 Net income (loss) applicable to common stockholders .............. $ 12,743 $ (35,074) $ 24,211 $ 35,137 Diluted per common share data: Net income (loss) applicable to common stockholders ......... $ 0.21 $ (0.64) $ 0.44 $ 0.66 Weighted average common shares outstanding .................. 59,377 54,945 54,579 53,202
F-28 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of FelCor Lodging Trust Incorporated: Our audits of the consolidated financial statements referred to in our report dated February 6, 2002, appearing on page F-2 of the Annual Report on Form 10-K of FelCor Lodging Trust Incorporated (which report and consolidated financial statements are included in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Dallas, Texas February 6, 2002 F-29 FELCOR LODGING TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2001 (IN THOUSANDS)
COST CAPITALIZED SUBSEQUENT INITIAL COST TO ACQUISITION -------------------- ---------------------------- BUILDINGS FURNITURE BUILDINGS FURNITURE AND AND AND AND DESCRIPTION OF PROPERTY ENCUMBRANCES LAND IMPROVEMENTS FIXTURE LAND IMPROVEMENT FIXTURES - ----------------------- ------------ ------ ------------ -------- ---- ----------- --------- Birmingham, AL(1) 12,096 $2,843 $29,286 $ 160 $ -- $ 672 $4,256 Montgomery E. (I-85), AL(2) 615 836 7,272 251 9 2,717 1,057 Texarkana, (I-30), AR(2) 5,245 162 -- 1,496 562 Flagstaff, AZ(1) 900 6,825 268 -- 1,605 1,329 Phoenix (Airport - 44th St), AZ(1) 2,969 25,828 891 -- 1,397 2,841 Phoenix (Camelback), AZ(1) 38,998 612 4,695 976 5,903 Phoenix (Crescent), AZ(3) 26,489 3,608 29,583 2,886 -- 183 1,454 Tempe (ASU), AZ(1) 11,987 3,951 34,371 1,185 -- 935 3,040 Anaheim (Disney(R) Area), CA(1) 11,120 2,548 14,832 607 -- 755 4,075 Burlingame (San Francisco A/P S), CA(1) 39,929 818 -- 242 4,514 Dana Point, CA(5) 1,787 15,545 536 -- 811 2,928 El Segundo (LAX Airport S), CA(1) 2,660 17,997 798 -- 571 6,663 Irvine (Orange County Airport), CA(6) 4,981 43,338 1,494 -- 1,789 771 Milpitas, CA(1) 20,831 4,021 23,677 562 -- 1,057 4,773 Milpitas (San Jose N), CA(6) 4,153 36,130 1,246 -- 5,886 1,976 Napa, CA(1) 10,944 3,287 14,205 494 -- 1,057 3,726 Oxnard (Mandalay Beach), CA(1) 2,930 22,124 879 -- 1,695 6,115 Palm Desert, CA(1) 8,569 2,368 20,598 710 -- 1,621 2,902 Pleasanton, CA(6) 3,169 27,569 951 -- 174 316 San Diego (On the Bay), CA(2) 68,633 2,123 -- 1,288 3,725 San Francisco (Financial District), CA(2) 21,679 670 -- 1,543 2,162 San Francisco (Fisherman's Wharf), CA(2) 62,203 1,924 -- 961 952 San Francisco (Union Square), CA(6) 8,514 74,075 2,554 -- 3,609 1,481 Santa Barbara, CA(2) 5,432 1,692 14,723 508 -- 199 345 So. San Francisco (SF Airport N), CA(1) 25,831 3,418 31,737 527 -- 896 5,165 Aurora (Denver Southeast), CO(7) 2,432 21,158 730 -- 504 2,392 Avon (Beaver Creek Resort), (16) CO(8) 1,134 9,864 340 (16) 342 1,138 Hartford (Downtown), CT(6) 2,327 20,243 698 -- 6,015 3,316 Stamford, CT(9) 37,356 1,155 -- 1,586 965 Wilmington, DE(7) 1,379 12,487 431 -- 9,480 3,788 Boca Raton, FL(1) 1,868 16,253 560 -- 90 4,010 Cocoa Beach (Oceanfront Resort), FL(2) 2,304 20,046 691 -- 9,711 4,081 Deerfield Beach, FL(1) 15,020 4,522 29,443 917 69 1,045 5,470 Ft. Lauderdale, FL(1) 16,032 5,329 47,850 903 (163) 1,497 6,222 Ft. Lauderdale (Cypress Creek), FL(11) 12,754 3,009 26,177 903 -- 1,042 2,828 Jacksonville, FL(1) 1,130 9,608 456 -- 4,877 2,453 Kissimmee (Nikki Bird Resort), FL(2) 31,652 979 -- 6,409 2,320 Lake Buena Vista (Disney World(C), FL(5) 2,896 25,196 869 -- 323 3,197 Miami (Airport), FL(6) 26,146 809 -- 1,090 1,448 Miami (Airport), FL(1) 12,960 4,135 24,950 1,171 -- 374 6,705 Orlando (Airport), FL(9) 2,564 22,310 769 -- 1,761 464 Orlando (Int'l Drive Resort), FL(2) 5,142 44,735 1,543 -- 8,569 3,469 Orlando (North), FL(1) 1,673 14,218 684 -- 5,523 3,148 Orlando (South), FL(1) 25,158 1,632 13,870 799 -- 632 3,037 Tampa (Near Busch Gardens), FL(2) 9,534 295 -- 11,209 2,203 GROSS AMOUNTS AT WHICH ACCUMULATED NET BOOK CARRIED AT CLOSE OF PERIOD DEPRECIATION VALUE ----------------------------------- BUILDINGS AND BUILDINGS AND BUILDINGS FURNITURE IMPROVEMENTS IMPROVEMENTS, AND AND FURNITURE & FURNITURE & DATE OF DATE DESCRIPTION OF PROPERTY LAND IMPROVEMENT FIXTURES TOTAL FIXTURES FIXTURES CONSTRUCTION ACQUIRED - ----------------------- ---- ----------- --------- ----- ------------- ------------ ------------ -------- Birmingham, AL(1) $2,843 $29,958 $4,416 $37,217 $ 8,118 $29,099 1987 01/03/96 Montgomery E. (I-85), AL(2) 845 9,989 1,308 12,142 1,565 10,577 1964 07/28/98 Texarkana, (I-30), AR(2) -- 6,741 724 7,465 945 6,520 1970 07/28/98 Flagstaff, AZ(1) 900 8,430 1,597 10,927 2,848 8,079 1988 02/16/95 Phoenix (Airport - 44th St), AZ(1) 2,969 27,225 3,732 33,926 3,604 30,322 1981 05/04/98 Phoenix (Camelback), AZ(1) 4,695 39,974 6,515 51,184 11,670 39,514 1985 01/03/96 Phoenix (Crescent), AZ(3) 3,608 29,766 4,340 37,714 6,509 31,205 1986 06/30/97 Tempe (ASU), AZ(1) 3,951 35,306 4,225 43,482 5,059 38,423 1986 05/04/98 Anaheim (Disney(R) Area), CA(1) 2,548 15,587 4,682 22,817 6,473 16,344 1987 01/03/96 Burlingame (San Francisco A/P S), CA(1) - 40,171 5,332 45,503 10,461 35,042 1986 11/06/95 Dana Point, CA(5) 1,787 16,356 3,464 21,607 4,576 17,031 1992 02/21/97 El Segundo (LAX Airport S), CA(1) 2,660 18,568 7,461 28,689 9,344 19,345 1985 03/27/96 Irvine (Orange County Airport), CA(6) 4,981 45,127 2,265 52,373 5,119 47,254 1986 07/28/98 Milpitas, CA(1) 4,021 24,734 5,335 34,090 8,180 25,910 1987 01/03/96 Milpitas (San Jose N), CA(6) 4,153 42,016 3,222 49,391 4,968 44,423 1987 07/28/98 Napa, CA(1) 3,287 15,262 4,220 22,769 5,626 17,143 1985 05/08/96 Oxnard (Mandalay Beach), CA(1) 2,930 23,819 6,994 33,743 9,051 24,692 1986 05/08/96 Palm Desert, CA(1) 2,368 22,219 3,612 28,199 3,851 24,348 1984 05/04/98 Pleasanton, CA(6) 3,169 27,743 1,267 32,179 3,083 29,096 1986 07/28/98 San Diego (On the Bay), CA(2) -- 69,921 5,848 75,769 7,684 68,085 1965 07/28/98 San Francisco (Financial District), CA(2) -- 23,222 2,832 26,054 3,095 22,959 1970 07/28/98 San Francisco (Fisherman's Wharf), CA(2) -- 63,164 2,876 66,040 6,852 59,188 1970 07/28/98 San Francisco (Union Square), CA(6) 8,514 77,684 4,035 90,233 8,802 81,431 1970 07/28/98 Santa Barbara, CA(2) 1,692 14,922 853 17,467 1,720 15,747 1969 07/28/98 So. San Francisco (SF Airport N), CA(1) 3,418 32,633 5,692 41,743 9,643 32,100 1988 01/03/96 Aurora (Denver Southeast), CO(7) 2,432 21,662 3,122 27,216 3,827 23,389 1989 03/15/98 Avon (Beaver Creek Resort), (16) CO(8) 1,118 10,206 1,478 12,802 2,926 9,876 1989 02/20/96 Hartford (Downtown), CT(6) 2,327 26,258 4,014 32,599 4,328 28,271 1973 07/28/98 Stamford, CT(9) - 38,942 2,120 41,062 4,444 36,618 1984 07/28/98 Wilmington, DE(7) 1,379 21,967 4,219 27,565 2,928 24,637 1972 03/20/98 Boca Raton, FL(1) 1,868 16,343 4,570 22,781 6,294 16,487 1989 02/28/96 Cocoa Beach (Oceanfront Resort), FL(2) 2,304 29,757 4,772 36,833 4,662 32,171 1960 07/28/98 Deerfield Beach, FL(1) 4,591 30,488 6,387 41,466 9,619 31,847 1987 01/03/96 Ft. Lauderdale, FL(1) 5,166 49,347 7,125 61,638 13,251 48,387 1986 01/03/96 Ft. Lauderdale (Cypress Creek), FL(11) 3,009 27,219 3,731 33,959 3,796 30,163 1986 05/04/98 Jacksonville, FL(1) 1,130 14,485 2,909 18,524 4,475 14,049 1986 07/28/94 Kissimmee (Nikki Bird Resort), FL(2) -- 38,061 3,299 41,360 5,071 36,289 1974 07/28/98 Lake Buena Vista (Disney World(C), FL(5) 2,896 25,519 4,066 32,481 5,090 27,391 1987 07/28/97 Miami (Airport), FL(6) -- 27,236 2,257 29,493 3,619 25,874 1987 01/03/96 Miami (Airport), FL(1) 4,135 25,324 7,876 37,335 10,188 27,147 1983 07/28/98 Orlando (Airport), FL(9) 2,564 24,071 1,233 27,868 2,651 25,217 1984 07/28/98 Orlando (Int'l Drive Resort), FL(2) 5,142 53,304 5,012 63,458 5,826 57,632 1972 07/28/98 Orlando (North), FL(1) 1,673 19,741 3,832 25,246 5,924 19,322 1985 07/28/94 Orlando (South), FL(1) 1,632 14,502 3,836 19,970 5,336 14,634 1985 07/28/94 Tampa (Near Busch Gardens), FL(2) -- 20,743 2,498 23,241 3,087 20,154 1966 07/28/98 LIFE UPON WHICH DEPRECIATION IN STATEMENT DESCRIPTION OF PROPERTY IS COMPUTED - ----------------------- ------------ Birmingham, AL(1) 5-40 Yrs Montgomery E. (I-85), AL(2) 5-40 Yrs Texarkana, (I-30), AR(2) 5-40 Yrs Flagstaff, AZ(1) 5-40 Yrs Phoenix (Airport - 44th St), AZ(1) 5-40 Yrs Phoenix (Camelback), AZ(1) 5-40 Yrs Phoenix (Crescent), AZ(3) 5-40 Yrs Tempe (ASU), AZ(1) 5-40 Yrs Anaheim (Disney(R) Area), CA(1) 5-40 Yrs Burlingame (San Francisco A/P S), CA(1) 5-40 Yrs Dana Point, CA(5) 5-40 Yrs El Segundo (LAX Airport S), CA(1) 5-40 Yrs Irvine (Orange County Airport), CA(6) 5-40 Yrs Milpitas, CA(1) 5-40 Yrs Milpitas (San Jose N), CA(6) 5-40 Yrs Napa, CA(1) 5-40 Yrs Oxnard (Mandalay Beach), CA(1) 5-40 Yrs Palm Desert, CA(1) 5-40 Yrs Pleasanton, CA(6) 5-40 Yrs San Diego (On the Bay), CA(2) 5-40 Yrs San Francisco (Financial District), CA(2) 5-40 Yrs San Francisco (Fisherman's Wharf), CA(2) 5-40 Yrs San Francisco (Union Square), CA(6) 5-40 Yrs Santa Barbara, CA(2) 5-40 Yrs So. San Francisco (SF Airport N), CA(1) 5-40 Yrs Aurora (Denver Southeast), CO(7) 5-40 Yrs Avon (Beaver Creek Resort), (16) CO(8) 5-40 Yrs Hartford (Downtown), CT(6) 5-40 Yrs Stamford, CT(9) 5-40 Yrs Wilmington, DE(7) 5-40 Yrs Boca Raton, FL(1) 5-40 Yrs Cocoa Beach (Oceanfront Resort), FL(2) 5-40 Yrs Deerfield Beach, FL(1) 5-40 Yrs Ft. Lauderdale, FL(1) 5-40 Yrs Ft. Lauderdale (Cypress Creek), FL(11) 5-40 Yrs Jacksonville, FL(1) 5-40 Yrs Kissimmee (Nikki Bird Resort), FL(2) 5-40 Yrs Lake Buena Vista (Disney World(C), FL(5) 5-40 Yrs Miami (Airport), FL(6) 5-40 Yrs Miami (Airport), FL(1) 5-40 Yrs Orlando (Airport), FL(9) 5-40 Yrs Orlando (Int'l Drive Resort), FL(2) 5-40 Yrs Orlando (North), FL(1) 5-40 Yrs Orlando (South), FL(1) 5-40 Yrs Tampa (Near Busch Gardens), FL(2) 5-40 Yrs
F-30 FELCOR LODGING TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
COST CAPITALIZED SUBSEQUENT INITIAL COST TO ACQUISITION -------------------- ---------------------------- BUILDINGS FURNITURE BUILDINGS FURNITURE AND AND AND AND DESCRIPTION OF PROPERTY ENCUMBRANCES LAND IMPROVEMENTS FIXTURE LAND IMPROVEMENT FIXTURES - ----------------------- ------------ ------ ------------ --------- ---- ----------- --------- Tampa Rocky Point, FL(5) 2,142 18,639 643 -- 1,240 2,603 Atlanta (Airport), GA(6) 40,943 1,266 -- 245 667 Atlanta (Airport), GA(1) 22,342 770 2,568 1,154 1,855 Atlanta (Airport Gateway), GA(3) 5,113 22,857 2,105 -- 235 4,334 Atlanta (Airport North), GA(2) 16,935 34,531 1,068 -- 293 920 Atlanta Buckhead, GA(1) 37,614 7,303 38,996 2,437 -- 744 3,074 Atlanta (Galleria) GA(11) 17,659 5,052 28,507 2,526 -- 863 925 Atlanta (Jonesboro South), GA(2) 2,815 864 7,515 259 -- 138 575 Atlanta Perimeter, GA(9) 10,509 20,556 636 -- 279 612 Atlanta Powers Ferry, GA(6) 10,250 3,410 29,672 1,023 1 557 821 Brunswick, GA(1) 705 6,067 247 -- 29 1,160 Columbus (Airport North), GA(2) 7,026 217 -- 1,996 917 Chicago (Allerton), IL(6) 3,343 29,086 1,003 -- 54,928 7,770 Chicago (O'Hare), IL(3) 24,527 8,178 37,043 2,887 -- 345 1,387 Deerfield, IL(1) 16,300 2,305 20,054 692 -- 532 2,088 Lexington, KY(14) 1,955 13,604 587 -- 165 2,290 Lexington, KY(11) 6,867 21,644 746 2,488 422 767 Baton Rouge, LA(1) 7,776 2,350 19,092 525 1 899 4,286 New Orleans (French Quarter), LA(2) 23,698 5,263 45,793 1,579 1 7,089 5,736 New Orleans, LA(1) 32,106 3,647 31,992 2,092 -- 5,205 3,425 Boston (Government Center), MA(9) 45,452 1,406 -- 5,279 1,601 Boston (Marlborough), MA(1) 20,159 948 8,143 325 761 13,083 5,381 Baltimore (BWI), MD(1) 2,568 22,433 770 (2) 1,309 2,785 Troy, MI(1) 2,968 25,905 909 -- 1,319 2,450 Bloomington, MN(1) 2,038 17,731 611 -- 561 3,439 Minneapolis (Airport), MN(1) 15,360 5,417 36,508 602 -- (14) 3,727 Minneapolis (Downtown), MN(1) 818 16,820 505 -- 87 3,971 St. Paul, MN(1) 1,156 17,315 849 -- (110) 3,783 Kansas City (Northeast), MO(2) 973 8,461 292 -- 31 2,613 St. Louis (Downtown), MO(1) 3,179 27,659 954 -- 1,317 3,992 St. Louis (Westport), MO(2) 7,990 2,767 24,072 830 -- 2,290 1,878 Jackson (Downtown), MS(6) 4,942 2,226 19,370 668 -- 122 462 Jackson (North), MS(15) 5,337 1,643 14,296 493 -- 227 505 Olive Branch (Whispering Woods Conference Center), MS(8) 1,247 12,155 419 (158) 1,603 1,557 Raleigh/Durham, NC(5) 2,124 18,476 637 -- 113 1,952 Omaha (Central), NE(5) 1,877 16,328 563 -- 1,114 2,476 Omaha (Central), NE(12) 518 4,504 155 -- 862 516 Omaha (I-80), NE(2) 1,795 15,614 538 -- 2,932 2,096 Omaha (Old Mill Northwest), NE(6) 979 8,519 294 -- 4,821 2,561 Omaha (Southwest), NE(12) 464 4,036 139 -- 719 288 Omaha (Southwest), NE(16) 923 8,029 277 -- 870 407 Omaha (Southwest), NE(15) 373 3,245 112 -- 23 126 Piscataway, NJ(1) 20,383 1,755 17,563 527 -- 888 3,144 Secaucus (Meadowlands), NJ(6) 2,356 20,497 707 -- 4,397 6,330 Albuquerque (Mountain View), NM(2) 1,322 11,505 397 -- 656 1,051 Syracuse, NY(1) 1,483 13,756 1,330 -- 320 514 Cleveland, OH(1) 1,755 15,329 527 -- 3,177 3,556 Columbus, OH(5) 1,918 16,691 576 -- 1,035 1,284 GROSS AMOUNTS AT WHICH ACCUMULATED NET BOOK CARRIED AT CLOSE OF PERIOD DEPRECIATION VALUE ----------------------------------- BUILDINGS AND BUILDINGS AND BUILDINGS FURNITURE IMPROVEMENTS IMPROVEMENTS, AND AND FURNITURE & FURNITURE & DATE OF DATE DESCRIPTION OF PROPERTY LAND IMPROVEMENT FIXTURES TOTAL FIXTURES FIXTURES CONSTRUCTION ACQUIRED - ----------------------- ---- ----------- --------- ----- ------------- ------------ ------------ -------- Tampa Rocky Point, FL(5) 2,142 19,879 3,246 25,267 3,914 21,353 1986 07/28/97 Atlanta (Airport), GA(6) -- 41,188 1,933 43,121 4,555 38,566 1975 07/28/98 Atlanta (Airport), GA(1) 2,568 23,496 2,625 28,689 2,941 25,748 1989 05/04/98 Atlanta (Airport Gateway), GA(3) 5,113 23,092 6,439 34,644 6,773 27,871 1986 06/30/97 Atlanta (Airport North), GA(2) -- 34,824 1,988 36,812 3,851 32,961 1967 07/28/98 Atlanta Buckhead, GA(1) 7,303 39,740 5,511 52,554 8,868 43,686 1988 10/17/96 Atlanta (Galleria) GA(11) 5,052 29,370 3,451 37,873 5,777 32,096 1990 06/30/97 Atlanta (Jonesboro South), GA(2) 864 7,653 834 9,351 992 8,359 1973 07/28/98 Atlanta Perimeter, GA(9) -- 20,835 1,248 22,083 2,391 19,692 1985 07/28/98 Atlanta Powers Ferry, GA(6) 3,411 30,229 1,844 35,484 3,446 32,038 1981 07/28/98 Brunswick, GA(1) 705 6,096 1,407 8,208 2,001 6,207 1988 07/19/95 Columbus (Airport North), GA(2) -- 9,022 1,134 10,156 1,360 8,796 1969 07/28/98 Chicago (Allerton), IL(6) 3,343 84,014 8,773 96,130 8,850 87,280 1923 07/28/98 Chicago (O'Hare), IL(3) 8,178 37,388 4,274 49,840 7,401 42,439 1994 06/30/97 Deerfield, IL(1) 2,305 20,586 2,780 25,671 4,542 21,129 1987 06/20/96 Lexington, KY(14) 1,955 13,769 2,877 18,601 4,090 14,511 1987 01/10/96 Lexington, KY(11) 2,488 22,066 1,513 26,067 2,667 23,400 1989 05/04/98 Baton Rouge, LA(1) 2,351 19,991 4,811 27,153 7,097 20,056 1985 01/03/96 New Orleans (French Quarter), LA(2) 5,264 52,882 7,315 65,461 5,733 59,728 1969 07/28/98 New Orleans, LA(1) 3,647 37,197 5,517 46,361 9,552 38,302 1984 12/01/94 Boston (Government Center), MA(9) -- 50,731 3,007 53,738 5,333 48,405 1968 07/28/98 Boston (Marlborough), MA(1) 1,709 21,226 5,706 28,641 7,234 21,407 1988 06/30/95 Baltimore (BWI), MD(1) 2,566 23,742 3,555 29,863 4,449 25,414 1987 03/20/97 Troy, MI(1) 2,968 27,224 3,359 33,551 4,711 28,840 1987 03/20/97 Bloomington, MN(1) 2,038 18,292 4,050 24,380 4,283 20,097 1980 02/01/97 Minneapolis (Airport), MN(1) 5,417 36,494 4,329 46,240 9,396 36,844 1986 11/06/95 Minneapolis (Downtown), MN(1) 818 16,907 4,476 22,201 6,466 15,735 1984 11/15/95 St. Paul, MN(1) 1,156 17,205 4,632 22,993 6,846 16,147 1983 11/15/95 Kansas City (Northeast), MO(2) 973 8,492 2,905 12,370 2,497 9,873 1975 07/28/98 St. Louis (Downtown), MO(1) 3,179 28,976 4,946 37,101 4,032 33,069 1985 05/04/98 St. Louis (Westport), MO(2) 2,767 26,362 2,708 31,837 2,995 28,842 1979 07/28/98 Jackson (Downtown), MS(6) 2,226 19,492 1,130 22,848 2,333 20,515 1975 07/28/98 Jackson (North), MS(15) 1,643 14,523 998 17,164 1,794 15,370 1957 07/28/98 Olive Branch (Whispering Woods Conference Center), MS(8) 1,089 13,758 1,976 16,823 2,200 14,623 1972 07/28/98 Raleigh/Durham, NC(5) 2,124 18,589 2,589 23,302 3,696 19,606 1987 07/28/97 Omaha (Central), NE(5) 1,877 17,442 3,039 22,358 3,829 18,529 1973 02/01/97 Omaha (Central), NE(12) 518 5,366 671 6,555 743 5,812 1965 07/28/98 Omaha (I-80), NE(2) 1,795 18,546 2,634 22,975 2,252 20,723 1991 07/28/98 Omaha (Old Mill Northwest), NE(6) 979 13,340 2,855 17,174 2,260 14,914 1974 07/28/98 Omaha (Southwest), NE(12) 464 4,755 427 5,646 593 5,053 1986 07/28/98 Omaha (Southwest), NE(16) 923 8,899 684 10,506 1,057 9,449 1989 07/28/98 Omaha (Southwest), NE(15) 373 3,268 238 3,879 462 3,417 1996 07/28/98 Piscataway, NJ(1) 1,755 18,451 3,671 23,877 5,505 18,372 1988 01/10/96 Secaucus (Meadowlands), NJ(6) 2,356 24,894 7,037 34,287 4,823 29,464 N/A 07/28/98 Albuquerque (Mountain View), NM(2) 1,322 12,161 1,448 14,931 1,558 13,373 1968 07/28/98 Syracuse, NY(1) 1,483 14,076 1,844 17,403 2,929 14,474 1989 06/30/97 Cleveland, OH(1) 1,755 18,506 4,083 24,344 4,961 19,383 1990 11/17/95 Columbus, OH(5) 1,918 17,726 1,860 21,504 2,742 18,762 1985 02/04/98 LIFE UPON WHICH DEPRECIATION IN STATEMENT DESCRIPTION OF PROPERTY IS COMPUTED - ----------------------- ------------ Tampa Rocky Point, FL(5) 5-40 Yrs Atlanta (Airport), GA(6) 5-40 Yrs Atlanta (Airport), GA(1) 5-40 Yrs Atlanta (Airport Gateway), GA(3) 5-40 Yrs Atlanta (Airport North), GA(2) 5-40 Yrs Atlanta Buckhead, GA(1) 5-40 Yrs Atlanta (Galleria) GA(11) 5-40 Yrs Atlanta (Jonesboro South), GA(2) 5-40 Yrs Atlanta Perimeter, GA(9) 5-40 Yrs Atlanta Powers Ferry, GA(6) 5-40 Yrs Brunswick, GA(1) 5-40 Yrs Columbus (Airport North), GA(2) 5-40 Yrs Chicago (Allerton), IL(6) 5-40 Yrs Chicago (O'Hare), IL(3) 5-40 Yrs Deerfield, IL(1) 5-40 Yrs Lexington, KY(14) 5-40 Yrs Lexington, KY(11) 5-40 Yrs Baton Rouge, LA(1) 5-40 Yrs New Orleans (French Quarter), LA(2) 5-40 Yrs New Orleans, LA(1) 5-40 Yrs Boston (Government Center), MA(9) 5-40 Yrs Boston (Marlborough), MA(1) 5-40 Yrs Baltimore (BWI), MD(1) 5-40 Yrs Troy, MI(1) 5-40 Yrs Bloomington, MN(1) 5-40 Yrs Minneapolis (Airport), MN(1) 5-40 Yrs Minneapolis (Downtown), MN(1) 5-40 Yrs St. Paul, MN(1) 5-40 Yrs Kansas City (Northeast), MO(2) 5-40 Yrs St. Louis (Downtown), MO(1) 5-40 Yrs St. Louis (Westport), MO(2) 5-40 Yrs Jackson (Downtown), MS(6) 5-40 Yrs Jackson (North), MS(15) 5-40 Yrs Olive Branch (Whispering Woods Conference Center), MS(8) 5-40 Yrs Raleigh/Durham, NC(5) 5-40 Yrs Omaha (Central), NE(5) 5-40 Yrs Omaha (Central), NE(12) 5-40 Yrs Omaha (I-80), NE(2) 5-40 Yrs Omaha (Old Mill Northwest), NE(6) 5-40 Yrs Omaha (Southwest), NE(12) 5-40 Yrs Omaha (Southwest), NE(16) 5-40 Yrs Omaha (Southwest), NE(15) 5-40 Yrs Piscataway, NJ(1) 5-40 Yrs Secaucus (Meadowlands), NJ(6) 5-40 Yrs Albuquerque (Mountain View), NM(2) 5-40 Yrs Syracuse, NY(1) 5-40 Yrs Cleveland, OH(1) 5-40 Yrs Columbus, OH(5) 5-40 Yrs
F-31 FELCOR LODGING TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
COST CAPITALIZED SUBSEQUENT INITIAL COST TO ACQUISITION -------------------- ---------------------------- BUILDINGS FURNITURE BUILDINGS FURNITURE AND AND AND AND DESCRIPTION OF PROPERTY ENCUMBRANCES LAND IMPROVEMENTS FIXTURE LAND IMPROVEMENT FIXTURES - ----------------------- ------------ ------ ------------ --------- ---- ----------- --------- Dayton, OH(5) 6,453 1,140 11,223 342 149 1,163 500 Tulsa, OK(1) 525 7,344 3,117 -- 640 2,657 Philadelphia (Center City), PA(6) 5,793 50,395 1,738 -- 2,556 1,460 Philadelphia (Independence Mall), PA(2) 12,577 3,184 27,704 955 -- 5,829 2,153 Philadelphia (Society Hill), PA(3) 33,355 4,542 45,121 1,536 -- 1,178 3,589 Pittsburgh, PA(9) 15,500 25,170 773 -- 1,738 1,952 Charleston (Mills House), SC(2) 3,270 28,446 981 -- 386 2,739 Greenville (Roper), SC(6) 1,551 13,492 465 -- 735 792 Myrtle Beach (Kingston Plantation), SC(1) 2,940 24,988 1,470 -- 1,710 5,661 Knoxville (Central), TN(2) 11,586 358 -- 1,537 1,068 Nashville, TN(1) 1,118 9,506 961 -- 278 2,307 Nashville, (Opryland/Airport), TN(9) 27,889 863 -- 1,897 1,779 Addison (North Dallas), TX(6) 4,938 42,965 1,482 -- 324 986 Amarillo (I-40), TX(2) 5,754 178 -- 2,734 870 Austin (Downtown), TX(5) 2,508 21,908 752 -- 898 646 Austin (Town Lake), TX(2) 21,551 667 -- 810 1,796 Beaumont (Midtown I-10), TX(2) 685 5,964 206 -- 2,278 763 Corpus Christi, TX(1) 5,249 1,113 9,618 390 51 584 1,757 Dallas, TX(19) 6,395 13,564 420 2,391 416 660 Dallas (Alpha Road), TX(17) 9,795 53 1,623 (1,632) 1,725 Dallas (Campbell Center), TX(7) 3,208 27,907 962 -- 1,054 2,235 Dallas (DFW Airport South), TX(1) 35,156 1,212 4,041 490 4,375 Dallas (Downtown West End), TX(12) 1,953 16,989 586 -- 155 66 Dallas (Love Field), TX(1) 13,479 1,934 16,674 757 -- 396 1,867 Dallas (Market Center), TX(6) 12,591 4,079 35,486 1,224 -- 618 960 Dallas (Market Center), TX(1) 12,035 2,560 23,751 2,182 -- 473 843 Dallas (Park Central), TX(6) 30,513 944 5,624 384 686 Dallas (Park Central), TX(1) 1,497 12,722 647 (19) 798 2,616 Dallas (Park Central), TX(3) 1,720 28,550 4,130 (898) 232 1,106 Dallas (Park Central), TX(20) 4,513 43,125 2,507 -- 4,441 2,874 Houston (I-10 West), TX(9) 3,055 26,575 916 -- 204 332 Houston (Int'l Airport), TX(2) 12,844 3,890 33,842 1,167 -- 584 987 Houston (Medical Center), TX(6) 6,098 2,493 21,687 748 -- 626 716 Houston (Medical Center), TX(15) 8,095 2,284 19,869 685 -- 2,166 1,763 Houston (Near Greenway), TX(9) 6,814 3,418 29,736 1,025 -- 582 1,182 Irving (DFW Airport North), TX(19) 56,714 1,754 10,040 814 1,774 Irving (DFW Airport North), TX(21) 10,566 1,546 13,453 464 -- 175 2,183 Midland (Country Villa), TX(2) 404 3,517 121 -- 128 326 Odessa (Centre), TX(15) 487 4,238 146 -- 88 428 Odessa (Parkway Blvd), TX(13) 370 3,218 111 -- 76 356 Plano, TX(19) 8,092 1,813 15,775 544 -- 587 1,193 Plano, TX(2) 885 7,696 265 -- 190 298 San Antonio (Downtown), TX(2) 22,246 688 -- 748 612 San Antonio (Int'l Airport), TX(9) 3,371 29,326 1,011 -- 1,857 926 Waco (I-35), TX(2) 574 4,994 172 -- 146 323 Salt Lake City (Airport), UT(2) 5,346 165 -- 2,734 1,065 Burlington, VT(3) 20,602 3,136 27,283 941 -- 502 2,150 Cambridge, Canada(2) 481 4,188 144 (35) 533 870 Kitchener (Waterloo), Canada(2) 9,441 292 -- 1,005 676 GROSS AMOUNTS AT WHICH ACCUMULATED NET BOOK CARRIED AT CLOSE OF PERIOD DEPRECIATION VALUE ----------------------------------- BUILDINGS AND BUILDINGS AND BUILDINGS FURNITURE IMPROVEMENTS IMPROVEMENTS, AND AND FURNITURE & FURNITURE & DATE OF DATE DESCRIPTION OF PROPERTY LAND IMPROVEMENT FIXTURES TOTAL FIXTURES FIXTURES CONSTRUCTION ACQUIRED - ----------------------- ---- ----------- --------- ----- ------------- ------------ ------------ -------- Dayton, OH(5) 1,289 12,386 842 14,517 1,633 12,884 1987 12/30/97 Tulsa, OK(1) 525 7,984 5,774 14,283 7,194 7,089 1985 07/28/94 Philadelphia (Center City), PA(6) 5,793 52,951 3,198 61,942 6,201 55,741 1970 07/28/98 Philadelphia (Independence Mall), PA(2) 3,184 33,533 3,108 39,825 4,520 35,305 1972 07/28/98 Philadelphia (Society Hill), PA(3) 4,542 46,299 5,125 55,966 7,166 48,800 1986 10/01/97 Pittsburgh, PA(9) - 26,908 2,725 29,633 3,423 26,210 1988 07/28/98 Charleston (Mills House), SC(2) 3,270 28,832 3,720 35,822 4,043 31,779 1982 07/28/98 Greenville (Roper), SC(6) 1,551 14,227 1,257 17,035 1,922 15,113 1984 07/28/98 Myrtle Beach (Kingston Plantation), SC(1) 2,940 26,698 7,131 36,769 8,104 28,665 1987 12/05/96 Knoxville (Central), TN(2) - 13,123 1,426 14,549 1,916 12,633 1966 07/28/98 Nashville, TN(1) 1,118 9,784 3,268 14,170 4,944 9,226 1985 07/28/94 Nashville, (Opryland/Airport), TN(9) - 29,786 2,642 32,428 3,626 28,802 1981 07/28/98 Addison (North Dallas), TX(6) 4,938 43,289 2,468 50,695 5,218 45,477 1985 07/28/98 Amarillo (I-40), TX(2) - 8,488 1,048 9,536 1,226 8,310 1970 07/28/98 Austin (Downtown), TX(5) 2,508 22,806 1,398 26,712 3,677 23,035 1987 03/20/97 Austin (Town Lake), TX(2) - 22,361 2,463 24,824 3,132 21,692 1967 07/28/98 Beaumont (Midtown I-10), TX(2) 685 8,242 969 9,896 1,123 8,773 1967 07/28/98 Corpus Christi, TX(1) 1,164 10,202 2,147 13,513 3,498 10,015 1984 07/19/95 Dallas, TX(19) 2,391 13,980 1,080 17,451 1,769 15,682 1988 07/28/98 Dallas (Alpha Road), TX(17) 1,623 8,163 1,778 11,564 3,344 8,220 1997 07/28/98 Dallas (Campbell Center), TX(7) 3,208 28,961 3,197 35,366 3,631 31,735 1982 05/29/98 Dallas (DFW Airport South), TX(1) 4,041 35,646 5,587 45,274 4,978 40,296 1985 07/28/98 Dallas (Downtown West End), TX(12) 1,953 17,144 652 19,749 1,855 17,894 1969 07/28/98 Dallas (Love Field), TX(1) 1,934 17,070 2,624 21,628 4,934 16,694 1986 03/29/95 Dallas (Market Center), TX(6) 4,079 36,104 2,184 42,367 4,187 38,180 1983 07/28/98 Dallas (Market Center), TX(1) 2,560 24,224 3,025 29,809 4,908 24,901 1980 06/30/97 Dallas (Park Central), TX(6) 5,624 30,897 1,630 38,151 3,540 34,611 1981 07/28/98 Dallas (Park Central), TX(1) 1,478 13,520 3,263 18,261 5,060 13,201 1985 07/28/94 Dallas (Park Central), TX(3) 822 28,782 5,236 34,840 4,845 29,995 1972 11/01/98 Dallas (Park Central), TX(20) 4,513 47,566 5,381 57,460 8,531 48,929 1983 06/30/97 Houston (I-10 West), TX(9) 3,055 26,779 1,248 31,082 3,030 28,052 1969 07/28/98 Houston (Int'l Airport), TX(2) 3,890 34,426 2,154 40,470 3,914 36,556 1971 07/28/98 Houston (Medical Center), TX(6) 2,493 22,313 1,464 26,270 2,666 23,604 1973 07/28/98 Houston (Medical Center), TX(15) 2,284 22,035 2,448 26,767 3,250 23,517 1984 07/28/98 Houston (Near Greenway), TX(9) 3,418 30,318 2,207 35,943 3,683 32,260 1984 07/28/98 Irving (DFW Airport North), TX(19) 10,040 57,528 3,528 71,096 6,946 64,150 1987 07/28/98 Irving (DFW Airport North), TX(21) 1,546 13,628 2,647 17,821 2,067 15,754 1989 07/28/98 Midland (Country Villa), TX(2) 404 3,645 447 4,496 554 3,942 1979 07/28/98 Odessa (Centre), TX(15) 487 4,326 574 5,387 603 4,784 1982 07/28/98 Odessa (Parkway Blvd), TX(13) 370 3,294 467 4,131 460 3,671 1977 07/28/98 Plano, TX(19) 1,813 16,362 1,737 19,912 2,264 17,648 1983 07/28/98 Plano, TX(2) 885 7,886 563 9,334 1,004 8,330 1983 07/28/98 San Antonio (Downtown), TX(2) - 22,994 1,300 24,294 2,692 21,602 1968 07/28/98 San Antonio (Int'l Airport), TX(9) 3,371 31,183 1,937 36,491 3,706 32,785 1981 07/28/98 Waco (I-35), TX(2) 574 5,140 495 6,209 716 5,493 1970 07/28/98 Salt Lake City (Airport), UT(2) - 8,080 1,230 9,310 1,192 8,118 1963 07/28/98 Burlington, VT(3) 3,136 27,785 3,091 34,012 4,155 29,857 1967 12/04/97 Cambridge, Canada(2) 446 4,721 1,014 6,181 817 5,364 1969 07/28/98 Kitchener (Waterloo), Canada(2) - 10,446 968 11,414 1,304 10,110 1965 07/28/98 LIFE UPON WHICH DEPRECIATION IN STATEMENT DESCRIPTION OF PROPERTY IS COMPUTED - ----------------------- ------------ Dayton, OH(5) 5-40 Yrs Tulsa, OK(1) 5-40 Yrs Philadelphia (Center City), PA(6) 5-40 Yrs Philadelphia (Independence Mall), PA(2) 5-40 Yrs Philadelphia (Society Hill), PA(3) 5-40 Yrs Pittsburgh, PA(9) 5-40 Yrs Charleston (Mills House), SC(2) 5-40 Yrs Greenville (Roper), SC(6) 5-40 Yrs Myrtle Beach (Kingston Plantation), SC(1) 5-40 Yrs Knoxville (Central), TN(2) 5-40 Yrs Nashville, TN(1) 5-40 Yrs Nashville, (Opryland/Airport), TN(9) 5-40 Yrs Addison (North Dallas), TX(6) 5-40 Yrs Amarillo (I-40), TX(2) 5-40 Yrs Austin (Downtown), TX(5) 5-40 Yrs Austin (Town Lake), TX(2) 5-40 Yrs Beaumont (Midtown I-10), TX(2) 5-40 Yrs Corpus Christi, TX(1) 5-40 Yrs Dallas, TX(19) 5-40 Yrs Dallas (Alpha Road), TX(17) 5-40 Yrs Dallas (Campbell Center), TX(7) 5-40 Yrs Dallas (DFW Airport South), TX(1) 5-40 Yrs Dallas (Downtown West End), TX(12) 5-40 Yrs Dallas (Love Field), TX(1) 5-40 Yrs Dallas (Market Center), TX(6) 5-40 Yrs Dallas (Market Center), TX(1) 5-40 Yrs Dallas (Park Central), TX(6) 5-40 Yrs Dallas (Park Central), TX(1) 5-40 Yrs Dallas (Park Central), TX(3) 5-40 Yrs Dallas (Park Central), TX(20) 5-40 Yrs Houston (I-10 West), TX(9) 5-40 Yrs Houston (Int'l Airport), TX(2) 5-40 Yrs Houston (Medical Center), TX(6) 5-40 Yrs Houston (Medical Center), TX(15) 5-40 Yrs Houston (Near Greenway), TX(9) 5-40 Yrs Irving (DFW Airport North), TX(19) 5-40 Yrs Irving (DFW Airport North), TX(21) 5-40 Yrs Midland (Country Villa), TX(2) 5-40 Yrs Odessa (Centre), TX(15) 5-40 Yrs Odessa (Parkway Blvd), TX(13) 5-40 Yrs Plano, TX(19) 5-40 Yrs Plano, TX(2) 5-40 Yrs San Antonio (Downtown), TX(2) 5-40 Yrs San Antonio (Int'l Airport), TX(9) 5-40 Yrs Waco (I-35), TX(2) 5-40 Yrs Salt Lake City (Airport), UT(2) 5-40 Yrs Burlington, VT(3) 5-40 Yrs Cambridge, Canada(2) 5-40 Yrs Kitchener (Waterloo), Canada(2) 5-40 Yrs
F-32 FELCOR LODGING TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
COST CAPITALIZED SUBSEQUENT INITIAL COST TO ACQUISITION -------------------- ----------------------------- BUILDINGS FURNITURE BUILDINGS FURNITURE AND AND AND AND DESCRIPTION OF PROPERTY ENCUMBRANCES LAND IMPROVEMENTS FIXTURE LAND IMPROVEMENT FIXTURES - ----------------------- ------------ ------ ------------ --------- ---- ----------- --------- Peterborough (Waterfront), Canada(2) 735 6,391 220 (35) 121 588 Sarnia, Canada(2) 271 2,359 81 (34) 758 876 Toronto (Airport), Canada(9) 21,168 655 -- 2,695 1,821 Toronto (Yorkdale), Canada(2) 1,578 13,725 473 (35) 3,908 1,270 -------- -------- ---------- -------- ------- -------- -------- Total $687,810 $288,893 $3,223,512 $124,884 $33,117 $288,930 $322,545 ======== ======== ========== ======== ======= ======== ======== GROSS AMOUNTS AT WHICH ACCUMULATED NET BOOK CARRIED AT CLOSE OF PERIOD DEPRECIATION VALUE ----------------------------------- BUILDINGS AND BUILDINGS AND BUILDINGS FURNITURE IMPROVEMENTS IMPROVEMENTS, AND AND FURNITURE & FURNITURE & DATE OF DATE DESCRIPTION OF PROPERTY LAND IMPROVEMENT FIXTURES TOTAL FIXTURES FIXTURES CONSTRUCTION ACQUIRED - ----------------------- ---- ----------- --------- ----- ------------- ------------ ------------ -------- Peterborough (Waterfront), Canada(2) 700 6,512 808 8,020 943 7,077 1965 07/28/98 Sarnia, Canada(2) 237 3,117 957 4,311 421 3,890 1970 07/28/98 Toronto (Airport), Canada(9) -- 23,863 2,476 26,339 3,229 23,110 1970 07/28/98 Toronto (Yorkdale), Canada(2) 1,543 17,633 1,743 20,919 2,230 18,689 1970 07/28/98 -------- ---------- -------- ---------- -------- ---------- Total $322,010 $3,512,442 $447,429 $4,281,881 $630,962 $3,650,919 ======== ========== ======== ========== ======== ========== LIFE UPON WHICH DEPRECIATION IN STATEMENT DESCRIPTION OF PROPERTY IS COMPUTED - ----------------------- ------------ Peterborough (Waterfront), Canada(2) 5-40 Yrs Sarnia, Canada(2) 5-40 Yrs Toronto (Airport), Canada(9) 5-40 Yrs Toronto (Yorkdale), Canada(2) 5-40 Yrs Total
Balance at December 31, 1998 $4,099,946 Additions during the period 247,116 ---------- Balance at December 31, 1999 $4,347,062 Sold hotels in 2000 (31,921) Hotels Held for Sale (206,000) Additions during the period 98,870 ---------- Balance at December 31, 2000 $4,208,011 Additions during the period 73,870 ---------- Balance at December 31, 2001 $4,281,881 ==========
Balance at December 31, 1998 $ 178,072 Depreciation expense during the period 152,483 ---------- Balance at December 31, 1999 330,555 Sold hotels in 2000 (4,200) Hotels Held for Sale (13,706) Depreciation expense during the period 160,452 ---------- Balance at December 31, 2000 473,101 Foreign Exchange (394) Purchase of DJONT Leases 1,011 Depreciation expense during the period 157,244 ---------- Balance at December 31, 2001 $ 630,962 ==========
COST CAPITALIZED SUBSEQUENT INITIAL COST TO ACQUISITION -------------------- ---------------------------- BUILDINGS FURNITURE BUILDINGS FURNITURE AND AND AND AND DESCRIPTION OF PROPERTY ENCUMBRANCES LAND IMPROVEMENTS FIXTURE LAND IMPROVEMENT FIXTURES - ----------------------- ------------ ------ ------------ --------- ---- ----------- --------- Boca Raton, FL(5) $ 5,433 $2,796 $ 468 -- $ 336 $1,283 Davenport, IA(12) 434 3,776 130 -- 571 537 Davenport, IA(2) 547 4,763 164 -- 1,333 1,168 Moline, IL(12) 505 4,398 152 -- 535 622 Moline (Airport), IL(2) 822 7,149 247 -- 1,487 1,285 Moline (Airport), IL(13) 232 2,021 70 -- 166 213 Colby, KS(13) 339 2,950 102 -- 228 92 Great Bend, KS(2) 549 4,780 165 -- 216 355 Hays, KS(12) 243 2,112 73 -- 319 367 Hays, KS(2) 597 5,190 179 -- 44 241 Salina, KS(2) 502 4,370 151 -- 67 367 Salina (I-70), KS(13) 341 2,964 102 -- 2 95 Nashville (Airport), TN(5) 1,073 9,331 322 -- 624 1,310 ------- ------- ------ ------ ------ Total $11,617 $56,600 $2,325 $5,928 $7,935 ======= ======= ====== ====== ====== Loss on hotels held for sale GROSS AMOUNTS AT WHICH ACCUMULATED NET BOOK CARRIED AT CLOSE OF PERIOD DEPRECIATION VALUE ----------------------------------- BUILDINGS AND BUILDINGS AND BUILDINGS FURNITURE IMPROVEMENTS IMPROVEMENTS, AND AND FURNITURE & FURNITURE & DATE OF DATE DESCRIPTION OF PROPERTY LAND IMPROVEMENT FIXTURES TOTAL FIXTURES FIXTURES CONSTRUCTION ACQUIRED - ----------------------- ---- ----------- --------- ----- ------------- ------------ ------------ -------- Boca Raton, FL(5) $ 5,433 $ 3,132 $1,751 $10,316 $ 1,538 $ 8,778 1989 11/15/95 Davenport, IA(12) 434 4,347 667 5,448 308 5,140 1985 07/28/98 Davenport, IA(2) 547 6,096 1,332 7,975 418 7,557 1966 07/28/98 Moline, IL(12) 505 4,933 774 6,212 347 5,865 1985 07/28/98 Moline (Airport), IL(2) 822 8,636 1,532 10,990 561 10,429 1961 07/28/98 Moline (Airport), IL(13) 232 2,187 283 2,702 148 2,554 1996 07/28/98 Colby, KS(13) 339 3,178 194 3,711 195 3,516 1998 07/28/98 Great Bend, KS(2) 549 4,996 520 6,065 401 5,664 1964 07/28/98 Hays, KS(12) 243 2,431 440 3,114 173 2,941 1985 07/28/98 Hays, KS(2) 597 5,234 420 6,251 396 5,855 1966 07/28/98 Salina, KS(2) 502 4,437 518 5,457 415 5,042 1986 07/28/98 Salina (I-70), KS(13) 341 2,966 197 3,504 275 3,229 1997 07/28/98 Nashville (Airport), TN(5) 1,073 9,955 1,632 12,660 1,240 11,420 1988 06/05/97 ------- ------- ------- ------- ------ ------- Total $11,617 $62,528 $10,260 $84,405 $6,415 $77,990 ======= ======= ======= ======= ====== Loss on hotels held for sale (39,053) ------- $38,937 ======= LIFE UPON WHICH DEPRECIATION IN STATEMENT DESCRIPTION OF PROPERTY IS COMPUTED - ----------------------- ------------ Boca Raton, FL(5) 5-40 Yrs Davenport, IA(12) 5-40 Yrs Davenport, IA(2) 5-40 Yrs Moline, IL(12) 5-40 Yrs Moline (Airport), IL(2) 5-40 Yrs Moline (Airport), IL(13) 5-40 Yrs Colby, KS(13) 5-40 Yrs Great Bend, KS(2) 5-40 Yrs Hays, KS(12) 5-40 Yrs Hays, KS(2) 5-40 Yrs Salina, KS(2) 5-40 Yrs Salina (I-70), KS(13) 5-40 Yrs Nashville (Airport), TN(5) 5-40 Yrs Total Loss on hotels held for sale
1. Embassy Suites 9. Holiday Inn Select 17. Bristol House 2. Holiday Inn 10. Courtyard by Marriott 18. Crowne Plaza Suites 3. Sheraton 11. Sheraton Suites 19. Harvey Hotel 4. Fairfield Inn 12. Hampton Inn 20. Westin 5. Doubletree Guest Suites 13. Holiday Inn Express 21. Harvey Suites 6. Crowne Plaza 14. Hilton Suites 7. Doubletree 15. Holiday Inn Hotel & Suites 8. Independents 16. Homewood Suites
F-33 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 3.1 - Articles of Amendment and Restatement dated June 22, 1995, amending and restating the Charter of FelCor Lodging Trust Incorporated ("FelCor"), as amended or supplemented by Articles of Merger dated June 23, 1995, Articles Supplementary dated April 30, 1996, Articles of Amendment dated August 8, 1996, Articles of Amendment dated June 16, 1997, Articles of Amendment dated October 30, 1997, Articles Supplementary dated May 6, 1998, Articles of Merger and Articles of Amendment dated July 27, 1998, and Certificate of Correction dated March 11, 1999 (filed as Exhibit 3.1 to FelCor's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (the "1998 10-K") and incorporated herein by reference). 3.1.1 - Certificate of Correction to the Articles of Merger between FelCor and Bristol Hotel Company, dated August 31, 1999 (filed as Exhibit 3.1.1 to FelCor's Form 10-Q for the quarter ended September 30, 1999 (the "September 1999 10-Q") and incorporated herein by reference). 3.2 - Bylaws of FelCor, as amended (filed as Exhibit 3.2 to FelCor's Registration Statement on Form S-11 (file no. 333-98332) and incorporated herein by reference). 4.1 - Form of Share Certificate for Common Stock (filed as Exhibit 4.1 to FelCor's Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference). 4.2 - Form of Share Certificate for $1.95 Series A Cumulative Convertible Preferred Stock (filed as Exhibit 4.4 to FelCor's Form 8-K dated May 1, 1996, and incorporated herein by reference).
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 4.3 - Form of Share Certificate for 9% Series B Cumulative Redeemable Preferred Stock (filed as Exhibit 4.5 to FelCor's Form 8-K dated May 29, 1998, and incorporated herein by reference). 4.4 - Deposit Agreement dated April 30, 1998, between FelCor and SunTrust Bank, Atlanta, as preferred share depositary (filed as Exhibit 4.6 to FelCor's Form 8-K dated May 29, 1998, and incorporated herein by reference). 4.5 - Form of Depositary Receipt evidencing the Depositary Shares (filed as Exhibit 4.7 to FelCor's Form 8-K dated May 29, 1998, and incorporated herein by reference). 4.6 - Indenture dated as of April 22, 1996 by and between FelCor and SunTrust Bank, Atlanta, Georgia, as Trustee (filed as Exhibit 4.2 to FelCor's Form 8-K dated May 1, 1996 and incorporated herein by reference). 4.7 - Indenture dated as of October 1, 1997 by and among FelCor Lodging Limited Partnership, formerly FelCor Suites Limited Partnership ("FelCor LP"), FelCor, the Subsidiary Guarantors named therein and SunTrust Bank, Atlanta, Georgia, as Trustee (filed as Exhibit 4.1 to the Registration Statement on Form S-4 (file no. 333-39595) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.7.1 - First Amendment to Indenture dated as of February 5, 1998 by and among FelCor, FelCor LP, the Subsidiary Guarantors named therein and SunTrust Bank, Atlanta, Georgia, as Trustee (filed as Exhibit 4.2 to the Registration Statement on Form S-4 (file no. 333-39595) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.7.2 - Second Amendment to Indenture and First Supplemental Indenture dated as of December 30, 1998, by and among FelCor, FelCor LP, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.7.2 to the 1998 10-K and incorporated herein by reference). 4.7.3 - Third Amendment to Indenture dated as of March 30, 1999 by and among FelCor, FelCor LP, the Subsidiary Guarantors named therein and SunTrust Bank, as Trustee (filed as Exhibit 4.7.3 to FelCor's Form 10-Q for the quarter ended March 31, 1999 (the "March 1999 10-Q") and incorporated herein by reference). 4.7.4 - Second Supplemental Indenture dated as of August 1, 2000, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein, who are signatories thereto, and SunTrust Bank, as Trustee (filed as Exhibit 4.2.4 to the Registration Statement on Form S-4 (file no. 333-47506) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.7.5 - Third Supplemental Indenture dated as of July 26, 2001, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein, who are signatories thereto, and SunTrust Bank, as Trustee (filed as Exhibit 4.2.5 to the Registration Statement on Form S-4 (file no. 333-63092) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.8 - Indenture dated as of September 15, 2000, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein, and SunTrust Bank, as Trustee (filed as Exhibit 4.3 to the Registration Statement on Form S-4 (file no. 333-47506) of FelCor LP and the other co-registrants named therein and incorporated herein by reference).
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 4.8.1 - First Supplemental Indenture dated as of July 26, 2001, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein, who are signatories thereto, and SunTrust Bank, as Trustee (filed as Exhibit 4.3.1 to the Registration Statement on Form S-4 (file no. 333-63092) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 4.9 - Indenture dated as of June 4, 2001, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein, and SunTrust Bank, as Trustee (filed as Exhibit 4.9 to FelCor's Form 8-K dated as of June 4, 2001 and filed June 14, 2001, and incorporated herein by reference). 4.9.1 - First Supplemental Indenture dated as of July 26, 2001, by and among FelCor LP, FelCor, the Subsidiary Guarantors named therein, who are signatories thereto, and SunTrust Bank, as Trustee (filed as Exhibit 4.4.1 to the Registration Statement on Form S-4 (file no. 333-63092) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 10.1* - Second Amended and Restated Agreement of Limited Partnership of FelCor LP dated as of December 31, 2001. 10.2 - Contribution Agreement dated as of January 1, 2001, by and among FelCor, FelCor LP, FelCor, Inc., RGC and DJONT Operations, L.L.C. (filed as Exhibit 10.27 to FelCor's Form 10-Q for the quarter ended March 31, 2001 (the "March 2001 10-Q"), and incorporated herein by reference). 10.3 - Leasehold Acquisition Agreement dated as of March 30, 2001, by and among Bass (U.S.A.) Incorporated, in its individual capacity and on behalf of its subsidiaries and affiliates, and FelCor, in its individual capacity and on behalf of its subsidiaries and affiliates, including as an exhibit thereto the form of Management Agreement for Six Continents-branded hotels (filed as Exhibit 10.28 to the March 2001 10-Q and incorporated herein by reference). 10.4 - Form of Management Agreement between subsidiaries of FelCor, as owner, and a subsidiary of Six Continents Hotels, as manager, with respect to FelCor's Six Continents-branded hotels (included as an exhibit to the Leasehold Acquisition Agreement filed as Exhibit 10.3 above). 10.5* - Form of Management Agreement between subsidiaries of FelCor, as owner, and a subsidiary of Hilton Hotels Corporation, as manager, with respect to FelCor's Embassy Suites Hotels, including the form of Embassy Suites Hotels License Agreement attached as an exhibit thereto. 10.6* - Form of Management Agreement between subsidiaries of FelCor, as owner, and a subsidiary of Hilton Hotels Corporation, as manager, with respect to FelCor's Doubletree and Doubletree Guest Suites hotels. 10.7* - Form of Management Agreement between subsidiaries of FelCor, as owner, and a subsidiary of Starwood Hotels & Resorts, Inc., as manager, with respect to FelCor's Sheraton and Westin hotels. 10.8 - Employment Agreement dated as of July 28, 1994 between FelCor and Thomas J. Corcoran, Jr. (filed as Exhibit 10.8 to FelCor's Annual Report on Form 10-K/A Amendment No. 1 for the fiscal year ended December 31, 1994 (the "1994 10-K/A") and incorporated herein by reference).
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.9 - Restricted Stock and Stock Option Plan of FelCor (filed as Exhibit 10.9 to the 1994 10- K/A and incorporated herein by reference). 10.10* - Savings and Investment Plan of FelCor. 10.11 - 1995 Restricted Stock and Stock Option Plan of FelCor (filed as Exhibit 10.9.2 to FelCor's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "1995 10-K") and incorporated herein by reference). 10.12 - Non-Qualified Deferred Compensation Plan, as amended and restated July 1999 (filed as Exhibit 10.9 to the September 1999 10-Q and incorporated herein by reference). 10.13 - 1998 Restricted Stock and Stock Option Plan (filed as Exhibit 4.2 to FelCor's Registration Statement on Form S-8 (file no. 333-66041) and incorporated herein by reference). 10.14 - Second Amended and Restated 1995 Equity Incentive Plan (filed as Exhibit 99.1 to FelCor's Post-Effective Amendment on Form S-3 to Form S-4 Registration Statement (file no. 333-50509) and incorporated herein by reference). 10.15 - Amended and Restated Stock Option Plan for Non-Employee Directors (filed as Exhibit 99.2 to FelCor's Post-Effective Amendment on Form S-3 to Form S-4 Registration Statement (file no. 333-50509) and incorporated herein by reference). 10.16 - Form of Severance Agreement for executive officers and certain key employees of FelCor (filed as Exhibit 10.13 to the 1998 10-K and incorporated herein by reference). 10.17 - Stockholders' and Registration Rights Agreement dated as of July 27, 1998 by and among FelCor, Bass America, Inc., Holiday Corporation, Bass plc, United/Harvey Investors I, L.P., United/Harvey Investors II, L.P., United/Harvey Investors III, L.P., United/Harvey Investors IV, L.P., and United/Harvey Investors V, L.P. (filed as Exhibit 10.18 to FelCor's Form 8-K dated August 10, 1998, and incorporated herein by reference). 10.18 - Seventh Amended and Restated Credit Agreement dated as of July 26, 2001, among the FelCor, FelCor LP and FelCor Canada Co., as Borrowers, the Lenders party thereto, The Chase Manhattan Bank and The Chase Manhattan Bank of Canada, as Administrative Agents, Bankers Trust Company, as Syndication Agent, J.P. Morgan Securities Inc. and Deutsche Banc Alex. Brown, Inc., as Co-Lead Arrangers and Joint Bookrunners, and Bank of America, N.A. and Salomon Smith Barney, Inc., as Document Agents (filed as Exhibit 10.17 to FelCor's Form 10-Q for the quarter ended June 30, 2001, and incorporated herein by reference). 10.18.1 - First Amendment dated as of November 6, 2001, among FelCor, FelCor LP and FelCor Canada Co., as borrowers, the lenders party thereto, The Chase Manhattan Bank and The Chase Manhattan Bank of Canada, as Administrative Agents, and Bankers Trust Company, as Syndication Agent (filed as Exhibit 10.17.1 to FelCor's Form 10-Q for the quarter ended September 30, 2001 (the "September 2001 10-Q") and incorporated herein by reference). 10.19 - Loan Agreement dated as of October 10, 1997 among Bristol Lodging Company, Bristol Lodging Holding Company, Nomura Asset Capital Corporation, as administrative agent and collateral agent for Lenders, and Bankers Trust Company, as co-agent for Lenders (filed as
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- Exhibit 10.10 to the Bristol Hotel Company Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and incorporated herein by reference). 10.19.1 - First Amendment to Loan Agreement and Ancillary Loan Documents made as of May 28, 1999, among FelCor Lodging Company, L.L.C., FelCor Lodging Holding Company, L.L.C. and LaSalle National Bank, as Trustee for Nomura Asset Securities Corporation Commercial Pass-Through Certificates Series 1998-D6, as administrative agent and collateral agent (filed as Exhibit 10.19.1 to FelCor's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "1999 10-K") and incorporated herein by reference). 10.20 - Form of Mortgage, Security Agreement and Fixture Filing by and between FelCor/CSS Holdings, L.P. as Mortgagor and The Prudential Insurance Company of America, as Mortgagee (filed as Exhibit 10.23 to the March 1999 10-Q and incorporated herein by reference). 10.20.1 - Promissory Note dated April 1, 1999, in the original principal amount of $100,000,000 made by FelCor/CSS Holdings, Ltd., payable to the order of The Prudential Insurance Company of America (filed as Exhibit 10.23.1 to FelCor's Form 10-Q for the quarter ended June 30, 1999 (the "June 1999 10-Q") and incorporated herein by reference). 10.21 - Form of Deed of Trust, Security Agreement and Fixture Filing, each dated as of May 12, 1999, from FelCor/MM Holdings, L.P., as Borrower, in favor of Fidelity National Title Insurance Company, as Trustee, and Massachusetts Mutual Life Insurance Company, as Beneficiary, each covering a separate hotel and securing one of the separate Promissory Notes described in Exhibit 10.21.1, also executed by FelCor/CSS Holdings, L.P. with respect to the Embassy Suites Hotels-Anaheim and Embassy Suites Hotels-Deerfield Beach, and by FelCor LP with respect to the Embassy Suites Hotels-Palm Desert (filed as Exhibit 10.24.2 to the June 1999 10-Q and incorporated herein by reference). 10.21.1 - Form of six separate Promissory Notes each dated May 12, 1999, made by FelCor/MM Holdings, L.P. payable to the order of Massachusetts Mutual Life Insurance Company in the respective original principal amounts of $12,500,000 (Embassy Suites Hotels-Dallas Market Center), $14,000,000 (Embassy Suites Hotels-Dallas Love Field), $12,450,000 (Embassy Suites Hotels-Tempe), $11,550,000 (Embassy Suites Hotels-Anaheim), $8,900,000 (Embassy Suites Hotels-Palm Desert), $15,600,000 (Embassy Suites Hotels-Deerfield Beach) (filed as Exhibit 10.24.1 to the June 1999 10-Q and incorporated herein by reference). 10.22 - Form Deed of Trust and Security Agreement and Fixture Filing with Assignment of Leases and Rents, each dated as of April 20, 2000, from FelCor/MM S-7 Holdings, L.P., as Mortgagor, in favor of Massachusetts Mutual Life Insurance Company and Teachers Insurance and Annuity Association of America, as Mortgagee, each covering a separate hotel and securing one of the separate Promissory Notes described in Exhibit 10.22.2 (filed as Exhibit 10.24 to FelCor's Form 10-Q for the quarter ended June 30, 2000 (the "June 2000 10-Q") and incorporated herein by reference). 10.22.1 - Form of Accommodation Cross-Collateralization Mortgage and Security Agreement, each dated as of April 20, 2000, executed by FelCor/MM S-7 Holdings, L.P., in favor of Massachusetts Mutual Life Insurance Company and Teachers Insurance and Annuity Association of America (filed as Exhibit 10.24.1 to the June 2000 10-Q and incorporated herein by reference).
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.22.2 - Form of fourteen separate Promissory Notes each dated April 20, 2000, each made by FelCor/MM S-7 Holdings, L.P., each separately payable to the order of Massachusetts Mutual Life Insurance Company and Teachers Insurance and Annuity Association of America, respectively, in the respective original principal amounts of $13,500,000 (Phoenix (Crescent), Arizona), $13,500,000 (Phoenix (Crescent), Arizona), $6,500,000 (Cypress Creek/Ft. Lauderdale, Florida), $6,500,000 (Cypress Creek/Ft. Lauderdale, Florida), $9,000,000 (Atlanta Galleria, Georgia), $9,000,000 (Atlanta Galleria, Georgia), $12,500,000 (Chicago O'Hare Airport, Illinois), $12,500,000 (Chicago O'Hare Airport, Illinois), $3,500,000 (Lexington, Kentucky), $3,500,000 (Lexington, Kentucky), $17,000,000 (Philadelphia Society Hill, Philadelphia), $17,000,000 (Philadelphia Society Hill, Philadelphia), $10,500,000 (South Burlington, Vermont), and, $10,500,000 (South Burlington, Vermont) (filed as Exhibit 10.24.2 to the June 2000 10-Q and incorporated herein by reference). 10.23 - Form Deed of Trust and Security Agreement, each dated as of May 2, 2000, from each of FelCor/CMB Buckhead Hotel, L.L.C., FelCor/CMB Marlborough Hotel, L.L.C., FelCor/CMB Deerfield Hotel, L.L.C., FelCor/CMB Corpus Holdings, L.P., FelCor/CMB Orsouth Holdings, L.P., FelCor/CMB New Orleans Hotel, L.L.C., FelCor/CMB Piscataway Hotel, L.L.C., and FelCor/CMB SSF Holdings, L.P., each as Borrower, in favor of The Chase Manhattan Bank, as Beneficiary, each covering a separate hotel and securing one of the separate Promissory Notes described in Exhibit 10.23.1 (filed as Exhibit 10.25 to the June 2000 10-Q and incorporated herein by reference). 10.23.1 - Form of eight separate Promissory Notes, each dated May 2, 2000, made by FelCor/CMB Buckhead Hotel, L.L.C., FelCor/CMB Marlborough Hotel, L.L.C., FelCor/CMB Deerfield Hotel, L.L.C., FelCor/CMB Corpus Holdings, L.P., FelCor/CMB Orsouth Holdings, L.P., FelCor/CMB New Orleans Hotel, L.L.C., FelCor/CMB Piscataway Hotel, L.L.C., and FelCor/CMB SSF Holdings, L.P., each separately payable to the order of The Chase Manhattan Bank in the respective original principal amounts of $38,250,000 (Atlanta Buckhead, Georgia), $20,500,000 (Boston Marlborough, Massachusetts), $16,575,000 (Chicago Deerfield, Illinois), $5,338,000 (Corpus Christi, Texas), $25,583,000 (Orlando South, Florida), $32,650,000 (New Orleans, Louisiana), $20,728,000 (Piscataway, New Jersey), and $26,268,000 (South San Francisco, California) (filed as Exhibit 10.25.1 to the June 2000 10-Q and incorporated herein by reference). 10.24 - Registration Rights Agreement dated as of September 8, 2000 among FelCor, FelCor LP, Deutsche Banc Securities Inc., Chase Securities Inc., Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, Banc One Capital Markets, Inc., Credit Lyonnais Securities (USA) Inc., and Scotia Capital (USA) Inc. (filed as Exhibit 10.26 to the Registration Statement on Form S-4 (file no. 333-47506) of FelCor LP and the other co-registrants named therein and incorporated herein by reference). 10.25 - Registration Rights Agreement dated as of January 11, 2001, among FelCor, FelCor LP and Deutsche Bank Securities Inc (filed as Exhibit 10.26 to FelCor's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference). 10.26 - Registration Rights Agreement dated as of June 4, 2001, by and among FelCor LP, FelCor, and Deutsche Banc Alex. Brown Inc., in its individual capacity and on behalf of J.P. Morgan Securities Inc., Banc of America Securities LLC, Salomon Smith Barney Inc., Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, SG Cowen Securities Corporation, Credit Lyonnais Securities (USA) Inc., Scotia Capital (USA) Inc., BMO Nesbitt Burns Corp., Fleet Securities, Inc., PNC Capital Markets, Inc. and Wells Fargo Brokerage Services, LLC (filed as Exhibit 10.29 to FelCor's Form 8-K dated June 4, 2001 and filed June 14, 2001, and incorporated herein by reference).
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.27* - Registration Rights Agreement dated as of December 3, 2001, by and among FelCor, FelCor LP, Deutsche Banc Alex. Brown, J.P. Morgan Securities Inc., Banc of America Securities LLC, Morgan Stanley & Co. Incorporated and Salomon Smith Barney Inc. 21* - List of Subsidiaries of FelCor. 23.1* - Consent of PricewaterhouseCoopers LLP.
- ---------- * Indicates that the document is filed herewith. EX-10.1 3 d95331ex10-1.txt 2ND AMENDED/RESTATED AGREEMENT OF LP EXHIBIT 10.1 SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF FELCOR LODGING LIMITED PARTNERSHIP TABLE OF CONTENTS
Page ---- ARTICLE I ORGANIZATIONAL MATTERS..........................................................................2 1.1 Formation.......................................................................................2 1.2 Name............................................................................................2 1.3 Registered Office; Principal Office.............................................................2 1.4 Power of Attorney...............................................................................2 1.5 Term............................................................................................3 ARTICLE II DEFINITIONS.....................................................................................3 "Additional Limited Partner".............................................................................3 "Adjusted Capital Account"...............................................................................3 "Adjusted Property"......................................................................................4 "Affiliate"..............................................................................................4 "Agreed Allocation"......................................................................................4 "Agreed Value"...........................................................................................4 "Agreement"..............................................................................................4 "Assignee"...............................................................................................4 "Book-Tax Disparity".....................................................................................4 "Capital Account"........................................................................................4 "Capital Contribution"...................................................................................4 "Carrying Value".........................................................................................4 "Cash Amount"............................................................................................4 "Cause" ................................................................................................5 "Certificate"............................................................................................5 "Certificate of Designation".............................................................................5 "Certificate of Limited Partnership".....................................................................5 "Class B, Series II Unit"................................................................................5 "Class B Unit"...........................................................................................5 "Closing Date"...........................................................................................5 "Code" ................................................................................................5 "Common Unit"............................................................................................6 "Company"................................................................................................6 "Consolidated"...........................................................................................5 "Contributed Property"...................................................................................6 "Contributing Partner"...................................................................................6 "Delaware Act"...........................................................................................6 "Departing Partner"......................................................................................6 "Economic Risk of Loss"..................................................................................6 "Event of Withdrawal"....................................................................................6 "Excess Balance".........................................................................................6 "Exchange Act"...........................................................................................6 "Fiscal Year"............................................................................................6 "General Partner"........................................................................................6 "General Partner Equity Value"...........................................................................6 "Indebtedness"...........................................................................................6 "Indemnitee".............................................................................................6 "Initial Hotels".........................................................................................6 "Initial Limited Partners"...............................................................................6 "Limited Partner"........................................................................................7 "Limited Partner Equity Value"...........................................................................7 "Limited Partner Interest"...............................................................................7
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Page ---- "Liquidation Preference".................................................................................7 "Liquidator".............................................................................................7 "Majority"...............................................................................................7 "Merger Agreement".......................................................................................7 "Minimum Gain Attributable to Partner Nonrecourse Debt"..................................................7 "National Securities Exchange"...........................................................................7 "Net Agreed Value".......................................................................................7 "Net Income".............................................................................................7 "Net Loss"...............................................................................................7 "Nonrecourse Built-in Gain"..............................................................................7 "Nonrecourse Deductions".................................................................................8 "Nonrecourse Liability"..................................................................................8 "Notice of Redemption"...................................................................................8 "Offering"...............................................................................................8 "Opinion of Counsel".....................................................................................8 "Organizational Limited Partner".........................................................................8 "Outstanding"............................................................................................8 "Partner"................................................................................................8 "Partner Nonrecourse Debt"...............................................................................8 "Partner Nonrecourse Deductions".........................................................................8 "Partnership"............................................................................................8 "Partnership Assets".....................................................................................8 "Partnership Inception"..................................................................................8 "Partnership Interest"...................................................................................8 "Partnership Minimum Gain"...............................................................................8 "Partnership Securities".................................................................................8 "Partnership Unit".......................................................................................8 "Partnership Year".......................................................................................8 "Percentage Interest"....................................................................................8 "Person" ................................................................................................9 "Plan of Merger".........................................................................................9 "Preferred Units"........................................................................................9 "Prospectus".............................................................................................9 "Public Offering Price"..................................................................................9 "Recapture Income".......................................................................................9 "Recaptured Credits".....................................................................................9 "Record Date"............................................................................................9 "Record Holder"..........................................................................................9 "Redeeming Partner"......................................................................................9 "Redemption Amount"......................................................................................9 "Redemption Right".......................................................................................9 "Registration Statement".................................................................................9 "Regulatory Allocations".................................................................................9 "REIT" ................................................................................................9 "REIT Share".............................................................................................9 "REIT Shares Amount"....................................................................................10 "Residual Gain" or "Residual Loss"......................................................................10 "Securities Act"........................................................................................10 "Series A Convertible Preferred Unit"...................................................................10 "Series B Redeemable Preferred Unit"....................................................................10 "Special Units".........................................................................................10 "Specified Redemption Date".............................................................................10 "Substituted Limited Partner"...........................................................................10
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Page ---- "Surviving Business Entity".............................................................................10 "Target Balance"........................................................................................10 "Transfer Agent"........................................................................................10 "Transfer Application"..................................................................................10 "Treasury Regulations"..................................................................................10 "Underwriter"...........................................................................................11 "Underwriting Agreement"................................................................................11 "Unrealized Gain".......................................................................................11 "Unrealized Loss".......................................................................................11 ARTICLE III PURPOSE........................................................................................11 3.1 Purpose and Business...........................................................................11 3.2 Powers.........................................................................................12 ARTICLE IV CAPITAL CONTRIBUTIONS..........................................................................11 4.1 Initial Contributions..........................................................................11 4.2 Return of Initial Contributions................................................................12 4.3 Capital Contributions by the Partners..........................................................12 4.4 Limited Preemptive Rights......................................................................12 4.5 Capital Accounts...............................................................................12 4.6 Issuance of Additional Partnership Units and Other Securities..................................14 4.7 Adjustment to Percentage Interests and Outstanding Partnership Units...........................15 4.8 Interest.......................................................................................16 4.9 No Withdrawal..................................................................................16 4.10 Loans from Partners............................................................................16 ARTICLE V ALLOCATIONS AND DISTRIBUTIONS..................................................................16 5.1 Allocations for Capital Account Purposes.......................................................16 5.2 Allocations for Tax Purposes...................................................................18 5.3 Distribution of Cash...........................................................................19 5.4 REIT Distribution Requirements.................................................................20 ARTICLE VI MANAGEMENT AND OPERATION OF BUSINESS...........................................................20 6.1 Management.....................................................................................20 6.2 Certificate of Limited Partnership.............................................................21 6.3 Restrictions on General Partner's Authority....................................................21 6.4 Reimbursement of the General Partner...........................................................21 6.5 Outside Activities.............................................................................22 6.6 Loans to and from the General Partner; Contracts with Affiliates...............................23 6.7 Indemnification................................................................................23 6.8 Liability of Indemnitees.......................................................................24 6.9 Resolution of Conflicts of Interest............................................................24 6.10 Liability of the General Partner...............................................................25 6.11 Other Matters Concerning the General Partner...................................................25 6.12 Title to Partnership Assets....................................................................26 6.13 Reliance by Third Parties......................................................................26 ARTICLE VII RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS.....................................................26 7.1 Limitation of Liability........................................................................26 7.2 Management of Business.........................................................................26 7.3 Return of Capital..............................................................................27 7.4 Rights of Limited Partners Relating to the Partnership.........................................27 7.5 Redemption Right...............................................................................27
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Page ---- 7.6 Outside Activities of Limited Partners.........................................................28 ARTICLE VIII BOOKS, RECORDS, ACCOUNTING AND REPORTS.........................................................29 8.1 Records and Accounting.........................................................................29 8.2 Fiscal Year....................................................................................29 ARTICLE IX TAX MATTERS....................................................................................29 9.1 Preparation of Tax Returns.....................................................................29 9.2 Tax Elections..................................................................................29 9.3 Tax Controversies..............................................................................29 9.4 Organizational Expenses........................................................................29 9.5 Withholding....................................................................................29 9.6 Opinions of Counsel............................................................................30 ARTICLE X TRANSFER OF INTERESTS..........................................................................30 10.1 Transfer.......................................................................................30 10.2 Transfer of General Partner's Partnership Interest.............................................30 10.3 Transfer of Partnership Units..................................................................31 10.4 Restrictions on Transfers......................................................................31 ARTICLE XI ADMISSION OF PARTNERS..........................................................................31 11.1 Admission of Substituted Limited Partners......................................................31 11.2 Admission of Successor General Partner.........................................................32 11.3 Amendment of Agreement and Certificate of Limited Partnership..................................32 11.4 Admission of Additional Limited Partners.......................................................32 ARTICLE XII WITHDRAWAL OF PARTNERS.........................................................................32 12.1 Withdrawal of the General Partner..............................................................32 12.2 Interest of Departing Partner and Successor General Partner....................................33 12.3 Reimbursement of Departing Partner.............................................................33 12.4 Withdrawal of Limited Partner..................................................................33 ARTICLE XIII PARTNERSHIP UNIT CERTIFICATE...................................................................34 13.1 Partnership Unit Certificates..................................................................34 13.2 Registration, Registration of Transfer and Exchange............................................34 13.3 Mutilated, Destroyed, Lost or Stolen Certificates..............................................34 13.4 Record Holder..................................................................................35 ARTICLE XIV DISSOLUTION AND LIQUIDATION....................................................................35 14.1 Dissolution....................................................................................35 14.2 Continuation of the Business of the Partnership after Dissolution..............................35 14.3 Liquidation....................................................................................36 14.4 Distributions in Kind..........................................................................37 14.5 Cancellation of Certificate of Limited Partnership.............................................37 14.6 Reasonable Time for Winding Up.................................................................37 14.7 Return of Capital..............................................................................37 14.8 No Capital Account Restoration Obligation......................................................37 14.9 Waiver of Partition............................................................................37 ARTICLE XV AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE......................................37 15.1 Amendments to be Adopted Solely by General Partner.............................................37 15.2 Amendment Procedures...........................................................................38 15.3 Amendment Requirements.........................................................................38
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Page ---- 15.4 Meetings of, or Actions by, the Partners.......................................................39 ARTICLE XVI MERGER.........................................................................................39 16.1 Authority......................................................................................39 16.2 Procedure for Merger or Consolidation..........................................................39 16.3 Approval of Merger or Consolidation by the Partners............................................40 16.4 Certificate of Merger..........................................................................40 16.5 Effect of Merger...............................................................................40 ARTICLE XVII GENERAL PROVISIONS.............................................................................41 17.1 Addresses and Notices..........................................................................41 17.2 Titles and Captions............................................................................41 17.3 Pronouns and Plurals...........................................................................41 17.4 Further Action.................................................................................41 17.5 Binding Effect.................................................................................41 17.6 Integration....................................................................................41 17.7 Creditors......................................................................................41 17.8 Waiver.........................................................................................42 17.9 Counterparts...................................................................................42 17.10 Applicable Law.................................................................................42 17.11 Invalidity of Provisions.......................................................................42
ATTACHMENTS Exhibit A - Names, Addresses, Partnership Units of Partners Exhibit B - Notice of Exercise of Redemption Right Addendum No. 1 - Designation of Class B Units Annex No. 2 to Addendum No. 1 - Designation of Class B Units, Series II Addendum No. 2 - Designation of Series A Cumulative Convertible Preferred Units Addendum No. 3 - Designation of Series B Cumulative Redeemable Preferred Units -v- SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF FELCOR LODGING LIMITED PARTNERSHIP RECITALS FelCor Lodging Limited Partnership (the "Partnership"), which was formerly known as FelCor Suites Limited Partnership, was formed as a limited partnership under the laws of the State of Delaware by filing a Certificate of Limited Partnership with the Secretary of State of the State of Delaware on May 23, 1994. The Partnership was originally governed by an Agreement of Limited Partnership of FelCor Suites Limited Partnership dated May 20, 1994 (the "Original Agreement"). The parties to the Original Agreement were FelCor Suite Hotels, Inc., a Delaware corporation (the "Original General Partner"), and Thomas J. Corcoran, Jr. (the "Organizational Limited Partner"). The Original General Partner, the Organizational Limited Partner and seven additional parties (the "Initial Limited Partners") entered into an Amended and Restated Agreement of Limited Partnership of FelCor Suites Limited Partnership dated as of July 25, 1994 (the "First Restated Partnership Agreement") to (i) admit the Initial Limited Partners to the Partnership, (ii) provide for the withdrawal of the Organizational Limited Partner and (iii) amend and restate the Original Agreement in its entirety. The First Restated Partnership Agreement was amended by (i) the First Amendment dated as of November 17, 1995 to admit an Additional Limited Partner (as defined below), (ii) the Second Amendment dated as of January 9, 1996 to add an Addendum No. 1 to authorize the issuance of a class of Partnership Units (as defined below) designated as the "Class B Units," (iii) the Third Amendment dated as of January 10, 1996 to admit an Additional Limited Partner and to authorize the issuance of a series of Class B Units designated as the "Class B Units, Series I" by adding Annex No. 1 to Addendum No. 1, (iv) the Fourth Amendment dated as of January 10, 1996 to admit an Additional Limited Partner and to authorize the issuance of a series of Class B Units designated as the "Class B Units, Series II" by adding an Annex No. 2 to Addendum No. 1, (v) the Fifth Amendment dated as of April 30, 1996 to add an Addendum No. 2 to the First Restated Partnership Agreement to authorize the issuance of a class of Partnership Units designated as the "Series A Cumulative Convertible Preferred Units," (vi) the Sixth Amendment dated as of September 16, 1996 to admit an Additional Limited Partner, (vii) the Seventh Amendment dated as of May 16, 1997 to admit an Additional Limited Partner, (viii) the Eighth Amendment dated as of February 6, 1998 to admit an Additional Limited Partner, (ix) the Ninth Amendment dated as of May 6, 1998 to add an Addendum No. 3 to authorize the issuance of a class of Partnership Units designated as the "Series B Cumulative Redeemable Preferred Units," (x) the Tenth Amendment dated as of June 22, 1998 to admit an Additional Limited Partner, (xi) the Eleventh Amendment dated as of July 28, 1998 to change the name of the Partnership to "FelCor Lodging Limited Partnership," (xii) the Twelfth Amendment dated as of December 29, 1998 to add a new subsection (d) to Section 10.2 and amend Sections 4.6(c), 4.7 and 7.5(e) of the First Restated Partnership Agreement, (xiii) the Thirteenth Amendment dated as of December 31, 1998 to admit a Substituted Limited Partner, (xiv) the Fourteenth Amendment dated as of March 1, 1999 to admit an Additional Limited Partner, (xv) the Fifteenth Amendment dated as of October 15, 1999 to admit an Additional Limited Partner, (xvi) the Sixteenth Amendment dated as of February 27, 2000 to admit an Additional Limited Partner, and (xvii) the Seventeenth Amendment dated as of November 1, 2000 to admit an Additional Limited Partner. Effective June 23, 1995, the Original General Partner was merged with and into FelCor Suite Hotels, Inc., a Maryland corporation, which changed its name on July 27, 1998 to "FelCor Lodging Trust Incorporated." By virtue of such merger, FelCor Lodging Trust Incorporated (the "General Partner") became the successor general partner of the Partnership and continued the business of the Partnership without dissolution in accordance with the terms of the First Restated Partnership Agreement. By Assignment and Assumption of Partnership Interest dated as of December 31, 1998, the General Partner assigned various Partnership Units to FelCor Nevada Holdings, L.L.C., a Nevada limited liability company ("FelCor LP"). The General Partner desires, pursuant to the authority granted to it under the First Restated Partnership Agreement, as amended, to amend and restate the First Restated Partnership Agreement to reflect (i) the deletion of the prior authorization contained in Annex No. 1 to Addendum No. 1 for the Class B, Series I Units, none of which are currently outstanding, (ii) all prior amendments in the text of this Second Amended and Restated Partnership Agreement, (iii) changes in applicable tax laws and regulations, (iv) changes necessary to conform the allocations and distributions required by Article V with the allocations and distributions required as a result of the applicable Certificate of Designation, and (v) other non-substantive clarifications to the First Restated Partnership Agreement. NOW, THEREFORE, in consideration of the foregoing, of mutual covenants among the parties hereto, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to amend and restate the First Restated Partnership Agreement, as amended, to read in its entirety as follows: ARTICLE I ORGANIZATIONAL MATTERS 1.1 Formation. The General Partner and the Organizational Limited Partner have formed the Partnership as a limited partnership pursuant to the provisions of the Delaware Act. Except as expressly provided to the contrary in this Agreement, the rights and obligations of the Partners and the administration, dissolution and termination of the Partnership shall be governed by the Delaware Act. The Partnership Interest of each Partner shall be personal property for all purposes. 1.2 Name. The name of the Partnership shall be "FelCor Lodging Limited Partnership". The Partnership's business may be conducted under any other name or names deemed necessary or appropriate by the General Partner, including, without limitation, the name of the General Partner or any Affiliate thereof. The words "Limited Partnership," "L.P.," "Ltd." or similar words or letters shall be included in the Partnership's name where necessary for the purposes of complying with the laws of any jurisdiction that so requires. The General Partner in its sole discretion may change the name of the Partnership at any time and from time to time and shall notify the Limited Partners of such change in the next regular communication to the Limited Partners. 1.3 Registered Office; Principal Office. Unless and until changed by the General Partner, the registered office of the Partnership in the State of Delaware shall be located at 1013 Centre Road, New Castle County, Wilmington, Delaware 19805, and the registered agent for service of process on the Partnership in the State of Delaware at such registered office shall be the Corporation Service Company. The principal office of the Partnership and the address of the General Partner shall be 545 East John Carpenter Freeway, Suite 1300, Irving, Texas 75062, or such other place as the General Partner may from time to time designate by notice to the Limited Partners. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General Partner deems advisable. 1.4 Power of Attorney. (a) Each Limited Partner and each Assignee hereby constitutes and appoints each of the General Partner and, if a Liquidator shall have been selected pursuant to Section 14.3, the Liquidator severally (and any successor to either thereof by merger, transfer, assignment, election or otherwise) and each of their authorized officers and attorneys-in-fact, with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead, to: (i) execute, swear to, acknowledge, deliver, file and record in the appropriate public offices (A) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate of Limited Partnership and all amendments or restatements thereof) that the General Partner or the Liquidator deems necessary or appropriate to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and in all other jurisdictions in which the Partnership may conduct business or own property; (B) all certificates, documents and other instruments that the General Partner or the Liquidator deems necessary or appropriate to reflect, in accordance with its terms, any amendment, change, modification or restatement of this Agreement; (C) all certificates, documents and other instruments (including, without limitation, conveyances and a certificate of cancellation) that the General Partner or the Liquidator deems necessary or appropriate to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement; (D) all certificates, documents and other instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to, or other events described in, Article X, XI, XII or XIV or the Capital Contribution of any Partner; (E) all certificates, documents and other instruments relating to the determinations of the rights, preferences and privileges of any class or series of Partnership Units or other Partnership Securities issued 2 pursuant to Section 4.6; (F) all certificates, documents and other instruments (including, without limitation, agreements and a certificate of merger) relating to a merger or consolidation of the Partnership pursuant to Article XVI; and (G) any documents necessary or advisable to convey any property contributed to the Partnership, to the Partnership. (ii) execute, swear to, acknowledge, deliver, file and record all ballots, consents, approvals, waivers, certificates and other instruments necessary or appropriate, in the sole discretion of the General Partner or the Liquidator, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action that is made or given by the Partners hereunder or is consistent with the terms of this Agreement or is necessary or appropriate, in the sole discretion of the General Partner or the Liquidator, to effectuate the terms or intent of this Agreement; provided, that when the approval or consent of the Limited Partners is required by any provision of this Agreement, the General Partner or the Liquidator may exercise the power of attorney made in this Section 1.4(a)(ii) only after the necessary vote, consent or approval of the Limited Partners. Nothing contained in this Section 1.4 shall be construed as authorizing the General Partner to amend this Agreement except in accordance with Article XV, or as may be otherwise expressly provided for in this Agreement. (b) The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, and it shall survive and not be affected by the subsequent death, incompetency, disability, incapacity, dissolution, bankruptcy or termination of any Limited Partner or Assignee and the transfer of all or any portion of such Limited Partner's or Assignee's Partnership Interest and shall extend to such Limited Partner's or Assignee's heirs, successors and assigns. Each such Limited Partner or Assignee hereby agrees to be bound by any representation made by the General Partner or the Liquidator acting in good faith pursuant to such power of attorney; and each such Limited Partner or Assignee hereby waives any and all defenses that may be available to contest, negate or disaffirm the action of the General Partner or the Liquidator taken in good faith under such power of attorney. Each Limited Partner or Assignee shall execute and deliver to the General Partner or the Liquidator, within fifteen days after receipt of the General Partner's or the Liquidator's request therefor, such further designations, powers of attorney and other instruments as the General Partner or the Liquidator deems necessary to effectuate this Agreement and the purposes of the Partnership. 1.5 Term. The Partnership commenced upon the filing of the Certificate of Limited Partnership in accordance with the Delaware Act and shall continue in existence until the close of Partnership business on December 31, 2044, or until the earlier termination of the Partnership in accordance with the provisions of Article XIV or as otherwise required by law. ARTICLE II DEFINITIONS The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement. "Additional Limited Partner" means a Person admitted to the Partnership as a Limited Partner pursuant to Section 11.4 and who is shown as such on the books and records of the Partnership. "Adjusted Capital Account" means the Capital Account maintained for each Partner as of the end of each taxable year of the Partnership, (a) increased by any amounts that such Partner is obligated to restore under the standards set by Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to restore under Treasury Regulation Sections 1.704-2(g)(1) and 1.704-2(i)(5)), and (b) decreased by (i) the amount of all losses and deductions that, as of the end of such taxable year, are reasonably expected to be allocated to such Partner in subsequent years under Sections 704(e)(2) and 706(d) of the Code and Treasury Regulation Section 1.751-1(b)(2)(ii), and (ii) the amount of all distributions that, as of the end of such taxable year, are reasonably expected to be made to such Partner in subsequent years in accordance with the terms of this Agreement or otherwise to the extent they exceed offsetting increases to such Partner's Capital Account that are reasonably expected to occur during (or prior to) the year in which such distributions are reasonably expected to be made (other than increases as a result of a minimum gain chargeback pursuant to Section 3 5. 1(d) or 5.1(e)). The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. "Adjusted Property" means any property the Carrying Value of which has been adjusted pursuant to Section 4.5(d)(i) or 4.5(d)(ii). "Affiliate" means, with respect to any Person, any other Person that directly or indirectly controls, is controlled by or is under common control with, the Person in question. As used herein, the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. "Agreed Allocation" means any allocation made pursuant to Section 5.1(a), (b), or (c). "Agreed Value" of any Contributed Property means the fair market value of such Property or other consideration at the time of contribution as determined by the General Partner using such reasonable method of valuation as it may adopt. For purposes of this Agreement, the Agreed Value of a Contributing Partner's non-cash Capital Contribution shall be based on the value of the Partnership Units received by the Contributing Partner in exchange for such Capital Contribution or in connection with the merger of a partnership of which such person is a partner with and into the Partnership. Except as otherwise expressly agreed by the Partnership and a Contributing Partner, the value of Common Units or Special Units received by the Contributing Partner shall equal the number of Common Units or Special Units multiplied by the Public Offering Price or, if the contribution is made after the initial public offering of the Company's common stock, the value of a share of the Company's common stock calculated in accordance with the second and third sentences of the definition of "Cash Amount." Except as otherwise expressly agreed by the Partnership and a contributing Partner, the value of Preferred Units shall be determined by the General Partner using such reasonable method as it may adopt. "Agreement" means this Second Amended and Restated Agreement of Limited Partnership of FelCor Lodging Limited Partnership, as it may be further amended, modified, supplemented or restated from time to time. "Assignee" means a Person to whom one or more Partnership Units have been transferred in a manner permitted under this Agreement and who has executed and delivered a Transfer Application as required by this Agreement but who has not become a Substituted Limited Partner. "Book-Tax Disparity" means with respect to any item of Contributed Property or Adjusted Property, as of the date of any determination, the difference between the Carrying Value of such Contributed Property or Adjusted Property and the adjusted basis thereof for federal income tax purposes as of such date. A Partner's share of the Partnership's Book-Tax Disparities in all of its Contributed Property and Adjusted Property will be reflected by the difference between such Partner's Capital Account balance as maintained pursuant to Section 4.5 and the hypothetical balance of such Partner's Capital Account computed as if it had been maintained strictly in accordance with federal income tax accounting principles. "Capital Account" means the capital account maintained for any Partner pursuant to Section 4.5. "Capital Contribution" means any cash, cash equivalents or the Net Agreed Value of Contributed Property that a Partner contributes to the Partnership pursuant to Section 4.1, 4.3, 4.4, 4.6(c) or 12.3. "Carrying Value" means (a) with respect to a Contributed Property, the Agreed Value of such property reduced (but not below zero) by all depreciation, amortization and cost recovery deductions charged to the Partners' Capital Accounts, and (b) with respect to any other Partnership property, the adjusted basis of such property for federal income tax purposes, all as of the time of determination. The Carrying Value of any property shall be adjusted from time to time in accordance with Sections 4.5(d)(i) and 4.5(d)(ii) and to reflect changes, additions or other adjustments to the Carrying Value for dispositions and acquisitions of Partnership properties, as deemed appropriate by the General Partner. "Cash Amount" means an amount of cash per Partnership Unit equal to the value of the REIT Shares Amount on the date of receipt by the General Partner of a Notice of Redemption. The value of the REIT Shares Amount shall be the average of the market price for each of the ten consecutive trading days immediately preceding the date of such 4 valuation. The market price for each such trading day shall be: (i) if the REIT Shares are listed or admitted to trading on any securities exchange or automatic inter-dealer quotation system, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day, (ii) if the REIT Shares are not listed or admitted to trading on any securities exchange or automatic inter-dealer quotation system, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or (iii) if the REIT Shares are not listed or admitted to trading on any securities exchange or automatic inter-dealer quotation system, and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than 10 days prior to the date in question) for which prices have been so reported; provided that if there are no bid and asked prices reported during the ten days prior to the date in question, the value of the REIT Shares shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. In the event the REIT Shares Amount includes rights that a holder of REIT Shares would be entitled to receive, then the value of such rights shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. "Cause" means that a court of competent jurisdiction has entered a final, non-appealable judgment finding the General Partner liable for actual fraud, gross negligence or willful or wanton misconduct in its capacity as general partner of the Partnership. "Certificate" means a certificate issued by the Partnership evidencing ownership of one or more Partnership Interests. "Certificate of Designation" means an addendum attached hereto which creates and provides for the issuance of a class of Partnership Units and fixes the designations, preferences and relative participating, optional or other special rights, powers and duties of such Partnership Units. "Certificate of Limited Partnership" means the Certificate of Limited Partnership filed with the Secretary of State of the State of Delaware as referenced in Section 6.2, as such Certificate may be amended or restated from time to time. "Class B, Series II Unit" means a Partnership Unit issued or authorized to be issued by the Partnership pursuant to Addendum No. 1 to this Agreement and Annex No. 2 to such Addendum, which designates the "Class B, Series II Units." "Class B Unit" means a Partnership Unit issued or authorized to be issued by the Partnership pursuant to Addendum No. 1 to this Agreement, which designates the "Class B Units." "Closing Date" means the date on which the transactions contemplated by the Underwriting Agreement are consummated. "Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of future law. "Common Unit" means a Partnership Unit that has no preferential or special rights or privileges and excludes the Preferred Units and Special Units. "Company" means FelCor Lodging Trust Incorporated, a Maryland corporation, as successor to FelCor Suite Hotels, Inc., a Delaware corporation, or its successors. "Consolidated" means as reported in the consolidated financial statements of the Partnership and its subsidiaries (if any) prepared in accordance with generally accepted accounting principles consistently applied. 5 "Contributed Property" means each property or other asset, in such form as may be permitted by the Delaware Act, but excluding cash, contributed to the Partnership. Once the Carrying Value of a Contributed Property is adjusted pursuant to Section 4.5(d), such property shall no longer constitute a Contributed Property for purposes of Section 5.1, but shall be deemed an Adjusted Property for such purposes. "Contributing Partner" means each Partner contributing a Contributed Property. "Delaware Act" means the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. Section 17-101, et. seq., as amended, supplemented or restated from time to time, and any successor to such statute. "Departing Partner" means a former General Partner, from and after the effective date of any withdrawal of the General Partner pursuant to Section 12.1. "Economic Risk of Loss" has the meaning set forth in Treasury Regulation Section 1.752-2(a). "Event of Withdrawal" has the meaning assigned to such term in Section 12.1. "Excess Balance" means for any Partner holding only Common Units and Special Units, the amount, if any, by which the Partner's positive Capital Account balance exceeds zero, and for any Partner holding both Common Units, Special Units and Preferred Units, the amount, if any, by which its positive Capital Account balance exceeds the sum of the positive balance of the Liquidation Preference of its Preferred Units. "Exchange Act" means the Securities Exchange Act of 1934 as amended, supplemented or restated from time to time, and any successor to such statute. "Fiscal Year" means the twelve-month period ending December 31 of each year; provided that the last Fiscal Year shall be the period beginning on January 1 of the calendar year in which the final liquidation and termination of the Partnership is completed and ending on the date such final liquidation and termination is completed. "General Partner" means the Company, and its successors, as general partner of the Partnership. "General Partner Equity Value" means, as of any date of determination, the fair market value of the General Partner's Partnership Interest, as a general partner, as determined by the General Partner using whatever reasonable method of valuation it may adopt. "Indebtedness" means the consolidated liabilities of the Partnership for borrowed money (including all notes payable and drafts accepted representing extensions of credit) and all obligations evidenced by bonds, debentures, notes or other similar instruments on which interest charges are customarily paid, including obligations under capital leases. "Indemnitee" means the General Partner, any Departing Partner, any Person who is or was an Affiliate of the General Partner or any Departing Partner, any Person who is or was an officer, director, employee, partner, agent or trustee of the General Partner or any Departing Partner or any such Affiliate, or any Person who is or was serving at the request of the General Partner or any Departing Partner or any such Affiliate as a director, officer, employee, partner, agent or trustee of another Person. "Initial Hotels" means the following six (6) hotels: (1) Embassy Suites (Dallas-Park Central), 13131 North Central Expressway, Dallas, Texas; (2) Embassy Suites (Jacksonville-Baymeadows), 9300 Baymeadows Road, Jacksonville, Florida; (3) Embassy Suites (Orlando-North), 225 East Altamonte Drive, Altamonte Springs, Florida; (4) Embassy Suites (Orlando-South), 8978 International Drive, Orlando, Florida; (5) Embassy Suites (Nashville-Airport), 10 Century Boulevard, Nashville, Tennessee; and (6) Embassy Suites (Tulsa-I-44), 3322 S. 79th East Avenue, Tulsa, Oklahoma. "Initial Limited Partners" means the initial Limited Partners set forth on Exhibit A admitted to the Partnership in accordance with Section 4.3(b). 6 "Limited Partner" means any Person named as a Limited Partner on Exhibit A attached hereto, and any Person who becomes a Substituted or Additional Limited Partner, in such Person's capacity as a Limited Partner in the Partnership. "Limited Partner Equity Value" means, as of any date of determination, the fair market value of a Limited Partner's Partnership Interest, as determined by the General Partner using whatever reasonable method of valuation it may adopt. "Limited Partner Interest" means the ownership interest of a Limited Partner in the Partnership at any particular time. "Liquidation Preference" means the amount, if any, required to be distributed to a holder of a Preferred Unit in the event of any liquidation, dissolution or winding up of the Partnership, whether voluntary or involuntary, if and to the extent such Preferred Unit has a preferential right to such distributions under the terms of the applicable Certificate of Designation. "Liquidator" means the General Partner or other Person approved pursuant to Section 14.3 who performs the functions described therein. "Majority" means Partners having among them fifty-one percent (51%) or more of the Outstanding Partnership Units. "Merger Agreement" has the meaning assigned to such term in Section 16.1. "Minimum Gain Attributable to Partner Nonrecourse Debt" means that amount determined in accordance with the principles of Treasury Regulation Section 1.704-2(i)(3). "National Securities Exchange" means an exchange registered with the Securities and Exchange Commission under Section 6(a) of the Exchange Act. "Net Agreed Value" means, (a) in the case of any Contributed Property the Agreed Value of such property reduced by any liabilities either assumed by the Partnership upon such contribution or to which such property is subject when contributed, and (b) in the case of any property distributed to a Partner or Assignee by the Partnership, the Partnership's Carrying Value of such property at the time such property is distributed (adjusted as provided in Section 4.5(d)(ii)), reduced by any indebtedness either assumed by such Partner or Assignee upon such distribution or to which such property is subject at the time of distribution as determined under Section 752 of the Code. "Net Income" means, for any taxable period, the excess, if any, of the Partnership's items of income and gain for such taxable period over the Partnership's items of loss and deduction for such taxable period. The items included in the calculation of Net Income shall be determined in accordance with Section 4.5(b) and shall not include any items specially allocated under Sections 5.1(d) through 5.1(l). Once an item of income, gain, loss or deduction that has been included in the initial computation of Net Income is subjected to a Regulatory Allocation, the applicable Net Income or Net Loss shall be recomputed without regard to such item. "Net Loss" means, for any taxable period, the excess, if any, of the Partnership's items of loss and deduction for such taxable period over the Partnership's items of income and gain for such taxable period. The items included in the calculation of Net Loss shall be determined in accordance with Section 4.5(b) and shall not include any items specially allocated under Sections 5.1(d) through 5.1(l). Once an item of income, gain, loss or deduction that has been included in the initial computation of Net Loss is subjected to a Regulatory Allocation, the applicable Net Income or Net Loss shall be recomputed without regard to such item. "Nonrecourse Built-in Gain" means with respect to any Contributed Properties or Adjusted Properties that are subject to a mortgage or negative pledge securing a Nonrecourse Liability, the amount of any taxable gain that would be allocated to the Partners pursuant to Sections 5.2(b)(i)(A), 5.2(b)(ii)(A) or 5.2(b)(iii) if such properties were disposed of in a taxable transaction in full satisfaction of such liabilities and for no other consideration. 7 "Nonrecourse Deductions" means any and all items of loss, deduction or expenditure (including any expenditure described in Section 705(a)(2)(B) of the Code) that, in accordance with the principles of Treasury Regulation Section 1.704-2(b)(1), are attributable to a Nonrecourse Liability. "Nonrecourse Liability" has the meaning set forth in Treasury Regulation Section 1.704-2(b)(3). "Notice of Redemption" means the Notice of Exercise of Redemption Right substantially in the form attached as Exhibit B hereto. "Offering" means the offer and sale by the General Partner and the purchase by the Underwriters (as defined in the Prospectus) of the common stock of the General Partner for sale to the public pursuant to the Registration Statement. "Opinion of Counsel" means a written opinion of counsel (who may be regular counsel to the Partnership or the General Partner) acceptable to the General Partner. "Organizational Limited Partner" means Thomas J. Corcoran, Jr., in his capacity as the organizational limited partner of the Partnership pursuant to this Agreement. "Outstanding" means, with respect to Partnership Units or other Partnership Securities, as the case may be, all Partnership Units or other Partnership Securities that are issued by the Partnership and reflected as outstanding on the Partnership's books and records as of the date of determination. "Partner" means the General Partner, Limited Partners and Assignees thereof, if applicable. "Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulation Section 1.704-2(b)(4). "Partner Nonrecourse Deductions" means any and all items of loss, deduction or expenditure (including any expenditure described in Section 705(a)(2)(B) of the Code) that, in accordance with the principles of Treasury Regulation Section 1.704-2(i)(2), are attributable to a Partner Nonrecourse Debt. "Partnership" means FelCor Lodging Limited Partnership, a Delaware limited partnership established pursuant to this Agreement, formerly known as FelCor Suites Limited Partnership, and any successor thereto. "Partnership Assets" means all assets of the Partnership whether tangible or intangible and whether real, personal or mixed. "Partnership Inception" means the Closing Date. "Partnership Interest" means the interest of a Partner in the Partnership. "Partnership Minimum Gain" means the amount determined pursuant to the provisions of Treasury Regulation Section 1.704-2(d). "Partnership Securities" means Partnership Units and any other securities issued by the Partnership. "Partnership Unit" means a Partnership Interest of a Partner or Assignee in the Partnership representing a fractional part of the Partnership Interests of all Partners and Assignees and includes Common Units, Special Units and Preferred Units. "Partnership Year" means the Fiscal Year of the Partnership. "Percentage Interest" means the percentage ownership interest in the Partnership of each Partner, as determined by dividing the total number of Common Units, Special Units and Preferred Units (other than Preferred Units having a Liquidation Preference) held by a Partner by the total number of Common Units, Special Units and Preferred Units 8 (other than Preferred Units having a Liquidation Preference) then outstanding. No Partner shall have any Percentage Interest attributable to any Preferred Units having a Liquidation Preference. "Person" means an individual or a corporation, partnership, joint venture, trust, limited liability company, unincorporated organization, association or other entity. "Plan of Merger" means the Agreement and Plan of Merger dated May 20, 1994 by and among FelCor Suites Limited Partnership, Suites DJON Limited Partnership, Suites DJON Nashville Limited Partnership and Suites Oklahoma Limited Partnership. "Preferred Units" means any class or series of Partnership Units that is designated as having preferential rights with respect to distributions by the Partnership as provided in the applicable Certificate of Designation, and includes without limitation the Series A Convertible Preferred Units and the Series B Redeemable Preferred Units. "Prospectus" means the final prospectus contained in the Registration Statement delivered to purchasers of the General Partner's common stock in the Offering. "Public Offering Price" shall mean the price set forth in the Prospectus. "Recapture Income" means any gain recognized by the Partnership (computed without regard to any adjustment required by Section 734 or 743 of the Code) upon the disposition of any property or asset of the Partnership, which gain is characterized as ordinary income because it represents the recapture of deductions previously taken with respect to such property or asset. "Recaptured Credits" means credits previously taken against federal income tax liability which are required to be recaptured upon the disposition of any property by the Partnership prior to the end of such property's useful life used in determining the amount of the credit relating thereto. "Record Date" means the date established by the General Partner for determining (a) the identity of Limited Partners (or Assignees, if applicable) entitled to notice of, or to vote at any meeting of Limited Partners or entitled to vote by ballot or give approval of Partnership action in writing without a meeting or entitled to exercise rights in respect of any lawful action of Limited Partners, or (b) the identity of Record Holders entitled to receive any report or distribution. "Record Holder" means the Person in whose name a Partnership Unit is registered on the books of the Transfer Agent as of the opening of business on a particular Business Day. "Redeeming Partner" has the meaning provided in Section 7.5(a) hereof. "Redemption Amount" means either the Cash Amount or the REIT Shares Amount. "Redemption Right" has the meaning provided in Section 7.5(a) hereof. "Registration Statement" means the Registration Statement on Form S-11 (Registration No. 33-79214), as it has been and as it may be amended or supplemented from time to time, filed by the General Partner with the Securities and Exchange Commission under the Securities Act to register the offering and sale of common stock of the General Partner in the Offering. "Regulatory Allocations" shall have the meaning assigned in Section 5.1(l). "REIT" means a real estate investment trust under Sections 856 through 860 of the Code. "REIT Share" means a share of the common stock of the General Partner or any option, warrant or right to purchase or subscribe for such shares. 9 "REIT Shares Amount" shall mean a number of REIT Shares equal to the number of Partnership Units offered for redemption by a Redeeming Partner; provided that in the event the General Partner issues to all holders of REIT Shares rights, options, warrants or convertible or exchangeable securities entitling the shareholders to subscribe for or purchase REIT Shares, or any other securities or property (collectively, the "rights"), then the REIT Shares Amount shall also include such rights as a holder of that number of REIT Shares would have been entitled to receive as of the Record Date for the issuance of such rights. "Residual Gain" or "Residual Loss" means any item of gain or loss, as the case may be, of the Partnership recognized for federal income tax purposes resulting from a sale, exchange or other disposition of a Contributed Property or Adjusted Property, to the extent such item of gain or loss is not allocated pursuant to Section 5.2(b)(i)(A) or 5.2(b)(ii)(A), to eliminate Book-Tax Disparities. "Securities Act" means the Securities Act of 1933, as amended, supplemented or restated from time to time, and any successor to such statute. "Series A Convertible Preferred Unit" means a Partnership Unit issued or authorized to be issued by the Partnership pursuant to Addendum No. 2 to this Agreement, which designates the "Series A Cumulative Convertible Preferred Units." "Series B Redeemable Preferred Unit" means a Partnership Unit issued or authorized to be issued by the Partnership pursuant to Addendum No. 3 to this Agreement, which designates the "Series B Cumulative Redeemable Preferred Units." "Special Units" means any class or series of Partnership Units that is designated as having preferential or special rights, powers or duties, other than with respect to distributions by the Partnership, and includes, without limitation, the Class B Units and Class B, Series II Units. "Specified Redemption Date" means the first business day of the month that is at least 10 business days after the receipt by the General Partner of the Notice of Redemption. "Substituted Limited Partner" means a Person who is admitted as a Limited Partner to the Partnership pursuant to Section 11.1 in place or and with all the rights of the Limited Partner and who is shown as the Limited Partner on the books and records of the Partnership. "Surviving Business Entity" has the meaning assigned to such term in Section 16.2(b). "Target Balance" means with respect to a Partner the sum of (i) an amount that bears the same ratio to the aggregate Capital Account balances (as determined immediately after the conversion of the Partner's Preferred Units to Common Units or redemption of Preferred Units into Common Units (as the case may be) under the applicable Certificate of Designation and reduced by an amount equal to the aggregate Liquidation Preference of all issued and outstanding Preferred Units that have a Liquidation Preference and that are not being converted or redeemed) of all Partners as the Partner's total number of Common Units, Special Units and Preferred Units that have a Percentage Interest (determined immediately after the conversion or redemption) bears to the aggregate number of Common Units, Special Units and Preferred Units that have a Percentage Interest owned by all Partners (determined immediately after the conversion or redemption), plus (ii) the Liquidation Preference of the Partner's total Preferred Units that have a Liquidation Preference and that are not being converted or redeemed. "Transfer Agent" means Sun Trust Bank, Atlanta, Georgia or such bank, trust company or other Person (including, without limitation, the General Partner or one of its Affiliates) as shall be appointed from time to time by the Partnership to act as registrar and transfer agent for the Partnership Units. "Transfer Application" means an application and agreement for transfer of Partnership Units in the form set forth on the back of a Partnership Unit Certificate or in a form substantially to the same effect in a separate instrument. "Treasury Regulations" means the existing, temporary and proposed income tax regulations under the Code, as amended from time to time. 10 "Underwriter" means each Person named as an underwriter in the Underwriting Agreement who purchases common stock of the General Partner pursuant thereto. "Underwriting Agreement" means the Underwriting Agreement dated July 21, 1994, among the Partnership, the Company, Morgan Keegan & Company, Inc. and Montgomery Securities providing for the purchase of the common stock of the General Partner to be offered in the Offering by such Underwriters. "Unrealized Gain" attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (a) the fair market value of such property as of such date over (b) the Carrying Value of such property as of such date (prior to any adjustment to be made pursuant to Section 4.5(d) as of such date). In determining such Unrealized Gain, the aggregate cash amount and fair market value of all Partnership assets (including cash or cash equivalents) shall be determined by the General Partner using such reasonable method of valuation as it may adopt; provided, however, that the General Partner, in arriving at such valuation, must take fully into account the aggregate Limited Partner Equity Value and the General Partner Equity Value at such time. The General Partner shall allocate such aggregate value among the Partnership Assets (in such manner as it determines in its sole discretion to be reasonable) to arrive at a fair market value for individual properties. "Unrealized Loss" attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (a) the Carrying Value of such property as of such date (prior to any adjustment to be made pursuant to Section 4.5(d) as of such date) over (b) the fair market value of such property as of such date. In determining such Unrealized Loss, the aggregate cash amount and fair market value of all Partnership assets (including cash or cash equivalents) shall be determined by the General Partner using such reasonable method of valuation as it may adopt; provided, however, that the General Partner, in arriving at such valuation, must take fully into account the aggregate Limited Partner Equity Value and the General Partner Equity Value at such time. The General Partner shall allocate such aggregate value among the Partnership Assets (in such manner as it determines in its sole discretion to be reasonable) to arrive at a fair market value for individual properties. ARTICLE III PURPOSE 3.1 Purpose and Business. The purpose and nature of the business to be conducted by the Partnership shall be (i) to engage directly in, or to enter into any partnership, joint venture or similar arrangement to engage in, any business activity that may be lawfully conducted by a limited partnership organized pursuant to the Delaware Act and, in connection therewith, to exercise all of the rights and powers conferred upon the Partnership pursuant to the agreements relating to such business activity; provided, however, that such business shall be limited to and conducted in such a manner as to permit the General Partner at all times to qualify as a REIT, unless the General Partner takes affirmative action not to qualify as a REIT or to otherwise revoke its election to be taxed as a REIT, and (ii) to do anything necessary or appropriate to the foregoing. 3.2 Powers. The Partnership shall be empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described in Section 3.1 and for the protection and benefit of the Partnership. ARTICLE IV CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP UNITS 4.1 Initial Contributions. To form the Partnership under the Delaware Act, the General Partner made an initial Capital Contribution to the Partnership in the amount of $99 for a 99% general partner interest in the Partnership and was admitted as the general partner of the Partnership, and the Organizational Limited Partner made a Capital Contribution to the Partnership in the amount of $1 for a 1% interest in the Partnership and was admitted as the Organizational Limited Partner of the Partnership. 11 4.2 Return of Initial Contributions. As of the Closing Date, after giving effect to (i) the transactions contemplated by Section 4.3 and (ii) the admission to the Partnership of the Initial Limited Partners in accordance with this Agreement, the interest in the Partnership of the Organizational Limited Partner was terminated, the $99 Capital Contribution by the General Partner and the $1 Capital Contribution by the Organizational Limited Partner as initial Capital Contributions were refunded and the interest of the Organizational Limited Partner as a limited partner of the Partnership was terminated and withdrawn. Ninety-nine percent of any interest or other profit that may have resulted from the investment or other use of such initial Capital Contributions was allocated and distributed to the General Partner, and the balance thereof was allocated and distributed to the Organizational Limited Partner. 4.3 Capital Contributions by the Partners. (a) On the Closing Date, the General Partner contributed to the Partnership the net proceeds from the sale of common stock in the Offering in exchange for 4,075,000 Partnership Units representing an approximately 70.6% general partner interest in the Partnership, after giving effect to the withdrawal of the Organizational Limited Partner as a limited partner of the Partnership. (b) On the Closing Date, the Initial Limited Partners contributed to the Partnership, through the Plan of Merger, the Initial Hotels. (c) The number and class or series of Partnership Units held by each Partner are set forth opposite the name of such Partner on Exhibit A. (d) Except as otherwise provided in this Agreement, the Partners shall have no right or obligation to make any Additional Capital Contributions or loans to the Partnership. The General Partner may contribute additional capital to the Partnership, from time to time, and receive an additional Partnership Interest in respect thereof, in the manner contemplated in Section 4.6 hereof. 4.4 Limited Preemptive Rights. Except as provided for herein, no Person shall have any preemptive, preferential or other similar right with respect to (a) additional Capital Contributions; (b) issuance or sale of any class or series of Partnership Units or other Partnership Securities, whether unissued, held in the treasury or hereafter created; (c) issuance of any obligations, evidences of indebtedness or other securities of the Partnership convertible into or exchangeable for, or carrying or accompanied by any rights to receive, purchase or subscribe to, any such Partnership Units or other Partnership Securities; (d) issuance of any right or subscription to or right to receive, or any warrant or option for the purchase of any such Partnership Units or other Partnership Securities; or (e) issuance or sale of any other securities that may be issued or sold by the Partnership. 4.5 Capital Accounts. (a) The Partnership shall maintain for each Partner a separate Capital Account in accordance with the rules of Treasury Regulation Section 1.704-1(b)(2)(iv). Such Capital Account shall be increased by (i) the Net Agreed Value of all Capital Contributions made by such Partner to the Partnership pursuant to this Agreement and (ii) all items of Partnership income and gain (including, without limitation, income and gain exempt from tax) computed in accordance with Section 4.5(b) and allocated to such Partner pursuant to Section 5.1 and decreased by (x) the amount of cash or Net Agreed Value of all distributions of cash or property made to such Partner pursuant to this Agreement and (y) all items of Partnership deduction and loss computed in accordance with Section 4.5(b) and allocated to such Partner pursuant to Section 5.1. (b) For purposes of computing the amount of any item of income, gain, loss or deduction to be reflected in the Partners' Capital Accounts, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for federal income tax purposes (including, without limitation, any method of depreciation, cost recovery or amortization used for that purpose), provided, that: (i) Solely for purposes of this Section 4.5, the Partnership shall be treated as owning directly its proportionate share (as determined by the General Partner) of all property owned by any partnership that the Partnership controls. 12 (ii) All fees and other expenses incurred by the Partnership to promote the sale of (or to sell) a Partnership Interest that can neither be deducted nor amortized under Section 709 of the Code, if any, shall, for purposes of Capital Account maintenance, be treated as an item of deduction at the time such fees and other expenses are incurred and shall be allocated among the Partners pursuant to Section 5.1. (iii) Except as otherwise provided in Treasury Regulation Section 1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss and deduction shall be made without regard to any election under Section 754 of the Code which may be made by the Partnership and, as to those items described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without regard to the fact that such items are not includable in gross income or are neither currently deductible nor capitalized for federal income tax purposes. (iv) Any income, gain or loss attributable to the taxable disposition of any Partnership property shall be determined as if the adjusted basis of such property as of such date of disposition were equal in amount to the Partnership's Carrying Value with respect to such property as of such date. (v) In accordance with the requirements of Section 704(b) of the Code, any deductions for depreciation, cost recovery or amortization attributable to any Contributed Property shall be determined as if the adjusted basis of such property on the date it was acquired by the Partnership were equal to the Agreed Value of such property. Upon an adjustment pursuant to Section 4.5(d) to the Carrying Value of any Partnership property subject to depreciation, cost recovery or amortization, any further deductions for such depreciation, cost recovery or amortization attributable to such property shall be determined (A) as if the adjusted basis of such property were equal to the Carrying Value of such property immediately following such adjustment and (B) using a rate of depreciation, cost recovery or amortization derived from the same method and useful life (or, if applicable, the remaining useful life) as is applied for federal income tax purposes; provided, however, that, if the asset has a zero adjusted basis for federal income tax purposes, depreciation, cost recovery or amortization deductions shall be determined using any reasonable method that the General Partner may adopt. (vi) If the Partnership's adjusted basis in depreciable or cost recovery property is reduced for federal income tax purposes pursuant to Section 50(c)(1) of the Code, the amount of such reduction shall, solely for purposes hereof, be deemed to be an additional depreciation or cost recovery deduction in the year such property is placed in service and shall be allocated among the Partners pursuant to Section 5.1. Any restoration of such basis pursuant to Section 50(c)(2) of the Code shall, to the extent possible, be allocated in the year of such restoration as an item of income pursuant to Section 5.1. (c) A transferee of a Partnership Interest shall succeed to a pro rata portion of the Capital Account of the transferor relating to the Partnership Interest so transferred. As required by the capital account maintenance rules of Treasury Regulation Section 1.704-1(b)(2)(iv), a single Capital Account shall be maintained for each Partner regardless of the number and type of Partnership Units held by such Partner. Upon the conversion of Preferred Units into Common Units or the redemption of Preferred Units as provided in the applicable Certificate of Designation, the Partners' Capital Accounts shall be adjusted as expressly provided in this Agreement. (d) (i) Consistent with the provisions of Treasury Regulation Section 1.704-1(b)(2)(iv)(f), on an issuance of additional Partnership Units or other Partnership Securities for cash or Contributed Property, the Capital Accounts of all Partners and the Carrying Value of each Partnership property immediately prior to such issuance shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as if such Unrealized Gain or Unrealized Loss had been recognized on an actual sale of each such property immediately prior to such issuance and had been allocated to the Partners at such time pursuant to Section 5.1. (ii) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f), immediately prior to any distribution to a Partner of any Partnership property (excluding distributions of cash that are not in redemption or retirement of a Partnership Interest but including distributions in connection with the redemption of a Preferred Unit for cash), the Capital Accounts of all Partners and the Carrying Value of each Partnership property shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as if such Unrealized Gain or Unrealized Loss had been recognized in a sale of such property immediately prior to such distribution for an amount equal to its fair market value, and had been allocated to the Partners, at such time, pursuant to Section 5.1. 13 (e) Immediately after the effective time of conversion of any Preferred Units into Common Units pursuant to the applicable Certificate of Designation, the respective Capital Account balances of the Partners who thereafter own Common Units or Special Units with respect to such Common Units or Special Units shall be equal to their respective Target Balances, which balances shall thereafter be adjusted as provided in this Article IV. For purposes of this Section 4.5(e), such Partner's Capital Account balance immediately preceding the determinations of the Target Balances shall include all adjustments and allocations required by Section 4.5(f). (f) In the event any Partner's Percentage Interest changes during a Fiscal Year for any reason, including without limitation, the redemption of any Partnership Units or the conversion of any Preferred Unit into a Common Unit, the allocations contained in Article V shall be applied by the General Partner as necessary to reflect the varying interest of the Partners during such year using any method determined by the General Partner to be permissible by the Code and Treasury Regulations. 4.6 Issuance of Additional Partnership Units and Other Securities (a) The General Partner is hereby authorized to cause the Partnership to issue, in addition to the Partnership Units issued pursuant to Section 4.3, such additional Partnership Units, or classes or series thereof (senior or junior to any of the Partnership Units), or options, rights, warrants or appreciation rights relating thereto, or any other type of equity security that the Partnership may lawfully issue, any unsecured or secured debt obligations of the Partnership or debt obligations of the Partnership convertible into any class or series of equity securities of the Partnership (collectively, "Partnership Securities"), for any Partnership purpose, at any time or from time to time, to the Partners or to other Persons for such consideration and on such terms and conditions as shall be established by the General Partner in its sole discretion, all without the approval of any Limited Partners or any other Person; provided, however, in no event shall the General Partner cause the Partnership to have Outstanding at any time Partnership Units (other than Preferred Units that are not convertible into Common Units) in excess of the total authorized common stock of the General Partner. The General Partner shall have sole discretion, subject to the guidelines set forth in this Section 4.6 and the requirements of the Delaware Act, in determining the consideration and terms and conditions with respect to any future issuance of Partnership Securities. (b) Notwithstanding any provision of this Agreement to the contrary, additional Partnership Securities to be issued by the Partnership pursuant to this Section 4.6 shall be issuable from time to time in one or more classes, or one or more series of any such classes, with such designations, preferences and relative, participating, optional or other special rights, powers and duties, including, without limitation, rights, powers and duties senior to existing classes and series of Partnership Securities, all as shall be fixed by the General Partner in the exercise of its sole and complete discretion, subject to Delaware law, including, without limitation, (i) the allocations of items of Partnership income, gain, loss, deduction and credit to each such class or series of Partnership Securities; (ii) the right of each such class or series of Partnership Securities to share in Partnership distributions; (iii) the rights of each such class or series of Partnership Securities upon dissolution and liquidation of the Partnership; (iv) whether such class or series of additional Partnership Securities is redeemable by the Partnership and, if so, the price at which, and the terms and conditions upon which, such class or series of additional Partnership Securities may be redeemed by the Partnership; (v) whether such class or series of additional Partnership Securities is issued with the privilege of conversion and, if so, the rate at which, and the terms and conditions upon which, such class or series of Partnership Securities may be converted into any other class or series of Partnership Securities; (vi) the terms and conditions upon which each such class or series of Partnership Securities will be issued, evidenced by Partnership Unit Certificates and assigned or transferred; and (vii) the right, if any, of each such class or series of Partnership Securities to vote on Partnership matters, including, without limitation, matters relating to the relative rights, preferences and privileges of each such class or series. (c) Nothing contained herein shall restrict the General Partner's right to issue additional REIT Shares or other capital stock of the General Partner or to transfer REIT Shares to the Partnership in connection with a redemption pursuant to Section 7.5 hereof; provided, however, in the event that REIT Shares or shares of other capital stock are issued by the General Partner, (i) the General Partner shall cause the Partnership to issue to the General Partner an equivalent amount of Partnership Interests or rights, options, warrants or convertible or exchangeable securities of the Partnership having designations, preferences and other rights, all such that the economic interests are substantially similar to those of the REIT Shares or 14 other capital stock issued by the General Partner to finance such investment, and (ii) the General Partner shall contribute (or be deemed to have contributed) to the Partnership the net proceeds from the offering of such REIT Shares or other capital stock and from the exercise of rights contained in such REIT Shares or other capital stock. In lieu of contributing such proceeds directly to the Partnership, the General Partner may contribute such proceeds to the Partnership indirectly through the General Partner's wholly-owned subsidiary or subsidiaries, and in that event, the Partnership will issue to such subsidiary or subsidiaries the securities of the Partnership required by clause (i) above. In connection with any and all issuances of REIT Shares and other capital stock of the General Partner, the General Partner shall make a Capital Contribution to the Partnership of the proceeds raised in connection with such issuance as required above, provided that if the proceeds actually received by the General Partner are less than the gross proceeds of such issuance as a result of any underwriter's discount or other expenses paid or incurred in connection with such issuance, then the General Partner shall be deemed to have made a Capital Contribution to the Partnership in the amount of the gross proceeds of such issuance and the Partnership shall be deemed simultaneously to have paid such underwriting discount and offering expenses in connection with the required issuance of additional Partnership Units to the General Partner for such Capital Contribution. (d) The General Partner is hereby authorized and directed to take all actions that it deems necessary or appropriate in connection with each issuance of Partnership Units or other Partnership Securities pursuant to Section 4.6(a) to amend this Agreement in any manner that it deems necessary or appropriate to provide for each such issuance, to admit Additional Limited Partners in connection therewith and to specify the relative rights, powers and duties of the holders of the Partnership Units or other Partnership Securities being so issued. (e) The General Partner shall do all things necessary to comply with the Delaware Act and is authorized and directed to do all things it deems necessary or advisable in connection with any future issuance of securities representing Partnership Interests, including, without limitation, compliance with any statute, rule, regulation or guideline of any federal, state or other governmental agency or any National Securities Exchange on which Partnership Units or other securities representing Partnership Interests are listed for trading. 4.7 Adjustment to Percentage Interests and Outstanding Partnership Units. (a) The General Partner shall cause the number of Common Units and Special Units Outstanding (and the conversion ratio of any Preferred Units that are convertible into Common Units) to be proportionately adjusted for any increase or decrease in the number of issued shares of common stock of the General Partner, or any successor in interest thereto, resulting from a subdivision or consolidation of shares, the payment of a stock dividend in common stock or other recapitalization, such that upon each Redeeming Partner's exercise of its Redemption Right pursuant to Section 7.5 hereof, such Redeeming Partner shall receive the same number of shares of common stock of the General Partner that it would have received had it exercised its Redemption Right immediately before the effective date of such change in the number of issued shares of common stock of the General Partner. In the event the General Partner effects a redemption or otherwise acquires any outstanding shares of its capital stock (other than common stock) for which corresponding Partnership Interests were issued to the General Partner (or its wholly-owned subsidiary or subsidiaries) in accordance with Section 4.6(c) hereof, the General Partner shall cause the Partnership to redeem from the General Partner (or its wholly-owned subsidiary or subsidiaries) an equivalent number of such Partnership Interests upon the same terms and conditions as the redemption effected by the General Partner. (b) Upon any conversion of Preferred Units into Common Units in accordance with the terms of the applicable Certificate of Designation, the Percentage Interests of the Partners shall be adjusted to reflect the Common Units issued pursuant to such conversion. Any Preferred Units so converted shall be retired. 4.8 Interest. No interest shall be paid by the Partnership on Capital Contributions or on balances in Partners' Capital Accounts. 4.9 No Withdrawal. No Partner shall be entitled to withdraw any part of its Capital Contributions or its Capital Account or to receive any distribution from the Partnership, except as provided herein. 4.10 Loans from Partners. Loans by a Partner to the Partnership shall not constitute Capital Contributions. If any Partner shall advance funds to the Partnership in excess of the amounts required hereunder to be contributed by it to the capital of the Partnership, the making of such excess advances shall not result in any increase in the amount of the Capital Account of such Partner. The amount of any such excess advances shall be a debt obligation of the Partnership to such Partner and shall be payable or collectible only out of the Partnership Assets in accordance with the terms and conditions upon which such advances are made. 15 ARTICLE V ALLOCATIONS AND DISTRIBUTIONS 5.1 Allocations for Capital Account Purposes. For purposes of maintaining the Capital Accounts and in determining the rights of the Partners among themselves, the Partnership's items of income, gain, loss and deduction (computed in accordance with Section 4.5(b)) shall be allocated among the Partners in each taxable year (or portion thereof) as provided herein below. (a) Net Income. After giving effect to the Regulatory Allocations, Section 5.1(k), Section 5.1(l), and after all distributions under Section 5.3 but before distributions under Section 14.3, all items of income, gain, loss and deduction taken into account in computing Net Income for such taxable period shall be allocated in the same manner as such Net Income is allocated hereunder, which Net Income shall be allocated to the Partners in the following order of priority: (i) First, Net Income shall be allocated to each holder of any Preferred Units that have a Liquidation Preference, pro rata within each class or series of Preferred Units and according to the priorities among each such class or series, as set forth in the applicable Certificates of Designations, until the positive Capital Account balance of such holder is equal to the sum of the Liquidation Preferences of such holder's Preferred Units; (ii) Second, Net Income shall be allocated among the Partners to the least extent necessary so that the ratio among the Partners' Excess Balances is as close as possible to the ratio among their respective Percentage Interests; and then (iii) Finally, Net Income shall be allocated pro rata to all Partners in proportion to their respective Percentage Interests. For purposes of making allocations under this Section 5.1(a), a Partner's Capital Account balance shall be increased by the Partner's share of Partnership Minimum Gain and Minimum Gain Attributable to Partner Nonrecourse Debt as of the applicable time. (b) Net Losses. After giving effect to the Regulatory Allocations, Section 5.1(k), Section 5.1(l), and after all distributions under Section 5.3 but before distributions under Section 14.3, all items of income, gain, loss and deduction taken into account in computing Net Losses for such taxable period shall be allocated in the same manner as such Net Losses are allocated hereunder, which Net Losses shall be allocated to the Partners in the following order of priority: (i) First, Net Loss shall be allocated among the Partners in the least amount necessary so that the ratio among the Partners' Excess Balances is as close as possible to the ratio among their respective Percentage Interests and then to such Partners in proportion to their Percentage Interests until their respective Excess Balances are reduced to zero; and then (ii) Second, Net Loss shall be allocated among the holders of any Preferred Units that have a Liquidation Preference, pro rata within each class or series of Preferred Units and according to the priorities among each such class or series as set forth in the applicable Certificate of Designation, until the positive balances of their Capital Accounts are reduced to zero; and then (iii) Third, Net Loss shall be allocated to the Partners in accordance with their Percentage Interests. For purposes of making allocations under this Section 5.1(b), a Partner's Capital Account balance shall be increased by the Partner's share of Partnership Minimum Gain and Minimum Gain Attributable to Partner Nonrecourse Debt as of the applicable time. 16 (c) Nonrecourse Liabilities. For purposes of Treasury Regulation Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of the Partnership in excess of the sum of (A) the amount of Partnership Minimum Gain and (B) the total amount of Nonrecourse Built-in Gain shall be allocated among the Partners in accordance with their respective Percentage Interests. (d) Partnership Minimum Gain Chargeback. Notwithstanding the other provisions of this Section 5.1, except as provided in Treasury Regulation Sections 1.704-2(f)(2) through (5), if there is a net decrease in Partnership Minimum Gain during any Partnership taxable period, each Partner shall be allocated items of Partnership income and gain for such period (and, if necessary, subsequent periods) in the manner and amounts provided in Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and 1.704-2(j)(2)(i), or any successor provisions. For purposes of this Section 5.1(d), each Partner's Adjusted Capital Account balance shall be determined, and the allocation of income or gain required hereunder shall be effected, prior to the application of any other allocations pursuant to this Section 5.1 with respect to such taxable period (other than an allocation pursuant to Sections 5.1(h) or 5.1(i)). (e) Chargeback of Minimum Gain Attributable to Partner Nonrecourse Debt. Notwithstanding the other provisions of this Section 5.1 (other than 5.1(d) and (i)), except as provided in Treasury Regulation Section 1.704-2(i)(4), if there is a net decrease in Minimum Gain Attributable to Partner Nonrecourse Debt during any Partnership taxable period, any Partner with a share of Minimum Gain Attributable to Partner Nonrecourse Debt at the beginning of such taxable period shall be allocated items of Partnership income and gain for such period (and, if necessary, subsequent periods) in the manner and amounts provided in Treasury Regulation Sections 1.704-2(i)(4) and 1.704- 2(j)(2)(ii), or any successor provisions. For purposes of this Section 5.1(e), each Partner's Adjusted Capital Account balance shall be determined and the allocation of income or gain required hereunder shall be effected, prior to the application of any other allocations pursuant to this Section 5.1, other than Section 5.1(d) (and other than an allocation pursuant to Sections 5.1(h) or 5.1(i)), with respect to such taxable period. (f) Qualified Income Offset. In the event any Partner unexpectedly receives adjustments, allocations or distributions described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership income and gain shall be specifically allocated to such Partner in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulations promulgated under Section 704(b) of the Code, the deficit balance, if any, in its Adjusted Capital Account created by such adjustments, allocations or distributions as quickly as possible unless such deficit balance is otherwise eliminated pursuant to Section 5.1(d) or 5.1(e). (g) Gross Income Allocations. In the event any Partner has a deficit balance in its Capital Account at the end of any Partnership taxable period that is in excess of the sum of (i) the amount, if any the Partner is obligated to restore pursuant to this Agreement and (ii) the amount the Partner is deemed to be obligated to restore pursuant to the penultimate sentences of Section 1.704-2(g)(1) and Section 1.704-2(i)(5) of the Treasury Regulations, such Partner shall be specially allocated items of Partnership gross income and gain in the amount of such excess as quickly as possible; provided, that an allocation pursuant to this Section 5.1(g) shall be made only and to the extent that such Partner would have a deficit balance in its Capital Account (as adjusted above in this Section 5.1(g)) after all other allocations provided in this Section 5.1 have been tentatively made as if this Section 5.1(g) were not in the Agreement. (h) Nonrecourse Deductions. Nonrecourse Deductions for any taxable period shall be allocated to the Partners in accordance with their respective Percentage Interests. If the General Partner determines in its good faith discretion that the Partnership's Nonrecourse Deductions must be allocated in a different ratio to satisfy the safe harbor requirements of the Treasury Regulations promulgated under Section 704(b) of the Code, the General Partner is authorized, upon notice to the Limited Partners, to revise the prescribed ratio to the numerically closest ratio which does satisfy such requirements. (i) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions for any taxable period shall be allocated 100% to the Partner that bears the Economic Risk of Loss for such Partnership Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Treasury Regulation Section 1.704-2(i). If more than one Partner bears the Economic Risk of Loss with respect to a Partner Nonrecourse Debt, such Partner Nonrecourse Deductions attributable thereto shall be allocated between or among such Partners in accordance with the ratios in which they share such Economic Risk of Loss. 17 (j) Loss Limitation. The Net Losses allocated to a Partner pursuant to Section 5.1(b) shall not exceed the maximum amount of Net Losses that can be so allocated without causing, or increasing, a deficit balance in a Partner's Adjusted Capital Account at the end of any Fiscal Year, and all Net Losses in excess of such limitation shall be allocated (subject to this Section 5.1(j)) to the other Partners in the same ratio that their respective Percentage Interests bear to the total Percentage Interests of all such Partners, or if such losses are not so allocable by reason of this Section 5.1(j), to the General Partner. (k) Gross Income Allocation. (i) Each Fiscal Year, after giving effect to the Regulatory Allocations, gross income shall be allocated to the Partners with respect to their Preferred Units until the cumulative amount allocated under this Section 5.1(k)(i) to them for the current year and prior years is equal to the cumulative amount for the current year and prior years of the distributions made to such Partners with respect to their Preferred Units under the first sentence of Section 5.3(a). To the extent that there is insufficient gross income in any year to allocate the full amount provided for by this Section 5.1(k)(i), the available gross income will be allocated among classes or series of Preferred Units in accordance with their relative distribution priorities, as set forth in the applicable Certificate of Designation, and pro rata within each such class or series. (ii) For any Fiscal Year in which a Preferred Unit that has a Liquidation Preference is redeemed under the Certificate of Designation therefor, after giving effect to the Regulatory Allocations, gross income shall be allocated to the Partner owning such Preferred Unit until the cumulative amount allocated under this Section 5.1(k)(ii) is equal to the sum of (A) the excess of (i) the amount distributed in redemption of the unit pursuant to the applicable Certificate of Designation over (ii) the Liquidation Preference for such Preferred Unit, and (B) the excess of (i) the total Net Loss allocated under Section 5.1(b)(ii) for the current Fiscal Year and all prior Fiscal Years attributable to the Preferred Unit redeemed over (ii) the Net Income allocated under Section 5.1(a)(i) for the current Fiscal Year and all prior Fiscal Years attributable to the Preferred Unit redeemed. (l) Curative Allocations. The allocations set forth in Section 5.1 (c) through (j) (the "Regulatory Allocations") are intended to comply with certain requirements of the Treasury Regulations. It is the intent of the Partners that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Partnership income, gain, loss or deduction pursuant to this Section 5.1(l). Therefore, notwithstanding any other provision of this Article V (other than the Regulatory Allocations), the General Partner shall make such offsetting special allocations of Partnership income, gain, loss or deduction in whatever manner it determines appropriate so that, after such offsetting allocations are made, each Partner's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Partner would have had if the Regulatory Allocations were not part of the Agreement and all Partnership items were allocated pursuant to this Section 5.1 other than the Regulatory Allocations. 5.2 Allocations for Tax Purposes. (a) Except as otherwise provided herein, for federal income tax purposes, each item of income, gain, loss and deduction which is recognized by the Partnership for federal income tax purposes shall be allocated among the Partners in the same manner as its correlative item of "book" income, gain, loss or deduction is allocated pursuant to Section 5.1 hereof. (b) In an attempt to eliminate Book-Tax Disparities attributable to a Contributed Property or Adjusted Property, items of income, gain, loss, depreciation, amortization and cost recovery deductions shall be allocated for federal income tax purposes among the Partners as follows: (i) (A) In the case of a Contributed Property, such items attributable thereto shall be allocated among the Partners in the manner provided under Section 704(c) of the Code that takes into account the variation between the Agreed Value of such property and its adjusted basis at the time of contribution; and (B) except as otherwise provided in Section 5.2(b)(iii), any item of Residual Gain or Residual Loss attributable to a Contributed Property shall be allocated among the Partners in the same manner as its correlative item of "book" gain or loss is allocated pursuant to Section 5.1. 18 (ii) (A) In the case of an Adjusted Property, such items shall (1) first, be allocated among the Partners in a manner consistent with the principles of Section 704(c) of the Code to take into account the Unrealized Gain or Unrealized Loss attributable to such property and the allocations thereof pursuant to Section 4.5(d)(i) or (ii), and (2) second, in the event such property was originally a Contributed Property, be allocated among the Partners in a manner consistent with Section 5.2(b)(i)(A); and (B) except as otherwise provided in Section 5.2(b)(iii), any item of Residual Gain or Residual Loss attributable to an Adjusted Property shall be allocated among the Partners in the same manner as its correlative item of "book" gain or loss is allocated pursuant to Section 5.1. (iii) Any items of income, gain, loss or deduction otherwise allocable under Section 5.2(b)(i)(B), or 5.2(b)(ii)(B) shall be subject to allocation by the General Partner in a manner designed to eliminate, to the maximum extent possible, Book-Tax Disparities in a Contributed Property or Adjusted Property otherwise resulting from the application of the "ceiling" limitation (under Section 704(c) of the Code or Section 704(c) principles) to the allocations provided under Section 5.2(b)(i)(A) or 5.2(b)(ii)(A). (c) For the proper administration of the Partnership or for the preservation of uniformity of the Partnership Units (or any class or classes thereof), the General Partner shall have sole discretion to (i) adopt such conventions as it deems appropriate in determining the amount of depreciation, amortization and cost recovery deductions; (ii) make special allocations for federal income tax purposes of income (including, without limitation, gross income) or deductions; and (iii) amend the provisions of this Agreement as appropriate (x) to reflect the proposal or promulgation of Treasury Regulations under Section 704(b) or Section 704(c) of the Code or (y) otherwise to preserve or achieve uniformity of the Partnership Units (or any class or classes thereof). The General Partner may adopt such conventions, make such allocations and make such amendments to this Agreement as provided in this Section 5.2(c) only if such conventions, allocations or amendments would not have a material adverse effect on the Partners, the holders of any class or classes of the Partnership Units issued and Outstanding, and if such allocations are consistent with the principles of Section 704 of the Code. (d) Any gain allocated to the Partners upon the sale or other taxable disposition of any Partnership asset shall, to the extent possible after taking into account other required allocations of gain pursuant to this Section 5.2, be characterized as Recapture Income in the same proportions and to the same extent as such Partners (or their predecessors in interest) have been allocated any deductions directly or indirectly giving rise to the treatment of such gain as Recapture Income. (e) All items of income, gain, loss, deduction and credit recognized by the Partnership for federal income tax purposes and allocated to the Partners in accordance with the provisions hereof shall be determined without regard to any election under Section 754 of the Code which may be made by the Partnership; provided, however, that such allocations, once made, shall be adjusted as necessary or appropriate to take into account those adjustments permitted or required by Sections 734 and 743 of the Code. 5.3 Distribution of Cash. (a) The holders of Preferred Units shall be entitled to receive distributions in accordance with the Certificates of Designation for such Preferred Units, to the extent such Preferred Units are entitled thereunder to preferential distributions from the Partnership. Such distributions shall be made pro rata within each class or series of Preferred Units and according to the relative priorities among each such class or series, as set forth in the applicable Certificate of Designation. After the distributions required pursuant to the preceding sentence are made, the General Partner shall distribute, at least quarterly, cash in such amount, if any, as may be determined by the General Partner, in its sole discretion, to be available and appropriate for distribution, to the holders of Common Units and Special Units who are Partners on the Record Date with respect to such quarter pro rata in accordance with their respective Percentage Interests on such Record Date. Notwithstanding anything in the immediately preceding sentence, all distributions after the commencement of the dissolution and liquidation of the Partnership shall be made under Section 14.3. (b) In no event may a Partner receive a distribution of cash with respect to a Partnership Unit if such Partner is entitled to receive a dividend out of the General Partner's share of such cash with respect to a REIT Share for which all or part of such Partnership Unit has been exchanged. 19 5.4 REIT Distribution Requirements. Unless the General Partner determines that such a distribution would not be in the best interests of the Partnership, it is the intent, but not the obligation, of the Partnership that cash distributions shall be made no less often than quarterly during each fiscal year of the Partnership in an amount sufficient to enable the General Partner (i) to meet its distribution requirement for qualification as a REIT as set forth in Section 857(a)(1) of the Code, (ii) to avoid corporate income tax under Section 857(b)(1) of the Code, and (iii) to avoid the excise tax imposed by Section 4981 of the Code. ARTICLE VI MANAGEMENT AND OPERATION OF BUSINESS 6.1 Management. The General Partner shall conduct, direct and exercise full control over all activities of the Partnership. Except as otherwise expressly provided in this Agreement, all management powers over the business and affairs of the Partnership shall be exclusively vested in the General Partner, and the Limited Partners shall not have any right of control or management power over the business and affairs of the Partnership. In addition to the powers now or hereafter granted a general partner of a limited partnership under applicable law or which are granted to the General Partner under any other provision of this Agreement, the General Partner, subject to Section 6.3, shall have full power and authority to do all things and on such terms as it, in its sole discretion, may deem necessary or desirable to conduct the business of the Partnership, to exercise all powers set forth in Section 3.2 and to effectuate the purposes set forth in Section 3.1, including, without limitation, (A) acquiring, purchasing, owning, leasing and disposing of any real property and any other property or assets that the General Partner determines are necessary or appropriate or in the best interests of the business of the Partnership; (B) constructing buildings and making other improvements on the properties owned or leased by the Partnership; (C) the making of any expenditures, the lending or borrowing of money, the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidences of indebtedness and the incurring of any other obligations and the securing of same by mortgage, deed of trust or other lien or encumbrance; (D) the making of tax, regulatory and other filings, or rendering of periodic or other reports to governmental or other agencies having jurisdiction over the business or assets of the Partnership; (E) leasing all or any portion of any of the Partnership Assets, whether or not the terms of such leases extend beyond the termination date of the Partnership and whether or not any portion of the Partnership's Assets so leased are to be occupied by the lessee, or, in turn, subleased in whole or in part to others, for such consideration and on such terms as the General Partner may determine; (F) the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any or all of the assets of the Partnership or the merger or other combination of the Partnership with or into another Person (the matters described in this clause (F) being subject, however, to any prior approval that may be required by Section 6.3); (G) the use of the assets of the Partnership (including, without limitation, cash on hand) for any purpose consistent with the terms of this Agreement, including, without limitation, the financing of the conduct of the operations of the Partnership, the lending of funds to other Persons and the repayment of obligations of the Partnership; (H) the negotiation, execution and performance of any contracts, conveyances or other instruments (including, without limitation, instruments that limit the liability of the Partnership under contractual arrangements to all or particular Partnership Assets, with the other party to the contract to have no recourse against the General Partner or its assets other than its interest in the Partnership, even if same results in the terms of the transaction being less favorable to the Partnership than would otherwise be the case); (I) the distribution of Partnership cash; (J) the selection and dismissal of employees and agents (including, without limitation, employees having titles such as "president," "vice president," "secretary" and "treasurer") and agents, outside attorneys, accountants, consultants and contractors and the determination of their compensation and other terms of employment or hiring; (K) the maintenance of insurance for the benefit of the Partners and the Partnership (including, without limitation, the assets and operations of the Partnership); (L) the formation of, or acquisition of an interest in, and the contribution of property to, any further limited or general partnerships, joint ventures or other relationships; (M) the control of any matters affecting the rights and obligations of the Partnership, including, without limitation, the bringing and defending of actions at law or in equity and otherwise engaging in the conduct of litigation and the incurring of legal expense and the settlement of claims and litigation; (N) the indemnification of any person against liabilities and contingencies to the extent permitted by law; (O) the maintenance of such insurance coverage for public liability, fire and casualty, and any and all other insurance for the protection of the Partnership, for the conservation of Partnership Assets, or for any other purpose convenient or beneficial to the Partnership, in such amounts and such types, as it shall determine from time to time; and (P) the undertaking of any action in connection with the Partnership's participation in the business activities that may be available to it (including, without limitation, contributions or loans of funds by the 20 Partnership to any limited or general partnership, joint venture or other relationship in which the Partnership has, or would have upon making any such contribution, an interest). 6.2 Certificate of Limited Partnership. The General Partner has caused the Certificate of Limited Partnership to be filed with the Secretary of State of the State of Delaware as required by the Delaware Act and shall use all reasonable efforts to cause to be filed such other certificates or documents as may be determined by the General Partner in its sole discretion to be reasonable and necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware or any other state in which the Partnership may elect to do business or own property. To the extent that such action is determined by the General Partner in its sole discretion to be reasonable and necessary or appropriate, the General Partner shall file amendments to and restatements of the Certificate of Limited Partnership and do all things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware or of any other state in which the Partnership may elect to do business or own property. Subject to the terms of Section 7.4(a), the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate of Limited Partnership, any qualification document or any amendment thereto to the Limited Partners. 6.3 Restrictions on General Partner's Authority. (a) The General Partner may not, without written approval of the specific act by holders of a Majority of the Outstanding Partnership Units or by other written instrument executed and delivered by the holders of at least 80% of the Outstanding Partnership Units subsequent to the date of this Agreement, take any action in contravention of this Agreement, including, without limitation, (i) any act that would make it impossible to carry on the ordinary business of the Partnership, except as otherwise provided in this Agreement; (ii) possess Partnership property, or assign any rights in specific Partnership property, for other than a Partnership purpose; (iii) admit a Person as a Partner, except as otherwise provided in this Agreement; (iv) amend this Agreement in any manner, except as otherwise provided in this Agreement or applicable law; or (v) transfer its interest as general partner of the Partnership, except as otherwise provided in this Agreement. (b) Except as provided in Articles XIV or XVI, the General Partner may not sell, exchange or otherwise dispose of all or substantially all of the Partnership Assets in a single transaction or a series of related transactions without the approval of holders of at least 80% of the Outstanding Partnership Units. (c) Unless approved by holders of at least 80% of the Outstanding Partnership Units, the General Partner shall not take any action or refuse to take any reasonable action the effect of which, if taken or not taken, as the case may be, would be to cause the Partnership to be taxable as a corporation or otherwise taxed as an entity for federal income tax purposes. 6.4 Reimbursement of the General Partner. (a) Except as provided in this Section 6.4 and elsewhere in this Agreement, the General Partner shall not be compensated for its services as general partner of the Partnership. (b) The Partnership shall have no employees. The General Partner, in its sole and absolute discretion and without the approval of the Limited Partners, shall employ any and all persons which it may deem necessary or appropriate for the conduct of the business of the Partnership, establish the compensation and benefits to be provided to such employees and, in connection therewith, may from time to time adopt, modify or terminate any benefit plans or programs which it may deem necessary or appropriate and determine the directors, officers and employees of the General Partner eligible to participate therein. The General Partner shall be reimbursed on a monthly basis, or such other basis as the General Partner may determine in its sole discretion, for (i) all direct and indirect expenses it incurs or payments it makes on behalf of the Partnership (including, without limitation, amounts paid to any Person to perform services for the Partnership), and (ii) that portion of the General Partner's or its Affiliates' legal, accounting, investor communications, utilities, telephone, secretarial, travel, entertainment, bookkeeping, reporting, data processing, office rent and other office expenses (including, without limitation, overhead charges), salaries, fees and other compensation and benefit expenses of employees, officers and directors, insurance, other administrative or overhead expenses and all other expenses, in each such case, necessary or appropriate to the conduct of the Partnership's business 21 and reasonably allocable to the Partnership or otherwise incurred by the General Partner in connection with operating the Partnership's business (including, without limitation, expenses allocated to the General Partner by its Affiliates). The General Partner shall determine the fees and expenses that are allocable to the Partnership in any reasonable manner determined by the General Partner in its sole discretion. Such reimbursements shall be in addition to any reimbursement to the General Partner as a result of indemnification pursuant to Section 6.7. 6.5 Outside Activities. (a) Subject to the Restated Certificate of Incorporation of the General Partner and any agreements entered into by the General Partner or its Affiliates with the Partnership or a Subsidiary, the General Partner and any officer, director, employee, agent, trustee, Affiliate or shareholder of the General Partner shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities substantially similar or identical to those of the Partnership. Neither the Partnership nor any of the Limited Partners shall have any rights by virtue of this Agreement in any business ventures of the General Partner. None of the Limited Partners nor any other Person shall have any rights by virtue of this Agreement or the partnership relationship established hereby in any such business interests or activities of the General Partner, and the General Partner shall have no obligation pursuant to this Agreement to offer any interest in any such business interests and activities to the Partnership or any Limited Partner, even if such opportunity is of a character which, if presented to the Partnership or any Limited Partner, could be taken by such Person. (b) Except as otherwise expressly provided in Section 6.5(a), each Indemnitee is free to engage in any business, including any business that is in competition with the business of the Partnership. The General Partner and any other Persons affiliated with the General Partner may acquire Partnership Units, in addition to those acquired by any of such Persons on the Closing Date, and shall be entitled to exercise all rights of an assignee or limited partner, as applicable, relating to such Partnership Units or securities representing Partnership Interests as the case may be. 6.6 Loans to and from the General Partner; Contracts with Affiliates. (a) The Partners or any of their Affiliates may lend to the Partnership, and the Partnership may borrow funds needed or desired by the Partnership for such periods or time as the General Partner may determine; provided, however, that none of the Partners, nor any of their Affiliates may charge the Partnership interest at a rate greater than the rate that would be charged the Partnership (without reference to the General Partner's financial abilities or guarantees) by unrelated lenders on comparable loans. The Partnership shall reimburse the Partners, or any of their Affiliates, as the case may be, for any costs (other than any interest costs in excess of that permitted by the preceding sentence) incurred by it in connection with the borrowing of funds obtained by the General Partner, the Limited Partners or any of their Affiliates and loaned to the Partnership. (b) The General Partner may itself, or may enter into an agreement with any of its Affiliates to, render services to the Partnership. Any service rendered to the Partnership by the General Partner or any of its Affiliates shall be on terms that are fair and reasonable to the Partnership as determined by the General Partner in good faith; provided, however, that the requirements of this Section 6.6(b) shall be deemed satisfied as to any transaction the terms of which are no less favorable to the Partnership than those generally being provided to or available from unrelated third parties. The provisions of Section 6.4 shall apply to the rendering of services described in this Section 6.6(b). (c) The Partnership may transfer assets to joint ventures, other partnerships, corporations or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions as are consistent with this Agreement and applicable law. (d) Neither the General Partner nor any of its Affiliates shall sell, transfer or convey any property to, or purchase any property from, the Partnership, directly or indirectly, except pursuant to transactions that are fair and reasonable to the Partnership as determined by the General Partner in good faith; provided, however, that the requirements of this Section 6.6(d) shall be deemed to be satisfied as to (i) the transactions effected pursuant to Sections 4.2 and 4.3, and any other transactions described in or contemplated by the Registration Statement and (ii) as to any transaction the terms of which are no less favorable to the Partnership than those generally being provided to or available from unrelated third parties. 22 (e) The General Partner and its Affiliates shall have no obligation to permit the Partnership to use any facilities of the General Partner and its Affiliates, except as may be provided in contracts entered into from time to time specifically dealing with such use, nor shall there be any obligation of the General Partner or its Affiliates to enter into such contracts. 6.7 Indemnification. (a) To the fullest extent permitted by law but subject to the limitations expressly provided in this Agreement, the General Partner, any Departing Partner and any person who is or was an officer or director of the General Partner or any Departing Partner shall be indemnified and held harmless by the Partnership, and all other Indemnitees may be indemnified and held harmless by the Partnership, to the extent deemed advisable by the General Partner to the fullest extent permitted by law, from and against any and all losses, claims, damages, liabilities (joint or several), expenses (including, without limitation, legal fees and expenses), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, in which any Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, by reason of its status as (i) the General Partner, a Departing Partner or any of their Affiliates, (ii) an officer, director, employee, partner, agent or trustee of the General Partner, any Departing Partner or any of their Affiliates or (iii) a Person serving at the request of the Partnership in another entity in a similar capacity; provided, that in each case the Indemnitee acted in good faith, in a manner which such Indemnitee believed to be in, or not opposed to, the best interests of the Partnership and, with respect to any criminal proceeding, had no reasonable cause to believe its conduct was unlawful; provided, further, no indemnification pursuant to this Section 6.7 shall be available to the General Partner with respect to its obligations incurred pursuant to the Underwriting Agreement (other than obligations incurred by the General Partner on behalf of the Partnership). The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that the Indemnitee acted in a manner contrary to that specified above. Any indemnification pursuant to this Section 6.7 shall be made only out of the Partnership Assets. (b) To the fullest extent permitted by law, expenses (including, without limitation, reasonable legal fees and expenses) incurred by an Indemnitee in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Partnership prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Partnership of an undertaking by or on behalf of the Indemnitee to repay such amount if it shall be determined that the Indemnitee is not entitled to be indemnified as authorized in this Section 6.7. (c) The indemnification provided by this Section 6.7 shall be in addition to any other rights to which an Indemnitee may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, both as to actions in the Indemnitees' capacity as (i) the General Partner, a Departing Partner or an Affiliate thereof, (ii) an officer, director, employee, partner, agent or trustee of the General Partner, any Departing Partner or an Affiliate thereof or (iii) a Person serving at the request of the Partnership in another entity in a similar capacity, and shall continue as to an Indemnitee who has ceased to serve in such capacity and as to actions in any other capacity (including, without limitation, any capacity under the Underwriting Agreement). (d) The Partnership may purchase and maintain (or reimburse the General Partner or its Affiliates for the cost of) insurance, on behalf of the General Partner and such other Persons as the General Partner shall determine, against any liability that may be asserted against or expense that may be incurred by such Person in connection with the Partnership's activities, whether or not the Partnership would have the power to indemnify such Person against such liabilities under the provisions of this Agreement. (e) For purposes of Section 6.7(a), the Partnership shall be deemed to have requested an Indemnitee to serve as a fiduciary of any employee benefit plan maintained by the General Partner whenever the performance by such Indemnitee of its duties to the General Partner or the Partnership also imposes duties on, or otherwise involves services by, it to such plan or participants or beneficiaries of any such plan; excise taxes assessed on an Indemnitee with respect to any such employee benefit plan pursuant to applicable law shall constitute "fines" within the meaning of Section 6.7(a); and action taken or omitted by it with respect to an employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is in, or not opposed to, the best interests of the Partnership. 23 (f) In no event may an Indemnitee subject the Limited Partners to personal liability by reason of the indemnification provisions set forth in this Agreement. (g) An Indemnitee shall not be denied indemnification in whole or in part under this Section 6.7 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement. (h) The provisions of this Section 6.7 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. (i) No amendment, modification or repeal of this Section 6.7 or any other provision hereof shall in any manner terminate, reduce or impair the right of any past, present or future Indemnitee to be indemnified by the Partnership, nor the obligation of the Partnership to indemnify any such Indemnitee under and in accordance with the provisions of this Section 6.7 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. 6.8 Liability of Indemnitees. (a) Notwithstanding anything to the contrary set forth in this Agreement, no Indemnitee shall be liable for monetary damages to the Partnership, the Limited Partners, the Assignees or any other Persons who have acquired Partnership Interests in the Partnership, for losses sustained or liabilities incurred as a result of any act or omission if such Indemnitee acted in good faith. (b) Subject to its obligations and duties as General Partner set forth in Section 6.1(a), the General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agents, and the General Partner shall not be responsible for any misconduct or negligence on the part of any such agent appointed by the General Partner in good faith. (c) Any amendment, modification or repeal of this Section 6.8 or any other provision hereof shall be prospective only and shall not in any way affect the limitations on the liability to the Partnership and the Limited Partners or the General Partner, its directors, officers and employees under this Section 6.8 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. 6.9 Resolution of Conflicts of Interest. (a) Unless otherwise expressly provided in this Agreement, whenever a potential conflict of interest exists or arises between the General Partner or any of its Affiliates, on the one hand, and the Partnership or the Limited Partners on the other hand, any resolution or course of action in respect of such conflict of interest shall be permitted and deemed approved by all Partners, and shall not constitute a breach of this Agreement, of any agreement contemplated herein or of any duty stated or implied by law or equity, if the resolution or course of action is or, by operation of this Agreement is deemed to be, fair and reasonable to the Partnership. The General Partner shall be authorized in connection with its determination of the "fair and reasonable" nature of any transaction or arrangement and in its resolution of any conflict of interest to consider (i) the relative interests of any party to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interest; (ii) any customary or accepted industry practices and any customary or historical dealings with a particular Person; (iii) any applicable generally accepted accounting practices or principles; and (iv) such additional factors as the General Partner determines in its sole discretion to be relevant, reasonable or appropriate under the circumstances. Nothing contained in this Agreement, however, is intended to nor shall it be construed to require the General Partner to consider the interests of any Person other than the Partnership. In the absence of bad faith by the General Partner, the resolution, action or terms so made, taken or provided by the General Partner with respect to such matter shall not constitute a breach of this Agreement or any other agreement contemplated herein or a breach of any standard of care or duty imposed herein or therein or under the Delaware Act or any other law, rule or regulation. 24 (b) Whenever this Agreement or any other agreement contemplated hereby provides that the General Partner or any of its Affiliates is permitted or required to make a decision (i) in its "sole discretion" or "discretion" that it deems "necessary or appropriate" or under a grant of similar authority or latitude, the General Partner or such Affiliate shall be entitled to consider only such interests and factors as it desires and shall have no duty or obligation to give any consideration to any interest of, or factors affecting, the Partnership or the Limited Partners, or (ii) in "good faith" or under another express standard, the General Partner or such Affiliate shall act under such express standard and shall not be subject to any other or different standards imposed by this Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation. (c) Whenever a particular transaction, arrangement or resolution of a conflict of interest is required under this Agreement to be "fair and reasonable" to any Person, the fair and reasonable nature of such transaction, arrangement or resolution shall be considered in the context of all similar or related transactions. 6.10 Liability of the General Partner. (a) Notwithstanding anything to the contrary set forth in this Agreement, the General Partner shall not be liable for monetary damages to the Partnership, any Partners or any Assignees for losses sustained or liabilities incurred as a result of errors in judgment or of any act or omission if the General Partner acted in good faith. (b) The Limited Partners expressly acknowledge that the General Partner is acting on behalf of the Partnership and the General Partner's shareholders collectively, that the General Partner is under no obligation to consider the separate interests of the Limited Partners (including, without limitation, the tax consequences to the Limited Partners) in deciding whether to cause the Partnership to take (or decline to take) any actions, and that the General Partner shall not be liable for monetary damages for losses sustained, liabilities incurred, or benefits not derived by the Limited Partners in connection with such decisions, provided that the General Partner has acted in good faith. (c) Subject to its obligations and duties as General Partner set forth in Section 6.1 hereof and the restrictions on its authority set forth in Section 6.3, the General Partner may exercise any of the powers granted to it under this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agents. The General Partner shall not be responsible for any misconduct or negligence on the part of any such agent appointed by it in good faith. (d) Notwithstanding any other provisions of this Agreement or the Act, any lawful action of the General Partner on behalf of the Partnership or any decision of the General Partner to refrain from acting on behalf of the Partnership, taken in the good faith belief that such action or omission is necessary or advisable in order (i) to protect the ability of the General Partner to continue to qualify as a REIT or (ii) to prevent the General Partner from incurring any taxes under Section 857 or Section 4981 of the Code, is expressly authorized under this Agreement and is deemed approved by all of the Limited Partners. (e) Any amendment, modification or repeal of this Section 6.10 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the General Partner's liability to the Partnership and the Limited Partners under this Section 6.10 as in effect immediately prior to such amendment, modification or repeal with respect to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when claims relating to such matters may arise or be asserted. 6.11 Other Matters Concerning the General Partner. (a) The General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. (b) The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisors selected by it, and any act taken or omitted in reliance upon the opinion (including, without limitation, an Opinion of Counsel) of such Persons as to matters that the General Partner reasonably believes to be within such Person's professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion. 25 (c) The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and a duly appointed attorney or attorneys-in-fact. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform each and every act and duty that is permitted or required to be done by the General Partner hereunder. (d) Any standard of care and duty imposed by this Agreement or under the Delaware Act or any applicable law, rule or regulation shall be modified, waived or limited as required to permit the General Partner to act under this Agreement or any other agreement contemplated by this Agreement and to make any decision pursuant to the authority prescribed in this Agreement, so long as such action is reasonably believed by the General Partner to be in, or not inconsistent with, the best interests of the Partnership. 6.12 Title to Partnership Assets. Title to Partnership Assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner or Assignee, individually or collectively, shall have any ownership interest in such Partnership Assets or any portion thereof. Title to any or all of the Partnership Assets may be held in the name of the Partnership, the General Partner or one or more nominees, as the General Partner may determine, including Affiliates of the General Partner. The General Partner hereby declares and warrants that any Partnership Assets for which record title is held in the name of the General Partner or any nominee or Affiliate of the General Partner shall be held by the General Partner for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, however, that the General Partner shall use its reasonable efforts to cause beneficial and record title to such assets (other than those assets in respect of which the General Partner determines that the expense and difficulty of conveyancing makes transfer of record title to the Partnership impracticable; provided that, prior to the withdrawal of the General Partner or as soon thereafter as practicable, the General Partner will use reasonable efforts to effect the transfer of record title to the Partnership and, prior to any such transfer, will provide for the use of such assets in a manner satisfactory to the Partnership) to be vested in the Partnership as soon as reasonably practicable. All Partnership Assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which record title to such Partnership Assets are held. 6.13 Reliance by Third Parties. Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority to encumber, sell or otherwise use in any manner any and all Partnership Assets and to enter into any contracts on behalf of the Partnership, and such Person shall be entitled to deal with the General Partner as if it were the Partnership's sole party in interest, both legally and beneficially. The Limited Partners hereby waive any and all defenses or other remedies that may be available against such Person to contest, negate or disaffirm any action of the General Partner in connection with any such dealing. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (a) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect, (b) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership and (c) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership. ARTICLE VII RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS 7.1 Limitation of Liability. The Limited Partners and the Organizational Limited Partner and the Assignees shall have no liability under this Agreement except as expressly provided in this Agreement or the Delaware Act. 7.2 Management of Business. The Limited Partners or Assignees shall not take part in the operation, management or control (within the meaning of the Delaware Act) of the Partnership's business, transact any business in the Partnership's name or have the power to sign documents for or otherwise bind the Partnership. The transaction of any such business by the General Partner, any of its Affiliates or any officer, director, employee, partner, agent or trustee 26 of the General Partner or any of its Affiliates, in its capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners or Assignees under this Agreement. 7.3 Return of Capital. The Limited Partners shall not be entitled to the withdrawal or return of their Capital Contribution, except to the extent, if any, that distributions made pursuant to this Agreement or upon termination of the Partnership may be considered as such by law and then only to the extent provided for in this Agreement. Except to the extent provided in the applicable Certificate of Designation or as otherwise expressly provided in this Agreement, no Limited Partner or Assignee shall have priority over any other Limited Partner or Assignee, either as to the return of Capital Contributions or as to profits, losses or distributions. 7.4 Rights of Limited Partners Relating to the Partnership. (a) In addition to other rights provided by this Agreement or by applicable law, and except as limited by Section 7.4(b), each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner's interest as a limited partner in the Partnership, upon reasonable demand and at such Limited Partner's own expense (including such reasonable administrative charges as the General Partner may establish from time to time): (i) to obtain true and full information regarding the status of the business and financial condition of the Partnership; (ii) promptly after becoming available, to obtain a copy of the Partnership's federal, state and local tax returns for each year; (iii) to have furnished to it, upon notification to the General Partner, a current list of the name and last known business, residence or mailing address of each Partner; (iv) to have furnished to it, upon notification to the General Partner, a copy of this Agreement and the Certificate of Limited Partnership and all amendments and restatements thereto; (v) to obtain true and full information regarding the amount of cash and description and statement of the Net Agreed Value of any other Capital Contribution by each Partner and which each Partner has agreed to contribute in the future, and the date on which each became a Partner; (vi) to obtain such other information regarding the affairs of the Partnership as is just and reasonable; and (vii) to obtain a copy of the most recent annual and quarterly reports filed with the Securities and Exchange Commission by the Partnership pursuant to the Securities Exchange Act of 1934. (b) Notwithstanding any other provision of this Agreement, the General Partner may keep confidential from the Limited Partners and Assignees for such period of time as the General Partner deems reasonable, any information that the General Partner reasonably believes to be in the nature of trade secrets or other information the disclosure of which the General Partner in good faith believes is not in the best interests of the Partnership or could damage the Partnership or that the Partnership is required by law or by agreements with third parties to keep confidential. 7.5 Redemption Right. (a) Subject to Section 7.5(c) and except as otherwise provided for any class or series of Preferred Units in the Certificate of Designation establishing such class or series, each Limited Partner or Assignee thereof shall have the right (the "Redemption Right") to require the Partnership to redeem on a Specified Redemption Date all or a portion of the Partnership Units held by such Limited Partner or Assignee thereof at a redemption price equal to and in the form of the Redemption Amount. The Redemption Right shall be exercised pursuant to a Notice of Redemption delivered to the General Partner by the Limited Partner or Assignee thereof who is exercising the Redemption Right (the "Redeeming Partner"). A Limited Partner or Assignee thereof may not exercise the Redemption Right for less than One Hundred (100) Partnership Units or, if such Limited Partner holds less than One Hundred (100) Partnership Units, all of the Partnership Units held by such Limited Partner or Assignee thereof. The Redeeming Partner shall have no right, 27 with respect to any Partnership Units so redeemed, to receive any distributions paid with respect to Partnership Units after the Specified Redemption Date. (b) Notwithstanding the provisions of Section 7.5(a), the General Partner may, in its sole and absolute discretion, assume directly and satisfy a Redemption Right by paying to the Redeeming Partner the Redemption Amount on the Specified Redemption Date, whereupon the General Partner shall acquire the Partnership Units offered for redemption by the Redeeming Partner and shall be treated for all purposes of this Agreement as the owner of such Partnership Units. In the event the General Partner shall exercise its right to satisfy the Redemption Right in the manner described in the preceding sentence, the Partnership shall have no obligation to pay any amount to the Redeeming Partner with respect to such Redeeming Partner's exercise of the Redemption Right, and each of the Redeeming Partner, the Partnership, and the General Partner shall treat the transaction between the General Partner and the Redeeming Partner as a sale of the Redeeming Partner's Partnership Units to the General Partner for federal income tax purposes. Each Redeeming Partner agrees to execute such documents as the General Partner may reasonably require in connection with the issuance of REIT Shares upon exercise of the Redemption Right. (c) Except as otherwise provided in this Section 7.5(c), the Partnership or the General Partner, as the case may be, shall pay the Redemption Amount either through payment of the REIT Shares Amount or the Cash Amount, or a combination of both, in its sole discretion. Notwithstanding the foregoing, neither the Partnership nor the General Partner shall have any obligation or authority to pay the Redemption Amount (whether in cash or REIT Shares) if payment of the Redemption Amount in REIT Shares (i) would result in a violation of the Ownership Limit (as such term is defined in the Articles of Amendment and Restatement, as amended, of the General Partner), (ii) would cause the General Partner to fail the "closely held" stock ownership test of Section 856(a)(6) of the Code, (iii) would cause the General Partner to be treated as owning, directly or constructively, 10% or more of the ownership interests in a tenant (or subtenant) of the Partnership's real property (or of the General Partner's real property), within the meaning of Sections 856(d)(2)(B) and 856(d)(5) of the Code, (iv) would otherwise jeopardize the REIT status of the General Partner, or (v) would cause the acquisition of REIT Shares by the Partner to be "integrated" with any other distribution of REIT Shares for purposes of complying with the registration provisions of the Securities Act of 1933, as amended; provided, however, that the Partnership or General Partner, as the case may be, may elect, in its sole discretion, to pay all or a portion of the Redemption Amount for all or a portion of the tendered Partnership Units in cash and/or such lesser amount of REIT Shares as would not cause a violation of clauses (i) through (v) above. Each Limited Partner tendering Units for redemption shall provide to the General Partner such information as the General Partner may request regarding such Limited Partner's actual and constructive ownership of common stock of the General Partner (and of individuals and entities related to such Limited Partner) in order for the General Partner to determine, in its sole discretion and with the advice of tax counsel to the General Partner, whether a purchase or redemption of the offered Units for shares of common stock of the General Partner would result in a violation of the foregoing restrictions. (d) In the event that a redemption pursuant to this Section 7.5 would result in the Limited Partners, in the aggregate, owning less than 1% of the Partnership Interests, the General Partner shall form another partnership, which shall acquire sufficient Partnership Units so that the Limited Partners, in the aggregate, own at least 1% of the Partnership Interests. (e) In the event the General Partner shall repurchase or redeem REIT Shares, then the General Partner shall cause the Partnership to purchase from the General Partner or its wholly-owned subsidiary or subsidiaries the same number of Partnership Units on the same terms that the General Partner redeemed such REIT Shares. 7.6 Outside Activities of Limited Partners. Subject to any agreements entered into pursuant to Section 6.6 hereof and any other agreements entered into by a Limited Partner or its Affiliates with the Partnership or any of its subsidiaries, any Limited Partner and any officer, director, employee, agent, trustee, Affiliate or shareholder of any Limited Partner shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities that are in direct competition with the Partnership or that are enhanced by the activities of the Partnership. Neither the Partnership nor any Partners shall have any rights by virtue of this Agreement in any business ventures of any Limited Partner or Assignee. None of the Limited Partners nor any other Person shall have any rights by virtue of this Agreement or the Partnership relationship established hereby in any business ventures of any other Person and such Person shall have no obligation pursuant to this Agreement to offer any interest in any such business ventures to the Partnership, any Limited Partner or any such other Person, even if such 28 opportunity is of a character which, if presented to the Partnership, any Limited Partner or such other Person, could be taken by such Person. ARTICLE VIII BOOKS, RECORDS, ACCOUNTING AND REPORTS 8.1 Records and Accounting. The General Partner shall keep or cause to be kept at the principal office of the Partnership appropriate books and records with respect to the Partnership's business including, without limitation, all books and records necessary to provide to the Limited Partners any information, lists and copies of documents required to be provided pursuant to Section 7.4(a). Any books and records maintained by or on behalf of the Partnership in the regular course of its business, including, without limitation, books of account and records of Partnership proceedings, may be kept on, or be in the form of, computer disks, hard disks, punch cards, magnetic tape, photographs, micrographics or any other information storage device, provided, that the books and records so maintained are convertible into clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained, for financial reporting purposes, on an accrual basis in accordance with generally accepted accounting principles. 8.2 Fiscal Year. The fiscal year of the Partnership shall be the calendar year. ARTICLE IX TAX MATTERS 9.1 Preparation of Tax Returns. The General Partner shall arrange for the preparation and timely filing of all returns of Partnership income, gains, deductions, losses and other items required of the Partnership for federal and state income tax purposes and shall use all reasonable efforts to furnish, within 90 days of the close of each taxable year of the Partnership, the tax information reasonably required by the Limited Partners for federal and state income tax reporting purposes. The classification, realization and recognition of income, gain, losses and deductions and other items shall be on the accrual method of accounting for federal income tax purposes or such other method as the General Partner determines to be necessary or appropriate. The taxable year of the Partnership shall be the calendar year. 9.2 Tax Elections. Except as otherwise provided herein, the General Partner shall in its sole discretion, determine whether to make any available election pursuant to the Code; provided, however, that the General Partner shall make the election under Section 754 of the Code in accordance with applicable regulations thereunder. The General Partner shall have the right to seek to revoke any such election (including, without limitation, the election under Section 754 of the Code) upon the General Partner's determination in its sole discretion that such revocation is in the best interests of the Limited Partners and Assignees. 9.3 Tax Controversies. Subject to the provisions hereof, the General Partner is designated the Tax Matters Partner (as defined in Section 6231 of the Code), and is authorized and required to represent the Partnership (at the Partnership's expense) in connection with all examinations of the Partnership's affairs by tax authorities, including, without limitation, resulting administrative and judicial proceedings, and to expend Partnership funds for professional services, including legal and accounting services, and costs associated therewith. Each Partner agrees to cooperate with the General Partner and to do or refrain from doing any or all things reasonably required by the General Partner to conduct such proceedings. The General Partner shall receive no special compensation for serving as Tax Matters Partner but shall be reimbursed for its costs and expenses in that connection in accordance with Section 6.4. 9.4 Organizational Expenses. The Partnership shall elect to deduct expenses, if any, incurred by it in organizing the Partnership ratably over a 60-month period as provided in Section 709 of the Code. 9.5 Withholding. Notwithstanding any other provision of this Agreement, the General Partner is authorized to take any action that it determines in its sole discretion to be necessary or appropriate to cause the Partnership to comply with any withholding requirements established under the Code or any other federal, state or local law, including, 29 without limitation, pursuant to Sections 1441, 1442, 1445 and 1446 of the Code. To the extent that the Partnership is required to withhold and pay over to any taxing authority any amount resulting from the allocation or distribution of income to any Partner (including, without limitation, by reason of Section 1446 of the Code), the amount withheld shall be treated as a distribution of cash pursuant to Section 5.3 in the amount of such withholding from such Partner. 9.6 Opinions of Counsel. Notwithstanding any other provision of this Agreement, if the Partnership is taxable for federal income tax purposes as a corporation or otherwise treated for federal income tax purposes as an association taxable as a corporation at any time and, pursuant to the provisions of this Agreement, an Opinion of Counsel would otherwise be required to the effect that an action will not cause the Partnership to become so taxable as a corporation or other entity or to be treated as an association taxable as a corporation, such requirement for an Opinion of Counsel shall be deemed automatically waived. ARTICLE X TRANSFER OF INTERESTS 10.1 Transfer. (a) The term "transfer," when used in this Article X with respect to a Partnership Interest, shall be deemed to refer to an appropriate transaction by which the General Partner assigns its Partnership Interest as General Partner to another Person or by which the holder of a Partnership Unit assigns such Partnership Unit to another Person who is or becomes an Assignee and includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition by law or otherwise. (b) No Partnership Interest shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article X. Any transfer or purported transfer of a Partnership Interest not made in accordance with this Article X shall be null and void. 10.2 Transfer of General Partner's Partnership Interest. (a) The General Partner may not transfer all or any part of its Partnership Interest as a general partner except as provided in Section 10.2(b) or 10.2(c). (b) The General Partner shall not engage in any merger, consolidation or other combination with or into another Person, where the General Partner is not the surviving entity, any sale of all or substantially all of its assets, or any reclassification, recapitalization or change of outstanding REIT Shares (other than a change in par value, or from par value to no par value, or as a result of a subdivision or combination of REIT Shares) (a "Transaction"), unless (i) the Transaction also includes a corresponding merger of the Partnership, sale of all or substantially all of the Partnership Assets, or reclassification, recapitalization or change of outstanding Partnership Units, as appropriate, as a result of which holders of a Redemption Right pursuant to Section 7.5 will have the right to receive, upon exercise of their Redemption Right or otherwise, for each Partnership Unit a Redemption Amount equal to the greatest amount of cash, securities or other property paid in the Transaction to a holder of one REIT Share in consideration of one REIT Share; provided, however, that if, in connection with the Transaction, a purchase, tender or exchange offer ("Offer") shall have been made to and accepted by the holders of more than fifty percent (50%) of the outstanding REIT Shares, each holder of a Redemption Right pursuant to Section 7.5 shall have the right to receive, upon exercise of their Redemption Right or otherwise, the greatest amount of cash, securities, or other property which such holder would have received had it (A) exercised its Redemption Right immediately prior to the earlier of the record date (if any) for the Transaction or the effective date of the Transaction and (B) sold, tendered or exchanged pursuant to the Offer the REIT Shares received upon such exercise of the Redemption Right; and (ii) no more than seventy-five percent (75%) of the equity securities of the acquiring Person in any Transaction that is a merger, consolidation or other combination of the General Partner with and into another Person or a sale of all or substantially all of the General Partner's assets, shall be owned, after consummation of such Transaction, by Persons who were Affiliates of the Partnership or the General Partner immediately prior to the date on which the Transaction is consummated. 30 (c) Notwithstanding Subsection 10.2(a) above, the General Partner may transfer from time to time any or all of its Partnership Interests to one or more wholly-owned subsidiaries of the General Partner, except that the General Partner must retain at all times at least a 1% Partnership Interest as a general partner and the General Partner and one or more wholly-owned subsidiaries of the General Partner must at all times own in the aggregate at least 20% of all of the Partnership Interests. 10.3 Transfer of Partnership Units. (a) Partnership Units may be transferred only in the manner described in Section 13.2. The transfer of any Partnership Units and the admission of any new Partner shall not constitute an amendment to this Agreement. (b) Until admitted as a Substituted Limited Partner pursuant to Article XI, the Record Holder of a Partnership Unit shall be an Assignee in respect of such Partnership Unit. Limited Partners may include custodians, nominees or any other individual or entity in its own or any representative capacity. (c) Each distribution in respect of Partnership Units shall be paid by the Partnership, directly or through the Transfer Agent or through any other Person or agent, only to the Record Holders thereof as of the Record Date set for the distribution. Such payment shall constitute full payment and satisfaction of the Partnership's liability in respect of such payment, regardless of any claim of any Person who may have an interest in such payment by reason of an assignment or otherwise. (d) A transferee who has completed and delivered a Transfer Application shall be deemed to have (i) requested admission as a Substituted Limited Partner, (ii) agreed to comply with and be bound by and to have executed this Agreement, (iii) represented and warranted that such transferee has the capacity and authority to enter into this Agreement, (iv) made the powers of attorney set forth in this Agreement and (v) given the consents and made the waivers contained in this Agreement. (e) No transfer by a Partner of his Partnership Units, in whole or in part, may be made to any Person if (i) in the opinion of legal counsel for the Partnership, the transfer would result in the Partnership's being treated as an association taxable as a corporation (other than a qualified REIT subsidiary within the meaning of Section 856(i) of the Code), or (ii) such transfer is effectuated through an "established securities market" or a "secondary market (or the substantial equivalent thereof)" within the meaning of Section 7704 of the Code. (f) Any transfer in contravention of the provisions of this Article X shall be void and ineffectual and shall not be binding upon, or recognized by, the Partnership. 10.4 Restrictions on Transfers. Notwithstanding the other provisions of this Article X, no transfer of any Partnership Units or interest therein of any Limited Partner or Assignee shall be made if such transfer would (a) violate the then applicable federal or state securities laws or rules and regulations of the Securities and Exchange Commission, any state securities commission or any other governmental authorities with jurisdiction over such transfer, (b) cause the Partnership to be taxable as a corporation or otherwise taxed as an entity for federal income tax purposes or (c) affect the Partnership's existence or qualification as a limited partnership under the Delaware Act. ARTICLE XI ADMISSION OF PARTNERS 11.1 Admission of Substituted Limited Partners. By transfer of a Partnership Unit in accordance with Article X, the transferor shall be deemed to have given the transferee the right to seek admission as a Substituted Limited Partner subject to the conditions of, and in the manner permitted under, this Agreement. A transferor of a Certificate shall, however, only have the authority to convey to a purchaser or other transferee who does not execute and deliver a Transfer Application (i) the right to negotiate such Certificate to a purchaser or other transferee and (ii) the right to transfer the right to request admission as a Substituted Limited Partner to such purchaser or other transferee in respect of the transferred Partnership Units. Each transferee of a Partnership Unit (including without limitation, any nominee 31 holder or an agent acquiring such Partnership Unit for the account of another Person) who executes and delivers a Transfer Application shall, by virtue of such execution and delivery, be an Assignee and be deemed to have applied to become a Substituted Limited Partner with respect to the Partnership Units so transferred to such Person. Such Assignee shall become a Substituted Limited Partner (i) at such time as the General Partner consents thereto, which consent may be given or withheld in the General Partner's sole discretion, and (ii) when any such admission is shown on the books and records of the Partnership. If such consent is withheld such transferee shall be an Assignee. An Assignee shall have an interest in the Partnership equivalent to that of a Limited Partner with respect to allocations and distributions, including, without limitation, liquidating distributions, of the Partnership; provided, however, in the event that the transferor of the Partnership Units was an Initial Limited Partner or an Assignee thereof, such transferee shall also be vested with a Redemption Right pursuant to Section 7.5 with respect to such Partnership Units. With respect to voting rights attributable to Partnership Units that are held by Assignees, the General Partner shall be deemed to be the Limited Partner with respect thereto and shall, in exercising the voting rights in respect of such Partnership Units on any matter, vote such Partnership Units at the written direction of the Assignee who is the Record Holder of such Partnership Units. If no such written direction is received, such Partnership Units will not be voted. An Assignee shall have no other rights of a Limited Partner. 11.2 Admission of Successor General Partner. A successor General Partner approved pursuant to Section 12.1 or the transferee of or successor to all of the General Partner's Partnership Interest pursuant to Section 10.2 who is proposed to be admitted as a successor General Partner shall be admitted to the Partnership as the General Partner, effective immediately prior to the withdrawal or removal of the General Partner pursuant to Section 12.1 or the transfer of the General Partner's Partnership Interest pursuant to Section 10.2; provided, however, that no such successor shall be admitted to the Partnership until such successor has complied with the terms of Section 10.2. Any such successor shall carry on the business of the Partnership without dissolution. In each case, the admission shall be subject to the successor General Partner executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement and such other documents or instruments as may be required to effect the admission. 11.3 Amendment of Agreement and Certificate of Limited Partnership. To effect the admission to the Partnership of any Partner, the General Partner shall take all steps necessary and appropriate under the Delaware Act to amend the records of the Partnership and, if necessary, to prepare as soon as practical an amendment of this Agreement and, if required by law, to prepare and file an amendment to the Certificate of Limited Partnership and may for this purpose, among others, exercise the power of attorney granted pursuant to Section 1.4. 11.4 Admission of Additional Limited Partners. (a) A Person (other than the General Partner, an Initial Limited Partner or a Substituted Limited Partner) who makes a Capital Contribution to the Partnership in accordance with this Agreement shall be admitted to the Partnership as an Additional Limited Partner only upon furnishing to the General Partner (i) evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement, including without limitation, the power of attorney granted in Section 1.4, and (ii) such other documents or instruments as may be required in the discretion of the General Partner to effect such Person's admission as an Additional Limited Partner. (b) Notwithstanding anything to the contrary in this Section 11.4, no Person shall be admitted as an Additional Limited Partner without the consent of the General Partner, which consent may be given or withheld in the General Partner's sole discretion. The admission of any Person as an Additional Limited Partner shall become effective on the date upon which the name of such Person is recorded on the books and records of the Partnership, following the consent of the General Partner to such admission. ARTICLE XII WITHDRAWAL OF PARTNERS 12.1 Withdrawal of the General Partner. (a) The General Partner shall be deemed to have withdrawn from the Partnership upon the occurrence of any one of the following events (each such event herein referred to as an "Event of Withdrawal"): 32 (i) the General Partner voluntarily withdraws from the Partnership by giving written notice to the Limited Partners; (ii) the General Partner transfers all of its rights as general partner pursuant to Section 10.2; (iii) the General Partner (A) makes a general assignment for the benefit of creditors; (B) files a voluntary bankruptcy petition; (C) files a petition or answer seeking for itself a reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any law; (D) files an answer or other pleading admitting or failing to contest the material allegations or a petition filed against the General Partner in a proceeding of the type described in clauses (A)-(C) of this sentence; or (E) seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator of the General Partner or of all or any substantial part of its properties; (iv) a final and non-appealable judgment is entered by a court with appropriate jurisdiction ruling that the General Partner is bankrupt or insolvent, or a final and non-appealable order for relief is entered by a court with appropriate jurisdiction against the General Partner, in each case under any federal or state bankruptcy or insolvency laws as now or hereafter in effect; or (v) a certificate of dissolution or its equivalent is filed for the General Partner, or ninety days expire after the date of notice to the General Partner of revocation of its charter without a reinstatement of its charter, under the laws of its state of incorporation. If an Event of Withdrawal specified in this Section 12.1(a)(i), (iii),(iv) or (v) occurs, the withdrawing General Partner shall give written notice to the Limited Partners within 30 days after such occurrence. The Partners hereby agree that only the Events of Withdrawal described in this Section 12.1 shall result in the withdrawal of the General Partner from the Partnership. (b) Withdrawal of the General Partner from the Partnership upon the occurrence of an Event of Withdrawal will not constitute a breach of this Agreement if the General Partner ceases to be a General Partner pursuant to Section 12.1(a)(ii) or Section 12.1(a)(iii). If the General Partner gives a notice of withdrawal pursuant to Section 12.1(a)(i), the Limited Partners may, prior to the effective date of such withdrawal, elect a successor General Partner. If, prior to the effective date of the General Partner's withdrawal, a successor is not selected by the Limited Partners as provided herein, the Partnership shall be dissolved in accordance with Section 14.1. If a successor General Partner is elected, such successor shall be admitted (subject to Section 11.2) immediately prior to the effective time of the withdrawal or removal of the Departing Partner and shall continue the business of the Partnership without dissolution. 12.2 Interest of Departing Partner and Successor General Partner. The Partnership Interest of a Departing Partner departing as a result of withdrawal or removal pursuant to Section 12.1 shall be purchased by the successor to the Departing Partner. Such purchase shall be a condition to the admission of the successor to the Partnership as a General Partner. The purchase price for such Partnership Interest shall be paid in cash and shall be equal to the fair market value of the Departing Partner's Partnership Interest as General Partner, such amount to be determined and payable as of the effective date of its departure. Any successor General Partner shall indemnify the Departing Partner as to all debts and liabilities of the Partnership arising on or after the effective date of the removal of the Departing Partner, and shall secure such obligation in a manner satisfactory to the Departing Partner. 12.3 Reimbursement of Departing Partner. The Partnership shall reimburse a Departing Partner for all employee related liabilities, including, without limitation, reasonable severance liabilities incurred in connection with the termination of employees employed by such Departing Partner for the benefit of the Partnership. 12.4 Withdrawal of Limited Partner. The Limited Partners shall not have any right to withdraw from the Partnership without the prior consent of the General Partner. This Section 12.4 shall not prohibit permitted transfers by a Limited Partner pursuant to Article 10 hereof. 33 ARTICLE XIII PARTNERSHIP UNIT CERTIFICATE 13.1 Partnership Unit Certificates. Upon the Partnership's issuance of Partnership Units to any Person, the Partnership shall issue one or more Certificates in the name of such Person evidencing the number of such Partnership Units being so issued. Certificates shall be executed on behalf of the Partnership by the General Partner. No Partnership Unit Certificate shall be valid for any purpose until it has been countersigned by the Transfer Agent. 13.2 Registration, Registration of Transfer and Exchange. (a) The General Partner shall cause to be kept on behalf of the Partnership a register (the "Partnership Unit Register") in which, subject to such reasonable regulations as it may prescribe and subject to the provisions of Section 13.2(b), the General Partner will provide for the registration and the transfer of Partnership Units. The Transfer Agent is hereby appointed registrar and transfer agent for the purpose of registering and transferring Partnership Units as herein provided. The Partnership shall not recognize transfers of Certificates representing Partnership Units unless same are effected in the manner described in this Section 13.2. Upon surrender for registration of transfer of any Partnership Units evidenced by a Certificate and subject to the provisions of Section 13.2(b), the General Partner on behalf of the Partnership will execute, and the Transfer Agent will countersign and deliver, in the name of the holder or the designated transferee or transferees, as required pursuant to the holder's instructions, one or more new Certificates evidencing the same aggregate number of Partnership Units as was evidenced by the Certificate so surrendered. (b) The Partnership shall not recognize any transfer of Partnership Units until the Certificates evidencing such Partnership Units are surrendered for registration of transfer and such Certificates are accompanied by a Transfer Application duly executed by the transferee (or the transferee's attorney-in-fact duly authorized in writing). No charge shall be imposed by the Partnership for such transfer, provided, that, as a condition to the issuance of any new Certificate under this Section 13.2, the General Partner may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed with respect thereto. 13.3 Mutilated, Destroyed, Lost or Stolen Certificates. (a) If any mutilated Certificate is surrendered to the Transfer Agent, the General Partner on behalf of the Partnership shall execute, and upon its request, the Transfer Agent shall countersign and deliver in exchange therefor, a new Certificate evidencing the same number of Partnership Units as the Certificate so surrendered. (b) The General Partner on behalf of the Partnership shall execute, and upon its request, the Transfer Agent shall countersign and deliver a new Certificate in place of any Certificate previously issued if the Record Holder of the Certificate: (i) makes proof by affidavit, in form and substance satisfactory to the General Partner, that a previously issued Certificate has been lost, destroyed or stolen; (ii) requests the issuance of a new Certificate before the Partnership has received notice that the Certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim; (iii) if requested by the General Partner, delivers to the Partnership such security or indemnity as may be required by the General Partner, in form and substance satisfactory to the General Partner, with surety or sureties and with fixed or open penalty as the General Partner may direct, in its sole discretion, to indemnify the Partnership, the General Partner and the Transfer Agent against any claim that may be made on account of the alleged loss, destruction or theft of the Certificate; and (iv) satisfies any other reasonable requirements imposed by the General Partner. If a Limited Partner or Assignee fails to notify the Partnership within a reasonable time after he has notice of the loss, destruction or theft of a Certificate, and a transfer of the Partnership Units represented by the Certificate is registered 34 before the Partnership, the General Partner or the Transfer Agent receives such notification, such Limited Partner or Assignee shall be precluded from making any claim against the Partnership, the General Partner or the Transfer Agent for such transfer or for a new Certificate. (c) As a condition to the issuance of any Certificate under this Section 13.3, the General Partner may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including, without limitation, the fees and expenses of the Transfer Agent) connected therewith. 13.4 Record Holder. In accordance with Section 13.2(b), the Partnership shall be entitled to recognize the Record Holder as the Limited Partner or Assignee with respect to any Partnership Units and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Partnership Units on the part of any other Person, whether or not the Partnership shall have actual or other notice thereof, except as otherwise provided by law or any applicable rule, regulation, guideline or requirement of any National Securities Exchange on which the Partnership Units are listed for trading. Without limiting the foregoing, when a Person (such as a broker, dealer, bank trust company or clearing corporation or an agent of any of the foregoing) is acting as nominee, agent or in some other representative capacity for another Person in acquiring and/or holding Partnership Units, as between the Partnership on the one hand and such other Persons on the other hand such representative Person (a) shall be the Limited Partner or Assignee (as the case may be) of record and beneficially, (b) must execute and deliver a Transfer Application and (c) shall be bound by this Agreement and shall have the rights and obligations of a Limited Partner or Assignee (as the case may be) hereunder and as provided for herein. ARTICLE XIV DISSOLUTION AND LIQUIDATION 14.1 Dissolution. The Partnership shall not be dissolved by the admission of a Substituted Limited Partner or by the admission of a successor General Partner in accordance with the terms of this Agreement. Upon the removal or withdrawal of the General Partner, any successor General Partner shall continue the business of the Partnership. The Partnership shall dissolve, and its affairs should be wound up, upon, the first to occur of any of the following: (a) the expiration of its term as provided in Section 1.5; (b) an Event of Withdrawal of the General Partner as provided in Section 12.1(a), unless a successor is named as provided in Section 12.1(b); (c) an election to dissolve the Partnership by the General Partner; (d) entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Delaware Act; (e) the sale of all or substantially all of the assets and properties of the Partnership; or (f) the redemption of all Limited Partner Interests (other than any of such interests held by the General Partner). 14.2 Continuation of the Business of the Partnership after Dissolution. Upon (i) dissolution of the Partnership following an Event of Withdrawal caused by the withdrawal of the General Partner and a failure of the Limited Partners to appoint a successor General Partner as provided in Section 12.1 or (ii) dissolution of the Partnership upon an event constituting an Event of Withdrawal described in Section 12.1(a)(iv), then, within 90 days thereafter in the case of a dissolution described in clause (i) and within 180 days thereafter in the case of a dissolution described in clause (ii), Record Holders of at least a Majority of the Outstanding Partnership Units may elect to reconstitute the Partnership and continue its business on the same terms and conditions set forth in this Agreement by forming a new limited partnership on terms identical to those set forth in this Agreement and having as a general partner a Person approved by the Record Holders of at least a Majority of the Outstanding Partnership Units. Upon any such election by 35 the Record Holders of at least a Majority of the Outstanding Partnership Units, all Partners shall be bound thereby and shall be deemed to have approved thereof. Unless such an election is made within the applicable time period as set forth above, the Partnership shall conduct only activities necessary to wind up its affairs. If such an election is so made, then: (a) The reconstituted Partnership shall continue until the end of the term set forth in Section 1.5 unless earlier dissolved in accordance with this Article XIV; (b) if the successor General Partner is not the former General Partner, then the interest of the former General Partner shall be purchased by the successor general partner in the manner provided in Section 12.2; and (c) all necessary steps shall be taken to cancel this Agreement and the Certificate of Limited Partnership and to enter into and, as necessary, to file a new partnership agreement and certificate of limited partnership, and the successor general partner may for this purpose exercise the powers of attorney granted to the General Partner pursuant to Section 1.4; provided that the right of the Limited Partners to approve a successor general partner and to reconstitute and to continue the business of the Partnership shall not exist and may not be exercised unless the Partnership has received an Opinion of Counsel that (x) the exercise of the right would not result in the loss of limited liability of the Limited Partners and (y) neither the Partnership nor the reconstituted limited partnership would become taxable as a corporation or otherwise be taxed as an entity for federal income tax purposes upon the exercise of such right to continue. 14.3 Liquidation. Upon dissolution of the Partnership, unless the Partnership is continued under an election to reconstitute and continue the Partnership pursuant to Section 14.2, the General Partner, or in the event the General Partner has been dissolved or removed, has become bankrupt as set forth in Section 12.1(a)(iii) or (iv) or has withdrawn from the Partnership, a liquidator or liquidating committee approved by the Record Holders of at least a Majority of the Outstanding Partnership Units, shall be the Liquidator. The Liquidator (if other than the General Partner) shall be entitled to receive such compensation for its services as may be approved by Record Holders of at least a Majority of the Outstanding Partnership Units. The Liquidator shall agree not to resign at any time without 15 days' prior written notice and (if other than the General Partner) may be removed at any time, with or without Cause by notice of removal approved by Record Holders of at least a Majority of the Outstanding Partnership Units. Upon dissolution, removal or resignation of the Liquidator, a successor and substitute Liquidator (who shall have and succeed to all rights, powers and duties of the original Liquidator) shall within thirty days thereafter be approved by Record Holders of at least a Majority of the Outstanding Partnership Units. The right to approve a successor or substitute Liquidator in the manner provided herein shall be deemed to refer also to any such successor or substitute Liquidator approved in the manner herein provided. Except as expressly provided in this Article XIV, the Liquidator approved in the manner provided herein shall have and may exercise, without further authorization or consent of any of the parties hereto, all of the powers conferred upon the General Partner under the terms of this Agreement (but subject to all of the applicable limitations, contractual and otherwise, upon the exercise of such powers, other than the limitation on sale set forth in Section 6.3(b)) to the extent necessary or desirable in the good faith judgment of the Liquidator to carry out the duties and functions of the Liquidator hereunder for and during such period of time as shall be reasonably required in the good faith judgment of the Liquidator to complete the winding-up and liquidation of the Partnership as provided for herein. The Liquidator shall liquidate the Partnership Assets, and apply and distribute the proceeds of such liquidation in the following order of priority, unless otherwise required by any Certificate of Designation for the Preferred Units or mandatory provisions of applicable law: (a) the payment to creditors of the Partnership, including, without limitation, Partners who are creditors, in the order of priority provided by law; and the creation of a reserve of cash or other Partnership Assets for contingent liabilities in an amount, if any, determined by the Liquidator to be appropriate for such purposes; and (b) to all Partners in accordance with the positive balances in their respective Capital Accounts after taking into account all adjustments to such Capital Accounts pursuant to this Agreement (other than distributions pursuant to this Section 14.3). To the extent deemed advisable by the General Partner or the Liquidator, appropriate arrangements (including the use of a liquidating trust) may be made to assure that adequate funds are available to pay any contingent debts or obligations of the Partnership. The General Partner shall receive no special compensation for serving as Liquidator but shall be reimbursed for its costs and expenses in that connection in accordance with Section 6.4. 36 14.4 Distributions in Kind. Notwithstanding the provisions of Section 14.3, which require the liquidation of the Partnership Assets, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership the Liquidator determines that an immediate sale of part or all of the Partnership Assets would be impractical or would cause undue loss to the Partners, the Liquidator may, in its absolute discretion, defer for a reasonable time the liquidation of any assets except those necessary to satisfy liabilities of the Partnership (including, without limitation, those to Partners as creditors) or distribute to the Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 14.3, undivided interests in such Partnership assets as the Liquidator deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, such distributions in kind are in the best interest of the Limited Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any agreement governing the operation of such properties at such time. The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt. 14.5 Cancellation of Certificate of Limited Partnership. Upon the completion of the distribution of Partnership cash and property as provided in Sections 14.3 and 14.4, the Partnership shall be terminated and the Certificate of Limited Partnership and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the State of Delaware shall be canceled and such other actions as may be necessary to terminate the Partnership shall be taken. 14.6 Reasonable Time for Winding Up. A reasonable time shall be allowed for the orderly winding up of business and affairs of the Partnership and the liquidation of its assets pursuant to Section 14.3 in order to minimize any losses otherwise attendant upon such winding up, and the provisions of this Agreement shall remain in effect between the Partners during the period of liquidation. 14.7 Return of Capital. The General Partner shall not be personally liable for the return of the Capital Contributions of the Partners, or any portion thereof, it being expressly understood that any such return shall be made solely from Partnership assets. 14.8 No Capital Account Restoration Obligation. If any Partner has a deficit balance in its Capital Account upon liquidation of such Partner's interest in the Partnership or the Partnership, such Partner shall have no obligation to make any contribution to the capital of the Partnership with respect to such deficit, and such deficit shall not be considered to be a debt owed to the Partnership or to any other person. 14.9 Waiver of Partition. Each Partner hereby waives any right to partition of the Partnership property. ARTICLE XV AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE 15.1 Amendments to be Adopted Solely by General Partner. Each Limited Partner agrees that the General Partner (pursuant to its powers of attorney from the Limited Partners and Assignees), without the approval of any Limited Partner or Assignee, may amend any provision of this Agreement, and execute, swear to, acknowledge, deliver, file and record whatever documents may be required in connection therewith, to reflect: (a) a change in the name of the Partnership, the location of the principal place of business of the Partnership, the registered agent of the Partnership or the registered office of the Partnership; (b) admission, substitution, withdrawal or removal of Partners in accordance with this Agreement; (c) a change that, in the sole discretion of the General Partner, is reasonable and necessary or appropriate to qualify or continue the qualification of the Partnership as a limited partnership or a partnership in which the limited partners have limited liability under the laws of any state or that is necessary or advisable in the opinion of the General Partner to ensure that the Partnership will not be taxable as a corporation or otherwise taxed as an entity for federal income tax purposes; 37 (d) a change (i) that, in the sole discretion of the General Partner, does not adversely affect the Limited Partners in any material respect, (ii) that is necessary or appropriate to satisfy any requirements, conditions, guidelines or interpretations contained in any opinion, interpretative release, directive, order, ruling or regulation of any federal or state agency or judicial authority or contained in any federal or state agency or judicial authority or contained in any federal or state statute (including, without limitation, the Delaware Act) or that is necessary or appropriate to facilitate the trading of the Partnership Units (including, without limitation, the division of Outstanding Partnership Units into different classes to facilitate uniformity of tax consequences within such classes of Partnership Units) or compliance with any of which the General Partner determines in its sole discretion to be in the best interests of the Partnership and the Limited Partners or (iii) that is required to effect the intent of the provisions of this Agreement or is otherwise contemplated by this Agreement; (e) an amendment that is necessary, in the Opinion of Counsel, to prevent the Partnership or the General Partner or its directors or officers from in any manner being subjected to the provisions of the Investment Company Act of 1940, as amended, the Investment Advisers Act of 1940, as amended, or "plan asset" regulations adopted under the Employee Retirement Income Security Act of 1974, as amended, whether or not substantially similar to plan asset regulations currently applied or proposed by the United States Department of Labor; (f) subject to the terms of Section 4.4, an amendment that the General Partner determines in its sole discretion to be necessary or appropriate in connection with the authorization for issuance of any class or series of Partnership Units pursuant to Section 4.4; (g) any amendment expressly permitted in this Agreement to be made by the General Partner acting alone; (h) an amendment effected, necessitated or contemplated by a Merger Agreement approved in accordance with Section 16.3; or (i) any other amendments substantially similar to the foregoing. 15.2 Amendment Procedures. Except as provided in Sections 15.1 and 15.3, all amendments to this Agreement shall be made in accordance with the following requirements. Amendments to this Agreement may be proposed solely by the General Partner. Each such proposal shall contain the text of the proposed amendment. If an amendment is proposed, the General Partner shall seek the written approval of the holders of the requisite percentage of Outstanding Partnership Units or call a meeting of the Partners to consider and vote on such proposed amendment. A proposed amendment shall be effective upon its approval of the Record Holders of at least a Majority of the Outstanding Partnership Units, unless a greater or different percentage is required under this Agreement, and an amendment that would materially and adversely affect the rights and preferences of any type or class of Partnership Interests in relation to other types or classes of Partnership Interests requires the approval of at least a majority of such class or type of partnership interest (excluding those held by the General Partner and its Affiliates). The General Partner shall notify all Partners upon final adoption of any proposed amendment. 15.3 Amendment Requirements. (a) Notwithstanding the provisions of Sections 15.1 and 15.2, no provision of this Agreement that establishes a percentage of Outstanding Partnership Units required to take any action shall be amended, altered, changed, repealed or rescinded in any respect that would have the effect of reducing such voting requirement unless such amendment is approved by the written consent or the affirmative vote of holders of Outstanding partnership Units whose aggregate percentage of Outstanding Partnership Units constitutes not less than the required percentage of Outstanding Partnership Units sought to be reduced. (b) Notwithstanding the provisions of Sections 15.1 and 15.2, no amendments to this Agreement may (i) enlarge the obligations of any Limited Partner without such Limited Partner's consent, which may be given or withheld in its sole discretion, (ii) without the consent of the General Partner, which may be given or withheld in its sole discretion, (A) modify the amounts distributable to the General Partner in respect of its general partner interest in the Partnership or modify the amounts reimbursable or otherwise payable to the General Partner or any of its Affiliates by the Partnership, (B) change Section 14.1(a) or (c), (C) restrict in any way any action by or rights of the General Partner 38 as set forth in this Agreement or (D) change the term of the Partnership or, except as set forth in Section 14.1(c), give any Person the right to dissolve the Partnership. (c) Notwithstanding any other provision of this Agreement, except for amendments pursuant to 15.1, no amendments shall become effective without the approval of the Record Holders of at least a Majority of the Outstanding Partnership Units unless the Partnership obtains an Opinion of Counsel to the effect that (a) such amendment will not cause the Partnership to be taxable as a corporation or otherwise taxed as an entity for federal income tax purposes and (b) such amendment will not affect the limited liability of any Limited Partner. (d) This Section 15.3 shall only be amended with the approval of the Record Holders of not less than a Majority of the Outstanding Partnership Units. 15.4 Meetings of, or Actions by, the Partners. (a) Meetings of the Partners to vote upon any matters on which the Partners are authorized to take action under this Agreement or as the same may be amended from time to time may be called at any time by the General Partner. The General Partner shall cause a written notice to be given, either in person or by registered mail, to the Partners entitled to vote advising them that a meeting, convenient to the Partners, will be held at a time and place fixed by the General Partner. Such meeting will be held not less than ten (10) days nor more than sixty (60) days after the mailing of the notice of the meeting. Included with the notice of the meeting shall be a detailed statement of the action proposed, including a verbatim statement of the wording of any resolution proposed for adoption by the Partners and of any proposed amendments to this Agreement, as the same may from time to time be amended. Meetings of the Partners may be conducted by means of telephone conference or similar communications equipment whereby all persons participating in the meeting can hear and speak to each other. All expenses of the meeting and notification shall be borne by the Partnership. (b) Record Holders of at least a Majority of the Outstanding Partnership Units entitled to vote on any such action shall constitute a quorum for the transaction of that specific action at any meeting. Personal presence of the Partners shall not be required, provided an effective and notarized written consent to or rejection of such proposed action is submitted to a General Partner. Attendance by a Partner and voting in person at any meeting shall revoke any written consents or rejections of such Partner submitted with respect to action proposed to be taken at such meeting. (c) Any matter on which the Partners are authorized to take action under this Agreement or under law may be taken by the Partners without a meeting and shall be as valid and effective as action taken by the Partners at a meeting assembled, if written consents to such action by the Partners are (i) signed by the Partners entitled to vote upon such action at a meeting who hold at least the minimum percentage of Outstanding Partnership Units required to authorize such action, and (ii) are delivered to the General Partner. In the event that there shall be no General Partner, the Limited Partners may take action without a meeting by the written consent of Limited Partners having at least a majority of all of the Limited Partner Interests entitled to vote thereon. ARTICLE XVI MERGER 16.1 Authority. The Partnership may merge or consolidate with one or more corporations, business trusts or associations, real estate investment trusts, common law trusts or unincorporated businesses, including, without limitation, a general partnership or limited partnership, formed under the laws of the State of Delaware or any other state of the United States of America, pursuant to a written agreement of merger or consolidation ("Merger Agreement") in accordance with this Article. 16.2 Procedure for Merger or Consolidation. Merger or consolidation of the Partnership pursuant to this Article requires the prior approval of the General Partner. If the General Partner shall determine, in the exercise of its sole discretion, to consent to the merger or consolidation, the General Partner shall approve the Merger Agreement, which shall set forth: 39 (a) the names and jurisdictions of formation or organization of each of the business entities proposing to merge or consolidate; (b) the name and jurisdictions of formation or organization of the business entity that is to survive the proposed merger or consolidation (hereafter designated as the "Surviving Business Entity"); (c) the terms and conditions of the proposed merger or consolidation; (d) the manner and basis of exchanging or converting the equity securities of each constituent business entity for, or into, cash, property or general or limited partnership interests, rights, securities or obligations of the Surviving Business Entity; and (i) if any general or limited partnership interests, securities or rights of any constituent business entity are not to be exchanged or converted solely for, or into, cash, property or general or limited partnership interests, rights, securities or obligations of the Surviving Business Entity, the cash, property or general or limited partnership interests, rights, securities or obligations of any limited partnership, corporation, trust or other entity (other than the Surviving Business Entity) which the holders of such general or limited partnership interest are to receive in exchange for, or upon conversion of their securities or rights, and (ii) in the case of securities represented by certificates, upon the surrender of such certificates, which cash, property or general or limited partnership interests, rights, securities or obligations of the Surviving Business Entity or any limited partnership, corporation, trust or other entity (other than the Surviving Business Entity), or evidences thereof, are to be delivered; (e) a statement of any amendments or other changes in the constituent documents (the articles or certificate of incorporation, articles of trust, declaration of trust, certificate or agreement of limited partnership or other similar charter or governing document), or the adoption of new constituent documents, in either case as contemplated in Section 17-211(g) of the Delaware Act, of the Surviving Business Entity to be effected by such merger or consolidation; (f) the effective time of the merger, which may be the date of the filing of the certificate of merger pursuant to Section 16.4 or a later date specified in or determinable in accordance with the Merger Agreement; provided that if the effective time of the merger is to be later than the date of the filing of the certificate of merger, it shall be fixed no later than the time of the filing of the certificate of merger and stated therein; and (g) such other provisions with respect to the proposed merger or consolidation as are deemed necessary or appropriate by the General Partner. 16.3 Approval of Merger or Consolidation by the Partners. (a) The General Partner of the Partnership, upon its approval of the Merger Agreement, shall direct that a copy of the Merger Agreement be submitted to a vote of the Partners whether at a meeting or by written consent, in either case in accordance with the requirements of Article XV. (b) The Merger Agreement shall be approved upon receiving the affirmative vote or consent of the holders of at least a majority of the Outstanding Partnership Units, unless the Merger Agreement contains any provision as to which, if contained in an amendment to this Agreement, the provisions of this Agreement or the Delaware Act would require the vote or consent of a greater percentage of the Outstanding Partnership Units or of any class of Partnership Units (voting separately as a class), in which case the vote or consent of such greater percentage or of such class of Partnership Units shall be required for approval of the Merger Agreement. (c) After such approval by vote or consent of the Partners, and at any time prior to the filing of the certificate of merger pursuant to Section 16.4, the merger or consolidation may be abandoned pursuant to provisions therefor, if any, set forth in the Merger Agreement. 16.4 Certificate of Merger. Upon the required approval by the General Partner and the Limited Partners of a Merger Agreement, a certificate of merger shall be executed and filed with the Secretary of State of the State of Delaware in conformity with the requirements of the Delaware Act. 16.5 Effect of Merger. 40 (a) Upon the effective date of the certificate of merger: (i) all of the rights, privileges and powers of each of the business entities that has merged or consolidated, and all property, real, personal and mixed, and all debts due to any of those business entities and all other things and causes of action belonging to each of those business entities shall be vested in the Surviving Business Entity and, after the merger or consolidation, shall be the property of the Surviving Business Entity to the extent they were part of each constituent business entity; (ii) the title to any real property vested by deed or otherwise in any of those constituent business entities shall not revert and shall not be in any way impaired because of the merger or consolidation; (iii) all rights of creditors and all liens on or security interest in property of any of those constituent business entities shall be preserved unimpaired; and (iv) all debts, liabilities and duties of those constituent business entities shall attach to the Surviving Business Entity, and may be enforced against it to the same extent as if the debts, liabilities and duties had been incurred or contracted by it. (b) A merger or consolidation effected pursuant to this Article shall not be deemed to result in a transfer or assignment of assets or liabilities from one entity to another having occurred. ARTICLE XVII GENERAL PROVISIONS 17.1 Addresses and Notices. Any notice, demand, request or report required or permitted to be given or made to a Partner under this Agreement shall be in writing and shall be deemed given or made if received by it at the principal office of the Partnership designated pursuant to Section 1.3 hereof. 17.2 Titles and Captions. All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof. Except as specifically provided otherwise, references to "Articles" and "Sections" are to Articles and Sections of this Agreement. 17.3 Pronouns and Plurals. Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice-versa. 17.4 Further Action. The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement. 17.5 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns. 17.6 Integration. This Agreement constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior agreements and understandings pertaining thereto. 17.7 Creditors. None of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Partnership. 17.8 Waiver. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute a waiver of any such breach or any other covenant, duty, agreement or condition. 41 17.9 Counterparts. This Agreement may be executed in counterparts, all of which together shall constitute an agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto, independently of the signature of any other party. 17.10 Applicable Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law. 17.11 Invalidity of Provisions. If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. [SIGNATURES ON FOLLOWING PAGE] 42 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the 31st day of December, 2001. GENERAL PARTNER: FELCOR LODGING TRUST INCORPORATED, a Maryland corporation formerly known as FelCor Suite Hotels, Inc. By: /s/ Lawrence D. Robinson ---------------------------------------------------- Lawrence D. Robinson, Executive Vice President LIMITED PARTNERS (for all the Limited Partners now and hereafter admitted as limited partners of the Partnership, pursuant to the powers of attorney in favor of the General Partner contained in Section 1.4 of the Partnership Agreement): By: FELCOR LODGING TRUST INCORPORATED, a Maryland corporation, formerly known as FelCor Suite Hotels, Inc., acting as General Partner and as duly authorized attorney-in-fact By: /s/ Lawrence D. Robinson ----------------------------------------------- Lawrence D. Robinson, Executive Vice President 43 EXHIBIT A INTENTIONALLY OMITTED. EXHIBIT B NOTICE OF EXERCISE OF REDEMPTION RIGHT In accordance with Section 7.5 of the Second Amended and Restated Agreement of Limited Partnership of FelCor Lodging Limited Partnership (the "Agreement"), the undersigned hereby irrevocably (i) presents for redemption ______ Partnership Units in FelCor Lodging Limited Partnership in accordance with the terms of the Agreement and the Redemption Right referred to in Section 7.5 thereof, (ii) surrenders such Partnership Units and all right, title and interest therein, and (iii) directs that the Cash Amount or REIT Shares Amount (as defined in the Agreement) as determined by the General Partner deliverable upon exercise of the Redemption Right be delivered to the address specified below, and if REIT Shares are to be delivered, such REIT Shares be registered or placed in the name(s) and at the address(es) specified below. Notwithstanding the foregoing, the undersigned acknowledges that there are certain limitations set forth in Section 7.5(c) of the Agreement relating to the Company's obligation to redeem Partnership Units. Dated: ---------------------------- Name of Limited Partner: ------------------------------------------ ------------------------------------------ (Signature of Limited Partner) ------------------------------------------ (Mailing Address) ------------------------------------------ (City) (State) (Zip Code) Signature Guaranteed by: ------------------------------------------ If REIT Shares are to be issued, issue to: ------------------------------------------ Please insert social security or identifying number: ------------------------------------------ Name: ------------------------------------------ FELCOR LODGING LIMITED PARTNERSHIP --------------------- ADDENDUM NO. 1 TO SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP --------------------- DESIGNATION OF CLASS B UNITS The General Partner of FelCor Lodging Limited Partnership, a Delaware limited partnership (the "Partnership"), pursuant to the authority expressly granted to the General Partner by the Second Amended and Restated Agreement of Limited Partnership of FelCor Lodging Limited Partnership, as amended (the "Agreement"), and in particular Sections 1.4 and 4.6 thereof, has approved this Addendum No. 1 to the Agreement (the "Addendum"), which Addendum is a part of the Agreement for all purposes, to create and provide for the issue of a class of Partnership Units and to fix the designations, preferences and relative, participating, optional or other special rights, powers and duties thereof as follows (initially capitalized terms used without definition herein having the meanings set forth therefor in the Agreement): 1. Designation of Class. A class of Partnership Units is hereby designated the "Class B Units" of the Partnership. The Class B Units shall have the preferences and relative, participating, optional or other special rights, powers and duties that are set forth in this Addendum and, to the extent permitted by this Addendum, established by the General Partner and set forth in any amendments to the Agreement or any amendments or annexes to this Addendum. 2. Designation of Series of Class B Units. The General Partner shall have authority to establish series of unissued Class B Units by fixing the preferences, rights, powers and duties of the Class B Units of any series so established in accordance with and to the extent permitted by the provisions of Section 4.6 of the Agreement, except that the General Partner may not decrease the number of Class B Units within a series to not less than the number of Class B Units within such series that are issued and may not increase or decrease the number of Class B Units within a series if prohibited by the annex to this Addendum providing for such series. Any such series shall be (i) established by the General Partner through an annex to this Addendum, for which no vote or consent of any Limited Partners shall be required, which annex shall set forth in detail the rights, preferences, powers and duties of that series, and (ii) subject to the terms and provisions of this Addendum. 3. Preferences, Rights, Powers and Duties. The Class B Units will have all of the same preferences, rights, powers and duties as the Partnership Units that are currently issued and outstanding, and in addition thereto, will have the preferences, rights, powers and duties set forth in this Addendum and any annex thereto. 4. Certain Definitions. For purposes of this Addendum only, the following terms have the indicated meanings: (a) "Class B Unitholder" shall mean any Person who owns, at the time of determination of whether such party is a "Class B Unitholder," a Class B Unit according to the Partnership's Unitholder records. (b) The term "Commission" shall mean the Securities and Exchange Commission and any successor agency. (c) The term "Holder" or "Holders" shall mean any Person who shall hereafter acquire any Qualified Registrable Securities and who holds, at the time of determination of whether such party is a "Holder", Qualified Registrable Securities of record. (d) The term "Independent Director" shall mean a director of the General Partner who is not an officer or employee of the General Partner, any Affiliate of an officer or employee or an Affiliate of (a) any advisor to the General Partner under an advisory agreement, (b) any lessee of any property of the General Partner, (c) any subsidiary of the General Partner, or (d) any partnership which is an Affiliate of the General Partner. (e) The term "NASDAQ" shall mean The Nasdaq Stock Market (formerly known as the National Market System), or any stock exchange on which the General Partner's REIT Shares may be subsequently listed for trading in substitution for The Nasdaq Stock Market. (f) The term "Qualified Registrable Securities" shall mean the REIT Shares that the General Partner or the Partnership may elect in their discretion to issue in redemption of Class B Units offered for redemption by a Redeeming Partner (who is then a Class B Unitholder) under Section 7.5(a) of the Agreement. As to any particular Qualified Registrable Securities, once issued, such REIT Shares shall cease to be Qualified Registrable Securities when (a) a registration statement with respect to such REIT Shares shall have become effective under the Securities Act and such REIT Shares shall have been disposed of in accordance with such registration statement, (b) such REIT Shares shall have ceased to be outstanding, (c) such REIT Shares shall have been sold pursuant to Rule 144 (or any successor provision) under the Securities Act or (d) at the time of determination of whether such REIT Shares are Qualified Registrable Securities, such REIT Shares may be sold under Rule 144(K) or otherwise by their owner or holder publicly without registration under the Securities Act. (g) The term "Qualified Registration" shall mean a registration statement of the General Partner under the Securities Act on a form which permits the sale of Qualified Registrable Securities (other than a registration statement (a) on Form S-4 or S-8 or any successor or similar form then in effect, (b) relating to warrants, options or shares of capital stock granted or to be granted or sold primarily to employees, directors or officers of the General Partner, (c) filed in connection with a transaction described in Rule 145 under the Securities Act or any successor rule, (d) relating to employee benefit plans or interests therein, or (e) relating primarily to preferred stock or other securities issued in connection with any financing by the General Partner which is principally debt or preferred stock financing). (h) The term "REIT Share" shall mean a share of the class of voting common stock of the General Partner. (i) The term "Securities Act" shall mean the Securities Act of 1933, as amended. (j) The term "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 5. Registrations. 5.1 Registration for Resale of REIT Shares. If the General Partner or the Partnership redeems any Class B Units through the issuance of REIT Shares to a Redeeming Partner who is a Class B Unitholder, either (i) the General Partner shall file with the Commission and cause to become effective a shelf registration statement under Rule 415 of the Securities Act, or any similar rule that may be adopted by the Commission, covering the reoffering and resale of such REIT Shares ("Shelf Registration"), or (ii) the General Partner shall provide to the Redeeming Partner an opinion of counsel satisfactory to the General Partner and the Redeeming Partner to the effect that such REIT Shares may be resold by the Redeeming Partner publicly without registration under the Securities Act. The General Partner may include in such Shelf Registration other securities of the General Partner to be resold by holders other than the Holders. The General Partner shall use reasonable efforts to cause the Shelf Registration to remain continuously effective until the date when all Qualified Registrable Securities registered thereunder cease to qualify as Qualified Registrable Securities. The General Partner shall amend or supplement the Shelf Registration, if and as required, to identify each Holder after its acquisition of Qualified Registrable Securities. 5.2 Piggyback Registration. Whenever the General Partner proposes to register any of its REIT Shares in a Qualified Registration, whether or not for sale for its own account, the General Partner will give prompt written notice ("Piggyback Notice") to the Holders of Qualified Registrable Securities of its intention to effect such a registration. Upon written request of any Holder of Qualified Registrable Securities made within 20 days after delivery of any Piggyback Notice (which request shall specify the Qualified Registrable Securities requested to be included in such Qualified Registration by such Holder), the General Partner will, subject to Sections 5.3 and 5.4 below, use its reasonable efforts to include in such Qualified Registration all Qualified Registrable Securities the Holders of which shall have so requested the inclusion thereof in such Qualified Registration, to permit the disposition by such Holders of such 2 Qualified Registrable Securities; provided, however, that (i) if, at any time after giving written notice of its intention to register any such REIT Shares (other than Qualified Registrable Securities requested to be included therein pursuant to this Section 5.2) in such Qualified Registration and prior to the effective date of the registration statement filed in connection with such Qualified Registration, the General Partner shall determine for any reason not to register such REIT Shares, the General Partner may, at its election, give written notice of such determination to all Holders of Qualified Registrable Securities requesting the inclusion of Qualified Registrable Securities therein and, thereupon, shall be relieved of its obligation to register any Qualified Registrable Securities in connection with such registration, without prejudice, however, to the future rights of Holders under this Section 5.2, (ii) in case of a determination by the General Partner to delay such registration of the REIT Shares (other than Qualified Registrable Securities requested to be included therein pursuant to this Section 5.2), the General Partner shall be permitted to delay the registration of such Qualified Registrable Securities for the same period as the delay in registering such other REIT Shares, and (iii) the General Partner shall not be required to effect any registration pursuant to this Section 5.2 unless it shall have received reasonable assurances that the seller or sellers of any such Qualified Registrable Securities covered thereby will pay any expenses required to be paid by such sellers as provided in Section 7. The registrations requested pursuant to this Section 5.2 are referred to herein as the "Piggyback Registrations." 5.3 Priority on Piggyback Registrations. If a Piggyback Registration is an underwritten registration and the managing underwriter(s) for the offering advises the General Partner in writing that in its opinion the number of shares of Qualified Registrable Securities requested or proposed to be included in such registration exceeds the number which can be sold in such offering without materially affecting the offering price of the securities proposed to be included therein, the General Partner will include in such registration (i) first, to the extent such securities of the General Partner may be included in such Qualified Registration without materially affecting the offering price thereof, in the opinion of such managing underwriter(s), (a) if such registration is initiated by the General Partner proposing to register any of its REIT Shares, such REIT Shares proposed to be sold by the General Partner, and (b) the securities of holders of securities of the General Partner (other than the Holders of Qualified Registrable Securities, as such, with respect to such Qualified Registrable Securities) who otherwise have preferential registration rights to include such securities in such Piggyback Registration in preference to the Holders which such holders have duly requested to be included in such Piggyback Registration, in each case in accordance with the agreement(s) with respect to such registration rights between the General Partner and such holders; and (ii) second, to the extent such Qualified Registrable Securities may be included in such Qualified Registration without materially affecting the offering price of the securities referred to in clause (i), in the opinion of such managing underwriter(s), the Qualified Registrable Securities requested by the Holders to be included in such Piggyback Registration pursuant to Section 5.2 and any other securities of the General Partner held by persons other than the Holders having rights to participate in such Piggyback Registration which are non-preferential to the Holders, pro rata among all such holders on the basis of the total number of shares of securities of the General Partner, including Qualified Registrable Securities, requested by each such holder to be included therein. 5.4 Selection of Underwriters. If any Piggyback Registration is an underwritten offering, the General Partner will have the sole right to select the managing underwriter(s) thereof. 6. Registration Procedures. If and whenever the General Partner is required by the provisions of this Addendum to use its reasonable efforts to effect the registration of any Qualified Registrable Securities as provided hereby: 6.1 The General Partner shall, as expeditiously as reasonably practicable: (a) Prepare and file with the Commission under the Securities Act a registration statement with respect to such Qualified Registrable Securities, which registration statement will state that the Qualified Registrable Securities are covered thereby, and use its reasonable efforts to cause such registration statement to become effective and to remain effective as provided herein; provided, however, that the General Partner may discontinue any registration of securities that is being effected pursuant to Section 5.2 at any time prior to the effective date of the registration statement relating thereto. (b) Prepare and file with the Commission such amendments and supplements, if any, to such registration statement and the prospectus used in connection therewith as may be necessary to (a) keep the registration statement effective (1) as to a Piggyback Registration until the earlier of 90 days after the effectiveness thereof or the completion of the distribution under such registration statement, or (2) as to the Shelf Registration until 3 the date on which all Qualified Registrable Securities registered thereunder cease to qualify as Qualified Registrable Securities, and (b) comply with the provisions of the Securities Act applicable to it with respect to the disposition of all Qualified Registrable Securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement. (c) Furnish to each seller of such Qualified Registrable Securities and each underwriter, if any, of the Qualified Registrable Securities being sold by such seller such number of copies of such registration statement (including exhibits), each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus) and of each amendment and supplement thereto as such seller and underwriter may reasonably request in order to facilitate the public disposition of the Qualified Registrable Securities owned by such seller and included in such registration statement. (d) Use its reasonable efforts to (a) register or qualify such Qualified Registrable Securities under such securities or blue sky laws of such jurisdictions as any seller of Qualified Registrable Securities or any managing underwriter reasonably requests, (b) keep such registration and qualification in effect for so long as such registration statement is in effect, and (c) do any and all other acts and things which may be reasonably necessary or advisable to enable such seller or underwriter to consummate the disposition in such jurisdictions of the relevant Qualified Registrable Securities (provided that the General Partner will not for any such purpose be required to (1) qualify generally to do business as a foreign corporation in any jurisdiction where it would not otherwise be required to qualify but for the requirements of this subsection; (2) subject itself to taxation in any such jurisdiction; (3) consent to general service of process in any such jurisdiction; or (4) register or qualify Qualified Registrable Securities or take any other action under the state securities or "Blue Sky" laws of any jurisdiction if, in the judgment of the Board of Directors of the General Partner, the consequences of such registration, qualification or other action would be unduly burdensome to the General Partner). (e) At any time when a prospectus relating thereto is required to be delivered under the Securities Act, notify each seller of Qualified Registrable Securities covered by a registration statement when it becomes aware of the happening of any event as a result of which the prospectus (as then amended or supplemented) contains any untrue statement of a material fact or omits any fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, and, at the request of any such seller, as promptly as practicable thereafter, prepare in sufficient quantities and furnish to such seller and each underwriter a reasonable number of copies of a prospectus supplemented or amended so that, as thereafter delivered to the offerees or purchasers of such Qualified Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein in light of the circumstances then existing not misleading. (f) Comply with all applicable rules and regulations of the Commission, and make generally available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve consecutive months beginning with the first day of the General Partner's first calendar quarter after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder. (g) Use its reasonable efforts to cause all such Qualified Registrable Securities covered by such registration statement to be listed on NASDAQ or on any securities exchange on which similar securities issued by the General Partner are then listed, if the listing of such Qualified Registrable Securities is then permitted under the rules governing NASDAQ or such exchange. (h) Enter into customary agreements relating to the registration (including an under writing agreement in customary form). (i) Subject to the execution of confidentiality agreements in a form satisfactory to the General Partner, make reasonably available for inspection by any seller of such Qualified Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement, the Representative Counsel (as hereinafter defined), and any legal counsel, accountant or other agent retained by any such Representative Counsel or underwriter, all financial and other records, pertinent corporate documents and properties of the General Partner, and cause the General Partner's officers, directors employees, counsel and independent public accountants to supply all information reasonably requested by, and to respond to inquiries from, any such seller, underwriter, Representative 4 Counsel, legal counsel, attorney, accountant or agent in connection with such registration statement, in each case, to the extent such information is reasonably necessary to satisfy any of its obligations under applicable law. (j) Use reasonable efforts to obtain an appropriate opinion from counsel for the General Partner and a "cold comfort" letter from the General Partner's independent public accountants, each in customary form and covering such matters of the type customarily covered by opinions of counsel and cold comfort letters in similar registrations; provided, however, that failure to provide such opinion or letter, or the provision of any such opinion or letter in a form not satisfactory to any seller whose Qualified Registrable Securities are covered by such registration statement, notwithstanding the General Partner's reasonable efforts, shall not give rise to any action, at law or in equity, for damages or injunctive or other relief, but rather shall only entitle such seller to withdraw his Qualified Registrable Securities from such registration statement, pursuant to Section 6.4 below. (k) Provide (a) the Holders of such Qualified Registrable Securities to be included in a registration statement hereunder, (b) the underwriters (which term, for purposes of this Addendum, shall include any person deemed to be an underwriter within the meaning of Section 2(11) of the Securities Act), if any, of the securities being sold, (c) counsel of such underwriters, and (d) Representative Counsel (as defined in Section 6.3) the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment or supplement thereto. (l) Promptly notify the selling Holders of Qualified Registrable Securities to be included in a registration statement hereunder and the managing underwriters, if any, of the securities being sold and (if requested by any such person) confirm such advice in writing, (a) when such registration statement, the prospectus or any prospectus supplement or post-effective amendment has been filed, and, with respect to such registration statement or any post-effective amendment thereto, when the same has become effective, (b) of the issuance by the Commission of any stop order suspending the effectiveness of such registration statement or the initiation of any proceedings for that purpose, or (c) of the receipt by the General Partner of any notification with respect to the suspension of the qualification of the Qualified Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. (m) Use its reasonable efforts to obtain the withdrawal of any order suspending the effectiveness of a registration statement hereunder or any post-effective amendment thereto at the earliest practicable date. (n) Notify in writing each Holder of Qualified Registrable Securities of any proposal by the General Partner to amend or waive any provision of this Addendum pursuant to Sections 12.1 and 12.2 hereof and of any amendment or waiver effected pursuant thereto, each of which notices shall contain the text of the amendment or waiver proposed or effected, as the case may be. 6.2 Certain Agreements by Holders. Each Holder of Qualified Registrable Securities selling securities in a registration hereunder agrees that upon receipt of any notice from the General Partner of the happening of any event of the kind described in Section 6.1(v), such seller will forthwith discontinue such seller's disposition of Qualified Registrable Securities pursuant to the registration statement covering such seller's Qualified Registrable Securities until such seller's receipt of the copies of the supplemented or amended prospectus contemplated by Section 6.1(v) and, if so directed by the General Partner, will deliver to the General Partner (at the General Partner's expense) all copies, other than permanent file copies, then in such seller's possession of the prospectus covering such Qualified Registrable Securities that was in effect at the time of receipt of such notice. In the event the General Partner shall give any such notice, the period mentioned in Section 6.1(ii) shall be extended by the number of days during the period from and including the date of the giving of such notice to and including the date when each seller of any Qualified Registrable Securities covered by such registration statement shall have received the copies of the supplemented or amended prospectus contemplated by Section 6.1(v). 6.3 Representative Counsel. In connection with the preparation and review of any registration statement or prospectus or any amendments or supplements thereto, the sellers (other than the General Partner) of the securities of the General Partner included in such registration will choose counsel ("Representative Counsel") who shall participate in the registration process on behalf of all of such sellers of securities of the General Partner, coordinate requests by such sellers for information from the General Partner, and act as liaison between such sellers or their 5 individual counsel, accountants and agents and the General Partner. The General Partner shall establish reasonable procedures with respect to the selection of the Representative Counsel. 6.4 Withdrawal. If any Holder disapproves of the terms of any offering, such Holder's sole remedy shall be, at its sole discretion, to withdraw the Holder's Qualified Registrable Securities and other securities of the General Partner therefrom by written notice to the General Partner and the underwriter (if any); and the Holder's Qualified Registrable Securities and other securities of the General Partner so withdrawn from the offering will also be withdrawn from registration. If the Holders participating therein withdraw all Qualified Registrable Securities from the offering, the General Partner may withdraw the registration. 6.5 Information. The General Partner may require each seller of Qualified Registrable Securities or securities of the General Partner as to which any registration is being effected to furnish the General Partner such information regarding such seller and the distribution of such securities as the General Partner may from time to time reasonably request in writing for purposes of preparation of the registration statement, to the extent that such information is required in order to comply with applicable legal requirements. If any such registration statement refers to any Holder by name or otherwise as the Holder of any securities of the General Partner, then such Holder shall have the right to require (i) the insertion therein of language, in form and substance satisfactory to such Holder, to the effect that the holding by such Holder of such securities is not to be construed as a recommendation by such Holder of the investment quality of the General Partner's securities covered thereby and that such holding does not imply that such Holder will assist in meeting any future financial requirements of the General Partner, or (ii) in the event that such reference to such Holder by name or otherwise is not in the judgment of the General Partner, as advised by counsel, required by the Securities Act or any similar federal statute or any state "blue sky" or securities law then in force, the deletion of such reference to such Holder. 7. Registration Expenses. 7.1 Responsibility for Payment. Whether or not any registration pursuant to this Addendum shall become effective, all expenses incident to the General Partner's performance of or compliance with this Addendum, including without limitation all registration and filing fees, National Association of Securities Dealers' fees, fees and expenses of compliance with state securities or blue sky laws, printing and engraving expenses and fees and disbursements of counsel for the General Partner and the independent certified public accountants for the General Partner, underwriters (excluding discounts, commissions and transfer taxes and amounts to be borne by such underwriters) and other persons retained by the General Partner (all such expenses being herein called "Registration Expenses"), will be borne by the General Partner; provided, however, that each seller of Qualified Registrable Securities or other securities of the General Partner shall pay any underwriting discounts and selling commissions and transfer taxes applicable to Qualified Registrable Securities or other securities of the General Partner sold by such seller as aforesaid. 8. Indemnification. 8.1 Indemnification by the General Partner. The General Partner will, and hereby does indemnify and hold harmless, with respect to any registration statement filed by it, to the full extent permitted by law, each Holder which is a seller of Qualified Registrable Securities covered by such registration statement, its officers, directors, employees, agents and general or limited partners (and the directors, officers, employees and agents thereof) and each other person, partnership, trust, corporation, joint venture, unincorporated organization or government or any department or agency thereof (each, a "Person") if any, who controls such Holder within the meaning of the Securities Act (collectively, the "Holder Indemnitees") against all losses, claims, damages, liabilities and expenses, joint or several, (including reasonable fees of counsel and any amounts paid in settlement effected with the General Partner's consent, which consent shall not be unreasonably withheld) to which any such Holder Indemnitee may become subject under the Securities Act, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions or proceedings, whether commenced or threatened, in respect thereof), are caused by (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement in which such Qualified Registrable Securities were included as contemplated hereby or the omission or alleged omission to state therein a 6 material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary, final or summary prospectus, together with the documents incorporated by reference therein (as amended or supplemented if the General Partner shall have filed with the Commission any amendment thereof or supplement thereto), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein in the light of the circumstances under which they were made not misleading, or (iii) any violation by the General Partner of any federal, state or common law rule or regulation applicable to the General Partner and relating to action of or inaction by the General Partner in connection with any such registration; and in each such case the General Partner will reimburse each such Holder Indemnitee for any reasonable legal or any other expenses incurred by any of them in connection with investigating or defending any such loss, claim, damage, liability, expense, action or proceeding; provided, that the General Partner shall not be liable to any such Holder Indemnitee in any such case to the extent that any such loss, claim, damage, liability or expense (or action or proceeding, whether commenced or threatened, in respect thereof) arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement or amendment thereof or supplement thereto or in any such preliminary, final or summary prospectus in reliance upon and in conformity with written information furnished to the General Partner by or on behalf of any such Holder Indemnitee relating to such Holder Indemnitee for use in the preparation thereof; and provided further that the General Partner shall not be liable to any such Holder Indemnitee with respect to any preliminary prospectus to the extent that any such loss, claim, damage, liability or expense of such Holder Indemnitee results from the fact that such Holder Indemnitee sold Qualified Registrable Securities to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the prospectus (excluding documents incorporated by reference) or of the prospectus as then amended or supplemented (excluding documents incorporated by reference) if the General Partner has previously furnished copies thereof to such Holder Indemnitee in compliance with Section 6 of this Addendum and the loss, claim, damage, liability or expense of such Holder Indemnitee results from an untrue statement or omission of a material fact contained in such preliminary prospectus which was corrected in the prospectus (or the prospectus as amended or supplemented). Such indemnity and reimbursement of expenses shall remain in full force and effect regardless of any investigation made by or on behalf of such Holder Indemnitee and shall survive the transfer of such securities by such Holder. 8.2 Indemnification by Holders. Each Holder participating in any registration statement hereunder will and hereby does indemnify and hold harmless, to the fullest extent permitted by law, the General Partner, its directors, officers, employees and agents and each Person who controls the General Partner (within the meaning of the Securities Act) (collectively, the "General Partner Indemnitees") against all losses, claims, damages, liabilities and expenses, joint or several (including reasonable fees of counsel and any amounts paid in settlement effected with such Holder's consent, which consent shall not be unreasonably withheld) to which any General Partner Indemnitee may become subject under the Securities Act, at common law or otherwise insofar as such losses, claims, damages, liabilities or expenses (or actions or proceedings, whether commenced or threatened, in respect thereof) are caused by (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement in which such Holder's Qualified Registrable Securities were included or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary, final or summary prospectus, together with the documents incorporated by reference therein (as amended or supplemented if the General Partner shall have filed with the Commission any amendment thereof or supplement thereto), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein in the light of the circumstances under which they were made not misleading to the extent, but only to the extent, in the cases described in clauses (i) and (ii), that such untrue statement or omission is contained in any information furnished in writing by such Holder relating to such Holder for use in the preparation thereof and if the General Partner does not know, at the time such information is included in the registration statement, prospectus, preliminary prospectus, amendment or supplement, that such information is false or misleading, (iii) any violation by such Holder of any federal, state or common law, rule or regulation applicable to such Holder and relating to action of or inaction by such Holder in connection with any such registration, and (iv) with respect to any preliminary prospectus, the fact that such Holder sold Qualified Registrable Securities to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the prospectus (excluding documents incorporated by reference) or of the prospectus as then amended or supplemented (excluding documents incorporated by reference) if (a) the General Partner has previously furnished copies thereof to such Holder in compliance with Section 6 of this Addendum and (b) the loss, claim, damage, liability or expense of such Holder Indemnitee results from an untrue statement or omission of a material fact contained in such preliminary prospectus which was corrected in the prospectus (or the prospectus as amended or supplemented). Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the General Partner (except as provided above) or any of the prospective sellers or any of their respective directors, officers, employees, agents, general or limited partners or controlling Persons and shall survive the transfer of such securities by such Holder. 7 8.3 Conduct of Indemnification Proceedings. Promptly after receipt by an indemnified party under subsection 8.1 or 8.2 above of written notice of the commencement of any action, suit, proceeding, investigation or threat thereof made in writing with respect to which a claim for indemnification may be made pursuant to this Section 8, such indemnified party shall, if a claim in respect thereto is to be made against an indemnifying party, give written notice to the indemnifying party of the threat or commencement thereof; but the failure so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such claim or action referred to under subsections 8.1 or 8.2 shall be brought against any indemnified party and it shall notify the indemnifying party of the threat or commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party). After notice from the indemnifying party to such indemnified party of its election so to assume the defense of any such claim or action, the indemnifying party shall not be liable to such indemnified party under this Section 8 for any legal expenses of counsel or any other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation unless the indemnifying party has failed to assume the defense of such claim or action or to employ counsel reasonably satisfactory to such indemnified party. The indemnifying party shall not be required to indemnify the indemnified party with respect to any amounts paid in settlement of any action, proceeding or investigation entered into without the written consent of the indemnifying party which consent shall not be unreasonably withheld. No indemnifying party will consent to the entry of any judgment or enter into any settlement without the consent of the indemnified party, unless (i) such judgment or settlement does not impose any obligation or liability upon the indemnified party other than the execution, delivery or approval thereof, and (ii) such judgment or settlement includes as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect of such claim for all persons that may be entitled to or obligated to provide indemnification or contribution under this Section 8. 8.4 Additional Indemnification. Indemnification similar to that specified in the preceding subsections of this Section 8 (with appropriate modifications) shall be given by the General Partner and each seller of Qualified Registrable Securities with respect to any required registration or other qualification of securities under any state securities or blue sky laws. 8.5 Contribution. If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsections 8.1 or 8.2 above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages, liabilities or expenses (or actions in respect thereof) referred to in subsections 8.1 or 8.2 in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements, omissions, actions or inactions which resulted in such losses, claims, damages, liabilities or expenses. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party, any action or inaction by any such party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement, omission, action or inaction. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or expenses (or actions in respect thereof) referred to above in this subsection 8.5 shall be deemed to include any reasonable legal or other expenses incurred by such indemnified party in connection with investigating or defending any such action or claim (which shall be limited as provided in subsection 8.3 if the indemnifying party has assumed the defense of any such action in accordance with the provisions thereof) which is the subject of this subsection 8.5. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Promptly after receipt by an indemnified party under this subsection 8.5 of written notice of the commencement of any action, suit, proceeding, investigation or threat thereof made in writing with respect to which a claim for contribution may be made against an indemnifying party under this subsection 8.5, such indemnified party shall, if a claim for contribution in respect thereto is to be made against an indemnifying party, give written notice to the indemnifying party in writing of the commencement thereof (if the notice specified in subsection 8.3 has not been given with respect to such action); but the failure to so to notify the indemnifying party shall not relieve it from any obligation to provide contribution which it may have to any indemnified party under this subsection 8.5 except to the extent that the indemnifying party is actually prejudiced by the failure to give notice. Notwithstanding anything in this subsection 8.5 to the contrary, no indemnifying party (other than the General Partner) shall be required pursuant to this subsection 8 8.5 to contribute any amount which exceeds the amount by which the dollar amount of the proceeds received by such indemnifying party from the sale of Qualified Registrable Securities and other securities of the General Partner (after deducting any underwriting commissions, discounts and transfer taxes applicable thereto) in the offering to which the losses, claims, damages, liabilities or expenses of the indemnified parties relate exceeds the amount of any losses, claims, damages, liabilities and expenses which such indemnifying party has otherwise been required to pay as indemnity or contribution hereunder by reason of such losses, claims, damages, liabilities or expenses. The parties hereto agree that it would not be just and equitable if contribution pursuant to this subsection 8.5 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. If indemnification is available under this Section 8, the indemnifying parties shall indemnify each indemnified party to the full extent provided in subsections 8.1 and 8.2 without regard to the relative fault of said indemnifying party or indemnified party or any other equitable consideration provided for in this subsection 8.5. The provisions of this subsection 8.5 shall be in addition to any other rights to indemnification or contribution which any indemnified party may have pursuant to law or contract and shall remain in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the transfer of securities by any such party. 8.6 Indemnification and Contribution of Underwriters. In connection with any underwritten offering contemplated by this Addendum which includes Qualified Registrable Securities, the General Partner, and all sellers of Qualified Registrable Securities included in any registration statement will agree to customary provisions for indemnification and contribution (consistent with the other provisions of this Section 8) in respect of losses, claims, damages, liabilities and expenses of the underwriters of such offering. 9. Participation in Underwritten Registrations. In the case of a registration hereunder, if the General Partner has determined to enter into an underwriting agreement in connection therewith, all shares of Qualified Registrable Securities or securities of the General Partner to be included in such registration shall be subject to such underwriting agreement which shall be in customary form and contain such terms as are customarily contained in such agreements, and no person may participate in any such registration unless such person (a) agrees to sell such person's securities on the basis provided in any underwriting arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. 10. Rights to Withdraw From Registration. If, as a result of the proration provisions of Section 5.2, any Holder shall not be entitled to include all Qualified Registrable Securities in a registration that such Holder has requested to be included, after the delivery to such Holder of notice thereof from the General Partner, such Holder may elect to withdraw his request to include Qualified Registrable Securities in such registration (a "Withdrawal Election"); provided, however, that a Withdrawal Election shall be irrevocable and, after making a Withdrawal Election, a Holder shall no longer have any right to include Qualified Registrable Securities in the registration as to which such Withdrawal Election was made. 11. Limitations on Sale or Distribution of Other Securities. If requested in writing by (A) the General Partner or (B) the managing underwriter, if any, of any underwritten registration contemplated by Section 5.2 hereof (a "Subsequent Registration"), each Holder hereby agrees not to effect any public offering, sale or distribution (including any sale pursuant to Rule 144 under the Securities Act) of any Qualified Registrable Security, REIT Shares, or other securities of the General Partner (other than as part of such underwritten public offering) within 45 days after the effective date of the Subsequent Registration, if such Holder was given the opportunity to include in the Subsequent Registration such Qualified Registrable Securities, REIT Shares, or any other securities of the General Partner. The General Partner may, at its sole discretion, waive, as to any one or more Holders, the restrictions contained in this Section 11 as they apply to a Subsequent Registration. 12. Miscellaneous. 12.1 Waivers. Except as otherwise provided herein, the General Partner may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the General Partner has obtained the written consent of Holders of a majority of the outstanding REIT Shares. 9 12.2 Amendments. Except as otherwise provided herein or in any annexes hereto, this Addendum may be amended only with the written consent of the General Partner, the Class B Unitholders holding at least two-thirds of the outstanding Class B Units and the Holders of a majority of the outstanding Qualified Registrable Securities. 12.3 Successors and Assigns. This Addendum shall be binding upon and inure to the benefit of and be enforceable by the respective permitted (as provided in Section 12.4) successors and assigns of the parties hereto, whether so expressed or not. Each of the Class B Holders, the Holders and the General Partner shall be entitled to enforce the respective obligations and receive the respective benefits of this Addendum notwithstanding that any Holder no longer is a Partner in the Partnership or a Class B Unitholder. 12.4 Subsequent Holders. (a) The rights of a Holder shall continue with respect to Qualified Registrable Securities of a Holder upon transfer of such securities by a Holder. The term "Holder" shall include any transferee of Qualified Registrable Securities, and the term "Qualified Registrable Securities" shall include the Qualified Registrable Securities transferred to such transferee but only so long as they continue to qualify as Qualified Registrable Securities. (b) Notwithstanding the foregoing, no rights hereunder shall inure to the benefit of, or be exercisable by, any transferee acquiring Qualified Registrable Securities in a public sale or public distribution. 12.5 Severability. Whenever possible, each provision of this Addendum will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Addendum is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Addendum. 12.6 Descriptive Headings. The descriptive headings of this Addendum are inserted for convenience only and shall not limit or otherwise affect the meaning hereof. 12.7 Changes in Outstanding Securities. The provisions of this Addendum regarding REIT Shares and Qualified Registrable Securities shall apply to securities of the General Partner or any successor or assign of the General Partner (whether by merger, consolidation, sale of assets or otherwise) that may be issued in respect of, or by reason of any stock dividend, stock split, stock issuance, reverse stock split, combination, recapitalization, reclassification, merger, consolidation or otherwise. Upon the occurrence of any of such events, the definitions of REIT Shares and Qualified Registrable Securities shall be appropriately modified by the Board of Directors of the General Partner. 12.8 Exchange Act Reports. The General Partner covenants that it will timely file the reports required to be filed by it under the Exchange Act (including but not limited to the reports under Section 13 of the Exchange Act referred to in subparagraph (c)(1) of Rule 144 under the Securities Act), and will take such further action as any Holder of Qualified Registrable Securities may reasonably request, all to the extent required from time to time to enable such Holder to sell Qualified Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 under the Securities Act. Upon the request of any Holder of Qualified Registrable Securities, the General Partner will deliver to such Holder a written statement as to whether it has complied with the requirements of this Section 12.8. 12.9 Reissuance of Class B Units. Unless otherwise specifically stated in the designation of any series, Class B Units which have been redeemed or purchased by the Partnership may be canceled by the General Partner or may have the status of authorized and unissued Class B Units and may be reissued as Class B Units, or may be reissued as a part of the series for which they were originally a part or may be reclassified and reissued as part of a new series of Class B Units to be established by the General Partner or as part of any other series of Class B Units. 10 FELCOR LODGING LIMITED PARTNERSHIP --------------------- ANNEX NO. 1 TO ADDENDUM NO. 1 TO SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP --------------------- [Intentionally Deleted] FELCOR LODGING LIMITED PARTNERSHIP --------------------- ANNEX NO. 2 TO ADDENDUM NO. 1 TO SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP --------------------- DESIGNATION OF CLASS B UNITS, SERIES II The General Partner of FelCor Lodging Limited Partnership, a Delaware limited partnership (the "Partnership"), pursuant to the authority expressly granted to the General Partner by the Amended and Restated Agreement of Limited Partnership of FelCor Lodging Limited Partnership, as amended (the "Agreement"), and Addendum No. 1 to the Agreement (the "Addendum"), and in particular Sections 1.4 and 4.6 of the Agreement and Section 2 of the Addendum, has approved this Annex No. 2 to the Addendum (the "Annex"), which Annex is a part of the Addendum for all purposes, to create and provide for the issue of a series of Class B Units and to fix the designations, preferences and relative, participating, optional or other special rights, powers and duties thereof as follows (initially capitalized terms used without definition herein having the meanings set forth therefor in the Agreement and the Addendum): 1. Designation of Series. A series of Class B Units is hereby designated the "Class B Units, Series II" of the Partnership. The Class B Units, Series II shall have the preferences and relative, participating, optional or other special rights, powers and duties that are set forth in this Annex and the Addendum and, to the extent permitted by this Annex and the Addendum, established by the General Partner and set forth in any amendments to this Annex or the Addendum. 2. Authorized Number of Class B Units, Series II. 350,000 3. Preferences, Rights, Powers and Duties. The Class B Units, Series II will have all of the same preferences, rights, powers and duties as the other Class B Units and, in addition thereto, will have the preferences, rights, powers and duties set forth in this Annex. Other Class B Units that are not part of this Series II shall not be entitled or subject to the preferences, rights, powers and duties set forth in this Annex. 4. Shelf Registration. Notwithstanding the provisions of Section 5.1 of the Addendum, the General Partner does not intend to effect the Shelf Registration until after May 30, 1996. Consequently, if the Class B Unitholder elects to obtain a redemption of any Class B Units, Series II prior to the effectiveness of such Shelf Registration, the condition specified in the first sentence of Section 5.1 does not apply and unregistered REIT Shares may be issued in redemption of the Class B Units, Series II by the General Partner or the Partnership. However, the General Partner covenants to effect the Shelf Registration of such REIT Shares no later than July 1, 1996. The General Partner shall only be obligated to maintain the effectiveness of the Shelf Registration for a period of 30 months after July 1, 1996. Notwithstanding the foregoing, if for any reason the effectiveness of the Shelf Registration is suspended or it ceases to be available for resales by any Holder of the Holder's Qualified Registrable Securities thereunder, the 30-month registration period shall be extended by the aggregate number of days of such suspension or nonavailability. 5. Qualified Registrable Securities. For the purpose of this Annex only, the definition of the term "Qualified Registrable Securities" in the Addendum shall be deemed amended by replacing the words "Class B Units" with "Class B Units, Series II." 6. Commencement of Redemption Rights. The redemption rights arising under Section 7.5(a) of the Agreement with respect to a Class B Unitholder's Class B Units, Series II shall not be exercisable prior to July 1, 1996. A Class B Unitholder may elect to require the Partnership to redeem his Class B Units, Series II after that date. 7. Amendments. This Annex may be amended only with the written consent of the General Partner and each Class B Unitholder that owns any Class B Units, Series II. 2 FELCOR LODGING LIMITED PARTNERSHIP --------------------- ADDENDUM NO. 2 TO SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP --------------------- DESIGNATION OF SERIES A CUMULATIVE CONVERTIBLE PREFERRED UNITS The General Partner of FelCor Lodging Limited Partnership, a Delaware limited partnership (the "Partnership"), pursuant to the authority expressly granted to the General Partner by the Second Amended and Restated Agreement of Limited Partnership of FelCor Lodging Limited Partnership, as amended (the "Agreement"), and in particular Sections 1.4 and 4.6 thereof, has approved this Addendum No. 2 to the Agreement (the "Addendum"), which Addendum is a part of the Agreement for all purposes, to create and provide for the issue of a class of Partnership Units and to fix the designations, preferences and relative, participating, optional or other special rights, powers and duties thereof as follows: 1. Designation of Class. A class of units of the Partnership is hereby authorized and designated as the "Series A Cumulative Convertible Preferred Units" (the "Series A Preferred Units"). The Series A Preferred Units shall have the preferences and relative, participating, optional or other special rights, powers and duties that are set forth in this Addendum and to the extent permitted by this Addendum, established by the General Partner and set forth in any amendments to the Agreement or any amendments or annexes to this Addendum. 2. Authorized Number of Series A Preferred Units. The authorized number of Series A Preferred Units shall be 6,900,000. 3. Preferences, Rights, Powers and Duties. 3.1 Definitions. For purposes of the Series A Preferred Units, the following terms shall have the meanings indicated: "Act" shall mean the Securities Act of 1933, as amended. "Addendum" shall have the meaning set forth in the preamble hereof. "Agreement" shall have the meaning set forth in the preamble hereof. "Business Day" shall mean any day other than a Saturday, Sunday or a day on which state or federally-chartered banking institutions in Texas or New York are not required to be open. "Call Date" shall have the meaning set forth in Section 3.4(b). "Common Unit" shall mean the units of partnership interest of the Partnership not designated as Preferred Units. "Common Stock" shall mean the common stock, $0.01 par value per share, of the General Partner. "Conversion Date" shall have the meaning set forth in Section 3.5(a). "Conversion Price" shall mean the conversion price per Common Unit for which the Series A Preferred Units are convertible, as such Conversion Price may be adjusted pursuant to Section 3.5. The initial Conversion Price shall be $32.25 (equivalent to a conversion rate of 0.7752 Common Units for each Series A Preferred Unit). "Current Market Price" of Common Units shall mean the equivalent of the current market price of the Common Stock. The current market price of the Common Stock or any other class of capital stock or other security of the General Partner or any other issuer for any day shall mean the last reported sales price, regular way on such day, or, if no sale takes place on such day, the average of the reported closing bid and asked prices on such day, regular way, in either case as reported on the New York Stock Exchange ("NYSE") or, if such security is not listed or admitted for trading or, if not listed or admitted for trading on any national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or, if such security is not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for such security on such day shall not have been reported through NASDAQ, the average of the bid and asked prices on such day as furnished by any NYSE member firm regularly making a market in such security selected for such purpose by the General Partner. "Distribution Payment Date" shall mean the last calendar day of January, April, July and October in each year, commencing on July 31, 1996; PROVIDED, HOWEVER, that if any Distribution Payment Date falls on any day other than a Business Day, the distribution payment due on such Distribution Payment Date shall be paid on the Business Day immediately following such Distribution Payment Date. "Distribution Period" shall mean quarterly distribution periods commencing January 1, March 1, June 1 and September 1 of each year and ending on and including the day preceding the first day of the next succeeding Distribution Period (other than the initial Distribution Period, which shall commence on May 6, 1996 and end on and include June 30, 1996). "Fair Market Value" shall mean the average of the daily Current Market Prices of a Common Unit during the five (5) consecutive Trading Days selected by the Partnership commencing not more than twenty (20) Trading Days before, and ending not later than, the earlier of the day in question and the day before the "ex" date with respect to the issuance or distribution requiring such computation. The term "'ex' date," when used with respect to any issuance or distribution, means the first day on which the shares of Common Stock trade regular way, without the right to receive such issuance or distribution, on the exchange or in the market, as the case may be, used to determine that day's Current Market Price. "General Partner" shall mean FelCor Lodging Trust Incorporated, a Maryland corporation, which is the sole general partner of the Partnership. "Issue Date" shall mean the date on which the Partnership first issues a Series A Preferred Unit. "Junior Units" shall have the meaning set forth in Section 3.6(c). "Parity Units" shall have the meaning set forth in Section 3.6(b). "Partnership" shall have the meaning set forth in the preamble hereof. "Person" shall mean any individual, partnership, limited liability company, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. "Preferred Units" shall mean units of partnership interest of the Partnership designated as having certain preferences to the Common Units with respect to distributions or upon liquidation of the Partnership. "Series A Preferred Stock" shall mean the $1.95 Series A Cumulative Convertible Preferred Stock, $0.01 par value and $25.00 liquidation preference per share, of the General Partner. 2 "Series A Preferred Units" shall have the meaning set forth in Section 1. "set apart for payment" shall be deemed to include, without any action other than the following, the recording by the Partnership in its accounting ledgers of any accounting or bookkeeping entry which indicates, pursuant to a declaration of dividends or other distribution by the Partnership, the allocation of funds to be so paid on any series or class of capital units of the Partnership; PROVIDED, HOWEVER, that if any funds for a class or series of Junior Units or any class or series of Parity Units are placed in a separate account of the Partnership or delivered to a disbursing, paying or other similar agent, then "set apart for payment" with respect to the Series A Preferred Units shall mean placing such funds in a separate account or delivering such funds to a disbursing, paying or other similar agent. "Trading Day" shall mean any day on which the Common Stock is traded on the NYSE, or if such securities are not listed or admitted for trading on the NYSE, on the principal national securities exchange on which such securities are listed or admitted, or if not listed or admitted for trading of any national securities exchange, on the National Market System of NASDAQ, or if such securities are not quoted on such National Market System, in the applicable securities market in which the securities are traded. Initially capitalized terms used without definition herein shall have the meanings set forth therefor in the Agreement. Other terms defined herein have the meanings so given them. Whenever the context requires, the gender of all words used in this Addendum shall include the masculine, feminine and neuter form of such words, and the singular form shall include the plural and vice versa. 3.2 Distributions. (a) The holders of the Series A Preferred Units shall be entitled to receive, when, as and if declared by the General Partner out of funds legally available for that purpose, distributions payable in cash in an amount per Series A Preferred Unit equal to the greater of $1.95 per annum or the cash distributions declared or paid for the corresponding period (determined on each Distribution Payment Date) on the number of Common Units, or portion thereof, into which each Series A Preferred Unit is convertible (under Section 3.5). Such distributions shall be cumulative from May 6, 1996, whether or not in any Distribution Period or Periods there shall be funds of the Partnership legally available for the payment of such distributions, and shall be payable quarterly, when, as and if declared by the General Partner, in arrears on Distribution Payment Dates, commencing on the first Distribution Payment Date after the Issue Date. Each such distribution shall be payable in arrears to the holders of record of the Series A Preferred Units, as they appear on the records of the Partnership at the close of business on such record dates, not more than sixty (60) days preceding such Distribution Payment Dates thereof, as shall be fixed by the General Partner. Accrued and unpaid distributions for any past Distribution Periods may be declared and paid at any time, without reference to any regular Distribution Payment Date, to holders of record on such date, not exceeding forty-five (45) days preceding the payment date thereof, as may be fixed by the General Partner. (b) The amount of distributions payable for each full Distribution Period for the Series A Preferred Units shall be computed by dividing the annual distribution rate by four (4). The amount of distributions payable for any period shorter or longer than a full Distribution Period, on the Series A Preferred Units shall be computed on the basis of twelve (12), thirty (30) day months and a 360-day year. Holders of the Series A Preferred Units shall not be entitled to any distributions, whether payable in cash, property or units, in excess of cumulative distributions, as herein provided, on the Series A Preferred Units. No interest, or sum of money in lieu of interest, shall be payable in respect of any distribution payment or payments on the Series A Preferred Units that may be in arrears. (c) So long as any of the Series A Preferred Units are outstanding, no distributions, except as described in the immediately following sentence, shall be declared or paid or set apart for payment on any class or series of Parity Units for any period unless full cumulative distributions have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Series A Preferred Units for all Distribution Periods terminating on or prior to the Distribution Payment 3 Date on such class or series of Parity Units. When distributions are not paid in full or a sum sufficient for such payment is not set apart, as aforesaid, all distributions declared upon the Series A Preferred Units and all distributions declared upon any other class or series of Parity Units shall be declared ratably in proportion to the respective amounts of distributions accumulated and unpaid on the Series A Preferred Units and accumulated and unpaid on such Parity Units. (d) So long as any of the Series A Preferred Units are outstanding, no distributions (other than dividends or distributions paid in units of, or options, warrants or rights to subscribe for or purchase units of, Junior Units), shall be declared or paid or set apart for payment or other distribution declared or made upon Junior Units, nor shall Junior Units be redeemed, purchased or otherwise acquired (other than a redemption, purchase or other acquisition of Common Units made for purposes of an employee incentive or benefit plan of the Partnership for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any such units) by the Partnership, directly or indirectly (except by conversion into or exchange for Junior Units)), unless in each case (i) the full cumulative distributions on all outstanding Series A Preferred Units and any other Parity Units shall have been paid or set apart for payment for all past Distribution Periods with respect to the Series A Preferred Units and all past distribution periods with respect to such Parity Units and (ii) sufficient funds shall have been paid or set apart for the payment of the distribution for the current Distribution Period with respect to the Series A Preferred Units and the current Distribution Period with respect to such Parity Units. 3.3 Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Partnership, whether voluntary or involuntary, before any payment or distribution of the assets of the Partnership (whether capital or surplus) shall be made to or set apart for the holders of Junior Units, the holders of the Series A Preferred Units shall be entitled to receive twenty-five Dollars ($25.00) per Series A Preferred Unit plus an amount equal to all distributions (whether or not earned or declared) accrued and unpaid thereon to the date of final distribution to such holders, but such holders shall not be entitled to any further payment. If, upon any liquidation, dissolution or winding up of the Partnership, the assets of the Partnership, or proceeds thereof, distributable among the holders of the Series A Preferred Units shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any other class or series of Parity Units, then such assets, or the proceeds thereof, shall be distributed among the holders of the Series A Preferred Units and any such other Parity Units ratably in accordance with the respective amounts that would be payable on such Series A Preferred Units and any such other Parity Units if all amounts payable thereon were paid in full. For the purposes of this Section 3.3, (i) a consolidation or merger of the Partnership with one or more Persons, (ii) a sale or transfer of all or substantially all of the assets of the Partnership, or (iii) a statutory exchange of units shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Partnership. (b) Subject to the rights of the holders of any series or class or classes of Parity Units, after payment shall have been made in full to the holders of the Series A Preferred Units, as provided in this Section 3.3, any other series or class or classes of Junior Units shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Series A Preferred Units shall not be entitled to share therein. 3.4 Redemption. (a) The Series A Preferred Units shall be redeemable by the Partnership solely when, as, and if any share of the Series A Preferred Stock is redeemed by the General Partner and in the same proportion as shares of the Series A Preferred Stock are redeemed by the General Partner so that the number of Series A Preferred Units remaining unredeemed shall be the same as, and at all times equal to, the number of shares of Series A Preferred Stock remaining unredeemed. The Series A Preferred Stock is not redeemable by the General Partner prior to April 30, 2001, and, therefore, the Series A Preferred Units shall not be redeemable by the Partnership prior to such date. 4 (b) Upon redemption of the Series A Preferred Units by the Partnership on the date specified in the notice to holders required under subparagraph (d) of this Section 3.4 (the "Call Date"), each Series A Preferred Unit called for redemption shall (i) be converted into a number of Common Units equal to the liquidation preference (excluding any accrued and unpaid distributions) of the Series A Preferred Units being redeemed divided by the Conversion Price as of the opening of business on the Call Date or (ii) be redeemed in cash at a price per unit equal to the aggregate Current Market Price (determined as of the date of the notice of redemption) of the number of Common Units into which the Series A Preferred Units are then convertible divided by the then current Conversion Price, in either case to the same extent and in the same amounts as the shares of Series A Preferred Stock are redeemed by the General Partner. Upon any redemption of the Series A Preferred Units, the Partnership shall pay any accrued and unpaid distributions in arrears for any full Distribution Period ending on or prior to the Call Date. If the Call Date falls after a distribution payment record date and prior to the corresponding Distribution Payment Date, then each holder of Series A Preferred Units at the close of business on such distribution payment record date shall be entitled to the distribution payable on such units on the corresponding Distribution Payment Date. Except as provided above, the Partnership shall make no payment or allowance for unpaid distributions, whether or not in arrears, on Series A Preferred Units called for redemption or on the Common Units issued upon such redemption. (c) If full cumulative distributions on the Series A Preferred Units and any other class or series of Parity Units have not been paid or declared and set apart for payment, the Series A Preferred Units may not be redeemed in part and the Partnership may not purchase or acquire Series A Preferred Units, otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of Series A Preferred Units. (d) If the Partnership shall redeem Series A Preferred Units pursuant to this Section 3.4, notice of such redemption shall be given to the holders of the Series A Preferred Units called for redemption as soon as practicable after notice of redemption of the Series A Preferred Stock is given by the General Partner. From and after the Call Date (unless the Partnership shall fail to make available a number of the Common Units or amount of cash necessary to effect such redemption), (i) except as otherwise provided herein, distributions on the Series A Preferred Units so called for redemption shall cease to accrue, (ii) such units shall no longer be deemed to be outstanding, and (iii) all rights of the holders thereof as holders of Series A Preferred Units shall cease (except the rights to receive the Common Units and cash payable upon such redemption, without interest thereon, upon surrender and endorsement of their certificates if so required to receive any distributions payable thereon). As promptly as practicable after the surrender in accordance with such notice of the certificates for any such units so redeemed (properly endorsed or assigned for transfer, if the Partnership shall so require and if the notice shall so state), such units shall be exchanged for certificates of Common Units and any cash (without interest thereon) for which such units have been redeemed. If fewer than all the outstanding Series A Preferred Units are to be redeemed, units to be redeemed shall be selected by the Partnership from outstanding Series A Preferred Units not previously called for redemption by lot or pro rata (as nearly as may be) or by any other method determined by the Partnership in its sole discretion to be equitable. If fewer than all the Series A Preferred Units represented by any certificate are redeemed, then new certificates representing the unredeemed units shall be issued without cost to the holder thereof. (e) No fractional units or scrip representing fractions of Common Units shall be issued upon redemption of the Series A Preferred Units. Instead of any fractional interest in a Common Unit that would otherwise be deliverable upon the redemption of a Series A Preferred Unit, the Partnership shall pay to the holder of such unit an amount in cash (computed to the nearest cent) based upon the Current Market Price of Common Units on the Trading Day immediately preceding the Call Date. If more than one (1) unit shall be surrendered for redemption at one time by the same holder, the number of full Common Units issuable, or cash paid, upon redemption thereof shall be computed on the basis of the aggregate number of Series A Preferred Units so surrendered. 5 3.5 Mandatory Conversion. Series A Preferred Units shall be automatically convertible into Common Units, as follows: (a) When, as and if any share of the Series A Preferred Stock is converted into Common Stock, then (and solely in such event) a Series A Preferred Unit shall automatically be converted into Common Units in the same proportion as shares of the Series A Preferred Stock are converted into shares of Common Stock so that the number of shares of Series A Preferred Stock remaining unconverted (if any) shall be the same as, and at all times equal to, the number of Series A Preferred Units remaining unconverted (if any). The Partnership or the General Partner shall cause a notice of such mandatory conversion to be mailed, postage prepaid, to the holders of the Series A Preferred Units at their respective addresses appearing on the unit transfer records of the Partnership. The notice shall set forth (i) the effective date of the conversion (which shall be the same date upon which the corresponding shares of Series A Preferred Stock are converted into Common Stock) (the "Conversion Date"), (ii) with respect to each holder, the number of Series A Preferred Units to be converted together with the number of Common Units to be issued upon conversion, and (iii) the address of the office of the General Partner where such the Series A Preferred Units called for conversion shall be surrendered. Any notice which is mailed in the manner provided herein shall be conclusively deemed to have been duly given, whether or not the holder of the Series A Preferred Units receives such notice, and failure to duly give such notice by mail, or any defect in such notice, to any holder of the Series A Preferred Units shall not affect the validity of the conversion thereof into Common Units. (b) On or after the Conversion Date, the holder of each Series A Preferred Unit to be converted shall surrender the certificate representing such unit, duly endorsed or assigned to the Partnership or in blank, at the office of the General Partner. Unless the units issuable on conversion are to be issued in the same name as the name in which such Series A Preferred Unit is registered, each unit surrendered for conversion shall be accompanied by instruments of transfer, in form satisfactory to the Partnership, duly executed by the holder or such holder's duly authorized attorney and an amount sufficient to pay any transfer or similar tax (or evidence reasonably satisfactory to the Partnership demonstrating that such taxes have been paid). Holders of Series A Preferred Units at the close of business on a distribution payment record date shall be entitled to receive the distribution payable on such units on the corresponding Distribution Payment Date notwithstanding the conversion thereof following such distribution payment record date and prior to such Distribution Payment Date. However, Series A Preferred Units called for conversion during the period between the close of business on any distribution payment record date and the opening of business on the corresponding Distribution Payment Date (except units converted after the issuance of notice of redemption with respect to a Call Date during such period, such Series A Preferred Units being entitled to such distribution on the Distribution Payment Date) shall be accompanied by a payment of an amount equal to the distribution payable on such units on such Distribution Payment Date. Each holder of Series A Preferred Units called for conversion on a distribution payment record date shall on such Distribution Payment Date receive the distribution payable by the Partnership on such Series A Preferred Units on such date, and the holder of such units need not include payment of the amount of such distribution upon conversion of the Series A Preferred Units. Except as provided above, the Partnership shall make no payment or allowance for unpaid distributions, whether or not in arrears, on Series A Preferred Units called for conversion or for distributions on the Common Units issued upon such conversion. As promptly as practicable after the surrender of certificates for Series A Preferred Units as aforesaid, the Partnership shall issue and shall deliver at the office of the General Partner to such holder, or on his or her written order, a certificate or certificates for the number of full Common Units issuable upon the conversion of such units in accordance with provisions of this Section 3.5, and any factional interest in respect of a Common Unit arising upon such conversion shall be settled as provided in paragraph (c) of this Section 3.5. If fewer than all the outstanding Series A Preferred Units are to be converted, units to be converted shall be selected by the Partnership from outstanding Series A Preferred Units not previously called for conversion by lot or pro rata (as nearly as may be) or by any other method determined by the Partnership in its sole discretion 6 to be equitable. If fewer than all the Series A Preferred Units represented by any certificate are converted, then new certificates representing the unconverted units shall be issued without cost to the holder thereof. Each conversion shall be deemed to have been effected immediately prior to the close of business on the Conversion Date and the Person or Persons in whose name or names any certificate or certificates for Common Units shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the units represented thereby at such time on the Conversion Date and such conversion shall be at the Conversion Price in effect at such time on the Conversion Date unless the unit transfer books of the Partnership shall be closed on that date, in which event such Person or Persons shall be deemed to have become holder or holders of record at the close of business on the next succeeding day on which such unit transfer books are open, but such conversion shall be at the Conversion Price in effect on the Conversion Date. On or after the Conversion Date, (i)(a) all distributions upon the Series A Preferred Units called for conversion shall cease and (b) all rights of the holders of the Series A Preferred Units called for conversion shall cease, except for the right to receive Common Units, and (ii) the Series A Preferred Units called for conversion shall no longer be deemed to be outstanding. (c) No fractional units or scrip representing Common Units shall be issued upon conversion of the Series A Preferred Units. Instead of any fractional interest in a Common Unit that would otherwise be deliverable upon the conversion of a Series A Preferred Unit, the Partnership shall pay to the holder of such unit an amount in cash (computed to the nearest cent) based upon the Current Market Price of Common Units on the Trading Day immediately preceding the Conversion Date. If more than one (1) unit of the same holder shall be called for conversion at one time, the number of full Common Units issuable, or cash paid, upon conversion thereof shall be computed on the basis of the aggregate number of Series A Preferred Units so converted. (d) The Conversion Price shall be adjusted from time to time in the same manner and to the same extent as the conversion price with respect to the Series A Preferred Stock is adjusted from time to time so that the Conversion Price shall be the same as and at all times equal to the conversion price of the Series A Preferred Stock. (e) Prior to the delivery of any securities that the Partnership shall be obligated to deliver upon conversion of the Series A Preferred Units, the Partnership shall endeavor to comply with all federal and state laws and the regulations promulgated thereunder requiring the registration of such securities with, or any approval of or consent to the delivery thereof, by any governmental authority. (f) The Partnership will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of Common Units or other securities or property on conversion of the Series A Preferred Units pursuant hereto; PROVIDED, HOWEVER, that the Partnership shall not be required to pay any tax that may be payable in respect of any transfer involved in the issue or delivery of Common Units or other securities or property in a name other than that of the holder of the Series A Preferred Units to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue or delivery has paid to the Partnership the amount of any such tax or established, to the reasonable satisfaction of the Partnership, that such tax has been paid. 3.6 Ranking. Any class or series of units of the Partnership shall be deemed to rank: (a) prior to the Series A Preferred Units, as to the payment of distributions and as to distribution of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Series A Preferred Units; (b) on a parity with the Series A Preferred Units, as to the payment of distributions and as to distribution of assets upon liquidation, dissolution or winding up, whether or not the distribution rates, 7 distribution payment dates or redemption or liquidation prices per unit thereof be different from those of the Series A Preferred Units, if the holders of such class of units or series and the Series A Preferred Units shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid distributions per unit or liquidation preferences, without preference or priority one over the other ("Parity Units"); and (c) junior to the Series A Preferred Units, as to the payment of distributions or as to the distribution of assets upon liquidation, dissolution or winding up, if such units or series shall be Common Units or if the holders of the Series A Preferred Units shall be entitled to receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of such units or series ("Junior Units"). 3.7 Record Holders. The Partnership may deem and treat the record holder of any Series A Preferred Units as the true and lawful owner thereof for all purposes, and the Partnership shall not be affected by any notice to the contrary. 8 FELCOR LODGING LIMITED PARTNERSHIP --------------------- ADDENDUM NO. 3 TO SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP --------------------- DESIGNATION OF SERIES B CUMULATIVE REDEEMABLE PREFERRED UNITS The General Partner of FelCor Lodging Limited Partnership, a Delaware limited partnership (the "Partnership"), pursuant to the authority expressly granted to the General Partner by the Second Amended and Restated Agreement of Limited Partnership of FelCor Lodging Limited Partnership, as amended (the "Agreement"), and in particular Sections 1.4 and 4.6 thereof, has approved this Addendum No. 3 to the Agreement (the "Addendum"), which Addendum is a part of the Agreement for all purposes, to create and provide for the issue of a class of Partnership Units and to fix the designations, preferences and relative, participating, optional or other special rights, powers and duties thereof as follows: 1. Designation of Class. A class of units of the Partnership is hereby authorized and designated as the "Series B Cumulative Redeemable Preferred Units" (the "Series B Preferred Units"). The Series B Preferred Units shall have the preferences and relative, participating, optional or other special rights, powers and duties that are set forth in this Addendum and to the extent permitted by this Addendum, established by the General Partner and set forth in any amendments to the Agreement or any amendments or annexes to this Addendum. 2. Authorized Number of Series B Preferred Units. The authorized number of Series B Preferred Units shall be 57,500. 3. Preferences, Rights, Powers and Duties. 3.1 Definitions. For purposes of the Series B Preferred Units, the following terms shall have the meanings indicated: "Addendum" shall have the meaning set forth in the preamble hereof. "Agreement" shall have the meaning set forth in the preamble hereof. "Business Day" shall mean any day other than a Saturday, Sunday or a day on which state or federally-chartered banking institutions in Texas or New York are not required to be open. "Call Date" shall have the meaning set forth in Section 3.4(b). "Common Unit" shall mean the units of partnership interest of the Partnership not designated as Preferred Units. "Common Stock" shall mean the common stock, $0.01 par value per share, of the General Partner. "Distribution Payment Date" shall mean the last calendar day of January, April, July and October in each year, commencing on July 31, 1998; PROVIDED, HOWEVER, that if any Distribution Payment Date falls on any day other than a Business Day, the distribution payment due on such Distribution Payment Date shall be paid on the Business Day immediately following such Distribution Payment Date. "Distribution Period" shall mean quarterly distribution periods commencing February 1, May 1, August 1 and November 1 of each year and ending on and including the day preceding the first day of the next succeeding Distribution Period (other than the initial Distribution Period, which shall commence on May 7, 1998 and end on and include July 31, 1998). "General Partner" shall mean FelCor Lodging Trust Incorporated, a Maryland corporation, which is the sole general partner of the Partnership. "Issue Date" shall mean the date on which the Partnership first issues a Series B Preferred Unit. "Junior Units" shall have the meaning set forth in Section 3.6(c). "Parity Units" shall have the meaning set forth in Section 3.6(b). "Partnership" shall have the meaning set forth in the preamble hereof. "Preferred Units" shall mean units of partnership interest of the Partnership designated as having certain preferences to the Common Units with respect to distributions or upon liquidation of the Partnership. "Series B Preferred Stock" shall mean the 9% Series B Cumulative Redeemable Preferred Stock, $0.01 par value and $2,500.00 liquidation preference per share, of the General Partner. "Series B Preferred Units" shall have the meaning set forth in Section 1. "Set apart for payment" shall be deemed to include, without any action other than the following, the recording by the Partnership in its accounting ledgers of any accounting or bookkeeping entry which indicates, pursuant to a declaration of dividends or other distribution by the Partnership, the allocation of funds to be so paid on any series or class of capital units of the Partnership; PROVIDED, HOWEVER, that if any funds for a class or series of Junior Units or any class or series of Parity Units are placed in a separate account of the Partnership or delivered to a disbursing, paying or other similar agent, then "set apart for payment" with respect to the Series B Preferred Units shall mean placing such funds in a separate account or delivering such funds to a disbursing, paying or other similar agent. Initially capitalized terms used without definition herein shall have the meanings set forth therefor in the Agreement. Other terms defined herein have the meanings so given them. Whenever the context requires, the gender of all words used in this Addendum shall include the masculine, feminine and neuter form of such words, and the singular form shall include the plural and vice versa. 3.2 Distributions. (a) The holders of the Series B Preferred Units shall be entitled to receive, when, as and if declared by the General Partner out of funds legally available for that purpose, distributions payable in cash in an amount per Series B Preferred Unit equal to $225.00 per annum. Such distributions shall be cumulative from May 7, 1998, whether or not in any Distribution Period or Periods there shall be funds of the Partnership legally available for the payment of such distributions, and shall be payable quarterly, when, as and if declared by the General Partner, in arrears on Distribution Payment Dates, commencing on the first Distribution Payment Date after the Issue Date. Each such distribution shall be payable in arrears to the holders of record of the Series B Preferred Units, as they appear on the records of the Partnership at the close of business on such record dates, not more than sixty (60) days preceding such Distribution Payment Dates thereof, as shall be fixed by the General Partner. Accrued and unpaid distributions for any past Distribution Periods may be declared and paid at any time, without reference to any regular Distribution Payment Date, to holders of record on such date, not exceeding forty-five (45) days preceding the payment date thereof, as may be fixed by the General Partner. 2 (b) The amount of distributions payable for each full Distribution Period for the Series B Preferred Units shall be computed by dividing the annual distribution rate by four. The amount of distributions payable for any period shorter or longer than a full Distribution Period, on the Series B Preferred Units shall be computed on the basis of a 360-day year. consisting of twelve 30-day months. Holders of the Series B Preferred Units shall not be entitled to any distributions, whether payable in cash, property or units, in excess of cumulative distributions, as herein provided, on the Series B Preferred Units. No interest, or sum of money in lieu of interest, shall be payable in respect of any distribution payment or payments on the Series B Preferred Units that may be in arrears. (c) So long as any of the Series B Preferred Units are outstanding, no distributions, except as described in the immediately following sentence, shall be declared or paid or set apart for payment on any class or series of Parity Units for any period unless full cumulative distributions have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Series B Preferred Units for all Distribution Periods terminating on or prior to the Distribution Payment Date on such class or series of Parity Units. When distributions are not paid in full or a sum sufficient for such payment is not set apart, as aforesaid, all distributions declared upon the Series B Preferred Units and all distributions declared upon any other class or series of Parity Units shall be declared ratably in proportion to the respective amounts of distributions accumulated and unpaid on the Series B Preferred Units and accumulated and unpaid on such Parity Units. (d) So long as any of the Series B Preferred Units are outstanding, no distributions (other than dividends or distributions paid in units of, or options, warrants or rights to subscribe for or purchase units of, Junior Units), shall be declared or paid or set apart for payment or other distribution declared or made upon Junior Units, nor shall Junior Units be redeemed, purchased or otherwise acquired (other than a redemption, purchase or other acquisition of Common Units made for purposes of an employee incentive or benefit plan of the Partnership for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any such units) by the Partnership, directly or indirectly), unless in each case (i) the full cumulative distributions on all outstanding Series B Preferred Units and any other Parity Units shall have been paid or set apart for payment for all past Distribution Periods with respect to the Series B Preferred Units and all past distribution periods with respect to such Parity Units and (ii) sufficient funds shall have been paid or set apart for the payment of the distribution for the current Distribution Period with respect to the Series B Preferred Units and the current Distribution Period with respect to such Parity Units. 3.3 Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Partnership, whether voluntary or involuntary, before any payment or distribution of the assets of the Partnership (whether capital or surplus) shall be made to or set apart for the holders of Junior Units, the holders of the Series B Preferred Units shall be entitled to receive two thousand five hundred dollars ($2,500.00) per Series B Preferred Unit plus an amount equal to all distributions (whether or not earned or declared) accrued and unpaid thereon to the date of final distribution to such holders, but such holders shall not be entitled to any further payment. If, upon any liquidation, dissolution or winding up of the Partnership, the assets of the Partnership, or proceeds thereof, distributable among the holders of the Series B Preferred Units shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any other class or series of Parity Units, then such assets, or the proceeds thereof, shall be distributed among the holders of the Series B Preferred Units and any such other Parity Units ratably in accordance with the respective amounts that would be payable on such Series B Preferred Units and any such other Parity Units if all amounts payable thereon were paid in full. For the purposes of this Section 3.3, (i) a consolidation or merger of the Partnership with one or more Persons, (ii) a sale or transfer of all or substantially all of the assets of the Partnership, or (iii) a statutory exchange of units shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Partnership. (b) Subject to the rights of the holders of any series or class or classes of Parity Units, after payment shall have been made in full to the holders of the Series B Preferred Units, as provided in this Section 3.3, any other series or class or classes of Junior Units shall, subject to the respective terms and 3 provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Series B Preferred Units shall not be entitled to share therein. 3.4 Redemption. (a) The Series B Preferred Units shall be redeemable by the Partnership solely when, as, and if any share of the Series B Preferred Stock is redeemed by the General Partner and in the same proportion as shares of the Series B Preferred Stock are redeemed by the General Partner so that the number of Series B Preferred Units remaining unredeemed shall be the same as, and at all times equal to, the number of shares of Series B Preferred Stock remaining unredeemed. The Series B Preferred Stock is not redeemable by the General Partner prior to May 7, 2003, and, therefore, the Series B Preferred Units shall not be redeemable by the Partnership prior to such date. (b) Upon redemption of the Series B Preferred Units by the Partnership on the date specified in the notice to holders required under subparagraph (d) of this Section 3.4 (the "Call Date"), each Series B Preferred Unit called for redemption shall be redeemed in cash at a price per unit equal to $2,500.00 per unit, plus all accrued and unpaid distributions thereon to the Call Date, without interest, to the extent that the Partnership has funds legally available therefor. The redemption price of the Series B Preferred Units (other than any portion thereof consisting of accrued and unpaid distributions) must be paid solely from the sale proceeds of other equity interests of the Partnership and not from any other source. For purposes of the foregoing sentence, "equity interests" means any general partner interests, limited partner interests, preferred units, depositary shares, interests, participations, or other ownership interests (however designated) and any rights (other than debt securities convertible into or exchangeable for partnership units) or options to purchase any of the foregoing. Distributions payable on the Series B Preferred Units for any period greater or less than a full dividend period will be computed on the basis of a 360-day year consisting of twelve 30-day months. Except as provided above, the Partnership shall make no payment or allowance for unpaid distributions, whether or not in arrears, on Series B Preferred Units called for redemption or on the equity interests issued upon such redemption. (c) If full cumulative distributions on the Series B Preferred Units and any other class or series of Parity Units have not been paid or declared and set apart for payment, the Series B Preferred Units may not be redeemed in part and the Partnership may not purchase or acquire Series B Preferred Units, otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of Series B Preferred Units. (d) If the Partnership shall redeem Series B Preferred Units pursuant to this Section 3.4, notice of such redemption shall be given to the holders of the Series B Preferred Units called for redemption as soon as practicable after notice of redemption of the Series B Preferred Stock is given by the General Partner. From and after the Call Date (unless the Partnership shall fail to make available the amount of cash necessary to effect such redemption), (i) except as otherwise provided herein, distributions on the Series B Preferred Units so called for redemption shall cease to accrue, (ii) such units shall no longer be deemed to be outstanding, and (iii) all rights of the holders thereof as holders of Series B Preferred Units shall cease (except the rights to receive the cash payable upon such redemption, without interest thereon, upon surrender and endorsement of their certificates). As promptly as practicable after the surrender in accordance with such notice of the certificates for any such units so redeemed (properly endorsed or assigned for transfer, if the Partnership shall so require and if the notice shall so state), such units shall be exchanged for cash (without interest thereon) for which such units have been redeemed. If fewer than all the outstanding Series B Preferred Units are to be redeemed, units to be redeemed shall be selected by the Partnership from outstanding Series B Preferred Units not previously called for redemption by lot or pro rata (as nearly as may be) or by any other method determined by the Partnership in its sole discretion to be equitable. If fewer than all the Series B Preferred Units represented by any certificate are redeemed, then new certificates representing the unredeemed units shall be issued without cost to the holder thereof. 4 3.5 Conversion. Holders of Series B Preferred Units shall have no conversion rights. 3.6 Ranking. Any class or series of units of the Partnership shall be deemed to rank: (a) prior to the Series B Preferred Units, as to the payment of distributions and as to distribution of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Series B Preferred Units; (b) on a parity with the Series B Preferred Units, as to the payment of distributions and as to distribution of assets upon liquidation, dissolution or winding up, whether or not the distribution rates, distribution payment dates or redemption or liquidation prices per unit thereof be different from those of the Series B Preferred Units, if the holders of such class of units or series and the Series B Preferred Units shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid distributions per unit or liquidation preferences, without preference or priority one over the other ("Parity Units"); the Series A Cumulative Convertible Preferred Units shall be Parity Units with respect to the Series B Preferred Units; and (c) junior to the Series B Preferred Units, as to the payment of distributions or as to the distribution of assets upon liquidation, dissolution or winding up, if such units or series shall be Common Units or if the holders of the Series B Preferred Units shall be entitled to receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of such units or series ("Junior Units"). 3.7 Record Holders. The Partnership may deem and treat the record holder of any Series B Preferred Units as the true and lawful owner thereof for all purposes, and the Partnership shall not be affected by any notice to the contrary. 5 EX-10.5 4 d95331ex10-5.txt MANAGEMENT AGREEMENT-FELCOR'S EMBASSY SUITES EXHIBIT 10.5 FORM OF MANAGEMENT AGREEMENT for FELCOR'S EMBASSY SUITES BRANDED HOTELS ARTICLE I THE HOTEL; OTHER RELATED AGREEMENTS ....................................................... 1 Section 1.01. The Hotel ................................................................... 1 Section 1.02. The Other License and Management Agreements ................................. 1 ARTICLE II TERM ...................................................................................... 1 Section 2.01. Term ........................................................................ 1 ARTICLE III MANAGER'S OBLIGATIONS Section 3.01. Manager's Obligations .................................................... 1 (a) Costs of the Partnership and Lessee ......................................... 2 (b) Personnel ................................................................... 2 (c) Hotel Policies .............................................................. 3 (d) Bank Accounts ............................................................... 3 (e) Operating Budgets ........................................................... 3 (f) Operating Statement ......................................................... 5 (g) Capital Budgets ............................................................. 5 (h) General Maintenance; Non-Capital Replacements ............................... 6 (i) Operating Equipment ......................................................... 6 (j) Operating Supplies .......................................................... 6 (k) Accounting Standards ........................................................ 6 (l) Marketing and Advertising ................................................... 6 (m) Permits and Licenses ........................................................ 6 (n) Lessee Meetings ............................................................. 7 (o) Insurance ................................................................... 7 (p) Lease and Concession Agreements ............................................. 7 (q) [Intentionally Deleted] ..................................................... 7 (r) Taxes and Assessments ....................................................... 7 (s) Compliance with Law ......................................................... 7 (t) Satisfaction of Obligations ................................................. 7 (u) Requests for Information .................................................... 8 (v) Discounts and Rebates ....................................................... 8 (w) Tax and Insurance Accruals .................................................. 8 ARTICLE IV LESSEE'S OBLIGATIONS ...................................................................... 8 Section 4.01. Lessee's Obligations ........................................................ 8 (a) License Agreement ........................................................... 8 (b) Licenses and Permits ........................................................ 8 (c) Operating Funds ............................................................. 8 (d) Capital Funds ............................................................... 9 (e) Payments to Manager ......................................................... 10 (f) Lessee's Representative ..................................................... 10 (g) Lessee's Right of Inspection and Review ..................................... 11 (h) Quiet and Peaceable Operation ............................................... 11
-i- ARTICLE V MANAGEMENT FEE ............................................................................ 11 Section 5.01. Management Fee .............................................................. 11 ARTICLE VI CLAIMS AND LIABILITY ...................................................................... 11 Section 6.01. Claims and Liability ........................................................ 11 Section 6.02. Survival .................................................................... 12 ARTICLE VII CLOSURE, EMERGENCIES AND DELAYS ........................................................... 12 Section 7.01. Events of Force Majeure ..................................................... 12 Section 7.02. Emergencies ................................................................. 12 ARTICLE VIII CONDEMNATION AND CASUALTY ................................................................. 13 Section 8.01. Condemnation ................................................................ 13 Section 8.02. Casualty .................................................................... 13 ARTICLE IX DEFAULT; TERMINATION RIGHTS ............................................................... 13 Section 9.01. Lessee's Default ............................................................ 13 Section 9.02. Manager Default ............................................................. 14 Section 9.03. [Intentionally deleted.] .................................................... 15 Section 9.04. Delays ...................................................................... 15 Section 9.05. Manager's Right to Terminate Upon Sale ...................................... 15 Section 9.06. Lessee's Special Rights of Termination ...................................... 15 Section 9.07. Transition Upon Termination ................................................. 16 ARTICLE X APPLICABLE LAW AND ARBITRATION ............................................................ 16 Section 10.01. Applicable Law ............................................................. 16 Section 10.02. Arbitration of Financial Matters ........................................... 17 Subsection 10.02.1. Matters to be Submitted to Arbitration ....................... 17 Subsection 10.02.2. The Accountants .............................................. 17 Subsection 10.02.3. Procedures ................................................... 17 Section 10.03. Performance During Disputes ................................................ 18 ARTICLE XI GENERAL PROVISIONS ........................................................................ 18 Section 11.01. Authorization .............................................................. 18 Section 11.02. Relationship ............................................................... 18 Section 11.03. Manager's Contractual Authority in the Performance of this Agreement ....... 18 Section 11.04. Further Actions ............................................................ 18 Section 11.05. Successors and Assigns ..................................................... 19 Section 11.06. Notices .................................................................... 19
-ii- Section 11.07. Documents .................................................................. 19 Section 11.08. Defense .................................................................... 19 Section 11.09. Waivers .................................................................... 20 Section 11.10. Changes .................................................................... 20 Section 11.11. Captions ................................................................... 20 Section 11.12. Severability ............................................................... 20 Section 11.13. Interest ................................................................... 20 Section 11.14. Reimbursement .............................................................. 20 Section 11.15. Agreement Not an Interest in Real Property ................................. 21 Section 11.16. Set Off .................................................................... 21 Section 11.17. Third Party Beneficiary .................................................... 21 Section 11.18. Brokerage .................................................................. 21 Section 11.19. Survival of Covenants ...................................................... 21 Section 11.20. Estoppel Certificate ....................................................... 22 Section 11.21. Other Agreements ........................................................... 22 Section 11.22. Periods of Time ............................................................ 22 Section 11.23. Preparation of Agreement ................................................... 22 Section 11.24. Exhibits ................................................................... 22 Section 11.25. Counterparts ............................................................... 22 Section 11.26. Attorneys' Fees and Other Cost ............................................. 22 Section 11.27. Entire Agreement ........................................................... 22
-iii- MANAGEMENT AGREEMENT This Management Agreement (the "Agreement") is made and entered into as of the ______________________ ("Effective Date"), by and between ______________ ____________________________________________, with offices located at 545 East John Carpenter Freeway, Suite 1300, Irving, TX 75062-3933 ("Lessee"), and ______ ____________________________________, with offices located at ______________ ______________________________ ("Manager"). ARTICLE I THE HOTEL; OTHER RELATED AGREEMENTS SECTION 1.01. THE HOTEL. The subject matter of this Agreement is the management by Manager of the "Hotel," as defined in the Embassy Suites License Agreement attached hereto as Exhibit "A" (the "License Agreement"), and located at __________________________________________. The Hotel is owned by FelCor Suites Limited Partnership, a Delaware limited partnership (the "Partnership"), and leased to Lessee pursuant to a lease entered into between the Partnership and Lessee covering the Hotel dated as of _____________ (hereinafter the "Percentage Lease"). The License Agreement shall exclusively govern Lessee's right to use the Embassy Suites "System" (as defined in the License Agreement) in connection with the operation of the Hotel; the Partnership shall have no right to use the Embassy Suites "System" except as expressly set forth in the License Agreement. Lessee hereby expressly acknowledges that neither Lessee nor the Partnership (Lessee and the Partnership are sometimes referred to herein collectively as "Owners") shall derive any rights in or to the use of the name ________________ or the Embassy Suites System from this Agreement. SECTION 1.02. THE OTHER LICENSE AND MANAGEMENT AGREEMENTS. Manager or its predecessor-in-interest, Embassy Suites, Inc., a Delaware corporation, has entered into other management agreements (the "Other Management Agreements") and other license agreements (the "Other License Agreements") in relation to those hotels listed on Exhibit "E" hereto (the "Other Hotels"). The Partnership or an affiliate of the Partnership entered into percentage leases with Lessee or an affiliate of Lessee covering the Other Hotels. ARTICLE II TERM SECTION 2.01. TERM. The term shall commence as of the date the Partnership enters into the Percentage Lease with Lessee covering the Hotel (the "Commencement Date") and, unless earlier terminated in the manner provided herein, shall continue for the term of years set forth in Exhibit "B" as measured from the Commencement Date ("Term"). ARTICLE III MANAGER'S OBLIGATIONS SECTION 3.01. MANAGER'S OBLIGATIONS. Manager, on behalf of Lessee and at Lessee's expense as provided for in this Agreement, shall direct the operation of the Hotel in accordance shall be exclusively responsible for directing the day-to-day activities of the Hotel and for establishing all policies and procedures relating to the management and operation of the Hotel, subject to the terms and conditions of this Agreement and the License Agreement. Except as herein specifically otherwise provided, all cost(s) and expense(s) incurred by Manager in connection with the performance of its obligations hereinafter set forth shall be Operating Costs and accordingly shall be paid from the Bank Account as hereinafter defined in Section 3.01(d) or the Operating Deficit Account as hereinafter defined in Section 4.01(c), as the case may be. Manager, during the Term, shall have the following duties and obligations: (a) Costs of the Partnership and Lessee. Pursuant to the terms of the Percentage Lease, the Partnership has agreed to pay, among other things (i) land, building and personal property taxes and assessments applicable to the Hotel, (ii) premiums and charges for the casualty insurance coverages specified on Exhibit "D", (iii) expenditures for capital replacements and (iv) expenditures for maintenance and repair of underground utilities and structural elements of the Hotel (collectively, "Partnership Costs"). To the extent this Agreement obligates or authorizes Manager to pay any such Partnership Costs, Manager shall pay such Partnership Costs on behalf of the Partnership to the extent of funds in the Bank Account(s), the Operating Deficit Account or the Reserve Fund (as such terms are defined below) and the Partnership and Lessee shall make such adjustments and payments to each other as may be necessary from time to time to take into account any such payments. Manager shall have no duty, obligation or liability to the Partnership or Lessee (i) to make any determination as to whether any expense required to be paid by Manager hereunder is a Partnership Cost or a cost of Lessee, (ii) to make any determination as to whether funds in the Bank Account(s), the Operating Deficit Account or the Reserve Fund belong to the Partnership or Lessee or (iii) to require that Partnership Costs be paid from funds which can be identified as belonging to the Partnership, or that other costs and expenses required to be paid by Lessee be paid from funds which can be identified as belonging to Lessee; it being the intent of the parties to this Agreement that Lessee and the Partnership shall look only to each other and not to Manager with respect to moneys that may be owed one to the other as a consequence of Manager's performance under this Agreement. (b) Personnel. Manager shall employ all personnel working at the Hotel (excluding any personnel employed by a lessee or concessionaire of space located in the Hotel) ("Hotel Personnel"). Manager (except to the extent provided below) shall be the sole judge of the fitness and qualification of all Hotel Personnel and shall have the sole and absolute right to hire, supervise, order, instruct, discharge and determine the compensation, benefits and terms of employment of all Hotel Personnel. In exercising such discretion, however, Manager shall use all reasonable efforts to hire the most qualified and competent personnel available, subject to budgetary and other constraints. Manager shall also have the right to use employees of Manager, Manager's parent and subsidiary and affiliated companies not located at the Hotel to provide services to the Hotel ("Off-Site Personnel") and to be reimbursed for travel and other out-of-pocket expenses (excluding any portion of such Off-Site Personnel's compensation or other general expenses) incurred by Off-Site Personnel in providing services for the Hotel; provided, however, travel and out-of-pocket expenses of officers of Manager and its parents and affiliates shall not be reimbursable. All expenses, costs (including, but not limited to, salaries, benefits and severance pay, to the extent provided for by Manager as part of its standard employment policies), liabilities and claims which are related to Hotel Personnel and all out-of-pocket expenses incurred by Off-Site Personnel in providing services to the Hotel that are reimbursed to -2- Manager shall be Operating Costs; provided, however, with respect to any moving expenses for any Hotel Personnel who has not been an employee at the Hotel for at least twenty-four (24) months, only that portion of such moving expenses equal to Lessee's Share (as hereinafter defined) shall constitute Operating Costs and the balance shall be paid by Manager and/or such employee. "Lessee's Share" shall mean a fraction having twenty-four (24) as its denominator and the number of months such person has been one of the Hotel Personnel as its numerator. All expenses for Off-Site Personnel shall be included as a separate category or item of the Operating Budgets or shall otherwise be approved by Lessee. Manager agrees that it will consult with Lessee regarding the hiring, transferring, or terminating of the General Manager and Director of Sales for the Hotel. Lessee shall be afforded an opportunity to review the resumes of, and to interview the candidates for these positions that Manager deems to be the best candidate(s) for each position. Manager and Lessee shall consult with each other concerning such decisions, and Manager agrees to give serious consideration to the views of Lessee, but in the event Manager and Lessee are not able to reach a mutually agreeable decision, the decision of Manager shall control. (c) Hotel Policies. Manager shall determine the terms of guest admittance to the Hotel, establish room rates, and use of rooms for commercial purposes, subject to the right of Lessee to identify from time to time certain individuals who shall be entitled to receive complimentary rooms as guests of Lessee. (d) Bank Accounts. Manager shall open and administer the Hotel's bank accounts in Lessee's name or the name of the Hotel at such banks as Manager and Lessee shall mutually agree ("Bank Account(s)"). All sums received from the operation of the Hotel and, except as otherwise provided in Section 4.01(c) below, all items paid by Manager arising by virtue of Manager's operation of the Hotel shall pass through the Bank Account(s). Manager's designees shall be exclusively authorized to administer and make withdrawals from the Bank Account(s). Each calendar month, Manager, on behalf of Lessee or the Partnership, as the case may be, shall disburse funds from the Bank Account(s) to the extent available for the items described on Exhibit "B." The same Bank Account(s) may be used for the Hotel that are also used for one or more of the Other Hotels and any sums deposited in such Bank Account(s) may be commingled; provided, however, no funds from any other hotel may be commingled with sums deposited in the Bank Account(s) from the operation of the Hotel or any Other Hotel. (e) Operating Budgets. The budget for calendar year 1997 has been prepared by Manager and provided to the Partnership (the "Operating Budget"). Manager, not less than forty-five (45) days prior to the commencement of each succeeding full or partial calendar year, shall submit to Lessee, for Lessee's approval, a proposed Operating Budget for the ensuing full or partial calendar year, as the case may be. Each Operating Budget shall be accompanied by, and shall include, a business plan which shall describe business objectives and strategies for the period covered by the Operating Budget. The business plan shall include without limitation an analysis of the market area in which the Hotel competes, a comparison of the Hotel and its business with competitive hotels, an analysis of categories of potential guests, and a description of sales and marketing activities designed to achieve and implement identified objectives and strategies. The Partnership shall not have the right to approve any Operating Budget. -3- Lessee's approval of the Operating Budget shall not be unreasonably withheld or delayed. Manager shall meet with Lessee to discuss the proposed Operating Budget and Lessee shall provide a written response to Manager approving or disapproving a proposed Operating Budget within twenty (20) days after the date Manager and Lessee have met to discuss the proposed Operating Budget. Lessee shall review the Operating Budget on a line-by-line basis. To be effective, any notice which disapproves a proposed Operating Budget must contain specific objections in reasonable detail to individual line items. If Lessee fails to provide an effective notice disapproving a proposed Operating Budget within such 20-day period, the proposed Operating Budget shall be deemed to be approved. If the proposed Operating Budget contains disputed budget item(s), Lessee and Manager agree to cooperate with each other in good faith to resolve the disputed or objectionable proposed item(s). In the event (i) Lessee and Manager are not able to reach mutual agreement concerning any disputed or objectionable item within a period of twenty (20) days after the date Lessee provides written notice of its objections to Manager, and (ii) the amount in dispute is in excess of fifty thousand dollars ($50,000), then either party shall be entitled to submit the dispute to arbitration in accordance with the provisions of Article X. If Lessee and Manager are unable to resolve the disputed or objectionable matter(s) prior to the commencement of the applicable calendar year, the undisputed portions of the proposed Operating Budget shall be deemed to be adopted and approved. The corresponding disputed line item(s) contained in the Operating Budget for the preceding calendar year shall be adjusted as set forth herein and shall be substituted in lieu of the disputed item in the proposed Operating Budget. Those line items which represent variable costs from year to year which are in dispute shall be determined by increasing the preceding calendar year's corresponding line items by an amount determined by Manager which does not exceed the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics of the United States Department of Labor, U.S. City Average, all items (1984-1986 = 100) for the calendar year prior to the calendar year with respect to which the adjustment to the line item is being calculated or any successor or replacement index thereto. The resulting Operating Budget obtained in accordance with the preceding sentence shall be deemed to be the Operating Budget in effect until such time as Manager and Lessee have resolved the item(s) objected to by Lessee. Manager may revise the Operating Budget from time to time, as necessary, to reflect any unpredicted significant changes, variables or events or to include significant, additional, unanticipated items of revenue and expense. Any such revision shall be submitted to Lessee for approval, which approval shall not be unreasonably withheld, delayed or conditioned. Manager may reallocate part or all of the amount budgeted with respect to any line item to another line item in the same Department (as hereinafter defined), but may not reallocate from one Department to another without Lessee's consent which shall not be unreasonably withheld or delayed. The term "Department" shall mean and refer to those general divisional categories shown in the Operating Budget (r.g., Guest Services Department or Administration Department), but shall not mean or refer to subcategories (g.g., linen replacement or uniforms) appearing in a divisional category. In addition, in the event actual Adjusted Gross Revenues (as defined on Exhibit "C" hereto) for any calendar period are greater than those provided for in the Operating Budget, the amounts approved in the Operating Budget for suite maintenance, guest services, food and beverage, telephone, utilities, marketing and hotel repair and maintenance for any -4- calendar month shall be automatically deemed to be increased to an amount that bears the same relationship (ratio) to the amounts budgeted for such items as actual Adjusted Gross Revenue for such month bears to the projected Adjusted Gross Revenue for such month. Lessee acknowledges that the Operating Budget is intended only to be a reasonable estimate of the Hotel's income and expenses for the ensuing calendar year. Manager shall not be deemed to have made any guarantee, warranty or representation whatsoever in connection with the Operating Budget. (f) Operating Statement. Manager shall prepare and furnish to Lessee, the following statements: (i) within fifteen (15) days after the end of each calendar month (Manager shall use all reasonable efforts to provide such reports within ten (10) days after the end of each calendar month, but in any respect not later than fifteen (15) days) a detailed profit and loss statement setting forth the results of the Hotel's operations for such calendar month and the calendar year to date, with a comparison to the then current Operating Budget; and a balance sheet setting forth the results of the Hotel's operations for the calendar year to date and the previous calendar year; (ii) within twenty (20) days after the end of each calendar quarter, a statement of Income Before Lessee's Overhead Expenses (as defined on Exhibit "C" hereto), including Income Before Lessee's Overhead Expenses from Hotel operations calendar year to date: (iii) within twenty (20) days after the end of each calendar year, a balance sheet together with a comparison to the previous calendar year, a related statement of profit and loss (including all supporting departmental schedules of revenues and expenses), together with a comparison to the previous calendar year, and having annexed thereto a computation in reasonable detail of the Basic Management Fee and the Incentive Management Fee for such calendar year; and (iv) such other additional statements, computations and reports as Lessee shall reasonably request. (g) Capital Budgets. The capital budget for ____ has been prepared by Manager and provided to the Partnership (the "Capital Budget"). Manager, not less than forty-five (45) days prior to the commencement of each succeeding calendar year, shall submit to Lessee a recommended Capital Budget for the ensuing full or partial calendar year, as the case may be, for furnishings, equipment, and Hotel capital replacement items as shall be required to operate the Hotel in accordance with the standards referred to in the License Agreement. Manager, to the extent it is able to do so without compromising compliance with the minimum standards required under the terms of the License Agreement, shall take into consideration the amount of funds available to pay for the proposed capital expenditures. Manager shall also identify for Lessee those projects that are required to meet the minimum standards of the License Agreement and give priority to such items. Lessee and Manager shall meet to discuss the proposed Capital Budget and Lessee shall be required to make specific written objections to a proposed Capital Budget in the manner and within the same time periods specified in Section 3.01(e) with respect to an Operating Budget. Lessee agrees not to unreasonably withhold or delay its consent. Manager, at Lessee's expense, shall be responsible for supervising the design, installation and construction of alterations or additions to, or rebuilding or renovation of, the Hotel, including any additions to Hotel furnishings and equipment (collectively, "Capital Improvements"). Lessee shall have the right to approve and inspect Capital Improvements and any mortgagee having a first lien on Lessee's leasehold estate in the Hotel ("Lessee's Mortgagee") or a first lien on the Partnership's fee estate in the Hotel (the "Partnership's Mortgagee") shall also have any right of approval or inspection of the Capital Improvements set forth in the mortgage, deed of trust or other loan documents (collectively, the "Financing Documents") (but only if and to the extent the -5- Manager has been provided with copies of the Financing Documents). The Partnership shall not have the right to approve any Capital Budget. After a Capital Budget has been adopted, it shall be subject to review and modification in the event unpredicted or unanticipated capital expenditures are required during any calendar year due to an emergency situation or otherwise. Manager and Lessee each agree not to unreasonably withhold or delay its consent to a proposed modification of a Capital Budget. Any amendment that is mutually agreed upon shall be set forth in writing and signed by both parties. (h) General Maintenance: Non-Capital Replacements. Manager shall supervise the maintenance, repair and replacement of fixtures, furnishings and equipment regardless whether such expenditures are expensed or capitalized and amortized. (i) Operating Equipment. Manager shall select and purchase all operating equipment for the Hotel such as linens, utensils, uniforms and other similar items. (j) Operating Supplies. Manager shall select and purchase all operating supplies for the Hotel such as food, beverages, fuel, soap, cleansing items, stationery and other consumable items. (k) Accounting Standards. Manager shall maintain the books and records reflecting the operations of the Hotel in accordance with the accounting practices of Manager in conformity with generally accepted accounting principles ("GAAP") consistently applied. The Hotel level generated accounting records reflecting detailed day-to-day transactions of the Hotel's operations shall be kept by Manager at the Hotel or at Manager's corporate headquarters, or at such other location as Manager shall reasonably determine. Manager agrees upon request to cooperate in good faith with Lessee and its representatives to facilitate an examination or audit of such books and records; Lessee agrees that any such examination or audit of such books and records shall be conducted by one of the "Big Six" firms of certified public accountants. (l) Marketing and Advertising. Manager shall advertise and promote the Hotel in coordination with the sales and marketing programs of the Manager and other Embassy Suites hotels. Manager may cause the Hotel to participate in sales and promotional campaigns and activities involving complimentary rooms which are intended to benefit the business of the Hotel. Manager, in marketing and advertising the Hotel, shall have the right to use marketing and advertising services of Off-Site Personnel. (m) Permits and Licenses. Manager shall obtain and maintain all licenses and permits that are required to be held in its name that are necessary to enable Manager to operate the Hotel in accordance with the terms of this Agreement and the License Agreement. In addition, Manager shall upon request cooperate with and assist Lessee in obtaining the various permits and licenses that are required to be held in the name of either or both of Lessee and the Partnership that are necessary to enable Manager to operate the Hotel. Manager shall use all reasonable efforts, to the extent within its control, to comply with the terms and conditions of all licenses and permits issued with respect to the Hotel and the business conducted at the Hotel, including without limitation the terms and conditions of the License Agreement. -6- (n) Lessee Meetings. A representative of Manager's corporate staff and the Hotel's general manager shall meet with Lessee's Representative (as hereinafter defined) quarterly to review and discuss the previous and future quarter's operating statement, cash flow, budget, capital expenditures, important personnel matters and the general concerns of Lessee and Manager ("Quarterly Lessee's Meeting"). Except to the extent otherwise mutually agreed upon by Lessee and Manager, all Quarterly Lessee's Meetings shall be held at the Hotel. (o) Insurance. Manager shall procure and maintain throughout the Term the insurance coverages set forth on Exhibit "D". (p) Lease and Concession Agreements. Manager shall consult with Lessee to determine the desirability of entering into lease and concession agreements to provide activities or services, including the food and beverage facilities, for the benefit of the Hotel and its guests. In situations in which it is mutually determined to be desirable to enter into lease or concession agreements, Manager shall assist Lessee to the extent requested in identifying suitable lessees and concessionaires, negotiating mutually agreeable lease and concession agreements, and monitoring the performance of the lessees and concessionaires under the agreements. The revenues and income generated by a lessee or concessionaire shall be excluded from Gross Revenues, but Gross Revenues shall include all rental or other payments made to Lessee pursuant to the provisions of such agreements. (q) [Intentionally Deleted] (r) Taxes and Assessments. Manager and/or Manager's agent shall annually review and submit all real estate and personal property taxes and all assessments affecting the Hotel to Lessee (who shall provide copies thereof to the Partnership) and shall recommend payment thereof or appeal therefrom. Manager shall file all personal property tax returns for the Hotel. (s) Compliance with Law. Manager shall use all reasonable efforts to comply with all laws, ordinances, regulations and requirements of any federal, state, or municipal government that are applicable to the use and operation of the Hotel, as well as with all orders and requirements of the local fire department, of which Manager has knowledge; provided, however, that Lessee shall have the right to contest by proper legal proceedings, the validity of any such law, ordinance, rule, regulation, order, decision or requirement and may postpone compliance therewith to the extent and in the manner provided by law until final determination of any such proceedings. Manager promptly shall notify Lessee in writing of all notices of legal requirements applicable to the Hotel that are received by Manager. (t) Satisfaction of Obligations. Manager agrees to pay, when due, all amounts due under any equipment leases and all other contracts and agreements relating to the operation or maintenance of the Hotel, but solely from and to the extent that funds are available in the Bank Account(s), and to comply with all other covenants and obligations contained in the equipment leases and all utility contracts, concession agreements, leases for retail or commercial space and service and maintenance contracts, to the extent that compliance therewith is within the reasonable control of Manager by reason of its management and operation of the Hotel pursuant to this. Manager shall have no obligation to perform or comply with any obligations of (i) the Partnership or Lessee under the Percentage Lease or (ii) the Partnership under any Financing -7- Documents relating to the Partnership's Mortgagee (other than any right to approve or inspect Capital Improvements contemplated by paragraph (g) above). (u) Requests for Information. Manager shall respond, with reasonable promptness, to any information requests by Lessee's Mortgagee in accordance with the Lessee's Financing Documents, to the extent such information is required to be furnished by Manager to Lessee pursuant to this Agreement. Any additional information or reports requested by Lessee's Mortgagee shall be provided by Manager only if Lessee so directs Manager in writing and, to the extent such information or reports are not being prepared for Lessee in the ordinary course of business pursuant to this Agreement Lessee agrees to pay the reasonable expenses of preparing such information and reports. (v) Discounts and Rebates. Lessee shall be credited with the full amount of any discounts, rebates or commissions obtained by Manager in respect of any purchases made by Manager for or on behalf of Lessee pursuant to this Agreement. (w) Tax and Insurance Accruals. If requested by Lessee, Manager shall accrue and set aside on a monthly basis Gross Revenues for the payment of real estate taxes and insurance premiums, and such accruals shall be deposited in a separate account and not commingled with other operating accounts for Hotel operations generally. If and to the extent Lessee and Manager agree in writing, the tax and insurance accruals on deposit may be used from time to time to pay Operating Costs if Adjusted Gross Revenues are not otherwise sufficient to pay such Operating Costs. ARTICLE IV LESSEE'S OBLIGATIONS SECTION 4.01. LESSEE'S OBLIGATIONS. During the Term, Lessee shall have the obligations set forth below: (a) License Agreement. Lessee shall comply with all the terms and conditions of the License Agreement (specifically including, but not limited to, Licensee's obligation to pay the fees, charges and contributions set forth in paragraph 3.C of the License Agreement) and keep the License Agreement in full force and effect from the Commencement Date through the remainder of the Term. Nothing in this Agreement shall be interpreted in a manner which would relieve Lessee of any of its obligations under the License Agreement. (b) Licenses and Permits. Lessee shall obtain and maintain (or shall cause to be obtained and maintained), with Manager's assistance and cooperation, all governmental permissions, licenses and permits required to be held in either Lessee's or the Partnership's name that are necessary to enable Manager to operate the Hotel in accordance with the terms of this Agreement and the License Agreement. (c) Operating Funds. Lessee shall provide all funds necessary to enable Manager to manage and operate the Hotel in accordance with the terms of this Agreement and the License Agreement. Lessee agrees to deliver to Manager for deposit into the Bank Account(s) on or -8- before the Commencement Date the amount specified on Exhibit "B," which amount shall be the "Minimum Balance" to be maintained by Lessee in the Bank Account(s) during each calendar year during the Term. The Minimum Balance shall serve as working capital for the Hotel's operations. Commencing forty-five (45) days after the date hereof and continuing on the first day of each calendar month thereafter, Lessee shall deliver to Manager for deposit in a separate interest-bearing account in Lessee's name but under the sole control of Manager (the "Operating Deficit Account") an amount equal to the lesser of five thousand dollars ($5,000) or the amount necessary to cause the funds in the Operating Deficit Account plus the balance in the Bank Account(s) as of the last day of the immediately preceding month to equal one hundred thousand dollars ($100,000), after taking into consideration pending or anticipated distributions from the Operating Deficit Account to fund cash shortfalls in operations of the Hotel. The Operating Deficit Account for the Hotel may be consolidated with the Operating Deficit Account for the Other Hotels. Interest on funds in the Operating Deficit Account shall be disbursed to Lessee monthly to the extent the average balance in the account for any calendar month is equal to or greater than one hundred thousand dollars ($100,000). At such time as any distributions are made from the Operating Deficit Account, all Net Cash Flow (as hereinafter defined) shall be deposited into the Operating Deficit Account until the amount of Net Cash Flow deposited in such account equals the amount of such distributions. The term "Net Cash Flow" shall have the same meaning as the term "Income Before Lessee's Overhead," as such term is defined on Exhibit "C" hereto, except there shall be no deduction for Percentage Lease Payments (other than to account for amounts deposited into the Reserve Fund in accordance with paragraph (d) below). Manager may use funds in the Operating Deficit Account from time to time, without the prior written consent of Lessee or the Partnership, to pay Operating Costs and, if requested by Lessee, Permitted Costs (as hereinafter defined) to the extent funds in the Bank Account are not sufficient to pay such Operating Costs and Permitted Costs. The term "Permitted Costs" shall mean (i) Percentage Lease Payments (as defined on Exhibit "C" hereto), (ii) premiums for insurance coverages specified on Exhibit "D" hereto to the extent Lessee is responsible for paying for such coverages in the Percentage Lease, (iii) lease payments under Qualifying Capital Leases (as defined on Exhibit "C" hereto) and (iv) audit legal and other professional fees incurred by Lessee and directly related to the operation of the Hotel. Within thirty (30) days of Manager's written request Lessee agrees to furnish Manager with sufficient funds to make up any deficiency in funds in the Bank Account(s) and the Operating Deficit Account. Manager's request for sufficient funds may be based on anticipated cash shortfalls shown on the cash flow projection delivered to Lessee or incurred cash shortfalls. If Manager determines, in its good faith business judgment that the amount of the Minimum Balance and the funds in the Operating Deficit Account are insufficient to adequately meet the working capital needs for the Hotel's operations, Manager shall notify Lessee and attempt to reach agreement on an adjustment to the amount of the Minimum Balance. In the event Lessee and Manager are unable to agree after a period of thirty (30) days, Manager may submit such matter to arbitration pursuant to Section 10.02 below. Lessee shall be responsible for providing funds to cover any shortfall in working capital for the Hotel irrespective of whether such shortfall is attributable in whole or in part to Partnership Costs. (d) Capital Funds. Lessee shall expend such amounts for renovation programs, furnishings, equipment and ordinary Hotel capital replacement items as are required from time to time to (i) maintain the Hotel in good order and repair; (ii) comply with the standards referred to in the License Agreement and (iii) comply with applicable governmental regulations and orders. -9- It is recognized that expenditures for capital replacements are incapable of precise calculation in advance. Therefore, there shall be paid over in cash in each calendar month after the Commencement Date, four percent (4%) of Suite Revenues (as hereinafter defined) into a Reserve Fund (as hereinafter defined) to pay for capital replacements. The term "Suite Revenues" means all revenue and income from the rental of guest suites at the Hotel with no deductions except for sales and room taxes. Manager shall establish a reserve for capital replacements on the books of account for the Hotel and the cash amounts required for such reserve shall be placed into an interest-bearing account (the "Reserve Fund") established in the Hotel's name at a bank chosen by Lessee and reasonably acceptable to Manager, with Manager's designees being the only authorized signatories on said account. The Reserve Fund for the Hotel may be consolidated with the Reserve Funds for the Other Hotels. Any expenditures for capital replacements during any calendar year which have been included in an approved Capital Budget may be made without either the Partnership's or Lessee's additional approval and shall be made by Manager from the Reserve Fund (including accrued interest and unused accumulations from prior calendar years). Any amounts remaining in the Reserve Fund at the close of each calendar year shall be carried forward and retained in the Reserve Fund until fully used as herein provided. To the extent the Reserve Fund is insufficient at a particular time, or to the extent the Reserve Fund plus anticipated contributions for the ensuing calendar year is less than budgeted expenditures for the ensuing calendar year, then, in either such event Manager shall give Lessee written notice thereof at least forty-five (45) days before the anticipated date such funds will be needed. Lessee shall supply the necessary funds by deposit to the Reserve Fund at least thirty (30) days before the anticipated date such funds will be needed. All proceeds from the sale of capital items no longer needed for the operation of the Hotel shall be deposited to the Reserve Fund. Sale of such items shall be at the discretion of Manager, and conducted in a commercially reasonable manner; Manager shall not dispose of any capital item or group of capital items having a value in excess of ten thousand dollars ($10,000) without Lessee's prior written consent unless the replacement of such capital item or group of capital items has been contemplated in the applicable Capital Budget. Upon termination of this Agreement for whatever reason, Manager's right to expend any unused portion of the Reserve Fund shall terminate and the balance of the fund shall be paid over to Lessee, less any sums then due Manager. To the extent any expenditure under this paragraph (d) shall exceed ten thousand dollars ($10,000), Manager shall first solicit bids from at least three different reputable and qualified third parties, and the lowest of the bidders shall be selected unless acceptance of a higher bid has been approved by Lessee in writing. (e) Payments to Manager. Lessee shall promptly pay to Manager all amounts due Manager under this Agreement. (f) Lessee's Representative. Lessee shall appoint two or more representatives to represent Lessee in all matters relating to this Agreement and/or the Hotel ("Lessee's Representatives"). Lessee's initial Lessee's Representatives shall be the individuals named on Exhibit "B." Manager shall have the right to deal solely with the Lessee's Representatives on all such matters. Manager may rely upon statements and representations of any one of Lessee's Representatives (without the joinder of the others) as being from and binding upon Lessee. Lessee may change one or more of its Lessee's Representatives from time to time by providing -10- written notice to Manager in the manner provided for herein. Lessee shall cause one or more of Lessee's Representatives or designated substitutes to attend all Quarterly Lessee's Meetings. (g) Lessee's Right of Inspection and Review. Lessee, Partnership's Mortgagee and their respective accountants, attorneys, agents and other representatives and invitees, shall have the right to enter upon any part of the Hotel at all reasonable times during normal business hours and during the term of this Agreement upon reasonable prior notice to Manager for the purpose of examining, repairing or inspecting the same, preventing damage to the Hotel, showing the Hotel to prospective purchasers or mortgagees, or auditing, examining or making extracts of books and records of the Hotel, or for any other purpose which Lessee, in its reasonable discretion, shall deem necessary or advisable, but the same shall be done with as little disruption to the business of the Hotel as under the circumstances is reasonable. Books and records of the Hotel shall be kept at Manager's office in Memphis, Tennessee or such other place as the Lessee may hereafter in writing agree. Lessee's rights of examination and audit of the books and records of the Hotel are subject to the provisions of Section 3.01 (k) above. (h) Quiet and Peaceable Operation. Lessee agrees that Manager shall be entitled to peaceably and quietly possess and operate the Hotel in accordance with the terms of this Agreement free from molestation, eviction and disturbance by Lessee or by any other person or persons claiming by, through or under Lessee. ARTICLE V MANAGEMENT FEE SECTION 5.01. MANAGEMENT FEE. Lessee authorizes Manager to pay itself from the Bank Account the Basic Management Fees and Incentive Management Fees (hereinafter collectively referred to as the "Management Fees") calculated and payable in the manner set forth on Exhibit "C." ARTICLE VI CLAIMS AND LIABILITY SECTION 6.01. CLAIMS AND LIABILITY. Lessee and Manager mutually agree for the benefit of each other to look only to the appropriate insurance coverages in effect pursuant to this Agreement in the event any demand, claim, action, damage, loss, liability or expense occurs as a result of injury to person or damage to property, regardless whether any such demand, claim, action, damage, loss, liability or expense is caused or contributed to by or results from the negligence of Lessee or Manager or their respective subsidiaries, affiliates, employees, directors, officers, agents or independent contractors and regardless whether the injury to person or damage to property occurs in and about the Hotel or elsewhere as a result of the performance of this Agreement. Nevertheless, in the event the insurance proceeds are insufficient or there is no insurance coverage to satisfy the demand, claim, action, loss, liability or expense and the same did not arise out of a breach of this Agreement by Manager or the gross negligence or willful misconduct of Manager, Lessee agrees, at its expense, to indemnify and hold Manager and its subsidiaries, affiliates, officers, directors, employees, agents and independent contractors harmless -11- to the extent of the excess liability. For purposes of this Section, any deductible amount under any policy of insurance shall not be deemed to be included as part of collectible insurance proceeds. Notwithstanding anything contained in this Agreement to the contrary (including without limitation the preceding provisions of this Section 6.01 and Sections 3.01(b) and 11 .08), Manager shall indemnify, defend and hold harmless Lessee and Lessee's subsidiaries, affiliates, officers, directors, employees, agents, partners, shareholders or independent contractors, from all demands, claims, actions, loss, liability or expense which is not covered by insurance and which is determined to have resulted from the gross negligence, willful misconduct or breach of this Agreement by Manager and its agents or employees in connection with the operation of the Hotel. SECTION 6.02. SURVIVAL. The provisions of this Article VI shall survive any cancellation, termination or expiration of this Agreement and shall remain in full force and effect until such time as the applicable statute of limitation shall cut off all demands, claims, actions, damages, losses, liabilities or expenses which are the subject of the provisions of this Article VI. ARTICLE VII CLOSURE, EMERGENCIES AND DELAYS SECTION 7.01. EVENTS OF FORCE MAJEURE. If at any time during the Term of this Agreement it becomes necessary, in Manager's opinion, to cease operation of the Hotel in order to protect the Hotel and/or the health, safety and welfare of the guests and/or employees of the Hotel for reasons beyond the reasonable control of Manager, such as, but not limited to, acts of war, insurrection, civil strife and commotion, labor unrest governmental regulations and orders, shortage or lack of adequate supplies or lack of skilled or unskilled employees, contagious illness, catastrophic events or acts of God ("Force Majeure"), then in any such event or similar events Manager may close and cease operation of all or any part of the Hotel, reopening and commencing operation when Manager deems that such may be done without jeopardy to the Hotel, its guests and employees. Manager and Lessee agree, except as otherwise provided herein, that the time within which a party is required to perform an obligation hereunder shall be extended for a period of time equivalent to the period of delay caused by an event of Force Majeure, but only to the extent that delay is caused or contributed to by a specific event of Force Majeure. SECTION 7.02. EMERGENCIES. If an emergency condition should exist which requires that immediate repairs be made for the preservation and protection of the Hotel, its guests or employees, or to assure the continued operation of the Hotel (for purposes of this Section, an emergency condition shall include any situation or circumstance that is reasonably estimated to require corrective action within a period of seventy-two (72) hours or less), Manager is authorized to take all actions and to make all expenditures necessary to repair and correct such condition, regardless whether provisions have been made in the applicable budget for such emergency expenditures. Expenditures made by Manager in connection with an emergency shall be paid, in Manager's sole discretion, out of the Bank Account(s) to the extent funds are available and, if not from the Operating Deficit Account and/or the Reserve Fund. Lessee shall, to the extent required to meet current obligations, immediately replenish such funds. Manager shall -12- endeavor to communicate with Lessee prior to making any expenditures to correct an emergency condition, but in any event shall promptly notify Lessee after the emergency expenditures have been made. ARTICLE VIII CONDEMNATION AND CASUALTY SECTION 8.01. CONDEMNATION. If the Hotel is taken in any eminent domain, expropriation, condemnation, compulsory acquisition or similar proceeding by any competent authority, this Agreement shall automatically terminate as of the date of taking or condemnation. Any compensation for the taking or condemnation of the physical facility comprising the Hotel shall be paid to Lessee and Lessee and the Partnership shall share such award in accordance with the terms of the Percentage Lease. Manager, however, with the full cooperation of Lessee, shall have the right to file a claim with the appropriate authorities for the loss of Management Fee income for the remainder of the Term and any extension thereof because of the condemnation or taking. If only a portion of the Hotel is so taken and the taking does not make it unreasonable or imprudent in the reasonable opinion of Lessee and Manager, to operate the remainder as a hotel of the type and class immediately preceding such taking, this Agreement shall not terminate. Any compensation shall be used, however, in whole or in part, to render the Hotel a complete and satisfactory architectural unit as a hotel of the same type and class as it was immediately preceding such taking or condemnation. SECTION 8.02. CASUALTY. In the event of a fire or other casualty, Lessee shall comply with the terms of the License Agreement and this Agreement shall remain in full force and effect so long as the License Agreement remains in full force and effect. ARTICLE IX DEFAULT; TERMINATION RIGHTS SECTION 9.01. LESSEE'S DEFAULT. The following shall, at the election of Manager, constitute events of default by Lessee under this Agreement (each such event being referred to herein as a "Lessee's Default"): (a) The failure of Lessee to pay any amount to Manager provided for herein for a period of ten (10) days after written notice by Manager of such failure to pay. (b) Failure of Lessee to keep or perform any duty, obligation, covenant or agreement of Lessee under this Agreement (other than the obligation to pay that is the subject of paragraph (a) above) and such failure continues for a period of thirty (30) days after receipt of written notice thereof from Manager; provided, however, if such failure cannot reasonably be remedied or corrected within such 30-day period, then such 30-day period shall be extended for such additional period as may be reasonably required to cure such default but only if the Lessee promptly commences to cure such default and continue thereafter with all due diligence to complete such a cure to the satisfaction of Manager. -13- (c) The occurrence of a default by Lessee under any of the Other Management Agreements, after taking into consideration applicable notice, grace and cure periods. (d) The occurrence of a default by the holder of the License under, or termination of the License Agreement or any of the Other License Agreements, after taking into consideration applicable notice, grace and cure periods, if any. (e) The occurrence of a default under or other termination of the Percentage Lease. (f) Lessee or the Partnership is voluntarily or involuntarily dissolved or declared bankrupt, insolvent or commits an act of bankruptcy or enters into liquidation whether compulsory or voluntary, other than for the purpose of amalgamation or reconstruction, or compounds with its creditors, or has a receiver appointed over all or any part of its assets, or conveys title in lieu of foreclosure. (g) A "Change in Ownership", as defined in the License Agreement occurs unless the new owner of the Hotel receives a Commitment Agreement (as defined in Section 9.05 below) and enters into an assumption agreement in accordance with Section 9.05 below. (h) Failure of the Partnership to keep or perform any duty, obligation, covenant or agreement of the Partnership under any of the "Comfort Letters" from Manager to the Partnership agreed to and accepted by the Partnership (collectively, the "Comfort Letters") relating to the Hotel and each of the Other Hotels and such failure continues for a period of thirty (30) days after receipt of written notice thereof from Manager; provided, however, if such failure cannot reasonably be remedied or corrected within such 30-day period, then such 30-day period shall be extended for such additional period as may be reasonably required to cure such default, but only if the Partnership promptly commences to cure such default and continue thereafter with all due diligence to complete such a cure to the satisfaction of Manager. On the occurrence of any Lessee's Default Manager shall have the right to terminate this Agreement by written notice to Lessee, in addition to its rights to seek damages or other remedies available to it at law or in equity. SECTION 9.02. MANAGER DEFAULT. The following shall, at the election of Lessee, constitute events of default by Manager under this Agreement (each such event being referred to herein as a "Manager Default"): (a) Failure of Manager to keep or perform any duty, obligation, covenant or agreement of Manager under this Agreement and such failure shall continue for a period of thirty (30) days after receipt of written notice thereof from Lessee; provided, however, if such failure cannot reasonably be remedied or corrected within such 30-day period, then such 30-day period shall be extended for such additional period as may be reasonably required to cure such default provided that Manager promptly commences to -14- cure such default and continues thereafter with all due diligence to complete such cure to the satisfaction of Lessee. (b) The occurrence of a default by Manager under the License Agreement or any of the Other License Agreements, after taking into consideration applicable notice, grace and cure periods, if any. (c) If Manager is voluntarily or involuntarily dissolved or declared bankrupt, insolvent or commits an act of bankruptcy, or enters into liquidation, whether compulsory or voluntary, other than for the purpose of amalgamation or reconstruction, or compounds with its creditors, or has a receiver appointed over all or any part of its assets. Upon the occurrence of a Manager Default Lessee shall have the right to terminate this Agreement by written notice to Manager, in addition to its right to seek damages or other remedies available to it at law or in equity. SECTION 9.03. [Intentionally deleted.] SECTION 9.04. DELAYS. Notwithstanding any other provision of this Agreement, if any event of the type described in Article VII or Article VIII occurs and Manager is unable to operate any portion of the Hotel for a period of ninety (90) days, Manager shall have the option to terminate this Agreement upon thirty (30) days' prior written notice to Lessee, without liability on the part of Manager, its parent or their subsidiaries or affiliates. SECTION 9.05. MANAGER'S RIGHT TO TERMINATE UPON SALE. If there is to be a "Change in Ownership" as defined in the License Agreement and the new owner of the Hotel has not received a Commitment Agreement to Issue an Embassy Suites License Agreement for the operation of the Hotel (for purposes of this Section 9.05, said agreement shall be referred to as the "Commitment Agreement"), Manager shall have the right upon giving notice to Lessee to terminate this Agreement on the effective date the Change of Ownership occurs. In the event the new owner applies for a Commitment Agreement Manager, acting in its capacity as licensor of the Embassy Suites system of hotels, agrees to review and consider such application in good faith in accordance with its standard procedures and criteria. If there is a Change of Ownership and the new owner of the Hotel receives a Commitment Agreement but does not enter into an assumption agreement pursuant to which the new owner assumes all of Lessee's obligations hereunder with Manager prior to the date the Change of Ownership occurs, Manager shall have the right, upon giving notice to Lessee, to terminate this Agreement on the effective date the Change of Ownership occurs. SECTION 9.06. LESSEE'S SPECIAL RIGHTS OF TERMINATION. During the Term, Lessee shall have the right to terminate this Agreement upon the occurrence of any of the following events: (a) Sale of Hotel. The Partnership's fee estate in the Hotel is sold and transferred to an unaffiliated third party and in connection with such transaction the Percentage Lease is terminated and neither Lessee, nor any of the Principals (as hereinafter defined) nor any person -15- or entity affiliated with the Principals retains any economic or beneficial interest in the transferee or the Hotel. The term "Principals" means any of Thomas J. Corcoran, Jr. or Hervey A. Feldman. (b) Failure to Meet Performance Test. Manager fails to satisfy the requirements of the "performance test" described in Paragraph A of the Section entitled "Performance Test; Termination Rights" on Exhibit "B" hereto; (c) Change in Control. There is a "Change in Control" (as hereinafter defined) of Manager and Manager fails to satisfy the requirements of the "performance test" described in Paragraph B of the Section entitled "Performance Test Termination Rights" on Exhibit "B" hereto. The term "Change in Control" shall mean any sale or transfer of a majority of the stock of Manager under circumstances in which ___________________________________ relinquishes direct or indirect control over the day-to-day operations and business of Manager. If there is a transfer of a majority of the stock of Manager and Lessee contends that a Change in Control of Manager has occurred that is disputed by Manager, then Manager shall demonstrate to the reasonable satisfaction of Lessee that Promus has retained the ability to control, directly or indirectly, the day-to-day operations and business of Manager. SECTION 9.07. TRANSITION UPON TERMINATION. Upon any termination of this Agreement, all fees and payments due to Manager as of the effective date of termination, including all accrued and unpaid fees and reimbursable charges and expenses, shall be paid to Manager within ten (10) days after delivery to Lessee of an itemized statement of such fees and payments, and Manager shall be entitled to exercise the right of set-off provided in Section 11.16 below with respect to such fees, charges and expenses. Manager shall deliver to Lessee, or such other person or persons as Lessee may designate, copies of all books and records of the Hotel and all funds in the possession of Manager belonging to Lessee or received by Manager pursuant to the terms of this Agreement, and shall assign, transfer or convey to such person or persons all service contracts and personal property relating to or used in the operation and maintenance of the Hotel, except any personal property which is owned by Manager. Manager, at its cost and expense, shall remove all signs that it may have placed at the Hotel indicating that it is the manager of same and replace and restore any damage resulting therefrom. Manager shall also, for a period of thirty (30) days after such expiration or termination, make itself available to consult with and advise Lessee or such other person or persons regarding the operation and maintenance of the Hotel at a consultation fee to be agreed upon between Manager and Lessee. ARTICLE X APPLICABLE LAW AND ARBITRATION SECTION 10.01. APPLICABLE LAW. The interpretation, validity and performance of this Agreement shall be governed by the procedural and substantive laws of the State of Tennessee. If any judicial authority holds or declares that the law of another jurisdiction is applicable, this Agreement shall remain enforceable under the laws of that jurisdiction. -16- SECTION 10.02. ARBITRATION OF FINANCIAL MAILERS SUBSECTION 10.02.1. MAILERS TO BE SUBMITTED TO ARBITRATION. In the case of a dispute with respect to any of the following matters, either party may submit such matter to arbitration which shall be conducted by the Accountants (as hereinafter defined in Subsection 10.02.2): (a) computation of the Management Fees; (b) reimbursements due to Manager under the provisions of Sections 11.14 and 11.16 (c) any adjustment in the Minimum Balance under the provisions of Section 4.01 (c) (d) any adjustment in dollar amounts of insurance coverages required to be maintained; and (e) any dispute concerning the approval of an Operating Budget. All disputes concerning the above matters shall be submitted to the Accountants. The decision of the Accountants with respect to any matters submitted to them under this Subsection 10.02.1 shall be binding on both parties hereto. SUBSECTION 10.02.2. THE ACCOUNTANTS. The "Accountants" shall be one of the so-called "Big Six" firms of certified public accountants, represented by a partner or manager-level employee who has personal experience with the hotel industry and hotel operations. Lessee (on behalf of itself and the Partnership) and Manager may select any one of such public accounting firms, notwithstanding any existing relationships which may exist between Owners or Manager and such accounting firm. The party desiring to submit any matter to arbitration under Subsection 10.02.1 shall do so by written notice to the other party, which notice shall set forth the items to be arbitrated and such party's choice of an accounting firm. The party receiving such notice shall within fifteen (15) days after receipt of such notice either approve such notice, or designate one of the remaining firms by written notice back to the first party, and the first party shall within fifteen (15) days after receipt of such notice either approve such choice or disapprove the same. If both parties shall have approved one of the firms under the preceding sentence, then such firm shall be the "Accountants" for the purposes of arbitrating the dispute. If the parties are unable to agree on an accounting firm, then the accounting firm selected by each party shall represent the respective parties and the two firms so selected shall select a third firm, and the three firms so selected shall be the "Accountants" for such purpose. The Accountants shall be required to render a decision in accordance with the procedures described in Subsection 10.02.3 within fifteen (15) days after being notified of their selection. The fees and expenses of the Accountants will be paid by the non-prevailing party. SUBSECTION 10.02.3. PROCEDURES. In all arbitration proceedings submitted to the Accountants, the Accountants (either the mutually agreed upon firm acting alone or two of the three firms selected to constitute a panel) shall be required to agree upon and approve in writing the substantive position advocated by Lessee or Manager with respect to each disputed item. -17- Any decision rendered by the Accountants that does not reflect the position advocated by Lessee or Manager shall be beyond the scope of authority granted to the Accountants and, consequently, may be overturned by either party. All proceedings by the Accountants shall be conducted in accordance with the Uniform Arbitration Act, except to the extent the provisions of such act are modified by this Agreement or by the mutual agreement of the parties. Unless Lessee and Manager agree otherwise, all arbitration proceedings shall be conducted at the Hotel. SECTION 10.03. PERFORMANCE DURING DISPUTES. It is mutually agreed that during any kind of bona fide, good faith controversy, claim, disagreement or dispute, including a dispute as to the validity of this Agreement Manager shall remain in possession of the Hotel as Manager, and Lessee and Manager shall continue their performance of the provisions of this Agreement and its exhibits. ARTICLE XI GENERAL PROVISIONS SECTION 11.01. AUTHORIZATION. Lessee and Manager represent and warrant to each other that their respective companies have full power and authority to execute this Agreement and to be bound by and perform the terms hereof. On request, each party shall furnish the other evidence of such authority. SECTION 11.02. RELATIONSHIP. Manager and Lessee shall not be construed as joint venturers or partners of each other by reason of this Agreement and neither shall have the power to bind or obligate the other except as set forth in this Agreement. SECTION 11.03. MANAGER'S CONTRACTUAL AUTHORITY IN THE PERFORMANCE OF THIS AGREEMENT. Manager is authorized to make, enter into and perform, in the name of and for the account of Lessee, any contracts deemed necessary by Manager to perform its obligations under this Agreement. In exercising its authority hereunder, Manager shall be entitled to execute and enter into contracts without the specific approval of Lessee so long as each such contract (i) requires expenditures or otherwise establishes liability of twenty-five thousand dollars ($25,000) or less and (ii) has a term (excluding options in favor of Manager and Lessee to renew) of one (1) year or less or can be canceled without penalty upon sixty (60) days' notice or less. Any contract that does not satisfy the conditions set forth in the preceding sentence shall require the prior approval in each instance of Lessee, regardless whether such expenditure is authorized in an applicable budget, unless the form of the contract proposed to be entered into has been approved in advance by Lessee. Lessee agrees to promptly respond to any request for approval and further agrees that its consent shall not be unreasonably withheld or delayed. Manager shall be authorized to enter into contracts with affiliates of Manager, but only so long as Lessee shall have approved in advance the cost of the service or product to be provided. SECTION 11.04. FURTHER ACTIONS. Lessee and Manager agree to execute all contracts, agreements and documents and to take all actions reasonably necessary to comply with the provisions of this Agreement and the intent hereof. -18- SECTION 11.05. SUCCESSORS AND ASSIGNS. Lessee's consent shall not be required for Manager to assign any of its rights, interests or obligations as Manager hereunder to any parent, subsidiary or affiliate of Manager or ______ or its successor corporation, provided that any such assignee agrees to be bound by the terms and conditions of this Agreement and provided further that such assignee has received assignment of all or substantially all of the management agreements entered into by Manager with respect to other Embassy Suites hotels in the Embassy Suites system of hotels. Subject to the provisions of Section 9.06(c) above, the acquisition of Manager or its parent company by a third party shall not constitute an assignment of this Agreement by Manager and this Agreement shall remain in full force and effect between Lessee and Manager. Except as herein provided, Manager shall not assign any of its obligations hereunder without the prior written consent of Lessee, which consent shall not be unreasonably withheld or delayed. Lessee shall be deemed to have consented to such an assignment of this Agreement if Lessee has not notified Manager in writing to the contrary within fifteen (15) days after Lessee has received Manager's request for Lessee's consent to an assignment. Manager shall have the right to pledge or assign its right to receive the Management Fees hereunder without the prior written consent of Lessee. The Partnership shall not have the right to consent to any assignment that otherwise complies with the requirements of this Section 11.05. Lessee shall have the right to assign this Agreement to any person or entity which has obtained (i) a leasehold estate in the Hotel in accordance with the provisions of the Comfort Letter relating to the Hotel and (ii) an Embassy Suites Commitment Agreement or License Agreement for the Hotel. Except as hereinabove provided, Lessee shall not have the right to assign this Agreement without the prior written consent of Manager, which consent shall not be unreasonably withheld or delayed. SECTION 11.06. NOTICES. All notices or other communications provided for in this Agreement shall be in writing and shall be either hand delivered, delivered by certified mail, postage prepaid, return-receipt requested, delivered by an overnight delivery service, or delivered by facsimile machine (with an executed original sent the same day by an overnight delivery service), addressed as set forth on Exhibit "B." Notices shall be deemed delivered on the date that is four (4) calendar days after the notice is deposited in the U.S. mail (not counting the mailing date) if sent by certified mail, or, if hand delivered, on the date the hand delivery is made, or, if delivered by facsimile machine, on the date the transmission is made. If given by an overnight delivery service, the notice shall be deemed delivered on the next business day following the date that the notice is deposited with the overnight delivery service. The addresses provided on Exhibit "B" may be changed by any party by notice given in the manner provided herein. SECTION 11.07. DOCUMENTS. Lessee shall furnish Manager copies of all leases, title documents, property tax receipts and bills, insurance statements, all financing documents (including notes and mortgages) relating to the Hotel and such other documents pertaining to the Hotel as Manager shall request. SECTION 11.08. DEFENSE. Manager shall defend and/or settle any claim or legal action brought against Manager or Lessee, individually, jointly or severally, in connection with the operation of the Hotel. Manager or the applicable insurance carrier shall retain legal counsel and Manager shall supervise legal counsel, accountants and such other professionals, consultants -19- and specialists as Manager deems appropriate to defend and/or settle any such claim or cause of action. Lessee shall have the right to actively participate in the defense of any such claim or cause of action in which Lessee is a named defendant. Manager shall confer with Lessee concerning any settlement proposal that Manager is considering accepting, regardless whether Lessee is a named party, but Lessee's approval shall not be required if Lessee is not a named party and the settlement is covered by insurance. Lessee's approval shall be required with respect to any proposed settlement of any claim or cause of action in which Lessee is a named party or that is not covered by insurance (excluding any deductible amount specified in the applicable policy of insurance). All liabilities, costs, and expenses, including attorneys' fees and disbursements, incurred in defending and/or settling any such claim or legal action which are not covered by insurance shall be an expense of Lessee or Manager as applicable under the provisions of Section 6.01. SECTION 11.09. WAIVERS. No failure or delay by Manager or Lessee to insist upon the strict performance of any covenant, agreement, term or condition of this Agreement, or to exercise any right or remedy consequent upon the breach thereof, shall constitute a waiver of any such breach or any subsequent breach of such covenant, agreement, term or condition. No covenant, agreement, term, or condition of this Agreement and no breach thereof shall be waived, altered or modified except by written instrument. No waiver of any breach shall affect or alter this Agreement, but each and every covenant, agreement, term and condition of this Agreement shall continue in full force and effect with respect to any other then existing or subsequent breach thereof. SECTION 11.10. CHANGES. Any change to or modification of this Agreement including, without limitation, any change in the application of this Agreement to the Hotel, must be evidenced by a written document signed by both parties hereto. SECTION 11.11. CAPTIONS. The captions for each Article and Section are intended for convenience only. SECTION 11.12. SEVERABILITY. If any of the terms and provisions hereof shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any of the other terms or provisions hereof. If, however, any material part of a party's rights under this Agreement shall be declared invalid or unenforceable (specifically including Manager's right to receive its Management Fees) the party whose rights have been declared invalid or unenforceable shall have the option to terminate this Agreement upon thirty (30) days' written notice to the other party, without liability on the part of the terminating party. SECTION 11.13. INTEREST. Any amount payable to Manager or Lessee by the other which has not been paid when due shall accrue interest at the lesser of (i) the highest legal limit in the state in which the Hotel is located or (ii) two percentage points (2%) over the published base rate of interest charged by Citibank, N.A., New York, New York, to borrowers on ninety (90) day unsecured commercial loans, as the same may be changed from time to time. SECTION 11.14. REIMBURSEMENT. The performance by Manager of its responsibilities under this Agreement are conditioned upon Lessee providing sufficient funds to Manager on a timely basis to enable Manager to perform its obligations hereunder. Nevertheless, Manager shall be -20- entitled, at its option, after first providing not less than ten (10) days' prior written notice to Lessee specifying the obligations to be satisfied and the amount of money to be advanced, to advance funds or contribute property on behalf of the Lessee to satisfy obligations of Lessee in connection with the Hotel and this Agreement; provided, however, Manager shall not be required to give prior written notice to advance funds for the purpose of paying compensation for Hotel Personnel within the Operating Budget or to remedy an emergency. Manager shall keep appropriate records to document all reimbursable expenses paid by Manager, which records shall be made available for inspection by Lessee or its agents upon request. Lessee agrees to reimburse Manager with interest upon demand for money paid or property contributed by Manager to satisfy obligations of Lessee in connection with the Hotel and this Agreement. Interest shall be calculated at the rate set forth in Section 11.13 from the date Lessee was obligated to remit the funds or contribute the property for the satisfaction of such obligation to the date reimbursement is made. SECTION 11.15. AGREEMENT NOT AN INTEREST IN REAL PROPERTY. This Agreement is not and shall not be deemed at any time to be or to create, an interest in real estate or a lien or other encumbrance of any kind whatsoever against the Hotel or the land on which it is erected. SECTION 11.16. SET OFF. Without prejudice to Manager's rights to terminate this Agreement pursuant to the provisions of this Agreement, Manager may at any time following an Owners Default and without notice to Lessee, set off or transfer any sum or sums held by Manager or other member of Promus to the order of or on behalf of Owners (or either of them) or standing to the credit of Lessee or the Partnership, as the case may be, in the Bank Account(s) and the Operating Deficit Account, as the case may be, in or towards the satisfaction of any of Owners' liabilities to Manager in respect of all sums due to Manager under the terms of this Agreement or any of the Other Management Agreements. If this Agreement is terminated for any reason, Manager may create a reserve from any funds in the Bank Account(s), the Operating Deficit Account, the Reserve Fund or otherwise held by Manager for or on behalf of, or as agent for, Owners (or either of them) to pay sums owed to Manager as they become due. SECTION 11.17. THIRD PARTY BENEFICIARY. This Agreement is exclusively for the benefit of Manager and Lessee and it may not be enforced by any party other than such parties and shall not give rise to liability to any third party other than the authorized successors and assigns of such parties. SECTION 11.18. BROKERAGE. Manager and Lessee represent and warrant to each other that neither has sought the services of a broker, finder or agent in this transaction, and neither has employed nor authorized any other person to act in such capacity. Manager and Lessee each hereby agrees to indemnify and hold the other harmless from and against any and all claims, loss, liability, damage or expenses (including reasonable attorneys' fees) suffered or incurred by the other party as a result of a claim brought by a person or entity engaged or claiming to be engaged as a finder, broker or agent by the indemnifying party. SECTION 11.19. SURVIVAL OF COVENANTS. Any covenant, term or provision of this Agreement which, in order to be effective, must survive the termination of this Agreement, shall survive any such termination. -21- SECTION 11.20. ESTOPPEL CERTIFICATE. Manager and Lessee agree to furnish to the other party and to the Partnership Mortgagee, from time to time upon request, an estoppel certificate in such reasonable form as the requesting party may request stating whether there have been any defaults under this Agreement known to the party furnishing the estoppel certificate and such other information relating to the Hotel as may be reasonably requested. SECTION 11.21. OTHER AGREEMENTS. Except to the extent as may now or hereafter be specifically provided, nothing contained in this Agreement shall be deemed to modify any other agreement between either Owner and Manager with respect to the Hotel or any other property. SECTION 11.22. PERIODS OF TIME. Whenever any determination is to be made or action is to be taken on a date specified in this Agreement, if such date shall fall on a Saturday, Sunday or legal holiday under the laws of the state of Tennessee and/or the state in which the Hotel is located, then in such event said date shall be extended to the next day which is not a Saturday, Sunday or legal holiday. SECTION 11.23. PREPARATION OF AGREEMENT. This Agreement shall not be construed more strongly against either party regardless of who is responsible for its preparation. SECTION 11.24. EXHIBITS. All exhibits attached hereto are incorporated herein by reference and made a part hereof as if fully rewritten or reproduced herein. SECTION 11.25. COUNTERPARTS. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original. SECTION 11.26. ATTORNEYS' FEES AND OTHER COST. The parties to this Agreement shall bear their own attorneys' fees in relation to negotiating and drafting this Agreement. Should Lessee or Manager engage in litigation to enforce their respective rights pursuant to this Agreement, the prevailing party shall have the right to indemnity by the non-prevailing party for an amount equal to the prevailing party's reasonable attorneys' fees, court costs and expenses arising therefrom. SECTION 11.27. ENTIRE AGREEMENT. This Agreement contains the entire agreement between Lessee and Manager regarding the management of the Hotel. The parties have respectively caused this Agreement to be executed as of the date set forth in the introductory paragraph above. LESSEE: ---------------------------------------- ---------------------------------------- ---------------------------------------- ---------------------------------------- -22- MANAGER: ----------------------------------- ----------------------------------- By: /s/ -------------------------------- Its: -23- EXHIBIT "A" LICENSE AGREEMENT Attached. A-1 [EMBASSY SUITES LETTERHEAD] EMBASSY SUITES(R) LICENSE AGREEMENT Dated _______________________ between _________________________________ ___________ ("Licensor"), and _________________________________________ _________________ ("Licensee"), whose address is c/o FelCor Suite Hotels, Inc., 545 E. John Carpenter Freeway, Suite 1300, Irving, Texas 75062-3933. THE PARTIES AGREE AS FOLLOWS: 1. THE LICENSE. Licensor owns, operates and licenses a system designed to provide a distinctive, high quality hotel service to the pubic under the name "Embassy Suites" (the "System"). High standards established by Licensor are the essence of the System. Future investments may be required of Licensee under this License Agreement ("Agreement"). Licensee has independently investigated the risks of the business to be operated hereunder, including current and potential market conditions, competitive factors and risks, has read Licensor's "Franchise Offering Circular," and has made an independent evaluation of all such facts. Aware of the relevant facts, Licensee desires to enter into this Agreement in order to obtain a license to use the System in the operation of an Embassy Suites hotel located at 2727 Stemmons Freeway, Dallas, Texas 75207 (the "Hotel"). a. THE HOTEL. The Hotel comprises all structures, facilities, appurtenances, furniture, fixtures, equipment, and entry, exit, parking and other areas from time to time located on the site approved for the Hotel and acknowledged by Licensor in anticipation of the execution of this Agreement, or located on any land from time to time approved by Licensor for additions, signs or other facilities. No change in the number of approved guest suites ("Guest Suites") reflected on Attachment B (the "Rider") and no other significant change in the Hotel may be made without Licensor's prior approval. Redecoration and minor structural changes that comply with Licensor's standards and specifications will not be considered significant. Licensee represents that it is entitled to possession of the Hotel during the entire License Term without restrictions that would interfere with anything contemplated in this Agreement. b. THE SYSTEM. The System is composed of elements, as designated from time to time by Licensor, designed to identify "Embassy Suites hotels" to the consuming public and/or to contribute to such identification and its association with quality standards. The System at present includes the service marks "Embassy Suites" and such other service marks and such copyrights, trademarks and similar property rights as may be designated from time to time by Licensor to be part of the System; access to a reservation service; distribution of advertising, publicity and other marketing programs and materials; the furnishing of training programs and materials, standards, specifications and policies for construction, furnishing, operation, appearance and service of the Hotel, and other requirements as stated or referred to in this Agreement and from time to time in the Manual (as defined herein) or in other communications to Licensee; and programs for inspecting the Hotel and consulting with Licensee. Licensor may add elements to the System or modify, after or delete elements of the System at its sole discretion from time to time. Licensee is only authorized to use "Embassy Suites" service marks and trademarks at or in connection with the Hotel. c. THE MANUAL. Licensee acknowledges the receipt of a current Embassy Suites Standards Manual ("Manual"). The Manual contains, among other matters, minimum standards and requirements for constructing, equipping, furnishing, supplying, operating, maintaining and marketing the Hotel. Licensor 1 shall have the right to change the Manual from time to time and Licensee agrees to abide by the Manual as changed. The Manual shall at all times remain the sole property of Licensor. Licensee shall use all reasonable efforts to maintain the confidentiality of the Manual. Licensee shall not make or distribute copies of the Manual or any portion thereof. d. APPLICATION OF MANUAL. All hotels operated within the System will be subject to the Manual, as it may from time to time be modified or revised by Licensor. Licensor may, in its sole discretion, grant limited exceptions from compliance with the Manual which may be made based on local conditions or special circumstances. Each material change in the Manual will be explained in writing to Licensee at least 30 days before it goes into effect. 2. GRANT OF LICENSE. Licensor hereby grants to Licensee a nonexclusive license (the "License") to use the System only at the Hotel, only in connection with the operation of an Embassy Suites hotel, only in accordance with this Agreement and only during the "License Term" beginning with the date hereof and terminating as provided in Paragraph 13. The License apples to the location of the Hotel specified herein and no other. This Agreement does not limit Licensor's right, or the rights of any parent, subsidiary, division or affiliate of Licensor ("Entities"), to use or license to others the System or any part thereof or to engage in or license any business activity at any other location. Licensee acknowledges that Licensor and its Entities are and may in the future be engaged in other business activities including activities involving transient lodging and related activities which may be or may be deemed to be competitive with the System; that facilities, programs, services and/or personnel used in connection with the System may also be used in connection with such other business activities of Licensor and its Entities; and that Licensee is acquiring no rights hereunder other than the non-exclusive right to use the System in connection with an Embassy Suites hotel as specifically defined herein in accordance with the terms of this Agreement. 3. LICENSOR'S RESPONSIBILITIES. a. TRAINING. During the License Term, Licensor will specify required and optional training programs and provide these programs at various locations. Licensee may be charged for (i) required training services and materials and (ii) for optional training services and materials if provided to Licensee. Travel, lodging and other expenses of Licensee and its employees will be borne by Licensee. b. RESERVATION SERVICES. During the License Term, so long as Licensee is in full compliance with the obligations set forth in this Agreement, Licensor will afford Licensee access to reservation services for the Hotel. c. CONSULTATION. Licensor will, from time to time at Licensor's sole discretion, make available to Licensee consultation and advice in connection with operations, facilities and marketing. Licensor shall have the right to establish fees in advance for its advice and consultation on a project-by-project basis. d. ARRANGEMENTS FOR MARKETING, ETC. Licensor will use the Marketing/Reservation Contribution for costs associated with advertising, promotion, publicity, market research and other marketing programs and related activities, including reservation programs and services. Licensor may enter into arrangements for development, marketing, operations, administrative, technical and support functions, facilities, programs, services and/or personnel with any other entity and may use any facilities, programs, services and/or personnel used in connection with the System in connection with any business activities of its Entities. Licensor is not obligated to expend funds for marketing or reservation services in excess of the amounts received from Licensees using the System. e. INSPECTIONS/COMPLIANCE ASSISTANCE. Licensor has the right to inspect the Hotel at any time, with or without notice to Licensee, to determine if the Hotel is in compliance with the standards and rules of operation set forth in the Manual. If the Hotel fails to comply with such standards and rules of operation, Licensor may, at its option and at Licensee's cost, require an action plan to correct the deficiencies. Licensee must then take all steps necessary to correct any deficiencies within the times established by Licensor. Licensor's approval of an action plan does not waive any rights it may have under this Agreement nor does it relieve Licensee of any obligations under this Agreement. 2 4. PROPRIETARY RIGHTS. a. OWNERSHIP OF THE SYSTEM. Licensee acknowledges and will not contest, either directly or Indirectly, Licensor's unrestricted and exclusive ownership of the System and any element(s) or component(s) thereof, and acknowledges that Licensor has the sole right to grant licenses to use all or any element(s) or component(s) of the System. Licensee specifically agrees and acknowledges that Licensor is the owner of all right, title and interest in and to the service mark "Embassy Suites", its distinguishing characteristics, trade names, service marks, trademarks, logos, copyrights, slogans, etc., and all other marks associated with the System ("Marks") together with the goodwill symbolized thereby and that Licensee will not contest directly or indirectly the validity or ownership of the Marks either during the term of this Agreement or at any time thereafter. All improvements and additions whenever made to or associated with the System by the parties to this Agreement or anyone else, and all service marks, trademarks, copyrights, and service mark and trademark registrations at any time used, applied for or granted in connection with the System, and all goodwill arising from Licensee's use of the Marks shall inure to the benefit of and become the property of Licensor. Upon expiration or termination of this Agreement, no monetary amount shall be assigned as attributable to any goodwill associated with Licensee's use of the System or any element(s) or component(s) of the System including the name or Marks. b. USE OF NAME. Licensee will not use the word "Embassy" or any similar word(s) in its corporate, partnership, business or trade name, nor authorize or permit such word(s) to be used by anyone else. 5. TRADEMARK AND SERVICE MARK. a. TRADEMARK DISPUTES. Licensor will have the sole right and responsibility to handle disputes with third parties concerning use of all or any part of the System, and Licensee will, at its reasonable expense, extend its full cooperation to Licensor in all such matters. All recoveries made as a result of disputes with third parties regarding use of the System or any part thereof shall be for the account of Licensor. Licensor need not initiate suit against alleged imitators or infringers and may settle any dispute by grant of a license or otherwise. Licensee will not initiate any suit or proceeding against alleged imitators or infringers or any other suit or proceeding to enforce or protect the System. b. PROTECTION OF NAMES AND MARKS. Both parties will make every effort consistent with the foregoing to protect and maintain the Marks and name "Embassy Suites" and its distinguishing characteristics as standing for the System and only the System; provided, however, both parties acknowledge that Licensor may allow certain hotels which had written franchise commitments or licenses in the ___________________________ franchise system to use the name "Embassy Suites" and other related marks of the System. Licensee agrees to execute any documents deemed necessary by Licensor or its counsel to obtain protection for Licensor's Marks or to maintain their continued validity and enforceability. Licensee agrees to use such names and Marks only in connection with the operation of an Embassy Suites hotel and in the manner authorized by Licensor. Licensee acknowledges that any unauthorized use of the names or Marks shall constitute infringement of Licensor's rights. Licensee must notify Licensor immediately, in writing, of any infringement or challenge to Licensee's use of the Marks or of any unauthorized use or possible misuse of Licensor's Marks or Licensor's proprietary information. 6. LICENSEE'S RESPONSIBILITIES. a. OPERATIONAL AND OTHER REQUIREMENTS. During the License Term, Licensee will: (1) promptly pay to Licensor all amounts due Licensor and its Entities as royalties or fees or for goods or services purchased by Licensee; (2) maintain the Hotel in a clean, safe and orderly manner and in first class condition; (3) provide efficient, courteous and high-quality service to the public; (4) operate the Hotel 24 hours a day every day, except as otherwise permitted by Licensor based on special circumstances; 3 (5) strictly comply in all respects with the Manual and with all other policies, procedures and requirements of Licensor which may be from time to time communicated to Licensee; (6) strictly comply with Licensor's reasonable requirements to protect the System and the Hotel from unreliable sources of supply; (7) strictly comply with Licensor's requirements as to: (a) the types of services and products that (i) must be used, promoted or offered at the Hotel and (ii) may be used at the Hotel; (b) use, display, style and type of signage; (c) directory and reservation service listings of the Hotel; (d) training of persons to be involved in the operation of the Hotel; (e) participation in all marketing, reservation service, advertising, training and operating programs designated by Licensor as System-wide (or area-wide) programs in the best interests of hotels using the System; (f) maintenance, appearance and condition of the Hotel; and (g) quality and type of service offered to customers at the Hotel. (8) use such automated guest service and/or hotel management and/or telephone system(s) which Licensor deems to be in the best interests of the System, including any additions, enhancements, supplements or variants thereof which may be developed during the term hereof; (9) participate in and use those reservation services which Licensor deems to be in the best interests of the System, including any additions, enhancements, supplements or variants thereof which may be developed during the term hereof; (10) adopt improvements or changes to the System as may be from time to time designated by Licensor (11) strictly comply with all governmental requirements, including the filing and maintenance of any required trade name or fictitious name registrations, paying all taxes, and maintaining all governmental licenses and permits necessary to operate the Hotel in accordance with the System; (12) permit inspection of the Hotel by Licensor's representatives at any time and give them free lodging for such time as may be reasonably necessary to complete their inspections; (13) upon request by Licensor, provide to Licensor statistics on Hotel operations in the form specified by Licensor and using definitions specified by Licensor; (14) promote the Hotel on a local or regional basis subject to Licensor's requirements as to form, content and prior approvals; (15) insure that no part of the Hotel or the System is used to further or promote a competing business or other lodging facility, except as Licensor may approve for those competing businesses or lodging facilities owned, licensed, operated or otherwise approved by Licensor or its Entities; (16) use every reasonable means to encourage use of Embassy Suites facilities everywhere by the public; 4 (17) in all respects use Licensee's best efforts to reflect credit upon and create favorable public response to the name "Embassy Suites"; and (18) comply with Licensor's requirements concerning confidentiality of information. b. UPGRADING OF THE HOTEL. Licensor may at any time during the License Term require substantial modernization, rehabilitation and other upgrading of the Hotel. Limited exceptions from those standards may be made by Licensor based on local conditions or special circumstances. If the upgrading requirements contained in this Paragraph 6.b. cause Licensee undue hardship, Licensee may terminate this Agreement by paying a fee computed according to Paragraph 13.f. c. STAFF AND MANAGEMENT. Licensee must at all times retain and exercise direct management control over the Hotel's business. Licensee shall not enter into any lease, management agreement or other similar arrangement for the operation of the Hotel or any part thereof with any entity without the prior written consent of Licensor. 7. FEES. a. For each month (or part of a month) during the License Term, Licensee will pay to Licensor by the 15th of the following month: (1) a royalty fee equal to 4 percent of the gross revenues attributable to or payable for rental of Guest Suites at the Hotel with deductions for sales and room taxes only ("Gross Suites Revenue"); and (2) a "Marketing/Reservation Contribution" equal to 3.5 percent of Gross Suites Revenue (but no less than $1.75 per guest suite per night). The Marketing/Reservation Contribution is subject to change by Licensor from time to time, which Marketing/Reservation Contributions do not include the cost, installation or maintenance of reservation services equipment or training; and (3) all amounts due Licensor for any other miscellaneous fees or invoices or for goods or services purchased by or provided to Licensee; and (4) an amount equal to any sales, gross receipts or similar tax imposed on Licensor for the receipt of the payments required in (1), (2) and (3) of this Paragraph above, unless the tax is an optional alternative to an income tax otherwise payable by Licensor. b. Licensee will operate the Hotel so as to maximize Gross Suites Revenue consistent with sound marketing and industry practice and will not engage in any conduct which is likely to reduce Gross Suites Revenue in order to further other business activities. c. Royalties may be charged on revenues (or upon any other basis, if so determined by Licensor) from any activity conducted at the Hotel if added by mutual agreement and if: (i) not now offered at hotels within the System generally and is likely to benefit significantly from or be identified significantly with the Embassy Suites name or other aspects of the System or (ii) designed or developed by or for Licensor. d. Licensor may charge for optional products or services accepted by Licensee from Licensor either in accordance with current practice or as developed in the future. e. A Guest Suite addition fee for guest suite additions to a hotel set forth in Licensor's then current "Franchise Offering Circular" shall be paid by Licensee to Licensor on Licensee's submission of an application to add any Guest Suites to the Hotel. As a condition to Licensor granting its approval of such application, Licensor may require Licensee to upgrade the Hotel, subject to Paragraph 6.b. f. Local and regional marketing programs and related activities may be conducted by Licensee, but only at Licensee's expense and subject to Licensor's requirements. Reasonable charges may be made by Licensor for optional advertising materials ordered or used by Licensee for such programs and activities. 5 g. Licensee shall participate in Licensor's travel agent commission program(s) as it may be modified from time to time and shall reimburse Licensor on or before the 15th of each month for travel agent commissions paid by Licensor. h. Each payment under this Paragraph 7 shall be accompanied by the monthly statement referred to in Paragraph 8. Licensor may apply any amounts received under this Paragraph 7 to any amounts due under this Agreement. If any amounts are not paid when due, such non-payment shall constitute a breach of this Agreement and, in addition, such unpaid amounts will accrue interest beginning on the first day of the month following the due date at 1 1/2 percent per month but not to exceed the maximum interest permitted by applicable law. 8. RECORDS AND AUDITS. a. DAILY AND MONTHLY REPORTS. At the request of Licensor, Licensee shall prepare and delver daily reports to Licensor, which reports will contain information reasonably requested by Licensor on a daily basis, such as daily rate and room occupancy, and which may be used by Licensor for its reasonable purposes. At least monthly, Licensee shall prepare a statement which will include all information concerning Gross Suites Revenue, other revenues generated at the Hotel, suite occupancy rates, reservation data and other information required by Licensor that may be useful in connection with marketing and other functions of Licensor and its Entities (the "Data"). The Data shall be the property of Licensor. The Data will be permanently recorded and retained as may be reasonably required by Licensor. By the 15th of each month, Licensee will submit to Licensor a statement setting forth the Data for the previous month and reflecting the computation of the amounts then due under Paragraph 7. The statement will be in such form and detail as Licensor may reasonably request from time to time, and may be used by Licensor for its reasonable purposes. b. MAINTENANCE OF RECORDS. Licensee shall, in a manner and form satisfactory to Licensor and utilizing accounting and reporting standards as reasonably required by Licensor, prepare on a current basis (and preserve for no less than four years), complete and accurate records concerning Gross Suites Revenue and all financial, operating, marketing and other aspects of the Hotel, and maintain an accounting system which fully and accurately reflects all financial aspects of the Hotel and its business. Such records shall include books of account, tax returns, governmental reports, register tapes, daily reports, and complete quarterly and annual financial statements (profit and loss statements, balance sheets and cash flow statements). c. AUDIT. Licensor may require Licensee to have the Gross Suites Revenue or other monies due hereunder computed and certified as accurate by a certified public accountant. During the License Term and for two years thereafter, Licensor and its authorized agents shall have the right to verify information required under this Agreement by requesting, receiving, inspecting and auditing, at all reasonable times, any and all records referred to above wherever they may be located (or elsewhere if reasonably requested by Licensor). If any such inspection or audit discloses a deficiency in any payments due hereunder, Licensee shall immediately pay to Licensor (i) the deficiency, (ii) interest thereon as provided in Paragraph 7.h., and (iii) all inspection and audit costs (including travel, lodging, meals, salaries and other expenses of the inspecting or auditing personnel). Licensor's acceptance of Licensee's payment of any deficiency as provided for herein shall not waive Licensor's right to terminate this Agreement as provided for herein in Paragraph 13. If the audit discloses an overpayment, Licensor shall refund the overpayment to Licensee within 30 days. d. ANNUAL FINANCIAL STATEMENTS. Licensee will submit to Licensor complete year-end financial statements for the Hotel, Licensee and/or any guarantors as soon as available but not later than 90 days after the end of Licensee's fiscal year. Licensee will certify them to be true and correct and to have been prepared in accordance with generally accepted accounting principles consistently applied, and any false certification will be a breach of this Agreement. 9. INDEMNITY. Licensee will indemnify, during and after the term of this Agreement, Licensor and its Entities and their officers, directors, employees, agents, predecessors, successors and assigns (`Indemnified Parties") against, hold them 6 harmless from, and promptly reimburse them for, all payments of money (fines, damages, legal fees, expenses, etc.) by reason of any claim, demand, tax, penalty, or judicial or administrative investigation or proceeding (even where negligence of Licensor and/or its Entities and/or their Indemnified Parties is actual or alleged) arising from any claimed occurrence at the Hotel or arising from, as a result of or in connection with the design, construction, furnishings, equipment and acquisition of supplies or any other of Licensee's acts, omissions or obligations or those of anyone associated or affiliated with Licensee or the Hotel. At the election of Licensor, Licensee will also defend Licensor and/or its Entities and/or their Indemnified Parties against the same. In any event, Licensor will have the right, through counsel of its choice, to control any mailer to the extent it could directly or indirectly affect Licensor and/or its Entities and/or their Indemnified Parties financially. Licensee will also reimburse Licensor for all expenses, including attorneys' fees and court costs, reasonably incurred by Licensor to protect itself and/or its Entities and/or their Indemnified Parties from, or to remedy Licensee's defaults or to collect any amounts due under this Agreement. 10. INSURANCE. a. Licensee will comply with Licensor's specifications for insurance as to amount and type of coverage as may be reasonably specified by Licensor from time to time in writing and will in any event maintain as a minimum the following insurance underwritten by an insurer approved by Licensor: (1) employer's liability and workers' compensation insurance as prescribed by applicable law; and (2) liquor liability insurance, if applicable, naming Licensor and its then current Entities and their predecessors, successors and assigns as additional insureds with single-limit coverage for personal and bodily injury and property damage of at least $10,000,000 for each occurrence; and (3) commercial general liability insurance (with products, completed operations and independent contractors coverage) and comprehensive automobile liability insurance, all on an occurrence and per location basis naming Licensor, its Entities and their predecessors, successors and assigns as additional insureds and underwritten by an insurer approved by Licensor, with single-limit coverage for personal and bodily injury and property damage of at least $10,000,000 for each occurrence; and (4) in connection with all construction at the Hotel during the License Term, Licensee will cause the general contractor to maintain with an insurer approved by Licensor commercial general liability insurance (with products, completed operations, and independent contractors coverage including workers' compensation and automobile liability insurance for such independent contractors) in at least the amount of $10,000,000 for each occurrence for personal and bodily injury and property damage with Licensor, its Entities and their predecessors, successors and assigns as additional insureds. b. EVIDENCE OF INSURANCE/CHANGES. This coverage shall be evidenced by original certificates of insurance submitted to Licensor simultaneously herewith, annually hereafter and each time a change is made in any insurance or insurance carrier, Licensee will furnish to Licensor certificates of insurance including the term and coverage of the insurance in force, the persons insured, and a statement that the coverage may not be cancelled, altered or permitted to lapse or expire without 30 days advance written notice to Licensor. Licensor will send Licensee notice of any policy or coverage which Licensor, in its sole discretion, finds unacceptable and upon receipt of such notice, Licensee will promptly undertake to change such policy or coverage. c. If Licensee fails or neglects to obtain or maintain the insurance or policy limits required by this Agreement, Licensor shall have the option, without notice, to obtain and maintain such insurance for Licensee, and Licensee shall pay immediately upon demand therefore, the premiums and the cost incurred by Licensor in taking such action. 11. TRANSFER. a. TRANSFER BY LICENSOR. Licensor shall have the right to transfer or assign this Agreement or any of Licensor's rights or obligations under this Agreement to any person or legal entity. 7 b. TRANSFERS BY LICENSEE. This License is not transferrable and to change the License holder a new License must be approved by Licensor and, if approved, executed by the new licensee. Licensee understands and acknowledges that the rights and duties set forth in this Agreement are personal to Licensee, and that Licensor has entered into this Agreement in reliance on the business skill, financial capacity, and personal character of Licensee (if Licensee is an individual), and that of the partners, members, or stockholders of Licensee (if Licensee is a partnership, company, corporation, or other legal entity). Accordingly, neither Licensee nor any immediate or remote successor to any part of Licensee's interest in this Agreement, nor any individual, partnership, company, corporation, or other legal entity which directly or indirectly owns an Equity Interest (as defined herein) in Licensee shall sell, assign, transfer, convey, pledge, mortgage, encumber, or give away ("Transfer") any direct or Indirect Interest in this Agreement or Equity Interest in Licensee, except as provided in this Agreement. (1) Any purported transfer, by operation of law or otherwise, of any interest in this Agreement or any Equity Interest in Licensee not in accordance with the provisions of this Agreement shall be null and void and shall constitute a material breach of this Agreement, for which Licensor may terminate this Agreement upon notice without opportunity to cure pursuant to Paragraph 13.d. (2) References in this Agreement to "Equity Interests" shall mean (i) any direct or indirect beneficial interest in Licensee; (ii) any stock, membership or partnership interest in Licensee, or (iii) any stock, membership or partnership interest in any corporation, partnership, company, or other legal entity which is a partner, member or stockholder of Licensee. In addition, "publicly-traded equity interest" shall mean any Equity Interest which is traded on any securities exchange or is quoted in any publication or electronic reporting service maintained by the National Association of Securities Dealers, Inc. or any of its successors. In computing changes of Equity Interests limited partners will not be distinguished from general partners, and Licensor's judgment will be final if there is any question as to the definition of Equity Interest or as to the computation of relative Equity Interests, the principal considerations being: direct and indirect (i) power to exercise control over the affairs of Licensee; (ii) right to share in Licensee's profits; and (iii) exposure to risk in the Licensee's business. (3) Licensee represents that the Equity Interests are directly and (if applicable) indirectly owned as shown on the Rider. c. TRANSFER OF EQUITY INTERESTS. The following situations are permitted Transfers of Equity Interests: (1) Equity Interests may be Transferred as follows, with Licensor's prior written consent, which will not be unreasonably withheld, provided at all times adequate provision is made for management of the Hotel: (a) Equity Interests which are not publicly-traded may be Transferred, if after the transaction, 50 percent or less of all Equity Interests will have changed hands since the date of this Agreement. (b) Equity Interests which require registration under any federal or state securities law may be Transferred provided that Licensee (i) at least 45 days prior to the proposed registration submits a request for Licensor's consent accompanied by a non-refundable payment of $25,000, and (ii) reimburses Licensor for expenses in excess of $25,000 incurred in connection with the review of the materials concerning the proposed registration, including Licensor's attorneys' fees and travel expenses. (c) Licensee and all participants in any proposed offering (including the sale of partnership or membership interests) must also agree to fully indemnify Licensor in connection with the registration; furnish Licensor all information requested by Licensor; avoid any implication of Licensor's participating in or endorsing the offering and use Licensor's service marks and trademarks only as directed by Licensor. 8 (d) Publicly-traded equity interest may be Transferred without Licensor's consent If such transfer is exempt from registration under federal securities law and if immediately before and after the Transfer, the transferor and transferee respectively each own less than 25 percent of the Equity Interests in Licensee. (2) PERMITTED TRANSFEREES/LICENSEE'S DEATH. (a) Licensee, if a natural person, may transfer the License to one or more of Licensee's spouse, parents, siblings, nephews, descendants or spouses descendants or to a corporation entirely owned by Licensee ("Permitted Transferees") provided (i) the Permitted Transferee promptly executes a new license agreement (and guaranty, if applicable) on Licensee's then current license agreement form for the unexpired term of this Agreement and (ii) Licensee guarantees, in Licensor's usual form, the performance of the Permitted Transferee's obligations under the newly executed license agreement. (b) If Licensee is a natural person, upon the Licensee's death, the License will pass in accordance with Licensee's will, or, if Licensee dies intestate, in accordance with laws of intestacy governing the distribution of the Licensee's estate, as the case may be, provided the transferee is one or more of the decedent's Permitted Transferee's (excluding corporations formerly owned by the Licensee) and provided the Permitted Transferee promptly executes a new license agreement (and guaranty if applicable) on Licensor's then current license agreement form for the unexpired term of this Agreement. (c) If an Equity Interest is owned by a natural person, the transfer provisions of Paragraph 11.c.(2)(a) and (b) above will apply to the Transfer of such Equity Interests to a Permitted Transferee. (3) FINANCING. The construction and/or operation of the Hotel may not be financed by a pubic offering of any right, title or interest in the Hotel, the property upon which it is built or the receipts from its operation without the prior review and approval of the applicable documentation by Licensor. Licensee shall submit a non-refundable $25,000 fee with said documentation. (4) CHANGE OF OWNERSHIP. (a) This License is not transferrable. If Licensee (i) receives an offer to purchase or lease the Hotel or any portion thereof, (ii) desires to sell or lease the Hotel or any portion thereof, (iii) wishes to convey the Hotel, Hotel site, or any Equity Interest in the Hotel, Licensee shall give prompt written notice thereof to Licensor, stating the identity of the prospective transferee, purchaser or lessee and the terms and conditions of the conveyance, including a copy of any proposed agreement and all other information with respect thereto, which Licensor may reasonably require. (b) Under the provisions of this Agreement, (i) any Transfer of Equity Interests (other than a permitted Transfer) or (ii) Transfer of all or a substantial part of the Hotel or Hotel site (if the Hotel or Hotel site is owned directly or indirectly by Licensee), to a new owner who desires to operate the Hotel as an Embassy Suites hotel, shall constitute a change of ownership requiring submittal of an application for a new license. (c) Licensor shall process such change of ownership application in good faith and in accordance with Licensor's then current procedures, criteria and requirements regarding fees, upgrading of the Hotel, credit, operational abilities and capabilities, prior business dealings, market feasibility and other factors deemed relevant by Licensor. If such change of ownership application is approved, Licensor and the new owner shall, upon surrender of this Agreement, enter into a new license agreement. The new license agreement shall be on Licensor's then current form and contain Licensor's then current terms (except for duration), and if applicable, the new license agreement will contain specified upgrading and other requirements. 9 (d) If a change of ownership application for the proposed new owner is not approved by Licensor and the conveyance of the Hotel or Equity Interests to the proposed new owner occurs, then this Agreement shall terminate pursuant to Paragraph 13.d hereof and Licensor shall be entitled to all of its remedies. 12. CONDEMNATION AND CASUALTY. a. CONDEMNATION. Licensee shall, at the earliest possible time, give Licensor notice of any proposed taking by eminent domain. If Licensor agrees that the Hotel or a substantial part thereof is to be taken, Licensor may, in its sole discretion and within a reasonable time of the taking (within four months) transfer this Agreement to a nearby location selected by Licensee. If Licensor approves the new location and authorizes the transfer and if within one year of the closing of the Hotel Licensee opens a new hotel at the new location in accordance with Licensor's specifications, then the new hotel will be deemed to be the Hotel licensed under this Agreement. If a condemnation takes place and a new hotel does not, for whatever reason, become the Hotel under this Agreement in strict accordance with this Paragraph (or if it is reasonably evident to Licensor that such will be the case), this Agreement will terminate immediately upon notice thereof by Licensor to Licensee, without the payment of liquidated damages as calculated in Paragraph 13.f. b. CASUALTY. If the Hotel is damaged by fire or other casualty, Licensee will expeditiously repair the damage. If the damage or repair requires closing the Hotel, Licensee will immediately notify Licensor, will repair or rebuild the Hotel according to Licensor's standards, will commence reconstruction within four months after closing, and will reopen the Hotel for continuous business operations as soon as practicable (but in any event within one year after the closing of the Hotel), giving Licensor ample advance notice of the date of reopening. If the Hotel is not reopened according to this Paragraph, this Agreement will terminate immediately, upon notice thereof by Licensor to Licensee, with the payment of liquidated damages as calculated in Paragraph 13.f. c. NO EXTENSIONS OF TERM. Nothing in this Paragraph 12 will extend the License Term but Licensee shall not be required to make any payments pursuant to Paragraph 7 for periods during which the Hotel is closed by reason of condemnation or casualty. 13. TERMINATION. a. EXPIRATION OF TERM. Unless terminated earlier, this Agreement will expire without notice on _________________ 20__. b. PERMITTED TERMINATION PRIOR TO EXPIRATION OF TERM. Licensee may terminate this Agreement on the tenth or fifteenth anniversary date of this Agreement by giving at least 12 but not more than 15 months advance notice to Licensor accompanied by the payment as provided in Paragraph 13.f. herein. c. TERMINATION OR SUSPENSION BY LICENSOR ON ADVANCE NOTICE. This Agreement may be terminated if Licensee fails to satisfy any obligations under this Agreement or any attachment hereto. Except as provided in Paragraph 13.d, this Agreement shall terminate following an Event of Default after the Licensor furnishes adequate notice of termination. (1) An "Event of Default" shall occur if the Licensee fails to satisfy or comply with any of the requirements and conditions or terms as set forth in Attachment A or this Agreement, or breaches any of the following provisions of this Agreement: (i) any transfer, (ii) any representation or warranty, (iii) any fee obligation, (iv) any certification of financial statements or (v) any other provision of this Agreement. (2) Notice of termination shall be adequate, if (i) mailed the number of days in advance of the termination date as Licensor shall determine in its sole discretion, or (ii) mailed the number of days in advance of the termination date as required by applicable state law. If no notice is required by applicable state law, Licensor may, in its sole discretion, terminate this Agreement immediately. Notwithstanding the foregoing, Licensor's failure to terminate this Agreement immediately shall not waive any of Licensor's termination rights under this Agreement. 10 (3) Licensor's notice of termination shall not relieve Licensee of its obligations under this Agreement or Attachment A. (4) As a result of Licensee's efforts to comply with the terms and conditions contained on Attachment A and elsewhere in this Agreement, Licensee will incur substantial expense and expend substantial time and effort. Licensee acknowledges and agrees that Licensor shall have no liability or obligation to Licensee for any losses, obligations, liabilities or expenses incurred by Licensee if (i) Licensee commits an Event of Default as described on 13.c(1); (ii) the Hotel is not authorized by Licensor to Open as defined in Attachment A or (iii) this Agreement is terminated because Licensee has not complied with the terms and conditions of this Agreement. (5) Notwithstanding the foregoing, following an Event of Default, Licensor may at any time, in its sole discretion, suspend its obligations under this Agreement (including reservation services). d. IMMEDIATE TERMINATION BY LICENSOR. Notwithstanding the foregoing Paragraph, this Agreement may be immediately terminated (or terminated at the earliest time permitted by applicable law) if one or more of the following material breaches to this Agreement or any Attachment occur: (1) Any Event of Default where a prior Event of Default had also occurred during the preceding 12 months, but the License was not terminated because Licensee cured the prior Event of Default; (2) Any Event of Default where the Licensor in its reasonable judgment believes that even if the Licensee were to cure such Event of Default the relationship between the parties has been irreparably damaged and cannot be satisfactorily restored; (3) Licensee or any guarantor of Licensee's obligations hereunder shall: (a) generally not pay its debts as they become due or shall admit in writing its inability to pay its debts, or shall make a general assignment for the benefit of creditors; or (b) commence any case, proceeding or other action seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property; or (c) take any corporate or other action to authorize any of the actions set forth above in Paragraphs (a) or (b); or (4) Any case, proceeding or other action against Licensee or any such guarantor shall be commenced seeking to have an order for relief entered against it as debtor, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, and such case, proceeding or other action (i) results in the entry of an order for relief against it which is not fully stayed within seven business days after the entry thereof or (ii) remains undismissed for a period of 45 days; or (5) an attachment remains on all or a substantial part of the Hotel or of Licensee's or any such guarantors assets for 30 days; or (6) Licensee or any such guarantor fails within 60 days of the entry of a final judgment against Licensee in any amount exceeding $50,000 to discharge, vacate or reverse the judgment, or to stay execution of it, or if appointed, to discharge the judgment within 30 days after a final adverse decision in the appeal; or (7) Licensee loses possession or the right to possession of all or a significant part of the Hotel or Hotel site; or 11 (8) Licensee fails to continue to identify the Hotel to the public as an Embassy Suites hotel; or (9) Licensee contests in any court or proceeding Licensor's ownership of the System or any part of the System, or the validity of any service marks or trademarks associated with Licensor's business; or (10) Any action is taken toward dissolving or liquidating Licensee or any such guarantor, if it is a corporation or partnership, except for death of a partner; or (11) Licensee or any of its principals is, or is discovered to have been convicted of a felony (or any other offense if it is likely to adversely reflect upon or affect the Hotel, the System, the Licensor and/or its Entities in any way; or (12) Licensee maintains false books and records of accounts or submits false reports or Information to Licensor. e. DE-IDENTIFICATION OF HOTEL UPON TERMINATION. Upon termination or expiration of the term, Licensee will take whatever action is necessary to assure that no use is made of any part of the System at or in connection with the Hotel or otherwise. Licensee shall return to Licensor the Manual and all other proprietary materials, remove all distinctive System features of the Hotel, including the primary freestanding sign down to the structural steel, and take all other actions ("De-identification Actions") required to preclude any possibility of confusion on the part of the public that the Hotel is still using all or any part of the System or is otherwise holding itself out to the public as an Embassy Suites hotel. If within 30 days after termination of this Agreement Licensee fails to comply with this Paragraph, Licensor or its agents at Licensee's expense, may enter the premises of the Hotel to perform the De-identification Actions. The preceding sentence shall not in any way limit Licensor's other rights or remedies under this Agreement. f. LIQUIDATED DAMAGES. The parties recognize the difficulty of ascertaining damages to Licensor resulting from premature termination of this Agreement, and have provided for liquidated damages, which liquidated damages represent the parties' best estimate as to the damages arising from the circumstances in which they are provided and which are only damages for the premature termination of this Agreement, and not as a penalty or as damages for breaching this Agreement or in lieu of any other payment. If this Agreement is terminated pursuant to Paragraphs 6.b., 12.b., 13.c., or 13.d., Licensee will pay Licensor, within 10 days of termination, an amount equal to the amount payable under Paragraph 7 for the three years prior to termination. If the Hotel has been Open for less than three years, Licensee will pay Licensor, within 10 days of termination, an amount equal to the greater of (i) 36 times the monthly average payable under Paragraph 7, or (ii) 36 times the amount payable under Paragraph 7 for the last full month prior to termination. Provided, however, if the Hotel has been authorized to open, but has not been in operation for one full month, Licensee will pay Licensor, within 10 days, an amount equal to $5,000 per Guest Suite in the Hotel. Further, provided, if the Agreement is terminated pursuant to Paragraph 13.b., the Licensee will pay the Licensor, within 10 days of notice required, an amount equal to the amount payable under Paragraph 7 for the two years prior to notice of termination. 14. RENEWAL. This Agreement is non-renewable. 15. RELATIONSHIP OF PARTIES. a. NO AGENCY RELATIONSHIP. Licensee is an independent contractor. Neither party is the legal representative or agent of, or has the power to obligate (or has the right to direct or supervise the daily affairs of) the other for any purpose whatsoever. Licensor and Licensee expressly acknowledge that the relationship intended by them is a business relationship based entirely on, and defined by, the express provisions of this Agreement and that no partnership, joint venture, agency, fiduciary or employment relationship is intended or created by reason of this Agreement. 12 b. LICENSEE'S NOTICES TO PUBLIC CONCERNING INDEPENDENT STATUS. Licensee will take all necessary steps including those reasonably requested by Licensor to minimize the chance of a claim being made against Licensor for anything that occurs at the Hotel, or for acts, omissions or obligations of Licensee or anyone associated or affiliated with Licensee or the Hotel. Such steps may, for example, include giving notice in Guest Suites, public rooms and advertisements, on business forms and stationery, etc., making clear to the public that Licensor is not the owner or operator of the Hotel and is not accountable for what happens at the Hotel. Unless required by law, Licensee will not use the words "Embassy", "Embassy Suites" or any other names or mark associated with the System to incur any obligation or indebtedness on behalf of Licensor. Licensee shall not enter into or execute any contracts in the name "Embassy Suites hotel", and all contracts for the Hotel's operations and services at the Hotel shall be in the name of Licensee or Licensee's management company. Likewise, the words "Embassy", "Embassy Suites", or any similar words will not be used to name or identify developments adjacent to or associated with the Hotel, nor will Licensee use such names in its general business in any manner separated from the business of the Hotel. 16. MISCELLANEOUS. a. SEVERABILITY AND INTERPRETATION. The remedies provided in this Agreement are not exclusive. If any provision of this Agreement is held to be unenforceable, void or voidable as being contrary to the law or public policy of the jurisdiction entitled to exercise authority hereunder, all remaining provisions shall nevertheless continue in full force and effect unless deletion of such provision(s) impairs the consideration for this Agreement in a manner which frustrates the purpose of the parties or makes performance commercially impracticable. The provisions of this Agreement shall be interpreted based on the reasonable intention of the parties in the context of this transaction without interpreting any provision in favor of or against any party whether or not such party was the drafting party or by such party's position relative to the other party. Any covenant, term or provision of this Agreement which, in order to effect the intent of the parties, must survive the termination of this Agreement, shall survive any such termination. b. BINDING EFFECT. This Agreement shall become valid when signed by the parties hereto. It shall be deemed made and entered into in the State of Tennessee and shall be governed and construed under and in accordance with the laws of the State of Tennessee. In entering into this Agreement, Licensee acknowledges that it has sought, voluntarily accepted and become associated with Licensor who is headquartered in Memphis, Tennessee, and that this Agreement contemplates and will result in business relationships with Licensor's headquarter's personnel. The choice of law designation permits, but does not require that all suits concerning this Agreement be filed in the State of Tennessee. c. EXCLUSIVE BENEFIT. This Agreement is exclusively for the benefit of the parties hereto, and it may not give rise to liability to a third party, except as otherwise specifically set forth herein. No agreement between Licensor and anyone else is for the benefit of Licensee. d. ENTIRE AGREEMENT. Licensor and the Licensee each acknowledge and warrant to each other that they wish to have all terms of this business relationship defined in this written agreement, Neither Licensor nor Licensee wishes to enter into a business relationship with the other in which any terms or obligations are the subject of alleged oral statements or in which oral statements serve as the basis for creating rights or obligations different than or supplementary to the rights and obligations set forth in this Agreement. Accordingly, Licensor and Licensee agree that this Agreement and any Attachments hereto and the documents referred to herein, shall be construed together and shall supersede and cancel any prior and/or contemporaneous discussions or writings (whether described as representations, inducements, promises, agreements or any other term) between Licensor or anyone acting on its behalf and Licensee or anyone acting on his, her or its behalf, which might be taken to constitute agreements, representations, inducements, promises or understandings (or any equivalent to such terms) with respect to this Agreement or the relationship between the parties and Licensor and Licensee each agree that they have placed, and will place, no reliance on any such discussions or writings. This Agreement (including any Attachments and the documents referred to herein), is the entire agreement between the parties and contains all of the terms, conditions, rights and obligations of the parties with respect to the Hotel or any other aspect of the relationship between the parties. No future license or offer of a license for additional locations or any other business activity have been promised to Licensee and no such license or offer 13 shall come into existence, except by means of a separate writing, executed by Licensor's officer or such other entity granting the license and specifically identified as a License Agreement. No change, modification, amendment or waiver of any of the provisions of this Agreement will be effective and binding upon Licensor unless it is in writing, specifically identified as an amendment to this Agreement and signed by Licensor's officer. e. LICENSOR'S WITHHOLDING CONSENT. Licensor may withhold its consent, wherever required under this Agreement, if any default or breach by Licensee exists under this Agreement. Approvals and consents by Licensor will not be effective unless evidenced by a writing duly executed on behalf of Licensor. f. NOTICES. Notices will be effective hereunder when and only when they are written and delivered personally, sent via facsimile or mailed by first class mail, next day express delivery service or by certified mail to the appropriate party at its address first stated above or to such person and at such address as may be designated by notice hereunder. g. GENERAL RELEASE. Licensee and its respective heirs, administrators, executors, agents, representatives and their respective successors and assigns, hereby release, remise, acquit and forever discharge Licensor and its Entities and their officers, directors, employees, agents, representatives and their respective successors and assigns from any and all actions, claims, causes of action, suits, rights, debts, liabilities, accounts, agreements, covenants, contracts, promises, warrants, judgments, executions, demands, damages, costs and expenses, whether known or unknown at this time, of any kind or nature, absolute or contingent, if any, at law or in equity, on account of any matter, cause or thing whatsoever which has happened, developed or occurred at any time from the beginning of time to and including the date of Licensee's execution and delivery to Licensor of this Agreement and that they will not institute any suit or action at law or otherwise against Licensor directly or indirectly relating to any claim released hereby by Licensee. This release and covenant not to sue shall survive the termination of this Agreement. Licensee shall take whatever steps are necessary or appropriate to carry out the terms of this release upon Licensor's request. h. DESCRIPTIVE HEADINGS. The descriptive headings in this Agreement are for convenience only and shall not control or affect the meaning or construction of any provision in this Agreement. i. WARRANTIES. Licensee warrants, represents and agrees that all statements made by Licensee in the Application submitted to Licensor in anticipation of this Agreement and all other documents and information submitted by Licensee are true, correct and complete as of the date hereof and will continue to be updated so that they are true, correct and complete. This warranty and representation shall survive the termination of this Agreement. j. TIME. Time is of the essence in this Agreement. k. INCLUDING. Including shall mean including, without limitation. l. COUNTERPARTS. This Agreement may be executed in counterparts, and each copy so executed and delivered shall be deemed an original. m. AMENDMENTS. If an amendment to this Agreement is required prior to its execution, said amendment shall be made a part of this Agreement as an Attachment. If an amendment to this Agreement is necessary after its execution, said amendment shall be made a part of this Agreement in the form of a separate document. n. PERFORMANCE REQUIREMENTS/RESPONSIBILITIES. Attachment A is hereby incorporated by reference and made a part of this Agreement to set forth certain of Licensee's performance conditions and requirements. 17. EXPIRATION OF AGREEMENT. This Agreement constitutes an offer which must be accepted by the Applicant named on the signature page hereof by dating, executing and returning to Licensor two copies hereof (and all attachments hereto, including, if required, the Guaranty) on or before the date specified on the Rider. 14 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first stated above. LICENSEE: LICENSOR: - ---------------------------------- ---------------------------------- By: By: ------------------------------- ------------------------------- Name: Name: ----------------------------- ----------------------------- Title: Title: ---------------------------- ---------------------------- Witness: Witness: --------------------------- --------------------------- Date: Date: ----------------------------- ----------------------------- 15 GUARANTY Location: As an inducement to _____________ Inc. ("Licensor") to execute the above License Agreement, the undersigned, jointly and severally, hereby unconditionally warrant to Licensor and its successors and assigns that all of Licensee's representations in the License Agreement and the application submitted by Licensee to obtain the License Agreement are true and guarantee that all of Licensee's obligations under the above License Agreement, including any amendments thereto whenever made (the "Agreement"), will be punctually paid and performed. Upon default by Licensee or notice from Licensor, the undersigned will immediately make each payment and perform each obligation required of Licensee under the Agreement. Without affecting the obligations of the undersigned under this Guaranty, Licensor may without notice to the undersigned extend, modify or release any indebtedness or obligation of Licensee, or settle, adjust or compromise any claims against Licensee. The undersigned waive notice of amendment of the Agreement and notice of demand for payment or performance by Licensee. Upon the death of an individual guarantor, the estate of such guarantor will be bound by this Guaranty but only for defaults and obligations hereunder existing at the time of death, and the obligations of the other guarantors will continue in full force and effect. The Guaranty constitutes a guaranty of payment and performance and not of collection, and each of the guarantors specifically waives any obligation of Licensor to proceed against Licensee on any money or property held by Licensee or by any other person or entity as collateral security, by way of set off or otherwise. The undersigned further agree that this Guaranty shall continue to be effective or be reinstated as the case may be, if at any time payment or any of the guaranteed obligations is rescinded or must otherwise be restored or returned by Licensor upon the insolvency, bankruptcy or reorganization of Licensee or any of the undersigned, all as though such payment has not been made. This Guaranty shall be governed and construed under and in accordance with the laws of the State of Tennessee. IN WITNESS WHEREOF, each of the undersigned has signed this Guaranty as of the date of the above Agreement. Witnesses. Witnesses: Guarantors: FelCor Suites Limited Partnership By: FelCor Suite Hotels, Inc. - ---------------------------------- ----------------------------- ----------------------------- By: FelCor Suite Hotels, Inc. - ---------------------------------- ----------------------------- ----------------------------- 16 ATTACHMENT A-PERFORMANCE CONDITIONS CHANGE OF OWNERSHIP A. CONSULTATION. Licensee or its representative(s) shall meet with Licensor at a location selected by Licensor, within 45 days following the date of Licensee's receipt of a request from Licensor for consultation and coordination with the project manager assigned to Licensee by Licensor. B. WORK AND PURCHASE REQUIREMENT. Attachment C, the Product Improvement Plan (the "PIP"), is incorporated by reference, attached to and made a part of this Agreement. Licensee shall perform the renovation and/or construction work and purchase the items described on the PIP (the "Work") on or before the completion date specified on the Rider. Whether or not indicated on the PIP, the Work shall include Licensee's purchasing and/or leasing and installing all fixtures, equipment, furnishings, furniture, signs, computer terminals and related equipment, supplies and other items which would be required of a new Embassy Suites licensee under the Manual and such other equipment, furnishings and supplies as may be required by Licensor in order to operate the Hotel. Licensee shall be solely responsible for obtaining all necessary licenses, permits and zoning variances required for the Hotel. C. APPROVAL OF ARCHITECT/ENGINEER AND CONTRACTOR. Licensor shall have the right to approve the architect/engineer, general contractor and major subcontractors for the Work. The Work shall not commence until such approval has been granted, which approvals may be conditioned on bonding of the contractors. Prior to commencement of the Work, if requested by Licensor, Licensee shall submit to Licensor, resumes and financial statements of the architect/engineer, general contractor and any major sub-contractors for the Work and such additional information concerning their experience and financial responsibility as Licensor may request. D. APPROVAL OF PLANS. On or before the Plans submission date specified on the Rider, Licensee shall submit to Licensor, Licensee's plans and specifications and drawings for the Work, including the proposed furnishings, fixtures, equipment and signs (collectively, "Plans") for approval. Once Licensor has approved the Plans, no change shall be made to the Plans without the advance consent of Licensor. In approving the Plans, Licensor does not in any manner warrant the depth of its analysis or assume any responsibility for the efficacy of the Plans or the resulting construction. Licensee shall cause the Hotel renovation and/or construction to be in accordance with this Agreement, the approved Plans, the Manual and the PIP. E. COMMENCEMENT; COMPLETION. Licensee shall commence the Work on or before the date specified on the Rider and shall continue the Work uninterrupted (except for interruption by reason of events constituting force majeure) until it is completed. Notwithstanding the occurrence of any events constituting force majeure, or any other cause, the Work shall be completed and the Hotel shall be furnished, equipped, and shall otherwise be in compliance with this Agreement not later than the date specified on the Rider. Licensor shall have the sole right to determine whether the Work has been completed in accordance with this Agreement, the approved Plans, the Manual and the PIP. F. INSPECTION. During the course of the Work, Licensee shall, and Licensee shall cause the architect, engineer, contractors, and subcontractors to cooperate fully with Licensor for the purpose of permitting Licensor to inspect the Hotel in order to determine whether the Work is being done in accordance with this Agreement and shall provide Licensor with samples of construction materials, etc. as Licensor may request. G. REPORTS. Licensee shall submit to Licensor each month after the date hereof (or more frequently if Licensor shall so request) a report showing progress made toward fulfilling the terms of this Agreement. H. ACQUISITION OF EQUIPMENT, FURNISHINGS, AND SUPPLIES/STAFFING. Licensee shall order, purchase and/or lease and install all fixtures, equipment, furnishings, furniture, signs, computer terminals and related equipment, supplies and other Items required by Licensor, this Agreement, the approved Plans, the Manual and the PIP. In accordance with the Manual and such other instructions as are furnished to Licensee by Licensor, Licensee shall cause to be hired a staff to operate the Hotel, and all such personnel shall be trained as required by the Manual. All costs and expenses incurred directly or indirectly in hiring and training such staff shall be paid by Licensee, except as expressly provided otherwise in the Manual. I. COST OF CONSTRUCTION AND EQUIPPING. Licensee shall bear the entire cost of the Work, Including the cost of the plans, professional fees, licenses and permits, equipment, furniture, furnishIngs and supplies. J. LIMITATION OF LIABILITY. Notwithstanding the right of Licensor to approve the Plans, the architect, engineer and certain contractors, and to inspect the Work and the Hotel, Licensor shall have no liability or obligation with respect to the Work, or the design and construction of the Hotel, as the rights of Licensor are being exercised solely for the purpose of assuring compliance with the terms and conditions of this Agreement. Licensor does not undertake to approve the Hotel as complying with governmental requirements or as being safe for guests or other third parties. Licensee should not rely upon Licensor's approval for any purpose whatsoever except compliance with Licensor's then prevailing standards and requirements of the Manual. K. CONDITIONAL AUTHORIZATION. Licensor may conditionally authorize Licensee to continue to operate the Hotel as an Embassy Suites hotel even though Licensee has not fully complied with the terms of this Agreement. Under certain circumstances, Licensor may suspend services to the Hotel (including reservation services) while the Work is being performed by Licensee. L. PERFORMANCE OF AGREEMENT. Licensee agrees to satisfy all of the terms and conditions of this Agreement, and to equip, supply and staff the Hotel in accordance with this Agreement and to cooperate with Licensor in connection therewith. As a result of Licensee's efforts to comply with the terms and conditions of this Agreement, Licensee will incur substantial expense and expend substantial time and effort. Licensee acknowledges and agrees that Licensor shall have no liability or obligation to Licensee for any losses, obligations, liabilities or expenses incurred by Licensee if this Agreement is terminated because Licensee has not complied with the terms and conditions of this Agreement. 2 ATTACHMENT B RIDER TO LICENSE AGREEMENT Name and Address of Licensee: ________________________________________ c/o FelCor Suite Hotels, Inc. 545 E. John Carpenter Freeway, Suite 1300 Irving, Texas 75062-3933 Location of Hotel: 2727 Stemmons Freeway Dallas, Texas 75207 Number of Approved Guest Suites: Term of License to Expire: 20 years from closing on the purchase of the Hotel Plans submission date Preliminary Plans: Upgrading Plans and Specifications: Within 30 days of closing on the purchase of the Hotel Construction or Work commencement date: Upon closing on the purchase of the Hotel Construction or Work Completion date: Within the time frames established in the Product Improvement Plan Additional Requirements: Within 30 days of closing, Licensee shall provide Licensor with a copy of the lease agreement between FelCor Suites Limited Partnership and DJONT Leasing, L.L.C. Agreement expiration date: (Paragraph 17} Ownership of Licensee:
EXHIBIT "B" DEAL SPECIFIC TERMS Term: Initial Minimum Balance for the Bank Account(s) for the Hotel: Initial Lessee's Representative: Disbursement Schedule: B-1 Notices: Lessee: Manager: 545 East John Carpenter Freeway ____________________________ Suite 1300 Irving, Texas 75062-3933 Fax: (214) 444-4949 Attn: with a copy to: ______________________________ PERFORMANCE TEST; TERMINATION RIGHTS: A. Lessee shall have the right to terminate this Agreement if, beginning in the first full calendar year of Hotel operations, Manager fails to achieve, in any two consecutive calendar years, a Gross Operating Profit which is at least eighty percent (80%) of the amount set forth in the respective annual Operating Budget for Gross Operating Profit ("Budgeted GOP") provided, however, that if within sixty (60) days of receipt of a notice from Lessee that Lessee intends to terminate this Agreement, Manager pays in cash to Lessee the difference between the achieved Gross Operating Profit and ninety percent (90%) of the Budgeted GOP (hereinafter referred to as a "Fund Up Cure") for the second of the two consecutive calendar years in which shortfalls occurred, then Lessee shall not be entitled to terminate this Agreement. Notwithstanding such Fund Up Cure of the second calendar year, if there is a failure to reach eighty percent (80%) of Budgeted GOP in a third consecutive calendar year, no Fund Up Cure shall be available. If Lessee is entitled to and elects to terminate this Agreement, Lessee shall give written notice to Manager within ninety (90) days following delivery to Lessee of the annual financial statements for the calendar year. If such notice is not provided by Lessee to Manager within such ninety-day (90) period, Lessee shall be deemed to have waived its right hereunder to terminate this Agreement with respect to the calendar year as to which the failure occurred. In the event Lessee has the right to terminate with respect to a calendar year but waives such right, Lessee's right to terminate shall carry forward and shall be applicable to the next succeeding calendar year if Manager fails to achieve eighty percent (80%) of Budgeted GOP for the next succeeding year. For purposes of this paragraph, the term "Gross Operating Profit" shall mean the amount, if any, by which Adjusted Gross Revenues for any calendar year exceed Operating Costs for such calendar year. B. In the event there is a Change in Control of Manager which satisfies the requirements of Section 9.06(c) of this Agreement, (i) the required level of performance contemplated in paragraph A above shall be increased from eighty percent (80%) to ninety percent (90%), and (ii) the Fund Up Cure shall be an amount equal to the difference between the achieved Gross Operating Profit and one hundred percent (100%) of Budgeted GOP. B-2 C. The provisions of paragraphs A and B above shall not apply in any calendar year in which the operation of the Hotel, or the use of the Hotel's facilities, are significantly disrupted by casualty loss, strike, eminent domain, or other events of Force Majeure that are beyond the reasonable control of Manager, or major repairs to or refurbishment of the Hotel. In the event Lessee exercises the right of termination contemplated in paragraph A or B above, Lessee shall have no obligation to pay any termination fee or other damages to Manager as a consequence of such termination except that Lessee shall be liable to Manager and shall pay immediately upon such termination all fees earned and other amounts and expenses payable or reimbursable to Manager pursuant to this Agreement. B-3 EXHIBIT "C" MANAGEMENT FEES 1. Defined Terms. Certain capitalized terms in this Exhibit "C" are defined in Paragraph 6 below; other capitalized terms have the meaning given such terms herein or in the Agreement. 2. Basic Management Fee. Commencing with the Commencement Date, and continuing during the Term of this Agreement, Lessee shall pay to Manager a basic management fee (the "Basic Management Fee"). The Basic Management Fee shall be payable monthly in an amount equal to two percent (2%) (such percentage is referred to herein as the "Applicable Percentage") of Adjusted Gross Revenues. 3. Incentive Management Fee. Commencing with the Commencement Date, and in addition to the Basic Management Fee, Manager shall be paid an incentive management fee (the "Incentive Management Fee") in an amount equal to fifty percent (50%) of Income Before Lessees Overhead Expenses, up to a maximum of two percent (2%) of Adjusted Gross Revenues. The Incentive Management Fee shall be payable monthly at the same time the Basic Management Fee is due and payable. Notwithstanding anything to the contrary contained herein or in that certain Management Agreement _____________________________________ of even date by and between Manager and Lessee related to the ______________________________ ___________________________________________________________________________, the sum of (i) the Incentive Management Fee payable pursuant to this Agreement plus (ii) the Incentive Management Fee as defined in, and payable pursuant to, the Syracuse Management Agreement, shall not exceed either: (A) Fifty percent (50%) of the sum of (i) the Income Before Lessees Overhead Expenses plus (ii) the Income Before Lessees Overhead Expenses as defined in the ________________________ Agreement, or (B) Two percent (2%) of the sum of (i) the Adjusted Gross Revenues plus (ii) the Adjusted Gross Revenues as defined in the Syracuse Management Agreement. 4. Books and Records. Manager shall maintain in the books and records of the Hotel all Management Fees that have been paid and shall set forth therein the accrual of all Management Fees that have been earned but are not yet due and payable. 5. Proration. With respect to any calculation in this "Exhibit C" that is based on a Term Year, such calculation shall be prorated for any partial Term Year based on the actual number of days elapsed in such partial Term Year that is applicable to the calculation. 6. Definitions: The term "Adjusted Gross Revenues" shall mean Gross Revenues less the following revenues actually received by the Hotel and included in Gross Revenues: (i) any gratuities or service charges added to a customer's bill; (ii) any credits or refunds made to customers, guests or patrons; (iii) any sums and C-1 credits received by Lessee for lost or damaged merchandise; (iv) any sales taxes, excise taxes, gross receipt taxes, admission taxes, entertainment taxes, tourist taxes or charges; (v) any proceeds from the sale or other disposition of the Hotel, furnishings and equipment or other capital assets; (vi) any fire and extended coverage insurance proceeds; (vii) any condemnation awards; (viii) any proceeds of financing or refinancing of the Hotel; and (ix) any interest on the Bank Account(s) and the Operating Deficit Account. The term "Excluded Lease Charges" shall mean all of the following: (i) late charges, penalties, fines, interests and cost associated with or attributable to non-payment or late payment of any obligation of Lessee or the Partnership; (ii) damages and liabilities (including legal fees and other legal costs) arising out of any default by Lessee or the Partnership under the Percentage Lease, the Management Agreement, the License Agreement any of the Financing Documents or any obligation owed to a third party; (iii) payments or liabilities arising under any indemnification obligation contained in the Percentage Lease; (iv) any cost or expense included in the calculation of Operating Costs; (v) payments made or costs incurred in connection with the exercise of any purchase option contained in the Percentage Lease; and (vi) appraisal costs contained in Article XXXIII of the Percentage Lease. The term "Gross Revenues" shall be defined as all revenues and income of any nature derived directly or indirectly from the Hotel or from the use or operation thereof, whether on or off the site, including total room sales, food and beverage sales, if any, laundry, telephone, telegraph and telex revenues, other income, rental or other payments from lessees, sublessees, licensees and concessionaires (but not the gross receipts of such lessees, sublessees, licensees or concessionaires) and the proceeds of business interruption, use, occupancy or similar insurance. The term "Income Before Lessee's Overhead Expenses" shall mean Adjusted Gross Revenues less the sum of (i) Operating Costs, (ii) lease payments under Qualifying Capital Leases, and (iii) Percentage Lease Payments; provided, however, in calculating Income Before Lessee's Overhead Expenses in deduction shall be made for (a) deposits into the Operating Deficit Account, (b) debt service on any borrowings of Lessee or the Partnership, (c) deposits into the Reserve Account, (d) Partnership Costs (as defined in Section 3.01(a) above) or (e) administrative and general overhead expenses of Lessee. The term "New Hotel" shall mean any Other Hotel and any other hotels with respect to which Lessee acquires a fee simple or leasehold interest after the Effective Date. The term "Operating Costs" shall mean the entire cost and expense of maintaining, operating and supervising the operation of the Hotel. Operating Costs shall be the sum of such costs and expenses which are normally charged as a cost of operation under standard accounting practices of Manager, including but not limited to: (i) the Management Fee; (ii) all amounts payable to Manager under the License Agreement; (iii) all reimbursable expenses due Manager; (iv) the cost of operating equipment and operating supplies, wages, salaries and employee fringe benefits, advertising and promotional expenses, the cost of personnel training programs, utility and energy costs, operating licenses and permits, grounds and landscaping maintenance costs and equipment rentals approved by Manager as an Operating Cost; (v) all expenditures made for maintenance and repairs to keep the Hotel in good condition and repair, specifically excluding capitalized expenditures for capital replacements; and (vi) premiums and charges C-2 on the insurance coverages specified on Exhibit "D" incurred after the Commencement Date. Operating Costs do not include Ownership Costs. The term "Ownership Costs" shall mean (i) depreciation of the Hotel, furnishings, fixtures and equipment; (ii) rental pursuant to a ground lease, if any, or any other lease payments; (iii) debt service (interest and principal) on any mortgage(s) encumbering the Lessee's leasehold estate or the Partnership's fee estate in the Hotel; (iv) property taxes and assessments; (v) amortization of pre-opening expenses; (vi) expenditures for capital replacements (to the extent actually capitalized rather than expensed); (vii) audit, legal and other professional or special fees; (viii) premiums for casualty insurance coverages specified in Exhibit "D" (ix) equipment rentals for capitalized leases; (x) administrative and general expenses and disbursements of Owners, including compensation of employees of Owners; (xi) Federal, State and local Franchise and Income Taxes; (xii) amortization of bond discounts and mortgage expenses; (xiii) such other costs or expenses which are normally treated as "Ownership Costs" under the standard accounting practices of Manager (which are in accordance with generally accepted accounting principles and are substantially similar to the Hotel and Motel Standard System of Accounts); (xiv) deposits into the Operating Deficit Account; and (xv) deposits into the Reserve Fund. The term "Percentage Lease Payments" shall mean payments of Base Rent, Percentage Rent and other regularly scheduled payments or charges required to be paid by Lessee under the Percentage Lease to the extent such payments relate to the ownership and operation of the Hotel, excluding, however, Excluded Lease Charges. The term "Qualifying Capital Leases" shall mean leases of equipment and other personal property that are capital in nature and are typically leased rather than purchased by Manager in Embassy Suites hotels owned by Manager. The term "Term Year" shall mean (i) with respect to the first Term Year, the period ending on the last day of the twelfth full calendar month after the Commencement Date, and (ii) with respect to each other Term Year, a twelve-month period ending on the applicable anniversary date of the first Term Year. C-3 EXHIBIT "D" INSURANCE In accordance with Section 3.01(o), Manager, on behalf of Lessee and at Lessee's expense, shall procure the insurance coverages hereinafter set forth and ensure that they are in full force and effect on the Commencement Date and that they remain in full force and effect throughout the Term of this Agreement. All cost(s) and expense(s) incurred by Manager in procuring the following insurance coverages shall be Operating Costs and shall be paid from the Bank Account(s): Coverages: Amounts Of Insurance: Workers' Compensation Statutory Employer's Liability $1,000,000 Fidelity (Employee Dishonesty) As required Money and Securities As required Builders Risk Completed value of the Hotel All risk for term of the initial and any subsequent Hotel construction and renovation Real and Personal Property 100% replacement value of building and contents Blanket Coverage Replacement Cost - All risk (including fire and earthquake) Boiler Machinery - written on a comprehensive form Business Interruption Calculated yearly based on estimated Hotel revenues Blanket Coverage for the perils insured against under Real and Personal Property in this Exhibit "D." This coverage shall specifically cover Manager's loss of Management Fees. The business interruption insurance shall be for a twelve (12) month indemnity period. Owner's Protective Liability $5,000,000 D-1 All risks from construction and renovation occurring prior to the Commencement Date and all risks from Hotel construction and renovation projects costing more than $250,000 occurring after the Commencement Date Comprehensive General Liability $10,000,000 per location Including - Premises - Operations Products/Completed Operations Contractual Personal Injury Liquor Liability/Dram Shop (if applicable) Elevators and Escalators Automobile Liability $10,000,000 Owned Vehicles Non-Owned Vehicles Uninsured Motorist where required by statute Automobile Physical Damage (Optional) Comprehensive (To value if insured) Collision All insurance coverages provided for under this Exhibit "D" shall be effected by policies issued by insurance companies (i) that are authorized to do business in the state in which the Hotel is located; and (ii) that are of good reputation and of sound and adequate financial responsibility, having a Best Rating of B + VI, or better, or a comparable rating if Best ceases to publish its ratings or materially changes its rating standards or procedures. Lessee hereby authorizes Manager to utilize the services of and/or place the insurance set forth in this Exhibit "D" with (i) any subsidiary or affiliated company of Promus or its successor corporation in the insurance business as Manager deems appropriate; or (ii) a third party insurance carrier, in each case meeting the specifications set forth above. Manager shall deliver to Lessee duly executed certificates, and, if requested by Lessee and if available, duplicate copies of all policies of insurance to be procured hereunder, including existing, additional and renewal policies. Each policy of insurance maintained in accordance with this Exhibit "D" to the extent obtainable, shall specify that such policies shall not be canceled or materially changed without at least thirty (30) days prior written notice to Lessee and Manager. D-2 Except as otherwise provided in the Agreement, Manager and Lessee each waives, releases and discharges the other, but only to the extent of collectible insurance proceeds, from all claims or demands which each may have or acquire against the other or the other's subsidiaries, affiliates, directors, officers, agents, employees, independent contractors or partners, with respect to any claims for any losses, damages, liabilities or expenses (including attorneys' fees) incurred or sustained by either of them on account of injury to persons or damage to property or business arising out of the ownership, management, operation and maintenance of the Hotel, regardless whether any such claim or demand may arise because of the fault or negligence of the other party or its subsidiaries, affiliates, officers, employees, directors, agents or independent contractors. Each policy of insurance maintained in accordance with this Exhibit "D" shall contain a specific waiver of subrogation reflecting the above. All policies of insurance provided for under this Exhibit "D" shall be carried in the name of the Owners and Manager, and losses thereunder shall be payable to the parties as their respective interests may appear. All liability policies shall name the Lessee and Manager, and in each case any of their affiliated or subsidiary companies which they may specify, and their respective directors, officers, agents, employees and partners as additional named insureds. All such policies of insurance shall be written on an "occurrence" basis to the extent obtainable. Either Manager or Lessee, by notice to the other, shall have the right to require that the minimum amount of insurance to be maintained with respect to the Hotel under this Exhibit "D" be increased to make such insurance comparable with prudent industry standards and to reflect increases in liability exposures, taking into account the size and location of the Hotel. D-3 EXHIBIT "E" OTHER HOTELS E-1 E-2 EX-10.6 5 d95331ex10-6.txt MANAGEMENT AGREEMENT-FELCOR'S DOUBLETREE HOTELS EXHIBIT 10.6 FORM OF MANAGEMENT AGREEMENT for FELCOR'S DOUBLETREE AND DOUBLETREE GUEST SUITES BRANDED HOTELS INDEX
Page ---- ARTICLE I DEFINITIONS .......................................................... 1 1.01 Definitions ......................................................... 1 1.02 Other Definitions ................................................... 5 ARTICLE 2 SCOPE OF AGREEMENT ................................................... 6 2.01 Subject Matter ...................................................... 6 2.02 Grant to Manager .................................................... 6 2.03 Funding ............................................................. 7 ARTICLE 3 TERM AND EXTENSIONS .................................................. 7 3.01 Commencement Date ................................................... 7 3.02 Term ................................................................ 7 3.03 Owner's Termination Right Upon Sale of Hotel ........................ 7 3.04 Performance Termination ............................................. 8 3.05 Post-Termination Matters; Reimbursements to Manager ................. 10 ARTICLE 4 NONDISTURBANCE ....................................................... 10 ARTICLE 5 STANDARDS AND MANAGER'S CONTROL ...................................... 10 5.01 Operational Standards ............................................... 10 5.02 Manager Control ..................................................... 11 5.03 Contractual Authority ............................................... 11 ARTICLE 6 USE OF MANAGER'S TRADENAME ........................................... 11 6.01 Use of Name ......................................................... 11 6.02 Definition of Marks ................................................. 12 6.03 Disputes Concerning Marks ........................................... 12 6.04 Rights Upon Termination ............................................. 12 ARTICLE 7 OPERATION OF THE HOTEL ............................................... 13 7.01 Permits ............................................................. 13 7.02 Operating Equipment and Operating Supplies .......................... 13 7.03 Personnel ........................................................... 13 Z.04 Sales, Marketing, Advertising and Additional Promotional Programs ... 14 7.05 Trades; Treatment Accorded .......................................... 15 7.06 FF&E Replacements ................................................... 15 7.07 Routine Maintenance and Repairs ..................................... 16 7.08 Capital Repairs ..................................................... 16 7.09 FF&E and Capital Repairs Estimates .................................. 17 7.10 Emergency Repairs; Repairs Required by Law .......................... 17 7.11 Replacement Reserve Fund ............................................ 17 7.12 Capital Improvements ................................................ 18
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Page ---- ARTICLE 8 FISCAL MATTERS ....................................................... 18 8.01 Accounting Matters and Fiscal Periods ............................... 18 8.02 Annual Business Plan ................................................ 19 8.03 Bank Accounts ....................................................... 21 8.04 Reimbursement of Out-of-Pocket Expenses ............................. 21 ARTICLE 9 ADDITIONAL SERVICES .................................................. 22 9.01 Additional Services ................................................. 22 9.02 Centralized Services ................................................ 22 9.03 National Sales, Business Promotion and Reservations Services ........ 23 9.04 Other Services ...................................................... 24 ARTICLE 10 PAYMENTS TO MANAGER ................................................. 24 10.01 Base Management Fee ................................................. 24 ARTICLE 11 DISBURSEMENTS ....................................................... 25 11.01 Disbursement of Funds ............................................... 25 11.02 Adjustment to Bank Account .......................................... 26 ARTICLE 12 INSURANCE ........................................................... 26 12.01 Insurance Coverage .................................................. 26 12.02 Insurance Policies .................................................. 26 12.03 Manager's Blanket Insurance Coverage ................................ 27 ARTICLE 13 RESPONSIBILITY FOR CLAIMS, ETC. ..................................... 28 13.01 Scope ............................................................... 28 ARTICLE 14 CASUALTY AND CONDEMNATION ........................................... 28 14.01 Casualty ............................................................ 28 14.02 Condemnation ........................................................ 29 14.03 Business Interruption Insurance ..................................... 29 ARTICLE 15 DEFAULT AND TERMINATION ............................................. 30 15.01 Events of Default ................................................... 30 15.02 Termination ......................................................... 30 ARTICLE 16 NOTICES ............................................................. 31 16.01 Procedure ........................................................... 31 ARTICLE 17 RELATIONSHIP, AUTHORITY AND FURTHER ACTIONS ......................... 31 17.01 Relationship ........................................................ 31 17.02 Further Actions ..................................................... 31 ARTICLE 18 APPLICABLE LAW ...................................................... 31
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Page ---- ARTICLE 19 SUCCESSORS AND ASSIGNS .............................................. 32 19.01 Assignment .......................................................... 32 19.02 Binding Effect ...................................................... 32 ARTICLE 20 AGREEMENT NOT AN INTEREST IN REAL ESTATE ............................ 32 ARTICLE 21 FORCE MAJEURE ....................................................... 32 21.01 Operation of Hotel .................................................. 32 21.02 Extension of Time ................................................... 33 ARTICLE 22 ARBITRATION ......................................................... 33 22.01 Arbitration Procedures .............................................. 33 ARTICLE 23 GENERAL PROVISIONS .................................................. 33 23.01 Authorization ....................................................... 33 23.02 Interest ............................................................ 34 23.03 Formalities ......................................................... 34 23.04 Documents ........................................................... 34 23.05 Consents ............................................................ 34 23.06 Estoppel Certificate ................................................ 34 23.07 Extension of Date of Termination .................................... 35 23.08 Hotel Reservations Honored .......................................... 35 23.09 No Representations .................................................. 35 Exhibit 1 ...................................................................... 37 Exhibit A - Legal Description .................................................. 38 Exhibit B - [Intentionally Deleted] ............................................ 39 Exhibit C - Schedule of Permitted Mortgages .................................... 40 Exhibit D - [Intentionally Deleted] ............................................ 41 Exhibit E - Schedule of Required Insurance ..................................... 42
-iii- MANAGEMENT AGREEMENT THIS AGREEMENT is dated effective as of the Execution Date, by and between ___________________________________________ and _______________________. Each reference in this Agreement to any of the terms and titles contained in any Exhibit attached to this Agreement shall be deemed and construed to incorporate herein the data stated under that term or title in such Exhibit. WITNESSETH: WHEREAS, Owner is desirous of having Manager operate Owner's hotel as a hotel under the Tradename on the parcel or parcels of land more particularly described on Exhibit A attached hereto; and WHEREAS, Manager (or its Affiliates) owns all right, title and interest in and to the Tradename, said Tradename being a registered service mark of Manager (or its Affiliates); NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, Owner and Manager agree as follows: ARTICLE 1 DEFINITIONS 1.01 DEFINITIONS As used herein the following terms shall have the respective meanings indicated below: (a) Hotels - The __________________________ hotels owned by Holdings in __________________________________________________________________ _________________________________. (b) Affiliate - any corporation or other entity controlled by, controlling or under common control with Owner or Manager, as applicable. The words "control," "controlled" and "controlling" mean ownership, directly or indirectly, of 50% or more of the legal or beneficial ownership interest of such corporation or other entity. (c) Affiliated Hotels - all hotels operating under the tradenames _____ ____________________________________________________________________________ ________________________________________ and/or any other tradename(s) now or hereafter utilized by Manager or its Affiliates, including, without limitation, hotels operated by Manager or its Affiliates and hotels operated by others under franchise arrangements with Manager or its Affiliates. (d) Building - all buildings, structures and improvements now located or hereafter constructed on the Site and all fixtures and equipment attached to, forming a part of and necessary for the operation of such buildings, structures or improvements as a hotel (including, without limitation, heating, lighting, plumbing, sanitary system, air-conditioning, laundry, refrigeration, kitchen, elevators and similar items) and such (i) restaurants, bars and banquet, meeting and other -1- public areas, (ii) commercial space, including concessions and shops, (iii) garage and parking space, (iv) storage and service areas, (v) recreational facilities and areas, (vi) public grounds and gardens, (vii) permanently affixed signage, (viii) other facilities and appurtenances and (ix) number of keyed guest rooms ("Keyed Guest Rooms") as presently exist on the Site or are hereafter added thereon during the Term. (e) FF&E - all fixtures, furniture, furnishings and equipment (not including Operating Equipment) required for the operation of the Building as a hotel in accordance with the standards set forth in this Agreement, including, without limitation, (i) office furnishings and equipment, (ii) specialized hotel equipment necessary for the operation of any portion of the Building as a hotel, including equipment for kitchens, laundries, dry cleaning facilities, bars, restaurants, public rooms, commercial and parking space, and recreational facilities, and (iii) all other furnishings and equipment as Manager deems necessary or desirable for the operation of the Building as a hotel in accordance with the Operational Standards. (f) GAAP - generally accepted accounting principals, consistently applied. (g) Gross Room Sales - that portion of Total Sales which is derived from the sale or rental of guest rooms and suites. (h) Hotel - a collective term for the Site, the Building, the FF&E, the Operating Equipment and the Operating Supplies. (i) Hotel Lease - the Lease Agreement of even date herewith between __________________________________ and Owner relating to the Hotel. (j) Index - the Consumer Price Index for All Urban Consumers (1982-84 = 100) as published by the United States Bureau of Labor Statistics, U.S. City Average. If the compilation and/or publication of such Index shall be discontinued or transferred to any other governmental department or bureau or agency, Manager shall (subject to Owner's approval, which shall not be unreasonably withheld) fix an alternate index or method to implement the parties' intention that the purchasing power of the amounts to be adjusted by reference to the Index (as hereinafter provided in this Agreement) shall be the same as the purchasing power of the stated amounts as of the Execution Date. Likewise, if such Index shall be modified as to components, computing methods or otherwise, then Manager may (subject to Owner's approval, which shall not be unreasonably withheld) fix an alternate index or method, as aforesaid, or Manager may utilize an appropriate conversion factor so as to achieve substantially the same result as would have been obtained if the Consumer Price Index in effect and as computed, calculated and constituted on the Execution Date were still then in effect. (k) Mortgagee - The holder of any Permitted Mortgage. (1) Net Operating Income - Total Sales less the sum of (i) Operating Costs and (ii) Specified Fixed Charges. There shall be excluded from Operating Costs (A) expenses for gratuities, service charges, sales and gross receipts taxes and other similar taxes and assessments, to -2- the extent that receipts in respect thereof are excluded from Total Sales, and (B) any overhead or other costs of Owner incurred as a result of being the lessee under the Hotel Lease. (m) Operating Cost(s) - the entire cost and expense of maintaining, operating and supervising the operation of the Hotel. Operating Costs shall be the sum of such costs and expenses which are normally charged as a cost of operation under GAAP, including, without limitation, (i) the cost of Operating Supplies and Operating Equipment; (ii) wages, salaries, employee fringe benefits, payroll taxes, bonuses and other costs related to employees at the Hotel; (iii) advertising and promotional expenses incurred directly by the Hotel, administrative and general expenses of the Hotel, the cost of Centralized Services under Article 9.02, the cost of personnel training programs (without duplication of those included in Centralized Services), charges for reservation-related distribution systems (e.g., airline reservation systems), utility and energy costs, operating licenses and permits, and grounds and landscaping maintenance costs; (iv) all expenditures made for routine maintenance and repairs to keep the Hotel in good condition and repair; (v) the Base Management Fee provided for in Article 10.01(a) and the National Sales, Business Promotion and Reservations Services Assessment provided for in Article 9.03; (vi) all reimbursable expenses due Manager; (vi) all reimbursable expenses due Manager; (vii) liability insurance premiums and premiums for other insurance to be carried by Manager pursuant to the requirements of Article 12 and Exhibit E; (viii) reasonable reserves for uncollectible accounts receivable as set forth in the Approved Budgets; and (ix) credit card and travel agent commissions. There shall be expressly excluded from Operating Costs the following costs and expenses of the Hotel, which shall be defined as "Fixed Charges": (i) depreciation of the Building, FF&E and Operating Equipment, and amortization of financing costs, pre-opening expenses, organizational and other costs; (ii) debt service (interest and principal) on any Permitted Mortgage; -3- (iii) rental payments pursuant to any ground lease (including the Hotel Lease); (iv) the cost of external (third-party) audits (whether certified or otherwise) of Hotel operations and/or with respect to the Owner entity itself; (v) legal and other professional fees, other than those properly included in Operating Costs under GAAP; (vi) other recurring and non-recurring ownership costs, such as Owner's entity administration and servicing costs; (vii) Specified Fixed Charges; and (viii) such other cash expenditures (including Capital Repairs) which are normally treated as a capital expenditure under GAAP. (n) Operating Equipment - all operating equipment required for the operation of a hotel, including chinaware, glassware, linens, silverware, utensils, uniforms and all other similar items. (o) Operating Supplies - all consumable items used in the operation of a hotel, including food and beverages, fuel, soap, cleaning materials, matches, stationery and all other similar items. (p) Permitted Mortgage - any mortgage, pledge or encumbrance of or other security interest in the Hotel or any part thereof or interest therein, which is listed in Exhibit C attached hereto and incorporated by reference as a part hereof or a copy of which shall hereafter be provided to Manager. (q) Portfolio Hotels - the Affiliated Hotels, any other hotels which are owned, operated or managed by Manager or its Affiliates (regardless of tradename) and any other hotel utilizing the Manager's Centralized Services or National Sales, Business Promotion and Reservations Services. (r) Site -- the parcel or parcels of real estate more particularly described on Exhibit A. (s) Specified Fixed Charges - the following cash expenditures made in connection with the operation of the Hotel: (1) payments pursuant to any equipment leases or installment sales contracts approved by Manager; (2) real estate and other ad valorem taxes and assessments applicable to the Hotel; provided, however, that for the purposes of determining Net operating Income, real estate and other ad valorem taxes and assessments shall be fixed the amounts paid or payable in respect of the Hotel for Fiscal Year 1998 at (3) premiums for insurance required to be obtained or maintained by Owner pursuant to the Hotel Lease; and -4- (4) the 3% of Total Sales required to be deposited to the Replacement Reserve Fund, as described in Article 7.11(a) below. (t) Total Sales - all revenues and income of any nature derived directly or indirectly from the Hotel or from the use or operation thereof including total room sales, food and beverage sales, telephone, telegraph, telecopier and telex revenues, in-room video and valet service receipts, rental or other payments from lessees and sublessees (but not the gross receipts of such lessees and sublessees), and the proceeds of business interruption, use, occupancy or similar insurance. If Manager itself operates any facilities instead of having them operated by a lessee, such as a newsstand, gift shop or other store, the gross receipts of such facility or store shall also be included in Total Sales. There shall be excluded from Total Sales: (i) any gratuities or service charges added to a customer's bill and distributed as compensation to the Hotel's employees; (ii) any credits or refunds made to customers, guests or patrons; (iii) any sums and credits received by Owner for lost or damaged merchandise; (iv) any sales taxes, excise taxes, gross receipt taxes, admission taxes, entertainment taxes, tourist taxes or charges; (v) any proceeds from the sale or other disposition of the Hotel, FF&E, or other capital assets; (vi) any interest paid with respect to the Replacement Reserve Fund, the Bank Account or any other deposit or investment of Hotel funds; (vii) any fire and extended coverage insurance proceeds; (viii) any condemnation awards; and (ix) any proceeds of financing or refinancing of the Hotel. Total Sales shall be determined on an accrual basis and in accordance with GAAP. 1.02 OTHER DEFINITIONS As used herein, the following terms have the meanings set forth in the respective Articles or Exhibits indicated below: Additional Program Charges - Article 7.04(c) Additional Services - Article 9.01 Annual Business Plan - Article 8.02(b)(1) Approved Budget - Article 8.02(b)(1) Bank Account - Article 8.03(a) Base Management Fee - Article 10.01 Capital Repairs - Article 7.08 Capital Repairs Budget - Article 7.09 Centralized Services - Article 9.02(a) Commencement Date - Article 3.01 Defaulting Party - Article 15.02(a) Event of Default - Article 15.01 Execution Date - Exhibit 1 Executive Employees - Article 13.01(a) Extension Notice - Article 3.02 FF&E Replacement Budget - Article 7.09 FF&E Replacements - Article 7.06 Fiscal Year - Article 8.01(c) Full Insurable Value - Exhibit E Holdings - Article 1.01(i) Hotel Lease - Article 1.01(i) -5- Initial Term - Article 3.02 Interested Persons - Article 23.06 Keyed Guest Rooms - Article 1.01(d) Losses - Article 13.01(a) Manager - Exhibit 1 Marks - Article 6.02 Minimum Balance - Article 2.03(b) National Sales, Business Promotion and Reservations Services Assessment - Article 9.03(b) National Sales, Business Promotion and Reservations Services - Article 9.03(a) Non-Defaulting Party - Article 15.02(a) Number of Keyed Guest Rooms - Exhibit 1 Operating Budget - Article 8.02(b)(1) Operational Standards - Article 5.01 Option Term - Article 3.02 Owner - Exhibit 1 Project Services - Article 9.04(a) Replacement Reserve Fund - Article 7.11(a) Replacement Reserve Percentage - Article 7.11(a) Sale of the Hotel - Article 3.03(b) Sale Termination Notice - Article 3.03(a) Term - Article 3.02 TPR Charges - Article 9.03(c) Tradename - Article 6.01 ARTICLE 2 SCOPE OF AGREEMENT 2.01 SUBJECT MATTER The subject matter of this Agreement is the Hotel referred to in Exhibit 1. 2.02 GRANT TO MANAGER Owner hereby grants to Manager the sole and exclusive right to possession of the Hotel for the Term and during said Term the sole and exclusive right to supervise and direct the management and operation of the Hotel for and on the account of Owner, and Manager hereby accepts said grant and agrees that it will supervise and direct the management and operation of the Hotel, all pursuant to the terms of this Agreement. Manager acknowledges that this Agreement is subject and subordinate to the Hotel Lease and that Manager, on behalf of Owner and at Owner's sole expense, shall use its best efforts to fulfill Owner's duties and obligations under the Hotel Lease. Owner agrees that it will cooperate with Manager in every reasonable and proper way to permit and assist Manager to carry out its duties hereunder. Owner and Manager further agree that this Agreement provides for management in respect of the Hotel, that Owner and Manager do not intend, nor does this Agreement grant or create, a franchise within the meaning of the Federal Trade Commission Act, any rule or regulation promulgated thereunder, or any other applicable law, rule, regulation or judicial decision. -6- 2.03 FUNDING (a) Owner agrees to provide all funds, both initially and throughout the Term, as shall be necessary to pay for all Operating Costs and Fixed Charges relating to the Hotel, and to perform and satisfy Owner's covenants and responsibilities under this Agreement. The performance of all activities by Manager hereunder shall be on behalf of, and for the account of, Owner. (b) Upon the Commencement Date, Owner shall deposit in the Bank Account at least Twenty-Five Thousand Dollars ($25,000) (the "Minimum Balance"); and throughout the Term, Owner shall maintain the Minimum Balance in the Bank Account. ARTICLE 3 TERM AND EXTENSIONS 3.01 COMMENCEMENT DATE The "Commencement Date" of the Term hereunder shall be 12:01 a.m. local time on May 29, 1998. 3.02 TERM The initial term (the "Initial Term") of this Agreement shall cover the period from and after the Commencement Date and ending on ____________. Manager shall have the right and option to extend the term of this Agreement to _______ ____ (the "Option Term") upon the condition that: (i) Manager gives written notice to Owner of its desire to extend (the "Extension Notice") not less than 45 days nor more than 90 days prior to the end of the Initial Term; (ii) at the end of the Initial Term the Owner has accumulated retained earnings (calculated in accordance with GAAP) generated solely by the Hotel during the Initial Term of not less than $535,000; (iii) at the end of the Initial Term no Event of Default on the part of Manager has occurred that is continuing beyond any applicable cure period under this Agreement, and any then existing Event of Default shall be cured within any applicable cure period; and (iv) at the end of the Initial Term ________________ Corporation is not in default under that certain Amended and Restated Revolving Credit Agreement of even date herewith between Owner and Doubletree Hotels Corporation (the "Revolving Credit Agreement"). The Initial Term and, if applicable, the Option Term shall expire on the dates hereinabove set forth, unless sooner terminated as hereinafter provided, and are herein referred to collectively as the "Term" of this Agreement. 3.03 OWNER'S TERMINATION RIGHT UPON SALE OF HOTEL (a) In the event Manager fails to timely consent, pursuant to Article 19.01(b) hereof, to any proposed assignment by Owner of its rights and obligations under this Agreement to a proposed purchaser upon a Sale of the Hotel, or upon a Sale of the Hotel at any time on or after ________________ Owner shall have the right, at its sole option, to terminate this Agreement by giving 90 days' prior written notice (a "Sale Termination Notice") to Manager. The Sale Termination Notice shall set forth an estimate of the effective termination date of this Agreement, which date shall not be less than 90 days subsequent to the date of the Sale Termination Notice. The actual effective date of termination shall be on the actual date of closing of the Sale of the Hotel which was the subject of the -7- Sale Termination Notice, regardless of the estimate provided in the Sale Termination Notice. Accordingly, Owner shall, upon reasonable notice, have the right to extend the effective date of such termination for a reasonable period of time based on delays in the closing date of the Sale of the Hotel, provided that Owner shall pay all actual costs reasonably incurred by Manager in postponing the effectiveness of such termination. (b) For the purposes hereof, a "Sale of the Hotel" shall be defined as a sale of the Hotel or any transaction which is substantially equivalent to a sale of the Hotel including, without limitation, a sale of all of the interests in Owner, a merger or consolidation of Owner with a third party in which neither Owner, Holdings nor any Affiliate of either of them is the surviving or resulting entity, or a deed, lease, or other conveyance of all or substantially all of Owner's interest in the Hotel (other than to Holdings or to any of its' or Owner's Affiliates) whether pursuant to foreclosure proceedings or otherwise. (c) Notwithstanding anything to the contrary contained herein, Owner's right to terminate this Agreement pursuant to Article 3.03(a) hereof, shall be conditioned upon either (i) Owner's extension to Manager, on or before the effective date of such termination, of an irrevocable offer to become the manager of another hotel, which in the reasonable judgment of Manager (exercised in good faith) is substantially comparable to the Hotel in quality, size and revenues, for a term commencing not more than thirty (30) days following the effective date of such termination and continuing for at least the unexpired portion of the Term of this Agreement and upon the same substantive terms and conditions as are set forth in this Agreement (including a right to extend any remaining Initial Term to include the Option Term, upon the conditions herein set forth for such extension) or (ii) Owner's (A) payment to Manager, upon the effective date of such termination, of an amount equal to the aggregate amount of the Base Management Fee actually paid to Manager during the twelve full calendar months immediately preceding the effective date of such termination and (B) provided that not less than 100 hotel properties are then being operated under the ____________ name within the United States, requiring the purchaser of the Hotel, on or before the effective date of such termination, to make an irrevocable offer to enter into a license agreement with an Affiliate of Manager for the continued operation of the Hotel under the ____________ name, such license to be in such Affiliate's then customary form, having a term at least equal to the greater of (y) five (5) years and (z) the unexpired Term of this Agreement (including the Option Term, if not theretofore exercised) and providing for license fees to such Affiliate aggregating not more than 2% of Gross Room Sales during the first twelve months, 3% of Gross Room Sales during the second twelve months and 4% of Gross Room Sales thereafter during the term of such license and such other fees as may then be customarily charged by such Affiliate in its license agreements for similar hotels. 3.04 PERFORMANCE TERMINATION (a) Beginning on January 1, 2002, and continuing for the remainder of the Term, Owner shall have the right to terminate this Agreement if Net Operating Income for the immediately preceding Fiscal Year does not equal or exceed 90% of the budgeted Net Operating Income for such Fiscal Year, as determined pursuant to the budgetary process described in Article 8. Owner may exercise such right to terminate this Agreement, without incurring a termination fee or penalty, by giving written notice to Manager within 90 days after receiving the annual financial statement for such Fiscal Year pursuant to Article 8.01. Such performance termination notice shall specify the effective -8- date of such termination which shall not be less than 90 days from the date of such performance termination notice. (b) Notwithstanding anything to the contrary in the foregoing, in the event that Owner is entitled to provide, and does provide, Manager with timely notice of termination of this Agreement pursuant to Article 3.04(a), Manager may elect, but shall not be obligated, to nullify such termination notice and the termination of this Agreement based thereon, by funding to Owner, within thirty (30) days after receipt of Owner's performance termination notice, an amount equal to the amount by which the actual Net Operating Income for the applicable Fiscal Year was less than 90% of the budgeted Net Operating Income for such Fiscal Year, as determined pursuant to the budgetary process described in Article 8. If Manager exercises this Net Operating Income shortfall cure right, Owner's performance termination notice shall be nullified and of no force and effect, and this Agreement shall remain in full force and effect and the Fiscal Year in question shall be deemed not to be a Fiscal Year in which there occurred a shortfall in Net Operating Income which would give rise to Owner's termination right under this Article 3.04. Manager shall be entitled to exercise this cure right any number of times during the Term; provided, however, Manager may not exercise this cure right for more than 2 consecutive Fiscal Years during the Term. (c) Notwithstanding anything to the contrary contained herein, Owner's right to terminate this Agreement under Article 3.04(a) (and the amount of any shortfall to be paid by Manager in the event Manager exercises its cure right pursuant to Article 3.04(b)) shall be eliminated, or reduced, as applicable, to the extent that the shortfall in Net Operating Income is attributable to (i) force majeure events as described in Article 21 or (ii) increases in utility rates and/or premiums for insurance which Manager is responsible to obtain under Exhibit E, in each case that could not have been reasonably anticipated by Manager in connection with the submission of the Annual Business Plan. Any disputes concerning the applicability of this Article 3.04(c) shall be resolved pursuant to the arbitration procedure described in Article 22, and the time period governing any Owner termination right or Manager cure right shall be extended for a reasonable period of time (not exceeding 180 days) pending such resolution. (d) Owner and Manager have agreed upon the Hotel's current Competitive Set and the Hotel's current Yield Index (as reported in the "Star Report" published by Smith Travel Research) versus such Competitive Set ("Base Yield Index"), all as set forth on Exhibit 1. As a part of the budgetary process described in Article 8, Owner and Manager shall review such Competitive Set annually and in good faith agree upon any additions to or deletions from such Competitive Set and, if necessary, adjust the Base Yield Index versus such Competitive Set to reflect any additions thereto or deletions therefrom. (e) Beginning on the later of (i) January 1, 2002, and (ii) the date upon which Owner has borrowed the full amount of the then "Commitment" under the Revolving Credit Agreement, and continuing for the remainder of the Term, Owner shall have the right to terminate this Agreement if, during each of the two immediately preceding fiscal years, the Hotel's Yield Index (as reported in the "Star Report" published by Smith Travel Research) versus its Competitive Set is below the agreed upon Base Yield Index of the Hotel for each of the applicable years. Owner may exercise such right to terminate this Agreement, without incurring a termination fee or penalty, by giving written notice to Manager within ninety (90) days after information regarding the Yield Index of the hotels within -9- the Competitive Set is published by Smith Travel Research and provided to Owner by Manager. Such performance termination notice shall specify the effective date of such termination, which shall not be less than ninety (90) days from the date of such performance termination notice. 3.05 POST-TERMINATION MATTERS; REIMBURSEMENTS TO MANAGER Upon any termination or expiration of this Agreement for any reason whatsoever (including, without limitation, pursuant to Article 15.02), Owner expressly agrees that Manager may remove any of its documents which are proprietary to Manager (e.g., without limitation, manuals, software programs, internal correspondence of a proprietary nature, etc.), specifically excluding financial records, documents, correspondence or other materials relating to the Hotel, and that, as a condition to such termination or expiration, within ten (10) days of billing therefor, Owner shall pay to Manager, in addition to any other amounts due pursuant to this Agreement (i) Manager's reasonable out-of-pocket costs incurred by reason of requests by Owner for assistance after termination of this Agreement and not otherwise reasonably expected of Manager in the orderly termination of its operations at the Hotel, (ii) any unpaid fees and other charges and reimbursements due Manager hereunder, and (iii) to the extent reasonable and consistent with Manager's standard practices and industry standards, termination-related employee expenses, including sick, vacation, pension, bonus and termination payments to employees. This Article 3.05 shall survive the expiration or termination of this Agreement. ARTICLE 4 NONDISTURBANCE Owner covenants that Manager, during the Term of this Agreement, shall have peaceable and quiet possession of the Hotel and shall be entitled to operate the Hotel in accordance with the terms of this Agreement, free from molestation, eviction and disturbance by Owner or by any person through whom Owner shall derive its title to or right to occupy and use the Hotel or by any other person or persons claiming by, through or under Owner. Owner covenants that throughout the Term, it will pay, keep, observe and perform all payments, terms, covenants, conditions and obligations to be made, kept, observed or performed by Owner under the Hotel Lease and any other lease, concession or other agreement, mortgage or security agreement in respect of the Hotel, and will provide all funds as shall be necessary to perform Owner's obligations hereunder. Owner further covenants, at its own expense, to undertake and prosecute or to permit Manager to undertake and prosecute all appropriate actions, judicial or otherwise, required to assure such quiet and peaceable possession and operation by Manager. Owner also covenants and agrees to pay, prior to delinquency, all taxes and assessments which may become a lien on or are assessed against the Hotel or any component thereof and which may be due and payable during the Term, unless payment thereof is in good faith being contested by Owner, enforcement is stayed and the amount so contested is escrowed or guaranteed in a form satisfactory to Manager. Upon Manager's request, Owner agrees to furnish Manager copies of all documents by and through which Owner has the right of possession to the Hotel and consequently the ability to enter into this Agreement. -10- ARTICLE 5 STANDARDS AND MANAGERS CONTROL 5.01 OPERATIONAL STANDARDS Manager covenants to and shall operate the Hotel under the Tradename at the expense of Owner in accordance with the terms of this Agreement and the operational standards developed by Manager in connection with its hotel management business, as such operational standards are modified, revised or amended from time to time (the "Operational Standards"). Owner shall cooperate with Manager throughout the Term (as the same may be extended) so that Manager shall be able to operate the Hotel in accordance with the Operational Standards. 5.02 MANAGER CONTROL Owner hereby covenants to Manager uninterrupted control in operation of the Hotel during the Term of this Agreement. Owner further covenants it will not interfere or involve itself in any way with the day-to-day operation of the Hotel. Manager shall have the right to determine operating policy, standards of operation, quality of service and any other matters affecting customer relations or the efficient management and operation of the Hotel. Without limiting the foregoing, Manager shall have the right, subject to the other provisions of this Agreement, to determine the terms of guest admittance to the Hotel, use of rooms for commercial purposes, policies relating to entertainment, labor policies, charges for rooms and commercial space, credit policies, food and beverage services, menu prices and other guest charges, receipt, holding and disbursement of funds, maintenance of bank accounts, and, from Owner's funds, the procurement of inventories, supplies and services, promotion and publicity, including, without limitation, the right to provide complimentary or discounted food, beverages, rooms and the use of other Hotel facilities to existing or potential customers, employees and others. Manager shall have the right to institute legal proceedings with regard to the Hotel or its operations in its own name, without the consent of Owner, or in Owner's name, with the prior written consent of Owner. 5.03 CONTRACTUAL AUTHORITY Subject to the limitations contained elsewhere in this Agreement, Manager is and shall be authorized to make, enter into and perform in the name of, for the account of, on behalf of and at the expense of Owner any contracts and agreements deemed necessary by Manager to carry out and place in effect the terms and conditions of this Agreement, including the execution by Manager in Owner's name of equipment leases and the like relating to the Hotel. Notwithstanding anything to the contrary in the foregoing, Manager shall not, without Owner's prior written approval, execute any contract in Owner's name which (a) is not provided for in the Approved Budget; (b) extends beyond one (1) year and is not cancelable by Owner without penalty thereafter upon thirty (30) days notice or less; or (c) provides for aggregate payments by Owner over the life of the contract (taking into account Owner's early termination rights, if any) in excess of $25,000. Further notwithstanding anything to the contrary in the foregoing, Owner shall execute in its own name all leases of retail space in the Hotel, all of which shall be subject to the approval of both Owner and Manager. -11- ARTICLE 6 USE OF MANAGER'S TRADENAME 6.01 USE OF NAME The Hotel shall (subject to the other provisions of this Article 6.01) be known and designated as a hotel operating under the tradename ____________ (the "Tradename") unless the parties hereto agree to the use of some other name. Owner acknowledges that the Tradename is a registered service mark of Manager and that the Tradename is and shall continue to be the sole property of Manager. It is acknowledged that in the future Manager may determine to change the name of the chain from the Tradename to another name, and, in connection with such change, Manager may determine to convert the name of the hotels in the chain, including the Hotel, from the Tradename to another designation; provided, however, that Manager, at its sole cost and expense, shall pay any expenses associated with such change, including, but not limited to, the cost of signage at the Hotel. Owner hereby consents to any such change of name which is acceptable to Manager. If such change is effected, references in this Agreement to the Tradename shall instead or also (as appropriate) be deemed to refer to such new chain name or names. As used in this Article 6 with reference to the Tradename and the other Marks, the term Manager shall mean and include Manager and any Affiliate(s) of Manager which from time to time may own the Tradename and other Marks. 6.02 DEFINITION OF MARKS As used herein, "Marks" shall mean the Tradename and any other name, service marks, trademarks, slogans and the like (including all improvements and additions whenever made to or associated with any thereof by the parties or anyone else) now or hereafter used by Manager in connection with the Tradename or any other future name or names of Affiliated Hotels. Owner shall not contest Manager's unrestricted and exclusive ownership of the Marks or its right to grant to others licenses to use the Marks. 6.03 DISPUTES CONCERNING MARKS Manager shall have the sole right and responsibility to handle disputes with third parties concerning use of all or any part of the Marks, and Owner will, at Manager's expense, extend its full cooperation to Manager in all such matters. Manager need not initiate suit against imitators or infringers and may settle any dispute by grant of a license or otherwise. Owner shall not initiate any suit or proceeding to enforce or protect the Marks. Both parties shall make every effort consistent with the foregoing to protect, maintain, and promote the Tradename and its distinguishing characteristics (and any other service marks, trademarks, slogans, etc., associated with the Marks) as standing for hotels being operated or developed by or by authorization from Manager under the Tradename and only those hotels. -12- 6.04 RIGHTS UPON TERMINATION Upon any termination or expiration of this Agreement for any reason whatsoever, unless Manager, in its sole discretion, authorizes Owner in writing to continue to use the Tradename or enters into a license agreement with respect to the use of the Tradename in connection with the Hotel, Owner, at its expense, shall immediately cease all uses of the Tradename and all Marks and shall remove from the Hotel, cover or otherwise conceal, any signs containing the Marks and, within thirty (30) days following such termination or expiration, cease to use any Operating Equipment, Operating Supplies, inventory, supplies or any other materials containing the Marks. Manager shall cooperate with Owner in minimizing interruption to Hotel operations by reason of such removal. Within thirty (30) days after the termination date, Manager shall acquire from Owner, at cost, all remaining non-location specific full-case inventory, amenities, supplies or similar material containing the Marks or any similar designation which meet Manager's then-current product specifications. ARTICLE 7 OPERATION OF THE HOTEL 7.01 PERMITS Owner warrants that there will be no covenants or restrictions which would prohibit or limit Manager, provided that the necessary licenses and permits therefor have been obtained, from operating the Hotel, including cocktail lounges, restaurants and other facilities in accordance with the Operational Standards. In cooperation with Owner, Manager shall apply for, process and take all necessary steps to procure (in Manager's name and/or Owner's name as required by local authority), at Owner's sole cost and expense, all licenses and permits required for the operation of the Hotel and related facilities, including, but not limited to, liquor licenses for the sale of alcoholic beverages at all restaurants, bars and lounges in the Hotel and in all banquet, meeting and guest rooms at the Hotel. Owner agrees to assist Manager in connection with Manager's efforts to obtain said liquor licenses. Manager undertakes to comply with any conditions set out in any such licenses and permits and at all times to operate and manage the Hotel in accordance with such conditions and any other legal requirements. Upon the expiration or sooner termination of this Agreement, Manager agrees, to the extent permitted by applicable law, to sell, assign, transfer and convey to Owner or its designee all of Manager's right, title and interest in and to all such licenses (including liquor licenses) and permits, without charge (other than expenses of transfer, which shall be borne by Owner), or (in the event such assignment is not permitted by applicable law) to use its reasonable best efforts to provide Owner or its designee with the use and benefits of such licenses until such time as Owner and/or its designee are able to obtain new licenses. 7.02 OPERATING EQUIPMENT AND OPERATING SUPPLIES Manager shall procure as an Operating Cost all Operating Supplies and Operating Equipment as Manager deems necessary to the normal and ordinary course of operation of the Hotel and to operate the Hotel in accordance with the Operational Standards. -13- 7.03 PERSONNEL (a) All personnel employed at the Hotel at all times shall be the employees of Manager or of an Affiliate of Manager. Subject to the Approved Budget, other employees of Manager or an Affiliate of Manager may be assigned temporarily or on a part-time basis to perform services at the Hotel, and the allocable portion of such temporary or part-time employee's salary (including employee benefits) while performing services at the Hotel, and actual expenses incurred by such employee in traveling to and from the Hotel, shall be reimbursed to Manager by Owner, and such employees will be entitled to free room and board (but not alcoholic beverages) and use of Hotel facilities while performing such services; provided, however, that in no event shall the reimbursable costs, plus the cost of room, board and facilities usage, of such temporary employees exceed the amount provided therefor in the Approved Budget without Owner's prior written consent, which shall not be unreasonably withheld. Manager shall have absolute discretion to hire, promote, supervise, direct and train all employees at the Hotel, to fix their compensation and fringe benefits, subject to the limitations provided in the Approved Budget, and, generally, to establish and maintain all policies relating to employment and employment benefits. Notwithstanding anything to the contrary in the foregoing, Owner shall have the right to interview and consent to the hiring or transfer of the General Manager and Director of Marketing of the Hotel. This right shall not be deemed to limit the right of Manager to terminate the employment of such persons; however, if circumstances permit, Manager shall consult with Owner prior to the termination of such persons. All costs of every kind and nature pertaining to all employees at the Hotel arising out of the employer-employee relationship, including, without limitation, salaries, fringe benefits, bonuses, relocation costs, employment-related legal costs, costs incurred in connection with governmental laws and regulations and insurance roles, and such other expenses as Manager, in its reasonable discretion, may deem appropriate (e.g., costs of defense of employees charged with a crime in connection with the performance of their duties at the Hotel and costs of defending claims brought by Hotel employees against Owner, Manager or the Hotel) shall be an Operating Cost, and Owner shall reimburse, indemnify and hold harmless Manager from all costs, expenses, liabilities and claims incurred in connection therewith; provided, however, that (i) unless agreed to by Owner in the Approved Budget or otherwise, out-of-pocket expenses of officers of Manager and its parents and affiliates shall not be reimbursable to Manager by Owner and (ii) with respect to any employee moving expenses attributable to the Hotel, Manager shall be obligated to reimburse Owner for one twenty-fourth (1/24th) of such expense during each of the 24 consecutive months following the date such employee becomes employed at the Hotel and during which such employee does not remain as an employee at the Hotel; provided, however, that Manager shall have no such obligation to reimburse Owner if the employment of such an employee terminates at Owner's request or with Owner's prior written consent, which consent shall not be unreasonably withheld. (b) Upon expiration or other termination of this Agreement (other than pursuant to Article 15.02 hereof as a consequence of a default on the part of Manager hereunder), an escrow fund shall be established from Total Sales (or, if Total Sales are not sufficient, with funds provided by Owner) to reimburse Manager for all costs and expenses incurred by Manager, such as reasonable transfer costs, severance pay, unemployment compensation and other employee liability costs arising out of either the transfer or termination of Hotel employees. If the parties fail to promptly agree with respect to the amount of the escrow fund, at the request of either party, the amount thereof shall be determined by arbitration pursuant to the provisions of Article 22. -14- 7.04 SALES. MARKETING. ADVERTISING AND ADDITIONAL PROMOTIONAL PROGRAMS (a) Manager shall arrange, contract for and carry out such advertising and promotion of the Hotel as Manager shall deem advisable and consistent with the Approved Budget. Funds for advertising and promotion of the Hotel may be expended exclusively for or with respect to the Hotel or, to the extent specified in the Approved Budget, in conjunction with the advertising or promotion of other Affiliated Hotels (including, without limitation, regional cooperative advertising and marketing programs), and in either case may be administered (and in the latter case, coordinated) at and through Manager's regional or home office which shall use all reasonable efforts to ensure that the Hotel shall receive an equitable share of the benefit of any such approved cooperative advertising and promotion, reasonably commensurate with its contribution to the costs thereof In the case of any such joint or cooperative advertising or promotion (or other joint or cooperative efforts such as development and/or publication of standardized directories for hotel rooms), the costs thereof (without markup or profit to Manager or any Affiliate) shall be equitably allocated by Manager between the Hotel and any other Affiliated Hotels participating therein, considering the relative benefits received therefrom by each of the participants. (b) Manager shall coordinate with tour programs marketed by airlines, travel agents and government tourist departments when Manager deems the same to be advisable and in the best interests of the Hotel. Manager, in its discretion, may cause the Hotel to participate in sales and promotional campaigns and activities involving complimentary rooms, food and beverages to bona fide travel agents, tourist officials and airline representatives where such is customary in the travel industry or in Manager's practice and policy. (c) The Hotel shall participate in the existing "Doubletree(R)" cookie program. The Hotel shall also participate in such other promotional programs (e.g., frequent flyer programs, etc.) as may, from time to time, be included in the Operational Standards. In the event the owners of two-thirds (2/3) or more of the rooms and suites in the Affiliated Hotels elect to participate in such programs, the Hotel shall participate in such programs. The cost and expense of such programs ("Additional Program Charges") will be borne by the participating hotels in a fair and equitable manner, as reasonably determined by Manager, and will be in addition to the other fees and charges payable by such hotels. 7.05 TRADES: TREATMENT ACCORDED Manager may arrange for and make trades of goods and/or services (including, but not limited to, room/suite occupancy, food, beverages, incidental charge items and taxes relating to any thereof) furnished or to be furnished to others at the Hotel, for goods and/or services (including, but not limited to, advertising, air and ground transportation, rental vehicles and taxes relating to any thereof) furnished or to be furnished to or for the benefit of the Hotel or Manager. In such event, if the goods and/or services received in a particular trade are exclusively for the use or benefit of the Hotel (and not for any other use or benefit of Manager or any other hotel or activity), there shall be included in Total Sales the usual charges for the goods and/or services given therefor in such trade and the same amount shall be deemed contemporaneously expended as Operating Costs for such goods and/or services received; and if the goods and/or services received in a particular trade are, to any extent, for the use or benefit of Manager and/or any other hotel or activity (and not exclusively for the benefit of the Hotel), Manager shall pay to the Hotel the usual charges for the goods and/or services given -15- by the Hotel in such trade (and such payment shall be included in Total Sales), and if any of the goods or services so received are used by or for the benefit of the Hotel, the entire amount so paid by Manager shall be equitably allocated among the Hotel and all other hotels or activities benefitting therefrom in a manner similar to the allocation of costs of marketing and of Centralized Services, and the portion thereof fairly allocable to the Hotel shall be reimbursed to Manager as an Operating Cost. 7.06 FF&E REPLACEMENTS Owner recognizes the necessity of replacement of FF&E due to age, wear, condition or obsolescence ("FF&E Replacements"). Owner agrees to expend, in accordance with the Approved Budget, such amounts for FF&E Replacements as shall be required in the normal and ordinary course of operation of the Hotel, to operate the Hotel in accordance with the Operational Standards and the Hotel Lease. Design and installation of FF&E Replacements, if requested by Owner, shall be under Manager's supervision, for which Manager may be entitled to additional compensation as provided in Article 9.04(a) below. Expenditures for FF&E Replacements shall, to the extent provided in Article 7.11(a) hereof, be paid from the Replacement Reserve Fund and the balance, if any, shall be paid from the Bank Account. 7.07 ROUTINE MAINTENANCE AND REPAIRS Subject to the availability of sufficient funds therefor and to the limitations of the Approved Budget, Manager shall maintain the Hotel in good repair and condition and in conformity with the Operational Standards, the Hotel Lease, and applicable laws and regulations, and shall make or cause to be made such routine maintenance, repairs and minor alterations, the cost of which can be expensed under generally accepted accounting principles, as Manager, from time to time, deems necessary for such purposes. The cost of such routine maintenance, repairs and alterations shall be paid from Total Sales and shall be treated as an Operating Cost; to the extent that Hotel revenues are insufficient therefor, Owner shall, upon Manager's request, provide sufficient funds to pay for such costs when due. Expenditures under this Article 7.07 shall not be paid from the Replacement Reserve Fund. The determination of whether an expenditure is for an FF&E Replacement under Article 7.06 or, in the alternative, for routine repairs and maintenance under this Article 7.07 shall be made in accordance with this Agreement and GAAP. If and to the extent that GAAP does not address and resolve the categorization of an expenditure, the determination shall be made by Manager, in good faith. 7.08 CAPITAL REPAIRS In addition to routine maintenance, repairs and alterations under Article 7.07, and subject to the limitations of the Approved Budget, Manager shall have the further right to make, as a Fixed Charge, such Capital Repairs as Manager deems to be beneficial to the Hotel or its operation or which Manager determines to be necessary in order to maintain the Hotel's competitive position or to maintain the Hotel in accordance with the Operational Standards and the Hotel Lease. Expenditures under this Article 7.08 shall, to the extent provided in Article 7.11(a) hereof, be paid from the Replacement Reserve Fund and the balance, if any, shall be paid from the Bank Account. The determination of whether an expenditure is for an FF&E Replacement under Article 7.06 or, in the alternative, for a Capital Repair under this Article 7.08 shall be made in accordance with this Agreement and GAAP. If and to the extent that GAAP does not address and resolve the -16- categorization of an expenditure, the determination shall be made by Manager, in good faith. As used herein, "Capital Repairs" shall mean and include repairs, alterations, improvements, renewals and replacements (other than FF&E Replacements) to the Hotel which are normally capitalized under GAAP, including, without limitation, repairs, alterations, improvements, renewals or replacements to the Building's structure or to its mechanical, electrical, heating, ventilating, air conditioning, plumbing or vertical transportation systems, exterior and interior repainting, and resurfacing building walls, floors, roofs and parking areas. Design and completion of Capital Repairs, if requested by Owner, shall be under Manager's supervision. To the extent Owner requests Manager, in writing, to supervise Capital Repairs, Manager shall do so and shall be entitled to compensation therefor in accordance with Article 9.04(a) hereof 7.09 FF&E AND CAPITAL REPAIRS ESTIMATES Manager shall prepare plans and estimates of the expenditures necessary, in such detail as Owner shall reasonably require, for (a) FF&E Replacements (the "FF&E Replacement Budget"), and (b) Capital Repairs (the "Capital Repairs Budget") during each ensuing Fiscal Year, and shall submit such FF&E Replacement Budget and Capital Repairs Budget to Owner for approval as a part of the Annual Business Plan described in Article 8.02. 7.10 EMERGENCY REPAIRS: REPAIRS REQUIRED BY LAW (a) In the event a condition should exist in, on or about the Hotel of an emergency nature, including Capital Repairs, which condition requires immediate action to preserve and protect the Hotel, to assure its continued operation, or to protect Hotel guests or employees, Manager, on behalf of and at the sole cost and expense of Owner, is authorized to take all steps and to make all expenditures necessary to repair and correct any such condition, whether or not provisions have been made in the Approved Budget for any such emergency expenditures. Manager shall not expend more than $25,000 (which figure shall be adjusted annually hereafter to reflect increases in the Index) on any one occasion pursuant to this Article 7.10(a) without Owner's prior approval, unless Manager determines that the emergency condition constitutes an immediate threat to the life or safety of Hotel guests or employees; and in any event, Manager shall advise Owner as promptly as possible of any expenditures made or to be made under this Article 7.10(a). Expenditures under this Article 7.10(a) shall, to the extent provided in Article 7.11(a) hereof, be paid from the Replacement Reserve Fund and the balance, if any, shall be paid from the Bank Account. (b) In the event that, at any time during the Term, repairs to or additions, changes or corrections in the Hotel of any nature shall be required by reason of any laws, ordinances, rules or regulations now or hereafter in force, or by order of any governmental or municipal power, department, agency, authority or officer, whether such repairs, etc. are Capital Repairs or otherwise, such repairs, additions, changes or corrections shall be made at the direction of Manager and paid for by Owner, unless (and except for so long as) compliance therewith is in good faith being contested by Owner and enforcement is stayed in a manner reasonably satisfactory to Manager. Expenditures under this Article 7.10(b) shall, to the extent provided in Article 7.11(a) hereof, be paid from the Replacement Reserve Fund and the balance, if any, shall be paid from the Bank Account. -17- 7.11 REPLACEMENT RESERVE FUND (a) Under the terms of the Hotel Lease, there shall be paid over into the Replacement Reserve Fund in cash in each month during the Term, an amount equal to 3% of Total Sales for the preceding month (the "Replacement Reserve Percentage"). The amounts so deposited in the Replacement Reserve Fund shall be recorded on the Hotel's books of account as "Replacement Reserve Fund." All deposits to, and the balance in, the Replacement Reserve Fund, from time to time, shall be placed into and maintained in, an interest-bearing account (the "Replacement Reserve Fund") established in Owner's name at a bank of Owner's selection with Manager's designees being the only authorized signatories on said account. Any expenditures for FF&E Replacements and Capital Repairs during any Fiscal Year, to the extent provided for in the Approved Budget, may be made without Owner's further approval and shall be made by Manager, to the extent permitted under the Hotel Lease, from the Replacement Reserve Fund (including accrued interest and unused accumulations from earlier years). Any amounts remaining in the Replacement Reserve Fund at the close of each Fiscal Year shall be carried forward and retained in the Replacement Reserve Fund until fully used as herein provided. (b) To the extent the Replacement Reserve Fund is insufficient at a particular time or to the extent the Replacement Reserve Fund plus anticipated contributions for the ensuing year are below the amount provided therefor in the Approved Budget for the ensuing year, then in either such event, Manager shall give Owner written notice thereof at least forty-five (45) days before the anticipated date such funds will be needed. Owner shall supply the necessary funds by deposit to the Replacement Reserve Fund at least thirty (30) days prior to the anticipated date such funds will be needed. (c) All proceeds from the sale or other disposition of FF&E no longer needed for the operation of the Hotel shall be deposited to the Replacement Reserve Fund. Sale of such items shall be at the discretion of Manager and conducted in a commercially reasonably manner. Manager shall not dispose of any capital item or group of capital items having an aggregate value in excess of $10,000 without Owner's prior written consent, unless the replacement of such capital item or group of capital items has been contemplated in the Approved Budget. Manager shall also obtain the written consent of Mortgagee, if required, for any such disposition of capital items. Upon termination of this Agreement for whatever reason, Manager's right to expend any unused portion of the Replacement Reserve Fund shall terminate and the balance of the fund shall be paid over to Owner, less any sums then due Manager. 7.12 CAPITAL IMPROVEMENTS Holdings or Owner may, but shall not be required to, make such other capital improvements or additions to the Hotel as they deem appropriate, from time to time. Holdings or Owner, as the case may be, shall consult with Manager regarding the nature, and cooperate with Manager in the timing, of such additional capital improvements or additions, with a view to minimizing the adverse revenue impact thereof upon the Hotel. -18- ARTICLE 8 FISCAL MATTERS 8.01 ACCOUNTING MATTERS AND FISCAL PERIODS (a) The books and records reflecting the Hotel operations shall be kept by Manager, as an Operating Cost, in accordance with GAAP. Such books and records shall be maintained either at the Hotel, at the principal office of Manager or at a regional accounting office, at Manager's option. Owner, the Mortgagee(s), and the independent accounting firms of Owner, the Mortgagee(s) and Manager shall each have the right and privilege of examining said books and records at any reasonable time. No part of Manager's corporate accounting or reporting functions (as opposed to accounting and reporting for individual hotels performed at corporate, central or regional offices) shall be charged to the Hotel or be included as a cost of Centralized Services. (b) Upon request of Owner and at Owner's sole cost and expense, a certified audit of the Hotel operations shall be performed by a nationally recognized, independent Certified Public Accounting firm appointed by Owner. Manager shall cooperate in good faith with Owner and its representatives to facilitate such audit. If the difference (if any) in the Net Operating Income of the Hotel reflected by such audit and the Net Operating Income of the Hotel reported by Manager hereunder, for any Fiscal Year, is more than 5% of the Net Operating Income of the Hotel so reported by Manager, Manager shall reimburse Owner for the entire cost of such audit. (c) Unless and until Owner and Manager otherwise agree in writing, the fiscal year of the Hotel shall be the calendar year (the "Fiscal Year"). Manager shall prepare and furnish to Owner, within fifteen (15) days after the end of each calendar month (Manager shall use all reasonable efforts to provide such reports within ten (10) days after the end of each calendar month, but in any event not later than fifteen (15) days) a detailed balance sheet and profit and loss statement for the Hotel, setting forth the financial position and results of operations of the Hotel for such calendar month and the calendar year to date, with comparisons to the then current Operating Budget and the previous year's results. Manager shall also provide Owner with additional operating and financial data as Owner may reasonably request, the cost of providing said data to be an Operating Cost of the Hotel. 8.02 ANNUAL BUSINESS PLAN (a) Manager has submitted to Owner an Operating Budget and the Annual Business Plan for ____ Fiscal Year. The Annual Business Plan for ____ has been reviewed and approved by Owner in the manner described in Article 8.02(b)(1) hereof Manager shall operate the Hotel in accordance with the Annual Business Plan for ______ during the ____ Fiscal Year. (b) (1) At least forty-five (45) days prior to the commencement of each subsequent Fiscal Year, Manager shall submit to Owner an annual forecast for the operation of the Hotel for such Fiscal Year containing, in such detail as may be reasonably requested by Owner, revenue projections and budgets of expenses (the "Operating Budget"). The Operating Budget shall be substantially in form consistent with GAAP. Manager shall, at the same time, also submit to Owner a Marketing Plan, a Human Resources Compensation Plan, the FF&E Replacement Budget and the Capital Repairs Budget, which, together with the Operating Budget, will comprise the "Annual Business Plan." Manager shall provide Owner, upon request, additional detail, information and assumptions -19- used in preparation of the Annual Business Plan. Manager shall review the Annual Business Plan with Owner, and subject to Owner's approval, which shall not be unreasonably withheld, Manager shall implement such Annual Business Plan during the successive Fiscal Year (during which it shall be referred to as the "Approved Budget"). Owner shall approve the proposed Annual Business Plan or state its specific objections thereto (or to any specific item or items therein) within thirty (30) days after the Annual Business Plan is submitted by Manager to Owner. In the event Owner declines to approve the Annual Business Plan or any specific line item or items of the Annual Business Plan prior to commencement of the Fiscal Year in question, pending resolution thereof the Annual Business Plan or the specific line item or items of expense (not revenue) that have not been approved shall be suspended and replaced for the Fiscal Year in question by an amount equal to the lesser of (i) that amount proposed by Manager and (ii) the amount of such budget item or items for the Fiscal Year prior thereto, adjusted (per item) by the percentage change in the Index over the twelve (12) month period immediately preceding the start of the Fiscal Year in question. If, thereafter, at any time either Owner or Manager determines that the Annual Business Plan, or any specific line item or items therein, cannot be agreed to by the parties, then either Manager or Owner may require the matter to be submitted to arbitration in accordance with Article 22 hereof Manager makes no assurances that the actual performance of the Hotel shall correspond to its estimates in the Annual Business Plan. Manager agrees to use all reasonable efforts to operate the Hotel within the Approved Budget and in a manner designed to maximize Gross Rooms Sales and Net Operating Income. Centralized Services costs, the National Sales, Business Promotion and Reservations Services Assessment, Additional Program Charges and TPR Charges (as herein defined), shall be included in the Operating Budget, but with Centralized Services costs to be subject to Owner's approval as part of the budget approval process set forth above. (2) Notwithstanding the provisions of Article 8.02(b)(1) or anything to the contrary contained elsewhere in this Agreement, Manager may, without Owner's approval, make aggregate expenditures in any year which exceed the Approved Budget, provided that such excess does not exceed the Approved Budget by more than 5%. In addition, Manager may expend in excess of said 5% limitation under the following circumstances (provided such expenditures are reasonable in nature and amount based on such circumstances): (A) as the result of increased costs due to increases in the volume of Total Sales (by reason of increased occupancy rates or otherwise); or (B) as the result of an emergency, as described in Article 7.10, or of uncontrollable expenditures, such as insurance, real estate taxes, weather-related costs, and increases in the cost of utilities based upon changes in utility rates. References in this Agreement to the limitations imposed by the Approved Budget (and phrases of similar import) shall be deemed to incorporate Manager's authority to expend funds in excess of the Approved Budget as set forth in this Article 8.02(b)(2). Manager shall promptly notify Owner of any expenditures that have been or are expected to be made in excess of the Approved Budget and of the reasons therefor. (3) In addition to the additional amounts Manager may expend pursuant to subparagraph (2) above, Owner and Manager acknowledge and agree that there may occur from time -20- to time unpredicted significant changes, variables or events affecting the operation of the Hotel, including unanticipated changes in occupancy rates, market conditions, or additional unanticipated items of income or expense. In such event, Manager may request variance(s) from the Approved Budget which are reasonable and necessary to continue to operate the Hotel in accordance with the Operational Standards and the Hotel Lease. Owner's approval of such a request shall not be unreasonably withheld. Any such request by Manager shall be submitted to Owner in writing with an explanation thereof and shall be accompanied by supporting information for the request. Owner shall respond to any such request within fifteen (15) days of the receipt thereof (b) At the time of the review by Owner with Manager of the Annual Business Plan and at any additional meetings during the Fiscal Year reasonably called by Owner or Manager, Manager shall consult with Owner on matters of policy concerning management, sales, room rates, wage scales, personnel, general overall operating procedures, economics and operation and other matters affecting the operation of the Hotel. 8.03 BANK ACCOUNTS (a) Manager shall establish such account(s) in the name of the Owner at a bank to be designated by Manager and approved by Owner (collectively, the "Bank Account") as are necessary for the operation of the Hotel. The Bank Account shall be separate and distinct from any other accounts, reserves or deposits required by this Agreement and Manager's designees shall be the only parties authorized to draw upon the Bank Account. Manager shall appoint at least two such designees, which designees shall be bonded or otherwise insured as Owner and Manager shall mutually agree. Checks or other items of withdrawal shall be signed only by such designees, acting singly or jointly. (b) Manager shall have absolute control of the Bank Account. All sums received from the operation of the Hotel and any and all items paid by Manager arising by virtue of management of the Hotel shall pass through the Bank Account. In addition, reasonable petty cash funds may be maintained at the Hotel. (c) In addition to the Bank Account, a payroll account shall be established by Manager which shall be under the sole ownership and control of Manager or its designee. Amounts disbursed or to be disbursed by Manager from its payroll account shall be paid to, and transferred by, Manager from the Bank Account. Such payment and transfer of funds may occur at such time (whether prior or subsequent to the release by Manager of checks drawn on its payroll account) as Manager, in its reasonable discretion, determines is necessary to assure that it will have sufficient funds from the revenues of the Hotel to satisfy its liabilities to employees at the Hotel. (d) In no event shall any funds in the Bank Account, the Replacement Reserve Fund or any other fund or account under the control of Manager that contains monies belonging to the Hotel or to the Owner be combined or commingled with any other accounts or funds belonging to Manager or any other person whatsoever. (e) All payments made by Manager hereunder shall be made from authorized bank accounts and petty cash funds. Except as otherwise expressly provided in Article 8.05 hereof, Manager shall not be required to make any advance or payment to or for the account of Owner -21- except out of such funds, and Manager shall not be obligated to incur any liability or obligation for Owner's account without reasonable assurances that necessary funds for the discharge thereof will be provided by Owner. Reasonable debts and liabilities incurred by Manager in the normal course of its operation and management of the Hotel pursuant to the terms hereof whether asserted before or after termination of this Agreement, shall be paid by Owner to the extent funds are not available for that purpose from the operation of the Hotel. 8.04 REIMBURSEMENT OF OUT-OF-POCKET EXPENSES It is agreed that Owner, subject to the Approved Budget, shall reimburse Manager and its Affiliates for actual, reasonable and necessary out-of-pocket costs incurred by them in the performance of this Agreement as an Operating Cost. Such costs shall include, but not be limited to, reasonable travel, entertainment, telephone, telegraph, electronic communication, postage, air express, costs of recruitment (including applicable agent's fee) and other incidental expenses. It is agreed that Manager shall be entitled to reimbursement of these expenses directly from the Bank Account at the time incurred. Such reimbursements shall be in addition to the Base Management Fee and other fees and payments due hereunder. ARTICLE 9 ADDITIONAL SERVICES 9.01 ADDITIONAL SERVICES Manager will provide to the Hotel additional services (collectively, "Additional Services") consisting of (i) Centralized Services, as described in Article 9.02, (ii) National Sales, Business Promotion and Reservations Services, as described in Article 9.03, and (iii) the Other Services described in, and as permitted by, Article 9.04. 9.02 CENTRALIZED SERVICES (a) Manager will cause to be furnished to the Hotel certain services ("Centralized Services") which are furnished generally on a central or regional basis to other Portfolio Hotels. Centralized Services shall include (i) training of personnel, (ii) accounting, internal audit and data processing services, and (iii) such additional central or regional services as may from time to time be furnished for the benefit of Portfolio Hotels or in substitution for services now performed at individual Portfolio Hotels which may be more efficiently performed on a group basis. Accounting and data processing services shall include a central office computer, full service accounting (or oversight of property stand-alone accounting systems) and data processing system/program support, and audit and system/personnel support for the purpose of ensuring the consistent and professional execution of accounting and data processing functions required for the Hotel. (b) Centralized Services costs shall consist of the actual cost of the services without markup or profit to Manager or any Affiliate, but shall include salary and employee benefit costs, cost of equipment used in performing such services, and overhead costs, reasonably allocable thereto, of the home office or any regional or other local office providing such services; provided, however, that costs attributable or allocable to corporate office accounting and reporting for Manager or any of its Affiliates shall not be included. Costs and expenses incurred in the providing of Centralized Services -22- for Portfolio Hotels shall be allocated by Manager and its Affiliates on a fair and equitable basis, consistently applied, among all Portfolio Hotels receiving such services; provided, however, that in no event shall the basis upon which the cost of such services is allocated to the Hotel be less favorable to the Hotel than the basis upon which such costs are allocated to any other hotel under an agreement entered into (as opposed to being assumed as part of an acquisition) subsequent to the Execution Date. A detailed budget for Centralized Services shall be prepared and included in the Annual Business Plan submitted to Owner pursuant to Article 8.02(b)(1) hereof and in each Approved Budget. Anything herein to the contrary notwithstanding, in no event shall the amounts charged to the Hotel for any Fiscal Year exceed the amount therefor included in the Approved Budget for such Fiscal Year, unless otherwise expressly approved by Owner in writing. Costs of Centralized Services shall be payable monthly as an Operating Cost. Owner may at any reasonable time review the records of Manager and its Affiliates pertaining to such charges. In addition, if equipment is installed and maintained at the Hotel in connection with the rendition of any Centralized Services, all costs thereof will be charged to the operation of the Hotel either as current expenses or capitalized over a period of years, as determined by Manager in good faith and consistent with GAAP. 9.03 NATIONAL SALES. BUSINESS PROMOTION AND RESERVATIONS SERVICES (a) Manager shall cause to be furnished to the Hotel certain services ("National Sales, Business Promotion and Reservations Services") consisting of central marketing services and a central reservations system. The central marketing services shall provide system-wide marketing activities for all Affiliated Hotels and shall include national and regional advertising, sales promotion, public relations and direct selling efforts for the collective business development of all Affiliated Hotels. The central reservations system shall provide a national toll-free system for inquiries regarding customer bookings and for making, changing and canceling reservations for the Hotel and other Affiliated Hotels. (b) Manager shall assess, and Owner shall pay to Manager, a monthly assessment (the "National Sales, Business Promotion and Reservations Services Assessment") for National Sales, Business Promotion and Reservations Services equal to 3.5% of Gross Room Sales. Such amount may be increased by a vote of the owners of a majority of the rooms and suites in all Affiliated Hotels. The National Sales, Business Promotion and Reservations Services Assessment will be payable each month directly from the Bank Account based upon Gross Room Sales for the preceding month. Costs of National Sales, Business Promotion and Reservations Services shall consist of the actual cost of providing such services without mark-up or profit to Manager or any Affiliate, but shall include salary and employee benefit costs, cost of equipment used in providing such services, and overhead costs of the home office or any regional or other local office providing such services, in each case reasonably allocable thereto. (c) The National Sales, Business Promotion and Reservations Assessment does not cover charges for third-party reservation systems (such as airline reservations systems) and/or other third-party reservation fees ("TPR Charges"), which shall be paid for separately by Owner as an Operating Cost of the Hotel. TPR Charges shall include costs incurred by Manager or any Affiliate (without markup for profit to Manager or any Affiliate) in administering such systems or fees, such as salary and employee benefit costs, cost of equipment, and overhead costs at the home office or any other regional or local office in administering such systems and fees, in each case reasonably allocable thereto. -23- (d) National Sales, Business Promotion and Reservations Services may be provided in common with other hotels and resorts and all-suite properties owned, operated or franchised by, or otherwise affiliated with, Manager or its Affiliates and with other hotels which elect to participate in such services, including hotels and resorts in the Canadian Pacific Hotel chain. In any event, advertising and promotional materials for the Affiliated Hotels may include cross-sell references to hotels and resorts in the Canadian Pacific Hotel chain, to other hotels owned, operated or franchised by Manager or its Affiliates, and to their affiliation with Manager. 9.04 OTHER SERVICES (a) Direction and administration of Hotel renovation projects, other planning, design, concept development and implementation, management information systems and accounting services for specific renovation or other projects, and related project management services which the Hotel may require (collectively, "Project Services"), are not Centralized Services and are not provided for under the scope of this Agreement. Accordingly, Manager will not furnish Project Services, unless the same are expressly requested by Owner in writing, and the amount of fees payable hereunder for such Project Services are approved in writing by Owner, in each instance before any such Project Services are furnished by Manager on behalf of Owner or at Owner's expense. In the event Owner so requests and approves such Project Services, Manager may use the services of its Affiliates to perform Project Services, in which case, Project Services shall be furnished to Owner on terms and conditions that are generally no less favorable to Owner than those available from unrelated third parties in an arms-length transaction. Owner agrees to give good faith consideration to the use of Manager to provide Project Services, but shall have no obligation to select Manager to provide the same. (b) In purchasing goods, supplies, equipment and services for the Hotel or organizations or entities providing Additional Services for the Hotel, including, without limitation, Operating Supplies, Operating Equipment, insurance and long distance telephone services, Manager shall (i) unless otherwise directed by Owner in writing, utilize the purchasing and procurement services of Affiliates of Manager and/or other group buying techniques involving other Portfolio Hotels, provided that the cost thereof shall be generally no less favorable to Owner than that which would be available through unrelated third party vendors in an arms-length transaction or (ii) if so directed by Owner in writing, utilize such other supplier or provider as may be designated by Owner. The Manager and/or Affiliates of Manager (as the case may be) providing any such purchasing or procurement services to the Hotel may mark up their costs or receive and retain a fee or other compensation from vendors and service providers for their services in making the benefit of volume purchases available to the Hotel or negotiating and implementing the arrangements with such vendors or providers; provided, however, that the total cost of goods and services (including such mark-up, fee or other compensation charged or retained by Manager or its Affiliates) so provided to the Hotel by Manager or its Affiliates shall be generally no less favorable to Owner than that which would be available through unrelated third party vendors in an arms-length transaction. Owner agrees to give good faith consideration to the use of Manager to provide procurement services, but shall have no obligation to select Manager to provide the same. -24- ARTICLE 10 PAYMENTS TO MANAGER 10.01 BASE MANAGEMENT FEE In consideration of the management of the Hotel by Manager, Owner agrees to pay to Manager the Base Management Fee. The "Base Management Fee" shall mean and refer to a fee equal to, during the period from the Commencement Date to and including _________________, 2.5% of Total Sales with respect to each month (or portion thereof) during such period, and during the period from _______________, to and including the end of the Term, 3.0% of Total Sales with respect to each month during such period. The Base Management Fee for the immediately preceding month shall be paid monthly to Manager from the Bank Account; provided, however, that the Base Management Fee shall be reduced as follows to the extent necessary to permit the Owner to pay, when due, all rent payable to Holdings under the Hotel Lease and the comparable hotel leases covering each of the AEW Hotels: (a) for the period from the Commencement Date through __________________ up to 1.5% of Total Sales; and (b) for the period from ________________ through the remainder of the Initial Term, up to 0.5% of Total Sales. Manager shall adjust the amounts charged by it to the Hotel, on a monthly basis, in respect of the Base Management Fee to reflect any anticipated reduction in the Base Management Fee payable to it for the then current Fiscal Year or, if no such reduction is anticipated, to restore reductions made in any previous month of the then current Fiscal Year. A final reconciliation of the Base Management Fee due Manager, if any, for each Fiscal Year shall be included with the financial statements to be provided by Manager to Owner with respect to December of each Fiscal Year and, within thirty (30) days following delivery thereof, (i) Owner shall pay to Manager any Base Management Fee due, but not paid to Manager, for such Fiscal Year, or (ii) Manager shall reimburse to Owner any Base Management Fee paid to Manager, but in excess of the Base Management Fee due, for such Fiscal Year. Any reduction in the Base Management Fee payable for any Fiscal Year, as a result of the foregoing provisions, shall not be payable in any subsequent Fiscal Year. ARTICLE 11 DISBURSEMENTS 11.01 DISBURSEMENT OF FUNDS All funds derived from the operation of the Hotel shall be deposited into the Bank Account created pursuant to the requirements of Article 8.03. There shall in turn be disbursed by Manager for and on behalf of Owner, funds from the Bank Account towards the following items to the extent available (with appropriate reserves established to cover items payable less frequently than monthly) in the following order of priority: -25- (a) all Operating Costs, including the Base Management Fee (subject to adjustment as provided in Article 10.01), charges for Additional Services, and all reimbursable expenses due Manager; (b) payments pursuant to any equipment leases or installment sale contracts approved by Manager; (c) all rental payments required to be made by Owner pursuant to the Hotel Lease; and (d) all other Fixed Charges. 11.02 ADJUSTMENT TO BANK ACCOUNT After the disbursements pursuant to Article 11.01, any excess funds remaining in the Bank Account over the Minimum Balance shall be disbursed monthly to Owner. Correspondingly, any deficiency in the Bank Account shall promptly be provided by Owner as required in Article 2.03. Notwithstanding that Manager is authorized to and shall make the hereinabove described disbursements to the extent funds are available, Owner will be solely liable for (i) all Operating Costs, Specified Fixed Charges and other Fixed Charges and (ii) all sales taxes, excise taxes, or other taxes which may be assessed by any taxing authority against or upon Manager with respect to any payments, receipts or earnings received by Manager pursuant to this Agreement, including, without limitation the fees received by Manager pursuant to Article 10, excluding in any case, however, any federal, state or local income, franchise or other taxes levied against Manager based upon its assets or income. ARTICLE 12 INSURANCE 12.01 INSURANCE COVERAGE Owner (or Holdings, to the extent provided under the Hotel Lease) shall procure and maintain, at its expense, and at all times during the Term, such casualty and other insurance coverage as is set forth under "Responsibilities of Owner" in Exhibit E attached hereto. Manager agrees to procure and maintain, as an Operating Cost, such comprehensive general liability insurance and other insurance coverage as is set forth under "Responsibilities of Manager" in said Exhibit E. In connection with all significant construction at the Hotel, Owner or Manager (whichever is the contracting party) will cause the general contractor to maintain with a reputable insurer comprehensive general liability insurance (with products, completed operations and independent contractors coverage) in at least the amount of $20,000,000. 12.02 INSURANCE POLICIES (a) All insurance provided for under this Article shall be effected by policies issued by insurance companies of good reputation and of sound financial responsibility and shall be subject to Manager's approval. Such insurance may be carried under blanket policies covering the Hotel and other locations provided such policies otherwise comply with all of the requirements of Exhibit E. -26- (b) Certificates of insurance shall be delivered to Owner and Manager on or before the Commencement Date. All insurance policies shall be renewed, and proof of such renewals shall be delivered to Owner and Manager at least ten (10) days prior to their respective expiration dates. (c) All insurance policies procured by Owner under Article 12.01 (or by Holdings, to the extent provided under the Hotel Lease) shall be written in the name of Owner with Holdings, Manager and any Mortgagee(s) being named thereon as additional insureds (as their respective interests may appear). All insurance policies procured by Manager under Article 12.01 shall be written in the name of Manager with Owner, Holdings any Mortgagee(s) and any other appropriate parties designated by Owner or Manager being named thereon as additional insureds (as their respective interests may appear), except for workers' compensation insurance and other insurance with respect to which it is impractical and inappropriate to name other parties as additional insureds. (d) All casualty insurance policies shall be endorsed specifically to the effect that the proceeds of any building, contents or business interruption losses shall be made payable to Owner, Holdings, the Mortgagee(s), and Manager jointly, as their interests may appear, unless otherwise required by any Mortgagee. All such policies of insurance shall also be endorsed specifically to the effect that such policies shall not be canceled or materially changed without at least thirty (30) days' prior written nOtice to Owner, Holdings, the Mortgagee(s) and Manager. Each party shall use all reasonable efforts to cause any policy which it is responsible to obtain under Exhibit E to provide that the insurer shall not have any rights of subrogation to any claim which either party hereto may have or acquire against the other. Neither Owner nor Manager shall have any claim against the other with respect to the failure of any insurance carrier to provide the coverage or protection placed with such carrier as contemplated by this Agreement. (e) Certificates of insurance (and copies of policies, to the extent required) shall be sent to Manager and to Owner at their respective addresses set forth in Exhibit 1 and to the Mortgagee(s) at such address(es) as the Mortgagee(s) shall designate. (f) All coverage limits and deductible amounts set forth in Exhibit E shall be reviewed by Owner and Manager from time to time for the purpose of determining the coverage limits and deductible amounts then appropriate for properties similar in type and construction to the Hotel and for the nature of the business being conducted. Manager and Owner shall cooperate in good faith to arrive at an agreement on such matters. 12.03 MANAGER'S BLANKET INSURANCE COVERAGE Manager may, at its option (but shall not be obligated to) make available to Owner and Holdings the opportunity to participate in blanket insurance policies carried by Manager for other properties, including, without limitation, other Portfolio Hotels, and which cover all or any portion of the insurance coverage specified in Exhibit E (including all or any portion of that insurance REQUIRED TO BE PROCURED AND MAINTAINED BY OWNER OR HOLDINGS UNDER ARTICLE 12.01). OWNER AGREES TO PARTICIPATE IN SUCH BLANKET POLICIES IF (a) MANAGER DETERMINES TO MAKE SUCH COVERAGE AVAILABLE TO OWNER, AND (b) THE PREMIUMS FOR, AND THE COVERAGE AND FINANCIAL STRENGTH PROVIDED BY THE INSURER(s) under such blanket policies applicable to the Hotel shall be competitive with the premiums for, and the coverage and financial strength provided by the insurer(s) from which Owner would otherwise obtain such insurance. In such event, notwithstanding the provisions of Article 12.01 and Exhibit E -27- hereof Manager shall be responsible for procuring and maintaining, at the expense of Owner all insurance coverage represented by such blanket policies. ARTICLE 13 RESPONSIBILITY FOR CLAIMS. ETC. 13.01 SCOPE (a) All debts and liabilities arising in the course of business of the Hotel or otherwise in connection with the use, occupancy or operation thereof (including, without limitation, all such liabilities under or with respect to environmental laws, hazards or claims) during the Term are and shall be the obligation of Owner, and Manager shall not be liable or otherwise responsible for any such debts or liabilities by reason of its management, supervision and operation of the Hotel during said Term, except for any such debt or liability that arises because of Manager's fraud, gross negligence or willful misconduct. Manager shall defend, indemnify and hold harmless Owner and its Affiliates, and their respective agents, officers, employees, directors and shareholders, from and against any and all losses, costs, liabilities, expenses and claims (whether administrative or judicial), including, without limitation, reasonable attorneys' fees and expenses (all of the foregoing being referred to as "Losses"), arising from any matter for which Manager is responsible under this Article 13.01 (excluding, however, any such loss, cost, liability, expense or claim covered by the insurance required to be maintained in accordance with this Agreement). The act or omission of a Hotel employee who is not an Executive Employee, which act or omission is willful or constitutes fraud or gross negligence on the part of such employee, shall not constitute fraud, gross negligence or willful misconduct on the part of Manager unless Manager's home office or regional staff, or an Executive Employee, acted with gross negligence in employing, training, supervising or continuing the employment of such employee. As used herein and elsewhere in this Agreement, "Executive Employees" shall mean and include the General Manager; Controller, Rooms Manager, Food and Beverage Manager, Director of Marketing, and Human Resources Director. (b) Except as to specific acts or omissions for which Manager has agreed to indemnify Owner in paragraph (a) above, Owner hereby agrees to defend, indemnify and hold Manager and its Affiliates, and their respective agents, officers, employees, directors and shareholders, harmless from and against Losses occurring out of or by reason of this Agreement or otherwise arising in connection with the ownership, use, occupancy or operation of the Hotel. (c) No person or entity shall be deemed to be a third party beneficiary of any term or provision of this Agreement, including, without limitation, the terms and provisions of this Article 13.01, and no person or entity shall have any rights of subrogation or similar rights under this Article 13.01, other than Affiliates of Owner and Manager, respectively, entitled to indemnification pursuant to the provisions of this Article 13. All indemnification obligations under this Agreement and the provisions of this Article 13 shall survive the expiration and any termination of this Agreement. -28- ARTICLE 14 CASUALTY AND CONDEMNATION 14.01 CASUALTY (a) If, during the Term, the Hotel incurs minor damage by fire, casualty or other cause, Owner shall, at its sole cost and expense and with all reasonable diligence, repair or replace the damaged portion of the Hotel to the same condition as existed previously. To the extent available, proceeds from the insurance described in Article 12 shall be applied to such repairs or replacements. (b) In the event damage or destruction to the Hotel from any cause materially and adversely affects the operation of the Hotel, Owner shall promptly commence and complete repairing, rebuilding or replacement of the Hotel to substantially the same character as existed prior to the damage or destruction provided replacement is justified in comparison to the anticipated profitability of the Hotel during the remaining Term, and provided that the available insurance proceeds (plus the amount of the deductible with respect thereto) permit such repair, rebuilding or replacement. In the event Owner chooses to not undertake the repairs, rebuilding or replacements specified above, Manager or Owner may terminate this Agreement upon sixty (60) days' advance written notice, respectively, to Owner or Manager without the payment of a termination fee or other penalty of any kind; provided, however, in the event Owner or any Affiliate (but not any unrelated third party transferee of Owner) shall reopen the Hotel as a hotel within two years after the date of such casualty, on or before the date of reopening, Owner shall pay Manager a termination payment in an amount equal to the aggregate amount of the Base Management Fee paid to Manager hereunder during the twelve full months immediately preceding the date of such casualty. 14.02 CONDEMNATION (a) In the event all or substantially all of the Hotel shall be taken in any eminent domain, condemnation, compulsory acquisition, or similar proceeding by any competent authority for any public or quasi-public use or purpose, or in the event a portion of the Hotel shall be so taken, but the result is that it is unreasonable to continue to operate the Hotel as a hotel of the same character and class, this Agreement shall terminate. Owner and Manager shall each have the right to initiate such proceedings as they deem advisable to recover any damages to which they may be entitled; provided, however, the Manager shall not be entitled to pursue any such claim if the effect thereof would reasonably be expected to have the effect of reducing the amount which may be awarded to Owner. (b) In the event a portion of the Hotel shall be taken by the events described in Article 14.02(a) or the entire Hotel is affected but on a temporary basis, and the result is not to make it unreasonable to continue to operate the Hotel, this Agreement shall not terminate. However, PROVIDED THAT OWNER (AND HOLDINGS, TO THE EXTENT REQUIRED UNDER THE HOTEL LEASE) DETERMINES THAT THE COST OF REPAIR, REBUILDING OR REPLACEMENT IS JUSTIFIED IN COMPARISON TO THE ANTICIPATED PROFITABILITY OF THE HOTEL DURING THE REMAINING TERM OF THIS AGREEMENT, SO MUCH OF ANY AWARD FOR ANY SUCH PARTIAL TAKING OR CONDEMNATION AS SHALL BE NECESSARY TO RENDER THE HOTEL EQUIVALENT TO ITS CONDITION PRIOR TO SUCH EVENT SHALL BE USED FOR SUCH PURPOSE; THE BALANCE OF SUCH AWARD, IF ANY, SHALL BE PAID TO OWNER. -29- 14.03 BUSINESS INTERRUPTION INSURANCE Any proceeds from business interruption insurance payable to Owner or Manager hereunder, including, without limitation, payments made in connection with, or with respect to periods before or after, the termination of this Agreement pursuant to Article 14.01 or 14.02, shall be fairly and equitably apportioned between Owner and Manager in accordance with their respective interests and equities to the end that the fair value of Manager's expectable compensation under this Agreement for the period covered by such business interruption insurance shall be paid to Manager. Any business interruption insurance paid to Manager pursuant to this Article 14.03 in respect of the period subsequent to the date of termination of this Agreement shall be credited against any termination payment payable by Owner to Manager pursuant to Article 14.01 (b). ARTICLE 15 DEFAULT AND TERMINATION 15.01 EVENTS OF DEFAULT It shall be an event of default hereunder (an "Event of Default") if any one or more of the following events shall occur: (a) If a party fails to timely perform any of its obligations and agreements under this Agreement; or (b) If a party shall (i) voluntarily or involuntarily be dissolved (except that if either party is a partnership and is dissolved solely by reason of the death, insanity, disappearance, bankruptcy or lack of legal capacity of one or more of its general partners and its remaining partners, within sixty (60) days, elect, pursuant the partnership agreement of such partnership to continue such partnership's business, then such party shall not be considered as "dissolved" for the purposes hereof); (ii) apply for or consent to the appointment of a receiver, trustee or liquidator of all or a substantial part of its assets; (iii) file a voluntary petition in bankruptcy or otherwise voluntarily avail itself of any federal or state laws for the relief of debtors; (iv) admit in writing its inability to pay its debts as they become due; (v) make a general assignment for the benefit of creditors; (vi) file a petition or an answer seeking reorganization or arrangement with creditors or to take advantage of any insolvency law or file an answer admitting the material allegations of any petition filed against it in any bankruptcy, reorganization or insolvency proceeding; (vii) be the subject of an order, judgment or decree entered by any court of competent jurisdiction, in the application of any one or more creditors of such party adjudicating it a bankrupt or insolvent or approving a petition seeking reorganization or appointing a receiver, trustee or liquidator of all or a substantial part of its assets, and such order, judgment or decree shall become final; or (viii) suffer to exist any action or proceeding to foreclose upon any security interest in the Management Agreement granted by it. 15.02 TERMINATION (a) Upon the occurrence of any Event of Default under Article 15.0 1(a) by or with respect to one of the parties hereto (the "Defaulting Party"), the other party hereto (the "Non-Defaulting Party") shall have the right (exercisable by the giving of notice to the Defaulting Party) to terminate this Agreement if the Defaulting Party fails to remedy such Event of Default within ten (10) days after -30- its receipt of notice to remedy if such default relates to the payment of a sum of money and, in all other cases, within thirty (30) days after its receipt of notice to remedy; provided, however, that if such Event of Default be of a non-monetary nature and if it cannot reasonably be remedied within said thirty (30) day period, then such thirty (30) day period shall be deemed to be extended for such additional period as may reasonably be required to remedy the same if the Defaulting Party shall promptly commence to remedy upon receipt of notice from the Non-Defaulting Party and shall continue therewith with due diligence. (b) With respect to the occurrence of an Event of Default under Article 15.01(b), this Agreement shall terminate, at the election of the Non-Defaulting Party, upon such occurrence, or at any time after such occurrence provided such Event of Default has not been remedied. (c) The terms of this Agreement shall not be deemed to impair the right of any party to exercise any right or remedy, whether for damages, injunctions, specific performance or otherwise, upon any breach or wrongful termination hereof ARTICLE 16 NOTICES 16.01 PROCEDURE All consents, approvals, notices or other communications provided for in this Agreement shall be in writing and shall be deemed delivered when personally served at, or sent by reputable overnight delivery service or by postage prepaid Registered or Certified Mail to, the respective addresses for Owner and Manager set forth in Exhibit 1, until such time as written notice, as provided hereby, of a change of address with a new address to be used thereafter is delivered to the other party. Upon request a party shall send copies of any notice or communication by ordinary mail as instructed by the other party. ARTICLE 17 RELATIONSHIP. AUTHORITY AND FURTHER ACTIONS 17.01 RELATIONSHIP Manager and Owner shall not be construed as joint venturers or partners of each other and neither shall have the power to bind or obligate the other except as set forth in this Agreement. 17.02 FURTHER ACTIONS Owner agrees to execute all contracts, agreements and documents, and to take all actions, necessary to comply with the provisions of this Agreement and the intent hereof -31- ARTICLE 18 APPLICABLE LAW The interpretation, validity and performance of this Agreement shall be governed by the laws of the State or Commonwealth in which the Hotel is located. In the event any court or appropriate judicial authority shall hold or declare that the law of another jurisdiction is applicable, this Agreement shall remain enforceable under the laws of that jurisdiction. If any of the terms and provisions hereof shall be held invalid or unenforceable for any reason, such invalidity or unenforceability shall in no event affect any of the other terms or provisions hereof, all such other terms and provisions to be valid and enforceable to the fullest extent permitted by law. ARTICLE 19 SUCCESSORS AND ASSIGNS 19.01 ASSIGNMENT (a) Manager, without the consent of Owner, shall have the right to assign from time to time this Agreement and its rights and interests hereunder to (i) any successor or assignee of Manager which may result from any merger, consolidation or reorganization with, or any sale or assignment to, any corporation, individual, partnership or other entity which shall acquire all or substantially all of Manager's hotel management business, and (ii) as security for any existing or future indebtedness of Manager or its Affiliates. Manager may also transfer from time to time this Management Agreement and its rights and interests hereunder without the consent of Owner to any Affiliate of Manager; provided, however, that no such transfer shall relieve Manager of any of its liabilities or obligations hereunder. Any such assignee shall agree to be bound by the terms and conditions of this Agreement. Except as hereinabove provided, Manager shall not assign or in any manner sell or transfer any of its rights and interests as Manager hereunder without the prior written consent of Owner. (b) Owner shall have the right, without the payment of any transfer or similar fee, to assign this Agreement to any third party acquiring the Hotel, subject to Manager's prior written consent, which consent shall not be unreasonably withheld or delayed. 19.02 BINDING EFFECT Subject to the restrictions on assignment set forth elsewhere in this Agreement, this Agreement shall be binding upon and inure to the benefit of Owner and its successors and assigns, and shall be binding upon and inure to the benefit of Manager and its successors and assigns. ARTICLE 20 AGREEMENT NOT AN INTEREST IN REAL ESTATE This Agreement is not, and shall not be deemed or construed, at any time or for any purpose, to be or create any interest in real estate or any lien or other encumbrance of any kind whatsoever against the Hotel or the land upon which it is erected. -32- ARTICLE 21 FORCE MAJEURE 21.01 OPERATION OF HOTEL If at any time during the term hereof it becomes necessary in Manager's reasonable opinion to cease operation of the Hotel in order to protect the Hotel and/or the health, safety and welfare of the guests and/or employees of the Hotel for reasons of force majeure such as, but not limited to, acts of war, insurrection, civil strife and commotion, labor unrest or acts of God, then in such event Manager may close and cease operation of all or part of the Hotel, reopening and commencing operation when Manager, in consultation with Owner, deems that such may be done without jeopardy to the Hotel, its guests and employees. 21.02 EXTENSION OF TIME With respect to any obligation to be performed by a party during the Term, such party shall in no event be liable for failure so to do when prevented by any force majeure cause beyond the reasonable control of such party such as strike, lockout, breakdown, accident, order or regulation of or by any governmental authority, failure of supply or inability, by the exercise of reasonable diligence, to obtain supplies, parts or employees necessary to perform such obligation, or war or other emergency. The time within which such obligation shall be performed shall be extended for a period of time equivalent to the delay from such cause. ARTICLE 22 ARBITRATION 22.01 ARBITRATION PROCEDURES Any arbitration referenced in Article 3.04(c), 7.03(b) or 8.02 shall commence as soon as possible but not more than fifteen (15) days after such need is determined hereunder. The arbitration shall be held at the Hotel in accordance with the rules of the American Arbitration Association but not under the authority of that Association. The arbitration shall be conducted by an arbitrator named by one of the following accounting firms (selected in the order named) who shall be an employee or partner of such firm experienced in the work the firm does for the hotel industry: PKF Consulting; KPMG Peat Marwick; and Coopers & Lybrand. If none of the named firms or their successor firms are in existence at the time of a request for arbitration, the parties shall agree on a similarly experienced accounting firm which shall name the arbitrator and if the parties are unable to agree, then the arbitrator shall be chosen by the presiding judge of the highest trial court in the County in which the Hotel is located. With respect to an Annual Business Plan proposed by Manager for a Fiscal Year which the Owner has declined to approve pursuant to the provisions of Article 8.02 and which is the subject of arbitration, the arbitrator shall decide only that the proposed Annual Business Plan shall or shall not be the Annual Business Plan for the Fiscal Year; the arbitrator shall not enter -33- a decision deciding upon a compromise of any kind. The decision of the arbitrator shall be binding upon the parties and no appeal of any kind of the decision shall be made by either party. The non-prevailing party shall pay the fees and expenses of the arbitrator and the attorneys' fees of the other party in the amount fixed by the arbitrator. The parties agree that this Article 22 shall apply only to Article 3.04(c), 7.03(b) and 8.02 and that any other dispute of any nature whatsoever regarding this Agreement or the operation of the Hotel shall not be subject to the arbitration procedures set forth in this Article 22. ARTICLE 23 GENERAL PROVISIONS 23.01 AUTHORIZATION Owner represents that it has full power and authority to execute this Agreement and to be bound by and perform the terms hereof Manager represents that it has full power and authority to execute this Agreement and to be bound by and perform the terms hereof On request each party shall furnish the other evidence of such authority. 23.02 INTEREST Any amount payable to Manager which shall not be paid when due shall accrue interest at the lesser of (a) the highest legal limit, or (b) 1% over the rate of interest announced by ____________________________ as its prime rate, as the same may be changed from time to time. 23.03 FORMALITIES Any change to or modification of this Agreement must be in writing signed by both parties hereto. This Agreement shall be executed in one or more counterparts, each of which shall be deemed an original. The captions for each Article are intended for convenience only. 23.04 DOCUMENTS Throughout the Term, Owner shall furnish Manager copies of all property tax and insurance statements, all financing documents (including notes and mortgages) relating to the Hotel and such other documents pertaining to the Hotel as Manager shall request. 23.05 CONSENTS Except as otherwise expressly provided in this Agreement, wherever in this Agreement it IS provided that an act or proposed act of Owner or Manager is subject to the consent or approval of the other, such consent or approval shall not be unreasonably withheld. The standard to be employed to determine reasonableness shall be the standard of practices and procedures employed at comparable hotels then being operated by Manager or its Affiliates. If the approval or consent of one -34- party hereto is required for any act or matter contemplated by the other party, the party desiring such consent may give to the party whose consent is desired, notice specifying in reasonable detail, the matter to which consent is requested. Unless otherwise specified herein, if the party whose consent is requested does not, within 20 days after actual receipt of such notice, respond positively or negatively to such notice in writing, the requested consent shall conclusively be deemed given. 23.06 ESTOPPEL CERTIFICATE Either party shall, at any time and from time to time, upon not less than ten (10) days prior written request from the other, execute, acknowledge and deliver to the requesting party, in form reasonably satisfactory to the requesting party, a written statement certifying (if true) (i) that this Agreement is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications); (ii) that there is no outstanding notice of an Event of Default hereunder and, to the best of such party's knowledge, no event has occurred or condition exists which, with the giving of notice or the passage of time or both, would constitute an Event of Default hereunder, and (iii) such other accurate information as may be reasonably requested by the requesting party or by any of the Interested Persons (as hereinafter defined). It is intended that any such statement delivered pursuant to this Article 23.06 may be relied upon by the requesting party, any current or prospective Mortgagee or other party providing financing to Owner or Manager (as the case may be), a prospective purchaser of the Hotel or permitted assignee of Manager's rights and interests hereunder, and the respective successors and assigns of any of the foregoing (the "Interested Persons"). 23.07 EXTENSION OF DATE OF TERMINATION Notwithstanding any contrary provision of this Agreement, the date of termination of this Agreement, other than upon expiration pursuant to Article 3.02, shall be extended so that the date of termination after notice of termination is given to or by Manager shall be on a date which is not earlier than fifteen (15) days plus the number of days, if any, Manager is required to give its employees advance notice of termination of employment as required by the Worker Adjustment and Retraining Act, 29 U.S.C., Section 2101 et. seq., as hereafter amended, or any similar federal or state statute. 23.08 HOTEL RESERVATIONS HONORED Upon termination of this Agreement for any reason, Owner agrees that Hotel reservations made by Manager in the ordinary and normal course of business, for dates not more than two (2) years after the date of termination and at rates prevailing for such reservations at the time they were made, shall be honored and remain in effect after the date of termination of this Agreement. -35- 23.09 NO REPRESENTATIONS (a) Owner and Manager acknowledge there have been no representations, inducements, promises or agreements made by Manager or Owner other than those specifically set forth herein. (b) Financial projections, budgets or similar forecasts as may have been prepared or in the future are prepared by Manager or its Affiliates do not take into account, nor make provisions for, any rise or decline in local or general economic conditions or other factors beyond the control of Manager. Manager and its Affiliates cannot and do not warrant or guaranty in any way said financial projections, budgets or other forecasts. Any financial projections, budgets or forecasts provided have been prepared on the basis of information available at the time of such preparation and Manager's and its Affiliate's experience in the hotel industry. Said financial projections, budgets and forecasts have been prepared for information only and not as an inducement for action. Owner hereby acknowledges that in entering into this Agreement, Owner has not relied on any projection of earnings, statements as to the possibility of future success, or other similar information which may have been prepared by Manager or its Affiliates. Owner further understands and acknowledges that no guaranty is made or implied by Manager or its Affiliates as to the cost, or the future financial success or profitability, of the Hotel. [SIGNATURES ON FOLLOWING PAGE] -36- IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement effective the Execution Date. OWNER: -------------------------------------------- Witness: -------------------------------------------- By: - ----------------------------- ---------------------------------------- MANAGER: --------------------------------- Witness: --------------------------------- By: - ----------------------------- ------------------------------------- Name: ------------------------------------- Title: ------------------------------------- -37- EXHIBIT 1 The following terms shall have the meanings assigned to them below: Execution Date - Manager - Number of Keyed Guest Rooms - Owner - Hotel - Competitive Set - Base Yield Index - All notices and other communications required or permitted to be given hereunder shall be given to the applicable party at the address set forth below: IF TO OWNER, TO: IF TO MANAGER, TO: _________________________________ c/o FelCor Suite Hotels, Inc. 545 E. John Carpenter Frwy. Suite 1300 Irving, Texas 75062 Attention: Thomas J. Corcoran, Jr. President WITH A COPY TO: WITH A COPY TO: Jenkens & Gilchrist, P.C. 3200 Fountain Place 1445 Ross Avenue Dallas, Texas 75202 Attention: Robert W. Dockery -38- EXHIBIT A LEGAL DESCRIPTION EXHIBIT B [Intentionally Deleted] -40- EXHIBIT C (Article 1.01 (p)) SCHEDULE OF PERMITTED MORTGAGES None at the present time. -41- EXHIBIT D [Intentionally Deleted] -42- EXHIBIT E A \~ (Article 12.01) SCHEDULE OF REQUIRED INSURANCE I. Responsibilities of Owner. A. At all times during the Term, Owner (or Holdings, to the extent provided under the Hotel Lease) shall procure and maintain, upon all buildings and improvements now existing or hereafter erected upon or above the Site, and all equipment, fixtures, motors, machinery, furnishings and furniture installed and owned or leased by Owner and used in connection with the Site or with the buildings and improvements upon or above the Site, including all alterations, rebuildings, replacements and additions thereto, so-called "all risk" property damage insurance in an amount equal to the "Full Insurable Value" thereof (as hereinafter defined), subject, at the option of Owner, to commercially reasonable deductibles, but in any event in an amount not less than that required to avoid the operation and effect of any co-insurance provisions in said policies. Fire insurance policies written with no co-insurance clause will be acceptable to Manager and Owner. If an insurer, or any governmental agency or authority having jurisdiction over the Site, shall at any time require that the foundations be insured in order to relieve the insured from the responsibility as a coinsurer or for any other purpose, the obligations with respect to insurance herein shall thenceforth be increased to the extent so required. All buildings and improvements now existing or hereafter erected upon or above the Site and all other property required to be covered by fire insurance in accordance with this paragraph A shall be covered by flood insurance in an amount at least equal to the Full Insurable Value thereof (or such lesser amount of flood insurance as may be obtainable at commercially reasonable rates). The term "Full Insurable Value" shall mean actual replacement cost (exclusive of cost of excavation, foundations and footings below the lowest basement floor). B. At all times during the Term, Owner (or Holdings, to the extent provided under the Hotel Lease) shall procure and maintain boiler and machinery insurance, in the amount of not less than the Full Insurable Value thereof, on all steam boilers and high pressure boilers, if any, or such other apparatus as Owner may reasonably deem necessary to be covered by such insurance, installed within any building on or above the Site. C. At all times during the Term, Owner (or Holdings, to the extent provided under the Hotel Lease) shall procure and maintain Business Interruption Insurance providing coverage for a period of business interruption of no less than one year, in an amount mutually satisfactory to Manager and Owner. D. At all times during the Term, Owner (or Holdings, to the extent provided under the Hotel Lease) shall procure and maintain such other insurance (other than insurance to be provided by Manager pursuant to Section II below) in such amounts as may from time to time be mutually satisfactory to Owner, Manager and the Permitted Mortgagee(s) against other insurable hazards which, at the time, are normally insured against in the case of similar premises and improvements, similarly situated, due regard being given to the height and type of buildings and improvements on and above the Site, their location, construction, use and occupancy. -43- II. Responsibilities of Manager. At all times during the Term, Manager shall procure and maintain, as an Operating Cost of the Hotel, the following insurance coverages: A. Workers' compensation as may be required under applicable laws covering all of Manager's and its Affiliates' employees employed at the Hotel. B. Employer's liability insurance in an amount not less than generally provided at other hotels managed by Manager and its Affiliates. C. Fidelity bonds, with reasonable limits and deductibles approved by Owner, covering employees at the Hotel in job classifications normally bonded in the other Affiliated Hotels or as otherwise required by law, and comprehensive crime insurance. D. Comprehensive general liability insurance against claims for bodily injury, death or property damage occurring on, in or about the Hotel, and automobile insurance on vehicles operated in conjunction with the Hotel, with a combined single limit for each occurrence for personal injury, death and property damage in an amount which is not less than that generally provided with respect to the Affiliated Hotels. E. Such other insurance in amounts as Manager and Owner, in their reasonable judgment, deem advisable for protection against claims, liabilities and losses arising out of or connected with the operation of the Hotel. -44 - EX-10.7 6 d95331ex10-7.txt MANAGEMENT AGREEMENT-FELCOR'S SHERATON WESTIN EXHIBIT 10.7 FORM OF MANAGEMENT AGREEMENT for FELCOR'S SHERATON AND WESTIN BRANDED HOTELS TABLE OF CONTENTS ARTICLE I Term Sheet ........................................................................ 2 ARTICLE II Appointment of the Operator ....................................................... 3 2.1 Appointment ....................................................................... 3 ARTICLE III Term 3.1 Term .............................................................................. 3 3.2 Extensions ........................................................................ 3 ARTICLE IV Fees .............................................................................. 3 4.1 Operator's Fees ................................................................... 3 4.2 Payment of Fees ................................................................... 3 4.3 Subordination of Fees ............................................................. 4 4.4 Adjustment of Fees ................................................................ 4 ARTICLE V Obligations of Operator ........................................................... 4 5.1 Operator's Obligations ............................................................ 4 a. Standard of Operation ................................................... 4 b. System Support .......................................................... 4 c. Consultation with Owner ................................................. 4 d. Marketing ............................................................... 4 e. Centralized Services .................................................... 4 f. Insurance ............................................................... 4 g. Remittance of Funds ..................................................... 4 ARTICLE VI Obligations of the Owner .......................................................... 5 6.1 Owner's Obligations ............................................................... 5 a. Maintenance of the Hotel ................................................ 5 b. Consultation with Operator .............................................. 5 c. Expenses and Liabilities; Operating Losses .............................. 5 d. Payment of Taxes ........................................................ 5 e. Working Capital ......................................................... 6 f. Title; Maintenance of Ownership ......................................... 6 ARTICLE VII Operation of the Hotel ............................................................ 6 7.1 Operator as Agent of Owner ........................................................ 6 7.2 Employment Matters ................................................................ 7 7.2.1 General .................................................................. 7 7.2.2 Union Relations .......................................................... 7 7.2.3 Stays by Other Operator Employees ........................................ 7 7.2.4 Employees of Operator or Affiliate ....................................... 7 7.2.5 Employee Benefits ........................................................ 7 7.3 Operating Plan; Rates ............................................................. 8 7.3.1 Operating Plan ........................................................... 8 7.3.2 Failure to Approve Operating Plan ........................................ 8 7.3.3 Budget Variances ......................................................... 8 7.3.4 Rates .................................................................... 9 7.4 Agreements ........................................................................ 9 7.4.1 Leases, Licenses, Concessions ............................................ 9 7.4.2 Contracts ................................................................ 9
-i- 7.5 Marketing and Advertising ......................................................... 10 7.5.1 Marketing ................................................................ 10 7.5.2 Advertising Costs ........................................................ 10 7.6 Centralized Services .............................................................. 10 7.6.1 Centralized Marketing Program ............................................ 10 7.6.2 Reservations ............................................................. 11 7.7 Purchasing ........................................................................ 11 7.8 Repairs, Maintenance and Capital Improvements ..................................... 11 7.8.1 Repairs and Maintenance .................................................. 11 7.8.2 Structural Repairs, Changes, Extraordinary Repairs and Replacements ...... 12 7.8.3 Capital Improvements by Owner ............................................ 12 7.8.4 Capital Improvements by Operator ......................................... 12 7.8.5 Operator Rights .......................................................... 12 7.9 Books and Records; Financial Statements; Bank Accounts ......................... 12 7.9.1 Books and Records ........................................................ 12 7.9.2 Financial Statements ..................................................... 13 7.9.3 Bank Accounts ............................................................ 13 7.10 Funding Requirements .............................................................. 13 7.10.1 Funding of Reserve Fund .................................................. 13 7.10.2 Use and Disbursal of Fund ................................................ 13 7.11 Technical Assistance by Operator, Starwood and its Affiliates ..................... 14 7.12 Liquor Licenses ................................................................... 14 7.13 Standards ......................................................................... 14 ARTICLE VIII Events of Default; Remedies ....................................................... 15 8.1 Events of Default ................................................................. 15 8.2 Notice and Right to Cure .......................................................... 15 8.3 Additional Owner Termination Rights - Cash-on-Cash Return for Both Hotels ......... 16 8.4 Additional Owner Termination Rights - Rev-Par Performance for the Hotel ........... 16 8.5 Compliance with WARN Act .......................................................... 17 8.6 Remedies .......................................................................... 17 ARTICLE IX Termination ....................................................................... 17 9.1 Obligations Upon Termination ...................................................... 17 9.2 Use of Sheraton Name .............................................................. 17 ARTICLE X Damage and Destruction; Condemnation .............................................. 18 10.1 Damage or Destruction ............................................................. 18 10.2 Condemnation ...................................................................... 18 ARTICLE XI Assignment and Transfer ........................................................... 19 11.1 Sale, Lease or Assignment by Owner ................................................ 19 11.1.1 Owner's Right to Assign .................................................. 19 11.1.2 Owner's Right to Sell .................................................... 19 11.1.3 Notice of Sale or Assignment ............................................. 20 11.2 Assignment by Operator ............................................................ 20 11.3 Liability After Assignment ........................................................ 20 ARTICLE XII Insurance ......................................................................... 20 12.1 Maintenance of Insurance Coverage ................................................. 20 12.2 Special Conditions or Hazards ..................................................... 20 12.3 Parties Insured and Amounts of Coverage ........................................... 21 12.4 Evidence of Insurance ............................................................. 21
-ii- 12.5 Duties of Operator ................................................................ 21 12.6 Review of Insurance ............................................................... 22 12.7 Waiver of Subrogation ............................................................. 22 12.8 Separate Operator Insurance ....................................................... 22 ARTICLE XIII Intellectual Property; Trade Names ................................................ 22 13.1 Use of Intellectual Property ...................................................... 22 13.2 Hotel Name ........................................................................ 22 13.3 Hotel Logo Goods .................................................................. 22 13.4 Protected Territory ............................................................... 23 ARTICLE XIV Claims and Indemnification ........................................................ 23 14.1 Claims and Liability .............................................................. 23 14.2 Indemnification in Favor of Owner ................................................. 23 14.3 Indemnification in Favor of Operator .............................................. 24 14.4 Limitation on Indemnification ..................................................... 24 14.5 Survival .......................................................................... 24 ARTICLE XV Miscellaneous ..................................................................... 24 15.1 Casino ............................................................................ 24 15.2 Financings and Offerings of Owner or its Affiliates ............................... 25 15.3 Notices ........................................................................... 25 15.4 Arbitration ....................................................................... 25 15.5 Performance During Disputes ....................................................... 26 15.6 Events of Force Majeure; Emergencies; Compliance with Laws ........................ 26 15.7 Gaming Licensure Issues and Compliance with Any Laws or Regulations Applicable to Operator ............................................................ 26 15.8 Employment Solicitation Restriction Upon Termination .............................. 27 15.9 Set-off ........................................................................... 27 15.10 Press Releases .................................................................... 27 15.11 Consents .......................................................................... 27 15.12 Partial Invalidity ................................................................ 27 15.13 Further Actions ................................................................... 27 15.14 Paragraph Headings ................................................................ 28 15.15 Governing Law ..................................................................... 28 15.16 Entire Agreement; Owner Has Not Relied on Representations ......................... 28 15.17 Benefits of Agreement; No Third-Party Rights ...................................... 28 15.18 Cooperation with Owner and the Joint Venture ...................................... 28
Exhibits and Schedules Exhibit A - Legal Description of the Premises Exhibit B - Definitions Exhibit C - Insurance Requirements Exhibit D - Centralized Services and Programs Exhibit E - List of Competitive Hotels Exhibit F - Protected Territory -iii- This MANAGEMENT AGREEMENT (this "Agreement") is made as of the Effective Date, by and between __________________________________________ _________________ ("Owner"), and __________________________________________ ________________________. RECITALS WHEREAS, _______________________________________________________ _________________ (the "Joint Venture") owns fee simple title to that certain first-class hotel (the "Hotel") located at _____________________________________ on the land described as set forth in Exhibit A (the "Premises"); WHEREAS, the Joint Venture, as landlord, and Owner, as tenant, are parties to that certain Lease Agreement, dated as of even date herewith (the "Lease Agreement"), pursuant to which Owner owns a leasehold interest in the Hotel; WHEREAS, Operator, an indirect wholly owned subsidiary of Starwood Hotels & Resorts Worldwide, Inc., a Maryland corporation ("Starwood"), is in the business of and experienced in the ownership, management and operation, by itself and through Affiliates, of hotels and resorts throughout the world; and WHEREAS, Owner desires to obtain the benefits of Operator's expertise by authorizing Operator to operate, direct, manage and supervise the Hotel, subject to the rights and obligations of Owner as hereinafter set forth, and Operator, for a fee, wishes to assume said responsibility. NOW, THEREFORE, in consideration of the foregoing and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Owner and Operator agree as follows: [Remainder of page intentionally left blank; see Term Sheet on following page] ARTICLE I Term Sheet Definitions: Unless otherwise defined herein, all capitalized terms used herein shall have the meanings set forth in Exhibit B. Effective Date: Owner's Notice Address: ________________________________ Attention: General Counsel 545 East John Carpenter Freeway, Suite 1300 Irving, Texas 75062 Telephone: (972) 444-4900 Telecopy: (972) 444-4949 Operator's Notice Address: c/o Starwood Hotels & Resorts Worldwide, Inc. Attention: General Counsel Name of Hotel: Term: Basic Fee: ________________ percent (______) of Total Revenue for each Accounting Period during the first eighteen (18) frill calendar months of the Operating Term, then ______ percent (____) of Total Revenue for each Accounting Period of the Operating Term thereafter. Incentive Fee: See definition on Exhibit B. Initial Working Capital: $________________- Annual Reserve _________________________________________ Fund Contribution: _________________________________________ _________________________________________ _________________________________________ _____________.
[Remainder of page intentionally left blank] -2- ARTICLE II Appointment of the Operator 2.1 Appointment. Owner hereby appoints Operator as its agent and the exclusive operator of the Hotel, and Operator hereby accepts its appointment as Owner's agent and as the exclusive operator of the Hotel, and each party undertakes and agrees to perform all of its obligations set forth herein and to comply with all the provisions of this Agreement. Subject to all of the terms and conditions of this Agreement, Operator shall be responsible for and shall direct the day-to-day operations and activities of the Hotel, establishing all policies and procedures relating to the management and operation of the Hotel, including, without limitation, the determination of salaries, benefits and labor policies (including the hiring, transfer and discharge of all Hotel employees), credit policies (including entering into agreements with credit card organizations), entertainment and amusements, purchasing, ordinary repairs and maintenance, legal proceedings, terms of admittance, charges for rooms, food and beverage policies, and all phases of sales, marketing, advertising, promotion and publicity related to the Hotel. If the Food and Beverage Revenues or Sublease Rent generated by any Restaurant operated or leased by Operator are less than the sum of the direct expenses and overhead allocable to such Restaurant for the period of any Fiscal Year (all as reasonably determined in good faith by the mutual agreement of Owner and Operator), Owner shall have the right to remove the Operator from operating or leasing such Restaurant; provided, however, that any successor operator shall comply with Operator's operating standards for such Restaurant or subleased space. ARTICLE III Term 3.1 Term. The Term of this Agreement shall be the period of time commencing on the Effective Date and continuing for a term of years as set forth in the Term Sheet. 3.2 Extensions. The Term may be extended only upon the mutual agreement in writing of Operator and Owner. ARTICLE IV Fees 4.1 Operator's Fees. During each Fiscal Year of the Operating Term (and proportionately for any partial Fiscal Year), Operator shall pay itself from the Bank Account for services rendered under this Agreement, the Basic Fee and the Incentive Fee. 4.2 Payment of Fees. On or before the fifth day of each Accounting Period during the Operating Term, Operator (1) shall pay itself the Basic Fee for the preceding Accounting Period, and (2) shall either (a) pay itself the Incentive Fee based on the Net Income of Owner for that portion of the current Fiscal Year which ended on the last day of the preceding Accounting Period to the extent such fee is reasonably expected to be earned, or (b) return to the Bank Account any excess Incentive Fee which Operator has already received in respect of such period, all as reasonably determined by Operator from the Books and Records. To the extent that there may be insufficient finds in the Bank Account for such payments, Owner shall pay to Operator forthwith on demand any insufficiency in the Basic Fee and Incentive Fee. -3- 4.3 Subordination of Fees. The Basic Fee shall have a first priority of payment over all Rent (as defined in the Lease Agreement) and other amounts payable by Owner under the Lease Agreement. 4.4 Adjustment of Fees. At the end of each Fiscal Year during the Operating Term and following receipt by Owner of the annual audit, an adjustment will be made based on such audit, if necessary, so that Operator shall have received its proper Basic Fee and Incentive Fee as provided in this Agreement for the said Fiscal Year. Within thirty (30) days of receipt by Owner of such audit, Operator shall either (a) place in the Bank Account or remit to Owner, as appropriate, any excess amounts it may have received as fees during such Fiscal Year, or (b) be paid out of the Bank Account or by Owner, as appropriate, any deficiency in the amounts it shall have received as such fees, whichever the case may be. ARTICLE V Obligations of Operator 5.1 Operator's Obligations. Operator, in addition to the other obligations set forth in this Agreement, shall have the following obligations, subject to Owner making available adequate funds (if not produced by Hotel operations) for such purposes: a. Standard of Operation. Operator shall manage and operate the Hotel, subject to the terms and conditions of this Agreement, as a first-class hotel consistent with the operation of similar Sheraton hotels managed by Operator in the same geographical area and subject to the facilities and condition of the Hotel from time to time. b. System Support. In accordance with the terms of this Agreement, Operator from time to time or upon reasonable request from Owner shall arrange for the Hotel to receive the benefits of Operator's division or regional headquarters operating reviews which will monitor and analyze Hotel operating activities, or particular elements thereof and, when appropriate offer advice, guidance and specific recommendations. Such reviews may take place at Owner's request as often as quarterly in each Fiscal Year. c. Consultation with Owner. Operator shall routinely consult with Owner as to its activities hereunder and shall keep Owner generally apprised of the state of operations at the Hotel. Operator shall be available to consult with and advise Owner, at Owner's reasonable request, concerning all policies and procedures affecting all phases of the conduct of business at the Hotel. d. Marketing. Operator shall arrange and contract for all advertising and other marketing activities which Operator reasonably believes to be appropriate for the operation of the Hotel, in accordance with Section 7.5. e. Centralized Services. Operator shall enroll the Hotel in the available Centralized Services in accordance with Section 7.6. f. Insurance. Operator shall obtain the Operator Insurance, as required pursuant to Article XII. g. Remittance of Funds. On or before the last day of each Accounting Period during the Operating Term, after payment of Operator's Basic Fee and Incentive Fee for the preceding Accounting Period, payment into the Reserve Account, and retention of working capital sufficient to assure the uninterrupted and efficient operation of the Hotel for the foreseeable future, which retention shall be generally consistent in amount with the level of working capital reserves -4- maintained at a hotel of similar characteristics and facilities owned, directly or indirectly, by FelCor or Starwood and FelCor, and operated by Operator or its Affiliates (including, if available and requested by Owner, payment of premiums for Owner Insurance, Property Taxes, and Owner's debt service), Operator shall transfer all remaining funds into the Bank Account or another account designated by Owner. ARTICLE VI Obligations of the Owner 6.1 Owner's Obligations. Owner, in addition to the other obligations set forth in this Agreement, shall have the following obligations: a. Maintenance of the Hotel. Owner shall at all times take such actions as shall be necessary to maintain the Hotel as a first-class hotel and in compliance with all Applicable Laws. b. Consultation with Operator. Owner shall be available to consult with and advise Operator, at Operator's reasonable request, concerning all policies and procedures affecting all phases of the conduct of business at the Hotel. Owner shall not intercede in the day-to-day operations of the Hotel and shall direct all contacts and communications (other than required notices, statements and demands, which shall be given pursuant to Section 15.3 hereof) concerning operation of the Hotel only to the General Manager of the Hotel and/or the Starwood area or regional manager responsible for the Hotel. c. Expenses and Liabilities: Operating Losses. Owner shall have exclusive financial responsibility for all expenses, debts and liabilities, including employment related expenses and liabilities, incurred by Operator in performing its duties hereunder, and, except as set forth in Section 14.2 hereof, Operator shall not be liable for any such obligations by reason of its management, supervision, direction and operation of the Hotel for Owner. Operator may so inform third parties with whom it deals and may take any other reasonable steps to carry out the intent of this paragraph. Owner acknowledges that, upon termination of this Agreement for any reason, all such debts and liabilities, and any which may specifically arise by virtue of such termination, are expressly the debts and liabilities of Owner alone. d. Payment of Taxes. Owner shall pay, not less than ten (10) days prior to the dates the same become delinquent (with the right to pay the same in installments to the extent permitted by Applicable Laws) all Property Taxes. Owner shall furnish Operator, not less than ten (10) days prior to the respective dates such taxes will become delinquent, proof of payment thereof in form satisfactory to Operator, in default whereof Operator: (a) may pay any such taxes on Owner's behalf, (b) shall be reimbursed forthwith by Owner for all sums so expended, and (c) may withdraw such sums for reimbursement from the Bank Account. -5- e. Working Capital. Owner will provide Operator with the Initial Working Capital on the Effective Date; and thereafter from time to time throughout the Operating Term, if and as requested by Operator, Owner shall promptly furnish to Operator funds which shall be generally consistent in amount with the level of working capital reserves maintained at a hotel of similar characteristics and facilities owned, directly or indirectly, by FelCor or Starwood and FelCor, and operated by Operator or its Affiliates and which shall be sufficient in amount to constitute normal working capital for the uninterrupted and efficient operation of the Hotel, including payment of all Operating Expenses and current funding of Operator's Basic Fee and of the Reserve Fund (and, if requested by Owner, payment of premiums for Owner's Insurance, Property Taxes, and Owner's debt service). If Operator deems such action necessary, it may use the hinds in the Reserve Fund to defray Operating Expenses of the Hotel, and Owner shall replace all such funds promptly on demand. Operator shall in no event be required to advance any of its own hinds for the operation of the Hotel, nor to incur any liability in connection therewith. However, if Operator shall at any time elect to advance any hinds in payment of Operating Expenses, which Operator shall have the right but not the obligation to do, Owner shall repay Operator on demand all of such funds, with interest at a rate of ten percent (10%) per annum. f. Title: Maintenance of Ownership. Owner covenants and agrees to keep and maintain the Lease Agreement in full force and effect throughout the Operating Term (or if Owner acquires fee simple title, to maintain full ownership of the Hotel and every component part hereof through the Operating Term), at all times free and clear of all liens and encumbrances except those approved in writing by Operator or which do not materially affect the operation of the Hotel. Owner covenants that Operator, upon fulfilling its obligations hereunder, shall and may peaceably and quietly possess, manage and operate the Hotel during the Operating Term, and Owner will at its own expense undertake and prosecute any appropriate action, judicial or otherwise, to assure such peaceful and quiet possession by Operator. Owner further agrees that throughout the Operating Term it will pay, keep, observe and perform all payments, terms, covenants, conditions and obligations required under the Lease Agreement, mortgage and any other agreement creating a lien on, or otherwise affecting the use or occupancy of, the Hotel or any component part thereof Owner shall provide or cause to be provided to Operator evidence of the leasehold interest or fee simple title of Owner with respect to the Premises as Operator may reasonably require from time to time. Owner shall obtain and deliver to Operator a non-disturbance agreement from the Joint Venture or other ground lessor pursuant to which the Joint Venture or other ground lessor agrees not to terminate this Agreement as long as Operator is not in material default hereunder, and which otherwise shall be in form and substance reasonably acceptable to Operator. ARTICLE VII Operation of the Hotel Subject to the applicable Approved Operating Plan and provided hinds are made available therefor, Operator shall, as agent of Owner and in the name of Owner, perform the following services, or cause the same to be performed for the Hotel: 7.1 Operator as Agent of Owner. In the performance of its duties as Operator of the Hotel, Operator shall act solely as agent of Owner, and Operator may so inform third parties with whom it deals on behalf of Owner. Nothing herein shall constitute or be construed to be or create a partnership or joint venture between Owner and Operator. Owner acknowledges that this Agreement is a management service contract which is irrevocable and non-terminable by Owner except as expressly set forth herein. Owner and Operator each acknowledge that it has significant and substantial duties, powers and obligations under the terms hereof relating to the ultimate success of the Hotel. -6- 7.2 Employment Matters. 7.2.1 General. Operator shall hire, discharge, promote and supervise the Hotel's general manager and other senior staff and shall supervise through such staff the hiring, discharging, promotion and work of all other employees of the Hotel. Operator shall consult with Owner prior to appointing any new or substitute general manager at a Hotel and Owner shall have the right to approve any such appointment, such approval not to be unreasonably withheld or delayed, provided, however, that (i) Owner may not reject more than three candidates for such position, and (ii) Owner shall be deemed to have approved such appointment if Owner does not reject such appointment within ten (10) days after Operator notifies Owner in writing of such proposed appointment. Costs associated with the recruitment and relocation to a Hotel (but not outgoing relocations) of any Hotel employee (i) shall be an Operating Expense if such employee is employed by Operator at the Hotel for a period of at least 24 months and (ii) shall be prorated as an Operating Expense based on the number of months such employee has been employed at the Hotel divided by 24 if such employee has been employed at the Hotel for a period less than 24 months and is relocated to another Sheraton hotel at the initiation of Operator or its Affiliate. In connection with any termination of any of the Hotel personnel who are on Starwood's payroll and who are entitled to termination benefits, the Hotel shall be responsible for the payment of severance payments to the extent of Starwood's written severance policy, but only for that portion of such severance payment equal to a fraction, the numerator of which is the number of months the individual was employed at the Hotel during Owner's ownership thereof and the denominator of which is the total number of months the individual was employed by Starwood and/or its Affiliates. Such payment shall be an Operating Expense. 7.2.2 Union Relations. Operator, with the participation, advice, assistance and cooperation of Owner, and using counsel mutually designated by and representing Owner and Operator, shall negotiate with any labor unions representing employees of the Hotel including, without limitation, negotiations with any labor union as to the terms of any applicable collective bargaining agreement or labor contract. The cost and expenses of such counsel shall be an Operating Expense. When Hotel employees are included in or covered by any pension and/or retirement, disability, health, welfare or other benefit plans pursuant to a collective bargaining agreement or labor contract, Owner shall be solely responsible for any plan contributions and/or other obligations or liabilities arising thereunder, and Operator shall pay such items out of the Bank Account on behalf of Owner as an Operating Expense. In addition, if there is negotiation of a labor contract with a union or unions representing Hotel employees and such negotiation is conducted in the city or local area of the Hotel on an association basis, and Operator believes being a member of such association is desirable, then the Operator may seek to enroll the Hotel as a member of the association and any costs associated with such membership shall be an Operating Expense. 7.2.3 Stays by Other Operator Employees. Employees of Operator or its Affiliates who travel to the Hotel to perform technical assistance or other services shall be permitted, without charge, to stay at the Hotel and use their facilities (including food and beverage consumption). Other employees of Operator or its Affiliates shall be permitted to stay at the Hotel for non-business purposes at reduced or complimentary rates in accordance with Starwood's policies with respect to such stays in effect from time to time. 7.2.4 Employees of Operator or Affiliate. Each Hotel employee shall be an employee of Operator or an Affiliate. Every person performing services in connection with this Agreement, including any agent or employee of Operator, Starwood or any of their Affiliates or any agent or employee of Owner hired by Operator, shall be acting as the agent of Owner. 7.2.5 Employee Benefits. Operator, in its discretion, may enroll the Hotel employees in (and remove them from) pension, medical and health, life insurance and similar -7- employee benefit plans, including multi-employer plans. Such plans may be joint plans for the benefit of employees at more than one hotel owned, leased or managed by Starwood or any of its Affiliates. Employer contributions to such plans, reasonable administrative fees which Operator may expend in connection therewith, and any liabilities relating to multi-employer pension or welfare plans will be Operating Expenses hereunder. The contributions, administrative expenses and liabilities of any joint plans will be equitably apportioned by Starwood among covered properties. 7.3 Operating Plan: Rates. 7.3.1 Operating Plan. Not later than sixty (60) days prior to the commencement of each Fiscal Year (commencing with the Fiscal Year beginning ________________, Operator shall submit to Owner a detailed annual budget for the operation of the Hotel in the form generally used by Operator from time to time in accordance with Operator's policy relating to all managed hotels in the Sheraton system, together with the assumptions on the basis of which such budget and schedules were prepared in narrative form (collectively, the "Operating Plan"). The Operating Plan shall also include a proposed budget for capital improvements during such succeeding Fiscal Year as set forth in Section 7.8.4. During the preparation of the Operating Plan, Operator will solicit comments and suggestions from Owner regarding the Operating Plan, which Operator shall reasonably consider in preparation of the Plan. Owner shall have the right to request such additional information and detail with respect to the Operating Plan as may be reasonable, and Operator shall promptly provide such additional information and detail. Operator will review the Operating Plan with Owner, and subject to the Owner's written approval, which approval shall be subject to the terms and conditions of this Agreement and shall not be unreasonably withheld or delayed for more than thirty (30) days, Operator shall implement the same for the forthcoming Fiscal Year (during which period the same shall be referred to as the "Approved Operating Plan"). 7.3.2 Failure to Approve Operating Plan. If the Owner does not approve or disapprove the Operating Plan in writing within such thirty (30) day period, Owner shall be deemed to have approved the Operating Plan for the relevant Fiscal Year, and such plan shall be the Approved Operating Plan. In the event Owner disapproves the Operating Plan, or any component thereof, Owner shall provide Operator with written notice thereof within such thirty (30) day period in reasonable detail specifying those items of the Operating Plan which Owner disapproves and the reasons for such disapproval. In such event, the disputed budget item(s) shall be replaced for the Fiscal Year by an amount equal to such budget item for the prior Fiscal Year, subject to escalation thereof by a percentage equal to the percentage increase during the immediately preceding Fiscal Year in the Consumer Price Index, and Operator or Owner may request that the parties' disagreement be submitted to arbitration pursuant to Section 15.4. As so modified, such plan shall be deemed to be the Approved Operating Plan. Although the Operating Plan will represent Operator's reasonable estimates relating to the matters contained therein, it will contain estimates only and Operator makes no representations, assurances or guarantees that the actual performance of the Hotel shall correspond to such estimates. 7.3.3 Budget Variances. After an Operating Plan has been approved by Owner or has otherwise become the Approved Operating Plan pursuant to the terms of the preceding paragraph, during the Fiscal Year in which an Approved Operating Plan is applicable, Operator shall operate and manage the Hotel in accordance with the Approved Operating Plan and, except as set forth below, Operator will not make expenditures, without Owner's prior written approval, which exceed a total of 110% of the aggregate budgeted amount in the Approved Operating Plan (excluding amounts budgeted for Capital Expenditures). Notwithstanding the foregoing, in the event actual Total Revenue for any Fiscal Year exceeds (or is reasonably projected to exceed) the Total Revenue for such Fiscal Year contemplated in the Approved Operating Plan, the aggregate budgeted amount with respect to expenditures which are reasonably anticipated to increase in connection with increases in Total Revenue will automatically be increased by a percentage which is determined by -8- dividing the actual or reforecasted Total Revenue by the Total Revenue which was contemplated in the Approved Operating Plan. In such event, Operator shall promptly give Owner written notice of such automatic increase, and the basis for such revenue projections. Owner and Operator on a quarterly basis during the Fiscal Year in which the Operating Plan is applicable will meet to review the operating performance of the Hotel as compared to the Approved Operating Plan and will make such modifications thereto as shall be reasonable in the circumstances. In addition to the foregoing, Operator shall have the right to depart from the Approved Operating Plan in the event such departure is necessary in view of reasonably unforeseen circumstances such as, but not limited to, the costs of labor, material, services, utilities and supplies, casualties, force majeure, operation of Applicable Laws or economic market conditions, provided that Operator shall notify Owner in writing of any such departure as soon as is practicable. 7.3.4 Rates. As part of the Operating Plan, Operator will submit to Owner the rates to be published and charged to members of the general public for normal transient occupancy of the various categories of rooms and suites in the Hotel during such Fiscal Year. It is understood that such rates will not apply to group business or other categories of business to which Operator may afford a lower rate and that in its discretion Operator may from time to time permit individuals to occupy rooms or suites at the Hotel at complimentary rates or at rates lower than such published rates. 7.4 Agreements. 7.4.1 Leases. Licenses. Concessions. Operator as agent for Owner shall enter into, terminate, amend and modify leases with respect to the commercial, retail and office space in the Hotel and concessions or other arrangements with respect to other non-guestroom space and facilities at the Hotel, subject to Owner's prior approval with respect to the entering into, termination or any material amendment or modification of any such lease which has a term greater than one year. Operator shall also enter into, terminate, amend and modify equipment leases with respect to the FF&E, as shall be reasonably necessary for the proper operation of the Hotel, provided that Owner's approval shall be required prior to entering into any equipment lease requiring aggregate rent payments in excess of $25,000 and any termination or material modification of any equipment lease requiring aggregate rent payments in excess of $25,000; provided that the foregoing amounts may be redetermined by agreement from time to time to reflect increases in the cost of living, and shall in any event be increased automatically in each Fiscal Year by the same percentage as the increase from the Effective Date in the Consumer Price Index. 7.4.2 Contracts. Operator as agent for Owner shall enter into, terminate, amend and modify contracts for the furnishing of utilities, maintenance, supplies, consumables and other services to the Hotel (including, without limitation, telephone, television, satellite, cable, and pay-per-view services), as shall be reasonably necessary for the proper operation and maintenance thereof, provided that Owner's prior approval shall be required (x) prior to entering into any contract requiring aggregate payments in excess of $25,000 or which is for a term of longer than one (1) year and (y) prior to any termination or material modification of any contract requiring aggregate payments in excess of $25,000 or which is for a term longer than one (1) year, other than (i) Centralized Services, (ii) utilities and (iii) expenses related to employee benefits provided for hereunder; provided, however, that the foregoing amounts may be redetermined by agreement from time to time to reflect increases in the cost of living, and shall in any event be increased automatically in each Fiscal Year by the same percentage as the increase from the Effective Date in the Consumer Price Index. -9- 7.5 Marketing and Advertising. 7.5.1 Marketing. The Starwood system of hotels is comprised of several separate and distinct brands. The marketing and advertising of the Hotel will be consistent with other hotels in the Starwood system utilizing the same brand, and the Hotel in its marketing and advertising will use the graphics standards consistent with its brand identity as such graphics standards are determined from time to time by Starwood. Operator as agent for Owner shall arrange and contract for all advertising and marketing for the Hotel, including, without limitation, media, internal hotel collateral, yellow pages and the Internet. The Hotel shall participate in Starwood marketing programs for the Sheraton brand, including, without limitation, the Starwood Preferred Guest Program and airline frequent traveler programs in which Starwood participates, and in Starwood's Cooperative Marketing Program, pursuant to which the Hotel shall contribute at the rate set forth in Exhibit D to be used in local, regional and/or national advertising of the Hotel as part of the Sheraton hotel system, in advertisements relating to multiple Sheraton hotels. The aforesaid rate may be subject to change from time to time, provided such rate change is generally consistent throughout the affected division, brand or product segment. The Hotel also will participate in any new marketing programs instituted from time to time, provided that such programs are instituted generally on a system-wide basis or to distinct sub-groups of properties in the Sheraton system in the country, state or area in which the Hotel is located. 7.5.2 Advertising Costs. As part of the Operating Plan, Operator shall deliver to Owner a budget of the estimated advertising costs of the Hotel for the succeeding Fiscal Year (commencing with the Fiscal Year beginning ________________. Such advertising costs shall require Owner's approval to the extent they exceed, in the aggregate, a sum equal to 3% of the Total Revenue of the Hotel (inclusive of contributions to the Cooperative Marketing Program, as described above) for the previous Fiscal Year (or, for the first full Fiscal Year, and any initial partial Fiscal Year, a sum equal to 3% of the projected Total Revenue for such periods), which approval shall not be unreasonably withheld. 7.6 Centralized Services. 7.6.1 Centralized Marketing Program. Operator shall cause Starwood and/or its Affiliates to furnish to the Hotel the benefits of the "Centralized Services", which phrase shall mean (a) those services, programs and group benefits as are described in Exhibit D (for so long as such services are offered generally within the Starwood system), and (b) such additional services, programs or group benefits as are, from time to time, provided generally to all or distinct sub-groups of properties in the ________ system in the country, state or area in which the Hotel are located, and Owner hereby agrees that Operator may in its discretion cause the Hotel to participate in any or all such Centralized Services. Operator and its Affiliates shall be entitled to be paid for the existing Centralized Services (as the same may be modified from time to time) based on the charges set forth on Exhibit D, as such charges may be increased to reflect increases in the Consumer Price Index from the Effective Date and to reflect specific increases in the costs of operating, maintaining and upgrading such services, and for any new Centralized Services based on Starwood's reasonable estimate of the costs and expenses which will be incurred in providing such services on a system-wide basis to Sheraton hotels, which estimate of costs may include, without limitation, salaries (including, without limitation, payroll taxes and employee benefits) of employees of Starwood and its Affiliates, overhead, recovery of development costs, promotion, costs of operating, upgrading and maintaining such services, and costs of all equipment employed in the rendition of such services. The Hotel's costs for participating in such Centralized Services shall be determined in an equitable manner and on the same basis as allocated or charged to other ________ hotels. In addition, if equipment is installed and maintained at a Hotel in connection with the rendition of any Centralized Services, all costs thereof will be paid by Owner and charged to the operation of the -10- Hotel either as an Operating Expense (and Operator may pay for same from the Bank Account) or over a period of years, as determined by Starwood's independent public accountant. 7.6.2 Reservations. Operator shall secure bookings for the Hotel through Starwood's sales and reservations offices and other distribution and sales systems, and shall encourage the use of the Hotel by tourists, special groups, travel congresses, travel agencies, airlines, and other recognized sources of hotel business. Operator shall develop a sales program, represent the Hotel at appropriate conventions and travel congresses, and list the Hotel in printings of general tariff bulletins. In addition, Operator shall process reservations for the Hotel through Operator's and its Affiliates' worldwide communications network. To facilitate Operator's provision of such reservations services, Owner agrees that: a. Owner shall not maintain or use in connection with the Hotel any toll-free or similar telephone line or communications device for making reservations that is independent of the reservations telephone line or communications device maintained by Operator or its Affiliates in connection with the worldwide communications network of Operator and its Affiliates. The toll-free reservations telephone line or similar telephone number or communications device for making reservations must be the only telephone reservations line or communications device for the Hotel. The Hotel must be listed in all airline reservations systems (which include what are known in the hospitality industry as Global Distribution Systems) under the applicable code for hotels and resorts operated under the __________ name. b. Throughout the Operating Term, Owner shall permit Operator to load into the reservations system maintained by Operator and its Affiliates, and to maintain on a current basis, the Hotel's total rooms inventory and all associated room rates. 7.7 Purchasing. In its management of the Hotel hereunder, Operator may purchase goods, supplies and services (i) from or through Starwood or any of its Affiliates, or (ii) by contracting directly with suppliers through regional or national purchasing contracts negotiated by Starwood or its Affiliates, so long as the prices and terms thereof (inclusive of the fees described hereafter) are competitive with the prices and terms of goods and services of equal quality available from others (including Owner or its suppliers); provided, however, if such goods or supplies are Capital Expenditures, the approval of Owner will be required in connection with any purchases made pursuant to clauses (i) or (ii) where such purchase exceeds the amount budgeted for such Capital Expenditure in an Approved Operating Plan. Starwood and its Affiliates may receive (i) fees from the Hotel for the negotiation of the purchasing contracts described above, and/or (ii) rebates or other payments from suppliers in connection with direct purchases for the Hotel from such independent suppliers of goods, supplies and services, so long as the prices and terms thereof after taking into account such fees and rebates are competitive with the prices and terms of goods and services of equal quality available from others (including Owner or its suppliers). Any fees charged to the Hotel shall be on the same basis as is applicable to other hotels owned, leased or managed by Starwood or its Affiliates. 7.8 Repairs. Maintenance and Capital Improvements. 7.8.1 Repairs and Maintenance. Operator shall from time to time cause to be undertaken such repairs and maintenance as it reasonably determines to be necessary to keep the Hotel in a first-class condition and in compliance with the standards for Sheraton hotels (excluding structural or otherwise extraordinary repairs and changes to the Hotel, and extraordinary repairs to or replacement of equipment included in the definition of Building and Appurtenances all of which shall be paid for by the Owner and shall not be an Operating Expense), subject to the Owner providing the necessary working capital therefor, as required under this Agreement. If any such repairs or maintenance shall be made necessary by any condition against the occurrence of which -11- Owner has received the guaranty or warranty of the builder of the Hotel or of any supplier of labor or materials for the construction of the Hotel, then Owner shall invoke said guarantees or warranties in Owner's name and at its own expense. Operator will cooperate fully with Owner in the enforcement thereof 7.8.2 Structural Repairs. Changes. Extraordinary Repairs and Replacements. If structural repairs or other extraordinary repairs and changes to the Hotel, or extraordinary repairs to or replacements of any equipment included in the definition of Building and Appurtenances shall be required at any time during the Operating Term to maintain the Hotel as a first-class hotel and in compliance with the standards for Sheraton hotels or by reason of any Applicable Laws, or because Operator and Owner jointly agree upon the desirability thereof then in such event all such repairs, changes or replacements shall be made by Owner and at Owner's sole expense, and shall be made with as little hindrance to the operation of the Hotel as possible. Notwithstanding the foregoing, Owner shall have the right to contest the need for any such repairs, changes or replacements required by Applicable Laws and may postpone compliance therewith, if so permitted by such Applicable Laws, but in each such event Owner shall protect Operator from any loss, cost, damage or expense which may result therefrom, such protection to be in a form satisfactory to Operator. 7.8.3 Capital Improvements by Owner. Owner may from time to time at its sole expense make such further alterations, additions or improvements in or to the Hotel as Owner shall determine, provided that Operator shall have the right to approve (which approval shall not be unreasonably withheld or delayed) any such alterations, additions or improvements which Operator reasonably believes could have an impact on the operation of the Hotel. Owner shall seriously consider any alterations, additions or improvements recommended by Operator. 7.8.4 Capital Improvements by Operator. Operator also may make capital improvements to the Hotel which are (i) included in the capital budget approved by the Owner as part of the Operating Plan, (ii) set forth in the product improvement plan agreed upon between Owner and Operator or their respective Affiliates, and (iii) otherwise expressly approved in writing by Owner. The entire cost and expense of any such capital improvements made by Operator shall be funded by Owner and shall not be deemed an Operating Expense or a deduction in the Net Income of Owner for the purposes of determining the Incentive Fee payable to Operator. 7.8.5 Operator Rights. The provisions of this Section 7.8 are without prejudice to any of Operator's rights or remedies arising out of any breach by Owner of its obligation under Section 6.1 .a. to maintain a first-class hotel and in compliance with the standards for Sheraton hotels. 7.9 Books and Records: Financial Statements: Bank Accounts. 7.9.1 Books and Records. Operator shall, for the account of Owner, keep full and adequate books of accounts and other records ("Books and Records") reflecting the results of operation of the Hotel on an accrual basis, all in accordance with the Uniform System and, if required, in accordance with any Applicable Laws; provided that Operator may make such modifications in the Books and Records as are consistent with Starwood's standard practice in accounting for its operations under management contracts generally, so long as such modifications do not affect the determination of Net Operating Income. Except for the Books and Records which may be kept in Starwood's home office or other suitable location pursuant to the adoption of a central billing or accounting system, the Books and Records shall be kept at the Hotel. All Books and Records shall be available to Owner and its representatives at all reasonable times, upon reasonable notice, for examination, audit, inspection, copying and transcription. Upon any termination of this Agreement, the Books and Records shall be turned over to Owner so as to insure the orderly continuance of the operation of the Hotel, but shall thereafter be available to Operator at all -12- reasonable times for examination, audit, inspection, copying and transcription for a period often (10) years. 7.9.2 Financial Statements. Operator shall deliver to Owner a profit and loss statement showing the results of the operation of the Hotel for the immediately preceding Accounting Period and for the Fiscal Year to date within fifteen (15) days from the end of such preceding Accounting Period. Such statement (a) shall be in the form customarily prepared by Operator or its Affiliates for other hotels managed by Starwood, (b) shall be taken from the Books and Records, and (c) shall follow the general form set forth in the Uniform System. Operator shall instruct the Independent Public Accountant to deliver to Owner a certified profit and loss statement, within fifteen (15) days after the end of each Fiscal Year, showing the results of operations of the Hotel during such Fiscal Year. Owner shall be deemed to have waived any objections to said certified statement not specified to Operator in writing within one hundred and five (105) days of receipt thereof 7.9.3 Bank Accounts. Except as expressly provided for in this Agreement, (i) all funds received by Operator in connection with the operation of the Hotel, including working capital furnished by Owner, shall be deposited in the Bank Account and (ii) all funds set aside for the Reserve Fund shall be deposited in the Reserve Account. Such funds shall not be commingled or otherwise mingled with Operator's other funds. The Bank Account will be established in Owner's name at a bank of Owner's selection with Owner's and Operator's designees being authorized signatories on said account. Operator shall be entitled to withdraw funds from the Bank Account, however, Operator's sole right to the funds in such accounts shall be to receive amounts the Operator is entitled to receive as expressly provided for in this Agreement. The Reserve Account will be established in Owner's name at a bank of Owner's selection with Operator's designees being the only authorized signatories on said account. Operator shall be entitled to withdraw funds from the Reserve Account as provided for in this Agreement. 7.10 Funding Requirements. 7.10.1 Funding of Reserve Fund. During each Fiscal Year (and proportionately for any fraction thereof) there shall be deducted in monthly installments from Total Revenue, the Annual Reserve Fund Contribution set forth in the Term Sheet for the Reserve Fund. The amounts so deducted shall be deposited in the Reserve Account and shall be recorded on the Books and Records as the Reserve Fund for Replacements, Substitutions and Additions to Furniture and Equipment. Interest on such account shall be credited to the Reserve Fund, but shall not reduce the required contributions thereto under this Agreement. 7.10.2 Use and Disbursal of Fund. Except as otherwise specified in this Agreement, the Reserve Fund shall be used solely for the purposes of replacing worn, damaged or obsolete furniture, furnishings and equipment utilized in the operation of the Hotel, or for the substitution of, or addition to, such items. Any expenditures for replacement or substitution of or additions to Furniture and Equipment made in any Fiscal Year up to the greater of (i) the Annual Reserve Fund Contribution during each Fiscal Year, or (ii) the amount then accrued in the Books and Records for the Reserve Fund, in each case if in accordance with an Approved Operating Plan, shall be deemed to be made in the ordinary course and may be made by Operator without Owner's approval. Such expenditures shall be paid from the Reserve Account including any unused accumulation from prior years. Any proposed expenditures in any Fiscal Year from the Reserve Fund in excess of said amount shall be subject to Owner's approval. All proceeds from the sale of Furniture and Equipment no longer needed for the operation of the Hotel shall be credited to the Reserve Fund. All amounts remaining in the Reserve Fund at the close of each Fiscal Year shall be carried forward and retained until fully used as herein provided. -13- 7.11 Operational Assistance and Consultation by Operator. Starwood and its Affiliates. During the Term, Operator shall provide, or shall cause Starwood or its Affiliates to provide, advisory, supervisory and control services and cost-benefit analyses with respect to the Hotel's operating departments and systems, including, without limitation, front office, food and beverage, management information systems, communications systems, purchasing, design and construction services and personnel, and general life safety and security consultation and advice. Such services shall be provided without additional charge to Owner, except that (i) Owner shall be charged for any services requested to be performed by the design and construction technical assistance services personnel of Starwood or its Affiliates, including life safety and security consultation, at the then generally prevailing rates charged by Starwood or its Affiliates, as applicable, (ii) with respect to stays by any other technical services personnel at the Hotel of more than a total of three (3) days in any one-year period, Owner shall reimburse Starwood or its Affiliates, as applicable, for the salary and benefits of such personnel for the period actually spent at the Hotel, (iii) Owner shall reimburse Starwood or its Affiliates, as applicable, for out-of pocket expenses (including, without limitation, travel expenses) with respect to such services, including the cost of any third-party consultants engaged for such purposes, and Owner shall pay for those items which are Centralized Services, in accordance with the terms of this Agreement, and (iv) Owner shall reimburse Starwood or its Affiliates, as applicable, for out-of pocket travel expenses incurred in connection with the attendance of its personnel at meetings, conferences, training sessions, seminars and similar events relating to the management and operation of the hotels operated by Operator and its Affiliates generally, but not otherwise specifically related to the Hotel; provided, however, that the amount to be charged to Owner shall not exceed Six Thousand Dollars ($6,000.00) in any Operating Year, increased annually (beginning on _______________) in direct proportion to any increase in the Consumer Price Index published for December 1999 (or if the Consumer Price Index ceases to be published, such other substantially comparable published index as may reasonably designated pursuant to this Agreement). Except for reimbursements of out-of-pocket expenses, there shall be no charge to Owner for the operating reviews provided by supervisory operations personnel from regional and divisional headquarters, as set forth in Section 5.1 .b. 7.12 Liquor Licenses. Operator shall assist Owner in making and prosecuting any applications required for approval of the transfer of all liquor licenses and alcoholic beverage licenses necessary to operate the restaurants, bars and lounges presently located within the Hotel. 7.13 Standards. Owner acknowledges that Starwood and Operator have and will from time to time establish and maintain operational policies and standards of quality, appearance and service, which shall be adhered to in the operation of the Hotel. Such policies and standards may be altered, modified, deleted or added to from time to time by Starwood or Operator in order to maintain or improve the public image and reputation of the brand, and to anticipate or respond to changes in technology, the lodging industry, competition and guests, needs and expectations. As absolute uniformity of such policies and standards under many varying conditions may not be possible or practical in a particular case, Starwood and Operator reserve the right, in their sole discretion, to vary standards for hotels within the system based on conditions which Starwood determines to be important to the successful operation of the relevant hotel, provided, however, that the same varying standard will be uniformly applied to all Starwood hotels of the same brand. 7.14 Commissions for Collection of Receivables. Owner acknowledges and agrees that Operator shall have the right to retain any commissions paid by the prior owner of the Hotel for the collection of accounts receivables by Operator on behalf of the prior owner of the Hotel. -14- ARTICLE VIII Events of Default: Remedies 8.1 Events of Default. Each of the following shall constitute an event of default: a. The failure of Operator to pay any amount to Owner provided for herein when the same is payable, or the failure of Owner to pay or furnish to Operator any amount Owner is required to pay or furnish to Operator in accordance with the terms hereof (including, without limitation, fees and working capital) when the same is payable or required to be furnished, or the failure of Owner to pay any amount payable to Starwood or any of its Affiliates when such amount is payable. b. The filing of a voluntary petition under 11 U.S.C. Section 101 seq. (the "Bankruptcy Code") or any successor thereto or under any other federal or state insolvency law for liquidation or reorganization by either Owner or Operator. c. The consent to an involuntary petition under the Bankruptcy Code or the failure to vacate within sixty (60) days from the date of entry of an order for relief thereunder or any other order approving an involuntary petition by either Owner or Operator. d. The entry of an order for relief, judgment, or decree by any court of competent jurisdiction, on the application of a creditor, under the Bankruptcy Code against either Owner or Operator as a bankrupt or insolvent or approving a petition seeking reorganization, liquidation or appointment of a custodian, receiver, trustee or liquidator of all or a substantial part of such party's assets, and such order, judgment or decree shall continue without being stayed and in effect for a period of one hundred twenty (120) consecutive days. e. The failure of either Owner or Operator to perform, keep or fulfill any of the other material covenants, undertakings, obligations or conditions set forth in this Agreement. f. The failure of either Owner or Operator to pay its respective debts as they become due. g. The failure of Owner to obtain new or reinstated liquor licenses. If the licenses for the sale of alcoholic beverages in the Hotel are at any time, without the fault of Operator, suspended, terminated or revoked and such suspension, termination or revocation shall continue in effect for a period of thirty (30) consecutive days, then, unless during such period Owner and Operator are able to negotiate a new fee structure and Operating Plan taking into account the loss of liquor revenues, such suspension, termination or revocation shall be a default hereunder. h. The failure of Owner or any its Affiliates to comply with all of the provisions of Section 15.2 hereof 8.2 Notice and Right to Cure. In any of such events of default specified in Section 8.1, the non-defaulting party may give to the defaulting party notice of its intention to terminate this Agreement after the expiration of a period of (i) ten (10) days from the effective date of such notice in the case of a default pursuant to the provisions of Section 8.1(a) above and (ii) thirty (30) days in the case of any other default pursuant to Section 8.1 and, upon the expiration of such period without such default being cured, the Operating Term shall expire; provided, however, in case of a default by Owner pursuant to the provisions of Section 8.1(b), (c), (d) or (h) above, Operator may elect, without limiting any other rights of Operator hereunder, to immediately terminate this Agreement without further notice or an opportunity to cure, if Operator determines in its sole discretion that any further delays would have a material adverse effect on Operator or Starwood's reputation or name -15- or would create a financial exposure to either, or to seek injunctive relief, the parties hereby agreeing that such a default would irreparably harm Operator and could not be adequately compensated through monetary damages. With respect to any default referred to in Section 8.1(e) above, if such default is not susceptible of being cured within such thirty (30) day period, the defaulting party shall undertake and continue action to cure such default with all due diligence until the same is cured, provided, however, such additional period of cure shall not in any event exceed ninety (90) days from the giving of such notice. Once cure has been effected as aforesaid such notice shall be of no further force and effect. 8.3 Additional Owner Termination Rights - Cash-on-Cash Return. In addition to the termination rights in Sections 8.1, 8.2 and 8.4, Owner shall have the right to terminate this Agreement (subject to Operator's cure rights set forth in this Section 8.3): (i) on the tenth anniversary of the Effective Date if the aggregate Rent with respect to the Hotel payable by Owner to the Joint Venture pursuant to the Lease Agreement during the two (2) then most recently completed Fiscal Years provides the Joint Venture with less than a 12% Cash-on-Cash Return, and (ii) on the fifteenth anniversary of the Effective Date if the aggregate Rent with respect to the Hotel payable by Owner to the Joint Venture pursuant to the Lease Agreement during the two (2) then most recently completed Fiscal Years provides the Joint Venture with less than a 12% Cash-on-Cash Return (for the purposes of clauses (i) and (ii), the two (2) Fiscal Year measuring period is referred to as the "Look-Back Period"); provided, however, that Owner shall not have any termination rights pursuant to this Section 8.3 if the conditions which gave rise to such termination rights would not have occurred but for the existence of a Force Majeure or a major renovation of the Hotel. If Owner elects to exercise any termination right set forth in this Section 8.3, Owner must give written notice of such election to Operator within thirty (30) business days after the date that Owner has received from Operator the certified profit and loss statement for the Hotel for the second Fiscal Year of the relevant Look-Back Period. Upon receipt of such notice of election from Owner, Operator and its Affiliates shall have the right within fifteen (15) business days following such notice to avoid such termination with respect to such notice by paying to Owner the amount of the shortfall necessary so that the aggregate Rent with respect to the Hotel payable by Owner under the Lease Agreement provides the Joint Venture with a 12% Cash-on-Cash Return for the relevant Look-Back Period. 8.4 Additional Owner Termination Rights - Rev-Par Performance for the Hotel. In addition to the termination rights in Sections 8.1, 8.2 and 8.3, Owner shall have the right to terminate this Agreement (subject to the Operator's cure rights set forth in this Section 8.4), if, for any two (2) consecutive Fiscal Years commencing after the first full Fiscal Year after completion of the initial renovations to the Hotel (each, a "Measuring Period"), (i) the Hotel fails to achieve 90% of the budgeted Net Operating Income (which budget shall be mutually agreed to between Owner and Operator) for the Hotel, on a cumulative basis (the "NOI Test"), and (ii) the Hotel fails to achieve 90% of the Star Report yield index calculated with respect to the Hotel based on the competitive set of hotels set forth in Exhibit E; provided, however, that Owner shall not have any termination rights pursuant to this Section 8.4 if the conditions which gave rise to such termination rights would not have occurred but for the existence of a Force Majeure. If Owner elects to exercise its termination right set forth in this 8.4, Owner must give written notice of such election to Operator within thirty (30) business days after the date that Owner has received from Operator the certified profit and loss statement for the Hotel for the second Fiscal Year of the relevant Measuring Period. Upon receipt of such notice of election from Owner, Operator and its Affiliates shall have the right within fifteen (15) business days following such notice to avoid such termination with respect to such notice by paying to Owner the amount of the shortfall necessary to provide Owner with Net Operating Income equal to 90% of the budgeted Net Operating Income for the Hotel for the two (2) Fiscal Years of the relevant Measuring Period. If Operator cures such shortfall for such two (2) Fiscal Year period, Operator shall be deemed to have satisfied the NOT Test for such Fiscal Years for the purposes of any other Measuring Period. -16- 8.5 Compliance with WARN Act. Notwithstanding the foregoing, if Owner terminates this Agreement pursuant to this Article VIII, such termination shall not become effective until sixty five (65) days after Operator's receipt of such notice of termination from Owner to allow Operator and its Affiliates to comply with their obligations under the WARN Act, provided that Owner shall have the right to terminate this Agreement prior to such period if Owner provides a written instrument in form and substance reasonably satisfactory to Operator pursuant to which Owner agrees to indemnify and hold harmless Operator from and against any and all Claims against Operator for violation of the WARN Act. 8.6 Remedies. Owner's and Operator's rights of termination set forth above shall be in addition to, and not in lieu of, any and all other rights and remedies which such party shall have at law or in equity, including, without limitation, injunctive relief ARTICLE IX Termination 9.1 Obligations Upon Termination. Upon termination of this Agreement, Owner acknowledges and agrees as follows: a. Owner is and will be responsible for and assumes (i) all obligations and liabilities under any and all contracts (including, but not limited to, collective bargaining agreements and pension plans, leases, licenses or concession agreements, maintenance and service contracts) in existence as of the date of the termination, (ii) all obligations and liabilities with respect to employees at the Hotel (including, but not limited to, applicable on-going health benefits, termination claims or benefits, workers' compensation claims and any retroactive premiums, and any obligations under any self insurance program) and any and all other obligations or liabilities with respect to the operation of the Hotel, and (iii) all obligations and liabilities with respect to reservations or bookings for rooms, lodging, banquets, or other functions reserved in advance and made by Operator during the Operating Term even though the same may be for a period which occurs after the termination of this Agreement. b. The termination of this Agreement shall not extinguish Owner's and Operator's obligations relating to (i) the payment of all sums due or to become due pursuant to this Agreement or any agreements entered into as a result of this Agreement, (ii) the provisions of Article XIV of this Agreement, or (iii) those provisions of this Agreement which, by their very terms (either expressly or implicitly), survive the termination of this Agreement. c. Operator shall have the right to maintain a representative at the Hotel for a period of sixty (60) days after the effective date of termination for the purpose of finalizing the termination of this Agreement. During such sixty (60) day period, Owner will provide Operator's representative with a guest room and private office space at the Hotel at no charge unless such termination is the result of an event of default by Operator, in which case Operator shall bear the cost of such room and space. Operator's representative shall have access to the Hotel's books and records for the period up to the date of termination and shall also have the right to use the telephone, computer, copying and other office equipment of the Hotel during normal business hours and will pay the actual out-of-pocket costs associated with the use of such equipment. 9.2 Use of ________ Name. Upon the termination of this Agreement, neither Owner nor any other owner or operator of the Hotel shall have the right to use the word __________ or any Starwood trademarks, emblems, insignia, slogans or distinguishing characteristics in connection with the operation of the Hotel, except that Owner shall have the right to use all of the then existing Operating Equipment and Operating Supplies even though marked with the names _________," or -17- with other ________ characteristics, until fully consumed, but in no event for a period in excess of sixty (60) days whereupon it shall destroy said identity items. Owner shall, at its own expense within five (5) days of the effective date of any termination or expiration of this Agreement, remove from the Hotel any signs or other indicia of any connection with the ________ hotel system or Starwood trademarks or programs. In the event Owner fails to remove such signs and other indicia within such five (5) day period, Operator shall have the right and Owner hereby grants Operator a license to enter upon the Premises and at Owner's expense to remove, or cause to be removed, such signs and indicia. Notwithstanding the foregoing, if within fifteen (15) days after termination Operator offers to buy any or all of said Operating Equipment and Operating Supplies bearing the name ________ or ________ trademarks, emblems, insignia or distinguishing characteristics, at the lesser of actual cost or fair market value, Owner shall cease to use same and shall sell same to Operator. In the event of any dispute as to fair market value, the Independent Public Accountant shall determine such value. Operator shall have the right to seek injunctive or other relief in a court of competent jurisdiction, to enforce the foregoing provisions, notwithstanding any arbitration provisions contained in this Agreement, the parties hereby agreeing that the failure of Owner to comply with this provision shall cause Operator irreparable harm which can not be fully compensated by monetary damages. Owner shall bear all of Operator's costs, including reasonable attorneys' fees, in connection with the enforcement of Operator's rights under this Article IX. The provisions of this Article IX shall survive termination of this Agreement. ARTICLE X Damage and Destruction: Condemnation 10.1 Damage or Destruction. If the Hotel or any portion thereof shall be damaged or destroyed at any time or times during the Operating Term by fire, casualty or any other cause, Owner will, at its own cost and expense and with due diligence, repair, rebuild or replace the same so that after such repairing, rebuilding, or replacing, the Hotel shall be substantially the same as prior to such damage or destruction. If Owner fails to undertake such work within ninety (90) days after the fire or other casualty, or shall fail to complete the same diligently, Operator may, at its option, terminate this Agreement by written notice to Owner, effective as of the date sent. Notwithstanding the foregoing, if the Hotel is damaged or destroyed to such an extent that the cost of repairs or restoration, as reasonably estimated by Operator, exceeds one-third of the original cost of the Hotel, Operator may terminate this Agreement by written notice to Owner, or Owner may, if it determines not to repair, rebuild or replace the Hotel, as aforesaid, terminate this Agreement by such notice to Operator. In the event Owner is not required to repair, rebuild or replace the Hotel under the terms hereof, but nevertheless determines at any time within three (3) years after the date of such casualty to so repair, rebuild or replace the Hotel, then Operator may reinstate this Agreement by written notice to Owner within sixty (60) days after the later of: (a) the commencement of such repairing, rebuilding or restoring, (b) receipt of written notice from Owner of the commencement thereof, or (c) receipt of written notice from Owner of its intention to repair, rebuild or replace the Hotel. 10.2 Condemnation. a. If the whole of the Hotel shall be taken or condemned in any eminent domain, condemnation, compulsory acquisition or like proceeding by any competent authority or if such a portion thereof shall be taken or condemned as to make it imprudent or unreasonable to use the remaining portion as a first-class hotel of the type immediately preceding such taking or condemnation, then the Operating Term shall terminate as of the date of such taking or condemnation. If only a part of the Hotel shall be taken or condemned and the taking or condemnation of such part does not make it unreasonable or imprudent to operate the remainder as a first-class hotel of the type immediately preceding such taking or condemnation, this Agreement -18- shall not terminate, and Owner shall undertake such alterations or modifications to the Hotel, or any part thereof, as shall be reasonably necessary to make the Hotel a satisfactory architectural unit as a first-class hotel of the type immediately preceding such taking or condemnation. b. Operator shall have the right, in the case of either total or partial taking or condemnation, either to institute or to intervene in any available administrative proceeding or judicial action, intended to determine just compensation for such taking, for the purpose of representing Operator's compensable interest in any award thereof arising from this Agreement and more specifically from Operator's right of quiet enjoyment. Any award that does not recognize the separate compensable interests of Owner and Operator shall be apportioned between the parties hereto in consideration, without limitation, of such factors as: (i) recoupment by Owner of its investment, (ii) return on investment to date, (iii) actual loss of income (including Operator's fee income hereunder), (iv) loss of reasonably anticipated future income (including Operator's fee income hereunder), (v) length of the unexpired term of this Agreement, and/or (vi) the proportion that Operator's Basic and Incentive Fees have historically borne to the return to Owner after payment of such fees. Any award which does not recognize such separate and compensable interest in Operator shall be the subject of arbitration between the parties hereto pursuant to Section 15.4. ARTICLE XI Assignment and Transfer 11.1 Sale. Lease or Assignment by Owner. 11.1.1 Owner's Right to Assign. Subject to the provisions of this Article XI, Owner shall have the right at any time during the Term to assign its entire interest in this Agreement in connection with a Change of Ownership, in which event such purchaser shall accept the assignment of this Agreement and assume in writing all of Owner's obligations hereunder as of the date of the Change of Ownership. The execution by the purchaser and Owner of an agreement of such assignment and assumption in form reasonably satisfactory to Operator's counsel shall be a condition of the sale or disposition to such proposed purchaser and Operator shall have the right to enjoin such sale or disposition in the event that such an agreement has not been delivered to Operator at least three (3) business days prior to such sale or disposition. Notwithstanding the foregoing, Owner shall not have the right to assign its interest in this Agreement if: (i) any event of default attributable to Owner has occurred and remains uncured, or (ii) Operator determines, in its reasonable judgment, that (a) the proposed purchaser or its beneficial owners do not have the ability to fulfill Owner's financial obligations hereunder; (b) the consummation of the proposed transaction would materially jeopardize any gaming or other license of Operator, Starwood or any of their respective Affiliates or it shall be contrary to any United States law or regulation for Operator to manage the Hotel for the proposed Owner; (c) the business reputation of the proposed purchaser or its beneficial owners is unacceptable; or (d) the proposed purchaser or its beneficial owners are (or are controlled by) a hotel management or franchising company which competes with Operator or its Affiliates. Any assignment of this Agreement by Owner in violation of this Article XI shall be null and void and of no force or effect. Owner shall not otherwise have the right to assign its interest in this Agreement during the Term, without Operator's prior written consent, such consent not to be unreasonably withheld. 11.1.2 Owner's Right to Sell. The partners or other constituent members of Owner may, upon written notice to Operator pursuant to Section 11.1.3 below, assign, transfer, or dispose of all or any part of their interest(s) in Owner from time to time without the consent of the Operator, provided that such assignment, transfer or disposition does not constitute a Change of Ownership, subject, however, to Operator's right to terminate this Agreement in certain circumstances pursuant to Section 15.7. -19- 11.1.3 Notice of Sale or Assignment. Owner and/or any partner or other constituent member of Owner desiring to sell or otherwise dispose of all or any part of its interest in the Hotel or Owner, as the case may be, shall give Operator not less than forty-five (45) days advance written notice of its intention, which notice shall identify in reasonable detail the owners of the proposed purchaser and shall be accompanied by the latest available audited and unaudited financial statements of the proposed purchaser. The effective date of such notice to Operator shall be the date on which Operator receives from Owner a detailed description of the proposed purchaser and all beneficial owners of the proposed purchaser, including, without limitation, the latest available audited and unaudited financial statements of the proposed purchaser and such beneficial owners. 11.2 Assignment by Operator. Operator shall have the right to assign all its right, title and interest under this Agreement to (a) any Affiliate of it or of Starwood, provided that (i) Operator shall remain liable for all obligations and liabilities of Operator hereunder, and (ii) such assignee enjoys the benefits of the Starwood organization to the same degree as Operator, or (b) any successor or assignee of Operator or Starwood which may result from any merger, consolidation or reorganization, or any other entity which acquires all or substantially all of the business and assets of Starwood. Operator shall have no right to assign its right, title and interest under this Agreement except as set forth in this Section 11.2. 11.3 Liability After Assignment. Except as expressly provided for herein, upon any assignment permitted by this Article and upon assumption of this Agreement by the assignee, the assignor shall be relieved of any obligation or liability under this Agreement incurred or arising subsequent to the date of such assignment. ARTICLE XII Insurance 12.1 Maintenance of Insurance Coverage. Operator shall, at all times during the Operating Term, and at Owner's expense, maintain insurance with respect to the Hotel with the coverages described in Exhibit C. If at any time during the Operating Term any one or more of the coverages specified in Exhibit C shall be unavailable to Operator through blanket policies, Owner shall place and maintain any such coverages, subject to the requirements of Section 12.3. In addition, if at any time Operator is unable to place any of the insurance described in Exhibit C at premiums and otherwise on terms and conditions (including amounts of coverage and deductibles) at least as advantageous to Owner as the premiums and other terms and conditions available to Owner under insurance policies available to Owner from time to time, then Owner may arrange for such insurance through its policies at Owner's cost and expense. Operator shall notify Owner of the costs and other variables of the Operator's insurance policies which are subject to renewal with reasonable advance notice sufficient to allow Owner to reasonably evaluate whether to use Operator's policies or procure its own policies. If Owner desires to place its own insurance pursuant to this Section 5.1., Owner shall so notify Operator in writing at least sixty (60) days prior to the scheduled effective date of such insurance. 12.2 Special Conditions or Hazards. Owner shall disclose to Operator prior to the commencement of the Operating Term the presence of any condition or hazard existing as of the commencement of the Operating Term that may create or contribute to any claims, damages, losses, or expenses not typically insured against by the coverages specified in Exhibit C. If any such condition or hazard requires removal, abatement, or any other special procedures, such special procedures shall be performed at Owner's expense in compliance with all Legal Requirements. -20- Conditions or hazards to which this Section 12.2. refers include: (i) latent risks to health such as asbestos, silicosis, toxic or hazardous chemicals, and waste products; (ii) hazards to the environment such as underground storage tanks; and (iii) latent or patent toxic, nontoxic, abrasive, or irritant pollutants. At Owner's expense, Operator shall endeavor to obtain appropriate insurance coverages against such conditions and hazards to protect the interests of both Operator and Owner. 12.3 Parties Insured and Amounts of Coverage. The carriers of all insurance policies required under this Agreement shall be subject to Operator's approval. All insurance policies provided for in this Article XII shall include: a. Operator and Owner as parties insured thereunder, as their interests may appear; b. when maintained by Owner, amounts and types of coverages and amounts of deductibles as shall be approved from time to time by Operator; c. where appropriate, mortgage endorsement(s) in favor of mortgagee(s), as their interests may appear; d. where appropriate (including the insurance provided for in Part A of Exhibit C), the insurer's waiver of subrogation rights against Operator and Owner; and e. a requirement that the insurer provide at least thirty (30) days' written notice of cancellation or material change in the terms and provisions of the applicable policy. 12.4 Evidence of Insurance. As soon as practicable prior to the effective date of the applicable coverages, the party obtaining the insurance coverages under this Article XII shall provide the other party with binders evidencing that the applicable insurance requirements of this Agreement have been satisfied and, as soon as practicable thereafter, shall provide certified copies of policies for such insurance or certificates of insurance. As soon as practicable prior to the expiration date of each such policy, the party obtaining such insurance shall provide the other party with binders evidencing renewal of existing or acquisition of new coverages. Certified copies of renewed or new policies or certificates of insurance shall be provided by the party obtaining insurance coverage under this Article XII to the other party as soon as practicable after renewed or new coverages become effective. On request, each Party shall furnish the other with a schedule of insurance obtained under this Article XII, listing the policy numbers of the insurance obtained, the names of the companies issuing such policies, the names of the parties insured, the amounts of coverage, the expiration date or dates of such policies, and the risks covered thereby. 12.5 Duties of Operator. Operator shall promptly: a. cause to be investigated all accidents and claims for damage relating to the operation and maintenance of the Hotel, as they become known to Operator, and shall report to Owner any such incident that is material; b. cause to be investigated all damage to or destruction of the Hotel, as it becomes known to Operator, and shall report to Owner any such incident that is material, together with the estimated cost of repair thereof; c. prepare any and all reports required by any insurance company as the result of an incident mentioned in this Section 12.5., acting as the sole agent for all other named insureds, additional insureds, mortgagees, and loss payees; and -21- d. retain on behalf of Owner all consultants and experts, including architects, engineers, contractors, accountants, and attorneys, as needed, and at Owner's expense, to assist in analyzing any loss or damage, determining the nature and cost of repair, and preparing and presenting any proofs of loss or claims to any insurers. 12.6 Review of Insurance. All insurance policy limits provided under this Article XII shall be reviewed by the parties every three (3) years following the commencement of the Operating Term, or sooner if reasonably requested by Operator, to determine the suitability of such insurance limits in view of exposures reasonably anticipated over the ensuing three (3) years. Owner and Operator hereby acknowledge that changing practices in the insurance industry and changes in the local law and custom may necessitate additions to types or amounts of coverage during the Operating Term. Owner agrees to comply with any other insurance requirements Operator reasonably requests in order to protect the Hotel and the respective interests of Owner and Operator. 12.7 Waiver of Subrogation. Owner hereby waives its right of subrogation and shall have all policies of insurance provide that the insurance company will have no right of subrogation against Operator, Starwood or any of their respective Affiliates or the agents or employees thereof Owner assumes all risks in connection with the adequacy of any insurance or self-insurance program required or permitted under this Agreement, and waives any claim against Operator, Starwood and all of their respective Affiliates for any liability, cost or expense arising out of any uninsured claim, in part or in full, of any nature whatsoever. 12.8 Separate Operator Insurance. Owner acknowledges that Operator, Starwood or any of their respective Affiliates may at their sole expense, carry insurance coverages separate and distinct from those required under this Agreement, including any excess coverage protecting only their separate interests. ARTICLE XIII Intellectual Property: Trade Names 13.1 Use of Intellectual Property. Operator shall utilize the Intellectual Property in connection with the operation of the Hotel as appropriate for the purpose of carrying out its agreements and obligations hereunder, but such use shall be strictly on a non-exclusive basis (except as provided in Section 13.4 below), and neither such use nor anything contained in this Agreement shall confer any proprietary rights in the Intellectual Property upon Owner or any third parties. All advertising, marketing promotional pieces, public relations and sales materials shall only use the Sheraton trademark and service marks, in an approved manner as to graphics, formatting, positioning and the like. 13.2 Hotel Name. During the Operating Term, the Hotel shall at all times be known and designated as indicated in the Term Sheet, or by such other name as from time to time may be agreed upon by Owner and Operator. All rights to any such name, exclusive of the name __________ or any other term utilized in the name of the Hotel which is a trade name or trade mark of Starwood, Operator or any of their respective Affiliates, or which is commonly used by Starwood, Operator or any of their respective Affiliates in connection with a group of their hotels, or which identifies the general or specific location of the Hotel, shall belong solely to Owner. 13.3 Hotel Logo Goods. The parties agree that clothing and other goods bearing the name or logo of the Hotel, or any other right, trade name, logo or mark used only at the Hotel or specifically making reference to the Hotel, may be sold at the Hotel and at any other hotel or facility owned, operated or licensed by Operator, Starwood, or any of their respective Affiliates. There shall -22- be no royalty, license fee or other charge by Operator or Owner in connection with the use of such rights. 13.4 Protected Territory. During the Operating Term, neither Operator nor any Affiliate shall either own, lease, manage, license, franchise, develop or construct a Sheraton-brand hotel within the area identified in Exhibit F (the "Protected Area!') (it being agreed that the Protected Area shall include any parcels of land abutting the public right-of way along which the boundary of the Protected Area runs); provided, however, that the restriction in this Section 13.4 (the "Restriction") shall not apply to (i) any hotel or similar facility operated under the _____________________________________________________________ or "W" brand name or any other brand name other than the __________ brand name, or (iii) any hotel or similar facility continuously operated under the __________ brand name from and after the date of this Agreement/Notwithstanding the foregoing, if the Rent with respect to the Hotel payable by Owner to the Joint Venture pursuant to the Lease Agreement provides the Joint Venture with a Cash-on-Cash Return of at least 12% for any two (2) consecutive Fiscal Year period, the Restriction shall no longer apply after the end of such two (2) Fiscal Year period (the "Restriction Release"); provided, however, that if the Rent with respect to the Hotel payable by Owner to the Joint Venture pursuant to the Lease Agreement provides the Joint Venture with a Cash-on-Cash Return of less than 10% for any Fiscal Year after the Restriction Release, then the Restriction shall again become effective as of the end of such Fiscal Year (the "Restriction Restoration") (except that the Restriction shall not apply with respect to the ownership, acquisition, development, leasing, management, franchise or construction of any hotel or similar facility in the Protected Area pursuant to any binding commitment of Starwood or any of its Affiliates which was entered into in good faith after the Restriction Release and prior to the Restriction Restoration). Any Restriction Restoration in effect from time to time shall continue to be subject to a further Restriction Release, and any Restriction Release in effect from time to time shall continue to be subject to a further Restriction Restoration, on the terms set forth in this Section 13.4. ARTICLE XIV Claims and Indemnification 14.1 Claims and Liability. Owner and Operator mutually agree for the benefit of each other to look only to the appropriate insurance coverages in effect pursuant to this Agreement in the event any demand, claim, action, damage, loss, liability or expense occurs as a result of injury to person or damage to property (collectively, a "Claim"), regardless whether any such Claim is caused or contributed to, by or results from the negligence of Owner or Operator or their respective Affiliates, employees, directors, officers, agents or independent contractors and regardless whether the injury to person or damage to property occurs in and about the Hotel or elsewhere as a result of the performance of this Agreement. 14.2 Indemnification in Favor of Owner. In the event the insurance proceeds are insufficient or there is no insurance coverage to satisfy such Claims, and provided Operator is made a party to such proceedings and is given an adequate opportunity to defend itself with respect to such Claims, Operator shall indemnify and hold Owner and its Affiliates, officers, directors, employees, agents and independent contractors harmless, to the extent of the excess liability (including any deductible amount under any policy of insurance), from and against any and all Claims which such party may suffer, sustain or incur, if, and only to the extent, such Claims are (i) determined by the final, unappealable judgment of a court of competent jurisdiction to result from Operator's Grossly Negligent or Willful Acts or any event of default by Operator under this Agreement, or (ii) arise out of or in connection with any use by Owner of the name __________ or any other Intellectual Property which Owner is permitted to use hereunder, in accordance with the terms of this Agreement. -23- 14.3 Indemnification in Favor of Operator. In the event the insurance proceeds are insufficient or there is no insurance coverage to satisfy such Claims, Owner shall indemnify and hold Operator, Starwood, their respective Affiliates, and any officers, directors, employees, agents or independent contractors of any of them, harmless from and against any and all Claims, including reasonable attorneys' fees, except to the extent such Claims are the responsibility of Operator pursuant to Section 14.2. Owner will, at Operator's request, assume the defense (with counsel satisfactory to Operator) of any proceeding brought by any third party to establish any such liability, the costs of any such defense being an Operating Expense hereunder. Operator shall also have the right to engage separate counsel, at its expense, to monitor the proceedings, and Owner and Owner's counsel shall fully cooperate with such counsel. Any liability resulting from, or settlement amount relating to, any Claim which is not covered by insurance (and the legal fees relating thereto) will be an Operating Expense so long as this Agreement remains in effect. In addition, without limiting any indemnifications set forth in this Agreement, Owner agrees to indemnify and hold Operator, Starwood, their respective Affiliates, and any officers, directors, employees, agents or independent contractors harmless from any and all liability, loss, damages, costs or expenses (including all reasonable attorneys' fees) of any kind or nature by reason of any claim which may arise as a result of a default or other breach by Owner of any of the obligations and liabilities set forth in Section 9.1. 14.4 Limitation on Indemnification. For purposes of determining the scope of the indemnification obligations of each party under this Article XIV, the parties expressly acknowledge and agree that errors in judgment made in good faith by Operator or its Affiliates or their respective directors, trustees, employees, or agents in the management of the Hotel (including, in connection with the employment or discharge of Hotel Personnel) shall not be deemed to constitute Operator's Grossly Negligent or Willful Acts within the meaning of this Article XIV, unless such errors in judgment (i) are material to the business of the Hotel, (ii) are repeated after notice to Operator bringing the error in judgment to Operator's attention, and (iii) result in debts or liabilities being incurred, or revenue being foregone, that would not normally be incurred or earned in the ordinary course of business of the Hotel. In no event shall the settlement by either party in good faith of any claim brought by a third party (including Hotel Personnel) in connection with the ownership or operation of the Hotel be deemed to create any presumption of the validity of the claim, nor shall any such settlement be deemed to create any presumption that the acts or omissions giving rise to such claim constituted Owner's Grossly Negligent or Willful Acts or an Event of Default by Operator under this Contract. Notwithstanding any contrary provision of this Article XIV, Owner and Operator mutually agree for the benefit of each other to look first to the appropriate insurance coverages in effect pursuant to this Agreement in the event any claim or liability occurs as a result of injury to person or damage to property, regardless of the cause of such claim or liability. 14.5 Survival. The provisions of this Article XIV shall survive termination of this Agreement. ARTICLE XV Miscellaneous 15.1 Casino. No casino shall be operated at the Hotel without the consent of Owner and Operator. In the event the parties shall approve a casino for operation at the Hotel, Operator shall have the exclusive right to operate such casino as a part of the Hotel, and the excess of the gross amount wagered therein over the total amount of money won by wagerers will be included in the Total Revenue of the Hotel and the expenses of operation relating to the casino will be an Operating Expense. -24- 15.2 Financings and Offerings of Owner or its Affiliates. Neither Owner nor any Affiliate of Owner shall represent to any lender or other participant in any financing or in any public or private offering of securities by Owner or any Affiliate of Owner that Operator, Starwood or any Affiliate of either is in any way responsible for any of the obligations of Owner or any Affiliate of Owner in such financing or is in any way participating in any such offering. Except with respect to public disclosure required by Applicable Laws, neither Owner nor any Affiliate of Owner shall make use of the name __________ or the name of Operator, Starwood or any Affiliate of either in connection with any financing or offering other than to state that the Hotel: (i) will bear the name __________, (ii) will be managed by Operator under this Agreement, and (iii) will be part of the _________________________________. The use of the name "Sheraton" or the name of Operator, Starwood or any Affiliate of either in any other fashion, or the use of any written or oral materials or information provided by Operator or any other Starwood brand, Starwood or any Affiliate of either to Owner, including, but not limited to, financial or any other information concerning Operator, Starwood or any Affiliate of either, shall be subject to the prior written approval of Operator and Starwood, which approval may be withheld in such party's sole discretion. Upon request, Operator and Starwood will provide Owner with written requirements which must be complied with as a prerequisite to any other such use of any such name or the use of any such materials or information. 15.3 Notices. Any notice, statement or demand required to be given under this Agreement shall be in writing, sent by (a) hand delivery, (b) certified mail (postage prepaid, return receipt requested), (c) Federal Express or other overnight delivery service, or (d) facsimile machine (provided that an executed original of such notice is sent the same day by overnight delivery service), addressed, in the case of Owner, to the address set forth in the Term Sheet, and in the case of Operator, to the address set forth in the Term Sheet, with a copy to the General Manager of the Hotel, sent to the address of the Hotel, or to such other addresses as Operator or Owner shall designate in the manner herein provided. Notices shall be deemed delivered to the party to whom such notice is sent upon (i) delivery to the offices of such party, provided that such delivery is made prior to 5:00 p.m. (local time for such party) on a business day, otherwise the following business day; or (ii) the attempted delivery of such notice if (A) such party refuses delivery thereof, or (B) such party is no longer at such address, and such party failed to provide the other party with its current address pursuant to this Section 15.3, and (iii) in the case of delivery of notice to Operator, the later of the date such notice is delivered to Operator and the General Manager of the Hotel as set forth above. Owner and Operator agree that the attorney for such party shall have the authority to deliver notices to the other party hereto. 15.4 Arbitration. The factual issues referred to in Sections 7.3.2 and l0.2.b. of this Agreement shall be settled by the final and binding decision of the Accountants as set forth herein. In the case of a dispute with respect to such matters, either party may submit such matter to arbitration which shall be conducted by the Accountants. The "Accountants" shall be one of three (3) firms of certified public accountants of recognized international standing in the hotel industry. Until otherwise agreed to by the parties, the three (3) firms shall be __________________________________________________________________ _______, notwithstanding any existing relationships which may exist between Owner and such accounting firms or Operator and such accounting firms. The party desiring to submit any matter to arbitration hereunder shall do so by written notice to the other party, which notice shall set forth the items to be arbitrated and such party's choice of one of the three (3) accounting firms. The party receiving such notice shall within fifteen (15) days after receipt of such notice either approve such choice, or designate one of the remaining two (2) firms by written notice back to the first party, and the first party shall within fifteen (15) days after receipt of such notice either approve such choice or disapprove the same. If both parties shall have approved one of the three (3) firms under the preceding sentence, then such firm shall be the "Accountants" for the purposes of arbitrating the dispute; if the parties are unable to agree on an accounting firm, then the third firm, which was not designated by either party, shall be the -25- "Accountants" for such purpose. The Accountants shall be required to render a decision in accordance with the procedures described below within fifteen (15) days after being notified of their selection. The fees and expenses of the Accountants will be paid by the non-prevailing party. In all arbitration proceedings submitted to the Accountants, the Accountants shall be required to agree upon and approve the substantive position advocated by Owner or Operator with respect to each disputed item. Any decision rendered by the Accountants that does not reflect the position advocated by Owner or Operator shall be beyond the scope of authority granted to the Accountants and, consequently, may be overturned by either party. All proceedings by the Accountants shall be conducted in accordance with the Uniform Arbitration Act, except to the extent the provisions of such act are modified by this Agreement or the mutual agreement of the parties. Unless otherwise agreed, all arbitration proceedings shall be conducted at the Hotel. 15.5 Performance During Disputes. It is mutually agreed that during any kind of controversy, claim, disagreement or dispute, including a dispute as to the validity of this Agreement, Operator shall remain in possession of the Hotel as Operator and shall be entitled to receipt of Basic Fees and Incentive Fees in accordance with the terms of this Agreement; and Owner and Operator shall continue their performance of the provisions of this Agreement. Operator shall be entitled to injunctive relief from a civil court or other competent authority to maintain possession in the event of a threatened eviction during any dispute, controversy, claim or disagreement arising out of this Agreement. 15.6 Events of Force Majeure: Emergencies: Compliance with Laws. If at any time during the Term Operator is unable to perform pursuant to the terms of this Agreement or it becomes necessary, in Operator's opinion, to cease operation of the Hotel in order to protect the Hotel and/or the health, safety and welfare of the guests and/or employees of the Hotel for reasons beyond the reasonable control of Operator, such as, but not limited to, acts of war, insurrection, civil strife and commotion, labor unrest, governmental regulations and orders, shortage or lack of adequate supplies or lack of skilled or unskilled employees, contagious illness, catastrophic events or acts of God ("Force Majeure"), then in any such event or similar events Operator may close and cease or partially cease operation of all or any part of a Hotel, reopening and commencing operation when Operator deems that such may be done pursuant to Applicable Laws applicable to Starwood and Operator, and without jeopardy to the Hotel, its guests and employees. Operator and Owner agree, except as otherwise provided herein, that the time within which a party is required to perform an obligation and the Term shall be extended for a period of time equivalent to the period of delay caused by an event of Force Majeure. If an emergency condition should exist which requires that immediate repairs be made for the preservation and protection of the Hotel, its guests or employees, or to assure the continued operation of the Hotel, Operator is authorized to take all actions and to make all expenditures necessary to repair and correct such condition, regardless whether provisions have been made in the applicable budget for such emergency expenditures. Expenditures made by Operator in connection with an emergency shall be paid, in Operator's sole discretion, out of the Bank Account to the extent funds are available; and if not, from the Reserve Account. Owner shall, to the extent required to meet current obligations, immediately replenish such funds. 15.7 Gaming Licensure Issues and Compliance with Any Laws or Regulations Applicable to Operator. Operator and Affiliates of Operator own and operate or will own and operate casino gaming facilities in the states of Nevada and New Jersey, and other U.S. and foreign jurisdictions, which are subject to extensive regulation. If, in the sole judgment and discretion of Operator, the association with Operator of Owner or any Affiliate of Owner or any employee, officer or director of Owner or any transferee of Owner may result in a disciplinary action or the loss of or inability to reinstate any registration, application or license or any rights or entitlements held by Operator or any Affiliate of Operator under any Applicable Gaming Laws, or if Owner or any Affiliate or transferee of Owner is required to qualify or be found suitable under any Applicable Gaming Laws under which Operator or any Affiliate of Operator is licensed, registered, qualified or found suitable, and -26- Owner or any Affiliate or transferee of Owner does not so qualify (at its own expense) or any of the foregoing shall be unsuitable or unacceptable for Operator to do business with under any law or regulation applicable to Operator or any Affiliate of Operator, then Operator may deliver written notice of the foregoing to Owner, and then Operator may elect to terminate this Agreement. Owner agrees to provide Operator with such information and details concerning Owner and officers, directors and shareholders of Owner as Operator or any regulatory agency may require in order to establish suitability. 15.8 Employment Solicitation Restriction Upon Termination. Owner and its Affiliates and their successors hereby agree not to solicit the employment of a Hotel's general manager, director of sales or controller or any personnel employed by Operator or an Affiliate of Operator at any time during the Term without Operator's prior written approval. Furthermore, Owner and its Affiliates agree not to solicit or employ a Hotel's general manager, director of sales or controller or any executive personnel employed by Operator or an Affiliate of Operator for a period of twelve (12) months after the termination or expiration of this Agreement, without Operator's prior written approval. 15.9 Set-off Without prejudice to Operator's right to terminate this Agreement pursuant to the provisions of this Agreement, Operator may at any time during the continuance of an event of default (as such term is defined in Article VIII) and without notice to Owner set-off or transfer any sum or sums held by Operator, Starwood or their Affiliates to the order o~ or on behalf o~ Owner, in or towards satisfaction of any of Owner's liabilities to Operator in respect of all sums due to Operator under the terms of this Agreement. 15.10 Press Releases. Except with respect to public disclosure required by Applicable Laws, no press releases or other written matter in which the name __________ or "Starwood" are used shall be released or otherwise used by Owner without Operator's prior written approval of the timing and content of such release in each and every case, which approval may be withheld in Operator's sole discretion. 15.11 Consents. Except as herein otherwise provided, whenever in this Agreement the consent or approval of Operator or Owner is required, Owner and Operator each agree to act reasonably and without undue delay with respect to requests for such consent or approval. Such consent or approval shall be in writing only and shall be duly executed by an authorized officer or agent of the party granting such consent or approval. 15.12 Partial Invalidity. In the event that any one or more of the phrases, sentences, clauses or paragraphs contained in this Agreement shall be declared invalid by the final and unappealable order, decree or judgment of any court, this Agreement shall be construed as if such phrases, sentences, clauses or paragraphs had not been inserted; provided that if any portion of Article IV or Sections 6.1 .c., 7.1, or 14.3 shall be so declared invalid, Operator shall have the option to terminate this Agreement within thirty (30) days thereafter on written notice to Owner. 15.13 Further Actions. Owner and Operator shall execute and deliver all other appropriate supplemental agreements and other instruments, and take any other action necessary to make this Agreement fully and legally effective, binding, and enforceable as between them and as against third parties, including Owner's filing in appropriate governmental offices pursuant to any statute, ordinance, rule or regulation requiring such filing by persons or entities doing business in a name other than their own, of a certificate or similar document indicating that Owner is engaging in the hotel business at the Hotel under the name of the Hotel. Any fees or expenses incurred in connection therewith shall be borne by Owner. -27- 15.14 Paragraph Headings. The headings of the titles to the several articles of this Agreement are inserted for convenience only and are not intended to affect the meaning of any of the provisions hereof. 15.15 Governing Law. This Agreement shall be construed, both as to its validity and as to the performance of the parties, in accordance with the Applicable Law of the place where the Hotel is located. This Agreement shall be binding upon and inure to the benefit of Owner and Operator, and their respective successors and permitted assigns. The waiver of any of the terms and conditions of this Agreement on any occasion or occasions shall not be deemed a waiver of such terms and conditions on any future occasion. 15.16 Entire Agreement: Owner Has Not Relied on Representations. This Agreement, including all exhibits and schedules hereto which are hereby incorporated by reference, constitutes the entire agreement between the parties relating to the subject matter hereof, superseding all prior agreements or undertakings, oral or written. Owner has not relied on any projection of earnings, statements as to the possibility of future success or other similar matter which may have been prepared by Operator, Starwood, or any of their respective Affiliates, and understands that no guaranty is made or implied by Operator, Starwood or any of their Affiliates as to the cost or the future financial success of the Hotel. 15.17 Benefits of Agreement: No Third-Party Rights. None of the provisions of this Agreement shall be for the benefit of or enforceable by any party other than Owner, Operator or any of either of their respective Affiliates. Except as expressly provided for herein, nothing in this Agreement shall be deemed to create any right by any party other than Owner, Operator and any of either of their respective Affiliates and this instrument shall not be construed in any respect to be a contract in whole or in part for the benefit of any third party nor is this instrument intended to create an interest in, or lien upon, the Premises. 15.18 Cooperation with Owner and the Joint Venture. Operator shall reasonably cooperate with Owner and the Joint Venture in connection with any financing or refinancing of the Hotel, and shall, upon not less than ten (10) days prior written request, execute and deliver to any lender or prospective lender, or purchaser or prospective purchaser of an interest in Owner or the Joint Venture, estoppel certificates regarding the effectiveness of this Agreement and performance by Owner thereunder, and cold comfort letters based upon terms reasonably acceptable to Operator, to the effect that such lender or purchaser will receive (i) concurrent notice and opportunity to cure defaults by Owner under this Agreement on the same terms as set forth herein with respect to Owner, and (ii) the right to substitute a new owner reasonably acceptable to Operator if and when such lender or purchaser obtains title to or possession of the Hotel. [Remainder of page intentionally left blank; signatures on following page] -28- IN WITNESS WHEREOF, Operator and Owner have duly executed this Agreement the day and year first written above in the Term Sheet. OWNER: By: -------------------------------------- Name: ------------------------------------ Its: ------------------------------------- OPERATOR: By: -------------------------------------- Name: ------------------------------------ Its: ------------------------------------- EXHIBIT A LEGAL DESCRIPTION OF THE PREMISES [To be completed] EXHIBIT `A' LEGAL DESCRIPTION EXHIBIT B DEFINITIONS For the purposes of this Agreement, the following terms shall have the following respective meanings: "Accounting Period" shall mean a period of time not less than three nor more than six full weeks, as shall be used by Operator in accounting for the operations of the Hotel. "Affiliate(s)" shall mean, with respect to any entity, any natural person or firm, corporation, partnership, limited liability company, association, trust or other entity which, directly or indirectly, controls, is controlled by, or is under common control with, the subject entity; a natural person or entity which has an entity as an Affiliate under the foregoing shall also be deemed to be an Affiliate of such entity. For purposes hereof, the term "control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of any such entity, or the power to veto major policy decisions of any such entity, whether through the ownership of voting securities, by contract or otherwise. "Applicable Gaming Laws" shall mean all Applicable Laws relating to or in any way affecting casino gaming operations and related activities at any hotel owned, leased, operated, managed, franchised or licensed by Operator, Starwood or any of their Affiliates. "Applicable Laws" shall mean all federal, state, local and foreign statutes, laws (including common law), codes, regulations, ordinances, rules and other legal requirements or guidance issued by any governmental authority or any board of fire underwriters and similar entities and agencies, and all judgments, injunctions, orders, directives, decrees or other judicial or regulatory requirements of any court of competent jurisdiction or other governmental authority relating to or in any way affecting the Hotel or any component part thereon the use, occupancy or operation thereof, or any activities conducted thereon. "Approved Operating Plan" shall mean an Operating Plan which has been approved or deemed approved by the Owner pursuant to Section 7.3. "Bank Account" shall mean a bank account designated by Owner from time to time. "Basic Fee" shall have the meaning set forth in the Term Sheet. "Books and Records" shall have the meaning set forth in Section 7.9.1. "Building and Appurtenances" shall mean all the buildings, structure, improvements and fixtures and all appurtenances thereto located on the Premises (including, without limitation, all heating, lighting, air conditioning equipment, elevators and other electrical, mechanical, plumbing and similar building systems; telecommunications and mainframe computer systems; wiring and cable installations; and landscaping). "Capital Expenditure" shall mean all expenditures incurred with respect to the Hotel during such period that, in accordance with GAAP, are or should be capitalized rather than expensed, including items included in "additions to property, plant or equipment" or similar items reflected in the statement of cash flows. "Cash-on-Cash Return" shall mean an amount computed over the applicable Look-Back Period, reflected as a percentage, equal to (a) the sum of(i) the aggregate amount of all Rent payable B-1 with respect to the Hotel under the Lease Agreement during such Look-Back Period (after payment by the Joint Venture of all Property Taxes and insurance premiums related to the Hotel for such Look-Back Period), (ii) the aggregate amount of distributions made (or if not made, cash available for distribution) by Owner to its members in respect of their owners hip interests in Owner during such Look-Back Period, (iii) the aggregate amount of any payments made to Operator in respect of the Incentive Fee pursuant to clause (ii) of the definition of the term "Incentive Fee" in this Agreement (but expressly excluding any payments made to Operator for the Hotel in respect of the Incentive Fee made pursuant to clause (i) of such definition) for such Look-Back Period, and (iv) aggregate Net Operating Income of the Hotel for any portion of such Look-Back Period during which the Lease Agreement is not then in effect with respect to the Hotel, divided by (b) the sum of ~ i) the aggregate cost basis of the Joint Venture in the Hotel (which, for purposes of clarity, includes t e aggregate cost basis of the Hotel if the Lease Agreement relating to such Hotel is not in effect during such Look-Back Period), plus (ii) the aggregate amount of all Capital Expenditures made by Owner with respect to the Hotel pursuant to Approved Operating Plans under t is Agreement. "Centralized Services" shall mean the services and group benefits from time to time made available for a fee to all or certain distinct groups of Starwood properties, as described in Section 7.6. "Change of Ownership" shall mean (1) any sale or disposition of all or any part of the Hotel, and/or (2) any sale or disposition of any interests in the Owner or in the partners or other constituent members of the Owner which would result in a change of the controlling interest in the Owner or in the general partner of the Owner (if the Owner is a limited partnership or limited liability company), or in any general partner(s) or venturer(s) of the Owner if the Owner is a general partnership, limited liability company or a joint venture. For purposes of this definition, "controlling interest" shall mean, as applicable, (a) management control and/or ownership of more than forty-nine and nine-tenths percent (49.9%) of all classes of the voting stock of a corporation, (b) management control and/or ownership of more than forty-nine and nine-tenths percent (49.9%) of all outstanding partnership interests of a limited partnership or limited liability company (which management control shall include, without limitation, management control and/or ownership of more than forty-nine and nine-tenths percent (49.9%) of the general partner thereof or managing member thereof) and (c) management control and/or ownership of more than forty-nine and nine-tenths percent (49.9%) of all outstanding partnership interests of a general partnership, limited liability company or joint venture. "Claim" shall have the meaning set forth in Section 14.1. "Compensation" shall mean the direct salaries and wages paid to, or accrued for the benefit of, any of the executive level Hotel personnel or any other Hotel employee to be paid in accordance with the terms of this Agreement, together with all fringe benefits payable to, or accrued for the benefit of, such executive level Hotel personnel or other Hotel employee, including employer's contributions required pursuant to any legal requirement, or other employment taxes, retirement, pension plans or pension fund contributions, group life, accident, disability and health insurance premiums, savings plans, executive compensation and bonus programs and other similar benefits to be paid in accordance with the terms of this Agreement and any expenses not otherwise specifically referred to in this definition which are referred to as "Administrative and General Expenses" in the Uniform System; provided that with respect to the certain senior hotel personnel who, in accordance with Starwood policy remain on Starwood's payroll, such benefits shall be charged to the Hotel as a percentage of direct salary, such percentage to be equal to the percentage of direct salary charged generally at other Starwood-managed hotels in the United States from time to time. "Consumer Price Index" shall mean the Consumer Price Index (1982-1984=100) for Urban Wage Earners and Clerical Workers, as compiled and published by the Bureau of Labor Statistics of the United States Department of Labor for the city or the smallest area including the city or town in which the Hotel is located for which such an index is published. In the event that such Consumer B-2 Price Index shall be discontinued or abandoned, the term Consumer Price Index shall refer to the closest comparable index as may be substituted by the Bureau of Labor Statistics. If no such index shall be substituted, then another index generally recognized as authoritative shall be substituted by agreement of the parties, and if the parties cannot agree, such index shall be determined by the Independent Public Accountant. "Corporate Personnel" shall mean any personnel from the corporate offices of Operator and its Affiliates who perform activities in connection with the services provided by Operator under this Agreement. "Effective Date" shall have the meaning set forth in the Term Sheet. "Fiscal Year" shall mean the calendar year, except that the first Fiscal Year shall be that period commencing on the first day of the Operating Term and ending on December 31 of the same year. "Food and Beverage Revenues" shall mean all revenues, receipts, and income of any kind derived directly or indirectly by Owner from or in connection with (a) the sale, for on-site consumption, of food and non-alcoholic beverages sold at the Hotel, including in respect to guest rooms, banquet rooms, ballrooms, meeting rooms and other similar rooms, including the rentals with respect to banquets, meetings and other functions held in such banquet rooms, ballrooms, meeting rooms and other similar rooms, and (b) (i) the sale of wine, beer, liquor or other alcoholic beverages, whether sold in the bar or lounge, delivered to a guest room, sold at meetings or banquets or at any other location at the Hotel or (ii) non-alcoholic beverages sold in the bar or lounge (other than, in either case, any Sublease Rent), whether on a cash basis or credit, paid or collected, determined in accordance with generally accepted accounting principles, excluding, however: (i) federal, state and municipal excise, sales, and use taxes collected directly from patrons and guests or as a part of the sales price of any goods, services or displays, such as gross receipts, admissions, cabaret or similar or equivalent taxes and paid over to any governmental authority, (ii) the amount of all credits, rebates or refunds to customers, guests or patrons, and all service charges, finance charges, interest and discounts attributable to charge accounts and credit cards, to the extent the same are paid to Owner by its customers, guests or patrons, or to the extent the same are paid for by Owner to, or charged to Owner by, credit card companies, (iii) gratuities or service charges actually paid to employees, (iv) sales other than sales in the ordinary course of business, (v) the cost of meals to Owner's or Operator's employees, and the cost of charitable, promotional or other complimentary meals given by Owner in the ordinary course of business and in accordance with its normal policies for giving such meals, as is customary for similar operations, (vi) revenues derived from vending machines operated by Owner or Operator for the convenience of their employees, (vii) receipts for returns to shippers, manufacturers or suppliers, (viii) proceeds of business interruption or other insurance, and (ix) items constituting "allowances" under the Uniform System. "Force Majeure" shall have the meaning set forth in Section 15.6. "Full Fiscal Year" shall mean a Fiscal Year containing not less than 365 days. "Furniture and Equipment" shall mean all furniture, furnishings, equipment (including but not limited to audio-visual, kitchen, bar, office, laundry and dry cleaning equipment), fixtures (excluding fixtures which, when attached thereto, became a part of the Building and Appurtenances pursuant to Applicable Laws), wall coverings, vehicles, engineering and cleaning equipment and other personal property used in, or held in storage for use in connection with the operation, maintenance and cleaning of the Hotel, but excluding Operating Equipment and Operating Supplies. B-3 "GAAP" shall mean generally accepted accounting principles in the United States in effect from time to time. "Gross Operating Profit" shall mean, for any Accounting Period, the excess of Total Revenue over all Operating Expenses for such period. "Hotel" shall mean collectively the Premises, Building and Appurtenances, Furniture and Equipment, Operating Equipment and Operating Supplies. "Incentive Fee" shall mean an amount per Fiscal Year equal to (i) 100% of the Net Income of Owner, if any, which is attributable to the Hotel on an aggregate basis up to of 2% of Total Revenue attributable to the Hotel for such Fiscal Year, plus (ii) 50% of any Net Income of Owner, if any, which is attributable to the Hotel on an aggregate basis for such Fiscal Year (after deducting the payment provided in clause (i) of this definition and the amount of any principal and interest paid under the Revolving Credit Agreements). "Independent Public Accountant" shall mean ___________________, or any successor firm thereto, or any other reputable national firm of certified public accountants having substantial hotel experience as shall be mutually agreed to by the parties. "Initial Working Capital" shall have the meaning set forth in the Term Sheet. "Intellectual Property" shall mean (i) proprietary software in use at one or more of the hotels owned, operated, leased or managed by Operator, Starwood or any of their respective Affiliates and utilized in connection with the operation of such hotels, and all related documentation, manuals and any enhancements, modifications or substitutions therefor, (ii) trade secrets, know-how and other proprietary information relating to the operating methods, procedures and policies distinctive to such hotels, and (iii) all service marks, trademarks, trade names, insignias and logos owned and used by Operator, Starwood or their respective Affiliates in connection with the operation of such hotels. "Net Income of Owner" shall mean, for any Fiscal Year, Total Revenue received by Owner with respect to the Hotel for such Fiscal Year, less the amount of: (i) Operating Expenses for such Fiscal Year; (ii) Specified Fixed Charges for such Fiscal Year; (iii) the Rent paid by Owner under the Lease Agreement for such Fiscal Year; (iv) Overhead of Owner for such Fiscal Year; and (v) the Basic Fee paid to Operator for such Fiscal Year. "Net Operating Income" shall mean Total Revenue less the sum of Operating Expenses and Specified Fixed Charges. "Operating Equipment" shall mean all chinaware, glassware, linens, flatware, uniforms, utensils and other items of a similar nature necessary for the operation of the Hotel by Operator as required under this Agreement. "Operating Expenses" shall mean all costs and expenses of maintaining, conducting and supervising the operation of the Hotel incurred by Operator directly or at its request or as otherwise provided herein which are attributable to the period under consideration under Operator's system of accounting and are normally charged as an operating expense under GAAP, which costs and expenses include without limitation: (i) the cost of all food and beverages sold or consumed and of all Operating Equipment (with the exception of the Operating Equipment initially supplied by Owner at its sole expense pursuant to this Agreement) and all Operating Supplies; B-4 (ii) Compensation of Hotel personnel, including all salaries, wages, bonuses, payroll taxes and employee benefits; (iii) the cost of all other goods and services obtained by Operator in connection with its operation of the Hotel to the extent equitably allocable to the Hotel; (iv) the cost of ordinary repairs to and routine maintenance of the Hotel; (v) insurance premiums for insurance required pursuant to Section 12.2 of this Agreement and losses incurred on any self-insured risks (including deductibles) in lieu thereof, provided that (a) Owner and Operator have approved in advance such self insurance to the extent such consent is required herein, or (b) insurance is unavailable to cover such risks. Premiums on policies for more than one year will be pro-rated over the period of insurance and premiums under blanket policies will be allocated among properties covered; (vi) taxes, assessments and other charges (other than income taxes and business taxes and the like which are not collected from the guest) payable by or assessed against Operator with respect to the operation of the Hotel, and all water and sewer charges; provided, that Operating Expenses shall not include any Property Taxes, all of which shall be paid by Owner; (vii) legal fees and fees of the Independent Public Accountant for services (including in the latter case, fees for the Hotel annual audit) directly related to the operation of the Hotel; (viii) expenses for advertising, marketing, sales, promotion and public relations activities; (ix) the cost of Centralized Services as provided in Section 7.6; (x) costs and expenses of employees of the Hotel and of Operator, Starwood and any of their Affiliates to attend meetings away from Operator's principal executive offices (including meetings with Owner) related to the administration or management of the Hotel, and costs and expenses of Hotel employees with respect to training sessions and similar meetings and conferences of Operator, Starwood or any of their Affiliates; and (xi) all other expenses and disbursements determined by the Independent Public Accountant to have been reasonably, properly and specifically incurred by Operator, Starwood or any of their Affiliates pursuant to, in the course of and directly related to, the management and operation of the Hotel under this Agreement, but specifically excluding any and all costs relating to the headquarters offices maintained by Operator, Starwood or any of their Affiliates (other than offices maintained by them at the Hotel for the management of the Hotel and offices utilized in connection with the provision of Centralized Services, the costs of which are reflected in the fees for such Centralized Services), but the term "Operating Expenses" does not include (1) any depreciation and amortization; (2) any principal or interest paid or accrued in respect of any Owner indebtedness; (3) any Specified Fixed Charges; (4) any lease payment or other rent payable with respect to the Hotel or any part or component thereof, including, without limitation, any Rent paid or other costs incurred by Owner under the Lease Agreement; (4) Property Taxes; (5) premiums and deductibles paid with respect to Owner's insurance; (6) any overhead of Owner, including, without limitation, the Overhead; (7) the cost of any repairs, replacements or capital improvements required to be paid by Owner under Section 6.1 or Section 7.8; (8) structural additions or modifications, extraordinary repairs, nonroutine maintenance and capital improvements and any other thing specified to be done or provided B-5 at Owner's sole expense; (9) any costs reimbursed to Owner or Operator by commercial tenants of the Hotel; or (10) any expenses for gratuities, service charges, sales and gross receipts taxes and other similar taxes and assessments, to the extent that receipts in respect thereof are excluded from Total Revenue. "Operating Plan" shall have the meaning set forth in Section 7.3.1. "Operating Supplies" shall mean the inventories of paper supplies, cleaning materials and other consumable items used in connection with the operation of the Hotel. "Operating Term" shall mean the Term and any extension thereof, as set forth in Article III. "Operator Insurance" shall have the meaning set forth in Article XII. "Operator's Grossly Negligent or Willful Acts" shall mean any gross negligence, willful misconduct or fraud committed by Operator, its employees, its Affiliates, or any of the Senior Executive Personnel. "Other Revenues" shall mean all revenues, receipts, and income of any kind derived directly or indirectly from or in connection with the Hotel and included in Total Revenues (other than Room Revenues, Food and Beverage Revenues and Telephone Revenues), including, without limitation, all Sublease Rent, revenues, receipts and income derived from the Hotel's TV and movie rentals, check room, washroom, laundry, valet, and vending machines and all other services not expressly specified herein as Room Revenues, Food and Beverage Revenues and Telephone Revenues. "Overhead" means, with respect to the Fiscal Year or other period in question, an amount equal to $20,000 per year, increased annually (beginning on _______________) in direct proportion to any increase in the Consumer Price Index for the immediately preceding month of December over the Consumer Price Index published for _____________ (or, if the Consumer Price Index ceases to be published, such other substantially comparable published index as may reasonably designated pursuant to the this Agreement). "Owner Insurance" shall have the meaning set forth in Article XII. "Percentage Rent" shall have the meaning set forth in the Lease Agreement. "Premises" shall mean the lands described in Exhibits A-1 and A-2 attached hereto. "Property Taxes" shall mean all real and personal property taxes, all betterments and public improvement assessments, and all other taxes or charges of a similar nature, assessed on the Hotel or any of its component parts. "Rent" shall have the meaning set forth in the Lease Agreement. "Reserve Account" shall mean the bank account designated by Operator for the purpose of holding the funds constituting the Reserve Fund. "Reserve Fund" shall mean the cash fund created for the purpose of establishing a reserve for replacements and additions to Furniture and Equipment in accordance with Section 7.10. "Restaurant" shall mean any restaurant or cocktail lounge, together with a kitchen for those facilities, which may be located in the Hotel at any time and from time to time. B-6 "Revolving Credit Agreements" shall mean that certain (i) Revolving Credit Agreement, dated as of the date of this Agreement, between ITT Sheraton Corporation, a Delaware corporation, as lender, and Owner, as borrower, with respect to the Hotel, and (ii) Revolving Credit Agreement, dated as of the date of this Agreement, between DJONT Operations, L.L.C., a Delaware limited liability company, as lender, and Owner, as borrower, with respect to the Hotel. "Room Revenues" shall mean all revenues, receipts, and income of any kind derived directly or indirectly by Owner from or in connection with the rental of guest rooms or suites, whether to individuals, groups or transients, at the Hotel, whether on a cash basis or credit, paid or collected, determined in accordance with generally accepted accounting principles, excluding the following: (a) The amount of all credits, rebates or refunds to customers, guests or patrons, and all service charges, finance charges, interest and discounts attributable to charge accounts and credit cards, to the extent the same are paid to Owner by its customers, guests or patrons, or to the extent the same are paid for by Owner to, or charged to Owner by, credit card companies; (b) All sales taxes or any other taxes imposed on the rental of such guest rooms or suites; (c) Gratuities or service charges actually paid to employees; (d) Proceeds of business interruption and other insurance; and (e) Food and Beverage Revenues, Telephone Revenues or Other Revenues. "Senior Executive Personnel" shall mean the individuals employed from time to time as the general manager, the director of marketing and the controller of the Hotel (or serving such functions, regardless of the specific title given to such individuals). "Specified Fixed Charges" shall mean the following cash expenditures made in connection with the operation of the Hotel: (1) payments pursuant to any equipment leases or installment sales contracts permitted under Section 7.4 or otherwise approved by Owner; (2) real estate taxes applicable to the Hotel to the extent paid by Owner; (3) premiums for insurance required to be obtained or maintained by Owner pursuant to the Lease Agreement; and (4) any amounts paid into the Reserve Fund. "Star Report" shall mean the "Star Report" published by Smith Travel Research. "Starwood" shall have the meaning set forth in the recitals. "Sublease Rent" shall mean the entire net amount of rentals (including base rent and percentage rent) and other amounts, if any, received by Owner under any sublease (or similar agreement) of a Restaurant or other retail space which may be entered into from time to time between Owner and any unaffiliated third party, net of any management fees payable to Manager under this Agreement with respect to. such rentals. B-7 "Telephone Revenues" shall mean all revenues, receipts and income derived directly from the Hotel's telephones. "Term" shall mean the period described in Section 3.1. "Term Sheet" shall mean the list of terms which are specific to this Agreement as set forth in Article I above. "Total Revenue" shall mean (1) all income and proceeds of sales of every kind (whether in cash or on credit) resulting from the operation of the Hotel and all of the facilities therein including, without limitation, all amounts received from tenants (other than costs reimbursed to Owner or Operator by commercial tenants of the Hotel), transient guests, patrons of Hotel facilities, lessees, licensees and concessionaires and other persons occupying space at the Hotel and/or rendering services to the Hotel guests, (2) all income from catering operations (whether conducted inside or outside of the Hotel), and (3) the proceeds of use and occupancy (and/or business interruption) insurance actually received by Operator or Owner with respect to the operation of the Hotel (after deduction from said proceeds of all necessary expenses incurred in the adjustment or collection thereof); provided, however, that the term "Total Revenue" shall not include (a) gross receipts of any lessee, licensee, concessionaire or other person occupying space in the Hotel, (b) payments received at a Hotel for hotel accommodations, goods or services to be provided at other hotels, although arranged by, for or on behalf of Operator, (c) gratuities paid over to Hotel employees, (d) state and municipal excise, sales and use taxes collected from patrons or guests of a Hotel as a part of or based upon the sales price of any goods or services, but does include any business tax or similar imposition of tax which is based on revenues and not collected from the guest, (e) condemnation awards (other than awards for temporary use), (f) any credits or refunds made to customers, guests or patrons, (g) any sums and credits received by Owner for lost or damaged merchandise, (h) proceeds from the sale or other disposition of a Hotel, (i) any interest paid with respect to any Hotel bank accounts, ~) any fire and extended coverage insurance proceeds, and (k) any proceeds of financing or refinancing of a Hotel. "Uniform System" shall mean the "Uniform System of Accounts for the Lodging Industry" (9th Revised Edition, 1996) as adopted by the American Hotel and Motel Association, with such exceptions as may be required by the provisions of this Agreement, as such Uniform System shall be modified from time to time. "WARN Act" shall mean the Worker's Adjustment and Retraining Notification Act, 29 U.S.C. Sections. 2101 to 2109, as amended from time to time, together with any rules and regulations issued pursuant thereto. B-8 EXHIBIT C INSURANCE REQUIREMENTS A. LIABILITY INSURANCE 1. Operator shall, at all times during the Operating Term, and at Owner's cost and expense: (i) maintain Commercial General Liability insurance, including products and completed operations, bodily injury and property damage liability, liquor liability, innkeepers' liability, contractual liability, independent contractors' liability, and personal and advertising injury liability of not less than $100,000,000 (if available) against claims occurring on, in, or about the Hotel, or any elevator or escalator therein, and on, in, or about the adjoining streets and passageways thereof, or otherwise, arising under this Agreement; (ii) maintain business automobile liability insurance, including coverage for the operation of owned, leased, hired and non-owned vehicles; (iii) maintain appropriate worker's compensation and employer's liability insurance as shall be required by and be in conformance with the laws of the state of in which the Hotel is located for all Hotel Personnel; and (iv) maintain such other insurance (including fidelity/crime coverage and employment practices liability) against other insurable risks not covered under subsections (a) and (b) which, at the time, are commonly insured against by owners of hotel premises in the Hotel's market area, with due regard being or to be given to the then existing circumstances and to the type, construction, design, use, and occupancy of the Hotel. B. PROPERTY/CASUALTY INSURANCE 1. Operator shall, at all times during the Operating Term, and at Owner's cost and expense, keep the Hotel building, and its contents, insured for the benefit of the Owner and Operator: (a) against "all risks" of physical loss or damage for the full replacement value thereof, without exclusion for loss or damage by fire, lightning, windstorm, hail, explosion, riot, civil commotion, aircraft, vehicles, smoke, vandalism, malicious mischief, sprinkler leakage, volcanic action, breakage of glass, falling objects, weight of ice and snow or sleet, water damage, weather conditions, or collapse; (b) against such other "all risk" perils, including earthquake and flood, commonly insured against by a Difference in Conditions insurance policy in such amounts as are obtainable from time to time, but in no event in amounts less than those required under the terms of the Mortgage(s); (c) on equipment for the supply or control of heat, light, power, hot water, cold water, gas, refrigeration, or air conditioning against direct or consequential loss or damage, as customarily covered under a Boiler and Machinery policy with a comprehensive definition of insured equipment, in the amount of at least Five Million Dollars ($5,000,000) or amounts as the Owner or Operator may from time to time reasonably require; (d) for such other risks (including loss to fine arts, accounts receivable, valuable papers and records, electronic media and records, and shipments in transit) that, at the time, are commonly insured against by owners of hotel premises in the Hotel's market area, with due regard being or to be given to the then existing circumstances and to the type, construction, design, use, and occupancy of the Hotel; and C-1 (e) against Business Interruption and Extra Expense resulting from loss or damage from the hazards specified above, to owned or non-owned property, which prevents normal operations from continuing; such insurance shall be written on an Actual Loss Sustained basis in an amount equal to at least one (1) year's expected net income before income tax (calculated according to Generally Accepted Accounting Principles), plus continuing normal operating expenses, including the Management Fee, the Centralized Services Fees and Charges, salaries and related payroll items, and all other Reimbursable Expenses, that necessarily continue, notwithstanding the business interruption; the insurance shall also provide Extended Period of Indemnity provisions for payment of loss until normal operations resume, but in any event for a period of not less than one hundred eighty (180) days after business operations have resumed. 2. "Full replacement value," as used herein, means the cost of repairing, replacing, or reinstating, including demolishing, any item of property, with materials of like kind and quality in compliance with, and without, an exclusion pertaining to application of, any law or building ordinance regulating repair or construction at the time of loss, and without deduction for physical, accounting, or any other depreciation, in an amount sufficient to meet the requirements of any applicable co-insurance clause and to prevent the Owner from being a co-insurer. C-2 EXHIBIT D CENTRALIZED SERVICES - DESCRIPTION OF SERVICES; CURRENT FEES AND CHARGES EX-10.10 7 d95331ex10-10.txt SAVINGS AND INVESTMENT PLAN EXHIBIT 10.10 NONSTANDARDIZED ADOPTION AGREEMENT PROTOTYPE CASH OR DEFERRED PROFIT-SHARING PLAN SPONSORED BY DIVERSIFIED INVESTMENT ADVISORS INC. The Employer named below hereby establishes a Cash or Deferred Profit-Sharing Plan for eligible Employees as provided in this Adoption Agreement and the accompanying Basic Plan Document #01. I. EMPLOYER INFORMATION IF MORE THAN ONE EMPLOYER IS ADOPTING THE PLAN, COMPLETE THIS SECTION BASED ON THE LEAD EMPLOYER. ADDITIONAL EMPLOYERS WHO ARE MEMBERS OF THE SAME CONTROLLED GROUP OR AFFILIATED SERVICE GROUP MAY ADOPT THIS PLAN BY COMPLETING AND EXECUTING SECTION XX(A) OF THE ADOPTION AGREEMENT. A. NAME AND ADDRESS: FelCor Lodging Trust, Inc. -------------------------------------------------------------- 545 East John Carpenter Freeway -------------------------------------------------------------- Suite 1300 -------------------------------------------------------------- Irving, TX 75062-3933 -------------------------------------------------------------- B. TELEPHONE NUMBER: 972-444-4900 C. EMPLOYER'S TAX ID NUMBER: 75-2541756 D. FORM OF BUSINESS: [ ] 1. Sole Proprietor [ ] 4. S Corporation [ ] 2. Partnership [ ] 5. Limited Liability Company [X] 3. Corporation [ ] 6. --------- E. IS THE EMPLOYER PART OF A CONTROLLED GROUP? [X] YES [ ] NO PART OF AN AFFILIATED SERVICE GROUP? [ ] YES [X] NO F. NAME OF PLAN: FelCor Lodging Trust Incorporated Savings and Retirement Plan ------------------------------------------------ G. THREE DIGIT PLAN NUMBER: 001 --- H. EMPLOYER'S TAX YEAR END: DECEMBER 31 ------------ I. EMPLOYER'S BUSINESS CODE: 721110 ------ 1 II. EFFECTIVE DATE A. NEW PLAN: This is a new Plan having an Effective Date of _____. B. AMENDMENT OR RESTATEMENT: This is an amendment or restatement of an existing Plan. The initial Effective Date of the Plan was _______. The Effective Date of this amendment or restatement is _____. C. AMENDMENT OR RESTATEMENT FOR GUST: This is an amendment or restatement of an existing Plan to comply with GUST [The Uruguay Round Agreements, Pub. L. 103-465 (GATT); The Uniformed Services Employment and Reemployment Rights Act of 1994, Pub. L. 105-34 (USERRA); The Small Business Job Protection Act of 1996, Pub. L. 104-188 (SBJPA) [including Section 414(u) of the Internal Revenue Code]; The Tax Reform Act of 1997 (TRA'97)]. The initial Effective Date of the Plan was January 1, 1995. Except as provided for in the Plan, the Effective Date of this amendment or restatement is June 1, 2001. (The restatement date should be no earlier than the first day of the current Plan Year. The Plan contains appropriate retroactive Effective Dates with respect to provisions of GUST.) D. EFFECTIVE DATE FOR ELECTIVE DEFERRALS: If different from above, the Effective Date for the Elective Deferral provisions shall be ____. PURSUANT TO CODE SECTION 411(d)(6) AND THE REGULATIONS ISSUED THEREUNDER, AN EMPLOYER CANNOT REDUCE, ELIMINATE OR MAKE SUBJECT TO EMPLOYER DISCRETION ANY CODE SECTION 411(d)(6) PROTECTED BENEFIT. WHERE THIS PLAN DOCUMENT IS BEING ADOPTED TO AMEND ANOTHER PLAN THAT CONTAINS A PROTECTED BENEFIT NOT PROVIDED FOR IN THE BASIC PLAN DOCUMENT #01, THE EMPLOYER MAY COMPLETE SCHEDULE A AS AN ADDENDUM TO THIS ADOPTION AGREEMENT. SCHEDULE A DESCRIBES SUCH PROTECTED BENEFITS AND SHALL BECOME PART OF THIS PLAN. IF A PRIOR PLAN DOCUMENT CONTAINS A PLAN FEATURE NOT PROVIDED FOR IN THE BASIC PLAN DOCUMENT #01, THE EMPLOYER MAY ATTACH SCHEDULE B DESCRIBING SUCH FEATURE. PROVISIONS LISTED ON SCHEDULE B ARE NOT COVERED BY THE IRS OPINION LETTER ISSUED WITH RESPECT TO THE BASIC PLAN DOCUMENT #01. III. DEFINITIONS A. "COMPENSATION" Select the definition of Compensation, the Compensation Computation Period, any Compensation Dollar Limitation and Exclusions from Compensation for each Contribution Type from the options listed below. Enter the letter of the option selected on the lines provided below. Leave the line blank if no election needs to be made. 2
COMPENSATION EMPLOYER COMPENSATION COMPUTATION COMPENSATION CONTRIBUTION TYPE DEFINITION PERIOD DOLLAR LIMITATION EXCLUSIONS - ----------------- ------------ ------------ ----------------- ---------- All Contributions d a $ d,g ------------ ------------ ------ ---------- Discretionary $ ------------ ------------ ------ ---------- Non-Safe Harbor Match Formula 1 $ ------------ ------------ ------ ---------- QNEC/QMAC $ ------------ ------------ ------ ---------- Elective Deferrals $ ------------ ------------ ------ ---------- Voluntary After-Tax $ ------------ ------------ ------ ---------- Required After-Tax $ ------------ ------------ ------ ---------- Safe Harbor $ ------------ ------------ ------ ---------- Non-Safe Harbor Match Formula 2 $ ------------ ------------ ------ ----------
ANTIDISCRIMINATION COMPENSATION COMPENSATION COMPENSATION TESTS DEFINITION COMPUTATION PERIOD DOLLAR LIMITATION - ------------------ ------------ ------------------ ----------------- ADP/ACP f a $ ------------ ------------------ -----------------
COMPENSATION COMPUTATION PERIODS MUST BE CONSISTENT FOR ALL CONTRIBUTION TYPES, EXCEPT DISCRETIONARY. IF DIFFERENT COMPUTATION PERIODS ARE SELECTED, THE SELECTION FOR ADP/ACP TESTING WILL BE DEEMED TO BE THE ELECTION FOR ALL PURPOSES, EXCEPT FOR DISCRETIONARY CONTRIBUTIONS. 1. Compensation Definition: a. Code Section 3401(a) - W-2 Compensation subject to income tax withholding at the source. b. Code Section 3401(a) - W-2 Compensation subject to income tax withholding at the source, with all pre-tax contributions added. c. Code Section 6041/6051 - Income reportable on Form W-2. d. Code Section 6041/6051 - Income reportable on Form W-2, with all pre-tax contributions added. e. Code Section 415 - All income received for services performed for the Employer. f. Code Section 415 - All income received for services performed for the Employer, with all pre-tax contributions added. The Code Section 415 definition will always apply with respect to sole proprietors and partners. 2. Compensation Computation Period: a. Compensation paid during a Plan Year while a Participant. b. Compensation paid during the entire Plan Year. c. Compensation paid during the Employer's fiscal year. d. Compensation paid during the calendar year. 3 3. Compensation dollar limitation: The dollar limitation section does not need to be completed unless Compensation of less than the Code Section 401(a)(17) limit of $160,000 (as indexed) is to be used. 4. Exclusions from Compensation (non-integrated plans only): a. There will be no exclusions from Compensation under the Plan. b. Any amount included in a Participant's gross income due to the application of Code Sections 125, 402(h)(1)(B), 402(e) or 403(b) will be excluded from the definition of Compensation under the Plan. c. Overtime d. Bonuses e. Commissions f. Exclusion applies only to Participants who are Highly Compensated Employees. g. Other: car allowances, housing allowances, relocation pay, amounts paid in the form of a non-qualified profit sharing distribution arrangement, or other allowances as designated on a non-discriminatory basis by the employer. B. "DISABILITY" [X] 1. As defined in paragraph 1.26 of the Basic Plan Document #01. [ ] 2. Disability will be defined as: _____. C. "HIGHLY COMPENSATED EMPLOYEES - TOP PAID GROUP ELECTION" Complete only if this is a new Plan. For amended and restated Plans, complete Schedule C outlining the preamendment operation of the Plan. IF THE FOLLOWING ELECTIONS ARE MADE, SUCH ELECTIONS SHALL APPLY TO ALL PLANS MAINTAINED BY THE EMPLOYER. [ ] 1. Top-Paid Group election: In determining who is a Highly Compensated Employee, the Employer makes the Top-Paid Group election. The effect of this election is that an Employee (who is not a 5% owner at any time during the determination year or the look-back year) who earned more than $80,000, as indexed for the look-back year, is a Highly Compensated Employee if the Employee was in the Top-Paid Group for the look-back year. This election is applicable for the Plan Year in which this Plan is effective. [ ] 2. Calendar Year Data election: If the Plan Year is not the calendar year, the prior year computation period for purposes of determining if an Employee earned more than $80,000, as indexed, is the calendar year beginning in the prior Plan Year. This election is applicable for the Plan Year in which this Plan is effective. D. "HOUR OF SERVICE" Hours shall be determined by the method selected below. Only one method may be selected. The method selected shall be applied to all Employees covered under the Plan as follows: [ ] 1. Not applicable. For all purposes under the Plan, a Year of Service (Period of Service) is defined as Elapsed Time. [X] 2. On the basis of actual hours for which an Employee is paid or entitled to payment. [ ] 3. On the basis of days worked. An Employee shall be credited with ten (10) Hours of Service if the Employee would be credited with at least one (1) Hour of Service during the day. [ ] 4. On the basis of weeks worked. An Employee shall be credited with forty-five (45) Hours of Service if the Employee would be credited with at least one (1) Hour of Service during the week. 4 [ ] 5. On the basis of semi-monthly payroll periods. An Employee shall be credited with ninety-five (95) Hours of Service if the Employee would be credited with at least one (1) Hour of Service during the semi-monthly payroll period. [ ] 6. On the basis of months worked. An Employee shall be credited with one-hundred-ninety (190) Hours of Service if the Employee would be credited with at least one (1) Hour of Service during the month. E. "INTEGRATION LEVEL" [X] 1. Not applicable. The Plan's allocation formula is not integrated with Social Security. [ ] 2. The maximum earnings considered wages for the Plan Year for Social Security withholding purposes without regard to Medicare. [ ] 3. _____% (not more than 100%) of the amount considered wages for such Plan Year for Social Security withholding purposes without regard to Medicare. [ ] 4. $______, provided that such amount is not in excess of the amount determined under paragraph (E)(2) above. [ ] 5. One dollar over 80% of the amount considered wages for such Plan Year for Social Security withholding purposes without regard to Medicare. [ ] 6. 20% of the maximum earnings considered wages for such Plan Year for Social Security withholding purposes without regard to Medicare. F. "LIMITATION YEAR" Unless elected otherwise below, the Limitation Year shall be the Plan Year. The 12-consecutive month period commencing on and ending on ___________ and ending on ___________. If applicable, there will be a short Limitation Year commencing on ___________________ and ending on __________________. Thereafter, the Limitation Year shall end on the date specified above. G. "NET PROFIT" [X] 1. Not applicable. Employer contributions to the Plan are not conditioned on profits. [ ] 2. Net Profits are required for some or all Employer contributions and are defined as follows: [ ] a. As defined in paragraph 1.61 of the Basic Plan Document #01. [ ] b. Net Profits shall be defined as: . [ ] 3. Net Profits are not required for the following contributions: [ ] a. Employer Non-Safe Harbor Match Formula 1. [ ] b. Employer Non-Safe Harbor Match Formula 2. [ ] c. Employer QNEC and QMAC. [ ] d. Employer Discretionary. ELECTIVE DEFERRALS CAN ALWAYS BE CONTRIBUTED REGARDLESS OF PROFITS. TOP-HEAVY MINIMUMS ARE REQUIRED REGARDLESS OF PROFITS. H. "PLAN YEAR" The 12-consecutive month period commencing on January 1 and ending on December 31. If applicable, there will be a short Plan Year commencing on __________ and ending on _____________. Thereafter, the Plan Year shall end on the date specified above. 5 I. "QDRO PAYMENT DATE" [X] 1. The date the QDRO is determined to be qualified. [ ] 2. The statutory age 50 requirement applies for purposes of making distribution to an alternate payee under the provisions of a QDRO. J. "QUALIFIED JOINT AND SURVIVOR ANNUITY" [X] 1. Not applicable. The Plan is not subject to Qualified Joint and Survivor Annuity rules. The Safe Harbor provisions of paragraph 8.7 of the Basic Plan Document #01 apply. The normal form of payment is a lump sum, and annuities are not offered under the Plan. [ ] 2. The normal form of payment is a lump sum. The Plan does provide for annuities as an optional form of payment at Section XVIII(C) of the Adoption Agreement. Joint and Survivor rules are avoided unless the Participant elects to receive his or her distribution in the form of an annuity. [ ] 3. The Joint and Survivor Annuity Rules are applicable and the survivor annuity will be _____% (50%, 66-2/3%, 75% or 100%) of the annuity payable during the lives of the Participant and his or her Spouse. If no selection is specified, 50% shall be deemed elected. K. "QUALIFIED PRERETIREMENT SURVIVOR ANNUITY" DO NOT COMPLETE THIS SECTION IF PARAGRAPH (J)(1) WAS ELECTED. [ ] 1. The Qualified Preretirement Survivor Annuity shall be 100% of the Participant's Vested Account Balance in the Plan as of the date of the Participant's death. [ ] 2. The Qualified Preretirement Survivor Annuity shall be 50% of the Participant's Vested Account Balance in the Plan as of the date of the Participant's death. IF NO SELECTION IS MADE, THE QUALIFIED PRERETIREMENT SURVIVOR ANNUITY SHALL BE 50%. L. "VALUATION OF PLAN ASSETS" The assets of the Plan shall be valued as specified in the Basic Plan Document #01 and on the following Valuation Date(s): [ ] 1. There are no other mandatory Valuation Dates. [X] 2. The Valuation Date for all contributions shall be the same as set forth below. [ ] 3. The Valuation Dates are applicable for the contribution type specified below: CONTRIBUTION TYPE VALUATION DATE ----------------- -------------- All Contributions a -------------- Discretionary -------------- Non-Safe Harbor Match Formula 1 -------------- Non-Safe Harbor Match Formula 2 -------------- QNEC -------------- QMAC -------------- Elective Deferrals -------------- Voluntary After-tax -------------- Required After-tax -------------- Safe Harbor -------------- a. Daily valued. b. The last day of the month. c. The last day of each quarter in the Plan Year. d. The last day of each semi-annual period in the Plan Year. e. At the discretion of the Plan Administrator. f. Other: _________. 6 IV. ELIGIBILITY REQUIREMENTS Complete the following using the eligibility requirements as specified for each contribution type. To become a Participant in the Plan, an Employee must satisfy the following eligibility requirements.
ELIGIBILITY MINIMUM SERVICE CLASS COMPUTATION ENTRY CONTRIBUTION TYPE AGE REQUIREMENT EXCLUSIONS PERIOD DATE - ----------------- ------- ----------- ---------- ----------- ----- All Contributions 1 2 1,6,8 1 1 ------- ----------- ---------- ----------- ----- Elective Deferrals ------- ----------- ---------- ----------- ----- Voluntary After-tax ------- ----------- ---------- ----------- ----- Required After-tax ------- ----------- ---------- ----------- ----- Non-Safe Harbor Match Formula 1 ------- ----------- ---------- ----------- ----- Employer Discretionary ------- ----------- ---------- ----------- ----- QNECs ------- ----------- ---------- ----------- ----- QMACs ------- ----------- ---------- ----------- ----- Safe Harbor* ------- ----------- ---------- ----------- ----- Non-Safe Harbor Match Formula 2 ------- ----------- ---------- ----------- -----
* IF ANY AGE OR SERVICE REQUIREMENT SELECTED IS MORE RESTRICTIVE THAN THAT WHICH IS IMPOSED ON ANY EMPLOYEE CONTRIBUTION, THAT GROUP OF EMPLOYEES WILL BE SUBJECT TO THE ADP AND/OR ACP TESTING AS PRESCRIBED UNDER IRS NOTICES 98-52, 2000-3 AND ANY APPLICABLE IRS REGULATIONS. A. Age: 1. No age requirement. 2. Minimum age is ____ (may not be greater than 21). B. Service: 1. No Service requirement. 2. 3 months of Service (insert number of months applicable to the specified contribution type). 3. 1 Year of Service or Period of Service. 7 4. 2 Years of Service or Periods of Service. 5. 1 Expected Year of Service. May enter after six (6) months of actual Service. 6. 1 Expected Year of Service. May enter after ____ months of actual Service [must be less than one (1) Year]. 7. Completion of ____ Hours of Service within the ____ month(s) time period following an Employee's commencement of employment. NO MORE THAN 83 1/3 HOURS OF SERVICE MAY BE REQUIRED DURING EACH SUCH MONTH; PROVIDED, HOWEVER, THAT HE OR SHE SHALL BECOME A PARTICIPANT NO LATER THAN UPON THE COMPLETION OF 1,000 HOURS OF SERVICE WITHIN A 12 CONSECUTIVE MONTH PERIOD AND THE ATTAINMENT OF THE MINIMUM AGE REQUIREMENT. The maximum Service requirement for Elective Deferrals and Top-Heavy minimum contributions is 1 year. For all other contributions, the maximum is 2 years. If a Service requirement greater than 1 year is selected, Participants must be 100% vested in that contribution. A Year of Service for eligibility purposes is defined as follows (choose one): DO NOT ENTER THIS DEFINITION IN THE TABLE ABOVE. [ ] 8. Not applicable. There is no Service requirement. [X] 9. Not applicable. The Plan is using Expected Year of Service or has a Service requirement of less than one year. [ ] 10. Hours of Service method. A Year of Service will be credited upon completion of ____ Hours of Service. A Year of Service for eligibility purposes may not be less than 1 Hour of Service nor greater than 1,000 hours by operation of law. If left blank, the Plan will use 1,000 hours. [ ] 11. Elapsed Time method. C. Employee Class Exclusions: 1. Employees included in a unit of Employees covered by a collective bargaining agreement between the Employer and Employee Representatives, if benefits were the subject of good faith bargaining. 2. Employees who are non-resident aliens [within the meaning of Code Section 7701(b)(1)(B)] who receive no Earned Income [within the meaning of Code Section 911(d)(2)] from the Employer which constitutes income from sources within the United States [within the meaning of Code Section 861(a)(3)]. 3. Employees compensated on an hourly basis. 4. Employees compensated on a salaried basis. 5. Employees compensated on a commission basis. 6. Leased Employees. 7. Highly Compensated Employees. 8. The Plan shall exclude from participation any nondiscriminatory classification of Employees determined as follows: Independent contractors, college interns, seasonal employees. D. Eligibility Computation Period: The initial Eligibility Computation Period shall commence on the date on which an Employee first performs an Hour of Service and the first anniversary thereof. Each subsequent Computation Period shall commence on: 1. Not applicable. The Plan has a Service requirement of less than one (1) year or uses the Elapsed Time method to determine eligibility. 8 2. The anniversary of the Employee's employment date and each subsequent 12-consecutive month period thereafter. 3. The first day of the Plan Year following the Employee's employment date and each subsequent 12-consecutive month period thereafter. E. Entry Date Options: 1. The first day of the month coinciding with or next following the date on which an Employee meets the eligibility requirements. 2. The first day of the payroll period coinciding with or next following the date on which an Employee meets the eligibility requirements. 3. The earlier of the first day of the Plan Year, or the first day of the fourth, seventh or tenth month of the Plan Year coinciding with or next following the date on which an Employee meets the eligibility requirements. 4. The earlier of the first day of the Plan Year or the first day of the seventh month of the Plan Year coinciding with or next following the date on which an Employee meets the eligibility requirements. 5. The first day of the Plan Year following the date on which the Employee meets the eligibility requirements. If this election is made, the Service waiting period cannot be greater than one-half year and the minimum age requirement may not be greater than age 20 1/2. 6. The first day of the Plan Year nearest the date on which an Employee meets the eligibility requirements. THIS OPTION CAN ONLY BE SELECTED FOR EMPLOYER RELATED CONTRIBUTIONS. 7. The first day of the Plan Year during which the Employee meets the eligibility requirements. THIS OPTION CAN ONLY BE SELECTED FOR EMPLOYER RELATED CONTRIBUTIONS. 8. The Employee's date of hire. 9. Other; specify Entry Date: ________________. F. Employees on Effective Date: [X] 1. All Employees will be required to satisfy both the age and Service requirements specified above. [ ] 2. Employees employed on the Plan's Effective Date do not have to satisfy the age requirement specified above. [ ] 3. Employees employed on the Plan's Effective Date do not have to satisfy the Service requirement specified above. V. RETIREMENT PROVISIONS A. NORMAL RETIREMENT: [X] 1. Normal Retirement Age shall be age 65 (not to exceed 65). [ ] 2. Normal Retirement Age shall be the later of attaining age ____ (not to exceed age 65) and/or the ____ (not to exceed the 5th) anniversary of the first day of the first Plan Year in which the Participant commenced participation in the Plan. [X] 3. The Normal Retirement Date shall be: [X] a. as of the date the Participant attains Normal Retirement Age. [ ] b. the first day of the month next following the Participant's attainment of Normal Retirement Age. 9 B. EARLY RETIREMENT: [X] 1. Not Applicable. [ ] 2. The Plan shall have an Early Retirement Age of ____ (not less than age 55) and completion of ____ Years of Service. [ ] 3. The Early Retirement Date shall be: [ ] a. as of the date the Participant attains Early Retirement Age. [ ] b. the first day of the month next following the Participant's attainment of Early Retirement Age. VI. EMPLOYEE CONTRIBUTIONS [X] A. ELECTIVE DEFERRALS: [ ] 1. Up to ____%. [X] 2. Participants shall be permitted to make Elective Deferrals in any amount from a minimum of 1% to a maximum of 20% of their Compensation or a flat dollar amount from a minimum of $____ to a maximum of $____, not to exceed ____% or $____ of their Compensation. [ ] 3. The maximum dollar limitation allowable under the law. B. BONUS OPTION: [X] 1. Not applicable. Bonuses are not included in the definition of Compensation. [ ] 2. Bonuses paid by the Employer ARE included in the definition of Compensation, and the Employer permits a Participant to amend their deferral election to defer to the Plan, an amount not to exceed ____% or $____ of any bonus received by the Participant for any Plan Year. IF THIS OPTION IS NOT ELECTED, THE PARTICIPANT'S NORMAL DEFERRAL ELECTION PERCENTAGE OR DOLLAR AMOUNT WILL AUTOMATICALLY BE WITHHELD FROM THE BONUS. [ ] C. AUTOMATIC ENROLLMENT: The Employer elects the Automatic Enrollment provisions as follows: [ ] 1. NEW EMPLOYEES. Employees who have not met the eligibility requirements shall have Elective Deferrals withheld in the amount of ____% of Compensation or $____ of Compensation upon entering the Plan. [ ] 2. CURRENT PARTICIPANTS. Current Participants who are deferring at a percentage less than the amount selected herein shall have Elective Deferrals withheld in the amount of ____% of Compensation or $____ of Compensation. [ ] 3. CURRENT EMPLOYEES. Employees who are eligible to participate but are not deferring shall have Elective Deferrals withheld in the amount of ____% of Compensation or $____ of Compensation upon entering the Plan. Employees and Participants shall have the right to amend the stated automatic Elective Deferral percentage or receive cash in lieu of deferral into the Plan. D. VOLUNTARY AFTER-TAX CONTRIBUTIONS: [X] 1. The Plan does not permit Voluntary After-tax Contributions. [ ] 2. Participants may make Voluntary After-tax Contributions in any amount from a minimum of ____% to a maximum of ____% of their Compensation or a flat dollar amount from a minimum of $____ to a maximum of $____. IF RECHARACTERIZATION OF ELECTIVE DEFERRALS HAS BEEN ELECTED AT SECTION XII(D) IN THIS ADOPTION AGREEMENT, VOLUNTARY AFTER-TAX CONTRIBUTIONS MUST BE PERMITTED IN THE PLAN BY COMPLETING THE SECTION ABOVE. 10 E. REQUIRED AFTER-TAX CONTRIBUTIONS (THRIFT SAVINGS PLANS ONLY): [X] 1. The Plan does not permit Required After-tax Contributions. [ ] 2. Participants shall be required to make Required After-tax contributions as follows: [ ] a. ____% of Compensation. [ ] b. A percentage determined by the Employee. F. ROLLOVER CONTRIBUTIONS: [ ] 1. The Plan does not accept Rollover Contributions. [X] 2. Participants may make Rollover Contributions after meeting the eligibility requirements for participation in the Plan. [ ] 3. Employees may make Rollover Contributions prior to meeting the eligibility requirements for participation in the Plan. G. ELECTIVE PLAN TO PLAN TRANSFER CONTRIBUTIONS: [ ] 1. The Plan does not accept Transfer Contributions. [X] 2. Participants may make Transfer Contributions after meeting the eligibility requirements for participation in the Plan. [ ] 3. Employees may make Transfer Contributions prior to meeting the eligibility requirements for participation in the Plan. H. CHANGES TO ELECTIVE DEFERRALS: Participants shall be permitted to terminate their Elective Deferrals at any time upon proper and timely notice to the Employer. Modifications to Participants' Elective Deferrals will become effective on a prospective basis as provided for below: [X] 1. On a daily basis. [ ] 2. Upon ____ (not to exceed 90) days notice to the Plan Administrator. [ ] 3. On the first day of each quarter. [ ] 4. On the first day of the next month. [ ] 5. The beginning of the next payroll period. [ ] 6. Other: ____. I. REINSTATEMENT OF ELECTIVE DEFERRALS: Participants who terminate their Elective Deferrals shall be permitted to reinstate their Elective Deferrals on a prospective basis as provided for below: [X] 1. On a daily basis. [ ] 2. Upon ____ (not to exceed 90) days notice to the Plan Administrator. [ ] 3. On the first day of each quarter. [ ] 4. On the first day of the next month. [ ] 5. The beginning of the next payroll period. [ ] 6. Other: ____. 11 VII. SAFE HARBOR PLAN PROVISIONS [ ] The Employer elects to comply with the Safe Harbor Cash or Deferred Arrangement provisions of Article XI of Basic Plan Document #01 and elects one of the following contribution formulas: A. SAFE HARBOR TESTS: [ ] 1. Only the ADP and not the ACP Test Safe Harbor provisions are applicable. [ ] 2. Both the ADP and ACP Test Safe Harbor provisions are applicable. If both ADP and ACP provisions are applicable: a. No additional Matching Contributions will be made in any Plan Year in which the Safe Harbor provisions are used. b. The Employer may make Matching Contributions in addition to any Safe Harbor Matching Contributions elected below. (Complete provisions in Article VIII regarding Matching Contributions that will be made in addition to those Safe Harbor Matching Contributions made below.) [ ] B. DESIGNATION OF ALTERNATE PLAN TO RECEIVE SAFE HARBOR CONTRIBUTION: If the Safe Harbor Contribution, as elected below, is not being made to this Plan, the name of the other plan that will receive the Safe Harbor Contribution is: ____. [ ] C. BASIC MATCHING CONTRIBUTION FORMULA: Matching Contributions will be made on behalf of Participants in an amount equal to 100% of the amount of the Eligible Participant's Elective Deferrals that do not exceed 3% of the Participant's Compensation and 50% of the amount of the Participant's Elective Deferrals that exceed 3% of the Participant's Compensation but that do not exceed 5% of the Participant's Compensation. [ ] D. ENHANCED MATCHING CONTRIBUTION FORMULA: [ ] Matching Contributions will be made in an amount equal to the sum of: [ ] 1. ____% (may not be less than 100%) of the Participant's Elective Deferrals that do not exceed ____% (if more than 6% or if left blank, the ACP Test will apply) of the Participant's Compensation, plus 2. ____% of the Participant's Elective Deferrals that exceed ____% of the Participant's Compensation but do not exceed ____% (if more than 6% or if left blank the ACP Test will apply) of the Participant's Compensation. This section must be completed so that at any rate of Elective Deferrals, the Matching Contribution is at least equal to the Matching Contribution received if the Employer used the Basic Matching Contribution Formula. The rate of match cannot increase as Elective Deferrals increase. If an additional discretionary match is made, it may not exceed 4% of the Participant's Compensation. [ ] E. GUARANTEED NON-ELECTIVE CONTRIBUTION FORMULA: The Employer shall make a Non-Elective Contribution equal to ____% (not less than 3%) of the Compensation of each Eligible Participant. [ ] F. FLEXIBLE NON-ELECTIVE CONTRIBUTION FORMULA: This provision provides the Employer with the ability to amend the Plan to comply with the Safe Harbor provisions during the Plan Year. To provide such option, the Employer must amend the Plan and indicate the Safe Harbor Contribution to be made for the Plan Year on Schedule D. Such election must be made no later than 30 days before the last day of the Plan Year for which such 12 election will apply. To use this option the Employer must provide a notice that it is considering making such a contribution not later that 30 days prior to the beginning of the Plan Year and confirming that it is making such contribution not later than 30 days prior to the end of the Plan Year. ADDITIONAL CONTRIBUTIONS MAY BE MADE TO THE PLAN (SEE SECTION VIII); REFER TO IRS NOTICES 98-52 AND 2000-3. [ ] G. LIMITATIONS ON SAFE HARBOR MATCHING CONTRIBUTIONS: If a Safe Harbor Matching Contribution is made to the Plan: [ ] 1. The Employer will annualize Safe Harbor Matching Contributions. [ ] 2. The Employer will not annualize Safe Harbor Matching Contributions and elects to match actual Elective Deferrals made: [ ] a. on a payroll basis. [ ] b. on a monthly basis. [ ] c. on a Plan Year quarterly basis. If no election is made, the payroll period method will be used. If one of the Matching Contribution calculation periods at Section VII(G)(2) above is selected, Matching Contributions must be deposited to the Plan, not later than the last day of the calendar quarter next following the quarter following to which they relate. IF THE SAFE HARBOR PLAN PROVISIONS ARE ELECTED, THE ANTIDISCRIMINATION TESTS AT ARTICLE XI OF THE BASIC PLAN DOCUMENT #01 ARE NOT APPLICABLE. SAFE HARBOR CONTRIBUTIONS MADE ARE SUBJECT TO THE WITHDRAWAL RESTRICTIONS OF CODE SECTION 401(k)(2)(B) AND TREASURY REGULATIONS SECTION 1.401(k)-1(d); SUCH CONTRIBUTIONS (AND EARNINGS THEREON) MUST NOT BE DISTRIBUTABLE EARLIER THAN SEPARATION FROM SERVICE, DEATH, DISABILITY, AN EVENT DESCRIBED IN CODE SECTION 401(k)(10), OR IN THE CASE OF A PROFIT-SHARING OR STOCK BONUS PLAN, THE ATTAINMENT OF AGE 59 1/2. SAFE HARBOR CONTRIBUTIONS ARE NOT AVAILABLE FOR HARDSHIP WITHDRAWALS. THE ACP TEST SAFE HARBOR IS AUTOMATICALLY SATISFIED IF THE ONLY MATCHING CONTRIBUTION TO THE PLAN IS EITHER A BASIC MATCHING CONTRIBUTION OR AN ENHANCED MATCHING CONTRIBUTION THAT DOES NOT PROVIDE A MATCH ON ELECTIVE DEFERRALS IN EXCESS OF 6% OF COMPENSATION. EMPLOYEES ELIGIBLE TO MAKE ELECTIVE DEFERRALS TO THIS PLAN MUST BE ELIGIBLE TO RECEIVE THE SAFE HARBOR CONTRIBUTION IN THE PLAN LISTED ABOVE, TO THE EXTENT REQUIRED BY IRS NOTICES 98-2 AND 2000-3. FOR PLANS THAT ALLOW AFTER-TAX CONTRIBUTIONS, THE ACP TEST IS APPLICABLE WITH REGARD TO SUCH CONTRIBUTIONS. VIII. EMPLOYER CONTRIBUTIONS The Employer shall make contributions to the Plan in accordance with the formula or formulas selected below. The Employer's contribution shall be subject to the limitations contained in Articles III and X. For this purpose, a contribution for a Plan Year shall be limited by Compensation earned in the Limitation Year which ends with or within such Plan Year. Do not complete this Section of the Adoption Agreement if the Plan only offers a Safe Harbor Contribution. A Plan that offers both a Safe Harbor Matching Contribution as well as an additional Matching Contribution which is specified below, must complete both Sections VII and VIII of the Adoption Agreement. 13 A. MATCHING EMPLOYER CONTRIBUTION: Select the Matching Contribution Formula, Computation Period and special Limitations for each contribution type from the options listed below. Enter the letter of the option(s) selected on the lines provided. Leave the line blank if no election is required.
NON-SAFE NON-SAFE HARBOR MATCHING HARBOR MATCHING TYPE OF MATCHING COMPUTATION MATCHING COMPUTATION CONTRIBUTION FORMULA 1 PERIOD LIMITATIONS FORMULA 2 PERIOD LIMITATIONS - ------------ --------- ----------- ----------- --------- ----------- ----------- Elective Deferrals c d --------- ----------- ----------- --------- ----------- ----------- Voluntary After-tax --------- ----------- ----------- --------- ----------- ----------- Required After-tax --------- ----------- ----------- --------- ----------- ----------- 403(b) Deferrals --------- ----------- ----------- --------- ----------- -----------
If any election is made with respect to "403(b) Deferrals" above, this Plan is used to fund any Employer Contributions to an existing 403(b) plan sponsored by the Employer. Name of corresponding 403(b) plan: _____. 1. MATCHING CONTRIBUTION FORMULAS: ELECTIVE DEFERRAL MATCHING CONTRIBUTION FORMULAS: a. PERCENTAGE OF DEFERRAL MATCH: The Employer shall contribute to each eligible Participant's account an amount equal to ____% of the Participant's Elective Deferrals up to a maximum of ____% or $____ of Compensation. b. UNIFORM DOLLAR MATCH: The Employer shall contribute to each eligible Participant's account $____ if the Participant contributes at least ____% or $____ of Compensation. The Employer's contribution will not exceed ____% of Compensation or $__________ for any Participant. c. DISCRETIONARY MATCH: The Employer's Matching Contribution shall be determined by the Employer with respect to each Plan Year. The Matching Contribution shall be contributed to each eligible Participant in accordance with the nondiscriminatory formula determined by the Employer. If this Plan is also utilizing a Safe Harbor Contribution, pursuant to Section VII of this Adoption Agreement, Discretionary Matching Contributions may not exceed 4% of Compensation. d. TIERED MATCH: The Employer shall contribute to each eligible Participant's account an amount equal to: ______% of the first _____% of the Participant's Compensation contributed, and ______% of the next _____% of the Participant's Compensation contributed, and ______% of the next _____% of the Participant's Compensation contributed. The Employer's contribution will not exceed ______% of Compensation, or $______for any Participant. THE PERCENTAGES SPECIFIED ABOVE MAY NOT INCREASE AS THE PERCENTAGE OF PARTICIPANT'S CONTRIBUTION INCREASES. 14 e. PERCENTAGE OF COMPENSATION MATCH: The Employer shall contribute to each eligible Participant's account _____% of Compensation if the eligible Participant contributes at least _____% of Compensation. The Employer's contribution will not exceed _____% of Compensation or $______for any Participant. f. PROPORTIONATE COMPENSATION MATCH: The Employer shall contribute to each eligible Participant who defers at least _____% of Compensation, an amount determined by multiplying such Employer Matching Contribution by a fraction, the numerator of which is the Participant's Compensation and the denominator of which is the Compensation of all Participants eligible to receive such an allocation. The Employer's contribution will not exceed _____% of Compensation or $______for any Participant. g. LENGTH OF SERVICE MATCH: The Employer shall make Matching Contributions equal to the formula determined under the following schedule:
Participant's Total Matching Years of Service Contribution Formula ------------------- -------------------- ----- ----- ----- ----- ----- -----
EACH SEPARATE MATCHING PERCENTAGE CONTRIBUTION MUST SATISFY CODE SECTION 401(a)(4) NONDISCRIMINATION REQUIREMENTS AND THE ACP TEST. VOLUNTARY AFTER-TAX MATCHING CONTRIBUTION FORMULAS: h. PERCENTAGE OF DEFERRAL MATCH: The Employer shall contribute to each eligible Participant's account an amount equal to _____% of the Participant's Voluntary After-tax Deferrals up to a maximum of _____% or $______ of Compensation. i. UNIFORM DOLLAR MATCH: The Employer shall contribute to each eligible Participant's account $______if the Participant contributes at least _____% or $______of Compensation. The Employer's contribution will not exceed _____% of Compensation or $______for any Participant. j. DISCRETIONARY MATCH: The Employer's Matching Contribution shall be determined by the Employer with respect to each Plan Year. The Matching Contribution shall be contributed to each eligible Participant in accordance with the nondiscriminatory formula determined by the Employer. REQUIRED AFTER-TAX MATCHING CONTRIBUTION FORMULAS: k. PERCENTAGE OF DEFERRAL MATCH: The Employer shall contribute to each eligible Participant's account an amount equal to _____% of the Participant's Required After-tax Deferrals up to a maximum of _____% or $______of Compensation. l. UNIFORM DOLLAR MATCH: The Employer shall contribute to each eligible Participant's account $______ if the Participant contributes at least _____% of Compensation. The Employer's contribution will not exceed _____% of Compensation or $______ for any Participant. m. DISCRETIONARY MATCH: The Employer's Matching Contribution shall be determined by the Employer with respect to each Plan Year. The Matching Contribution shall be contributed to each eligible Participant in accordance with the nondiscriminatory formula determined by the Employer. 15 IF THE MATCHING CONTRIBUTION FORMULA SELECTED BY THE EMPLOYER IS 100% VESTED AND MAY NOT BE DISTRIBUTED TO THE PARTICIPANT BEFORE THE EARLIER OF THE DATE THE PARTICIPANT SEPARATES FROM SERVICE, RETIRES, BECOMES DISABLED, ATTAINS 59 1/2, OR DIES, IT MAY BE TREATED AS A QUALIFIED MATCHING CONTRIBUTION. 403(b) MATCHING CONTRIBUTION FORMULAS: n. PERCENTAGE OF DEFERRAL MATCH: The Employer shall contribute to each eligible Participant's account an amount equal to _____% of the Participant's 403(b) Deferrals up to a maximum of _____% or $______ of Compensation. o. UNIFORM DOLLAR MATCH: The Employer shall contribute to each eligible Participant's account $______ if the Participant contributes at least _____% of Compensation. The Employer's contribution will not exceed _____% of Compensation or $______for any Participant. p. DISCRETIONARY MATCH: The Employer's Matching Contribution shall be determined by the Employer with respect to each Plan Year. The Matching Contribution shall be contributed to each eligible Participant in accordance with the nondiscriminatory formula determined by the Employer. 2. MATCHING CONTRIBUTION COMPUTATION PERIOD: The Compensation or any dollar limitation imposed in calculating the match will be based on the period selected below. Matching Contributions will be calculated on the following basis: a. Weekly e. Quarterly b. Bi-weekly f. Semi-Annually c. Semi-monthly g. Annually d. Monthly h. Payroll Based The calculation of Matching Contributions based on the Computation Period selected above has no applicability as to when the Employer remits Matching Contributions to the Trust. 3. LIMITATIONS ON MATCHING FORMULAS: a. ANNUALIZATION OF MATCHING CONTRIBUTIONS. The Employer elects to annualize Matching Contributions made to the Plan. IF NO ELECTION IS MADE, MATCHING CONTRIBUTIONS WILL NOT BE ANNUALIZED. b. CONTRIBUTIONS TO PARTICIPANTS WHO ARE NOT HIGHLY COMPENSATED EMPLOYEES: Contribution of the Employer's Matching Contribution will be made only to eligible Participants who are non-Highly Compensated Employees. c. DEFERRALS WITHDRAWN PRIOR TO THE END OF THE MATCHING COMPUTATION PERIOD: Matching Contributions (whether or not Qualified) will not be made on Employee contributions withdrawn prior to the end of the [ ] Matching Computation Period, or [ ] Plan Year. If elected, this requirement [ ] shall [ ] shall not apply in the event of a withdrawal occurring as the result of a termination of employment for reasons other than retirement, Disability or death. d. Other, specify: _____. 16 4. QUALIFIED MATCHING CONTRIBUTIONS (QMAC): [ ] a. For purposes of the ADP or ACP Test, all Matching Contributions made to the Plan will be deemed "Qualified" for purposes of calculating the Actual Deferral Percentage and/or Actual Contribution Percentage. All Matching Contributions must be fully vested when made and are not available for in-service withdrawal. [ ] b. For purposes of the ADP or ACP Test, only Matching Contributions made to the Plan that are needed to meet the Actual Deferral Percentage or Actual Contribution Percentage Test be deemed "Qualified" for purposes of calculating the Actual Deferral Percentage and/or Actual Contribution Percentage. All such Matching Contributions used must be fully vested when made and are not available for in-service withdrawal. 5. QUALIFIED NON-ELECTIVE CONTRIBUTIONS (QNEC): [ ] a. For purposes of the ADP or ACP Test, all Non-Elective Contributions made to the Plan will be deemed "Qualified" for purposes of calculating the Actual Deferral Percentage and/or Actual Contribution Percentage. All Non-Elective Contributions must be fully vested when made and are not available for in-service withdrawal. [ ] b. For purposes of the ADP or ACP Test, only the Non-Elective Contributions made to the Plan that are needed to meet the Actual Deferral Percentage or Actual Contribution Percentage Test be deemed "Qualified" for purposes of calculating the Actual Deferral Percentage and/or Actual Contribution Percentage. All such Non-Elective Contributions used must be fully vested when made and are not available for in-service withdrawal. B. QUALIFIED MATCHING (QMAC) AND QUALIFIED NON-ELECTIVE (QNEC) EMPLOYER CONTRIBUTION FORMULAS: [ ] 1. QMAC CONTRIBUTION FORMULA: The Employer may contribute to each eligible Participant's Qualified Matching account an amount equal to $______or _____% of the Participant's Elective Deferrals or $______or _____% of the Participant's Voluntary After-tax Contributions or ___$ or _____% of the Participant's Required After-Tax Contributions. This part of the Employer's contribution shall be fully vested when made. [ ] 2. DISCRETIONARY QMAC CONTRIBUTION FORMULA: The Employer shall have the right to make a discretionary QMAC contribution. The Employer's Matching Contribution shall be determined by the Employer with respect to each Plan Years' eligible Participants. This part of the Employer's contribution shall be fully vested when made. [ ] 3. DISCRETIONARY PERCENTAGE QNEC CONTRIBUTION FORMULA: The Employer shall have the right to make a discretionary QNEC contribution which shall be made to each eligible Participant in proportion to his or her Compensation as a percentage of the Compensation of all eligible Participants. This part of the Employer's contribution shall be fully vested when made. This contribution will be made to: [ ] a. All eligible Participants. [ ] b. Only eligible Participants who are non-Highly Compensated Employees. [ ] 4. DISCRETIONARY UNIFORM DOLLAR QNEC CONTRIBUTION FORMULA: The Employer shall have the right to make a discretionary QNEC contribution which shall be contributed to each eligible Participant in a uniform dollar amount to be determined by the Employer and allocated in a nondiscriminatory manner. This part of the Employer's contribution shall be fully vested when made and not available for in-service withdrawal. This contribution will be made to: [ ] a. All eligible Participants. [ ] b. Only eligible Participants who are non-Highly Compensated Employees. [X] 5. CORRECTIVE QNEC CONTRIBUTION FORMULA: The Employer shall have the right to make a QNEC contribution in the amount necessary to pass the ADP/ACP Test or the maximum permitted under Code Section 415. This contribution will be allocated to some or all Non-Highly Compensated Participants designated by the Plan Administrator. The allocation will be the lesser of the amount required to pass the ADP/ACP Test, or the maximum permitted under Code Section 415 and not available for in-service withdrawal. This part of the Employer's contribution shall be fully vested when made. 17 [X] C. DISCRETIONARY EMPLOYER CONTRIBUTION - NON-INTEGRATED FORMULA: The Employer shall have the right to make a discretionary contribution. The Employer's contribution for the Plan Year shall be made to the accounts of eligible Participants as follows: [ ] 1. _____% of the Employer's Net Profit. [ ] 2. _____% of Compensation of eligible Participants for the Plan Year. [X] 3. An amount fixed by an appropriate action of the Employer as of the time prescribed by law. [ ] 4. Such contribution shall be allocated equally (a uniform dollar amount) to each eligible Participant. [ ] D. DISCRETIONARY EMPLOYER CONTRIBUTION - EXCESS INTEGRATED ALLOCATION FORMULA: The Employer shall have the right to make a discretionary contribution. The Employer's contribution for the Plan Year shall be allocated to the accounts of eligible Participants as follows: ONLY ONE PLAN MAINTAINED BY THE EMPLOYER MAY BE INTEGRATED WITH SOCIAL SECURITY. ANY PLAN UTILIZING A SAFE HARBOR FORMULA PROVIDED IN SECTION VII OF THIS ADOPTION AGREEMENT MAY NOT APPLY THE SAFE HARBOR CONTRIBUTION TO THE INTEGRATED ALLOCATION FORMULA. IF THE PLAN IS NOT TOP-HEAVY OR IF THE TOP-HEAVY MINIMUM CONTRIBUTION OR BENEFIT IS PROVIDED UNDER ANOTHER PLAN COVERING THE SAME EMPLOYEES, PARAGRAPHS 1 AND 2 BELOW MAY BE DISREGARDED AND 5.7%, 5.4% OR 4.3% MAY BE SUBSTITUTED FOR 2.7%, 2.4% OR 1.3% WHERE IT APPEARS IN PARAGRAPH 3 BELOW. 1. Step One: To the extent contributions are sufficient, all Participants will receive an allocation equal to 3% of their Compensation. 2. Step Two: Any remaining Employer contributions will be allocated up to a maximum of 3% of excess Compensation of all Participants to Participants who have Compensation in excess of the Integration Level (excess Compensation). Each such Participant will receive an allocation in the ratio that his or her excess Compensation bears to the excess Compensation of all Participants. If Employer contributions are insufficient to fund to this level, the Employer must determine the uniform allocation percentage to allocate to those Participants who have Compensation in excess of the Integration Level. To determine this uniform allocation percentage, the Employer must take the remaining contribution and divide that amount by the total excess Compensation of Participants. 3. Step Three: Any remaining Employer contributions will be allocated to all Participants in the ratio that their Compensation plus excess Compensation bears to the total Compensation plus excess Compensation of all Participants. Participants may only receive an allocation of up to 2.7% of their Compensation plus excess Compensation, under this allocation step. If the Integration Level defined at Section III(E) is less than or equal to the greater of $10,000 or 20% of the maximum, the 2.7% need not be reduced. If the amount specified is greater than the greater of $10,000 or 20% of the maximum Taxable Wage Base, but not more than 80%, 2.7% must be reduced to 1.3%. If the amount specified is greater than 80% but less than 100% of the maximum Taxable Wage Base, the 2.7% must be reduced to 2.4%. If Employer contributions are insufficient to fund to this level, the Employer must determine the uniform allocation percentage to allocate to those Participants who have Compensation up to the Integration Level and excess Compensation. To determine this uniform allocation percentage, the Employer must take the remaining contribution and divide that amount by the total Compensation including excess Compensation of Participants. 4. Step Four: Any remaining Employer contributions will be allocated to all Participants in the ratio that each Participant's Compensation bears to all Participants' Compensation. [ ] E. DISCRETIONARY EMPLOYER CONTRIBUTION - BASE INTEGRATED ALLOCATION FORMULA: The Employer shall have the right to make a discretionary contribution. To the extent that such contributions are sufficient, they shall be allocated as follows: 18 _____% of each eligible Participant's Compensation, plus _____% of Compensation in excess of the Integration Level defined at Section III(E) hereof. The percentage of excess Compensation may not exceed the lesser of (i) the amount first specified in this paragraph or (ii) the greater of 5.7% or the percentage rate of tax under Code Section 3111(a) as in effect on the first day of the Plan Year attributable to the Old Age (OA) portion of the OASDI provisions of the Social Security Act. If the Employer specifies an Integration Level in Section III(E) which is lower than the Taxable Wage Base for Social Security purposes (SSTWB) in effect as of the first day of the Plan Year, the percentage contributed with respect to excess Compensation must be adjusted. If the Plan's Integration Level is greater than the larger of $10,000 or 20% of the SSTWB but not more than 80% of the SSTWB, the excess percentage is 4.3%. If the Plan's Integration Level is greater than 80% of the SSTWB but less than 100% of the SSTWB, the excess percentage is 5.4%. ONLY ONE PLAN MAINTAINED BY THE EMPLOYER MAY BE INTEGRATED WITH SOCIAL SECURITY. ANY PLAN UTILIZING A SAFE HARBOR FORMULA AS PROVIDED IN SECTION VII OF THIS ADOPTION AGREEMENT MAY NOT APPLY THE SAFE HARBOR CONTRIBUTIONS TO THE INTEGRATED ALLOCATION FORMULA. [ ] F. UNIFORM POINTS ALLOCATION FORMULA: The allocation for each eligible Participant will be determined on a uniform points method. Each eligible Participant's allocation shall bear the same relationship to the Employer contribution as the Participant's total points bears to all points awarded. Each eligible Participant will receive points for each of the following: [ ] 1. _____ year(s) of age. [ ] 2. _____ Year(s) of Service determined: [ ] a. In the same manner as determined for eligibility. [ ] b. In the same manner as determined for vesting. [ ] c. Points will not be awarded with respect to Year(s) of Service in excess of ___________. [ ] 3. $______ (not to exceed $200) of Compensation. [ ] 4. Other (explain): ____. [ ] G. ADDITIONAL ADOPTING EMPLOYERS: [ ] 1. All participating Employer's contributions and forfeitures under Section VIII entitled "Employer Contributions" above and forfeitures attributable to each specific contribution source shall be pooled together and allocated uniformly among all eligible Participants. [ ] 2. Each participating Employer's contribution under Section VIII above and forfeitures attributable to each specific contribution source made by such Employer shall be allocated only to eligible Participants of the participating Employer. WHERE CONTRIBUTIONS AND FORFEITURES ARE TO BE ALLOCATED TO ELIGIBLE PARTICIPANTS BY PARTICIPATING EMPLOYERS, EACH SUCH EMPLOYER MUST MAINTAIN DATA DEMONSTRATING THAT THE ALLOCATIONS BY GROUP SATISFY THE NONDISCRIMINATION RULES UNDER CODE SECTION 401(a)(4). H. MINIMUM EMPLOYER CONTRIBUTION FORMULA UNDER TOP-HEAVY PLANS: For any Plan Year during which the Plan is Top-Heavy, the sum of the contributions and forfeitures (excluding Elective Deferrals and/or Matching Contributions) allocated to non-Key Employees shall not be less than the amount required under the Basic Plan Document #01. The eligibility of a Participant to receive Top-Heavy Contributions mirrors the eligibility for any contribution with the earliest Entry Date. Top-Heavy minimums will be allocated to: 19 [ ] 1. all eligible Participants. [X] 2. only eligible non-Key Employees who are Participants. IX. ALLOCATIONS TO PARTICIPANTS A. THIS IS A SAFE HARBOR PLAN: [ ] Employer Non-Elective and/or Matching Contributions will be made to all Employees who have satisfied the Safe Harbor eligibility requirements. B. ALLOCATION ACCRUAL REQUIREMENTS: A Year of Service for eligibility to receive an allocation of Employer contributions will be determined on the basis of the: [ ] 1. Elapsed Time method. [X] 2. Hours of Service method. A Year of Service will be credited upon completion of the requirements below. A Year of Service for allocation accrual purposes cannot be less than 1 Hour of Service nor greater than 1,000 hours by operation of law. If left blank, the Plan will use 1,000 hours. ENTER WHOLE DIGIT NUMBERS ONLY. a. Active Participants:
CONTRIBUTION TYPE HOURS OF SERVICE REQUIREMENT ----------------- ---------------------------- All contributions ---------------------------- Non-Safe Harbor Match Formula 1 ---------------------------- Employer Discretionary 1000 ---------------------------- QNECs ---------------------------- QMACs ---------------------------- Non-Safe Harbor Match Formula 2 ----------------------------
b. Terminated Participants:
CONTRIBUTION TYPE HOURS OF SERVICE REQUIREMENT ----------------- ---------------------------- All contributions ---------------------------- Non-Safe Harbor Match Formula 1 ---------------------------- Employer Discretionary 1000 ---------------------------- QNECs ---------------------------- QMACs ---------------------------- Non-Safe Harbor Match Formula 2 ----------------------------
20 C. ALLOCATION OF CONTRIBUTIONS TO PARTICIPANTS: Employer contributions for a Plan Year will be allocated to all active Participants who have met the allocation accrual requirements at Section IX(B)(2)(a) above and those terminated Participants who have met the allocation accrual requirement at Section IX(B)(2)(b) above and have met the following requirements (check all applicable boxes): IF NO PROVISION IS SELECTED BELOW, PARTICIPANTS WILL NOT BE REQUIRED TO COMPLETE A YEAR OF SERVICE OR BE EMPLOYED ON THE LAST DAY OF THE PLAN YEAR TO RECEIVE AN ALLOCATION. 1.
Non-Safe Non-Safe Harbor Harbor Match Match Formula 1 Formula 2 QNEC QMAC Discretionary --------- --------- ---- ---- ------------- Employment on the last day of the Plan Year is Required for: a. All employees [ ] [ ] [ ] [ ] [ ] b. Termination [ ] [ ] [ ] [ ] [ ] c. Retirement [ ] [ ] [ ] [ ] [ ] d. Disability [ ] [ ] [ ] [ ] [ ] e. Death [ ] [ ] [ ] [ ] [ ] f. Other: [ ] [ ] [ ] [ ] [ ] --------------
2. A Year of Service will be required for: a. All employees [ ] [ ] [ ] [ ] [ ] b. Termination [ ] [ ] [ ] [ ] [X] c. Retirement [ ] [ ] [ ] [ ] [X] d. Disability [ ] [ ] [ ] [ ] [ ] e. Death [ ] [ ] [ ] [ ] [ ] f. Other: Active [ ] [ ] [ ] [ ] [X]
[ ] D. CONTRIBUTIONS TO DISABLED PARTICIPANTS: The Employer will continue to make contributions on behalf of a Participant who is permanently and totally disabled. These contributions will be based on the Compensation each such Participant would have received for the Limitation Year if the Participant had been paid at the rate of Compensation paid immediately before becoming permanently and totally disabled. Such imputed Compensation for the disabled Participant may be taken into account only if the Participant is not a Highly Compensated Employee. These contributions will be 100% vested when made. 21 [X] E. CORRECTION OF COVERAGE TESTING: The Employer shall suspend accrual requirements for eligible Employees who are Participants beginning first with the Employee(s) employed on the last day of the Plan Year, then the eligible Employees who have the latest separation from Service date during the Plan Year, and continuing to suspend in descending order the accrual requirements for each eligible Employee who incurred an earlier separation from Service date, until the Plan satisfies the coverage test. If after application of the preceding paragraph, the coverage requirements are still not satisfied, the Employer shall apply the same procedure as outlined in the preceding paragraph to an otherwise excludable class of Employees. F. LEASED EMPLOYEES: [X] 1. Not applicable. Leased Employees do not participate in this Plan. [ ] 2. A Leased Employee of the Employer is a Participant in the Plan and also participates in a plan maintained by the leasing organization. [ ] G. OFFSET OF CONTRIBUTION: A Participant's allocation of Employer Contributions otherwise made under Section VIII will be reduced by the Participant's allocation under the following qualified plan(s) maintained by the Employer: -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- 22 X. DISPOSITION OF FORFEITURES [X] A. NOT APPLICABLE. All contributions are fully vested. If (A) is selected, do not complete (B) or (C) below. B. FORFEITURE ALLOCATION ALTERNATIVES: Select the method in which forfeitures associated with the contribution type will be allocated (number each item in order of use).
Employer Contribution Type -------------------------------- All Non- All Safe Harbor Other Disposition Method Match Contributions ------------------ ----------- ------------- 1. Restoration of Participant's forfeitures. ------- ------- 2. Used to offset Plan expenses. ------- ------- 3. Used to reduce the Employer's contribution under the Plan. ------- ------- 4. Used to reduce the Employer's Matching Contribution under the Plan. ------- ------- 5. Added to the Employer's contributions under the Plan. ------- ------- 6. Added to the Employer's Matching Contributions under the Plan. ------- ------- 7. Allocate to all Participants eligible to share in the allocations in the same proportion that each Participant's Compensation for the year bears to the Compensation of all other Participant's for such year. ------- ------- 8. Allocate to all NHCEs eligible to share in the allocations in proportion to each such Participant's Compensation for the year. ------- ------- 9. Allocate to all NHCEs eligible to share in the allocations in proportion to each such Participant's Elective Deferrals for the year. ------- ------- 10. Allocate to all Participants eligible to share in the allocations in the same proportion that each Participant's Elective Deferrals for the year bears to the Elective Deferrals of all Participants for such year. ------- ------- Participants eligible to share in the allocation of other Employer Contributions under Section VIII shall be eligible to share in the allocation of forfeitures except where allocations are only to Non-Highly Compensated Employees.
23 C. TIMING OF ALLOCATION OF FORFEITURES: If no distribution or deemed distribution has been made to a former Participant, nonvested portions shall be forfeited at the end of the Plan Year during which the former Participant incurs his or her fifth consecutive one-year Break in Service. If a former Participant has received the full amount of his or her vested interest, the nonvested portion of his or her account shall be forfeited and shall be disposed of: [ ] 1. during the Plan Year following the Plan Year in which the forfeiture arose. [ ] 2. as of any Valuation or Allocation Date during the Plan Year (or as soon as administratively feasible following the close of the Plan Year) in which the former Participant receives full payment of his or her vested benefit. [ ] 3. at the end of the Plan Year during which the former Participant incurs his or her _____ (1st, 2nd, 3rd, 4th or 5th) consecutive one-year Break in Service. [ ] 4. as of the end of the Plan Year during which the former Participant received full payment of his or her vested benefit. [ ] 5. as of the earlier of the first day of the Plan Year, or the first day of the seventh month of the Plan Year following the date on which the former Participant has received full payment of his or her vested benefit. [ ] 6. as of the next Allocation Date following the date on which the former Participant receives full payment of his or her vested benefit. XI. MULTIPLE PLANS MAINTAINED BY THE EMPLOYER, LIMITATIONS ON ALLOCATIONS, AND TOP-HEAVY CONTRIBUTIONS A. PLANS MAINTAINED BY THE EMPLOYER: [X] 1. This is the only Plan the Employer maintains. In the event that the allocation formula results in an Excess Amount, such excess, after distribution of Employee contributions pursuant to paragraph 10.2 of the Basic Plan Document #01, shall be: [X] a. Placed in a suspense account for the benefit of the Participant without the crediting of gains or losses for the benefit of the Participant. [ ] b. Reallocated as additional Employer contributions to all other Participants to the extent that they do not have any Excess Amount. IF NO METHOD IS SPECIFIED, THE SUSPENSE ACCOUNT METHOD WILL BE USED. [ ] 2. The Employer does maintain another Plan [including a Welfare Benefit Fund or an individual medical account as defined in Code Section 415(l)(2)], under which amounts are treated as Annual Additions and has completed the proper sections below. [ ] a. If the Participant is covered under another qualified Defined Contribution Plan maintained by the Employer, other than a Master or Prototype Plan: [ ] i. The provisions of Article X of the Basic Plan Document #01 will apply as if the other plan were a Master or Prototype Plan. [ ] ii. The Employer has specified below the method under which the plans will limit total Annual Additions to the Maximum Permissible Amount, and will properly reduce any Excess Amounts in a manner that 35 Section 401(k) Plan AA #010 precludes Employer discretion. ___. EMPLOYERS WHO MAINTAINED A QUALIFIED DEFINED BENEFIT PLAN, PRIOR TO JANUARY 1, 2000, SHOULD COMPLETE SCHEDULE C TO DOCUMENT THE PREAMENDMENT OPERATION OF THE PLAN. 24 [ ] b. Allocation of Excess Annual Additions: In the event that the allocation formula results in an Excess Amount, such excess, after distribution of Employee contributions pursuant to paragraph 10.2 of the Basic Plan Document #01, shall be: [ ] i. Placed in a suspense account for the benefit of the Participant without the crediting of gains or losses for the benefit of the Participant. [ ] ii. Reallocated as additional Employer contributions to all other Participants to the extent that they do not have any Excess Amount. IF NO METHOD IS SPECIFIED, THE SUSPENSE ACCOUNT METHOD WILL BE USED. B. TOP-HEAVY PROVISIONS: In the event the Plan is or becomes Top-Heavy, the minimum contribution or benefit required under Code Section 416 relating to Top-Heavy Plans shall be satisfied in the elected manner: [X] 1. This is the only qualified retirement Plan maintained by the Employer. The minimum contribution will be satisfied by this Plan. [ ] 2. The Employer does maintain another Defined Contribution Plan. The minimum contribution will be satisfied by: [ ] a. this Plan. [ ] b. . ---------------------------------------- (Name of other qualified plan) [ ] 3. The Employer maintains a Defined Benefit Plan. A method is stated below under which the minimum contribution and benefit provisions of Code Section 416 will be satisfied. Such method precludes Employer discretion. Interest and mortality assumptions used in the Top-Heavy Ratio must be stated. ---------------- XII. ANTIDISCRIMINATION TESTING COMPLETE ONLY IF THIS IS A NEW PLAN OR AN EXISTING PLAN WHICH HAS PREVIOUSLY BEEN AMENDED OR RESTATED FOR GUST. FOR AMENDED AND RESTATED PLANS, PLEASE COMPLETE SCHEDULE C OUTLINING THE PREAMENDMENT OPERATION OF THE PLAN. SAFE HARBOR PLANS ARE AUTOMATICALLY DEEMED TO HAVE MADE THE CURRENT YEAR TESTING ELECTION. [ ] A. NOT APPLICABLE FOR PLAN YEARS BEGINNING IN 2000. The Plan is not subject to ADP or ACP testing. The Plan does not offer Voluntary After-tax Contributions or Required After-tax contributions and it either meets the Safe Harbor provisions of Section VII of this Adoption Agreement, or it does not benefit any Highly Compensated Employees. [ ] B. TESTING ELECTIONS: [ ] 1. This Plan is using the Prior Year testing method for purposes of the ADP and ACP Tests. [ ] 2. This Plan is using the Current Year testing method for purposes of the ADP and ACP Tests. IF NO ELECTION IS MADE, THE PLAN WILL USE THE CURRENT YEAR TESTING METHOD. 25 This election cannot be rescinded for a Plan Year unless (1) the Plan has been using the Current Year testing method for the preceding 5 Plan Years, or, if lesser, the number of Plan Years the Plan has been in existence; or (2) the Plan otherwise meets one of the conditions specified in IRS Notice 98-1 (or other superseding guidance) for changing from the Current Year testing method. A PROTOTYPE PLAN MUST USE THE SAME TESTING METHOD FOR BOTH THE ADP AND ACP TESTS FOR PLAN YEARS BEGINNING ON OR AFTER THE DATE THE EMPLOYER ADOPTS ITS GUST-RESTATED PLAN DOCUMENT. [ ] C. TESTING ELECTIONS FOR THE FIRST PLAN YEAR: COMPLETE ONLY WHEN PRIOR YEAR TESTING METHOD ELECTION IS MADE. [ ] 1. If this is not a successor Plan, then, for the first Plan Year this Plan permits any Participant to make Employee Contributions, provides for Matching Contributions or both, the ACP used in the ACP test for Participants who are Non-Highly Compensated Employees shall be such first Plan Year's ACP. DO NOT SELECT THIS OPTION IF THE EMPLOYER IS USING THE "DEEMED 3% " RULE. [ ] 2. If this is not a successor Plan, then, for the first Plan Year this Plan permits any Participant to make Elective Deferrals, the ADP used in the ADP test for Participants who are Non-Highly Compensated Employees shall be such first Plan Year's ADP. DO NOT SELECT THIS OPTION IF THE EMPLOYER IS USING THE "DEEMED 3% " RULE. [ ] D. RECHARACTERIZATION: Elective Deferrals may be recharacterized as Voluntary After-tax Contributions to satisfy the ADP Test. The Employer must have elected to permit Voluntary After-tax Contributions in the Plan for this election to be operable. XIII. VESTING Participants shall always have a fully vested and nonforfeitable interest in their Employee Contributions (including Elective Deferrals, Required After-tax and Voluntary After-tax Contributions), Qualified Matching Contributions ("QMACs"), Qualified Non-Elective Contributions ("QNECs") or Safe Harbor Matching or Non-Elective Contributions and their investment earnings. Each Participant shall acquire a vested and nonforfeitable percentage in his or her account balance attributable to Employer contributions and their earnings under the schedule(s) selected below except in any Plan Year during which the Plan is determined to be Top-Heavy. In any Plan Year in which the Plan is Top-Heavy, the Two-twenty vesting schedule [option (B)(4)] or the three-year cliff schedule [option (B)(3)] shall automatically apply unless the Employer has elected a faster vesting schedule. If the Plan is switched to option (B)(4) or (B)(3), because of its Top-Heavy status, that vesting schedule will remain in effect even if the Plan later becomes non-Top-Heavy until the Employer executes an amendment of this Adoption Agreement. A. VESTING COMPUTATION PERIOD: [X] A Year of Service for vesting will be determined on the basis of the (choose one): [ ] 1. Not applicable. All contributions are fully vested. [ ] 2. Elapsed Time method. 3. Hour of Service method. A Year of Service will be credited upon completion of Hours of Service. A Year of Service for vesting purposes will not be less than 1 Hour of Service nor greater than 1,000 hours by operation of law. If left blank, the Plan will use 1,000 hours. 26 The computation period for purposes of determining Years of Service and Breaks in Service for purposes of computing a Participant's nonforfeitable right to his or her account balance derived from Employer contributions: [X] 4. shall not be applicable since Participants are always fully vested. [ ] 5. shall not be applicable, as the Plan is using Elapsed Time. [ ] 6. shall commence on the date on which an Employee first performs an Hour of Service for the Employer and each subsequent 12-consecutive month period shall commence on the anniversary thereof. [ ] 7. shall commence on the first day of the Plan Year during which an Employee first performs an Hour of Service for the Employer and each subsequent 12-consecutive month period shall commence on the anniversary thereof. For Plans not using Elapsed Time, a Participant shall receive credit for a Year of Service if he or she completes the number of hours specified above at any time during the 12-consecutive month computation period. A Year of Service may be earned prior to the end of the 12-consecutive month computation period and the Participant need not be employed at the end of the 12-consecutive month computation period to receive credit for a Year of Service. B. VESTING SCHEDULES: Select the option and complete any blank vesting percentages from the list below and insert the option number in the vesting schedule chart below.
Years of Service ----------------------------------------------------------------------- 1 2 3 4 5 6 7 --- --- --- --- --- --- --- [X] 1. Full and immediate vesting [ ] 2. % 100% ----- [ ] 3. % % 100% ----- ----- [ ] 4. % 20% 40% 60% 80% 100% ----- [ ] 5. % % 20% 40% 60% 80% 100% ----- ----- [ ] 6. 10% 20% 30% 40% 60% 80% 100% [ ] 7. % % % % 100% ----- ----- ----- ----- [ ] 8. % % % % % % 100% ----- ----- ----- ----- ----- -----
THE PERCENTAGES SELECTED FOR SCHEDULE (8) MAY NOT BE LESS FOR ANY YEAR THAN THE PERCENTAGES SHOWN AT SCHEDULE (5).
Vesting Schedule Chart Employer Contribution Type ---------------------- -------------------------- 1 All Employer Contributions --- 1 Safe Harbor Contributions (Matching or Non-Elective) --- 1 QMACs and QNECs --- Non-Safe Harbor Match - Formula 1 --- Non-Safe Harbor Match - Formula 2 --- Match on Voluntary After-tax Contributions --- Match on Required After-tax Contributions --- Discretionary Contributions --- Top-Heavy Minimum Contributions --- Other Employer Contribution ---
27 C. SERVICE DISREGARDED FOR VESTING: [X] 1. Not Applicable. All Service is recognized. [ ] 2. Service prior to the Effective Date of this Plan or a predecessor plan is disregarded when computing a Participant's vested and nonforfeitable interest. [ ] 3. Service prior to a Participant having attained age 18 is disregarded when computing a Participant's vested and nonforfeitable interest. 28 XIV. SERVICE WITH PREDECESSOR ORGANIZATION [X] A. Not applicable. The Plan does not recognize Service with any predecessor organization. [ ] B. The Plan will recognize service with all predecessor organizations. [ ] C. Service with the following organization(s) will be recognized for the Plan purpose indicated:
Allocation Eligibility Accrual Vesting ----------- ---------- ------- ------------------------------------------- [ ] [ ] [ ] ------------------------------------------- [ ] [ ] [ ] Attach additional pages as necessary.
XV. IN-SERVICE WITHDRAWALS A. IN-SERVICE WITHDRAWALS: [ ] 1. In-service withdrawals are not permitted in the Plan. [X] 2. In-service withdrawals are permitted in the Plan. Participants may withdraw the following contribution types after meeting the following requirements (select one or more of the following options):
WITHDRAWAL RESTRICTIONS CONTRIBUTION TYPES A B C D E F ------------------ -------------------------------------- a. All Contributions [ ] [ ] [ ] [ ] [ ] [ ] b. Voluntary After-tax [ ] [ ] [ ] [ ] [ ] [ ] c. Required After-tax [ ] [ ] [ ] [ ] [ ] [ ] d. Rollover [ ] [X] [ ] [ ] [ ] [ ] e. Transfer [ ] [X] [ ] [ ] [ ] [ ] f. Elective Deferrals [ ] n/a n/a [ ] [X] n/a g. Qualified Non-Elective [ ] n/a n/a [ ] [ ] n/a h. Qualified Matching [ ] n/a n/a [ ] [ ] n/a i. Safe Harbor Matching [ ] n/a n/a [ ] [ ] n/a j. Safe Harbor Non-Elective [ ] n/a n/a [ ] [ ] n/a k. Vested Non-Safe Harbor Matching Formula 1 [X] [ ] [ ] [ ] [ ] [ ] l. Vested Non-Safe Harbor Matching Formula 2 [ ] [ ] [ ] [ ] [ ] [ ] m. Vested Discretionary [X] [ ] [ ] [ ] [ ] [ ]
29 WITHDRAWAL RESTRICTION KEY A. Not available for in-service withdrawals. B. Available for in-service withdrawals. C. Participants having completed five years of Plan participation may elect to withdraw all or any part of their Vested Account Balance. D. Participants may withdraw all or any part of their Account Balance after having attained the Plan's Normal Retirement Age. E. Participants may withdraw all or any part of their Vested Account Balance after having attained age 59 1/2 (not less than age 59 1/2). F. Participants may elect to withdraw all or any part of their Vested Account Balance which has been credited to their account for a period in excess of two years. B. HARDSHIP WITHDRAWALS: [ ] 1. Hardship withdrawals are not permitted in the Plan. [X] 2. Hardship withdrawals are permitted in the Plan and will be taken from the Participant's account as follows (select one or more of these options): [X] a. Participants may withdraw Elective Deferrals. [X] b. Participants may withdraw Rollover Contributions plus their earnings. [X] c. Participants may withdraw fully vested Employer contributions plus their earnings. [X] d. Participants may withdraw vested Non-Safe Harbor Matching Formula 1 Contributions plus their earnings. [ ] e. Participants may withdraw vested Non-Safe Harbor Matching Formula 2 Contributions plus their earnings. [ ] f. Participants may withdraw Qualified Matching Contributions and Qualified NonElective Contributions plus their earnings, and the earnings on Elective Deferrals which have been credited to the Participant's account as of a date that is no later than December 31, 1988 (or, if later, the end of the last Plan Year ending before July 1, 1989). XVI. LOAN PROVISIONS [X] A. Participant loans are permitted in accordance with the Employer's established loan procedures. [X] B. Loan payments will be suspended under the Plan as permitted under Code Section 414(u) in compliance with the Uniformed Services Employment and Reemployment Rights Act of 1994. 30 XVII. INVESTMENT MANAGEMENT A. INVESTMENT MANAGEMENT RESPONSIBILITY: [ ] 1. The Employer shall appoint a discretionary Trustee to manage the assets of the Plan. [ ] 2. The Employer shall direct the investments with respect to Plan assets. [X] 3. The Employer shall appoint a nondiscretionary Trustee or Custodian. By selecting a box, the Employer is making a designation as to whom will have authority to issue investment directives with respect to the specified contribution type (check all applicable boxes):
Named Investment Fiduciary Employer Participant ---------- -------- ----------- a. All Contributions [ ] [ ] [X] b. Employer Contributions [ ] [ ] [ ] c. Elective Deferrals [ ] [ ] [ ] d. Voluntary After-tax [ ] [ ] [ ] e. Required After-tax [ ] [ ] [ ] f. Safe Harbor Contributions [ ] [ ] [ ] g. Non-Safe Harbor Match Formula 1 [ ] [ ] [ ] h. Non-Safe Harbor Match Formula 2 [ ] [ ] [ ] i. QMACs [ ] [ ] [ ] j. QNECs [ ] [ ] [ ] k. Rollover Contributions [ ] [ ] [ ] l. Transfer Contributions
TO THE EXTENT THAT PARTICIPANT SELF-DIRECTION WAS PREVIOUSLY PERMITTED, THE EMPLOYER SHALL HAVE THE RIGHT TO EITHER MAKE THE ASSETS PART OF THE GENERAL FUND, OR LEAVE THEM AS SELF-DIRECTED SUBJECT TO THE PROVISIONS OF THE BASIC PLAN DOCUMENT #01. B. LIMITATIONS ON PARTICIPANT DIRECTED INVESTMENTS: [X] 1. Participants are permitted to invest among only those investment alternatives made available by the Employer under the Plan. [ ] 2. Participants are permitted to invest in any investment permitted under the Basic Plan Document #01. [ ] C. INSURANCE: The Plan permits insurance as an investment alternative. [ ] D. ERISA SECTION 404(c): The Employer intends to be covered by the fiduciary liability provisions with respect to Participant directed investments under ERISA Section 404(c). [ ] E. VOTING RIGHTS: Voting rights on Employer securities will be passed through to Participants. 31 XVIII. DISTRIBUTION OPTIONS A. TIMING OF DISTRIBUTIONS [both (1) and (2) must be completed]: 1. Distributions payable as a result of termination for death, Disability or retirement shall be paid c [select from the list at (A)(3) below]. 2. Distributions payable as a result of termination for reasons other than death, Disability or retirement shall be paid c [select from the list at (A)(3) below]. 3. Distribution Options: a. As soon as administratively feasible on or after the Valuation Date on which a distribution is requested or is otherwise payable. b. As soon as administratively feasible following the close of the Plan Year during which a distribution is requested or is otherwise payable. c. As soon as administratively feasible following the date on which a distribution is requested or is otherwise payable. (This option is recommended for Daily Valuation Plans). d. As soon as administratively feasible after the close of the Plan Year during which the Participant incurs ______ (cannot be more than 5) consecutive one-year Breaks in Service. [This formula can only be used in (A)(1).] e. As soon as administratively feasible after the close of the Plan Year during which the Participant incurs ______ (cannot be more than 5) consecutive one-year Breaks in Service. [This formula can only be used in (A)(2).] f. Only after the Participant has achieved the Plan's Normal Retirement Age or Early Retirement Age, if applicable. g. Other (please specify):______. B. REQUIRED BEGINNING DATE: The Required Beginning Date of a Participant with respect to a Plan is (select one from below): [ ] 1. The April 1 of the calendar year following the calendar year in which the Participant attains age 70 1/2. [ ] 2. The April 1 of the calendar year following the calendar year in which the Participant attains age 70 1/2 except that distributions to a Participant (other than a 5% owner) with respect to benefits accrued after the later of the adoption of this Plan or Effective Date of the amendment of this Plan must commence no later than the April 1 of the calendar year following the later of the calendar year in which the Participant attains age 70 1/2 or the calendar year in which the Participant retires. [X] 3. The later of the April 1 of the calendar year following the calendar year in which the Participant attains age 70 1/2 or retires except that distributions to a 5% owner muST commence by the April 1 of the calendar year following the calendar year in which the Participant attains age 70 1/2. Except that such Participant [X] may [ ] may not elect to begin receiving distributions as of April 1st of the calendar year following the calendar year in which the Participant attains age 70 1/2. Any distributions made pursuant to such an election will not be considered required minimum distributions. Such distributions will be considered in service distributions and as such, will be subject to applicable withholding. 32 PLANS WHICH ARE AN AMENDMENT OR RESTATEMENT OF AN EXISTING PLAN WHICH PROVIDED FOR THE PROVISIONS OF CODE SECTION 401(a)(9) CURRENTLY IN EFFECT PRIOR TO THE AMENDMENT OF THE SMALL BUSINESS JOB PROTECTION ACT OF 1996 MUST COMPLETE SCHEDULE C. C. FORMS OF PAYMENT (select all that apply): [X] 1. Lump sum. [X] 2. Installment payments. [ ] 3. Partial payments; the minimum amount will be $_____ . [ ] 4. Life annuity. [ ] 5. Term certain annuity with payments guaranteed for years (not to exceed 20). [ ] 6 Joint and [ ] 50%, [ ]66-2/3%, [ ]75% or [ ] 100% survivor annuity. [ ] 7. The default form of payment will be a direct rollover into an individual retirement account or annuity for any "cash out" distribution made pursuant to Code Sections 411(a)(7), 411(a)(11) and 417(e)(1). [X] 8. Cash. [ ] 9. Employer securities. [ ] 10. Other marketable securities. [ ] 11. Other: ______. THE NORMAL FORM OF PAYMENT IS DETERMINED AT SECTION III(J) OF THIS ADOPTION AGREEMENT. D. RECALCULATION OF LIFE EXPECTANCY: [ ] 1. Recalculation is not permitted. [X] 2. Recalculation is permitted. When determining installment payments in satisfying the minimum distribution requirements under the Plan, and life expectancy is being recalculated: [ ] a. only the Participant's life expectancy shall be recalculated. [X] b. both the Participant and Spouse's life expectancy shall be recalculated. [ ] c. the Participant will determine whose life expectancy is recalculated. 33 XIX. SPONSOR INFORMATION AND ACCEPTANCE This Plan may not be used and shall not be deemed to be a Prototype Plan unless an authorized representative of the Sponsor has acknowledged the use of the Plan. Such acknowledgment that the Employer is using the Plan does not represent that the Adoption Agreement (as completed) and Plan have been reviewed by a representative of the Sponsor or constitute a qualified retirement plan. Acknowledged and accepted by the Sponsor this _______ day of ______ , ______ . Name: ----------------------------------------------------- Title: ----------------------------------------------------- Signature: ----------------------------------------------------- Questions concerning the language contained in and qualification of the Prototype should be addressed to: - ---------------------------------------------------- (Position): (Phone Number): -------- -------- In the event that the Sponsor amends, discontinues or abandons this Prototype Plan, notification will be provided to the Employer's address provided on the first page of this Adoption Agreement. 34 XX. SIGNATURES IT IS RECOMMENDED THAT THE EMPLOYER CONSULT WITH ITS LEGAL COUNSEL AND/OR TAX ADVISOR BEFORE EXECUTING THIS ADOPTION AGREEMENT. A. EMPLOYER: This Adoption Agreement and the corresponding provisions of Basic Plan Document #01 are adopted by the Employer this ______ day of ______ , _____. Name of Employer: FelCor Lodging Trust, Inc. -------------------------------- Executed on behalf of the Employer by: -------------------------------- Title: -------------------------------- Signature: -------------------------------- Name and address of Employer if different than specified in Section I above. -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- PARTICIPATING EMPLOYER: This Adoption Agreement and the corresponding provisions of Basic Plan Document #01 are adopted by the Participating Employer this ______ day of ______ , ____. Name of Participating Employer: ------------------------------- Executed on behalf of the Participating Employer by: ----------------------------------- Title: -------------------------------- Signature: -------------------------------- Attach additional signature pages as necessary. THE EMPLOYER UNDERSTANDS THAT ITS FAILURE TO PROPERLY COMPLETE THE ADOPTION AGREEMENT MAY RESULT IN DISQUALIFICATION OF ITS PLAN. EMPLOYER'S RELIANCE: The adopting Employer may not rely on the Opinion Letter issued by the National Office of the Internal Revenue Service as evidence that the Plan is qualified under Code Section 401. In order to obtain reliance with respect to Plan qualification, the Employer must apply to Employee Plans Determinations of the Internal Revenue Service Key District Office for a determination letter. This Adoption Agreement may only be used in conjunction with Basic Plan Document #01. 35 B. TRUSTEE: Trust Agreement: [ ] Not applicable. Plan assets will be invested in Group Annuity Contracts. There is no Trustee and the terms of the contract(s) will apply. [ ] The Trust provisions used will be as contained in the Basic Plan Document #01. [X] The Trust provisions used will be as contained in the accompanying executed Trust Agreement between the Employer and the Trustee attached hereto. Complete the remainder of this section only if the Trust provisions used are as contained in the Basic Plan Document #01. Name and address of Trustee: -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- The assets of the Plan shall be invested in accordance with paragraph 13.10 of the Basic Plan Document #01. The Employer's Plan and Trust as contained herein is accepted by the Trustee this day ______ of ______, ____. Accepted on behalf of the Trustee by: -------------------------------- Title: -------------------------------- Signature: -------------------------------- Accepted on behalf of the Trustee by: -------------------------------- Title: -------------------------------- Signature: -------------------------------- Accepted on behalf of the Trustee by: -------------------------------- Title: -------------------------------- Signature: -------------------------------- 36 C. CUSTODIAN: Custodial Agreement: [X] Not applicable. There is no Custodian. [ ] Not applicable. Plan assets will be invested in Group Annuity Contracts. There is no Custodian and the terms of the contract(s) will apply. [ ] The Custodial provisions used will be as contained in Basic Plan Document #01. [ ] The Custodial provisions used will be as contained in the accompanying executed Custodial Agreement between the Employer and the Custodian attached hereto. Complete the remainder of this section only if the custodial provisions used are as contained in the Basic Plan Document #01. Name and address of Custodian: -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- The assets of the Plan shall be invested in accordance with paragraph 13.13 of the Basic Plan Document #01. The Employer's Plan and Custodial Account as contained herein are accepted by the Custodian this ______ day of ______, ____. Accepted on behalf of the Custodian by: -------------------------------- Title: -------------------------------- Signature: -------------------------------- 37 SCHEDULE A PROTECTED BENEFITS This Schedule includes any prior Plan protected benefits which are not available in Basic Plan Document #01. Complete as applicable. 1. PLAN PROVISION: -------- EFFECTIVE DATE: -------- 2. PLAN PROVISION: -------- EFFECTIVE DATE: -------- 3. PLAN PROVISION: -------- EFFECTIVE DATE: -------- 4. PLAN PROVISION: -------- EFFECTIVE DATE: -------- 5. PLAN PROVISION: -------- EFFECTIVE DATE: -------- 38 SCHEDULE B PRIOR PLAN PROVISIONS This Schedule should be used if a prior plan contains provisions not found in Basic Plan Document #01, or where the Employer wishes to document transactions or historical provisions of the Employer's Plan. 1. PLAN PROVISION: --------- EFFECTIVE DATE: --------- 2. PLAN PROVISION: --------- EFFECTIVE DATE: --------- 3. PLAN PROVISION: --------- EFFECTIVE DATE: --------- 4. PLAN PROVISION: --------- EFFECTIVE DATE: --------- 5. PLAN PROVISION: --------- EFFECTIVE DATE: --------- 39 SCHEDULE C PREAMENDMENT OPERATION OF THE PLAN The following are the adopting Employer's elective Plan provisions which conform the terms of this Prototype Plan to the preamendment operation of the Plan during the transition period between the earliest effective date under GUST (as defined below) and the effective date of adoption of this Prototype Plan and Trust which takes into account all of the changes in the qualification requirements made by the following: The Uruguay Round Agreements, Pub. L. 103-465 (GATT); The Small Business Job Protection Act of 1996, Pub. L. 104-188 (SBJPA) [including Section 414(u) of the Internal Revenue Code]; The Uniformed Services Employment and Reemployment Rights Act of 1994, Pub. L. 105-34 (USERRA); The Tax Reform Act of 1997 (TRA'97); and The Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206 (IRSRRA), hereinafter referred to collectively as GUST. Complete as applicable and appropriate. I. PLAN PROVISION: HIGHLY COMPENSATED EMPLOYEES For Plan Years beginning after 1996, the Employer may elect a "Top-Paid Group" election and the Calendar Year Data election to determine the definition of Highly Compensated Employee (HCE): [ ] A. Top-Paid Group Election: A Participant (who is not a 5% owner at any time during the determination year or the look-back year) who earned more than $80,000 as indexed for the look-back year is a Highly Compensated Employee if the Employee was in the Top-Paid Group for the look-back year. The election is applicable for: [ ] 1. 1997 Plan Year. [ ] 2. 1998 Plan Year. [ ] 3. 1999 Plan Year. [ ] 4. 2000 Plan Year. [ ] 5. 2001 Plan Year. [ ] B. Calendar Year Election: In determining who is a Highly Compensated Employee (other than a 5 percent owner) the Employer makes a calendar year data election. The look-back year is the calendar year beginning with or within the look-back year. The election is applicable for: [ ] 1. 1998 Plan Year. [ ] 2. 1999 Plan Year. [ ] 3. 2000 Plan Year. [ ] 4. 2001 Plan Year. If the elections above are made, such election shall apply to all Plans maintained by the Employer. [ ] C. Calendar Year Calculation Election (for 1997 Plan Year only): Indicate below whether the Calendar Year calculation election was made for Plan Years beginning in 1997: [ ] Yes [ ] No II. PLAN PROVISION: FAMILY AGGREGATION Did the Pre-SBJPA Family Aggregation rules of Code Sections 401(a)(17)(a) and 414(q)(6), both in effect for Plan Years beginning before January 1, 1997, continue to apply for any purpose for Plan Years beginning after 1996? [X] No [ ] Yes; explain the application: ______. If this rule was subsequently discontinued, indicate when rule no longer applied: _______. EMPLOYERS WHO ADOPT THIS PROTOTYPE PLAN MAY NOT ELECT TO CONTINUE TO APPLY THE PRE-SBJA FAMILY AGGREGATION RULES. 40 III. PLAN PROVISION: COMBINED PLAN LIMIT OF CODE SECTION 415(e) Did the Employer maintain a Defined Benefit Plan prior to January 1, 2000? [ ] Yes [X] No Did the Plan continue to apply the combined Plan limit of Code Section 415(e) (as in effect for Limitation Years beginning before January 1, 2000) in limitation years beginning after December 31, 1999, to the extent that such election conforms to the Plan's operation? [ ] Yes [ ] No If yes, specify provisions below that will satisfy the 1.0 limitation of Code Section 415(e). Such language must preclude Employer discretion. The Employer must also specify the interest and mortality assumptions used in determining Present Value in the Defined Benefit Plan. ----. EMPLOYERS WHO ADOPT THIS PROTOTYPE PLAN MAY NOT ELECT TO CONTINUE TO APPLY THE COMBINED PLAN LIMIT OF CODE SECTION 415(e) IN YEARS BEGINNING AFTER THE DATE THE EMPLOYER ADOPTS THIS PLAN. IV. PLAN PROVISION: NONDISCRIMINATION TESTING The Small Business Job Protection Act permits the Employer to use the ADP and/or ACP of Non-Highly Compensated Employees for the prior year or current year in determining whether the plan satisfied the nondiscrimination tests. Employers who adopt this Prototype Plan must use the same testing method for both the ADP and ACP tests for Plan Years beginning on or after the date the Employer adopts this GUST-restated Plan. This restriction does not apply with respect to Plan Years beginning before the date the Employer adopts this GUST-restated plan. 1. ADP TESTING ELECTION: [ ] a. Current year data for all Participants will be used. [ ] 1. 1997 Plan Year. [ ] 2. 1998 Plan Year. [ ] 3. 1999 Plan Year. [ ] 4. 2000 Plan Year. [ ] 5. 2001 Plan Year. [X] b. Prior year data for Participants who are Non-Highly Compensated Employees will be used. [X] 1. 1997 Plan Year. [X] 2. 1998 Plan Year. [X] 3. 1999 Plan Year. [X] 4. 2000 Plan Year. [X] 5. 2001 Plan Year. 41 2. ACP TESTING ELECTION: [ ] a. Current year data for all Participants will be used. [ ] 1. 1997 Plan Year. [ ] 2. 1998 Plan Year. [ ] 3. 1999 Plan Year. [ ] 4. 2000 Plan Year. [ ] 5. 2001 Plan Year. [X] b. Prior year data for Participants who are Non-Highly Compensated Employees will be used. [X] 1. 1997 Plan Year. [X] 2. 1998 Plan Year. [X] 3. 1999 Plan Year. [X] 4. 2000 Plan Year. [X] 5. 2001 Plan Year. 42 V. PLAN PROVISION: FIRST PLAN YEAR TESTING ELECTIONS For a new 401(k) Plan, the Employer could use either the current or prior year testing methods as well as a rule that deems the prior year ADP/ACP to be 3%. 1. ADP TESTING ELECTION: [ ] a. Current year data for all Participants will be used. [ ] 1. 1997 Plan Year. [ ] 2. 1998 Plan Year. [ ] 3. 1999 Plan Year. [ ] 4. 2000 Plan Year. [ ] 5. 2001 Plan Year. [ ] b. Current year data for Participants who are HCE's will be used. The ADP for Participants who are Non-Highly Compensated Employees is assumed to be 3% or the actual ADP if greater. [ ] 1. 1997 Plan Year. [ ] 2. 1998 Plan Year. [ ] 3. 1999 Plan Year. [ ] 4. 2000 Plan Year. [ ] 5. 2001 Plan Year. 2. ACP TESTING ELECTION: [ ] a. Current year data for all Participants will be used. [ ] 1. 1997 Plan Year. [ ] 2. 1998 Plan Year. [ ] 3. 1999 Plan Year. [ ] 4. 2000 Plan Year. [ ] 5. 2001 Plan Year. [ ] b. Current year data for Participants who are HCE's will be used. The ACP for Participants who are Non-Highly Compensated Employees is assumed to be 3% or the actual ACP if greater. [ ] 1. 1997 Plan Year. [ ] 2. 1998 Plan Year. [ ] 3. 1999 Plan Year. [ ] 4. 2000 Plan Year. [ ] 5. 2001 Plan Year. VI. PLAN PROVISION: DISTRIBUTION ALTERNATIVES FOR PARTICIPANTS WHO ARE NOT A MORE THAN 5% OWNER Select (A), (B), (C) and/or (D), whichever is applicable. Subsection (D) must be selected to the extent that there would otherwise be an elimination of a pre-retirement age 70 1/2 distribution option fOR Employees other than those listed above. [ ] A. Any Participant who has not had a separation from Service who had attained age 70 1/2 in years after 1995 may elect by April 1 of the calendar year following the year in which the Participant attained age 70 1/2 (or by December 31, 1997 in the case of a Participant attaining age 70 1/2 in 1996) to defer distributions until the calendar year in which the Participant retires. If no such election is made, the Participant will begin receiving distributions by the April 1 of the calendar year following the year in which the Participant attained age 70 1/2 (or by December 31, 1997 in tHE case of a Participant attaining age 70 1/2 in 1996). [X] B. Any Participant who has not had a separation from Service and is currently in benefit payment status because of attainment of age 70 1/2 in years prior to 1997 may elect to stoP distributions and recommence by the April 1 of the calendar year in which the Participant 55 retires. There is either (select one): [X] 1. a new Annuity Starting Date upon recommencement, or [ ] 2. no new Annuity Starting Date upon recommencement. 43 [ ] C. Any Participant who has not had a separation from Service, and is currently in benefit payment status because of attainment of age 70 1/2 in 1997 or in a later year (or attained age 70 1/2 in 1996, but had not commenced required minimum distributions in 1996) may elect to stop distributions and recommence by the April 1 of the calendar year in which the Participant retires. There is either (select one): [ ] 1. a new Annuity Starting Date upon recommencement, or [ ] 2. no new Annuity Starting Date upon recommencement. [ ] D. The pre-retirement distribution option is only eliminated with respect to Employees who reach age 70 1/2 in or after a calendar year that begins after the later of December 31, 1998, OR the adoption of the amendment to the Plan. The pre-retirement age 70 1/2 distribution option is AN optional form of benefit under which benefits are payable in a particular distribution form (including any modifications that maybe elected after benefit commencement) and commencing at a time during the period that begins on or after January 1 of the calendar year in which an Employee attains age 70 1/2 and ends April 1 of the immediately following calendar year. VII. PLAN PROVISION: MANDATORY CASH-OUT RULE [X] For Plan Years beginning after August 9, 1997, the $3,500 cash-out limit is increased to $5,000. VIII. PLAN PROVISION: 30-DAY WAIVER PERIOD For Plan Years beginning after December 31, 1996, if the Plan is subject to the Joint and Survivor rules did the Plan provide distributions prior to the expiration of the 30-day waiting period? [ ] Yes [ ] No IX. PLAN PROVISION: SUSPENSION OF LOAN REPAYMENTS On or after December 12, 1994, did the Employer permit the suspension of loan repayments due to qualified military leave? [X] Yes [ ] No Effective Date: January 1, 1995 X. PLAN PROVISION: HARDSHIP DISTRIBUTIONS TREATED AS ELIGIBLE ROLLOVER DISTRIBUTIONS The Employer had the option with respect to Hardship distributions made after December 31, 1998 to treat as eligible rollover distributions, or to delay the Effective Date until January 1, 2000. Hardship distributions were not treated as eligible rollover distributions effective as of: [X] January 1, 1999 [ ] January 1, 2000 [ ] Other (specify date): ________________________ XI. PLAN PROVISION: SAFE HARBOR PROVISIONS For Plan Years beginning after 1998, the Employer may implement safe harbor provisions under Code Sections 401(k)(11) and 401(k)(12). Did the Plan elect safe harbor status? [ ] Yes [X] No 44 If yes, enter the formulas below:
DATE PLAN YEAR BEGINS SECTION 401(k) SECTION 401(m) --------------------- -------------- -------------- / /99 --------------------- -------------- -------------- / /00 --------------------- -------------- -------------- / /01 --------------------- -------------- --------------
XII. OTHER PLAN PROVISIONS: ---------- EFFECTIVE DATE: ----- 45 SCHEDULE D SAFE-HARBOR ELECTIONS FOR FLEXIBLE NON-ELECTIVE CONTRIBUTION The following elections are made with regard to the Plan's Safe Harbor status pursuant to Section VII herein. For Plan Years indicated below, the Plan hereby invokes a Safe Harbor status in accordance with IRS Notices 98-52 and 2000-3. For all Plan Years in which this Safe Harbor election is being made, the limitations and restrictions found in Section VII herein apply. 1. For the Plan Year beginning ______ and ending ______, the Employer hereby invokes a Safe Harbor status as provided in IRS Notice 2000-3. The Safe Harbor Contribution will be an amount equal to _____% (not less than 3%) of Compensation. This election is made on this ______ day of ______ , ____(date may not be later than 30 days prior to the end of the Plan Year in which such election is being made). 2. For the Plan Year beginning ______ and ending ______, the Employer hereby invokes a Safe Harbor status as provided in IRS Notice 2000-3. The Safe Harbor Contribution will be an amount equal to _____% (not less than 3%) of Compensation. This election is made on this day______ day of ______ ,______ (date may not be later than 30 days prior to the end of the Plan Year in which such election is being made). 3. For the Plan Year beginning ______ and ending ______, the Employer hereby invokes a Safe Harbor status as provided in IRS Notice 2000-3. The Safe Harbor Contribution will be an amount equal to _____% (not less than 3%) of Compensation. This election is made on this ______ day of ______ , ______ (date may not be later than 30 days prior to the end of the Plan Year in which such election is being made). 4. For the Plan Year beginning ______ and ending ______, the Employer hereby invokes a Safe Harbor status as provided in IRS Notice 2000-3. The Safe Harbor Contribution will be an amount equal to _____% (not less than 3%) of Compensation. This election is made on this ______ day of ______ , ______ (date may not be later than 30 days prior to the end of the Plan Year in which such election is being made). 5. For the Plan Year beginning ______ and ending ______, the Employer hereby invokes a Safe Harbor status as provided in IRS Notice 2000-3. The Safe Harbor Contribution will be an amount equal to _____% (not less than 3%) of Compensation. This election is made on this ______ day of ______ , ______ (date may not be later than 30 days prior to the end of the Plan Year in which such election is being made). 6. For the Plan Year beginning ______ and ending ______, the Employer hereby invokes a Safe Harbor status as provided in IRS Notice 2000-3. The Safe Harbor Contribution will be an amount equal to _____% (not less than 3%) of Compensation. This election is made on this ______ day of ______ , ______ (date may not be later than 30 days prior to the end of the Plan Year in which such election is being made). 46 SCHEDULE E COLLECTIVE AND COMMINGLED FUNDS The Trustee is authorized to invest all or any part of the Fund in the following Collective and Commingled Funds as provided at paragraph 13.10(b) of the Basic Plan Document #01: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 47 PROTOTYPE DEFINED CONTRIBUTION PLAN SPONSORED BY DIVERSIFIED INVESTMENT ADVISORS, INC. BASIC PLAN DOCUMENT #01 THIS DOCUMENT IS COPYRIGHTED UNDER THE LAWS OF THE UNITED STATES. ITS USE, DUPLICATION OR REPRODUCTION, INCLUDING THE USE OF ELECTRONIC MEANS, IS PROHIBITED BY LAW WITHOUT THE EXPRESS CONSENT OF THE AUTHOR. TABLE OF CONTENTS
PARAGRAPH PAGE --------- ---- ARTICLE I DEFINITIONS 1.1 Actual Contribution Percentage (ACP) 1 1.2 Actual Deferral Percentage (ADP) 1 1.3 Adoption Agreement 2 1.4 Aggregate Limit 2 1.5 Allocation Date(s) 2 1.6 Annual Additions 2 1.7 Annuity Starting Date 3 1.8 Applicable Calendar Year 3 1.9 Applicable Life Expectancy 3 1.10 Average Annual Compensation 3 1.11 Average Contribution Percentage (ACP) 3 1.12 Average Deferral Percentage (ADP) 4 1.13 Beneficiary 4 1.14 Break In Service 4 1.15 Code 4 1.16 Compensation 5 1.17 Covered Compensation 8 1.18 Custodian 8 1.19 Davis-Bacon Act 8 1.20 Defined Benefit Plan 8 1.21 Defined Benefit (Plan) Fraction 8 1.22 Defined Contribution Dollar Limitation 8 1.23 Defined Contribution Plan 9 1.24 Defined Contribution (Plan) Fraction 9 1.25 Direct Rollover 9 1.26 Disability 9 1.27 Distribution Calendar Year 9 1.28 Early Retirement Age 9 1.29 Early Retirement Date 9 1.30 Earned Income 10 1.31 Effective Date 10 1.32 Election Period 10 1.33 Elapsed Time 10 1.34 Elective Deferrals 10 1.35 Eligible Employee 10 1.36 Eligible Employer 10 1.37 Eligible Participant 11 1.38 Eligible Retirement Plan 11 1.39 Eligible Rollover Distribution 11 1.40 Employee 11 1.41 Employer 12 1.42 Entry Date 12 1.43 ERISA 12
1.44 Excess Aggregate Contributions 12 1.45 Excess Annual Additions 12 1.46 Excess Contribution 13 1.47 Excess Elective Deferrals 13 1.48 Expected Year Of Service 13 1.49 First Distribution Calendar Year 13 1.50 Hardship 13 1.51 Highest Average Compensation 13 1.52 Highly Compensated Employee 13 1.53 Hour Of Service 14 1.54 Integration Level 14 1.55 Key Employee 15 1.56 Leased Employee 15 1.57 Limitation Year 15 1.58 Master Or Prototype Plan 15 1.59 Matching Contribution 15 1.60 Maximum Permissible Amount 15 1.61 Net Profit 16 1.62 Normal Retirement Age 16 1.63 Normal Retirement Date 16 1.64 Owner-Employee 16 1.65 Paired Plans 16 1.66 Participant 16 1.67 Participant's Benefit 16 1.68 Period Of Severance 16 1.69 Permissive Aggregation Group 16 1.70 Plan 16 1.71 Plan Administrator 16 1.72 Plan Sponsor 17 1.73 Plan Year 17 1.74 Present Value 17 1.75 Prior Plan Year 17 1.76 Prior Safe Harbor Plan 17 1.77 Projected Annual Benefit 17 1.78 Projected Participation 17 1.79 Qualified Domestic Relations Order (QDRO Or Order) 18 1.80 Qualified Early Retirement Age 18 1.81 Qualified Joint And Survivor Annuity (QJSA) 18 1.82 Qualified Matching Contributions (QMACs) 18 1.83 Qualified Non-Elective Contributions (QNECs) 18 1.84 Qualified Plan 18 1.85 Qualified Pre-Retirement Survivor Annuity 18 1.86 Qualified Voluntary Contribution 18 1.87 Required Aggregation Group 19 1.88 Required Beginning Date 19 1.89 Required After-tax Contributions 19 1.90 Rollover Contribution 19 1.91 Salary Deferral Agreement 19 1.92 Savings Incentive Match Plan For Employees (SIMPLE) 19 1.93 Self-Employed Individual 19 1.94 Service 19 1.95 Severance Date 20 1.96 Severance Period 20 1.97 Service Provider 20
1.98 Shareholder Employee 20 1.99 Simplified Employee Pension Plan 20 1.100 Sponsor 20 1.101 Spouse 20 1.102 Stated Benefit Formula 20 1.103 Super Top-Heavy Plan 20 1.104 Taxable Wage Base 20 1.105 Top-Heavy Determination Date 20 1.106 Top-Heavy Plan 20 1.107 Top-Heavy Ratio 21 1.108 Top-Paid Group 22 1.109 Transfer Contribution 22 1.110 Trust 22 1.111 Trustee 22 1.112 Uniformed Services Employment And Reemployment Rights Act Of 1994 (USERRA) 22 1.113 Valuation Date 22 1.114 Vested Account Balance 22 1.115 Voluntary After-tax Contribution 22 1.116 Welfare Benefit Fund 23 1.117 Year Of Service 23 ARTICLE II ELIGIBILITY REQUIREMENTS 2.1 Eligibility 26 2.2 Determination Of Eligibility 26 2.3 Change In Classification Of Employment 26 2.4 Participation 27 2.5 Employment Rights 27 2.6 Service With Controlled Groups 27 2.7 Leased Employees 27 2.8 Thrift Plan 28 2.9 Target Benefit Plan 28 2.10 Davis-Bacon Plan 28 2.11 Waiver Of Participation 28 2.12 Omission Of Eligible Employee 28 2.13 Inclusion Of Ineligible Employee 29 ARTICLE III EMPLOYER CONTRIBUTIONS 3.1 Contribution Amount 30 3.2 Contribution Amount For A SIMPLE 401(k) Plan 30 3.3 Responsibility For Contributions 31 3.4 Return Of Contributions 31 3.5 Merger Of Assets From Another Plan 31 3.6 Coverage Requirements 32 3.7 Eligibility For Contribution 32 3.8 Target Benefit Plan Contribution 33 3.9 Davis-Bacon Plan Contribution 34 3.10 Uniform Dollar Contribution 34 3.11 Uniform Points Contribution 34 3.12 403(b) Matching Contribution 34
ARTICLE IV EMPLOYEE CONTRIBUTIONS 4.1 Voluntary After-tax Contributions 35 4.2 Required After-tax Contributions 35 4.3 Qualified Voluntary Contributions 35 4.4 Rollover Contributions 35 4.5 Plan To Plan Transfer Contributions 36 4.6 Voluntary Direct Transfers Between Plans 36 4.7 Elective Deferrals In A 401(k) Plan 37 4.8 Elective Deferrals In A SIMPLE 401(k) Plan 38 4.9 Automatic Enrollment 39 4.10 Make-Up Contributions Under USERRA 40 ARTICLE V PARTICIPANT ACCOUNTS 5.1 Separate Accounts 41 5.2 Valuation Date 41 5.3 Allocations To Participant Accounts 42 5.4 Allocating Employer Contributions 42 5.5 Allocating Investment Earnings And Losses 43 5.6 Allocation Adjustments 43 5.7 Participant Statements 44 5.8 Changes In Method And Timing Of Valuing Participants' Accounts 44 ARTICLE VI RETIREMENT BENEFITS AND DISTRIBUTIONS 6.1 Normal Retirement Benefits 45 6.2 Early Retirement Benefits 45 6.3 Benefits On Termination Of Employment 45 6.4 Restrictions On Immediate Distributions 46 6.5 Normal And Optional Forms Of Payment 47 6.6 Commencement Of Benefits 48 6.7 Transitional Rules For Cash-Out Limits 49 6.8 In-Service Withdrawals 50 6.9 Hardship Withdrawals 52 6.10 Direct Rollover Of Benefits 53 6.11 Participant's Notice 53 6.12 Assets Transferred From Money Purchase Pension Plans 54 6.13 Assets Transferred From A Code Section 401(k) Plan 54
ARTICLE VII DISTRIBUTION REQUIREMENTS 7.1 Joint And Survivor Annuity Requirements 55 7.2 Minimum Distribution Requirements 55 7.3 Limits On Distribution Periods 55 7.4 Required Distributions On Or After The Required Beginning Date 55 7.5 Required Beginning Date 56 7.6 Transitional Rules 58 7.7 Designation Of Beneficiary 58 7.8 Beneficiary 59 7.9 Distribution Beginning Before Death 59 7.10 Distribution Beginning After Death 59 7.11 Distribution Of Excess Elective Deferrals 60 7.12 Distribution Of Excess Contributions 61 7.13 Distribution Of Excess Aggregate Contributions 61 7.14 Distributions To Minors And Individuals Who Are Legally Incompetent 62 7.15 Unclaimed Benefits 62 ARTICLE VIII JOINT AND SURVIVOR ANNUITY REQUIREMENTS 8.1 Applicability Of Provisions 64 8.2 Payment Of Qualified Joint And Survivor Annuity 64 8.3 Payment Of Qualified Pre-Retirement Survivor Annuity 64 8.4 Qualified Election 64 8.5 Notice Requirements For Qualified Joint And Survivor Annuity 65 8.6 Notice Requirements For Qualified Pre-Retirement Survivor Annuity 65 8.7 Special Safe Harbor Exception For Certain Profit-Sharing Or 401(k) Plans 66 8.8 Transitional Joint And Survivor Annuity Rules 67 8.9 Automatic Joint And Survivor Annuity And Early Survivor Annuity 67 8.10 Annuity Contracts 68 ARTICLE IX VESTING 9.1 Employee Contributions 69 9.2 Employer Contributions 69 9.3 Vesting Of Employer Contributions In A SIMPLE 401(k) Plan 69 9.4 Computation Period 69 9.5 Requalification Prior To Five Consecutive One-Year Breaks In Service 69 9.6 Requalification After Five Consecutive One-Year Breaks In Service 69 9.7 Calculating Vested Interest 69 9.8 Forfeitures 70 9.9 Amendment Of Vesting Schedule 70 9.10 Service With Controlled Groups 71 9.11 Compliance With Uniformed Services Employment And Reemployment Rights Act Of 1994 71
ARTICLE X LIMITATIONS ON ALLOCATIONS 10.1 Participation In This Plan Only 72 10.2 Disposition Of Excess Annual Additions 72 10.3 Participation In Multiple Defined Contribution Plans 73 10.4 Disposition Of Excess Annual Additions Under Two Plans 73 10.5 Participation In This Plan And A Defined Benefit Plan 73 ARTICLE XI ANTIDISCRIMINATION TESTING 11.1 General Testing Requirements 74 11.2 ADP Testing Limitations 74 11.3 Special Rules Relating To The Application Of The ADP Test 75 11.4 Calculation And Distribution Of Excess Contributions And Excess Aggregate Contributions 75 11.5 Qualified Non-Elective And/Or Matching Contributions 76 11.6 ACP Testing Limitations 76 11.7 Special Rules Relating To The Application Of The ACP Test 77 11.8 Recharacterization 78 11.9 Nondiscrimination Tests In A SIMPLE 401(k) Plan 78 11.10 Safe Harbor Rules Of Application 78 11.11 Safe Harbor Definitions 80 11.12 Required Restrictions On Safe Harbor Contributions 80 11.13 ADP Test Safe Harbor 81 11.14 ACP Test Safe Harbor 81 11.15 Safe Harbor Status 81 11.16 Safe Harbor Notice Requirement 82 11.17 Satisfying Safe Harbor Contribution Requirements Under Another Defined Contribution Plan 83 ARTICLE XII ADMINISTRATION 12.1 Plan Administrator 85 12.2 Persons Serving As Plan Administrator 86 12.3 Action By Employer 86 12.4 Responsibilities Of The Parties 86 12.5 Allocation Of Investment Responsibility 86 12.6 Appointment Of Investment Manager 86 12.7 Participant Investment Direction 87 12.8 Application Of ERISA Section 404 (c) 88 12.9 Participant Loans 88 12.10 Insurance Policies 90 12.11 Determination Of Qualified Domestic Relations Order (QDRO Or Order) 92 12.12 Receipt And Release For Payments 93 12.13 Resignation And Removal 93 12.14 Claims and Claims Review Procedure 93 12.15 Bonding 94
ARTICLE XIII TRUST PROVISIONS 13.1 Establishment Of The Trust 95 13.2 Control Of Plan Assets 95 13.3 Discretionary Trustee 95 13.4 Nondiscretionary Trustee 96 13.5 Provisions Relating To Individual Trustees 96 13.6 Investment Instructions 96 13.7 Fiduciary Standards 97 13.8 Powers Of The Trustee 97 13.9 Appointment Of Additional Trustee And Allocation Of Responsibilities 99 13.10 Compensation, Administrative Fees And Expenses 100 13.11 Records 100 13.12 Limitation On Liability And Indemnification 101 13.13 Custodian 103 13.14 Investment Alternatives Of The Custodian 103 13.15 Prohibited Transactions 104 13.16 Exclusive Benefit Rules 104 13.17 Assignment And Alienation Of Benefits 104 13.18 Liquidation Of Assets 104 13.19 Resignation and Removal 105 ARTICLE XIV TOP-HEAVY PROVISIONS 14.1 Applicability Of Rules 106 14.2 Minimum Contribution 106 14.3 Minimum Vesting 106 14.4 Limitations On Allocations 107 14.5 Use Of Safe Harbor Contributions To Satisfy Top-Heavy Contribution Rules 107 14.6 Top-Heavy Rules For SIMPLE 401(k) Plans 107 ARTICLE XV AMENDMENT AND TERMINATION 15.1 Amendment By Sponsor 108 15.2 Amendment By Employer 108 15.3 Protected Benefits 108 15.4 Plan Termination 108 15.5 Distribution Restrictions Under A Code Section 401(k) Plan 109 15.6 Qualification Of Employer's Plan 109 15.7 Mergers And Consolidations 109 15.8 Qualification Of Prototype 109
ARTICLE XVI GOVERNING LAW 16.1 Governing Law 110 16.2 State Community Property Laws 110 IRS MODEL AMENDMENT 111 EGTRRA MODEL AMENDMENT
PROTOTYPE DEFINED CONTRIBUTION PLAN SPONSORED BY DIVERSIFIED INVESTMENT ADVISORS, INC. The Sponsor hereby establishes this Plan for use by its clients who wish to adopt a qualified retirement plan. This Plan shall be interpreted in a manner consistent with the intention of the adopting Employer that this Plan satisfy Internal Revenue Code Sections 401 and 501. Any Plan and Trust established hereunder shall be so established for the exclusive benefit of Plan Participants and their Beneficiaries and shall be administered under the following terms and conditions: ARTICLE I DEFINITIONS 1.1 ACTUAL CONTRIBUTION PERCENTAGE (ACP) The ratio (expressed as a percentage and calculated separately for each Participant) of: (a) the Participant's Contribution Percentage Amounts [as defined at (c)-(f)] for a Plan Year, to (b) the Participant's Compensation for such Plan Year. [Unless otherwise specified in the Adoption Agreement, Compensation will only include amounts for the period during which the Employee was eligible to participate.] Contribution Percentage Amounts on behalf of any Participant shall include: (c) the amount of Voluntary After-tax Contributions, Required After-tax Contributions, Matching Contributions (except to the extent such Matching Contributions may be disregarded in accordance with IRS Notice 98-1), and Qualified Matching Contributions (to the extent not taken into account for purposes of the ADP test) made under the Plan on behalf of the Participant, (d) forfeitures of Excess Aggregate Contributions or Matching Contributions allocated to the Participant's account which shall be taken into account in the year in which such forfeiture is allocated, (e) at the election of the Employer, Qualified Non-Elective Contributions, and (f) the Employer may elect to use Elective Deferrals in the Contribution Percentage Amounts as long as the ADP test is met before the Elective Deferrals are used in the ACP test and continues to be met following the exclusion of those Elective Deferrals that are used to meet the ACP test. Contribution amounts shall not include Matching Contributions, whether or not Qualified, that are forfeited either to correct Excess Aggregate Contributions, or because the contributions to which they relate are Excess Deferrals, Excess Contributions, or Excess Aggregate Contributions. 1.2 ACTUAL DEFERRAL PERCENTAGE (ADP) The ratio (expressed as a percentage and calculated separately for each Participant) of: (a) the amount of Employer contributions [as defined at (c) - (d)] actually contributed to the Trust on behalf of such Participant for a Plan Year, to (b) the Participant's Compensation for such Plan Year. [Unless otherwise specified in the Adoption Agreement, Compensation will only include amounts received for the period during which the Employee was eligible to participate.] 1 Employer contributions on behalf of any Participant shall include: (c) any Elective Deferrals made pursuant to the Participant's Salary Deferral Agreement, including Excess Elective Deferrals of Highly Compensated Employees, but excluding Excess Elective Deferrals distributed to Non-Highly Compensated Employees and Elective Deferrals that are either taken into account in the Contribution Percentage test (provided the ADP test is satisfied both with and without exclusion of these Elective Deferrals) or are returned as excess Annual Additions, (d) at the election of the Employer, Qualified Non-Elective Contributions and Qualified Matching Contributions. For purposes of computing Actual Deferral Percentages, an eligible Employee who fails to make Elective Deferrals shall be treated as a Participant on whose behalf no Elective Deferrals are made. 1.3 ADOPTION AGREEMENT The document attached to this Plan by which an Employer who adopts a Plan elects the terms and conditions of a Qualified Plan established under this Basic Plan Document #01. 1.4 AGGREGATE LIMIT The sum of: (a) 125% of the greater of the Average Deferral Percentage of the Non-Highly Compensated Employees for the Prior Plan Year or the Average Contribution Percentage of Non-Highly Compensated Employees under the 401(k) Plan subject to Code Section 401(m) for the Plan Year beginning with or within the Prior Plan Year, and (b) the lesser of 200% or two percent plus the lesser of such ADP or ACP. Alternatively, the Aggregate Limit can be determined by substituting "the lesser of 200% or two percent plus" for "125% of" in (a) above, and substituting "125% of" for "the lesser of 200% or two percent plus" in (b) above if it would result in a larger Aggregate Limit. If the Employer has elected in the Adoption Agreement to use the Current Year Testing Method, then, in calculating the Aggregate Limit for a particular Plan Year, the Non-Highly Compensated Employees' ADP and ACP for that Plan Year, instead of the prior Plan Year, is used. 1.5 ALLOCATION DATE(S) The date or dates on which Participant recordkeeping accounts are adjusted to reflect account activity including but not limited to contributions, loans distributions, Hardship withdrawals, as well as earnings activity including but not limited to income, capital gains or market fluctuations in accordance with Article V hereof. Unless the Plan Administrator in a uniform and nondiscriminatory manner designates otherwise, all allocations for a particular Plan Year will be made as of the Valuation Date of that Plan Year. 1.6 ANNUAL ADDITIONS The sum of the following amounts credited to a Participant's account for the Limitation Year: (a) Employer contributions (under Article III), (b) Employee contributions (under Article IV), (c) forfeitures, (d) Employer allocations under a Simplified Employee Pension Plan, 2 (e) amounts allocated after March 31, 1984, to an individual medical account as defined in Code Section 415(l)(2), which is part of a pension or annuity plan maintained by the Employer (these amounts are treated as Annual Additions to a Defined Contribution Plan though they arise under a Defined Benefit Plan), and (f) amounts derived from contributions paid or accrued after 1985, in taxable years ending after 1985, which are either attributable to post-retirement medical benefits allocated to the account of a Key Employee or to a Welfare Benefit Fund maintained by the Employer. For purposes of this paragraph, an Employee is a Key Employee if he or she meets the requirements of paragraph 1.55 at any time during the Plan Year or any preceding Plan Year. For purposes of applying the limitations of Code Section 415, the transfer of funds from one Qualified Plan to another is not considered an Annual Addition. The following are not Employee contributions for the purposes of Annual Additions: (g) Rollover Contributions [as defined in Code Sections 402(e)(6), 403(a)(4), 403(b)(8) and 408(d)(3)]; (h) repayments of loans made to a Participant from the Plan; (i) repayments of distributions received by an Employee pursuant to Code Section 411(a)(7)(B) (cash-outs); (j) repayments of distributions received by an Employee pursuant to Code Section 411(a)(3)(D) (mandatory contributions); and (k) Employee contributions to a Simplified Employee Pension Plan excludible from gross income under Code Section 408(k)(6). Employee and Employer make-up contributions under USERRA received during the current Limitation Year shall be treated as Annual Additions with respect to the Limitation Year to which the make-up contributions are attributable. Excess Amounts applied in a Limitation Year to reduce Employer contributions will be considered Annual Additions for such Limitation Year, pursuant to the provisions of Article X. 1.7 ANNUITY STARTING DATE The first day of the first period for which an amount is paid as an annuity or in any other form. 1.8 APPLICABLE CALENDAR YEAR The First Distribution Calendar Year, and in the event of the recalculation of life expectancy, such succeeding calendar year. If payments commence in accordance with paragraph 7.4(d) before the Required Beginning Date, the Applicable Calendar Year is the year such payments commence. If distribution is in the form of an immediate annuity purchased after the Participant's death with the Participant's remaining interest, the Applicable Calendar Year is the year of purchase. 1.9 APPLICABLE LIFE EXPECTANCY The life expectancy or joint and last survivor expectancy calculated using the attained age of the Participant or Beneficiary as of the Participant's or Beneficiary's birthday in the Applicable Calendar Year, reduced by one for each calendar year which has elapsed since the date life expectancy was first calculated. If life expectancy is being recalculated, the Applicable Life Expectancy shall be the life expectancy as so recalculated. The life expectancy of a non-Spouse Beneficiary may not be recalculated. 1.10 AVERAGE ANNUAL COMPENSATION The average of a Participant's annual Compensation as defined in paragraph 1.16 of this Basic Plan Document #01, over the three (3) consecutive Plan Year period ending in either the current year or any prior year that produces the highest average. If the Participant has fewer than three (3) years of participation in this Plan, Compensation is averaged over the Participant's total period of participation. 1.11 AVERAGE CONTRIBUTION PERCENTAGE (ACP) The average of the Actual Contribution Percentages for the eligible Participants in a specified group of Participants for a Plan Year. 3 1.12 AVERAGE DEFERRAL PERCENTAGE (ADP) The average of the Actual Deferral Percentages for Participants in a specified group of Participants for a Plan Year. 1.13 BENEFICIARY A "Beneficiary" is any person other than the Participant and an estate or trust who by operation of law, or under the terms of the Plan is entitled to receive any Vested Account Balance of a Participant under the Plan. A "Designated Beneficiary" is any individual designated or determined in accordance with Code Section 401(a)(9) and the Regulations issued thereunder, except that it shall not include any person who becomes a beneficiary by virtue of the laws of inheritance or intestate succession. 1.14 BREAK IN SERVICE (a) If the Hours of Service method is used in determining either an Employee's initial or continuing eligibility to participate in the Plan, or the nonforfeitable interest in the Employee's account balance derived from Employer contributions, a Break in Service is a twelve (12) consecutive month period during which the Employee has not completed more than five hundred (500) Hours of Service. (b) For purposes of determining whether a Break in Service has occurred in a particular computation period, an Employee who is absent from work for maternity or paternity reasons shall receive credit for Hours of Service which would otherwise have been credited to such Employee but for such absence, or in any case in which such hours cannot be determined, with eight (8) Hours of Service per day of such absence. The Hours of Service to be so credited shall be credited in the computation period in which the absence begins if the crediting is necessary to prevent a Break in Service in that period or, in all other cases, in the following computation periods. (c) With respect to determinations based on the Elapsed Time method, a severance period of not less than twelve (12) consecutive months. In the case of an Employee who is absent from work for maternity or paternity reasons, the twelve (12) consecutive month period beginning on the first anniversary of the first day of such absence shall not constitute a Break in Service. (d) Notwithstanding the foregoing, in the case of an Employee who is absent from work beyond the first anniversary of the first day of absence from work for maternity or paternity reasons, such period begins on the second anniversary of the first day of such absence. The period between the first and second anniversaries of said first day of absence from work is neither a Period of Service for which the Employee will receive credit nor is such period a Break in Service. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (1) by reason of the pregnancy of the Employee, (2) by reason of the birth of a child of the Employee, (3) by reason of the placement of a child with the Employee in connection with the adoption of such child by such Employee, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement. (e) An Employer adopting the Elapsed Time method is required to credit periods of Service and, under the Service spanning rules, certain periods of severance of twelve (12) months or less. Under the first Service spanning rule, if an Employee severs from Service as a result of resignation, discharge or retirement and then returns to Service within twelve (12) months, the Period of Severance is required to be taken into account. A situation may arise in which an Employee is absent from Service for any reason other than resignation, discharge, retirement and during the absence a resignation, discharge or retirement occurs. The second Service spanning rule provides that, under such circumstances, the Plan is required to take into account the period of time between the severance from Service date (i.e., the date of resignation, discharge or retirement) and the first anniversary of the date on which the Employee was first absent, if the Employee returns to Service on or before such first anniversary date. 1.15 CODE The Internal Revenue Code of 1986, including any amendments thereto. Reference to any section or subsection of the Code, includes reference to any comparable or succeeding provisions of any legislation which 4 amends, supplements or replaces such section or subsection, and also includes reference to any Regulation issued pursuant to or with respect to such section or subsection. 1.16 COMPENSATION The Employer may select one of the following three safe harbor definitions of Compensation in the Adoption Agreement. The definition of Compensation (for Employers who adopt) under standardized plans, plans that provide permitted disparity (other than the CODA portion of these plans), Target Benefit Plans and for Employers determining top-heavy minimum contributions must be one of the three safe harbor definitions of Compensation. In a Nonstandardized Adoption Agreement, the Employer may modify the definition of Compensation provided that such definition, as modified, satisfies the provisions of Code Sections 414(s) and 401(a)(4). Compensation will also include Compensation by the Employer through another employer or entity under the provisions of Code Sections 3121 and 3306. (a) CODE SECTION 3401(A) WAGES - All remuneration received by an Employee for services performed for the Employer which are subject to Federal income tax withholding at the source. Unless elected otherwise in the Adoption Agreement, Compensation shall include any amount deferred under a Salary Deferral Agreement which is not includible in the gross income of a Participant under Code Section 125 in connection with a cafeteria plan, Code Section 402(e)(3) in connection with a cash or deferred plan, Code Section 402(h)(1)(B) in connection with a Simplified Employee Pension Plan, Code Section 401(k) in connection with a SIMPLE Retirement Account, Code Section 457 in connection with a Plan maintained under said Section, and Code Section 403(b) in connection with a tax-sheltered annuity plan. Wages are determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed [such as the exception for agricultural labor in Code Section 3401(a)(2)]. For Limitation Years beginning after December 31, 1997, for purposes of applying the limitations of this paragraph, Compensation paid or made available during such Limitation Year shall include any Elective Deferral [as defined in Code Section 402(g)(3)], and any amount which is contributed or deferred by the Employer at the election of the Employee and which is not includible in the gross income of the Employee by reason of Code Sections 125, 132(f)(4), 402(e)(3), 402(h)(1), or 403(b). (b) CODE SECTIONS 6041, 6051 AND 6052 REPORTABLE WAGES - All remuneration received by an Employee for services performed for the Employer which are required to be reported on Form W-2. Unless otherwise elected in the Adoption Agreement, Compensation shall include any amount deferred under a Salary Deferral Agreement which is not includible in the gross income of a Participant under Code Section 125 in connection with a cafeteria plan, Code Section 402(e)(3) in connection with a cash or deferred plan, Code Section 402(h)(1)(B) in connection with a Simplified Employee Pension Plan, and Code Section 403(b) in connection with a tax-sheltered annuity plan. A Participant's wages includes remuneration defined at subparagraph (a) above and all other remuneration paid to an Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under Code Sections 6041(d), 6051(a)(3) and 6052. Such amount must be determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed [such as the exception for agricultural labor in Code Section 3401(a)(2)]. For Limitation Years beginning after December 31, 1997, for purposes of applying the limitations of this paragraph, Compensation paid or made available during such Limitation Year shall include any Elective Deferral [as defined in Code Section 402(g)(3)], and any amount which is contributed or deferred by the Employer at the election of the Employee and which is not includible in the gross income of the Employee by reason of Code Sections 125, 132(f)(4), 402(e)(3), 402(h)(1) or 403(b). (c) CODE SECTION 415 COMPENSATION - A Participant's Earned Income, wages, salaries, and fees for professional services and other amounts received, without regard to whether or not an amount is paid in cash, for personal services actually rendered in the course of employment with the Employer maintaining the Plan. Compensation includes, but is not limited to, commissions paid salesmen, Compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits and reimbursements or other expense 5 allowances under a nonaccountable plan [as described in Regulation Section 1.62-2(c)]. For Limitation Years beginning after December 31, 1997, for purposes of applying the limitations of this paragraph, Compensation paid or made available during such Limitation Year shall include any Elective Deferral [as defined in Code Section 402(g)(3)], and any amount which is contributed or deferred by the Employer at the election of the Employee and which is not includible in the gross income of the Employee by reason of Code Sections 125, 132(f)(4), 402(e)(3), 402(h)(1) or 403(b). Compensation excludes the following: (1) for Plan Years beginning before January 1, 1998, Employer contributions made under the terms of a Salary Deferral Agreement between an Employee and the Employer to a plan of deferred compensation which are not includible in the Employee's gross income for the taxable year in which contributed. Such contributions shall include any amount deferred under Code Section 125 in connection with a cafeteria plan, Code Section 402(e)(3) in connection with a cash or deferred plan, Code Section 402(h)(1)(B) in connection with a Simplified Employee Pension Plan, Code Section 402(k) in connection with a SIMPLE Retirement Account, Code Section 457 in connection with a Plan maintained under said Section, and Code Section 403(b) in connection with a tax-sheltered annuity plan, (2) distributions received from a plan of deferred compensation, (3) amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture, (4) amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option, and (5) amounts deferred by an Employee under the terms of a non-qualified deferred compensation plan. Unless otherwise specified by the Employer in the Adoption Agreement, Compensation shall be determined as provided in Code Section 3401(a) [paragraph (a) above]. Notwithstanding the foregoing, the Compensation of a Participant who is a sole proprietor, partner or a member of a limited liability corporation (LLC) shall be determined under Code Section 415. Unless indicated otherwise in the Adoption Agreement, the definition of Compensation used in nondiscrimination testing (ADP/ACP Testing) will be determined by the Employer. Notwithstanding any other provision to the contrary, if the Plan is an amendment and restatement of a Qualified Plan, for Plan Years ending prior to the Plan Year in which the amendment or restatement is adopted, Compensation shall have the meaning set forth in the Qualified Plan prior to its amendment. EXCLUSIONS FROM COMPENSATION A Participant's Compensation shall be determined in accordance with paragraph (a), (b) or (c) above and shall not exclude any item of income unless provided in the basic definition or elected by the Employer in the Adoption Agreement. ANNUAL ADDITIONS AND TOP-HEAVY RULES Except as elected on the Adoption Agreement, for purposes of Article X and XIV, Compensation shall be Code Section 415 Compensation as described in paragraph 1.16(c). For Plan Years beginning before January 1, 1998, Compensation excludes amounts deferred under a plan of deferred Compensation as described at paragraph 1.16(c)(1). For Plan Years beginning after December 31, 1997, Compensation includes amounts deferred under a plan of deferred compensation as described at paragraph 1.16(c)(1). For purposes of applying the limitations of Article X, Compensation for a Limitation Year is the Compensation actually paid or made available during such Limitation Year. For Limitation Years beginning after December 31, 1997, for purposes of applying the limitations of this paragraph, Compensation paid or made available during such Limitation Year shall include any Elective Deferral [as defined in Code Section 402(g)(3)], and any amount which is contributed or deferred by the Employer at the election of the Employee and which is not includible in the gross income of the Employee by reason of Code Sections 125, 132(f)(4), 402(e)(3), 402(h)(1)(B) or 403(b). 6 If the Plan is or becomes Top-Heavy in any Plan Year beginning after December 31, 1983, the provisions of Article XIV will supersede any conflicting provisions in the Basic Plan Document #01 or Adoption Agreement. CONTRIBUTIONS MADE ON BEHALF OF DISABLED PARTICIPANTS Compensation with respect to a Participant in a Defined Contribution Plan who is permanently and totally disabled [as defined in Code Section 22(e)(3)] is the Compensation such Participant would have received for the Limitation Year if the Participant had been paid at the rate of Compensation paid immediately before becoming permanently and totally disabled; for Limitation Years beginning before January 1, 1997, but not for Limitation Years beginning after December 31, 1996, such imputed Compensation for the disabled Participant may be taken into account only if the Participant is not a Highly Compensated Employee (defined at paragraph 1.52) and contributions made on behalf of such Participant are nonforfeitable when made. Compensation will mean Compensation as that term is defined in this paragraph. HIGHLY COMPENSATED AND KEY EMPLOYEES For purposes of paragraphs 1.52 and 1.55, Compensation shall be Code Section 415 Compensation as described in paragraph 1.16(c). Such definition shall include any amount deferred under Code Section 125 in connection with a cafeteria plan, Code Section 402(e)(3) in connection with a cash or deferred plan, Code Section 402(h)(1)(B) in connection with a Simplified Employee Pension Plan, Code Section 402(k) in connection with a SIMPLE Retirement Account (SIMPLE), Code Section 457 in connection with a Plan maintained under said Section, and Code Section 403(b) in connection with a tax-sheltered annuity plan. The Employer, if elected in the Adoption Agreement, may limit Compensation considered for purposes of the Plan for these Participants. COMPUTATION PERIOD The Plan Year, while eligible to participate, shall be the computation period for purposes of determining a Participant's Compensation, unless the Employer selects a different computation period in the Adoption Agreement. LIMITATION ON COMPENSATION The annual Compensation of each Participant which may be taken into account for determining all benefits provided under the Plan for any year, shall not exceed the limitation as imposed by Code Section 401(a)(17), as adjusted under Code Section 401(a)(17)(B). If a Plan has a Plan Year that contains fewer than twelve (12) calendar months, the annual Compensation limit for that period is an amount equal to the limitation as imposed by Code Section 401(a)(17) as adjusted for the calendar year in which the Compensation period begins, multiplied by a fraction, the numerator of which is the number of full months in the short Plan Year and the denominator of which is twelve (12). USERRA For purposes of Employee and Employer make-up contributions, Compensation during the period of military service shall be deemed to be the Compensation the Employee would have received during such period if the Employee were not in qualified military service, based on the rate of pay the Employee would have received from the Employer but for the absence due to military leave. If the Compensation the Employee would have received during the leave is not reasonably certain, Compensation will be equal to the Employee's average Compensation from the Employer during the twelve (12) month period immediately preceding the military leave or, if shorter, the Employee's actual period of employment with the Employer. DEFINITION OF COMPENSATION FOR PURPOSES OF SAFE HARBOR CODA PROVISIONS Compensation for the purposes of a Safe Harbor CODA is defined in this paragraph 1.16 of this Basic Plan Document #01. No dollar limit other than the limit imposed by Code Section 401(a)(17) applies to the Compensation of a Non-Highly Compensated Employee. For purposes of determining the Compensation subject to a Participant's salary deferral election, the Employer may use an alternative definition to the one described above provided such alternative definition is a reasonable definition within the meaning of Section 1.414(s)-1(d)(2) of the Regulations and permits each Participant to contribute sufficient Elective Deferrals to receive the maximum amount of Matching Contributions (determined using the definition of Compensation described above) available to the Participant under the Plan. 7 DEFINITION OF COMPENSATION FOR PURPOSES OF 401(k) SIMPLE PROVISIONS For purposes of paragraphs 1.36 and 3.2, of this Basic Plan Document #01, Compensation is the sum of the wages, tips and other compensation from the Employer subject to Federal income tax withholding [as described in Code Section 6051(a)(3)] and the Employee's salary reduction contributions made under Code Section 125 in connection with a cafeteria plan, Code Section 402(e)(3) in connection with a cash or deferred plan, Code Section 402(h)(1)(B) in connection with a Simplified Employee Pension Plan, Code Section 402(k) in connection with a SIMPLE Retirement Account, Code Section 457 in connection with a plan maintained under said Section and Code Section 403(b) in connection with a tax-sheltered annuity plan, required to be reported by the Employer on Form W-2 [as described in Code Section 6051(a)(8)]. For self-employed individuals, Compensation means net earnings from self-employment determined under Code Section 1402(a) prior to subtracting any contributions made to this Plan on behalf of any Employee. The provisions of the Plan implementing the limit on Compensation under Code Section 401(a)(17) apply to the Compensation under paragraph 4.8 of Article IV. 1.17 COVERED COMPENSATION A Participant's Covered Compensation for a Plan Year is the average (without indexing) of the Taxable Wage Bases in effect for each calendar year in the thirty-five (35) year period ending with the calendar year in which the Participant attains (or will attain) social security retirement age. In determining a Participant's Covered Compensation for a Plan Year, the Taxable Wage Base in effect for the current Plan Year and any subsequent Plan Year will be assumed to be the same as the taxable wage base in effect as of the beginning of the Plan Year for which the determination is being made. Covered Compensation will be determined for the year designated by the Employer in Section III(C) of the Target Benefit Plan Adoption Agreement. A Participant's Covered Compensation for a Plan Year before the end of the thirty-five (35) year period ending with the last day of the calendar year in which the Participant attains social security retirement age is the Taxable Wage Base in effect as of the beginning of the Plan Year. A Participant's Covered Compensation for a Plan Year after such thirty-five (35) year period is the Participant's Covered Compensation for the Plan Year during which the thirty-five (35) year period ends. 1.18 CUSTODIAN The institution or institutions (who may be the Sponsor or an affiliate) and any successors or assigns thereto, appointed by the Employer to hold the assets of the Trust as provided at paragraph 13.2 herein. 1.19 DAVIS-BACON ACT 40 U.S.C. Section 276a et seq. as may be amended from time to time. 1.20 DEFINED BENEFIT PLAN A plan under which a Participant's benefit is determined by a formula contained in the plan and no Employee accounts are maintained for Participants. 1.21 DEFINED BENEFIT (PLAN) FRACTION For Limitation Years beginning before January 1, 2000, a fraction, the numerator of which is the sum of the Participant's Projected Annual Benefits under all the Defined Benefit Plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of 125% of the dollar limitation determined for the Limitation Year under Code Sections 415(b) and (d) or 140% of the Highest Average Compensation, including any adjustments under Code Section 415(b). TRANSITIONAL RULE If an Employee was a Participant as of the first day of the first Limitation Year beginning after 1986, in one or more Defined Benefit Plans maintained by the Employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than 125% of the sum of the annual benefits under such Plans which the Participant had accrued as of the close of the last Limitation Year beginning before 1987, disregarding any changes in the terms and conditions of the Plan after May 5, 1986. The preceding sentence applies only if the Defined Benefit Plans individually and in the aggregate satisfied the requirements of Code Section 415 for all Limitation Years beginning before 1987. 1.22 DEFINED CONTRIBUTION DOLLAR LIMITATION Thirty thousand dollars ($30,000) as adjusted by the Secretary of the Treasury for increases in the cost-of-living. This limitation shall be adjusted by the Secretary at the same time and in the same manner as under Code Section 415(d). Such increases will be in multiples of five thousand dollars ($5,000). 1.23 DEFINED CONTRIBUTION PLAN A plan under which Employee accounts are maintained for each Participant to which all contributions, forfeitures, investment income and gains or losses, and expenses are credited or 8 deducted. A Participant's benefit under such plan is based solely on the fair market value of his or her account balance. 1.24 DEFINED CONTRIBUTION (PLAN) FRACTION For Limitation Years beginning before January 1, 2000, a fraction, the numerator of which is the sum of the Annual Additions to the Participant's account under all the Defined Contribution Plans (whether or not terminated) maintained by the Employer for the current and all prior Limitation Years (including the Annual Additions attributable to the Participant's nondeductible Employee contributions to all Defined Benefit Plans, whether or not terminated, maintained by the Employer, and the Annual Additions attributable to all Welfare Benefit Funds as defined in paragraph 1.116, individual medical accounts as defined in Code Section 415(l)(2) and Simplified Employee Pension Plans as defined in paragraph 1.99, maintained by the Employer), and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior Limitation Years of Service with the Employer (regardless of whether a Defined Contribution Plan was maintained by the Employer). The maximum aggregate amount in the Limitation Year is the lesser of 125% of the dollar limitation determined under Code Sections 415(b) and (d) in effect under Code Section 415(c)(1)(A) or 35% of the Participant's Compensation for such year. TRANSITIONAL RULE If an Employee was a Participant as of the end of the first day of the first Limitation Year beginning after 1986, in one or more Defined Contribution Plans maintained by the Employer which were in existence on May 6, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the Defined Benefit Fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of the excess of the sum of the fractions over 1.0 multiplied by the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last Limitation Year beginning before 1987, and disregarding any changes in the terms and conditions of the Plan made after May 6, 1986, but using the Code Section 415 limitation applicable to the first Limitation Year beginning on or after January 1, 1987. The Annual Addition for any Limitation Year beginning before 1987, shall not be re-computed to treat all Employee contributions as Annual Additions. 1.25 DIRECT ROLLOVER A payment made by the Plan to an Eligible Retirement Plan that is specified by the Participant or a payment received by the Plan from an Eligible Retirement Plan on behalf of a Participant or an Employee, if selected in the Adoption Agreement by the Employer. 1.26 DISABILITY Unless the Employer has elected a different definition in the Adoption Agreement, Disability is defined as an illness or injury of a potentially permanent nature, expected to last for a continuous period of not less than 12 months or can be expected to result in death, certified by a physician selected by or satisfactory to the Employer, which prevents the Participant from engaging in any occupation for wage or profit for which the Employee is reasonably fitted by training, education or experience. If elected by the Employer in the Adoption Agreement, nonforfeitable contributions will be made to the Plan on behalf of each disabled Participant who is not a Highly Compensated Employee (as defined at paragraph 1.52). Compensation for purposes of calculating the contribution will mean Compensation as defined at paragraph 1.16 herein. 1.27 DISTRIBUTION CALENDAR YEAR A calendar year for which a minimum distribution is required. 1.28 EARLY RETIREMENT AGE The age set by the Employer in the Adoption Agreement, not less than age fifty five (55), at which a Participant becomes fully vested and is eligible to retire and receive his or her benefits under the Plan. 1.29 EARLY RETIREMENT DATE The date elected by the Employer in the Adoption Agreement on which a Participant or former Participant has satisfied the Early Retirement Age requirements. If no election is made on the Adoption Agreement, it shall mean the date on which a Participant attains his or her Early Retirement Age. A former Participant who has separated from Service after satisfying any service requirement but before satisfying the Early Retirement Age and who thereafter reaches the age requirement elected on the Adoption Agreement shall be entitled to receive benefits under the Plan (other than full vesting and any allocation of Employer contributions) as though the requirements for Early Retirement Age had been satisfied. 9 1.30 EARNED INCOME Net earnings from self-employment in the trade or business with respect to which the Plan is established, determined without regard to items not included in gross income and the deductions allocable to such items, provided that personal services of the individual are a material income-producing factor. Earned Income shall be reduced by contributions made by an Employer to a Qualified Plan to the extent deductible under Code Section 404. Net earnings shall be determined taking into account the deduction for one-half of self-employment taxes allowed to the taxpayer under Code Section 164(f), to the extent deductible for taxable years beginning after December 31, 1989. 1.31 EFFECTIVE DATE The date on which the Employer's Plan or amendment to such Plan becomes effective. For amendments reflecting statutory and regulatory changes contained in The Uruguay Round Agreements Act of the General Agreement on Tariffs and Trade (GATT), The Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA), The Small Business Job Protection Act of 1996 (SBJPA), The Taxpayer Relief Act of 1997 (TRA'97), The Internal Revenue Service Restructuring and Reform Act of 1998 (IRSRRA), and the Community Renewal Tax Relief Act of 2000 (CRA), the Effective Date(s) of the applicable provisions of this legislation will be the earlier of the date upon which such amendment is first administratively applied or the first day of the Plan Year following the date of adoption of such amendment or adoption of the Basic Plan Document #01 and accompanying Adoption Agreement. 1.32 ELECTION PERIOD The period which begins on the first day of the Plan Year in which the Participant attains age thirty-five (35) and ends on the date of the Participant's death. If a Participant separates from Service prior to the first day of the Plan Year in which age thirty-five (35) is attained, the Election Period shall begin on the date of separation, with respect to the account balance as of the date of separation. 1.33 ELAPSED TIME A method of determining an Employee's entitlement under the Plan with respect to eligibility to participate, and/or vesting, which is not based on the Employee's completion of a specified number of Hours of Service during a consecutive twelve (12) month period, but rather with reference to the total period of time which elapses during which the Employee is employed by the Employer maintaining the Plan. If the Employer is a member of an affiliated service group [under Code Section 414(m)], a controlled group of corporations [under Code Section 414(b)], a group of trades or businesses under common control [under Code Section 414(c)] or any other entity required to be aggregated with the Employer pursuant to Code Section 414(o), Service will be credited for any employment for any period of time for any other member of such group. Service will also be credited for any individual required under Code Section 414(n) or Code Section 414(o) to be considered an Employee of any Employer aggregated under Code Section 414(b), (c) or (m). 1.34 ELECTIVE DEFERRALS Employer contributions in lieu of cash Compensation made to the Plan on behalf of the Participant pursuant to a Salary Deferral Agreement or other deferral mechanism. With respect to any taxable year, a Participant's Elective Deferral is the sum of all Employer contributions made on behalf of such Participant pursuant to an election to defer under any qualified cash or deferred arrangement as described in Code Section 401(k), any Simplified Employee Pension Plan with a cash or deferred arrangement as described in Code Section 408(k)(6), any SIMPLE IRA Plan described in Code Section 408(p), any eligible deferred compensation plan under Code Section 457, any plan as described under Code Section 501(c)(18), and any Employer contributions made on behalf of a Participant for the purchase of an annuity contract under Code Section 403(b) pursuant to a Salary Deferral Agreement. Elective Deferrals shall not include any deferrals properly distributed as excess Annual Additions. 1.35 ELIGIBLE EMPLOYEE For purposes of the SIMPLE 401(k) Plan provisions, any Employee who is entitled to make Elective Deferrals under the terms of the SIMPLE 401(k) Plan. 1.36 ELIGIBLE EMPLOYER An Eligible Employer means with respect to any Plan Year, an Employer who had no more than one hundred (100) Employees who received at least $5,000 of Compensation from the Employer for the preceding year. In applying the preceding sentence, all Employees of controlled groups of corporations under Code Section 414(b), all Employees of trades or businesses (whether incorporated or not) under common control under Code Section 414(c), all Employees of affiliated service groups under Code Section 414(m), and Leased Employees required to be treated as the Employer's Employees under Code Section 414(n), are taken into account. 10 An Eligible Employer that elects to have the SIMPLE 401(k) Plan provisions apply to the Plan that fails to be an Eligible Employer for any subsequent year, is treated as an Eligible Employer for the two (2) years following the last year the employer was an Eligible Employer. If the failure is due to any acquisition, disposition, or similar transaction involving an Eligible Employer, the preceding sentence applies only if the provisions of Code Section 410(b)(6)(C)(I) are satisfied. 1.37 ELIGIBLE PARTICIPANT Any Employee who is eligible to make a Voluntary or Required After-tax Contribution or an Elective Deferral (if the Employer takes such contributions into account in the calculation of the Actual Contribution Percentage), or to receive a Matching Contribution (including forfeitures) or a Qualified Matching Contribution. If a Required After-tax Contribution is required as a condition of participation in the Plan, any Employee who would be a Participant in the Plan if such Employee made such a contribution shall be treated as an Eligible Participant even though no Employee contributions are made. 1.38 ELIGIBLE RETIREMENT PLAN An individual retirement account (IRA) as described in Code Section 408(a), an individual retirement annuity (IRA) as described in Code Section 408(b), an annuity plan as described in Code Section 403(a), or a qualified trust as described in Code Section 401(a), which accepts Eligible Rollover Distributions. However, in the case of an Eligible Rollover Distribution paid to a surviving Spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. 1.39 ELIGIBLE ROLLOVER DISTRIBUTION An Eligible Rollover Distribution is any distribution of all or any portion of the balance to the credit of the Participant except that an Eligible Rollover Distribution does not include: (a) any distribution that is one of a series of substantially equal periodic payments made not less frequently than annually for the life (or life expectancy) of the Participant or the joint lives (or joint life expectancies) of the Participant and the Participant's Beneficiary, or for a specified period of ten (10) years or more, (b) any distribution to the extent such distribution is required under Code Section 401(a)(9), (c) any Hardship withdrawals under Code Section 401(k)(2)(B)(i)(IV) received after December 31, 1998, (or if elected by the Employer in accordance with IRS Notice 99-5, received after December 31, 1999). (d) the portion of any distribution that would not be includible in gross income if paid to the Participant (determined without regard to the exclusion for net unrealized appreciation with respect to Employer securities), (e) excess amounts which are returned to a Participant in accordance with paragraphs 7.11, 7.12, 7.13, and 10.2, (f) any other distribution(s) that is reasonably expected to total less than $200 during a year, (g) corrective distributions of Excess Elective Deferrals under Code Section 402(g), and the income allocable thereto, (h) Excess Contributions and Excess Aggregate Contributions under Code Section 401(k) and Code Section 401(m), and the income allocable thereto, (i) PS 58 costs, and (j) dividends paid on securities under Code Section 404(k). 1.40 EMPLOYEE A person employed by an Employer maintaining the Plan (including Self-Employed Individuals and partners). The term Employee shall include Employees of a member of an affiliated service group [as defined in Code Section 414(m)], all Employees of a controlled group of corporations [as defined in Code 11 Section 414(b)], all Employees of any incorporated or unincorporated trade or business which is under common control [as defined in Code Section 414(c)], Leased Employees [as defined in Code Section 414(n)], and any Employee required to be aggregated by Code Section 414(o). All such Employees shall be treated as employed by a single Employer. Leased Employees shall not be Employees for purposes of participation in any Plan established under a Nonstandardized Adoption Agreement, unless otherwise elected by the Employer in the Adoption Agreement. Leased Employees [as defined in Code Sections 414(n) or 414(o)] shall be considered Employees in a Plan established under a standardized Adoption Agreement except as otherwise provided in this paragraph. Exclusion under a standardized Adoption Agreement is available only if Leased Employees do not constitute more than 20% of the recipient Employer's non-highly compensated work force, and the Employer complies with the requirements as outlined in paragraph 2.7, and so elects in the Adoption Agreement. An individual shall only be treated as an Employee if he or she is reported on the payroll records of the Employer or an employer who is a member of the same controlled group or affiliated service group as a common law employee. The term does not include any other common law employee or any Leased Employee. It is expressly intended that individuals not treated as common law employees by the Employer or a member of the same controlled group or affiliated service group on their payroll records, as identified by a specific job code or work status code, are to be excluded from plan participation even if a court or administrative agency subsequently determines that such individuals are common law employees and not independent contractors. 1.41 EMPLOYER The Self-Employed Individual, partnership, corporation or other organization which adopts this Plan including any entity that succeeds the Employer and adopts this Plan. For purposes of Article X, Limitations on Allocations, Employer shall mean the Employer that adopts this Plan, and all members of a controlled group of corporations [as defined in Code Section 414(b) as modified by Code Section 415(h)], all commonly controlled trades or businesses [as defined in Code Section 414(c) as modified by Code Section 415(h)] or affiliated service groups [as defined in Code Section 414(m)] of which the adopting Employer is a part, and any other entity required to be aggregated with the Employer pursuant to Regulations under Code Section 414(o). In addition to such required treatment, the Plan Sponsor may, in its discretion, designate as an Employer any business entity which is not such a "common control," "affiliated service group" or "predecessor" business entity which is otherwise affiliated with the Employer, subject to such nondiscriminatory limitations as the Employer may impose. 1.42 ENTRY DATE The date as of which an Employee who has satisfied the Plan's eligibility requirements enters or reenters the Plan, as defined in the Adoption Agreement. 1.43 ERISA The Employee Retirement Income Security Act of 1974, as amended and any successor statute. 1.44 EXCESS AGGREGATE CONTRIBUTIONS The excess, with respect to any Plan Year, of: (a) the aggregate Contribution Percentage Amounts taken into account in computing the numerator of the Contribution Percentage actually made on behalf of Highly Compensated Employees for such Plan Year, over (b) the maximum Contribution Percentage Amounts permitted by the ACP test (determined hypothetically by reducing contributions made on behalf of Highly Compensated Employees in order of their Contribution Percentages beginning with the highest of such percentages). (c) Such determination shall be made after first determining Excess Elective Deferrals pursuant to paragraph 1.47 and then determining Excess Contributions pursuant to paragraph 1.46. 1.45 EXCESS ANNUAL ADDITIONS The excess of the Participant's Annual Additions for the Limitation Year over the Maximum Permissible Amount. 12 1.46 EXCESS CONTRIBUTION With respect to any Plan Year, the excess of: (a) the aggregate amount of Employer contributions actually taken into account in computing the ADP of Highly Compensated Employees for such Plan Year, over (b) the maximum amount of such contributions permitted by the ADP Test (determined by hypothetically reducing contributions made on behalf of Highly Compensated Employees in order of the ADPs, beginning with the highest of such percentages). 1.47 EXCESS ELECTIVE DEFERRALS Those Elective Deferrals that are includible in a Participant's gross income under Code Section 402(g) to the extent such Participant's Elective Deferrals for a taxable year exceed the dollar limitation under Code Section 402(g). Excess Elective Deferrals shall be treated as Annual Additions under the Plan, unless such amounts are distributed no later than the first April 15 following the close of the Participant's taxable year. 1.48 EXPECTED YEAR OF SERVICE An eligibility computation period during which an Employee in an eligible class is expected to complete a Year of Service. If an Employee who is not expected to complete a Year of Service actually completes a Year of Service during an applicable computation period, he shall be deemed to have become an Employee in the eligible class as of the first day of the eligibility computation period in which he first completes a Year of Service. 1.49 FIRST DISTRIBUTION CALENDAR YEAR For distributions beginning before the Participant's death, the First Distribution Calendar Year is the calendar year immediately preceding the calendar year which contains the Participant's Required Beginning Date. For distributions beginning after the Participant's death, the First Distribution Calendar Year is the calendar year in which distributions are required to begin pursuant to paragraph 7.10. 1.50 HARDSHIP An immediate and heavy financial need of the Employee where such Employee lacks other available financial resources to satisfy such financial need. 1.51 HIGHEST AVERAGE COMPENSATION For Limitation Years beginning before January 1, 2000, the average Compensation for the three (3) consecutive Years of Service with the Employer that produces the highest average. A Year of Service with the Employer is the twelve (12) consecutive month period defined in the Adoption Agreement, or, if not indicated in the Adoption Agreement, as defined in paragraph 1.117. 1.52 HIGHLY COMPENSATED EMPLOYEE Effective for years after December 31, 1996, the term Highly Compensated Employee means any Employee who: (1) is a 5% owner at any time during the year or preceding year, or (2) for the preceding year had Compensation from the Employer in excess of $80,000 and if the Employer so elects in the Adoption Agreement, is in the Top-Paid Group for the preceding year. The $80,000 amount is adjusted at the same time and in the same manner as under Code Section 415(d), except that the base period is the calendar quarter ending September 30, 1996. For the determination of who is a Highly Compensated Employee, the applicable year of the Plan for which a determination is being made is called a determination year and the preceding twelve (12) month period is called a look-back year. Employees who do not meet the Highly Compensated Employee definition are considered Non-Highly Compensated Employees. A Highly Compensated former Employee is based on the rules applicable to determining Highly Compensated Employee status in effect for that determination year, in accordance with Section 1.414(q)-1T, A-4 of the temporary Income Tax Regulations and IRS Notice 97-45. In determining whether an Employee is a Highly Compensated Employee for years beginning in 1997, the amendments to Code Section 414(q) stated above are treated as having been in effect for years beginning in 1996. In order to be effective, a Top-Paid Group election or calendar year data election must apply consistently to all plans of the Employer that begin with or within the same calendar year. 13 1.53 HOUR OF SERVICE (a) Unless otherwise specified in the Adoption Agreement, each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Employer. These hours shall be credited to the Employee for the computation period in which the duties are performed, and (b) each hour for which an Employee is paid, or entitled to payment, by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including Disability), layoff, jury duty, military duty or leave of absence. No more than five hundred and one (501) Hours of Service shall be credited under this paragraph for any single continuous period (whether or not such period need occur in a single computation period). Hours under this paragraph shall be calculated and credited pursuant to Section 2530.200b-2 of the Department of Labor Regulations which are incorporated herein by this reference, and (c) each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. The same Hours of Service shall not be credited both under paragraph (a) or paragraph (b), as the case may be, and under this paragraph (c). These hours shall be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made. (d) Hours of Service shall be credited for employment with the Employer and with other members of an affiliated service group [as defined in Code Section 414(m)], a controlled group of corporations [as defined in Code Section 414(b)], or a group of trades or businesses under common control [as defined in Code Section 414(c)] of which the adopting Employer is a member, and any other entity required to be aggregated with the Employer pursuant to Code Section 414(o) and the Regulations thereunder. Hours of Service shall also be credited for any individual considered an Employee for purposes of this Plan under Code Section 414(n) or Code Section 414(o) and the Regulations thereunder. (e) Solely for purposes of determining whether a Break in Service, as defined in paragraph 1.14, for participation and vesting purposes has occurred in a computation period, an individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such hours cannot be determined, eight (8) Hours of Service per day of such absence. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence by reason of the pregnancy of the individual, by reason of a birth of a child of the individual, by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this paragraph shall be credited in the computation period in which the absence begins if the crediting is necessary to prevent a Break in Service in that period, or in all other cases, in the following computation period. No more than five hundred and one (501) hours will be credited under this paragraph. (f) Hours of Service shall be determined under the hours counting method as elected by the Employer in the Adoption Agreement. If no election is made, actual hours under the hours counting method will be used. 1.54 INTEGRATION LEVEL The amount of Compensation specified in the Adoption Agreement at or below which the rate of contributions or benefits (expressed in each case as a percentage of such Compensation) provided under the Plan is less than the rate of contributions or benefits (expressed in each case as a percentage of such Compensation) provided under the Plan with respect to Compensation above such level. The Adoption Agreement must specify an Integration Level in effect for the Plan Year for each Participant. No Integration Level in effect for a particular year may exceed the contribution and benefit base ("Taxable Wage Base") under Section 230 [Code Section 3121(a)(1)] of the Social Security Act in effect on the first day of the Plan Year. 14 1.55 KEY EMPLOYEE Any Employee or former Employee (and the Beneficiaries of such Employee) who at any time during the determination period was: (a) an officer of the Employer if such individual's annual Compensation exceeds 50% of the dollar limitation under Code Section 415(b)(1)(A) (the defined benefit maximum annual benefit), (b) an owner or an individual considered an owner under Code Section 318 of one of the ten (10) largest interests in the Employer if such individual's Compensation exceeds 100% of the dollar limitation under Code Section 415(c)(1)(A) and such ownership exceeds 1/2%, (c) a more than 5% owner of the Employer, or (d) a 1% owner of the Employer who has an annual Compensation of more than $150,000. The determination period is the Plan Year containing the Top-Heavy Determination Date and the four (4) preceding Plan Years. The determination of Key Employee status will be made in accordance with Code Section 416(i)(1) and the Regulations thereunder. 1.56 LEASED EMPLOYEE Effective for Plan Years beginning after December 31, 1996, any person (other than an Employee of the recipient) who, pursuant to an agreement between the recipient and any other person ("leasing organization"), has performed services for the recipient [or for the recipient and related persons determined in accordance with Code Section 414(n)(6)] on a substantially full-time basis for a period of at least one year and such services are performed under the primary direction or control of the recipient Employer. If a Leased Employee is treated as an Employee by reason of this paragraph 1.56, "Compensation" includes Compensation from the leasing organization which is attributable to services performed for the Employer. 1.57 LIMITATION YEAR The calendar year or such other twelve (12) consecutive month period designated by the Employer in the Adoption Agreement for purposes of determining the maximum Annual Additions to a Participant's account. All Qualified Plans maintained by the Employer must use the same Limitation Year. If the Limitation Year is amended to a different twelve (12) consecutive month period, the new Limitation Year must begin on a date within the Limitation Year in which the amendment is made. If no designation is made on the Adoption Agreement, the Limitation Year will automatically default to the Plan Year. 1.58 MASTER OR PROTOTYPE PLAN A plan, the form of which is the subject of a favorable opinion letter from the Internal Revenue Service. 1.59 MATCHING CONTRIBUTION An Employer contribution made to this or any other Defined Contribution Plan on behalf of a Participant on account of a Voluntary or Required After-tax Contribution made by such Participant, or on account of a Participant's Elective Deferral made by such Participant under a Plan maintained by the Employer. 1.60 MAXIMUM PERMISSIBLE AMOUNT The maximum Annual Additions that may be contributed or allocated to a Participant's account under the Plan for any Limitation Year shall not exceed the lesser of: (a) the Defined Contribution Dollar Limitation, or (a) 25% of the Participant's Compensation for the Limitation Year. The Compensation limitation referred to in (b) shall not apply to any contribution for medical benefits [within the meaning of Code Section 401(h) or Code Section 419A(f)(2)] which is otherwise treated as an Annual Addition under Code Sections 415(l)(1) or 419(d)(2). If a short Limitation Year is created because of an amendment changing the Limitation Year to a different twelve (12) consecutive month period, the Maximum Permissible Amount will not exceed the Defined Contribution Dollar Limitation multiplied by a fraction, the numerator of which is the number of months in the short Limitation Year and the denominator of which is twelve (12). 15 1.61 NET PROFIT The current and accumulated operating earnings of the Employer after Federal and state income taxes, excluding nonrecurring or unusual items of income, and before contributions to this and any other Qualified Plan of the Employer, unless the Employer has elected a different definition in the Adoption Agreement. 1.62 NORMAL RETIREMENT AGE The age set by the Employer in the Adoption Agreement, not to exceed age sixty-five (65), at which a Participant becomes fully vested and is eligible to retire and receive his or her benefits under the Plan. 1.63 NORMAL RETIREMENT DATE The date on which the Participant attains the Normal Retirement Age as elected in the Adoption Agreement. If no election is made on the Adoption Agreement, it shall mean the date on which a Participant attains his or her Normal Retirement Age. 1.64 OWNER-EMPLOYEE A sole proprietor or a partner owning more than 10% of either the capital or profits interest of the partnership. 1.65 PAIRED PLANS Two (2) or more plans which are either a combination of two (2) or more standardized Defined Contribution Plans or a combination of one (1) or more standardized Defined Contribution Plan(s) and one (1) Defined Benefit Plan offered by the same sponsor, which have been designed so that any single Plan, or combination of Plans adopted by an Employer, where each Plan by itself or the Plans together will meet the requirements of the antidiscrimination rules, the contribution and benefit limitations, and the Top-Heavy provisions of Code Sections 401(a)(4), 415 and 416. 1.66 PARTICIPANT Any current Employee who met the applicable eligibility requirements and reached his or her Entry Date and, where the context so requires, pursuant to the terms of the Plan, any living former Employee on whose behalf an Account is maintained or former Employee who has met the eligibility requirements. 1.67 PARTICIPANT'S BENEFIT With respect to required distributions pursuant to paragraph 7.4, the account balance as of the last Valuation Date in the calendar year immediately preceding the Distribution Calendar Year increased by the amount of any contributions or forfeitures allocated to the account balance as of the dates in the calendar year after the Valuation Date and decreased by distributions made in the calendar year after the Valuation Date. A special exception exists for the second Distribution Calendar Year. For purposes of this paragraph, if any portion of the minimum distribution for the First Distribution Calendar Year is made in the second Distribution Calendar Year on or before the Required Beginning Date, the amount of the minimum distribution made in the second Distribution Calendar Year shall be treated as if it had been made in the immediately preceding Distribution Calendar Year. a) PERIOD OF SEVERANCE For Plans using Elapsed Time for purposes of crediting Service: (a) a Break in Service shall mean a Period of Severance of at least twelve (12) months; (b) a Period of Severance is a continuous period of time during which the Employee is not employed by the Employer; (c) a Period of Severance begins on the date the Employee retires, quits, or is discharged, or if earlier, the twelve (12) month anniversary of the date on which the Employee was otherwise first absent from Service. 1.69 PERMISSIVE AGGREGATION GROUP The Required Aggregation Group of plans plus any other plan or plans of the Employer which, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of Code Sections 401(a)(4) and 410. 1.70 PLAN The Defined Contribution Plan of the Employer in the form of this Prototype Defined Contribution Plan and the applicable Adoption Agreement executed by the Employer as may be amended from time to time (which includes any addendum thereto). The Plan shall have the name specified in the Adoption Agreement. 16 1.71 PLAN ADMINISTRATOR The Employer or individual(s) or entity(ies) appointed by the Employer to administer the Plan as provided at paragraph 12.1 herein. 1.72 PLAN SPONSOR The Employer who adopts this Prototype Defined Contribution Plan and accompanying Adoption Agreement. 1.73 PLAN YEAR The twelve (12) consecutive month period designated by the Employer in the Adoption Agreement. If the Employer maintains Paired Plans under Basic Plan Document #01, each Plan established thereunder must have the same Plan Year. 1.74 PRESENT VALUE The actuarial equivalent of a Participant's accrued benefit under a Defined Benefit Plan maintained by the Employer expressed in the form of a lump sum. Actuarial equivalence shall be based on reasonable interest and mortality assumptions determined in accordance with the Top-Heavy provisions of the respective plan. Present Value is used for the purposes of the Top-Heavy test and the determination with respect thereto. 1.75 PRIOR PLAN YEAR The Plan Year immediately preceding the current Plan Year. 1.76 PRIOR SAFE HARBOR PLAN A Target Benefit Plan that: (a) was adopted and in effect on September 19, 1991, (b) which on that date contained a Stated Benefit Formula applicable to Target Benefit Plans that took into account Service prior to that date, and (c) satisfied the applicable nondiscrimination requirements for Target Benefit Plans for those prior years. For purposes of determining whether a plan satisfies the applicable nondiscrimination requirements for Target Benefit Plans for Plan Years beginning before January 1, 1994, no amendments after September 19, 1991, other than amendments necessary to satisfy Code Section 401(l), will be taken into account. 1.77 PROJECTED ANNUAL BENEFIT For Limitation Years beginning before January 1, 2000, the annual retirement benefit (adjusted to an actuarial equivalent straight life annuity if such benefit is expressed in a form other than a straight life annuity or Qualified Joint and Survivor Annuity) to which the Participant would be entitled under the terms of a Defined Benefit Plan or Plans, assuming: (a) the Participant will continue employment until Normal Retirement Age under the Plan (or current age, if later), and (b) the Participant's Compensation for the current Limitation Year and all other relevant factors used to determine benefits under the Plan will remain constant for all future Limitation Years. 1.78 PROJECTED PARTICIPATION For purposes of determining a Participant's stated benefit, a Participant's years of Projected Participation under the Plan is the sum of (a) and (b), where (a) is the number of years during which the Participant benefited under this Plan beginning with the latest of: (1) the first Plan Year in which the Participant benefited under the Plan, (2) the first Plan Year taken into account in the Stated Benefit Formula, and (3) any Plan Year immediately following a Plan Year in which the Plan did not satisfy the safe harbor for Target Benefit Plans in Regulations Section 1.401(a)(4)-8(b)(3), and ending with the last day of the current Plan Year, and 17 (b) is the number of years if any, subsequent to the current Plan Year through the end of the Plan Year in which the Participant attains Normal Retirement Age. For purposes of this definition of years of Projected Participation, if this Plan is a Prior Safe Harbor Plan, the Plan is deemed to satisfy the safe harbor for Target Benefit Plans in Regulations Section 1.401(a)(4)-8(b)(3) and a Participant is treated as benefiting under the Plan in any Plan Year beginning prior to January 1, 1994. 1.79 QUALIFIED DOMESTIC RELATIONS ORDER (QDRO ORDER) A Qualified Domestic Relations Order (QDRO) is a signed domestic relations order issued by a state court or agency which creates, recognizes or assigns to an alternate payee(s) the right to receive all or part of a Participant's Plan benefit and which meets the requirements of Code Section 414(p). An alternate payee is a Spouse, former Spouse, child, or other dependent who is treated as a Beneficiary under the Plan as a result of the QDRO. Unless elected otherwise by the Employer in the Adoption Agreement, the earliest date for payment of a QDRO to an alternate payee, is the date upon which the order is deemed qualified. 1.80 QUALIFIED EARLY RETIREMENT AGE For purposes of paragraph 8.9, Qualified Early Retirement Age is the latest of: (a) the earliest date under the Plan on which the Participant may elect to receive retirement benefits, or (b) the first day of the 120th month beginning before the Participant reaches Normal Retirement Age, or (c) the date the Participant begins participation. 1.81 QUALIFIED JOINT AND SURVIVOR ANNUITY (QJSA) An immediate annuity for the life of the Participant with a survivor annuity for the life of the Participant's Spouse which is at least 50% of but not more than 100% of the annuity payable during the joint lives of the Participant and the Participant's Spouse. The exact amount of the survivor annuity is to be specified by the Employer in the Adoption Agreement. If not designated by the Employer, the survivor annuity will be 50% of the amount paid to the Participant during his or her lifetime. The Qualified Joint and Survivor Annuity will be the amount of benefit which can be provided by the Participant's Vested Account Balance. 1.82 QUALIFIED MATCHING CONTRIBUTIONS (QMACS) Matching contributions which when made are subject to the distribution and nonforfeitability requirements under Code Section 401(k). 1.83 QUALIFIED NON-ELECTIVE CONTRIBUTIONS (QNECS) Contributions (other than Matching Contributions or Qualified Matching Contributions) made by the Employer and allocated to Participants' accounts that the Participants may not elect to receive in cash until distributed from the Plan, that are nonforfeitable when made, and that are distributable only in accordance with the distribution provisions that are applicable to Elective Deferrals and Qualified Matching Contributions. 1.84 QUALIFIED PLAN Any pension, profit-sharing, stock bonus, or other plan which meets the requirements of Code Section 401 and includes a trust exempt from tax under Code Section 501(a) or any annuity plan described in Code Section 403(a). a) QUALIFIED PRE-RETIREMENT SURVIVOR ANNUITY An annuity for the life of the Surviving Spouse of a Participant the actuarial equivalent of which is not less than 50% of the vested Participant's Account Balance as of the date of the Participants' death, as elected by Employer in the Adoption Agreement. If no election is made on the Adoption Agreement the Qualified Pre-Retirement Survivor Annuity shall be 50% of the Participant's Vested Account Balance as of the date of the death of the Participant, unless the Employer in a prior version of the Adoption Agreement or Plan, had elected that the Qualified Pre-Retirement Survivor Annuity be 100% of the Account Balance. 18 1.86 QUALIFIED VOLUNTARY CONTRIBUTION A tax-deductible Voluntary Employee Contribution which was permitted to be made for the tax years 1982 through 1986. This type of contribution is no longer permitted to be made by a Participant. This Plan shall accept such type of contribution if made in a prior plan and an appropriate recordkeeping account will be established on behalf of the Participant. 1.87 REQUIRED AGGREGATION GROUP A group of plans including: (a) each Qualified Plan of the Employer in which at least one (1) Key Employee participates or participated at any time during the determination period (regardless of whether the plan has terminated), and (b) any other Qualified Plan of the Employer which enables a plan described in (a) to meet the requirements of Code Sections 401(a)(4) or 410. 1.88 REQUIRED BEGINNING DATE The date on which a Participant is required to take his or her first minimum distribution under the Plan as elected by the Employer in the Adoption Agreement. The rules regarding the determination of the Required Beginning Date are set forth at paragraph 7.5 herein. 1.89 REQUIRED AFTER-TAX CONTRIBUTIONS Employee after-tax contributions required as a condition of participation in the Plan. 1.90 ROLLOVER CONTRIBUTION A contribution made by a Participant of an amount distributed to such Participant from another Qualified Plan in accordance with Code Section 402(c). 1.91 SALARY DEFERRAL AGREEMENT An agreement between the Employer and an Employee where the Employee authorizes the Employer to withhold a specified percentage or dollar amount of his or her Compensation (otherwise payable in cash) for deposit to the Plan on behalf of such Employee. 1.92 SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES (SIMPLE) A plan adopted by an Eligible Employer under Code Section 401(k)(11) under which Eligible Employees are permitted to make Elective Deferrals to a Qualified Plan established under the SIMPLE 401(k) Plan Adoption Agreement. 1.93 SELF-EMPLOYED INDIVIDUAL An individual who has Earned Income for the taxable year from the trade or business for which the Plan is established including an individual who would have had Earned Income but for the fact that the trade or business had no Net Profit for the taxable year. 1.94 SERVICE The period of current or prior employment with the Employer including any imputed period of employment which must be counted under USERRA. If the Employer maintains a plan of a predecessor employer, service for such predecessor shall be treated as Service for the Employer for the purpose(s) specified in the Adoption Agreement. Service is determined under an hours counting method or Elapsed Time method as selected by the Employer in the Adoption Agreement. If the Employer has elected to use the Elapsed Time method to determine eligibility and/or vesting Service, the aggregate of the following (applied without duplication and except for periods of Service that may be disregarded under paragraph 9.6): (a) Each period from an Employee's date of hire (or reemployment date) to his next Severance Date; and (b) If an Employee performs an Hour of Service within twelve (12) months of a Severance Date, the period from such Severance Date to such Hour of Service. Service shall be credited for all periods whether the Employee is employed by an Employer or an Affiliate. Service shall be measured in whole years and fractions of a year in months. For this purpose, (a) periods of less than a full year shall be aggregated on the basis that twelve (12) months or three hundred and sixty five (365) days equals a year, and (b) in aggregating days into months, thirty (30) days shall be rounded up to the nearest whole month. For purposes of determining Service, "Date of Hire" means the date on which an Employee first completes 19 an Hour of Service and "Reemployment Date" means the date on which an Employee first completes an Hour of Service after a Severance Date. If the Employer is a member of an affiliated service group [under Code Section 414(m)], a controlled group of corporations [under Code Section 414(b)], a group of trades or businesses under common control [under Code Section 414(c)] or any other entity required to be aggregated with the Employer pursuant to Code Section 414(o), Service will be credited for any employment for any period of time for any other member of such group. Service will also be credited for any individual required under Code Section 414(n) or Code Section 414(o) to be considered an Employee of any Employer aggregated under Code Section 414(b), (c), or (m). 1.95 SEVERANCE DATE The date which is the earlier of: (a) the date on which an Employee quits, retires, is discharged or dies; or (b) the first anniversary of the first date of a period in which an Employee remains continuously absent from Service with an Employer or affiliate (with or without pay) for any reason other than quit, retirement, discharge or death. 1.96 SEVERANCE PERIOD Each period from an Employee's Severance Date to his next Reemployment Date. 1.97 SERVICE PROVIDER An individual or business entity who is retained by the Plan Administrator on behalf of the Plan to provide specified administrative services to the Plan. 1.98 SHAREHOLDER EMPLOYEE An Employee or officer who owns [or is considered as owning within the meaning of Code Section 318(a)(1)], on any day during the taxable year of an electing small business corporation (S Corporation), more than 5% of such corporation's outstanding stock. 1.99 SIMPLIFIED EMPLOYEE PENSION PLAN A plan under which the Employer makes contributions for eligible Employees pursuant to a written formula. Contributions are made to an individual retirement account which meets the requirements of Code Section 408(k). 1.100 SPONSOR The institution or entity and any of its affiliates or any successor or assigns thereto identified in the Adoption Agreement who makes this Prototype Defined Contribution Plan available to adopting Employers. 1.101 SPOUSE The individual to whom a Participant is married, or was married in the case of a deceased Participant who was married at the time of his or her death. A former Spouse will be treated in the same manner as a Spouse to the extent provided under a Qualified Domestic Relations Order as described in Code Section 414(p). 1.102 STATED BENEFIT FORMULA The formula elected by the Employer in the Adoption Agreement expressed in the form of a straight life annuity without a term certain, refund feature or survivor benefit. 1.103 SUPER TOP-HEAVY PLAN A Plan described at paragraph 1.106 under which the Top-Heavy Ratio exceeds 90%. 1.104 TAXABLE WAGE BASE For plans with an allocation formula which takes into account the Employer's contribution under the Federal Insurance Contributions Act (FICA), the contribution and benefit base in effect under the Social Security Act (Section 203) at the beginning of the Plan Year. 1.105 TOP-HEAVY DETERMINATION DATE For the first Plan Year of the Plan, the last day of the first Plan Year. For any Plan Year subsequent to the first Plan Year, the last day of the preceding Plan Year. 1.106 TOP-HEAVY PLAN For any Plan Year, the Employer's Plan is Top-Heavy if any of the following conditions exist: (a) The Top-Heavy Ratio for the Employer's Plan exceeds 60% and this Plan is not part of any Required Aggregation Group or Permissive Aggregation Group of plans. 20 (b) The Employer's Plan is a part of a Required Aggregation Group of plans but not part of a Permissive Aggregation Group and the Top-Heavy Ratio for the group of plans exceeds 60%. (c) The Employer's Plan is a part of a Required Aggregation Group and part of a Permissive Aggregation Group of plans and the Top-Heavy Ratio for the Permissive Aggregation Group exceeds 60%. 1.107 TOP-HEAVY RATIO (a) If the Employer maintains one or more Defined Contribution Plans (including any Simplified Employee Pension Plan) and the Employer has not maintained any Defined Benefit Plan which during the five (5) year period ending on the Determination Date(s) has or has had accrued benefits, the Top-Heavy Ratio for this Plan alone, or for the Required or Permissive Aggregation Group as appropriate, is a fraction, (1) the numerator of which is the sum of the account balances of all Key Employees as of the Determination Date(s) [including any part of any account balance distributed in the five year period ending on the Determination Date(s)], and (2) the denominator of which is the sum of all account balances [including any part of any account balance distributed in the five (5) year period ending on the Determination Date(s)], both computed in accordance with Code Section 416 and the Regulations thereunder. Both the numerator and denominator of the Top-Heavy Ratio are increased to reflect any contribution not actually made as of the Determination Date but which is required to be taken into account on that date under Code Section 416 and the Regulations thereunder. (b) If the Employer maintains one or more Defined Contribution Plans (including any Simplified Employee Pension Plan) and the Employer maintains or has maintained one or more Defined Benefit Plans which during the five (5) year period ending on the Determination Date(s) has or has had any accrued benefits, the Top-Heavy Ratio for any Required or Permissive Aggregation Group, as appropriate, is a fraction, the numerator of which is the sum of account balances under the aggregated Defined Contribution Plan or Plans for all Key Employees, determined in accordance with (a) above, and the Present Value of accrued benefits under the aggregated Defined Benefit Plan or Plans for all Key Employees as of the Determination Date(s), and the denominator of which is the sum of the account balances under the aggregated Defined Contribution Plan or Plans for all Participants, determined in accordance with (a) above, and the Present Value of accrued benefits under the Defined Benefit Plan or Plans for all Participants as of the Determination Date(s), all determined in accordance with Code Section 416 and the Regulations thereunder. The accrued benefits under a Defined Benefit Plan in both the numerator and denominator of the Top-Heavy Ratio are increased for any distribution of an accrued benefit made in the five (5) year period ending on the Determination Date. (c) For purposes of (a) and (b) above, the value of account balances and the Present Value of accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the twelve (12) month period ending on the Determination Date, except as provided in Code Section 416 and the Regulations thereunder for the first and second Plan Years of a Defined Benefit Plan. The account balances and accrued benefits of a Participant who is not a Key Employee but who was a Key Employee in a prior year, or who has not been credited with at least one (1) Hour of Service with any Employer maintaining the Plan at any time during the five (5) year period ending on the Determination Date, will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Code Section 416 and the Regulations thereunder. Qualified Voluntary Employee Contributions will not be taken into account for purposes of computing the Top-Heavy Ratio. When aggregating plans, the value of account balances and accrued benefits will be 21 calculated with reference to the Determination Dates that fall within the same calendar year. The accrued benefit of a Participant other than a Key Employee shall be determined under the method, if any, that uniformly applies for accrual purposes under all Defined Benefit Plans maintained by the Employer, or if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Code Section 411(b)(1)(C). 1.108 TOP-PAID GROUP The group consisting of the top 20% of Employees when ranked on the basis of Compensation paid during such year. For purposes of determining the number of Employees in the group (but not who is in it), Employees identified in (a) through (d) may be excluded and Employees identified in (e) through (f) shall be excluded: (a) Employees who have not completed six (6) months of Service by the end of the year; (b) Employees who normally work less than seventeen and one-half (17 1/2) hours per week by the end of the year; (c) Employees who normally work not more than six (6) months during any year; (d) Employees who have not attained age twenty-one (21) by the end of the year; (e) Employees included in a collective bargaining unit, covered by an agreement between Employee representatives and the Employer, where retirement benefits were the subject of good faith bargaining, if they constitute at least 90% of the Employer's workforce and the Plan covers only non-union Employees; and (f) Employees who are nonresident aliens and who receive no Earned Income which constitutes income from sources within the United States. 1.109 TRANSFER CONTRIBUTION A non-taxable transfer of a Participant's benefit directly from a Qualified Plan to this Plan. This type of transfer does not constitute constructive receipt of plan assets. 1.110 TRUST The trust established in conjunction with the Plan, together with any and all amendments thereto which holds assets of the Plan held by or in the name of the Trustee or Custodian. 1.111 TRUSTEE An individual, individuals or corporation and any of its affiliates or any successor or assigns (who may be the Sponsor or an affiliate) who are appointed or assigned in the Adoption Agreement or any duly appointed successor or assigns as provided for in paragraph 13.19. 1.112 UNIFORMED SERVICES EMPLOYMENT AND REEMPLOYMENT RIGHTS ACT OF 1994 (USERRA) The Uniformed Services Employment and Reemployment Rights Act of 1994, as amended. Notwithstanding any provision of the Plan to the contrary, contributions, benefits, Plan loan repayment, suspensions and service credit with respect to qualified military service will be provided in accordance with Code Section 414(u). 1.113 VALUATION DATE The last day of the Plan Year and such other date(s) as specified in the Adoption Agreement on which the fair market value of Plan assets is determined. The Trustee and/or Custodian must also value the Trust on such other Valuation Dates as directed by the Plan Administrator. 1.114 VESTED ACCOUNT BALANCE The aggregate value of the Participant's Vested Account Balances derived from Employer and Employee contributions (including Rollovers), whether vested before or upon death, including the proceeds of insurance contracts, if any, on the Participant's life. The provisions of Article VIII shall apply to a Participant who is vested in amounts attributable to Employer contributions, Employee contributions (or both) at the time of death or distribution. 22 1.115 VOLUNTARY AFTER-TAX CONTRIBUTION Any contribution made to the Plan by or on behalf of a Participant that is included in the Participant's gross income in the year in which made and that is maintained under a separate account to which earnings and losses are allocated. 1.116 WELFARE BENEFIT FUND Any fund that is part of a plan of the Employer, or has the effect of a plan, through which the Employer provides welfare benefits to Employees or their beneficiaries. For these purposes, Welfare Benefit means any benefit other than those with respect to which Code Section 83(h) (relating to transfers of property in connection with the performance of services), Code Section 404 (relating to deductions for contributions to an Employees' trust or annuity and Compensation under a deferred payment plan), Code Section 404A (relating to certain foreign deferred compensation plans) apply. A "Fund" for purposes of this paragraph, is any social club, voluntary employee benefit association, supplemental unemployment benefit trust or qualified group legal service organization described in Code Section 501(c)(7), (9), (17) or (20); any trust, corporation, or other organization not exempt from income tax, or to the extent provided in regulations, any account held for an Employer by any person. 1.117 YEAR OF SERVICE (a) If elected in the Adoption Agreement, the hours counting method will be used in determining either an Employee's initial or continuing eligibility to participate in the Plan, or the nonforfeitable interest in the Participant's account balance derived from Employer contributions. A Year of Service is a twelve (12) consecutive month period in which an Employee has completed one-thousand (1,000) Hours of Service (or such lower number as is specified in the Adoption Agreement). (1) The eligibility computation period starts with the day the Employee first performs an Hour of Service and is a twelve (12) consecutive month period during which the Employee has completed the number of Hours of Service [not to exceed one-thousand (1,000)] as elected in the Adoption Agreement. (2) The vesting computation period is a twelve (12) consecutive month period as elected by the Employer in the Adoption Agreement during which the Employee completed the number of Hours of Service [not to exceed one-thousand (1,000)] as elected in the Adoption Agreement. If no election is made, the Plan Year shall be used provided that in the event the Plan Year is changed, the "vesting computation period" shall be the twelve (12) consecutive month period determined in accordance with Department of Labor Regulation Section 2530.203-2(c), the provisions of which are incorporated herein by reference. (b) If elected in the Adoption Agreement, the Elapsed Time method will be used in determining either an Employee's initial or continuing eligibility to participate in the Plan, or the nonforfeitable interest in the Participant's account balance derived from Employer contributions. An Employee will receive credit for the aggregate of all time period(s) commencing with the Employee's first day of employment or reemployment and ending on the date a Break in Service begins. The first day of employment or reemployment is the first day the Employee performs an Hour of Service for the Employer. An Employee will also receive credit for any Period of Severance of less than twelve (12) consecutive months. Fractional periods of a year will be expressed in terms of days. Years of Service will be determined in accordance with paragraph 1.94. (1) A Break in Service under the Elapsed Time method is a Period of Severance of at least twelve (12) consecutive months. A Period of Severance is a continuous period of time during which the Employee is not employed by the Employer. The continuous period begins on the date the Employee retires, quits, is discharged or if earlier, the first twelve (12) month anniversary of the date on which the Employee is first absent from Service. 23 (2) In the case of an individual who is absent from work for maternity or paternity reasons, the twelve (12) consecutive month period beginning on the first anniversary of the first date of such absence from work for maternity or paternity reasons (a) by reason of the pregnancy of the individual, (b) by reason of the birth of the child of the individual, (c) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (d) for purposes of caring for such child for a period beginning immediately following such birth or placement. (a) Each Employee will share in Employer contributions for the period beginning on the date the Employee commences participation under the Plan and ending on the date on which such Employee terminates employment with the Employer or is no longer a member of an eligible class of Employees. (b) If two (2) Years of Service are required as a condition of eligibility, a Participant will only have completed two (2) Years of Service for eligibility purposes upon the actual completion of two (2) consecutive Years of Service. (c) The Employer may elect in the Adoption Agreement for purposes of determining a Participant's vested interest to disregard Years of Service prior to: (1) the time the Employer or any affiliate maintained the Plan or any predecessor plan; and (2) an Employee's attainment of a certain age, not to exceed age eighteen (18). (f) An Employee's Years of Service under this Plan may be determined using the hours counting method or the Elapsed Time method or both. Unless otherwise elected in the Adoption Agreement, Years of Service shall be determined using the hours counting method on the basis of actual hours worked. (g) If the Plan determines Service for a given purpose on one basis and an Employee transfers to Employment covered by this Plan from Employment covered by another Qualified Plan which determines Service for such purpose on the other basis, and if the Employee's Service for the period during which he was covered by such other plan is required to be taken into consideration under this Plan for that purpose, then the following rules shall apply: (1) If such Service was determined under the other plan using the hours counting method, then the period so taken into consideration through the close of the computation period in which such transfer occurs shall be: (i) the number of Years of Service credited to the Employee for such purpose under such other plan as of the start of such computation period, and (ii) for the computation period in which such transfer occurs, the greater of: (A) his Service for such period as of the date of transfer determined under the rules of such other plan, or (B) his Service for such period determined under the Elapsed Time rules of this Plan. Service after the close of that computation period shall be determined for such purpose solely under the Elapsed Time rules of this Plan. (2) If such Service was determined under the other plan using the Elapsed Time method, then the period taken into consideration shall be (1) the number of one-year periods of 24 Service credited to the Employee under such other plan as of the date of the transfer, and (2) for the computation period which includes the date of transfer, the Hours of Service equivalent to any fractional part of a Year of Service credited to him under such other plan. In determining such equivalency, the Employee shall be credited with one-hundred-ninety (190) Hours of Service for each month or fraction thereof. 25 If this Plan is an amendment and continuation of another Qualified Plan or if this Plan is amended and an effect of the amendment is to change the basis on which Years of Service are determined, the foregoing rules shall be applied as if each Employee had transferred employment on the effective date of such amendment. If no election is made on the Adoption Agreement, the Plan will define a Year of Service as a twelve (12) consecutive month period in which an individual has completed one-thousand (1,000) Hours of Service under the hours counting method. 26 ARTICLE II ELIGIBILITY REQUIREMENTS 2.1 ELIGIBILITY Employees who meet the eligibility requirements in the Adoption Agreement on the Effective Date of the Plan shall become Participants as of the Effective Date of the Plan. If elected in the Adoption Agreement, all Employees employed on the Effective Date of the Plan may participate, even if they have not satisfied the Plan's specified eligibility requirements. Employees hired after the Effective Date of the Plan, upon meeting the eligibility requirements, shall become Participants on the applicable Entry Date. For amended and restated Plans, Employees who were Participants in the Plan prior to the Effective Date will continue to participate in the Plan, regardless of whether the Employee satisfies the eligibility requirements in the restated or amended Plan, unless otherwise elected in the Adoption Agreement. If no age and Service requirement are elected in the Adoption Agreement, an Employee will become a Participant on the date the individual first performs an Hour of Service for the Employer. The Employee must satisfy the eligibility requirements specified in the Adoption Agreement and be employed on the Entry Date to become a Participant in the Plan. (a) In the event that an Employee has satisfied the eligibility requirements, but is not employed on the applicable Entry Date, such Employee will become a Participant for the purpose(s) for which an Employee had previously qualified upon his or her rehire. (b) Except as otherwise provided in the Adoption Agreement, all Years of Service will be counted for purposes of determining whether an Employee has satisfied the Plan's Service eligibility requirement, if any. If a Participant has a Break in Service or Period of Severance, Service before that Break in Service or Period of Severance shall be reinstated as of the date the Employee is credited with an Hour of Service after incurring such Break in Service or Period of Severance. (c) In the event an Employee who is not a member of an eligible class of Employees becomes a member of an eligible class, such Employee shall participate immediately if such Employee has satisfied the minimum age and Service requirements and would have previously become a Participant had he or she been in an eligible class. (d) A former Participant shall be eligible to authorize Elective Deferrals and may make other Employee Contributions as permitted under the Plan as of the date on which the individual is rehired. Such contributions shall resume immediately (or as soon as administratively feasible) on or after his or her date of rehire. A former Employee who had become a Participant for the purpose of Employer contributions shall again become a Participant with respect to Employer Contributions on the date on which the individual is rehired. (e) An Employee who has become a Participant under the Plan will remain a Participant for as long as an account is maintained under the Plan for his or her benefit, or until his or her death, if earlier. (f) Each Employee will share in Employer contributions for the period beginning on the date the Employee commences participation under the Plan and ending on the date on which such Employee terminates employment with the Employer or is no longer a member of an eligible class of Employees. 2.2 DETERMINATION OF ELIGIBILITY The Plan Administrator shall determine the eligibility of each Employee for participation in the Plan based upon information provided by the Employer. Such determination shall be conclusive and binding on all individuals except as otherwise provided herein or by operation of law. 2.3 CHANGE IN CLASSIFICATION OF EMPLOYMENT In the event a Participant becomes ineligible to participate because he or she is no longer a member of an eligible class of Employees (as elected by the Employer in the Adoption Agreement), Elective Deferrals and/or other Employee contributions will cease as soon as 27 administratively practicable after the Participant becomes ineligible. Such Participant shall participate for the purpose(s) for which the Participant had previously qualified immediately (or as soon as administratively feasible) upon his or her return to an eligible class of Employees. 2.4 PARTICIPATION A Year of Service for participation in the Plan is an eligibility computation period during which an Employee completes the Hours of Service requirement [one-thousand (1,000) hours or less] elected by the Employer in the Adoption Agreement. If the Plan utilizes the Elapsed Time method of crediting Service, an eligibility computation period for which the Employee receives credit for a Year of Service will be determined under the Service crediting rules of paragraph 1.117. The initial eligibility computation period shall be the twelve (12) consecutive month period beginning on the Employee's employment commencement date (the first day an Employee completes an Hour of Service for the Employer). The Plan will measure succeeding eligibility computation periods based on the Plan Year, unless otherwise elected in the Adoption Agreement. Where the subsequent computation periods are calculated on the basis of the Plan Year, an Employee who receives credit for the required number of Hours of Service during the initial computation period and then earns an additional Year of Service credit during the Plan Year commencing during the subsequent twelve (12) month period will be credited with two (2) Years of Service for purposes of eligibility to participate. An Employer may specify in the Adoption Agreement a Service requirement for eligibility for participation in the Plan after completion of a specified number of months or Hours of Service. Any Service requirement based on months of Service may not require an Employee to complete more than one (1) Year of Service [one-thousand (1,000) Hours of Service] in a twelve (12) consecutive month period, or if applicable, two (2) Years of Service. 2.5 EMPLOYMENT RIGHTS Participation in the Plan shall not confer upon a Participant any employment rights, nor shall it interfere with the Employer's right to terminate the employment of any Employee at any time. 2.6 SERVICE WITH CONTROLLED GROUPS All Years of Service with other members of a controlled group of corporations [as defined in Code Section 414(b)], trades or businesses under common control [as defined in Code Section 414(c)], or members of an affiliated service group [as defined in Code Section 414(m)] and any other entity required to be aggregated with the Employer pursuant to Code Section 414(o) shall be credited for purposes of determining an Employee's eligibility to participate. 2.7 LEASED EMPLOYEES A Leased Employee shall be treated as an Employee of the recipient Employer. Notwithstanding the foregoing, a Leased Employee shall not be considered an Employee of the recipient Employer for purposes of participation in any Plan established under a Nonstandardized Adoption Agreement, unless otherwise elected in the Adoption Agreement. Contributions or benefits provided by the leasing organization which are attributable to services performed for the recipient Employer shall be treated as provided by the recipient Employer. A Leased Employee shall not be considered an Employee of the recipient if such Employee is covered by a money purchase pension plan sponsored by the leasing organization providing: (a) a non-integrated Employer contribution rate of at least 10% of Compensation [as defined in Code Section 415(c)(3)], but including amounts contributed pursuant to a salary reduction agreement which are excludable from the Employee's gross income under Code Sections 125, 132(f)(4), 402(e)(3), 402(h)(1)(B) or 403(b), (b) immediate participation, and (c) full and immediate vesting. This exclusion is only available if Leased Employees do not constitute more than 20% of the recipient's Non-Highly Compensated work force. The Plan Administrator must apply this paragraph 2.7 consistent with Code Sections 414(n) and 414(o) and the Regulations issued thereunder. The Employer must specify in an addendum to the Adoption Agreement the manner in which the Plan will determine the allocation of Employer contributions 28 and Participant forfeitures on behalf of a Participant if the Participant is a Leased Employee covered by a plan maintained by the leasing organization. 2.8 THRIFT PLAN The Employer may make an election in the Adoption Agreement to require Employee after-tax contributions (Required After-tax Contributions) as a condition of participation in the Plan. The Employer shall notify each eligible Employee of his or her eligibility for participation prior to the appropriate Entry Date. The Employee shall indicate his or her intention to join the Plan by authorizing the Employer to withhold a percentage of his or her Compensation as provided in the Plan. Such authorization shall be returned to the Employer within the time prescribed. The Employee may decline participation by so indicating in accordance with the procedures prescribed by the Employer. If the Employee declines to participate, such Employee shall be given the opportunity to join the Plan on any subsequent Entry Date. 2.9 TARGET BENEFIT PLAN A Target Benefit Plan may be established by executing a Target Benefit Plan Adoption Agreement. The Employer shall notify each eligible Employee of his or her eligibility for participation prior to the appropriate Entry Date. The Employer will make contributions for each Participant in level annual contributions which will fund the Participant's target benefit at the Plan's Normal Retirement Age. 2.10 DAVIS-BACON PLAN A Davis-Bacon Plan may be established by executing a Davis-Bacon Plan Adoption Agreement. The Employer shall notify each Employee covered by any Davis Bacon or prevailing wage contract of his or her eligibility for participation prior to the appropriate Entry Date. The Employer will make contributions for each Participant in accordance with the formula or any public contract subject to the Davis-Bacon Act or to any other Federal, state or municipal prevailing wage law as specified in the Adoption Agreement or the schedule attached thereto. For the purposes of this paragraph, Employees covered by a Davis Bacon or prevailing wage contract will be those who are included in a unit of Employees covered by a collective bargaining agreement between the Employer and Employee representatives, if retirement benefits were the subject of good faith bargaining and if two percent or less of the Employees who are covered pursuant to that agreement are professionals as defined in Section 1.410(b)-9 of the Regulations. For this purpose, the term "Employee representatives" does not include any organization more than half of whose members are Employees who are owners, officers, or executives of the Employer. 2.11 WAIVER OF PARTICIPATION A Plan established under a standardized Adoption Agreement may not permit an otherwise eligible Employee or Participant to elect not to participate in the Plan. A Plan established under a Nonstandardized Adoption Agreement may treat Employees who waive participation in the Plan as a nondiscriminatory class of Employees who are ineligible to participate therein by making the proper designation in the Adoption Agreement. Waivers of Plan participation must not constitute cash or deferred arrangements [within the meaning of Code Section 401(k)] or they shall be ineffective. A waiver shall not be considered a cash or deferred arrangement if it is irrevocable, applies to all Plans maintained by the Employer, and is made prior to the date on which the Employee is first eligible to participate in the Plan of the Employer. The Plan Administrator shall establish uniform and nondiscriminatory procedures as it deems necessary to carry out this provision including, but not limited to, rules prescribing the timing and filing of elections not to participate. The Plan Administrator shall determine the propriety of any such waiver. An Employee or Participant continues to earn credit for each Year of Service for eligibility or vesting purposes he or she completes and his or her account (if any) will share in the gains or losses of the Plan during the periods he or she elects not to participate. 2.12 OMISSION OF ELIGIBLE EMPLOYEE If, in any Plan Year, an Employee who should be included as a Participant in the Plan is erroneously omitted and discovery of such omission is not made until after a contribution by his or her Employer for the Plan Year has been made, the Employer shall make a subsequent contribution so that the omitted Employee receives a total amount which the Employee would have received had he or she not been omitted. Such contribution shall be made regardless of whether or not it is deductible in whole or in part in any taxable year under applicable provisions of the Code. 29 2.13 INCLUSION OF INELIGIBLE EMPLOYEE If, in any Plan Year, any person who should not have been included as a Participant in the Plan is erroneously included and discovery of such incorrect inclusion is not made until after a contribution for the Plan Year has been made, the Employer shall not be entitled to recover the contribution made with respect to the ineligible individual regardless of the deductibility of the contribution in question. The contribution and any earnings made with respect to the ineligible person shall be forfeited in the Plan Year in which the discovery is made. If any person made Elective Deferrals erroneously, the Elective Deferrals and the associated earnings shall be distributed to that individual in the Plan Year in which the discovery was made. Alternatively, the Employer may determine if an alternative correction method may be available and use said method to make the correction. 30 ARTICLE III EMPLOYER CONTRIBUTIONS 3.1 CONTRIBUTION AMOUNT (a) The Employer will make periodic contributions to the Plan in accordance with the contribution formula or formulas elected in the Adoption Agreement. (b) The Employer shall also make Matching, Top-Heavy minimum contributions and any other Employer contribution for the benefit of Participants who are covered by USERRA. Employer Matching Contributions under USERRA shall be made in the Plan Year for which the Participant exercises his or her right to make-up Elective Deferrals and/or other Employee contributions for prior years. Top-Heavy minimum contributions and other Employer contributions for USERRA protected Service shall be made during the Plan Year in which the individual returns to employment with the Employer. (a) Employer contributions required under USERRA are not increased or decreased with respect to Plan investment earnings for the period to which such contributions relate. The Employer's contribution for any Plan Year shall be subject to the limitations on allocations contained in Article X. a) CONTRIBUTION AMOUNT FOR A SIMPLE 401(k) PLAN If the Employer has executed the SIMPLE 401(k) Adoption Agreement the provisions of the following paragraphs shall apply for a Plan Year if the Employer is an Eligible Employer and no contributions are made or benefits accrued for services during the Plan Year on behalf of any Eligible Employee under any other plan, contract, pension or trust described in Code Section 219(g)(5)(A) or (B) maintained by the Employer. (a) SIMPLE 401(k) MATCHING CONTRIBUTION FORMULA - For each Plan Year, the Employer shall contribute and allocate to each Eligible Employee's account an amount equal to the Employee's Elective Deferral contribution up to a limit of 3% of the Employee's Compensation for the full Plan Year. If the Employer elects in the Adoption Agreement to make the Non-Elective Contribution as specified in paragraph 3.2(b) below, this Matching Contribution will not be made. (b) SIMPLE 401(k) NON-ELECTIVE CONTRIBUTION FORMULA - For any Plan Year, the Employer may elect to contribute a Non-Elective Contribution of 2% of Compensation for the full Plan Year for each Eligible Employee who received at least $5,000 of Compensation (or such lesser amount as elected by the Employer in the SIMPLE 401(k) Plan Adoption Agreement) for the Plan Year. The allocation thereof shall be unrelated to any Participant Elective Deferral contributions made hereunder. If the Employer elects in the Adoption Agreement to make the Non-Elective Contribution for a Plan Year, the Employer shall not make the Matching Contribution described in paragraph 3.2(a) above with respect to the same Plan Year. The Employer shall notify Eligible Employees within a reasonable period of time (before the sixtieth day) prior to the beginning of each Plan Year of its election to make the 2% Non-Elective Contribution in lieu of the Matching Contribution. (c) The provisions of the Plan implementing the limitations of Code Section 415 apply to contributions made pursuant to paragraphs 3.2(a) and (b). (d) In the event that the contribution and allocation formula above results in an Excess Annual Addition, such excess shall be corrected as provided for at paragraph 10.2 of the Basic Plan Document #01. The Employer's contribution for any Plan Year shall be subject to the overall limitations on allocations contained in Article X. 31 (e) No other Employer or Employee contributions may be made to the SIMPLE 401(k) Plan for the Plan Year other than Elective Deferrals described in paragraph 4.8, Matching or Non-Elective Contributions described in paragraphs 3.2(a) and (b), and Rollover Contributions described in Regulations Section 1.402(c)-2, Q&A1 (a). (f) In the event the deduction of a contribution made by the Employer is disallowed under Code Section 404, such contribution (to the extent disallowed) must be returned to the Employer within one year of the disallowance of the deduction. (g) All benefits attributable to contributions described in paragraphs 3.2(a) and (b) are nonforfeitable at all times, and all previous contributions made under the Plan provisions are nonforfeitable as of the beginning of the Plan Year the SIMPLE 401(k) provisions apply. 3.3 RESPONSIBILITY FOR CONTRIBUTIONS The Trustee, the Sponsor or the Custodian shall not be required to determine if the Employer has made a contribution or if the amount contributed from its general assets is in accordance with the Code and the provisionS elected in the Adoption Agreement. The Employer shall have sole responsibility in this regard. The Trustee shall be accountable solely for contributions actually received within the limits of Article X. 3.4 RETURN OF CONTRIBUTIONS Contributions made to the Plan by the Employer shall be irrevocable except as provided below: (a) Any contribution forwarded to the Trustee or Custodian due to a mistake of fact, provided that the contribution is returned to the Employer within one year of the date of the contribution. The Trustee will not increase the amount of the Employer contribution returnable under this paragraph 3.3 for any earnings attributable to the contribution but the Trustee will reduce the amount returned to the Employer for any losses incurred attributable to the excess contribution. (b) In the event that the Commissioner of Internal Revenue determines that the Plan is not initially qualified under the Internal Revenue Code, any contribution dependent on the initial qualification by the Employer must be returned to the Employer within one year after the date the initial qualification is denied, but only if the application for the qualification is made by the time prescribed by law for filing the Employer's return for the taxable year in which the Plan is adopted, or such later date as the Secretary of the Treasury may prescribe. (c) Contributions forwarded to the Trustee or Custodian are presumed to be deductible and are conditioned on their deductibility. Contributions which are determined by the Internal Revenue Service to not be deductible will be returned to the Employer. 3.5 MERGER OF ASSETS FROM ANOTHER PLAN (a) The Employer may in its sole discretion direct the Trustee or Custodian to accept assets from another Defined Contribution Plan, or to transfer assets to another Defined Contribution Plan, provided that such transfer satisfies the requirements of Code Section 414(l) and the Regulations thereunder. The Employer, Plan Administrator, Trustee or Custodian shall have the right to refuse to accept or transfer assets for any reason, provided that nothing in this paragraph 3.5 shall give the Trustee or Custodian the right to refuse to make a direct transfer of an Eligible Rollover Distribution if requested to do so by a Participant in accordance with paragraph 6.10. (b) When the transferor plan is a money purchase pension plan and the transferee plan (the Plan established under this document), is not a money purchase pension plan as set forth in Code Section 401(a)(11)(B)(iii)(III), the Qualified Joint and Survivor Annuity option may not be eliminated at least with respect to the benefits which are transferred. 32 When the transferor plan is a profit-sharing, stock bonus or cash or deferred arrangement [401(k) plan] which included the Qualified Joint and Survivor Annuity provisions but was not required to do so, upon the transfer of those assets, the transferee plan may be amended to entirely eliminate the annuity option. 3.6 COVERAGE REQUIREMENTS For purposes of coverage testing, a Participant is treated as benefiting under the Plan for any Plan Year during which the Participant received or is deemed to receive an allocation in accordance with Code Section 1.410(b)-3(a). If the number of Participants who are eligible to share in any contribution for a Plan Year is such that the Plan established under a Nonstandardized Adoption Agreement would fail to meet the requirements of Code Section 410(b)(1) or 410(b)(2)(A)(i), then the group of Participants eligible to share in the contribution for the Plan Year will be increased to include such minimum number of Participants who are not employed by the Employer on the last day of the Plan Year and who did not meet the hours requirement, as may be necessary to satisfy the applicable tests under the Code Sections referenced above. The Participants who will become eligible to share in the contribution will be those Participants when compared to Participants who are similarly situated, are those who completed the greatest number of Hours of Service in the Plan Year before the termination of their Service. If after such allocation, the coverage requirements of the Code are still not satisfied, allocation shall continue to be made to Participants with decreasing Hours of Service until the coverage requirements of the ratio percentage test of Code Section 410(b)(1)(A) are satisfied. If after the application of the correction procedure in the preceding paragraph the coverage requirements are still not satisfied, the Employer may apply the same correction procedure to an otherwise excludable class of Employees until the coverage requirements of the ratio percentage test of Code Section 410(b)(1)(A) are satisfied. The preceding paragraph will not be construed to permit the reduction of any Participant's account balance, and any amounts which were allocated to Participants whose eligibility to share in the contribution did not result from the application of the preceding paragraph will not be reallocated to satisfy such requirements. Instead, the Employer will make an additional contribution equal to the amount which the affected Participants would have received had they been included initially in the allocation of the Employer's contribution, even if it would cause the contributions of the Employer for the applicable Plan Year to exceed the amount which is deductible by the Employer for such Plan Year under Code Section 404. Any adjustments pursuant to this paragraph will be considered a retroactive amendment of the Plan which was adopted by the last day of the Plan Year. Specifically excluded from the Code Section 410(b) coverage tests are those Employees who are excluded from participation in the Plan for the entire Plan Year which includes those Employees whose retirement benefits are subject to a collective bargaining agreement, nonresident aliens, those Employees excluded from Plan participation by age and Service requirements imposed by the Plan and those Employees who incur a Separation from Service during the applicable Plan Year and for the Plan Year fail to complete more than five hundred (500) Hours of Service or three (3) consecutive calendar months under the Elapsed Time method. 3.7 ELIGIBILITY FOR CONTRIBUTION The Employer will determine on the Adoption Agreement the conditions which Participants must meet in order to receive an allocation of an Employer contribution and any forfeitures, subject to the following: (a) In a Plan established under a standardized Adoption Agreement, a Participant who is employed on the last day of the Plan Year will share in the allocation of the Employer contribution and that Plan Year without regard to the Participant's Hours of Service. In a Plan established under a standardized Adoption Agreement, a Participant who completed more than five hundred (500) Hours of Service or three (3) consecutive calendar months under the Elapsed Time method will share in the allocation of Employer contributions for the Plan Year, regardless of whether employed on the last day of the Plan Year. 33 (b) In a Plan established under a Nonstandardized Adoption Agreement, the Employer will elect in the Adoption Agreement whether any Employer contribution will be allocated to any Participant who does not complete the necessary Hours of Service or consecutive calendar months requirement elected in the Adoption Agreement, subject to the Top Heavy minimum contribution requirements, if applicable. In a Plan established under a Nonstandardized Adoption Agreement, the Employer will elect in the Adoption Agreement whether a Participant will receive an allocation of the Employer's contribution if not employed on the last day of the Plan Year. (c) The Employer may elect in the standardized or Nonstandardized Adoption Agreement any other conditions a Participant must meet to receive an allocation under the Plan. 3.8 TARGET BENEFIT PLAN CONTRIBUTION The Employer's annual contribution to a Target Benefit Plan shall be determined by a Stated Benefit Formula and corresponding factor tables contained in the Adoption Agreement and shall be allocated to Participants as provided in paragraph 5.3. This notwithstanding, the Employer's contribution for any Plan Year shall be subject to the limitations on allocations contained in Article X and shall not be less than the minimum contribution required at Article XIV for Top-Heavy Plans. The annual Employer contribution necessary to fund the stated benefit with respect to a Participant will be determined each year as follows: (a) STEP 1: PRESENT VALUE OF BENEFIT - If the Participant has not yet reached Normal Retirement Age, calculate the present value of the stated benefit by multiplying the stated benefit by the factor that is the product of (i) the applicable factor in Table I [if attained age is less than sixty-five (65)] or Table IA [if attained age is greater than or equal to sixty-five (65)], multiplied by (ii) the applicable factor in Table III. If the Participant is at or beyond Normal Retirement Age, calculate the present value of the stated benefit by multiplying the stated benefit by the factor in Table IV corresponding to that Normal Retirement Age. (b) STEP 2: THEORETICAL RESERVE - The Theoretical Reserve is determined according to (1) and (2) below: (1) Initial Theoretical Reserve. A Participant's Theoretical Reserve as of the last day of the Participant's first year of Projected Participation (year 1) is zero. However, if this Plan is a Prior Safe Harbor Plan with a Stated Benefit Formula that takes into account Plan Years prior to the first Plan Year and this Plan satisfies the safe harbor in Regulations Section 1.401(a)(4)-8(b)(3)(C), the Initial Theoretical Reserve is determined as follows: (i) Calculate as of the last day of the Plan Year immediately preceding year 1, the present value of the stated benefit using the actuarial assumptions, the provisions of the Plan, and the Participant's Compensation as of such date. For a Participant who is beyond Normal Retirement Age during year 1, the stated benefit will be determined using the actuarial assumptions, the provisions of the Plan, and the Participant's Compensation as of such date, except that the straight life annuity factor used in that determination will be the factor applicable for the Participant's Normal Retirement Age. (ii) Calculate as of the last day of the Plan Year immediately preceding year 1 the present value of future Employer contributions, i.e., the contributions due each Plan Year using the actuarial assumptions, the provisions of the Plan, (disregarding those provisions of the Plan providing for the limitations of Code Section 415 or the minimum contributions under Code Section 416), and the Participant's Compensation as of such date, beginning with year 1 through the end of the Plan Year in which the Participant attains Normal Retirement Age. (iii) Subtract the amount determined in (ii) from the amount determined in (i). 34 (2) Accumulate the Initial Theoretical Reserve determined in (1) and the Employer contribution (as limited by Code Section 415, without regard to any required minimum contributions under Code Section 416) for each Plan Year beginning in year 1 up through the last day of the current Plan Year (excluding contributions, if any, for the current Plan Year) using the Plan's interest assumption in effect for each such year. In any Plan Year following the Plan Year in which the Participant attains Normal Retirement Age, the accumulation is calculated assuming an interest rate of 0%. For purposes of determining the level of annual Employer contribution necessary to fund the stated benefit, the calculations in (1) and (2) above will be made as of the last day of each Plan Year, on the basis of the Participant's age on the Participant's last birthday, using the interest rate in effect on the last day of the prior year. (c) STEP 3: UNFUNDED AMOUNT - The excess, if any, of the amount determined in Step 1 over the amount determined in Step 2. (d) STEP 4: CONTRIBUTION - Amortize the result in Step 3 by multiplying it by the applicable factor from Table II. For the Plan Year in which the Participant attains Normal Retirement Age and for any subsequent Plan Year, the applicable factor is 1.0. 3.9 DAVIS-BACON PLAN CONTRIBUTION The Employer will irrevocably contribute the amount determined in accordance with the contribution formula or formulas elected on the Davis-Bacon Adoption Agreement. An Employer may take credit for purposes of the Davis-Bacon Act or other prevailing wage law at the hourly rate specified in an addendum attached to the Davis-Bacon Adoption Agreement. Contributions made by the Employer to a Davis-Bacon plan for the Davis-Bacon work performed by the Employer's covered Employees during the Plan Year may be used as an offset for any Employer contributions to be made to another Defined Contribution Plan sponsored by the Employer. The Employer may make Qualified Non-Elective Contributions to the Plan, designated as "Davis-Bacon or Prevailing Wage Contributions", in order to satisfy the Employer's obligations under the Davis-Bacon Act, or any other Federal, state or municipal Davis-Bacon or prevailing wage law. Contributions made on behalf of Participants who do not perform prevailing wage work cannot be used as a credit towards meeting the Employer's obligation under the prevailing wage plan. 3.10 UNIFORM DOLLAR CONTRIBUTION The Employer's contribution to a plan utilizing a uniform dollar allocation formula for a Plan Year shall be the same dollar amount to each Participant regardless of Compensation, Years of Service, age or any other variable set forth in the Adoption Agreement. 3.11 UNIFORM POINTS CONTRIBUTION The Employer's contribution to a Plan utilizing a uniform points allocation formula for a Plan Year shall be in the same ratio that each Participant's points, as elected in the Adoption Agreement, bears to the total points awarded to all Participants for the Plan Year. 3.12 403(b) MATCHING CONTRIBUTION If a tax-exempt Employer elects in the 401(k) Adoption Agreement to make a Matching Contribution based on the Employee's Elective Deferral contributions under the Code Section 403(b) Plan, the Employer shall make a Matching Contribution to the Matching Contribution Account of those Participants who make Elective Deferrals (while an Employee and a Participant in the Plan) and who are eligible under the Adoption Agreement to receive the Matching Contribution. Any such Matching Contribution made to the Plan will be allocated under the formula elected in the Adoption Agreement. In the event the rate of Matching Contribution is determined to be discriminatory in favor of one or more Highly Compensated Employees, that part of the Matching Contribution as is necessary to make such rate nondiscriminatory shall be forfeited. Any such amounted forfeited shall be disregarded under the Plan's provisions relating to Code Sections 401(k)(3) and 401(m)(2). 35 ARTICLE IV EMPLOYEE CONTRIBUTIONS A) VOLUNTARY AFTER-TAX CONTRIBUTIONS If elected by an Employer in the Adoption Agreement, a Participant may make Voluntary After-tax Contributions to the Plan. These contributions are not excludable from the Participant's gross income. Such contributions must be made in a uniform and nondiscriminatory manner. Such contributions are subject to the limitations on Annual Additions and are subject to antidiscrimination testing. Any Voluntary After-tax Contribution will not be a condition precedent to the contribution or allocation of any Employer contribution to the Participant. Under any Plan which can be established hereunder and if permitted in the Plan's loan policy document, a Participant may repay a defaulted loan with after-tax dollars. The Employer may permit buy-back of amounts previously forfeited with after-tax dollars even if Voluntary After-tax Contributions are not permitted in the Plan. Any buy-back of amounts previously forfeited must be subject to uniform and nondiscriminatory rules which do not operate in favor of Highly Compensated Employees. Repayment of loans made to a Participant and buy-backs of cash-outs as described in Code Section 411(a)(7)(B) will not be considered Annual Additions as described in Regulations Section 1.415-6(b)(6). These amounts are not subject to the limitation contained in Code Section 401(m) in the year in which made, as they are not considered Annual Additions pursuant to Code Section 415. 4.2 REQUIRED AFTER-TAX CONTRIBUTIONS If elected by the Employer in the Adoption Agreement, each Eligible Participant shall be required to make Required After-tax Contributions to the Plan as a condition of participation in the Plan. Such contributions shall be withheld from the Employee's Compensation and shall be transmitted by the Employer to the Trustee/Custodian. A Participant may discontinue participation or change his or her contribution percentage in accordance with either an election on the Adoption Agreement or uniform and nondiscriminatory rules established by the Employer. If a Participant discontinues his or her contributions, such Participant may not again authorize such contributions until a change is permitted in accordance with uniform and nondiscriminatory rules established by the Employer. The Employer may reduce a Participant's contribution percentage if required to satisfy the ACP Test described in Article XI. 4.3 QUALIFIED VOLUNTARY CONTRIBUTIONS A Participant may no longer make Qualified Voluntary Contributions to the Plan. Amounts already contributed may remain in the Plan until distributed to the Participant. Such amounts will be maintained in a separate account which will be nonforfeitable at all times. The account will share in the gains and losses of the Trust in the same manner as described at paragraph 5.5 of the Plan. No part of the Qualified Voluntary Contribution Plan account will be used to purchase life insurance. Subject to Article VIII, Joint and Survivor Annuity Requirements (if applicable), the Participant may withdraw any part of the Qualified Voluntary Contribution account by making written application to the Plan Administrator. 4.4 ROLLOVER CONTRIBUTIONS Unless elected otherwise in the Adoption Agreement, a Participant/Employee may make a Rollover Contribution to a Defined Contribution Plan established hereunder of all or any part of an amount distributed or distributable to him or her from a Qualified Plan or an individual retirement account (IRA) qualified under Code Section 408 where the IRA was used as a conduit from a Qualified Plan provided: (a) the amount distributed to the Participant/Employee is deposited to the Plan no later than the sixtieth day after such distribution was received by the Participant/Employee, (b) the amount distributed is not one of a series of substantially equal periodic payments made for the life (or life expectancy) of the Participant/Employee or the joint lives (or joint life expectancies) of the Participant/Employee and the Participant's/Employee's Beneficiary, or for a specified period of ten (10) years or more, (c) the amount distributed is not a required minimum distribution under Code Section 401(a)(9), 36 (d) if the amount distributed included property, such property is rolled over only upon the Trustee, Custodian and/or Employer's approval, or if sold, the proceeds of such property may be rolled over, (e) the amount distributed would otherwise be includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to Employer securities), and (f) the amount rolled over does not include any amounts contributed on an after-tax basis by the Participant to the Qualified Plan. The Plan Administrator shall be held solely responsible for determining the tax free status of any Rollover Contribution made to this Plan, and the Trustee/Custodian shall have no responsibility for any such determination. 4.5 PLAN TO PLAN TRANSFER CONTRIBUTIONS (a) If elected by the Employer in the Adoption Agreement, a Participant or an Employee may arrange for the direct transfer of his or her entire benefit from another Qualified Plan to the Plan established hereunder. Such transfer shall be made for any reason and may be in cash and/or in-kind. The Employer and/or the Trustee/Custodian in their sole discretion shall have the right to refuse to accept a transfer for any reason including but not limited to if such assets do not comply operationally, would result in a prohibited transaction, are not readily marketable or are not compatible with the Employer's investment policy objectives. If necessary, for accounting and recordkeeping purposes, Transfer Contributions shall be treated in the same manner as Rollover Contributions. (b) The Employer may arrange for the direct transfer of a Participant's/Employee's benefit from a Qualified Plan to this Plan. If necessary, for accounting and recordkeeping purposes, Transfer Contributions shall be treated in the same manner as Rollover Contributions. (c) In the event the Employer accepts a Transfer Contribution from a Plan in which the Participant/Employee was directing the investment of his or her account, the Employer may, if the Employer determines that it is appropriate and not in violation of the nondiscrimination rules under Regulation Section 1.401(a)(4)-4, permit the Employee to continue to direct his or her investments in accordance with paragraph 12.7 with respect only to such Transfer Contribution. (d) Notwithstanding any provision of this Plan to the contrary, to the extent that any optional form of benefit under the Plan established hereunder permits a distribution prior to the Employee's Normal Retirement Age, death, Disability, or severance from employment, and prior to Plan termination, the optional form of benefit is not available with respect to benefits attributable to assets (including the post-transfer earnings thereon) and liabilities that are transferred, within the meaning of Code Section 414(1), to this Plan from a money purchase pension plan qualified under Code Section 401(a) (other than any portion of those assets and liabilities attributable to Voluntary After-tax Contributions). 4.6 VOLUNTARY DIRECT TRANSFERS BETWEEN PLANS A Participant or Employee shall be able to transfer his or her entire benefit between qualified Defined Contribution Plans [other than a direct transfer described in Code Section 401(a)(31)] without regard to whether the Participant's benefit is immediately distributable or results in the elimination or reduction of Code Section 411(d)(6) protected benefits. Such a transfer does not violate Code Section 411(d)(6) if the following requirements are met: (a) The plan from which the benefits are transferred must provide that the transfer is conditioned upon a voluntary, fully informed election by the Participant to transfer his or her entire benefit to another qualified Defined Contribution Plan. As an alternative to the transfer, the Participant must be offered the opportunity to retain the Participant's Code Section 411(d)(6) protected benefits under the Plan [or if the Plan is terminating, to receive any optional form of benefit for which the Participant is eligible under the Plan as required by Code Section 411(d)(6)]. 37 (b) The transferring plan must be the same plan type as the Plan sponsored by the Employer. When benefits are being transferred from a qualified cash or deferred arrangement under Code Section 401(k), the benefits must be transferred to a qualified cash or deferred arrangement under Code Section 401(k). Money purchase pension plans must be transferred to money purchase pension plans. Benefits transferred from a profit-sharing plan other than a 401(k) plan or employee stock ownership plan may be transferred to any type of Defined Contribution Plan, even if the event is not one that allows a distribution. (c) The transfer must be made in connection with certain corporate transactions such as an asset or stock acquisition, merger or other similar transaction involving a change in Employer of the Employees of a trade or business [i.e., an acquisition or disposition within the meaning of Regulation Section 1.410(b)-2(f)] or in connection with the Participant's transfer of employment to a different job for which Service does not result in additional allocations under the transferor plan. (d) This type of elective transfer is only available for transfers made on or after September 6, 2000, even if the transaction or change of employment occurred prior to that date. (e) If the conditions outlined in (a), (b), (c) and (d) above are met, the Employer's Plan is not required to protect optional forms of benefits available under the prior plan with respect to any benefit transferred [except as required by the Qualified Joint and Survivor Annuity requirements under Code Sections 401(a)(11) and 417]. Such a transfer is not a protected optional form of benefit, but rather is a "right or feature" under Regulation Section 1.401(a)(4)-4(e). 4.7 ELECTIVE DEFERRALS IN A 401(K) PLAN (a) A Participant may enter into a Salary Deferral Agreement with the Employer authorizing the Employer to withhold a portion of such Participant's Compensation not to exceed the dollar limit under Code Section 402(g), as adjusted under Code Section 415(d), for the Applicable Calendar Year, or the percentage or dollar amount of Compensation specified in the Adoption Agreement. (b) Any Salary Deferral Agreement may not be effective earlier than the latest date of the following: (1) The date of the Participant's entry (or reentry) into the Plan; (2) the execution of the Participant's Salary Deferral Agreement; (3) the date the Employer adopts the 401(k) Plan by executing the Adoption Agreement; (4) the Effective Date of the Elective Deferral provisions as specified in the Adoption Agreement. (c) Any such contribution shall be credited to the Employee's Elective Deferral account. A Participant may terminate deferrals at any time. A Participant may amend his or her Salary Deferral Agreement to increase or decrease his or her deferral percentage upon notice in accordance with the provisions in the Adoption Agreement or such other uniform and nondiscriminatory procedures. The Employer shall determine the permitted frequency of such changes which shall be no less frequently than once each calendar year. Any such election will be effective as soon as practicable following the receipt of the notification by the Employer in accordance with uniform and nondiscriminatory procedures established and communicated to the Participants. The Participant shall notify the Employer of any change in his or her deferral election in writing or in such other form or manner as permitted. The Employer may, notwithstanding any limit to the contrary in the Adoption Agreement, limit the maximum 38 deferral percentage for Highly Compensated Employees. If a Participant terminates his or her agreement, such Participant shall be permitted to put a new Salary Deferral Agreement into effect as provided in the Adoption Agreement or any other uniform and nondiscriminatory procedures established. The Employer may also amend or terminate said agreement on notice to the affected Participant, if required to maintain the qualified status of the Plan. (d) If permitted by the Employer, when a Participant who has not authorized the Employer to withhold the maximum annual deferral amount pursuant to Code Section 402(g) and desires to increase the total amount withheld for a Plan Year, the Participant may authorize the Employer to withhold a supplemental amount up to 100% of his or her Compensation for one or more pay periods. In no event may the amounts withheld under the Salary Deferral Agreement plus any additional amount deferred exceed the lesser of 25% of a Participant's Compensation or any other limitation elected in the Adoption Agreement by the Employer. (e) If the Plan permits Voluntary After-tax Contributions and the Employer has elected in the Adoption Agreement, all or any portion of amounts previously withheld under any Salary Deferral Agreement may be recharacterized as Voluntary After-tax Contributions within the Plan Year. (f) Elective Deferrals shall be deposited in the Plan's Trust as soon as administratively feasible after being withheld from the Participant's Compensation at the earliest date on which the contributions can reasonably be segregated from the Employer's general assets, but no later than the time prescribed by the Code, ERISA or by applicable Treasury or Department of Labor Regulations. 4.8 ELECTIVE DEFERRALS IN A SIMPLE 401(K) PLAN (a) An Eligible Employee may enter into a Salary Deferral Agreement with the Employer authorizing the Employer to withhold a portion of such Eligible Employee's Compensation, not to exceed $6,000 per calendar year, as adjusted to reflect any annual cost-of-living increases announced by the Internal Revenue Service. No Eligible Employee shall be permitted to make Elective Deferrals under this Plan, or any other Qualified Plan maintained by the Employer, during any taxable year in excess of the dollar limitation contained in Code Section 402(g) in effect in at the beginning of such taxable year. The $6,000 limit may be reduced if an Eligible Employee contributes pre-tax contributions to Qualified Plans of other employers. (b) In addition to any other election periods provided, each Participant may make or modify his Salary Deferral Agreement during the sixty (60) day election period immediately preceding each January 1. (c) For the Plan Year in which an Eligible Employee becomes eligible to make Elective Deferrals under the SIMPLE 401(k) Plan provisions, the sixty (60) day election period requirement of paragraph 4.8(b) above is deemed satisfied if the Eligible Employee may make or modify a Salary Deferral Agreement election during a sixty (60) day period that includes either the date the Employee becomes eligible, or the day before. (d) An Eligible Employee may amend his or her Salary Deferral Agreement to increase or decrease the percentage upon proper and timely notice to the Employer. The Employer shall determine the permitted frequency of such changes. An Eligible Employee may terminate his or her Salary Deferral Agreement at any time during the Plan Year upon notice to the Employer. If an Eligible Employee terminates his or her Salary Deferral Agreement, such Eligible Employee will be permitted to execute a new Salary Deferral Agreement in accordance with the provisions elected in the Adoption Agreement or any other uniform and nondiscriminatory procedure. The Employer may also amend or terminate any Salary Deferral Agreement on notice to the affected Eligible Employee, if required to maintain the qualified status of the Plan. 39 (e) If permitted by the Employer, a Participant who has not authorized the Employer to withhold at the maximum annual deferral amount and desires to increase the total amount withheld for a Plan Year, such Participant may authorize the Employer to withhold an amount up to 100% of his or her Compensation for one or more pay periods. (f) Elective Deferrals shall be deposited in the Plan's Trust as soon as administratively feasible after being withheld from the Participant's Compensation at the earliest date on which the contributions can reasonable be segregated from the Employer's general assets but no later than the time prescribed by the Code, ERISA or by applicable Treasury or Department of Labor Regulations. (g) The Employer will notify each Eligible Employee prior to the sixty (60) day election period described in paragraph 4.8(b) that he or she can make an Elective Deferral or modify a prior election during that period. (h) The notification described in this subparagraph 4.8(h) will indicate whether the Employer will provide a Matching Contribution described in paragraph 3.2(a) or a 2% Non-Elective Contribution described in paragraph 3.2(b). (i) The Plan is not treated as a Top-Heavy Plan under Code Section 416 for any Plan Year for which the SIMPLE 401(k) Plan provisions apply. 4.9 AUTOMATIC ENROLLMENT (a) If the Employer so elects in the Adoption Agreement, each Employee eligible under the Employer's Code Section 401(k) cash or deferred arrangement shall automatically become a Participant in the Plan as of the first Entry Date after satisfying the Plan's eligibility requirements. The Employer may elect on the Adoption Agreement to apply the automatic enrollment provisions to current Employees and Participants or only to Employees hired on or after the Effective Date of the adoption of or the amendment to the Plan providing for the automatic enrollment provisions. If the Employer elects the provision to apply to current Employees, the Employer will apply the automatic enrollment provision to Employees and Participants who are deferring at less than the amount elected on the Adoption Agreement on or after the Effective Date of the adoption of or the amendment to the Plan, except for those Employees and Participants who make an affirmative election to receive the Compensation in cash. (b) After satisfying the Plan's eligibility requirements, each Employee will have his or her Compensation automatically reduced by the percentage elected in the Adoption Agreement. These amounts will be contributed to the Plan. An election by the Employee not to make Elective Deferrals or to contribute a different percentage may be made at any time. The election is effective for the first pay period and subsequent pay periods (until superseded by a subsequent election) if filed when the Employee is hired, or within a reasonable period thereafter ending before the Compensation for the first pay period is currently made available. In the event an Employee has Elective Deferrals withheld pursuant to this provision and no investment directive has been received, any cash received shall be invested as provided for in paragraph 13.8 herein. If an Employee elects to receive cash in lieu of Elective Deferrals and the election is made when the Employee is hired or within a reasonable period thereafter ending before the Compensation is currently available, then no Elective Deferrals for the first pay period or subsequent pay periods are made on the Employee's behalf to the Plan until the Employee makes a subsequent affirmative election to reduce his or her Compensation. Elections filed at a later date are effective for payroll periods beginning in the month next following the date the election is filed. (c) For those current Participants who are deferring at a percentage or dollar amount less than the amount elected on the Adoption Agreement, the Employer will in the first payroll period after the effective date of the amendment reduce the Participant's Compensation by the difference between the Participant's current deferral election and the election as stated on the Adoption Agreement. 40 (d) At the time an Employee is hired, the Plan Administrator shall provide the Employee a notice that explains the automatic enrollment provision. This notice will also explain the Employee's right to elect to have no such Elective Deferrals made to the Plan or to alter the amount of those contributions. This notice will include the procedure for exercising the right and the timing for implementation of any such election. The Plan Administrator shall provide each Participant in the Plan with an annual notice of his or her Elective Deferral percentage and each Participant's right to change the percentage, including the procedure for exercising that right and the timing for implementation of any such election. Prior to an Employee's automatic enrollment becoming effective, the Plan Administrator will provide such Employee with appropriate guidance as to the procedures then in effect, for the Employee to make alternative elections referenced above. Each Employee deferring Compensation pursuant to this paragraph shall be deemed to have consented to an Elective Deferral contribution in the amount specified by the Employer in the Adoption Agreement, unless he/she has filed an election to the contrary with the Plan Administrator pursuant to the Plan's administrative procedures. 4.10 MAKE-UP CONTRIBUTIONS UNDER USERRA A Participant who has the right to make-up Elective Deferrals, Voluntary After-tax Contributions and/or Required After-tax Contributions under USERRA shall be permitted to increase his or her Elective Deferral with respect to a make-up year without regard to any provision limiting contributions for such Plan Year. Make-up contributions shall be limited to the maximum amount permitted under the Plan and the statutory limitations applicable with respect to the make-up year. Employee-related make-up contributions must be made within the time period beginning on the date of reemployment and continuing for the lesser of five (5) years or three (3) times the period of military service. 41 ARTICLE V PARTICIPANT ACCOUNTS 5.1 SEPARATE ACCOUNTS The Plan Administrator or its agent shall establish a separate recordkeeping account for each Participant showing the fair market value of his or her Plan benefits. Each Participant's account may be separated for recordkeeping purposes into the following sub-accounts: (a) Employer contributions: (1) Non Safe-Harbor Matching Contribution Formula 1 Contributions (2) Non Safe-Harbor Matching Contribution Formula 2 Contributions (3) Qualified Matching Contributions (4) Qualified Non-Elective Contributions (5) Discretionary Contributions (6) Safe Harbor Matching Contributions (7) Safe Harbor Non-Elective Contributions (8) Davis-Bacon Contributions (9) Target Benefit Contributions (10) SIMPLE 401(k) Matching Contributions (11) SIMPLE 401(k) Non-Elective Contributions (12) Money Purchase Pension Plan Contributions (b) Employee contributions: (1) Voluntary After-tax Contributions (2) Qualified Voluntary Contributions (3) Elective Deferrals (4) Required After-tax Contributions (5) Rollover Contributions (6) Transfer Contributions (7) Elective Deferrals in a SIMPLE 401(k) Plan a) VALUATION DATE The Trustee shall value the Trust at the fair market value as of each Valuation Date and those Valuation Dates elected in the Adoption Agreement or as directed in writing by the Plan Administrator. (a) Plan Administrators utilizing a daily valuation system for Participant recordkeeping purposes shall process any contributions, distributions, investment income or loss, any appreciation or depreciation, investment transactions (including a purchase or sale of an investment alternative) and any other transactions which affect a Participant on each business day that securities are traded on the New York Stock Exchange or any other national securities market. Individual Participant recordkeeping accounts are updated in accordance with paragraph 5.3 hereof as of 42 each Valuation Date specified in the Adoption Agreement or such other date as elected by the Plan Administrator. (b) Plan Administrators utilizing a balance forward valuation system for Participant recordkeeping purposes will process contributions, distributions, investment income or loss, investment transactions (including a purchase or sale of an investment alternative) and any other transactions at the Plan level on the Valuation Date and those other Valuation Dates as specified in the Adoption Agreement or any other date(s) as the determined by the Plan Administrator. Individual Participant recordkeeping accounts will be updated within the allocation period on the date or dates determined by the Plan Administrator with respect to contributions and distributions. Investment earnings will be allocated at the end of the valuation period. Any other transactions which affect Participant accounts will be posted or allocated to individual Participant accounts on the next following Valuation Date unless the Plan Administrator elects, in a uniform and nondiscriminatory manner, to allocate such transactions as they occur. The Employer may utilize a daily valuation system for a portion of the Plan and a balance forward valuation system for the balance of the Plan. All allocations for a particular Plan Year will be made as of the last Valuation Date(s) of that Plan Year or such other dates determined by the Plan Administrator. 5.3 ALLOCATIONS TO PARTICIPANT ACCOUNTS As of each Valuation Date elected by the Employer in the Adoption Agreement and/or on any date within the allocation period selected in writing by the Plan Administrator, each Participant's account shall be adjusted to reflect: (a) the Participant's share of the Employer's contribution and forfeitures as determined in the Adoption Agreement, (b) any Employee contributions, (c) any repayment of amounts previously distributed to a Participant upon a separation from Service and repaid by the Participant since the last Allocation Date, (d) the Participant's proportionate share of any investment earnings and increase in the fair market value of the Trust since the last Allocation Date, and (e) loan repayments of principal and interest. The Employer shall deduct from each account: (f) any withdrawals or payments made from the Participant's account since the last Allocation Date, (g) the Participant's proportionate share of any decrease in the fair market value of the Trust since the last allocation Date, and (h) the Participant's proportionate share of any fees and expenses paid from the Plan. 5.4 ALLOCATING EMPLOYER CONTRIBUTIONS (a) The Employer must specify in the Adoption Agreement the manner in which the Employer's contribution shall be allocated to Participants including any minimum contribution for Top-Heavy Plans. Employer contributions shall be allocated to all Participants eligible to receive a contribution as provided in the Adoption Agreement. (b) Notwithstanding any provision of this Plan to the contrary, Participants will accrue the right to share in allocations of Employer contributions with respect to periods of qualified military service as provided in Code Section 414(u). (c) At the end of each Plan Year the Plan Administrator shall redetermine any Matching Contribution for each Participant based on his or her eligible annual Compensation in accordance 43 with the Matching Contribution formula elected by the Employer in the Adoption Agreement. Any Participant for whom any Matching Contribution has not been sufficiently made in accordance with the Matching Contribution formula elected by the Employer shall receive an additional Matching Contribution so that the total annual deferrals (whether pre-tax or after-tax) reflected as a percentage of eligible annual Compensation are matched in accordance with the Matching Contribution formula ("true-up" of Matching Contributions) selected by the Employer in the Adoption Agreement. If no election is made on the Adoption Agreement, no true-up of Matching Contributions will occur. 5.5 ALLOCATING INVESTMENT EARNINGS AND LOSSES Account balances are adjusted to reflect actual income and investment gains and losses from the period beginning on the day following the last Valuation Date and ending on the current Valuation Date. Each Participant's account shall receive a proportionate share of the actual income and investment gains and losses during the period. The value of accounts for allocation purposes shall be based on the value of all Participant accounts (without regard to any portion of any such account attributable to segregated investments) as of the last Valuation Date less withdrawals, distributions and expenses plus any contributions including deferrals (whether pre-tax or after-tax) if any, paid from the Trust since the last Valuation Date. Investment gains and losses shall be credited to all Participant accounts having a balance on the Valuation Date regardless of the vested status of such account and regardless of the Participant's employment status. The Plan Administrator shall also have the right to adopt an alternative procedure for allocating income and investment gains and losses provided that such alternative procedure is uniform and does not discriminate in favor of Highly Compensated Employees. Any change in procedure shall be effective as of the next following Valuation Date or such other date as agreed to by the Employer and the Plan Administrator. Accounts with segregated investments shall receive the income or loss on such segregated investments. Investment gains or losses are determined separately for each investment alternative offered under the Plan. (a) The value of a Participant's account invested in a mutual fund (Registered Investment Company) will equal the value of a share in such fund multiplied by the number of shares credited to the Participant's account. (b) In the case of any pooled investment vehicle, earnings, gains or losses on the pooled investment vehicle will be allocated among the Participant's accounts in proportion to the value of each Participant's account invested in that investment vehicle immediately prior to the Valuation Date. The gain or loss attributed to each investment vehicle will be credited to or charged against the Participants' account. Alternatively, the Plan Administrator or his designate may establish unit values for each pooled investment vehicle offered under the Plan in accordance with uniform procedures established by the Plan Administrator for this purpose. The value of the portion of a Participant's account invested in a pooled investment vehicle will equal the value of a unit in such investment vehicle multiplied by the number of units credited to the account. (c) In the case of any investment that is held specifically for a Participant's account, any gain or loss on such investment will be charged or credited to that Participant's account. 5.6 ALLOCATION ADJUSTMENTS The Plan Administrator or his designate, if applicable, shall have the right to redetermine the value of Participant accounts if a previous allocation or valuation was performed incorrectly. Such redetermination shall be made without regard to the reason for the incorrect allocation. Such reasons may include, but are not limited to, incorrect contribution or Employee information provided by the Employer or representative of the Employer, incorrect valuation of Plan assets, incorrect determination of investment income and gains or losses, improper interpretation of the Plan's allocation formulas or procedures, erroneous omission of Top-Heavy minimum contributions and failure to transmit, receive or interpret amendments to the allocation formulas, methods or procedures. Subject to express limits that may be imposed under the Code, the Plan Administrator reserves the right to delay the processing of any contribution, distribution or other transaction for any legitimate business reason (including, but not limited to, failure of systems or computer programs, failure of means of transmission of data, force majeure, the failure of any Service Provider to timely receive values or prices, or to correct for its errors omissions or the errors or omissions of any Service Provider). After having made any necessary adjustments, the Plan Administrator or his designate, if applicable, may issue either revised or adjusted statements to Participants with an explanation of the allocation adjustments. 44 5.7 PARTICIPANT STATEMENTS The Plan Administrator shall prepare a statement for each Participant not less frequently than annually. Statements may be prepared more frequently as agreed between the Plan Administrator and the Service Provider or other entity responsible for the maintenance of Plan records or for valuing Plan assets. Each statement shall show the additions to and subtractions from the Participant's account for the period since the last such statement and shall show the fair market value of the Participant's account as of the current statement date. 5.8 CHANGES IN METHOD AND TIMING OF VALUING PARTICIPANTS' ACCOUNTS If necessary or appropriate, the Plan Administrator may establish different or additional uniform and nondiscriminatory procedures for determining the fair market value of Participant's accounts under the Plan. 45 ARTICLE VI RETIREMENT BENEFITS AND DISTRIBUTIONS 6.1 NORMAL RETIREMENT BENEFITS A Participant shall be entitled to receive the balance held in his or her account upon attaining his or her Normal Retirement Age or at such earlier dates as the provisions of this Article VI may permit. If a Participant elects to continue working past his or her Normal Retirement Age, he or she will continue as an active Participant. Unless the Employer elects otherwise in the Adoption Agreement, distribution shall be made to such Participant at his or her request prior to his or her actual retirement. Distribution shall be made in the normal form, or if elected, in one of the optional forms of payment provided below. 6.2 EARLY RETIREMENT BENEFITS An Early Retirement benefit may be available if elected in the Adoption Agreement to individuals who meet the age and Service requirements specified in the Adoption Agreement. A Participant who attains his or her Early Retirement Date will become fully vested, regardless of any vesting schedule which otherwise might apply. If a Participant separates from Service with a nonforfeitable benefit before satisfying the age requirements, but after having satisfied the Service requirement, the Participant will be entitled to elect an Early Retirement benefit upon satisfaction of the age requirement. 6.3 BENEFITS ON TERMINATION OF EMPLOYMENT (a) If a Participant terminates employment prior to Normal Retirement Age, such Participant shall be entitled to receive the vested balance held in his or her account payable at Normal Retirement Age in the normal form, or if elected, in one of the other forms of payment provided hereunder. If applicable, the Early Retirement benefit provisions may be elected. Notwithstanding the preceding, a former Participant may, if allowed in the Adoption Agreement, make application to the Employer requesting early payment of any deferred vested and nonforfeitable benefit due. (b) If a Participant terminates employment, and the value of the Participant's Vested Account Balance is not greater than $5,000, the Participant may receive a lump sum distribution of the value of the entire vested portion of such account balance and the nonvested portion will be treated as a forfeiture. The Plan Administrator shall follow a consistent and nondiscriminatory policy, as may be established, regarding immediate cash-outs of Vested Account Balances. (c) For purposes of this Article, if the value of a Participant's Vested Account Balance is zero, the Participant shall be deemed to have received a distribution of such Vested Account Balance immediately following termination. If the Participant is reemployed prior to incurring five (5) consecutive one (1) year Breaks in Service or Periods of Severance, he or she will be deemed to have immediately repaid such distribution. Notwithstanding the above, if the Employer maintains or has maintained a policy of not distributing any amounts until the Participant's Normal Retirement Age, the Employer can continue to uniformly apply such policy. (d) If a Participant terminates employment with a Vested Account Balance greater than $5,000, and elects (with his or her Spouse's consent, if required) to receive 100% of the value of his or her Vested Account Balance in a lump sum, the nonvested portion will be treated as a forfeiture. The Participant (and his or her Spouse, if required) must consent to any distribution when the Vested Account Balance described above exceeds $5,000. (e) If a Participant who is not 100% vested receives or is deemed to receive a distribution pursuant to this paragraph and resumes employment covered under this Plan, the Participant shall have the right to repay to the Plan the full amount of the distribution attributable to both Employer contributions and Elective Deferrals on or before the earlier of the date the Participant incurs five (5) consecutive one (1) year Breaks in Service following the date of distribution or five (5) years after the first date on which the Participant is subsequently reemployed. In such event, the Participant's account shall be restored to the value thereof at the time the distribution was made. 46 The account may be further increased by the Plan's income and investment gains and/or losses on the undistributed amount from the date of the distribution to the date of repayment. (f) If the Participant's Vested Account Balance is greater than $5,000, a Participant shall have the option to postpone payment of his or her Plan benefits until his or her Required Beginning Date. If elected in the Adoption Agreement, any balance in a Participant's account resulting from his or her Employee contributions listed at paragraph 5.1(b), hereof, not previously withdrawn, may be withdrawn by the Participant immediately following separation from Service. (g) If a Participant ceases to be an active Employee as a result of a Disability, such Participant shall have the right to make an application for a disability retirement benefit payment. The Participant's account balance will be deemed "immediately distributable" as set forth in paragraph 6.4, and will be fully vested pursuant to paragraph 9.2. (h) If elected in the Adoption Agreement, when a terminating Participant or Employee does not make a timely election with respect to the cash out distribution of amounts greater than $1,000 but less than or equal to $5,000, pursuant to Code Sections 411(a)(7), 411(a)(11) and 417(e)(7), the Plan Administrator will make a direct rollover into an individual retirement account or annuity ("IRA"). The Plan Administrator will select the IRA trustee or custodian, establish the IRA and make the initial IRA investment selection. 6.4 RESTRICTIONS ON IMMEDIATE DISTRIBUTIONS (a) An account balance is immediately distributable if any part of the account balance could be distributed to the Participant (or Surviving Spouse) before the Participant attains (or would have attained if not deceased) the later of the Normal Retirement Age or age sixty-two (62). (b) If payment in the form of a Qualified Joint and Survivor Annuity is required and the value of a Participant's Vested Account Balance exceeds $5,000, or there are remaining payments to be made with respect to a particular distribution option that previously commenced, and the account balance is immediately distributable, the Participant and his or her Spouse (or where either the Participant or the Spouse has died, the survivor) must consent to any distribution of such account balance. (c) If payment in the form of a Qualified Joint and Survivor Annuity is not required with respect to a Participant and the value of a Participant's Vested Account Balance exceeds $5,000, and the account balance is immediately distributable, only the Participant must consent to any distribution of such account balance. (d) The consent of the Participant and/or the Spouse shall be obtained in writing or in such other form accepted by the Plan Administrator within the ninety (90) day period ending on the Annuity Starting Date, which is the first day of the first period for which an amount is paid as an annuity or in any other form. The Plan Administrator shall notify the Participant and the Participant's Spouse of the right to defer any distribution until the Participant's account balance is no longer immediately distributable. Such notification shall include a general description of the material features, and an explanation of the relative values of, the optional forms of benefit available under the Plan in a manner that would satisfy the notice requirements of Code Section 417(a)(3), and shall be provided no less than thirty (30) days and no more than ninety (90) days prior to the Annuity Starting Date. (e) If the distribution is one to which Code Sections 401(a)(11) and 417 do not apply, such distribution may commence less than thirty (30) days after the notice required under Regulation Section 1.411(a)-11(c) is given provided that: 47 (1) the Plan Administrator clearly informs the Participant that the Participant has the right to a period of at least thirty (30) days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the Participant after receiving the notice affirmatively elects a distribution. If a distribution is one to which Code Section 417 does apply, the distribution may commence less than thirty (30) days, but not less than seven (7) days after the notice required under Regulations Section 1.411(a)-11(c) is given, provided that the conditions of sub-paragraphs (1) and (2) above are satisfied with regard to both the Participant and the Participant's Spouse. (f) Notwithstanding the foregoing, only the Participant need consent to the commencement of a distribution in the form of a Qualified Joint and Survivor Annuity while the account balance is immediately distributable. Furthermore, if payment in the form of a Qualified Joint and Survivor Annuity is not required with respect to the Participant pursuant to paragraph 8.7 of the Plan, only the Participant need consent to the distribution of an account balance that is immediately distributable. Neither the consent of the Participant nor the Participant's Spouse shall be required to the extent that a distribution is required to satisfy Code Section 401(a)(9) or Code Section 415 or constitutes Excess Deferrals, Excess Contributions or Excess Aggregate Contributions. In addition, upon termination of this Plan if the Plan does not offer an annuity option (purchased from a commercial provider), the Participant's account balance may, without the Participant's consent, be distributed to the Participant or transferred to another Defined Contribution Plan [other than an employee stock ownership plan as defined in Code Section 4975(e)(7)] within the same controlled group. a) NORMAL AND OPTIONAL FORMS OF PAYMENT (a) The normal form of payment for a profit sharing, 401(k) or SIMPLE 401(k) plan satisfying the requirements of paragraph 8.7 herein shall be a lump sum. (a) A Plan other than a money purchase pension plan, a target benefit plan or a profit-sharing plan required to provide a Joint and Survivor benefit may be amended to eliminate or restrict optional payment forms provided that a single lump sum payment options remains available, that is an otherwise identical distribution form to the eliminated or restricted option, except with respect to the timing of payments after commencement. The form must have the same (or less restrictive) timing of distribution, medium of distribution and eligibility conditions that were available for the eliminated forms of payment, and any such amendment will not be effective until the earlier of ninety (90) days after the date that Plan Participants are provided with the written notice of the Plan amendment in the form of a summary of material modification (SMM) or the first day of the second Plan Year after the Plan Year in which the amendment is adopted. Each optional form of benefit provided under a standardized or non-standardized safe-harbor plan (other than any that have been prospectively eliminated) must be currently available to all Employees benefiting under the Plan. This is the case regardless of whether a particular form of benefit is the actuarial equivalent of any other optional form of benefit under the Plan. Code Section 411(d)(6) prevents a Plan from being amended to eliminate or restrict optional forms of benefits and any other Code Section 411(d)(6) protected benefits with respect to benefits attributable to Service before the amendments except as expressly provided under the Regulations Section 1.411(d)-4. (b) For money purchase and target benefit plans, the normal form of payment hereunder shall be a Qualified Joint and Survivor Annuity as provided under Article VIII. Effective January 1, 2002, the Employer may elect in the Adoption Agreement to eliminate any periodic payment 48 options that are not required by the Qualified Joint and Survivor Annuity rules such as but not limited to installment payments. (c) The normal form of payment shall be automatic, unless the Participant files a written request with the Employer prior to the date on which the benefit is automatically payable, electing another option available under the Plan. (d) A Participant whose Vested Account Balance exceeds $5,000 shall (with the consent of his or her spouse, if applicable) have the right to receive his or her benefit in a single lump sum or in installment payments. Installment payments need not be equal or substantially equal until such time as the individual reaches his or her Required Beginning Date. Installment payments which are intended to be equal or substantially equal can be made monthly, quarterly, semi-annually or annually based on any period not extending beyond the Joint and Survivor life expectancy of the Participant and his or her Beneficiary. (e) Benefits payable under the Plan may be distributed in cash or in-kind as elected in the Adoption Agreement. (f) The Employer may elect on the Adoption Agreement to limit a Participant's right to receive distributions in the form of marketable securities (other than Employer securities) and to require distributions in the form of cash only. Only the right to receive a distribution in the form of cash, Employer securities and/or other property that is not marketable is protected. Any such amendment to the Plan will not be effective until the earlier of ninety (90) days after the date that Plan Participants are provided with the written notice of the Plan amendment in the form of a summary of material modification (SMM) or the first day of the second Plan Year after the Plan Year in which the amendment is adopted. (g) A Plan that permits its Participants to receive in-kind distributions may limit the available in-kind distributions to the investments listed in the Adoption Agreement and only to the extent the investments are held in the Participant's account at the time of the distribution. A Plan may be amended to limit the investments which will be distributed in-kind. The amendment must include all investments (other than marketable securities for which cash may be substituted) that are held in a Participant's account at the time of the amendment and for which the Plan, prior to such amendment, allowed for distribution of those investments in kind. The right to an in-kind distribution for investments held at the time of the distribution would only have to be protected to the extent such investment was in the Participant's account at the time the amendment was adopted or effective, if later. Any such amendment will not be effective until the earlier of ninety (90) days after the date that Plan Participants are provided with the written notice of the Plan amendment in the form of a summary of material modification (SMM) or the first day of the second Plan Year after the Plan Year in which the amendment is adopted. (h) Promissory notes of Participants may be distributed in-kind pursuant to the Employer's loan policy document. (i) Distribution of benefits payable in the form of installments shall be paid in cash. (f) The propriety, amount, and form of any distribution made under the terms of this Plan shall be determined by the Plan Administrator. Upon such determination, the Plan Administrator shall direct the Trustee or Custodian in writing or by any such other means as expressly agreed upon, to make such a distribution. 6.6 COMMENCEMENT OF BENEFITS (a) Unless the Participant elects otherwise, distribution of benefits will begin no later than the sixtieth day after the close of the Plan Year in which the latest of the following events occurs: 49 (1) the Participant attains age sixty-five (65) (or Normal Retirement Age if earlier), (2) the tenth anniversary of the year in which the Participant commenced participation in the Plan, or (3) the Participant terminates Service with the Employer. (b) Notwithstanding the foregoing, the failure of a Participant and Spouse (if necessary) to consent to a distribution while a benefit is immediately distributable within the meaning of paragraph 6.4 hereof, shall be deemed an election to defer commencement of payment of any benefit sufficient to satisfy this paragraph. (c) If elected in the Adoption Agreement, if a terminating Participant or Employee does not make a timely election with respect to the cash-out distribution pursuant to Code Sections 411(a)(7), 411(a)(11) and 417(e)(1), the Plan Administrator will make a direct rollover into an individual retirement account or annuity (IRA). The Plan Administrator will select the IRA trustee or custodian, establish the IRA account and make the initial IRA investment selection. 6.7 TRANSITIONAL RULES FOR CASH-OUT LIMITS This paragraph provides transitional rules with regard to the cash-out limits for distributions made prior to October 17, 2000. (a) DISTRIBUTIONS SUBJECT TO CODE SECTION 417 - If payments in the form of a Qualified Joint and Survivor Annuity are required with regard to a Participant, the rules in this sub-paragraph 6.7(a) are substituted for the rule in the first sentence of paragraph 6.4(b). If the value of the Participant's Vested Account Balance exceeds $5,000 (or at the time of any distribution (1) in Plan Years beginning before August 6, 1997, exceeded $3,500 or (2) in Plan Years beginning after August 5, 1997, exceeded $5,000), and the account balance is immediately distributable, the Participant and the Participant's Spouse (or where either the Participant or the Spouse has died, the survivor) must consent to any distribution of such account balance. (b) DISTRIBUTIONS NOT SUBJECT TO CODE SECTION 417 - If payment in the form of a Qualified Joint and Survivor Annuity is not required with respect to a Participant, the rules in this subparagraph 6.7(b) are substituted for the rules in paragraph 6.4(c). If the value of a Participant's Vested Account Balance derived from Employer and Employee contributions: (1) for Plan Years beginning before August 6, 1997, exceeds $3,500 (or exceeded $3,500 at the time of any prior distribution), (2) for Plan Years beginning after August 5, 1997, exceeds $3,500 (or exceeded $3,500 at the time of any prior distribution), (3) for Plan Years beginning after August 5, 1997 and for a distribution made after March 21, 1999, that either exceeds $5,000 or is a remaining payment under a selected optional form of payment that exceeded $5,000 at the time the selected payment began, and the account balance is immediately distributable, the Participant and the Participant's Spouse (or where either the Participant or the Spouse had died, the survivor) must consent to any distribution of such account balance. 50 6.8 IN-SERVICE WITHDRAWALS If elected in the Adoption Agreement, an Employer may elect to permit a Participant in the Plan to make an in-service withdrawal subject to any limitation(s) specified in the Adoption Agreement. (a) An Participant may withdraw all or any part of the fair market value of his or her Voluntary or Required After-tax Contributions as described in Article IV, other than Elective Deferrals, upon request to the Plan Administrator unless indicated otherwise on the Adoption Agreement. No amount will be forfeited solely as a result of a Participant's withdrawal of an amount pursuant to this paragraph 6.8. Employee Rollover and Transfer Contributions and the income allocable to each may be withdrawn at any time unless indicated otherwise on the Adoption Agreement. (b) Subject to Article VIII, Joint and Survivor Annuity Requirements (if applicable) and pursuant to the Employer's election in the Adoption Agreement, a Participant may be eligible to withdraw any part of his or her Qualified Voluntary Contribution account by making application to the Plan Administrator. A request to withdraw amounts pursuant to this paragraph must be consented to by the Participant's Spouse unless the Plan satisfies the safe harbor under paragraph 8.7 hereof. Spousal consent, if required, shall comply with the requirements of paragraph 6.4 relating to immediate distributions. (c) A Participant may withdraw all or any part of the fair market value of his or her pre-1987 Voluntary Contributions with or without withdrawing the earnings attributable thereto. Post-1986 Voluntary Contributions may only be withdrawn along with a portion of the earnings thereon. The amount of the earnings to be withdrawn is determined by using the formula: DA [1-(V / V+E)], where DA is the distribution amount, V is the amount of Voluntary Contributions and V+E is the amount of Voluntary Contributions plus the earnings attributable thereto. The aggregate value of the Participant's Vested Account Balance derived from Employer and Employee contributions (including Rollovers), whether vested before or upon death, includes the proceeds of insurance contracts, if any, on the Participant's life. The provisions of this Article shall apply to a Participant who is vested in amounts attributable to Employer contributions, Employee contributions (or both) at the time of death or distribution. (d) Under a Profit Sharing Plan to the extent that the Employer elects in the Adoption Agreement, one of the following conditions is required to withdraw all or any part of the vested Non-Safe Harbor Matching Contributions and discretionary contributions. (1) An Employee who has been a Participant in the Plan for at least five (5) years may, prior to separating from Service with the Employer, elect to withdraw all or any part of the vested Non-Safe Harbor Matching Contributions, and discretionary contributions. (2) An Employee who has been a Participant in the Plan for at least two (2) years may, prior to separating from Service with the Employer, elect to withdraw all or any part of the vested Non-Safe Harbor Matching Contributions and discretionary contributions. (3) A Participant who had attained age 59 1/2 may, prior to separation from Service, elect to withdraw all of any part of the vested Non-Safe Harbor Matching Contributions and discretionary contributions. (e) Unless otherwise elected by the Employer in the Adoption Agreement, Elective Deferrals, Qualified Non-Elective Contributions, Safe Harbor Matching and Non-Elective Contributions, and Qualified Matching Contributions, and income allocable to each, are not distributable to a Participant earlier than upon separation from Service, death, or Disability. Such amounts may also be distributed upon: 51 (1) termination of the Plan without the establishment of another Defined Contribution Plan other than an employee stock ownership plan [as defined in Code Section 4975(e)(7)] or a Simplified Employee Pension Plan [as defined in Code Section 408(k)], or a SIMPLE IRA plan [as defined in Code Section 408(p)], (2) the disposition by a corporation to an unrelated corporation of substantially all of the assets [within the meaning of Code Section 409(d)(2)] used in a trade or business of such corporation if such corporation continues to maintain this Plan after the disposition, but only with respect to Employees who continue employment with the corporation acquiring such assets, (3) the disposition by a corporation to an unrelated entity of such corporation's interest in a subsidiary [within the meaning of Code Section 409(d)(3)] if such corporation continues to maintain this Plan, but only with respect to Employees who continue employment with such subsidiary, (4) the attainment of age 59 1/2, or (5) the hardship of a Participant as described in paragraph 6.9. (f) An in-service withdrawal shall not be eligible for redeposit to the Trust. A withdrawal under this paragraph shall not prohibit such Participant from sharing in any future Employer contribution he or she would otherwise be eligible to receive. (g) Money purchase pension plans and target benefit plans may not allow in-service withdrawals prior to attainment of the Normal Retirement Age as specified in the Adoption Agreement. (h) Notwithstanding any provisions of the Plan to the contrary, to the extent that any optional form of benefit under this Plan permits a distribution prior to the Participant's retirement, death, Disability, or separation from Service, and prior to Plan termination, the optional form of benefits is not available with respect to benefits attributable to assets (including the post-transfer earnings thereon) and liabilities that are transferred within the meaning of Code Section 414(l), to this Plan from a money purchase pension plan qualified under Code Section 401(a) (other than any portion of those assets and liabilities attributable to Voluntary After-tax Contributions). (i) A Participant may withdraw any amount attributable to profit-sharing contributions, Elective Deferrals, Matching Contributions, Rollover and Transfer Contributions, not in excess of the vested amount of such contributions, if the withdrawal is made after the Participant attains age 59 1/2, as elected in the Adoption Agreement. (j) PARTIALLY VESTED PARTICIPANTS - If a distribution is made at a time when a Participant has a nonforfeitable right to less than 100% of the account balance derived from Employer contributions and the Participant may increase the nonforfeitable percentage in the account: (1) a separate account will be established for the Participant's interest in the Plan as of the time of the distribution, and (2) at any relevant time the Participant's nonforfeitable portion of the separate account will be equal to an amount ("X") determined by the formula: X = P [AB + D] - D For purposes of applying the formula: "P" is the nonforfeitable percentage at the relevant time, "AB" is the account balance at the relevant time, "D" is the amount of the distribution. 52 6.9 HARDSHIP WITHDRAWALS If elected in the Adoption Agreement, a Participant may request a Hardship withdrawal as provided in this paragraph. If applicable, Hardship withdrawals are subject to the spousal consent requirements in Code Sections 401(a)(11) and 417. A request to withdraw amounts must be consented to by the Participant's Spouse unless the Plan satisfies the safe harbor provisions under paragraph 8.7 hereof. Spousal consent, if required, shall comply with the requirements of paragraph 6.4 relating to immediate distributions. If elected in the Adoption Agreement, a Participant shall be permitted to make a Hardship withdrawal of any amount attributable to the vested portion of Elective Deferral Contributions (and any earnings credited to a Participant's account as of the later of December 31, 1988, and the end of the last Plan Year ending before July 1, 1989). If elected in the Adoption Agreement, fully vested profit-sharing contributions, Matching Contributions, Rollover Contributions, Transfer Contributions and the income allocable to each (without regard to attainment of age 59 1/2 or Disability) may be available for Hardship withdrawal if the Participant establishes that an immediate and heavy financial need exists and the withdrawal is necessary to satisfy such financial need. A Participant may withdraw all or any part of the fair market value of his or her Voluntary or Required After-tax Contributions due to a Hardship upon request to the Plan Administrator. Such request shall be made in accordance with procedures adopted by the Plan Administrator or his or her designate who shall have sole authority to authorize and direct a Hardship withdrawal pursuant to the following rules: (a) ADMINISTRATIVE REQUIREMENTS - A distribution will be considered as necessary to satisfy an immediate and heavy financial need of the Participant only if: (1) The Participant has obtained all distributions, other than Hardship distributions, and all nontaxable loans under all plans maintained by the Employer. (2) The Participant's Elective Deferrals, Voluntary After-tax Contributions and Required After-tax Contributions will be suspended for all plans maintained by the Employer (other than benefits under Code Section 125 plans) for twelve (12) months after the receipt of the Hardship distribution. (3) The distribution is not in excess of the amount of the immediate and heavy financial need described at paragraph (b) including amounts necessary to pay any Federal, state or local income taxes or penalties reasonably anticipated to result from the distribution. (4) All plans maintained by the Employer must provide that a Participant may not make Elective Deferrals for the Participant's taxable year immediately following the taxable year of the Hardship distribution in excess of the applicable limit under Code Section 402(g) for such taxable year, less the amount of such Participant's Elective Deferrals for the taxable year during which the Hardship distribution was received. (b) EXCLUSIVE REASONS FOR HARDSHIP WITHDRAWAL - An immediate and heavy financial need exists when the Hardship withdrawal will be used to pay the following: (1) expenses incurred or necessary for medical care [described in Code Section 213(d)] of the Participant, his or her Spouse, children and other dependents, (2) the cost directly related to the purchase (excluding mortgage payments) of the principal residence of the Participant, (3) payment of tuition and related educational expenses (including but not limited to expenses associated with room and board) for the next twelve (12) months of post-secondary education for the Participant, his or her Spouse, children or other dependents, or (4) the need to prevent eviction of the Participant from, or a foreclosure on the mortgage of, the Participant's principal residence. 53 (c) If a request for a Hardship withdrawal is approved by the Plan Administrator, funds shall be withdrawn from the contribution sources as elected in the Adoption Agreement unless provided otherwise by the Plan Administrator in an administrative procedure. Liquidation of a Participant's assets for the purpose of a Hardship withdrawal will be allocated on a pro-rata basis across all the investment alternatives in a Participant's account, unless otherwise provided by administrative procedure or by a directive from the Plan Administrator or by the Plan Participant. 6.10 DIRECT ROLLOVER OF BENEFITS (a) Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Participant's election under this paragraph, for distributions made on or after January 1, 1993, a Participant may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan or individual retirement account specified by the Participant in a Direct Rollover. Any portion of a distribution which is not paid directly to an Eligible Retirement Plan or individual retirement account shall be distributed to the Participant. For purposes of this paragraph, a surviving Spouse or a Spouse or former Spouse who is an alternate payee under a Qualified Domestic Relations Order as defined in Code Section 414(p), will be permitted to elect to have any Eligible Rollover Distribution paid directly to an individual retirement account (IRA) or an individual retirement annuity (IRA) or to another Qualified Plan in which the alternate payee is a participant. (b) If the entire Vested Account Balance is not eligible for a Direct Rollover of benefits as described in (a) above, the Participant may either make an elective transfer of the entire Vested Account Balance pursuant to the procedure described at paragraph 4.5 or a direct rollover of the portion which can be rolled over as described in (a) above and an elective transfer of the rest as described in paragraph 4.5 herein. (c) After December 31, 2001, the elective transfer of distributable benefits will be available only if the direct rollover provisions of Code Section 401(a)(31) would not be available to transfer the Participant's entire Vested Account Balance to the transferee plan. This elective transfer option will only be available in the following circumstances; (1) The Plan does not have a single sum distribution option available. The benefits are distributable only in a periodic payment method. (2) The distribution includes benefits that are not eligible for rollover treatment, including benefits attributable to After-tax Contributions, required minimum distributions or other amounts that have previously been included in income. (d) Distributions that consist of the Participant's entire account balance which is entirely eligible for rollover treatment will be transferred as a direct rollover rather than an elective transfer. 6.11 PARTICIPANT'S NOTICE In the event that a Participant's benefit becomes payable under Plan terms or if a Participant requests distribution of his or her benefit, the Plan Administrator shall provide such Participant with a notice regarding distribution of such benefit. The notice shall describe any Plan related information regarding the distribution including the Joint and Survivor Annuity requirements provided at paragraph 6.4(d), if applicable, the normal and optional forms of payment provided at paragraph 6.5, and the information required in connection with an Eligible Rollover Distribution. Information in connection with an Eligible Rollover Distribution shall include the right to have the funds transferred directly to another Qualified Plan or individual retirement account, the income tax withholding requirements, the rollover rules with respect to amounts distributed to the Participant, the default direct rollover provisions of Vested Account Balances greater than $1,000 but less than or equal to $5,000 (any other appropriate information such as the name and address, and telephone number of the IRA Trustee and information regarding IRA maintenance and withdrawal fees and how the IRA funds will be invested) and the general tax rules which apply to such distributions. Such notice shall be provided to the Participant within the time period prescribed at paragraph 6.4(d) hereof or, if the safe harbor provisions of paragraph 8.7 are applicable, 54 not less than thirty (30) days prior to the Annuity Starting Date, subject to a waiver period of a lesser number of days if elected by the Participant and if applicable, their Spouse. A default direct rollover will occur not less than thirty (30) days and not more than ninety (90) days after such notice with the explanation of the default direct rollover is provided to the separating Participant. 6.12 ASSETS TRANSFERRED FROM MONEY PURCHASE PENSION PLANS Notwithstanding any provision of this Plan to the contrary, to the extent that any optional form of benefit under this Plan permits a distribution prior to the Employee's retirement, death, Disability, or severance from employment, and prior to Plan termination, the optional form of benefit is not available with respect to benefits attributable to assets (including the associated post-transfer earnings) and liabilities that are transferred, within the meaning of Code Section 414(l), to this Plan from a money purchase pension plan qualified under Code Section 401(a) (other than any portion of those assets and liabilities attributable to Voluntary After-tax Contributions). 6.13 ASSETS TRANSFERRED FROM A CODE SECTION 401(k) PLAN If the Plan receives a direct transfer (by merger or otherwise) of Elective Deferrals (or amounts treated as Elective Deferrals) under a Plan with a Code Section 401(k) arrangement, the distribution restrictions of Code Sections 401(k)(2) and 401(k)(10) continue to apply to those transferred Elective Deferrals. 55 ARTICLE VII DISTRIBUTION REQUIREMENTS a) JOINT AND SURVIVOR ANNUITY REQUIREMENTS All distributions made under the terms of this Plan must comply with the provisions of Article VIII including, if applicable, the safe harbor provisions thereunder. 7.2 MINIMUM DISTRIBUTION REQUIREMENTS All distributions required under this Article shall be determined and made in accordance with the minimum distribution requirements of Code Section 401(a)(9) and the Regulations issued thereunder, including the minimum distribution incidental benefit rules found at Regulations Section 1.401(a)(9)-2. The entire interest of a Participant must be distributed or begin to be distributed no later than the Participant's Required Beginning Date. Life expectancy and joint and last survivor life expectancies are computed by using the expected return multiples found in Tables V and VI of Regulations Section 1.72-9. 7.3 LIMITS ON DISTRIBUTION PERIODS As of the First Distribution Calendar Year, distributions, if not made in a single sum, may only be made over one of the following periods (or a combination thereof): (a) the life of the Participant, (b) the life of the Participant and their Beneficiary, (c) a period certain not extending beyond the life expectancy of the Participant, or (d) a period certain not extending beyond the joint and last survivor life expectancy of the Participant and their Beneficiary. 7.4 REQUIRED DISTRIBUTIONS ON OR AFTER THE REQUIRED BEGINNING DATE (a) If a Participant's benefit is to be distributed over (i) a period not extending beyond the life expectancy of the Participant or the joint life and last survivor expectancy of the Participant and the Participant's Beneficiary or (ii) a period not extending beyond the life expectancy of the Beneficiary, the amount required to be distributed for each calendar year, beginning with distributions for the First Distribution Calendar Year, must at least equal the sum obtained by dividing the Participant's benefit by the Applicable Life Expectancy. (b) For calendar years beginning before January 1, 1988, if the Participant's Spouse is not the designated Beneficiary, the method of distribution selected must assure that at least 50% of the Present Value of the amount available for the distribution is paid within the life expectancy of the Participant. (c) For calendar years beginning after December 31, 1989, the amount to be distributed each year beginning with distributions for the First Distribution Calendar Year, shall not be less than the quotient obtained by dividing the Participant's Benefit by the lesser of (i) the Applicable Life Expectancy or (ii) if the Participant's Spouse is not the Beneficiary, the applicable divisor determined from the table set forth in Q&A-4 of Regulations Section 1.401(a)(9)-2. Distributions after the death of the Participant shall be distributed using the Applicable Life Expectancy as the relevant divisor without regard to Regulations Section 1.401(a)(9)-2. (d) The minimum distribution required for the Participant's First Distribution Calendar Year must be made on or before the Participant's Required Beginning Date. The minimum distribution for other calendar years, including the minimum distribution for the Distribution Calendar Year in which the Participant's Required Beginning Date occurs, must be made on or before December 31 of that Distribution Calendar Year. 56 (e) If the Participant's Benefit is distributed in the form of an annuity, distributions thereunder shall be made in accordance with the requirements of Code Section 401(a)(9) and the Regulations thereunder. (f) Distributions made to a Participant and the Participant's Beneficiary shall be made in accordance with the incidental death benefit requirements of Code Section 401(a)(9) and the Regulations issued thereunder. (g) For purposes of determining the amount of the required distribution for each Distribution Calendar Year, the account balance to be used is the account balance determined as of the last Valuation Date preceding the Distribution Calendar Year. This balance will be increased by the amount of any contributions or forfeitures allocated to the account balance after the Valuation Date in such preceding calendar year. Such balance will also be decreased by distributions made after the Valuation Date in such preceding Calendar Year. (h) For purposes of paragraph 7.4(g), if any portion of the minimum distribution for the First Distribution Calendar Year is made in the second Distribution Calendar Year on or before the Required Beginning Date, the amount of the minimum distribution made in the second Distribution Calendar Year shall be treated as if it had been made in the immediately preceding Distribution Calendar Year. a) REQUIRED BEGINNING DATE If this Plan is an amendment or restatement of a Plan which included the provisions of the minimum distribution rules as in effect prior to the enactment of the Small Business Job Protection Act of 1996 (SBJPA), the Employer may elect in the Adoption Agreement to substitute the minimum distribution rules in effect after the enactment of SBJPA. The Employer, so electing, must also elect in the Adoption Agreement those transitional rules that shall apply to its Plan. (a) The Required Beginning Date for a Participant who is a 5% owner with respect to the Plan Year ending in the calendar year in which the Participant attains age 70 1/2 is the April 1 of the calendar year following the calendar year in which the Participant attains age 70 1/2. Once distributions have begun to a 5% owner under this paragraph, they must continue to be distributed even if the Participant ceases to be a 5% owner in any subsequent year. (b) Unless the Employer has elected to continue to operate the provisions of the minimum required distribution in accordance with the provisions prior to the enactment of the SBJPA, or if elected otherwise in the Adoption Agreement or by operation of the Plan, the Required Beginning Date for a Participant who is not a 5% owner is no later than the April 1 of the calendar year following the later of the calendar year in which the Participant attains age 70 1/2 or the calendar year in which the Participant retires. (c) If the Employer has elected to continue under the prior provisions of the law, then except as provided below, the Required Beginning Date is the April 1 of the calendar year following the calendar year in which a Participant attains age 70 1/2. (1) A Participant who: (i) is not a 5% owner, (ii) has not had a Separation from Service, (ii) had attained age 70 1/2 prior to 1997, and (iii) had previously commenced required minimum distributions under the distribution rules (as then in effect) may elect to discontinue receiving distributions under the Plan. A Participant who makes such an election to discontinue distributions must establish a new Annuity Starting Date when benefits recommence under the Plan. A married Participant who is subject to the Qualified Joint and Survivor Annuity 57 provisions of 8.9 must obtain spousal consent to discontinue his or her distributions if distributions are in the form of a Qualified Joint and Survivor Annuity and to recommence benefits in a form other than a Qualified Joint and Survivor Annuity. Any such election will be made pursuant to the uniform and nondiscriminatory procedures established by the Plan Administrator. (1) A Participant who: (i) is not a more than 5% owner, and (ii) had attained age 70 1/2 in 1997 or in a later year (or attained age 70 1/2 in 1996, but had not commenced required minimum distributions in 1996) may elect to postpone distribution of the required minimum distributions until the Participant's Required Beginning Date as established in this paragraph. If a Participant attained age 70 1/2 in 1996, he or she must have elected under this paragraph to postpone distribution by December 31, 1997. If the Participant attains age 70 1/2 in 1997 or later, he or she must elect to postpone distributions under this paragraph not later than April 1 of the year following the year in which the Participant attained age 70 1/2. (iii) Notwithstanding the foregoing, a Participant who is not a more than 5% owner, has not had a separation from service, and is currently in benefit payment status because of attainment of age 70 1/2 in 1997 or in a later year (or attained age 70 1/2 in 1996) may elect to discontinue receiving distributions under the Plan and recommence payments by April 1 of the calendar year in which the Participant retires. A Participant who makes such an election to discontinue distributions must establish a new Annuity Starting Date when benefits recommence under the Plan. A married Participant who is subject to the Qualified Joint and Survivor Annuity provisions of paragraph 8.9 must obtain spousal consent to discontinue his or her distributions if distributions are in the form of a Qualified Joint and Survivor Annuity and to recommence benefits in the form other than a Qualified Joint and Survivor Annuity. Any such election will be made pursuant to the uniform and nondiscriminatory procedures established by the Plan Administrator. (3) The Required Beginning Date for a Participant who: (i) had attained age 70 1/2 prior to January 1, 1998, and (ii) was not a 5% owner at any time during the Plan Year ending with or within the calendar year in which the Participant attained age 66 1/2 or any subsequent Plan Year, is April 1 of the calendar year following the calendar year in which the Participant retires. (3) Except as provided above, the Required Beginning Date for a Participant who was a 5% owner at any time during the five (5) Plan Year period ending in the calendar year in which the Participant attained age 70 1/2 is April 1 of the calendar year following the calendar year in which the Participant attained age 70 1/2. For a Participant who became a 5% owner during any Plan Year after the calendar year in which the Participant attained age 70 1/2, the Required Beginning Date is April 1 of the calendar year in which such subsequent Plan Year ends. For purposes of this Article, the term 5% owner shall have the same meaning as the term is defined under Code Section 416. A Participant is treated as a 5% owner under this paragraph if such Participant is a 5% owner at any 58 time during the Plan Year ending with or within the calendar year the Participant attains age 70 1/2. Once distributions have begun to a 5% owner under this paragraph, they must continue to be distributed even if the Participant ceases to be a 5% owner in a subsequent year. 7.6 TRANSITIONAL RULES (a) Notwithstanding the other requirements of this Article and subject to the requirements of Article VIII, Joint and Survivor Annuity Requirements, distribution on behalf of any Employee, including a 5% owner may be made in accordance with all of the following requirements, regardless of when such distribution commences: (1) the distribution by the Trust is one which would not have disqualified such Trust under Code Section 401(a)(9) as in effect prior to amendment by the Deficit Reduction Act of 1984, (2) the distribution is in accordance with a method of distribution designated by the Participant whose interest in the Trust is being distributed or, if the Participant is deceased, by a Beneficiary of such Participant, (3) such designation was in writing, was signed by the Participant or the Beneficiary, and was made before January 1, 1984, (4) the Participant had accrued a benefit under the Plan as of December 31, 1983, and (5) the method of distribution designated by the Participant or the Beneficiary specifies the time at which distribution will commence, the period over which distributions will be made, and in the case of any distribution upon the Participant's death, the Beneficiaries of the Participant listed in order of priority. (b) A distribution upon death will not be covered by this transitional rule unless the information in the designation contains the required information described above with respect to the distributions to be made upon the death of the Participant. (c) For any distribution which commences before January 1, 1984, but continues after December 31, 1983, the Participant or the Beneficiary to whom such distribution is being made, will be presumed to have designated the method of distribution under which the distribution is being made, if the method of distribution was specified in writing and the distribution satisfies the requirements in subparagraphs (a)(1) through (5) above. (d) If a designation is revoked, any subsequent distribution must satisfy the requirements of Code Section 401(a)(9) and the Regulations thereunder. If a designation is revoked subsequent to the date distributions are required to begin, the Plan must distribute by the end of the calendar year following the calendar year in which the revocation occurs the total amount not yet distributed which would have been required to have been distributed to satisfy Code Section 401(a)(9) and the Regulations thereunder, but for the Code Section 242(b)(2) election of the Tax Equity and Fiscal Responsibility Act of 1982. For calendar years beginning after 1988, such distributions must meet the minimum distribution incidental benefit requirements in Section 1.401(a)(9)-2 of the Income Tax Regulations. Any changes in the designation will be considered to be a revocation of the designation. However, the mere substitution or addition of another Beneficiary (one not named in the designation) under the designation will not be considered to be a revocation of the designation, so long as such substitution or addition does not alter the period over which distributions are to be made under the designation, directly or indirectly (for example, by altering the relevant measuring life). In the case in which an amount is transferred or rolled over from one plan to another plan, the rules in Q&A J-2 and Q&A J-3 of the Regulations shall apply. 59 7.7 DESIGNATION OF BENEFICIARY Each Participant shall file a written designation of Beneficiary with the Plan Administrator upon qualifying for participation in this Plan. Such designation shall remain in force until revoked by the Participant by filing a new Beneficiary designation form with the Employer. A profit-sharing or 401(k) Plan satisfying the requirements of paragraph 8.7 requires the Beneficiary shall be the Participant's Spouse, if any, unless such Spouse properly consents otherwise. 7.8 BENEFICIARY (a) For purposes of the Plan, a Beneficiary is the person or persons designated as such in accordance with Code Section 401(a)(9) and the Regulations thereunder by the Participant or by the Participant's surviving Spouse if the Participant's surviving Spouse is entitled to receive distributions under the Plan. Such a designation by the Participant's surviving Spouse, however, shall relate solely to the distributions to be made under the Plan after the death of both the Participant and the surviving Spouse. A Beneficiary designation shall be communicated to the Plan Administrator on a form or other type of communication acceptable to the Plan Administrator for use in connection with the Plan, signed by the designating person, and subject to the last sentence of this subparagraph (a), filed with the Plan Administrator in accordance with this paragraph 7.8 not later than thirty (30) days after the designating person's death. The form may name individuals, trusts or estates to take upon the contingency of survival and may specify or limit the manner of distribution thereto. In the event a Participant or the Participant's surviving Spouse, as the case may be, fails to properly designate a Beneficiary (including, as improper, a designation to which the Participant's surviving Spouse did not properly consent) or in the event that no properly designated Beneficiary survives the Participant or the Participant's surviving Spouse, as applicable, then the Beneficiary of such person shall be his surviving Spouse or, if none, his issue per stirpes or, if no issue, the Participant's surviving parents in equal shares, or if no surviving parents, then to the Participant's estate. The Beneficiary designation last accepted by the Plan Administrator during the designating person's lifetime before such distribution is to commence shall be controlling and, whether or not fully dispositive of the vested portion of the account of the Participant involved, thereupon shall revoke all such forms previously filed by that person. (b) Notwithstanding subparagraph (a) of this paragraph 7.8, the designation by a married Participant of any Beneficiary other than the Participant's Spouse, or the change of any such Beneficiary to a new Beneficiary other than the Participant's Spouse, shall not be valid unless made in writing and consented to by the Participant's Spouse. The Spouse's consent to such designation must be made in the manner described in this paragraph 7.8. (c) Any Beneficiary designation made and in effect under a Qualified Plan immediately prior to that Plan's amendment and continuation in the form of this Plan shall be deemed to be a valid Beneficiary designation filed under this Plan to the extent consistent with this Plan. If such Beneficiary designation was made with respect to a Qualified Plan that permitted the Participant to designate without spousal consent a Beneficiary to receive 50% of the Participant's account balance in the event of the Participant's death, with respect to such Beneficiary designation under this Plan, paragraph 7.8 shall be applied by application of 50% of the vested portion of the Participant's account toward the purchase of a Qualified Pre-Retirement Survivor Annuity and the balance of the Participant's account shall be paid to the designated Beneficiary pursuant to the provisions of Article VIII. In such event, the amount of Voluntary After-tax Contributions applied to the purchase of the annuity shall be in the same proportion as the Voluntary After-tax Contributions bear to the entire Participant's account. 7.9 DISTRIBUTION BEGINNING BEFORE DEATH This paragraph is applicable only after the Participant's Required Beginning Date as elected by the Employer in the Adoption Agreement. If the Participant dies after distribution of his or her interest has begun, the remaining portion of such interest will continue to be distributed at least as rapidly as under the method of distribution being used prior to the Participant's death. 60 a) DISTRIBUTION BEGINNING AFTER DEATH This paragraph is applicable before the Participant's Required Beginning Date as elected by the Employer in the Adoption Agreement, even if distributions have commenced from the Plan. If the Participant dies before distribution of his or her interest begins, distribution of the Participant's entire interest shall be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death, except to the extent that an election is made to receive distributions in accordance with (a) or (b) below: (a) if any portion of the Participant's interest is payable to a Beneficiary, distributions may be made over the life or over a period certain not greater than the life expectancy of the Beneficiary commencing on or before December 31 of the calendar year immediately following the calendar year in which the Participant died; (b) if the Beneficiary is the Participant's surviving Spouse, the date distributions are required to begin in accordance with (a) above shall not be earlier than the later of (i) December 31 of the calendar year immediately following the calendar year in which the Participant died or (ii) December 31 of the calendar year in which the Participant would have attained age 70 1/2. If the Participant has not made an election pursuant to this paragraph 7.10 by the time of his or her death, the Participant's Beneficiary must elect the method of distribution no later than the earlier of (i) December 31 of the calendar year in which distributions would be required to begin under this section, or (ii) December 31 of the calendar year which contains the fifth anniversary of the date of death of the Participant. If the Participant has no Beneficiary, or if the Beneficiary does not elect a method of distribution, then distribution of the Participant's entire interest must be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death. If the surviving Spouse dies after the Participant but before payments to such Spouse begin, the provisions of this paragraph with the exception of subparagraph (b) herein, shall be applied as if the surviving Spouse were the Participant. For the purposes of this paragraph and paragraph 7.9, distribution of a Participant's interest is considered to begin on the Participant's Required Beginning Date (or, if the preceding sentence is applicable, the date distribution is required to begin to the Surviving Spouse). If distribution in the form of an annuity described in paragraph 7.4(d) irrevocably commences to the Participant before the Required Beginning Date, the date distribution is considered to begin is the date distribution actually commences. 7.11 DISTRIBUTION OF EXCESS ELECTIVE DEFERRALS (a) No Participant shall be permitted to defer under this Plan with respect to a calendar year more than the maximum dollar amount permitted under Code Section 402(g), as indexed, for such calendar year. If a Participant defers more than the maximum allowed due to mistake of fact, such Excess Elective Deferrals shall be distributed to the Participant no later than April 15 following the calendar year to which the excess is attributable. If a Participant who participates in this Plan and in another plan which permits Elective Deferrals defers more than the Code Section 402(g) maximum, such Participant shall have the right to notify one or both plans by March 1 of the calendar year following the year to which the excess is attributable requesting a distribution of the Excess Elective Deferral. A Participant is deemed to notify the Plan Administrator of any Excess Elective Deferrals that arise by taking into account only those Elective Deferrals made to the Plan of the Employer. If distribution is requested, the applicable plan(s) shall make distribution of the Excess Elective Deferrals, plus any income and minus any loss allocable thereto, no later than April 15 following the calendar year to which the excess is attributable. Excess Elective Deferrals which are distributed on a timely basis shall not be considered Annual Additions for the Limitation Year during which such amounts are deferred. 61 (b) Excess Elective Deferrals shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to Excess Elective Deferrals is the sum of (1) income or loss allocable to the Participant's Elective Deferral account for the taxable year multiplied by a fraction, the numerator of which is such Participant's Excess Elective Deferrals for the year and the denominator is the Participant's account balance attributable to Elective Deferrals without regard to any income or loss occurring during such taxable year; and (2) ten percent (10%) of the amount determined under (1) multiplied by the number of whole calendar months between the end of the Participant's taxable year and the date of the distribution, counting the month of the distribution if the distribution occurs after the fifteenth (15th) of such month. (c) The amount a Participant receives as a distribution of his or her Excess Elective Deferrals is includible in income with respect to the taxable year to which the excess is attributable. (d) Any income attributable to the Excess Elective Deferrals determined in (b) above shall be includible in income with respect to the taxable year in which the excess is distributed. 7.12 DISTRIBUTION OF EXCESS CONTRIBUTIONS (a) Excess Contributions plus any income and minus any loss allocable thereto, shall be distributed to affected Participants no later than the last day of the Plan Year following the Plan Year to which the Excess Contributions are attributable. Excess Contributions are allocated to the Highly Compensated Employees with the largest amounts of Employer contributions taken into account in calculating the ADP Test for the year in which the excess arose beginning with the Highly Compensated Employee with the largest amount of such Employer contributions and continuing in descending order until all the Excess Contributions have been allocated. For purposes of the preceding sentence, the "largest amount" is determined after distribution of any Excess Contributions. If such Excess Contributions are distributed more than two and one-half (2 1/2) months after the last day of the Plan Year to which the Excess Contributions are attributable, a 10% excise tax will be imposed on the Employer maintaining the Plan with respect to the principal amount of the excess. (b) Excess Contributions, including any amount recharacterized as a Voluntary After-tax Contribution, shall be treated as Annual Additions with respect to the Plan Year to which the excess is attributable. (c) Excess Contributions shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to Excess Contributions allocated to each Participant is the sum of (1) income or loss allocable to the Participant's Elective Deferral account (and, if applicable, the Qualified Nonelective Contribution Account or the Qualified Matching Contribution Account or both) for the Plan Year multiplied by a fraction, the numerator of which is such Participant's Excess Contributions for the year and the denominator is the Participant's account balance attributable to Elective Deferrals (and Qualified Nonelective Contributions or Qualified Matching Contributions, or both, if any of such contributions are included in the ADP test) without regard to any income or loss occurring during such Plan Year; and (2) ten percent (10%) of the amount determined under (1) multiplied by the number of whole calendar months between the end of the Plan Year and the date of distribution, counting the month of distribution if the distribution occurs after the fifteenth (15th) of such month. (d) Excess Contributions shall be distributed from the Participant's Elective Deferral account and Qualified Matching Contribution account (if applicable) in proportion to the Participant's Elective Deferrals and Qualified Matching Contributions (to the extent used in the ADP Test) for the test year. Excess Contributions shall be distributed from the Participant's Qualified Non-Elective Contribution account only to the extent that such Excess Contributions exceed the Participant's Elective Deferrals and Qualified Matching Contributions account for the applicable test year. 62 (e) The return of an Excess Contribution under a Plan established under a Davis-Bacon Adoption Agreement will be reported as additional wages paid to the affected Participant. 7.13 DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS (a) Notwithstanding any other provisions of this Plan, Excess Aggregate Contributions, plus any income and minus any loss allocable thereto, shall be forfeited, if forfeitable or if not forfeitable, distributed no later than the last day of each Plan Year to Participants to whose accounts such Excess Aggregate Contributions were allocated for the preceding Plan Year. Excess Aggregate Contributions are allocated to the Highly Compensated Employees with the largest Contribution Percentage Amounts taken into account in calculating the ACP test for the year in which the excess arose, beginning with the Highly Compensated Employee with the largest amount of such Contribution Percentage and continuing in descending order until all the Excess Aggregate Contributions have been allocated. For purposes of the preceding sentence, the "largest amount" is determined after distribution of any Excess Aggregate Contributions. (b) If such Excess Aggregate Contributions are distributed more than two and one-half (2 1/2) months after the last day of the Plan Year in which such excess amount arose, a 10% excise tax will be imposed on the Employer maintaining the Plan with respect to those amounts. Excess Aggregate Contributions shall be treated as Annual Additions for purposes of Article X, Limitations On Allocations. (c) Excess Aggregate Contributions shall be adjusted for any income or loss up to the date of the distribution. The income or loss allocable to the Excess Aggregate Contributions allocated to each Participant is the sum of (1) income or loss allocable to each Participant's Employee Contribution account, Matching Contribution account, Qualified Matching Contribution account (if any, and if all amounts therein are not used in the ADP test) and, if applicable, Qualified Nonelective Contribution account and the Elective Deferral account of the Plan Year multiplied by a fraction, the numerator of which is such Participant's Excess Aggregate Contributions for the year end the denominator is the Participant's account balance(s) attributable to Contribution Percentage amounts without regard to any income or loss occurring during such Plan Year; and (2) ten percent (10%) of the amount determined under (1) multiplied by the number of whole calendar months between the end of the Plan Year and the date of distribution, counting the month of distribution if distribution occurs after the fifteenth (15th) of such month. (d) Excess Aggregate Contributions shall be forfeited if forfeitable, or distributed on a pro-rata basis, from the Participant's Voluntary After-tax Contribution account, Required After-tax Contribution account, Matching Contribution account and Qualified Matching Contribution account (and if applicable the Participant's Qualified Matching Contribution account, and/or Elective Deferral account, or both). (e) Forfeitures of Excess Aggregate Contributions may be reallocated to the accounts of other Participants or applied to reduce Employer contributions, or as otherwise elected by the Employer in the Adoption Agreement. 7.14 DISTRIBUTIONS TO MINORS AND INDIVIDUALS WHO ARE LEGALLY INCOMPETENT Benefits payable to either a minor or an individual who has been declared legally incompetent shall be paid, at the direction of the conservator appointed either under a court order or applicable state law which permits such an individual to be a guardian for the benefit of said minor or incompetent. 7.15 UNCLAIMED BENEFITS (a) If elected on the Adoption Agreement, the default form of payment will be a direct rollover into an individual retirement account or annuity for any cash out distribution of amounts greater than $1,000 but less than or equal to $5,000 made pursuant to Code Sections 411(a)(7), 411(a)(11) and 417(e)(1). If an individual retirement account or annuity is established, no amounts contributed to these accounts may be forfeited under the Plan. 63 (b) The Plan Administrator shall notify Participants or Beneficiaries by certified or registered mail sent to his or her last known address of record with the Employer when their benefits become distributable as provided at paragraph 6.11 hereof. If a Participant or Beneficiary does not respond to the notice within ninety (90) days of the date of the notice, the Plan Administrator may take reasonable steps to locate the Participant or Beneficiary including, but not limited to, requesting assistance from the Employer, Employees, Social Security Administration and/or the Internal Revenue Service. (c) If the Participant cannot be located after a period of twelve (12) months, or such other period determined in a uniform and nondiscriminatory manner by the Plan Administrator, the Plan Administrator shall treat the benefit as a forfeiture pursuant to paragraph 9.8. The forfeiture provisions of this subparagraph 7.15(c) apply only to the Participant's or Beneficiary's account balance which is less than $5,000. If the Employer does not make a contribution for the Plan Year during which the forfeiture takes place, such amount shall first be applied to pay Plan expenses and, if there are no such expenses, it shall then be allocated to eligible Participant accounts as if the amount were the Employer's contribution for such Plan Year. (d) If a Participant or Beneficiary later makes a claim for such benefit, the Plan Administrator shall validate such claim and provide the Participant or Beneficiary with all notices and other information necessary for the Participant or Beneficiary to perfect the claim. If the Plan Administrator validates the claim for benefits, the Participant's account balance shall be restored to the benefit amount treated as a forfeiture. Such benefit shall not be adjusted for investment earnings or losses during the period beginning on the date of forfeiture and ending on the date of restoration. The funds necessary to restore the Participant's account will first be taken from amounts eligible for reallocation or other disposition as forfeitures with respect to the Plan Year. If such funds do not exist or if such funds are insufficient, the Employer will make a contribution prior to the date on which the benefit is payable to restore such Participant's account. Such benefit shall be paid or commence to be paid in the same manner as if the benefit was eligible for distribution on the date the claim for benefit is validated. (e) The Plan Administrator shall follow the same procedure in locating and subsequently treating as a forfeiture the benefit of a Participant or Beneficiary whose benefit has been properly paid under Plan terms but where the Participant or Beneficiary has not negotiated the benefit check(s). (f) Notwithstanding the foregoing, the Plan Administrator in his discretion may establish alternative procedures for locating and administering the benefits of missing Plan Participants. 64 ARTICLE VIII JOINT AND SURVIVOR ANNUITY REQUIREMENTS 8.1 APPLICABILITY OF PROVISIONS The provisions of this Article shall apply to any Participant who is credited with at least one (1) Hour of Service with the Employer and such other Participants as provided in paragraph 8.8. 8.2 PAYMENT OF QUALIFIED JOINT AND SURVIVOR ANNUITY Unless an optional form of benefit is selected pursuant to a Qualified Election within the ninety (90) day period ending on the Annuity Starting Date, a Participant's Vested Account Balance will be paid in the form of a Qualified Joint and Survivor Annuity. For this purpose, a Qualified Joint and Survivor Annuity with respect to an unmarried Participant's Vested Account Balance will be paid in the form of a straight life annuity. A straight life annuity means an annuity payable in equal installments for the life of the Participant that terminates upon the Participant's death. The Participant may elect to have such annuity distributed upon attainment of the Early Retirement Age under the Plan, if any. 8.3 PAYMENT OF QUALIFIED PRE-RETIREMENT SURVIVOR ANNUITY Unless an optional form of benefit has been elected within the Election Period pursuant to a Qualified Election, if a Participant dies before benefits have commenced then the Participant's Vested Account Balance shall be paid in the form of a life annuity for the life of the surviving Spouse. The surviving Spouse may elect to have such annuity distributed within a reasonable period after the Participant's death. If no election has been made within the Election Period prior to the Participant's death, the surviving Spouse shall have the right to select an optional form of benefit after the Participant's death. Such election will only be permitted if the surviving Spouse is provided with a notice similar to that required under paragraph 8.5 except that the notice will be modified to explain a life annuity rather than a Qualified Joint and Survivor Annuity. A Participant who does not meet the age thirty-five (35) requirement set forth in the Election Period as of the end of any current Plan Year may make a special qualified election to waive the Qualified Pre-Retirement Survivor Annuity for the period beginning on the date of such election and ending on the first day of the Plan Year in which the Participant will attain age thirty-five (35). Such election shall not be valid unless the Participant receives a written explanation of the Qualified Pre-Retirement Survivor Annuity in such terms as are comparable to the explanation required under paragraph 8.5. Qualified Pre-Retirement Survivor Annuity coverage will be automatically reinstated as of the first day of the Plan Year in which the Participant attains age thirty-five (35). Any new waiver on or after such date shall be subject to the full requirements of this Article. 8.4 QUALIFIED ELECTION A Qualified Election is an election to either waive a Qualified Joint and Survivor Annuity or a Qualified Pre-Retirement Survivor Annuity. Any such election shall not be effective unless: (a) the Participant's Spouse consents in writing to the election, (b) the election designates a specific Beneficiary, including any class of Beneficiaries or any contingent Beneficiaries, which may not be changed without spousal consent unless the Spouse expressly permits designations by the Participant without any further spousal consent, (c) the Spouse's consent acknowledges the effect of the election, and (d) the Spouse's consent is witnessed by a Plan representative or notary public. A Participant's waiver of the Qualified Joint and Survivor Annuity shall not be effective unless the election designates a form of benefit payment which may not be changed without spousal consent unless the Spouse expressly permits designations by the Participant without any further spousal consent. If it is established to the satisfaction of the Plan Administrator that the Participant is unmarried or that the Spouse cannot be located, a waiver will be deemed a Qualified Election. Any consent by a Spouse obtained under this provision (or establishment that the consent of a Spouse cannot be obtained) shall be effective only with respect to such Spouse. A consent that permits designations by the Participant without any requirement of further consent by such Spouse must acknowledge that the Spouse has the right to limit consent to a specific Beneficiary, and a specific form of 65 benefit where applicable, and that the Spouse voluntarily elects to relinquish either or both of such rights. A revocation of a prior waiver may be made by a Participant without the consent of the Spouse at any time before the commencement of benefits. The number of revocations shall not be limited. No consent obtained under this provision shall be valid unless the Participant has received notice as provided in paragraphs 8.5 and 8.6 below. 8.5 NOTICE REQUIREMENTS FOR QUALIFIED JOINT AND SURVIVOR ANNUITY In the case of a Qualified Joint and Survivor Annuity, the Plan Administrator shall, no less than thirty (30) days and no more than ninety (90) days prior to the Annuity Starting Date, provide each Participant a written explanation of: (a) the terms and conditions of a Qualified Joint and Survivor Annuity, (b) the Participant's right to make and the effect of an election to waive the Qualified Joint and Survivor Annuity form of benefit, (c) the rights of a Participant's Spouse, and (d) the right to make and the effect of a revocation of a previous election to waive the Qualified Joint and Survivor Annuity. The Annuity Starting Date may be less than thirty (30) days after and may be before receipt of the written explanation described in the preceding paragraph provided that: (e) the Plan Administrator clearly informs the Participant and the Participant's Spouse that they have a right to a period of at least thirty (30) days after receiving the notice to consider the decision of whether to waive the Qualified Joint and Survivor Annuity and elect (with spousal consent) a form of distribution other than a Qualified Joint and Survivor Annuity; and (f) the Participant is permitted to revoke any affirmative distribution election at least until the Annuity Starting Date or, if later, at any time prior to the expiration to the seven (7) day period that begins the day after the explanation of the Qualified Joint and Survivor Annuity is provided to the Participant. 8.6 NOTICE REQUIREMENTS FOR QUALIFIED PRE-RETIREMENT SURVIVOR ANNUITY In the case of a Qualified Pre-Retirement Survivor Annuity as described in paragraph 8.3, the Plan Administrator shall provide each Participant within the applicable period for such Participant a written explanation of the Qualified Pre-Retirement Survivor Annuity in such terms and in such manner as would be comparable to the explanation provided for meeting the requirements of paragraph 8.5 applicable to a Qualified Joint and Survivor Annuity. The applicable period for a Participant is whichever of the following periods ends at the latest date: (a) the period beginning with the first day of the Plan Year in which the Participant attains age thirty-two (32) and ending with the close of the Plan Year preceding the Plan Year in which the Participant attains age thirty-five (35), (b) a reasonable period ending after the individual becomes a Participant, or (c) a reasonable period ending after this article first applies to the Participant. (d) Notwithstanding the foregoing, notice must be provided within a reasonable period ending after separation from Service in the case of a Participant who separates from Service before attaining age thirty-five (35). If such a Participant subsequently returns to employment with the Employer, the applicable period for such Participant shall be redetermined. 66 For purposes of applying the preceding paragraph, a reasonable period ending after the events described in (b) and (c) is the end of the two (2) year period beginning one (1) year prior to the date the applicable event occurs, and ending one (1) year after that date. In the case of a Participant who separates form Service before the Plan Year in which age thirty-five (35) is attained, notice shall be provided within the two (2) year period beginning one (1) year prior to separation and ending one (1) year after separation. 8.7 SPECIAL SAFE HARBOR EXCEPTION FOR CERTAIN PROFIT-SHARING OR 401(K) PLANS This paragraph shall apply to a Participant in a profit-sharing or 401(k) plan, and to any distribution, made on or after the first day of the first Plan Year beginning after 1988, from or under a separate account attributable solely to Qualified Voluntary Contributions, as maintained on behalf of a Participant in a money purchase pension plan or target benefit plan, if the following conditions are satisfied: (a) the Participant does not elect payments in the form of a life annuity, and (b) on the death of a Participant, the Participant's Vested Account Balance will be paid to the Participant's Surviving Spouse, but if there is no surviving Spouse, or if the Surviving Spouse has consented to, in a manner conforming to a Qualified Election, then to the Participant's Beneficiary. (c) The surviving Spouse may elect to have distribution of the Vested Account Balance commence within the ninety (90) day period following the date of the Participant's death. The account balance shall be adjusted for gains or losses occurring after the Participant's death in accordance with the provisions of the Plan governing the adjustment of account balances for other types of distributions. (d) If a Plan is otherwise exempt from the Qualified Joint and Survivor Annuity requirements, the Qualified Joint and Survivor Annuity requirements are not triggered unless the Participant in the Plan actually elects a life annuity as a distribution option. (e) These safe harbor rules shall not be applicable to a Participant in a profit-sharing or 401(k) plan if the Plan is the recipient of a merger of assets from a plan which was subject to the survivor annuity requirements of Code Sections 401(a)(11) and 417, and would therefore have a Qualified Joint and Survivor Annuity as its normal form of benefit, unless separate accounts or separate accounting was monitored for the assets of the merged plan. (f) Money purchase and target benefit plans are required to include the Qualified Joint and Survivor Annuity option. These Plans may eliminate any periodic payment options that are not required by the Qualified Joint and Survivor Annuity rules such as installment payments. (g) The Participant may waive the spousal death benefit described in this paragraph at any time provided that no such waiver shall be effective unless it satisfies the conditions (described in paragraph 8.4) that would apply to the Participant's waiver of the Qualified Pre-Retirement Survivor Annuity. (h) Profit Sharing Plans satisfying all of the requirements of this paragraph for a Participant such that the Plan is not required to provide a Qualified Joint and Survivor Annuity for the Participant, but that do provide such annuity (even if the annuity is the normal form), may replace the Qualified Joint and Survivor Annuity with payment in a single-sum distribution form that is otherwise identical to such annuity in accordance with the requirements under the Regulations Section 1.411(d)-4. (i) If this paragraph 8.7 is operative, then all other provisions of this Article VIII other than paragraph 8.8 are inoperative. 67 a) TRANSITIONAL JOINT AND SURVIVOR ANNUITY RULES Special transitional rules apply to Participants who were not receiving benefits on August 23, 1984. (a) Any living Participant not receiving benefits on August 23, 1984, who would otherwise not receive the benefits prescribed by the previous paragraphs of this Article, must be given the opportunity to elect to have the prior paragraphs of this Article apply if such Participant is credited with at least one (1) Hour of Service under this Plan or a predecessor Plan in a Plan Year beginning on or after January 1, 1976, and such Participant had at least ten (10) Years of Service for vesting purposes when he or she separated from Service. (b) Any living Participant not receiving benefits on August 23, 1984, who was credited with at least one (1) Hour of Service under this Plan or a predecessor plan on or after September 2, 1974, and who is not otherwise credited with any Service in a Plan Year beginning on or after January 1, 1976, must be given the opportunity to have his or her benefits paid in accordance with paragraph 8.9. (c) The respective opportunities to elect [as described in (a) and (b) above] must be afforded to the appropriate Participants during the period commencing on August 23, 1984, and ending on the date benefits would otherwise commence to said Participants. 8.9 AUTOMATIC JOINT AND SURVIVOR ANNUITY AND EARLY SURVIVOR ANNUITY Any Participant who has elected pursuant to paragraph 8.8(b) and any Participant who does not elect under paragraph 8.8(a) or who meets the requirements of paragraph 8.8(a), except that such Participant does not have at least ten (10) years of vesting Service when he or she separates from Service, shall have his or her benefits distributed in accordance with all of the following requirements if benefits would have been payable in the form of a life annuity in accordance with all of the following requirements: (a) If benefits in the form of a life annuity become payable to a married Participant who: (1) begins to receive payments under the Plan on or after Normal Retirement Age, or (2) dies on or after Normal Retirement Age while still working for the Employer, or (3) begins to receive payments on or after the Qualified Early Retirement Age, or (4) separates from Service on or after attaining Normal Retirement Age (or the Qualified Early Retirement Age) and after satisfying the eligibility requirements for the payment of benefits under the Plan and thereafter dies before beginning to receive such benefits, such benefits will be received under this Plan in the form of a Qualified Joint and Survivor Annuity, unless the Participant has elected otherwise during the Election Period. The Election Period must begin at least six (6) months before the Participant attains Qualified Early Retirement Age and end not more than ninety (90) days before the commencement of benefits. Any election will be in writing and may be changed by the Participant at any time. (b) A Participant who is employed after attaining the Qualified Early Retirement Age will be given the opportunity to elect, during the Election Period, to have a survivor annuity payable on death. If the Participant elects the survivor annuity, payments under such annuity must not be less than the payments which would have been made to the Spouse under the Qualified Joint and Survivor Annuity if the Participant had retired on the day before his or her death. Any election under this provision will be in writing and may be changed by the Participant at any time. The Election Period begins on the later of: 68 (1) the ninetieth day before the Participant attains the Qualified Early Retirement Age, or (2) the date on which participation begins, and ends on the date the Participant terminates employment. For purposes of this paragraph 8.9, Qualified Early Retirement Age is defined at paragraph 1.80 herein. 8.10 ANNUITY CONTRACTS Any annuity contract distributed under this Plan must be nontransferable. The terms of any annuity contract purchased and distributed by the Plan to a Participant or Spouse shall comply with the requirements of this Plan. 69 ARTICLE IX VESTING 9.1 EMPLOYEE CONTRIBUTIONS A Participant shall always have a 100% vested and nonforfeitable interest in his or her Elective Deferrals, Voluntary After-tax Contributions, Qualified Voluntary Contributions, Required After-tax Contributions, Qualified Non-Elective Contributions, Safe Harbor Matching Contributions, Safe Harbor Non-Elective Contributions, SIMPLE 401(k), Qualified Matching Contributions, Rollover and Transfer Contributions plus the earnings thereon. No forfeiture of Employer contributions (including any minimum contributions made under paragraph 15.2) will occur solely as a result of a Participant's withdrawal of any Employee contributions. 9.2 EMPLOYER CONTRIBUTIONS A Participant shall acquire a vested and nonforfeitable interest in his or her account attributable to Employer contributions in accordance with the schedule selected in the Adoption Agreement, provided that if a Participant is not already fully vested, he or she shall become so upon attaining Normal Retirement Age, Early Retirement Age, on death prior to normal retirement (provided the Participant has not terminated employment prior to death), on retirement due to Disability, or on termination of the Plan. Any contributions made on behalf of a Participant with a Disability within the meaning of Code Section 22(e)(3) at the election of the Employer must be fully vested when made. 9.3 VESTING OF EMPLOYER CONTRIBUTIONS IN A SIMPLE 401(K) PLAN A Participant shall have a 100% vested and nonforfeitable interest in his or her account attributable to any Employer contributions made under a SIMPLE 401(k) Plan. 9.4 COMPUTATION PERIOD A period used for determining Years of Service and Breaks in Service used in calculating the vesting of a Participant. A Year of Service means any twelve (12) consecutive month vesting computation period as elected in the Adoption Agreement during which an Employee completes the number of Hours of Service [not to exceed one-thousand (1,000)] as specified in the Adoption Agreement. If the Plan utilizes the Elapsed Time method of crediting Service, a vesting computation period for which the Employee receives credit for a Year of Service will be determined under the Service crediting rules of paragraph 1.117. 9.5 REQUALIFICATION PRIOR TO FIVE CONSECUTIVE ONE-YEAR BREAKS IN SERVICE Subject to Article VI, the account balance of a Participant who is re-employed prior to incurring five (5) consecutive one (1) year Breaks in Service or Periods of Severance shall consist of any undistributed amount in his or her account as of the date of re-employment plus any future contributions added to such account plus the investment earnings on the account. The Vested Account Balance of such Participant shall be determined by multiplying the Participant's account balance (adjusted to include any distribution or redeposit made under paragraph 6.3) by such Participant's vested percentage. All Service of the Participant, both prior to and following the break, shall be counted when computing the Participant's vested percentage. 9.6 REQUALIFICATION AFTER FIVE CONSECUTIVE ONE-YEAR BREAKS IN SERVICE Subject to Article VI, if a Participant was not fully vested prior to termination of employment and is re-employed after incurring five (5) consecutive one (1) year Breaks in Service or Periods of Severance, a new account shall be established for such Participant to separate his or her deferred vested and nonforfeitable account, if any, from the account to which new allocations will be made. The Participant's deferred account to the extent remaining shall be fully vested and shall continue to share in earnings and losses of the Trust. When computing the Participant's vested portion of the new account, all pre-break and post-break Service shall be counted. However, notwithstanding this provision, no such former Participant who has had five (5) consecutive one (1) year Breaks in Service or Periods of Severance shall acquire a larger vested and nonforfeitable interest in his or her prior account balance as a result of requalification hereunder. 9.7 CALCULATING VESTED INTEREST A Participant's vested and nonforfeitable interest, as determined by the Plan Administrator shall be calculated by multiplying the fair market value of his or her account attributable to Employer contributions on the Valuation Date concurrent with or preceding distribution by the decimal equivalent of the vested percentage as of his or her termination date. The amount attributable to Employer contributions for purposes of the calculation includes amounts previously paid out pursuant to paragraph 6.3 and not repaid. The Participant's vested and nonforfeitable interest, once calculated above, shall be reduced to reflect those amounts previously paid out to the Participant and not repaid by the Participant. The Participant's vested and nonforfeitable interest so determined shall continue to share in the investment earnings and any increase or decrease in the fair 70 market value of the Trust up to the Valuation Date preceding or coinciding with payment. a) FORFEITURES Any balance in the account of a Participant who has separated from Service to which he or she is not entitled under the foregoing provisions, shall be forfeited and applied as provided in the Adoption Agreement, or in accordance with a uniform and nondiscriminatory policy established by the Plan Administrator. The reallocation or other disposition of a nonvested benefit may only occur if the Participant has received payment of his or her entire vested benefit from the Plan or if the Participant has incurred five (5) consecutive one (1) year Breaks in Service. To the extent that forfeitures are reallocated, in the year in which the Participant terminates Service, a Participant shall not share in the allocation of a forfeiture of any portion of his account balance or of the forfeitures of any other Participant who has terminated Service in the same or prior Plan Year(s). While awaiting reallocation or other disposition, the Plan Administrator or his designate, if applicable, shall have the right to leave the nonvested benefit in the Participant's account or may transfer the nonvested benefit to a forfeiture suspense account. Amounts held in a forfeiture suspense account may share in any increase or decrease in fair market value of the assets of the Trust in accordance with Article V of the Plan. Such determination shall be made by the Plan Administrator or his designate, if applicable. If a Participant's account balance is forfeited prior to five consecutive one-year Breaks in Service, the amount necessary to restore the account balance to a Participant will be obtained from one of the following sources; current Plan Year's forfeitures, an additional Employer contribution, or earnings on investments for the applicable Plan Year, as determined by the Plan Administrator. For purposes of this paragraph, if the value of a Participant's Vested Account Balance is zero, the Participant shall be deemed to have received a distribution of such Vested Account Balance. A Highly Compensated Employee's Matching Contributions may be forfeited, even if vested, if the contributions to which they relate are Excess Deferrals, Excess Contributions or Excess Aggregate Contributions. Benefits with respect to Participants who cannot be located as provided at paragraph 7.15 hereof will be treated in the same manner as a forfeiture. 9.9 AMENDMENT OF VESTING SCHEDULE No amendment to the Plan shall have the effect of decreasing a Participant's Vested Account Balance determined without regard to such amendment as of the later of the date such amendment is adopted or the date it becomes effective. Further, if the vesting schedule of the Plan is amended, or the Plan is amended in any way that directly or indirectly affects the computation of any Participant's nonforfeitable percentage or if the Plan is deemed amended by an automatic change to or from a Top-Heavy vesting schedule, each Participant with at least three (3) Years of Service with the Employer may elect, during the election period defined herein, to have his or her nonforfeitable percentage computed under the Plan without regard to such amendment. For Participants who do not have at least one (1) Hour of Service in any Plan Year beginning after 1988, the preceding sentence shall be applied by substituting "five (5) Years of Service" for "three (3) Years of Service" where such language appears. The period during which the election may be made shall commence with the date the amendment is adopted and shall end on the later of: (a) sixty (60) days after the amendment is adopted, (b) sixty (60) days after the amendment becomes effective, or (c) sixty (60) days after the Participant is issued written notice of the amendment by the Employer or the Trustee. If the Trustee notifies the Participants involved, the Plan may be charged for the costs thereof. No amendment to the Plan shall be effective to the extent that it has the effect of decreasing a Participant's accrued benefit. Notwithstanding the preceding sentence, a Participant's account balance may be reduced to the extent permitted under Code Section 412(c)(8) relating to financial hardships. For purposes of this paragraph, a Plan amendment which has the effect of decreasing a Participant's account balance with respect to benefits attributable to Service before the amendment, shall be treated as reducing an accrued benefit. Furthermore, if the vesting schedule of a Plan is amended, in the case of an Employee who is a Participant as of the later of the date such amendment is adopted or the date it becomes effective, the nonforfeitable percentage (determined as of such date) of such Employee's Employer-derived accrued benefit will not be less than the percentage computed under the Plan without regard to such amendment. 71 No amendment to the Plan shall be effective to eliminate or restrict an optional form of benefit. The preceding sentence shall not apply to a Plan amendment that eliminates or restricts the ability of a Participant to receive payment of his or her account balance under a particular form of benefit if the amendment satisfies the conditions in (d) or (e) below: (d) The amendment provides a single sum distribution form that is otherwise identical to the optional form of benefit restricted. For purposes of this condition, a single-sum distribution form is otherwise identical only if it is identical in all respects to the eliminated or restricted optional form of benefit (or would be identical except that it provides greater rights to the Participant) except with respect to the timing of payments after commencement. (e) The amendment is not effective unless it provides that the amendment shall not apply to any distribution with an Annuity Starting Date earlier than the earlier of (i) the ninetieth (90th) day after the date the Participant receiving the distribution has been furnished a summary that reflects the amendment and that satisfies the ERISA requirements at 29 CFR 2520.104b-3 relating to a summary of material modifications or (ii) the first day of the second Plan Year following the Plan Year in which the amendment is adopted. 9.10 SERVICE WITH CONTROLLED GROUPS All Years of Service with all members of a controlled group of corporations [as defined in Code Section 414(b) as modified by Code Section 415(h)], all commonly controlled trades or businesses [as defined in Code Section 414(c) as modified by Code Section 415(h)], or members of an affiliated service group [as defined in Code Section 414(m)] of which the Employer is a part, and any other entity required to be aggregated with the Employer pursuant to Regulations under Code Section 414(o), shall be considered for purposes of determining a Participant's nonforfeitable percentage. 9.11 COMPLIANCE WITH UNIFORMED SERVICES EMPLOYMENT AND REEMPLOYMENT RIGHTS ACT OF 1994 Notwithstanding any provision of this Plan to the contrary, Years of Service for vesting will be credited to Participants with respect to periods of qualified military service as provided in Code Section 414(u). 72 ARTICLE X LIMITATIONS ON ALLOCATIONS a) PARTICIPATION IN THIS PLAN ONLY If the Participant does not participate in and has never participated in another Qualified Plan, a Welfare Benefit Fund, individual medical account as defined in Code Section 415(l)(2), or a Simplified Employee Pension Plan maintained by the adopting Employer, which provides an Annual Addition, the amount of Annual Additions which may be credited to the Participant's account for any Limitation Year will not exceed the lesser of the Maximum Permissible Amount or any other limitation contained in this Plan. If the Employer contribution that would otherwise be contributed or allocated to the Participant's account would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount, the amount contributed or allocated will be reduced so that the Annual Additions for the Limitation Year will equal the Maximum Permissible Amount. Prior to determining the Participant's actual Compensation for the Limitation Year, the Employer may determine the Maximum Permissible Amount for a Participant on the basis of a reasonable estimate of the Participant's Compensation for the Limitation Year, uniformly determined for all Participants similarly situated. As soon as is administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year will be determined on the basis of the Participant's actual Compensation for the Limitation Year. 10.2 DISPOSITION OF EXCESS ANNUAL ADDITIONS If there is an Excess Annual Addition due to an error in estimating a Participant's Compensation for a Limitation Year under paragraph 10.1, an error in estimating the amount of Elective Deferrals of the Participant, or as a result of the allocation of forfeitures, the excess will be distributed to the affected Participant in the order which follows: (a) Any Voluntary or Required After-tax Contributions plus the investment earnings thereon, to the extent they would reduce the excess, shall be returned to the Participant. (b) Simultaneously, with the return of any Voluntary or Required After-tax Contributions (plus attributable earnings), any associated Employer Matching Contribution(s) plus the investment earnings thereon that relate to the returned Voluntary or Required After-tax Contributions, to the extent they would reduce the excess, will be held either unallocated in a suspense account or forfeited in accordance with the "spillover method" as elected in the Adoption Agreement. (c) Elective Deferrals plus the investment earnings thereon shall be returned to the Participant to the extent they would reduce the excess. (d) Simultaneously with the return of the Elective Deferrals (plus attributable earnings), any associated Employer Matching Contribution(s) plus the investment earnings thereon that relate to the returned Elective Deferrals, to the extent they would reduce the excess, will be either held unallocated in a suspense account or forfeited in accordance with the "spillover method" as elected in the Adoption Agreement. (e) If, after the application of subparagraphs (a) through (d), an excess still exists, the excess will be held either unallocated in a suspense account or forfeited in accordance with the "spillover method" as elected in the Adoption Agreement. (f) When the suspense account method is used, and the Participant is not covered by the Plan at the end of the Limitation Year, the Plan Administrator will apply the suspense account to reduce future Employer contributions for all remaining Participants in the next Limitation Year, and each succeeding Limitation Year until the Excess Annual Addition is eliminated. If a suspense account is in existence at any time during a Limitation Year, all amounts in the suspense account must be allocated to Participant accounts before any Employer contributions or any Employee contributions may be made to the Plan for that Limitation Year. If a suspense account is in 73 existence at any time during a Limitation Year pursuant to this paragraph, it will not participate in the allocation of investment gains or losses. 10.3 PARTICIPATION IN MULTIPLE DEFINED CONTRIBUTION PLANS The Annual Additions which may be credited to a Participant's account under this Plan for any Limitation Year will not exceed the Maximum Permissible Amount. With respect to this Plan, the Maximum Permissible Amount is reduced by the Annual Additions credited to a Participant's account under any other qualified Master or Prototype Defined Contribution plans, Welfare Benefit funds, individual medical accounts as defined in Code Section 415(l)(2), and Simplified Employee Pension Plans maintained by the Employer, which provide an Annual Addition for the same Limitation Year. If the Annual Additions with respect to the Participant under other Defined Contribution Plans, Welfare Benefit funds, individual medical accounts and Simplified Employee Pension Plans maintained by the Employer are less than the Maximum Permissible Amount and the Employer contribution that would otherwise be contributed or allocated to the Participant's account under this Plan would cause the Annual Additions for the Limitation Year to exceed this limitation, the amount contributed or allocated under this Plan will be reduced so that the Annual Additions under all such plans and funds for the Limitation Year will equal the Maximum Permissible Amount. If the Annual Additions with respect to the Participant under such other Defined Contribution Plans and Welfare Benefit funds in the aggregate are equal to or greater than the Maximum Permissible Amount, no amount will be contributed or allocated to the Participant's account under this Plan for the Limitation Year. Prior to determining the Participant's actual Compensation for the Limitation Year, the Employer may determine the Maximum Permissible Amount for a Participant in the manner described in paragraph 10.1. As soon as administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year will be determined on the basis of the Participant's actual Compensation for the Limitation Year. If the Participant is covered under another qualified Defined Contribution Plan maintained by the Employer which is not a Master or Prototype Plan, Annual Additions which may be credited to the Participant's account under this Plan for any Limitation Year will be limited in accordance with this paragraph as though the other plan were a Master or Prototype Plan unless the Employer specifies other limitations in the Adoption Agreement. 10.4 DISPOSITION OF EXCESS ANNUAL ADDITIONS UNDER TWO PLANS If a Participant's Annual Additions under this Plan and such other plans as described in the preceding paragraph would result in an Excess Annual Additions for a Limitation Year due to an error in estimating a Participant's Compensation for a Limitation Year under paragraph 10.3 or as a result of forfeitures, the Excess Annual Additions will be deemed to consist of the Annual Additions last allocated except that Annual Additions attributable to a Simplified Employee Pension Plan will be deemed to have been allocated first and then Annual Additions to a Welfare Benefit Fund or individual medical account as defined in Code Section 415(l)(2) will be deemed to have been allocated next regardless of the actual Allocation Date. If an Excess Annual Addition was allocated to a Participant on a Valuation or Allocation Date of this Plan which coincides with a valuation or allocation date of another plan, the Excess Annual Additions attributed to this Plan will be the product of: (a) the total Excess Annual Additions allocated as of such date, times (b) the ratio of: (1) the Annual Additions allocated to the Participant for the Limitation Year as of such date under this Plan, to (2) the total Annual Additions allocated to the Participant for the Limitation Year as of such date under this and all the other qualified Master or Prototype Defined Contribution Plans. Any Excess Annual Additions attributed to this Plan will be disposed of in the manner described in paragraph 10.2. 10.5 PARTICIPATION IN THIS PLAN AND A DEFINED BENEFIT PLAN If the Employer maintains, or at any time maintained, a qualified Defined Benefit Plan (other than Paired Plan #02001 or #02002) covering any Participant in this Plan, the sum of the Participant's Defined Benefit Plan Fraction and Defined Contribution Plan Fraction will not exceed 1.0 in any Limitation Year. For any Plan Year during which the Plan is Top-Heavy, the Defined Benefit and Defined Contribution Plan Fractions shall be calculated in accordance with Code Section 416(h). The Annual Additions which may be credited to the Participant's account under this Plan for any Limitation Year will 74 be limited in accordance with the Adoption Agreement. This paragraph does not apply for Limitation Years beginning on or after January 1, 2000. 75 ARTICLE XI ANTIDISCRIMINATION TESTING 11.1 GENERAL TESTING REQUIREMENTS With respect to each Plan Year, an Employer's Plan which offers a Code Section 401(k) cash or deferred arrangement and any contributions made thereunder must satisfy the Average Deferral Percentage Test ("ADP Test") and, if applicable, the Average Contribution Percentage Test ("ACP Test"). Under each of these tests, the Average Deferral Percentage (ADP) and the Average Contribution Percentage (ACP) for Highly Compensated Employees may not exceed the ADP and ACP for Non-Highly Compensated Employees by more than the amount permitted by application of the basic limit or the alternative limit. These limits are described at paragraphs 11.2 and 11.6 herein. If the ADP or ACP for Highly Compensated Employees exceeds the basic limit or the alternative limit, the applicable average for Highly Compensated Employees either must be reduced to the maximum permitted under the most liberal limit or the average of the Non-Highly Compensated Employees is increased. The reduction in the average is determined in accordance with paragraph 11.4 herein. In lieu of reducing the applicable average for the Highly Compensated Employees, the Employer may elect to make an additional Qualified Non-Elective Contribution (QNEC) and/or a Qualified Matching Contribution (QMAC) for Non-Highly Compensated Employees to increase their Average Deferral Percentage and/or Average Contribution Percentage to the point where the Plan satisfies the ADP and/or the ACP Test. These qualified contributions are described at paragraph 11.5 herein. If the Plan can only satisfy the ADP Test and the ACP Test by application of the alternative limit, the Plan must apply the multiple use test as described at paragraph 11.7(b) hereof. If the Plan fails to satisfy the multiple use test, the Employer must either make correcting distributions to affected Highly Compensated Employees or make QNEC and/or QMAC contributions for Non-Highly Compensated Employees to the point where the Plan satisfies the multiple use test. 11.2 ADP TESTING LIMITATIONS (a) PRIOR YEAR TESTING - If elected by the Employer in the Adoption Agreement, the ADP for a Plan Year for Participants who are Highly Compensated Employees for each Plan Year and the Prior Plan Year's ADP for Participants who were Non-Highly Compensated Employees for the Prior Plan Year must satisfy the basic limit set forth in (1) or the alternative limit set forth at (2): (1) The ADP for the Plan Year for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Prior Plan Year's ADP for Participants who were Non-Highly Compensated Employees for the Prior Plan Year multiplied by 1.25; or (2) The ADP for a Plan Year for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Prior Year's ADP for Participants who were Non-Highly Compensated Employees for the Prior Plan Year multiplied by 2.0, provided that the ADP for Participants who are Highly Compensated Employees does not exceed the ADP for Participants who were Non-Highly Compensated Employees in the Prior Plan Year by more than two (2) percentage points. (b) For the first Plan Year of a Plan, where the Plan permits a Participant to make Elective Deferrals and the Plan is not a successor Plan, for purposes of the foregoing limits, the Prior Plan Year's Non-Highly Compensated Employees' ADP shall be 3%, unless the Employer has elected in the Adoption Agreement to use the current Plan Year's ADP for these Participants. 76 (c) CURRENT YEAR TESTING - If no election is made by the Employer in the Adoption Agreement, the ADP limits in (1) and (2), above, will be applied by comparing the current Plan Year's ADP for Participants who are Highly Compensated Employees with the current Plan Year's ADP for Participants who are Non-Highly Compensated Employees. This election can only be changed if the Plan meets the requirements for changing to Prior Plan Year testing set forth in IRS Notice 98-1 (or superseding guidance). 11.3 SPECIAL RULES RELATING TO APPLICATION OF THE ADP TEST (a) A Participant is a Highly Compensated Employee for a particular Plan Year if he or she meets the definition of a Highly Compensated Employee in effect for that Plan Year. Similarly, a Participant is a Non-Highly Compensated Employee for a particular Plan Year if he or she does not meet the definition of a Highly Compensated Employee in effect for that Plan Year. (b) The Actual Deferral Percentage for any Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have Elective Deferrals (and Qualified Non-Elective Contributions or Qualified Matching Contributions, or both, if treated as Elective Deferrals for purposes of the ADP Test) allocated to his or her accounts under two (2) or more arrangements described in Code Section 401(k), that are maintained by the Employer, shall be determined as if such Elective Deferrals (and, if applicable, such Qualified Non-Elective Contributions or Qualified Matching Contributions, or both) were made under a single arrangement. If a Highly Compensated Employee participates in two (2) or more cash or deferred arrangements that have different Plan Years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under Regulations issued under Code Section 401(k). (c) In the event that this Plan satisfies the requirements of Code Sections 401(k), 401(a)(4), or 410(b) only if aggregated with one (1) or more other plans, or if one (1) or more other plans satisfy the requirements of such Code Sections only if aggregated with this Plan, then this section shall be applied by determining the Actual Deferral Percentage of Participants as if all such plans were a single plan. Any adjustments to the Non-Highly Compensated Employee ADP for the Prior Plan Year will be made in accordance with IRS Notice 98-1 and any superseding guidance, unless the Employer has elected in the Adoption Agreement to use the current year testing method. Plans may be aggregated in order to satisfy Code Section 401(k) only if they have the same Plan Year and use the same ADP testing method. (d) The Employer shall maintain records sufficient to demonstrate satisfaction of the ADP Test and the amount of Qualified Non-Elective Contributions or Qualified Matching Contributions, or both, used in such test. (e) For purposes of the ADP Test, Elective Deferrals, Qualified Non-Elective Contributions and Qualified Matching Contributions must be made before the end of the twelve (12) month period immediately following the Plan Year to which the contributions relate. 11.4 CALCULATION AND DISTRIBUTION OF EXCESS CONTRIBUTIONS AND EXCESS AGGREGATE CONTRIBUTIONS (a) REDUCING THE AVERAGE FOR HIGHLY COMPENSATED EMPLOYEES - If necessary, the ADP and/or ACP for Highly Compensated Employees must be reduced to the maximum allowed by the applicable limit at paragraph 11.2 and 11.6. The average is reduced on a step-by-step leveling basis beginning by reducing the Actual Deferral Percentage or the Actual Contribution Percentage for the Highly Compensated Employee with the highest percentage until the average is reduced to the maximum allowed or until the Actual Deferral Percentage or Actual Contribution Percentage for such Highly Compensated Employee is lowered to that of the Highly Compensated Employee with the next highest percentage. This process continues until the ADP and/or the ACP is lowered to the maximum allowed for the Plan Year. The excess dollar amount 77 attributable to each affected Highly Compensated Employee is then totaled for purposes of correcting distributions determined at paragraph (b) below. (b) CORRECTING DISTRIBUTIONS TO HIGHLY COMPENSATED EMPLOYEES - The total amount to be distributed as determined under paragraph (a) is allocated to Highly Compensated Employees on the basis of the dollar amount included for such Employee in the numerator of the Actual Deferral Percentage or the Actual Contribution Percentage, as applicable. The distribution for each affected Highly Compensated Employee is determined on a leveling basis similar to that described at paragraph (a) except that the process is based on dollars rather than percentages. Excess Contributions and Excess Aggregate Contributions are allocated to the Highly Compensated Employees with the largest amount of Employer contributions taken into account in calculating the ADP or ACP Test for the year in which the excess arose, beginning with the Highly Compensated Employee with the largest amount of such Employer contributions and continuing in descending order until all the Excess Contributions and Excess Aggregate Contributions have been allocated. For purposes of the preceding sentence, the "largest amount" is determined after distribution of any Excess Contribution and Excess Aggregate Contributions. After correcting distributions are allocated, it is not necessary to recompute the Highly Compensated Employee averages to determine if they satisfy the ADP Test and/or the ACP Test. Distributions of Excess Contributions and Excess Aggregate Contributions are to be made in accordance with paragraphs 7.12 and 7.13 hereof. 11.5 QUALIFIED NON-ELECTIVE AND/OR MATCHING CONTRIBUTIONS The Employer may make a Qualified Non-Elective Contribution (QNEC) or Qualified Matching Contribution (QMAC) for Non-Highly Compensated Employees (whether or not so designated in the Adoption Agreement) to increase the Average Deferral Percentage and/or Average Contribution Percentage to the point where the Plan passes the ADP Test and/or the ACP Test. The following rules apply with respect to such contributions: (a) A QNEC or QMAC used in the ADP Test may not also be included in the ACP Test. (b) If testing is done on the basis of current Plan Year data, QNECs and/or QMACs must be made and credited to Participant accounts not later than the last day of the twelve (12) consecutive month period following the end of the Plan Year being tested. (c) If testing is done on the basis of Prior Plan Year data for Non-Highly Compensated Employees, QNECs and/or QMACs for such Employees must be contributed not later than the last day of the Plan Year being tested. (d) If the Employer makes Non-Elective Contributions which are not designated as Qualified Non-Elective Contributions at the time of the contribution to the Plan, the Plan Administrator may redesignate such contributions as Qualified Non-Elective Contributions if the contributions otherwise satisfy the requirements of a Qualified Non-Elective Contribution. (e) The Employer's contribution will be allocated to a group of Non-Highly Compensated Participants designated by the Plan Administrator. The allocation will be the lesser of the amount required to pass the ADP/ACP Test, or the maximum permitted under Code Section 415. 11.6 ACP TESTING LIMITATIONS Employee contributions and Matching Contributions must meet the nondiscrimination requirements of Code Section 401(a)(4) and the Average Contribution Percentage (hereinafter ACP) Test of Code Section 401(m). If Employee contributions (including any Elective Deferrals recharacterized as Voluntary After-tax Contributions) or Matching Contributions are made in connection with a cash or deferred arrangement, the ACP Test is in addition to the ADP Test under Code Section 401(k). Qualified Matching Contributions and Qualified Non-Elective Contributions used to satisfy the ADP test may not be used to satisfy the ACP test. 78 (a) PRIOR YEAR TESTING - If elected by the Employer in the Adoption Agreement, the ACP for a Plan Year for eligible Participants who are Highly Compensated Employees for each Plan Year and the prior Plan Year's ACP for eligible Participants who were Non-Highly Compensated Employees for the Prior Plan Year must satisfy one of the following tests: (1) The ACP for a Plan Year for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the prior Plan Year's ACP for eligible Participants who were Non-Highly Compensated Employees for the Prior Plan Year multiplied by 1.25; or (2) The ACP for a Plan Year for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the prior year's ACP for eligible Participants who were Non-Highly Compensated Employees for the Prior Plan Year multiplied by 2.0, provided that the ACP for eligible Participants who are Highly Compensated Employees does not exceed the ACP for eligible Participants who were Non-Highly Compensated Employees in the Prior Plan Year by more than two (2) percentage points. (b) For the first Plan Year of a Plan, where this Plan permits any eligible Participant to make Employee contributions, provides for Matching Contributions, or both, and the Plan is not a successor Plan, for purposes of the foregoing limits, the Prior Plan Year's Non-Highly Compensated Employees' ACP shall be 3% unless the Employer has elected in the Adoption Agreement to use the current Plan Year's ACP for these Participants. (c) CURRENT YEAR TESTING - If no election is made by the Employer in the Adoption Agreement, the ACP limits in (1) and (2), above, will be applied by comparing the current Plan Year's ACP for eligible Participants who are Highly Compensated Employees for the Plan Year with the current Plan Year's ACP for eligible Participants who are Non-Highly Compensated Employees. This election can only be changed if the Plan meets the requirements for changing to Prior Plan Year testing set forth in IRS Notice 98-1 (or superseding guidance). 11.7 SPECIAL RULES RELATING TO THE APPLICATION OF THE ACP TEST (a) A Participant is a Highly Compensated Employee for a particular Plan Year if he or she meets the definition of a Highly Compensated Employee in effect for that Plan Year. Similarly, a Participant is a Non-Highly Compensated Employee for a particular Plan Year if he or she does not meet the definition of a Highly Compensated Employee in effect for that Plan Year. (b) If one or more Highly Compensated Employees participate in both a cash or deferred arrangement and a plan subject to the ACP Test maintained by the Employer and the sum of the ADP and ACP of those Highly Compensated Employees subject to either or both tests exceeds the Aggregate Limit, then the ADP or ACP of those Highly Compensated Employees who also participate in a cash or deferred arrangement will be reduced in accordance with paragraph 11.4 so that the limit is not exceeded. The amount by which each Highly Compensated Employee's Contribution Percentage Amounts is reduced shall be treated as an Excess Aggregate Contribution. The ADP and ACP of the Highly Compensated Employees are determined after any corrections required to meet the ADP and ACP tests and are deemed to be the maximum permitted under such tests for the Plan Year. Multiple use of the aggregate limit does not occur if either the ADP and ACP of the Highly Compensated Employees does not exceed 1.25 multiplied by the ADP and ACP of the Non-Highly Compensated Employees. (c) For purposes of this paragraph, the Actual Contribution Percentage for any Participant who is a Highly Compensated Employee and who is eligible to have Contribution Percentage Amounts allocated to his or her account under two (2) or more plans described in Code Section 401(a) or arrangements described in Code Section 401(k) that are maintained by the Employer, shall be determined as if the total of such Contribution Percentage Amounts were made under a single plan. If a Highly Compensated Employee participates in two (2) or more cash or deferred arrangements that have different Plan Years, all cash or deferred 79 arrangements ending with or within the same calendar year shall be treated as a single arrangement. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatory disaggregation under the Regulations issued under Code Section 410(b) apply. (d) In the event that this Plan satisfies the requirements of Code Sections 401(a)(4), 401(m), or 410(b) only if aggregated with one (1) or more other plans, or if one (1) or more other plans satisfy the requirements of such Code Sections only if aggregated with this Plan, then this section shall be applied by determining the Actual Contribution Percentage of Eligible Participants as if all such plans were a single plan. Any adjustments to the Non-Highly Compensated Employee ACP for the Prior Plan Year will be made in accordance with IRS Notice 98-1 and any superseding guidance, unless the Employer has elected in the Adoption Agreement to use the Current Year testing method. Plans may be aggregated in order to satisfy Code Section 401(m) only if the aggregated plans have the same Plan Year and use the same ACP testing method. (e) For purposes of the ACP Test, Employee contributions are considered to have been made for the Plan Year in which contributed to the Plan. Matching Contributions and Qualified Matching and Non-Elective Contributions will be considered made for a Plan Year if made no later than the end of the twelve (12) month period beginning on the day after the close of the Plan Year. (f) The determination and treatment of the Actual Contribution Percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. 11.8 RECHARACTERIZATION If the Employer allows for Voluntary After-tax Contributions in the Adoption Agreement, a Participant may treat his or her Excess Contributions allocated to him or her as an amount distributed to the Participant and then contributed by the Participant to the Plan. Recharacterized amounts will remain nonforfeitable and subject to the same distribution requirements as Elective Deferrals. Amounts may not be recharacterized by a Highly Compensated Employee to the extent that such amount in combination with other Employee contributions made by that Employee would exceed any stated limit under the Plan on Voluntary After-tax Contributions. Recharacterization must occur no later than two and one-half (2 1/2) months after the last day of the Plan Year for which such Excess Contributions arose and is deemed to occur no earlier than the date the last Highly Compensated Employee is informed in writing of the amount recharacterized and the consequences thereof. Recharacterized amounts will be taxable to the Participant for the Participant's tax year in which the Participant would have received them in cash. 11.9 NONDISCRIMINATION TESTS IN A SIMPLE 401(K) PLAN The ADP/ACP Tests described this Article XI are treated as satisfied for any Plan Year for which the Employer has adopted and complied with the provisions of the SIMPLE 401(k) Adoption Agreement. 11.10 SAFE HARBOR RULES OF APPLICATION (a) The Employer may elect in a cash or deferred adoption agreement to apply the safe harbor plan provisions found in paragraphs 11.10 through 11.17. Except as otherwise permitted, an Employer must elect the Safe Harbor Plan provisions and must satisfy the notice requirements of paragraph 11.16 prior to the beginning of the Plan Year to which the Safe Harbor provisions will be applied. The Employer must apply the Safe Harbor provisions for the entire Plan Year, including any short Plan Year. An Employer who elects in the Adoption Agreement and operationally satisfies the Safe Harbor provisions of paragraphs 11.10 through 11.17 is not subject to the nondiscrimination requirements of 11.2. An Employer who elects to provide additional Matching Contributions as set forth in paragraph 11.14 will be subject to the nondiscrimination provisions of paragraph 11.6, unless the additional Matching Contributions satisfy the ACP test safe harbor provisions in paragraph 11.14. 80 (b) The Employer may elect in the Adoption Agreement either to make a Safe Harbor Non-Elective Contribution on behalf of each eligible Employee who is eligible to participate in the Plan, or to make a Safe Harbor Matching Contribution on behalf of each eligible Employee who is eligible to participate in the Plan and who is making Elective Deferrals. (c) The Safe Harbor Non-Elective Contribution will be made on behalf of each eligible Employee who is eligible to participate in the Plan equal to at least 3% of the Employee's Compensation. (d) The Safe Harbor Matching Contribution shall be made under the Basic Matching Formula or an Enhanced Matching Formula as described below. (e) A Plan intending to satisfy the requirements of Code Sections 401(k)(12) and 401(m)(11) [a "Safe Harbor CODA"] generally must satisfy such requirements, including the notice requirement, for the entire Plan Year. See Notice 98-52, 1988-46 I.R.B. 16, Notice 2000-3, 2000-4 I.R.B. 413, and Revenue Procedure 2000-29, 2000-6 I.R.B. 553. (1) BASIC MATCHING CONTRIBUTION FORMULA - The Basic Matching Formula provides a Matching Contribution on behalf of each eligible Employee who is making Elective Deferrals to the Plan in an amount equal to 100% of the amount of the Employee's Elective Deferrals that do not exceed 3% of the Employee's Compensation and 50% of the amount of the Employee's Elective Deferrals that exceed 3% of the Employee's Compensation but do not exceed 5% of the Employee's Compensation. A Plan satisfying the ADP Safe Harbor using the Basic Matching Formula automatically satisfies the ACP Test, if no After-tax or other Matching Contribution is made under the Plan. (2) ENHANCED MATCHING FORMULA - The Enhanced Matching Formula provides a Matching Contribution on behalf of each Eligible Employee who is making Elective Deferrals to the Plan under a formula, that, at any rate of Elective Deferrals, provides an aggregate amount of Matching Contributions at least equal to the aggregate amount of Matching Contributions that would have been provided under the Basic Matching Formula. In no event shall the aggregate amount of Matching Contributions under an Enhanced Matching Formula exceed 6% of an eligible Employee's Compensation. Under the Enhanced Matching Formula, the rate of Matching Contributions may not increase as a Participant's rate of Elective Deferrals increases. A Plan satisfying the ADP Safe Harbor using the Enhanced Matching Formula under which Matching Contributions made with respect to Elective Deferrals are not made in excess of 6% of the eligible Employee's Compensation, automatically satisfies the ACP Test if no other Matching Contribution is made under the Plan. (3) ADDITIONAL DISCRETIONARY MATCHING CONTRIBUTION - An Employer may elect in the Adoption Agreement for Plan Years [beginning after January 1, 2000] to provide an additional discretionary Matching Contribution. Any such contribution cannot exceed 4% of a Participant's Compensation. This is a limit on the total Matching Contribution formula, and is not a limit on the percentage of Compensation which is deferred and taken into account under the matching formula. (4) LIMITATION ON MATCHING CONTRIBUTIONS TO HIGHLY COMPENSATED EMPLOYEES - The Matching Contribution requirement will not be satisfied if, at any rate of Elective Deferrals, the rate of Matching Contributions that would apply with respect to any Highly Compensated Employee who is making Elective Deferrals under the Plan is greater than the rate of Matching Contributions that would apply with respect to any Non-Highly Compensated Employee who is making Elective Deferrals to the Plan and who has the same rate of Elective Deferrals. 81 a) SAFE HARBOR DEFINITIONS (a) "ACP TEST SAFE HARBOR" is the method described in paragraph 11.14 for satisfying the ACP Test of Code Section 401(m)(2). (b) "ACP TEST SAFE HARBOR MATCHING CONTRIBUTIONS" are Matching Contributions described in paragraph 11.5. (c) "ADP TEST SAFE HARBOR" is the method described in paragraph 11.13 for satisfying the ADP Test of Code Section 401(k)(3). (d) "ADP TEST SAFE HARBOR CONTRIBUTIONS" are Matching Contributions and Non-Elective Contributions described in paragraph 11.10. (e) "COMPENSATION" is defined in paragraph 1.16 with no dollar limit other than the limit imposed by Code Section 401(a)(17) as it applies to the Compensation of a Non-Highly Compensated Employee. Solely for purposes of determining the Compensation subject to a Participant's Salary Deferral Agreement, the Employer may use an alternative definition to the one described in the preceding sentence, provided such alternate definition is a reasonable definition with the meaning of Section 1.414(s)-1(d)(2) of the Regulations, and permits each Participant to elect sufficient Elective Deferrals to receive the maximum amount of Matching Contributions (determined using the definition of Compensation described in the preceding sentence) available to the Participant under this Plan. (f) "ELIGIBLE EMPLOYEE" means an Employee eligible to make Elective Deferrals under the Plan for any part of the Plan Year or who would be eligible to make Elective Deferrals but for a suspension due to a Hardship distribution described in paragraph 6.9 of the Plan or to statutory limitations, such as Code Sections 402(g) and 415. (g) "MATCHING CONTRIBUTIONS" are contributions made by the Employer on account of an Eligible Employee's Elective Deferrals. b) REQUIRED RESTRICTIONS ON SAFE HARBOR CONTRIBUTIONS (a) Safe Harbor Matching Contributions and Safe Harbor Non-Elective Contributions are Matching and Non-Elective Contributions respectively, that are: (1) nonforfeitable within the meaning of Treasury Regulations Section 1.401(k)-1(c), (2) are subject to the distribution restrictions of Code Section 401(k)(2)(B) and Treasury Regulations Section 1.401(k)-1(d), and (3) used to satisfy the Safe Harbor Contribution requirements. (b) Pursuant to Code Section 401(k)(2)(B) and Treasury Regulations Section 1.401(k)-1(d), such contributions (and earnings thereon) must not be distributable earlier than separation from Service, death, Disability, an event described in Code Section 401(k)(10), or in the case of a profit-sharing or stock bonus plan, the attainment of age 59 1/2. Pursuant to Code Section 401(k)(2)(B) and Treasury Regulations Section 1.401(k)-1(d)(2)(ii), these contributions shall not be eligible for distribution for reasons of Hardship. A Plan electing to use either of the Safe Harbor Matching or the Non-Elective Contribution provisions shall not require that an Employee be employed on the last day of the Plan Year or impose an hourly requirement in order for the Employee to be eligible to receive a Safe Harbor Non-Elective Contribution or a Safe Harbor Matching Contribution. 82 (c) Such contributions must satisfy the ADP Test Safe Harbor without regard to permitted disparity under Code Section 401(l). (d) Safe Harbor Matching or Non-Elective Contributions cannot be used to satisfy the Safe Harbor Contribution requirements with respect to more than one (1) Plan. (e) A Plan will fail to satisfy the ADP Test Safe Harbor or the ACP Test Safe Harbor for a Plan Year unless the Plan Year is twelve (12) months in duration or in the case of the first Plan Year of a newly established Plan (other than a successor Plan), the Plan Year is at least three (3) months in duration (or any shorter period in the case of a newly established Employer that establishes the Plan as soon as administratively feasible after the Employer came into existence). If the Employer amends an existing Defined Contribution Plan to offer the Safe Harbor provisions, the 401(k) arrangement of the Plan must be at least three (3) months in duration. (f) If the Safe Harbor provisions are an amendment and restatement of an existing Plan, any contributions made prior to the adoption of the Safe Harbor provisions which are subject to a vesting schedule will continue to vest according to the vesting schedule in effect prior to the amendment or restatement of the Plan. 11.13 ADP TEST SAFE HARBOR (a) The Employer may elect in the Adoption Agreement to make Basic Safe Harbor Matching Contributions, Enhanced Safe Harbor Matching Contributions or Safe Harbor Non-Elective Contributions. (b) Notwithstanding the requirement in (a) above that the Employer make the ADP Test Safe Harbor Contributions to the Defined Contribution Plan indicated in the Adoption Agreement, such contributions will not be made to this Plan unless the requirements of paragraph 11.17 are met. ACP TEST SAFE HARBOR The Employer maintaining a 401(k) Plan may elect in the Adoption Agreement to make additional Matching Contributions in addition to the Safe Harbor Matching Contributions made to the Plan. These additional Matching Contributions may be subject to the ACP Test Safe Harbor requirements instead of testing the contributions under paragraph 11.2. If the Employer elects using the current year testing method to test the additional Matching Contributions for nondiscrimination as set forth in paragraph 11.2, the ACP Test Safe Harbor will be satisfied if the following conditions are met: (a) no Matching Contribution may be made with respect to a Participant's Elective Deferrals and/or Voluntary After-tax Contributions which exceed 6% of Compensation; (b) the amount of any discretionary Matching Contribution made after the 1999 Plan Year may not exceed 4% of the Participant's Compensation; (c) the rate of Matching Contributions made to the Plan may not increase as the rate of Elective Deferrals increase; (d) no Highly Compensated Employee may receive a greater rate of match than a Non-Highly Compensated Employee; and (e) the Employer must elect in the Adoption Agreement the vesting schedule distribution restrictions and eligibility to receive an allocation of these additional Matching Contributions. a) SAFE HARBOR STATUS The Employer may amend a profit-sharing or 401(k) plan during a Plan Year to comply with the Safe Harbor provisions of this Article for the Plan Year. In order to comply with these provisions, the Employer must: (a) use the current year testing method; 83 (b) amend the Plan to add the Safe Harbor provisions no later than thirty (30) days prior to the end of the Plan Year and apply the Safe Harbor provisions for the entire Plan Year; (c) satisfy the Safe Harbor contribution requirements using the Safe Harbor Non-Elective Contribution; (d) provide the Safe Harbor notice to Participants prior to the beginning of the Plan Year for which the Plan amendment applies which indicates the Employer will provide Basic or Enhanced Matching Contributions or indicates that the Employer may later amend the Plan to comply with the Safe Harbor provisions by use of the Safe Harbor Non-Elective Contribution; (e) provide an additional notice to Participants at least thirty (30) days prior to the end of the Plan Year only in the case of Safe Harbor Non-Elective Contribution advising Participants of the amendment; and (f) actually provide the notice described in (e) above, should the Employer amend the Plan to comply with the Safe Harbor requirements. A Safe Harbor 401(k) Plan may be amended during a Plan Year to reduce or entirely eliminate on a prospective basis any safe harbor contribution which is either a Basic or Enhanced Matching Contribution conditioned on the Employer providing a notice to the Participants which explains the effect of the amendment and specifies the following: (g) informs the Participants they will have the opportunity to amend their Salary Deferral Agreements; (h) the effective date of the amendment is specified; (i) Participants are given the opportunity prior to the effective date of the amendment to amend their Salary Deferral Agreement; and (j) the amendment to the Plan does not take effect until the later of thirty (30) days after the notice of the amendment is provided to the Participant or the date the Employer adopts the amendment. An Employer who amends a Safe Harbor Plan to either reduce or eliminate the Safe Harbor Matching Contribution under this paragraph or terminates the Plan during the Plan Year, must continue to comply with all of the Safe Harbor requirements of this paragraph until the amendment or Plan termination becomes effective. The Plan must continue to use the current year testing method for the entire Plan Year and satisfy the nondiscrimination test under paragraph 11.2, and if applicable the nondiscrimination tests under paragraph 11.6. 11.16 SAFE HARBOR NOTICE REQUIREMENT The notice requirement is satisfied if each Eligible Employee is given an annual written notice of the Employee's rights and obligations under the Plan and the notice provided to the Employee satisfies the content requirement and the timing requirement mandated under IRS Notices 98-52 and 2000-3. (a) The notice shall be sufficiently accurate and comprehensive to inform the Employee of the Employee's rights and obligations under the Plan and written in a manner calculated to be understood by the average Employee eligible to participate in the Plan. The notice shall accurately describe: (1) the Safe Harbor Matching or Non-Elective Contribution Formula (including a description of the levels of Matching Contributions, if any, available under the Plan); (2) any other contributions under the Plan (including the potential for discretionary Matching Contributions) and the conditions under which such contributions are made; 84 (3) the Plan to which the Safe Harbor Contributions will be made (if different than the Plan containing the cash or deferred arrangement); (4) the type and amount of Compensation that may be deferred under the Plan; (5) how to make cash or deferred elections, including any administrative requirements that apply to such elections; (6) the periods available under the Plan for making cash or deferred elections; and (7) withdrawal and vesting provisions applicable to contributions under the Plan. (b) If the notice is provided to eligible Employees within a reasonable period before the beginning of each Plan Year (or in the Plan Year an Employee becomes eligible within a reasonable period before the Employee becomes eligible), the Plan shall satisfy the Safe Harbor notice requirements. Notwithstanding the foregoing general rule, a notice shall only be deemed to be provided in timely manner if the notice is provided to each Employee who is eligible to participate in the Plan for the Plan Year at least thirty (30) days [and no more than ninety (90) days] before the beginning of the Plan Year. If an Employee does not receive the notice because he or she only becomes eligible to participate in the Plan after the ninetieth day before the beginning of the Plan Year, the requirement to give the notice will be satisfied if the notice is provided not more than ninety (90) days before the Employee becomes eligible to participate, but in no event later than the date the Employee becomes eligible. The preceding sentence shall apply in the case of any Employee eligible for the first Plan Year in which an Employee becomes eligible under an existing Code Section 401(k) cash or deferred arrangement. (c) The Plan may provide the Safe Harbor notice in writing or by electronic means. If provided electronically, the notice must be no less understandable than a written paper document and at the time of delivery of the electronic notice, the Employee is advised that he or she may request to receive the notice in writing at no additional charge. Supplemental notices may also be given electronically under the same conditions. (d) The Plan may also comply with the notice requirements by use of the Summary Plan Description. The Safe Harbor notice must cross-reference the applicable sections in the Summary Plan Description. The information which may be contained in the Summary Plan Description, as well as the notice, is the Safe Harbor Contribution Formula, including a description of the levels of Matching Contributions, if any, how to make Salary Deferral elections, including any administrative requirements that apply to such elections, and the periods available under the Plan for making deferral elections. 11.17 SATISFYING SAFE HARBOR CONTRIBUTION REQUIREMENTS UNDER ANOTHER DEFINED CONTRIBUTION PLAN (a) GENERAL REQUIREMENTS - A Safe Harbor Matching or Non-Elective Contribution may be made to this Plan or to another Defined Contribution Plan maintained by the Employer that satisfies Code Sections 401(a) or 403(a). The Employer electing this option shall do so by identifying the plan that makes the Safe Harbor Contribution in the Adoption Agreement. If the Safe Harbor Contributions are made to another Defined Contribution Plan, the Safe Harbor Contribution requirements must be satisfied in the same manner as if the contributions were being made to this Plan. A Safe Harbor Contribution made to another Defined Contribution Plan shall not satisfy this Safe Harbor requirement unless each Employee eligible to participate in this Plan is eligible to participate in the other Defined Contribution Plan under the same terms and conditions. (b) SAME PLAN YEAR REQUIREMENT - In order to satisfy the Safe Harbor Contribution requirements, this Plan and the other Defined Contribution Plan to which the Safe Harbor Contribution is to be made must have the same Plan Year. 85 (c) AGGREGATION AND DISAGGREGATION RULES - The rules that apply for purposes of aggregating and disaggregating cash or deferred arrangement and Plans under Code Sections 401(k) and 401(m) also apply for purposes of Code Sections 401(k)(12) and 401(m)(11), respectively. All cash or deferred arrangements included in a Plan are treated as a single cash or deferred arrangement that must satisfy the Safe Harbor Contribution and notice requirements. Moreover, two (2) Plans within the meaning of Regulations Section 1.410(b)-7(b) that are treated as a single Plan pursuant to the permissive aggregation rules of Treasury Regulations 1.410(b)-7(d) are treated as a single Plan for purposes of the Safe Harbor requirements. Conversely, a Plan [within the meaning of Code Section 414(l)] that includes a cash or deferred arrangement covering both collectively bargained employees and noncollectively bargained employees is treated as two (2) separate Plans for purposes of Code Section 401(k), and the ADP Safe Harbor need not be satisfied with respect to both Plans in order for one (1) of the Plans to take advantage of the ADP Test Safe Harbor. Similarly, if, pursuant to Code Section 410(b)(4)(B), an Employer applies Code Section 410(b) separately to the portion of the Plan [within the meaning of Code Section 414(l)] that benefits only Employees who satisfy age and Service conditions under the Plan that are lower than the greatest minimum age and Service conditions permitted under Code Section 410(a), the Plan is treated as two (2) separate Plans for purposes of Code Section 401(k), and the ADP Test Safe Harbor need not be satisfied with respect to both plans in order for one (1) of the Plans to take advantage of the ADP Test Safe Harbor. 86 ARTICLE XII ADMINISTRATION 12.1 PLAN ADMINISTRATOR Unless otherwise provided in a separate Trust agreement, the Plan shall be administered by the Plan Administrator who shall have the authority to enforce the Plan on behalf of any persons having or claiming any interest under the Plan and who shall be responsible for the operation of the Plan in accordance with its terms. The Plan Administrator shall be the "named fiduciary" for purposes of ERISA Section 402(a)(2) with the sole authority to control and manage the operation and administration of the Plan, and will be responsible for complying with the reporting and disclosure requirements of Part 1 of Subtitle B of Title I of ERISA and agent for service of legal process with respect to the Plan. The Plan Administrator shall determine by rules of uniform application all questions arising out of the administration, interpretation and application of the Plan which determination(s) shall be conclusive and binding on all parties. The Employer will serve as Plan Administrator unless an individual or other entity (excluding the Trustee or Custodian, unless they are the Employer sponsoring the Plan) is named to serve in such capacity. The Plan Administrator may appoint or allocate the duties of the Plan Administrator among several individuals or entities. The Plan Administrator's duties shall include: (a) appointing the Plan's attorney, accountant, Service Provider, actuary, Trustee, Custodian, investment manager, or any other party needed to administer the Plan; (b) directing the appropriate party with respect to payments from the Trust; (c) communicating with Employees regarding their participation and benefits under the Plan, including the administration of all claims procedures; (d) maintaining all necessary records for the administration of the Plan, antidiscrimination testing, and filing any returns and reports with the Internal Revenue Service, Department of Labor, or any other governmental agency; (e) reviewing and approving any financial reports, investment reviews, or other reports prepared by any party appointed by the Employer under paragraph (a); (f) establishing a funding policy and investment objectives consistent with the purposes of the Plan and ERISA; (g) construing and resolving any question of Plan interpretation and questions of fact. The Plan Administrator's interpretation of Plan provisions and resolution of questions of facts including eligibility and amount of benefits under the Plan is final and unless it can be shown to be arbitrary and capricious, will not be subject to "de novo" review; (h) monitoring the activities of the Trustee and the performance of, and making changes when necessary to, the portfolio of the Plan; (i) obtaining a legal determination of the qualified status of all domestic relations orders and complying with the requirements of the law with regard thereto; (j) administering the loan program including ensuring that any and all loans made by the Plan are in compliance with the requirements of the Internal Revenue Code and the Regulations issued thereunder, and the Regulations issued by the Department of Labor; (k) determining from the records of the Employer, the Compensation, Service, records, status, and the other facts regarding Participants and Employees; 87 (l) to the extent provided in the Adoption Agreement, directing the Trustee or Custodian with respect to the investments, in the Plan Administrator's capacity as named fiduciary; and (m) the right to employ others, including legal counsel who may, but need not, be counsel to the Employer, to render advice regarding any questions which may arise with respect to its rights, duties and responsibilities under the Plan, and may rely upon the opinions or certificates of any such person. 12.2 PERSONS SERVING AS PLAN ADMINISTRATOR Unless otherwise provided in a separate Trust agreement, if the Employer is no longer in existence, and the Plan or the Employer does not specify the person to take an action or otherwise serve in the place of the Employer in connection with the operation of the Plan, the Plan Administrator shall so act or serve, but if there is no person serving as Plan Administrator, then a successor shall be designated in writing by a majority of Participants whose accounts under the Plan have not yet been fully distributed at such time. A majority of the legally competent Beneficiaries of a deceased Participant then entitled to receive benefits may exercise the deceased Participant's rights to participate in that designation and shall be considered for that purpose to be one Participant, in the Participant's place. 12.3 ACTION BY EMPLOYER Action by the Employer under the Plan shall be carried out by the sole proprietor, if the Employer is a sole proprietorship, by a general partner of the Employer, if the Employer is a partnership, or by the board of directors or a duly authorized officer of the Employer, if the Employer is a corporation. If the Employer is no longer in existence, and the Plan does not specify the person to take an action, or otherwise serve in the place of the Employer, in connection with the operation of the Plan, the Plan Administrator shall so act or serve, but if there is no person serving as Plan Administrator, such action shall be taken by a person selected following the approach referred to in paragraph 12.2. The Trustee/Custodian shall have, and assume, no responsibility for inquiring into the authority of any person purporting to act on behalf of an Employer. 12.4 RESPONSIBILITIES OF THE PARTIES Unless otherwise provided in a separate Trust agreement: (a) The Employer and the Plan Administrator shall cooperate with each other in all respects, including the provision to each other of records and other information relating to the Plan, as may be necessary or appropriate for the proper operation of the Plan or as may be required under the Code or ERISA. (b) The Plan Administrator may delegate in writing all or any part of the Plan Administrator's responsibilities under the Plan to agents or others by written agreement communicated to the delegate and to the Employer or, if the Employer is no longer in existence, to such person or persons selected following the approach in paragraph 12.2 and, in the same manner, may revoke any such delegation of responsibility. Any action of a delegate in the exercise of such delegated responsibilities shall have the same force and effect for all purposes as if such action had been taken by the Plan Administrator. The delegate shall have the right, in such person's sole discretion, by written instrument delivered to the Plan Administrator, to reject and refuse to exercise any such delegated authority. The Trustee/Custodian need not act on instructions of such a delegate despite any knowledge of such delegation, but may require the Plan Administrator to give the Trustee/Custodian all instructions necessary under the Plan. 12.5 ALLOCATION OF INVESTMENT RESPONSIBILITY Unless otherwise provided in a separate Trust agreement, responsibility with respect to the investment of the Trust shall be as elected in the Adoption Agreement. The amounts allocated to Participants' accounts shall be invested by the Trustee or Custodian pursuant to the elections in the Adoption Agreement, Articles XII and XIII as applicable, and in accordance with investment directions from authorized parties as provided hereunder. 12.6 APPOINTMENT OF INVESTMENT MANAGER Unless otherwise provided in a separate Trust agreement, the appointment of an investment manager shall be made in accordance with this Article. If an investment manager is appointed, such entity or individual must be registered as an investment manager under the Investment Advisors Act of 1940 or under applicable state law, meet the requirements of ERISA Section 3(38) or be a bank as defined in said Act or an insurance company qualified under the laws of more than one state to perform investment management services. An investment manager shall acknowledge in writing its appointment and fiduciary status 88 hereunder and shall agree to comply with all applicable provisions of this document. The investment manager shall have the investment powers granted the Trustee in paragraph 13.8 except to the extent the investment manager's powers are limited by the investment management agreement. A copy of the investment management agreement (and any modifications or termination thereof) must be provided to the Trustee or Custodian. Written notice of each appointment of an investment manager shall be given to the Trustee or Custodian in advance of the effective date of the appointment. Such notice or agreement shall specify what portion of the Trust Fund will be subject to the investment manager's discretion. 12.7 PARTICIPANT INVESTMENT DIRECTION Unless otherwise provided in a separate Trust agreement, and if elected by the Employer in the Adoption Agreement, Participants shall be given the option to direct the investment of such part of their account balances as specified therein. The Employer or the Named Investment Fiduciary from time to time shall select the investments to be made available, including the appointment of any investment manager who meets the requirements of ERISA Section 3(38) to manage the assets of any Participant's account. The Employer or the Named Investment Fiduciary, independent of the Trustee, shall be responsible for reviewing the performance of such investments. The following administrative procedures shall apply to the administration of investments selected by the Employer or the Employer's designated fiduciary: (a) The Plan Administrator shall administer the program. (b) At the time an Employee becomes eligible for the Plan, he or she shall provide the Plan Administrator an investment designation stating the percentage of his or her contributions to be invested in the available investments. (c) A Participant may change his or her election with respect to future contributions by notifying the Employer, Trustee/Custodian or other Service Provider, as they shall mutually agree, in accordance with the procedures established by the Plan Administrator. (d) A Participant may transfer or exchange his or her balance from one investment alternative to another by notifying the Employer, Trustee/Custodian or other Service Provider, as they shall mutually agree, in accordance with the procedures established by the Plan Administrator. (e) The investment alternatives offered under the Plan may be limited in a uniform and nondiscriminatory manner. Investments may be restricted to specific investment alternatives selected, including but not limited to, certain mutual funds, investment contracts, collective funds or deposit accounts. If investments outside the alternatives selected are permitted, Participants may not direct that investments be made in collectibles other than U.S. Government or state issued gold and silver coins. (f) The Plan Administrator may permit, in a uniform and nondiscriminatory manner, a Beneficiary of a deceased Participant or alternate payee under a Qualified Domestic Relations Order [as defined in Code Section 414(p)] to individually direct their account in accordance with this paragraph. (g) Investment directions will be processed as soon as administratively practicable after proper investment directions are received from the Participant. The Employer, Plan Administrator, Service Provider, Trustee and/or Custodian cannot provide any guarantee of the timing of processing of any investment directive. The Employer, Plan Administrator, Service Provider, Trustee and/or Custodian reserve the right not to value an investment alternative or a Participant's account on any given Valuation Date for any reason deemed appropriate by the Employer or Plan Administrator. The Employer, Plan Administrator, Service Provider, Trustee and/or Custodian further reserve the right to delay the processing of any investment transaction for any legitimate business reason including but not limited to failure of systems or computer programs, failure of the means of the transmission of data, force majeure, the failure of a Service Provider to timely receive values or prices, to correct its errors or omissions or the errors or omissions of any Service Provider. 89 (m) Notwithstanding the foregoing, and regardless of a Participant's authority to direct the investment of assets allocated to his or her account, the Named Investment Fiduciary is authorized and empowered to direct the Trustee to invest funds in short term investments pending other investment instructions by the Plan Administrator. 12.8 APPLICATION OF ERISA SECTION 404(c) Unless otherwise provided in a separate Trust agreement, if elected by the Employer in the Adoption Agreement, all Participant accounts under the Plan shall be invested as elected by each Participant in a broad range of investment options made available from time to time by the Employer for this purpose. If the Employer further elects that the Plan is intended to qualify as an "ERISA Section 404(c) Plan" within the meaning of Regulations issued pursuant to such section, Participants shall have the opportunity, at least once in any three (3) month period, to give investment instructions (with an opportunity to obtain written confirmation of such instructions) as to the investment of contributions made on his or her behalf among the available investment options. The Plan Administrator shall be obligated to comply with such instructions except as otherwise provided in the Regulations issued under ERISA Section 404(c). The Plan Administrator will provide or will make arrangement to provide each Participant with a description of the investment alternatives available under the Plan; and with respect to each designated investment alternative, a general description of the investments objectives, risk and return characteristics of each alternative, including information relating to the type and diversification of assets comprising the investment portfolio. The Plan Administrator by separate document may prescribe the form and the manner in which such direction shall be made, as well as the frequency with which such directions may be made or changed and the dates as of which they shall be effective, in a manner consistent with the foregoing. The Plan Administrator (or a person or entity so designated by the Employer) shall be the fiduciary identified to furnish the information as contemplated by ERISA Section 404(c), but may designate on its behalf another person or entity to provide such information or to perform any of the obligations of the Plan Administrator under this paragraph. Except as otherwise provided in this Basic Plan Document #01, the Trustee, Custodian, the Employer, or any fiduciary of the Plan shall not be liable to the Participant or any of his or her Beneficiaries for any loss resulting from action taken at the direction of the Participant. All fiduciaries of the Plan shall be relieved of their fiduciary liability with respect to the Participant directing his or her investments pursuant to ERISA Section 404(c) if elected by the Employer in the Adoption Agreement of its intention to comply with ERISA Section 404(c). Any costs and expenses related to compliance with the Participant's directions shall be borne by the Participant's directed account, unless paid by the Employer. 12.9 PARTICIPANT LOANS Unless otherwise provided in a separate Trust agreement, if permitted by the Employer in the Adoption Agreement, a Plan Participant and Beneficiaries who are parties-in-interest as defined in ERISA Section 3(14) may make application to the Plan Administrator requesting a loan from the Plan. The Plan Administrator shall have the sole right to approve or deny a Participant's application provided that loans shall be made available to all Participants on a reasonably equivalent basis. Loans shall not be made available to Highly Compensated Employees in an amount greater than the amount made available to other Participants. Any loan granted under the Plan shall be made in accordance with the terms of a written loan policy adopted by the Employer which is hereby incorporated by reference and made a part of this Basic Plan Document #01. The loan policy may be amended in writing from time to time without the necessity of amending this paragraph and shall be subject to the following rules to the extent such rules are not inconsistent with such loan policy. (a) No loan, when aggregated with any outstanding loan(s) to the Participant, shall exceed the lesser of (i) $50,000 reduced by the excess, if any, of the Participant's highest outstanding balance of all loans on any day during the one (1) year period ending on the day before the loan is made, over the outstanding balance of loans from the Plan on the date the Participant's loan is made or (ii) one-half of the fair market value of the Participant's Vested Account Balance consisting of contributions as specified in the loan policy. An election may be made in the loan policy, that if the Participant's Vested Account Balance is $20,000 or less, the maximum loan shall not exceed the lesser of $10,000 or 100% of the Participant's Vested Account Balance. For the purpose of the above limitation, all loans from all plans of the Employer and other members of a group of 90 employers described in Code Sections 414(b), 414(c), and 414(m) are aggregated. An assignment or pledge of any portion of the Participant's interest in the Plan and a loan, pledge, or assignment with respect to any insurance contract purchased under the Plan, will be treated as a loan under this paragraph. (b) All applications must be in accordance with procedures adopted by the Plan Administrator. (c) Any loan shall bear interest at a rate reasonable at the time of application, considering the purpose of the loan and the rate being charged by representative commercial banks in the local area for a similar loan unless the Plan Administrator sets forth a different method for determining loan interest rates in its written loan procedures. The loan agreement shall also provide that the payment of principal and interest be amortized in level payments not less frequently than quarterly. (d) The term of such loan shall not exceed a period of five (5) years except in the case of a loan for the purpose of acquiring any house, apartment, condominium, or mobile home that is used or is to be used within a reasonable time as the principal residence of the Participant. The Plan Administrator in accordance with the Plan's loan policy shall determine the term of such loan. (e) The principal and interest paid by a Participant on his or her loan shall be credited to the Plan in the same manner as for any other Plan investment. Unless otherwise provided in the loan policy, loans will be treated as segregated investments of the individual Participant on whose behalf the loan was made. This provision is not available if its election will result in discrimination in the operation of the Plan. (f) If the Plan Administrator approves a Participant's loan request, it shall be evidenced by a note, loan agreement, and assignment of up to 50% of his or her interest in the Trust as collateral for the loan. The Participant, except in the case of a profit-sharing plan satisfying the requirements of paragraph 8.7, must obtain the consent of his or her Spouse, if any, within the ninety (90) day period before the time his or her account balance is used as security for the loan. A new consent is required if the account balance is used for any renegotiation, extension, renewal or other revision of the loan, including an increase in the loan amount. The consent must be written, must acknowledge the effect of the loan, and must be witnessed by a Plan representative or notary public. Such consent shall subsequently be binding with respect to the consenting Spouse or any subsequent Spouse. (g) If a valid Spousal consent has been obtained in accordance with (f), then, notwithstanding any other provision of this Plan, the portion of the Participant's Vested Account Balance used as a security interest held by the Plan by reason of a loan outstanding to the Participant shall be taken into account for purposes of determining the amount of the account balance payable at the time of death or distribution, but only if the reduction is used as repayment of the loan. If less than 100% of the Participant's Vested Account Balance (determined without regard to the preceding sentence) is payable to the surviving Spouse, then the account balance shall be adjusted by first reducing the Vested Account Balance by the amount of the security used as repayment of the loan, and then determining the benefit payable to the surviving Spouse. (h) Any loan made hereunder shall be subject to the provisions of a loan agreement, promissory note, security agreement, payroll withholding authorization and, if applicable, financial disclosure. Such documentation may contain additional loan terms and conditions not specifically itemized in this section provided that such terms and conditions do not conflict with this section. Such additional terms and conditions may include, but are not limited to, procedures regarding default, a grace period for missed payments, and acceleration of a loan's maturity date on specific events such as termination of employment. (i) No loans will be made to Owner-Employees or Shareholder Employees, unless the Employer obtains a prohibited transaction exemption from the Department of Labor. 91 (j) Liquidation of a Participant's assets for the purpose of the loan will be allocated on a pro-rata basis across all the investment alternatives in a Participant's account, unless otherwise specified by the Participant, Plan Administrator, or the Plan's loan policy. (k) If a request for a loan is approved by the Plan Administrator, funds shall be withdrawn from the recordkeeping subaccounts specified by the Participant or in the absence of such a specification, from the recordkeeping subaccounts in the order specified in the loan policy. (l) If a Plan permits loans to Participants, the Trustee/Custodian may appoint the Employer as its agent, and if the Employer accepts such appointment, agree to hold all notes and other evidence of any loans made to Participants. If provided in the loan policy, the Plan Administrator may also require additional collateral in order to adequately secure the loan. The Employer shall hold such notes and evidence under such conditions of safekeeping as is prudent and as required by ERISA. The Trustee/Custodian may account for all loans in the aggregate so that all Participant loans will be shown collectively as a single asset of the Plan. (m) Unless otherwise elected in the Adoption Agreement, loan payments will be suspended under this Plan as permitted under Code Section 414(u). 12.10 INSURANCE POLICIES Unless otherwise provided in a separate Trust agreement, if elected by the Employer in the Adoption Agreement and agreed to by the Trustee or Custodian, Participants may purchase life insurance policies under the Plan. Any life insurance premium paid for any Participant out of the Employer contributions will be made on behalf of the Participant unless the amount of such payment, plus all premiums previously paid on behalf of such Participant is (a) with respect to ordinary life insurance policies, less than fifty percent (50%) of the Employer Contributions and forfeitures allocated to the Participant's account determined on the date the premium is paid, (b) with respect to term and universal life policies, less than twenty-five percent (25%) of such allocation amounts, or (c) a combination of ordinary life and term and/or universal life insurance policies are purchased, the sum of the term and universal life insurance premiums plus one-half of the ordinary life premiums may not exceed twenty-five percent (25%) of such amounts allocated. Dividends received on life insurance policies shall be considered a reduction of premiums paid in such computations. If the Plan established is a profit sharing plan, the incidental insurance benefit requirement is not applicable if the Plan purchases life insurance benefits from only Employer contributions which have been allocated to the Participant's account for at least two years. (n) The Named Investment Fiduciary or its agent shall select the insurance company and the policy and direct the Trustee (or Custodian) as to the purchase of the insurance contract. Such direction shall include but not be limited to the term, price and the insurance company from which the policy should be purchased. (o) The Trustee, if the Plan is trusteed, or Custodian, if the Plan has a custodial account, shall apply for and will be the owner of any insurance contract and named beneficiary of any policies purchased under the terms of this Plan. The insurance contract(s) must provide that proceeds will be payable to the Trustee (or Custodian, if applicable), however the Trustee (or Custodian) shall be required to pay over all the proceeds of the contract(s) to the Participant's designated Beneficiary in accordance with the distributions provisions of this Plan. A Participant's Spouse will be the designated Beneficiary of the proceeds in all circumstances unless a qualified election has been made in accordance with paragraph 8.4, Joint and Survivor Annuity requirements, if applicable. Under no circumstances shall the Trust (or custodial account) retain any part of the proceeds. In the event of any conflict between the terms of this Basic Plan Document #01 and the terms of any insurance contract purchased hereunder, these Plan provisions shall control. The Beneficiary of a deceased Participant shall receive, in addition to the proceeds of the Participant's policy or policies, the amount credited to such Participant's account. (p) A Participant who is uninsurable or insurable at substandard rates may elect to receive a reduced amount of insurance, if available, or may waive the purchase of any insurance. 92 (q) All dividends or other returns received on any policy purchased shall be applied to reduce the next premium due on such policy, or if no further premium is due, such amount shall be credited to the Trust as part of the account of the Participant for whom the policy is held. (r) If Employer contributions are inadequate to pay all premiums on all insurance policies, the Trustee or Custodian may, at the option of the Employer, utilize other amounts remaining in each Participant's account to pay the premiums on his or her respective policy or policies, allow the policies to lapse, reduce the policies to a level at which they may be maintained, or borrow against the policies on a prorated basis, provided that the borrowing does not discriminate in favor of the policies on the lives of Highly Compensated Employees. (s) On retirement or termination of employment of a Participant, termination of the Plan, or the contract would but for the sale, be surrendered by the Plan, the Employer shall direct the Trustee or Custodian to surrender the Participant's policy and credit the proceeds to his or her account for distribution under the terms of the Plan. However, before so doing, the Trustee or Custodian shall first offer to transfer ownership of the policy to the Participant. Prior to such transfer, the Participant may elect to make payment to the Trust of the cash value of the policy. Such payment shall be credited to the Participant's account for distribution under the terms of the Plan. All distributions resulting from the application of this paragraph shall be subject to the Joint and Survivor Annuity Rules of Article VIII, if applicable. (t) The Employer shall be solely responsible to ensure the insurance provisions are administered properly and that if there is any conflict between the provisions of this Plan and any insurance contracts issued, the terms of this document will control. (u) Notwithstanding the above, in profit-sharing plans, the limitations imposed herein with respect to the purchase of life insurance shall not apply to any Participant who has participated in this Plan for five (5) or more years or to the portion of a Participant's Vested Account Balance, that would be eligible for withdrawal under paragraph 6.8 whether or not in-service withdrawals are actually allowed under the Plan, that has accumulated for at least two (2) Plan Years. No amount of Qualified Voluntary Contributions made to the Plan may be used to purchase life insurance. In addition, under such Plans, a Participant may, subject to the limitations set forth in this subparagraph, elect to have keyman life insurance purchased on the life of any Participant who is considered essential to the success of the Employer's business. In such case, the proceeds of such a life insurance contract in excess of such contract's cash value as of the date of death of such insured shall be paid to the Beneficiaries named with respect to such contract. Death benefits, including those in the previous sentence, payable from a life insurance contract shall be paid in accordance with paragraph 8.7, if this Plan meets the safe harbor provisions in that paragraph, or in accordance with paragraph 8.2 or 8.3, whichever may be applicable. The cash value of the contract shall be added to the Participant's Vested Account Balance. (v) No insurance contract will be purchased under the Plan unless such contract or a separate definite written agreement between the Employer and the insurer provides that no value under contracts providing benefits under the Plan or credits determined by the insurer (on account of dividends, earnings, or other experience rating credits, or surrender or cancellation credits) with respect to such contracts may be paid or returned to the Employer or diverted to or used for other than the exclusive benefit of the Participants or their Beneficiaries. However, any contribution made by the Employer because of a mistake of fact must be returned to the Employer within one (1) year of the contribution. (j) If this Plan is funded by individual contracts that provide a Participant's benefit under the Plan, such individual contracts shall constitute the Participant's account balance. If this Plan is funded by group contracts, under the group annuity or group insurance contract, premiums or other consideration received by the insurance company must be allocated to Participants' accounts under the Plan. 93 (k) For Plans funded with individual or group annuity contracts, no Trustee or Custodian is required to hold the assets of the Plan. Accordingly, any references to the Trust, the Trust fund or the fund collectively refers to any contracts issued by an insurance company to fund a Plan established under this document. 12.11 DETERMINATION OF QUALIFIED DOMESTIC RELATIONS ORDER (QDRO OR ORDER) Unless otherwise provided in a separate Trust agreement, a domestic relations order shall specifically state all of the following in order to be deemed a Qualified Domestic Relations Order ("QDRO"): (a) The name and last known mailing address (if any) of the Participant and of each alternate payee covered by the QDRO. However, if the QDRO does not specify the current mailing address of the alternate payee, but the Plan Administrator has independent knowledge of that address, the QDRO will still be valid. (b) The dollar amount or percentage of the Participant's benefit to be paid by the Plan to each alternate payee, or the manner in which the amount or percentage will be determined. (c) The number of payments or period for which the order applies. (d) The specific Plan (by name) to which the domestic relations order applies. The domestic relations order shall not be deemed a QDRO if it requires the Plan to provide: (e) any type or form of benefit or any option not already provided for in the Plan; (f) increased benefits or benefits in excess of the Participant's vested rights; (g) payment of a benefit earlier than allowed by the Plan's earliest retirement provisions or, in the case of a profit-sharing or 401(k) plan, prior to the first date on which an in-service withdrawal is allowed; or (h) payment of benefits to an alternate payee which are required to be paid to another alternate payee under another QDRO. Upon receipt of a domestic relations order ("Order") which may or may not be "qualified", the Plan Administrator shall notify the Participant and any alternate payee(s) named in the Order of such receipt, and forward either a copy of this paragraph or other written QDRO policies and procedures. The Plan Administrator shall establish written procedures to establish the qualified status of a domestic relations order, which may include forwarding the Order to the Plan's legal counsel for an opinion as to whether or not the Order is in fact "qualified" as defined in Code Section 414(p). Within a reasonable time after receipt of the Order, not to exceed sixty (60) days, the Plan Administrator shall make a determination as to its "qualified" status and the Participant and any alternate payee(s) shall be promptly notified in writing of the determination. If the "qualified" status of the Order is in question, there will be a delay in any payout to any payee including the Participant, until the status is resolved. In such event, the Plan Administrator shall segregate the amount that would have been payable to the alternate payee(s) if the Order had been deemed a QDRO. If the Order is not qualified or the status is not resolved (for example, it has been sent back to the court for clarification or modification) within eighteen (18) months beginning with the date the first payment would have to be made under the Order, the Plan Administrator shall pay the segregated amounts plus interest to the person(s) who would have been entitled to the benefits had there been no Order. If a determination as to the qualified status of the Order is made after the eighteen (18) month period described above, then the Order shall only be applied on a prospective basis. If the Order is determined to be a QDRO, the Participant and alternate payee(s) shall again be notified promptly after such determination. Once an Order is deemed a QDRO, the Plan Administrator shall pay to the alternate payee(s) all the amounts due under the QDRO, including segregated amounts plus earnings, if any, which may have accrued during a dispute as to the Order's qualification. 94 Unless specified otherwise in the Adoption Agreement or in a separate Trust agreement, the QDRO retirement age with regard to the Participant against whom the order is entered shall be the date the order is determined to be qualified. These provisions will only allow distributions to the alternate payee(s) and not the Participant. 12.12 RECEIPT AND RELEASE FOR PAYMENTS Unless otherwise provided in a separate Trust agreement, any payment to any Participant, his legal representative, Beneficiary, or to any guardian or committee appointed for such Participant or Beneficiary in accordance with the provisions of the Plan shall be in full satisfaction of all claims hereunder against the Trustee, Employer or Plan Administrator each of whom may require such Participant, legal representative, Beneficiary, guardian or committee as a condition prior to such payment, to execute a receipt and release in such form as shall be determined by the Trustee, Employer or Plan Administrator. 12.13 RESIGNATION AND REMOVAL Unless otherwise provided in a separate Trust agreement, an individual serving as Plan Administrator may resign by giving written notice to the Employer, or if the Employer is no longer in existence, to the Trustee/Custodian, not less than thirty (30) days before the effective date of the individual's resignation. The Plan Administrator may be removed upon thirty (30) days prior written notice to the Plan Administrator, with or without cause, by the Employer, or if the Employer is no longer in existence, by a majority of the Participants and Beneficiaries following the approach referred to in paragraph 12.2. A notice period provided for in this paragraph 12.13 may be waived or reduced if acceptable to the parties involved. The Employer, if in existence, shall be the successor to the position involved, or the Employer may appoint a successor to a person who has resigned or been removed as Plan Administrator, but if the Employer is no longer in existence, the appointment shall be made by a majority of the Participants and Beneficiaries following the approach referred to in paragraph 12.2. When the Plan Administrator's resignation or removal becomes effective, the Plan Administrator shall perform all acts necessary to transfer all relevant records to its successor. A successor Plan Administrator shall have all the rights and powers and all of the duties and obligations of the original Plan Administrator but shall have no responsibility for acts or omissions before the successor became Plan Administrator. 12.14 CLAIMS AND CLAIMS REVIEW PROCEDURE Unless otherwise provided in a separate Trust agreement, if any Employee, Participant, Beneficiary or any other person claims to be entitled to benefits under the Plan, and the Plan Administrator denies that claim in whole or in part, the Plan Administrator shall, in writing, within ninety (90) days notify the claimant that his claim has been denied in whole or in part, setting forth the specific reason or reasons for the denial, specific reference to pertinent Plan provisions upon which the denial is based, a description of any additional material or information which may be needed to clarify the claim, including an explanation of why such information is necessary, and shall refer to the claims review procedure as set forth in this paragraph 12.14. Within sixty (60) days after the mailing or delivery by the Plan Administrator of such notice, the claimant may request, by written notice to the Plan Administrator, a review by the Employer of the decision denying the claim. The claimant may examine documents pertinent to the review and may submit written issues and comments to the Plan Administrator. If the claimant fails to request such a hearing within such sixty (60) day period, it shall be conclusively determined for all purposes of this Plan that the denial of such claim is correct. If the claimant requests a review within the sixty (60) day period, the Plan Administrator shall designate a time, which time shall be no less than ten (10) nor more than forty-five (45) days from the date of receipt by the Plan Administrator of the claimant's notice to the Plan Administrator, and a place for such hearing, and shall promptly notify such claimant of such time and place. Within forty-five (45) days after the conclusion of the hearing, including any extensions of the date thereof mutually agreed to by the claimant and the Plan Administrator, the Plan Administrator shall communicate to the claimant the Plan Administrator's decision in writing, and if the Plan Administrator confirms the denial, in whole or in part, the communication shall set forth the specific reason or reasons for the decision and specific reference to those Plan provisions upon which the decision is based. 95 12.15 BONDING Every fiduciary, except for a bank, trust company or an insurance company, unless otherwise exempted by ERISA and the Regulations issued thereunder shall be bonded in an amount not less than 10% of the amount of the funds such fiduciary handles; provided however, that the minimum bond shall be $1,000 and the maximum bond $500,000. The amount of funds handled shall be determined at the beginning of each Plan Year by the amount of funds handled by such person, group or class to be covered and their predecessors, if any, during the preceding Plan Year, or if there is no preceding Plan Year, then by the amount of the funds to be handled during the then current year. The bond shall provide protection to the Plan against any loss by reason of acts of fraud or dishonesty by the fiduciary either acting alone or in concert with others. The surety shall be a corporate surety company [as the term is used in ERISA Section 412(a)(2)], and the bond shall be in a form approved by the Secretary of Labor. Notwithstanding anything in the Plan to the contrary, the costs of such bonds shall be an expense of and may, at the election of the Plan Administrator, be paid from the Trust or by the Employer. 96 ARTICLE XIII TRUST PROVISIONS a) ESTABLISHMENT OF THE TRUST (a) The Employer shall appoint within the Adoption Agreement who may be the Sponsor (or an affiliate) of this Basic Plan Document #01 or an individual(s), institution or other party, to serve as Trustee or Custodian (if applicable) of the Plan. The Employer shall also have the right, but is not required, to appoint a Custodian in the Adoption Agreement to have custody of the Plan's assets. The Employer may execute a separate trust or custodial agreement outlining the Trustee's or Custodian's duties and responsibilities which shall be incorporated by reference and made part of this Basic Plan Document #01. No such ancillary agreement may conflict with any provision(s) of this document. Any provision which would jeopardize the tax-qualified status of this Plan shall be null and void. Unless otherwise elected in the Adoption Agreement, the Trust and/or Custodial provisions of this Article XIII and Article XII, as applicable, of the Basic Plan Document #01 together with any such ancillary agreement shall be operative. If the Sponsor is a bank, trust company or other financial organization, a person or institution other than the Sponsor or its affiliate may not serve as Trustee or Custodian of the Plan without the express written consent of the Sponsor. If a financial organization is the Sponsor, and is not named Trustee, the Sponsor may serve as Custodian under the Plan as provided at paragraph 13.13 herein. The Trustee shall invest the Trust Fund in any of the investment alternatives as provided in paragraph 13.8. If a Custodian is appointed, the Trust Fund shall be invested in accordance with paragraph 13.14. (b) The Employer establishes with the Trustee a Trust which shall consist of all money and property received under Articles III and IV of this document, increased by any income on or increment in such value of assets and decreased by any investment loss, expense, benefit payment, withdrawal or other distribution by the Trustee in accordance with the provisions of the Plan. The Trustee/Custodian shall hold the Trust fund without distinction between principal and income. The Trust fund will be held, invested, reinvested and administered by the Trustee in accordance with this Article and any ancillary documents as provided for in this Article. b) CONTROL OF PLAN ASSETS The assets of the Trust or evidence of ownership shall be held by the Trustee and/or the Custodian under the terms of the Basic Plan Document #01. If the assets represent amounts transferred from another trustee or custodian under a former plan, the Trustee and/or Custodian named hereunder shall not be responsible for any actions of the prior fiduciary including the propriety of any investment decision made by the prior trustee/custodian under any prior plan. Instead, the Employer shall be responsible for such actions. 13.3 DISCRETIONARY TRUSTEE If the Employer elects in the Adoption Agreement, or otherwise appoints the Trustee to act in the capacity of discretionary Trustee, the Trustee shall invest the Trust in accordance with the Plan's investment policy statement and the investment alternatives permitted at paragraph 13.8 herein. The Trustee will have the discretion and authority to invest, manage and control those Plan assets except those assets which are subject to the investment direction of a Participant (if Participant direction is permitted), or an investment manager or Named Investment Fiduciary, or other agent properly appointed by the Employer. The exercise of any investment direction hereunder shall be consistent with the investment policy of the Plan. The Trustee shall also perform custodial functions described at paragraph 13.14 hereof for the Trust with respect to Plan assets over which the Trustee has investment management responsibility. The Trustee may also perform custodial functions for the Trust with respect to Plan assets the Trustee does not manage, to the extent agreed to between the Trustee and the Employer, if the Trustee is appointed Custodian for some or all of such assets in accordance with the terms of the Plan. The Trustee may execute any additional documents as required which shall be treated as an addendum to this Basic Plan Document #01. No such agreement may conflict with any provision nor shall any provision in such an agreement jeopardize the tax-qualified status of the Plan. Any such provision shall be null and void. The Trustee's administrative duties shall be limited to those agreed to between the parties. 97 The Employer or its designate shall be responsible for other administrative duties required under the Plan or by applicable law. 13.4 NONDISCRETIONARY TRUSTEE If the Employer elects in the Adoption Agreement or as otherwise agreed to in writing, the Trustee may act in the capacity of a nondiscretionary Trustee. In this capacity, the Trustee shall have no discretionary authority to invest, manage or control Plan assets and is authorized solely to make and hold investments only as directed pursuant to paragraph 12.5. The nondiscretionary Trustee shall have the same rights, powers and duties as the discretionary Trustee but exercises such authority in accordance with the direction of the party which has the authority to manage and control the investment of Plan assets. If directions are not provided to the Trustee, the Employer will provide such necessary direction. 13.5 PROVISIONS RELATING TO INDIVIDUAL TRUSTEES (a) Notwithstanding any other provisions of the Plan to the contrary, the provisions of this paragraph shall apply if one (1) or more individuals are named as Trustee(s) in the Adoption Agreement and shall not apply to any institutional Trustee named in the Adoption Agreement. (b) If there shall be more than one individual acting in the capacity of Trustee, they shall act by a majority of their number, unless they unanimously decide that one (1) or more of them may act on the matter or category of matters involved without the approval of the others and they may authorize in writing that one (1) or more of them shall act on their behalf including but not limited to executing documents and authorizing distributions on behalf of the Trustees. (c) Any person may rely, without having to make further inquiry, upon instructions appearing to be genuine instructions from any individual serving as Trustee as being the will, intent and action of all individuals so serving if no allocation of duties has been made. (d) The Trustee shall be paid such reasonable compensation for services as shall from time to time be agreed upon in writing by the Employer and the Trustee, provided that an individual serving as Trustee who already receives full-time Compensation from the Employer shall not receive compensation for serving as such from the Plan. 13.6 INVESTMENT INSTRUCTIONS Any investment directive shall be made in writing or such other form as agreed to by the Employer, Trustee/Custodian and the investment manager. In the absence of such directive, cash shall be automatically invested in such investment or investments as the Employer or Named Investment Fiduciary shall select from the investments made available for that purpose unless and until the person or persons responsible for giving directions directs otherwise. Such automatic investment shall be made at regular intervals and pursuant to procedures established by the parties (which procedures may without limitation, provide for more frequent intervals only if uninvested balances exceed a stated amount). Absent a contrary direction in accordance with the preceding provisions of this paragraph 13.6, such instructions regarding the delegation of investment responsibility shall remain in force until revoked or amended in writing. Neither the Trustee nor the Custodian shall be responsible for the propriety of any directed investment made nor shall they be required to consult with or advise the Employer regarding the investment quality of any directed investment held hereunder. If the Employer fails to designate an investment manager, the Trustee shall have full investment management authority as agreed upon in a duly authorized and executed investment management agreement. If the Employer does not issue investment directions with regard to specific assets held in the Trust, the Trustee shall have authority to invest those assets in the Trust in its sole discretion subject to paragraph 13.8. While the Employer may direct the Trustee with respect to Plan investments, the Employer may not: (a) borrow from the Plan or pledge any of the assets of the Plan as security for a loan, (b) buy property or assets from or sell property or assets to the Plan, (c) charge any fee for services rendered to the Plan, or (d) receive any services from the Plan on a preferential basis. 98 13.7 FIDUCIARY STANDARDS Subject to paragraphs 13.6 and 13.8 hereof, the Trustee, if discretionary, shall invest and reinvest principal and income of the Trust in accordance with the funding policy and investment objectives established by the Employer, provided that: (a) such investments are prudent under ERISA, as amended, and the Regulations thereunder, (b) such investments are sufficiently diversified to minimize the risk of large losses, (c) such investments are made in accordance with the provisions of this Plan and Trust document, and (d) such investments are made with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character with like aims. 13.8 POWERS OF THE TRUSTEE The Trustee shall be responsible for the investment, administration and safekeeping of assets held in the Trust Fund. The Trustee shall have the following duties and responsibilities, in addition to powers given by law: (a) receiving contributions under the terms of the Plan; (b) implementing an investment program based on the Employer's investment policy statement, funding policy, investment objectives and ERISA, as amended; (c) invest the Trust in any form of property, including common and preferred stocks, exchange-traded covered put and call options, bonds, money market instruments, mutual funds (including funds for which the Sponsor, Trustee or its affiliates receive compensation for providing investment advisory, custody, transfer agency or other services), savings accounts, plan loans, certificates of deposit, securities issued by the U.S. government or by governmental agencies, insurance policies and contracts, or in any other property, real or personal, having a ready market, including securities issued by the Trustee and/or affiliates of the Trustee as permitted by law. The Trustee may invest in time deposits (including, if applicable, its own or those of affiliates) which bear a reasonable interest rate. No portion of any Qualified Voluntary Contribution, or the earnings thereon, may be invested in life insurance contracts or, as with any Participant-directed investment, in tangible personal property characterized by the IRS as a collectible; (d) invest any assets of the Trust in a group or collective trust fund established to permit the pooling of funds of separate pension and profit-sharing trusts, provided the Internal Revenue Service has ruled such group or collective trust to be qualified under Code Section 401(a) and exempt under Code Section 501(a) (or the applicable corresponding provision of any other Revenue Act) or to any other common, collective, or commingled trust fund which has been or may hereafter be established and maintained by the Trustee, affiliate(s) of the Trustee, the Custodian or investment manager. Such commingling of assets of the Trust with assets of other qualified trusts is specifically authorized, and to the extent of the investment of the Trust in such a group or collective trust, the terms of the instrument establishing the group or collective trust shall be a part hereof as though set forth herein. The name of the group or collective trust fund shall be specified in an addendum to the Adoption Agreement. The Employer expressly understands and agrees that any such collective fund may provide for the lending of its securities by the collective fund trustee and that such collective fund's trustee will receive compensation from such collective fund for the lending of securities that is separate from any compensation of the Trustee hereunder, or any compensation of the collective fund trustee for the management of such collective fund; 99 (e) for collective investment purposes, may combine into one trust fund the Trust created under this Plan with the Trust created under any other qualified retirement plan the Employer maintains. However, the Trustee must maintain separate records of account for the assets of each Trust in order to reflect properly each Participant's Vested Account Balance under the Plan(s) in which he is a Participant; (f) invest up to 100% of the Trust in the common stock, debt obligations, or any other security issued by the Employer or by an affiliate of the Employer within the limitations provided under ERISA Sections 406, 407, and 408, as amended, and further provided that such investment does not constitute a prohibited transaction under Code Section 4975. Any such investment in Employer securities shall only be made upon written direction of the Employer who shall be solely responsible for the propriety of such investment. Additional directives regarding the purchase, sale, retention or valuing of such securities may be addressed in an investment management or trust agreement, which is incorporated by reference. If there are any conflicts between this document and the above referenced agreements, this document shall govern; (g) hold cash uninvested and deposit the same with any banking or savings institution, including its own banking department or the banking department of an affiliate; (h) utilize a general disbursement account, i.e., in the form of a demand deposit account and/or time deposit account, for distributions from the Trust, without incurring any liability for payment of interest thereon, notwithstanding the Trustee's receipt of income with respect to float involving the disbursement account; (i) hold contributions in an omnibus account, i.e., in the form of a demand deposit and/or time deposit account, maintained by the Trustee for up to three (3) business days (or such longer period as may result due to circumstances beyond the Trustee's control), without liability for interest thereon. (The Employer acknowledges that any float earnings associated with the assets held in such omnibus account are retained by the Trustee as part of its compensation for performing services with respect to the allocation of contributions to Participants' accounts); (j) join in or oppose the reorganization, recapitalization, consolidation, sale or merger of corporations or properties, including those in which it or its affiliates are interested as Trustee, upon such terms as it deems advisable; (k) hold investments in nominee or bearer form; (l) exercise all ownership rights including the voting of proxies and the exercise of tender offers but only with respect to assets over which the Trustee has investment management responsibility; (m) to hold, manage and control all property forming part of the Trust Fund and to sell, convey, transfer, exchange and otherwise dispose of the same from time to time; (n) to apply for and procure from an insurance company as an investment of the Trust such annuity, or other contracts on the life of any Participant as the Plan Administrator shall deem proper; to exercise, at any time or from time to time, whatever rights and privileges may be granted under such annuity, or other contracts; to collect, receive, and settle for the proceeds of any such annuity, or other contracts as and when entitled to do so under the provisions thereof; (o) unless otherwise provided by a directive as described by paragraph 13.6, the Employer will pass through shareholder rights (including voting rights) on Employer securities to Plan Participants. If no directive is provided, the Trustee shall exercise any shareholder rights (including voting rights) with respect to any securities held, but only in accordance with the instructions of the person or persons responsible for the investment of such securities subject to and as permitted by, any applicable rules of the Securities and Exchange Commission and any national securities exchange. Voting rights with respect to shares of registered investment companies held in the Trust shall be directed by the Named Investment Fiduciary responsible for selection of such 100 registered investment companies as permissible investment alternatives. In the event of any conflict with any other provision of this Article or this Basic Plan Document #01, the provision of this paragraph shall control. The Employer shall be responsible for preparing and distributing all required prospectuses for Employer securities and making such materials available to Plan Participants; (p) to retain and employ such attorneys, agents and servants as may be necessary or desirable, in the opinion of the Trustee, in the administration of the Plan, and to pay them such reasonable compensation for their services as may be agreed upon as an expense of administration of the Plan, including power to employ and retain counsel upon any matter of doubt as to the meaning or interpretation to be placed upon this Plan or any provisions thereof with reference to any question arising in the administration of the Plan or pertaining to the rights and liabilities of the Trustee hereunder. The Trustee in any such event, any act in reliance upon the advice, opinions, records, statements and computations of any attorneys and agents and on the records, statements and computations of any servants so selected by it in good faith and shall be released and exonerated of and from all liability to anyone in so doing (except to the extent that liability is imposed under ERISA); (q) to institute, prosecute and maintain, or to defend, any proceeding at law or in equity concerning the Plan or the assets thereof or any claims thereto, or the interests of Participants and Beneficiaries hereunder at the sole cost and expense of the Plan or at the sole cost and expense of the Participant that may be concerned therein or that may be affected thereby, as, in its opinion, shall be fair and equitable in each case, and to compromise, settle and adjust all claims and liabilities asserted by or against the Plan or asserted by or against it, or such terms as it, in each such case, shall deem reasonable and proper. The Trustee shall be under no duty or obligation to institute, prosecute, maintain or defend any suit, action or other legal proceeding unless it shall be indemnified to its satisfaction against all expenses and liabilities (including without limitation, legal and other professional fees) which it may sustain or anticipate by reason thereof; and (r) the Trustee is expressly authorized to the fullest extent permitted by law to (1) retain the services of any broker-dealer, registered investment advisor or other financial services entity (including the Trustee and any of its affiliates) and any future successors in interest thereto collectively, for the purposes of this paragraph referred to as the "Affiliated Entities"), to provide services to assist or facilitate the purchase or sale of investments in the Trust, (2) acquire as assets of the Trust shares of mutual funds to which Affiliated Entities provide, for a fee, services in any capacity and (3) acquire in the Trust any other services or products of any kind or nature from the Affiliated Entities regardless of whether the same or dissimilar services or products are available from other institutions. The Trust may pay directly or indirectly (through mutual funds fees and charges for example) pay management fees, transaction fees and other commissions to the Affiliated Entities for the services or products provided to the Trust and/or such mutual funds at such Affiliated Entities' standard or published rates without offset (unless required by law) from any fees charged by the Trustee for its services as Trustee. The Trustee may also deal directly with the Affiliated Entities regardless of the capacity in which it is then acting, to purchase, sell, exchange or transfer assets of the Trust even though the Affiliated Entities are receiving compensation or otherwise profiting from such transaction or are acting as principal in such transaction. Each of the Affiliated Entities is authorized to effect transactions on national securities exchanges for the Trust as directed by the Trustee, and retain any transactional fees related thereto, consistent with Section 11(a)(1) of the Securities and Exchange Act of 1934, as amended and related Rule 11a2-2(T). Included specifically, but not by way of limitation in the transactions authorized by this provision, are transactions in which any of the Affiliated Entities is serving as an underwriting or member of an underwriting syndicate for a security being purchased or is purchasing or selling a security for its own account. In the event the Trustee is directed by the Plan Administrator, any named fiduciary, designated Investment Manager, Participant and/or Beneficiary, as applicable hereunder (collectively referred to as for purposes of this paragraph as the "Directing Party"), the Directing Party shall be authorized, and expressly retains the right hereunder, to direct the Trustee to retain the services of, and conduct transactions with, Affiliated Entities fully in the manner described above. 101 13.9 APPOINTMENT OF ADDITIONAL TRUSTEE AND ALLOCATION OF RESPONSIBILITIES Assets for which the Trustee is not serving in the capacity of Trustee may be held by a second Trustee appointed by the Employer to hold specified investments. In the event that an additional Trustee is appointed for the Plan to serve as the Trustee of specific investments for which the Trustee is not acting in the capacity of Trustee, the second Trustee shall have no responsibilities to these assets other than as set forth herein. The Trustee shall have no duties with respect to investment held by any other person including, without limitation, any other Trustee for the Plan. Any other secondary Trustee of the Plan shall have no duties with respect to assets held in the Plan by the Trustee. 13.10 COMPENSATION, ADMINISTRATIVE FEES AND EXPENSES All reasonable fees, charges and expenses incurred by the Trustee or the Custodian in connection with the administration of the Trust and all reasonable fees, charges and expenses incurred by the Plan Administrator in connection with the administration of the Plan (including such reasonable compensation to the Trustee/Custodian and the Plan Administrator as may be agreed upon from time to time between the Employer, the Trustee/Custodian and Plan Administrator) and fees for legal services rendered to the Trustee/Custodian or Plan Administrator shall be paid from the Trust unless: (a) The payment of such expense would constitute a "prohibited transaction" within the meaning of ERISA Section 406 or Code Section 4975 for which no statutory or administrative exemption is available. (b) The Employer actually pays such expenses directly. Any and all reasonable additional administrative expenses incurred to effect investment directives made by the Participants and by each Beneficiary under this Plan shall be paid by the Trust and as determined by the Employer shall either be charged (in accordance with such reasonable nondiscriminatory rules as the Employer deems appropriate under the circumstances) to the account of the individual issuing such directive, or treated as a general expense of the Trust. If charged to a Participant's account and if the assets of such account are insufficient to satisfy such charges, the Employer shall pay any deficit to the Trustee. Notwithstanding the foregoing, nothing in this section shall prevent the Employer from paying the administrative expenses of the Plan directly. (c) All transaction related expenses incurred to effect a specific investment for a Participant directed account (such as brokerage commissions and other transaction related expenses), shall, as determined by the Employer, either be paid from or otherwise be charged directly to the account of the Participant providing such direction or treated as a general expense of the Trust. (d) If there are insufficient liquid assets of the Trust to cover the fees of the Trustee or the Custodian, then assets of the Trust shall be liquidated to the extent necessary to cover fees. (e) Notwithstanding the foregoing, no compensation other than reimbursement for expenses incurred shall be paid to a Plan Administrator who is the Employer or Employee of the Employer. (f) In the event any part of the Plan becomes subject to tax, all taxes incurred will be paid from the Plan at the direction of the Plan Administrator. (g) Any investment gain or loss of the Trust that is not directly attributable to the investment of the account of any Participant (including, but not limited to, for example, any "float" earned on the disbursement account established for the Plan and not treated as part of the compensation of the Trustee or paying agent for the Plan, and any 12b-1 or similar fees paid to the Plan) will be applied to pay administrative expenses of the Plan, with any excess remaining at the close of the Plan Year being allocated among the Participant's accounts in accordance with the procedure established by the Plan Administrator for this purpose. 13.11 RECORDS Within ninety (90) days following the close of each Plan Year, or at such other times as may be agreed to between the Employer and the Trustee, and within ninety (90) days following its removal or resignation, the Trustee shall file with the Employer a report of that part of the Trust under the investment management of the Trustee during such year or from the end of the preceding Plan Year to the date of removal or resignation. Such 102 report shall include a statement of receipts and disbursements, the net income or loss of the Trust, the gains or losses realized by the Trust upon sale or other disposition of the assets, the increase or decrease in the value of the Trust, all payments and distributions made from the Trust since the date of its last report, and shall contain a schedule of assets listing the fair market value of investments held in the Trust as of the end of the Plan Year or the date of removal or resignation, as applicable. The fair market value of investments for which there is a ready market shall be determined using the most recent price quoted on a national or other recognized securities exchange or over-the-counter market. The fair market value of illiquid investments shall be obtained by a valuation performed by an independent appraiser appointed by the Trustee or appointed by the Employer and approved by the Trustee for this purpose whose determination shall be final. The Employer shall review the Trustee's report and notify the Trustee in the event of its disapproval of the report within thirty (30) days, providing the Trustee with a written description of the items in question. The Trustee shall have sixty (60) days to provide the Employer with a written explanation of the items in question. If the Employer again disapproves, the Trustee shall have the right to file its report in a court of competent jurisdiction for audit and adjudication. In the event the Employer fails to file a written objection to the Trustee's report within the ninety (90) day period following receipt of the report, the Employer shall be deemed to have approved the report. In such case, the Trustee shall be released and discharged with respect to all matters contained in the report. 13.12 LIMITATION ON LIABILITY AND INDEMNIFICATION (a) The Trustee shall have the authority to manage and govern the Trust to the extent provided in this instrument, but does not guarantee the Trust in any manner against investment loss or depreciation in asset value, or guarantee the adequacy of the Trust to meet and discharge all or any liabilities of the Plan. (b) The Trustee and/or Custodian shall not be liable for the making, retention, or sale of any investment or reinvestment made by it, as herein provided, or for any loss to, or diminution of the Trust, or for any other loss or damage which may result from the discharge of its duties hereunder except to the extent it is judicially determined such loss or damage is attributable to the Trustee/Custodian's breach of its duties hereunder or under ERISA. (c) An institution acting as a Custodian or nondiscretionary Trustee shall have no discretion or investment management responsibility, unless otherwise expressly agreed in writing (pursuant to an investment management agreement, for example) and shall only be responsible to perform the functions described at paragraph 13.5 hereof. Neither the Custodian nor Trustee (whether nondiscretionary or discretionary) shall have any responsibility with respect to Plan investments and does not guarantee the adequacy of the Trust to meet and discharge any or all liabilities associated with the Plan. (d) The Employer warrants that all directions issued to the Trustee or Custodian by it or the Plan Administrator will be in accordance with the terms of the Plan and the auxiliary agreement and not contrary to the provisions of ERISA, as amended, and the Regulations issued thereunder. (e) Neither the Trustee nor the Custodian shall be answerable for any action taken pursuant to any direction, consent, certificate, or other paper or document in the belief that the same is genuine. All directions by the Employer, Participant, the Plan Administrator, Named Fiduciary or an investment manager shall be made pursuant to pre-approved communication procedures to which all such parties, as applicable, shall have consented to in writing. The Employer shall deliver to the Trustee and Custodian written notification identifying the individual or individuals authorized to act on behalf the Plan and shall deliver specimens of their signatures to the Trustee/Custodian. (f) The duties and obligations of the Trustee and the Custodian shall be limited to those expressly imposed by this instrument or subsequently agreed upon by the parties in writing. Responsibility for administrative duties required under the Plan or applicable law not expressly imposed upon or agreed to by the Trustee or the Custodian shall rest solely with the Employer. 103 (g) The Employer shall indemnify the Trustee/Custodian against, and agrees to hold the Trustee/Custodian harmless from, all liabilities and claims and expenses including attorney's fees and expenses incurred in defending against such liability or claims against the Trustee/Custodian, unless such liability or claim results from the negligent action or inaction of the Trustee/Custodian, or where the Trustee/Custodian is found to have breached its duties under this Article or Part 4 of Title I of ERISA by a final judgment of a court of competent jurisdiction. Except as otherwise provided by the preceding sentence, the Employer also shall indemnify the Trustee/Custodian against and agrees to hold the Trustee/Custodian harmless from all liabilities, claims and expenses including attorney's fees and other expenses incurred in defending against such liabilities or claims, arising from any actions or breach of responsibility by any party other than the Trustee/Custodian, including without limitation by specification any acts of a prior Trustee or of another Trustee or Custodian appointed by the Employer. (h) Without limiting any provision in the prior paragraph, the Employer expressly agrees to indemnify the Trustee/Custodian against any liability or claim (including attorney's fees and expenses in defending against such liabilities or claims) arising as a result of any act taken or failure to act, in accordance with the directions received from the Employer, Plan Administrator, investment manager, Participant, or a designee specified by the Employer directly or transmitted by a designated Service Provider to the Plan and without limitation by specification. (i) The Trustee/Custodian will take all reasonable steps to assure the security of any data received from the Employer in connection with services provided to the Plan. The Employer will be responsible for retaining duplicate copies of any such data or materials it forwards to the Trustee/Custodian and for taking all other reasonable and necessary precautions in event such data or materials are lost or destroyed, regardless of cause, or in the event reprocessing is needed for any reason. The Trustee/Custodian will maintain records in connection with the performance of services hereunder for the applicable period as required by law, or if no period is required, for such period as is reasonable under the law. (j) No waiver of any breach of this agreement shall constitute a waiver of any other breach, whether of the same or any other covenant, term or condition. The subsequent performance of any of the terms, covenants and conditions of this Article shall not constitute a waiver of any preceding breach, nor shall any delay or omission of any party's exercise of any rights arising from any default effect or impair the party's rights as to the same or future default. (k) Neither the Trustee or the Custodian shall be responsible in any way for any actions taken, or failure to act, by a prior trustee/custodian. The Employer shall indemnify and hold harmless the Trustee/Custodian for such prior trustee/custodian's acts or inactions for any periods applicable, including periods for which the Plan must retroactively comply with any tax law or regulations thereunder. (l) A fiduciary with respect to the Plan shall not be liable for a breach of fiduciary responsibility of another fiduciary with respect to the Plan except to the extent that: (1) it participates knowingly in, or knowingly undertakes to conceal, an act or omission of such other fiduciary, knowing such act or omission is a breach; (2) by its failure to comply with ERISA Section 404(a)(1) in the administration of its specific responsibilities which give rise to its status as a fiduciary, it has enabled such other fiduciary to commit a breach; or (3) it has knowledge of a breach by such other fiduciary, unless it makes reasonable efforts under the circumstances to remedy the breach. 104 (m) If the assets of the Plan are held by two (2) or more Trustees, each Trustee will use reasonable care to prevent a co-Trustee from committing a breach of duty under the Employee Retirement Income Security Act of 1974, as amended, and they shall jointly manage and control the assets of the Plan; provided however, that such co-Trustee shall be authorized to allocate specific responsibilities, obligations or duties among the co-Trustees pursuant to a written agreement. If co-Trustees do enter into such an agreement, then a Trustee to whom certain responsibilities, obligations or duties have not been allocated shall not be liable either individually or as Trustee for any loss resulting to the Plan arising from the acts or omissions on the part of another Trustee to which such responsibilities, obligations or duties have been allocated. 13.13 CUSTODIAN If a discretionary Trustee has been appointed, the Employer may appoint a Custodian as provided for in the Adoption Agreement. A Custodian shall have the same rights, powers and duties as a nondiscretionary Trustee. Any reference in the Plan to a Trustee is also a reference to the Custodian unless the context indicates otherwise. Any limitation of the Trustee's liability in the Plan shall act as a limitation of the Custodian's liability. Where a discretionary Trustee has provided direction, any action taken by the Custodian satisfies the requirement in the Plan referencing the Trustee taking that action. The resignation or removal of the Custodian shall be made in accordance with paragraph 13.19 as though the Custodian were the Trustee. The Custodian shall be responsible for the holding and safekeeping of all or a portion of the Plan's assets. One or more Custodian(s) appointed under this Plan may hold all or any portion of the Plan's assets. Such separate assets shall be held pursuant to the terms of a separate custodial agreement with such Custodian. The separate custodial agreement shall be treated as an addendum and, as such, may not conflict with any provision of this document. In addition, any provision of a separate custodial agreement which would jeopardize the tax qualified status of this Defined Contribution Plan shall be null and void. In addition to the holding and safekeeping of Plan assets, the Custodian's duties shall include: (a) receiving contributions under the terms of the Plan, but not determining the amount or enforcing the payment thereof, (b) making distributions from the Plan in accordance with instructions received from the Plan Administrator or an authorized representative of the Employer, (c) keeping records reflecting its administration of the Trust or the custodial account and making such records, statements and reports available to the Employer for review and audit at such times as agreed to between the Custodian, Plan Administrator, and the Employer, and (d) retaining and employing such attorneys, agents and servants as may be necessary or desirable, in the opinion of the Custodian, in the administration of the Plan, and to pay them such reasonable compensation for their services as may be agreed upon as an expense of administration of the Plan, including power to employ and retain counsel upon any matter of doubt as to the meaning or interpretation to be placed upon this Plan or any provisions thereof with reference to any question arising in the administration of the Plan or pertaining to the rights and liabilities of the Trustee hereunder. The Custodian in any such event, any act in reliance upon the advice, opinions, records, statements and computations of any attorneys and agents and on the records, statements and computations of any servants so selected by it in good faith shall be released and exonerated of and from all liability to anyone in so doing (except to the extent that liability is imposed under ERISA). The Custodian's duties shall be limited to those as agreed to between the Employer and the Custodian. The Employer shall be responsible for any other administrative duties required under the Plan or by applicable law. 13.14 INVESTMENT ALTERNATIVES OF THE CUSTODIAN (a) The Custodian shall hold any or all assets received from the Trustee or its agents. If the Custodian holds title to Plan assets and such ownership requires action on the part of the registered owner, such action will be taken by the Custodian only upon receipt of specific instructions from the Trustee, or its designated agents or the Named Investment Fiduciary. 105 Proxies shall be voted by or pursuant to the express direction of the Trustee its' authorized agent or the Named Investment Fiduciary. The Custodian shall not render any investment advice, including any opinion on the prudence of directed investments. The Employer and Trustee and its agents thereof assume all responsibility for adherence to fiduciary standards under ERISA, as amended, and the Regulations issued thereunder. (b) Where the Sponsor serves as Custodian, the Trust shall only be invested in investment alternatives the Custodian makes available in the ordinary course of business unless the Custodian is directed otherwise by the Employer, the Trustee or any properly designated agent thereof. The Custodian under applicable Federal or state laws, may limit the investment alternatives including but not limited to savings accounts, savings certificates, or in other savings instruments offered by the Sponsor or its affiliates. Such investments shall be made at the direction of the Employer or Trustee(s) or other Named Investment Fiduciary and the Custodian shall have no responsibility for the propriety of such investments. 13.15 PROHIBITED TRANSACTIONS The Trustee, Custodian, Employer, investment manager, the Named Investment Fiduciary or Participant shall not knowingly enter into any transaction, engage in any activity, or direct the purchase or acquisition of any investment with respect to the Plan which would constitute a prohibited transaction under ERISA or the Code for which a statutory or administrative exemption is not available. The Trustee or Custodian shall not receive any investment advisory or other fees from a regulated investment company (a mutual fund) which duplicates investment management fees charged by the Trustee. The Trustee or Custodian shall be permitted to receive fees from a regulated investment company if the Trustee or Custodian has made a good faith determination that the receipt of such fees is not a prohibited transaction pursuant to any guidance or exemption issued by the Department of Labor from time to time. 13.16 EXCLUSIVE BENEFIT RULES No part of the Trust shall be used for, or diverted to, purposes other than for the exclusive benefit of Participants, former Participants with a vested interest, and the Beneficiary or Beneficiaries of deceased Participants who have in a vested interest in the Plan at death. 13.17 ASSIGNMENT AND ALIENATION OF BENEFITS Except as provided in paragraphs 12.9 or 12.11, no right or claim to, or interest in, any part of the Plan, or any payment from the Plan, shall be assignable, transferable, or subject to sale, mortgage, pledge, hypothecation, commutation, anticipation, garnishment, attachment, execution, or levy of any kind. Neither the Trustee or Custodian shall recognize any attempt to assign, transfer, sell, mortgage, pledge, hypothecate, commute, or anticipate the same, except to the extent required by law. The preceding sentences shall also apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a Participant pursuant to a domestic relations order, unless such order is determined to be a Qualified Domestic Relations Order, as defined in Code Section 414(p), or any domestic relations order entered before January 1, 1985 which the Plan's attorney and Plan Administrator deem to be qualified. Notwithstanding any provision of this paragraph 13.17 to the contrary, an offset to a Participant's Vested Account Balance against an amount that the Participant is ordered or required to pay the Plan with respect to a judgment, order or decree issued, or a settlement entered into, on or after August 5, 1997, shall be permitted in accordance with Code Sections 401(a)(13)(C) and (D). 13.18 LIQUIDATION OF ASSETS If the Trustee and/or Custodian must liquidate assets in order to make distributions, transfer assets, or pay fees, expenses or taxes assessed against all or a part of the Trust, and the Trustee/Custodian is not instructed as to the liquidation of such assets, assets will be liquidated on a pro rata basis across all the investment alternatives in the Trust. The Trustee and /or Custodian are expressly authorized to liquidate assets in order to satisfy the Trust's obligation to pay the Trustee and /or Custodian's fees or other compensation if such fees or compensation is not paid on a timely basis. 106 13.19 RESIGNATION AND REMOVAL The Trustee may resign upon thirty (30) days written notice to the Employer. The Employer may remove the Trustee upon sixty (60) days written notice to the Trustee, or such shorter period of time as may be agreed to by the parties. The Employer may discontinue its participation in this Prototype Defined Contribution Plan effective upon thirty (30) days written notice to the Sponsor. In such event the Employer shall, prior to the effective date thereof, amend the Plan to eliminate any reference to this Prototype Defined Contribution Plan and appoint a successor trustee/custodian. The Trustee shall deliver the Trust to its successor on the effective date of the resignation or removal, or as soon thereafter as practicable, provided that this shall not waive any lien the Trustee may have upon the Trust for its compensation or expenses. Following the effective date of the notice of termination, the Trustee shall have no further responsibility for providing services to the Employer or the Plan. If the Employer fails to amend the Plan and appoint a successor trustee/custodian within the said thirty (30) days, or such longer period as the Trustee may specify in writing, the Plan shall be deemed individually designed and the highest ranking officer of the Employer shall be deemed the successor trustee or custodian as the case may be. In such event, the Trustee may but shall not be required to continue to hold custody of the assets of the Plan until such time as appropriate arrangements have been made for the security of the Plan assets, but for a discretionary Trustee, upon notification thereof to Plan Participants, shall no longer have any responsibility for the investment of Plan assets. 107 ARTICLE XIV TOP-HEAVY PROVISIONS 14.1 APPLICABILITY OF RULES If the Plan [except in the case of a SIMPLE 401(k) Plan] is or becomes Top-Heavy in any Plan Year, the provisions of this Article will supersede any conflicting provisions in the Basic Plan Document #01 and accompanying Adoption Agreement. 14.2 MINIMUM CONTRIBUTION Notwithstanding any other provision in the Employer's Plan, for any Plan Year in which the Plan is Top-Heavy, the aggregate Employer contributions and forfeitures allocated on behalf of any Participant (without regard to any Social Security contribution) under this Plan or a combination of paired or non-paired Defined Contribution Plans and no Defined Benefit Plans which are Top-Heavy, the Employer will contribute the lesser of 3% of such Participant's Compensation or the largest percentage of the Employer contributions and forfeitures, as a percentage of the Key Employee's Compensation, up to a maximum permitted under Code Section 401(a)(17), as indexed, allocated on behalf of any Key Employee for that year. (a) In any Limitation Year prior to January 1, 2000, if the Employer maintains or maintained a Defined Benefit Plan which is not paired, the provisions of the "Limitations on Allocations" section of the Adoption Agreement shall apply. (b) Each Participant who is employed by the Employer on the last day of the Plan Year shall be entitled to receive an allocation of the Employer's minimum contribution for such Plan Year. The minimum allocation applies even though under other Plan provisions the Participant would not otherwise be entitled to receive an allocation, or would have received a lesser allocation for the year because the Participant fails to make required contributions to the Plan, the Participant's Compensation is less than a stated amount, or the Participant fails to complete one-thousand (1,000) Hours of Service (or such lesser number designated by the Employer in the Adoption Agreement) during the Plan Year. A paired profit-sharing Plan designated to provide the Top-Heavy minimum contribution must do so regardless of profits. An Employer may elect in the Adoption Agreement by resolution or by Plan amendment whether the Top-Heavy minimum Contribution will be made to all Participants or just non-Key Employees. The Top-Heavy minimum contribution does not apply to any Participant to the extent the Participant is covered under any other plan(s) of the Employer and the Employer has provided in the Adoption Agreement that the minimum allocation or benefit requirements applicable to this Plan will be satisfied in the other plan(s). If a Key Employee makes an Elective Deferral or has an allocation of Matching Contributions credited to his or her account, a Top-Heavy minimum contribution will be required for non-Key Employees who are Participants. For purposes of satisfying the Top-Heavy minimum contribution requirement, Elective Deferrals and Matching Contributions are not taken into account. 14.3 MINIMUM VESTING For any Plan Year during which this Plan is Top-Heavy, the minimum vesting schedule selected by the Employer in the Adoption Agreement will automatically apply to the Plan. If the vesting schedule elected by the Employer in the Adoption Agreement is less liberal than the allowable schedule, the schedule will automatically shift to a vesting schedule which satisfies the Top-Heavy minimum requirements. If the vesting schedule under the Employer's Plan shifts in or out of the Top-Heavy schedule for any Plan Year, such shift is an amendment to the vesting schedule and the election in paragraph 9.9 of the Basic Plan Document #01 applies. The minimum vesting schedule applies to all accrued benefits within the meaning of Code Section 411(a)(7) except those attributable to Employee contributions, including benefits accrued before the effective date of Code Section 416 and benefits accrued before the Plan became Top-Heavy. No reduction in vested benefits may occur in the event the Plan's status as Top-Heavy changes for any Plan Year. This paragraph does not apply to the account balances of any Employee who does not have one (1) Hour of Service after the Plan initially becomes Top-Heavy and such Employee's account balance attributable to Employer contributions and forfeitures will be determined without regard to this paragraph. 108 14.4 LIMITATIONS ON ALLOCATIONS In any Limitation Year beginning prior to January 1, 2000 in which the Top-Heavy Ratio exceeds 90% (i.e., the Plan becomes Super Top-Heavy), the denominators of the Defined Benefit Fraction and Defined Contribution Fraction shall be computed using 100% of the dollar limitation instead of 125%. 14.5 USE OF SAFE HARBOR CONTRIBUTIONS TO SATISFY TOP-HEAVY CONTRIBUTION RULES If elected in the Adoption Agreement, a 3% Safe Harbor Non-Elective Contribution allocated to all eligible Employees may be used to satisfy the minimum contribution requirement for a Top-Heavy Plan. A Safe Harbor Matching Contribution may not be used to satisfy the minimum contribution requirement for a Top-Heavy Plan. 14.6 TOP-HEAVY RULES FOR SIMPLE 401(K) PLANS A SIMPLE 401(k) Plan is not treated as a Top-Heavy Plan under Code Section 416 for any year for which this article applies. 109 ARTICLE XV AMENDMENT AND TERMINATION 15.1 AMENDMENT BY SPONSOR The Sponsor may amend any or all provisions of this Prototype Defined Contribution Plan at any time without obtaining the approval or consent of any Employer which has adopted this Plan and Trust provided that no amendment shall authorize or permit any part of the corpus or income of the Plan to be used for or diverted to purposes other than for the exclusive benefit of Participants and their Beneficiaries, or eliminate an optional form of distribution. For purposes of Sponsor amendments, the mass submitter of this Basic Plan Document #01 shall be recognized as the agent of the Sponsor. If the Sponsor does not adopt the amendments made by the mass submitter, it will no longer be identical to or a minor modifier of the mass submitter plan. 15.2 AMENDMENT BY EMPLOYER The Employer may amend any option in the Adoption Agreement, and may include language as permitted in the Adoption Agreement to satisfy Code Section 415 or to avoid duplication of minimums under Code Section 416 because of the required aggregation of multiple plans. The Employer may also adopt certain model amendments published by the Internal Revenue Service which specifically provide that their adoption will not cause the Plan to be treated as an individually designed plan for which the Employer must obtain a separate determination letter. An Employer that amends the Plan for any other reason, including a waiver of the minimum funding requirement under Code Section 412(d), will no longer participate in this Prototype Plan program and will be considered an individually designed Plan. In such event, all references to the institution or company as Sponsor shall be deemed null and void. 15.3 PROTECTED BENEFITS An amendment (including the adoption of this Plan as a restatement of an existing Plan) may not decrease a Participant's accrued benefit or account balance except to the extent permitted under Code Section 412(c)(8), and may not reduce or eliminate a Code Section 411(d)(6) protected benefit (except as provided by the Code or the Regulations issued thereunder) determined immediately prior to the date of adoption, or if later, the Effective Date of the amendment. Where this Plan is being adopted to amend another plan that contains a protected benefit not provided for in this document, the Employer may attach an addendum to the Adoption Agreement that describes such protected benefit which shall be incorporated in the Plan. 15.4 PLAN TERMINATION The Employer shall have the right to terminate its Plan at any time. The Sponsor of this Prototype Defined Contribution Plan is to be given sixty (60) days notice in writing of the Employer's intent to terminate or transfer the assets of the Plan. If the Plan is terminated, partially terminated, or if there is a complete discontinuance of contributions under a profit-sharing plan maintained by the Employer, all amounts credited to the accounts of Participants shall vest and become nonforfeitable. In the event of a partial termination, only those who are affected by such partial termination shall be fully vested. In the event of termination, the Plan Administrator shall direct the Trustee or the Custodian as applicable with respect to the distribution of accounts to or for the exclusive benefit of Participants or their Beneficiaries. Such distribution shall be made directly to Participants or, at the direction of the Participant, may be transferred directly to another Eligible Retirement Plan or individual retirement account. In the absence of an election by a Participant who has received notice from the Plan Administrator under paragraph 6.11, the Plan Administrator may direct the Trustee or Custodian to transfer the Participant's benefit to another Defined Contribution Plan maintained by the Employer, other than an employee stock ownership plan. If the Employer does not maintain another Defined Contribution Plan, the Plan Administrator may direct the Trustee or Custodian to transfer the Participant's benefit to an individual retirement account with an institution selected by the Plan Administrator, or make a distribution pursuant to paragraph 7.15. Prior to making any distribution, the Plan Administrator shall establish in a manner acceptable to the Trustee or Custodian, that the Plan has received a favorable determination letter from the Internal Revenue Service approving the Plan termination and authorizing the distribution of benefits to Plan Participants. In the absence of such determination letter, the Trustee or Custodian may agree to make distributions to Participants if the Plan Administrator represents that the applicable requirements, if any, of ERISA and the Code governing the termination of employee benefit plans have been or are being complied with or that appropriate authorizations, waivers, exemptions, or variances have been or are being obtained. 110 15.5 DISTRIBUTION RESTRICTIONS UNDER A CODE SECTION 401(k) PLAN If the Employer's Plan includes a cash or deferred arrangement or if transferred assets described in paragraph 6.13 are subject to the distribution restrictions of Code Sections 401(k)(2) and 401(k)(10), the special distribution provisions of this paragraph apply. The portion of the Participant's Vested Account Balance attributable to Elective Deferrals (or to amounts treated under the cash or deferred arrangement as Elective Deferrals) is not distributable on account of Plan termination, as described in this paragraph, unless: (a) the Participant otherwise is entitled under the Plan to a distribution of that portion of the Vested Account Balance, or (a) the Plan termination occurs without the establishment of a successor Plan. A successor Plan under subparagraph (b) is a Defined Contribution Plan other than an employee stock ownership plan [as defined in Code Section 4975(e)(7)], a Simplified Employee Pension Plan [as defined in Code Section 408(k)], or a SIMPLE IRA Plan [as defined in Code Section 408(p)] maintained by the Employer (or by a related Employer) at the time of the termination of the Plan or within the period ending twelve (12) months after the final distribution of assets. A distribution pursuant to this subparagraph (b), must be part of a lump sum distribution(s) to the Participant of his Vested account balance. (b) The disposition by a corporation to an unrelated entity of such corporation's interest in a subsidiary [within the meaning of Code Section 409(d)(3)] if such corporation continues to maintain the Plan, but only with respect to the Employees who continue employment with such subsidiary. (d) In connection with the disposition by an Employer of less than 85% of the assets used by the Employer in a trade or business to an unrelated entity, distribution of the entire Vested Account Balance of an Participant who continues employment with the acquirer will, if so agreed to by the Employer, be made to the Participant in a single lump sum. This paragraph shall apply if the acquirer does not maintain the Plan after disposition and only if such Employee's change in employment status constitutes a "separation from Service" within the meaning of Code Section 401(k)(2)(b)(i)(I). 15.6 QUALIFICATION OF EMPLOYER'S PLAN If the adopting Employer fails to obtain or retain applicable Internal Revenue Service qualification as a Prototype Plan, such Employer's Plan shall no longer participate in this Prototype Defined Contribution Plan and will be considered an individually designed plan. 15.7 MERGERS AND CONSOLIDATIONS (a) In the case of any merger or consolidation of the Employer's Plan with, or transfer of assets or liabilities of the Employer's Plan to any other plan, Participants in the Employer's Plan shall be entitled to receive benefits immediately after the merger, consolidation, or transfer which are equal to or greater than the benefits they would have been entitled to receive immediately before the merger, consolidation, or transfer if the Plan had then terminated. (b) Any corporation into which the Trustee, Custodian or any successor thereto may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Trustee, Custodian or any successor thereto may be a party, or any corporation to which all or substantially all the business of the Trustee, Custodian or any successor thereto may be transferred, shall automatically be the successor without the filing of any instrument or performance of any further act, before any court. 15.8 QUALIFICATION OF PROTOTYPE The Sponsor intends that this Prototype Defined Contribution Plan will meet the requirements of the Code as a qualified Defined Contribution Plan. Should the Commissioner of Internal Revenue or any delegate of the Commissioner at any time determine that the Prototype Defined Contribution Plan fails to meet the requirements of the Code, the Sponsor will amend the Basic Plan Document #01 as necessary to maintain its qualified status. 111 ARTICLE XVI GOVERNING LAW 16.1 GOVERNING LAW Construction, validity and administration of the Prototype Defined Contribution Plan and any Employer Plan established under the terms of this Plan and accompanying Adoption Agreement, shall be governed by Federal law to the extent applicable and to the extent not applicable by the laws of the State or Commonwealth in which the principal office of the Prototype Sponsor or its affiliate is located. 16.2 STATE COMMUNITY PROPERTY LAWS The terms and conditions of the Prototype Defined Contribution Plan and any Employer's Plan established under the terms of this Basic Plan Document #01 and accompanying Adoption Agreement shall be applicable without regard to community property laws of any state. 112 IRS MODEL AMENDMENT With respect to distributions under the Plan made for calendar years beginning on or after: [ ] January 1, 2001 [X] January 1, 2002 the Plan will apply the minimum distribution requirements of Code Section 401(a)(9) in accordance with the Regulations under Code Section 401(a)(9) that were proposed on January 17, 2001, notwithstanding any provision of the Plan to the contrary. This paragraph shall continue in effect until the end of the last calendar year beginning before the effective date of the final Regulations under Code Section 401(a)(9) or such other date as may be specified in guidance published by the Internal Revenue Service. 113 AMENDMENT TO THE PROTOTYPE DEFINED CONTRIBUTION PLAN BASIC PLAN DOCUMENT #01 The Employer named in the Adoption Agreement hereby amends the Plan to reflect certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). This amendment is intended as a good faith compliance with the requirements of EGTRRA and is to be construed in accordance with EGTRRA and guidance issued thereunder. This amendment shall supersede the provisions of the Basic Plan Document #01 to the extent those provisions are inconsistent with the provisions of this amendment. The Basic Plan Document #01 is hereby amended as follows: 1. Paragraph 1.16 of the Basic Plan Document #01 entitled "Compensation", under the paragraph entitled "Limitation on Compensation" is amended effective for Plan Years beginning after December 31, 2001, by the addition of the following three sentences at the end of the paragraph: "The annual Compensation of each Participant taken into account in determining allocations for any Plan Year beginning after December 31, 2001, shall not exceed $200,000, as adjusted for cost-of-living increases in accordance with Code Section 401(a)(17)(B). Annual Compensation means Compensation during the Plan Year or such other consecutive 12-month period over which Compensation is otherwise determined under the Plan (the determination period). The cost-of-living adjustment in effect for a calendar year applies to annual Compensation for the determination period that begins with or within such calendar year." 2. Paragraph 1.55 of the Basic Plan Document #01 entitled "Key Employee", is deleted in its entirety and replaced with the following for Plan Years beginning after December 31, 2001: "1.55 Key Employee Key Employee means any Employee or former Employee (including any deceased Employee) who at any time during the Plan Year that includes the determination date was an officer of the Employer having annual Compensation greater than $130,000 [as adjusted under Code Section 416(i)(1) for Plan Years beginning after December 31, 2002], a five percent (5%) owner of the Employer, or a one percent (1%) owner of the Employer having annual Compensation of more than $150,000. For this purpose, annual Compensation means Compensation within the meaning of Code Section 415(c)(3). The determination of who is a Key Employee will be made in accordance with Code Section 416(i)(1) and the applicable Regulations and other guidance of general applicability issued thereunder." 3. Paragraph 4.4 of the Basic Plan Document #01 entitled "Rollover Contributions", is amended by the addition of the following paragraph (g) which shall read as follows: "(g) If elected by the Employer in the Adoption Agreement, the Plan will accept Participant Rollover Contributions and/or Direct Rollovers of distributions made after December 31, 2001, from the types of plans specified in the Adoption Agreement, beginning on the Effective Date specified in the Adoption Agreement." 4. Paragraph 4.7 of the Basic Plan Document #01 entitled "Elective Deferrals in a 401(k) Plan", is amended by the addition of three new paragraphs (g), (h) and (i) which shall read as follows: "(g) No Participant shall be permitted to have Elective Deferrals made under this Plan, or any other Qualified Plan maintained by the Employer during any taxable year, in excess of the dollar limitation contained in Code Section 402(g) in effect for such taxable year, except to the extent permitted under subparagraph (h) below and Code Section 414(v), if applicable. (h) If elected by the Employer in the Adoption Agreement, all Employees who are eligible to make Elective Deferrals under this Plan and who have attained age fifty (50) before the close 114 of the Plan Year shall be eligible to make catch-up contributions in accordance with, and subject to the limitations of, Code Section 414(v). Such catch-up contributions shall not be taken into account for purposes of the provisions of the Plan implementing the required limitations of Code Sections 402(g) and 415. The Plan shall not be treated as failing to satisfy the provisions of the Plan implementing the requirements of Code Sections 401(k)(3), 401(k)(11), 401(k)(12), 410(b), or 416, as applicable, by reason of the making of such catch-up contributions. (i) Except to the extent permitted under subparagraph (h) above, the Adoption Agreement, EGTRRA section 631 and Code Section 414(v), the maximum salary reduction contribution that can be made to this Plan is the amount determined under Code Section 408(p)(2)(A)(ii) for the calendar year." 5. Effective as of the date set forth in the Adoption Agreement Section entitled "Distribution Upon Severance from Employment", paragraph 6.3 of the Basic Plan Document #01 entitled "Benefits on Termination of Employment " is amended by the addition of paragraphs (i) and (j) which shall read as follows: "(i) If elected by the Employer in the Adoption Agreement, this paragraph shall apply for distributions and severances from employment occurring after the dates specified in the Adoption Agreement. A Participant's Elective Deferrals, Qualified Non-Elective Contributions, Qualified Matching Contributions, and earnings attributable to these contributions shall be distributed on account of the Participant's severance from employment. However, such a distribution shall be subject to the other provisions of the Plan regarding distributions, other than provisions that require a separation from Service before such amounts may be distributed. (j) If elected by the Employer in the Adoption Agreement, the value of a Participant's nonforfeitable account balance shall be determined without regard to that portion of the account balance that is attributable to rollover contributions (and the earnings allocable thereto) within the meaning of Code Sections 402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii) and 457(e)(16). If the value of the Participant's nonforfeitable account balance as so determined is $5,000 or less, the Plan shall immediately distribute the Participant's entire nonforfeitable account balance." 6. Effective as of the date set forth in the Adoption Agreement Section entitled "Distribution Upon Severance from Employment", paragraph 6.6 of the Basic Plan Document #01 entitled "Commencement of Benefits", is amended by the addition of paragraph (d) which shall read as follows: "(d) If elected by the Employer in the Adoption Agreement, this paragraph shall apply for distributions and severances from employment occurring after the dates specified in the Adoption Agreement. A Participant's Elective Deferrals, Qualified Non-Elective Contributions, Qualified Matching Contributions, and earnings attributable to these contributions shall be distributed on account of the Participant's severance from employment. However, such a distribution shall be subject to the other provisions of the Plan regarding distributions, other than provisions that require a separation from Service before such amounts may be distributed." 7. The following new paragraph (c) is added to paragraph 6.7 of the Basic Plan Document #01 entitled "Transitional Rules for Cash-Out Limits" and shall apply if elected by the Employer in the Adoption Agreement and be effective as specified in the Adoption Agreement. "(c) If elected by the Employer in the Adoption Agreement, for purposes of this paragraph 6.7, the value of a Participant's nonforfeitable account balance shall be determined without regard to that portion of the account balance that is attributable to Rollover Contributions (and the earnings allocable thereto) within the meaning of Code Sections 402(c), 403(a)(4), 403(b)(8), 115 408(d)(3)(A)(ii), and 457(e)(16). If the value of the Participant's nonforfeitable account balance as so determined is $5,000 or less, the Plan shall immediately distribute the Participant's entire nonforfeitable account balance." 8. Paragraph 6.9 of the Basic Plan Document #01 entitled "Hardship Withdrawals", is amended effective January 1, 2002 by the addition of the following paragraph (d): "(d) A Participant who receives a distribution after December 31, 2001, on account of Hardship shall be prohibited from making Elective Deferrals and Voluntary After-tax Contributions under this and all other Plans of the Employer for six (6) months after receipt of the distribution. A Participant who receives a distribution in calendar year 2001 on account of Hardship shall be prohibited from making Elective Deferrals and Voluntary After-tax Contributions under this and all other Plans of the Employer for the period specified by the Employer in the Adoption Agreement." 9. Paragraph 6.10 of the Basic Plan Document #01 entitled "Direct Rollover of Benefits", is amended effective January 1, 2002 by the addition of the following paragraph (e): "(e) This paragraph shall apply only to distributions made after December 31, 2001. For purposes of the Direct Rollover provisions in paragraph 6.10 of the Plan, an Eligible Retirement Plan shall also mean an annuity contract described in Code Section 403(b) and an eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state which agrees to separately account for amounts transferred into such plan from this Plan. The definition of Eligible Retirement Plan shall also apply in the case of a distribution to a surviving Spouse, or to a Spouse or former Spouse who is the alternate payee under a Qualified Domestic Relations Order, as defined in Code Section 414(p). For purposes of the Direct Rollover provisions in paragraph 6.10 of the Plan, any amount that is distributed on account of Hardship shall not be an Eligible Rollover Distribution and the distributee may not elect to have any portion of such a distribution paid directly to an Eligible Retirement Plan. For purposes of the Direct Rollover provisions in paragraph 6.10 of the Plan, a portion of the distribution shall not fail to be an Eligible Rollover Distribution merely because the portion consists of Voluntary After-tax Contributions which are not includible in gross income. However, such portion may be transferred only to an individual retirement account or annuity described in Code Section 408(a) or (b), or to a qualified Defined Contribution Plan described in Code Section 401(a) or 403(a) that agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible." 10. Article IX of Basic Plan Document #01 entitled "VESTING", is hereby amended effective for the first Plan Year beginning after December 31, 2001, by adding a new paragraph 9.12 entitled "Vesting of Employer Matching Contributions" which shall read as follows: "9.12 VESTING OF EMPLOYER MATCHING CONTRIBUTIONS This section shall apply to Participants with an account balance derived from Employer Matching Contributions who complete an Hour of Service under the Plan in a Plan Year beginning after December 31, 2001. If elected by the Employer in the Adoption Agreement, this section shall also apply to all other Participants with an account balance derived from Employer Matching Contributions. A Participant's account balance derived from Employer Matching Contributions shall vest as provided in Section XIII(E) of the Adoption Agreement if elected." 116 11. Article X of Basic Plan Document #01 entitled "LIMITATIONS ON ALLOCATIONS", is amended by the addition of the following paragraph 10.6 entitled "Annual Additions" which shall read as follows: "10.6 ANNUAL ADDITIONS Except to the extent permitted under Section 4.7(h) of Basic Plan Document #01 and under Code Section 414(v), the Annual Addition that may be contributed or allocated to a Participant's account under the Plan for any Limitation Year beginning after December 31, 2001 shall not exceed the lesser of: (a) $40,000, as adjusted for increases in the cost-of-living under Code Section 415(d), or (b) 100% of the Participant's Compensation, within the meaning of Code Section 415(c)(3), for the Limitation Year. The Compensation limit referred to in (b) above shall not apply to any contribution for medical benefits after separation from Service [within the meaning of Code Section 401(h) or Code Section 419A(f)(2)] which is otherwise treated as an Annual Addition." 12. Effective for Plan Years beginning after December 31, 2001, paragraph 11.7(b) of the Basic Plan Document #01 is amended by the deletion of this paragraph which outlines the multiple use test described in Treasury Regulations Section 1.401(m)-2. 13. Paragraph 12.9 of the Basic Plan Document #01 entitled "Participant Loans" is amended effective January 1, 2001 by deleting the language at subsection (i) and replacing it with the following: "(i) Effective for Plan loans made after December 31, 2001, Plan provisions prohibiting loans to any Owner-Employee or Shareholder Employee shall cease to apply." 14. Paragraph 14.2 of the Basic Plan Document #01 entitled "Minimum Contribution" is amended for Plan Years beginning after December 31, 2001 by the addition of the following two new subparagraphs at the end of the paragraph which shall read as follows: "MATCHING CONTRIBUTIONS - Employer Matching Contributions shall be taken into account for purposes of satisfying the minimum contribution requirements of Code Section 416(c)(2). The preceding sentence shall apply with respect to Matching Contributions under the Plan or, if the Plan provides that the minimum contribution requirement shall be met in another plan, such other plan. Employer Matching Contributions that are used to satisfy the minimum contribution requirements shall be treated as Matching Contributions for purposes of the Actual Contribution Percentage Test and other requirements of Code Section 401(m). CONTRIBUTIONS UNDER OTHER PLANS - The Employer may provide in the Adoption Agreement that the minimum benefit requirement shall be met in another plan, including another plan that consists solely of a cash or deferred arrangement which meets the requirements of Code Section 401(k)(12) and Matching Contributions which meet the requirements of Code Section 401(m)(11)." 15. The Top-Heavy requirements of Code Section 416 and Article XIV of the Basic Plan Document #01 shall not apply in any Plan Year beginning after December 31, 2001, in which the Plan established under the Basic Plan Document #01 consists solely of a cash or deferred arrangement which meets the requirements of Code Section 401(k)(12) and Matching Contributions which meet the requirements of Code Section 401(m)(11). This paragraph shall apply for purposes of determining whether the Plan is a Top-Heavy Plan under Code Section 416(g) for Plan Years beginning after December 31, 2001, and whether the Plan satisfies the minimum benefits requirements of Code Section 416(c) for such years. This section amends Article XIV of the Basic Plan Document #01 by adding paragraph 14.7 entitled "Determination of Top-Heavy Status". The paragraph shall read as follows: 117 "14.7 DETERMINATION OF TOP-HEAVY STATUS (a) DETERMINATION OF PRESENT VALUES AND AMOUNTS - This paragraph 14.7 shall apply for purposes of determining the Present Values of accrued benefits and the amounts of account balances of Employees as of the Top-Heavy Determination Date. (b) DISTRIBUTIONS DURING THE PLAN YEAR ENDING ON THE TOP-HEAVY DETERMINATION DATE - The Present Value of accrued benefits and the amounts of account balances of an Employee as of the Top-Heavy Determination Date shall be increased by the distributions made with respect to the Employee under the Plan and any plan aggregated with this Plan under Code Section 416(g)(2) during the 1-year period ending on the Top-Heavy Determination Date. The preceding sentence shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with this Plan under Code Section 416(g)(2)(A)(i). In the case of a distribution made for a reason other than separation from Service, death, or Disability, this provision shall be applied by substituting "5-year period" for "1-year period". (C) EMPLOYEES NOT PERFORMING SERVICES DURING THE PLAN YEAR ENDING ON THE TOP-HEAVY DETERMINATION DATE - The accrued benefits and accounts of any individual who has not performed services for the Employer during the 1 -year period ending on the Top-Heavy Determination Date shall not be taken into account." 118 EX-10.27 8 d95331ex10-27.txt REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.27 REGISTRATION RIGHTS AGREEMENT Dated December 3, 2001 AMONG FELCOR LODGING LIMITED PARTNERSHIP, FELCOR LODGING TRUST INCORPORATED and THE PLACEMENT AGENTS NAMED HEREIN REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT") is made and entered into as of December 3, 2001, among FELCOR LODGING LIMITED PARTNERSHIP, a Delaware limited partnership (the "OPERATING PARTNERSHIP"), FELCOR LODGING TRUST INCORPORATED, a Maryland corporation ("FELCOR" and, together with the Operating Partnership, the "COMPANY"), and DEUTSCHE BANC ALEX. BROWN INC., J.P. MORGAN SECURITIES INC., BANC OF AMERICA SECURITIES LLC, MORGAN STANLEY & CO. INCORPORATED and SALOMON SMITH BARNEY INC., as placement agents (collectively, the "PLACEMENT AGENTS"). This Agreement is made pursuant to the Placement Agreement dated as of November 16, 2001, between the Operating Partnership, FelCor and the Placement Agents (the "PLACEMENT AGREEMENT"), which provides for the sale by the Operating Partnership to the Placement Agents of $100,000,000 aggregate principal amount of 9 1/2% Senior Notes due 2008 of the Operating Partnership (the "NOTES") to be issued pursuant to the Indenture (as defined below). The Notes will be guaranteed by FelCor and the Subsidiary Guarantors (as defined herein) so long as they are obligors on other indebtedness of FelCor and the Operating Partnership which is pari passu with or subordinated to the Notes. In order to induce the Placement Agents to enter into the Placement Agreement, the Company has agreed to provide to the Placement Agents and their direct and indirect transferees the registration rights with respect to the Notes set forth in this Agreement. The execution of this Agreement is a condition to the closing under the Placement Agreement. In consideration of the foregoing, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "1933 ACT" shall mean the Securities Act of 1933, as amended from time to time. "1934 ACT" shall mean the Securities Exchange Act of 1934, as amended from time to time. "CLOSING DATE" shall mean the Closing Date as defined in the Placement Agreement. "COMPANY" shall have the meaning set forth in the preamble to this Agreement and shall also include the Company's successors. "EXCHANGE NOTES" shall mean Notes issued by the Operating Partnership under the Indenture containing terms identical to the Notes (except that (i) interest thereon shall accrue from the last date on which interest was paid on the Notes or, if no such interest has been paid, from December 3, 2001, (ii) the Exchange Notes will not contain restrictions on transfer and (iii) certain provisions relating to an increase in the stated rate of interest thereon shall be eliminated) and to be offered to Holders of Notes in exchange for Notes pursuant to the Exchange Offer. "EXCHANGE OFFER" shall mean the exchange offer by the Company of Exchange Notes for Registrable Notes pursuant to Section 2(a) hereof. "EXCHANGE OFFER REGISTRATION" shall mean a registration under the 1933 Act effected pursuant to Section 2(a) hereof. -2- "EXCHANGE OFFER REGISTRATION STATEMENT" shall mean an exchange offer registration statement on Form S-4 (or, if applicable, on another appropriate form) and all amendments and supplements to such registration statement, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "HOLDER" shall mean the Placement Agents, for so long as any of them own any Registrable Notes, and their successors, assigns and direct and indirect transferees who become registered owners of Registrable Notes under the Indenture; provided that for purposes of Sections 4 and 5 of this Agreement, the term "Holder" shall include Participating Broker-Dealers (as defined in Section 4(a)). "INDENTURE" shall mean the Indenture relating to the Notes dated as of September 15, 2000 between the Operating Partnership, FelCor, the Subsidiary Guarantors and SunTrust Bank, as trustee, and as the same may be amended or supplemented from time to time in accordance with the terms thereof. "MAJORITY HOLDERS" shall mean the Holders of a majority of the aggregate principal amount of outstanding Registrable Notes; provided that whenever the consent or approval of Holders of a specified percentage of Registrable Notes is required hereunder, Registrable Notes held by the Company or any of its affiliates (as such term is defined in Rule 405 under the 1933 Act) (other than the Placement Agents or subsequent holders of Registrable Notes if such subsequent holders are deemed to be such affiliates solely by reason of their holding of such Registrable Notes) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage or amount. "NOTES" shall have the meaning set forth in the second paragraph of this Agreement. "PERSON" shall mean an individual, partnership, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof. "PLACEMENT AGENTS" shall have the meaning set forth in the preamble to this Agreement. "PLACEMENT AGREEMENT" shall have the meaning set forth in the second paragraph of this Agreement. "PROSPECTUS" shall mean the prospectus included in a Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including a prospectus supplement with respect to the terms of the offering of any portion of the Registrable Notes covered by a Shelf Registration Statement, and by all other amendments and supplements to such prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. "REGISTRABLE NOTES" shall mean the Notes other than the Exchanges Notes; provided, however, that a Note shall cease to be a Registrable Note (i) when a Registration Statement with respect to such Note shall have been declared effective under the 1933 Act and such Note shall have been disposed of pursuant to such Registration Statement, (ii) when such Note has been sold to the public pursuant to Rule 144(k) (or any similar provision then in force, but not Rule 144A) under the 1933 Act or (iii) when such Note shall have ceased to be outstanding. "REGISTRATION EXPENSES" shall mean any and all expenses incident to performance of or compliance by the Company with this Agreement, including without limitation: (i) all SEC, stock exchange or National Association of Securities Dealers, Inc. (the "NASD") registration and filing fees, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws (including reasonable fees and disbursements of counsel for any underwriters or Holders in connection with blue sky qualification of any of the Exchange Notes or Registrable Notes), (iii) all expenses of any Persons in preparing or assisting in preparing, word proc- -3- essing, printing and distributing any Registration Statement, any Prospectus, any amendments or supplements thereto, any underwriting agreements, securities sales agreements and other documents relating to the performance of and compliance with this Agreement, (iv) all rating agency fees, (v) all fees and disbursements relating to the qualification of the Indenture under applicable securities laws, (vi) the fees and disbursements of the Trustee and its counsel, (vii) the fees and disbursements of counsel for the Company and, in the case of a Shelf Registration Statement, the reasonable fees and disbursements of one counsel for the Holders (which counsel shall be selected by the Majority Holders and which counsel may also be counsel for the Placement Agents) and (viii) the fees and disbursements of the independent public accountants of the Company, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, but excluding fees and expenses of counsel to the underwriters (other than reasonable fees and expenses set forth in clause (ii) above) or the Holders and underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Notes by a Holder. "REGISTRATION STATEMENT" shall mean any registration statement of FelCor and the Operating Partnership that covers any of the Exchange Notes or Registrable Notes pursuant to the provisions of this Agreement and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "SEC" shall mean the Securities and Exchange Commission. "SHELF REGISTRATION" shall mean a registration effected pursuant to Section 2(b) hereof. "SHELF REGISTRATION STATEMENT" shall mean a "shelf" registration statement of the Company pursuant to the provisions of Section 2(b) of this Agreement which covers all of the Registrable Notes (but no other Notes unless approved by the Holders whose Registrable Notes are covered by such Shelf Registration Statement) on an appropriate form under Rule 415 under the 1933 Act, or any similar rule that may be adopted by the SEC, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "SUBSIDIARY GUARANTORS" shall mean each of (i) FelCor/CSS Hotels, L.L.C., a Delaware limited liability company, (ii) FelCor/LAX Hotels, L.L.C., a Delaware limited liability company, (iii) FelCor/CSS Holdings, L.P., a Delaware limited partnership, (iv) FelCor/St. Paul Holdings, L.P., a Delaware limited partnership, (v) FelCor/LAX Holdings, L.P., a Delaware limited partnership, (vi) FelCor Eight Hotels, L.L.C., a Delaware limited liability company, (vii) FelCor Hotel Asset Company, L.L.C., a Delaware limited liability company, (viii) FelCor Nevada Holdings L.L.C., a Nevada limited liability company, (ix) FHAC Nevada Holdings, L.L.C., a Nevada limited liability company, (x) FHAC Texas Holdings, L.P., a Texas limited partnership, (xi) FelCor Omaha Hotel Company, L.L.C., a Delaware limited liability company, (xii) FelCor Country Villa Hotel, L.L.C., a Delaware limited liability company, (xiii) FelCor Moline Hotel, L.L.C., a Delaware limited liability company, (xiv) FelCor Canada Co., a Nova Scotia unlimited liability company, (xv) Kingston Plantation Development Corp., a Delaware corporation, and (xvi) FelCor TRS Holdings, L.P., a Delaware limited partnership, and each other entity that becomes a Subsidiary Guarantor in accordance with the terms of the Indenture. "TRUSTEE" shall mean the trustee with respect to the Notes under the Indenture. "UNDERWRITTEN REGISTRATION" or "UNDERWRITTEN OFFERING" shall mean a registration in which Registrable Notes are sold to an Underwriter (as hereinafter defined) for reoffering to the public. -4- 2. Registration Under The 1933 Act. (a) To the extent not prohibited by any applicable law or applicable interpretation of the Staff of the SEC, the Company shall cause to be filed after the Closing Date an Exchange Offer Registration Statement covering the offer by the Company to the Holders to exchange all of the Registrable Notes for Exchange Notes, use its best efforts to have such Registration Statement declared effective by the SEC, and to have such Exchange Offer Registration Statement remain effective until the closing of the Exchange Offer. The Company shall commence the Exchange Offer promptly after the Exchange Offer Registration Statement has been declared effective by the SEC and use its best efforts to have the Exchange Offer consummated not later than 180 days after the Closing Date. The Company shall commence the Exchange Offer by mailing the related exchange offer Prospectus and accompanying documents to each Holder stating, in addition to such other disclosures as are required by applicable law: (i) that the Exchange Offer is being made pursuant to this Agreement and that all Registrable Notes validly tendered will be accepted for exchange; (ii) the dates of acceptance for exchange (which shall be a period of at least 20 business days from the date such notice is mailed) (the "EXCHANGE DATES"); (iii) that any Registrable Note not tendered will remain outstanding and continue to accrue interest in accordance with the terms of the Notes, but will not retain any rights under this Registration Rights Agreement; (iv) that Holders electing to have a Registrable Note exchanged pursuant to the Exchange Offer will be required to surrender such Registrable Note, together with the enclosed letters of transmittal, to the institution and at the address located in the Borough of Manhattan, The City of New York, specified in the notice prior to the close of business on the last Exchange Date; and (v) that Holders will be entitled to withdraw their election, not later than the close of business on the last Exchange Date, by sending to the institution and at the address located in the Borough of Manhattan, The City of New York, specified in the notice a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Registrable Notes delivered for exchange and a statement that such Holder is withdrawing his election to have such Notes exchanged. As soon as practicable after the last Exchange Date, the Company shall: (i) accept for exchange Registrable Notes or portions thereof tendered and not validly withdrawn pursuant to the Exchange Offer; and (ii) deliver, or cause to be delivered, to the Trustee for cancellation all Registrable Notes or portions thereof so accepted for exchange by the Company and issue, and cause the Trustee to promptly authenticate and mail to each Holder, an Exchange Note equal in principal amount to the principal amount of the Registrable Notes surrendered by such Holder. The Company shall use its best efforts to complete the Exchange Offer as provided above and shall comply with the applicable requirements of the 1933 Act, the 1934 Act and other applicable laws and regulations in connection with the Exchange Offer. The Exchange Offer shall not be subject to any conditions, other than that the Exchange Offer does not violate applicable law or any applicable interpretation of the Staff of the SEC. The Company shall inform the Placement Agents, if requested by the Placement Agents, of the names and addresses of the -5- Holders to whom the Exchange Offer is made, and the Placement Agents shall have the right, subject to applicable law, to contact such Holders and otherwise facilitate the tender of Registrable Notes in the Exchange Offer. (b) In the event that (i) the Company determines that the Exchange Offer Registration provided for in Section 2(a) above is not available or may not be consummated as soon as practicable after the last Exchange Date because it would violate applicable law or the applicable interpretations of the Staff of the SEC, (ii) the Exchange Offer is not for any other reason consummated on or prior to 180 days after the Closing Date, or (iii) in the opinion of counsel for the Placement Agents a Registration Statement must be filed and a Prospectus must be delivered by the Placement Agents in connection with any offering or sale of Registrable Notes, the Company shall cause to be filed as soon as practicable after such determination, date or notice of such opinion of counsel is given to the Company, a Shelf Registration Statement providing for the sale by the Holders of all of the Registrable Notes and use its best efforts to have such Shelf Registration Statement declared effective by the SEC. In the event the Company is required to file a Shelf Registration Statement solely as a result of the matters referred to in clause (iii) of the preceding sentence, the Company shall file and use its best efforts to have declared effective by the SEC both an Exchange Offer Registration Statement pursuant to Section 2(a) with respect to all Registrable Notes and a Shelf Registration Statement (which may be a combined Registration Statement with the Exchange Offer Registration Statement) with respect to offers and sales of Registrable Notes held by such Placement Agents after completion of the Exchange Offer. The Company agrees to use its best efforts to keep the Shelf Registration Statement continuously effective until the expiration of the period referred to in Rule 144(k) with respect to all Registrable Notes covered by the Shelf Registration Statement or such shorter period that will terminate when all of the Registrable Notes covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement. The Company further agrees to supplement or amend the Shelf Registration Statement if required by the rules, regulations or instructions applicable to the registration form used by the Company for such Shelf Registration Statement or by the 1933 Act or by any other rules and regulations thereunder for shelf registration or if reasonably requested by a Holder with respect to information relating to such Holder, and to use its best efforts to cause any such amendment to become effective and such Shelf Registration Statement to become usable as soon as thereafter practicable. The Company agrees to furnish to the Holders of Registrable Notes copies of any such supplement or amendment promptly after its being used or filed with the SEC. (c) The Company shall pay all Registration Expenses in connection with the registration pursuant to Section 2(a) or Section 2(b). Each Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable Notes pursuant to the Shelf Registration Statement. (d) An Exchange Offer Registration Statement pursuant to Section 2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b) hereof will not be deemed to have become effective unless it has been declared effective by the SEC; provided, however, that, if, after it has been declared effective, the offering of Registrable Notes pursuant to a Shelf Registration Statement is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, such Registration Statement will be deemed not to have become effective during the period of such interference until the offering of Registrable Notes pursuant to such Registration Statement may legally resume. As provided for in the Indenture, in the event that the Exchange Offer is not consummated, and if a Shelf Registration Statement is required hereby, the Shelf Registration Statement is not declared effective on or prior to 180 days after the Closing Date, the interest rate on the Notes (and the Exchange Notes) will increase by 0.5% per annum until the Exchange Offer is consummated or a Shelf Registration Statement is declared effective. (e) Without limiting the remedies available to the Placement Agents and the Holders, the Company acknowledges that any failure by the Company to comply with its obligations under Section 2(a) and -6- Section 2(b) hereof may result in material irreparable injury to the Placement Agents or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Placement Agents or any Holder may obtain such relief as may be required to specifically enforce the Company's obligations under Section 2(a) and Section 2(b) hereof. 3. Registration Procedures. In connection with the obligations of the Company with respect to the Registration Statements pursuant to Section 2(a) and Section 2(b) hereof, the Company shall as expeditiously as possible: (a) prepare and file with the SEC a Registration Statement on the appropriate form under the 1933 Act, which form (x) shall be selected by the Company and (y) shall, in the case of a Shelf Registration, be available for the sale of the Registrable Notes by the selling Holders thereof and (z) shall comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the SEC to be filed therewith, and use its best efforts to cause such Registration Statement to become effective and remain effective in accordance with Section 2 hereof; (b) prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary to keep such Registration Statement effective for the applicable period and cause each Prospectus to be supplemented by any required prospectus supplement and, as so supplemented, to be filed pursuant to Rule 424 under the 1933 Act; to keep each Prospectus current during the period described under Section 4(3) and Rule 174 under the 1933 Act that is applicable to transactions by brokers or dealers with respect to the Registrable Notes or Exchanges Notes; (c) in the case of a Shelf Registration, furnish to each Holder of Registrable Notes, to counsel for the Placement Agents, to counsel for the Holders and to each Underwriter of an Underwritten Offering of Registrable Notes, if any, without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto and such other documents as such Holder or Underwriter may reasonably request, in order to facilitate the public sale or other disposition of the Registrable Notes; and the Company consents to the use of such Prospectus and any amendment or supplement thereto in accordance with applicable law by each of the selling Holders of Registrable Notes and any such Underwriters in connection with the offering and sale of the Registrable Notes covered by and in the manner described in such Prospectus or any amendment or supplement thereto in accordance with applicable law; (d) use its reasonable best efforts to register or qualify the Registrable Notes under all applicable state securities or "blue sky" laws of such jurisdictions as any Holder of Registrable Notes covered by a Registration Statement shall reasonably request in writing by the time the applicable Registration Statement is declared effective by the SEC, to cooperate with such Holders in connection with any filings required to be made with the NASD and do any and all other acts and things which may be reasonably necessary or advisable to enable such Holder to consummate the disposition in each such jurisdiction of such Registrable Notes owned by such Holder; provided, however, that the Company shall not be required to (i) qualify as a foreign corporation or as a broker or dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (ii) file any general consent to service of process or (iii) subject itself to taxation in any such jurisdiction that it is already not so subject; (e) in the case of a Shelf Registration, notify each Holder of Registrable Notes, counsel for the Holders and counsel for the Placement Agents promptly and, if requested by any such Holder or counsel, confirm such advice in writing (i) when such Registration Statement has become effective and -7- when any post-effective amendment thereto has been filed and becomes effective, (ii) of any request by the SEC or any state securities authority for amendments and supplements to such Registration Statement and Prospectus or for additional information after such Registration Statement has become effective, (iii) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of such Registration Statement or the initiation of any proceedings for that purpose, (iv) if, between the effective date of such Registration Statement and the closing of any sale of Registrable Notes covered thereby, the representations and warranties of the Company contained in any underwriting agreement, securities sales agreement or other similar agreement, if any, relating to the offering cease to be true and correct in any material respect or if the Company receives any notification with respect to the suspension of the qualification of the Registrable Notes for sale in any jurisdiction or the initiation of any proceeding for such purpose, (v) of the happening of any event during the period a Shelf Registration Statement is effective such that such Registration Statement or the related Prospectus contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make statements therein not misleading and (vi) of any determination by the Company that a post-effective amendment to such Registration Statement would be appropriate; (f) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement at the earliest possible moment and provide immediate notice to each Holder of the withdrawal of any such order; (g) in the case of a Shelf Registration, furnish to each Holder of Registrable Notes, without charge, at least one conformed copy of each Registration Statement and any post-effective amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless requested); (h) in the case of a Shelf Registration, cooperate with the selling Holders of Registrable Notes to facilitate the timely preparation and delivery of certificates representing Registrable Notes to be sold and not bearing any restrictive legends and enable such Registrable Notes to be in such denominations (consistent with the provisions of the Indenture) and registered in such names as the selling Holders may reasonably request at least one business day prior to the closing of any sale of Registrable Notes; (i) in the case of a Shelf Registration, upon the occurrence of any event contemplated by Section 3(e)(v) or (vi) hereof, use its best efforts to prepare and file with the SEC a supplement or post-effective amendment to a Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Notes, such Prospectus will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The Company agrees to notify the Holders to suspend use of the Prospectus as promptly as practicable after the occurrence of such an event, and the Holders hereby agree to suspend use of the Prospectus upon receipt of such notice until the Company has amended or supplemented the Prospectus to correct such misstatement or omission; (j) a reasonable time prior to the filing of any Registration Statement, any Prospectus, any amendment to a Registration Statement or amendment or supplement to a Prospectus or any document which is to be incorporated by reference into a Registration Statement or a Prospectus after initial filing of a Registration Statement, provide copies of such document to the Placement Agents and their counsel, upon request, (and, in the case of a Shelf Registration Statement, the Holders and their counsel) and make such of the representatives of the Company as shall be reasonably requested by the Placement -8- Agents or their counsel (and, in the case of a Shelf Registration Statement, the Holders or their counsel) available for discussion of such document, and shall not at any time file or make any amendment to the Registration Statement, any Prospectus or any amendment of or supplement to a Registration Statement or a Prospectus or any document which is to be incorporated by reference into a Registration Statement or a Prospectus, of which the Placement Agents and their counsel (and, in the case of a Shelf Registration Statement, the Holders and their counsel) shall not have previously been advised and furnished a copy or to which the Placement Agents or their counsel (and, in the case of a Shelf Registration Statement, the Holders or their counsel) shall reasonably object; (k) to cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended (the "TIA"), in connection with the registration of the Exchange Notes or Registrable Notes, as the case may be, cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for the Indenture to be so qualified in accordance with the terms of the TIA and execute, and use its reasonable best efforts to cause the Trustee to execute, all documents as may be required to effect such changes and all other forms and documents required to be filed with the SEC to enable the Indenture to be so qualified in a timely manner; (l) in the case of a Shelf Registration, make available for inspection by a representative of the Holders of the Registrable Notes, any Underwriter participating in any disposition pursuant to such Shelf Registration Statement, and attorneys and accountants designated by the Holders, at reasonable times and in a reasonable manner, all financial and other records, pertinent documents and properties of the Company, and cause the respective officers, directors and employees of the Company to supply all information reasonably requested by any such representative, Underwriter, attorney or accountant in connection with a Shelf Registration Statement; (m) in the case of a Shelf Registration, use its best efforts to cause all Registrable Notes to be listed on any securities exchange or any automated system on which similar securities issued by FelCor or the Operating Partnership are then listed if requested by the Majority Holders, to the extent such Registrable Notes satisfy applicable listing requirements; (n) use its best efforts to cause the Exchange Notes or Registrable Notes, as the case may be, to be rated by two nationally recognized statistical rating organizations (as such term is defined in Rule 436(g)(2) under the 1933 Act); (o) if reasonably requested by any Holder of Registrable Notes covered by a Registration Statement in order to accurately reflect information regarding such Holder or such Holder's plan of distribution as required by such Registration Statement, (i) promptly incorporate in a Prospectus supplement or post-effective amendment such required information with respect to such Holder as such Holder reasonably requests to be included therein and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as the Company has received notification of the matters to be incorporated in such filing; and (p) in the case of a Shelf Registration, use its reasonable best efforts to enter into such customary agreements and take all such other actions in connection therewith (including those requested by the Holders of a majority of the Registrable Notes being sold) in order to expedite or facilitate the disposition of such Registrable Notes including, but not limited to, an Underwritten Offering and in such connection, (i) to the extent possible, make such representations and warranties to the Holders and any Underwriters of such Registrable Notes with respect to the business of the Company and its subsidiaries, the Registration Statement, Prospectus and documents incorporated by reference or deemed incorpo- -9- rated by reference, if any, in each case, in form, substance and scope as are customarily made by issuers to underwriters in Underwritten Offerings (but in no event more onerous to the Company than those contained in the Placement Agreement), and confirm the same if and when requested, (ii) obtain opinions of counsel to the Company (which counsel and opinions, in form, scope and substance, shall be reasonably satisfactory to the Holders and such Underwriters and their respective counsel) addressed to each selling Holder and Underwriter of Registrable Notes covering the matters customarily covered in opinions requested in Underwritten Offerings (but in no event more onerous to the Company than those opinions required in the Placement Agreement), (iii) obtain "cold comfort" letters from the independent certified public accountants of FelCor and the Operating Partnership (and, if necessary, any other certified public accountant of any subsidiary of the Company, or of any business acquired by the Company for which financial statements and financial data are or are required to be included in the Registration Statement) addressed to each selling Holder and Underwriter of Registrable Notes, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with Underwritten Offerings, and (iv) deliver such documents and certificates as may be reasonably requested by the Holders of a majority in principal amount of the Registrable Notes being sold or the Underwriters, and which are customarily delivered in Underwritten Offerings, to evidence the continued validity of the representations and warranties of the Company made pursuant to clause (i) above and to evidence compliance with any customary conditions contained in an underwriting agreement. In the case of a Shelf Registration Statement, the Company may require each Holder of Registrable Notes to furnish to the Company such information regarding such Holder and the proposed distribution by such Holder of such Registrable Notes as the Company may from time to time reasonably request in writing. In the case of a Shelf Registration Statement, each Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(e)(v) or (vi) hereof, such Holder will forthwith discontinue disposition of Registrable Notes pursuant to a Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(i) hereof, and, if so directed by the Company, such Holder will deliver to the Company (at its expense) all copies in its possession, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Notes current at the time of receipt of such notice. The Company may suspend the availability of any Shelf Registration Statement for not more than two times during any 365 day period and any such suspensions may not exceed 30 days for each suspension. If the Company shall give any such notice to suspend the disposition of Registrable Notes pursuant to a Registration Statement, the Company shall extend the period during which the Registration Statement shall be maintained effective pursuant to this Agreement by the number of days during the period from and including the date of the giving of such notice to and including the date when the Company shall have made available to the Holders copies of the supplemented or amended Prospectus necessary to resume such dispositions. The Holders of Registrable Notes covered by a Shelf Registration Statement who desire to do so may sell such Registrable Notes in an Underwritten Offering; provided that the Company shall be required to use its best efforts to make an Underwritten Offering only upon the request of Holders of at least 25% of the Registrable Notes outstanding at the time such request is delivered to the Company. In the case of any Underwritten Offering, the Company shall (x) provide written notice to the Holders of all Registrable Notes of such Underwritten Offering at least 30 days prior to the filing of a prospectus for such Underwritten Offering, (y) specify a date, which shall be no earlier than 10 days following the date of such notice, by which each such Holder must inform the Company of its intent to participate in such Underwritten Offering and (z) include reasonable procedures that are customary to underwritten offerings of the type contemplated herein that such Holder must follow in order to participate in such Underwritten Offering. In any such Underwritten Offering, the investment banker or invest- -10- ment bankers and manager or managers (the "UNDERWRITERS") that will administer the offering will be selected by the Majority Holders of the Registrable Notes included in such offering and shall be approved by the Company, which approval shall not be unreasonably withheld. 4. Participation of Broker-Dealers In Exchange Offer. (a) The Staff of the SEC has taken the position that any broker-dealer that receives Exchange Notes for its own account in the Exchange Offer in exchange for Notes that were acquired by such broker-dealer as a result of market-making or other trading activities (a "PARTICIPATING BROKER-DEALER"), may be deemed to be an "underwriter" within the meaning of the 1933 Act and must deliver a prospectus meeting the requirements of the 1933 Act in connection with any resale of such Exchanges Notes. The Company understands that it is the Staff's position that if the Prospectus contained in the Exchange Offer Registration Statement includes a plan of distribution containing a statement to the above effect and the means by which Participating Broker-Dealers may resell the Exchange Notes, without naming the Participating Broker-Dealers or specifying the amount of Exchange Notes owned by them, such Prospectus may be delivered by Participating Broker-Dealers to satisfy their prospectus delivery obligation under the 1933 Act in connection with resales of Exchange Notes for their own accounts, so long as the Prospectus otherwise meets the requirements of the 1933 Act. (b) In light of the above, notwithstanding the other provisions of this Agreement, the Company agrees that the provisions of this Agreement as they relate to a Shelf Registration shall also apply to an Exchange Offer Registration to the extent, and with such reasonable modifications thereto as may be, reasonably requested by the Placement Agents or by one or more Participating Broker-Dealers, in each case as provided in clause (ii) below, in order to expedite or facilitate the disposition of any Exchange Notes by Participating Broker-Dealers consistent with the positions of the Staff recited in Section 4(a) above; provided that: (i) the Company shall not be required to amend or supplement the Prospectus contained in the Exchange Offer Registration Statement, as would otherwise be contemplated by Section 3(i), for a period exceeding 180 days after the last Exchange Date (as such period may be extended pursuant to the penultimate paragraph of Section 3 of this Agreement) and Participating Broker-Dealers shall not be authorized by the Company to deliver and shall not deliver such Prospectus after such period in connection with the resales contemplated by this Section 4; and (ii) the application of the Shelf Registration procedures set forth in Section 3 of this Agreement to an Exchange Offer Registration, to the extent not required by the positions of the Staff of the SEC or the 1933 Act and the rules and regulations thereunder, will be in conformity with the reasonable request to the Company by the Placement Agents or with the reasonable request in writing to the Company by one or more broker-dealers who certify to the Placement Agents and the Company in writing that they anticipate that they will be Participating Broker-Dealers; and provided further that, in connection with such application of the Shelf Registration procedures set forth in Section 3 to an Exchange Offer Registration, the Company shall be obligated (x) to deal only with one entity representing the Participating Broker-Dealers, which shall be Deutsche Bank Securities Inc. unless it elects not to act as such representative, (y) to pay the fees and expenses of only one counsel representing the Participating Broker-Dealers, which shall be counsel to the Placement Agents unless such counsel elects not to so act and (z) to cause to be delivered only one, if any, "cold comfort" letter with respect to the Prospectus in the form existing on the last Exchange Date and with respect to each subsequent amendment or supplement, if any, effected during the period specified in clause (i) above. -11- (c) The Placement Agents shall have no liability to the Company or any Holder with respect to any request that it may make pursuant to Section 4(b) above. 5. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each Placement Agent, each Holder and each person, if any, who controls such Placement Agent or any Holder within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, or is under common control with, or is controlled by, such Placement Agents or any Holder, from and against all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred by such Placement Agent, any Holder or any such controlling or affiliated person in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment thereto) pursuant to which Exchange Notes or Registrable Notes were registered under the 1933 Act, including all documents incorporated therein by reference, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or caused by any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to such Placement Agent or any Holder furnished to the Company in writing by such Placement Agent or such Holder expressly for use therein. In connection with any Underwritten Offering permitted by Section 3, the Company will also indemnify the Underwriters, if any, their officers and directors and each Person who controls such Persons (within the meaning of the Securities Act and the Exchange Act) to the same extent as provided above with respect to the indemnification of the Holders, if requested in connection with any Registration Statement. (b) Each Holder agrees, severally and not jointly, to indemnify and hold harmless the Company, each Placement Agent and the other selling Holders, and each of their respective directors, officers who sign the Registration Statement and each person, if any, who controls the Company, each Placement Agent and any other selling Holder within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act to the same extent as the foregoing indemnity from the Company to each Placement Agent and the Holders, but only with reference to information relating to such Holder furnished to the Company in writing by such Holder expressly for use in any Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto). (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to either paragraph (a) or paragraph (b) above, such person (the "INDEMNIFIED PARTY") shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the reasonable fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them or (iii) the indemnifying party does not, within a reasonable period of time after request of such indemnified party, retain counsel to represent such indemnified party. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (A) the reasonable fees and expenses of more than -12- one separate firm (in addition to any local counsel) for the Placement Agents and all persons, if any, who control the Placement Agents within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, (B) the reasonable fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors and officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either such Section and (C) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Holders and all persons, if any, who control any Holders within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In such case involving the Placement Agents and persons who control the Placement Agents, such firm shall be designated in writing by Deutsche Banc Alex. Brown, Inc. In such case involving the Holders and such persons who control Holders, such firm shall be designated in writing by the Majority Holders. In all other cases, such firm shall be designated by the Company. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but, if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for reasonable fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party for such fees and expenses of counsel in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which such indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (d) If the indemnification provided for in paragraph (a) or paragraph (b) of this Section 5 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company and the Holders shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Holders and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Holders' respective obligations to contribute pursuant to this Section 5(d) are several in proportion to the respective number of Registrable Notes of such Holder that were registered pursuant to a Registration Statement. (e) The Company and each Holder agree that it would not be just or equitable if contribution pursuant to this Section 5 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in paragraph (d) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5, no Holder shall be required to indemnify or contribute any amount in excess of the amount by which the total price at which Registrable Notes were sold by such Holder exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation -13- (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 5 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. The indemnity and contribution provisions contained in this Section 5 shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of the Placement Agents, any Holder or any person controlling the Placement Agents or any Holder, or by or on behalf of the Company, its officers or directors or any person controlling the Company, (iii) acceptance of any of the Exchange Notes and (iv) any sale of Registrable Notes pursuant to a Shelf Registration Statement. 6. Miscellaneous. (a) No Inconsistent Agreements. The Company has not entered into, and on or after the date of this Agreement will not enter into, any agreement which is inconsistent with the rights granted to the Holders of Registrable Notes in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's other issued and outstanding securities under any such agreements. (b) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of Holders of at least a majority in aggregate principal amount of the outstanding Registrable Notes affected by such amendment, modification, supplement, waiver or consent; provided, however, that no amendment, modification, supplement, waiver or consents to any departure from the provisions of Section 5 hereof shall be effective as against any Holder of Registrable Notes unless consented to in writing by such Holder. (c) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, facsimile or any courier guaranteeing overnight delivery (i) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of this Section 6(c), which address initially is, with respect to the Placement Agents, the address set forth in the Placement Agreement; and (ii) if to the Company, initially at the Company's address set forth in the Placement Agreement and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 6(c). All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when receipt is confirmed, if faxed; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands, or other communications shall be concurrently delivered by the person giving the same to the Trustee, at the address specified in the Indenture. (d) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; provided that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Notes in violation of the terms of the Placement Agreement. If any transferee of any Holder shall acquire Registrable Notes, in any manner, whether by operation of law or otherwise, such Registrable Notes shall be held subject to all of the terms of this Agreement, and by taking -14- and holding such Registrable Notes such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement and such person shall be entitled to receive the benefits hereof. The Placement Agents (in their capacity as Placement Agents) shall have no liability or obligation to the Company with respect to any failure by a Holder to comply with, or any breach by any Holder of, any of the obligations of such Holder under this Agreement. (e) Purchases and Sales of Notes. The Company shall not, and shall use its best efforts to cause its affiliates (as defined in Rule 405 under the 1933 Act) not to, purchase and then resell or otherwise transfer any Notes other than Notes acquired and cancelled. (f) Third Party Beneficiary. The Holders shall be third party beneficiaries to the agreements made hereunder between the Company, on the one hand, and the Placement Agents, on the other hand, and shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder. (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. (j) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. FELCOR LODGING TRUST INCORPORATED By: /s/ Lawrence D. Robinson ------------------------------------------- Lawrence D. Robinson Executive Vice President & General Counsel FELCOR LODGING LIMITED PARTNERSHIP By: FelCor Lodging Trust Incorporated, General Partner By: /s/ Lawrence D. Robinson ------------------------------------------- Lawrence D. Robinson Executive Vice President & General Counsel S-1 The foregoing Registration Rights Agreement is hereby confirmed and accepted as of the date hereof by: DEUTSCHE BANC ALEX. BROWN INC. J.P. MORGAN SECURITIES INC. BANC OF AMERICA SECURITIES LLC MORGAN STANLEY & CO. INCORPORATED SALOMON SMITH BARNEY INC. Acting on behalf of itself and as Representative of the several Placement Agents By: DEUTSCHE BANC ALEX. BROWN INC. By: /s/ A. Drew Goldman ---------------------------------------------- Name: A. Drew Goldman Title: Director By: /s/ [ILLEGIBLE] ---------------------------------------------- Name: Title: S-2 EX-21 9 d95331ex21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 LIST OF THE SUBSIDIARIES OF FELCOR LODGING TRUST INCORPORATED (as of December 31, 2001)
STATE AND FORM OF NAME ORGANIZATION ---- ----------------- FelCor Nevada Holdings, L.L.C. Nevada; Limited Liability Company Special Remote I, Inc. Delaware; Corporation FelCor Lodging Limited Partnership Delaware; Limited Partnership FelCor/CSS Hotels, L.L.C. Delaware; Limited Liability Company FelCor/CSS Holdings, L.P. Delaware; Limited Partnership FelCor/St. Paul Holdings, L.P. Delaware; Limited Partnership FelCor/Charlotte Hotel, L.L.C. Delaware; Limited Liability Company FelCor/Indianapolis Hotel, L.L.C. Delaware; Limited Liability Company E.S. Charlotte Limited Partnership Minnesota; Limited Partnership E.S. North, an Indiana Limited Partnership Indiana; Limited Partnership FCH/PSH, L.P. Pennsylvania; Limited Partnership FelCor Lodging Holding Company, L.L.C. Delaware; Limited Liability Company FelCor Lodging Company, L.L.C. Delaware; Limited Liability Company FelCor Hotel Operating Company, L.L.C. Delaware; Limited Liability Company FelCor Pennsylvania Company, L.L.C. Delaware; Limited Liability Company FelCor Hospitality Holding Company, L.L.C. Delaware; Limited Liability Company FelCor Hospitality Company, L.L.C. Delaware; Limited Liability Company FelCor Hotel Asset Company, L.L.C. Delaware; Limited Liability Company FHAC Nevada Holdings, L.L.C. Nevada; Limited Liability Company FHAC Texas Holdings, L.P. Texas; Limited Partnership FelCor HHCL Company, L.L.C. Delaware; Limited Liability Company FelCor Hotels GenPar, L.L.C. Delaware; Limited Liability Company FelCor Hotels LimPar, L.L.C. Delaware; Limited Liability Company HHHC GenPar, L.P. Delaware; Limited Partnership FelCor Hotel Company, Ltd. Texas; Limited Partnership
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STATE AND FORM OF NAME ORGANIZATION ---- ----------------- FelCor Hotels GenPar II, L.L.C. Delaware; Limited Liability Company FelCor Hotel Company II, Ltd. Texas; Limited Partnership FelCor Chat-Lem, L.L.C. Delaware; Limited Liability Company HI Chat-Lem/Iowa - New Orleans Venture Louisiana; General Partnership FelCor Philadelphia Center, L.L.C. Delaware; Limited Liability Company FelCor Marshall Motels, L.L.C. Delaware; Limited Liability Company Center City Hotel Associates Pennsylvania; Limited Partnership FelCor Hotels Financing II, L.L.C. Delaware; Limited Liability Company FelCor Hotels Financing I, L.L.C. Delaware; Limited Liability Company FelCor Hotels Investments I, Ltd. Texas; Limited Partnership FelCor Hotels Investments II, Ltd. Texas; Limited Partnership FelCor Salt Lake, L.L.C. Delaware; Limited Liability Company FelCor St. Louis Company, L.L.C. Delaware; Limited Liability Company FelCor Canada Holding GP, L.L.C. Delaware; Limited Liability Company FelCor Canada Holding, L.P. Delaware; Limited Partnership FelCor Canada Co. Nova Scotia; Unlimited Liability Company FelCor Omaha Hotel Company, L.L.C. Delaware; Limited Liability Company FelCor Country Villa Hotel, L.L.C. Delaware; Limited Liability Company FelCor Moline Hotel, L.L.C. Delaware; Limited Liability Company FelCor Eight Hotels, L.L.C. Delaware; Limited Liability Company EPT Meadowlands Limited Partnership Delaware; Limited Partnership EPT Kansas City Limited Partnership Delaware; Limited Partnership EPT San Antonio Limited Partnership Delaware; Limited Partnership EPT Austin Limited Partnership Delaware; Limited Partnership EPT Overland Park Limited Partnership Delaware; Limited Partnership EPT Atlanta - Perimeter Center Limited Partnership Delaware; Limited Partnership EPT Raleigh Limited Partnership Delaware; Limited Partnership EPT Covina Limited Partnership Delaware; Limited Partnership
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STATE AND FORM OF NAME ORGANIZATION ---- ----------------- Promus/FCH Condominium Company, L.L.C. Delaware; Limited Liability Company Promus/FCH Development Company, L.L.C. Delaware; Limited Liability Company Promus/FelCor San Antonio Venture Texas; General Partnership Promus/FelCor Parsippany Venture New Jersey; General Partnership MHV Joint Venture Texas; General Partnership Promus/FelCor Lombard Venture Illinois; General Partnership Promus/FelCor Hotels, L.L.C. Delaware; Limited Liability Company Kingston Plantation Development Corp. Delaware; Corporation Promus/FelCor Manager, Inc. Delaware; Corporation FelCor/New Orleans Annex, L.L.C. Delaware; Limited Liability Company Brighton at Kingston Plantation, L.L.C. Delaware; Limited Liability Company Margate Towers at Kingston Plantation, L.L.C. Delaware; Limited Liability Company FCH/Deerfield Development Co, L.L.C. Delaware; Limited Liability Company FCH/DT Hotels, L.L.C. Delaware; Limited Liability Company FCH/DT Holdings, L.P. Delaware; Limited Partnership FCH/DT BWI Holdings, L.P. Delaware; Limited Partnership FelCor/LAX Hotels, L.L.C. Delaware; Limited Liability Company FelCor/LAX Holdings, L.P. Delaware; Limited Partnership Los Angeles International Airport Hotel Associates, a Texas; Limited Partnership Texas limited partnership Park Central Joint Venture Texas; General Partnership FelCor Airport Utilities, L.L.C. Delaware; Limited Liability Company FelCor/MM Hotels, L.L.C. Delaware; Limited Liability Company FelCor/MM Holdings, L.P. Delaware; Limited Partnership Tysons Corner Hotel Company, L.L.C. Delaware; Limited Liability Company FelCor/MM S-7 Hotels, L.L.C. Delaware; Limited Liability Company FelCor/MM S-7 Holdings, L.P. Delaware; Limited Partnership FelCor/CMB Buckhead Hotel, L.L.C. Delaware; Limited Liability Company
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STATE AND FORM OF NAME ORGANIZATION ---- ----------------- FelCor/CMB Corpus Hotel, L.L.C. Delaware; Limited Liability Company FelCor/CMB Corpus Holdings, L.P. Delaware; Limited Partnership FelCor/CMB Deerfield Hotel, L.L.C. Delaware; Limited Liability Company FelCor/CMB Marlborough Hotel, L.L.C. Delaware; Limited Liability Company FelCor/CMB New Orleans Hotel, L.L.C. Delaware; Limited Liability Company FelCor/CMB Orsouth Hotel, L.L.C. Delaware; Limited Liability Company FelCor/CMB Orsouth Holdings, L.P. Delaware; Limited Partnership FelCor/CMB Piscataway Hotel, L.L.C. Delaware; Limited Liability Company FelCor/CMB SSF Hotel, L.L.C. Delaware; Limited Liability Company FelCor/CMB SSF Holdings, L.P. Delaware; Limited Partnership FCH/IHC Hotels, L.P. Delaware; Limited Partnership FCH/IHC Dallas Holdings, L.L.C. Delaware; Limited Liability Company FCH/IHC Dallas Hotels, L.P. Delaware; Limited Partnership FCH/IHC I-10 Holdings, L.L.C. Delaware; Limited Liability Company FCH/IHC I-10 Hotels, L.P. Delaware; Limited Partnership FCH/IHC Atlanta Hotels, L.L.C. Delaware; Limited Liability Company FCH/IHC Scottsdale Hotels, L.L.C. Delaware; Limited Liability Company FCH/IHC Houston Holdings, L.L.C. Delaware; Limited Liability Company FCH/IHC Houston Hotels, L.P. Delaware; Limited Partnership FelCor TRS I, L.L.C. Delaware; Limited Liability Company FelCor TRS Holdings, L.P. Delaware; Limited Partnership FelCor TRS II, Inc. Delaware; Corporation DJONT Operations, L.L.C. Delaware; Limited Liability Company DJONT Leasing, L.L.C. Delaware; Limited Liability Company DJONT/EPT Manager, Inc. Delaware; Corporation DJONT/EPT Leasing, L.L.C. Delaware; Limited Liability Company
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STATE AND FORM OF NAME ORGANIZATION ---- ----------------- FCH/DT Leasing, L.L.C. Delaware; Limited Liability Company FCH/DT Leasing II, L.L.C. Delaware; Limited Liability Company FCH/SH Leasing, L.L.C. Delaware; Limited Liability Company FCH/SH Leasing II, L.L.C. Delaware; Limited Liability Company DJONT/CMB Buckhead Leasing, L.L.C. Delaware; Limited Liability Company DJONT/CMB FCOAM, L.L.C. Delaware; Limited Liability Company DJONT/CMB Deerfield Leasing, L.L.C. Delaware; Limited Liability Company DJONT/CMB Corpus Leasing, L.L.C. Delaware; Limited Liability Company DJONT/CMB SSF Leasing, L.L.C. Delaware; Limited Liability Company DJONT/CMB Orsouth Leasing, L.L.C. Delaware; Limited Liability Company DJONT/CMB NEW ORLEANS LEASING, L.L.C. Delaware; Limited Liability Company DJONT/CMB Piscataway Leasing, L.L.C. Delaware; Limited Liability Company BHR Operations, L.L.C. Delaware; Limited Liability Company FCH/JVEIGHT Leasing, L.L.C. Delaware; Limited Liability Company FCH/IHC Leasing, L.P. Delaware; Limited Partnership FCH/IHC Atlanta Leasing, L.L.C. Delaware; Limited Liability Company FCH/IHC Scottsdale Leasing, L.L.C. Delaware; Limited Liability Company FCH/IHC I-10 Leasing GP, L.L.C. Delaware; Limited Liability Company FCH/IHC I-10 Leasing, L.P. Delaware; Limited Partnership FCH/IHC Houston Leasing GP, L.L.C. Delaware; Limited Liability Company FCH/IHC Houston Leasing, L.P. Delaware; Limited Partnership FCH/IHC Dallas Leasing GP, L.L.C. Delaware; Limited Liability Company FCH/IHC Dallas Leasing, L.P. Delaware; Limited Partnership BHR Hotels Finance, Inc. Delaware; Corporation BHR Dallas Tenant Company, L.P. Delaware; Limited Partnership BHR Plano Tenant Company, L.P. Delaware; Limited Partnership
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STATE AND FORM OF NAME ORGANIZATION ---- ----------------- BHR Lodging Tenant Company Delaware; Corporation BHR Canada Tenant Company Nova Scotia; Unlimited Liability Company BHR Salt Lake Tenant Company, L.L.C. Delaware; Limited Liability Company
-6- EX-23.1 10 d95331ex23-1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (File Nos. 333-04947, 333-25717, 333-46357, 333-50509, 333-62599, and 333-51588) and Form S-8 (File Nos. 333-32579, 333-66041, and 333-69869) of FelCor Lodging Trust Incorporated of our report dated February 6, 2002 relating to the financial statements, which appears in the Annual Report to Stockholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated February 6, 2002 relating to the financial statement schedules, which appears in this Form 10-K. We also consent to the references to us under the heading "Selected Financial Data", which appears in this Form 10-K. PricewaterhouseCoopers LLP Dallas, Texas March 28, 2002 -----END PRIVACY-ENHANCED MESSAGE-----