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FILED PURSUANT TO RULE NO. 424(b)(3)
REGISTRATION NO. 333-22495
LOGO JOINT PROXY STATEMENT/PROSPECTUS
LOGO
SPECIAL MEETING OF STOCKHOLDERS OF
STUDIO PLUS HOTELS, INC.
AND
SPECIAL MEETING OF STOCKHOLDERS OF
EXTENDED STAY AMERICA, INC.
This Joint Proxy Statement/Prospectus is being furnished to the holders of
common stock, par value $.01 per share (the "Studio Plus Common Stock"), of
Studio Plus Hotels, Inc., a Virginia corporation ("Studio Plus"), and to the
holders of common stock, par value $.01 per share (the "ESA Common Stock"), of
Extended Stay America, Inc., a Delaware corporation ("ESA"), in connection
with the solicitation of proxies by the respective Boards of Directors of
Studio Plus and ESA for use at the special meeting of stockholders of Studio
Plus and at the special meeting of stockholders of ESA, and at any
adjournments or postponements thereof (the "Studio Plus Meeting" and the "ESA
Meeting," respectively, and together, the "Meetings").
At the Studio Plus Meeting, stockholders of Studio Plus will be asked to
consider and vote upon an Agreement and Plan of Merger, dated as of January
16, 1997, by and among ESA, ESA Merger Sub, Inc., a Delaware corporation and a
wholly-owned subsidiary of ESA ("Merger Sub"), and Studio Plus (the "Merger
Agreement"), providing for the merger of Studio Plus with and into Merger Sub
(the "Merger"). If the proposed Merger is consummated, stockholders of Studio
Plus will be entitled to receive 1.2272 (the "Exchange Ratio") shares of ESA
Common Stock for each share of Studio Plus Common Stock (the "Merger
Consideration") owned by them. Merger Sub will be the surviving corporation
and will change its name to Studio Plus Hotels, Inc. and will be a wholly-
owned subsidiary of ESA.
At the ESA Meeting, stockholders of ESA will be asked (i) to consider and
vote upon a proposal to approve the Merger Agreement and the related
transactions; (ii) to approve an amendment to the Restated Certificate of
Incorporation of ESA (the "ESA Charter") to increase the number of authorized
shares of ESA Common Stock from 200 million to 500 million (the "ESA Charter
Amendment"); (iii) to consider and vote upon a proposal to approve and adopt
the Extended Stay America, Inc. 1997 Employee Stock Option Plan (the "1997
Plan"); and (iv) to transact such other business as may properly come before
the ESA Meeting.
ESA has filed a registration statement on Form S-4 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with the Securities and Exchange Commission (the "Commission"),
covering the shares of ESA Common Stock to be issued in the event the proposed
Merger is consummated. This document also constitutes the prospectus of ESA
filed as part of the Registration Statement.
SEE "RISK FACTORS" ON PAGE 23 FOR A DISCUSSION OF CERTAIN INFORMATION
RELEVANT TO OWNERSHIP OF ESA COMMON STOCK.
In the event the proposed Merger is consummated, ESA will issue
approximately 15,411,000 shares of ESA Common Stock in exchange for all of the
shares of Studio Plus Common Stock outstanding at that time, which would
constitute approximately 16.2% of the outstanding shares of ESA Common Stock
after giving effect to such issuance. ESA may also issue up to approximately
1,439,000 additional shares of ESA Common Stock pursuant to the Studio Plus
1995 Stock Incentive Plan and the Studio Plus 1995 Non-Employee Directors'
Stock Incentive Plan (collectively, the "Studio Plus Stock Plans"). For more
information regarding the Studio Plus Stock Plans, see "The Merger--Treatment
of Studio Plus Options."
All information concerning Studio Plus contained in this Joint Proxy
Statement/Prospectus has been supplied by Studio Plus, and all information
concerning ESA contained in this Joint Proxy Statement/Prospectus has been
supplied by ESA.
THE ESA COMMON STOCK TO BE ISSUED PURSUANT TO THIS JOINT PROXY
STATEMENT/PROSPECTUS HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This Joint Proxy Statement/Prospectus is dated March 6, 1997 and is first
being mailed to Studio Plus and ESA stockholders on or about March 10, 1997.
<PAGE>
AVAILABLE INFORMATION
ESA and Studio Plus are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, each files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following Regional Offices of the Commission: Chicago
Regional Office, 500 West Madison Street, Chicago, Illinois 60661; and New
York Regional Office, Seven World Trade Center, New York, New York 10048.
Copies of such material can be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. Such reports and other information, including the Registration
Statement and the exhibits thereto, are also available on the Commission's Web
site at http://www.sec.gov.
ESA has filed with the Commission a Registration Statement on Form S-4 under
the Securities Act, covering shares of ESA Common Stock to be issued in the
Merger. This Joint Proxy Statement/Prospectus does not contain all of the
information in the Registration Statement, as permitted by the rules of the
Commission. For further information with respect to ESA or Studio Plus,
reference is made to the Registration Statement, including exhibits and other
documents filed with or incorporated as a part thereof. Statements in this
Joint Proxy Statement/Prospectus as to the contents of any contract,
agreement, or other document filed with, or incorporated by reference in, the
Registration Statement are summaries only and are not necessarily complete.
For complete information as to these matters, refer to the applicable exhibit
or schedule to the Registration Statement and each such statement is qualified
in its entirety by reference to the copy of the applicable document filed with
the Commission. The Registration Statement and the related exhibits and other
documents filed by ESA or Studio Plus with the Commission and incorporated by
reference herein may be inspected at the reference facilities of the
Commission listed above.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY ESA OR STUDIO PLUS.
INFORMATION INCORPORATED BY REFERENCE
ESA's Annual Report on Form 10-K for the fiscal year ended December 31, 1996
(the "ESA 1996 10-K"), Current Reports on Form 8-K dated January 16, 1997 (as
amended on Form 8-K/A dated January 16, 1997) and February 5, 1997,
registration statement on Form 8-A dated November 8, 1995, and the historical
financial statements of Welcome, Apartment/Inn, Hometown Inn, Gwinnett, the
M&M Facilities, and KHEC (each as defined herein) included in Post-Effective
Amendment No. 4 to ESA's Registration Statement on Form S-1 (Registration No.
333-102) are hereby incorporated by reference into this Joint Proxy
Statement/Prospectus. Studio Plus' Annual Report on Form 10-K for the fiscal
year ended December 31, 1996 (the "Studio Plus 1996 10-K"), and Current Report
on Form 8-K dated January 16, 1997, are hereby incorporated by reference into
this Joint Proxy Statement/Prospectus. All documents filed by ESA or Studio
Plus with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this Joint Proxy Statement/Prospectus and prior
to the Effective Time (as defined herein) shall be deemed to be incorporated
by reference into this Joint Proxy Statement/Prospectus and to be a part
hereof from the date of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Joint Proxy
Statement/Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Joint Proxy
Statement/Prospectus.
2
<PAGE>
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH
DOCUMENTS, OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY
INCORPORATED BY REFERENCE THEREIN, ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON,
INCLUDING ANY ESA OR STUDIO PLUS STOCKHOLDER, TO WHOM THIS JOINT PROXY
STATEMENT/PROSPECTUS IS DELIVERED UPON WRITTEN OR ORAL REQUEST TO, IN THE CASE
OF DOCUMENTS RELATING TO ESA, SECRETARY, EXTENDED STAY AMERICA, INC., 450 EAST
LAS OLAS BOULEVARD, SUITE 1100, FT. LAUDERDALE, FLORIDA 33301, TELEPHONE
NUMBER (954) 713-1600 AND, IN THE CASE OF DOCUMENTS RELATING TO STUDIO PLUS,
SECRETARY, STUDIO PLUS HOTELS, INC., 1999 RICHMOND ROAD, SUITE FOUR,
LEXINGTON, KENTUCKY 40502, TELEPHONE NUMBER (606) 269-1999. IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BEFORE APRIL 1,
1997.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Information Incorporated By Reference..................................... 2
Summary................................................................... 6
Introduction.............................................................. 21
General................................................................. 21
Record Date; Voting Rights; Vote Required............................... 21
Proxy Solicitation...................................................... 22
Risk Factors.............................................................. 23
The Merger................................................................ 28
General................................................................. 28
Background of the Merger................................................ 28
Studio Plus' Reasons for the Merger; Recommendation of Studio Plus'
Board of Directors..................................................... 31
Opinion of Studio Plus' Financial Advisor............................... 33
ESA's Reasons for the Merger; Recommendation of ESA's Board of Direc-
tors................................................................... 37
Opinion of ESA's Financial Advisor...................................... 38
Management of ESA After the Merger; Interests of Certain Persons in the
Merger................................................................. 40
Exchange of Shares; Fractional Shares................................... 40
Stockholder Agreement................................................... 41
Voting Agreement........................................................ 42
Registration Rights Agreement........................................... 42
Amendment to Rights Plan................................................ 42
Accounting Treatment.................................................... 42
Conditions to the Merger................................................ 42
Alternative Proposals................................................... 43
Termination............................................................. 43
Expenses................................................................ 44
Treatment of Studio Plus Options........................................ 44
Restrictions on Resale; Affiliate Agreements............................ 44
Certain Federal Income Tax Consequences................................. 45
Dissenters' Rights...................................................... 46
Comparative Rights of Stockholders........................................ 47
Unaudited Pro Forma Condensed Combined Financial Statements of ESA and
Studio Plus.............................................................. 54
Business of Studio Plus; Recent Developments.............................. 61
Business of ESA; Recent Developments...................................... 62
ESA Additional Proposal Number 1--ESA Charter Amendment................... 64
ESA Additional Proposal Number 2--Approval of 1997 Plan................... 65
Other Matters............................................................. 66
Certain Legal Matters..................................................... 66
Experts................................................................... 67
</TABLE>
4
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<TABLE>
<C> <S>
Appendix A --Agreement and Plan of Merger
Appendix B --Opinion of Smith Barney Inc.
Appendix C --Opinion of Donaldson, Lufkin & Jenrette Securities Corporation
Appendix D --Article 15 of the Virginia Stock Corporation Act
Appendix E --Certificate of Amendment to ESA's Restated Certificate of
Incorporation
Appendix F --Extended Stay America, Inc. 1997 Employee Stock Option Plan
</TABLE>
5
<PAGE>
SUMMARY
Certain significant matters discussed in this Joint Proxy
Statement/Prospectus are summarized below. This Summary is not intended to be
complete and is qualified in all respects by reference to the more detailed
information appearing or incorporated by reference in this Joint Proxy
Statement/Prospectus. Stockholders are urged to review carefully the entire
Joint Proxy Statement/Prospectus (including the Appendices and the documents
incorporated herein by reference). All references in this Joint Proxy
Statement/Prospectus to ESA Common Stock and Studio Plus Common Stock,
including prices and earnings per share, give effect to a 2-for-1 stock split
in the form of a stock dividend of ESA Common Stock effected on July 19, 1996
(the "1996 ESA Stock Split") and a 3-for-2 stock split in the form of a stock
dividend of Studio Plus Common Stock effected on July 9, 1996 (the "1996 Studio
Plus Stock Split").
GENERAL INFORMATION
EXTENDED STAY AMERICA, ESA develops, owns, and manages extended stay lodg-
INC...................... ing facilities which are designed to appeal to
value-conscious guests. ESA's facilities are de-
signed to offer quality accommodations for guests
at substantially lower rates than most other ex-
tended stay lodging providers. They feature fully
furnished rooms which are generally rented on a
weekly basis to guests such as business travelers
(particularly those with limited expense ac-
counts), professionals on temporary work assign-
ment, persons between domestic situations, and
persons relocating or purchasing a home, with most
guests staying for multiple weeks. ESA's facili-
ties contain a variety of features that are at-
tractive to the extended stay guest such as a
fully-equipped kitchenette, weekly housekeeping,
with twice-weekly towel service, color television
with cable or satellite hook-up, coin-operated
laundromat, and telephone service with voice mail
messaging. Through December 31, 1996, ESA had de-
veloped and opened 30 extended stay lodging facil-
ities, acquired 10 others, and had 50 facilities
under construction. ESA plans to begin construc-
tion of approximately 80 extended stay lodging fa-
cilities during 1997 and to continue an active de-
velopment program thereafter.
ESA was formed in 1995 as a Delaware corporation.
Its principal executive offices are located at 450
East Las Olas Boulevard, Ft. Lauderdale, Florida
33301, and its telephone number is (954) 713-1600.
Unless the context suggests otherwise, references
in this Joint Proxy Statement/Prospectus to "ESA"
mean ESA and its subsidiaries, and, with respect
to ESA, references to the year ended December 31,
1995 mean the period from January 9, 1995 (ESA's
date of inception) through December 31, 1995.
ESA MERGER SUB, INC....... Merger Sub was formed in 1997 as a Delaware corpo-
ration for the purpose of effecting the Merger.
Merger Sub is a wholly-owned subsidiary of ESA. In
connection with the Merger, Merger Sub will be the
surviving corporation, and the name of Merger Sub
will be changed to Studio Plus Hotels, Inc.
6
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STUDIO PLUS HOTELS, INC... Studio Plus owns, develops, and operates
StudioPLUS(TM) extended stay hotels and owns the
rights to the related trade name and service marks
for "StudioPLUS." StudioPLUS hotels are designed
to combine the convenience of a hotel with many of
the comforts of an apartment in order to provide
affordable lodging for extended stay guests. These
guests include business travelers, professionals
on temporary work assignment, persons relocating
or purchasing a home, tourists and others desiring
high quality, furnished accommodations with full
kitchens. As of December 31, 1996, Studio Plus
owned and operated 35 mid-price extended stay
lodging facilities, had 11 facilities under con-
struction, and options to purchase 28 additional
sites for development.
Studio Plus, a Virginia corporation, is a successor
corporation to entities founded in 1985 by Norwood
Cowgill, Jr., Chairman of the Board of Directors
and Chief Executive Officer of Studio Plus ("Mr.
Cowgill"). Studio Plus' principal executive of-
fices are located at 1999 Richmond Road, Suite
Four, Lexington, Kentucky 40502 and its telephone
number is (606) 269-1999.
MERGER AGREEMENT.......... On January 16, 1997, ESA, Merger Sub, and Studio
Plus entered into the Merger Agreement, a copy of
which is attached hereto as Appendix A, providing
for the Merger of Studio Plus with and into Merger
Sub. See "The Merger."
THE STUDIO PLUS MEETING
DATE, TIME AND PLACE OF The Studio Plus Meeting is to be held on Friday,
THE STUDIO PLUS MEETING.. April 11, 1997 at 9:30 a.m., Eastern time, at the
Carrick Theatre in the Mitchell Fine Arts Build-
ing, Transylvania University, 300 N. Broadway,
Lexington, Kentucky.
PURPOSE OF THE STUDIO
PLUS MEETING.............
The purpose of the Studio Plus Meeting will be to
consider and vote upon a proposal to approve and
adopt the Merger Agreement and to transact any
other business that may properly come before the
Studio Plus Meeting.
RECORD DATE AND QUORUM.... Only holders of record of shares of Studio Plus
Common Stock at the close of business on March 7,
1997 (the "Studio Plus Record Date") will be enti-
tled to notice of and to vote at the Studio Plus
Meeting. As of the date of this Joint Proxy
Statement/Prospectus, there were approximately
12,558,000 shares of Studio Plus Common Stock out-
standing. The presence, either in person or by
properly executed proxy, of the holders of a ma-
jority of the outstanding shares of Studio Plus
Common Stock at the close of business on the Stu-
dio Plus Record Date is necessary to constitute a
quorum at the Studio Plus Meeting.
7
<PAGE>
VOTE REQUIRED............. Pursuant to Studio Plus' Articles of Incorporation,
the Merger Agreement must be approved by the af-
firmative vote of the holders of two-thirds of the
outstanding shares of Studio Plus Common Stock.
In connection with the Merger Agreement, ESA, Mr.
Cowgill, and Cowgill Partners, L.P., a limited
partnership controlled by Mr. Cowgill ("Cowgill
Partners"), entered into a Stockholder Agreement,
dated January 16, 1997 (the "Stockholder Agree-
ment"). Pursuant to the Stockholder Agreement, Mr.
Cowgill and Cowgill Partners granted to ESA a
proxy to represent and vote the 985,927 shares of
Studio Plus Common Stock owned by Mr. Cowgill and
the 470,000 shares of Studio Plus Common Stock
beneficially owned by Cowgill Partners (collec-
tively, the "Cowgill Shares") with respect to the
Merger or any other business combination of Studio
Plus with any other party or on any other business
presented to the stockholders of Studio Plus that
has been the subject of preliminary proxy materi-
als filed by Studio Plus with the Commission (sub-
ject to a requirement to vote the Cowgill Shares
in favor of the Merger). The Cowgill Shares repre-
sent approximately 11.6% of the votes entitled to
be cast at the Studio Plus Meeting. The Stock-
holder Agreement expires on the first to occur of
(i) the closing of the Merger or (ii) the date 180
days after the termination of the Merger Agree-
ment. See "The Merger--Stockholder Agreement."
Abstentions, directions to withhold authority, and
broker non-votes are counted as shares present in
the determination of whether the shares of stock
represented at the Studio Plus Meeting constitute
a quorum. Abstentions are counted in tabulations
of the votes cast on proposals presented to stock-
holders. Thus, an abstention from voting on a mat-
ter has the same legal effect as a vote against
the matter. Broker non-votes and directions to
withhold authority are counted as present, but are
deemed not entitled to vote on proposals for which
brokers do not have discretionary authority and
are not counted as a vote for the Merger. Accord-
ingly, they have the same legal effect as a vote
against the Merger. An automated system adminis-
tered by Studio Plus' transfer agent will be used
to tabulate the votes by stockholders of Studio
Plus.
THE ESA MEETING
DATE, TIME AND PLACE OF The ESA Meeting is to be held on Friday, April
THE ESA MEETING.......... 11, 1997 at 10:30 a.m., Eastern time, at the
Carrick Theatre in the Mitchell Fine Arts Build-
ing, Transylvania University, 300 N. Broadway,
Lexington, Kentucky.
PURPOSE OF THE ESA The purpose of the ESA Meeting will be to consider
MEETING.................. and vote upon a proposal to approve and adopt the
Merger Agreement, to approve the ESA Charter
Amendment, to consider and vote upon a proposal to
approve and adopt the 1997 Plan, and to transact
any other business that may properly come before
the ESA Meeting or any adjournments or postpone-
ments thereof.
8
<PAGE>
RECORD DATE AND QUORUM.... Only holders of record of shares of ESA Common
Stock at the close of business on March 7, 1997
(the "ESA Record Date") will be entitled to notice
of and to vote at the ESA Meeting. As of the date
of this Joint Proxy Statement/Prospectus, there
were approximately 79,886,000 shares of ESA Common
Stock outstanding. The presence, either in person
or by properly executed proxy, of the holders of a
majority of the outstanding shares of ESA Common
Stock at the close of business on the ESA Record
Date is necessary to constitute a quorum at the
ESA Meeting.
VOTE REQUIRED............. In general, approval of any matter submitted to the
stockholders for their consideration, including
the approval of the Merger Agreement and the
transactions contemplated thereby, requires the
affirmative vote of the holders of a majority of
the shares of ESA Common Stock present in person
or represented by proxy and entitled to vote at
the ESA Meeting. Approval of the ESA Charter
Amendment requires the affirmative vote of the
holders of a majority of the outstanding shares of
ESA Common Stock. Abstentions, directions to with-
hold authority and broker non-votes are counted as
shares present in the determination of whether the
shares of stock represented at the ESA Meeting
constitute a quorum. Abstentions are counted in
tabulations of the votes cast on proposals pre-
sented to stockholders. Thus, an abstention from
voting on a matter has the same legal effect as a
vote against the matter. Broker non-votes and di-
rections to withhold authority are counted as
present, but are deemed not entitled to vote on
proposals for which brokers do not have discre-
tionary authority and, therefore, have no effect
on any matters other than the approval of the ESA
Charter Amendment, as to which they would have the
same legal effect as a vote against such proposal.
An automated system administered by ESA's transfer
agent will be used to tabulate the votes by stock-
holders of ESA.
In connection with the Merger Agreement, Mr. George
D. Johnson, Jr., the President and Chief Executive
Officer of ESA ("Mr. G. Johnson"), and Studio Plus
entered into a Voting Agreement, dated January 16,
1997 (the "Voting Agreement"), pursuant to which
Mr. G. Johnson agreed to vote the 3,832,524 shares
of ESA Common Stock owned by him in favor of the
Merger and to recommend the Merger to other stock-
holders of ESA. Such shares represent approxi-
mately 4.8% of the votes entitled to be cast at
the ESA Meeting. See "The Merger--Voting Agree-
ment." The Voting Agreement expires upon the first
to occur of (i) the Merger, (ii) the termination
of the Merger Agreement, or (iii) August 31, 1997.
THE MERGER
GENERAL................... At the Effective Time of the Merger, each of the
shares of outstanding Studio Plus Common Stock
will be converted into the right to receive 1.2272
shares of ESA Common Stock. In addition, each out-
standing option to purchase Studio Plus Common
Stock will be ex-
9
<PAGE>
changed for an option to purchase shares of ESA
Common Stock in an amount equal to the number of
shares of Studio Plus Common Stock covered by such
option multiplied by the Exchange Ratio, and will
have a per share exercise price equal to the per
share exercise price of such option for the Studio
Plus Common Stock covered by such option divided
by the Exchange Ratio. Upon consummation of the
Merger, Studio Plus will be merged with and into
Merger Sub, with Merger Sub surviving the Merger
as a wholly-owned subsidiary of ESA and changing
its name to Studio Plus Hotels, Inc. (the "Surviv-
ing Corporation"). See "The Merger."
The Merger will be consummated by the filing with
the Secretary of State of the State of Delaware
and the State Corporation Commission of the Com-
monwealth of Virginia of a certificate of merger
(the time of such filing, or such other time as
the certificate of merger may designate, being the
"Effective Time"). It is currently anticipated
that, if all conditions to the Merger have been
met or waived, the filing of the certificate of
merger will take place on April 11, 1997, or as
soon thereafter as is practicable.
EXCHANGE OF SHARES; If the Merger becomes effective, upon surrender
FRACTIONAL SHARES........ of certificates which formerly represented shares
of Studio Plus Common Stock ("Studio Plus Stock
Certificates") to Harris Trust and Savings Bank,
as exchange agent (the "Exchange Agent"), ESA will
issue to each holder of outstanding shares of Stu-
dio Plus Common Stock certificates representing
the Merger Consideration (the "ESA Stock Certifi-
cates"). Upon consummation of the Merger, each
holder of record of Studio Plus Common Stock imme-
diately prior to the Effective Time will be pro-
vided with a letter of transmittal and instruc-
tions for use in effecting the surrender of the
Studio Plus Certificates in exchange for the
Merger Consideration with respect to the shares of
Studio Plus Common Stock formerly represented
thereby.
Fractional shares of ESA Common Stock will not be
issued. Instead, each holder of Studio Plus Common
Stock who otherwise would have been entitled to a
fraction of a share of ESA Common Stock will be
paid cash in an amount equal to such fraction mul-
tiplied by the closing sale price of ESA Common
Stock on The Nasdaq Stock Market on the date of
the Effective Time or, if ESA Common Stock is not
traded on that date, the trading day preceding
such date.
RECOMMENDATION OF STUDIO The Board of Directors of Studio Plus believes
PLUS' BOARD OF the Merger is in the best interests of Studio Plus
DIRECTORS................ and its stockholders. In evaluating the Merger,
the Studio Plus Board of Directors considered,
among other things, (i) the financial position,
capitalization, historical results of operations
and other operating data, and historical stock
prices of Studio Plus and ESA, (ii) the market
presence and access to capital of ESA after the
Merger, (iii) the diversification of risk provided
to Studio Plus stockholders in the Merger by giv-
ing such stockholders
10
<PAGE>
ownership in a larger, more diversified company,
(iv) the terms of the Merger Agreement, including
the value and nature of the consideration to be
received by Studio Plus stockholders in the Merg-
er, (v) the expectation that the Merger will be
treated as a tax-free reorganization for federal
income tax purposes and accounted for as a "pool-
ing of interests" for accounting purposes, and
(vi) the opinion dated January 16, 1997 rendered
to the Board of Directors by Smith Barney Inc.
("Smith Barney") to the effect that, as of the
date of such opinion and based upon and subject to
certain matters stated therein, the Exchange Ratio
was fair, from a financial point of view, to the
holders of Studio Plus Common Stock. The full text
of the written opinion of Smith Barney is set
forth as Appendix B to this Joint Proxy
Statement/Prospectus.
The Board of Directors of Studio Plus has deter-
mined that the Merger is in the best interests of
Studio Plus and its stockholders, has approved the
Merger, has approved and adopted the Merger Agree-
ment and recommends that the Studio Plus stock-
holders vote for the proposal to approve the
Merger Agreement.
OPINION OF STUDIO PLUS'
FINANCIAL ADVISOR........
Smith Barney has acted as financial advisor to Stu-
dio Plus in connection with the Merger and has de-
livered to the Board of Directors of Studio Plus a
written opinion dated January 16, 1997 to the ef-
fect that, as of the date of such opinion and
based upon and subject to certain matters stated
therein, the Exchange Ratio was fair, from a fi-
nancial point of view, to the holders of Studio
Plus Common Stock. The full text of the written
opinion of Smith Barney dated January 16, 1997,
which sets forth the assumptions made, matters
considered and limitations on the review undertak-
en, is attached as Appendix B to this Joint Proxy
Statement/Prospectus and should be read carefully
in its entirety. The opinion of Smith Barney is
directed to the Board of Directors of Studio Plus
and relates only to the fairness of the Exchange
Ratio from a financial point of view, does not ad-
dress any other aspect of the Merger or related
transactions, and does not constitute a recommen-
dation to any stockholder as to how such stock-
holder should vote at the Studio Plus Meeting. See
"The Merger--Opinion of Studio Plus' Financial Ad-
visor."
RECOMMENDATION OF ESA'S
BOARD OF DIRECTORS.......
The Board of Directors of ESA has unanimously ap-
proved the Merger and has determined that the
Merger is in the best interests of ESA and its
stockholders. The ESA Board of Directors unani-
mously recommends approval and adoption of the
Merger Agreement by the stockholders of ESA. The
primary factors considered and relied upon by the
ESA Board of Directors in reaching its recommenda-
tion are referred to in "The Merger--ESA's Reasons
for the Merger; Recommendations of ESA's Board of
Directors." The Board of Directors also unani-
mously recommends approval of the ESA Charter
11
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Amendment and approval of the 1997 Plan. See "The
Merger--ESA's Reasons for the Merger; Recommenda-
tion of ESA's Board of Directors."
OPINION OF ESA'S
FINANCIAL ADVISOR........
On January 16, 1997, Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") rendered an oral
opinion, which was subsequently confirmed by a
written opinion of the same date (the "DLJ Opin-
ion") to the Board of Directors of ESA that the
Exchange Ratio is fair to ESA from a financial
point of view. All of DLJ's analyses were as of
January 16, 1997 and have not been, and will not
be, updated to any more current date. The full
text of the DLJ Opinion, which sets forth assump-
tions made, matters considered and limitations on
the review undertaken in connection with the DLJ
Opinion is attached hereto as Appendix C. Holders
of ESA Common Stock are urged to read the DLJ
Opinion in its entirety. See "The Merger--Opinion
of ESA's Financial Advisor."
DISSENTERS' RIGHTS........ Pursuant to the Virginia Stock Corporation Act (the
"VSCA"), any holder of Studio Plus Common Stock
(i) who delivers to Studio Plus written notice
prior to the vote taken at the Studio Plus Meeting
of his intent to demand payment for his shares if
the Merger is consummated, (ii) whose shares are
not voted in favor of the Merger, and (iii) who
follows certain other procedural requirements set
forth in the VSCA, shall be entitled to dissent-
ers' rights under Section 13.1-730 of the VSCA.
See "The Merger--Dissenters' Rights." The receipt
of cash in exchange for Studio Plus Common Stock
pursuant to the exercise of dissenters' rights
will be a taxable transaction. See "The Merger--
Certain Federal Income Tax Consequences" and "--
Dissenters' Rights."
Under the Delaware General Corporation Law
("DGCL"), holders of shares of ESA Common Stock
are not entitled to any appraisal or dissenters'
rights in connection with the Merger. See "The
Merger--Dissenters' Rights."
ACCOUNTING TREATMENT...... The Merger is expected to be accounted for by ESA
as a pooling of interests for accounting purposes.
See "The Merger--Accounting Treatment." It is a
condition to the consummation of the Merger that
ESA and Studio Plus receive from Coopers & Lybrand
L.L.P., independent accountants, a letter to the
effect that the independent accountants concur
with the conclusions of ESA's and Studio Plus'
management that no conditions exist which would
preclude accounting for the Merger as a pooling of
interests. Studio Plus and ESA have agreed that
neither they nor any of their respective subsidi-
aries or affiliates will knowingly take or fail to
take any action that would jeopardize the treat-
ment of the Merger as a pooling of interests for
accounting purposes.
12
<PAGE>
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES.........
The Merger is designed to result in the conversion
of shares of Studio Plus Common Stock into shares
of ESA Common Stock on a "tax-free" basis. Studio
Plus and ESA each has received from its respective
counsel an opinion to the effect that, subject to
the assumptions, qualifications, and limitations
set forth therein, the Merger will constitute a
tax-free reorganization for federal income tax
purposes and that, accordingly, no gain or loss
will be recognized by holders of Studio Plus Com-
mon Stock upon the conversion of Studio Plus Com-
mon Stock by reason of the Merger (except with re-
spect to cash, if any, received in lieu of frac-
tional shares or paid to stockholders who exercise
dissenters' rights). Holders of Studio Plus Common
Stock should read the discussion under "The Merg-
er--Certain Federal Income Tax Consequences" and
are urged to consult their own tax advisors as to
the specific tax consequences to them of the Merg-
er.
MANAGEMENT OF ESA AFTER
THE MERGER; INTERESTS OF
CERTAIN PERSONS IN THE
MERGER...................
Following the Merger, Merger Sub will be the Sur-
viving Corporation (as defined herein) and will be
a wholly-owned subsidiary of ESA.
In considering the recommendation of the Board of
Directors of Studio Plus with respect to the
Merger Agreement and the transactions contemplated
thereby, stockholders of Studio Plus should be
aware that certain members of the management of
Studio Plus and the Board of Directors of Studio
Plus have certain interests in the Merger that are
in addition to the interests of stockholders of
Studio Plus generally. It is a condition to the
consummation of the Merger that Mr. Cowgill shall
have been appointed to the Board of Directors of
ESA. In addition, the terms of the Registration
Rights Agreement to be entered into at the Effec-
tive Time among ESA, Mr. Cowgill and Cowgill Part-
ners (the "Registration Rights Agreement") will
provide, among other things, that ESA will under-
take to register on Form S-3 under the Securities
Act the shares of ESA Common Stock to be received
by Mr. Cowgill and Cowgill Partners in the Merger.
Upon consummation of the Merger and pursuant to
the terms of the Studio Plus options, the vesting
of all Studio Plus options, including options held
by management and the Board of Directors of Studio
Plus, will be accelerated and will be exchanged
for immediately exercisable options to purchase
ESA Common Stock. In addition, pursuant to the
Merger Agreement, ESA will be required to main-
tain, or cause the Surviving Corporation to main-
tain, directors' and officers' liability insurance
for Studio Plus' officers and directors for six
years following the Merger for events occurring
prior to the Merger. For a discussion of these
matters, see "The Merger--Management of ESA after
the Merger; Interests of Certain Persons in the
Merger," and "--Registration Rights Agreement."
ALTERNATIVE PROPOSALS..... Pursuant to the Merger Agreement, Studio Plus has
agreed that it shall not initiate, solicit or en-
courage the submission of any proposal or
13
<PAGE>
offer with respect to an Alternative Proposal (as
defined below), or engage in any discussions or
negotiations with any person or entity relating to
an Alternative Proposal or otherwise facilitate
any effort or attempt to make or implement an Al-
ternative Proposal. The Board of Directors of Stu-
dio Plus is permitted to furnish information to
and enter into discussions with any person that
makes an unsolicited Alternative Proposal if the
Board of Studio Plus determines in good faith that
it is required to do so to comply with its fidu-
ciary duties to Studio Plus stockholders. An "Al-
ternative Proposal" is any merger, consolidation,
reorganization, exchange, plan of liquidation, or
similar transaction involving Studio Plus or its
subsidiaries, other than the Merger. See "The
Merger--Alternative Proposals." Pursuant to the
terms of the Stockholder Agreement, Mr. Cowgill
and Cowgill Partners granted to ESA an option to
purchase the Cowgill Shares, at an exercise price
of $25.00 per share, in the event that the Merger
Agreement is terminated by (i) Studio Plus, upon
receipt of an Alternative Proposal, or (ii) ESA,
in the event that the Board of Directors of Studio
Plus shall have (a) withdrawn or modified its ap-
proval or recommendation of the Merger or the
Merger Agreement or (b) adopted resolutions to ac-
cept or implement an Alternative Proposal and, in
any case, there exists at the time of exercise an
Alternative Proposal.
CONDITIONS TO THE MERGER.. The obligations of ESA, Merger Sub, and Studio Plus
to consummate the Merger are subject to certain
conditions, including, among others, (i) the ap-
proval of the Merger Agreement by (a) the stock-
holders of Studio Plus and (b) the stockholders of
ESA, (ii) the Registration Statement having been
declared effective under the Securities Act and
having not become the subject of any stop order,
(iii) the absence of any injunction or other legal
prohibition to consummation of the Merger, (iv)
the appointment of Mr. Cowgill to the ESA Board of
Directors, and (v) that the Merger be accounted
for as a "pooling of interests." See "The Merger--
Conditions to the Merger."
TERMINATION OF THE MERGER
AGREEMENT................
The Merger Agreement may be terminated at any time
prior to the Effective Time, notwithstanding any
approval thereof by the stockholders of Studio
Plus or the stockholders of ESA, for a number of
reasons, including the following: (i) by mutual
written consent of ESA and Studio Plus; (ii) by
either ESA or Studio Plus if the vote on the
Merger occurs and the requisite vote of the stock-
holders of Studio Plus or the stockholders of ESA,
respectively, in favor of the Merger Agreement as
described in "Introduction--Record Date; Voting
Rights; Vote Required" is not obtained; (iii) by
either ESA or Studio Plus if the Merger is not
consummated on or before August 31, 1997; (iv) by
Studio Plus if its Board of Directors determines
in good faith that its fiduciary duties require it
to terminate the Merger Agreement by reason of an
Alternative Proposal; (v) by ESA if the Board of
Directors of Studio Plus shall have (a) withdrawn,
or modified in a manner materially adverse to ESA,
its approval of the
14
<PAGE>
Merger Agreement or the Merger, (b) recommended an
Alternative Proposal, or (c) adopted resolutions
to accept or implement an Alternative Proposal; or
(vi) upon a failure of any of the conditions to
close the Merger. In the event the Merger Agree-
ment is terminated pursuant to clause (iv) or (v)
above, Studio Plus must pay ESA a fee of
$7,500,000. See "The Merger--Termination."
EXPENSES.................. The Merger Agreement provides that, whether or not
the Merger is consummated, all costs and expenses
incurred in connection with the Merger Agreement
and the transactions contemplated thereby shall be
paid by the party incurring such expenses, except
that the filing fee in connection with filing of
the Registration Statement or the Joint Proxy
Statement/Prospectus and expenses incurred in con-
nection with printing and mailing the Registration
Statement and the Joint Proxy Statement/Prospectus
shall be shared equally by ESA and Studio Plus.
RISK FACTORS.............. Certain factors to be considered in connection with
an investment in, and the ownership of, shares of
ESA Common Stock are set forth under "Risk Fac-
tors" elsewhere herein.
15
<PAGE>
SELECTED FINANCIAL DATA OF ESA
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
The selected financial data set forth below has been derived from the
historical financial statements of ESA and from the historical financial
statements of Welcome Inn America 89-1, L.P. ("Welcome"). The selected
financial data for Welcome is included because Welcome may be deemed to be a
predecessor of ESA. The historical financial statements of ESA for each of the
two years in the period ended December 31, 1996 have been audited by Coopers &
Lybrand L.L.P., independent accountants. The historical financial statements of
Welcome for the years ended December 31, 1992, 1993, and 1994, and for the
period from January 1, 1995 through August 18, 1995, have been audited by
Coopers & Lybrand L.L.P., independent accountants. The Adjusted amounts give
pro forma effect to the acquisitions of lodging facilities from Apartment/Inn
in January 1996, Hometown Inn in February 1996, Gwinnett in June 1996, and the
M&M Facilities and KHEC in July 1996 (collectively, the "Significant Purchase
Acquisitions") as if they had occurred as of January 1, 1996. The Adjusted data
is unaudited but, in the opinion of management of ESA, all necessary pro forma
adjustments for the Significant Purchase Acquisitions have been made. The
unaudited adjusted operating statement data is not necessarily indicative of
what the actual results of operations of ESA would have been had the
Significant Purchase Acquisitions been completed as of January 1, 1996, nor
does it purport to represent the results of operations for any future periods.
These selected financial data should be read in conjunction with the historical
financial statements and related notes thereto of ESA and the historical
financial statements and related notes thereto for the Significant Purchase
Acquisitions incorporated by reference into this Joint Proxy
Statement/Prospectus.
ESA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1996
----------------- --------------------------
ACTUAL ACTUAL ADJUSTED(1)
----------------- ------- -----------------
<S> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Revenue.................. $ 878 $15,745 $ 20,958
Operating expenses....... 2,887 19,574 22,104
Depreciation and
amortization............ 147 2,803 2,869
Income (loss) from
operations.............. (2,156) (6,632) (4,015)
Interest income.......... 849 11,538 11,538
Income taxes............. 1,470 3,009
Net income (loss)........ $ (1,307) $ 3,436 $ 4,514
======== ======= ========
Net income (loss) per
share (2)............... $ (0.05) $ 0.06 $ 0.07
======== ======= ========
Weighted average number
of shares of common
stock and equivalents
outstanding (2)......... 25,304 59,724 61,584
======== ======= ========
<CAPTION>
AS OF AS OF
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
ACTUAL ACTUAL
------ ------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............. $123,358 $189,647
Total assets............. 149,616 522,595
Long-term debt........... 0 0
Stockholders' equity..... 147,223 495,502
</TABLE>
WELCOME INN AMERICA 89-1, L.P.
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1,
DECEMBER 31, 1995 THROUGH
------------------- AUGUST 18,
1992 1993 1994 1995
----- ---- ------ ------------
<S> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Revenue..................................... $ 866 $999 $1,079 $713
Operating expenses.......................... 502 557 562 367
Depreciation and amortization............... 160 139 141 96
Income from operations...................... 204 303 376 250
Interest expense............................ (399) (382) (360) (272)
Net income (loss)........................... $(195) $(79) $ 16 $(22)
===== ==== ====== ====
</TABLE>
- -------
(1) The Adjusted amounts give pro forma effect of the Significant Purchase
Acquisitions as if they had occurred as of January 1, 1996. The acquisition
of American Apartmen-Tels Investors II, L.P. ("AATI") has been excluded
from Significant Purchase Acquisitions because the purchase price and the
unaudited results of operations for the period, when measured in relation
to ESA, did not meet certain materiality standards and can be excluded as
permitted by the rules and regulations of the Commission. See notes to the
ESA consolidated financial statements and the historical financial
statements of the Significant Purchase Acquisitions incorporated by
reference into this Joint Proxy Statement/Prospectus.
(2) See notes 2 and 5 to ESA's consolidated financial statements incorporated
by reference into this Joint Proxy Statement/Prospectus.
16
<PAGE>
SELECTED FINANCIAL DATA OF STUDIO PLUS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following selected financial data set forth below has been derived from
the historical financial statements of S corporations and partnerships (the
"Studio Plus Predecessor Entities") prior to the initial public offering of
Studio Plus Common Stock on June 26, 1995 (the "Studio Plus IPO"), and selected
historical financial information and other data for Studio Plus since the date
of the Studio Plus IPO. The selected historical financial information and other
data for Studio Plus and the Studio Plus Predecessor Entities for each of the
five years in the period ended December 31, 1996 have been audited by Coopers &
Lybrand L.L.P., independent accountants. These selected financial data should
be read in conjunction with the historical financial statements and the related
notes thereto of Studio Plus incorporated by reference into this Joint Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Revenue..................... $ 8,515 $10,309 $12,152 $15,890 $23,065
Operating expenses.......... 4,100 5,250 6,137 8,488 13,453
Depreciation and
amortization............... 1,185 1,313 1,472 1,912 3,336
Income from operations...... 3,230 3,746 4,543 5,490 6,276
Interest income (expense)... (2,542) (2,498) (2,532) (1,356) 2,206
Third party investors'
interest................... (126) (198) (358) (142)
Income taxes (1)............ 1,670 3,308
Extraordinary loss (2)...... (185)
Net income.................. $ 562 $ 1,050 $ 1,653 $ 2,137 $ 5,174
======= ======= ======= ======= =======
Net income per share (3).... $ 0.45
=======
Pro forma net income (4).... $ 2,313
=======
Pro forma net income per
share (5).................. $ 0.46
=======
Weighted average number of
shares of common stock and
equivalents outstanding
(3)........................ 4,995 11,580
======= =======
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents... $ 674 $ 861 $ 457 $ 2,557 $ 34,678
Total assets................ 28,541 30,313 36,222 63,376 146,240
Long-term debt.............. 29,018 28,831 32,306 4,000 0
Stockholders' equity (defi-
cit)....................... (1,699) (1,611) (1,247) 51,646 133,613
</TABLE>
- --------
(1) Historical financial information prior to the Studio Plus IPO does not
include a provision for income taxes because the Studio Plus Predecessor
Entities were not subject to income taxes.
(2) As a result of repayment of approximately $37,049 of mortgage indebtedness,
including approximately $226 of accrued interest, with the net proceeds of
the Studio Plus IPO, Studio Plus wrote off approximately $308 of
unamortized deferred loan costs associated with this debt. This charge has
been recorded as an extraordinary loss, net of the related income tax
benefit of approximately $123.
(3) The outstanding shares and other equity interests of the Studio Plus
Predecessor Entities differ substantially from the shares of Studio Plus
Common Stock outstanding after the Studio Plus IPO. Accordingly, Studio
Plus has not historically presented earnings per share information for the
years ended December 31, 1992, 1993, and 1994.
(4) Pro forma net income for 1995 includes an adjustment to reflect the tax
that would have been paid had Studio Plus been subject to income tax for
the full year.
(5) Pro forma net income per share has been calculated by dividing the pro
forma net income by the weighted average number of shares of common stock
and equivalents deemed to be outstanding.
17
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following selected unaudited pro forma condensed combined financial data
should be read in conjunction with the historical financial statements of ESA
and Studio Plus, and the respective notes thereto, which are incorporated
herein by reference, and the Unaudited Pro Forma Condensed Combined Balance
Sheet and Income Statements, and the respective notes thereto, included
elsewhere herein. See "Unaudited Pro Forma Condensed Combined Financial
Statements of ESA and Studio Plus."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
OPERATING STATEMENT DATA:
Revenue............................................ $12,152 $16,768 $44,022
Operating expenses................................. 6,137 11,375 34,840
Depreciation and amortization...................... 1,472 2,059 6,922
Income from operations............................. 4,543 3,334 2,260
Interest income (expense).......................... (2,532) (507) 13,744
Third party investors' interest.................... (358) (142)
Income taxes....................................... 1,147 6,347
Income before extraordinary item................... $ 1,653 $ 1,538 $ 9,657
======= ======= =======
Pro forma income before extraordinary item (1)..... $ 1,038 $ 1,714
======= =======
Income per share before extraordinary item (2)..... $ 0.05 $ 0.13
======= =======
Pro forma income per share before extraordinary
item (1)(2)....................................... $ 0.05
=======
Weighted average number of shares of ESA Common
Stock and equivalents outstanding (2)............. 31,434 76,450
======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1996
------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................ $224,325
Total assets..................................................... 668,835
Long-term debt................................................... 0
Stockholders' equity............................................. 622,864
</TABLE>
- --------
(1) Historical financial information prior to the Studio Plus IPO does not
include a provision for income taxes because the Studio Plus Predecessor
Entities were S corporations or partnerships not subject to income taxes.
Pro forma income before extraordinary item includes an adjustment to
reflect the tax that would have been paid had Studio Plus been subject to
income taxes for the full year.
(2) Per share amounts have been calculated by dividing the income before
extraordinary item and the pro forma income before extraordinary item,
respectively, by the weighted average number of shares of ESA Common Stock
and equivalents outstanding, as adjusted to reflect the issuance of the
additional shares to be issued in the Merger at a ratio of 1.2272 shares
per share of Studio Plus Common Stock. Prior to the Studio Plus IPO, the
assets of Studio Plus were owned and operated by the Studio Plus
Predecessor Entities. The outstanding shares and other equity interests of
the Studio Plus Predecessor Entities differ substantially from the shares
of Studio Plus Common Stock outstanding after the Studio Plus IPO.
Accordingly, Studio Plus has not historically presented earnings per share
information for the year ended December 31, 1994.
18
<PAGE>
COMPARATIVE PER SHARE INFORMATION
The following table sets forth certain per common share information for ESA
and Studio Plus on both historical and pro forma combined bases (giving effect
to the Merger using the pooling of interests method of accounting) and certain
information on an equivalent pro forma combined basis for each share of Studio
Plus Common Stock. See "Unaudited Pro Forma Condensed Combined Financial
Statements of ESA and Studio Plus." No cash dividends have ever been declared
or paid on ESA Common Stock or Studio Plus Common Stock.
<TABLE>
<CAPTION>
PER SHARE OF COMMON STOCK
-------------------------
INCOME CASH BOOK
(LOSS)(1) DIVIDENDS VALUE
--------- --------- -----
<S> <C> <C> <C>
ESA--Historical (2):
Year ended December 31, 1995................ $(0.05) $-- $3.33
Year ended December 31, 1996................ 0.06 -- 7.26
ESA--Pro Forma Combined (2) (3):
Year ended December 31, 1995................ 0.05 -- 3.59
Year ended December 31, 1996................ 0.13 -- 7.45
Studio Plus--Historical (4) (5):
Year ended December 31, 1995................ 0.46 -- 6.73
Year ended December 31, 1996................ 0.45 -- 10.66
Studio Plus--Equivalent Pro Forma Combined
(6):
Year Ended December 31, 1995................ 0.06 -- 4.40
Year ended December 31, 1996................ 0.16 -- 9.14
</TABLE>
- --------
(1) Income (loss) represents income (loss) before extraordinary item.
(2) Historical book value per share information for ESA as of the end of each
period presented is computed by dividing historical stockholders' equity by
the number of shares of ESA Common Stock outstanding at the end of each
period presented, excluding common stock equivalents. Pro forma combined
book value per share information as of the end of each period presented is
computed by dividing pro forma stockholders' equity by the number of shares
of ESA Common Stock outstanding on such dates and the shares of ESA Common
Stock to be issued in the Merger.
(3) The ESA Pro Forma Combined Income (Loss) per share amounts for the years
ended December 31, 1995 and 1996 give effect to (i) the Merger as if it had
occurred on January 1, 1995 and (ii) certain pro forma adjustments related
to the Significant Purchase Acquisitions as if each had occurred on January
1, 1996.
(4) Historical book value per share information for Studio Plus as of the end
of each period presented is computed by dividing historical stockholders'
equity by the number of shares of Studio Plus Common Stock outstanding at
the end of each period presented, excluding common stock equivalents.
(5) The outstanding shares and other equity interests of the Studio Plus
Predecessor Entities differ substantially from the shares of Studio Plus
Common Stock outstanding after the Studio Plus IPO. Accordingly, Studio
Plus has not historically presented earnings per share information for the
year ended December 31, 1994. The amount presented for 1995 historical
income per share represents pro forma net income per share which has been
calculated by dividing the pro forma net income by the weighted average
number of shares of common stock and equivalents deemed to be outstanding.
(6) Equivalent pro forma combined per share information for Studio Plus is
determined by multiplying the ESA pro forma combined amounts by the
Exchange Ratio to represent equivalent per share amounts to stockholders of
Studio Plus.
19
<PAGE>
ESA AND STUDIO PLUS
MARKET INFORMATION
ESA Common Stock is traded on the Nasdaq National Market tier of The Nasdaq
Stock Market ("Nasdaq") under the symbol "STAY". Studio Plus Common Stock is
traded on the Nasdaq National Market tier of Nasdaq under the symbol "SPHI".
The table below sets forth the high and low sales prices of shares of ESA
Common Stock and Studio Plus Common Stock on the Nasdaq National Market as
reported by Nasdaq for the periods indicated.
<TABLE>
<CAPTION>
ESA STUDIO PLUS
COMMON STOCK COMMON STOCK
------------- -------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
Year Ended December 31, 1995
2nd Quarter (1)............................ $ -- $ -- $11.83 $10.67
3rd Quarter................................ -- -- 18.67 10.83
4th Quarter (2)............................ 14.00 10.12 18.83 12.50
Year Ended December 31, 1996
1st Quarter................................ 15.67 10.00 21.67 14.33
2nd Quarter................................ 17.50 11.00 22.00 16.67
3rd Quarter................................ 20.75 12.87 23.88 15.50
4th Quarter................................ 23.00 18.25 18.50 14.75
Year Ending December 31, 1997
1st Quarter (3)........................... 20.75 16.75 25.13 14.25
</TABLE>
- --------
(1) The price range of Studio Plus Common Stock for this period begins on June
21, 1995.
(2) The price range of ESA Common Stock for this period begins on December 14,
1995.
(3) Through March 5, 1997.
On January 16, 1997, the last trading day before the Merger Agreement was
publicly announced, the reported high and low sales prices of the ESA Common
Stock were $19.50 and $18.50, respectively, and the reported high and low sales
prices of Studio Plus Common Stock were $14.75 and $14.25, respectively. At the
time of approval of the Merger by the Boards of Directors of ESA and Studio
Plus (January 16, 1997), the closing market value of 1.2272 shares of ESA
Common Stock to be received for each share of Studio Plus Common Stock in the
Merger was $22.86. On March 5, 1997, the last full trading day for which
closing sales prices were available at the time of the printing of this Joint
Proxy Statement/Prospectus, the high and low sales prices of ESA Common Stock
were $19.50 and $18.88, respectively, and the high and low sales prices of
Studio Plus Common Stock were $23.25 and $22.75, respectively. The closing
market value of 1.2272 shares of ESA Common Stock at such time was $23.32,
thereby reflecting an aggregate market value for the Merger Consideration on
that date of approximately $292,853,000.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements in this Joint Proxy Statement/Prospectus Summary and under
the captions entitled "Risk Factors," "Business of Studio Plus; Recent
Developments," and "Business of ESA; Recent Developments," and elsewhere in
this Joint Proxy Statement/Prospectus (including documents incorporated herein
by reference), constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance, or achievements of ESA to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, ESA's limited operating history and uncertainty as to ESA's
future profitability; the ability to meet construction and development
schedules and budgets; the ability to develop and implement operational and
financial systems to manage rapidly growing operations; the uncertainty as to
the consumer demand for extended stay lodging; increasing competition in the
extended stay lodging market; the ability to integrate and successfully operate
acquired properties and the risks associated with such properties; the ability
to obtain financing on acceptable terms to finance ESA's growth strategy; and
the ability of ESA to operate within the limitations imposed by financing
arrangements; and other factors referenced in this Joint Proxy
Statement/Prospectus. See "Risk Factors."
20
<PAGE>
INTRODUCTION
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to the holders of
Studio Plus Common Stock and to the holders of ESA Common Stock in connection
with the solicitation of proxies by the respective Boards of Directors of
Studio Plus and ESA for use at the Studio Plus Meeting and at the ESA Meeting,
and at any adjournments or postponements thereof.
At the Studio Plus Meeting, stockholders of Studio Plus will be asked to
consider and vote upon the Merger Agreement providing for the Merger of Studio
Plus with and into Merger Sub. If the proposed Merger is consummated,
stockholders of Studio Plus will be entitled to receive 1.2272 shares of ESA
Common Stock for each share of Studio Plus Common Stock owned by them.
At the ESA Meeting, stockholders of ESA will be asked (i) to consider and
vote upon a proposal to approve the Merger Agreement and the related
transactions; (ii) to approve the ESA Charter Amendment; (iii) to consider and
vote upon a proposal to approve and adopt the 1997 Plan; and (iv) to transact
such other business as may properly come before the ESA Meeting.
The executive offices of Studio Plus are located at 1999 Richmond Road,
Suite Four, Lexington, Kentucky 40502, and its telephone number is (606) 269-
1999. ESA's executive offices are located at 450 East Las Olas Boulevard, Ft.
Lauderdale, Florida 33301, and its telephone number is (954) 713-1600.
Studio Plus and ESA have no present affiliation with each other, except to
the extent provided in the Stockholder Agreement and the Voting Agreement. See
"The Merger--Stockholder Agreement" and "--Voting Agreement."
RECORD DATE; VOTING RIGHTS; VOTE REQUIRED
The close of business on March 7, 1997 has been fixed as the record date for
determination of the holders of Studio Plus Common Stock and the record date
for the determination of the holders of ESA Common Stock who are entitled to
notice of, and to vote at, the Studio Plus Meeting and the ESA Meeting, (and
any adjournments or postponements of such Meetings), respectively. As of the
date of this Joint Proxy Statement/Prospectus, there were approximately
12,558,000 shares of Studio Plus Common Stock outstanding and as of the date
of this Joint Proxy Statement/Prospectus, there were approximately 79,886,000
shares of ESA Common Stock outstanding. The Studio Plus and ESA holders of
record on the Studio Plus Record Date and the ESA Record Date, respectively,
are each entitled to one vote per share on each matter submitted to a vote at
their respective Meetings. The presence, either in person or by properly
executed proxy, of the holders of a majority of the outstanding shares of
Studio Plus Common Stock or the holders of a majority of the outstanding
shares of ESA Common Stock at the close of business on the Studio Plus Record
Date or the ESA Record Date, as the case may be, is necessary to constitute a
quorum at the Studio Plus Meeting and the ESA Meeting, respectively. Pursuant
to the Articles of Incorporation of Studio Plus, the affirmative vote of the
holders of two-thirds of the outstanding shares of Studio Plus Common Stock
entitled to vote thereon is required for the approval of the Merger Agreement.
At the Studio Plus Meeting, an abstention, direction to withhold authority,
and broker non-vote are counted in the determination of whether the shares of
Studio Plus Common Stock represented at the Studio Plus Meeting constitute a
quorum but will have the effect of a vote against the proposal to approve the
Merger Agreement (assuming the presence of a quorum).
Pursuant to the Stockholder Agreement, Mr. Cowgill and Cowgill Partners have
granted to ESA the right to vote the shares of Studio Plus Common Stock owned
by each of them (an aggregate of 1,455,927 shares, or approximately 11.6% of
votes entitled to be cast at the Studio Plus Meeting) in favor of approval of
the Merger Agreement. All other directors and executive officers of Studio
Plus beneficially own an aggregate of
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approximately 165,170 shares of Studio Plus Common Stock (or approximately
1.3% of the votes entitled to be cast at the Studio Plus Meeting). See "The
Merger--Stockholder Agreement."
The affirmative vote of the holders of the majority of the outstanding
shares of ESA Common Stock present in person or represented by proxy at the
ESA Meeting and entitled to vote thereon is required for approval of the
Merger Agreement. With respect to the ESA Meeting and the proposals to (i)
approve the Merger Agreement; (ii) approve the ESA Charter Amendment; and
(iii) approve and adopt the 1997 Plan, abstentions, directions to withhold
authority, and broker non-votes are counted as shares present in the
determination of whether the shares of ESA Common Stock represented at the ESA
Meeting constitute a quorum. Abstentions are counted in tabulations of the
votes cast on proposals presented to stockholders. Thus, an abstention from
voting on a matter has the same legal effect as a vote against the matter.
Broker non-votes and directions to withhold authority are counted as present,
but are deemed not entitled to vote on proposals for which brokers do not have
discretionary authority and, therefore, have no effect on any matters other
than the approval of the ESA Charter Amendment, as to which they would have
the same legal effect as a vote against such approval.
In general, approval of any matter submitted to the stockholders for their
consideration requires the affirmative vote of the holders of a majority of
the shares of the ESA Common Stock present in person or represented by proxy
and entitled to vote at the ESA Meeting.
Pursuant to the Voting Agreement, Mr. G. Johnson has agreed to vote the
3,832,524 shares of ESA Common Stock owned by him, representing approximately
4.8% of the votes entitled to be cast at the ESA Meeting, in favor of approval
of the Merger Agreement. See "The Merger--Voting Agreement."
PROXY SOLICITATION
All properly completed proxies received at or prior to the Meetings and
which have not been revoked will be voted at the Meetings in accordance with
the instructions contained therein. Proxies solicited by the respective Boards
of Directors of Studio Plus and ESA which contain no instructions regarding
the proposal relating to the Merger specified in the form of proxy will be
voted FOR the approval and adoption of the Merger Agreement. If any other
matters are brought before the Studio Plus Meeting and submitted to a vote,
all proxies solicited by the Board of Directors of Studio Plus will be voted
in accordance with the judgment of the persons voting the proxies. Execution
and delivery of a proxy will not prevent a stockholder of Studio Plus or ESA
from attending the Studio Plus Meeting or the ESA Meeting, as the case may be,
and voting in person. A stockholder who has executed and returned a proxy may
revoke it at any time before it is voted, but only by executing and returning
a proxy bearing a later date, by giving written notice of revocation to the
Secretary of Studio Plus or ESA, as the case may be, bearing a later date than
the proxy or by attending the Meeting and voting in person. Attendance at a
Meeting will not by itself revoke the proxy.
Proxies solicited by the Board of Directors of ESA which contain no
instructions regarding the proposals specified in the form of proxy will be
voted FOR the proposal to approve the ESA Charter Amendment and FOR the
proposal to approve the 1997 Plan. If any other matters are brought before the
ESA Meeting and submitted to a vote, all proxies solicited by the Board of
Directors of ESA will be voted in accordance with the judgment of the persons
voting the proxies.
With respect to each of the Meetings, if a quorum is not obtained, or if
fewer shares are voted in favor of approval and adoption of the Merger
Agreement than the number required for approval and adoption, then such
Meeting may be adjourned for the purpose of obtaining additional proxies for
votes in favor of the proposal or for any other purpose, and, at any
subsequent reconvening of such Meeting, all proxies will be voted in the same
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manner as such proxies would have been voted at the original meeting (except
for any proxies which have theretofore effectively been revoked or withdrawn),
notwithstanding that they may have been effectively voted on the same or any
other matter at a previous meeting.
The cost of solicitation of the stockholders of ESA and Studio Plus shall be
borne by ESA and Studio Plus, respectively. Such cost will include the
reimbursement of banks, brokerage firms, nominees, fiduciaries and other
custodians for expenses of forwarding solicitation materials to beneficial
owners of shares. In addition to the solicitation of proxies by use of mail,
the directors, officers and employees of ESA and Studio Plus may solicit
proxies personally or by telephone, telegraph or facsimile transmission. Such
directors, officers and employees will not be additionally compensated for
such solicitation but may be reimbursed for out-of-pocket expenses incurred in
connection therewith. In addition, ESA and Studio Plus have retained Morrow &
Co., Inc. to assist in soliciting proxies and to provide proxy materials to
banks, brokerage firms, nominees, fiduciaries and other custodians. For such
services, ESA and Studio Plus will pay to Morrow & Co., Inc. a fee of $9,500
plus reasonable out-of-pocket expenses.
The mailing of this Joint Proxy Statement/Prospectus to ESA and Studio Plus
stockholders will commence on or about March 10, 1997.
RISK FACTORS
The following are certain risk factors or investment considerations which,
in addition to the other information in this Joint Proxy Statement/Prospectus,
should be considered carefully in evaluating a continuing investment in ESA
Common Stock.
FIXED EXCHANGE RATIO
The Exchange Ratio is expressed in the Merger Agreement as a fixed ratio.
Accordingly, the Exchange Ratio will not be adjusted in the event of any
increase or decrease in the price of either ESA Common Stock or Studio Plus
Common Stock. The price of ESA Common Stock may vary from its price at the
date of this Joint Proxy Statement/Prospectus and the dates of the Meetings.
Such variations may be the result of changes in the business, operations, or
prospects of ESA or Studio Plus, market assessments of the likelihood that the
Merger will be consummated and the timing thereof, general market and economic
conditions, and other factors. Because the Effective Time may occur at a date
later than the Meetings, there can be no assurance that the price of ESA
Common Stock on the dates of the Meetings will be indicative of its price at
the Effective Time. The Effective Time will occur as soon as practicable
following the Meetings and the satisfaction or waiver of the conditions set
forth in the Merger Agreement. Stockholders of ESA and Studio Plus are urged
to obtain current market quotations for ESA Common Stock and Studio Plus
Common Stock. Pursuant to the Merger Agreement, the respective Boards of
Directors of Studio Plus and ESA may withdraw its recommendation of the Merger
if such Board believes it is required to do so in accordance with its
respective fiduciary duties. See "The Merger--Conditions to the Merger" and
"--Exchange of Shares; Fractional Shares."
UNCERTAINTIES IN INTEGRATING BUSINESS OPERATIONS
In determining that the Merger is advisable and in the best interests of its
stockholders, each of the ESA Board of Directors and the Studio Plus Board of
Directors, respectively, considered the operating, management, marketing and
development benefits expected to result from the consummation thereof. See
"The Merger--Studio Plus' Reasons for the Merger; Recommendation of Studio
Plus' Board of Directors" and "--ESA's Reasons for the Merger; Recommendation
of ESA's Board of Directors." There can be no assurance that any or all of
such benefits will be realized as rapidly as currently expected or at all.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Merger by the Board of Directors of
Studio Plus, Studio Plus stockholders should be aware that certain directors
and executive officers of Studio Plus have certain interests in the Merger
that are different from, or in addition to, the interests of Studio Plus
stockholders generally; such interests, together with other relevant factors,
were considered by the Board of Directors of Studio Plus in making its
recommendation and approving the Merger Agreement. See "The Merger--Management
of ESA After the Merger; Interests of Certain Persons in the Merger."
RISKS ASSOCIATED WITH THE LODGING INDUSTRY
The extended stay segment of the lodging industry may be adversely affected
by changes in national or local economic conditions, neighborhood
characteristics and other local market conditions, such as an oversupply of
hotel space or a reduction in demand for hotel space in a geographic area;
changes in travel patterns; extreme weather conditions; changes in
governmental regulations which influence or determine wages, prices, or
construction costs; changes in interest rates; the availability of financing
for operating or capital needs; and changes in real estate tax rates and other
operating expenses. ESA's principal assets will consist of real property, and
real estate values are sensitive to changes in local market and economic
conditions and to fluctuations in the economy as a whole. In addition, due in
part to the strong correlation between the lodging industry's performance and
economic conditions, the lodging industry is subject to cyclical changes in
revenues and profits. These risks may be exacerbated by the relatively
illiquid nature of real estate holdings. The ability of ESA to vary its
portfolio in response to changes in economic and other conditions will be
limited. There can be no assurance that downturns or prolonged adverse
conditions in real estate or capital markets or in national, state or local
economies, and the inability of ESA to dispose of an investment when it finds
disposition to be advantageous or necessary, will not have a material adverse
impact on ESA.
COMPETITION IN THE LODGING INDUSTRY
There is no single competitor or small number of competitors that is or are
dominant in the economy or mid-price extended stay markets. However, some of
ESA's indirect competitors have substantially larger networks of locations and
greater financial resources than ESA. A number of major lodging companies
recently have announced their intent to aggressively develop extended stay
lodging properties which may compete with ESA's properties. Competition in the
U.S. lodging industry is based generally on convenience of location, price,
range of services and guest amenities offered, and quality of customer
service. ESA considers the location of its lodging facilities, the
reasonableness of its room rates, and the services and guest amenities
provided by it to be among the most important factors in its business.
Demographic or other changes in one or more of ESA's markets could impact the
convenience or desirability of the sites of certain lodging facilities, which
would adversely affect their operations. Further, there can be no assurance
that new or existing competitors will not significantly lower rates or offer
greater convenience, services, or amenities or significantly expand or improve
facilities in a market in which ESA's facilities compete, thereby adversely
affecting ESA's operations.
LIMITED OPERATING HISTORY AND COSTS ASSOCIATED WITH EXPANSION
ESA first began operating economy extended stay facilities in August 1995
and has a limited operating history upon which investors may evaluate ESA's
performance. ESA has incurred operating losses in the past and, given the
substantial development and financing expenses relating to ESA's expansion,
there can be no assurance that ESA will be profitable in the future.
DEVELOPMENT RISKS
ESA intends to grow primarily by developing additional ESA-owned lodging
facilities. Development involves substantial risks, including the risk that
development costs will exceed budgeted or contracted amounts, the risk of
delays in completion of construction, the risk of failing to obtain all
necessary zoning and construction
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permits, the risk that financing might not be available on favorable terms,
the risk that developed properties will not achieve desired revenue or
profitability levels once opened, the risk of competition for suitable
development sites from competitors (some of which have greater financial
resources than ESA), the risks of incurring substantial costs in the event a
development project must be abandoned prior to completion, changes in
governmental rules, regulations, and interpretations (including
interpretations of the requirements of the Americans with Disabilities Act),
and general economic and business conditions. Although ESA intends to manage
development to reduce such risks, there can be no assurance that present or
future developments will perform in accordance with ESA's expectations. As of
December 31, 1996, ESA had developed and opened 30 extended stay lodging
facilities, acquired 10 others, and had 50 facilities under construction. ESA
plans to begin construction of approximately 80 extended stay lodging
facilities during 1997 and to continue an active development program
thereafter. There can be no assurance, however, that ESA will complete the
development and construction of the facilities or will acquire each of the
planned properties and complete development of an ESA-owned facility thereon,
or that any such developments will be completed in a timely manner or within
budget.
RISKS ASSOCIATED WITH RAPID GROWTH
ESA's rapid development plans will require the implementation of enhanced
operational and financial systems and will require additional management,
operational, and financial resources. For example, ESA will be required to
recruit and train property managers and other personnel for each new lodging
facility as well as additional accounting personnel. In addition, ESA needs to
complete the development of a systemwide integrated computer network. There
can be no assurance that ESA will be able to manage its expanding operations
effectively. The failure to implement such systems and add such resources on a
cost-effective basis could have a material adverse effect on ESA's results of
operations and financial condition.
RISKS ASSOCIATED WITH ACQUISITIONS
Although ESA expects that the construction and development of new extended
stay lodging facilities will be its primary means of expansion, ESA has also
made, and may continue to make, acquisitions of existing extended stay lodging
facilities or other properties that are suitable for conversion to the
extended stay concept and acquisitions of companies that are in the extended
stay lodging industry, such as the pending Merger with Studio Plus. There can
be no assurance that ESA will be able to acquire other extended stay lodging
facilities or companies on terms favorable to ESA or that ESA will be able to
consummate its pending Merger with Studio Plus. When ESA does make such
acquisitions, it encounters various associated risks, including possible
environmental and other regulatory costs, goodwill amortization, diversion of
management's attention, potential dilution of stockholders' equity, and
unanticipated problems or liabilities, some or all of which could have a
material adverse effect on ESA's operations and financial performance.
RISKS OF BORROWING
ESA may incur substantial borrowings in connection with its expansion.
Pursuant to its mortgage facilities, ESA may be able to borrow up to $400
million to finance its properties, depending on certain conditions. This
compares to total equity of $495.5 million as of December 31, 1996. These
borrowings will be secured by mortgages on ESA's properties and various
accounts and other assets. ESA may incur additional debt from time to time.
Leverage increases the risks to ESA of any variations in its results,
construction cost overruns, or any other factors affecting its cash flow or
liquidity. In addition, ESA's interest costs could increase as the result of
general increases in interest rates. Because a portion of ESA's borrowings
under these facilities will bear interest at floating rates, the rates on
individual term loans under these facilities will depend on the level of
prevailing yields on U.S. Treasury securities at the times loans are made, and
additional borrowings may bear interest at floating rates.
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NEED FOR ADDITIONAL CAPITAL
The extent to which ESA will be able to borrow under its mortgage facilities
will be dependent on ESA meeting certain conditions and maintaining certain
reserves. In addition, these mortgage facilities may restrict the ability of
ESA to incur additional debt in the future. Although ESA is unable to quantify
its needs for additional financing, ESA expects that it will need to procure
additional financing over time, the amount of which will depend on a number of
factors including the number of properties ESA constructs or acquires and the
cash flow generated by its properties. There can be no assurance regarding the
availability or terms of additional financing ESA may be able to procure over
time. Any future debt financings or issuances of preferred stock by ESA will
be senior to the rights of the holders of shares of ESA Common Stock, and any
future issuances of shares of ESA Common Stock will result in the dilution of
the then existing stockholders' proportionate equity interests in ESA.
RESTRICTIONS ON OPERATIONS IN MORTGAGE FACILITIES
ESA's financing arrangements contain a number of provisions that impose
restrictions on ESA which could, under certain circumstances, limit ESA's
operating and financial flexibility and adversely affect its results of
operations. These provisions include restrictions on the ability of ESA to
incur additional indebtedness, prepay indebtedness, declare dividends, enter
into certain financing arrangements, acquire or dispose of certain assets, or
make certain investments. In addition, ESA's ability to utilize its mortgage
facilities is subject to it meeting certain conditions.
IMPACT OF ENVIRONMENTAL REGULATIONS
ESA's operating costs may be affected by the obligation to pay for the cost
of complying with existing environmental laws, ordinances, and regulations. In
addition, in the event any future legislation is adopted, ESA may, from time
to time, be required to make significant capital and operating expenditures in
response to such legislation. ESA attempts to minimize its exposure to
potential environmental liability through its site-selection procedures. ESA
typically secures an option to purchase land subject to certain contingencies.
Prior to exercising such option and purchasing the property, ESA conducts a
Phase I environmental assessment (which generally involves a physical
inspection and database search, but not soil or groundwater analyses). Under
various federal, state, and local environmental laws, ordinances, and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic
substances on, under, or in such property. Such laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In addition, the presence of
contamination from hazardous or toxic substances, or the failure to properly
remediate such contaminated property, may adversely affect the owner's ability
to borrow using such real property as collateral. Persons who arrange for the
disposal or treatment of hazardous or toxic substances also may be liable for
the costs of removal or remediation of such substances at the disposal or
treatment facility, whether or not such facility is or ever was owned or
operated by such person. Certain environmental laws and common-law principles
could be used to impose liability for releases of hazardous materials,
including asbestos-containing materials ("ACMs"), into the environment, and
third parties may seek recovery from owners or operators of real properties
for personal injury associated with exposure to released ACMs or other
hazardous materials. Environmental laws also may impose restrictions on the
manner in which property may be used or transferred or in which businesses may
be operated, and these restrictions may require significant expenditures. In
connection with the ownership of its properties, ESA may be potentially liable
for any such costs. The cost of defending against claims of liability or
remediating contaminated property and the cost of complying with environmental
laws could materially adversely affect ESA's results of operations and
financial condition.
LOSSES IN EXCESS OF INSURANCE COVERAGE
ESA maintains comprehensive insurance on each of its properties, including
liability, fire, and extended coverage, in the types and amounts customarily
obtained by an owner and operator in ESA's industry.
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Nevertheless, there are certain types of losses, generally of a catastrophic
nature, such as hurricanes, earthquakes, and floods, that may be uninsurable
or not economically insurable. ESA uses its discretion in determining amounts,
coverage limits, and deductibility provisions of insurance, with a view to
obtaining appropriate insurance on ESA's properties at a reasonable cost and
on suitable terms. This may result in insurance coverage that in the event of
a loss would not be sufficient to pay the full current market value or current
replacement value of ESA's lost investment, and the insurance proceeds
received by ESA might not be adequate to restore its economic position with
respect to such property.
RELIANCE ON KEY PERSONNEL
ESA's success depends to a significant extent upon the efforts and abilities
of its senior management and key employees, particularly, Mr. G. Johnson,
President and Chief Executive Officer, and Mr. Robert A. Brannon, Senior Vice
President and Chief Financial Officer ("Mr. Brannon"). The loss of the
services of any of these individuals could have a material adverse effect upon
ESA. ESA does not have employment or consulting agreements with any of its
officers other than Mr. Harold E. Wright nor does it carry key man life
insurance on any of its officers. Studio Plus has an employment agreement with
Michael J. Moriarty which ESA will assume in the Merger.
CONTROL OF ESA BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
As of February 7, 1997, Mr. G. Johnson, the President and Chief Executive
Officer of ESA, H. Wayne Huizenga, the Chairman of the Board of Directors of
ESA ("Mr. Huizenga"), and Stewart H. Johnson, a Director of ESA ("Mr. S.
Johnson"), beneficially owned approximately 27.5% of the outstanding shares of
ESA Common Stock, and these individuals together with other executive officers
and directors of ESA as a group owned approximately 33.9% of the outstanding
shares of ESA Common Stock. Following the Merger, these individuals will own
approximately 23.0% of the outstanding shares of ESA Common Stock, and all
such officers and directors of ESA as a group will own approximately 30.2% of
the outstanding shares of ESA Common Stock (including shares of ESA Common
Stock to be owned by Mr. Cowgill upon consummation of the Merger). In
addition, ESA's debt agreements contain, and future financing arrangements may
contain, provisions regarding the composition of ESA's Board of Directors.
ANTITAKEOVER EFFECT OF CHARTER, BYLAWS, STATUTORY PROVISIONS, AND FINANCING
ARRANGEMENTS
The ownership positions of Mr. G. Johnson, Mr. Huizenga, and Mr. S. Johnson
and the other executive officers and directors of ESA as a group, together
with the anti-takeover effects of Section 203 of the DGCL which, in general,
imposes restrictions upon acquirors of 15% or more of the ESA Common Stock,
and of certain provisions in ESA's Charter and Bylaws, may have the effect of
delaying, deferring, or preventing a change of control of ESA, even if such
event would be beneficial to stockholders. For example, ESA's Charter requires
that all stockholder action must be effected at a duly-called annual or
special meeting of stockholders, and the Bylaws require that stockholders
follow an advance notification procedure for certain stockholder nominations
of candidates for the Board of Directors and for certain other business to be
conducted at any meeting of stockholders. In addition, ESA's Charter
authorizes "blank check" preferred stock, so that ESA's Board of Directors
may, without stockholder approval, issue preferred shares through a
stockholders' rights plan or otherwise which could inhibit a change of
control. In the event that the current members of ESA's Board of Directors
cease to constitute a majority of the Board or Mr. G. Johnson or Mr. Huizenga
ceases to be a member of the Board, amounts outstanding under its current
financing arrangements, if any, would become immediately due.
ABSENCE OF DIVIDENDS
ESA intends to retain its earnings to finance its growth and for general
corporate purposes and therefore does not anticipate paying any cash dividends
in the foreseeable future. In addition, ESA's debt agreements contain, and
future financing agreements may contain, limitations on the payment of cash
dividends or other distributions of assets.
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THE MERGER
The description of the Merger Agreement set forth below does not purport to
be complete and is qualified in its entirety by reference to the Merger
Agreement, which is attached as Appendix A to this Joint Proxy
Statement/Prospectus and is incorporated herein by reference.
GENERAL
At the Effective Time, Studio Plus will be merged with and into Merger Sub.
It is contemplated that after the Merger, the Surviving Corporation will
operate the Studio Plus business substantially as now conducted by Studio
Plus. As a result of the Merger, the stockholders of Studio Plus will become
stockholders of ESA. See "Comparative Rights of Stockholders."
BACKGROUND OF THE MERGER
As part of their evaluation of the extended stay lodging industry in
connection with the formation of ESA in January 1995, Mr. G. Johnson, Mr.
Huizenga and Mr. Brannon met with numerous owners and operators of extended
stay lodging facilities, including Mr. Cowgill of Studio Plus. ESA management
was interested in evaluating the extended stay lodging industry generally, and
determining whether the potential existed to develop strategic relationships
with such owners/operators in connection with ESA's entry into the extended
stay lodging industry. Based on these discussions, ESA determined that the
potential for strategic relationships did not exist at that time because the
existing owner/operators either did not meet ESA's criteria or were not
interested in a strategic relationship. Particularly, at such time Mr. Cowgill
indicated that Studio Plus had no interest in forming a strategic relationship
with ESA. Accordingly, ESA decided to proceed with the development of extended
stay lodging facilities with its own development and operational concepts.
From time to time following the formation of ESA, Mr. G. Johnson has
contacted extended stay lodging owner/operators, including Studio Plus, to
discuss the extended stay lodging industry generally and to indicate ESA's
interest in evaluating the merits of business combinations which would further
the goals of the respective parties. ESA also has performed detailed analyses,
based on publicly available information with respect to public companies and
information estimated by ESA personnel or provided by private businesses, of
the economic impact of such combinations.
In late May 1996, Mr. G. Johnson had a telephone conversation with Mr.
Cowgill in which Mr. G. Johnson indicated that ESA would like to analyze the
effects of a business combination with Studio Plus and that, in order to do
so, ESA would need to evaluate the possibility of the combination being
accounted for as a pooling of interests. To make the determination of whether
the combination could be accounted for as a pooling of interests, ESA's
auditors, Coopers & Lybrand, L.L.P. ("Coopers & Lybrand"), needed to consult
with Studio Plus' auditors, also Coopers & Lybrand, regarding Studio Plus'
formation and subsequent activities. Mr. Cowgill agreed to allow his auditors
to discuss these factors with ESA's auditors on the condition that ESA pay all
fees associated with the analysis and that Studio Plus personnel not be
involved with the analysis.
In early June 1996, Coopers & Lybrand advised ESA that it could not conclude
its analysis without further information from and cooperation by Studio Plus.
Mr. Cowgill denied ESA's request for additional information because Studio
Plus had no interest in evaluating a business combination with ESA at that
time. ESA immediately terminated its engagement of Coopers & Lybrand to
perform the pooling of interests analysis. ESA did not make a proposal and did
not discuss specific terms of a business combination with Studio Plus at that
time.
In November 1996, Mr. G. Johnson asked Mr. Cowgill whether Studio Plus would
be interested in considering a possible business combination with ESA. On
November 18, 1996, Mr. G. Johnson and Mr. Brannon, on behalf of ESA, and Mr.
Cowgill and Mr. James C. Baughman, Jr., the Chief Financial Officer and
Treasurer of Studio Plus ("Mr. Baughman"), on behalf of Studio Plus,
participated in a telephone conversation
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in which Mr. G. Johnson stated that ESA would consider issuing ESA Common
Stock to Studio Plus stockholders based on an exchange ratio that valued
Studio Plus Common Stock at between $18 and $20 per share, subject to
additional due diligence and other conventional terms. Mr. Cowgill indicated
that while he would be willing to discuss the proposal with the Board of
Directors of Studio Plus, he would need to have a much better understanding of
the other terms and conditions in such a business combination, including the
time required to close such a transaction, the income tax impact to Studio
Plus stockholders, and any restrictions on the ESA Common Stock which would be
received in exchange for Studio Plus Common Stock. Therefore, the parties
agreed that Mr. Brannon and Mr. Baughman would meet in Atlanta, Georgia on
November 19, 1996, with legal counsel for the respective companies, to discuss
the process involved in, and issues related to, such a transaction.
On November 19, 1996, Mr. Brannon and a representative of Bell, Boyd &
Lloyd, counsel to ESA, met with Mr. Baughman and a representative of King &
Spalding, counsel to Studio Plus, at the offices of King & Spalding in
Atlanta. At that meeting, the parties discussed and summarized the significant
issues that would need to be addressed in a merger agreement. The parties also
discussed the steps necessary to complete such a transaction and the related
time schedule. No negotiations were held nor were any agreements reached in
this meeting because the purpose of the meeting was solely to educate each of
the companies as to the issues involved in such a transaction.
Following the November 19, 1996 meeting in Atlanta, Mr. Brannon and Mr.
Baughman each consulted with Mr. G. Johnson and Mr. Cowgill, respectively,
regarding the issues presented at the meeting. On November 21, 1996, Mr.
Cowgill met with Mr. G. Johnson, Mr. Huizenga and Mr. Brannon in Ft.
Lauderdale, Florida to discuss further the issues presented at the Atlanta
meeting and the merits of an ESA/Studio Plus business combination. Mr. Cowgill
expressed some reservations regarding the amount of the proposed
consideration, but indicated that he would at least present the proposal to
the Board of Directors of Studio Plus. Mr. G. Johnson indicated that ESA would
be willing to further evaluate the proposed consideration based upon
additional information regarding the prospects for Studio Plus' business. Mr.
Cowgill suggested that the parties execute a confidentiality agreement before
any non-public information was exchanged. Mr. Johnson agreed and asked that
such an agreement be forwarded to ESA as soon as possible.
On November 22, 1996, Mr. Cowgill called a meeting of the Board of Directors
of Studio Plus to advise the board of the communications he had received from
ESA and several other lodging companies regarding a possible business
combination involving Studio Plus. At this meeting, the Studio Plus Board of
Directors authorized Studio Plus management to continue discussions with ESA
and any other entities deemed appropriate regarding a potential business
combination involving Studio Plus. Further, the Studio Plus Board of Directors
authorized management to retain an investment banking firm to serve as Studio
Plus' financial advisor in connection with the consideration of such strategic
alternatives. Studio Plus subsequently retained Smith Barney to assist Studio
Plus in connection with a potential transaction.
On November 27, 1996, ESA and Studio Plus entered into a confidentiality
agreement regarding confidential information of both Studio Plus and ESA, but
no information was delivered by either party pursuant to such agreement
because Mr. Cowgill indicated that he needed additional time to discuss the
ESA proposal with the Studio Plus Board of Directors.
On December 4, 1996, a meeting of the Board of Directors of Studio Plus was
held. Studio Plus' management and financial advisors were present at the
meeting and a discussion was had regarding Mr. Cowgill's conversations with
ESA, the extended stay lodging industry generally and other possible strategic
partners which may have an interest in a transaction with Studio Plus. After
discussion, the Studio Plus Board of Directors requested that Smith Barney
contact a select group of possible strategic partners with respect to a
potential transaction with Studio Plus.
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On December 10, 1996, Mr. G. Johnson and Mr. Robert W. Levis (Vice
President-Corporate Development of ESA Management, Inc., a wholly-owned
subsidiary of ESA), on behalf of ESA, and Mr. Cowgill and Mr. Baughman, on
behalf of Studio Plus, met in St. Petersburg, Florida to discuss further the
ESA proposal. At this meeting, Mr. G. Johnson indicated that ESA would
consider an exchange ratio that valued Studio Plus Common Stock at up to $21
per share, again based on further due diligence and the receipt of additional
information which would validate the proposed exchange ratio. Mr. Cowgill
indicated that he would again discuss the proposal with the Studio Plus Board
of Directors and respond to the ESA proposal.
ESA was notified on December 12, 1996 that Smith Barney had been requested
by the Studio Plus Board of Directors to solicit other potential parties to a
transaction with Studio Plus. At that time, Mr. G. Johnson indicated that ESA
was considering other business combinations, as well as its own development of
a mid-price extended stay lodging product, and that the time delay in reaching
a decision might preclude ESA from consummating a business combination with
Studio Plus in the future. Therefore, Mr. G. Johnson indicated that any
previous proposals by ESA should no longer be considered by Studio Plus.
On December 26, 1996, Mr. G. Johnson, Mr. Huizenga and Mr. Brannon met to
discuss the options available to ESA to expand ESA's development in the
extended stay lodging industry. Based on these discussions, it was determined
that Studio Plus offered the best opportunity to enter the mid-price segment
of the extended stay industry and that, if a definitive agreement for a
business combination with Studio Plus could be completed in the near future at
a price acceptable to ESA, such a transaction should be pursued before
committing to any of the alternatives. Following the meeting, Mr. G. Johnson
immediately contacted a representative of DLJ and asked DLJ to act as its
financial advisor in connection with a transaction with Studio Plus and
requested that DLJ contact Smith Barney. On that day, DLJ contacted Smith
Barney and indicated that ESA was considering other business transactions
that, if implemented, could preclude or significantly delay discussions
regarding a possible business combination with Studio Plus, but that ESA would
be prepared to engage in immediate discussions regarding a possible business
combination with Studio Plus before pursuing such other transactions. After
further discussions between DLJ and Smith Barney (and such advisors and their
respective clients), DLJ, on behalf of ESA, executed a revised confidentiality
agreement on December 30, 1996, relating to confidential information of Studio
Plus, and thereafter received a package containing such information regarding
Studio Plus.
On January 2 and 3, 1997, DLJ and Smith Barney had numerous telephone
conversations discussing the data in the confidential information package. On
January 6, 1997, DLJ and Smith Barney met to discuss further the financial and
operating data included in the confidential information package as well as
additional property and development data provided to DLJ at the meeting. The
representatives of DLJ and Smith Barney also discussed timing issues and steps
necessary to complete a potential transaction between ESA and Studio Plus.
On January 8, 1997, Smith Barney representatives met with representatives of
another possible partner of Studio Plus to discuss financial and operational
data relating to Studio Plus which had been provided to such party. Also on
January 8, 1997, ESA submitted, through DLJ, an oral offer to acquire Studio
Plus in a merger transaction with a fixed exchange ratio, with no adjustment
provisions, that valued Studio Plus Common Stock at $22.00 to $23.00 per
share, subject to terms and conditions customary for such a transaction. At
that time, DLJ confirmed that if an agreement could not be reached within a
reasonable period of time, ESA was prepared to move forward with other
activities which could preclude or significantly delay further discussions
with Studio Plus. None of the other potential participants in a transaction
with Studio Plus had submitted a formal preliminary indication of interest in
proceeding with a transaction with Studio Plus at that time.
On January 9, 1997, DLJ further discussed terms of the offer with Smith
Barney. Terms discussed at this time included termination fees to be paid to
ESA should a transaction not be consummated, and the proxy of Mr. Cowgill to
vote his shares in favor of the merger.
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On January 10, 1997, the parties reached agreement on the fixed exchange
ratio, subject to certain conditions and adjustments. Discussions continued on
January 11 and 12, 1997, and plans were made for due diligence and resolution
of the final terms of the Merger at the offices of King & Spalding on January
14, 1997.
On January 14, 1997, Mr. Brannon and Mr. Levis and representatives of DLJ,
Bell, Boyd & Lloyd and Coopers & Lybrand met at the offices of King & Spalding
in Atlanta with Mr. Baughman and Mr. Michael Moriarty, President of Studio
Plus, and representatives of Smith Barney, King & Spalding and Coopers &
Lybrand. Mr. Cowgill and Mr. G. Johnson participated telephonically from time-
to-time throughout the meeting. At that meeting, which continued until the
morning of January 16, 1997, ESA and Studio Plus exchanged more detailed
financial, legal and business due diligence information and negotiated the
remaining terms of the Merger. By the morning of January 16, 1997, the final
terms of the Merger had been reached, subject to approval by the Boards of
Directors of ESA and Studio Plus.
On the afternoon of January 16, 1997, at a special meeting, the members of
the Board of Directors of ESA, with Mr. Brannon and representatives of DLJ and
Bell, Boyd & Lloyd in attendance, met to consider the proposed Merger with
Studio Plus. The Board of Directors of ESA heard a presentation from DLJ on
the financial terms of the Merger and DLJ delivered to the ESA Board of
Directors its oral opinion to the effect that the Exchange Ratio was fair to
ESA from a financial point of view. (See "--Opinion of ESA's Financial
Advisor"). Legal counsel to ESA then reviewed with the ESA Board of Directors
the material provisions of the Merger Agreement and related documents. After a
discussion of the terms of the Merger Agreement, the ESA Board of Directors
unanimously approved the Merger Agreement.
On the afternoon of January 16, 1997, at a special meeting, the members of
the Studio Plus Board of Directors met to consider the proposed transaction
with ESA. At such meeting, legal counsel to Studio Plus reviewed with the
Board of Directors the drafts of the Merger Agreement and related agreements
and the fiduciary duties of the Studio Plus Board of Directors in connection
with the proposed Merger. Smith Barney then delivered to the Studio Plus Board
of Directors its opinion to the effect that, as of such date and based upon
and subject to certain matters stated in such opinion, the Exchange Ratio was
fair, from a financial point of view, to the holders of Studio Plus Common
Stock. Smith Barney also reviewed with the Studio Plus Board of Directors the
financial analyses performed by Smith Barney in connection with such opinion
(See "--Opinion of Studio Plus' Financial Advisor"). Studio Plus' independent
accountants discussed the accounting treatment for the transaction with the
Studio Plus Board of Directors. Studio Plus' management also reported to the
Board of Directors on the results of the due diligence review of ESA. The
Studio Plus Board of Directors engaged Studio Plus' management and its
advisors in a thorough discussion of the proposed transaction. After such
discussion, the Studio Plus Board of Directors unanimously approved the Merger
Agreement.
After the Studio Plus special Board of Directors meeting ended in the
evening of January 16, 1997, Studio Plus and ESA executed the Merger
Agreement; ESA, Mr. Cowgill, and the Cowgill Partners executed the Stockholder
Agreement; and Mr. G. Johnson and Studio Plus executed the Voting Agreement.
On January 17, 1997, the parties issued a joint press release announcing the
Merger.
STUDIO PLUS' REASONS FOR THE MERGER; RECOMMENDATION OF STUDIO PLUS' BOARD OF
DIRECTORS
At a meeting held on January 16, 1997, the Board of Directors of Studio Plus
unanimously determined that the terms of the Merger are in the best interests
of Studio Plus and its stockholders. In reaching its determination, the Studio
Plus Board of Directors consulted with Studio Plus management, as well as
Studio Plus' legal counsel, financial advisor, and accountants, and considered
a number of factors, including, without limitation, the following:
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(i) Studio Plus' Business, Condition, and Prospects. The Studio Plus
Board of Directors considered information with respect to the financial
condition, results of operations and business of Studio Plus, and current
industry, economic and market conditions. The Studio Plus Board of
Directors considered Studio Plus' historical growth strategies and
determined that a combination with ESA would allow Studio Plus stockholders
to receive the benefits of synergies between the operating capabilities of
Studio Plus and the development capabilities of ESA.
(ii) ESA's Business, Condition and Prospects. The Studio Plus Board of
Directors considered information with respect to the financial condition,
results of operations and business of ESA, on both a historical and
prospective basis, and current industry, economic and market conditions.
Management and Studio Plus' financial advisor reviewed with the Studio Plus
Board of Directors information regarding ESA's financial condition and
prospects after conducting business and financial due diligence. The Studio
Plus Board of Directors considered, among other things, the strength of
ESA's management team (including, in particular, their development
expertise), the rapid pace of its development activities, and the
geographical distribution of its existing and planned properties. The
Studio Plus Board of Directors also found favorable the fact that ESA
enjoyed a higher market capitalization and perceived greater access to the
capital markets than Studio Plus.
(iii) Value/Nature of Merger Consideration. In evaluating the Merger, the
Studio Plus Board of Directors considered the value and nature of the
consideration to be received by Studio Plus stockholders in the Merger. At
the Effective Time, each share of Studio Plus Common Stock will be
converted into the right to receive 1.2272 shares of ESA Common Stock. At
the time the Board of Directors of Studio Plus approved the Merger
Agreement, the market value of the 1.2272 shares of ESA Common Stock was
approximately $22.86 (based on the closing sale price of $18.625 per share
on January 16, 1997). The Studio Plus Board of Directors considered as
favorable to its determination the fact that the value to be received per
share of Studio Plus Common Stock represented a premium of more than 54%
over the closing sale price of $14.75 for Studio Plus Common Stock on
January 16, 1997, the last trading day preceding the announcement of the
Merger. The Studio Plus Board of Directors took into account that the
implied value of the consideration to be received by holders of Studio Plus
Common Stock in the Merger based on the then current price of ESA Common
Stock compared favorably to the range of implied equity values for Studio
Plus reflected in the financial analyses prepared by Studio Plus' financial
advisor. See "--Opinion of Studio Plus' Financial Advisor." The shares of
ESA Common Stock to be issued in the Merger will be registered under the
Securities Act and quoted on The Nasdaq Stock Market. As a result, Studio
Plus stockholders will receive freely transferable stock that can be sold
in the public market (subject to certain limitations applicable to
stockholders deemed to be "affiliates" of Studio Plus). In addition, the
Merger will constitute a tax-free reorganization for federal income tax
purposes. See "--Certain Federal Income Tax Consequences."
(iv) Termination Provisions and Termination Fee. The Studio Plus Board of
Directors considered the provisions of the Merger Agreement that permit the
Studio Plus Board of Directors to continue to receive unsolicited inquiries
and proposals and to terminate the Merger Agreement upon payment to ESA of
a $7.5 million termination fee, if, by reason of an Alternative Proposal
being made, the Studio Plus Board of Directors determines that such
termination is necessary in the exercise of its fiduciary duties to
stockholders. The Studio Plus Board of Directors concluded that the amount
of the termination fee in relation to the value of the Merger Consideration
would give the Studio Plus Board of Directors sufficient flexibility to
consider Alternative Proposals.
(v) Opinion of Smith Barney. The Studio Plus Board of Directors
considered as favorable to its determination the financial presentation and
oral opinion of Smith Barney delivered to the Studio Plus Board of
Directors at its meeting on January 16, 1997 (which oral opinion was
subsequently confirmed by delivery of a written opinion dated January 16,
1997) to the effect that, as of such date and based upon and subject to
certain matters stated in such opinion, the Exchange Ratio was fair, from a
financial point of view, to the holders of Studio Plus Common Stock. See
"--Opinion of Studio Plus' Financial Advisor."
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(vi) Other Prospective Merger Partners. The Studio Plus Board of
Directors reviewed the discussions with other lodging companies regarding a
potential transaction with Studio Plus. The Board of Directors considered
that none of those prospective merger partners had submitted a formal
preliminary indication of interest in proceeding with a transaction with
Studio Plus. In addition, the Studio Plus Board of Directors considered
approaching other companies about a possible business combination, but
concluded any such discussions were unlikely to result in a transaction on
terms as favorable as the Merger.
In view of the wide variety of factors considered in connection with its
evaluation of the Merger, the Studio Plus Board of Directors did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination.
THE BOARD OF DIRECTORS OF STUDIO PLUS BELIEVES THAT THE MERGER AGREEMENT IS
FAIR TO, AND IN THE BEST INTERESTS OF, STUDIO PLUS AND ITS STOCKHOLDERS AND
HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS OF STUDIO PLUS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
OPINION OF STUDIO PLUS' FINANCIAL ADVISOR
Smith Barney was retained by Studio Plus to act as its financial advisor in
connection with the Merger. In connection with such engagement, Studio Plus
requested that Smith Barney evaluate the fairness, from a financial point of
view, to the holders of Studio Plus Common Stock of the consideration to be
received by such holders in the Merger. On January 16, 1997, at a meeting of
the Board of Directors of Studio Plus held to evaluate the Merger, Smith
Barney delivered an oral opinion (subsequently confirmed by delivery of a
written opinion dated January 16, 1997) to the Board of Directors of Studio
Plus to the effect that, as of the date of such opinion and based upon and
subject to certain matters stated therein, the Exchange Ratio was fair, from a
financial point of view, to the holders of Studio Plus Common Stock.
In arriving at its opinion, Smith Barney reviewed the Merger Agreement and
held discussions with certain senior officers, directors and other
representatives and advisors of Studio Plus and certain senior officers and
other representatives and advisors of ESA concerning the businesses,
operations, and prospects of Studio Plus and ESA. Smith Barney examined
certain publicly available business and financial information relating to
Studio Plus and ESA as well as certain financial forecasts and other
information and data for Studio Plus and ESA which were provided to or
otherwise discussed with Smith Barney by the respective managements of Studio
Plus and ESA, including information relating to certain strategic implications
and operational benefits anticipated to result from the Merger. Smith Barney
reviewed the financial terms of the Merger as set forth in the Merger
Agreement in relation to, among other things: current and historical market
prices and trading volumes of Studio Plus Common Stock and ESA Common Stock;
the respective companies' historical and projected earnings and other
operating data (including current and anticipated operating results from
existing and planned properties); and the capitalization and financial
condition of Studio Plus and ESA. Smith Barney also considered, to the extent
publicly available, the financial terms of other transactions recently
effected which Smith Barney considered relevant in evaluating the Merger and
analyzed certain financial, stock market and other publicly available
information relating to the businesses of other companies whose operations
Smith Barney considered relevant in evaluating those of Studio Plus and ESA.
Smith Barney also evaluated the potential pro forma financial impact of the
Merger on ESA. In connection with its engagement, Smith Barney was requested
to approach on a limited basis, and held discussions with, certain third
parties to solicit indications of interest in a possible acquisition of Studio
Plus. In addition to the foregoing, Smith Barney conducted such other analyses
and examinations and considered such other financial, economic and market
criteria as Smith Barney deemed appropriate in arriving at its opinion. Smith
Barney noted that its opinion was necessarily based upon information
available, and financial, stock market and other conditions and circumstances
existing and disclosed, to Smith Barney as of the date of its opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information and data publicly available or furnished to or
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otherwise reviewed by or discussed with Smith Barney. With respect to
financial forecasts and other information and data furnished to or otherwise
reviewed by or discussed with Smith Barney, the managements of Studio Plus and
ESA advised Smith Barney that their respective forecasts and other information
and data were reasonably prepared reflecting the best currently available
estimates and judgments of the managements of Studio Plus and ESA,
respectively, as to the future financial performance of Studio Plus and ESA,
respectively, and the strategic implications and operational benefits
anticipated to result from the Merger. Smith Barney assumed, with the consent
of the Board of Directors of Studio Plus, that the Merger will be treated as a
pooling of interests in accordance with generally accepted accounting
principles and as a tax-free reorganization for federal income tax purposes.
Smith Barney did not express any opinion as to what the value of ESA Common
Stock actually will be when issued to Studio Plus stockholders pursuant to the
Merger or the price at which ESA Common Stock will trade subsequent to the
Merger. Smith Barney did not make and was not provided with an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of Studio Plus or ESA nor did Smith Barney make any physical inspection of the
properties or assets of Studio Plus or ESA. Although Smith Barney evaluated
the Exchange Ratio from a financial point of view, Smith Barney was not asked
to and did not recommend the specific consideration payable in the Merger,
which was determined through negotiation between Studio Plus and ESA. No other
limitations were imposed by Studio Plus on Smith Barney with respect to the
investigations made or procedures followed by Smith Barney in rendering its
opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF SMITH BARNEY DATED JANUARY 16, 1997,
WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON
THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS APPENDIX B, AND IS INCORPORATED
HEREIN BY REFERENCE. HOLDERS OF STUDIO PLUS COMMON STOCK ARE URGED TO READ
THIS OPINION CAREFULLY IN ITS ENTIRETY. THE OPINION OF SMITH BARNEY IS
DIRECTED TO THE BOARD OF DIRECTORS OF STUDIO PLUS AND RELATES ONLY TO THE
FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW, DOES NOT
ADDRESS ANY OTHER ASPECT OF THE MERGER OR RELATED TRANSACTIONS AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER
SHOULD VOTE AT THE STUDIO PLUS MEETING. THE SUMMARY OF THE OPINION OF SMITH
BARNEY SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In preparing its opinion, Smith Barney performed a variety of financial and
comparative analyses, including those described below. The summary of such
analyses does not purport to be a complete description of the analyses
underlying Smith Barney's opinion. The preparation of a fairness opinion is a
complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, such an opinion
is not readily susceptible to summary description. Accordingly, Smith Barney
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and factors, without considering all analyses and
factors, could create a misleading or incomplete view of the processes
underlying such analyses and opinion. In its analyses, Smith Barney made
numerous assumptions with respect to Studio Plus, ESA, industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of Studio Plus and ESA. The estimates
contained in such analyses and the valuation ranges resulting from any
particular analysis are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or
less favorable than those suggested by such analyses. In addition, analyses
relating to the value of businesses or securities do not purport to be
appraisals or to reflect the prices at which businesses or securities actually
may be sold. Accordingly, such analyses and estimates are inherently subject
to substantial uncertainty. Smith Barney's opinion and analyses were only one
of many factors considered by the Board of Directors of Studio Plus in its
evaluation of the Merger and should not be viewed as determinative of the
views of the Board of Directors or management of Studio Plus with respect to
the Exchange Ratio or the Merger.
Selected Company Analysis. Using publicly available information, Smith
Barney analyzed, among other things, the market values and trading multiples
of Studio Plus and the following 21 selected publicly traded companies in the
lodging and extended stay industries, consisting of: (i) Lodging Companies:
Marriott International, Inc., La Quinta Inns, Inc., Promus Hotels Corporation,
Choice Hotels International, Inc., Interstate Hotels Company, Prime
Hospitality Corp., Bristol Hotel Company, Wyndham Hotel Corporation, Capstar
Hotel
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Company, Doubletree Corporation, Red Roof Inns, Inc., HFS Incorporated, Hilton
Hotels Corporation, Host Marriott Corporation, Red Lion Inns L.P., Renaissance
Hotel Group N.V., and John Q. Hammons Hotels, Inc. (the "Lodging Companies")
and (ii) Extended Stay Companies: ESA, Suburban Lodges of America, Inc.,
Homegate Hospitality, Inc., and Candlewood Hotel Corporation (the "Extended
Stay Companies" and, together with the Lodging Companies, the "Selected
Companies"). Smith Barney compared market values as multiples of, among other
things, estimated calendar 1997 and 1998 net income, and adjusted market
values (equity market value, plus total debt, minority interest and the book
value of preferred stock, less cash and cash equivalents) as multiples of,
among other things, estimated calendar 1997 earnings before interest, taxes,
depreciation and amortization ("EBITDA"). Net income projections for the
Selected Companies were based on estimates of selected investment banking
firms, and net income projections for Studio Plus were based on internal
estimates of the management of Studio Plus. All multiples were based on
closing stock prices as of January 15, 1997. Applying a range of mean
multiples (excluding outliers) for the Selected Companies of estimated
calendar 1997 and estimated calendar 1998 net income of 20.8x to 26.8x and
14.4x to 16.5x, respectively, and estimated calendar 1997 EBITDA of 9.6x to
18.2x to corresponding financial data for Studio Plus resulted in an equity
reference range for Studio Plus of approximately $17.84 to $25.14 per share,
as compared to the equity value implied by the Exchange Ratio of approximately
$23.47 per share based on the average closing stock price of ESA Common Stock
for the five trading days ending January 15, 1997.
No company or business used in the "Selected Company Analysis" as a
comparison is identical to Studio Plus or ESA. Accordingly, an analysis of the
results of the foregoing is not entirely mathematical; rather, it involves
complex considerations and judgments concerning differences in financial and
operating characteristics and other factors that could affect the acquisition,
public trading or other values of the Selected Companies or the business
segment or company to which they are being compared.
Projected 1998 Net Income and EBITDA Analysis. Using publicly available
information and internal estimates of the management of Studio Plus, Smith
Barney compared market values of the Selected Companies as a multiple of
estimated calendar 1996 net income and adjusted market values of the Selected
Companies as a multiple of estimated calendar 1996 EBITDA. Applying a range of
selected multiples of estimated calendar 1996 net income and EBITDA for the
Selected Companies of 23.0x to 25.0x and 10.0x to 12.0x, respectively, to
corresponding estimated calendar 1998 financial data for Studio Plus,
discounted to present value using discount rates ranging from 20.0% to 25.0%,
resulted in an equity reference range for Studio Plus of approximately $19.34
to $25.50 per share, as compared to the equity value implied by the Exchange
Ratio of approximately $23.47 based on the average closing stock price of ESA
Common Stock for the five trading days ending January 15, 1997.
Discounted Cash Flow Analysis. Smith Barney performed a discounted cash flow
analysis of the projected free cash flow of Studio Plus for the fiscal years
1997 through 1999, based on internal estimates of the management of Studio
Plus. The stand-alone discounted cash flow analysis of Studio Plus was
determined by (i) adding (x) the present value of projected free cash flows
over the three-year period from 1997 to 1999 and (y) the present value of the
estimated terminal value of Studio Plus in year 1999 and (ii) subtracting the
current net debt of Studio Plus. The range of estimated terminal values for
Studio Plus at the end of the three-year period was calculated by applying
terminal multiples ranging from 9.0x to 10.0x to the projected 1999 EBITDA of
Studio Plus, representing the estimated value of Studio Plus beyond the year
1999. The cash flows and terminal values of Studio Plus were discounted to
present value using discount rates ranging from 20.0% to 25.0%. Based on such
terminal value multiples and discount rates, this analysis resulted in an
equity reference range for Studio Plus of approximately $14.49 to $23.34 per
share, as compared to the equity value implied by the Exchange Ratio of
approximately $23.47 per share based on the average closing stock price of ESA
Common Stock for the five trading days ending January 15, 1997.
Property Value Analysis. Smith Barney analyzed the implied equity values of
the properties of Studio Plus existing or under development for fiscal 1996
and 1997, based on internal estimates of the management of Studio Plus as to,
among other things, the number of hotels and suites opened, under construction
or planned in such fiscal years and the anticipated costs and stabilized cash
flow attributable to such properties. Utilizing terminal value capitalization
rates of stabilized cash flow of 11% to 12%, this analysis resulted in an
equity reference
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range for Studio Plus of approximately $19.31 to $21.12 per share, as compared
to the equity value implied by the Exchange Ratio of approximately $23.47 per
share based on the average closing stock price of ESA Common Stock for the
five trading days ending January 15, 1997.
Pro Forma Merger Analysis. Smith Barney analyzed certain pro forma effects
resulting from the Merger, including, among other things, the impact of the
Merger on ESA's projected earnings per share ("EPS") for fiscal years 1997 and
1998, based on internal estimates of the managements of Studio Plus and ESA.
The results of the pro forma merger analysis suggested that the Merger could
be accretive to ESA's EPS in each of the fiscal years analyzed. The actual
results achieved by the combined company may vary from projected results and
the variations may be material.
Selected Merger and Acquisition Transactions Analysis. Using publicly
available information, Smith Barney reviewed, among other things, the implied
transaction multiples paid or proposed to be paid in the following nine
selected transactions in the lodging industry, consisting of
(acquiror/target): Interstate Hotels Company/Equity Inns, Inc. (Trust Leasing
Inc.), Doubletree Corporation/Red Lion Hotels, Inc., Doubletree
Corporation/RFS, Inc., TRT Holdings Inc./Omni Hotels Group, FelCor Suite
Hotels Inc./Crown Sterling Suites, Starwood Capital Group L.P. and Goldman
Sachs/Westin Hotels (Aoki Corp.), The Hampstead Group, Inc./Harvey
Hotels/United Inns, Inc., Saudi Prince Al-Waleed/Four Seasons Hotels, Inc.,
and Starwood Capital Group L.P./Hotel Investors Trust (collectively, the
"Selected Transactions"). Smith Barney compared transaction values as
multiples of, among other things, latest 12 months EBITDA and earnings before
interest and taxes ("EBIT"). Applying a range of multiples (excluding
outliers) for the Selected Transactions of latest 12 months EBITDA and EBIT of
8.9x to 11.6x and 14.3x to 15.5x, respectively, to corresponding financial
data for Studio Plus resulted in an equity reference range for Studio Plus of
approximately $9.26 to $10.62 per share, as compared to the equity value
implied by the Exchange Ratio of approximately $23.47 per share based on the
average closing stock price of ESA Common Stock for the five trading days
ending January 15, 1997.
No transaction used in the "Selected Merger and Acquisition Transaction
Analysis" as a comparison is identical to the Merger. Accordingly, an analysis
of the results of the foregoing is not entirely mathematical; rather, it
involves complex considerations and judgments concerning differences in
financial and operating characteristics and other factors that could affect
the acquisition or other values of the Selected Transactions or the business
segment or transaction to which they are being compared.
Exchange Ratio Analysis. Smith Barney compared the Exchange Ratio with the
historical ratio of the daily closing prices of Studio Plus Common Stock and
ESA Common Stock during the 20-day and 90-day periods preceding public
announcement of the Merger. The exchange ratios of the daily closing prices of
one share of Studio Plus Common Stock to one share of ESA Common Stock during
the 20-day and 90-day periods preceding public announcement of the Merger were
0.8079 and 0.8454, respectively, as compared to the Exchange Ratio of 1.2272.
Premium Analysis. Smith Barney analyzed the implied premium payable in the
Merger and the premiums paid in approximately 230 selected transactions having
a transaction value of $100 million to $500 million, including transactions in
the real estate industry and the Selected Transactions. The range of mean and
median premiums paid in such transactions (excluding transactions in the real
estate industry and the Selected Transactions) based on the closing stock
price of the acquired company one day prior to public announcement of the
transaction was approximately 20.0% to 24.6%, with a range of mean and median
premiums of approximately 7.6% to 7.9% in the case of transactions in the real
estate industry and approximately 43.6% to 46.7% in the case of the Selected
Transactions, as compared to the implied premium payable in the Merger, based
on closing stock prices of Studio Plus Common Stock and ESA Common Stock on
January 15, 1997, of approximately 59.1%. Based on the average closing stock
price of ESA Common Stock for the five trading days ending January 15, 1997,
this analysis resulted in an equity reference range for Studio Plus of
approximately $18.25 to $18.64 per share, as compared to the equity value
implied by the Exchange Ratio of approximately $23.47 per share.
Other Factors and Comparative Analyses. In rendering its opinion, Smith
Barney considered certain other factors and conducted certain other
comparative analyses, including, among other things, a review of (i)
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indications of interest received from third parties other than ESA; (ii)
historical and projected financial results of Studio Plus and ESA; (iii) the
history of trading prices and volume for Studio Plus Common Stock and ESA
Common Stock and the relationship between movements of such common stock,
movements of the common stock of the Selected Companies and movements in the
S&P 400 Index; (iv) selected published analysts' reports on Studio Plus and
ESA; and (v) the pro forma ownership of the combined company.
Pursuant to the terms of Smith Barney's engagement, Studio Plus has agreed
to pay Smith Barney for its services in connection with the Merger an
aggregate financial advisory fee of $2.7 million. Studio Plus has also agreed
to reimburse Smith Barney for travel and other reasonable out-of-pocket
expenses incurred by Smith Barney in performing its services, including the
reasonable fees and expenses of its legal counsel, and to indemnify Smith
Barney and related persons against certain liabilities, including liabilities
under the federal securities laws, arising out of Smith Barney's engagement.
Smith Barney has advised Studio Plus that, in the ordinary course of
business, Smith Barney and its affiliates may actively trade or hold the
securities of Studio Plus and ESA for their own account or for the account of
customers and, accordingly, may at any time hold a long or short position in
such securities. Smith Barney has in the past provided investment banking and
financial advisory services to Studio Plus and ESA unrelated to the Merger,
for which services Smith Barney has received compensation. In addition, Smith
Barney and its affiliates (including Travelers Group Inc. and its affiliates)
may maintain relationships with Studio Plus and ESA.
Smith Barney is a nationally recognized investment banking firm and was
selected by Studio Plus based on its experience, expertise and familiarity
with Studio Plus and its business. Smith Barney regularly engages in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
ESA'S REASONS FOR THE MERGER; RECOMMENDATION OF ESA'S BOARD OF DIRECTORS
Based on a review by management of ESA of the overall extended stay lodging
industry and the price segments of that industry that complement ESA's
existing economy extended stay product and concept, ESA has concluded that it
is advantageous to expand its product offering into other price segments of
the extended stay lodging industry. ESA believes that the StudioPLUS hotels
are similar in concept and operation to ESA's economy extended stay hotels and
will enable ESA to enter the mid-price segment of the extended stay lodging
industry with a product that is already established. The Merger with Studio
Plus also will immediately give ESA an experienced team of development,
construction and operations personnel which should allow ESA to pursue rapid
growth in the mid-price segment of the extended stay lodging industry.
At a meeting held on January 16, 1997, the Board of Directors of ESA
unanimously approved the Merger Agreement and the transactions contemplated
thereby. In reaching its decision, the Board of Directors of ESA considered
several factors including, among others, the following: the benefit to both
Studio Plus and ESA of a strategy of utilizing one another's management,
marketing, development and construction expertise; the extent to which
StudioPLUS hotels matched a product and price point that ESA had previously
determined to develop independently; the extent to which the StudioPLUS chain
of hotels and Studio Plus' development capabilities could accelerate ESA's
entry into the mid-price segment of the extended stay lodging market; the
number of properties owned and operated by Studio Plus relative to other
companies operating in the mid-price segment; the geographical dispersion of
Studio Plus' properties; the extent to which financing from ESA may be able to
accelerate the development of StudioPLUS hotels; and the valuation of the
Merger Consideration relative to the historical and projected financial
performance of Studio Plus.
THE BOARD OF DIRECTORS OF ESA BELIEVES THAT THE MERGER AGREEMENT IS FAIR TO,
AND IN THE BEST INTERESTS OF, ESA AND ITS STOCKHOLDERS AND HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS OF
ESA VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY.
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OPINION OF ESA'S FINANCIAL ADVISOR
Studio Plus and ESA, through negotiations, jointly determined the Exchange
Ratio. DLJ has acted as financial advisor to ESA in connection with the Merger
Agreement and the transactions contemplated thereby, and has delivered the DLJ
Opinion to ESA dated January 16, 1997. The DLJ Opinion, including the factors
considered, the assumptions made and the procedures followed, are set forth as
Appendix C to this Joint Proxy Statement/Prospectus and should be read in full
and reviewed carefully by the stockholders of ESA. In addition to assisting in
the negotiations of the Merger Agreement and rendering its fairness opinion,
DLJ will provide ongoing and customary advisory services as reasonably
requested by ESA in connection with the Merger.
In its role as financial advisor to ESA, DLJ was asked by ESA to render an
opinion to the Board of Directors of ESA as to the fairness of the Exchange
Ratio to ESA from a financial point of view. On January 16, 1997, DLJ
delivered an oral opinion (subsequently confirmed by a written opinion of the
same date) to the Board of Directors that the Exchange Ratio was fair to ESA
from a financial point of view as of that date.
THE FULL TEXT OF THE WRITTEN OPINION OF DLJ, DATED JANUARY 16, 1997, IS
ATTACHED HERETO AS APPENDIX C. THE DLJ OPINION SHOULD BE READ CAREFULLY AND IN
ITS ENTIRETY FOR ASSUMPTIONS MADE, MATTERS CONSIDERED, SCOPE AND LIMITS OF THE
REVIEW AND PROCEDURES FOLLOWED BY DLJ IN CONNECTION WITH SUCH OPINION.
DLJ was selected to act as financial advisor to ESA because of its expertise
and familiarity with ESA's previous offerings of its securities. DLJ was not
retained as an advisor or agent to the stockholders of ESA or any other person
and rendered the DLJ Opinion for the benefit of the Board of Directors of ESA.
DLJ is a nationally recognized investment banking firm and is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
listed and unlisted securities, leveraged buy-outs and valuations for estate,
corporate and other purposes.
The DLJ Opinion does not constitute a recommendation to any stockholder as
to how such stockholder should vote at the Meetings. The DLJ Opinion does not
constitute an opinion as to the price at which the ESA Common Stock will trade
in the future. No restrictions or limitations were imposed by ESA upon DLJ
with respect to the investigations made or the procedures followed by DLJ in
rendering its opinion. ESA did not authorize DLJ to solicit, and DLJ did not
solicit, any third party indications of interest in a purchase of, or business
combination with, ESA or Studio Plus.
In arriving at the DLJ Opinion, DLJ reviewed the Merger Agreement. DLJ also
reviewed financial and other information that was publicly available or
furnished to it on behalf of ESA and Studio Plus including information
provided during discussions with their respective managements. Included in the
information provided were certain financial projections for ESA and Studio
Plus, respectively. In addition, DLJ examined the impact of the Merger on
earnings per share of ESA, compared to the relative contribution of both ESA's
and Studio Plus' revenue, operating cash flow and other measures to ESA's and
Studio Plus' relative ownership of the combined companies upon giving effect
to the Merger; reviewed the historical stock prices of ESA Common Stock and
Studio Plus Common Stock; performed a discounted cash flow analysis; and
conducted such other financial studies, analyses and investigations as DLJ
deemed appropriate for purposes of rendering the DLJ Opinion. DLJ also
discussed the past and current operations, financial condition and prospects
of ESA and Studio Plus with the respective managements of ESA and Studio Plus.
In rendering the DLJ Opinion, DLJ relied upon and assumed, without
independent verification, the accuracy, completeness and fairness of all of
the financial and other information that was available to it from public
sources, that was provided to it by ESA and Studio Plus or their respective
representatives or that was otherwise reviewed by it. DLJ also assumed that
the financial projections supplied to it were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
respective managements of ESA and Studio Plus as to the future operating and
financial performance of ESA and Studio Plus, respectively. DLJ did not make
any independent evaluation of the assets, liabilities or operations of ESA or
Studio Plus, nor did DLJ verify the information reviewed by it. DLJ made no
independent investigation of any legal matters affecting ESA or Studio Plus
and assumed the correctness of all legal advice given to ESA by its counsel.
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The DLJ Opinion is necessarily based on economic, market, financial and
other conditions as they existed on, and on the information made available to
it as of, the date of its opinion. It should be understood that, although
subsequent developments may affect the DLJ Opinion, DLJ does not have any
obligation to update, revise or reaffirm the DLJ Opinion.
The following is a summary of the presentation made by DLJ to the ESA Board
in connection with the DLJ Opinion.
Pro Forma Merger Analysis. DLJ analyzed certain pro forma effects resulting
from the Merger. DLJ analyzed the pro forma effect of the Merger on EPS and
EBITDA per share for ESA. The analysis indicated that the pro forma EPS and
pro forma EBITDA per share of ESA would be higher in each of the fiscal years
ending 1997 through 2000 than comparable projections for such years for ESA as
a stand-alone company during the same period. The results of the pro forma
combination analysis are based upon the assumptions and projections supplied
by the managements of ESA and Studio Plus, and are not necessarily indicative
of future operating results or financial position.
Contribution Analysis. DLJ analyzed ESA's and Studio Plus' relative
contribution to the combined companies with respect to revenues and EBITDA.
Its analysis was made for the projected fiscal years ended December 31, 1997
through 2000. As of the date of the DLJ Opinion, as a result of the Merger ESA
stockholders would have owned approximately 81% of the combined companies.
This compares with ESA's projected contribution to the combined companies' pro
forma results for the fiscal years ended December 31, 1997 through 2000 of
67%, 65%, 64%, and 64% of revenues and 56%, 61%, 62%, and 62% of EBITDA,
respectively.
Stock Trading History. To provide contextual data and comparative market
data, DLJ examined the history of the trading prices and their relative
relationships for both ESA Common Stock and Studio Plus Common Stock from June
20, 1995 to January 14, 1997. This information was presented solely to provide
the Board of Directors of ESA with background information regarding the stock
prices of Studio Plus and ESA over the period indicated.
Discounted Cash Flow Analysis. DLJ also performed a discounted cash flow
analysis to evaluate the consideration being paid in the Merger. In conducting
this analysis, DLJ relied on certain assumptions, financial forecasts and
other information provided by Studio Plus and ESA management. Using the
information set forth in the Studio Plus forecast, DLJ calculated the
estimated "Free Cash Flow" based on projected unleveraged operating income
adjusted for: (i) taxes; (ii) certain projected non-cash items (i.e.,
depreciation and amortization); and (iii) projected capital expenditures. DLJ
analyzed the Studio Plus forecast and discounted the stream of free cash flows
from fiscal 1997 to fiscal 2000 provided in such projections to December 31,
1996 using discount rates ranging from 14% to 18%. To estimate the residual
value of Studio Plus at the end of the forecast period, DLJ applied terminal
multiples of 10.0 times to 13.0 times the projected fiscal 2000 EBITDA and
discounted such value estimates to December 31, 1996 using discount rates
ranging from 14% to 18%. DLJ then summed the present values of the free cash
flows and the present values of the residual values to derive a range of
implied enterprise values for Studio Plus. The range of implied enterprise
values of Studio Plus was then adjusted for net debt to yield implied equity
values of Studio Plus. The implied equity value range of $436.7 million to
$862.9 million was then divided by the current fully diluted shares
outstanding provided by the management of Studio Plus to yield an implied
equity value range of $33.98 to $67.14 per fully diluted share.
The summary set forth above does not purport to be a complete description of
the analyses performed by DLJ. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Accordingly, notwithstanding the separate factors
summarized above, DLJ believes that its analyses must be considered as a whole
and that selecting portions of its analyses and the factors considered by it,
without considering all analyses and factors, could create an incomplete view
of the evaluation process underlying its opinions. In performing its analyses,
DLJ made numerous assumptions with respect to industry performance, business
and economic conditions and
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other matters. The analyses performed by DLJ are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than suggested by such analyses.
Pursuant to the terms of an engagement letter dated January 14, 1997, ESA
has agreed to pay DLJ a fee of $500,000 upon delivery of the DLJ Opinion and
an additional fee of $1,000,000 upon consummation of the Merger. ESA has also
agreed to reimburse DLJ promptly for all out-of-pocket expenses (including the
reasonable fees and out-of-pocket expenses of counsel) incurred by DLJ in
connection with its engagement, which will not exceed $25,000 without the
prior approval of ESA, and to indemnify DLJ and certain related persons
against certain liabilities in connection with its engagement, including
liabilities under the federal securities laws. The terms of the fee
arrangement with DLJ, which DLJ and ESA believe are customary in transactions
of this nature, were negotiated at arm's length between ESA and DLJ, and the
Board of Directors of ESA was aware of such arrangement, including the fact
that a significant portion of the aggregate fee payable to DLJ is contingent
upon consummation of the Merger.
In the ordinary course of business, DLJ actively trades the securities of
ESA for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short portion in the securities.
DLJ, as part of its investment banking services, is regularly engaged in the
valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes.
Since January 1995, DLJ acted as the lead-managing underwriter in connection
with (i) the initial public offering of ESA Common Stock in December 1995 and
(ii) the June 1996 offering of ESA Common Stock. In addition, as of December
31, 1996, DLJ and its affiliates owned in the aggregate 1,883,914 shares of
ESA Common Stock.
MANAGEMENT OF ESA AFTER THE MERGER; INTERESTS OF CERTAIN PERSONS IN THE MERGER
Following the Merger, Merger Sub will be the Surviving Corporation and a
wholly-owned subsidiary of ESA. The Certificate of Incorporation of Merger Sub
as amended at the Effective Time will be the Certificate of Incorporation of
the Surviving Corporation after the Merger and the Bylaws of Merger Sub at the
Effective Time will be the Bylaws of the Surviving Corporation after the
Merger, in each case until amended in accordance with their terms and
applicable law.
Pursuant to the terms of the existing options to purchase Studio Plus Common
Stock, all of such options held by management of Studio Plus will become fully
vested as of the Effective Time and will be converted into options to purchase
shares of ESA Common Stock. In addition, pursuant to the terms of the Merger
Agreement, ESA will be required to maintain, or cause the Surviving
Corporation to maintain, directors' and officers' liability insurance for
Studio Plus' officers and directors for six years following the Merger for
events occurring prior to the Merger.
It is a condition to the consummation of the Merger that Mr. Cowgill shall
have been appointed to the Board of Directors of ESA. It is also a condition
to the obligations of Studio Plus to consummate the Merger that ESA execute
the Registration Rights Agreement, pursuant to which Mr. Cowgill and Cowgill
Partners will receive registration rights with respect to ESA Common Stock to
be received in the Merger. See "--Registration Rights Agreement."
EXCHANGE OF SHARES; FRACTIONAL SHARES
Upon the proper filing with the Secretary of State of Delaware and the State
Corporation Commission of Virginia of a Certificate of Merger, the Merger will
become effective and each share of Studio Plus Common Stock outstanding
immediately prior to the Effective Time (other than shares which are held by
Studio Plus
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stockholders who have properly exercised dissenters' rights in accordance with
the provisions of the VSCA) by virtue of the Merger will be converted into the
right to receive 1.2272 shares of ESA Common Stock.
If the Merger becomes effective, ESA will issue to each holder of
outstanding shares of Studio Plus Common Stock ESA Stock Certificates
representing the number of shares of ESA Common Stock which such Studio Plus
stockholder shall be entitled to receive pursuant to the terms of the Merger
Agreement. The Exchange Agent will distribute the ESA Stock Certificates (and
cash for any fractional share interests, as described below) to each Studio
Plus stockholder upon the surrender to the Exchange Agent for cancellation of
Studio Plus Stock Certificates accompanied by a letter of transmittal (in the
form prescribed by the Merger Agreement).
Upon consummation of the Merger, all of the shares of ESA Common Stock to be
issued to Studio Plus stockholders will be duly authorized, fully paid, and
non-assessable. ESA will file an application to list on The Nasdaq Stock
Market the shares of ESA Common Stock to be issued in the Merger. The
obligations of Studio Plus and ESA to consummate the Merger are conditioned
upon such listing.
No fractional shares of ESA Common Stock will be issued pursuant to the
Merger. In lieu thereof, each Studio Plus stockholder who would otherwise have
been entitled to a fraction of a share of ESA Common Stock upon surrender of
one or more Studio Plus Stock Certificates shall be paid cash upon surrender
in an amount equal to such fraction multiplied by the closing sale price of
ESA Common Stock on Nasdaq on the day of the Effective Time or, if such shares
are not traded on that day, on the trading day preceding such date.
Promptly after the Effective Time, transmittal forms will be sent to Studio
Plus stockholders with instructions for use in effecting the surrender of
their Studio Plus Stock Certificates to the Exchange Agent in exchange for ESA
Stock Certificates and cash in lieu of any fractional share interests. Studio
Plus Stock Certificates should not be surrendered for exchange prior to the
receipt by the Studio Plus holders of such transmittal forms. It is important
for Studio Plus stockholders to exchange their Studio Plus Stock Certificates
for ESA Stock Certificates promptly after the Effective Time. Dividends or
other distributions payable by ESA will not be paid on outstanding Studio Plus
Stock Certificates until surrendered for exchange, but upon surrender of such
Studio Plus Stock Certificates, any unpaid dividends or distributions will be
paid, without interest. Until so exchanged, Studio Plus Stock Certificates
will evidence for all other purposes (including voting rights, except for any
fractional share interests) the right to receive the number of shares of ESA
Common Stock into which they were converted at the Effective Time.
STOCKHOLDER AGREEMENT
ESA, Mr. Cowgill and Cowgill Partners entered into the Stockholder Agreement
pursuant to which Mr. Cowgill and Cowgill Partners granted to ESA (i) a proxy
to represent and vote the Cowgill Shares with respect to the Merger or any
other business combination of Studio Plus with any other party or on any other
business presented to the stockholders of Studio Plus that has been the
subject of preliminary proxy materials filed by Studio Plus with the
Commission (subject to a requirement to vote the Cowgill Shares in favor of
the Merger), and (ii) an option to purchase the Cowgill Shares, in certain
events, at a cash price of $25.00 per share.
The Option is exercisable in the event that the Merger Agreement is
terminated by: (i) Studio Plus, upon receipt of an Alternative Proposal or
(ii) ESA, in the event that the Board of Directors of Studio Plus shall have
(a) withdrawn or modified its approval or recommendation of the Merger or the
Merger Agreement, or (b) adopted resolutions to accept or implement an
Alternative Proposal.
During the term of the Stockholder Agreement, Mr. Cowgill and Cowgill
Partners each agreed (i) not to sell, transfer, pledge, encumber or otherwise
dispose of the Cowgill Shares, (ii) not to solicit or encourage inquiries or
proposals for the acquisition of all or any part of the securities, assets or
business of Studio Plus, and (iii) not to engage in any negotiations with
potential acquirers of Studio Plus, except as required by Mr.
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Cowgill's fiduciary duties as a director of Studio Plus, other than ESA. The
Stockholder Agreement expires on the first to occur of (i) the closing of the
Merger or (ii) the date 180 days after the termination of the Merger
Agreement.
VOTING AGREEMENT
Mr. G. Johnson and Studio Plus entered into a Voting Agreement, dated
January 16, 1997, pursuant to which Mr. G. Johnson agreed to vote the
3,832,524 shares of ESA Common Stock owned by him in favor of the Merger and
to recommend the Merger to other stockholders of ESA. The Voting Agreement
expires upon the first to occur of (i) the Merger, (ii) the termination of the
Merger Agreement, or (iii) August 31, 1997.
REGISTRATION RIGHTS AGREEMENT
In connection with the Merger Agreement, ESA, Mr. Cowgill, and Cowgill
Partners will enter into the Registration Rights Agreement at the Effective
Time. The Registration Rights Agreement will provide, among other things, that
ESA will undertake to register on Form S-3 (the "Resale Registration
Statement") under the Securities Act the shares of ESA Common Stock to be
received by Mr. Cowgill and Cowgill Partners in the Merger. The registration
rights of Mr. Cowgill and Cowgill Partners will expire when all of the
remaining shares of ESA Common Stock covered by the Registration Rights
Agreement may be disposed of other than pursuant to the Resale Registration
Statement and without limitation or restriction under Rule 144 or Rule 145
under the Securities Act.
AMENDMENT TO RIGHTS PLAN
Studio Plus and Fifth Third Bank, as Rights Agent (the "Rights Agent"),
entered into an Amended and Restated Rights Agreement, dated as of June 6,
1995, and amended as of February 27, 1996 (the "Rights Agreement"), between
Studio Plus and the Rights Agent. On January 16, 1997, Studio Plus and the
Rights Agent entered into Amendment No. 2 to the Rights Agreement (the "Rights
Amendment"). Pursuant to the Rights Amendment, neither ESA, Merger Sub, nor
any affiliate or associate of ESA or Merger Sub shall be deemed to be an
"Acquiring Person" as defined in the Rights Agreement by virtue of the Merger
Agreement or any of the transactions contemplated by the Merger Agreement, the
"Distribution Date" shall not be deemed to have occurred by virtue of the
execution, consummation, or public announcement of the Merger Agreement or by
virtue of any of the transactions contemplated thereby, and the Rights will
expire immediately prior to the Effective Time. See "Comparative Rights of
Stockholders--Rights Agreement."
ACCOUNTING TREATMENT
The Merger is expected to be accounted for as a "pooling of interests" under
generally accepted accounting principles. Accordingly, the assets and
liabilities of Studio Plus will be recorded at their book values at the
Effective Time. For accounting purposes, ESA is considered to be the acquirer.
It is a condition to the consummation of the Merger that ESA and Studio Plus
receive from Coopers & Lybrand L.L.P., independent accountants, a letter to
the effect that the independent accountants concur with the conclusions of
ESA's and Studio Plus' management that no conditions exist which would
preclude accounting for the merger of ESA and Studio Plus as a pooling of
interests. Studio Plus and ESA have agreed that neither they nor any of their
respective subsidiaries or affiliates will knowingly take or fail to take any
action that would jeopardize the treatment of the Merger as a pooling of
interests for accounting purposes.
CONDITIONS TO THE MERGER
The obligations of ESA, Merger Sub, and Studio Plus to consummate the Merger
are each subject to various conditions, including: (i) the approval of the
Merger Agreement and the transactions contemplated thereby by (a) the
stockholders of ESA and (b) the stockholders of Studio Plus; (ii) the absence
of any injunction or other legal prohibition to consummation of the Merger;
(iii) the Registration Statement having been declared effective
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under the Securities Act and having not become the subject of any stop order
and not containing any material misstatements or omissions; (iv) the receipt
of any necessary governmental consents or approvals; (v) the ESA Common Stock
to be issued in the Merger shall have been approved for quotation on Nasdaq,
subject to official notice of issuance; (vi) receipt by ESA and Studio Plus of
an opinion from their respective counsel that the Merger will constitute a
tax-free reorganization within the meaning of the Internal Revenue Code of
1986, as amended (the "Code"); and (vii) the receipt from Coopers & Lybrand
L.L.P., independent accountants, of a letter to the effect that the
independent accountants concur with the conclusions of ESA's and Studio Plus'
management that no conditions exist which would preclude accounting for the
merger of ESA and Studio Plus as a pooling of interests.
The obligations of Studio Plus to consummate the Merger are also subject to
the following additional conditions: (i) ESA and Merger Sub shall have
complied with all of their respective obligations under the Merger Agreement
and all of their representations and warranties shall be true and correct in
all material respects; (ii) there shall not have been any material adverse
change in the business of ESA; (iii) Studio Plus shall have received an
opinion from Bell, Boyd & Lloyd, counsel for ESA, as to certain matters
relating to the Merger; (iv) the Voting Agreement shall have remained in full
force and effect; (v) ESA shall have executed the Registration Rights
Agreement; and (vi) Mr. Cowgill shall have been appointed to the Board of
Directors of ESA.
The obligations of ESA to consummate the Merger are also subject to the
following additional conditions: (i) Studio Plus shall have complied with all
of its obligations under the Merger Agreement and all of its representations
and warranties shall be true and correct in all material respects; (ii) there
shall not have been any material adverse change in the business of Studio
Plus; (iii) the Stockholder Agreement shall have remained in full force and
effect; (iv) immediately prior to the Effective Time, no person shall have any
Rights (as defined in the Rights Agreement) under the Rights Agreement; (v)
stockholders of Studio Plus who have exercised dissenters' rights shall hold
no more than 9.9% of the outstanding shares of Studio Plus Common Stock or a
lesser amount to the extent such percentage would negate accounting for the
Merger as a pooling of interests; (vi) ESA and Merger Sub shall have received
an opinion from King & Spalding, counsel for Studio Plus, as to certain
matters relating to the Merger; and (vii) an existing employment agreement
between Studio Plus and Mr. Cowgill shall have been terminated and no "change
of control" or other nonrecurring payments shall have been made thereunder.
ALTERNATIVE PROPOSALS
Pursuant to the Merger Agreement, Studio Plus has agreed that it shall not
initiate, solicit or encourage the submission of any Alternative Proposal, or
engage in any discussions or negotiations with any person or entity relating
to an Alternative Proposal or otherwise facilitate any effort or attempt to
make or implement an Alternative Proposal. The Board of Directors of Studio
Plus is permitted to furnish information to and enter into discussions with
any person that makes an unsolicited Alternative Proposal if the Board
determines in good faith that it is required to do so to comply with its
fiduciary duties to Studio Plus stockholders. In the event that the Board of
Directors of Studio Plus determines to enter into any discussions or furnish
information in connection with an Alternative Proposal, it must provide to ESA
prior written notice to that effect and keep ESA informed of the status of
such negotiations or discussions.
TERMINATION
The Merger Agreement may be terminated at any time prior to the consummation
of the Merger, notwithstanding any approval thereof by the stockholders of ESA
or of Studio Plus, for a number of reasons, including the following: (i) by
mutual consent of ESA and Studio Plus; (ii) by either ESA or Studio Plus if
the requisite vote of the stockholders of ESA and Studio Plus in favor of the
Merger Agreement is not obtained; (iii) by either ESA or Studio Plus if the
Merger is not consummated on or before August 31, 1997; (iv) by either ESA or
Studio Plus if its respective conditions to consummate the Merger have not
been satisfied; (v) by Studio Plus if its Board of Directors determines in
good faith that its fiduciary duties require it to recommend an
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Alternative Proposal; or (vi) by ESA if the Board of Directors of Studio Plus
shall have (a) withdrawn, or modified in a manner materially adverse to ESA,
its approval or recommendation of the Merger Agreement, (b) shall have
recommended an Alternative Proposal, or (c) shall have adopted resolutions to
accept or implement an Alternative Proposal. In the event the Merger Agreement
is terminated pursuant to clause (v) or (vi) above, Studio Plus must pay ESA a
fee of $7,500,000.
EXPENSES
The Merger Agreement provides that, whether or not the Merger is
consummated, all costs and expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby shall be paid by the party
incurring such expenses, except that the filing fee in connection with filing
of the Registration Statement or the Joint Proxy Statement/Prospectus and
expenses incurred in connection with printing and mailing the Registration
Statement and the Joint Proxy Statement/Prospectus shall be shared equally by
ESA and Studio Plus.
TREATMENT OF STUDIO PLUS OPTIONS
In connection with the Merger, ESA will enter into an Option Notice and
Assumption Agreement (the "Assumption Agreement") with each holder of an
option ("Studio Plus Option Holder") to purchase shares of Studio Plus Common
Stock ("Studio Plus Options"). The Assumption Agreement will provide that, at
the Effective Time, the options held by each Studio Plus Option Holder will be
exchanged for options to purchase shares of ESA Common Stock (the "Exchange
Options"), in an amount equal to the number of shares of Studio Plus Common
Stock covered by such option multiplied by the Exchange Ratio. The exercise
price for the Exchange Options will be the per share exercise price for the
Studio Plus Options immediately prior to the Effective Time divided by 1.2272.
Pursuant to the terms of the Studio Plus Options and the Assumption Agreement,
all of the Exchange Options will be fully vested upon issuance.
RESTRICTIONS ON RESALE; AFFILIATE AGREEMENTS
ESA Common Stock issuable in connection with the Merger will be registered
under the Securities Act, but such registration will not cover resale by
stockholders of Studio Plus who may be deemed to control or be under common
control with Studio Plus at the Effective Time ("Affiliates"). Affiliates may
not sell the shares of ESA Common Stock they will acquire in connection with
the Merger except pursuant to an effective registration statement under the
Securities Act covering such shares or in compliance with Rule 145 promulgated
under the Securities Act, or another applicable exemption from the
registration requirements of the Securities Act. In general under Rule 145,
for one year following the Merger, an Affiliate (together with certain related
persons) would be entitled to sell shares of ESA Common Stock acquired in
connection with the Merger only through unsolicited "brokers' transactions" or
in transactions directly with a "market maker," as such terms are defined in
Rule 144 of the Securities Act. Additionally, the number of shares to be sold
by an Affiliate (together with certain related persons and persons acting in
concert with such Affiliate) within any three-month period for purposes of
Rule 145 may not exceed the greater of 1% of the outstanding shares of ESA
Common Stock or the average weekly trading volume of such stock during the
four calendar weeks preceding such sale. Rule 145 would only be available to
Affiliates if ESA remained current with its informational filings with the
Commission under the Exchange Act. After one year, Affiliates would be able to
sell such ESA Common Stock without compliance with such manner of sale and
volume limitations as long as ESA was current with its informational filings
under the Exchange Act and such Affiliate was not then an affiliate of ESA.
Two years after the Effective Time, Affiliates would be able to sell such
shares of ESA Common Stock without any restrictions so long as they had not
been an affiliate of ESA for at least three months prior thereto.
Pursuant to the Merger Agreement, Studio Plus has agreed to use its
reasonable efforts to cause each of its Affiliates to deliver to ESA, at least
30 days prior to the Merger, executed agreements from each of such Affiliates
pursuant to which such Affiliates agree, among other matters, not to dispose
of, or reduce their risk relative to, shares of (i) Studio Plus Common Stock
prior to the Merger or (ii) ESA Common Stock received in
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the Merger at any time prior to the publication by ESA of financial results
covering at least 30 days of combined post-Merger operations of ESA and Studio
Plus. Each Affiliate will also agree not to dispose of shares of ESA Common
Stock received in the Merger in violation of the Securities Act or the rules
and regulations of the SEC promulgated thereunder. See "--Registration Rights
Agreement" for a description of the registration rights to be received by Mr.
Cowgill and Cowgill Partners.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Studio Plus and ESA each has received from its respective counsel, King &
Spalding and Bell, Boyd & Lloyd, an opinion that, based upon its review of
this Joint Proxy Statement/Prospectus, certain other facts and documents it
has considered relevant, and certain representations made to it by Studio Plus
and ESA, the material federal income tax consequences of the Merger to the
stockholders of Studio Plus are as follows:
1. The Merger will constitute a reorganization for federal income tax
purposes within the meaning of Sections 368(a)(1)(A) and (a)(2)(D) of the
Code.
2. No gain or loss will be recognized by Studio Plus as a result of the
Merger.
3. No gain or loss will be recognized by the holders of Studio Plus
Common Stock upon the conversion of such Studio Plus Common Stock into
shares of ESA Common Stock by reason of the consummation of the Merger.
4. The aggregate tax basis of the shares of ESA Common Stock into which
shares of Studio Plus Common Stock will be converted pursuant to the Merger
will be the same as the aggregate tax basis of the shares of Studio Plus
Common Stock so converted, decreased by the amount of any tax basis
allocable to the fractional shares of ESA Common Stock in lieu of which
cash is to be paid.
5. The holding period for the shares of ESA Common Stock into which
shares of Studio Plus Common Stock are converted pursuant to the Merger
will include the period that such shares of Studio Plus Common Stock were
held, provided such shares of Studio Plus Common Stock are held as capital
assets at the Effective Time.
6. Cash received by a holder of Studio Plus Common Stock in lieu of a
fractional share interest in ESA Common Stock will result in the
recognition of gain or loss for federal income tax purposes, measured by
the difference between the amount of cash received and the portion of the
basis of the shares of Studio Plus Common Stock allocable to such
fractional share interest. Such gain or loss will be capital gain or loss,
provided that the holder's shares of Studio Plus Common Stock are held as
capital assets at the Effective Time and will be long-term capital gain or
loss if such shares of Common Stock will have been held by the Studio Plus
stockholder for more than one year.
7. If a holder of Studio Plus Common Stock dissents to the Merger and
receives solely cash in exchange for his Studio Plus Common Stock, such
cash will be treated as having been received in redemption of the Studio
Plus Common Stock, subject to the provisions and limitations of Section 302
of the Code.
In rendering the foregoing opinions, counsel have relied upon certain
written representations as to factual matters made by appropriate officers of
Studio Plus and ESA. Such representations are customary for opinions of this
type; the tax opinions cannot be relied upon, however, if any such
representation is, or later becomes, inaccurate. No ruling from the Internal
Revenue Service (the "Service") with respect to the tax consequences of the
Merger has been, or will be, requested, and the tax opinions are not binding
upon the Service or the courts. If the Merger is consummated, and it is later
determined that the Merger did not qualify as a "reorganization" under the
Code, then each holder of Studio Plus Common Stock would recognize taxable
gain or loss equal to the difference between the fair market value of the ESA
Common Stock received by him or her in the Merger and his tax basis in the
Studio Plus Common Stock exchanged therefor.
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The foregoing discussion is based upon the Code, Treasury Regulations
thereunder, and administrative rulings and court decisions as of the date
hereof. All of the foregoing are subject to change, and any such change could
affect the continuing validity of this discussion. The discussion does not
take into account any facts and circumstances particular to the situation of
individual Studio Plus stockholders, such as stockholders, if any, who
received their Studio Plus Common Stock upon the exercise of employee stock
options or otherwise as compensation, Studio Plus stockholders who are
insurance companies, securities dealers, financial institutions, or foreign
persons, or Studio Plus stockholders who do not hold their Studio Plus Common
Stock as a capital asset. Each Studio Plus stockholder should consult such
holder's own tax advisor regarding the specific tax consequences of the
proposed transaction, including the application and effect of state, local,
foreign and other tax laws.
DISSENTERS' RIGHTS
Studio Plus. Each holder of Studio Plus Common Stock has the right to
dissent from the Merger and demand and perfect dissenters' rights in
accordance with the conditions established by Section 13.1-730 of Article 15
of the VSCA.
ARTICLE 15 OF THE VSCA IS REPRINTED IN ITS ENTIRETY AS APPENDIX D TO THIS
JOINT PROXY STATEMENT/PROSPECTUS. THE FOLLOWING DISCUSSION IS NOT A COMPLETE
STATEMENT OF THE LAW RELATING TO DISSENTERS' RIGHTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO APPENDIX D. THIS DISCUSSION AND APPENDIX D SHOULD BE
REVIEWED CAREFULLY BY ANY HOLDER WHO WISHES TO EXERCISE STATUTORY DISSENTERS'
RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO, AS FAILURE TO COMPLY WITH
THE PROCEDURES SET FORTH HEREIN OR THEREIN WILL RESULT IN THE LOSS OF
DISSENTERS' RIGHTS.
Any holder of Studio Plus Common Stock who exercises his right to dissent is
entitled to receive the "fair value" of his shares from Studio Plus. The
notice of the Studio Plus Meeting accompanying this Joint Proxy
Statement/Prospectus contains a statement that any holder of Studio Plus
Common Stock is entitled to assert dissenters' rights pursuant to Article 15
of the VSCA, and a copy of that Article is attached hereto as Appendix D. Any
holder of Studio Plus Common Stock who wishes to assert dissenters' rights
must deliver to Studio Plus, before the vote on adoption of the Merger
Agreement is taken, written notice of his intent to exercise his dissenters'
rights and must not vote in favor of adoption of the Merger Agreement. If the
Merger Agreement is subsequently adopted at the Studio Plus Meeting, the
Surviving Corporation shall deliver a dissenters' notice in writing to each
such dissenting stockholder (i) stating where the payment demand shall be sent
and where and when certificated shares shall be deposited; (ii) informing
holders of uncertificated shares to what extent transfer of such shares may be
restricted after the payment demand is received; (iii) supplying a form for
demanding payment; (iv) setting a date between 30 and 60 days after the date
of delivery of the dissenters' notice by which the Surviving Corporation must
receive the payment demand; and (v) containing a copy of Article 15 of the
VSCA.
The dissenting stockholder must then demand payment, certify that he
acquired the shares of Studio Plus Common Stock before the date set forth in
the dissenters' notice, and deposit his share certificates in accordance with
the dissenters' notice. The Surviving Corporation will then pay such
dissenting stockholder the amount the Surviving Corporation estimates to be
the fair value of such shares of Studio Plus Common Stock, plus accrued
interest, within 30 days after receipt of the payment demand, accompanied by
certain financial statements, an explanation of how the fair value and the
interest were calculated, and a statement of the dissenters' right to demand
payment under Section 13.1-739 of the VSCA. Within 30 days after the Surviving
Corporation has made or offered payment for his shares, Section 13.1-739 of
the VSCA permits a dissenting stockholder to notify the Surviving Corporation
in writing of his own estimate of the fair value of his shares and interest
due or reject the Surviving Corporation's offer and demand payment of the fair
value of his shares and interest due, if the dissenter believes that the
amount offered by the Surviving Corporation is less than the fair value of his
shares.
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Any dispute between the Surviving Corporation and a dissenting stockholder as
to the fair value of shares or interest due will be resolved by court action
in accordance with Section 13.1-740 of the VSCA.
ESA. Under Delaware law, none of the holders of ESA Common Stock will have
appraisal or dissenters' rights in connection with the Merger.
COMPARATIVE RIGHTS OF STOCKHOLDERS
ESA is incorporated under the laws of the State of Delaware, and Studio Plus
is incorporated under the laws of the Commonwealth of Virginia. Accordingly,
the rights of the stockholders of ESA and Studio Plus are governed by Delaware
and Virginia law, respectively. The rights of the stockholders of ESA are
governed by the DGCL, the ESA Charter, and ESA's Bylaws. Each of the Studio
Plus stockholders will receive ESA Common Stock in the Merger and will
thereafter become stockholders of ESA and, as such, their rights will be
governed by the DGCL, the ESA Charter and ESA's Bylaws. The following summary
of certain differences which may affect the rights and interests of Studio
Plus stockholders does not purport to be a complete discussion of such
differences, but should give some basis for Studio Plus stockholders to
evaluate their rights as ESA stockholders upon receipt of ESA Common Stock.
References to the VSCA below describe Virginia law as it is currently in
effect.
BOARD OF DIRECTORS
Number. ESA's Bylaws currently provide that the number of directors
constituting the entire Board of Directors shall consist of not less than
three (3) nor more than fifteen (15) members. Studio Plus' Bylaws provide that
the number of directors may be established by the Board of Directors but may
not be fewer than three (3) nor more than eleven (11).
Removal. The DGCL provides that directors may be removed by stockholders
with or without cause. ESA's Bylaws currently provide that any director or the
entire Board of Directors may be removed, with or without cause, by the
holders of a majority of shares of Common Stock entitled to vote at an
election of directors, whether at an annual or special meeting of the
stockholders. Although the VSCA also provides that directors may be removed by
stockholders with or without cause, the Restated Articles of Incorporation of
Studio Plus provide that directors may be removed only for cause by an
affirmative vote of the holders of at least 75% of the outstanding shares of
Studio Plus then entitled to vote on the election of the directors.
Vacancies. In accordance with the DGCL, ESA's Bylaws provide that vacancies
and newly created directorships may be filled by a majority of the directors
then in office (even if less than a quorum). Pursuant to the VSCA, unless the
articles of incorporation provide otherwise, if a vacancy occurs on the board
of directors, including a vacancy resulting from an increase in the number of
directors, such vacancy may be filled by the stockholders, the board of
directors, or if the directors remaining in office constitute fewer than a
quorum the vacancy may be filled by the affirmative majority vote of such
remaining directors. The Bylaws of Studio Plus provide that any vacancy in the
Board of Directors, including newly created directorships, shall be filled by
action of a majority of the remaining directors although such majority may be
less than a quorum.
Cumulative Voting. Under the DGCL, cumulative voting in the election of
directors is not mandatory. The ESA Charter does not provide for cumulative
voting. Similarly, under the VSCA, stockholders do not have a right to
cumulative voting unless the articles of incorporation so provide. The
Restated Articles of Incorporation of Studio Plus do not provide for
cumulative voting.
Classified Board. The DGCL allows a corporation to adopt a classified board
of directors consisting of as many as three classes, without specifying any
minimum number required in each class. The ESA Charter does not provide for a
classified Board of Directors. The VSCA similarly allows a corporation's
articles of incorporation to provide for staggering the terms of directors by
dividing the total number of directors into two
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or three groups, with each group containing one-half or one-third of the
total. The terms of directors in the first group expire at the first annual
stockholders' meeting after their election, the terms of the second group
expire at the second annual stockholders' meeting after their election, and
the terms of the third, if any, expire at the third annual stockholders'
meeting after their election. Studio Plus' Board of Directors is divided into
three classes of directors serving staggered three-year terms.
RIGHTS AGREEMENT
Studio Plus' Board of Directors has adopted the Rights Agreement, having the
terms summarized below which provides that one Right (as defined in the Rights
Agreement) is attached to each share of Studio Plus Common Stock outstanding.
Each Right entitles the registered holder to purchase from Studio Plus one
one-hundredth of a share (a "Unit") of Class A preferred stock ("Class A
Preferred Stock"). Each Unit of Class A Preferred Stock is structured to be
the economic equivalent of one share of Studio Plus Common Stock. The exercise
price per Right will be $56 subject to adjustment (the "Purchase Price").
The Rights Agreement also provides that if any person becomes an Acquiring
Person (as defined below), proper provision shall be made so that each holder
of a Right (except as set forth below) will thereafter have the right to
receive, upon exercise and payment of the Purchase Price, Class A Preferred
Stock or Studio Plus Common Stock at the option of Studio Plus (or, in certain
circumstances, cash, property or other securities of Studio Plus) having a
value equal to twice the amount of the Purchase Price.
The Rights will attach to the shares of Studio Plus Common Stock and will be
evidenced by Studio Plus Certificates, and no separate certificates evidencing
the Rights (the "Rights Certificates") will be distributed initially. The
Rights will separate from the Studio Plus Common Stock and a distribution of
the Rights Certificates will occur (the "Distribution Date") upon the earlier
of (i) 10 days following a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 15% or more of the
outstanding shares of Studio Plus Common Stock (the "Stock Acquisition Date"),
or (ii) 10 business days following the commencement of a tender offer or
exchange offer that would result in a person or group beneficially becoming an
Acquiring Person. Until the Distribution Date, (i) the Rights will be
evidenced by the Studio Plus Certificates and will be transferred with and
only with such Studio Plus Certificates, (ii) any Studio Plus Certificates
issued will contain a notation incorporating the Rights Agreement by reference
and (iii) the surrender for transfer of any Studio Plus Certificates
outstanding will also constitute the transfer of the Rights associated with
the Studio Plus Common Stock represented by such certificates.
In the event that, at any time following the Stock Acquisition Date, (i)
Studio Plus is acquired in a merger, statutory share exchange, or other
business combination in which Studio Plus is not the surviving corporation, or
(ii) 50% or more of Studio Plus' assets or earning power is sold or
transferred, each holder of a Right (except as set forth below) shall
thereafter have the right to receive, upon exercise and payment of the
Purchase Price, common stock of the acquiring company having a value equal to
twice the Purchase Price. The events set forth in this paragraph and in the
preceding paragraph are referred to as the "Triggering Events."
The Amendment and Substitution Agreement to the Rights Agreement, which was
adopted on February 27, 1996 and reduced the percentage of beneficial
ownership required to be deemed an Acquiring Person from 20% to 15% of the
outstanding shares of Studio Plus Common Stock (the "Ownership Reduction"),
contains a provision which permits a person who becomes an Acquiring Person
solely because of the Ownership Reduction to reduce its beneficial ownership
of Studio Plus Common Stock to less than 15% by the close of business on the
tenth business day following notice from Studio Plus that such person's
beneficial ownership equals or exceeds 15% of the outstanding shares of Studio
Plus Common Stock to avoid classification as an Acquiring Person.
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The Rights are not exercisable until the Distribution Date and will expire
at the close of business on June 30, 2000, unless earlier redeemed or
exchanged by Studio Plus as described below or unless such expiration date is
extended pursuant to the Rights Agreement. As soon as practicable after the
Distribution Date, Rights Certificates will be mailed to holders of record of
Studio Plus Common Stock as of the close of business on the Distribution Date,
and thereafter such separate Rights Certificates alone will represent the
Rights.
Upon the occurrence of a Triggering Event that entitles Rights holders to
purchase securities or assets of Studio Plus, Rights that are or were owned by
the Acquiring Person, or any affiliate or associate of such Acquiring Person,
on or after such Acquiring Person's Stock Acquisition Date shall be null and
void and shall not thereafter be exercised by any person (including subsequent
transferees). Upon the occurrence of a Triggering Event that entitles Rights
holders to purchase common stock of a third party, or upon the authorization
of an Exchange (as defined below), Rights that are or were owned by any
Acquiring Person or any affiliate or associate of any Acquiring Person on or
after such Acquiring Person's Stock Acquisition Date shall be null and void
and may not thereafter be exercised by any person (including subsequent
transferees).
The Purchase Price payable, and the number of shares of Class A Preferred
Stock, Studio Plus Common Stock or other securities or property issuable upon
exercise of the Rights are subject to adjustment from time to time to prevent
dilution.
At any time after any person becomes an Acquiring Person, Studio Plus may
exchange all or part of the Rights (except as set forth below) for shares of
Studio Plus Common Stock (an "Exchange") at an exchange ratio of one share per
Right, as appropriately adjusted to reflect any stock split or similar
transaction.
At any time until ten days following the Stock Acquisition Date, Studio Plus
may redeem the Rights in whole, but not in part, at a price of $.01 per Right
(the "Redemption Price"). Under certain circumstances set forth in the Rights
Agreement, the decision to make an Exchange or to redeem the Rights shall
require the concurrence of a majority of the Continuing Directors (as defined
below). Additionally, Studio Plus may thereafter but prior to the occurrence
of a Triggering Event redeem the Rights in whole, but not in part, at the
Redemption Price provided that such redemption is incidental to a merger or
other business combination transaction involving Studio Plus that is approved
by a majority of the Continuing Directors, does not involve an Acquiring
Person, and in which all holders of Studio Plus Common Stock are treated
alike. After the redemption period has expired, Studio Plus' right of
redemption may be reinstated if an Acquiring Person reduces his beneficial
ownership to less than 10% of the outstanding shares of Studio Plus Common
Stock in a transaction or series of transactions not involving Studio Plus.
Immediately upon the action of the Board ordering redemption of the Rights,
with, where required, the concurrence of the Continuing Directors, the Rights
will terminate and the only right of the holders of Rights will be to receive
the Redemption Price.
The term "Continuing Directors" means any member of the Board who was a
member of the Board immediately before the adoption of the Rights Agreement,
and any person who is subsequently elected to the Board if such person is
recommended or approved by a majority of the Continuing Directors, but does
not include an Acquiring Person, or an affiliate or associate of an Acquiring
Person, or any representative of the foregoing entities.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of Studio Plus, including, without limitation, the right to
vote or to receive dividends. While the distribution of the Rights will not be
taxable to stockholders or to Studio Plus, stockholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights
become exercisable for Class A Preferred Stock (or other consideration) of
Studio Plus or for common stock of the acquiring company as set forth above.
Other than those provisions relating to certain economic terms of the
Rights, including an increase in the Purchase Price or an extension of the
expiration of the Rights, any of the provisions of the Rights Agreement may be
amended by the Board prior to the Distribution Date. After the Distribution
Date, the provisions of the Rights Agreement may be amended by the Board (in
certain circumstances, with the concurrence of the
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Continuing Directors) in order to cure any ambiguity, to make changes that do
not adversely affect the interests of the holders of Rights (excluding the
interests of any Acquiring Person), or to shorten or lengthen any time period
under the Rights Agreement; provided, however, no amendment to adjust the time
period governing redemption may be made at such time as the Rights are not
redeemable.
The Rights may have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that acquires more than 15% of the
outstanding shares of Studio Plus Common Stock or in the event another
Triggering Event occurs without the Rights having been redeemed or in the
event of an Exchange. However, the Rights should not interfere with any merger
or other business combination approved by the Board and the stockholders
because the Rights are redeemable by the Board under these circumstances.
A copy of the Rights Agreement is available free of charge from the Rights
Agent, Fifth Third Bank, Cincinnati, Ohio. This summary description of the
Rights and the Rights Agreement does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement.
Studio Plus and the Rights Agent entered into the Rights Amendment as of
January 16, 1997. Pursuant to the Rights Amendment, neither ESA, Merger Sub,
nor any affiliate or associate of ESA or Merger Sub shall be deemed to be an
"Acquiring Person" as defined in the Rights Agreement by virtue of the Merger
Agreement or any of the transactions contemplated by the Merger Agreement, the
"Distribution Date" shall not be deemed to have occurred by virtue of the
execution, consummation, or public announcement of the Merger Agreement or by
virtue of any of the transactions contemplated thereby, and the Rights will
expire immediately prior to the Effective Time.
ESA does not have a rights agreement or any other plan or agreement that is
similar in purpose or effect to the Rights Agreement.
POSSIBLE ANTI-TAKEOVER EFFECTS
ESA was incorporated in 1995 as a Delaware corporation and is subject to
Section 203 of the DGCL ("Section 203"). Pursuant to Section 203, with certain
exceptions, a Delaware corporation may not engage in any of a broad range of
business combinations, such as mergers, consolidations, and sales of assets,
with an "interested stockholder" for a period of three years from the date
that such person became an interested stockholder unless (i) the transaction
that results in the person's becoming an interested stockholder, or the
business combination, is approved by the board of directors of the corporation
before the person becomes an interested stockholder, (ii) upon consummation of
the transaction which results in the stockholder becoming an interested
stockholder, the interested stockholder owns 85% or more of the voting stock
of the corporation outstanding at the time the transaction commenced (other
than certain excluded shares), or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by holders of at least two-thirds of the
corporation's outstanding voting stock, excluding shares owned by the
interested stockholder, at a meeting of stockholders. Under Section 203, an
"interested stockholder" is defined as any person, other than the corporation
and any direct or indirect majority-owned subsidiaries of the corporation,
that is (i) the owner of 15% or more of the outstanding voting stock of the
corporation or (ii) an affiliate or associate of the corporation and the owner
of 15% or more of the outstanding voting stock of the corporation at any time
within the three-year period immediately prior to the date on which it is
sought to be determined whether such person is an interested stockholder. ESA
has approved Mr. G. Johnson, Mr. Huizenga, and Mr. S. Johnson as "interested
stockholders."
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period. The provisions of
Section 203 may encourage persons interested in acquiring ESA to negotiate in
advance with ESA's Board of Directors because the stockholder approval
requirement would be avoided if a majority of ESA's directors then in office
approve either the business combination or the transaction which results in
the person becoming an interested stockholder. Such provisions also may have
the effect of preventing changes in management of ESA. It is possible that
such provisions could make it more difficult to accomplish transactions that
stockholders may otherwise deem to be in their best interests.
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As a Virginia corporation, Studio Plus is subject to Section 13.1-725 et
seq. of the VSCA ("Section 725") which contains provisions restricting
"Affiliated Transactions." Section 725 requires approval of Affiliated
Transactions between a Virginia corporation and an Interested Shareholder
(defined in Section 725 to include any (i) beneficial owner of more than 10%
of any class of its outstanding voting shares or (ii) an affiliate or
associate of the corporation that at any time within the preceding three years
has been an Interested Shareholder of the corporation) by an affirmative vote
of a majority of the Disinterested Directors (as defined below) and holders of
at least two-thirds of the voting shares other than shares beneficially owned
by the Interested Shareholder as defined in the VSCA. Affiliated Transactions
subject to this approval requirement include, without limitation, (1) mergers
and share exchanges with an Interested Shareholder, (2) dispositions of
material corporate assets to or with an Interested Shareholder not in the
ordinary course of business, (3) any guaranty by the corporation of
indebtedness of any Interested Shareholder in an amount in excess of five
percent of the corporation's consolidated net worth, (4) dispositions to an
Interested Shareholder of an amount of voting shares of the corporation having
an aggregate fair market value in excess of five percent of the aggregate fair
market value of all of the outstanding voting shares except pursuant to a
share dividend or the exercise of rights distributed on a basis affording
substantially proportionate treatment to all holders of the same class or
series of voting shares, (5) a dissolution of the corporation proposed by or
on behalf of an Interested Shareholder, or (6) any reclassification,
including, reverse stock split, recapitalization or merger of the corporation
with its subsidiaries which increases the percentage of voting shares owned
beneficially by an Interested Shareholder by more than 5%. A Disinterested
Director means, with respect to a particular Interested Shareholder, a member
of the corporation's board of directors who was a member on the date on which
an Interested Shareholder became an Interested Shareholder and who was
recommended for election by, or was elected to fill a vacancy and received the
affirmative vote of, a majority of the Disinterested Directors then on the
Board. The VSCA requires that an Affiliated Transaction with an Interested
Shareholder occurring three years or more after the Interested Shareholder
becomes an Interested Shareholder must be approved by the affirmative vote of
the holders of two-thirds of the voting shares (other than those beneficially
owned by the Interested Shareholder) or by a majority of the Disinterested
Directors.
Under the VSCA, the special voting requirements do not apply to Affiliated
Transactions proposed after the three year period has expired if the
transaction satisfies the fair-price requirements of the statute. In general,
the fair-price requirement provides that in a two-step acquisition
transaction, the Interested Shareholder must pay the stockholders in the
second step either the same amount of cash or the same amount and type of
consideration paid to acquire the Virginia corporation's shares in the first
step.
None of the foregoing limitations and special voting requirements applies to
a transaction with an Interested Shareholder (i) whose acquisition of shares
making such person an Interested Shareholder was approved by a majority of the
Virginia corporation's Disinterested Directors, (ii) who was an Interested
Shareholder on the date the Virginia corporation became subject to these
provisions by virtue of its having 300 shareholders of record, (iii) who
became an Interested Shareholder as a result of acquiring shares by gift,
testamentary bequest or the laws of descent and distribution or (iv)
generally, who became an Interested Shareholder inadvertently.
These provisions may have the effect of deterring certain takeovers of
Virginia corporations. In addition, the VSCA provides that, by affirmative
vote of a majority of the voting shares other than shares owned by an
Interested Stockholder, a corporation can "opt out" of the Affiliated
Transactions provisions by adopting an amendment to its Articles of
Incorporation or Bylaws providing that the Affiliated Transactions provisions
shall not apply to the corporation. Studio Plus has not "opted out" of the
Affiliated Transactions provisions. Additionally, Studio Plus' Articles of
Incorporation increase from a majority to 75% the statutory stockholder vote
requirement to "opt out" of Section 725.
SPECIAL MEETING OF STOCKHOLDERS
The DGCL provides that a special meeting of stockholders may be called by a
corporation's board of directors or by such person or persons as may be
authorized by its certificate of incorporation or bylaws. Unlike the VSCA (as
discussed below), the DGCL does not provide stockholders with the right to
call special meetings
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unless otherwise set forth in the certificate of incorporation or bylaws. In
that regard, ESA's Bylaws provide that a special meeting of stockholders may
be called by the President, at the written request of a majority of the
stockholders or at the written request of a majority of the Board of
Directors.
The VSCA provides that a corporation shall hold a special meeting of
stockholders on call of the chairman of the board of directors, the president,
the board of directors, or the person or persons authorized to do so by the
articles of incorporation or bylaws. The Bylaws of Studio Plus provide that a
special meeting of stockholders may be called at any time by the Chairman of
the Board of Directors, the Vice-Chairman, the President, or by a majority of
the Board of Directors.
STOCKHOLDER ACTION IN LIEU OF MEETING
The DGCL provides that, unless otherwise provided in a corporation's
certificate of incorporation, any action required or permitted to be taken at
an annual or special meeting of stockholders may be taken without a meeting,
without prior notice and without a vote, if a consent or consents in writing,
setting forth the action that would be taken, is signed by holders of
outstanding stock having not less than the minimum number of votes that would
be necessary to authorize such action at a meeting. The ESA Charter provides
that no action required or permitted to be taken at any annual or special
meeting of stockholders may be taken without a meeting, and the power of
stockholders to consent in writing without a meeting to the taking of any
action is specifically denied.
The VSCA provides that any action required or permitted to be taken at a
meeting of the stockholders of a corporation may be taken without a meeting,
but only with the written consent of all stockholders entitled to vote with
respect to the subject matter thereof. The action shall be evidenced by one or
more written consents describing the action taken, signed by all the
stockholders entitled to vote on the action and included on the corporate
records. Neither the Bylaws nor the Restated Articles of Incorporation of
Studio Plus provide for, or prohibit, stockholder action in lieu of a meeting.
BYLAW AMENDMENTS BY DIRECTORS
Under the DGCL, the power to adopt, amend, or repeal bylaws is vested
exclusively in the stockholders entitled to vote, unless the certificate of
incorporation confers such power upon the board of directors as well. The ESA
Charter and ESA's Bylaws provide that the Board of Directors is expressly
authorized to make, alter or repeal ESA's Bylaws by an affirmative majority
vote of the Board of Directors.
The VSCA provides that the power to alter, amend or repeal bylaws is vested
in the board of directors, subject to repeal or change by action of the
stockholders, provided such powers are reserved to the stockholders by the
articles of incorporation. Studio Plus' Restated Articles of Incorporation do
not reserve such powers to the stockholders.
PAYMENT OF DIVIDENDS; SHARE REPURCHASES
Under the DGCL, a corporation may declare and pay dividends either out of
its surplus or, if there is no surplus, out of its net profits for the fiscal
year in which the dividend is declared and/or the preceding fiscal year. The
ESA Charter stipulates that, subject to the provisions of applicable law and
the preferences of the preferred stock, the holders of ESA Common Stock shall
be entitled to receive dividends at such times and in such amounts as
determined by the Board of Directors.
The DGCL permits a corporation to purchase or redeem shares of its own stock
when its capital is not impaired and such purchase or redemption would not
cause any impairment of the capital of the corporation, except that a
corporation may purchase or redeem out of capital any of its preferred shares
if such shares will be retired upon their acquisition and the capital of the
corporation will be reduced in accordance with the DGCL.
52
<PAGE>
Under the DGCL, a corporation may not purchase any of its redeemable shares
for more than the price at which they may then be redeemed.
Under the VSCA, a board of directors may authorize and the corporation may
make distributions to its stockholders, subject to restrictions by the
articles of incorporation; except that no distribution may be made if, after
giving it effect, the corporation would not be able to pay its debts as they
become due in the usual course of business or if the corporation's total
assets would be less than the sum of its total liabilities plus (unless the
articles of incorporation permit otherwise) the amount that would be needed,
if the corporation were to be dissolved at the time of the distribution, to
satisfy the preferential rights upon dissolution of stockholders whose
preferential rights are superior to those receiving the distribution. The VSCA
permits a corporation to acquire its own shares. Such acquired shares
constitute authorized but unissued shares of the same class, but undesignated
as to series.
DIRECTOR LIABILITY; RELIANCE; INDEMNIFICATION
The DGCL and the VSCA are substantially identical with regard to limitations
on director liability. The DGCL and the VSCA permit a corporation to include
in its certificate or articles of incorporation, as the case may be, a
provision eliminating or limiting a director's liability to the corporation or
its stockholders for monetary damages for breaches of fiduciary duty,
including conduct which could be characterized as negligence or gross
negligence. The DGCL and the VSCA expressly provide, however, that liability
for breaches of duty of loyalty, acts or omissions not in good faith or
involving intentional misconduct or knowing violations of the law, the
unlawful purchase or redemption of stock or payment of unlawful dividends or
the receipt of improper personal benefits cannot be eliminated or limited in
this manner. Both statutes further provide that no such provision shall
eliminate or limit the liability of a director for any act or omission
occurring prior to the date when such provision becomes effective. Article
Nine of The ESA Charter contains provisions which eliminate the personal
liability of the directors of ESA in certain circumstances. Studio Plus'
Articles of Incorporation contain similar provisions.
Under the DGCL, a member of the board of directors of a corporation or a
member of any committee designated by the board of directors will, in the
performance of his duties, be fully protected in relying in good faith upon
the records of the corporation and upon such information, opinions, reports,
or statements presented to the corporation by any of the corporation's
officers or employees, or committees of the board of directors, or by any
other person as to matters the member reasonably believes are within such
other person's professional or expert competence and who has been selected
with reasonable care by or on behalf of the corporation. The VSCA does not
contain a similar provision.
Both the DGCL and the VSCA provide that a corporation may purchase and
maintain insurance on behalf of any individual who is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in such
capacity, whether or not the corporation would have the power to indemnify him
against such liability.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling ESA or Studio
Plus pursuant to the foregoing provisions, ESA and Studio Plus have been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is therefore
unenforceable.
PREEMPTIVE RIGHTS
None of the stockholders of ESA or Studio Plus have any preemptive rights.
53
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
OF ESA AND STUDIO PLUS
The accompanying unaudited Pro Forma Condensed Combined Financial Statements
are presented as if ESA had completed the Significant Purchase Acquisitions at
January 9, 1995 (ESA's date of inception) and as if the Merger of Studio Plus
had been completed at January 1, 1994. The acquisition of AATI has been
excluded from Significant Purchase Acquisitions because the purchase price and
the unaudited results of operations for the periods, when measured in relation
to ESA, did not meet certain materiality standards and can be excluded as
permitted by the rules and regulations of the Commission. This pro forma
information is based in part upon the Consolidated Financial Statements of ESA
and Studio Plus and Statements of Operations of each of the Significant
Purchase Acquisitions, which are incorporated by reference into this Joint
Proxy Statement/ Prospectus. In management's opinion, all adjustments
necessary to reflect the effects of these transactions have been made.
The unaudited Pro Forma Condensed Combined Statements of Income are not
necessarily indicative of what the actual results of operations of ESA would
have been assuming such transactions had been completed as of the beginning of
the periods discussed above, nor do they purport to represent the results of
operations for any future periods. Results of operations and the related
earnings or loss per share for future periods will be affected by a number of
factors, including, but not limited to, the number of facilities opened and
the operating results therefrom, interest costs incurred on indebtedness
(including the amortization of deferred loan costs), corporate operating and
property operating expenses, site selection costs and the number of future
shares issued.
Certain data and notes normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted. The accompanying unaudited Pro Forma Condensed Combined Financial
Statements and notes should be read in conjunction with the Consolidated
Financial Statements of ESA and Studio Plus included in the ESA 1996 10-K and
the Studio Plus 1996 10-K.
54
<PAGE>
ESA AND STUDIO PLUS
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO
ESA STUDIO PLUS MERGER FORMA
ASSETS (HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------ ------------ ------------ ----------- --------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.... $189,647 $ 34,678 $224,325
Accounts receivable, net..... 1,027 638 1,665
Supply inventories........... 2,922 $ 57 (a) 2,979
Prepaid expenses............. 796 170 (a) 966
Pre-opening costs............ 726 (726)(a)
Deferred income taxes........ 1,000 109 (a) 1,109
Other current assets......... 377 336 390 (a) 1,103
-------- -------- ------ --------
Total current assets....... 195,769 36,378 232,147
Property and equipment, net.... 306,067 107,567 413,634
Site deposits and
preacquisition costs.......... 10,318 1,925 12,243
Deferred loan costs............ 9,158 361 9,519
Other assets................... 1,283 9 1,292
-------- -------- ------ --------
Total assets............... $522,595 $146,240 $ $668,835
======== ======== ====== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS'
EQUITY
-----------------------------
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable............. $ 9,770 $ 5,057 $6,250 (b) $ 21,077
Accrued salaries and related
expenses.................... 1,156 538 1,694
Due to related parties....... 204 204
Other accrued expenses....... 2,051 738 333 (a) 3,122
Accrued retainage............ 11,371 11,371
Income taxes payable......... 239 239
Deferred revenue............. 179 135 (a) 314
Property taxes............... 468 (468)(a)
-------- -------- ------ --------
Total current liabilities.. 24,731 7,040 6,250 38,021
-------- -------- ------ --------
Deferred income taxes.......... 2,362 5,588 7,950
-------- -------- ------ --------
Commitments
Shareholders' equity:
Preferred stock, $.01 par
value.......................
Common stock, $.01 par value. 683 125 28 (c) 836
Additional paid in capital... 492,690 127,209 (28)(c) 619,871
Retained earnings............ 2,129 6,278 (6,250)(b) 2,157
-------- -------- ------ --------
Total shareholders' equity. 495,502 133,612 (6,250) 622,864
-------- -------- ------ --------
Total liabilities and
shareholders' equity...... $522,595 $146,240 $ $668,835
======== ======== ====== ========
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
55
<PAGE>
ESA AND STUDIO PLUS
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ESA STUDIO PLUS MERGER PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Room revenue................. $11,830 $11,830
Other revenue................ 322 322
-------- ------- ------- -------
Total revenue.............. 12,152 12,152
-------- ------- ------- -------
Costs and expenses:
Property operating expenses.. 5,256 5,256
Corporate operating expenses. 881 881
Depreciation and amortiza-
tion........................ 1,472 1,472
-------- ------- ------- -------
Total costs and expenses... 7,609 7,609
-------- ------- ------- -------
Income from operations......... 4,543 4,543
Interest expense............... (2,532) (2,532)
-------- ------- ------- -------
Income before third party in-
vestors' interest............. 2,011 2,011
Third party investors' inter-
est........................... (358) (358)
-------- ------- ------- -------
Income before income taxes..... 1,653 1,653
Provision for income taxes.....
-------- ------- ------- -------
Net income..................... $ 1,653 $ 1,653
======== ======= ======= =======
Pro forma income data:
Net income................... $ 1,653 $ 1,653
Pro forma adjustment for in-
come taxes.................. (615) (615)
------- -------
Pro forma net income......... $ 1,038 $ 1,038
======= =======
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
56
<PAGE>
ESA AND STUDIO PLUS
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ESA STUDIO PLUS MERGER PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Room revenue................ $ 817 $15,309 $16,126
Other revenue............... 61 581 642
------- ------- ------ -------
Total revenue............. 878 15,890 16,768
------- ------- ------ -------
Costs and expenses:
Property operating expenses. 332 6,374 6,706
Corporate operating ex-
penses..................... 2,555 2,114 4,669
Depreciation and amortiza-
tion....................... 147 1,912 2,059
------- ------- ------ -------
Total costs and expenses.. 3,034 10,400 13,434
------- ------- ------ -------
Income (loss) from operations. (2,156) 5,490 3,334
Interest income (expense)..... 849 (1,356) (507)
------- ------- ------ -------
Income before third party in-
vestors' interest............ (1,307) 4,134 2,827
Third party investors' inter-
est.......................... (142) (142)
------- ------- ------ -------
Income (loss) before income
taxes........................ (1,307) 3,992 2,685
Provision for income taxes.... 1,670 $ (523)(c) 1,147
------- ------- ------ -------
Income (loss) before extraor-
dinary item.................. $(1,307) $ 2,322 $ 523 $ 1,538
======= ======= ====== =======
Income (loss) per share before
extraordinary item........... $ (0.05) $ 0.05
======= =======
Pro forma income data:
Income before extraordinary
item....................... $ 2,322 $ 1,538
Pro forma adjustment for in-
come taxes................. 176 176
------- -------
Pro forma income before ex-
traordinary item........... $ 2,498 $ 1,714
======= =======
Pro forma income per share be-
fore extraordinary item...... $ 0.50 $ 0.05
======= =======
Weighted average number of
shares of common stock and
equivalents outstanding...... 25,304 4,995 1,135 (b) 31,434
======= ======= ====== =======
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
57
<PAGE>
ESA AND STUDIO PLUS
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA SIGNIFICANT PRO
ESA STUDIO PLUS MERGER COMBINED PURCHASE FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS (HISTORICAL) ACQUISITIONS COMBINED
------------ ------------ ----------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Room revenue.......... $15,280 $22,201 $37,480 $5,172(a) $42,652
Other revenue......... 465 864 1,329 41(a) 1,370
------- ------- ----- ------- ------ -------
Total revenue....... 15,745 23,065 38,809 5,213 44,022
------- ------- ------- ------ -------
Costs and expenses:
Property operating ex-
penses............... 6,929 9,631 16,560 416(a) 16,976
Corporate operating
expenses............. 12,645 3,822 16,467 1,397(a) 17,864
Depreciation and amor-
tization............. 2,803 3,336 6,139 783(a) 6,922
------- ------- ----- ------- ------ -------
Total costs and ex-
penses............. 22,377 16,789 39,166 2,596 41,762
------- ------- ------- ------ -------
Income (loss) from oper-
ations................. (6,632) 6,276 (357) 2,617 2,260
Interest income......... 11,538 2,206 13,744 13,744
------- ------- ----- ------- ------ -------
Income before income
taxes.................. 4,906 8,482 13,387 2,617 16,004
Provision for income
taxes.................. 1,470 3,308 $ 523(c) 5,301 1,046(a) 6,347
------- ------- ----- ------- ------ -------
Net income.............. $ 3,436 $ 5,174 $(523) $ 8,086 $1,571 $ 9,657
======= ======= ===== ======= ====== =======
Net income per common
share.................. $ 0.06 $ 0.45 $ 0.11 $ 0.13
======= ======= ======= =======
Weighted average number
of shares of common
stock and equivalents
outstanding............ 59,724 11,580 2,631(b) 73,935 2,515(a) 76,450
======= ======= ===== ======= ====== =======
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
58
<PAGE>
ESA AND STUDIO PLUS
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Historical. The historical Condensed Combined Financial Statements of ESA
and Studio Plus include the accounts of ESA and its subsidiaries and of Studio
Plus and its subsidiary, respectively. All significant intercompany balances
within each company have been eliminated. ESA was formed on January 9, 1995.
Studio Plus was formed on December 19, 1994 and on June 26, 1995 acquired
through merger and exchange of partnership interests all of the assets of the
Studio Plus Predecessor Entities which owned and operated StudioPLUS hotels.
The historical Condensed Consolidated Statements of Operations of Studio Plus
for the years ended December 31, 1994 and 1995 reflect combined financial data
for the Studio Plus Predecessor Entities, accounted for as if the combination
of the Studio Plus Predecessor Entities were a pooling of interests. Income
taxes on earnings were paid by stockholders and partners of the Studio Plus
Predecessor Entities. Accordingly, income taxes are provided on a pro forma
basis for the years ended December 31, 1994 and 1995.
Pursuant to the rules and regulations of the Commission, the historical
Condensed Consolidated Statement of Operations of Studio Plus for the year
ended December 31, 1995 does not reflect an extraordinary loss, net of the
related income tax benefit, of $184,618.
The Merger. The Merger has been accounted for in the Pro Forma Condensed
Combined Financial Statements using the pooling of interests method of
accounting whereby the accounts of ESA are combined with the accounts of
Studio Plus as though both companies operated as one business for the periods
presented. The non-recurring costs associated with the Merger, estimated to be
$6.25 million, have been excluded from the Pro Forma Condensed Combined
Statements of Income to more accurately reflect the actual operations of the
companies. These costs will be expensed in the period that the Merger is
consummated.
Significant Purchase Acquisitions. The Pro Forma Condensed Combined
Statements of Income reflect the results of the operations for the Significant
Purchase Acquisitions for the respective periods as if they were acquired as
of January 1, 1996. These acquisitions were accounted for using the purchase
method of accounting.
2. EARNINGS PER SHARE
Earnings per share have been calculated by dividing the net income by the
outstanding shares of ESA Common Stock, adjusted to reflect the issuance of
the additional shares to be issued in the Merger at a ratio of 1.2272 shares
per share of Studio Plus Common Stock. Prior to the Studio Plus IPO, the
assets of Studio Plus were owned and operated by the Predecessor Entities. The
outstanding shares and other equity interests of the Studio Plus Predecessor
Entities differ substantially from the shares of Studio Plus Common Stock
outstanding after the Studio Plus IPO. Accordingly, Studio Plus has not
historically presented earnings per share information for the year ended
December 31, 1994.
The weighted average number of shares of common stock and equivalents
outstanding during the period and the related earnings per share data as
reflected in the historical Consolidated Statements of Operations for the year
ended December 31, 1995 for both ESA and Studio Plus have been adjusted to
give effect to the stock splits occurring in 1996.
59
<PAGE>
ESA AND STUDIO PLUS
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
(UNAUDITED)
3. PRO FORMA ADJUSTMENTS
Pro Forma Balance Sheet.
(a) To reclassify certain assets and liabilities of Studio Plus to conform
with ESA's presentation.
(b) To reflect the estimated costs associated with the Merger.
(c) To reflect the issuance of 2,846,554 incremental shares of ESA Common
Stock in the Merger and the elimination of a corresponding amount of
additional paid in capital.
Pro Forma Statements of Income.
(a) To reflect the results of operations of the Significant Purchase
Acquisitions for the respective periods as if they were acquired on January 1,
1996.
(b) To reflect the issuance of the incremental shares of ESA Common Stock in
the Merger based on a ratio of 1.2272 shares per share of Studio Plus Common
Stock.
(c) To reflect the adjustment in the provision for income taxes resulting
from the combination on a pro forma basis.
60
<PAGE>
BUSINESS OF STUDIO PLUS; RECENT DEVELOPMENTS
Studio Plus owns, develops, and operates StudioPLUS(TM) extended stay hotels
and owns the rights to the related trade name and service marks for
"StudioPLUS." StudioPLUS hotels are designed to combine the convenience of a
hotel with many of the comforts of an apartment in order to provide affordable
lodging for extended stay guests. Studio Plus believes that it accommodates an
underserved niche of guests in the extended stay sector of the lodging
industry. These guests include business travelers, professionals on temporary
work assignment, persons relocating or purchasing a home, tourists, and others
desiring high quality, furnished accommodations with full kitchens. Studio
Plus guests typically prefer weekly rather than daily accommodations.
Studio Plus believes that several factors distinguish its properties within
the extended stay category of the lodging industry. Studio Plus offers quality
accommodations at competitive rates within the mid-price segment of the
extended stay market. The average weekly rate at its 18 existing properties
open throughout both 1995 and 1996 (the "Existing Studio Plus Properties")
increased from $247.32 to $268.93 per suite, and average occupancy at the
Existing Studio Plus Properties decreased from 83.8% to 82.4%.
Studio Plus designs its hotels, and markets and prices its suites, to
accommodate guests staying one week or longer and believes this strategy
results in longer guest stays and a more stable revenue stream. Studio Plus
estimates that over 65% of its guests stay one month or longer and believes
the longer term nature of guest stays and the limited number of suites per
property lead to operating efficiencies. Each StudioPLUS hotel has
approximately five employees, in addition to a resident manager.
StudioPLUS hotels are designed and built to uniform plans and specifications
developed and periodically refined since 1985. Studio Plus believes this
standardization lowers construction costs and establishes uniform quality and
operational standards. A typical StudioPLUS hotel contains 72 suites (one
suite for the resident manager and 71 suites available for rent) and will
generally average between $40,000 and $50,000 per suite to develop and
construct, including land costs. Once a site is selected and acquired and
regulatory permits and approvals are obtained, the construction phase of
development generally requires approximately eight to nine months from
groundbreaking to opening. On average, the StudioPLUS properties opened since
1988 have reached at least a 70% occupancy level within approximately four
months after opening.
Each StudioPLUS hotel suite contains a fully equipped kitchen including a
full-size refrigerator, range with conventional oven, microwave and a direct-
dial telephone. A typical StudioPLUS hotel has two types of suites: designer
suites and larger deluxe suites. All of the properties have weekly maid
service, with an option for daily service, and coin-operated laundry
facilities, and most of the properties have an exercise room and a swimming
pool. Each hotel employee participates in incentive programs based on
individual property level performance. Studio Plus considers its incentive
programs to be an important part of its compensation plan.
From 1991 through 1996, (i) the number of StudioPLUS hotels increased from
14 to 35, (ii) consolidated average occupancy increased from 75.3% to 80.8%,
(iii) average weekly room rates increased from $174.79 to $284.13,
representing a compounded annual growth rate of approximately 10.2%, and (iv)
weekly revenue per available room increased from $131.68 to $229.60,
representing a compounded annual growth rate of 11.8%.
As of December 31, 1996, Studio Plus owned and operated 35 mid-price
extended stay lodging facilities, had 11 facilities under construction and
options to purchase 28 additional sites for development.
Additional information with respect to Studio Plus' business is included in
the Studio Plus 1996 10-K, which is incorporated herein by reference.
61
<PAGE>
BUSINESS OF ESA; RECENT DEVELOPMENTS
ESA was organized in January 1995 to develop, own, and manage extended stay
lodging facilities which are designed to appeal to value-conscious guests.
ESA's facilities are designed to offer quality accommodations for guests at
substantially lower rates than most other extended stay lodging providers.
They feature fully furnished rooms which are generally rented on a weekly
basis to guests such as business travelers (particularly those with limited
expense accounts), professionals on temporary work assignment, persons between
domestic situations, and persons relocating or purchasing a home, with most
guests staying for multiple weeks. ESA's facilities provide a variety of
features that are attractive to the extended stay guest such as a fully-
equipped kitchenette, weekly housekeeping with twice-weekly towel service,
color television with cable or satellite hook-up, coin-operated laundromat,
and telephone service with voice mail messaging. To help maintain
affordability of room rates, labor intensive services, such as daily cleaning,
room service, and restaurants are not provided.
ESA's goal is to become a national provider of extended stay lodging. ESA
intends to achieve this goal by rapidly developing properties in selected
markets, providing high value accommodations for its guests, actively managing
its properties to increase revenue and reduce operating costs, and increasing
awareness of the extended stay concept. Through December 31, 1996, ESA had
developed and opened 30 extended stay lodging facilities, acquired 10 others,
and had 50 facilities under construction. ESA plans to begin construction of
approximately 80 extended stay lodging facilities during 1997 and to continue
an active development program thereafter. ESA's plans call for the average
facility to have approximately 120 extended stay rooms and to take
approximately 7-9 months to construct.
ESA was founded by Mr. G. Johnson and Mr. Huizenga. Mr. G. Johnson, who is
the President and Chief Executive Officer of ESA, was formerly the President
of the Consumer Products Division of Blockbuster Entertainment Group, a
division of Viacom, Inc. Mr. Huizenga, who is the Chairman of the Board of
Directors of ESA, is the Chairman and Co-Chief Executive Officer of Republic
Industries, Inc. and the Chairman of the Board of Directors of Florida
Panthers Holdings, Inc. Mr. Huizenga was formerly Vice-Chairman of Viacom,
Inc. and Chairman and Chief Executive Officer of Blockbuster Entertainment
Corporation. ESA's management team has extensive experience in the acquisition
and development of real estate and the operation of properties on a national
scale.
During 1996, ESA acquired ten extended stay properties in six separate
transactions (each such transaction is referred to herein as an
"Acquisition"), as summarized below. Each of the Acquisitions was accounted
for using the purchase method of accounting.
On January 26, 1996, ESA acquired substantially all of the assets of
Apartment/Inn, L.P., a Georgia limited partnership ("Apartment/Inn").
Apartment/Inn owned and operated a 199-room extended stay lodging facility
in Norcross, Georgia. In consideration for such Acquisition, ESA issued an
aggregate of 587,258 shares of ESA Common Stock.
On February 23, 1996, ESA acquired substantially all of the assets of
Hometown Inn I, LTD and Hometown Inn II, LTD (collectively "Hometown Inn").
Hometown Inn owned and operated a 133-room extended stay lodging facility
in Norcross, Georgia and a 147-room extended stay lodging facility in
Riverdale, Georgia. In consideration for such Acquisition, ESA issued
857,216 shares of ESA Common Stock and paid an additional $75,000 in cash.
On May 10, 1996, ESA acquired substantially all of the assets of AATI,
which owned and operated a 59-room extended stay lodging facility in
Lenexa, Kansas, for a purchase price of approximately $3.3 million in cash.
This Acquisition includes adjacent land on which ESA intends to build a new
60-room economy extended stay lodging facility.
On June 25, 1996, ESA acquired substantially all of the assets of
Apartment Inn Partners/Gwinnett, L.P., a Georgia limited partnership
("Gwinnett"). Gwinnett owned and operated a 129-room extended stay
62
<PAGE>
lodging facility in Lawrenceville, Georgia. The facility was operated as
The Apartment Inn and rights for the use of that name and certain other
rights were controlled by Apartment/Inn. In consideration for such
Acquisition, ESA issued 344,200 shares of ESA Common Stock and paid an
additional $23,000 in cash.
On July 9, 1996, ESA acquired substantially all of the assets of Melrose
Suites, Inc., St. Louis Manor, Inc., Boulder Manor, Inc., and Nicolle
Manor, which owned extended stay lodging facilities in Las Vegas, Nevada
(collectively, the "M & M Facilities"), that have 177 rooms, 125 rooms, 211
rooms, and 122 rooms, respectively. Each of the M & M Facilities was
managed by M & M Development, with which ESA has entered into a two-year
consulting agreement for a fee of $120,000 per year. In consideration for
the M & M Facilities, in addition to assuming liability under certain
leases for personal property, ESA issued 2,470,000 shares of ESA Common
Stock and paid an additional $500,000 in cash.
On July 29, 1996, ESA acquired a traditional lodging facility owned by
Kipling Hospitality Enterprise Corporation ("KHEC"), which was a 147-room
traditional lodging facility located in Lakewood, Colorado, which ESA is
remodeling to convert to the extended stay format. In consideration for
this Acquisition, ESA issued 200,000 shares of ESA Common Stock and paid an
additional $25,000 in cash.
On February 6, 1997, ESA issued 11,500,000 shares of ESA Common Stock to a
number of institutional investors in a private placement transaction (the "ESA
Private Placement"). The purchase price in the ESA Private Placement was
$17.625 per share, for an aggregate amount of approximately $202.7 million.
Net proceeds received by ESA from the ESA Private Placement were approximately
$198.2 million. The shares of ESA Common Stock issued in the ESA Private
Placement were not registered under the Securities Act at the time of issuance
and constitute "restricted securities" within the meaning of Rule 144 under
the Securities Act. ESA has registered under the Securities Act all of the
shares of ESA Common Stock issued in the ESA Private Placement so that the
holders of such shares may make resales in the public market of those shares.
On February 20, 1997, ESA announced its intention to develop and launch the
Crossland Economy Studios brand of budget extended stay lodging facilities.
ESA opened the first Crossland Economy Studios lodging facility on January 2,
1997. ESA expects to open three additional Crossland Economy Studios
facilities during 1997 and at least 30 additional Crossland Economy Studios
per year beginning in 1998. Three of ESA's extended stay lodging facilities
under construction as of December 31, 1996 were Crossland Economy Studios.
Crossland Economy Studios will be priced to compete in the budget segment of
the extended stay lodging market. Upon completion of the Merger, ESA's
Crossland Economy Studios, Extended Stay America Efficiency Studios, and
StudioPLUS brands of lodging facilities will compete in the budget, economy,
and mid-price segments, respectively, of the extended stay lodging market.
Additional information with respect to ESA's business is included in the ESA
1996 10-K, which is incorporated herein by reference.
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ESA ADDITIONAL PROPOSAL NUMBER 1--ESA CHARTER AMENDMENT
ESA's Charter currently authorizes the issuance of a total of 200 million
shares of ESA Common Stock and 10 million shares of preferred stock, par value
$.01 per share ("ESA Preferred Stock"). Of such 200 million presently
authorized shares of ESA Common Stock, 79,808,520 were issued and outstanding
as of February 7, 1997. No shares of ESA Preferred Stock are issued and
outstanding. As of February 7, 1997, additional shares of ESA Common Stock had
been reserved for issuance as follows: (i) an aggregate of approximately
14,796,000 shares in connection with options granted or to be granted under
ESA's stock option plans (including 6,000,000 shares under the 1997 Plan);
(ii) approximately 15,376,000 shares in connection with shares of ESA Common
Stock to be issued upon consummation of the Merger; (iii) approximately
1,475,000 shares in connection with the issuance of Exchange Options upon
consummation of the Merger; and (iv) approximately 3,541,000 shares that have
not been issued under ESA's acquisition shelf registration under the
Securities Act.
The Board of Directors of ESA has adopted and approved, and recommends that
the ESA stockholders adopt and approve, an amendment to Article FOURTH of the
ESA Charter which would increase the number of authorized shares of ESA Common
Stock from 200 million to 500 million (the "ESA Charter Amendment"). The ESA
Charter Amendment will not increase or otherwise affect the number of
authorized shares of ESA Preferred Stock which may be issued by ESA. The
provisions of Article FOURTH of the ESA Charter, as proposed to be amended,
are set forth in Appendix E to this Joint Proxy Statement/Prospectus.
The Board of Directors of ESA believes that it is in ESA's best interests to
increase the number of authorized shares of ESA Common Stock in order to have
additional authorized but unissued shares available for issuance to meet ESA's
needs as they arise. The Board of Directors of ESA believes that the
availability of such additional shares will provide ESA with the flexibility
to issue shares of ESA Common Stock for possible future financings; stock
splits, dividends, or distributions; acquisitions of businesses or properties
or securities of other businesses; stock option plans; or other proper
corporate purposes which may be identified in the future by the ESA Board of
Directors, without the possible expense and delay of a special stockholder
meeting.
The authorized shares of ESA Common Stock in excess of those issued will be
available for issuance at such times and for such corporate purposes as the
ESA Board of Directors may deem advisable, without further action by ESA's
stockholders, except as may be required by applicable law or by the rules of
The Nasdaq Stock Market, as determined by the National Association of
Securities Dealers, Inc., or any other stock exchange or national securities
association trading system on which the ESA Common Stock may be listed or
traded. Upon issuance, such shares will have the same rights as the
outstanding shares of ESA Common Stock. Holders of shares of ESA Common Stock
have no preemptive rights.
ESA has no arrangements, agreements, understandings, or plans at the present
time for the issuance or use of the additional shares of ESA Common Stock
proposed to be authorized. However, the Board of Directors of ESA believes
that the current number of authorized unreserved shares of ESA Common Stock
will be insufficient to meet ESA's future needs. The Board of Directors of ESA
intends to issue ESA Common Stock only on terms which the Board deems to be in
the best interests of ESA and its then existing stockholders. Any future
issuance of ESA Common Stock will be subject to the rights of holders of
outstanding shares of any ESA Preferred Stock which ESA may issue in the
future.
The ESA Charter and Bylaws include certain provisions that may have the
effect of discouraging, delaying, or preventing a change in control of ESA
(even though such change in control could be beneficial to ESA's stockholders
generally), including procedural requirements with respect to stockholder
action. The issuance of additional shares of ESA's capital stock, including
shares authorized pursuant to the ESA Charter Amendment, could in certain
circumstances also have the effect of similarly discouraging, delaying, or
preventing a change in control of ESA. However, ESA is not aware of any
efforts by another party to acquire a controlling interest or to seek
representation on the Board of Directors of ESA, nor is this proposal being
submitted to frustrate any such efforts. In addition, the ESA Charter
Amendment is not part of any plan by ESA's management to adopt a series of
amendments to the ESA Charter or bylaws so as to render the takeover of ESA
more difficult.
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The issuance of additional shares of ESA Common Stock may have a dilutive
effect on earnings per share and on the equity and voting power of existing
holders of ESA Common Stock. It may also adversely effect the market price of
the ESA Common Stock. However, in the event additional shares are issued in
transactions which result in favorable business opportunities or that provide
working capital sufficient to allow ESA to pursue its business plans, the
dilutive effect on earnings per share may be offset and this may cause the
market price of the ESA Common Stock to increase.
The affirmative vote of the holders of a majority of the outstanding shares
of ESA Common Stock is necessary to approve the ESA Charter Amendment. Unless
otherwise instructed, properly executed proxies which are returned in a timely
manner will be voted in favor of adoption of the ESA Amendment.
THE BOARD OF DIRECTORS OF ESA RECOMMENDS THAT THE STOCKHOLDERS VOTE
"FOR" APPROVAL OF THE ESA CHARTER AMENDMENT.
ESA ADDITIONAL PROPOSAL NUMBER 2--APPROVAL OF 1997 PLAN
In order to continue to encourage ownership of ESA's Common Stock by
executives, employees, and key personnel of ESA and to provide incentives for
them to make maximum efforts for the success of the business, the Board of
Directors of ESA has adopted and recommends that stockholders vote to approve
the 1997 Plan. Options granted under the 1997 Plan are not intended to qualify
as "Incentive Stock Options" as defined in the Code. The full text of the 1997
Plan is attached to this Joint Proxy Statement/Prospectus as Appendix F. The
description below of the 1997 Plan is qualified in its entirety by reference
to Appendix F.
DESCRIPTION OF THE 1997 PLAN
In January 1997, the Board of Directors of ESA adopted the 1997 Plan,
subject to approval by ESA's stockholders at the ESA Meeting. The 1997 Plan
will be administered by the Compensation Committee of the Board of Directors
of ESA (the "Compensation Committee"), which consists solely of non-employee
directors. The Compensation Committee has authority to determine the persons
to be granted options under the 1997 Plan, the number of shares subject to
each option, the time or times at which options will be granted, the option
price of the shares subject to each option (which price shall not be less than
the fair market value of the shares at the date of grant), and the time or
times when each option becomes exercisable and the duration of the exercise
period. Except for specific situations, such as a change in control of ESA,
options which have been granted become exercisable as to one-fourth of the
grant on each of the first, second, third, and fourth anniversary of the date
of grant.
Options may be granted under the 1997 Plan to key employees and consultants
(other than members of the Compensation Committee) of ESA. Options may be
granted with respect to a total of not more than 6,000,000 shares of Common
Stock under the 1997 Plan, subject to antidilution and other adjustment
provisions. No options may be granted to a single optionee under the 1997 Plan
in excess of 50% of the total number of shares authorized for issuance under
the 1997 Plan. No options may be granted under the 1997 Plan after January 16,
2007. If an option expires or is terminated or canceled unexercised as to any
shares, such released shares may again be optioned (including a grant in
substitution for a canceled option). As of the date hereof, no options to
purchase shares of ESA Common Stock have been granted under the 1997 Plan.
Each option is for such term of not more than ten years as shall be
determined by the Compensation Committee at the date of the grant. Options
granted under the 1997 Plan may be subject to such conditions as the
Compensation Committee may in its discretion determine at the date of grant.
The Compensation Committee may provide different termination provisions of an
option in the event of termination of employment of the optionee and may
accelerate the exercisability of any option or, at any time before the
expiration or termination of an option previously granted, extend the terms of
such option for such additional period as the Compensation Committee, in its
discretion, shall determine, except that the aggregate option period with
respect to any option, including the original term of the option and any
extensions thereof, shall never exceed ten years.
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The Compensation Committee may permit the exercise price to be paid, all or
in part, by delivery to ESA of a promissory note or other shares of ESA Common
Stock in such circumstances and manner as the Compensation Committee may
specify, valued at the fair market value of the ESA Common Stock on the date
of exercise, or by using a "cashless" broker-assisted method.
If the employment of any optionee with ESA or any of its subsidiaries is
terminated for any reason other than death, permanent disability, retirement
after age 65, or pursuant to a change in control of ESA, such optionee's
option shall expire immediately. In the event of termination of employment
because of a change in control of ESA, the option may be exercised in full,
unless otherwise provided at the time of grant, by the optionee or, if he is
not living, by his heirs, legatees, or legal representative, during its
specified term. In the event of termination of employment because of death,
disability, or retirement after age 65, the option may be exercised by the
optionee or, if he is not living, by his heirs, legatees, or legal
representative, at any time during its specified term prior to three years
after the date of such termination, but only to the extent the option was
exercisable at the date of such termination.
No option is transferable by the optionee otherwise than by will or the laws
of descent and distribution or pursuant to a qualified domestic relations
order, and each option shall be exercisable during an optionee's lifetime only
by him.
The Compensation Committee may amend or discontinue the 1997 Plan at any
time. However, no such amendment or discontinuation shall (i) change or impair
any option previously granted without the consent of the optionee, (ii)
increase the maximum number of shares which may be purchased by all optionees,
(iii) change the minimum purchase price, (iv) change the limitations on the
option period or increase the time limitations on the grant of options, or (v)
permit the granting of options to members of the Compensation Committee.
FEDERAL INCOME TAX CONSEQUENCES
ESA understands that no gain or loss will be recognized by an optionee upon
the grant of an option under the 1997 Plan, but that upon exercise of the
option ordinary income will be recognized by the optionee measured by the
excess of the fair market value of the shares of ESA Common Stock acquired
over the option price. ESA will be entitled to a deduction equal to the amount
of ordinary income recognized by the optionee. An optionee's basis in shares
acquired upon the exercise of an option will be equal to the option price plus
the amount of ordinary income recognized by the optionee. An optionee's
holding period begins on the date on which the option is exercised.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
"FOR" APPROVAL OF THE 1997 PLAN.
OTHER MATTERS
Management of ESA knows of no other matters to be brought before the ESA
Meeting other than those described above. If any other business should come
before the meeting, it is intended that the persons named in the enclosed
proxy will vote the shares in accordance with their best judgment on any such
matter.
CERTAIN LEGAL MATTERS
Certain legal matters in connection with the Merger will be passed upon for
ESA by Bell, Boyd & Lloyd, Chicago, Illinois. Certain legal matters in
connection with the Merger will be passed upon for Studio Plus by King &
Spalding, Atlanta, Georgia. In rendering such opinion, King & Spalding will
rely upon the opinion of Virginia counsel as to all matters of Virginia law.
66
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EXPERTS
The consolidated balance sheet of Extended Stay America, Inc. and
subsidiaries as of December 31, 1996 and the related consolidated statements
of operations, shareholders' equity and cash flows for the period from January
9, 1995 (inception) through December 31, 1996, the statements of operations,
partners' deficit, and cash flows of Welcome Inn America 89-1, L.P. for each
of the two years in the period ended December 31, 1994 and the period from
January 1, 1995 through August 18, 1995, the balance sheets of Apartment/Inn,
L.P. as of December 31, 1994 and 1995 and the related statements of operations
and partners' deficit and cash flows for each of the two years in the period
ended December 31, 1995, the combined balance sheets of Hometown Inn I, LTD
and Hometown Inn II, LTD as of December 31, 1994 and 1995 and the related
combined statements of operations and partners' capital and cash flows for
each of the three years in the period ended December 31, 1995, the balance
sheet of Kipling Hospitality Enterprise Corporation as of December 31, 1995
and the related statements of operations and retained earnings and cash flows
for the year then ended, the balance sheet of Apartment Inn Partners/Gwinnett,
L.P. as of December 31, 1995 and the related statements of operations and
partners' capital and cash flows for the year then ended, and the combined
balance sheets of the M&M Facilities as of December 31, 1994 and 1995 and the
related combined statements of operations and equity (deficit) and cash flows
for each of the three years in the period ended December 31, 1995, each as
incorporated by reference into in this Joint Proxy Statement/Prospectus, have
been included herein in reliance on the reports of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The consolidated balance sheets of Studio Plus Hotels, Inc. and subsidiaries
as of December 31, 1996 and 1995 and the related consolidated statements of
operations, capital, and cash flows for each of the three years in the period
ended December 31, 1996, as incorporated by reference into this Joint Proxy
Statement/Prospectus, have been included herein in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
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APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
EXTENDED STAY AMERICA, INC.,
ESA MERGER SUB, INC.
AND
STUDIO PLUS HOTELS, INC.
DATED AS OF JANUARY 16, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ARTICLE 1--THE MERGER...................................................... A-1
1.1 The Merger.......................................................... A-1
1.2 Effective Time...................................................... A-1
1.3 Effects of the Merger............................................... A-2
1.4 Certificate of Incorporation and Bylaws; Directors and Officers..... A-2
1.5 The Closing......................................................... A-2
ARTICLE 2--EFFECT OF THE MERGER ON SECURITIES OF THE COMPANY AND NEWCO..... A-2
2.1 NEWCO Stock......................................................... A-2
2.2 Conversion of Company Common Stock.................................. A-2
2.3 Exchange of Shares.................................................. A-4
2.4 Dividends, Fractional Shares, Etc. ................................. A-4
2.5 Tax-Free Reorganization............................................. A-5
ARTICLE 3--REPRESENTATIONS AND WARRANTIES OF THE COMPANY................... A-5
3.1 Organization, Standing and Power.................................... A-5
3.2 Capital Structure................................................... A-6
3.3 Subsidiaries........................................................ A-6
3.4 Other Interests..................................................... A-6
3.5 Authority; Non-Contravention........................................ A-7
3.6 SEC Documents....................................................... A-7
3.7 Absence of Certain Events........................................... A-8
3.8 Litigation.......................................................... A-8
3.9 Material Contracts.................................................. A-9
3.10 Employee Plans...................................................... A-9
3.11 Employment Relations and Agreements................................. A-10
3.12 Real Property....................................................... A-11
3.13 Limitation on Business Conduct; Condition of Assets................. A-11
3.14 Environmental Laws and Regulations.................................. A-12
3.15 Trademarks, Copyrights.............................................. A-12
3.16 Compliance with Laws................................................ A-13
3.17 Takeover Statutes................................................... A-13
3.18 Taxes............................................................... A-13
3.19 Brokers............................................................. A-13
3.20 Opinion of Financial Advisor........................................ A-13
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
3.21 Pooling of Interests................................................ A-13
3.22 Ownership of Purchaser Shares....................................... A-13
3.23 Amendment to Rights Plan............................................ A-14
ARTICLE 4--REPRESENTATIONS AND WARRANTIES OF THE PURCHASER................. A-14
4.1 Organization, Standing and Power.................................... A-14
4.2 Capital Structure................................................... A-14
4.3 Authority; Non-Contravention........................................ A-14
4.4 SEC Documents....................................................... A-15
4.5 Absence of Certain Events........................................... A-16
4.6 Purchaser Material Contracts........................................ A-16
4.7 Employee Plans...................................................... A-16
4.8 Taxes............................................................... A-18
4.9 Compliance with Laws................................................ A-18
4.10 Litigation.......................................................... A-18
4.11 Employment Relations and Agreements................................. A-18
4.12 Environmental Laws and Regulations.................................. A-18
4.13 Trademarks, Copyrights.............................................. A-18
4.14 Brokers............................................................. A-19
4.15 Takeover Statute.................................................... A-19
ARTICLE 5--COVENANTS....................................................... A-19
5.1 Alternative Proposals............................................... A-19
5.2 Interim Operations.................................................. A-19
5.3 Meetings of Stockholders............................................ A-22
5.4 Filings, Other Action............................................... A-22
5.5 Inspection of Records............................................... A-22
5.6 Publicity........................................................... A-23
5.7 Registration Statement.............................................. A-23
5.8 Listing Application................................................. A-23
5.9 Affiliate Letters................................................... A-24
5.10 Expenses............................................................ A-24
5.11 Takeover Statute.................................................... A-24
5.12 Conduct of Business by NEWCO Pending the Merger..................... A-24
5.13 Conveyance Taxes.................................................... A-24
5.14 Further Amendments to Rights Plan................................... A-24
</TABLE>
A-ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
5.15 Indemnification of Officers and Directors........................... A-25
5.16 Tax Treatment....................................................... A-25
5.17 Employee Benefits................................................... A-25
5.18 Stock Options....................................................... A-25
5.19 Purchaser Board of Directors........................................ A-26
5.20 Employment Contract................................................. A-26
ARTICLE 6--CONDITIONS...................................................... A-26
6.1 Conditions to Each Party's Obligation to Effect the Merger.......... A-26
6.2 Conditions to Obligation of Company to Effect the Merger............ A-27
6.3 Conditions to Obligation of the Purchaser to Effect the Merger...... A-27
ARTICLE 7--TERMINATION..................................................... A-28
7.1 Termination by Mutual Consent....................................... A-28
7.2 Termination by Either the Purchaser or Company...................... A-28
7.3 Termination by Company.............................................. A-28
7.4 Termination by the Purchaser........................................ A-29
7.5 Effect of Termination and Abandonment............................... A-29
7.6 Extension, Waiver................................................... A-29
ARTICLE 8--GENERAL PROVISIONS.............................................. A-29
8.1 Nonsurvival of Representations, Warranties and Agreements........... A-29
8.2 Notices............................................................. A-30
8.3 Assignment; Binding Effect.......................................... A-30
8.4 Entire Agreement.................................................... A-30
8.5 Amendment........................................................... A-30
8.6 Governing Law....................................................... A-30
8.7 Counterparts........................................................ A-30
8.8 Headings............................................................ A-30
8.9 Interpretation...................................................... A-31
8.10 Waivers............................................................. A-31
8.11 Incorporation of Exhibits........................................... A-31
8.12 Severability........................................................ A-31
8.13 Enforcement of Agreement............................................ A-31
</TABLE>
A-iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (the "Agreement") is made and entered into
as of this 16th day of January 1997, by and among Extended Stay America, Inc.,
a Delaware corporation (the "Purchaser"), ESA Merger Sub, Inc., a Delaware
corporation and wholly-owned subsidiary of the Purchaser ("NEWCO"), and Studio
Plus Hotels, Inc., a Virginia corporation (the "Company").
RECITALS
A. The Boards of Directors of the Purchaser, NEWCO, and the Company have
approved, and deem it advisable and in the best interests of their respective
companies and stockholders to consummate, the acquisition of the Company by
the Purchaser by means of a merger of the Company with and into NEWCO;
B. For federal income tax purposes, it is intended that the Merger, as
defined herein, qualify as a reorganization under the provisions of Sections
368(a)(1)(A) and (a)(2)(D) of the United States Internal Revenue Code of 1986,
as amended (the "Code");
C. For accounting purposes, it is intended that the Purchaser's acquisition
of the Company be treated as a pooling of interests pursuant to Accounting
Principles Board Opinion No. 16, and each of the parties hereto have made
certain representations and warranties and have undertaken certain obligations
relating to the preservation of such treatment;
D. Concurrently with the execution hereof, in order to induce the parties
hereto to enter into this Agreement, Norwood Cowgill, Jr. has granted to the
Purchaser an irrevocable proxy ("Proxy") with respect to his Company Common
Stock (as defined herein) in the form of the proxy set forth in the
Stockholder Agreement attached as Exhibit A hereto (the "Stockholder
Agreement") and George D. Johnson, Jr. has entered into an agreement to vote
his Purchaser Stock (as defined herein) in the form set forth in the Voting
Agreement attached hereto as Exhibit B (the "Voting Agreement");
E. The Merger described herein is subject to approval of the stockholders of
the Purchaser and the Company, respectively, and satisfaction of certain other
conditions described in this Agreement; and
F. The Purchaser and the Company desire to make certain representations,
warranties, covenants and agreements in connection with the transactions
contemplated hereby.
Now, Therefore, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions hereof, and in
accordance with the General Corporation Law of the State of Delaware, as
amended (the "DGCL"), and the Virginia Stock Corporation Act, as amended (the
"VSCA"), the Company shall be merged with and into NEWCO at the Effective
Time, as defined herein (the "Merger"). Following the Merger, the separate
corporate existence of the Company shall cease and NEWCO shall continue as the
surviving corporation (the "Surviving Corporation") and shall succeed to and
assume all the rights and obligations of the Company in accordance with the
DGCL and the VSCA. The name of NEWCO as the Surviving Corporation, shall be
changed, by virtue of the Merger, to Studio Plus Hotels, Inc.
1.2 Effective Time. The Merger shall become effective when a certificate or
articles of merger, as applicable, (the "Certificate of Merger"), executed in
accordance with the relevant provisions of the DGCL and the VSCA, is accepted
for filing by the Secretary of State of the State of Delaware (the "Delaware
Secretary of State") and the Virginia State Corporation Commission (the
"Virginia Commission"). When used in this Agreement, the term "Effective Time"
shall mean the later of (i) the date and time at which the Certificate of
Merger has been accepted for filing by both the Delaware Secretary of State
and the Virginia Commission, or
A-1
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(ii) such later time established by the Certificate of Merger. The filing of
the Certificate of Merger with both the Delaware Secretary of State and the
Virginia Commission shall be made as soon as reasonably practicable (but not
later than the third business day) after the satisfaction or waiver of the
conditions to the Merger set forth herein.
1.3 Effects of the Merger. The Merger shall have the effects set forth in
the DGCL and VSCA.
1.4 Certificate of Incorporation and Bylaws; Directors and Officers. (a) The
Certificate of Incorporation of NEWCO, as in effect immediately prior to the
Effective Time, shall be amended by the Certificate of Merger to change the
name of NEWCO to "Studio Plus Hotels, Inc." and, as so amended, the
Certificate of Incorporation and the Bylaws of NEWCO shall be the Certificate
of Incorporation and the Bylaws of the Surviving Corporation until thereafter
changed or amended as provided therein or by applicable law.
(b) The directors of NEWCO at the Effective Time shall, from and after the
Effective Time, be the initial directors of the Surviving Corporation until
their successors have been duly elected or appointed and qualified or until
their earlier death, resignation or removal, in accordance with the Surviving
Corporation's Certificate of Incorporation and Bylaws.
(c) The officers of NEWCO at the Effective Time and such other persons as
designated by the Purchaser shall, from and after the Effective Time, be the
initial officers of the Surviving Corporation until their successors have been
duly elected or appointed and qualified or until their earlier death,
resignation or removal, in accordance with the Surviving Corporation's
Certificate of Incorporation and Bylaws.
1.5. The Closing. Subject to the terms and conditions of this Agreement, the
closing of the transactions contemplated by this Agreement (the "Closing")
shall take place (a) at the offices of Bell, Boyd & Lloyd, 70 West Madison
Street, Chicago, Illinois, at 10:00 a.m., local time, on the first business
day following the day on which the last to be fulfilled or waived of the
conditions set forth in Article 6 shall be fulfilled or waived in accordance
herewith or (b) at such other time, date or place as the Purchaser and the
Company may agree. The date on which the Closing occurs is referred to herein
as the "Closing Date."
ARTICLE 2
EFFECT OF THE MERGER ON SECURITIES
OF THE COMPANY AND NEWCO
2.1. NEWCO Stock. At the Effective Time, each share of the common stock of
NEWCO outstanding immediately prior to the Effective Time shall remain
outstanding and shall continue as one share of common stock of the Surviving
Corporation, and each certificate theretofore representing any such shares
shall, without any action on the part of the holder thereof, be deemed to
represent the same number of shares of the Surviving Corporation.
2.2. Conversion of Company Common Stock. (a) Except as otherwise provided in
Section 2.4 and subject to Sections 2.2(c) and 2.2(d), at the Effective Time
each issued and outstanding share of common stock, par value $.01 per share,
of the Company (the "Company Common Stock"), shall be converted into the right
to receive 1.2272 shares (the "Exchange Ratio") of common stock, par value
$.01 per share, of the Purchaser ("Purchaser Stock"). The number of shares of
Purchaser Stock received as determined as aforesaid is referred to herein as
the "Stock Consideration." In the event of any change in Purchaser Stock or
Company Common Stock between the date of this Agreement and the Effective Time
by reason of any stock dividend, stock split, subdivision, reclassification,
recapitalization, combination, exchange of shares or the like ("Adjustment
Event"), the Exchange Ratio shall be appropriately adjusted so that each
holder of Company Common Stock will receive in the Merger the same
proportionate amount of Purchaser Stock such holder would have been entitled
to receive if the Effective Time had been immediately prior to such Adjustment
Event.
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(b) As a result of the Merger and without any action on the part of the
holder thereof, at the Effective Time, all shares of Company Common Stock
shall cease to be outstanding and shall be canceled and retired and shall
cease to exist, and each holder of shares of Company Common Stock shall
thereafter cease to have any rights with respect to such shares of Company
Common Stock, except the right to receive, without interest, the Stock
Consideration and cash for fractional shares of Purchaser Stock in accordance
with Section 2.4 upon the surrender of a certificate representing such shares
of Company Common Stock (a "Company Certificate").
(c) Notwithstanding anything contained in this Section 2.2 to the contrary,
each share of Company Common Stock held of record by the Purchaser and each
share of Company Common Stock issued and held in the Company's treasury
immediately prior to the Effective Time shall, by virtue of the Merger, cease
to be outstanding and shall be canceled and retired without payment of any
consideration therefor.
(d) Notwithstanding any provision of this Agreement to the contrary, if
required by the DGCL or the VSCA (but only to the extent required thereby),
shares of Company Common Stock which are issued and outstanding immediately
prior to the Effective Time and which are held by holders of such shares of
Company Common Stock who have properly exercised dissenter rights with respect
thereto in accordance with Article 15 of the VSCA (the "Dissenting Company
Common Shares") will not be exchangeable for the right to receive the Stock
Consideration, and holders of such shares of Company Common Stock will be
entitled to receive payment of the appraised value of such shares of Company
Common Stock in accordance with the provisions of such Article 15 unless and
until such holders fail to perfect or effectively withdraw or shall have lost
their rights to appraisal and payment under the VSCA. If, after the Effective
Time, any such holder fails to perfect or effectively withdraws or loses such
right, such shares of Company Common Stock will thereupon be treated as if
they had been converted into and have become exchangeable for, at the
Effective Time, the right to receive the Stock Consideration, without any
interest thereon. The Company will give the Purchaser prompt notice of any
demands received by the Company for appraisals of shares of Company Common
Stock. The Company shall not, except with the prior written consent of the
Purchaser, voluntarily make any payment with respect to any demands for
appraisal or offer to settle or settle any such demands. Payment for the
Dissenting Company Common Shares shall be made as required by the VSCA.
(e) At the Effective Time, each outstanding option or right to purchase from
the Company shares of Company Common Stock (a "Company Option") under any of
the Stock Plans (as defined in Section 3.2) or otherwise shall, to the extent
agreed to by the holder of such Company Option in an Option Assumption
Agreement (as hereinafter defined) (which agreement the Company will use its
best efforts to obtain), be assumed by the Purchaser in such manner that each
such Company Option (whether or not such option is then exercisable) shall be
converted into an option to purchase shares of Purchaser Stock, as provided
below. Following the Effective Time, each such Company Option shall be subject
to the same terms and conditions as are applicable to such Company Option at
the Effective Time, except that (i) all references in the Company Options to
Company and Company Common Stock shall be deemed to be references to Purchaser
and Purchaser Stock, respectively, (ii) all actions to be taken thereunder by
the Board of Directors of the Company or a committee thereof shall be taken by
the Board of Directors of the Purchaser or a committee thereof, (iii) each
such Company Option shall be immediately and fully exercisable for that number
of whole shares (with fractions rounded up to the next whole number) of
Purchaser Stock equal to the product of (x) the number of shares of Company
Common Stock covered by such Company Option immediately prior to the Effective
Time and (y) the Exchange Ratio as defined in Section 2.2(a) and (iv) the
exercise price of such Company Option shall be equal to the exercise price of
such option immediately prior to the Effective Time divided by the Exchange
Ratio. It is the intention of the parties that, to the extent that any such
Company Option constituted an "incentive stock option" (within the meaning of
Section 422 of the Code) immediately prior to the Effective Time, such Company
Option shall continue to qualify as an incentive stock option to the maximum
extent permitted by Section 422 of the Code, and that the assumption of the
Company Options provided by this Section 2.2(e) satisfy the conditions of
Section 424(a) of the Code. Except as set forth in the Company Disclosure
Letter, from and after the date of this Agreement, no additional options to
purchase shares of Company Common Stock shall be granted under the Stock Plans
or otherwise. Approval by the stockholders of the Company and the Purchaser of
this Agreement shall constitute authorization and approval of any and all of
the actions described in this Section 2.2(e).
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2.3 Exchange of Shares. (a) Approval of the Merger as contemplated by
Section 6.1(a) hereof shall constitute appointment by the stockholders of the
Company of Harris Trust and Savings Bank as the Exchange Agent in the Merger
(the "Exchange Agent"). Promptly after the Effective Time, the Purchaser shall
deposit (or cause to be deposited) with the Exchange Agent, for the benefit of
the holders of shares of Company Common Stock, for exchange in accordance with
this Article 2, certificates ("Purchaser Certificates") representing the
aggregate number of shares of Purchaser Stock constituting Stock Consideration
for exchange in accordance with this Article 2 and cash to be paid in lieu of
fractional shares (the shares deposited pursuant hereto and such cash being
referred to herein as the "Exchange Fund"). Purchaser Stock into which Company
Common Stock shall be converted pursuant to the Merger shall be deemed to have
been issued at the Effective Time.
(b) As soon as practicable after the Effective Time, Purchaser and NEWCO
shall cause the Exchange Agent to mail to each holder of record of Company
Common Stock immediately prior to the Effective Time (excluding any shares of
Company Common Stock which will be canceled pursuant to Section 2.2(c) or
Dissenting Company Common Shares) (i) a letter of transmittal (the "Company
Letter of Transmittal") (which shall specify that delivery shall be effected,
and risk of loss and title to the Company Certificates shall pass, only upon
delivery of such Company Certificates to the Exchange Agent and shall be in
such form and have such other provisions as the Purchaser and the Company may
reasonably specify), and (ii) instructions for use in effecting the surrender
of the Company Certificates in exchange for the Stock Consideration with
respect to the shares of Company Common Stock formerly represented thereby.
(c) Upon surrender of a Company Certificate for cancellation to the Exchange
Agent, together with the Company Letter of Transmittal, duly executed, and
such other documents as the Exchange Agent shall reasonably request, the
holder of such Company Certificate shall be entitled to receive promptly in
exchange therefor a Purchaser Certificate representing that number of shares
of Purchaser Stock which such holder has the right to receive pursuant to this
Article 2 and the Company Certificate so surrendered shall forthwith be
canceled. Until surrendered as contemplated by this Section 2.3, each Company
Certificate shall be deemed at any time after the Effective Time to represent
only the right to receive the Stock Consideration with respect to the shares
of Company Common Stock formerly represented thereby.
2.4. Dividends, Fractional Shares, Etc. (a) Notwithstanding any other
provisions of this Agreement, no dividends or other distributions declared
after the Effective Time on Purchaser Stock shall be paid with respect to any
shares of Company Common Stock represented by a Company Certificate, until
such Company Certificate is surrendered for exchange as provided herein.
Subject to the effect of applicable laws, following surrender of any such
Company Certificate, there shall be paid to the holder of the Purchaser
Certificates issued in exchange therefor, without interest, (i) at the time of
such surrender, the amount of dividends or other distributions with a record
date after the Effective Time theretofore payable with respect to such whole
shares of Purchaser Stock and not paid, less the amount of any withholding
taxes which may be required thereon, and (ii) at the appropriate payment date,
the amount of dividends or other distributions with a record date after the
Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole shares of Purchaser Stock, less
the amount of any withholding taxes which may be required thereon.
(b) At or after the Effective Time, there shall be no transfers on the stock
transfer books of the Company of the shares of Company Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, certificates representing any such shares are presented to the Surviving
Corporation, they shall be canceled and exchanged for certificates for the
consideration deliverable in respect thereof pursuant to this Agreement in
accordance with the procedures set forth in this Article 2. Company
Certificates surrendered for exchange by any person constituting an
"affiliate" of the Company for purposes of Rule 145(c) under the Securities
Act of 1933, as amended (including the rules and regulations promulgated
thereunder, the "Securities Act"), shall not be exchanged until the Purchaser
has received a written agreement from such person as provided in Section 5.9.
(c) No fractional shares of Purchaser Stock shall be issued pursuant to the
Merger, and such fractional interests shall not entitle the owners thereof to
vote, to receive dividends or to exercise any other right of a
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stockholder with respect to such fractional interest. In lieu of the issuance
of any fractional share of Purchaser Stock pursuant to the Merger, each holder
of Company Common Stock who would otherwise have been entitled to a fraction
of a share of Purchaser Stock upon surrender of Company Certificates pursuant
to Section 2.3(c) hereof shall be paid cash (rounded to the nearest cent,
$.005 to be rounded to $.01) upon surrender in an amount equal to such
fraction times the closing sale price of the Purchaser Stock on the Nasdaq
National Market ("Nasdaq") on the day of the Effective Time, or, if the
Purchaser Stock is not traded on such day, such closing price on the next
preceding day on which such stock was traded on Nasdaq.
(d) Any portion of the Exchange Fund that remains unclaimed by the former
stockholders of the Company six months after the Effective Time shall be
delivered to the Purchaser. Any former stockholder of the Company who has not
theretofore complied with this Article 2 shall thereafter look only to the
Purchaser for payment of the Stock Consideration, cash in lieu of fractional
shares and unpaid dividends and distributions on the Purchaser Stock
deliverable in respect of each share of Company Common Stock such stockholder
holds as determined pursuant to this Agreement, in each case without any
interest thereon.
(e) None of the Purchaser, the Company, NEWCO, the Surviving Corporation,
the Exchange Agent or any other person shall be liable to any former holder of
shares of Company Common Stock for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar laws.
(f) In the event that any Company Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Company Certificate to be lost, stolen or destroyed and, if
required by the Purchaser, the posting by such person of a bond in such
reasonable amount as the Purchaser may direct as indemnity against any claim
that may be made against it with respect to such Company Certificate, the
Exchange Agent will issue in exchange for such lost, stolen or destroyed
Company Certificate the applicable Stock Consideration, cash in lieu of
fractional shares, and unpaid dividends and distributions on shares of
Purchaser Stock as provided in this Section 2.4, deliverable in respect
thereof pursuant to this Agreement.
2.5 Tax-Free Reorganization. The Merger is intended to be a reorganization
within the meaning of Sections 368(a)(1)(A) and (a)(2)(D) of the Code, and
this Agreement is intended to be a "plan of reorganization" within the meaning
of the regulations promulgated under Section 368 of the Code.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchaser as follows:
3.1 Organization, Standing and Power. The Company and each of its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it is incorporated and
has the requisite corporate power and authority to carry on its business as
now being conducted. The Company and each of its Subsidiaries is duly
qualified to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary, except where the failure to be
so qualified and in good standing would not, individually or in the aggregate,
have a Material Adverse Effect on the Company. For purposes of this Agreement,
(a) "Material Adverse Change" or "Material Adverse Effect" means, when used
with respect to the Purchaser, NEWCO, or the Company, as the case may be, any
change or effect, either individually or in the aggregate, that is materially
adverse to (i) the business, assets, financial condition or results of
operations of the Purchaser and its Subsidiaries taken as a whole, or the
Company and its Subsidiaries taken as a whole, as the case may be, or (ii) the
ability of Purchaser, NEWCO, or the Company, as the case may be, to consummate
the transactions contemplated by this Agreement, and (b) "Subsidiary" means
any corporation, partnership, joint venture or other legal entity of which the
Purchaser or the Company, as the case may be (either alone or through or
together with any other Subsidiary),
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owns, directly or indirectly, 50% or more of the stock or other equity
interests the holders of which are generally entitled to vote for the election
of the board of directors or other governing body of such corporation or other
legal entity.
3.2 Capital Structure. The authorized capital stock of the Company consists
of 50,000,000 shares of Company Common Stock and 10,000,000 shares of
Preferred Stock, par value $.01 per share ("Preferred Stock"). At the close of
business on January 15, 1997, (i) 12,528,845 shares of Company Common Stock
were issued and outstanding, (ii) 1,071,514 shares of Company Common Stock
were reserved for issuance upon the exercise of outstanding Company Options
and 130,000 shares of Company Common Stock have been reserved for issuance for
satisfaction of contractual obligations of the Company to grant options to
current and future employees of the Company and (iii) no shares of Company
Common Stock were held by the Company in its treasury. As of the date hereof,
there are no shares of Preferred Stock outstanding. All outstanding shares of
capital stock of the Company are validly issued, fully paid and nonassessable
and not subject to preemptive rights. As of January 15, 1997, there were (i)
45 Company Options outstanding under the Company's 1995 Stock Incentive Plan
(the "Employee Plan") to acquire 1,011,514 shares of Company Common Stock, and
(ii) 4 Company Options outstanding under the Company's 1995 Non-Employee
Directors' Stock Incentive Plan (the "Directors' Plan") to acquire 60,000
shares of Company Common Stock. The foregoing stock option plans of the
Company are referred to herein as the "Stock Plans." Except for such Company
Options, rights under the Company Rights Agreement (as defined below), and
contractual obligations of the Company to grant options on a total of 130,000
shares of Company Common Stock to current and future employees of the Company,
there are no options, warrants, rights, commitments, agreements, arrangements
or undertakings of any kind to which the Company or any of its Subsidiaries is
a party or by which any of them is bound obligating the Company or any of its
Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock or other voting securities of the
Company or of any of its Subsidiaries. The Company Disclosure Letter (as
defined below) sets forth a schedule of the exercise prices for all
outstanding Company Options as of January 15, 1997. Since January 15, 1997, no
shares of the Company's capital stock have been issued other than pursuant to
the exercise of Company Options already in existence on such date and the
Company has not granted any stock options for any capital stock or other
voting securities of the Company.
3.3 Subsidiaries. Except as set forth in the letter from the Company to the
Purchaser dated the date hereof, which letter relates to this Agreement and is
designated therein as the Company Disclosure Letter (the "Company Disclosure
Letter"), all of the outstanding capital stock of, or ownership interests in,
each Subsidiary of the Company is owned by the Company, directly or
indirectly, free and clear of any security interests, liens, claims, pledges,
options, rights of first refusal, agreements, charges or other encumbrances of
any nature ("Liens") or any other limitation or restriction (including any
restriction on the right to vote or sell the same, except as may be provided
as a matter of law). Except as set forth in the Company Disclosure Letter,
there are no (i) securities of the Company or any of its Subsidiaries
convertible into or exchangeable for, (ii) options or other rights to acquire
from the Company or any of its Subsidiaries, or (iii) other contracts,
understandings, arrangements or obligations (whether or not contingent)
providing for the issuance or sale, directly or indirectly, in each case, with
respect to any capital stock or other ownership interests in, or any other
securities of, any Subsidiary of the Company. There are no outstanding
contractual obligations of the Company or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any outstanding shares of capital
stock or other ownership interests in any Subsidiary of the Company nor are
there any irrevocable proxies with respect to any shares of the capital stock
of any of the Company's Subsidiaries. All of the shares of capital stock of
each Subsidiary of the Company are validly issued, fully paid and
nonassessable. Other than restrictions imposed by applicable law or as set
forth in the Company Disclosure Letter, there are no restrictions which
prevent or limit the payment of dividends by any of the Company's
Subsidiaries.
3.4 Other Interests. Except for the Company's interest in its Subsidiaries
or as set forth in the Company Disclosure Letter, neither the Company nor its
Subsidiaries owns directly or indirectly any equity interest or equity
investment in, nor is the Company or any of its Subsidiaries subject to any
obligation or requirement to provide for or to make any equity investment in,
any corporation, limited liability company, partnership, joint venture,
business, trust or entity.
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3.5 Authority; Non-Contravention. The Board of Directors of the Company has
unanimously approved this Agreement and determined that the Merger is fair to
and in the best interests of the Company and its stockholders, and the Company
has all requisite corporate power and authority to enter into this Agreement
and, subject to approval of the Merger by the stockholders of the Company, to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company, subject to such approval of the
Merger by the stockholders of the Company. This Agreement has been duly
executed and delivered by the Company and (assuming the valid authorization,
execution and delivery of this Agreement by the Purchaser and NEWCO)
constitutes a valid and binding obligation of the Company enforceable against
the Company in accordance with its terms; (i) except as may be limited by
bankruptcy, insolvency, moratorium or other similar laws affecting or relating
to enforcement of creditors' rights generally; and (ii) subject to general
principles of equity. Except as set forth in the Company Disclosure Letter,
the execution and delivery of this Agreement do not, and the consummation of
the transactions contemplated hereby and compliance with the provisions hereof
will not, conflict with, or result in any violation of, or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation, contractually
require any offer to purchase or any prepayment of any debt, contractually
require the payment of (or result in the vesting of) any severance, golden
parachute, change of control or similar type of payment, or give rise to the
loss of a material benefit under, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties or assets
of the Company or any of its Subsidiaries under, any provision of (i) the
Articles of Incorporation or Bylaws of the Company (true and complete copies
of which as of the date hereof have been delivered to the Purchaser) or the
comparable charter or organization documents of any of its Subsidiaries, (ii)
any loan or credit agreement, note, bond, mortgage, indenture, lease or other
agreement, instrument, concession, franchise or license applicable to the
Company or any of its Subsidiaries or (iii) subject to the governmental
filings and other matters referred to in the following sentence and approval
of this Agreement by the Company's stockholders, any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to the Company or any
of its Subsidiaries or any of their respective properties or assets, other
than, in the case of clauses (ii) or (iii), any such conflicts, violations,
defaults, rights, offers, prepayments, payments, losses, liens, security
interests, charges or encumbrances that would not have a Material Adverse
Effect on the Company. Copies of all contracts, agreements, instruments or
other documents referred to in the Company Disclosure Letter pursuant to this
Section 3.5 have been furnished or made available to the Purchaser. The
Company Disclosure Letter lists the amounts payable or that will or may become
payable to directors, officers or employees or former directors, officers or
employees of the Company and its Subsidiaries as a result of the execution and
delivery by the Company of this Agreement or the consummation of the
transactions contemplated hereby. No filing or registration with, or
authorization, consent or approval of, any domestic (federal and state),
foreign or supranational court, commission, governmental body, regulatory or
administrative agency, authority or tribunal (a "Governmental Entity") is
required by or with respect to the Company or any of its Subsidiaries in
connection with the execution and delivery of this Agreement by the Company or
the consummation by the Company of the transactions contemplated hereby,
except for (i) in connection or in compliance with the provisions of the
Securities Exchange Act of 1934, as amended (including the rules and
regulations promulgated thereunder, the "Exchange Act"), (ii) the filing of
the Certificate of Merger with the Delaware Secretary of State and the
Virginia Commission, and appropriate documents with the relevant authorities
of other states in which the Company is qualified to do business, (iii) such
filings and approvals as may be required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), (iv) such filings and
approvals as may be required by any applicable state securities or "blue sky"
laws or state takeover laws, and (v) such other consents, orders,
authorizations, registrations, approvals, declarations and filings the failure
of which to be obtained or made would not, individually or in the aggregate,
have a Material Adverse Effect on the Company.
3.6 SEC Documents. (a) Since June 20, 1995, the Company has filed all
documents with the Securities and Exchange Commission ("SEC") required to be
filed under the Securities Act or the Exchange Act (such documents filed with
the SEC on or before January 15, 1997 referred to herein as the "Company SEC
Documents"). Except as set forth in the Company Disclosure Letter, as of their
respective dates, (i) the Company
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SEC Documents complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and (ii) none of the
Company SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading. The financial statements of the Company
included in the Company SEC Documents comply as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with generally accepted accounting principles (except, in the case of
unaudited statements, as permitted by Form 10-Q of the SEC) applied on a
consistent basis during the periods involved (except as may be indicated
therein or in the notes thereto) and fairly present the consolidated financial
position of the Company and its consolidated Subsidiaries as at the dates
thereof and the consolidated results of their operations and changes in
financial position for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments and to any other
adjustments described therein).
(b) Except as set forth in the Company SEC Documents or the Company
Disclosure Letter, neither the Company nor any of its Subsidiaries has any
liability or obligation of any nature (whether accrued, absolute, contingent
or otherwise) which would be required to be reflected on a balance sheet, or
in the notes thereto, prepared in accordance with generally accepted
accounting principles, except for liabilities and obligations incurred in the
ordinary course of business consistent with past practice since September 30,
1996 which would not have a Material Adverse Effect on the Company.
(c) The Company has heretofore made available to the Purchaser a complete
and correct copy of any amendments or modifications which have not yet been
filed with the SEC to agreements, documents or other instruments which
previously have been filed with the SEC pursuant to the Securities Act or the
Exchange Act.
3.7 Absence of Certain Events. Since December 31, 1995, the Company and its
Subsidiaries have operated their respective businesses only in the ordinary
course consistent with past practice and, except as contemplated by this
Agreement or disclosed in the Company SEC Documents or the Company Disclosure
Letter, there has not occurred (i) any Material Adverse Change in the Company;
(ii) any change by the Company or any of its Subsidiaries in its accounting
methods, principles or practices; (iii) any amendments or changes in the
Articles of Incorporation or Bylaws of the Company; (iv) any revaluation by
the Company or any of its Subsidiaries of any of their respective assets,
including, without limitation, write-offs of accounts receivable or write-offs
or write-downs of inventory, other than in the ordinary course of the
Company's and its Subsidiaries' businesses consistent with past practices; (v)
any damage, destruction or loss with respect to the property or assets of the
Company or its Subsidiaries which resulted in, or is reasonably likely to
result in, a Material Adverse Effect on the Company; (vi) any declaration,
setting aside or payment of any dividend or other distribution with respect to
any shares of capital stock of the Company, or any repurchase, redemption or
other acquisition by the Company or any of its Subsidiaries of any outstanding
shares of capital stock or other securities of, or other ownership interests
in, the Company; (vii) any grant of any severance or termination pay to any
director, executive officer or key employee of the Company or any of its
Subsidiaries, except as required under any severance agreements disclosed in
the Company Disclosure Letter; (viii) any entry into any employment, deferred
compensation or other similar agreement (or any amendment to any such existing
agreement) with any director, executive officer or key employee of the Company
or any of its Subsidiaries; (ix) any increase in benefits payable under any
existing severance or termination pay policies or employment agreements with
any director, executive officer or key employee of the Company or any of its
Subsidiaries except in the ordinary course of business consistent with past
practice; or (x) any increase in compensation, bonus or other benefits payable
to directors, executive officers or key employees of the Company or any of its
Subsidiaries except in the ordinary course of business consistent with past
practice. Notwithstanding the foregoing, the representations contained in this
Section 3.7 shall not apply to any change or development, or combination of
changes or developments, to the extent such changes and developments are the
result of stock market fluctuations.
3.8 Litigation. Except as set forth in the Company SEC Documents or the
Company Disclosure Letter, there are no actions, suits, proceedings,
investigations or reviews pending against the Company or its Subsidiaries or,
to the knowledge of the Company, threatened against the Company or its
Subsidiaries, at law or in equity, or
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before or by any federal or state commission, board, bureau, agency,
regulatory or administrative instrumentality or other Governmental Entity or
any arbitrator or arbitration tribunal, that are reasonably likely to have a
Material Adverse Effect on the Company.
3.9 Material Contracts. Except for (a) agreements, commitments,
arrangements, leases or other instruments disclosed in the Company Disclosure
Letter, (b) agreements, commitments, arrangements, leases or other instruments
disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, or in any Company SEC Documents filed thereafter, and (c)
other agreements, commitments, arrangements, leases or other instruments
entered into in the ordinary course of business (collectively the "Material
Contracts"), neither the Company nor any of its Subsidiaries is a party to any
material agreements, commitments, arrangements, leases or other instruments.
Assuming due authorization and execution by the other parties thereto, to the
knowledge of the Company, each of the Material Contracts is valid, binding,
and in full force and effect in all material respects and enforceable by the
Company or such Subsidiary, as the case may be, in accordance with its
respective terms. The Company or such Subsidiary, as the case may be, has
materially performed its obligations under such Material Contracts in
accordance with the terms thereof and, to the knowledge of the Company, the
other parties to such Material Contracts are not in default under any Material
Contract as to which it is reasonably foreseeable that an adverse
determination would result in a Material Adverse Effect on the Company. Except
as set forth in the Company Disclosure Letter, neither the Company nor any of
its Subsidiaries has received notice from any person alleging that the Company
or any of its Subsidiaries is in default under any Material Contract as to
which it is reasonably foreseeable that an adverse determination would result
in a Material Adverse Effect on the Company.
3.10 Employee Plans. (a) To the knowledge of the Company, except as set
forth in the Company Disclosure Letter, the Company and each Subsidiary has
complied with and performed all contractual obligations and all obligations
under applicable federal, state and local laws, rules and regulations required
to be performed by it under or with respect to any of the Company Benefit
Plans (as defined below) or any related trust agreement or insurance contract,
other than where the failure to so comply or perform does not have, nor is
reasonably likely to have, a Material Adverse Effect on the Company. Except as
set forth in the Company Disclosure Letter, all contributions and other
payments required to be made by the Company and its Subsidiaries to any
Company Benefit Plan prior to the date hereof have been made, other than where
the failure to so contribute or make payments will not have a Material Adverse
Effect on the Company, and all accruals required to be made under any Company
Benefit Plan through December 31, 1996 have been made. Except as set forth in
the Company Disclosure Letter, there is no claim, dispute, grievance, charge,
complaint, restraining or injunctive order, litigation or proceeding pending,
or, to the best knowledge of the Company and its Subsidiaries, threatened or
anticipated (other than routine claims for benefits) against or relating to
any Company Benefit Plan or against the assets of any Company Benefit Plan,
which is reasonably likely to have a Material Adverse Effect on the Company.
To the knowledge of the Company, neither the Company nor any of its
Subsidiaries has communicated generally to employees or specifically to any
employee regarding any future increase of benefit levels (or future creations
of new benefits) with respect to any Company Benefit Plan beyond those
reflected in the Company Benefit Plans, which benefit increases or creations,
either individually or in the aggregate, will have or are reasonably likely to
have, a Material Adverse Effect on the Company. Except as set forth in the
Company Disclosure Letter, neither the Company nor any of its Subsidiaries
presently sponsors, maintains, contributes to, nor is the Company or its
Subsidiaries required to contribute to, nor has the Company or any of its
Subsidiaries ever sponsored, maintained, contributed to, or been required to
contribute to, any employee pension benefit plan within the meaning of section
3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
(b) With respect to each Company Benefit Plan subject to Title IV of ERISA,
(i) no termination of any Company Benefit Plan has occurred pursuant to which
all liabilities have not been satisfied in full, and no event has occurred and
no condition exists that could reasonably be expected to result in the Company
or Subsidiary incurring a material liability under Title IV of ERISA; (ii)
each such Company Benefit Plan which is subject to Part 3 of Subtitle B of
Title I of ERISA or Section 412 of the Code, has been maintained in compliance
with the
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minimum funding standards of ERISA and the Code and no such Company Benefit
Plan has incurred any "accumulated funding deficiency," as defined in Section
412 of the Code and Section 302 of ERISA, whether or not waived; (iii) neither
the Company nor any Subsidiary has sought or received a waiver of its funding
requirements with respect to any Company Benefit Plan; (iv) no reportable
event, within the meaning of Section 4043 of ERISA, and no event described in
Section 4062 or 4063 of ERISA, has occurred with respect to any Company
Benefit Plan; and (v) no Company Benefit Plan would have an amount of Unfunded
Benefit Liabilities (as defined in Section 4001(a)(18) of ERISA) if such plan
were terminated as of the Effective Time.
(c) Except as set forth in the Company Disclosure Letter, neither the
Company nor any of its Subsidiaries has incurred, nor has any event occurred
which has imposed or is reasonably likely to impose upon the Company or any of
its Subsidiaries, any withdrawal liability (complete or partial within the
meanings of sections 4203 or 4205 of ERISA, respectively) in respect of any
multiemployer plan (within the meaning of section 3(37) or 4001(a)(3) of
ERISA) (a "Multiemployer Plan"), which withdrawal liability has not been
satisfied or discharged in full or which, either individually or in the
aggregate, will cause, or is reasonably likely to cause, a Material Adverse
Effect on the Company.
(d) Except as set forth in the Company Disclosure Letter, neither the
Company nor any Subsidiary maintains or contributes to (or has maintained or
contributed to) any Company Benefit Plan which provides, or has a liability to
provide, life insurance, medical, severance, or other employee welfare
benefits to any employee upon such employee's retirement or termination of
employment, except as may be required by Section 4980B of the Code.
(e) (i) "Plan" means any bonus, incentive compensation, deferred
compensation, pension, profit sharing, retirement, stock purchase, stock
option, stock ownership, stock appreciation rights, phantom stock, leave of
absence, layoff, vacation, day or dependent care, legal services, cafeteria,
life, health, accident, disability, workers' compensation or other insurance,
severance, separation or other employee benefit plan, practice, policy or
arrangement of any kind, including, but not limited to, any "employee benefit
plan" within the meaning of section 3(3) of ERISA and (ii) "Company Benefit
Plan" means any Plan, other than a Multiemployer Plan, established by the
Company or any of its Subsidiaries or to which the Company or any of its
Subsidiaries contributes or has contributed (including any such Plans not now
maintained by the Company or any of its Subsidiaries or to which the Company
or any of its Subsidiaries does not now contribute, but with respect to which
the Company or any of its Subsidiaries has or may have any liability). Copies
of all written Plans (and, if applicable, related trust agreements and ERISA
summary plan descriptions) and all amendments thereto, and the most recent
Forms 5500 required to be filed with respect thereto have been made available
to the Purchaser. The Company Disclosure Letter sets forth each Plan with
respect to which benefits will be accelerated, vested, increased or paid as a
result of the transactions contemplated by this Agreement.
3.11 Employment Relations and Agreements. (a) Except as would not constitute
a Material Adverse Effect on the Company, (i) each of the Company and its
Subsidiaries is in compliance in all material respects with all federal, state
or other applicable laws respecting employment and employment practices, terms
and conditions of employment and wages and hours; (ii) as of the date of this
Agreement, there is no labor strike, dispute, slowdown or stoppage actually
pending or, to the best knowledge of the Company or its Subsidiaries,
threatened against or involving the Company or any of its Subsidiaries; (iii)
no collective bargaining agreement is being negotiated as of the date of this
Agreement by the Company or any of its Subsidiaries; and (iv) the Company and
its Subsidiaries taken as a whole have not experienced any material labor
difficulty during the last three years.
(b) Except as set forth in the Company Disclosure Letter, neither the
Company nor any of its Subsidiaries has any written, or to the knowledge of
the Company, any binding oral, employment, severance, "change of control,"
collective bargaining or similar agreements ("Employment Agreements"). Copies
of all Employment Agreements and all amendments thereto have been previously
made available to the Purchaser.
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3.12 Real Property. (a) The Company Disclosure Letter accurately and
completely sets forth, with respect to every parcel of real estate owned by
the Company or any of its Subsidiaries (the "Real Estate"): (i) the owner;
(ii) the location, including address, thereof; (iii) the legal description and
approximate size thereof; (iv) a brief description (including size,
approximate year of completion, and function) of the principal improvements
and buildings thereon, all of which are within the property, set-back and
building lines; (v) the nature and amount of any mortgages, tax liens or other
liens thereon (including without limitation any environmental liens).
(b) The Company Disclosure Letter accurately and completely sets forth, with
respect to every parcel of real estate leased by the Company or any of its
Subsidiaries (the "Leasehold Premises"): (i) the lessor and lessee thereof and
the date and term of the lease governing such property; (ii) the location,
including address, thereof; (iii) the legal description and the approximate
size thereof; (iv) a brief description (including size, approximate year of
completion, and function) of the principal improvements and buildings thereon,
all of which are within the property, set-back and building lines of the
Leasehold Premises; and (v) the nature and amount of any mortgages, tax liens
or other liens thereon (including without limitation any environmental liens).
The Company has previously delivered to the Purchaser accurate and complete
copies of each of the leases covering the Leasehold Premises, and none of such
leases has been amended or modified except to the extent that such amendments
or modifications are disclosed in such copies or in the Company Disclosure
Letter. The Company or the respective Subsidiary is not in default or breach
under any such lease. No event has occurred which with the passage of time or
the giving of notice or both would cause a material breach of or default by
the Company or the respective Subsidiary under any such lease. The Company has
no knowledge of any breach or anticipated breach by the other parties to such
lease.
(c) Except as reflected in the Company Disclosure Letter, the Company or the
respective Subsidiary has good and marketable title to each parcel of the Real
Estate and a valid leasehold interest in each of the Leasehold Premises, free
and clear of all liens, mortgages, pledges, charges, encumbrances,
assessments, restrictions, covenants and easements or title defects of any
nature whatsoever, except for liens for real estate taxes not yet due and
payable, and such imperfections of title and encumbrances, if any, as are not
substantial in character, amount or extent and do not materially interfere
with the present use, of such properties or otherwise impair business
operations in any material respect.
(d) Except as set forth in the Company Disclosure Letter, the buildings
located on the Real Estate and the Leasehold Premises are each in good
operating condition, sufficient for the use for which such buildings are
intended, normal wear and tear excepted.
(e) Each parcel of the Real Estate and the Leasehold Premises: (i) has
direct access to public roads or access to public roads by means of a
perpetual access easement, such access being sufficient to satisfy the current
normal transportation requirements of the Company's business as presently
conducted at such parcel; and (ii) is served by utilities in such quantity and
quality as are sufficient to satisfy the current normal occupancy levels and
business activities of the Company's business as conducted at such parcel.
(f) None of the Company or its Subsidiaries has received notice of: (i) any
condemnation proceeding with respect to any portion of the Real Estate or the
Leasehold Premises, and to the best of the knowledge of the Company and its
Subsidiaries no such proceeding is contemplated by any governmental authority;
or (ii) except as reflected in the Company Disclosure Letter, any special
assessment which may materially affect the Real Estate or the Leasehold
Premises, and to the best of the knowledge of the Company and its Subsidiaries
no such special assessment is contemplated by any governmental authority.
3.13 Limitation on Business Conduct; Condition of Assets. Except as set
forth in the Company Disclosure Letter, neither the Company nor its
Subsidiaries is a party to, or has any obligation under, any contract or
agreement, written or oral, which contains any covenants currently or
prospectively limiting in any material respect the freedom of the Company or
any of its Subsidiaries to engage in any line of business or to compete with
any entity. Except as set forth in the Company Disclosure Letter, the Company
and its Subsidiaries have good and marketable title to all of their respective
assets and properties, other than the Real Estate and Leasehold
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Premises, including the assets reflected on the Company's balance sheet
included in the Company's Form 10-Q for the quarter end September 30, 1996
(the "Company Balance Sheet") and all of the assets thereafter acquired by
them (except to the extent that such assets have thereafter been disposed of
for fair value in the ordinary course of business), and good title to all
their leasehold interests, in each case subject to no liens, mortgages,
pledges, encumbrances or charges of any kind except as noted on the Company
Balance Sheet or the Company Disclosure Letter and except for liens,
encumbrances or charges which are not material in character, amount or extent
with respect to the related asset and which do not in the aggregate have a
Material Adverse Effect.
3.14 Environmental Laws and Regulations. (a) The Company and its
Subsidiaries are in compliance with all applicable Environmental Laws, except
as otherwise disclosed in the Company SEC Documents or the Company Disclosure
Letter and except for non-compliance which would not have a Material Adverse
Effect on the Company. The term "Environmental Laws" means any federal, state,
local or foreign statute, ordinance, rule, regulation, policy, permit,
consent, approval, license, judgment, order, decree, injunction or other
authorization applicable to the Company and its Subsidiaries and relating to:
(i) pollution or protection of human health or safety, health or safety of
employees, sanitation, or the environment (including, without limitation,
ambient air, surface water, ground water, land surface or subsurface strata),
(ii) Releases (as defined in 42 U.S.C. Sections 9601 et seq.) or threatened
Releases of Hazardous Material (as hereinafter defined) into the environment
or (iii) the generation, treatment, storage, disposal, use, handling,
manufacturing, transportation or shipment of Hazardous Material.
(b) There has not occurred, nor is there presently occurring, a Release of
any Hazardous Material in, on, under or affecting any of the Company's or its
Subsidiaries' respective current or previously owned or leased properties or
any surrounding site, and none of the Company or its Subsidiaries has disposed
of any Hazardous Material or any other substance in a manner that has led, or
could reasonably be anticipated to lead, to a Release, except as otherwise
disclosed in the Company SEC Documents or the Company Disclosure Letter and
except in each case for those Releases and disposals which individually or in
the aggregate are not reasonably likely to have a Material Adverse Effect on
the Company. Except as disclosed in the Company SEC Documents or the Company
Disclosure Letter, neither the Company nor its Subsidiaries has received any
notice that it is a "potentially responsible person" under any Environmental
Laws. The term "Hazardous Material" means any pollutants, contaminants,
hazardous substances, hazardous chemicals, toxic substances, hazardous wastes,
infectious and medical wastes, radioactive materials, petroleum (including
crude oil or any fraction thereof), natural gas, synthetic gas and mixtures
thereof, PCBs, or materials containing PCBs in excess of 50 ppm, asbestos
and/or asbestos-containing materials or solid wastes, including but not
limited to those defined in any Environmental Law and all regulations
promulgated under each and all amendments thereto.
(c) None of the Company or any of the Subsidiaries use, and has not used,
any Underground Storage Tanks, and there are not now nor have there ever been
Underground Storage Tanks on the Real Estate or the Leasehold Premises. For
purposes of this Section, the term "Underground Storage Tanks" shall have the
meaning given it in the Resource Conservation and Recovery Act (42 U.S.C.
Sections 6901 et seq.).
(d) There are no laws, regulations, ordinances, licenses, permits or orders
relating to environmental, worker safety or other matters that require any
work, repairs, construction, alteration or capital expenditures with respect
to the assets or properties of the Company and its Subsidiaries except for
such as would not have a Material Adverse Effect on the Company.
3.15 Trademarks, Copyrights. Except as set forth in the Company Disclosure
Letter, the Company or its Subsidiaries own or possess adequate licenses or
other valid rights to use all material trademarks, trademark rights, trade
names, trade name rights, copyrights, know-how and other proprietary
information used or held for use in connection with the business of the
Company or any of its Subsidiaries as currently being conducted and, to the
knowledge of the Company, there are no assertions or claims challenging the
validity of any of the foregoing, except where the failure to own or possess,
or where such assertions or claims, would not have a Material Adverse Effect
on the Company.
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3.16 Compliance with Laws. To the knowledge of the Company, except as set
forth in the Company Disclosure Letter, each of the Company and its
Subsidiaries is in compliance with all laws, regulations and orders applicable
to it, its assets, properties and business, except where such noncompliance
would not have a Material Adverse Effect on the Company. Neither the Company
nor any of its Subsidiaries has received notification of any asserted past or
present failure to comply with any laws which has not been remedied, and to
the best of their knowledge, no proceeding with respect to any such violation
is contemplated. Neither the Company nor any of its Subsidiaries, nor, to the
best knowledge of the Company and each of its Subsidiaries, any employee of
the Company or any of its Subsidiaries, has made any payment of funds in
connection with the business of the Company or any of its Subsidiaries
prohibited by law, and no funds have been set aside to be used in connection
with the business of the Company or any of its Subsidiaries for any payment
prohibited by law.
3.17 Takeover Statutes. The Board of Directors of the Company has
unanimously approved the transactions contemplated by this Agreement and,
assuming the accuracy of the Purchaser's representations and warranties
contained in Section 4.15, has taken all appropriate action so that the
transactions contemplated by this Agreement will not be subject to the
Affiliated Transactions provisions of Sections 13.1-725 through 13.1-727.1 of
the VSCA. The Company has taken all appropriate action so that the
transactions contemplated by this Agreement will not be subject to the
"Control Share Acquisition" provisions of Section 13.1-728.1 through 13.1-
728.9 of the VSCA.
3.18 Taxes. Except as set forth in the Company Disclosure Letter, (i) the
Company and each Subsidiary have filed all material Tax Returns required to
have been filed on or before the date hereof, which returns are true and
complete in all material respects and all Taxes shown due thereon have been
paid; (ii) no issues that have been raised in writing by the relevant taxing
authority in connection with the examination of the Tax Returns referred to in
clause (i) are currently pending; and (iii) all deficiencies asserted or
assessments made as a result of any examination of the Tax Returns referred to
in clause (i) by a taxing authority have been paid in full or are being
contested in good faith by the Company or such Subsidiary. For purposes of
this Agreement, (a) "Tax" (and, with correlative meaning, "Taxes" and
"Taxable") means any federal, state, local or foreign income, gross receipts,
property, sales, use, license, excise, franchise, employment, payroll,
premium, withholding, alternative or added minimum, ad valorem, transfer or
excise tax, or any other tax, custom, duty, governmental fee or other like
assessment or charge of any kind whatsoever, together with any interest or
penalty, imposed by any governmental authority, and (b) "Tax Return" means any
return, report or similar statement required to be filed with respect to any
Tax (including any attached schedules), including, without limitation, any
information return, claim for refund, amended return or declaration of
estimated Tax.
3.19 Brokers. No broker, investment banker or other person, other than Smith
Barney Inc. ("Smith Barney"), the fees and expenses of which will be paid by
the Company, is entitled to any broker's, finder's or other similar fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Company. A copy of the
engagement letter between Smith Barney and the Company, as amended, setting
forth the fees and expenses to be paid by the Company in connection with the
transactions contemplated by this Agreement has been provided to the
Purchaser.
3.20 Opinion of Financial Advisor. The Board of Directors of the Company has
received the opinion of Smith Barney to the effect that, as of the date of
this Agreement, the Exchange Ratio is fair to the holders of Company Common
Stock from a financial point of view.
3.21 Pooling of Interests. To the knowledge of the Company, the Company has
not had, nor does it plan to have any transaction or condition which would
preclude the transactions contemplated by this Agreement from being accounted
for as a "pooling of interests."
3.22 Ownership of Purchaser Shares. Neither the Company nor any of its
Subsidiaries or, to the knowledge of the Company, any affiliate owns directly
or indirectly any Purchaser Stock or has any rights to purchase such shares,
and will not purchase any such shares in a fashion that would prevent the
accounting treatment of the transactions contemplated by this Agreement as a
pooling of interests, unless the Purchaser waives the condition in Section 6.3
hereof.
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3.23 Amendment to Rights Plan. The Company has amended, and the Board of
Directors of the Company has authorized such amendment, the Rights Agreement,
dated as of June 6, 1995, and amended as of February 27, 1996, among the
Company, Bank One, Indianapolis, N.A., and Fifth Third Bank, Cincinnati, Ohio
("the Company Rights Agreement"), so that (i) the Purchaser will not become an
"Acquiring Person" as a result of the consummation of the transactions
contemplated by this Agreement, (ii) no "Stock Acquisition Date" or
"Distribution Date" (as such terms are defined in the Company Rights
Agreement) will occur as a result of the consummation of the transactions
contemplated by this Agreement, and (iii) all Rights (as defined in the
Company Rights Agreement) issued and outstanding under the Company Rights
Agreement will expire immediately prior to the Effective Time.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Company as follows:
4.1 Organization, Standing and Power. Each of the Purchaser and NEWCO is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction in which it is incorporated and has the requisite
corporate power and authority to carry on its business as now being conducted.
Each of the Purchaser and NEWCO is duly qualified to do business, and is in
good standing, in each jurisdiction where the character of its properties
owned or held under lease or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified and in
good standing would not, individually or in the aggregate, have a Material
Adverse Effect on the Purchaser.
4.2 Capital Structure. The authorized capital stock of the Purchaser
consists of 200,000,000 shares of Purchaser Stock and 10,000,000 shares of
Preferred Stock, par value $.01 per share ("Purchaser Preferred Stock"). At
the close of business on December 31, 1996, (i) 68,290,984 shares of Purchaser
Stock were issued and outstanding, (ii) no shares of Purchaser Preferred Stock
were issued and outstanding, (iii) 8,813,520 shares of Purchaser Stock were
reserved for issuance upon the exercise of stock options of the Purchaser, and
(iv) no shares of Purchaser Stock were held by the Purchaser in its treasury.
All outstanding shares of capital stock of the Purchaser are validly issued,
fully paid and nonassessable and not subject to preemptive rights. As of
December 31, 1996, there were options ("Purchaser Stock Options") outstanding,
in the aggregate, under the Purchaser's Amended and Restated 1995 Employee
Stock Option Plan, Amended and Restated 1996 Employee Stock Option Plan, and
1995 Stock Option Plan for Non-Employee Directors (collectively, the
"Purchaser Option Plans") to acquire 5,811,868 shares of Common Stock. Except
for such Purchaser Stock Options, as of December 31, 1996, there were no
options, warrants, rights, commitments, agreements, arrangements or
undertakings of any kind to which the Purchaser or any of its Subsidiaries is
a party or by which any of them is bound obligating the Purchaser or any of
its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered
or sold, additional shares of capital stock or other voting securities of the
Purchaser or of any of its Subsidiaries. Since December 31, 1996, no shares of
Purchaser's capital stock have been issued other than pursuant to the exercise
of Purchaser Stock Options already in existence on such date, and the
Purchaser has not granted any stock options on any capital stock or other
voting securities of the Purchaser, except as may be consistent with past
practice or as otherwise may be contemplated by this Agreement, in each case
in a manner as would not preclude the Merger from being accounted for as a
"pooling of interests." All of the shares of capital stock of NEWCO are owned
by the Purchaser.
4.3 Authority; Non-Contravention. The Board of Directors of the Purchaser
has unanimously approved this Agreement and determined that the Merger is fair
and in the best interests of the Purchaser and its stockholders and the
Purchaser has all requisite corporate power and authority to enter into this
Agreement to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by the Purchaser and the consummation by the
Purchaser of the transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of the Purchaser. This Agreement
has been duly executed
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and delivered by the Purchaser and (assuming the valid authorization,
execution and delivery of this Agreement by the Company) constitutes a valid
and binding obligation of the Purchaser enforceable against the Purchaser in
accordance with its terms; (i) except as may be limited by bankruptcy,
insolvency, moratorium or other similar laws affecting or relating to
enforcement of creditors' rights generally; and (ii) subject to general
principles of equity. Except as set forth in the letter from the Purchaser to
the Company dated the date hereof, which letter relates to this Agreement and
is designated as the Purchaser Disclosure Letter (the "Purchaser Disclosure
Letter"), the execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated hereby and compliance with the
provisions hereof will not, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation,
contractually require any offer to purchase or any prepayment of any debt,
contractually require the payment of (or result in the vesting of) any
severance, golden parachute, change of control or similar type of payment, or
give rise to the loss of a material benefit under, or result in the creation
of any lien, security interest, charge or encumbrance upon any of the
properties or assets of the Purchaser or any of its Subsidiaries under, any
provision of (i) the Certificate of Incorporation or Bylaws of the Purchaser
or the comparable charter or organization documents of any of its
Subsidiaries, (ii) any loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement, instrument, permit, concession, franchise
or license applicable to the Purchaser or any of its Subsidiaries or (iii)
subject to the governmental filings and other matters referred to in the
following sentence, any judgment, order, decree, statute, law, ordinance, rule
or regulation applicable to the Purchaser or any of its Subsidiaries or any of
their respective properties or assets, other than, in the case of clauses (ii)
or (iii), any such conflicts, violations, defaults, rights, offers,
prepayments, payments, losses, liens, security interests, charges or
encumbrances that would not have a Material Adverse Effect on the Purchaser.
No filing or registration with, or authorization, consent or approval of, any
Governmental Entity is required by or with respect to the Purchaser or any of
its Subsidiaries in connection with the execution and delivery of this
Agreement by the Purchaser or the consummation by the Purchaser or NEWCO of
the transactions contemplated hereby, except for (i) in connection or in
compliance with the provisions of the Securities Act and Exchange Act, (ii)
the filing of the Certificate of Merger with the Delaware Secretary of State
and the Virginia Commission, and appropriate documents with the relevant
authorities of other states in which the Purchaser or NEWCO is qualified to do
business, (iii) such filings and approvals as may be required under the HSR
Act, (iv) such filings and approvals as may be required by any applicable
state securities or "blue sky" laws or state takeover laws, and (v) such other
consents, orders, authorizations, registrations, approvals, declarations and
filings the failure of which to be obtained or made would not, individually or
in the aggregate, have a Material Adverse Effect on the Purchaser or NEWCO.
4.4 SEC Documents. (a) Since December 13, 1995, the Purchaser has filed all
documents with the SEC required to be filed under the Securities Act or the
Exchange Act (such documents filed with the SEC on or before January 15, 1997
referred to herein as the "Purchaser SEC Documents"). As of their respective
dates, (i) the Purchaser SEC Documents complied in all material respects with
the requirements of the Securities Act or the Exchange Act, as the case may
be, and (ii) none of the Purchaser SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
financial statements of the Purchaser included in the Purchaser SEC Documents
comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with generally accepted accounting
principles (except, in the case of unaudited statements, as permitted by Form
10-Q of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated therein or in the notes thereto) and fairly
present the consolidated financial position of the Purchaser and its
consolidated Subsidiaries as at the dates thereof and the consolidated results
of their operations and changes in financial position for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments and to any other adjustments described therein).
(b) Except as set forth in the Purchaser SEC Documents or the Purchaser
Disclosure Letter, neither the Purchaser nor any of its Subsidiaries has any
liability or obligation of any nature (whether accrued, absolute, contingent
or otherwise) which would be required to be reflected on a balance sheet, or
in the notes thereto,
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prepared in accordance with generally accepted accounting principles, except
for liabilities and obligations incurred in the ordinary course of business
consistent with past practice since September 30, 1996 which would not have a
Material Adverse Effect on the Purchaser.
(c) The Purchaser has heretofore made available to Company a complete and
correct copy of any amendments or modifications which have not yet been filed
with the SEC to agreements, documents or other instruments which previously
have been filed with the SEC pursuant to the Exchange Act.
4.5 Absence of Certain Events. Since December 31, 1995, the Purchaser and
its Subsidiaries have operated their respective lodging facilities only in the
ordinary course consistent with past practice and, except as contemplated by
this Agreement or disclosed in the Purchaser SEC Documents or the Purchaser
Disclosure Letter, there has not occurred (i) any Material Adverse Change in
the Purchaser; (ii) any change by the Purchaser or any of its Subsidiaries in
its accounting methods, principles or practices; (iii) any amendments or
changes in the Certificate of Incorporation or Bylaws of the Purchaser; (iv)
any revaluation by the Purchaser or any of its Subsidiaries of any of their
respective assets, including, without limitation, write-offs of accounts
receivable or write-offs or write-downs of inventory, other than in the
ordinary course of the Purchaser's and its Subsidiaries' businesses consistent
with past practices; (v) any damage, destruction or loss with respect to the
property or assets of the Purchaser or its Subsidiaries which resulted in, or
is reasonably likely to result in, a Material Adverse Effect on the Purchaser;
or (vi) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of the Purchaser, or
any repurchase, redemption or other acquisition by the Purchaser or any of its
Subsidiaries of any outstanding shares of capital stock or other securities
of, or other ownership interests in, the Purchaser. Notwithstanding the
foregoing, the representations contained in this Section 4.5 shall not apply
to any change or development, or combination of changes or developments, to
the extent such changes and developments are the result of stock market
fluctuations.
4.6 Purchaser Material Contracts. Except for (a) agreements, commitments,
arrangements, leases or other instruments disclosed in the Purchaser
Disclosure Letter, (b) agreements, commitments, arrangements, leases or other
instruments disclosed in the Purchaser's Annual Report on Form 10-K for the
year ended December 31, 1995, or in any Purchaser SEC Documents filed
thereafter, and (c) other agreements, commitments, arrangements, leases or
other instruments entered into in the ordinary course of business
(collectively the "Purchaser Material Contracts"), neither the Purchaser nor
any of its Subsidiaries is a party to any material agreements, commitments,
arrangements, leases or other instruments. Assuming due authorization and
execution by the other parties thereto, to the knowledge of the Purchaser,
each of the Purchaser Material Contracts is valid, binding, and in full force
and effect in all material respects and enforceable by the Purchaser or such
Subsidiary, as the case may be, in accordance with its respective terms. The
Purchaser or such Subsidiary, as the case may be, has materially performed its
obligations under such Purchaser Material Contracts in accordance with the
terms thereof and, to the knowledge of the Purchaser, the other parties to
such Purchaser Material Contracts are not in default under any Purchaser
Material Contract as to which it is reasonably foreseeable that an adverse
determination would result in a Material Adverse Effect on the Purchaser.
Except as set forth in the Purchaser Disclosure Letter, neither the Purchaser
nor any of its Subsidiaries has received notice from any person alleging that
the Purchaser or any of its Subsidiaries is in default under any Purchaser
Material Contract as to which it is reasonably foreseeable that an adverse
determination would result in a Material Adverse Effect on the Purchaser.
4.7 Employee Plans. (a) To the knowledge of the Purchaser, except as set
forth in the Purchaser Disclosure Letter, the Purchaser and each of its
Subsidiaries has complied with and performed all contractual obligations and
all obligations under applicable federal, state and local laws, rules and
regulations required to be performed by it under or with respect to any of the
Purchaser Benefit Plans (as defined below) or any related trust agreement or
insurance contract, other than where the failure to so comply or perform does
not have, nor is reasonably likely to have, a Material Adverse Effect on the
Purchaser. Except as set forth in the Purchaser Disclosure Letter, all
contributions and other payments required to be made by the Purchaser and its
Subsidiaries to any Purchaser Benefit Plan prior to the date hereof have been
made, other than where the failure to so contribute or make payments will not
have a Material Adverse Effect on the Purchaser, and all accruals required to
be made under
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any Purchaser Benefit Plan have been made. Except as set forth in the
Purchaser Disclosure Letter, there is no claim, dispute, grievance, charge,
complaint, restraining or injunctive order, litigation or proceeding pending,
or, to the best knowledge of the Purchaser and its Subsidiaries, threatened or
anticipated (other than routine claims for benefits) against or relating to
any Purchaser Benefit Plan or against the assets of any Purchaser Benefit
Plan, which is reasonably likely to have a Material Adverse Effect on the
Purchaser. To the knowledge of the Purchaser, neither the Purchaser nor any of
its Subsidiaries has communicated generally to employees or specifically to
any employee regarding any future increase of benefit levels (or future
creations of new benefits) with respect to any Purchaser Benefit Plan beyond
those reflected in the Purchaser Benefit Plans, which benefit increases or
creations, either individually or in the aggregate, will have or are
reasonably likely to have, a Material Adverse Effect on the Purchaser. Except
as set forth in the Purchaser Disclosure Letter, neither the Purchaser nor any
of its Subsidiaries presently sponsors, maintains, contributes to, nor is the
Purchaser or its Subsidiaries required to contribute to, nor has the Purchaser
or any of its Subsidiaries ever sponsored, maintained, contributed to, or been
required to contribute to, any employee pension benefit plan within the
meaning of Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA").
(b) With respect to each Purchaser Benefit Plan subject to Title IV of
ERISA, (i) no termination of any Purchaser Benefit Plan has occurred pursuant
to which all liabilities have not been satisfied in full, and no event has
occurred and no condition exists that could reasonably be expected to result
in the Purchaser or Subsidiary incurring a liability under Title IV of ERISA;
(ii) each such Purchaser Benefit Plan which is subject to Part 3 of Subtitle B
of Title I of ERISA or Section 412 of the Code, has been maintained in
compliance with the minimum funding standards of ERISA and the Code and no
such Purchaser Benefit Plan has incurred any "accumulated funding deficiency,"
as defined in Section 412 of the Code and Section 302 of ERISA, whether or not
waived; (iii) neither the Purchaser nor any Subsidiary has sought or received
a waiver of its funding requirements with respect to any Purchaser Benefit
Plan; (iv) no reportable event, within the meaning of Section 4043 of ERISA,
and no event described in Section 4062 or 4063 of ERISA, has occurred with
respect to any Purchaser Benefit Plan; and (v) no Purchaser Benefit Plan would
have an amount of Unfunded Benefit Liabilities (as defined in Section
4001(a)(18) of ERISA) if such plan were terminated as of the Effective Time.
(c) Except as set forth in the Purchaser Disclosure Letter, neither the
Purchaser nor any of its Subsidiaries has incurred, nor has any event occurred
which has imposed or is reasonably likely to impose upon the Purchaser or any
of its Subsidiaries, any withdrawal liability (complete or partial within the
meanings of Sections 4203 or 4205 of ERISA, respectively) in respect of any
Multiemployer Plan, which withdrawal liability has not been satisfied or
discharged in full or which, either individually or in the aggregate, will
cause, or is reasonably likely to cause, a Material Adverse Effect on the
Purchaser.
(d) Except as set forth in the Purchaser Disclosure Letter, neither the
Purchaser nor any of its Subsidiaries maintains or contributes to (or has
maintained or contributed to) any Purchaser Benefit Plan which provides, or
has a liability to provide, life insurance, medical, severance, or other
employee welfare benefits to any employee upon such employee's retirement or
termination of employment, except as may be required by Section 4980B of the
Code.
(e) (i) "Plan" means any bonus, incentive compensation, deferred
compensation, pension, profit sharing, retirement, stock purchase, stock
option, stock ownership, stock appreciation rights, phantom stock, leave of
absence, layoff, vacation, day or dependent care, legal services, cafeteria,
life, health, accident, disability, workers' compensation or other insurance,
severance, separation or other employee benefit plan, practice, policy or
arrangement of any kind, including, but not limited to, any "employee benefit
plan" within the meaning of Section 3(3) of ERISA and (ii) "Purchaser Benefit
Plan" means any Plan, other than a Multiemployer Plan, established by the
Purchaser or any of its Subsidiaries or to which the Purchaser or any of its
Subsidiaries contributes or has contributed (including any such Plans not now
maintained by the Purchaser or any of its Subsidiaries or to which the
Purchaser or any of its Subsidiaries does not now contribute, but with respect
to which the Purchaser or any of its Subsidiaries has or may have any
liability). Copies of all written Purchaser Plans (and, if applicable, related
trust agreements and ERISA summary plan descriptions) and all amendments
thereto, and the most recent Forms 5500 required to be filed with respect
thereto have been made available to the Purchaser. The Purchaser Disclosure
Letter sets forth each Purchaser Plan with respect to which benefits will be
accelerated, vested, increased or paid as a result of the transactions
contemplated by this Agreement.
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4.8 Taxes. Except as set forth in the Purchaser Disclosure Letter, (i) the
Purchaser and each of its Subsidiaries has filed all material Tax Returns
required to have been filed on or before the date hereof, which returns are
true and complete in all material respects and all Taxes shown due thereon
have been paid; (ii) no issues that have been raised in writing by the
relevant taxing authority in connection with the examination of the Tax
Returns referred to in clause (i) are currently pending; and (iii) all
deficiencies asserted or assessments made as a result of any examination of
the Tax Returns referred to in clause (i) by a taxing authority have been paid
in full or are being contested in good faith by the Purchaser or such
Subsidiary.
4.9 Compliance with Laws. To the knowledge of the Purchaser, except as set
forth in the Purchaser Disclosure Letter, each of the Purchaser and its
Subsidiaries is in compliance with all laws, regulations and orders applicable
to it, its assets, properties and business, except where such noncompliance
would not have a Material Adverse Effect on the Purchaser. Neither the
Purchaser nor any of its Subsidiaries has received notification of any
asserted past or present failure to comply with any laws which has not been
remedied, and to the best of their knowledge, no proceeding with respect to
any such violation is contemplated. Neither the Purchaser nor any of its
Subsidiaries, nor, to the best knowledge of the Purchaser and each of its
Subsidiaries, any employee of the Purchaser or any of its Subsidiaries, has
made any payment of funds in connection with the business of the Purchaser or
any of its Subsidiaries prohibited by law, and no funds have been set aside to
be used in connection with the business of the Purchaser or any of its
Subsidiaries for any payment prohibited by law.
4.10 Litigation. Except as set forth in the Purchaser SEC Documents or the
Purchaser Disclosure Letter, there are no actions, suits, proceedings,
investigations or reviews pending against the Purchaser or its Subsidiaries
or, to the knowledge of the Purchaser, threatened against the Purchaser or its
Subsidiaries, at law or in equity, or before or by any federal or state
commission, board, bureau, agency, regulatory or administrative
instrumentality or other Governmental Entity or any arbitrator or arbitration
tribunal, that are reasonably likely to have a Material Adverse Effect on the
Purchaser.
4.11 Employment Relations and Agreements. Except as would not result in a
Material Adverse Change with respect to the Purchaser, (i) each of the
Purchaser and its Subsidiaries is in compliance in all material respects with
all federal, state or other applicable laws respecting employment and
employment practices, terms and conditions of employment and wages and hours;
(ii) as of the date of this Agreement, there is no labor strike, dispute,
slowdown or stoppage actually pending or, to the best knowledge of the
Purchaser or its Subsidiaries, threatened against or involving the Purchaser
or any of its Subsidiaries; (iii) no collective bargaining agreement is being
negotiated as of the date of this Agreement by the Purchaser or any of its
Subsidiaries; and (iv) the Purchaser and its Subsidiaries taken as a whole
have not experienced any material labor difficulty during the last three
years.
4.12 Environmental Laws and Regulations. (a) The Purchaser and its
Subsidiaries are in compliance with all applicable Environmental Laws, except
as otherwise disclosed in the Purchaser SEC Documents or the Purchaser
Disclosure Letter and except for non-compliance which would not have a
Material Adverse Effect on the Purchaser.
(b) During the period of ownership or operation by the Purchaser and its
Subsidiaries of any of their respective current or previously owned or leased
properties, there have been no Releases of Hazardous Material in, on, under or
affecting such properties or any surrounding site, and none of the Purchaser
or its Subsidiaries has disposed of any Hazardous Material or any other
substance in a manner that has led, or could reasonably be anticipated to
lead, to a Release, except as otherwise disclosed in the Purchaser SEC
Documents or the Purchaser Disclosure Letter and except in each case for those
Releases and disposals which individually or in the aggregate are not
reasonably likely to have a Material Adverse Effect on the Purchaser. Except
as disclosed in the Purchaser SEC Documents or the Purchaser Disclosure
Letter, neither the Purchaser nor its Subsidiaries has received any notice
that it is a "potentially responsible person" under any Environmental Laws.
4.13 Trademarks, Copyrights. Except as set forth in the Purchaser Disclosure
Letter, the Purchaser or its Subsidiaries own or possess adequate licenses or
other valid rights to use all material trademarks, trademark rights, trade
names, trade name rights, copyrights, know-how and other proprietary
information used or held for
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use in connection with the business of the Purchaser or any of its
Subsidiaries as currently being conducted and, to the knowledge of the
Purchaser, there are no assertions or claims challenging the validity of any
of the foregoing, except where the failure to own or possess, or where such
assertions or claims, would not have a Material Adverse Effect on the
Purchaser.
4.14 Brokers. No broker, investment banker or other person, other than
Donaldson, Lufkin & Jenrette, Inc. ("DLJ") the fees and expenses of which will
be paid by the Purchaser, is entitled to any broker's, finder's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of the Purchaser.
4.15 Takeover Statute. The Purchaser has not been an "interested
stockholder" (as such term is defined by Section 13.1-725 of the VSCA) with
respect to the Company at any time prior to the approval by the Board of
Directors of the Company of the Merger Agreement and the entering into of the
Stockholder Agreement.
ARTICLE 5
COVENANTS
5.1 Alternative Proposals. Prior to the Effective Time, the Company agrees
(a) that neither it nor any of its Subsidiaries shall, nor shall it or any of
its Subsidiaries, knowingly permit their respective officers, directors,
employees, agents and representatives (including, without limitation, any
investment banker, attorney or accountant retained by it or any of its
Subsidiaries) to, initiate, solicit or encourage, directly or indirectly, the
submission of any proposal or offer (including, without limitation, any
proposal or offer to its stockholders) with respect to a merger,
consolidation, reorganization, exchange, plan of liquidation or similar
transaction involving the Company or its Subsidiaries, or any purchase of any
equity securities of the Company or all or any significant portion of the
assets of the Company or its Subsidiaries other than the transactions
contemplated hereby (any such proposal or offer being hereinafter referred to
as an "Alternative Proposal"), or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any person or entity relating to an Alternative Proposal or otherwise
facilitate any effort or attempt to make or implement an Alternative Proposal;
(b) that it will promptly cease and cause to be terminated any existing
activities, discussions or negotiations with any person or entity conducted
heretofore with respect to any of the foregoing; and (c) that it will notify
the Purchaser promptly if any such inquiries or proposals are received by, any
such information is requested from, or any such negotiations or discussions
are sought to be initiated or continued with, the Company; provided, however,
that nothing contained in this Section 5.1 shall prohibit the Board of
Directors of the Company and its authorized representatives from (i)
furnishing information to or entering into discussions or negotiations with,
any person or entity that makes an unsolicited Alternative Proposal, if, and
only to the extent that, (A) the Board of Directors of the Company, based upon
the advice of outside counsel, determines in good faith that such action is
required for the Board of Directors to comply with its fiduciary duties to
stockholders imposed by law, (B) prior to furnishing such information to, or
entering into discussions or negotiations with, such person or entity, the
Company provides written notice to the Purchaser to the effect that it is
furnishing information to, or entering into discussions or negotiations with,
such person or entity, and (C) the Company keeps the Purchaser reasonably
informed of the status and all material information with respect to any such
discussions or negotiations; and (ii) to the extent applicable, complying with
Rule 14e-2 promulgated under the Exchange Act with regard to an Alternative
Proposal. Nothing in this Section 5.1 shall (x) permit the Company to
terminate this Agreement (except as specifically provided in Article 7
hereof), (y) permit the Company to enter into any agreement with respect to an
Alternative Proposal for as long as this Agreement remains in effect (it being
agreed that for as long as this Agreement remains in effect, the Company shall
not enter into any agreement with any person that provides for, or in any way
facilitates, an Alternative Proposal (other than a confidentiality agreement
in customary form)), or (z) affect any other obligation of the Company under
this Agreement.
5.2 Interim Operations. (a) Prior to the Effective Time, except as
contemplated by this Agreement, unless the Purchaser has consented in writing
thereto, the Company:
(i) Shall, and shall cause each of its Subsidiaries to, conduct its
operations according to their usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
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(ii) Shall use its reasonable efforts, and shall cause each of its
Subsidiaries to use their reasonable efforts, to preserve intact their
respective business organizations and goodwill, keep available the services
of their respective officers and employees and maintain satisfactory
relationships with those persons having business relationships with them;
(iii) Shall not amend its Articles of Incorporation or Bylaws or
comparable governing instruments;
(iv) Shall promptly notify the Purchaser of any material breach of any
representation or warranty contained herein or any Material Adverse Effect
with respect to the Company;
(v) Shall promptly deliver to the Purchaser true and correct copies of
any report, statement or schedule filed with the SEC subsequent to the date
of this Agreement;
(vi) (A) Shall not, except pursuant to (i) the exercise of options,
warrants, conversion rights and other contractual rights existing on the
date hereof and disclosed pursuant to this Agreement, and (ii) the Company
Rights Agreement, issue any shares of its capital stock, effect any stock
split or otherwise change its capitalization as it existed on the date
hereof and (B) shall not, and shall not permit any of its Subsidiaries to,
(x) grant, confer or award any option, warrant, conversion right or other
right not existing on the date hereof to acquire any shares of its capital
stock (except as contemplated by the Company Rights Agreement and as
identified in the Company Disclosure Letter) or grant, confer or award any
bonuses or other forms of cash incentives, except as is consistent with
past practice, to any officer, director or key employee, (y) increase any
compensation under any employment agreement with any present or future
officers, directors or employees, except for normal increases consistent
with past practice, grant any severance or termination pay to, or enter
into any employment or severance agreement with any officer or director or
amend any such agreement in any material respect other than severance
arrangements which are consistent with past practice with respect to
employees terminated by the Company or such Subsidiary, or (z) except as
may be required by law, adopt any new employee benefit plan (including any
stock option, stock benefit or stock purchase plan) or amend any existing
employee benefit plan in any material respect;
(vii) Shall not (i) declare, set aside or pay any dividend or make any
other distribution or payment with respect to any shares of its capital
stock or other ownership interests or (ii) directly or indirectly redeem,
purchase or otherwise acquire any shares of its capital stock or capital
stock of any of its Subsidiaries, or make any commitment for any such
action;
(viii) Shall not, and shall not permit any of its Subsidiaries to, sell,
lease or otherwise dispose of any of its assets (including capital stock of
Subsidiaries) or acquire by merging or consolidating with, or by purchasing
a substantial portion of the assets of or equity in, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof or otherwise acquire any assets,
except for purchases and sales of inventory, real estate, construction
services and equipment, in the ordinary course of business consistent with
past practice and the Company's existing business plan as previously
delivered to the Purchaser.
(ix) Shall not, and shall not permit any of its Subsidiaries to, incur or
guarantee any indebtedness for borrowed money or make any loans, advances
or capital contributions to, or investments in, any other person, or issue
or sell any debt securities, other than to the Company or any wholly owned
Company Subsidiary and other than borrowings under existing lines of credit
in the ordinary course of business; provided, however, that the Company may
enter into the proposed new bank credit facility if, prior to entering into
such facility, the Purchaser is afforded an opportunity to consult with the
Company with regard to (but not approve) the terms of such facility;
(x) Shall not, and shall not permit any of its Subsidiaries to, mortgage
or otherwise encumber or subject to any lien any of its properties or
assets, except in the ordinary course of business and except as may be
incurred by the Company in connection with the entering into of the
proposed new bank credit facility if, prior to entering into such facility,
the Purchaser is afforded an opportunity to consult with the Company with
regard to (but not approve) the terms of such facility;
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(xi) Shall not, and shall not permit any of its Subsidiaries to, make any
change to its accounting (including tax accounting) methods, principles or
practices, except as may be required by generally accepted accounting
principles and except, in the case of tax accounting methods, principles or
practices, in the ordinary course of business of the Company or any of its
Subsidiaries;
(xii) Shall not, and shall not permit any of its Subsidiaries to, make
any commitment or enter into any contract or agreement except (x) in the
ordinary course of business consistent with past practice or (y) for
capital expenditures to be made as identified in the Company's existing
business plan previously delivered to the Purchaser;
(xiii) Shall not, and shall not permit any of its Subsidiaries to, alter
through merger, liquidation, reorganization, restructuring or in any other
fashion the corporate structure or ownership of any Subsidiary of the
Company;
(xiv) Shall not, and shall not permit any of its Subsidiaries to, revalue
any of its assets, including, without limitation, writing down the value of
its inventory or writing off notes or accounts receivable, other than in
the ordinary course of business, except as may be required in connection
with unamortized fees relating to the Company's existing line of credit;
(xv) Shall not, and shall not permit any of its Subsidiaries to, make any
material tax election or settle or compromise any material income tax
liability;
(xvi) Shall not, and shall not permit any of its Subsidiaries to, settle
or compromise any pending or threatened suit, action or claim relating to
the transactions contemplated hereby;
(xvii) Shall not, and shall not permit any of its Subsidiaries to, pay,
discharge or satisfy any claims, liabilities or obligations (absolute,
accrued, asserted or unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction in the ordinary course of business of
liabilities reflected or reserved against in, or contemplated by, the
financial statements (or the notes thereto) of the Company or incurred in
the ordinary course of business consistent with past practice;
(xviii) Shall not, and shall not permit any of its Subsidiaries to,
except in connection with the exercise of its fiduciary duties by the Board
of Directors of the Company as set forth in Section 5.1, waive, amend or
allow to lapse (other than in accordance with its terms) any term or
condition of any confidentiality or "standstill" agreement to which the
Company or any of its Subsidiaries is a party;
(xix) Shall not, and shall not permit any of its Subsidiaries to, take
any action which would jeopardize the treatment of the Purchaser's
acquisition of the Company as a pooling of interests for accounting
purposes; and
(xx) Shall not, and shall not permit any of its Subsidiaries to, agree or
otherwise commit to take any of the foregoing actions or take, or agree to
take, any action which would make any of the representations or warranties
of the Company contained in this Agreement untrue or incorrect as of the
date when made.
(b) Prior to the Effective Time, except as contemplated by this
Agreement, unless the Company has consented in writing thereto, the
Purchaser:
(i) Shall promptly notify the Company of any breach of any representation
or warranty contained herein or any Material Adverse Effect with respect to
the Purchaser;
(ii) Shall promptly deliver to the Company true and correct copies of any
report, statement or schedule filed with the SEC subsequent to the date of
this Agreement;
(iii) Shall not declare, set aside or pay any dividend or make any other
distribution or payment with respect to any shares of its capital stock or
other ownership interests;
(iv) Shall, and shall cause each of its Subsidiaries to, conduct the
operations of its lodging facilities according to their usual, regular and
ordinary course in substantially the same manner as heretofore conducted;
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(v) Shall not amend its Certificate of Incorporation or Bylaws or
comparable governing instruments in any way that would have an adverse
impact on the transactions contemplated by this Agreement, or which would
amend or modify the terms or provisions of the capital stock of the
Purchaser other than any amendment to its Certificate of Incorporation to
increase the number of authorized shares of capital stock;
(vi) Shall not, and shall not permit any of its Subsidiaries to, settle
or compromise any pending or threatened suit, action or claim relating to
the transactions contemplated hereby;
(vii) Shall not, and shall not permit any of its Subsidiaries to, take
any action which would jeopardize the treatment of the Purchaser's
acquisition of the Company as a pooling of interests for accounting
purposes; and
(viii) Shall not, and shall not permit any of its Subsidiaries to, agree
or otherwise commit to take any of the foregoing actions or take, or agree
to take, any action which would make any of the representations or
warranties of the Purchaser contained in this Agreement untrue or incorrect
as of the date when made.
5.3 Meetings of Stockholders. Each of the Company and the Purchaser will
take all action necessary in accordance with applicable law and its
Articles/Certificate of Incorporation and Bylaws to convene a meeting of its
stockholders as promptly as practicable to consider and vote upon the approval
of this Agreement and the Merger. Each of the Board of Directors of the
Company and the Purchaser shall recommend such approval and the Purchaser and
the Company shall each use their respective reasonable efforts to solicit such
approval, including, without limitation, timely mailing the Proxy
Statement/Prospectus (as defined in Section 5.7); provided, however, that the
Company's and the Purchaser's respective Board of Directors may withdraw or
modify its recommendation to approve this Agreement and the Merger if
necessary in light of the applicable fiduciary duties of the Company's and the
Purchaser's respective directors, as determined by such directors in good
faith after consultation with, and based upon the advice of, outside counsel.
5.4 Filings, Other Action. Subject to the terms and conditions herein
provided, the Company and the Purchaser shall: (a) promptly make their
respective filings, if necessary, and thereafter make any other required
submissions under the HSR Act; (b) use all reasonable efforts to cooperate
with one another in (i) determining which filings are required to be made
prior to the Effective Time with, and which consents, approvals, permits or
authorizations are required to be obtained prior to the Effective Time from,
governmental or regulatory authorities of the United States, the several
states and foreign jurisdictions in connection with the execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
and (ii) timely making all such filings and timely seeking all such consents,
approvals, permits or authorizations; and (c) use all reasonable efforts to
take, or cause to be taken, all other action and do, or cause to be done, all
other things necessary, proper or appropriate to consummate and make effective
the transactions contemplated by this Agreement. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purpose of this Agreement, the proper officers and directors of the Purchaser
and the Company shall take all such necessary action.
5.5 Inspection of Records. Subject to the restrictions contained in
Confidentiality Agreements (as defined below), from the date hereof to the
Effective Time, each of the Company and the Purchaser shall (i) allow all
designated officers, attorneys, accountants and other representatives of the
other reasonable access at all reasonable times and upon reasonable notice to
the offices, records and files, correspondence, audits and properties, as well
as to all information relating to commitments, contracts, titles and financial
position, or otherwise pertaining to the business and affairs, of the Company
and the Purchaser and their respective Subsidiaries, as the case may be, (ii)
furnish to the other, the other's counsel, financial advisors, auditors and
other authorized representatives such financial and operating data and other
information as such persons may reasonably request and (iii) instruct the
employees, counsel and financial advisors of the Company or the Purchaser, as
the case may be, to cooperate with the other in the other's investigation of
the business of it and its Subsidiaries. All confidential information provided
pursuant to this Section 5.5 will be subject to the Confidentiality Agreement
dated as of December 30, 1996, and the Confidentiality Agreement dated as of
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January 10, 1997 (the "Confidentiality Agreements"), in each case between the
Company and the Purchaser. Notwithstanding the foregoing, no party shall have
access to information or documents subject to the attorney/client privilege.
5.6 Publicity. The initial press release relating to this Agreement shall be
a joint press release, reasonably satisfactory to the Company and the
Purchaser, and thereafter the Company and the Purchaser shall, subject to
their respective legal obligations (including requirements of stock exchanges,
automated quotation systems, and other similar regulatory bodies), consult
with each other, and use reasonable efforts to agree upon the text of any
press release, before issuing any such press release or otherwise making
public statements with respect to the transactions contemplated hereby and in
making any filings with any federal or state governmental or regulatory agency
or with any national securities exchange or automated quotation system with
respect thereto.
5.7 Registration Statement. The Purchaser and the Company shall cooperate
and promptly prepare and the Purchaser shall file with the SEC as soon as
practicable a Registration Statement on Form S-4 (the "Form S-4") under the
Securities Act, with respect to the Purchaser Stock issuable in the Merger, a
portion of which Registration Statement shall also serve as the proxy
statement with respect to the meetings of the stockholders of the Company and
the Purchaser in connection with the Merger (the "Proxy
Statement/Prospectus"). The respective parties will cause the Proxy
Statement/Prospectus and the Form S-4 to comply as to form in all material
respects with the applicable provisions of the Securities Act, the Exchange
Act and the rules and regulations thereunder. The Purchaser shall use all
reasonable efforts, and the Company will cooperate with the Purchaser, to have
the Form S-4 declared effective by the SEC as promptly as practicable and to
keep the Form S-4 effective as long as is necessary to consummate the Merger.
The Purchaser shall, as promptly as practicable, provide copies of any written
comments received from the SEC with respect to the Form S-4 to the Company and
advise the Company of any verbal comments with respect to the Form S-4
received from the SEC. The Purchaser shall use its best efforts to obtain,
prior to the effective date of the Form S-4, all necessary state securities
law or "Blue Sky" permits or approvals required to carry out the transactions
contemplated by this Agreement and will pay all expenses incident thereto. The
Purchaser agrees that the Proxy Statement/Prospectus and each amendment or
supplement thereto at the time of mailing thereof and at the time of the
meetings of stockholders of the Company and the Purchaser, or, in the case of
the Form S-4 and each amendment or supplement thereto, at the time it is filed
and becomes effective, will not include an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the foregoing shall not
apply to the extent that any such untrue statement of a material fact or
omission to state a material fact was made by the Purchaser in reliance upon
and in conformity with written information concerning the Company furnished to
the Purchaser by the Company specifically for use in the Proxy
Statement/Prospectus. The Company agrees that the written information
concerning the Company provided by it for inclusion in the Proxy
Statement/Prospectus and each amendment or supplement thereto, at the time of
mailing thereof and at the time of the meetings of stockholders of the Company
and the Purchaser, or, in the case of written information concerning the
Company provided by the Company for inclusion in the Form S-4 or any amendment
or supplement thereto, at the time it is filed and becomes effective, will not
include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. No amendment or supplement to the Proxy Statement/Prospectus will
be made by the Purchaser or the Company without the approval of the other
party. The Purchaser will advise the Company, promptly after it receives
notice thereof, of the time when the Form S-4 has become effective or any
supplement or amendment has been filed, the issuance of any stop order, the
suspension of the qualification of the Purchaser Stock issuable in connection
with the Merger for offering or sale in any jurisdiction, or any request by
the SEC for amendment of the Proxy Statement/Prospectus or the Form S-4 or
comments thereon and responses thereto or requests by the SEC for additional
information.
5.8 Listing Application. The Purchaser shall promptly prepare and submit to
the Nasdaq National Market a listing application covering the shares of
Purchaser Stock issuable in the Merger and pursuant to Company Options, and
shall use reasonable efforts to obtain, prior to the Effective Time, approval
for the quotation on Nasdaq of such Purchaser Stock, subject to official
notice of issuance.
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5.9 Affiliate Letters. At least 45 days prior to the Closing Date, the
Company shall deliver to the Purchaser a list of names and addresses of those
persons who were, in the Company's reasonable judgment, as of the date of such
list, "affiliates" (each such person, an "Affiliate") of the Company within
the meaning of Rule 145 of the rules and regulations promulgated under the
Securities Act and the Company shall promptly notify the Purchaser if, at any
time prior to the Closing Date, the Company believes a change should be made
to such list. The Company shall use all reasonable efforts to deliver or cause
to be delivered to the Purchaser, at least 30 days prior to the Closing Date,
from each of the Affiliates of the Company identified in the foregoing list,
an Affiliate Letter in the form attached hereto as Exhibit 5.9. The Purchaser
shall be entitled to place legends as specified in such Affiliate Letters on
the certificates evidencing any Purchaser Stock to be received by such
Affiliates pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer agent for the Purchaser Stock,
consistent with the terms of such Affiliate Letters.
5.10 Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses except
as expressly provided herein and except that (a) the filing fee in connection
with the HSR Act filings, if any, (b) the filing fee in connection with the
filing of the Form S-4 or Proxy Statement/Prospectus with the SEC, and (c) the
expenses incurred in connection with printing and mailing the Form S-4 and the
Proxy Statement/Prospectus, shall be shared equally by the Company and the
Purchaser.
5.11 Takeover Statute. If any "fair price", "moratorium", "control share
acquisition" or other form of antitakeover statute or regulation shall become
applicable to the transactions contemplated hereby or the transactions
contemplated by the Stockholder Agreement(s), the Company and Purchaser and
the members of the Board of Directors of the Company and Purchaser shall grant
such approvals and take such reasonable actions as are within its authority
and consistent with its fiduciary obligations as determined in good faith by
such Board so that the transactions contemplated hereby and the transactions
contemplated by the Stockholder Agreement(s) may be consummated as promptly as
practicable on the terms contemplated hereby and thereby and otherwise act to
eliminate or minimize the effects of such statute or regulation on the
transactions contemplated hereby and thereby.
5.12 Conduct of Business by NEWCO Pending the Merger. Prior to the Effective
Time and subject to any applicable regulatory approvals, the Purchaser shall
cause NEWCO to (i) perform its obligations under this Agreement in accordance
with the terms hereof and take all other actions necessary or appropriate for
the consummation of the transactions contemplated hereby, (ii) not incur
directly or indirectly any liabilities or obligations except those incurred in
connection with the consummation of this Agreement and the transactions
contemplated hereby, (iii) not engage directly or indirectly in any business
or activities of any type or kind whatsoever and not enter into any agreements
or arrangements with any person or entity, or be subject to or be bound by any
obligation or undertaking which is not contemplated by this Agreement and (iv)
not create, grant or suffer to exist any lien upon their respective properties
or assets which would attach to any properties or assets of the Purchaser or
the Surviving Corporation after the Effective Time.
5.13 Conveyance Taxes. The Company and the Purchaser shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any real property transfer or gains, sales, use,
transfer, value added, stock transfer and stamp taxes, any transfer,
recording, registration and other fees, and any similar taxes which become
payable in connection with the transactions contemplated by this Agreement
that are required or permitted to be filed on or before the Effective Time.
5.14 Further Amendments to Rights Plan. Prior to the Effective Time, the
Board of Directors of the Company shall not take any action that would amend,
or have the effect of amending the Company Rights Agreement, so that (i) the
Purchaser would become an "Acquiring Person" as a result of the consummation
of the transactions contemplated by this Agreement, (ii) a "Stock Acquisition
Date" or "Distribution Date" (as such terms are defined in the Company Rights
Agreement) would occur as a result of the consummation of the transactions
contemplated by this Agreement, and (iii) all Rights (as defined in the
Company Rights Agreement) issued and outstanding under the Company Rights
Agreement would not expire immediately prior to the Effective Time.
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5.15 Indemnification of Officers and Directors. (a) Until such time as the
applicable statute of limitations shall have expired, the Purchaser shall, and
shall cause the Surviving Corporation to, provide with respect to each present
or former director and officer of the Company and its Subsidiaries (both
present and past) (the "Indemnified Parties"), the indemnification rights
which such Indemnified Parties had, whether from the Company or such
Subsidiary, immediately prior to the Merger, whether under the VSCA or the
Articles of Incorporation or Bylaws of the Company or such Subsidiary or
otherwise.
(b) Immediately following the Effective Time, the Purchaser shall cause to
be in effect the current policies of directors' and officers' liability
insurance maintained by the Company or any Company Subsidiary (provided the
Purchaser may substitute therefor policies of at least the same coverage and
amounts containing terms and conditions which are no less advantageous) with
respect to claims arising from facts or events which occurred at or before the
Effective Time, and the Purchaser shall maintain such coverage for a period of
six years after the Effective Time.
(c) This Section 5.15 shall survive the Closing and is intended to benefit
the Company, the Surviving Corporation and each of the Indemnified Parties and
his or her heirs and representatives (each of whom shall be entitled to
enforce this Section 5.15 against the Purchaser or the Surviving Corporation,
as the case may be) and shall be binding on all successors and assigns of the
Purchaser and the Surviving Corporation.
5.16 Tax Treatment. The Purchaser and the Company agree to treat the Merger
as a reorganization within the meaning of Sections 368(a)(1)(A) and (a)(2)(D)
of the Code. During the period from the date of this Agreement through the
Effective Time, unless the parties shall otherwise agree in writing, none of
the Purchaser, the Company or any of their respective Subsidiaries shall
knowingly take or fail to take any action which action or failure to act would
jeopardize qualification of the Merger as a reorganization within the meaning
of Sections 368(a)(1)(A) and (a)(2)(D) of the Code.
5.17 Employee Benefits. (a) Accrued Obligations. From and after the
Effective Time, the Purchaser shall cause the Surviving Corporation to honor
all obligations and commitments under the Company Benefit Plans in accordance
with their terms as in effect at the Effective Time, with only such amendments
as are permitted by the terms thereof as in effect at the Effective Time.
(b) Transition Period. For the period commencing with the Effective Time and
ending on December 31, 1997, the Purchaser shall cause the Surviving
Corporation to provide welfare plan benefits (as defined under Section 3(1) of
ERISA) and retirement benefits to employees (and their beneficiaries) of the
Surviving Corporation and its Subsidiaries that are no less favorable in the
aggregate than the benefits provided by the Company and its Subsidiaries to
their employees (the "Company Employees") (and their beneficiaries) in
comparable positions immediately before the Effective Time. The Purchaser
shall take, and shall cause the Surviving Corporation and its Subsidiaries and
all other affiliates of the Purchaser to take, the following actions: (i)
waive any limitations regarding pre-existing conditions under any welfare or
other employee benefit plan maintained by any of them for the benefit of the
Company Employees or in which Company Employees participate after the
Effective Time, and (ii) for all purposes under all compensation and benefit
plans and policies applicable to employees of any of them, treat all service
by Company Employees with the Company or any affiliates of the Company before
the Effective Time as service with the Purchaser and its affiliates, except to
the extent such treatment would result in duplication of benefits.
5.18 Stock Options. (a) At least ten days prior to the Effective Time, the
Company shall deliver to each holder of a Company Option an Option Notice and
Assumption Agreement in the form attached as Exhibit 5.18 (the "Option
Assumption Agreement") setting forth the Purchaser's assumption of the Company
Option and substitution of the Assumed Option in accordance with the terms of
Section 2.2(c). The Purchaser shall not be entitled to or required to
substitute an Assumed Option for a Company Option in accordance with Section
2.2(c) until it has received from the holder of a Company Option a properly
executed and completed Option Assumption Agreement with respect to the Company
Option.
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(b) The Purchaser agrees to cause the shares of Purchaser Stock issuable
upon exercise of the Assumed Options and all other options assumed by the
Purchaser or issued by the Purchaser in replacement of the Company Options to
be covered by a Form S-8 Registration Statement filed with the SEC within
thirty days following the Effective Time. The Purchaser further agrees to
cause the shares of Purchaser Stock issuable upon exercise of the Assumed
Options (and, to the extent Assumed Options were not issued in substitution
therefor, the Company Options) to be registered or exempt from the
registration requirements of all applicable state securities laws, rules and
regulations.
5.19 Purchaser Board of Directors. At the Effective Time, the Purchaser
agrees to cause the Purchaser Board of Directors to take all action necessary
to appoint Norwood Cowgill, Jr. as a member of the Board of Directors of the
Purchaser, to serve pursuant to the Certificate of Incorporation and Bylaws of
the Purchaser and applicable law until his successor is elected and qualified
or his earlier resignation, respectively.
5.20 Employment Contract. The Company agrees to use its best efforts to
cause the existing employment agreement between the Company and Norwood
Cowgill, Jr. (the "Cowgill Employment Agreement") to be terminated at or prior
to the Effective Time with no "change of control" or other nonrecurring
payments being made thereunder.
ARTICLE 6
CONDITIONS
6.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved, in the manner required by applicable law or by the
applicable regulations of any stock exchange, automated quotation system,
or other regulatory body, as the case may be, and in accordance with the
parties' respective Articles/Certificate of Incorporation and Bylaws, by
the holders of the issued and outstanding shares of capital stock of each
of the Company and the Purchaser.
(b) The waiting period applicable to the consummation of the Merger under
the HSR Act, if applicable, shall have expired or been terminated.
(c) No governmental authority or other regulatory body (including any
court of competent jurisdiction) shall have enacted, issued, promulgated,
enforced or entered any law, rule, regulation, executive order, decree,
injunction or other order (whether temporary, preliminary or permanent)
which is then in effect and has the effect of making illegal, materially
restricting or in any way preventing or prohibiting the Merger or
transactions contemplated by this Agreement; provided, however, that the
parties shall use their reasonable efforts to cause any such law, rule,
regulation, executive order, decree, injunction or other order to be
vacated or lifted.
(d) The Form S-4 shall have become effective and shall be effective at
the Effective Time, and no stop order suspending effectiveness of the Form
S-4 shall have been issued, no action, suit, proceeding or investigation by
the SEC to suspend the effectiveness thereof shall have been initiated and
be continuing, or, to the knowledge of the Purchaser or the Company,
threatened, and all necessary approvals under state securities laws
relating to the issuance or trading of the Purchaser Stock to be issued to
the Company stockholders in connection with the Merger shall have been
received. At the effective date of the Form S-4, the Form S-4 shall not
contain any untrue statement of a material fact, or omit to state any
material fact necessary in order to make the statements therein not
misleading, and, at the mailing date of the Proxy Statement/Prospectus and
the date of the stockholders' meetings, the Proxy Statement/Prospectus
shall not contain any untrue statement of a material fact, or omit to state
any material fact necessary in order to make the statements therein not
misleading.
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(e) All consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental commission, board or other regulatory
body required in connection with the execution, delivery and performance of
this Agreement shall have been obtained or made, except for filings in
connection with the Merger and any other documents required to be filed
after the Effective Time and except where the failure to have obtained or
made any such consent, authorization, order, approval, filing or
registration would not have a Material Adverse Effect on the Purchaser or
the Company following the Effective Time.
(f) The Purchaser Stock to be issued to the Company stockholders in
connection with the Merger and the Company Options shall have been approved
for quotation on the Nasdaq National Market, subject only to official
notice of issuance.
(g) The Purchaser and the Company shall each have received a written
opinion from their respective counsel to the effect that the Merger will
constitute a reorganization within the meaning of Sections 368(a)(1)(A) and
(a)(2)(D) of the Code.
(h) The Purchaser and the Company shall have been advised in writing, as
of the Effective Time, by Coopers & Lybrand L.L.P. that, in accordance with
generally accepted accounting principles, the Merger qualifies to be
treated as a "pooling of interests" for accounting purposes.
(i) All authorizations, consents, waivers and approvals from parties to
contracts or other agreements to which either of the Company or the
Purchaser is a party, or by which either is bound, as may be required to be
obtained by them in connection with the performance with this Agreement,
the failure to obtain which would have a Material Adverse Effect on the
Company or the Purchaser, shall have been obtained.
6.2 Conditions to Obligation of Company to Effect the Merger. The obligation
of the Company to effect the Merger shall be subject to the fulfillment at or
prior to the Closing Date of the following conditions:
(a) The Purchaser and NEWCO shall have performed in all material respects
their agreements contained in this Agreement required to be performed on or
prior to the Closing Date, the representations and warranties of the
Purchaser contained in this Agreement and in any document delivered in
connection herewith shall be true and correct in all material respects as
of the Closing Date, except (i) for changes specifically permitted by this
Agreement and (ii) that those representations and warranties which address
matters only as of a particular date shall remain true and correct as of
such date, and the Company shall have received a certificate of the
President or a Vice President of the Purchaser, dated the Closing Date,
certifying to such effect.
(b) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of the Purchaser and its Subsidiaries, taken as a whole, that
would have or would be reasonably likely to have a Material Adverse Effect
on the Purchaser.
(c) The Company shall have received a favorable opinion from Bell, Boyd &
Lloyd, dated the Closing Date, substantially to the effect set forth in
Exhibit 6.2(c).
(d) The Voting Agreement shall have remained in full force and effect
through the Effective Time.
(e) The Purchaser shall have delivered an executed registration rights
agreement, substantially in the form attached hereto as Exhibit 6.2(e) (the
"Registration Rights Agreement"), with each person (other than the
Purchaser) who is a party to a Stockholder Agreement.
6.3 Conditions to Obligation of the Purchaser to Effect the Merger. The
obligation of the Purchaser to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
(a) The Company shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior
to the Closing Date, the representations and warranties of the Company
contained in this Agreement and in any document delivered in connection
herewith shall be true and correct in all material respects as of the
Closing Date, except (i) for changes specifically permitted by this
Agreement and (ii) that those representations and warranties which address
matters only as of a particular date shall remain true and correct as of
such date, and the Purchaser shall have received a certificate of the
President or a Vice President of the Company, dated the Closing Date,
certifying to such effect.
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(b) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of the Company and its Subsidiaries, taken as a whole, that
would have or would be reasonably likely to have a Material Adverse Effect
on the Company.
(c) The Stockholder Agreement shall have remained in full force and
effect through the Effective Time.
(d) After the Effective Time, no person shall have any Right (as defined
in the Company Rights Agreement) under the Company Rights Agreement to
acquire any equity securities of the Company.
(e) Stockholders of the Company who have exercised dissenter's rights
with respect to the Merger under Article 15 of the VSCA and other
applicable provisions of the VSCA or other statute shall hold no more than
9.9% of the outstanding shares of the Company Common Stock, or a lesser
amount to the extent such percentage would negate accounting for the Merger
as a pooling of interests.
(f) The Purchaser and NEWCO shall have received a favorable opinion from
King & Spalding, dated the Closing Date, substantially to the effect set
forth in Exhibit 6.3(f).
(g) The Cowgill Employment Agreement shall have been terminated and no
"change of control" or other nonrecurring payments shall have been made
thereunder.
ARTICLE 7
TERMINATION
7.1 Termination by Mutual Consent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the stockholders of the Company, by
the mutual written consent of the Purchaser and the Company.
7.2 Termination by Either the Purchaser or Company. This Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either the Purchaser or the Company if (a) the Merger shall not have been
consummated by August 31, 1997, (or such later date as shall have been
approved by the Purchaser and the Company), (b) the approval of the Company's
stockholders and the Purchaser's stockholders required by Section 6.1(a) shall
not have been obtained at a meeting duly convened therefor or at any
adjournment thereof, or (c) a United States federal or state court of
competent jurisdiction or United States federal or state governmental,
regulatory or administrative agency or commission shall have issued an order,
decree or ruling or taken any other action permanently restraining, enjoining
or otherwise prohibiting the transactions contemplated by this Agreement and
such order, decree, ruling or other action shall have become final and non-
appealable; provided, that the party seeking to terminate this Agreement
pursuant to this clause (c) shall have used all reasonable efforts to remove
such injunction, order or decree; and provided, in the case of a termination
pursuant to clause (a) above, that the terminating party shall not have
breached in any material respect its obligations under this Agreement in any
manner that shall have proximately contributed to the failure to consummate
the Merger by August 31, 1997 (or such later date as shall have been approved
by the Purchaser and the Company).
7.3 Termination by Company. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, before or after the
adoption and approval by the stockholders of the Company or the Purchaser
referred to in Section 6.1(a), by action of the Board of Directors of the
Company, if: (a) there is an Alternative Proposal which, in the exercise of
its good faith judgment as to its fiduciary duties to its stockholders imposed
by law, based upon the advice of outside counsel, the Board of Directors of
the Company determines that such termination is required by reason of such
Alternative Proposal being made; provided that the Company shall notify the
Purchaser promptly of its intention to terminate this Agreement or enter into
a definitive agreement with respect to any Alternative Proposal (which notice
shall describe the material terms of such definitive agreement); or (b) events
occur which render impossible the satisfaction of one or more of the
conditions set forth in Sections 6.1 and 6.2 and such conditions are not
waived by the Company, unless the failure of such occurrence shall be due to
the failure of the Company to perform or observe the covenants, agreements and
conditions hereof to be performed by it at or before the Effective Time.
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7.4 Termination by the Purchaser. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the stockholders of the Company or the Purchaser
referred to in Section 6.1(a), by action of the Board of Directors of the
Purchaser, if: (a) the Board of Directors of the Company shall have withdrawn
or modified in a manner materially adverse to the Purchaser its approval or
recommendation of this Agreement or the Merger or shall have recommended an
Alternative Proposal to the Company's stockholders or shall have adopted
resolutions to accept or implement an Alternative Proposal; or (b) events
occur which render impossible the satisfaction of one or more of the
conditions set forth in Sections 6.1 and 6.3 and such conditions are not
waived by the Purchaser, unless the failure of such occurrence shall be due to
the failure of the Purchaser or NEWCO to perform or observe the covenants,
agreements and conditions hereof to be performed or observed by them at or
before the Effective Time.
7.5 Effect of Termination and Abandonment. (a) In the event that this
Agreement is terminated pursuant to Section 7.3(a) or Section 7.4(a), (such
event being called a "Topping Event"), then the Company shall pay the
Purchaser a fee of $7,500,000, which amount shall be payable by wire transfer
of same day funds within two business days after such amount becomes due. The
Company acknowledges that the agreements contained in this Section 7.5(a) are
an integral part of the transactions contemplated in this Agreement, and that,
without these agreements, the Purchaser would not enter into this Agreement;
accordingly, if the Company fails to promptly pay the amount due pursuant to
this Section 7.5(a), and, in order to obtain such payment, the Purchaser
commences a suit which results in a judgment against the Company for the fee
set forth in this Section 7.5(a), the Company shall pay to the Purchaser its
costs and expenses (including reasonable attorneys' fees) in connection with
such suit, together with interest on the amount of the fee at a rate equal to
the prime rate of NationsBank, N.A.
(b) In the event of termination of this Agreement and the abandonment of the
Merger pursuant to this Article 7, all obligations of the parties hereto shall
terminate, except the obligations of the parties pursuant to this Section 7.5,
the last sentence of Section 5.5, and Section 5.11 and except for the
provisions of Article 8. Nothing herein shall prejudice the ability of the
non-breaching party from seeking damages from any other party for any willful
breach of this Agreement, including without limitation, reasonable attorneys'
fees and the right to pursue any remedy at law or in equity.
7.6 Extension, Waiver. At any time prior to the Effective Time, any party
hereto, by action taken by its Board of Directors, may, to the extent legally
allowed, (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto and (c) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall
be valid only if set forth in an instrument in writing signed on behalf of
such party.
ARTICLE 8
GENERAL PROVISIONS
8.1 Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall be deemed to the extent
expressly provided herein to be conditions to the Merger and shall not survive
the Merger, and thereafter neither the Purchaser, NEWCO or the Company nor any
affiliate, officer, director, employee or stockholder thereof shall have any
liability with respect thereto; provided, however, that the agreements
contained in Articles 1 and 2, Sections 5.4, 5.15, 5.16, 5.17, 5.18, this
Article 8 and any other covenant or agreement which contemplates performance
after the Effective Time shall survive the Merger.
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8.2 Notices. Any notice required to be given hereunder shall be sufficient
if in writing, and sent by facsimile transmission and by courier service (with
proof of service), hand delivery or certified or registered mail (return
receipt requested and first-class postage prepaid), addressed as follows:
If to the Purchaser: If to the Company:
Extended Stay America, Inc. Studio Plus Hotels, Inc.
450 Las Olas Boulevard 1999 Richmond Road, Suite 4
Ft. Lauderdale, Florida 33301 Lexington, Kentucky 40502
Attention: Robert A. Brannon, Attention: William A. Anderson,
Secretary Secretary
With copies to: With copies to:
Bell, Boyd & Lloyd King & Spalding
70 West Madison Street 191 Peachtree Street
Suite 3300 Atlanta, Georgia 30303-1763
Chicago, Illinois 60602 Attention: Alan J. Prince
Attention: D. Mark McMillan Fax: 404/572-5100
Fax: 312/372-2098
or to such other address as any party shall specify by written notice so
given, and such notice shall be deemed to have been delivered as of the date
so telecommunicated, personally delivered or mailed.
8.3 Assignment; Binding Effect. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Except as otherwise
expressly provided in this Agreement, nothing in this Agreement is intended to
confer on any person other than the parties hereto or their respective heirs,
successors, executors, administrators and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
8.4 Entire Agreement. This Agreement, the Exhibits, the Company Disclosure
Letter, the Purchaser Disclosure Letter, the Confidentiality Agreements and
any documents delivered by the parties in connection herewith constitute the
entire agreement among the parties with respect to the subject matter hereof
and supersede all prior agreements and understandings among the parties with
respect thereto.
8.5 Amendment. This Agreement may be amended by the parties hereto, by
action taken by their respective Boards of Directors, at any time before or
after approval of matters presented in connection with the Merger by the
stockholders of the Company and the Purchaser, but after any such stockholder
approval, no amendment shall be made which by law requires the further
approval of stockholders without obtaining such further approval. This
Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
8.6 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to its rules
of conflict of laws.
8.7 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof
each signed by less than all, but together signed by all of the parties
hereto.
8.8 Headings. Headings of the Articles and Sections of this Agreement are
for the convenience of the parties only, and shall be given no substantive or
interpretive effect whatsoever.
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8.9 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and
vice versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
8.10 Waivers. Except as provided in this Agreement, no action taken pursuant
to this Agreement, including, without limitation, any investigation by or on
behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties,
covenants or agreements contained in this Agreement. The waiver by any party
hereto of a breach of any provision hereunder shall not operate or be
construed as a waiver of any prior or subsequent breach of the same or any
other provision hereunder.
8.11 Incorporation of Exhibits. The Company Disclosure Letter, the Purchaser
Disclosure Letter and all Exhibits attached hereto and referred to herein are
hereby incorporated herein and made a part hereof for all purposes as if fully
set forth herein.
8.12 Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
8.13 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
was not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any Delaware Court, this being
in addition to any other remedy to which they are entitled at law or in
equity.
[**SIGNATURE PAGE FOLLOWS**]
A-31
<PAGE>
In Witness Whereof, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
Extended Stay America, Inc.
/s/ George D. Johnson, Jr.
By:__________________________________
George D. Johnson, Jr.
President and Chief Executive
Officer
ESA Merger Sub, Inc.
/s/ George D. Johnson, Jr.
By:__________________________________
George D. Johnson, Jr.
President
Studio Plus Hotels, Inc.
/s/ Norwood Cowgill, Jr.
By:__________________________________
Norwood Cowgill, Jr.
Chief Executive Officer
A-32
<PAGE>
APPENDIX B
[LETTERHEAD OF SMITH BARNEY]
January 16, 1997
The Board of Directors
Studio Plus Hotels, Inc.
1999 Richmond Road
Lexington, Kentucky 40502
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the common stock of Studio Plus Hotels, Inc. ("Studio
Plus") of the consideration to be received by such holders pursuant to the
terms and subject to the conditions set forth in the Agreement and Plan of
Merger, dated as of January 16, 1997 (the "Merger Agreement"), by and among
Extended Stay America, Inc. ("Extended Stay"), ESA Merger Sub, Inc., a wholly
owned subsidiary of Extended Stay ("Newco"), and Studio Plus. As more fully
described in the Merger Agreement, (i) Newco will be merged with and into
Studio Plus (the "Merger") and (ii) each outstanding share of the common
stock, par value $0.01 per share, of Studio Plus (the "Studio Plus Common
Stock") will be converted into the right to receive 1.2272 shares (the
"Exchange Ratio") of the common stock, par value $0.01 per share, of Extended
Stay (the "Extended Stay Common Stock").
In arriving at our opinion, we reviewed the Merger Agreement and held
discussions with certain senior officers, directors and other representatives
and advisors of Studio Plus and certain senior officers and other
representatives and advisors of Extended Stay concerning the businesses,
operations and prospects of Studio Plus and Extended Stay. We examined certain
publicly available business and financial information relating to Studio Plus
and Extended Stay as well as certain financial forecasts and other information
and data for Studio Plus and Extended Stay which were provided to or otherwise
discussed with us by the respective managements of Studio Plus and Extended
Stay, including information relating to certain strategic implications and
operational benefits anticipated to result from the Merger. We reviewed the
financial terms of the Merger as set forth in the Merger Agreement in relation
to, among other things: current and historical market prices and trading
volumes of Studio Plus Common Stock and Extended Stay Common Stock; the
historical and projected earnings and other operating data (including current
and anticipated operating results from existing and planned properties) of
Studio Plus and Extended Stay; and the capitalization and financial condition
of Studio Plus and Extended Stay. We considered, to the extent publicly
available, the financial terms of other transactions recently effected which
we considered relevant in evaluating the Merger and analyzed certain
financial, stock market and other publicly available information relating to
the businesses of other companies whose operations we considered relevant in
evaluating those of Studio Plus and Extended Stay. We also evaluated the
potential pro forma financial impact of the Merger on Extended Stay. In
addition to the foregoing, we conducted such other analyses and examinations
and considered such other financial, economic and market criteria as we deemed
appropriate in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed
by or discussed with us. With respect to financial forecasts and other
information and data provided to or otherwise reviewed by or discussed with
us, we have been advised by the managements of Studio Plus and Extended Stay
that such forecasts and other information and data were reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
managements of Studio Plus and Extended Stay as to the future financial
performance of Studio Plus and Extended Stay and the strategic implications
and operational benefits anticipated to result from the Merger. We have
assumed, with your consent, that the Merger will be treated as a pooling of
interests in accordance with generally accepted accounting principles and as a
tax-free reorganization for federal income tax purposes. We are not expressing
any opinion as to what the value of the
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<PAGE>
Extended Stay Common Stock actually will be when issued to Studio Plus
stockholders pursuant to the Merger or the price at which the Extended Stay
Common Stock will trade subsequent to the Merger. We have not made or been
provided with an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of Studio Plus or Extended Stay nor have
we made any physical inspection of the properties or assets of Studio Plus or
Extended Stay. In connection with our engagement, we were requested to
approach on a limited basis, and held discussions with, certain third parties
to solicit indications of interest in a possible acquisition of Studio Plus.
Our opinion is necessarily based upon information available to us, and
financial, stock market and other conditions and circumstances existing and
disclosed to us, as of the date hereof.
Smith Barney has been engaged to render financial advisory services to Studio
Plus in connection with the proposed Merger and will receive a fee for such
services, a significant portion of which is contingent upon the consummation
of the Merger. We also will receive a fee in connection with the delivery of
this opinion. In the ordinary course of our business, we and our affiliates
may actively trade or hold the securities of Studio Plus and Extended Stay for
our own account or for the account of our customers and, accordingly, may at
any time hold a long or short position in such securities. We have in the past
provided investment banking services to Studio Plus and Extended Stay
unrelated to the proposed Merger, for which services we have received
compensation. In addition, we and our affiliates (including Travelers Group
Inc. and its affiliates) may maintain relationships with Studio Plus and
Extended Stay.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of Studio Plus in its evaluation of the
proposed Merger, and our opinion is not intended to be and does not constitute
a recommendation to any stockholder as to how such stockholder should vote on
the proposed Merger. Our opinion may not be published or otherwise used or
referred to, nor shall any public reference to Smith Barney be made, without
our prior written consent.
Based on and subject to the foregoing, our experience as investment bankers,
our work as described above and other factors we deemed relevant, we are of
the opinion that, as of the date hereof, the Exchange Ratio is fair, from a
financial point of view, to the holders of Studio Plus Common Stock.
Very truly yours,
Smith Barney Inc.
B-2
<PAGE>
APPENDIX C
[LETTERHEAD OF DONALDSON, LUFKIN & JENRETTE]
January 16, 1997
Board of Directors
Extended Stay America, Inc.
450 East Las Olas Boulevard
Suite 1100
Ft. Lauderdale, Florida 33301
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to Extended Stay America, Inc., a Delaware corporation (the "Company"),
of the consideration to be paid by the Company pursuant to the terms of the
Agreement and Plan of Merger (the "Agreement"), by and among the Company, ESA
Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of the
Company ("Newco"), and Studio Plus Hotels, Inc., a Virginia corporation
("Studio Plus"), pursuant to which Studio Plus will be merged (the "Merger")
with and into Newco.
Pursuant to the Agreement, each share of common stock, $.01 par value per
share, of Studio Plus ("Studio Plus Common Stock") will be converted into the
right to receive 1.2272 shares (the "Exchange Ratio") of common stock, $.01
par value per share, of the Company ("Company Common Stock").
In arriving at our opinion, we have reviewed the Agreement. We also have
reviewed financial and other information that was publicly available or
furnished to us by the Company and Studio Plus including information provided
during discussions with their respective managements. Included in the
information provided by the respective managements were certain financial
projections of Studio Plus prepared by the management of the Company. In
addition, we have compared certain financial and securities data of the
Company and Studio Plus with various other companies whose securities are
traded in public markets, reviewed the historical stock prices and trading
volumes of the Studio Plus Common Stock and Company Common Stock, reviewed
prices and premiums paid in certain other business combinations and conducted
such other financial studies, analyses and investigations as we deemed
appropriate for purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available
to us from public sources, that was provided to us by the Company and Studio
Plus or their respective representatives, or that was otherwise reviewed by
us. With respect to the financial projections supplied to us, we have assumed
that they have been reasonably prepared on the basis reflecting the best
currently available estimates and judgments of the managements of the Company
and Studio Plus as to the future operating and financial performance of the
Company and Studio Plus. We have not assumed any responsibility for making any
independent evaluation of Studio Plus's assets or liabilities or for making
any independent verification of any of the information reviewed by us.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as
of, the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion as to the prices
at which the Company Common Stock will trade in the future. Our opinion does
not address the relative merits of the Merger and the other business
strategies being considered by the Company's Board of Directors, nor does it
address the Board's decision to proceed with the Merger. Our opinion does not
constitute a recommendation to any shareholder as to how such shareholder
should vote on the proposed transaction.
C-1
<PAGE>
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
DLJ has performed investment banking services for the Company and its
affiliates in the past and has been compensated for such services. DLJ and its
affiliates own in the aggregate 1,883,914 shares of the Company Common Stock.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Exchange Ratio is fair to the Company from a financial
point of view.
Very truly yours,
Donaldson, Lufkin & Jenrette
Securities Corporation
By: /s/ J. Patrick O'Shaughnessy
---------------------------------
J. Patrick O'Shaughnessy
Vice President
C-2
<PAGE>
APPENDIX D
ARTICLE 15
DISSENTERS' RIGHTS
13.1-729 DEFINITION.--In this article:
"Corporation" means the issuer of the shares held by a dissenter before
the corporate action, except that (i) with respect to a merger,
"corporation" means the surviving domestic or foreign corporation or
limited liability company by merger of that issuer, and (ii) with respect
to a share exchange, "corporation" means the acquiring corporation by share
exchange, rather than the issuer, if the plan of share exchange places the
responsibility for dissenters' rights on the acquiring corporation.
"Dissenter" means a shareholder who is entitled to dissent from corporate
action under (S)13.1-730 and who exercises that right when and in the
manner required by (S)(S)13.1-732 through 13.1-739.
"Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
"Interest" means interest from the effective date of the corporate action
until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair
and equitable under all the circumstances.
"Record shareholder" means the person in whose name shares are registered
in the records of a corporation or the beneficial owner of shares to the
extent of the rights granted by a nominee certificate on file with a
corporation.
"Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
"Shareholder" means the record shareholder or the beneficial shareholder.
13.1-730 RIGHT TO DISSENT.--A. A shareholder is entitled to dissent from,
and obtain payment of the fair value of his shares in the event of, any of the
following corporate actions:
1. Consummation of a plan of merger to which the corporation is a party
(i) if shareholder approval is required for the merger by (S)13.1-718 or
the articles of incorporation and the shareholder is entitled to vote on
the merger or (ii) if the corporation is a subsidiary that is merged with
its parent under (S)13.1-719;
2. Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the shareholder
is entitled to vote on the plan;
3. Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation if the shareholder was entitled to vote on
the sale or exchange or if the sale or exchange was in furtherance of a
dissolution on which the shareholder was entitled to vote, provided that
such dissenter's rights shall not apply in the case of (i) a sale or
exchange pursuant to court order, or (ii) a sale for cash pursuant to a
plan by which all or substantially all of the net proceeds of the sale will
be distributed to the shareholders within one year after the date of sale;
4. Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
B. A shareholder entitled to dissent and obtain payment for his shares under
this article may not challenge the corporate action creating his entitlement
unless the action is unlawful or fraudulent with respect to the shareholder or
the corporation.
D-1
<PAGE>
C. Notwithstanding any other provision of this article, with respect to a
plan of merger or share exchange or a sale or exchange of property there shall
be no right of dissent in favor of holders of shares of any class or series
which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting at which the plan of merger or
share exchange or the sale or exchange of property is to be acted on, were (i)
listed on a national securities exchange or on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) or (ii) held by at
least 2,000 record shareholders, unless in either case:
1. The articles of incorporation of the corporation issuing such shares
provide otherwise;
2. In the case of a plan of merger or share exchange, the holders of the
class or series are required under the plan of merger or share exchange to
accept for such shares anything except:
a. Cash;
b. Shares or membership interests, or shares or membership interests
and cash in lieu of fractional shares (i) of the surviving or acquiring
corporation or limited liability company or (ii) of any other
corporation or limited liability company which, at the record date
fixed to determine the shareholders entitled to receive notice of and
to vote at the meeting at which the plan of merger or share exchange is
to be acted on, were either listed subject to notice of issuance on a
national securities exchange or held of record by at least 2,000 record
shareholders or members; or
c. A combination of cash and shares or membership interests as set
forth in subdivisions 2a and 2b of this subsection; or
3. The transaction to be voted on is an "affiliated transaction" and is
not approved by a majority of "disinterested directors" as such terms are
defined in (S)13.1-725.
D. The right of a dissenting shareholder to obtain payment of the fair value
of his shares shall terminate upon the occurrence of any one of the following
events:
1. The proposed corporate action is abandoned or rescinded;
2. A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
3. His demand for payment is withdrawn with the written consent of the
corporation.
13.1-731 DISSENT BY NOMINEES AND BENEFICIAL OWNERS.--A. A record shareholder
may assert dissenters' rights as to fewer than all the shares registered in
his name only if he dissents with respect to all shares beneficially owned by
any one person and notifies the corporation in writing of the name and address
of each person on whose behalf he asserts dissenters' rights. The rights of a
partial dissenter under this subsection are determined as if the shares as to
which he dissents and his other shares were registered in the names of
different shareholders.
B. A beneficial shareholder may assert dissenters' rights as to shares held
on his behalf only if:
1. He submits to the corporation the record shareholder's written consent
to the dissent not later than the time the beneficial shareholder asserts
dissenters' rights; and
2. He does so with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote.
13.1-732 NOTICE OF DISSENTERS' RIGHTS.--A. If proposed corporate action
creating dissenters' rights under (S)13.1-730 is submitted to a vote at a
shareholders' meeting, the meeting notice shall state that shareholders are or
may be entitled to assert dissenters' rights under this article and be
accompanied by a copy of this article.
B. If corporate action creating dissenters' rights under (S)13.1-730 is
taken without a vote of shareholders, the corporation, during the ten-day
period after the effectuation of such corporate action, shall notify in
writing all record shareholders entitled to assert dissenters' rights that the
action was taken and send them the dissenters' notice described in (S)13.1-
734.
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13.1-733 NOTICE OF INTENT TO DEMAND PAYMENT.--A. If proposed corporate
action creating dissenters' rights under (S)13.1-730 is submitted to a vote at
a shareholders' meeting, a shareholder who wishes to assert dissenters' rights
(i) shall deliver to the corporation before the vote is taken written notice
of his intent to demand payment for his shares if the proposed action is
effectuated and (ii) shall not vote such shares in favor of the proposed
action.
B. A shareholder who does not satisfy the requirements of subsection A of
this section is not entitled to payment for his shares under this article.
13.1-734 DISSENTERS' NOTICE.--A. If proposed corporate action creating
dissenters' rights under (S)13.1-730 is authorized at a shareholders' meeting,
the corporation, during the ten-day period after the effectuation of such
corporate action, shall deliver a dissenters' notice in writing to all
shareholders who satisfied the requirements of (S)13.1-733.
B. The dissenters' notice shall:
1. State where the payment demand shall be sent and where and when
certificates for certificated shares shall be deposited;
2. Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
3. Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not he acquired beneficial ownership
of the shares before or after that date;
4. Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty nor more than sixty days after the
date of delivery of the dissenters' notice; and
5. Be accompanied by a copy of this article.
13.1-735 DUTY TO DEMAND PAYMENT.--A. A shareholder sent a dissenters' notice
described in (S)13.1-734 shall demand payment, certify that he acquired
beneficial ownership of the shares before or after the date required to be set
forth in the dissenters' notice pursuant to subdivision 3 of subsection B of
(S)13.1-734, and, in the case of certificated shares, deposit his certificates
in accordance with the terms of the notice.
B. The shareholder who deposits his shares pursuant to subsection A of this
section retains all other rights of a shareholder except to the extent that
these rights are cancelled or modified by the taking of the proposed corporate
action.
C. A shareholder who does not demand payment and deposits his share
certificates where required, each by the date set in the dissenters' notice,
is not entitled to payment for his shares under this article.
13.1-736 SHARE RESTRICTIONS.--A. The corporation may restrict the transfer
of uncertificated shares from the date the demand for their payment is
received.
B. The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder except to the extent that
these rights are cancelled or modified by the taking of the proposed corporate
action.
13.1-737 PAYMENT.--A. Except as provided in (S)13.1-738, within thirty days
after receipt of a payment demand made pursuant to (S)13.1-735, the
corporation shall pay the dissenter the amount the corporation estimates to be
the fair value of his shares, plus accrued interest. The obligation of the
corporation under this paragraph may be enforced (i) by the circuit court in
the city or country where the corporation's principal office is located, or,
if none in this Commonwealth, where its registered office is located or (ii)
at the election of any dissenter residing or having its principal office in
the Commonwealth, by the circuit court in the city or county where the
dissenter resides or has its principal office. The court shall dispose of the
complaint on an expedited basis.
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B. The payment shall be accompanied by:
1. The corporation's balance sheet as of the end of a fiscal year ending
not more than sixteen months before the effective date of the corporate
action creating dissenters' rights, an income statement for that year, a
statement of changes in shareholders' equity for that year, and the latest
available interim financial statements, if any;
2. An explanation of how the corporation estimated the fair value of the
shares and of how the interest was calculated;
3. A statement of the dissenters' rights to demand payment under (S)13.1-
739; and
4. A copy of this article.
13.1-738 AFTER-ACQUIRED SHARES.--A. A corporation may elect to withhold
payment required by (S)13.1-737 from a dissenter unless he was the beneficial
owner of the shares on the date of the first publication by news media or the
first announcement to shareholders generally, whichever is earlier, of the
terms of the proposed corporate action, as set forth in the dissenters'
notice.
B. To the extent the corporation elects to withhold payment under subsection
A of this section, after taking the proposed corporate action, it shall
estimate the fair value of the shares, plus accrued interest, and shall offer
to pay this amount to each dissenter who agrees to accept it in full
satisfaction of his demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares and of how the
interest was calculated, and a statement of the dissenter's right to demand
payment under (S)13.1-739.
13.1-739 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.--A. A
dissenter may notify the corporation in writing of his own estimate of the
fair value of his shares and amount of interest due, and demand payment of his
estimate (less any payment under (S)13.1-737), or reject the corporation's
offer under (S)13.1-738 and demand payment of the fair value of his shares and
interest due, if the dissenter believes that the amount paid under (S)13.1-737
or offered under (S)13.1-738 is less than the fair value of his shares or that
the interest due is incorrectly calculated.
B. A dissenter waives his right to demand payment under this section unless
he notifies the corporation of his demand in writing under subsection A of
this section within thirty days after the corporation made or offered payment
for his shares.
13.1-740 COURT ACTION.--A. If a demand for payment under (S)13.1-739 remains
unsettled, the corporation shall commence a proceeding within sixty days after
receiving the payment demand and petition the circuit court in the city or
county described in subsection B of this section to determine the fair value
of the shares and accrued interest. If the corporation does not commence the
proceeding within the sixty day period, it shall pay each dissenter whose
demand remains unsettled the amount demanded.
B. The corporation shall commence the proceeding in the city or county where
its principal office is located, or, if none in this Commonwealth, where its
registered office is located. If the corporation is a foreign corporation
without a registered office in this Commonwealth, it shall commence the
proceeding in the city or county in this Commonwealth where the registered
office of the domestic corporation merged with or whose shares were acquired
by the foreign corporation was located.
C. The corporation shall make all dissenters, whether or not residents of
this Commonwealth, whose demands remain unsettled parties to the proceeding as
in an action against their shares and all parties shall be served with a copy
of the petition. Nonresidents may be served by registered or certified mail or
by publication as provided by law.
D. The corporation may join as a party to the proceeding any shareholder who
claims to be a dissenter but who has not, in the opinion of the corporation,
complied with the provisions of this article. If the court determines that
such shareholder has not complied with the provisions of this article, he
shall be dismissed as a party.
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E. The jurisdiction of the court in which the proceeding is commenced under
subsection B of this section is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend a decision
on the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to it. The dissenters are entitled
to the same discovery rights as parties in other civil proceedings.
F. Each dissenter made a party to the proceeding is entitled to judgment (i)
for the amount, if any, by which the court finds the fair value of his shares,
plus interest, exceeds the amount paid by the corporation or (ii) for the fair
value, plus accrued interest, of his after-acquired shares for which the
corporation elected to withhold payment under (S)13.1-738.
13.1-741 COURT COSTS AND COUNSEL FEES.--A. The court in an appraisal
proceeding commenced under (S)13.1-740 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court
finds the dissenters did not act in good faith in demanding payment under
(S)13.1-739.
B. The court may also assess the reasonable fees and expenses of experts,
excluding those of counsel, for the respective parties, in amounts the court
finds equitable:
1. Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of (S)(S)13.1-732 through 13.1-739; or
2. Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses
are assessed did not act in good faith with respect to the rights provided
by this article.
C. If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded
the dissenters who were benefited.
D. In a proceeding commenced under subsection A. of (S)13.1-737 the court
shall assess the costs against the corporation, except that the court may
assess costs against all or some of the dissenters who are parties to the
proceeding, in amounts the court finds equitable, to the extent the court
finds that such parties did not act in good faith in instituting the
proceeding.
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APPENDIX E
CERTIFICATE OF AMENDMENT TO THE
RESTATED CERTIFICATE OF INCORPORATION OF
EXTENDED STAY AMERICA, INC.
PURSUANT TO SECTION 242 OF THE
GENERAL CORPORATION LAW OF THE
STATE OF DELAWARE
Extended Stay America, Inc., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware (the
"Company"), does hereby certify as follows:
1. The Restated Certificate of Incorporation of the Company is hereby
amended by changing Article FOURTH thereof so that, as amended, the first
paragraph of Article FOURTH of the Restated Certificate of Incorporation of
the Company shall read in its entirety as follows:
"FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 510,000,000 of which (i)
500,000,000 shares, par value $.01 per share, are to be of a class
designated Common Stock ("Common Stock") and (ii) 10,000,000 shares,
par value $.01 per share, are to be of a class designated Preferred
Stock ("Preferred Stock")."
2. That such amendment has been duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware, the Board of Directors of the Company having adopted resolutions
setting forth such amendment and declaring its advisability, and the
holders of a majority of the outstanding stock of the Company having
approved and adopted resolutions providing for such amendment.
In Witness Whereof, Extended Stay America, Inc. has caused this Certificate
to be signed by its Senior Vice President and attested to by its Assistant
Secretary, on this day of , 1997.
Extended Stay America, Inc.
By: _________________________________
Robert A. Brannon
Senior Vice President
Attest:
- -------------------------------------
Gregory R. Moxley
Assistant Secretary
E-1
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APPENDIX F
EXTENDED STAY AMERICA, INC.
1997 EMPLOYEE STOCK OPTION PLAN
1. STATEMENT OF PURPOSE. The purpose of this Stock Option Plan (the "Plan")
is to benefit Extended Stay America, Inc. (the "Company") and its subsidiaries
by offering certain present and future key individuals a favorable opportunity
to become holders of stock in the Company over a period of years, thereby
giving them a stake in the growth and prosperity of the Company and
encouraging the continuance of their services with the Company or its
subsidiaries.
2. ADMINISTRATION. The Plan shall be administered by the Compensation
Committee (the "Committee") of the board of directors of the Company (the
"Board of Directors"), whose interpretation of the terms and provisions of the
Plan and whose determination of matters pertaining to options granted under
the Plan shall be final and conclusive. The Committee shall be composed of two
or more disinterested members of the Board of Directors of the Company.
3. ELIGIBILITY. Options shall be granted only to key employees and
consultants of the Company and its subsidiaries (including officers of the
Company and its subsidiaries but excluding members of the Committee) selected
initially and from time to time thereafter by the Committee on the basis of
the special importance of their services in the management, development and
operations of the Company or its subsidiaries (each such individual receiving
options granted under the Plan and each other person entitled to exercise an
option granted under the Plan is referred to herein as an "Optionee").
4. GRANTING OF OPTIONS. (a) The Committee may grant options to employees,
directors and consultants of the Company and its subsidiaries; provided,
however, that members of the Committee shall not be eligible to receive grants
of options under the Plan. Pursuant to the Plan, a maximum of 6,000,000 shares
of the $.01 par value common stock of the Company (the "Common Stock") may be
purchased from the Company, subject to adjustment as provided in Paragraph 10
hereof; provided, however, that the maximum number of shares subject to all
options granted to an individual under the Plan shall in no event exceed 50%
of the shares of Common Stock authorized for issuance under the Plan. Options
granted under the Plan are intended not to be treated as incentive stock
options as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
(b) No options shall be granted under the Plan subsequent to the tenth
anniversary of the adoption of the Plan. In the event that an option expires
or is terminated or canceled unexercised as to any shares, such released
shares may again be optioned (including a grant in substitution for a canceled
option). Shares subject to options may be made available from unissued or
reacquired shares of Common Stock.
(c) Nothing contained in the Plan or in any option granted pursuant thereto
shall confer upon any Optionee any right to be continued in the employment of,
or a consulting arrangement with, the Company or any subsidiary, or interfere
in any way with the right of the Company or its subsidiaries to terminate his
or her employment or consulting arrangement at any time.
5. OPTION PRICE. The option price of any option granted under the Plan shall
be determined by the Committee and shall not be less than the fair market
value of the shares of Common Stock subject to the option on the date of the
grant of such option. Unless the Committee otherwise determines, for purposes
of this Paragraph 5, "fair market value" shall be the average of the highest
and lowest sales prices of the Common Stock reported on the Nasdaq National
Market (or on the principal national stock exchange on which it is listed or
quotation service on which it is listed) (as reported in The Wall Street
Journal) on the date the option is granted (or, if the date of grant is not a
trading date, on the first trading date immediately preceding the date of
grant). In the event that the Common Stock is not listed or quoted on the
Nasdaq National Market or any other national stock exchange, the fair market
value of the shares of Common Stock for all purposes of this Plan shall be
reasonably determined by the Committee.
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6. DURATION OF OPTIONS, INCREMENTS AND EXTENSIONS. (a) Subject to the
provisions of Paragraph 8 hereof, each option shall be for such term of not
more than ten years as shall be determined by the Committee at the date of the
grant. Each option shall become exercisable with respect to one-fourth of the
total number of shares subject to the option 12 months after the date of its
grant and with respect to an additional one-fourth at the end of each 12-month
period thereafter during the succeeding three years.
(b) Notwithstanding any other provisions of the Plan to the contrary, the
Committee may in its discretion (i) specifically provide as of the date of the
grant for another time or times of exercise; (ii) accelerate the
exercisability of any option, subject to such terms and conditions as the
Committee deems necessary and appropriate to effectuate the purposes of the
Plan, which may include, without limitation, a requirement that the Optionee
grant to the Committee an option to repurchase all or a portion of the number
of shares acquired upon exercise of the accelerated option for their fair
market value, as determined by the Committee, as of the date of acceleration;
(iii) at any time prior to the expiration or termination of any options
previously granted, extend the term of any option (including such options held
by officers) for such additional period or periods as the Committee, in its
discretion, may determine. In no event, however, shall the aggregate option
period with respect to any option, including the original term of the option
and any extensions thereof, exceed ten years. Subject to the foregoing, all or
any part of the options as to which the right to exercise has accrued may be
exercised at the time of such accrual or at any time or times thereafter
during the option term.
(c) In the event of a change in control of the Company, all outstanding
options shall become immediately exercisable. For the purposes of the Plan,
the term "change in control" shall mean (1) that any person is or becomes the
beneficial owner, directly or indirectly, of at least 50% of the combined
voting power of the Company's outstanding securities, except by reason of a
repurchase by the Company of its own securities, or (2) that a change in the
composition of the Board of Directors of the Company occurs as a result of
which fewer than one-half of the incumbent directors are directors who either
had been directors of the Company 24 months prior to such change or were
elected or nominated for election to the Board of Directors with the approval
of at least a majority of the directors who had been directors of the Company
24 months prior to such change and who were still in office at the time of the
election or nomination.
7. EXERCISE OF OPTION. (a) An option may be exercised by giving written
notice to the Committee, specifying the number of shares to be purchased. The
option price for the number of shares of Common Stock for which the option is
exercised shall become immediately due and payable; provided, however, that in
lieu of cash an Optionee may, with the approval of the Committee, exercise his
or her option by (i) delivering a promissory note in accordance with the terms
of the Plan and in a form specified by the Company; (ii) tendering to the
Company shares of Common Stock owned by him or her and with the certificates
therefor registered in his or her name, having a fair market value equal to
the cash exercise price of the shares being purchased; or (iii) delivery of an
irrevocable written notice instructing the Company to deliver the shares of
Common Stock being purchased to a broker selected by the Company, subject to
the broker's written guarantee to deliver the cash to the Company, in each
case equal to the full consideration of the exercise price for the shares of
Common Stock being purchased. For this purpose, the per share value of Common
Stock shall be the fair market value on the date of exercise (or, if the date
of exercise is not a trading date, on the first trading date immediately
preceding the date of exercise), which shall, unless the Committee otherwise
determines, be the average of the highest and lowest sales prices of the
Common Stock reported on the Nasdaq National Market (or on the principal
national stock exchange on which it is listed or quotation service on which it
is listed) (as reported in The Wall Street Journal) on such date.
(b) In connection with the exercise of options granted under the Plan, the
Company may make loans to such Optionees as the Committee, in its discretion,
may determine. Such loans shall be subject to the following terms and
conditions and such other terms and conditions as the Committee shall
determine to be not inconsistent with the Plan. Such loans shall bear interest
at such rates as the Committee shall determine from time to time, which rates
may be below then current market rates or may be made without interest. In no
event may any such loan exceed the fair market value, at the date of exercise,
of the shares covered by the option, or portion thereof,
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<PAGE>
exercised by the Optionee. No loan shall have an initial term exceeding two
years, but any such loan may be renewable at the discretion of the Committee.
When a loan shall have been made, shares of Common Stock having a fair market
value at least equal to 150 percent of the principal amount of the loan shall
be pledged by the Optionee to the Company as security for payment of the
unpaid balance of the loan.
(c) At the time of the exercise of any option, the Company may require, as a
condition of the exercise of such option, the Optionee to pay the Company an
amount equal to the amount of the tax the Company may be required to withhold
to obtain a deduction for federal and state income tax purposes as a result of
the exercise of such option by the Optionee or to comply with applicable law.
An Optionee may, with the approval of the Committee, make an election to
satisfy the tax withholding obligation by either (1) tendering to the Company
shares of Common Stock owned by him or her and with the certificates therefor
registered in his or her name, having a fair market value equal to the tax
withholding obligation, (2) deduct from any cash payment pursuant to any
broker-assisted option exercise (net to Optionee in cash or shares) an amount
sufficient to satisfy any withholding tax requirements, or (3) instructing the
Company to withhold from the shares of Common Stock otherwise issuable upon
the exercise of the option that number of shares having a fair market value
equal to the tax withholding obligation. The value of the shares to be
delivered or withheld shall be based on the fair market value of the shares of
Common Stock on the date of exercise, which shall, unless the Committee
otherwise determines, be the average of the highest and lowest sales prices of
the Common Stock reported on the Nasdaq National Market (or on the principal
national stock exchange on which it is listed or quotation service on which it
is listed) (as reported in The Wall Street Journal) on the date of exercise.
(d) At the time of any exercise of any option, the Company may, if the
Company shall determine it necessary or desirable for any reason, require the
Optionee (or his or her heirs, legatees, or legal representative, as the case
may be) as a condition upon the exercise thereof, to deliver to the Company a
written representation of present intention to purchase the shares for
investment and not for distribution. In the event such representation is
required to be delivered, an appropriate legend may be placed upon each
certificate delivered to the Optionee upon his or her exercise of part or all
of the option and a stop order may be placed with the transfer agent for the
Common Stock. Each option shall also be subject to the requirement that, if at
any time the Company determines, in its discretion, that the listing,
registration or qualification of the shares subject to the option upon any
securities exchange or under any state, federal or foreign law, or the consent
or approval of any governmental regulatory body is necessary or desirable as a
condition of, or in connection with, the issue or purchase of shares
thereunder, the option may not be exercised in whole or in part unless such
listing, registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Company.
8. TERMINATION OF EMPLOYMENT OR CONSULTING ARRANGEMENT--EXERCISE THEREAFTER.
(a) In the event the employment or consulting arrangement of an Optionee with
the Company or any of its subsidiaries is terminated for any reason other than
the Optionee's death, permanent disability, retirement after age 65 or
following a change in control (as defined in Paragraph 6(c) hereof), such
Optionee's option shall expire and all rights to purchase shares pursuant
thereto shall terminate immediately. Temporary absence from employment because
of illness, vacation, approved leaves of absence, and transfers of employment
among the Company and its subsidiaries, shall not be considered to terminate
employment or to interrupt continuous employment. Temporary cessation of the
provision of consulting services because of illness, vacation or any other
reason approved in advance by the Company shall not be considered a
termination of the consulting arrangement or an interruption of the continuity
thereof. Conversion of an Optionee's employment relationship to a consulting
arrangement shall not result in termination of previously granted options.
(b) In the event of termination of employment or consulting arrangement
following a change in control (as defined in Paragraph 6(c) hereof), the
option may be exercised in full (without regard to any times of exercise
established under Paragraph 6 hereof; provided, however, that no options shall
be exercisable during the first six months after the date of grant) by the
Optionee or, if the Optionee is not living, by the Optionee's heirs, legatees,
or legal representatives, as the case may be, during its specified term. In
the event of termination of employment
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<PAGE>
or consulting arrangement because of death, permanent disability (as that term
is defined in Section 22(e)(3) of the Code, as now in effect or as shall be
subsequently amended) or retirement after age 65, the option may be exercised
by the Optionee, or, if the Optionee dies after such termination, by the
Optionee's heirs, legatees, or legal representatives, as the case may be, at
any time during its specified term prior to three years after the date of such
termination, but only to the extent the option was exercisable at the date of
such termination.
(c) Notwithstanding any other provision of the Plan to the contrary, the
Committee may in its discretion provide for such other terms of expiration and
termination of an option in the event of termination of the employment or
consulting arrangement of the optionee as the Committee shall determine.
9. NON-TRANSFERABILITY OF OPTIONS. No option shall be transferable by the
Optionee otherwise than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order and each option shall be
exercisable during an Optionee's lifetime only by the Optionee or by the
Optionee's legal representative. This restriction on transferability is
effective only so long as it is required pursuant to Section 16 under the
Securities Exchange Act of 1934, as amended. At the time such restriction on
transferability is no longer so required, the Committee, in its discretion,
may permit the transfer of an option on such terms and subject to such
conditions as the Committee may deem necessary or appropriate or as otherwise
may be required by applicable law or regulation.
10. ADJUSTMENT. The number of shares subject to the Plan and to options
granted under the Plan shall be adjusted as follows: (a) in the event that the
number of outstanding shares of Common Stock is changed by any stock dividend,
stock split or combination of shares, the number of shares subject to the Plan
and to options granted thereunder shall be proportionately adjusted; (b) in
the event of any merger, consolidation or reorganization of the Company with
any other corporation or legal entity there shall be substituted, on an
equitable basis as determined by the Committee, for each share of Common Stock
then subject to the Plan and for each share of Common Stock then subject to an
option granted under the Plan, the number and kind of shares of stock or other
securities to which the holders of shares of Common Stock will be entitled
pursuant to the transaction; and (c) in the event of any other relevant change
in the capitalization of the Company, the Committee shall provide for an
equitable adjustment in the number of shares of Common Stock then subject to
the Plan and to each share of Common Stock then subject to an option granted
under the Plan. In the event of any such adjustment, the option price per
share of Common Stock shall be proportionately adjusted.
11. AMENDMENT OF THE PLAN. The Board of Directors of the Company or any
authorized committee thereof may amend or discontinue the Plan at any time.
However, no such amendment or discontinuance shall (a) without the consent of
the Optionee change or impair any option previously granted, or (b) without
the approval of the holders of a majority of the shares of the Common Stock
which vote in person or by proxy at a duly held stockholders' meeting, (i)
increase the maximum number of shares which may be purchased by all employees
pursuant to this Plan, (ii) change the minimum purchase price of any option,
or (iii) change the limitations on the option period or increase the time
limitations on the grant of options.
12. EFFECTIVE DATE. The Plan is effective as of January 16, 1997.
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