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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
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PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported):
AUGUST 5, 1997
COMMISSION FILE NUMBER 0-26304
SUNSTONE HOTEL INVESTORS, INC.
(Exact Name of Registrant as Specified in its Charter)
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MARYLAND 52-1891908
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
115 CALLE DE INDUSTRIAS, SUITE 201, SAN CLEMENTE, CA 92672
(Address of Principal Executive Offices) (Zip Code)
(714) 361-3900
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name or Former Address, if Changed Since Last Report)
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ITEM 5. OTHER EVENTS.
On August 5, 1997, Sunstone Hotel Investors, Inc., a Maryland
corporation (the "Company") entered into a definitive agreement to acquire all
the capital stock of Kahler Realty Corporation, a privately held Minnesota
corporation ("Kahler") for approximately $322 million from Westbrook Real Estate
Fund I, L.P. and Westbrook Real Estate Co-Investment Partnership I, L.P.,
affiliates of Westbrook Partners, L.L.C., a real estate investment firm. The
acquisition of Kahler, which owns and operates 17 hotels with an aggregate of
4,255 rooms, will almost double the number of hotel rooms in the Company's
portfolio from the current number. The transaction is expected to close during
the fourth quarter of 1997. The $322 million consideration to be paid at closing
will consist of approximately $95 million in cash, $25 million of newly issued
preferred stock and $32 million of newly issued common stock of the Company, and
the assumption of approximately $170 million of debt which, after closing, will
be kept in place, refinanced or retired.
The acquisition is described in greater detail in the Stock Purchase
Agreement and in the press release filed as exhibits to this report on
Form 8-K.
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ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Businesses Acquired. The historical
financial statements required to be provided in this Form 8-K are
impracticable to file at this time but will be filed under cover of
Form 8-K/A as soon as practicable in accordance with the
requirements of Form 8-K.
(b) Pro Forma Financial Information. The pro forma financial
information required to be provided in this Form 8-K is
impracticable to file at this time but will be filed under cover of
Form 8-K/A as soon as practicable in accordance with the
requirements of Form 8-K.
(c) Exhibits.
10.1 Stock Purchase Agreement dated as of August 5, 1997.
99.1 Press Release dated August 6, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SUNSTONE HOTEL INVESTORS, INC.
Date: August 13, 1997 By: /s/ ROBERT A. ALTER
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Robert A. Alter, President
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EXHIBIT 10.1
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STOCK PURCHASE AGREEMENT
AMONG
SUNSTONE HOTEL INVESTORS, INC.
WESTBROOK REAL ESTATE FUND I, L.P.
WESTBROOK REAL ESTATE CO-INVESTMENT PARTNERSHIP I, L.P.
AND
KAHLER REALTY CORPORATION
DATED AS OF AUGUST 5, 1997
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TABLE OF CONTENTS
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ARTICLE I
THE PURCHASE AND SALE OF STOCK AND NOTES.......................... 2
SECTION 1.1 General....................................................................................... 2
SECTION 1.2 Closing....................................................................................... 2
SECTION 1.3 Consideration................................................................................. 2
(a) General....................................................................................... 2
(b) Legends....................................................................................... 3
(c) Allocation of Stock Purchase Consideration and Interest....................................... 4
SECTION 1.4 Pre-Closing Distribution of Earnings & Profits................................................ 4
SECTION 1.5 Pre-Closing Restructuring of the Company and of Non-Qualifying
Businesses.................................................................................... 5
SECTION 1.6 Closing Deliveries............................................................................ 5
(a) Purchaser..................................................................................... 5
(b) The Funds..................................................................................... 6
ARTICLE II......................................... 6
SECTION 2.1 Earnout............................................................................... 6
ARTICLE III
REPRESENTATIONS AND WARRANTIES............................... 16
SECTION 3.1. Representations and Warranties of the Funds................................................... 16
(a) Organization and Qualification of the Company; Subsidiaries................................... 16
(b) Corporate Organization of the Funds........................................................... 16
(c) Capitalization................................................................................ 17
(d) Authority of the Company Relative to Agreement................................................ 18
(e) Authority of the Funds Relative to Agreements................................................. 18
(f) Regulatory Approvals for the Company.......................................................... 19
(g) Regulatory Approvals for the Funds............................................................ 19
(h) No Conflicts - Company........................................................................ 19
(i) No Conflicts - Funds.......................................................................... 20
(j) Financial Statement........................................................................... 20
(k) Absence of Certain Changes or Events.......................................................... 21
(l) Compliance with Laws.......................................................................... 22
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(m) Agreements.................................................................................... 23
(n) Permitted Liens............................................................................... 26
(o) Absence of Litigation......................................................................... 26
(p) Employee Matters.............................................................................. 26
(q) Tax Matters................................................................................... 28
(r) Environmental Matters......................................................................... 29
(s) Properties.................................................................................... 30
(t) Condition of Improvements..................................................................... 31
(u) Insurance..................................................................................... 31
(v) Transactions with Affiliates.................................................................. 32
(w) Investment Intention.......................................................................... 32
(x) Ability to Bear Risk.......................................................................... 32
(y) Access to Information; Evaluation of Risks.................................................... 32
(z) Shares Not Registered......................................................................... 32
(aa) Status of Fund................................................................................ 33
(ab) Brokers....................................................................................... 33
SECTION 3.2 Representations and Warranties of the Purchaser............................................... 33
(a) Corporate Organization........................................................................ 33
(b) Capitalization................................................................................ 33
(c) Authority Relative to Agreements.............................................................. 34
(d) No Conflict; Required Filings and Consents.................................................... 34
(e) SEC Filings; Financial Statements............................................................. 35
(f) Absence of Certain Changes or Events.......................................................... 36
(g) Absence of Litigation......................................................................... 36
(h) Environmental Matters......................................................................... 36
(i) Validity of Shares............................................................................ 37
(j) Transactions with Affiliates.................................................................. 37
(k) Financing..................................................................................... 37
(l) Brokers....................................................................................... 37
ARTICLE IV
CONDUCT OF BUSINESS PENDING THE MERGER; OTHER COVENANTS........................... 38
SECTION 4.1 Conduct of Business of the Company Pending the Closing........................................ 38
SECTION 4.2 Conduct of Business of the Purchaser.......................................................... 41
SECTION 4.3 Access to Information; Confidentiality........................................................ 41
SECTION 4.4 Employee Benefits Matters..................................................................... 42
SECTION 4.5 Directors' and Officers' Indemnification and Insurance........................................ 43
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SECTION 4.6 Registration Rights Agreement................................................................. 43
SECTION 4.7 Further Action; Reasonable Best Efforts....................................................... 43
SECTION 4.8 Public Announcements.......................................................................... 44
SECTION 4.9 Maintenance of REIT Qualification............................................................. 44
SECTION 4.10 Transfer Restrictions......................................................................... 44
SECTION 4.11 Board Representation.......................................................................... 45
SECTION 4.12 Amendment of Articles of Incorporation........................................................ 47
SECTION 4.13 Non-Solicitation. ........................................................................... 47
SECTION 4.14 No Negotiation................................................................................ 47
SECTION 4.15 Organization and Qualification of Subsidiaries................................................ 47
SECTION 4.16 Licenses and Permits.......................................................................... 48
SECTION 4.17 Additional Information........................................................................ 49
SECTION 4.18 New York Stock Exchange Listing............................................................... 49
SECTION 4.19 Share Trust................................................................................... 49
SECTION 4.20 Earnings and Profits Distribution............................................................. 49
SECTION 4.21 GMX........................................................................................... 51
SECTION 4.22 Non-Core Assets............................................................................... 51
ARTICLE V
CONDITIONS TO THE CLOSING.......................................... 51
SECTION 5.1 Conditions to Obligation of Each Party to Effect the Merger................................... 51
(a) Government Approvals.......................................................................... 51
(b) No Injunctions or Restraints; Illegality...................................................... 51
(c) Maintenance of REIT Qualification............................................................. 52
(d) Earnings and Profits Certification............................................................ 52
(e) Confirmation of Exempted Holder Status for Funds.............................................. 52
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SECTION 5.2 Conditions to Obligations of Purchaser........................................................ 52
(a) Representations and Warranties................................................................ 53
(b) Performance of Obligations of the Company and the Funds....................................... 53
(c) Required Consents; Governmental Approvals..................................................... 53
(d) No Material Adverse Change.................................................................... 53
(e) Legal Opinions................................................................................ 54
SECTION 5.3 Conditions to Obligations of the Company and the Funds........................................ 54
(a) Representations and Warranties................................................................ 54
(b) Performance of Obligations of the Purchaser................................................... 54
(c) Required Consents; Governmental Approvals..................................................... 54
(d) No Material Adverse Change.................................................................... 55
(e) Legal Opinions................................................................................ 55
(f) Confirmation of Exempt Purchase Status for Funds.............................................. 55
(g) Distribution\Restructuring.................................................................... 55
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER...................................... 56
SECTION 6.1 Termination................................................................................... 56
SECTION 6.2 Effect of Termination......................................................................... 56
SECTION 6.3 Reports....................................................................................... 57
SECTION 6.4 Fees and Expenses............................................................................. 57
SECTION 6.5 Amendment..................................................................................... 57
SECTION 6.6 Waiver........................................................................................ 57
ARTICLE VII
GENERAL PROVISIONS.............................................. 57
SECTION 7.1 Survival of Representations, Warranties and Agreements;
Indemnification............................................................................... 57
(a) Survival...................................................................................... 57
(b) Indemnification by Purchaser.................................................................. 58
(c) Indemnification by the Funds.................................................................. 58
(d) Limitations on Indemnification................................................................ 58
(e) Third-Party Claims............................................................................ 59
(f) Termination of Indemnification................................................................ 60
(g) Exclusive Remedy.............................................................................. 60
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(h) Calculation of Loss and Expenses.............................................................. 60
SECTION 7.2 Notices....................................................................................... 60
SECTION 7.3 Certain Definitions........................................................................... 61
SECTION 7.4 Severability.................................................................................. 69
SECTION 7.5 Entire Agreement; Assignment.................................................................. 69
SECTION 7.6 Parties in Interest........................................................................... 69
SECTION 7.7 Governing Law; Submission to Jurisdiction; Waiver of Jury Trial;
Specific Performance.......................................................................... 69
SECTION 7.8 Interpretation................................................................................ 70
SECTION 7.9 Counterparts.................................................................................. 71
SECTION 7.10 No Recourse................................................................................... 72
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STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of August 5, 1997 (this
"Agreement"), among SUNSTONE HOTEL INVESTORS, INC., a Maryland corporation (the
"Purchaser"), WESTBROOK REAL ESTATE FUND I, L.P., a Delaware limited
partnership ("Westbrook Fund"), Westbrook Real Estate Co- Investment
Partnership I, L.P., a Delaware limited partnership ("Westbrook Co-Investment
Fund" and collectively with Westbrook Fund, the "Funds"), and KAHLER REALTY
CORPORATION, a Minnesota corporation (the "Company").
WHEREAS, the Funds own 100 shares (the "Stock") of common
stock (the "Company Common Stock"), par value $.10 per share, of the Company;
and
WHEREAS, the Stock constitutes all of the outstanding
shares of the capital stock of the Company; and
WHEREAS, the Purchaser desires to purchase from the Funds, and
the Funds desire to sell to the Purchaser, all of the Stock upon the terms and
subject to the conditions set forth herein (the sale and purchase of the Stock
being referred to herein as the "Stock Purchase"); and
WHEREAS, the Company has an outstanding promissory note in
favor of the Westbrook Fund in the principal amount of $36,394,440 (the
"Westbrook Note") and an outstanding promissory note in favor of the Westbrook
Co-Investment Fund in the principal amount of $3,605,560 (the "Co-Investment
Note" and collectively with the Westbrook Note, the "Notes"); and
WHEREAS, the Purchaser desires to purchase from the Funds, and
the Funds desire to sell to the Purchaser, the Notes upon the terms and subject
to the conditions set forth herein (the sale and purchase of the Notes being
referred to herein as the "Notes Purchase"); and
WHEREAS, the Board of Directors of the Purchaser has approved,
and deems it advisable and in the best interest of its stockholders to
consummate the Stock Purchase and the Notes Purchase; and
WHEREAS, the Purchaser, the Company and the Funds desire to
make certain representations, warranties, covenants and agreements in
connection with the Stock Purchase and also to prescribe various conditions to
the Stock Purchase.
NOW, THEREFORE, in consideration of the foregoing and the
respective representations, warranties, mutual covenants and agreements herein
contained, and intending to be legally bound hereby, the Purchaser, the Company
and the Funds agree as follows:
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ARTICLE I
THE PURCHASE AND SALE OF STOCK AND NOTES
SECTION 1.1 General. Upon the terms and subject to the
conditions set forth in this Agreement, the Funds shall sell to the Purchaser,
and the Purchaser shall purchase from the Funds, the Stock and Notes at the
Closing (as hereinafter defined). The consideration for the Stock and the
Notes shall be paid as provided in Section 1.3.
SECTION 1.2 Closing. Unless this Agreement shall have
been terminated and the transactions herein contemplated shall have been
abandoned pursuant to Section 6.1, and subject to the satisfaction or waiver of
the conditions set forth in Article V, the closing of the Stock Purchase and
the Notes Purchase (the "Closing") shall take place on the later of (i) October
15, 1997 (or such earlier date as the Purchaser may designate at its discretion
on at least two business days' prior written notice to the Funds) and (ii) the
date which is two business days following satisfaction or waiver of the
conditions set forth in Article V (other than with respect to actions to take
place on the date of Closing or the day preceding the date of Closing) at the
offices of Brobeck, Phleger & Harrison, 4675 MacArthur Court, Suite 1000,
Newport Beach, California 92660, unless another date, time or place is agreed
to in writing by the parties hereto; provided that in the event the condition
precedents set forth in Article V are satisfied on or after October 15, 1997
but the Purchaser does not yet have available all necessary financing to
consummate the Closing, the Purchaser may specify that the Closing Date will
occur on the first date that all such financing is available (but in no event
shall such date be later than December 23, 1997) provided that the Purchaser
has been using, and continues to use, reasonable best efforts to obtain such
financing at the earliest practicable date and the Purchaser delivers to the
Funds (x) a letter from Bank One of Arizona confirming that its commitment
remains in full force and effect and unmodified in any material respect or
written financial commitments in form and substance reasonably acceptable to
the Funds from other financial institutions reasonably acceptable to the Funds
with respect to the financing contemplated by the Bank One of Arizona
Commitment and (y) written financing commitments in form and substance
reasonably acceptable to the Funds from Merrill Lynch & Co. or from other
financial institutions reasonably acceptable to the Funds with respect to all
equity and other financing that is required to consummate the transactions
contemplated by this Agreement. The actual date and time of the Closing are
referred to herein as the "Closing Date."
SECTION 1.3 Consideration.
(a) General. (i) The consideration for the Stock shall
consist of: (i) $94,680,000 in cash (the "Cash Consideration"); provided,
however, that the amount payable pursuant to this clause (i) shall be
reduced by an amount equal to the sum of the accumulated earnings and profits
through the Closing Date as determined pursuant to Section 1.4 (for purposes of
this Section 1.3(a), the accumulated earnings and profits as determined
pursuant to Section 1.4 shall not be reduced by any distributions made after
the date of this Agreement), plus $250,000; provided further, that if the
Closing has not occurred on or before October 15,
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1997, the amount of cash payable to the Funds at Closing shall be increased by
an amount equal to a 10% per annum return on $151,680,000 for the period
beginning on (and including) October 16, 1997 through (but excluding) the
Closing Date (it being understood, however, that if the Closing Date is October
16, 1997, the consideration payable will be increased by one day's return)
which return shall be computed on the basis of a 365-day year and for the
actual number of days elapsed in the period during which it accrues, (ii)
2,284,262 shares (the "Purchaser Common Stock Consideration") of common stock,
par value $.01 per share, of the Purchaser (the "Purchaser Common Stock");
provided, however, that if, after the date of this Agreement and prior to the
Closing Date, (x) the issued and outstanding shares of Purchaser Common Stock
shall have been changed, or a record date shall have been set for a change of
such issued and outstanding shares, into a different number of shares or a
different class by reason of any stock dividend, subdivision, reclassification,
recapitalization, split, combination, exchange of shares or otherwise, the
Purchaser Common Stock Consideration shall be correspondingly adjusted to
reflect such change or (y) the Purchaser shall effect a merger, consolidation
or other business combination, then at the Closing the Funds shall be entitled
to receive such consideration under this clause (ii) as the Funds would have
received in such merger, consolidation or other business combination had the
Funds owned the Purchaser Common Stock Consideration at the time of such
transaction (iii) 250,000 shares (the "Purchaser Convertible Preferred Stock
Consideration" and collectively with the Cash Consideration and Purchaser
Common Stock Consideration, the "Stock Purchase Consideration") of convertible
preferred stock, par value $.01 per share, of the Purchaser (the "Purchaser
Convertible Preferred Stock") having the powers, preferences, and other rights
set forth in the articles supplementary attached hereto as Exhibit 1.3 (the
"Certificate of Designation"), and (iv) any payment made pursuant to Article II
herein.
(ii) The consideration for each Note shall consist of the
outstanding principal amount of such Note ($36,394,440 in the case of the
Westbrook Note and $3,605,560 in the case of the Co-Investment Note) plus all
accrued and unpaid interest thereon through the Closing Date (collectively, the
"Note Purchase Consideration") and shall be paid to the holder of such Note.
(b) Legends. The certificate (or certificates)
representing the Purchaser Common Stock Consideration and Purchaser Convertible
Stock Consideration shall bear the following legend (until such time as
subsequent transfers thereof are no longer restricted in accordance with the
Securities Act of 1933, as amended (the "Securities Act")):
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE GIVEN,
SOLD, ASSIGNED, TRANSFERRED, PLEDGED, HYPOTHECATED, OR OTHERWISE
DISPOSED OF UNLESS SUCH GIFT, SALE, ASSIGNMENT, TRANSFER, PLEDGE,
HYPOTHECATION OR OTHER DISPOSITION COMPLIES WITH THE PROVISIONS OF THE
STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 5, 1997 (AS AMENDED,
SUPPLEMENTED OR OTHERWISE MODIFIED, THE "STOCK PURCHASE AGREEMENT")
AMONG SUNSTONE HOTEL INVESTORS, INC. (THE "COMPANY"), WESTBROOK REAL
ESTATE FUND I, L.P.,
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WESTBROOK REAL ESTATE CO-INVESTMENT PARTNERSHIP I, L.P. AND KAHLER
REALTY CORPORATION. A COPY OF THE STOCK PURCHASE AGREEMENT IS ON FILE
WITH THE SECRETARY OF THE COMPANY. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE NOT REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") OR THE SECURITIES LAWS OF ANY STATE, ARE SUBJECT
TO THE PROVISIONS (INCLUDING THE RESTRICTIONS ON TRANSFER) SET FORTH
IN THE STOCK PURCHASE AGREEMENT AND NO GIFT, SALE, ASSIGNMENT,
TRANSFER, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE MAY BE MADE EXCEPT (A) IN COMPLIANCE
WITH RULE 144 UNDER THE ACT, (B) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT AND ALL APPLICABLE STATE SECURITIES OR "BLUE
SKY" LAWS OR (C) IF THE COMPANY HAS BEEN FURNISHED WITH AN OPINION OF
COUNSEL WHICH SHALL BE REASONABLY SATISFACTORY TO THE COMPANY TO THE
EFFECT THAT SUCH GIFT, SALE, ASSIGNMENT, TRANSFER, PLEDGE,
HYPOTHECATION OR OTHER DISPOSITION IS EXEMPT FROM THE REGISTRATION
REQUIREMENTS OF THE ACT AND THE RULES AND REGULATIONS IN EFFECT
THEREUNDER AND IS NOT IN VIOLATION OF APPLICABLE STATE SECURITIES
LAWS. ADDITIONALLY, IF THE HOLDER IS A CITIZEN OR RESIDENT OF ANY
COUNTRY OTHER THAN THE UNITED STATES, OR THE HOLDER DESIRES TO EFFECT
ANY SUCH TRANSACTION IN ANY SUCH COUNTRY, THE COMPANY MUST BE
FURNISHED WITH A REASONABLY SATISFACTORY OPINION OR OTHER ADVICE OF
COUNSEL FOR THE HOLDER THAT SUCH TRANSACTION WILL NOT VIOLATE THE LAWS
OF SUCH COUNTRY. THE HOLDER OF THIS CERTIFICATE, BY ACCEPTANCE OF
THIS CERTIFICATE, ACKNOWLEDGES THAT IT IS BOUND BY THE PROVISIONS OF
THE STOCK PURCHASE AGREEMENT TO THE EXTENT PROVIDED THEREIN."
(c) Allocation of Stock Purchase Consideration and
Interest. All Stock Purchase Consideration shall be paid to each of the Funds
pro rata in accordance with their respective percentage ownership of the
"Company Common Stock" as set forth on Schedule 1.3(c).
SECTION 1.4 Pre-Closing Distribution of Earnings &
Profits. Notwithstanding anything in this Agreement to the contrary, on the
day before Closing, the Company and its Subsidiaries shall have the right to
make a distribution (the "Distribution") to the Funds entirely from the assets
of the Company and its Subsidiaries (including with the proceeds of the
Distribution Financing (as defined in Section 4.20)), in an amount equal to the
sum of the amount of accumulated earnings and profits through the Closing Date
determined by KPMG Peat
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Marwick, LLP, ("KPMG") as described below plus $250,000. The determination of
accumulated earnings and profits for purposes of this Section 1.4 shall take
into account the estimated activities of the Company and its Subsidiaries
through the Closing Date. It is understood and agreed that the Funds do not
anticipate making, and will under no circumstances be obligated to make, the
Distribution unless the Funds shall have received a certificate from the
Purchaser, signed on behalf of the Purchaser by its chief financial officer,
stating that all conditions set forth in Article V (other than the
Distribution) have been satisfied and that the Purchaser will proceed with the
Closing but thereafter the Distribution and the Distribution Financing will not
be contingent on the Closing. The Company shall obtain a certification of the
earnings and profits calculation from KPMG. The Company shall use its
reasonable best efforts to have KPMG provide such certification to the Company
and to the Purchaser within 30 days of the execution of this Agreement.
SECTION 1.5 Pre-Closing Restructuring of the Company and
of Non-Qualifying Businesses.
Subject to the Funds receipt of evidence satisfactory to them
that the conditions set forth in Article V are or will be satisfied within two
days, prior to the Closing the Company and its Subsidiaries will be
restructured in the manner identified in Steps 1 through 4 of Schedule 1.5 (the
"Pre-Closing Restructuring"). The specific legal steps required to effect the
Restructuring will be determined by the Purchaser in consultation with the
Funds and the Company. The Purchaser will be responsible at its cost and
expense for the preparation of all documentation and making all necessary legal
arrangements to effect the Pre-Closing Restructuring, except for any expenses
or costs which the Funds are expressly required to pay under this Agreement
relating to the Stock Purchase and in connection with obtaining any Required
Consent. The Purchaser will consult with the Funds and the Company, and
provide the Funds and the Company a reasonable opportunity to review and
comment on, all documentation and other arrangements relating to the
Pre-Closing Restructuring and the Pre-Closing Restructuring will be effected in
a manner that does not impose any tax or other liability or obligation of any
nature on the Funds. The Funds, the Company, and the Company's Subsidiaries
and, to the extent within the Company's control, the Company's Investment
Entities, shall cooperate with the Purchaser in connection with the matters
contemplated by this Section 1.5. The Company and the Subsidiaries shall not
be required to consummate any material aspect of the Pre-Closing Restructuring
(including, without limitation, any merger or combination of any Subsidiaries
or the Company or any other action that would adversely affect the Company or
any of its Subsidiaries or Investment Entities if the Closing does not occur)
prior to the day preceding the Closing Date and the presentation of reasonable
evidence that the conditions set forth in Article V will be satisfied no later
than the Closing.
SECTION 1.6 Closing Deliveries.
(a) Purchaser. At the Closing, the Purchaser shall: (i)
pay, or cause to be paid, to the Funds by wire transfer in immediately
available funds to one or more bank accounts designated by the Funds an
aggregate amount equal to the Cash Consideration in respect of the
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Stock and the Note Purchase Consideration in respect of the Notes, (ii) deliver
to the Funds certificates, registered in the Funds' names, representing the
Purchaser Common Stock Consideration and the Purchaser Convertible Preferred
Stock Consideration and (iii) execute and deliver to the Funds the Registration
Rights Agreement in accordance with Section 4.6.
(b) The Funds. Contemporaneously with (i) the receipt by
the Funds of the Cash Consideration and the Note Purchase Consideration and
(ii) the receipt by the Funds of the certificates representing the Purchaser
Common Stock Consideration and the Purchaser Convertible Preferred Stock
Consideration, the Funds shall deliver to the Purchaser (x) certificates
representing the Stock, duly endorsed for transfer to the Purchaser, or
accompanied by stock powers duly executed in favor of the Purchaser, with all
necessary transfer stamps attached thereto and cancelled and (y) the Notes duly
endorsed for transfer to the Purchaser.
ARTICLE II
SECTION 2.1 Earnout.
(a) Payment of Preliminary Earn-Out Payment. (i) On the
Earn-Out Payment Date (as defined below), if the Preliminary Earn-Out Ratio (as
defined above) is equal to or greater than 11%, the Purchaser shall at its
election (which shall be exercised in writing delivered to the Funds no later
than the first day of the Trading Period; if no such notice is received by the
Funds prior to the first day of the Trading Period the Purchaser shall be
deemed to have elected to pay cash) either (i) pay to the Funds by wire
transfer in immediately available funds to one or more bank accounts designated
by the Funds an aggregate amount of cash or (ii) issue shares of Purchaser
Common Stock in the manner and number calculated as provided in paragraph (ii)
below (the "Preliminary Earn-Out Payment") equal to the Preliminary Earn-Out
Payment Amount (as defined below).
(ii) The number of shares of Purchaser Common
Stock to be issued to the Funds in payment of the Preliminary Earn- Out Payment
calculated pursuant to Section 2.1(a)(i) above shall be fixed based on the
twenty "Trading Days" (the "Trading Period") weighted average (based on the
average daily volume) "Closing Price" of the Purchaser Common Stock during the
period ending three Trading Days prior to the relevant date of payment. The
"Closing Price" of any day shall mean the last reported sale price, regular way
or in case no such sale takes place on such day, the average of the closing bid
and asked prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange, of the Purchaser Common
Stock, or, if not then listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting
system with respect to securities listed on the principal national securities
exchange on which the Company Purchaser Common Stock are listed or admitted to
trading or, if such Purchaser Common stock are not then listed or admitted into
trading on any national securities exchange, the last quoted price, or if not
so quoted, the average of the high bid and low asked prices in the
over-the-counter
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market, as reported by the National Association of Security Dealers, Inc.
Automated Quotation System, or if such system is no longer in use, the
principal other automated quotations system that may then be in use, or, if
Purchaser Common Stock is not then quoted by any such organization, the average
of the closing bid and asked prices as furnished by a professional market maker
making a market in the Purchaser Common Stock, as selected in good faith by the
board of directors of the Purchaser. "Trading Day" shall mean a day on which
the principal national securities exchange on which the Purchaser Common Stock
are listed or admitted to trading as open for the transactions of business or,
if the Purchaser Common Stock is not listed or admitted to trading on any
national securities exchange, shall mean any day other than a Saturday, a
Sunday or a day on which banking institutions in the State of New York are
authorized or obligated by law or executive order to close.
(iii) Any shares of Purchaser Common Stock issued
pursuant to Section 2.1(a)(ii) above shall contain the legend required under
Section 1.3(b).
(b) Determination of Earn-Out Payment Amount.
(i) Not later than four (4) business days prior
to the Earn-Out Payment Date, the Purchaser shall deliver to the Funds a
certificate (the "Purchaser's Earn-Out Calculation Certificate") in the form
set forth on Schedule 2.1(b) setting forth and certifying the Purchaser's good
faith determination of (A) the Adjusted 1999 EBITDA (as defined below), (B) the
Adjusted Valuation Amount (as defined below), (C) the aggregate Capital
Expenditures (as defined below) incurred after the Closing (and prior to
September 30, 1998) for September Qualifying Projects (as defined below), (D)
the aggregate Capital Expenditures incurred after the Closing (and prior to
December 31, 1998) for December Qualifying Projects (as defined below), (E) the
aggregate Capital Expenditures incurred after the Closing (and prior to March
31, 1999) for March Qualifying Projects (as defined below), (F) 1997/1998 Room
Revenues (as defined below), (G) Lessee 1999 Adjusted Portfolio EBITDA, (H)
Excess Lessee Adjusted EBITDA, (I) the Earn-Out Ratio (as defined below) and
(J) the Earn-Out Payment Amount (as defined below), which certificate shall set
forth in reasonable detail the basis for each of such determinations.
Purchaser's determination of the Earn-Out Ratio as set forth in the Purchaser's
Earn-Out Calculation Certificate is referred to herein as the "Preliminary
Earn-Out Ratio" and Purchaser's determination of the Earn-Out Payment Amount as
set forth in the Purchaser's Earn-Out Calculation Certificate is referred to
herein as the "Preliminary Earn-Out Payment Amount." The amounts set forth in
the Purchaser's Earn-Out Calculation Certificate shall be derived from the
Purchaser's and Lessee's audited financial statements. The Funds shall have
the right to review and copy all of the computations and underlying books and
records of the Purchaser and its Subsidiaries and the Lessee that are relevant
to the determination of any amounts set forth in the Purchaser's Earn-Out
Calculation Certificate, including, without limitation, all underlying books
and records (including auditors work papers) relating to the preparation of the
Purchaser's and Lessee's audited financial statements to the extent they relate
to any of the amounts set forth in Purchaser's Earn-Out Calculation
Certificate, and to have reasonable access to the Purchaser's and its
Subsidiaries' and Lessee's employees, and their respective books and records,
in connection therewith.
<PAGE> 14
8
(ii) The Funds shall notify the Purchaser in
writing ("Funds' Dispute Notice") within forty-five (45) days after receiving
the Purchaser's Earn-Out Calculation Certificate if the Funds disagree with the
Purchaser's determination of the Earn-Out Payment Amount, which notice shall
set forth in reasonable detail each item which the Funds' dispute and the basis
for their disagreement. If no Funds' Dispute Notice is received by the
Purchaser within such forty-five (45) day period, the Purchaser's determination
of the Earn-Out Payment Amount shall be final and binding on the parties and
shall be the final Earn-Out Payment Amount.
(iii) The Funds and Purchaser shall negotiate in
good faith to resolve any disagreement with respect to the final Earn-Out
Payment Amount. If the Funds and the Purchaser are unable to agree with
respect to the final Earn-Out Payment Amount within thirty (30) days of the
receipt by the Purchaser of the Funds' Dispute Notice, the Funds and the
Purchaser shall select a mutually acceptable "big six" accounting firm other
than the accounting firm then engaged by either party (the "Independent
Accounting Firm"), and submit their dispute to the Independent Accounting Firm.
The Independent Accounting Firm will be requested to review only the disputed
items identified and not previously resolved by the Funds and the Purchaser.
The Independent Accounting Firm shall resolve such dispute after reviewing
written submissions of the Funds and the Purchaser supporting their respective
determinations of the items in dispute and stating each of their calculations
of the final Earn-Out Payment Amount. The Independent Accounting Firm shall
make an independent determination of all disputed items and then calculate the
final Earn-Out Payment Amount based upon such independent determination and the
Funds' and Purchaser's determination of all amounts not in dispute. In its
determination, the Independent Accounting Firm shall be entitled to rely on
presentations prepared by the Funds and the Purchaser. The decision of the
Independent Accounting Firm shall be conclusive between, and final and binding
on, the parties hereto. The fees and expenses of the Independent Accounting
Firm will be paid by the party (either the Funds or the Purchaser) whose
calculation of the Earn-Out Payment Amount deviates the furthest from the final
Earn-Out Payment Amount as calculated by the Independent Accounting Firm.
(iv) Upon the final determination of the Earn-Out
Payment Amount in accordance herewith, the Purchaser shall pay to the Funds the
amount (if any) by which the final Earn-Out Payment Amount exceeds the
Preliminary Earn-Out Payment and the Funds shall pay to the Purchaser the
amount (if any) by which the Preliminary Earn-Out Payment exceeds the final
Earn-Out Payment together, in either case with interest thereon from the date
of any Dispute Notice at a rate of interest equal to the "Prime Rate"
established by Wells Fargo Bank, N.A. on the date of payment. Such payment
shall be made within five (5) business days after all disputes, if any, have
been resolved as set forth above. Such payment shall be by wire transfer of
immediately available funds to a bank account specified by the recipient not
less than two (2) business days prior to such payment date. In the event that
the final Earn-Out Payment Amount exceeds the Preliminary Earn-Out Payment by
more than $250,000 then the Purchaser at its election may rather than paying
cash as provided above issue such number of shares of Purchaser Common Stock as
is calculated in accordance with Section 2.1(a)(ii) above.
<PAGE> 15
9
(c) Calculation of Amounts with Respect to Partially-Owned
Hotels. With respect to the Portfolio Hotels set forth on Schedule 2.1(c), the
determinations of Room Revenue, clause (B) and (C) of Adjusted Valuation
Amount, Sale Proceeds, Capital Expenditures, clauses (A) and (B) of EBITDA, and
Capital Expenditures, Lessee 1999 Portfolio Revenue and Lessee 1999 Adjusted
Portfolio EBITDA shall all be adjusted to reflect the pro rata interest in such
Portfolio Hotels as set forth on Schedule 2.1(c).
(d) Allocation of Earn-Out Payment Amount. The Earn-Out
Payment Amount consisting of cash shall be paid and the Earn-Out Payment Amount
consisting of Purchaser Common Stock shall be issued to each of the Funds pro
rata in accordance with their respective percentage ownership of the Company
Common Stock as set forth on Schedule 1.3(c).
(e) Defined Terms. As used herein, the following terms will
have the following meanings:
"Adjusted 1999 EBITDA" means the sum of (A) 1999 EBITDA minus
(B) the 1999 Capital Expenditure Reserve.
"Adjusted Valuation Amount" means the sum of (A) $322,000,000
minus (B) the sum of the cash consideration plus the Fair Market Value
of any non-cash consideration received by the Purchaser and its
Subsidiaries and Investment Entities in connection with the sale,
transfer or other disposition to any Person other than Purchaser or
any of its Subsidiaries or Investment Entities of any asset or other
right owned, possessed or otherwise held immediately prior to the
Closing by the Company, any of the Company's Subsidiaries or any of
the Company's Investment Entities other than any Portfolio Hotel, plus
the outstanding principal amount of any indebtedness directly or
indirectly assumed by the purchaser or transferee in such transaction
plus the Fair Market Value of any other liabilities directly or
indirectly assumed by the purchaser or transferee in such transaction,
minus (C) the aggregate Sale Proceeds from all Asset Sales that close
after the Closing and prior to December 31, 1999, minus (D) the
aggregate amount of all payments received by the Purchaser or its
Subsidiaries after the Closing Date and on or prior to December 31,
1999 (or, if earlier, the date of conversion of the relevant mortgage
note into equity of the maker thereof) in respect of the mortgage
notes currently held by the Company and its Subsidiaries (net of any
deficiency funding or equity contribution by the Purchaser into any
partnership or limited liability company that owns the Portfolio Hotel
relating to the applicable mortgage note) plus (E) in the event that
the Purchaser or its Subsidiaries elects to exercise the termination
rights under any of the telephone service agreements with Innkeepers
Telemanagement & Equipment Corporation ("Itec") set forth on Schedule
3.1(m) hereto so that such agreement is terminated in whole or in part
or the Purchaser otherwise elects to modify any such agreements in
consideration for the payment by the Purchaser to Itec prior to
January 1, 1999, an amount equal to the lesser of (x) all payments
required to be made to Itec upon such termination or modification of
such agreement as currently in effect or (y) the
<PAGE> 16
10
payments actually made by Purchaser or its Subsidiaries in
consideration for such termination or modification.
"Asset Sales" means any direct or indirect sale, assignment,
exchange, transfer or other disposition of any Portfolio Hotel or any
portion thereof or direct or indirect interest therein by the
Purchaser or any Subsidiary of the Purchaser (other than to the
Purchaser or to a Subsidiary of the Purchaser) other than the lease of
any such Portfolio Hotel to the Lessee. For purposes hereof, any
Condemnation shall be deemed to be an Asset Sale.
"Capital Expenditures" means (i) capital expenditures of the
Purchaser, its Subsidiaries and its Investment Entities, in each case
determined in accordance with GAAP applied on a basis consistent with
the Purchaser's audited consolidated financial statements for the year
ended December 31, 1996 and (ii) the sum of the cash consideration
plus the Fair Market Value of any non-cash consideration paid by the
Purchaser or its Subsidiaries or Investment Entities in connection
with the buy-out of any currently existing ground lease of any real
property on which any Portfolio Hotel is located, including without
limitation the Portfolio Hotel located in Fort Worth, Texas, provided
that there shall be excluded from the amount of capital expenditures
all expenditures with respect to the repair or replacement of any
insured loss or damage (but such exclusion shall apply only to the
extent of the insurance proceeds recoverable by the Purchaser, its
Subsidiaries or its Investment Entities).
"Capital Expenditures Reserve" means, with respect to any
period, an amount equal to the product of (A) 0.04 multiplied by (B)
the aggregate Room Revenues for all Portfolio Hotels for such period.
"Completed in Full" means (i) in respect of a Qualifying
Project consisting of the renovation of guest rooms, that not less
than 95% of the guest rooms at the applicable Portfolio Hotel have
been renovated and are available for rent as of the relevant date and
(ii) with respect to all other Qualifying Projects, that such
Qualifying Project requires no additional work as of the relevant date
other than the completion of "punch list" items.
"Condemnation" has the meaning set forth in the Existing Lease
Agreement.
"December Qualifying Project" means a Qualifying Project
(other than a September Qualifying Project or March Qualifying
Project) that is Completed in Full on or prior to December 31, 1998.
"Earn-Out Payment Amount" shall mean the following amount:
(i) If the Earn-Out Ratio is less than 11%, the
Earn-Out Payment Amount will be zero.
<PAGE> 17
11
(ii) If the Earn-Out Ratio is equal to or greater
than 11% but less than 11.5%, then the Earn-Out Payment Amount
will equal the following amount:
(Earn-Out Ratio) - 11% x $1,650,000
----------------------
0.5%
(iii) If the Earn-Out Ratio is equal to or greater
than 11.5% but less than 12%, then the Earn-Out Payment Amount
will equal the sum of $1,650,000 plus the following amount:
(Earn-Out Ratio) - 11.5% x $3,300,000
------------------------
0.5%
(iv) If the Earn-Out Ratio is equal to or greater
than 12% but less than 12.5%, then the Earn-Out Payment Amount
will equal the sum of $4,950,000 plus the following amount:
(Earn-Out Ratio) - 12% x $5,362,500
----------------------
0.5%
(v) If the Earn-Out Ratio is equal to or greater
than 12.5% but less than 13.0%, then the Earn-Out payment
Amount will equal the sum of $10,312,500 plus the following
amount:
(Earn-Out Ratio) - 12.5% x $6,187,500
------------------------
0.5%
(vi) If the Earn-Out Ratio is equal to or greater
than 13.0%, then the Earn-Out Payment Amount will equal
$16,500,000.
"Earn-Out Payment Date" means April 30, 2000 or, if such day
is not a business day, the immediately succeeding business day.
"Earn-Out Ratio" means the quotient, expressed as a percentage
carried out to four decimal places (e.g. 12.1234%), of (A) Adjusted
1999 EBITDA divided by (B) the sum of (1) the Adjusted Valuation
Amount, plus (2) 100% of all Capital Expenditures incurred after the
Closing (and prior to September 30, 1998) for September Qualifying
Projects, plus (3) 75% of all Capital Expenditures incurred after the
Closing (and prior to December 31, 1998) for December Qualifying
Projects, plus (4) 50% of all Capital Expenditures incurred after the
Closing (and prior to March 31, 1999) for March Qualifying Projects,
minus (5) .04 multiplied by 1997/1998 Room Revenues, plus (6) the
Earn-Out Payment Amount.
<PAGE> 18
12
"EBITDA" means, with respect to any Portfolio Hotel for any
period, the sum of (A) total revenue of the Purchaser, its
Subsidiaries and its Investment Entities for such Portfolio Hotel
during such period determined in accordance with GAAP applied on a
basis consistent with the Purchaser's audited consolidated financial
statements for the year ended December 31, 1996 (including any
proceeds of any business interruption or lost rental insurance policy
maintained by the Purchaser but excluding any interest income of the
Purchaser, its Subsidiaries and its Investment Entities) minus (B)
total real estate tax, personal property tax, insurance expense,
ground rent and equipment lease expense of the Purchaser, its
Subsidiaries and its Investment Entities for such Portfolio Hotel
during such period determined in accordance with GAAP applied on a
basis consistent with the Purchaser's audited consolidated financial
statements for the year ended December 31, 1996. Notwithstanding the
foregoing, in the event that any major renovation takes place at a
Portfolio Hotel during 1999 and the 1999 EBITDA for such Portfolio
Hotel that is less than the EBITDA for such Portfolio Hotel during the
year ended December 31, 1997 increased by the amount of any percentage
increase in the RevPar Index from 1997 to 1999, then EBITDA for such
Portfolio Hotel for 1999 will equal the EBITDA for such Portfolio
Hotel in 1997 increased by the amount of any percentage increase in
the RevPar Index from 1997 to 1999.
"Excess Lessee Adjusted EBITDA" means (x) if Lessee 1999
Adjusted Portfolio EBITDA is less than zero, the Lessee 1999 Adjusted
Portfolio EBITDA and ((y) if Lessee 1999 Adjusted Portfolio EBITDA is
zero or greater, the amount, if any, by which (A) Lessee 1999 Adjusted
Portfolio EBITDA exceeds (B) the product of 0.0225 multiplied by
Lessee 1999 Portfolio Revenue.
"Existing Lease" means the form of Lease Agreement between
Sunstone Hotel Investors, L.P., as lessor, and the Lessee, as lessee,
in substantially the form delivered to the Funds prior to the date
hereof.
"Fair Market Value" shall mean, in respect of any asset,
securities or other property (the "Valued Asset"), the fair market
value of the Valued Asset as determined by agreement of the Funds and
the Purchaser. If the Funds and the Purchaser fail to agree on such
fair market value within 20 business days, then the Funds shall
provide the Purchaser with a list of three nationally recognized
investment banking firms or other appraisers with expertise in valuing
similar assets to the Valued Asset. The Purchaser shall, within 5
business days of receiving such list, select one of such three
investment banking firms or other appraisers (the "Appraiser") to
determine the fair market value of the Valued Asset. The Appraiser
shall promptly be jointly instructed by the parties to issue a
certificate to the parties within 20 business days after receipt of
such instructions, setting out its determination of the fair market
value, which determination shall be final and binding on all parties.
The Funds shall pay, and be jointly and severally liable for, one-half
of the fees and expenses of any Appraiser, and the Purchaser shall pay
the other one-half.
<PAGE> 19
13
"Lessee" means Sunstone Hotel Properties, Inc. and any other
lessee of any of the Portfolio Hotels or other Properties.
"Lessee 1999 Adjusted Portfolio EBITDA" means the sum of (A)
Lessee 1999 Portfolio Revenue minus (B) total expenses of the Lessee
(including rents payable to the Lessor) with respect to the Retained
Portfolio Hotels for the year ending December 31, 1999 excluding
interest expense, income tax expense, depreciation expense,
amortization expense, and management fees (which shall include all
fees and other amounts payable to the Manager), in each case excluding
any extraordinary items and determined in accordance with GAAP
applied on a basis consistent with the Lessee's audited financial
statements for the year ended December 31, 1996, provided that when
calculating Lessee 1999 Adjusted Portfolio EBITDA general and
administrative costs of the Lessee will be allocated between the
Retained Portfolio Hotels and all other hotel properties of the Lessee
pro rata based on the weighted average number of guest rooms at the
relevant hotels during calendar year 1999.
"Lessee 1999 Portfolio Revenue" means the total revenue of
Lessee with respect to the Retained Portfolio Hotels for the year
ending December 31, 1999, determined in accordance with GAAP applied
on a basis consistent with the Lessee's audited financial statements
for the year ended December 31, 1996.
"March Qualifying Project" means a Qualifying Project that is
completed in full on or prior to March 31, 1998.
"Manager" means Sunstone Hotel Management, Inc. or any
successor manager.
"1999 Capital Expenditure Reserve" means the product of (A)
0.04 multiplied by (B) 1999 Room Revenues.
"1999 EBITDA" means (i) the aggregate EBITDA (as defined
above) for the year ending December 31, 1999 for all of the Retained
Portfolio Hotels, plus (ii) the earnings before interest, taxes,
depreciation and amortization of the Purchaser, its Subsidiaries and
Investment Entities during 1999 arising from all of the following
assets or other rights owned, possessed or otherwise held by the
Company, its Subsidiaries and its Investment Entities immediately prior
to the Closing: (A) all interest accrued under the mortgage notes
owned on the date hereof (net of any deficiency funding or equity
contribution by the Purchaser into any partnership or limited liability
company that owns the Portfolio Hotel relating to the applicable
Mortgage Note), and (B) the laundry business, sewer plant and other
assets and other rights owned by the Company, its Subsidiaries and its
Investment Entities immediately prior to the Closing, plus (iii) the
amount of Excess Lessee Adjusted EBITDA, if any. In the event any
Portfolio Hotel or other assets are the subject of an Asset Sale or
Condemnation, then the revenues attributable to such Portfolio Hotel or
other asset shall only be included for the period of time during
<PAGE> 20
14
calendar year 1999 during which Purchaser or its Subsidiaries owned
such Portfolio Hotel or assets.
"1999 Room Revenues" means the aggregate Room Revenues for the
year ending December 31, 1999 for all of the Retained Portfolio
Hotels.
"1997/1998 Room Revenues" means the aggregate Room Revenues
for the period beginning on the Closing Date and ending on December
31, 1998 for all of the Portfolio Hotels (whether or not such
Portfolio Hotels are Retained Hotels, provided that for any Portfolio
Hotel that is disposed of in an Asset Sale that closes prior to
December 31, 1998, Room Revenues shall be measured only for the period
prior to the closing of such Asset Sale).
"Other Revenues" means, with respect to any Portfolio Hotel,
any and all revenues generated by or at such Portfolio Hotel,
including, without limitation, by vending machines, honor bar, movie
rental, telephone, concessions and similar services.
"Portfolio Hotels" means each of the hotels set forth on
Schedule 2.1(c), together with all Real Property relating thereto.
"Qualifying Project" means any capital expenditure project
capitalized in accordance with GAAP by the Purchaser or its
Subsidiaries at any Portfolio Hotel (regardless of whether such
Portfolio Hotel is a Retained Portfolio Hotel) including, without
limitation, renovations, expansions and other physical plant upgrades,
provided that recurring or maintenance capital expenditures will be a
Qualifying Project only to the extent they are undertaken in the
ordinary course of business at the usual time therefore.
"Retained Portfolio Hotels" means each of the Portfolio Hotels
that have not been disposed of pursuant to an Asset Sale that closes
on or prior to December 31, 1999.
"RevPar Index" means the "Star Report" for the relevant period
prepared by Smith Travel Research for the competitive market area used
by the Lessee for its own marketing purposes in which the Portfolio
Hotels that is the subject of an adjustment in EBITDA is located.
"Room Revenues" means, with respect to any period and for any
Portfolio Hotel, gross revenue of the Lessee of the relevant Portfolio
Hotel from the rental of guest rooms, whether to individuals, groups
or transients, at the relevant Portfolio Hotel, excluding the
following: (A) the amount of all credits, rebates or refunds to
customers, guests or patrons; (B) all sales taxes or any other taxes
imposed in the rental of such guests rooms; and (C) Other Revenues.
Room Revenues shall be determined in a manner consistent with the past
practice of the Existing Leases; provided, however, that Room Revenues
shall not include any revenues of the Lessee from the Olympia Park
Hotel in
<PAGE> 21
15
Park City, Utah relating to the management or operation of any
condominiums associated with such hotel.
"Sale Proceeds" means, with respect to any Asset Sale, an
amount equal to the sum of (A) the cash consideration minus all of the
Purchaser's or its Subsidiaries' or the Lessee's out of pocket costs
incurred in such Asset Sale plus the Fair Market Value of any non-cash
consideration received by the Company, any of its Subsidiaries or its
Investment Entities, plus (B) the outstanding principal amount of any
indebtedness directly or indirectly assumed by the purchaser or
transferee in such Asset Sale (including, without limitation, the
outstanding principal amount of any indebtedness or other liabilities
of any Subsidiary or Investment Entity that is sold or transferred in
any Asset Sale), plus (C) the Fair Market Value of any other
liabilities directly or indirectly assumed by the purchaser or
transferee in such Asset Sale (including, without limitation, the Fair
Market Value of any other liabilities of any Subsidiary or Investment
Entity that is sold or transferred in any Asset Sale).
"September Qualifying Project" means a Qualifying Project
(other than a March Qualifying Project or December Qualifying Project)
that is Completed in Full on or prior to September 30, 1998.
(f) Covenants of Purchaser. The Purchaser covenants and
agrees with the Funds as follows:
(i) The Purchaser, the Purchaser's Subsidiaries,
the Lessee and, to the extent within the Purchaser's control, the Purchaser's
Investment Entities will afford the officers, employees, auditors and other
agents of the Funds and their general partner reasonable access during normal
business hours to their respective officers,employees, Retained Portfolio
Hotels and other assets owned by the Company and its Subsidiaries at the
Closing and to their respective contracts, commitments, books and records as
the Funds or its general partner, through their officers, employees or agents
may from time to time reasonably request in order to verify any information
required to calculate the Earn-Out Payment.
(ii) The lease agreements entered into by the
Purchaser or its Subsidiaries with the Lessee with respect to each Portfolio
Hotel will have a term of at least five years and will provide for the payment
of annual rent determined by a formula that is the same for 1999 as for prior
and subsequent years (other than for adjustments based on changes in the
consumer price index or any other formula measuring general changes in prices).
(iii) All transactions between the Lessee and any
Affiliate of the Lessee (other than the Purchaser and its Subsidiaries and
Investment Entities) which affect Lessee 1999 Adjusted Portfolio EBITDA shall
be on arm's length terms at least as favorable to the Lessee as would be
obtained with a non-affiliated third party. If the Lessee enters into any such
Affiliate transactions that are on less favorable terms to the Lessee, Lessee
1999 Adjusted
<PAGE> 22
16
Portfolio EBITDA will be appropriately adjusted to reflect the amount that
would result if the preceding sentence had been complied with.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1. Representations and Warranties of the Funds.
The Funds hereby, jointly and severally, represent and warrant to the Purchaser
as follows:
(a) Organization and Qualification of the Company;
Subsidiaries. The Company, each of its Subsidiaries and its Investment
Entities (as defined below) is a Person duly organized, validly existing and in
good standing under the laws of the jurisdiction of its formation and has the
requisite corporate or partnership power and authority to own, lease and
operate its Properties and assets and to carry on its business as it is now
being conducted. The Company, each of its Subsidiaries and its Investment
Entities is duly qualified or licensed as a foreign corporation or partnership
to do business, and is in good standing, in each jurisdiction where the
character of the Properties and assets owned, leased or operated by it or the
nature of its activities makes such qualification or licensing necessary,
except for such failures to be so duly qualified or licensed and in good
standing which would not reasonably be expected to result in a material
liability. Except as set forth on Schedule 3.1(a), the Company has heretofore
made available to the Purchaser a true, correct and complete copy of the stock
ledger, minute book, the Articles of Incorporation and the By-Laws of the
Company, and each corporate Subsidiary of the Company and either the
partnership, operating or joint venture agreement, as applicable, of each
Subsidiary and of each Investment Entity of the Company that is not a
corporation, as applicable, each as amended to date and as currently in effect.
Except as set forth on Schedule 3.1(a), the books of account, minute books,
stock record books and other records of the Company and its Subsidiaries and,
to the knowledge of the Company, its Investment Entities, are complete and
correct in all material respects and have been maintained in accordance with
sound business practices, including the maintenance of an adequate system of
internal controls. Except as set forth on Schedule 3.1(a), the minute books of
the Company and its Subsidiaries contain accurate and complete records of all
meetings held of, and corporate action taken by, the stockholders, the Boards
of Directors, and committees of the Boards of Directors of the Company and its
Subsidiaries, or applicable, and no meeting of any such stockholders, Board of
Directors, or committee has been held for which minutes have not been prepared
and are not contained in such minute books. At the Closing, all of those books
and records will be in the possession of the Company or its Subsidiaries.
(b) Corporate Organization of the Funds. Each Fund is a
limited partnership duly organized and validly existing under the laws of the
state of its formation and has the requisite partnership power and authority to
own, lease and operate its properties and to carry on its business as is now
being conducted, except where the failure to have such power and authority
would not reasonably be expected to have a material adverse effect on the
ability of
<PAGE> 23
17
such Fund to perform its obligations hereunder or under the Registration Rights
Agreement. The Funds have heretofore delivered to Purchaser the names and
percentage ownership interest of each of their partners.
(c) Capitalization. (i) The authorized capital stock of
the Company consists of 1,000 shares of Company Common Stock. As of the date
hereof there are, and as of the Closing Date there will be, 100 shares of
Company Common Stock issued and outstanding, all of which are and will be
validly issued, fully paid and nonassessable and were issued free of preemptive
rights. All of the outstanding Company Common Stock is owned of record and
beneficially by the Funds on the date hereof and will be owned of record and
beneficially by the Funds on the Closing Date. Schedule 3.1(c)(i) provides a
list of the Subsidiaries of the Company and other entities in which the Company
holds, directly or indirectly, an equity interest (those entities in which the
Company has an equity interest but which do not constitute Subsidiaries are
hereinafter referred to as the "Investment Entities") and, as to each such
Subsidiary which is not wholly owned by the Company and each Investment Entity
the identity and percent record ownership of third parties as of the date
hereof, the percentage of capital stock or other equity interests owned by the
Company, directly or indirectly, in such Subsidiaries or Investment Entities
and the percentage of capital stock or other equity interests owned by
Affiliates of the Company or the Funds. Except as set forth in Schedule
3.1(c)(i), each of the outstanding shares of capital stock of each of the
Company's corporate Subsidiaries and Investment Entities directly or indirectly
owned by the Company is duly authorized, validly issued, fully paid and
nonassessable. Except as set forth in Schedule 3.1(c)(i), the Company does not
own, directly or indirectly, less than a 50% equity interest in any Person.
(ii) Except as reflected in Section 3.1(c)(i) or as
reflected on Schedule 3.1(c)(ii), there are outstanding (w) no shares of
capital stock or other equity interests of the Company or any of its
Subsidiaries or Investment Entities, (x) no securities of the Company or any of
its Subsidiaries or Investment Entities convertible into or exchangeable or
exercisable for shares of capital stock or other equity interests of the
Company or any of its Subsidiaries or Investment Entities, (y) no options,
warrants or other rights, agreements, arrangements or commitments pursuant to
which the Company or any of its Subsidiaries or Investment Entities is
obligated to issue, any capital stock, other equity interests or securities
convertible into or exchangeable or exercisable for capital stock of or other
equity interests of the Company or any of its Subsidiaries or its Investment
Entities, and (z) except pursuant to agreements listed on Schedule 3.1(c)(ii),
no equity equivalents or other similar rights, options or warrants, or other
rights, agreements, arrangements or commitments pursuant to which the Company
or any of its Subsidiaries or Investment Entities is obligated to issue any
such equity equivalents or such interests (collectively referred to for
purposes of this Section 3.1(c) as "Company Securities"). Except as set forth
above, or as set forth on Schedule 3.1(c)(ii), there are no outstanding
obligations of the Company or any of its Subsidiaries or, to the knowledge of
the Company, Investment Entities to repurchase, redeem or otherwise acquire any
Company Securities and no subscriptions, agreements or other commitments of any
character pursuant to which the Company or any of its Subsidiaries or, to the
knowledge of the Company, its Investment Entities is or may become obligated to
issue Company Securities or evidencing the
<PAGE> 24
18
right to subscribe for Company Securities. Neither the Company nor any of its
Subsidiaries or Investment Entities has any authorized or outstanding bonds,
debentures, notes or other indebtedness the holders of which have the right to
vote (or convertible or exchangeable into or exercisable for securities having
the right to vote) with the stockholders of the Company or any of its
Subsidiaries or Investment Entities on any matter, except for debt owed by one
of the Company's Subsidiaries or Investment Entities to the Company or a wholly
owned Subsidiary thereof and which is disclosed on Schedule 3.1(c)(ii).
(iii) Schedule 3.1(c)(iii) sets forth a true, correct and
complete list of each partnership agreement, joint venture agreement and
similar agreement (together with all supplements, amendments and modifications
thereto) (collectively, the "Partnership Agreements") with respect to each of
the Company's Subsidiaries and its Investment Entities which is a partnership.
Neither the Company nor any of its Subsidiaries nor, to the knowledge of the
Company, any of its Investment Entities is in default of any of its material
obligations under such Partnership Agreement, nor, except as set forth in
Schedule 3.1(c)(iii), is the Company or any of its Subsidiaries or, to the
knowledge of the Company, any of its Investment Entities, party to an action
alleging such default, nor has the Company or any of its Subsidiaries, or, to
the knowledge of the Company, any of its Investment Entities, received written
notice of any such default.
(d) Authority of the Company Relative to Agreement. The
Company has all necessary corporate power and authority to execute and deliver
this Agreement, to perform its obligations under this Agreement and to
consummate the transactions contemplated hereby. The execution, delivery and
performance of this Agreement by the Company and the consummation by the
Company of the transactions contemplated hereby have been duly authorized by
the Board of Directors of the Company and no other corporate proceedings on the
part of the Company are necessary to authorize this Agreement and the
consummation by the Company of such transactions other than such further
actions as may be required, and will be taken, in connection with the matters
referred to in Section 1.5. This Agreement has been validly executed and
delivered by the Company and, assuming the due authorization, execution and
delivery hereof by the other parties hereto, constitutes a legal, valid and
binding obligation of the Company, enforceable against the Company in
accordance with its terms, except at enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, by general equitable
principles (regardless of whether such enforceability is considered in a
proceeding in equity or at law) or by an implied covenant of good faith and
fair dealing.
(e) Authority of the Funds Relative to Agreements. Each
Fund has all necessary partnership power and authority to execute and deliver
this Agreement and the Registration Rights Agreement, to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The execution, delivery and performance of
this Agreement and the Registration Rights Agreement by such Fund, and the
consummation by such Fund of the transactions contemplated hereby and thereby,
have been duly authorized by all necessary partnership action on the part of
such Fund. This Agreement
<PAGE> 25
19
has been, and on the Closing Date the Registration Rights Agreement will be,
validly executed and delivered by such Fund and, assuming the due
authorization, execution and delivery hereof by the other parties hereto and
thereto, respectively, this Agreement constitutes, and the Registration Rights
Agreement will constitute, a legal, valid and binding obligation of such Fund,
enforceable against such Fund in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally, by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law) or by an
implied covenant of good faith and fair dealing.
(f) Regulatory Approvals for the Company. The execution,
delivery and performance of this Agreement by the Company and the consummation
of the transactions contemplated hereby by the Company do not and will not
require any consent, approval, authorization or permit of, action by, filing
with or notification to, any Governmental Entity except for: (A) applicable
filings pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"), and the expiration or termination of all applicable
waiting periods thereunder; (B) the filing and recordation of the appropriate
documents as required by the Business Corporation Act of the State of Minnesota
(the "MBCA"); (C) to the extent applicable, compliance with the statutory
provisions and regulations relating to real property transfer gains taxes and
real property transfer taxes; (D) such other consents, approvals,
authorizations, filings or notices as are set forth in Schedule 3.1(f); (E)
such consents, approvals, authorizations, permits, actions, filings or
notifications as may be required in connection with the matters referred to in
Section 1.5 and (F) such consents, approvals, authorizations, permits, actions,
filings or notifications which failure to make or obtain would not singly or in
the aggregate reasonably be expected to have a Company Material Adverse Effect.
(g) Regulatory Approvals for the Funds. The execution,
delivery and performance of this Agreement and the Registration Rights
Agreement by each Fund and the consummation of the transactions contemplated
hereby and thereby by each Fund do not and will not require any consent,
approval, authorization or permit of, action by, filing with or notification
to, any Governmental Entity except for applicable filings pursuant to the HSR
Act and filings under the Securities Exchange Act of 1934, as amended, with
respect to the Stock Purchase Consideration.
(h) No Conflicts - Company. Except as disclosed on
Schedule 3.1(h), the execution, delivery and performance of this Agreement by
the Company and the Funds do not and will not: (A) assuming that all consents,
approvals and authorizations contemplated by Section 3.1(f) have been obtained
and all filings described in Section 3.1(f) have been made, conflict with or
violate any Governmental Regulation applicable to the Company or any of its
Subsidiaries or Investment Entities or by which its or any of their respective
Properties or assets are bound; (B) assuming that all consents, approvals and
authorizations under the agreements listed on Schedule 3.1(f) have been
obtained and all filings described in Section 3.1(f) have been made, result in
any breach or violation of or constitute a default under, or give rise to any
right of first refusal, termination, amendment, acceleration or cancellation
of, result in a loss or
<PAGE> 26
20
reduction of rights under, or result in the creation of a Lien on any of the
Properties or assets of the Company or any of its Subsidiaries or Investment
Entities pursuant to, any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to which
the Company or any of its Subsidiaries or, to the knowledge of the Company, any
of its Investment Entities is a party or by which the Company or any of its
Subsidiaries or, to the knowledge of the Company, any of its Investment
Entities or its or any of their respective material Properties or assets are
bound or are subject; (C) conflict with or violate the Articles of
Incorporation or By-Laws of the Company; or (D) conflict with or violate any
partnership or joint venture agreement or articles of incorporation or bylaws,
as the case may be, of any of the Company's Subsidiaries or Investment
Entities, except, in the case of clause (A), (B) or (D), for any such
conflicts, violations, breaches, defaults or other occurrences which (x)
individually or in the aggregate, would not reasonably be expected to have a
Company Material Adverse Effect or (y) arise in connection with the matters
referred to in Section 1.5.
(i) No Conflicts - Funds. The execution, delivery and
performance of this Agreement and the Registration Rights Agreement by each
Fund do not and will not: (A) conflict with or violate the Partnership
Agreement of each Fund, (B) assuming that all consents, approvals and
authorizations contemplated by Section 3.1(g) above have been obtained and all
filings described in such Section have been made, conflict with or violate any
Governmental Regulation applicable to each Fund or by which any it or its
respective properties are bound or (C) result in any breach or violation of or
constitute a default, or give rise to any right of termination, amendment,
acceleration or cancellation of, or result in the creation of a Lien or
encumbrance on any of the property or assets of each Fund pursuant to, any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which each Fund is a party or by
which each Fund is bound.
(j) Financial Statements. (i) The Funds have previously
delivered to the Purchaser the audited consolidated balance sheets of the
Company as at December 31, 1994, 1995 and 1996 and the related audited
consolidated statements of income and changes in cash flows for the years then
ended (collectively, the "Company Audited Financial Statements"). The Company
Audited Financial Statements have been prepared in accordance with GAAP,
applied on a consistent basis (except as may be indicated in the notes thereto)
and fairly present in all material respects the consolidated financial position
of the Company and its consolidated subsidiaries at the respective dates
thereof and the consolidated results of their operations and changes in cash
flows for the period indicated.
(ii) The Funds have previously delivered to the
Purchaser the unaudited consolidated balance sheet of the Company as at June
30, 1997 and the related unaudited consolidated statements of income and
changes in cash flows for the three-month period then ended (collectively, the
"Company Unaudited Financial Statements"). The Company Unaudited Financial
Statements were prepared in a manner consistent with that employed in the
Company Audited Financial Statements. The Company Unaudited Financial
Statements do not contain full footnote disclosures in accordance with GAAP and
are subject to normal year-end adjustments, but otherwise fairly present in all
material respects the consolidated financial position of the
<PAGE> 27
21
Company and its consolidated subsidiaries as at June 30, 1997 and the
consolidated results of their operations and changes in cash flows for the
period indicated.
(iii) Except as set forth on Schedule 3.1(j)(iii) and
except as and to the extent disclosed in the consolidated balance sheet of the
Company as at December 31, 1996 previously furnished to the Purchaser, there
are no liabilities, whether absolute, accrued, contingent or otherwise, of the
Company or any of its Subsidiaries, that would be required to be reflected on,
or reserved against, in a consolidated balance sheet of the Company in
accordance with GAAP, except for (x) liabilities which, singly or in the
aggregate, are immaterial in amount or nature, and (y) liabilities incurred
subsequent to the date of such financial statement by the Company, its
Subsidiaries or its Investment Entities in the ordinary course of business
consistent with past practice or in connection with the matters referred to in
Section 1.5 or the Stock Purchase.
(k) Absence of Certain Changes or Events. Except as
disclosed on Schedule 3.1(k) and except for transactions contemplated by this
Agreement to occur between the date hereof and the Closing, since June 30,
1997, the Company and its Subsidiaries and, to the knowledge of the Company,
its Investment Entities has conducted its business in all material respects
only in the ordinary course, consistent with past practice. Except as
disclosed on Schedule 3.1(k), since June 30, 1997 there has not been prior to
the date hereof, (x) any material adverse change in the business, results of
operations, financial condition or prospects (based on the conduct of the
Company's, its Subsidiaries' and its Investment Entities' business as currently
conducted) of the Company and its Subsidiaries taken as a whole or, to the
knowledge of the Company, the Investment Entities taken as a whole with the
Company and its Subsidiaries other than changes arising out of or relating to
general economic conditions or other factors affecting the hotel industry
generally where the Company and its Subsidiaries and Investment Entities
operate, (y) any material change in any accounting principles, method or
practice used by it or any change in the classification of assets, recognition
of income or expenses or the depreciation or amortization policies or rates
therefore applied (unless required by the Financial Accounting Standards Board
("FASB")), or (z) except in the ordinary course of business consistent with
past practice any actual or, to the knowledge of the Company, threatened,
material damage, material destruction, material loss, conversion, condemnation
or taking by eminent domain related to any material asset or Property of the
Company, its Subsidiaries or, to the knowledge of the Company, its Investment
Entities (including each of the Property Owners), nor are any proceedings
pending with respect to the same. In addition, except as disclosed on Schedule
3.1(k), from June 30, 1997 (April 30, 1997 in the case of (C) below) to the
date hereof, neither the Company nor any of its Subsidiaries nor, to the
knowledge of the Company, its Investment Entities has (A) issued, sold or
delivered or agreed to issue, sell or deliver any additional shares of their
capital stock, partnership, joint venture or other equity interests
(collectively, "Ownership Interests"), or any options, warrants or rights to
acquire any Ownership Interests, or securities convertible into or exchangeable
for Ownership Interests, other than to the Company or its wholly owned
Subsidiaries; (B) acquired or disposed of any material assets or material
Properties or agreed to manage or operate any material asset or material
Property, or entered into any agreement or other arrangement for any such
acquisition, disposition, management or operation, except in each case in the
ordinary course of business
<PAGE> 28
22
consistent with past practice; (C) declared, made, paid or set apart any sum
for any dividend or other distribution to its shareholders, partners or
co-venturers (other than to the Company and its wholly owned Subsidiaries and
other than the Distribution), or purchased or redeemed any of its Ownership
Interests or reclassified any of its Ownership Interests; (D) except to the
minimum extent required under existing Company Plans, increased or accelerated
the wages, salaries, compensation, pension or other benefits payable to any
employee, or granted any severance or termination pay, except to employees who
are not executive officers or directors in accordance with its past business
practice, or entered into any employment agreement with any officer or salaried
employee which is not terminable by the employer, without cause and without
severance or termination payments, upon notice of 30 days or less, or
established, adopted, entered into or amended or terminated any Company Plan or
other Material Contract listed on Schedule 3.1(m)(B); (E) relinquished,
forgiven or canceled any material debts or claims (except with respect to
transient hotel guests in the ordinary course of business consistent with past
practice) or waived any rights of material value; (F) suffered any strike or
other material labor trouble; (G) made or prepaid any material investment, loan
or other extension of credit (other than working capital borrowings) or entered
into any commitment or agreement to make or prepay any material investments,
loans or extensions of credit (other than working capital borrowings) to any
entity, other than a wholly owned Subsidiary of the Company; (H) issued any
indemnity, guaranty, "keep well" agreement or similar assurances of performance
for any other entity, other than a wholly owned Subsidiary, with respect to
which the contingent liability exceeds $100,000 per agreement and $500,000 in
the aggregate; (I) amended its organizational documents or altered, through
merger, liquidation, reorganization, restructuring or any other fashion the
entity structure or the Company's direct or indirect Ownership Interests in any
entity; or (J) made any material Tax elections, settled or compromised any
material income Tax liabilities or deferred the payment of any material Taxes
that came due. For each of the severance agreements listed on Schedule
3.1(k)(D) which indicate that the relevant severance has been paid in full,
such severance has been so paid.
(l) Compliance with Laws.
(i) Except as set forth on Schedule 3.1(l)(i),
the Company, each of its Subsidiaries and, to the knowledge of the Company,
each of the Investment Entities hold all material Licenses and Permits
necessary for the lawful conduct of their respective businesses and the
operation and management of the Properties as currently conducted and all such
Licenses and Permits are valid and in full force and effect.
(ii) The Company, each of its Subsidiaries and,
to the knowledge of the Company, each of the Investment Entities are in
compliance in all material respects with the terms of their respective Licenses
and Permits, and each of the Properties is being operated, leased, managed and
used in accordance in all material respects with the Licenses and Permits.
(iii) The Company, each of its Subsidiaries and,
to the knowledge of the Company, each of the Investment Entities are in
compliance in all material respects with all
<PAGE> 29
23
Government Regulations, excluding the Americans with Disabilities Act (the
"ADA") (as to which no representation or warranty is made pursuant to this
clause (iii)).
(iv) Except as set forth on Schedule 3.1(l)(iv),
as of the date of this Agreement, no investigation, review, inquiry or
proceeding by any Governmental Entity is pending or, to the knowledge of the
Company, threatened with respect to any material matter as to which the
Company, any of its Subsidiaries or any of its Investment Entities is a party
or subject other than any investigation or inquiry as to which neither the
Company, any Subsidiary nor any Investment Entity has received notice of the
conduct thereof.
(v) Except as set forth on Schedule 3.1(l)(v),
as of the date of this Agreement, (A) neither the Company nor any Subsidiary
nor, to the knowledge of the Company, any Investment Entity, has received any
written notice from any Governmental Entity with respect to noncompliance with
the ADA, (B) the Company has in effect an ADA compliance program for the
Company, its Subsidiaries and the Investment Entities and (C) the Company, its
Subsidiaries and the Investment Entities have taken all commercially reasonable
actions to comply with the ADA.
(m) Agreements.
(i) Schedule 3.1(m) and Schedules 3.1(p)(i)
through 3.1(p)(vii) together set forth a true, correct and complete list of all
of the executory contracts and other agreements (together with all supplements,
amendments and modifications thereto) in each of the following categories to
which the Company or any of its Subsidiaries or, to the knowledge of the
Company, any of the Investment Entities is a party or by or to which their
respective assets, properties or businesses are bound or subject as of the date
hereof (the "Material Contracts"):
(A) (x) any agreement, preferential rights or options or
rights of first refusal in each case relating to the acquisition by
the Company, any of its Subsidiaries or, to the knowledge of the
Company, its Investment Entities, of any operating business or the
capital stock or other equity interests of any other Person or
relating to the disposition of the capital stock of the Company, any
of its Subsidiaries or, to the knowledge of the Company, its
Investment Entities, or a material amount of its or their Properties
(including grants of any preferential rights or options or right of
first refusal with respect thereto) and (y) any agreement for the sale
or exchange of assets that provides for payments in excess of $100,000
per annum or $250,000 in the aggregate per agreement;
(B) all Company Plans (as defined in Section 3.1(p)) for
the benefit of, or relating to, any employee, director, former
employee, former director or retiree of the Company, any of the
Company's Subsidiaries or any of its Investment Entities;
<PAGE> 30
24
(C) all employment, consulting, severance, or any similar
agreement, arrangement or contract related to employment or personal
services with Persons who are not officers, directors or employees of
the Company having a remaining term of one year or more, not
terminable by the Company or any Subsidiary without penalty on 90 days
or less notice and involving payments in excess of $50,000;
(D) all collective bargaining or similar arrangements
with any labor union;
(E) all contracts or agreements to indemnify any officers
or directors of the Company, its Subsidiaries or, to the knowledge of
the Company, its Investment Entities;
(F) except for Partnership Agreements and agreements
listed on Schedule 3.1(c)(iii), all agreements of surety, guarantee,
reimbursement, indemnity, "keep well" or agreements to advance funds,
letters of credit, bid bond, temporary performance bond or
indemnification or similar assurances of performance with respect to
which the Company or any of its subsidiaries or, to the knowledge of
the Company, any of the Investment Entities, is the obligor or
beneficiary, with respect to which the contingent liability exceeds
$100,000 (excluding any such arrangement between the Company and its
wholly owned Subsidiaries);
(G) except for documents relating to indebtedness not
exceeding $10,000 in any single instrument and $100,000 for all such
instruments, all indentures, loan agreements, promissory notes,
agreements pledging, mortgaging or otherwise granting a security
interest in collateral or guarantees under which the Company or any of
its Subsidiaries or, to the knowledge of the Company, its Investment
Entities has outstanding indebtedness (including Existing
Indebtedness), obligations or liabilities, contingent or otherwise,
for borrowed money or under which any Person (including the Company,
any of its Subsidiaries or, to the knowledge of the Company, any of
the Investment Entities) has outstanding indebtedness, obligations or
liabilities, contingent or otherwise, for borrowed money with the
Company, any of its Subsidiaries or, to the knowledge of the Company,
any of the Investment Entities (set forth in Schedule 3.1(m)(i)(G) is
a list by Property of the Existing Indebtedness, which identifies the
borrower, creditor, outstanding principal balance as of June 29, 1997,
maturity date and interest rate with respect to each Existing Loan,
and specifying whether such Existing Loan is non-recourse);
(H) excluding group reservations for transient hotel
guests, all material Property Contracts and, to the knowledge of the
Company, all proposed material Property Contracts being negotiated;
<PAGE> 31
25
(I) all Ground Leases and material Space Leases;
(J) all commitments to make capital expenditures, capital
additions or capital improvements (including, without limitations,
tenant improvements) not reflected in the Capital Expenditure Budget
and involving an expenditure in excess of $100,000;
(K) all agreements (other than Franchise Agreements,
Partnership Agreements, REAs and Ground Leases) which limit in any
material respect the right of the Company or any of its Subsidiaries
or, to the knowledge of the Company, any of the Investment Entities to
engage in any business (including without limitation, the ownership,
operation or sale of hotels); and
(L) any agreements or contracts (of the types not covered
by clauses (A) through (J) above and except for Permitted Liens),
which are material to the business, operations, Properties, assets or
results of operations of the Company and its Subsidiaries taken as a
whole and which are not terminable by the Company without penalty on
90 days' notice or less.
(ii) The Company has made available to the
Purchaser true, correct and complete copies of the Material Contracts, except
for the indemnification agreements identified as numbers 5, 6 and 18 on
Schedule 3.1(k)(E), which the Company represents are the same in form and
substance as the other indemnification agreements identified on such Schedule.
Each of the Material Contracts is valid and binding, in full force and effect.
Except as set forth on Schedule 3.1(m)(ii), neither the Company nor any of its
Subsidiaries or, to the knowledge of the Company, its Investment Entities; (x)
is in material breach or default under any Material Contract; (y) has received
any written notice of default, acceleration, cancellation or termination (or
any other written notice with like or similar effect) under any Material
Contract; or (z) has any knowledge of any default or fact which would, to the
knowledge of the Company, with the giving of notice or passage of time or both,
constitute a material default by the Company, its Subsidiaries or its
Investment Entities under any Material Contract, and the Company has no
knowledge that any other party to any Material Contract is in material breach
or default thereof.
(iii) The Company has made available to the
Purchaser true, correct and complete copies of all material agreements
governing transactions that have been consummated during the five years
preceding the date of this Agreement that have involved (i) the sale of capital
stock of any of the Subsidiaries or merger of any of the Subsidiaries with and
into another entity (each, a "Corporate Sale") and (ii) the acquisition by the
Company or any of the Subsidiaries of the capital stock of another entity or
merger of another entity with and into the Company or any of the Subsidiaries
(each, a "Corporate Acquisition"). During the five years preceding the date of
this Agreement, the only Corporate Sale was the sale of all of the capital
stock of Anderson's Formal Wear, Inc. ("Anderson's") to Frana and Associates,
Inc. on June 30, 1997 pursuant to that certain Stock Purchase Agreement dated
April 4, 1997, and the only Corporate Acquisition was the acquisition through
July 31, 1997 of approximately 98% of the
<PAGE> 32
26
common stock of GMX Corporation pursuant to that certain Offer to Purchase and
related Letter of Transmittal dated December 20, 1996. On the date the
Corporate Sale of Anderson's was consummated Anderson's was not obligated to
guarantee any indebtedness and had no other guarantees, except guarantees in
the ordinary course of business to purchase clothing from suppliers, and, to
the best knowledge of the Company, nothing had occurred prior to the date of
the consummation of such Corporate Sale that would give rise to material
liabilities on the part of the Company or any of its Subsidiaries to the
purchaser of Anderson's for the violation of Environmental Laws.
(n) Permitted Liens. The Company, the Subsidiaries and,
to the knowledge of the Company, each of its Investment Entities and each
Property is in compliance in all material respects with the terms of Permitted
Liens applicable to it except to the extent non- compliance would not,
individually or in the aggregate, reasonably be expected to result in any
material liability or disrupt the business of the Company as currently
operated.
(o) Absence of Litigation. Except as disclosed on
Schedule 3.1(o) or the financial statements or the notes thereto delivered to
the Purchaser pursuant to Sections 3.1(j)(ii) as of the date hereof, there are
no suits, claims, actions, proceedings or, to the knowledge of the Company,
investigations pending or threatened against the Company, or any of the
Subsidiaries or any of its Investment Entities or any of their Properties or
rights before any court, arbitrator or administrative, governmental or
regulatory authority or body, domestic or foreign, other than ordinary course
claims of the type adequately insured against (subject to self-insured
retentions and deductibles) by the Company, its Subsidiaries and, to the
knowledge of the Company, its Investment Entities. Neither the Company nor any
of its Subsidiaries or, to the knowledge of the Company, any of its Investment
Entities, nor any of their respective Properties is or are subject to any
material order, writ, judgment, injunction, decree, determination or award that
remains unsatisfied or in effect.
(p) Employee Matters. (i) Schedule 3.1(p)(i) lists each
"employee benefit plan" (within the meaning of section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), and any other
bonus, stock option, stock purchase, stock appreciation right, incentive,
deferred compensation, supplemental retirement, severance and other similar
material fringe or employee benefit plans, programs, policies or arrangements,
any employment, consulting, indemnification or executive compensation
agreements for the benefit of, or relating to, any employee, former employee or
retiree of the Company, currently maintained by the Company or under which the
Company has any liability in respect of current or former employees
(collectively referred to as the "Company Plans"). True, correct and complete
copies of the following have been made available to the Purchaser: (A) all
Company Plans and any trust agreement or other funding arrangement related
thereto; (B) the most recent annual report (Form 5500 Series) with respect to
each Company Plan; (C) the most recent summary plan description (as described
in section 102(a)(1) of ERISA); and (D) the most recent actuarial report of
each Title IV Plan (as defined in Section 3.1(p)(v) below)).
<PAGE> 33
27
(ii) Each Company Plan has been administered in
compliance with ERISA, the Code, the terms of such Company Plan and all laws,
rules and regulations applicable thereto, except where the failure to do so
would not reasonably be expected to result in a material liability.
(iii) The Company is not required to contribute
to, and has not been required within the preceding six years to contribute to,
any "multiemployer plan" (within the meaning of section 3(37) of ERISA).
(iv) Each Company Plan which is intended to be
qualified within the meaning of Section 401(a) of the Code has received a
favorable determination letter from the Internal Revenue Service ("IRS") as to
its qualification, and to the best knowledge of the Company, nothing has
occurred that would reasonably be expected to result in the loss of such
status.
(v) Schedule 3.1(p)(v) sets forth each Company
Plan (other than a multiemployer plan) that is subject to Title IV of ERISA (a
"Title IV Plan"). Except as set forth on Schedule 3.1(p)(v), no accumulated
funding deficiency or unpaid required installments within the meaning of
section 412 of the Code exists, nor has there been issued a waiver or variance
of the minimum funding standards imposed by the Code with respect to any Title
IV Plan, nor has any lien been created under section 302(f) of ERISA or
security been required under section 307 of ERISA.
(vi) Except as set forth on Schedule 3.1(p)(vi),
no Company Plan or agreement, program, policy or other arrangement by or to
which the Company is a party, is bound or is otherwise liable, by its terms or
in effect would reasonably be expected to require any payment or transfer of
money, property or other consideration on account of or in connection with the
sale, lease, exchange or transfer of either any shares of stock or any of the
assets of the Company (whether or not any such payment would constitute a
"parachute payment" or "excess parachute payment" within the meaning of Section
280G of the Code).
(vii) Schedule 3.1(p)(vii) sets forth a list of
all collective bargaining agreements to which the Company, its Subsidiaries or
Investment Entities is a party as of the date hereof and any pending grievances
thereunder. As of the date hereof, no demand for recognition made by any labor
organization is pending with respect to any employees of the Company or its
Subsidiaries. To the knowledge of the Company, the Company has not at any time
during the last two years (a) had, nor is there now threatened, a material
strike, picketing, work stoppage, work slowdown, lockout or other labor trouble
or dispute or grievance under any collective bargaining agreement or (b)
engaged in any unfair labor practice or discriminated on the basis of age or
other discrimination prohibited by applicable law in their employment
conditions or practices. As of the date hereof, there are no representation
petitions, unfair labor practice or age discrimination charges or complaints,
or other charges or complaints alleging illegal discriminatory practices by the
Company, pending or to the knowledge of the Company threatened before the
National Labor Relations Board or any other governmental body, which
<PAGE> 34
28
would be reasonably likely to result in a material liability. The Company has
not incurred any liability or obligation under the Worker Adjustment and
Retraining Notification Act or similar state laws, which remains unpaid or
unsatisfied.
(viii) Except as disclosed in Schedule
3.1(p)(viii), or as required by Section 4980B of the Code, no Company Plan
provides medical or insurance benefits to current or former employees (or their
eligible dependents) beyond their retirement or other termination of
employment.
(ix) To the best knowledge of the Company, with
respect to the Company Plans, no condition or event exists which could
reasonably be expected to subject the Company or any of the Company Plans to
any liability under ERISA, the Code or any other applicable laws (excluding
liabilities with respect to the payment of contributions and premiums in the
ordinary course), except where such liability would not reasonably be expected
to have a Company Material Adverse Effect.
(x) As of the date hereof, the Company has not
received notice of any pending investigations by any governmental agency with
respect to any of the Company Plans that would reasonably be expected to
subject the Company or any of the Company Plans to any liability or expense.
(q) Tax Matters. Except as disclosed in Schedule 3.1(q):
(i) the Company and each of its Subsidiaries
and, to the knowledge of the Company, each of the Investment Entities, and any
consolidated, combined, unitary or aggregate group for Tax (as hereinafter
defined) purposes of which the Company or any of its Subsidiaries and
Investment Entities is or has been a member has timely filed all Tax Returns
(as hereinafter defined) required to be filed by it, has paid all Taxes
required to be paid whether or not shown to be due prior to the date any fine
or penalty would be assessed thereon or has provided adequate reserves in its
financial statements for any Taxes that have not been paid, whether or not
shown as being due on any returns.
(ii) (A) No deficiency for any Taxes has been
proposed, asserted or assessed against the Company or its Subsidiaries and, to
the knowledge of the Company, its Investment Entities that has not been
resolved and paid in full, (B) there are no waivers or comparable consents
regarding the application of the statute of limitations with respect to any
material Taxes or Tax Returns of the Company or any of its Subsidiaries and, to
the knowledge of the Company, its Investment Entities and (C) there are no
present or proposed audits, examinations, administrative proceedings or court
proceedings with respect to any Taxes or Tax Returns of the Company or its
Subsidiaries and, to the knowledge of the Company, its the Investment Entities.
<PAGE> 35
29
(iii) None of the Company or any of its
Subsidiaries and, to the knowledge of the Company, its Investment Entities is a
party to or liable under any material agreement for the allocation, payment or
sharing of Taxes.
(iv) There are no material Liens (other than
Permitted Liens) for Taxes upon the Properties or assets of the Company or any
of its Subsidiaries and, to the knowledge of the Company, its Investment
Entities except for liens for Taxes not yet due and payable.
(v) As used herein, "Taxes" shall mean any
federal, state, local or foreign taxes of any kind, including but not limited
to those on or measured by or referred to as income, gross receipts, sales,
use, ad valorem, franchise, profits, license, withholding, payroll, employment,
excise, severance, stamp, occupation, premium, value added, property or
windfall profits taxes, customs, duties or similar fees, assessments or charges
of any kind whatsoever, together with any interest and any penalties, additions
to tax or additional amounts imposed by any governmental entity, domestic or
foreign. As used herein, "Tax Return" shall mean any return, report or
statement required to be filed with any governmental entity with respect to
Taxes.
(r) Environmental Matters. Except as set forth in
Schedule 3.1(r) or in the Environmental Reports previously made available to
Purchaser and, with respect to clauses (i) through (iv), except for matters
that would not, individually or in the aggregate, reasonably be expected to
result in material liability (other than, for purposes of clauses (iii) and
(iv), expenses incurred for ordinary course maintenance and disposal practices
consistent with past practices and liabilities that could result in connection
with renovation or demolition of any Property or portion thereof):
(i) The operations of the Real Property, the
Company, its Subsidiaries and, to the knowledge of the Company, its Investment
Entities are in compliance with applicable Environmental Laws;
(ii) The Company, its Subsidiaries and the
Investment Entities and the Properties are in compliance with the terms of
their Licenses and Permits required under applicable Environmental Laws;
(iii) There has been no Release and Hazardous
Materials are not present at any parcel of Real Property (whether currently or
previously owned or operated by the Company, its Subsidiaries, or its
Investment Entities);
(iv) No friable asbestos is present in any of
the properties; and
(v) (A) No Environmental Claims are pending
against the Company or any of its Subsidiaries or their Properties or, to the
knowledge of the Company, any Investment Entity or any of its Properties, (B)
neither the Company, its Subsidiaries, nor to the
<PAGE> 36
30
knowledge of the Company, any of the Investment Entities has knowledge or
written notice of any threatened Environmental Claim against the Company, its
Subsidiaries, the Investment Entities or the Real Property, and (C) no order,
judgement or decree providing for a remedial obligation has been imposed on the
Company, any of its Subsidiaries or any of their Properties and, to the
knowledge of the Company, any of the Investment Entities or any of the Real
Property under any applicable Environmental Law.
(s) Properties.
(i) Each Property Owner (a true, correct and
complete list of which is set forth on Schedule 3.1(s)(i)) has (A) good and
marketable fee simple title to the Real Property owned by such Property Owner,
free and clear of all Liens other than the Permitted Liens applicable to it,
and (B) good and marketable leasehold title to the Real Property leased by such
Property Owner, free and clear of all Liens other than the Permitted Liens
applicable to it.
(ii) Except as set forth on Schedule 3.1(s)(ii),
as the date hereof, neither the Company nor any Property Owner has knowledge
of, nor has it received any notice of, any non-recurring or special taxes or
assessments or any planned public improvements that may result in a
non-recurring or special tax or assessment with respect to the Company, its
Subsidiaries, its Investment Entities or the Properties.
(iii) The Company, its Subsidiaries or its
Investment Entities has (A) good title to all of the Personal Property owned by
such Person, free and clear of all Liens other than Permitted Liens applicable
to it and (B) a valid leasehold interest to all Personal Property leased by
such Person, free and clear of all Liens other than Permitted Liens applicable
to it. Each parcel of Real Property which is a hotel contains all levels of
Personal Property and inventories of supplies necessary to operate such hotel
in the ordinary course of business, consistent with past practice.
(iv) The lessee under each Ground Lease and
under each Space Lease (where the Company, or any of its Subsidiaries or its
Investment Entities is lessee) is in peaceful and quiet possession of the
Property demised thereunder.
(v) As of the date hereof, neither the Company,
nor any of its Subsidiaries or any of its Investment Entities has knowledge of
any change or proposed change in the route, grade or width of, or otherwise
affecting, any street, creek or road adjacent to or serving any parcel of Real
Property. Within the period of eighteen (18) months prior to the date hereof,
no portion of any of the Properties has suffered any material damage or had its
operation curtailed in any material respect by fire, flood or other casualty
which has not heretofore been repaired and restored to its original or better
condition and paid or provided for, all in accordance with all applicable
Governmental Regulations.
<PAGE> 37
31
(vi) All utilities required for the operation of
each parcel of Real Property either enter such Real Property through adjoining
streets, or they pass through adjoining land, do so in accordance with valid
public easements or irrevocable private easements, and all of said utilities
are installed and operating.
(vii) Except as set forth on Schedule
3.1(s)(vii), the present zoning (including, by means of special variances of
record) of each parcel of Real Property permits the current use thereof
(excluding isolated instances of non-compliance which are immaterial in
nature). Neither the Company, its Subsidiaries, nor, to the knowledge of the
Company, any of the Investment Entities, has knowledge of any fact, proceeding
or threatened action or proceeding which could materially adversely affect the
present zoning of any parcel of Real Property.
(viii) There are no (A) unrecorded easements which
are not shown on the Surveys, (B) strips or gores with respect to or affecting
any parcel of Real Property (or portion thereof) which cause any related
parcels of Land to be non-contiguous or (C) encroachments either by the
Improvements on any property owned by others or by any improvement owned by
others on any parcel of the Real Property (other than encroachments which are
immaterial in nature). Each parcel of Real Property has a right to access to
and from such parcel of Real Property.
(ix) Schedule 3.1(s)(ix) contains (A) a true,
correct and complete list of all Title Insurance Policies, each of which is in
full force and effect and (B) a list of all Title Reports previously delivered
to the Purchaser or the Purchaser covering those Real Properties not insured by
Title Insurance Policies.
(t) Condition of Improvements. Except as disclosed on
Schedule 3.1(t) or in the Report of Marshall and Stevens previously provided to
Purchaser, the Improvements are in a good state of condition, normal wear and
tear excepted, except where the failure to be in such condition would not,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect.
(u) Insurance. Schedule 3.1(u) contains an accurate and
complete list of all material policies of insurance (other than Title Insurance
Policies), including the amounts thereof and all deductibles, maintained by the
Company, each of its Subsidiaries and, to the knowledge of the Company, its
Investment Entities with respect to its business, employees, Properties and
assets. To the knowledge of the Company, except for such matters that,
individually or in the aggregate, would not reasonably be expected to result in
a material liability, each such policy is in full force and effect and,
assuming consummation of the transactions contemplated hereby, is free from any
right of termination on the part of the insurance carriers. To the knowledge
of the Company no notice of cancellation of any such policy has been received
by the Company or the relevant Subsidiary or Investment Entity. Except as set
forth on Schedule 3.1(u), there are no outstanding requirements or written
recommendations by any insurance company that issued a policy with respect to
any of the Properties and assets of the Company, any of its
<PAGE> 38
32
Subsidiaries or the Investment Entities or by any Board of Fire Underwriters or
other body exercising similar functions or by any Governmental Entity requiring
or recommending any material repairs or other material work to be done on or
with respect to any of the Properties and assets of the Company, any of its
Subsidiaries or, to the knowledge of the Company, its the Investment Entities,
or requiring or recommending any material equipment or facilities to be
installed on or in connection with any of the Properties or assets of the
Company, any of its Subsidiaries or, to the knowledge of the Company, its
Investment Entities.
(v) Transactions with Affiliates. Other than matters
referred to in Schedule 3.1(v) and transactions among any of the Company and
its Subsidiaries and Investment Entities, there are no material contracts,
agreements or transactions between the Company, any of its Subsidiaries or its
Investment Entities, on the one hand, and the Funds or any Affiliate of the
Funds, on the other.
(w) Investment Intention. Each Fund is acquiring its
portion of the Purchaser Common Stock Consideration and the Purchaser
Convertible Preferred Stock Consideration solely for its own account for the
purpose of investment and not with a view to or for sale in connection with any
distribution thereof.
(x) Ability to Bear Risk. The financial situation of
each Fund is such that it can afford to bear the economic risk of holding the
unregistered shares of Purchaser Common Stock and Purchaser Convertible
Preferred Stock for an indefinite period and such Fund can afford to suffer the
complete loss of its investment in the Purchaser Common Stock Consideration and
the Purchaser Convertible Preferred Stock Consideration.
(y) Access to Information; Evaluation of Risks. (i)
Each Fund has had access to and/or has received and carefully reviewed
information (including, without limitation, financial information) regarding
the Purchaser and the shares of Purchaser Common Stock and Purchaser
Convertible Preferred Stock and has been granted the opportunity to ask
questions of, and receive answers and request information from, representatives
of the Purchaser concerning the terms and conditions of the acquisition of the
Purchaser Common Stock Consideration and the Purchaser Convertible Preferred
Stock Consideration and to obtain any additional information which it deems
necessary in connection with its decision to acquire the Purchaser Common Stock
Consideration and the Purchaser Convertible Preferred Stock Consideration and
(ii) its knowledge and experience in financial and business matters is such
that it is capable of evaluating the merits and risks of the investment in the
Purchaser Common Stock Consideration and Purchaser Convertible Preferred Stock
Consideration.
(z) Shares Not Registered. Each Fund understands and
acknowledges that the shares of Purchaser Common Stock Consideration and the
Purchaser Convertible Preferred Stock Consideration have not been registered
under the Securities Act or any other applicable securities law, and that
unless so registered may not be offered, sold or otherwise transferred except
in compliance with the registration requirements of the Securities Act or any
other applicable
<PAGE> 39
33
securities law, pursuant to an exemption therefrom or in a transaction not
subject thereto and in each case in compliance with the conditions for transfer
set forth in Section 4.13 below.
(aa) Status of Fund. Each Fund is an "accredited
investor" as defined under the Securities Act.
(ab) Brokers. No broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of the Company or the Funds.
SECTION 3.2 Representations and Warranties of the
Purchaser. The Purchaser hereby represents and warrants to the Funds and the
Company as follows:
(a) Corporate Organization. The Purchaser is a
corporation duly organized, validly existing and in good standing under the
laws of the state of its incorporation and has the requisite corporate power
and authority for such entity to own, lease and operate its properties and to
carry on its business as it is now being conducted.
Each Subsidiary of the Purchaser is a Person duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
formation and has the requisite corporate or partnership power and authority to
own, lease and operate its Properties and assets and to carry on its business
as it is now being conducted, except where the failure to be duly organized and
in good standing or to have such power and authority would not, individually or
in the aggregate, reasonably be expected to have a Purchaser Material Adverse
Effect. The Purchaser and each of its Subsidiaries is duly qualified or
licensed as a foreign corporation or partnership to do business, and is in good
standing, in each jurisdiction where the character of the properties and assets
owned, leased or operated by it or the nature of its activities makes such
qualification or licensing necessary, except for such failures to be so duly
qualified or licensed and in good stand which would not, individually or in the
aggregate, reasonably be expected to have a Purchaser Material Adverse Effect.
(b) Capitalization. (i) The authorized capital stock of
the Purchaser consists of 50,000,000 shares of Purchaser Common Stock, $.01 par
value and 10,000,000 shares of Preferred Stock, $0.01 par value per share
("Purchaser Preferred Stock"). As of July 29, 1997, (i)(A) 20,386,635 shares
of Purchaser Common Stock were issued and outstanding, all of which were
validly issued, fully paid and nonassessable and were issued free of preemptive
rights and (B) an aggregate of 2,319,811 shares of Purchaser Common Stock were
reserved for issuance and issuable upon or otherwise deliverable in connection
with the Purchaser's dividend reinvestment and stock purchase plan or the
exercise of outstanding options or other rights to acquire shares of Purchaser
Common Stock (other than pursuant to the conversion of or exchange for
operating partnership units of Sunstone Hotel Investors, L.P.). As of the date
hereof, no shares of Purchaser Preferred Stock are issued and outstanding. As
of July 29, 1997, 2,562,560 shares of the Purchaser Common Stock were reserved
for issuance and/or issuable
<PAGE> 40
34
upon or otherwise deliverable in connection with the conversion of or exchange
for operating partnership units of Sunstone Hotel Investors, L.P.
(c) Authority Relative to Agreements. The Purchaser has
all necessary power and authority for such entity to execute and deliver this
Agreement and the Registration Rights Agreement, to perform its obligations
hereunder and thereunder and to consummate the transactions contemplated hereby
and thereby. The execution, delivery and performance of this Agreement by the
Purchaser, and the consummation by the Purchaser of the transactions
contemplated hereby, have been duly authorized by the Board of Directors of the
Purchaser and no other corporate or other proceedings on the part of the
Purchaser are necessary to authorize this Agreement and the consummation by the
Purchaser of such transactions (including without limitation, the amendment to
the Certificate of Incorporation of the Purchaser by the Certificate of
Designation). The execution, delivery and performance of the Registration
Rights Agreement by the Purchaser and the consummation by the Purchaser of the
transactions contemplated thereby have been duly authorized by all necessary
corporate action by the Purchaser. This Agreement has been duly executed and
delivered by the Purchaser and, assuming due authorization, execution and
delivery by the other parties hereto, constitutes a legal, valid and binding
obligation of the Purchaser, enforceable against the Purchaser in accordance
with its terms except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally, by general equitable principles
(regardless of whether such enforceability is considered in a proceeding in
equity or at law) or by an implied covenant of good faith and fair dealing. On
the Closing Date, the Registration Rights Agreement will be validly executed
and delivered by the Purchaser and, assuming the due authorization, execution
and delivery hereof by the Fund constitute a legal, valid and binding
obligation of the Purchaser, enforceable against the Purchaser in accordance
with its terms, except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally, by general equitable principles
(regardless of whether such enforceability is considered in a proceeding in
equity or at law) or by an implied covenant of good faith and fair dealing.
(d) No Conflict; Required Filings and Consents. (i) The
execution, delivery and performance of this Agreement by the Purchaser do not
and will not: (A) conflict with or violate the Articles of Incorporation or
By-Laws of the Purchaser, (B) assuming that all consents, approvals and
authorizations contemplated by subsection (ii) below have been obtained and all
filings described in such subsection have been made, conflict with or violate
any Governmental Regulation applicable to the Purchaser or any of its
Subsidiaries or by which any of them or their respective properties are bound
or (C) assuming that all consents, approvals and authorizations contemplated by
subsection (ii) below have had been obtained and all filings described in such
clause have been made, result in any breach or violation of or constitute a
default, or give rise to any right of termination, amendment, acceleration or
cancellation of, or result in the creation of a Lien or encumbrance on any of
the property or assets of the Purchaser or any of its Subsidiaries pursuant to,
any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which the Purchaser or
any
<PAGE> 41
35
of its Subsidiaries is a party or by which the Purchaser or any of its
Subsidiaries or any of their respective properties are bound.
(ii) The execution, delivery and performance of
this Agreement by the Purchaser and the consummation of the transactions
contemplated hereby by the Purchaser do not and will not require any consent,
approval, authorization or permit of, action by, filing with or notification
to, any Governmental Entity, except for: (A) applicable filings pursuant to
the HSR Act and the expiration or termination of all applicable waiting periods
thereunder, (B) applicable filings under state securities, takeover or Blue Sky
laws, (C) compliance with the statutory provisions and regulations relating to
any Real Property transfer gains tax or Real Property transfer tax, (D) the
filing with the Securities and Exchange Commission (the "SEC") of applicable
filings under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") as may be required in connection therewith, and (E) such other consents,
approvals, authorizations, permits, actions, filings or notifications the
failure of which to make or obtain would not, individually or in the aggregate,
reasonably be expected to have a Purchaser Material Adverse Effect or arise in
connection with the matters referred to in Section 1.5.
(e) SEC Filings; Financial Statements. (i) The
Purchaser has filed all forms, reports, statements and other documents required
to be filed with the SEC since January 1, 1996 (collectively, the "SEC
Reports"). The SEC Reports (including the Registration Statement on Form S-1,
Registration No. 33-84346), including all the SEC Reports filed after the date
of this Agreement and prior to the Closing Date, were or will be in compliance
in all material respects with the applicable requirements of the Securities Act
or the Exchange Act, as applicable, each as in effect on the date so filed.
None of the SEC Reports filed by the Purchaser, including all the SEC Reports
filed after the date of this Agreement and prior to the Closing Date,
contained, or will contain when filed, 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 the light of the circumstances
under which they were made, not misleading.
(ii) The consolidated financial statements of the
Purchaser for each of the three fiscal years ended December 31, 1994, 1995 and
1996, and for the three month period ended March 31, 1997 included in SEC
Reports comply, and the financial statements included in all SEC Reports filed
after the date of this Agreement and prior to the Closing Date will comply, as
to form in all material respects with applicable accounting requirements and
with the published rules and regulations of the SEC with respect thereto, have
been or will be prepared in accordance with GAAP applied on a consistent basis
(except as may be indicated in the notes thereto) and do or will fairly present
in all material respects the consolidated financial position of the Purchaser
and its consolidated Subsidiaries at the respective dates thereof and the
consolidated results of their operations and changes in cash flows for the
periods indicated.
(iii) Except as and to the extent disclosed in the
consolidated balance sheet of the Purchaser as at December 31, 1996, and the
SEC Reports or any financial statements or the notes thereto contained in the
SEC Reports filed since such date, there are no liabilities, whether absolute,
accrued, contingent or otherwise, of the Purchaser or any of its Subsidiaries,
<PAGE> 42
36
that would be required to be reflected on, or reserved against, in a
consolidated balance sheet of the Purchaser in accordance with GAAP, except for
(i) liabilities which, singly or in the aggregate, are immaterial in amount or
nature, and (ii) liabilities incurred subsequent to the date of such financial
statement by the Purchaser or its Subsidiaries in the ordinary course of
business consistent with past practice.
(f) Absence of Certain Changes or Events. Since March
31, 1997, the Purchaser and its Subsidiaries and, to the knowledge of the
Purchaser, its Investment Entities has conducted its business in all material
respects only in the ordinary course, consistent with past practice and except
as disclosed in Purchaser's SEC Reports or any financial statements or the
notes thereto contained in the SEC Reports since March 31, 1997, there has not
been prior to the date hereof, (x) any material adverse change in the business,
results of operations, financial condition or prospects of the Purchaser and
its Subsidiaries taken as a whole or, to the knowledge of the Purchaser, its
Investment Entities taken as a whole with the Purchaser and its Subsidiaries,
other than changes arising out of or relating to general economic conditions or
other factors affecting the hotel industry generally where the Purchaser, its
Subsidiaries and its Investment Entities own hotel properties or (y) except in
the ordinary course of business consistent with past practice and except for
such matters that would not reasonably be expected to have a Purchaser Material
Adverse Effect, any actual or, to the knowledge of the Purchaser, threatened,
damage, destruction, loss, conversion, condemnation or taking by eminent domain
related to any material asset or Property of the Purchaser, its Subsidiaries
or, to the knowledge of the Purchaser, its Investment Entities, nor are any
proceedings pending with respect to the same.
(g) Absence of Litigation. Except as disclosed in the
SEC Reports filed with the SEC prior to the date hereof or the financial
statements or the notes thereto contained in the SEC Reports filed with the SEC
prior to the date hereof, and except as would not, individually or in the
aggregate, reasonably be expected to result in a Purchaser Material Adverse
Effect, as of the date hereof, there are no suits, claims, actions, proceedings
or investigations pending or, to the knowledge of the Purchaser, threatened
against the Purchaser or any of its Subsidiaries or, to the knowledge of the
Purchaser, any of its Investment Entities or any Properties or rights of the
Purchaser or any of its Subsidiaries or, to the knowledge of the Purchaser, any
of its Investment Entities, before any court, arbitrator or administrative,
governmental or regulatory authority or body, domestic or foreign, other than
ordinary course claims of the type insured against (subject to self-insured
retentions and deductibles) by the Purchaser, its Subsidiaries and, to the
knowledge of the Purchaser, its Investment Entities. Except as would not
reasonably be expected to result in a Purchaser Material Adverse Effect,
neither the Purchaser nor any of its Subsidiaries or, to the knowledge of the
Purchaser, any of its Investment Entities nor any of their respective
Properties is or are subject to any material order, writ, judgment, injunction,
decree, determination or award that remains unsatisfied or in effect.
(h) Environmental Matters. Except for matters that would
not, individually or in the aggregate, reasonably be expected to have a
Purchaser Material Adverse Effect:
<PAGE> 43
37
(i) The operations of the real property owned
or operated by the Purchaser or its Subsidiaries, the Purchaser, and its
Subsidiaries and, to the knowledge of the Purchaser, its Investment Entities
are in compliance with applicable Environmental Laws;
(ii) The Purchaser, its Subsidiaries and its
Investment Entities and the real property owned or operated by the Purchaser or
its Subsidiaries are in compliance with the terms of their Licenses and Permits
required under applicable Environmental Laws;
(iii) There has been no Release at any parcel of
real property owned or operated by the Purchaser or its Subsidiaries;
(iv) (A) No Environmental Claims are pending
against the Purchaser or any of its Subsidiaries or the real property owned or
operated by the Purchaser or its Subsidiaries or, to the knowledge of the
Purchaser, any Investment Entity or any of its properties, (B) neither the
Purchaser, its Subsidiaries, nor to the knowledge of the Purchaser, any of its
Investment Entities has knowledge or written notice of any threatened
Environmental Claim against the Purchaser, or its Subsidiaries, its Investment
Entities or the properties, and (C) no order, judgement or decree providing for
a remedial obligation has been imposed on the Purchaser, any of its
Subsidiaries or any of the real property.
(i) Validity of Shares. The issuance of the shares of
Purchaser Common Stock and Purchaser Convertible Preferred Stock comprising the
Purchaser Common Stock Consideration and the Purchaser Convertible Stock
Consideration and that may be issued pursuant to Section 2.2 has been duly
authorized by all necessary corporate action on the part of the Purchaser and,
when such shares of Purchaser Common Stock or Purchaser Convertible Preferred
Stock, as applicable, are issued and delivered in accordance with Section 1.6
or Section 2.2, as applicable, such shares of Purchaser Common Stock will be
validly issued, fully paid and nonassessable.
(j) Transactions with Affiliates. Other than matters
referred to in Schedule 3.2(j) and transactions among any of the Purchaser and
its Subsidiaries, and except as disclosed in the SEC Reports, there are no
material contracts, agreements or transactions between the Purchaser or any of
its Subsidiaries, on the one hand, and any Affiliates, directors or executive
officers of the Purchaser, on the other.
(k) Financing. On or prior to the date hereof, the
Purchaser has received and delivered to the Funds a copy of a commitment letter
from Bank One of Arizona, with respect to the debt financing required to
consummate the transactions contemplated by this Agreement. On the date of the
Closing the Purchaser will have available all necessary financing to consummate
the transactions contemplated by this Agreement (including the Stock Purchase
and any necessary refinancing of the indebtedness of the Company and its
Subsidiaries).
(l) Brokers. Except as set forth on Schedule 3.2(l), no
broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection
<PAGE> 44
38
with the transactions contemplated by this Agreement based upon arrangements
made by and on behalf of the Purchaser.
ARTICLE IV
CONDUCT OF BUSINESS PENDING THE MERGER; OTHER COVENANTS
SECTION 4.1 Conduct of Business of the Company Pending
the Closing. Except as contemplated by this Agreement, during the period from
the date of this Agreement to the Closing Date, the Funds agree that the
Company shall, and shall cause its Subsidiaries and, to the extent within its
control, its Investment Entities to, act and carry on their respective
businesses in all material respects in the ordinary course of business and, to
the extent consistent therewith, use reasonable efforts to preserve intact
their current business organizations, keep available the services of their
current key officers and employees and preserve the goodwill of those engaged
in material business relationships with them and to maximize the cash position
of the Company to fund in part the Distribution. Without limiting the
generality of the foregoing, during the period from the date of this Agreement
to the Closing Date, except as expressly contemplated by this Agreement, the
Funds agree that the Company shall not, and shall not permit any of its
Subsidiaries or, to the extent within the Company's control, its Investment
Entities to, without the prior consent of the Purchaser:
(a) except as set forth on Schedule 4.1(a), (i) declare,
set aside or pay any dividends on, or make any other distributions in respect
of, any of its outstanding Ownership Interests, other than dividends and
distributions to the Company or any of its wholly owned Subsidiaries and other
than dividends and distributions by non-wholly owned Subsidiaries and
Investment Entities, (ii) split, combine or reclassify any of its outstanding
Ownership Interests or issue or authorize the issuance of any other securities
in respect of, in lieu of or in substitution for shares of its outstanding
Ownership Interests or (iii) purchase, redeem or otherwise acquire any
outstanding Ownership Interests of the Company or any of its Subsidiaries or
its Investment Entities, or any rights, warrants or options to acquire any such
Ownership Interests except, in the case of clause (iii), for the acquisition by
the Company or its wholly owned Subsidiaries of the capital stock of its wholly
owned Subsidiaries;
(b) except as set forth on Schedule 4.1(b), authorize for
issuance, issue, deliver, sell or agree or commit to issue, sell or deliver
(whether through the issuance or granting of options, warrants, commitments,
subscriptions, rights to purchase or otherwise), pledge or otherwise encumber
any shares of its Ownership Interests, any other voting securities or any
securities convertible, exchangeable or exercisable into, or any rights,
warrants or options to acquire, any such Ownership Interests, voting securities
or other equity equivalents (including without limitation stock appreciation
rights) (other than sales of capital stock of any wholly owned Subsidiary of
the Company to the Company or another wholly owned Subsidiary of the Company),
or subject to contractual obligations, not consent to the admission of any new
partners to any Partnerships;
<PAGE> 45
39
(c) except to the extent required under existing Company
Plans as in effect on the date of this Agreement or as set forth on Schedule
4.1(c), (i) increase or accelerate the compensation or fringe benefits of any
of its directors, officers or employees, except for increases in salary or
wages of employees of the Company who are not directors or officers of the
Company in the ordinary course of business in accordance with past practice, or
(ii) grant any severance or termination pay not currently required to be paid
under any Company Plans as in effect on the date hereof, or (iii) enter into
any employment agreement with any present or former director or officer or
senior employee, or, other than in the ordinary course of business consistent
with past practice and subject to a right to terminate without cause and
without severance payments, any other employee of the Company, or (iv)
establish, adopt, enter into or amend or terminate any Company Plan or other
plan, agreement, trust, fund, policy or arrangement for the benefit of any
current or former directors, officers or employees of the Company, its
Subsidiaries or its Investment Entities; provided, however, that the Collective
Bargaining Agreement for employees of the Lawler's, Inc. laundry operation and
the Hotel Properties in Rochester, Minnesota (the "Collective Bargaining
Agreement"), which is to expire on August 31, 1997, and the salaries and
benefits provided thereunder may be amended, modified, extended or replaced as
the result of good faith negotiations between the Company and the Union;
(d) amend its or their Articles of Incorporation,
By-Laws, partnership agreement or other comparable charter or organizational
documents or alter through merger, liquidation, reorganization, restructuring
or in any other fashion the entity structure or ownership of any of the
Company's Subsidiaries and, to the extent within the control of the Company,
its Investment Entities;
(e) except as set forth on Schedule 4.1(e), acquire or
agree to acquire (i) by merging or consolidating with, or by purchasing a
substantial portion of the stock, assets or properties of, (including through
the exercise of any right of first refusal or the exercise of any option to
purchase or convert), or by any other manner, any business or any corporation,
partnership, joint venture, association or other business organization or
division thereof; or (ii) any material assets or properties (except purchases
of inventory and services in the ordinary course of business consistent with
past practice and capital expenditures permitted by (g) below);
(f) except as provided in Section 4.22, sell, lease,
license, mortgage or otherwise encumber or subject to any Lien or otherwise
dispose of any of its Properties or assets, except (i) sales of inventory and
worn out or obsolete furniture, fixtures and equipment in the ordinary course
of business consistent with past practice, (ii) leases of retail space in
Properties which are hotels for more than 2,500 square feet or have a term of
less than 6 months and which are in the ordinary course of business consistent
with past practice; provided that Purchaser agrees not to unreasonably withhold
its consent to any lease of a longer term or greater square footage, or (iii)
as disclosed on Schedule 4.1(f);
(g) except as set forth on Schedule 4.1(g) make any
capital expenditure or commitment to make any such expenditure except in
accordance with the Capital Expenditures
<PAGE> 46
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Budget or defer making any budgeted capital expenditure; provided that (i) the
Company shall not make any expenditure, or enter into any agreement which could
result in an expenditure, in excess of $50,000 or approve any renovation plans
or specifications without the approval of the Purchaser, which approval shall
not be unreasonably withheld and (ii) following notice to, and to the extent
circumstances permit, consultation with Purchaser, the Company shall be
permitted to make capital expenditures not contemplated by the Capital
Expenditure Budget to make emergency repairs;
(h) (i) except for mandatory prepayments from the
proceeds of the sale of any asset listed on Schedule 4.1(f) and as set forth on
Schedule 4.1(h), incur or prepay any indebtedness for borrowed money or
guarantee any such indebtedness of another Person (other than guarantees by the
Company in favor of any of its wholly owned Subsidiaries or by any of its
Subsidiaries in favor of the Company), issue or sell any debt securities or
warrants or other rights to acquire any debt securities of the Company or any
of its Subsidiaries or its Investment Entities, guarantee any debt securities
of another Person, enter into any "keep well" or other agreement to maintain
any financial condition of another Person or enter into any arrangement having
the economic effect of any of the foregoing, except for short-term working
capital borrowings incurred in the ordinary course of business consistent with
past practice, which borrowings shall not in the aggregate exceed $8,500,000
outstanding at any particular time (provided that the foregoing shall not
restrict the Company or any of its Subsidiaries or Investment Entities from
renewing or replacing existing working capital lines provided that no such
lines shall in the aggregate be in excess of $500,000 over the working capital
lines that the Company has available to it on the date heretofore provide for
any penalties for the prepayment or termination of the same (other than
customary LIBOR breakage costs), or (ii), except pursuant to partnership
agreements previously disclosed to Purchaser and except pursuant to capital
calls of Investment Entities not controlled by the Company or its Subsidiaries,
make any loans, advances or capital contributions to, or investments in, any
other Person, other than to the Company or any wholly owned Subsidiary of the
Company, and other routine advances to employees (which advances shall not
exceed $50,000 in the aggregate at any one time outstanding);
(i) change any accounting principle, method or practice
used by it or any change in the classification of assets, recognition of income
or expenses or the depreciation or amortization policies or rates theretofore
applies, unless required by the Financial Accounting Standards Board ("FASB");
(j) make any material Tax election or settle or
compromise any income Tax liability in excess of $250,000, in the aggregate or
defer the payment of any material Taxes that come due;
(k) enter into any contract, including but not limited to
mortgages and security agreements, which would require the consent (including
the waiver of any right of first refusal or similar right) of, the third party
to the consummation of the transactions contemplated hereby
<PAGE> 47
41
other than renewals or replacements of existing working capital lines of credit
on terms no less favorable to the Company than the terms of such existing lines
of credit;
(l) make any single expenditure in excess of $50,000
without providing Purchaser's senior management the reasonable right to review
and make recommendations of ways to defer payment and improve the Company's
cash position, provided, however, that the Company shall be permitted to make
timely payments required to avoid a breach or default under any existing
contractual arrangements; or
(m) authorize any of, or commit or agree to take any of,
the foregoing actions.
None of (a) through (m) above shall in any way be deemed to
prevent the Company from making current interest payments on the Notes.
SECTION 4.2 Conduct of Business of the Purchaser. During
the period from the date of this Agreement to the Closing Date the Purchaser
shall not declare, set aside or pay any dividends on, or make any other
distributions in respect of (including, without limitation, making any rights
offering), the Purchaser Common Stock having a record date for determining the
stockholders of Purchaser entitled to receive such dividend or distribution on
or prior to the Closing Date, except for the payment of regular quarterly cash
distributions on shares of Purchaser Common Stock in an aggregate amount not
exceeding 115% of the most recent quarterly dividends.
SECTION 4.3 Access to Information; Confidentiality.
(a) From the date hereof to the Closing Date, the Funds
agree that the Company shall, and shall cause its Subsidiaries and, to the
extent within the Company's control, the Investment Entities to, afford the
officers, employees, auditors and other agents of the Purchaser, full and
complete access to its officers, employees, Properties, offices, plants and
other facilities and to its contracts, commitments, books and records, and
shall furnish the Purchaser and such other Persons all such documents and such
financial, operating and other data and information regarding the Company, its
Subsidiaries and, to the extent within its control, its Investment Entities
that are in the possession of the Company and its Subsidiaries as the
Purchaser, through its officers, employees or agents may from time to time
request. Without limiting the foregoing, the Purchaser shall be provided
copies of all existing space plans and plans for proposed renovations and shall
have the right to locate two employees of the Purchaser or its agents or
consultants at the Company's corporate headquarters, which employees, agents or
consultants will be provided with free accommodations at the Company's hotels,
reasonable office space and support (taking into account the availability of
such space and support) and such employees, agents or consultants and the
senior executives of the Purchaser shall be entitled to attend all operations
review meetings between senior officers of the Company and the Funds and all
meetings of senior officers of the Company where the integration of the
Company's operations and personnel into those of the Purchaser and its
affiliates post-Closing is discussed. In addition, the Purchaser shall have
the right to conduct, at its own cost and
<PAGE> 48
42
expense, engineering and/or environmental site assessments and title reports of
each of the Properties by one or more independent engineering or environmental
site assessment firms (which assessments may include the taking and testing of
samples to the extent reasonably required and reasonably conducted) or title
insurance companies. The Purchaser shall use its best efforts to complete such
site assessments as soon as practicable, and in any event, such site assessments
shall be completed no later than forty-five (45) days from the date hereof.
The Funds agree that the Company shall fully cooperate and shall cause its
Subsidiaries and, to the extent within the Company's control, the Investment
Entities to fully cooperate, with such site assessments. The Purchaser shall
keep the Funds and the Company informed on a current basis of the status of any
site assessments and to promptly notify the Funds and the Company of any
material issues that are identified pursuant to such site assessments. Any
environmental or engineering assessments by the Purchaser will be conducted in
a manner that does not cause any meaningful interruption to the business or
operations of any of the Properties and by Clayton Environmental Consultants
and Marshall and Stevens or another licensed engineering or environmental firm
with not less than $3,000,000 of errors and omission insurance coverage
(subject to customary deductibles). Purchaser shall indemnify and hold the
Company, its Subsidiaries, its Investment Entities and the Funds harmless
against, and agrees to promptly reimburse such Persons for, any losses, costs,
penalties, injuries or damages to any of their respective assets or to any
third parties resulting from the conduct (but not the results) of the
environmental and engineering assessments.
(b) From the date hereof to the Closing Date, the
Purchaser shall, and shall cause its Subsidiaries and, to the extent within its
control, its Investment Entities to, afford the officers, employees, auditors
and other agents of the Company and the Funds, reasonable access during normal
business hours to its officers, employees, Properties, offices, plants and
other facilities and to its contracts, commitments, books and records, and
shall furnish the Seller and such other Persons all such documents and such
financial, operating and other data and information regarding the Purchaser,
its Subsidiaries and, to the extent within its control, its Investment Entities
that are in the possession of the Purchaser and its Subsidiaries as the Funds,
through their respective officers, employees or agents may from time to time
reasonably request.
(c) Each of the Purchaser, the Company and the Funds will
hold, and will cause their officers, employees, auditors and other agents to
hold, in confidence pursuant to the Confidentiality Agreement, previously
executed by Westbrook Partners, L.L.C. and the Purchaser, all documents and
other information received pursuant to this Section 4.3.
SECTION 4.4 Employee Benefits Matters.
The Purchaser agrees to use its reasonable best efforts to
cause the Lessee to provide to each of the employees of the Company and its
Subsidiaries who are retained by the Lessee (the "Employees"), for a period
commencing at the Closing Date and ending on the one-year anniversary of the
Closing Date, employee benefits comparable in the aggregate to those currently
provided by the Lessee to its employees, taking into account the duties and
responsibilities of such Employees and labor market conditions in the areas in
which they work;
<PAGE> 49
43
provided, however, that Employees covered by collective bargaining agreements
in effect as of the date hereof (or, entered into after the date hereof in
accordance with Section 4.1(c)(iv)) shall be provided with such benefits as
shall be required under the terms of the applicable collective bargaining
agreement. Subject to the foregoing, nothing herein shall prevent the
amendment or termination of any plan, program or arrangement. The Purchaser
and the Company shall work together in good faith to issue a joint statement as
soon as reasonably practicable after the date of this Agreement to the
Company's employees regarding the transactions contemplated by this Agreement,
which statements shall comply with the notice standards of the WARN Act.
SECTION 4.5 Directors' and Officers' Indemnification and
Insurance. The Purchaser covenants and agrees with the Funds that on and after
the Closing Date all terms and provisions of Section 4.7 of the Agreement and
Plan of Merger, dated as of May 6, 1996, among the Westbrook Fund (formerly
known as Tiger Real Estate Fund L.P.), Tiger Real Estate Acquisition Corp. and
Kahler Realty Corporation will be complied with.
SECTION 4.6 Registration Rights Agreement. On the
Closing Date the Purchaser and the Fund shall execute a Registration Rights
Agreement substantially in the form attached hereto as Exhibit 4.6.
SECTION 4.7 Further Action; Reasonable Best Efforts.
Upon the terms and subject to the conditions hereof, each of the parties hereto
shall use its reasonable best efforts to take, or cause to be taken, all
appropriate action, and to do or cause to be done, all things necessary, proper
or advisable to facilitate to satisfaction and make effective each condition to
the consummation of the transactions, including without limitation the Stock
Purchase, contemplated by this Agreement, including but not limited to (i)
cooperating in the preparation and filing of any required filings under the HSR
Act, and any amendments to any thereof and (ii) using its reasonable best
efforts to make all required regulatory filings and applications and to obtain
at the lowest practicable cost all Licenses and Permits, consents, waivers of
rights of first refusal and similar rights, approvals, authorizations,
qualifications and orders of Governmental Entities and parties to contracts
with the Company, its Subsidiaries and the Investment Entities as are necessary
for the consummation of the transactions contemplated by this Agreement, or to
permit such Licenses and Permits, consents, waivers of rights of first refusal
and similar rights, approvals, authorizations, qualifications, orders and
contracts to continue in effect without modification after the Closing Date.
Notwithstanding the foregoing, (A) the Funds shall not be required to incur or
assume any liability or obligation of any nature (including, without
limitation, making any amendment or modification to any existing agreement,
arrangement or understanding) to any Governmental Entity or other third party,
(B) the Company's and the Funds' obligations under Section 4.20 shall only be
as set forth therein and shall not be subject to this Section 4.7, (C) the
Purchaser shall have no obligation to obtain (or assist in obtaining) the
Distribution Financing except as specifically set forth in Section 4.20, (D) no
party hereto shall be required to commence litigation and (E) neither the
Company, the Purchaser nor any of their respective Subsidiaries shall be
required to incur or assume any liability or obligation of any nature
(including, without limitation, making any amendment or modification to any
existing agreement, arrangement or understanding) to any Governmental
<PAGE> 50
44
Entity or other third party that is not conditioned on, and effective only upon
the occurrence of, the Closing.
SECTION 4.8 Public Announcements. The Purchaser, on the
one hand, and the Company and the Fund, on the other hand, shall consult with
each other before issuing any press release or otherwise making any public
statements with respect to the Stock Purchase, shall provide each other the
opportunity to review and comment upon, any such press release or public
statement, and shall not issue any such press release or make any such public
statement prior to such consultation, except as may be required by law or any
listing agreement with any securities exchange on which its securities are
listed. The parties agree that the initial press release to be issued with
respect to the Stock Purchase shall be in the form heretofore agreed to by the
parties.
SECTION 4.9 Maintenance of REIT Qualification. If at any
time either the Purchaser or the Funds believes that the consummation by the
Purchaser of the transactions contemplated by this Agreement, after giving
effect to the additional actions contemplated by Schedule 1.5 hereto, would
result in the Purchaser losing its REIT Qualification, such party shall
promptly advise the others of such belief and the reasons therefore and all
parties will negotiate in good faith and use their respective best efforts to
agree to such modifications to the transactions contemplated by this Agreement
and Schedule 1.5 as may be necessary to allow the consummation of the
transactions contemplated hereby without the loss of the Purchaser's REIT
Qualification and in a manner that does not diminish in any material respect
the benefits of the transactions contemplated hereby to the Funds and the
Purchaser.
SECTION 4.10 Transfer Restrictions. (a) Each Fund
covenants and agrees that all shares of Purchaser Common Stock and the
Purchaser Convertible Preferred Stock constituting the Purchaser Common Stock
Consideration and the Purchaser Convertible Preferred Stock Consideration or
received upon conversion of the Purchaser Convertible Preferred Stock and
issued to such Fund (the "Shares") will not be transferred or otherwise
disposed of except in a transaction registered or exempt from registration
under the Securities Act. Each Fund agrees that, without the consent of the
Purchaser, such Fund will not, directly or indirectly, offer, transfer, sell,
pledge, hypothecate or otherwise dispose of any of the Shares, except for (i)
sales in compliance with Rule 144 under the Securities Act, (ii) a public
offering of Shares in accordance with the registration rights set forth in the
Registration Rights Agreement or (iii) a sale, pledge, hypothecation or other
disposition in connection with which such Fund shall have delivered to the
Purchaser a written opinion of legal counsel to such Fund, reasonably
satisfactory in form and substance to the Purchaser, to the effect that the
transaction may be effected without registration under the Securities Act.
(b) Each Fund covenants and agrees that, notwithstanding
anything herein to the contrary, such Fund will not, directly or indirectly,
transfer, sell or otherwise dispose of any Shares for a period of twelve (12)
months after the Closing Date (the "Initial Lock-Up Period"). Following the
Initial Lock-Up Period, the Funds shall be permitted to sell, transfer or
otherwise dispose of the following percentages of all Shares owned by the Funds
on the day after the
<PAGE> 51
45
Closing Date (which number of Shares shall be increased or decreased as
appropriate in the event that the number of issued and outstanding shares of
Purchaser Common Stock shall have been changed into a different number of
shares or a different class by reason of any stock dividend, subdivision,
reclassification, recapitalization, split, combination, exchange of shares or
otherwise): (i) up to 25% of the Shares may be sold, transferred or otherwise
disposed of during the period ending on the three month anniversary of the last
day of the Initial Lock- Up Period; (ii) up to 50% of the shares may be sold,
transferred or otherwise disposed of during the period ending on the six month
anniversary of the last day of the Initial Lock-Up Period; (iii) up to 75% of
the shares may be sold, transferred or otherwise disposed of during the period
ending on the nine month anniversary of the last day of Initial Lock-Up Period
and (iv) on the day after the one year anniversary of the last day of the
Initial Lock-Up Period all restrictions in this clause (b) will terminate;
provided that following the Initial Lock-Up Period, the Funds may, in their
sole discretion, distribute solely to their respective limited and general
partners all or any portion of the Shares in a registered offering utilizing
the registration rights provided for in the Registration Rights Agreement. For
purposes of determining the number of Shares sold, transferred or otherwise
disposed of for purposes of this clause (b), the Purchaser Common Stock and
Purchaser Convertible Preferred Stock shall be aggregated and considered
together, with the Purchase Convertible Preferred Stock being treated on an as
converted basis.
SECTION 4.11 Board Representation.
(a) (i) The Purchaser shall increase the number of
authorized directors from 8 to 9 and cause one person designated by
the Funds to be elected to fill the vacancy created on the Board of
Directors of the Purchaser, effective upon the Closing Date.
Thereafter, in the event that the Purchaser shall increase the number
of members of its Board of Directors, the Funds shall be entitled to
have a number of representatives on the Board of Directors of the
Purchaser so that the Funds representation on the Board of Directors
of the Purchaser shall equal a number of directors equal to the
product of the total number of directors on such Board multiplied by
the percentage of the outstanding Purchaser Common Stock that is
beneficially owned by the Funds (other than shares purchased by the
Funds from any person other than the Purchaser) on a fully diluted
basis (including the shares of Purchaser Common Stock issuable upon
conversion of the Purchaser Convertible Preferred Stock) provided,
however, that such calculation shall be rounded to the nearest whole
number of directors; provided, further, that, unless otherwise
provided in Section 4.1(a)(ii), irrespective of the above calculation,
the Funds shall have at least one designee on the Board of Directors
of the Purchaser. In the event that the Funds are entitled to
designate more than one person to serve on the Purchaser's Board of
Directors, the Funds' designees shall be allocated among the
Purchaser's classes of directors as equally as possible.
(ii) If the number of directors designated by the
Funds is increased to greater than one pursuant to Section 4.11(a)(i),
then the Purchaser agrees that as long as the Funds continue to
beneficially own in the aggregate a number of shares of the Purchaser
Common Stock equal to at least 50% of the outstanding Purchaser Common
<PAGE> 52
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Stock beneficially owned by the Funds immediately following the
Closing, which calculation shall be made as appropriate to take into
account any conversions, reclassifications, reorganizations, in-kind
dividends, splits, reverse splits and similar events that may occur
with the Purchaser Common Stock, at all meetings of the stockholders
of the Purchaser at which members of the Purchaser's Board of
Directors are elected, the Purchaser shall nominate for election as a
director as part of the management slate, a number of persons
designated by the Funds such that if such persons were elected as
directors the number of directors of the Purchaser designated by the
Funds pursuant to this Section would equal the number of directors as
determined pursuant to Section 4.11(a)(i). The Purchaser also agrees
that as long as the Funds continue to beneficially own in the
aggregate a number of shares of the Purchaser Common Stock equal to at
least 33 1/3% but less than 50% of the Purchaser Common Stock
beneficially owned by the Funds immediately following the Closing,
which calculation shall be made as appropriate to take into account
any conversions, reclassifications, reorganizations, in-kind
dividends, splits, reverse splits and similar events that may occur
with the Purchaser Common Stock, at all meetings of the stockholders
of the Purchaser at which members of the Purchaser's Board of
Directors are elected, the Purchaser shall nominate for election as a
director as part of the management slate, one person designated by the
Funds unless a person designated by the Funds pursuant to this Section
is serving as a director of the Purchaser and such person's term will
not expire in connection with such shareholder meeting. The Purchaser
agrees to provide the same type of support for the election of the
designees of the Funds as directors of the Purchaser, its affiliates
and its management provides to other persons standing for election as
directors of the parent as part of the management slate. In the event
that any designee of Purchaser for election to the Purchaser's Board
of Directors pursuant to the foregoing provisions shall cease to serve
as a director for any reason (other than the failure of the
stockholders of Purchaser to elect such person as a director), the
vacancy resulting therefrom shall be filled by a designee of the
Funds.
(iii) As long as the Funds have the right to
designate at least one nominee to the Board of Directors of the
Company, unless otherwise agreed by the Funds, each Committee of the
Purchaser's Board of Directors will contain at least one member
designated by the Funds.
(iv) The Purchaser shall furnish to the Funds'
designee or designees, as the case may be, on the Purchaser's Board of
Directors all information that is provided to the other members of the
Board of Directors of the Purchaser.
(v) The Purchaser and the Funds agree that any
breach of this Section 4.11 would cause irreparable injury to the
Funds and that money damages will be an inadequate remedy for any
breach or threatened breach of the agreements described in this
Section 4.11. The Purchaser agrees that in the event of a breach or a
threatened breach of the agreements described in this Section 4.11,
the Funds shall, in addition to other rights and remedies existing in
their favor, be entitled to specific performance
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and/or injunctive relief in order to enforce, or prevent any
violations of, the provisions of this Section 4.11 (without the
posting of a bond or other security).
SECTION 4.12 Amendment of Articles of Incorporation.
On or prior to the Closing Date, the Purchaser shall amend its Articles of
Incorporation by filing the Certificate of Designation with the Secretary of
the State of Delaware. As long as any shares of Purchaser Convertible
Preferred Stock remain outstanding, Purchaser will reserve and have available
for issuance to the holders of the Purchaser Convertible Preferred Stock upon
conversion thereof a number of authorized but unissued shares of the Purchaser
Common stock equal to the number of shares of Purchaser Common Stock issuable
upon conversion of the Purchaser Convertible Preferred Stock.
SECTION 4.13 Non-Solicitation. If the transactions
contemplated hereby have been abandoned pursuant to Section 6.1 or if this
Agreement shall have been terminated for any reason, the Purchaser hereby
agrees that from the date hereof until the date of such termination or
abandonment and for a period of twenty-four (24) months thereafter, Purchaser
shall not, on its own behalf or an behalf of any person, firm or company,
directly or indirectly, solicit or offer employment to any person who is or has
been employed by the Company or its Subsidiaries or its Investment Entities at
any time during the twelve (12) months immediately preceding such solicitation.
SECTION 4.14 No Negotiation. Until such time, if any, as
this Agreement is terminated pursuant to Section 6.1, the Funds will not, and
will cause the Company and its Subsidiaries and their respective employees and
agents not to, directly or indirectly, solicit, initiate, or encourage any
inquiries or proposals from, discuss or negotiate with, provide any non-public
information to, or consider the merits of any unsolicited inquiries or
proposals from, any Person (other than the Purchaser) relating to any
transaction involving the sale of all or substantially all of the business or
assets of the Company or any Subsidiary of the Company, or any of the capital
stock of the Company or any Subsidiary of the Company, or any merger,
consolidation, business combination, or similar transaction involving the
Company or any Subsidiary of the Company.
SECTION 4.15 Organization and Qualification of
Subsidiaries. The Company shall use its reasonable best efforts to provide the
Purchaser, as soon as reasonably practicable following the date hereof, the
records identified on Schedule 3.1(a). In addition, to the extent any
Subsidiary is not duly organized, validly existing and in good standing under
the laws of the jurisdiction of its formation and, with respect to each
Subsidiary that owns a Hotel Property or material asset, qualified to do
business in the state where such Hotel Property or other material asset is
located, the Company shall, at the Funds' sole cost and expense, take all
action necessary to make such Subsidiary duly organized, validly existing and
in good standing or qualified to do business, as applicable, in such
jurisdiction prior to the Closing.
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SECTION 4.16 Licenses and Permits. As soon as
practicable, and in any event no later than thirty (30) days after the date
hereof, the Company shall provide Purchaser with a list and copies of all
Licenses and Permits possessed by the Company and its Subsidiaries.
<PAGE> 55
49
SECTION 4.17 Additional Information.
Within 30 days of the date hereof, the Company shall provide
Purchaser with a list and copies of all agreements pursuant to which the
Company or its Subsidiaries is or may be liable for a payment of in excess of
$5,000 in any given year.
SECTION 4.18 New York Stock Exchange Listing. The
Purchaser shall, if permitted by the rules of the New York Stock Exchange (the
"NYSE") or such other national securities exchange as the Purchaser Common
Stock may be listed, list and keep listed on the NYSE or such other national
securities exchange as the Purchaser Common Stock may be listed, all shares of
the Purchaser Common Stock Consideration which have been registered under the
Securities Act for so long as the Purchaser Common Stock remains so listed.
SECTION 4.19 Share Trust. The Purchaser shall not
repurchase, redeem or otherwise acquire any of the Purchaser Common Stock if
such action would cause any of the Purchaser Common Stock Consideration or the
Purchaser Preferred Stock Consideration, or any shares of the Purchaser Common
Stock issued to the Funds upon the conversion thereof, to be transferred
pursuant to the Purchaser's Amended Articles of Incorporation to the Share
Trust (as such term is defined in Section 2(a) of such Articles of
Incorporation); provided that for purposes of determining whether such a
repurchase, redemption or acquisition of Purchaser Common Stock would cause
such a transfer to the Share Trust, it shall be assumed that: (i) each
constituent partner of the Funds owns (independent of such partner's ownership
in the Fund) no more Purchaser Common Stock than such partner owned on the
Closing Date, and (ii) each such constituent partner's percentage ownership
interest in the Funds is the lesser of (A) such partner's actual ownership
percentage at the time of the repurchase, redemption or acquisition, or (B)
such partner's ownership percentage as delivered to the Purchaser prior to the
date hereof. If there is a reasonable question on the part of the Funds as to
whether an intended repurchase, redemption or other acquisition by the
Purchaser of the Purchaser Common Stock will cause such a transfer to the Share
Trust, upon receipt by the Funds and approval by the Funds' counsel of an
opinion to the Purchaser from counsel to the Purchaser in form and substance
reasonably satisfactory to the Funds to the effect that the intended
acquisition will not cause such a transfer to the Share Trust, the Company will
be permitted to effect such repurchase, redemption or other acquisition,
provided, that the Purchaser will remain liable for any breach of the first
sentence of this Section 4.19 with respect to such transaction. The Funds
shall provide the Purchaser and its counsel such written representations of and
undertakings on the part of the Funds addressing such matters as shall be
reasonably required by such counsel in connection with the preparation of such
opinion.
SECTION 4.20 Earnings and Profits Distribution. (a) (i)
Subject to the terms and conditions set forth in this Section 4.20, the Company
will seek to obtain all necessary financing for the Distribution from one or
more financial institutions (excluding the Funds or the Purchaser) on the terms
and conditions set forth in this Section 4.20 (the "Distribution Financing"),
and the Purchaser will not participate in obtaining the Distribution Financing
(other than, if requested by the Company, identifying potential sources of the
Distribution Financing).
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The Distribution Financing may be secured only by assets of the Company and/or
its Subsidiaries and shall be repayable solely from such assets and/or the
earnings and profits of such assets; provided that the Distribution Financing
may include a general recourse obligation of the Company prior to the
contribution of its assets to a limited liability company or grantor trust as
contemplated by Schedule 1.5 and, after such contribution, to such limited
liability company or grantor trust; provided further that the lenders shall not
have any general recourse to the Purchaser or its assets other than the Company
and/or its Subsidiaries and the Purchaser shall not be required to guarantee or
otherwise provide assurances to the lenders or be a party to the agreements
with respect to the Distribution Financing but shall have the right to approve
the Distribution Financing, which approval shall not be unreasonably withheld
(with the ability of the Purchaser to withhold its consent being subject to its
using its reasonable best efforts to cause the satisfaction of the conditions
in Article V hereof and such approval not to be withheld on the basis of the
security granted for such Financing or its maturity as long as such terms
comply with the provisions hereof, and the Purchaser will also not be permitted
to withhold its consent if the Distribution Financing can be repaid at the
option of the borrower without penalty). The Company will use its reasonable
commercial efforts to have the Distribution Financing secured by as few
Properties of the Company and its Subsidiaries as the Company in good faith
believes is practical in order to obtain such financing, provided that the
Company will be entitled to have such financing secured by as many Properties
of the Company as it deems necessary in order to obtain such financing and
shall not secure the financing with any assets other than Properties or the
proceeds thereof. The maturity date of the Distribution Financing will be at
least two years after the Closing Date. Neither the Purchaser nor the Funds
shall be responsible for the costs and expenses of the Company seeking to
arrange, or effecting, the Distribution Financing.
(ii) Notwithstanding the foregoing, the Funds may, but shall not be
obligated to, fund the Distribution by accepting a promissory note (the
"Distribution Note") issued by the Company as a dividend to the Funds. The
Distribution Note, if issued, and related security shall be on the same terms
and conditions as the Distribution Financing described in Section 4.20(a)(i)
except that the Distribution Note shall mature in two years, subject to
optional prepayment by the borrower without penalty and, the borrower will have
the right within 60 days of issuance to repackage the collateral for such loan
with first mortgages on Hotel Properties having a loan to value ratio based on
recent MAI Appraisals on commercially reasonable terms mutually acceptable to
the Purchaser and the Funds.
(b) In the event that the Company determines in good
faith that it is unable to obtain the Distribution Financing described in
Section 4.20(a)(i) from parties other than the Funds and the Funds determine in
their sole discretion not to finance the Distribution as permitted by Section
4.20(a)(ii), the Company, the Funds and the Purchaser will negotiate in good
faith and use their respective reasonable best efforts to agree upon an
alternative structure to fund the Distribution in a manner that, unless agreed
otherwise by the parties hereto, does not diminish in any material respect the
benefits of the transactions contemplated hereby to the Funds and the Purchaser
does not cause the Purchaser to lose its REIT Qualification.
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(c) Notwithstanding the foregoing, (A) the Funds shall
not be required to incur or assume any liability or obligation of any nature
(including, without limitation, making any amendment or modification to any
existing agreement, arrangement or understanding to any Governmental Entity or
other third party), and (B) neither the Company, the Purchaser nor any of their
respective Subsidiaries shall be required to incur or assume any liability or
obligation of any nature (including, without limitation, making any amendment
or modification to any existing agreement, arrangement or understanding) with
respect to the Distribution Financing until the day immediately preceding the
Closing Date and receipt of satisfactory evidence that the conditions to the
Closing in Article V will be satisfied on the date of Closing, but thereafter
the consummation of the Distribution Financing will not be contingent on the
Closing.
SECTION 4.21 GMX. The Company shall use its reasonable
best efforts to ensure that on or before the Closing Date, the Company owns
100% of the outstanding shares of the common stock of GMX, Inc.
SECTION 4.22 Non-Core Assets. The Company shall use
commercially reasonably efforts to sell the Non-Core Assets set forth on
Schedule 4.22; provided, however, that the Company will not enter into any
contract or other obligation to sell any of the Non-Core Assets without the
prior consent of the Purchaser, which consent shall not be unreasonably
withheld.
ARTICLE V
CONDITIONS TO THE CLOSING
SECTION 5.1 Conditions to Obligation of Each Party to
Effect the Merger. The respective obligations of each party to effect the
Closing shall be subject to the satisfaction at or prior to the Closing Date of
the following conditions precedent:
(a) Government Approvals. All consents, approvals,
authorizations or permits of, actions by, or filings with or notifications to,
and all expirations of waiting periods imposed by, any Governmental Entity
listed on Schedule 5.1(a) shall have been filed, occurred or been obtained and
shall be in full force and effect.
(b) No Injunctions or Restraints; Illegality. No
temporary restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the Stock Purchase shall be in
effect, no action or proceeding shall have been commenced by any Governmental
Entity seeking any injunction, restraining order or other order which seeks to
prohibit consummation of the Stock Purchase, and no action or proceeding shall
have been commenced by any Governmental Entity seeking material damages in
connection with the Stock Purchase shall be pending; provided, however, that
the parties invoking this condition shall use reasonable efforts to have any
such action, proceeding, order or injunction vacated. There shall not be any
action
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taken, or any statute, rule, regulation or order enacted, entered, enforced or
deemed applicable to the Stock Purchase, which makes the consummation of the
Stock Purchase illegal.
(c) Maintenance of REIT Qualification. Neither the
Purchaser nor the Funds shall have determined in good faith based upon the
written opinion of outside counsel that the consummation by the Purchaser of
the transactions contemplated by this Agreement, after giving effect to the
additional actions contemplated by Schedule 1.5 hereto and despite efforts by
the Purchaser and the Funds to restructure the transactions contemplated hereby
and by Schedule 1.5 in order to preserve the Purchaser's REIT Qualification
pursuant to Section 4.9, would result in the Purchaser losing its REIT
Qualification.
(d) Earnings and Profits Certification. The Company and
the Purchaser shall have obtained the certification of the earnings and profits
calculation from KPMG as provided in Section 1.4 in a form reasonably
acceptable to the Purchaser and the Funds, and such certification shall have
been revised by KPMG to include the earnings and profits actually generated
between the date of the original certification pursuant to Section 1.4 and the
most recent date through which the earnings and profits are ascertainable as
well as a reasonable estimate of any earnings and profits from such most recent
date through the Closing Date, and Ernst and Young, LLP shall have reviewed and
approved in the exercise of its reasonable judgment the certification and
workpapers of KPMG.
(e) Confirmation of Exempted Holder Status for Funds. No
later than two weeks following receipt by the Funds of a draft legal opinion
from counsel to the Purchaser to the effect that the proposed ownership by the
Funds of the shares of Purchaser Common Stock Consideration or Purchaser
Convertible Preferred Stock Consideration will not violate the restrictions
contained in Sections 2(b)(i)(x), 2(b)(i)(y) and 2(b)(i)(z) of Article V of the
Amended Articles of Incorporation of the Purchaser, the Funds shall provide the
Purchaser and its counsel (i) such representations and undertakings regarding
the Funds and its constituent partners as are reasonably necessary to address
the assumptions contained in such legal opinion regarding the Funds status as
an Exempted Holder (as defined in the Purchaser's Amended Articles of
Incorporation) and (ii) on or prior to the Closing, the Funds shall deliver to
the Purchaser written assurance that the Funds agree that any violation or
attempted violation by any individual of the Ownership Limit (as defined in
Section 2(a) of Article V of the Purchaser's Amended Articles of Incorporation)
due to such individual's Beneficial Ownership of the Purchaser Common Stock
Consideration or Purchaser Convertible Preferred Stock Consideration (or any
shares of Common Stock issued upon conversion thereof) (as defined in Section
2(a) of the Purchaser's Amended Articles of Association) will result in
transfer of their shares to the Share Trust as defined in and pursuant to
Section 2(c) of Article V of the Amended Articles of Incorporation.
SECTION 5.2 Conditions to Obligations of Purchaser. The
obligations of the Purchaser to effect the transactions contemplated by this
Agreement are further subject to the satisfaction of the following conditions
prior to the Closing Date unless waived by the Purchaser:
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(a) Representations and Warranties. (i) The
representations and warranties of the Funds set forth in this Agreement shall
be true, correct and complete as of the date of this Agreement and (except to
the extent such representations and warranties speak as of an earlier date) as
of the Closing Date as though made on and as of the Closing Date, except as
otherwise contemplated by this Agreement and except for such failures to be
true, correct and complete as of the Closing Date that would not individually
or in the aggregate reasonably be expected to have a Company Material Adverse
Effect (it being agreed that any matter for which the Purchaser is compensated
pursuant to clause (iv) of Section 7.1(c) shall not be deemed to have a Company
Material Adverse Effect) or arise out of or relate to the transactions referred
to in Section 1.5, and (ii) the Purchaser shall have received certificates to
such effect signed on behalf of the Funds by the general partner of the Funds,
respectively; provided, however, that receipt of such certificate shall not be
evidence that the Purchaser concurs with anything set forth in such
certificate.
(b) Performance of Obligations of the Company and the
Funds. The Company and the Funds shall have performed in all material respects
all material obligations, required to be performed by it under this Agreement
at or prior to the Closing Date, and the Purchaser shall have received
certificates to such effect signed on behalf of the Company (with respect to
the Company's obligations) and the Funds (with respect to the Funds'
obligations) by the chief financial officer of the Company and the general
partners of the Funds, respectively.
(c) Required Consents; Governmental Approvals. (i) All
Required Consents shall have been obtained on terms and conditions that comply
with the terms of any side letter and that would not have a Company Material
Adverse Effect and shall be in full force and effect, and (ii) Purchaser shall
have received all consents, approvals, Licenses and Permits of Governmental
Entities so as to enable Sunstone Hotel Investors, L.P. to own the Properties
(or the Investment Entities to own the Properties owned by the Investment
Entities on the date hereof) and to enable Sunstone Hotel Properties, Inc. to
operate the Properties immediately following the Closing Date substantially in
the same manner as operated on the date hereof; provided that with respect to
Licenses and Permits or other governmental consents or approvals that can be
obtained only after consummation of the Stock Purchase, such consents,
approvals, Licenses or Permits shall not be a condition precedent if Purchaser
shall have not received advice from its counsel, after due inquiry of the
appropriate regulatory agency or from the appropriate regulatory agency to the
effect that there is a substantial possibility that such Licenses and Permits
will not be obtained promptly following such consummation and that failure to
procure the applicable License and Permit will result in a Company Material
Adverse Effect.
(d) No Material Adverse Change. Since the date hereof,
(i) there shall have been no material adverse change in the business,
Properties, assets, results of operations, financial condition or prospects of
the Company and its Subsidiaries taken as a whole, nor (ii) shall there have
been any development which, taken together with all other developments in the
aggregate, would reasonably be expected to result in such a material adverse
change, in each case of clause (i) and (ii) except for such developments or
changes arising out of or relating to
<PAGE> 60
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the transactions contemplated by this Agreement or to general economic
conditions or other factors affecting the hotel industry generally where the
Company and its Subsidiaries and Investment Entities operate.
(e) Legal Opinions. The Purchaser shall have received
(i) a legal opinion in form and substance reasonably satisfactory to the
Purchaser from in-house counsel to the general partner of the Funds to the
effect that this Stock Purchase Agreement and any written supplement hereto and
the Registration Rights Agreement each have been duly authorized, executed and
delivered by the Funds to the Purchaser, (ii) a legal opinion from Simpson
Thacher & Bartlett in form and substance reasonably acceptable to the Purchaser
to the effect that this Stock Purchase Agreement and any written supplement
hereto and the Registration Rights Agreement are enforceable against each of
the Funds in accordance with their respective terms, and (iii) a legal opinion
from Minnesota counsel reasonably acceptable to the Purchaser (which shall
include Dorsey & Whitney) in form and substance reasonably satisfactory to the
Purchaser to the effect that this Stock Purchase Agreement and any written
supplement hereto has been duly authorized, executed and delivered by the
Company to the Purchaser and is enforceable against the Company in accordance
with its terms. Such legal opinions may contain customary qualifications and
limitations for opinions of such nature.
SECTION 5.3 Conditions to Obligations of the Company and
the Funds. The obligations of the Company and the Funds to effect the
transactions contemplated by this Agreement are subject to the satisfaction of
the following unless waived by the Company and the Funds:
(a) Representations and Warranties. The representations
and warranties of the Purchaser set forth in this Agreement shall be true,
correct and complete as of the date of this Agreement and (except to the extent
such representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date, except as otherwise
contemplated by this Agreement and except for such failures to be true, correct
and complete as of the Closing Date that would not, reasonably be expected to
have a Purchaser Material Adverse Effect or adversely affect the validity of,
or the Funds title to the Stock Consideration, and the Funds shall have
received a certificate to such effect signed on behalf of the Purchaser by the
chief financial officer of the Purchaser; provided, however, that receipt of
such certificate shall not be evidence that the Funds concur with anything set
forth in such certificate.
(b) Performance of Obligations of the Purchaser. The
Purchaser shall have performed in all material respects all material
obligations required to be performed by them under this Agreement at or prior
to the Closing Date, and the Funds shall have received a certificate to such
effect signed on behalf of the Purchaser by the chief financial officer of the
Purchaser to such effect.
(c) Required Consents; Governmental Approvals. (i) All
Required Consents shall have been obtained on terms and conditions that would
not, individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect and shall be in
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full force and effect, and (ii) Purchaser shall have received all consents,
approvals, Licenses and Permits of Governmental Entities so as to enable
Sunstone Hotel Investors, L.P. to own the Properties (or the Investment
Entities to own the Properties owned by the Investment Entities on the date
hereof) and to enable Sunstone Hotel Properties, Inc. to operate the Properties
immediately following the Closing Date substantially in the same manner as
operated on the date hereof; provided that with respect to Licenses and Permits
or other governmental consents or approvals that can be obtained only after
consummation of the Stock Purchase, such consents, approvals, Licenses or
Permits shall not be a condition precedent if the Funds shall have not received
advice from its counsel, after due inquiry of the appropriate regulatory agency
or from the appropriate regulatory agency to the effect that there is a
substantial possibility that such Licenses and Permits will not be obtained
promptly following such consummation and that failure to procure the applicable
License and Permit will result in a Company Material Adverse Effect.
(d) No Material Adverse Change. Since the date hereof,
there shall have been no material adverse change in the business, properties,
assets, results of operations or financial condition of the Purchaser and its
Subsidiaries taken as a whole, nor shall there have been any development which,
taken together with all other developments in the aggregate, would reasonably
be expected to result in such a material adverse change.
(e) Legal Opinions. The Funds shall have received (i) a
legal opinion from Ballard, Spahr, Andrews & Ingersoll, special Maryland
counsel to the Purchaser, in form and substance reasonably acceptable to the
Funds to the effect that this Stock Purchase Agreement and any written
supplement hereto and the Registration Rights Agreement have each been duly
authorized, executed and delivered by the Purchaser to the Funds and to the
effect of the matters set forth in Section 3.2(i) and 5.3(f), and (ii) a legal
opinion from Brobeck, Phleger & Harrison LLP, counsel to the Purchaser, in form
and substance reasonably acceptable to the Funds to the effect that this Stock
Purchase Agreement and any written supplement hereto and the Registration
Rights Agreement are each enforceable against the Purchaser in accordance with
their respective terms. Such legal opinions may contain customary
qualifications and limitations for opinions of such nature.
(f) Confirmation of Exempt Purchase Status for Funds.
The Purchaser shall have delivered to the Funds written certification, in form
and substance reasonably satisfactory to the Funds, that the Board of Directors
of the Purchaser has exempted the Funds and its partners from the Ownership
Limit (as defined in Section 2 of Article V of the Amended Articles of
Incorporation of the Purchaser) pursuant to Section 2(f) of Article V of the
Amended Articles of Incorporation of the Purchaser, which certificate shall
attach copies of the relevant resolution of the Board of Directors and the
legal opinion that forms the basis thereof.
(g) Distribution\Restructuring. Either (i) the Company
shall have obtained the Distribution Financing and paid the Distribution in the
amount determined pursuant to Section 1.4 or (ii) if the Company, after using
commercially reasonable efforts, is unable to obtain the Distribution
Financing, the parties shall have arrived at a mutually acceptable means for
funding
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the Distribution. This condition cannot be deemed waived in any manner by
virtue of any action or inaction by the Company, its Subsidiaries, its
Investment Entities or the Purchaser, including any failure by any of them to
obtain the Distribution Financing.
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER
SECTION 6.1 Termination. This Agreement may be
terminated and the Stock Purchase contemplated hereby may be abandoned at any
time prior to the Closing Date:
(a) by mutual written consent of the Purchaser and the
Funds;
(b) by the Purchaser, upon a breach of any
representation, warranty, covenant or agreement on the part of the Company or
the Funds set forth in this Agreement, or if any such representation or
warranty of the Company or the Funds shall have been or become untrue, in each
case such that the conditions set forth in Section 5.2(a) or Section 5.2(b), as
the case may be, would be incapable of being satisfied (following notice and
failure to cure within 20 days of such notice);
(c) by the Funds, upon a breach of any representation,
warranty, covenant or agreement on the part of the Purchaser set forth in this
Agreement, or if any such representation or warranty of the Purchaser shall
have been or become untrue, in each case such that the conditions set forth in
Section 5.3(a) or Section 5.3(b), as the case may be, would be incapable of
being satisfied (following notice and failure to cure within 20 days of such
notice);
(d) by either the Purchaser or the Funds, if any
permanent injunction or action by any Governmental Entity preventing the
consummation of the Stock Purchase or transactions contemplated by Section 1.5
shall have become final and nonappealable;
(e) by either the Purchaser or the Funds if the Stock
Purchase shall not have been consummated on or prior to December 31, 1997; or
(f) by the Funds in the event that all of the conditions
precedent in Sections 5.1 and 5.2 are satisfied or would be satisfied but for a
breach of this Agreement by the Purchaser, the Funds are prepared to effect the
transactions required to occur on the day before the Closing and on the Closing
Date and the Purchaser is unable to effect the Closing due to the Purchaser not
having available all necessary financing, subject to the right of the Purchaser
to delay the Closing Date pursuant to the proviso in Section 1.2.
SECTION 6.2 Effect of Termination. In the events of the
termination of this Agreement pursuant to Section 6.1, this Agreement shall
forthwith become void and there shall be no liability on the part of any party
hereto except as set forth in Section 4.3, in Section
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7.1 and in the immediately succeeding sentence; provided, however, that nothing
herein shall relieve any party from liability for any willful and material
breach hereof. The Purchaser shall be liable to the Funds for all direct,
actual damages (and all expenses incurred by the Funds and the Company in
connection with the preparation, negotiation and execution of this Agreement
and the taking of all actions contemplated hereby) incurred by the Funds due to
the failure of the Closing to occur if this Agreement is terminated pursuant to
Section 6.1(f).
SECTION 6.3 Reports. In the event this Agreement is
terminated pursuant to Section 6.1(c), Purchaser shall deliver to the Funds
copies of all written environmental and engineering reports prepared by
Purchaser's consultants.
SECTION 6.4 Fees and Expenses. Except as provided in this
Section 6.4 and Section 6.2, the Purchaser and the Funds shall each bear their
own fees and expenses in connection with this Agreement and the transactions
contemplated hereby. Without limiting the foregoing, the Funds shall pay all
fees and expenses of Simpson Thacher & Bartlett, counsel to the Funds, incurred
in connection with the preparation, negotiation and execution of this Agreement
and the consummation of the transactions contemplated hereby.
SECTION 6.5 Amendment. This Agreement may be amended,
supplemented or otherwise modified by the parties hereto only by written
agreement executed and delivered by duly authorized officers of the respective
parties.
SECTION 6.6 Waiver. Any party hereto may (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 contained herein or in any document delivered pursuant hereto or (c)
waive compliance with any of the agreements or conditions contained herein.
Any such extension or waiver shall be valid only if set forth in an instrument
in writing signed by the party or parties to be bound thereby. The failure of
any party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of such rights.
ARTICLE VII
GENERAL PROVISIONS
SECTION 7.1 Survival of Representations, Warranties and
Agreements; Indemnification.
(a) Survival. The representations and warranties and
agreements in Article IV of the Funds and the Purchaser in this Agreement shall
survive the Closing until the one year anniversary of the Closing Date,
provided that, notwithstanding the foregoing, (i) the representations and
warranties contained in Sections 3.1(k), 3.1(l)(v), 3.1(s)(i), (iii), (iv),
(vi) and (viii), 3.1(t) and 3.2(f) shall terminate on the Closing Date, (ii)
the representations and
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warranties contained in Sections 3.1(w), 3.1(x), 3.1(y), 3.1(z), 3.1(aa) and
3.2(i) (collectively, the "Non-Terminating Representations") shall survive the
Closing and shall not terminate and (iii) the agreements in Sections 4.3(c) (as
it applies to Section 4.3(b) only), 4.4, 4.5, 4.10, 4.11, 4.12, 4.18 and 4.19
shall survive the Closing and shall not terminate (collectively, the
"Non-Terminating Pre-Closing Agreements"). No party shall have any liability
or obligation of any nature with respect to any representation, warranty or
pre-Closing agreement after the termination thereof.
(b) Indemnification by Purchaser. Subject to Section
7.1(d), (e), (f) and (h), from and after the Closing Date, the Purchaser shall
indemnify and hold harmless the Funds, the Funds' Affiliates, each of their
respective directors, officers, employees and agents, and each of the heirs,
executors, successors and assigns of any of the foregoing from and against any
and all damages, claims, losses, expenses, costs, obligations and liabilities
including without limiting the generality of the foregoing, liabilities for all
reasonable attorneys' fees and expenses (including attorney and expert fees and
expenses incurred to enforce the terms of this Agreement in the event of a
breach) (collectively, "Losses and Expenses") suffered or incurred by any such
indemnified Person arising from, relating to or otherwise in respect of, (i)
any breach of, or inaccuracy in, any representation or warranty of the
Purchaser contained in this Agreement or in the certificate delivered pursuant
to Section 5.3(a) of this Agreement and (ii) any breach of any agreement of the
Purchaser contained in this Agreement.
(c) Indemnification by the Funds. Subject to Sections
7.1(d), (e), (f) and (h), from and after the Closing Date, the Funds shall,
jointly and severally, indemnify and hold harmless the Purchaser, Purchaser's
Affiliates, each of their respective directors, officers, employees and agents,
and each of the heirs, executors, successors and assigns of any of the
foregoing from and against any and all Losses and Expenses suffered or incurred
by any such indemnified Person arising from, relating to or otherwise in
respect of, (i) any breach of, or inaccuracy in, any representation or warranty
of the Funds contained in this Agreement or in the certificates delivered
pursuant to Section 5.2(a) of this Agreement, (ii) any breach by the Funds of
Section 4.1 of this Agreement or the related provisions of the certificate
delivered pursuant to Section 5.2(b) other than a breach of any provision of
clause (a) through (m) (which shall be subject to indemnification pursuant to
clause (iii) hereof), (iii) any breach of any agreement of the Funds contained
in this Agreement except for matters covered by clause (ii), and (iv) for the
matters (and in the manner) set forth on Schedule 7.1(c).
(d) Limitations on Indemnification. Neither the
Purchaser nor the Funds shall have any obligation to indemnify any indemnified
person pursuant to clause (i) of Section 7.1(b) or clause (i) of Section 7.1(c)
(other than with respect to a Non-Termination Representation, which shall not
be subject to this Section 7.1(d)) unless the aggregate of all Losses and
Expenses in respect of all matters subject to such claims would, but for this
section, exceed $2,500,000, in which case the Purchaser or the Funds,
respectively, shall, subject to the immediately succeeding sentence, be liable
for all amounts in excess of such $2,500,000 threshold; provided, however, that
no threshold shall apply to breaches of representations contained in Section
3.1(c)(i) as to the percentage ownership of capital stock of those corporate
entities identified by
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the footnotes on Schedule 3.1(c)(i). The maximum aggregate liability of the
Purchaser on the one hand and the Funds, collectively, on the other for all
Losses and Expenses incurred by all indemnified parties for all matters subject
to clause (i) of Section 7.1(b) or clause (i) of Section 7.1(c) (in each case
other than with respect to Non-Terminating Representations, which shall not be
subject to this Section 7.1(d)), as applicable, is $5,000,000 in the aggregate
for all matters and neither the Purchaser nor the Funds shall have any
obligation or liability pursuant to such clauses in excess of such amount.
(e) Third-Party Claims. If a claim by a third party is
made against an indemnified Person hereunder, and if such indemnified Person
intends to seek indemnity with respect thereto under this Article, such
indemnified Person shall promptly notify the indemnifying Person in writing of
such claims setting forth such claims in reasonable detail, provided that
failure of such indemnified Person to give prompt notice as provided herein
shall not relieve the indemnifying Person of any of its obligations hereunder,
except to the extent that the indemnifying Person is materially prejudiced by
such failure. The indemnifying Person shall have twenty (20) days after
receipt of such notice to undertake, through counsel of its own choosing,
subject to the reasonable approval of such indemnified Person, the settlement
or defense thereof, and the indemnified Person shall cooperate with it in
connection therewith; provided, however, that the indemnified Person may
participate in such settlement or defense through counsel chosen by such
indemnified Person; provided that the fees and expenses of such counsel shall
be borne by such indemnified Person. If the indemnifying Person shall assume
the defense of a claim, it shall not settle or compromise such claim without
the prior written consent of the indemnified Person (which consent shall not be
unreasonably withheld) unless (i) the indemnifying Person agrees in writing
that the indemnified Person is entitled to indemnification in respect of such
claim pursuant to this Section 7.1, (ii) such settlement or compromise includes
as an unconditional term thereof the giving by the claimant of a release of the
indemnified Person from all liability with respect to such claim and (iii) such
settlement or compromise does not involve the imposition of equitable remedies
or the imposition of any obligations on such indemnified Person other than
financial obligations for which such indemnified party will be indemnified
hereunder. If the indemnifying Person shall assume the defense of a claim, all
fees and expenses of the indemnifying Person's counsel and other costs of
defending such claim shall be borne by the indemnifying party; provided that
the fees of any separate counsel retained by the indemnified Person shall be
borne by such indemnified Person unless there exists a conflict between them as
to their respective legal defenses (other than one that is of a monetary
nature), in which case the indemnified Person shall be entitled to retain
separate counsel, the reasonable fees and expenses of which shall be reimbursed
by the indemnifying Person. If the indemnifying Person does not notify the
indemnified Person within twenty (20) days after the receipt of the indemnified
Person's notice of a claim of indemnity hereunder that it elects to undertake
the defense thereof, the indemnified Person shall have the right to defend the
claim and shall not settle or compromise the claim without the consent of the
indemnifying party (which consent will not be unreasonably withheld) unless the
indemnifying party agrees in writing that it is not entitled to any indemnities
pursuant to this Section 7.1.
<PAGE> 66
60
(f) Termination of Indemnification. The obligations to
indemnify and hold harmless a Person pursuant to Section 7.1(b) or 7.1(c) shall
terminate when the applicable representation, warranty or agreement terminates
pursuant to Section 7.1(a); provided, however, that such obligation to
indemnify and hold harmless shall not terminate with respect to any item as to
which the person to be indemnified shall have, after the Closing Date but
before the expiration of the applicable period, previously made a claim by
delivering a written notice (stating in reasonable detail the basis of such
claim) to the indemnifying party; provided, further, that a claim for any item
under Section 3.1(q) shall not be deemed made with respect to any Tax until
such time as the Purchaser receives written notice from a taxing authority
asserting that such Tax is due or, if earlier, such time as Purchaser, its
Subsidiary or Investment Entity has actually paid such Tax (but such claim will
be deemed made only to the extent of such payment).
(g) Exclusive Remedy. After the Closing Date, the
indemnification provided pursuant to this Section 7.1 shall be the sole and
exclusive remedy of any party hereto for any Losses and Expenses arising out of
or relating to any breach of any representation, warranty or agreement
contained in this Agreement.
(h) Calculation of Loss and Expenses. In the event of
any breach of representation and warranty contained in Section 3.1 or Section
3.2, the amount of Losses and Expenses arising from, relating to or otherwise
in respect of such breach shall be determined based on the entire amount of any
such Losses and Expenses, not merely the portion above any "Material Adverse
Effect" or other materiality qualifiers contained in the applicable
representation and warranty.
SECTION 7.2 Notices. All notices, requests, claims,
demands and other communications hereunder shall be in writing and shall be
given (and shall be deemed to have been duly given upon receipt) by delivery in
Person, by cable, telecopy, telegram or telex or by registered or certified
mail (postage prepaid, return receipt requested) to the respective parties at
the following addresses (or at such other address for a party as shall be
specified by like notice):
if to the Purchaser:
Sunstone Hotel Investors, Inc.
115 Calle de Industrias
Suite 201
San Clemente, CA 92672
Attn: Robert A. Alter
with a copy to:
Brobeck, Phleger & Harrison LLP
4675 MacArthur Court
Suite 1000
Newport Beach, CA 92660
Attn: Roger M. Cohen, Esq.
<PAGE> 67
61
if to the Company:
Kahler Realty Corporation
20 Second Avenue SW
Rochester, Minnesota 55902
Attn: Thomas O'Leary
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017-3954
Attn: Richard Capelouto, Esq.
if to the Funds:
Westbrook Real Estate Fund I, L.P.
Westbrook Real Estate Co-Investment
Partnership I, L.P.
599 Lexington Avenue
New York, New York 10022
Attn: Jonathan Paul
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017-3954
Attn: Richard Capelouto, Esq.
SECTION 7.3 Certain Definitions.
(a) For purposes of this Agreement, the term:
"Affiliate" of a specified Person means a Person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, such specified Person.
"Capital Expenditures Budget" means the Company's capital
expenditures budget, dated May 14, 1997, delivered by the Company to Purchaser
on the date hereof.
"Code" means the Internal Revenue Code of 1986, as amended.
<PAGE> 68
62
"Company Material Adverse Effect" means a material adverse
effect on the business, assets, results of operations, financial condition or
prospects (based on the conduct of the Company's, its Subsidiaries' and its
Investment Entities' business as currently conducted) of the Company and its
Subsidiaries taken as a whole, or on the ability of the Company to perform its
obligations hereunder.
"Construction Contract" means any construction contract,
architect's and/or engineer's agreement, construction management contract,
design contract, subcontract, and other similar type of agreement, together
with all supplements, amendments, modifications, general conditions, change
orders and addenda thereto entered into by or on behalf of any Property Owner
(as hereinafter defined) or tenant under any Space Lease (where the Company,
its Subsidiaries or its Investment Entity is such tenant under any Space
Lease), or its predecessors-in- interest, in connection with the construction,
rehabilitation or renovation of any of the Properties or any part thereof or
the installation of any Improvements on any of the Properties or any part
thereof and which in each instance provides for the payment of $250,000 or more
or provides for payment on a "cost plus" basis.
"Disqualifying Asset" means assets other than "real estate
assets" within the meaning of Section 856(c)(6)(B) of the Code.
"Environmental Claims" refers to any written complaint,
summons, citation, notice, directive, order, claim, litigation, investigation,
judicial or administrative proceeding, judgment, letter or other written
communication from any Governmental Entity or the commencement of any
litigation by any third party, in each case involving violations of
Environmental Laws or Releases of Hazardous Materials.
"Environmental Laws" includes the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. 9601 et seq.,
as amended; the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. 6901
et seq., as amended; the Clean Air Act ("CAA"), 42 U.S.C. 7401 et seq., as
amended; the Clean Water Act ("CWA"), 33 U.S.C. 1251 et seq., as amended; and
any other federal, state, local or municipal laws, statutes, regulations, rules
or ordinances imposing liability or establishing standards of or requirements
for conduct for protection of the environment, which standards or requirements
are now in effect.
"Environmental Report" means any environmental consultant's
report, study or assessment that addresses actual or potential noncompliance
with, or actual or potential liability under Environmental Law on the part of
the Company, any of its subsidiaries and/or any of its Investment Entities.
"Existing Indebtedness" means, with respect to each Existing
Loan, the indebtedness borrowed thereunder (including all unpaid principal and
accrued interest and all other penalties, charges, and other amounts due and
payable under each such Existing Loan as of June 29, 1997).
<PAGE> 69
63
"Existing Loan" means the loans set forth on Attachment
3.1(m)(i)(G).
"Franchise Agreements" means the Franchise Agreements listed
on Schedule 3.1(m)(i)(H) under the heading "Franchise Agreements", together
with all supplements, amendments and modifications thereto.
"GAAP" shall mean the generally accepted accounting principles
set forth in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment of
the accounting profession in the United States.
"Governmental Entity" means the United States of America, any
state or local government, any political subdivision of either, any agency,
department, commission, board, bureau or instrumentality of any of them, or any
quasi-public agency established by any of the foregoing including, without
limitation, any insurance rating organization or board of fire underwriters
which exercises jurisdiction over the Premises.
"Governmental Regulations" means any laws, orders, judgments,
decrees, ordinances, rules, requirements, resolutions, and regulations, now or
hereinafter existing (including, without limitation, those relating to land
use, subdivision, zoning, environmental, hazardous substances, employment
practices, occupational health and safety, water and building and fire codes)
of any Governmental Entity.
"Ground Lease" means each of the leases, together with all
supplements, amendments and modifications thereto, listed on Schedule
3.1(m)(i)(I) under the heading "Ground Lease."
"Hazardous Materials" means any chemical, material or
substance defined as or included in the definition of "hazardous substances,"
"hazardous wastes," "hazardous materials," "regulated substances," "extremely
hazardous waste," "restricted hazardous waste," "toxic substances,"
"contaminants," "pollutants," "medical waste," "biohazardous or infectious
waste," "solid waste," "special waste," or words of similar import under any
applicable Environmental Law. Without limiting the generality of the
foregoing, the term "Hazardous Materials" shall include, to the extent such
materials are regulated by any Environmental Law (a) any oil, flammable
substances, explosives, radioactive materials, hazardous wastes, chemicals, or
substances, or toxic wastes; (b) friable asbestos; (c) urea formaldehyde foam
insulation; (d) transformers or other equipment which contain polychlorinated
biphenyls; and (e) Radon gas.
"Hotel Property" means Real Property which includes a hotel.
"Improvements" means all buildings, improvements, structures
and fixtures located on the Land or any part thereof.
<PAGE> 70
64
"Intangible Personal Property" means all Intangible Personal
Property owned or possessed by any Property Owner and used in connection with
the ownership, operation, leasing, occupancy or maintenance of any of the
Properties, including, without limitation, (a) such Property Owner's right to
use any tradenames, (b) the Licenses and Permits, (c) any escrow accounts, (d)
all rights, privileges and appurtenances pertaining to any of the Properties,
including, without limitation, air-rights, development rights and utility
rights, (e) general intangibles, (f) all books, plans and records of the
Company, its Subsidiaries and each Property Owner, and (g) any unpaid award for
taking by condemnation or any damage to the Land by reason of a change of grade
or location of or access to any street or highway.
"Knowledge" means, with respect to a Person the actual
knowledge, after having made reasonable inquiry of its executive officers and
directors.
"Land" means, collectively, each parcel of Real Property shown
on the Survey for such parcel of Real Property and denoted thereon as being
owned or leased by the applicable Property Owner.
"Leasehold Estates" means, collectively, each Leasehold Estate
created pursuant to a Ground Lease with respect to a parcel of Land related
thereto.
"Licenses and Permits" means, collectively, all licenses
(including, without limitation, liquor licenses and casino licenses), permits,
authorizations, certificates of occupancy, approvals, dedications, subdivision
approvals and entitlements issued, approved or granted by any Governmental
Entity or otherwise in connection with any of the Properties; and all licenses,
consents, easements, rights of way and approvals required from private parties
to make use of the existing utilities and to insure vehicular and pedestrian
ingress and egress to any of the Properties.
"Liens" means any mortgage, deed of trust, pledge, security
interest, financing statement, encumbrance, lien, judgment, segregation, charge
or deposit arrangement or other arrangement having the practical effect of any
of the foregoing and shall include the interest of a vendor or lessor under any
conditional sale agreement, capitalized lease or other title retention
agreement.
"Management Contracts" means the management contracts listed
on Schedule 3.1(m)(i)(H) together with all supplements, amendments and
modifications thereto.
"material liability" means the expenditure of more than
$75,000. The definition of material liability for purposes of this Agreement
is solely for the purposes where such term is specifically used and shall not
be relied upon to determine and shall not be used as evidence of the
appropriate standard of "materiality" in the context of the determination of
whether a Company Material Adverse Effect has occurred or whether any other
"materiality" qualifier has been satisfied.
<PAGE> 71
65
"Non-Core Assets" shall mean the assets set forth on Schedule
4.22.
"Permitted Liens" means, subject to the terms and conditions
of the second sentence of this definition, (a) liens, levies and assessments
(it being understood that in the case of levies and assessments, such matters
are recurring and generally reflected in the Company's financial statements)
for current taxes, sewer charges, water charges or common charges of any
condominium association, in all cases, not yet due and payable, (b) rights of
(x) tenants or persons in possession as listed on Schedule 3.1(m)(i)(I) and (y)
tenants or persons in possession pursuant to immaterial Space Leases, (c) the
matters and items listed on the Title Insurance Policies and Title Reports set
forth on Schedule 3.1(s)(ix) excluding any matters or items of the type
referenced in clause (E) or (F) of the last sentence of this definition, (d)
the matters and items shown on the Surveys, which Surveys have been made
available to the Purchaser prior to the date hereof, (e) matters that would be
disclosed by an accurate survey of the Land done after the date of the
respective Surveys, (f) as to Personal Property, liens of carriers and
warehousemen incurred in the ordinary course of business for sums not yet due
and liens arising under the loan documents described on Schedule 3.1(m)(i)(F)
and (G) and, (g) as to Personal Property, liens incurred or deposits made in
the ordinary course of business in connection with workers compensation,
unemployment insurance and other types of social security, or to secure the
performance of tenders, statutory obligations, surety and appeal bonds, bids,
leases, performance and return-of-money bonds and similar obligations
(exclusive of obligations for the payment of borrowed money), (h) easements,
covenants and restrictions placed of record subsequent to the date of the Title
Policies and Title Reports described on Schedule 3.1(s)(ix), (i) matters placed
of record subsequent to the date of the Title Policies and Title Reports
described on Schedule 3.1(s)(ix) affecting the title of any owner of the Land
covered by the Ground Leases, provided that such matter is subject and
subordinate in all respects to the tenants interest under applicable Ground
Lease. Notwithstanding the foregoing, a matter or item described above in
clauses (e) or (h) above (collectively, the "Excludable Liens") shall not be a
"Permitted Lien" (1) if any such Excludable Lien (A) (excluding the terms of
any of the Ground Leases and any mortgages or deeds of trust or other
collateral loan document) provides for a condition or right of reverter or
other provision for forfeiture under which the fee or leasehold title, as the
case may be, or the possessory rights of the Company, any of its Subsidiaries
or its Investment Entities can be cut off, subordinated or otherwise disturbed
as a result of (w) a presently existing default thereunder, (x) notice or the
passage of time or both (excluding in the case of default or violation
thereunder subsequent to the Effective Date), (y) the consummation of the
transactions contemplated by this Agreement (other than the transactions
contemplated by Section 1.5) or (z) the current use of the Real Property, (B)
is violated by the existence of the existing Improvements, (C) prohibits or
impairs in any material respect the present use and enjoyment of the Real
Property, or (D) causes the representations and warranties set forth in Section
3.1(s)(viii) to be untrue or (E) if any such Excludable Lien relates to
financing or indebtedness not set forth on Schedule 3.1(m)(i)(F) and (G) or (F)
if any such Excludable Lien relates to a monetary judgment, or (G) if any such
Excludable Lien has been or is voluntarily placed of record by the Company, any
Subsidiary or any Investment Entity subsequent to the date of the Title
Policies and Title Reports described on Schedule 3.1(s)(ix) and (2) if a
reputable national title insurance company shall not be ready, willing and able
to
<PAGE> 72
66
issue affirmative title insurance (without additional cost or premium and
otherwise reasonably acceptable to Purchaser) insuring against the matters
described in clauses (A), (B) and (C) above, as applicable, with respect to any
such Excludable Lien.
"Person" means an individual, corporation, partnership,
association, trust, unincorporated organization, other entity or group (as
defined in Section 13(d)(3) of the Exchange Act).
"Personal Property" means, collectively, the Tangible Personal
Property and the Intangible Personal Property.
"Properties" or "Property" means the Real Property, any
premises demised to the Company or any of its Subsidiaries or its Investment
Entities under any Space Lease and the Personal Property.
"Property Contracts" means, collectively, Construction
Contracts, Service Contracts, the Franchise Agreements and the Management
Contracts relating to any of the Properties.
"Property Owner" means the owners or tenants, as the case may
be (as set forth on Schedule 3.1(s)(i) and (ii) hereto), of each parcel of Real
Property.
"Purchaser Material Adverse Effect" means a material adverse
effect on (i) the business, properties, assets, results of operations or
financial condition of the Purchaser and its Subsidiaries taken as a whole, or
(ii) on the ability of the Purchaser to perform its obligations hereunder or
under the Registration Rights Agreement.
"Real Property" means the Land, the Leasehold Estates and the
Improvements.
"REIT Qualification" means the Purchaser's satisfaction of the
requirements of Section 856(a) of the Code such that the Purchaser will
continue to be treated as a real estate investment trust for federal income tax
purposes.
"Release" means any spilling, leaking, pumping, emitting,
emptying, discharging, injecting, escaping, leaching, dumping, or disposing of
Hazardous Materials (including the abandonment or discarding of barrels,
containers or other closed receptacles containing Hazardous Materials) into the
environment.
"Required Consents" means the consents set forth on Schedule
7.3(a).
"Service Contract" means any service agreement, brokerage
commission agreement, maintenance contract, contract for the purchase or
delivery of services, materials, goods, inventory or supplies, cleaning
contracts, equipment rental agreements, equipment leases or leases of Personal
Property (other than the Franchise Agreements and the Management
<PAGE> 73
67
Agreements), together with all supplements, amendments and modifications
thereto, relating to any of the Properties or any part thereof; provided,
however, the term "Service Contract" shall not include any Service Contract
which (i) provides for the payment of $100,000 per annum or $250,000 in the
aggregate or less, or (ii) is terminable without penalty on 90 days' or less
prior written notice.
"Space Leases" means all material leases, licenses, subleases,
rental agreements or occupancy agreements, together with all supplements,
amendments and modifications thereto, entered into by the Company or its
Subsidiaries or Investment Entities.
"Subsidiary" or "Subsidiaries" of the Company, the Purchaser
or any other Person means any corporation, partnership, joint venture or other
legal entity of which the Company, the Purchaser or such other Person, as the
case may be (either alone or through or together with any other Subsidiary),
owns or has the right to acquire, directly or indirectly, 50% or more of the
stock or other equity interests the holder of which is generally entitled to
vote for the election of the board of directors or other governing body of such
corporation or other legal entity, and specifically includes Park Hotels L.C.
"Surveys" means the Surveys, plats, plot plans and floor plans
listed on Schedule 3.1(s)(ix).
"Tangible Personal Property" means the items of tangible
personal property consisting of all furniture, furnishings, fixtures,
equipment, machinery and other Personal Property of every kind and nature
located on or used or useful in the operation of any of the Properties,
including, without limitation, as lessee with respect to any such Tangible
Personal Property.
"Title Insurance Policies" means any title insurance policy
insuring title (either fee simple or leasehold) vested in the Company or one of
its Subsidiaries or Investment Entities, as the case may be.
"Title Reports" means the title reports, title commitments and
title opinions listed under the heading "Title Reports" on Schedule 3.1(s)(ix).
(b) The following terms shall have the meaning specified in
the indicated Section of this Agreement:
<PAGE> 74
68
<TABLE>
<CAPTION>
Term Section Term Section
- ---- ------- ---- -------
<S> <C> <C> <C>
ADA............................................. 3.1 HSR Act..........................................3.1
Additional Contribution......................... 4.9 Independent Accounting Firm......................2.1
Adjusted 1999 EBITDA.............................2.1 Interest.........................................1.3
Adjusted Valuation Amount........................2.1 IRS..............................................3.1
Agreement Recitals Initial Lock-Up Period..........................4.10
Amendment.......................................4.11 Investment Entities..............................3.1
Asset Sales......................................2.1 KPMG.............................................1.4
Capital Expenditures.............................2.1 Lessee...........................................2.1
Capital Expenditures Reserve.....................2.1 Lessee 1999 Adjusted Portfolio EBITDA............2.1
Cash Consideration ............................. 1.3 Lessee 1999 Portfolio Revenue....................2.1
Certificate of Designation...................... 1.3 Losses and Expenses..............................7.1
Closing......................................... 1.2 Material Contracts...............................3.1
Closing Date.................................... 1.2 Manager Qualifying Project.......................2.1
Collective Bargaining March Qualifying Project.........................2.1
Agreement........................................4.1 MBCA.............................................1.1
Company.....................................Recitals Merger......................................Recitals
Company Audited Financial 1999 Capital Expenditure Reserve.................2.1
Statements.......................................3.1 1999 EBITDA......................................2.1
Company Common Stock........................Recitals 1999 Room Revenues...............................2.1
Company Plans....................................3.1 1997/1998 Room Revenues..........................2.1
Company Preferred Stock..........................3.1 Notes............................................4.9
Company Securities...............................3.1 Other Revenues...................................2.1
Company Unaudited Financial Ownership Interests..............................3.1
Statements.......................................3.1 Portfolio Hotels.................................2.1
Completed in Full................................2.1 Purchaser...................................Recitals
Condemnation.....................................2.1 Preliminary Earn-Out Payment.....................2.1
December Qualifying Project......................2.1 Preliminary Earn-Out Payment
Distribution.....................................1.4 Amount...........................................2.1
Earn-Out Payment Amount..........................2.1 Preliminary Earn-Out Ratio.......................2.1
Earn-Out Payment Date............................2.1 Purchaser Common Stock...........................1.3
Earn-Out Ratio...................................2.1 Purchaser Common Stock
EBITDA...........................................2.1 Consideration....................................1.3
Employees....................................... 4.4 Purchaser Convertible Preferred Stock............1.3
ERISA............................................3.1 Purchaser Convertible
Exchange Act.....................................3.2 Preferred Stock
Excess Lessee Adjusted EBITDA....................2.1 Consideration....................................1.3
Existing Lease...................................2.1 Purchaser Preferred Stock........................3.2
Fair Market Value................................2.1 Purchaser's Earn-Out Calculation
FASB.............................................3.1 Certificate......................................2.1
Funds.......................................Recitals Qualifying Project...............................2.1
Funds' Dispute Notice............................2.1 Returned Portfolio Hotels........................2.1
</TABLE>
<PAGE> 75
69
<TABLE>
<CAPTION>
Term Section Term Section
- ---- ------- ---- -------
<S> <C> <C> <C>
RevPur Index................................2.1 Stock Purchase Consideration................1.3
Room Revenues...............................2.1 Taxes.......................................3.1
Sale Proceeds...............................2.1 Tax Return..................................3.1
SEC Reports.................................3.2 Title IV Plan...............................3.1
Securities Act..............................1.3 Trading Period..............................2.1
September Qualifying Project................2.1 Westbrook Co-Investment
Shares.....................................4.10 Funds..................................Recitals
Stock..................................Recitals Westbrook Fund.........................Recitals
Stock Purchase.........................Recitals
</TABLE>
SECTION 7.4 Severability. If any term or other provision
of this Agreement is invalid, illegal or incapable of being enforced by any
rule of law, or public policy, all other conditions and provisions of this
Agreement shall nevertheless remain in full force and effect so long as the
economic or legal substance of the transactions contemplated hereby is not
affected in any manner adverse to any party. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner to the end that the transactions contemplated hereby are
fulfilled to the fullest extent possible.
SECTION 7.5 Entire Agreement; Assignment. This Agreement
constitutes the entire agreement among the parties with respect to the subject
matter hereof and supersedes all prior agreements and undertakings, both
written and oral, among the parties, or any of them, with respect to the
subject matter hereof. This Agreement shall not be assigned by operation of
law or otherwise, except that the Purchaser and the Purchaser may assign all or
any of their respective rights and obligations hereunder to any direct or
indirect wholly owned Subsidiary or Subsidiaries of the Purchaser or to the
Lessee or its wholly-owned Subsidiary or Subsidiaries; provided that no such
assignment shall relieve the assigning party of its obligations hereunder if
such assignee does not perform such obligations.
SECTION 7.6 Parties in Interest. This Agreement shall be
binding upon and inure solely to the benefit of each party hereto, and nothing
in this Agreement, express or implied, is intended to or shall confer upon any
other Person any rights, benefits or remedies of any nature whatsoever under or
by reason of this Agreement.
SECTION 7.7 Governing Law; Submission to Jurisdiction;
Waiver of Jury Trial; Specific Performance. (a) This Agreement shall be
governed by, and construed in accordance with, the laws of the State of New
York, regardless of the laws that might otherwise govern under applicable
principles of conflicts of laws thereof.
<PAGE> 76
70
(b) Each Party hereby irrevocably and unconditionally:
(i) submits for itself and its property in any
legal action or proceeding relating to this agreement and any related
documents to which it is a party, or for recognition and enforcement
of any judgment in respect thereof, to the non-exclusive general
jurisdiction of the courts of the State of New York, the courts of the
United States of America for the Southern District of New York, and
appellate courts from any thereof;
(ii) consents that any such action or proceeding
may be brought in such courts, and waives trial by jury and any
objection that it may now or hereafter have to the venue of any such
action or proceeding in any such court or that such action or
proceeding was brought in an inconvenient court and agrees not to
plead or claim the same;
(iii) agrees that service of process in any such
action or proceeding may be effected by mailing a copy thereof by
registered or certified mail (or any substantially similar form of
mail), postage prepaid, to such party at its address set forth in
subsection 7.2 or at such other address of which the company and each
shareholder shall have been notified pursuant thereto; and
(iv) agrees that nothing herein shall affect the
right to effect service of process in any other manner permitted by
law or shall limit the right to sue in any other jurisdiction.
(c) Each party to this agreement hereby irrevocably and
unconditionally waives trial by jury in any legal action or proceeding arising
out of or relating to this Agreement or the transactions relating hereto.
(d) The Purchaser and the Funds agree that any breach of
Article I would cause irreparable injury to the other party and that money
damages will be an inadequate remedy for any breach or threatened breach of the
agreements described in Article I. The Purchaser and the Funds agree that, in
the event of a breach or threatened breach by the Company or the Funds of the
agreements described in Article I, the Purchaser shall, in addition to other
rights and remedies existing in its favor, be entitled to specific performance
and/or injunctive relief in order to enforce, or prevent any violations of, the
provisions of Article I (without the posting of a bond or other security). The
Purchaser and the Funds agree that, in the event of a breach or threatened
breach by the Purchaser of the agreements described in Article I, the Funds
shall, in addition to other rights and remedies existing in their favor, be
entitled to specific performance and/or injunctive relief in order to enforce,
or prevent any violations of, the provisions of Article I (without the posting
of a bond or other security).
SECTION 7.8 Interpretation. When a reference is made in
this Agreement to a Section or Schedule, such reference shall be to a Section
of, or a Schedule to, this
<PAGE> 77
71
Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement.
SECTION 7.9 Counterparts. This Agreement may be executed
in one or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but
all of which taken together shall constitute one and the same agreement.
<PAGE> 78
SECTION 7.10 No Recourse. None of the general partners
or limited partners of the Funds will have any personal liability with respect
to any of the obligations or liabilities of the Funds under this Agreement and
the sole recourse of the Purchaser for any such obligations or liabilities will
be to the Funds themselves.
IN WITNESS WHEREOF, the Purchaser, the Purchaser, the Company
and the Fund have caused this Agreement, as amended and restated, to be
executed by their respective officers thereunto duly authorized, all as of the
date written above.
SUNSTONE HOTEL INVESTORS, INC.
By: /s/ Robert A. Alter
-------------------------------------------------
Robert A. Alter
President
WESTBROOK REAL ESTATE FUND I, L.P.
By: Westbrook Real Estate Partners Management,
L.L.C., its general partner
By: Westbrook Real Estate Partners, L.L.C.,
its managing member
By: /s/ Jonathan H. Paul
--------------------------------
Jonathan H. Paul
Managing Principal
<PAGE> 79
WESTBROOK REAL ESTATE CO-INVESTMENT
PARTNERSHIP I, L.P.
By: Westbrook Real Estate Partners Management,
L.L.C., its general partner
By: Westbrook Real Estate Partners,
L.L.C., its managing member
By: /s/ Jonathan H. Paul
-----------------------------
Jonathan H. Paul
Managing Principal
KAHLER REALTY CORPORATION
By: /s/ Thomas O'Leary
----------------------------------------------
Thomas O'Leary
Chief Executive Officer
<PAGE> 80
EXHIBIT 1.3 TO STOCK PURCHASE AGREEMENT
SUNSTONE HOTEL INVESTORS, INC.
ARTICLES SUPPLEMENTARY CLASSIFYING SHARES OF
7.9% CLASS A CUMULATIVE CONVERTIBLE PREFERRED STOCK
Sunstone Hotel Investors, Inc., a corporation organized and existing
under the laws of the State of Maryland (the "Company"), and having its
principal office in the State of Maryland at c/o The Prentice Hall Corporation
System, Inc., 11 East Chase Street, Suite 7-C, Baltimore City, Maryland 21202,
hereby certifies to the State Department of Assessments and Taxation of Maryland
(the "Department") that:
FIRST: Pursuant to the authority expressly vested in the Board of
Directors (the "Board") of the Company by Article V, Section 5 of the Company's
Amended Articles of Incorporation filed with the Department on September 23,
1994 (the "Charter") and Section 2-105 of the Maryland General Corporation Law
("MGCL"), the Board has, at a meeting duly called and noticed at which a quorum
of directors was present and acting throughout, adopted resolutions permitting
the Board to (i) classify and designate a separate class of authorized but
unissued Preferred Stock of the Company and (ii) set certain of the powers,
rights, designations, preferences, qualifications, limitations and restrictions
of each such separate class of Preferred Stock, and provided for the issuance of
a maximum of 10,000,000 shares of Preferred Stock.
SECOND: Pursuant to the authority conferred upon the Board as
aforesaid, the Board has at a special meting held on August 1, 1997 duly adopted
resolutions authorizing the issuance of a class of Preferred Stock consisting of
250,000 shares, designating such class as 7.9% Class A Cumulative Convertible
Preferred Stock, and setting the powers, rights, designations, preferences,
qualifications, limitations and restrictions of such 7.9% Class A Cumulative
Convertible Preferred Stock.
THIRD: The class of Preferred Stock of the Company created by the
resolutions duly adopted by the Board and referred to in these Articles
Supplementary shall have the following designation, number of shares, powers,
rights, preferences, qualifications, limitations and restrictions, as to
dividends, voting rights, conversion, terms and conditions of redemption,
liquidation and other terms and conditions.
1. Designation and Number. The powers, rights, designations,
preferences, qualifications, limitations and restrictions granted to and imposed
on the 7.9% Class A Cumulative Convertible Preferred Stock (the "Series A
Preferred Stock"), which class shall consist of 250,000 shares, is hereby
established. The Board is hereby authorized to fix or alter the powers, rights,
designations, preferences, qualifications, limitations and restrictions granted
to or imposed upon additional classes of Preferred Stock, and the number of
shares constituting any such class and the designation thereof, or of any of
them. Subject to compliance with
<PAGE> 81
applicable protective voting rights which may be granted to any class of
Preferred Stock in Articles Supplementary or to the Series A Preferred Stock
("Protective Provisions"), but notwithstanding any other rights of the Preferred
Stock or any class thereof, the powers, rights, designations, preferences,
qualifications, limitations and restrictions of any such additional class may be
subordinated to, pari passu with (including, without limitation, inclusion in
provisions with respect to liquidation and acquisition preferences, redemption
and/or approval of matters by vote or written consent), or senior to any of
those of any present or future class of Preferred or Common Stock. Subject to
compliance with applicable Protective Provisions and these Articles
Supplementary, the Board is also authorized to increase or decrease the number
of shares of any class (including the Series A Preferred Stock), prior or
subsequent to the issue of that class, but not below the number of shares of
such class then outstanding. In case the number of shares of any class shall be
so decreased, the shares constituting such decrease shall resume the status
which they had prior to the adoption of the resolution originally fixing the
number of shares of such class.
2. Dividend Provisions. Subject to the rights of classes of Preferred
Stock which may from time to time come into existence in compliance with Section
7, the holders of shares of Series A Preferred Stock shall be entitled to
receive for each share of Series A Preferred Stock cash dividends, out of any
assets legally available therefor, prior and in preference to any declaration or
payment of any cash dividend on the Common Stock of the Company, at the greater
of (i) 7.9% of the Original Series A Issue Price (as defined below) (as adjusted
for any stock dividends, combinations or splits with respect to such shares) per
share per annum or (ii) the product of the dividend or other distribution paid
by the Company for the quarter in question on each share of the Common Stock
(including all regular and special dividends and distributions) multiplied by
the number of shares of Common Stock into which such shares of Series A
Preferred Stock could be converted pursuant to subsection 5(a) below. All such
dividends shall be declared and paid quarterly in arrears contemporaneously with
payment of the dividends or other distributions on the Common Stock and with the
same record date for determining holders entitled to receive such dividend as
the corresponding record date on the Common Stock; provided that if no dividends
or other distributions are declared and paid on the Common Stock for 150 days, a
cash dividend for such quarter will be declared and paid to the holders of
shares of Series A Preferred Stock in accordance with clause (i) on such 150th
day. The determination of whether the amount of the quarterly dividend on the
Series A Preferred Stock will be established pursuant to clause (i) or clause
(ii) of this Section 2 will be made for each three-month period ending each
March 31, June 30, September 30 or December 31 and the determination of whether
clause (i) or clause (ii) is greater shall be made solely on the basis of the
dividends paid or to be paid on the Common Stock during such quarterly period.
Such dividends shall accrue on each share of Series A Preferred Stock from the
initial date of issuance of such share, and shall accrue from day to day,
whether or not earned or declared. Such dividends shall be cumulative so that,
except as provided below, if such dividends in respect of any previous or
current annual dividend period, at the annual rate specified above, shall not
have been paid the deficiency shall first be fully paid before any dividend or
other distribution shall be paid on or declared and set apart for the Common
Stock. If any dividend is not paid when due, interest shall accrue on such
unpaid dividend at the rate
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<PAGE> 82
of 7.9% per annum compounded quarterly from the date that such dividend was due
to the date such dividend is paid. Cumulative dividends with respect to a share
of Series A Preferred Stock with a record date for payment prior to the
Conversion Date or which have accrued and remain unpaid for any prior quarterly
dividend period shall, upon conversion of such share to Common Stock, be paid to
the holder of such share. Except as provided in the immediately preceding
sentence, cumulative dividends with respect to a share of Series A Preferred
Stock which are accrued shall, upon conversion of such share to Common Stock,
not then or thereafter be paid and shall cease to be accrued, payable and/or in
arrears.
In the event that the Company has failed to pay when due any dividend
on the Series A Preferred Stock then, until such dividend has been paid in full,
neither the Company nor any corporation, partnership, limited liability company
or other entity directly or indirectly controlled by the Company will redeem,
purchase or otherwise acquire any shares of Common Stock.
Any dividend or distribution which is declared by the Company and
payable with assets of the Company other than cash shall be governed by the
provisions of subsections 5(d)(i) and 5(e), as applicable, of these Articles
Supplementary.
3. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of
the Company, either voluntary or involuntary, subject to the rights of classes
of Preferred Stock that may from time to time come into existence in compliance
with Section 7, the holders of Series A Preferred Stock shall (unless such
shares of Series A Preferred Stock are converted into shares of Common Stock
pursuant to Section 5 hereof) be entitled to receive, prior and in preference to
any distribution of any of the assets of the Company to the holders of Common
Stock by reason of their ownership thereof, an amount per share equal to the sum
of (i) $100.00 for each outstanding share of Series A Preferred Stock (the
"Original Series A Issue Price") (as adjusted for any stock dividends,
combinations or splits with respect to such shares) and (ii) an amount equal to
accrued but unpaid dividends on each such share to the date of dissolution,
liquidation or winding up (collectively, the "Liquidation Preference"). If upon
the occurrence of such event, the assets and funds thus distributed among the
holders of the Series A Preferred Stock shall be insufficient to permit the
payment to such holders of the full aforesaid preferential amounts, then,
subject to the rights of classes of Preferred Stock that may from time to time
come into existence in compliance with Section 7, the entire assets and funds of
the Company legally available for distribution shall be distributed ratably
among the holders of the Series A Preferred Stock in proportion to the amount of
such stock owned by each such holder.
(b) Upon the completion of the distribution required by subsection
(a) of this Section 3 and any other distribution that may be required with
respect to classes of Preferred Stock that may from time to time come into
existence in compliance with Section 7, if assets remain in the Company, the
holders of the Common Stock of the Company shall receive all of the remaining
assets of the Company.
3
<PAGE> 83
(c)(i) For purposes of this Section 3, a liquidation, dissolution or
winding up of the Company shall be deemed to be occasioned by, or to include (A)
the acquisition of a majority of the beneficial voting control of the Company by
another entity by means of any transaction or series of related transactions
(including, without limitation, any reorganization, merger or consolidation)
unless, in the case of any acquisition of the Company to which the Company is
not a party, the holders of a majority of the outstanding shares of Series A
Preferred Stock determines otherwise within 15 days of receiving notice of such
event or (B) a sale of all or substantially all of the assets of the Company;
unless the Company's shareholders of record as constituted immediately prior to
such acquisition or sale will, immediately after such acquisition or sale (by
virtue of securities issued as consideration for the Company's acquisition or
sale or otherwise) hold at least 50% of the voting power of the surviving or
acquiring entity.
(ii) In any of such events, if the consideration received by the
Company is other than cash, its value will be deemed its fair market value.
(A) The method of valuation of securities not subject to
investment letter or other similar restrictions on free marketability covered by
subparagraph (B) below shall be as follows:
(1) If traded on a securities exchange or through the
Nasdaq National Market, the value shall be deemed to be the average of the
closing prices of the securities on such exchange over the thirty-day period
ending three (3) days prior to the closing;
(2) If actively traded over-the-counter, the value shall
be deemed to be the average of the closing bid or sale prices (whichever is
applicable) over the thirty-day period ending three (3) days prior to the
closing; and
(3) If there is no active public trading market, the
value shall be the fair market value thereof, as mutually determined by the
Company and the holders of at least a majority of the voting power of all then
outstanding shares of Series A Preferred Stock.
(B) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a shareholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in subparagraph (A) (1), (2) or (3) to reflect the
approximate fair market value thereof, as mutually determined by the Company and
the holders of at least a majority of the voting power of all then outstanding
shares of Series A Preferred Stock.
4
<PAGE> 84
(C) The fair market value of any other property or assets
shall be mutually determined by the Company and the holders of at least a
majority of the voting power of all then outstanding shares of Series A
Preferred Stock.
(iii) In the event the requirements of this subsection 3(c) are
not complied with, the Company shall forthwith either:
(A) cause such closing to be postponed until such time as
the requirements of this subsection 3(c) have been complied with; or
(B) cancel such transaction, in which event the powers,
rights, designations and preferences of the holders of the Series A Preferred
Stock shall revert to and be the same as such powers, rights, designations and
preferences existing immediately prior to the date of the first notice referred
to in subsection 3(c)(iv) below.
(iv) The Company shall give each holder of record of Series A
Preferred Stock written notice of such impending transaction not later than
twenty (20) days prior to the shareholders' meeting called to approve such
transaction, or twenty (20) days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in writing of the final
approval of such transaction (in either instance a "Liquidation Notice"). The
first of such notices shall describe the material terms and conditions of the
impending transaction and the provisions of this Section 2, and the Company
shall thereafter give such holders prompt notice of any material changes. The
transaction shall in no event take place sooner than twenty (20) days after the
Company has given the first notice provided for herein or sooner than ten (10)
days after the Company has given notice of any material changes provided for
herein; provided, however, that such periods may be shortened upon the written
consent of the holders of Series A Preferred Stock that are entitled to such
notice rights or similar notice rights and that represent at least a majority of
the voting power of all then outstanding shares of such Series A Preferred
Stock.
4. Redemption.
(a) Subject to the rights of classes of Preferred Stock which may
from time to time come into existence in compliance with Section 7, on or at any
time and from time to time after [FIVE YEAR ANNIVERSARY OF DATE OF ORIGINAL
ISSUANCE] (each a "Series A Redemption Date"), the Company may at any time it
may lawfully do so, at the option of the Board, redeem in whole or in part the
Series A Preferred Stock by paying in cash therefor an amount per share equal to
the Redemption Percentage (as defined below) of the Original Series A Issue
Price (as adjusted for any stock dividends, combinations or splits with respect
to such shares) plus all accrued but unpaid dividends on such shares (the
"Series A Redemption Price"). Any redemption effected pursuant to this
subsection (4)(a) shall be made on a pro rata basis among the holders of the
Series A Preferred Stock in proportion to the number of shares of Series A
Preferred Stock then held by them. As used herein the "Redemption Percentage"
shall mean the percentage specified in the following table:
5
<PAGE> 85
<TABLE>
<CAPTION>
Redemption Date Redemption Percentage (%)
--------------- -------------------------
<S> <C>
[ ], 2002 to [ ], 2003 105
[ ], 2003 to [ ], 2004 104
[ ], 2004 to [ ], 2005 103
[ ], 2005 to [ ], 2006 102
[ ], 2006 to [ ], 2007 101
[ ], 2007 and thereafter 100
</TABLE>
[INSERT DAY OF INITIAL ISSUANCE OF SERIES A PREFERRED STOCK IN FIRST COLUMN]
(b) As used herein and in subsections (4)(c) and (d) below, the term
"Redemption Date" shall refer to each "Series A Redemption Date" and the term
"Redemption Price" shall refer to each "Series A Redemption Price." Subject to
the rights of classes of Preferred Stock which may from time to time come into
existence in compliance with Section 7, at least thirty (30) but no more than
forty-five (45) days prior to each Redemption Date, written notice shall be
mailed, first class postage prepaid, to each holder of record (at the close of
business on the business day next preceding the day on which notice is given) of
the Series A Preferred Stock to be redeemed, at the address last shown on the
records of the Company for such holder, notifying such holder of the redemption
to be effected, specifying the number of shares to be redeemed from such holder,
the Redemption Date, the Redemption Price, the place at which payment may be
obtained and calling upon such holder to surrender to the Company, in the manner
and at the place designated, his, her or its certificate or certificates
representing the shares to be redeemed (the "Redemption Notice"). Except as
provided in subsection (4)(c), on or after the Redemption Date, each holder of
Series A Preferred Stock to be redeemed shall surrender to the Company the
certificate or certificates representing such shares, in the manner and at the
place designated in the Redemption Notice, and thereupon the Redemption Price of
such shares shall be paid to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be cancelled. In the event less than all the shares
represented by any such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares.
(c) From and after the Redemption Date, unless there shall have been
a default in payment of the Redemption Price, all rights of the holders of
shares of Series A Preferred Stock designated for redemption in the Redemption
Notice as holders of Series A Preferred Stock (except the right to receive the
Redemption Price without interest upon surrender of their certificate or
certificates) shall cease with respect to such shares, and such shares shall not
thereafter be transferred on the books of the Company or be deemed to be
outstanding for any purpose whatsoever. Subject to the rights of classes of
Preferred Stock which may from time to time come into existence in compliance
with Section 7, if the funds of the Company legally available for redemption of
shares of Series A Preferred Stock on any Redemption Date are insufficient to
redeem the total number of shares of Series A Preferred Stock to be redeemed on
such date, those funds which are legally available will be used to redeem the
maximum possible number of such shares ratably among the holders of such shares
to be redeemed based
6
<PAGE> 86
upon their holdings of Series A Preferred Stock. The shares of Series A
Preferred Stock not redeemed shall remain outstanding and entitled to all the
rights and preferences provided herein. Subject to the rights of classes of
Preferred Stock which may from time to time come into existence in compliance
with Section 7, at any time thereafter when additional funds of the Company are
legally available for the redemption of shares of Series A Preferred Stock, such
funds will immediately be used to redeem the balance of the shares which the
Company has become obliged to redeem on any Redemption Date but which it has not
redeemed.
(d) On or prior to each Redemption Date, the Company may deposit the
Redemption Price of all shares of Series A Preferred Stock designated for
redemption in the Redemption Notice, and not yet redeemed or converted, with a
bank or trust corporation having aggregate capital and surplus in excess of
$100,000,000 as a trust fund for the benefit of the respective holders of the
shares designated for redemption and not yet redeemed, with irrevocable
instructions and authority to the bank or trust corporation to publish the
notice of redemption thereof and pay the Redemption Price for such shares to
their respective holders on or after the Redemption Date, upon receipt of
notification from the Company that such holder has surrendered his, her or its
share certificate to the Company pursuant to subsection (4)(b) above. As of the
date of any such deposit (even if prior to the Redemption Date), the deposit
shall constitute full payment of the shares to the holders, and from and after
the date of the deposit the shares so called for redemption shall be redeemed
and shall be deemed to be no longer outstanding, and the holders thereof shall
cease to be shareholders with respect to such shares and shall have no rights
with respect thereto except the rights to receive from the bank or trust
corporation payment of the Redemption Price of the shares, without interest,
upon surrender of their certificates therefor, and the right to convert such
shares as provided in Section 5 hereof. Such instructions shall also provide
that any monies deposited by the Company pursuant to this subsection (4)(d) for
the redemption of shares thereafter converted into shares of the Company's
Common Stock pursuant to Section 5 hereof prior to the Redemption Date shall be
returned to the Company forthwith upon such conversion. The balance of any
monies deposited by the Company pursuant to this subsection (4)(d) remaining
unclaimed at the expiration of two (2) years following the Redemption Date shall
thereafter be returned to the Company upon its request expressed in a resolution
of its Board.
5. Conversion. The holders of the Series A Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred Stock shall
be convertible, at the option of the holder thereof, at any time after the date
of issuance of such share and on or prior to the fifth day prior to the
Redemption Date or the closing of any transaction involving the liquidation,
dissolution or winding up of the Company, if any, as may have been fixed in any
Redemption Notice or Liquidation Notice with respect to the Series A Preferred
Stock, at the office of the Company or any transfer agent for such stock, into
such number of fully paid and nonassessable shares of Common Stock as is
determined by dividing the Original Series A Issue Price by the Conversion Price
applicable to such share, determined as hereafter provided, in effect on the
date the certificate is surrendered for conversion. The
7
<PAGE> 87
initial Conversion Price per share for shares of Series A Preferred Stock shall
be $14.7093; provided, however, if after August 4, 1997 and prior to the filing
date of these Articles Supplementary, any event occurs that would result in an
adjustment to the Conversion Price if such event occurred after the date of
issue, the initial Conversion Price shall be correspondingly adjusted to reflect
such change; and provided further, however, that the Conversion Price for the
Series A Preferred Stock shall be subject to adjustment as set forth in
subsection 5(d) after the date of issuance.
(b) Automatic Conversion. [INTENTIONALLY OMITTED]
(c) Mechanics of Conversion. Before any holder of Series A Preferred
Stock shall be entitled to convert the same into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly endorsed,
at the office of any transfer agent of the Company for the Series A Preferred
Stock, and shall give written notice to the Company at its principal corporate
office, of the election to convert the same and shall state therein the name or
names in which the certificate or certificates for shares of Common Stock are to
be issued. The Company shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series A Preferred Stock, or to the
nominee or nominees of such holder, a certificate or certificates for the number
of shares of Common Stock to which such holder shall be entitled as aforesaid.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the shares of Series A Preferred
Stock to be converted (the "Conversion Date"), and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock as of the Conversion Date. The holder of record of shares of
Series A Preferred Stock on a dividend record date who surrenders such shares
for conversion during the period between a dividend record date and the
corresponding dividend payment date shall be entitled to receive the dividend on
such dividend payment date notwithstanding the prior conversion of such shares.
(d) Conversion Price Adjustments of Preferred Stock for Certain
Splits and Combinations. The Conversion Price of the Series A Preferred Stock
shall be subject to adjustment from time to time as follows:
(i) In the event the Company should at any time or from time to
time after the date upon which any shares of Series A Preferred Stock were first
issued (the "Purchase Date") fix a record date for the effectuation of a split
or subdivision of the outstanding shares of Common Stock or the determination of
holders of Common Stock entitled to receive a dividend or other distribution
payable in additional shares of Common Stock or other securities or rights
convertible, exchangeable or exercisable into, or entitling the holder thereof
to receive directly or indirectly, additional shares of Common Stock
(hereinafter referred to as "Common Stock Equivalents"), without payment of any
consideration by such holder for the additional shares of Common Stock or the
Common Stock Equivalents (including the additional shares of Common Stock
issuable upon conversion, exchange or exercise thereof), then, as of such record
date (or the date of such dividend distribution, split or subdivision if no
record date is fixed),
8
<PAGE> 88
the Conversion Price of the Series A Preferred Stock shall be appropriately
decreased so that the number of shares of Common Stock issuable on conversion of
each share of such class shall be increased in proportion to such increase in
the aggregate number of shares of Common Stock outstanding and those issuable
with respect to such Common Stock Equivalents, with the number of shares
issuable with respect to Common Stock Equivalents determined from time to time
in the manner provided for deemed issuances in subsection 5(d)(iii) below.
(ii) If the number of shares of Common Stock outstanding at any
time after the Purchase Date is decreased by a combination of the outstanding
shares of Common Stock, then, following the record date of such combination, the
Conversion Price for the Series A Preferred Stock shall be appropriately
increased so that the number of shares of Common Stock issuable on conversion of
each share of such class shall be decreased in proportion to such decrease in
the aggregate number of shares of Common Stock outstanding.
(iii) In the case of the issuance (whether before, on or after
the Purchase Date) of Common Stock Equivalents, the following provisions shall
apply for all purposes of subsection 5(d)(i):
(A) The aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange (to the extent then convertible or
exchangeable) for any such convertible or exchangeable securities or upon the
exercise of options to purchase or rights to subscribe for such convertible or
exchangeable securities and subsequent conversion or exchange thereof shall be
deemed to have been issued at the time such securities were issued or such
options or rights were issued and for a consideration equal to the
consideration, if any, received by the Company for any such securities and
related options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the minimum additional consideration, if
any, to be received by the Company upon the conversion or exchange of such
securities or the exercise of any related options or rights.
(B) In the event of any change in the number of shares of
Common Stock deliverable or in the consideration payable to the Company upon
exercise of such options or rights or upon conversion of or in exchange for such
convertible or exchangeable securities, including, but not limited to, the
Conversion Price of the Series A Preferred Stock, to the extent in any way
affected by or computed using such options, rights or securities, shall be
recomputed to reflect such change, but no further adjustment shall be made for
the actual issuance of Common Stock or any payment of such consideration upon
the exercise of any such options or rights or the conversion or exchange of such
securities.
(C) Upon the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the expiration of any
options or rights related to such convertible or exchangeable securities, the
Conversion Price of the Series A Preferred Stock, to the extent in any way
affected by or computed using such options, rights or securities or options or
rights related to such securities, shall be recomputed to reflect the issuance
of only the number of shares of Common Stock (and convertible or exchangeable
9
<PAGE> 89
securities which remain in effect) actually issued upon the exercise of such
options or rights, upon the conversion or exchange of such securities or upon
the exercise of the options or rights related to such securities.
(D) The number of shares of Common Stock deemed issued and
the consideration deemed paid therefor pursuant to subsection 5(d)(iii)(A) shall
be appropriately adjusted to reflect any change, termination or expiration of
the type described in either subsection 5(d)(iii)(B) or (C).
(e) Other Distributions. In the event the Company shall
declare or otherwise effect a dividend or distribution payable in securities of
other persons, evidences of indebtedness issued by the Company or other persons,
assets (excluding cash dividends) or Common Stock Equivalents not referred to in
subsection 5(d)(i), then, in each such case, the holders of the Series A
Preferred Stock shall be entitled to a proportionate share of any such dividend
or distribution as though they were the holders of the number of shares of
Common Stock of the Company into which their shares of Series A Preferred Stock
are convertible as of the record date fixed for the determination of the holders
of Common Stock of the Company entitled to receive such dividend or
distribution.
(f) Recapitalizations. If at any time or from time to time
there shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 5 or Section 3), provision shall be made so that the holders of the
Series A Preferred Stock shall thereafter be entitled to receive upon conversion
of the Series A Preferred Stock the number of shares of stock or other
securities or property of the Company or otherwise, to which a holder of Common
Stock deliverable upon conversion would have been entitled on such
recapitalization. In case of any such recapitalization, the successor or
acquiring corporation (if other than the Company) shall expressly assume the due
and punctual observance and performance of each and every covenant and condition
of this Agreement to be performed and observed by the Company and all the
obligations and liabilities hereunder, subject to such modifications as may be
deemed appropriate (as determined by resolution of the Board of Directors of the
Company) in order to provide for adjustments of shares of the Common Stock
issuable upon conversion of the Series A Preferred Stock which shall be as
nearly equivalent as practicable to the adjustments provided for in subsection
5(d).
(g) No Impairment. The Company will not, by amendment of its
Articles of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Section 5 and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series A Preferred Stock against impairment.
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(h) No Fractional Shares and Certificate as to Adjustments.
(i) No fractional shares shall be issued upon the
conversion of any share or shares of the Series A Preferred Stock. Any
fractional interest in a share of Common Stock resulting from conversion of
shares of Series A Preferred Stock will be paid in cash (computed to the nearest
cent) based on the fair market value (as defined in subsection 3(c)(ii) above)
of the Common Stock. If more than one share of Series A Preferred Stock is
surrendered for conversion at substantially the same time by the same holder,
the number of full shares of Common Stock issuable upon the conversion will be
computed on the basis of all the shares of Series A Preferred Stock surrendered
at that time by that holder.
(ii) Upon the occurrence of each adjustment or
readjustment of the Conversion Price of Series A Preferred Stock pursuant to
this Section 5, the Company, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of Series A Preferred Stock a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Company shall, upon the written request
at any time of any holder of Series A Preferred Stock, furnish or cause to be
furnished to such holder a like certificate setting forth (A) such adjustment
and readjustment, (B) the Conversion Price for such class of Preferred Stock at
the time in effect, and (C) the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received upon the
conversion of a share of Series A Preferred Stock.
(i) Notices of Record Date. In the event of any taking by the
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend) or other distribution, any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, the Company shall mail to
each holder of Series A Preferred Stock, at least 20 days prior to the date
specified therein, a notice specifying the date on which any such record is to
be taken for the purpose of such dividend, distribution or right, and the amount
and character of such dividend, distribution or right.
(j) Reservation of Stock Issuable Upon Conversion.
(i) The Company shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for
the purpose of effecting the conversion of the shares of the Series A Preferred
Stock, such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of the Series A
Preferred Stock; and if at any time the number of authorized but unissued shares
of Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series A Preferred Stock, in addition to such other
remedies as shall be available to the holder of such Preferred Stock, the
Company will take such corporate action as may, in the opinion of its counsel,
be necessary to increase its authorized but unissued shares of Common
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Stock to such number of shares as shall be sufficient for such purposes,
including, without limitation, engaging in best efforts to obtain the requisite
shareholder approval of any necessary amendment to its Articles of
Incorporation.
(ii) For the purposes of this subsection 5(j)(i), the
number of shares of Common Stock which the Company would be required to deliver
upon the conversion of all the outstanding shares of Series A Preferred Stock
will be computed as if at the time of the computation all the outstanding shares
of Series A Preferred Stock were held by a single holder.
(iii) If any shares of Common Stock required to be
reserved for purposes of conversion of the Series A Preferred Stock hereunder
require registration with or approval of any governmental authority under any
Federal or State law before such shares may be issued upon conversion, the
Company shall in good faith and as expeditiously as possible endeavor to cause
such shares to be duly registered or approved, as the case may be. The Company
will seek to list the shares of Common Stock required to be delivered upon
conversion of the Series A Preferred Stock, prior to the delivery, upon each
national securities exchange, if any, upon which the outstanding shares of
Common Stock are listed at the time of delivery.
(k) Taxes. The Company will pay any documentary stamp of
similar issue or transfer taxes payable in respect of the issue or delivery of
shares of Common Stock on conversion of Series A Preferred Stock; provided,
however, that the Company will not be required to pay any tax which may be
payable in respect of any transfer involved in the issue or delivery of shares
of Common Stock in a name other than that of the holder of record of the Series
A Preferred Stock to be converted and no such issue or delivery will be made
unless and until the person requesting the issue or delivery has paid to the
Company the amount of any such tax or has established, to the satisfaction of
the Company, that the tax has been paid.
(l) Notices. Any notice required by the provisions of this
Section 5 to be given to the holders of shares of Series A Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at such holder's address appearing on the
books of the Company.
6. Voting Rights.
(a) Except as required by law or by the provisions of subsections
6(b) and (c), the holders of each share of Series A Preferred Stock shall have
the right to one vote for each share of Common Stock into which such holder's
shares of Series A Preferred Stock could then be converted, and with respect to
such vote, such holder shall have full voting rights and powers equal to the
voting rights and powers of the holders of Common Stock, and shall be entitled,
notwithstanding any provision hereof, to notice of any shareholders' meeting in
accordance with the bylaws of the Company, and shall be entitled to vote,
together with holders of Common Stock as a single class, with respect to any
matter submitted to a vote of holders of Common Stock. Fractional votes shall
not, however, be permitted and any fractional voting
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rights available on an as-converted basis (after aggregating all shares into
which shares of Series A Preferred Stock held by each holder could be converted)
shall be rounded to the nearest whole number (with one-half being rounded
upward).
(b) In the event the Company fails to pay dividends to the holders
of Series A Preferred Stock contemporaneously with dividends paid to the holders
of Common Stock for two consecutive quarters or, in the event no dividends have
been paid or declared on the Common Stock, by the 150th day thereafter, in
either event in accordance with Section 2 hereof, then and until such accrued
but unpaid dividends shall have been paid in full, the holders of Series A
Preferred Stock shall, voting separately as one class, have the exclusive and
special right to elect one (1) director to the Board of the Company. At such
time as all accrued but unpaid dividends on the Series A Preferred Stock shall
have been paid in full, the holders of Series A Preferred Stock shall no longer
be entitled to a special right to elect a director under this subsection 5(b)
but shall instead vote together with the holders of Common Stock in the election
of directors in accordance with subsection 5(a) above, and any such director
then in office shall be deemed to have resigned effective with such payment. In
any election of directors pursuant to this subsection 5(b), each holder of
shares of Series A Preferred Stock shall be entitled to one vote for each share
of Common Stock into which such holder's Series A Preferred Stock is convertible
as determined in accordance with subsection 5(a) above. The special and
exclusive voting right of the holders of the Series A Preferred Stock, voting
separately as one class, contained in this subsection 5(b) may be exercised
either at a special meeting of the holders of Series A Preferred Stock called as
provided below, or at any annual or special meeting of the shareholders of the
Company, or by unanimous written consent of such holders in lieu of a meeting.
The director to be elected by the holders of the Series A Preferred Stock,
voting separately as one class, pursuant to this subsection 5(b), shall serve
for terms extending from the date of his election and qualification until the
earlier of (i) the next succeeding annual meeting of shareholders, (ii) his
successor has been elected and qualified or (iii) all such accrued but unpaid
dividends on the Series A Preferred Stock shall have been paid in full.
(c) If at any time any directorship to be filled by the holders of
Series A Preferred Stock, voting separately as one class pursuant to subsection
5(b) above, has been vacant for a period of ten (10) days, the Secretary of the
Company shall, upon the written request of the holders of record of shares
representing at least ten percent (10%) of the voting power of the Series A
Preferred Stock then outstanding, call a special meeting of the holders of
Series A Preferred Stock for the purpose of electing the director to fill such
vacancy. Such meeting shall be held at the earliest practicable date at such
place as is specified in or determined in accordance with the Bylaws of the
Company. If such meeting shall not be called by the Secretary of the Company
within ten (10) days after personal service of said written request on him, then
the holders of record of shares representing at least ten percent (10%) of the
voting power of the Series A Preferred Stock then outstanding may designate in
writing one of their number to call such meeting at the expense of the Company,
and such meeting may be called by such person so designated upon the notice
required for annual meetings of shareholders and shall be held at the place
specified in the notice. Any holder of the Series A Preferred Stock
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<PAGE> 93
so designated shall have access to the stock books of the Company relating to
the Series A Preferred Stock for the purpose of calling a meeting of the
shareholders pursuant to these provisions.
7. Protective Provisions. Subject to the rights of classes of Preferred
Stock which may from time to time come into existence in compliance with Section
7, so long as any shares of Series A Preferred Stock are outstanding, the
Company shall not (including through a merger or consolidation with another
corporation or otherwise), without first obtaining the approval (by vote or
written consent, as provided by law) of the holders of at least a majority of
the then outstanding shares of Series A Preferred Stock:
(a) alter or change the rights, preferences or privileges of the
shares of Series A Preferred Stock so as to affect adversely the shares;
(b) increase or decrease (other than by redemption or conversion)
the total number of authorized shares of Series A Preferred Stock;
(c) authorize or issue, or obligate itself to issue, any other
equity security, including any other security convertible into or exercisable
for any equity security having a preference over, or being on a parity with, the
Series A Preferred Stock with respect to voting, dividends or upon liquidation.
8. Status of Converted or Redeemed Stock. In the event any shares of
Series A Preferred Stock shall be redeemed or converted pursuant to Section 4 or
Section 5 hereof, the shares so converted or redeemed shall be cancelled and
shall not be issuable by the Company. The Articles of Incorporation of the
Company shall be appropriately amended to effect the corresponding reduction in
the Company's authorized capital stock.
FOURTH: These Articles Supplementary have been approved by the Board in
the manner and by the vote required by law.
FIFTH: The undersigned President of the Company acknowledges these
Articles Supplementary to be the corporate act of the Company and, as to all
matters or facts required to be verified under oath, the undersigned President
of the Company acknowledges that to the best of his knowledge, information and
belief, these matters and facts are true in all material respects and that this
statement is made under the penalties of perjury.
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IN WITNESS WHEREOF, SUNSTONE HOTEL INVESTORS, INC. has caused these
Articles Supplementary to be executed under seal in its name and on its behalf
by its President and attested to by its Assistant Secretary on this ____ day of
October, 1997.
SUNSTONE HOTEL INVESTORS, INC.
By:
---------------------------
Robert A. Alter,
President
ATTEST:
By:
---------------------------
Roger M. Cohen,
Assistant Secretary
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EXHIBIT 4.6 TO STOCK PURCHASE AGREEMENT
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of [ ], 1997, among SUNSTONE
HOTEL INVESTORS, INC. ("Sunstone"), a Maryland corporation, WESTBROOK REAL
ESTATE FUND I, L.P., a Delaware limited partnership ("Westbrook Fund") and
WESTBROOK CO-INVESTMENT PARTNERSHIP I, L.P., a Delaware limited partnership
("Westbrook Co-Investment Fund" and collectively with Westbrook Fund, the
"Funds").
RECITALS
WHEREAS, pursuant to a Stock Purchase Agreement, dated as of August 4,
1997 (the "Stock Purchase Agreement"), among Sunstone, Westbrook Fund, Westbrook
Co-Investment Fund and Kahler Realty Corporation ("Kahler"), Sunstone will
purchase 100% of the outstanding common stock of Kahler from the Funds on the
date hereof (the "Stock Purchase"). In consideration for the common stock of
Kahler, the Funds shall receive, among other things, (i) 2,284,262 shares of
common stock, par value $0.01 per share, of Sunstone (the "Common Stock") and
(ii) 250,000 shares of 7.9% Series A Cumulative Convertible Preferred Stock, par
value $0.01 per share, of Sunstone (the "Convertible Preferred Stock") on the
terms and conditions set forth in the Stock Purchase Agreement; and
WHEREAS, it is a condition to the obligations of each of Sunstone and
the Funds to consummate the transactions contemplated by the Stock Purchase
Agreement that this Registration Rights Agreement be executed and delivered by
Sunstone and the Funds.
NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements herein contained the parties hereto agree as follows:
AGREEMENT
1. Definitions. As used in this Agreement, the following capitalized
terms shall have the following respective meanings:
"Common Stock" shall mean the common stock, par value $0.01 per
share, of Sunstone and its successors.
"Demand Party" shall mean (a) Westbrook Fund, (b) Westbrook
Co-Investment Fund or (c) any other Holder or Holders, including,
without limitation, any present or future general or limited partner of
either of the Funds, or any general or limited partner of any general
or limited partner thereof, that may become an assignee of such Funds'
rights hereunder; provided that to be a Demand Party under clause (c),
a Holder or
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Holders must either individually or in the aggregate with all other
Holders with whom it is acting together to demand registration own at
least 500,000 shares of Registrable Securities.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations
of the SEC thereunder, all as the same shall be in effect from time to
time, and a reference to a particular section thereof shall be deemed
to include a reference to the comparable section, if any, of any such
similar federal statute.
"Holder" shall mean each of the Funds, and any other holder of
Registrable Securities (including any direct or indirect transferees of
the Funds) who agree in writing to be bound by the provisions of this
Agreement.
"Initial Lock-Up Period" shall have the meaning set forth in the
Stock Purchase Agreement.
"Person" shall mean any individual, partnership, joint venture,
corporation, trust, unincorporated organization, government or any
department or agency thereof or other entity of whatever nature.
"Registrable Securities" shall mean (1) the Common Stock issued to
the Funds pursuant to the Stock Purchase Agreement, (2) the Common
Stock issued or issuable upon conversion of the Convertible Preferred
Stock issued to the Funds pursuant to the Stock Purchase Agreement, and
(3) any Common Stock which may be issued or distributed by way of stock
dividend or stock split or other distribution, recapitalization or
reclassification with respect to, or in exchange for, or in replacement
of, any other Registrable Securities. As to any particular Registrable
Securities, once issued, such Registrable Securities shall cease to be
Registrable Securities when (i) a registration statement with respect
to the sale by the Holder of such securities shall have become
effective under the Securities Act and such securities shall have been
disposed of in accordance with such registration statement, (ii) such
securities shall have been distributed to the public pursuant to Rule
144 (or any successor provision) under the Securities Act, (iii) such
securities shall have been otherwise transferred, new certificates for
such securities not bearing a legend restricting further transfer shall
have been delivered by Sunstone and subsequent disposition of such
securities shall not require registration or qualification of such
securities under the Securities Act or any state securities or blue sky
law then in force, or (iv) such securities shall have ceased to be
outstanding.
"Registration Expenses" shall mean any and all expenses incident to
performance of or compliance with this Agreement, including, without
limitation, (i) all SEC and stock exchange or National Association of
Securities Dealers, Inc. (the "NASD") registration and filing fees
(including, if applicable, the fees and expenses of any "qualified
independent underwriter," as such term is defined in Schedule E to the
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By-laws of the NASD, and of its counsel), (ii) all fees and expenses of
complying with securities or blue sky laws (including the reasonable
fees and disbursements of counsel for the underwriters, if any, in
connection with blue sky qualifications of the Registrable Securities),
(iii) all printing, messenger and delivery expenses, (iv) all fees and
expenses incurred in connection with the listing of the Registrable
Securities on the New York Stock Exchange or on any securities exchange
pursuant to clause (viii) of Section 5, (v) the fees and disbursements
of one counsel for Sunstone and of its independent public accountants,
including the expenses of any special audits and/or "cold comfort"
letters required by or incident to such performance and compliance,
(vi) the reasonable fees and disbursements of one counsel selected
pursuant to Section 8 hereof by the Holders of the Registrable
Securities being registered to represent such Holders in connection
with each such registration, (vii) any fees and disbursements of
underwriters, if any, customarily paid by the issuers or sellers of
securities, including liability insurance if Sunstone so desires or if
the underwriters so require, and the reasonable fees and expenses of
any special experts retained in connection with the requested
registration, but excluding underwriting discounts and commissions,
transfer taxes, and (viii) other reasonable out-of-pocket expenses of
Holders (provided that such expenses shall not include expenses of
counsel other than those provided for in clause (vi) above).
"Securities Act" shall mean the Securities Act of 1933, as amended,
or any similar federal statute and the rules and regulations of the SEC
thereunder, all as the same shall be in effect from time to time, and a
reference to a particular section thereof shall be deemed to include a
reference to the comparable section, if any, of any such similar
federal statute.
"SEC" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act or the
Exchange Act.
2. Incidental Registrations. (a) Right to Include Common or Common
Equivalent Registrable Securities. If Sunstone at any time after the Initial
Lock-Up Period proposes to register its Common Stock under the Securities Act
(other than a registration on Form S-4 or S-8, or any successor or other forms
promulgated for similar purposes), for sale for its own account, in a manner
which would permit registration of Registrable Securities for sale to the public
under the Securities Act, it will, at each such time, give prompt written notice
to all Holders of Registrable Securities of its intention to do so and of such
Holders' rights under this Section 2. Upon the written request of any such
Holder made within 15 days after the receipt of any such notice (which request
shall specify the Registrable Securities intended to be disposed of by such
Holder), Sunstone will use its best efforts to effect the registration under the
Securities Act of all Registrable Securities which Sunstone has been so
requested to register by the Holders thereof, to the extent requisite to permit
the disposition of the Registrable Securities so to be registered; provided that
(i) if, at any time after giving written notice of its intention to register any
securities and prior to the effective date of the registration statement filed
in connection with such registration, Sunstone shall determine for any reason
not to proceed with the proposed registration of the securities to be sold by
it, Sunstone may, at its election, give written notice of such determination to
each Holder of Registrable Securities and,
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thereupon, shall be relieved of its obligation to register any Registrable
Securities in connection with such registration (but not from its obligation to
pay the Registration Expenses in connection therewith), and (ii) if such
registration involves an underwritten offering, all Holders of Registrable
Securities requesting to be included in Sunstone's registration must sell their
Registrable Securities to the underwriters selected by Sunstone on the same
terms and conditions as apply to Sunstone, with such differences, including any
with respect to indemnification and liability insurance, as may be customary or
appropriate in combined primary and secondary offerings; and provided further
that under no circumstances will the scope of any indemnification or
contribution obligations of any Holder be broader than the provisions of Section
6(b) hereof nor will the maximum liability of the Holders be greater than that
specified in Section 6 hereof. If a registration requested pursuant to this
Section 2(a) involves an underwritten public offering, any Holder of Registrable
Securities requesting to be included in such registration may elect, in writing
within seven (7) business days prior to the effective date of the registration
statement filed in connection with such registration, not to register such
securities in connection with such registration. Nothing in this Section 2(a)
shall operate to limit the right of any Holder to request the registration of
Common Stock issuable upon conversion or exercise of convertible securities held
by such Holder notwithstanding the fact that at the time of request such Holder
holds only convertible securities.
(b) Expenses. Sunstone will pay all Registration Expenses in connection
with each registration of Registrable Securities requested pursuant to this
Section 2.
(c) Priority in Incidental Registrations. If a registration pursuant to
this Section 2 involves an underwritten offering and the managing underwriter
advises Sunstone in writing that, in its opinion, the number of shares of Common
Stock requested to be included in such registration exceeds the number which can
be sold in such offering, so as to be likely to have an adverse effect on the
price, timing or distribution of the Common Stock offered in such offering as
contemplated by Sunstone, then Sunstone will include in such registration (i)
first, 100% of the securities Sunstone proposes to sell and (ii) second, the
number of Registrable Securities requested to be included in such registration
which, in the opinion of such managing underwriter, can be sold without having
the adverse effect referred to above, such amount to be allocated pro rata among
all requesting Holders on the basis of the relative number of shares of
Registrable Securities then held by each such Holder (provided that any shares
thereby allocated to any such Holder that exceed such Holder's request will be
reallocated among the remaining requesting Holders in like manner).
(d) Limitations on Shelf Offerings. Notwithstanding the foregoing, in
the event that Registrable Securities have been included in a registration
effected by Sunstone pursuant to Rule 415 under the Securities Act in accordance
with this Section 2, the Holders agree that, without the prior written consent
of Sunstone, they will not effect more than one sale of Registrable Securities
pursuant to such registration in any 30-day period.
3. Registration on Request. (a) Request by the Demand Party. At any
time after the Initial Lock-Up Period, upon the written request of the Demand
Party requesting that Sunstone effect the registration under the Securities Act
of all or part of such Demand Party's
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Registrable Securities and specifying the amount and intended method of
disposition thereof, Sunstone will promptly give written notice of such
requested registration to all other Holders of such Registrable Securities, and
thereupon will, as expeditiously as possible, use its best efforts to effect the
registration under the Securities Act of:
(i) such Registrable Securities (including, if such request relates
to a security which is convertible into shares of Common Stock, the
shares of Common Stock issuable upon such conversion) which Sunstone
has been so requested to register by the Demand Party; and
(ii) all other Registrable Securities of the same class or series
as are to be registered at the request of a Demand Party and which
Sunstone has been requested to register by any other Holder thereof by
written request given to Sunstone within 15 days after the giving of
such written notice by Sunstone (which request shall specify the amount
and intended method of disposition of such Registrable Securities),
all to the extent necessary to permit the disposition (in accordance with the
intended method thereof as aforesaid) of the Registrable Securities so to be
registered; provided, that with respect to any Demand Party, Sunstone shall not
be obligated to effect any registration of Registrable Securities under this
Section 3(a) unless such Demand Party requests that Sunstone register at least
20% of the total number of Registrable Securities then outstanding (or such
lesser percent if the anticipated aggregate offering price, net of underwriting
discounts and commissions would exceed $10,000,000); and provided, further,
that, Sunstone shall not be obligated to file a registration statement relating
to any registration request under this Section 3(a) (x) within a period of six
months after the effective date of any other registration statement relating to
any registration request under this Section 3(a) or relating to any registration
effected under Section 2 in which Registrable Securities were included in such
registration, (y) if with respect thereto the managing underwriter, the SEC, the
Securities Act or the rules and regulations thereunder, or the form on which the
registration statement is to be filed, would require the completion of an audit
other than the regular audit conducted by Sunstone at the end of its fiscal
year, in which case the filing may be delayed until the completion of such
regular audit (unless the Holders of the Registrable Securities to be registered
agree to pay the expenses of Sunstone in connection with such an audit other
than the regular audit) or (z) subject to Section 9(j)(ii), during any period of
not more than 90 days that the Company, its executive officers or directors are
precluded from selling shares of Common Stock as the result of any lock-up
restrictions imposed by any underwriter in a previous primary offering, unless
such underwriters agree otherwise. Nothing in this Section 3 shall operate to
limit the right of a Holder to request the registration of Common Stock issuable
upon conversion or exercise of convertible securities held by such Holder
notwithstanding the fact that at the time of request such Holder holds only
convertible securities.
(b) Notwithstanding the foregoing provisions of Section 3(a), Sunstone
shall not be obligated to effect more than two demand registrations pursuant to
requests made by the Demand Holders pursuant to this Section 3. No Holder's
rights under this Section 3 shall be affected by a registration pursuant to
Section 2.
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(c) Registration Statement Form. If any registration requested pursuant
to this Section 3, which is proposed by Sunstone to be effected by the filing of
a registration statement on Form S-3 (or any successor or similar short-form
registration statement), shall be in connection with an underwritten public
offering, and if the managing underwriter shall advise Sunstone in writing that,
in its opinion, the inclusion of additional information is of material
importance to the success of such proposed offering, then such registration
shall include such other information.
(d) Expenses. Sunstone will pay all Registration Expenses in connection
with each of the registrations of each class or series of Registrable Securities
effected pursuant to this Section 3.
(e) Effective Registration Statement. A registration requested pursuant
to this Section 3 will not be deemed to have been effected unless the applicable
registration statement has become effective; provided that if, prior to the end
of any applicable distribution period as defined in the Securities Act, the
offering of Registrable Securities pursuant to such registration is interfered
with by any stop order, injunction or other order or requirement of the SEC or
other governmental agency or court, such registration will be deemed not to have
been effected with respect to any selling Holder whose Registrable Securities
that are registered have not been fully distributed.
(f) Selection of Underwriters. If a requested registration pursuant to
this Section 3 involves an underwritten offering, the Holders of a majority of
the shares of Registrable Securities which are held by Holders and which
Sunstone has been requested to register shall have the right to select the
investment banker or bankers and managers to administer the offering; provided,
however, that such investment banker or bankers and managers shall be reasonably
satisfactory to Sunstone.
(g) Priority in Requested Registrations. If a requested registration
pursuant to this Section 3 involves an underwritten offering and the managing
underwriter advises Sunstone in writing that, in its opinion, the number of
shares of Common Stock requested to be included in such registration (including
securities of Sunstone which are not Registrable Securities) exceeds the number
which can be sold in such offering, Sunstone will include in such registration
only the Registrable Securities requested to be included in such registration.
In the event that the number of Registrable Securities requested to be included
in such registration exceeds the number which, in the opinion of such managing
underwriter, can be sold, the number of such Registrable Securities to be
included in such registration shall be allocated pro rata among all requesting
Holders on the basis of the relative number of shares of Registrable Securities
then held by each such Holder; provided that any shares thereby allocated to any
such Holder that exceed such Holder's request shall be reallocated among the
remaining requesting Holders in like manner; provided, further that if any such
exclusion causes less than 90% of the number of shares of Registrable Securities
as to which registration was requested by the Holders to be registered, such
registration shall not constitute a request for registration under Section 3(b).
In the event that the number of Registrable Securities requested to be included
in such registration is less than the number which, in the opinion of the
managing underwriter, can
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be sold, Sunstone may include in such registration up to the number of shares of
Common Stock that, in the opinion of the underwriter, can be sold.
(h) Additional Rights. If Sunstone at any time grants to any other
holders of Common Stock, or Common Stock issuable upon conversion, exchange or
exercise of a security, any rights to request Sunstone to effect the
registration under the Securities Act of any such shares of Common Stock on
terms more favorable to such holders than the terms set forth in this Section 3,
the terms of this Section 3 shall be deemed amended or supplemented to the
extent necessary to provide the Holders such more favorable rights and benefits.
The provisions of this Section 3(h) will not be applicable to the registration
rights of the limited partners of Sunstone Hotel Investors, L.P. permitting them
to require Sunstone to register the shares of Common Stock into which their
partnership units are exchangeable.
4. Stock Purchase Agreement Transfer Restrictions. Notwithstanding
anything in this Agreement to the contrary, any sales of Registrable Securities
shall be subject to the conditions set forth in Section 4.10 of the Stock
Purchase Agreement.
5. Registration Procedures. If and whenever Sunstone is required to use
its best efforts to effect or cause the registration of any Registrable
Securities under the Securities Act as provided in this Agreement, Sunstone
will, as expeditiously as possible:
(a) prepare and, in any event within 120 days after the end of the
period within which a request for registration may be given to
Sunstone, file with the SEC a registration statement with respect to
such Registrable Securities and use its best efforts to cause such
registration statement to become effective; provided, however, that
Sunstone may discontinue any registration of its securities which is
being effected pursuant to Section 2 at any time prior to the effective
date of the registration statement relating thereto or in accordance
with Section 3(b);
(b) prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement
effective during the distribution period, in the case of a registration
effected pursuant to Section 2, or for a period not in excess of 270
days (or such lesser period ending on the day after the distribution of
all registered securities is complete) in the case of a registration
effected pursuant to Section 3, and to comply with the provisions of
the Securities Act, the Exchange Act and the rules and regulations of
the SEC thereunder with respect to the disposition of all securities
covered by such registration statement during such period in accordance
with the intended methods of disposition by the seller or sellers
thereof set forth in such registration statement; provided that before
filing a registration statement or prospectus relating to the sale of
Registrable Securities, or any amendments or supplements thereto,
Sunstone will furnish to counsel selected pursuant to Section 8 hereof
by the Holders of the Registrable Securities covered by such
registration statement to represent such Holders, copies of all
documents proposed to be filed, which documents will be subject to the
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review of such counsel within five (5) days after receipt thereof, and
Sunstone will give reasonable consideration in good faith to any
comments of such counsel;
(c) furnish to each seller of such Registrable Securities such
number of copies of such registration statement and of each amendment
and supplement thereto (in each case including all exhibits filed
therewith, including any documents incorporated by reference), such
number of copies of the prospectus included in such registration
statement (including each preliminary prospectus and summary
prospectus), in conformity with the requirements of the Securities Act,
and such other documents as such seller may reasonably request in order
to facilitate the disposition of the Registrable Securities by such
seller;
(d) use its best efforts to register or qualify such Registrable
Securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as each seller shall
reasonably request, and do any and all other acts and things which may
be reasonably necessary or advisable to enable such seller to
consummate the disposition in such jurisdictions of the Registrable
Securities owned by such seller, except that Sunstone shall not for any
such purpose be required to qualify generally to do business as a
foreign corporation in any jurisdiction where, but for the requirements
of this clause (iv), it would not be obligated to be so qualified, to
subject itself to taxation in any such jurisdiction or to consent to
general service of process in any such jurisdiction;
(e) use its best efforts to cause such Registrable Securities
covered by such registration statement to be registered with or
approved by such other governmental agencies or authorities as may be
necessary to enable the seller or sellers thereof to consummate the
disposition of such Registrable Securities;
(f) notify promptly each seller of any such Registrable Securities
covered by such registration statement, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act
within the appropriate period mentioned in clause (b) of this Section
5, of Sunstone's becoming aware that the prospectus included in such
registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing, and at the
request of any such seller, prepare and furnish to such seller a
reasonable number of copies of an amended or supplemental prospectus as
may be necessary so that, as thereafter delivered to the purchasers of
such Registrable Securities, such prospectus shall 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 not misleading in the light of the circumstances then existing;
(g) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC, and make available to its security
holders, as soon as reasonably practicable (but not more than eighteen
months) after the effective date of the registration
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statement, if required, an earnings statement which shall satisfy the
provisions of Section 11(a) of the Securities Act and the rules and
regulations promulgated thereunder;
(h) (i) use its best efforts to list such Registrable Securities on
any securities exchange on which the Common Stock is then listed if
such Registrable Securities are not already so listed and if such
listing is then permitted under the rules of such exchange; and (ii)
use its best efforts to provide a transfer agent and registrar for such
Registrable Securities covered by such registration statement not later
than the effective date of such registration statement;
(i) enter into such customary agreements (including an underwriting
agreement in customary form), which may include indemnification
provisions in favor of underwriters and other persons in addition to,
or in substitution for the provisions of Section 6 hereof, and take
such other actions as sellers of a majority of shares of such
Registrable Securities or the underwriters, if any, reasonably
requested in order to expedite or facilitate the disposition of such
Registrable Securities;
(j) use its best efforts to obtain a "cold comfort" letter or
letters from Sunstone's independent public accountants in customary
form and covering matters of the type customarily covered by "cold
comfort" letters as the seller or sellers of a majority of shares of
such Registrable Securities shall reasonably request (provided that
Registrable Securities constitute at least 25% of the securities
covered by such registration statement, unless such a "cold comfort"
letter or letters are provided to other selling holders in connection
with such registration; it being understood, however, that Sunstone
will, if requested by the underwriters in any underwritten offering, be
obligated to use its best efforts to obtain for such underwriters a
"cold comfort" letter or letters from Sunstone's independent public
accountants in customary form;
(k) make available for inspection by any seller of such Registrable
Securities covered by such registration statement, by any underwriter
participating in any disposition to be effected pursuant to such
registration statement and by any attorney, accountant or other agent
retained by any such seller or any such underwriter, all pertinent
financial and other records, pertinent corporate documents and
properties of Sunstone, and cause all of Sunstone's officers, directors
and employees to supply all information reasonably requested by any
such seller, underwriter, attorney, accountant or agent in connection
with such registration statement;
(l) notify counsel (selected pursuant to Section 8 hereof) for the
Holders of Registrable Securities included in such registration
statement and the managing underwriter or agent, immediately, and
confirm the notice in writing (A) when the registration statement, or
any post-effective amendment to the registration statement, shall have
become effective, or any supplement to the prospectus or any amendment
prospectus shall have been filed, (B) of the receipt of any comments
from the SEC, (C) of any request of the SEC to amend the registration
statement or amend or supplement the prospectus or for additional
information and (D) of the issuance by the SEC of any
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stop order suspending the effectiveness of the registration statement
or of any order preventing or suspending the use of any preliminary
prospectus, or of the suspension of the qualification of the
registration statement for offering or sale in any jurisdiction, or of
the institution or threatening of any proceedings for any of such
purposes;
(m) use reasonable efforts to prevent the issuance of any stop
order suspending the effectiveness of the registration statement or of
any order preventing or suspending the use of any preliminary
prospectus and, if any such order is issued, to obtain the withdrawal
of any such order at the earliest possible moment;
(n) if requested by the managing underwriter or agent or any Holder
of Registrable Securities covered by the registration statement,
promptly incorporate in a prospectus supplement or post-effective
amendment such information as the managing underwriter or agent or such
Holder reasonably requests to be included therein, including, without
limitation, the number of Registrable Securities being sold by such
Holder to such underwriter or agent, the purchase price being paid
therefor by such underwriter or agent and any other terms of the
underwritten offering of the Registrable Securities to be sold in such
offering; and make all required filings of such prospectus supplement
or post-effective amendment as soon as practicable after being notified
of the matters incorporated in such prospectus supplement or
post-effective amendment;
(o) cooperate with the Holders of Registrable Securities covered by
the registration statement and the managing underwriter or agent, if
any, to facilitate the timely preparation and delivery of certificates
(not bearing any restrictive legends) representing securities sold
under the registration statement, and enable such securities to be in
such denominations and registered in such names as the managing
underwriter or agent, if any, or such Holders may request;
(p) obtain for delivery to the Holders of Registrable Securities
being registered and to the underwriter or agent an opinion or opinions
of counsel for Sunstone in customary form and in form, substance and
scope reasonably satisfactory to such Holders, underwriters or agents
and their counsel; and
(q) cooperate with each seller of Registrable Securities and each
underwriter or agent participating in the disposition of such
Registrable Securities and their respective counsel in connection with
any filings required to be made with the NASD.
Sunstone may require each seller of Registrable Securities as to which
any registration is being effected to furnish Sunstone with such information
regarding such seller and pertinent to the disclosure requirements relating to
the registration and the distribution of such securities as Sunstone may from
time to time reasonably request in writing.
Each Holder of Registrable Securities agrees that, upon receipt of any
notice from Sunstone of the happening of any event of the kind described in
clause (f) of this Section 5, such
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Holder will forthwith discontinue disposition of Registrable Securities pursuant
to the registration statement covering such Registrable Securities until such
Holder's receipt of the copies of the supplemented or amended prospectus
contemplated by clause (f) of this Section 5, and, if so directed by Sunstone,
such Holder will deliver to Sunstone (at Sunstone's expense) all copies, other
than permanent file copies then in such Holder's possession, of the prospectus
covering such Registrable Securities current immediately prior to the receipt of
such notice. In the event Sunstone shall give any such notice, the period
mentioned in clause (b) of this Section 5 shall be extended by the number of
days during the period from and including the date of the giving of such notice
pursuant to clause (f) of this Section 5 and including the date when each seller
of Registrable Securities covered by such registration statement shall have
received the copies of the supplemented or amended prospectus contemplated by
clause (f) of this Section 5.
In lieu of satisfying the requirements of Sections 2 or 3 hereunder,
Sunstone may, at any time after the Initial Lock-Up Period, elect to file a
registration statement pursuant to Rule 415 under the Securities Act permitting
the resale of all Registrable Securities and shall covenant and agree to keep
such registration statement effective for a period of two years after the
expiration of the Initial Lock-Up Period (or such shorter period as to any
Holder that is then entitled to sell his or its Registrable Securities under
Rule 144 in any three-month period without restriction). All other provisions of
this Agreement shall continue to apply to any such registration. Upon expiration
of the initial two-year registration, if a Holder still holds Registrable
Securities that cannot be sold under Rule 144 during any three-month period
without restriction, Sunstone will file a new registration statement pursuant to
Rule 415 under the Securities Act (or maintain the effectiveness of the initial
registration statement) permitting the resale of all such Registrable Securities
that then remain unsold and shall keep such registration statement effective for
one additional period of two years.
6. Indemnification.
(a) Indemnification by Sunstone. In the event of any registration of
any securities of Sunstone under the Securities Act pursuant to Section 2 or 3,
Sunstone will, and it hereby does, indemnify and hold harmless, to the extent
permitted by law, the seller of any Registrable Securities covered by such
registration statement, each affiliate of such seller and their respective
directors and officers or general and limited partners or members or managing
members (including any director, officer, affiliate, employee, agent or
controlling Person of any of the foregoing), each other Person who participates
as an underwriter in the offering or sale of such securities and each other
Person, if any, who controls such seller or any such underwriter within the
meaning of the Securities Act (collectively, the "Seller Indemnified Parties"),
against any and all losses, claims, damages or liabilities, joint or several,
and expenses (including reasonable attorney's fees and reasonable expenses of
investigation) to which such Seller Indemnified Party may become subject under
the Securities Act, common law or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof, whether or
not such Seller Indemnified Party is a party thereto) arise out of or are based
upon (i) any untrue statement or alleged untrue statement of any material fact
contained in any registration statement under which such securities were
registered under the Securities Act, any preliminary, final or summary
prospectus contained therein, or any
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amendment or supplement thereto, or (ii) any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein (in the case of a prospectus, in light of the
circumstances under which they were made) not misleading, and Sunstone will
reimburse such Seller Indemnified Party for any legal or any other expenses
reasonably incurred by it in connection with investigating or defending against
any such loss, claim, liability, action or proceeding (collectively, a
"Violation"); provided that Sunstone shall not be liable to any Seller
Indemnified Party in any such case to the extent that any such loss, claim,
damage, liability (or action or proceeding in respect thereof) or expense arises
out of or is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in such registration statement or amendment or
supplement thereto or in any such preliminary, final or summary prospectus in
reliance upon and in conformity with written information furnished to Sunstone
through an instrument duly executed by such seller specifically stating that it
is for use in the preparation thereof nor shall it apply to amounts paid in
settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of Sunstone (which consent shall not
be unreasonably withheld or delayed); and provided, further, that in the case of
any registration effected pursuant to Section 3 or any registration effected
pursuant to Section 2 in which the underwriters have agreed to indemnify the
Holders for the matters set forth in this proviso, if any losses, claims,
damages or liabilities arise out of or are based upon a Violation which did not
appear in the final prospectus, Sunstone shall not have any liability with
respect thereto to the Holder, any underwriter, or any person who controls such
Holder or underwriter within the meaning of Section 15 of the Securities Act if
the Holder or underwriter delivered a copy of the preliminary prospectus to the
person alleging such losses, claims, damages or liabilities and failed to
deliver a copy of the final prospectus, as so supplemented, to such person at or
prior to the written confirmation of the sale to such person. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such seller or any Seller Indemnified Party and shall survive the
transfer of such securities by such seller.
(b) Indemnification by the Seller. In the event of any registration
of any securities of Sunstone under the Securities Act pursuant to Section 2 or
3, each selling Holder will, and it hereby does, indemnify and hold harmless, to
the extent permitted by law, Sunstone and all other prospective sellers of
Registrable Securities, each affiliate of Sunstone or such seller and their
respective directors and officers or general and limited partners or members or
managing members (including any director, officer, affiliate, employee, agent or
controlling Person of any of the foregoing) and each other Person, if any, who
controls Sunstone or any such seller within the meaning of the Securities Act
(collectively, the "Company Indemnified Parties") against any and all losses,
claims, damages or liabilities, joint or several, and expenses (including
reasonable attorney's fees and reasonable expenses of investigation) to which
such Company Indemnified Party may become subject under the Securities Act,
common law or otherwise, insofar as such losses, claims, damages or liabilities
(or actions or proceedings in respect thereof, whether or not such Company
Indemnified Party is a party thereto) arise out of or are based upon any untrue
statement or alleged untrue statement in or omission or alleged omission from
such registration statement, any preliminary, final or summary prospectus
contained therein, or any amendment or supplement, if such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with
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written information furnished to Sunstone through an instrument duly executed by
such seller specifically stating that it is for use in the preparation of such
registration statement, preliminary, final or summary prospectus or amendment or
supplement, or a document incorporated by reference into any of the foregoing,
provided that no Holder shall be liable to any Company Indemnified Party with
respect to amounts paid in settlement of any such loss, claim, damage, liability
or action if such settlement is effected without the consent of such Holder
(which consent shall not be unreasonably withheld or delayed); and provided
further that if any losses, claims, damages or liabilities arise out of or are
based upon a violation which did not appear in the final prospectus, no Holder
shall have any liability with respect thereto to Sunstone, any other seller or
any person who controls Sunstone or such other seller within the meaning of
Section 15 of the Securities Act if Sunstone or an underwriter delivered a copy
of the preliminary prospectus to the person alleging such losses, claims,
damages or liabilities and failed to deliver a copy of the final prospectus, as
so supplemented, to such person at or prior to the written confirmation of the
sale to such person. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of Sunstone or any of the
prospective sellers, or any of their respective affiliates, directors, officers
or controlling Persons and shall survive the transfer of such securities by such
seller. In no event shall the liability of any selling Holder of Registrable
Securities hereunder be greater in amount than the dollar amount of the proceeds
received by such Holder upon the sale of the Registrable Securities giving rise
to such indemnification obligation.
(c) Notices of Claims, Etc. Promptly after receipt by a Seller
Indemnified Party or a Company Indemnified Party (an "Indemnified Party")
hereunder of written notice of the commencement of any action or proceeding with
respect to which a claim for indemnification may be made pursuant to this
Section 6, such Indemnified Party will, if a claim in respect thereof is to be
made against an indemnifying party, give written notice to the latter of the
commencement of such action; provided that the failure of the Indemnified Party
to give notice as provided herein shall not relieve the indemnifying party of
its obligations under the preceding subdivisions of this Section 6, except to
the extent that the indemnifying party is actually prejudiced by such failure to
give notice. In case any such action is brought against an Indemnified Party,
unless in such Indemnified Party's reasonable judgment a conflict of interest
between such Indemnified Party and indemnifying parties may exist in respect of
such claim, the indemnifying party will be entitled to participate in and to
assume the defense thereof, jointly with any other indemnifying party similarly
notified to the extent that it may wish, with counsel reasonably satisfactory to
such Indemnified Party, and after notice from the indemnifying party to such
Indemnified Party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such Indemnified Party for any legal or
other expenses subsequently incurred by the latter in connection with the
defense thereof other than reasonable costs of investigation. In the event that
the Indemnified Parties are conducting the defense of any action or other
claims, the indemnifying party will not be responsible for the costs and
expenses of more than one counsel for all of the Indemnified Parties (plus the
fees and expenses of one local counsel if the action is pending in a foreign
jurisdiction). No indemnifying party will consent to entry of any judgment or
enter into any settlement which does not include as an unconditional term
thereof, the giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation.
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(d) Contribution. If the indemnification provided for in this
Section 6 from the indemnifying party is unavailable to an Indemnified Party
hereunder in respect of any losses, claims, damages, liabilities or expenses
referred to herein, then the indemnifying party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages, liabilities or
expenses in such proportion as is appropriate to reflect the relative fault of
the indemnifying party and Indemnified Parties in connection with the actions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative fault of such
indemnifying party and Indemnified Parties shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied by,
such indemnifying party or Indemnified Parties, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such action. The amount paid or payable by a party under this Section 6(d) as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall include any legal or other fees or expenses reasonably incurred by
such party in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
(e) Other Indemnification. Indemnification similar to that specified
in the preceding subdivisions of this Section 6 (with appropriate modifications)
shall be given by Sunstone and each seller of Registrable Securities with
respect to any required registration or other qualification of securities under
any federal or state law or regulation or governmental authority other than the
Securities Act.
(f) Non-Exclusivity. The obligations of the parties under this
Section 6 shall be in addition to any liability which any party may otherwise
have to any other party.
(g) Conflicting Provisions. To the extent that the provisions of
this Section 6 differ from the terms and conditions of any indemnification
provision contained in any underwriting agreement entered into in connection
with any underwritten offering effected pursuant to Section 2 hereof, the
indemnification provisions contained in such underwriting agreement will, for
all purposes, supersede the terms and conditions of this Section 6. To the
extent that the provisions of this Section 6 differ from the terms and
conditions contained in any underwriting agreement entered into in connection
with any underwritten offering effected pursuant to Section 3 hereof, then (x)
unless otherwise agreed to by the Holders of Registrable Securities
participating in any such registration, with respect to the substantive scope
and limitations (including, without limitation, the maximum liability of the
Holders) of the indemnification and contribution provided by Sunstone and the
Holders to the Indemnified
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Person, the provisions of this Section 6 shall govern and supersede the terms of
such Underwriting Agreement and (y) with respect to all other matters the terms
of the underwriting agreement will supersede the terms and conditions of this
Section 6.
(h) Indemnification by Underwriters. Sunstone may require, as a
condition to including any Registrable Securities in any registration statement
filed in accordance with Section 3 herein, that Sunstone shall have received an
undertaking reasonably satisfactory to it from any underwriter to indemnify and
hold harmless Sunstone in customary form.
7. Rule 144. Sunstone covenants that it will file the reports required
to be filed by it under the Securities Act and the Exchange Act and the rules
and regulations adopted by the SEC thereunder (or, if Sunstone is not required
to file such reports, it will, upon the request of any Holder of Registrable
Securities, make publicly available such information), and it will take such
further action as any Holder of Registrable Securities may reasonably request,
all to the extent required from time to time to enable such Holder to sell
shares of Registrable Securities without registration under the Securities Act
within the limitation of the exemptions provided by (i) Rule 144 under the
Securities Act, as such Rule may be amended from time to time or (ii) any
similar rule or regulation hereafter adopted by the SEC. Upon the request of any
Holder of Registrable Securities, Sunstone will deliver to such Holder a written
statement as to whether it has complied with such requirements. Notwithstanding
anything contained in this Section 7, Sunstone may de-register under Section 12
of the Exchange Act if it is then permitted to do so pursuant to the Exchange
Act and the rules and regulations thereunder and, in such circumstances, shall
not be required hereby to file any reports which may be necessary in order for
Rule 144 or any similar rule or regulation to be available.
8. Selection of Counsel. In connection with any registration of
Registrable securities pursuant to Sections 2 and 3 hereof, the Holders of a
majority of the Registrable Securities covered by any such registration may
select one counsel to represent all Holders of Registrable Securities covered by
such registration.
9. Miscellaneous.
(a) Amendments and Waivers. This Agreement may be amended and
Sunstone may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, only if Sunstone shall have obtained the
written consent to such amendment, action or omission to act, of the Holders of
a majority of the Registrable Securities then outstanding; provided, however,
that no amendment, waiver or consent to the departure from the terms and
provisions of this Agreement that is adverse to the Funds or any of their
respective successors and assigns shall be effective as against any such Person
for so long as such Person holds any Registrable Securities unless consented to
in writing by such Person. Each Holder of any Registrable Securities at the time
or thereafter outstanding shall be bound by any consent authorized by this
Section 9(a), whether or not such Registrable Securities shall have been marked
to indicate such consent.
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(b) Successors, Assigns and Transferees. This Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and assigns. The rights to cause the Company to register
Registrable Securities pursuant to Section 2 or 3 may be assigned (but only with
all related obligations) by a Holder to a transferee or assignee of such
securities, provided: (a) the Company is, within a reasonable time after such
transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned; (b) such transferee or assignee assigns
in writing to be bound by and subject to the terms and conditions of this
Agreement. Without limitation of the foregoing, in the event that either of the
Funds distributes or otherwise transfers any shares of the Registrable
Securities to any of its present or future general or limited partners, Sunstone
hereby acknowledges that the registration rights granted pursuant to this
Agreement shall be transferred to such partner or partners on a pro rata basis,
and that at or after the time of any such distribution or transfer, any such
partner or group of partners shall designate a Person to act on its behalf in
delivering any notices or making any requests hereunder. Notwithstanding the
foregoing, in the event of a transfer of the registration rights granted
pursuant to this Agreement to a Fund's general or limited partners, such
partners shall not have any registration rights pursuant to Section 2 with
respect to any registration effected pursuant to Rule 415 under the Securities
Act.
(c) Notices. All notices and other communications provided for
hereunder shall be in writing and shall be sent by first class mail, telex,
telecopier or hand delivery:
(i) (A) if to Sunstone:
Sunstone Hotel Investors, Inc.
115 Calle de Industrias
Suite 201
San Clemente, CA 92672
Attention: Robert A. Alter
with a copy to:
Brobeck, Phleger & Harrison LLP
4675 MacArthur Court
Suite 1000
Newport Beach, CA 92660
Attention: Roger M. Cohen, Esq.
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(ii) if to Westbrook Fund:
Westbrook Real Estate Fund I, L.P.
599 Lexington Avenue
Suite 3800
New York, New York 10022
Attention: Jonathan Paul
with a copy to:
Simpson Thatcher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Richard Capelouto, Esq.
(iii) if to Westbrook Co-Investment Fund
Westbrook Co-Investment Partnership
I, L.P.
599 Lexington Avenue
Suite 3800
New York, New York 10022
Attention: Jonathan Paul
with a copy to:
Simpson Thatcher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Richard Capelouto, Esq.
(iv) if to any other holder of Registrable Securities, to the
address of such other holder as shown in the stock record book of Sunstone, or
to such other address as any of the above shall have designated in writing to
all of the other above.
All such notices and communications shall be deemed to have been given
or made (1) when delivered by hand, (2) five business days after being deposited
in the mail, postage prepaid, (3) when telexed answer-back received or (4) when
telecopied, receipt acknowledged.
(d) Descriptive Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning of terms contained herein.
(e) Severability. In the event that any one or more of the
provisions, paragraphs, words, clauses, phrases or sentences contained herein,
or the application thereof in any circumstances, is held invalid, illegal or
unenforceable in any respect for any reason, the
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<PAGE> 112
validity, legality and enforceability of any such provision, paragraph, word,
clause, phrase or sentence in every other respect and of the remaining
provisions, paragraphs, words, clauses, phrases or sentences hereof shall not be
in any way impaired, it being intended that all rights, powers and privileges of
the parties hereto shall be enforceable to the fullest extent permitted by law.
(f) Counterparts. This Agreement may be executed in counterparts,
and by different parties in separate counterparts, each of which shall be deemed
an original, but all such counterparts shall together constitute one and the
same instrument.
(g) Governing Law; Submission to Jurisdiction. This Agreement shall
be governed by and construed and enforced in accordance with the laws of the
State of New York applicable to contracts made and to be performed therein. The
parties to this Agreement hereby agree to submit to the jurisdiction of the
courts of the State of New York, the courts of the United States of America for
the Southern District of New York, and appellate courts from any thereof in any
action or proceeding arising out of or relating to this Agreement.
(h) Specific Performance. The parties hereto acknowledge and agree
that irreparable damage would occur in the event that any of the provisions of
this Agreement were not performed in accordance with their specific terms or
were otherwise breached. Accordingly, it is agreed that they shall be entitled
to an injunction or injunctions to prevent breaches of the provisions of this
Agreement and to enforce specifically the terms and provisions hereof in any
court of competent jurisdiction in the United States or any state thereof, in
addition to any other remedy to which they may be entitled at law or in equity.
Notwithstanding the foregoing, no Holder shall have any right to obtain or seek
an injunction restraining or otherwise delaying or requiring the completion of
any such registration as the result of any controversy that might arise with
respect to the interpretation or implementation of this Agreement.
(i) Limited Liability of Partners. Notwithstanding any other
provision of this Agreement, neither the general partner nor the limited
partners, nor any future general or limited partner of the Funds, nor any member
or managing member of the Funds shall have any personal liability for
performance of any obligation of such Common Stock Partnership or the Funds
under this Agreement.
(j) "Market Stand-Off" Agreement. (i) Subject to clauses (ii) and
(iii) below, each Holder hereby agrees that during the period in which Sunstone
and its officers and directors are prohibited by the underwriters from selling,
transferring or otherwise disposing of Common Stock (but in no event more than
ninety (90) days) following the effective date of a registration statement of
the Company filed under the Securities Act, without the prior written consent of
the underwriters it shall not, whether or not such Holder is participating in
the offering, to the extent requested by the Company, sell or otherwise transfer
or dispose of (other than to donees who agree to be similarly bound) any Common
Stock of the Company held by it at any time during such period except Common
Stock included in such registration. In order to enforce the foregoing covenant,
the Company may impose stop-transfer instructions with
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<PAGE> 113
respect to the securities of each Holder (and the shares or securities of any
other person subject to the foregoing restrictions) until the end of such
period.
(ii) Anything herein to the contrary notwithstanding, the
Holders will not be prohibited from selling or otherwise disposing of shares of
Common Stock pursuant to this Section 9(j) and/or clause (z) of Section 3(a) for
more than 90 days during any nine-month period.
(iii) The provisions of this Section 9(j) shall terminate as to
any Holder at such time as such Holder is able to sell all of the Registrable
Securities held by it under Rule 144 in any three-month period without
restriction.
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<PAGE> 114
IN WITNESS WHEREOF, each of the undersigned has executed this Agreement
or caused this Agreement to be duly executed on its behalf as of the date first
written above.
SUNSTONE HOTEL INVESTORS, INC.
By:
--------------------------------
Robert A. Alter
President
WESTBROOK REAL ESTATE FUND I, L.P.
By: Westbrook Real Estate Partners
Management, L.L.C., its general
partner
By: Westbrook Real Estate Partners,
L.L.C., its managing member
By:
---------------------------
Jonathan H. Paul
Managing Principal
WESTBROOK CO-INVESTMENT PARTNERSHIP I,
L.P.
By: Westbrook Real Estate Partners
Management, L.L.C., its general
partner
By: Westbrook Real Estate Partners,
L.L.C., its managing member
By:
---------------------------
Jonathan H. Paul
Managing Principal
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<PAGE> 1
EXHIBIT 99.1
FOR IMMEDIATE RELEASE
AUGUST 6, 1997
SUNSTONE HOTEL INVESTORS SIGNS DEFINITIVE AGREEMENT TO ACQUIRE
KAHLER REALTY CORPORATION
ACQUISITION HIGHLIGHTS:
- $322 MILLION ACQUISITION
- ESTABLISHES STRATEGIC ALLIANCE WITH WESTBROOK PARTNERS, L.L.C.
- DOUBLES SUNSTONE'S HOTEL ROOM TOTAL TO 9,021
- EXPECTED TO CLOSE IN FOURTH QUARTER 1997
- EXPECTED TO BE ACCRETIVE TO FFO PER SHARE IN 1998
- MARKET CAPITALIZATION TO INCREASE 10 TIMES OVER IPO SIZE IN 2 YEARS
- CONTINUES WESTERN UNITED STATES EMPHASIS
SAN CLEMENTE, CA., AUGUST 6, 1997 - Sunstone Hotel Investors, Inc. (NYSE:SSI), a
real estate investment trust (REIT), today announced that the Company has signed
a definitive $322 million agreement that will double Sunstone's hotel room total
by acquiring Kahler Realty Corporation from affiliates of Westbrook Partners,
L.L.C., a real estate investment firm. The transaction is expected to close
during the fourth quarter of 1997. Sunstone President and Chief Executive
Officer Robert A. Alter said he expects the acquistion to be accretive to FFO
per share in 1998.
DOUBLES ROOMS, COMPLEMENTS STRATEGY
Alter believes that Kahler's business fundamentals are complementary to
Sunstone's Western U.S. concentration which is experiencing strong economic
growth, favorable supply and demand dynamics and high barriers to entry in
certain Kahler hotel markets, further increasing the attractiveness of the
acquisition. Kahler is a private C-Corporation that owns and operates 17 hotels,
including 4,255 rooms primarily in two principal markets: the intermountain
region of Utah, Idaho, Montana and Arizona (eleven hotels) and Rochester,
Minnesota (four hotels). The largest number of rooms are concentrated in
Rochester, Minnesota -- four hotels with 1,329 rooms and in the Salt
<PAGE> 2
Lake City, Utah area -- five hotels with 1,306 rooms. Nine of the 17 hotels are
operated independently while the balance is operated under Sheraton, Hilton,
Holiday Inn, Best Western and Quality Inn franchises. The acquisition of Kahler
brings Sunstone's room total to 9,021.
Alter said, "We are excited about our alliance with Westbrook and the
acquisition of Kahler and believe that Kahler's hotel portfolio will complement
the existing potential for internal growth of our presently owned hotels. We
believe Westbrook's strategic investment in Sunstone validates management's
expertise and strategy and opens another valve to the acquisition pipeline. This
transaction will enable us to nearly double our hotel room portfolio and
maintain our focus in the Western part of the United States. While our portfolio
now includes hotels outside our primary geographic area, we plan to continue our
Western U.S. focus, particularly along the Pacific Coast, while selectively
responding to favorable opportunities we find elsewhere."
Paul D. Kazilionis, Managing Principal of Westbrook Partners, said, "We are
excited about the growth prospects of Sunstone. Sunstone's track record of
renovating, repositioning and rebranding hotels to create value was a
significant factor in our efforts to increase our returns on this group of hotel
assets. With a 13.0% investment in the Company and Board representation, we
expect to be very active in identifying and facilitating future acquisition
opportunities." Westbrook was formed in April 1994 by former senior executives
in the real estate department of Morgan Stanley Group, Inc. and currently
controls more than $2.5 billion in real estate assets.
The transaction forming the strategic alliance between Sunstone and Westbrook is
comprised of a combination of approximately $95 million cash, $25 million in
newly issued preferred stock, $32 million of newly issued common stock, and
approximately $170 million of debt which will be retired, assumed or refinanced
with more favorable interest rates. The purchase price, excluding amounts to be
paid for golf courses and other operating assets, reflects an average price of
approximately $69,000 per room, which Sunstone estimates to be approximately 72%
of replacement cost. Sunstone intends to finance the transaction by issuing
additional equity capital and with borrowings on its unsecured loan facility,
which Sunstone intends to increase from $100 million to $200 million in
connection with the transaction.
Upon consummation of the transaction and related financing, Westbrook will own
up to 13.0% in Sunstone, post merger. Westbrook will have one seat on Sunstone's
board and will earn additional consideration of up to $16.5 million if the
Kahler assets exceed certain performance thresholds during 1999. Both of the
Boards of Directors of Sunstone and Westbrook have approved the transaction.
Subject to certain regulatory approvals, the acquisition is expected to close in
the fourth quarter of 1997.
HOTEL PROPERTIES
The Rochester hotels serve the Mayo Clinic, an internationally renowned private
health care provider. Almost 400,000 patients a year come to its outpatient
clinics and hospitals. More than 85% of the patients who come to the Mayo Clinic
in Rochester are treated on an outpatient basis and typically require extended
overnight stays. Mayo is currently planning to approximately double the size of
its facility in Rochester.
<PAGE> 3
The four hotels in Rochester are interdependent with the Mayo Clinic. The
194-room Kahler Plaza, the 266-room Kahler Inn and Suites and the 699-room
Kahler Hotel are adjacent to, and directly connected with, the Mayo Clinic
medical facilities through several floor-to-floor entries and basement-level
walkways. The Clinic has few patient beds, so the hotels have a significant
number of guests who require extended outpatient medical evaluation and
treatment. The major buildings in downtown Rochester are all connected by
above-street enclosed walkways. This system includes the four Kahler hotels, the
Mayo Clinic, the Civic Center, a Radisson Hotel and several multi-level retail
malls. The ground floors and basement levels of the Kahler Plaza and Kahler
Hotel have a number of retail shops and food courts that have historically
generated significant revenues.
In the intermountain region, the state of Utah has recently been experiencing
significant economic and demographic growth. Salt Lake City is a major hotel
market which provides excellent price and value for conventions and also
provides access to seven major ski areas. The 2002 Winter Olympics are expected
to boost occupancy and average rates and further increase Salt Lake City's
national and international visibility. New businesses continue to relocate to
the area and stimulate the growth of the local economy. Gateway 2000, a leading
global manufacturer of personal computer products, just announced construction
of a new plant near the airport.
The Salt Lake Hilton Hotel has 18,000 square feet of meeting space, which is the
largest amount of meeting space of any hotel in Salt Lake City. The property has
good visibility and is easily accessible from Interstate I-15. The 351-room
hotel offers a full package of services including two restaurants, a fitness
center, swimming pool, hair salon, business center, ski rental shop, car rental
and airline services, a jewelry store, health spa services and a gift shop. Due
to its proximity to area attractions and restaurants, the hotel is able to
compete for demand generated by Salt Lake City's Salt Palace Convention Center
and the Delta Center. Management believes that if the hotel were to be renovated
and brought to a quality level comparable to that of the Marriott, Doubletree
and Wyndham in its competitive market, the average daily room rate could be
increased by as much as $20 to $30. Management currently estimates renovation
costs for the Hilton at approximately $10 million. Renovations are currently
scheduled to commence in September 1997 and last through March 1998.
The 220-room University Park Hotel and Suites is adjacent to the University of
Utah and is located within the University's commercial research park, seven
minutes from downtown Salt Lake City. The strongest demand generators are the
University and related medical and other corporate businesses. The hotel has 11
meeting rooms including two restaurants, a 4,700 square foot ballroom, indoor
pool, fitness center, and a tiered seminar room with audio visual capability.
The Provo Park Hotel is a four diamond full-service hotel built as a 233-room
hotel in 1985 and expanded by 100 suites in 1996. The 333-room hotel has two
restaurants, room service, private club, gift shop, business center, two
swimming pools (indoor and outdoor), 28,000 square feet of meeting space and
full banquet and catering service. The hotel is located near Brigham Young
University and Utah Valley State College, the headquarters of Novell and other
high-tech companies, Geneva Steel and its support companies as well as NuSkin
and other health and beauty product corporations. In addition, Micron has a $2.7
billion plant under construction located 20 minutes away and J.P.
<PAGE> 4
Realty is building the Provo Town Center Mall with over 1.0 million square feet
which will include three anchor stores.
The Sheraton San Marcos Golf Resort and Conference Center is a 295-room,
full-service hotel in Chandler, Arizona located close to several major demand
generators such as Intel, Motorola and General Motors. Two hundred fifty new
rooms were constructed as part of the restoration of the original resort. The
resort has three restaurants, a lounge, 31,000 square feet of meeting space,
swimming pools, an 18-hole PGA championship golf course, tennis courts, beauty
salon and a gift shop.
[TABLE FOLLOWS]
<PAGE> 5
The following tables provide financial information of the Kahler portfolio of
hotel properties:
KAHLER HISTORICAL PERFORMANCE
(IN MILLIONS)
<TABLE>
<CAPTION>
1994 1995 1996 CAGR
---- ---- ---- ----
<S> <C> <C> <C> <C>
ADR $ 64.82 $ 67.71 $ 70.85 4.50%
Occupancy 67.6% 68.2% 69.1% 1.10%
REVPAR $ 43.82 $ 46.18 $ 48.96 5.70%
Revenues (In millions) $ 101.00 $ 112.40 $ 124.70 11.10%
EBITDA (In millions) $ 20.60 $ 24.60 $ 28.10 16.80%
</TABLE>
<TABLE>
<CAPTION>
NO. OF REVPAR
HOTEL LOCATION ROOMS 2Q 1997
----- -------- ----- -------
<S> <C> <C> <C>
Sheraton San Marcos Golf Resort &
Conference Center Chandler, AZ 295 $86.36
Salt Lake Hilton Hotel Salt Lake City, UT 351 71.62
University Park Hotel & Suites Salt Lake City, UT 220 66.81
Best Western Ogden Park Hotel Ogden, UT 288 41.13
Olympia Park Hotel & Conference Center Park City, UT 203 64.04
Provo Park Hotel Provo, UT 333 42.53
Residence Inn by Marriott Provo, UT 114 41.19
Boise Park Suite Hotel Boise, ID 238 41.30
Quality Inn Pocatello Park Hotel Pocatello, ID 152 33.73
Best Western Canyon Springs Park Hotel Twin Falls, ID 112 38.78
Best Western Colonial Park Hotel Helena, MT 149 45.54
Holiday Inn Downtown Rochester, MN 170 47.03
The Kahler Hotel Rochester, MN 699 42.52
Kahler Inn & Suites Rochester, MN 266 43.02
Kahler Plaza Hotel Rochester, MN 194 90.49
Green Oaks Park Hotel Fort Worth, TX 284 35.37
Lakeview Resort & Conference Center Morgantown, WV 187 46.53
</TABLE>
<PAGE> 6
STRATEGY OF MAXIMIZING FINANCIAL PERFORMANCE
Sunstone's continuing business strategy is to own mid-price and upscale hotels
with revenue growth opportunities in strong markets. In the first six months of
1997, the Company reported REVPAR growth of 16.9% for stabilized hotels, a 163%
increase in revenue and a 195% increase in FFO compared with the corresponding
six months in 1996. For the latest twelve months ended June 30, 1997, Kahler had
EBITDA of $31.0 million. Management believes that the acquisition of Kahler will
be break-even to accretive based on trailing twelve-month earnings. This
anticipated effect to earnings does not take into account any renovating,
repositioning or rebranding the Company will undertake to maximize financial
performance.
Upon completion of this transaction, Sunstone Hotel Investors, Inc., the only
hotel REIT that currently focuses its acquisition strategy in the Western United
States, will own, through Sunstone Hotel Investors, L.P., 48 hotels comprising
9,021 rooms.
Statements in this press release which are not strictly historical are
"forward-looking" and are subject to the many risks and uncertainties which
affect Sunstone's business, and could cause actual results to differ materially
from those projected and forecasted. These uncertainties, which include
competition within the lodging industry, the balance between supply and demand
for hotel rooms, the Company's continued ability to execute acquisitions and
renovations, the effect of economic conditions, and the availability of capital
to finance planned growth, are described, but are not limited to those
disclosed, in the Company's annual report on Form 10-K for the year ended
December 31, 1996, and the Company's quarterly report on Form 10-Q for the
quarter ended March 31, 1997, each as filed with the Securities and Exchange
Commission.
For information on Sunstone Hotel Investors' Dividend Reinvestment Program,
please call 1-888-261-6776. For investor information on Sunstone Hotel
Investors via facsimile at no cost, simply call 1-800-PRO-INFO and dial client
code "SSI".
