<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )*
SUNSTONE HOTEL INVESTORS, INC.
(NAME OF ISSUER)
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(TITLE OF CLASS OF SECURITIES)
867933 10 3
(CUSIP NUMBER)
JONATHAN H. PAUL
WESTBROOK PARTNERS
599 LEXINGTON AVENUE
NEW YORK, N.Y. 10022
(212) 849-8800
WITH A COPY TO:
PATRICK K. FOX, ESQ.
WESTBROOK PARTNERS
13155 NOEL ROAD - LB54
SUITE 2300
DALLAS, TX 75240
(972) 934-0100
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES AND
COMMUNICATIONS)
OCTOBER 15, 1997
(DATE OF EVENT WHICH REQUIRES FILING OF THIS STATEMENT)
IF THE FILING PERSON HAS PREVIOUSLY FILED A STATEMENT ON SCHEDULE 13G TO REPORT
THE ACQUISITION WHICH IS THE SUBJECT OF THIS SCHEDULE 13D, AND IS FILING THIS
SCHEDULE BECAUSE OF RULE 13d-1(b)(3) OR (4), CHECK THE FOLLOWING BOX / /.
NOTE: SIX COPIES OF THIS STATEMENT, INCLUDING ALL EXHIBITS, SHOULD BE FILED WITH
THE COMMISSION. SEE RULE 13d-1(a) FOR OTHER PARTIES TO WHOM COPIES ARE TO BE
SENT.
*THE REMAINDER OF THIS COVER PAGE SHALL BE FILLED OUT FOR A REPORTING PERSON'S
INITIAL FILING ON THIS FORM WITH RESPECT TO THE SUBJECT CLASS OF SECURITIES, AND
FOR ANY SUBSEQUENT AMENDMENT CONTAINING INFORMATION WHICH WOULD ALTER
DISCLOSURES PROVIDED IN A PRIOR COVER PAGE.
THE INFORMATION REQUIRED ON THE REMAINDER OF THIS COVER PAGE SHALL NOT BE DEEMED
TO BE "FILED" FOR THE PURPOSE OF SECTION 18 OF THE SECURITIES EXCHANGE ACT OF
1934 ("ACT") OR OTHERWISE SUBJECT TO THE LIABILITIES OF THAT SECTION OF THE ACT
BUT SHALL BE SUBJECT TO ALL OTHER PROVISIONS OF THE ACT (HOWEVER, SEE THE
NOTES).
PAGE 1 of 139 PAGES
<PAGE> 2
SCHEDULE 13D
- ------------------------ -----------------------------------
CUSIP NO. 867933 10 3 PAGE 2 OF 139 PAGES
- ------------------------ -----------------------------------
- -------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
WESTBROOK REAL ESTATE PARTNERS, L.L.C.
- -------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ]
(b) [ ]
- ------------------------------------------------------------------------------
3 SEC USE ONLY
- -------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
OO (see Item 3)
- -------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e) [ ]
- -------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- -------------------------------------------------------------------------------
7 SOLE VOTING POWER
0
NUMBER OF
SHARES --------------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY
EACH 3,983,867
REPORTING --------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH
0
--------------------------------------------------
10 SHARED DISPOSITIVE POWER
3,983,867
- -------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
3,983,867
- -------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
[ ]
- -------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
11.9%
- -------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
OO
- -------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE AND THE SIGNATURE ATTESTATION
<PAGE> 3
SCHEDULE 13D
- ------------------------ -----------------------------------
CUSIP NO. 867933 10 3 PAGE 3 OF 139 PAGES
- ------------------------ -----------------------------------
- -------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
WESTBROOK REAL ESTATE PARTNERS MANAGEMENT I, L.L.C.
- -------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ]
(b) [ ]
- -------------------------------------------------------------------------------
3 SEC USE ONLY
- -------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
OO (see Item 3)
- -------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e) [ ]
- -------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- -------------------------------------------------------------------------------
7 SOLE VOTING POWER
0
NUMBER OF
SHARES --------------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY
EACH 3,983,867
REPORTING --------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH
0
--------------------------------------------------
10 SHARED DISPOSITIVE POWER
3,983,867
- -------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
3,983,867
- -------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
[ ]
- -------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
11.9%
- -------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
OO
- -------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE AND THE SIGNATURE ATTESTATION
<PAGE> 4
SCHEDULE 13D
- ------------------------ -----------------------------------
CUSIP NO. 867933 10 3 PAGE 4 OF 139 PAGES
- ------------------------ -----------------------------------
- -------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
WESTBROOK REAL ESTATE FUND I, L.P.
- -------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ]
(b) [ ]
- -------------------------------------------------------------------------------
3 SEC USE ONLY
- -------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
OO (see Item 3)
- -------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e) [ ]
- -------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- -------------------------------------------------------------------------------
7 SOLE VOTING POWER
0
NUMBER OF
SHARES -------------------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY
EACH 3,573,794
REPORTING -------------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH
0
-------------------------------------------------------
10 SHARED DISPOSITIVE POWER
3,573,794
- -------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
3,573,794
- -------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
[ ]
- -------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
10.7%
- -------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
PN
- -------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE AND THE SIGNATURE ATTESTATION
<PAGE> 5
SCHEDULE 13D
- ------------------------ -----------------------------------
CUSIP NO. 867933 10 3 PAGE 5 OF 139 PAGES
- ------------------------ -----------------------------------
- -------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
WESTBROOK REAL ESTATE CO-INVESTMENT PARTNERSHIP I, L.P.
- -------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ]
(b) [ ]
- -------------------------------------------------------------------------------
3 SEC USE ONLY
- -------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
OO (see Item 3)
- -------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e) [ ]
- -------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- -------------------------------------------------------------------------------
7 SOLE VOTING POWER
0
NUMBER OF
SHARES -------------------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY
EACH 410,073
REPORTING -------------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH
0
-------------------------------------------------------
10 SHARED DISPOSITIVE POWER
410,073
- -------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
410,073
- -------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
[ ]
- -------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
1.2%
- -------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
PN
- -------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE AND THE SIGNATURE ATTESTATION
<PAGE> 6
SCHEDULE 13D
- ------------------------ -----------------------------------
CUSIP NO. 867933 10 3 PAGE 6 OF 139 PAGES
- ------------------------ -----------------------------------
- -------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSON
Gregory H. Hartman
- -------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ]
(b) [ ]
- -------------------------------------------------------------------------------
3 SEC USE ONLY
- -------------------------------------------------------------------------------
4 SOURCE OF FUNDS
OO (see Item 3)
- -------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e) [ ]
- -------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
United States
- -------------------------------------------------------------------------------
7 SOLE VOTING POWER
0
NUMBER OF
SHARES -------------------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY
EACH 0
REPORTING -------------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH
0
-------------------------------------------------------
10 SHARED DISPOSITIVE POWER
0
- -------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
0
- -------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
3,983,867 [ ]
- -------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
0%
- -------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
IN
- -------------------------------------------------------------------------------
<PAGE> 7
- ------------------------ -----------------------------------
CUSIP NO. 867933 10 3 PAGE 7 OF 139 PAGES
- ------------------------ -----------------------------------
- -------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSON
Jeffrey M. Kaplan
- -------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ]
(b) [ ]
- -------------------------------------------------------------------------------
3 SEC USE ONLY
- -------------------------------------------------------------------------------
4 SOURCE OF FUNDS
OO (see Item 3)
- -------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e) [ ]
- -------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
United States
- -------------------------------------------------------------------------------
7 SOLE VOTING POWER
0
NUMBER OF
SHARES -------------------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY
EACH 0
REPORTING -------------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH
0
-------------------------------------------------------
10 SHARED DISPOSITIVE POWER
0
- -------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
0
- -------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
3,983,867 [ ]
- -------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
0%
- -------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
IN
- -------------------------------------------------------------------------------
<PAGE> 8
- ------------------------ -----------------------------------
CUSIP NO. 867933 10 3 PAGE 8 OF 139 PAGES
- ------------------------ -----------------------------------
- -------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSON
Paul D. Kazilionis
- -------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ]
(b) [ ]
- -------------------------------------------------------------------------------
3 SEC USE ONLY
- -------------------------------------------------------------------------------
4 SOURCE OF FUNDS
OO (see Item 3)
- -------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e) [ ]
- -------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
United States
- -------------------------------------------------------------------------------
7 SOLE VOTING POWER
0
NUMBER OF
SHARES -------------------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY
EACH 0
REPORTING -------------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH
0
-------------------------------------------------------
10 SHARED DISPOSITIVE POWER
0
- -------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
0
- -------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
3,983,867 [ ]
- -------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
0%
- -------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
IN
- -------------------------------------------------------------------------------
<PAGE> 9
- ------------------------ -----------------------------------
CUSIP NO. 867933 10 3 PAGE 9 OF 139 PAGES
- ------------------------ -----------------------------------
- -------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSON
Jonathan H. Paul
- -------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ]
(b) [ ]
- -------------------------------------------------------------------------------
3 SEC USE ONLY
- -------------------------------------------------------------------------------
4 SOURCE OF FUNDS
OO (see Item 3)
- -------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e) [ ]
- -------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
United States
- -------------------------------------------------------------------------------
7 SOLE VOTING POWER
0
NUMBER OF
SHARES -------------------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY
EACH 0
REPORTING -------------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH
0
-------------------------------------------------------
10 SHARED DISPOSITIVE POWER
0
- -------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
0
- -------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
3,983,867 [ ]
- -------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
0%
- -------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
IN
- -------------------------------------------------------------------------------
<PAGE> 10
- ------------------------ -----------------------------------
CUSIP NO. 867933 10 3 PAGE 10 OF 139
- ------------------------ -----------------------------------
- -------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSON
William H. Walton III
- -------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ]
(b) [ ]
- -------------------------------------------------------------------------------
3 SEC USE ONLY
- -------------------------------------------------------------------------------
4 SOURCE OF FUNDS
OO (see Item 3)
- -------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e) [ ]
- -------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
United States
- -------------------------------------------------------------------------------
7 SOLE VOTING POWER
0
NUMBER OF
SHARES -------------------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY
EACH 0
REPORTING -------------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH
0
-------------------------------------------------------
10 SHARED DISPOSITIVE POWER
0
- -------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
0
- -------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
3,983,867 [ ]
- -------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
0%
- -------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
IN
- -------------------------------------------------------------------------------
<PAGE> 11
Item 1. Security and Issuer.
This statement relates to shares of common stock, $0.01 par
value per share, of Sunstone Hotel Investors, Inc. ("Issuer Common Stock"), a
Maryland corporation (the "Issuer"). The principal executive offices of the
Issuer are located at 115 Calle de Industries, Suite 201, San Clemente, CA
92672.
Item 2. Identity and Background.
This Schedule 13D is being filed by (i) Westbrook Real Estate
Fund I, L.P., a Delaware limited partnership ("WREF I"), (ii) Westbrook Real
Estate Co-Investment Partnership I, L.P., a Delaware limited partnership
("WRECIP I"), (iii) Westbrook Real Estate Partners Management I, L.L.C., a
Delaware limited liability company ("WREM I"), (iv) Westbrook Real Estate
Partners, L.L.C., a Delaware limited liability company ("WREP"), (v) Gregory H.
Hartman ("Hartman"), a member of WREP, (vi) Jeffrey M. Kaplan ("Kaplan"), a
member of WREP, (vi) Paul D. Kazilionis ("Kazilionis"), a member of WREP, (vii)
Jonathan H. Paul ("Paul"), a member of WREP, and (viii) William H. Walton III
("Walton"), a member of WREP. WREF I, WRECIP I, WREM I, WREP, Hartman, Kaplan,
Kazilionis, Paul and Walton are sometimes referred to collectively herein as the
"Reporting Persons." The agreement among the Reporting Persons relating to the
joint filing of this statement is attached as Exhibit 1 hereto.
The state of organization for each of WREF I, WRECIP I, WREM
I, and WREP is Delaware. Each of Hartman, Kaplan, Kazilionis, Paul and Walton
are citizens of the United States. The principal executive offices of WREF I,
WRECIP I, WREM I and WREP are located at 599 Lexington Avenue, Suite 3800, New
York, New York 10022. The principal business address for Kaplan, Paul and
Walton, is 599
<PAGE> 12
Page 12 of 139 Pages
Lexington Avenue, Suite 3800, New York, New York 10022. The principal business
address for Hartman is 11150 Santa Monica Boulevard, Suite 1450, Los Angeles,
California 90025. The principal business address for Kazilionis is 284 South
Beach Road, Hobe Sound, Florida 33455.
The principal business of WREF I and WRECIP I is to make
direct and indirect investments in real estate and real estate interests. The
principal business of WREM I is to serve as the general partner of each of WREF
I and WRECIP I. The principal business of WREP is to serve as the managing
member of WREM I and as the managing member of other similar funds. The
principal occupations of Hartman, Kaplan, Kazilionis, Paul and Walton are their
activities on behalf of WREP.
During the last five years, to the best knowledge of the
Reporting Persons, none of the Reporting Persons: (i) has been convicted in a
criminal proceeding (excluding traffic violations or similar misdemeanors) and
(ii) was a party to a civil proceeding of a judicial or administrative body of
competent jurisdiction as a result of which he was or is subject to a judgment,
decree or final order enjoining further violations of or prohibiting or
mandating activities subject to federal or state securities laws or finding any
violation with respect to such laws.
Item 3. Source and Amount of Funds or Other Consideration.
On October 15, 1997, WREF I and WRECIP I acquired 2,049,135
and 235,127 shares of Issuer Common Stock ("Acquired Common Stock"),
respectively, and 224,266.60 and 25,733.4 shares of the Issuer's 7.9% Class A
Cumulative Convertible Preferred Stock par value $0.01 per share ("Issuer
Preferred Stock"), respectively, pursuant to a Stock
<PAGE> 13
Page 13 of 139 Pages
Purchase Agreement (the "Kahler Stock Purchase Agreement"), dated as of August
5, 1997, among the Issuer, WREF I, WRECIP I and Kahler Realty Corporation, a
Minnesota corporation ("Kahler") attached hereto as Exhibit 2. Pursuant to the
Kahler Stock Purchase Agreement, on October 15, 1997, the Issuer purchased all
of the outstanding common stock of Kahler from WREF I and WRECIP I in exchange
for, among other things, the Acquired Common Stock and Issuer Preferred Stock.
Item 4. Purpose of Transaction.
WREF I and WRECIP I acquired the Issuer's securities for
investment purposes. The acquisition of the 2,284,262 shares of Issuer Common
Stock and the 250,000 shares of Issuer Preferred Stock was made pursuant to the
terms of the Kahler Stock Purchase Agreement.
Pursuant to the terms of the Kahler Stock Purchase Agreement,
the Issuer increased the size of its Board of Directors from 8 to 9 directors
and caused Kazilionis to be designated as a member of its Board of Directors
effective October 15, 1997. The Kahler Stock Purchase Agreement provides that as
long as WREF I and WRECIP I continue to beneficially own at least 33-1/3% of the
Common Stock of the Issuer acquired on October 15, 1997, WREF I and WRECIP I
will have the right to designate one person for nomination as a director of the
Issuer as part of the Issuer's management slate. In addition, if the Issuer
increases the size of its Board of Directors in the future, and WREF I and
WRECIP I continue to beneficially own 50% or more of the Common Stock of the
Issuer acquired on October 15, 1997, WREF I and WRECIP I have a right to
designate for nomination as a director of the Issuer as part of the Issuer's
management slate that number of directors equal to the product of the percentage
of outstanding Issuer
<PAGE> 14
Page 14 of 139 Pages
Common Stock beneficially owned by WREF I and WRECIP I (on a fully diluted
basis) multiplied by the number of directors on the Board of Directors of the
Issuer. The Issuer has agreed to provide the same type of support for the
election of the designees of WREF I and WRECIP I as directors of the Issuer that
its affiliates and management provide to persons standing for election as
director as part of its management slate.
Under the terms of the Kahler Stock Purchase Agreement, WREF I
and WRECIP I have agreed not to sell Issuer Common Stock or Issuer Preferred
Stock until October 15, 1998. From October 15, 1998 until January 15, 1999, WREF
I and WRECIP I may sell up to 25% of the Issuer Common Stock and Issuer
Preferred Stock purchased by them on October 15, 1997 and Issuer Common Stock
acquired by them upon conversion of the Issuer Preferred Stock. From
January 15, 1999 until May 15, 1999, WREF I and WRECIP I may sell up to 50% of
the Issuer Common Stock and Issuer Preferred Stock purchased by them on October
15, 1997 and Issuer Common Stock acquired by them upon conversion of the Issuer
Preferred Stock. From May 15, 1999 until August 15, 1999, WREF I and WRECIP I
may sell up to 75% of the Issuer Common Stock and Issuer Preferred Stock
purchased by them on October 15, 1997 and Issuer Common Stock acquired by them
upon conversion of the Issuer Preferred Stock. Beginning on October 15, 1999
all such transfer restrictions shall cease, provided that any such sale of
Issuer Common Stock and Issuer Preferred Stock must be made pursuant to a
transaction registered or exempt from registration under the Securities Act of
1933, as amended. The description of the Kahler Stock Purchase Agreement
contained herein is qualified in its entirety by reference to the Stock
Purchase Agreement attached hereto as Exhibit 2, which Stock Purchase Agreement
is incorporated herein by reference.
<PAGE> 15
Page 15 of 139 Pages
Pursuant to the Articles Supplementary of the Articles of
Incorporation of the Issuer which relate to the Issuer Preferred Stock (as
amended, the "Articles Supplementary") filed as Exhibit 3 attached hereto, WREF
I and WRECIP I may convert their holdings of Issuer Preferred Stock into shares
of Issuer Common Stock at any time after issuance of the Issuer Preferred Stock
and prior to the fifth day prior to the date set for the redemption of such
Issuer Preferred Stock in whole or in part or the closing of any transaction
involving the liquidation, dissolution or winding up of the Issuer. The number
of shares of Issuer Common Stock issued upon such conversion will be equal to
the Original Series A Issue Price (as defined in the Articles Supplementary), as
adjusted (currently $100), divided by the Conversion Price (as defined in the
Articles Supplementary) applicable to each share of Issuer Preferred Stock, as
adjusted (currently $14.7093). The Original Series A Issue Price and the
Conversion Price are to be adjusted to take into account any stock dividends,
combinations, splits or similar events with respect to the Issuer Common Stock
or Issuer Preferred Stock.
In addition, pursuant to the Articles Supplementary, the
holders of the Issuer Preferred Stock have the right, upon the occurrence of
certain events, to elect one director to the Board of Directors of the Issuer.
The description of the Articles Supplementary contained herein is qualified in
its entirety by reference to the Articles Supplementary attached hereto as
Exhibit 3, which Articles Supplementary are incorporated herein by reference.
The Reporting Persons intend to review their holdings with
respect to the Issuer on a continuing basis. Depending on the
<PAGE> 16
Page 16 of 139 Pages
Issuer's business and prospects, and upon future developments (including, but
not limited to, market prices of the Issuer Common Stock and availability and
alternative uses of funds; as well as conditions in the securities markets and
general economic conditions and industry conditions), the Reporting Persons may
acquire other securities of the Issuer; sell all or a portion of their Issuer
Common Stock or Issuer Preferred Stock or other securities of the Issuer; now
owned or hereafter acquired, or maintain its position as current levels.
Accordingly, the Reporting Persons reserve the right to acquire additional
securities of the Issuer or to dispose of some or all of the securities of the
Issuer beneficially owned by them either in the open market, in privately
negotiated transactions or otherwise, or take such other action or actions with
respect to the Issuer Common Stock or Issuer Preferred Stock as they deem
advisable to the extent permitted under applicable federal and state securities
law. Other than as described above, the Reporting Persons have no plans or
proposals which relate to or would result in (a) the acquisition by any person
of additional securities of the Issuer or the disposition of any such
securities, (b) an extraordinary corporate transaction, such as a merger,
reorganization or liquidation, involving the Issuer or any of its subsidiaries,
(c) a sale or transfer of a material amount of assets of the Issuer or any of
its subsidiaries, (d) any change in the present management of the Issuer, (e)
any material change in the present capitalization or dividend policy of the
Issuer, (f) any other material change in the Issuer's business or corporate
structure, (g) any other material change in the Issuer's charter, bylaws or
instruments corresponding thereto or other actions which may impede the
<PAGE> 17
Page 17 of 139 Pages
acquisition of control of the Issuer by any person, (h) causing a class of
securities of the Issuer to be delisted from a national securities exchange or
to cease to be authorized to be quoted in an inter-dealer quotation system of a
registered national securities association, (i) a class of equity securities of
the Issuer becoming eligible for termination of registration pursuant to Section
12(g)(4) of the Securities Exchange Act of 1934, or (j) any action similar to
any of the enumerated in (a) through (i) above.
Item 5. Interest in Securities of the Issuer.
WREF I is the record owner of 2,049,135 shares of Issuer
Common Stock (the "WREF I Common Shares") and 224,266.60 shares of Issuer
Preferred Stock. As of the date of this filing, 224,266.60 shares of WREF I's
Issuer Preferred Stock are presently convertible into 1,524,659 shares of Issuer
Common Stock (the "WREF I Conversion Shares"). The calculation of the number of
WREF I Conversion Shares was determined in accordance with Section 5 of the
Articles Supplementary.
WRECIP I is the record owner of 235,127 shares of Issuer
Common Stock (the "WRECIP I Common Shares") and 25,733.4 shares of Issuer
Preferred Stock. As of the date of this filing, 25,733.4 shares of WRECIP I's
Issuer Preferred Stock are presently convertible into 174,946 shares of Common
Stock of the Issuer (the "WRECIP I Conversion Shares"). The calculation of the
number of WRECIP I Conversion Shares was determined in accordance with Section 5
of the Articles Supplementary.
As the sole general partner of WREF I and WRECIP I, WREM I may
be deemed to own beneficially the WREF I Common Shares, the WRECIP
<PAGE> 18
Page 18 of 139 Pages
I Common Shares, the WREF I Conversion Shares and the WRECIP I Conversion Shares
pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended
(the "Act"). As the sole managing member of WREM I, WREP may be deemed to own
beneficially the WREF I Common Shares, the WRECIP I Common Shares, the WREF I
Conversion Shares and the WRECIP I Conversion Shares pursuant to Rule 13d-3
under the Act. As the managing members of WREP, Hartman, Kaplan, Kazilionis,
Paul and Walton may be deemed to own beneficially the WREF I Common Shares, the
WRECIP I Common Shares, the WREF I Conversion Shares and the WRECIP I Conversion
Shares pursuant to Rule 13d-3 under the Act.
Hartman, Kaplan, Kazilionis, Paul and Walton each disclaims
beneficial ownership of the WREF I Common Shares, the WRECIP I Common Shares,
WREF I Conversion Shares and the WRECIP I Conversion Shares.
Each of the Reporting Persons may be deemed to beneficially
own 11.9% of the Issuer's Common Stock, which percentage is calculated based
upon (i) 20,458,820 shares of Common Stock reported outstanding by the Issuer on
September 30, 1997, (ii) 11,284,262 shares of Common Stock issued by the Issuer
subsequent to September 30, 1997 and (iii) that number of shares of Common
Stock (1,699,605) issuable upon the conversion of the WREF I Issuer Preferred
Stock and the WRECIP I Issuer Preferred Stock.
(a) Number of Shares as to which each such person has
(i) Sole power to vote or direct the vote: 0
shares for each Reporting Person;
(ii) Shared power to vote or direct the vote:
3,983,867 shares for each Reporting Person;
(iii) Sole power to dispose or to direct the
disposition: 0 shares for each Reporting
<PAGE> 19
Page 19 of 139 Pages
Person;
(iv) Shared power to dispose or to direct the
disposition: 3,983,867 shares for each
Reporting Person.
(b) No one other than the Reporting Persons has the right to
receive, or the power to direct the receipt of, dividends from, or the proceeds
from the sale of, any of the securities of the Issuer acquired by the Reporting
Persons as described in Item 5.
(c) Not applicable.
Item 6. Contracts, Arrangements or Understandings with Respect to
Securities of the Issuer.
WREF I, WRECIP I and the Issuer are parties to a Registration
Rights Agreement, dated as of October 15, 1997, attached hereto as Exhibit 4,
whereby WREF I and WRECIP I have certain rights with respect to the registration
under the Securities Act of 1933, as amended, of Issuer Common Stock owned by
them and are subject to certain restrictions on the sale of their shares
following certain registered offerings of Common Stock of the Issuer. The
description of
<PAGE> 20
Page 20 of 139 Pages
the Registration Rights Agreement contained herein is qualified in its entirety
by reference to the Registration Rights Agreement attached hereto as Exhibit 4,
which Registration Rights Agreement is incorporated herein by reference.
Except as set forth in Item 4 of this Statement and in the
preceding paragraph, to the best knowledge of the Reporting Persons, there are
no other contracts, arrangements, understandings or relationships (legal or
otherwise) among the persons named in Item 2 and between such persons and any
person with respect to any securities of the Issuer, including but not limited
to, transfer or voting of any of the securities of the Issuer, joint ventures,
loan or option arrangements, puts or calls, guarantees of profits, division of
profits or loss, or the giving or withholding of proxies, or a pledge or
contingency the occurrence of which would give another person voting power over
the securities of the Issuer.
Item 7. Material to be Filed as Exhibits.
1. Joint Filing Agreement, dated October 24, 1997, among WREF I,
WRECIP I, WREP, WREM I, Hartman, Kaplan, Kazilionis, Paul and
Walton relating to the filing of a joint statement on Schedule
13D.
2. Stock Purchase Agreement, dated August 5, 1997, among the
Issuer, WREF I, WRECIP I, and Kahler.
3. Articles Supplementary Classifying 7.9% Class A Cumulative
Convertible Preferred Stock of the Issuer.
4. Registration Rights Agreement, dated as of October 15, 1997,
among the Issuer, WREF I and WRECIP I.
<PAGE> 21
Page 21 of 139 Pages
SIGNATURE
After reasonable inquiry and to the best of my knowledge and
belief, I certify that the information set forth in this Statement is true,
complete and correct.
WESTBROOK REAL ESTATE
PARTNERS, L.L.C.
/s/ Jonathan H. Paul
By:________________________________________
Name: Jonathan H. Paul
Title: Managing Principal
WESTBROOK REAL ESTATE
PARTNERS MANAGEMENT I, L.L.C.
/s/ Jonathan H. Paul
By:________________________________________
Name: Jonathan H. Paul
Title: Managing Principal of Managing
Member
WESTBROOK REAL ESTATE FUND I, L.P.
/s/ Jonathan H. Paul
By:________________________________________
Name: Jonathan H. Paul
Title: Managing Principal of Managing
Member of General Partner
WESTBROOK REAL ESTATE
CO-INVESTMENT PARTNERSHIP I, L.P.
/s/ Jonathan H. Paul
By:________________________________________
Name: Jonathan H. Paul
Title: Managing Principal of Managing
Member of General Partner
<PAGE> 22
Page 22 of 139 Pages
GREGORY H. HARTMAN
/s/ Gregory H. Hartman
By:________________________________________
Name: Gregory H. Hartman
JEFFREY M. KAPLAN
/s/ Jeffrey M. Kaplan
By:________________________________________
Name: Jeffrey M. Kaplan
PAUL D. KAZILIONIS
/s/ Paul D. Kazilionis
By:________________________________________
Name: Paul D. Kazilionis
JONATHAN H. PAUL
/s/ Jonathan H. Paul
By:________________________________________
Name: Jonathan H. Paul
WILLIAM H. WALTON III
/s/ William H. Walton III
By:________________________________________
Name: William H. Walton III
DATED: October 24, 1997
<PAGE> 23
Page 23 of 139 Pages
INDEX TO EXHIBITS
Exhibit Number Description of Exhibits
1. Joint Filing Agreement, dated October 24, 1997, among
WREF I, WRECIP I, WREP, WREM I, Hartman, Kaplan,
Kazilionis, Paul and Walton relating to the filing of
a joint statement on Schedule 13D.
2. Stock Purchase Agreement, dated August 5, 1997, among
the Issuer, WREF I, WRECIP I, and Kahler.
3. Articles Supplementary Classifying 7.9% Class A
Cumulative Convertible Preferred Stock of the Issuer.
4. Registration Rights Agreement, dated as of October
15, 1997, among the Issuer, WREF I and WRECIP I.
<PAGE> 1
Page 24 of 139 Pages
EXHIBIT 1
JOINT FILING AGREEMENT
We, the signatories of the statement on Schedule 13D to which
this Agreement is attached, hereby agree that such statement is, and any
amendments thereto filed by any of us will be, filed on behalf of each of us.
WESTBROOK REAL ESTATE
PARTNERS, L.L.C.
/s/ Jonathan H. Paul
By:___________________________________________
Name: Jonathan H. Paul
Title: Managing Principal
WESTBROOK REAL ESTATE
PARTNERS MANAGEMENT I, L.L.C.
/s/ Jonathan H. Paul
By:___________________________________________
Name: Jonathan H. Paul
Title: Managing Principal of Managing
Member
WESTBROOK REAL ESTATE FUND I, L.P.
/s/ Jonathan H. Paul
By:___________________________________________
Name: Jonathan H. Paul
Title: Managing Principal of Managing
Member of General Partner
WESTBROOK REAL ESTATE
CO-INVESTMENT PARTNERSHIP I, L.P.
/s/ Jonathan H. Paul
By:___________________________________________
Name: Jonathan H. Paul
Title: Managing Principal of Managing
Member of General Partner
<PAGE> 2
Page 25 of 139 Pages
GREGORY H. HARTMAN
/s/ Gregory H. Hartman
By:___________________________________________
Name: Gregory H. Hartman
JEFFREY M. KAPLAN
/s/ Jeffrey M. Kaplan
By:___________________________________________
Name: Jeffrey M. Kaplan
PAUL D. KAZILIONIS
/s/ Paul D. Kazilionis
By:___________________________________________
Name: Paul D. Kazilionis
JONATHAN H. PAUL
/s/ Jonathan H. Paul
By:___________________________________________
Name: Jonathan H. Paul
WILLIAM H. WALTON III
/s/ William H. Walton III
By:___________________________________________
Name: William H. Walton III
DATED: October 24, 1997
<PAGE> 1
Exhibit 2
------------------------------------------------------
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
------------------------------------------------------
Page 26 of 139
<PAGE> 2
TABLE OF CONTENTS
Page
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
- i -
Pge 27 of 139
<PAGE> 3
Page
(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................................................. 32
(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............................... 33
(d) No Conflict; Required Filings and Consents..................... 34
(e) SEC Filings; Financial Statements.............................. 35
(f) Absence of Certain Changes or Events........................... 35
(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
- ii -
Page 28 of 139
<PAGE> 4
Page
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................... 46
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..................................... 47
SECTION 4.17 Additional Information................................... 48
SECTION 4.18 New York Stock Exchange Listing.......................... 48
SECTION 4.19 Share Trust.............................................. 48
SECTION 4.20 Earnings and Profits Distribution........................ 48
SECTION 4.21 GMX...................................................... 50
SECTION 4.22 Non-Core Assets.......................................... 50
ARTICLE V
CONDITIONS TO THE CLOSING....................... 50
SECTION 5.1 Conditions to Obligation of Each Party to Effect the Merger.. 50
(a) Government Approvals........................................... 50
(b) No Injunctions or Restraints; Illegality....................... 50
(c) Maintenance of REIT Qualification.............................. 51
(d) Earnings and Profits Certification............................. 51
(e) Confirmation of Exempted Holder Status for Funds............... 51
- iii -
Page 29 of 139
<PAGE> 5
Page
SECTION 5.2 Conditions to Obligations of Purchaser....................... 51
(a) Representations and Warranties................................. 52
(b) Performance of Obligations of the Company and the Funds........ 52
(c) Required Consents; Governmental Approvals...................... 52
(d) No Material Adverse Change..................................... 52
(e) Legal Opinions................................................. 53
SECTION 5.3 Conditions to Obligations of the Company and the Funds....... 53
(a) Representations and Warranties................................. 53
(b) Performance of Obligations of the Purchaser.................... 53
(c) Required Consents; Governmental Approvals...................... 53
(d) No Material Adverse Change..................................... 54
(e) Legal Opinions................................................. 54
(f) Confirmation of Exempt Purchase Status for Funds............... 54
(g) Distribution\Restructuring..................................... 54
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER................... 55
SECTION 6.1 Termination.................................................. 55
SECTION 6.2 Effect of Termination........................................ 55
SECTION 6.3 Reports...................................................... 56
SECTION 6.4 Fees and Expenses............................................ 56
SECTION 6.5 Amendment.................................................... 56
SECTION 6.6 Waiver....................................................... 56
ARTICLE VII
GENERAL PROVISIONS.................................. 56
SECTION 7.1 Survival of Representations, Warranties and Agreements;
Indemnification.............................................. 56
(a) Survival....................................................... 56
(b) Indemnification by Purchaser................................... 57
(c) Indemnification by the Funds................................... 57
(d) Limitations on Indemnification................................. 57
(e) Third-Party Claims............................................. 58
(f) Termination of Indemnification................................. 58
(g) Exclusive Remedy............................................... 59
- iv -
Page 30 of 139
<PAGE> 6
Page
(h) Calculation of Loss and Expenses............................... 59
SECTION 7.2 Notices...................................................... 59
SECTION 7.3 Certain Definitions.......................................... 60
SECTION 7.4 Severability................................................. 68
SECTION 7.5 Entire Agreement; Assignment................................. 68
SECTION 7.6 Parties in Interest.......................................... 68
SECTION 7.7 Governing Law; Submission to Jurisdiction; Waiver of Jury
Trial; Specific Performance.................................. 68
SECTION 7.8 Interpretation............................................... 69
SECTION 7.9 Counterparts................................................. 70
SECTION 7.10 No Recourse.................................................. 71
- v -
Page 31 of 139
<PAGE> 7
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:
Page 32 of 139
<PAGE> 8
2
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, 1997, the amount
Page 33 of 139
<PAGE> 9
3
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., WESTBROOK
REAL ESTATE CO-INVESTMENT PARTNERSHIP I, L.P. AND KAHLER
Page 34 of 139
<PAGE> 10
4
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 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
Page 35 of 139
<PAGE> 11
5
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 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
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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 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
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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.
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(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.
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(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 payments actually made by Purchaser or its Subsidiaries in
consideration for such termination or modification.
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"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.
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(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.
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"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.
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"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 calendar
year 1999 during which Purchaser or its Subsidiaries owned such Portfolio
Hotel or assets.
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"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 Park City, Utah
relating to the management or operation of any condominiums associated
with such hotel.
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"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 Portfolio EBITDA will be appropriately adjusted to reflect the amount
that would result if the preceding sentence had been complied with.
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16
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 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.
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17
(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 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
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18
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 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
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19
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 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,
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20
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 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.
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21
(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 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
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22
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 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
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23
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;
(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;
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24
(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;
(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;
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25
(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 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
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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)).
(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.
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(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 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.
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(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.
(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.
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(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 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
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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.
(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.
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31
(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 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
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32
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 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.
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(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 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
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34
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 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,
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(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, 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
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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:
(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;
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(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 with the transactions contemplated by this Agreement
based upon arrangements made by and on behalf of the Purchaser.
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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;
(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
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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 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
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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 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;
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(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
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
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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 Company 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;
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
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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 Entity or other third party that is not conditioned on, and
effective only upon the occurrence of, the Closing.
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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
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):
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(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 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
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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 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 Certificate of Incorporation by
filing the Certificate
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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.
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.
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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 the transactions
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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 full force and effect, and (ii)
Purchaser shall have received all consents, approvals, Licenses and Permits of
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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 the
Distribution. This condition cannot be deemed waived in any manner by virtue of
any action
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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 7.1 and in the immediately succeeding
sentence; provided, however, that nothing herein shall
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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
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-
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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
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
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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.
(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,
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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.
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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.
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61
"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).
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"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.
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"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.
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64
"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 issue affirmative
title
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65
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 Agreements),
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66
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:
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Term Section
ADA.................................................................. 3.1
Additional Contribution.............................................. 4.9
Adjusted 1999 EBITDA................................................. 2.1
Adjusted Valuation Amount............................................ 2.1
Agreement Recitals Amendment.........................................4.11
Asset Sales.......................................................... 2.1
Capital Expenditures................................................. 2.1
Capital Expenditures Reserve......................................... 2.1
Cash Consideration .................................................. 1.3
Certificate of Designation........................................... 1.3
Closing.............................................................. 1.2
Closing Date......................................................... 1.2
Collective Bargaining Agreement...... ............................... 4.1
Company..........................................................Recitals
Company Audited Financial Statements..................................3.1
Company Common Stock.............................................Recitals
Company Plans.........................................................3.1
Company Preferred Stock...............................................3.1
Company Securities....................................................3.1
Company Unaudited Financial Statements................................3.1
Completed in Full.....................................................2.1
Condemnation..........................................................2.1
December Qualifying Project...........................................2.1
Distribution..........................................................1.4
Earn-Out Payment Amount...............................................2.1
Earn-Out Payment Date.................................................2.1
Earn-Out Ratio........................................................2.1
EBITDA................................................................2.1
Employees............................................................ 4.4
ERISA.................................................................3.1
Exchange Act..........................................................3.2
Excess Lessee Adjusted EBITDA.........................................2.1
Existing Lease........................................................2.1
Fair Market Value.....................................................2.1
FASB..................................................................3.1
Funds............................................................Recitals
Funds' Dispute Notice.................................................2.1
HSR Act...............................................................3.1
Independent Accounting Firm...........................................2.1
Interest..............................................................1.3
IRS...................................................................3.1
Initial Lock-Up Period...............................................4.10
Investment Entities...................................................3.1
KPMG..................................................................1.4
Lessee................................................................2.1
Lessee 1999 Adjusted Portfolio EBITDA.................................2.1
Lessee 1999 Portfolio Revenue.........................................2.1
Losses and Expenses...................................................7.1
Material Contracts....................................................3.1
Manager Qualifying Project............................................2.1
March Qualifying Project..............................................2.1
MBCA..................................................................1.1
Merger...........................................................Recitals
1999 Capital Expenditure Reserve......................................2.1
1999 EBITDA...........................................................2.1
1999 Room Revenues....................................................2.1
1997/1998 Room Revenues...............................................2.1
Notes.................................................................4.9
Other Revenues........................................................2.1
Ownership Interests...................................................3.1
Portfolio Hotels......................................................2.1
Purchaser........................................................Recitals
Preliminary Earn-Out Payment..........................................2.1
Preliminary Earn-Out Payment Amount...................................2.1
Preliminary Earn-Out Ratio............................................2.1
Purchaser Common Stock................................................1.3
Purchaser Common Stock Consideration..................................1.3
Purchaser Convertible Preferred Stock.................................1.3
Purchaser Convertible Preferred Stock Consideration...................1.3
Purchaser Preferred Stock.............................................3.2
Purchaser's Earn-Out Calculation Certificate..........................2.1
Qualifying Project....................................................2.1
Returned Portfolio Hotels.............................................2.1
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68
Term Section
RevPur Index..........................................................2.1
Room Revenues.........................................................2.1
Sale Proceeds.........................................................2.1
SEC Reports...........................................................3.2
Securities Act........................................................1.3
September Qualifying Project..........................................2.1
Shares...............................................................4.10
Stock............................................................Recitals
Stock Purchase...................................................Recitals
Stock Purchase Consideration..........................................1.3
Taxes.................................................................3.1
Tax Return............................................................3.1
Title IV Plan.........................................................3.1
Trading Period........................................................2.1
Westbrook Co-Investment Funds....................................Recitals
Westbrook Fund...................................................Recitals
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.
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<PAGE> 75
69
(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 Agreement unless otherwise indicated. The table of contents
and headings contained in this
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70
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.
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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
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<PAGE> 78
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
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<PAGE> 1
Exhibit 3
SUNSTONE HOTEL INVESTORS, INC.
ARTICLES SUPPLEMENTARY CLASSIFYING 250,000 SHARES
OF PREFERRED STOCK AS 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, as amended, (the "Charter") and Section 2-105 of the Maryland General
Corporation Law ("MGCL"), the Board has, at a duly called and noticed meeting
held on August 1, 1997 at which a quorum of directors was present and acting
throughout, adopted resolutions classifying 250,000 authorized but unissued
shares of preferred stock of the Company, par value $0.01 per share ("Preferred
Stock"), as a separate class of Preferred Stock to be known as "7.9% Class A
Cumulative Convertible Preferred Stock," setting the preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends and other
distributions, qualifications and terms and conditions of redemption of the 7.9%
Class A Cumulative Convertible Preferred Stock, as set forth in Article SECOND
of these Articles Supplementary, and authorizing the issuance of up to 250,000
shares of 7.9% Class A Cumulative Convertible Preferred Stock.
SECOND: 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. A class of Preferred Stock of the Company
designated as "7.9% Class A Cumulative Preferred Stock" (the "Class A Preferred
Stock") is hereby established. The number of shares of Class A Preferred Stock
shall be 250,000.
2. Maturity. The Class A Preferred Stock has no stated maturity and
will not be subject to any sinking fund or a mandatory redemption.
3. Other Classes or Series of Preferred Stock. The Board is hereby
authorized to fix or alter the powers, rights, designations, preferences,
qualifications, limitations
Page 104 of 139
<PAGE> 2
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 applicable protective
voting rights which may be granted to any class of Preferred Stock in Articles
Supplementary or to the Class 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 Class 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.
4. Dividend Provisions. Subject to the rights of classes of
Preferred Stock which may from time to time come into existence in compliance
with Section 9, the holders of shares of Class A Preferred Stock shall be
entitled to receive for each share of Class 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 Class 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
Class A Preferred Stock could be converted pursuant to subsection 7(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 Class A Preferred Stock in accordance with
clause (i) on such 150th day. The determination of whether the amount of the
quarterly dividend on the Class A Preferred Stock will be established pursuant
to clause (i) or clause (ii) of this Section 4 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 Class
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
2
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<PAGE> 3
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 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 Class 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
Class 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 Class 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 7(d)(i) and 7(e), as applicable, of these Articles
Supplementary.
5. 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 9, the holders of Class A Preferred Stock shall (unless
such shares of Class A Preferred Stock are converted into shares of Common Stock
pursuant to Section 7 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 Class A Preferred Stock (the
"Original Class 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 Class 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 9, the entire assets and funds of
the Company legally available for distribution shall be distributed ratably
among the holders of the Class A Preferred Stock in proportion to the amount of
such stock owned by each such holder.
3
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<PAGE> 4
(b) Upon the completion of the distribution required by
subsection (a) of this Section 5 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 9, 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.
(c)(i) For purposes of this Section 5, 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 Class 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 Class 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)
4
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<PAGE> 5
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 Class A Preferred Stock.
(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 Class 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 5(c) have been complied with; or
(B) cancel such transaction, in which event the
powers, rights, designations and preferences of the holders of the Class 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 5(c)(iv) below.
(iv) The Company shall give each holder of record of
Class 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 5, 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 Class 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 Class A Preferred Stock.
6. Redemption.
(a) Subject to the rights of classes of Preferred Stock which
may from time to time come into existence in compliance with Section 9, on or at
any time and from time to time after October 15, 2002 (each a "Class 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 Class A Preferred Stock by
paying in cash therefor an amount per share equal to the Redemption Percentage
(as defined below) of the Original Class A Issue Price (as adjusted for any
stock dividends, combinations or splits with respect to such shares) plus all
accrued but unpaid
5
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<PAGE> 6
dividends on such shares (the "Class A Redemption Price"). Any redemption
effected pursuant to this subsection (6)(a) shall be made on a pro rata basis
among the holders of the Class A Preferred Stock in proportion to the number of
shares of Class A Preferred Stock then held by them. As used herein the
"Redemption Percentage" shall mean the percentage specified in the following
table:
Redemption Date Redemption Percentage (%)
October 15, 2002 to October 14, 2003 105
October 15, 2003 to October 14, 2004 104
October 15, 2004 to October 14, 2005 103
October 15, 2005 to October 14, 2006 102
October 15, 2006 to October 14, 2007 101
October 15, 2007 and thereafter 100
(b) As used herein and in subsections (6)(c) and (d) below,
the term "Redemption Date" shall refer to each "Class A Redemption Date" and the
term "Redemption Price" shall refer to each "Class 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 9, 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 Class 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 (6)(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 Class A Preferred Stock designated for redemption in the
Redemption Notice as holders of Class 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
6
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<PAGE> 7
time to time come into existence in compliance with Section 9, if the funds of
the Company legally available for redemption of shares of Class A Preferred
Stock on any Redemption Date are insufficient to redeem the total number of
shares of Class 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 upon their
holdings of Class A Preferred Stock. The shares of Class 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 9, at any time
thereafter when additional funds of the Company are legally available for the
redemption of shares of Class 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 Class 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 (6)(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 (6)(d) for
the redemption of shares thereafter converted into shares of the Company's
Common Stock pursuant to Section 7 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 (6)(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.
7. Conversion. The holders of the Class A Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Class 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
7
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<PAGE> 8
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 Class 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 Class 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 initial Conversion Price per share for shares of Class 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 Class A Preferred Stock shall be subject to adjustment as set forth in
subsection 7(d) after the date of issuance.
(b) Automatic Conversion. [Intentionally Omitted]
(c) Mechanics of Conversion. Before any holder of Class 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 Class
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 Class 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 Class 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 Class 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 Class 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 Class 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
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<PAGE> 9
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), the Conversion Price of the Class 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 7(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 Class 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 7(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 Class 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
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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 Class 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 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
7(d)(iii)(A) shall be appropriately adjusted to reflect any change, termination
or expiration of the type described in either subsection 7(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 7(d)(i), then, in each such case, the holders of the Class 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 Class 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 7 or Section 5), provision shall be made so that the holders of the
Class A Preferred Stock shall thereafter be entitled to receive upon conversion
of the Class 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 Class A Preferred Stock which shall be as nearly equivalent as
practicable to the adjustments provided for in subsection 7(d).
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(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 7 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 Class A Preferred Stock against impairment.
(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 Class A Preferred Stock. Any fractional
interest in a share of Common Stock resulting from conversion of shares of Class
A Preferred Stock will be paid in cash (computed to the nearest cent) based on
the fair market value (as defined in subsection 5(c)(ii) above) of the Common
Stock. If more than one share of Class 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 Class A Preferred Stock surrendered at that time by
that holder.
(ii) Upon the occurrence of each adjustment or
readjustment of the Conversion Price of Class A Preferred Stock pursuant to this
Section 7, 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 Class 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 Class 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 Class 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 Class 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.
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(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 Class 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 Class 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 Class A Preferred Stock, in addition to such other
remedies as shall be available to the holder of such Preferred Stock, the
Company will use its best efforts to take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common 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 7(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 Class A Preferred Stock
will be computed as if at the time of the computation all the outstanding shares
of Class 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 Class 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 Class 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 Class 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 Class 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 Class 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.
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8. Voting Rights.
(a) Except as required by law or by the provisions of
subsections 6(b) and (c), the holders of each share of Class A Preferred Stock
shall have the right to one vote for each share of Common Stock into which such
holder's shares of Class 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 rights available on
an as-converted basis (after aggregating all shares into which shares of Class 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 Class 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
Class 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, provided, however, that if, at such time, the number of directors of
the Company, as fixed by the shareholders or the Board of Directors of the
Company, is the maximum number permitted by the Charter of the Company, the
Company shall use its best efforts to cause its Charter to be amended to
increase the maximum number of directors of the Company so as to allow for the
election on one (1) director by the holders of the Class A Preferred Stock, and
the right of the holders of the Class A Preferred stock to elect one (1)
director in such instance will be deferred until such time as the Charter of the
Company is amended to appropriately increase the maximum number of directors
permitted thereunder. Once all accrued but unpaid dividends on the Class A
Preferred Stock shall have been paid in full, the holders of Class A Preferred
Stock shall no longer be entitled to a special right to elect a director under
this subsection 8(b) but shall instead vote together with the holders of Common
Stock in the election of directors in accordance with subsection 8(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 8(b),
each holder of shares of Class A Preferred Stock shall be entitled to one vote
for each share of Common Stock into which such holder's Class A Preferred Stock
is convertible as determined in accordance with subsection 8(a) above. The
special and exclusive voting right of the holders of the Class A Preferred
Stock, voting separately as one class, contained in this subsection 8(b) may be
exercised either at a special meeting of the holders of Class 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 Class A
Preferred Stock, voting separately as one class, pursuant to this subsection
8(b),
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<PAGE> 14
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 Class A Preferred Stock shall have been paid in full.
(c) If at any time any directorship to be filled by the holders of
Class A Preferred Stock, voting separately as one class pursuant to subsection
8(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 Class A
Preferred Stock then outstanding, call a special meeting of the holders of Class
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 Class 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 Class A Preferred Stock so designated shall have
access to the stock books of the Company relating to the Class A Preferred Stock
for the purpose of calling a meeting of the shareholders pursuant to these
provisions.
9. Protective Provisions. Subject to the rights of classes of
Preferred Stock which may from time to time come into existence in compliance
with Section 9, so long as any shares of Class 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 Class A Preferred Stock:
(a) alter or change the rights, preferences or privileges of
the shares of Class 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 Class 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
Class A Preferred Stock with respect to voting, dividends or upon liquidation.
10. Status of Converted or Redeemed Stock. In the event any shares
of Class A Preferred Stock shall be redeemed or converted pursuant to Section 6
or Section 7 hereof, the shares so converted or redeemed shall be cancelled and
shall not be issuable by the Company.
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<PAGE> 15
THIRD: These Articles Supplementary have been approved by the Board
in the manner and by the vote required by law.
FOURTH: The undersigned Vice 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 Vice
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 Vice President and attested to by its Assistant Secretary on this
13th day of October, 1997.
SUNSTONE HOTEL INVESTORS, INC.
/s/ Kenneth J. Biehl
By:________________________________
Kenneth J. Biehl,
Vice President
ATTEST:
/s/ Roger M. Cohen
By:_________________________
Roger M. Cohen,
Assistant Secretary
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<PAGE> 1
Exhibit 4
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of October 15, 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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<PAGE> 2
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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<PAGE> 3
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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<PAGE> 4
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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<PAGE> 5
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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<PAGE> 6
(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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<PAGE> 7
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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<PAGE> 8
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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<PAGE> 9
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) to the extent permitted by the rules of the AICPA, 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
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<PAGE> 10
the prospectus or for additional information and (D) of the issuance by
the SEC of any 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.
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<PAGE> 11
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 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
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<PAGE> 12
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 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
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<PAGE> 13
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 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
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<PAGE> 14
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.
(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
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<PAGE> 15
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 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
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<PAGE> 16
authorized by this Section 9(a), whether or not such Registrable Securities
shall have been marked to indicate such consent.
(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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<PAGE> 17
(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> 18
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> 19
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> 20
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: /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
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: /s/ Jonathan H. Paul
----------------------------------
Jonathan H. Paul
Managing Principal
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