<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
SUNSTONE HOTEL INVESTORS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common stock, $0.01 par value per share, of Sunstone Hotel Investors,
Inc. Class A cumulative convertible preferred stock, $0.01 par value
per share, of Sunstone Hotel Investors, Inc.
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(2) Aggregate number of securities to which transaction applies:
39,757,386 shares of common stock, assuming the exercise of all
currently outstanding options to purchase common stock and the
conversion of all other outstanding securities (other than preferred
stock) currently convertible into shares of common stock and no other
issuance or redemption of common stock
250,000 shares of preferred stock
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
In accordance with Rule 0-11(c), the fee was calculated to be
one-fiftieth of one percent of the aggregate of the cash and value of
securities and other property to be distributed to the stockholders
of Sunstone Hotel Investors, Inc.
$10.41 per share of common stock
$100.00 per share of preferred stock
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(4) Proposed maximum aggregate value of transaction: $438,874,389
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(5) Total fee paid: $87,775
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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[LOGO OF SUNSTONE HOTEL INVESTORS]
___________ ___, 1999
Dear Sunstone Hotel Investors, Inc. Stockholder:
You are cordially invited to attend the special meeting of stockholders of
Sunstone Hotel Investors, Inc., a Maryland corporation (we refer to ourselves as
"Sunstone," "we" or "us"), to be held on _________ ___, 1999 at ______ a.m.,
local time, at ______________________________.
At the special meeting, you will be asked to vote on a set of proposals
(Items 1, 2 and 3 on your Proxy) relating to the merger of SHP Investors Sub,
Inc., a Maryland corporation, with and into Sunstone. SHP Investors Sub is a
subsidiary of SHP Acquisition, L.L.C., a Delaware limited liability company.
If the proposals are approved and the merger is consummated, you will
receive $10.35 in cash for each share of our common stock that you own, subject
to adjustment as described below. In addition, you and the other common
stockholders will be paid an amount equal to your proportionate share of 50% of
the increase in our cash balance on the date five business days prior to the
merger as compared to our cash balance on June 30, 1999, in each case as
calculated as provided in the merger agreement. This additional payment to you
and the other stockholders will be at least $2.5 million, or approximately 6
cents per share, even if the increase in the cash balance is less than that
amount. The merger agreement also provides for a possible decrease in the merger
price in the event certain transaction expenses and consent payments exceed
amounts specified in the merger agreement. The price of $10.41 per share of
common stock represents a premium of approximately 44.18% to the average closing
price of the common stock on the New York Stock Exchange of $7.22 over the 30-
day period ending on and including April 5, 1999, the day prior to the date SHP
Acquisition (through an affiliate) publicly disclosed its initial cash offer of
$9.50 to $10.00 per share. If the merger is completed, holders of our preferred
stock will receive an amount equal to the liquidation preference ($100.00, plus
accrued and unpaid dividends) for each share of preferred stock owned by them.
The accompanying proxy statement provides a detailed description of the
merger and other information regarding matters to be considered at the special
meeting. As described in this proxy statement, at the special meeting, you will
be asked to consider and vote upon the adoption and authorization of an
Agreement and Plan of Merger dated as of July 12, 1999 among us, SHP Acquisition
and SHP Investors Sub, as well as certain related matters that are required to
permit the merger. Please note that unless our stockholders approve all three
proposals, we will not implement any of the proposals. A copy of the merger
agreement is attached to the proxy statement as Appendix A.
An independent Special Committee of our Board of Directors has carefully
reviewed and considered the terms and conditions of the merger and the related
proposals that are required to implement the merger. The Special Committee
consists of five members of our Board of
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2
Directors who are not employees of or otherwise affiliated with us, SHP
Acquisition or its affiliates.
Our Board of Directors, acting on the unanimous recommendation of the
Special Committee, unanimously believes that the proposed merger and the related
matters to be voted upon at the special meeting are in the best interests of our
stockholders, has approved the merger, the merger agreement and the related
matters and recommends that our stockholders vote FOR all three proposals.
The investment banking firm of Goldman, Sachs & Co. has delivered its
opinion to the Special Committee of the Board of Directors dated July 12, 1999
to the effect that, as of such date and based upon certain assumptions and
limitations set forth in such opinion, the $10.35 per share, as adjusted in the
manner provided in the merger agreement, to be received by the holders (other
than SHP Acquisition, its subsidiaries and certain of its affiliates) of common
stock in the merger was fair to such stockholders from a financial point of
view. A copy of the opinion of Goldman, Sachs & Co. is attached to the proxy
statement as Appendix B.
Your vote on these matters is very important. The merger must be approved
by holders of a majority of the outstanding shares of our common stock and
preferred stock (voting as a single class, with the preferred stock voting on an
as converted basis). The two related proposals, which must be approved in order
for the merger to be completed, must be approved and authorized by holders of at
least 66b of the outstanding shares of our common stock and preferred stock
(voting as a single class, with the preferred stock voting on an as converted
basis). If you fail to return your proxy card or vote by telephone or
electronically over the Internet, the effect will be the same as a vote against
the merger and the two related proposals, unless you appear at the special
meeting and vote in favor of the merger and the two related proposals. We urge
you to review carefully the enclosed materials and to return your proxy
promptly.
Stockholders with questions regarding the merger or other transactions or
matters described herein may contact [Name of Proxy Solicitor] at
_______________.
Whether or not you plan to attend the special meeting, please sign and
promptly return your proxy card in the enclosed postage paid envelope. If you
attend the special meeting, you may vote in person if you wish, even though you
have previously returned your proxy.
Sincerely,
___________________
903 Calle Amanecer
San Clemente, California 92673-6212
Telephone (949) 369-4000
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SUNSTONE HOTEL INVESTORS, INC.
903 CALLE AMANECER
SAN CLEMENTE, CALIFORNIA 92673-6212
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON _______________, 1999
To the stockholders of Sunstone Hotel Investors, Inc.:
Notice is hereby given that a special meeting of the stockholders of
Sunstone Hotel Investors, Inc., a Maryland corporation (we refer to ourselves as
"Sunstone," "we" or "us") will be held on __________, 1999 at ___ a.m., local
time, at _________________ for the following purposes:
1. To consider and vote upon a proposal to approve the merger of SHP
Investors Sub, Inc., a Maryland corporation, with and into us pursuant
to an Agreement and Plan of Merger dated as of July 12, 1999 by and
among us, SHP Acquisition, L.L.C., a Delaware limited liability
company, and SHP Investors Sub (Item No. 1). A copy of the merger
agreement is attached as Appendix A to the Proxy Statement
accompanying this notice.
2. To consider and vote upon a proposal to approve resolutions of our
Board of Directors recommending that we terminate our status as a real
estate investment trust qualifying as such under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (a "REIT"), and
that we amend provisions of our Articles of Incorporation ("Charter"),
including Article V of our Charter, to permit us to terminate our REIT
status in connection with the proposed merger of SHP Investors Sub
with and into us, and to approve the implementation of such actions
(Item No. 2).
3. To consider and vote upon a proposal to approve the amendment of our
Charter to permit us to terminate our status as a REIT, as
contemplated by the resolution referred to in paragraph 2 above,
specifically by deleting Sections 2, 4 and 7 of Article V and Section
3(b) of Article IX thereof, modifying Article III, Sections 1(a), 3,
and 6 of Article V, Sections 1 and 3 of Article VII and Section 3(a)
of Article IX thereof and renumbering Sections 3, 5 and 6 of Article V
and Section 3(c) of Article XI thereof (Item No. 3). A copy of the
proposed amendment to our Charter is attached as Appendix C to the
Proxy Statement accompanying this Notice.
Each proposal will be voted upon separately by our stockholders;
however, unless our stockholders approve all three proposals, we will not close
the merger or implement any of the proposals. If the proposals are approved, we
will not permit the termination of our status as a REIT prior to the closing of
the merger.
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2
In addition, at the special meeting, the holders of our common stock
will be asked to consider and to vote upon such other business as may properly
come before the special meeting or any postponement or adjustment thereof.
The Board of Directors has fixed the close of business on ___________,
1999 as the record date for the determination of the stockholders of Sunstone
entitled to notice of and to vote at the special meeting and at any adjournments
thereof. Only stockholders of record on the record date will be so entitled to
vote.
By order of the Board of Directors.
_________________________________
Robert A. Alter, Secretary
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SUNSTONE HOTEL INVESTORS, INC.
903 CALLE AMANECER
SAN CLEMENTE, CALIFORNIA 92673-6212
PROXY STATEMENT
FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON ____________, 1999
This Proxy Statement is furnished in connection with the solicitation
by the Board of Directors of Sunstone Hotel Investors, Inc., a Maryland
corporation (we refer to ourselves as "Sunstone," "we" or "us"), of proxies for
use at the special meeting of stockholders of Sunstone to be held on
________________, 1999 at _____ a.m. at ________________________ and at any
adjournments or postponements thereof.
At the special meeting, the holders of our common stock, $0.01 par
value per share, and our Class A cumulative convertible preferred stock, $0.01
par value per share, will consider and vote upon three proposals:
(1) to approve the merger of SHP Investors Sub, Inc., a Maryland
corporation, with and into us pursuant to an Agreement and Plan of Merger
dated as of July 12, 1999 by and among us, SHP Acquisition, L.L.C., a
Delaware limited liability company, and SHP Investors Sub,
(2) to approve resolutions of our Board of Directors recommending
that we:
- terminate our status as a real estate investment trust qualifying
as such under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended (a "REIT"), and
- amend provisions of our articles of incorporation (which are
referred to in this Proxy Statement as the "Charter"), including
Article V thereof, to permit us to terminate our REIT status in
connection with the proposed merger of SHP Investors Sub with and
into us, and to approve the implementation of such actions, and
(3) to approve the amendment of our Charter in connection with the
proposed merger to permit us to terminate our status as a REIT, as
contemplated by the resolutions referred to in the preceding paragraph 2,
specifically by deleting Sections 2, 4 and 7 of Article V and Section 3(b)
of Article IX thereof, modifying Article III, Sections 1(a), 3, and 6 of
Article V, Sections 1 and 3 of Article VII and Section 3(a) of Article IX
thereof and renumbering Sections 3, 5 and 6 of Article V and Section 3(c)
of Article XI thereof.
The three proposals are collectively referred to in this Proxy Statement as the
"Merger Proposals." Each Merger Proposal will be voted upon separately by our
stockholders;
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2
however, unless our stockholders approve all three Merger Proposals, we will not
close the merger or implement any of the Merger Proposals. If the Merger
Proposals are approved, we will not permit the termination of our status as a
REIT prior to the closing of the merger.
In addition, at the special meeting, the holders of our common stock
will be asked to consider and to vote upon such other business as may properly
come before the special meeting or any postponement or adjournment thereof.
A copy of the merger agreement is attached as Appendix A to this Proxy
Statement. A copy of the resolutions of the Board recommending the termination
of our status as a REIT and the proposed amendment of our Charter is attached as
Appendix D to this Proxy Statement. A copy of the proposed amendment of our
Charter is attached as Appendix C to this Proxy Statement.
As a result of the merger agreement,
- prior to the merger, certain assets would be distributed to us by
Sunstone Hotel Investors, L.P., a Delaware limited partnership through
which we conduct substantially all our operations (referred to in this
Proxy Statement as the "Operating Partnership"), after which a
subsidiary of SHP Acquisition would be merged with and into the
Operating Partnership, which would continue as the surviving entity;
- SHP Investors Sub would then be merged with and into us, with Sunstone
continuing as the surviving entity;
- each outstanding share of common stock (other than shares owned by SHP
Acquisition and its affiliates) would be converted, upon consummation
of the merger, into the right to receive $10.35 in cash, as such
amount may be adjusted as further described in "The Merger and the
Merger Agreement (Item No. 1) -- Merger Consideration" below; and
- each outstanding share of preferred stock will be owned by SHP
Acquisition Sub at the time of closing of the merger, and will be
canceled in the merger for no consideration.
The Securities and Exchange Commission has not approved or disapproved
this transaction or determined if this Proxy Statement is truthful or complete.
Any representation to the contrary is a criminal offense.
SHP Investors Sub is a wholly-owned indirect subsidiary of SHP
Acquisition. Mr. Robert Alter, who currently serves as our President, Chief
Executive Officer and Chairman of our Board of Directors, is an affiliate of SHP
Acquisition and SHP Investors Sub and beneficially owns _________ shares of our
common stock. Westbrook Real Estate Partners, L.L.C., a
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3
Delaware limited liability company ("Westbrook"), which is an affiliate of SHP
Acquisition and SHP Investors Sub, may be deemed to be the beneficial owner of
__________ shares of our common stock and all 250,000 shares of our preferred
stock. Mr. Paul Kazilionis, who serves as a Director of Sunstone, is a managing
principal of Westbrook. Members of our Board of Directors are referred to as
"Directors," and our Board of Directors is referred to as the "Board of
Directors" or the "Board," in this Proxy Statement.
Our Board of Directors, acting on the unanimous recommendation of a
Special Committee consisting of five Directors who are not employees of or
otherwise affiliated with us, SHP Acquisition or its affiliates, unanimously
believes that each of the Merger Proposals is in the best interest of our
stockholders, has approved each of the Merger Proposals and recommends that the
stockholders vote FOR approval and adoption of each of the Merger Proposals. The
Special Committee received an opinion dated July 12, 1999 from the Special
Committee's financial advisor, Goldman, Sachs & Co., to the effect that, as of
such date, and based upon the assumptions made, matters considered and
limitations on the review undertaken in connection with such opinion, as set
forth therein, the $10.35 per share, as adjusted as provided in the merger
agreement, to be received by holders (other than SHP Acquisition, its
subsidiaries and certain of its affiliates) of our common stock in the merger
was fair to such stockholders from a financial point of view.
Stockholders are urged to read and consider carefully the information
contained in this Proxy Statement and to consult with their personal financial
and tax advisors.
Each executed proxy will be voted in accordance with the instructions
of the stockholder granting it. If no choice is specified, the proxy will be
voted FOR approval of each of the Merger Proposals. Any proxy may be revoked by
the stockholder granting it at any time before its exercise by delivery of a
written revocation or a subsequently dated proxy to our transfer agent and
registrar, or by voting in person at the special meeting. Attendance at the
special meeting will not itself be deemed to revoke a proxy; the stockholder
must give affirmative written notice at the special meeting that the stockholder
intends to revoke the proxy and vote in person. If a stockholder holds shares
through a broker, the stockholder must notify the broker in order to revoke a
proxy.
It is important that proxies be returned promptly. Therefore, whether
or not you plan to attend the special meeting, please complete, date, sign and
return the proxy card in the enclosed postage-paid envelope or vote by telephone
or electronically over the Internet following the instructions on your proxy
card.
The notice of meeting, this Proxy Statement and the enclosed proxy
card are first being mailed to stockholders on or about _______________, 1999.
THE DATE OF THIS PROXY STATEMENT IS _________, 1999.
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER.................................... 1
WHO CAN HELP ANSWER YOUR QUESTIONS?....................................... 2
SUMMARY................................................................... 3
VOTING SECURITIES AND VOTES REQUIRED................................. 3
PURPOSE, STRUCTURE AND EFFECTS OF THE MERGER......................... 5
RECOMMENDATION OF THE BOARD OF DIRECTORS AND THE SPECIAL COMMITTEE... 6
FAIRNESS OPINION..................................................... 7
CERTAIN CONFLICTS OF INTEREST OF OFFICERS AND DIRECTORS OF SUNSTONE.. 7
CLOSING DATE......................................................... 8
MERGER CONSIDERATION................................................. 8
OPERATING PARTNERSHIP MERGER AND RELATED MATTERS..................... 9
VOTING AGREEMENT..................................................... 9
CONDITIONS TO THE MERGER............................................. 10
TERMINATION OF THE MERGER AGREEMENT.................................. 12
TERMINATION FEES AND EXPENSES........................................ 15
FINANCING; SOURCE OF FUNDS........................................... 15
FEDERAL INCOME TAX CONSEQUENCES...................................... 16
INFORMATION CONCERNING THE SPECIAL MEETING................................ 17
TIME, PLACE AND DATE................................................. 17
PURPOSE OF THE SPECIAL MEETING....................................... 17
RECORD DATE; QUORUM; OUTSTANDING COMMON STOCK AND
PREFERRED STOCK ENTITLED TO VOTE................................ 17
VOTE REQUIRED........................................................ 18
ACTION TO BE TAKEN UNDER THE PROXY................................... 19
PROXY SOLICITATION................................................... 20
MATTERS RELATING TO THE MERGER PROPOSALS.................................. 20
GENERAL.............................................................. 20
SUNSTONE........................................................ 20
</TABLE>
i
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<TABLE>
<S> <C>
SHP ACQUISITION AND SHP INVESTORS SUB........................... 21
BACKGROUND OF THE MERGER............................................. 21
PURPOSE AND STRUCTURE OF THE MERGER.................................. 44
PURPOSE......................................................... 44
STRUCTURE....................................................... 44
BENEFITS AND DETRIMENTS OF THE MERGER TO SHP ACQUISITION............. 45
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD OF
DIRECTORS; FAIRNESS OF THE MERGER............................... 46
BENEFITS AND DETRIMENTS TO NONAFFILIATED STOCKHOLDERS................ 50
OPINION OF THE INDEPENDENT FINANCIAL ADVISOR......................... 50
SELECTED LODGING COMPANIES ANALYSIS............................. 52
SELECTED ACQUISITIONS OF COMPANIES IN THE LODGING
INDUSTRY................................................... 54
NET ASSET VALUE ANALYSIS........................................ 55
POSITION OF SHP ACQUISITION AND SHP INVESTORS SUB.................... 57
INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON............. 58
CONTRIBUTION AND SALE AGREEMENT................................. 58
FORMATION OF SHP ACQUISITION.................................... 59
OPTIONS AND WARRANTS............................................ 59
INDEMNIFICATION AND INSURANCE................................... 60
EMPLOYMENT AND RELATED AGREEMENTS AND
ARRANGEMENTS.................................................... 61
CERTAIN CONSEQUENCES OF THE MERGER................................... 61
REDEMPTION AND OPERATING PARTNERSHIP MERGER.......................... 62
PLANS FOR SUNSTONE AFTER THE MERGER.................................. 63
CONDUCT OF THE BUSINESS OF SUNSTONE IF THE MERGER IS NOT
CONSUMMATED..................................................... 64
MATERIAL FEDERAL TAX CONSEQUENCES.................................... 65
UNITED STATES STOCKHOLDERS...................................... 65
FOREIGN STOCKHOLDERS............................................ 65
WITHHOLDING..................................................... 66
LITIGATION REGARDING THE MERGER...................................... 66
ACCOUNTING TREATMENT................................................. 67
FINANCING; SOURCE OF FUNDS........................................... 67
APPRAISAL RIGHTS..................................................... 69
FEES AND EXPENSES.................................................... 69
REGULATORY REQUIREMENTS.............................................. 70
THE MERGER AND THE MERGER AGREEMENT (ITEM NO. 1).......................... 70
THE MERGER........................................................... 70
MERGER CONSIDERATION................................................. 70
CLOSING DATE AND EFFECTIVE TIME...................................... 73
EXCHANGE AND PAYMENT PROCEDURES...................................... 73
TRANSFER OF COMMON STOCK AND PREFERRED STOCK......................... 74
ADDITIONAL AGREEMENTS................................................ 74
</TABLE>
ii
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<TABLE>
<S> <C>
LESSEE/MANAGER AGREEMENT............................................. 76
CONDUCT OF BUSINESS PENDING THE MERGER............................... 76
REPRESENTATIONS AND WARRANTIES....................................... 80
CONDITIONS........................................................... 83
TERMINATION; WITHDRAWAL OF RECOMMENDATIONS........................... 86
TERMINATION FEES AND EXPENSES........................................ 88
AMENDMENT AND WAIVER................................................. 92
DIRECTORS RESOLUTIONS RECOMMENDING REIT TERMINATION (ITEM NO. 2).......... 93
CHARTER AMENDMENTS (ITEM NO. 3)........................................... 96
SELECTED FINANCIAL DATA OF SUNSTONE AND LESSEE............................ 97
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS................ 99
CERTAIN FINANCIAL PROJECTIONS REGARDING SUNSTONE.......................... 100
COMMON STOCK MARKET PRICE INFORMATION; DIVIDEND INFORMATION............... 105
CERTAIN RELATIONSHIPS AND TRANSACTIONS.................................... 106
PERCENTAGE LEASES.................................................... 107
MANAGEMENT AGREEMENTS................................................ 107
EMPLOYMENT AGREEMENTS................................................ 107
TRANSACTIONS WITH LESSEE............................................. 108
TRANSACTIONS WITH MANAGEMENT COMPANY................................. 108
THIRD PARTY PLEDGE................................................... 109
OP UNIT PURCHASE AGREEMENT........................................... 109
LESSEE STOCK APPRECIATION RIGHTS/WARRANT EXCHANGE
PROGRAM......................................................... 109
CONSULTING AGREEMENT WITH MR. GELLER................................. 110
TRANSACTION BONUS AGREEMENT WITH MR. CROWLEY......................... 111
VOTING AGREEMENT..................................................... 111
MANAGEMENT OF SUNSTONE.................................................... 111
MANAGEMENT OF SHP ACQUISITION AND SHP INVESTORS SUB;
MEMBERS OF SHP ACQUISITION........................................... 115
SHP ACQUISITION AND SHP INVESTORS SUB................................ 115
ALTER SHP AND BIEDERMAN SHP.......................................... 115
WESTBROOK AFFILIATES................................................. 115
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF SUNSTONE............................................... 116
</TABLE>
iii
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<TABLE>
<S> <C>
PROPOSALS BY STOCKHOLDERS OF SUNSTONE..................................... 118
INDEPENDENT ACCOUNTANTS................................................... 119
WHERE YOU CAN FIND MORE INFORMATION....................................... 119
OTHER MATTERS............................................................. 120
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 120
</TABLE>
APPENDIX A - MERGER AGREEMENT
APPENDIX B - FAIRNESS OPINION OF GOLDMAN, SACHS & CO.
APPENDIX C - FORM OF CHARTER AMENDMENTS
APPENDIX D - BOARD OF DIRECTORS REIT STATUS RESOLUTIONS
APPENDIX E - COMPOSITE CHARTER
iv
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: If the merger is completed, you will receive $10.35 in cash in exchange for
each share of Sunstone common stock owned by you at the time of the merger,
subject to adjustment as described below. You and the other common stockholders
will also be paid an amount equal your proportionate share of 50% of the
increase in our cash balance five business days prior to the merger as compared
to our cash balance on June 30, 1999, in each case as calculated as provided in
the merger agreement. You will, however, be paid approximately 6 cents per share
even if your proportionate share is less than 6 cents. However, the merger
agreement also provides for a possible decrease in the merger price in the event
certain transaction expenses and consent payments exceed amounts specified in
the merger agreements. See "The Merger and the Merger Agreement (Item No. 1) --
Merger Consideration."
The record date for the special meeting is earlier than the expected
date of the merger. Therefore, transferors of shares of common stock and
preferred stock after the record date but prior to the merger will retain their
right to vote at the special meeting but the right to receive the cash payment
per share will transfer with the shares of common stock and preferred stock,
respectively.
Q: WHAT WILL HAPPEN TO MY COMMON STOCK DIVIDENDS?
A: The merger agreement provides that we will not pay any dividends on common
stock without SHP Acquisition's prior consent unless a dividend is required in
order for us to maintain our REIT status. In the event any dividend is paid
prior to the closing of the merger, the amount paid to you at the closing of the
merger would be reduced by the amount of the dividend.
Q: WHAT DO I NEED TO DO NOW?
A: Please complete, date and sign your proxy card and then mail it in the
enclosed postage-paid envelope as soon as possible, so that your shares may be
represented at the special meeting. You can also cast your vote by telephone by
calling the number on your proxy card or over the Internet by going to the web
site designated on your proxy card.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. If the merger is completed, we will send you written instructions for
exchanging your stock certificates for cash.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares ONLY if you provide your broker with
instructions on how to vote. Any failure to instruct your broker to vote in
favor of the merger will have the effect
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2
of a NO vote. You should follow the directions provided by your broker regarding
how to instruct your broker to vote your shares.
Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD OR VOTED
BY TELEPHONE OR OVER THE INTERNET?
A: Yes. Just send in a later-dated, signed proxy card before the special
meeting or attend the special meeting, give written notice that you are revoking
your proxy and vote in person. You can also change your vote by voting by
telephone or over the Internet at a later time. If your shares are held in
"street name" by a broker and you wish to change your vote, you will need to
contact your broker.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working to complete the merger as quickly as possible, and we
expect to complete the merger (if it is approved by the stockholders) on or
about _________, 1999.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER?
A: The exchange of common stock and preferred stock for cash by a stockholder
in the merger will be a taxable transaction for federal income tax purposes
(which will cause you to recognize a taxable gain upon completion of the merger
if, and to the extent, the amount of cash you receive in the merger exceeds your
tax basis in your common stock or preferred stock, as the case may be) and may
also be a taxable transaction under state and local and other tax laws. You
should consult your own financial and tax advisor for a full understanding of
the tax consequences of the merger. See "Information Regarding the Merger --
Material Federal Tax Consequences."
Q: WHAT OTHER MATTERS WILL BE VOTED ON AT THE SPECIAL MEETING?
A: We do not expect any other matters to be voted on at the special meeting.
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you have more questions about the merger or would like additional
copies of this Proxy Statement, you should contact:
[Name of Proxy Solicitor]
[Address]
[Telephone]
<PAGE>
3
SUMMARY
This summary highlights certain material information included in this
Proxy Statement. This summary may not contain all of the information that is
important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger, you should read carefully this
entire document and the other documents to which we have referred you. See
"Where You Can Find More Information."
All information contained in this Proxy Statement relating to SHP
Acquisition, SHP Investors Sub, Westbrook and their respective affiliates (other
than us and our subsidiaries) or to their respective actions, purposes, beliefs,
intentions or plans has been supplied by SHP Acquisition, SHP Investors Sub,
Westbrook or such affiliate for inclusion herein and has not been independently
verified by us. For a description of the members of SHP Acquisition, see
"Management of SHP Acquisition and SHP Investors Sub -- Members of SHP
Acquisition."
VOTING SECURITIES AND VOTES REQUIRED
On August 13, 1999, we had outstanding and entitled to vote an
aggregate of 37,940,453 shares of common stock and 250,000 shares of preferred
stock. Each holder of shares of common stock is entitled to one vote per share.
Holders of shares of preferred stock are entitled to vote on an "as converted"
basis, together with the holders of shares of common stock as one class, on all
matters on which the holders of shares of common stock are entitled to vote (the
preferred stock on an "as converted basis" and the common stock are collectively
referred to in this Proxy Statement as the "Voting Securities"). Subject to the
terms of the Articles Supplementary classifying and establishing the terms
applicable to the preferred stock, each share of preferred stock is currently
convertible into 6.79842 shares of common stock based upon a conversion price of
$14.7093, thus entitling the holders of shares of preferred stock issued and
outstanding on August 13, 1999 to 1,699,605 votes or 4.29% of the 39,640,058
total votes on such date.
Our Board of Directors has fixed __________, 1999 as the record date
for determination of stockholders entitled to vote at the special meeting.
The presence at the special meeting, in person or by proxy, of the
holders of 50% of all votes entitled to be cast by the holders of the issued and
outstanding common stock and preferred stock as of the record date will
constitute a quorum for the transaction of business at the special meeting.
Shares which abstain or do not vote with respect to one or more of the matters
presented for stockholder approval at the special meeting will nonetheless be
counted for purposes of determining whether a quorum is present at the special
meeting.
The following votes are required for approval of the Merger Proposals:
- the affirmative vote of holders of a majority of all votes entitled to
be cast is required to approve and adopt the merger pursuant to the
merger agreement;
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4
- the affirmative vote of holders of two-thirds of all votes entitled to
be cast is required to approve resolutions of our Board of Directors
recommending that we terminate our status as a REIT and that we amend
the provisions of our Charter, including Article V thereof, to allow
us to terminate our REIT status in connection with the proposed merger
of SHP Investors Sub with and into us, and to approve the
implementation of those actions; and
- the affirmative vote of holders of two-thirds of all votes entitled to
be cast is required to approve the proposed amendment of our Charter.
Each Merger Proposal will be voted upon separately by our stockholders; however,
unless our stockholders approve all three Merger Proposals, we will not close
the merger or implement any of the Merger Proposals. If the Merger Proposals
are approved, we will not terminate our status as a REIT prior to the closing of
the merger.
Shares which abstain from voting on any of the Merger Proposals, and
shares held in "street name" by brokers or nominees who indicate on their
proxies that they do not have discretionary authority to vote such shares as to
any of the Merger Proposals, are nonetheless considered outstanding shares.
Thus, such abstentions and "broker non-votes" will have the same effect as a
vote against the Merger Proposals.
Westbrook Real Estate Fund I, L.P., a Delaware limited partnership
("Westbrook Fund I"), Mr. Alter and Mr. Charles Biederman, our Executive Vice
President and Vice Chairman of our Board, have each agreed to vote their shares
of our common stock and preferred stock for approval and adoption of each of the
Merger Proposals. As of ________, 1999, Messrs. Alter and Biederman (each of
whom is an affiliate of SHP Acquisition and SHP Investors Sub), and their
affiliates owned approximately ____% of the Voting Securities. As of ________,
1999, Westbrook Fund I and its affiliates owned approximately _____% of the
Voting Securities. See "Certain Relationships and Transactions."
In addition, Directors and executive officers of Sunstone (other than
Messrs. Alter and Biederman) who own or control _____ shares of our common stock
(constituting approximately ____% of the outstanding Voting Securities) have
indicated to us that they currently intend to vote all such shares for approval
and adoption of each of the Merger Proposals.
We conduct substantially all of our operations through the Operating
Partnership. We are the sole general partner and a limited partner of the
Operating Partnership. Under the partnership agreement for the Operating
Partnership, the holders of units of limited partnership interest in the
Operating Partnership ("OP Units") (other than us) have redemption rights that
enable them to cause the Operating Partnership to redeem their OP Units in
exchange for cash or, at the election of the Operating Partnership, shares of
our common stock on a one-for-one basis, subject to anti-dilution provisions.
Prior to the merger, an affiliate of SHP Acquisition will be merged with and
into the Operating Partnership. See "-- Operating Partnership Merger and Related
Matters." The holders of two-thirds of the OP Units must approve and adopt the
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5
Operating Partnership merger and related required amendment of the partnership
agreement of the Operating Partnership in order for the Operating Partnership
merger and the merger of SHP Investors Sub into us to take place. It is a
condition to the closing of the merger that the Operating Partnership merger
have occurred. The holders of OP Units will receive separate consent
solicitation materials in connection with their vote and this Proxy Statement is
not a solicitation of a vote from the holders of OP Units. The OP Units do not
have the right to vote at the special meeting.
PURPOSE, STRUCTURE AND EFFECTS OF THE MERGER
The purpose of the merger is to enable SHP Acquisition to acquire the
entire equity interest in Sunstone and provide our stockholders other than SHP
Acquisition and its wholly-owned subsidiaries (the "Nonaffiliated Stockholders")
with the opportunity to liquidate their investment in us for cash at a
significant premium to market prices for the common stock prior to the
announcement of SHP Acquisition's acquisition offer. SHP Acquisition and SHP
Investors Sub believe that the merger is beneficial to them because, following
the merger, they intend to take advantage of alternate structures not available
to us due to the limitations of tax laws applicable to REITs by combining our
business with the operations currently conducted by Sunstone Hotel Management,
Inc., a Colorado corporation (the "Management Company"), and Sunstone Hotel
Properties, Inc., a Colorado corporation ("Lessee"). Lessee is owned 80% by Mr.
Alter and 20% by Mr. Biederman and the Management Company is owned entirely by
Mr. Alter. SHP Acquisition will become the beneficiary of any of our future
earnings growth and any increase in our value as well as any additional earnings
growth and value resulting from synergies of the combination with Lessee and the
Management Company. For the reasons set forth below under "Matters Relating to
the Merger Proposals -- Recommendation of the Special Committee and the Board of
Directors; Fairness of the Merger," our Board of Directors and the Special
Committee believe that the merger is beneficial to the Nonaffiliated
Stockholders because they believe it represents the best currently available
alternative for maximizing stockholder value.
Pursuant to the merger agreement, following approval and adoption of
the Merger Proposals and subject to the fulfillment or waiver of the other
conditions in the merger agreement, SHP Investors Sub would be merged with and
into us, and we would continue as the surviving company in the merger. The
consequences to the Nonaffiliated Stockholders are described below.
Immediately prior to and in connection with the merger, a subsidiary
of SHP Acquisition will be merged with and into the Operating Partnership, with
the Operating Partnership as the surviving entity. See "-- Operating
Partnership Merger and Related Matters." The Operating Partnership merger is
a condition to the obligations of SHP Acquisition, SHP Investors Sub and
Sunstone to consummate the merger. See "The Merger and the Merger Agreement
(Item No. 1) -- Conditions." The holders of two-thirds of the OP Units must
approve and adopt the Operating Partnership merger and related required
amendment of the partnership agreement of the Operating Partnership in order for
the Operating Partnership merger, and the merger of Sunstone, to occur. See "--
Voting Securities and Votes Required."
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6
Immediately prior to the Operating Partnership merger, the Operating
Partnership will redeem from us some of the OP Units held by us, and in exchange
we will receive certain equity interests and assets relating to the hotel
properties we obtained from Kahler Realty Corporation. The redemption by the
Operating Partnership of a portion of the OP Units held by us is a condition to
the obligation of SHP Acquisition and SHP Investors Sub to consummate the
merger.
Upon completion of the merger, Nonaffiliated Stockholders who hold
shares of common stock will have the right to receive $10.35 in cash per share,
as adjusted by (i) a payment equal to the Nonaffiliated Stockholders'
proportionate share of 50% of the increase in our cash balance five business
days prior to the merger as compared to our cash balance as of June 30, 1999, in
each case as calculated as provided in the merger agreement, provided that a
--------
minimum of approximately 6 cents per share will be paid ($2.5 million in the
aggregate) even if such proportionate share is less than that amount and (ii) a
reduction in the event certain transaction expenses and consent payments exceed
amounts specified in the merger agreement. (See "--Merger Consideration").
Also, upon completion of the merger, the Nonaffiliated Stockholders will cease
to have any ownership interest in us and will cease to participate in our future
earnings growth, if any, or to benefit from any increase in our value. Moreover,
public trading of the common stock will cease, the common stock will be delisted
from the New York Stock Exchange and the registration of the common stock under
the Securities Exchange Act of 1934, as amended, will terminate.
Westbrook Fund I and an affiliate hold all our preferred stock and
have agreed to sell the preferred stock to SHP Investors Sub prior to the
merger for an amount equal to the liquidation preference for the preferred stock
(as set forth in the Articles Supplementary designating the preferred stock).
The preferred stock will then be canceled in the merger for no consideration in
accordance with the merger agreement.
See "Matters Relating to the Merger Proposals -- Certain Consequences
of the Merger."
RECOMMENDATION OF THE BOARD OF DIRECTORS AND THE SPECIAL COMMITTEE
Our Board of Directors, acting on the unanimous recommendation of the
Special Committee, has unanimously approved each of the Merger Proposals and
recommends that you vote FOR adoption and approval of all of the Merger
Proposals. The Board of Directors and the Special Committee believe that the
merger is fair to, and in the best interests of, the Nonaffiliated Stockholders,
and that the Merger Consideration (as this term is defined below in "The Merger
and the Merger Agreement (Item No. 1) -- Merger Consideration") is fair to the
Nonaffiliated Stockholders. The Special Committee and our Board of Directors
considered several factors in evaluating and approving the Merger Proposals.
See "Matters Relating to the Merger Proposals -- Recommendation of the Special
Committee and the Board of Directors; Fairness of the Merger."
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7
The members of the Special Committee are Messrs. Laurence S. Geller,
Fredric H. Gould, H. Raymond Bingham, Edward H. Sondker and David E. Lambert.
None of the members of the Special Committee are employees of or otherwise
affiliated with us, SHP Acquisition or its affiliates. Whether or not the
merger occurs, each Director on the Special Committee will receive a payment of
$50,000 for his service on the Special Committee, and Mr. Geller will receive an
additional $50,000 for serving as chairman of the Special Committee. They own in
the aggregate _________ shares of common stock and will receive an aggregate
amount of approximately $________ (assuming the price paid for each share of
common stock in the merger equals $10.41) upon consummation of the merger as
payment for their shares of common stock. In addition, they will receive payment
in respect of stock options upon consummation of the merger in the aggregate
amount of approximately $_______ (assuming the price paid for each share of
common stock in the merger equals $10.41). See "Matters Relating to the Merger
Proposals -- Interests of Certain Persons in Matters to be Acted Upon -- Options
and Warrants."
FAIRNESS OPINION
The Special Committee's financial advisor, Goldman Sachs, has
delivered a written opinion to the Special Committee that, as of July 12, 1999
and based upon the assumptions made, matters considered and limitation on the
review undertaken in connection with such opinion, as set forth therein, the
Merger Consideration (as this term is defined below in "The Merger and the
Merger Agreement (Item No. 1) -- Merger Consideration") to be received by the
holders of shares of common stock was fair from a financial point of view to our
stockholders other than SHP Acquisition, its subsidiaries and certain of its
affiliates (collectively, the "Related Persons").
The full text of the written opinion of Goldman Sachs, which sets
forth assumptions made, matters considered and limitations on the review
undertaken in connection with the opinion, is attached as Appendix B to this
Proxy Statement. The opinion of Goldman Sachs referred to in this Proxy
Statement does not constitute a recommendation as to how any holder of shares of
common stock should vote with respect to the merger agreement. Holders of
shares of common stock are urged to, and should, read such opinion in its
entirety. See "Matters Relating to the Merger Proposals -- Opinion of the
Independent Financial Advisor." Goldman Sachs has received or will receive
financial advisory fees of approximately 0.67% of the aggregate consideration
paid in connection with the merger (including payments made for our and the
Operating Partnership's equity securities, and the principal amount of all
indebtedness for borrowed money as shown on our most recent consolidated balance
sheet prior to the closing). See "Matters Relating to the Merger Proposals --
Opinion of the Independent Financial Advisor."
CERTAIN CONFLICTS OF INTEREST OF OFFICERS AND DIRECTORS OF SUNSTONE
Our executive officers and Directors may have interests in the merger
that are different from your interests as a stockholder or relationships that
may present conflicts of interest. See "Matters Relating to the Merger
Proposals -- Interests of Certain Persons in Matters to be Acted Upon" and
"Certain Relationships and Transactions."
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8
CLOSING DATE
The closing of the merger will take place at 10:00 a.m., local time in
New York, New York, on the date which is the third business day following
satisfaction (or waiver by the parties entitled to the benefit thereof) of the
conditions (other than those that are incapable of being satisfied until the
date of the closing) set forth in the merger agreement, unless another date is
agreed to in writing by the parties to the merger agreement. Articles of Merger
will be filed with the Department of Assessments and Taxation of the State of
Maryland to become effective on the closing date of the merger.
MERGER CONSIDERATION
Upon completion of the merger, Nonaffiliated Stockholders who hold
shares of common stock will have the right to receive $10.35 in cash per share
as adjusted by:
(1) an increase of not less than approximately 6 cents per share ($2.5
million in the aggregate) representing a pro rata portion (based on
the number of outstanding shares of common stock) of an aggregate
amount equal to 50% of the increase in our cash balance as of the date
five business days prior to the merger as compared to our cash balance
as of June 30, 1999, in each case as calculated as provided in the
merger agreement
(2) a decrease, if any, representing a pro rata portion (based on the
number of outstanding shares of common stock) of an aggregate amount
equal to a specified formula based on the amount by which fees and
certain other costs relating to the consents of franchisors under the
franchise agreements for our hotel properties which are required to be
obtained in connection with merger exceed $12.5 million,
(3) a decrease, if any, representing the amount by which our expenses
relating to the merger and the Operating Partnership merger exceed
$11.5 million,
(4) a decrease, if any, representing the amount by which fees relating to
obtaining the consents of the lessors under certain ground leases for
our hotel properties and the lenders under certain of our outstanding
debt financing, including the four loans described below for which
consents are required, exceeds $1.5 million,
(5) a decrease, if any, representing the amount by which consents relating
to the merger and the Operating Partnership merger other than as
described in the preceding paragraphs (2) through (4) exceeds
$100,000,
(6) a decrease, if any, representing the amount necessary to pay in full
at the closing of the merger all remaining amounts under four loans
for which lender consents are required and not obtained and
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9
(7) a decrease, if any, representing the amount of any dividends paid
after July 12, 1999 and prior to the closing of the merger
The amount per share of common stock paid to the Nonaffiliated Stockholders,
after the adjustments described in each of paragraphs 1 through 7 above, is
referred to in this Proxy Statement as the "Merger Consideration."
OPERATING PARTNERSHIP MERGER AND RELATED MATTERS
Immediately prior to the consummation of the merger, and in accordance
with the terms of the Agreement and Plan of Merger, dated as of July 12, 1999,
by and among SHP Acquisition, SHP OP, L.L.C., a Delaware limited liability
company, SHP Properties Corp., a Delaware corporation, and the Operating
Partnership, SHP OP will be merged with and into the Operating Partnership with
the Operating Partnership as the surviving entity.
In connection with the Operating Partnership merger, subject to
satisfaction of certain conditions, the holders of OP Units will have the right
to elect to receive an amount of cash per OP Unit equal to the Merger
Consideration or preferred or common equity interests in SHP Acquisition. This
Proxy Statement does not constitute an offer to holders of OP Units to make any
such election.
The consent of the holders of more than 50% of the OP Units must be
obtained to approve the Operating Partnership merger, and the consent of holders
of more than 66-2/3% of the OP Units (excluding OP Units held by us and our
affiliates) is required to approve the amendment of the partnership agreement of
the Operating Partnership necessary to effect the Operating Partnership merger.
We held approximately ____% of the outstanding OP Units as of _____, 1999, and
were required by the terms of the merger agreement to consent to the Operating
Partnership merger. In addition, holders of _____ % of the outstanding OP Units
(other than OP Units held by us and our affiliates which are not counted for
purposes of the vote regarding the amendment) have delivered written consents to
the amendment of the partnership agreement of the Operating Partnership.
Immediately prior to the merger of the Operating Partnership, the
Operating Partnership will redeem a portion of the OP Units owned by us in
exchange for certain assets and equity interests. In this redemption, certain
subsidiaries and/or properties owned directly or indirectly by the Operating
Partnership will be transferred to one or more direct or indirect subsidiaries
of us.
VOTING AGREEMENT
Pursuant to a voting agreement dated as of July 12, 1999 among us,
Messrs. Alter and Biederman and Westbrook Fund I, each of Westbrook Fund I and
Messrs. Alter and Biederman has agreed to vote the common stock and preferred
stock which they own directly and indirectly (including any shares of common
stock or preferred stock issued after the date the voting agreement was
executed) for approval and adoption of each of the Merger Proposals. As
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10
of the date hereof, the shares subject to the voting agreement represent
approximately ___% of the votes entitled to be cast on the Merger Proposals.
The voting agreement is an exhibit to the Rule 13e-3 Transaction
Statement on Schedule 13E-3 with respect to the merger. See "Where You Can Find
More Information." The summaries of the voting agreement set forth in this Proxy
Statement do not purport to be complete and are subject to, and qualified in
their entirety by, the text of the voting agreement.
CONDITIONS TO THE MERGER
The merger agreement sets forth a number of conditions that must be
satisfied before we, SHP Acquisition and SHP Investors Sub are obligated to
complete the merger. These conditions are:
- two-thirds of all votes entitled to be cast by the holders of the
issued and outstanding common stock and preferred stock (voting on an
as-converted basis) voting as a single class must approve the
amendment of our Charter set forth as Appendix C to this Proxy
Statement and the recommendation by the Board that we should terminate
our status as a REIT;
- a majority of all votes entitled to be cast by the holders of the
issued and outstanding common stock and preferred stock (voting on an
as-converted basis) voting as a single class must approve the merger
pursuant to the merger agreement;
- our Board of Directors must ratify and approve the votes of the
stockholders described above to approve the merger, merger agreement,
termination of our status as a REIT and amendment of our Charter;
- there can be no legal restraints or prohibitions that prevent
completion of the merger, the Operating Partnership merger or the
other transactions contemplated by the merger agreement; and
- all applicable waiting periods under the Hart-Scott Rodino Antitrust
Improvements Act of 1976, as amended, if any, must have expired or
have otherwise been terminated. See "Matters Relating to the Merger
Proposals -- Regulatory Requirements."
There are additional conditions that must be satisfied before SHP
Acquisition and SHP Investors Sub are obligated to complete the merger. These
conditions are:
- the representations and warranties we made in the merger agreement
must be true and correct, as of the date of the merger agreement and
the closing date of the merger, in all material respects, except for
representations and warranties that are qualified by their terms as to
materiality, which must be true in all respects;
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11
- we must perform in all material respects all obligations required to
be performed by us pursuant to the terms of the merger agreement;
- no material adverse changes to our business, properties, assets,
financial condition or results of operations may have occurred since
the date of the merger agreement, including no change of law resulting
in our not qualifying as a REIT;
- SHP Acquisition and SHP Investors Sub must have received tax opinions
as to our qualification as a REIT within the meaning of the Internal
Revenue Code of 1986, as amended, and as to the treatment of the
Operating Partnership, as a partnership for federal income tax
purposes from our counsel, Brobeck, Phleger & Harrison LLP;
- certain identified third-party consents and waivers identified in the
merger agreement must have been obtained and not subsequently revoked;
- certain of our expenses in connection with the merger and the
Operating Partnership merger must not exceed $11.5 million, unless we
elect to reduce the Merger Consideration by the amount that exceeds
$11.5 million;
- the redemption of a portion of our interests in the Operating
Partnership must have occurred as provided in the merger agreement;
- the Operating Partnership merger must have been consummated; and
- SHP Acquisition and its subsidiaries must have obtained funds under
its debt financing commitment letter of at least $454.6 million
(subject to reduction as provided in the merger agreement).
There are additional conditions that must be satisfied before we are
obligated to complete the merger. These conditions are:
- the representations and warranties of SHP Acquisition and SHP
Investors Sub made in the merger agreement must be true and correct,
as of the date of the merger agreement and the closing date of the
merger, in all material respects, except for representations and
warranties that are qualified by their terms as to materiality, which
must be true in all respects;
- each of SHP Acquisition and SHP Investors Sub must perform in all
material respects all obligations required to be performed by them
pursuant to the terms of the merger agreement;
- no change may have occurred since the date of the merger agreement in
the business, financial condition or results of operations of SHP
Investors Sub and its subsidiaries, taken as a whole, or SHP
Acquisition and its subsidiaries, taken as a
<PAGE>
12
whole, that has had or would reasonably be expected to have a material
adverse effect on the ability of SHP Investors Sub, SHP OP or SHP
Acquisition to consummate the transactions contemplated by the merger
agreement and the Operating Partnership merger agreement;
- we and the Operating Partnership must have received an opinion by a
reputable expert firm selected by SHP Acquisition and reasonably
acceptable to us as to the solvency and adequate capitalization of us
and the Operating Partnership immediately before, and of Sunstone and
the Operating Partnership as the surviving entities immediately after,
giving effect to the merger and the Operating Partnership merger;
- certain of our expenses in connection with the merger and the
Operating Partnership merger not exceeding $11.5 million shall have
been paid or arrangements shall have been made to pay them; and
- the Operating Partnership merger shall have been consummated.
The threat or existence of any legal action with respect to the merger
agreement or the Operating Partnership merger agreement or any transaction
contemplated by the merger agreement or the Operating Partnership merger
agreement will not constitute a failure of specified conditions set forth in the
merger agreement, unless that action has resulted in the granting of injunctive
relief that prevents the consummation of the merger and the other transactions
contemplated by the merger agreement and the Operating Partnership merger
agreement and such injunctive relief has not been dissolved or vacated.
The mutual conditions can be waived if waiver is legally permitted and
both parties agree. The conditions we must meet can be waived by SHP Investors
Sub and the conditions SHP Acquisition and SHP Investors Sub must meet can be
waived by us.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated at any time prior to the
effective time of the merger, whether before or after approval by our
stockholders:
- by mutual written consent of us, SHP Acquisition and SHP Investors
Sub;
- by SHP Investors Sub or SHP Acquisition, upon a breach of any
representation, warranty or agreement set forth in the merger
agreement on our part such that certain conditions set forth in the
merger agreement are not satisfied or would be incapable of being
satisfied within 30 days after the giving of written notice to us;
- by us, upon a breach of any representation, warranty or agreement set
forth in the merger agreement on the part of SHP Investors Sub or SHP
Acquisition, in either case such that certain conditions set forth in
the merger agreement are not satisfied
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13
or would be incapable of being satisfied within 30 days after the
giving of written notice to SHP Investors Sub or SHP Acquisition;
- by SHP Investors Sub, SHP Acquisition or us, if any judgment,
injunction, order, decree or action by any governmental entity of
competent authority preventing the consummation of the merger has
become final and nonappealable;
- by SHP Investors Sub, SHP Acquisition or us, if the merger has not
been consummated on or before December 31, 1999, except that a party
may not terminate the merger agreement for this reason if such party
has breached in any material respect its representations, warranties
or obligations under the merger agreement in any manner that has
proximately contributed to the failure of the merger to be consummated
on or before December 31, 1999;
- by either us (unless we are in breach of our obligations set forth in
the merger agreement with respect to the special meeting) or SHP
Investors Sub or SHP Acquisition (unless SHP Investors Sub or SHP
Acquisition is in breach of its obligations set forth in the merger
agreement with respect to obtaining certain debt financing) if the
Merger Proposals have not been approved at the special meeting or an
adjournment thereof;
- by us, prior to the special meeting, if our Board of Directors has
withdrawn or modified its approval or recommendation of the merger or
the merger agreement in connection with, or approved or recommended, a
bona fide acquisition proposal made by a third party which our Board
or a committee of the Board determines in good faith (after
consultation with its financial advisor) to be more favorable to the
stockholders than the merger and which the Board (or committee)
determines is reasonably capable of being consummated (an acquisition
proposal meeting these criteria is hereafter referred to in this Proxy
Statement as a "Superior Acquisition Proposal"); but no such
termination will be effective under circumstances in which a
termination fee in the amount of $17.5 million, plus expenses up to
$7.5 million, is payable by us and the Operating Partnership pursuant
to the terms of the merger agreement, unless simultaneous with such
termination, such termination fee is paid to SHP Acquisition in full
by us or the Operating Partnership (see "The Merger and the Merger
Agreement (Item No. 1) -- Termination Fees and Expenses" for a
discussion of termination fees and amounts reimbursable for expenses
in the event the merger agreement is terminated);
- by SHP Investors Sub or SHP Acquisition if:
-- prior to the special meeting, our Board of Directors has
withdrawn or modified in any manner adverse to SHP Investors Sub
its approval or recommendation of the merger or the merger
agreement, or approved or recommended any acquisition proposal
from a third party, or
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14
-- we have entered into an agreement with respect to any acquisition
proposal from a third party (other than a confidentiality
agreement entered into in compliance with the terms of the merger
agreement);
- by us, if SHP Investors Sub has not closed the borrowings contemplated
by the commitment letter dated as of July 12, 1999 provided by PW Real
Estate Investments Inc. ("Paine Webber"), a wholly-owned subsidiary of
Paine Webber Real Estate Securities Inc., to Westbrook Real Estate
Fund III, L.P., a Delaware limited partnership ("Westbrook Fund III"),
on or prior to the closing date of the merger, or if the commitment
under the commitment letter terminates, unless a Lender Property
Determination (as such term is defined in the following paragraph) has
been made;
- by SHP Acquisition or SHP Investors Sub, if SHP Investors Sub has not
closed the borrowings contemplated by the commitment letter with Paine
Webber because the costs of remedying certain defects identified by
Paine Webber in our hotel properties plus uninsured losses with
respect to such properties exceed $25 million or because our net
actual cash flow together with the net actual cash flow of our
subsidiaries over the prior twelve month period has decreased by more
than 1.5% from the calculation of net actual cash flow of us and our
subsidiaries for the twelve month period ended May 31, 1999 (either
such event, a "Lender Property Determination");
- by SHP Acquisition or SHP Investors Sub, if an acquisition proposal
from a third party that is publicly announced has been commenced or
communicated in writing to us and contains a proposal as to price and:
-- we have not rejected such proposal within ten business days after
the date of receipt thereof by us or within ten business days
after the date its existence first becomes publicly announced, if
sooner, or
-- we have failed to confirm the recommendation of our Board of
Directors to the stockholders approving the merger and adopting
the merger agreement within ten business days after being
requested by SHP Investors Sub to do so;
- by SHP Acquisition or SHP Investors Sub, if the fees with respect to
obtaining the consent of franchisors under certain franchise
agreements with respect to our hotel properties to the transactions
contemplated by the merger agreement exceed $25 million and we do not
elect to decrease the Merger Consideration by the amount of such
excess; or
- by SHP Acquisition or SHP Investors Sub, in the event each of the
Merger Proposals is approved by the required stockholders and the
ratification and
<PAGE>
15
approval of such approval by our Board of Directors does not occur by
the first business day following the approval by the stockholders.
TERMINATION FEES AND EXPENSES
If the merger agreement is terminated for certain of the reasons
described above, we and the Operating Partnership will be obligated to pay SHP
Acquisition, or SHP Acquisition and SHP Investors Sub will be obligated to pay
us, on behalf of the Operating Partnership, the stockholders and the holders of
OP Units:
- a termination fee in the amount of $17.5 million (or, in the case of
amounts payable to us, the lesser of $17.5 million or the maximum
amount that can be paid to us without causing us to fail to meet
certain REIT requirements); and/or
- the lesser of certain specified amounts and the documented out-of-
pocket expenses (such expenses not to exceed $7.5 million) incurred by
the party to which the payment is to be made in connection with the
merger agreement and the transactions contemplated thereby.
See "The Merger and the Merger Agreement (Item No. 1) -- Termination Fees and
Expenses" for a detailed explanation of the fees payable in the event of a
termination of the merger agreement for any reason described above.
FINANCING; SOURCE OF FUNDS
The total amount of funds required by SHP Acquisition in connection
with the consummation of the merger and the Operating Partnership merger is
estimated to be approximately $837 million, assuming the Merger Consideration is
$10.41 per share, including:
- Payment of the Merger Consideration to stockholders in the amount of
approximately $394.7 million, consisting of an aggregate of $23.8
million to Westbrook and its affiliates, Mr. Alter and his affiliates
and Mr. Biederman and his affiliates and an aggregate of $370.9
million to all other stockholders.
- Payment of cash to holders of preferred stock in the amount of
approximately $25 million.
- Payment of cash to holders of OP Units (other than us, SHP Acquisition
and its affiliates) in the amount of approximately $12.4 million
(assuming that all such holders elect to receive cash).
- Repayment of debt in the amount of approximately $365.7 million.
- Payment in respect of stock options and warrants in the aggregate
amount of approximately $1.0 million.
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16
- Payment of fees and expenses (including debt prepayment fees and
financing fees) in the amount of approximately $29.3 million.
- Cash payments under the contribution agreement in the amount of
approximately $8.5 million.
Pursuant to a commitment letter, Paine Webber has agreed to provide at
least $454.6 million of debt financing (subject to reduction as provided in the
commitment letter) and may provide as much as $502 million of debt financing
with respect to the transactions contemplated by the merger agreement and the
Operating Partnership merger agreement. Paine Webber has subsequently indicated
it will provide $495 million of debt financing. Pursuant to a contribution
agreement entered into among certain affiliates of Westbrook and Messrs. Alter
and Biederman, members of SHP Acquisition affiliated with Westbrook have agreed
to make aggregate cash contributions to SHP Acquisition on or prior to the
closing date of the merger such that, after giving effect to the proceeds under
the commitment letter, SHP Acquisition and its subsidiaries shall have an amount
of cash that is sufficient to consummate the transactions contemplated by the
merger agreement and the Operating Partnership merger agreement. See "Matters
Relating to the Merger Proposals -- Financing; Source of Funds." Pursuant to the
contribution agreement, Mr. Alter and his affiliates have agreed to contribute
to SHP Acquisition all of the assets and liabilities of the Management Company
and a controlling interest in Lessee, as well as all OP Units held by them. The
contribution agreement further provides that Mr. Biederman will sell all of his
interest in Lessee and will contribute all OP Units held by him to SHP
Acquisition. See "Matters Relating to the Merger Proposals -- Interests of
Certain Persons in Matters to be Acted On -- Contribution and Sale Agreement."
FEDERAL INCOME TAX CONSEQUENCES
You will be taxed on your receipt of the Merger Consideration if and
to the extent that the amount you receive exceeds your tax basis in your common
stock or preferred stock, as the case may be. In addition, immediately prior to
the Operating Partnership merger, the Operating Partnership will redeem from us
a portion of the OP Units held by us in exchange for certain equity interests
and assets relating to the hotel properties we obtained from Kahler Realty
Corporation. After that redemption, the Operating Partnership merger will
occur. Determining the tax consequences of the merger can be complicated. You
should consult your financial and tax advisor in order to understand fully how
the merger will affect you.
APPRAISAL RIGHTS
Under Maryland law, stockholders are not entitled to seek any
appraisal or similar rights with respect to such stockholders' shares of common
stock as a result of the consummation of the merger or any of the actions
contemplated by the Merger Proposals. See "Matters Relating to the Merger
Proposals -- Appraisal Rights."
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17
INFORMATION CONCERNING THE SPECIAL MEETING
TIME, PLACE AND DATE
This Proxy Statement is being furnished to the holders of the
outstanding shares of our common stock and preferred stock in connection with
the solicitation of proxies by our Board of Directors for use at the special
meeting of our stockholders to be held on ____________, 1999 at _____ a.m.,
local time, at ___________________, including any adjournments or postponements
thereof.
PURPOSE OF THE SPECIAL MEETING
At the special meeting, holders of Voting Securities will consider and
vote upon each of the Merger Proposals. Additional information concerning the
special meeting and the merger agreement is set forth below and a copy of the
merger agreement is attached as Appendix A to this Proxy Statement. The
summaries of the portions of the merger agreement set forth in this Proxy
Statement do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, the text of the merger agreement.
At a meeting held on July 12, 1999, all of the members of our Board of
Directors, based upon the unanimous recommendation of the Special Committee,
determined that the terms of each of the Merger Proposals are advisable and fair
to, and in the best interests of, the Nonaffiliated Stockholders.
Our Board of Directors, acting on the unanimous recommendation of the
Special Committee, unanimously believes that each of the Merger Proposals is in
the best interests of our stockholders, has approved each of the Merger
Proposals and recommends that you vote FOR adoption and approval of all of the
Merger Proposals. Stockholders should be aware that certain of the members of
our Board of Directors have conflicts of interest with respect to the merger.
See AMatters Relating to the Merger Proposals -- Interests of Certain Persons in
Matters to Be Acted Upon" And "Certain Relationships And Transactions."
RECORD DATE; QUORUM; OUTSTANDING COMMON STOCK AND PREFERRED STOCK ENTITLED TO
VOTE
The record date for the special meeting has been fixed as the close of
business on __________, 1999. Only holders of record of common stock and
preferred stock on the record date are entitled to notice of and to vote at the
special meeting.
Holders of common stock on the record date are entitled to one vote on
matters properly presented at the special meeting for each share of common stock
held. Holders of preferred stock are entitled to vote on an "as converted"
basis, together with the holders of common stock as a single class, on all
matters on which the holders of common stock are entitled to vote. Each share of
preferred stock is currently convertible, subject to the terms of the Articles
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18
Supplementary with respect thereto, into 6.79842 shares of common stock, based
on a conversion price of $14.7093.
Accordingly, on the record date, there were outstanding shares of
common stock and preferred stock entitled to cast a total of ____________ votes,
of which ________ votes could be cast by holders of common stock and 1,699,605
votes by holders of preferred stock.
As of the record date, Messrs. Alter and Biederman and their
affiliates owned ________ OP Units. Under the partnership agreement for the
Operating Partnership, the holders of OP Units (other than us) have redemption
rights that enable them to cause the Operating Partnership to redeem their OP
Units in exchange for cash or, at the election of the Operating Partnership,
shares of our common stock on a one-for-one basis, subject to anti-dilution
provisions. The holders of OP Units will have no rights in their capacity as
such holders to vote at the special meeting. The holders of two-thirds of the
outstanding OP Units (excluding OP Units held by Sunstone) must approve and
adopt the Operating Partnership merger and related required amendment of the
Operating Partnership's partnership agreement before the Operating Partnership
Merger and the merger of SHP Acquisition Sub into us can take place.
A list of stockholders will be available for examination by holders of
common stock or preferred stock, for any purpose related to the special meeting,
during the ten-day period preceding the special meeting, at the offices of
Sunstone, 903 Calle Amanecer, San Clemente, California 92673-6212, telephone
(949) 369-4000.
The presence at the special meeting in person or by proxy of the
holders entitled to cast 50% of the votes that could be cast by the holders of
Voting Securities will constitute a quorum for the transaction of business by
the holders of common stock and preferred stock at the special meeting. Shares
of common stock and preferred stock present in person or represented by proxy
(including shares whose holders abstain or do not vote with respect to one or
more of the matters presented for stockholder approval) will be counted for
purposes of determining whether a quorum exists at the special meeting.
VOTE REQUIRED
The approval of the resolutions of our Board of Directors recommending
that we terminate our status as a REIT and that we amend the provisions of our
Charter, including Article V thereof, and the proposed amendment of our Charter,
each require the affirmative vote of two-thirds of all votes entitled to be
cast. A copy of the proposed amendment of Article V and the other articles of
our Charter is set forth as Appendix C to this Proxy Statement. The merger
must be approved by the stockholders holding a majority of all votes entitled to
be cast. Shares which abstain from voting on any of the Merger Proposals, and
shares held in "street name" by brokers or nominees who indicate on their
proxies that they do not have discretionary authority to vote such shares as to
any of the Merger Proposals, are nonetheless considered outstanding shares and
such abstentions and "broker non-votes" will have the same effect as a vote
against the Merger Proposals.
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19
Since the affirmative vote of two-thirds of all votes entitled to be
cast by the stockholders is required for approval of the recommendation of our
Board of Directors that we terminate our status as a REIT and amend the
provisions of our Charter, including Article V thereof, and for approval of the
amendment of our Charter and since consummation of the merger is conditioned
upon approval of such proposals, we expect that if the holders of less than two-
thirds (or such higher percentage as our Board may determine) of the shares of
our stock outstanding and entitled to vote are present, in person or by proxy,
at the special meeting, the special meeting may be adjourned to a later date,
notwithstanding the presence of a quorum thereat.
As of the close of business on the record date, Messrs. Alter and
Biederman (each of whom is an affiliate of SHP Acquisition and SHP Investors
Sub), and their affiliates owned approximately ____% of the Voting Securities.
As of the closing of business on the record date, Westbrook Fund I and its
affiliates owned approximately _____% of the Voting Securities. See "Certain
Relationships and Transactions." Westbrook Fund I, Mr. Alter and Mr. Biederman,
our Executive Vice President and Vice Chairman of our Board, have each agreed to
vote their shares of our common stock and preferred stock for approval and
adoption of each of the Merger Proposals. In addition, Directors and executive
officers of Sunstone (other than Messrs. Alter and Biederman) who own or control
_____ shares of our common stock (constituting approximately ____% of the
outstanding Voting Securities) have indicated to us that they currently intend
to vote all such shares for approval and adoption of each of the Merger
Proposals.
The merger is subject to conditions in addition to the required vote
of the stockholders. See "The Merger and the Merger Agreement (Item No. 1) --
Conditions."
ACTION TO BE TAKEN UNDER THE PROXY
All proxies that are properly executed and returned to our transfer
agent and registrar, Chase Mellon Shareholder Services, on or before the date of
the special meeting, and that are not revoked, will be voted at the special
meeting or any adjournments or postponements thereof in accordance with any
instructions thereon, or, if no instructions are provided, will be voted FOR
adoption and approval of each of the Merger Proposals. The enclosed form of
proxy card is provided for your use, and proxies may be submitted by U.S. mail,
telephone or Internet. Any stockholder who has given a proxy pursuant to this
solicitation may revoke it by attending the special meeting and giving written
notice to the Secretary of Sunstone of his or her intention to vote in person,
without compliance with any other formalities. In addition, any proxy given
pursuant to this solicitation may be revoked prior to the special meeting by
delivering an instrument revoking it or a duly executed proxy bearing a later
date to the transfer agent and registrar. Stockholders who hold shares through
a broker must notify the broker in order to revoke a proxy.
If a motion to adjourn or postpone the special meeting to another time
or place for the purpose of soliciting additional proxies or allowing additional
time for the satisfaction of conditions of the merger is presented for
consideration, the persons named in the enclosed form
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20
of proxy and acting thereunder generally will have the discretion to vote on
such matters in accordance with their best judgment, except that any shares
which were voted by proxy against the merger proposal will not be voted in favor
of the adjournment or postponement of the special meeting in order to solicit
additional proxies.
Our management does not know of any matters other than those set forth
in this Proxy Statement which may come before the special meeting. If any other
matters are properly presented at the special meeting for action, the persons
named in the enclosed form of proxy and acting thereunder will vote in
accordance with their discretion on such matters.
PROXY SOLICITATION
The expense of preparing, printing and mailing this Proxy Statement
and the proxies solicited hereby will be borne by us. In addition to the use of
the mails, proxies may be solicited by our officers and Directors and our
regular employees, without additional remuneration, by personal interviews,
written communication, telephone, telegraph or facsimile transmission. We also
will request brokerage firms, nominees, custodians and fiduciaries to forward
proxy materials to the beneficial owners of common stock and preferred stock
held of record by such brokerage firms, nominees, custodians and fiduciaries and
will provide reimbursement for the cost of forwarding the material in accordance
with customary charges. In addition, we have retained ____________ to assist in
the solicitation of proxies at an estimated fee of $_______ plus reimbursement
of reasonable expenses to be paid by us.
MATTERS RELATING TO THE MERGER PROPOSALS
GENERAL
SUNSTONE. Sunstone was incorporated as a Maryland corporation in September
1994 and is structured for federal tax purposes as a REIT. Through our 94.7%
ownership interest in the Operating Partnership, we own and lease luxury,
upscale and mid-price hotels located primarily in the Pacific and Mountain
regions of the western United States, which includes the states of California,
Utah, Colorado, Arizona, Washington, Oregon, New Mexico and Minnesota. The
hotels are operated on behalf of Lessee through percentage leases. Messrs.
Alter and Biederman own Lessee. The hotels operate primarily under national
franchises, including brands affiliated with Marriott International, Inc., Bass
Hotels and Resorts, Hilton Hotels Corporation and Promus Hotel Corporation. As
of August 13, our portfolio consisted of 59 hotels with a total of 10,525 rooms.
The majority of our hotel portfolio consists of luxury, upscale and mid-price
full-service hotels and upscale extended-stay properties (approximately 78%)
with the remainder of our portfolio consisting of mid-price limited service
properties.
On ___________, 1999 (the most recent practicable date prior to the
printing of this Proxy Statement), the high and low sales prices of our common
stock on the New York Stock Exchange were $____ and $____, respectively.
<PAGE>
21
The address of the principal business and the principal executive
offices of Sunstone is 903 Calle Amanecer, San Clemente, California 92673, and
its telephone number is (949) 369-4000.
SHP ACQUISITION AND SHP INVESTORS SUB. SHP Acquisition is a Delaware
limited liability company recently organized by affiliates of Westbrook and Mr.
Alter. SHP Acquisition was formed for the purpose of owning and conducting the
business of Sunstone, Lessee and the Management Company following the merger.
SHP Investors Sub is a Maryland corporation and a wholly-owned indirect
subsidiary of SHP Acquisition. SHP Investors Sub was organized for the purpose
of effecting the merger.
SHP Acquisition and SHP Investors Sub currently have no material
assets, do not own any shares of common stock or OP Units and have not engaged
in any activities except those incident to their formation and in connection
with the merger. The principal business address of SHP Acquisition and SHP
Investors Sub is c/o Westbrook Real Estate Partners, L.L.C., 599 Lexington
Avenue, New York, New York 10022, telephone (212) 583-1800.
The members of SHP Acquisition are Westbrook Fund III, Westbrook SHP
L.L.C., a Delaware limited liability company ("Westbrook SHP"), and Westbrook
Real Estate Co-Investment Partnership III, L.P., a Delaware limited partnership
("Westbrook Co-Invest III") (each of which is an affiliate of Westbrook), Alter
SHP LLC, a Delaware limited liability company (which is an affiliate of Mr.
Alter), and Biederman SHP LLC, a Delaware limited liability company (which is an
affiliate of Mr. Biederman). See "Matters Relating to the Merger Proposals --
Interests of Certain Persons in Matters to be Acted Upon."
As of the record date, Messrs. Alter and Biederman and their
affiliates owned ______ shares, or approximately ___%, of our outstanding common
stock and ________ OP Units or approximately ____%, of the outstanding OP Units.
OP Units are redeemable by the holder for cash or shares of common stock, at our
option, on a one-for-one basis. If the OP Units held by Messrs. Alter and
Biederman and their affiliates had been converted into our common stock as of
the record date, such persons would have owned approximately _____% of our
outstanding shares of common stock as of such date.
As of the record date, Westbrook and its affiliates owned _______
shares or approximately ____% of our outstanding common stock and all of our
preferred stock. Westbrook Fund I holds _______ shares of common stock and
_______ shares of preferred stock and Westbrook Real Estate Co-Investment
Partnership I, L.P., a Delaware limited partnership ("Westbrook Co-Invest I"),
holds _______ shares of common stock and _______ shares of our preferred stock.
Mr. Kazilionis has been granted options exercisable as of the record date to
purchase _______ shares of common stock.
BACKGROUND OF THE MERGER
REIT STRUCTURE AND SUNSTONE OPERATIONS PRIOR TO 1998. We were formed as a
self-administered REIT for federal tax purposes in 1994. In order to qualify as
a
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22
REIT under the Internal Revenue Code of 1986, neither we nor the Operating
Partnership can operate hotels. Accordingly, since our formation each of our
hotels has been leased to Lessee, a corporation owned by Messrs. Alter and
Biederman, and has been managed by the Management Company, a corporation owned
by entirely by Mr. Alter. The Operating Partnership or one of its subsidiaries
has entered into a separate percentage lease with Lessee for each hotel
property, each of which provides for Lessee to pay the Operating Partnership a
fixed rent charge plus a percentage of revenues for such property. See "Certain
Relationships and Transactions -- Percentage Leases." Lessee has entered into a
separate management agreement with the Management Company for each of our
hotels, providing for the payment of a fee to the Management Company equal to a
percentage of revenues. See "Certain Relationships and Transactions --Management
Agreements." Because of this structure, all of our revenues are derived from the
payments made to us by Lessee.
Our earnings per share on a diluted basis were $0.69 for the year
ended December 31, 1996 and $0.71 for the year ended December 31, 1997. We paid
dividends of $0.96 and $1.05 per share in those periods. On October 15, 1997,
we acquired all of the outstanding capital stock of Kahler Realty Corporation,
which owned and operated 17 hotels, from Westbrook Fund I and Westbrook Co-
Invest I for an aggregate purchase price of approximately $372.3 million. In
1998, we then embarked on a strategic plan to make capital improvements to the
hotels acquired from Kahler Realty Corporation and our other properties,
acquired 11 hotels and commenced construction on three additional hotels. Our
intent was to update and renovate our properties and shift our market focus from
limited service properties to midscale and upscale properties. We had planned
to fund these improvements and acquisitions through public sales of our equity
and debt. Our stock traded above $16.00 per share on the New York Stock
Exchange for most of the last quarter of 1997 and the first few weeks of 1998.
STRUCTURAL DIFFICULTIES AND INITIAL CONSIDERATION OF ALTERNATIVES. Early
1998, conditions in the capital markets for Sunstone's securities as well as
those of other public REITs began to become unfavorable. A significant downturn
began in both the equity and debt markets for lodging REITs. During the summer
and early fall of 1998, conditions in the market for public REITs deteriorated
substantially. During 1998, the S&P 500 was up 27%, while REIT stock prices were
down over 20%. In 1998, our earnings per share on a diluted basis declined to
$0.40 per share and we paid $1.12 per share in dividends for that year. The
combined effect of our deteriorating financial performance and the adverse
market conditions was that the trading price of our common stock on the New York
Stock Exchange fell from $17.3125 in early January 1998 to $6.50 in early
October of that year.
In addition to depressing our stock price, the changes in the markets
limited our access to capital, which in turn increased our difficulty in
carrying out our capital improvements plan. We cancelled two offerings for our
securities in August 1998 because of the declining securities market in general
and the falling market for REIT securities in particular. Our capital
improvements plan resulted in our incurrence of significant expenditures on
improvements and a loss of revenues during the time that the hotel rooms that
were being renovated could not be occupied. These expenditures and lost revenues
ultimately exceeded the budgets prepared by Lessee and us relating to our
capital improvement plan. Without access to
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23
the public debt or equity markets, we had to fund our operations, capital
improvements and dividends with more expensive bank debt.
Due to our increased bank debt and our inability to access the capital
markets, by the summer of 1998 our Board of Directors spent more time
considering ways to address our financial difficulties and, as part of this
evaluation, our Board of Directors began to consider ways in which we could
restructure our relationship with Lessee. We considered creating a revised
structure with Lessee that would (i) minimize conflicts of interest between, and
further align the interests of, our stockholders and the stockholders of Lessee,
(ii) provide more opportunity for equity incentives tied to our stock price for
the stockholders of Lessee and (iii) increase the capitalization of Lessee.
The Board considered on several occasions alternative structures. In
connection with this evaluation, Lessee retained NationsBank Montgomery
Securities to review potential structural alternatives. On August 25, 1998, at a
meeting of the Executive Committee of the Board attended by Messrs. Lambert,
Geller, Alter and Gould, NationsBank Montgomery presented a written analysis of
possible methods of restructuring the relationship between us and the Operating
Partnership, on the one hand, and Lessee and the Management Company on the
other. NationsBank Montgomery recommended the creation of a "paper-clipped"
structure in which our stockholders would receive shares in a newly created
publicly traded operating company that would be the lessee under percentage
leases with the Operating Partnership. In the report, NationsBank Montgomery
estimated that the combined valuation of Lessee and the Management Company was
between $55 and $70 million.
The Board of Directors at its September 1, 1998 meeting created the
Lessee Assessment Committee to study the NationsBank Montgomery proposal and
other possible methods of restructuring the current relationship. The members of
a Lessee Assessment Committee were Messrs. Gould, Kazilionis and Lambert, who
served as the Chairman. This Committee met five times, on September 1 and 9,
October 8 and December 23 of 1998 and January 14, 1999, to discuss the
NationsBank Montgomery proposal and the valuation of Lessee in any transaction.
During this period, representatives of the Lessee Assessment Committee and the
stockholders of Lessee met to discuss a proposed valuation of Lessee and the
Management Company in connection with creation of a new "paper clipped" lessee.
Ultimately the Lessee Assessment Committee reported to the Board of
Directors at its January 14 meeting that it had determined that the NationsBank
Montgomery proposal was not currently in the best interests of Sunstone and our
stockholders.
With no decision relating to the realignment of our relationship with
Lessee and in light of continued financial market turmoil and deteriorating
financial performance at a growing number of our hotels, certain Directors,
including some of our independent Directors, began to
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24
believe that we should review our strategic alternatives. Certain of our
Directors became concerned that future cash flow might not be sufficient to
implement our capital improvements plan and at the same time maintain our
current dividend rate. Several Directors indicated that they continued to
believe strategic alternatives should be pursued, despite the fact that no
conclusion had resulted from the earlier discussions.
DISCUSSIONS BETWEEN WESTBROOK AND MR. ALTER PRIOR TO DELIVERY OF PROPOSAL
OF SHP ACQUISITION. On February 17, 1999, Mr. Kazilionis, one of our Directors
and a managing principal of Westbrook, contacted Mr. Alter to explore whether he
might be interested in considering a possible offer for Sunstone in a
transaction that would combine us, Lessee and the Management Company under
common ownership. They agreed that Westbrook would consider a possible proposal
and that Mr. Alter and Mr. Kazilionis would speak again in approximately two
weeks. On March 1, 1999, a subsequent conversation was held among Mr. Alter, Mr.
Kazilionis, Jonathan Paul, a principal in Westbrook, and certain other
representatives of Westbrook to discuss a possible proposal regarding us. These
discussions were preliminary in nature and included possible terms of the
contribution of Lessee and the Management Company to the combined entity and Mr.
Alter's continued employment and equity participation in the combined entity.
These discussions continued during the month of March and into early April.
During this time period, Westbrook had preliminary conversations with several
potential financing sources for the transaction, including Paine Webber, and Mr.
Alter spoke with Mr. Robert Enever and Mr. Biederman, Directors of Sunstone,
about their possible participation in a transaction. On April 4, 1999, Mr. Alter
and Westbrook reached agreement on the general terms on which they would be
willing to make an offer for us. The agreement between Westbrook and Mr. Alter
was documented in a letter agreement dated April 5, 1999 and a letter dated
April 5, 1999 to the Board of Directors quoted below (each of which was publicly
filed as an exhibit to a Schedule 13D statement by SHP Acquisition on April 6,
1999).
DELIVERY OF INITIAL PROPOSAL OF SHP ACQUISITION. At a previously scheduled
April 5, 1999 Board of Directors meeting, Mr. Alter made a presentation
regarding the difficulties facing the lodging industry and public hotel
companies in general and us in particular. These difficulties included the
depressed stock prices for lodging REITs and limited access to capital which had
previously concerned the Board. Mr. Alter discussed other transactions
previously examined by us to address these problems and the structural problems
associated with Lessee and the Management Company. After completion of this
discussion, representatives of Westbrook were admitted to the meeting and Mr.
Alter then delivered to the Board of Directors and discussed the following
letter on behalf of SHP Acquisition:
April 5, 1999
Board of Directors
Sunstone Hotel Investors, Inc.
903 Calle Amanecer
San Clemente, CA 92673
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25
Dear Sirs:
SHP Acquisition, L.L.C. ("SHP Acquisition") is pleased to propose
that it acquire all of the common stock of Sunstone Hotel Investors, Inc.
("Sunstone") for consideration of $9.50 to $10.00 in cash per share
(the "Cash Price"), on the terms and subject to the conditions set forth in
this letter. The average trading price of the Sunstone common stock on the
New York Stock Exchange for the period March 1, 1999 through April 1, 1999
was $7.25. Based on this price, the consideration we are offering your
shareholders represents a premium of 31% to 38%. Under this proposal, the
holders of outstanding partnership units in Sunstone Hotel Investors, L.P.
("Sunstone OP") (other than Sunstone) would receive, at their option,
either cash in an amount per partnership unit equal to the Cash Price or
redeemable perpetual preferred units in Sunstone OP having a face value
equal to the Cash Price. Sunstone's 7.9% Class A Cumulative Convertible
Preferred Stock would be redeemed in accordance with its terms for a cash
amount equal to its liquidation preference plus accrued and unpaid
dividends. SHP Acquisitions, L.L.C. is a Delaware limited liability company
newly organized by Westbrook Fund III Acquisitions, L.L.C. ("Westbrook"),
Mr. Robert A. Alter ("Mr. Alter") and certain management personnel of
Sunstone Hotel Properties, Inc. ("Lessee").
It is our view that this consideration is very fair and would be
attractive to your shareholders. We hope that you will view this proposal
as an excellent opportunity for the shareholders of Sunstone to realize
full value for their shares to an extent not available to them in the
marketplace, and for Sunstone to continue its operations even more strongly
as a private company in experienced industry hands focused on the long-term
value of Sunstone and no longer subject to the often short-term pressures
imposed by the public financial markets and the limitations imposed by
Sunstone's REIT structure.
We presently contemplate that the acquisition would be accomplished
by the merger of a subsidiary of SHP Acquisition into Sunstone. After
consummation of the transaction, Sunstone would be wholly owned by SHP
Acquisition, which would in turn be owned by Westbrook, Mr. Alter and other
members of Lessee's management. Prior to consummation of the merger, SHP
Acquisition would acquire all of Sunstone's interests in Sunstone OP and
acquire or receive a contribution of certain stock and certain assets of
Lessee and Sunstone Hotel Management, Inc. ("Management"). We and our
representatives are prepared to discuss our proposed acquisition structure
with you at your request. Attached as Annex A is a term sheet outlining the
arrangements, which Westbrook and Mr. Alter intend to enter into between
themselves with respect to the ownership and operation of SHP Acquisition
and the businesses of SHP Acquisition's subsidiaries after the acquisition,
including the equity interests to be held by each such person.
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26
We believe that the combination of Westbrook and Mr. Alter represents
a strategic match up of longstanding industry experience and expertise with
well-recognized financial and investment sophistication. Mr. Alter, a co-
founder of Sunstone, has been actively involved with Sunstone since its
formation and has been active in hotel management and ownership since 1976.
Led by Mr. Alter, management of Lessee has a unique blend of experience in
hotel ownership and operation, particularly with acquisitions, development
and financing, combined with exceptional regional and property level
managers. Westbrook's parent, Westbrook Real Estate Fund III, L.P.
("Westbrook Fund"), is a $1.25 billion equity fund that targets investments
in a broad range of real estate related assets, portfolios and companies.
The proposal contained in this letter has been approved by the investment
committee of Westbrook Fund. Westbrook Fund's investor group includes
institutional investors, primarily consisting of public and private pension
funds, endowments and foundations. Since its inception in 1994, Westbrook
Real Estate Partners L.L.C. ("Westbrook Partners"), the general partner of
Westbrook Fund, has closed over 70 investments with a total capitalization
in excess of $6 billion.
The financing used to complete the proposed transaction will be a
combination of equity and debt. Westbrook Fund is prepared to make an
equity investment in excess of $250 million in this acquisition, and we are
confident that we will be able to secure the required debt financing on an
expedited basis. In fact, we have already had extensive discussions with
and received a preliminary proposal from an affiliate of PaineWebber (which
we are currently negotiating), which has financed a number of transactions
for Westbrook Partners in the past, to provide all necessary funds to
consummate the transaction. Should you wish to discuss any aspect of the
proposed debt financing with PaineWebber, we would be happy to arrange an
opportunity for you to meet with appropriate representatives.
As with every other Westbrook Partners transaction, consummation of
this transaction is subject to the completion of the financing arrangements
described above. We believe that Westbrook Partner's record of securing the
financing necessary to complete transactions by its affiliates is well
recognized by the investment community. The magnitude of Westbrook Fund's
proposed equity investment demonstrates its commitment to a responsible
capital structure in order to facilitate Sunstone's continuing as a
financially sound, growing company which is well positioned to meet its
ongoing responsibilities and obligations. We would like to sign a
definitive merger agreement no later than April 30, 1999, and we expect to
have executed commitment letters for all of the required financing at that
time. We anticipate that definitive documentation for the financing would
be finalized in the period prior to the vote of the Sunstone shareholders
with respect to the proposed acquisition.
This proposal is also subject to the following conditions: (i)
approval by Sunstone's Board of Directors and shareholders pursuant to the
requirements of
<PAGE>
27
Maryland law and the rules of the New York Stock Exchange, (ii) any
required approval by the holders of the operating partnership units of
Sunstone OP, (iii) receipt of any consents of third parties required under
material contracts of Sunstone, Lessee and Management, (iv) Sunstone having
balance sheet liabilities at the closing of the proposed acquisition not in
excess of those shown on its consolidated balance sheet dated as of March
31,1999 and (v) the negotiation and execution of definitive agreements
providing for the merger and the transactions outlined on Annex A and the
satisfaction of customary conditions to be set forth therein, including a
mutually satisfactory definitive merger agreement which would contain
customary covenants, representations, warranties, conditions and other
provisions normal to such agreements. The merger agreement would prohibit
Sunstone from soliciting indications of interest from other persons with
respect to an acquisition of Sunstone, although it would permit the Board
of Directors of Sunstone to respond to inquiries from and provide
information to bona fide interested third parties and, subject to
reimbursement of expenses and payment of a termination fee in the amount of
3% of the total transaction value (which value shall include the total
price to be paid to Sunstone shareholders, all debt to be assumed or
refinanced and all fees and expenses), terminate the merger agreement if it
determined to accept an alternative transaction. The merger agreement would
provide Sunstone the ability to require that the shareholders of Lessee and
Management sell such companies to any purchaser of Sunstone for a cash
purchase price of $35 million and give the shareholders of such companies
the option to sell such companies to any such purchaser or its designee for
a $35 million cash purchase price. We would expect that Sunstone would
continue to pay dividends to its shareholders in the ordinary course
consistent with past practice until the consummation of this acquisition.
While we have reviewed the publicly available information with
respect to Sunstone and have devoted a great deal of time and effort to
studying Sunstone, our proposal is subject to confirmatory due diligence to
be conducted by Westbrook. Given the familiarity of both Mr. Alter and
Westbrook with Sunstone, this diligence would be completed expeditiously
and should not delay the execution of a definitive merger agreement. Our
offer is based on the understanding that there are approximately 37,638,427
shares of common stock of Sunstone currently outstanding and approximately
2,106,480 additional shares are currently issuable upon conversion of
operating partnership units of Sunstone OP.
We have no intention of attempting to acquire Sunstone other than in
a transaction approved by Sunstone's Board of Directors. We hope that you
will view this merger proposal favorably and that you, after appropriate
consideration, will authorize further discussions with a view towards
reaching a definitive agreement. We would appreciate hearing from you
regarding our proposal by the close of business on April 19, 1999, at which
time our proposal will lapse. If you believe that you will require
additional time to consider our proposal adequately, we would be pleased to
discuss an extension.
<PAGE>
28
We are prepared to move promptly in connection with this matter. We
have considered legal and other requirements with our advisors and do not
foresee any insurmountable difficulties. We are prepared to meet with you
or with your representatives to discuss our proposal and to answer any
questions you or they may have. We believe that the negotiation of a
satisfactory definitive merger agreement could be accomplished in a
relatively short period of time. Thereafter we would work with you to
obtain any required regulatory approvals and the other approvals referred
to above. Please contact Paul Kazilionis [...] [...] of Westbrook Partners,
or Bob Alter [...] of SHP Acquisition, or [...] of Simpson Thacher &
Bartlett, or [...] of Battle Fowler LLP, to respond to our offer, or if you
or your counsel require any additional information with respect to the
offer. We look forward to discussing our offer with you, entering into a
definitive merger agreement promptly and consummating this transaction on
an expedited basis.
Very truly yours,
SHP Acquisition, L.L.C.
By /s/ Robert A. Alter
-------------------------------
Name: Robert A. Alter
Title: Manager
By /s/ Paul D. Kazilionis
-------------------------------
Name: Paul D. Kazilionis
Title: Manager
Attachment
FORMATION AND INITIAL ACTIONS OF THE SPECIAL COMMITTEE. Following the
presentation of the proposal letter from SHP Acquisition, Messrs. Alter,
Biederman, Enever and Kazilionis, as well as the other representatives of
affiliates of Westbrook present at the meeting, excused themselves from the
meeting. At the time, Mr. Enever was considering making an equity investment in
SHP Acquisition, which he subsequently determined not to do. The Board then
formed the independent Special Committee of the Board of Directors, consisting
of the remaining five of the nine members, Messrs. Geller, Bingham, Gould,
Sondker, and Lambert. Mr. Geller was named Chairman of the Special Committee.
The Special Committee was charged by the Board to consider the terms of the
proposal of SHP Acquisition, to discuss and, should the Special Committee
determine it in our best interest to do so, negotiate that proposal with SHP
Acquisition; take actions to facilitate the development of alternatives to the
SHP Acquisition
<PAGE>
29
proposal should the Special Committee determine it in our best interest to do
so; consider and negotiate any alternatives; and report to the full Board of
Directors its recommendations and conclusions with regard to the proposal of SHP
Acquisition and any or all alternatives to that proposal.
INITIAL ACTIONS AND MEETING OF THE SPECIAL COMMITTEE. Between April 6, 1999
and April 9, 1999, Mr. Geller, on behalf of the Special Committee, began to
contact and interview potential legal and financial advisors to the Special
Committee.
The initial meeting of the Special Committee was held on April 9,
1999. The Special Committee decided to engage Altheimer & Gray as independent
legal counsel to the Special Committee, and Altheimer & Gray then joined the
meeting. Altheimer & Gray summarized and discussed with the members the duties
of the Special Committee. Mr. Geller then reported that he had interviewed eight
investment banks, and described the relative merits of each. The Special
Committee determined to engage Goldman Sachs as its independent financial
advisor to help it evaluate SHP Acquisition's proposal and consider
alternatives. The Special Committee, on behalf of Sunstone, and Goldman Sachs
executed a formal engagement letter on April 14, 1999. The Special Committee
instructed Goldman Sachs and Altheimer & Gray to commence a due diligence review
of Sunstone and its properties with a view to advising the Special Committee on
its legal and business options in responding to SHP Acquisition's proposal.
ACTIONS OF SHP ACQUISITION BETWEEN APRIL 5 AND APRIL 23. After the
presentation of the proposal of SHP Acquisition to the Board, Mr. Alter and
Westbrook began to prepare and negotiate agreements with respect to the
ownership and governance of SHP Acquisition and SHP Acquisition's proposed
acquisition of Lessee and the Management Company. Negotiations took place among
Mr. Alter and Westbrook during this period and continued on an on-going basis
until definitive documentation was signed by them concurrently with the
execution of the merger agreement on July 12. Representatives of Westbrook also
continued their negotiations with Paine Webber for the debt financing for the
proposed transactions. SHP Acquisition was informed that the Special Committee
had retained independent legal and financial advisors and would not be in a
position to respond to SHP Acquisition's proposal until these advisors had time
to review the situation and Sunstone and report back to the Special Committee.
APRIL 16 SPECIAL COMMITTEE MEETING. At an April 16 meeting of the Special
Committee, Mr. Crowley, our Chief Operating Officer, reviewed our financial
position, and as part of his review discussed our cash constraints. Goldman
Sachs and Altheimer & Gray were present at the meeting.
During the Special Committee meeting, Mr. Geller updated the Committee
regarding his contacts with representatives of SHP Acquisition to date and
discussed with the Special Committee a letter which he had received on April 16,
1999 from a third party. The letter indicated that in light of SHP Acquisition's
proposal the party was evaluating its
<PAGE>
30
willingness in making its own offer for us and had an interest in obtaining
additional information and due diligence materials regarding Sunstone.
Goldman Sachs and Altheimer & Gray reviewed and analyzed options for
the process and timing of the Special Committee's evaluation of the proposal of
SHP Acquisition.
In anticipation of the quarterly Board of Directors meeting scheduled
for April 19, 1999, the Special Committee analyzed our ability to declare and
pay a dividend for the quarter ended March 30, 1999. The Special Committee, and
subsequently the Board of Directors at the April 19 meeting, determined that
there were sufficient funds to pay the dividend. The Special Committee also
determined that, absent significant improvement in our financial performance or
our otherwise generating additional cash (for example, through the sale of some
of our properties), the Board of Directors might be required to either
significantly curtail or completely omit to pay the dividend for the quarter
ended June 30, 1999. Members of the Special Committee asked numerous questions
of Goldman Sachs and Altheimer & Gray regarding how a failure to declare and pay
the regular dividend in order to maintain the appropriate corporate liquidity
could limit the Special Committee's ability to generate alternatives to the
proposal of SHP Acquisition that could benefit our stockholders. The Special
Committee agreed to continue to monitor our liquidity.
EVENTS BETWEEN APRIL 16 AND APRIL 23; ANALYSIS OF STRUCTURAL ISSUES
CONCERNING LESSEE. By this time, Goldman Sachs and Altheimer & Gray had
commenced and were continuing their due diligence investigations regarding us,
which included identifying and analyzing key issues associated with us, SHP
Acquisition's proposal and possible alternatives to that proposal. These key
issues included the fact that each of our properties would remain subject to a
lease with Lessee and a management agreement with the Management Company in
connection with any sale of us. If a potential purchaser did not have the
management expertise necessary to operate our hotels and run our business, then
that purchaser might want to acquire Lessee and the Management Company along
with us. SHP Acquisition had already agreed with Messrs. Alter and Biederman
that, in connection with an acquisition of us by SHP Acquisition, SHP
Acquisition would acquire control of Lessee and the Management Company. We did
not have the right to cause Messrs. Alter and Biederman to sell those entities
to any other potential purchaser. By letter dated April 19, 1999, the Special
Committee requested Messrs. Alter and Biederman to agree to grant any third
party purchaser of Sunstone an option to acquire Lessee and the Management
Company for a purchase price of $35 million. Messrs. Alter and Biederman
indicated that their agreement with Westbrook relating to SHP Acquisition would
prohibit them from agreeing to provide such an option at that time. As indicated
in SHP Acquisition's April 5 proposal, SHP Acquisition and Messrs. Alter and
Biederman were willing, however, to agree (as part of an agreement by SHP
Acquisition and Messrs. Alter and Biederman to acquire Sunstone), to provide us
with an option to require Messrs. Alter and Biederman to sell Lessee and the
Management Company to any third party purchaser of Sunstone for a cash purchase
price of $35 million, but only if Messrs. Alter or Biederman also had the right
to sell Lessee and the Management Company to any such purchaser for the same
price.
<PAGE>
31
A potential purchaser might want to terminate the contractual
arrangements with Lessee and the Management Company with respect to the hotels.
Such a purchaser could structure the acquisition as a purchase of our underlying
hotels, which would permit the termination of the leases with Lessee, subject to
the payment of a termination fee based on the profits of Lessee. Upon
termination of a lease, the related management agreement with the Management
Company would also be canceled. We estimated that the aggregate termination
fees payable to Lessee under the leases in connection with the sale of all of
the hotels would be significantly less than $35 million. However, the tax basis
of the hotels acquired by us from Kahler Realty Corporation was significantly
less than their fair market value and, under tax rules applicable to us, if we
were to sell such hotels at this time we would incur a tax on the "built-in-
gain" of the hotels. We estimated this tax would be approximately $60 to $80
million if all these hotels were sold for cash in a taxable transaction,
depending upon the actual selling price for the hotels.
Also during this time, we, Altheimer & Gray and Goldman Sachs
assembled a "data room" containing all the documents we thought were necessary
for any prospective acquirer to conduct a thorough due diligence review of us.
SHP Acquisition's proposal was to expire on April 19, 1999. At the
request of the Special Committee, in a letter dated April 21, 1999, SHP
Acquisition extended its proposal until April 30, 1999. The letter was publicly
filed as an exhibit to a Schedule 13D statement by SHP Acquisition on April 22,
1999.
APRIL 23 MEETING REGARDING SHP ACQUISITION PROPOSAL. On April 23, 1999,
the Special Committee's legal and financial advisors met with representatives
of SHP Acquisition including its counsel, Simpson Thacher & Bartlett and Battle
Fowler LLP. At the meeting, SHP Acquisition discussed the key terms of its
proposal in greater detail and indicated that it would like to receive a
response from the Special Committee as soon as possible, although it understood
that the Special Committee and its advisors required sufficient time to act on a
fully-informed basis. SHP Acquisition indicated that to complete the proposed
acquisition it would require approximately $850 million of financing, including
approximately $600 million of debt financing. SHP Acquisition anticipated that
Paine Webber would commit to provide up to $530 million in debt financing and
that SHP Acquisition would assume approximately $70 million of our existing
debt. SHP Acquisition indicated that affiliates of Westbrook were prepared to
make an equity contribution of approximately $250 million to SHP Acquisition.
SHP Acquisition also indicated that affiliates of Westbrook were not then in a
position to provide any additional equity if SHP Acquisition could not access a
total of $600 million of debt financing, including the assumed debt.
Representatives of the Special Committee then discussed the Special Committee's
desire to conduct a fair process with regard to evaluating SHP Acquisition's
proposal and evaluating our other alternatives. The representatives also
reviewed certain terms of SHP Acquisition's proposal that they indicated should
be improved upon by SHP Acquisition. Among other things, the representatives
requested that SHP Acquisition remove the condition relating to financing from
its proposal and lower the amount of its proposed termination fee, but SHP
Acquisition was not willing to do so.
<PAGE>
32
On April 26, 1999, representatives of the Special Committee and SHP
Acquisition discussed the tax implications of SHP Acquisition's proposal.
APRIL 28 SPECIAL COMMITTEE MEETING AND SOLICITATION OF OTHER POTENTIAL
BIDDERS. The Special Committee held its next meeting on April 28, 1999.
Goldman Sachs discussed with the members of the Special Committee the events
which occurred since the last meeting. The Special Committee also discussed SHP
Acquisition's proposed financing.
Goldman Sachs then discussed with the Special Committee the view of
Goldman Sachs regarding our alternatives in light of SHP Acquisition's proposal,
and the benefits and risks of each alternative. These alternatives included:
- continuing to operate Sunstone independently;
- accepting the proposal of SHP Acquisition and entering into a
definitive agreement that provided us with sufficient flexibility to
examine competing offers, conduct a market check by permitting us to
enter into negotiations with other potential bidders and accept an
alternative proposal should a better offer emerge;
- soliciting alternative acquisition proposals through an auction
process prior to entering into an agreement with SHP Acquisition; and
- liquidating Sunstone through an asset sale strategy.
The Special Committee discussed each of the forgoing items. The Special
Committee was concerned about our capital constraints and their effect on
stockholder value, as well as issues of management continuity if we remained
independent. The Special Committee considered the fact that we could terminate
the leases in an asset sale for less than $35 million as well as the large tax
burden associated with a sale of the hotels formerly owned by Kahler Realty
Corporation. Entering into a definitive agreement with SHP Acquisition, and
then attempting a market check, would have provided some additional assurance
that a transaction would be completed. However, this advantage was offset by
the termination fee that would have to be paid to SHP Acquisition, the request
that Messrs. Alter and Biederman have the right to require the sale of Lessee
and the Management Company for $35 million in cash, and the significant closing
conditions (particularly relating to financing) SHP Acquisition required.
Although there was a risk that SHP Acquisition would withdraw its bid,
soliciting bids for Sunstone while negotiating with SHP Acquisition, in the
Special Committee's view, maximized its alternatives and would most likely
deliver the greatest value to our stockholders.
The Special Committee decided to solicit offers to acquire Sunstone
under two scenarios: (1) by means of a purchase of Sunstone, subject to the
existing leases and management contracts, and (2) by means of a purchase of
Sunstone, Lessee and the Management Company on a combined basis. The Special
Committee authorized Goldman Sachs to contact, and Goldman
<PAGE>
33
Sachs subsequently contacted, 38 potential bidders, whom Goldman Sachs and the
Special Committee believed were the parties who might have an interest in, and
the ability to purchase, us.
Twenty of the 38 potential bidders that were contacted, including the
party that had previously requested information, indicated that they had a
possible interest in a purchase of us and executed confidentiality agreements.
Information packages regarding us and our properties were distributed to those
20 parties beginning April 29, 1999. The packages also contained instructions
asking each of the recipients to provide Goldman Sachs with an initial bid for
us by May 10, 1999. The instructions also requested that the bids be structured
either as an acquisition of us, subject to the existing lease and management
arrangements or as an acquisition of us, Lessee and the Management Company on a
combined basis, assuming a purchase price of $35 million for Lessee and the
Management Company. These packages included financial projections for us and
Lessee dated April 29, 1999 which were prepared by Lessee and the Management
Company (the "April 29 Projections"). SHP Acquisition also received the April
29 Projections.
APRIL 30 MEETING BETWEEN SHP ACQUISITION AND THE SPECIAL COMMITTEE. On
April 30, 1999, representatives of the Special Committee, SHP Acquisition and
Paine Webber met to discuss Paine Webber's proposed financing. Paine Webber
indicated that it had a long and excellent relationship with Westbrook and
discussed its plans for financing SHP Acquisition's proposal. Paine Webber
suggested that a full financing commitment with respect to the loan would not be
issued until two weeks after the meeting. Paine Webber indicated the amount of
the loan would not be finalized until certain due diligence and related reviews
of the properties were completed, which could take an additional 60 days after
the commitment was issued. In addition, Paine Webber described certain of the
conditions to its obligation to fund the proposed loan.
At the April 30, 1999 meeting, Goldman Sachs informed SHP Acquisition
that it had been instructed by the Special Committee to conduct a process which
would include soliciting other parties regarding their interest in purchasing
Sunstone in order to evaluate SHP Acquisition's proposal and our alternatives to
it. Goldman Sachs emphasized that the Special Committee had authorized material
negotiations with respect to SHP Acquisition's proposal only after the Special
Committee had received assurances that SHP Acquisition would obtain an
acceptable financing commitment.
Representatives of the Special Committee then asked SHP Acquisition to
extend its proposal to a future date. SHP Acquisition initially declined to do
so, but following discussions between Mr. Geller and Mr. Jonathan Paul of
Westbrook after the April 30, 1999 meeting, by letter dated April 30, 1999, SHP
Acquisition extended the date of its proposal to May 5, 1999. The letter was
publicly filed as an exhibit to a Schedule 13D statement by SHP Acquisition on
April 30, 1999.
On May 5, 1999, at the request of the Special Committee, by letter
dated May 5, 1999, SHP Acquisition again extended the expiration date of its
proposal, this time for an
<PAGE>
34
indefinite period. SHP Acquisition retained the right, however, to withdraw its
proposal at any time. The letter was publicly filed as an exhibit to a Schedule
13D statement by SHP Acquisition on May 5, 1999.
MAY 6 SPECIAL COMMITTEE MEETING. The Special Committee again met on May 6,
1999. Goldman Sachs and Altheimer & Gray described the status of SHP
Acquisition's proposal, its financing and the discussions that had taken place.
The Special Committee and its advisors were concerned with the lack of certainty
regarding the size of Paine Webber's commitment as well as the conditions to
such financing. As a result, the Special Committee instructed Goldman Sachs to
request that SHP Acquisition obtain a firmer financing commitment than that
being discussed and that SHP Acquisition make a significant cash deposit in
connection with the signing of any definitive acquisition agreement, which
deposit would be forfeited if the proposed acquisition failed to close due to
SHP Acquisition not receiving the required financing. Goldman Sachs also
reported that 17 of the 20 other potential bidders remained in the process and
that its own financial analysis of us was continuing, but was taking longer than
anticipated in light of our deteriorating financial position.
At the May 6 meeting, the Special Committee also determined that it
was essential for us to retain the services of Mr. Crowley, who was serving a
critical role in running Sunstone and assisting the Special Committee and its
advisors. In light of this, the Special Committee determined it would be
appropriate to provide additional compensation to Mr. Crowley. See "Certain
Relationships and Transactions -- Transaction Bonus Agreement with Mr. Crowley."
Between May 5 and May 16, 1999, Goldman Sachs and members of the
Special Committee continued their analysis of the financial performance and
operations of us and Lessee. The analysis indicated that the financial
performance of us and Lessee for the month of April were below budget, leading
us to be concerned about the ability of Lessee and Sunstone to meet their future
budgets and forecasts in the future.
INITIAL INDICATIONS OF INTEREST FROM OTHER POTENTIAL PURCHASERS. On May 9
and 10, 1999, Goldman Sachs received indications of interest from three
potential purchasers who had been provided with information packages about us.
No party indicated any interest in purchasing us subject to the existing leases
and management agreements. Each of the three expressed an interest in
purchasing us, together with Lessee and the Management Company. One of those
bidders offered $9.12 per share, assuming a purchase price of $35 million to
purchase Lessee and the Management Company, and would have deducted transaction
expenses in excess of $10 million. A second bidder offered $9.10 per share,
also assuming a purchase price of $35 million to purchase Lessee and the
Management Company, but did not disclose either its equity financing or its debt
financing arrangements. On May 12, 1999, following discussions to clarify their
proposals, these two bidders were notified by Goldman Sachs that their bids were
not competitive. After receiving the notification, both bidders withdrew from
the bidding process.
A third bidder ("Competing Bidder") provided a non-binding preliminary
proposal on May 10, 1999. Competing Bidder's proposal contained a price to
stockholders of between
<PAGE>
35
$10.50 and $11.00 per share assuming the acquisition of Lessee and the
Management Company for an additional $35 million. Competing Bidder's bid letter
stated that it also wished to examine an alternative structure under which it
would not acquire Lessee and the Management Company. Competing Bidder stated
that it would increase its purchase price to our stockholders by the difference
between $35 million and the actual cost of terminating the leases and the
incremental costs of engaging in an asset acquisition rather than a stock
acquisition. We proposed an alternative structure, whereby we would sell all of
our hotels to Competing Bidder which would allow termination of the lease and
management arrangements. Competing Bidder indicated that it would acquire the
hotels formerly owned by Kahler Realty Corporation in like-kind exchanges that
would not trigger the estimated $60 to 80 million tax on these hotels' built-in
gain.
MAY 16 SPECIAL COMMITTEE MEETING. The Special Committee again met on May
16, 1999. At this meeting, Mr. Geller reported on information furnished by Mr.
Crowley regarding the continuing deterioration of the financial performance of
our hotels. The Special Committee asked Mr. Crowley to monitor Lessee's
performance. The Special Committee considered securing the advice of an outside
asset manager to determine the reasons for the decline and to evaluate Lessee's
financial projections.
Goldman Sachs then reported to the Special Committee the status of the
bidding process, summarizing the indications of interest received and the fact
that two of the three bidders subsequently withdrew from the bidding. Goldman
Sachs noted some of the issues it encountered in obtaining bids and the concerns
of potential bidders. One issue was that Sunstone, due to additional borrowing
in light of our deteriorating financial performance coupled with our payment of
a first quarter dividend of 28.5 cents, owed more debt than had previously been
estimated and communicated to potential bidders. Another concern was the
ability of us and Lessee to achieve the financial result contained in the April
29 Projections under these changed circumstances.
Goldman Sachs and Altheimer & Gray discussed with the Special
Committee the status of SHP Acquisition's proposal, in particular the financing
commitment of Paine Webber. Goldman Sachs indicated that in its view the
proposed financing was aggressive but within market parameters. The Special
Committee was concerned about the relatively large proportion of debt financing
required by SHP Acquisition in order to accomplish the proposed transaction and
the number of conditions to the financing. The Special Committee was also
concerned that after the amount of Paine Webber's loan commitment was
determined, the proceeds of the loan might be insufficient to fund the
transaction. As a result of the uncertainty and conditions associated with Paine
Webber's commitment, the Special Committee viewed SHP Acquisition's bid as
highly conditional.
The Special Committee then considered Competing Bidder's indication of
interest, including its proposed alternative structure. Altheimer & Gray and
Goldman Sachs told the Special Committee that Competing Bidder was exploring use
of a Section 1031 like-kind exchange for the purchase of the hotels we acquired
from Kahler Realty Corporation. The Special Committee instructed its advisors
to continue to evaluate such structure and for Goldman Sachs to explore this
alternative with interested parties who were previously contacted.
<PAGE>
36
The Special Committee also discussed a draft of an agreement and plan
of merger prepared by Altheimer & Gray to be submitted to interested bidders,
including SHP Acquisition. After making comments and suggestions, the Special
Committee approved the form of agreement. The Special Committee also instructed
its advisors to keep all potential acquirors proceeding at as close to the same
pace as possible.
MAY 17 THROUGH MAY 24 CONTACTS BETWEEN THE SPECIAL COMMITTEE AND SHP
ACQUISITION AND COMPETING BIDDER. On May 17, 1999, Altheimer & Gray distributed
a draft of the merger agreement to SHP Acquisition and its counsel. On May 20,
1999, SHP Acquisition's counsel sent its initial comments to the merger
agreement.
In a letter dated May 24, 1999 from Competing Bidder to Goldman Sachs,
Competing Bidder indicated a preliminary price of $10.50 to $11.00 per share
under its proposed alternative structure which did not contemplate the purchase
of Lessee or the Management Company. In that letter, Competing Bidder stated
that it was willing to participate in an auction process so long as the process
included reimbursement of its out-of-pocket expenses. In subsequent discussions
with Goldman Sachs, Competing Bidder explained that it could not offer a higher
price as previously indicated in light of the increase in our projected debt.
Competing Bidder was also asked by Goldman Sachs to quantify the effect of our
increased debt on its original proposal, but Competing Bidder declined to do so.
MAY 25 SPECIAL COMMITTEE MEETING. The Special Committee again met on May
25, 1999. Goldman Sachs updated the Special Committee on the discussions with
SHP Acquisition and reviewed the process of soliciting other offers. They
reported that SHP Acquisition had indicated that due to our increased debt and
declining operating performance, in the event it were to enter into an agreement
with us, its price would likely be in the low end of the $9.50 to $10.00 range
indicated in SHP Acquisition's proposal letter of April 5, 1999. Goldman Sachs
also continued to express its concerns to the Special Committee about the extent
of the conditions to SHP Acquisition's proposal. Goldman Sachs then updated the
Special Committee about the May 24 letter of Competing Bidder, and informed the
Special Committee that it had contacted the other parties that had indicated an
interest in purchasing us and suggested to them the alternative structure being
examined by Competing Bidder. None of the other bidders indicated any interest
in pursuing this strategy or remained interested in pursuing any transaction
involving us.
Mr. Crowley then reported in detail about our financial condition. He
stated that the financial results for the month of May would mostly likely be
significantly lower than budgeted, and May's results would show a larger decline
from budget than the decline in April. Mr. Crowley also stated that without a
sale of assets it was most likely that we would only be able to pay a second
quarter dividend significantly less than the $0.285 per share dividend paid in
the first quarter, if at all. The Special Committee determined that it should
appoint an asset manager not affiliated with us, Lessee or the Management
Company to examine why our performance was below that contemplated by the April
29 Projections and to assess the probability of our achieving our projections
for the remainder of 1999. We authorized Altheimer & Gray to retain on our
behalf Mr. Vern Deming as a consultant to perform that analysis and assist us by
<PAGE>
37
preparing a set of projections independent of our management and that of Lessee
and the Management Company as part of our due diligence to be used in addition
to those prepared by Lessee. Mr. Deming is a consultant with twenty-three years
experience in the hospitality industry in both management and consulting
capacities. Mr. Deming is an Executive Vice President of, and had previously
provided asset management services for, Strategic Hotel Capital Incorporated, of
which Mr. Geller is Chief Executive Officer.
Goldman Sachs was asked to update the Special Committee on its ongoing
financial analysis of us. Goldman Sachs requested that we provide it with
revised projections, due to our failure to meet targets contained in the April
29 Projections.
The Special Committee then discussed developments regarding SHP
Acquisition's proposal. Additionally, the Special Committee discussed and
solicited Goldman Sachs' opinion of the seriousness of Competing Bidder.
Because of the conditions to SHP Acquisition closing its proposed merger, the
proposed termination fee of 3% of the transaction value, the required payments
for Lessee and the Management Company associated with SHP Acquisition's proposal
and the uncertainty of Paine Webber's proposed financing, and in the context of
the ongoing discussions and indications of Competing Bidder, the Special
Committee determined that it would continue to negotiate with both SHP
Acquisition and Competing Bidder. Goldman Sachs was instructed to set up a
procedure where both SHP Acquisition and Competing Bidder would submit firm
offers to purchase Sunstone by a set date. The Special Committee requested
Goldman Sachs to ask Competing Bidder whether it would make a firm bid with
respect to us that was not contingent on financing as part of that process.
With respect to the request for expense reimbursement described in Competing
Bidder's letter, the Special Committee also agreed to pay up to $2 million of
any bidder's expenses upon the receipt of a firm bid from the bidder, subject to
certain conditions, if its bid was not accepted.
NEGOTIATIONS WITH SHP ACQUISITION AND COMPETING BIDDER. Goldman Sachs
notified representatives of SHP Acquisition on May 25, 1999 that the Special
Committee had determined that its proposal was not acceptable in its present
form. SHP Acquisition reiterated its position that it would strongly prefer not
to enter into a bidding process, but that it was amenable to continuing to
negotiate its proposal.
On May 28, 1999, Goldman Sachs sent Competing Bidder final bid
instructions which included a June 17, 1999 deadline for a bid that was not
subject to a financing contingency and an offer of expense reimbursement of up
to $2.0 million if Competing Bidder submitted such a bid by that date that
offered a price no less favorable than that set forth in its May 24 letter.
Competing Bidder stated that it would need more time in order to complete its
financing arrangements, and discussions between Competing Bidder and Goldman
Sachs continued regarding the amount of time it would need to complete its bid
and elements of a revised proposal.
JUNE 1 SPECIAL COMMITTEE MEETING. Goldman Sachs met with the Special
Committee on June 1, 1999 to discuss the progress of the discussions between
Goldman Sachs and each of SHP Acquisition and Competing Bidder.
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38
With respect to SHP Acquisition, Goldman Sachs reported that SHP
Acquisition had indicated that if a definitive agreement were reached, it would
consider making concessions including with respect to price, size of termination
fee and the Special Committee's request that SHP Acquisition provide a deposit.
Goldman Sachs also reported that SHP Acquisition again stated that it could
withdraw its offer at any time. The Special Committee was of the view that,
although it would not accept SHP Acquisition's proposal in its present form at
that time, it wished to continue simultaneously to negotiate with both SHP
Acquisition and Competing Bidder. To that end, the Special Committee authorized
Altheimer & Gray to send a merger agreement to Competing Bidder for its
consideration and to continue negotiating with SHP Acquisition and Competing
Bidder. A proposed agreement, reflecting Competing Bidder's proposed
alternative structure, was sent by Altheimer & Gray to Competing Bidder on June
4, 1999.
JUNE 7 SPECIAL COMMITTEE MEETING. The Special Committee again met on June
7, 1999. At the meeting, Goldman Sachs reviewed its continued discussions with
Competing Bidder. Goldman Sachs noted Competing Bidder's position that it be
reimbursed for expenses even if it did not deliver a firm bid or delivered a bid
with a financing contingency. Goldman Sachs was concerned that this request
raised questions as to Competing Bidder's willingness to actually consummate a
transaction. Goldman Sachs also communicated Competing Bidder's concerns that
the June 17 deadline did not give it sufficient time to submit a fully financed
bid. Goldman Sachs then discussed the recent developments with SHP Acquisition,
noting that SHP Acquisition had indicated that it might be prepared to revise
its offer to $10.125 per share, assuming that the dividend with respect to the
second quarter of 1999 would not be paid. Goldman Sachs also detailed other
elements which SHP Acquisition had indicated it might be prepared to agree to in
the event a definitive agreement was reached, including providing additional
equity as long as the proposed debt financing of Paine Webber reached a minimum
amount, making a deposit and potentially reducing the purchase price for Lessee
and Management Company. Goldman Sachs noted, however, that the price SHP
Acquisition had indicated it might be prepared to offer was still less than
Competing Bidder's indicated price. The Special Committee again discussed other
alternatives to SHP Acquisition's proposal or negotiating with Competing Bidder,
including keeping us independent. The Special Committee determined to continue
negotiations with SHP Acquisition and Competing Bidder. Additionally, since
each of SHP Acquisition and Competing Bidder had indicated to Goldman Sachs that
it would not be able to provide firm financing commitments by June 17, the
Special Committee determined to extend the deadline date for bids until July 9,
1999. The Special Committee also determined to offer Competing Bidder and SHP
Acquisition up to $2 million of expense reimbursement, subject to certain
conditions, to ensure their continued participation in the process.
On June 11, 1999 the Special Committee and its advisors received our
revised projections which were prepared by Lessee and the Management Company
(the "June 11 Projections") and which updated the April 29 Projections based on
our recent financial performance. The June 11 Projections were furnished to
Competing Bidder and SHP Acquisition. As part of his work for the Special
Committee, Mr. Deming, our independent
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39
consultant, reviewed, among other things, the June 11 Projections. Mr. Deming
also reviewed the preparation of the June 11 Projections.
SHP Acquisition was informed in a letter dated June 11, 1999 and
Competing Bidder was informed in letter dated June 15, 1999 of a revised final
bidding process establishing July 9, 1999 as the revised final bid date,
although the Special Committee expressly retained the option to sign an
agreement with any party or terminate the bid process at any time. Each letter
contemplated expense reimbursement of up to $2 million to either party, subject
to certain conditions. Competing Bidder's letter also provided up to $750,000
of expense reimbursement under certain other conditions in the event it did not
meet the conditions for the $2 million reimbursement.
CONTINUING NEGOTIATIONS WITH SHP ACQUISITION. Between June 8 and June 22,
1999, the Special Committee and SHP Acquisition's representatives continued to
negotiate the terms of a merger agreement. A revised draft of Paine Webber's
proposed commitment letter with respect to the proposed financing was sent to
Altheimer & Gray and Goldman Sachs on June 15, 1999. Members of the Special
Committee indicated to SHP Acquisition their continuing concerns with the
conditions to funding under the draft commitment. The negotiations included a
meeting among Mr. Geller, Mr. Gould and Mr. Kazilionis on June 8, 1999 during
which the participants discussed the process and procedures relating to SHP
Acquisition's proposal. During this period, SHP Acquisition indicated that it
would be willing to consider making a $5 million deposit to be forfeited if
Paine Webber withdrew its commitment and that SHP Acquisition's purchase of
Lessee and the Management Company need not be a condition to SHP Acquisition's
closing the merger.
On June 23, 1999, representatives of the Special Committee and SHP
Acquisition again met to continue negotiations regarding the significant open
issues with respect to SHP Acquisition's proposal (other than price), in light
of SHP Acquisition indicating that it might withdraw its proposal prior to July
9, 1999, the date final bids were due. SHP Acquisition also discussed changes
to Paine Webber's proposed financing commitment that addressed some of the
Special Committee's concerns regarding the conditional nature of the proposed
financing. SHP Acquisition confirmed that Paine Webber had agreed to provide at
least $454 million in debt financing for the proposed acquisition, and might be
willing to fund up to $502 million pending completion of Paine Webber's due
diligence. SHP Acquisition also indicated that it might be prepared to withdraw
its request that Messrs. Alter and Biederman could require a third party
purchaser of us to purchase the shares of Lessee and the Management Company in
the event a third party purchased us, but that we would retain the option to
purchase all of the outstanding shares of Lessee and the Management Company.
However, SHP Acquisition was not prepared to make requested concessions on
certain other items with respect to financing (including the termination date of
the proposed commitment), matters regarding the nonsolicitation provisions, the
termination fee and our representations and warranties in the draft Merger
Agreement.
JUNE 24 SPECIAL COMMITTEE MEETING. The Special Committee met on June 24,
1999 to discuss the previous day's meeting. Specifically, the Special Committee
was concerned
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40
that Paine Webber's commitment would expire on October 29, 1999, as the Special
Committee was advised that we would likely not be able to consummate a
transaction by that date.
The Special Committee was briefed on, and continued to question and be
concerned by, our operating performance, particularly the general decline in the
industry and Goldman Sachs stated that it would be able to complete its
financial analysis of us after it obtained the projections being prepared by Mr.
Deming.
The Special Committee then had an extended discussion on the possible
effects of signing or not signing an agreement with SHP Acquisition prior to the
July 9 date. The Special Committee also discussed the material unresolved
issues with SHP Acquisition. The Special Committee unanimously directed its
advisors to continue negotiations with SHP Acquisition and to inform Competing
Bidder that it might be required to accelerate the submission of a bid in order
for that bid to be considered.
Negotiations with SHP Acquisition continued from the 25th through the
28th of June. On June 25, 1999, SHP Acquisition responded to the Special
Committee's request for its best price by indicating that in the event it could
enter into an agreement by July 2, 1999, it believed it would be in the position
to pay $10.35 per share (provided we did not pay a second quarter dividend) less
any amounts of expense reimbursements paid to third parties, reduce the
termination fee to $25 million and address certain other concerns of the Special
Committee, including the provision of a $7.5 million deposit that would be
payable to us if Paine Webber defaulted on its loan commitment. SHP Acquisition
indicated that it could not make certain concessions requested by the Special
Committee concerning our proposed representations, warranties and covenants.
On June 26, 1999, representatives of Competing Bidder provided the
advisors to the Special Committee with a brief outline of a proposed change in
their acquisition structure, which eliminated the need for a Section 1031 like-
kind exchange. On June 27, 1999, Goldman Sachs requested that Competing Bidder
submit its bid by July 2, 1999. In response, Competing Bidder indicated that it
would not be prepared to submit a definitive bid until July 9, 1999.
JUNE 29 SPECIAL COMMITTEE MEETING. On June 29, 1999, Mr. Geller and
Goldman Sachs updated the Special Committee on the recent operating performance
of Sunstone and a new set of projections dated June 28, 1999 that had been
prepared by our independent consultant, Mr. Deming (the "June 28 Projections").
The members of the Special Committee discussed the June 28 Projections, which
were less favorable than our June 11 Projections, which, in turn, were less
favorable than the April 29 Projections. Based on the historic and continuing
performance of Lessee and Sunstone relative to the April 29 Projections and the
June 11 Projections, the Special Committee instructed Goldman Sachs to rely only
on the June 28 Projections for purposes of its financial analysis of us.
The Special Committee then considered the status of the two proposals
from SHP Acquisition and Competing Bidder. Goldman Sachs summarized its June 25
discussions with SHP Acquisition.
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41
Goldman Sachs then discussed the status of Competing Bidder's bid and
the fact that Competing Bidder would not be in a position to make a definitive
offer until the July 9 date previously established by the Special Committee.
The Special Committee discussed the risk that SHP Acquisition withdraw or
adversely modify its bid if negotiations extended past July 2, 1999. The
Special Committee instructed Goldman Sachs to ascertain the status of Competing
Bidder 's proposal, including price, financing and conditions to its offer while
simultaneously requesting that SHP Acquisition commit to make a definitive bid
on July 9, 1999.
On June 30, 1999, Goldman Sachs met with the representatives of
Competing Bidder. At the meeting, Competing Bidder indicated that the declining
financial position of Sunstone was not of particular concern, and that it was
impressed with our hotel properties following its visits to them. In response to
Goldman Sachs' inquiries, Competing Bidder reiterated that it expected to make a
definitive offer on July 9, 1999 in the price range previously indicated under
its alternative structure that did not contemplate the purchase of Lessee or the
Management Company and that its offer would be a firm, fully financed bid that
would be attractive to the Special Committee and in the best interest of our
shareholders.
JULY 1 SPECIAL COMMITTEE MEETING. On July 1, 1999, Goldman Sachs
summarized for the Special Committee its discussions with SHP Acquisition and
Competing Bidder, including the results of its June 30 meeting with Competing
Bidder. Goldman Sachs then contrasted the offer it expected to receive from
Competing Bidder, against the terms being discussed with SHP Acquisition.
Goldman Sachs noted, however, that SHP Acquisition had indicated that it might
withdraw or adversely modify the revised terms being discussed if a definitive
agreement were not signed by July 2, 1999.
The Special Committee determined not to accept any offer until the
July 9 bid deadline. Instead, it instructed Goldman Sachs to communicate to SHP
Acquisition that, although it could not enter into a definitive agreement at
that time, the Special Committee requested that SHP Acquisition submit its best
and final offer on July 9, stressing that the Special Committee was obligated
to explore all available alternatives to SHP Acquisition's proposal that would
maximize stockholder value, and that it would not be prepared to recommend SHP
Acquisition's proposal until the Special Committee had determined whether
another bid offering higher value was forthcoming.
Goldman Sachs communicated this to SHP Acquisition later that same
day, and Altheimer & Gray sent a revised draft of the merger agreement to
Simpson Thacher & Bartlett on July 2, 1999.
FURTHER NEGOTIATIONS WITH COMPETING BIDDER AND SHP ACQUISITION. On July 1
and 2, Altheimer & Gray held conversations with Competing Bidder's counsel
regarding the structure and timing of Competing Bidder's proposal. On July 6, 7
and 8 Competing Bidder's advisors also conducted further due diligence.
Competing Bidder delivered the initial draft of its Asset Purchase Agreement to
Altheimer & Gray on July 8, 1999.
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42
On July 6, 1999, a principal of SHP Acquisition called Mr. Geller
regarding the status of the Special Committee's deliberations. Mr. Geller
encouraged SHP Acquisition to submit a bid on July 9 containing terms no less
favorable to Sunstone than those that had been previously discussed.
SUBMISSION OF FINAL BIDS. On July 9, 1999, both Competing Bidder and SHP
Acquisition submitted formal bids. In contrast to its prior statements,
Competing Bidder offered $10.00 per share for the common stock of Sunstone under
its alternative structure and did not, in effect, permit us to pay any
dividends. Competing Bidder's bid made receiving adequate financing a condition
of its transaction, and its financing proposal was subject to a number of
significant conditions, including completion of lender due diligence which had
not yet begun. SHP Acquisition offered $10.35 per share less transaction
expenses (including expense reimbursement of bidders) in excess of $10 million,
provided that we did not pay any more dividends. SHP Acquisition's bid was
otherwise generally consistent with its prior positions in its negotiations with
the Special Committee. In a letter dated July 9, 1999 following submission of
its bid, SHP Acquisition clarified that we could retain a $25 million deposit or
that it would obtain alternative financing if Paine Webber refused to fund the
loan for other than agreed upon reasons. The loan commitment from Paine Webber
had also been extended to November 23, 1999.
JULY 10 SPECIAL COMMITTEE MEETING. On July 10, 1999, Goldman Sachs
summarized for the Special Committee the bids of each of Competing Bidder and
SHP Acquisition. Goldman Sachs noted that Competing Bidder's bid was
conditioned on receiving adequate financing with no money at risk and that, at
Competing Bidder's option, a portion of the consideration could be paid as a
dividend to our stockholders.
The Special Committee then extensively discussed and questioned
Goldman Sachs and Altheimer & Gray regarding the issues relating to SHP
Acquisition's and Competing Bidder's proposals. Goldman Sachs stated to the
Special Committee that when compared to Competing Bidder's proposal, SHP
Acquisition's proposal provided a higher price, better overall economics and
fewer conditions to closing. The Special Committee also discussed having
Sunstone remain independent. Following deliberations, the Special Committee
agreed with the recommendation of Goldman Sachs to have Goldman Sachs contact
SHP Acquisition for clarification of issues regarding the payment of dividends,
transaction expenses and consents. The Special Committee also instructed
Altheimer & Gray to complete the documentation required for a transaction with
SHP Acquisition. The Special Committee also requested that Goldman Sachs
contact Competing Bidder to clarify why its bid was so materially different than
what it previously indicated and previously reconfirmed and to confirm that this
was its best and final offer.
Goldman Sachs then contacted Competing Bidder and Competing Bidder
stated that it would not increase its price.
On July 10, 11 and 12, 1999, representatives of the Special Committee
and SHP Acquisition continued to negotiate the remaining open issues with
respect to SHP Acquisition's
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43
bid. In those negotiations, the parties agreed that, in lieu of a third quarter
dividend payment, each of our stockholders would be paid, as additional merger
consideration, an amount equal to its proportionate share of 50% of the increase
in our cash balance on the date five business days prior to the merger as
compared to our cash balance on June 30, 1999, in each case as calculated as
provided in the merger agreement. The stockholders would, however, be paid a
total of $2.5 million, or approximately 6 cents per share, even if the increase
were less than that amount.
JULY 12 SPECIAL COMMITTEE MEETING. On July 12, 1999, Goldman Sachs
reported to the Special Committee on the result of its negotiations with SHP
Acquisition since July 10, 1999 and its conversation with Competing Bidder.
Goldman Sachs also reviewed the process undertaken since receipt of SHP
Acquisition's proposal on April 5, 1999, the analysis performed by Goldman
Sachs, and the June 28 Projections as well as actual financial results.
The Special Committee considered its alternatives to accepting SHP
Acquisition's bid and the attendant risks and benefits. It discussed the
challenges facing Sunstone should we determine to remain independent. These
issues included lack of access to capital, our recent operating performance, the
fact that our stock had under-performed the stock of our peers, a lack of
understanding by the public markets of the capital expenditures incurred in
connection with our renovation program and the issues resulting from our
relationship with Lessee and the Management Company. Goldman Sachs then
discussed other alternative transactions available to us, noting that there was
no interest in the market in acquiring Sunstone subject to the leases on its
properties and that the sale of assets alternative bid on by Competing Bidder
did not yield a higher price to us and was a less certain transaction.
Goldman Sachs reviewed the process it had gone through in evaluating
SHP Acquisition's proposal and our alternatives and stated to the Special
Committee that it believed that the process undertaken by the Special Committee
and its advisors represented a very thorough marketing effort. Goldman Sachs
had contacted parties it believed were qualified and potentially interested, and
had structured a process designed to obtain the highest price for our
stockholders. Goldman Sachs noted several areas in which the current SHP
Acquisition bid was superior to SHP Acquisition's original proposal, especially
considering the decline in our financial performance during the intervening
period. The Special Committee then extensively discussed SHP Acquisition's
proposal and compared it to Competing Bidder's proposal. The Special Committee
considered the significant conditions to closing associated with Competing
Bidder's proposal to be a fundamental issue. Furthermore, the Committee did not
see how the Competing Bidder's transaction could deliver more value to our
stockholders, especially in light of the fact that Competing Bidder's final
proposal was at a per share price lower than SHP Acquisition's proposal and
effectively precluded us from paying any further dividends.
Goldman Sachs reviewed in detail its financial analysis of SHP
Acquisition's bid. Following its presentation and subsequent discussion with
the members of the Special Committee, Goldman Sachs stated that in its opinion,
as of July 12, 1999 and based upon the assumptions made, matters considered and
limitations on the review undertaken in connection with such opinion, and the
Merger Consideration to be received by the holders of shares of
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44
common stock, was fair from a financial point of view to our stockholders (other
than the Related Persons).
Following discussions among the members of the Special Committee after
being advised by and asking questions of Goldman Sachs and Altheimer & Gray, the
members of the Special Committee unanimously approved entering into each of the
Merger Proposals and recommended that the full Board of Directors approve them.
BOARD OF DIRECTORS MEETING. Following the meeting of the Special
Committee, a meeting of our Board of Directors was convened. The Special
Committee recommended that we enter into each of the Merger Proposals. The
Board of Directors unanimously approved and adopted resolutions relating to each
of the Merger Proposals which, among other things, authorized us to enter into
the merger agreement, as well as resolutions that we pay a success bonus to Mr.
Terry Crowley and approving the fees to be paid to the members of the Special
Committee. The Board of Directors also approved and adopted resolutions
permitting the Special Committee to continue in operation with regard to
oversight of expenditures that could result in an adjustment to the Merger
Consideration, including with regard to certain third party consents and capital
expenditures and other issues arising from the merger agreement, as well as the
power to enter into any amendments or waivers with respect to the merger
agreement.
Following further minor negotiations with respect to the merger
agreement and the related documents, the parties executed the merger agreement
and related documents on July 13, 1999 and issued a press release announcing the
transaction.
PURPOSE AND STRUCTURE OF THE MERGER
PURPOSE. The purpose of effecting the merger at this time is to:
- enable SHP Acquisition and SHP Investors Sub to acquire the entire
equity interest in Sunstone, and
- to provide the Nonaffiliated Stockholders with an opportunity to
liquidate their investment in us for cash at a significant premium to
the market prices for the common stock prior to the announcement of
SHP Acquisition's initial acquisition offer and at the Liquidation
Preference per share of preferred stock.
SHP Acquisition determined that it was an appropriate time to make its
acquisition offer to us based on its knowledge of the real estate industry, its
belief that the trading price of our common stock undervalued us and our assets
and its desire to take advantage of the benefits described below under "--
Benefits and Detriments of the Merger to SHP Acquisition."
STRUCTURE. The transaction was structured as a sale of our interest in the
Operating Partnership by means of a merger of a subsidiary of SHP Acquisition
with and into the Operating Partnership followed by the merger of SHP Investors
Sub with and into us. We and SHP Acquisition believed this structure to be the
most efficient means to transfer the assets of and
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45
entire equity interest in us to SHP Acquisition and to provide the Nonaffiliated
Stockholders with cash for their common stock.
BENEFITS AND DETRIMENTS OF THE MERGER TO SHP ACQUISITION
Following the merger, SHP Acquisition will become the beneficiary of
any future earnings growth and any increase in our value. SHP Acquisition
believes the value of Sunstone as the surviving entity will be enhanced
following the merger (which will benefit SHP Acquisition) by the following:
- by becoming a private company (which will occur as a result of the
merger), we will have access to capital from our controlling investor
rather than being dependant upon the cyclical public capital markets
- by becoming a private company, we will be able to emphasize growth and
operating cash flow without the constraint of the public market's
emphasis on quarterly earnings;
- by deciding to cease operating Sunstone as the surviving company as a
REIT (see "-- Plans for Sunstone After the Merger"), the need to
comply with the distribution requirements imposed by tax laws
applicable to REITs will be eliminated, thereby increasing our ability
to retain capital;
- by combining our operations with those of Lessee and the Management
Company (which will be permitted when we cease to operate as a REIT),
we will be able to eliminate certain conflicts and inefficiencies of
the current organizational structure (see "-- Plans for Sunstone After
the Merger"), resulting in a more efficient operating entity; and
- by eliminating the costs associated with our public ownership, the
overall operational and administrative costs of Sunstone as the
surviving company will be reduced.
The detriments of the completion of the merger to SHP Acquisition are:
- the significant cash outlay by SHP Acquisition required to complete
the merger;
- the inability of Sunstone as the surviving company to pay for
acquisitions with publicly traded securities; and
- the inability of Sunstone as the surviving company to grant options to
its employees exercisable for publicly traded securities.
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46
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS; FAIRNESS OF
THE MERGER
At a meeting held on July 12, 1999, the Special Committee unanimously
(i) determined that the terms of the merger are fair to, and in the best
interests of, us and the Nonaffiliated Stockholders, and (ii) recommended that
the Board of Directors approve the merger agreement, declare the merger to be
advisable and approve each of the Merger Proposals. At a meeting of the Board of
Directors held on July 12, 1999, all of the Directors, based on the
recommendation of the Special Committee, among other things:
- determined that the merger is fair and reasonable to, and in the best
interests of, the Nonaffiliated Stockholders and declared the merger
advisable;
- authorized our officers to call a special meeting of our stockholders
for purposes of approving the Merger Proposals;
- determined to recommend to our stockholders that they vote to approve
the Merger Proposals; and
- authorized our officers to execute the merger agreement and related
documents.
See "Matters Relating to the Merger Proposals -- Background of the Merger."
THE SPECIAL COMMITTEE. In determining to recommend to the Board of
Directors that it approve the merger agreement and declare the merger to be
advisable, and in determining that the merger was fair to, and in the best
interests of, the Nonaffiliated Stockholders, the Special Committee considered
both potential positive and negative factors. Among the positive factors
considered were the following factors, each of which, in the Special Committee's
view, supported the Special Committee's determination to recommend the merger:
- its determination, after consultation with its independent financial
advisor, that the Merger Consideration presented greater value to the
Nonaffiliated Stockholders than they were likely to realize by:
-- any alternative sale proposed by any other bidder for us;
-- continuing to operate us as an independent company (especially
considering issues regarding our recent difficulties in obtaining
financing, our recent operating performance and the inherent
structural limitations of our relationship with Lessee and the
Management Company); or
-- conducting an orderly liquidation of Sunstone through an asset
sale strategy;
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47
- we had thoroughly explored the market interest in an acquisition of
us, through the efforts on our behalf by Goldman Sachs to solicit
indications of interest to purchase all or part of our business, which
efforts included contacting 38 potential acquirors and extended over
nearly three months;
- that, based on:
-- its negotiations with other parties that expressed interest or
made offers to acquire us which, among other things, led to
significant improvements in SHP Acquisition's offer, and
-- the extensive efforts made by the Special Committee to negotiate
and execute a merger agreement favorable to us and the
Nonaffiliated Stockholders;
the Merger Consideration together with the other terms set forth in
the merger agreement represented the best of the available
alternatives;
- historical data relating to market prices of our common stock,
including data that indicated that, assuming the Merger Consideration
would be $10.41 per share, the Merger Consideration represents an
approximately 44.18% premium to the average closing price of our
common stock on the New York Stock Exchange of $7.22 over the 30-day
period prior ending on and including April 5, 1999 (the day prior to
the date SHP Acquisition's initial cash offer was made and disclosed);
- the opinion dated July 12, 1999 of Goldman Sachs, independent
financial advisor to the Special Committee, that, as of such date, and
based upon the assumptions made, matters considered and limitations on
review undertaken in connection with such opinion, as set forth
therein, that the Merger Consideration to be received by our
stockholders who are not Related Persons was fair from a financial
point of view to those holders;
- that SHP Acquisition, upon signing the merger agreement, posted a
letter of credit in the amount of $25 million to secure the
performance of certain of its obligations under the merger agreement;
- the increased likelihood of consummation of the merger by SHP
Acquisition and SHP Investors Sub because of the delivery of the
letter of credit described above and the limited number and nature of
the conditions to their obligations to close, including:
-- that SHP Acquisition has received a commitment to fund $454
million (subsequently increased to $495 million) of the purchase
price from Paine Webber, and that the financing commitment
subjects the financing to only limited conditions; and
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48
-- that the existence of litigation relating to the merger, other
than any such litigation resulting in the granting of injunctive
relief that prevents consummation of the merger, will not cause a
failure of the conditions;
- although Sunstone is restricted from paying dividends under the merger
agreement, the Merger Consideration will be increased by half of the
increase of our available cash from June 30, 1999 until the fifth
business day prior to the closing, as calculated as provided in the
merger agreement, which increase will be not less than approximately 6
cents per share, subject to adjustments which may decrease the amount
of the Merger Consideration (See "The Merger and the Merger Agreement
(Item No. 1) -- Merger Consideration");
- the other terms and conditions of the merger agreement, including the
scope of the parties' representations, warranties, covenants and
agreements and the right of the Board of Directors to withdraw or
modify its recommendation if we receive an unsolicited superior
acquisition proposal that we desire to accept (See "The Merger and
Merger Agreement (Item No. 1) -- Termination; Withdrawal of
Recommendations"); and
- the approval of the merger will require the affirmative vote of the
holders of approximately __% of the shares held by the Nonaffiliated
Stockholders, assuming all other stockholders vote for each of the
Merger Proposals.
The material negative factors, which the Special Committee viewed as
insufficient to outweigh the positive factors, were:
- that, following the merger, the Nonaffiliated Stockholders would not
benefit from our future earnings growth or increase in value, should
either of these events occur;
- the potential conflicts of interest of certain of our officers and
Directors in connection with the merger; and
- that a Nonaffiliated Stockholder will recognize a taxable gain upon
completion of the merger if the amount of cash that the Nonaffiliated
Stockholder receives in the merger exceeds its tax basis in its common
stock.
The Special Committee believes that the merger is procedurally fair
because:
- the Special Committee consisted of disinterested Directors appointed
to represent the interests of, and to negotiate on an arm's-length
basis with all potential acquirors (including SHP Acquisition) on
behalf of, the holders of common stock;
- the Special Committee retained and was advised by independent outside
legal counsel;
<PAGE>
49
- the Special Committee retained and was advised by Goldman Sachs, as
its independent financial advisor; and
- the Company thoroughly explored the interest of other potential
acquirors in entering into a transaction with Sunstone.
In light of the number and variety of factors the Special Committee
considered in connection with its evaluation of the merger, the Special
Committee did not find it practicable to assign relative weights to the
foregoing factors; accordingly, the Special Committee did not do so.
In addition, the Special Committee believes that the merger is
procedurally fair because the price and the other terms and conditions of the
merger agreement resulted from active arm's-length bargaining between the
Special Committee and SHP Acquisition.
THE BOARD OF DIRECTORS. The Board of Directors, at its July 12, 1999
meeting, considered the unanimous recommendation of the Special Committee, the
opinions of the independent financial advisor as to the fairness of the Merger
Consideration from a financial point of view, as well as the other factors
(enumerated above) considered by the Special Committee, and determined that the
merger is fair to, and in the best interests of, the stockholders, approved and
adopted the Merger Proposals, and recommended that the stockholders vote to
approve and adopt the Merger Proposals. The vote of the Directors to authorize
and approve the Merger Proposals was unanimous, and a majority of the Directors
voting were not employees of, or otherwise affiliated with (other than as
Directors), us. The Board of Directors considered the recommendation of the
Special Committee but made its own evaluation, based on the factors enumerated
above, of the substantive and procedural fairness of the Merger Proposals.
The foregoing discussion of the information and factors considered by
the Special Committee and the Board of Directors is not intended to be
exhaustive but includes all material factors considered by them in making their
respective decisions. In view of the variety of factors considered in connection
with their evaluation of the merger, the Special Committee and the Board of
Directors did not find it practicable to, and did not, quantify or otherwise
attempt to assign relative weights to the specific factors considered in
reaching their respective determinations. In addition, individual members of the
Special Committee or of the Board of Directors may have given different weight
to different factors. In the course of their deliberations, neither the Special
Committee nor the Board of Directors established a range of values for us;
however, based on the factors outlined above and on the presentation and opinion
of Goldman Sachs, the Special Committee and the Board of Directors determined
that the merger agreement and the merger are fair to, and in the best interests
of, Sunstone and the Nonaffiliated Stockholders.
The Board of Directors also considered the interests described under
"Matters Relating to the Merger Proposals -- Interests of Certain Persons in
Matters to be Acted Upon" that certain Directors and members of management have
in the merger. The Board concluded that
<PAGE>
50
the fact that existing stock options previously granted to Directors and
management will accelerate and be converted into cash as a result of the merger,
and that certain members of management will receive payments as a result of the
merger, all as described under "Matters Relating to the Merger Proposals --
Interests of Certain Persons in Matters to be Acted Upon," were reasonable in
the context of the entire transaction.
The Board of Directors considered the significant equity to be held in
SHP Acquisition by affiliates of Messrs. Alter and Biederman and the employment
agreements they have entered into with SHP Acquisition. The Board concluded that
these arrangements were reasonable in the context of the entire transaction in
light of the fact that they were the product of arm's length negotiations
between the individuals involved and affiliates of Westbrook.
BENEFITS AND DETRIMENTS TO NONAFFILIATED STOCKHOLDERS
We, SHP Acquisition and SHP Investors Sub believe that the merger will
result in the following benefits to Nonaffiliated Stockholders:
- they will realize the value of their investment in our company in cash
at a price which represents a substantial premium to the market price
for the common stock prior to the announcement of SHP Acquisition's
initial cash offer of $9.50 to $10.00 per share; and
- it will eliminate the risk of a decline in the value of their
investment in our company in the depressed market for public REITs.
The primary detriment of the merger to Nonaffiliated Stockholders is that they
will not have an opportunity to continue their equity interest in our company as
an ongoing concern. This means they will not share in the future earnings and
potential growth, if any, of our company or its properties, or benefit from any
increases in the value of our company, if any. Nonaffiliated Stockholders also
will recognize a taxable gain upon the completion of the merger if the amount of
cash such Nonaffiliated Stockholders receive in the merger exceeds their tax
basis in their common stock. See "Matters Relating to the Merger Proposals --
Material Federal Tax Consequences."
OPINION OF THE INDEPENDENT FINANCIAL ADVISOR
On July 12, 1999, Goldman Sachs delivered its oral opinion to the
Special Committee that, as of the date of such opinion, and based upon the
assumptions made, matters considered and limitations on review undertaken in
connection with such opinion, as set forth therein, the Merger Consideration to
be received by the holders of shares of common stock was fair from a financial
point of view to our stockholders (other than the Related Persons). Goldman
Sachs subsequently confirmed its oral opinion by delivery of its written opinion
dated July 12, 1999.
<PAGE>
51
The full text of the written opinion of Goldman Sachs, dated July 12,
1999, which sets forth assumptions made, matters considered and limitations on
the review undertaken in connection with the opinion, is attached as Appendix B
to this Proxy Statement. Holders of shares of common stock are urged to, and
should, read such opinion in its entirety.
In connection with its opinion, Goldman Sachs reviewed, among other
things:
- the merger agreement;
- the Lessee/Manager Agreement, dated as of July 12, 1999, among us, the
Operating Partnership, Messrs. Alter and Biederman, Lessee and the
Management Company;
- our Annual Reports to stockholders and Annual Reports on Form 10-K for
the three years ended December 31, 1996, 1997 and 1998;
- certain interim reports to stockholders and our Quarterly Reports on
Form 10-Q;
- certain other communications from us to our stockholders; and
- certain internal financial analyses and forecasts for us, including:
(i) projections, dated November 1998, prepared by outside consultants,
Hospitality Valuation Services; (ii) projections, dated April 29,
1999, prepared collectively by Lessee and the Management Company and
reviewed by our management; (iii) projections, dated June 11, 1999,
prepared collectively by Lessee and the Management Company and
reviewed by our management; and (iv) projections, dated June 28, 1999,
prepared by independent consultants hired by our management at the
direction of the Special Committee.
Goldman Sachs also held discussions with members of the Special
Committee and the management of Sunstone and Lessee regarding our past and
current business operations, financial condition and future prospects. In
addition, Goldman Sachs:
- reviewed the reported price and trading activity for the shares of
common stock;
- compared certain financial and stock market information for us with
similar information for certain other companies the securities of
which are publicly traded;
- reviewed the financial terms of certain recent business combinations
in the hospitality and real estate industries specifically and other
industries generally; and
- performed such other studies and analyses as it considered
appropriate.
<PAGE>
52
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and has assumed such accuracy and
completeness for purposes of rendering its opinion. In that regard, for purposes
of the opinion and the related analysis, the Special Committee instructed
Goldman Sachs to rely on the June 28 Projections, and accordingly Goldman Sachs
has assumed that the June 28 Projections were reasonably prepared. In addition,
Goldman Sachs did not make an independent evaluation or appraisal of the assets
and liabilities of us or any of our subsidiaries.
The advisory services and the opinion of Goldman Sachs are provided
for the information and assistance of the Special Committee in connection with
its consideration of the transaction contemplated by the merger agreement, and
such opinion does not constitute a recommendation as to how any holder of shares
of common stock should vote with respect to such transaction.
The following is a summary of certain of the financial analyses used
by Goldman Sachs in connection with providing its oral opinion to the Special
Committee on July 12, 1999, which opinion was subsequently confirmed in writing.
SELECTED LODGING COMPANIES ANALYSIS. Goldman Sachs reviewed and compared
certain financial information, ratios and public market multiples relating to us
to corresponding financial information, ratios and public market multiples for
eight publicly traded REITs:
- Boykin Lodging Company;
- Equity Inns Inc.;
- FelCor Lodging Trust Incorporated Inc.;
- Hospitality Properties Trust;
- Host Marriott Corporation;
- Lasalle Hotel Properties;
- MeriStar Hospitality Corporation; and
- Patriot American Hospitality
Goldman Sachs also reviewed and compared certain financial
information, ratios and public market multiples relating to us to corresponding
financial information, ratios and public market multiples for ten publicly
traded corporations in the lodging business:
- Florida Panthers Holdings, Inc.;
<PAGE>
53
- Four Seasons Hotels Inc.;
- Hilton Hotels Corporation;
- Marriott International, Inc.;
- MeriStar Hotels & Resorts, Inc.;
- Prime Hospitality Corp.;
- Promus Hotel Corporation;
- Red Roof Inns, Inc.;
- Starwood Hotel & Resorts Worldwide, Inc.; and
- U.S. Franchise Systems, Inc.
The selected lodging companies were chosen because they are publicly-
traded companies with operations that for purposes of analysis may be considered
similar to us. Goldman Sachs calculated and compared various financial multiples
and ratios. The multiples for us were calculated using alternatively a price of
$7.56 per share of common stock (the closing price on April 5, 1999, the day
preceding public announcement of the offer by SHP Acquisition to purchase us),
and a price of $9.00 per share of common stock (the closing price on July 9,
1999). The multiples and ratios for each of the selected companies were based on
the most recent publicly available information. The EBITDA and funds from
operations per share estimates with respect to us were based on the June 28
Projections and our projected net debt at October 31, 1999 was based upon
estimates of our management. With respect to the selected companies, among other
things, Goldman Sachs considered:
- leveraged market capitalization (i.e., the market value of common
equity plus the book value of debt and preferred stock less cash) as a
multiple of estimated 1999 and 2000 earnings before interest, taxes,
depreciation and amortization ("EBITDA");
- current share price (as of July 9, 1999 with respect to the selected
companies and as of April 5, 1999 and July 9, 1999 with respect to us)
as a multiple of Institutional Broker Estimated System estimated 1999
and 2000 funds from operations per share (for REITs) and as a multiple
of Institutional Broker Estimated System estimated 1999 and 2000
earnings per share (for corporations);
- Institutional Broker Estimated System estimated 5-year growth rate of
funds from operations per share (for REITs) and earnings per share
(for corporations); and
<PAGE>
54
- Institutional Broker Estimated System estimated 1999 funds from
operations per share (for REITs) and earnings per share (for
corporations) as a multiple of Institutional Broker Estimated System
estimated 5-year growth rate of funds from operations per share (for
REITs) and earnings per share (for corporations).
The results of this analysis were as follows:
Selected Companies: REITs
-------------------------
<TABLE>
<CAPTION>
1999E EBITDA 2000E EBITDA 1999E FFO 1 2000E FFO 5-Year FFO 1999E FFO to
Multiples Multiples Multiples Multiples Growth Rate 5-year Growth
<S> <C> <C> <C> <C> <C> <C>
High Point of
Range 9.1x 8.7x 6.9x 6.4x 15.0% 0.9x
Low Point of
Range 7.8x 7.1x 2.8x 3.1x 7.5% 0.2x
Mean 8.4x 7.9x 5.7x 5.3x 10.1% 0.6x
Sunstone
(4/5/1999) 8.3x 7.6x 5.2x 4.8x 11.0% 0.5x
Sunstone
(7/9/1999) 9.0x 8.2x 6.2x 5.7x 11.0% 0.6x
</TABLE>
/1/ Funds from operations per share
Selected Companies: Corporations
--------------------------------
<TABLE>
<CAPTION>
1999E EBITDA 2000E EBITDA 1999E PE 2000E PE 5-Year EPS 2 1999 PE to
Multiples Multiples Multiples Multiples Growth Rate 5-year Growth
<S> <C> <C> <C> <C> <C> <C>
High Point of
Range 24.5x 22.8x 47.2x 28.3x 35.0% 1.6x
Low Point of Range 6.3x 5.8x 10.9x 9.6x 11.5% 0.6x
Mean 10.0x 10.0x 21.3x 16.4x 19.3% 1.1x
Sunstone
(4/5/1999) 8.3x 7.6x 5.2x 4.8x 11.0% 0.5x
Sunstone
(7/9/1999) 9.0x 8.2x 6.2x 5.7x 11.0% 0.6x
</TABLE>
/2/ Earnings per share
SELECTED ACQUISITIONS OF COMPANIES IN THE LODGING INDUSTRY. Goldman Sachs
reviewed and compared certain financial information, ratios and public market
multiples relating to the merger to corresponding financial information, ratios
and public market multiples relating to selected acquisitions of companies in
the lodging industry between January 1997 and February 8, 1999. With respect to
the selected acquisitions, among other things, Goldman Sachs considered:
- the transaction value (i.e., the acquired company's equity market
capitalization plus assumed debt) as a multiple of the acquired
company's forward EBITDA;
- the transaction value as a multiple of the acquired company's forward
earnings before interest and taxes ("EBIT");
- the price per share paid in the applicable transaction as a multiple
of the acquired company's forward funds from operations per share per
share (for REITs) and its earnings per share (for corporations); and
<PAGE>
55
- the premium in percentage terms of the price per share paid in the
applicable transaction over the price of the acquired company's stock
one month prior to announcement of the applicable transaction.
The multiples in each case were derived with respect to the year that
the relevant transaction was announced. The analysis with respect to Sunstone
assumed an offer price of $10.35 per share of common stock, was based on the
June 28 Projections and included our projected net debt (and preferred stock) at
October 31, 1999 which was based upon estimates of our management.
The results of this analysis were as follows:
<TABLE>
<CAPTION>
Forward EBITDA Forward Forward Forward Premium Over Stock
Multiple EBIT P/E FFO Price One Month
Multiple Multiple Multiple Prior
<S> <C> <C> <C> <C> <C>
High Point of Range 14.0x 19.7x 38.0x 9.7x 76.0%
(excluding Sunstone)
Median of Range 11.3x 15.0x 27.0x 9.5x 24.8%
(excluding Sunstone)
Mean (excluding 11.0x 15.5x 27.0x 8.0x 24.9%
Sunstone)
Low Point of Range 7.6x 11.5x 15.2x 4.8x (1.0)%
(excluding Sunstone)
SHP 9.6x 17.4x NA 7.1x 34.6%
Acquisition/Sunstone
</TABLE>
NET ASSET VALUE ANALYSIS. Goldman Sachs calculated the net asset value per
share of our common stock using various capitalization rates ranging from 13.00%
to 10.50%. For purposes of such calculations, 2000 property net operating income
for the properties owned by us, leased by Lessee and managed by the Management
Company was estimated at $97.1 million based upon the June 28 Projections. A
real estate value was calculated by dividing the estimated 2000 property net
operating income by the applicable capitalization rate. The amounts of certain
notes receivable and other assets were added and the amounts of the total net
debt at October 31, 1999 as estimated by our management and the preferred stock
and the value of Lessee and the Management Company were subtracted,
respectively, from the applicable real estate value to calculate our net asset
value. The value of Lessee and the Management Company was derived from the fact
that in conjunction with a Superior Acquisition Proposal (see "Summary --
Termination of the Merger Agreement" above for the definition of this term) we
have the right to purchase Lessee and the Management Company at a purchase price
of $30 million. Goldman Sachs also calculated the premium (or discount) in
percentage terms of the Merger Consideration, the final trading price of the
shares of common stock on July 9, 1999 and the average trading price of the
shares of common stock over various periods preceding announcement of the
merger, respectively, over the net asset value per share using various
capitalization rates.
The results of this analysis were as follows:
<PAGE>
56
<TABLE>
<CAPTION>
Capitalization Capitalization Capitalization Capitalization Capitalization Capitalization
Rate Rate Rate Rate Rate Rate
13.00% 12.50% 12.00% 11.50% 11.00% 10.50%
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value per $6.42 $7.16 $7.96 $8.84 $9.79 $10.83
share
Merger consideration 61.2% 44.5% 30.0% 17.1% 5.8% (4.4%)
as percentage
premium/(discount) to
net asset value per
share
7/09/1999 share price 40.1% 25.7% 13.0% 1.9% (8.0%) (16.9%)
($9.00) as percentage
premium/(discount) to
net asset value per
share
30 day 12.7% 1.1% (9.1%) (18.1%) (26.0%) (33.2%)
pre-announcement
average share price
($7.24) as percentage
premium/(discount) to
net asset value per
share
90 day 31.0% 17.4% 5.6% (4.8%) (14.1%) (22.3%)
pre-announcement
average share price
($8.41) as percentage
premium/(discount) to
net asset value per
share
180 day 37.1% 23.0% 10.6% (0.3%) (10.0%) (18.7%)
pre-announcement
average share price
($8.81) as percentage
premium/(discount) to
net asset value per
share
One year 68.3% 50.9% 35.7% 22.3% 10.4% (0.2%)
pre-announcement
average share price
($10.81) as
percentage
premium/(discount) to
net asset value per
share
</TABLE>
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all such analyses. No company or
transaction used in the above analyses as a comparison is directly comparable to
us or the contemplated transaction.
The analyses were prepared solely for purposes of Goldman Sachs
providing its opinion to the Special Committee as to the fairness from a
financial point of view to the stockholders (other than the Related Persons) of
the Merger Consideration to be received by such holders. Analyses based upon
forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such analyses. Because such analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control the parties or
their respective advisors, none of the Special Committee, Goldman Sachs or any
other person assumes responsibility if future results are materially different
from those forecast.
<PAGE>
57
As described above, Goldman Sachs' opinion to the Special Committee
was one of many factors taken into consideration by the Special Committee in
making its determination to approve the merger agreement. The foregoing summary
does not purport to be a complete description of the analyses performed by
Goldman Sachs and is qualified by reference to the written opinion of Goldman
Sachs set forth as Appendix B to this Proxy Statement.
Goldman Sachs, as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. Goldman
Sachs is familiar with us because it has provided certain investment banking
services to us from time to time, including having acted as a co-managing
underwriter of a public offering of 4.5 million shares of common stock in
February 1998, and having acted as financial advisor to the Special Committee in
connection with, and having participated in certain of the negotiations leading
to, the merger agreement. Goldman Sachs has also provided certain investment
banking services to Westbrook Fund III and its affiliates from time to time and
may provide investment banking services to Westbrook Fund III and its affiliates
in the future. Goldman Sachs provides a full range of financial advisory and
securities services and, in the course of its normal trading activities, may
from time to time effect transactions and hold securities, including derivative
securities, of Sunstone for its own account and for the account of customers. As
of July 12, 1999, Goldman Sachs had accumulated a long position of 1,000,000
shares of common stock.
Pursuant to a letter agreement dated April 14, 1999, the Special
Committee engaged Goldman Sachs to act as its independent financial advisor to
assist the Special Committee in connection with the transactions contemplated by
the merger agreement. Pursuant to the terms of the letter agreement, we have
agreed to pay Goldman Sachs upon consummation of the merger a transaction fee of
0.67% of the aggregate consideration paid in connection with the merger
(including payments made for our equity securities (including to holders of
options, warrants and other convertible securities), payments made for the
equity securities of the Operating Partnership, and the principal amount of all
indebtedness for borrowed money as shown on our most recent consolidated balance
sheet prior to the closing). We also have agreed to reimburse Goldman Sachs for
its reasonable out-of-pocket expenses, including attorney's fees, and to
indemnify Goldman Sachs against certain liabilities, including certain
liabilities under the federal securities laws.
POSITION OF SHP ACQUISITION AND SHP INVESTORS SUB
The rules of the Securities and Exchange Commission require each of
SHP Acquisition and SHP Investors Sub to express its belief as to the fairness
of the merger to the Nonaffiliated Stockholders. While neither SHP Acquisition
nor SHP Investors Sub has undertaken any evaluation of the merger from the
standpoint of fairness to the Nonaffiliated Stockholders, they have considered
the factors listed above under "-- Recommendation of the Special Committee and
the Board of Directors; Fairness of the Merger" which were taken into
consideration by the Special Committee and the Board of Directors, based,
however, only on the more limited facts and information available to them.
Although SHP Acquisition and SHP
<PAGE>
58
Investors Sub did not find it practicable to quantify or otherwise attach
relative weights to the factors considered by the Special Committee and the
Board, each of SHP Acquisition and SHP Investors Sub did consider in particular
the fact that the estimated $10.41 per share of common stock to be paid in the
merger represented a premium of approximately 44.18% to the average closing
price of the common stock on the New York Stock Exchange of $7.22 for the 30-day
period prior to and including April 5, 1999 (the day prior to the date SHP
Acquisition publicly announced its initial cash offer of $9.50 to $10.00 per
share).
Each of SHP Acquisition and SHP Investors Sub also considered the fact
that the Special Committee received the written opinion of Goldman Sachs with
respect to the fairness of the consideration to be received by the Nonaffiliated
Stockholders. In addition, each of SHP Acquisition and SHP Investors Sub
considered the measures taken by the Board of Directors to ensure the procedural
fairness of the transaction, including the formation of the Special Committee,
the retention of independent legal and financial advisors by the Special
Committee and the arms-length nature of the negotiations. On the basis of all of
the above factors, each of SHP Acquisition and SHP Investors Sub believes that
the merger is fair, from a financial point of view, to the Nonaffiliated
Stockholders.
INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
In considering the recommendation of the Special Committee and our
Board of Directors, stockholders should be aware that some of our executive
officers and Directors have interests in the merger or relationships, including
those referred to below, that may present potential or actual conflicts of
interest in connection with the merger. The Special Committee and our Board of
Directors were aware of these potential or actual conflicts of interest and
considered them (as described in "-- Recommendation of the Special Committee and
the Board of Directors; Fairness of the Merger") along with other matters
described under "-- Recommendation of the Special Committee and the Board of
Directors; Fairness of the Merger" and "Certain Relationships and Transactions."
CONTRIBUTION AND SALE AGREEMENT. In exchange for the assets of the
Management Company and its subsidiaries, certain related liabilities will be
assumed and Mr. Alter will receive $3 million in cash from SHP Acquisition as
well as equity interests in SHP Acquisition. In exchange for the stock of Lessee
and OP Units being conveyed, Mr. Alter and his affiliates will receive
additional equity interests in SHP Acquisition and a capital account credit of
$8.6 million, and Mr. Biederman and his affiliates will receive $2.15 million in
cash. In addition, SHP Acquisition has agreed to pay Mr. Biederman an additional
$2.25 million in cash for certain services performed by him. SHP Acquisition has
also agreed to cause certain of Messrs. Alter's and Biederman's obligations
under a third party pledge, an OP unit purchase agreement and an institutional
lender's working capital facility, each of which is discussed in more detail
under "Certain Relationships and Transactions", to be terminated. The
contribution agreement further provides that Messrs. Alter and Biederman will be
released from certain personal guarantees and indemnities incurred by them on
behalf of us under our line of credit, franchise agreements and percentage
leases.
<PAGE>
59
FORMATION OF SHP ACQUISITION. SHP Acquisition was formed by affiliates of
Westbrook and Mr. Alter in connection with the transactions contemplated by the
merger agreement. Alter SHP, a member of SHP Acquisition, is an affiliate of Mr.
Alter, the President, Chief Executive Officer and Chairman of our Board of
Directors, and has agreed to cause all shares of common stock and OP Units
currently owned by Mr. Alter and entities controlled by him to be contributed to
SHP Acquisition at the time of the merger in exchange for equity interests in
SHP Acquisition. Biederman SHP, a member of SHP Acquisition, is an affiliate of
Mr. Biederman, the Vice Chairman of our Board of Directors, and has agreed to
cause all OP Units currently owned by Mr. Biederman and entities controlled by
him to be contributed to SHP Acquisition at the time of the merger in exchange
for equity interests in SHP Acquisition. Certain affiliates of Westbrook have
agreed to contribute cash to SHP Acquisition at the closing of the merger in
exchange for interests in SHP Acquisition.
As of the effective time of the merger, affiliates of Westbrook are
expected to own in the aggregate approximately 90% of the then-outstanding
interests of SHP Acquisition, and Alter SHP and Biederman SHP are expected to
own in the aggregate approximately 10% of the then-outstanding interests of SHP
Acquisition, depending on the amount of financing obtained as of the closing of
the merger and the number of holders of OP Units who elect to receive cash in
the Operating Partnership merger. Each of these equity holders will be entitled
to receive initially a specified percentage return on their investment. After
that return has been received, the interests held by Alter SHP and Biederman SHP
will generally entitle them to a disproportionate portion of SHP Acquisition's
distributions of available cash and proceeds in the event of the sale or
liquidation of SHP Acquisition or of us or the Operating Partnership as the
surviving entities. Consequently, Messrs. Alter and Biederman (through their
affiliates) will have a significant interest in SHP Acquisition and will
continue to have the opportunity to participate in the future earnings growth,
if any, of Sunstone as the surviving entity and benefit from any increases in
our value. See "-- Purpose and Structure of the Merger." The limited liability
company agreement of SHP Acquisition also provides for annual bonus payments of
$920,000 to Mr. Alter and $80,000 to Mr. Biederman. In addition, Messrs. Alter
and Biederman have each entered into employment agreements with SHP Acquisition
as described below.
OPTIONS AND WARRANTS. Certain Directors and executive officers have
received options to acquire common stock pursuant to our stock option plan.
Pursuant to the stock option plan and the merger agreement, we agree to use our
best efforts so that at the time of closing of the merger, each outstanding
option, whether or not then vested or exercisable, will be converted into a cash
amount equal to the excess of the Merger Consideration over the exercise price
for each share of common stock subject to the option, payable at the closing of
the merger. Payments pursuant to these options will be approximately $________
in the aggregate. Messrs. Alter and Biederman and certain employees of Lessee
have received warrants to acquire common stock pursuant to our 1994 Stock
Incentive Plan. Under the terms of the merger agreement, at the closing of the
merger, each outstanding warrant to purchase common stock, whether or not vested
or exercisable, will be converted into a cash amount equal to the excess of the
Merger Consideration over the exercise price for each share of common stock
subject to the warrant, payable at the closing. Payments with respect to these
warrants to purchase common stock will be approximately $________ in the
aggregate. In connection with our initial capitalization, Mr.
<PAGE>
60
Alter received warrants to acquire OP Units. Pursuant to the merger agreement,
at the closing of the merger, each outstanding warrant to purchase OP Units will
be converted into a cash amount equal to the excess of the Merger Consideration
over the exercise price for each OP Unit subject to the warrant, payable at the
closing. Payments with respect to these warrants to purchase OP Units will be
approximately $_________ in the aggregate. Each of the calculations of this
paragraph assumes the Merger Consideration will be $10.41 per share.
The table below shows the options and the warrants to purchase common
stock or OP Units currently held by each of our executive officers and Directors
(and all other individuals as a group) and the amounts in respect of such
options that such individuals will be entitled to receive at the effective time
of the merger.
TOTAL OPTIONS AMOUNT RECEIVED
AT OUTSTANDING EFFECTIVE TIME
- --------------------------------------------------------------------------------
DIRECTORS:
Robert A. Alter 592,600
Charles L. Biederman 235,720
Raymond H. Bingham 7,500
C. Robert Enever 4,500
Laurence Geller 54,500
Fredric Gould 3,000
Paul Kazilionis 3,000
David Lambert 7,500
Edward H. Sondker 7,500
Subtotal for Directors: 915,820
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS:
R. Terrence Crowley 350,000
Subtotal for Officers: 350,000
- --------------------------------------------------------------------------------
ALL OTHER INDIVIDUALS
AS A GROUP 115,000
Total: 1,380,820
- --------------------------------------------------------------------------------
INDEMNIFICATION AND INSURANCE. Pursuant to the merger agreement, Sunstone
as the surviving entity will provide exculpation and indemnification for each
person who was at any time prior to the effective time of the merger, an
officer, employee or director of us or any of our subsidiaries. The exculpation
and indemnification provided will be equivalent to that which is currently
provided in our Charter and by-laws or the organizational documents of the
applicable subsidiary. At or before closing of the merger, we will obtain $20
million of officers and directors liability insurance for acts or omissions
occurring prior to the merger for each person currently covered by the officers
and directors liability insurance of us or our subsidiaries, and that policy
will remain effective for 6 years after the closing.
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61
EMPLOYMENT AND RELATED AGREEMENTS AND ARRANGEMENTS. Upon the closing of the
merger, SHP Acquisition intends to enter into employment or other agreements or
arrangements with certain of our executive officers as summarized below.
Mr. Alter has entered into a five-year employment agreement with SHP
Acquisition, effective as of the closing date of the merger, pursuant to which
he will serve as its chief executive officer. The employment agreement provides
for an annual salary of $500,000. The SHP Acquisition Limited Liability Company
Agreement contemplates that if the employment of Mr. Alter with SHP Acquisition
is terminated by SHP Acquisition without cause, or by Mr. Alter with good
reason, or by reason of Mr. Alter's death or disability, or if SHP Acquisition
fails to offer to enter into a new employment agreement with Mr. Alter as
provided in the SHP Acquisition Limited Liability Company Agreement after
expiration of the term of his initial employment agreement with SHP Acquisition,
he will have the right to require SHP Acquisition to purchase the equity
interest in SHP Acquisition held by Alter SHP (his affiliate) for a price equal
to fair market value on the date such right is exercised. If the employment of
Mr. Alter with SHP Acquisition is terminated for any reason, SHP Acquisition
will have the right to purchase the equity interests in SHP Acquisition held by
Alter SHP for a price equal to fair market value on the date such right is
exercised.
Mr. Biederman has entered into a five-year employment agreement with
SHP Acquisition, effective as of the closing date of the merger. The employment
agreement provides for an annual salary of $200,000. The SHP Acquisition Limited
Liability Company Agreement contemplates that if the employment of Mr. Biederman
with SHP Acquisition is terminated by SHP Acquisition without cause, or by Mr.
Biederman with good reason, or by reason of Mr. Biederman's death or disability,
or if SHP Acquisition fails to offer to enter into a new employment agreement
with Mr. Biederman as provided in the SHP Acquisition Limited Liability Company
Agreement after expiration of the term of his initial employment agreement with
SHP Acquisition, he will have the right to require SHP Acquisition to purchase
the equity interest in SHP Acquisition held by Biederman SHP (his affiliate) for
a price equal to Fair Market Value on the date such right is exercised. If the
employment of Mr. Biederman with SHP Acquisition is terminated for any reason,
SHP Acquisition will have the right to purchase the equity interests in SHP
Acquisition held by Biederman SHP for a price equal to Fair Market Value on the
date such right is exercised.
CERTAIN CONSEQUENCES OF THE MERGER
At the effective time of the merger, SHP Investors Sub will be merged
with and into us, and we will continue as the surviving entity in the merger,
with the result that:
- each share of common stock of SHP Investors Sub immediately prior to
the effective time of the merger will be converted in the merger into
one share of common stock of Sunstone as the surviving entity;
- our Charter and by-laws, as amended, will be the Charter and by-laws
of Sunstone as the surviving entity; and
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62
- the Directors and officers of SHP Investor Sub will be the directors
and officers of Sunstone as the surviving entity.
Following the merger, the Nonaffiliated Stockholders will cease to
participate in our future earnings growth, if any, or to benefit from any
increase in our value, and they no longer will bear the risk of any decrease in
our value. Because the common stock held by Nonaffiliated Stockholders will be
canceled as a result of the merger, the common stock will be delisted from the
New York Stock Exchange.
Distributions by Sunstone as the surviving entity after completion of
the merger (other than any distribution for which the record date is a date
prior to the date of completion of the merger) will be paid to the equity owners
of the surviving entity and not to the Nonaffiliated Stockholders.
The common stock is currently registered under the Securities Exchange
Act of 1934, as amended. Following the merger:
- the common stock will become eligible for termination of registration
pursuant to Section 12(g)(4) of the Securities Exchange Act of 1934,
as amended;
- SHP Acquisition has indicated its intention to have the common stock's
registration under the Securities Exchange Act of 1934, as amended,
terminated; and
- upon such termination, our obligation to file reports pursuant to
Section 15(d) of the Securities Exchange Act of 1934, as amended, will
be suspended.
In addition, we will be relieved of our obligation to comply with other
requirements of the Securities Exchange Act of 1934, as amended, including the
proxy rules of Regulation 14A, the short-swing trading profits provisions of
Section 16 and, with respect to future transactions involving us, the "going
private" provisions of Rule 13e-3 promulgated under the Securities Exchange Act
of 1934, as amended.
Accordingly, as a result of the merger, the information required to be
furnished to the Securities and Exchange Commission and the stockholders of
Sunstone as the surviving entity will be significantly reduced.
REDEMPTION AND OPERATING PARTNERSHIP MERGER
In the merger agreement, we have agreed that before the merger of us
and the merger of the Operating Partnership takes place, the Operating
Partnership will redeem a portion of the OP Units owned by us in exchange for
certain assets and equity interests. In this redemption, certain subsidiaries
and/or properties owned directly or indirectly by the Operating Partnership will
be transferred to one or more direct or indirect subsidiaries of us. These
equity interests and assets relate to the hotel properties we obtained from
Kahler Realty Corporation.
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63
After this redemption is complete, and immediately prior to the merger
of SHP Investors Sub into us, the Operating Partnership merger will occur. The
Operating Partnership merger agreement provides for the merger of SHP OP with
and into the Operating Partnership, with the Operating Partnership as the
surviving entity. We will receive an amount of cash for each OP Unit we hold
(whether as a limited partner or a general partner) equal to the Merger
Consideration. After completion of the Operating Partnership merger, the
Operating Partnership will be a subsidiary of SHP Acquisition.
PLANS FOR SUNSTONE AFTER THE MERGER
SHP Acquisition has advised us that, following the merger, SHP
Acquisition will evaluate the business, assets, organizational structure,
policies, management and personnel of Sunstone as the surviving entity and
consider what changes, if any, would be desirable to be effected in light of the
circumstances which then exist. SHP Acquisition currently intends not to operate
Sunstone as a REIT after the merger. Lessee will become a subsidiary of SHP
Acquisition and the business currently conducted by the Management Company will
be transferred to a subsidiary of SHP Acquisition. The day-to-day business and
operations of Sunstone as the surviving entity will be conducted under common
management and common ownership with the Operating Partnership, Lessee and the
Management Company.
The Directors of Sunstone as the surviving entity after the merger
will be the members of the board of directors of SHP Investors Sub immediately
prior to the merger. SHP Acquisition currently plans to retain the members of
our senior management (other than Mr. Crowley, who has tendered his resignation
effective as of the effective time of the merger) in their current positions
with Sunstone as the surviving entity after the merger. SHP Acquisition also
intends to employ Mr. Alter as chief executive officer of SHP Acquisition,
effective as of the closing date of the merger. See "-- Interests of Certain
Persons in Matters to be Acted Upon -- Employment and Related Agreements and
Arrangements."
Because SHP Acquisition currently intends not to operate the surviving
entity as a REIT, it will not be subject to the REIT qualification rules under
the Internal Revenue Code of 1986, as amended, including the requirement to make
annual distributions to its stockholders of substantially all of its taxable
income. Although SHP Acquisition has made no definitive determination as to the
rate or frequency of distributions to be made by the surviving entity following
the merger, SHP Acquisition intends to reduce the level of distributions of the
surviving entity below the aggregate amount of annual distributions that would
be required were Sunstone to be operated as a REIT following the merger.
Except as otherwise described in this Proxy Statement, we have not,
and SHP Acquisition has not, as of the date of this Proxy Statement, approved
any specific plans or proposals for:
- any extraordinary corporate transaction involving Sunstone as the
surviving entity after the completion of the merger;
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64
- any sale or transfer of a material amount of assets currently held by
Sunstone after the completion of the merger;
- any change in our Board of Directors or management;
- any material change in the dividend rate or policy of Sunstone as the
surviving entity; or
- any other material change in Sunstone's corporate structure or
business.
CONDUCT OF THE BUSINESS OF SUNSTONE IF THE MERGER IS NOT CONSUMMATED
If the Merger is not consummated for any reason, we expect our
business and operations to continue with certain modifications. We will continue
negotiations with our lenders under the $350 million revolving line of credit to
obtain waivers of certain technical defaults through modifications of certain
covenants, but there can be no assurance that our efforts will be successful.
Our lenders have already advised us that any modification of the credit line
will result in an increase in the interest rate paid, require that we pay them a
modification fee, limit our expenditures for new acquisitions and renovations,
and require us to maintain certain minimum levels of liquidity. In addition,
our lenders have advised us that if the merger does not close, they will require
us to secure the line with the hotel properties and pay additional fees and that
will further increase our interest rate. The increase in debt constraints under
the line of credit, coupled with the current difficulty in both the debt and
equity markets for REITs would also result in a re-evaluation of, and may result
in a reduction in, or elimination of, our dividend, which had been payable at
the rate of $0.285 per share quarterly.
Our credit line also matures in July 2000 and will not be extended by
our current lenders. Therefore, we will continue to look at alternative funding
structures to replace the line.
The Board will also likely resume its evaluation of alternatives
intended to address restrictions on us imposed by the REIT structure, which
could involve ceasing to qualify as a REIT (subject to necessary stockholder
approval) or taking steps to restructure our relationship with Lessee and the
Management Company. The Board may also consider conducting an orderly
liquidation of our assets.
We will also continue our policy of reviewing all properties in our
portfolio on an ongoing basis to assess their future FFO growth potential and
capital needs. We expect this process to continue to lead to selected
disposition of properties and reduction in debt or reinvestment in newly-
acquired or developed assets which we believe have greater growth potential.
The information set forth above constitutes our current plans for the
remainder of 1999. However, a number of factors could cause us to modify our
plans.
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MATERIAL FEDERAL TAX CONSEQUENCES
The following discussion summarizes the material United States federal
income tax considerations of the merger based upon the law as currently in
effect. It does not address any state, local or foreign tax consequences and
does not address the tax consequences to any stockholder in special
circumstances. Accordingly, each stockholder should consult his or her own
financial and tax advisor regarding the precise tax consequences of the merger
to the stockholder.
UNITED STATES STOCKHOLDERS. A "United States Stockholder" is one of the
following: a citizen or resident of the United States; a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision of the United States; an estate, the
income of which is subject to United States federal income taxation regardless
of its source; any trust if a court within the United States is able to exercise
primary supervision over the administration of such trust and one or more United
States persons have the authority to control all of the substantial decisions of
such trust; or a trust that has a valid election in effect under applicable
United States Department of Treasury regulations to be treated as a United
States person. The exchange of common stock or preferred stock for cash by a
stockholder in the merger will be a taxable transaction under the Internal
Revenue Code of 1986, as amended. In general, a stockholder will recognize gain
or loss equal to the difference between the tax basis of his or her common stock
or preferred stock and the amount of cash received in exchange therefor. Such
gain or loss will be capital gain or loss if the common stock or preferred stock
is a capital asset in the hands of the stockholder and will be long-term gain or
loss if the stockholder has held the common stock or preferred stock for more
than one year as of the effective time of the merger. Long-term capital gains of
individuals are taxed at a maximum rate of 20%. The deductibility of capital
losses is subject to certain limitations. These rules may not apply to
stockholders who acquired their common stock or preferred stock pursuant to the
exercise of stock options or other compensation arrangements with us or to
stockholders who are not citizens or residents of the United States or who are
otherwise subject to special tax treatment under the Internal Revenue Code of
1986, as amended.
FOREIGN STOCKHOLDERS. A "Foreign Stockholder" is a person that, for United
States federal income tax purposes, is a non-resident alien individual, a
foreign corporation, a foreign partnership, or a foreign trust or estate.
Pursuant to the Foreign Investment in Real Property Tax Act of 1980 if the
common stock or the preferred stock exchanged for cash in the merger will not be
subject to United States taxation unless such shares constitute a "United States
real property interest", in which case a Foreign Stockholder will be subject to
United States federal income tax at regular graduated rates on the gain realized
by such Foreign Stockholder with respect to such stock.
However, the shares will not be treated as a "United States real
property interest" and, as a result, the amount realized by a Foreign
Stockholder on the disposition of common stock or preferred stock will not be
subject to United States tax if one of the following conditions is met:
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66
- we are a "domestically-controlled REIT" within the meaning of the
Internal Revenue Code of 1986, as amended, or
- our common stock or preferred stock is regularly traded on an
established securities market within the meaning of the Internal
Revenue Code of 1986, as amended; provided, however, that if the
Foreign Stockholder owns, actually or constructively, under the
attribution rules provided in the Internal Revenue Code of 1986, as
amended, in excess of 5% of the fair market value of all common stock
and preferred stock outstanding at any time during the shorter of the
five- year period preceding the merger or the Foreign Stockholder's
holding period, such stockholder will be subject to the tax, but not
the withholding described above.
We believe that the common stock is regularly traded on an established
securities market within the meaning of the Internal Revenue Code of 1986, as
amended, and will endeavor to determine whether it continues to be so traded and
whether we are a "domestically-controlled REIT" as of the effective time of the
merger.
WITHHOLDING. The exchange of common stock or preferred stock for cash by a
stockholder will be reported to the Internal Revenue Service. "Backup"
withholding at a rate of 31% will apply to payments made to a United States
Stockholder (other than a corporation or any other exempt United States
Stockholder) unless the United States Stockholder furnishes its taxpayer
identification number in the manner prescribed in applicable Treasury
regulations, certifies that such number is correct, certifies as to no loss of
exemption from backup withholding and meets certain other conditions. A Foreign
Stockholder will be exempt from backup withholding provided that certain
certification requirements are satisfied. Payment of the proceeds from the
disposition of the common stock or preferred stock to or through the United
States office of a broker is subject to information reporting and backup
withholding unless the stockholder establishes an exemption from information
reporting and backup withholding.
Any amounts withheld from a stockholder under the withholding rules
described above will be allowed as a refund or a credit against such
stockholder's United States federal income tax liability, provided the required
information is furnished to the Internal Revenue Service on a timely basis.
LITIGATION REGARDING THE MERGER
Eight substantially similar purported class actions have been filed
concerning the proposed merger. Five of these actions were filed in Maryland
state court and the remaining three were filed in California state court. By
agreement of the parties the five Maryland state court actions have been stayed
pending resolution of the three parallel actions pending in California state
court. The parties have agreed to consolidate the California actions under the
first case filed in California for all purposes, and a proposed consolidation is
currently being negotiated among the parties. The plaintiffs therein have
indicated that they intend to file a
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67
consolidated amended complaint shortly in the Superior Court of the State of
California, County of Orange.
Each of the actions is brought on behalf of a purported class of all
our stockholders other than the named defendants. The complaints, each of which
was filed prior execution of the merger agreement, allege that certain members
of our Board, in conjunction with SHP Acquisition, have breached their fiduciary
duties by negotiating a proposed acquisition of Sunstone for an unfair price. In
addition to certain members of the Board of Directors, the complaints purport to
allege claims against SHP Acquisition, Westbrook Fund I, Westbrook Co-Invest I
and Lessee. Each of the complaints purports to seek injunctive relief and
monetary damages.
We believe that these lawsuits will not have a material adverse effect
on our financial position or results of operations. We believe that the suits
are without merit and we, along with the other defendants, intend to contest
them vigorously.
ACCOUNTING TREATMENT
The merger will be accounted for by SHP Acquisition under the
"purchase" method of accounting in accordance with generally accepted accounting
principles.
FINANCING; SOURCE OF FUNDS
The total amount of funds required by SHP Acquisition in connection
with the consummation of the merger and the Operating Partnership merger is
estimated to be approximately $837 million, assuming the Merger Consideration is
$10.41 per share, including:
- Payment of the Merger Consideration to stockholders in the amount of
approximately $394.7 million, consisting of an aggregate of $23.8
million and to Westbrook and its affiliates, Mr. Alter and his
affiliates and Mr. Biederman and his affiliates, and an aggregate of
$370.9 million to all other stockholders.
- Payment of cash to holders of preferred stock in the amount of
approximately $25 million.
- Payment of cash to holders of OP Units (other than us, SHP Acquisition
and its affiliates) in the amount of approximately $12.4 million
(assuming all of such holders elect to receive cash).
- Repayment of debt in the amount of approximately $365.7 million.
- Payment in respect of stock options and warrants in the aggregate
amount of approximately $1.0 million.
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- Payment of fees and expenses (including debt prepayment fees and
financing fees) in the amount of approximately $29.3 million.
- Cash payments under the contribution agreement in the amount of
approximately $8.5 million.
The amount of funds required by SHP Acquisition in connection with the
merger and the Operating Partnership merger will be obtained through a
combination of equity and debt financing. The Operating Partnership as the
surviving entity will continue to be obligated for an aggregate of approximately
$69 million of outstanding debt.
Pursuant to a contribution agreement, members of SHP Acquisition who
are affiliates of Westbrook, including Westbrook Fund III (collectively, the
"Westbrook Members"), have agreed to make aggregate cash contributions to SHP
Acquisition on or prior to the closing date of the merger such that, after
giving effect to the proceeds under the debt financing arrangements described
below, SHP Acquisition and its subsidiaries shall have an amount of cash that is
sufficient to consummate the transactions contemplated by the merger agreement
and the Operating Partnership merger agreement. Messrs. Alter and Biederman and
their affiliates have agreed to cause to be contributed to SHP Acquisition a
total of _________ OP Units. The amount of cash to be contributed by the
Westbrook Members is subject to reduction (i) to the extent the aggregate cash
consideration to be paid in the Operating Partnership merger is reduced as a
result of holders of OP Units electing to receive interests in SHP Acquisition
rather than cash and (ii) based on the amount of debt financing obtained with
respect to the merger and the Operating Partnership merger as described below.
Paine Webber has provided Westbrook Fund III with a commitment letter,
subject to the terms and conditions of which Paine Webber has agreed to provide
a loan to fund a portion of the consideration required for the consummation of
the transactions contemplated by the merger agreement and the Operating
Partnership merger agreement. Subject to the terms and conditions set forth in
the commitment letter, Paine Webber has indicated that it currently intends to
provide $495 million of debt financing.
The commitment letter provides that the loan will have a maturity date
of four years from the initial funding, with a single one year extension option
of the borrower subject to satisfaction of certain conditions. The commitment
letter requires that the proceeds be used to finance the cash consideration to
be paid in the merger and the Operating Partnership merger, to refinance certain
indebtedness of the Operating Partnership and to fund certain fees and expenses
associated with the merger and the Operating Partnership merger.
The funds borrowed pursuant to the commitment letter are to be secured
by, among other things, (i) first mortgage liens on certain properties, (ii) a
first priority assignment of all leases and rents attributable to such
properties, (iii) a first priority assignment of all security accounts and other
reserves and escrows for such properties and (iv) a first priority assignment of
all rights of the borrowers or the operating lessee, as applicable, under
operating leases,
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69
management agreements, franchise agreements, licensing agreements and other
licenses, permits and agreements relating to the ownership and/or operation of
such properties.
The commitment letter provides for an interest rate equal to the one-
month LIBOR rate plus a specified percentage. The financing commitment provided
for in the commitment letter is subject to a number of conditions, including the
occurrence of the merger and the Operating Partnership merger by no later than
November 23, 1999, the funding by the current members of SHP Acquisition of the
equity commitments set forth in SHP Acquisition Limited Liability Company
Agreement, the receipt of certain legal opinions and the receipt of customary
mortgage title insurance policies. The commitment letter is an exhibit to the
Schedule 13E-3 with respect to the merger. See "Where You Can Find More
Information."
The funds to be used by the Westbrook Members to meet their equity
contributions described above are expected to come from capital contributions
from their respective partners or members, as the case may be.
APPRAISAL RIGHTS
Under Maryland law, holders of common stock are not entitled to seek
any appraisal or similar rights with respect to such stockholders' shares of
common stock as a result of the consummation of the merger or any of the actions
contemplated by the Merger Proposals.
The Maryland General Corporation Law does not provide appraisal rights
to stockholders of a corporation in connection with a merger if their shares are
listed on a national securities exchange, such as the New York Stock Exchange,
on the record date for determining stockholders entitled to vote on such merger.
All of the shares of common stock outstanding on the record date for determining
the stockholders entitled to vote on the merger, the termination of our status
as a REIT and the amendment of our Charter were listed on the New York Stock
Exchange, thus the holders of common stock are not entitled to any appraisal
rights with respect to their shares of common stock.
Westbrook Fund I has entered into a voting agreement pursuant to which
it has agreed to vote its shares of preferred stock in favor of the Merger
Proposals. (See "Certain Relationship and Transactions -- Voting Agreement").
FEES AND EXPENSES
The estimated aggregate costs and fees of us on the one hand, and SHP
Acquisition and SHP Investors Sub on the other hand, in connection with the
merger and related transactions are as follows:
Item Amount
---- ------
Estimated Costs to SHP Acquisition and SHP Investors Sub $ 6.3
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Estimated Costs to Sunstone 11.5
Estimated Lender Fees and Expenses 11.4
Total Estimated Closing Costs $29.2
The merger agreement calls for such fees and expenses to be paid by
the party which incurred them, except that we on the one hand, and SHP
Acquisition and SHP Investors Sub on the other hand, may be required to pay
Termination Expenses and/or Termination Fees. See "The Merger and the Merger
Agreement (Item No. 1) -- Termination Fees and Expenses."
REGULATORY REQUIREMENTS
Except for the filing of the Articles of Merger with the Department of
Assessments and Taxation of the State of Maryland pursuant to the Maryland
General Corporation Law and any required filings under the Hart-Scott Rodino
Antitrust Improvements Act of 1976, the filing of any required transfer tax
returns or related documents and compliance with federal and state securities
laws, none of us, SHP Investors Sub or SHP Acquisition is aware of any material
United States federal or state or foreign governmental regulatory requirement
necessary to be complied with or approval that must be obtained in connection
with the merger.
THE MERGER AND THE MERGER AGREEMENT (ITEM NO. 1)
Stockholders are being asked to approve the merger of SHP Investors
Sub with and into us under the merger agreement. Approval of the merger
constitutes approval of the merger agreement and all transactions contemplated
thereby.
The following is a summary of all material provisions of the merger
agreement. The following summary does not purport to be complete and is
qualified in its entirety by reference to the merger agreement which is attached
as Appendix A to this Proxy Statement. Stockholders are urged to read the merger
agreement in its entirety and to consider it carefully.
THE MERGER
The merger agreement provides for the merger of SHP Investors Sub with
and into us, in which event we will be the surviving entity and will continue
our corporate existence under the laws of the State of Maryland. As the
surviving entity, we will continue to possess all our rights, privileges,
immunities, powers and purposes and will assume and become liable for all our
liabilities and obligations.
MERGER CONSIDERATION
In the merger, each outstanding share of common stock, will be
converted, by virtue of the merger and without any action on the part of the
stockholders, into the right to
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receive the Merger Consideration, which consists of $10.35 in cash per share,
which amount shall be adjusted by:
(1) an increase equal to not less than approximately 6 cents per share
representing a pro rata portion (based on the number of outstanding
shares of common stock) of an aggregate amount equal to 50% of the
increase in our cash balance as of five business days prior to the
merger as compared to the cash balance as of June 30, 1999, in each
case as calculated as described below,
(2) a decrease equal to an amount representing a pro rata portion (based
on the number of outstanding shares of common stock) of an aggregate
amount equal to one-half of the amount by which fees relating to the
consents of franchisors under the franchise agreements for our hotel
properties exceed $12.5 million and are less than $25 million. If
those fees exceed $25 million, we may either further decrease the
Merger Consideration by the full amount by which those fees exceed $25
million or terminate the merger agreement,
(3) a decrease equal to the amount (if any) by which our expenses relating
to the merger and the Operating Partnership merger exceed $11.5
million,
(4) a decrease equal to the amount (if any) by which fees relating to
obtaining the consents of the lessors under certain ground leases for
our hotel properties and the lenders under certain of our outstanding
debt financing including the four loans described below for which
lender consents to transfer are required exceeds $1.5 million,
(5) a decrease equal to the amount (if any) by which consents relating to
the merger and the Operating Partnership merger other than as
described in the preceding paragraphs 2 through 4 exceeds $100,000,
(6) a decrease, at our election, equal to the amount (if any) necessary to
pay in full at the closing of the merger all remaining amounts under
four loans for which lender consents are required, and
(7) a decrease equal to the amount (if any) of any dividends paid after
July 12, 1999 and prior to the closing of the merger, to the extent
any such dividend distribution is necessary for us to maintain REIT
status or to prevent us from having to pay federal or excise tax.
Our cash balance increase referred to in paragraph 1 above is
calculated under the merger agreement, as follows:
- consolidated cash, cash equivalents and marketable securities (valued
equal to their market value) of us and our subsidiaries, determined by
Ernst & Young, LLP
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in accordance with GAAP, as of the close of business on the fifth
business day prior to the closing of the merger,
- minus consolidated cash, cash equivalents and marketable securities
-----
(valued equal to their market value) of us and our subsidiaries,
determined by Ernst & Young LLP in accordance with GAAP, as of June
30, 1999;
- minus the aggregate proceeds received by us and our subsidiaries
-----
during the period after June 30, 1999 and on or prior to the fifth
business day prior to the closing of the merger of (x) any sales or
other dispositions of assets of us or any of our subsidiaries, (y) any
incurrence of indebtedness or other non-equity financing by us or any
of our subsidiaries or (z) any issuances of equity interests in us or
any of our subsidiaries, except in each case to the extent such
proceeds were utilized to pay down debt (other than scheduled
amortization payments or payments at scheduled maturity);
- plus certain transaction related expenses not exceeding $11.5 million
----
and paid in cash by us after June 30, 1999 and on or prior to the
close of business on the fifth business day prior to the closing of
the merger,
- plus the amount by which our accrued property taxes as of the close of
----
business on the fifth business day prior to the closing of the merger
are less than the amount at June 30, 1999;
- minus the amount by which our accrued property taxes as of the close
-----
of business on the fifth business day prior to the closing of the
merger exceed the amount at June 30, 1999;
- plus any amounts overdue from Lessee as of the close of business on
----
the fifth business day prior to the closing of the merger; and
- minus the amount of insurance and condemnation proceeds received by us
-----
that have not been applied (x) to purchase or repair the assets giving
rise to such proceeds or (y) to the repayment of debt (other than
scheduled amortization payments or payments at scheduled maturity);
provided however that the merger agreement provides that this total amount will
always equal at least $2.5 million.
The Merger Consideration payable to the stockholders was determined as
the result of arm's-length negotiations between the Special Committee and SHP
Acquisition. See "Matters Relating to the Merger Proposals -- Background of the
Merger," "-- Purpose and Structure of the Merger," "-- Recommendation of the
Special Committee and the Board of Directors; Fairness of the Merger" and "--
Opinion of the Financial Advisor."
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The consideration payable to the holders of preferred stock other than
SHP Acquisition and its wholly-owned subsidiaries under the merger agreement is
equal to the Liquidation Preference for such shares as set forth in the Articles
Supplementary designating the preferred stock, but shares owned by SHP
Acquisition and its wholly-owned subsidiaries shall be canceled without any
payment being made. At the time of closing of the merger, all shares of
preferred stock will be owned by SHP Acquisition or one of its wholly-owned
subsidiaries.
CLOSING DATE AND EFFECTIVE TIME
The closing of the merger will take place at 10:00 a.m., local time in
New York, New York, on the date which is the third business day following
satisfaction (or waiver by the parties entitled to the benefit thereof) of the
conditions (other than those that are incapable of being satisfied until the
date of the closing) set forth in the merger agreement, unless another date is
agreed to in writing by the parties to the merger agreement.
Articles of Merger will be filed with the Department of Assessments
and Taxation of the State of Maryland to become effective on the closing date of
the merger. The effective time of the merger will be the time that the Articles
of Merger are filed and accepted for record by the Department of Assessments and
Taxation of Maryland, or at such other time as we and SHP Investors Sub agree
should be specified in the Articles of Merger (not to exceed 30 days after the
Articles of Merger are filed with the Department of Assessments and Taxation of
the State of Maryland).
EXCHANGE AND PAYMENT PROCEDURES
Promptly after the effective time of the merger, Sunstone as the
surviving entity will cause a paying agent appointed by SHP Investors Sub and
reasonably acceptable to us to mail to each Nonaffiliated Stockholder who is a
record holder of certificates representing outstanding shares of common stock or
preferred stock immediately prior to the effective time of the merger, a letter
of transmittal and instructions for use in effecting the surrender of such
certificates in exchange for the Merger Consideration. Upon surrender to the
paying agent of a certificate for cancellation representing shares of common
stock or preferred stock, together with such letter of transmittal, duly
executed and completed in accordance with the instructions thereto, and such
other documents as may reasonably be required by the paying agent, the holder of
such certificate will be entitled to receive, in exchange therefor, the
applicable Merger Consideration and the certificate so surrendered will be
canceled immediately thereafter. No interest will be paid or will accrue on the
Merger Consideration upon the surrender of any certificate. Until surrendered in
accordance with the foregoing instructions, each certificate representing shares
of common stock or preferred stock will represent for all purposes only the
right to receive the Merger Consideration (without interest).
Stockholders should not send their common stock or preferred stock
certificates now; they should send them only pursuant to instructions set forth
in letters of transmittal to be mailed to stockholders as soon as practicable
after the effective time. In all
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cases, the merger consideration will be provided only in accordance with the
procedures set forth in this Proxy Statement, the merger agreement and such
letters of transmittal.
We, SHP Acquisition and SHP Investors Sub strongly recommend that
certificates representing shares of common stock and preferred stock and letters
of transmittal be transmitted only by registered United States mail, return
receipt requested, appropriately insured. Stockholders whose certificates are
lost will be required, at the holder's expense, to furnish a lost certificate
affidavit and bond acceptable in form and substance to the paying agent.
Any Merger Consideration delivered to the paying agent that remains
unclaimed by stockholders for 12 months after the effective time of the merger
will be delivered by the paying agent to Sunstone as the surviving entity, upon
demand, and any stockholders who have not theretofore made an exchange subject
to escheat laws must thereafter look only to the Sunstone as the surviving
entity for payment of their claim for Merger Consideration.
Any questions concerning exchange and payment procedures and requests
for letters of transmittal may be addressed to ________________, the paying
agent.
TRANSFER OF COMMON STOCK AND PREFERRED STOCK
No transfer of common stock or preferred stock will be made on our
stock transfer books after the effective time of the merger. If, at or after the
effective time of the merger, certificates of common stock or preferred stock
are presented, they will be canceled and exchanged for the right to receive the
Merger Consideration, as provided in "-- Exchange and Payment Procedures."
ADDITIONAL AGREEMENTS
We, SHP Acquisition and SHP Investors Sub have agreed in the merger
agreement to promptly prepare and file with the Securities and Exchange
Commission this Proxy Statement and a Transaction Statement on Schedule 13E-3
and otherwise use all reasonable efforts to cause this Proxy Statement to be
mailed to the stockholders at the earliest practicable date. We, SHP Acquisition
and SHP Investors Sub have agreed to cooperate with each other and use our
reasonable best efforts to take or cause to be taken all actions, and do or
cause to be done all things, necessary, proper or appropriate to consummate and
make effective the merger and the other transactions contemplated by the merger
agreement.
The merger agreement provides that we will:
- as soon as practicable, call and convene the special meeting for the
purpose of obtaining the required stockholder approvals; and
- through our Board of Directors, recommend to the stockholders that
they approve the Merger Proposals and will not withdraw, modify or
change such
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recommendation, or recommend any other offer or proposal, at any time
prior to the conclusion of the special meeting.
Notwithstanding the foregoing, our Board of Directors may at any time
prior to the effective time of the merger withdraw or modify its approval or
recommendation regarding the merger or the merger agreement, or recommend any
other offer or proposal, if such offer or proposal is a Superior Acquisition
Proposal (see "Summary -- Termination of the Merger Agreement" above for the
definition of this term).
The merger agreement provides that we, SHP Acquisition and SHP
Investors Sub will, prior to the effective time of the merger, (i) afford
representatives of each other party reasonable access to our and our
subsidiaries' properties, books, contracts, commitments, personnel and records;
and (ii) furnish promptly to each other party and its financing sources all
information concerning our and our subsidiaries' business, properties and
personnel as such other party may reasonably request.
Except (a) in connection with a Superior Acquisition Proposal and (b)
if our Board of Directors determines in good faith that such action is required
for the Board to comply with its duties to stockholders imposed by law, and
subject to a notice requirement by us to SHP Investors Sub, the merger agreement
provides that we will not:
- initiate, solicit or knowingly encourage, directly or indirectly, any
inquiries or the making or implementation of any proposal or offer
with respect to a merger, acquisition, tender offer, exchange offer,
consolidation, sale of assets or similar transaction involving all or
any significant portion of our or any of our subsidiaries' assets or
equity securities (any such proposal or offer, an "Acquisition
Proposal");
- engage in any negotiations concerning or provide any confidential
information or data to, or have any discussions with, any person or
entity relating to an Acquisition Proposal; or
- otherwise facilitate any effort to attempt to make or implement an
Acquisition Proposal.
In addition, the merger agreement requires us to:
- direct and use our best efforts to cause our officers, directors,
employees, agents or financial advisors not to engage in any of the
activities set forth above;
- cease and cause to be terminated any activities, discussions or
negotiations with any parties conducted before the execution of the
merger agreement with respect to any of the activities set forth
above; and
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- notify SHP Investors Sub promptly if we receive any such inquiries or
proposals or any requests for such information or if any such
negotiations or discussions are sought to be initiated or continued
with it.
LESSEE/MANAGER AGREEMENT
Concurrently with the execution of the merger agreement, we, Mr.
Alter, Mr. Biederman, Lessee, the Management Company and the Operating
Partnership entered into the Lessee/Manager Agreement pursuant to which in the
event of (i) a termination of the merger agreement and (ii) a subsequent entry
by us into an agreement constituting a Superior Acquisition Proposal (see
"Summary -- Termination of the Merger Agreement" above for the definition of
this term), then we and the Operating Partnership shall have the right to
acquire all of the common stock of Lessee and the Management Company from
Messrs. Alter and Biederman for an aggregate purchase price of $30 million, on
the terms and subject to the conditions set forth in the Lessee/Manager
Agreement.
CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the merger agreement, from July 12, 1999 through the
effective time of the merger, except as consented to in writing by SHP Investors
Sub or as contemplated by the merger agreement, we and our subsidiaries,
including the Operating Partnership, must conduct our and their respective
businesses only in the usual, regular and ordinary course and in substantially
the same manner as such businesses were conducted prior to the execution of the
merger agreement and take all action necessary to continue to qualify as a REIT.
We and our subsidiaries must also use our and their reasonable efforts to
preserve intact our present business organizations and goodwill and keep
available the services of our officers and key employees (other than those
employed by SHP Acquisition, Lessee, the Management Company or their
affiliates).
In addition, we generally must, and must cause each of our
subsidiaries to:
- confer on a regular basis with one or more representatives of SHP
Investors Sub to report on material operational matters and any
proposals to engage in material transactions;
- promptly notify SHP Investors Sub of any material adverse change in
our condition (financial or otherwise), business, properties, assets
or liabilities, or of any material governmental complaints,
investigations or hearings which could reasonably be expected to have
a material adverse effect on us (or communications indicating that the
same may be contemplated);
- promptly deliver to SHP Investors Sub true and correct copies of any
report, statement or schedule filed with the Securities and Exchange
Commission after July 12, 1999 and prior to the effective time of the
merger;
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- maintain our books and records in accordance with generally accepted
accounting principles ("GAAP") consistently applied and not change in
any material manner any of our methods, principles or practices of
accounting, except as may be required by the Securities and Exchange
Commission, applicable law or GAAP;
- duly and timely file all material tax returns and other documents
required to be filed with federal, state, local and other tax
authorities;
- not make, rescind or revoke any material express or deemed election
relative to taxes (unless required by law or necessary to preserve our
status as a REIT or the status of any of our subsidiaries as a
partnership for federal income tax purposes or as a qualified REIT
subsidiary);
- not acquire, enter into any option to acquire, or exercise an option
or contract to acquire, additional real property, incur additional
indebtedness (except for working capital under our revolving lines of
credit), encumber assets or commence construction of, or enter into
any agreement or commitment to develop or construct, other real estate
projects, except with respect to projects under development in
accordance with the agreements in existence on the date of the merger
agreement and previously furnished or otherwise disclosed to SHP
Acquisition;
- except as contemplated by the merger agreement and the Operating
Partnership merger agreement, not amend our Charter or by-laws, or the
organizational documents of any of our subsidiaries;
- except as contemplated by the merger agreement and for issuances under
our dividend reinvestment plan in accordance with past practice, make
no change in the number of our shares of capital stock, membership
interests or units of limited partnership interest (as the case may
be) issued and outstanding or reserved for issuance, other than
pursuant to
-- the exercise of options or other rights contemplated by the
merger agreement,
-- the conversion of shares of preferred stock, or
-- the exchange or redemption of OP Units;
- except as previously disclosed to SHP Investors Sub, not grant any
options or other rights or commitments relating to our shares of
capital stock, membership interests or units of limited partnership
interest or any security convertible into our shares of capital
stock, membership interests or units of limited partnership interest,
or any security the value of which is measured by shares of capital
stock, or any security subordinated to the claim of our general
creditors and, except as
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contemplated by the merger agreement, not amend or waive any rights
under any of the qualified or nonqualified options to purchase shares
of our common stock granted under our 1994 Incentive Plan, Director
Plan, 1997 Supplemental Plan, or any other formal or informal
arrangement;
- except as provided in the merger agreement, the Operating Partnership
merger agreement or described under "Questions and Answers About the
Merger -- What will happen to my common stock dividends", or in
connection with (1) the payment of the exercise price or tax
withholding in connection with equity-based employee benefit plans by
the participants in those benefit plans, (2) the redemption of shares
of common stock required by the Charter in order to preserve our REIT
status or (3) conversions or redemptions of OP Units in accordance
with the terms of the partnership agreement of the Operating
Partnership, not:
-- authorize, declare, set aside or pay any dividend or make any
other distribution or payment with respect to any shares of
common stock, preferred stock or OP Units, or
-- directly or indirectly redeem, purchase or otherwise acquire any
shares of capital stock, membership interests or units of
partnership interest or any option, warrant or right to acquire,
or security convertible into, shares of capital stock, membership
interests, or units of partnership interest;
- not sell, lease (other than to Lessee), exchange or otherwise dispose
of any real properties owned or leased by us or our subsidiaries
outside the ordinary course of business (except for certain specified
properties);
- not make any loans, advances or capital contributions to, or
investments in, any other person or entity, other than regular
advances to employees in the ordinary course of business and loans,
advances and capital contributions to our subsidiaries in existence on
the date of the merger agreement;
- not pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise)
which are material to us and our subsidiaries taken as a whole, other
than the payment, discharge or satisfaction, in the ordinary course of
business consistent with past practice or in accordance with their
terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or
the notes thereto) furnished to SHP Investors Sub or incurred in the
ordinary course of business consistent with past practice;
- except as provided in the merger agreement, not enter into any
commitment, contractual obligation or transaction for the purchase of
any real estate other than
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expansion or improvements made in the ordinary course of business to
existing real property;
- not guarantee the indebtedness of another person or entity, enter into
any "keep well" or other agreement to maintain any financial statement
condition of another person or entity or enter into any arrangement
having the economic effect of the foregoing;
- not enter into any contractual obligation with any of our officers,
Directors or affiliates except as set forth in the merger agreement;
- not increase any compensation or enter into or amend any employment,
severance or other agreement with any of our officers, directors or
employees earning a base salary of more than $100,000 per annum, other
than as required by any contract or employee plan or pursuant to
waivers by employees of benefits under such agreements;
- except as provided in the merger agreement, not adopt any new employee
benefit plan or amend, terminate or increase the benefits under any
existing plans or rights, not grant any additional options, warrants,
rights to acquire stock, stock appreciation rights, phantom stock,
dividend equivalents, performance units or performance stock to any
officer, employee or director, or accelerate vesting with respect to
any grant of our common stock to employees which are subject to any
risk of forfeiture, except for changes which are required by law and
changes which are not more favorable to participants than provision
presently in effect;
- not change the ownership of any of our subsidiaries, except changes
which arise as a result of the conversion of OP Units into shares of
common stock or cash or the redemption of certain interests of us in
the Operating Partnership as contemplated by the merger agreement;
- not accept a promissory note in payment of the exercise price payable
under any option to purchase common stock;
- not enter into or amend or otherwise modify or waive any material
rights under any agreement or arrangement for the executive officers
or directors of us or any of our subsidiaries (other than Messrs.
Alter and Biederman in their capacities as such);
- not directly or indirectly or through a subsidiary, merge or
consolidate with, acquire all or substantially all of the assets of,
or acquire the beneficial ownership of a majority of the outstanding
capital stock or a majority of any other equity interest in, any other
entity;
- not settle or compromise any material tax liability;
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- perform all actions required to consummate the redemption of certain
interests of us in the Operating Partnership must have occurred as
provided in the merger agreement prior to the effective time of the
merger;
- perform all agreements required to be performed by us and our
subsidiaries (including the Operating Partnership) under the Operating
Partnership merger agreement; and
- not agree, commit or arrange to take any action prohibited by the
covenants set forth above.
REPRESENTATIONS AND WARRANTIES
The material representations and warranties of us to SHP Acquisition
and SHP Investors Sub contained in the merger agreement relate to the following
matters:
- the due organization and valid existence of us and our subsidiaries
and similar corporate matters;
- the capitalization of us and our subsidiaries;
- the due authorization, execution and delivery of the merger agreement
by us and its binding effect on us;
- the lack of required regulatory filings and approvals for the
consummation of the merger, and the lack of conflicts between the
merger agreement (and the transactions contemplated thereby) and the
Charter or the by-laws, contracts to which we or our subsidiaries are
parties, or any law, rule, regulation, order or decree applicable to
us and our subsidiaries;
- the accuracy of our filings with the Securities and Exchange
Commission and financial statements;
- the accuracy of the information provided by us for inclusion in this
Proxy Statement and the Schedule 13E-3 filed with respect to the
merger;
- compliance with applicable laws;
- the absence of current litigation or actions pending or threatened in
writing against or affecting us or our subsidiaries;
- the absence of any undisclosed liabilities;
- our payment of, or provision of adequate reserve for, tax liabilities,
our compliance with tax return filing requirements, our qualification
as a REIT under
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the Internal Revenue Code of 1986, as amended, and the treatment of
the Operating Partnership, and each subsidiary of us that is a
partnership, as a partnership for federal income tax purposes;
- employee benefit plans, labor matters, severance and change of control
agreements;
- the ownership of, encumbrances on, and restrictions relating to, our
properties;
- our exposure to environmental liabilities and compliance with
environmental laws;
- our material contracts and indebtedness and our obligations
thereunder;
- the absence of any event since December 31, 1998 through July 12, 1999
that constitutes a material adverse change in our business,
properties, assets, financial condition or results of operations;
- our disclosure of all of our material arrangements with our control
persons and affiliates;
- the inapplicability to the merger of certain provisions of state
takeover law;
- the absence of brokers and finders (other than Goldman Sachs) engaged
by us who would be entitled to payment in connection with the merger;
- the receipt by the Special Committee of the Board of Directors of the
opinion of Goldman Sachs;
- the adequacy of our insurance coverage;
- the absence of any requirement that we or our subsidiaries be
registered under the Investment Company Act of 1940, as amended;
- the recommendation of our Board of Directors that stockholders approve
and adopt the Merger Proposals; and
- the truth and accuracy of the representations and warranties of the
Operating Partnership and its general partner in the Operating
Partnership merger agreement.
These representations and warranties are subject, in certain cases, to
specified exceptions and qualifications, including certain qualifications as to
items disclosed in documents filed by us with the Securities and Exchange
Commission since July 1, 1996, and material adverse effects on (1) the business,
properties, assets, financial condition or results of operations of us and our
subsidiaries, taken as a whole, or (2) the ability of us or the Operating
Partnership
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to consummate the transactions contemplated by the merger agreement and the
Operating Partnership merger agreement.
The merger agreement also contains representations and warranties of
SHP Acquisition and SHP Investors Sub to us, including with respect to the
following matters:
- due organization and valid existence of SHP Acquisition and the SHP
Investors Sub and similar corporate matters;
- the due authorization, execution and delivery of the merger agreement
by SHP Acquisition and SHP Investors Sub and its binding effect on SHP
Acquisition and SHP Investors Sub;
- the lack of required regulatory filings and approvals for the
consummation of the merger by SHP Acquisition or SHP Investors Sub,
and the lack of conflicts between the merger agreement (and the
transactions contemplated thereby) and the organizational documents of
SHP Acquisition and SHP Investors Sub, contracts to which they are a
party, or any law, rule, regulation, order or decree applicable to SHP
Acquisition and SHP Investors Sub;
- the absence of current litigation or actions pending threatened in
writing against or affecting SHP Acquisition or any of the
subsidiaries of SHP Acquisition;
- the compliance by SHP Acquisition and its subsidiaries with the
statutes, laws, ordinances, regulations, rules, judgments, decrees or
orders of any governmental authority applicable to its business,
properties or operations;
- the absence of any written notice that SHP Acquisition or any of its
Subsidiaries is in violation of or in default under any material loan,
credit agreement or other evidence of indebtedness;
- the access of SHP Investors Sub to funds sufficient to consummate the
transactions contemplated by the merger agreement;
- the accuracy of the information provided by SHP Acquisition and SHP
Investors Sub or any of their affiliates for inclusion in this Proxy
Statement and the Schedule 13E-3 filed with respect to the merger;
- the absence of brokers and finders (other than as disclosed to us)
entitled to payment from SHP Acquisition or its subsidiaries;
- the solvency of Sunstone and the Operating Partnership as the
surviving entities immediately after the effective time of the merger;
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- the absence of any requirement that SHP Acquisition or any of its
subsidiaries be registered under the Investment Company Act of 1940,
as amended;
- the beneficial ownership of common stock, preferred stock and OP Units
by SHP Acquisition, SHP Investors Sub and SHP OP and certain other
parties;
- the absence of any undisclosed liabilities; and
- the truth and accuracy of the representations and warranties of SHP
Acquisition and SHP OP in the Operating Partnership merger agreement.
These representations and warranties are subject, in certain cases, to
specified exceptions and qualifications, including certain qualifications as to
material adverse effects on SHP Acquisition and SHP Investors Sub.
CONDITIONS
The obligations of us, SHP Acquisition and SHP Investors Sub to
consummate the merger are subject to the satisfaction at or prior to the closing
date of the merger of the following conditions:
- the approval of the amendment of our Charter and the recommendation by
our Board of Directors that we should terminate our status as a REIT,
in each case, by the affirmative vote of two-thirds of all votes
entitled to be cast by the holders of the issued and outstanding
common stock and preferred stock (voting on an "as converted" basis),
voting as a single class;
- the approval of the merger and the merger agreement by the affirmative
vote of a majority of all votes entitled to be cast by the holders of
the issued and outstanding common stock and preferred stock (voting on
an "as converted" basis), voting as a single class;
- the ratification and approval of the matters described in the prior
two paragraphs by our Board of Directors following stockholder
approval;
- there not being in effect any 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 merger, the Operating Partnership
merger, the redemption of certain of our interests in the Operating
Partnership as provided in the merger agreement or any of the other
transactions contemplated by the merger agreement; and
- the expiration or other termination of all applicable waiting periods
(and any extensions thereof) under the Hart-Scott Rodino Antitrust
Improvements Act of 1976, if any.
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There are additional conditions that must be satisfied before SHP
Acquisition and SHP Investors Sub are obligated to complete the merger. These
conditions are:
- the representations and warranties made by us in the merger agreement
must be true and correct in all material respects, except for those
representations and warranties that are qualified by their terms as to
materiality, which must be true and correct in all respects, as of the
date of the merger agreement and as of the closing date of the merger;
- we must perform in all material respects all obligations required to
be performed by us pursuant to the terms of the merger agreement at or
prior to the effective time of the merger;
- SHP Acquisition and SHP Investors Sub must have received a tax opinion
(as to our qualification as a REIT within the meaning of the Internal
Revenue Code of 1986, as amended, and as to the treatment of the
Operating Partnership as a partnership for federal income tax purposes
up to the closing) from our counsel, Brobeck Phleger & Harrison LLP
(or other counsel reasonably acceptable to SHP Acquisition and SHP
Investors Sub);
- no material adverse changes to our business, properties, assets,
financial condition or results of operations may have occurred since
the date of the merger agreement; for this purpose, a material adverse
change will be deemed to have occurred if, as a result of a change of
federal tax laws after the date of the merger agreement, at or prior
to the effective time of the merger we would not qualify as a REIT;
- certain identified third-party consents and waivers must have been
obtained and not subsequently revoked; in addition, the aggregate
costs and termination fees payable by us or our subsidiaries
(including the Operating Partnership) or by Lessee in connection with
obtaining the consent of franchisors under certain franchise
agreements must not exceed $25 million if we do not agree to reduce
the Merger Consideration by the aggregate amount of such excess;
- all investment banking, legal, accounting, printing, Securities and
Exchange Commission filing and certain other fees and expenses
incurred, paid or accrued by us and any of our subsidiaries in
connection with the transactions contemplated by the merger agreement
and the Operating Partnership merger agreement must not exceed $11.5
million if we do not agree to reduce the Merger Consideration by the
aggregate amount of such excess;
- the redemption of certain interests of us in the Operating Partnership
as provided in the merger agreement must have occurred;
- the Operating Partnership merger must have been consummated; and
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- SHP Acquisition and its subsidiaries must have obtained funds under
the commitment letter with Paine Webber of at least $454.6 million
(subject to reduction as provided in the merger agreement).
There are additional conditions that must be satisfied before we are
obligated to complete the merger. These conditions are:
- the representations and warranties of SHP Acquisition and SHP
Investors Sub set forth in the merger agreement must be true and
correct in all material respects, except for those representations and
warranties that are qualified as to materiality, which shall be true
and correct in all respects, as of the date of the merger agreement
and as of the closing date of the merger, in each case as though made
on and as of the closing date of the merger;
- SHP Acquisition and SHP Investors Sub must have performed in all
material respects all obligations required to be performed by them
under the merger agreement at or prior to the effective time of the
merger;
- no change in the business, financial condition or results of
operations of SHP Acquisition and its subsidiaries, taken as a whole,
or of SHP Investors Sub and its subsidiaries, taken as a whole, since
the date of the merger agreement, that has had or would reasonably be
expected to have a material adverse effect on the ability of SHP
Acquisition, SHP Investors Sub or SHP OP to consummate the
transactions contemplated by the merger agreement and the Operating
Partnership merger agreement;
- Sunstone and the Operating Partnership shall have received an opinion,
by a nationally recognized firm, as to solvency and adequate
capitalization of us and the Operating Partnership immediately before
the mergers and Sunstone and as the surviving entities immediately
after giving effect to the transactions contemplated by the merger
agreement and the Operating Partnership merger agreement;
- certain expenses, to the extent incurred and not exceeding $11.5
million, shall have been paid in full or a reasonably satisfactory
arrangements shall exist to pay in full such amounts at closing of the
merger; and
- the Operating Partnership merger shall have been consummated.
Notwithstanding anything to the contrary in the merger agreement, none
of the initiation, threat or existence of any legal action of any kind with
respect to the merger agreement or the Operating Partnership merger agreement or
any transaction contemplated by the merger agreement or the Operating
Partnership merger agreement, including, without limitation, any action
initiated, threatened or maintained by any of our stockholders or any partner in
the Operating Partnership, whether alleging rights with respect to claims under
any federal or state
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securities law, contract or tort claims, claims for breach of fiduciary duty or
otherwise, will constitute a failure of the conditions relating to us or SHP
Acquisition and SHP Investors Sub unless that action has resulted in the
granting of injunctive relief that prevents the consummation of the merger and
the other transactions contemplated by the merger agreement or the Operating
Partnership merger agreement and such injunctive relief has not been dissolved
or vacated.
The conditions we must meet can be waived in writing by SHP Investors
Sub and the conditions SHP Acquisition and SHP Investors Sub must meet can be
waived in writing by us. As of the date of this Proxy Statement, we have no
present intention, and SHP Acquisition and SHP Investors Sub have advised us
that they have no present intention, to waive any material conditions to the
merger. If any material conditions are waived by us, our Board of Directors
will, in light of its duties under Maryland law and the federal securities laws,
determine at such time if a resolicitation of stockholders should be made.
TERMINATION; WITHDRAWAL OF RECOMMENDATIONS
The merger agreement may be terminated at any time prior to the
effective time of the merger, whether before or after approval by our
stockholders as follows:
- by mutual written consent duly authorized by us, SHP Acquisition and
SHP Investors Sub;
- by SHP Investors Sub or SHP Acquisition, upon a breach of any
representation, warranty, covenant, obligation or agreement set forth
in the merger agreement on the part of us such that certain conditions
set forth in the merger agreement are not satisfied or would be
incapable of being satisfied within 30 days after the giving of
written notice to us or, if sooner, the date the closing would have
otherwise occurred;
- by us, upon a breach of any representation, warranty, covenant,
obligation or agreement set forth in the merger agreement on the part
of SHP Investors Sub or SHP Acquisition, in either case such that
certain conditions set forth in the merger agreement are not satisfied
or would be incapable of being satisfied within 30 days after the
giving of written notice to SHP Investors Sub or SHP Acquisition;
- by us, SHP Investors Sub or SHP Acquisition, if any judgment,
injunction, order, decree or action by any governmental entity of
competent authority preventing the consummation of the merger has
become final and nonappealable or, if sooner, the date the closing
would have otherwise occurred;
- by us, SHP Investors Sub or SHP Acquisition, if the merger has not
been consummated on or before December 31, 1999, provided that a party
may not terminate the merger agreement for this reason if such party
has breached in any material respect its representations, warranties
or obligations under the merger
<PAGE>
87
agreement in any manner that has contributed to the failure of the
merger to be consummated on or before December 31, 1999;
- by either of us (unless we are in breach of our obligations set forth
in the merger agreement with respect to this Proxy Statement or the
special meeting) or SHP Investors Sub or SHP Acquisition (unless SHP
Investors Sub or SHP Acquisition is in breach of its obligations set
forth in the merger agreement with respect to obtaining certain debt
financing) if, upon a vote at a duly held meeting of the stockholders
or any adjournment thereof, the stockholder approval described under
"Summary -- Voting Securities and Votes Required" has not been
obtained if the proposed amendment of the Operating Partnership's
partnership agreement are not approved within five days of the
stockholder approval described above;
- by us, prior to the special meeting, if our Board of Directors has
withdrawn or modified its approval or recommendation of the merger or
the merger agreement in connection with, or approved or recommended, a
Superior Acquisition Proposal (see "Summary -- Termination of the
Merger Agreement" above for the definition of this term); provided,
however, that no such termination will be effective under
circumstances in which a $17.5 million termination fee, plus expenses
up to $7.5 million, is payable pursuant to the terms of the merger
agreement, unless simultaneous with such termination, such termination
fee is paid to SHP Acquisition in full by us or the Operating
Partnership;
- by SHP Investors Sub or SHP Acquisition if:
-- prior to the special meeting, our Board of Directors has
withdrawn or modified in any manner adverse to SHP Investors Sub
its approval or recommendation of the merger or the merger
agreement, or approved or recommended any acquisition proposal
from a third party, or
-- we have entered into an agreement with respect to any acquisition
proposal from a third party (other than a confidentiality
agreement entered into in compliance with certain terms of the
merger agreement);
- by us, if SHP Investors Sub has not closed the borrowings contemplated
by the commitment letter with Paine Webber on or prior to the closing
date of the merger, or if the commitment under the commitment letter
terminates, unless a Lender Property Determination (see "Summary --
Termination of the Merger Agreement" above for the definition of this
term) has been made;
- by SHP Acquisition or SHP Investors Sub, if SHP Investors Sub has not
closed the borrowings contemplated by the commitment letter with Paine
Webber because of a Lender Property Determination;
<PAGE>
88
- by SHP Acquisition or SHP Investors Sub, if an acquisition proposal
from a third party that is publicly announced has been commenced or
communicated in writing to us and contains a proposal as to price and:
-- we have not rejected such proposal within ten business days after
the date of receipt thereof by us or after the date its existence
first becomes publicly announced, if sooner, or
-- we have failed to confirm the recommendation of our Board of
Directors approving the merger and adopting the merger agreement
within ten business days after being requested by SHP Investors
Sub to do so;
- by SHP Acquisition or SHP Investors Sub, if the fees with respect to
obtaining the consent of franchisors under certain franchise
agreements with respect to our hotel properties to the transactions
contemplated by the merger agreement exceed $25 million and we do not
elect to decrease the Merger Consideration by the amount of such
excess; or
- by SHP Acquisition or SHP Investors Sub, if the Merger Proposals are
approved by the required stockholders and the ratification and
approval of such approval by our Board of Directors does not occur by
the first business day following the approval by our stockholders.
TERMINATION FEES AND EXPENSES
In the event the merger agreement is terminated for certain of the
reasons described above, we and the Operating Partnership will be obligated to
pay SHP Acquisition, or SHP Acquisition and SHP Investors Sub will be obligated
to pay us, on behalf of the Operating Partnership, the stockholders and the
holders of OP Units:
- a termination fee in the amount of $17.5 million (the "Termination
Fee") (or, in the case of amounts payable to us, the lesser of $17.5
million or the maximum amount that can be paid to us without causing
us to fail to meet certain REIT requirements); and/or
- the lesser of the documented out-of-pocket expenses incurred by the
party to which the payment is to be made in connection with the merger
agreement and the transactions contemplated thereby, not to exceed
$7.5 million (the "Termination Expenses") or certain specified
amounts.
The payment of the Termination Fee and Termination Expenses by SHP
Acquisition and SHP Investors Sub is secured by a letter of credit in the amount
of $25 million. The right to draw on the letter of credit is our exclusive
remedy against SHP Acquisition and SHP Investors Sub for any and all losses
suffered as a result of the failure of the merger and the Operating Partnership
merger to be consummated. The letter of credit is held by Fidelity
<PAGE>
89
National Title Insurance Company, as escrow agent, under an escrow
agreement among us, SHP Investors Sub, SHP Acquisition and Fidelity
National.
The following table summarizes the circumstances in which the
merger agreement may be terminated and the payments required to be made in
connection therewith:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Terminating Party Event Giving Rise to Right to Terminate Payment
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mutual Written consent of Sunstone, SHP No payment
Acquisition and SHP Investors Sub
- -------------------------------------------------------------------------------------------------------------------
SHP Acquisition or SHP Breach by Sunstone of any representation Sunstone and the Operating
Investors Sub or warranty or breach by Sunstone of any Partnership pay Termination Fee
covenant, obligation or agreement, except plus Termination Expenses
with respect to certain unwillful and other
breaches as described below
- -------------------------------------------------------------------------------------------------------------------
SHP Acquisition or SHP Unwillful breach by Sunstone of a Sunstone and the Operating
Investors Sub specified representation with respect to Partnership pay $7.5 million plus
environmental matters, or breach of any Termination Expenses
representation which Mr. Alter knew was not
true and correct when made
- -------------------------------------------------------------------------------------------------------------------
Sunstone Breach by SHP Acquisition or SHP Investors SHP Acquisition or SHP Investors
Sub of any representation, warranty, Sub pay Termination Fee plus
covenant, obligation or agreement Termination Expenses
- -------------------------------------------------------------------------------------------------------------------
Sunstone (unless in breach The requisite approval of the stockholders Sunstone and the Operating
of its obligations to give has not been obtained at meeting of Partnership pay Termination
notice of and hold stockholders Expenses, provided that SHP
meeting of stockholders) Acquisition and SHP Investors
or SHP Acquisition or SHP Sub are not in material breach of
Investors Sub (unless in merger agreement, and both the
breach of their obligations commitment letter with Paine Webber
to use reasonable best and the contribution agreement
efforts to obtain equity relating to the contributions to
and debt financing) SHP Acquisition at the closing of
the merger are in full force and
effect
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
90
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Terminating Party Event Giving Rise to Right to Terminate Payment
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sunstone (unless in breach The requisite approval of the stockholders Sunstone and the Operating
of its obligations to give has not been obtained at meeting of Partnership pay Termination Fee
notice of and hold stockholders or the requisite approval of plus Termination Expenses, to the
meeting of stockholders) the Operating Partnership's partnership extent not already paid provided
or SHP Acquisition or SHP agreement has not been obtained within five that SHP Acquisition and SHP
Investors Sub (unless in days of the stockholder approval, and Investors Sub are not in material
breach of their obligations Acquisition Proposal has been by breach of merger agreement, and
to use reasonable best Sunstone or publicly announced at or both the commitment letter with
efforts to obtain equity prior to the time of termination of the Paine Webber and the contribution
and debt financing) merger agreement, and either prior to or agreement are in full force and
within 12 months of such termination, effect
a written agreement (other than a
confidentiality agreement entered
into in compliance with the terms of
the merger agreement) is entered into
with respect to an Acquisition
Proposal or an Acquisition Proposal
is consummated with any person who
made an Acquisition Proposal prior to
termination of the merger agreement.
- -------------------------------------------------------------------------------------------------------------------
Sunstone Prior to the special meeting if the Board Sunstone and the Operating Partnership
of Directors has withdrawn or modified its pay Termination Fee plus Termination
approval or recommendation of the merger Expenses provided that SHP Acquisition
in connection with, or approved or and SHP Investors Sub are not in
recommended, a Superior Acquisition material breach of merger agreement, and
Proposal both the commitment letter with Paine
Webber and the contribution agreement
are in full force and effect
- -------------------------------------------------------------------------------------------------------------------
SHP Acquisition and SHP The Board of Directors, prior to the Sunstone and the Operating
Investors Sub special meeting, has withdrawn or Partnership pay Termination Fee
modified in any manner adverse to SHP plus Termination Expenses provided
Investors Sub or SHP Acquisition its that SHP Acquisition and SHP
approval or recommendation of the Merger Investors Sub are not in material
Proposals or has approved or recommended breach of merger agreement, and
any other Acquisition Proposal, or both the commitment letter with
Sunstone has entered into an agreement Paine Webber and the contribution
with respect to any Acquisition agreement are in full force and
Proposal (other than a confidentiality effect
agreement entered into in compliance with
the provisions of the merger agreement)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
91
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Terminating Party Event Giving Rise to Right to Terminate Payment
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sunstone The commitment letter with Paine Webber is No payment
terminated for any reason and Sunstone
acts to terminate before the date the
closing of the merger would otherwise have
occurred
- -------------------------------------------------------------------------------------------------------------------
Sunstone The borrowings contemplated by the SHP Acquisition pays Termination
commitment letter with Paine Webber have Expenses plus Termination Fee
not been closed on or prior to the date
the closing of the merger would otherwise
have occurred unless a Lender Property
Determination was made
- -------------------------------------------------------------------------------------------------------------------
SHP Investors Sub or SHP The borrowings contemplated by the No payment
Acquisition commitment letter with Paine Webber have
not been closed on or prior to the date
the closing of the merger would otherwise
have occurred because a Lender Property
Determination was made
- -------------------------------------------------------------------------------------------------------------------
SHP Investors Sub or SHP (i) Another acquisition proposal has been Sunstone and the Operating Partnership
Acquisition publicly announced and Sunstone has not pay Termination Fee plus Termination
rejected such proposal within ten business Expenses provided that SHP Acquisition
days or (ii) Sunstone has failed to and SHP Investors Sub are not in
confirm its recommendation of the Merger material breach of merger agreement, and
Proposals within ten business days of both the commitment letter with Paine
SHP Investors Sub's request to do so Webber and the contribution agreement
are in full force and effect
- -------------------------------------------------------------------------------------------------------------------
Any party Any judgment, injunction, order, decree or No payment
action of a governmental authority
preventing the consummation of the merger
has become final and non-appealable
- -------------------------------------------------------------------------------------------------------------------
Any party (so long as such Closing of the merger has not occurred on No payment
party is not in breach) or before December 31,1999
- -------------------------------------------------------------------------------------------------------------------
Sunstone Closing of the merger has not occurred Sunstone will pay Termination Expenses
on or before December 31, 1999 and
Sunstone has not mailed the Proxy Statement
to the stockholders because lender under
the commitment letter with Paine Webber has
not provided Sunstone with certification
that it has reviewed substantially all the
property reports with respect to Sunstone's
properties
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
92
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Terminating Party Event Giving Rise to Right to Terminate Payment
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHP Acquisition or SHP Fees to obtain consents of franchisors No payment
Investors Sub under certain franchise agreement for
Sunstone's properties to the transactions
contemplated by the merger agreement exceed
$25 million, and Sunstone does not elect to
adjust the Merger Consideration in the
amount of such excess
- -------------------------------------------------------------------------------------------------------------------
SHP Acquisition or SHP The Merger Proposals are approved by the Sunstone to pay Termination Fee and
Investors Sub required stockholders and the ratification Termination Expenses
and approval of such approval by the Board
of Directors of Sunstone does not occur by
the first business day following the
approval by the stockholders
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
AMENDMENT AND WAIVER
The merger agreement provides that it may be amended in writing
by the parties thereto, by action taken by their respective Boards of
Directors or other governing bodies at any time before or after approval of
the Merger Proposals by the stockholders and prior to the effective time of
the merger, but, after such approval, no amendment, modification or
supplement may be made which by law requires further approval by the
stockholders without obtaining such further approval. The parties have
agreed to amend the merger agreement in this manner to the extent required
to continue our status as a REIT.
At any time prior to the effective time of the merger, the
parties to the merger agreement may, to the extent legally allowed:
- extend the time for the performance of any of the obligations or
other acts of the other party;
- waive any inaccuracies in the representations and warranties of
any other party contained in the merger agreement or in any
document delivered pursuant to the merger agreement; and
- subject to the limitations set forth in the preceding paragraph
with respect to further stockholder approval, waive compliance
with any of the agreements or conditions contained in the merger
agreement.
Any agreement on the part of a party to the merger agreement to any such
extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party.
<PAGE>
93
DIRECTORS RESOLUTIONS RECOMMENDING REIT TERMINATION (ITEM NO. 2)
The consummation of the merger is conditioned upon the approval
by our stockholders of the resolutions of our Board of Directors
recommending the termination of our status as a REIT and certain amendment
of our Charter, including Article V thereof, and the implementation of
those actions by us. This proposal will be voted upon separately by our
stockholders; however, unless our stockholders approve all three Merger
Proposals, we will not close the merger or implement any of the Merger
Proposals.
Approval of the resolutions of our Board of Directors
recommending termination of our status as a REIT and the related amendment
of Article V of our Charter by the stockholders shall be deemed also to
constitute approval of a resolution authorizing our Board of Directors, at
any time prior to consummation of the merger, to abandon such proposed
termination of the status of Sunstone as a REIT and the related amendments
of our Charter without further action by the stockholders, in connection
with the termination of the merger agreement or otherwise, notwithstanding
the approval by the stockholders. Furthermore, we do not intend to effect
the termination of REIT status or to amend our charter as recommended by
our Board of Directors until the conditions to closing the merger are
satisfied.
SHP Investors Sub is not a REIT and after completion of the
merger Sunstone will terminate its status as a REIT. The Charter provides
that to terminate our status as a REIT or to make any amendment of Article
V of the Charter (which contains REIT-related restrictions and limitations
on the equity shares of Sunstone), the Board must first adopt a resolution
recommending the termination of the REIT status or amendment of Article V
of the Charter and then present such resolution to the stockholders for
approval. The Board has adopted resolutions recommending that we terminate
our status as a REIT for federal tax purposes in connection with the
proposed merger. A copy of the resolution of our Board of Directors
relating to the proposed termination is attached as Appendix D to this
Proxy Statement. This summary is qualified in all respects by reference to
Appendix D.
The proposed amendment of our Charter would amend our Charter so
as to no longer require us to remain a REIT after the merger and make
certain amendment of Article V of our Charter. The full text of the
proposed amendment of Article V of the Charter appear as items 2, 3, 4, 5
and 6 of Appendix C to this Proxy Statement. The following summary is
qualified in all respects by reference to Appendix C.
Item 4 of Appendix C relates to the deletion from our Charter of
Sections 2, 4 and 7 of Article V, which contain, among other things, REIT-
related restrictions on the ownership of our common stock and preferred
stock as summarized below. The following description is qualified in its
entirety by reference to our Charter.
Our Charter currently provides that, subject to certain
exceptions, no person may own, or be deemed to own by virtue of the
constructive ownership provisions of the Internal Revenue Code of 1986, as
amended, more than 9.8% of the lesser in value of the total number or value
of our outstanding shares of common stock or our outstanding shares of
preferred stock.
<PAGE>
94
Our Charter also prohibits any transfer of our common stock or preferred
stock that would (i) result in our common stock and preferred stock being
owned by fewer than 100 persons (determined without reference to any rules
of attribution under the Internal Revenue Code of 1986, as amended), (ii)
result in our being "closely held" within the meaning of Section 856(h) of
the Internal Revenue Code of 1986, as amended, or (iii) cause us to own,
directly or constructively, 10% or more of the ownership interests in a
tenant of our or the Operating Partnership's real property, within the
meaning of Section 856(d)(2)(B) of the Internal Revenue Code of 1986, as
amended. Under our current Charter, any such acquisition or transfer of our
common stock or preferred stock will be null and void, and the intended
transferee or owner will acquire no rights to, or economic interests in,
the transferred shares.
Under our current Charter, any purported transfer of our common
stock or preferred stock that would (a) result in any person owning,
directly or indirectly, common stock or preferred stock in excess of the
9.8% ownership limitation discussed above, (b) result in our common stock
and preferred stock being owned by fewer than 100 persons (determined
without reference to any rules of attribution), (c) result in our being
"closely held" within the meaning of Section 856(h) of the Internal Revenue
Code of 1986, as amended, or (d) cause us to own, directly or
constructively, 10% or more of the ownership interests in a tenant of our
or the Operating Partnership's real property, within the meaning of Section
856(d)(2)(B) of the Internal Revenue Code of 1986, as amended, will be
designated as "Shares-in-Trust" and transferred automatically to a trust
effective on the day before the purported transfer of such common stock or
preferred stock. The record holder of the shares of common stock or
preferred stock that are designated as Shares-in-Trust will be required to
submit such number of shares of common stock or preferred stock to the
trust for designation in the name of a trustee designated by us. The
beneficiary of that trust will be one or more charitable organizations
named by us.
Our Charter provides that Shares-in-Trust will remain issued and
outstanding common stock or preferred stock and will be entitled to the
same rights and privileges as all other shares of the same class or series.
The trust in which the Shares-in-Trust are placed will receive all
dividends and distributions on the Shares-in-Trust and will hold such
dividends or distributions in trust for the benefit of the relevant
beneficiary. The trustee of that trust will vote all Shares-in-Trust and
will designate a permitted transferee of the Shares-in-Trust, provided that
the permitted transferee (i) purchases such Shares-in-Trust for valuable
consideration and (ii) acquires such Shares-in-Trust without such
acquisition resulting in a transfer to another trust.
Currently, the record holder of the shares of our common stock or
preferred stock that are designated as Shares-in-Trust are required to
repay to the trust in which those Shares-in-Trust are placed the amount of
any dividends or distributions received by that record holder (1) that are
attributable to any Shares-in-Trust and (2) for which the record date was
on or after the date that such shares became Shares-in-Trust. Such a holder
generally will receive from the trustee the lesser of (i) the price per
share such holder paid for our common stock or preferred stock that were
designated as Shares-in-Trust (or, in the case of a gift or devise, the
market price (based on a five day trading average) per share on the date of
such transfer) and (ii) the price per share received by the trustee from
the sale or other disposition of such Shares-in-Trust. Any
<PAGE>
95
amounts received by the Share Trustee in excess of the amounts to be paid
to the record holder will be distributed to the beneficiary designated by
us.
The Shares-in-Trust will be deemed to have been offered for sale
to us or our designee at a price per share equal to the lesser of (A) the
price per share in the transaction that created such Shares-in-Trust (or,
in the case of a gift or devise, the market price per share on the date of
such transfer) or (B) the market price per share on the date that we, or
our designee, accept such offer. We will have the right to accept such
offer for a period of ninety days after the later of the date of the
purported transfer which resulted in such Shares-in-Trust and the date we
determine in good faith that a transfer resulting in such Shares-in-Trust
occurred.
Any person who acquires or attempts to acquire our common stock
or preferred stock in violation of the foregoing restrictions, or any
person who owned shares of our common stock or preferred stock that were
transferred to a trust pursuant to the above-described provisions will be
required (i) to give immediately written notice to us of such event and
(ii) to provide us with such other information as we may request in order
to determine the effect, if any, of such transfer on our status as a REIT.
Under our current Charter, all persons who own, directly or
indirectly, more than 5% (or such lower percentages as required pursuant to
regulations under the Internal Revenue Code of 1986, as amended) of our
outstanding shares of common stock and preferred stock must within 30 days
after January 1 of each year, provide us with a written statement or
affidavit stating the name and address of such direct or indirect owner,
the number of shares of our common stock and preferred stock owned directly
or indirectly and a description of how such shares are held. In addition,
each direct or indirect stockholder must provide us with such additional
information as we may request in order to determine the effect, if any, of
such ownership on our as a REIT and to ensure compliance with the 9.8%
ownership limitation.
Any certificates representing shares of our common stock or
preferred stock are currently required to bear a legend referring to the
restrictions described above. Furthermore, our Charter currently provides
that any of our shares of our common stock or preferred stock that are the
subject of a settlement of any transaction entered into through the
facilities of the New York Stock Exchange will continue to be subject to
the terms of Article V of our Charter subsequent to such settlement.
The proposed amendment of our Charter described in Item 4 on
Appendix C would delete all of the restrictive provisions described above.
Items 2, 3, 5, 6 and 7 of Appendix C contain proposed amendment of conform
the language in our Charter to reflect the deletions proposed in Item 4.
Specifically, Items 2 and 3 conform references to sections of Article V
that would be renumbered to reflect the proposed deletions, and Items 5 and
6 remove references to the restrictive provisions of Article V that are
being proposed to be deleted. Item 5 also provides that the description of
the rights and preferences of our common shares contained therein will be
subject to the provision of our Charter relating to the classification and
reclassification of our capital stock.
<PAGE>
96
CHARTER AMENDMENTS (ITEM NO. 3)
The consummation of the merger is conditioned up the approval of
certain amendment of the Charter in connection with the merger to permit us
to terminate our status as a REIT, as contemplated by the resolutions
referred to in Item No. 2, by our stockholders and the filing of these
amendments with the Department of Assessments and Taxation of Maryland.
This proposal will be voted upon separately by our stockholders; however,
unless our stockholders approve all three Merger Proposals, we will not
close the merger or implement any of the Merger Proposals.
The stockholders are being asked to approve this additional
amendment of the Charter, as well as the amendment of Article V,
substantially in a form that would result in the provisions of the Charter
as so amended, if the Charter were to be restated, reading in their
entirety as set forth in the composite form of restated Charter included as
Appendix E to this Proxy Statement. The following is a summary of this
additional amendment of the Charter. The amendment of Article V of the
Charter and all other articles thereof required by the Merger Proposals are
set forth as Appendix C to this Proxy Statement. This summary is qualified
in its entirety by reference to Appendix C.
Approval of the amendment of the Charter by the stockholders
shall be deemed also to constitute approval of a resolution authorizing our
Board of Directors, at any time prior to the filing of the amendment of the
Charter with the Department of Assessments and Taxation of Maryland, to
abandon such proposed amendment without further action by the stockholders,
in connection with the termination of the merger agreement or otherwise,
notwithstanding the approval of by the stockholders. We do not intend to
file the amendment of the Charter with the Department of Assessments and
Taxation of Maryland until the conditions to closing the merger are
satisfied.
The Charter contains a number of provisions, in addition to those
contained in Article V thereof, which refer to our status as a REIT. Upon
completion of the merger we would no longer be a REIT. This proposal seeks
approval from the stockholders of amendment of the Charter which would
delete references to our being a REIT in those articles of the Charter
other than Article V.
Items 1, 7, 8, 9, 10 and 11 of Appendix C to this Proxy Statement
are the changes to those provisions of the Charter other than Article V
which relate to the termination of our status as a REIT. Item 1 would
delete a provision in our Charter that states that we shall engage in
business as a REIT, qualifying as such for federal income tax purposes.
Item 7 would delete a reference to the 9.8% ownership limit set forth in
Section 2 of Article V, which is proposed to be deleted as discussed above.
Item 8 would conform a section reference to the newly numbered section in
Article V (renumbered to reflect the proposed deletions to provisions of
Article V). Item 9 would delete a provision in our Charter that requires
that no provision of our Charter may be amended in any respect that would
cause us not to be a REIT for federal income tax purposes unless approved
by the affirmative vote of at least two-thirds of all votes entitled to be
cast on the matter. Item 10 would delete the provision in our Charter that
states that our Board shall not take
<PAGE>
97
any action to terminate our status as a REIT or amend provisions of Article
V of our charter until certain actions are undertaken. Finally, Item 11
would renumber certain sections of Article V of our Charter to reflect the
deletion of certain provisions of Article V, as discussed above.
SELECTED FINANCIAL DATA OF SUNSTONE AND LESSEE
The following table sets forth selected financial data and other
operating information of us and Lessee. The selected financial data in the
tables are derived from the consolidated financial statements of us and
Lessee and should be read in conjunction with the consolidated financial
statements, related notes thereto and other financial information included
or incorporated by reference in this Proxy Statement.
SUNSTONE HOTEL INVESTORS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Inception
Six Months August 16, 1995
Ended June 30, For the Years Ended December 31, to December 31,
1999 1998 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Lease revenue -Lessee $ 49,898,000 $ 48,462,000 $ 98,682,000 $ 44,680,000 $ 14,848,000 $ 3,013,000
Interest and other 358,000 140,000 473,000 471,000 236,000 47,000
income ------------- ------------- ------------- ------------- ------------ ------------
50,256,000 48,602,000 99,155,000 45,151,000 15,084,000 3,060,000
------------- ------------- ------------- ------------- ------------ ------------
EXPENSES:
Real estate related
depreciation
and amortization 20,281,000 16,912,000 35,835,000 14,749,000 4,514,000 968,000
Interest expense and
amortization of 13,645,000 10,108,000 23,734,000 6,365,000 1,558,000 47,000
financing costs
Real estate and
personal property
taxes and
insurance 6,078,000 5,662,000 11,409,000 4,670,000 1,273,000 312,000
General and
administrative 2,906,000 2,374,000 5,344,000 1,890,000 1,015,000 109,000
Transaction costs 2,222,000 - - - - -
Cost of withdrawn
offerings - - 1,450,000 - - -
------------- ------------- ------------- ------------- ------------ ------------
Total expenses 45,132,000 35,056,000 77,772,000 27,674,000 8,360,000 1,436,000
Income before gain
(losses) on
dispositions of
hotel
properties,
minority interest
and extraordinary
item 5,124,000 13,546,000 21,383,000 17,477,000 6,724,000 1,624,000
Gain (losses) on
dispositions of
hotel properties 490,000 - (3,574,000) - - -
Minority interest (243,000) (675,000) (851,000) (1,886,000) (1,090,000) (284,000)
------------- ------------- ------------- ------------ ------------
Income before
extraordinary item 5,371,000 12,871,000 16,958,000 15,591,000 5,634,000 1,340,000
Extraordinary charge
for early
extinguishment of
debt (net of
$34,000 of
minority interest) - - - - - (159,000)
------------- ------------- ------------- ------------- ------------ ------------
</TABLE>
<PAGE>
98
<TABLE>
<CAPTION>
Inception
Six Months August 16, 1995
Ended June 30, For the Years Ended December 31, to December 31,
1999 1998 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET INCOME 5,371,000 12,871,000 16,958,000 15,591,000 5,634,000 1,181,000
Distributions on (979,000) (979,000) (1,975,000) (422,000) - -
preferred shares ------------- ------------- ------------- ------------- ------------ ------------
INCOME AVAILABLE TO
COMMON STOCKHOLDERS $ 4,392,000 $ 11,892,000 $ 14,983,000 $ 15,169,000 $ 5,634,000 $ 1,181,000
============= ============= ============= ============= ============ ============
EARNINGS PER SHARE - BASIC $0.12 $0.33 $0.40 $0.72 $0.70 $0.19
EARNINGS PER SHARE - DILUTED $0.12 $0.32 $0.40 $0.71 $0.69 $0.19
DIVIDENDS DECLARED PER
COMMON SHARE $0.285 $0.55 $1.12 $1.05 $0.96 $0.35
CASH FLOW FROM
OPERATING ACTIVITIES $ 25,736,000 $ 28,233,000 $ 63,911,000 $ 24,316,000 $ 11,669,000 $ 2,291,000
CASH FLOW USED IN
INVESTING ACTIVITIES (66,215,000) (145,787,000) (165,441,000) (392,546,000) (82,757,000) (32,899,000)
CASH FLOW FROM
FINANCING ACTIVITIES 41,550,000 114,162,000 98,805,000 371,672,000 66,008,000 35,824,000
RATIO OF EARNINGS TO
COMBINED FIXED
CHARGES AND PREFERRED
DISTRIBUTIONS (1) 1.2x 1.7x 1.5x 2.6x -- --
FUNDS FROM OPERATIONS (2) $ 27,627,000 $ 30,458,000 $ 57,218,000 $ 32,226,000 $ 11,238,000 $ 2,592,000
Balance sheet and Other Data:
Investments in hotel properties,
net $ 874,801,000 839,314,000 $ 840,974,000 $ 704,817,000 $152,937,000 $ 50,063,000
Total assets 916,899,000 878,424,000 875,636,000 739,577,000 160,079,000 57,226,000
Total debt 455,387,000 383,007,000 398,893,000 307,830,000 63,300,000 11,510,000
STOCKHOLDERS' EQUITY 437,603,000 468,740,000 451,250,000 397,887,000 80,801,000 37,495,000
BOOK VALUE PER COMMON
SHARE (3) $11.65 -- $12.01 -- -- --
Number of properties owned at
end of period 58 61 57 53 24 11
Number of rooms at end of period 10,361 11,005 10,215 9,854 3,389 1,477
</TABLE>
(1) For purposes of computing the ratios of earnings to combined fixed
charges and preferred dividends, earnings consist of income before
extraordinary items and minority interest in the income of the
Operating Partnership and fixed charges, excluding capitalized
interest. Fixed charges consist of interest, whether expensed or
capitalized and amortization of deferred financing costs.
<PAGE>
99
(2) Management and industry analysts generally consider funds from
operations to be an appropriate measure of the performance of an
equity REIT. The White Paper on funds from operations approved by the
Board of Governors of the National Association of Real Estate
Investment Trusts, Inc. ("NAREIT") defines funds from operations as
net income or loss (computed in accordance with GAAP), excluding gains
or losses from debt restructuring and sales of property, plus real
estate related depreciation and amortization, and after adjustments
for unconsolidated partnerships and joint ventures. Sunstone computes
funds from operations in accordance with standards established by
NAREIT, adjusted for minority interest and nonrecurring items, which
may not be comparable to funds from operations reported by other REITs
that do not define the term in accordance with the current NAREIT
definition or that interpret the current NAREIT definition differently
than Sunstone.
Funds from operations should be considered in conjunction with net
income and cash flows from operating, investing and financing
activities as presented in Sunstone's consolidated financial
statements and notes thereto. Funds from operations should not be
considered as an alternative to net income (determined in accordance
with GAAP) as an indication of Sunstone's financial performance or to
cash flow from operating, investing or financing activities
(determined in accordance with GAAP) as a measure of Sunstone's
liquidity, nor is it indicative of funds available to fund Sunstone's
cash needs, including its ability to make cash distributions. Funds
from operations may include funds that may not be available for
management's discretionary use due to the requirements to conserve
funds for capital expenditures and property acquisitions and other
commitments.
(3) Book value per share is calculated by dividing the number of
outstanding shares of common stock into stockholders' equity.
LESSEE AND ITS PREDECESSOR
<TABLE>
<CAPTION>
Sunstone Hotel Properties Inc. (Lessee) Sunstone Hotels (Predecessor)
--------------------------------------- -------------------------------
Six Months From August 16, For the Period For the
Ended June 30, For the Years Ended December 31, 1995 (Inception) January 1, 1995 Year Ended
to December 31, to August 15, December 31,
1999 1998 1998 1997 1996 1995 1995 1994
---- ---- ---- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hotel operating
revenue $136,559,000 $136,340,000 $273,596,000 $118,153,000 $38,593,000 $7,925,000 $9,675,000 $13,863,000
Hotel operating
expense 85,754,000 89,800,000 179,297,000 75,604,000 26,907,000 5,658,000 5,679,000 9,168,000
Operating Profit 50,805,000 46,540,000 94,299,000 42,549,000 11,686,000 2,267,000 3,996,000 4,695,000
Lease rent
expense 49,898,000 48,462,000 98,682,000 44,680,000 14,848,000 3,013,000 - -
Net income (loss) 907,000 (1,922,000) (4,383,000) (2,131,000) (3,162,000) (746,000) 1,674,000 398,000
</TABLE>
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Proxy Statement are forward-looking
statements that involve risks and uncertainties that could cause our actual
results to differ materially from the expectations described in such statements.
These risks and uncertainties include the factors referred to under the section
captioned "Forward-Looking Statements" in our Annual Report on
<PAGE>
100
Form 10-K/A for the year ended December 31, 1998, which is incorporated in this
Proxy Statement by reference. Forward-looking statements include the information
set forth under "Certain Financial Projections of Sunstone." Such information
has been included in this Proxy Statement for the limited purpose of giving the
stockholders access to financial projections that were furnished to our Board of
Directors, the Special Committee, Goldman Sachs, SHP Acquisition and certain
potential bidders, and their financial advisors.
CERTAIN FINANCIAL PROJECTIONS REGARDING SUNSTONE
The information set forth in this section is based on the June 28
Projections, the April 29 Projections and the June 11 Projections, and the
underlying assumptions concerning our business prospects, revenue and operations
in the years 1999 and 2000. The information also was based on other industry
specific revenue and operating assumptions. Information of this type is based on
estimates and assumptions that are inherently subject to significant economic
and competitive uncertainties and contingencies, all of which are difficult to
predict and many of which are beyond our control. Accordingly, there can be no
assurance that the projected results would be realized or that actual results
would not be significantly higher or lower than those set forth in the
projections described in this section.
As further described under "Background of the Merger," the April 29
Projections were provided to SHP Acquisition and to the other twenty potential
bidders who were distributed information packages regarding us and our
properties by Goldman Sachs. The April 29 Projections were prepared by Lessee
and the Management Company and used by us to generate certain of our financial
information including funds from operations (FFO). Shortly after the release of
the April 29 Projections, after learning that our actual results for April would
be less than the budgeted amounts underlying the April 29 Projections, the
Special Committee believed the projections needed to be revised to reflect more
current financial performance of our properties.
The June 11 Projections, which updated the April 29 Projections, were
provided to Goldman Sachs, Competing Bidder and SHP Acquisition. The June 11
Projections were prepared by Lessee and the Management Company and used by us in
a similar manner to the April 29 Projections, although we did not provide all of
the items provided in the April 29 Projections.
Between April 29 and June 11, the Special Committee appointed Mr. Vern
Deming, an independent consultant who was not affiliated with us, Lessee or the
Management Company, to examine various issues regarding our, Lessee's and the
Management Company's financial performance. As part of his assignment, Mr.
Deming reviewed, among other things, the April 29 Projections and the June 11
Projections.
After receiving and reviewing the June 11 Projections, reviewing our
and Lessee's results for the first five months of 1999, noting that our actual
performance did not meet budgeted performance and following discussions with the
independent consultant regarding the June 11 Projections, the Special Committee
instructed the independent consultant to prepare revised projections. The June
28
<PAGE>
101
Projections, prepared at the request of the Special Committee and without the
involvement of, or review by, our management, Lessee or the Management Company:
- were based upon certain of the financial information used to prepare
the June 11 Projections,
- included our and Lessee's actual financial results for the first five
months of 1999 and
- were based upon revised assumptions that the independent consultant
believed would more accurately forecast our results for the remained
of 1999 and for 2000.
- We then used the projections of the independent consultant to generate
certain projections regarding us.
Following the Special Committee's review of the June 28 Projections,
and because of the Special Committee's concerns with the April 29 Projections
and the June 11 Projections described above, the Special Committee instructed
Goldman Sachs to rely only on, and Goldman Sachs relied only on, the June 28
Projections.
We do not as a matter of course publicly disclose either our, Lessee's
or the Management Company's internal budgets, plans, estimates, forecasts or
projections as to future revenues, earnings or other financial information.
Projections are included in this Proxy Statement only because the April 29
Projections and the June 11 Projections were provided to SHP Acquisition and
other bidders and each set of the projections was made available to Goldman
Sachs. The items supplied in these projections are the items provided to the
above parties.
The projections described in this section were not prepared with a
view to public disclosure or compliance with the published guidelines of the
Securities and Exchange Commission or the guidelines established by the American
Institute of Certified Public Accountants regarding projections and forecasts.
Neither our independent auditors, nor any other independent accountants, have
compiled, examined or performed any procedures with respect to the prospective
financial information contained in the projections, nor have they expressed any
opinion or given any form of assurance on such information or its ability to be
achieved. For all of the reasons described above, stockholders should not place
undue reliance on any of the projections.
While presented with numerical specificity, the projections
necessarily were based on numerous assumptions, the material ones of which are
set forth below and many of which are beyond our control and may prove not to
have been, or may no longer be, accurate. However, we believe that as of the
date they were prepared, such assumptions were reasonable given the information
known by management as of such date. The projections do not reflect any of the
effects of the merger and do not reflect revised prospects for our business,
changes in general business and economic conditions, or any other transaction or
event that has occurred or that may occur and that was not anticipated at the
time the projections were prepared. Accordingly, such information is not
necessarily indicative of current values or future performance, which may be
significantly more favorable or less favorable than as set forth below, and
should not be regarded as a representation that they will be achieved.
<PAGE>
102
The information set forth below should be read together with the
information contained in our Annual Report on Form 10-K/A for the year ended
December 31, 1998, our Quarterly Report on Form 10-Q for the quarter ended June
30, 1999 and the other information included or incorporated by reference in this
Proxy Statement.
No party who made the projections or to whom the projections were
provided can give any assurances as to the accuracy of any such projections or
their underlying assumptions. The projections are not guarantees of performance.
They involve risks, uncertainties and assumptions. Our future results and
stockholder value may differ materially from those expressed in the projections.
Many of the factors that will determine these results and values are beyond our
ability to control or predict. There can be no assurance that the projections
will be realized or that our future financial results will not materially vary
from the projections. We do not intend to update or revise the projections
except as may be required by applicable law.
JUNE 28 PROJECTIONS
Subject to the qualifications and limitations stated above, the June
28 Projections prepared by the independent consultant are generally based upon
the following material assumptions of the independent consultant:
- Property revenues, expenses and resulting net operating income were
determined through analysis of our portfolio's actual individual
property performance for the first five months of 1999.
- Projections for the balance of 1999 were made with consideration of
market dynamics on an individual property basis. As such, individual
properties, whose performance was either enhanced or diminished due to
specific market conditions, were forecasted to perform in a similar
manner to the property's five-month actual performance for the balance
of 1999.
- Expense ratios expressed in management's forecasts (including the
April 29 Projections and the June 11 Projections) that produced wide
fluctuations to past performance were adjusted to reflect industry
norms for similar properties.
- Properties added to our portfolio during 1999 were forecasted using
most recent management projections.
- Consideration for occupancy and rate improvement was made for
properties that had recently completed extensive renovation programs.
- Many of our portfolio's properties had been recently re-flagged or a
brand change was imminent. Newly re-flagged hotels were, therefore,
forecasted to achieve revenue growth higher than the growth forecasted
by the portfolio.
- Property performance was made on an individual basis.
<PAGE>
103
- Projections for revenues other than rooms revenue were projected on a
"per occupied room basis."
- Departmental expenses were adjusted on an individual property basis to
account for fixed costs which will not be affected by changes in
business volumes.
- No expense adjustments were forecasted for future statutory increases
in the federal minimum wage.
- No changes were contemplated in our debt structure and no assumption
was made for an increase in equity capital.
- No disposition or acquisition of properties was considered.
- No further renovation projects were considered.
- Adjustments for the year 2000 were made with respect to average daily
rate, growth in occupancy and CPI increase, each on a hotel by hotel
basis.
JUNE 28 PROJECTIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Property Level Data (a) 1999 2000
- ----------------------- ---------- ----------
<S> <C> <C>
Occupancy 68.5% 70.1%
Average Daily Rate (ADR) $ 86.61 $ 90.77
Revenue per Available Room (RevPAR) 59.33 63.63
Lessee Total Revenue $281,289.8 $306,659.1
Gross Operating Profit 127,187.2 139,396.3
REIT Level Data (b)
- -------------------
REIT Total Revenue $110,018.0 $119,946.0
REIT Rent Revenue 109,734.9 119,542.3
REIT Real Estate Property Taxes & Insurance (13,392) (14,004)
REIT General & Administrative (4,957) (5,205)
REIT Funds From Operations (FFO) 60,491.0 65,516.0
REIT Fully Diluted FFO/Share and Unit $ 1.45 $ 1.57
</TABLE>
(a) Prepared by independent consultant.
(b) Prepared based upon Property Level Data, using our existing models.
APRIL 29 AND JUNE 11 PROJECTIONS
Subject to the qualifications and limitations stated above, the April
29 Projections and the June 11 Projections prepared by Lessee and the Management
Company are generally based upon the following material assumptions:
- Property revenues, expenses and resulting net operating income were
determined through analysis of our portfolio's actual individual
property performance for the
<PAGE>
104
first three months of 1999, in the case of the April 29 Projections,
and the first four months of 1999, in the case of the June 11
Projections.
- Projections are pro forma for an un-levered integrated company which
includes us, Lessee and the Management Company.
- Management fees to the Management Company and rent expense to Lessee
have been eliminated in the pro forma combination.
- Property taxes and insurance are based on 1999 estimated plus 2% per
year increases thereafter.
- Ground lease payments generally are calculated based on the actual
lease terms (base rent plus percentage rent, whereby percentage rent
is determined using hotel revenue projections).
- Overhead going forward on an integrated company basis is estimated by
management to be $3.5 million due to synergies and due to the
elimination of public reporting requirements. From the year 2000 on,
this overhead is projected to increase 3% annually.
- For three development assets, property taxes and insurance estimates
were not available and were estimated at 0.5% and 3% of revenues,
respectively.
- Adjustments for the year 2000 were made with respect to average daily
rate, growth in occupancy and CPI increase, each on a hotel by hotel
basis.
APRIL 29 PROJECTIONS AND JUNE 11 PROJECTIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
April 29 Projections (a) June 11 Projections (a)
Property Level Data(b) 1999 2000 1999 2000
- ---------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Occupancy 70.0% 71.2% 69.1% 70.8%
ADR $ 87.32 $ 92.84 $ 87.27 $ 92.22
RevPAR 61.17 66.15 60.31 65.31
Lessee Total Revenues $ 288,612.0 $ 320,200.0 $ 288,322.2 $ 316,390.4
Gross Operating Profit 132,712.0 146,900.0 132,006.0 145,897.6
REIT Level Data (c)
- -------------------
REIT Total Revenue 113,908.0 127,709.0 N/A (d) N/A (d)
REIT Rent Revenue 113,362.0 127,153.0 111,462.0 125,553.0
REIT Real Estate Property Taxes &
Insurance (13,727) (14,044) N/A (d) N/A (d)
REIT General & Administrative (4,988) (5,009) N/A (d) N/A (d)
</TABLE>
<PAGE>
105
<TABLE>
<S> <C> <C> <C> <C>
REIT FFO 64,236.7 74,068.0 N/A (d) N/A (d)
REIT Fully Diluted FFO/ Share and Unit 1.54 1.78 N/A (d) N/A (d)
</TABLE>
(a) Please see the above discussion for why the Special Committee
instructed Goldman Sachs not to rely upon, and why Goldman Sachs did
not rely upon, these projections.
(b) Prepared by Lessee and Management Company.
(c) Prepared based upon Property Level Data, using our existing models.
(d) Not provided.
COMMON STOCK MARKET PRICE INFORMATION; DIVIDEND INFORMATION
Our common stock is traded on the New York Stock Exchange under the
symbol "SSI." The following table shows the per share high and low sales prices
of the common stock as reported by the New York Stock Exchange. April 2, 1999
was the last full trading day prior to the day SHP Acquisition publicly
disclosed its initial proposal to effectuate the merger at a price of $9.50 to
$10.00 per share. The following table also shows, for the periods indicated, the
dividends declared per share of common stock. The closing price on the New York
Stock Exchange of the common stock on ___________, 1999 (the most recent
practicable date prior to the printing of this Proxy Statement) was $______.
Holders of common stock are encouraged to obtain current market quotations for
the common stock.
<TABLE>
<CAPTION>
Market Price of Common Stock Dividends
----------------------------
High Low Declared
---- --- --------
<S> <C> <C> <C>
1997
First Quarter $ 14.000 $12.250 $0.250
Second Quarter 14.500 12.625 0.250
Third Quarter 18.125 13.750 0.275
Fourth Quarter 18.125 15.500 0.275
1998
First Quarter $ 17.375 $14.875 $0.275
Second Quarter 16.500 12.500 0.275
Third Quarter 13.750 8.313 0.285
Fourth Quarter 11.000 6.500 0.285
1999
First Quarter $10.6875 $6.9375 $0.285
Second Quarter (through April 2, 1999) 7.6875 7.6875 __
Second Quarter (from April 2, 1999 9.4375 7.5625 __
Third Quarter through August 13, 1999 9.3125 8.5625
</TABLE>
The high and low sale prices of the common stock on July 12, 1999, the
last full trading day prior to the announcement of the signing of the merger
agreement were $______ and $______, respectively.
On _____________, we consummated our initial underwritten public
offering of _________ shares of our common stock at a price of $_____ per share
and received proceeds after underwriting discounts and commissions of
approximately $___________.
<PAGE>
106
During the 60-day period preceding the date of this Proxy Statement,
we issued _________ shares of common stock as a result of conversions of OP
Units.
Our practice is to review and declare dividends on a quarterly basis,
and to establish a dividend rate that is supportable by funds from operations,
after considering capital expenditures necessary for the maintenance of the
hotel properties. On January 15, 1999, the Board approved a dividend of $0.285
per share payable on February 15, 1999 to the stockholders of record on January
31, 1999. We do not expect to make any further dividend payments to
stockholders. However, if any further dividends are made, they will serve to
reduce the amount paid in the merger. See "Questions and Answers About the
Merger -- What will happen to my common stock dividends?"
As of _________, 1999, there were approximately _______ registered
holders of common stock and 2 registered holders of preferred stock.
As of _________, 1999, there were 250,000 shares of preferred stock
outstanding. Holders of shares of preferred stock are entitled to receive, if
declared by the Board of Directors, preferential cumulative quarterly cash
dividends, at the greater of the rate of 7.9% per annum or the dividend payable
on shares of common stock. Each share of preferred stock is currently
convertible, at the option of the holder, 6.79842 shares of common stock, based
on a conversion price of $14.7093.
The terms of the preferred stock provide that the preferred stock will
rank prior to any other series of preferred stock, prior to the common stock and
prior to any other class or series of our capital stock with respect to the
payment of dividends, the right to redemption and the distribution preference in
the event of a change in ownership or the liquidation, dissolution or winding up
of Sunstone.
If the merger is not consummated, the declaration of future dividends,
if any, will necessarily be dependent upon business conditions, the earnings and
financial position of us and our plans with respect to operating and capital
expenditures and such other matters as the Board of Directors deems relevant.
See "Questions and Answers About the Merger -- What will happen to my common
stock dividends?" Due to our financial situation, the Board would reevaluate
and may reduce or eliminate the amount of dividends we pay.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Sunstone, a Maryland corporation, was formed on September 21, 1994 and
elected to be taxed as a REIT. We completed an initial public offering on August
16, 1995 and contributed the net proceeds therefrom to the Operating
Partnership. On October 15, 1997, we purchased a portfolio consisting of 17
hotels. In order to qualify as a REIT for tax purposes, neither we nor the
Operating Partnership may operate hotels, so each of our hotels has been leased
to Lessee. Lessee is owned by Mr. Alter, our Chairman and President (80%), and
Mr. Biederman, our Vice Chairman and Executive Vice President (20%). Lessee has
entered into management
<PAGE>
107
agreements pursuant to which all of the hotels it leases from the Operating
Partnership (or its subsidiaries) are managed by the Management Company, of
which Mr. Alter is the sole stockholder.
We and the Operating Partnership have entered into a number of
transactions and agreements with Mr. Alter and Mr. Biederman and certain of
their affiliates. We receive management fees and reimbursements associated with
third-party management contracts which are primarily with entities affiliated
with Mr. Alter.
PERCENTAGE LEASES
In order for us to qualify as a REIT, the Operating Partnership (or
one of its subsidiaries) has leased each of our hotels to Lessee pursuant to
percentage leases. As of August 13, 1999, the Operating Partnership had a
portfolio of 59 hotels which it leases to Lessee pursuant to separate percentage
leases. Rent payments are based on fixed based rent plus a percentage rent
based on room revenues, Lessee's food and beverage revenues and sublease and
concession rentals.
Each percentage lease has been approved by a majority of the
Independent Directors. The percentage leases are designed to allow us to
participate in revenue growth by providing that (i) between approximately 9% to
50% in the first tier and 60% to 68% in the second tier of room revenues in
excess of specified amounts, (ii) 5% of Lessee's food and beverage revenues,
(iii) 100% of any sublease and concession rentals, and (iv) other net revenues
described in the percentage lease for the applicable hotel in excess of base
rent will be paid to the Operating Partnership as percentage rent. Once all
other operating expenses of each hotel are paid by Lessee, Lessee will be
entitled to all of the net income from the hotels.
MANAGEMENT AGREEMENTS
Lessee has entered into management agreements with the Management
Company for each of the hotels it leases from the Operating Partnership.
Pursuant to the management agreements, the Management Company provides
management and administrative services to Lessee in consideration for between 1%
to 2% of gross revenue of the hotels and reimbursement of certain direct
expenses incurred by the Management Company for Lessee. As the sole stockholder
of the Management Company, Mr. Alter would be entitled to the net income of the
Management Company. Because of Lessee's current financial condition, the
Management Company agreed to abate payment of management fees and
reimbursements, up to a maximum of $3.5 million during 1998. Management fees
amounting to $3.3 million were abated through December 31, 1998. No such
agreement is in effect for 1999.
EMPLOYMENT AGREEMENTS
We entered into employment agreements with each of Messrs. Alter and
Biederman that renew automatically each August 16 until terminated. Mr. Alter
serves as President and is required to devote substantially all of his time to
the business of Sunstone with an
<PAGE>
108
annual base compensation of $120,000 a year subject to any further increases
approved by the Compensation Committee. Mr. Biederman serves as Executive Vice
President for an annual base compensation of $30,000, subject to any increases
based on recommendations by our President for performance of special
assignments. Mr. Biederman is not required to devote substantially all of his
time to our business. Each of the employment agreements restricts competitive
activities by Mr. Alter, Mr. Biederman or any of their affiliates.
TRANSACTIONS WITH LESSEE
We and Lessee entered into a series of transactions during fiscal year
1998 relating to the hotels acquired by us and leased to Lessee. Mr. Alter owns
80% and Mr. Biederman owns 20% of Lessee. During fiscal 1998, we reimbursed
Lessee $962,000 for certain Lessee's employees' salaries and identifiable
expenses incurred in connection with acquisition and construction services.
Commencing in 1999, the employees of Lessee involved in acquisition and
construction services became our employees.
Upon the execution of each percentage lease, we assign all hotel
operating assets and liabilities to Lessee at our cost. Lessee records all such
hotel operating assets and liabilities at our cost with a corresponding net
amount payable to or receivable from us, depending on whether net assets or
liabilities were assigned. During 1998, the net assets assigned in this manner
totaled $218,000.
Lessee was reimbursed in 1998 by us for $1.6 million in costs it
incurred related to our renovation of the hotels. In addition, we reimbursed
Lessee for general and administrative expenses incurred by Lessee on behalf of
us. The total costs reimbursable to Lessee during 1998 totaled $167,000.
During 1998, Lessee reconveyed to us certain hotel telephone equipment
relating to hotels acquired from Kahler Realty Corporation that was being leased
from a third party pursuant to a capital lease agreement. The equipment carried
at $404,000 and related capital lease obligation of $421,000 were previously
assigned by us to Lessee. We agreed to assume the capital lease obligation and
to reimburse Lessee for all lease payments made by Lessee since the equipment
was assigned to Lessee in October 1997.
During 1998, Lessee reconveyed to us approximately $2.2 million in
china, glass, silver and linen that was previously assigned to Lessee by us and
originally recorded by Lessee at our cost.
TRANSACTIONS WITH MANAGEMENT COMPANY
We paid the Management Company $171,000 in 1998 for certain accounting
and management services relating to taking over newly acquired hotels.
Additionally, we paid the Management Company $18,000 for employee salaries,
identifiable employee expenses and other costs incurred in connection with
acquisition, and construction and renovation services performed for us during
1998. Mr. Alter owns 100% of the Management Company.
<PAGE>
109
THIRD PARTY PLEDGE
Mr. Alter and Mr. Biederman, the stockholders of Lessee, have through
________, 1999 pledged to the Operating Partnership ________ OP Units with a
value equal to approximately $_____ million, based upon a price of $10.41 per
share of common stock, to secure Lessee's obligations under the percentage
leases. Provided no event of default under any percentage lease exists, the
pledged OP Units corresponding to a particular percentage lease will be released
to the pledgors on the third anniversary of such percentage lease. The
Independent Directors approved an amendment to the Third Party Pledge Agreement
with Mr. Alter and Mr. Biederman to limit the total number of OP Units that
would be required to be pledged to secure Lessee's obligations under the
percentage leases to four (4) months base rent under each new percentage lease,
up to an aggregate not to exceed 481,955 OP Units. The Independent Directors
also approved an amendment to the pledge agreement with Messrs. Alter and
Biederman to limit the total number of OP Units that would be required to be
pledged to the number currently owned. The Independent Directors also approved
the subordination of our lien in the OP Units to a lien proposed in favor of an
institutional lender that, as a condition to making a proposed working capital
facility available to Lessee, has required that Mr. Alter guarantee the loan and
secure it with a first priority lien in his OP Units. The loan was recently
restructured so that the lender has made the loan directly to Mr. Alter, who in
turn lends the money to Lessee, but the lien on Mr. Alter's OP Units in favor of
the institutional lender remains effective. In connection with the merger,
these pledges will be terminated. See "Interests of Certain Persons in Matters
to be Acted Upon -- Contribution and Sale Agreement."
OP UNIT PURCHASE AGREEMENT
Messrs. Alter and Biederman have entered into a unit purchase
agreement with us, Lessee and the Operating Partnership to use distributions
from Lessee, in excess of their tax liability for earnings of Lessee, to either
accumulate reserves for Lessee's rental obligations due under the percentage
leases, or purchase from the Operating Partnership additional OP Units at the
then current market price of the common stock. The unit purchase agreement will
remain in effect so long a there is a percentage lease in effect, but will be
terminated in connection with the merger. See "Matters Relating to the Merger
Proposals -- Interests of Certain Persons in Matters to be Acted Upon --
Contribution and Sale Agreement." Lessee has lost money since its inception and
had a cumulative deficit of $9.6 million as of June 30, 1999. Therefore, neither
Mr. Alter nor Mr. Biederman have purchased any OP Units under the unit purchase
agreement.
LESSEE STOCK APPRECIATION RIGHTS/WARRANT EXCHANGE PROGRAM
In 1996, Lessee implemented its 1996 Stock Appreciation Rights Plan,
pursuant to which employees of Lessee were granted stock appreciation rights
with a base price per share tied to the fair market value of our common stock on
the date of grant of the stock appreciation rights. Each stock appreciation
right entitled the holder, to the extent vested in the stock appreciation right
shares, to surrender the stock appreciation right and receive from Lessee, with
respect to each stock appreciation right share surrendered, a cash payment equal
to the excess of the fair market value per share of our common stock on the date
of exercise over the stock appreciation
<PAGE>
110
right base price per share. Messrs. Alter and Biederman agreed to contribute in
cash, in the 80%/20% proportion reflecting their respective ownership interests
in Lessee, the amount necessary to enable Lessee to pay the amounts due to
Lessee's employees upon exercise of their stock appreciation rights, to the
extent Lessee did not otherwise have sufficient cash available to meet such
obligation. In consideration for their services to us, during the period from
August 1995 to January 1998, we granted Messrs. Alter and Biederman options,
under our 1994 Stock Incentive Plan to purchase up to an aggregate of 447,000
shares of common stock at exercise prices ranging from $9.50 to $16.63 per
share, to provide them with a source of cash to fund this obligation to Lessee.
For financial reporting purposes, Lessee was required to record a
compensation expense with respect to all outstanding stock appreciation rights,
equal to the appreciation in the fair market value of the number of shares of
common stock covered by such stock appreciation rights over the aggregate amount
of the base prices established for such stock appreciation rights. Because of
the negative impact of such compensation expense on Lessee's financial
statements, Lessee determined in September 1998 that it was in its best interest
to terminate the 1996 Stock Appreciation Rights Plan and cancel the outstanding
stock appreciation rights. However, it was determined that, in order to continue
to incentivize Lessee's employees, it was necessary to provide them with an
alternative equity incentive program linked to our common stock. Accordingly,
effective September 25, 1998 we awarded to each of Messrs. Alter and Biederman
transferable warrants to purchase an aggregate of 447,000 shares of our common
stock under our 1994 Stock Incentive Plan at exercise prices ranging from $9.50
to $16.63 per share. Messrs. Alter and Biederman each agreed to assign their
warrants to the stock appreciation right holders to replace the stock
appreciation rights, which the stock appreciation right holders agreed to
surrender to Lessee for cancellation. Messrs. Alter and Biederman surrendered
the options issued in connection with such stock appreciation rights to us for
cancellation as they were no longer required to fund the stock appreciation
rights. Each warrant issued to Messrs. Alter and Biederman covers the same
number of shares of common stock covered by the option which such warrant
replaces and is exercisable at the same exercise price as applied under such
option. Each warrant becomes exercisable in full on October 25, 1999 and remains
so exercisable until September 24, 2003. Upon assignment of each warrant to an
employee of Lessee, the shares of our common stock purchasable upon exercise of
such warrant are subject to repurchase by the assignors (in the ratio of
approximately 80% repurchasable by Mr. Alter and approximately 20% by Mr.
Biederman), at the warrant exercise price paid per share, in the event the
assignee terminates service with Lessee prior to vesting in the warrant shares.
Such repurchase right will lapse, and the assignee will vest in the warrant
appreciation right which such warrant replaced. Upon consummation of the
merger, Messrs. Alter and Biederman will receive an aggregate of approximately
$________ in payment for cancellation of warrants to purchase common stock held
by them, assuming the Merger Consideration is $10.41 per share.
<PAGE>
111
CONSULTING AGREEMENT WITH MR. GELLER
In July 1996, we entered into a consulting agreement with Mr. Geller,
a member of our Board of Directors. Through his company, Geller & Co., Mr.
Geller provides strategic consulting services to us for a two-year period with
an option at our election to extend for an additional year. We exercised the
option to extend the term until July 1999. The agreement has now terminated. In
consideration for services rendered by Mr. Geller under the consulting
agreement, Mr. Geller was granted non-qualified options to purchase 50,000
shares of common stock, which are fully vested. Of these options, 25,000 are
exercisable at $10.50 per share and 25,000 at $15.50 per share. In addition, Mr.
Geller received each quarter during the term of the agreement a restricted stock
grant of 1,250 shares of common stock.
TRANSACTION BONUS AGREEMENT WITH MR. CROWLEY
In June 1999, we entered into an Agreement for Transaction Success
Bonus with Mr. Crowley. Under the terms of the agreement, we will pay Mr.
Crowley a bonus of $1.2 million upon satisfaction of all conditions to the
completion of the merger agreement. If all the conditions are not satisfied,
Mr. Crowley will not receive any payment. The agreement also requires us to pay
Mr. Crowley an additional amount to reimburse him for special federal taxes that
he may be assessed against him due to the bonus payment. Mr. Crowley's
liability for such taxes is estimated to be between $104,000 and $690,000.
VOTING AGREEMENT
Pursuant to a voting agreement, Messrs. Alter and Biederman have
agreed to vote the common stock which they own (including any shares of common
stock issued after the date the voting agreement was executed) for approval and
adoption of the Merger Proposals and the approval of the transactions
contemplated thereby. In addition, the voting agreement provides that Messrs.
Alter and Biederman will vote the OP Units that they own for approval and
adoption of the Operating Partnership merger agreement and the approval of the
transactions contemplated thereby. Westbrook Fund I is also a party to the
voting agreement, and has agreed to vote its preferred stock and common stock to
approve the Merger Proposals and transactions contemplated thereby. As of the
date hereof, the shares subject to the voting agreement represent approximately
___% of the votes entitles to be cast on the Merger Proposals. Holders of ___ %
of the outstanding OP Units, including Messrs. Alter and Biederman, have
delivered written consents to the consummation of the Operating Partnership
merger and related matters.
MANAGEMENT OF SUNSTONE
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Name Age Title Director or
Executive Officer
Since
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Robert A. Alter (1) 48 Chairman, President, Chief Executive Officer, 1994
Secretary and Director
</TABLE>
<PAGE>
112
<TABLE>
<S> <C> <C> <C>
Charles L. Biederman 65 Vice Chairman, Executive Vice President and 1994
Director
R. Terrence Crowley 41 Chief Operating Officer and General 1997
Counsel
H. Raymond Bingham(2) (3)(5) 54 Director 1995
C. Robert Enever 71 Director 1994
Laurence S. Geller(1)(4)(5) 51 Director 1996
Fredric H. Gould (2) (3) (4)(5) 63 Director 1995
Paul D. Kazilionis 42 Director 1997
David E. Lambert (1) (2) (3) (4)(5) 47 Director 1995
Edward H. Sondker (2) (3)(5) 51 Director 1995
</TABLE>
__________________
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
(4) Member of the Lessee Special Assessment Committee
(5) Member of the Special Committee
Mr. Alter has served as President, Secretary, Chief Executive Officer
and Chairman of the Board since August 1994. From 1990 until August 1995, Mr.
Alter served as President of the Management Company, which currently manages all
of the hotels owned by us. Mr. Alter also serves as chairman of the board of
directors of both the Management Company and Lessee, the lessee of all the
hotels owned by us. Mr. Alter has been engaged in the hotel ownership,
development and management business since 1976. Mr. Alter is a Certified Hotel
Administrator, as designated by the American Hotel and Motel Association, and is
a past President and a former member of the Board of Directors of the
International Association of Holiday Inns, the franchisee association for
Holiday Inn hotels. Mr. Alter is President of Riverside Hotel Partners and a
Partner of Southeast Aurora Hotel Venture. Mr. Alter holds a Bachelor of Science
degree in Hotel Administration from Cornell University.
Mr. Biederman has served as Executive Vice President and a director
since September 1994. Mr. Biederman has also served as Vice Chairman of our
Board of Directors since January 1998. From 1990 until August 1995, Mr.
Biederman served as Executive Vice President of the Management Company. Mr.
Biederman has previously served as President of Provident Development Group
Corporation, a Florida corporation engaged in the design, development and sale
of luxury homes in South Florida, from 1989 until 1992 and as President and Vice
President of Colorado Home Improvements, Inc., a Colorado corporation engaged in
general contracting, renovation and related services for existing homes in the
Denver, Colorado area, since 1989. From 1974 to 1996, Mr. Biederman was Vice
President of Robert Rouse and Associates, and President of NDH. He is currently
President of C.L.B., Inc., a director of One Liberty Properties, Inc., a New
York-based real estate investment trust specializing in the purchase and leasing
of single tenant net leased properties throughout the United States. Mr.
Biederman has been engaged in the real estate development business since 1962.
Mr. Biederman holds a Bachelor of Arts degree from Colgate University and a
Bachelor of Architecture and a Masters in Architecture from Columbia University
and is a registered architect.
<PAGE>
113
Mr. Crowley has served as an officer since joining us in his capacity
as general counsel in October 1997. Mr. Crowley has served as Chief Operating
Officer since December 1998. Prior to joining Sunstone, Mr. Crowley practiced
law as a partner and associate in New York and San Francisco-based law firms.
Mr. Crowley holds a Bachelor of Arts degree from the University of Southern
California and Juris Doctorate from Loyola University.
Mr. Bingham has served as a director since August 1995. Mr. Bingham
also serves as Chairman of the Audit Committee. Since 1999, Mr. Bingham has
served as the Chief Executive Officer of Cadence Design Systems, a publicly
traded computer aided design company. Prior to joining Cadence Design Systems in
1993 as its Executive Vice President and Chief Financial Officer, Mr. Bingham
served as Executive Vice President and Chief Financial Officer of Red Lion
Hotels & Inns for eight years. Mr. Bingham is currently a director of WTD
Industries, a wood products and wood mills company, and IMS, a test equipment
and manufacturing company. Mr. Bingham is the former Chairman of the American
Hotel & Motel Association Industry Real Estate Finance Council and a former
Director of the National Realty Committee. Mr. Bingham holds a Bachelor of
Science degree in Economics from Weber State College and a Masters in Business
Administration from Harvard Business School.
Mr. Enever has served as a director since September 1994. Mr. Enever
is retired but currently manages a portfolio of real estate and securities
investments. From 1971 until his retirement, Mr. Enever was engaged in real
estate development management and ownership, through several owned entities.
Before that he had a career in financial analysis, pricing and international
operations with Ford Motor Company. Mr. Enever holds a Bachelor of Science
degree in Economics from the University of London, a C.P.A. from the State of
Illinois and a Masters Degree in Business Administration (with distinction) in
Finance and Accounting from Northwestern University.
Mr. Geller has served as a director since November 1996 and also
serves as the Chairman of the Special Committee. Since May, 1997, Mr. Geller
has been Chief Executive Officer of Strategic Hotel Capital Incorporated. From
1989 to 1997, Mr. Geller was Chairman of Geller & Co., a hotel-industry
consulting firm based in Chicago, Illinois. From 1984 through December 1989, Mr.
Geller served as the Executive Vice President and Chief Operating Officer of
Hyatt Development Corporation, a developer of domestic and international hotels
and resorts, and from 1976 to 1981, as a Senior Vice President of Holiday Inns,
Inc. Mr. Geller is a graduate of the Ealing Technical College (U.K.) in Hotel
Management and Catering.
Mr. Gould has served as a director since August 1995. Mr. Gould has
served for the past seven years as General Partner of Gould Investors L.P., a
master limited partnership engaged in the ownership and operation of various
types of income-producing real property located throughout the United States and
which holds substantial interests in publicly held real estate investment trusts
and savings and commercial banks. In addition, Mr. Gould is currently the
Chairman of the Board of Trustees of BRT Realty Trust, a publicly-traded
mortgage real estate investment trust, Chairman of the Board of Directors of One
Liberty Properties, Inc., President of REIT Management Corporation, President of
Majestic Property Management Corporation and
<PAGE>
114
Chairman of Georgetown Partners, Inc. Mr. Gould holds a Bachelor of Business
Administration from Lehigh University and an L.L.B. from New York Law School.
Mr. Kazilionis has served as a director since October 1997. From April
1994 until the present, Mr. Kazilionis has been a Managing Principal of
Westbrook, a real estate investment management company. Prior to co-founding
Westbrook, Mr. Kazilionis spent 12 years at Morgan Stanley and Company serving
most recently as Managing Director and President of the General Partner of the
Morgan Stanley Real Estate Fund, through which Morgan Stanley conducted its
principal real estate investment activities. Mr. Kazilionis is also a Director
of Berkshire Realty Company, Inc. Mr. Kazilionis received a Bachelor of Arts
degree from Colby College in 1979 and a Masters in Business Administration
degree from the Amos Tuck School of Business Administration at Dartmouth College
in 1982. Mr. Kazilionis is a member of the Dartmouth College real estate
advisory committee.
Mr. Lambert has served as a director since August 1995. Mr. Lambert
also serves as Chairman of the Compensation Committee. Since February 1999, Mr.
Lambert has served as Chief Executive Officer of Discovermusic.com. Prior to
joining Discovermusic.com, Mr. Lambert was Executive Vice President of Preview
Travel, Inc., from June 1995, a San Francisco Bay Area company in the online
travel business and media production and syndication business. Prior to joining
Preview Travel, Mr. Lambert had served as Executive Vice President and Chief
Financial Officer of Excalibur Technologies Corporation, a publicly-traded
computer software company from 1992 to 1995. Prior to joining Excalibur
Technologies, Mr. Lambert served as a private consultant in marketing, strategic
planning, operations and computer systems from 1991 to 1992 and as Chairman of
the Board, President and Chief Executive Officer of Grand American Fare, Inc., a
$30 million restaurant company, from 1985 to 1991. From 1981 to 1985, Mr.
Lambert served as Executive Vice President of Colony Hotels and Resorts, a
subsidiary of Radisson Hotels. Mr. Lambert holds Bachelor of Arts degrees in
Physics and Math from Occidental College and a Masters in Business
Administration from the University of California, Los Angeles, and is a licensed
California real estate broker.
Mr. Sondker has served as a director since August 1995. Also since
August 1995, Mr. Sondker has served as President and Chief Executive Officer of
Bay View Capital Corporation, a publicly-traded bank holding company located in
the San Francisco Bay Area. Prior to joining Bay View Capital Corporation, Mr.
Sondker served from 1990 through June 1995 as the President and Chief Executive
Officer of Independence One Bank of California. During the fifteen years prior
to that time, Mr. Sondker served in senior executive positions with several
independent financial institutions having assets ranging in size from $200
million to over $1 billion. Mr. Sondker holds both a Bachelor of Arts and a J.D.
degree from Washburn University. Mr. Sondker currently is a director of Bay Area
Council, a public policy forum for businesses in San Francisco, California.
There is no family relationship between any of our directors or
executive officers.
<PAGE>
115
MANAGEMENT OF SHP ACQUISITION AND SHP INVESTORS SUB;
MEMBERS OF SHP ACQUISITION
SHP ACQUISITION AND SHP INVESTORS SUB
SHP Acquisition is a Delaware limited liability company. SHP Investors
Sub is a wholly-owned indirect subsidiary of SHP Acquisition. The business and
affairs of SHP Acquisition are controlled by its members, Westbrook SHP,
Westbrook Fund III, Westbrook Co-Invest III, Alter SHP and Biederman SHP,
pursuant to the terms of the SHP Acquisition Limited Liability Company
Agreement. Under the SHP Acquisition Limited Liability Company Agreement, SHP
Acquisition is governed by an executive committee consisting of one
representative of each of Westbrook SHP, Westbrook Fund III, Westbrook Co-Invest
III and Alter SHP. Although the officers of SHP Acquisition are generally
responsible for managing its day-to-day operations, the SHP Acquisition Limited
Liability Company Agreement provides that certain actions of SHP Acquisition may
not be taken without the prior approval of a majority, or in some cases all, of
the member of the executive committee. SHP Acquisition and SHP Investors Sub
currently have no executive officers.
ALTER SHP AND BIEDERMAN SHP
Alter SHP is a newly-formed Delaware limited liability company wholly
owned by Mr. Alter, our President, Chief Executive Officer and the Chairman of
our Board of Directors. Biederman SHP is a newly-formed Delaware limited
liability company wholly owned by Mr. Biederman, the Vice Chairman of our Board
of Directors. Neither Alter SHP nor Biederman SHP currently has any executive
officers. The principal business address of Alter SHP, Biederman SHP and Messrs.
Alter and Biederman is c/o Sunstone Hotel Properties, Inc., 903 Calle Amanecer,
San Clemente, California 92673-6212. The principal occupation of each of
Messrs. Alter and Biederman is as an employee of Sunstone. Each of Messrs.
Alter and Biederman is a citizen of the United States.
WESTBROOK AFFILIATES
Each of Westbrook SHP, Westbrook Fund III and Westbrook Co-Invest III
is engaged in the principal business of making direct and indirect investments
in real estate. Westbrook SHP is a newly-formed Delaware limited liability
company. Westbrook Fund III and Westbrook Co-Invest III are Delaware limited
partnerships. The general partner of each of Westbrook Fund III and Westbrook
Co-Invest III is Westbrook Real Estate Partners Management III, L.L.C., a
Delaware limited liability company ("Westbrook Management III"). The principal
business of Westbrook is to serve as managing member of Westbrook Management III
and other similar funds. Mr. Kazilionis, and Gregory Hartman, Jonathan Paul and
William Walton are the managing principals of Westbrook, and their principal
occupations are their activities on behalf of Westbrook. The principal office
of each of Westbrook SHP, Westbrook Fund III, Westbrook Co-Invest III, Westbrook
Management III and Westbrook is located at, and the principal business address
for Messrs. Paul and Walton is, 599 Lexington Avenue, Suite 3800, New York, New
York 10022. The principal business address for Hartman is 11150 Santa Monica
Boulevard, Suite
<PAGE>
116
1450, Los Angeles, California 90025. The principal business address for Mr.
Kazilionis is 265 Franklin Street, Suite 1800, Boston, Massachusetts 02110. Each
of Messrs. Kazilionis, Hartman, Paul and Walton is a United States citizen.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF SUNSTONE
The following table sets forth information concerning the beneficial
ownership of shares of our common stock by (i) each beneficial owner of more
than 5% of the outstanding shares of common stock; (ii) each director and
nominee of Sunstone, (iii) the executive officers named in the Summary
Compensation Table below; and (iv) by all current directors and executive
officers of Sunstone as a group. This information is presented as of August 13,
1999. The number of shares of common stock includes the number of shares of
common stock into which OP Units may be redeemed in certain circumstances.
Except as otherwise noted, each beneficial owner listed has sole investment and
voting power with respect to the common stock indicated.
<TABLE>
<CAPTION>
Name of Individuals or Number Position with Sunstone Number of Shares of Common Percent
of Persons on Group Stock Beneficially Owned (1) of Class
<S> <C> <C> <C>
Westbrook Real Estate Fund I, L.P. 3,989,867 (2) 9.57
Westbrook Real Estate
Co-Investment Partnership I, L.P.
Robert A. Alter President, Secretary, 569,812 (3) 1.35
Chief Executive Officer
and Director
Charles L. Biederman Executive Vice President 460,367 (4) 1.09
and Director
R. Terrence Crowley Chief Operating Officer 20,000 (5) 0
Kenneth J. Biehl Chief Financial Officer (6) 0 (6) 0
H. Raymond Bingham Director 15,038 (7) 0
C. Robert Enever Director 197,140 (8) 0
Laurence S. Geller Director 70,250 (9) 0
Fredric H. Gould Director 52,288 (10) 0
David E. Lambert Director 22,074 (11) 0
Paul D. Kazilionis Director 3,989,867 (2)(12) 9.57
Edward H. Sondker Director 17,138 (13) 0
All current directors and 5,413,974 (14) 12.96
executive officers as a group
(11 persons)
</TABLE>
<PAGE>
117
- ------------------
*Less than one percent
(1) The Operating Partnership had 40,012,703 Common OP Units and 250,000
Preferred OP Units outstanding as of August 11, 1999, of which 37,940,453
Common OP Units and all of the Preferred OP Units were owned by Sunstone,
corresponding to the number of shares of common stock or 250,000 shares of
convertible preferred stock outstanding as of that date, and 2,072,250 by
other limited partners. Each of the Common OP Units are redeemable pursuant
to certain redemption rights on a one-for-one basis for shares of common
stock. The number and percentages set forth above assumes that all OP Units
held by the person are redeemed for shares of common stock. The total
number of shares of common stock outstanding used in calculating the
percentage assumes that all convertible preferred stock is converted and
all of the OP Units held by other persons are redeemed for shares of common
stock.
(2) Includes (i) 1,699,605 shares of common stock initially issuable to
Westbrook Fund I and Westbrook Co-Invest I upon conversion of preferred
stock, subject to adjustment in certain events and (ii) 3,000 shares of
common stock underlying stock options granted pursuant to the Directors
Plan which are currently exercisable or which become exercisable within 60
days after August 11, 1999.
(3) Includes (i) 86,000 shares of common stock underlying stock options granted
pursuant to the Incentive Plan which are currently exercisable or which
become exercisable within 60 days after August 11, 1999 and (ii) 483,812 OP
Units redeemable on a one-for-one basis for shares of common stock,
including an 82% interest (65,600 OP Units) of OP Units owned by Riverside
Hotel Partners and 99,251 OP Units owned by Alter Investment Group, Ltd.
(4) Includes (i) 63,320 shares of common stock underlying stock options granted
pursuant to the Incentive Plan which are currently exercisable or which
become exercisable within 60 days after August 11, 1999 and (ii) 397,047 OP
Units redeemable on a one-for-one basis for shares of common stock,
including an 18% interest (14,400 OP Units) of OP Units owned by Riverside
Hotel Partners of which Mr. Biederman has an 18% interest.
(5) Common stock underlying stock options granted pursuant to the Incentive
Plan which are currently exercisable or which become exercisable within 60
days after August 11, 1999.
(6) Mr. Biehl resigned his position as Chief Financial Officer of Sunstone on
February 26, 1999.
(7) Includes 7,500 shares of common stock underlying stock options granted
pursuant to the Directors Plan which are currently exercisable or which
become exercisable within 60 days after August 11, 1999.
(8) Includes (i) 4,500 shares of common stock underlying stock options granted
pursuant to the Directors Plan which are currently exercisable or which
become exercisable within 60 days after August 11, 1999, (ii) 61,049 OP
Units redeemable on a one- for-one basis for shares of common stock, (iii)
100,254 OP Units owned by Enever Rout Investment Group Ltd. redeemable on a
one-for-one basis for shares of common stock and (iv) 20,799 shares of
common stock owned by Mr. Enever's spouse.
<PAGE>
118
(9) Includes 54,500 shares of common stock underlying stock options which are
currently exercisable or which become exercisable within 60 days after
August 11, 1999, of which 50,000 were granted in connection with his
consulting agreement with Sunstone pursuant to the Incentive Plan and 4,500
were granted pursuant to the Directors Plan.
(10) Includes (i) 3,000 shares of common stock underlying stock options granted
pursuant to the Directors Plan which are currently exercisable or which
become exercisable within 60 days after August 11, 1999 and (ii) 10,250
shares of common stock held by One Liberty Properties, Inc. of which Mr.
Gould is Chairman of the Board, (ii) 3,000 shares of common stock held by
BRT Pension Trust of which Mr. Gould is the Trustee, (iii) 3,000 shares of
common stock held by GIT Pension Trust of which Mr. Gould is the Trustee,
(iv) 3,000 shares of common stock held by REIT Management Corporation
Pension Trust of which Mr. Gould is the Trustee, (v) 3,000 shares of common
stock held by REIT Management Corporation Profit Sharing Trust of which Mr.
Gould is the Trustee.
(11) Includes 7,500 shares of common stock underlying stock options granted
pursuant to the Directors Plan which are currently exercisable or which
become exercisable within 60 days after August 11, 1999.
(12) Includes (i) 2,287,262 shares of common stock owned by Westbrook Fund I
and Westbrook Co-Invest I, (ii) 1,699,605 shares of common stock initially
issuable to Westbrook Fund I and Westbrook Co-Invest I upon conversion of
the preferred stock, subject to adjustment in certain events and (iii)
3,000 shares of common stock underlying stock options granted pursuant to
the Directors Plan which are currently exercisable or which become
exercisable within 60 days after August 11, 1999. Mr. Kazilionis is a
Managing Principal of Westbrook.
(13) Includes (i) 7,500 shares of common stock underlying stock options granted
pursuant to the Directors Plan which are currently exercisable or which
become exercisable within 60 days after August 11, 1999 and (ii) 2,000
shares owned by the Sondker Family Trust.
(14) Includes (i) 256,820 shares of common stock underlying stock options
granted pursuant to the Incentive Plan and the Directors Plan which are
currently exercisable or which become exercisable within 60 days after
August 11, 1999 and (ii) 1,062,961 OP Units redeemable on a one-for-one
basis for shares of common stock. Also includes the shares deemed to be
beneficially owned by Mr. Kazilionis.
PROPOSALS BY STOCKHOLDERS OF SUNSTONE
If the merger is consummated, we will not have any public stockholders
or any public participation in any future meetings of stockholders of Sunstone.
However, if the merger is not consummated, we intend to hold our 1999 Annual
Meeting of stockholders as promptly as reasonably practicable. In such case, our
stockholders would continue to be entitled to attend and participate in our
stockholder meetings.
Any proposals by stockholders intended to be presented at the 2000
Annual Meeting of stockholders must be made in writing to the Secretary of
Sunstone and delivered to, or mailed and received at, the principal executive
offices of Sunstone no later than November 14,
<PAGE>
119
1999. Any proposal must be sent to our principal address and in the case of
matters other than the nomination of directors must include a description of the
proposed business, the reasons therefor and other specific matters.
Any stockholder desiring a copy of our by-laws, which include
provisions governing matters to be considered at stockholder meetings, will be
furnished a copy without charge upon written request of the Secretary of
Sunstone.
INDEPENDENT ACCOUNTANTS
Our consolidated financial statements as of December 31, 1998 and for
each of the years in the three year period ended December 31, 1998, incorporated
in this Proxy Statement by reference, have been audited by Ernst & Young LLP
independent auditors, as set forth in their report. It is expected that
representatives of Ernst & Young LLP will be present at the special meeting,
both to respond to appropriate questions of stockholders and to make a statement
if they so desire.
WHERE YOU CAN FIND MORE INFORMATION
As required by law, we file reports, proxy statements and other
information with the Securities and Exchange Commission. Because the merger is a
"going private" transaction, we, SHP Acquisition and SHP Investors Sub have
filed a Rule 13e-3 Transaction Statement on Schedule 13E-3 with respect to the
merger. The Schedule 13E-3 with respect to the merger and such reports, proxy
statements and other information contain additional information about us. You
can inspect and copy these materials at the public reference facilities
maintained by the Securities and Exchange Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Securities and Exchange Commission: 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New York, New
York 10048. For further information concerning the Securities and Exchange
Commission's public reference rooms, you may call the Securities and Exchange
Commission at 1-800-SEC-0330. Some of this information may also be accessed on
the World Wide Web through the Securities and Exchange Commission's Internet
address at "http://www.sec.gov." The common stock is listed on the New York
Stock Exchange and the materials described above may also be inspected at the
New York Stock Exchange's offices, 20 Broad Street, New York, New York 10005.
You should rely only on the information contained in (or incorporated
by reference into) this Proxy Statement in connection with your consideration of
the Merger Proposals. We have not authorized anyone to give any information
different from the information contained in (or incorporated by reference into)
this Proxy Statement. This Proxy Statement is dated __________, 1999. You should
not assume that the information contained in this Proxy Statement is accurate as
of any later date, and the mailing of this Proxy Statement to stockholders shall
not create any implication to the contrary.
<PAGE>
120
OTHER MATTERS
Our Board of Directors does not know of any matter other than that
described in this Proxy Statement that will be presented for action at the
special meeting. If other matters properly come before the meeting, the persons
named as proxies intend to vote the shares they represent in accordance with
their discretion.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by us with the Securities and
Exchange Commission (File No. 0-26304)) are incorporated in this Proxy Statement
by reference:
(a) Annual Report on Form 10-K for the year ended December 31, 1998 as
filed on March 30, 1999, as amended by Annual Report on Form 10-K/A as
filed on July 15, 1999;
(b) Current Reports on Form 8-K as filed on April 8, 1999, July 13, 1999
and July 14, 1999;
(c) Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 as
filed on May 17, 1999, as amended by Quarterly Report on Form 10-Q/A
as filed on July 15, 1999; and
(d) Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 as
filed on August 16, 1999.
All documents filed by us pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date
hereof and prior to the date of the special meeting or any adjournment or
postponement thereof shall be deemed to be incorporated by reference in this
Proxy Statement and made a part hereof from the date of the filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference in this Proxy Statement shall be deemed to be modified
or superseded for purposes of this Proxy Statement to the extent that a
statement contained in this Proxy Statement or in any other document
subsequently filed with the Securities and Exchange Commission which also is
deemed to be incorporated by reference in this Proxy Statement modified or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Proxy Statement.
We will provide without charge to each person to whom a copy of this
Proxy Statement is delivered, upon the written or oral request of such person, a
copy of any or all of the documents incorporated by reference in this Proxy
Statement (not including the exhibits to such documents, unless such exhibits
are specifically incorporated by reference in such documents). Requests for such
copies should be directed to: Sunstone Hotel Investors, Inc., 903 Calle
<PAGE>
121
Amanecer, San Clemente, California 92673-6212, Attention: R. Terrence Crowley,
telephone 949-369-4000.
By Order of the Board of Directors,
_______________________________
Robert A. Alter, Secretary
________________, 1999
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
SHP ACQUISITION, L.L.C.,
SHP INVESTORS SUB, INC.
AND
SUNSTONE HOTEL INVESTORS, INC.
DATED AS OF JULY 12, 1999
<PAGE>
EXECUTION COPY
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TABLE OF CONTENTS
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ARTICLE 1 THE MERGER........................................................ 2
1.1 The Merger........................................................ 2
1.2 Closing........................................................... 2
1.3 Effective Time.................................................... 3
1.4 Effect of Merger on Charter and Bylaws............................ 3
1.5 Directors and Officers............................................ 3
1.6 Effect on Shares.................................................. 3
1.7 Merger Consideration.............................................. 3
1.8 Transactions Relating to Seller Partnership....................... 5
1.9 Exchange of Certificates.......................................... 5
1.10 Further Assurances................................................ 6
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF SELLER.......................... 7
2.1 Organization, Standing and Power of Seller........................ 7
2.2 Seller Subsidiaries/Investments................................... 7
2.3 Capital Structure................................................. 8
2.4 Authority; Noncontravention; Consents............................. 10
2.5 SEC Documents; Financial Statements; Undisclosed Liabilities...... 11
2.6 Absence of Certain Changes or Events.............................. 12
2.7 Litigation........................................................ 13
2.8 Properties........................................................ 13
2.9 Environmental Matters............................................. 15
2.10 Related Party Transactions........................................ 16
2.11 Employee Benefits................................................. 16
2.12 Employee Matters.................................................. 18
2.13 Taxes............................................................. 18
2.14 No Payments to Employees, Officers or Directors................... 20
2.15 Brokers........................................................... 20
2.16 Compliance With Laws.............................................. 20
2.17 Contracts; Debt Instruments....................................... 21
2.18 Opinion of Financial Advisor...................................... 22
2.19 State Takeover Statutes........................................... 22
2.20 Proxy Statement and Information Statement......................... 23
2.21 Investment Company Act of 1940.................................... 23
2.22 Definition of Knowledge of Seller................................. 23
2.23 Insurance......................................................... 23
2.24 Board Recommendation.............................................. 23
2.25 Representations in Partnership Merger Agreement................... 24
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PARENT AND BUYER................ 24
3.1 Organization, Standing and Power of Parent and Buyer.............. 24
3.2 Ownership of Parent, Buyer and Holdings........................... 25
3.3 Authority; Noncontravention; Consents............................. 25
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3.4 Litigation........................................................ 26
3.5 Undisclosed Liability............................................. 26
3.6 Brokers........................................................... 26
3.7 Compliance With Laws.............................................. 26
3.8 Contracts; Debt Instruments....................................... 27
3.9 Solvency.......................................................... 27
3.10 Proxy Statement and Information Statement......................... 27
3.11 Investment Company Act of 1940.................................... 27
3.12 Ownership of Stock in Seller...................................... 27
3.13 Definition of Knowledge........................................... 28
3.14 Sufficient Funds.................................................. 28
3.15 Representations in Partnership Merger Agreement................... 28
ARTICLE 4 COVENANTS......................................................... 28
4.1 Acquisition Proposals............................................. 28
4.2 Conduct of Seller's Business Pending Merger....................... 30
4.3 Conduct of Parent's and Buyer's Business Pending Merger........... 33
4.4 Other Actions..................................................... 33
4.5 Private Placement................................................. 34
4.6 Escrow Arrangement................................................ 34
4.7 Seller Partnership Actions........................................ 34
4.8 Pro Formas........................................................ 34
ARTICLE 5 ADDITIONAL COVENANTS.............................................. 34
5.1 Preparation of the Proxy Statement; Seller Stockholders Meeting... 34
5.2 Access to Information; Confidentiality............................ 36
5.3 Reasonable Best Efforts; Notification............................. 36
5.4 Public Announcements.............................................. 39
5.5 Transfer Taxes.................................................... 39
5.6 Benefit Plans..................................................... 39
5.7 Indemnification................................................... 40
5.8 Declaration of Dividends and Distributions........................ 41
5.9 Resignations...................................................... 42
5.10 Stockholder Claims................................................ 42
5.11 Seller Franchise Agreements and Leases............................ 42
5.12 Cooperation with Proposed Financings.............................. 42
ARTICLE 6 CONDITIONS........................................................ 43
6.1 Conditions to Each Party's Obligation to Effect the Merger........ 43
6.2 Conditions to Obligations of Parent and Buyer..................... 43
6.3 Conditions to Obligations of Seller............................... 45
ARTICLE 7 TERMINATION, AMENDMENT AND WAIVER................................. 46
7.1 Termination....................................................... 46
7.2 Certain Fees and Expenses......................................... 47
7.3 Effect of Termination............................................. 51
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7.4 Amendment......................................................... 51
7.5 Extension; Waiver................................................. 51
ARTICLE 8 GENERAL PROVISIONS................................................ 51
8.1 Nonsurvival of Representations and Warranties..................... 51
8.2 Notices........................................................... 52
8.3 Interpretation.................................................... 53
8.4 Counterparts...................................................... 53
8.5 Entire Agreement; No Third-Party Beneficiaries.................... 53
8.6 Governing Law..................................................... 53
8.7 Assignment........................................................ 53
8.8 Enforcement....................................................... 54
8.9 Severability...................................................... 54
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EXHIBITS
Exhibit A Seller Partnership Redemption Terms
Exhibit B Lessee/Manager Agreement
Exhibit C Voting Agreement and Irrevocable Proxy
Exhibit D Form of Seller Charter Amendments
Exhibit E Voting Agreements and Consents of Seller Unit Holders
Exhibit F Form of Seller Partnership Agreement Amendments
Exhibit G Financing Commitment
Exhibit H Form of Letter of Credit
Exhibit I Form of Tax Opinions
Exhibit J Pro Forma
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INDEX OF DEFINED TERMS
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DEFINED TERM SECTION
<S> <C>
1940 Act......................................................................................... 2.21
Acquisition Proposal............................................................................. 4.1(a)
Additional Filings............................................................................... 5.1(a)
Adverse Determination............................................................................ 7.1(j)
Affiliate........................................................................................ 2.10
Agreement........................................................................................ Preamble
AICPA Statement.................................................................................. 5.1(b)
Alter............................................................................................ Recital E
Alter Investment Group........................................................................... Recital E
Articles of Merger............................................................................... 1.3
Base Amount...................................................................................... 7.2(b)
Biederman........................................................................................ Recital E
Break-Up Expenses................................................................................ 7.2(c)
Break-Up Expenses Tax Opinion.................................................................... 7.2(c)
Break-Up Fee..................................................................................... 7.2(b)
Break-Up Fee Tax Opinion......................................................................... 7.2(b)
Buyer............................................................................................ Preamble
Buyer Disclosure Letter.......................................................................... Article 3
Buyer Material Adverse Effect.................................................................... 3.1(b)
Buyer Operating Partnership...................................................................... Recital G
CapEx Budget..................................................................................... 2.8(c)
Cash Collateral.................................................................................. 4.6
Certificates..................................................................................... 1.9(c)
Charter.......................................................................................... 1.4
Charter Amendments............................................................................... 2.4(a)
Claims........................................................................................... 5.7(b)
Closing.......................................................................................... 1.2
Closing Date..................................................................................... 1.2
Code............................................................................................. 2.11(a)
Commitment....................................................................................... 4.2(q)
Common Merger Consideration...................................................................... 1.7(a)(i)
Contribution..................................................................................... Recital E
Contribution Agreement........................................................................... Recital E
Controlled Group Member.......................................................................... 2.11
Data Room........................................................................................ 2.8(a)
Defect Amount.................................................................................... 7.1(j)
Development Agreements........................................................................... 4.2(i)
Effective Time................................................................................... 1.3
Employee Plan.................................................................................... 2.11
Encumbrances..................................................................................... 2.8(a)
Environmental Law................................................................................ 2.9(c)
Environmental Liabilities and Costs.............................................................. 2.9(c)
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ERISA........................................................................................... 2.11
Escrow Agent.................................................................................... 4.6
Escrow Agreement................................................................................ 4.6
Exchange Act.................................................................................... 2.5(a)
Financing....................................................................................... 3.14
Financing Commitment............................................................................ 3.14
Financing Overage............................................................................... 5.3(c)(i)
Flow-Through Entity............................................................................. 2.13(b)
Franchise Consents.............................................................................. 5.3(a)
Franchise Fees.................................................................................. 5.3(d)
GAAP............................................................................................ 2.5(a)
Goldman Sachs................................................................................... 2.15
Governmental Entity............................................................................. 2.4(b)
Hazardous Materials............................................................................. 2.9(a)
Holdings........................................................................................ 3.1(b)
HSR Act......................................................................................... 2.4(b)
Indebtedness.................................................................................... 2.17(b)
Indemnified Parties............................................................................. 5.7(a)
Indemnifying Parties............................................................................ 5.7(b)
Information Statement........................................................................... 5.1(a)
Injunction...................................................................................... 7.1(d)
Irrevocable Proxy............................................................................... Recital I
IRS............................................................................................. 7.2(d)
Knowledge of Buyer.............................................................................. 3.13
Knowledge of Parent............................................................................. 3.13
Knowledge of Seller............................................................................. 2.22
Laws............................................................................................ 2.4(b)
Lender Consents.................................................................................5.3(a), 5.3(a)
Lender Property Determination................................................................... 7.1
Lessee.......................................................................................... Recital E
Lessee/Manager Agreement........................................................................ Recital H
Letter of Credit................................................................................ 4.6
Liens........................................................................................... 2.2(b)(i)
Management Sub.................................................................................. Recital E
Manager......................................................................................... Recital E
Maryland Department............................................................................. 1.3
Material Contract............................................................................... 2.17(a)
Merger.......................................................................................... Recital A
Merger Consideration............................................................................ 1.7(a)(ii)
MGCL............................................................................................ 1.1
Option Consideration............................................................................ 1.7(b)
Ordinary Course Liabilities..................................................................... 4.2(p)
Outside Date.................................................................................... 2.4(b)
Parent.......................................................................................... Preamble
Parent Material Adverse Effect.................................................................. 3.1(a)
Partnership Agreement Amendment................................................................. 2.24
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Partnership Merger.............................................................................. 1.8
Partnership Merger Agreement.................................................................... Recital G
Paying Agent.................................................................................... 1.9(a)
Pension Plan.................................................................................... 2.11
Person.......................................................................................... 2.2(a)
Preferred Merger Consideration.................................................................. 1.7(a)(ii)
Property Reports................................................................................ 5.1(a)
Property Restrictions........................................................................... 2.8(a)
Proxy Statement................................................................................. 5.1(a)
Qualifying Income............................................................................... 7.2(b)
REIT............................................................................................ 2.13(b)
REIT Income Requirements........................................................................ 7.2(b)
Required Consents............................................................................... 5.3(a)
Riverside....................................................................................... Recital E
Satisfaction Date............................................................................... 1.2
SEC............................................................................................. 2.4(b)
Securities Act.................................................................................. 2.5(a)
Seller.......................................................................................... Preamble
Seller 1994 Incentive Plan...................................................................... 2.3(a)
Seller 1997 Supplemental Plan................................................................... 2.3(a)
Seller Board.................................................................................... Recital A
Seller Common OP Units.......................................................................... 1.8
Seller Common Shares............................................................................ 2.3(a)
Seller Common Unit Holder....................................................................... 1.8
Seller Contribution Agreements.................................................................. 2.17(a)
Seller Director Plan............................................................................ 2.3(a)
Seller Disclosure Letter........................................................................ Article 2
Seller Financial Statement Date................................................................. 2.6
Seller Franchise Agreements..................................................................... 2.8(e)
Seller Ground Leases............................................................................ 2.8(d)
Seller Material Adverse Change.................................................................. 2.6
Seller Material Adverse Effect.................................................................. 2.1
Seller OP Preferred Units....................................................................... 2.3(e)
Seller OP Preferred Unit Holder................................................................. 2.3(e)
Seller OP Units................................................................................. 2.3(e)
Seller Options.................................................................................. 2.3(b)
Seller Partner Approval......................................................................... 2.4(a)
Seller Partnership.............................................................................. Recital F
Seller Partnership Agreement.................................................................... 2.3(e)
Seller Partnership Redemption................................................................... Recital F
Seller Permits.................................................................................. 2.16
Seller Plans.................................................................................... 2.3(b)
Seller Preferred Shares......................................................................... 2.3(a)
Seller Properties...............................................................................2.8(a), 2.9(a)
Seller SEC Documents............................................................................ 2.5(b)
Seller Stockholder Approvals.................................................................... 2.4(a)
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Seller Stockholders Meeting..................................................................... 5.1(c)
Seller Subsidiaries............................................................................. 2.2(a)
Seller's Environmental Reports.................................................................. 2.9(a)
Seller's Knowledge.............................................................................. 2.22
Service Agreements.............................................................................. 2.17(a)
Special Committee............................................................................... Recital A
Subsidiary...................................................................................... 2.2(a)
Superior Acquisition Proposal................................................................... 4.1
Surviving Company............................................................................... 1.1
Surviving Operating Partnership................................................................. Recital G
Takeover Statute................................................................................ 2.19
Tax Authority................................................................................... 2.13(a)
Tax Protection Agreements....................................................................... 2.17(f)
Tax Returns..................................................................................... 2.13(a)
Taxes........................................................................................... 2.13(a)
Third Party Provisions.......................................................................... 8.5
Transactions.................................................................................... 2.24
Transfer Taxes.................................................................................. 5.5
Underlying Loan................................................................................. 5.3(c)(i)
Voting Agreement................................................................................ Recital I
Welfare Plan.................................................................................... 2.11
Westbrook Co-Investment......................................................................... Recital E
Westbrook Fund I................................................................................ Recital E
Westbrook Fund III.............................................................................. Recital E
Westbrook SHP................................................................................... Recital E
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of July 12,
---------
1999, is by and among SHP Acquisition, L.L.C., a Delaware limited liability
company ("Parent"), SHP Investors Sub, Inc., a Maryland corporation and an
------
indirect subsidiary of Parent ("Buyer"), and Sunstone Hotel Investors, Inc., a
-----
Maryland corporation ("Seller").
------
RECITALS:
A. The Board of Directors of Seller ("Seller Board"), based upon the
------------
recommendation of a duly appointed special committee thereof of independent
directors ("Special Committee"), and the Board of Directors of Buyer have each
-----------------
determined it to be advisable and in the best interests of their respective
stockholders, subject to the conditions and other provisions contained herein,
that Buyer merge with and into Seller ("Merger").
------
B. The members of Parent have approved this Agreement and the Merger.
C. The Special Committee and the Seller Board have received a fairness
opinion relating to the transactions contemplated hereby as more fully described
herein.
D. Parent, Buyer and Seller desire to make certain representations,
warranties and agreements in connection with the transactions contemplated
hereby.
E. Contemporaneously with the execution of this Agreement, Westbrook SHP
L.L.C., a Delaware limited liability company ("Westbrook SHP"), Robert A. Alter
-------------
("Alter"), Riverside Hotel Partners, Inc., a California corporation
-----
("Riverside"), Alter Investment Group Ltd., a Colorado limited partnership,
---------
("Alter Investment Group"), Charles L. Biederman ("Biederman"), Sunstone Hotel
----------------------- ---------
Management, Inc., a Colorado corporation ("Manager"), Management Sub SHP L.L.C.,
-------
a Delaware limited liability company ("Management Sub"), Sunstone Hotel
--------------
Properties, Inc., a Colorado corporation ("Lessee"), Parent, Westbrook Real
------
Estate Fund III, L.P., a Delaware limited partnership ("Westbrook Fund III"),
------------------
Westbrook Real Estate Co-Investment Partnership III, L.P., a Delaware limited
partnership ("Westbrook Co-Investment"), and, solely for purposes of Section
-----------------------
4.2(c) of the Contribution Agreement (as defined), Westbrook Real Estate Fund I,
L.P., a Delaware limited partnership ("Westbrook Fund I"), and, solely for the
----------------
purposes of Section 9.14 of the Contribution Agreement, Regina Biederman have
entered into a Contribution Agreement (the "Contribution Agreement") pursuant to
----------------------
which and subject to the terms and conditions thereof, Westbrook SHP, Alter,
Biederman, Manager, Westbrook Fund III, Westbrook Co-Investment, Management Sub,
Riverside and Alter Investment Group shall contribute certain assets, equity
interests and cash to Parent as described therein (the "Contribution")
------------
immediately prior to the Seller Partnership Redemption (as defined below).
F. Immediately prior to the Partnership Merger (as defined below)
Sunstone Hotel Investors, L.P., a Delaware limited partnership ("Seller
------
Partnership"), will redeem from Seller certain outstanding units of Seller
- -----------
Partnership held by Seller in exchange for certain assets held by Seller
Partnership ("Seller Partnership Redemption") in accordance with the terms set
-----------------------------
forth on Exhibit A attached hereto.
---------
<PAGE>
G. Contemporaneously with the execution of this Agreement, SHP OP,
L.L.C., a Delaware limited liability company ("Buyer Operating Partnership"),
---------------------------
Seller Partnership and Parent are entering into a Merger Agreement ("Partnership
-----------
Merger Agreement") pursuant to which, and subject to the terms and conditions
- ----------------
thereof, immediately after the Seller Partnership Redemption and immediately
prior to the Merger, Buyer Operating Partnership will be merged with and into
Seller Partnership (the "Partnership Merger") with Seller Partnership as the
------------------
surviving entity ("Surviving Operating Partnership").
-------------------------------
H. To effect the Partnership Merger and the Partnership Agreement
Amendment (as defined below), (i) approval by the General Partner (as defined in
the Seller Partnership Agreement) (the "General Partner") and Limited Partners
---------------
(as defined in the Seller Partnership Agreement, "Limited Partners") who own
----------------
more than 50% of the Percentage Interests (as defined in the Seller Partnership
Agreement) ("Percentage Interests") of the Partners (as defined in the Seller
--------------------
Partnership Agreement) of the Partnership Merger and the Partnership Merger
Agreement and (ii) approval by Limited Partners holding more than 66-2/3% of the
Percentage Interests of the Limited Partners (excluding the Percentage Interests
held by Seller or any entity controlled by Seller) of the Partnership Agreement
Amendment ((i) and (ii) collectively, the "Seller Partner Approval") must be
-----------------------
obtained as of the date hereof, and copies of such approvals as have been
obtained as a result of the delivery to the Seller Partnership of certain voting
agreements and consents are attached as Exhibit E.
---------
I. Contemporaneously with the execution of this Agreement, Alter,
Biederman, Seller, Seller Partnership, Lessee and Manager have entered into a
drag-along agreement (the "Lessee/Manager Agreement"), a copy of which is
------------------------
attached as Exhibit B, pursuant to which, under certain circumstances, Seller
---------
and the Seller Partnership have the right to require Alter and Biederman or
Lessee and Manager, and Alter and Biederman or Lessee or Manager have the
obligation, to sell all of their equity interest in Lessee and Manager, as the
case may be, to certain third parties.
J. Contemporaneously with the execution of this Agreement, Seller,
Alter, Biederman, Westbrook Fund I and Parent have entered into a voting
agreement (the "Voting Agreement") and a limited irrevocable proxy (the
----------------
"Irrevocable Proxy"), a copy of which is attached as Exhibit C.
----------------- ---------
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, the parties hereto hereby
agree as follows:
ARTICLE 1
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions of this
----------
Agreement, and in accordance with Subtitle 1 of Title 3 of the Maryland General
Corporation Law ("MGCL"), Buyer shall be merged with and into Seller, with
----
Seller as the surviving entity (the entity surviving the Merger, the "Surviving
---------
Company"). The Merger shall have the effects specified in Section 3-114 of the
- -------
MGCL and this Agreement.
1.2 Closing. On the terms and subject to the conditions of this
-------
Agreement and provided that this Agreement has not been terminated pursuant to
Article 7, the closing of the Merger ("Closing") will take place at 10:00 a.m.,
-------
local time in New York, New York, on the date which is the third business day
following
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satisfaction (or waiver by the parties entitled to the benefit thereof) of the
conditions set forth in Article 6 (other than conditions that by their terms,
cannot be satisfied until the Closing Date), at the offices of Simpson Thacher &
Bartlett, 425 Lexington Avenue, New York, NY 10017-3954, unless another date or
place is agreed to in writing by the parties; provided however that without the
written consent of Parent and Buyer, the Closing shall not occur prior to
October 30, 1999 unless the Lender Consent (as herein defined) has been obtained
under that certain loan facility dated May 7, 1999 in the original principal
amount of $16,135,000. The date on which the Closing occurs is referred to
herein as the "Closing Date."
------------
1.3 Effective Time. On the Closing Date, the parties shall execute and
--------------
file articles of merger (the "Articles of Merger"), executed in accordance with
------------------
Maryland law, and shall make all other filings and recordings required under
Maryland law. The Merger shall become effective at the time ("Effective Time")
--------------
the Articles of Merger are accepted for record by the Maryland State Department
of Assessments and Taxation (the "Maryland Department"), or at such time as
-------------------
Buyer and Seller shall agree should be specified in the Articles of Merger (not
to exceed 30 days after the Articles of Merger are filed with the Maryland
Department). Unless otherwise agreed, the parties shall cause the Effective
Time to occur on the Closing Date.
1.4 Effect of Merger on Charter and Bylaws. The Articles of
--------------------------------------
Incorporation, as amended and restated ("Charter"), as further amended by the
-------
amendments discussed below, of Seller and the bylaws, as amended and restated,
of Seller, as in effect immediately prior to the Effective Time, shall
constitute the Charter and bylaws, respectively, of the Surviving Company, from
and after the Effective Time, until further amended in accordance with
applicable Maryland law.
1.5 Directors and Officers. The directors and officers of the Surviving
----------------------
Company shall be the Persons who were the directors and officers, respectively,
of Buyer immediately prior to the Effective Time. Such directors and officers
shall continue to serve for the balance of their unexpired terms or their
earlier death, resignation or removal.
1.6 Effect on Shares. The effect of the Merger on the shares of Seller
----------------
shall be as provided in this Article 1. Each share of common stock of Buyer
outstanding immediately prior to the Merger shall be converted, without any
action on the part of the holder thereof, into one share of the common stock of
the Surviving Company.
1.7 Merger Consideration.
--------------------
(a) At the Effective Time, by virtue of the Merger and without any
action on the part of Parent, Buyer, Seller or the holders of the following
securities:
(i) each Seller Common Share (as defined in Section 2.3(a)) issued
and outstanding immediately prior to the Effective Time shall be converted into
the right to receive $10.35 in cash as adjusted pursuant to Section 1.7(c)
("Common Merger Consideration"), without interest thereon, upon surrender of the
---------------------------
certificate formerly representing such Share; and
(ii) each Seller Preferred Share (as defined in Section 2.3(a))
issued and outstanding immediately prior to the Effective Time (other than
Seller Preferred Shares held by Parent, Buyer or any wholly-owned Subsidiary of
Parent or Buyer, which shares by virtue of the Merger and without any action
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on the part of the holder thereof, shall be canceled and shall cease to exist
with no payment being made with respect thereto and Parent and Buyer hereby
consent to such treatment) shall be converted into the right to receive the
"Liquidation Preference" (as such term is defined in the Articles Supplementary
of the Seller Preferred Shares) (the "Preferred Merger Consideration"), without
------------------------------
interest thereon, upon surrender of the certificate formerly representing such
share.
The Preferred Merger Consideration, together with the Common Merger
Consideration, is hereinafter referred to as the "Merger Consideration."
--------------------
(b) Each outstanding Seller Option (as defined in Section 2.3(b))
shall be subject to the terms of this Agreement. As of the Effective Time, each
outstanding Seller Option, whether or not then vested or exercisable, shall have
the expiration date thereof accelerated to the Closing Date, and Seller shall
use its reasonable best efforts to cause each such Seller Option to be converted
into the right to receive from the Surviving Company an amount of cash equal to
the product of (i) the number of Seller Common Shares subject to the Seller
Option and (ii) the excess, if any, of the Common Merger Consideration over the
exercise price per Seller Common Share of such option (the "Option
------
Consideration"). Each outstanding agreement for the issuance of warrants
- -------------
("Warrants") and the shares which would be issuable upon the exercise of such
--------
warrants (such shares, "Warrant Shares") shall be subject to the terms of this
--------------
Agreement. Seller shall use its reasonable best efforts to cause each Warrant to
be converted into the right to receive from the Surviving Company an amount of
cash equal to the product of (i) the number of Warrant Shares and (ii) the
excess, if any, of the Common Merger Consideration over the exercise price per
Warrant Share of such Warrants (the "Warrant Consideration"). Prior to the
---------------------
Effective Time, Seller shall take all steps necessary to give written notice to
each holder of a Seller Option and Warrant that all Seller Options and Warrants
shall expire effective as of the Effective Time and be converted into the right
to receive the Option Consideration or Warrant Consideration, as the case may
be. The Surviving Company shall cause the Paying Agent (as defined below) to
pay each holder of Seller Options and Warrants, promptly following the Effective
Time, the Option Consideration or Warrant Consideration, as the case may be, for
all Seller Options and of Warrant Shares held by such holder. The Seller Board
or any committee thereof responsible for the administration of Seller's stock
option plans or warrant plans shall take any and all action necessary to
effectuate the matters described in this Section 1.7(b) on or before the
Effective Time. Any amounts payable pursuant to this Section 1.7(b) shall be
subject to any required withholding of taxes and shall be paid without interest.
Parent agrees to provide the Surviving Company with sufficient funds to permit
the Surviving Company to satisfy its obligations under this Section 1.7(b).
(c) The Common Merger Consideration shall be decreased to the
extent and in the circumstances described in Section 5.3 (a)(ii)(y) and (z),
Section 5.3(c), Section 5.3(d), the last sentence of Section 5.8 or the last
sentence of Section 6.2(f). The Common Merger Consideration shall be increased
by an amount (the "Closing Adjustment Amount") equal to: 50% of (i) consolidated
-------------------------
cash, cash equivalents and marketable securities (valued equal to their market
value) of Seller and its Subsidiaries, determined by Ernst & Young, LLP in
accordance with GAAP, as of the close of business on the fifth business day
prior to Closing(the "Measurement Date") minus (ii) consolidated cash, cash
---------------- -----
equivalents and marketable securities (valued equal to their market value) of
Seller and its Subsidiaries, determined by Ernst & Young LLP in accordance with
GAAP, as of June 30, 1999; minus (iii) the aggregate proceeds received by
-----
Seller and its Subsidiaries during the period after June 30, 1999 and on or
prior to the Measurement Date of (x) any sales or other dispositions of assets
of Seller or any of its Subsidiaries, (y) any incurrence of indebtedness or
other non-equity financing by Seller or any of its Subsidiaries or (z) any
issuances of equity interests by Seller or
-4-
<PAGE>
any of its Subsidiaries, except in each case to the extent such proceeds were
utilized to pay down debt (other than scheduled amortization payments or
payments at scheduled maturity); plus (iv) expenses not exceeding $11,500,000
----
described in Section 6.2(f) and paid in cash by Seller after June 30, 1999 and
on or prior to the Measurement Date, plus (v) the amount by which accrued
----
property taxes of Seller as of the Measurement Date are less than the amount at
June 30, 1999; minus (vi) the amount by which accrued property taxes of Seller
-----
as of the Measurement Date exceed the amount at June 30, 1999; plus (vii) any
----
amounts overdue from Lessee as of the Measurement Date; minus (viii) the amount
-----
of insurance and condemnation proceeds received by Seller that have not been
applied (x) to purchase or repair the assets giving rise to such proceeds or (y)
to the repayment of debt (other than scheduled amortization payments or payments
at scheduled maturity); provided however that the Closing Adjustment Amount will
equal not less than $2,500,000. The determination of Ernst & Young LLP with
respect to the Closing Adjustment Amount pursuant to this Section 5.8(b) will be
binding on the parties except in the case of fraud or gross negligence by Ernst
& Young LLP.
1.8 Transactions Relating to Seller Partnership. Contemporaneously with
-------------------------------------------
the execution of this Agreement, Buyer Operating Partnership and Seller
Partnership are entering into the Partnership Merger Agreement pursuant to which
and subject to the terms and conditions thereof, among other things, (i) on the
Closing Date and prior to the Effective Time Buyer Operating Partnership will be
merged with and into Seller Partnership (the "Partnership Merger") with Seller
------------------
Partnership surviving as the Surviving Operating Partnership and (ii) each
holder ("Seller Common Unit Holder") other than Seller of common units in the
-------------------------
Seller Partnership ("Seller Common OP Units") will be offered the option of
----------------------
receiving either (A) an amount per Seller Common OP Unit equal to the Common
Merger Consideration or (B) one Class A Unit (as defined in the limited
liability company agreement of Parent, as amended) for each Seller Common OP
Unit held by such holder, or (C) one Class B Unit (as defined in the Limited
Liability Company Agreement of Parent, as amended) for each Seller Common OP
Unit held by such holder, provided that such holder must be an "accredited
investor" as defined in Rule 501 under the Securities Act (as defined below) and
not an "interested stockholder" of Seller or an "affiliate" of an interested
stockholder of Seller (both as defined in Section 3-601 of the MGCL) to elect
the option described in the clause (B) or (C). Each Seller Common OP Unit held
by Seller shall be converted into the right to receive an amount equal to the
Common Merger Consideration. Immediately prior to the Partnership Merger,
Seller Partnership shall redeem all of the Seller OP Preferred Units (as defined
in Section 2.3(e)) and certain of the Seller Common OP Units held by Seller in
exchange for certain assets held by the Seller Partnership in accordance with
the terms set forth on Exhibit A attached hereto.
---------
1.9 Exchange of Certificates.
------------------------
(a) Prior to the Effective Time, Buyer shall appoint a paying agent
reasonably acceptable to Seller to act as agent (the "Paying Agent") for the
------------
payment of the Merger Consideration upon surrender of certificates formerly
representing issued and outstanding Seller Common Shares or Seller Preferred
Shares and cash payable in respect of Seller Common OP Units, Seller Options and
Warrants.
(b) Parent and Buyer shall provide to the Paying Agent on or before
the Effective Time, for the benefit of the holders of Seller Common Shares,
Seller Preferred Shares and Seller Common OP Units, cash payable in exchange
for the issued and outstanding Seller Common Shares and Seller Preferred Shares
and cash payable in respect of Seller Common OP Units.
-5-
<PAGE>
(c) Promptly after the Effective Time, the Surviving Company shall
cause the Paying Agent to mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding Seller Common Shares or Seller Preferred Shares (the "Certificates")
------------
(i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Paying Agent and shall be in such form and
have such other provisions as Buyer may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for the Merger Consideration. Upon surrender of a Certificate for cancellation
to the Paying Agent, together with such letter of transmittal, duly executed and
completed in accordance with the instructions thereto, the holder of such
Certificate shall be entitled to receive in exchange therefor the applicable
Merger Consideration, and the Certificate so surrendered shall forthwith be
canceled. In the event of a transfer of ownership of Seller Common Shares or
Seller Preferred Shares which is not registered in the transfer records of
Seller, payment may be made to a Person (as defined in Section 2.2(a)) other
than the Person in whose name the Certificate so surrendered is registered if
such Certificate shall be properly endorsed or otherwise be in proper form for
transfer and the Person requesting such payment either shall pay any transfer or
other Taxes (as defined in Section 2.14(a)) required by reason of such payment
being made to a Person other than the registered holder of such Certificate or
establish to the satisfaction of the Surviving Company that such Tax or Taxes
have been paid or are not applicable. Until surrendered as contemplated by this
Section 1.9, each Certificate shall be deemed at any time after the Effective
Time to represent only the right to receive upon such surrender the Merger
Consideration, without interest. No interest will be paid or will accrue on the
Merger Consideration upon the surrender of any Certificate. Consideration
payable in respect of Seller Common OP Units will be paid as provided in the
Partnership Merger Agreement.
(d) All Merger Consideration paid upon the surrender of
Certificates in accordance with the terms of this Section 1.9 shall be deemed to
have been paid in full satisfaction of all rights pertaining to the Seller
Common Shares or Seller Preferred Shares formerly represented by such
Certificates; provided, however, that Seller shall transfer to the Paying Agent
cash sufficient to pay any dividends or make any other distributions with a
record date on or prior to the Effective Time which may have been declared or
made by Seller on such Seller Common Shares or Seller Preferred Shares,
including without limitation any dividends permitted by the second paragraph of
Section 5.8 hereof, in accordance with the terms of this Agreement or prior to
the date of this Agreement and which remain unpaid at the Effective Time and
have not been paid prior to such surrender, and there shall be no further
registration of transfers on the stock transfer books of Seller of the Seller
Common Shares or Seller Preferred Shares which were outstanding immediately
prior to the Effective Time. If, after the Effective Time, Certificates are
presented to the Surviving Company for any reason, they shall be canceled and
exchanged as provided in this Section 1.9.
(e) None of Parent, Seller, Buyer, the Surviving Company or the
Paying Agent shall be liable to any Person in respect of any Merger
Consideration delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. Any portion of the Merger
Consideration delivered to the Paying Agent pursuant to this Agreement that
remains unclaimed for 12 months after the Effective Time shall be redelivered by
the Paying Agent to the Surviving Company, upon demand, and any holders of
Certificates who have not theretofore complied with Section 1.9(c) shall
thereafter look only to the Surviving Company for delivery of the Merger
Consideration and any unpaid dividends, subject to applicable escheat and other
similar Laws (as defined below).
-6-
<PAGE>
1.10 Further Assurances. If, at any time after the Effective Time, the
------------------
Surviving Company shall determine or be advised that any deeds, bills of sale,
assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Company the right, title or interest in, to or under any of the rights,
properties or assets of Seller acquired or to be acquired by the Surviving
Company as a result of, or in connection with, the Merger or otherwise to carry
out this Agreement, the Surviving Company shall be authorized to execute and
deliver, in the name and on behalf of each of Parent, Buyer and Seller, all such
deeds, bills of sale, assignments and assurances and to take and do, in the name
and on behalf of each of Parent, Buyer and Seller or otherwise, all such other
actions and things as may be necessary or desirable to vest, perfect or confirm
any and all right, title and interest in, to and under such rights, properties
or assets in the Surviving Company or otherwise to carry out this Agreement.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Parent and Buyer, except (i) as set forth
in Seller SEC Documents (as defined below) to the extent it is reasonably clear
from a reading of the disclosure in such Seller SEC Document that such
disclosure is applicable to the relevant representation and warranty contained
herein, (ii) with respect to events, facts, or circumstances or conditions known
to Alter as of the date of this Agreement or existing because of acts or
omissions by Alter since April 6, 1999, but solely with respect to the
representations and warranties set forth in Sections 2.4(b)(ii) and (iii),
2.6(f), and 2.8(e), (g) and (h) or (iii) the letter of even date herewith
delivered to Buyer prior to the execution hereof (the "Seller Disclosure
-----------------
Letter") (it being understood that the Seller Disclosure Letter shall be
arranged in sections corresponding to the sections contained in this Article 2,
and the disclosures in any section of the Seller Disclosure Letter shall qualify
all of the representations in the corresponding section of this Article 2 and,
in addition, all other sections in this Article 2 to the extent it is reasonably
clear from a reading of the disclosure that such disclosure is applicable to
such other sections) as follows:
2.1 Organization, Standing and Power of Seller. Seller is a corporation
------------------------------------------
duly organized and validly existing under the Laws of Maryland. Seller has the
requisite corporate power and authority to carry on its business as now being
conducted. Seller is duly qualified or licensed to do business as a foreign
corporation and is in good standing in each jurisdiction in which the nature of
its business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions where the
failure to be so qualified or licensed, individually or in the aggregate, would
not have a Seller Material Adverse Effect. Seller has delivered to Buyer
complete and correct copies of Seller's Charter and bylaws, in each case, as
amended to the date of this Agreement. As used in this Agreement, "Seller
------
Material Adverse Effect" shall mean a material adverse effect on the business,
- -----------------------
properties, assets, financial condition, or results of operations of Seller and
its Subsidiaries, taken as a whole, including the prevention of the ability of
Seller or Seller Partnership to consummate timely any of the Transactions (as
defined below); provided that adverse effects on the business, properties,
assets, financial condition or results of operation of Seller or its
Subsidiaries resulting from (A) the fact that Seller and Seller Partnership have
entered into this Agreement or Seller's and Seller Partnership's compliance with
the terms of this Agreement, including consummating the Merger or the
Partnership Merger, (B) general economic or market conditions or (C) the real
estate or hotel and lodging industry generally, shall not individually or in the
aggregate constitute a Seller Material Adverse Effect.
-7-
<PAGE>
2.2 Seller Subsidiaries/Investments.
-------------------------------
(a) Section 2.2(a) of the Seller Disclosure Letter sets forth as of
----------------------------------------------
the date hereof (i) each Subsidiary (as defined below) of Seller (the "Seller
------
Subsidiaries"), (ii) the ownership interest therein of Seller, (iii) if not
- ------------
wholly-owned by Seller, the identity and ownership interest of each of the other
owners of such Seller Subsidiary (it being understood that such representation
with respect to securities held by any entity other than Seller or a Seller
Subsidiary is made only to the Knowledge of Seller (as defined below)) and (iv)
each real property owned or leased by such Subsidiary, and identifies whether
such property is owned or leased and if leased, the name of the lessor. As used
in this Agreement, "Subsidiary" of any Person (as defined below) means any
----------
corporation, partnership, limited liability company, joint venture, trust or
other legal entity of which such Person (either directly or through or together
with another Subsidiary of such Person) owns 50% or more of the capital stock or
other equity interests of such corporation, partnership, limited liability
company, joint venture or other legal entity, including, without limitation, the
Seller Partnership, but does not include short-term money market investments and
other participation interests in short-term investments. As used herein,
"Person" means an individual, corporation, partnership, limited liability
- -------
company, joint venture, association, trust, unincorporated organization or other
entity.
(b) (i) All the outstanding shares of capital stock owned by Seller
or a Seller Subsidiary of each Seller Subsidiary that is a corporation have been
validly issued and are (A) fully paid, nonassessable and free of any preemptive
rights, (B) owned by Seller or by another Seller Subsidiary and (C) owned free
and clear of all pledges, claims, liens, charges, encumbrances and security
interests of any kind or nature whatsoever (collectively, "Liens") or any other
-----
limitation or restriction (including any contractual restriction on the right to
vote or sell the same) other than restrictions under applicable securities laws;
and (ii) all equity interests in each Seller Subsidiary that is a partnership,
joint venture, limited liability company or trust which are owned by Seller, by
another Seller Subsidiary or by Seller and another Seller Subsidiary are owned
free and clear of all Liens or any other limitation or restriction (including
any contractual restriction on the right to vote or sell the same) other than
restrictions under applicable securities laws. Each Seller Subsidiary that is a
corporation is duly incorporated and validly existing under the Laws of its
jurisdiction of incorporation and has the requisite corporate power and
authority to carry on its business as now being conducted, and each Seller
Subsidiary that is a partnership, limited liability company or trust is duly
organized and validly existing under the Laws of its jurisdiction of
organization and has the requisite power and authority to carry on its business
as now being conducted. Each Seller Subsidiary is duly qualified or licensed to
do business and is in good standing in each jurisdiction in which the nature of
its business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions where the
failure to be so qualified or licensed, individually or in the aggregate, would
not have a Seller Material Adverse Effect. True and correct copies of the
certificate or articles of incorporation, By-laws, organization documents and
partnership, joint venture and operating agreements of each Seller Subsidiary,
and all amendments to the date of this Agreement, have been made available or
previously delivered to Buyer.
(c) Neither Seller nor any Seller Subsidiary owns, directly or
indirectly, any interest or investment (whether equity or debt) in any
corporation, partnership, joint venture, business, trust or entity (other than
investments in the Seller Subsidiaries and short-term investment securities).
2.3 Capital Structure.
-----------------
-8-
<PAGE>
(a) The authorized shares of capital stock of Seller consist of
150,000,000 shares of common stock, $0.01 par value per share, of which
37,929,477 shares are issued and outstanding as of June 30, 1999 (the "Seller
------
Common Shares"), and 10,000,000 shares of preferred stock, $0.01 par value per
- -------------
share, of which 250,000 are issued and outstanding as of the date hereof and are
designated as Class A Cumulative Convertible Preferred Stock (the "Seller
------
Preferred Shares"). Since June 30, 1999, no Seller Common Shares have been
- ----------------
issued. As of the date hereof, (i) 2,400,000 Seller Common Shares have been
reserved for issuance under the 1994 Stock Incentive Plan of Seller (the "Seller
------
1994 Incentive Plan"), under which options in respect of 1,690,640 Seller Common
- -------------------
Shares have been granted and are outstanding as of the date hereof, (ii) 150,900
Seller Common Shares have been reserved for issuance under the 1994 Directors
Plan of Seller (the "Seller Director Plan"), under which options in respect of
--------------------
30,000 Seller Common Shares have been granted and are outstanding on the date
hereof, (iii) 15,900 Seller Common Shares have been reserved for issuance under
the 1997 Supplemental Stock Option Plan of Seller (the "Seller 1997 Supplemental
------------------------
Plan"), under which options in respect of 9,300 Seller Common Shares have been
- ----
granted and are outstanding on the date hereof, (iv) 2,072,250 Seller Common
Shares are reserved for issuance upon conversion of Seller Common OP Units, (v)
1,699,605 Seller Common Shares are reserved for issuance upon conversion of the
Seller Preferred Shares, and (vi) 464,042 Seller Common Shares are reserved for
issuance upon exercise of warrants of Seller of which warrants for the purchase
of 17,042 Seller Common Shares have been issued and are outstanding.
(b) Set forth in Section 2.3(b) of the Seller Disclosure Letter is
----------------------------------------------
a true and complete list of the following: (i) each qualified or nonqualified
option to purchase Seller Common Shares granted under the Seller 1994 Incentive
Plan, Seller Director Plan and Seller 1997 Supplemental Plan (collectively, the
"Seller Plans") or any other formal or informal arrangement ("Seller Options");
------------ --------------
(ii) each grant of Seller Common Shares to employees which are subject to any
risk of forfeiture; (iii) all agreements for the issuance of warrants or to
purchase Seller Common Shares and the number of shares which would be issuable
upon the exercise of such warrants or agreements, and (iv) all other rights to
acquire stock, all limited stock appreciation rights, phantom stock, dividend
equivalents, performance units and performance shares granted under the Seller
Plans which are outstanding as of the date hereof. On the date of this
Agreement, except as set forth in this Section 2.3, no shares of capital stock
of Seller were outstanding or reserved for issuance.
(c) All outstanding shares of capital stock of Seller are duly
authorized, validly issued, fully paid and nonassessable, and not subject to
preemptive rights. There are no bonds, debentures, notes or other indebtedness
of Seller having the right under applicable law or Seller's Charter or bylaws to
vote (or convertible into, or exchangeable for, securities having the right to
vote) on any matters on which stockholders of Seller may vote.
(d) There are no outstanding securities, options, warrants, calls,
rights, commitments, agreements, arrangements or undertakings of any kind to
which Seller or any Seller Subsidiary is a party or by which any such entity is
bound, obligating Seller or any Seller Subsidiary to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital stock,
voting securities or other ownership interests of Seller or any Seller
Subsidiary or obligating Seller or any Seller Subsidiary to issue, grant, extend
or enter into any such security, option, warrant, call, right, commitment,
agreement, arrangement or undertaking (other than to Seller or a Seller
Subsidiary). There are no outstanding obligations of Seller or any Seller
Subsidiary to repurchase, redeem or otherwise acquire any shares of stock of
Seller or shares of stock or other ownership interests of any Seller Subsidiary.
-9-
<PAGE>
(e) As of the date hereof, 40,001,727 Seller Common OP Units are
validly issued and outstanding, fully paid and nonassessable, except to the
extent provided by applicable law, of which 37,929,477 are owned by Seller. As
of the date hereof, 250,000 preferred units of the Seller Partnership are
designated 7.9% Class A Cumulative Convertible Preferred Partnership Units (the
"Seller OP Preferred Units" (and each holder thereof, a "Seller OP Preferred
------------------------- -------------------
Unit Holder"), and together with the Seller OP Common Units, the "Seller OP
- ----------- ---------
Units") and are validly issued and outstanding, fully paid and nonassessable,
- -----
all of which are owned by Seller. Section 2.3(e) of the Seller Disclosure
---------------------------------------
Letter sets forth the name of each Seller OP Common Unit Holder and the number
- ------
of Seller OP Units owned by each such Seller Unit Holder as of the date of this
Agreement. The Seller OP Units are not subject to any restriction established
by Seller or under applicable law (other than restrictions on sale imposed by
applicable securities laws) except as set forth in the Second Amended and
Restated Agreement of Limited Partnership of the Seller Partnership (the "Seller
------
Partnership Agreement") and Seller Contribution Agreements (as defined below).
- ---------------------
Seller Partnership has not issued or granted and is not a party to any
outstanding commitments of any kind relating to, or any presently effective
agreements or understandings with respect to, issuing interests in Seller
Partnership or securities convertible into interests in Seller Partnership.
(f) All dividends on Seller Common Shares and distributions on
Seller OP Units which have been declared prior to the date of this Agreement
have been paid in full.
2.4 Authority; Noncontravention; Consents.
-------------------------------------
(a) Seller has the requisite corporate power and corporate
authority to enter into this Agreement and, subject to the approval (i) of the
amendments to Seller's Charter as set forth on Exhibit D hereto ("Charter
-------
Amendments") and the recommendation by Seller Board that Seller should terminate
- ----------
its status as a real estate investment trust, in each case, by the affirmative
vote of two-thirds of all votes entitled to be cast by the holders of the issued
and outstanding Seller Common Shares and Seller Preferred Shares (voting on an
"as converted" basis), voting as a single class, and (ii) of this Agreement and
the Merger by the affirmative vote of a majority of all votes entitled to be
cast by the holders of the issued and outstanding Seller Common Shares and
Seller Preferred Shares (voting on an "as converted" basis), voting as a single
class ((i) and (ii) collectively, the "Seller Stockholder Approvals"), and
----------------------------
ratification and approval of the matters described in (i) and (ii) by Seller
Board following stockholder approval ("Seller Board Approval") and the Seller
---------------------
Partner Approval to consummate the transactions contemplated by this Agreement
to which Seller is a party. The execution and delivery of this Agreement by
Seller and the consummation by Seller of the transactions contemplated by this
Agreement to which Seller is a party have been duly authorized by all necessary
corporate action on the part of Seller, except for and subject to the Seller
Stockholder Approvals, Seller Partner Approval and Seller Board Approval. This
Agreement has been duly executed and delivered by Seller and constitutes a valid
and binding obligation of Seller, enforceable against Seller in accordance with
and subject to its terms, subject to applicable bankruptcy, insolvency,
moratorium or other similar Laws relating to creditors' rights and general
principles of equity. The Seller Board, based upon the recommendation of the
Special Committee, has duly and validly approved, and taken all corporate action
required to be taken by it for the consummation of the Transactions (other than
the Seller Board Approval), including, assuming the accuracy of the
representations and warranties of Parent and Buyer in Section 3.12, all actions
required to render inapplicable to the Merger and this Agreement (and the
transactions provided for herein) the restrictions on "business combinations"
(as defined in Subtitle 6 of Title 3 of the MGCL) between Seller (or any
affiliate thereof) and Buyer (or any affiliate thereof) set forth in Subtitle 6
of Title
-10-
<PAGE>
3 of the MGCL and the limitations on voting rights of shares of stock acquired
in a "control share acquisition" (as defined in Subtitle 7 of Title 3 of the
MGCL) set forth in Subtitle 7 of Title 3 of the MGCL.
(b) The execution and delivery of this Agreement by Seller do not,
and the consummation of the transactions contemplated by this Agreement to which
Seller is a party and compliance by Seller with the provisions of this Agreement
will not, require any consent, approval or notice under, or conflict with, or
result in any violation of, or default (with or without notice or lapse of time,
or both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to loss of a benefit under, or result in the
creation of any Lien upon any of the properties or assets of Seller or any
Seller Subsidiary under, (i) the Charter or the bylaws of Seller, or subject to
the Seller Partner Approval, the comparable articles or certificate of
incorporation or organizational documents or partnership or similar agreement
(as the case may be) of any Seller Subsidiary, each as amended or supplemented
to the date hereof, (ii) any material loan or credit agreement, note, bond,
mortgage or indenture to which Seller or any Seller Subsidiary is a party, (iii)
any reciprocal easement agreement, lease, joint venture agreement, development
agreement, benefit plan or other agreement, instrument, permit, concession,
franchise or license applicable to Seller or any Seller Subsidiary or (iv)
subject to the governmental filings and other matters referred to in the
following sentence, any judgment, order, decree, statute, law, ordinance, rule
or regulation (collectively, "Laws") applicable to Seller or any Seller
----
Subsidiary, provided no representation or warranty is made in this sentence as
to any agreement with Lessee, Manager or any of their affiliates, and in the
case of clause (iii) or (iv), any such conflicts, violations, defaults, rights,
loss or Liens that individually or in the aggregate would not reasonably be
expected to (x) have a Seller Material Adverse Effect or (y) prevent or delay
beyond December 31, 1999 (the "Outside Date") the consummation of the
------------
transactions contemplated by this Agreement. No consent, approval, order or
authorization of, or registration, declaration or filing with, any federal,
state or local government or any court, administrative or regulatory agency or
commission or other governmental authority or agency, domestic or foreign (a
"Governmental Entity"), is required by or with respect to Seller or any Seller
- --------------------
Subsidiary in connection with the execution and delivery of this Agreement by
Seller or the consummation by Seller of the transactions contemplated by this
Agreement, except for (i) the filing with the Securities and Exchange Commission
(the "SEC") and the New York Stock Exchange of the Proxy Statement (as defined
---
in Section 5.1(a)) and any filings required by the Exchange Act (including
Schedule 13E-3), (ii) the filing of the Articles of Merger with the Maryland
Department, (iii) the filing of a certificate of merger with the Secretary of
State of the State of Delaware with respect to the Partnership Merger, (iv) any
filings required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"), (v) the filing of a Form D with the SEC with respect
-------
to the transaction contemplated by the Partnership Merger Agreement and (vi)
such other consents, approvals, orders, authorizations, registrations,
declarations and filings (A) as are set forth in Section 2.4 of the Seller
-------------------------
Disclosure Letter, (B) as may be required under (y) federal, state or local
- -----------------
environmental Laws or (z) the "blue sky" laws of various states, to the extent
applicable or (C) which, if not obtained or made, would not prevent or delay
beyond the Outside Date the consummation of any of the transactions contemplated
by this Agreement or otherwise prevent or delay beyond the Outside Date Seller
from performing its obligations under this Agreement in any material respect or
have, individually or in the aggregate, a Seller Material Adverse Effect.
2.5 SEC Documents; Financial Statements; Undisclosed Liabilities.
------------------------------------------------------------
(a) Seller has filed all Seller SEC Documents (as defined below) on
a timely basis. Section 2.5(a) of the Seller Disclosure Letter contains a
----------------------------------------------
complete list of all Seller SEC Documents filed by
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<PAGE>
Seller or Seller Partnership with the SEC since January 1, 1999 and on or prior
to the date of this Agreement. All of the Seller SEC Documents (other than
preliminary material and, if amended or superseded by a filing prior to the date
of this Agreement or of the Closing Date, then on the date of such filing), as
of their respective filing dates, did or, if not yet filed, will (i) comply as
to form in all material respects with all applicable requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the Securities
--------------
Exchange Act of 1934, as amended (the "Exchange Act"), and, in each case, the
------------
rules and regulations promulgated thereunder applicable to such Seller SEC
Documents and (ii) not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading. The consolidated financial statements of Seller
included in the Seller SEC Documents did (or, if not yet filed, upon filing
will) comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, have been (or, if not yet filed, upon filing will be) prepared in
accordance with generally accepted accounting principles ("GAAP") (except, in
----
the case of unaudited statements, as permitted by the applicable rules and
regulations of the SEC) applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto) and fairly presented
(or, if not yet filed, upon filing will fairly present) in all material
respects, in accordance with the applicable requirements of GAAP and the
applicable rules and regulations of the SEC, the consolidated financial position
of Seller and its Subsidiaries, as of the dates thereof and the consolidated
results of operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments). Seller has
no Subsidiaries which are not consolidated for accounting purposes.
(b) Except (i) for liabilities or obligations incurred in the
ordinary course of business, (ii) for liabilities or obligations incurred in
connection with the transactions contemplated by this Agreement, or (iii) as
disclosed in the Seller SEC Documents filed after July 1, 1996 or in the Seller
Disclosure Letter, Seller and its Subsidiaries have no liabilities or
obligations (whether absolute, accrued, contingent or otherwise) which would
have a Seller Material Adverse Effect other than those resulting from any
lawsuits or other claims filed with respect to the Merger and the other
transactions completed hereby. As used herein, "Seller SEC Documents" shall mean
--------------------
all reports, schedules, forms, statements and other documents required to be
filed by the Seller with the SEC since July 1, 1996; provided that with respect
to all representations and warranties of Seller contained in this Article 2
(except those contained in Section 2.5(a)), references to Seller SEC Documents
shall refer only to those filings made prior to the date hereof.
2.6 Absence of Certain Changes or Events. Except as disclosed in the
------------------------------------
Seller SEC Documents, since the date of the most recent audited financial
statements included in the Seller SEC Documents (the "Seller Financial Statement
--------------------------
Date") through the date of this Agreement, Seller and its Subsidiaries have
- ----
conducted their business only in the ordinary course (taking into account prior
practices, including the acquisition and disposition of properties and issuance
of securities) and, except as disclosed in the Seller SEC Documents or the
Seller Disclosure Letter, there has not been (a) any Seller Material Adverse
Change (as defined below), (b) except for regular quarterly distributions not in
excess of $0.285 per Seller Common Share or Seller Common OP Unit and dividends
on the Seller Preferred Shares in accordance with the terms of Seller's Articles
Supplementary of Incorporation, respectively (or as necessary to maintain REIT
status) and Seller Preferred OP Units, in each case subject to rounding
adjustments as necessary and with customary record and payment dates, and any
authorization, declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to the Seller
Common Shares, the Seller OP Units or the Seller Preferred Shares, (c) any
split, combination or reclassification of the Seller Common Shares, the Seller
OP Units or the Seller Preferred Shares or any issuance or the authorization of
any issuance
-12-
<PAGE>
of any other securities in respect of, in lieu of or in substitution for, or
giving the right to acquire by exchange or exercise, shares of stock of Seller
or partnership interests in Seller partnerships or any issuance of an ownership
interest in, any Seller Subsidiary, (d) any damage, destruction or loss, whether
or not covered by insurance, that has or would reasonably be likely to have a
Seller Material Adverse Effect, (e) any change in financial or tax accounting
methods, principles or practices by Seller or any Seller Subsidiary materially
affecting its assets, liabilities or business, except insofar as may have been
required by a change in GAAP, (f) (x) any granting by Seller or any of its
Subsidiaries to any officer or other key employee of Seller or any of its
Subsidiaries of any increase in compensation, except for normal increases in the
ordinary course of business consistent with past practice or as required under
employment agreements in effect as of the date hereof, (y) any granting by
Seller or any of its Subsidiaries to any such officer or key employee of any
increase in severance or termination pay, except as was required under any
employment, severance or termination agreements in effect as of December 31,
1998 or (z) any entry by Seller or any of its Subsidiaries into any employment,
severance or termination agreement with any such officer or key employee except
in the ordinary course of business consistent with past practice, (g) any
acquisition or disposition of any real property, or any commitment to do so,
made by Seller or any of its Subsidiaries or (h) any making or revocation of any
material tax election. As used in this Agreement, "Seller Material Adverse
-----------------------
Change" shall mean (i) any material adverse change in the business, properties,
- ------
assets, financial condition or results of operations of Seller and its
Subsidiaries, taken as a whole, or (ii) any other change that would prevent or
delay beyond the Outside Date the ability of Seller or the Seller Partnership
from consummating any of the Transactions; provided that in no event shall any
change, circumstance or effect relating to or arising out of (A) the fact that
Seller and Seller Partnership have entered into this Agreement or Seller's and
Seller Partnership's compliance with the terms of this Agreement including,
consummating the Merger or the Partnership Merger, (B) general economic or
market conditions, or (C) the real estate or hotel and lodging industry
generally, individually or in the aggregate, constitute a Seller Material
Adverse Change.
2.7 Litigation. Except as disclosed in the Seller SEC Documents, and
----------
other than personal injury and other routine tort litigation arising from the
ordinary course of operations of Seller and its Subsidiaries which are covered
by adequate insurance, as of the date hereof, there are no suits, actions or
proceedings pending (in which service of process has been received by Seller or
a Seller Subsidiary) or, to the Knowledge of Seller, threatened in writing
against or affecting Seller or any Seller Subsidiary that, individually or in
the aggregate, would reasonably be expected to (i) have a Seller Material
Adverse Effect or (ii) prevent or delay beyond the Outside Date the consummation
of the material transactions contemplated by this Agreement, nor, as of the date
of this Agreement, is there any judgment, decree, injunction, rule or order of
any Governmental Entity or arbitrator outstanding against Seller or any Seller
Subsidiaries having, or which insofar as can reasonably be foreseen, in future
will have, any such effect. No claim is pending or has been made within the
two-year period ending on the date of this Agreement under any director's or
officer's liability insurance policy maintained at any time by Seller or any of
its Subsidiaries.
2.8 Properties.
----------
(a) Each Seller Subsidiary set forth in Section 2.2(a) of the
---------------------
Seller Disclosure Letter owns marketable fee simple or leasehold title to the
- ------------------------
real properties identified opposite it in Section 2.2(a) of the Seller
----------------------------
Disclosure Letter (collectively with all buildings, structures and other
- -----------------
improvements thereon, the "Seller Properties" and each, collectively with all
-----------------
buildings, structures and other improvements thereon, a "Seller Property"),
---------------
which are all of the real properties owned or leased by Seller and the Seller
Subsidiaries as of the date hereof. Except as set forth in the existing title
reports identified in clause (iii) below or in
-13-
<PAGE>
Section 2.2(a) of the Seller Disclosure Letter and except for any easements
- ----------------------------------------------
granted in the ordinary course of business since the date of such title reports
which do not have a material adverse effect on the operation of any of the
Seller Properties, no other Person has any real property ownership interest in
any of the Seller Properties. The Seller Properties are not subject to any
rights of way, written agreements, Laws, ordinances and regulations affecting
building use or occupancy, or reservations of an interest in title
(collectively, "Property Restrictions") or Liens (including Liens for Taxes),
---------------------
mortgages or deeds of trust, claims against title, charges which are Liens,
security interests or other encumbrances on title (the "Encumbrances"), except
------------
for (i) Property Restrictions and Encumbrances set forth in Section 2.8(a)(i) of
--------------------
the Seller Disclosure Letter, (ii) Property Restrictions imposed or promulgated
- ----------------------------
by law or any governmental body or authority with respect to real property,
including zoning regulations, which, individually or in the aggregate, would not
have a Seller Material Adverse Effect, (iii) Property Restrictions and
Encumbrances disclosed on existing title reports or existing surveys (in either
case copies of which title reports and surveys have been made available to
Buyer's representatives at the data room established by Seller and examined by
representatives of Buyer (the "Data Room")), and referenced on Seller's Data
---------
Room index dated June 15, 1999 or provided to Parent or Buyer prior to the date
hereof, and (iv) mechanics', carriers', workmen's, repairmen's Liens and other
Encumbrances and Property Restrictions, if any, which, individually or in the
aggregate, would not have a Seller Material Adverse Effect.
(b) Seller has obtained title insurance insuring Seller's or the
applicable Seller Subsidiary's fee simple title to each of the Seller Properties
owned by it and leasehold title to each of the Seller Properties leased by it,
in each case, subject only to the matters disclosed in such policies, in clause
(a) above and in Section 2.8(b) of the Seller Disclosure Letter. Seller has not
----------------------------------------------
received any written notice that any such policy is not in full force and
effect. No claim has been made against any such policy in excess of $50,000.
(c) Section 2.8(c) of the Seller Disclosure Letter sets forth
----------------------------------------------
Seller's and each Seller Subsidiary's capital expenditure budget and schedule
for each Seller Property, which describes the capital expenditures which the
Seller or any Subsidiary has budgeted for such Seller Property for the period
running through December 31, 1999 (the "CapEx Budget"). Section 2.8(c) of the
------------ ---------------------
Seller Disclosure Letter, sets forth a complete list of each Seller Property
- ------------------------
that is currently under development or subject to any agreement with respect to
development; provided, however, that "development" shall not include capital
improvements made in the ordinary course of business to existing Seller
Properties and repairs made to existing Seller Properties.
(d) The ground leases underlying the leased Seller Properties
referenced in Section 2.2(a) of the Seller Disclosure Letter (collectively, the
----------------------------------------------
"Seller Ground Leases") are listed, by property, in Section 2.8(d) of the Seller
-------------------- ----------------------------
Disclosure Letter. Each of the Seller Ground Leases is valid, binding and in
- -----------------
full force and effect as against Seller or its Subsidiaries and, to Seller's
Knowledge, as against the other party thereto, except to the extent the failure
to be binding and in full force and effect would not reasonably be expected to
have a Seller Material Adverse Effect. Seller has not received written notice
under any of the Seller Ground Leases of any default, and, to Seller's
Knowledge, no event has occurred which, with notice or lapse of time or both,
would constitute such a default by Seller, except as would not, individually or
in the aggregate, be reasonably expected to result in a Seller Material Adverse
Effect.
(e) Section 2.8(e) to the Seller Disclosure Letter sets forth a list
----------------------------------------------
of the hotel franchise agreements (the "Seller Franchise Agreements") pursuant
---------------------------
to which each of the Seller Properties is being operated by Lessee and Manager.
Each of the Seller Franchise Agreements is in full force and effect with respect
to Seller or the applicable Seller Subsidiary and there are no defaults
thereunder by Seller or a Seller
-14-
<PAGE>
Subsidiary and, to the Knowledge of Seller, or by any other party thereto. To
the Knowledge of Seller, no events have occurred which with the giving notice or
the passage time or both would constitute a default or event of default
thereunder, except for those which either singly or in the aggregate would not
constitute a Seller Material Adverse Effect.
(f) Neither Seller nor any Seller Subsidiary has received written
notice of any violation of any federal, state or municipal law, ordinance,
order, regulation or requirement issued by any governmental authority which,
individually or in the aggregate, would have a Seller Material Adverse Effect.
There has been no physical damage to any Seller Properties which, individually
or in the aggregate, would have a Seller Material Adverse Effect for which there
is no insurance in effect covering the cost of the restoration (less applicable
deductibles).
(g) Neither Seller nor any of the Seller Subsidiaries has received
any written notice with respect to any Seller Property to the effect that any
condemnation or rezoning proceedings are pending or threatened which,
individually or in the aggregate, would have a Seller Material Adverse Effect.
(h) To the Knowledge of Seller, no Governmental Entity having
jurisdiction over any Seller Property under development has denied or rejected
any applications by Seller for a certificate, permit or license with respect to
such Seller Property, which denial or rejection, individually or in the
aggregate, would have a Seller Material Adverse Effect.
(i) There are no structural defects in any of the Seller Properties
that would, individually or in the aggregate, have a Seller Material Adverse
Effect.
(j) Seller or Seller Partnership has marketable title to all material
furniture, fixtures equipment, operating supplies and other personal property
necessary for the operation of the Seller Properties, subject to no Liens which,
individually or in the aggregate, would have a Seller Material Adverse Effect.
2.9 Environmental Matters.
---------------------
(a) Except as disclosed in the Seller SEC Documents and Seller's
Environmental Reports (as defined below) previously made available to Buyer,
none of Seller, any of the Seller Subsidiaries or any other Person has caused or
permitted (i) the presence of any hazardous substances, hazardous materials,
toxic substances or waste materials, pollutants, contaminants, and materials
regulated or defined or designated as hazardous, extremely or imminently
hazardous, dangerous, or toxic pursuant to any local, county, state, territorial
or federal governmental authority or with respect to which such a governmental
authority otherwise requires environmental investigation, monitoring, reporting
or remediation (collectively, "Hazardous Materials") on any of the Seller
-------------------
Properties except to the extent such presence would, individually or in the
aggregate, not have a Seller Material Adverse Effect or (ii) any spills,
releases, discharges or disposal of Hazardous Materials to have occurred or be
presently occurring on or from the Seller Properties as a result of any
construction on or operation and use of the Seller Properties, which presence or
occurrence would, individually or in the aggregate, have a Seller Material
Adverse Effect; and in connection with the construction on or operation and use
of the Seller Properties, Seller and the Seller Subsidiaries have complied with
all applicable local, state and federal Environmental Laws, including all
regulations, ordinances and administrative and judicial orders relating to the
generation, recycling, reuse, sale, storage, handling,
-15-
<PAGE>
transport and disposal of any Hazardous Materials, except to the extent such
failure to comply, individually or in the aggregate, would not have a Seller
Material Adverse Effect. With respect to each Seller Property, since the date of
the most recent Seller's Environmental Report relating to such Seller Property,
except where the failure of any of the following to be true individually or in
the aggregate would not have a Seller Material Adverse Effect, (i) the assets,
properties, businesses and operations of Seller and its Subsidiaries are and
have been in compliance with applicable Environmental Laws, (ii) Seller and its
Subsidiaries have obtained, currently maintain and, as currently operating, are
in compliance with all Seller Permits necessary under any Environmental Law for
the conduct of the business and operations of Seller and its Subsidiaries in the
manner now conducted, and there are no actions or proceedings pending or
threatened to revoke or materially modify such Seller Permits, (iii) no
Hazardous Materials have been used, stored, manufactured, treated, processed or
transported to or from any such Seller Property except as necessary to the
customary conduct of business and in compliance with law and in a manner that
does not result in liability under applicable Environmental Laws; (iv) there
have been no spills, releases, discharges or disposals of Hazardous Materials on
or from such Seller Property of any type or quantity as would require reporting
to a Governmental Entity under the Environmental Laws; and (v) Seller and Seller
Subsidiaries have not received any written notice of potential responsibility,
letter of inquiry or written notice of alleged liability from any Person
regarding such Seller Property or the business conducted thereon. For the
purposes of this Section 2.9 only, "Seller Properties" shall be deemed to
-----------------
include all property formerly owned, operated or leased by Seller or Seller
Subsidiaries; solely, however, as to the period of time when such property was
so owned, operated or leased by Seller or the Seller Subsidiaries. Seller has
previously made available to Buyer complete copies of all final versions of
environmental investigations and testing or analysis (other than those which
have been superseded by more recent investigations, testing or analyses) that
are in the possession, custody or control of any of Seller or any of the Seller
Subsidiaries with respect to the environmental condition of the Seller
Properties, all of which are listed in Section 2.9 of the Seller Disclosure
------------------------------------
Letter ("Seller's Environmental Reports").
- ------ ------------------------------
(b) Except as set forth in Seller's Environmental Reports, (i) there
are no friable asbestos-containing materials, lead-based paints, or radon at, in
or part of any facility owned, operated or leased by Seller or any of its
Subsidiaries, and (ii) there are no underground storage tanks owned, operated or
controlled by Seller or its Subsidiaries on any real property owned, operated or
leased by Seller, the presence of which, in the case of items described in
clauses (i) and (ii) individually or in the aggregate, would be reasonably
expected to result in Seller incurring Environmental Liabilities and Costs
aggregating $30 million or more.
(c) For purposes of this Agreement, the terms below shall have the
following meanings:
"Environmental Law" means any law (including, without limitation,
-----------------
common law), regulation, ordinance, guideline, code, decree, judgment,
order, permit or authorization or other legally enforceable requirement of
any Governmental Entity relating to or imposing liability with respect to
worker or public safety or the indoor or outdoor environment or natural
resources, including, without limitation, pollution, contamination,
Hazardous Materials, cleanup, regulation and protection of the air, natural
resources, water or soils in the indoor or outdoor environment; and
"Environmental Liabilities and Costs" means all losses, liabilities,
-----------------------------------
damages, fines, penalties, obligations, costs or expenses (including,
without limitation, fees, disbursements, expenses of legal
-16-
<PAGE>
counsel, experts and engineers and the costs of investigation and cleanup
studies and to remove, treat or clean up Hazardous Materials) incurred,
assessed or levied pursuant to any Environmental Law.
2.10 Related Party Transactions. Set forth in Section 2.10 of the Seller
-------------------------- --------------------------
Disclosure Letter is a list of all written arrangements, agreements and
- -----------------
contracts entered into by Seller or any of the Seller Subsidiaries with any
Person who is an officer, director or Affiliate (as defined below) of Seller, or
any entity of which any of the foregoing is an Affiliate, except those of a type
available to Seller employees generally or are with Parent or an Affiliate of
Parent. Such documents, copies of all of which have previously been delivered
or made available to Buyer, are listed in Section 2.10 of the Seller Disclosure
-------------------------------------
Letter. As used in this Agreement, the term "Affiliate" shall have the same
- ------ ---------
meaning as such term is defined in Rule 405 promulgated under the Securities
Act.
2.11 Employee Benefits. As used herein, the term "Employee Plan" includes
----------------- -------------
any pension, retirement, savings, disability, medical, dental, health, life,
death benefit, group insurance, profit sharing, deferred compensation, stock
option, bonus, incentive, vacation pay, tuition reimbursement, severance pay, or
other material employee benefit plan, trust, employment agreement, contract,
agreement, policy or commitment (including, without limitation, any pension
plan, as defined in Section 3(2) of the Employee Retirement Income Security Act
of 1974, as amended and the rules and regulations promulgated thereunder
("ERISA") ("Pension Plan"), and any welfare plan as defined in Section 3(1) of
----- ------------
ERISA ("Welfare Plan")), whether any of the foregoing is funded, insured or
------------
self-funded, written or oral, (i) sponsored or maintained by Seller or its
Subsidiaries (each a "Controlled Group Member") and covering any Controlled
-----------------------
Group Member's active or former employees (or their beneficiaries), (ii) to
which any Controlled Group Member is a party or by which any Controlled Group
Member (or any of the rights, properties or assets thereof) is bound or (iii)
with respect to which any current Controlled Group Member may otherwise have any
material liability (whether or not such Controlled Group Member still maintains
such Employee Plan). Each Employee Plan is listed in Section 2.11 of the Seller
--------------------------
Disclosure Letter. With respect to the Employee Plans:
- -----------------
(a) No Controlled Group Member has any continuing liability under any
Welfare Plan which provides for continuing benefits or coverage for any
participant or any beneficiary of a participant after such participant's
termination of employment, except as may be required by Section 4980B of the
Internal Revenue Code of 1986, as amended (the "Code"), or Section 601 (et seq.)
----
of ERISA, or under any applicable state law, and at the expense of the
participant or the beneficiary of the participant.
(b) Each Employee Plan complies in all material respects with the
applicable requirements of ERISA and any other applicable law governing such
Employee Plan, and each Employee Plan has at all times been properly
administered in all material respects in accordance with all such requirements
of law, and in accordance with its terms and the terms of any applicable
collective bargaining agreement to the extent consistent with all such
requirements of law. Each Pension Plan which is intended to be qualified is
qualified under Section 401(a) of the Code, has received a favorable
determination letter from the IRS stating that such Plan meets the requirements
of Section 401(a) of the Code and that the trust associated with such Plan is
tax exempt under Section 501(a) of the Code and to the Knowledge of Seller no
event has occurred which would jeopardize the qualified status of any such plan
or the tax exempt status of any such trust under Sections 401(a) and Section
501(a) of the Code, respectively, except in circumstances in which, individually
or in the aggregate, the failure to so qualify or be tax exempt would not have a
Seller Material Adverse Effect. No lawsuits, claims (other than routine claims
for benefits) or complaints to, or by, any Person or Governmental Entity have
been filed or are pending which, individually or in the
-17-
<PAGE>
aggregate, would have a Seller Material Adverse Effect and, to the Knowledge of
Seller, there is no fact or contemplated event which would be expected to give
rise to any such lawsuit, claim (other than routine claims for benefits) or
complaint with respect to any Employee Plan that would have a Seller Material
Adverse Effect. Without limiting the foregoing, except in the case of the
following clauses (i) through (iv) which have not and would not individually or
in the aggregate have a Seller Material Adverse Effect, the following are true
with respect to each Employee Plan:
(i) all Controlled Group Members have filed or caused to be
filed every material return, report statement, notice, declaration and
other document required by any law or governmental agency, federal, state
and local (including, without limitation, the Internal Revenue Service and
the Department of Labor) with respect to each such Employee Plan, each of
such filings has been complete and accurate in all material respects and no
Controlled Group Member has incurred any material liability in connection
with such filings;
(ii all Controlled Group Members have delivered or caused to be
delivered to every participant, beneficiary and other party entitled to
such material, all material plan descriptions, returns, reports, schedules,
notices, statements and similar materials, including, without limitation,
summary plan descriptions and summary annual reports, as are required under
Title I of ERISA, the Code, or both, and no Controlled Group Member has
incurred any material liability in connection with such deliveries;
(iii all contributions and payments with respect to Employee
Plans that are required to be made by a Controlled Group Member with
respect to periods ending on or before the Closing Date (including periods
from the first day of the current plan or policy year to the Closing Date)
have been, or will be, made or accrued before the Closing Date in
accordance with the appropriate plan document, actuarial report, collective
bargaining agreements or insurance contracts or arrangements or as
otherwise required by ERISA or the Code;
(iv with respect to each such Employee Plan, to the extent
applicable, Seller has delivered to or has made available to Buyer true and
complete copies of (A) plan documents, or any and all other documents that
establish the existence of the plan, trust, arrangement, contract, policy
or commitment and all amendments thereto, (B) the most recent determination
letter, if any, received from the Internal Revenue Service, (C) the three
most recent Form 5500 Annual Reports (and all schedules and reports
relating thereto) and actuarial reports and (D) all related trust
agreements, insurance contract or other funding agreements that implement
each such Employee Plan; and
(v) no payment made or to be made to an officer, director or
employee, whether or not pursuant to an Employee Plan, either before, on,
or after consummation of the transactions contemplated by this Agreement
shall constitute an "excess parachute payment" within the meaning of
Section 280G of the Code; and consummation of the transactions contemplated
by this Agreement shall not (A) give rise to a severance pay obligation
with respect to those employees who continue employment with the Surviving
Corporation or (B) enhance or trigger (including acceleration of vesting,
payment or funding) any benefits under any Employee Plan.
-18-
<PAGE>
(c) With respect to each Employee Plan, there has not occurred, and
no Person or entity is contractually bound to enter into, any "prohibited
transaction" within the meaning of Section 4975(c) of the Code of Section 406 of
ERISA, which transaction is not exempt under Section 4975(d) of the Code or
Section 408 of ERISA which, individually or in the aggregate, would have a
Seller Material Adverse Effect.
(d) No Controlled Group Member has maintained or been obligated to
contribute to any Employee Plan subject to Section 412 of the Code or Title IV
of ERISA.
2.12 Employee Matters. Neither Seller nor any of the Seller Subsidiaries
----------------
is a party to, or bound by, any collective bargaining agreement, contract or
other agreement or understanding with a labor union or other labor organization,
nor has Seller or any of the Seller Subsidiaries agreed that any unit of its
employees is appropriate for collective bargaining. No union or other labor
organization has been certified as bargaining representative for any employees
of Seller or any of its Subsidiaries. To the Knowledge of Seller, there are no
organizational efforts with respect to the formation of a collective bargaining
unit presently being made or threatened involving employees of Seller or any of
the Seller Subsidiaries.
2.13 Taxes.
-----
-19-
<PAGE>
(a) Each of Seller and the Seller Subsidiaries and any consolidated,
combined, unitary or aggregate group for tax purposes of which Seller or any
Seller Subsidiary is or has been a member has timely filed all Tax Returns (as
defined below) required to be filed by it (after giving effect to any extension
properly granted by a Tax Authority (as defined below) having authority to do
so) and has timely paid (or Seller has timely paid on its behalf) all Taxes (as
defined below) required to be paid by it (whether or not shown on such Tax
Returns) except (i) Taxes that are being contested in good faith by appropriate
proceedings and for which Seller or the applicable Seller Subsidiary shall have
set aside on its books adequate reserves or (ii) where the failure to file such
Tax Returns or pay such Taxes would not have a Seller Material Adverse Effect.
Each such Tax Return is complete and accurate except where any failure to be
complete and accurate would not have a Seller Material Adverse Effect. The most
recent audited financial statements contained in the Seller SEC Documents
reflect an adequate reserve for all Taxes payable by Seller and the Seller
Subsidiaries for all taxable periods and portions thereof through the date of
such financial statements except where any failure would not have a Seller
Material Adverse Effect. Since the Seller Financial Statement Date, Seller has
incurred no liability for Taxes under Sections 857(b), 857(f), 860(c) or 4981 of
the Code, including without limitation any Tax arising from a prohibited
transaction described in Section 857(b)(6) of the Code, and neither Seller nor
any Seller Subsidiary has incurred any material liability for Taxes other than
in the ordinary course of business. No event has occurred, and no condition or
circumstance exists, which, in the absence of the Transactions (as defined
below), would present a risk that any Tax described in the preceding sentence
will be imposed upon Seller or any Seller Subsidiary except where any failure
would not have a Seller Material Adverse Effect. No material deficiencies for
any Taxes have been proposed, asserted or assessed in writing against Seller or
any Seller Subsidiary, and no requests for waivers of the time to assess any
such Taxes are pending and no extensions of time to assess any such Taxes are in
effect. All Taxes required to be withheld, collected and paid over to any Tax
Authority by the Seller and any Seller Subsidiary have been timely withheld,
collected and paid over to the proper Tax Authority except where failure to do
so would not have a Seller Material Adverse Effect. No Tax Authority has imposed
a Lien against any Seller Property for any Taxes payable by Seller except for
Taxes not yet due and payable. There are no material pending actions or
proceedings by any Taxing Authority for assessment or collection of any Tax.
Complete copies of all federal, state and local income or franchise Tax Returns
that have been filed by Seller and each Seller Subsidiary for all taxable years
beginning on or after January 1, 1995, all extensions filed with any Tax
Authority that are currently in effect and all written communications with a
Taxing Authority relating thereto, have been made available to the Buyer and the
representatives of the Buyer. No written claim has been made by a Taxing
Authority in a jurisdiction where Seller or any Seller Subsidiary does not file
Tax Returns that it is or may be subject to taxation by the jurisdiction except
where the failure to file such Tax Return would not have a Seller Material
Adverse Effect. Neither the Seller nor any Seller Subsidiary holds any material
asset (A) the disposition of which would be subject to rules similar to Section
1374 of the Code as a result of an election under Internal Revenue Service
Notice 88-19 other than as set forth in Section 2.13 of the Seller Disclosure
-------------------------------------
Letter or (B) that is subject to a consent filed pursuant to Section 341(f) of
- ------
the Code and the regulations thereunder. Neither the Seller, nor any Seller
Subsidiary is obligated to make after the Closing any payment that would be not
deductible under Section 162(m) of the Code except where the lack of such
deduction would not have a Seller Material Adverse Effect. Neither Seller nor
any Seller Subsidiary is party to, nor has any liability under (including
liability with respect to any predecessor entity), any indemnification,
allocation or sharing agreement with respect to Taxes. As used in this
Agreement, "Tax" or "Taxes" shall include all federal, state, local and foreign
--- -----
income, property, sales, use, occupancy, transfer, recording, withholding,
franchise, employment, excise and other taxes, tariffs or governmental charges
of any nature whatsoever, together with penalties, interest or additions to tax
with respect thereto. As used in this Agreement, "Tax Return" or "Tax Returns"
---------- -----------
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<PAGE>
shall include all original and amended returns and reports (including elections,
claims, declarations, disclosures, schedules, estimates, computations and
information returns) required to be supplied to a Tax Authority in any
jurisdiction. As used in this Agreement, "Tax Authority" shall mean the
-------------
Internal Revenue Service and any other domestic or foreign bureau, department,
entity, agency or other Governmental Entity responsible for the administration
of any Tax.
(b) Seller (i) for all taxable years commencing with its initial
taxable year through December 31, 1998 has been properly subject to taxation as
a real estate investment trust (a "REIT") within the meaning of Section 856 of
----
the Code and has qualified as a REIT for such years, (ii) has operated since
December 31, 1998, and will continue to operate to the Closing, in such a manner
as to qualify as a REIT (determined without regard to the dividends paid
deduction requirements for the current year) for the taxable year beginning
January 1, 1999 determined as if the taxable year of the REIT ended as of the
Closing and (iii) has not taken or omitted to take any action which would
reasonably be expected to result in a challenge to its status as a REIT, and no
such challenge is pending or to Seller's Knowledge threatened. Each Seller
Subsidiary which is a partnership, joint venture or limited liability company
(i) has been since its formation and continues to be treated for federal income
tax purposes as a partnership or disregarded as a separate entity, as the case
may be, and has not been treated for federal income tax purposes as a
corporation or an association taxable as a corporation and (ii) has not since
the later of its formation or the acquisition by Seller of a direct or indirect
interest therein owned any assets (including, without limitation, securities)
that would cause Seller to violate Section 856(c)(4) of the Code. The nature of
the assets of the Seller and the Seller Subsidiaries is such that the sale of
all of the assets owned by them would not cause the Seller to be disqualified as
a REIT under Code Section 856(c)(2) or 856(c)(3) or otherwise. Seller has not
elected to pay Tax on any capital gain recognized on or after January 1, 1999.
Each Seller Subsidiary which is a corporation has been since it became a
Subsidiary a qualified REIT subsidiary under Section 856(i) of the Code. Seller
Partnership is not a publicly traded partnership within the meaning of Section
7704 of the Code, and the interests in the Seller Partnership are not considered
to be (i) traded on an established securities market or (ii) readily tradable on
a secondary market or the substantial equivalent thereof under either Internal
Revenue Service Notice 88-75 or Treasury Regulations Section 1.7704-1. In the
case of a partner of Seller Partnership that is a Flow-Through Entity (as
defined below), no Person owning an interest in such Flow-Through Entity
(directly or through another Flow-Through Entity) is treated as a partner of the
Seller Partnership under either Internal Revenue Service Notice 88-75 or
Treasury Regulation Section 1.7704-1(h)(3). For purposes of this Section
2.13(b), "Flow-Through Entity" means an entity classified as a partnership, a
-------------------
grantor trust or an S corporation for federal income tax purposes.
2.14 No Payments to Employees, Officers or Directors. Section 2.14 of the
----------------------------------------------- -------------------
Seller Disclosure Letter contains a true and complete list of all material cash
- ------------------------
and non-cash payments, rights to property or other contract rights which will
become payable, accelerated or vested to or in each employee, officer or
director of Seller or any Seller Subsidiary as a result of the Merger other than
Alter and Biederman. There is no employment or severance contract, or other
agreement requiring payments or an increase in existing payments, cancellation
of indebtedness or other obligation to be made on a change of control or
otherwise as a result of the consummation of any of the transactions
contemplated by this Agreement, with respect to any employee, officer or
director of Seller or any Seller Subsidiary (other than Alter and Biederman) in
an aggregate amount in excess of $50,000.
2.15 Brokers. No broker, investment banker, financial advisor or other
-------
Person, other than Goldman, Sachs & Co. ("Goldman Sachs"), the fees and expenses
-------------
of which are as described in the
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engagement letter dated April 14, 1999, a true and correct copy of which has
previously been given to Buyer, is entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the transactions
contemplated hereby based upon arrangements made by or on behalf of Seller or
any Seller Subsidiary.
2.16 Compliance With Laws. (i) Neither Seller nor any of the Seller
--------------------
Subsidiaries has violated or failed to comply with any statute, law, ordinance,
regulation, rule, judgment, decree or order of any Governmental Entity
applicable to its business, properties or operations (excluding any violation or
failure by Lessee or Manager), except to the extent that such violation or
failure has not had or would not reasonably be expected to have a Seller
Material Adverse Effect; (ii) Seller and its Subsidiaries have, and are in
compliance with, all permits, licenses, certificates, franchises, registrations,
variances, exemptions, orders and approvals of all Governmental Entities which
are material to the operation of their businesses, taken as a whole ("Seller
------
Permits"), except where the failure to comply has not had or would not
- -------
reasonably be expected to have a Seller Material Adverse Effect; and (iii) no
investigation by any Governmental Entity with respect to the Seller or the
Seller Subsidiaries is pending or, to the Knowledge of the Seller, threatened,
other than investigations which, individually or in the aggregate, would not
reasonably be expected to have a Seller Material Adverse Effect.
2.17 Contracts; Debt Instruments.
---------------------------
(a) Except as disclosed in the Seller SEC Documents, neither Seller
nor any Seller Subsidiary is a party to any contract or agreement that purports
to limit in any material respect the geographic location in which Seller or any
Seller Subsidiary may conduct its business. Neither Seller nor any Seller
Subsidiary (i) is in violation of or in default under any material loan or
credit agreement, note, bond, mortgage, indenture, lease, permit, concession,
franchise, license or any other material contract, agreement, arrangement or
understanding, to which it is a party or by which it or any of its properties or
assets is bound (excluding primarily as a result of any action or inaction of
Lessee or Manager and excluding any of the foregoing with Lessee or Manager)
(each, a "Material Contract"), nor (ii) to the Knowledge of Seller does such a
-----------------
violation or default exist, except to the extent that such violation or default
referred to in clauses (i) or (ii), individually or in the aggregate, would not
have a Seller Material Adverse Effect. Each Material Contract as of the date
hereof which has not been filed as an Exhibit to any of the Seller SEC Documents
has been or made available to Buyer's representatives at the Data Room, is
listed on Seller's Data Room index dated June 15, 1999 or has been provided to
Parent or Buyer prior to the date hereof. Seller has made available at the Data
Room on or prior to June 15, 1999 or has provided to Parent or Buyer prior to
the date hereof all contracts and other agreements relating to the contribution
of assets to Seller Partnership in exchange for Seller OP Units (the "Seller
------
Contribution Agreements") and all such agreements are listed on Seller's Data
- -----------------------
Room index dated June 15, 1999 or have been provided to Parent or Buyer prior to
the date hereof.
(b) Section 2.17(b) of the Seller Disclosure Letter sets forth a list
-----------------------------------------------
as of the date hereof of each loan or credit agreement, note, bond, mortgage,
indenture and any other agreement and instrument pursuant to which any
Indebtedness (as defined below) of Seller or any of Seller Subsidiaries, other
than Indebtedness payable to Seller or a Seller Subsidiary, is outstanding or
may be incurred in an amount in excess of $2,000,000, together with the amount
outstanding thereunder as of the date hereof. For purposes of this Section 2.17,
"Indebtedness" shall mean (i) indebtedness for borrowed money, whether
------------
secured or unsecured, (ii) obligations under conditional sale or other title
retention agreements relating to property
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<PAGE>
purchased by such Person, (iii) capitalized lease obligations, (iv) obligations
under interest rate cap, swap, collar or similar transaction or currency hedging
transactions (valued at the termination value thereof) and (v) guarantees of any
such indebtedness of any other Person.
(c) Neither Seller nor any of the Seller Subsidiaries is a party to
any agreement relating to the management of any of the Seller Properties by any
Person other than Manager. Section 2.17(c) to the Seller Disclosure Letter
-----------------------------------------------
lists as of the date hereof all service agreements, brokerage commission
agreements, maintenance contracts, contracts for purchase of delivery of
services, materials, goods, inventory or supplies, cleaning contracts, equipment
rental agreements, equipment leases or leases of personal property (other than
the Seller Franchise Agreements) (but excluding any such agreements providing
for payment of less than $100,000 per annum or which are terminable by Seller or
a Seller Subsidiary without penalty upon 90 days or less prior written notice)
to which Seller or any Seller Subsidiary is a party (the foregoing, collectively
the "Service Agreements"). Section 2.17(c) to the Seller Disclosure Letter lists
------------------ -----------------------------------------------
as of the date hereof all proposed material Service Agreements being negotiated
except for proposed Service Agreements known to Alter as of the date hereof. To
Seller's Knowledge, (i) the Service Agreements are in full force and effect and
constitute legal, valid, binding and enforceable obligations as against Seller
or its Subsidiaries and, to Seller's Knowledge, as against the other party
thereto, and (ii) there exists no default of any party thereto, nor has any
event or circumstances occurred that, with notice or lapse of time or both,
would constitute any default thereunder, except for any defaults that would not
reasonably be expected to have a Seller Material Adverse Effect.
(d) Section 2.17(d) of the Seller Disclosure Letter lists all
-----------------------------------------------
agreements entered into by Seller or any of the Seller Subsidiaries providing
for the sale or exchange of, or option to sell or exchange, any Seller
Properties or the purchase of or exchange, or option to purchase or exchange,
any real estate which are currently in effect.
(e) Neither Seller nor any Seller Subsidiary has any continuing
contractual liability (i) for indemnification under any agreement relating to
the sale of real estate previously owned by Seller or any Seller Subsidiary,
(ii) to pay any additional purchase price for any of the Seller Properties, or
(iii) to make any reprorations or adjustments to prorations involving an amount
in excess of $500,000 that may previously have been made with respect to any
property currently or formerly owned by Seller.
(f) Neither Seller nor any Seller Subsidiary has entered into or is
subject, directly or indirectly, to any Tax Protection Agreements. As used
herein, a "Tax Protection Agreement" is an agreement, oral or written, other
------------------------
than with Parent or an Affiliate of Parent (A) that has as one of its purposes
to permit a Person to take the position that such Person could defer federal
taxable income that otherwise might have been recognized upon a transfer of
property to Seller Partnership or any other Seller Subsidiary that is treated as
a partnership for federal income tax purposes, and (B) that (i) prohibits or
restricts in any manner the disposition of any assets of Seller or any Seller
Subsidiary, (ii) requires that Seller or any Seller Subsidiary maintain, or put
in place, or replace, indebtedness, secured by one or more of the Seller
Properties, or (iii) requires that Seller or any Seller Subsidiary offer to any
Person at any time the opportunity to guarantee or otherwise assume, directly or
indirectly, the risk of loss for federal income tax purposes for indebtedness or
other liabilities of Seller or any Seller Subsidiary.
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<PAGE>
(g) Except for obligations to provide funds to the Seller Partnership
or to Seller Subsidiaries owned entirely by Seller and/or Seller Partnership,
there are no material outstanding contractual obligations of Seller or its
Subsidiaries to provide any funds to, or make investments in, any other Person.
(h) Neither Seller nor any of the Seller Subsidiaries is party to any
agreement other than with Parent or, in the case of clause (ii), with an
affiliate of Parent which (i) would restrict any of them from prepaying any of
their Indebtedness without penalty or premium at any time or (ii) requires any
of them to maintain any amount of Indebtedness with respect to any of the Seller
Properties.
(i) To the extent not set forth in response to the requirements of
Section 2.17(b), Section 2.17 of the Seller Disclosure Letter sets forth as of
--------------------------------------------
the date hereof each interest rate cap, interest rate collar, interest rate
swap, currency hedging transaction, and any other agreement relating to a
similar transaction, in each case involving $50,000 or more, to which Seller or
any Seller Subsidiary is a party or an obligor with respect thereto.
(j) Neither Seller nor any of the Seller Subsidiaries is a party to
any agreement pursuant to which Seller or any Seller Subsidiary manages any real
properties.
2.18 Opinion of Financial Advisor. The Seller Board and Special Committee
----------------------------
have received the opinion of Goldman Sachs dated July 12, 1999 with respect to
the fairness from a financial point of view of the consideration to be received
by the holders (other than Parent and its Subsidiaries and Affiliates) of Seller
Common Shares in connection with the Merger.
2.19 State Takeover Statutes. Assuming the accuracy of the representations
-----------------------
and warranties of Parent and Buyer set forth in Section 3.12, Seller has taken
all action necessary to exempt the transactions contemplated by this Agreement,
including without limitation the Merger, among Parent, Buyer and Seller and
their respective Affiliates from the operation of any "business combination,"
"fair price," "moratorium," "control share acquisition" or any other anti-
takeover statute or similar statute of any state (a "Takeover Statute") and
----------------
(ii) the action of the Seller Board and Special Committee in approving the
Merger and this Agreement (and the transactions provided for herein) is
sufficient to render inapplicable to the Merger and this Agreement (and the
transactions provided for herein) the restrictions on "business combinations"
(as defined in Subtitle 6 of Title 3 of the MGCL) set forth in Subtitle 6 of
Title 3 of the MGCL and the limitations on the voting rights of shares of stock
acquired in a "control share acquisition" (as defined in Subtitle 7 of Title 3
of the MGCL) set forth in Subtitle 7 of Title 3 of the MGCL.
2.20 Proxy Statement and Information Statement. The information relating to
-----------------------------------------
Seller and the Seller Subsidiaries included in the Proxy Statement (as defined
in Section 5.1(a)) and the Information Statement (as defined in Section 5.1(a))
will not, as of the date of mailing of the Proxy Statement and the Information
Statement, respectively, contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
2.21 Investment Company Act of 1940. Neither Seller nor any of Seller
------------------------------
Subsidiaries is, or at the Effective Time will be, required to be registered
under the Investment Company Act of 1940, as amended (the "1940 Act").
--------
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<PAGE>
2.22 Definition of Knowledge of Seller. As used in this Agreement, the
---------------------------------
phrase "Knowledge of Seller" or "Seller's Knowledge" (or words of similar
------------------- ------------------
import) means the actual knowledge, without any duty of investigation or
inquiry, of only those individuals identified in Section 2.22 of the Seller
--------------------------
Disclosure Letter. Without limiting the generality of the foregoing, in no event
- -----------------
will the knowledge of Alter or Biederman by itself be deemed the "Knowledge of
Seller" or "Seller's Knowledge."
2.23 Insurance. Seller and Seller Subsidiaries maintain insurance coverage
---------
for Seller and Seller Subsidiaries and their respective properties and assets of
a type and in amounts typical of similar companies engaged in the respective
businesses in which Seller and Seller Subsidiaries are engaged. All such
insurance policies (a) are in full force and effect, and with respect to all
policies neither of Seller nor any Seller Subsidiary is delinquent in the
payment of any premiums thereon, and no notice of cancellation or termination
has been received with respect to any such policy, and (b) are sufficient for
compliance with all requirements of law and of all agreements to which Seller or
the Seller Subsidiaries are a party or otherwise bound and are valid,
outstanding, collectible, and enforceable policies, subject to any exception in
the case of either clause (a) or (b), as would not, alone or in the aggregate,
be reasonably expected to have a Seller Material Adverse Effect or prevent or
materially delay the ability of Seller to consummate the transactions
contemplated by this Agreement. Neither Seller nor any Seller Subsidiary has
received written notice within the last 12 months from any insurance company or
board of fire underwriters of any defects or inadequacies that would materially
adversely affect the insurability of, or cause any material increase in the
premiums for, insurance covering either Seller or any Seller Subsidiary or any
of their respective properties or assets that have not been cured or repaired to
the satisfaction of the party issuing the notice, except as would not have a
Seller Material Adverse Effect.
2.24 Board Recommendation. Seller Board, at a meeting duly called and held
--------------------
on July 12, 1999, at which all of the incumbent directors were present and
acting throughout, based upon the unanimous recommendation and approval of the
Special Committee, unanimously adopted resolutions which, among other things,
(a) declared that the Merger and the other transactions contemplated by this
Agreement are advisable on substantially the terms set forth in this Agreement,
(b) set forth the Charter Amendments and declared that the Charter Amendments
are advisable, (c) directed that the Charter Amendments, the Merger and the
other transactions contemplated by this Agreement be submitted for consideration
by the stockholders of Seller, (d) recommended that the Seller terminate its
status as a real estate investment trust and (e) authorized and approved the
Partnership Merger Agreement and the transactions contemplated thereby,
including the Partnership Merger (such transactions, together with the
transactions contemplated by this Agreement, including, without limitation, the
Merger, are hereinafter collectively referred to as the "Transactions"). Seller
------------
Board has recommended that (y) Seller's stockholders approve this Agreement, the
Merger, the Charter Amendments, the termination of Seller's status as a real
estate investment trust and the other transactions contemplated by this
Agreement, and (z) on behalf of Seller as the sole general partner of Seller
Partnership, that the Seller Unit Holders adopt the Partnership Merger Agreement
and approve the Partnership Merger and the amendment (the "Partnership Agreement
---------------------
Amendment") to the Seller Partnership Agreement attached hereto as Exhibit F.
- --------- ---------
Such recommendations shall not be withdrawn, modified or amended, other than as
expressly permitted under Section 4.1.
2.25 Representations in Partnership Merger Agreement. The representations
-----------------------------------------------
and warranties of the Seller and the Seller Partnership set forth in the
Partnership Merger Agreement are true and correct.
ARTICLE 3
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<PAGE>
REPRESENTATIONS AND WARRANTIES OF PARENT AND BUYER
Parent and Buyer, jointly and severally, represent and warrant to Seller,
except as set forth in the letter of even date herewith and delivered to Seller
prior to the execution hereof (the "Buyer Disclosure Letter") (it being
-----------------------
understood that the Buyer Disclosure Letter shall be arranged in sections
corresponding to the sections contained in this Article 3, and the disclosures
in any section of the Buyer Disclosure Letter shall qualify all of the
representations in the corresponding section of this Article 3 and, in addition,
other sections in this Article 3 to the extent it is reasonably clear from a
reading of the disclosure that such disclosure is applicable to such other
sections) as follows:
3.1 Organization, Standing and Power of Parent and Buyer.
----------------------------------------------------
(a) Parent is a limited liability company duly organized and validly
existing under the Laws of Delaware and has the requisite power and authority to
carry on its business as now being conducted. Parent is duly qualified or
licensed to do business as a foreign limited liability company and is in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or licensing
necessary, other than in such jurisdictions where the failure to be so qualified
or licensed, individually or in the aggregate, would not have a material adverse
effect on the ability of Parent and Buyer to timely consummate the transactions
contemplated by this Agreement or the Partnership Merger Agreement ("Parent
------
Material Adverse Effect"). Parent has delivered to Seller complete and correct
- -----------------------
copies of its organizational documents (including the certificate of formation
and limited liability company agreement of Parent) as amended or supplemented to
the date of this Agreement.
(b) Each of Buyer and SHP Investors, Inc. ("Holdings") is a
--------
corporation duly organized and validly existing under the Laws of Maryland, in
the case of Buyer, or Delaware, in the case of Holdings, and has the requisite
corporate power and authority to carry on its business as now being conducted.
Each of Buyer and Holdings is duly qualified or licensed to do business as a
foreign corporation and is in good standing in each jurisdiction in which the
nature of its business or the ownership or leasing of its properties makes such
qualifications or licensing necessary, other than in such jurisdictions where
the failure to be so qualified or licensed, individually or in the aggregate,
would not have a material adverse effect on the ability of Buyer and Holdings to
timely consummate the transactions contemplated by this Agreement or the
Partnership Merger Agreement (a "Buyer Material Adverse Effect"). Complete and
-----------------------------
correct copies of the organizational documents as amended or supplemented to the
date of this Agreement of Buyer and Holdings have been delivered to Seller.
(c) Each of Parent, Buyer and Holdings are newly formed and, except
for activities incident to the acquisition of Seller, none of Parent, Buyer or
Holdings has (i) engaged in any business activities of any type or kind
whatsoever or (ii) acquired any property of any type or kind whatsoever.
3.2 Ownership of Parent, Buyer and Holdings. As of the date hereof, all
---------------------------------------
of Parent's membership interests are owned by Westbrook Fund III and Alter.
Holdings is a wholly-owned Subsidiary of Parent, and Buyer is a wholly-owned
Subsidiary of Holdings. As of the Closing Date, at least 75% of the voting
interests and 75% of the equity interest of Parent will be owned, directly or
indirectly by Westbrook Fund III, Westbrook SHP and Westbrook Co-Investment.
Parent has delivered to Seller a true and complete copy of
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<PAGE>
the Contribution Agreement which is being executed contemporaneously with the
execution of this Agreement.
3.3 Authority; Noncontravention; Consents.
-------------------------------------
(a) Each of Parent and Buyer has the requisite power and authority to
enter into this Agreement and to consummate the transactions contemplated by
this Agreement to which it is a party. The execution and delivery of this
Agreement by Parent and Buyer and the consummation by Parent and Buyer of the
transactions contemplated by this Agreement to which Parent and/or Buyer is a
party have been duly authorized by all necessary limited liability company or
corporate action on the part of Parent, Buyer and Holdings. The Merger has been
approved by Holdings as the sole stockholder of Buyer. This Agreement has been
duly executed and delivered by Parent and Buyer and constitutes a valid and
binding obligation of each of Parent and Buyer, enforceable against each of
Parent and Buyer in accordance with and subject to its terms, subject to
applicable bankruptcy, insolvency, moratorium or other similar Laws relating to
creditors' rights and general principles of equity. The Contribution Agreement
has been duly executed and delivered by the parties thereto and constitutes a
valid and binding obligation of each party thereto, enforceable against each
party thereto in accordance with and subject to its terms, subject to applicable
bankruptcy, insolvency, moratorium or other similar laws relating to creditors'
rights and general principles of equity.
(b) The execution and delivery of this Agreement by each of Parent and
Buyer does not, and the consummation of the transactions contemplated by this
Agreement to which Parent and/or Buyer is a party and compliance by each of
Parent and Buyer with the provisions of this Agreement will not, conflict with,
or result in any violation of or default (with or without notice or lapse of
time, or both) under, or give rise to a right of termination, cancellation or
acceleration of any material obligation or to loss of a material benefit under,
or result in the creation of any Lien upon any of the properties or assets of
Parent or any of its Subsidiaries under, (i) the organizational documents of
Parent or Buyer or the comparable certificate of incorporation or organizational
documents or partnership or similar agreement (as the case may be) of any other
Subsidiary of the Parent, each as amended or supplemented to the date of this
Agreement, (ii) any loan or credit agreement, note, bond, mortgage, indenture,
reciprocal easement agreement, lease or other agreement, instrument, permit,
concession, franchise or license applicable to Parent or any of its Subsidiaries
or their respective properties or assets or (iii) subject to the governmental
filings and other matters referred to in the following sentence, any Laws
applicable to Parent or any of its Subsidiaries or their respective properties
or assets, other than, in the case of clause (ii) or (iii), any such conflicts,
violations, defaults, rights, loss or Liens that individually or in the
aggregate would not reasonably be expected to (x) have a Parent Material Adverse
Effect or a Buyer Material Adverse Effect or (y) prevent the consummation of the
transactions contemplated by this Agreement. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity is required by or with respect to Parent or any of its Subsidiaries in
connection with the execution and delivery of this Agreement by Parent or Buyer
or the consummation by Parent or Buyer of any of the transactions contemplated
by this Agreement, except for (i) any filings required under the Exchange Act
(including Schedule 13E-3), (ii) the filing of the Articles of Merger with the
Maryland Department, (iii) the filing of a certificate of merger with the
Secretary of State of the State of Delaware with respect to the Partnership
Merger, (iv) such filings as may be required in connection with the payment of
any Transfer Taxes (as defined in Section 5.6), (v) any filings required under
the HSR Act, (vi) the filing of a Form D with the SEC with respect to the
transaction contemplated by the Partnership Merger Agreement and (vii) such
other consents, approvals, orders, authorizations, registrations,
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<PAGE>
declarations and filings (A) as may be required under federal, state or local
environmental Laws, (B) as may be required under the "blue sky" laws of various
states, to the extent applicable, or (C) which, if not obtained or made, would
not prevent or delay beyond December 31, 1999 the consummation of any of the
transactions contemplated by this Agreement or otherwise prevent Parent or Buyer
from timely performing its obligations under this Agreement in any material
respect or have, individually or in the aggregate, a Parent Material Adverse
Effect.
3.4 Litigation. As of the date of this Agreement, there is no suit,
----------
action or proceeding pending (in which service of process has been received by
Parent or any of its Subsidiaries) or, to the Knowledge of Parent (as defined in
Section 3.13), threatened in writing against or affecting Parent or any of its
Subsidiaries that, individually or in the aggregate, would reasonably be
expected to (i) have a Parent Material Adverse Effect or (ii) prevent or delay
beyond the Outside Date the consummation of any of the material transactions
contemplated by this Agreement, nor, as of the date of this transaction, is
there any judgment, decree, injunction, rule or order of any Governmental Entity
or arbitrator outstanding against Parent of any of its Subsidiaries having, or
which, insofar as reasonably can be foreseen, in the future would have, any such
effect.
3.5 Undisclosed Liability. As of the date hereof, neither Parent nor
---------------------
Buyer has any liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) whether or not required by GAAP to be set
forth on a consolidated balance sheet of Parent or Buyer or in the notes thereto
which, individually or in the aggregate, would have a Parent Material Adverse
Effect or Buyer Material Adverse Effect other than those resulting from any
lawsuits or other claims filed with respect to the Merger and the other
transactions contemplated hereby.
3.6 Brokers. No broker, investment banker, financial advisor or other
-------
Person, the fees and expenses of which will be paid by Parent or Buyer, is
entitled to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated hereby based upon
arrangements made by or on behalf of Parent or any of its Subsidiaries other
than as set forth in Section 3.6 of the Buyer Disclosure Letter.
------------------------------------------
3.7 Compliance With Laws. Neither Parent nor any of its Subsidiaries has
--------------------
violated or failed to comply with any statute, law, ordinance, regulation, rule,
judgment, decree or order of any Governmental Entity applicable to its business,
properties or operations, except to the extent that such violation or failure
would not reasonably be expected to have a Parent Material Adverse Effect or
Buyer Material Adverse Effect.
3.8 Contracts; Debt Instruments. Neither Parent nor any of its
---------------------------
Subsidiaries (i) has received a written notice that Parent or any of its
Subsidiaries is in violation of or in default under any material loan or credit
agreement, note, bond, mortgage, indenture, lease, permit, concession,
franchise, license or any other material contract, agreement, arrangement or
understanding, to which it is a party or by which it or any of its properties or
assets is bound, nor (ii) to the Knowledge of Buyer (as defined in Section 3.15)
does such a violation or default exist, except to the extent such violation or
default referred to in clauses (i) or (ii), individually or in the aggregate,
would not have a Parent Material Adverse Effect or a Buyer Material Adverse
Effect.
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<PAGE>
3.9 Solvency. Immediately after giving effect to the Transactions and the
--------
closing of the Financing (as herein defined) and the Contribution, the Surviving
Company and the Surviving Operating Partnership shall (a) be able to pay their
respective debts as they become due and shall each own property having a fair
market value greater than the amounts required to pay its debts (including a
reasonable estimate of the amount of all contingent liabilities) and (b) have
adequate capital to carry on their respective businesses. No transfer of
property is being made and no obligation is being incurred in connection with
the transactions contemplated by this Agreement and the Partnership Merger
Agreement and the closing of any financing to be obtained by Parent, Buyer or
Buyer Operating Partnership in order to effect the transactions contemplated by
this Agreement and the Partnership Merger Agreement or with the intent to
hinder, delay or defraud either present or future creditors of Parent, Buyer,
Buyer Operating Partnership, the Surviving Company or the Surviving Operating
Partnership.
3.10 Proxy Statement and Information Statement. The information provided
-----------------------------------------
by Parent or Buyer with respect to Parent and its Subsidiaries and the Surviving
Company for inclusion in the Proxy Statement and the Information Statement will
not, as of the date of mailing of the Proxy Statement and the Information
Statement, respectively, contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein, or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
3.11 Investment Company Act of 1940. Neither Parent nor any of its
------------------------------
Subsidiaries is, or at the Effective Time will be, required to be registered
under the 1940 Act.
3.12 Ownership of Stock in Seller.
----------------------------
(a) The beneficial ownership of Seller Common Shares (excluding any
Seller Common Shares issuable upon exercise of the options for 845,362 Seller
Common Shares issued to Alter and Biederman that were not exercisable within 60
days of April 15, 1999), Seller Preferred Shares and Seller OP Units by Parent,
Buyer, Buyer Operating Partnership and the parties to the Contribution Agreement
and certain other affiliated persons and entities listed in the Schedule 13Ds
are as set forth in the Schedule 13D filed by Westbrook Fund I and the other
parties named therein with the SEC on October 24, 1997, as amended through the
date hereof, and the Schedule 13D filed by Alter and the other parties named
therein with the SEC on April 15, 1999, as amended through the date hereof.
(b) Parent, Holdings, Buyer, and Buyer Operating Partnership are
"affiliates" or "associates" (as such terms are defined in Section 3-601 of the
MGCL) of Alter.
(c) Of Parent, Holdings, Buyer, Buyer Operating Partnership, the
parties to the Contribution Agreement and the other direct and indirect
beneficial owners of stock and affiliates (as such terms are defined in Section
3-601 of the MGCL) of Buyer, only (i) Westbrook Fund I, (ii) Westbrook Co-
Investment Partnership I, L.P., a Delaware limited partnership ("Westbrook Co-
------------
Investment I"), and (iii) each other beneficial owner of the securities of
- ------------
Seller beneficially owned by Westbrook Fund I or Westbrook Co-Investment I is or
was at any time within the 2 years prior to the date hereof the beneficial owner
(as such term is defined in Section 3-601 of the MGCL) directly or indirectly of
10 percent or more of the voting power of the outstanding voting stock of
Seller.
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3.13 Definition of Knowledge. As used in this Agreement, the phrase
-----------------------
"Knowledge of Parent" or "Knowledge of Buyer" (or words of similar import) means
- -------------------- ------------------
the actual knowledge without any duty of investigation or inquiry of those
individuals identified in Section 3.13 of the Buyer Disclosure Letter.
-------------------------------------------
3.14 Sufficient Funds. After giving effect to the contribution of cash and
----------------
assets to Parent pursuant to, and in accordance with, the Contribution
Agreement, and borrowings (the "Financing") under Parent's financing commitment
---------
attached as Exhibit G (the "Financing Commitment"), which Contribution
--------- --------------------
Agreement and Financing Commitment are in full force and effect, the Surviving
Company and the Surviving Operating Partnership will have sufficient funds
available to:
(a) refinance or repay in cash all indebtedness for borrowed money of
Seller or any Seller Subsidiary that will become due as a result of the
transactions contemplated by this Agreement or the Partnership Merger Agreement,
plus unpaid interest accrued thereon, and any prepayment, breakage or other
costs associated with the repayment or refinancing, as the case may be, in each
case as set forth in Section 3.14(a) of the Seller Disclosure Letter;
-----------------------------------------------
(b) pay all amounts required to be paid pursuant to this Agreement and
the Partnership Merger Agreement;
(c) pay all fees, costs and expenses incurred by Seller and the Seller
Partnership in connection with this Agreement, the Partnership Merger Agreement
and the transactions contemplated herein and therein assuming such fees, costs
and expenses (including severance costs) are not in excess of $11,500,000; and
(d) pay all fees, costs and expenses incurred by Parent, Buyer and
Buyer Operating Partnership in connection with this Agreement, the Partnership
Merger Agreement and the other transactions contemplated herein and therein.
3.15 Representations in Partnership Merger Agreement. The representations
-----------------------------------------------
and warranties of Parent and the Buyer Operating Partnership and its
Subsidiaries set forth in the Partnership Merger Agreement are true and
correct.
ARTICLE 4
COVENANTS
4.1 Acquisition Proposals. During the period from the date hereof and
---------------------
continuing through the Effective Time or the earlier termination of this
Agreement in accordance with its terms, Seller agrees that:
(a) neither it nor any of the Seller Subsidiaries shall initiate,
solicit or knowingly encourage, directly or indirectly, any inquiries or the
making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its stockholders) with respect to a merger,
acquisition, tender offer, exchange offer, consolidation, share exchange, sale
of assets or similar transaction involving all or any significant portion of the
assets or any equity securities of, Seller and its Subsidiaries, taken as a
whole, other than the transactions contemplated by this Agreement (any such
proposal or offer being hereinafter referred to as an "Acquisition Proposal") or
--------------------
engage in any negotiations concerning or provide any
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<PAGE>
confidential information or data to, or have any discussions with, any Person
relating to an Acquisition Proposal, or otherwise facilitate any effort or
attempt to make or implement an Acquisition Proposal (for the avoidance of
doubt, responding to an unsolicited inquiry by informing such inquiror that
Seller is subject to this Section 4.1 and instructing such inquiror to review
this Agreement shall not be a violation of this Section 4.1);
(b) it shall direct and use its reasonable best efforts to cause its
officers, directors, employees, agents or financial advisors not to engage in
any of the activities restricted by Section 4.1(a);
(c) it will immediately cease and cause to be terminated any existing
activities, discussions or negotiations theretofore conducted with any Person
with respect to any Acquisition Proposal and will take the necessary steps to
inform the individuals or entities referred to in Section 4.1(b) of the
obligations undertaken in this Section 4.1; and
(d) it will notify Buyer promptly if Seller receives any such
inquiries or proposals, or any requests for such information, or if any such
negotiations or discussions are sought to be initiated or continued with it;
provided, however, that nothing contained in this Agreement shall restrict
Seller Board or Special Committee (and the officers, directors, employees,
agents and financial advisors of Seller acting at the direction of Seller Board
or Special Committee) from (i) prior to the Seller Stockholders Meeting (as
defined below), furnishing information to, or entering into discussions or
negotiations with, any Person that makes an unsolicited Acquisition Proposal, if
(A) Seller Board or Special Committee determines in good faith that the failure
to take such action would reasonably be expected to violate its duties under
applicable law and such proposal is, or is reasonably likely to be, a Superior
Acquisition Proposal (as defined below), (B) prior to furnishing such
information to, or entering into discussions or negotiations with, such Person,
Seller provides written notice to Buyer to the effect that it is furnishing
information to, or entering into discussions with, such Person and (C) subject
to any confidentiality agreement with such Person, Seller keeps Buyer informed
of the status (not the terms or identity of parties) of any such discussions or
negotiations (Seller agreeing that it will not enter into any confidentiality
agreement with any Person subsequent to the date hereof which prohibits Seller
from providing such information to Buyer); and (ii) to the extent applicable,
taking and disclosing to the Seller stockholders a position contemplated by
Rules 14d-9 and 14e-2 promulgated under the Exchange Act with regard to an
Acquisition Proposal; provided, however, that Seller Board or Special Committee
may not approve or recommend an Acquisition Proposal, or withdraw or modify in a
manner adverse to Buyer its approval or recommendation of this Agreement and the
Merger, unless such Acquisition Proposal is a Superior Acquisition Proposal.
Nothing in this Section 4.1 shall (x) permit Seller to terminate this Agreement
(except as specifically provided in Article 7 hereof) or (y) permit Seller to
enter into an agreement with respect to an Acquisition Proposal during the term
of this Agreement (other than a confidentiality agreement in customary form
executed as provided above); provided, however, that the Seller Board or Special
Committee may approve and recommend a Superior Acquisition Proposal and, in
connection therewith, withdraw or modify its approval or recommendation of this
Agreement and the Merger. As used herein, "Superior Acquisition Proposal" means
-----------------------------
a bona fide Acquisition Proposal made by a third party which Seller Board or
Special Committee determines in good faith (after consultation with its
financial advisor) to be more favorable to Seller's stockholders than the Merger
and which Seller Board or Special Committee determines is reasonably capable of
being consummated.
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<PAGE>
4.2 Conduct of Seller's Business Pending Merger. During the period from
-------------------------------------------
the date hereof and continuing through the Effective Time, except (i) as
consented to in writing by Buyer or as contemplated by this Agreement and (ii)
as set forth on Section 4.2 of the Seller Disclosure Letter, Seller shall, and
-------------------------------------------
shall cause each of the Seller Subsidiaries to:
(a) conduct its business only in the usual, regular and ordinary
course and in substantially the same manner as heretofore conducted and, except
as contemplated by this Agreement and the transactions contemplated hereby, take
all action necessary to continue to qualify as a REIT;
(b) use its reasonable efforts to (i) preserve intact its business
(corporate or otherwise) organizations and goodwill and (ii) keep available the
services of its officers and key employees other than those employed by Parent,
Lessee or Manager or any of Affiliate thereof;
(c) confer on a regular basis upon reasonable request with one or more
representatives of Buyer to report on material operational matters and, subject
to Section 4.1, any proposals to engage in material transactions;
(d) promptly notify Buyer of any material adverse change in its
condition (financial or otherwise), business, properties, assets or liabilities,
or of any material governmental complaints, investigations or hearings adverse
to it (or written threats thereof) which could reasonably be expected to have a
Seller Material Adverse Effect;
(e) promptly deliver to Buyer true and correct copies of any report,
statement or schedule filed with the SEC subsequent to the date of this
Agreement and prior to the Closing Date;
(f) maintain its books and records in accordance with GAAP
consistently applied and not change in any material manner any of its methods,
principles or practices of accounting in effect at the Seller Financial
Statement Date, except as may be required by the SEC, applicable law or GAAP;
(g) duly and timely file all material Tax Returns and other documents
required to be filed with federal, state, local and other Tax Authorities,
subject to timely extensions permitted by law, and provided such extensions do
not adversely affect Seller's status as a qualified REIT under the Code;
(h) except as set forth in this Agreement, not make, rescind or revoke
any material express or deemed election relative to Taxes (unless required by
law or necessary to preserve Seller's status as a REIT or the status of any
Seller Subsidiary as a partnership for federal income tax purposes or as a
qualified REIT subsidiary under Section 856(i) of the Code, as the case may be);
(i) except as contemplated in the CapEx Budget previously made
available to Buyer, not acquire, enter into any option to acquire, or exercise
an option or contract to acquire, additional real property, incur additional
indebtedness except for working capital under its revolving lines of credit,
encumber assets or commence construction of, or enter into any agreement or
commitment to develop or construct, other real estate projects, except with
respect to projects described in the Seller SEC Documents or the Seller
Disclosure Letter as being under development in accordance with the agreements
in existence on the date of this Agreement and previously furnished to Buyer
(the "Development Agreements");
----------------------
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<PAGE>
(j) not (except as contemplated by this Agreement and the Partnership
Merger Agreement) amend its Charter or bylaws, or the articles or certificate of
incorporation, bylaws, code of regulations, partnership agreement, operating
agreement or joint venture agreement or comparable charter or organization
document of any Seller Subsidiary;
(k) except as contemplated by this Agreement and the Seller
Partnership Redemption and for issuances under Seller's dividend reinvestment
plan in accordance with past practice, make no change in the number of its
shares of capital stock, membership interests or units of limited partnership
interest (as the case may be) issued and outstanding or reserved for issuance,
other than pursuant to (i) the exercise of options or other rights disclosed in
Section 2.3 of the Seller Disclosure Letter, (ii) the conversion of Seller
- -------------------------------------------
Preferred Shares, or (iii) the exchange or redemption of Seller OP Units
pursuant to the Seller Partnership Agreement for Seller Common Shares or cash,
at Seller's option;
(l) except as set forth in Section 4.2(l) of the Seller Disclosure
---------------------------------------
Letter or without the consent of Parent, grant no options or other rights or
- ------
commitments relating to its shares of capital stock, membership interests or
units of limited partnership interest or any security convertible into its
shares of capital stock, membership interests or units of limited partnership
interest, or any security the value of which is measured by shares of capital
stock, or any security subordinated to the claim of its general creditors and,
except as contemplated by this Agreement, not amend or waive any rights under
any of the Seller Options;
(m) except as provided in this Agreement (including the Seller
Partnership Redemption and Section 5.8), the Partnership Merger Agreement and in
connection with the use of Seller Common Shares to pay the exercise price or tax
withholding in connection with equity-based employee benefit plans by the
participants therein, not (i) authorize, declare, set aside or pay any dividend
or make any other distribution or payment with respect to any Seller Common
Shares, Seller Preferred Shares or Seller OP Units or (ii) directly or
indirectly redeem, purchase or otherwise acquire any shares of capital stock,
membership interests or units of partnership interest or any option, warrant or
right to acquire, or security convertible into, shares of capital stock,
membership interests, or units of partnership interest, except for (A)
redemptions of Seller Common Shares required under Section 2 of Article V of
Seller's Charter in order to preserve the status of Seller as a REIT under the
Code and (B) conversions or redemptions of Seller OP Units, whether or not
outstanding on the date of this Agreement, for cash or Seller Common Shares in
accordance with the terms of the Seller Partnership Agreement;
(n) not sell, lease (other than to Lessee), exchange or otherwise
dispose of any Seller Property outside the ordinary course of business or as set
forth on Section 4.2(n) of the Seller Disclosure Letter;
----------------------------------------------
(o) not make any loans, advances or capital contributions to, or
investments in, any other Person, other than regular advances to employees in
the ordinary course of business and loans, advances and capital contributions to
Seller Subsidiaries in existence on the date hereof;
(p) not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or otherwise)
which are material to Seller and its Subsidiaries taken as a whole, other than
the payment, discharge or satisfaction, in the ordinary course of business
consistent with past practice or in accordance with their terms, of liabilities
reflected or reserved against in, or contemplated
-33-
<PAGE>
by, the most recent consolidated financial statements (or the notes thereto)
furnished to Buyer or incurred in the ordinary course of business consistent
with past practice (collectively, "Ordinary Course Liabilities");
---------------------------
(q) except as provided in Section 4.2(i) above, not enter into any
commitment, contractual obligation or transaction (each, a "Commitment") for the
----------
purchase of any real estate; provided that expansion or improvements made in the
ordinary course of business to existing real property shall not be considered a
purchase of real property;
(r) not guarantee the indebtedness of another Person, enter into any
"keep well" or other agreement to maintain any financial statement condition of
another Person or enter into any arrangement having the economic effect of any
of the foregoing;
(s) not enter into any contractual obligation with any officer,
director or Affiliate of Seller except as set forth in this Agreement;
(t) not increase any compensation or enter into or amend any
employment, severance or other agreement with any of its officers, directors or
employees earning a base salary of more than $100,000 per annum, other than as
required by any contract or Employee Plan or pursuant to waivers by employees of
benefits under such agreements;
(u) except as provided in Section 4.2(l) of this Agreement, not adopt
any new employee benefit plan or amend or terminate or increase the benefits
under any existing plans or rights, not grant any additional options, warrants,
rights to acquire stock, stock appreciation rights, phantom stock, dividend
equivalents, performance units or performance stock to any officer, employee or
director, or accelerate vesting with respect to any grant of Seller Common
Shares to employees which are subject to any risk of forfeiture, except for
changes which are required by law and changes which are not more favorable to
participants than provisions presently in effect;
(v) not change the ownership of any of its Subsidiaries, except
changes which arise as a result of the conversion of Seller OP Units into Seller
Common Shares or cash or the Seller Partnership Redemption;
(w) not accept a promissory note in payment of the exercise price
payable under any option to purchase Seller Common Shares;
(x) not enter into or amend or otherwise modify or waive any material
rights under any agreement or arrangement for the Persons that are executive
officers or directors of Seller or any Seller Subsidiary (other than Alter and
Biederman in their capacities as such);
(y) not directly or indirectly or through a subsidiary, merge or
consolidate with, acquire all or substantially all of the assets of, or acquire
the beneficial ownership of a majority of the outstanding capital stock or a
majority of any other equity interest in, any Person other than any of the
foregoing (other than a merger or consolidation) in connection with a
transaction permitted pursuant to Section 4.2(i);
(z) not settle or compromise any material tax liability;
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<PAGE>
(aa) perform all actions required to consummate the Seller Partnership
Redemption on the Closing Date prior to the Effective Time;
(bb) perform all agreements required to be performed by the Seller and
its Subsidiaries (including the Seller Partnership) under the Partnership Merger
Agreement; and
(cc) not agree, commit or arrange to take any action prohibited under
this Section.
4.3 Conduct of Parent's and Buyer's Business Pending Merger. Prior to the
-------------------------------------------------------
Effective Time, except as (i) contemplated by this Agreement, or (ii) consented
to in writing by Seller, Parent shall, and shall cause Buyer to:
(a) use its reasonable efforts to preserve intact its business
organizations and goodwill and keep available the services of its officers and
employees;
(b) promptly notify Seller of any material emergency or other
material change in the condition (financial or otherwise), business, properties,
assets, liabilities, prospects or the normal course of its businesses or in the
operation of its properties, or of any material governmental complaints,
investigations or hearings (or communications indicating that the same may be
contemplated);
(c) not directly or indirectly, through a subsidiary or otherwise,
merge or consolidate with, or acquire all or substantially all of the assets of,
or the beneficial ownership of a majority of the outstanding capital stock or
other equity interests in any Person whose securities are registered under the
Exchange Act unless such transaction has been approved by Seller;
(d) except as contemplated by this Agreement, not issue or commit to
issue or change the ownership of any Buyer or Buyer Operating Partnership
securities unless such issuance or change in ownership has been approved by
Seller;
(e) use reasonable best efforts to do all necessary things required
to obtain and to close the funding contemplated by the Contribution Agreement
and the borrowings contemplated by the Financing Commitment or if the Financing
Commitment is terminated or such funds shall not otherwise be available, to
obtain alternate financing, in each case on financial and other terms no less
favorable than those set forth in the Financing Commitment or to the extent not
set forth therein, on terms reasonably acceptable to Parent, and to cause such
equity funding and such borrowings to be made available to Parent, Buyer, Buyer
Operating Partnership and Seller Partnership or the other borrowers thereunder,
as applicable as and subject to the conditions provided in the Contribution
Agreement and the Financing Commitment. Parent and Buyer will not amend or
otherwise modify in any material respect, or waive any material rights under the
Contribution Agreement or Financing Commitment, in each case to the extent such
action could reasonably be expected to materially and adversely affect the
likelihood of obtaining such funding. Parent agrees to use its reasonable best
efforts so that representatives of Seller shall have reasonable access to the
lender under the Financing Commitment and use its reasonable best efforts to
cause such lender to respond to Seller's reasonable request regarding the status
of such financing;
(f) not agree, commit or arrange to take any action prohibited under
this Section; and
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<PAGE>
(g) except as contemplated by the Contribution Agreement, not acquire
ownership, beneficially or of record, of any Seller Common Shares or Seller
Preferred Shares.
4.4 Other Actions. Each of Seller on the one hand, and Parent and Buyer
-------------
on the other hand, shall not knowingly take, and shall use commercially
reasonable efforts to cause their Subsidiaries not to take, any action that
would result in (i) any of the representations and warranties of such party
(without giving effect to any "knowledge" qualification) set forth in this
Agreement that are qualified as to materiality becoming untrue, (ii) any of such
representations and warranties (without giving effect to any "knowledge"
qualification) that are not so qualified becoming untrue in any material respect
or (iii) except as contemplated by Section 4.1, any of the conditions to the
Merger set forth in Article 6 not being satisfied.
4.5 Private Placement. Parent shall take all actions necessary to offer
-----------------
and sell interests in Parent to holders of Seller OP Units in the manner
contemplated by the Partnership Merger Agreement and Sections 1.8 and 5.1 hereof
and as shall be required for the offering and sale of such units of limited
partnership interest to be exempt from the registration requirements of the
Securities Act pursuant to Rule 506 of Regulation D.
4.6 Escrow Arrangement. Parent has delivered to Fidelity National Title
------------------
Insurance Company, as escrow agent (the "Escrow Agent") $25,000,000 (the "Cash
------------ ----
Collateral") in cash or an irrevocable letter of credit in the amount of the
- ----------
Cash Collateral, substantially in the form attached hereto as Exhibit H, with
---------
such changes as shall be reasonably satisfactory to Seller and from a bank
reasonably satisfactory to Seller (the "Letter of Credit") to secure the
----------------
obligation of Parent and Buyer to pay certain fees and expenses pursuant to
Section 7.2 and to be held in accordance with the terms of an Escrow Agreement
dated as of the date hereof among the Escrow Agent, Seller, Seller Partnership
and Parent (the "Escrow Agreement").
----------------
4.7 Seller Partnership Actions. Seller shall use its reasonable best
--------------------------
efforts to cause Seller Partnership to (a) obtain the Seller Partner Approval
and (b) redeem from Seller, Seller OP Units in exchange for assets of Seller
Partnership as set forth on Exhibit A. Parent will cooperate with Seller in
---------
obtaining the Seller Partner Approval.
4.8 Pro Formas. Set forth on Exhibit J is the current estimated sources
---------- ---------
and uses of funds in connection with the Contribution, the Financing Commitment
and the consummation of the transactions contemplated by this Agreement and the
Partnership Merger Agreement, which reflects the current assumptions regarding
sources and uses of funds for such purposes, and Parent will promptly notify
Seller of any material changes in such estimated sources and uses of funds and
provide Seller a revised statement reflecting such changes.
ARTICLE 5
ADDITIONAL COVENANTS
5.1 Preparation of the Proxy Statement; Seller Stockholders Meeting.
---------------------------------------------------------------
(a) The parties shall cooperate and promptly prepare, and Seller shall
file with the SEC as soon as practicable a proxy statement with respect to the
meeting of the stockholders of Seller in connection with the Merger and Charter
Amendments (the "Proxy Statement"). The parties shall cooperate
---------------
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<PAGE>
and promptly prepare and the appropriate party shall file with the SEC as soon
as practicable any other filings required under the Exchange Act ("Additional
----------
Filings"), including a Rule 13e-3 Transaction Statement on Schedule 13E-3 with
- -------
respect to the Merger to be filed jointly by Seller, Parent and Buyer, together
with any required amendments thereto. To the extent the Seller Partnership has
received the Seller Partner Approval in the form of valid written consents
executed by partners of the Seller Partnership promptly after the date hereof,
Seller Partnership and Parent shall jointly promptly prepare an Information
Statement of Seller Partnership and Parent for use in connection with the
offering of units of limited liability company interest in Parent (the
"Information Statement). To the extent the Seller Partnership has not received
---------------------
the Seller Partner Approval in the form of valid written consents executed by
partners of the Seller Partnership promptly after the date hereof, Seller
Partnership and Parent shall jointly and promptly prepare a Consent Solicitation
Statement soliciting the written consent of the holders of Seller OP Units to
the adoption of this Agreement and the approval of the Partnership Merger (the
"Consent Solicitation Statement"), which Consent Solicitation Statement shall
------------------------------
contain a description of the terms of the Class A Preferred Units and the Class
B Units and the recommendation of Seller General Partner's Board of Directors
that the holders of Seller OP Units consent to the adoption of this Agreement
and the approval of the Partnership Merger. Each of Seller, Seller Partnership,
Parent, Buyer and Buyer Operating Partnership agrees that the information
provided by it for inclusion in the Proxy Statement, the Additional Filings, the
Information Statement, Consent Solicitation Statement and each amendment or
supplement thereto, at the time of mailing thereof and at the time of the
meeting of stockholders of Seller and at the time of the taking of consent in
respect of the Seller Partner Approval, will not include an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. Parent, Buyer and Buyer Operating
Partnership shall, with respect to the Seller Partner Approval and the offering
of units of limited liability interests in Parent to holders of Seller OP Units,
comply with Regulation D of the Securities Act, as applicable. Seller will use
its reasonable best efforts, and Parent, Buyer and Buyer Operating Partnership
will cooperate with Seller to (i) file a preliminary Proxy Statement with the
SEC and (ii) cause the Proxy Statement to be mailed to Seller's stockholders, in
each case, as promptly as practicable (including clearing the Proxy Statement
with the SEC) following receipt by Seller of written certification from the
lender under the Financing Commitment that it has received and reviewed the
environmental reviews, engineering reports, title reports, surveys and appraisal
reports with respect to substantially all (based on the aggregate value of the
Seller Properties) of the Seller Properties for which it desires such reports
(collectively, the "Property Reports"), provided that the termination date of
----------------
the Financing Commitment shall be later than 12 days from the date the Proxy
Statement was otherwise to be mailed to Seller's stockholders; and provided,
--------
further, that the parties acknowledge that any of such reports may be updated or
- -------
supplemented from time to time prior to Closing. Seller will use its reasonable
best efforts, and Parent, Buyer and Buyer Operating Partnership will cooperate
with Seller, to cause the Information Statement or Consent Solicitation
Statement, as applicable, to be mailed to the Seller Unit Holders as promptly as
practicable after the SEC has cleared the Proxy Statement and it has been mailed
to Seller's stockholders. Seller will notify Buyer promptly of the receipt of
any comments from the SEC and of any request by the SEC for amendments or
supplements to the Proxy Statement or the Additional Filings or for additional
information and will supply Buyer with copies of all correspondence between such
party or any of its representatives and the SEC, with respect to the Proxy
Statement or the Additional Filings. The parties shall cooperate to cause the
Proxy Statement, the Information Statement, Consent Solicitation Statement and
any Additional Filings to comply in all material respects with all applicable
requirements of law. Whenever any event occurs which is required to be set forth
in an amendment or supplement to the Proxy Statement, the Additional Filings, or
the Information Statement or Consent Solicitation Statement, Seller on the one
hand, and Parent and Buyer on the other hand, shall
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<PAGE>
promptly inform the other of such occurrence and cooperate in filing with the
SEC and/or mailing to the stockholders of Seller or holders of Seller OP Units,
as applicable, such amendment or supplement to the Proxy Statement or the
Information Statement or Consent Solicitation Statement .
(b) It shall be a condition to the mailing of the Proxy Statement and
the Information Statement that if they so request, Buyer and Buyer Operating
Partnership shall have received a "comfort" letter or an "agreed upon
procedures" letter from Ernst & Young LLP, independent public accountants for
Seller and Seller Partnership, of the kind contemplated by the Statement of
Auditing Standards with respect to Letters to Underwriters promulgated by the
American Institute of Certified Public Accountants (the "AICPA Statement"),
---------------
dated as of the date on which the Proxy Statement is to be mailed to the
stockholders of Seller, addressed to Parent, Buyer and Buyer Operating
Partnership, in form and substance reasonably satisfactory to Buyer and Buyer
Operating Partnership, concerning the procedures undertaken by Ernst & Young,
LLP with respect to the financial statements and information of Seller, Seller
Partnership and their Subsidiaries contained in the Proxy Statement and the
other matters contemplated by the AICPA Statement and otherwise customary in
scope and substance for letters delivered by independent public accountants in
connection with transactions such as those contemplated by this Agreement.
(c) Seller will, as soon as practicable following the date of this
Agreement, duly call, give notice of, convene and hold a meeting of its
stockholders, such meeting to be held no sooner than 20 business days nor later
than 45 days following the date the Proxy Statement is mailed to the
stockholders of Seller (the "Seller Stockholders Meeting") for the purpose of
---------------------------
obtaining the Seller Stockholder Approvals. Seller shall be required to hold the
Seller Stockholders Meeting, regardless of whether the Seller Board has
withdrawn, amended or modified its recommendation that its stockholders adopt
this Agreement and approve the Merger, unless this Agreement has been terminated
pursuant to the provisions of Section 7.1. Seller will, through its Seller
Board, recommend that its stockholders adopt this Agreement and approve the
transactions contemplated hereby, including the Merger and Charter Amendments;
provided, that prior to the Seller Stockholders Meeting, such recommendation may
be withdrawn, modified or amended only to the extent expressly permitted under
Section 4.1.
(d) If on the date for the Seller Stockholders Meeting established
pursuant to Section 5.1(c) of this Agreement, Seller has not received duly
executed proxies which, when added to the number of votes represented in person
at the meeting by Persons who intend to vote to adopt this Agreement, will
constitute a sufficient number of votes to adopt the Seller Stockholder
Approvals (but less than one-third of the outstanding Seller Common Shares and
Seller Preferred Shares (voting on an "as-converted basis"), voting as a single
class have indicated their intention to vote against, or have submitted duly
executed proxies voting against, the adoption of the Seller Stockholder
Approvals), then Seller shall recommend the adjournment of its stockholders
meeting until the date 10 business days after the originally scheduled date of
the stockholders meeting.
5.2 Access to Information; Confidentiality. Subject to the requirements
--------------------------------------
of confidentiality agreements with third parties, each of Seller, Parent and
Buyer shall, and shall cause each of its Subsidiaries to, afford to the other
party and to the officers, employees, accountants, counsel, financial advisors,
sources of financing and other representatives of such other party, reasonable
access during normal business hours prior to the Effective Time to all their
respective properties, books, contracts, commitments, personnel and records and,
during such period, each of Seller, Parent and Buyer shall, and shall cause each
of its Subsidiaries to, furnish promptly to the other party and its financing
sources all other information concerning
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its business, properties and personnel as such other party may reasonably
request. Parent, Buyer and their financing sources shall have the right to
conduct non-intrusive environmental and engineering inspections at the Seller
Properties, provided that in no event shall Parent or Buyer have the right to
conduct so-called "Phase II" environmental tests without Seller's prior consent,
which shall not be unreasonably withheld. Notwithstanding anything in this
Section 5.2 to the contrary, all of Parent's and Buyer's activities pursuant to
this Section 5.2 must be conducted in a manner that does not unreasonably
interfere with the ongoing operations of Seller and Seller Subsidiaries.
5.3 Reasonable Best Efforts; Notification.
-------------------------------------
(a) Subject to the terms and conditions herein provided, Seller,
Parent and Buyer shall: (i) use all reasonable best efforts to cooperate with
one another in (A) determining which filings are required to be made prior to
the Effective Time with, and which consents, approvals, permits or
authorizations are required to be obtained prior to the Effective Time from,
governmental or regulatory authorities of the United States, the several states
and foreign jurisdictions and any third parties in connection with the execution
and delivery of this Agreement, and the consummation of the transactions
contemplated hereby, including without limitation any required filings and
consents under the HSR Act, and (B) timely making all such filings and timely
seeking all such consents, approvals, permits and authorizations (the parties
acknowledge that all consents under each of the Seller Franchise Agreements
shall comply with the provisions of Section 5.3(a) of the Buyer Disclosure
--------------------------------------
Letter unless otherwise mutually agreed by Seller and Parent); (ii) use all
- ------
reasonable best efforts to obtain, in writing, the consents listed in Section
-------
5.3(a)(1) of the Seller Disclosure Letter (the "Lender Consents") in the manner
- ----------------------------------------- ---------------
set forth in Section 5.3(c) and the consents listed in Section 5.3(a)(3) of the
Seller Disclosure Letter (the "Ground Lessor Consents"), and the parties shall
----------------------
use all reasonable best efforts to cause Lessee to obtain, in writing, the
consents listed in Section 5.3(a)(2) of the Seller Disclosure Letter (the
-------------------------------------------------
"Franchise Consents") in the manner set forth in Section 5.3(d) (such Lender
- -------------------
Consents, Ground Lessor Consents and Franchise Consents referred to herein
collectively as the "Required Consents") in form reasonably satisfactory to
-----------------
Seller and Buyer, provided however, that, without the prior written consent of
Parent, neither Seller, the Seller Partnership nor any other Seller Subsidiary
shall pay any cash or other consideration, make any commitments or incur any
liability or other obligation except (x) in the case of obtaining Lender
Consents and consents under the Seller Franchise Agreements, as set forth in
clause (y) below and Sections 5.3(c) and 5.3(d), (y) in the case of obtaining
Ground Lessor Consents and Lender Consents, in an aggregate amount of $1,500,000
or less for the payment of all Ground Lessor Amounts and Prepayment Amounts
(provided that such amount may exceed $1,500,000 if the aggregate cash
consideration payable to holders of Seller Common Shares in the Merger and
Seller Partnership Units in the Partnership Merger is reduced by the aggregate
amount of such excess, and the Merger Consideration and Partnership Merger
Consideration per share or unit, as the case may be, is reduced accordingly) and
(z) for all other consents required to effect the Transactions, in an aggregate
amount of $100,000 or less (provided that such amount may exceed $100,000 if the
aggregate cash consideration payable to holders of Seller Common Shares in the
Merger and Seller Partnership Units in the Partnership Merger is reduced by the
aggregate amount of such excess, and the Merger Consideration and Partnership
Merger Consideration per share or unit, as the case may be, is reduced
accordingly); and (iii) use all reasonable best efforts to take, or cause to be
taken, all other action and do, or cause to be done, all other things necessary,
proper or appropriate to consummate and make effective the transactions
contemplated by this Agreement, subject in the case of Seller to the exercise by
the Seller Board or Special Committee prior to the Outside Date of its duties
under applicable law; provided however, that nothing in this Section 5.3 shall
require Parent or Buyer to pay or commit to pay any money or other consideration
or to incur any liability or other obligation (except
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as described in clause (i) of Section 5.3(c)). In furtherance thereof, Seller
agrees to vote in favor of, or at Buyer's request deliver a written consent with
respect to, the transactions contemplated by the Partnership Merger Agreement in
its capacity as a limited partner of the Seller Partnership, and in its capacity
as a general partner of the Seller Partnership. If at any time after the
Effective Time any further action is necessary or desirable to carry out the
purpose of this Agreement, Parent and the Surviving Company shall take all such
necessary action.
(b) Seller shall give prompt notice to Parent and Buyer, and Parent
and Buyer shall give prompt notice to Seller, (i) if any representation or
warranty made by it or them contained in this Agreement that is qualified as to
Seller Material Adverse Effect, Parent Material Adverse Effect or Buyer Material
Adverse Effect, as the case may be, becomes untrue or incorrect in any respect
or any such representation or warranty that is not so qualified becomes untrue
or incorrect in any material respect or (ii) of the failure by it or them to
comply with or satisfy in any material respect any covenant, condition or
agreement to be complied with or satisfied by it under this Agreement; provided,
however, that no such notification shall affect the representations, warranties,
covenants or agreements of the parties or the conditions to the obligations of
the parties under this Agreement.
(c) With respect to securing the Lender Consents, Buyer and Seller
shall cooperate with each other and use all reasonable best efforts to secure
each of the Lender Consents, including taking the actions set forth in Section
-------
5.3(d) of the Seller's Disclosure Schedule. Each party shall update the other
- ------------------------------------------
on its progress at the request of the other:
(i) In the event some or all of the Lender Consents are not
obtained, to the extent the Original Loan Amounts (as defined in the
Financing Commitment), as such Original Loan Amount may be increased
pursuant to the terms of the Financing Commitment, exceed $454,600,000 less
the amount, if any, by which the proceeds under the Financing Commitment
are reduced as a result of any defect or loss referred to in clause (i)(A)
of Section 7.1(j) (whether or not a Lender Property Determination (as
defined below) shall have occurred) (a "Financing Overage"), the Financing
-----------------
Overage shall be used as a source of funds to prepay as of the Closing
Date, in whole or in part, the outstanding amounts under all of the loans
for which a Lender Consent is required (any such loan, an "Underlying
----------
Loan") which have not been received and any prepayment penalty with respect
thereto. To the extent an Underlying Loan and any related prepayment
penalty will be paid as of the Closing Date with the proceeds of a
Financing Overage, the Lender Consent with respect to such Underlying Loan
shall be deemed to have been obtained;
(ii) In the event that at any time after July 15, 1999, Seller
reasonably believes that (A) some or all of the Lender Consents will not be
obtained or waived or (B) the Financing Overage will be an insufficient
source of funds for the prepayment in full of all the Underlying Loans
(together with all prepayment penalties) or (C) Buyer will not be able to
obtain additional financing to prepay in full all the Underlying Loans
(together with all prepayment penalties), Seller may seek to obtain new
financing in an amount equal to such excess upon terms materially similar
to market terms for similar loans on the date hereof. The proceeds of such
financings shall be used solely to prepay as of the Closing Date in whole
or in part one or more of the Underlying Loans for which Lender Consents
have not been received or waived and any prepayment penalty with respect
thereto. To the extent an Underlying Loan and any related prepayment
penalty will be paid as of the Closing Date with the proceeds of any such
financing, together with any Financing Overage, the
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Lender Consent with respect to such Underlying Loan shall be deemed to have
been obtained. With respect to Underlying Loans that are not prepayable in
accordance with their respective terms, all amounts paid or required to be
paid pursuant to clause (i) above or this clause (ii) to obtain Lender
Consents that exceed the amount of principal and accrued interest on the
applicable Underlying Loan are referred to herein as the "Prepayment
----------
Amounts" and the parties shall use all reasonable best efforts to minimize
-------
the Prepayment Amounts;
(iii) In the event that, following the operation of clauses
(i) and (ii) above, all of the Lender Consents have not been obtained or
deemed waived, Seller may, at its sole option, agree to have the Common
Merger Consideration reduced by the aggregate amount necessary to pay at
Closing all remaining amounts under the Underlying Loans in full, and Buyer
shall agree to waive the condition that it receive any of the Lender
Consents.
(d) Seller, Buyer and Parent shall use all reasonable best efforts to
minimize (i) the amounts of so-called Property Improvement Plan costs and
termination fees paid or payable by Seller, Seller Partnership or any other
Seller Subsidiary or Lessee in cash or other consideration (including by making
commitments or incurring any liability or obligation) in connection with
obtaining consent of the franchisors (including the Franchise Consents) under
each of the Seller Franchise Agreements with respect to any Seller Property
(collectively and in the aggregate, "Franchise Fees") and (ii) the amounts paid
--------------
or required to be paid by Seller, Seller Partnership or any other Seller
Subsidiary in cash or other consideration (including by making commitments or
incurring any liability or obligation) in connection with obtaining the Ground
Lessor Consents (the "Ground Lessor Amounts"), in each case in connection with
---------------------
transactions contemplated hereby and by the Contribution Agreement. If the
Franchise Fees are equal to or less than $12,500,000, the aggregate cash
consideration payable to the holders of Seller Common Shares in the Merger and
Seller Partnership Units in the Partnership Merger shall not be adjusted
pursuant to this Section 5.3(d). If the Franchise Fees exceed $12,500,000 but
are less than $25,000,000 the aggregate cash consideration payable to holders of
Seller Common Shares in the Merger and Seller Partnership Units in the
Partnership Merger shall be reduced by one-half of the amount by which the
Franchise Fees exceed $12,500,000, and the Merger Consideration and Partnership
Merger Consideration per share or unit, as the case may be, shall be reduced
accordingly. If the Franchise Fees exceed $25,000,000, at the option of Seller,
Seller may or any Seller Subsidiary may pay or commit to pay or Seller may
consent to Lessee paying or committing to pay such excess, and the aggregate
cash consideration payable to holders of Seller Common Shares in the Merger and
Seller Partnership Units in the Partnership Merger shall be reduced by the sum
of (x) $6,250,000 as required by the preceding sentence and (y) the amount by
which the Franchise Fees exceed $25,000,000, and the Merger Consideration and
Partnership Merger Consideration per share or unit, as the case may be, shall be
reduced accordingly. The Special Committee (or its representatives) shall be
provided reasonable advance notice of all meetings with and copies of all
correspondence with any franchisors under each of the Seller Franchise
Agreements and be given the opportunity to attend and participate in all such
meetings.
(e) For purposes of the last two sentences of Section 5.3(d), no
Franchise Fees that are paid or payable by Parent, Buyer or Lessee shall be
included in determining the dollar thresholds in such sentences unless Seller
shall have been consulted by Parent, Buyer or Lessee, as applicable, prior to
the incurrence of such Franchise Fees.
5.4 Public Announcements. Parent, Buyer and Seller will consult with each
--------------------
other before issuing, and provide each other the opportunity to review and
comment upon, any press release or other
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written public statements with respect to the transactions contemplated by this
Agreement, and shall not issue any such press release or make any such written
public statement prior to such consultation, except as may be required by
applicable law, court process or by obligations pursuant to any listing
agreement with any national securities exchange. The parties agree that the
initial press release to be issued with respect to the transactions contemplated
by this Agreement will be in the form agreed to by the parties hereto prior to
the execution of this Agreement.
5.5 Transfer Taxes. Buyer and Seller shall cooperate in the preparation,
--------------
execution and filing of all returns, questionnaires, applications or other
documents regarding any real property transfer, sales, use, transfer, value
added, stock transfer and stamp taxes, any transfer, recording, registration and
other fees and any similar taxes which become payable in connection with the
transactions contemplated by this Agreement (together with any related
interests, penalties or additions to tax, "Transfer Taxes"). From and after the
--------------
Effective Time, the Surviving Company shall pay, or shall cause the Surviving
Operating Partnership, as appropriate, to pay or cause to be paid, without
deduction or withholding from any amounts payable to the holders of Seller
Common Shares or Seller OP Units, all Transfer Taxes.
5.6 Benefit Plans. After the Effective Time, all employees of Seller who
-------------
are employed by the Surviving Company shall, at the option of the Surviving
Company, either continue to be eligible to participate in an "employee benefit
plan," as defined in Section 3(3) of ERISA, of Seller which is, at the option of
the Surviving Company, continued by the Surviving Company, or alternatively
shall be eligible to participate in any "employee benefit plan," as defined in
Section 3(3) of ERISA, established, sponsored or maintained by the Surviving
Company after the Effective Time. With respect to each such employee benefit
plan not formerly maintained by Seller, service with Seller or any Seller
Subsidiary (as applicable) shall be included for purposes of determining
eligibility to participate, vesting (if applicable) and entitlement to benefits
and all pre-existing condition exclusions shall be waived and expenses incurred
by any employee for deductibles and copayments in the portion of the year prior
to the date such employee first becomes a participant in such employee benefit
plan shall be credited to the benefit of such employee under such employee
benefit plan for the year in which the employee's participation commences.
5.7 Indemnification.
---------------
(a) From and after the Effective Time, the Surviving Company shall
provide exculpation and indemnification for each Person who is now or has been
at any time prior to the date hereof or who becomes prior to the Effective Time,
an officer, employee or director of Seller or any Seller Subsidiary (the
"Indemnified Parties") which is the same as the exculpation and indemnification
- --------------------
provided to the Indemnified Parties by Seller and the Seller Subsidiaries
immediately prior to the Effective Time in their respective articles or
certificate of incorporation and bylaws or other organizational documents, as in
effect on the date hereof; provided, that such exculpation and indemnification
covers actions on or prior to the Effective Time, including, without limitation,
all transactions contemplated by this Agreement and the Financing.
(b) In addition to the rights provided in Section 5.7(a) above, in the
event of any threatened or actual claim, action, suit, proceeding or
investigation, whether civil, criminal or administrative, including without
limitation, any action by or on behalf of any or all security holders of Seller,
Parent or Buyer, or any Subsidiary of the Seller or Parent, or by or in the
right of Seller, Parent or Buyer, or any Subsidiary of the Seller or Parent, or
any claim, action, suit, proceeding or investigation (collectively,
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"Claims") in which any Indemnified Party is, or is threatened to be, made a
------
party based in whole or in part on, or arising in whole or in part out of, or
pertaining to (i) the fact that he is or was an officer, employee or director of
Seller or any of the Seller Subsidiaries or any action or omission or alleged
action or omission by such Person in his capacity as an officer, employee or
director, or (ii) this Agreement or the Partnership Merger Agreement or the
transactions contemplated by this Agreement, the Partnership Merger Agreement or
the Financing, whether in any case asserted or arising before or after the
Effective Time, Parent and the Surviving Company (the "Indemnifying Parties")
--------------------
shall from and after the Effective Time jointly and severally indemnify and hold
harmless the Indemnified Parties from and against any losses, claims,
liabilities, expenses (including reasonable attorneys' fees and expenses),
judgments, fines or amounts paid in settlement arising out of or relating to any
such Claims. Parent, the Surviving Company and the Indemnified Parties hereby
agree to use their reasonable best efforts to cooperate in the defense of such
Claims. In connection with any such Claim, the Indemnified Parties shall have
the right to select and retain one counsel, at the cost of the Indemnifying
Parties, subject to the consent of the Indemnifying Parties (which consent shall
not be unreasonably withheld or delayed). In addition, after the Effective Time,
in the event of any such threatened or actual Claim, the Indemnifying Parties
shall promptly pay and advance reasonable expenses and costs incurred by each
Indemnified Person as they become due and payable in advance of the final
disposition of the Claim to the fullest extent and in the manner permitted by
law. Notwithstanding the foregoing, the Indemnifying Parties shall not be
obligated to advance any expenses or costs prior to receipt of an undertaking by
or on behalf of the Indemnified Party, such undertaking to be accepted without
regard to the creditworthiness of the Indemnified Party, to repay any expenses
advanced if it shall ultimately be determined that the Indemnified Party is not
entitled to be indemnified against such expense. Notwithstanding anything to the
contrary set forth in this Agreement, the Indemnifying Parties (i) shall not be
liable for any settlement effected without their prior written consent (which
consent shall not be unreasonably withheld or delayed), and (ii) shall not have
any obligation hereunder to any Indemnified Party to the extent that a court of
competent jurisdiction shall determine in a final and non-appealable order that
such indemnification is prohibited by applicable law. In the event of a final
and non-appealable determination by a court that any payment of expenses is
prohibited by applicable law, the Indemnified Party shall promptly refund to the
Indemnifying Parties the amount of all such expenses theretofore advanced
pursuant hereto. Any Indemnified Party wishing to claim indemnification under
this Section 5.7, upon learning of any such Claim, shall promptly notify the
Indemnifying Parties of such Claim and the relevant facts and circumstances with
respect thereto; provided however, that the failure to provide such notice shall
not affect the obligations of the Indemnifying Parties except to the extent such
failure to notify materially prejudices the Indemnifying Parties' ability to
defend such Claim; and provided, further, however, that no Indemnified Party
shall be obligated to provide any notification pursuant to this Section 5.7(b)
prior to the Effective Time.
(c) At or prior to the Effective Time, Buyer shall purchase directors'
and officers' liability insurance policy coverage for Seller's and each Seller
Subsidiary's directors and officers with at least $20,000,000 of coverage for a
period of six years which will provide the directors and officers with coverage
on substantially similar terms as currently provided by Seller and the Seller
Subsidiaries to such directors and officers. At or prior to the Effective Time,
Seller shall have the right to reasonably review and approve any such policy,
which approval shall not be unreasonably withheld.
(d) This Section 5.7 is intended for the irrevocable benefit of, and
to grant third-party rights to, the Indemnified Parties and their successors,
assigns and heirs and shall be binding on all successors and assigns of Parent
and Buyer, including without limitation the Surviving Company. Each of
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the Indemnified Parties shall be entitled to enforce the covenants contained in
this Section 5.7 and Parent and Buyer acknowledge and agree that each
Indemnified Party would suffer irreparable harm and that no adequate remedy at
law exists for a breach of such covenants and such Indemnified Party shall be
entitled to injunctive relief and specific performance in the event of any
breach of any provision in this Section 5.7.
(e) In the event that the Surviving Company or any of its respective
successors or assigns (i) consolidates with or merges into any other Person and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any Person, then, and in each such case, the successors
and assigns of such entity shall assume the obligations set forth in this
Section 5.7, which obligations are expressly intended to be for the irrevocable
benefit of, and shall be enforceable by, each director and officer covered
hereby.
Parent guarantees, unconditionally and absolutely, the performance of
Surviving Company's and Buyer's obligations under this Section 5.7.
5.8 Declaration of Dividends and Distributions. From and after the date
------------------------------------------
of this Agreement, Seller shall not make any dividend or distribution to its
stockholders without the prior written consent of Buyer; provided, however, the
written consent of Buyer shall not be required for the authorization and payment
of, and Seller shall make quarterly distributions with respect to the Seller
Preferred Shares in the amounts provided for in the Articles Supplementary in
respect of the Seller Preferred Shares. From and after the date of this
Agreement, Seller Partnership shall not make any distribution to the holders of
Seller OP Units except a distribution per Seller OP Unit in the same amount as a
dividend per Seller Common Share, with the same record and payment dates as such
dividend on the Seller Common Shares, and the Seller Partnership shall not make
any distribution to Seller OP Preferred Unit Holders except a distribution per
Seller OP Preferred Unit in the same amount as a dividend per Seller Preferred
Share. The foregoing restrictions, and Section 4.2(m)(i), shall not apply,
however, to the extent a distribution by Seller is necessary for Seller to
maintain REIT status or to prevent Seller from having to pay federal income or
excise tax; provided that in the event of such a necessary distribution, the
aggregate cash consideration payable to holders of Seller Common Shares in the
Merger and Seller Partnership Units in the Partnership Merger shall be reduced
by the aggregate amount of such distribution, and the Merger Consideration and
Partnership Merger Consideration per share or unit, as the case may be, shall be
reduced accordingly.
5.9 Resignations. On the Closing Date, Seller shall use its best efforts
------------
to cause the directors and officers of Seller or any of the Seller Subsidiaries
to submit their resignations from such positions as may be requested by Buyer,
effective immediately after the Effective Time; provided, however, that by
resigning, such officers and directors will not lose the benefit of any "change
of control" provisions of any employment agreement or other instruments to which
they would otherwise be entitled.
5.10 Stockholder Claims. Seller shall not settle or compromise any claim
------------------
relating to the Transactions brought by any current, former or purported holder
of any securities of Seller or the Seller Partnership without the prior written
consent of Buyer, which consent will not be unreasonably withheld.
5.11 Seller Franchise Agreements and Leases. Except as (i) permitted
--------------------------------------
pursuant to Section 5.3 or (ii) approved by Buyer (which approval shall not be
unreasonably withheld or delayed), Seller will not, and will not permit any of
its Subsidiaries to, amend in any material respect any of the Seller Franchise
Agreements or Seller Ground Leases, or renew any Seller Franchise Agreement or
Seller Ground Lease.
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5.12 Cooperation with Proposed Financings. At the request of the Buyer,
------------------------------------
Seller will, at the Buyer's expense, reasonably cooperate with the Buyer in
connection with the proposed financing of the Transactions by the Parent and its
Subsidiaries (including causing Seller Partnership and other Seller Subsidiaries
who are identified as borrowers in the Financing Commitment to execute and
deliver at the Closing the definitive financing agreements as contemplated under
the Financing Commitment), provided that such requested actions do not
unreasonably interfere with the ongoing operations of Seller and Seller
Subsidiaries. Solely in order to permit Parent and Buyer to consummated the
Financing, Seller shall immediately prior to the Effective Time cause to be (i)
created a special committee of the Seller Board whose sole authority and purpose
shall be to authorize the execution of definitive finance documents to effect
the Financing at the Closing and (ii) appointed to such special committee 2
designees of Parent who are reasonably acceptable to Seller. It is expressly
agreed and understood that no action or inaction of such special committee shall
be treated as action or inaction of Seller or any of its Subsidiaries for
purposes of this Agreement.
ARTICLE 6
CONDITIONS
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
----------------------------------------------------------
obligations of each party to effect the Merger and to consummate the other
transactions contemplated by this Agreement to occur on the Closing Date shall
be subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) Stockholder Approval. The (i) Seller Stockholder Approvals and
--------------------
(ii) Seller Board Approval shall have been obtained.
(b) No Injunctions or Restraints. 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 Merger, the Partnership Merger, the Seller Partnership
Redemption or any of the other transactions contemplated hereby (other than the
Contribution) shall be in effect.
(c) HSR. All applicable waiting periods (and any extensions thereof)
---
under the HSR Act shall have expired or otherwise been terminated.
6.2 Conditions to Obligations of Parent and Buyer. The obligations of
---------------------------------------------
Parent and Buyer to effect the Merger and to consummate the other transactions
contemplated to occur on the Closing Date are further subject to the following
conditions, any one or more of which may be waived in writing by Buyer (provided
that the failure of any condition set forth in Section 6.2(a) and (c) as a
result of any action taken or not taken by Seller as contemplated by Section 4.2
-----------
of the Seller Disclosure Letter, as otherwise agreed to by Parent or as a result
- -------------------------------
of the consummation of the transactions contemplated by this Agreement and the
Partnership Merger Agreement shall not cause or result in any such condition not
being satisfied):
(a) Representations and Warranties. The representations and
------------------------------
warranties of Seller set forth in this Agreement (i) that are qualified as to
Seller Material Adverse Effect shall be true and correct and (ii) that are not
so qualified shall be true and correct in all material respects, as of the date
of this
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Agreement and as of the Closing Date, in each case as though made on and as of
the Closing Date, except to the extent the representation or warranty is
expressly limited by its terms to another date, in which case such
representation or warranty shall be true and correct (if qualified as to Seller
Material Adverse Effect) or true and correct in all material respects (if not so
qualified) only as of such specific date, and Parent and Buyer shall have
received a certificate (which certificate may be qualified by Knowledge to the
same extent as the representations and warranties of Seller contained herein are
so qualified) signed on behalf of Seller by the chief operating officer of
Seller, in such capacity, to such effect.
(b) Performance of Obligations of Seller. Seller shall have performed
------------------------------------
in all material respects all obligations required to be performed by it under
this Agreement at or prior to the Effective Time, and Parent and Buyer shall
have received a certificate signed on behalf of Seller by an executive officer
of Seller, in such capacity, to such effect.
(c) Material Adverse Change. Since the date of this Agreement through
-----------------------
and including the Closing Date, (i) there shall have been no Seller Material
Adverse Change and (ii) Parent and Buyer shall have received a certificate of an
executive officer of Seller, in such capacity, certifying to such effect. For
purposes of this Section 6.2(c), it is understood and agreed that a Seller
Material Adverse Change shall be deemed to have occurred, without regard to any
certificate provided pursuant to clause (ii) of the first sentence of this
Section 6.2(c), if, as a result of a "change of law" after the date hereof, at
the Effective Time Seller would not qualify (at or prior to the Effective Time)
as a REIT. For this purpose, the term "change in law" shall mean any amendment
to or change (including any announced prospective change having a proposed
effective date at or prior to the Effective Time) in the federal tax laws of the
United States, including any statute, regulation or proposed regulation or any
official administrative pronouncement (consisting of the issuance or revocation
of any revenue ruling, revenue procedure, notice, private letter ruling or
technical advice memorandum) or any judicial decision interpreting such federal
tax laws (whether or not such pronouncement or decision is issued to, or in
connection with, a proceeding involving the Seller or a Seller Subsidiary or is
subject to review or appeal).
(d) Tax Opinions Relating to REIT Status of Seller And Partnership
--------------------------------------------------------------
Status of Seller Partnership. Parent and Buyer shall have received an opinion
- ----------------------------
of Brobeck, Phleger and Harrison LLP, or other counsel to Seller reasonably
acceptable to Parent and Buyer, dated as of the Effective Time, in the form
attached hereto as Exhibit J. Such opinion may be based on certificates in the
---------
form of Section 6.2(d) of the Seller Disclosure Letter.
----------------------------------------------
(e) Consents. All Required Consents shall have been obtained, and not
--------
subsequently been revoked, as of the Closing Date. In addition, the Franchise
Fees shall not exceed $25 million (unless Seller shall have exercised its option
described in the last sentence of Section 5.3(d)).
(f) Seller Expenses. All (i) investment banking, (ii) legal and
---------------
accounting, (iii) advisory, consulting and severance, (iv) printing and SEC
filing and (v) other fees and expenses incurred, paid or accrued by Seller and
the Seller Subsidiaries in connection with the Transactions shall not exceed
$11,500,000. Parent and Buyer shall have received a certificate signed on
behalf of Seller by the chief operating officer of Seller setting forth in
reasonable detail the amount of each such fees and expenses. In the event the
aggregate of such fees and expenses exceed $11,500,000, the aggregate cash
consideration payable to holders of Seller Common Shares in the Merger and
Seller Partnership Units in the Partnership
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<PAGE>
Merger shall be reduced by the aggregate amount of such excess, and the Common
Merger Consideration and Partnership Merger Consideration per share or unit, as
the case may be, shall be reduced accordingly.
(g) Partnership Redemption. The Partnership Redemption shall have
----------------------
occurred.
(h) Partnership Merger. The Partnership Merger shall have been
------------------
consummated.
(i) Financing. Parent and its Subsidiaries shall have obtained funds
---------
under the Financing Commitment on terms and conditions consistent with Exhibit G
---------
hereto and otherwise reasonably acceptable to Parent and Buyer and the Original
Loan Amount equals or exceeds $454,600,000 less any reduction resulting from a
Lender Property Determination up to the Defect Amount (as defined below).
Notwithstanding anything to the contrary in this Agreement, none of the
initiation, threat or existence of any legal action of any kind with respect to
this Agreement or the Partnership Merger Agreement or any transaction
contemplated hereby or thereby, including without limitation any action
initiated, threatened or maintained by any stockholder of Seller or any partner
in the Seller Partnership, whether alleging rights with respect to claims under
any Federal or state securities law, contract or tort claims, claims for breach
of fiduciary duty or otherwise, will constitute a failure of any of the
conditions set forth in Sections 6.2 and 6.3 (and no such action shall cause the
chief operating officer of Seller or of Parent or Buyer to be unable to deliver
a certificate attesting to compliance with such conditions) unless that action
has resulted in the granting of injunctive relief that prevents the consummation
of the Merger and the other transactions contemplated hereby or thereby, and
such injunctive relief has not been dissolved or vacated.
6.3 Conditions to Obligations of Seller. The obligation of Seller to
-----------------------------------
effect the Merger and to consummate the other transactions contemplated to occur
on the Closing Date is further subject to the following conditions, any one or
more of which may be waived in writing by Seller:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Parent and Buyer set forth in this Agreement (i) that are
qualified as to Parent Material Adverse Effect or Buyer Material Adverse Effect
shall be true and correct and (ii) that are not so qualified shall be true and
correct in all material respects, as of the date of this Agreement and as of the
Closing Date, in each case as though made on and as of the Closing Date, except
to the extent the representation or warranty is expressly limited by its terms
to another date, in which case such representation or warranty shall be true and
correct (if qualified as to Parent Material Adverse Effect or Buyer Material
Adverse Effect) or true and correct in all material respects (if not so
qualified) only as of such specific date, and Seller shall have received a
certificate (which certificate may be qualified by Knowledge to the same extent
as the representations and warranties of Parent and Buyer contained herein are
so qualified) signed on behalf of Parent and Buyer by the chief executive
officer or the chief financial officer of such party, in such capacity, to such
effect.
(b) Performance of Obligations of Buyer. Each of Parent and Buyer
-----------------------------------
shall have performed in all material respects all obligations required to be
performed by them, respectively under this Agreement at or prior to the
Effective Time, and Seller shall have received a certificate of Parent and Buyer
signed on behalf of Parent and Buyer by the chief executive officer or the chief
financial officer of Parent and Buyer, in such capacity, to such effect.
(c) Material Adverse Change. Since the date of this Agreement, there
-----------------------
shall have been no change in the business, financial condition or results of
operations of Parent and its Subsidiaries, taken
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<PAGE>
as a whole, or of Buyer and the Buyer Subsidiaries, taken as a whole, that has
had or would reasonably be expected to have a material adverse effect on the
ability of Parent, Buyer or Buyer Operating Partnership to consummate the
transactions contemplated by this Agreement and the Partnership Merger
Agreement, and Seller shall have received a certificate of the chief executive
officer or chief financial officer of Parent and Buyer, in such capacity,
certifying to such effect.
(d) Solvency Opinion. Seller and Seller Partnership shall have
----------------
received an opinion, by a nationally recognized firm selected by Parent and
reasonably acceptable to Seller, in a customary form for transactions of this
type as to the solvency and adequate capitalization of the Seller and Seller
Partnership immediately before and of the Surviving Company and the Surviving
Operating Partnership immediately after giving effect to the Transactions, which
opinion shall be reasonably satisfactory to Seller.
(e) Payment of Expenses. Expenses, to the extent incurred and not
-------------------
exceeding $11,500,000, described in Section 6.2(f) shall have been paid in full
or a reasonably satisfactory arrangement exists to pay in full such amounts at
Closing.
(f) Partnership Merger. The Partnership Merger shall have been
------------------
consummated.
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to
-----------
the Effective Time, (in the case of Seller, upon the direction of the Special
Committee) whether before or after the Seller Stockholder Approvals are
obtained:
(a) by mutual written consent duly authorized by Parent, Buyer and
Seller;
(b) by Parent or Buyer, upon a breach of any (i) representation or
warranty, or (ii) covenant, obligation or agreement on the part of Seller set
forth in this Agreement, in any case such that the conditions set forth in
Section 6.2(a) or Section 6.2(b), as the case may be, are not satisfied or would
be incapable of being satisfied within 30 days after the giving of written
notice to Seller (or, if sooner, the date the Closing would otherwise occur);
(c) by Seller, upon a breach of any (i) representation or warranty, or
(ii) covenant obligation or agreement on the part of Parent or Buyer set forth
in this Agreement, in either case such that the conditions set forth in Section
6.3(a) or Section 6.3(b), as the case may be, are not satisfied or would be
incapable of being satisfied within 30 days after the giving of written notice
to Parent or Buyer (or, if sooner, the date the Closing would otherwise occur);
(d) by Parent, Buyer or Seller, if any judgment, injunction, order,
decree or action by any Governmental Entity of competent authority preventing
the consummation of the Merger shall have become final and nonappealable (an
"Injunction");
- -----------
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<PAGE>
(e) by Parent, Buyer or Seller, if the Merger shall not have been
consummated on or before the Outside Date; provided, however, that a party may
not terminate pursuant to this clause (e) if the terminating party shall have
breached in any material respect its representations or warranties or its
obligations under this Agreement in any manner that shall have proximately
contributed to the occurrence of the failure referred to in this clause;
(f) by either Seller (unless Seller is in breach of its obligations
under Section 5.1(c)) or Parent and Buyer (unless Parent or Buyer is in breach
of its obligations under Section 4.3(e)) if, upon a vote at a duly held Seller
Stockholders Meeting or any adjournment thereof, Seller Stockholder Approvals
shall not have been obtained as contemplated by Section 5.1 or the Seller
Partner Approval shall not have been obtained within 5 business days of receipt
of the Seller Stockholder Approvals;
(g) by Seller, prior to the Seller Stockholders Meeting, if Seller
Board or Special Committee shall have withdrawn or modified its approval or
recommendation of the Merger or this Agreement in connection with, or approved
or recommended, a Superior Acquisition Proposal; provided, however, that no
termination shall be effective pursuant to this Section 7.1(g) under
circumstances in which a Break-Up Fee (as defined in Section 7.2(b)) is payable
pursuant to Section 7.2(a)(vii), unless simultaneous with such termination, such
Break-Up Fee is paid in full by Seller or Seller Partnership in accordance with
Section 7.2(a)(vii);
(h) by Parent or Buyer if (i) prior to the Seller Stockholders
Meeting, Seller Board shall have withdrawn or modified in any manner adverse to
Buyer its approval or recommendation of the Merger or this Agreement, or
approved or recommended any Acquisition Proposal; or (ii) Seller shall have
entered into an agreement with respect to any Acquisition Proposal other than a
confidentiality agreement that was entered into in compliance with Section 4.1;
(i) by Seller, unless a Lender Property Determination (as defined
below) shall have occurred, if (x) the borrowings contemplated by the Financing
Commitment have not been closed on or prior to the date the Closing would
otherwise have occurred (except if the failure of the Closing to occur is due to
the failure of the condition set forth in Section 6.2(i) to be satisfied) or (y)
the Financing Commitment shall have terminated in accordance with its terms or
been terminated for any reason whatsoever;
(j) by Parent or Buyer, if (i) the lender under the Financing
Commitment does not provide the funds specified in the Financing Commitment on
or prior to the date the Closing would otherwise have occurred because (A) the
aggregate amount of the sum of (x) the amount of the estimated expenditures
necessary to remedy defects which are identified in the Property Reports, as
such may have been amended or supplemented, at or with respect to the Seller
Properties and, in the case of any defects at or with respect to the Seller
Properties which are identified in the Property Reports, as such may have been
amended or supplemented, which cannot be remedied, the difference between the
value of such Seller Property with such defect and its value without such defect
plus (y) the sum of all losses with respect to which there is not insurance and
which occur following the date hereof at the Seller Properties exceeds the
Defect Amount or (B) the Bench Mark Cash Flow Amount (as defined in the
Financing Commitment) is more than 1.5% less than the Bench Mark Cash Flow
Amount at May 31, 1999 (a circumstance described in either clause (A) or (B), a
"Lender Property Determination"). As used in the prior sentence, "Defect
----------------------------- ------
Amount" means $25,000,000;
- ------
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<PAGE>
(k) by Parent or Buyer if an Acquisition Proposal shall have been
publicly announced and (i) Seller shall not have rejected such proposal within
10 business days after the date of the receipt thereof by Seller or after the
date of its existence first becomes publicly announced, if sooner, or (ii)
Seller shall have failed to confirm its recommendation described in Section 2.24
within 10 business days after being requested by Buyer to do so;
(l) by Parent or Buyer if the Franchise Fees exceed $25,000,000 and
Seller does not, within five business days of a request by Parent, notify Parent
in writing that Seller has exercised Seller's option described in the last
sentence of Section 5.3(d); and
(m) by Parent or Buyer in the event the condition set forth in Section
6.1(a)(ii) is not satisfied by the first business day following receipt of the
Seller Stockholder Approvals.
7.2 Certain Fees and Expenses.
-------------------------
(a) If this Agreement shall be terminated:
(i) pursuant to Section 7.1(b)(i), then Seller and Seller
Partnership will pay Parent an aggregate amount equal to the Break-Up Fee
plus the Break-Up Expenses (provided that, in the case of a termination by
Parent or Buyer pursuant to Section 7.1(b)(i) on the basis of a breach of
(A) the representation in Section 2.9(b) that was not willful or (B) any
representation which Alter had actual knowledge (without any duty of
investigation or inquiry) as of the date hereof was not true and correct,
then Seller and Seller Partnership will pay Parent an aggregate amount
equal to the Break-Up Expenses plus $7,500,000;
(ii) pursuant to Section 7.1(b)(ii), then Seller and Seller
Partnership will pay Parent an aggregate amount equal to the Break-Up Fee
plus the Break-Up Expenses;
(iii) pursuant to Section 7.1(c)(i), then Parent and Buyer will
pay Seller an aggregate amount equal to the Break-Up Fee plus the Break-Up
Expenses;
(iv) pursuant to Section 7.1(c)(ii), then Parent and Buyer will
pay Seller an aggregate amount equal to the Break-Up Fee plus Break-Up
Expenses;
(v) pursuant to Section 7.1(f) and at the time of the Seller
Stockholders Meeting, (A) Parent and Buyer are not in material breach of
this Agreement, and (B) the Financing Commitment and Contribution Agreement
are then in full force and effect, then Seller and Seller Partnership will
pay Parent an aggregate amount equal to the Break-Up Expenses;
(vi) pursuant to Section 7.1(f) and (A) at or prior to the time
of the termination of this Agreement, an Acquisition Proposal has been
received by Seller or publicly announced, (B) Parent and Buyer are not then
in material breach of this Agreement, (C) the Financing Commitment and
Contribution Agreement are then in full force and effect, and (D) either
prior to the termination of this Agreement or within 12 months thereafter
an Acquisition Proposal is consummated or Seller, Seller Partnership or any
other Seller Subsidiary enters into any written agreement, other than a
confidentiality agreement (which confidentiality agreement shall have been
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<PAGE>
entered into in compliance with Section 4.1 if entered into prior to the
termination of this Agreement), related to any Acquisition Proposal which
is subsequently consummated, in each case with any Person (or any Affiliate
thereof) who shall have made an Acquisition Proposal prior to the
termination of this Agreement, then Seller and Seller Partnership will pay
Parent upon consummation of such Acquisition Proposal an aggregate amount
equal to the Break-Up Fee plus Break-Up Expenses (to the extent not already
paid);
(vii) pursuant to Section 7.1(g), 7.1(h) or 7.1(k) and at the
time of such termination (A) Parent and Buyer are not in material breach of
this Agreement and (B) the Financing Commitment and Contribution Agreement
are in full force and effect, then Seller and Seller Partnership will pay
Parent an aggregate amount equal to the Break-Up Fee plus the Break-Up
Expenses;
(viii) pursuant to Section 7.1(i)(x) then Parent will pay Seller
an aggregate amount equal to the Break-Up Fee plus the Break-Up Expenses;
provided, however, that Parent shall not be obligated to pay Seller any
amount if the lender terminates the Financing Commitment because of a
Lender Property Determination;
(ix) pursuant to Section 7.1(e) by Seller and Seller had not
mailed the Proxy Statement to its stockholders as permitted by Section 5.1
due to the failure of the lender under the Financing Commitment to deliver
the certification to Seller contemplated by such Section when Seller was
otherwise prepared to mail the Proxy Statement, then the terminating party
will pay the non-terminating party an aggregate amount equal to the Break-
Up Expenses; and
(x) pursuant to Section 7.1(m) by Parent or Buyer then Seller
will pay Parent an aggregate amount equal to the Break-Up Fee plus the
Break-Up Expenses.
Notwithstanding anything in this Agreement to the contrary, the right of a
party to receive payment of the Break-Up Fee, Break-Up Expenses or other amounts
in accordance with this Section 7.2 shall be the exclusive remedy of such party
for the loss suffered by such party as a result of the failure of the Merger and
the Partnership Merger to be consummated, any breach of this Agreement or
otherwise, and no party shall have any other liability to any other party after
the payment of the Break-Up Fee, Break-Up Expenses or other amounts (as
applicable) as a result of the failure of the Merger and the Partnership Merger
to be consummated, any breach of this Agreement or otherwise. The Break-Up Fee,
Break-Up Expenses or other amounts payable by Seller and Seller Partnership in
accordance with this Section 7.2 shall be paid by Seller and Seller Partnership
to Parent, in immediately available funds within 15 days after the date the
event giving rise to the obligation to make such payment occurred unless a
different time is expressly provided. Except as provided in Section 7.2(b), the
Break-Up Fee, the Break-Up Expenses or other amounts payable by Parent and Buyer
to Seller in accordance with this Section 7.2 shall be paid by Parent or Buyer
to Seller, in immediately available funds within 15 days after the day the event
giving rise to the obligation to make such payment occurred except as otherwise
specifically provided in Section 7.2.
(b) As used in this Agreement, the "Break-Up Fee" payable to Parent
------------
shall be an amount equal to $17,500,000. The "Break-Up Fee" payable to Seller
------------
shall be an amount equal to the lesser of: (i) $17,500,000, (the "Base
----
Amount"); and (ii) the maximum amount that can be paid to Seller without causing
- ------
it to fail to meet the requirements of Sections 856(c)(2) and (3) of the Code
(the "REIT Income
-----------
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<PAGE>
Requirements") determined as if the payment of such amount did not constitute
- ------------
income described in Sections 856(c)(2) and 856(c)(3) of the Code ("Qualifying
----------
Income"), as determined by independent accountants to Seller. Notwithstanding
- ------
the foregoing, in the event Seller receives a letter from outside counsel (the
"Break-Up Fee Tax Opinion") or a ruling from the Internal Revenue Service
------------------------
("IRS") to the effect that Seller's receipt of the Base Amount would either
---
constitute Qualifying Income or would otherwise not cause Seller to fail to meet
the REIT Income Requirements, the Break-Up Fee shall be an amount equal to the
Base Amount. The obligation of Parent and Buyer to pay any unpaid portion of the
Break-Up Fee not payable by reason of the foregoing provisions shall terminate
five years from the date of this Agreement. In the event that Seller is not able
to receive the full Base Amount, Parent and Buyer shall place the unpaid amount
in escrow by wire transfer within three days of termination (except as otherwise
provided in Section 7.1(c)), and the Escrow Agent shall not release any portion
thereof to Seller, and such portion shall not be payable, except in accordance
with, and unless and until the other party receives, either one or a combination
of the following: (i) a letter from Seller's independent accountants indicating
the maximum amount that can be paid at that time to Seller without causing
Seller to fail to meet the REIT Income Requirements or (ii) a Break-Up Fee Tax
Opinion, in either of which events the escrow agent or the other party shall pay
to Seller the lesser of the unpaid Base Amount or the maximum amount stated in
the letter referred to in (i) above. Parent and Buyer agree to amend this
Section 7.2 at the reasonable request of Seller solely in order to (x) maximize
the portion of the Base Amount that may be paid to Seller hereunder without
causing Seller to fail to meet the REIT Income Requirements or (y) improve
Seller's chances of securing a favorable ruling described in this Section
7.2(b), provided that no such amendment may result in any additional cost or
expense to the other party. Amounts remaining in escrow after the obligation of
a party to pay the Break-Up Fee is satisfied or otherwise terminates shall be
released to the party making such escrow deposit. The amounts described in
Sections 7.2(a)(iii) and (iv) shall be subject to the conditional limitations of
clause (ii) of this Section 7.2(b) as if it were a Break-Up Fee payable to
Seller.
(c) As used in this Agreement, the "Break-Up Expenses" payable to
-----------------
Seller or Parent, as the case may be, shall be an amount, not to exceed
$7,500,000, equal to the documented out-of-pocket expenses of such party (and,
in the case of Parent, including Buyer's and Parent's respective stockholders
and members) incurred in connection with this Agreement and the transactions
contemplated hereby and any litigation associated therewith (including, without
limitation, all fees and expenses payable to financing sources or hedging
counterparties, environmental and structural consultants, attorneys',
accountants', and investment bankers' fees and expenses); provided that the
Break-Up Expenses payable to Seller shall not exceed the maximum amount that can
be paid to Seller without causing it to fail to meet the REIT Income
Requirements determined as if the payment of such amount did not constitute
Qualifying Income, as determined by independent accountants to Seller.
Notwithstanding the foregoing, in the event Seller receives a letter from
outside counsel (the "Break-Up Expenses Tax Opinion") or a ruling from the IRS
-----------------------------
to the effect that Seller's receipt of the Break-Up Expenses would either
constitute Qualifying Income or would otherwise not cause Seller to fail to meet
the REIT Income Requirements, the Break-Up Expenses shall be determined without
regard to foregoing provisions. The obligation of Buyer, as applicable, to pay
any unpaid portion of the Break-Up Expenses not payable by reason of foregoing
proviso shall terminate five years from the date of this Agreement. In the event
that Seller is not able to receive the full Break-Up Expenses determined without
regard to foregoing proviso, Parent and Buyer shall place the unpaid amount in
escrow, and the escrow agent shall not release any portion thereof to Seller,
and such portion shall not be payable, except in accordance with, and unless and
until the Buyer receives any one or a combination of the following: (i) a letter
from Seller's independent accountants indicating the maximum amount that can be
paid at that time to Seller without causing Seller to fail to meet the REIT
Income Requirements or (ii) a Break-Up Expense
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<PAGE>
Tax Opinion, in either of which events the escrow agent or the Buyer shall pay
to Seller the lesser of the unpaid Break-Up Expenses or the maximum amount
stated in the letter referred to in (i) above. Amounts remaining in escrow after
the obligation of a party to pay the Break-Up Expenses is satisfied or otherwise
terminates shall be released to the party making such escrow deposit. Such
Break-Up Expenses shall be reflected on invoices or other means verifying the
incurrence of such Break-Up Expenses. Buyer agrees to amend this Section 7.2 at
the reasonable request of Seller solely in order to (x) maximize the portion of
Break-Up Expenses that may be paid to Seller hereunder without causing Seller to
fail to meet the REIT Income Requirements or (y) improve Seller's chances of
securing a favorable ruling described in this Section 7.2(c), provided that no
such amendment may result in any additional cost or expense to the other party.
(d) If this Agreement shall be terminated by Seller and, as provided
in Section 7.2(a), Parent and Buyer are required to pay to Seller a Break-Up Fee
or Break-Up Expenses, then Seller shall be entitled to enforce its rights under
the Escrow Agreement to receive the Cash Collateral or to draw on the Letter of
Credit in accordance with the terms thereof. Except as described in the
preceding sentence, in no other circumstances shall Seller have any right to
receive any part of the Cash Collateral or to draw on the Letter of Credit. If
this Agreement is terminated in any circumstance other than as described in the
first sentence of this Section 7.2(d), Seller shall direct the Escrow Agent to
return the Cash Collateral of Letter of Credit, as applicable, to Parent within
one business day of any such termination. Notwithstanding anything in this
Agreement to the contrary, the receipt by Seller of amounts under the Escrow
Agreement shall be the exclusive remedy of Seller, and its stockholders, the
Seller Partnership and the OP Unit Holders for any and all losses suffered as a
result of the failure of the Merger and the Partnership Merger to be consummated
and upon payment of such amounts neither Parent nor Buyer shall have any other
liability to Seller hereunder (including under Section 7.2(a)). Any amounts
which Seller has the right to receive pursuant to this Section 7.2(d) shall be
applied as set forth in the Escrow Agreement.
(e) In the event either party is required to file suit to seek all or
a portion of the Break-Up Fee and/or Break-Up Expenses, and it ultimately
succeeds, it shall be entitled to all expenses, including attorneys' fees and
expenses, which it has incurred in enforcing its rights hereunder. Except as
specifically provided in this Section 7.2, each party shall bear its own
expenses in connection with this Agreement and the Transactions.
(f) Notwithstanding anything else to the contrary herein, if Seller
or Seller Partnership shall be required to make a payment to Parent or Buyer
pursuant to (i) Section 7.2(a), then the amount of such payment shall be
increased by $12,500,000 if, on or prior to the termination of this Agreement,
Seller has committed a willful violation of the provisions of Section 4.1 and
(ii) Section 7.2(a)(ix), then the maximum amount of Break-Up Expenses pursuant
to Section 7.2(c) shall be limited to $3,000,000.
(g) If Seller and Seller Partnership shall be required to make a
payment to Parent pursuant to Section 7.2(a)(i) and there is a dispute, as the
case may be, whether a breach of Section 2.9(b) was willful or Alter had actual
knowledge then Seller and Seller Partnership shall, no later than the time that
they were required to make such payment to Parent, deliver to the Escrow Agent
$10,000,000 or a letter of credit for such amount to be held and disbursed
pursuant to the terms of an escrow agreement substantially in the form of the
Escrow Agreement, except that such agreement shall secure the obligations of
Seller and Seller Partnership described in Section 7.2(g) rather than the
obligations of Parent secured under the Escrow Agreement, and if such dispute is
ultimately resolved in favor of Parent, in addition to the $10,000,000 held
under such escrow, Parent shall be entitled to receive interest from Seller and
Seller Partnership on such
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<PAGE>
$10,000,000 at a rate of 5.5% per annum from the date of termination of the
Merger Agreement until Parent receives such $10,000,000.
7.3 Effect of Termination. In the event of termination of this Agreement
---------------------
by Seller, Buyer or Parent as provided in Section 7.1, this Agreement shall
forthwith become void and have no effect, without any liability or obligation on
the part of Parent, Buyer, or Seller, other than in accordance with or as
provided in Section 7.2, this Section 7.3 and Article 8.
7.4 Amendment. This Agreement may be amended by Parent, Buyer and Seller
---------
in writing by action of their respective Boards of Directors at any time before
or after any Seller Stockholder Approvals are obtained and prior to the
Effective Time; provided, however, that, after the Seller Stockholder Approvals
are obtained, no such amendment, modification or supplement shall be made which
by law requires the further approval of stockholders without obtaining such
further approval. The parties agree to amend this Agreement in the manner
provided in the immediately preceding sentence to the extent required to
continue the status of Seller as a REIT.
7.5 Extension; Waiver. At any time prior to the Effective Time, the
-----------------
parties may (a) extend the time for the performance of any of the obligations or
other acts of any other party, (b) waive any inaccuracies in the representations
and warranties of any other party contained in this Agreement or in any document
delivered pursuant to this Agreement or (c) subject to the proviso of Section
7.4, waive compliance with any of the agreements or conditions of any other
party contained in this Agreement. Any agreement on the part of a party to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. 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 those rights.
ARTICLE 8
GENERAL PROVISIONS
8.1 Nonsurvival of Representations and Warranties. None of the
---------------------------------------------
representations and warranties in this Agreement, the Partnership Merger
Agreement or in any instrument delivered pursuant to this Agreement or the
Partnership Merger Agreement confirming the representations and warranties in
this Agreement shall survive the Effective Time. This Section 8.1 shall not
limit any covenant or agreement of the parties which by its terms contemplates
performance after the Effective Time.
8.2 Notices. All notices, requests, claims, demands and other
-------
communications under this Agreement shall be in writing and shall be delivered
personally, sent by overnight courier (providing proof of delivery) to the
parties or sent by telecopy (providing confirmation of transmission) at the
following addresses or telecopy numbers (or at such other address or telecopy
number for a party as shall be specified by like notice):
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<PAGE>
(a) if to Parent or Buyer, to:
SHP Acquisition, L.L.C.
c/o Sunstone Hotel Properties, Inc.
903 Calle Amanecer
San Clemente, CA 92673
Attention: Robert A. Alter
Fax: (949) 369-4210
and to:
SHP Acquisition, L.L.C.
c/o Westbrook Real Estate Partners
599 Lexington Avenue
Suite 3800
New York, NY 10022
Attention: Jonathan Paul
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017-3954
Attention: Richard Capelouto, Esq.
Brian M. Stadler, Esq.
Fax: (212) 455-2502
and
Battle Fowler LLP
75 East 55th Street
New York, NY 10022
Attention: Steve Lichtenfeld, Esq.
Fax: (212) 856-7823
(b) if to Seller, to:
Sunstone Hotel Investors, Inc.
903 Calle Amanecer
San Clemente, CA 92673
Attention: Chief Operating Officer
Fax: (949) 369-4230
-55-
<PAGE>
with a copy to:
Altheimer & Gray
10 South Wacker Drive
Chicago, IL 60606
Attention: Phillip Gordon, Esq.
Fax: (312) 715-4800
All notices shall be deemed given only when actually received.
8.3 Interpretation. When a reference is made in this Agreement to a
--------------
Section, such reference shall be to a Section of this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
8.4 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
8.5 Entire Agreement; No Third-Party Beneficiaries. This Agreement, the
----------------------------------------------
Seller Disclosure Letter, the Buyer Disclosure Letter, the Partnership Merger
Agreement and the other agreements entered into in connection with the Merger
(a) constitute the entire agreement and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter of this Agreement and (b) except as provided in Section 5.7 (the
"Third Party Provisions") are not intended to confer upon any Person other than
----------------------
the parties hereto any rights or remedies. The Third Party Provisions may be
enforced by the beneficiaries thereof or on behalf of the beneficiaries thereof
by the directors of Seller who had been members of the Seller Board prior to the
Effective Time.
8.6 Governing Law. EXCEPT TO THE EXTENT THAT THE MGCL SHALL GOVERN THE
-------------
MERGER AND THE CHARTER AMENDMENTS, THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, REGARDLESS OF
THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICT OF
LAWS THEREOF.
8.7 Assignment. Neither this Agreement nor any of the rights, interests
----------
or obligations under this Agreement shall be assigned or delegated, in whole or
in part, by operation of law or otherwise by any of the parties without the
prior written consent of the other parties. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of, and be enforceable
by, the parties and their respective successors and assigns.
8.8 Enforcement. The parties agree that irreparable harm would occur in
-----------
the event that any of the provisions of this Agreement were not performed by any
party in accordance with their specific terms or were otherwise breached. It is
accordingly agreed that any party shall be entitled to an injunction or
injunctions to prevent or redress breaches of this Agreement by any other party
and to enforce specifically the terms and provisions of this Agreement in any
federal court located in Delaware or in Chancery Court
-56-
<PAGE>
in Delaware, this being in addition to any other remedy to which they are
entitled at law or in equity. Notwithstanding the foregoing, the parties agree
that no party shall be entitled to a judgment specifically enforcing the
obligations of any other party to consummate the Merger or the Partnership
Merger. The parties agree that the provisions of Section 7.2 constitute the
exclusive remedy of any party for the loss suffered by such party as a result of
the failure of the Merger and the Partnership Merger to be consummated. In
addition, each of the parties hereto (a) consents to submit itself (without
making such submission exclusive) to the personal jurisdiction of any federal
court located in Delaware or Chancery Court located in Delaware in the event any
dispute arises out of this Agreement or any of the transactions contemplated by
this Agreement and (b) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such court.
8.9 Severability. Any term or provision of this Agreement which is
------------
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
* * * * * *
-57-
<PAGE>
IN WITNESS WHEREOF, Parent, Buyer and Seller have caused this Agreement to
be signed by their respective officers thereunto duly authorized all as of the
date first written above.
SHP ACQUISITION, L.L.C.,
a Delaware limited liability company
By: _____________________________________
Name: _____________________________________
Title: _____________________________________
SHP INVESTORS SUB, INC.,
a Maryland corporation
By: _____________________________________
Name: _____________________________________
Title: _____________________________________
SUNSTONE HOTEL INVESTORS, INC.,
a Maryland corporation
By: _____________________________________
Name: _____________________________________
Title: _____________________________________
SUNSTONE HOTEL INVESTORS, L.P., a Delaware limited partnership, joins in
this Agreement solely with respect to Section 7.2
By: Sunstone Hotel Investors, L.P.
By: _____________________________________
Name _____________________________________
Title: _____________________________________
-58-
<PAGE>
APPENDIX B
PERSONAL AND CONFIDENTIAL
- -------------------------
July 12, 1999
Special Committee of the Board of Directors
Sunstone Hotel Investors, Inc.
903 Calle Amanecer
San Clemente, CA 92673-6212
Gentlemen:
You have requested our opinion as to the fairness from a financial point of view
to the holders (other than Parent (as defined below), its subsidiaries and
affiliates and the Related Parties (as defined below)) of the outstanding shares
of Common Stock, par value $.01 per share (the "Shares"), of Sunstone Hotel
Investors, Inc. ("Sunstone") of the $10.35 per Share in cash, subject to
adjustment as set forth in the Agreement (as defined below), to be received by
such holders pursuant to the Agreement and Plan of Merger (the "Agreement"),
dated as of July 12, 1999, by and among SHP Acquisition, L.L.C. ("Parent"), a
Delaware limited liability company formed by Westbrook Real Estate Fund III,
L.P. ("Westbrook III") and certain members of Sunstone's management and other
entities as set forth in Recital E of the Agreement (collectively, the "Related
Parties"), SHP Investor Sub, Inc., a Maryland corporation and an indirect
subsidiary of Parent, and Sunstone.
Goldman, Sachs & Co., as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. We are familiar with
Sunstone having provided certain investment banking services to Sunstone from
time to time, including having acted as a co-managing underwriter of a public
offering of 4.5 million Shares in February 1998, and having acted as financial
advisor to the Special Committee of the Board of Directors of Sunstone (the
"Special Committee") in connection with, and having participated in certain of
the negotiations leading to, the Agreement. We have also provided certain
investment banking services to Westbrook III and its affiliates from time to
time and may provide investment banking services to Westbrook III and its
affiliates in the future. Goldman, Sachs & Co. provides a full range of
financial advisory, investment banking and securities services and, in the
course of its normal trading activities, may from time to time effect
transactions and hold securities, including derivative securities, of Sunstone
for its own account and for the accounts of customers. As of the date hereof,
Goldman, Sachs & Co. has accumulated a long position of 1,000,000 Shares.
<PAGE>
Sunstone Hotel Investors, Inc.
July 12, 1999
Page Two
In connection with this opinion, we have reviewed, among other things, the
Agreement; the Lessee/Manager Agreement, dated as of July 12, 1999, among
Sunstone, Sunstone Hotel Investors, L.P., Robert A. Alter, Charles L. Biederman,
Sunstone Hotel Properties, Inc. (the "Lessee") and Sunstone Hotel Management,
Inc. (the "Management Company"); Annual Reports to Stockholders and Annual
Reports on Form 10-K of Sunstone for the three years ended December 31, 1998;
certain interim reports to stockholders and Quarterly Reports on Form 10-Q of
Sunstone; certain other communications from Sunstone to its stockholders; and
certain internal financial analyses and forecasts for Sunstone, including: (i)
projections, dated November 1998, prepared by outside consultants, Hospitality
Valuation Services; (ii) projections, dated April 29, 1999, prepared
collectively by the Lessee and the Management Company and reviewed by Sunstone
management; (iii) projections, dated June 11, 1999, prepared collectively by the
Lessee and the Management Company and reviewed by Sunstone management; and (iv)
projections, dated June 28, 1999, prepared by independent consultants hired by
Sunstone management at the direction of the Special Committee (the "June 28,
1999 Forecasts"). We also have held discussions with members of the Special
Committee and the management of Sunstone and of the Lessee regarding the past
and current business operations, financial condition and future prospects of
Sunstone. In addition, we have reviewed the reported price and trading activity
for the Shares, compared certain financial and stock market information for
Sunstone with similar information for certain other companies the securities of
which are publicly traded, reviewed the financial terms of certain recent
business combinations in the hospitality and real estate industries specifically
and other industries generally and performed such other studies and analyses as
we considered appropriate.
We have relied on the accuracy and completeness of all of the financial and
other information reviewed by us and have assumed such accuracy and completeness
for purposes of rendering this opinion. In that regard, for purposes of this
opinion, you have instructed us to rely on the June 28, 1999 Forecasts, and
accordingly we have assumed that the June 28, 1999 Forecasts have been
reasonably prepared and reflect the best currently available estimates and
judgment of Sunstone's management as to the expected future financial
performance of Sunstone. In addition, we have not made an independent evaluation
or appraisal of the assets and liabilities of Sunstone or any of its
subsidiaries. Our advisory services and the opinion expressed herein are
provided for the information and assistance of the Special Committee of the
Board of Directors of Sunstone in connection with its consideration of the
transaction contemplated by the Agreement and such opinion does not constitute a
recommendation as to how any holder of Shares should vote with respect to such
transaction.
<PAGE>
Sunstone Hotel Investors, Inc.
July 12, 1999
Page Three
Based upon and subject to the foregoing and based upon such other matters as we
consider relevant, it is our opinion that as of the date hereof the $10.35 per
Share in cash, subject to adjustment as set forth in the Agreement, to be
received by the holders (other than Parent, its subsidiaries and affiliates and
the Related Parties) of Shares pursuant to the Agreement is fair from a
financial point of view to such holders.
Very truly yours,
________________________
(GOLDMAN, SACHS & CO.)
<PAGE>
APPENDIX C
APPENDIX C
RESOLUTIONS ADOPTED BY THE
BOARD OF DIRECTORS
OF
SUNSTONE HOTEL INVESTORS, INC.
ON JULY 12, 1999
WHEREAS, on or about April 5, 1999, the Corporation received a
proposal (the "Proposal") from SHP Acquisition, LLC, an entity formed by Robert
A. Alter, certain management of Sunstone Hotel Properties, Inc. and Westbrook
Fund III Acquisitions, LLC ("Offerors") to acquire the outstanding shares of the
Corporation and partnership units of Sunstone Hotel Investors, L.P. (the
"Partnership") of which the Corporation is the sole general partner; and
WHEREAS, by resolutions adopted by the Board of Directors on April 5,
1999, the Board of Directors appointed a special committee of the Board (the
"Special Committee") comprised of Independent Directors and authorized and
empowered the Special Committee to, among other things, review the Proposal,
consider alternatives thereto and negotiate agreements and other documents with
respect to the Proposal or any alternative thereto; and
WHEREAS, the Special Committee has caused to be negotiated that
certain Agreement and Plan of Merger dated as of July 12, 1999 by and among SHP
Acquisition, LLC ("Parent"), SHP Investors Sub, Inc. ("Buyer") and the
Corporation, a copy of which has been presented to each Director for review (the
"Merger Agreement") and that certain Agreement and Plan of Merger dated as of
July 12, 1999 by and among SHP OP LLC ("Buyer Operating Partnership"), Parent
and the Partnership, a copy of which has also been presented to each Director
for review (the "Partnership Merger Agreement"); and
WHEREAS, the Special Committee has unanimously approved the Merger
Agreement and the proposed actions and transactions contemplated thereby
including, without limitation, the Merger and the Charter Amendment (both as
defined in the Merger Agreement), and the Partnership Merger Agreement and the
proposed actions and transactions contemplated thereby including, without
limitation, the Partnership Merger and the Partnership Amendment (both as
defined in the Partnership Merger Agreement), and the Special Committee has
recommended that the Board of Directors declare the Merger Agreement and the
proposed actions and transactions contemplated thereby including, without
limitation the Merger and the Charter Amendment, and the Partnership Merger
Agreement and the proposed actions and transactions contemplated thereby
including without limitation the Partnership Merger, to be advisable and direct
that the Merger Agreement and the proposed actions and transactions contemplated
thereby, and the Partnership Merger Agreement and the proposed actions and
transactions
<PAGE>
contemplated thereby, be submitted for consideration by the stockholders of the
Corporation at a special meeting thereof; and
WHEREAS, the material terms, conditions and provisions of the Merger
Agreement and the proposed actions and transactions contemplated thereby
including, without limitation, the Merger pursuant to which Buyer will be merged
with and into the Corporation, each issued and outstanding share of common stock
of the Corporation, par value $.01 per share ("Common Stock") will be converted
into the right to receive cash in the approximate amount of $10.35 per share,
subject to the adjustments provided in the Merger Agreement, and each issued and
outstanding share of preferred stock of the Corporation, par value $.01 per
share ("Preferred Stock"), will be converted into the right to receive cash in
the amount of the Liquidation Preference as provided in the Articles
Supplementary creating the authorized class of Preferred Stock, and each issued
and outstanding share of stock of Buyer will be converted into one share of
Common Stock of the Corporation, as the surviving corporation in the Merger,
have been reviewed and summarized for the Directors by officers of the
Corporation and counsel to the Corporation who were present at the meeting; and
WHEREAS, the material terms, conditions and provisions of the
Partnership Merger Agreement and the proposed actions and transactions
contemplated thereby including, without limitation, the Partnership Merger
pursuant to which Buyer Operating Partnership will be merged with and into the
Partnership have been reviewed and summarized for the Directors by officers of
the Corporation and counsel to the Corporation who were present at the meeting;
and
WHEREAS, the Board of Directors has, by resolutions previously adopted
on September 23, 1994 and August 1, 1997 respectively, exempted from Maryland
Business Combination Statute (Subtitle 6 of Title 3 of the Maryland General
Corporation Law (the "MGCL"), among other things, any business combinations
between the Corporation and Robert A. Alter and/or any affiliate of Mr. Alter,
and any business combination involving the Corporation or any of its
subsidiaries to the extent which such business combination would not be subject
to Subtitle 6 of Title 3 of the MGCL, if the Westbrook Fund I, L.P. and
Westbrook Co. Investment Partnership I, L.P. (and any other beneficial owner of
shares of stock of the Corporation beneficially owned by either such Westbrook
entity) were not "interested stockholders" as defined in Subtitle 6 of Title 3
of the MGCL.
WHEREAS, the Special Committee has been informed by Goldman Sachs &
Co. that it is of the opinion that the consideration proposed to be received by
the holders of issued and outstanding shares of common stock of the Corporation
pursuant to the proposed Merger is fair to such holders from a financial point
of view; and
WHEREAS, after due consideration and discussion of the Merger
Agreement and the proposed actions and transactions contemplated thereby and
other factors deemed material by the Board of Directors, the Board of Directors
has determined it to be fair and reasonable to and in the best interests of the
Corporation and its stockholders that the proposed Merger be consummated and
that the Merger Agreement be executed, delivered and performed by the
Corporation; and
2
<PAGE>
WHEREAS, after due consideration and discussion of the Partnership
Merger Agreement and the proposed actions and transactions contemplated thereby
and other factors deemed material by the Board of Directors in its capacity as
the Board of Directors of the general partner of the Partnership, the Board of
Directors has determined it to be fair and reasonable to and in the best
interests of the Partnership and the unit holders of partnership units therein
that the proposed Partnership Merger be consummated and that the Partnership
Merger Agreement be executed, delivered and performed by the Corporation in its
capacity as general partner or the Partnership; and
WHEREAS, the Board of Directors deems it advisable and in the best
interest of the Corporation for the Merger Agreement and the proposed actions
and transactions contemplated thereby, including, without limitation, the Merger
and the Charter Amendment, and the Partnership Merger, to be submitted for
consideration by the stockholders of the Corporation at a special meeting
thereof.
NOW, THEREFORE, IT IS HEREBY RESOLVED, that the entry by the
Corporation into the Merger Agreement, and the performance by the Corporation of
its obligations under the Merger Agreement, and the entry by the Corporation, in
its capacity as general partner of the Partnership, on behalf of the
Partnership, into the Partnership Merger Agreement and the performance by the
Corporation, in its capacity as general partner of the Partnership, of the
obligations of the Partnership under the Partnership Merger Agreement be, and
hereby is, authorized and approved, the Board of Directors having determined, on
behalf of the Corporation in its individual capacity and in its capacity as
general partner or the Partnership, that the proposed transactions contemplated
by each of the aforesaid agreements are fair and reasonable to and in the best
interests of the Corporation and its stockholders as well as the Partnership and
its unit holders; and it is
FURTHER RESOLVED, that the Board of Directors declares the Merger
Agreement and the proposed actions and transactions contemplated thereby
including, but not limited to, the Merger and the Charter Amendment, and the
Partnership Merger Agreement and the proposed actions and transactions
contemplated thereby including, but not limited to, the Partnership Merger, to
be advisable substantially upon the terms and conditions set forth in the Merger
Agreement and the Partnership Merger Agreement, respectively, which Merger
Agreement including, without limitation, Exhibit D thereto which sets forth the
proposed Charter Amendment (a copy of which is attached hereto as Exhibit A),
and Partnership Merger Agreement, are incorporated herein by reference and
constitute a part hereof, and authorizes and approves the Merger Agreement and
the proposed actions and transactions contemplated thereby, and the Partnership
Merger Agreement and the proposed actions and transactions contemplated thereby,
including, without limitation, the Partnership merger and the Partnership
Amendment; and it is
FURTHER RESOLVED, that the Board of Directors has determined that at
such time as the proposed Merger and the proposed Partnership Merger are
consummated, it will no longer be in the best interest of the Corporation to
continue to qualify as a real estate investment trust ("REIT") and that the
Corporation should terminate its status as a
3
<PAGE>
REIT as of the time of consummation of the proposed Merger and the proposed
Partnership Merger; and it is
FURTHER RESOLVED, that the Board of Directors does hereby advise and
recommend that the Corporation terminate its status as REIT, and amend its
Charter, including the provision of Article V, thereof as set forth on Exhibit A
attached hereto and incorporated herein by reference, in connection with the
proposed Merger.
FURTHER RESOLVED, that the Board of Directors directs that the
proposed Merger, the proposed Charter Amendment, the proposed Partnership Merger
and the other proposed actions and transactions contemplated by the Merger
Agreement, the resolutions of the Board of Directors recommending the Charter
Amendment and the proposed termination by the Corporation of its status as a
REIT (the "Recommending Resolution"), and the proposed termination by the
Corporation of its status as a REIT as of the time of the consummation of the
proposed Merger and the proposed Partnership Merger, be submitted for
consideration and approval by the stockholders of the Corporation entitled to
vote thereon at a special meeting of stockholders to be called for such purpose,
among other purposes (the "Special Meeting"); and it is
FURTHER RESOLVED, that the Special Meeting is hereby called by the
Board of Directors for a date to be set by the officers of the Corporation, or
any of them, which date shall be within one hundred twenty (120) days from the
date hereof, and the Board of Directors hereby establishes the record date for
determining the stockholders entitled to vote at the Special Meeting as the
close of business on the date on which the notice of the Special Meeting is
sent, which date shall be not more than forty-five (45) nor less than twenty
(20) days preceding the date of the Special Meeting; and it is
FURTHER RESOLVED, that the Board of Directors does hereby advise and
recommend that the stockholders of the Corporation approve the Merger Agreement
and the proposed actions and transactions contemplated thereby including,
without limitation, the Merger and the Charter Amendment, the Recommending
Resolution and the proposed termination by the Corporation of its status as a
REIT as of the time of consummation of the proposed Merger; and it is
FURTHER RESOLVED, that the Board of Directors, on behalf of the
Corporation in its capacity as sole general partner or the Partnership,
recommends that the holders of partnership units of the Partnership approve and
adopt the Partnership Merger Agreement and the proposed actions and transactions
contemplated thereby including, without limitation, the Partnership Merger and
the Partnership Amendment; and it is
FURTHER RESOLVED, that the officers of the Corporation be, and each of
them hereby is, authorized and directed to execute and deliver in the name and
on behalf of the Corporation, the Merger Agreement, with such modifications,
additions, or deletions as may be approved by such officer, such approval to be
conclusively evidenced by the execution by such officer of the Merger Agreement
containing such modifications, additions or deletions, and to execute and
deliver in the name and on behalf of the Corporation such other agreements,
certificates, instruments and documents including,
4
<PAGE>
without limitation, the Escrow Agreement, the Lessee/Manager Agreement and the
Voting Agreement referred to in the Merger Agreement, and to take such actions
which such officer may determine to be necessary or desirable, in his or her
discretion, in connection with the entry by the Corporation into the Merger
Agreement and the performance by the Corporation of its obligations thereunder;
and it is
FURTHER RESOLVED, that the officers of the Corporation be, and each of
them hereby is, authorized and directed to execute and deliver, in the name and
on behalf of the Corporation in its capacity as general partner of the
Partnership, the Partnership Merger Agreement, with such modifications,
additions or deletions as may be approved by such officer, such approval to be
conclusively evidenced by the execution by such officer of the Partnership
Merger Agreement containing such modifications, additions or deletions, and to
execute and deliver, in the name and on behalf of the Corporation in its
capacity as general partner of the Partnership, such other agreements,
certificates, instruments and documents, and to take such actions which such
officer may determine to be necessary or desirable, in his or her discretion, in
connection with the entry by the Corporation, in its capacity as general partner
of the Partnership, on behalf of the Partnership, into the Partnership Merger
Agreement and the performance by the Corporation, in its capacity as general
partner of the Partnership, of the obligations of the Partnership thereunder;
and it is
FURTHER RESOLVED, that the officers of the Corporation be, and each
of them hereby is, authorized and directed to cause the Special Meeting to be
held for the purpose, among other things, of having the stockholders of the
Corporation, consider and approve the proposed Merger, the proposed Charter
Amendment, the proposed Partnership Merger, and the other proposed actions and
transactions contemplated by the Merger Agreement, the Recommending Resolution,
and the proposed termination by the Corporation of its status as a REIT as of
the time of consummation of the proposed Merger; and it is
FURTHER RESOLVED, that the officers of the Corporation be, and each of
them hereby is, authorized, in the name and on behalf of the Corporation, to
prepare or cause to be prepared and filed with the Securities and Exchange
Commission a proxy statement and any other filing under applicable securities
laws as required in connection with and in furtherance of the Special Meeting
and to take such other and further action and to enter into such other
agreements, including, without limitation, agreements with one or more proxy
solicitors, as such officer may deem necessary or desirable, in the discretion
of such officer, in connection with the Special Meeting; and it is
FURTHER RESOLVED, that the officers of the Corporation be, and each of
them hereby is, authorized, empowered and directed, for and on behalf of the
Corporation, in its individual capacity and in its capacity as general partner
of the Partnership to submit to the stockholders at the Special Meeting for
their approval, the proposed Merger, the proposed Charter Amendment, the
proposed Partnership Merger and the other proposed actions and transactions
contemplated by the Merger Agreement, the Recommending Resolution and the
proposed termination by the Corporation of its status as a REIT as of the time
of consummation of the proposed Merger, consistent with all applicable
requirements of the MGCL, federal securities laws and any other applicable laws
or regulations; and it is
5
<PAGE>
FURTHER RESOLVED, that the officers of the Corporation be, and each of
them hereby is, authorized and directed to cause a special meeting of the
holders of units of partnership interests in the Partnership to be held and/or
to cause to be prepared and sent to holders of units of partnership interests in
the Partnership a consent solicitation information statement, for the purpose,
among other things, of having such unit holders of the Partnership consider,
approve and adopt the Partnership Merger Agreement and the proposed actions and
transactions contemplated thereby including, without limitation, the Partnership
Merger and the Partnership Amendment; and it is
FURTHER RESOLVED, that in connection with the Merger, the Corporation
be, and hereby is, authorized to issue up to 20,000,000 shares of its Common
Stock to the stockholders of the Buyer upon conversion of the issued and
outstanding shares of stock of Buyer; and it is
FURTHER RESOLVED, that upon approval of the proposed Merger, the
proposed Charter Amendment, the proposed Partnership Merger and the other
proposed transactions contemplated by the Merger Agreement, the Recommending
Resolution and the termination of the Corporation's status as a REIT as of the
time of consummation of the proposed Merger (collectively the "Actions and
Transactions"), by the stockholders of the Corporation entitled to vote thereon
by the requisite vote required by the Charter of the Corporation and applicable
law, and the approval of the proposed actions and transactions contemplated by
the Partnership Merger Agreement including, without limitation the Partnership
Merger, by the unit holders of the Partnership by the requisite vote, the
Actions and Transactions shall be submitted to the Board of Directors for
ratification and approval as a condition to consummation thereof; and it is
FURTHER RESOLVED, that if the Actions and Transactions are not
ratified and approved by the Board of Directors within a reasonable time, not to
exceed twenty (20) days after approval thereof by the stockholders of the
Corporation (unless extended by the Board of Directors), such Actions and
Transactions shall be deemed to be abandoned and shall not be implemented or
consummated; and it is
FURTHER RESOLVED, that if the Actions and Transactions are ratified
and approved by the Board of Directors within a reasonable period of time after
approval thereof by the stockholders of the Corporation, then upon, and only
upon, such ratification and approval by the Board of Directors, (i) the officers
of the Corporation be, and each of them hereby is, authorized to execute and
deliver, in the name and on behalf of the Corporation, in its individual
capacity and its capacity as general partner or the Partnership, such
agreements, certificates, instruments and documents and to take such actions
which such officer may determine to be necessary or desirable, in his or her
discretion, in order to effect the Charter Amendment and to consummate the
proposed Merger, the proposed Partnership Merger and the other proposed actions
and transactions contemplated by the Merger Agreement and the Partnership Merger
Agreement and the termination of the Corporation's status as a REIT; and (ii)
the Chairman, Vice Chairman, President, any Vice President and other proper
officers of the Corporation, be, and each of them hereby is, authorized and
directed to execute, deliver, acknowledge and file with the
6
<PAGE>
State Department of Assessments and Taxation of Maryland ("Department") Articles
of Amendment containing the Charter Amendments and Articles of Merger, in such
form or as may be approved by such officer, said approval to be conclusively
evidenced by the execution by such officer of the Articles of Merger and/or the
Articles of Amendment containing such modifications, additions or deletions; and
it is
FURTHER RESOLVED, that pursuant to Section 3-603(c) of the MGCL, any
business combination (as defined in Section 3-601(e) of the MGCL) between the
Corporation and any present or future stockholder of the Corporation, any
present or future "affiliate" or "associate" (as such terms are defined in
Section 3-601 of the MGCL) of any present or future stockholder, any other
person acting in concert with, or as a group with, any present or future
stockholder (within the meaning of Section 13(d)(3) of the Securities Exchange
Act of 1934 (as amended), and/or any other person or entity be, and the same
hereby is, exempted from the provisions Section 3-602 of the MGCL; provided,
however, that this resolution may be altered or repealed, in whole or in part,
at any time by the Board of Directors of the Corporation; and it is
FURTHER RESOLVED, that if the Merger is not consummated for any reason
including, but not limited to, abandonment of the Merger prior to its effective
date, the proposed termination by the Corporation of its status as a REIT as of
the time of consummation of the proposed Merger shall also be deemed abandoned
and the Corporation shall continue to qualify as a REIT; and it is
FURTHER RESOLVED, that the Board of Directors authorizes and approves
the entry by the Corporation into that certain Agreement for Transaction Success
Bonus with R. Terrence Crowley, the Chief Operating Officer of the Corporation,
substantially in the form presented to each Director for review, and the
performance by the Corporation of its obligations thereunder including, without
limitation, the payment to Mr. Crowley of the Transaction Success Bonus referred
to therein, and the officers of the Corporation be, and each of them hereby is,
authorized and directed, in the name and on behalf of the Corporation, to
execute and deliver the Agreement for Transaction Success Bonus, with such
modifications, additions or deletions as may be approved by such officer, and to
execute and deliver such other agreements, certificates, instruments and
documents and to take such actions as such officer may determine to be necessary
or desirable, in his or her discretion, in connection with the entry by the
Corporation into the Agreement for Transaction Success Bonus and the performance
by the Corporation of its obligations thereunder; and it is
FURTHER RESOLVED, that the officers of the Corporation be, and each of
them hereby is, authorized, empowered and directed, in the name and on behalf of
the Corporation, in its individual capacity, in its capacity as general partner
of the Partnership and/or in its capacity as the stockholder, partner or member
of any corporation, partnership or limited liability company, to prepare,
negotiate, execute, deliver, acknowledge and/or file any agreements,
certificates, instruments, notices, requests, consents and documents, and to
take, or cause to be taken, any action or actions which such officer may
determine to be necessary, advisable or desirable, in his or her discretion, in
connection with the entry by the Corporation into the Merger Agreement, the
7
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performance by the Corporation of its obligations under the Merger Agreement and
the consummation of the actions and transactions contemplated by the Merger
Agreement including, without limitation, the Merger and the Charter Amendment,
and in connection with the entry by the Corporation, in its capacity as general
partner or the Partnership, on behalf of the Partnership, into the Partnership
Merger Agreement, the performance by the Corporation, in its capacity as general
partner of the Partnership, of the obligations of the Partnership under the
Partnership Merger Agreement and the consummation of the actions and
transactions contemplated by the Partnership Merger Agreement, or to otherwise
effectuate the full intent and purposes of any or all of the foregoing
resolutions, subject however to approval by the stockholders of the Corporation
and ratification and approval by the Board of Directors as provided in the
foregoing resolutions; and it is
FURTHER RESOLVED, that the Special Committee shall remain as presently
constituted and, in addition to the powers previously delegated to the Special
Committee, the Board of Directors hereby delegates to the Special Committee all
powers of the Board of Directors which, under the Charter and Bylaws of the
Corporation and applicable law, can be delegated to a committee, and the Special
Committee is authorized and empowered, to: (a) take, or authorize and approve,
such action, and authorize the officers of the Corporation to take such actions,
subsequent to execution and delivery of the Merger Agreement and the agreements,
certificates, instruments and documents to be executed and delivered
contemporaneous therewith and the Partnership Merger Agreement but prior to
consummation of the Actions and Transactions, as the Special Committee may deem
necessary or desirable in connection with the Merger Agreement, the other
agreements, certificates, instruments and documents executed contemporaneous
therewith and the Partnership Merger Agreement, and the performance by the
Corporation of its obligations thereunder including, without limitation,
resolution of disputes relating thereto, (b) negotiate amendments to the Merger
Agreement, the other agreements, certificates, instruments and documents
executed contemporaneous therewith and/or the Partnership Agreement which the
Special Committee deems necessary or desirable and submit such amendments to the
Board of Directors for approval, (c) adopt procedures pending the completion of
the Actions and Transactions limiting the authority of the officers of the
Corporation who have an interest in SPH Acquisition, LLC, to take action which
the Special Committee determines, in its discretion, to be other than in the
best interest of the Corporation and its stockholders and (d) authorize and
approve agreements and arrangements with officers and employees of the
Corporation and salaries, bonuses and other compensation to be paid by the
Corporation to its officers and employees; provided, however, that consummation
of the Actions and Transactions shall be and remain subject to approval by the
Stockholders of the Corporation and ratification and approval by the Board of
Directors as provided in the foregoing resolutions.
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APPENDIX D
COMPOSITE CHARTER
OF
SUNSTONE HOTEL INVESTORS, INC.
ARTICLE I
The undersigned, Lezli E. Beach, whose post office address is 4675
MacArthur Court, Suite 1000, Newport Beach, California 92660-1846, being at
least eighteen years of age and the sole incorporator of Sunstone Hotel
Partners, Inc., does, pursuant to Section 2-603(b) of the Maryland General
Corporation Law, no organizational meeting or action of the Board of Directors
having occurred or been taken, hereby amend the Articles of Incorporation of
Sunstone Hotel Investors, Inc.
ARTICLE II
NAME
The name of the corporation (which is hereinafter called the
"Corporation") is:
Sunstone Hotel Investors, Inc.
ARTICLE III
PURPOSES
The purposes for which the Corporation is formed is to engage in any
lawful act or activity for which corporations may be organized under the General
Laws of the State of Maryland now or hereafter in force.
The foregoing enumerated purposes and objects shall be in no way
limited or restricted by reference to, or inference from, the terms of any other
clause of this or any other Article of the Articles of Incorporation of the
Corporation, and each shall be regarded as independent; and they are intended to
be and shall be construed as powers as well as purposes and objects of the
Corporation and shall be in addition to and not in limitation of the general
powers of corporations under the General Laws of the State of Maryland.
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2
ARTICLE IV
PRINCIPAL OFFICE IN MARYLAND
AND RESIDENT AGENT
The address of the principal office of the Corporation in the State of
Maryland is c/o The Prentice-Hall Corporation System, Inc., 11 East Chase
Street, Suite 7C, Baltimore, Maryland 21202. The name of the resident agent of
the Corporation in the State of Maryland is The Prentice-Hall Corporation
System, Inc., a Maryland corporation, 11 East Chase Street, Suite 7C, Baltimore,
Maryland 21202.
ARTICLE V
SHARES OF CAPITAL STOCK
SECTION 1. Authorized Shares of Capital Stock.
(a) Authorized Shares. The total number of shares of capital stock of
all classes that the Corporation has authority to issue is One Hundred Sixty
Million (160,000,000) shares of capital stock (par value One Cent ($.01) per
share), consisting of: (i) One Hundred Fifty Million (150,000,000) shares of
Common Stock, par value One Cent ($.01) per share (the "Common Shares"); and
(ii) Ten Million (10,000,000) shares of Preferred Stock, par value One Cent
($.01) per share (the "Preferred Shares") which may be issued in one or more
classes as described in Section 3 of Article V. The Common Shares and each
class of the Preferred Shares shall each constitute a separate class of capital
stock of the Corporation.
The Board of Directors may classify and re-classify any unissued
shares of capital stock in accordance with Section 4 of Article V hereof.
(b) Terminology and Aggregate Par Value. The Common Shares and
Preferred Shares are collectively referred to herein as the "Equity Shares."
The aggregate par value of all of the authorized Equity Shares having par value
of $1,600,000.
SECTION 2. Common Shares.
Subject to the provisions of Sections 3 and 4 of this Article V, the
Common Shares shall have the following preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption and such other rights as may be afforded by
law:
(a) Voting Rights. Except as may otherwise be required by law, each
holder of Common Shares shall have one vote in respect of each Common Share on
all actions to be taken by the stockholders of the Corporation, and, except as
otherwise provided in respect of any class of
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3
stock hereafter classified or reclassified, the exclusive voting power for all
purposes shall be vested in the holders of the Common Shares.
(b) Dividend Rights. Subject to the provisions of law and any
preferences of any class of stock hereafter classified or reclassified,
dividends, including dividends payable in shares of another class of the
Corporation's stock, may be paid on the Common Shares of the Corporation at such
time and in such amounts as the Board of Directors may deem advisable and the
holders of the Common Shares shall share ratably in any such dividends, in
proportion to the number of shares of Common Shares held by them respectively,
on a share for share basis.
(c) Liquidation Rights. In the event of any liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, the holders
of the Common Shares shall be entitled, after payment or provision for payment
of the debts and other liabilities of the Corporation and the amount to which
the holders of any class of capital stock hereafter classified or reclassified
having a preference on distributions in the liquidation, dissolution or winding
up of the Corporation are entitled, together with the holders of any other class
of capital stock hereafter classified or reclassified not having a preference on
distributions in the liquidation, dissolution or winding up of the Corporation,
to share ratably in the remaining net assets of the Corporation.
SECTION 3. Preferred Shares.
The Preferred Shares may be issued from time to time in one or more
classes. The Board of Directors is expressly authorized, in the resolution or
resolutions providing for the issuance of any wholly unissued class of Preferred
Shares, to fix, state and express the powers, rights, designations, preferences,
qualifications, limitations and restrictions thereof, including without
limitation: the rate of dividends upon which and the times at which dividends
on shares of such class shall be payable and the preference, if any , which such
dividends shall have relative to dividends on shares of any other class or
classes of stock of the Corporation; whether such dividends shall be cumulative
or noncumulative, and if cumulative, the date or dates from which dividends on
shares of such class shall be cumulative; the voting rights, if any, to be
provided for shares of such class; the rights, if any, which the holders of
shares of such class shall have in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation; the
rights, if any, which the holders of shares of such class shall have to convert
such shares into or exchange such shares for shares of stock of the Corporation,
and the terms and conditions, including price and rate of exchange, of such
conversion or exchange; and the redemption rights (including sinking fund
provisions), if any, for shares of such class; and such other powers, rights,
designations, preferences, qualifications, limitations and restrictions as the
Board of Directors may declare to so fix. The Board of Directors is also
expressly authorized to fix the number of shares constituting such class and to
increase or decrease the number of shares of any class prior to the issuance of
shares of that class and to increase or decrease the number of shares of any
class subsequent to the issuance of shares of that class, but not to decrease
such number 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.
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4
SECTION 4. Classification and Reclassification of Capital Stock.
(a) The power of the Board of Directors to classify and reclassify any
of the shares of capital stock shall include, without limitation, subject to the
provisions of the Charter, authority to classify or reclassify any unissued
shares of such stock into a class or classes of preferred stock, preference
stock, special stock or other stock, by determining, fixing, or altering one or
more of the following:
(i) The distinctive designation of such class and the number
of shares to constitute such class; provided that, unless otherwise prohibited
by the terms of such or any other class, the number of shares of any class may
be decreased by the Board of Directors in connection with any classification or
reclassification of unissued shares and the number of shares of such class may
be increased by the Board of Directors in connection with any such
classification or reclassification, and any shares of any class which have been
redeemed, purchased, otherwise acquired or converted into Common Shares or any
other class shall become part of the authorized capital stock and be subject to
classification and reclassification as provided in this Section.
(ii) Whether or not and, if so, the rates, amounts and times at
which, and the conditions under which, dividends shall be payable on shares of
such class, whether any such dividends shall rank senior or junior to or on a
parity with the dividends payable on any other class of stock, and the status of
any such dividends as cumulative, cumulative to a limited extent or non-
cumulative and as participating or non-participating.
(iii) Whether or not shares of such class shall having voting
rights, in addition to any voting rights provided by law and, if so, the terms
of such voting rights.
(iv) Whether or not such shares of such class shall have
conversion or exchange privileges and, if so, the terms and conditions thereof,
including provision for adjustment of the conversion or exchange rate in such
events or at such times as the Board of Directors shall determine.
(v) Whether or not shares of such class shall be subject to
redemption and, if so, the terms and conditions of such redemption, including
the date or dates upon or after which they shall be redeemable and the amount
per share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates; and whether or not there shall be
any sinking fund or purchase account in respect thereof, and if so, the terms
thereof.
(vi) The rights of the holders of shares of such class upon the
liquidation, dissolution or winding up of the affairs of, or upon any
distribution of the assets of, the Corporation, which rights may vary depending
upon whether such liquidation, dissolution or winding up is voluntary or
involuntary and, if voluntary, may vary at different dates, and whether such
rights shall rank senior or junior to or on a parity with such rights of any
other class of stock.
(vii) Whether or not there shall be any limitations applicable,
while shares of such class are outstanding, upon the payment of dividends or
making of distributions on, or the
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5
acquisition of, or the use of moneys for purchase or redemption of, any stock of
the Corporation, or upon any other action of the Corporation, including action
under this Section, and, if so, the terms and conditions thereof.
(viii) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of such class, not
inconsistent with law and the Charter of the Corporation.
(b) For the purposes hereof and of any articles supplementary to the
Charter providing for the classification or reclassification of any shares of
capital stock or of any other charter document of the Corporation (unless
otherwise provided in any such articles or document), any class of stock of the
Corporation shall be deemed to rank;
(i) prior to another class either as to dividends or upon
liquidation, if the holders of such class shall be entitled to the receipt of
dividends or of amounts distributable on liquidation, dissolution or winding up,
as the case may be, in preference on priority to holders of such other class;
(ii) on a parity with another class either as to dividends or
upon liquidation, whether or not the dividend rates, dividend payment dates or
redemption or liquidation price per share thereof be different from those of
such others, if the holders of such class of stock shall be entitled to receipt
of dividends or amounts distributable upon liquidation, dissolution or winding
up, as the case may be, in proportion to their respective dividend rates or
redemption or liquidation prices, without preference or priority over the
holders of such other class; and
(iii) junior to another class either as to dividends or upon
liquidation, if the rights of the holders of such class shall be subject or
subordinate to the rights of the holders of such other class in respect of the
receipt of dividends or the amounts distributable upon liquidation, dissolution
or winding up, as the case may be.
ARTICLE VI
THE BOARD OF DIRECTORS
SECTION 1. Number and Qualification of Directors.
(a) Authorized Number. The number of Directors of the Corporation
shall not be less than nine (9) nor more than twelve (12), with the exact number
of Directors to be fixed from time to time by the shareholders or by the
affirmative vote of at least 80% of the Board of Directors but shall never be
less than the minimum number permitted by the General Laws of the State of
Maryland nor or hereafter in force. The exact number of directors presently
authorized shall be nine (9) until changed within such specified limit in the
manner prescribed above. A director need not be a shareholder.
<PAGE>
6
(b) Initial Directors. The names of the directors who will serve
until the first annual meeting (or until such directors' class, determined in
accordance with Section 2 of this Article VI, expires) and until their
successors are elected and qualify are as follows:
Robert A. Alter
Charles L. Biederman
C. Robert Enever
(c) Independent Directors. Notwithstanding anything herein to the
contrary, at all times (except during a period not to exceed sixty (60) days
following the death, resignation, incapacity or removal from office of a
director prior to expiration of the director's term of office), a majority of
the Board of Directors shall be comprised of persons who are not officers or
employees of the Corporation.
(d) Definition of Affiliate. For purposes of the foregoing
subsection, "Affiliate" of a person shall mean (i) any person that, directly or
indirectly, controls or is controlled by or is under common control with such
person, (ii) any other person that owns, beneficially, directly or indirectly,
five percent (5%) or more of the outstanding capital shares, shares or equity
interests of such person, or (iii) any officer, director, employee, partner or
trustee of such person or any person controlling, controlled by or under common
control with such person (excluding trustees and persons serving in similar
capacities who are not otherwise an Affiliate of such person). The term
"person" means and includes individuals, corporations, general and limited
partnerships, stock companies or associations, joint ventures, associations,
companies, trusts, banks, trust companies, land trusts, business trusts, or
other entities and governments and agencies and political subdivisions thereof.
For the purposes of this definition, "control" (including the correlative
meanings of the terms "controlled by" and "under common control with"), as used
with respect to any person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
such person, through the ownership of voting securities, partnership interests
or other equity interests.
(e) Amendment of this Section. Notwithstanding any other provisions
of the Charter, or the Bylaws of the Corporation (and notwithstanding that some
lesser percentage may be specified by law, the Charter, or the Bylaws of the
Corporation), the provisions of this Article VI shall not be amended, altered,
changed or repealed unless duly authorized, approved and advised by not less
than 80% of the authorized and elected members of the Board of Directors and
approved by the affirmative vote of the holders of not less than 66-2/3% of the
outstanding Equity Shares of the Corporation entitled to vote generally in the
election of directors, voting separately as a class.
SECTION 2. Classified Board.
The directors of the Corporation shall be and are hereby divided into
three Classes, designated "Class I," "Class II" and "Class III," respectively.
The number of directors in each Class shall be as nearly equal in number as
possible. Each director shall serve for a term ending on the date of the third
annual meeting of stockholders following the annual meeting at which such
director was elected; provided, however, that each initial director in Class I
shall serve for a term ending on
<PAGE>
7
the date of the annual meeting held in 1998; each initial director in Class II
shall serve for a term ending on the date of the annual meeting held in 1997;
and each initial director in Class III shall serve for a term ending on the date
of the annual meeting held in 1996. The three (3) initial directors of the
Corporation named in Section 1(b) of Article VI of the Charter of the
Corporation are classified as follows: Robert A. Alter- Class I; Charles L.
Biederman - Class II; C. Robert Enever - Class III.
SECTION 3. Removal of Directors.
Any director may be removed with or without cause by the affirmative
vote of stockholders holding not less than 66-2/3% of all the votes entitled to
be cast for the election of directors; provided, however, that in the case of
-------- -------
any directors elected by holders of a class of Equity Shares other than Common
Shares, such directors may be removed with or without cause, by the affirmative
vote of all of the votes of that class of Equity Shares.
SECTION 4. Filling Vacancies.
Except in the case of a vacancy on the Board of Directors among the
directors elected by a class of Equity Shares other than Common Shares, any
vacancy on the Board of Directors may be filled by the affirmative vote of the
remaining directors (except that a vacancy which results from an increase in the
number of directors may be filled by a majority of the entire Board of
Directors), and, in the case of a vacancy resulting from the removal of a
director, by the stockholders by the vote of a majority of the votes entitled to
be cast in the election of directors. Any vacancy on the Board of Directors
among the directors elected by a class of Equity Shares (other than Common
Shares) may be filled by a majority of the remaining directors elected by that
class or the sole remaining director elected by that class, or by the
stockholders by a majority of the votes of that class.
SECTION 5. No Cumulative Voting.
Stockholders shall not be entitled to cumulative voting rights with
respect to the election of directors.
SECTION 6. Reserved Powers of the Board of Directors.
The enumeration and definition of particular powers of the Board of
Directors included in the foregoing provisions of Article VI or the provisions
of Article VII of the Charter shall in no way be limited or restricted by
reference to or inference from the terms of any other clause of this or any
other Article of the Charter of the Corporation, or construed as or deemed by
inference or otherwise in any manner to exclude or limit any powers conferred
upon the Board of Directors under the General Laws of the State of Maryland now
or hereafter in force.
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8
ARTICLE VII
PROVISIONS FOR DEFINING, LIMITING AND REGULATING
CERTAIN POWERS OF THE CORPORATION AND OF THE
STOCKHOLDERS AND DIRECTORS
The following provisions are hereby adopted for the purpose of
defining, limiting, and regulating the powers of the Corporation and of the
directors and stockholders:
SECTION 1. Corporation as General Partner of the Partnership.
The Corporation shall be authorized to act as the general partner of
the Partnership. In addition, the Corporation shall be permitted to exchange
Common Shares for partnership interests in the Partnership pursuant to the
provisions contained in the Partnership Agreement and without any action by the
stockholders.
SECTION 2. Board Authorization of Share Issuances.
The Board of Directors is hereby empowered to authorize the issuance
from time to time of shares of any class of Equity Shares, whether nor or
hereafter authorized, or securities convertible into any class of Equity Shares,
whether now or hereafter authorized, for such consideration as may be deemed
advisable by the Board of Directors and without any action by the stockholders.
SECTION 3. No Preemptive Rights.
Except as provided by the Board of Directors in authorizing the
issuance of Preferred Shares pursuant to Section 3 of Article V, no holder of
any stock or any other securities of the Corporation, whether now or hereafter
authorized, shall have any preemptive right to subscribe to or purchase (i) any
shares of capital stock of the Corporation, (ii) any warrants, rights, or
options to purchase any such shares, or (iii) any other securities of the
Corporation or obligations convertible into any shares of capital stock of the
Corporation or such other securities or into warrants, rights or options to
purchase any such shares or other securities.
SECTION 4. Powers of the Board of Directors.
The Board of Directors of the Corporation shall, consistent with
applicable law, have the power in its sole discretion to determine from time to
time in accordance with sound accounting practice or other reasonable valuation
methods what constitutes annual or other net profits, earnings, surplus, or net
assets in excess of capital; to fix and vary from time to time the amount to be
reserved as working capital, or determine that retained earnings or surplus
shall remain in the hands of the Corporation; to set apart out of any funds of
the Corporation such reserve or reserves in such amount or amounts and for such
proper purpose as it shall determine and to abolish any such reserve or any part
thereof; to distribute and pay distributions or dividends in stock, cash or
other securities or property, out of surplus or any other funds or amounts
legally available therefor, at such times and
<PAGE>
9
to the stockholders of record on such dates as it may, from time to time,
determine; and to determine whether and to what extent and at what times and
places and under what conditions and regulations the books, accounts and
documents of the Corporation, or any of them, shall be open to the inspection of
stockholders, except as otherwise provided by statute or by the Bylaws of the
Corporation, and, except as so provided, no stockholder shall have any right to
inspect any book, account or document of the Corporation unless authorized to do
so by resolution of the Board of Directors.
SECTION 5. Related Party Transactions.
Without limiting any other procedures available by law or otherwise to
the Corporation, the Board of Directors may authorize any agreement or
transaction with any Person, corporation, association, company, trust,
partnership (limited or general) or other organization, although one or more of
the directors or officers of the Corporation may be a party to any such
agreement or an officer, director, stockholder or member of such other party (an
"Interested Officer/Director"), and no such agreement or transaction shall be
invalidated or rendered void or voidable solely by reason of the existence of
any such relationship if: (i) the existence is disclosed or known to the Board
of Directors, and the contract or transaction is authorized, approved or
ratified by the affirmative vote of a majority of the directors, including a
majority of the Independent Directors, even if the Independent Directors
constitute less than a quorum of the Board of Directors; or (ii) the existence
is disclosed to the stockholders entitled to vote, and the contract or
transaction is authorized, approved or ratified by a majority of the votes
entitled to be cast by the stockholders, other than the votes of the shares held
of record by the Interested Officers/Directors; or (iii) the contract or
transaction is fair and reasonable to the Corporation. Any Interested
Officer/Director of the Corporation or the stock owned by them or by a
corporation, association, company, trust, partnership (limited or general) or
other organization in which an Interested Officer/Director may have an interest,
may be counted in determining the presence of a quorum at a meeting of the Board
of Directors or a committee of the Board of Directors or at a meeting of the
stockholders, as the case may be, at which the contract or transaction is
authorized, approved or ratified.
ARTICLE VIII
INDEMNIFICATION
AND LIMITATION OF LIABILITY
SECTION 1. Indemnification.
(a) Indemnification of Agents. The Corporation shall indemnify, in
the manner and to the fullest extent permitted by law, any person (or the estate
of any person) who is or was a party to, or is threatened to be made party to,
any threatened, pending or completed action, suit or proceeding, whether or not
by or in the right of the Corporation, and whether civil, criminal,
administrative, investigative or otherwise, by reason of the fact that such
person is or was a director or officer of the Corporation, or such director or
officer is or was serving at the request of the Corporation as a director,
officer, agent, trustee, partner or employee of another corporation,
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10
partnership, joint venture, limited liability company, trust, real estate
investment trust, employee benefit plan or other enterprise. To the fullest
extent permitted by law, the indemnification provided herein shall include
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement and any such expenses may be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding. The Corporation shall
indemnify other employees and agents to such extent as shall be authorized by
the Board of Directors or the Corporation's Bylaws and be permitted by law. Any
repeal or modification of this Section 1(a) by the stockholders of the
Corporation shall be prospective only, and shall not adversely affect any right
to indemnification or advancement of expenses hereunder existing at the time of
such repeal or modification.
(b) Insurance. The Corporation may, to the fullest extent permitted
by law, purchase and maintain insurance on behalf of any such person against any
liability which may be asserted against such person.
(c) Indemnification Non-Exclusive. The indemnification provided
herein shall not be deemed to limit the right of the Corporation to indemnify
any other person for any such expenses to the fullest extent permitted by law,
nor shall it be deemed exclusive of any other rights to which any person seeking
indemnification from the Corporation may be entitled under any agreement, vote
of stockholders or disinterested directors, or otherwise, both as to action in
such person's official capacity and as to action in another capacity while
holding such office.
SECTION 2. Limitation of Liability.
To the fullest extent permitted by Maryland statutory or decisional
law, as amended or interpreted from time to time, no director or officer of this
Corporation shall be personally liable to the Corporation or its stockholders,
or any of them, for money damages. No amendment of the Charter of the
Corporation or repeal of any of its provisions shall limit or eliminate the
benefits provided to directors and officers under this provision with respect to
any act or omission which occurred prior to such amendment or repeal.
ARTICLE IX
AMENDMENTS
SECTION 1. Right to Amend Charter.
The Corporation reserves the right from time to time to make any
amendments to the Charter which may now or hereafter be authorized by law,
including any amendments changing the terms or contract rights, as expressly set
forth in the Charter, of any of its outstanding stock by classification,
reclassification or otherwise.
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11
SECTION 2. Amendment to the Charter of the Corporation.
Notwithstanding any provision of law to the contrary, except as
otherwise specifically provided in Section 3 of this Article IX and Section 1(e)
of Article VI, the affirmative vote of a majority of all votes entitled to be
cast by the stockholders of the Corporation shall be sufficient, valid and
effective, after due authorization, approval or advice by the Board of
Directors, to approve and authorize any amendment to the Charter of the
Corporation.
SECTION 3. Certain Amendments Requiring Special Stockholder Vote.
(a) Notwithstanding any other provisions of the Charter or Bylaws of
the Corporation (and in addition to any other vote, approval, authorization or
advice (including that of the Board of Directors) that may be required by law,
the Charter or the Bylaws of the Corporation), the affirmative vote of
stockholders holding at least two-thirds (66-2/3%) of all of the votes entitled
to be cast thereon shall be required to amend, alter, change, repeal, or adopt
any provisions inconsistent with, the provisions of this Article IX, Section 2
(classified Board) and Section 3 (removal of directors) of Article VI, Section 5
(no cumulative voting) of Article VI, Article VIII (indemnification of
directors, officers, employees and agents and limitation of liability of
officers and directors) and Section 2 (preemptive rights) of Article VII.
(b) The stockholders of the Corporation shall have the right to adopt,
alter or repeal the Bylaws of the Corporation. Subject to the right of the
stockholders to adopt, alter and repeal Bylaws, the Board of Directors is
expressly authorized to adopt, alter or repeal the Bylaws of the Corporation.
ARTICLE X
DURATION OF CORPORATION
SECTION 1. General.
The duration of the Corporation shall be perpetual.
SECTION 2. Change in Control or Dissolution of Corporation.
Notwithstanding any provision of law to the contrary, the affirmative
vote of a majority of all votes entitled to be cast by the stockholders shall be
sufficient, valid and effective, after due authorization, approval or advice by
the Board of Directors, to approve and authorize: (i) any consolidation or
merger of the Corporation with or into another entity; (ii) any share exchange;
(iii) any sale of all or substantially all of the assets of the Corporation; or
(iv) any voluntary dissolution of the Corporation; provided, however, that the
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Corporation may not merge, consolidate or engage in any share exchange or
combination or sell all or substantially all of its assets unless such
transaction includes a merger or consolidation of, or sale of assets by, the
Partnership so long as the Corporation is the general partner of such entity.
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12
IN WITNESS WHEREOF, the undersigned has executed these Amended
Articles of Incorporation and acknowledges the same to be her act, and further
acknowledges, under the penalties of perjury, that, to the best of her
knowledge, information and belief, the matters and facts contained herein are
true in all material respects on this 22nd day of September, 1994.
By: /s/ Lezli E. Beach
--------------------
Lezli E. Beach
Sole Incorporator
WITNESS:
/s/ Kurt M. Clayton
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<PAGE>
APPENDIX E
SUNSTONE HOTEL INVESTORS, INC.
CHARTER AMENDMENTS
1. Article III of the Charter is to be amended by deleting in its entirety the
second sentence of said Article III.
2. The words "Section 5 of Article V" at the end of the first sentence of
Section 1(a) of Article V are to be deleted in their entirety and"Section 3
of Article V" inserted in lieu thereof.
3. The words "Section 6 of Article V" at the end of the third sentence of
Section 1(a) of Article V are to be deleted in their entirety and "Section
4 of Article V" inserted in lieu thereof.
4. Sections 2, 4 and 7 of Article V of the Charter are to be deleted in their
entirety.
5. The initial phrase of the first sentence of Section 3 of Article V of the
Charter is to be deleted in its entirety and the following inserted in lieu
thereof:
Subject to the provisions of Sections 3 and 4 of this Article V, the
Common Shares shall have the following preferences, conversion and
other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of the redemption
and such other rights as may be afforded by law:.
6. The initial phrase of the first sentence of Section 6 of Article V of the
Charter is to be deleted in its entirety and the following inserted in lieu
thereof:
The power of the Board of Directors to classify and reclassify any of
the shares of capital stock shall include, without limitation, subject
to the provisions of the Charter, authority to classify or reclassify
any unissued shares of such stock into a class or classes of
preferenced stock, special stock or other stock, by determining,
fixing or altering one or more of the following:.
7. Section 1 of Article VII of the Charter is to be deleted in its entirety
and the following inserted in lieu thereof:
The Corporation shall be authorized to act as the general partner of
the Partnership. In addition, the Corporation shall be permitted to
exchange Common Shares for partnership interests in the Partnership
pursuant to the provisions
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2
contained in the Partnership Agreement and without any action by the
stockholders.
8. Section 3 of Article VII of the Charter is to be deleted in its entirety
and the following inserted in lieu thereof:
Except as provided by the Board of Directors in authorizing the
issuance of Preferred Shares pursuant to Section 3 of Article V, no
holder of any stock or any securities of the Corporation, whether now
or hereafter authorized, shall have any preemptive right to subscribe
to or purchase (i) any shares of capital stock of the Corporation,
(ii) any warrants, rights or options to purchase any such shares, or
(iii) any other securities of the Corporation or obligations
convertible into any shares of capital stock of the Corporation or
such other securities or into warrants, rights or options to purchase
any such shares or other securities.
9. Section 3 of Article IX of the Charter is to be amended by deleting in its
entirety the last sentence of subsection (a) of said Section 3 of Article
IX.
10. Section 3 of Article IX of the Charter is to be amended by deleting in its
entirety subsection (b) of said Section 3 of Article IX and by
redesignating subsection (c) of said Section 3 of Article IX as subsection
(b) of said Section 3.
11. Sections 3, 5 and 6 of Article V of the Charter are to be renumbered as
Sections 2, 3 and 4, respectively of Article V of the Charter.
<PAGE>
PRELIMINARY COPY
CONFIDENTIAL--For Use of Securities and Exchange Commission Only
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Stockholder Name:________________ Voter Control Number:____________
SUNSTONE HOTEL INVESTORS, INC.
This Proxy is being solicited on behalf of the Board of Directors for the
special meeting of stockholders to be held on , 1999.
The undersigned hereby appoints _______________, ________________ and
______________, or any of them, with individual power of substitution, proxies
to vote all shares of common stock of Sunstone Hotel Investors, Inc. which the
undersigned may be entitled to vote at the special meeting of stockholders of
Sunstone to be held in _________________, at ____ a.m. _____ time, on , 1999 and
at any adjournment or postponement thereof, as designated on the reverse side of
this proxy card, and in their discretion, the proxies are authorized to vote
upon such other business as may properly come before the meeting. You are
encouraged to specify your choice by marking the appropriate box on the reverse
side. If you do not mark any box, your proxy will be voted in accordance with
the Board of Directors' recommendations. The proxies cannot vote your shares
unless you or your authorized agent signs and returns this card or unless you
vote by proxy over the Internet or by telephone as described below. The
undersigned hereby acknowledges receipt of the Notice of the special meeting of
stockholders and the related Proxy Statement (with all annexes and enclosures)
dated ,1999.
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. If no direction is given on any proposal,
this proxy will be voted FOR the proposal and if any other matters should
properly come before the special meeting, such shares will be voted with respect
to such matters in accordance with the judgment of the persons voting such
proxies.
Instead of signing and returning this proxy card, you may vote by proxy over
the Internet or by telephone in accordance with the instructions set forth
below. Sunstone is a corporation organized under the laws of the State of
Maryland. Section 2-507 of the Maryland General Corporation Law authorizes the
granting of proxies over the Internet or by telephone. Accordingly, proxies
granted over the Internet or by telephone in accordance with the procedures set
forth on this proxy card will be valid under Maryland law.
PROXY VOTING BY INTERNET
In order to vote by proxy over the Internet go the web site www.________.com.
Enter your _____ digit Voter Control Number located on you proxy card, and
follow the instructions provided.
PROXY VOTING BY TELEPHONE
In order to vote by proxy via telephone, please call the toll-free number
________________ on a touch-tone phone, enter your _______ digit Voter Control
Number located on your proxy card and follow the recorded instructions.
(Continued and to be signed on reverse side)
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The Board of Directors recommends a vote FOR each of the Merger Proposals.
<S> <C> <C> <C>
FOR AGAINST ABSTAIN
Proposal to approve the merger of SHP Investors Sub, Inc. with and into Sunstone
Hotel Investors, Inc. pursuant to an Agreement and Plan of Merger dated as of
July 12, 1999 among SHP Acquisition L.L.C, SHP Investors Sub, Inc. and Sunstone
Hotel Investors, Inc. all as described in the accompanying proxy statement [_] [_] [_]
Proposal to approve the resolutions of the Board of Directors recommending that
Sunstone Hotel Investors, Inc. terminate its status as a real estate investment
trust qualifying as such under Section 856 through 860 of the Internal Revenue
Code of 1986, as amended, and amend the provisions of its Charter, including
Article V thereof, and to approve the implementation of such actions, all as
described in the accompanying proxy statement [_] [_] [_]
Proposal to approve the amendment of Articles III, V, VII and IX of the Charter
of Sunstone Hotel Investors, Inc. in connection with the proposed merger, all as
described in the accompanying proxy statement [_] [_] [_]
Please check this box if you plan to attend the special meeting [_]
SIGNATURE(S)___________________________________________ DATE__________________________
The signer hereby revokes all proxies heretofore given by the signer to vote at said meeting or any adjournments thereof.
IMPORTANT: Please date this proxy and sign exactly as your name or names appear(s) hereon. If the stock is held jointly, signatures
should include both names. Executors, administrators, trustees, guardians and others signing in a representative
capacity should give full title. In order to insure that your shares will be represented at the special meeting of
stockholders, please sign, date and return this proxy promptly in the enclosed business reply envelope. If you do attend
the meeting, you may, if you wish, withdraw your proxy and vote in person.
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