<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. 2)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
<TABLE>
<S> <C>
[X] Preliminary Proxy Statement [_] Confidential, for Use of the Commission Only
[_] Definitive Proxy Statement (as permitted by Rule 14a-6(e)(2))
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
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)(1) 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.
(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
(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
(4) Proposed maximum aggregate value of transaction: $438,874,389
(5) Total fee paid: $87,775
[X] 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:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
[Sunstone Hotel Investors Logo]
October 19, 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 November 17, 1999 at 10:00 a.m.,
California time, at the La Mirada Holiday Inn Select, 14299 Firestone
Boulevard, La Mirada, California 90638.
At the special meeting, you will be asked to vote on 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 stockholders approve the merger and the merger is consummated, you
will receive $10.35 in cash for each share of our common stock that you own,
subject to adjustments which we currently anticipate will increase the merger
consideration to approximately $10.39 per share. The adjustments provide that
you and the other common stockholders will be paid an additional amount equal
to your proportionate share of $2.5 million, or approximately 6 cents per
share. The merger agreement also provides for a possible decrease in the merger
consideration in the event certain transaction expenses, consent payments or
other payments exceed amounts specified in the merger agreement. We currently
anticipate that these adjustments will result in a decrease of approximately 2
cents per share. The net result of all the adjustments is currently anticipated
to increase the merger consideration by approximately 4 cents per share to
approximately $10.39 per share. The actual amount of the adjustments will not
be determined until shortly prior to the closing of the merger.
The price of $10.39 per share of common stock represents a premium of
approximately 43.9% 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, including the adjustments to the merger consideration referenced above,
and other information regarding 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 the merger pursuant to an Agreement and Plan
of Merger dated as of July 12, 1999, as amended and restated as of October 7,
1999, by and among us, SHP Acquisition and SHP Investors Sub. A copy of the
amended and restated merger agreement, which we refer to as the "merger
agreement," is attached to the proxy statement as Appendix A. We refer to the
July 12, 1999 agreement as the "original merger agreement."
An independent Special Committee of our Board of Directors has carefully
reviewed and considered the terms and conditions of the merger. The Special
Committee consists of five members of our Board of 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 (with one member absent), unanimously (with two Directors
absent) believes that the proposed merger is in the best interests of our
stockholders, has approved the merger and the merger agreement and recommends
that our stockholders vote FOR the merger proposal.
<PAGE>
The investment banking firm of Goldman, Sachs & Co. delivered its written
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 the assumptions made,
matters considered and limitations on the review undertaken in connection with
such opinion, as set forth in that opinion, the $10.35 per share, as adjusted
as provided in the original merger agreement, to be received by the holders
(other than SHP Acquisition, its subsidiaries and affiliates and other related
persons) of common stock in the merger contemplated by the original merger
agreement was fair to such stockholders from a financial point of view. A copy
of the opinion, dated July 12, 1999, of Goldman, Sachs & Co. is attached to the
proxy statement as Appendix B. Goldman, Sachs & Co. subsequently delivered its
written opinion to the Special Committee of the Board of Directors, dated
October 7, 1999, 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 in that opinion, the $10.35 per
share, as adjusted as provided in the merger agreement, to be received by the
holders (other than SHP Acquisition, its subsidiaries and affiliates and other
related persons) of common stock in the merger contemplated by the merger
agreement was fair to such stockholders from a financial point of view. A copy
of the opinion, dated October 7, 1999, of Goldman, Sachs & Co. is attached to
the proxy statement as Appendix C.
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). If you fail to return your proxy card, or fail to vote
by telephone or electronically over the Internet if such option is available to
you, the effect will be the same as a vote against the merger, unless you
appear at the special meeting and vote in favor of the merger. 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 D.F. King & Co., Inc. at (212) 269-5550.
Whether or not you plan to attend the special meeting, please complete,
date, sign, and promptly return your proxy card in the enclosed postage paid
envelope, or vote by telephone or electronically over the Internet if permitted
by the proxy card you receive, by following the instructions on your proxy
card. If you attend the special meeting, you may vote in person if you wish,
even though you have previously returned your proxy.
Sincerely,
[logo of signature]
-------------------------------------
R. Terrence Crowley,
Vice President, Chief Operating
Officer and
General Counsel
903 Calle Amanecer
San Clemente, California 92673-6212
Telephone (949) 369-4000
<PAGE>
SUNSTONE HOTEL INVESTORS, INC.
903 Calle Amanecer
San Clemente, California 92673-6212
----------------
Notice of Special Meeting of Stockholders
to be held on November 17, 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 November 17, 1999 at 10:00 a.m.,
California time, at the La Mirada Holiday Inn Select, 14299 Firestone
Boulevard, La Mirada, California 90638 for the purpose of considering and
voting upon the following matters, which are more fully described in the
attached proxy statement:
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 Amended and Restated Agreement and Plan of Merger
dated as of October 7, 1999 by and among us, SHP Acquisition, L.L.C.,
a Delaware limited liability company, and SHP Investors Sub. A copy
of the amended and restated merger agreement is attached as Appendix
A to the Proxy Statement accompanying this notice.
2. To transact such other business as may properly come before the
special meeting or any postponement or adjustment thereof.
The Board of Directors has no knowledge of any other business to be
transacted at the special meeting.
The Board of Directors has fixed the close of business on October 15, 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.
[LOGO OF SIGNATURE APPEARS HERE]
--------------------------------------
Robert A. Alter, Secretary
<PAGE>
SUNSTONE HOTEL INVESTORS, INC.
903 Calle Amanecer
San Clemente, California 92673-6212
----------------
PROXY STATEMENT
----------------
For the Special Meeting of Stockholders
to be held on November 17, 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 November 17, 1999 at
10:00 a.m. at the La Mirada Holiday Inn Select, 14299 Firestone Boulevard, La
Mirada, California 90638 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 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, as amended and restated as of October 7,
1999, by and among us, SHP Acquisition, L.L.C., a Delaware limited liability
company, and SHP Investors Sub. A copy of the amended and restated merger
agreement, which we refer to as the "merger agreement," is attached as Appendix
A to this Proxy Statement. We refer to the July 12, 1999 agreement as the
"original merger agreement." The proposal is referred to in this Proxy
Statement as the "Merger Proposal." 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.
As a result of the merger agreement,
. prior to the merger, certain assets will be distributed to us by Sunstone
Hotel Investors, L.P., a Delaware limited partnership and the entity
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 will be merged with and into the Operating
Partnership, which will continue as the surviving entity;
. SHP Investors Sub will 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 wholly-owned subsidiaries) will 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--Merger Consideration" below; and
. each outstanding share of preferred stock (other than shares owned by SHP
Acquisition and its wholly-owned subsidiaries) will be converted upon
consummation of the merger, into the right to receive the Liquidation
Preference for such shares as set forth in the Articles Supplementary
designating the preferred stock.
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 does not own any shares of our common
stock
<PAGE>
(although he does own options convertible into common stock). Westbrook Real
Estate Partners, L.L.C., a 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 2,287,262 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 (with one member absent) consisting of five Directors who are not
employees of or otherwise affiliated with us, SHP Acquisition or its
affiliates, unanimously (with two Directors absent) believes that the Merger
Proposal is in the best interest of our stockholders, has approved the Merger
Proposal and recommends that the stockholders vote FOR approval and adoption of
the Merger Proposal. The Special Committee received an opinion, dated July 12,
1999, from the Special Committee's independent 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 original merger agreement, to be received by
holders (other than SHP Acquisition, its subsidiaries and affiliates and other
related persons) of our common stock in the merger contemplated by the original
merger agreement was fair to such stockholders from a financial point of view.
Goldman Sachs subsequently delivered its written opinion to the Special
Committee of the Board of Directors, dated October 7, 1999, 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 in that opinion, the $10.35 per share, as adjusted as provided in the
merger agreement, to be received by the holders (other than SHP Acquisition,
its subsidiaries and affiliates and other related persons) of common stock in
the merger contemplated by the merger agreement 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 the Merger Proposal. 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 in
and of itself be sufficient 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
promptly return the proxy card in the enclosed postage-paid envelope, or vote
by telephone or electronically over the Internet if permitted by the proxy card
you receive, 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 October 19, 1999.
THE DATE OF THIS PROXY STATEMENT IS OCTOBER 19, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<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............................ 4
RECOMMENDATION OF THE BOARD OF DIRECTORS AND THE SPECIAL COMMITTEE...... 5
FAIRNESS OPINION........................................................ 6
CERTAIN CONFLICTS OF INTEREST OF OFFICERS AND DIRECTORS OF SUNSTONE..... 6
CLOSING DATE............................................................ 6
MERGER CONSIDERATION.................................................... 7
OPERATING PARTNERSHIP MERGER AND RELATED MATTERS........................ 8
VOTING AGREEMENT........................................................ 8
CONDITIONS TO THE MERGER................................................ 9
TERMINATION OF THE MERGER AGREEMENT..................................... 10
TERMINATION FEES AND EXPENSES........................................... 12
FINANCING; SOURCE OF FUNDS.............................................. 12
FEDERAL INCOME TAX CONSEQUENCES......................................... 13
INFORMATION CONCERNING THE SPECIAL MEETING................................ 14
TIME, PLACE AND DATE.................................................... 14
PURPOSE OF THE SPECIAL MEETING.......................................... 14
RECORD DATE; QUORUM; OUTSTANDING COMMON STOCK AND PREFERRED STOCK
ENTITLED TO VOTE....................................................... 14
VOTE REQUIRED........................................................... 15
ACTION TO BE TAKEN UNDER THE PROXY...................................... 15
PROXY SOLICITATION...................................................... 16
MATTERS RELATING TO THE MERGER PROPOSAL................................... 16
GENERAL................................................................. 16
BACKGROUND OF THE MERGER................................................ 17
PURPOSE AND STRUCTURE OF THE MERGER..................................... 35
BENEFITS AND DETRIMENTS OF THE MERGER TO SHP ACQUISITION................ 35
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS;
FAIRNESS OF THE MERGER................................................. 36
BENEFITS AND DETRIMENTS TO NONAFFILIATED STOCKHOLDERS................... 39
OPINION OF THE INDEPENDENT FINANCIAL ADVISOR............................ 39
POSITION OF SHP ACQUISITION AND THE OTHER FILING PERSONS................ 45
INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON................ 47
CERTAIN CONSEQUENCES OF THE MERGER...................................... 49
REDEMPTION AND OPERATING PARTNERSHIP MERGER............................. 50
PLANS FOR SUNSTONE AFTER THE MERGER..................................... 50
CONDUCT OF THE BUSINESS OF SUNSTONE IF THE MERGER IS NOT CONSUMMATED.... 51
MATERIAL FEDERAL INCOME TAX CONSEQUENCES................................ 52
LITIGATION REGARDING THE MERGER......................................... 53
ACCOUNTING TREATMENT.................................................... 54
FINANCING; SOURCE OF FUNDS.............................................. 54
APPRAISAL RIGHTS........................................................ 56
FEES AND EXPENSES....................................................... 56
REGULATORY REQUIREMENTS................................................. 56
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
THE MERGER AND THE MERGER AGREEMENT...................................... 56
THE MERGER............................................................. 57
MERGER CONSIDERATION................................................... 57
CLOSING DATE AND EFFECTIVE TIME........................................ 58
EXCHANGE AND PAYMENT PROCEDURES........................................ 58
TRANSFER OF COMMON STOCK AND PREFERRED STOCK........................... 59
ADDITIONAL AGREEMENTS.................................................. 59
LESSEE/MANAGER AGREEMENT............................................... 60
CONDUCT OF BUSINESS PENDING THE MERGER................................. 60
REPRESENTATIONS AND WARRANTIES......................................... 63
CONDITIONS............................................................. 65
TERMINATION; WITHDRAWAL OF RECOMMENDATIONS............................. 67
TERMINATION FEES AND EXPENSES.......................................... 68
AMENDMENT AND WAIVER................................................... 72
SELECTED FINANCIAL DATA OF SUNSTONE, LESSEE AND PREDECESSOR.............. 73
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS............... 75
CERTAIN FINANCIAL PROJECTIONS REGARDING SUNSTONE......................... 75
COMMON STOCK MARKET PRICE INFORMATION; DIVIDEND INFORMATION.............. 79
CERTAIN RELATIONSHIPS AND TRANSACTIONS................................... 80
PERCENTAGE LEASES...................................................... 80
MANAGEMENT AGREEMENTS.................................................. 80
EMPLOYMENT AGREEMENTS.................................................. 81
TRANSACTIONS WITH LESSEE............................................... 81
TRANSACTIONS WITH MANAGEMENT COMPANY................................... 81
THIRD PARTY PLEDGE..................................................... 81
OP UNIT PURCHASE AGREEMENT............................................. 82
LESSEE STOCK APPRECIATION RIGHTS/WARRANT EXCHANGE PROGRAM.............. 82
CONSULTING AGREEMENT WITH MR. GELLER................................... 83
TRANSACTION BONUS AGREEMENT WITH MR. CROWLEY........................... 83
VOTING AGREEMENT....................................................... 83
MANAGEMENT OF SUNSTONE................................................... 84
MANAGEMENT OF SHP ACQUISITION AND SHP INVESTORS SUB;
MEMBERS OF SHP ACQUISITION............................................. 87
SHP ACQUISITION AND SHP INVESTORS SUB.................................. 87
ALTER SHP AND BIEDERMAN SHP............................................ 87
WESTBROOK AFFILIATES................................................... 87
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
SUNSTONE................................................................ 88
PROPOSALS BY STOCKHOLDERS OF SUNSTONE.................................... 90
INDEPENDENT AUDITORS..................................................... 90
WHERE YOU CAN FIND MORE INFORMATION...................................... 90
OTHER MATTERS............................................................ 91
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................... 91
</TABLE>
APPENDIX A-- AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
APPENDIX B-- FAIRNESS OPINION OF GOLDMAN, SACHS & CO., DATED JULY 12, 1999
APPENDIX C-- FAIRNESS OPINION OF GOLDMAN, SACHS & CO., DATED OCTOBER 7, 1999
ii
<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 adjustments which we currently anticipate will increase the
merger consideration to approximately $10.39 per share. The adjustments
provide that you and the other common stockholders will be paid an
additional amount equal to your proportionate share of $2.5 million, or
approximately 6 cents per share. The merger agreement also provides for a
possible decrease in the merger consideration in the event certain
transaction expenses, consent payments or other payments exceed amounts
specified in the merger agreement. We currently anticipate that these
adjustments will result in a decrease of approximately 2 cents per share.
The net result of all the adjustments is currently anticipated to increase
the merger consideration by approximately 4 cents per share to approximately
$10.39 per share. The actual amount of the adjustments will not be
determined until shortly prior to the closing of the merger. See "The Merger
and the Merger Agreement-- 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 status as a real estate investment trust
(REIT) for federal income tax purposes or to prevent us from having to pay
federal income or excise tax. 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. Those of you who hold your shares in
street name may also be able to 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 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, IF
PERMITTED, 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
<PAGE>
by voting by telephone or over the Internet at a later time, if the proxy
card you receive permits voting in this manner. 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. The merger
agreement provides that the merger will close on the third business day
following the satisfaction or waiver of the conditions to the merger
agreement (other than conditions that by their terms, cannot be satisfied
until the closing), which include obtaining the requisite vote of our
stockholders, unless another date is agreed to by the parties to the merger
agreement. Assuming our stockholders approve the merger at the special
meeting on November 17, 1999, we expect to close the merger on or about
November 17, 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 generally 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, 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
"Matters Relating to the Merger Proposal--Material Federal Income 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:
D.F. King & Co., Inc.
77 Water Street
New York, New York 10005
(212) 260-5550
2
<PAGE>
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 October 15, 1999, we had outstanding and entitled to vote an aggregate of
37,942,227 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 October 15, 1999 to 1,699,605 votes or 4.3% of
the 39,641,832 total votes on such date.
Our Board of Directors has fixed October 15, 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 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.
Shares which abstain from voting on the Merger Proposal, 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 the Merger Proposal,
are nonetheless considered outstanding shares. Thus, such abstentions and
"broker non-votes" will have the same effect as a vote against the Merger
Proposal.
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 the Merger
Proposal. As of October 15, 1999, Mr. Alter (who is an affiliate of SHP
Acquisition and SHP Investors Sub) and his affiliates do not own any of the
Voting Securities, and Mr. Biederman (who is an affiliate of SHP Acquisition
and SHP Investors Sub) owned approximately 0.1% of the Voting Securities. As of
October 15, 1999, Westbrook Fund I and its affiliates owned approximately 10.0%
of the Voting Securities. See "Certain Relationships and Transactions."
3
<PAGE>
In addition, Directors and executive officers of Sunstone (other than
Messrs. Alter, Biederman and Kazilionis) who own or control 107,326 shares of
our common stock (constituting approximately 0.3% of the outstanding Voting
Securities) have indicated to us that they currently intend to vote all such
shares for approval and adoption of the Merger Proposal.
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 of 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." It is a condition to the closing of the merger that the Operating
Partnership merger have occurred. See "The Merger and the Merger Agreement--
Conditions."
The Operating Partnership merger and certain related required amendments of
the partnership agreement of the Operating Partnership require the approval of
holders of at least two-thirds of the OP Units (excluding OP Units held by
Sunstone). The holders of more than two-thirds of the OP Units (excluding OP
Units held by Sunstone) have delivered written consents approving and adopting
the Operating Partnership merger and these related amendments. Accordingly, the
Operating Partnership will not be soliciting consents with respect to the
Operating Partnership merger and related partnership agreement amendments. The
holders of OP Units will, however, be provided with a separate information
statement/offering memorandum relating to the Operating Partnership merger and
the consideration they will receive as a result of the Operating Partnership
merger. 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 will have the ability to 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 take advantage
of alternate structures not available to us 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 Proposal--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 Proposal 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
4
<PAGE>
"--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--Conditions." Holders of the requisite amount of OP Units have
delivered written consents approving and adopting the Operating Partnership
merger and related required amendments of the partnership agreement of the
Operating Partnership. See "--Voting Securities and Votes Required."
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, our common stockholders, including
Nonaffiliated Stockholders who hold shares of common stock, will receive $10.35
in cash per share, subject to adjustments which we currently anticipate will
increase the merger consideration to approximately $10.39 per share. The
adjustments provide that the common stockholders will be paid an additional
amount equal to their proportionate share of $2.5 million, or approximately 6
cents per share. The merger agreement also provides for a possible decrease in
the merger consideration paid to common stockholders in the event certain
transaction expenses, consent payments or other payments exceed amounts
specified in the merger agreement. We currently anticipate that these
adjustments will result in a decrease of approximately 2 cents per share. The
net result of all the adjustments is currently anticipated to increase the
merger consideration by approximately 4 cents per share to approximately $10.39
per share. The actual amount of the adjustments will not be determined until
shortly prior to the closing of the merger. 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 a wholly-owned subsidiary of SHP
Acquisition and parent of 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 additional consideration in
accordance with the merger agreement.
See "Matters Relating to the Merger Proposal--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 (with one member absent), has unanimously approved the Merger
Proposal (with two Directors absent) and recommends that you vote FOR adoption
and approval of the Merger Proposal. 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--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
Proposal. See "Matters Relating to the Merger Proposal--Recommendation of the
Special Committee and the Board of Directors; Fairness of the Merger."
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
5
<PAGE>
Committee. The members of the Special Committee own in the aggregate 96,788
shares of common stock and will receive an aggregate amount of approximately
$1,005,627 (assuming the price paid for each share of common stock in the
merger equals $10.39) 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 $15,529 (assuming the price paid for each share of common stock
in the merger equals $10.39). See "Matters Relating to the Merger Proposal--
Interests of Certain Persons in Matters to be Acted Upon--Options and
Warrants."
Fairness Opinion
The Special Committee's independent financial advisor, Goldman Sachs,
delivered a written opinion to the Special Committee, dated July 12, 1999, 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 original merger agreement, to be received by the holders (other than SHP
Acquisition, its subsidiaries and affiliates, 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-Invest III"), Westbrook SHP, L.L.C., a Delaware limited
liability company ("Westbrook SHP"), Mr. Alter, Riverside Hotel Partners, Inc.,
a California corporation, Alter Investment Group Ltd., a Colorado limited
partnership, Mr. Biederman, the Management Company, Management Sub SHP L.L.C.,
a Delaware limited liability company, Lessee, Westbrook Fund I and Regina
Biederman (collectively, the "Related Persons")) of common stock in the merger
contemplated by the original merger agreement was fair to such stockholders
from a financial point of view. Goldman Sachs subsequently delivered its
written opinion to the Special Committee, dated October 7, 1999, 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 in that opinion, the Merger Consideration (as this term is defined
below in "The Merger and the Merger Agreement--Merger Consideration") to be
received by the holders (other than the Related Persons) of common stock in the
merger contemplated by the merger agreement was fair to such stockholders from
a financial point of view.
The full text of the written opinions of Goldman Sachs, which sets forth the
assumptions made, matters considered and limitations on the review undertaken
in connection with those opinions, are attached as Appendix B and Appendix C to
this Proxy Statement. The opinions of Goldman Sachs referred to in this Proxy
Statement do 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 those opinions in their
entirety. See "Matters Relating to the Merger Proposal--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
Proposal--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 Proposal--
Interests of Certain Persons in Matters to be Acted Upon" and "Certain
Relationships and Transactions."
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
6
<PAGE>
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, all common stockholders, including
Nonaffiliated Stockholders who hold shares of common stock, will receive $10.35
in cash per share, subject to the adjustments set forth below. The net result
of all the adjustments is currently anticipated to increase the merger
consideration by approximately 4 cents per share to approximately $10.39 per
share. Except for the adjustment set forth in paragraph 7 below, which is on a
per share basis, all of the other adjustments are expressed as an aggregate
adjustment for all common stockholders and will be converted to a per share
basis immediately prior to the closing by dividing the applicable aggregate
dollar adjustment by the aggregate number of our outstanding common shares and
OP Units (other than those held by us). The adjustments are:
(1) an increase of $2.5 million (approximately 6 cents per share);
(2) a decrease equal to one-half of the amount (if any) by which the
aggregate costs and fees relating to obtaining consents of franchisors
under the franchise agreements for our hotel properties exceed $12.5
million and are less than $25 million. If those costs and fees exceed
$25 million, we have the option to either further decrease the
aggregate amount to be paid to the common stockholders by the 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 the four loans described in
paragraph 6 below 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 equal to the amount (if any) necessary (after giving effect
to the "Financing Overage" described below) to pay in full at the
closing of the merger all remaining amounts under four loans with an
aggregate outstanding principal amount of approximately $69 million for
which lender consents are required but have not been obtained prior to
the closing. To the extent the amount of the Paine Webber loan to SHP
Acquisition described under "Matters Relating to the Merger Proposal--
Financing; Source of Funds" below exceeds $454.6 million (a "Financing
Overage"), such funds will be used to pay the amounts due under these
four loans prior to reducing the merger consideration. The proceeds of
the Paine Webber loan are currently anticipated to be approximately
$508 million to $518.5 million, which would result in a Financing
Overage of between approximately $53.4 million to $63.9 million. Any
adjustment to the purchase price described under this paragraph is not
automatic but would only be effected if we elected to do so rather than
have a condition to SHP Acquisition's obligation to close the merger
fail to be satisfied; 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. Under the merger
agreement, dividends are payable to our common stockholders only to the
extent necessary for us to maintain our REIT status or to prevent us
from having to pay federal income or excise tax.
7
<PAGE>
The amount per share of common stock paid to the common stockholders,
including the Nonaffiliated Stockholders, after giving effect to the
adjustments described in each of paragraphs 1 through 7 above, is referred to
in this Proxy Statement as the "Merger Consideration."
We currently do not anticipate that any adjustments will be made to the
amount paid to the common stockholders under the provisions described above in
paragraphs 2, 4, 5, 6 or 7. In addition to the adjustment described in
paragraph 1, we expect that an adjustment to the amount paid to the common
stockholders will be made pursuant to the provisions described in paragraph 3.
We currently believe that our expenses relating to the merger and the Operating
Partnership merger will be between approximately $12.2 million to $12.7
million, and that the excess of that amount over $11.5 million will result in
an aggregate reduction in the amount paid to the common stockholders of between
approximately $700,000 to $1.2 million, or approximately 2 cents per share of
common stock, using the $950,000 mid-point of our estimate. After giving effect
to the downward adjustment for expenses of approximately 2 cents per share and
the upward adjustment of approximately 6 cents per share described in paragraph
1, we currently anticipate that the amount per share paid to common
stockholders will be increased from $10.35 to approximately $10.39 per share.
The actual amount of the adjustments will not be determined until shortly prior
to the closing of the merger.
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 Operating Partnership merger and certain related required amendments of
the partnership agreement of the Operating Partnership require the approval of
holders of at least two-thirds of the OP Units, excluding OP Units held by
Sunstone. The holders of more than two-thirds of the OP Units, excluding OP
Units held by Sunstone have delivered written consents approving and adopting
the Operating Partnership merger and those related amendments.
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 the Merger Proposal. As of the date hereof, the shares
subject to the voting agreement represent approximately 9.1% of the votes
entitled to be cast on the Merger Proposal.
The voting agreement is an exhibit to the Rule 13e-3 Transaction Statement
on Schedule 13E-3 with respect to the merger, filed by Sunstone, SHP
Acquisition, SHP Investors Sub, Mr. Alter, Alter SHP LLC, a
8
<PAGE>
Delaware limited liability company and an affiliate of Mr. Alter ("Alter SHP"),
Mr. Biederman, Biederman SHP LLC, a Delaware limited liability company and an
affiliate of Mr. Biederman ("Biederman SHP"), Westbrook Fund III, Westbrook Co-
Invest III, Westbrook SHP and Mr. Kazilionis (SHP Acquisition, SHP Investors
Sub, Mr. Alter, Alter SHP, Mr. Biederman, Biederman SHP, Westbrook Fund III,
Westbrook Co-Invest III, Westbrook SHP and Mr. Kazilionis are collectively
referred to as the "Filing Persons"). 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:
. 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;
. 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 Proposal--
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;
. 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
9
<PAGE>
. 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 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
10
<PAGE>
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 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 Proposal has not been
approved at the special meeting or any 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--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
. 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 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");
11
<PAGE>
. 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; or
. 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.
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--Termination Fees and Expenses" for a
detailed explanation of the fees payable in the event of a termination of the
merger agreement for any of the reasons 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 $840 million, assuming the Merger Consideration is $10.39 per
share, including:
. Payment of the Merger Consideration to stockholders in the amount of
approximately $394.0 million, consisting of an aggregate of $24.2 million
to Westbrook and its affiliates, Mr. Alter and his affiliates and Mr.
Biederman and his affiliates, and an aggregate of $369.8 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 $368.5 million;
. Payment in respect of stock options and warrants in the aggregate amount
of approximately $1.0 million;
. Payment of fees and expenses (including debt prepayment fees and
financing fees) in the amount of approximately $30.4 million; and
. Cash payments under the contribution agreement (described below) in the
amount of approximately $8.5 million.
12
<PAGE>
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 $508 million to $518.5 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 Proposal--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
Proposal--Interests of Certain Persons in Matters to be Acted On--Contribution
and Sale Agreement."
Federal Income Tax Consequences
You generally 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. 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. See "Matters Relating to the Merger Proposal--Material Federal
Income Tax Consequences."
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 Proposal. See "Matters Relating to the Merger Proposal--Appraisal
Rights."
13
<PAGE>
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 November 17, 1999 at 10:00 a.m.,
California time, at the La Mirada Holiday Inn Select, 14299 Firestone
Boulevard, La Mirada, California 90638, including any adjournments or
postponements thereof.
Purpose of the Special Meeting
At the special meeting, holders of Voting Securities will consider and vote
upon the Merger Proposal. 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 October 7, 1999, all of the members of our Board of
Directors (with two Directors absent), based upon the unanimous recommendation
of the Special Committee (with one member absent), determined that the terms of
the Merger Proposal 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 (with one member absent), unanimously believes that the
Merger Proposal is in the best interests of our stockholders, has approved the
Merger Proposal (with two Directors absent) and recommends that you vote FOR
adoption and approval of the Merger Proposal. Stockholders should be aware that
certain of the members of our Board of Directors have conflicts of interest
with respect to the merger. See "Matters Relating to the Merger Proposal--
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 October 15, 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 Supplementary with respect thereto, into 6.79842 shares of common
stock, based on a conversion price of $14.7093 per share.
Accordingly, on the record date, there were outstanding shares of common
stock and preferred stock entitled to cast a total of 39,641,832 votes, of
which 37,942,227 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 880,859 OP Units. Under the partnership agreement of 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 at least two-thirds of the OP
Units (excluding OP Units held by Sunstone) must approve and adopt the
Operating Partnership merger and related required amendments of the partnership
agreement of the Operating Partnership before the Operating Partnership merger
can take place. The holders of more than two-thirds of the OP Units (excluding
OP Units by Sunstone) have delivered written consents approving and adopting
the Operating Partnership merger and related partnership agreement amendments.
14
<PAGE>
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 merger must be approved by the stockholders holding a majority of all
votes entitled to be cast. Shares which abstain from voting on the Merger
Proposal, 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 the Merger Proposal, are nonetheless considered outstanding shares
and such abstentions and "broker non-votes" will have the same effect as a vote
against the Merger Proposal. We expect that if the holders of less than 50% (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 will be adjourned to a later date,
notwithstanding the presence of a quorum thereat.
As of the close of business on the record date, Mr. Alter (who is an
affiliate of SHP Acquisition and SHP Investors Sub) and his affiliates did not
own any of the Voting Securities, and Mr. Biederman (who is an affiliate of SHP
Acquisition and SHP Investors Sub) and his affiliates owned approximately 0.1%
of the Voting Securities. As of the closing of business on the record date,
Westbrook Fund I and its affiliates owned approximately 10.0% 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 the Merger Proposal. In addition, Directors
and executive officers of Sunstone (other than Messrs. Alter, Biederman and
Kazilionis) who own or control 107,326 shares of our common stock (constituting
approximately 0.3% of the outstanding Voting Securities) have indicated to us
that they currently intend to vote all such shares for approval and adoption of
the Merger Proposal.
The merger is subject to conditions in addition to the required vote of the
stockholders. See "The Merger and the Merger Agreement--Conditions."
Action to be Taken Under the Proxy
All proxies that are properly executed and returned 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 the Merger Proposal. The enclosed form of proxy card
is provided for your use, and proxies may be submitted by U.S. mail, and in
certain circumstances, over the telephone or via the 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 of proxy and acting
thereunder generally
15
<PAGE>
will have the discretion to vote on such matters in accordance with their best
judgment.
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 D.F. King & Co., Inc. to
assist in the solicitation of proxies at an estimated fee of approximately
$120,000 plus reimbursement of reasonable expenses to be paid by us.
MATTERS RELATING TO THE MERGER PROPOSAL
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 September 30, 1999, 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 October 15, 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 $8.75 and $8.50, respectively.
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
16
<PAGE>
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 and
Westbrook Co-Invest III (each of which is an affiliate of Westbrook), Alter SHP
(which is an affiliate of Mr. Alter) and Biederman SHP (which is an affiliate
of Mr. Biederman). See "Matters Relating to the Merger Proposal--Interests of
Certain Persons in Matters to be Acted Upon."
As of the record date, Mr. Alter and his affiliates did not own any shares
of our outstanding common stock, Mr. Biederman and his affiliates owned 38,680
shares of our common stock, and Messrs. Alter and Biederman and their
affiliates owned 880,859 OP Units or approximately 2.2%, of the outstanding OP
Units (excluding OP Units owned by us). 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 2.4% of our outstanding shares of common stock as of such
date.
As of the record date, Westbrook and its affiliates owned (i) 2,284,262
shares or approximately 6.0% of our outstanding common stock and (ii) all of
our preferred stock. Westbrook Fund I holds 2,049,135 shares of common stock
and 224,266.6 shares of preferred stock and Westbrook Real Estate Co-Investment
Partnership I, L.P., a Delaware limited partnership ("Westbrook Co-Invest I"),
holds 235,127 shares of common stock and 25,733.4 shares of our preferred
stock. Mr. Kazilionis has been granted options exercisable as of the record
date to purchase 3,000 shares of common stock, of which 1,500 are in the money.
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 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
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 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 in
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.
17
<PAGE>
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 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 the
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 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.
18
<PAGE>
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
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").
19
<PAGE>
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.
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.
20
<PAGE>
This proposal is also subject to the following conditions: (i) approval
by Sunstone's Board of Directors and shareholders pursuant to the
requirements of 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.
21
<PAGE>
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.
/s/ Robert A. Alter
By __________________________________
Name: Robert A. Alter
Title: Manager
/s/ Paul D. Kazilionis
By __________________________________
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 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.
22
<PAGE>
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 original 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. R. Terrence 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 willingness to make 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
23
<PAGE>
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.
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.
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 had
occurred since the last meeting. The Special Committee also discussed SHP
Acquisition's proposed financing.
24
<PAGE>
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 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.
25
<PAGE>
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 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.
26
<PAGE>
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 $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.
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 original merger agreement to SHP Acquisition and its counsel. On
May 20, 1999, SHP Acquisition's counsel sent its initial comments to the
original merger agreement.
27
<PAGE>
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 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.
28
<PAGE>
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.
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
29
<PAGE>
Competing Bidder and SHP Acquisition. As part of his work for the Special
Committee, Mr. Deming, our independent 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 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.
30
<PAGE>
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.
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 stockholders.
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
31
<PAGE>
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 original 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.
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 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
32
<PAGE>
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 original merger
agreement. The stockholders would, however, be paid a total of $2.5 million, or
approximately 6 cents per share, even if the increase in our cash balance did
not warrant such payment.
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, the $10.35 per share, as
adjusted as provided in the original merger agreement, to be received by our
stockholders (other than the Related Persons) was fair from a financial point
of view to such stockholders.
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 the
original merger agreement and the merger and recommended that the full Board of
Directors approve the original merger agreement and the merger.
Board of Directors Meeting. Following the meeting of the Special Committee
on July 12, 1999, a meeting of our Board of Directors was convened. The Special
Committee recommended that we enter into the merger and the original merger
agreement. After receiving a comprehensive oral report from the Special
Committee as to its deliberations and a review of its discussions with Goldman
Sachs as to the fairness of the transaction, the Board of Directors discussed
with the Special Committee the procedures and inquiries taken by it.
Thereafter, the Board of Directors (with all Directors present), unanimously
approved and adopted resolutions relating to the merger, which, among other
things, authorized us to enter into the original merger agreement, as well as
resolutions that we pay a success bonus to Mr. Crowley and approving the fees
to be paid to the members of the Special Committee. The Board of Directors also
approved and adopted resolutions
33
<PAGE>
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 original merger
agreement, as well as the power to enter into any amendments or waivers with
respect to the original merger agreement. No further specific inquiries were
made of the Special Committee.
Following further minor negotiations with respect to the original merger
agreement and the related documents, the parties executed the original merger
agreement and related documents on July 13, 1999 and issued a press release
announcing the transaction.
Monitoring of Closing Matters. Subsequent to the execution of the original
merger agreement, the Special Committee met several times to discuss and
monitor the progress of the matters necessary to close the merger transaction.
Change in Structure/Amendment and Restatement of Original Merger
Agreement. On September 28, 1999, representatives of SHP Acquisition informed
us that SHP Acquisition had restructured its financing arrangements and
therefore no longer needed, as originally contemplated by the original merger
agreement, certain amendments to our articles of incorporation (our "Charter")
to be implemented as of the effective time of the merger. These amendments,
along with a proposal relating to the termination of our REIT status, would
have required the approval of two-thirds 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). In contrast, the approval of the merger
requires us to obtain the approval 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). Because SHP Acquisition was
no longer requesting that we seek stockholder approval to effect Charter
amendments and terminate our REIT status, the Special Committee, at a meeting
held on October 7, 1999, agreed to amend the original merger agreement to no
longer contemplate stockholder approval for these matters.
At its October 7, 1999 meeting, the Special Committee also approved an
amendment of the adjustment provisions of the original merger agreement. The
original merger agreement had provided that the common stockholders would be
paid an amount equal to their proportionate share of 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, provided that common stockholders
would receive an aggregate of at least $2.5 million even if the increase in our
cash balance did not warrant such payment. In light of our financial
performance and the belief of the Special Committee, after review and analysis
by the Special Committee, the Board of Directors and their advisors, that the
closing adjustment would not be greater than $2.5 million and that the expenses
associated with the cash balance calculation would be effectively borne by our
stockholders, and after receipt of the opinion, dated October 7, 1999, of
Goldman Sachs described below, the Special Committee agreed to amend the
original merger agreement to provide that, under this adjustment, our common
stockholders would receive an aggregate amount of $2.5 million, or
approximately 6 cents per share. In determining whether to approve the
amendment to the adjustment provisions of the original merger agreement, the
Special Committee considered the opinion, dated October 7, 1999, of Goldman
Sachs 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 in that opinion, the Merger Consideration to be received
by our stockholders (other than the Related Persons) in the merger contemplated
by the merger agreement was fair to such stockholders from a financial point of
view.
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 (with one member not present at the meeting)
unanimously approved entering into the merger agreement, which gives effect to
the amendments described above, and the merger and recommended that the full
Board of Directors approve the merger agreement and the merger.
Following the meeting of the Special Committee, a meeting of our Board of
Directors was convened. The Special Committee recommended that we enter into
the merger and the merger agreement. The Board of Directors (with two members
not present at the meeting) unanimously approved and adopted resolutions
34
<PAGE>
relating to the merger, which, among other things, authorized us to enter into
the merger agreement and the merger. Following the Board of Directors meeting,
the parties executed the merger agreement.
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, for holders of preferred
stock, 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 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 having the ability to terminate Sunstone's status as a REIT following
the closing (see "--Plans for Sunstone After the Merger"), the need to
comply with the distribution requirements imposed by tax laws applicable
to REITs could 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 in the event 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.
35
<PAGE>
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 original merger agreement, declare the merger to be
advisable and approve the merger. 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;
. determined to recommend to our stockholders that they vote to approve the
merger; and
. authorized our officers to execute the original merger agreement and
related documents.
At a meeting held on October 7, 1999, the Special Committee (with one member
absent) 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 the merger. At a meeting of the Board of
Directors held on October 7, 1999, all of the Directors present at the meeting
(with two Directors absent), 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;
. determined to recommend to our stockholders that they vote to approve the
Merger Proposal; and
. authorized our officers to execute the merger agreement and related
documents.
See "Matters Relating to the Merger Proposal--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;
. 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;
36
<PAGE>
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 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 the review
undertaken in connection with such opinion, as set forth in that opinion,
the $10.35 per share, as adjusted as provided in the original merger
agreement, to be received by our stockholders (other than the Related
Persons) in the merger contemplated by the original merger agreement was
fair to such stockholders from a financial point of view;
. the opinion, dated October 7, 1999, of Goldman Sachs, 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 in that opinion, the Merger Consideration to be received by our
stockholders (other than the Related Persons) in the merger contemplated
by the merger agreement was fair to such stockholders from a financial
point of view;
. that SHP Acquisition, upon signing the original 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
(which funding is currently anticipated to be approximately $508
million to $518.5 million) of the purchase price from Paine Webber, and
that the financing commitment subjects the financing to only limited
conditions; and
. 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 an aggregate
amount of $2.5 million, or approximately 6 cents per share, subject to
adjustments which may decrease the amount of the merger consideration
(See "The Merger and the Merger Agreement--Merger Consideration"); and
. 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--
Termination; Withdrawal of Recommendations").
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
37
<PAGE>
. 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.
In light of the number and variety of factors the Special Committee
considered in connection with its evaluation of the fairness 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.
Although our obligation to consummate the merger is not conditioned upon the
favorable vote of a majority of the Nonaffiliated Stockholders and our Board
did not retain an unaffiliated representative to act solely on behalf of the
Nonaffiliated Stockholders, 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;
. 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.
The Special Committee also 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.
Because cash flow indicators such as EBITDA, FFO and expected yields are one
of the primary methods of determining the value of real-estate based
investments, including REITs; the fact that we would base our own financial
performance and would make significant capital expenditures on capital
improvements based in part on these cash flow indicators; and the fact that
other valuation methods were not believed to be as appropriate for the reasons
discussed below, the Special Committee believed that cash flow and expected
yield analysis were useful indicators of our value. Conversely, net book value
is not related to cash flows or expected yields and is therefore not a useful
indicator of our value, the Special Committee did not consider our net book
value to be a material factor in determining the fairness of the transaction to
our stockholders. Moreover, the Special Committee did not conduct a liquidation
valuation of us, primarily because it did not believe liquidation value to be
indicative of our going concern value. The Special Committee believed that the
liquidation value of our assets was not indicative of our value primarily
because we would incur a tax liability in the event of a liquidation of
approximately $60 to $80 million with respect to certain hotels acquired by us
from Kahler Realty Corporation. The Special Committee also did not establish a
pre-merger going concern value for our equity for the purpose of determining
the fairness of the Merger Consideration to our stockholders. The Special
Committee does not think that there is any single method of determination of
going concern value, but the Special Committee did note that the sale process
conducted on our behalf contemplated our sale as a going concern. In this
regard, the Special Committee noted that the only other firm offer for us was
at a price lower than the Merger Consideration.
The Board of Directors. The Board of Directors, at its October 7, 1999
meeting, considered the unanimous recommendation of the Special Committee (with
one member absent), 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 Proposal, and recommended that
the stockholders vote to approve and adopt the Merger Proposal. The vote of the
Directors to authorize and approve the Merger Proposal was unanimous (with two
Directors absent), and a majority of the Directors voting were not employees
of, or otherwise affiliated with (other than as Directors), us. The Board of
Directors received an oral report of the Special Committee as to its
deliberations and a review of its discussions with Goldman Sachs as to the
fairness of the transaction. Thereafter the Board of Directors considered the
recommendation of the Special Committee but made its own evaluation without
making any additional inquiries, based on the factors enumerated above, of the
substantive and procedural fairness of the Merger Proposal and its prior
discussions in July with the Special Committee.
38
<PAGE>
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 Proposal--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 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 Proposal--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 and the Filing Persons 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 generally 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 Proposal--Material Federal Income Tax Consequences."
Opinion of the Independent Financial Advisor
On July 12, 1999, Goldman Sachs delivered its oral opinion to the Special
Committee to the effect that, as of the date of such opinion, and based upon
the assumptions made, matters considered and limitations on the review
undertaken in connection with such opinion, as set forth in that opinion, the
$10.35 per share, as adjusted as provided in the original merger agreement, to
be received by our stockholders (other than the Related Persons) in the merger
contemplated by the original merger agreement was fair to such stockholders
39
<PAGE>
from a financial point of view. Goldman Sachs subsequently confirmed its oral
opinion by delivery of its written opinion dated July 12, 1999. Goldman Sachs
subsequently delivered its written opinion to the Special Committee, dated
October 7, 1999, 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 in that opinion, the Merger
Consideration to be received by our stockholders (other than the Related
Persons) in the merger contemplated by the merger agreement was fair to such
stockholders from a financial point of view.
The full text of the written opinions of Goldman Sachs, dated July 12, 1999
and October 7, 1999, which sets forth the assumptions made, matters considered
and limitations on the review undertaken in connection with such opinions, are
attached as Appendix B and Appendix C, respectively, to this Proxy Statement.
Holders of shares of common stock are urged to, and should, read such opinions
in their entirety.
In connection with its opinion, dated July 12, 1999, Goldman Sachs reviewed,
among other things:
. the original 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.
In connection with its opinion, dated October 7, 1999, Goldman Sachs
reviewed, in addition to the documents and information it reviewed in
connection with its opinion, dated July 12, 1999, among other things, the
merger agreement.
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 (including, in connection with the
opinion dated October 7, 1999, monthly operating results for the Sunstone
properties for July and August 1999) 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.
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 opinions. In that regard, for
purposes of the opinions 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
40
<PAGE>
were reasonably prepared, although they do not reflect Sunstone's actual
operating results for the period following May 31, 1999. In that regard, the
management of Sunstone has informed Goldman Sachs that such operating results
are below the level implied by the June 28 Projections. Goldman Sachs' opinion,
dated October 7, 1999, does not address the relative merits for Sunstone of the
merger agreement as compared to the original merger agreement. 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 opinions of Goldman Sachs are provided for the
information and assistance of the Special Committee in connection with its
consideration of the transactions contemplated by the original merger agreement
and the merger agreement, and such opinions do not constitute a recommendation
as to how any holder of shares of common stock should vote with respect to the
transactions contemplated by the merger agreement.
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. Goldman Sachs utilized substantially the same type of financial
analyses in connection with providing its written opinion, dated October 7,
1999.
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.;
. 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.
41
<PAGE>
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
. 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:
<TABLE>
<CAPTION>
Selected Companies: REITs
-------------------------
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
<TABLE>
<CAPTION>
Selected Companies: Corporations
--------------------------------
5-Year
1999E EBITDA 2000E EBITDA 1999E PE 2000E PE EPS/1/ 1999E 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>
- --------
/1/ 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
42
<PAGE>
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
. 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>
Premium Over Stock
Forward EBITDA Forward EBIT Forward P/E Forward FFO Price One Month
Multiple Multiple Multiple Multiple Prior
-------------- ------------ ----------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
High Point of Range
(excluding Sunstone)... 14.0x 19.7x 38.0x 9.7x 76.0%
Median of Range
(excluding Sunstone)... 11.3x 15.0x 27.0x 9.5x 24.8%
Mean (excluding
Sunstone).............. 11.0x 15.5x 27.0x 8.0x 24.9%
Low Point of Range
(excluding Sunstone)... 7.6x 11.5x 15.2x 4.8x (1.0)%
SHP
Acquisition/Sunstone... 9.6x 17.4x NA 7.1x 34.6%
</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 $10.35 per share contemplated by the
original merger agreement, 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.
43
<PAGE>
The results of this analysis were as follows:
<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 share....... $6.42 $7.16 $7.96 $8.84 $9.79 $10.83
Merger consideration as
percentage premium/(discount)
to net asset value per share... 61.2% 44.5% 30.0% 17.1% 5.8% (4.4)%
7/09/1999 share price ($9.00) as
percentage premium/(discount)
to net asset value per share... 40.1% 25.7% 13.0% 1.9% (8.0)% (16.9)%
30 day pre-announcement average
share price ($7.24)
as percentage premium/(discount)
to net asset value per share... 12.7% 1.1% (9.1)% (18.1)% (26.0)% (33.2)%
90 day pre-announcement average
share price ($8.41)
as percentage premium/(discount)
to net asset value per share... 31.0% 17.4% 5.6% (4.8)% (14.1)% (22.3)%
180 day pre-announcement average
share price ($8.81)
as percentage premium/(discount)
to net asset value per share... 37.1% 23.0% 10.6% (0.3)% (10.0)% (18.7)%
One year pre-announcement
average share price ($10.81)
as percentage premium/(discount)
to net asset value per share... 68.3% 50.9% 35.7% 22.3% 10.4% (0.2)%
</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, dated July 12, 1999, to the Special Committee as to the fairness
from a financial point of view to the stockholders (other than the Related
Persons) of the $10.35 per share, as adjusted as provided in the original
merger agreement, to be received by such holders in the merger contemplated by
the original merger agreement and its opinion, dated October 7, 1999, 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 in
the merger contemplated by the merger agreement. 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.
As described above, Goldman Sachs' opinions, dated July 12, 1999 and October
7, 1999, to the Special Committee were one of many factors taken into
consideration by the Special Committee in making its determination to approve
the original merger agreement and the merger agreement, respectively. 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
opinions of Goldman Sachs, dated July 12, 1999 and October 7, 1999, set forth
as Appendix B and Appendix C, respectively, 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,
44
<PAGE>
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 original merger agreement and 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 October 7, 1999, Goldman Sachs had accumulated a long position of
1,000,000 shares of our 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 the Other Filing Persons
The rules of the Securities and Exchange Commission require each of the
Filing Persons to express its belief as to the fairness of the merger to the
Nonaffiliated Stockholders. While none of the Filing Persons has undertaken any
evaluation of the merger from the standpoint of fairness to the Nonaffiliated
Stockholders, each of the Filing Persons has 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. The Filing Persons also
understand that our obligation to consummate the merger is conditioned upon the
favorable vote of a majority of all stockholders entitled to vote, and not
solely upon the approval of a majority of the Nonaffiliated Stockholders, and
that our Board did not retain an unaffiliated representative to act solely on
behalf of all the Nonaffiliated Stockholders. Among the positive factors
considered were the following factors, each of which, in the Filing Persons'
view, supports their belief that the Merger Consideration is fair to the
Nonaffiliated Stockholders from a financial point of view:
. Sunstone had thoroughly explored the market interest in an acquisition of
it, through the efforts on its behalf by Goldman Sachs to solicit
indications of interest to purchase all or part of Sunstone's business,
whose efforts included contacting 38 potential acquirors and extended
over nearly three months;
. historical data relating to market prices of Sunstone's common stock,
including data that indicated that, assuming the Merger Consideration
would be $10.39 per share, the Merger Consideration represents an
approximately 43.9% premium to the average closing price of Sunstone's
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's initial cash offer was made and disclosed);
. the opinion dated July 12, 1999 of Goldman Sachs, which opinion has been
adopted by the Filing Persons, 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 original merger
agreement, to be received by the stockholders (other than the Related
Persons) was fair from a financial point of view to such stockholders;
45
<PAGE>
. the opinion dated October 7, 1999 of Goldman Sachs, which opinion has
been adopted by the Filing Persons, 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
Merger Consideration to be received by the stockholders (other than the
Related Persons) was fair from a financial point of view to such
stockholders;
. although Sunstone is restricted from paying dividends under the merger
agreement, the merger consideration will be increased by an aggregate
amount of $2.5 million, or approximately 6 cents per share, subject to
adjustments which may decrease the amount of the merger consideration
(See "The Merger and the Merger Agreement--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 Sunstone receives an unsolicited Superior
Acquisition Proposal that it desires to accept (See "The Merger and
Merger Agreement--Termination; Withdrawal of Recommendations"); and
. the approval of the merger by all the members of the Special Committee
and the fact that the Special Committee, based on the factors described
in "--Recommendation of the Special Committee and the Board of Directors;
Fairness of the Merger," determined that the merger is fair to and in the
best interests of the Nonaffiliated Stockholders and declared that the
merger agreement and the transactions contemplated by the merger
agreement are advisable.
The Filing Persons considered the material negative factors described under
"--Recommendation of the Special Committee and the Board of Directors; Fairness
of the Merger" and viewed them as insufficient to outweigh the positive
factors.
After considering the foregoing, each of the Filing Persons has indicated
that it believes the Merger Consideration to be fair to the Nonaffiliated
Stockholders from a financial point of view. In light of the number and variety
of factors the Filing Persons considered in connection with their evaluation of
the fairness of the Merger Consideration to the Nonaffiliated Stockholders from
a financial point of view, the Filing Persons did not find it practicable to
assign relative weights to the foregoing factors; accordingly, the Filing
Persons did not do so.
Because cash flow indicators such as EBITDA, FFO and expected yields are one
of the primary methods of determining the value of real-estate based
investments, including REITs; the fact that we would base our own financial
performance and would make significant capital expenditures on capital
improvements based in part on these cash flow indicators; and the fact that
other valuation methods were not believed to be as appropriate for the reasons
discussed below, the Filing Persons believed that cash flow and expected yield
analysis were useful indicators of our value. Conversely, net book value is not
related to cash flows or expected yields and is therefore not a useful
indicator of our value, the Filing Persons did not consider our net book value
to be a material factor in determining the fairness of the transaction to our
stockholders. None of the Filing Persons conducted a liquidation valuation of
Sunstone, primarily because none of them believed liquidation value to be
indicative of our going concern value. The Filing Persons believed that the
liquidation value of our assets was not indicative of our value primarily
because we would incur a tax liability in the event of a liquidation of
approximately $60 to $80 million with respect to certain hotels acquired by us
from Kahler Realty Corporation. The Filing Persons also did not establish a
pre-merger going concern value for our equity for the purpose of determining
the fairness of the Merger Consideration to our stockholders. The Filing
Persons do not think that there is any single method of determination of going
concern value, but the Filing Persons did note that the sale process conducted
on our behalf contemplated our sale as a going concern. In this regard, the
Filing Persons noted that the only other firm offer for Sunstone was at a price
lower than the Merger Consideration.
The Filing Persons considered the procedural measures taken by the Board 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. The Filing Persons also believe that the merger is procedurally
fair because:
. the Special Committee met separately from any interested parties and
received advice from its independent financial and legal advisors on
numerous occasions prior to and during the auction process;
46
<PAGE>
. the Special Committee engaged in extensive deliberations in evaluating
the merger agreement and alternatives thereto, including authorizing
Goldman Sachs to solicit indications of interest to purchase all or part
of Sunstone's business, whose efforts included contacting 38 potential
acquirors and extended over nearly three months; and
. the Special Committee supervised the auction process and directed its
independent financial and legal advisors with respect to the negotiation
of the principal terms of the merger agreement.
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 Mr. Biederman and his
affiliates will receive equity interests in SHP Acquisition and $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.
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, our President, Chief Executive Officer and Chairman of our Board of
Directors, and has agreed to cause all 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, our
Executive Vice President and 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.
After the consummation of the merger and related transactions, 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
percentage 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.
47
<PAGE>
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 the in the money options will be approximately
$656,000 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 held by Messrs. Alter and
Biederman will be approximately $138,465.20 in the aggregate. In connection
with our initial capitalization, Mr. 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 $15,167 in
the aggregate. Each of the calculations of this paragraph assumes the Merger
Consideration will be $10.39 per share.
The table below shows the in the money options and the warrants, including
OP warrants held by Mr. Alter, to purchase common stock currently held by each
of our executive officers and Directors and the amounts in respect of such
options that such individuals will be entitled to receive at the effective time
of the merger (assuming the Merger Consideration will be $10.39 per share).
<TABLE>
<CAPTION>
TOTAL AMOUNT
IN THE MONEY RECEIVED
OPTIONS AND AT
WARRANTS EFFECTIVE
OUTSTANDING TIME
------------ ---------
<S> <C> <C>
DIRECTORS:
Robert A. Alter......................................... 202,042 $179,817
Charles L. Biederman.................................... 59,000 42,630
H. Raymond Bingham...................................... 4,500 3,724
C. Robert Enever........................................ 1,500 2,366
Laurence S. Geller...................................... 1,500 1,991
Fredric H. Gould........................................ 1,500 2,366
Paul D. Kazilionis...................................... 1,500 2,835
David E. Lambert........................................ 4,500 3,724
Edward H. Sondker....................................... 4,500 3,724
------- --------
Subtotal for Directors:................................. 280,542 $243,177
------- --------
EXECUTIVE OFFICERS:
R. Terrence Crowley..................................... 250,000 $566,250
------- --------
Subtotal for Officers:.................................. 250,000 $566,250
------- --------
TOTAL FOR DIRECTORS AND EXECUTIVE OFFICERS:.............. 530,542 $809,427
======= ========
</TABLE>
48
<PAGE>
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.
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, Alter SHP will have the right to require SHP Acquisition to
purchase the equity interest in SHP Acquisition held by Alter SHP 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, Biederman SHP will have the right to
require SHP Acquisition to purchase the equity interest in SHP Acquisition held
by Biederman SHP 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 outstanding 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;
. each share of preferred stock of SHP Investors Sub outstanding
immediately prior to the effective time of the merger will be converted
in the merger into one share of preferred stock of Sunstone as the
surviving entity with substantially the same terms and conditions as SHP
Investor Sub's preferred stock;
49
<PAGE>
. our Charter and by-laws, as amended, will be the Charter and by-laws of
Sunstone as the surviving entity; and
. 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 or eliminated.
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.
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.
50
<PAGE>
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 held by 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, the surviving entity 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;
. 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.
51
<PAGE>
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.
Material Federal Income Tax Consequences
The following discussion summarizes the material United States federal
income tax considerations of the merger to our stockholders 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 tax consequences of the merger to
him or her.
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 United States Stockholder in the merger will be a taxable transaction
under the Internal Revenue Code of 1986, as amended. In general, a United
States Stockholder will recognize capital 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 (other than any cash deemed to be
received as a dividend, which will be taxable as ordinary income to the extent
not previously included in income by the stockholder) if the common stock or
preferred stock is a capital asset in the hands of the stockholder. Such gain
or loss will be long-term capital 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 subject to federal
income tax 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, the common
stock or the preferred stock exchanged for cash in the merger will not be
subject to United States taxation on the gain recognized upon the exchange
unless such stock constitutes 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 stock will not be treated as a "United States real property
interest" and, as a result, any gain recognized 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:
. we are a "domestically-controlled REIT" within the meaning of the
Internal Revenue Code of 1986, as amended; or
52
<PAGE>
. 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 United States federal income tax.
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.
Backup 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.
Any amounts withheld from a stockholder under the backup 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 consolidated amended
complaint shortly in the Superior Court of the State of California, County of
Orange.
The five suits that have been brought in Maryland are: (i) Belloco v.
Sunstone Hotel Investors, Inc. et al., Baltimore County Circuit Court, Case No.
24-C-99-001601, (filed April 7, 1999); (ii) Brenin v. Sunstone Hotel Investors,
Inc. et al., Montgomery County Circuit Court, Case No. 198629-V (filed April 7,
1999); (iii) Rongelap Resettlement Trust Fund v. Sunstone Hotel Investors, Inc.
et al., Montgomery County Circuit Court, Case No. 198654-V, filed (April 7,
1999); (iv) Branch v. Alter, et al., Baltimore County Circuit Court, Case No.
03-C-99-003422, (filed April 8, 1999); and (v) Muti v. Sunstone Hotel
Investors, Inc., et al., Circuit Court for Baltimore City, (filed April 21,
1999).
The three suits that have been brought in California are: (i) Yuan v. Alter
et al., Orange County Superior Court, Case No. CV 807886 (filed April 8, 1999)
(per letter from plaintiff's lawyer); (ii) Mittleman v. Sunstone Hotel
Investors, Inc., et al., Orange County Superior Court, Case No. CV 808099
(summons issued April 14, 1999); and (iii) Buie and Smith v. Sunstone Hotel
Investors, Inc., et al., Orange County Superior Court, Case No. 808233 (filed
April 26, 1999).
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 to 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.
53
<PAGE>
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 $840 million, assuming the Merger Consideration is $10.39 per
share, including:
. Payment of the Merger Consideration to stockholders in the amount of
approximately $394.0 million, consisting of an aggregate of $24.2 million
to Westbrook and its affiliates, Mr. Alter and his affiliates and Mr.
Biederman and his affiliates, and an aggregate of $369.8 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 $368.5 million;
. Payment in respect of stock options and warrants in the aggregate amount
of approximately $1.0 million;
. Payment of fees and expenses (including debt prepayment fees and
financing fees) in the amount of approximately $30.4 million; and
. 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 880,859 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.
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.
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
financing for a portion of the consideration required for the consummation of
the transactions contemplated by the merger agreement and the Operating
Partnership
54
<PAGE>
merger agreement. Subject to the terms and conditions set forth in the
commitment letter, Paine Webber and Westbrook Fund III currently anticipate
that Paine Webber will provide debt financing in an amount estimated to be
between $508 million and $518.5 million. Paine Webber and Westbrook Fund III
are currently negotiating the terms of the definitive financing agreements and
such agreements are not expected to be completed until shortly prior to the
consummation of the 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, management agreements, franchise
agreements, licensing agreements and other licenses, permits and agreements
relating to the ownership and/or operation of such properties. The financing
will be non-recourse, except for losses sustained by Paine Webber in connection
with customary exceptions.
The commitment letter provides that the financing 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, including (i) no
monetary or material non-monetary event of default existing with respect to the
financing at the time of extension, (ii) the borrower having requested the
extension not less than 60 days or more than 150 days prior to the then
existing maturity date, (iii) the borrower paying an extension fee at the time
of the extension in the amount of 1.0% of the outstanding principal amount of
the loan at the time of the time of the extension and (iv) the debt service
coverage ratio for the loan, being not less than 1.35 times.
The commitment letter provides for an interest rate equal to the one-month
LIBOR rate plus 375 basis points, subject to reduction. Interest payments will
be due monthly on the first business day of each month, in arrears, calculated
on an actual/360 day basis.
The financing may be prepaid in whole or in part at any time during the term
of the loan, subject, in most circumstances, to the payment by borrower of
certain prepayment fees equal to a certain percentage of the principal amount
of the financing then being prepaid.
The commitment letter provides for certain customary affirmative covenants,
negative covenants and events of default applicable to the borrower, including
without limitation, limitations on liens, transfers, certain changes in the
franchisors of the hotels and fundamental changes (including, certain changes
in control of the borrower) and certain financial covenants.
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 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
the 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 indebtedness incurred under the financing commitment is expected to be
repaid from funds internally generated by SHP Acquisition and/or its
subsidiaries (including Sunstone and the Operating Partnership), through
additional borrowings and/or the sale of assets, or from a combination of such
sources. No final decisions have been made concerning the method by which any
such funds will be repaid. Such decisions will be based upon SHP Acquisition's
review of the advisability of particular actions, as well as on prevailing
interest rates and financial and other economic considerations.
55
<PAGE>
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 Proposal.
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 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.
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:
<TABLE>
<CAPTION>
Item Amount
- ---- -------------
(In millions)
<S> <C>
Estimated Costs to SHP Acquisition and SHP Investors Sub.......... $ 6.3
Estimated Costs to Sunstone....................................... 12.5
Estimated Lender Fees and Expenses................................ 11.6
-----
Total Estimated Closing Costs..................................... $30.4
</TABLE>
The merger agreement calls for such fees and expenses to be paid by the
party which incurred them, except (i) in certain circumstances the merger
consideration may be reduced to the extent our expenses exceed certain
thresholds and (ii) 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--Merger
Consideration" and "--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, 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
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.
56
<PAGE>
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 continue to be liable for all our liabilities and
obligations.
Merger Consideration
Upon completion of the merger, all common stockholders, including
Nonaffiliated Stockholders who hold shares of common stock, will receive $10.35
in cash per share, subject to the adjustments set forth below. The net result
of all the adjustments is currently anticipated to increase the merger
consideration by approximately 4 cents per share to approximately $10.39 per
share. Except for the adjustment set forth in paragraph 7 below, which is on a
per share basis, all of the other adjustments are expressed as an aggregate
adjustment for all common stockholders and will be converted to a per share
basis immediately prior to the closing by dividing the applicable aggregate
dollar adjustment by the aggregate number of our outstanding common shares and
OP Units (other than those held by us). The adjustments are:
(1) an increase of $2.5 million (approximately 6 cents per share);
(2) a decrease equal to one-half of the amount (if any) by which the
aggregate costs and fees relating to obtaining consents of franchisors
under the franchise agreements for our hotel properties exceed $12.5
million and are less than $25 million. If those costs and fees exceed
$25 million, we have the option to either further decrease the
aggregate amount to be paid to the common stockholders by the 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 the four loans described in
paragraph 6 below 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 equal to the amount (if any) necessary (after giving effect
to the Financing Overage discussed in "Summary--Merger Consideration")
to pay in full at the closing of the merger all remaining amounts under
four loans with an aggregate outstanding principal amount of
approximately $69 million for which lender consents are required but
have not been obtained prior to the closing. To the extent that the
Paine Webber loan results in a Financing Overage, such funds will be
used to pay the amounts due under these four loans prior to reducing
the merger consideration. The proceeds of the Paine Webber loan are
currently anticipated to be approximately $508 million to $518.5
million, which would result in a Financing Overage of approximately
$53.4 million to $63.9 million. See "Summary--Merger Consideration."
Any adjustment to the purchase price described under this paragraph is
not automatic but would only be effected if we elected to do so rather
than have a condition to SHP Acquisition's obligation to close the
merger fail to be satisfied; 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. Under the merger
agreement, dividends are payable to our common stockholders only to the
extent necessary for us to maintain our REIT status or to prevent us
from having to pay federal income or excise tax.
We currently do not anticipate that any adjustments will be made to the
amount paid to the common stockholders under the provisions described above in
paragraphs 2, 4, 5, 6 or 7. In addition to the adjustment described in
paragraph 1, we expect that an adjustment to the amount paid to the common
stockholders will be
57
<PAGE>
made pursuant to the provisions described in paragraph 3. We currently believe
that our expenses relating to the merger and the Operating Partnership merger
will be between approximately $12.2 million to $12.7 million, and that the
excess of that amount over $11.5 million will result in an aggregate reduction
in the amount paid to the common stockholders of between approximately $700,000
to $1.2 million, or approximately 2 cents per share of common stock, using the
$950,000 mid-point of our estimate. After giving effect to the downward
adjustment for expenses of approximately 2 cents per share and the upward
adjustment of approximately 6 cents per share described in paragraph 1, we
currently anticipate that the amount per share paid to common stockholders will
be increased from $10.35 to approximately $10.39 per share. The actual amount
of the adjustments will not be determined until shortly prior to the closing of
the merger.
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 Proposal--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 Independent Financial Advisor."
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 recording 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. Following the
effective time of the merger, 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).
58
<PAGE>
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 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 Chase Mellon Shareholder Services,
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 Proposal and will not withdraw, modify or change such
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.
59
<PAGE>
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
. 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 original 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);
60
<PAGE>
. 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;
. 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
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
61
<PAGE>
. 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 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 provisions 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;
62
<PAGE>
. 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 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 opinion of Goldman Sachs;
63
<PAGE>
. 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 Proposal; 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 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;
. 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;
64
<PAGE>
. 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 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;
. 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.
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;
65
<PAGE>
. 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
. 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 the Operating Partnership 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 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 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.
66
<PAGE>
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 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 or if the proposed
amendments 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
67
<PAGE>
. 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;
. 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; or
. 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.
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
National Title Insurance Company, as escrow agent, under an escrow agreement
among us, SHP Investors Sub, SHP Acquisition and Fidelity National.
68
<PAGE>
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>
Event Giving Rise to
Terminating Party Right to Terminate Payment
- --------------------------------------------------------------------------------------
<S> <C> <C>
Mutual Written consent of Sunstone, No payment
SHP Acquisition and SHP
Investors Sub
- --------------------------------------------------------------------------------------
SHP Acquisition or SHP Breach by Sunstone of any Sunstone and the Operating
Investors Sub representation or warranty Partnership pay Termination
or breach by Sunstone of any Fee plus Termination
covenant, obligation or Expenses
agreement, except with
respect to certain unwillful
and other breaches as
described below
- --------------------------------------------------------------------------------------
SHP Acquisition or SHP Unwillful breach by Sunstone Sunstone and the Operating
Investors Sub of a specified Partnership pay $7.5 million
representation with respect plus Termination Expenses
to environmental matters, or
breach of any representation
which Mr. Alter knew was not
true and correct when made
- --------------------------------------------------------------------------------------
Sunstone Breach by SHP Acquisition or SHP Acquisition or SHP
SHP Investors Sub of any Investors Sub pay
representation, warranty, Termination Fee plus
covenant, obligation or Termination Expenses
agreement
- --------------------------------------------------------------------------------------
Sunstone (unless in The requisite approval of Sunstone and the Operating
breach of its the stockholders has not Partnership pay Termination
obligations to give been obtained at meeting of Expenses, provided that SHP
notice of and hold stockholders Acquisition and SHP
meeting of stockholders) Investors Sub are not in
or SHP Acquisition or material breach of merger
SHP Investors Sub agreement, and both the
(unless in breach of commitment letter with Paine
their obligations to use Webber and the contribution
reasonable best efforts agreement relating to the
to obtain equity and contributions to SHP
debt financing) Acquisition at the closing
of the merger are in full
force and effect
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
Event Giving Rise to
Terminating Party Right to Terminate Payment
- --------------------------------------------------------------------------------------
<S> <C> <C>
Sunstone (unless in The requisite approval of Sunstone and the Operating
breach of its the stockholders has not Partnership pay Termination
obligations to give been obtained at meeting of Fee plus Termination
notice of and hold stockholders or the Expenses, to the extent not
meeting of stockholders) requisite approval of the already paid provided that
or SHP Acquisition or Operating Partnership's SHP Acquisition and SHP
SHP Investors Sub partnership agreement has Investors Sub are not in
(unless in breach of not been obtained within material breach of merger
their obligations to use five days of the stockholder agreement, and both the
reasonable best efforts approval, and an Acquisition commitment letter with Paine
to obtain equity and Proposal has been received Webber and the contribution
debt financing) by Sunstone or publicly agreement are in full force
announced at or prior to the and effect
time of termination of the
merger agreement, and either
prior to or within 12 months
of such termination, 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 Sunstone and the Operating
if the Board of Directors Partnership pay Termination
has withdrawn or modified Fee plus Termination
its approval or Expenses provided that SHP
recommendation of the merger Acquisition and SHP
in connection with, or Investors Sub are not in
approved or recommended, a material breach of merger
Superior Acquisition agreement, and both the
Proposal commitment letter with Paine
Webber and the contribution
agreement are in full force
and effect
- --------------------------------------------------------------------------------------
SHP Acquisition and SHP The Board of Directors, Sunstone and the Operating
Investors Sub prior to the special Partnership pay Termination
meeting, has withdrawn or Fee plus Termination
modified in any manner Expenses provided that SHP
adverse to SHP Investors Sub Acquisition and SHP
or SHP Acquisition its Investors Sub are not in
approval or recommendation material breach of merger
of the Merger Proposal or agreement, and both the
has approved or recommended commitment letter with Paine
any other Acquisition Webber and the contribution
Proposal, or Sunstone has agreement are in full force
entered into an agreement and effect
with respect to any
Acquisition Proposal (other
than a confidentiality
agreement entered into in
compliance with the
provisions of the merger
agreement)
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
Event Giving Rise to
Terminating Party Right to Terminate Payment
- --------------------------------------------------------------------------------------
<S> <C> <C>
Sunstone The commitment letter with No payment
Paine Webber is 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 SHP Acquisition pays
by the commitment letter Termination Expenses plus
with Paine Webber have not Termination Fee
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 No payment
Acquisition by the 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 Sunstone and the Operating
Acquisition proposal has been publicly Partnership pay Termination
announced and Sunstone has Fee plus Termination
not rejected such proposal Expenses provided that SHP
within ten business days or Acquisition and SHP
(ii) Sunstone has failed to Investors Sub are not in
confirm its recommendation material breach of merger
of the Merger Proposal agreement, and both the
within ten business days of commitment letter with Paine
SHP Investors Sub's request Webber and the contribution
to do so agreement are in full force
and effect
- --------------------------------------------------------------------------------------
Any party Any judgment, injunction, No payment
order, decree or action of a
governmental authority
preventing the consummation
of the merger has become
final and non-appealable
- --------------------------------------------------------------------------------------
Any party (so long as Closing of the merger has No payment
such party is not in not occurred on or before
breach) December 31, 1999
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
Event Giving Rise to
Terminating Party Right to Terminate Payment
- ----------------------------------------------------------------------------
<S> <C> <C>
Sunstone Closing of the merger has Sunstone will pay
not occurred on or before Termination Expenses
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
- ----------------------------------------------------------------------------
SHP Acquisition or SHP Fees to obtain consents of No payment
Investors Sub franchisors 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
</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
Proposal 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.
72
<PAGE>
SELECTED FINANCIAL DATA OF SUNSTONE, LESSEE AND PREDECESSOR
The following tables set forth selected financial data and other operating
information of us, the Lessee and the Lessee's predecessor. The selected
financial data in the tables are derived from unaudited and audited
consolidated financial statements of us, the Lessee and the Lessee's
predecessor 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. See "Incorporation of
Certain Documents by Reference."
SUNSTONE HOTEL INVESTORS, INC.
<TABLE>
<CAPTION>
Six Months
Ended June 30, For the Years Ended December 31, Inception
--------------------------- ------------------------------------------ August 16, 1995
1999 1998 1998 1997 1996 to December 31, 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
income................. 358,000 140,000 473,000 471,000 236,000 47,000
------------ ------------- ------------- ------------- ------------ ------------
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
financing costs........ 13,645,000 10,108,000 23,734,000 6,365,000 1,558,000 47,000
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)
------------ ------------- ------------- ------------- ------------ ------------
NET INCOME.............. 5,371,000 12,871,000 16,958,000 15,591,000 5,634,000 1,181,000
Distributions on
preferred shares....... (979,000) (979,000) (1,975,000) (422,000) -- --
------------ ------------- ------------- ------------- ------------ ------------
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........... $ 0.57 $ 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)
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
Six Months Inception
Ended June 30, For the Years Ended December 31, August 16, 1995
------------------------ -------------------------------------- to December 31,
1999 1998 1998 1997 1996 1995
------------ ----------- ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
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 57,236,000
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)............... $ 11.54 -- $ 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.
(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 Hotels
Sunstone Hotel Properties Inc. (Lessee) (Predecessor)
------------------------------------------------------- -----------------------
From For the
August 16, Period
Six Months 1995 January 1, For the
Ended June 30, For the Years Ended December 31, (Inception) to 1995 to Year Ended
------------------------- --------------------------------------- December 31, 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>
74
<PAGE>
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 Reports
on Form 10-K and Form 10-K/A for the year ended December 31, 1998, which are
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 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 remainder of
1999 and for 2000.
We then used the projections of the independent consultant to generate
certain projections regarding us.
75
<PAGE>
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.
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
76
<PAGE>
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.
. 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
<CAPTION>
REIT Level Data (b)
- -------------------
<S> <C> <C>
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>
77
<PAGE>
- --------
(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 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
<CAPTION>
REIT Level Data (c)
- -------------------
<S> <C> <C> <C> <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)
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.
78
<PAGE>
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 October 15, 1999 (the most recent practicable
date prior to the printing of this Proxy Statement) was $8.5625. 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..................................... 9.4375 8.5625 --
Fourth Quarter (through October 15, 1999)......... 9.0625 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 original
merger agreement were $9.00 and $8.9375, respectively.
On August 16, 1995, we consummated our initial underwritten public offering
of 5,910,000 shares of our common stock at a price of $9.50 per share and
received proceeds after underwriting discounts and commissions of approximately
$51,934,125. The over allotment option related to this offering for 404,500
shares of our common stock was exercised at a price of $9.50 per share and we
received net proceeds, after underwriting discounts and commissions, of
$3,550,150.
On August 13, 1996, we consummated another public offering of 4,600,000
shares of our common stock (including shares sold upon exercise of an over
allotment option) at a price of $10.00 per share and we received net proceeds,
after underwriting discounts and commissions, of $43,240,000.
On January 15, 1997, we consummated another public offering of 4,600,000
shares of our common stock (including shares sold upon exercise of an over
allotment option) at a price of $13.00 per share and we received net proceeds,
after underwriting discounts and commissions, of $59,064,000.
On March 31, 1997, we consummated another public offering of 805,000 shares
of our common stock (including shares sold upon exercise of an over allotment
option) at a price of $13.75 per share and we received net proceeds, after
underwriting discounts and commissions, of $10,626,000.
On May 6, 1997, we consummated another public offering of 4,000,000 shares
of our common stock at a price of $13.375 per share and we received net
proceeds, after underwriting discounts and commissions, of $51,360,000.
On October 15, 1997, we consummated another public offering of 9,490,000
shares of our common stock (including shares sold upon exercise of an over
allotment option) at a price of $17.25 per share and we received net proceeds,
after underwriting discounts and commissions, of $155,114,050.
79
<PAGE>
On February 11, 1998, we consummated another public offering of 4,500,000
shares of our common stock at a price of $16.375 per share and we received net
proceeds, after underwriting discounts and commissions, of $69,907,500.
During the 60-day period preceding the date of this Proxy Statement, we did
not issue any 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 October 15, 1999, there were approximately 811 registered holders of
common stock and 2 registered holders of preferred stock.
As of October 15, 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, into 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 agreements pursuant to which all of the hotels it
leases from the Operating Partnership (or its subsidiaries) are managed by the
Management Company, which is owned entirely by Mr. Alter.
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 September 30, 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.
80
<PAGE>
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 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.
81
<PAGE>
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.
Third Party Pledge
Mr. Alter and Mr. Biederman, the stockholders of Lessee, have through
October 15, 1999 pledged to the Operating Partnership 481,955 OP Units with a
value equal to approximately $5 million, based upon a price of $10.39 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 as there is a percentage lease in effect, but will be terminated
in connection with the merger. See "Matters Relating to the Merger Proposal--
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 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
82
<PAGE>
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 $138,465.20 in payment for cancellation
of warrants to purchase common stock held by them, assuming the Merger
Consideration is $10.39 per share.
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
provided 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 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 Proposal 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 Proposal and transactions contemplated thereby. As of the
date hereof, the shares subject to the voting agreement represent approximately
9.1% of the votes entitled to be cast on the Merger Proposal. The holders of
more than two-thirds of the outstanding OP Units (excluding OP Units held by
Sunstone), including Messrs. Alter and Biederman, have delivered written
consents to the consummation of the Operating Partnership merger and related
matters.
83
<PAGE>
MANAGEMENT OF SUNSTONE
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
Director or
Executive Officer
Name Age Title Since
---- --- ----- -----------------
<S> <C> <C> <C>
Robert A. Alter(1)....... 48 Chairman, President, Chief
Executive Officer, Secretary and
Director 1994
Charles L. Biederman..... 65 Vice Chairman, Executive Vice
President and Director 1994
R. Terrence Crowley...... 41 Chief Operating Officer and
General Counsel 1997
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.
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.
84
<PAGE>
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 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
85
<PAGE>
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.
86
<PAGE>
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 members 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, our Executive Vice President and 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 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.
87
<PAGE>
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 of
Sunstone, (iii) our Chief Executive Officer and other executive officers; and
(iv) by all current directors and executive officers of Sunstone as a group.
This information is presented as of October 15, 1999. The number of shares of
common stock includes the 2,068,250 shares of common stock into which OP Units
(other than OP Units held by us) 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>
Number of Shares
Name of Individuals or of Common Stock
Number Beneficially Percent of
of Persons on Group Position with Sunstone Owned(1) Class
---------------------- ------------------------------- ---------------- ----------
<S> <C> <C> <C>
Westbrook Real Estate 3,986,867(2) 9.6
Fund I, L.P............
Westbrook Real Estate
Co-Investment
Partnership I, L.P.
Robert A. Alter......... President, Secretary, Chief 1,076,412(3) 2.5
Executive Officer and Director
Charles L. Biederman.... Executive Vice President and 671,447(4) 1.6
Director
R. Terrence Crowley..... Chief Operating Officer 350,000(5) *
Kenneth J. Biehl........ Chief Financial Officer(6) 0(6) *
H. Raymond Bingham...... Director 15,038(7) *
C. Robert Enever........ Director 197,140(8) *
Laurence S. Geller...... Director 70,250(9) *
Fredric H. Gould........ Director 52,288(10) *
David E. Lambert........ Director 22,074(11) *
Paul D. Kazilionis...... Director 3,986,867(12) 9.6
Edward H. Sondker....... Director 17,138(13) *
All current directors
and executive officers
as a group (11
persons)............... 6,458,654(14) 15.3
</TABLE>
- --------
* Less than one percent
(1) The Operating Partnership had 40,010,477 Common OP Units and 250,000
Preferred OP Units outstanding as of October 15, 1999, of which 37,942,227
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 2,068,250 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
percentages assumes that all convertible preferred stock is converted and
all of the OP Units (other than OP Units held by Sunstone) held by persons
are redeemed for shares of common stock.
(2) Includes (i) 2,284,262 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 to Mr.
Kazilionis pursuant to the Directors Plan, all of which will accelerate but
only 1,500 of which are in the money options. Mr. Kazilionis is a Managing
Principal of Westbrook.
(3) Includes (i) 592,600 shares of common stock underlying stock options
granted pursuant to the Incentive Plan, all of which will accelerate but
only 185,000 of which are in the money options, and (ii) 483,812
88
<PAGE>
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) 235,720 shares of common stock underlying stock options
granted pursuant to the Incentive Plan, all of which will accelerate but
only 59,000 of which are in the money options, 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, all of which will accelerate but only 250,000 of which are in the
money options.
(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, all of which will accelerate but only
4,500 of which are in the money options.
(8) Includes (i) 4,500 shares of common stock underlying stock options granted
pursuant to the Directors Plan, all of which will accelerate but only
1,500 of which are in the money options, (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 OP Units redeemable on a
one-for-one basis for shares of common stock, owned by Mr. Enever's
spouse.
(9) Includes 4,500 shares of common stock underlying stock options granted
pursuant to the Directors Plan and 50,000 which were granted in connection
with his consulting agreement with Sunstone pursuant to the Incentive
Plan, all of which will accelerate but only 1,500 of which are in the
money options.
(10) Includes (i) 3,000 shares of common stock underlying stock options granted
pursuant to the Directors Plan, all of which will accelerate but only
1,500 of which are in the money options, and (ii) 10,250 shares of common
stock held by One Liberty Properties, Inc. of which Mr. Gould is Chairman
of the Board, (iii) 3,000 shares of common stock held by BRT Pension Trust
of which Mr. Gould is the Trustee, (iv) 3,000 shares of common stock held
by GIT Pension Trust of which Mr. Gould is the Trustee, (v) 3,000 shares
of common stock held by REIT Management Corporation Pension Trust of which
Mr. Gould is the Trustee, (vi) 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, all of which will accelerate but only
4,500 of which are in the money options.
(12) Includes (i) 2,284,262 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 to Mr.
Kazilionis pursuant to the Directors Plan, all of which will accelerate
but only 1,500 of which are in the money options. 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, all of which will accelerate but only
4,500 of which are in the money options and (ii) 2,000 shares owned by the
Sondker Family Trust.
(14) Includes (i) 1,265,820 shares of common stock underlying stock options
granted pursuant to the Incentive Plan and the Directors Plan, all of
which will accelerate but only 513,500 of which are in the money options,
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.
89
<PAGE>
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 2000 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, 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 AUDITORS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and Lessee's consolidated financial statements as of
December 31, 1998 and 1997 and for the years then ended, including our 1998
real estate and accumulated depreciation schedule, and PricewaterhouseCoopers
LLP, independent accountants, have audited our consolidated financial
statements and Lessee's consolidated financial statements for the year ended
December 31, 1996, all included in our Annual Report on Form 10-K for the year
ended December 31, 1998, as set forth in their respective reports, which are
incorporated by reference in this Proxy Statement. 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 and the Filing Persons 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 Proposal. 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 October 19, 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.
90
<PAGE>
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
Amanecer, San Clemente, California 92673-6212, Attention: R. Terrence Crowley,
telephone 949-369-4000.
By Order of the Board of Directors,
[LOGO OF SIGNATURE of ROBERT A. ALTER]
---------------------------------------
Robert A. Alter, Secretary
October 19, 1999
91
<PAGE>
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 November 17, 1999.
The undersigned hereby appoints Robert A. Alter and R. Terrence Crowley, or
either 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 at the La Mirada Holiday Inn Select, 14299 Firestone Boulevard, La Mirada,
California, at 10:00 a.m. California time, on November 17, 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. 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, October 19,
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 vote 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 judgement of the persons voting
such proxies.
(Continued and to be signed on reverse side)
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE>
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR the Merger Proposal.
Please mark your votes as [X]
indicated in this example
Proposal to approve the merger of SHP Investors Sub, Inc. with and into Sunstone
Hotel Investors, Inc., pursuant to an Amended and Restated Agreement and Plan of
Merger dated as of October 7, 1999 by and among SHP Acquisition L.L.C., SHP
Investors Sub, Inc. and Sunstone Hotel Investors, inc., all as described in the
accompanying proxy statement.
FOR AGAINST ABSTAIN
[_] [_] [_]
Proposal to transact such other business as may properly come before the special
meeting or any postponement or adjustment thereof.
[_] [_] [_]
Please check this box if you plan to attend the special meeting.
[_]
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.
SIGNATURE(S) DATE
--------------------------------------------- _______________
The signer hereby revokes all proxies heretofore given by the signer to vote at
said meeting or any adjournments thereof.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
v FOLD AND DETACH HERE V
