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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Schedule 13E-3
Rule 13e-3 Transaction Statement
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934)
SUNSTONE HOTEL INVESTORS, INC.
(Name of the Issuer)
SUNSTONE HOTEL INVESTORS, INC.
SHP ACQUISITION, L.L.C.
SHP INVESTORS SUB, INC.
(Name of Person(s) Filing Statement)
COMMON STOCK, $0.01 PAR VALUE
(Title of Class of Securities)
867933 10 3
(CUSIP Number of Class of Securities)
R. TERRENCE CROWLEY JONATHAN H. PAUL
SUNSTONE HOTEL INVESTORS, INC. SHP ACQUISITION, L.L.C.
903 CALLE AMANECER c/o WESTBROOK REAL ESTATE PARTNERS, L.L.C.
SAN CLEMENTE, CALIFORNIA 92673 599 LEXINGTON AVENUE
(949) 369-4230 NEW YORK, NY 10022
(212) 849-8839
(Name, Address and Telephone Number of Person Authorized
to Receive Notices and Communications on Behalf of
Person(s) Filing Statement)
---------------------------
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Copies to:
LAURA HUNTER, ESQ. RICHARD CAPELOUTO, ESQ.
ROGER COHEN, ESQ. BRIAN M. STADLER, ESQ.
BROBECK, PHLEGER & HARRISON LLP SIMPSON THACHER & BARTLETT
38 TECHNOLOGY DRIVE 425 LEXINGTON AVENUE
IRVINE, CALIFORNIA 92618 NEW YORK, NEW YORK 10017
(949) 790-6300 (212) 455-2000
PHILLIP GORDON, ESQ. STEVEN L. LICHTENFELD, ESQ.
ALTHEIMER & GRAY BATTLE FOWLER LLP
10 SOUTH WACKER DRIVE 75 EAST 55th STREET
CHICAGO, IL 60606 NEW YORK, NEW YORK 10021
(312) 715-4000 (212) 856-7000
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This statement is filed in connection with (check the appropriate box):
a. [x] The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the
Securities Exchange Act of 1934.
b. [_] The filing of a registration statement under the Securities Act of
1933.
c. [_] A tender offer.
d. [_] None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: [x]
Calculation of Filing Fee
- --------------------------------------------------------------------------------
Transaction Valuation* Amount of Filing Fee
$438,874,389 $87,775
- --------------------------------------------------------------------------------
[_] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form or
Schedule and the date of its filing.
* For purposes of calculation of the filing fee only. This amount is based
upon a merger involving the cancellation of 39,757,386 shares of common
stock, par value $0.01, of Sunstone Hotel Investors, Inc. at $10.41 cash
per share and 250,000 shares of Preferred Stock of Sunstone Hotel
Investors, Inc. at $100.00 per share. Pursuant to, and as provided by,
Rule 0-11 under the Securities Exchange Act of 1934, as amended, the amount
required to be paid with the filing of this Schedule 13E-3 is $87,775.
[x] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
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Amount previously paid: $87,775 Filing Party: Sunstone Hotel
Investors, Inc.
Form or registration No.: Preliminary Schedule 14A Date Filed: August 18, 1999
This Rule 13e-3 Transaction Statement on Schedule 13E-3 is being filed
jointly by Sunstone Hotel Investors, Inc., a Maryland corporation (the
"Company"), SHP Acquisition, L.L.C., a Delaware limited liability company ("SHP
Acquisition"), and SHP Investors Sub, Inc., a Maryland corporation ("SHP
Investors Sub"), in connection with the proposed merger of SHP Investors Sub
with and into the Company (the "Merger"), pursuant to an Agreement and Plan of
Merger, dated as of July 12, 1999 (the "Merger Agreement"), by and among the
Company, SHP Acquisition and SHP Investors Sub.
Upon the effectiveness of the Merger (the "Effective Time"), each
share of common stock, par value $0.01 per share, of the Company issued and
outstanding immediately prior to the Effective Time will be converted into the
right to receive $10.35 in cash, as adjusted as provided in the Merger
Agreement, and each share of the Company's Class A Cumulative Convertible
Preferred Stock, $0.01 par value per share, issued and outstanding immediately
prior to the Effective Time, will be converted into the right to receive
$100.00, together with all accrued dividends, in cash.
This Schedule 13E-3 is being filed with the Securities and Exchange
Commission concurrently with a proxy statement filed by the Company pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"). A copy of the Proxy Statement is attached hereto as Exhibit 99.1.
The following cross reference sheet is being supplied pursuant to
General Instruction F to Schedule 13E-3 and shows the location in the Proxy
Statement of the information required to be included in this Schedule 13E-3. The
information contained in the Proxy Statement, including all appendices thereto,
is expressly incorporated herein by reference and the responses to each item are
qualified in their entirety by reference to the information contained in the
Proxy Statement and the appendices thereto. Capitalized terms used herein and
not otherwise defined herein shall have the meanings ascribed to such terms in
the Proxy Statement.
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CROSS REFERENCE SHEET
Item Number
and Caption in
Schedule 13E-3 Location in the Proxy Statement
- -------------- -------------------------------
1. Issuer and
Class of Security
Subject to the
Transaction
(a) "MATTERS RELATING TO THE MERGER PROPOSALS--GENERAL--
SUNSTONE"
(b) COVER PAGE, "SUMMARY--VOTING SECURITIES AND VOTES
REQUIRED;" and "INFORMATION CONCERNING THE SPECIAL MEETING--
RECORD DATE, QUORUM DATE; QUORUM; OUTSTANDING COMMON STOCK
AND PREFERRED STOCK ENTITLED TO VOTE"
(c) "COMMON STOCK MARKET PRICE INFORMATION; DIVIDEND
INFORMATION"
(d) "COMMON STOCK MARKET PRICE INFORMATION; DIVIDEND
INFORMATION"
(e) "COMMON STOCK MARKET PRICE INFORMATION; DIVIDEND
INFORMATION"
(f) *
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2. Identity and
Background
(a) - (g) "SUMMARY;" "MATTERS RELATING TO THE MERGER PROPOSALS--
GENERAL--SUNSTONE;" "MATTERS RELATING TO THE MERGER
PROPOSALS--GENERAL--SHP ACQUISITION AND SHP INVESTORS
SUB;" "MANAGEMENT OF SUNSTONE;" and "MANAGEMENT OF SHP
ACQUISITION AND SHP INVESTORS SUB; MEMBERS OF SHP
ACQUISITION"
3. Past Contacts,
Transactions or
Negotiations
(a)(1) "MATTERS RELATING TO THE MERGER PROPOSALS--BACKGROUND OF
THE MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS--
INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON;"
and "CERTAIN RELATIONSHIPS AND TRANSACTIONS"
(a)(2) "MATTERS RELATING TO THE MERGER PROPOSALS--BACKGROUND OF
THE MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS--
PURPOSE AND STRUCTURE OF THE MERGER;" "MATTERS RELATING TO
THE MERGER PROPOSALS--INTERESTS OF CERTAIN PERSONS IN
MATTERS TO BE ACTED UPON;" "CERTAIN RELATIONSHIPS AND
TRANSACTIONS;" and "SUMMARY--OPERATING PARTNERSHIP MERGER"
(b) "MATTERS RELATING TO THE MERGER PROPOSALS--BACKGROUND OF
THE MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS--
INTERESTS
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OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON;" and
"CERTAIN RELATIONSHIPS AND TRANSACTIONS"
4. Terms of the
Transaction
(a) "SUMMARY;" "MATTERS RELATING TO THE MERGER PROPOSALS;" and
"THE MERGER AND THE MERGER AGREEMENT (ITEM NO. 1)--THE
MERGER"
(b) "SUMMARY;" "MATTERS RELATING TO THE MERGER PROPOSALS;" and
"THE MERGER AND THE MERGER AGREEMENT (ITEM NO. 1)--THE
MERGER"
5. Plans or
Proposals of the
Issuer or Affiliate
(a) - (g) "SUMMARY--OPERATING PARTNERSHIP MERGER;" "MATTERS RELATING
TO THE MERGER PROPOSALS--PURPOSE AND STRUCTURE OF THE
MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS--
INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON;"
"MATTERS RELATING TO THE MERGER PROPOSALS--CERTAIN
CONSEQUENCES OF THE MERGER;" "MATTERS RELATING TO THE MERGER
PROPOSALS--PLANS FOR SUNSTONE AFTER THE MERGER;" "THE
MERGER AND THE MERGER AGREEMENT (ITEM NO. 1)--THE MERGER;"
"MATTERS RELATING TO THE MERGER PROPOSALS--FINANCING;
SOURCE OF FUNDS;" and "COMMON STOCK MARKET PRICE
INFORMATION; DIVIDEND INFORMATION"
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6. Source and Amount
of Funds or Other
Consideration
(a) - (c) "SUMMARY -- FAIRNESS OPINION;" "SUMMARY -- FINANCING; SOURCE
OF FUNDS;" "MATTERS RELATING TO THE MERGER PROPOSALS --
FINANCING; SOURCE OF FUNDS;" and "MATTERS RELATING TO THE
MERGER PROPOSALS -- FEES AND EXPENSES"
(d) *
7. Purpose(s),
Alternatives,
Reasons and Effects
(a) - (c) "SUMMARY -- PURPOSE, STRUCTURE AND EFFECTS OF THE MERGER;"
"MATTERS RELATING TO THE MERGER PROPOSALS -- BACKGROUND OF
THE MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS --
PURPOSE AND STRUCTURE OF THE MERGER;" "MATTERS RELATING TO
THE MERGER PROPOSALS -- BENEFITS AND DETRIMENTS OF THE
MERGER TO SHP ACQUISITION;" "MATTERS RELATING TO THE MERGER
PROPOSALS -- RECOMMENDATION OF THE SPECIAL COMMITTEE OF THE
BOARD OF DIRECTORS; FAIRNESS OF THE MERGER;" "MATTERS
RELATING TO THE MERGER PROPOSALS -- OPINION OF THE
INDEPENDENT FINANCIAL ADVISOR;" and "MATTERS RELATING TO THE
MERGER PROPOSALS -- POSITION OF SHP ACQUISITION AND SHP
INVESTORS SUB"
(d) "SUMMARY--PURPOSE, STRUCTURE AND EFFECTS OF THE MERGER;"
"SUMMARY--CONFLICTS OF INTEREST OF OFFICERS AND DIRECTORS
OF SUNSTONE;" "SUMMARY--FEDERAL INCOME TAX CONSEQUENCES;"
"MATTERS RELATING TO THE MERGER PROPOSALS--
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PURPOSE AND STRUCTURE OF THE MERGER;" "MATTERS RELATING TO
THE MERGER PROPOSALS--BENEFITS AND DETRIMENTS OF THE MERGER
TO SHP ACQUISITION;" "MATTERS RELATING TO THE MERGER
PROPOSALS--RECOMMENDATION OF THE SPECIAL COMMITTEE OF THE
BOARD OF DIRECTORS; FAIRNESS OF THE MERGER;" "MATTERS
RELATING TO THE MERGER PROPOSALS--BENEFITS AND DETRIMENTS TO
NONAFFILIATED STOCKHOLDERS;" "MATTERS RELATING TO THE MERGER
PROPOSALS--INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE
ACTED UPON;" "MATTERS RELATING TO THE MERGER PROPOSALS--
CERTAIN CONSEQUENCES OF THE MERGER;" "MATTERS RELATING TO
THE MERGER PROPOSALS--PLANS FOR SUNSTONE AFTER THE MERGER;"
"MATTERS RELATING TO THE MERGER PROPOSALS--MATERIAL FEDERAL
TAX CONSEQUENCES;" "MATTERS RELATING TO THE MERGER
PROPOSALS--LITIGATION REGARDING THE MERGER;" "MATTERS
RELATING TO THE MERGER PROPOSALS--ACCOUNTING TREATMENT;" and
"THE MERGER AND THE MERGER AGREEMENT (ITEM NO. 1)--THE
MERGER"
8. Fairness of the
Transaction
(a) - (f) "SUMMARY--RECOMMENDATION OF THE BOARD OF DIRECTORS AND THE
SPECIAL COMMITTEE;" "INFORMATION CONCERNING THE SPECIAL
MEETING--VOTE REQUIRED;" "MATTERS RELATING TO THE MERGER
PROPOSALS--BACKGROUND OF THE MERGER;" "MATTERS RELATING TO
THE MERGER PROPOSALS--PURPOSE AND STRUCTURE OF THE
MERGER;" "MATTERS RELATING TO THE MERGER
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PROPOSALS--RECOMMENDATION OF THE SPECIAL COMMITTEE OF THE
BOARD OF DIRECTORS; FAIRNESS OF THE MERGER;" "MATTERS
RELATING TO THE MERGER PROPOSALS--POSITION OF SHP
ACQUISITION AND SHP INVESTORS SUB;" "MATTERS RELATING TO THE
MERGER PROPOSALS--BENEFITS AND DETRIMENTS TO NONAFFILIATED
STOCKHOLDERS;" "MATTERS RELATING TO THE MERGER PROPOSALS--
OPINION OF THE INDEPENDENT FINANCIAL ADVISOR;" "MATTERS
RELATING TO THE MERGER PROPOSALS--INTERESTS OF CERTAIN
PERSONS IN MATTERS TO BE ACTED UPON;" "APPENDIX B--FAIRNESS
OPINION OF GOLDMAN, SACHS & CO."
9. Reports,
Opinions,
Appraisals and
Certain
Negotiations
(a) - (c) "MATTERS RELATING TO THE MERGER PROPOSALS--BACKGROUND OF
THE MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS--
RECOMMENDATION OF THE SPECIAL COMMITTEE OF THE BOARD OF
DIRECTORS; FAIRNESS OF THE MERGER;" "MATTERS RELATING TO THE
MERGER PROPOSALS--OPINION OF THE INDEPENDENT FINANCIAL
ADVISOR;" "APPENDIX B--FAIRNESS OPINION OF GOLDMAN, SACHS
& CO."
10. Interest in
Securities of the
Issuer
(a) "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF SUNSTONE"
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(b) "COMMON STOCK MARKET PRICE INFORMATION; DIVIDEND
INFORMATION"
11. Contracts,
Arrangements or
Understanding with
Respect to the
Issuer's Securities
"SUMMARY;" "INFORMATION CONCERNING THE SPECIAL MEETING--
VOTE REQUIRED;" "MATTERS RELATING TO THE MERGER PROPOSALS--
INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON;"
"THE MERGER AND THE MERGER AGREEMENT (ITEM NO. 1)--THE
MERGER;" and "CERTAIN RELATIONSHIPS AND TRANSACTIONS"
12. Present
Intention and
Recommendation of
Certain Persons
with Regard to
the Transaction
(a) - (b) "SUMMARY;" "INFORMATION CONCERNING THE SPECIAL MEETING--
VOTE REQUIRED;" "MATTERS RELATING TO THE MERGER PROPOSALS--
BACKGROUND OF THE MERGER;" "MATTERS RELATING TO THE MERGER
PROPOSALS--PURPOSE AND STRUCTURE OF THE MERGER;" "MATTERS
RELATING TO THE MERGER PROPOSALS--RECOMMENDATION OF THE
SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS; FAIRNESS OF THE
MERGER;" "CERTAIN RELATIONSHIPS AND TRANSACTIONS;" and
"MATTERS RELATING TO THE MERGER PROPOSALS -- POSITION OF SHP
ACQUISITION AND SHP INVESTORS SUB"
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13. Other Provisions
of the Transaction
(a) "MATTERS RELATING TO THE MERGER PROPOSALS -- APPRAISAL
RIGHTS"
(b) *
(c) *
14. Financial
Information
(a) "SELECTED FINANCIAL DATA OF SUNSTONE AND LESSEE"
(b) *
15. Persons and
Assets Employed,
Retained or
Utilized
(a) "INFORMATION CONCERNING THE SPECIAL MEETING--PROXY
SOLICITATION;" "MATTERS RELATING TO THE MERGER PROPOSALS--
BACKGROUND OF THE MERGER;" "MATTERS RELATING TO THE MERGER
PROPOSALS--PLANS FOR SUNSTONE AFTER THE MERGER;" and
"CERTAIN RELATIONSHIPS AND TRANSACTIONS"
(b) "INFORMATION CONCERNING THE SPECIAL MEETING--PROXY
SOLICITATION;" "MATTERS RELATING TO THE MERGER PROPOSALS--
OPINION OF THE INDEPENDENT FINANCIAL ADVISOR;" "MATTERS
RELATING TO THE MERGER PROPOSALS--FEES AND
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EXPENSES;" "APPENDIX B--FAIRNESS OPINION OF GOLDMAN,
SACHS & CO."
16. Additional
Information
The Proxy Statement, including the Appendices thereto
17. Material to be
Filed as Exhibits
(a) - (f) Separately filed with this Schedule 13E-3
* The Item is inapplicable or the answer thereto is in the negative.
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ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
(a) The information set forth in "MATTERS RELATING TO THE MERGER PROPOSALS
- -- GENERAL -- SUNSTONE" in the Proxy Statement is hereby incorporated herein by
reference.
(b) The information set forth on the Cover Page of the Proxy Statement and
in "SUMMARY -- VOTING SECURITIES AND VOTES REQUIRED;" and "INFORMATION
CONCERNING THE SPECIAL MEETING -- Record Date; Quorum; Outstanding Common Stock
and Preferred Stock Entitled to Vote" in the Proxy Statement is hereby
incorporated herein by reference.
(c) The information set forth in "COMMON STOCK MARKET PRICE INFORMATION;
DIVIDEND INFORMATION" in the Proxy Statement is hereby incorporated herein by
reference.
(d) The information set forth in "COMMON STOCK MARKET PRICE INFORMATION;
DIVIDEND INFORMATION" in the Proxy Statement is hereby incorporated herein by
reference.
(e) The information set forth in "COMMON STOCK MARKET PRICE INFORMATION;
DIVIDEND INFORMATION" in the Proxy Statement is hereby incorporated herein by
reference.
(f) Not applicable.
ITEM 2. IDENTITY AND BACKGROUND.
This Schedule 13E-3 is being filed by the Company, SHP Acquisition and SHP
Investors Sub. The Company is the issuer of the Common Stock which is the
subject of the Rule 13e-3 transaction. The information set forth in "SUMMARY;"
"MATTERS RELATING TO THE MERGER PROPOSALS -- GENERAL -- SHP ACQUISITION AND SHP
INVESTORS SUB;" "MANAGEMENT OF SUNSTONE;" and "MANAGEMENT OF SHP ACQUISITION AND
SHP INVESTORS SUB; MEMBERS OF SHP ACQUISITION" in the Proxy Statement is hereby
incorporated herein by reference.
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During the last five years, none of the Company, SHP Acquisition or SHP
Investors Sub, nor any person controlling SHP Acquisition or SHP Investors Sub,
nor, to the best of their knowledge, any of the persons set forth in "MANAGEMENT
OF SUNSTONE" and "MANAGEMENT OF SHP ACQUISITION AND SHP INVESTORS SUB; MEMBERS
OF SHP ACQUISITION" in the Proxy Statement has (i) been convicted in a criminal
proceeding (excluding traffic violations or similar misdemeanors) or (ii) been a
party to a civil proceeding of a judicial or administrative body of competent
jurisdiction and as a result of such proceeding was or is subject to a judgment,
decree, or final order enjoining further violations of, or prohibiting
activities subject to, federal or state securities laws or finding any violation
of such laws.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS.
(a) (1) The information set forth in "MATTERS RELATING TO THE MERGER
PROPOSALS -- BACKGROUND OF THE MERGER;" "MATTERS RELATING TO THE MERGER
PROPOSALS -- INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON;" and
"CERTAIN RELATIONSHIPS AND TRANSACTIONS" in the Proxy Statement is hereby
incorporated herein by reference.
(a) (2) The information set forth in "MATTERS RELATING TO THE MERGER
PROPOSALS -- BACKGROUND OF THE MERGER;" "MATTERS RELATING TO THE MERGER
PROPOSALS -- PURPOSE AND STRUCTURE OF THE MERGER;" "MATTERS RELATING TO THE
MERGER PROPOSALS -- INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON;"
"CERTAIN RELATIONSHIPS AND TRANSACTIONS;" and "SUMMARY -- OPERATING PARTNERSHIP
MERGER" in the Proxy Statement is hereby incorporated herein by reference.
(b) The information set forth in "MATTERS RELATING TO THE MERGER PROPOSALS
- -- BACKGROUND OF THE MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS --
INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON;" and "CERTAIN
RELATIONSHIPS AND TRANSACTIONS" in the Proxy Statement is hereby incorporated
herein by reference.
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ITEM 4. TERMS OF THE TRANSACTION.
(a) The information set forth in "SUMMARY;" "MATTERS RELATING TO THE
MERGER PROPOSALS;" and "THE MERGER AND THE MERGER AGREEMENT (ITEM NO. 1) -- THE
MERGER" in the Proxy Statement is hereby incorporated herein by reference.
(b) The information set forth in "SUMMARY;" "MATTERS RELATING TO THE
MERGER PROPOSALS;" and "THE MERGER AND THE MERGER AGREEMENT (ITEM NO. 1) -- THE
MERGER" in the Proxy Statement is hereby incorporated herein by reference.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
(a) - (g) The information set forth in "SUMMARY -- OPERATING PARTNERSHIP
MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS -- PURPOSE AND STRUCTURE OF
THE MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS -- INTERESTS OF CERTAIN
PERSONS IN MATTERS TO BE ACTED UPON;" "MATTERS RELATING TO THE MERGER PROPOSALS
- -- CERTAIN CONSEQUENCES OF THE MERGER;" "THE MERGER AND THE MERGER AGREEMENT
(ITEM NO. 1) -- THE MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS -- PLANS
FOR SUNSTONE AFTER THE MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS --
FINANCING; SOURCE OF FUNDS;" and "COMMON STOCK MARKET PRICE INFORMATION;
DIVIDEND INFORMATION" in the Proxy Statement is hereby incorporated herein by
reference.
ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) - (c) The information set forth in "SUMMARY -- FAIRNESS OPINION;"
"SUMMARY -- FINANCING; SOURCE OF FUNDS;" "MATTERS RELATING TO THE MERGER
PROPOSALS -- FINANCING; SOURCE OF FUNDS;" and "MATTERS RELATING TO THE MERGER
PROPOSALS -- FEES AND EXPENSES" in the Proxy Statement is hereby incorporated
herein by reference.
(d) Not Applicable.
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ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a) - (c) The information set forth in "SUMMARY -- PURPOSE, STRUCTURE AND
EFFECTS OF THE MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS -- BACKGROUND
OF THE MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS -- PURPOSE AND
STRUCTURE OF THE MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS --
RECOMMENDATION OF THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS; FAIRNESS OF
THE MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS -- OPINION OF THE
INDEPENDENT FINANCIAL ADVISOR;" and "MATTERS RELATING TO THE MERGER PROPOSALS --
POSITION OF SHP ACQUISITION AND SHP INVESTORS SUB" in the Proxy Statement is
hereby incorporated herein by reference.
(d) The information set forth in "SUMMARY -- PURPOSE, STRUCTURE AND
EFFECTS OF THE MERGER;" "SUMMARY -- CONFLICTS OF INTEREST OF OFFICERS AND
DIRECTORS OF SUNSTONE;" "SUMMARY -- FEDERAL INCOME TAX CONSEQUENCES;" "MATTERS
RELATING TO THE MERGER PROPOSALS -- PURPOSE AND STRUCTURE OF THE MERGER;"
"MATTERS RELATING TO THE MERGER PROPOSALS -- RECOMMENDATION OF THE SPECIAL
COMMITTEE OF THE BOARD OF DIRECTORS; FAIRNESS OF THE MERGER;" "MATTERS RELATING
TO THE MERGER PROPOSALS -- BENEFITS AND DETRIMENTS TO NONAFFILIATED
STOCKHOLDERS;" "MATTERS RELATING TO THE MERGER PROPOSALS -- INTERESTS OF CERTAIN
PERSONS IN MATTERS TO BE ACTED UPON;" "MATTERS RELATING TO THE MERGER PROPOSALS
- -- CERTAIN CONSEQUENCES OF THE MERGER;" "MATTERS RELATING TO THE MERGER
PROPOSALS -- PLANS FOR SUNSTONE AFTER THE MERGER;" "MATTERS RELATING TO THE
MERGER PROPOSALS -- MATERIAL FEDERAL TAX CONSEQUENCES;" "MATTERS RELATING TO THE
MERGER PROPOSALS -- LITIGATION REGARDING THE MERGER;" "MATTERS RELATING TO THE
MERGER PROPOSALS -- ACCOUNTING TREATMENT;" and "THE MERGER AND THE MERGER
AGREEMENT (ITEM NO. 1) -- THE MERGER" in the Proxy Statement is hereby
incorporated herein by reference.
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ITEM 8. FAIRNESS OF THE TRANSACTION.
(a) - (f) The information set forth in "SUMMARY - RECOMMENDATION OF THE
BOARD OF DIRECTORS AND THE SPECIAL COMMITTEE;" "INFORMATION CONCERNING THE
SPECIAL MEETING -- VOTE REQUIRED;" "MATTERS RELATING TO THE MERGER PROPOSALS --
BACKGROUND OF THE MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS -- PURPOSE
AND STRUCTURE OF THE MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS --
RECOMMENDATION OF THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS; FAIRNESS OF
THE MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS -- POSITION OF SHP
ACQUISITION AND SHP INVESTORS SUB;" "MATTERS RELATING TO THE MERGER PROPOSALS --
BENEFITS AND DETRIMENTS TO NONAFFILIATED STOCKHOLDERS;" "MATTERS RELATING TO THE
MERGER PROPOSALS -- OPINION OF THE INDEPENDENT FINANCIAL ADVISOR;" "MATTERS
RELATING TO THE MERGER PROPOSALS -- INTERESTS OF CERTAIN PERSONS IN MATTERS TO
BE ACTED UPON;" and "APPENDIX B -- FAIRNESS OPINION OF GOLDMAN, SACHS & CO." in
the Proxy Statement is hereby incorporated herein by reference.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a) - (c) The information set forth in "MATTERS RELATING TO THE MERGER
PROPOSALS -- BACKGROUND OF THE MERGER;" "MATTERS RELATING TO THE MERGER
PROPOSALS -- RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS;
FAIRNESS OF THE MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS -- OPINION OF
THE INDEPENDENT FINANCIAL ADVISOR;" and "APPENDIX B -- FAIRNESS OPINION OF
GOLDMAN, SACHS & CO." in the Proxy Statement is hereby incorporated herein by
reference.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER.
(a) The information set forth in "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF SUNSTONE" in the Proxy Statement is hereby incorporated
herein by reference.
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(b) The information set forth in "COMMON STOCK MARKET PRICE INFORMATION;
DIVIDEND INFORMATION" in the Proxy Statement is hereby incorporated herein by
reference.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE ISSUER'S
SECURITIES.
The information set forth in "SUMMARY;" "INFORMATION CONCERNING THE SPECIAL
MEETING -- VOTE REQUIRED;" "MATTERS RELATING TO THE MERGER PROPOSALS --
INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON;" "THE MERGER AND THE
MERGER AGREEMENT (ITEM NO. 1) -- THE MERGER;" and "CERTAIN RELATIONSHIPS AND
TRANSACTIONS" in the Proxy Statement is hereby incorporated herein by reference.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO
THE TRANSACTION.
(a) - (b) The information set forth in "SUMMARY;" "INFORMATION CONCERNING
THE SPECIAL MEETING -- VOTE REQUIRED;" "MATTERS RELATING TO THE MERGER PROPOSALS
- -- BACKGROUND OF THE MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS --
PURPOSE AND STRUCTURE OF THE MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS
- -- RECOMMENDATION OF THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS; FAIRNESS
OF THE MERGER;" "CERTAIN RELATIONSHIPS AND TRANSACTIONS;" and "MATTERS RELATING
TO THE MERGER PROPOSALS -- POSITION OF SHP ACQUISITION AND SHP INVESTORS SUB" in
the Proxy Statement is hereby incorporated herein by reference.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION.
(a) The information set forth in "MATTERS RELATING TO THE MERGER PROPOSALS
- -- APPRAISAL RIGHTS" in the Proxy Statement is hereby incorporated herein by
reference.
(b) Not Applicable.
<PAGE>
20
(c) Not Applicable.
ITEM 14. FINANCIAL INFORMATION.
(a) The information set forth in "SELECTED FINANCIAL DATA OF SUNSTONE AND
LESSEE" in the Proxy Statement is hereby incorporated herein by reference. The
consolidated financial statements of the Company are hereby incorporated by
reference to the Company's consolidated financial statements, related notes
thereto and other financial information contained in the Company's 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, and in the
Company's 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.
(b) Not Applicable.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED.
(a) The information set forth in "INFORMATION CONCERNING THE SPECIAL
MEETING -- PROXY SOLICITATION;" "MATTERS RELATING TO THE MERGER PROPOSALS --
BACKGROUND OF THE MERGER;" "MATTERS RELATING TO THE MERGER PROPOSALS -- PLANS
FOR SUNSTONE AFTER THE MERGER;" and "CERTAIN RELATIONSHIPS AND TRANSACTIONS" in
the Proxy Statement is hereby incorporated by reference.
(b) The information set forth in "INFORMATION CONCERNING THE SPECIAL
MEETING -- PROXY SOLICITATION;" "MATTERS RELATING TO THE MERGER PROPOSALS --
OPINION OF THE INDEPENDENT FINANCIAL ADVISOR;" "MATTERS RELATING TO THE MERGER
PROPOSALS -- FEES AND EXPENSES;" and "APPENDIX B - FAIRNESS OPINION OF GOLDMAN,
SACHS & CO." in the Proxy Statement is hereby incorporated by reference.
<PAGE>
21
ITEM 16. ADDITIONAL INFORMATION.
The information set forth in the Proxy Statement and the Appendices thereto
and the Exhibits hereto is incorporated herein by reference.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
2.1 Agreement and Plan of Merger, dated as of July 12, 1999, among
SHP Acquisition, SHP Investors Sub and the Company, which is
incorporated herein by reference to Appendix A to the Proxy
Statement.
99.1 Proxy Statement filed by the Company with the Commission on even
date hereof and hereby incorporated by reference.
99.2 Letter to Stockholders of the Company from the Company, filed by
the Company with the Commission on even date hereof and hereby
incorporated by reference.
99.3 Notice of Special Meeting of the Stockholders of the Company
filed by the Company with the Commission on even date hereof and
hereby incorporated by reference.
99.4 Opinion of Goldman, Sachs & Co., dated July 12, 1999,
incorporated by reference to Appendix B to the Proxy Statement.
99.5 Financial Analysis Presentation Materials prepared by Goldman,
Sachs & Co. in connection with providing its opinion to the
Special Committee of the Board of Directors of the Company.
99.6 Financing Commitment Letter, dated July 12, 1999, from PW Real
Estate Investments Inc. to Westbrook Real Estate Fund III, L.P.,
incorporated by reference to Exhibit G to the Merger Agreement,
as filed on the Company's Form 8-K/A dated July 14, 1999.
<PAGE>
22
99.7 Voting Agreement, dated as of July 12, 1999, among Westbrook Real
Estate Fund I, L.P., Robert A. Alter, Charles L. Biederman, SHP
Acquisition and the Company and Limited Irrevocable Proxy of
Westbrook Real Estate Fund I, L.P., Robert A. Alter and Charles
L. Biederman, incorporated by reference to Exhibit C to the
Merger Agreement, as filed on the Company's Form 8-K/A dated July
14, 1999.
99.8 Amended and Restated Limited Liability Company Agreement of SHP
Acquisition, dated as of July 12, 1999.
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Dated: August 18, 1999
Sunstone Hotel Investors, Inc.
By /s/ R. Terrence Crowley
-------------------------------------
Name: R. Terrence Crowley
Title: Authorized Person
SHP Acquisition, L.L.C.
By /s/ Paul Kazilionis
-------------------------------------
Name: Paul Kazilionis
Title: Manager
SHP Investors Sub, Inc.
By /s/ Jonathan H. Paul
-------------------------------------
Name: Jonathan H. Paul
Title: President
<PAGE>
EXHIBIT INDEX
Exhibit Description
2.1 Agreement and Plan of Merger, dated as of July 12, 1999, among
SHP Acquisition, SHP Investors Sub and the Company, which is
incorporated herein by reference to Appendix A to the Proxy
Statement.
99.1 Proxy Statement filed by the Company with the Commission on even
date hereof and hereby incorporated by reference.
99.2 Letter to Stockholders of the Company from the Company, filed by
the Company with the Commission on even date hereof and hereby
incorporated by reference.
99.3 Notice of Special Meeting of the Stockholders of the Company
filed by the Company with the Commission on even date hereof and
hereby incorporated by reference.
99.4 Opinion of Goldman, Sachs & Co., dated July 12, 1999,
incorporated by reference to Appendix B to the Proxy Statement.
99.5 Financial Analysis Presentation Materials prepared by Goldman,
Sachs & Co. in connection with providing its opinion to the
Special Committee of the Board of Directors of the Company.
99.6 Financing Commitment Letter, dated July 12, 1999, from PW Real
Estate Investments Inc. to Westbrook Real Estate Fund III, L.P.,
incorporated by reference to Exhibit G to the Merger Agreement,
as filed on the Company's Form 8-K/A dated July 14, 1999.
99.7 Voting Agreement, dated as of July 12, 1999, among Westbrook
Real Estate Fund I, L.P., Robert A. Alter, Charles L. Biederman,
SHP Acquisition and the Company and Limited Irrevocable Proxy
of Westbrook Real Estate Fund I, L.P., Robert A. Alter and
Charles L.
<PAGE>
Biederman, incorporated by reference to Exhibit C to the Merger
Agreement, as filed on the Company's Form 8-K/A dated July 14,
1999.
99.8 Amended and Restated Limited Liability Company Agreement of SHP
Acquisition, dated as of July 12, 1999.
<PAGE>
1
EXHIBIT 99.5
PRESENTATION TO THE
FIRECRACKER SPECIAL COMMITTEE
REGARDING
PROJECT FIRECRACKER
GOLDMAN, SACHS & CO.
JULY 12, 1999
<PAGE>
2
TABLE OF EXHIBITS
PROJECT FIRECRACKER
EXHIBIT
PROCESS OVERVIEW I
FIRECRACKER OVERVIEW II
FIRECRACKER TRADING ANALYSIS III
SUMMARY OF ALTERNATIVES CONSIDERED AND PROCESS IV
SUMMARY OF SHP ACQUISITION PROPOSAL V
OVERVIEW OF CURRENT LODGING ENVIRONMENT VI
VALUATION ANALYSIS VII
[GOLDMAN SACHS LOGO]
<PAGE>
3
EXHIBIT I
<PAGE>
4
PROCESS OVERVIEW
IN THE PROCESS OF EVALUATING SHP ACQUISITION'S OFFER, GOLDMAN SACHS CONDUCTED
AN OPEN AUCTION FOR THE ALL-CASH SALE OF FIRECRACKER
. Public announcement of offer by SHP Acquisition (a company newly organized
by Westbrook Real Estate Fund III, L.P. and certain of its affiliates,
Robert Alter and certain management personnel of Firecracker's Lessee, and
certain affiliates of Firecracker) to purchase Firecracker made on April 5,
1999
. Special Committee appointed Goldman Sachs and announced its intention to
consider Firecracker's alternatives on April 19, 1999
. Broad market interest was solicited
-- 38 potential bidders initially contacted
-- 20 potential bidders received the Sunstone Information Package
-- 3 bidders submitted preliminary bids on May 10-11, 1999
-- SHP Acquisition and one additional bidder, Apollo Real Estate Capital
Advisors IV, Inc. ("Apollo"), were invited into second round of
bidding with comprehensive due diligence, including data room visits
and property tours, and contract negotiation
. Extensive month-long contract negotiations conducted with SHP Acquisition
-- On June 24, 1999, the Special Committee authorized final negotiations
with SHP Acquisition
-- Firecracker and SHP Acquisition made substantial progress toward
negotiation of a definitive merger agreement by Wednesday, June 30,
1999 (subject to approval of the Special Committee)
. One week contract discussions with, and additional due diligence by, Apollo
-- On July 1, 1999, the Special Committee elected not to accept SHP
Acquisition's offer at that time in order to allow Apollo to submit a
final proposal on the final bid date (July 9, 1999)
. Final proposals received from each of SHP Acquisition and Apollo on July
9,1999, including contract mark-ups and financing term sheets
[GOLDMAN SACHS LOGO]
<PAGE>
5
EXHIBIT II
<PAGE>
6
<TABLE>
<CAPTION>
FIRECRACKER OVERVIEW
- -------------------------------------------------------------- --------------------------------------------------------------
COMPANY OVERVIEW FINAL OVERVIEW(A)
- -------------------------------------------------------------- --------------------------------------------------------------
<S> <C>
. Firecracker is a self-administered real estate investment CURRENT STOCK PRICE (7/9/1999): $9.00
trust ("REIT") that through its 94.6% ownership interest
in Firecracker, LP (the "Operating Partnership") owns and DIVIDEND / DIVIDEND YIELD: $1.14 / 12.7%
leases primarily full-service, mid-priced hotels and
limited-service hotels located in Minnesota and the 1999E (C) 2000E (C)
Pacific and Mountain regions of the western United --------------------------------------------------------------
States. The Company focuses on acquiring underperforming FFO/SHARE $1.45 $1.57
and undercapitalized hotels with re-branding
opportunities that are in strong markets. Since its IPO ANNUAL FFO/SHARE GROWTH 3.6% 8.3%
as a predominantly limited-service hotel REIT,
Firecracker has transformed itself primarily into a FFO MULTIPLE 6.2x 5.7x
full-service hotel company through acquisitions and its
renovation/repositioning strategy. As of June 1999, the EBITDA ($ MILLIONS) $91.7 $100.7
Company's portfolio consisted of 59 hotels with 10,525
rooms including one hotel currently under development. EBITDA MULTIPLE 9.0x 8.2x
--------------------------------------------------------------
. HEADQUARTERS: San Clemente, CA
- -------------------------------------------------------------- --------------------------------------------------------------
FINANCIAL OVERVIEW ($ MILLIONS) SENIOR MANAGEMENT
- -------------------------------------------------------------- --------------------------------------------------------------
NET DEBT (B): $436.9 NAME TITLE
--------------------------------------------------------------
EQUITY MARKET CAP (A): $360.2 Robert Alter (f) Chairman and CEO
PREFERRED STOCK (A): $25.0 Charles Biederman (f) Vice Chairman and Executive VP
TOTAL MARKET CAP (A): $822.1 Terrence Crowley Chief Operating Officer
NET DEBT/TOTAL MARKET CAP: 53.1% Daniel Lutz Corporate Controller and VP
UPREIT: YES Ken Coatsworth Director of Finance
COMMON SHARES OUTSTANDING: 37.9 MM . TOTAL BOARD MEMBERS: (D) 9
OP UNITS: 2.1 MM . TOTAL INDEPENDENT BOARD MEMBERS: 6
IPO DATE: 8/10/95 . INSIDER OWNERSHIP AND WESTBROOK REAL ESTATE FUND I, 8.9%
L.P. OWNERSHIP (D) (E):
BANK LOAN RATINGS (MOODY'S/S&P): BA2 / BB-
</TABLE>
[FN]
(a) As of 7/9/1999.
(b) Net debt at 10/31/1999 estimated by Firecracker management (versus $396.6
at 3/31/99). Assumes no dividend is paid in respect of second quarter.
(c) Source: Projections dated 6/28/1999 prepared by independent consultants
hired by Firecracker management at the direction of the Special Committee.
(d) Source: Firecracker Proxy, 5/24/1999.
(e) Includes Westbrook Real Estate Fund I, L.P. holdings of 2,290,262 shares of
common stock. Does not include 1,699,605 shares of common stock initially
issuable to Westbrook upon the conversion of its Preferred Stock.
(f) Affiliated with SHP Acquisition, the entity that made an offer to
Firecracker disclosed on 4/5/1999.
</FN>
<PAGE>
7
FIRECRACKER OVERVIEW
LEGAL AND ORGANIZATIONAL STRUCTURE
[GRAPHIC]
[GOLDMAN SACHS LOGO]
<PAGE>
8
<TABLE>
CAPTION>
FIRECRACKER OVERVIEW
HISTORICAL AND MANAGEMENT PROJECTED CONSOLIDATED BALANCE SHEET
($ IN THOUSANDS)
ASSETS 3/31/1999A 10/31/1999E (B)(C)
---------------- ------------------
<S> <C> <C>
Investments in Hotel Properties, Net $842,323 $880,918
Other Real Estate Investment Properties, Net 19,410 19,890
Cash and Cash Equivalents 663 7,555
Restricted Cash 3,173 --
Rent Receivable - Lessee 12,347 15,615
Notes Receivable 1,674 1,590
Other Assets 9,462 5,403
---------------- ------------------
Total Assets $889,052 $930,971
================ ==================
LIABILITIES AND STOCKHOLDER'S EQUITY
Revolving Line of Credit $287,500 $300,300
Notes Payable 109,747 144,178
Accounts Payable and Other Accrued Expenses 21,761 13,690
Distributions Payable to Preferred Shareholders 492 1,171
---------------- ----------------------
Total Liabilities 419,500 459,339
Minority Interest 25,069 23,671
Stockholder's Equity (a) 444,483 447,961
================ ======================
Total Liabilities and Stockholder's Equity $889,052 $930,971
================ ======================
</TABLE>
[FN]
(a) Includes Class A Convertible Preferred Stock with a liquidation value of
$25 million.
(b) Assumes no dividend is paid in respect of second quarter.
(c) Estimated by Firecracker management on 7/8/1999. Does not take into account
Firecracker's transaction costs.
</FN>
[GOLDMAN SACHS LOGO]
<PAGE>
9
<TABLE>
<CAPTION>
FIRECRACKER OVERVIEW
HISTORICAL AND MANAGEMENT PROJECTED INCOME STATEMENT
($ IN THOUSANDS, EXCEPT PER SHARE)
HISTORICAL
--------------------------------------------------------
1997A 1998A AS OF MAY 1998A AS OF MAY 1999A 1999E (A) 2000E (A)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ADR $ 76.06 $ 83.15 $ 81.08 $ 85.83 $ 86.81 $ 90.77
Occupancy Rate 70.9% 65.9% 63.3% 65.0% 68.5% 70.1%
RevPAR $ 53.92 $ 54.81 $ 51.35 $ 55.82 $ 59.46 $ 63.63
Growth (c) 1.7% 8.7% 8.5% 7.0%
Total Revenue $ 45,151 $ 99,155 $39,484 $ 40,896 $110,018 $119,946
Real Estate Property Taxes
& Insurance (4,670) (11,409) (5,362) (5,081) (13,392) (14,004)
General & Administrative (1,890) (5,344) (2,468) (2,342) (4,957) (5,205)
EBITDA (B) 38,591 82,402 31,655 33,474 91,670 100,737
Growth (c) 113.5% 5.7% 11.2% 9.9%
Funds From Operations (FFO) 32,000 60,695 23,439 22,440 60,491 65,516
FULLY DILUTED FFO/SHARE
AND UNIT $ 1.34 $ 1.40 $ 0.60 $ 0.54 $ 1.45 $ 1.57
Growth (c) 4.5% -10.2% 3.6% 8.3%
Dividend/Share $ 1.03 $ 1.11 NA NA NA
Growth (c) 7.8%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Projections dated 06/28/1999 prepared by independent consultants hired by
Firecracker management at the direction of the Special Committee.
(b) Lease revenue less property taxes and insurance less general and
administrative expense. Does not include cost of withdrawn debt offering of
$1.45 million in 1998 or loss on the sale of hotel properties of $489,500
in 1999.
(c) Growth with respect to previous comparable period.
<PAGE>
10
FIRECRACKER OVERVIEW
ISSUES TO CONSIDER AS A GOING CONCERN
. Access to capital for growth is significantly impaired in the current
market environment
-- The negative lodging environment of the past eighteen months is
unlikely to turn around in the near-term
-- Mid-scale, full-service and limited-service properties with limited
barriers to entry are vulnerable to overbuilding and deteriorating
supply/demand fundamentals
. Firecracker's stock has under-performed other lodging stocks in 1998 and
1999 year to date
-- On January 27, 1999, the Company announced 1998 year-end FFO of $1.40
per share, $0.08 below consensus estimates; the stock dropped 16.5%
that day on the announcement
-- Actual first quarter 1999 FFO per share results were $0.34 versus
consensus Street estimates of $0.38 per share at the beginning of the
year
. A renovation program which ran over budget and behind schedule has left
Firecracker with significant cash flow constraints which are not fully
understood by the research community
-- With lower than expected lease revenue, Firecracker must consider
selling assets, refinancing properties and postponing additional hotel
renovations in order to meet its ongoing obligations
-- Firecracker is unlikely to be able to fund its second quarter and
third quarter 1999 dividends unless it completes some asset sales--
Firecracker is in jeopardy of violating a borrowing capacity covenant
under its Credit Facility in July 1999
. Ongoing concerns exist with respect to Firecracker's REIT/Lessee conflicted
structure (a)
-- Historically, the Lessee has been operated at a loss
-- Currently, the Lessee is operating above breakeven, but at the expense
of reduced revenues and thus reduced rent payments to Firecracker
(a) Sunstone Hotel Properties, Inc. (the "Lessee") operates all of
Firecracker's properties under separate 10-year leases for each property
(see Legal and Organization Structure).
[GOLDMAN SACHS LOGO]
<PAGE>
11
<TABLE>
<CAPTION>
FIRECRACKER OVERVIEW
PROPERTY-LEVEL PERFORMANCE: BUDGETED VS. ACTUAL INCOME STATEMENT
($ IN THOUSANDS)
1998 AS OF MAY 1999
------------------------------------------------- ----------------------------------------------
BUDGET(A) Actual Difference Percent Budget(A) Actual Difference Percent
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Room $214,119 $204,492 $ (9,627) -4.5% $ 93,124 $ 86,354 $ (6,770) -7.3%
Food and Beverage 42,018 41,857 (161) -0.4% 15,662 14,733 (929) -5.9%
Other 20,599 27,247 6,648 32.3% 8,195 10,800 (2,604) 31.8%
-------- -------- -------- ------ --------- -------- -------- ------
Total Revenue 276,736 273,596 (3,140) -1.1% 116,982 111,887 (5,095) -4.4%
DEPARTMENTAL EXPENSES
Room 47,210 47,585 (375) -0.8% 19,496 16,587 2,909 14.9%
Food and Beverage 33,496 34,474 (978) -2.9% 11,908 11,401 507 4.3%
Other 13,281 17,382 (4,101) -30.9% 5,511 9,077 (3,566) -64.7%
-------- -------- -------- ------ --------- -------- -------- ------
Total Departmental Expenses 93,988 99,441 (5,453) -5.8% 36,915 37,065 (150) -0.4%
UNDISTRIBUTED EXPENSES
General and Administrative (b) 21,109 28,697 (7,588) -35.9% 8,635 11,150 (2,515) -29.1%
Advertising and Promotion 13,001 20,719 (7,718) -59.4% 5,468 5,077 391 7.1%
Repairs and Maintenance 11,581 11,314 267 2.3% 4,625 4,114 512 11.1%
Utilities 11,373 10,960 413 3.6% 4,551 3,841 710 15.6%
Other 9,725 -- 9,725 100.0% 4,144 3,896 248 6.0%
-------- -------- -------- ------ --------- ------ -------- ------
Total Undistributed Expenses 66,789 71,690 (4,901) -7.3% 27,423 28,077 (655) -2.4%
GROSS OPERATING PROFIT 115,959 102,465 (13,494) -11.6% 52,644 46,744 (5,900) -11.2%
REIT LEASE REVENUE 102,673 98,682 (3,991) -3.9% 44,641 40,638 (4,003) -9.0%
</TABLE>
- --------------------------------------------------------------------------------
(a) Prepared by the Lessee.
(b) Includes corporate overhead of the Lessee.
<PAGE>
12
FIRECRACKER OVERVIEW
REVIEW OF YEAR-TO-DATE PROPERTY-LEVEL MONTHLY PERFORMANCE
[GRAPHIC CHART]
[GOLDMAN SACHS LOGO]
<PAGE>
13
<TABLE>
<CAPTION>
FIRECRACKER OVERVIEW
PROPERTY-LEVEL PERFORMANCE: COMPARISON OF PROJECTIONS
($ IN THOUSANDS, EXCEPT PER SHARE)
LESSEE FIRECRACKER MANAGEMENT/
HVS 1999 MANAGEMENT MANAGEMENT CONSULTANTS
NOV. 1998 (A) BUDGET (B) 4/29/1999 (C) 6/11/1999 (C) 6/28/99 (D)
- --------------------------------- -----------------------------------------------------------------------------------------------
1999
- ----
<S> <C> <C> <C> <C> <C>
Occupancy 69.6% 70.8% 70.0% 69.1% 68.5%
Average Daily Rate (ADR) $ 89.08 $ 88.64 $ 87.32 $ 87.27 $ 86.61
Revenue per Available Room (RevPAR) 61.99 62.79 61.17 60.31 59.33
Total Revenues $302,200.0 $295,350.2 $ 288,612.0 $ 285,322.2 $ 281,289.8
Gross Operating Profit 136,100.0 135,647.4 132,712.0 132,006.0 127,187.2
REIT Rent Revenue 115,500.0 113,617.2 113,362.0 111,480.7 109,734.9
2000
- ----
Occupancy 71.1% NA 71.2% 70.8% 70.1%
ADR $ 93.40 NA $ 92.84 $ 92.22 $ 90.77
RevPAR 66.45 NA 66.15 65.31 63.63
Total Revenues $329,300.0 NA $ 320,200.0 $ 316,390.4 $ 306,659.1
Gross Operating Profit 151,500.0 NA 146,900.0 145,897.6 139,396.3
REIT Rent Revenue 127,900.0 NA 127,153.0 125,533.3 119,542.3
</TABLE>
- --------------------------------------------------------------------------------
[FN]
(a) Prepared by outside consultants, HVS.
(b) Prepared by Lessee.
(c) Prepared collectively by the Lessee and the Management Company and reviewed
by Firecracker management.
(d) Prepared by independent consultants hired by Firecracker management at the
direction of the Special Committee.
</FN>
[GOLDMAN SACHS LOGO]
<PAGE>
14
EXHIBIT III
<PAGE>
15
FIRECRACKER
DAILY COMMON STOCK PRICE AND TRADING VOLUME HISTORY
PRIOR TO THE ANNOUNCEMENT OF THE WESTBROOK/FIRECRACKER MANAGEMENT OFFER,
FIRECRACKER'S STOCK HAD FALLEN OVER 50% IN THE PREVIOUS 12 MONTHS
[GRAPHIC]
[GOLDMAN SACHS LOGO]
<PAGE>
16
FIRECRACKER
WEEKLY COMMON STOCK PRICE AND TRADING VOLUME HISTORY SINCE IPO
IPO PRICE: $9.50
SINCE IPO:
HIGH $17.56 (11/28/1997)
LOW $7.06 (3/12/1999)
[GRAPHIC]
[GOLDMAN SACHS LOGO]
<PAGE>
17
FIRECRACKER SHARES TRADED AT VARIOUS PRICES [GOLDMAN SACHS LOGO]
[GRAPHIC CHARTS]
<PAGE>
18
<TABLE>
<CAPTION>
FIRECRACKER [GOLDMAN SACHS LOGO]
SUMMARY OF ANALYST RECOMMENDATIONS FFO ESTIMATES
----------------------
COMPANY ANALYST RECOMMENDATION LAST UPDATE 1999 2000
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Goldman Sachs David Kostin Market Perform 4/30/1999 $ 1.52 $ 1.60
A.G. Edwards Manual Pyles Maintain Position 6/24/1999 1.46 1.54
Bear Stearns Robert LaFleur Attractive 6/22/1999 1.48 1.62
Everen Jeff Donnelly Short-term Outperform 6/15/1999 1.50 1.65
Jefferies & Co. Mark Benson Accumulate 6/11/1999 1.53 1.64
Merrill Lynch Eric Hemel Accumulate 5/1/1999 1.53 1.66
Putnam, Lovell Paul Saint-Pierre Buy 6/7/1999 1.50 1.60
Raymond James Paul Puryear Neutral 6/23/1999 1.48 1.65
Sands Brothers Brad Cohen Buy 4/30/1999 1.50 NA
Sutro & Co. Janet Campbell Hold 5/31/1999 1.53 NA
FIRST CALL CONSENSUS
ESTIMATES $ 1.50 $ 1.62
FIRECRACKER
MANAGEMENT'S
PROJECTIONS (A) $ 1.45 $ 1.57
</TABLE>
(a) Based upon projections completed on 6/28/1999 by independent consultants
hired by Firecracker management at the direction of the Special Committee
<PAGE>
19
<TABLE>
<CAPTION>
REVIEW OF ANALYST COMMENTARY [GOLDMAN SACHS LOGO]
AFTER ANNOUNCEMENT BY SHP ACQUISITION
FFO PER SHARE (a)
------------------
FIRM DATE RATING 1999E 2000E COMMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Raymond James 5/3/1999 Neutral $1.53 $1.65 . We view the current tender offer of $9.50-$10.00
as inadequate versus our range of NAV estimates
at $11-$12 and would encourage investors and the
Board to also consider what appears to be
moderately strengthening fundamentals for the
hotel industry
n . Firecracker is trading in line with its peers on
a multiple basis with adequate growth prospects
for the near term, but given the risks
surrounding the outcome of any possible merger,
we maintain our NEUTRAL rating
Goldman Sachs 4/30/1999 Market Performer 1.52 1.60 . Firecracker reported 1Q 1999 Funds From
Operations (FFO) of $0.34 per share, $0.01 above
our estimate and 10.5% below 1Q 1998. We are
maintaining our 1999 and 2000 FFO estimates of
$1.52 and $1.60, respectively
. At $9 3/16, Firecracker is trading at a 6.1
multiple of our 1999 FFO estimate, a 10% discount
to the hotel REIT sector average. The 1999-2000
growth rate of 6.3% is a 17% discount to the
sector average. The shares have a current
annualized dividend yield of 12.2%
Goldman Sachs 4/7/1999 Market Performer 1.52 1.60 . Focus on redevelopment of underperforming hotels
produces solid RevPAR growth and attractive
returns on invested capital
. Based on our estimate of Firecracker's 1999E NOI
of $100 million and using a conservative
capitalization rate (before capitalized
expenditures) of 12%, our net asset value
estimate for Firecracker would be $10.20 per
share
</TABLE>
(a) As of respective research report date. Continued
<PAGE>
20
<TABLE>
<CAPTION>
REVIEW OF ANALYST COMMENTARY [GOLDMAN SACHS LOGO]
AFTER ANNOUNCEMENT BY SHP ACQUISITION
FFO PER SHARE (a)
------------------
FIRM DATE RATING 1999E 2000E COMMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jefferies & Co. 4/7/1999 Accumulate 1.55 1.64 . Firecracker announced yesterday that it had
received a management led buyout proposal for the
Company. The offer price of $9.50 to $10.00 per
share implies an equity buyout price of $365
million. While this price represents more than a
20% premium over the previous closing price, we
believe that the underlying value of the hotel
assets warrants a higher price for the shares.
Given our $12 to $13 net asset value per share
estimate, we believe that the proposed $10 buyout
price represents a surprisingly large discount to
our estimated value of the underlying real
estate. We view this offer as a first step in
what should be an interesting real estate
negotiating process
Merrill Lynch 4/6/1999 Accumulate 1.53 1.66 . Firecracker received a management led buyout
offer of $9.50 to $10.00 per share in cash, which
is 10-15% below our estimated NAV figure of
$11.10
. An alternative buyer of Firecracker would own
properties encumbered with 10+ year lease
agreements with the management team that
effectively lost out in the buyout bid*
. Thus, it is hard to envision a scenario where
another bidder (either a REIT, a C-Corp, or
another private equity fund) would offer a higher
price for the assets
. Therefore, the issues the board faces are more
likely to pertain to the "fairness" of the buyout
offer than the logistics of conducting an
effective auction process
* THIS REPORT DOES NOT ACKNOWLEDGE THE INFORMATION PUBLICLY DISCLOSED ON THE
PREVIOUS DAY (4/5/99) BY SHP ACQUISITION THAT THE TERMS OF ITS PROPOSAL
CONTEMPLATED THAT, IN THE EVENT AN AGREEMENT IS SIGNED WITH SHP
ACQUISITION, AND A SUCCESSFUL SUPERIOR PROPOSAL FOR FIRECRACKER,
FIRECRACKER WOULD HAVE HAD THE RIGHT TO PURCHASE, AND THE LESSEE WOULD HAVE
HAD THE RIGHT TO SELL, THE LESSEE AND THE MANAGEMENT COMPANY FOR A PRICE OF
$35 MILLION.
</TABLE>
(a) As of respective research report date. Continued
<PAGE>
21
<TABLE>
<CAPTION>
REVIEW OF ANALYST COMMENTARY [GOLDMAN SACHS LOGO]
AFTER ANNOUNCEMENT BY SHP ACQUISITION
FFO PER SHARE (a)
------------------
FIRM DATE RATING 1999E 2000E COMMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Raymond James 4/6/1999 Neutral 1.53 1.65 . We have estimated Firecracker's net asset value
at between $10.00 and $12.00, employing cap rates
of 11.00% and 10.00%, respectively. Based upon
our understanding of the current offer by SHP
Acquisition, we view a $9.50 to $10.00 bid to be
inadequate and would expect a final buyout number
to be $11.00-$12.00
. There is little doubt that the recent price makes
Firecracker an attractive target for both private
and publicly traded entities. However, with Bob
Alter owning the lessee and operating company and
participating in the buyout group, other
potential bidders are disadvantaged
</TABLE>
(a) As of respective research report date. Continued
<PAGE>
22
<TABLE>
<CAPTION>
REVIEW OF ANALYST COMMENTARY [GOLDMAN SACHS LOGO]
BEFORE ANNOUNCEMENT BY SHP ACQUISITION
FFO PER SHARE (a)
------------------
FIRM DATE RATING 1999E 2000E COMMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A.G. Edwards 2/8/1999 Maintain 1.55 1.66 . Fourth-quarter 1998 operating FFO per share were
/Aggressive $0.27, 16% below the year-earlier quarter and
16% below our expectations
. The lackluster demand and continued supply
problems in several of the trust's markets have
us concerned about meaningful FFO growth into the
foreseeable future
Jefferies & Co. 2/2/1999 Accumulate 1.55 1.64 . Lowered Investment Rating to Accumulate from Buy
- Our growing concern with a number of
Firecracker's markets and the ability of its
properties to compete in these markets, our
expectations that the impact of rooms being out
of service due to renovation may make quarter to
quarter earnings estimates more volatile as the
overall earnings growth rate of the Company
slows, and a severely restricted capital
position, are all the basis for our investment
rating downgrade
Continued
</TABLE>
(a) As of respective research report date.
<PAGE>
23
<TABLE>
<CAPTION>
REVIEW OF ANALYST COMMENTARY [GOLDMAN SACHS LOGO]
BEFORE ANNOUNCEMENT BY SHP ACQUISITION
FFO PER SHARE (a)
------------------
FIRM DATE RATING 1999E 2000E COMMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Merrill Lynch 1/28/1999 Accumulate 1.57 1.69 . Firecracker reported 4Q1998 FFO of $0.22, a 31%
decrease from the year-ago period and our
estimate. However, the $0.22 includes five cents
of non-recurring charges. Therefore, on an apples
to apples basis, Firecracker's FFO declined 15.5%
to $0.27
. As a result, we are lowering our 1999 FFO
estimate to $1.57 from $1.65 while our 2000 FFO
estimate decreases to $1.69 from $1.76
. Despite these estimate reductions, we are
maintaining our Accumulate rating based on our
above-average dividend yield which is nearly 13%
Raymond James 1/28/1999 Neutral 1.55 N.A. . We are lowering our 1999 FFO estimate by $0.10
per share to $1.55 per share, which is a 7%
increase from 1998 FFO of $1.45 per share (before
the special 4Q charges) and assumes a 3-4% RevPAR
increase. The Company is not giving guidance on
1999 FFO
. We believe the dividend remains secure and
provides investors an 11.5% yield. However, there
is little price appreciation potential in the
stock given the 4Q performance and concerns about
the lodging industry, we are lowering our rating
on the stock to a NEUTRAL (3)
</TABLE>
(a) As of respective research report date.
<PAGE>
EXHIBIT IV
<PAGE>
25
<TABLE>
<CAPTION>
PROJECT FIRECRACKER [GOLDMAN SACHS LOGO]
SUMMARY OF ALTERNATIVES CONSIDERED BY THE SPECIAL COMMITTEE
--------------------------- ------------------------------------ ---------------------------
PROS CONS ISSUES
--------------------------- ------------------------------------ ---------------------------
<S> <C> <C> <C>
1. Stand-Alone Strategy Wait for better REIT market Capital constraints Creditworthiness of Lessee
Liquidity shortage Management continuity
Shareholder value in the short term
2. Auction the REIT No tag-along for Lessee and Limited market appetite for REIT Franchise agreements
subject to existing Management Company assets encumbered by leases and Properties operated by
leases and management No breakup fee payable to management contracts Lessee until leases expire
contracts SHP Acquisition
3. Negotiate agreement Can deliver integrated hotel $50-60mm additional investment for Financing of SHP
with SHP acquisition company to third parties third party as a result of tag- Acquisition offer
and continue auction along and breakup fee payable to Franchise agreements
of integrated hotel Preserve ability to deliver SHP Acquisition Value of Lessee
company a transaction with SHP Size of breakup fee
Acquisition
4. Liquidate through a Breaks leases (compensation High corporate tax leakage under Kahler portfolio
sale of assets payable to Lessee) most circumstances (a) Taxable gain to Alter &
Timing Biederman
Execution risk Franchise agreements
May lose SHP's bid Possible Injunction
</TABLE>
(a) Circumvented by the structure proposed by Apollo.
<PAGE>
26
<TABLE>
<CAPTION>
SUMMARY OF FIRECRACKER SALE PROCESS
-------------------------------------------------------------------------------------------------------------------
DATE EVENT
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
THE SPECIAL April 5, 1999 SHP Acquisition publicly files a management sponsored offer to acquire Firecracker
COMMITTEE
CONDUCTED A April 19, 1999 Special Committee of the Board of Directors of Firecracker engages Goldman Sachs as the sole
FULL TWO- advisor
STEP AUCTION
PROCESS April 28, 1999 Special Committee authorizes contact with 38 potential bidders
April 30, 1999 Twenty potential bidders receive Sunstone Information Package with instructions to bid under
alternative structures, (a) REIT as a stand alone entity encumbered by leases and management
contracts and (b) for the consolidated company (REIT, Lessee and Management Company as one
integrated entity)
May 10-11, 1999 Receive preliminary bids from 3 bidders (Apollo, Lend Lease and Lowe Enterprises) to purchase
the consolidated company; Apollo indicates breaking leases may realize higher value for
Firecracker shareholders
May 12, 1999 Lend Lease and Lowe Enterprises are advised that their bids were not competitive and dropped
from the process
May 24, 1999 Receive preliminary bid from Apollo to purchase Firecracker subject to existing leases and
contracts
May 29-30, 1999 SHP Acquisition (Westbrook) visits data room
May 28, 1999 Apollo receives final round bid letter establishing June 17, 1999 as final bid date.
Letter offers expense reimbursement up to $2 million for a firm bid
June 1-3, 1999 Apollo (on basis of offer subject to existing leases) visits data room
June 11, 1999 SHP Acquisition receives final round bid letter establishing July 9, 1999 as revised final bid
date. Letter offers expense reimbursement up to $2 million for a firm bid
June 15, 1999 Apollo receives final round bid letter establishing July 9, 1999 as revised final bid date. As
an alternative to expense reimbursement previously offered, letter offers expense reimbursement
up to $750,000 for a bona fide offer that is subject to financing
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Continued
</TABLE>
[GOLDMAN SACHS LOGO]
<PAGE>
27
<TABLE>
<CAPTION>
SUMMARY OF FIRECRACKER SALE PROCESS
<S> <C> <C>
THE SPECIAL -------------------------------------------------------------------------------------------------------------------
COMMITTEE DATE EVENT
CONDUCTED A -------------------------------------------------------------------------------------------------------------------
FULL TWO- June 21, 1999 Apollo and its advisors begin conducting property tours of all 59 assets
STEP AUCTION
PROCESS June 24, 1999 Apollo receives follow-up letter clarifying certain items in the letter sent on June 15, 1999
June 25, 1999 Receive proposal from SHP Acquisition with a July 2, 1999 expiration
June 30, 1999 Substantial progress made on negotiating a definitive merger agreement (subject to approval of
the Special Committee) with SHP Acquisition
July 1, 1999 Special Committee elects not to accept SHP Acquisition's offer at such time in order to allow
Apollo to submit a final proposal on the final bid date
July 6-8, 1999 Apollo's advisors conduct additional data room visits and further due diligence
July 8, 1999 Receive initial contract mark-up from Apollo
July 9, 1999 Receive final proposal from each of SHP Acquisition and Apollo, including contract mark-ups and
financing term sheets
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
</TABLE>
[GOLDMAN SACHS LOGO]
<PAGE>
28
FIRECRACKER - FINAL BID INSTRUCTIONS
FINAL BID . Final bidders were invited to submit a firm proposal to
INSTRUCTIONS WERE purchase all the outstanding shares of Firecracker and
SENT TO SHP OP units of the Operating Partnership by noon on
ACQUISTION AND July 9, 1999. Bidders were asked to address:
APOLLO
-- The price per share to be paid to all shareholders
and unit holders, including form of consideration if
other than 100% cash.
-- The source of equity funds and the assumed amount of
the equity investment.
-- The assumed amount(s), terms and conditions of any
financing to be utilized, including the terms and
documentation of the commitment(s). Bidders were
instructed to submit proposals that were not subject
to financing contingencies.
. In arriving at bid amounts, final bidders were
instructed to take into account information disclosed
in the preliminary bid letter, the Firecracker
Information Package, additional information provided to
bidders, in the data room.
. Final bidders were entitled to reimbursement of
documented out-of-pocket expenses subject to the
following terms and conditions:
-- (A) The Special Committee receives a firm proposal
supported by full documentation on or prior to the
final bid date stating a price per share not less
than the higher end of the range disclosed by SHP
Acquisition in its offer and the final proposal is
rejected; OR
(B) The Special Committee accepts a bid from a third
party prior to the final bid date.
-- Expense reimbursement is capped at $2.0 million (a).
. Depending upon the structure indicated in their
preliminary bid letter, final bidders were provided
with a merger agreement reflecting a stock transaction
or an asset purchase transaction and were instructed to
submit a markup of such agreement with their final bid.
[GOLDMAN SACHS LOGO]
(a) Expense reimbursement for Apollo is capped at $750,000 in the event that
their final proposal contains some degree of financing contingency and the
Special Committee does not accept a bid from a third party prior to the
final bid date.
<PAGE>
29
EXHIBIT V
<PAGE>
30
<TABLE>
<CAPTION>
SUMMARY OF OFFERS BY SHP ACQUISITION, L.L.C.
COMPARISON OF KEY TERMS
APRIL 5, 1999 OFFER FINAL OFFER (A)
===================================================================================================================================
. Price $9.50-10.00/share $10.35/share (b)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
. Ability to pay dividends pre-
closing Yes No (c)
- -----------------------------------------------------------------------------------------------------------------------------------
. Financing
-- Amount $530 million, including second $454 million increasing to $502 million (not
mortgages on mortgaged assets including mortgaged assets), based on Lender due
($502 million excluding second diligence
mortgages on mortgaged assets)
-- Conditionality Bid subject to financing SHP Acquisition's obligation conditional upon Lender
confirmation within 60 days funding at least $429 million. Lender's obligation
conditional upon:
(i) structural, title, engineering, environmental
defects less than $25 million;
(ii) no material adverse change (1.5% decline in
rolling 12-month NOI); and
(iii) November 23, 1999 expiration
- -----------------------------------------------------------------------------------------------------------------------------------
. Break-up Fee 3% of transaction value plus $25 million ($17.5 million plus up to $7.5 million
expenses (approximately $35 of expenses)
million in the aggregate)
- -----------------------------------------------------------------------------------------------------------------------------------
. Non-refundable deposit None $25 million
- -----------------------------------------------------------------------------------------------------------------------------------
. Lessee/Management Company Put/Call @ $35 million Call by Firecracker @ $30 million
Purchase (No Put for the Lessee)
- -----------------------------------------------------------------------------------------------------------------------------------
(a) As set forth in SHP Acquisition's final bid letter dated July 9, 1999 as modified by SHP Acquisition's amendment thereto
and subsequent negotiations with representatives of SHP Acquisition.
(b) Subject to certain purchase price adjustments if seller expenses exceed $11.5 million and the cost of obtaining franchisor
consents exceeds $12.5 million. Additionally, Firecracker has the right to cure under certain other circumstances via a
purchase price reduction.
(c) Firecracker has the ability to pay out one half of the cash flow generated between July 1, 1999 and the date five business
days prior to closing.
</TABLE>
[GOLDMAN SACHS LOGO]
<PAGE>
31
<TABLE>
<CAPTION>
SUMMARY OF OFFERS BY SHP ACQUISITION, L.L.C.
COMPARISON OF KEY TERMS
APRIL 5, 1999 OFFER FINAL OFFER (A)
===================================================================================================================================
<S> <C> <C>
. Closing Conditions
-- All franchisor consents Yes Marriott, Holiday Inn and Hilton only.
Cost of obtaining all franchisor consents handled by
a potential purchase price reduction as follows:
(i) less than $12.5 million, SHP Acquisition's
cost;
(ii) greater than $12.5 million but not more
than $25 million, split 50/50; and
(iii) thereafter, at its option, Firecracker's
cost via a purchase price reduction
-- Lender consents Yes Only if refinancing amount plus the amount by which
($69 million of debt to PaineWebber's loan (after hold backs for property
remain in place) defects) exceeds $454 million is less than $69
million. Firecracker has the ability to cure.
-- Contribution Agreement Yes No
(Westbrook agreement with
Alter to purchase
Lessee/Management
Company)
- -----------------------------------------------------------------------------------------------------------------------------------
. Material Adverse Change Customary Customary
- -----------------------------------------------------------------------------------------------------------------------------------
. Reps and Warranties Not qualified by Alter's knowledge Certain reps qualified by Alter's knowledge
===================================================================================================================================
</TABLE>
(a) As set forth in SHP Acquisition's final bid letter dated July 9, 1999 as
modified by SHP Acquisition's amendment thereto and subsequent negotiations
with representatives of SHP Acquisition.
[GOLDMAN SACHS LOGO]
<PAGE>
32
APOLLO'S BID FOR FIRECRACKER
. On May 10, 1999, Apollo submitted a preliminary bid to purchase Firecracker
for a purchase price per share between $10.50-11.00, and indicated that
breaking the leases and management contracts may realize higher value for
Firecracker shareholders. On May 24, 1999, Apollo submitted a revised
preliminary bid to purchase Firecracker subject to existing leases and
management contracts for a purchase price per share in the range indicated in
its preliminary bid letter
. Apollo contemplates an asset purchase transaction that would enable it to
effectively break the operating leases between the REIT and the Lessee at
minimal cost without making an additional negotiated payment to acquire the
Lessee or the Management Company
. Based on preliminary discussions with tax counsel, Apollo could effect a
transaction that would allow it to terminate the leases without payment of a
corporate level tax
. The leases can be terminated for a fee that is equal to the hotel's net
operating profit for the trailing twelve months
-- Firecracker's accountants estimate that, assuming a September 30, 1999
closing, such fee would amount to approximately $7.3 million(a)
-- The fee may be reduced by 50% for a bulk sale (such term not defined in
the lease agreements)
. While this acquisition structure would potentially minimize any payment to
the Lessee, it involves substantial business and legal risks that must be
considered
. On July 9, 1999, Apollo submitted a final proposal to purchase Firecracker
subject to existing leases and management contracts for a purchase price per
share of $10.00
[GOLDMAN SACHS LOGO]
(a) Based on projections of 6/11/1999 prepared collectively by the Lessee and
the Management Company and reviewed by Firecracker management.
<PAGE>
33
EXHIBIT VI
<PAGE>
34
LODGING INDUSTRY - U.S. OUTLOOK
GOLDMAN SACHS RESEARCH 1999 OUTLOOK
GOLDMAN SACHS . Goldman Sachs Research continues its bearish stance
RESEARCH EXPECTS on the lodging sector and expects the sector to show
LODGING STOCKS TO negative returns relative to the broader market
SHOW LACKLUSTER
PERFORMANCE IN 1999 . Supply growth will still be greater than demand in
1999 and 2000; RevPAR growth will continue to slow
ON JUNE 3, 1999, and may lead to a decline in valuation multiples
GOLDMAN SACHS
RESEARCH ISSUED A . Another wave of earnings reductions could occur as
REPORT IN WHICH IT current RevPAR trends are at the bottom of full year
INDICATED THAT IT expectations
CONSIDERED
DOWNGRADING THE . The hotel industry has now entered a period of
SECTOR aggravated competition - market share maintenance is
taking precedence over profit growth
[GOLDMAN SACHS LOGO]
<PAGE>
35
COMPARISON OF SELECTED LODGING COMPOSITES
ONE YEAR DAILY INDEXED COMMON STOCK PRICE HISTORY
[GRAPHIC]
Full Service REITs:
- ------------------
Starwood through 1/6/1999
Host Marriott after 1/1/1999
Felcor Lodging Trust
Meristar Hospitality
Boykin Lodging
LaSalle Properties
Limited Service REITs:
- ---------------------
Equity Inns
Hospitality Properties
Innkeepers USA
Winston Hotels
US C-Corps:
- ----------
Starwood after 1/6/1999
Host Marriott through 1/1/1999
Hilton
Marriott Int'l
Four Seasons
MeriStar Hotels & Resorts
Florida Panthers
US Franchise System
Prime Hospitality
Promus Hotel Corp
Red Roof Inns
[GOLDMAN SACHS LOGO]
<PAGE>
36
COMPARISON OF SELECTED LODGING COMPOSITES
THREE YEAR WEEKLY INDEXED COMMON STOCK PRICE HISTORY
[GRAPHIC]
Full Service REITs:
- ------------------
Starwood through 1/6/1999
Host Marriott after 1/1/1999
Felcor Lodging Trust
Meristar Hospitality
Boykin Lodging
LaSalle Properties
Limited Service REITs:
- ---------------------
Equity Inns
Hospitality Properties
Innkeepers USA
Winston Hotels
US C-Corps:
- ----------
Starwood after 1/6/1999
Host Marriott through 1/1/1999
Hilton
Marriott Int'l
Four Seasons
MeriStar Hotels & Resorts
Florida Panthers
US Franchise System
Prime Hospitality
Promus Hotel Corp
Red Roof Inns
[GOLDMAN SACHS LOGO]
<PAGE>
37
EXHIBIT VII
<PAGE>
38
SUMMARY OF FINAL OFFER BY SHP ACQUISITION L.L.C.
VALUATION SUMMARY
($ IN THOUSANDS, EXCEPT PER SHARE)
SHP Acquisition Offer per Share (a) $10.35
Diluted Shares Outstanding (b) 40,365
-------
Total Equity Consideration $417,776
Total Net Debt (c) 436,923
Preferred Stock (d) 25,000
-------
TOTAL ENTERPRISE VALUE OF FIRECRACKER $879,699
Price of Lessee/Management Company (e) $17,500
-------
TOTAL ENTERPRISE VALUE OF INTEGRATED COMPANY $897,199
1999E (F) 2000E (F)
---------------------------------------------------------------------
Firecracker FFO Multiple (g) 7.1 x 6.6 x
Firecracker EBITDA Multiple (h) 9.6 x 8.7 x
Firecracker Value/Room (i) $ 83,582
Integrated Company NOI Cap Rate (j) 9.8% 10.8%
Integrated Company Value/Room (l) $ 85,245
(a) SHP Acquisition's final offer.
(b) Assumes conversion of all outstanding OP units and treats stock options
and warrants using the treasury method (i.e., issuing new shares in an
amount equal to the aggregate in the money value of such options and
warrants outstanding).
(c) Net debt at 10/31/1999 estimated by Firecracker management. Assumes no
dividend is paid in respect of second quarter.
(d) Convertible at $14.71. Preferred stock to be redeemed at par.
(e) Derived from the terms of SHP Acquisition's agreement to purchase the
Lessee and the Management Company. Includes Robert Alter's capital
account of $10.5 million (the value of his shares/units is included in
the equity consideration), $3.0 million in cash paid to Robert Alter,
$1.75 million in cash paid to Charles Biederman and $2.25 million paid
in cash to certain employees of the Lessee. Assumes a debt-free
purchase.
(f) Based on projections dated 06/28/1999 prepared by independent
consultants hired by Firecracker Management at the direction of the
Special Committee.
(g) SHP Acquisition's offer per share divided by projected FFO per
share of $1.45 and $1.57 for 1999E and 2000E, respectively.
(h) Total Enterprise Value of Firecracker divided by projected EBITDA of
$91.7 million and $100.7 million for 1999E and 2000E, respectively.
(i) Total Enterprise Value of Firecracker divided by 10,525 rooms (includes
new builds).
(j) Integrated company NOI divided by Total Enterprise Value of Integrated
Company. NOI is equal to gross operating profit less 4% FF&E reserves,
3% management fee, franchise fees, real estate taxes, property
insurance and ground lease payments, plus additional income from
laundry, telephone contracts from certain assets, and accounting fee
reimbursements.
[GOLDMAN SACHS LOGO]
<PAGE>
39
SUMMARY OF FINAL OFFER BY SHP ACQUISITION L.L.C.
PREMIUM/DISCOUNT TO HISTORICAL FIRECRACKER PRICES
Price Premium/Discounts to Final
Offer Price
----------------------------------------
SHP ACQUISITION'S FINAL OFFER $ 10.35
Current (07/09/1999) $ 9.00 15.0%
Pre-Announcement Price (04/05/99)(a) $ 7.56 36.9%
30 Day Average (Pre-Announcement) $ 7.24 43.0%
90 Day Average (Pre-Announcement) $ 8.41 23.1%
180 Day Average (Pre-Announcement) $ 8.81 17.5%
One Year Average (Pre-Announcement) $ 10.81 (4.3)%
(a) Last closing price prior to the announcement of SHP Acquisition L.L.C.'s
proposal disclosed in a schedule 13-D dated April 6, 1999.
[GOLDMAN SACHS LOGO]
<PAGE>
40
<TABLE>
<CAPTION>
COMPARISON OF SELECTED LODGING COMPANIES
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
[GOLDMAN SACHS LOGO]
- ------------------------------------------------------------------------------------------------------------------------------------
7/9/1999 % OF MARKET CAPITALIZATION (A)
52-WEEK SHARES/ ------------------------------- NET DEBT/
COMPANY SHARE PRICE HIGH UNITS EQUITY NET DEBT LEVERED TOTAL CAP
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FIRECRACKER-PRE ANNOUNCEMENT (4/5/1999) (o) $ 7.56 46.3 % 40.0 $ 302.6 $ 436.9 $ 764.4 57.2 %
- ------------------------------------------------------------------------------------------------------------------------------------
REITS/REAL ESTATE COMPANIES
- ---------------------------
Hospitality Properties Trust (d) $ 27.19 81.9 % 45.6 $ 1,240.5 $ 580.3 $ 1,820.8 31.9 %
Lasalle Hotel Properties (e) 15.81 93.4 18.5 291.8 210.5 502.3 41.9
Host Marriott (f) 11.19 75.9 297.1 3,324.0 4,829.0 8,703.0 55.5
- ------------------------------------------------------------------------------------------------------------------------------------
FIRECRACKER (O) 9.00 66.1 40.0 360.2 436.9 822.1 53.1
- ------------------------------------------------------------------------------------------------------------------------------------
Boykin Lodging (g) 14.88 66.7 18.5 275.6 287.1 562.7 51.0
Equity Inns (e) 9.31 66.5 38.6 359.4 339.8 768.0 44.2
MeriStar Hospitality 20.94 87.0 52.6 1,101.6 1,656.5 2,758.1 60.1
Felcor Lodging Trust (d) 21.00 65.1 71.6 1,504.5 1,644.6 3,444.1 47.8
Patriot American Hospitality (n) 4.81 98.7 275.0 1,323.3 3,752.9 6,076.2 61.8
- ------------------------------------------------------------------------------------------------------------------------------------
HIGH 98.7 % $ 8,703.0 61.8 %
MEAN 77.9 2,828.6 49.7
LOW 65.1 502.3 31.9
- ------------------------------------------------------------------------------------------------------------------------------------
C-CORPS
- -------
US Franchise Systems (h) $ 21.25 91.6 % 19.9 $ 422.3 $ 0.0 $ 422.3 0.0 %
Florida Panthers (m) 11.00 59.1 40.8 448.8 559.7 1,008.5 55.5
Four Seasons (i)(j) 70.00 100.0 33.8 2,369.4 147.4 2,516.8 5.9
Marriott International (d) 37.69 85.8 269.3 10,149.4 605.0 10,754.4 5.6
Starwood Hotel & Resorts (l) 27.50 56.1 210.4 5,786.0 8,325.0 14,418.2 57.7
Hilton 14.25 67.9 258.3 3,680.8 3,060.0 6,740.8 45.4
MeriStar Hotels & Resorts 3.56 80.3 27.4 97.6 49.8 147.4 33.8
Promus Hotel 28.56 66.6 82.9 2,367.8 764.2 3,132.0 24.4
Red Roof Inns (h) 18.31 89.6 26.9 492.6 529.2 1,021.8 51.8
Prime Hospitality (d) 11.94 64.3 55.4 661.4 588.4 1,249.8 47.1
- ------------------------------------------------------------------------------------------------------------------------------------
HIGH 100.0 % $14,418.2 57.7 %
MEAN 76.1 4,141.2 32.7
LOW 56.1 147.4 0.0
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
5-YEAR 1999
EBITDA MULTIPLES(B) FFO/PE MULTIPLES(C) ANNUAL FFO/EPS FFO/PE
------------------- ------------------- DIVIDEND GROWTH TO 5-YR.
COMPANY 1999E 2000E 1999E 2000E YIELD RATE (C) GROWTH
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FIRECRACKER-PRE ANNOUNCEMENT (4/5/1999) (o) 8.3 x 7.6 x 5.2 x 4.8 x 15.1 % 11.0 % 0.5 x
- ------------------------------------------------------------------------------------------------------------------------------------
REITS/REAL ESTATE COMPANIES
- ---------------------------
Hospitality Properties Trust (d) 8.4 x 7.1 x 6.9 x 6.2 x 10.0 % 7.5 % 0.9 x
Lasalle Hotel Properties (e) 8.6 7.9 6.8 6.4 9.5 7.5 0.9
Host Marriott (f) 8.6 8.2 6.3 5.8 7.5 15.0 0.4
- ------------------------------------------------------------------------------------------------------------------------------------
FIRECRACKER (O) 9.0 8.2 6.2 5.7 12.7 11.0 0.6
- ------------------------------------------------------------------------------------------------------------------------------------
Boykin Lodging (g) 8.0 NA 5.7 5.5 12.6 8.0 0.7
Equity Inns (e) 7.9 7.5 5.6 5.5 13.3 8.0 0.7
MeriStar Hospitality 8.4 8.0 5.4 5.1 9.6 10.0 0.5
Felcor Lodging Trust (d) 7.8 7.3 5.2 4.8 10.5 10.0 0.5
Patriot American Hospitality (n) 9.1 8.7 2.8 3.1 0.0 14.0 0.2
- ------------------------------------------------------------------------------------------------------------------------------------
HIGH 9.1 x 8.7 x 6.9 x 6.4 x 13.3 % 15.0 % 0.9 x
MEAN 8.4 7.9 5.7 5.3 9.5 10.1 0.6
LOW 7.8 7.1 2.8 3.1 0.0 7.5 0.2
- ------------------------------------------------------------------------------------------------------------------------------------
C-CORPS
- -------
US Franchise Systems (h) NM 22.8 x 47.2 x 28.3 x 0.0 % 35.0 % 1.3 x
Florida Panthers (m) 9.1 8.1 28.9 NA 0.0 20.0 1.4
</TABLE>
<PAGE>
41
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Four Seasons (i)(j) 24.5 17.0 28.1 24.6 0.3 18.0 1.6
Marriott International (d) 12.1 10.2 22.7 19.2 0.5 18.0 1.3
Starwood Hotel & Resorts (l) 8.0 7.6 18.0 14.5 2.2 20.0 0.9
Hilton 9.5 8.4 17.4 15.5 0.6 15.0 1.2
MeriStar Hotels & Resorts 6.3 5.8 14.8 11.9 0.0 25.0 0.6
Promus Hotel 7.3 7.1 13.1 12.4 0.0 15.0 0.9
Red Roof Inns (h) 6.7 6.7 12.3 11.2 0.0 11.5 1.1
Prime Hospitality (d) 6.5 5.9 10.9 9.6 0.0 15.0 0.7
- ------------------------------------------------------------------------------------------------------------------------------------
HIGH 24.5 x 22.8 x 47.2 x 28.3 x 2.2 % 35.0% 1.6 x
MEAN 10.0 10.0 21.3 16.4 0.4 19.3 1.1
LOW 6.3 5.8 10.9 9.6 0.0 11.5 0.6
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Ordered by 1999 FFO/PE multiples. REITS are compared on the basis of FFO
multiples. C-Corps use PE multiples as a point of comparison.
(a) Equity market cap. does not include preferred stock. Levered market cap.
includes preferred stock.
(b) EBITDA estimates are from GS Research unless otherwise noted.
(c) All FFO/EPS estimates are calendarized IBES median estimates unless
otherwise noted.
(d) EBITDA estimates are from Merrill Lynch research.
(e) EBITDA estimates are from Prudential research.
(f) Financials stated pro forma for special cash dividend (2/10/1999) and $300
million 8.375% note offering (2/25/1999).
(g) EBITDA estimates are from AG Edwards research.
(h) EBITDA estimates are from CIBC Oppenheimer research.
(i) EBITDA estimates are from PaineWebber research.
(j) Four Seasons financial information is reported in Canadian dollars.
(l) EBITDA estimates from SalomonSmithBarney.
(m) Florida Panthers' EBITDA estimates are from Jefferies & Co. research. EBITDA
and EPS estimates have been calendarized to a December 31 fiscal year end.
(n) Financials stated pro forma for $1.0 billion equity investment led by Apollo
RE Advisors and Thomas H. Lee Company. At closing, Patriot American will
convert to c-corp status.
(o) EBITDA and FFO estimates are based on management's projections dated
6/28/1999 prepared by independent consultants hired by Firecracker
management at the direction of the Special Committee. EBITDA does not
include loss on sale of hotel properties of $495,500 in 1999. Net debt at
10/31/1999 estimated by Firecracker management.
<PAGE>
42
SUMMARY OF SELECTED ACQUISITIONS OF COMPANIES IN THE LODGING INDUSTRY
($ IN MILLIONS) (A)
<TABLE>
<CAPTION>
TARGET TRANSACTION VALUE
TARGET AS A MULTIPLE OF: PREMIUM OVER
EQUITY TARGET ------------------------ FORWARD FORWARD STOCK PRICE
MARKET TRANSACTION FORWARD FORWARD P/E FFO ONE MONTH CONSIDERATION
DATE ACQUIROR/TARGET CAP ($) VALUE ($)(B) EBITDA (C) EBIT (C) MULTIPLE (C) MULTIPLE (C) PRIOR (%) (CASH/STOCK)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
04/06/1999 SHP ACQUISITION/ $ 418 $ 880 9.6 X 17.4 X NA 7.1 X 34.6 % 100% CASH
FIRECRACKER (D)
02/08/1999 Ladbroke/Stakis 1,890 2,113 10.8 NA 15.2 NA 44.0 40% cash/
60% stock
12/15/1998 Apollo led 1,357 5,653 7.9 NA NA 4.8 12.0 100% cash
investor group/
Patriot American
Hospitality
04/21/1998 Equity Inns/ 620 969 12.0 14.8 NA 9.7 25.5 100% stock
RFS Hotel
Investors
(WITHDRAWN)
04/17/1998 Host Marriott/ 940 1,755 11.4 NA NA NA NA 54% stock
Blackstone
Portfolio
(13 hotels)
04/09/1998 Blackstone & 867 867 NA 18.6 NA NA 16.5 100% cash
Colony/Savoy
03/24/1998 Felcor Suite 1,146 1,846 10.1 NA NA NA 8.4 100% stock
Hotels/ Bristol (e)
03/15/1998 CapStar/American 785 1,277 10.7 NA NA 9.5 (1.0) 100% stock
General
02/20/1998 Bass PLC/ 1,400 2,950 14.0 NA NA NA NA 100% cash
InterContinental
01/04/1998 Meditrust/ 2,007 2,907 9.7 NA 20.8 NA 34.0 75% stock
La Quinta
12/03/1997 Patriot American 1,328 2,113 11.3 15.2 25.9 NA 24.0 75% stock
Hospitality/
Interstate
Hotel Company
10/20/1997 Starwood Lodging 10,700 14,200 12.6 16.3 29.6 NA 31.0 75% stock
Trust/ITT Corp.
09/09/1997 Starwood Lodging 800 1,830 11.3 NA NA NA NA 80% stock
Trust/Westin
Hotels (f)
09/02/1997 Promus/Doubletree 1,874 2,388 11.0 14.3 22.7 NA 7.0 100% stock
07/25/1997 Prime Hospitality 133 158 7.6 11.5 38.0 NA 35.6 100% stock
Corp./Homegate (g) Pooling
04/14/1997 Patriot American/ 611 763 11.2 13.9 28.0 NA 3.0 100% stock
Wyndham Hotel (h)
02/18/1997 Marriott 908 970 12.8 NA NA NA 76.0 100% stock
International/
Renaissance Hotel
Group N.V.
01/17/1997 Extended Stay 296 296 11.5 19.7 35.7 NA 32.5 100% stock
America/Studio Pooling
Plus Hotels
Inc. (g)
HIGH (EXCLUDING FIRECRACKER): 14.0 19.7 38.0 9.7 76.0
MEDIAN (EXCLUDING FIRECRACKER): 11.3 15.0 27.0 9.5 24.8
MEAN (EXCLUDING FIRECRACKER): 11.0 15.5 27.0 8.0 24.9
LOW (EXCLUDING FIRECRACKER): 7.6 11.5 15.2 4.8 (1.0)
(a) Multiples are for the year that the transaction is announced.
</TABLE>
<PAGE>
43
(b) Target equity market cap plus assumed debt.
(c) Forward multiples based on latest available research estimates as of date of
announcement unless otherwise noted.
(d) Assumes offer price of $10.35 per share. Based on projections dated
6/28/1999 prepared by independent consultants hired by REIT management at
the direction of the Special Committee. Does not include loss on sale of
hotel properties of $489.5 thousand.
(e) Real estate EBITDA contribution is assumed to be 91.5% of total Bristol
EBITDA.
(f) Transaction multiples are based on Westin management estimates.
(g) EBITDA multiples based on rolling four quarter analyst estimates. Homegate
multiple on 1997E EBITDA would have been 22.2X.
(h) Patriot has option to replace up to $100mm of stock with cash.
[GOLDMAN SACHS LOGO]
<PAGE>
44
INTEGRATED COMPANY
2000E NET ASSET VALUE ANALYSIS AT VARIOUS CAP RATES
<TABLE>
<CAPTION>
($ in thousands except per share amounts)
CAPITALIZATION RATE 13.00% 12.50% 12.00% 11.50% 11.00% 10.50%
==========================================================================
<S> <C> <C> <C> <C> <C> <C>
2000E Property NOI (a)(b) $ 97,103 $ 97,103 $ 97,103 $ 97,103 $ 97,103 $ 97,103
Real Estate Value (c) 746,944 776,821 809,189 844,371 882,752 924,787
Plus:
Notes Receivable 1,590 1,590 1,590 1,590 1,590 1,590
Other Assets (d) 2,600 2,600 2,600 2,600 2,600 2,600
Less:
Total Net Debt (e) $ 436,923 $ 436,923 $ 436,923 $ 436,923 $ 436,923 $ 436,923
Preferred Stock (f) 25,000 25,000 25,000 25,000 25,000 25,000
------- ------- ------- ------- ------- ------
NET ASSET VALUE WITH LESSEE/MGMT. COMPANY $ 289,211 $ 319,088 $ 351,456 $ 386,638 $ 425,019 $ 467,054
Diluted Shares Outstanding (g) 40,365 40,365 40,365 40,365 40,365 40,365
NET ASSET VALUE PER SHARE WITH LESSEE/MGMT. COMPANY $ 7.16 $ 7.91 $ 8.71 $ 9.58 $ 10.53 $ 11.57
Price Per Share of Lessee/Management Company (h) $ 0.74 $ 0.74 $ 0.74 $ 0.74 $ 0.74 $ 0.74
NET ASSET VALUE PER SHARE WITHOUT LESSEE/MGMT.
COMPANY $ 6.42 $ 7.16 $ 7.96 $ 8.84 $ 9.79 $ 10.83
</TABLE>
<TABLE>
<CAPTION>
PREMIUM/DISCOUNT TO NAV/SHARE WITHOUT LESSEE/MGMT. COMPANY
--------------------------------------------------------------------------
Share Price
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
SHP Acquisition's Final Offer $10.35 (i) 61.2% 44.5% 30.0% 17.1% 5.8% (4.4%)
- -------------------------------------------------------------------------------------------------------------------------------
Current (07/09/1999) $9.00 40.1% 25.7% 13.0% 1.9% (8.0%) (16.9%)
30 Day Avg. (Pre-Announcement) $7.24 12.7% 1.1% (9.1%) (18.1%) (26.0%) (33.2%)
90 Day Avg. (Pre-Announcement) $8.41 31.0% 17.4% 5.6% (4.8%) (14.1%) (22.3%)
180 Day Avg. (Pre-Announcement) $8.81 37.1% 23.0% 10.6% (0.3%) (10.0%) (18.7%)
One Year Avg. (Pre-Announcement) $10.81 68.3% 50.9% 35.7% 22.3% 10.4% (0.2%)
</TABLE>
(a) Projections dated 06/28/1999 prepared by independent consultants hired by
Firecracker management at the direction of the Special Committee.
(b) Gross operating profit less 4% FF&E reserves, 3% management fee, franchise
fees, real estate taxes, property insurance and ground lease payments, plus
additional income from laundry, telephone contracts from certain assets, and
accounting fee reimbursements.
(c) Calculated by dividing NOI by the capitalization rate.
(d) Reflects Firecracker Management's estimated value of office land adjacent to
Firecracker's headquarters.
(e) Net debt at 10/31/1999 estimated by Firecracker management. Assumes no
dividend is paid in respect of second quarter.
(f) Convertible at $14.71. Preferred stock to be redeemed at par.
(g) Assumes conversion of all outstanding OP units and treats stock options and
warrants using the treasury method (i.e., issuing new shares in an amount
equal to the aggregate in the money value of such options and warrants
outstanding). Also assumes a $10.35 price per share for determining the
conversion of options and warrants.
(h) In conjunction with a Superior Proposal, Firecracker has the right to
purchase the Lessee and the Management Company at a purchase price of $30
million.
(i) SHP Acquisition's 7/9/99 offer.
[GOLDMAN SACHS LOGO]
<PAGE>
45
ANALYSIS AT VARIOUS PRICES
($ IN THOUSANDS EXCEPT PER SHARE/ROOM AMOUNTS)
<TABLE>
<CAPTION>
NET PRICE TO FIRECRACKER SHAREHOLDERS $ 9.00 $ 9.50 $ 10.00 $ 10.50 $ 11.00 $ 11.50
====================================================================
<S> <C> <C> <C> <C> <C> <C>
Discount/Premium to Pre-Offer Market Price 19.0% 25.6% 32.2% 38.8% 45.5% 52.1%
Diluted Shares Outstanding (a) 40,306 40,322 40,348 40,372 40,403 40,433
------- ------- ------- ------- ------- -------
Total Equity Consideration $ 362,755 $ 383,058 $ 403,475 $ 423,905 $ 444,438 $ 464,977
Total Net Debt (b) 436,923 436,923 436,923 436,923 436,923 436,923
Preferred Equity (c) 25,000 25,000 25,000 25,000 25,000 25,000
------- ------- ------- ------- ------- -------
Enterprise Value of Firecracker $ 824,678 $ 844,981 $ 865,398 $ 885,828 $ 906,361 $ 926,900
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
EBITDA (D)(E) IMPLIED FIRECRACKER EBITDA MULTIPLES
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998A $ 82,402 10.0 x 10.3 x 10.5 x 10.8 x 11.0 x 11.2 x
1999E $ 91,670 9.0 x 9.2 x 9.4 x 9.7 x 9.9 x 10.1 x
2000E $ 100,737 8.2 x 8.4 x 8.6 x 8.8 x 9.0 x 9.2 x
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
FFO PER SHARE (D) IMPLIED FIRECRACKER FFO MULTIPLES
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998A $ 1.40 6.4 x 6.8 x 7.1 x 7.5 x 7.9 x 8.2 x
1999E $ 1.45 6.2 x 6.6 x 6.9 x 7.2 x 7.6 x 7.9 x
2000E $ 1.57 5.7 x 6.1 x 6.4 x 6.7 x 7.0 x 7.3 x
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
ENTERPRISE VALUE OF FIRECRACKER PER ROOM (F)
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
No. of Rooms 10,525 $ 78,354 $ 80,283 $ 82,223 $ 84,164 $ 86,115 $ 88,067
- ---------------------------------------------------------------------------------------------------------
Price of Lessee/Management
Company (g) 30,000 30,000 30,000 30,000 30,000 30,000
Total Enterprise Value of
Integrated Company $ 854,678 $ 874,981 $ 895,398 $ 915,828 $ 936,361 $ 956,900
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NET OPERATING INCOME OF INTEGRATED COMPANY(D)(H) IMPLIED INTEGRATED COMPANY CAP RATES
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998A $ 67,900 7.9% 7.8% 7.6% 7.4% 7.3% 7.1%
1999E $ 88,317 10.3% 10.1% 9.9% 9.6% 9.4% 9.2%
2000E $ 97,103 11.4% 11.1% 10.8% 10.6% 10.4% 10.1%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
ENTERPRISE VALUE OF INTEGRATED COMPANY PER ROOM (F)
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
No. of Rooms 10,525 $ 81,205 $ 83,134 $ 85,073 $ 87,015 $ 88,965 $ 90,917
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Assumes conversion of all outstanding OP units and treats stock options and
warrants using the treasury method (i.e., issuing new shares in an amount
equal to the aggregate in the money value of such options and warrants
outstanding).
(b) Net debt at 10/31/1999 estimated by Firecracker management. Assumes no
dividend is paid in respect of second quarter.
(c) Convertible at $14.71. Preferred stock is redeemed at par.
(d) Based on projections dated 06/28/1999 prepared by independent consultants
hired by Firecracker management at the direction of the Special Committee.
(e) Lease revenue less property taxes and insurance less general and
administrative expense. Does not include cost of withdrawn debt offering of
<PAGE>
46
$1.45 million in 1998 or loss on the sale of hotel properties of $489,500 in
1999.
(f) Includes new builds.
(g) In conjunction with a Superior Proposal, Firecracker has the right to
purchase the Lessee and the Management Company at a purchase price of $30
million.
(h) Gross operating profit less 4% FF&E reserves, 3% management fee, franchise
fees, real estate taxes, property insurance and ground lease payments, plus
additional income from laundry, telephone contracts from certain assets, and
accounting fee reimbursements.
[GOLDMAN SACHS LOGO]
<PAGE>
EXHIBIT 99.8
==============================
SHP ACQUISITION, L.L.C.
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
Dated as of July 12, 1999
==============================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
DEFINITIONS............................................................................. 2
SECTION 1.1 Definitions................................................................ 2
SECTION 1.2 Terms Generally............................................................ 16
ARTICLE II
GENERAL PROVISIONS...................................................................... 16
SECTION 2.1 Formation.................................................................. 16
SECTION 2.2 Name....................................................................... 17
SECTION 2.3 Term....................................................................... 17
SECTION 2.4 Purpose; Powers............................................................ 17
SECTION 2.5 Registered Office; Place of Business....................................... 18
SECTION 2.6 Alternative Investment Structure........................................... 18
ARTICLE III
MEMBERS AND INTERESTS................................................................... 21
SECTION 3.1 Units...................................................................... 21
SECTION 3.2 Members.................................................................... 21
SECTION 3.3 Class A Units.............................................................. 21
SECTION 3.4 Class B Units.............................................................. 22
SECTION 3.5 Class C and D Units........................................................ 22
SECTION 3.6 Additional Issuance of New Class of Units.................................. 23
ARTICLE IV
MANAGEMENT AND OPERATION OF THE COMPANY................................................. 23
SECTION 4.1 Management................................................................. 23
SECTION 4.2 Officers................................................................... 25
SECTION 4.3 Executive Committee Approval Requirements and Other Limitations on Actions. 26
SECTION 4.4 Budget..................................................................... 29
SECTION 4.5 Certain Duties and Obligations of the Members.............................. 29
SECTION 4.6 UBTI....................................................................... 32
SECTION 4.7 Consent of Alter Member.................................................... 32
SECTION 4.8 Non-Voting Members......................................................... 32
ARTICLE V
OTHER ACTIVITIES........................................................................ 32
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 5.1 Other Activities............................................................ 32
SECTION 5.2 Transactions With the Company............................................... 32
ARTICLE VI
CAPITAL CONTRIBUTIONS; DISTRIBUTIONS...................................................... 33
SECTION 6.1 Capital Contributions....................................................... 33
SECTION 6.2 Loans for Additional Capital Contributions; Other Loans to the Company...... 34
SECTION 6.3 Distributions Generally..................................................... 35
SECTION 6.4 Distributions of Available Cash............................................. 35
SECTION 6.5 Restricted Payments......................................................... 39
SECTION 6.6 Organizational Expenses..................................................... 39
ARTICLE VII
BOOKS; REPORTS; TAX MATTERS; CAPITAL ACCOUNTS; ALLOCATIONS................................ 40
SECTION 7.1 General Accounting Matters.................................................. 40
SECTION 7.2 Certain Tax Matters......................................................... 42
SECTION 7.3 Capital Accounts............................................................ 43
SECTION 7.4 Allocations................................................................. 43
ARTICLE VIII
DISSOLUTION............................................................................... 46
SECTION 8.1 Dissolution................................................................. 46
SECTION 8.2 Winding-up.................................................................. 46
SECTION 8.3 Final Distribution.......................................................... 46
ARTICLE IX
TRANSFER OF MEMBERS' INTERESTS............................................................ 47
SECTION 9.1 Restrictions on Transfer of Units........................................... 47
SECTION 9.2 Tag-Along and Drag-Along Rights............................................. 49
SECTION 9.3 Required Sale or Purchase of Alter Member or Biederman Member Units......... 51
SECTION 9.5 Sale of Company............................................................. 54
SECTION 9.6 Required Sale or Purchase of Class A Units.................................. 56
SECTION 9.7 Other Transfer Provisions................................................... 57
ARTICLE X
MISCELLANEOUS............................................................................. 59
SECTION 10.1 No Brokers.................................................................. 59
SECTION 10.2 Equitable Relief............................................................ 59
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 10.3 Governing Law............................................................ 59
SECTION 10.4 Mediation; Submission to Jurisdiction; Waiver of Trial By Jury........... 59
SECTION 10.5 Successors and Assigns................................................... 60
SECTION 10.6 Confidentiality.......................................................... 60
SECTION 10.7 Notices.................................................................. 60
SECTION 10.8 Counterparts............................................................. 60
SECTION 10.9 Entire Agreement......................................................... 61
SECTION 10.10 Amendments............................................................... 61
SECTION 10.11 Section Titles........................................................... 61
SECTION 10.12 Representations and Warranties........................................... 61
SECTION 10.13 Waiver of Partition...................................................... 62
SECTION 10.14 Bonus.................................................................... 62
SECTION 10.15 No Third Party Beneficiaries............................................. 63
SECTION 10.16 Consent to Merger and Related Transactions............................... 63
</TABLE>
SCHEDULES AND EXHIBITS
SCHEDULE A Name, Address and Units of Members
SCHEDULE B Class C Units and Class D Units
SCHEDULE 3.1 Designated Alter Member Alternative Managers
SCHEDULE 10.1 Brokers
EXHIBIT A Initial Approved Budget
-iii-
<PAGE>
SHP ACQUISITION, L.L.C.
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT dated as of
July 12, 1999 by and between WESTBROOK SHP L.L.C., a Delaware limited liability
company (together with its successors and permitted assigns, "Westbrook Co-
------------
Invest"), WESTBROOK REAL ESTATE FUND III, L.P., a Delaware limited partnership
- ------
(together with its successors and permitted assigns, the "Westbrook Fund"),
--------------
WESTBROOK REAL ESTATE CO-INVESTMENT PARTNERSHIP III, L.P., a Delaware limited
partnership (together with its successors and permitted assigns, "WRECIP III"),
----------
ALTER SHP LLC, a Delaware limited liability company (together with its
successors and permitted assigns, "Alter LLC"), BIEDERMAN SHP LLC, a Delaware
---------
limited liability company (together with its successors and permitted assigns,
"Biederman LLC"), and, solely for purposes of withdrawing as Member of the
-------------
Company and Section 10.12 hereof, ROBERT A. ALTER ("Alter") and WESTBROOK FUND
-----
III ACQUISITIONS, L.L.C., a Delaware limited liability company ("Westbrook
---------
Acquisitions" and, together with Alter, the "Original Members").
- ------------ ----------------
Preliminary Statement
---------------------
A Certificate of Formation was filed on April 5, 1999 for this limited
liability company pursuant to the provisions of the Delaware Limited Liability
Company Act.
A Limited Liability Company Agreement for this limited liability
company was duly adopted by the Original Members pursuant to and in accordance
with the Delaware Limited Liability Company Act on April 5, 1999 (the "Original
--------
Agreement").
- ---------
The Original Members wish to amend and restate in its entirety the
Original Agreement and admit Westbrook Co-Invest, the Westbrook Fund, WRECIP
III, Biederman LLC and Alter LLC as new Members and the Original Members wish to
withdraw as Members in accordance with the further provisions of this Agreement.
Concurrently with the execution and delivery of this Agreement, this
limited liability company has entered into a Merger Agreement (the "Merger
------
Agreement") dated as of the date hereof with Sunstone Hotel Investors, Inc., a
- ---------
Maryland corporation ("Sunstone") and SHP Investors Sub, Inc., a Maryland
--------
corporation and a subsidiary of SHP ("Investors Sub"), pursuant to which and
-------------
subject to the terms and conditions thereof, Investors Sub shall merge into
Sunstone.
Concurrently with the execution and delivery of this Agreement, this
limited liability company has entered into a Merger Agreement (the "OP Merger
---------
Agreement") dated as the date hereof with Sunstone Hotel Properties, L.P., a
- ---------
Delaware limited partnership ("Sunstone OP") and SHP Properties, L.L.C., a
-----------
Delaware limited liability company and a subsidiary of SHP ("SHP Properties")
--------------
pursuant to which and subject to the terms and conditions thereof, SHP
Properties shall merge into Sunstone OP (the "OP Merger").
---------
<PAGE>
2
Concurrently with the execution and delivery of this Agreement, this
limited liability company has entered into a Contribution Agreement (the
"Contribution Agreement") dated the date hereof with Westbrook Fund, WRECIP III,
----------------------
Westbrook Co-Invest, Alter, Charles L. Biederman ("Biederman"), Sunstone Hotel
---------
Management, Inc., a Colorado corporation, and Sunstone Hotel Properties, Inc., a
Colorado corporation, and the other parties identified therein pursuant to which
certain parties shall contribute certain assets, equity interests and cash to
this limited liability company as provided therein.
Concurrently with the execution and delivery of this Agreement, this
limited liability company has entered into an Employment Agreement (the "Alter
-----
Employment Agreement") with Alter dated as of the date hereof pursuant to which
- --------------------
and subject to the terms and conditions thereof, this limited liability company
shall employ Alter as Chief Executive Officer of this limited liability company
as of the Closing Date as provided therein.
Agreement
---------
Accordingly, in consideration of the mutual promises and agreements
herein made and intending to be legally bound hereby, the parties hereto agree
as follows:
ARTICLE I
DEFINITIONS
-----------
SECTION 1.1 Definitions. (a) Unless the context otherwise requires,
-----------
the following terms shall have the following meanings for purposes of this
Agreement:
"Act" shall mean the Delaware Limited Liability Company Act, 6 Del. C.
--- -------
(SS) 18-101 et seq., as it may be amended from time to time, and any
-- ---
successor to such statute.
"Additional Capital Expenditures" shall mean any capital expenditure
-------------------------------
of the Company or any of its Subsidiaries in excess of 6% of FF&E relating
to hotel properties owned or leased by the Company or any of its
Subsidiaries approved by the Executive Committee other than an Emergency
Expense.
"Additional Capital Contributions" shall mean all capital
--------------------------------
contributions required to be made by, and made by, any Member pursuant to,
and to the extent provided in, Section 6.1(b) and to the extent such
capital contributions are not Initial Capital Contributions.
"Adjusted Capital Account Balance" shall mean, with respect to any
--------------------------------
Member, the balance in such Member's Capital Account adjusted (i) by taking
into account the adjustments, allocations and distributions described in
Regulations section 1.704-1(b)(2)(ii)(d)(4), (5), and (6); and (ii) by
adding to such balance such Member's share of
<PAGE>
3
Minimum Gain and Member Nonrecourse Debt Minimum Gain, determined pursuant
to Regulations section 1.704-2(g)(1) and 1.704-2(i)(5).
"Affiliate" with respect to any Person shall mean (i) any other Person
---------
who controls, is controlled by or is under common control with such Person
(whether directly or through one or more intermediaries), (ii) any
director, officer, partner or employee of such Person or any Person
specified in clause (i) above or (iii) any immediate family member of any
Person specified in clause (i) or (ii) above. For purposes of this
definition, "control" of a Person includes the possession, directly or
indirectly, of the power to (i) vote 10% or more of the voting securities
of such Person and (ii) direct or cause the direction of the management and
policies of such Person, whether by contract or otherwise.
"Agreement" shall mean this Amended and Restated Limited Liability
---------
Company Agreement, as it may be amended, supplemented, modified or restated
from time to time.
"Alter Cause" shall mean "Cause" as such term is defined in Section
-----------
8(a)(ii) of the Alter Employment Agreement.
"Alter Good Reason" shall mean "Good Reason" as such term is defined
-----------------
in Section 8(c)(iii) of the Alter Employment Agreement.
"Alter Member" shall mean, collectively, Alter LLC and any Alter
------------
Transferee admitted as an additional or substitute Member of the Company in
accordance with the provisions of this Agreement and any other transferee
of Alter LLC by operation of law, until such time as such Person ceases to
be a Member of the Company as provided herein; provided that each Alter
Member shall be a Subsidiary of Alter of which Alter directly or indirectly
directs or causes the direction of the management and policies; and
provided further that the assignment to any Person of any Class D Units as
provided in Section 6.4(g) hereof does not make that Person an "Alter
Member".
"Alter Transferees" shall mean (i) any corporation, partnership,
-----------------
limited liability company or other legal entity of which Alter (A) has a
50% direct or indirect economic interest and owns, directly or indirectly,
50% or more of the capital stock or other equity interests, the holders of
which are generally entitled to vote for the election of the board of
directors or other governing body of such corporation or other legal entity
and (B) directly or indirectly directs or causes the direction of the
management and policies, and (ii) any trust or custodianship the
beneficiaries of which include only Alter, his present, former or future
spouse or his lineal descendants and their present, former or future
spouses, provided that in each case the transferee agrees in writing to be
--------
bound by the terms and conditions of this Agreement in a writing in form
and substance reasonably satisfactory to the Company.
"Available Cash" shall mean, for any quarterly period or such other
--------------
period for which computation may be appropriate, the excess, if any, of (A)
the sum of (i) the
<PAGE>
4
amount of all cash receipts of the Company and its Subsidiaries during such
period from whatever source (including all Capital Contributions and all
loans from any Person, including any Member or its Affiliates) and (ii) any
reduction in the Reserves existing at the start of such period, less (B)
the sum of (i) all cash amounts paid or payable (without duplication) in
such period on account of expenses and capital expenditures incurred in
connection with the business of the Company and its Subsidiaries and
approved in accordance with the provisions hereof (including, without
limitation, general operating expenses, taxes, required amortization or
interest on any debt of the Company and its Subsidiaries (including on any
Priority Loan, Tax Loan or other loan made by a Member or an Affiliate of a
Member) and expenses incurred in connection with the satisfaction of any
refinancing of any of the properties acquired by the Company and its
Affiliates), (ii) Reserves necessary as of the end of such period and (iii)
any Bonus.
"Biederman Member" shall mean, collectively, Biederman LLC and any
----------------
Biederman Transferee admitted as an additional or substitute Member of the
Company in accordance with the provisions of this Agreement and any other
transferee of Biederman LLC by operation of law, until such time as such
Person ceases to be a Member of the Company as provided herein; provided
that each Biederman Member shall be a Subsidiary of Biederman of which
Biederman directly or indirectly directs or causes the direction of the
management and policies.
"Biederman Transferees" shall mean (i) any corporation, partnership,
---------------------
limited liability company or other legal entity of which Biederman (A) has
a 50% direct or indirect economic interest and owns, directly or
indirectly, 50% or more of the capital stock or other equity interests, the
holders of which are generally entitled to vote for the election of the
board of directors or other governing body of such corporation or other
legal entity and (B) directly or indirectly directs or causes the direction
of the management and policies, and (ii) any trust or custodianship the
beneficiaries of which include only Biederman, his present, former or
future spouse or his lineal descendants and their present, former or future
spouses, provided that in each case the transferee agrees in writing to be
--------
bound by the terms and conditions of this Agreement in a writing in form
and substance reasonably satisfactory to the Company.
"Business Day" shall mean any day on which commercial banks are
------------
authorized to do business and are not required by law or executive order to
close in either New York, New York or Los Angeles, California.
"Capital Contributions" shall mean, with respect to a Member at any
---------------------
time, the aggregate of all Initial Capital Contributions and Additional
Capital Contributions made by such Member to the Company as of such time.
"Carrying Value" shall mean, with respect to any Company Asset, the
--------------
asset's adjusted basis for U.S. federal income tax purposes, except that
the Carrying Values of all Company Assets shall be adjusted to equal their
respective fair market values, in accordance with the rules set forth in
Regulations Section 1.704-1(b)(2)(iv)(f), except as
<PAGE>
5
otherwise provided herein, as of: (a) the date of the acquisition of any
additional Units by any new or existing Member in exchange for more than a
de minimis capital contribution, other than pursuant to the initial
-- -------
formation of the Company; (b) the date of the distribution of more than a
de minimis amount of Company property other than cash to a Member; (c) the
-- -------
date that all or a portion of Units are is redeemed by the Company or (d)
the date of the termination of the Company under Section 708(b)(1)(A) of
the Code; provided, however, that adjustments pursuant to subsections (a),
-------- -------
(b) and (c) above shall be made only if the Managing Member determines that
such adjustments are necessary or appropriate to reflect the relative
economic interests of the Members. The Carrying Value of any Company Asset
distributed to any Member shall be adjusted immediately prior to such
distribution to equal its fair market value, as determined by the Members.
Depreciation shall be calculated by reference to Carrying Value, instead of
tax basis once Carrying Value differs from tax basis. The Carrying Value of
any Initial Contributions other than cash shall be determined as provided
in Article II of the Contribution Agreement.
"Class" means the classes of Units into which the Interests in the
-----
Company may be classified or divided from time to time pursuant to the
provisions of this Agreement.
"Class A Member" means any Member holding one or more Class A Units in
--------------
its capacity as such.
"Class A Unit" means any Class A Preferred Unit classified as such
------------
pursuant to the provisions of this Agreement.
"Class B Member" means any Member holding one or more Class B Units in
--------------
its capacity as such.
"Class B Unit" means any Class B Common Unit classified as such
------------
pursuant to the provisions of this Agreement.
"Class C Member" means any Member holding one or more Class C Units in
--------------
its capacity as such.
"Class C Unit" means any Class C Common Unit classified as such
------------
pursuant to the provisions of this Agreement.
"Class D Member" means any Member holding one or more Class D Units in
--------------
its capacity as such.
"Class D Unit" means any Class D Common Unit classified as such
------------
pursuant to the provisions of this Agreement.
"Closing" shall have the meaning set forth in the Contribution
-------
Agreement.
<PAGE>
6
"Closing Date" shall have the meaning set forth in the Contribution
------------
Agreement.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
----
time to time, or any successor statute. Any reference herein to a
particular provision of the Code shall mean, where appropriate, the
corresponding provision in any successor statute.
"Common Cash Consideration" has the meaning set forth in the OP Merger
-------------------------
Agreement.
"Company" shall mean SHP Acquisition, L.L.C., the Delaware limited
-------
liability company being operated pursuant to this Agreement.
"Company Assets" shall mean all right, title and interest of the
--------------
Company and its Subsidiaries in and to all or any portion of their
respective assets (including the interest of the Company in each of its
Subsidiaries).
"Dissolution Event" shall mean an event causing a dissolution of the
-----------------
Company under Section 18-801 of the Act, including the bankruptcy of any
Voting Member as provided under Section 18-801(b) of the Act but excluding
(i) the death, retirement, resignation, expulsion, bankruptcy or
dissolution of any Non-Voting Member and (ii) the event specified in
Section 18-801(a)(3).
"Emergency Expenses" shall mean any expenditure of the Company or any
------------------
of its Subsidiaries necessary with respect to required non-discretionary
debt service payments, the payment of taxes, operating deficits and
insurance premiums or similar matters reasonably required to avert or
mitigate an emergency that threatens imminent injury to persons or material
damage to property; provided that "Emergency Expenses" shall not include
--------
any portion of any operating deficit attributable to capital expenditures
relating to hotel properties owned or leased by the Company or any of its
Subsidiaries in excess of 6% of FF&E, except to the extent such capital
expenditure is to repair damage or destruction to hotel properties of the
Company and its Subsidiaries not covered by insurance proceeds (which shall
in all cases constitute "Emergency Expenses"); and provided further that in
-------- -------
no event shall "Emergency Expenses" include any amounts required to fund
direct or indirect expenses of the Company or its Subsidiaries unless the
contract, agreement or other obligation that gives rise to any such expense
was approved pursuant to the terms of this Agreement to the extent such
contract, agreement or other obligation was required to be approved
hereunder.
"Employee Cause" shall mean, with respect to any employee of the
--------------
Company or its Subsidiaries, "Cause" as such term is defined in any then-
effective employment agreement of such employee with the Company or its
Subsidiary, provided that in the event "Cause" is not defined in such
--------
employment agreement or such employee does not have such an employment
agreement, "Employee Cause" shall mean "Cause" as reasonably determined by
the Chief Executive Officer.
<PAGE>
7
"Employee Good Reason" shall mean, with respect to any employee of the
--------------------
Company or its Subsidiaries, "Good Reason" as such term is defined in any
then-effective employment agreement of such employee with the Company or
its Subsidiary, provided that in the event "Good Reason" is not defined in
--------
such employment agreement or such employee does not have such an employment
agreement, "Employee Good Reason" shall mean "Good Reason" as reasonably
determined by the Chief Executive Officer.
"Employee Members" shall mean (i) each New Employee Member and (ii)
----------------
any Affiliate of (i) admitted as an additional or substitute Employee
Member of the Company in accordance with the provisions of this Agreement,
until such time as such Person ceases to be a Member of the Company as
provided herein.
"Employment Agreement" means, with respect to any Employee Member, any
--------------------
then-effective employment agreement of such Employee Member or the parent
of such Employee Member with the Company or any Subsidiary; provided that
--------
nothing in any Employment Agreement shall contravene any provision of this
Agreement and in the event of any conflicts, this Agreement shall govern.
"Executive Committee Decisions" shall mean each of the following
-----------------------------
decisions affecting the Company or any Subsidiary thereof:
(i) (A) entering into, modifying or terminating any management,
franchise or similar agreement for any hotel or (B) taking any action not
in compliance with any management, franchise or similar agreement for any
hotel;
(ii) modifying or terminating, or taking any action not in compliance
with the Alter Employment Agreement, any New Alter Employment Agreement or
any other employment agreement between Alter and the Company;
(iii) purchasing or leasing assets, or making capital expenditures;
(iv) selling, exchanging, leasing or otherwise transferring any
assets other than in the ordinary course of business;
(v) entering into, modifying or terminating any contract which
provides for payments in excess of $75,000 during any one-year period or
$500,000 over the term of the contract;
(vi) dissolving, terminating and winding up the Company or any of its
Subsidiaries, or filing a petition under any bankruptcy or other insolvency
law, or admitting in writing the bankruptcy, insolvency or general
inability to pay its debts of the Company or its Subsidiaries;
(vii) (A) entering into or amending any financing agreements or
incurring, guaranteeing, assuming, renewing, refinancing or paying any
indebtedness for borrowed
<PAGE>
8
money, and (B) any other decisions or actions with respect to any
outstanding indebtedness (other than the payment of regularly scheduled
mandatory payments under such loans) other than in the ordinary course of
business;
(viii) commencing, terminating or settling any litigation or claim
which would reasonably be expected to result in liability to the Company or
any of its Subsidiaries in excess of $75,000;
(ix) issuing any Units or admitting any new or substitute Members
to the Company except as otherwise provided in Article IX hereof and except
as provided in Sections 3.3, 3.4(b) or 6.1(b);
(x) changing the business of the Company or any of its
Subsidiaries;
(xi) merging or consolidating the Company or any of its
Subsidiaries with any other entity;
(xii) authorizing a Member to disclose confidential information;
(xiii) making or accepting any loan or advance (excluding advances
under any loan previously approved by the Executive Committee);
(xiv) hiring, firing or renewing the employment agreement of the
Chief Executive Officer;
(xv) forming any Subsidiary or entering into any partnership,
limited liability company or other joint venture, or acquiring any equity
interests in or otherwise making any equity investment in any other entity;
(xvi) (A) causing the Company or any Subsidiary to employ any
individual, or otherwise engage any Person outside of the ordinary course
of business, if such employment or engagement is material or (B) entering
into any employment agreement with any Person for employment with the
Company or any Subsidiary or, except as otherwise permitted by Section
3.5(b) or 6.4(g), any other agreement providing for the assignment of
Units;
(xvii) engaging any accountant, counsel or consultant for the Company
and its Subsidiaries, or any change in or termination of any such
accountant, counsel or consultant except in the ordinary course of
business;
(xviii) taking or committing to take any other action expressly
requiring approval of the Executive Committee under this Agreement; and
(xix) taking or committing to take any other action or making any
decision of the Company or its Subsidiaries other than normal and customary
day to day actions and
<PAGE>
9
decisions in operating the Company or any of its Subsidiaries or otherwise
in the ordinary course of business in accordance with the Approved Budget
then in effect.
Notwithstanding anything to the contrary in clauses (i)(A), (iii), (iv),
(v) or (xiii) of this definition, decisions taken in accordance with
specific provisions of the applicable Approved Budget (after giving effect
to the provisions of the last sentence of Section 4.4) and listed as a
line-item in such Approved Budget shall not be "Executive Committee
Decisions".
"Expenses" shall mean expenses of the Company and its Subsidiaries
--------
incurred in connection with the normal and customary day-to-day operation
thereof and Emergency Expenses.
"Fair Market Value" shall mean, with respect to any security listed on
-----------------
Nasdaq or another principal securities exchange, the average closing prices
of such securities quoted on Nasdaq or such other principal securities
exchange on which such securities are listed, for the ten (10) trading days
prior to the date of determination. "Fair Market Value" shall mean, with
respect to any security not listed on a principal securities exchange or
any Company Asset or other asset (other than cash or a cash equivalent),
the "fair market value" as agreed upon in good faith by the relevant
parties or, if the relevant parties cannot so agree within ten (10) days,
then each party shall, within ten (10) days, submit in writing to a
nationally recognized investment banking firm not having any substantial
relation with either party and reasonably acceptable to each party (an
"Independent Firm"), a proposed "Fair Market Value" together with
----------------
documentation supporting such Fair Market Value (each such submission, a
"Proposed FMV"). The Independent Firm shall determine, within ten (10)
------------
days of receipt of the Proposed FMVs and supporting documentation, a fair
market value for the relevant assets, and the Proposed FMV closest to such
fair market value determined by the Independent Firm shall be the "Fair
Market Value" and shall be final and binding on the parties for all
purposes hereof; provided that the Independent Firm's determination of such
--------
fair market value shall not exceed the highest of the Proposed FMVs and not
be less than the lowest of the Proposed FMVs. In the event that the
parties fail to promptly agree on an Independent Firm, each of the parties
shall select a nationally-recognized investment banking firm, and the two
investment banking firms proposed by the parties shall select a third
nationally-recognized investment banking firm to serve as the Independent
Firm, and the relevant Members shall be required to submit their Proposed
FMV's to such Independent Firm within ten (10) days thereafter. Failure by
either party to submit a Proposed FMV to the Independent Firm (or failure
to propose an investment banking firm as the Independent Firm) shall,
following receipt of written notice by the failing Member and a 15-day cure
period thereafter, be deemed to result in the selection of the Proposed FMV
or the proposed Independent Firm, as the case may be, of the non-defaulting
party.
"FF&E" means the gross revenues for any year with respect to the hotel
----
properties of the Company and its Subsidiaries as such amount appears in
the consolidated financial statements of the Company.
<PAGE>
10
"Fiscal Year" shall mean the calendar year ending on December 31 of
-----------
each year, unless a different fiscal year shall be required by the Code;
provided that the first Fiscal Year of the Company shall commence on the
Closing Date and end on December 31, 1999 (or such shorter period for which
a determination is being made).
"Funding Members" shall mean the Westbrook Members, Alter Member and
---------------
Biederman Member.
"Initial Capital Contributions" shall mean the Initial Capital
-----------------------------
Contributions made by the Members pursuant to the Contribution Agreement,
in the amounts provided in Article II of the Contribution Agreement.
"Interest" means a limited liability company interest in the Company
--------
as provided in this Agreement and under the Act and includes any and all
rights and benefits to which the holder of such Interest may be provided
under this Agreement, together with all obligations of such Person to
comply with the terms and provisions of this Agreement. Interests shall be
expressed as a number of Units.
"Managing Member" shall mean Westbrook Co-Invest or any other
---------------
Westbrook Member designated by Westbrook Co-Invest, until such time as such
Person ceases to be a Member of the Company as provided herein.
"Member Nonrecourse Debt" shall have the meaning ascribed to such term
-----------------------
in Regulations section 1.704-2(b)(4).
"Member Nonrecourse Debt Minimum Gain" shall have the meaning ascribed
------------------------------------
to such term in Regulations section 1.704-2(i)(2).
"Member Nonrecourse Deductions" shall mean any item of Company loss,
-----------------------------
deduction, or expenditure under section 705(a)(2)(B) of the Code that is
attributable to a Member Nonrecourse Debt, as determined pursuant to
Regulations section 1.704-2(i)(2).
"Members" shall mean the Westbrook Members, the Alter Member, the Non-
-------
Voting Members and any other Person admitted to the Company as an
additional or substitute Member of the Company in accordance with the
provisions of this Agreement, until such time as such Person ceases to be a
Member of the Company as provided herein and "Member" means any one such
------
Person.
"Minimum Gain" shall have the meaning set forth in Regulations section
------------
1.704-2(d)(1) and shall mean the amount determined by (i) computing for
each nonrecourse liability of the Company any gain the Company would
realize if it disposed of the property subject to that liability for no
consideration other than full satisfaction of the liability and (ii)
aggregating the separately computed gains. If the Carrying Value of any
Company Asset differs from the adjusted tax basis of such property, the
calculation of Minimum Gain pursuant to the preceding sentence shall be
made by reference to the
<PAGE>
11
Carrying Value. For purposes hereof, a liability of the Company is a
nonrecourse liability to the extent that no Member or related Person bears
the economic risk of loss for that liability within the meaning of
Regulations section 1.752-1.
"Net Income (Loss)" shall mean for each Fiscal Year or other period,
-----------------
the taxable income or loss of the Company, or particular items thereof,
determined in accordance with the accounting method used by the Company for
U.S. federal income tax purposes with the following adjustments: (i) all
items of income, gain, loss or deduction allocated pursuant to Section
7.4(c) through (f) shall not be taken into account in computing such
taxable income or loss; (ii) any income of the Company that is exempt from
U.S. federal income taxation and not otherwise taken into account in
computing Net Income and Net Loss shall be added to such taxable income or
loss; (iii) if the Carrying Value of any asset differs from its adjusted
tax basis for U.S. federal income tax purposes, any depreciation,
amortization or gain resulting from a disposition of such asset shall be
calculated with reference to such Carrying Value; (iv) upon an adjustment
to the Carrying Value of any asset, pursuant to the definition of Carrying
Value, the amount of the adjustment shall be included as gain or loss in
computing such taxable income or loss; and (v) except for items in (i)
above, any expenditures of the Company not deductible in computing taxable
income or loss, not properly capitalizable and not otherwise taken into
account in computing Net Income and Net Loss pursuant to this definition
shall be treated as deductible items.
"New Employee Member" shall mean each employee or Subsidiary of such
-------------------
employee admitted as a Member after the date hereof pursuant to the
provisions of Section 9.1(b)(x), until such time as such Person ceases to
be a Member of the Company as provided herein; provided that the engagement
--------
by the Company or its Subsidiary of such employee must be approved by the
Executive Committee hereunder prior to the admission of such Person as a
Member hereunder.
"New Alter Employment Agreement" shall mean an employment agreement
------------------------------
for employment of Alter with the Company with a term commencing on the date
after the date of expiration of the initial Alter Employment Agreement,
having the same terms and conditions as the Alter Employment Agreement,
provided that the base salary in such "New Alter Employment Agreement"
--------
shall equal the base salary of Alter under the Alter Employment Agreement
as of the date of expiration thereof.
"Non-Voting Members" shall mean each of the Biederman Member, each
------------------
Employee Member, each Class A Member and each Class B Member other than the
Alter Member and Westbrook Member.
"Nonrecourse Deductions" shall have the meaning ascribed to such term
----------------------
in Regulations section 1.704-2(b)(1).
"OP Units" shall mean the common and preferred limited partnership
--------
units in Sunstone OP.
<PAGE>
12
"Organizational Expenses" shall mean the actual third-party costs and
-----------------------
expenses (excluding overhead or other internal costs) of the Company or any
Initial Member arising out of or relating to the organization of the
Company (including the negotiation of this Agreement), the negotiation of
the Merger Agreement and the agreements referred to therein (including any
merger agreement with respect to Sunstone OP, any financing agreements, the
Alter Employment Agreement, the Contribution Agreement and the Term Sheet
dated April 5, 1999 relating thereto) and the consummation of the
transactions contemplated thereby (including the financing thereof),
including fees and expenses of counsel to the Company and the Alter Member
and the Westbrook Members.
"Person" shall mean an individual, partnership, joint venture,
------
corporation, business trust, limited liability company, trust,
unincorporated organization, governments (or agencies or political
subdivisions thereof) and other associations and entities.
"Pre-Liquidation Target Account" means, with respect to any Member at
------------------------------
the close of any period for which Net Income or Net Loss is being
determined, an amount (which may be either a positive balance or a negative
balance to the extent a contribution is required) equal to the hypothetical
distribution (or contribution) such Member would receive (or contribute) if
all assets of the Company, including cash that has not been distributed
(whether held in Reserves or otherwise), were sold for cash equal to their
Carrying Value (taking into account any adjustments to Carrying Value for
such year), all liabilities of the Company were then satisfied according to
their terms (limited, with respect to each nonrecourse liability, to the
Carrying Value of the assets securing such liability) and all remaining
proceeds from such sale were distributed to the Members in the order of
priority set forth in Section 6.4.
"Rate of Return" shall mean, with respect to any Class A Units or
--------------
Class B Units, a return of all Capital Contributions made in respect of
such Class A Units or Class B Units held by the holder of such Units (or by
any previous holder of such Class A Units or Class B Units) plus a
cumulative, quarterly compounded return on such Capital Contributions (and
accrued but unpaid return at the specified rate outstanding from time to
time) as made from time to time at a rate per annum equal to the applicable
percentage specified herein. For purposes of computing such Rate of
Return, the periods used to measure capital inflows and outflows shall be
monthly and any Capital Contribution made, or deemed made, by such Member,
any forfeiture of any Capital Contribution and any distribution of funds
received by such Member at any time during a month shall be deemed to be
made, forfeited or received on the date actually made. Any calculations
shall be based on a 12-month year based on thirty (30) day months.
"Regulations" shall mean the regulations promulgated under the Code.
-----------
"Renewal Date" shall mean the effective date of a New Alter Employment
------------
Agreement.
<PAGE>
13
"Reserves" shall mean reserves of the Company reasonably established
--------
in good faith by the Executive Committee, (including in connection with any
Emergency Expenses), as necessary for the operation of the Company and its
Subsidiaries, in light of the anticipated cash receipts, including the
timing thereof, of the Company and its Subsidiaries as of the end of the
period for which such reserves are established; provided that in no event
--------
shall "Reserves" include any amounts required to fund direct or indirect
expenses of the Company or its Subsidiaries unless the contract, agreement
or other obligation that gives rise to any such Expense was approved
pursuant to the terms of this Agreement to the extent such contract,
agreement or other obligation was required to be approved hereunder; and
provided, further, that "Reserves" may include amounts relating to future
-------- -------
required debt payments, but shall not include amounts relating to
discretionary debt payments or to acquisitions or major expansions of
hotels to the extent the Company or any Subsidiary does not then have a
contractual obligation entered into in compliance with the terms of this
Agreement to make any such acquisition or expansion.
"Residual Share" shall mean for each Class B Member, a fraction, the
--------------
numerator of which is the aggregate of the Initial Capital Contributions of
such Class B Member (and by any previous holder of the Class B Units then
held by such Member) in respect of the Class B Units held by such Member
plus all Capital Contributions made (and required to be made) by a Class B
----
Member pursuant to Section 6.1(b) (or by any previous holder of the Class B
Units then held by such Class B Member) (not reduced by distributions
thereof) in respect of the Class B Units held by such Member plus the
----
outstanding principal amount of, and accrued interest on, any Priority
Loans made by such Class B Member under Section 6.2(b) (or by any previous
holder of the Class B Units then held by such Class B Member) (not reduced
by repayments thereof) in respect of the Class B Units held by such Member
plus any amounts distributed to such Class B Member under Section 6.4(d)
----
(or to any previous holder of the Class B Units then held by such Member),
and the denominator of which is the aggregate of all such amounts for all
Class B Members.
"Subsidiary" or "Subsidiaries" of any Person means any corporation,
---------- ------------
partnership, limited liability company, joint venture or other legal entity
of which such Person (either alone or through or together with any other
wholly-owned subsidiary) owns, directly or indirectly, more than 50% of the
stock or other equity interests, the holders of which are generally
entitled to vote for the election of the board of directors or other
governing body of such corporation or other legal entity, and any
partnership of which such Person serves as general partner. In addition,
Sunstone Hotel Properties, Inc., a Colorado corporation or any successor
entity thereto ("Lessee"), shall be a "Subsidiary" of the Company for
------
purposes of this Agreement as long as the Company holds, directly or
indirectly, at least a 49% equity interest in Lessee.
"Unit" means a fractional share of the Interests of all Members. The
----
number of Units outstanding and the holders thereof are set forth on
Schedule A, as Schedule A may be amended from time to time pursuant to
Section 3.2.
<PAGE>
14
"Voting Members" shall mean the Alter Member and the Westbrook
--------------
Members.
"Westbrook Members" shall mean Westbrook Co-Invest, Westbrook Fund,
-----------------
WRECIP III and any Westbrook Transferee admitted as an additional or
substitute Member of the Company in accordance with the provisions of this
Agreement, until such time as such Person ceases to be a Member of the
Company as provided herein.
"Westbrook Transferees" shall mean (i) any investment fund of which
---------------------
Westbrook Real Estate Partners, L.L.C, a Delaware limited liability company
("WREP"), or a Subsidiary of WREP of which WREP directly or indirectly
----
directs or causes the direction of the management and policies, is the
general partner (a "Westbrook Investment Fund"); provided that such general
------------------------- --------
partner continues to be a Subsidiary of WREP and so directed by WREP as
long as such investment fund is a Member or (ii) any entity in which any
Westbrook Investment Fund (A) has a 50% direct or indirect economic
interest or owns, directly or indirectly, 50% or more of the capital stock
or other equity interests, the holders of which are generally entitled to
vote for the election of the board of directors or other governing body of
such corporation or other legal entity and (B) directly or indirectly
directs or causes the direction of the management and policies; provided
--------
that in each case the transferee agrees in writing to be bound by the terms
and conditions of this Agreement in a writing in form and substance
reasonably satisfactory to the Company.
(b) As used in this Agreement, each of the following capitalized
terms shall have the meaning ascribed to them in the Section set forth opposite
such term:
Term Section
---- -------
Adverse Change 2.6(a)
Alter Preamble
Alter Call 9.3(b)
Alter Employment Agreement Recitals
Alter LLC Preamble
Alter Price 9.3(a)
Alter Put 9.3(a)
Approved Budget 4.4
Biederman Recitals
Biederman Call 9.3(d)
Biederman LLC Preamble
Biederman Price 9.3(c)
Biederman Put 9.3(c)
Bonus 10.14
CapEx Loan 6.2(c)
Capital Account 7.3
Chief Executive Officer 4.2
Company Accountant 7.1(f)
Company Sale 9.5(a)
<PAGE>
15
Term Section
---- -------
Contributing Member 6.2(b)
Contribution Agreement Recitals
Contribution Loan 6.2(a)
Drag-Along Rights 9.2(b)
Employee Call 9.4(a)
Employee Price 9.4(a)
Executive Committee 4.1(a)
Indemnitees 4.5(e)(iii)
Initial Members 3.2
Investors Sub Recitals
Liquidator 8.2
Managers 4.1(a)
Merger Agreement Recitals
Net Income Excess 6.4(j)
Noncontributing Member 6.2(b)
Notified Member 9.5(b)
Notifying Member 9.5(b)
Offer Notice 4.3(c)
Officers 4.2
OP Merger Recitals
OP Merger Agreement Recitals
OP Unitholder 3.3
Original Agreement Recitals
Original Members Preamble
Other Employees 6.4(g)
Other Members 9.2(b)
Permitted Transfer 9.1(b)
Plan Asset Rules 2.6
Preferred Call 9.6(b)
Preferred Price 9.6(a)
Preferred Put 9.6(a)
Principal Agreements 10.16
Priority Loan 6.2(b)
Sale Proposal 9.5(a)
SHP Properties Recitals
Stand Alone Sale 4.3(c)
Sunstone Recitals
Sunstone OP Recitals
Tag-Along Rights 9.2(a)
Tagging Members 9.2(a)
Tax Loan 6.4(j)
Tax Matters Member 7.2
Termination Notice 9.5(b)
<PAGE>
16
Term Section
---- -------
Transfer 9.1(a)
Transferee 9.1(b)
UBTI 2.6(a)
Valuation Agent 2.6(b)
Westbrook Acquisitions Preamble
Westbrook Co-Invest Preamble
Westbrook Fund Preamble
WRECIP III Preamble
SECTION 1.2 Terms Generally. The definitions in Section 1.1 shall
---------------
apply equally to both the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. Unless the context requires otherwise, the
words "include", "includes" and "including" shall be deemed to be followed by
the phrase "without limitation". The term "hereunder" shall mean this entire
Agreement as a whole unless reference to a specific section of this Agreement is
made.
ARTICLE II
GENERAL PROVISIONS
------------------
SECTION 2.1 Formation. The Original Members have formed the Company
---------
under the provisions of the Act for the limited purposes set forth and on the
other terms and conditions set forth in this Agreement.
SECTION 2.2 Name. The Company shall conduct its activities under the
----
name of SHP Acquisition, L.L.C. The Executive Committee shall have the power at
any time to change the name of the Company; provided, that the name shall always
--------
contain the words "Limited Liability Company" or the abbreviation "L.L.C.". The
Executive Committee shall give prompt notice of any such change to each Member.
SECTION 2.3 Term. The term of the Company commenced April 5, 1999
----
and shall continue until December 31, 2049, unless sooner dissolved, wound up
and terminated in accordance with Article VIII of this Agreement.
SECTION 2.4 Purpose; Powers. (a) The purpose of the Company shall
---------------
be, directly or through ownership of equity interests in other entities, (i) to
own, acquire, manage and reposition primarily full service hotel properties in
the United States and (ii) to do all things permitted by law that are necessary
or incidental to any of the foregoing.
(b) In furtherance of its purposes, the Company shall have all powers
necessary, suitable or convenient for the accomplishment of its purposes, alone
or with others, including the following:
<PAGE>
17
(i) to invest and reinvest the cash assets of the Company and its
Subsidiaries in money-market or other short-term investments;
(ii) to have and maintain one or more offices within or without the
State of Delaware, and, in connection therewith, to rent or acquire office
space, engage personnel and compensate them and do such other acts and
things as may be advisable or necessary in connection with the maintenance
of such office or offices;
(iii) to open, maintain and close bank accounts and draw checks and
other orders for the payment of moneys;
(iv) to form or cause to be formed and to own the stock of one or
more corporations, whether foreign or domestic, and to form or cause to be
formed and to participate in and own equity interests in partnerships,
joint ventures and limited liability companies, whether foreign or
domestic;
(v) to enter into, make and perform all contracts, agreements and
other undertakings as may be necessary or advisable or incident to carrying
out its purposes;
(vi) to sue, prosecute, settle or compromise all claims against
third parties, to compromise, settle or accept judgment of claims against
the Company and its Subsidiaries, and to execute all documents and make all
representations, admissions and waivers in connection therewith;
(vii) to distribute, subject to the terms of this Agreement, at any
time and from time to time to Members cash or investments or other property
of the Company or its Subsidiaries, or any combination thereof;
(viii) to borrow money, whether secured or unsecured, and to make,
issue, accept, endorse and execute promissory notes, drafts, bills of
exchange and other instruments and evidences of indebtedness, all without
limit as to amount, and to guarantee the payment thereof, and to secure the
payment thereof by mortgage, pledge, or assignment of, or security interest
in, the assets then owned or thereafter acquired by the Company or its
Subsidiaries;
(ix) to buy, sell, own, operate and otherwise deal with assets of
any nature, including real estate assets;
(x) to hold, receive, mortgage, pledge, lease, transfer, exchange
or otherwise dispose of, grant options with respect to, and otherwise deal
in and exercise all rights, powers, privileges and other incidents of
ownership or possession with respect to, all property held or owned by the
Company or any of its Subsidiaries; and
(xi) to take such other actions necessary or incidental thereto as
may be permitted under applicable law.
<PAGE>
18
SECTION 2.5 Registered Office; Place of Business; Registered Agent.
------------------------------------------------------
The Company shall maintain a registered office at The Corporation Trust Company,
1209 Orange Street, Wilmington, New Castle County, Delaware 19801, or such other
office within the State of Delaware as is chosen by the Executive Committee.
The Company shall maintain an office and principal place of business at 903
Calle Amanecer, San Clemente, California 9273-6212, or at such other place as
may from time to time be determined as its principal place of business by the
Executive Committee; provided, that the Executive Committee shall give notice to
--------
the other Members of any change in the Company's principal place of business.
The name and address of the Company's registered agent as of the date of this
Agreement is The Corporation Trust Company, 1209 Orange Street, Wilmington, New
Castle County, Delaware 19801. The name and address of the Company's registered
agent in California as of the date of this Agreement is CT Corporation System,
818 West Seventh Street, Los Angeles, California 90017.
SECTION 2.6 Alternative Investment Structure. (a) In order (i) to
--------------------------------
qualify and/or preserve the status of (x) the Company, (y) any entity which owns
an interest in any Westbrook Member or (z) any entity in which any Member and/or
the Company owns an interest and which owns any Units as an "operating company"
as defined in the United States Department of Labor regulations 29 C.F.R.
(S)2510.3-101 (the "Plan Asset Rules"), or (ii) to minimize the effects of any
----------------
"unrelated business taxable income" as described in sections 512 and 514 of the
Code ("UBTI") on any entity which owns an interest in any Westbrook Member and
----
their respective Affiliates, each Member agrees to consent to modifications
reasonably proposed from time to time by any Westbrook Member to the structure
of the Company and/or the Company's investments in, and ownership of, its assets
and properties and/or to the terms of this Agreement, including, without
limitation, the capital contribution and allocation and distribution provisions
set forth in Articles VI and VII, if in any such case the modifications will not
adversely affect to any degree the aggregate amount or timing of capital
contributions, payment of fees, distributions of Available Cash and liquidation
proceeds or the aggregate allocations of Net Income and Net Loss to any Other
Member or any other economic rights of any Other Member hereunder or any
management rights or other control rights of any Other Member hereunder;
provided, however, that if such modifications adversely affect to any degree the
aggregate amount or timing of capital contributions, fees payable or
distribution of Available Cash and liquidation proceeds or the aggregate
allocations of Net Income and Net Loss or any other economic rights of any Other
Member hereunder or any rights of management or other control rights hereunder
to any Other Member (an "Adverse Change"), the provisions of Section 2.6(b)
--------------
shall apply. Subject to and specifically limited by the foregoing, any such
modification may include, without limitation, the formation by the Members of
other entities (including, without limitation, corporations and trusts that
qualify as real estate investment trusts under Section 856 of the Code) to be
owned by the Members or their Affiliates and which will own a portion of the
assets and properties to be included in the Initial Capital Contributions to the
Company. In any such event the Company and such other entities shall be treated
as a single partnership for federal income tax purposes and the fees payable to,
the amounts distributable to, the Net Income and Net Loss allocable to, the
capital contributions required to be contributed by, the maintenance of Capital
Accounts, and the buy-sell rights and obligations pursuant to this Agreement and
the organizational documents governing such other entities shall be calculated,
determined and applied on an aggregate basis as if the property and assets to be
included in the Initial Capital Contribution were owned by the
<PAGE>
19
Company pursuant to this Agreement as in effect as of the Closing unless the
Managing Member determines in its sole discretion that such provisions must be
calculated, determined and applied on an entity by entity basis and not on an
aggregate basis to qualify or preserve the status of the Managing Member, any
entity which owns an interest in any Westbrook Member, the Company or any entity
in which the Members and/or the Company owns an interest and which owns any
Units as an "operating company" under the Plan Asset Rules. If the Managing
Member determines that such provisions must be calculated, determined and
applied on an entity by entity basis and not an aggregate basis, the Members
agree to negotiate in good faith modifications to the terms of this Agreement
and to the organic documents governing such other entities so as to preserve as
nearly as possible without any material adverse affect to any Other Member the
same overall economic benefits and burdens relating to the property and assets
to be included in the Initial Capital Contribution as exist under this Agreement
as in effect as of the Closing; provided, however, that if such modifications
cause any Adverse Change, the provisions of Section 2.6(b) shall apply. Each
Member agrees to execute, acknowledge, deliver, file, record and publish all
such documents, agreements and instruments and to do all such other acts and
things as are reasonably necessary to implement the foregoing, subject to the
limitations set forth in the first sentence of this Section 2.6. The Westbrook
Members shall bear (directly, and not as a capital contribution or a loan to the
Company) all costs and expenses of the Company and the Members (and shall be
allocated all of the deductions associated with such costs and expenses which
shall be treated as deductions of the Westbrook Members and not deductions of
the Company) incurred in connection with any transfers of the property and
assets included in the Initial Capital Contribution and the formation of any
additional entities to own any portion of the property and assets included in
the Initial Capital Contribution in connection with any of the foregoing,
including the reasonable fees and expenses of the legal counsel, accountants and
other advisors of each Other Member in connection with any modification
consummated pursuant to this Section 2.6 and all costs relating to the process
described in Section 2.6(b) below, including the cost relating to the engagement
of any Valuation Agent. The Westbrook Members shall reimburse each Other Member
for all such costs within ten (10) Business Days after such Other Member
delivers to the Westbrook Member written notice that is has incurred any such
costs and reasonable supporting documentation relating thereto. If the Westbrook
Members fail to reimburse any Other Member within such time period, the Company
shall pay (and such Other Member shall have the authority to cause the Company
to so pay) all such amounts to such Other Member.
(b) In the event of any Adverse Change, the Managing Member shall
notify each Member and calculate and provide each Member with a calculation of
an estimate of the economic value of such Adverse Change incurred by such
Member. If the Members are unable to mutually agree upon the amount thereof
within 30 days, the Members shall, within 10 days after the expiration of the
foregoing 30-day period, mutually agree on an independent third party (the
"Valuation Agent") to determine the economic value of the Adverse Change to the
---------------
Alter Member arising from the Adverse Change resulting from a modification
described in Section 2.6(a). If the parties are unable to agree on a Valuation
Agent within such 10-day period, the Valuation Agent shall be appointed by the
Chief Judge of the District Court of the United States of America for the
Southern District of New York acting as an individual. In making its
determination of the economic value of the Adverse Change, the Valuation Agent
shall only
<PAGE>
20
consider the impact of the modifications to the amounts and timing of capital
contributions, fees payable and distributions of Available Cash and liquidation
proceeds and the allocation of Net Income and Net Loss to any Other Member. Any
Valuation Agent selected shall be independent and shall not have performed any
appraisal or valuation services for the Company, the Managing Member, any other
Member, any entity owning an interest in any Member or their Affiliates at any
time prior to its selection unless approved in writing by the Alter Member.
Within 60 days after the selection or appointment of the Valuation Agent, the
Valuation Agent shall deliver to the Members a written report of the foregoing
valuation, and the determination of the Valuation Agent thereon shall be
conclusive and binding upon the Members. Within 30 days after the receipt of
such report, the Westbrook Members shall pay in cash (in such proportion as they
shall agree) to each Other Member the amount of the economic value of the
Adverse Change with respect to such Member determined by the Valuation Agent.
Such payment shall not be considered or deemed a transaction of the Company and
shall not be treated Capital Contribution or loan by any Westbrook Member or a
distribution or borrowing by any Other Member.
ARTICLE III
MEMBERS AND INTERESTS
---------------------
SECTION 3.1 Units. Each Member's Interest shall be represented by
-----
Units. The Units initially shall be divided into four Classes, "Class A
Preferred Units", "Class B Common Units", "Class C Common Units" and "Class D
Common Units". Except as expressly provided in this Agreement to the contrary,
(a) any reference to "Units" shall include the Class A Units, Class B Units,
Class C Units and Class D Units and any other Classes of Units that may be
established pursuant to Section 3.6 and (b) any reference to "Members" shall
include the Class A Members, Class B Members, Class C Members and Class D
Members and any other Member holding any other Class of Units. At the Closing,
Class A Units will be issued to one or more OP Unitholders to the extent any
such OP Unitholder elects to receive Class A Units (in lieu of Class B Units or
Common Cash Consideration), as further provided in Section 3.3. At the Closing,
Class B Units will be issued to (i) the Westbrook Members, Alter Member and
Biederman Member in exchange for their Initial Capital Contributions made
pursuant to Section 6.1(a) as set forth in Article II of the Contribution
Agreement, as further provided in Section 3.4(a) and (ii) one or more OP
Unitholders to the extent any such OP Unitholder elects to receive Class B Units
(in lieu of Class A Units or Common Cash Consideration), as further provided in
Section 3.4(b). Class B Units will also be issued to the Funding Members as
provided in Section 3.4(c) to the extent such Funding Members make any
Additional Capital Contributions to the Company as provided in Section 6.1(b).
At the Closing, Class C Units and Class D Units, which represent limited rights
as provided in Section 3.5(a), will be issued to the Initial Members as further
provided in Section 3.5(b), subject to the transfer of such Units pursuant to
Section 3.5(b) or the assignment of such Units pursuant to Section 6.4(g).
SECTION 3.2 Members. Schedule A hereto contains the name and address
------- ----------
of each Member of the Company as of the date of this Agreement. Each of Alter
LLC, Biederman LLC, Westbrook Fund, WRECIP III and Westbrook Co-Invest is hereby
admitted as a Member
<PAGE>
21
as of the date of this Agreement (collectively, the "Initial Members") and each
---------------
of Westbrook Acquisitions and Alter hereby resigns as a Member as of the date of
this Agreement. Schedule A shall be revised by the Managing Member from time to
----------
time to reflect the admission, resignation, substitution, expulsion, bankruptcy
or dissolution of a Member and the issuance, transfer, assignment or other
changes in ownership of Units in accordance with the terms of this Agreement and
other modifications to or changes in the information set forth therein.
SECTION 3.3 Class A Units. At the Closing, pursuant to the terms of
-------------
the OP Merger Agreement, each Person who is a registered holder of OP Units (an
"OP Unitholder") may receive, as consideration for such OP Units under the OP
-------------
Merger Agreement, either Class A Units or Class B Units, at the election of such
OP Unitholder. Each OP Unitholder electing to receive Class A Units shall
receive a number of Class A Units equal to the number of OP Units exchanged for
such Class A Units and shall have an agreed-upon value of its Capital
Contribution as of the Closing for purposes of its initial Capital Account equal
to (a) the number of OP Units exchanged for Class A Units multiplied by (b) the
amount of the Common Cash Consideration. Any such OP Unitholder shall, after
agreeing in writing to be bound by the terms and conditions of this Agreement in
a writing in form and substance reasonably satisfactory to the Company, be
admitted as a Class A Member without the consent of any other Member.
SECTION 3.4 Class B Units. (a) Upon making the Initial Capital
-------------
Contributions provided in Section 6.1(a)(i), there will be issued (i) to each
Westbrook Member a number of Class B Units that equals (A) the Initial Capital
Contribution of such Westbrook Member divided by (B) the amount of the Common
Cash Consideration, (ii) to the Alter Member a number of Class B Units that
equals (A) the Initial Capital Contribution of the Alter Member divided by (B)
the amount of the Common Cash Consideration and (iii) to the Biederman Member a
number of Class B Units that equals (A) the Initial Capital Contribution of the
Biederman Member divided by (B) the amount of the Common Cash Consideration.
(b) At the Closing, pursuant to the terms of the OP Merger Agreement,
each OP Unitholder electing to receive Class B Units as consideration for such
OP Units under the OP Merger Agreement shall receive a number of Class B Units
equal to the number of OP Units exchanged for such Class B Units, and shall have
an agreed-upon value of its Capital Contribution as of the Closing for purposes
of its initial Capital Account equal to (i) the number of OP Units exchanged for
Class B Units multiplied by (ii) the amount of the Common Cash Consideration.
Any such OP Unitholder shall, after agreeing in writing to be bound by the terms
and conditions of this Agreement in a writing in form and substance reasonably
satisfactory to the Company, be admitted as a Class B Member without the consent
of any other Member.
(c) In the event any additional Class B Units are issued after the
Closing Date, the number of Class B Units to be issued will equal the number
determined by multiplying (i) the number of then-outstanding Class B Units by
(ii) a fraction, the numerator of which is the total Capital Contributions being
made to acquire such new Class B Units and the denominator of which is the
aggregate Capital Contributions previously made in respect of all the then-
outstanding Class B Units.
<PAGE>
22
SECTION 3.5 Class C and D Units. (a) The Class C Units and the Class
-------------------
D Units shall be special Classes of Interests representing only (i) the right to
participate in allocations of Net Income and Losses of the Company and to
receive distributions from the Company in accordance with the terms of this
Agreement and (ii) such other rights as expressly provided to the Class C Units
and/or the Class D Units under this Agreement.
(b) As of the Closing, there will be issued and outstanding to the
Initial Members 1,207,730 Class C Units and 1,000 Class D Units, which Class C
Units and Class D Units will be owned by the Initial Members as set forth on
Schedule B. Subject to the terms of any Employment Agreement, the Alter Member
- ----------
will have the right, in its sole discretion, to transfer Class C Units and Class
D Units at any time from any Employee Member to the Alter Member, any other
Employee Member or any Other Employee without the prior consent of such Employee
Member (or any other Member, including any Westbrook Member) and the Alter
Member will amend Schedule B from time to time to reflect any such transfers.
The Employment Agreements of the Employee Members may contain additional
provisions with respect to the ownership of the Class C Units and Class D Units,
including provisions providing for vesting of ownership over time and forfeiture
of ownership under certain circumstances; provided that the provisions of such
--------
Employment Agreements must not contravene any provisions of this Agreement and
in the event of a conflict this Agreement shall govern.
SECTION 3.6 Additional Issuance of New Class of Units. Subject to
-----------------------------------------
the provisions of this Agreement, including Articles IV and IX, after the
Closing, for any purpose specified in Section 2.4, the Executive Committee is
authorized to cause the Company to issue one or more new Classes of Units
representing additional Interests (in addition to the Class A Units, the Class B
Units, the Class C Units and the Class D Units) at any time or from time to time
to existing Members or to other Persons and to admit such other Persons as
Members subject to the terms and conditions of this Agreement. Subject to the
provisions of this Agreement, including Articles IV and IX, the Executive
Committee Board shall have sole and complete discretion to determine whether to
cause the Company to issue a new Class or Classes of Units and in determining
the consideration and terms and conditions with respect to any future issuance
of a new Class of Units, and the designations, preferences and relative,
participating, optional or other special rights, powers and duties of any such
Class or Classes; provided that any such new Class or Classes of Units may be
--------
pari passu with, but shall not have any distribution or other rights hereunder
senior in priority to, the Class A Units.
ARTICLE IV
MANAGEMENT AND OPERATION OF THE COMPANY
---------------------------------------
SECTION 4.1 Management. (a) The Company shall have an Executive
----------
Committee (the "Executive Committee") which shall initially consist of four
-------------------
individuals (each, a "Manager") or such other number (but in no event fewer than
-------
four) as may be established by agreement of the Managing Member and the Alter
Member, of whom one shall be appointed by the Alter Member, one by the Westbrook
Fund, one by WRECIP III and one by Westbrook Co-
<PAGE>
23
Invest; provided that in the event the number of Managers is adjusted, the
--------
Westbrook Members, collectively, shall in all cases have the right to appoint a
majority of the Managers; and provided, further that the Westbrook Members,
-------- -------
collectively, shall have the right to appoint all of the Managers, and any
Manager appointed by the Alter Member shall cease to be a Manager, in the event
either (i) the employment of Alter with the Company is terminated by the Company
for Alter Cause pursuant to the Alter Employment Agreement or the New Alter
Employment Agreement or (ii) the Alter Member ceases to hold any Units. For so
long as Alter is employed by the Company or any Subsidiary thereof, Alter shall
be appointed by the Alter Member as a Manager; thereafter, an individual listed
on Schedule 4.1 or another individual reasonably acceptable to the Managing
------------
Member may be selected by the Alter Member to serve instead of Alter as the
Manager to be appointed by the Alter Member pursuant to this Section 4.1.
Subject to the immediately preceding sentence, each of the Alter Member and each
Westbrook Member shall have the right to remove and designate replacements of
those Managers appointed by it. In acting in the capacity as a Manager, an
individual shall not be required to consider the interests of, or have any duty
stated or implied by law or equity to, any Member other than the Member that
appointed such Manager. None of the Non-Voting Members shall have any right to
appoint a Manager hereunder. The Managers shall appoint by majority vote one of
the Managers to preside at meetings of the Executive Committee.
(b) The Executive Committee shall have general supervision, direction
and control of the business of the Company. The normal and customary day-to-day
operations of the Company shall be managed by officers of the Company in
accordance with Section 4.2 and subject to Sections 4.3 and 4.4.
(c) Except as provided in Section 4.3(a), (i) an action or decision
of the Executive Committee shall require the consent or vote of a majority of
the Managers and (ii) a majority of the total number of incumbent Managers shall
be necessary to constitute a quorum for the transaction of business at any
meeting of the Executive Committee. Except as otherwise provided in this
Agreement or by the Act, the action of a majority of the Managers present at any
meeting at which there is a quorum, when duly assembled, is valid. A meeting at
which a quorum is initially present may continue to transact business,
notwithstanding the withdrawal of Managers, if any action taken is approved by a
majority of the required quorum for such meeting. No Member, acting solely in
its capacity as a Member, shall have the power and authority to act for and bind
the Company unless such matter has been approved by the Managers as set forth
herein.
(d) Meetings of the Executive Committee shall be held at the
principal office of the Company, unless some other place is designated in the
notice of the meeting. Any Manager may participate in a meeting through use of
a conference telephone, video conference or similar communication equipment so
long as all Managers participating in such a meeting can hear one another.
Accurate minutes of any meeting of the Executive Committee shall be maintained
by the Officer designated by the Executive Committee for that purpose.
(e) Special meetings of the Executive Committee for any purpose may
be called at any time by the person selected to preside at meetings of the
Executive Committee.
<PAGE>
24
Unless waived by the Executive Committee, at least two business days notice of
the time and place of any meeting of the Executive Committee shall be delivered
personally to each of the Managers, communicated to them by facsimile, or
communicated by Federal Express or other comparable overnight courier service.
Notice shall be transmitted to the last known facsimile number or address of the
Manager as shown on the records of the Company. Such notice as above provided
shall be considered due, legal and personal notice to such Manager. With respect
to a special meeting which has not been duly called or noticed pursuant to the
foregoing provisions, all transactions carried out at the meeting are as valid
as if had at a meeting regularly called and noticed if: (i) all Managers are
present at the meeting, and sign a written consent to the holding of such
meeting, (ii) if a majority of the Managers are present and if those not present
sign a waiver of notice of such meeting and a written consent to the matters
approved therein, whether prior to or after the holding of such meeting, which
waiver, consent or approval shall be filed with the other records of the Company
or (iii) if a Manager attends a meeting without notice and does not protest
prior to the meeting or at its commencement that notice was not given to him or
her.
(f) Any action required or permitted to be taken by the Managers may
be taken without a meeting and will have the same force and effect as if taken
by a vote of Managers at a meeting properly called and noticed, if authorized by
a writing signed individually or collectively by all, but not less than all, the
Managers. Such consent shall be filed with the records of the Company.
(g) The Members hereby delegate to each and any one of the Managers
the nonexclusive power and authority to act as an agent of Company and, in such
capacity, to bind the Company in the ordinary course of the Company's business
and to execute any and all documents to be signed by the Company, subject to the
limitations on the authority of the Managers.
(h) Notwithstanding anything to the contrary contained in this
Agreement, the Managers appointed by the Original Members in the Original
Agreement (which Managers are Alter, Paul Kazilionis and Jonathan H. Paul) shall
continue as Managers designated by the Members as of the date of this Agreement.
Alter shall be deemed appointed by Alter Member, Paul Kazilionis by Westbrook
Co-Invest and Jonathan H. Paul by Westbrook Fund for purposes of Section 4.1(a)
hereof. In addition, Mark Mance shall be appointed as Manager by WRECIP III for
purposes of Section 4.1(a) hereof. The delegation by the Original Members to
the Managers of nonexclusive power and authority to act as an agent of the
Company and, in such capacity, to bind the Company in the ordinary course of the
Company's business and to execute any and all documents to be signed by the
Company shall continue in full force and effect.
SECTION 4.2 Officers. The Members agree that the Company shall not
--------
have, and the Executive Committee shall not appoint, any officers of the Company
(the "Officers") prior to the Closing Date (other than pursuant to the Alter
--------
Employment Agreement pursuant to which Alter shall become Chief Executive
Officer as of (but not prior to) the Closing). As of the Closing, the Officers
shall include a chief executive officer (the "Chief Executive Officer"). The
-----------------------
Company may also have such other Officers as the Executive Committee in its
discretion may
<PAGE>
25
appoint or whom may be appointed by the other Officers if specifically
authorized to do so by the Executive Committee. Following the Closing, the Chief
Executive Officer shall, subject to the general direction and control of the
Executive Committee, have overall responsibility for the management of the
normal and customary day-to-day operations of the Company, subject to Sections
4.1, 4.3 and 4.4, and will be empowered to and will engage in all appropriate
and necessary activities to accomplish the purposes of the Company as set forth
herein. Notwithstanding the foregoing, all Executive Committee Decisions shall
be approved by a majority of the Executive Committee (or all of the Managers to
the extent required by Section 4.3). The initial Chief Executive Officer will be
Alter, and as of the date hereof the Company has entered into the Alter
Employment Agreement providing the terms of Alter's employment with the Company
effective as of the Closing. The Members hereby delegate to each of the Officers
the nonexclusive power and authority to act as an agent of the Company and, in
such capacity, to bind the Company in the ordinary course of the Company's
business and to execute any and all documents to be signed by the Company,
subject to the limitations on the authority of the Officers set forth herein and
under the Act. The Officers and other key employees of the Company will be
compensated in accordance with this Agreement, their respective employment
agreements, if any, and, if applicable, the compensation guidelines agreed to by
the Alter Member and the Westbrook Members.
SECTION 4.3 Executive Committee Approval Requirements and Other
---------------------------------------------------
Limitations on Actions. (a) Prior to the Closing, the Executive Committee will
- ----------------------
not authorize and the Company will not take, and will cause each of its
Subsidiaries not to take, any of actions set forth in clauses (i), (ii), (iii)
or (vii) below and after the Closing, the Executive Committee will not authorize
and the Company will not take, and will cause each of its Subsidiaries not to
take, any of the following actions without the prior approval of all the
Managers at a meeting of the Executive Committee or action by written consent of
the Executive Committee pursuant to Section 4.1, except that the Company shall
have the right to do such of the following as is necessary to permit it to
fulfill its obligations under Section 9.3 and 9.4 hereof:
(i) amending the Merger Agreement, provided that approval of the
--------
Manager appointed by the Alter Member shall not be required to terminate
the Merger Agreement or to waive any condition precedent under the Merger
Agreement;
(ii) changing the interest rate or principal amount, reducing the
maturity to a period of less than three years or making any material change
in the mandatory amortization schedule under any debt financing agreements
relating to the Merger Agreement, provided that approval of the Manager
--------
appointed by the Alter Member shall not be required to terminate any such
agreements prior to the termination of the Merger Agreement or to waive any
condition precedent under such agreements;
(iii) conducting any business prior to the Closing other than that
necessary or incidental to the consummation of the transactions
contemplated by the Merger Agreement and the agreements referred to therein
(including any merger agreement with respect to Sunstone OP, any financing
agreements, the Alter Employment Agreement, the Contribution Agreement and
the Term Sheet dated April 5, 1999 relating thereto);
<PAGE>
26
(iv) acquiring all or any portion of any hotel property or any
direct or indirect interest therein or entering into any contract to
acquire any hotel properties, directly or indirectly;
(v) funding any capital expenditure in any fiscal year for
renovations of hotel properties in excess of 6% of FF&E other than as
provided in Section 6.2(c) (except to the extent such capital expenditure
is to repair damage or destruction to hotel properties of the Company and
its Subsidiaries not covered by insurance proceeds);
(vi) entering into any transaction with any Affiliate of any
Westbrook Member unless such affiliation is disclosed in writing to all of
the Managers and such transaction is on terms no less favorable to the
Company or any of its Subsidiaries than it would obtain in a comparable
arm's length transaction with a third party that is not an Affiliate of any
Westbrook Member and otherwise complies with Section 4.5(d);
(vii) issuing any Units or admitting any Person as a substitute or
additional Member (other than in connection with a Permitted Transfer)
except as provided in Sections 3.3, 3.4, 3.5 or 6.1(b);
(viii) amending this Agreement or otherwise taking any act in
contravention of this Agreement;
(ix) making any distribution to the Members other than cash;
(x) retaining (and not distribute as contemplated by Section 6.3)
any Available Cash;
(xi) requiring or making any Additional Capital Contributions other
than pursuant to Section 6.1(b);
(xii) paying any discretionary bonus to Alter (which does not include
the Bonus) or any other Officer;
(xiii) taking any action which would cause the Partnership to become
an entity other than a Delaware limited partnership;
(xiv) establishing or adjusting the adjusted basis of any asset for
federal income tax purposes, provided that approval of a Manager shall not
--------
be required if the Member which appointed such Manager is not adversely
affected by such action;
(xv) entering into any agreement (A) which would cause any Member to
become personally liable on or in respect of or to guarantee any
indebtedness of the Company or any Subsidiary thereof or (B) which is not
nonrecourse to such Member;
<PAGE>
27
(xvi) performing any act which would make it impossible to carry on
the ordinary business of the Company, except in connection with the
involuntary dissolution, winding up and termination of the Company as
provided by Sections 8.1 and 8.2;
(xvii) possessing Company Assets, or assigning, transferring or
pledging the Company's rights in specific Company Assets, for other than a
Company purpose; or
(xviii) employing, or permitting to be employed, the funds or assets
of the Company or any Subsidiary for other than a Company purpose.
(b) Prior to the eighteen-month anniversary of the Closing Date,
the Company shall not (and the Members shall not permit the Company to), and
shall not permit any Subsidiary to, voluntarily sell or otherwise transfer, in
one transaction or in a series of transactions (whether or not related), Company
Assets which, in the aggregate, include more than 30% of (x) the aggregate
number of guest rooms owned (directly or indirectly) by the Company and its
Subsidiaries as of the Closing Date plus (y) the number of guest rooms
----
subsequently acquired by them, unless the aggregate sale price for such Company
Assets exceeds the aggregate cost basis of the assets sold for purposes of the
Company's financial statements, excluding depreciation and amortization of the
Company and its Subsidiaries in such Company Assets, but including the aggregate
of all capital improvements made thereto as of the date of such proposed sale to
the extent such improvements exceed 4% of the aggregate investment in fixtures,
furniture and equipment of the Company and its Subsidiaries in such Company
Assets as of such date. In addition, prior to the eighteen-month anniversary of
the Closing Date, the Company shall not (and the Members shall not permit the
Company to), and shall not permit any Subsidiary to, voluntarily liquidate the
Company or sell all or substantially all the Company Assets unless the aggregate
proceeds to the Company and its Subsidiaries resulting from such liquidation or
sale are sufficient to pay Alter (and/or any employees he has designated to
receive a portion of the Bonus pursuant to Section 10.14 hereof) the Bonus and
to distribute to the Alter Member, the Biederman Member and the Employee
Members, collectively, $12.5 million pursuant to Section 6.4(d).
(c) If prior to the four-year anniversary of the Closing Date, the
Company or any of its Subsidiaries proposes to sell, transfer or otherwise
dispose (by merger or otherwise) to any Person any equity interest in or all or
a significant portion of the assets (including the management contracts) of SHP
Management, Inc. (or any successor thereto) without also simultaneously selling
or leasing (for a term of not less than five years) to such Person related hotel
assets or any interest in any Affiliate of the Company that directly or
indirectly owns related hotel assets (a "Stand-Alone Sale"), the Company will
----------------
first provide the Alter Member with a written notice setting forth the equity
interest or assets to be offered for sale and the material terms and conditions
of the proposed sale, including the price (the "Offer Notice"). Within thirty
------------
(30) days following the receipt of the Offer Notice, the Alter Member shall have
the opportunity and right to elect to purchase, and the Company shall have the
obligation to agree to sell to the Alter Member, such equity interest or assets
on the terms set forth in the Offer Notice, and the Alter Member shall exercise
such right of election by delivering written notice of acceptance to the Company
within such 30-day period. If the Alter Member exercises its right pursuant to
this
<PAGE>
28
Section 4.3(c), the closing of such purchase by the Alter Member of the equity
interest or assets with respect to which such rights have been exercised shall
occur at the offices of the Company on the date which is 60 days after the
delivery of the notice of acceptance by the Alter Member to the Company (or, if
such date is not a Business Day, on the next succeeding Business Day). If the
Alter Member does not deliver such an acceptance notice within such 30-day
period, the right of the Alter Member to purchase such equity interest or assets
pursuant to the Offer Notice shall terminate and the Company shall have the
right to sell such equity interest or assets described in the Offer Notice to
any third party on terms which are not materially less favorable to the Company
than those set forth in the Offer Notice; provided that if an agreement to sell
--------
such equity interest or assets has not been entered into within 120 days after
termination of such 30-day period, the rights of the Alter Member as described
above shall be reinstated and the Company will be required to deliver another
Offer Notice to the Alter Member with respect to such proposed sale before such
sale can occur.
(d) Commencing on the four-year anniversary of the Closing Date, the
rights of the Alter Member described in Section 4.3(c) shall not apply to any
Stand-Alone Sale unless, as of the date of the Offer Notice that would be
required pursuant to Section 4.3(c), the Units held by the Westbrook Members
would receive a Rate of Return of at least 17.5%, calculated by taking into
account (i) all prior distributions of Available Cash to the Westbrook Members
pursuant to Section 6.4, (ii) the aggregate gross proceeds (net of transaction
expenses) received by the Westbrook Members on any sale by any Westbrook Member
(to any Person other than another Westbrook Member) of all or any portion of its
Units, (iii) the aggregate amount that would be distributed to each Westbrook
Member if the Company were liquidated (not including the amount to be
distributed pursuant to clause (iv) below) as of the date of such Offer Notice
(assuming Company Assets were sold at Fair Market Value) and (iv) the amount
that would be distributed to the Westbrook Members, collectively, as a result of
such Stand-Alone Sale.
SECTION 4.4 Budget. The Members have agreed upon an initial budget
------
for the Company for the period commencing on the Closing Date and ending on
December 31, 1999, a copy of which is attached as Exhibit A, which shall be the
---------
budget for the Company for such period in the event the Alter Member and
Westbrook Members do not agree upon another budget for such period prior to the
Closing Date. Not less than thirty (30) days prior to the end of each fiscal
quarter and not less than sixty (60) days prior to the end of each fiscal year,
the Chief Executive Officer shall submit to the Executive Committee a proposed
budget for the next such fiscal period, which shall be prepared at the expense
of the Company. Prior to the commencement of the fiscal period to which such
budget applies, the Executive Committee (by majority vote) shall either approve
such budget as presented or modify the proposed budget following consultation
with the Chief Executive Officer (such budget, as approved, whether or not with
modification, by the Executive Committee, the "Approved Budget"), provided that
---------------
if the Executive Committee does not modify any such proposed budget within 20
days (in the case of any quarterly budget) or 45 days (in the case of any annual
budget) after its submission by the Chief Executive Officer, such proposed
budget shall be deemed approved by the Executive Committee. No Member, Manager,
Officer (including the Chief Executive Officer) or any other employee of the
Company shall authorize (i) with respect to all expenditures of the Company in
any fiscal period, expenditures of more than 105% of total amount allocated for
all expenditures
<PAGE>
29
in the Approved Budget (including any contingency amounts in such Approved
Budget) for such fiscal period, and (ii) with respect to any individual
line-item set forth in the Approved Budget for any fiscal period, expenditures
of more than 110% of the amount allocated to such individual line-item in such
Approved Budget (including any contingency amounts in such Approved Budget) for
such fiscal period.
SECTION 4.5 Certain Duties and Obligations of the Members. (a)
---------------------------------------------
Subject to the terms of this Agreement, the Members shall take all action which
may be reasonably necessary or appropriate for the formation and continuation of
the Company as a limited liability company under the laws of the State of
Delaware.
(b) No Member shall take any action so as to cause the Company to be
classified for Federal income tax purposes as an association taxable as a
corporation and not as a partnership.
(c) The Company shall take all action which is necessary to form or
qualify the Company and to conduct the business in which the Company is engaged
under the laws of any jurisdiction in which the Company is doing business and to
continue in effect such formation or qualification.
(d) Except as otherwise permitted hereunder, no Member shall take, or
cause to be taken, any action that would result in any Member having any
personal liability for the obligations of the Company. Neither any Member nor
any Affiliate of any Member shall enter into any transaction with the Company
unless the transaction (i) is expressly permitted hereunder, (ii) with respect
to services, the fees for such services must be no greater than the fees charged
generally by qualified, unaffiliated third-parties performing similar services
in the geographical area in which the services are to be performed and the other
terms of the agreement pursuant to which such services will be performed shall
generally be no more onerous to the Company than the terms of agreements used by
qualified, unaffiliated third-parties performing similar services in the
geographical area in which the particular services are to be rendered, (iii)
with respect to purchases and sales of property, the price paid for such
property must be no greater than the price that an unaffiliated third-party
would pay for such property and the other terms of the agreement pursuant to
which such property is purchased or sold shall generally be no more onerous to
the Company than the terms of agreements used by unaffiliated third-parties
purchasing or selling similar property in the geographical area in which such
property is located or (iv) is approved by all the Managers upon disclosure of
any direct or indirect interest such Member or any Affiliate thereof may have in
the transaction. Each Member hereby agrees that it shall not recommend that the
Company or any Subsidiary enter into, or otherwise permit the Company or any
Subsidiary to enter into any, an agreement with any Person that is an Affiliate
of such Member without first disclosing to the other Member in writing that such
Person is an Affiliate of such Member.
(e) (i) Except as otherwise expressly provided in the Act, the debts,
obligations and liabilities of the Company, whether arising in contract, tort or
otherwise, shall be solely the debts, obligations and liabilities of the
Company, and no Member shall be obligated for
<PAGE>
30
any such debt, obligation or liability of the Company solely by reason of being
a Member of the Company. Except as otherwise expressly provided in the Act or in
this Agreement, the liability of each Member shall be limited to the amount of
Capital Contributions made (or required to be made) by such Member in accordance
with the provisions of this Agreement.
(ii) No Manager, Member and no partner, shareholder or member or
other holder of an equity interest in any Member or any officer of director
of any of the foregoing shall be liable, responsible or accountable to the
Company or to any Member for monetary damages for any losses, claims,
damages or liabilities arising from any act or omission performed or
omitted by it and arising out of or in connection with (A) any act
performed within the scope of the authority conferred on it by this
Agreement, (B) its failure or refusal to perform any act, (C) its
performance of, or failure to perform, any act on the reasonable reliance
on advice of legal counsel to the Company or (D) the negligence, dishonesty
or bad faith of any agent, consultant or broker of the Company, except, in
each case described in clauses (A) through (D), to the extent the action or
failure to act of such party (but not of such legal counsel, agent,
consultant or broker) constituted fraud, willful misconduct or gross
negligence. No Manager, partner, shareholder, member or other holder of an
equity interest in any Member or officer or director of any of the
foregoing shall be personally liable for the performance of such Member's
obligations under this Agreement, but the foregoing shall not relieve any
partner or member of any Member from its obligations to such Member.
(iii) The Company shall, to the fullest extent permitted by applicable
law, indemnify, defend and hold harmless each Member and each general or
limited partner of any Member or such Member's Affiliates, shareholder,
members or other holder of any equity interest in such Member or its
Affiliate, or any officer or director of any of the foregoing and each and
every Manager or Officer (collectively, the "Indemnitees"), from and
-----------
against any losses, claims, demands, liabilities, costs, damages, expenses
and causes of action to which such Indemnitee may become subject in
connection with any matter arising out of or incidental to this Agreement,
including the formation hereof, the making of the Initial Capital
Contributions and any matter for which such Indemnitee is exculpated under
Section 4.5(e)(ii) or any other act performed or omitted to be performed by
any such Indemnitee in connection with this Agreement or the Company's
business or affairs; provided, however, that such act or omission was not
attributable to such Indemnitee's fraud, willful misconduct or gross
negligence or its breach of the representation set forth in Section 10.1.
Any indemnity under this Section shall be paid solely out of and to the
extent of Company Assets and shall not be a personal obligation of any
Member and in no event will any Member be required, or permitted without
the consent of all of the Members, to contribute additional capital to
enable the Company to satisfy any obligation under this Section. The
Company shall indemnify, defend and hold harmless each Member from and
against any losses, claims, demands, liabilities, costs, damages, expenses
with respect to any cause of action arising from the Merger Agreement and
the transactions contemplated thereby to the extent such Member acted in
its capacity as a Member of the Company.
<PAGE>
31
(iv) The Company, each Manager and the other Members shall be
indemnified and held harmless by each Member from and against any and all
claims, demands, liabilities, costs, damages, expenses and causes of action
of any nature whatsoever arising out of or attributable to the fraud,
willful misconduct or gross negligence of such Member.
(f) No Member shall be required to consider the interests of, or
have any duty stated or implied by law or equity to (including any fiduciary
duty), any other Member.
SECTION 4.6 UBTI. Subject to the obligations of the Westbrook
----
Members pursuant to Section 2.6, the Company will use its best efforts to avoid
the incurrence of any UBTI by any Member.
SECTION 4.7 Consent of Alter Member. To the extent the Alter Member
-----------------------
is required to grant any consent or take any other action under any provision of
this Agreement, such consent or other action shall be taken or made on behalf of
the Alter Member by the Manager appointed by the Alter Member.
SECTION 4.8 Non-Voting Members. Anything in this Agreement to the
------------------
contrary notwithstanding, none of the Non-Voting Members shall have any voting,
management or other rights with respect to the Company under this Agreement
except for the right of such Non-Voting Members to receive distributions as
provided in Section 6.4 hereof. Without limiting the foregoing, (a) none of the
Non-Voting Members will have any right to vote on and their consent shall not be
required for any amendment, supplement or other modification to this Agreement
or for the Company to take any action or to vote on or approve of any matters
requiring the consent or approval of the Members, including any matter requiring
the unanimous consent of the Members under the Act and (b) neither the Company,
any Manager or any Member will have any fiduciary or other duties or obligation
to the Non-Voting Members.
ARTICLE V
OTHER ACTIVITIES
----------------
SECTION 5.1 Other Activities. Except as expressly provided
----------------
hereunder, this Agreement shall not be construed in any manner to preclude any
Member or any of its Affiliates from engaging in any activity whatsoever
permitted by applicable law (whether or not such activity might compete, or
constitute a conflict of interest, with the Company or any of its Subsidiaries),
including, without limitation, engaging in other real estate investments and
related ventures. No Member or any of its Affiliates will have any obligation
to present or otherwise make available to the Company any business opportunity
which such Member or any of its Affiliates may become aware of.
SECTION 5.2 Transactions With the Company. This Agreement shall not
-----------------------------
be construed in any manner to preclude any Member (or Affiliate of any Member)
from (a) lending
<PAGE>
32
money to, (b) borrowing money from, (c) acting as a surety, guarantor or
endorser for, (d) guaranteeing or assuming one or more obligations of, (e)
providing collateral for or (f) transacting other businesses with, the Company
or its Subsidiaries, to the extent approved by the Executive Committee and not
in violation of Section 4.3(a)(vi) or 4.5(d). Any Member performing any of the
transactions set forth in this Section 5.2 with the approval of the Executive
Committee (or all the Managers) to the extent required by the provisions of
Section 4.3(a) hereof) shall have the same rights and obligations with respect
to any such transaction as a Person who is not a Member.
ARTICLE VI
CAPITAL CONTRIBUTIONS; DISTRIBUTIONS
------------------------------------
SECTION 6.1 Capital Contributions. (a) (i) Immediately prior to
---------------------
the Closing, the Initial Members (other than the Employee Members) shall
make Initial Capital Contributions to the Company solely as provided in the
Contribution Agreement. Each of the Members hereby acknowledges and agrees
that the agreed-upon value of the respective Initial Capital Contributions
of the Initial Members for purposes of their initial Capital Account shall
be determined as set forth in Article II of the Contribution Agreement.
(ii) At the Closing, the OP Unitholders being admitted as Class A
Members or Class B Members shall make Capital Contributions as set forth in
Section 3.3 or 3.4(b) hereof.
(b) The Funding Members shall make Additional Capital Contributions
to the Company as directed by either the Alter Member or any Westbrook Member
only to the extent additional funds are required by the Company in connection
with Emergency Expenses. Each Funding Member shall be given written notice of
any Additional Capital Contribution required by the Member directing such
Additional Capital Contribution to be made at least 20 Business Days prior to
the date on which such Additional Capital Contribution is required to be made.
Each Funding Member shall make all Additional Capital Contributions in the same
proportion as their Residual Shares. The Company shall issue Class B Units as
consideration for Additional Capital Contributions in accordance with the
provisions of Section 3.4(c).
(c) No Member shall be required or permitted to make Capital
Contributions to the Company except as provided in Section 6.1(a) or (b).
(d) No Member shall have any obligation to restore any negative
balance in the Member's Capital Account, whether to the Company, any Member or
any other Person. A deficit balance in any Member's Capital Account shall not
be deemed to be a liability of such Member (or of such Member's members or
partners) or an asset or property of the Company (or any Member). No Member
shall be entitled to withdraw all or any part of its Capital Contributions
except as expressly provided in this Agreement. No interest shall be payable by
the Company on
<PAGE>
33
the Capital Contributions of any Member except as otherwise provided herein. In
no event shall any Member be entitled to demand any property from the Company
other than cash.
(e) If any Westbrook Member or the Alter Member require Additional
Capital Contributions in accordance with Section 6.1(b), such Member shall give
notice to all of the other Funding Members of the amount of funds required and
the date such funds shall be due; provided that unless otherwise expressly
provided herein, (i) such notice must provide at least 15 business days prior
written notice for any Additional Capital Contributions, and (ii) the date such
Capital Contributions shall be required shall be a Business Day.
SECTION 6.2 Loans for Additional Capital Contributions; Other Loans
-------------------------------------------------------
to the Company. (a) In the event an Additional Capital Contribution to the
- --------------
Company is required pursuant to Section 6.1(b), and such Additional Capital
Contribution is required by the Company in connection with Emergency Expenses
attributable to capital expenditures relating to hotel properties owned or
leased by the Company or any of its Subsidiaries in excess of 4% of FF&E, each
of the Alter Member, Biederman Member and Westbrook Co-Invest shall have the
right to borrow the amount needed to fund its Additional Capital Contribution in
the form of a recourse loan made by the Company to such Funding Member, which
shall bear interest at an annual rate equal to the lesser of (i) 15% compounded
quarterly and (ii) the maximum rate permitted by applicable law, shall be
payable by set-off against any payments or distributions to be made by the
Company to the Funding Member pursuant to this Agreement, and shall be secured
by the Units of such Funding Member (each such loan, a "Contribution Loan"). In
-----------------
the event any of the Alter Member, Biederman Member or Westbrook Co-Invest
wishes to exercise its right to receive a Contribution Loan, the Westbrook
Members agree to lend to the Company an amount equal to the aggregate amount of
all such Contribution Loans to be made by the Company, which loan by the
Westbrook Members shall be made to the Company immediately prior to the making
of such Contribution Loans, shall bear interest at a rate equal to that with
respect to such Contribution Loans, shall be payable with the proceeds of any
set-off made or other payments received by the Company with respect to such
Contribution Loans and shall be secured by the Units held as security under such
Contribution Loans.
(b) If any Funding Member shall fail to make an Additional Capital
Contribution to the Company as required in Section 6.1(b) above for a reason
other than the failure of the Company or the Westbrook Members to make the loans
contemplated by Section 6.2(a) (a "Noncontributing Member"), the Executive
----------------------
Committee shall promptly notify such Noncontributing Member in writing and if
such default is not cured within 10 days after receipt of such notice of such
default, then any other Funding Member (a "Contributing Member") may fund all or
-------------------
part of the Noncontributing Member's Additional Capital Contribution in the form
of a nonrecourse demand loan (a "Priority Loan") made by the Contributing Member
-------------
to the Company, and such Priority Loan with respect to the Noncontributing
Member's Additional Capital Contribution shall bear interest at an annual rate
equal to the lesser of (i) 15% compounded quarterly and (ii) the maximum rate
permitted by applicable law.
(c) The Westbrook Members shall have the right to fund any Additional
Capital Expenditures in whole or in part in the form of a nonrecourse demand
loan (a "CapEx
-----
<PAGE>
34
Loan") made by one or more Westbrook Members to the Company. Any such CapEx Loan
- ----
shall bear interest at an annual rate equal to the lesser of (i) 15% compounded
quarterly and (ii) the maximum rate permitted by applicable law. Notwithstanding
the foregoing, the Company shall use reasonable commercial efforts to obtain
alternative financing less expensive to the Company than a CapEx Loan for any
Additional Capital Expenditures.
SECTION 6.3 Distributions Generally. Available Cash shall be
-----------------------
distributed from time to time as determined by the Executive Committee for each
fiscal quarter, but no later than 45 days following the end of such quarter.
The Company shall make such distributions in cash among the Members in
accordance with Section 6.4, and all distributions shall be subject to any
restrictions contained in any agreement between the Company and any lender.
SECTION 6.4 Distributions of Available Cash. Each distribution of
-------------------------------
Available Cash hereunder shall be made to the Members as follows and the
calculations described in the following clauses shall be made as of the date of
each distribution, on a cumulative basis:
(a) First, to the Class A Members pro rata in accordance with the
--- ----
number of Class A Units held by each Class A Member until such time as the Class
A Members have received a cumulative compounded quarterly (to the extent not
paid on a quarterly basis) return of 8.5% on the Class A Members' Capital
Contributions attributable to the Class A Units (without any return of Capital
Contributions);
(b) Second, to the Class B Members pro rata in accordance with the
--- ----
number of Class B Units held by each Class B Member until such time as the Class
B Members have received a cumulative compounded quarterly (to the extent not
paid on a quarterly basis) return of 15% on the Class B Members' Capital
Contribution attributable to the Class B Units (without any return of Capital
Contributions);
(c) Third, pro rata among the Class A Members and Class B Members in
--- ----
accordance with their respective Capital Contributions until such time as the
Class A Members and Class B Members have received a return of their Capital
Contributions attributable to the Class A Units and Class B Units; and
thereafter each such Class A Member shall no longer be entitled to receive any
distributions of Available Cash hereunder, such Class A Units shall no longer be
considered outstanding for purposes of this Agreement and each such Class A
Member shall cease to be a Member;
(d) Fourth, 100% to the Class C Members, collectively, pro rata in
--- ----
accordance with the number of Class C Units held by each Class C Member, until
such time as the Class C Members have received an aggregate of $12.5 million
pursuant to this Section 6.4(d); and
(e) Thereafter, (i) 12.5% to the Class D Members collectively, pro
---
rata in accordance with the number of Class D Units held by each Class D Member,
- ----
provided that in the event any Class D Units are forfeited and retained by the
- --------
Company pursuant to Section 6.4(f)(i), 6.4(f)(ii) or 6.4(f)(iii), such
percentage will be reduced pro rata based on the number of Class D Units which
--- ----
remain outstanding; and (ii) 87.5% to the Class B Members in proportion to each
<PAGE>
35
Class B Member's Residual Share; provided that in the event any Class D Units
--------
are forfeited and retained by the Company pursuant to Section 6.4(f)(i),
6.4(f)(ii) or 6.4(f)(iii), such percentage will be increased in proportion to
each Class B Member's Residual Share.
(f) (i) Notwithstanding the provisions of Section 6.4(e) and
subject to the provisions of Section 6.4(g), (A) in the event that during
the term of the Alter Employment Agreement the employment of Alter is
terminated by the Company for Alter Cause or by Alter without Alter Good
Reason, the Alter Member shall forfeit 86.9% of its Class D Units and such
forfeited Class D Units shall be retained by the Company; (B) in the event
that prior to the expiration of the term of the Alter Employment Agreement
Alter is offered a New Alter Employment Agreement by the Company but Alter
does not execute and deliver to Company such New Alter Employment Agreement
with the Company (for any reason other than Alter's death or Disability (as
defined in the Alter Employment Agreement) or his prior termination of
employment other than by the Company for Alter Cause or by Alter without
Alter Good Reason) prior to the later of (x) the expiration of the term of
the Alter Employment Agreement or (y) fifteen (15) Business Days after
receipt of such New Alter Employment Agreement by Alter, the Alter Member
will forfeit 86.9% of its Class D Units and such forfeited Class D Units
shall be retained by the Company; and (C) in the event that during the term
of the New Alter Employment Agreement the employment of Alter is terminated
by the Company for Alter Cause or by Alter without Alter Good Reason, the
Alter Member will forfeit the percentage of Class D Units set forth below
and such forfeited Class D Units shall be retained by the Company: (1)
43.5% of its Class D Units if such termination occurs prior to the first
anniversary of the Renewal Date; (2) 34.8% of its Class D Units if such
termination occurs on or after the first anniversary of the Renewal Date
and prior to the second anniversary of the Renewal Date; (3) 26.1% of its
Class D Units if such termination occurs on or after the second anniversary
of the Renewal Date and prior to the third anniversary of the Renewal Date;
(4) 17.4% of its Class D Units if such termination occurs on or after the
third anniversary of the Renewal Date and prior to the fourth anniversary
of the Renewal Date; and (5) 8.7% of its Class D Units if such termination
occurs on or after the fourth anniversary of the Renewal Date and prior to
the fifth anniversary of the Renewal Date. In the event that prior to the
expiration of the term of the Alter Employment Agreement, Alter is not
offered a New Alter Employment Agreement by the Company, the Class D Units
of the Alter Member shall no longer be subject to forfeiture.
(ii) Notwithstanding the provisions of Section 6.4(e), the Class D
Units of any Employee Member shall be subject to forfeiture as provided in
any Employment Agreement or other written agreement among the Company, the
Alter Member and the Employee Member, and any such forfeited Class D Units
shall be immediately transferred to the Alter Member, except that any Class
D Units that would have been previously forfeited by the Alter Member
pursuant to this Section 6.4(f) had the Alter Member owned such Class D
Units prior to the date of such forfeiture shall be retained by the
Company.
<PAGE>
36
(iii) Notwithstanding the provisions of Section 6.4(e), (A) in the
event that prior to the fifth anniversary of the Closing Date, the
employment of Biederman with the Company (or its Subsidiary) is terminated
by the Company (or its Subsidiary) for Cause or by Biederman without Good
Reason, the Biederman Member shall forfeit 86.9% of its Class D Units and
such forfeited Class D Units shall be retained by the Company; and (B) in
the event that prior to the fifth anniversary of the Closing Date,
Biederman is offered the opportunity to continue his employment with the
Company (or its Subsidiary) after the fifth anniversary of the Closing Date
on the same terms and conditions and with a base salary not less than the
base salary paid to Biederman immediately prior to the fifth anniversary of
the Closing Date, and the employment of Biederman is terminated thereafter
(for any reason other than Biederman's death or disability or his prior
termination of employment other than by the Company for Cause or by
Biederman without Good Reason), the Biederman Member will forfeit the
percentage of Class D Units set forth below and such forfeited Class D
Units shall be retained by the Company: (1) 43.5% of its Class D Units if
such termination occurs prior to the sixth anniversary of the Closing Date;
(2) 34.8% of its Class D Units if such termination occurs on or after the
sixth anniversary of the Closing Date and prior to the seventh anniversary
of the Closing Date; (3) 26.1% of its Class D Units if such termination
occurs on or after the seventh anniversary of the Closing Date and prior to
the eighth anniversary of the Closing Date; (4) 17.4% of its Class D Units
if such termination occurs on or after the eighth anniversary of the
Closing Date and prior to the ninth anniversary of the Closing Date; and
(5) 8.7% of its Class D Units if such termination occurs on or after the
ninth anniversary of the Closing Date and prior to the tenth anniversary of
the Closing Date. In the event that prior to the fifth anniversary of the
Closing Date, Biederman is not offered the opportunity to continue his
employment with the Company (or its Subsidiary) after the fifth anniversary
of the Closing Date on the same terms and conditions and with a base salary
not less than the base salary paid to Biederman immediately prior to the
fifth anniversary of the Closing Date, the Class D Units of the Biederman
Member shall no longer be subject to forfeiture.
(g) As long as Alter remains the Chief Executive Officer, the Alter
Member shall assign Class D Units to one or more key employees of the Company or
its Subsidiaries (other than Alter, the Biederman Member and the Employee
Members), which employees may or may not have an Employment Agreement (the
"Other Employees") as determined by the Alter Member in its sole discretion;
---------------
provided that the Class D Units assigned to the Other Employees plus the Class D
- -------- ----
Units held by the Biederman Member and the Employee Members shall equal not less
than 28.7% of the total outstanding Class D Units; and provided further that in
-------- -------
the event Alter is no longer the Chief Executive Officer, the Alter Member shall
no longer have the right to make such assignment and the Company shall have the
right to assign such 28.7% of the outstanding Class D Units. Any assignment of
any Class D Units to any Other Employee shall automatically terminate (and the
right to Class D Units shall be automatically assigned to the Company without
any consideration) at the time any such Other Employee to whom such an
assignment has been made ceases to be an employee of the Company or its
Subsidiary as a result of such Other Employee's termination for Employee Cause
by the Company or its Subsidiary or by such Other Employee without Employee Good
Reason. Any Class D Units assigned to the
<PAGE>
37
Company as described in the immediately preceding sentence may be assigned by
the Alter Member to one or more Other Employees as determined by the Alter
Member in its sole discretion as long as Alter remains the Chief Executive
Officer (and must be so assigned by the Alter Member if the total Class D Units
so assigned by the Alter Member to such Other Employees plus the total Class D
----
Units held by the Biederman Member and the Employee Members is less than 28.7%
of the total outstanding Class D Units), provided that in the event Alter is no
--------
longer the Chief Executive Officer, the Alter Member shall no longer have the
right to make such assignment and the Company shall have the right to reassign
any Class D Units required to be assigned pursuant to this Section 6.4(g).
Persons to whom Class D Units are assigned pursuant to this Section 6.4(g) shall
not become Members or receive any rights under this Agreement solely by virtue
of such assignment, but Class D Units may be assigned by the Alter Member to key
employees who are Members. In the event of the forfeiture of any Class D Units
by the Alter Member pursuant to Section 6.4(f), those Class D Units which the
Alter Member has assigned to Other Employees pursuant to this Section 6.4(g)
shall not be forfeited and the assignment to such Other Employees shall continue
until such time as such Other Employee ceases to be an employee of the Company
or its Subsidiary as a result of such Other Employee's termination for Employee
Cause by the Company or its Subsidiary or by such Other Employee without
Employee Good Reason (at which time any such assignment shall automatically
terminate and the right to such Class D Units shall be automatically assigned to
the Company).
(h) Notwithstanding any provision of this Section 6.4, all amounts
distributed in connection with a liquidation of the Company or the sale or other
disposition of all or substantially all the assets of the Company that leads to
a liquidation of the Company will be distributed to the Members in accordance
with their respective Capital Account balances with respect to the Units held by
such Members, as adjusted for all Company operations up to and including the
date of such distribution. The parties intend that such final Capital Account
balances shall be determined after allocating all income and loss for all
purposes taking into account Section 7.4(g)(vi) and making the adjustments to
fair market value as described in the definition of Carrying Value.
(i) For purposes of determining the distributions under this Section
6.4, the Company shall be deemed to have made distributions to each Member in an
amount equal to all taxes paid by the Company (or the Company's share of taxes
paid by any entity owned, directly or indirectly, in whole or in part, by the
Company) attributable solely to such Member; such distributions shall be deemed
made on the later of (i) the date upon which the distributions related thereto
are made or (ii) the date upon which such taxes are paid. This Section 6.4(i)
shall not apply with respect to the amounts of any Tax Loans to the Alter
Member, Biederman Member or any Employee Member.
(j) If, as of the end of the Fiscal Year, the cumulative Net Income
plus items of income and gain (for tax purposes or book purposes) allocated to
the Alter Member, Biederman Member or any Employee Member exceeds the cumulative
Net Loss plus items of deduction and loss (for tax purposes or book purposes)
allocated to the Alter Member, Biederman Member or any Employee Member for all
Fiscal Years (on a cumulative basis taking
<PAGE>
38
into account the principal amount of any earlier Tax Loan) (a "Net Income
----------
Excess"), the Company shall make or continue a tax loan, within 10 Business Days
- ------
after a request therefor (a "Tax Loan") to the Alter Member, Biederman Member or
--------
such Employee Member equal to (i) such Net Income Excess multiplied by the
actual income tax rates (taking into account the federal deduction for state and
local taxes) applicable to the Alter Member, Biederman Member or such Employee
Member from time to time reduced by (ii) the cumulative distributions to the
Alter Member, Biederman Member or such Employee Member under Section 6.4 for all
Fiscal Years. The Tax Loan shall bear interest at the prime rate of The Chase
Manhattan Bank as adjusted from time to time, and shall be repaid out (A) out of
distributions to the Alter Member, Biederman Member or such Employee Member, (B)
to the extent of any reduction in the amount of the Tax Loan by reason of a
reduction in the Net Income Excess and (C) if not repaid earlier, on the
termination of the Company. In the event of the assignment or Transfer by the
Alter Member, Biederman Member or any Employee Member of any Units, any
outstanding Tax Loans with respect to such Units shall be repaid by the Alter
Member, Biederman Member or such Employee Member to the Company at the time of
such transfer.
SECTION 6.5 Restricted Payments. Notwithstanding any provisions to
-------------------
the contrary in this Agreement, neither the Company nor any Member on behalf of
the Company shall make a distribution or Tax Loan if such distribution or Tax
Loan would violate the Act or violate any contractual obligations of the Company
that is entered into pursuant to the terms of this Agreement (provided, however,
-------- -------
the Members shall use reasonable efforts, and shall cause the Executive
Committee to do so, to not permit the Company to enter into loan documents or
other agreements that prohibit the Company from making tax loans to the Alter
Member).
SECTION 6.6 Organizational Expenses. (a) Promptly after the Closing
-----------------------
Date, the Company, to the extent it does not pay such costs and expenses
directly and to the extent previously approved by the Executive Committee, will
reimburse each Initial Member for Organizational Expenses incurred by such
Member. Any Organizational Expenses incurred by a Member shall not be included
as a Capital Contribution and any reimbursement by the Company shall not be
treated as a distribution. In the event this Agreement is terminated by its
terms prior to the Closing, the Company shall have no obligation to reimburse
any Member for any Organizational Expenses hereunder except to the extent
provided in the Contribution Agreement.
(b) The Company shall pay (or reimburse each Member to the extent
incurred by such Member) all third-party expenses actually incurred by any
Member in the operation and business of the Company to the extent approved by
the Executive Committee and provided for in an Approved Budget, including the
acquiring, holding, owning, developing, servicing, collecting upon and operating
the Company or the Company Assets, any taxes imposed on the Company, fees and
expenses for attorneys and accountants, the costs and expenses of any insurance
purchased by the Company, the costs and expenses of any litigation involving the
Company and the amount of any judgments or settlements paid in connection
therewith, and any diligence expenses in connection with investments being
considered by the Company.
<PAGE>
39
ARTICLE VII
BOOKS; REPORTS; TAX MATTERS; CAPITAL ACCOUNTS; ALLOCATIONS
----------------------------------------------------------
SECTION 7.1 General Accounting Matters; Books and Records. (a)
---------------------------------------------
Allocations of Net Income (Loss) pursuant to Section 7.4 shall be made by or
under the reasonable direction of the Managing Member at the end of each Fiscal
Year.
(b) Except as otherwise provided herein, all determinations,
valuations and other matters of judgment required to be made for accounting and
tax purposes under this Agreement shall be made by or under the reasonable
direction of the Managing Member in a reasonable manner after consultation with
the Alter Member.
(c) The Chief Executive Officer shall cause the Company through the
Company's accountants to maintain, at the expense of the Company, in a manner
customary and consistent with good accounting principles, practices and
procedures, a comprehensive system of office records, books and accounts (which
records, books and accounts shall be and remain the property of the Company) in
which shall be entered fully and accurately each and every financial transaction
with respect to the ownership and operation of the Company Assets. Bills,
receipts and vouchers shall be maintained on file by the Company. Said books
and accounts shall be maintained in a safe manner and separate from any records
not having to do directly with the Company or any Company Assets. The Chief
Executive Officer shall cause audits to be performed and audited statements and
income tax returns to be prepared at the expense of the Company as required by
Section 7.1(e) below. Such books and records of account shall be prepared by
the Company's accountants and maintained at the principal place of business of
the Company or such other place or places as may from time to time be determined
by the Voting Members. Each Member or its duly authorized representative shall
have the right to inspect, examine and copy such books and records of account at
the Company's office during reasonable business hours. A reasonable charge
(approximating the cost thereof) for copying books and records may be charged by
the Company.
(d) The books of the Company shall be kept on the accrual basis in
accordance with GAAP and on a tax basis (in accordance with United States tax
requirements) and the Company shall report its operations for tax purposes on
the accrual method, provided that the Company shall not be required to keep
separate books on a tax basis as long as the books that are maintained on a GAAP
basis are sufficient to permit the Chief Executive Officer to make all quarterly
tax adjustments and to prepare all of the reports described in Section 7.1(e).
(e) (i) The Chief Executive Officer will prepare, or will cause the
Company Accountant to prepare, at the expense of the Company, and furnish to
each Member within 21 calendar days after the end of each fiscal quarter of the
Company (unless, except in the case of clause (E) which shall be required for
every fiscal quarter, such fiscal quarter is the last fiscal quarter of any
fiscal year of the Company) (A) an unaudited balance sheet of the Company dated
as of the end of such fiscal quarter, (B) an unaudited related income statement
of the Company for such fiscal quarter, (C) an unaudited statement of each
Member's capital account for such
<PAGE>
40
fiscal quarter, (D) an unaudited statement of cash flows for such fiscal
quarter, and (E) a status report of the Company's activities during such fiscal
quarter, including summary descriptions of additions to, dispositions of and
leasing and occupancy of the Company Assets during such fiscal quarter, all of
which shall be certified by the Chief Executive Officer as being, to the best of
his knowledge, true and correct.
(ii) The Chief Executive Officer will prepare, or will cause the
Company Accountant to prepare, at the expense of the Company, and furnish
to each Member within 30 calendar days after the end of each Fiscal Year,
the final audited amount of net income of the Company for such Fiscal Year
and, within 30 calendar days after the end of each Fiscal Year (1) an
audited balance sheet of the Company prepared on a GAAP basis dated as of
the end of such Fiscal Year, (2) an audited related income statement of the
Company prepared on a GAAP basis for such Fiscal Year, (3) an audited
statement of cash flows for such Fiscal Year and (4) an audited statement
of each Member's Capital Account for such Fiscal Year, all of which shall
be certified by the Chief Executive Officer as being, to the best of its
knowledge, true and correct and all of which shall be certified in the
customary manner by the Company Accountant (which firm shall provide such
balance sheet, income statement and statement of Capital Account in draft
form to the Members for review prior to finalization and certification
thereof).
(iii) The Chief Executive Officer will furnish to each Member, at the
expense of the Company, copies of all reports required to be furnished to
any lender of the Company.
(iv) When requested, the Company Accountant shall prepare a
reasonable estimate of the taxable income of the Company. All schedules of
book income shall be prepared on a GAAP basis. Promptly after the end of
each Fiscal Year, the Chief Executive Officer will use reasonable efforts
to cause the Company Accountant to prepare and deliver to each Member a
report setting forth in sufficient detail all such additional information
and data with respect to business transaction effected by or involving the
Company during the Fiscal Year as will enable the Company and each Member
to timely prepare its federal, state and local income tax returns in
accordance with applicable laws, rules and regulations. The Chief
Executive Officer will use reasonable efforts to cause the Company
Accountant to prepare all federal, state and local tax returns required of
the Company, submit those returns to the Voting Members for their approval
no later than February 1 of the year following such Fiscal Year and will
file the tax returns after they have been approved by each of the Voting
Members. If each of the Voting Members shall not have approved any such
tax return prior to the date required for the filing thereof (including any
extensions granted), the Chief Executive Officer will timely obtain an
extension of such date to the extent such an extension is available. Each
Member shall give prompt notice to each Voting Member of any and all
notices or other communications it receives from the Internal Revenue
Service concerning the Company, including any notice of audit, any notice
of action with respect to a revenue agent's report, any notice of a 30-day
appeal letter and any notice of a deficiency in tax concerning any Company
tax return. Upon request, the Tax Matters Member shall furnish
<PAGE>
41
each Voting Member with status reports regarding any negotiation between
the Internal Revenue Service or any other taxing authority and the Company.
(v) The Chief Executive Officer shall prepare, or shall cause the
Company Accountant to prepare, at Company expense, such additional
financial reports and other information as the Managing Member may
determine are appropriate.
(vi) All decisions as to accounting principles shall be made by the
Managing Member subject to the provisions of this Agreement, including
Section 7.2 hereof.
(f) The Company shall retain as the regular accountant and auditor of
the Company (the "Company Accountant") a nationally-recognized accounting firm
------------------
agreed upon by the Westbrook Members and the Alter Member, or a different
nationally-recognized accounting firm as may be selected by all the Managers at
any time. The fees and expenses of the Company Accountant shall be a Company
expense.
SECTION 7.2 Certain Tax Matters. The taxable year of the Company
-------------------
shall be the same as its Fiscal Year. The Chief Executive Officer shall cause
to be prepared all Federal, state and local tax returns of the Company for each
year for which such returns are required to be filed and, after approval of such
returns by the Executive Committee, shall cause such returns to be timely filed,
provided, however, that extensions shall be applied for unless otherwise
- --------
approved by the Westbrook Members and the Alter Member. The Managing Member
shall determine the appropriate treatment of each item of income, gain, loss,
deduction and credit of the Company and the accounting methods and conventions
under the tax laws of the United States, the several states and other relevant
jurisdictions as to the treatment of any such item or any other method or
procedure related to the preparation of such tax returns. The Tax Matters
Member shall make the election provided for in Section 754 of the Code, if, and
only if the Member who or which has acquired any Units or a distribution of
Company property with respect to which the election is made will have provided
to the Tax Matters Member concurrently, or within 30 days after the Transfer of
such Units, its undertaking to the effect that it, and its successors in
interest hereunder, will reimburse the Company annually for its additional
administrative costs incurred by reason of such election as determined by the
auditor of the Company. The Tax Matters Member shall also make the election to
amortize Organizational Expenses pursuant to Code Section 709 and the regulation
promulgated thereunder. In addition, the Managing Member may cause the Company
to make or refrain from making any and all other elections permitted by the tax
laws of the United States, the several states and other relevant jurisdictions.
The Company shall be treated as a partnership for tax purposes. The "Tax
Matters Partner" for purposes of Section 6231(a)(7) of the Code (the "Tax
---
Matters Member") shall be the Managing Member, subject to the right of the Alter
- --------------
Member to participate in all negotiations with respect to settlements. If a
dispute as to the content of a tax return cannot be resolved to the reasonable
satisfaction of all Voting Members prior to the required filing date therefor,
the Managing Member shall have the right to direct the Chief Executive Officer
to cause the Company's tax return to be filed as reasonably approved by the
Managing Member. The Tax Matters Member shall have all of the rights, duties,
powers and obligations provided for in Sections 6221 through 6232 of the Code
with respect to the Company.
<PAGE>
42
SECTION 7.3 Capital Accounts. There shall be established for each
----------------
Member on the books of the Company as of the date hereof, or such later date on
which such Member is admitted to the Company, a capital account (each being a
"Capital Account"). Each Capital Contribution shall be credited to the Capital
---------------
Account of such Member on the date such contribution of capital is paid to the
Company. In addition, each Member's Capital Account shall be (a) credited with
such Member's allocable share of any Net Income of the Company as well as items
of income specifically allocated pursuant to Sections 7.4(c), 7.4(d) and 7.4(f),
(b) debited with (i) distributions to such Member of cash or the fair market
value of other property and (ii) such Member's allocable share of Net Loss of
the Company as well as items of loss or deduction specifically allocated for
book purposes pursuant to Section 7.4(f), and (c) otherwise maintained in
accordance with the provisions of the Code. Any other item which is required to
be reflected in a Member's Capital Account under Section 704(b) of the Code or
otherwise under this Agreement shall be so reflected. Capital Accounts shall be
appropriately adjusted to reflect transfers of part (but not all) of a Member's
Units. Interest shall not be payable on Capital Account balances.
Notwithstanding anything to the contrary contained in this Agreement, the
Company shall maintain the Capital Accounts of the Members in accordance with
the principles and requirements set forth in section 704(b) of the Code and
Regulations section 1.704-1(b)(2)(iv).
SECTION 7.4 Allocations. For purposes of determining Capital Account
-----------
balances under this Section 7.4, a Member's Capital Account balance shall be
deemed to be increased by such Member's share of Minimum Gain and Member
Nonrecourse Debt Minimum Gain remaining at the close of such Fiscal Year as
determined under the Regulations under Code Section 704(b):
(a) For each Fiscal Year, Net Loss shall be allocated among the
Members in the following order of priority:
(i) First, among the Members as necessary to cause each Member's
Capital Account balance to equal such Member's Pre-Liquidation Target
Account, and
(ii) Second, after giving effect to the allocations made pursuant to
Section 7.4(a)(i), among the Class B Members in proportion to the Class B
Members' then respective Capital Contributions.
(b) For each Fiscal Year, Net Income shall be allocated among the
Members as necessary to cause each Member's Capital Account balance to equal
such Member's Pre-Liquidation Target Account.
(c) Notwithstanding the foregoing, Net Loss shall be allocated to the
Alter Member, Biederman Member and Employee Members in a percentage greater than
their share of Capital Contributions only to reverse prior allocations of Net
Income in the same percentage and the same order previously allocated to the
Alter Member, Biederman Member and Employee Members. The allocations of Net
Income and Net Loss pursuant to this Section 7.4 are intended to satisfy the
"fractions" and "substantial economic effect" rules contained in Section
<PAGE>
43
514(c)(9)(E) of the Code, and Net Income and Net Loss shall be allocated among
the Members only to the extent that such allocations would not violate such
rules.
(d) Notwithstanding anything herein to the contrary, in the event any
Member unexpectedly receives any adjustments, allocations or distributions
described in paragraphs (b)(2)(ii)(d)(4), (5) or (6) of Section 1.704-1 of the
regulations under the Code, there shall be specially allocated to such Member
such items of Company income and gain, at such times and in such amounts as will
eliminate as quickly as possible that portion of any deficit in its Capital
Account caused or increased by such adjustments, allocations or distributions.
(e) Notwithstanding any other provision of this Agreement, taxable
loss (or items of deduction) as computed for book purposes shall not be
allocated to a Member to the extent that the Member has or would have, as a
result of such allocations, a deficit Adjusted Capital Account Balance. Any
taxable loss (or items of deduction) as computed for book purposes which
otherwise would be allocated to a Member, but which cannot be allocated to such
Member because of the application of the immediately preceding sentence, shall
instead be allocated to the other Members. In the event any Member has a
deficit Adjusted Capital Account Balance at the end of any Fiscal Year, each
such Member shall be specially allocated items of Company income and gain in the
amount of such excess as quickly as possible, provided, that an allocation
--------
pursuant to this paragraph Section 7.4(e) shall be made only if and to the
extent that a Member would have a deficit Adjusted Capital Account Balance after
all other allocations provided for in this Article VII have been tentatively
made as if Section 7.4(d) and 7.4(e) were not in this Agreement.
(f) All items of income, gain, loss, deduction and credit of the
Company shall be allocated among the Members for Federal, state and local income
tax purposes consistent with the manner that the corresponding constituent items
of Net Income (Loss) shall be allocated among the Members pursuant to this
Agreement, except as may otherwise be provided herein or by the Code.
(g) Notwithstanding the provisions of this Section 7.4, net income,
net gain, and net loss of the Company (or items of income, gain, loss,
deduction, or credit, as the case may be) shall be allocated in accordance with
the following provisions of this Section 7.4 to the extent such provisions shall
be applicable.
(i) Nonrecourse Deductions of the Company for any Fiscal Year shall
be specially allocated to the Members in proportion to each such Member's
Capital Contributions. Member Nonrecourse Deductions of the Company for
any Fiscal Year shall be specially allocated to the Member who bears the
economic risk of loss for the liability in question. The provisions of
this Section 7.4(g)(i) are intended to satisfy the requirements of
Regulations sections 1.704-2(e)(2) and 1.704-2(i)(1) and shall be
interpreted in accordance therewith for all purposes under this Agreement.
(ii) If there is a net decrease in the Minimum Gain of the Company
during any Company Fiscal Year, each Member shall be specially allocated
items of Company
<PAGE>
44
income and gain for such year equal to that Member's share of the net
decrease in Minimum Gain, within the meaning of Regulations section 1.704-
2(g)(2), to the extent required by the Regulations. The provisions of this
Section 7.4(g)(ii) are intended to comply with the Minimum Gain chargeback
requirements of Regulations section 1.704-2(e) and shall be interpreted in
accordance therewith for all purposes under this Agreement.
(iii) If there is a net decrease in Member Nonrecourse Debt Minimum
Gain during any Fiscal Year, each Member that has a share of such Member
Nonrecourse Debt Minimum Gain, determined in accordance with Regulations
section 1.704-2(i)(5), as of the beginning of such year shall be specially
allocated items of Company income and gain for such year (and, if
necessary, for succeeding years) equal to such Member's share of the net
decrease in Member Nonrecourse Debt Minimum Gain, to the extent required by
the Regulations. The provisions of this Section 7.4(g)(iii) are intended
to comply with the Member Nonrecourse Debt Minimum Gain chargeback
requirement of Regulations section 1.704-2(i)(4) and shall be interpreted
in accordance therewith for all purposes under this Agreement.
(iv) Notwithstanding the foregoing, if any special allocation
otherwise required pursuant to this Section 7.4(g) would cause the
Company's allocations to violate Section 514(c)(9)(B)(iv) of the Code
(taking into account its incorporation by reference of the "substantial
economic effect" requirement of Section 704(b)(2) of the Code), then the
special allocation shall not be made.
(v) Any item of income, gain, loss and deduction with respect to any
property (other than cash) that has been contributed by a Member to the
capital of the Company or which has been revalued for Capital Account
purposes pursuant to Regulations Section 1.704-1(b)(2)(iv) shall be
allocated among the Members for income tax purposes under Code Section
704(c) so as to take into account the variation between the tax basis of
such property and its fair market value at the time of its contribution or
at the time of its revaluation for Capital Account purposes pursuant to the
"traditional method" under Regulations Section 1.704-3(b) (or any successor
Regulation). Allocations under this Section 7.4(g)(v) are solely for
purposes of federal, state and local taxes and shall not affect, or in any
way be taken into account in computing, any Member's Capital Account or
share of Net Income or Net Loss or other items or distributions under any
provision of this Agreement.
(vi) The parties intend that the foregoing tax allocation provisions
of this Article VII, as applied for book purposes, shall be interpreted so
as to produce final Capital Account balances of the Members that would
permit liquidating distributions made in accordance with final Capital
Account balances under Section 8.3 to be made (after unpaid loans and
interest thereon, including those owed to Members have been paid) in a
manner identical to the order of priorities set forth in Section 6.4.
<PAGE>
45
ARTICLE VIII
DISSOLUTION
-----------
SECTION 8.1 Dissolution. The Company shall be dissolved and
-----------
subsequently terminated upon the occurrence of the first of the following
events:
(a) subject to Section 9.4(b), after the ten-year anniversary of the
Closing Date, upon the determination of either the Alter Member or any
Westbrook Member, in its sole discretion, to dissolve the Company;
(b) December 31, 2049;
(c) upon the written determination of all the Voting Members to
dissolve the Company; or
(d) the occurrence of a Dissolution Event, except the Company shall
not be dissolved upon the occurrence of a Dissolution Event that terminates
the continued membership of a Member in the Company if within 90 days after
the occurrence of such Dissolution Event, any remaining Voting Members
consent to the continuation of the Company.
SECTION 8.2 Winding-up. When the Company is dissolved, the business
----------
and property of the Company shall be wound up and liquidated by such party
appointed by the Executive Committee (the party conducting the liquidation being
hereinafter referred to as the "Liquidator"), which party shall not receive any
----------
fee from the Company for acting as Liquidator hereunder. The Liquidator shall
use its best efforts to reduce to cash and cash equivalent items such assets of
the Company as the Liquidator shall deem it advisable to sell, subject to
obtaining fair value for such assets and any tax or other legal considerations.
SECTION 8.3 Final Distribution. Within 270 calendar days after the
------------------
effective date of dissolution of the Company, the assets of the Company shall be
distributed in the following manner and order:
(a) to the payment of the expenses of the winding-up, liquidation
and dissolution of the Company;
(b) to pay all creditors of the Company, other than Members, either
by the payment thereof or the making of reasonable provision therefor;
(c) to establish reserves, in amounts reasonably established by the
Liquidator, to meet other liabilities of the Company for a period of up to
18 months after the date on which the liquidation is consummated; and
<PAGE>
46
(d) to pay, in accordance with the provisions of this Agreement
applicable to such loans or in accordance with the terms agreed among them
and otherwise on a pro rata basis, all creditors of the Company that are
--- ----
Members, either by the payment thereof or the making of reasonable
provision therefor.
The remaining assets of the Company shall be applied and distributed in
accordance with the positive balances of the Members' Capital Accounts, as
determined after taking into account all adjustments to Capital Accounts for the
Company taxable year during which the liquidation occurs.
ARTICLE IX
TRANSFER OF MEMBERS' INTERESTS
------------------------------
SECTION 9.1 Restrictions on Transfer of Units. (a) No Member may,
---------------------------------
directly or indirectly, assign, sell, exchange, transfer, pledge, mortgage,
hypothecate or otherwise encumber or dispose of all or any part of its Units (a
"Transfer") to any Person, other than in accordance with this Article IX.
--------
(b) Any Member may Transfer its Units as follows:
(i) all or part of such Units to any Person after obtaining the
prior written consent of the Alter Member and each Westbrook Member, which
Transfer shall be subject to the Tag-Along Rights and the Drag-Along Rights
to the extent, if any, provided in such consent;
(ii) solely in the case of the Alter Member and each Westbrook
Member, all or part of such Units to an Alter Transferee or a Westbrook
Transferee, which Transfer shall not be subject to any Tag-Along Rights or
Drag-Along Rights under Section 9.2 except in the case of a transfer from a
Westbrook Member to a Westbrook Transferee for any cash consideration in
excess of the basis of the Westbrook Member in such Units, which shall be
subject to Tag-Along Rights and Drag-Along Rights under Section 9.2;
(iii) all (but not part) of such Units by operation of law, including
death or bankruptcy, which Transfer shall not be subject to any Tag-Along
Rights or Drag-Along Rights under Section 9.2;
(iv) solely in the case of each Westbrook Member, in one or more
transactions (A) at any time, up to 50% of the aggregate Units of all
Westbrook Members as of the Closing Date or (B) after the 18-month
anniversary of the Closing Date, all of its Units, each of which Transfers
shall be subject to the Tag-Along Rights and the Drag-Along Rights under
Section 9.2;
<PAGE>
47
(v) (A) solely in the case of the Alter Member, Biederman Member or
any Employee Member any Units pursuant to an exercise by such Member of the
Tag-Along Rights of such Member under Section 9.2(a) or (B) solely in the
case of any Other Member any Units pursuant to an exercise by any Westbrook
Member of the Drag-Along Rights of such Westbrook Member under Section
9.2(b) with respect to such Other Member;
(vi) solely in the case of each Westbrook Member, in one or more
transactions prior to the one-year anniversary of the Closing Date, less
than 50% of the aggregate Units of all Westbrook Members as of the Closing
Date, which Transfer shall not be subject to any Tag-Along Rights or Drag-
Along Rights under Section 9.2, as long as such Units transferred by the
Westbrook Member have not received any positive Rate of Return, provided
--------
that receipt of a carry, promote or profit interest with respect to the
transferred Units or a right to receive future payments upon the attainment
of certain financial or other measurements shall not be disregarded in
determining whether there has been a positive Rate of Return;
(vii) (A) solely in the case of the Alter Member, all of such Units
as required by an exercise of the Alter Put or Alter Call, (B) solely in
the case of the Biederman Member, all of such Units as required by an
exercise of the Biederman Put or Biederman Call, (C) solely in the case of
each Employee Member, all of such Units as required by an exercise of an
Employee Call with respect to such Employee Member, and (D) solely in the
case of each Class A Member, all of such Units as required by an exercise
of the Preferred Put or Preferred Call; none of which Transfers shall be
subject to any Tag-Along Rights or Drag-Along Rights under Section 9.2;
(viii) all of such Units as required by a Company Sale or exercise of
a Notified Member of the right of such Notified Member to purchase such
Units, which Transfer shall not be subject to any Tag-Along Rights or Drag-
Along Rights under Section 9.2;
(ix) solely in the case of the Alter Member, part (but not all) of
the Class D Units to any employee of the Company or its Subsidiaries
pursuant to Section 6.4(g), which Transfer shall not be subject to any Tag-
Along Rights or Drag-Along Rights under Section 9.2;
(x) solely in the case of the Alter Member, part (but not all) of
the Class B Units, Class C Units or Class D Units to any New Employee
Member, which Transfer shall not be subject to any Tag-Along Rights or
Drag-Along Rights under Section 9.2; or
(xi) solely in the case of each Employee Member, all or part of the
Class C Units or Class D Units to the Alter Member, any other Employee
Member or any Other Employee pursuant to the provisions of Section 3.5(b),
which Transfer shall not be subject to any Tag-Along Rights or Drag-Along
Rights under Section 9.2;
<PAGE>
48
(xii) solely in the case of each Class A Member, all or part of its
Units to any Affiliate of such Class A Member, which Transfer shall not be
subject to any Tag-Along Rights or Drag-Along Rights under Section 9.2; or
(xiii) as provided in Article II of the Contribution Agreement.
provided that in the case of any Transfer pursuant to clause (i), (ii), (iv),
- --------
(v), (vi), (ix), (x), (xi) or (xii) above of this Section 9.1(b), the Person
(the "Transferee") to whom the Member's Units was Transferred shall not be
----------
admitted as a substitute Member until the Transferee has delivered to the
Company written acceptance and adoption of all of the terms and provisions of
this Agreement in form and substance reasonably satisfactory to the Company; and
provided further that in the case of any Transfer pursuant to clause (iv)(A) or
- -------- -------
(vi) above of this Section 9.1(b), the Westbrook Member shall retain the right
to appoint a majority of the Executive Committee. Each Transfer pursuant to
clause (ii) through (xii) above of this Section 9.1(b) shall be a "Permitted
---------
Transfer" hereunder. Except as provided in this Section 9.1(b), no Member may
- --------
Transfer any Units.
(c) No Member may mortgage, pledge, hypothecate or otherwise
encumber all or any portion of such Member's Units or such Member's rights to
receive a portion of the Available Cash, Net Income and Net Losses except that a
Member may pledge or hypothecate its right to receive distributions hereunder as
long as such pledge or hypothecation does not provide the pledgee with any
voting or other rights with respect to the Company either upon such pledge or
hypothecation or upon foreclosure thereof.
SECTION 9.2 Tag-Along and Drag-Along Rights. (a) With respect to
-------------------------------
any proposed Transfer subject to Tag-Along Rights pursuant to Section 9.1(b)
hereof by one or more of the Westbrook Members of part (but not all) of the
Units held by the Westbrook Members, each Westbrook Member shall have the
obligation, and each of the Alter Member, Biederman Member and each Employee
Member (the "Tagging Members") shall have the right, to require the proposed
---------------
transferee to purchase from any Tagging Member, at the same price and upon the
same terms and conditions as to be paid and given to such Westbrook Member, a
number of Class B Units equal to the number of Class B Units owned by such
Tagging Member multiplied by a fraction, the numerator of which is the number of
Class B Units being sold by the Westbrook Members and the denominator of which
is the total number of Class B Units held by all the Westbrook Members. With
respect to any proposed Transfer subject to Tag-Along Rights pursuant to Section
9.1(b) hereof by the Westbrook Members of all the Units held by the Westbrook
Members, each Westbrook Member shall have the obligation, and each Tagging
Member shall have the right, to require the proposed transferee to purchase from
such Tagging Member all Class B Units, Class C Units and Class D Units held by
such Tagging Member in each case for the consideration described in the
following sentence and upon the same terms and conditions as to be given to the
Westbrook Members. The gross proceeds to be paid to the Members as
consideration in the event of a Transfer of all the Units in accordance with the
preceding sentence shall be distributed among the Members in accordance with the
provisions of Section 6.4, in the same manner as if such proceeds were
distributed as Available Cash hereunder. In the event some but not all of the
Tagging Members exercise their Tag-Along Rights with respect to a Transfer by
the Westbrook Members of all the Units held by the
<PAGE>
49
Westbrook Members, the proceeds will be distributed to the Westbrook Members and
the Tagging Members exercising their Tag-Along Rights using an implied valuation
of the Company determined by the Executive Committee in good faith. The rights
of the Tagging Members to require a purchase of any of their Units pursuant to
this Section 9.2(a) are collectively referred to herein, as applicable, as the
"Tag-Along Rights". In order to be entitled to exercise its Tag-Along Rights, a
----------------
Tagging Member must agree to make, severally but not jointly, the same
representations, warranties, covenants and indemnities and other similar
agreements as the Westbrook Member agrees to make in connection with the
proposed Transfer of its Units. Each Westbrook Member shall give notice to each
Tagging Member of each proposed Transfer by such Westbrook Member giving rise to
the Tag-Along Rights of such Tagging Member at least 20 days prior to the
proposed consummation of such Transfer, setting forth the name and address of
the proposed transferee, the proposed amount of consideration therefor and terms
and conditions agreed to by the proposed transferee, and the number of Units
such Tagging Member may sell to such proposed transferee (in accordance with the
first two sentences of this Section 9.2(a)). The Tag-Along Rights must be
exercised by each Tagging Member within 15 days following receipt of the notice
required by the preceding sentence, by delivery of a written irrevocable notice
to the relevant Westbrook Member indicating the exercise by such Tagging Member
of its rights and specifying the Units it desires to sell. If the proposed
transferee fails to purchase the interest of any Tagging Member after it has
properly exercised its Tag-Along Rights, then such Westbrook Member shall not be
permitted to make the proposed Transfer, and any such attempted Transfer shall
be void and of no effect. If any Tagging Member exercises its Tag-Along Rights,
the closing of the purchase of its Units with respect to which such Tag-Along
Rights have been exercised shall take place concurrently with the closing of the
sale of the Westbrook Member's Units.
(b) With respect to any proposed Transfer by the Westbrook Members of
all their Units, each Westbrook Member shall have the right to require each
Member other than the Westbrook Members (collectively, the "Other Members") to
-------------
sell to the proposed transferee all the Units of such Other Member, and all of
any Class D Units assigned to any Other Employee, in each case for the
consideration described in the following sentence and upon the same terms and
conditions as given to the Westbrook Members, provided that no Other Member or
--------
Other Employee shall make any representations and warranties other than with
respect to ownership and title, but each Other Member shall be liable, severally
but not jointly, for a pro rata portion (determined by reference to the relative
gross proceeds received by each transferring Member in such transaction) of any
indemnities which the Westbrook Members agree to make in connection with the
proposed Transfer of its Units (and the parent of the Alter Member may be
required to guarantee such indemnification obligations of the Alter Member),
provided further that in no event shall the indemnification obligations of the
- -------- -------
Alter Member to any proposed transferee exceed the consideration (whether cash
or non-cash) paid to such Alter Member for its Units, and provided further that
-------- -------
any such indemnification obligation of the Alter Member may be satisfied by use
of any non-cash consideration that the Alter Member received as such
consideration. The gross proceeds to be paid to Members as consideration for
the Transfers of all the Units shall be distributed among the Members in
accordance with the provisions of Section 6.4, in the same manner as if such
proceeds were distributed as Available Cash hereunder. The rights of the
Westbrook Members to require a sale of all the Units of each Other Member
pursuant to this
<PAGE>
50
Section 9.2(b) are referred to herein as the "Drag-Along Rights". The Westbrook
-----------------
Members shall give notice to each Other Member and each Other Employee of each
proposed Transfer by the Westbrook Members giving rise to the Drag-Along Rights
at least 20 days prior to the proposed consummation of such Transfer, setting
forth the name and address of the proposed transferee, the proposed amount of
consideration therefor and terms and conditions agreed to by the proposed
transferee. Each Other Member and each Other Employee shall consent to and raise
no objections to the proposed transaction and will take all other actions
necessary or desirable to cause the consummation of such sale on the terms
proposed by the Westbrook Members. If the Westbrook Members exercises their
Drag-Along Rights, the closing of the purchase of the Units with respect to
which such rights have been exercised shall take place concurrently with the
closing of the sale of the Westbrook Members' Units. Notwithstanding the
foregoing, no Westbrook Member shall have the right to exercise any Drag-Along
Rights with respect to any Transfer by the Westbrook Members prior to the
eighteen-month anniversary of the Closing Date unless the Alter Member
(collectively with any transferees or assignees of the Bonus pursuant to Section
10.14 and any transferees or assignees of any Units initially issued to the
Alter Member) will receive as consideration in connection with the Transfer of
the Alter Member's Units as a result of the exercise by the Westbrook Members of
such Drag-Along Rights, together with all prior distributions of Available Cash,
an amount equal to the sum of (i) the Initial Capital Contribution of the Alter
Member plus (ii) any accrued but unpaid Bonus plus (iii) $12.5 million.
(c) In the event any Other Member fails to deliver the assignments
reasonably requested by the Westbrook Member as set forth in this Section 9.2,
the Company may deliver the applicable purchase price pursuant to the provisions
of this Section 9.2 to such Other Member and upon such delivery execute and
deliver, as the attorney in fact for such Other Member, such required
assignments. Such power of attorney is coupled with an interest and shall
survive the insolvency, bankruptcy and dissolution of the Company. Each of the
Company, and any Member shall each pay its own legal fees in connection with the
exercise of any of its rights under this Section 9.2.
SECTION 9.3 Required Sale or Purchase of Alter Member or Biederman
------------------------------------------------------
Member Units. (a) In the event that Alter's employment with the Company is
- ------------
terminated by the Company without Alter Cause, terminated by Alter with Alter
Good Reason, or terminated by reason of Alter's death or Disability (as defined
in the Alter Employment Agreement), or in the event the Company does not offer
to enter into a New Alter Employment Agreement with Alter not less than fifteen
(15) Business Days prior to the expiration of the term of the Alter Employment
Agreement, the Alter Member shall have the right to sell to the Company, and the
Company shall be required to purchase, all of the Alter Member's Units (the
"Alter Put") at a cash price equal to the Fair Market Value of such Units as of
---------
the date of such event (the "Alter Price"), calculated by assuming the Company
-----------
were liquidated as of the date of such event and assuming all the Company Assets
were sold as of such date for their Fair Market Value and taking into account
any forfeiture of the Class D Units pursuant to Section 6.4(f), if any. The
Alter Put may be exercised by the Alter Member at any time within ninety (90)
days after, as applicable, any such termination of his employment with the
Company or the failure of the Company to offer to enter into a New Alter
Employment Agreement within such time period by delivery of written notice to
the Company. If the Alter Member does not deliver an exercise
<PAGE>
51
notice with respect to the Alter Put within such 90-day period, the right of the
Alter Member to cause the Company to purchase its Units shall terminate and the
Company shall have no further obligation with respect to the Alter Put.
(b) In the event that Alter's employment with the Company is
terminated for any reason, each Westbrook Member shall have the right to cause
the Company to purchase, and upon exercise of such right, the Alter Member shall
be required to sell, all the Alter Member's Units (the "Alter Call") at a cash
----------
price equal to the Alter Price. The Alter Call may be exercised by the Company
at any time within ninety (90) days after the termination of Alter's employment
with the Company by delivery of written notice to the Alter Member. If the
Company does not deliver an exercise notice with respect to the Alter Call
within such 90-day period, the right of the Company to purchase the Alter
Member's Units shall terminate and the Alter Member shall have no further
obligation with respect to the Alter Call.
(c) In the event that Biederman's employment with the Company is
terminated by the Company without Employee Cause, terminated by Biederman with
Employee Good Reason, or terminated by reason of Biederman's death or
"disability" (as such term is defined in the Employment Agreement between
Biederman and the Company), the Biederman Member shall have the right to sell to
the Company, and the Company shall be required to purchase, all of the Biederman
Member's Units (the "Biederman Put") at a cash price equal to the Fair Market
-------------
Value of such Units as of the date of such event (the "Biederman Price"),
---------------
calculated by assuming the Company were liquidated as of the date of such event
and assuming all the Company Assets were sold as of such date for their Fair
Market Value and taking into account any forfeiture of the Class D Units
pursuant to the provisions of Section 6.4(f)(iii)). The Biederman Put may be
exercised by the Biederman Member at any time within ninety (90) days after any
such termination of his employment with the Company within such time period by
delivery of written notice to the Company. If the Biederman Member does not
deliver an exercise notice with respect to the Biederman Put within such 90-day
period, the right of the Biederman Member to cause the Company to purchase its
Units shall terminate and the Company shall have no further obligation with
respect to the Biederman Put.
(d) In the event that Biederman's employment with the Company is
terminated for any reason, each Westbrook Member shall have the right to cause
the Company to purchase, and upon exercise of such right the Biederman Member
shall be required to sell, all the Biederman Member's Units (the "Biederman
---------
Call") at a cash price equal to the Biederman Price. The Biederman Call may be
- ----
exercised by the Company at any time within ninety (90) days after the
termination of Biederman's employment with the Company by delivery of written
notice to the Biederman Member. If the Company does not deliver an exercise
notice with respect to the Biederman Call within such 90-day period, the right
of the Company to purchase the Biederman Member's Units shall terminate and the
Biederman Member shall have no further obligation with respect to the Biederman
Call.
(e) Unless otherwise agreed upon by the Company and the Alter Member
or the Biederman Member, as the case may be, the closing of the purchase of the
Alter Member's Units under Section 9.3(a) or 9.3(b) or the Biederman Member's
Units under Section 9.3(c) or
<PAGE>
52
9.3(d), shall occur at the offices of the Company on the date which is 30 days
after final determination of the Alter Price or Biederman Price, as applicable
(or, if such date is not a Business Day, on the next succeeding Business Day).
At the closing, the selling Member shall deliver to the Company such assignments
and other documents as reasonably requested by the Company, and the Company
shall deliver to the selling Member the Alter Price or Biederman Price, as
applicable. The selling Member shall not be required to make any representations
or warranties except with respect to the title of the selling Member to the
Units being transferred and the absence of liens on such Units and shall not be
required to make any indemnifications or otherwise incur any obligations with
respect to such representations and warranties. Each of the Alter Member, the
Biederman Member and the Company shall be entitled to enforce its rights under
this Section 9.3 by specific performance. In addition, in the event the selling
Member fails to deliver the assignments reasonably requested by the Company as
set forth herein, the Company may deliver the Alter Price or Biederman Price, as
applicable, to the selling Member and upon such delivery, execute and deliver,
as the attorney in fact for the selling Member, such required assignments. Such
power of attorney is coupled with an interest and shall survive the insolvency,
bankruptcy and dissolution of the Company. The Company, the Biederman Member and
the Alter Member shall each pay its own legal fees in connection with the
exercise of its rights under this Section 9.3. In the event the Alter Member or
Biederman Member exercises the Alter Put or Biederman Put or the Company
exercises the Alter Call or Biederman Call, the Company shall cause the selling
Member to be removed as guarantor from any debt obligations of the Company no
later than 30 days after the date of the closing of the purchase and sale
pursuant to this Section 9.3(e). The Company shall have the right to assign its
rights (but not its obligations) under this Section 9.3 to any other Person.
SECTION 9.4 Required Sale or Purchase of Employee Member Units. (a)
--------------------------------------------------
In the event that the employment of any Employee Member (or the parent of any
Employee Member) with the Company is terminated for any reason, the Alter Member
shall have the right, in addition to its right to assign the Units of such
Employee Member pursuant to Section 3.5(b), to purchase, and, if such right is
exercised by the Alter Member, the Employee Member shall be required to sell,
all the Units of such Employee (after giving effect to any forfeiture of Units
pursuant to the terms of the Employment Agreement of such Employee Member) (the
"Employee Call") at a cash price equal to the fair market value of such Units as
-------------
of the date of such event (the "Employee Price"), calculated by assuming the
--------------
Company were liquidated as of the date of such event and assuming all the
Company Assets were sold as of such date for their Fair Market Value, and after
giving effect to any forfeiture of Units pursuant to the terms of the Employment
Agreement of such Employee Member. The Employee Call may be exercised by the
Alter Member at any time within ninety (90) days after the termination of
employment of the Employee Member (or its parent) with the Company by delivery
of written notice to the Employee Member. If the Alter Member does not deliver
an exercise notice with respect to the Employee Call within such 90-day period,
then each Westbrook Member shall have the right to Exercise the Employee Call by
causing the Company to purchase, and, if such right is exercised by the
Westbrook Member, the Employee Member shall be required to sell, all its Units
at the Employee Price. The Employee Call may be exercised by the Company at any
time commencing ninety (90) days after the termination of employment of the
Employee Member (or its parent) with the Company until 180 days after such
termination by delivery of written notice to the
<PAGE>
53
Employee Member. If the Company does not deliver an exercise notice with respect
to the Employee Call within such period, the right of the Company to purchase
the Employee Member's Units shall terminate and the Employee Member shall have
no further obligation with respect to the Employee Call.
(b) Unless otherwise agreed upon by the Alter Member or Company, as
the case may be, and the Employee Member, the closing of the purchase of the
Employee Member's Units under Section 9.4(a), shall occur at the offices of the
Company on the date which is 30 days after final determination of the Employee
Price (or, if such date is not a Business Day, on the next succeeding Business
Day). At the closing, the Employee Member shall deliver to the Alter Member or
the Company, as the case may be, such assignments and other documents as
reasonably requested by the Alter Member or the Company, as the case may be, and
the Alter Member or the Company, as the case may be, shall deliver to the
Employee Member the Employee Price. Each of the Alter Member, Employee Member
and the Company shall be entitled to enforce its rights under this Section 9.4
by specific performance. In addition, in the event the Employee Member fails to
deliver the assignments reasonably requested by the Alter Member or the Company,
as the case may be, as set forth herein, the Alter Member or the Company, as the
case may be, may deliver the Employee Price to the Employee Member and upon such
delivery, execute and deliver, as the attorney in fact for the Employee Member,
such required assignments. Such power of attorney is coupled with an interest
and shall survive the insolvency, bankruptcy and dissolution of the Company.
The Alter Member, the Company and the Employee Member shall each pay its own
legal fees in connection with the exercise of its rights under this Section 9.4.
The Company shall have the right to assign its rights (but not its obligations)
under this Section 9.4 to any other Person.
SECTION 9.5 Sale of Company. (a) At any time after the ten-year
---------------
anniversary of the Closing Date, subject to Section 9.5(b), either the Alter
Member or any Westbrook Member may, in its sole discretion request the Executive
Committee in writing (a "Sale Proposal") to cause the sale of all of the Company
-------------
Assets or all of the Units of the Members (a "Company Sale"). In the event of a
------------
request for Company Sale, the Executive Committee shall have the obligation to
identify prospective purchasers of such Company Assets or Units, determine the
terms on which such prospective purchasers would engage in a Company Sale and
negotiate the terms of such Company Sale. The Executive Committee shall have an
obligation to conduct the Company Sale in good faith and use reasonable
commercial efforts to effect the Company Sale as promptly as reasonably
practical. Each Member shall be required to agree to sell such Company Assets
or to sell its Units on the terms and conditions as agreed upon by Executive
Committee, and each Member shall consent to and raise no objections to the
proposed transaction and will take all other actions necessary or desirable to
cause the consummation of such sale on such terms; provided that the provisions
--------
of this Section 9.5(a) shall not apply with respect to any sale to any Westbrook
Transferee or Alter Transferee.
(b) Prior to requesting a Company Sale pursuant to Section 9.5(a) or
taking any action to dissolve the Company pursuant to Section 8.1(a), the Member
proposing such Sale Proposal or dissolution (the "Notifying Member") shall first
----------------
provide the Alter Member, if any Westbrook Member is the Notifying Member, or
each Westbrook Member, if the Alter Member
<PAGE>
54
is the Notifying Member (the "Notified Member") with a written notice notifying
----------------
each Notified Member of the intended dissolution or Sale Proposal (and certain
proposed terms, including a minimum purchase price for all the Units of such
Notifying Member, in the case of a proposed Sale Proposal) (the "Termination
-----------
Notice"). Within thirty (30) days following the delivery of the Termination
- ------
Notice, the Notified Members shall have the opportunity and right (i) to elect
to purchase the assets or Units proposed to be sold on the terms set forth in
the Termination Notice or (ii) in the case of a proposed dissolution, to elect
to purchase all (but not part) of the Notifying Member's Units for Fair Market
Value and in each case the Notifying Member shall have the obligation to sell
such Units to the Notified Members. Each Notified Member shall exercise such
right by delivering written notice of acceptance to the Notifying Member within
such 30-day period. If any Notified Member does not deliver an acceptance notice
within such 30-day period, the right of such Notified Member to purchase such
Units pursuant to the Termination Notice shall terminate and the Notifying
Member shall have the right to cause such dissolution of the Company to take
place in accordance with the provisions of Article VIII hereof or to submit a
Sale Proposal to the Executive Committee. Notwithstanding the foregoing, if such
dissolution has not occurred or an agreement for such Company Sale, the terms of
which include a purchase price for the Notifying Member's Units not less than
the minimum purchase price set forth in the Termination Notice, has not been
entered into within 120 days after delivery of the Termination Notice, the
rights of each Notified Member as described above shall be reinstated and the
Notifying Member will have to deliver another Termination Notice to each
Notified Member with respect to such dissolution or sale before such dissolution
or sale can occur. If any Notified Member exercises its right to purchase
pursuant to this Section 9.5(b), the closing of such purchase by such Notified
Member of the Units with respect to which such rights have been exercised shall
occur at the offices of the Company (i) on the date which is 60 days after the
delivery of the notice of acceptance by such Notified Member in the case of a
dissolution or agreement of the Executive Committee as to the purchase price in
the case of a proposed Sale Proposal (or, if such date is not a Business Day, on
the next succeeding Business Day) or (ii) on the date agreed to by the Executive
Committee and the purchaser in the case of any Company Sale. In addition, in the
event the Notifying Member fails to deliver the transfer documents and
assignments reasonably requested by any Notified Member to effect the purchase
pursuant to this Section 9.5(b), such Notified Member may deliver the
consideration to be paid to the Notifying Member pursuant to this Section 9.5(b)
to the Notifying Member and upon such delivery, execute and deliver, as the
attorney in fact for the Notifying Member, such required assignments. Such power
of attorney is coupled with an interest and shall survive the insolvency,
bankruptcy and dissolution of the Notifying Member.
SECTION 9.6 Required Sale or Purchase of Class A Units. (a) At any
------------------------------------------
time after the fifth anniversary of the Closing Date, each Class A Member shall
have the right to sell to the Company, and the Company shall be required to
purchase, all the Class A Units held by such Class A Member (the "Preferred
---------
Put") at a cash price equal to (i) the amount of the Capital Account of such
Class A Member relating the Class A Units held by such Class A Member plus (ii)
----
an amount necessary to cause such Class A Units to have received a 8.5% Rate of
Return minus (iii) any amounts distributed to such Class A Member pursuant to
-----
Section 6.4(a) or 6.4(c) hereof with respect to such Class A Units prior to the
date of such purchase (the "Preferred Price"). The Preferred Put may be
---------------
exercised by any Class A Member at any time after the fifth
<PAGE>
55
anniversary of the Closing Date by delivery of written notice to the Company;
provided that in the event the purchase by the Company of Class A Units required
- --------
by the exercise of the Preferred Put would result in a default or an event of
default on the part of the Company or any Subsidiary under any loan or other
agreement under which the Company or any of its Subsidiaries has borrowed money,
the Company shall not be obligated to purchase such Class A Units until the
tenth day (or, if such date is not a Business Day, on the next succeeding
Business Day) after the date that exercise of the Preferred Put would no longer
result in such a default or event of default.
(b) At any time after the third anniversary of the Closing Date, the
Company shall have the right to purchase, and upon exercise of such right, each
Class A Member shall be required to sell, all or part of the Class A Units held
by such Class A Member (the "Preferred Call") at a cash price equal to the
--------------
Preferred Price (as of the date of purchase) with respect to the portion of the
Class A Units held by such Class A Member to be purchased. The Preferred Call
may be exercised by the Company with respect to the Class A Units held by such
Class A Member at any time after the third anniversary of the Closing Date by
delivery of written notice to such Class A Member.
(c) Unless otherwise agreed upon by the Company and the selling
Class A Member, the closing of the purchase of any Class A Units held by such
Class A Member under Section 9.6(a) or 9.6(b) shall occur at the offices of the
Company on the date which is 30 days after delivery of the exercise notice with
respect to the Preferred Put or the Preferred Call, as applicable (or, if such
date is not a Business Day, on the next succeeding Business Day). At the
closing, each Class A Member shall deliver to the Company such assignments and
other documents as reasonably requested by the Company, and the Company shall
deliver to each Class A Member the Preferred Price for the purchased Class A
Units held by such Class A Member. No Class A Member shall be required to make
any representations or warranties except with respect to the title of such Class
A Member to the Units being transferred and the absence of liens on such Units.
Each of the Company and each Class A Member shall be entitled to enforce its
rights under this Section 9.6 by specific performance. In addition, in the
event any Class A Member fails to deliver the assignments reasonably requested
by the Company as set forth herein, the Company may deliver the Preferred Price
to such Class A Member and upon such delivery, execute and deliver, as the
attorney in fact for such Class A Member, such required assignments. Such power
of attorney is coupled with an interest and shall survive the insolvency,
bankruptcy and dissolution of the Company. The Company and each Class A Member
shall each pay its own legal fees in connection with the exercise of its rights
under this Section 9.6.
SECTION 9.7 Other Transfer Provisions. (a) Any purported Transfer
-------------------------
by a Member of all or any part of its Units in violation of this Article IX
shall be null and void and of no force or effect.
(b) Except as provided in this Article IX, no Member shall have the
right to resign from the Company prior to its termination and no additional
Member may be admitted to the Company without the prior written consent of the
Managing Member and the Alter Member.
<PAGE>
56
(c) Notwithstanding any provision of this Agreement to the contrary,
a Member may not Transfer all or any part of its Units if such Transfer would
jeopardize the status of the Company as a partnership for federal income tax
purposes, cause a dissolution of the Company under the Act or would violate, or
would cause the Company to violate, any applicable law or regulation (including
any applicable federal or state securities laws) or contract to which the
Company or any of its Subsidiaries is a party.
(d) Concurrently with the admission of any substitute or additional
Member, the Managing Member shall forthwith cause any necessary papers to be
filed and recorded and notice to be given wherever and to the extent required
showing the substitution of a Transferee as a substitute Member in place of the
Member Transferring its Units, or the admission of an additional Member, all at
the expense, including payment of any professional and filing fees incurred, of
such substituted or additional Member. The admission of any Person as a
substitute or additional Member shall be conditioned upon such Person's written
acceptance and adoption of all the terms and provisions of this Agreement.
(e) If any Units are Transferred during any accounting period in
compliance with the provisions of this Article IX, each item of income, gain,
loss, expense, deduction and credit and all other items attributable to such
Units for such period shall be divided and allocated between the transferor and
the transferee by taking into account their varying Interests during such period
in accordance with Section 706(d) of the Code, using any conventions permitted
by law and selected by the Managing Member. All distributions on or before the
date of such Transfer shall be made to the transferor, and all distributions
thereafter shall be made to the transferee. Solely for purposes of making such
allocations and distributions, the Company shall recognize a Transfer on the
date that the Managing Member receives notice of the Transfer which complies
with this Article IX from the Member Transferring its Units.
(f) Without limiting the foregoing and notwithstanding any of other
provision of this Agreement to the contrary, a Member's ability to Transfer all
or any portion of its Units shall be subject to the following additional
restrictions, and any purported transfer or any other action taken in violation
of this Section 9.7(f) shall be void:
(i) no Transfer of all or any portion of such Units shall be
effective unless (A) such Transfer complies with the Transfer restrictions
in all agreements to which the Company or such Member is a party, and (B)
such Units are registered under the Securities Act and any applicable state
securities laws, or an exemption from registration is available, and the
Company shall (if reasonably requested by the non-Transferring Members)
have received an opinion of counsel reasonably acceptable to such non-
Transferring Members to such effect;
(ii) no Member shall be permitted to Transfer any portion of its Units
or take any other action which would cause the Company to be (a) treated as
a "publicly traded partnership" within the meaning of Code Section 7704 or
(b) classified as a corporation (or as an association taxable as a
corporation) within the meaning of Code Section 7701(a);
<PAGE>
57
(iii) unless arrangements concerning withholding are reasonably
acceptable to such non-Transferring Members, if such withholding is
required of the Company, no Member shall be permitted to Transfer all or
any portion of its Units to any Person, unless such Person is a United
States Person as defined in Code Section 7701(a)(30) and is not subject to
withholding of any federal tax; and
(iv) no Member shall be permitted to Transfer all or any portion of
its Units if such Transfer will (A) cause the assets of the Company to be
deemed to be "plan assets" under ERISA or its accompanying regulations or
the Code, (B) result in any "prohibited transaction" under ERISA or its
accompanying regulations affecting the Company or (C) cause the Company or
any Member to incur any UBTI.
(g) The Members acknowledge that the relationship of each Member to
the other Members is a personal relationship and that the restrictions on the
power of each Member to withdraw or Transfer its Units, and the remedies with
respect thereto, that are set forth herein (i) are necessary to preserve such
personal relationship and safeguard the investment of the other Members in the
Company, (ii) were a material inducement to the other Members entering into this
Agreement, and (iii) shall be enforceable notwithstanding the Bankruptcy of any
Member or any applicable prohibition against restraints on alienation.
(h) Each Alter Member agrees not to permit any transfer of any
interests in such Alter Member or any taking of any other action with respect to
the direct or indirect ownership thereof to the extent such transfer or other
action would result in the Alter Member failing to satisfy the definition of
"Alter Transferee" at any time while it is a Member. Each Westbrook Member
agrees not to permit any transfer of any interests in such Westbrook Member or
any taking of any other action with respect to the direct or indirect ownership
thereof to the extent such transfer or other action would result in such
Westbrook Member failing to satisfy the definition of "Westbrook Transferee" at
any time while it is a Member.
ARTICLE X
MISCELLANEOUS
-------------
SECTION 10.1 No Brokers. Except as set forth on Schedule 10.1
---------- -------------
attached hereto, each Member hereby represents to the Company and the other
Members that it has dealt with no real estate agent, broker, salesman or finder
with respect to this Agreement or the transactions contemplated hereby. Each
Member shall indemnify the Company and the other Members and protect, defend and
hold the Company and the other Members harmless from and against all claims,
losses, damages, liabilities, costs, expenses (including reasonable attorneys'
fees and disbursements) and charges resulting from a breach by such Member of
the representation contained in this Section 10.1.
SECTION 10.2 Equitable Relief. The Members hereby confirm that
----------------
damages at law may be an inadequate remedy for a breach or threatened breach of
this Agreement and agree
<PAGE>
58
that, in the event of a breach or threatened breach of any provision hereof, the
respective rights and obligations hereunder shall be enforceable by specific
performance, injunction or other equitable remedy, but, nothing herein contained
is intended to, nor shall it, limit or affect any right or rights at law or by
statute or otherwise of a Member aggrieved as against the other for a breach or
threatened breach of any provision hereof, it being the intention by this
Section 10.2 to make clear the agreement of the Members that the respective
rights and obligations of the Members hereunder shall be enforceable in equity
as well as at law or otherwise and that the mention herein of any particular
remedy shall not preclude a Member from any other remedy it or he might have,
either in law or in equity.
SECTION 10.3 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware. In particular,
the Company is formed pursuant to the Act, and the rights and liabilities of the
Members shall be as provided therein, except as herein otherwise expressly
provided.
SECTION 10.4 Mediation; Submission to Jurisdiction; Waiver of Trial
------------------------------------------------------
By Jury. (a) In the event any dispute or difference of opinion arises under this
- -------
Agreement, the parties hereto shall endeavor to resolve such dispute or
difference of opinion by negotiation or mediation. If, for any reason, such
mediation or negotiation fails to result promptly in an amicable resolution, the
parties agree to be bound by their consent to the jurisdiction pursuant to
Section 10.4(b).
(b) Each Member unconditionally and irrevocably submits to and
accepts the jurisdiction of any state or federal court of competent jurisdiction
located in the State of Delaware for the purposes of any suit, action or other
proceeding arising out of this Agreement or any transaction contemplated hereby,
and each Member unconditionally and irrevocably agrees to be bound by any final
judgment rendered thereby in connection therewith. Each Member further agrees
that service of any process, summons, notice or document by U.S. registered mail
to such party's respective address set forth on Schedule A shall be effective
----------
service of process for any action, suit or proceeding in any state or federal
court located in the State of Delaware with respect to any matters to which it
has submitted to jurisdiction as set forth above in the immediately preceding
sentence. Each Member irrevocably and unconditionally waives trial by jury and
irrevocably and unconditionally waives any objections, including the laying of
venue or based on the grounds of forum non conveniens, which it may have to the
----- --- ----------
bringing of any action, suit or proceeding arising out of this Agreement or the
transactions contemplated hereby in any state or federal courts located in the
State of Delaware, and hereby further irrevocably and unconditionally waives and
agrees not to plead or claim in any such court that any such action, suit or
proceeding brought in any such court has been brought in an inconvenient forum.
Each Member acknowledges that a final, nonappealable judgment against it in any
action, suit or proceeding referred to in this Section shall be conclusive and
may be enforced in any other jurisdiction, by suit on the judgment, a certified
or exemplified copy of which shall be conclusive evidence of the fact and of the
amount of the judgment.
SECTION 10.5 Successors and Assigns. This Agreement shall be binding
----------------------
upon and shall inure to the benefit of the parties hereto, their respective
successors and assigns.
<PAGE>
59
SECTION 10.6 Confidentiality. By executing this Agreement, each
---------------
Member expressly agrees, at all times during the term of the Company and
thereafter and whether or not at the time a Member of the Company, (a) not to
issue any press release or advertisement or take any similar action concerning
the Company's business or affairs without the consent of all of the Members, (b)
not to publicize financial information concerning the Company without the
consent of the Managing Member and (c) not to disclose the Company's affairs
generally, including without limitation the terms of this Agreement, without the
consent of the other Member; provided that each Member shall have the right to
--------
disclose information as necessary to its legal, accounting and financial
advisors who need to know such information for the purpose of advising such
Member and who are informed on the confidential nature of such information and
agree not to disclose such information; and provided further that each Member
-------- -------
shall have the right to disclose such information as required by applicable law,
regulation or legal process.
SECTION 10.7 Notices. Whenever notice is required or permitted by
-------
this Agreement to be given, such notice shall be in writing. Such notice shall
be given to any Member at its address or facsimile number shown in the Company's
books and records (including Schedule A hereto). Each such notice shall be
----------
effective (a) if given by facsimile, upon confirmation of receipt, (b) if given
by air courier, when recorded on the records of the air courier as received by
the receiving party and (c) if given by any other means, when delivered to and
receipted for at the address of such Member specified as aforesaid. The time to
respond to any notice given shall commence to run upon the date of delivery at
the correct address (or the date of attempted delivery if delivery is refused
during normal business hours).
SECTION 10.8 Counterparts. This Agreement may be executed in any
------------
number of counterparts, all of which together shall constitute a single
instrument.
SECTION 10.9 Entire Agreement. This Agreement and the Contribution
----------------
Agreement (including in each case the exhibits and schedules thereto) embody the
entire agreement and understanding of the parties hereto in respect of the
subject matter contained herein. There are no restrictions, promises,
representations, warranties, covenants or undertakings, other than those
expressly set forth or referred to herein or in the Contribution Agreement.
This Agreement supersedes all prior agreements and understandings between the
parties with respect to the subject matter hereof other than the Contribution
Agreement.
SECTION 10.10 Amendments. Subject to the provisions of Section 4.3(a)
----------
hereof, any amendment to this Agreement shall be in writing and shall be
effective upon execution by the Alter Member and each of the Westbrook Members
and delivery to each of the Members. Notwithstanding the foregoing, as long as
the Alter Member has not forfeited all of the right of such Alter Member to its
Class D Units, the Alter Member shall have the right, in its sole discretion, to
amend at any time Schedule B and such amendments shall be in writing and
effective upon execution by the Alter Member and delivery to each of the other
Members.
SECTION 10.11 Section Titles. Section titles are for descriptive
--------------
purposes only and shall not control or alter the meaning of this Agreement as
set forth in the text hereof.
<PAGE>
60
SECTION 10.12 Representations and Warranties. Each Member (including
------------------------------
each Original Member) represents, warrants and covenants to each other Member
and to the Company, as of the date hereof and during the term of this Agreement,
that:
(a) such Member, if not a natural Person, is duly formed and validly
existing under the laws of the jurisdiction of its organization with full power
and authority to conduct its business to the extent contemplated in this
Agreement;
(b) this Agreement has been duly authorized, executed and delivered by
such Member and constitutes the valid and legally binding agreement of such
Member enforceable in accordance with its terms against such Member except as
enforceability hereof may be limited by bankruptcy, insolvency, moratorium and
other similar laws relating to creditors' rights generally and by general
equitable principles;
(c) the execution and delivery of this Agreement by such Member does
not, and the performance of its duties and obligations hereunder will not,
result in a breach of any of the terms, conditions or provisions of, or
constitute a default under, or give rise to a right to terminate, cancel or
accelerate under, or the creation of lien, pledge or other encumbrance pursuant
to, any indenture, mortgage, deed of trust, credit agreement, note or other
evidence of indebtedness, or any material lease or other agreement, or any
material license, permit, franchise or certificate, to which such Member is a
party or by which it is bound or to which its properties are subject, or require
any authorization or approval under or pursuant to any of the foregoing, or
violate any statute, regulation, law, order, writ, injunction, judgment or
decree to which such Member or its property is subject;
(d) such Member is not in default (nor has any event occurred which
with notice, lapse of time, or both, would constitute a default) in the
performance of any material obligation, agreement or condition contained in any
indenture, mortgage, deed of trust, credit agreement, note or other evidence of
indebtedness or any lease or other agreement (including the Original Agreement),
or any license, permit, franchise or certificate, to which it is a party or by
which it is bound or to which the properties of it are subject, nor is it in
violation of any statute, regulation, law, order, writ, injunction, judgment or
decree to which it or its property is subject, which default or violation would
adversely affect such Member's ability to carry out its obligations under this
Agreement;
(e) there is no litigation, investigation or other proceeding pending
or, to the knowledge of such Member, threatened against such Member or any of
its Affiliates or their property which, if adversely determined, would
materially adversely affect such Member's ability to carry out its obligations
under this Agreement;
(f) no consent, approval or authorization of, or filing, registration
or qualification with, any court or governmental authority on the part of such
Member is required for the execution and delivery of this Agreement by such
Member and the performance of its obligations and duties hereunder; and
<PAGE>
61
(g) No amounts are due and owing to the Company from any Original
Member and no tax allocations have been made with respect to any Original
Member, in each case in its capacity as Original Member, and no Original Member
has an Capital Account its capacity as Original Member which has not been
repaid.
SECTION 10.13 Waiver of Partition. Each of the Members hereby
-------------------
irrevocably waive any rights such Member may have under any applicable law to
partition.
SECTION 10.14 Bonus. After each Unit initially issued to a Westbrook
-----
Member has received a cumulative compounded quarterly (to the extent not paid on
a quarterly basis) return of 12% (without any return of Capital Contributions),
the Company shall accrue out of Available Cash (a) an amount equal to $230,000
per calendar quarter (which will be cumulative and compound quarterly at a rate
of 12%) as a bonus to the Alter Member (a designated portion of which shall be
paid to any other senior employees of the Company or its Subsidiaries, if any,
as designated by the Alter Member in its sole discretion as long as Alter is
Chief Executive Officer) and (b) an amount equal to $20,000 per calendar quarter
(which will be cumulative and compound quarterly at a rate of 12%) as a bonus to
the Biederman Member (collectively, the "Bonus"). The Company shall, or shall
-----
cause a Subsidiary to, pay and the Executive Committee shall authorize the
payment to the Alter Member or any other senior employee as may be designated by
the Alter Member (as long as Alter is Chief Executive Officer) and the Biederman
Member of the Bonus within 10 days following the end of any fiscal year of the
Company for which a Bonus has accrued, provided that the Executive Committee
--------
shall have the right to reduce the Bonus to the Alter Member or the Biederman
Member with respect to any then-current fiscal year (but not any then-prior or
then-future fiscal year) to the extent (and only to the extent) that any
Available Cash has been or is to be distributed to the Alter Member or the
Biederman Member, as the case may be, with respect to such then-current fiscal
year (but not any then-prior or then-future fiscal year) (whether or not yet
paid) pursuant to Section 6.4(d).
SECTION 10.15 No Third Party Beneficiaries. Except for the
----------------------------
beneficiaries of the indemnification provided herein, this Agreement does not
create any rights, claims or benefits inuring to any Person that is not a party
hereto nor create or establish any third party beneficiary hereto.
SECTION 10.16 Consent to Merger and Related Transactions. The Members
------------------------------------------
hereby deem it advisable and in the best interest of the Company that the
Company enter into the Merger Agreement, the OP Merger Agreement, the
Contribution Agreement, the Alter Employment Agreement and the commitment letter
with respect to the financing of the Merger and the OP Merger (collectively, the
"Principal Agreements"), a form of each of which has been presented to the
--------------------
Members, and the transactions contemplated thereby, be, and each of them hereby
is, in all respects authorized and approved, and the Managers are, and each of
them hereby is, authorized to execute and deliver on behalf of the Company each
of the Principal Agreements, and any and all ancillary documents, in such form
as the Manager executing any of the Principal Agreements or such ancillary
documents shall approve, such Manager's execution thereof to be conclusive
evidence of such approval.
<PAGE>
62
IN WITNESS WHEREOF, the parties have executed this Amended and
Restated Limited Liability Company Agreement as of the day and year first above
written.
MEMBERS:
WESTBROOK SHP L.L.C.
By: _______________________
Name:
Title:
ALTER SHP L.L.C.
By: _______________________
Name:
Title:
BIEDERMAN SHP L.L.C.
By: _______________________
Name:
Title:
WITHDRAWING MEMBERS:
____________________________
Robert A. Alter
WESTBROOK FUND III ACQUISITIONS, L.L.C.
By: _______________________
Name:
Title:
<PAGE>
SCHEDULE A
Members of the Company
----------------------
<TABLE>
<CAPTION>
===================================================================================================================================
Member Address Class of Units Number of Units
===================================================================================================================================
<S> <C> <C> <C>
Westbrook SHP L.L.C. 599 Lexington Avenue Class B
Suite 3800
New York, New York 10022
Attention: Jonathan Paul
for notices, with a copy to
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Richard Capelouto
Brian M. Stadler
- -----------------------------------------------------------------------------------------------------------------------------------
Westbrook Real Estate Fund III, L.P. Same as Westbrook SHP L.L.C. Class B
- -----------------------------------------------------------------------------------------------------------------------------------
Westbrook Real Estate Co-Investment Same as Westbrook SHP L.L.C. Class B
Partnership III, L.P.
- -----------------------------------------------------------------------------------------------------------------------------------
Alter SHP L.L.C. c/o Sunstone Hotel Investors, Inc. Class B
903 Calle Amanecer
San Clemente, California 92673-6212 Class C 1,111,112
for notices, with a copy to: Class D 900
Battle Fowler LLP
75 East 55/th/ Street
New York, New York 10022
Attention: Steven Lichtenfeld
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================
Member Address Class of Units Number of Units
===============================================================================================
<S> <C> <C> <C>
Biederman SHP LLC c/o Charles L. Biederman Class B
5 Sunset Drive
Englewood, Colorado 80110 Class C 96,618
for notices, with a copy to: Class D 100
Battle Fowler LLP
75 East 55/th/ Street
New York, New York 10022
Attention: Steven Lichtenfeld
- -----------------------------------------------------------------------------------------------
===============================================================================================
</TABLE>
<PAGE>
SCHEDULE B
----------
CLASS C UNITS AND CLASS D UNITS
-------------------------------
<PAGE>
SCHEDULE 3.1
------------
DESIGNATED ALTER MEMBER ALTERNATIVE MANAGERS
--------------------------------------------
Charles Biederman
<PAGE>
SCHEDULE 10.1
-------------
BROKERS
-------
Letter Agreement dated September 25, 1998 among Sunstone Hotel Properties,
Sunstone Hotel Management Company and NationsBanc Montgomery Securities LLC, as
amended
