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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
[X] JOINT ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 1-6828 COMMISSION FILE NUMBER: 1-7959
STARWOOD HOTELS & STARWOOD HOTELS &
RESORTS RESORTS WORLDWIDE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS
CHARTER) CHARTER)
MARYLAND MARYLAND
(STATE OR OTHER JURISDICTION (STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION) OF INCORPORATION OR ORGANIZATION)
52-0901263 52-1193298
(I.R.S. EMPLOYER IDENTIFICATION NO.) (I.R.S. EMPLOYER IDENTIFICATION NO.)
2231 E. CAMELBACK ROAD, SUITE 410 2231 E. CAMELBACK ROAD, SUITE 400
PHOENIX, ARIZONA 85016 PHOENIX, ARIZONA 85016
(ADDRESS OF PRINCIPAL EXECUTIVE (ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES, INCLUDING ZIP CODE) OFFICES, INCLUDING ZIP CODE)
(602) 852-3900 (602) 852-3900
(REGISTRANT'S TELEPHONE NUMBER, (REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE) INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common shares of beneficial interest, par value New York Stock Exchange
$.01 Pacific Exchange
per share, of Starwood Hotels & Resorts ("Trust
Shares")
paired with shares of Common Stock, par value $.01
per share, of Starwood Hotels & Resorts Worldwide,
Inc.
("Corporation Shares")
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of each Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
As of March 27, 1998, the aggregate market value of the Registrants' voting
and non-voting common equity held by non-affiliates(1) was $9,845,566,727.
As of March 27, 1998, the Trust had 184,196,766 outstanding Trust Shares,
and the Corporation had outstanding 184,196,766 Corporation Shares.
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(1) For purposes of this Joint Annual Report only, includes all shares other
than those held by the Registrants' Trustees, Directors and executive
officers.
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TABLE OF CONTENTS
ITEM
NUMBER
IN FORM
10-K PAGE
- ------- ----
PART I
1. Business.................................................... 8
2. Properties.................................................. 32
3. Legal Proceedings........................................... 47
4. Submission of Matters to a Vote of Security Holders......... 48
PART II
5. Market for Registrants' Common Equity and Related
Stockholder Matters......................................... 49
6. Selected Financial Data..................................... 51
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 52
8. Financial Statements and Supplementary Data................. 65
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 65
PART III
10. Trustees, Directors and Executive Officers of the
Registrants................................................. 65
11. Executive Compensation...................................... 72
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 80
13. Certain Relationships and Related Transactions.............. 84
PART IV
14. Exhibits, Financial Statements, Financial Statement
Schedules and Reports on Form 8-K........................... 86
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This Joint Annual Report is filed by Starwood Hotels & Resorts, a Maryland
real estate investment trust (the "Trust"), and Starwood Hotels & Resorts
Worldwide, Inc., a Maryland corporation (the "Corporation"). Unless the context
otherwise requires, (i) all references herein to the Trust include the Trust and
those entities owned or controlled by the Trust, including SLT Realty Limited
Partnership, a Delaware limited partnership (the "Realty Partnership"); (ii) all
references to the Corporation include those entities owned or controlled by the
Corporation, including SLC Operating Limited Partnership, a Delaware limited
partnership (the "Operating Partnership"); and (iii) and all references to
"Starwood Hotels" or the "Company" refer to the Trust, the Corporation and their
respective subsidiaries, collectively. The common shares of beneficial interest,
par value $.01 per share, of the Trust ("Trust Shares") and the shares of common
stock, par value $.01 per share, of the Corporation ("Corporation Shares") are
"paired" and may be held or transferred only in units consisting of one Trust
Share and one Corporation Share (a "Paired Share"). Unless otherwise stated
herein, all information with respect to the Paired Shares has been restated to
give effect to the three-for-two stock split effective January 27, 1997.
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This Joint Annual Report contains statements that constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements appear in a number of places in
this Joint Annual Report, including, without limitation, the sections of Items 1
and 2 captioned "Operating Strategy," "Development Opportunities; Future
Acquisitions; Sales" and "Other Information" Structure and Item 5, Management's
Discussion and Analysis of Financial Condition and Results of Operations. Such
forward-looking statements may include statements regarding the intent, belief
or current expectations of Starwood Hotels, its Trustees or Directors or its
officers with respect to the matters discussed in this Joint Annual Report. All
such forward-looking statements involve risks and uncertainties and that could
cause actual results to differ materially from those in projected in the
forward-looking statements including, without limitation, the risks and
uncertainties set forth below. The Company undertakes no obligation to publicly
update or revise any forward-looking statement to reflect current or future
events or circumstances.
RECENTLY PROPOSED LEGISLATION
On March 26, 1998, the Chairman of the Ways and Means Committee of the
United States House of Representatives and the Chairman of the Finance Committee
of the United States Senate introduced identical bills ("H.R. 3558") that would,
if enacted, limit the ability of the Company to manage or operate real property
that it acquires after March 26, 1998. If enacted, H.R. 3558 would make it
difficult for the Company to acquire and operate hotels after March 26, 1998 in
the same manner as the Company has in the past. As a result, enactment of H.R.
3558 could have a material adverse effect on the results of operations,
financial condition and prospects of the Company. No assurance can be given that
H.R. 3558 will not be enacted in its current form or that other new legislation,
regulations or administrative interpretations with respect to the grandfathering
of the Company will not be adopted. The Company is evaluating its options in the
event that H.R. 3558 (or a similar measure) were to be adopted.
FAILURE TO MANAGE RAPID GROWTH
The full benefits of the Company's acquisition of Westin Hotels & Resorts
Worldwide, Inc. ("Westin Worldwide") and certain of its affiliates
(collectively, "Westin"), of ITT Corporation ("ITT") and of the other hotel
properties acquired during 1997 and thereafter will require the integration of
administrative, finance, sales and marketing organizations; the coordination of
sales efforts; and the implementation of appropriate operations, financial and
management systems and controls in order to realize the efficiencies, revenue
enhancements and cost reductions that are expected from such acquisitions.
Although the Company's management team has experience integrating acquisitions,
none of the prior acquisitions have been of comparable magnitude to, or included
the breadth of operations involved in, the acquisition of Westin or ITT. The
diversion of management attention, as well as any other difficulties which may
be encountered in the transition and integration process, could have an adverse
impact on the revenue and operating results of the Company. There can be no
assurance that the Company will be able to integrate successfully the operations
of the acquired properties with those of the Company or that anticipated
synergies will be realized or, if realized, that such synergies will occur when
anticipated.
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The Company's future success and its ability to manage future growth
depends in large part upon the efforts of its senior management and its ability
to attract and retain key officers and other highly qualified personnel.
Competition for such personnel is intense. Since January 1996, the Company has
experienced significant changes in its senior management, including executive
officers. (See Item 10, Trustees, Directors and Executive Officers of the
Registrants, of this Joint Annual Report.) There can be no assurance that the
Company will continue to be successful in attracting and retaining qualified
personnel. Accordingly, there can be no assurance that the Company's senior
management will be able successfully to execute and implement the Company's
growth and operating strategies.
TAX RISKS
Failure to Qualify as a REIT. The Trust believes that it has operated so
as to qualify as a "real estate investment trust" (a "REIT") under the Internal
Revenue Code of 1986, as amended (the "Code"), commencing with the Trust's
taxable year ended December 31, 1995, and the Trust intends to continue to so
operate. No assurance, however, can be given that the Trust will remain
qualified as a REIT. Qualification as a REIT involves the application of highly
technical and complex Code provisions for which there are only limited judicial
or administrative interpretations. The complexity of these provisions is greater
in the case of a REIT that owns hotels and leases them to a corporation with
which its stock is paired. As a result, the Trust is likely to encounter a
greater number of interpretive issues under the REIT qualification rules, and
more such issues which lack clear guidance, than are other REITs. The
determination of various factual matters and circumstances not entirely within
the Trust's control may affect its ability to qualify as a REIT. In addition, no
assurance can be given that new legislation, new regulations, administrative
interpretations or court decisions will not significantly change the tax laws
with respect to qualification as a REIT or the federal income tax consequences
of such qualification. Furthermore, the qualification of the Trust as a REIT
will depend on the Trust's continuing ability to meet various requirements
concerning, among other things, the ownership of Paired Shares and other equity
securities of the Trust, the nature of the Trust's assets, the sources of its
income and the amounts of its distributions to its shareholders. In connection
with the acquisition of Westin in January 1998 and ITT in February 1998, the
Trust acquired new assets and operations (including the leasing of newly
acquired assets, loans to the Corporation and the ownership of certain
corporations that own hotels or intangible assets). By increasing the complexity
of the Company's operations, these assets and operations may make it more
difficult for the Trust to continue to satisfy the REIT qualification
requirements.
The Trust's ability to qualify as a REIT is also dependent on its continued
exemption from the anti-pairing rules of Section 269B(a)(3) of the Code. Section
269B(a)(3) would ordinarily prevent a company from qualifying as a REIT if its
stock is paired with the stock of another company whose activities are
inconsistent with REIT status, such as the Corporation. The "grandfathering
rules" governing Section 269B(a)(3) generally provide, however, that Section
269B(a)(3) does not apply to a paired REIT if the shares of the REIT and its
paired operating company were paired on or before June 30, 1983 and the REIT was
taxable as a REIT on or before June 30, 1983. There are, however, no judicial or
administrative authorities interpreting the grandfathering rules governing
Section 269B(a)(3).
If in any taxable year the Trust were to fail to qualify as a REIT, the
Trust would not be allowed a deduction for distributions to shareholders in
computing its taxable income and would be subject to federal income tax on its
taxable income at regular corporate rates. Unless entitled to relief under
certain Code provisions, the Trust would also be disqualified from treatment as
a REIT for the four taxable years following the year during which qualification
was lost. The failure of the Trust to qualify as a REIT would reduce its net
earnings available for distribution to shareholders because of the additional
tax liability to the Trust for the year or years involved. In addition,
distributions would no longer be required to be made. To the extent that
distributions to shareholders would have been made in anticipation of the Trust
qualifying as a REIT, the Trust might be required to borrow funds or to
liquidate certain of its investments to pay the applicable tax. The failure to
qualify as a REIT would also constitute a default under certain debt obligations
of the Trust.
Required Distributions to Shareholders. In order to obtain and retain REIT
status, the Trust must distribute to its shareholders at least 95% of its REIT
taxable income (excluding any net capital gain). In
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addition, the Trust will be subject to tax on its undistributed net taxable
income and net capital gain, and a 4% nondeductible excise tax on the amount, if
any, by which certain distributions paid by the Trust with respect to any
calendar year are less than the sum of (i) 85% of the Trust's ordinary income,
(ii) 95% of its capital gain net income for that year and (iii) 100% of its
undistributed income from prior years. The Trust intends to make distributions
to its shareholders to comply with the distribution requirements of the Code and
to avoid federal income taxes and the nondeductible federal excise tax. The
Trust (or the Realty Partnership) could be required to borrow funds on a
short-term basis to meet the REIT distribution requirements, which borrowing may
not otherwise be advisable for the Company.
Distributions by the Trust and Corporation will be determined by the
Trust's Board of Trustees (the "Board of Trustees") or the Corporation's Board
of Directors (the "Board of Directors"), as applicable, and will depend on a
number of factors, including the amount of cash available for distributions, the
Company's financial condition, decisions by either such board to reinvest funds
rather than to distribute such funds, the Company's capital expenditures, the
annual distribution requirements under the REIT provisions of the Code (in the
case of the Trust) and such other factors as either Board deems relevant. For
federal income tax purposes, distributions paid to shareholders may consist of
ordinary income, capital gains (in the case of the Trust), nontaxable return of
capital, or a combination thereof.
DEBT FINANCING
As a result of incurring debt, the Company is subject to the following
risks associated with debt financing: (i) the risk that cash flow from
operations will be insufficient to meet required payments of principal and
interest; (ii) the risk that (to the extent that the Company maintains floating
rate indebtedness) interest rates will fluctuate; and (iii) the agreements
governing the Company's loan and credit facilities contain covenants imposing
certain limitations on the Company's ability to acquire and dispose of assets.
In addition, although the Company anticipates that it will be able to repay or
refinance its existing indebtedness and any other indebtedness when it matures,
there can be no assurance that the Company will be able to do so or that the
terms of such refinancings will be favorable.
In connection with the acquisitions of Westin and ITT, the Company incurred
a substantial amount of additional debt, thereby increasing its exposure to the
risks associated with debt financing. The Company's increased leverage may have
important consequences, including the following: (i) the ability of the Company
to obtain additional financing for acquisitions, working capital, capital
expenditures or other purposes, if necessary, may be impaired or such financing
may not be available on terms favorable to the Company; (ii) a substantial
decrease in operating cash flow or an increase in expenses of the Company could
make it difficult for the Company to meet its debt service requirements and
force it to modify its operations; (iii) the Company's higher level of debt and
resulting interest expense may place it at a competitive disadvantage with
respect to certain competitors with lower amounts of indebtedness and/or higher
credit ratings; and (iv) the Company's greater leverage may make it more
vulnerable to a downturn in its business or in the economy generally.
LIMITS ON CHANGE OF CONTROL AND OWNERSHIP LIMITATION
Ownership Limitation. In order for the Trust to maintain its qualification
as a REIT, not more than 50% in value of its outstanding shares may be owned,
directly or indirectly, by five or fewer individuals (which term is defined in
the Code to include certain entities) at any time during the last half of the
Trust's taxable year. Furthermore, actual or constructive ownership of a
sufficient number of the Paired Shares could cause the Operating Partnership or
the Corporation to become a "related party tenant" of the Trust, which would
result in the loss of the Trust's REIT status. In order to help preserve the
Trust's REIT status, the Declaration of Trust and the Articles of Incorporation
prohibit actual or constructive ownership by any one person or group of related
persons of more than 8.0% of the shares of the Trust or the Corporation, whether
measured by vote, value or number of shares (the "Ownership Limit"). Generally,
the Paired Shares owned by related or affiliated persons will be aggregated and
certain options and warrants will be treated as exercised for purposes of the
Ownership Limit.
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The constructive ownership rules of the Code are extensive and complex and
may cause Paired Shares owned, directly or indirectly, by certain direct or
indirect partners in any partnership, including the direct and indirect owners
of interests in the Realty Partnership and the Operating Partnership, and other
classes of related individuals and/or entities, to be deemed to be
constructively owned by one individual or entity. As a result, the acquisition
of less than 8.0% of the Paired Shares (or the acquisition of an interest in an
entity which owns Paired Shares) by an individual or entity could cause that
individual or entity (or another individual or entity) to own constructively in
excess of 8.0% of the Paired Shares, and thus subject such Paired Shares to the
Ownership Limit. Direct or constructive ownership in excess of the Ownership
Limit would cause the violative transfer or ownership to be void, or cause such
shares to be converted into "Excess Shares," which have limited economic rights,
to the extent necessary to ensure that the purported transfer or other event
does not result in a violation of the Ownership Limit. Notwithstanding the
Ownership Limit, given the breadth of the Code's constructive ownership rules
and that it is not possible for the Trust and the Corporation continuously to
monitor direct and constructive ownership of Paired Shares, it is possible that
an individual or entity could at some time constructively own sufficient Paired
Shares to cause termination of the Trust's REIT status.
Limits on Change of Control. Certain provisions of the Trust's declaration
of trust, as amended (the "Declaration of Trust"), and the Corporation's
articles of incorporation, as amended (the "Articles of Incorporation"),
including, without limitation, those providing for the ability to issue
preferred shares and the maintenance of staggered terms for Trustees and
Directors, may have the effect of discouraging a third party from making an
acquisition proposal for the Trust and the Corporation and may thereby delay,
defer or prevent a change in control under circumstances that could otherwise
give the holders of Paired Shares or other equity securities of the Company the
opportunity to realize a premium over then-prevailing market prices.
INFLUENCE BY STARWOOD CAPITAL
Individuals employed by or otherwise affiliated with Starwood Capital
Group, L.L.C. ("Starwood Capital") hold two positions on the Board of Trustees
and two positions on the Board of Directors. Although the Company has a policy
requiring a majority of its Trustees and Directors to be "independent," Starwood
Capital may have the ability to exercise certain influence over the affairs of
the Company. Barry S. Sternlicht is the President and Chief Executive Officer
of, and controls, Starwood Capital. Mr. Sternlicht also is a Trustee of the
Trust and the Chairman and Chief Executive Officer of the Trust. In addition,
Mr. Sternlicht is Chairman of the Board of Directors of the Corporation. As a
consequence, Mr. Sternlicht has the ability to exercise certain influence over
the affairs of the Company. Starwood Capital and certain of its affiliates own
limited partnership interests in the Realty Partnership and the Operating
Partnership ("Units") that are exchangeable for Paired Shares. As a result, and
due to its different tax situation, prior to the exchange of its Units into
Paired Shares, Starwood Capital's objectives regarding the pricing, structure
and timing of any sale of certain properties or the restructuring or sale of
certain mortgage loans may differ from the objectives of the shareholders of the
Company or current management of the Company.
RISKS RELATING TO HOTEL OPERATIONS
Operating Risks. The properties of the Company are subject to all
operating risks common to the hotel industry. These risks include changes in
general economic conditions (as described below); decreases in the level of
demand for rooms and related services; cyclical over-building in the hotel
industry; restrictive changes in zoning and similar land use laws and
regulations or in health, safety and environmental laws, rules and regulations;
the inability to obtain property and liability insurance fully to protect
against all losses or to obtain such insurance at reasonable rates; and changes
in travel patterns. In addition, the hotel industry is highly competitive. The
properties of the Company compete with other hotel properties in their
geographic markets, and some of the Company's competitors may have substantially
greater marketing and financial resources than the Company.
Acquisition Risks. The Company competes for acquisition opportunities with
other owners of hotel properties, some of which may have substantially greater
financial resources than the Company. These
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competitors may generally be able to accept more risk than the Company can
prudently manage. Competition may generally reduce the number of suitable
investment opportunities offered to the Company and increase the bargaining
power of property owners seeking to sell. Further, management believes that the
Company will face competition for acquisition opportunities from entities
organized for purposes substantially similar to the objectives of the Company.
Seasonality of Hotel Business. The hotel industry is seasonal in nature.
This seasonality may cause quarterly fluctuations in the operating results of
the Company and the market prices of the Paired Shares.
Capital Intensive Business. The Company's properties are capital intensive
and, in order to remain attractive and competitive, must be well maintained as
well as periodically modernized and refurbished. This creates an on-going need
for capital and, to the extent such capital expenditures may not be funded from
cash generated by the Company, financial results may be sensitive to the cost
and availability of funds.
REAL ESTATE INVESTMENT RISKS
General Risks. Real property investments are subject to varying degrees of
risk. The investment returns available from equity investments in real estate
depend in large part on the amount of income earned and capital appreciation
generated by the related properties as well as the expenses incurred.
In addition, income from properties and real estate values are also
affected by a variety of other factors, such as governmental regulations and
applicable laws (including real estate, zoning, tax and eminent domain laws),
interest rate levels and the availability of financing. For example, existing or
new real estate, zoning or tax laws can make it more expensive and/or time
consuming to develop real property or expand, modify or renovate hotels.
Governments can, under eminent domain laws, take real property, sometimes
for less compensation than the owner believes the property is worth. When
prevailing interest rates increase, the expense of acquiring, developing,
expanding or renovating real property increases, and values decrease as it
becomes more difficult to sell property because the number of potential buyers
decreases. Similarly, as financing becomes less available, it becomes more
difficult both to acquire real property and, because of the diminished number of
potential buyers, to sell real property. Any of these factors could have a
material adverse impact on the Company's results of operations or financial
condition, as well as on the Trust's ability to make distributions to its
shareholders.
In addition, equity real estate investments, such as the investments held
by the Company and any additional properties that may be acquired by the
Company, are relatively illiquid. If the properties of the Company do not
generate revenue sufficient to meet operating expenses, including debt service
and capital expenditures, the income of the Company and the Trust's ability to
make distributions to shareholders will be adversely affected.
Hotel Development. The Company intends to develop hotel properties as
suitable opportunities arise and is currently developing several upscale hotels.
New project development is subject to a number of risks, including risks of
construction delays or cost overruns that may increase project costs; receipt of
zoning, occupancy and other required governmental permits and authorization; and
the incurring of development costs that are not pursued to completion. There can
be no assurance that any development project will be completed in a timely
manner or within budget.
Possible Liability Relating to Environmental Matters. Under various
federal, state, local and foreign environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may become
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability without regard
to whether the owner or operator knew of, or was responsible for, the presence
of such hazardous or toxic substances. The presence of hazardous or toxic
substances, or the failure properly to remediate such substances when present,
may adversely affect the owner's ability to sell or rent such real property or
to borrow using such real property as collateral. Persons who arrange for the
disposal or treatment of hazardous or toxic wastes may be liable for the costs
of removal or remediation of such wastes at the disposal or treatment facility,
regardless of whether such facility is owned or
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operated by such person. Other federal, state, local and foreign laws,
ordinances and regulations require abatement or removal of certain
asbestos-containing materials in the event of demolition or certain renovations
or remodeling and govern emissions of and exposure to asbestos fibers in the
air. The operation and subsequent removal of certain underground storage tanks
also are regulated by federal, state, local and foreign laws.
RISKS RELATING TO GAMING OPERATIONS
Regulation of Gaming Operations. The Company owns and operates a number of
casino gaming facilities, including Caesars Palace and The Desert Inn Resort &
Casino in Las Vegas, Nevada; Caesars Atlantic City in Atlantic City, New Jersey;
and Caesars Tahoe in Stateline, Nevada. Other gaming facilities are located in
Nevada, New Jersey, Delaware, Indiana and Mississippi; in four foreign
countries; and on cruise ships operating in international waters. Each of these
gaming operations is subject to extensive licensing, permitting and regulatory
requirements administered by various governmental entities. Typically, gaming
regulatory authorities have broad powers with respect to the licensing of gaming
operations, and may revoke, suspend, condition or limit the gaming approvals and
licenses of the Company and its gaming subsidiaries, impose substantial fines
and take other actions, any of which could have a material adverse effect on the
business and the value of the Company's hotel/casinos. Directors, officers and
certain key employees of the Company and its gaming subsidiaries are subject to
licensing or suitability determinations by various gaming authorities. If any of
such gaming authorities were to find a person occupying any such position
unsuitable, the Company would be required to sever its relationship with that
person.
Increased Gaming Competition. The Company faces significant domestic and
international competition from both established casinos and newly emerging
gaming operations. Proposals have been made for a significant number of casinos,
both land-based and those involving vessels on navigable waters, in a number of
jurisdictions and large metropolitan areas. Legalization of gaming in additional
jurisdictions may also provide opportunities for expansion by the Company's
competitors that could adversely affect the Company's existing gaming
operations. The Company believes that the adoption of legalized gaming in any
jurisdiction near Nevada (particularly California or other states in the
southwestern United States) or near New Jersey (particularly New York or
Pennsylvania) or the advent of gaming on nearby Native American lands could have
a material adverse effect on the Company's operations in Las Vegas and Atlantic
City.
Risks Associated with High-End Gaming. There are risks associated with the
high end gaming business that currently comprises a portion of the Company's
Caesars Palace and Desert Inn operations. High-end gaming is more volatile than
other forms of gaming, and variances attributable to high-end gaming could,
under certain circumstances, have a positive or negative impact on cash flow,
earnings and other financial measures in a particular quarter. In addition, a
substantial portion of the Company's table gaming revenues from its Caesars
Palace and Desert Inn operations is attributable to the play of a relatively
small number of international customers. The loss of, or a reduction in play of,
the most significant of such customers could have an adverse effect on the
Company's future operating results.
FOREIGN OPERATIONS AND CURRENCY FLUCTUATIONS
The Company has significant international operations, including, as of
March 1, 1998, 31 owned properties in Europe, two properties owned in Africa/the
Middle East, 15 properties owned in Latin America and three properties owned in
Asia/Pacific. International operations generally are subject to various
political and other risks that are not present in U.S. operations, including,
among other things, the risk of war or civil unrest, expropriation and
nationalization. In addition, certain international jurisdictions restrict the
repatriation of non-U.S. earnings. Various international jurisdictions also have
laws limiting the right and ability of non-U.S. entities to pay dividends and
remit earnings to affiliated companies unless specified conditions have been
met. In addition, sales in international jurisdictions typically are made in
local currencies, which subjects the Company to risks associated with currency
fluctuations. Currency devaluations and unfavorable changes in international
monetary and tax policies and other changes in the international regulatory
climate and international economic conditions could materially adversely affect
the Company's profitability and financing
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plans. Other than Italy, where the Company is subject to certain risks due to
currency fluctuations, the Company's properties are geographically diversified
and not concentrated in any particular region.
POSSIBLE LIABILITY OF TRUST SHAREHOLDERS
Both the Maryland statute governing real estate investment trusts formed
under the laws of that state (the "Maryland REIT Law") and the Declaration of
Trust provide that no shareholder of the Trust will be personally liable for any
obligation of the Trust solely as a result of such shareholder's status as a
shareholder of the Trust. The Declaration of Trust further provides that the
Trust shall indemnify each shareholder against any claim or liability to which
the shareholder may become subject by reason of being or having been a
shareholder. In addition, it is the Trust's policy to include a clause in its
contracts which provides that shareholders assume no personal liability for
obligations entered into on behalf of the Trust. However, with respect to tort
claims, contractual claims where shareholder liability is not so negated, claims
for taxes and certain statutory liabilities, the shareholders may, in some
jurisdictions, be personally liable to the extent that such claims are not
satisfied by the Trust. Inasmuch as the Trust does and will carry public
liability insurance which it considers adequate, any risk of personal liability
to shareholders is limited to situations in which the Trust's assets plus its
insurance coverage would be insufficient to satisfy the claims against the Trust
and its shareholders.
RISKS RELATING TO GENERAL ECONOMIC CONDITIONS
The Company's hotel and gaming operations may be adversely affected by
moderate or severe economic downturns, including conditions which may be
isolated to one or more geographic regions. As a result, the Company's ability
to achieve or sustain substantial improvements in funds from operations and
other important financial tests may be adversely affected by general economic
conditions.
Further, an economic downturn in the countries from which the Company's
gaming operations draw high-end international customers could cause a reduction
in the frequency of visits and the revenues generated by such customers.
Similarly, the collectibility of receivables from international gaming customers
could be adversely affected by future business or economic trends, or by
significant events, in the countries in which such customers reside.
RISKS RELATING TO ACTS OF GOD AND WAR
The Company's financial and operating performance may be adversely affected
by acts of God, such as natural disasters, in both the locations in which the
Company owns and/or operates significant properties and areas of the world from
which the Company draws a large number of customers. Similarly, wars, political
unrest and other forms of civil strife may cause the Company's results to differ
materially from predicted results.
PART I
ITEM 1. BUSINESS.
Starwood Hotels & Resorts Worldwide, Inc. and Starwood Hotels & Resorts
are, together with their subsidiaries, one of world's leading hotel operating
companies and the largest real estate investment trust in the United States,
respectively. The Corporation conducts its hotel business both directly and
through its subsidiaries ITT Sheraton Corporation ("Sheraton") and Ciga, S.P.A.
("Ciga"), and engages in the gaming business principally through its subsidiary
Caesars World, Inc. ("Caesars"). Through the Sheraton, Westin, The Luxury
Collection, St. Regis, Ciga, Four Points Hotels and Caesars brand names,
Starwood Hotels is represented in most major markets of the world. At December
31, 1997, the Trust owned fee, ground leasehold and mortgage loan interests in
hotel properties located throughout the United States and in Mexico and
Scotland. At December 31, 1997, the Corporation leased properties from the Trust
and operated them directly or through third-party management companies. As of
March 30, 1998, Starwood Hotels owned equity interests in approximately 220
hotel properties, held mortgage interests in eight hotel properties, operated
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approximately 180 hotel properties on behalf of third-party owners and earned
franchise fees by licensing one of its brand names to approximately 240 hotel
properties. Gaming operations generally are marketed under either the Caesars or
Sheraton brand name and service mark and are currently represented in, among
other areas, Las Vegas, Atlantic City and Tunica County, Mississippi, in five
foreign countries and on two cruise ships that operate in international waters.
At December 31, 1997, Starwood Hotels owned fee or ground leasehold
interests in 102 hotel properties and mortgage interests in another eight hotel
properties. Of the 102 hotels in which Starwood Hotels owned an equity interest,
12 hotels were being managed by third-party operators, including four hotels
leased to third parties. In addition, the Corporation managed nine hotels for
third-party owners. In furtherance of the Company's strategy to enhance, expand
and diversify its hotel portfolio and to develop or acquire global brands, on
January 2, 1998, the Company acquired Westin and on February 23, 1998, the
Company acquired ITT.
ITT
Prior to its acquisition by the Company, ITT was one of the world's largest
hotel and gaming companies. ITT conducts its hotel and gaming business through
its subsidiaries Sheraton, Ciga and Caesars. Through the Sheraton, The Luxury
Collection, Ciga, Four Points Hotels and Caesars brand names, ITT is represented
in most major markets of the world. In 1997, ITT hosted over 4.5 million
customer nights at ITT's properties in 63 countries. Gaming operations are
marketed under either the Caesars or Sheraton brand name and service mark, and
are currently represented in Las Vegas (Nevada), Atlantic City (New Jersey),
Halifax and Sydney (Nova Scotia), Lake Tahoe (Nevada), Tunica County
(Mississippi), Lima (Peru), Cairo (Egypt), Windsor (Ontario) and Townsville
(Australia).
BUSINESS SEGMENTS
Business segment information for ITT is as follows:
REVENUES NET INCOME
-------------------------- -----------------------
1997 1996 1995 1997 1996 1995
------ ------ ------ ----- ----- -----
(IN MILLIONS)
Hotels................................ $4,687 $4,433 $4,164 $ 400 $ 371 $ 197
Gaming................................ 1,123 1,159 1,045 151 219 191
------ ------ ------ ----- ----- -----
Ongoing Segments.................... 5,810 5,592 5,209 551 590 388
Dispositions.......................... 89 126 187 (47) (8) 11
------ ------ ------ ----- ----- -----
Total Segments...................... 5,899 5,718 5,396 504 582 399
Other................................. (739) (83) (5)
----- ----- -----
(235) 499 394
Interest expense, net................. (94) (96) (152)
Miscellaneous income (expense), net... 227 3 5
Income tax expense.................... (159) (173) (87)
Minority equity....................... (9) (7) 1
----- ----- -----
Income (loss) from continuing
operations.......................... (270) 226 161
Discontinued operations (after tax)... 25 23 (14)
Extraordinary item.................... (42) -- --
Cumulative effect of accounting
change.............................. (11) -- --
------ ------ ------ ----- ----- -----
$5,899 $5,718 $5,396 $(298) $ 249 $ 147
====== ====== ====== ===== ===== =====
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HOTEL OPERATIONS
ITT's revenues from hotel operations are derived worldwide from Sheraton's
owned, leased and managed hotels and ITT's 70.3% ownership interest in Ciga, a
group of luxury hotels in Europe. ITT also earns franchise fees by licensing the
"Sheraton" and "Four Points Hotels" brands to owners of independent hotels.
Revenues in the hotel business (excluding franchised hotels) are essentially a
function of number of rooms, average daily rate charged for rooms and number of
rooms occupied.
ITT's gaming operations in hotels in the Sheraton network and the gaming
operations of Caesars are discussed below under "Gaming Operations." The tables
contained in this "Hotel Operations" section of Item 1 of this Joint Annual
Report do not include information relating to hotel/casinos owned by Sheraton or
Caesars.
The following table illustrates the sources of revenues of ITT's hotel
operations for the years ended December 31, 1997 and December 31, 1996,
respectively.
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
Owned and Leased Hotels..................................... 33% 33%
Managed and Joint Venture Hotels(1)......................... 64% 64%
Franchised Hotels(2)........................................ 1% 1%
Other(3).................................................... 2% 2%
---- ----
100% 100%
==== ====
- ---------------
(1) Includes 100% of the revenues of managed and joint venture hotels.
(2) Includes franchise fees paid to Sheraton, not revenues of franchised hotels.
(3) Other revenues primarily include revenues from reservation services and
Sheraton Club International operations.
Sheraton's hotel operations are conducted worldwide. As of December 31,
1997, Sheraton owned or leased 17 properties in North America. Generally,
outside of North America, Sheraton manages hotels and, to a limited extent,
invests equity in hotels. As of December 31, 1997, Sheraton had an equity
interest of 50% or less in eight properties in Europe, five properties in the
Asia/Pacific region, one property in Latin America and one property in the
Africa/Middle East region.
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Owned and Leased Hotels
The following table illustrates, for owned and leased properties classified
by geographic region and hotel type, the average number of years since purchase
or major renovation, total revenue (in millions), average daily occupancy rate,
average daily rate and revenue per available room ("REVPAR") for the years ended
December 31, 1997 and 1996 and the number of rooms and the number of properties
at December 31, 1997 and 1996. The amounts shown in the table reflect the U.S.
dollar equivalent of all local currencies; in some cases, currency fluctuations
may have an adverse effect on the comparison of any region or individual
property for the periods presented.
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
NORTH AMERICA -- LUXURY
Average number of years since purchase or major
renovation................................................ 9 8
Total revenues.............................................. $216.3 $ 193.3
Average daily occupancy rate(1)............................. 78% 75%
Average daily rate(2)....................................... $ 335 $ 309
REVPAR(3)................................................... $ 258 $ 231
Number of rooms............................................. 1,152 1,145
Number of properties........................................ 3 3
NORTH AMERICA -- UPSCALE:
Average number of years since purchase or major
renovation................................................ 6 4
Total revenues.............................................. $521.5 $ 520.7
Average daily occupancy rate(1)............................. 75% 72%
Average daily rate(2)....................................... $ 155 $ 137
REVPAR(3)................................................... $ 115 $ 99
Number of rooms............................................. 7,668 9,797
Number of properties........................................ 14 18
NORTH AMERICA -- TOTAL:
Average number of years since purchase or major
renovation................................................ 8 5
Total revenues.............................................. $737.8 $ 714.0
Average daily occupancy rate(1)............................. 75% 72%
Average daily rate(2)....................................... $ 177 $ 155
REVPAR(3)................................................... $ 131 $ 112
Number of rooms............................................. 8,820 10,942
Number of properties........................................ 17 21
EUROPE/CIGA -- LUXURY:
Average number of years since purchase or major
renovation................................................ 3 2
Total revenues.............................................. $253.6 $ 263.3
Average daily occupancy rate(1)............................. 72% 66%
Average daily rate(2)....................................... $ 228 $ 225
REVPAR(3)................................................... $ 161 $ 149
Number of rooms............................................. 3,350 3,188
Number of properties........................................ 18 17
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YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
EUROPE/CIGA -- UPSCALE:
Average number of years since purchase or major
renovation................................................ 5 4
Total revenues.............................................. $248.0 $ 218.5
Average daily occupancy rate(1)............................. 74% 72%
Average daily rate(2)....................................... $ 125 $ 129
REVPAR(3)................................................... $ 92 $ 93
Number of rooms............................................. 3,829 3,537
Number of properties........................................ 15 15
EUROPE/CIGA -- TOTAL
Average number of years since purchase or major
renovation................................................ 4 3
Total revenues.............................................. $501.6 $ 481.8
Average daily occupancy rate(1)............................. 73% 69%
Average daily rate(2)....................................... $ 168 $ 171
REVPAR(3)................................................... $ 122 $ 119
Number of rooms............................................. 7,179 7,622
Number of properties........................................ 33 32
AFRICA/MIDDLE EAST -- UPSCALE AND TOTAL:
Average number of years since purchase or major
renovation................................................ N/A(4) 16
Total revenues.............................................. $ 2.5
Average daily occupancy rate(1)............................. 67%
Average daily rate(2)....................................... $ 11
REVPAR(3)................................................... $ 7
Number of rooms............................................. 164
Number of properties........................................ 2
LATIN AMERICA -- LUXURY:
Average number of years since purchase or major
renovation................................................ 4 6
Total revenues.............................................. $ 36.3 $ 25.9
Average daily occupancy rate(1)............................. 65% 63%
Average daily rate(2)....................................... $ 258 $ 238
REVPAR(3)................................................... $ 162 $ 150
Number of rooms............................................. 470 425
Number of properties........................................ 3 2
LATIN AMERICA -- UPSCALE:
Average number of years since purchase or major
renovation................................................ 12 14
Total revenues.............................................. $191.5 $ 172.3
Average daily occupancy rate(1)............................. 74% 69%
Average daily rate(2)....................................... $ 105 $ 98
REVPAR(3)................................................... $ 77 $ 67
Number of rooms............................................. 4,256 4,008
Number of properties........................................ 9 8
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YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
LATIN AMERICA -- TOTAL
Average number of years since purchase or major
renovation................................................ 10 13
Total revenues.............................................. $227.8 $ 198.2
Average daily occupancy rate(1)............................. 73% 68%
Average daily rate(2)....................................... $ 118 $ 106
REVPAR(3)................................................... $ 85 $ 73
Number of rooms............................................. 4,726 4,433
Number of properties........................................ 12 10
ASIA/PACIFIC -- LUXURY:
Average number of years since purchase or major
renovation................................................ 2 1
Total revenues.............................................. $ 50.9 $ 14.5
Average daily occupancy rate(1)............................. 83% 84%
Average daily rate(2)....................................... $ 167 $ 173
REVPAR(3)................................................... $ 135 $ 145
Number of rooms............................................. 559 559
Number of properties........................................ 1 1
ASIA/PACIFIC -- UPSCALE:
Average number of years since purchase or major
renovation................................................ 2 2
Total revenues.............................................. $ 32.8 $ 16.1
Average daily occupancy rate(1)............................. 72% 76%
Average daily rate(2)....................................... $ 144 $ 142
REVPAR(3)................................................... $ 99 $ 108
Number of rooms............................................. 563 567
Number of properties........................................ 2 2
ASIA/PACIFIC -- TOTAL:
Average number of years since purchase or major
renovation................................................ 2 1
Total revenues.............................................. $ 83.7 $ 30.6
Average daily occupancy rate(1)............................. 77% 79%
Average daily rate(2)....................................... $ 156 $ 154
REVPAR(3)................................................... $ 117 $ 122
Number of rooms............................................. 1,112 1,112
Number properties........................................... 3 3
- ---------------
(1) Occupied rooms in the period divided by rooms available for sale in the same
period.
(2) Room revenues for the period divided by rooms occupied for the same period.
(3) REVPAR was computed as room revenue divided by rooms available for sale.
(4) There were no properties in this geographic region for the period presented.
During 1996, subsidiaries of Sheraton leased two properties; these leases
were terminated in 1997 and Sheraton entered into new management agreements
for these properties.
The hotel properties that are owned and leased by Sheraton are, in many
cases, subject to mortgage and lease indebtedness. As of December 31, 1997, the
aggregate mortgage and lease indebtedness relating to these hotels was
approximately $252 million. For ITT's leased properties, a subsidiary of
Sheraton generally leases the land upon which the hotel has been built and the
hotel building. At the end of the lease, the buildings and other leasehold
improvements revert to the landlord. Usually, a Sheraton subsidiary is
responsible for repairs,
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maintenance, operating expenses and lease rentals and retains managerial
discretion over operations. Generally, Sheraton pays a percentage rental based
on total revenues or gross operating profit for the facility, but sometimes with
a minimum fixed annual rent or a preferential rent. During 1997 and 1996,
Sheraton paid aggregate rentals, including rentals attributable to the leased
properties, of $28 million and $22 million, respectively.
In June 1997, Sheraton sold to FelCor Suite Hotels, Inc. five hotel
properties (the Park Central (Dallas), the O'Hare Gateway (Chicago), the
Crescent (Phoenix), the Atlanta Galleria and the Atlanta Gateway) for $200
million in cash and retained a 20-year contract to manage these hotels.
Managed and Joint Venture Hotels
Through its subsidiaries, ITT manages, usually under a long-term agreement
with the owner, a number of hotels throughout the world. The following table
illustrates, for managed and joint venture properties, classified by geographic
region, total revenue (in millions), average daily occupancy rate, average daily
rate, REVPAR for the years ended December 31, 1997 and 1996 and the number of
rooms and number of properties at December 31, 1997 and 1996. The amounts shown
in the table reflect the U.S. dollar equivalent of all local currencies; in some
cases, currency fluctuations may have an adverse effect on the comparison of any
region or individual property for the periods presented.
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
NORTH AMERICA:
Total revenues.............................................. $1,375.2 $1,231.0
Average daily occupancy rate(1)............................. 75% 72%
Average daily rate(2)....................................... $ 148 $ 139
REVPAR(3)................................................... $ 109 $ 101
Number of rooms............................................. 25,987 22,091
Number of properties........................................ 49 37
EUROPE/CIGA:
Total revenues.............................................. $ 464.8 $ 444.9
Average daily occupancy rate(1)............................. 69% 69%
Average daily rate(2)....................................... $ 141 $ 140
REVPAR(3)................................................... $ 96 $ 97
Number of rooms............................................. 8,743 7,339
Number of properties........................................ 31 26
AFRICA/MIDDLE EAST:
Total revenues.............................................. $ 415.8 $ 382.8
Average daily occupancy rate(1)............................. 65% 61%
Average daily rate(2)....................................... $ 90 $ 91
REVPAR(3)................................................... $ 57 $ 55
Number of rooms............................................. 9,933 9,244
Number of properties........................................ 37 34
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YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
LATIN AMERICA:
Total revenues.............................................. $ 35.1 $ 21.0
Average daily occupancy rate(1)............................. 54% 59%
Average daily rate(2)....................................... $ 91 $ 66
REVPAR(3)................................................... $ 48 $ 39
Number of rooms............................................. 1,464 1,084
Number of properties........................................ 6 4
ASIA/PACIFIC:
Total revenues.............................................. $ 713.4 $ 790.9
Average daily occupancy rate(1)............................. 69% 68%
Average daily rate(2)....................................... $ 133 $ 138
REVPAR(3)................................................... $ 89 $ 93
Number of rooms............................................. 12,658 11,790
Number of properties........................................ 39 34
- ---------------
(1) Occupied rooms in the period divided by rooms available for sale in the same
period.
(2) Room revenues for the period divided by rooms occupied for the same period.
(3) REVPAR was computed as room revenue divided by rooms available for sale.
Under its standard management agreement, Sheraton operates lodging
facilities under long-term arrangements with property owners. Sheraton's
responsibilities include hiring, training and supervising the managers and
employees required to operate these facilities. For additional fees, Sheraton
provides reservation services. Sheraton also coordinates national advertising
and certain marketing and promotional services. Sheraton prepares and implements
annual budgets for lodging facilities under its management and is responsible
for allocating property-owner funds for periodic maintenance and repair of
buildings and furnishings. Sheraton's management fee is generally based on a
percentage of the hotel's total revenues plus, in certain instances, an
incentive fee based on the hotel's operating performance.
During 1997, Sheraton invested approximately $18 million, in hotel joint
ventures, including investments in Key West-Florida, Schiphol Airport-Amsterdam,
The Netherlands and Beijing International Club-Beijing, China. In each of these
projects, Sheraton owns an equity interest and is, or will be, the manager of
the hotel.
During 1997, Sheraton signed agreements to manage 45 additional hotels, of
which 14 had opened as of December 31, 1997. Sheraton did not invest in the
ownership of any of these hotels. Of these 45 hotels, seven are in North
America, 16 in Asia/Pacific, four in Europe, 10 in Africa or the Middle East and
eight in Latin America.
Franchised Hotels
Sheraton franchises properties located primarily in North America. Of
Sheraton's over 200 franchised hotels and inns, as of December 31, 1997, only 23
were located outside of North America.
For Sheraton's franchise business (which includes properties operated under
the "Four Points Hotels" name), the following table illustrates the number of
properties, number of room nights available, average daily
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occupancy rate and average daily rate for the years ended December 31, 1997 and
December 31, 1996, respectively.
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
Number of properties........................................ 216 208
Number of room nights available............................. 19,180,437 18,867,329
Average daily occupancy rate(1)............................. 68% 67%
Average daily rate(2)....................................... $87 $81
- ---------------
(1) Occupied rooms in the period divided by rooms available for sale in the same
period.
(2) Room revenues for the period divided by rooms occupied for the same period.
Hotels that are franchised by Sheraton are permitted to operate under the
"Sheraton" trade name and to use the stylized "S" and wreath service mark.
Sheraton franchised hotels are generally smaller than the hotels owned, leased
or managed by Sheraton. Sheraton approves certain plans for, and the location
of, franchised hotels and reviews their design.
In general, each franchisee pays Sheraton an initial minimum fee plus an
additional fee for every room over 100. There is a continuing monthly license
fee based on a percentage of the facility's room revenues. Although Sheraton
does not directly participate in the day-to-day management or operation of its
franchised hotels, Sheraton or an agent of Sheraton periodically inspects the
hotels to ensure that Sheraton's standards are maintained.
In 1995, Sheraton began offering its franchised hotel owners the
opportunity to convert inns that are franchised by Sheraton to the "Four Points
Hotels" name, a new mid-priced hotel brand. As of December 31, 1997, Sheraton
had 68 franchised properties operating under the Four Points Hotels brand name.
Of these properties, 37 were properties converted from Sheraton franchises, 28
properties were converted from competing brands and three were newly
constructed. Sheraton expects that each Four Points Hotel will be operated and
marketed by its owners with a view toward providing hospitality services to the
business-oriented traveler.
During 1997, Sheraton executed 37 new franchise agreements, of which 10 had
been opened as of December 31, 1997. Of these, 15 are or will be operated under
the Sheraton name and 22 are or will be operated under the Four Points Hotels
name. At December 31, 1997, there were 216 franchised hotels in operation under
the Sheraton and Four Points Hotels names.
GAMING OPERATIONS
Currently, ITT's gaming operations consist of 15 casinos or other gaming
facilities, including Caesars Palace in Las Vegas, Nevada; Caesars Atlantic City
in Atlantic City, New Jersey; Caesars Tahoe in Stateline, Nevada; The Desert Inn
Resort & Casino in Las Vegas, Nevada; The Sheraton Casino & Hotel in Tunica
County, Mississippi; and various other casino/hotel operations under Sheraton
and Caesars outside the United States. In April 1997, ITT announced its
intention to sell The Desert Inn Resort & Casino.
Beginning in June 1996, ITT undertook a capital expenditure program to
upgrade and expand ITT's existing gaming operations. Upon completion of this
program, approximately $500 million will have been invested at Caesars Palace,
approximately $272 million will have been invested at Caesars Atlantic City, and
approximately $193 million has been invested at The Desert Inn Resort & Casino,
excluding in each case capitalized interest and pre-opening expenses. ITT is
also in the process of constructing a riverboat casino and a hotel in Harrison
County, Indiana.
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Caesars World
Caesars operates three destination gaming resorts: Caesars Palace in Las
Vegas, Nevada; Caesars Tahoe in Stateline, Nevada; and Caesars Atlantic City in
Atlantic City, New Jersey. Caesars also owns one-half of a management company
that operates Casino Windsor, a casino in Windsor, Canada that is owned by the
Government of the Province of Ontario. Caesars subsidiaries also operate small
casinos on two cruise ships and operate a 1,000 machine slot operation at Dover
Downs in Dover, Delaware.
Caesars Palace. Caesars Palace, which opened in 1966 as the first themed
casino on the "Strip" in Las Vegas, Nevada, is a casino/hotel complex located on
approximately 80 acres. At December 31, 1997, Caesars Palace had approximately
2,469 hotel rooms and suites in service, 10 restaurants, a 1,126-seat showroom,
a convention complex with approximately 171,000 square feet of meeting and
banquet space, numerous bars and lounges, The Forum Shops (a retail shopping
arcade), health spas and an "Omnimax" theater. Currently, the Caesars Palace
casino is approximately 125,000 square feet, and offers wagering limits that are
among the highest in Nevada.
As part of its capital expenditure program, Caesars has invested
approximately $406 million at Caesars Palace during the two years ended February
28, 1998. The project is intended to create a more attractive, exciting gaming
environment, while satisfying previously unmet room demand. The project has
resulted in the addition of approximately 1,130 rooms, which have increased the
total number of rooms at Caesars Palace to approximately 2,470. Construction of
the room tower was completed during the fourth quarter of 1997. Enhancements to
the casino include the addition of gaming space for slot machines and table
games. Other improvements include the development of the second phase of The
Forum Shops (which was developed by a third party and opened in the third
quarter of 1997) with 250,000 square feet of retail space, and the addition of
112,000 square feet of meeting and convention facilities. Construction of a new
health club and spa is underway and the facility is expected to open in April
1998.
The average occupancy rate at Caesars Palace was 93% and 92.3% for 1997 and
1996, including occupancy of 43% and 42%, respectively, of the occupied rooms
and suites by guests receiving complimentary rooms.
Caesars Atlantic City. Caesars Atlantic City is a casino/hotel on the
Boardwalk in Atlantic City, New Jersey. At December 31, 1997, Caesars Atlantic
City had approximately 1,144 rooms in service, a 78,000-square foot casino,
including table games and slots, and approximately 6,000 square feet of gaming
space for keno, poker and race simulcasting. It also had 13 restaurants and
bars, 40,000 square feet of meeting and banquet space, a 1,100-seat showroom, a
shopping arcade, a Roman-themed transportation center that accommodates 2,500
cars and 11 buses, a health club and two tennis courts. The property on which
Caesars Atlantic City stands consists of approximately 8.1 acres, including
contiguous parcels totaling approximately 5.4 acres bounded on three sides by
Missouri, Arkansas and Pacific Avenues, with an entire block of Boardwalk
frontage.
Improvements at Caesars Atlantic City are expected to cost approximately
$272 million during the 1997-1998 period. These improvements will bring the
total number of rooms to approximately 1,125 and will increase casino space by
approximately 30,000 square feet. As part of this project, Caesars Atlantic City
is constructing a new entrance and central four-story atrium, a grand
multi-function ballroom and expanded dining facilities. The design incorporates
an elaborate Roman theme with Corinthian columns, large statues and extensive
fountains. These improvements are expected to enable Caesars Atlantic City to
increase its convention business and to satisfy substantial unmet room demand.
The exterior renovations are designed to further enhance Caesar's visibility on
the center of the Boardwalk to attract more "walk-in" patrons.
Caesars also owns the Ocean One retail mall. The Ocean One mall is
constructed on a pier that extends out 900 feet over the Atlantic Ocean and is
located directly in front of the Boardwalk entrance to Caesars Atlantic City.
Ocean One contains approximately 400,000 square feet of restaurant and retail
space on three floors. Under current applicable local and state laws, and
subject to certain restrictions, Ocean One may be used for gaming or lodging
activities. The average occupancy rate at Caesars Atlantic City was 93.5% and
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95.6% for 1997 and 1996, including occupancy of 88.5% and 88.7%, respectively,
of the available rooms and suites by guests receiving complimentary rooms.
Caesars Tahoe. Caesars Tahoe casino/hotel opened in 1979 and is located in
Stateline, Nevada, adjacent to Lake Tahoe. At that time, Caesars entered into a
long-term lease of the 24-acre property on which the casino/hotel stands. At
December 31, 1997, Caesars Tahoe had 440 rooms and suites in service, five
restaurants, a 1,500-seat showroom, 16,000 square feet of convention space, a
Roman-themed nightclub, a 40,000-square foot casino including a race and sports
book, bars, shops, four outdoor tennis courts and an indoor health spa
containing a swimming pool and a racquetball court. The average occupancy rate
at Caesars Tahoe was 80.5% and 82.7% for 1997 and 1996, including occupancy of
22.1% and 24.8%, respectively, of the available rooms and suites by guests
receiving complimentary rooms.
Casino Windsor. Caesars owns a one-half interest in Windsor Casino Limited
("Windsor"). Windsor is the operator of Casino Windsor, a 50,000-square foot
interim casino in Windsor, Ontario, which is owned by the Ontario provincial
government. Caesars anticipates that the interim casino will be replaced by a
permanent facility in the second quarter of 1998, which is expected to include a
hotel of approximately 400 rooms, a 100,000-square foot casino and entertainment
and meeting facilities.
Harrison County Riverboat Development. In May 1996, Caesars was granted a
certificate of suitability by the Indiana Gaming Commission to construct and
operate a riverboat casino. The land-based and marine facilities will be located
on the Indiana side of the Ohio River across the river from Louisville,
Kentucky. Construction of the riverboat casino and related improvements is
subject to receipt of various consents, permits and approvals, all of which have
been secured.
The Desert Inn Resort & Casino
The Desert Inn Resort & Casino, which ITT purchased in November 1993, is a
casino/hotel complex located on approximately 200 acres on the "Strip" in Las
Vegas, Nevada. The Desert Inn underwent extensive renovations in 1996 and 1997
at a total cost of approximately $193 million. At December 31, 1997, The Desert
Inn had 715 rooms and suites, six restaurants, a 636-seat showroom, a convention
complex with approximately 27,000 square feet of meeting and banquet space,
numerous bars and lounges, swimming pools, tennis facilities, an 18-hole
championship golf course, a spa and other facilities. Its casino is
approximately 30,000 square feet. The average occupancy rate at The Desert Inn
was 70.2% and 75.4% for 1997 and 1996, including occupancy of 22.3% and 22.7%,
respectively, of the available rooms and suites by guests receiving
complimentary rooms.
The Sheraton Casino & Hotel
The Sheraton Casino opened in Tunica County, Mississippi, in August 1994;
in November 1997, the hotel opened a 150-room tower and was renamed "Sheraton
Casino & Hotel." The Sheraton Casino & Hotel has three restaurants, three bars
and lounges and other facilities. Its casino has approximately 31,000 square
feet of gaming space.
Other Sheraton Gaming Operations
Sheraton also operates casinos in Lima, Peru at the Sheraton Lima Hotel &
Casino, which has 438 rooms and suites; in Halifax, Nova Scotia at the Sheraton
Halifax Hotel & Casino, which has 351 rooms and suites; in Sydney, Cape Breton,
Nova Scotia at the Sheraton Casino Sydney, which is a stand-alone casino; in
Townsville, Australia at the Sheraton Breakwater, which has 192 rooms and 16
suites; and in Cairo, Egypt at the Cairo Sheraton and the El Gezirah Sheraton,
which have 433 rooms and 86 suites and 477 rooms and 68 suites, respectively.
Termination of Planet Hollywood Development
In June 1996, ITT entered into an agreement in principle to form a joint
venture with Planet Hollywood International, Inc. ("Planet Hollywood") to
develop, own and operate "Planet Hollywood" themed hotel/
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casinos. The Company does not expect that the definitive agreement with Planet
Hollywood will be executed or that the Company will develop "Planet Hollywood"
themed hotel/casinos.
OTHER ASSETS AND OPERATIONS; CERTAIN RECENT DEVELOPMENTS
Potential Disposition of ITT Educational
In addition to its hotel and gaming businesses, ITT owns 83.3% of the
outstanding shares of ITT Educational Services, Inc. ("ITT Educational"). The
shares of common stock of ITT Educational are traded on the New York Stock
Exchange under the symbol "ESI". The term "ITT Technical Institutes" (in
singular or plural form) refers to educational institutions owned and operated
by ITT Educational.
Starwood Hotels is currently exploring a range of disposition strategies
for ITT's equity interest in ITT Educational. As part of this disposition
strategy, on February 13, 1998, ITT Educational filed a registration statement
with the Securities and Exchange Commission for the sale by ITT in an
underwritten public offering of up to 12,650,000 shares (assuming the
underwriters' overallotment option is exercised in full) of ITT Educational
common stock.
ITT Educational is a leading proprietary provider of technology-oriented
post-secondary degree programs in the United States. ITT Educational offers
associate, bachelor and master degree programs and non-degree diploma programs
to over 24,000 students through a system of 63 ITT Technical Institutes located
in 27 states. The education programs are designed, after consultation with
employers, to help graduates prepare for careers in a variety of fields
involving technology. As of December 31, 1997, approximately 97% were enrolled
in a degree program, with approximately 74% of ITT Technical Institute students
enrolled in programs related to electronics engineering technology and
approximately 23% enrolled in programs related to computer-aided drafting
technology. While most graduates of ITT Technical Institutes are initially
employed by numerous small, technology-oriented companies, employers have also
included well recognized corporations, such as AT&T, Boeing, Intel, NCI,
Microsoft, Motorola, IBM and General Electric. Additionally, the institutes'
graduates have been hired by some federal and local government agencies,
including the Federal Bureau of Investigation and the Central Intelligence
Agency.
ITT Educational has experienced significant growth, acquiring three and
establishing 50 new technical institutes since 1981. Of the 63 institutes
currently operating, 20 have been established since January 1, 1993. The number
of students attending ITT Technical Institutes has increased 32.1% from 18,539
students at December 31, 1992 to 24,498 at December 31, 1997. Total revenues
from ITT Technical Institutes have increased 74% from $150.4 million (excluding
discontinued operations) in 1992 to $261.7 million in 1997. ITT Educational
opened three new institutes in 1997. ITT Educational intends to continue
expanding by opening new institutes (including six new institutes in 1998) and
offering a broader range of programs at its institutes.
Madison Square Garden
In August 1994, Madison Square Garden, L.P. ("MSG"), a partnership among
subsidiaries of ITT and Cablevision Systems Corporation ("Cablevision"), was
formed to acquire the business previously operated by Madison Square Garden
Corporation. MSG is the owner of the New York Knickerbockers basketball
franchise (the "Knicks"), and New York Rangers hockey franchise (the "Rangers"),
the Madison Square Garden Arena and the MSG cable television network.
At the time MSG was formed, MSG Eden Corporation ("MSGE") was the general
partner and owner of a 1% general partnership interest in MSG, and was owned by
ITT Eden Corporation ("ITTE") and Rainbow Garden Corp. ("RGC"), a subsidiary of
Cablevision; ITT MSG Inc. ("ITT MSG") and Garden L.P. Holding Corp. ("GHC"),
another subsidiary of Cablevision, each owned a 49.5% limited partnership
interest in MSG.
On April 15, 1997, ITT, ITTE and ITT MSG entered into a Partnership
Interest Transfer Agreement (the "Transfer Agreement") with MSG and Cablevision
that provides for the sale of ITT MSG's interest in MSG to Cablevision for $650
million plus the assumption of approximately $115 million of indebtedness.
19
21
Pursuant to the Transfer Agreement, on July 17, 1997, MSG redeemed, for $493.5
million, a portion of ITT MSG's limited partnership interest in MSG, MSGE
redeemed all of ITTE's ownership interest in MSGE for $6.5 million and
Cablevision caused Sports Channel Associates to be contributed to MSG. After
such redemptions and contribution, ITT (through ITT MSG) owned a 10.2% limited
partnership interest in MSG.
In March 1998, ITT MSG was notified that, as permitted by MSG's partnership
agreement, affiliates of Cablevision had contributed approximately $450 million
of additional capital to MSG, thereby reducing ITT MSG's limited partnership
interest in MSG to approximately 7.81%.
The Transfer Agreement provides that ITT MSG (i) had an initial "put"
option to require Cablevision to purchase (or cause MSG to redeem) one half of
ITT's continuing interest in MSG for $94 million on June 17, 1998 and (ii) has a
second "put" option to require Cablevision to purchase (or cause MSG to redeem)
ITT MSG's then remaining interest on June 17, 1999 for $94 million. In addition,
on June 17, 2000, Cablevision has the right to purchase (or cause MSG to redeem)
ITT MSG's then remaining interest in MSG at a price determined by an investment
banking firm to be the fair market value, subject to a "floor" price equal to
the proportionate "put" price. ITT MSG exercised the initial "put" option in
March 1998.
Pursuant to an Aircraft Contribution Agreement dated as of April 15, 1997,
among GHC, MSGE, ITT MSG, ITT Flight Operations, Inc. ("ITTF") and MSG, on
December 31, 1997, ITTF contributed to MSG an ITT-owned aircraft that MSG had
used for the Knicks and the Rangers, which was valued at $38 million. In the
event the remaining put and call rights are not exercised, ITT's percentage
interest in MSG will be increased to reflect the contribution to MSG of the
aircraft described above.
WBIS+
In July 1996, ITT purchased, in partnership with Dow Jones & Co. ("Dow
Jones"), television station WNYC-TV, Channel 31 in New York City, from The City
of New York. The purchase price of $207 million was paid one-half by ITT and
one-half by Dow Jones, and the partnership is managed on a 50/50 basis. The
station was renamed WBIS+ and, in January 1997, introduced a new format of
business and sports programming.
In March 1998, ITT and Dow Jones sold WBIS+ to Paxson Communications
Corporation for a cash purchase price of approximately $257.5 million. ITT's
proceeds from the sale of approximately $128.8 million were used to pay down
existing indebtedness of the Corporation .
Disposition of ITT World Directories
In February 1998, ITT disposed of ITT World Directories, Inc., the
subsidiary through which ITT conducted its telephone directories publishing
business, to VNU International B.V., a leading international publishing and
information company based in The Netherlands, for a total gross consideration
valued at $2.1 billion. Proceeds from the disposition were used, in part, to
acquire certain outstanding debt of Starwood Hotels.
WESTIN
As of December 31, 1997, Westin owned, managed, franchised or represented
97 luxury or upscale hotel and resort properties worldwide, excluding 15 Westin
hotels owned by the Company. Westin's primary strategy is to provide, for its
own hotels and to the other owners of Westin's hotel and resort properties,
focused, responsive, high quality marketing, reservations, management and, as
appropriate, franchise services that are designed to increase the operating
revenues and profitability of the properties and to increase hotel and resort
customer satisfaction.
Westin Hotel Company, originally founded as Western Hotels in 1930, became
Western International Hotels in 1963 and adopted the Westin name and logo in the
late 1970s. It grew from its initial 17 hotels located in the Pacific Northwest
to 82 properties when it was acquired by W&S Hotel L.L.C. in May 1995, and grew
to its 97 luxury or upscale hotel and resort properties (excluding 15 Westin
hotels owned by the
20
22
Company) throughout the world at December 31, 1997 through a combination of
Westin's own development efforts and management, franchise and representation
agreements with other hotel owners. Westin hotel and resort properties are
located throughout the United States and in Argentina, Brazil, Canada, China,
England, France, Germany, Guatemala, Indonesia, Japan, Korea, Malaysia, Mexico,
the Netherlands, Panama, the Philippines, Portugal, Singapore, Switzerland and
Thailand.
As of December 31, 1997, the Westin portfolio (excluding 15 Westin hotels
owned by the Company) consisted of 12 owned hotels with approximately 5,900
rooms, five joint ventures with approximately 3,200 rooms, 37 managed hotels
with approximately 20,500 rooms, 28 franchised hotels with approximately 8,400
rooms and 15 represented hotels with approximately 5,300 rooms.
Owned Hotels
The following table illustrates, for each hotel owned by Westin at December
31, 1997, the total number of guest rooms at that date, the year the hotel was
first operated, and for 1997, the average daily occupancy rate, average daily
room rate and REVPAR:
1997
-------------------------------
AVERAGE AVERAGE
FIRST DAILY DAILY
YEAR ROOM RATE OCCUPANCY REVPAR
HOTEL(1) LOCATION ROOMS OPERATED ($) RATE (%) ($)
- -------- -------- ----- -------- --------- --------- -------
Westin South Coast Plaza.... Costa Mesa, CA 390 1975 113.31 75.4 85.44
Westin San Francisco
Airport................... Millbrae, CA 391 1987 128.52 83.3 107.06
Cherry Creek Inn............ Denver, CO 320 1979 61.16 85.5 52.29
Westin Tabor Center......... Denver, CO 420 1985 141.82 77.1 109.34
Westin Fort Lauderdale...... Fort Lauderdale, FL 293 1986 68.50 78.6 53.84
Westin Peachtree Plaza...... Atlanta, GA 1,068 1976 120.64 69.9 84.33
Westin Indianapolis......... Indianapolis, IN 573 1989 103.84 73.1 75.91
Westin Cincinnati........... Cincinnati, OH 448 1981 111.85 69.1 77.29
Westin Galleria Houston..... Houston, TX 485 1977 109.35 75.3 82.34
Westin Oaks................. Houston, TX 406 1971 109.35 75.3 82.34
Westin Resort............... St. John, US Virgin Islands 285 1997(2) N/A N/A N/A
Westin Seattle.............. Seattle, WA 865 (3) 133.43 75.0 100.07
-----
5,994
- ---------------
(1) The Trust (or, as to the properties in Atlanta, Georgia and St. John, US
Virgin Islands, the Operating Partnership) acquired a 100% equity interest
in each of these hotels on January 2, 1998. See "Structure -- Acquisition of
Westin" below.
(2) Substantially destroyed by a hurricane in September 1995 and reopened in
December 1997 following significant renovations and reconstruction.
(3) South Tower, 1969; North Tower, 1982.
21
23
Joint Venture Hotels
At December 31, 1997, Westin also had an equity interest in five joint
ventures that owned the following hotels:
HOTEL LOCATION ROOMS WESTIN'S EQUITY INTEREST(%)(1)
- ----- ----------------- ----- ------------------------------
Westin London, Ontario................. London, Canada 322 10.0
Westin O'Hare.......................... Chicago, IL 525 48.6
Westin Michigan Avenue................. Chicago, IL 740 8.3
Westin Galleria Dallas................. Dallas, TX 431 20.0
Westin St. Francis..................... San Francisco, CA 1,200 8.3
-----
3,218
- ---------------
(1) Acquired by the Corporation on January 2, 1998. See
"Structure -- Acquisition of Westin" below.
Managed, Franchised and Represented Hotels
The following table lists the hotels managed, franchised or represented by
Westin at December 31, 1997, and the number of guest rooms per property at that
date. Each of these hotels is now managed, franchised or represented by the
Corporation; see "Structure -- Acquisition of Westin" below.
HOTEL LOCATION ROOMS
- ----- ---------------------------- ------
MANAGED:
Westin Calgary................................... Calgary, Canada 525
Westin Edmonton.................................. Edmonton, Canada 413
Westin Ottawa.................................... Ottawa, Canada 478
Westin Harbour Castle............................ Toronto, Canada 980
Westin Bayshore.................................. Vancouver, Canada 517
Le Hameau du Trianon, a Westin Hotel............. Versailles, France 190
Westin Grand, Berlin............................. Berlin, Germany 358
Westin Bellevue, Dresden......................... Dresden, Germany 339
Westin Resort.................................... Tumon Bay, Guam 420
Westin Surabaya.................................. Surabaya, Indonesia 418
Westin Tokyo..................................... Tokyo, Japan 445
Westin Resort.................................... Coloane Ihla, Macau 208
Westin Dragonara Resort.......................... St. Julians, Malta 311
Las Brisas....................................... Acapulco, Mexico 265
Westin Brisas Resort............................. Ixtapa, Mexico 428
Westin Galleria Plaza............................ Mexico City, Mexico 439
Westin Philippine Plaza.......................... Manila, Philippines 609
Westin Plaza..................................... Singapore 796
Westin Stamford.................................. Singapore 1,253
Westin Chosun Beach.............................. Pusan, South Korea 290
Westin Chosun.................................... Seoul, South Korea 479
Westin Banyan Tree............................... Bangkok, Thailand 216
Westin Chiangmai................................. Chiang Mai, Thailand 528
Westin Copley Place.............................. Boston, MA 800
Westin Charlotte................................. Charlotte, NC 410
Westin River North............................... Chicago, IL 422
Westin Innisbrook Resort......................... Tarpon Springs, FL 850
Westin Renaissance Center........................ Detroit, MI 1,392
Westin Resort.................................... Hilton Head Island, SC 412
22
24
HOTEL LOCATION ROOMS
- ----- ---------------------------- ------
Westin Maui...................................... Kaanapali Beach, HI 742
Westin Crown Center.............................. Kansas City, MO 725
Westin Century Plaza Hotel and Tower............. Los Angeles, CA 1,072
Westin Canal Place............................... New Orleans, LA 438
Westin Santa Clara............................... Santa Clara, CA 500
Walt Disney World Swan........................... Orlando, FL 758
Westin William Penn.............................. Pittsburgh, PA 595
Westin La Paloma................................. Tucson, AZ 487
------
20,508
------
FRANCHISED:
Westin Nova Scotian.............................. Halifax, Canada 307
Le Westin Mont-Royal............................. Montreal, Canada 300
Westin Prince Toronto............................ Toronto, Canada 381
Westin Shanghai.................................. Shanghai, China 495
Westin Demeure Hotels (Astor).................... Paris, France 125
Westin Demeure Hotels (Baltimore)................ Paris, France 105
Westin Demeure Hotels (Castille)................. Paris, France 111
Westin Demeure Hotels (Le Parc).................. Paris, France 120
Westin Demeure Hotels (Marignan-Elysees)......... Paris, France 73
Westin Casuarina Resort.......................... Grand Cayman Islands 343
Westin Osaka..................................... Osaka, Japan 304
Westin San Luis Potosi........................... San Luis Potosi, Mexico 123
Westin Demeure Hotels (The Grand)................ Amsterdam, Netherlands 182
Westin Rio Mar Beach Resort & Casino............. Rio Mar Beach, Puerto Rico 600
Westin Demeure Hotels (Hotel D'Angleterre)....... Geneva, Switzerland 45
Westin Demeure Hotels (47 Park Street)........... London, England 52
Westin Carambola Beach Resort.................... St. Croix, US Virgin Islands 150
Westin Alyeska Prince............................ Girdwood, AK 307
Westin Atlanta Airport........................... Atlanta, GA 496
Westin Columbus.................................. Columbus, OH 196
Westin Beach Resort.............................. Key Largo, FL 200
Hapuna Beach Prince Hotel........................ Kohala Coast, HI 350
Mauna Kea Beach Hotel............................ Kohala Coast, HI 310
Westin Bonaventure Hotel and Suites.............. Los Angeles, CA 1,369
Biltmore Hotel................................... Coral Gables, FL 275
Westin Resort.................................... Miami Beach, FL 423
Westin Providence................................ Providence, RI 350
Westin Washington DC, City Center................ Washington, DC 400
------
8,492
------
REPRESENTED:(*)
Caesar Park Buenos Aires......................... Buenos Aires, Argentina 173
Caesar Park Hotel................................ Fortaleza, Brazil 230
Caesar Park Hotel Ipanema........................ Rio de Janeiro, Brazil 221
Caesar Park Sao Paulo............................ Sao Paulo, Brazil 177
Camino Real Tikal................................ El Remate, Peten, Guatemala 72
Camino Real...................................... Guatemala City, Guatemala 404
Westin Kyoto Takara-ga-ike Prince Hotel.......... Kyoto, Japan 322
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25
HOTEL LOCATION ROOMS
- ----- ---------------------------- ------
Hotel Grand Palace............................... Tokyo, Japan 464
Palace Hotel..................................... Tokyo, Japan 391
Caesar Park Cancun Beach & Golf Resort........... Cancun, Mexico 426
Caesar Park Hotel................................ Panama City, Panama 491
Caesar Park Penha Longa Golf Resort.............. Sintra, Portugal 176
Hawaii Prince Hotel Waikiki...................... Honolulu, HI 521
Maui Prince Hotel................................ Makena, HI 310
New York Palace.................................. New York, NY 985
------
5,363
------
43,525
======
- ---------------
* Westin provides reservation and marketing services for these hotels, but does
not allow hotels to use the Westin name.
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26
OTHER ACQUISITIONS
1997 Acquisitions
During the year ended December 31, 1997, Starwood Hotels acquired equity
interests in the following 44 hotels (the "1997 Properties"):
PURCHASE NUMBER OF
DATE OF PRICE GUEST
HOTEL(1) LOCATION PURCHASE (000'S) ROOMS
- -------- ---------------------- -------- ------------ ---------
Deerfield Beach Hilton............. Deerfield Beach, FL 01/08/97 $ 11,500 220
Radisson Denver South.............. Denver, CO 01/20/97 21,750 263
The HEI Owned Hotels, consisting
of:
Sheraton Hotel................... Long Beach, CA 02/14/97 460
Omni Waterside Hotel............. Norfolk, VA 02/14/97 446
BWI Airport Marriott............. Baltimore, MD 02/14/97 310
Crowne Plaza Edison.............. Edison, NJ 02/14/97 274
Courtyard by Marriott Crystal
City.......................... Arlington, VA 02/14/97 272
Charleston Hilton................ Charleston, SC 02/14/97 296
Park Ridge Hotel................. King of Prussia, PA 02/14/97 265
Sonoma County Hilton............. Santa Rosa, CA 02/14/97 245
Novi Hilton...................... Novi, MI 02/14/97 239
Embassy Suites................... Atlanta, GA 02/14/97 233
---------- ------
312,000 3,040
Days Inn Lake Shore Drive.......... Chicago, IL 02/21/97 48,000 578
Westin Hermitage................... Nashville, TN 03/11/97 15,800 120
Hotel De La Poste.................. New Orleans, LA 03/12/97 16,000 100
San Diego Marriott Suites.......... San Diego, CA 04/03/97 32,500 264
Tremont Hotel...................... Chicago, IL 04/04/97 14,400 130
Raphael Hotel...................... Chicago, IL 05/07/97 17,750 172
Sheraton Stamford.................. Stamford, CT 06/12/97 14,600 480
Westin Southfield -- Detroit....... Southfield, MI 07/10/97 40,000 385
Westin Regina Portfolio, consisting
of:
Westin Regina Resort............. Cabo San Lucas, Mexico 08/21/97 229
Westin Regina Resort............. Cancun, Mexico 08/21/97 385
Puerto Vallarta,
Westin Regina Resort............. Mexico 08/21/97 280
---------- ------
133,000 894
The Flatley Portfolio, consisting
of:
Wayfarer Inn..................... Bedford, NH 09/11/97 194
Sheraton Tara Hotel.............. Braintree, MA 09/11/97 376
Tara's Ferncroft Conference
Resort........................ Danvers, MA 09/11/97 367
Sheraton Tara Hotel.............. Framingham, MA 09/11/97 375
Tara's Cape Codder Hotel......... Hyannis, MA 09/11/97 261
Tara Hyannis Hotel & Resort...... Hyannis, MA 09/11/97 224
Sheraton Tara Lexington Inn...... Lexington, MA 09/11/97 119
Colonial Hilton and Resort....... Lynnfield, MA 09/11/97 280
Merrimack Hotel & Conference
Center........................ Merrimack, NH 09/11/97 200
Sheraton Tara Hotel.............. Nashua, NH 09/11/97 337
Sheraton Tara Hotel(3)........... Newton, MA 09/11/97 272
Sheraton Tara Hotel.............. Parsippany, NJ 09/11/97 383
25
27
PURCHASE NUMBER OF
DATE OF PRICE GUEST
HOTEL(1) LOCATION PURCHASE (000'S) ROOMS
- -------- ---------------------- -------- ------------ ---------
Sheraton Tara Hotel.............. South Portland, ME 09/11/97 220
Tara Stamford Hotel.............. Stamford, CT 09/11/97 328
Sheraton Tara Airport Hotel...... Warwick, RI 09/11/97 207
---------- ------
469,970 4,143
Crowne Plaza....................... New Orleans, LA 09/23/97 58,750 439
One Washington Circle.............. Washington, DC 09/30/97 19,000 151
Radisson Plaza & Suite Hotel....... Indianapolis, IN 10/30/97 54,000 552
Westin Aquila...................... Omaha, NE 12/08/97 14,000 145
Westin Mission Hills Resort........ Rancho Mirage, CA 12/15/97 118,000(2) 512
Turnberry Hotel and Golf Resort.... Ayreshire, Scotland 12/23/97 51,500 132
---------- ------
$1,462,520 12,720
========== ======
- ---------------
(1) Starwood Hotels acquired a 100% fee or ground leasehold interest in each of
these hotel properties except for the Westin Mission Hills Resort and the
Sheraton Tara Hotel in Newton, Massachusetts. See footnotes (2) and (3)
below.
(2) Amount shown represents a 100% interest; Starwood Hotels acquired a 95%
interest in a joint venture that acquired the property.
(3) Starwood Hotels acquired an operating leasehold in this property.
Of the 44 hotel properties acquired in 1997, all but four were acquired by
the Realty Partnership. The Turnberry Hotel and Golf Resort and the Westin
Regina Portfolio are owned by the Operating Partnership.
HEI Acquisition
On February 14, 1997, in addition to the 10 hotels referred to above as the
HEI Owned Hotels that were acquired from Prudential Property Investment Separate
Account II, an institutional real estate investment fund ("PRISA II") managed by
Prudential Real Estate Investors, and HEI Hotels LLC ("HEI"), a Westport,
Connecticut based hotel operating company, the Company also acquired HEI and
contracts to manage the following nine hotels (the "HEI Managed Hotels"):
HOTEL LOCATION ROOMS
----- ------------------ -----
Sheraton Gateway Houston Airport.................... Houston, TX 418
Ontario Airport Hilton.............................. Ontario, CA 309
Grand Junction Hilton............................... Grand Junction, CO 264
Danbury Hilton & Towers............................. Danbury, CT 242
Residence Inn By Marriott........................... Princeton, NJ 208
Long Island Sheraton Hotel.......................... Smithtown, NY 211
Wilmington Hilton Hotel............................. Wilmington, DE 193
Ramada Hotel Bethesda............................... Bethesda, MD 160
The Pavilion Towers Hotel........................... Virginia Beach, VA 292
-----
2,297
As consideration for the HEI Owned Hotels, HEI and the nine management
contracts (collectively the "HEI Portfolio"), the Company paid an aggregate of
$112 million in cash and notes and issued Units exchangeable for a total of
6,548,000 Paired Shares (which Units were valued for purposes of the transaction
at approximately $215 million).
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28
Al-Anwa Portfolio
On January 15, 1998, Starwood Hotels acquired the following four hotels
(the "Al-Anwa Portfolio") for a combination of approximately $150 million in
cash and approximately 3.7 million Paired Shares (which shares were valued for
purposes of the acquisition at approximately $184 million):
1997
----------------------------------
YEAR AVERAGE OCCUPANCY
HOTEL LOCATION ROOMS OPENED DAILY RATE RATE REVPAR
----- -------------- ----- ------ ---------- --------- -------
The Al-Anwa Portfolio:
ITT Sheraton Luxury
Collection Hotel
Aspen(1).............. Aspen, CO 257 1992 $255.12 67.6% $172.35
ITT Sheraton Luxury
Collection Hotel
Houston............... Houston, TX 232 1981 153.29 70.7% 108.32
ITT Sheraton Luxury
Collection Hotel
Washington, DC........ Washington, DC 213 1929 199.03 55.7% 110.77
ITT Sheraton Luxury
Collection Hotel New
York(2)............... New York, NY 214 1929 312.09 71.5% 223.24
---
916
- ---------------
(1) Re-flagged as a St. Regis following the acquisition.
(2) Re-flagged as a Westin following the acquisition.
DEVELOPMENT OPPORTUNITIES; FUTURE ACQUISITIONS; SALES
Development Opportunities
Starwood Hotels also intends to develop, on a limited basis, new hotels,
either through new construction or conversion of office buildings, in certain
under-served markets. In this respect, in November 1996, the Trust paid
approximately $7.0 million to acquire a site in downtown Seattle, Washington,
which has full entitlements for construction of a 426-room hotel. The Trust
began construction on this hotel in August 1997. This hotel is estimated to cost
approximately $73 million and is expected to open in early 1999.
In May 1997, Starwood Hotels paid $11.9 million to acquire the site and
development rights to construct, and began to build, a 30-story, 423-room hotel
in downtown San Francisco, California. The hotel is estimated to cost
approximately $73 million and is expected to open in May 1999.
In October 1997, Starwood Hotels formed a joint venture to convert a
474,000-square-foot, 31-story office building located in downtown Denver into a
540-room, four-star hotel that is expected to open in 1999. Conversion of the
building is expected to begin in early 1998. The Company paid approximately $9
million to acquire a 50% interest in the leasehold of the office building. The
estimated cost of the project is $68.6 million.
Future Acquisitions
Starwood Hotels intends to continue to expand and diversify its hotel
portfolio through the acquisition of primarily upscale hotels in major
metropolitan areas. Starwood Hotels believes that hotels in this segment can be
purchased at prices below replacement cost and offer better potential for cash
flow growth than hotels in other market segments. Starwood Hotels generally
seeks investments in hotels where management believes that profits can be
increased by the introduction of more professional and efficient management
techniques, a change of franchise affiliation or the injection of capital for
renovating, repositioning or expanding a property. Properties are targeted
throughout the world, but Starwood Hotels generally focuses on properties with
favorable demographic trends, significant barriers to entry or with major room
demand generators such as
27
29
office or retail complexes, airports, tourist attractions or universities. The
Company intends to finance future acquisitions of hotel properties through cash
flow from operations, through borrowings under new or existing credit facilities
and, when market conditions warrant, through the issuance of debt or equity
securities.
Sales
As part of its continuous evaluation of its portfolio and efforts to
redeploy capital in high growth assets, the Company has identified certain
properties for sale. These properties include hotels primarily in market
segments that the Company believes have limited growth potential. In 1997, the
Company sold the Radisson Marque in Winston-Salem, North Carolina for
approximately $7.6 million and three Best Western hotels in Savannah, Georgia;
El Paso, Texas; and Las Cruces, New Mexico for approximately $12 million,
recognizing losses of approximately $614,000 and $314,000, respectively. The
Corporation has entered into an agreement to sell the personal property relating
to the King 8 Hotel & Casino in Las Vegas, Nevada (the "King 8") for $3 million
and expects the closing to occur in June 1998 following receipt by the purchaser
of required gaming approvals. The Trust sold the real property of the King 8 in
1996 for approximately $18.8 million, recognizing a gain of approximately $5.6
million. The Company is currently engaged in efforts to sell the Milwaukee
Sheraton in Brookfield, Wisconsin; the Tyee Hotel in Olympia, Washington; and
the Bay Valley Hotel & Resort in Bay City, Michigan. In February 1998, the
Company sold three Vagabond hotels in Rosemead, California; Woodland Hills,
California; and Sacramento, California, respectively, for approximately $7.7
million, recognizing a loss of approximately $105,000.
STRUCTURE AND OPERATING STRATEGY
Current Structure
As of the date of this Joint Annual Report, the structure of Starwood
Hotels is as follows:
[PAIRED SHARES CHART]
The limited partnership interests of the Realty Partnership and the
Operating Partnership held by the limited partners are (subject to the ownership
limitation provisions of the Trust and the Corporation)
28
30
exchangeable for, at the option of the Trust and the Corporation, either cash,
Paired Shares representing up to 5.9% of the Paired Shares after such exchange
(based on the number of Paired Shares outstanding on March 30, 1998), or a
combination of cash and such Paired Shares. The ownership limitation provisions
of the Declaration of Trust are designed to preserve the status of the Trust as
a REIT for tax purposes by providing in general that no shareholder may own,
directly or indirectly, more than 8% of the outstanding Paired Shares. The Trust
controls the Realty Partnership as its sole general partner; the Corporation
controls the Operating Partnership as its sole general partner.
As of December 31, 1997, the Realty Partnership held fee interests, ground
leaseholds and mortgage loan interests in 120 hotel properties containing over
32,800 rooms located in 34 states throughout the United States and the District
of Columbia, and in Mexico and Scotland. The Operating Partnership leased from
the Realty Partnership all but four of the 96 hotel properties owned in fee or
held pursuant to long-term leases by the Realty Partnership. In addition, the
Operating Partnership owned, as of December 31, 1997, the Milwaukee Sheraton,
the Midland Hotel in Chicago, Illinois, the Westin Regina Portfolio and the
Turnberry Hotel and Golf Resort, all subject to mortgages to the Trust, and
managed nine hotels for third-party owners.
Tax Status of the Trust
The Trust elected to be taxed as a REIT, commencing with its taxable year
ended December 31, 1995. The Trust expects to also make this election for the
year ended December 31, 1997, when it files its tax return for such period,
which is due no later than September 15, 1998. The Trust was taxed as a REIT
beginning in 1969 through and including its taxable year ended December 31,
1990. During 1994, the Trust discovered that it may not have qualified as a REIT
in 1991 through 1994, due to its failure to comply with certain procedural
requirements of the Code. The Trust requested and received a letter from the
Internal Revenue Service providing that the Trust's election to be taxed as a
REIT terminated beginning with the Trust's taxable year ended December 31, 1991,
and permitting the Trust to re-elect to be taxed as a REIT commencing with its
taxable year ended December 31, 1995. Because the Trust had net losses for tax
purposes for its 1991 through 1994 taxable years, the Trust does not owe any
Federal income tax for such years.
Acquisition of Westin
On January 2, 1998, pursuant to a Transaction Agreement dated as of
September 8, 1997 (the "Westin Transaction Agreement") among WHWE L.L.C.
("WHWE"), Woodstar Investor Partnership ("Woodstar"), Nomura Asset Capital
Corporation ("Nomura"), Juergen Bartels (Mr. Bartels together with WHWE,
Woodstar and Nomura, the "Members"), Westin Worldwide, W&S Lauderdale Corp.
("Lauderdale"), W&S Seattle Corp. ("Seattle"), Westin St. John Hotel Company,
Inc. ("St. John"), W&S Denver Corp. ("Denver"), W&S Atlanta Corp. ("Atlanta"),
W&S Hotel L.L.C. ("W&S LLC" and, together with Westin, the "Westin Companies"),
the Trust, the Realty Partnership, the Corporation and the Operating
Partnership, the Company acquired Westin.
Pursuant to the terms of the Westin Transaction Agreement:
(i) Westin Worldwide merged into the Trust (the "Westin Merger"). In
connection with the Westin Merger, all of the issued and outstanding shares
of capital stock of Westin Worldwide (other than shares held by Westin and
its subsidiaries or by the Company) were converted into an aggregate of
6,285,783 Class A Exchangeable Preferred Shares, par value $.01 per share
(the "Class A EPS"), of the Trust and 5,294,783 Class B Exchangeable
Preferred Shares, liquidation value $38.50 per share (the "Class B EPS" and
together with the Class A EPS, the "EPS"), of the Trust and $177.9 million
in cash;
(ii) The stockholders of Lauderdale, Seattle and Denver contributed
all of the outstanding shares of such companies to the Realty Partnership.
In exchange for such contribution and after giving effect to the deemed
exchange of certain units, the Realty Partnership issued to such
stockholders an aggregate of 470,309 limited partnership units of the
Realty Partnership and the Trust issued to such stockholders an aggregate
of 127,534 shares of Class B EPS. In addition, in connection with the
foregoing share contribution, the Realty Partnership assumed, repaid or
refinanced the indebtedness of Lauderdale,
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Seattle and Denver and assumed $84.2 million of indebtedness incurred by
the Members prior to such contributions; and
(iii) The stockholders of Atlanta and St. John contributed all of the
outstanding shares of such companies to the Operating Partnership. In
exchange for such contribution and after giving effect to the deemed
exchange of certain units, the Operating Partnership issued to such
stockholders an aggregate of 312,741 limited partnership units of the
Operating Partnership and the Trust issued to such stockholders an
aggregate of 80,415 shares of Class B EPS. In addition, in connection with
the foregoing share contributions, the Operating Partnership assumed,
repaid or refinanced indebtedness of Atlanta and St. John and assumed $3.4
million of indebtedness incurred by the Members prior to such
contributions.
The contributions of shares of stock of each of Seattle, Lauderdale,
Denver, Atlanta and St. John (collectively, the "Westin Subsidiaries") are
referred to in this Joint Annual Report as the "Subsidiary Contributions." The
aggregate principal amount of debt assumed by the Company pursuant to the Westin
Transaction Agreement was approximately $1.0 billion.
The shares of Class A EPS, the shares of Class B EPS and the limited
partnership interests issued in connection with the Westin Merger and the
contribution of Seattle, Lauderdale, Denver, St. John and Atlanta to the
Partnerships are directly or indirectly exchangeable on a one-to-one basis
(subject to certain adjustments) for Paired Shares (subject to the right of the
Company to elect to pay cash in lieu of issuing such shares). The limited
partnership interests also are exchangeable on a one-to-one basis for shares of
Class B EPS. The shares of Class B EPS have a liquidation preference of $38.50
per share and provide the holders with the right, from and after the fifth
anniversary of the closing date of the Westin acquisition, to require the Trust
to redeem such shares at a price of $38.50.
Acquisition of ITT
On February 23, 1998, pursuant to an Amended and Restated Agreement and
Plan of Merger dated as of November 12, 1997 (the "ITT Merger Agreement") among
the Corporation, Chess Acquisition Corp., a newly formed Nevada corporation and
a subsidiary of the Company ("Merger Sub"), the Trust and ITT, the Company
acquired ITT.
Pursuant to the terms of the ITT Merger Agreement, Merger Sub was merged
with and into ITT (the "ITT Merger"), whereupon the separate corporate existence
of Merger Sub ceased and ITT continued as the surviving corporation. As a result
of the ITT Merger, ITT was owned jointly by the Trust and the Corporation.
Immediately after the effective time of the ITT Merger, the Corporation
purchased all of the common stock, no par value, of ITT ("ITT Common Stock")
owned by the Trust for a combination of cash and notes. Upon such purchase, ITT
became a wholly owned subsidiary of the Corporation.
Under the terms of the ITT Merger Agreement, each outstanding share of ITT
Common Stock, together with the associated right to purchase shares of Series A
Participating Cumulative Preferred Stock of ITT (the "Rights" and, together with
the ITT Common Stock, "ITT Shares"), other than those that were converted into
cash pursuant to a cash election by the holder (and other than ITT Shares owned
directly or indirectly by ITT or Starwood Hotels, which shares were canceled),
was converted into 1.543 Paired Shares. Pursuant to cash election procedures,
35,195,664 ITT Shares, representing approximately 30% of the outstanding ITT
Shares, were converted into $85 in cash per share. In addition, each ITT Share
was converted into additional cash consideration in the amount of $.37493151,
which amount represents the interest that would have accrued (without
compounding) on $85 at an annual rate of 7% during the period from and including
January 31, 1998 to but excluding the date of the closing (February 23, 1998).
The aggregate value of the ITT acquisition in cash, Paired Shares and assumed
debt was approximately $14.6 billion.
Reorganization
Effective January 1, 1995 (the "Reorganization Date"), the Trust and the
Corporation consummated a reorganization (the "Reorganization") with Starwood
Capital and certain affiliates of Starwood Capital (collectively, the "Starwood
Partners").
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The Reorganization involved a number of related transactions that occurred
simultaneously on the Reorganization Date. Such transactions included (i) the
formation of the Realty Partnership, and the contribution by the Trust to the
Realty Partnership of substantially all of the properties and assets of the
Trust, subject to substantially all of the liabilities of the Trust, in exchange
for an approximately 28.3% interest as a general partner in the Realty
Partnership; (ii) the contribution by the Starwood Partners to the Realty
Partnership of approximately $12.6 million in cash and certain hotel properties
and first mortgage notes, in exchange for Units representing the remaining
approximately 71.7% interest in the Realty Partnership; (iii) the formation of
the Operating Partnership, and the contribution by the Corporation and its
subsidiaries to the Operating Partnership of substantially all of their
properties and operating assets (except for their gaming assets), subject to
substantially all of their liabilities, in exchange for an approximately 28.3%
interest as a general partner in the Operating Partnership; and (iv) the
contribution by the Starwood Partners to the Operating Partnership of
approximately $1.4 million in cash and fixtures, furnishings and equipment of
certain hotel properties, in exchange for Units representing the remaining
approximately 71.7% interest in the Operating Partnership. On March 24, 1995, a
Starwood Partner exchanged $12 million of debt of the Realty Partnership for
additional Units, resulting in the Starwood Partners owning approximately 74.6%
of each of the Partnerships on such date.
Operating Strategy
The Trust and the Corporation intend that the Corporation lease and operate
hotels owned or acquired by the Trust or the Realty Partnership, thereby
retaining for shareholders the economic benefits otherwise captured by
third-party operators. During 1997, the Corporation assumed management of 48
hotels, including 38 hotels acquired by the Company.
The Corporation intends to continue to reposition hotels in order to
increase cash flows and asset values by changing or initiating franchise
affiliations to one of the brands acquired in 1998 and implementing renovations,
expansions and upgrades of hotel facilities. In 1997, the Corporation entered
into new franchise affiliations with respect to three hotels, of which two were
acquired and converted to the Westin brand in 1997. The other was acquired in
1996 and converted to the Westin brand in 1997.
The Corporation also intends to manage hotels on behalf of third-party
owners, thereby capitalizing on the enhanced operational management
infrastructure of the Corporation. The Company believes that third-party
management contracts could provide the Company with an additional source of
earnings as well as a source of potential acquisitions, including minority
equity investments in hotel properties.
Additionally, the Company intends to continue to acquire debt interests in
hotels at discounts to their face amounts with the intention of acquiring the
hotel.
OTHER INFORMATION
Seasonality and Competition
The hotel and gaming industries are seasonal in nature; however, the
periods during which the Company's properties experience higher hotel revenues
or gaming activities vary from property to property and depend principally upon
location. Although the Company's revenues historically have been lower in the
first than in the second, third or fourth quarters, the acquisitions of Westin
and ITT are expected to affect, and future acquisitions may further affect,
seasonal fluctuations in revenues and cash flows.
Competition in the hotel and gaming industries is vigorous and is generally
based on quality and consistency of room, restaurant, casino, entertainment and
convention facilities and services, attractiveness of locations, availability of
a global distribution system, price and other factors. Management believes that
the Company competes favorably in these areas. The properties of the Company
compete with other hotel and casino properties in their geographic markets. The
principal competitors of the Company include other hotel REITs, hotel operating
and gaming companies and national hotel brands. Some of the Company's
competitors may have greater marketing and financial resources than the Company.
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33
The Company may compete for acquisition opportunities with entities which
have greater financial resources than the Company or which may accept more risk
than the Company. Competition may generally reduce the number of suitable
investment opportunities and increase the bargaining power of property owners
seeking to sell. Further, management of the Company believes that it will face
competition for acquisition opportunities from entities organized for purposes
substantially similar to the objectives of the Trust or the Company.
Environmental Matters
The Company is subject to certain requirements and potential liabilities
under various federal, state and local environmental laws, ordinances and
regulations ("Environmental Laws"). For example, a current or previous owner or
operator of real property may become liable for the costs of removal or
remediation of hazardous or toxic substances on, under or in such property. Such
laws often impose liability without regard to whether the owner or operator knew
of, or was responsible for, the presence of such hazardous or toxic substances.
The presence of hazardous or toxic substances may adversely affect the owner's
ability to sell or rent such real property or to borrow using such real property
as collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic wastes may be liable for the costs of removal or remediation of such
wastes at the treatment, storage or disposal facility, regardless of whether
such facility is owned or operated by such person. The Company uses certain
substances and generates certain wastes that may be deemed hazardous or toxic
under applicable Environmental Laws, and the Company from time to time has
incurred, and in the future may incur, costs related to cleaning up
contamination resulting from historic uses of certain of the Company's current
or former properties or the Company's treatment, storage or disposal of wastes
at facilities owned by others. Other Environmental Laws require abatement or
removal of certain asbestos-containing materials ("ACMs") (limited quantities of
which are present in various building materials such as spray-on insulation,
floor coverings, ceiling coverings, tiles, decorative treatments and piping
located at certain of the Company's hotels) in the event of damage or
demolition, or certain renovations or remodeling. These laws also govern
emissions of and exposure to asbestos fibers in the air. Environmental Laws also
regulate polychlorinated biphenyls ("PCBs"), which may be present in electrical
equipment. A number of the Company's hotels have underground storage tanks
("USTs") and equipment containing chlorofluorocarbons ("CFCs"); the operation
and subsequent removal or upgrading of certain USTs and the use of equipment
containing CFCs also are regulated by Environmental Laws. In connection with the
Company's ownership, operation and management of its properties, the Company
could be held liable for the costs of remedial or other action with respect to
PCBs, USTs or CFCs.
Environmental Laws are not the only source of environmental liability.
Under the common law, owners and operators of real property may face liability
for personal injury or property damage because of various environmental
conditions such as alleged exposure to hazardous or toxic substances (including,
but not limited to, ACMs, PCBs and CFCs), poor indoor air quality, radon and
poor drinking water quality.
Although the Company has incurred and expects to incur remediation and
other environmental costs during the ordinary course of operations, management
anticipates that such costs will not have a material adverse effect on the
operations or financial condition of the Company.
Regulation and Licensing
The ownership and operation of the casino gaming facilities of the Company
are subject to extensive licensing, permitting and regulatory requirements
administered by various governmental entities. See "Regulation and Licensing"
included in Item 2 of this Joint Annual Report.
Employees
As of December 31, 1997, the Trust had four employees and the Corporation
had approximately 15,000 employees. As a result of the acquisitions of ITT and
Westin, the Corporation has, as of March 1, 1998, approximately 100,000
employees.
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Executive Offices
The Trust's executive offices are located at 2231 East Camelback Road,
Suite 410, Phoenix, Arizona 85016 (telephone (602) 852-3900) and the
Corporation's executive offices are located at 2231 East Camelback Road, Suite
400, Phoenix, Arizona 85016 (telephone (602) 852-3900).
Industry Segments
Financial information with respect to the two segments of the hospitality
industry (hotels and gaming) and the domestic and foreign segments in which the
Corporation operated during the year ended December 31, 1997 is included in Note
22 of the Notes to Financial Statements included in Item 8 of this Joint Annual
Report.
ITEM 2. PROPERTIES.
For information with respect to the properties owned, managed, franchised
or represented by ITT and Westin, see Item 1 of this Joint Annual Report.
At December 31, 1997, the Company owned, operated and managed a
geographically diversified portfolio of hotel assets, including fee, ground
lease and first mortgage interests in 120 hotel properties containing
approximately 32,800 guest rooms located in 34 states and the District of
Columbia, Mexico and Scotland. At that time, 92 of such hotels were operated
under licensing, membership, franchise or management agreements or leases with
national hotel organizations, including Ritz Carlton(R), Westin(R), Marriott(R),
Hilton(R), Sheraton(R), Omni(R), Doubletree(R), Embassy Suites(R), Crowne
Plaza(R), Courtyard By Marriott(R), Wyndham(R), Ramada(R), Radisson(R),
Clarion(R), Holiday Inn(R), Residence Inn(R), Days Inn(R), Best Western(R) and
Vagabond Inn(R).
EQUITY INVESTMENTS
As of December 31, 1997, the Company had equity investments in 102
properties containing a total of over 27,500 guest rooms. All but six of the
properties are owned by the Trust. Those six properties -- the Milwaukee
Sheraton, the Midland Hotel, the Turnberry Hotel and Golf Resort and the Westin
Regina Resorts in Cancun, Cabo San Lucas and Puerto Vallarta, Mexico -- are
owned by the Operating Partnership; all are subject to mortgages held by the
Trust. Of the 96 hotels owned by the Trust at December 31, 1997, all but four
are leased to the Corporation or its subsidiaries pursuant to leases between the
Trust and the Corporation (the "Intercompany Leases").
Each of the Intercompany Leases provides for the lessee's payment of annual
minimum rent in a specified amount plus additional rent based on a percentage of
the gross revenues (or items thereof) of the leased property. The Intercompany
Leases have an average remaining term of three years. The Intercompany Leases
are "triple-net" -- i.e., the lessee is generally responsible for paying all
operating expenses of the hotel property, including maintenance and repair
costs, insurance premiums and real estate and personal property taxes, and for
making all rental and other payments required pursuant to any underlying ground
leases. As lessee, the Operating Partnership retains all of the profits, net of
rents and other expenses, and bears all risk of losses, generated by the hotel
property's operations.
Of the four Trust hotels not subject to Intercompany Leases, the three
Vagabond Inns (the "Vagabond Inns") as of December 31, 1997 were leased by the
Trust to a third party pursuant to ground leases that expire in 2001, 2007 and
2008, respectively. In February 1998, the Trust sold its leasehold interests in
the Vagabond Inns for approximately $7.7 million. The remaining property, the
Doral Inn, is leased by the Trust to a third party; such lease expires in 2005.
The Trust owns the land underlying the Doral Inn and holds a leasehold mortgage
on the building and personal property; the Operating Partnership operates the
hotel pursuant to a sublease. Lastly, the Marriott Forrestal Village is leased
by the Trust to the Corporation, which, in turn, leases the property to a third
party. Both such leases expire in 2007.
The following table sets forth the average occupancy rate, average daily
rate ("ADR"), REVPAR and certain other information concerning the Company's
non-gaming hotels (excluding the Vagabond Inns) for the year ended December 31,
1997. Each hotel in the following table is owned by the Trust and leased to the
Corporation, except as noted.
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YEAR ENDED DECEMBER 31, 1997
YEAR YEAR -----------------------------
HOTEL LOCATION ROOMS OPENED ACQUIRED(1) ADR($) OCCUP(%) REVPAR($)
----- ------------------- ----- ------ ----------- ------ -------- ---------
Embassy Suites Phoenix Airport....... Phoenix, AZ 227 1981 1983 101.54 71.9 72.99
Tempe Embassy Suites................. Tempe, AZ 224 1984 1995 115.55 78.3 90.43
Hotel Park Tucson.................... Tucson, AZ 215 1986 1996 78.32 67.8 53.08
Plaza Hotel & Conference
Center(15)......................... Tucson, AZ 149 1971 1983 58.21 60.2 35.05
Sheraton Hotel....................... Long Beach, CA 460 1988 1997 87.12 70.4 61.33
Westin Los Angeles Airport(19)....... Los Angeles, CA 723 1986 1996 68.75 72.3 49.68
Clarion at San Francisco Airport..... Millbrae, CA 442 1962 1996 94.29 74.4 70.17
Palm Desert Embassy Suites........... Palm Desert, CA 198 1985 1996 112.54 72.7 81.86
Doubletree Club Hotel Rancho
Bernardo........................... Rancho Bernardo, CA 209 1988 1995 81.07 70.3 56.96
Westin Mission Hills Resort(13)...... Rancho Mirage, CA 512 1987 1997 155.00 68.5 106.19
San Diego Marriott Suites............ San Diego, CA 264 1989 1997 125.09 72.8 91.10
Westin Horton Plaza San Diego........ San Diego, CA 450 1987 1996 125.46 73.4 92.10
Sonoma County Hilton................. Santa Rosa, CA 245 1984 1997 82.13 67.2 55.18
Westwood Marquis Hotel & Gardens(7).. Westwood, CA 257 1969 1996 185.51 59.1 109.58
Radisson Denver South................ Englewood, CO 263 1986 1997 90.33 68.5 61.84
Sheraton Stamford(9)................. Stamford, CT 480 1985 1997 101.92 60.6 61.74
Tara Stamford Hotel.................. Stamford, CT 445 1984 1997 103.25 57.6 59.45
Capitol Hill Suites.................. Washington, DC 152 1955 1995 104.55 70.0 73.17
One Washington Circle................ Washington, DC 151 1964 1997 113.35 82.5 93.56
Westin Washington, DC................ Washington, DC 263 1984 1995 133.59 65.2 87.06
Wyndham Hotel at Ft. Lauderdale
Airport............................ Dania, FL 251 1986 1996 82.61 79.4 65.58
Deerfield Beach Hilton............... Deerfield Beach, FL 220 1985 1997 82.16 74.2 61.00
Doubletree Guest Suites Cypress
Creek.............................. Fort Lauderdale, FL 254 1985 1996 85.19 76.5 65.18
Gainesville Radisson Hotel........... Gainesville, FL 195 1974 1986 69.13 52.7 36.40
Westin Tampa Airport................. Tampa, FL 260 1987 1996 93.71 64.5 60.48
Holiday Inn -- Albany................ Albany, GA 151 1989 1989 64.43 60.5 38.98
Lenox Inn............................ Atlanta, GA 180 1965 1995 79.62 65.8 52.37
Marque of Atlanta.................... Atlanta, GA 275 1980 1996 95.89 63.1 60.49
Sheraton Colony Square............... Atlanta, GA 462 1973 1995 111.49 66.6 74.26
Terrace Garden Hotel................. Atlanta, GA 364 1975 1995 93.82 63.8 59.86
Westin Atlanta North at Perimeter.... Atlanta, GA 370 1986 1996 111.10 65.7 72.99
Embassy Suites Hotel................. College Park, GA 233 1989 1997 102.12 68.9 70.31
Arlington Park Hilton................ Arlington Heights, 422 1968 1996 92.54 73.5 68.06
IL
Days Inn Lake Shore Drive............ Chicago, IL 578 1965 1997 104.07 70.2 73.04
Midland Hotel(2)..................... Chicago, IL 257 1934 1996 139.87 73.4 102.66
Raphael Hotel........................ Chicago, IL 172 1978 1997 135.59 67.5 91.50
Tremont Hotel........................ Chicago, IL 129 1974 1997 157.35 62.0 97.61
Radisson Plaza & Suite Hotel(18)..... Indianapolis, IN 552 1983 1997 92.29 75.0 69.19
Harvey Hotel......................... Wichita, KS 259 1974 1995 58.71 59.8 35.10
Doubletree Guest Suites.............. Lexington, KY 155 1989 1995 91.89 70.3 64.62
Crowne Plaza(10)..................... New Orleans, LA 439 1984 1997 116.23 72.4 84.17
Hotel De La Poste.................... New Orleans, LA 100 1973 1997 124.31 72.7 90.39
Park Plaza Hotel(5).................. Boston, MA 960 1927 1996 131.61 77.1 101.45
Sheraton Tara Hotel.................. Braintree, MA 376 1971 1997 114.86 76.1 87.36
Tara's Ferncroft Conference Resort... Danvers, MA 367 1978 1997 101.03 55.7 56.25
Sheraton Tara Hotel.................. Framingham, MA 375 1973 1997 105.52 64.0 67.55
Tara Hyannis Hotel & Resort.......... Hyannis, MA 224 1967 1997 105.79 56.4 59.66
Tara's Cape Codder Hotel............. Hyannis, MA 261 1975 1997 87.85 48.1 42.26
Sheraton Tara Lexington Inn.......... Lexington, MA 119 1958 1997 114.34 76.1 87.02
Colonial Hilton and Resort........... Lynnfield, MA 280 1966 1997 107.71 63.3 68.21
Sheraton Needham..................... Needham, MA 247 1986 1996 112.80 76.7 86.46
Sheraton Tara Hotel(20).............. Newton, MA 272 1968 1997 114.29 72.8 83.21
Westin Waltham Hotel................. Waltham, MA 347 1990 1996 126.88 73.3 93.03
BWI Airport Marriott................. Baltimore, MD 310 1988 1997 112.12 75.6 84.71
Holiday Inn -- Calverton............. Beltsville, MD 206 1987 1995 73.15 63.7 46.62
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YEAR ENDED DECEMBER 31, 1997
YEAR YEAR -----------------------------
HOTEL LOCATION ROOMS OPENED ACQUIRED(1) ADR($) OCCUP(%) REVPAR($)
----- ------------------- ----- ------ ----------- ------ -------- ---------
Sheraton Tara Hotel.................. South Portland, ME 220 1973 1997 90.51 66.2 59.93
Bay Valley Hotel & Resort(4)......... Bay City, MI 151 1973 1984 65.26 51.9 33.90
Novi Hilton.......................... Novi, MI 239 1985 1997 94.68 70.4 66.63
Westin Southfield -- Detroit......... Southfield, MI 385 1987 1997 102.43 66.0 67.57
Doubletree Hotel Minneapolis Airport
at the Mall........................ Bloomington, MN 321 1975 1996 98.63 74.7 73.72
Sheraton Metrodome................... Minneapolis, MN 254 1980 1996 83.65 72.3 60.45
Ritz Carlton -- Kansas City.......... Kansas City, MO 373 1973 1996 138.66 78.4 108.65
St. Louis Embassy Suites............. St. Louis, MO 297 1985 1996 101.24 68.5 69.38
Omni Hotel........................... Chapel Hill, NC 168 1981 1995 93.27 71.2 66.37
Westin Aquila........................ Omaha, NE 145 1995 1997 102.94 63.8 65.70
Wayfarer Inn......................... Bedford, NH 194 1966 1997 77.07 63.5 48.98
Merrimack Hotel & Conference
Center............................. Merrimack, NH 200 1979 1997 60.51 37.9 22.91
Sheraton Tara Hotel.................. Nashua, NH 337 1980 1997 80.51 59.0 47.46
Crowne Plaza Edison.................. Edison, NJ 274 1987 1997 85.58 72.4 61.99
Sheraton Tara Hotel.................. Parsippany, NJ 389 1987 1997 115.60 73.6 85.07
Marriott Forrestal Village
Hotel(3)........................... Princeton, NJ 294 1987 1996 117.38 84.4 99.07
Best Western Airport Inn (16)........ Albuquerque, NM 123 1980 1984 59.40 68.0 40.39
Doral Court(6)(14)................... New York, NY 199 1927 1996 165.28 75.5 124.78
Doral Inn(8)......................... New York, NY 652 1927 1996 126.60 63.0 79.82
Doral Tuscany(6)(14)................. New York, NY 121 1935 1996 188.98 73.6 139.02
Days Inn City Center................. Portland, OR 173 1962 1984 77.55 68.3 52.96
Riverside Inn........................ Portland, OR 137 1964 1984 96.27 65.9 63.47
Allentown Hilton..................... Allentown, PA 224 1981 1996 70.94 69.6 49.37
Park Ridge Hotel..................... King of Prussia, PA 265 1973 1997 100.38 76.1 76.40
Days Inn Airport(12)................. Philadelphia, PA 177 1984 1996 70.14 74.6 52.34
Ritz Carlton -- Philadelphia......... Philadelphia, PA 290 1990 1996 166.53 82.5 137.31
Westin Philadelphia International
Airport(12)........................ Philadelphia, PA 251 1985 1996 101.58 64.2 65.17
Sheraton Tara Airport Hotel.......... Warwick, RI 207 1979 1997 87.48 71.1 62.18
Charleston Hilton North.............. Charleston, SC 296 1983 1997 78.01 70.5 55.00
Westin Hermitage..................... Nashville, TN 120 1910 1997 129.18 65.7 84.92
Radisson Dallas Park Central......... Dallas, TX 438 1972 1972 78.55 45.9 36.04
Doubletree Guest Suites DFW
Airport............................ Irving, TX 308 1985 1996 107.70 73.7 79.40
Courtyard by Marriott Crystal City... Arlington, VA 272 1990 1997 106.40 68.8 73.22
Omni Waterside Hotel................. Norfolk, VA 446 1976 1997 90.16 60.4 54.44
Residence Inn Tyson's Corner......... Vienna, VA 96 1984 1984 119.47 83.0 99.14
Tyee Hotel(4)........................ Olympia, WA 145 1961 1987 65.27 49.3 32.20
Days Inn -- Town Center(17).......... Seattle, WA 90 1957 1984 78.28 71.4 55.86
Edmond Meany Hotel................... Seattle, WA 155 1932 1984 95.06 57.8 54.93
Sixth Avenue Inn(17)................. Seattle, WA 166 1959 1984 91.00 65.2 59.34
Milwaukee Sheraton(2)(4)............. Brookfield, WI 393 1972 1990 81.67 72.8 59.45
Turnberry Hotel and Golf Resort(2)... Ayreshire, Scotland 132 1905 1997 156.12 49.5 77.31
Westin Regina Resort(2)(11).......... Cancun, Mexico 385 1991 1997 111.25 72.0 80.10
Westin Regina Resort(2)(11).......... Puerto Vallarta, 280 1992 1997 98.99 67.5 66.82
Mexico
Westin Regina Resort(2) (11)......... Cabo San Lucas, 229 1994 1997 204.36 74.7 152.75
Mexico
TOTAL OWNED (99 HOTELS)..............
109.41 68.6 75.08
MANAGED:
Ontario Airport Hilton............... Ontario, CA 309 1997 78.85 71.6 56.47
Grand Junction Hilton................ Grand Junction, CO 264 1997 69.57 68.7 47.81
Danbury Hilton & Towers.............. Danbury, CT 242 1997 93.49 80.3 75.09
Wilmington Hilton Hotel.............. Wilmington , DE 193 1997 83.73 68.8 57.42
Atlanta Hilton Northeast............. Atlanta, GA 272 1997 93.40 63.0 58.86
Ramada Hotel......................... Bethesda, MD 160 1997 84.35 70.8 59.70
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YEAR ENDED DECEMBER 31, 1997
YEAR YEAR -----------------------------
HOTEL LOCATION ROOMS OPENED ACQUIRED(1) ADR($) OCCUP(%) REVPAR($)
----- ------------------- ----- ------ ----------- ------ -------- ---------
Long Island Sheraton Hotel........... Smithtown, NY 211 1997 93.05 80.7 75.06
Sheraton Gateway Houston Airport..... Houston, TX 418 1997 72.06 65.8 47.40
Pavillion Towers Hotel............... Virginia Beach, VA 292 1997 65.55 38.4 25.17
TOTAL MANAGED (9 HOTELS).............
82.07 66.6 54.64
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(1) "Year acquired" represents the calendar year in which the Trust or
Corporation (or a predecessor) made its initial investment in the property.
(2) Property is owned by the Corporation subject to a first mortgage to the
Trust.
(3) Property is subject to a ground lease expiring in December 2055, which is
terminable by the ground lessor after September 1999 and prior to that
time, upon six months' notice under certain circumstances.
(4) Property is an asset held for sale at December 31, 1997.
(5) The Trust owns a 58.2% general partnership interest in the partnership that
owns this hotel. The property is subject to the BPP Mortgage (as defined in
"Liquidity and Capital Resources -- Cash Flows from Investing and Financing
Activities -- Credit Facilities and Recent Stock Sales" included in Item 7
of this Joint Annual Report).
(6) Property is subject to a mortgage under the Doral Mortgage(as defined in
"Liquidity and Capital Resources -- Cash Flows from Investing and Financing
Activities -- Loan and Credit Facilities" included in Item 7 of this Joint
Annual Report).
(7) The Trust owns a 93.5% general partnership interest in the partnership that
owns this hotel.
(8) The Trust owns the land and holds a leasehold mortgage on the hotel
building and personal property; the Operating Partnership operates the
hotel pursuant to a sublease.
(9) Property is subject to a mortgage under the Stamford Note (as defined in
"Liquidity and Capital Resources -- Cash Flows from Investing and Financing
Activities -- Loan and Credit Facilities" included in Item 7 of this Joint
Annual Report).
(10) Property is subject to the Crowne Plaza Mortgage (as defined in "Liquidity
and Capital Resources -- Cash Flows from Investing and Financing
Activities -- Loans and Credit Facilities" included in Item 7 of this Joint
Annual Report).
(11) Property is subject to a mortgage under the Bancomer Note (as defined
in"Liquidity and Capital Resources -- Cash Flows from Investing and
Financing Activities -- Loans and Credit Facilities" included in Item 7 of
this Joint Annual Report).
(12) Property is subject to a mortgage under the Tax Exempt Bonds (as defined in
"Liquidity and Capital Resources -- Cash Flows from Investing and Financing
Activities -- Loans and Credit Facilities" included in Item 7 of this Joint
Annual Report).
(13) The Trust owns a 95% interest in this property.
(14) The Trust owns a 49% interest in this property.
(15) Property is subject to ground leases that expire between 1999 to 2007,
depending on the parcel.
(16) Property is subject to a ground lease expiring in 2029.
(17) Property is subject to a ground lease expiring in 1999.
(18) Property is subject to a ground lease expiring in 2067.
(19) Property is subject to a ground lease expiring in 2054.
(20) Property is subject to a ground lease expiring in 2010.
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FRANCHISE AGREEMENTS
Seventy-three of the 102 hotel properties in which Starwood Hotels had an
equity interest at December 31, 1997 were operated at such time pursuant to
franchise or license agreements ("Franchise Agreements"), including 14 Franchise
Agreements with Westin and 13 Franchise Agreements with Sheraton. The Franchise
Agreements generally require the payment of a monthly royalty fee based on gross
room revenue and various other fees associated with certain marketing or
advertising and centralized reservation services, which fees also are generally
based on gross room revenues.
The Franchise Agreements have various durations but generally may be
terminated upon not more than three years' prior notice or upon payment of
certain specified fees.
The Franchise Agreements generally contain specific standards for, and
restrictions and limitations on, the operation and maintenance of the hotels,
which standards are established by the franchisors to maintain uniformity in the
system created by each such franchisor. Such standards generally regulate the
appearance of the hotel, the quality and type of goods and services offered,
signage and usage of trade and service marks.
The Franchise Agreements also typically contain financial reporting
requirements relating to the calculation of royalty and other fees and insurance
requirements with respect to coverage for specified liabilities, approved
coverage limits and minimum insurance company ratings.
The Franchise Agreements generally require the consent of the franchisor to
a transfer of an interest in the applicable franchise, and both the consent of
the franchisor and the execution of a new franchise agreement in the event of a
transfer of all or a controlling portion of the franchisee under the relevant
Franchise Agreement. In addition, some Franchise Agreements may require payment
of an initial fee upon establishment of a franchise relationship.
The Company intends to convert many of its hotels to a Westin or Sheraton
brand.
MANAGEMENT AGREEMENTS
As of December 31, 1997, nine of the Company-owned hotels were managed by
third-party operators. The Marriott Forrestal Village is operated by Marriott
International, Inc. ("Marriott") pursuant to a lease expiring in 2007, and the
Ritz Carlton Hotels in Philadelphia, Pennsylvania, and Kansas City, Missouri are
operated by an affiliate of Marriott pursuant to operating agreements that
terminate in 1999 but are subject to earlier termination if certain annual
financial performance standards are not met. The Westin Regina Resorts in Cabo
San Lucas, Cancun and Puerto Vallarta, Mexico, the Westin Mission Hills Resort
in Rancho Mirage, California; the Westin Aquila in Omaha, Nebraska; and the
Turnberry Hotel and Golf Resort in Ayreshire, Scotland have been operated by
Westin Worldwide since their respective acquisition dates by the Company.
Each of the management agreements described above provides that the
operator has the exclusive right to direct the operations of the hotel subject
to that agreement. The operator is responsible for maintaining and making all
necessary repairs to the managed hotel, hiring, training and supervising all
hotel employees, and performing all hotel bookkeeping and other administrative
duties. Each operator is required to submit to the Company for its approval an
annual budget that includes proposed capital expenditures, and the operator
makes only those capital expenditures that are approved by the Company. The
Company is required to make available to each operator sufficient working
capital to operate the hotel.
For their services in managing the hotels, each operator receives a fee
equal to a specified percentage (generally 2%-4%) of the gross revenues of the
managed hotel, plus additional incentive fees based upon the hotel's operating
profits.
As of December 31 1997, the Company managed nine hotels owned by third
parties. Certain of these management agreements are currently month-to-month;
others have expiration dates ranging from 1999 to 2016. Management fees ranging
from 2.5% of hotel revenues to 4% of hotel revenues.
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MORTGAGE AND OTHER NOTES RECEIVABLES
At December 31, 1997, the Trust held nine promissory notes issued by the
Operating Partnership. Three of those notes ($31.8 million in aggregate
principal amount at December 31, 1997) are secured by the Sheraton Hotel in
Milwaukee, Wisconsin; one note ($40.3 million in principal amount at December
31, 1997) is secured by the Doral Inn in New York, New York; one note ($20.0
million in principal amount at December 31, 1997) is secured by the Midland
Hotel in Chicago, Illinois; one note ($42.3 million in principal amount at
December 31, 1997) is secured by the Westin Regina in Cancun, Mexico; one note
($54.7 million in principal amount at December 31, 1997) is secured by the
Westin Regina in Cabo San Lucas, Mexico; one note ($25.3 million in principal
amount at December 31, 1997) is secured by the Westin Regina in Puerto Vallarta,
Mexico; and one note ($27.0 million in principal amount at December 31, 1997) is
secured by the Turnberry Hotel and Golf Resort in Ayreshire, Scotland.
At December 31, 1997, the Trust held 11 promissory notes that were either
contributed by the Starwood Partners to the Realty Partnership as part of the
Reorganization, executed by third-party purchasers of the Trust's hotels, or
purchased by the Trust, all of which are secured by mortgages (including deeds
of trust) on eight hotels in the aggregate. Of these 11 promissory notes, eight
notes ($63.0 million in aggregate principal amount at December 31, 1997) are
secured by first mortgages and three notes ($0.2 million in aggregate principal
amount as of December 31, 1997) are secured by second mortgages. Seven of these
11 notes have fixed interest rates that currently range from 8% to 10% per
annum; one note has a variable interest rate that was the three-month London
Interbank Offered Rate ("LIBOR") plus 1.25% per annum at December 31, 1997; one
note also provides for contingent interest based on a percentage of the gross
revenue of the property securing such note and three notes are non-interest
bearing. The maturity dates of the 11 notes range from current to December 2006.
For additional information with respect to the mortgage notes receivable
held by the Trust, see Notes 14 and 15 and Schedule IV of Notes to Financial
Statements included in Item 8 of this Joint Annual Report.
In December 1987, in connection with the acquisition by the Company of an
interest in two Atlanta, Georgia area hotels (which have been subsequently
sold), a former officer of the Trust assumed certain obligations of the seller,
which obligations are evidenced by an unsecured promissory note to the Trust in
the principal amount of $800,000. Interest on the outstanding principal amount
of this note accrues interest at an annual rate of 10% and is payable annually;
the entire principal amount of the note is due in December 1999. During 1995,
the Trust loaned another former officer of the Trust, on an unsecured basis,
$250,000, of which $100,000 was outstanding as of December 31, 1997. The
remaining principal amount is due in July 2005 and bears interest at an annual
rate equal to the lowest applicable rate prescribed by Section 1274(d) of the
Code.
During 1996, the Corporation made a $150,000 non-interest bearing bridge
loan to a former officer of the Corporation, Eric A. Danziger, which loan was
repaid in February 1998; and a $250,000 non-interest bearing loan to Theodore W.
Darnall, an officer of the Corporation, of which $150,000 remained outstanding
as of December 31, 1997. This loan is secured by a second mortgage on Mr.
Darnall's residence in Phoenix, Arizona, and will mature as to $150,000 upon
termination of Mr. Darnall's employment with the Corporation. (See Note 21 of
Notes to Financial Statements included in Item 8 of this Joint Annual Report and
"Employment and Compensation Agreements with Executive Officers" included in
Item 11 hereof.)
REGULATION AND LICENSING
Casino Gaming Regulation -- General. As a result of the ITT Merger,
Starwood Hotels' gaming operations include Caesars Palace and the Desert Inn
Resort & Casino ("Desert Inn"), both in Las Vegas, Nevada; Caesars Atlantic City
in Atlantic City, New Jersey; Caesars Tahoe in Stateline, Nevada; the Sheraton
Casino in Tunica County, Mississippi; the Sheraton Lima Hotel and Casino in
Lima, Peru; the Sheraton Halifax Hotel and Casino in Halifax, Nova Scotia; the
Sheraton Casino Sydney in Sydney, Cape Breton, Nova Scotia. Caesars also owns
one-half of a management company that operates Casino Windsor, a casino in
Windsor, Canada, which is owned by Government of the Province of Ontario. A
Caesars subsidiary operates small casinos on two cruise ships as well. Sheraton
also operates casinos in Australia and Egypt. In
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May 1996, Caesars was granted a certificate of suitability by the Indiana Gaming
Commission to construct and operate a riverboat casino on the Ohio River in
Harrison County, Indiana, across the river from Louisville, Kentucky.
Construction of the facility is subject to receipt of various consents, permits
and approvals. Another subsidiary of the Corporation, Hotel Investors
Corporation of Nevada ("HICN"), leases and operates the King 8 Hotel in Las
Vegas, Nevada. The Trust sold the King 8 in 1996 pursuant to an arrangement in
which HICN agreed to continue to operate the hotel and casino to the earlier of
when the purchaser or his designee obtains required gaming licenses and
approvals or June 30, 1998.
The Desert Inn is owned and operated by Sheraton Desert Inn Corporation
("SDI"), which is a wholly owned subsidiary of Sheraton Gaming Corporation
("SGC"), which is a wholly owned subsidiary of Sheraton (Sheraton, SGC and SDI
are collectively referred to as the "Sheraton Desert Inn Companies"). The
Sheraton Casino in Tunica County, Mississippi, is owned and operated by Sheraton
Tunica Corporation ("STC"), which is a wholly owned subsidiary of SDI.
Caesars' casino gaming operations in Las Vegas, Nevada and Stateline,
Nevada are conducted by Desert Palace, Inc. ("DPI"), which is a wholly owned
subsidiary of Caesars Palace Corporation ("CPC"), which is a wholly owned
subsidiary of Caesars (Caesars, CPC and DPI are hereinafter collectively
referred to as the "Caesars Nevada Companies"). Caesars is a wholly owned
subsidiary of Sheraton. Caesars' casino gaming operations in Atlantic City are
conducted by Boardwalk Regency Corporation ("BRC"), which is a wholly owned
subsidiary of Caesars New Jersey, Inc. ("CNJ"), which is a wholly owned
subsidiary of Caesars (as required by the context, Caesars, CNJ and BRC are
collectively referred to as the "Caesars New Jersey Companies"). In addition,
DPI owns all of the issued and outstanding capital stock of Tele/Info, Inc.
("Tele/Info"), which is a Nevada licensed disseminator of horse race simulcasts
for the purpose of receiving and disseminating live telecasts of horse racing
information.
The ownership and/or operation of casino gaming facilities in the United
States are subject to extensive Federal, state and local regulations. Under
Federal Law, Starwood Hotels' casino gaming operations are specifically subject
to the compliance with the Gambling Devices Act of 1962, as amended, and the
Bank Secrecy Act, as amended. These statutes govern the ownership, possession,
manufacture, distribution and transportation in interstate commerce of gaming
devices, and the recording and reporting of currency transactions, respectively.
Starwood Hotels' Nevada casino gaming operations are subject to the Nevada
Gaming Control Act and the regulations promulgated thereunder (the "Nevada
Act"), and the licensing and regulatory control of the Nevada Gaming Commission
(the "Nevada Commission") and the Nevada State Gaming Control Board (the "Nevada
Board"), as well as, certain county government agencies (collectively referred
to as the "Nevada Gaming Authorities"). Due to the development of a riverboat
gaming facility located on the Ohio River in Harrison County, Indiana, Starwood
Hotels' casino gaming operations in Indiana are subject to the Indiana Gaming
Control Act (the "Indiana Act"), and the licensing and regulatory control of the
Indiana Gaming Commission, as well as various local, county and state regulatory
agencies. Starwood Hotels' New Jersey casino gaming operations are subject to
the New Jersey Casino Control Act (the "New Jersey Act"), and the licensing and
regulatory control of the New Jersey Casino Control Commission (the "New Jersey
Commission"), and the New Jersey Department of Law & Public Safety, Divisions of
Gaming Enforcement (the "New Jersey DGE"), as well as various local, county and
state regulatory agencies (collectively referred to as the "New Jersey Gaming
Authorities"). Starwood Hotels' Mississippi casino gaming operations are subject
to the Mississippi Gaming Control Act (the "Mississippi Act"), and the licensing
and regulatory control of the Mississippi Gaming Commission (the "Mississippi
Commission"), as well as various local, county and state regulatory agencies
(collectively referred to as the "Mississippi Gaming Authorities"). Starwood
Hotels' Ontario casino gaming operations are subject to the Ontario Gaming
Control Act (the "Ontario Act"), and the licensing and regulatory control of the
Ontario Gaming Control Commission (the "Ontario Commission"), as well as various
local, provincial and federal regulatory agencies (collectively referred to as
the "Ontario Gaming Authorities"). Starwood Hotels' Nova Scotia casino gaming
operations are subject to the Nova Scotia Gaming Control Act (the "Nova Scotia
Act"), and the licensing and regulatory control of the Nova Scotia Gaming
Control Commission (the "Nova Scotia Commission"), as well as various local,
provincial and federal regulatory agencies (collectively referred to as the
"Nova Scotia Gaming Authorities").
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The casino gaming laws, regulations and supervisory procedures of Nevada,
New Jersey, Indiana, Mississippi, Ontario and Nova Scotia are extensive and
reflect certain public policy considerations as to (i) the integrity of casino
gaming operations and their participants; (ii) the need for strict governmental
and regulatory control of casino gaming operations; (iii) the creation of
economic development, taxes and employment; and, (iv) the maintenance and
development of public confidence and trust in casino gaming regulation and
control. Changes to these laws, regulations and supervisory procedures could
have an adverse effect on Starwood Hotels' casino gaming operations.
Nevada Gaming Regulation. The gaming laws, regulations and supervisory
procedures of Nevada seek to (i) prevent unsavory or unsuitable persons from
having any direct or indirect involvement with gaming at any time or in any
capacity; (ii) establish and maintain responsible accounting practices and
procedures; (iii) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenues, providing reliable record-keeping,
and making periodic reports to the applicable casino gaming authority; (iv)
prevent cheating and fraudulent practices; and, (v) provide a source of state
and local revenues through taxation and licensing fees.
Starwood Hotels, ITT and Caesars are registered with the Nevada Commission
as publicly traded corporations and Starwood Hotels has been found suitable by
the Nevada Gaming Authorities to own all of the outstanding capital stock of ITT
and HICN. The Nevada Gaming Authorities have found suitable ITT as the sole
shareholder of Sheraton. Sheraton is registered with the Nevada Commission as an
intermediary company and been found suitable by the Nevada Gaming Authorities to
own all the outstanding capital stock of Caesars and SGC. Similarly, SGC is
registered with the Nevada Commission as an intermediary company and been found
suitable by the Nevada Gaming Authorities to own all the outstanding capital
stock of SDI.
SDI operates the Desert Inn, DPI operates both Caesars Palace and Caesars
Tahoe, and HICN operates the King 8 pursuant to licenses granted by the Nevada
Gaming Authorities. These casino gaming licenses are not transferrable and must
be renewed periodically by the payment of various gaming license fees and taxes.
No person may become a stockholder of, or receive any percentage of profits from
SDI, DPI or HICN without first obtaining certain required licenses and approvals
from the Nevada Gaming Authorities.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, a corporation which is
involved in gaming activities. Officers, directors and key employees of each of
SDI, DPI and HICN must be individually licensed by, and changes in corporate
positions must be reported to the Nevada Gaming Authorities, which changes may
be disapproved by the Nevada Gaming Authorities. Certain of Starwood Hotels'
officers, directors and key employees and those of Starwood Hotels' subsidiaries
who are actively and directly involved in Starwood Hotels' gaming activities
have been, and others may be, required to be licensed or found suitable by the
Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application
for licensing for any cause which they deem reasonable. A finding of suitability
is comparable to licensing, and both require submission of detailed personal and
financial information followed by a thorough investigation.
If the Nevada Gaming Authorities find an officer, director or key employee
unsuitable for licensing or unsuitable to continue having a relationship with
Starwood Hotels, ITT, the Sheraton Desert Inn Companies, the Caesars Nevada
Companies or HICN, the companies involved would be required to sever all
relationships with such person. In addition, the Nevada Gaming Authorities may
require a registered company or licensee to terminate the employment of any
person who refuses to file appropriate applications or disclosures.
Starwood Hotels, ITT, the Sheraton Desert Inn Companies, the Caesars Nevada
Companies and HICN are required to submit detailed financial and operating
reports to the Nevada Commission. Substantially all loans, leases, sales of
securities and similar financing transactions by either SDI, DPI or HICN must be
reported to or approved by the Nevada Commission. Nevada law prohibits a
corporation registered by the Nevada Commission from making a public offering of
its securities without the prior approval of the Nevada Commission if any part
of the proceeds of the offering of the securities is, or the securities
themselves are, to be used either to (i) finance the construction, acquisition
or operation of gaming facilities in Nevada; or (ii) retire or extend
obligations incurred for one or more such purposes.
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If it were determined that the Nevada Act was violated by SDI, DPI or HICN,
the gaming license each holds could be limited, conditioned, suspended or
revoked. In addition, at the discretion of the Nevada Commission, Starwood
Hotels, ITT, the Sheraton Desert Inn Companies and the persons involved could be
subject to substantial fines for each separate violation of the Nevada Act by
the Desert Inn. Similarly, and also at the discretion of the Nevada Commission,
Starwood Hotels, ITT, the Caesars Nevada Companies and the persons involved
could be subject to substantial fines for each separate violation of the Nevada
Act by either Caesars Palace or Caesars Tahoe. Likewise, the Nevada Commission
may exercise its discretion to impose substantial fines on Starwood Hotels, HICN
and the persons involved for each separate violation of the Nevada Act by the
King 8. Furthermore, a supervisor could be appointed by the Nevada Commission to
operate the gaming property of SDI, DPI or HICN and, under certain
circumstances, earnings generated during the supervisor's appointment (except
for the reasonable rental value of the affected gaming property) could be
forfeited to the State of Nevada. Any suspension or revocation of the licenses
or approvals, or the appointment of a supervisor, would have a material adverse
effect on SDI, DPI or HICN, as the case may be.
The Nevada Gaming Authorities may investigate and require a finding of
suitability of any holder of any class of Starwood Hotels' voting securities at
any time. Nevada law requires any person who acquires more than 5% of any class
of Starwood Hotels' voting securities to report the acquisition to the Nevada
Commission and such person may be investigated and found suitable or not
suitable. Any person who becomes a beneficial owner of more than 10% of any
class of Starwood Hotels' voting securities must apply for a finding of
suitability by the Nevada Commission within 30 days after the Nevada Board
Chairman mails a written notice requiring such filing, and must pay the costs
and fees incurred by the Nevada Board in connection with the investigation.
Under certain circumstances, an "institutional investor," as defined by the
Nevada Act, that acquires more than 10% but not more than 15% of Starwood
Hotels' voting securities may apply to the Nevada Commission for a waiver of
such finding of suitability requirements if such institutional investor holds
the voting securities for investment purposes only. An institutional investor
will not be deemed to hold voting securities for investment purposes unless the
voting securities were acquired and are held in the ordinary course of business
as an institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of either the Board of
Directors or the Board of Trustees, any change in Starwood Hotels' corporate
charter, bylaws, management, policies or operations or any of Starwood Hotels'
casino gaming operations, or any other action which the Nevada Commission finds
to be inconsistent with holding Starwood Hotels' voting securities for
investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include (i) voting
on all matters voted on by stockholders; (ii) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management, policies or
operations; and, (iii) such other activities as the Nevada Commission may
determine to be consistent with such investment intent. If the stockholder who
must be found suitable is a corporation, partnership or trust, it must submit
detailed business and financial information, including a list of beneficial
holders of its ownership interests.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
by the Chairman of the Nevada Board may be found unsuitable. Any person found
unsuitable who holds, directly or indirectly, any beneficial ownership of
Starwood Hotels' debt or equity voting securities beyond such period or periods
of time as may be prescribed by the Nevada Commission may be guilty of a gross
misdemeanor. Starwood Hotels, ITT, the Desert Inn Companies or the Caesars
Nevada Companies could be subject to disciplinary action if, without the prior
approval of the Nevada Commission and after receipt of notice that a person is
unsuitable to be an equity or debt security holder or to have any other
relationship with Starwood Hotels, ITT, the Sheraton Desert Inn Companies or the
Caesars Nevada Companies, any of such entities either (i) pays to the unsuitable
person any dividend, interest or any distribution whatsoever; (ii) recognizes
any voting right by such unsuitable person in connection with such securities;
(iii) pays the unsuitable person remuneration in any form; (iv) makes any
payment to the unsuitable person by way of principal, redemption, conversion,
exchange, liquidation or similar transaction; or, (v) fails to pursue all lawful
efforts to require such unsuitable person to relinquish his securities
including, if necessary, the immediate purchase of such securities for cash at
fair market value.
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Regulations of the Nevada Commission provide that control of a registered
publicly traded corporation cannot be changed through merger, consolidation,
acquisition of assets, management or consulting agreements, or any form of
takeover without the prior approval of the Nevada Commission. Persons seeking
approval to control a registered publicly traded corporation must satisfy the
Nevada Commission as to a variety of stringent standards prior to assuming
control of such corporation. The failure of a person to obtain such approval
prior to assuming control over the registered publicly traded corporation may
constitute grounds for finding such person unsuitable.
Regulations of the Nevada Commission also prohibit certain repurchases of
securities by registered publicly traded corporations without the prior approval
of the Nevada Commission. Transactions covered by these regulations are
generally aimed at discouraging repurchases of securities at a premium over
market price from certain holders of more that 3% of the outstanding securities
of the registered publicly traded corporation. The regulations of the Nevada
Commission also require prior approval for a "plan of recapitalization."
Generally, a plan of recapitalization is a plan proposed by the management of a
registered publicly traded corporation that contains recommended action in
response to a proposed corporate acquisition opposed by management of the
corporation if such acquisition would require the prior approval of the Nevada
Commission.
Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively
"Licensees"), and who proposes to become involved in a gaming operation outside
the State of Nevada is required to deposit with the Nevada Control Board, and
thereafter maintain, a revolving fund in the amount of $10,000 to pay the
expenses of investigation by the Nevada Board of the Licensees' participation in
such foreign gaming; the revolving fund is subject to increase or decrease in
the discretion of the Nevada Commission. Once such revolving fund is
established, the Licensees may engage in gaming activities outside the State of
Nevada without seeking the approval of the Nevada Commission provided (i) such
activities are lawful in the jurisdiction where they are to be conducted; and,
(ii) the Licensees comply with certain reporting requirements imposed by the
Nevada Act. Licensees are subject to disciplinary action by the Nevada
Commission if they (i) knowingly violate any laws of the foreign jurisdiction
pertaining to the foreign gaming operation; (ii) fail to conduct the foreign
gaming operation in accordance with the standards of honesty and integrity
required of Nevada gaming operations; (iii) engage in activities that are
harmful to the State of Nevada or its ability to collect gaming taxes and fees;
or, (iv) employ a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.
New Jersey Gaming Regulation. The New Jersey gaming laws and regulations
primarily concern (a) the financial stability and character of casino operators,
their employees, their security holders and others financially interested in
casino operations; and, (b) the operating methods and the financial and
accounting procedures used in connection with casino operations. The New Jersey
gaming laws and regulations include, among other requirements, detailed
provisions concerning (i) the type, manner and number of applications and
licenses required to conduct casino gaming and ancillary activities; (ii) the
licensing, regulation and curricula of gaming schools; (iii) the establishment
of minimum standards of accounting and internal control, including the issuance
and enforceability of casino credit; (iv) the manufacture, sale, distribution
and possession of gaming equipment; (v) the rules of the games; (vi) the
exclusion of undesirable persons; (vii) the use, regulation and reporting of
junket activities; (viii) the possession, sale and distribution of alcoholic
beverages; (ix) the regulation and licensing of suppliers to licensed casino
operators; (x) the conduct of entertainment within licensed casino facilities;
(xi) equal employment opportunity for employees of licensed casino operators,
contractors for casino facilities and other entities; (xii) the payment of gross
revenue taxes and similar fees and expenses; (xiii) the conduct of casino
simulcasting; and, (xiv) the imposition and discharge of casino reinvestment
development obligations. A number of these regulations require practices which
are different from those in many casinos elsewhere and some of them result in
casino operating costs greater than those in comparable facilities elsewhere. As
a prerequisite to being licensed, a New Jersey hotel/ casino facility must meet
certain facilities requirements concerning, among other things, the size and
number of guest rooms.
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BRC is licensed to operate Caesars Atlantic City by the New Jersey
Commission, which has broad discretion with regard to the issuance, renewal,
revocation or suspension of licenses. A New Jersey casino license is not
transferable and must be renewed at designated periods of up to four years.
Renewal is not automatic and involves an extensive review by the New Jersey DGE,
a report by the New Jersey DGE to the New Jersey Commission, an independent
review by the New Jersey Commission, and the affirmative vote of at least four
of the five sitting Commissioners of the New Jersey Commission. The casino
license to operate Caesars Atlantic City was renewed on November 30, 1996, and
expires on November 30, 2000. As a prerequisite to BRC holding a license, ITT,
Caesars and CNJ have been and are approved by the New Jersey Commission due to
their corporate relationship to BRC. Starwood Hotels also is required to be
approved by the New Jersey Commission, and has received interim casino
authorization.
Except for certain banking and lending institutions exempted under the New
Jersey Act, all financial backers, investors, mortgagees, debt holders,
landlords under leases relating to Starwood Hotels' New Jersey hotel/casino
facilities, all lenders to BRC, all officers and directors of BRC and all
employees who work at Caesars Atlantic City have to be qualified, licensed,
approved or registered by or with the New Jersey Commission. In addition, all
contracts and leases entered into by BRC are subject to approval by the New
Jersey Commission.
Any holder of the debt or equity securities of Starwood Hotels, Caesars or
CNJ must be found qualified; the qualification requirement may be waived based
on an express finding by the New Jersey Commission, with the consent of the
Director of the New Jersey DGE, that the security holder either (a)(i) is not
significantly involved in the activities of BRC; (ii) does not have the ability
to control Starwood Hotels, ITT, Caesars, CNJ or BRC; and (iii) does not have
the ability to elect one or more members of the Board of Directors, the Board of
Trustees, or the respective boards of directors of ITT, Caesars, CNJ or BRC; or
(b) is an "institutional investor." The New Jersey Act presumes that any
security holder that is not an "institutional investor" who owns or beneficially
holds 5% or more of Starwood Hotels' equity securities has the ability to
control Starwood Hotels, ITT, Caesars, CNJ or BRC, unless such presumption is
rebutted by clear and convincing evidence.
The New Jersey Act and regulations define an "institutional investor" as
(i) any retirement fund administered by a public agency for the exclusive
benefit of Federal, state or local public employees; (ii) an investment company
registered under the Investment Company Act of 1940; (iii) a collective
investment trust organized by banks under Part Nine of the Rules of the
Comptroller of the Currency; (iv) a closed end investment trust; (v) a chartered
or licensed life insurance company or property and casualty insurance company;
(vi) banking or other licensed or chartered lending institutions; (vii) an
investment advisor registered under the Investment Advisors Act of 1940; or,
(viii) such other persons as the New Jersey Commission may determine for reasons
consistent with the policies of the New Jersey Act. In the absence of a prima
facie showing by the Director of the DGE that there is any cause to believe that
such institutional investor may be found unqualified, upon application and for
good cause shown, an institutional investor holding either (a) less than 10% of
Starwood Hotels' equity securities; or, (b) debt securities constituting less
than 20% of Starwood Hotels' outstanding debt and less than 50% of the issue
involved may be granted a waiver of qualification as to such holdings if (i)
such securities are those of a publicly traded corporation; (ii) the
institutional investor's holdings of such securities were purchased for
investment purposes only; and, (iii) upon request by the New Jersey Commission,
the institutional investor files with the New Jersey Commission a certified
statement to the effect that the institutional investor has no intention of
influencing or affecting the affairs of Starwood Hotels, ITT, Caesars, CNJ or
BRC; notwithstanding the foregoing, the institutional investor is permitted to
vote on matters put to the vote of the outstanding security holders of Starwood
Hotels.
If an institutional investor who has been granted a waiver subsequently
determines to influence or affect Starwood Hotels' affairs, the institutional
investor must provide to the New Jersey Commission not less than 30 days' prior
notice of such intent and the institutional investor must file with the New
Jersey Commission an application for qualification before taking any action that
may influence or affect Starwood Hotels' affairs; notwithstanding the foregoing,
the institutional investor is permitted to vote on matters put to the vote of
Starwood Hotels' outstanding security holders. If an institutional investor
changes its investment intent, or if
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the New Jersey Commission finds reasonable cause to believe that the
institutional investor may be found unqualified, no action other than
divestiture shall be taken by that institutional investor until there has been
compliance with the interim casino authorization provisions of the New Jersey
Act, including the execution of a trust agreement. Starwood Hotels, ITT,
Caesars, CNJ and BRC are required to immediately notify the New Jersey
Commission and the New Jersey DGE of any information about, or action of an
institutional investor holding Starwood Hotels' equity or debt securities where
such information or action may impact on the eligibility of such institutional
investor for a waiver. If the New Jersey Commission finds an institutional
investor unqualified or if the New Jersey Commission finds that, by reason of
the extent or nature of its holdings, an institutional investor is in the
position to exercise a substantial impact on the controlling interests of BRC so
that qualification of the institutional investor is necessary to protect the
public interest, the New Jersey Act vests in the New Jersey Commission the power
to take all necessary action to protect the public interest, including the power
to require that the institutional investor submit to qualification and become
qualified under the New Jersey Act.
Any holder of Starwood Hotels' debt or equity securities, including an
institutional investor, who is required to be found qualified by the New Jersey
Commission must submit an application for qualification within 30 days after
being ordered to do so or divest all security holdings within 120 days after the
New Jersey Commission determines such qualification is required. The application
for qualification must include a trust agreement by which the security holder
places its interest in Starwood Hotels' securities in trust with a trustee
qualified by the New Jersey Commission. If the security holder is ultimately
found qualified, the trust agreement is terminated. In connection with the ITT
Merger, Starwood Hotels petitioned for and, on January 28, 1998 received,
interim casino authorization under the provisions of the New Jersey Act,
including the execution of a trust agreement. Starwood Hotels has filed an
application for plenary qualification, which, pursuant to the New Jersey Act,
the New Jersey Commission will act upon within nine months from the date interim
casino authorization was granted.
If the security holder is not found qualified or withdraws its application
for qualification, the trustee will be empowered with all rights of ownership
pertaining to such security holder's securities, including all voting rights and
the power to sell the securities; in any event, the unqualified security holder
will not be entitled to receive in exchange for its securities an amount in
excess of the lower of (i) the actual cost the security holder incurred in
acquiring the securities; or, (ii) the value of such securities, calculated as
if the investment had been made on the date the trust became operative. If the
security holder is not found qualified, it is unlawful for the security holder
to (i) receive any dividends or interest on such securities; (ii) exercise,
directly or through any trustee or nominee, any right conferred by such
securities; or, (iii) receive any remuneration in any form from Starwood Hotels,
ITT, Caesars, CNJ or BRC for services rendered or otherwise.
Each officer, director, lender and certain other persons of Starwood
Hotels, ITT, Caesars and CNJ must be found qualified unless the New Jersey
Commission, with the consent of the Director of the New Jersey Commission, with
the consent of the Director of the New Jersey DGE, finds that such officer,
director, lender or other person is not significantly involved in the affairs of
BRC and is thus waived from qualification. New Jersey law requires that an
officer or director of Starwood Hotels, ITT, Caesars or CNJ must apply for
temporary qualification at least 30 days before assuming any duties.
The New Jersey Act requires that each of Starwood Hotels, ITT, Caesars, CNJ
and BRC maintain financial stability and capability. For purposes of these
requirements, the New Jersey Commission has adopted regulations defining
"financial stability" and has set forth certain standards for determining
compliance with the financial stability regulations. Under the regulations of
the New Jersey Commission, "financial stability" has been defined as (i) the
ability to assure the financial integrity of casino operations by the
maintenance of a casino bankroll or equivalent provisions adequate to pay
winning wagers to casino patrons when due; (ii) the ability to meet ongoing
operating expenses which are essential to the maintenance of continuous and
stable casino operations; (iii) the ability to pay, as and when due, all local,
state and Federal taxes and any and all fees imposed by the New Jersey Act; (iv)
the ability to make necessary capital and maintenance expenditures in a timely
manner which are adequate to insure maintenance of a superior first class
facility of exceptional quality as required by the New Jersey Act; and, (v) the
ability to pay, exchange, refinance or extend debts, including long-term and
short-term principal and interest and capital lease obligations, which will
mature or
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otherwise come due and payable during either the license term or within 12
months after the end of the license term or to otherwise manage such debts and
any default with respect to the debts. The New Jersey Commission regulations
provide that the financial stability standards concerning casino bankroll,
operating expenses and capital and maintenance expenditures are met if the
following is shown by clear and convincing evidence: (i) casino bankroll -- the
maintenance, on a daily basis, of a casino bankroll at least equal to the
average daily casino bankroll, calculated on a monthly basis, for the
corresponding month in the previous year; (ii) operating expenses -- the
demonstration of the ability to achieve positive gross operating profit measured
on an annual basis; and, (iii) capital and maintenance expenditures -- the
demonstration that its capital and maintenance expenditures over the five-year
period, which includes the previous 36 calendar months and the upcoming license
period, average at least 5% of net revenue per annum. Starwood Hotels believes
that, at current operating levels, BRC will have no difficulty in complying with
these requirements. The New Jersey Commission has the authority to restrict or
prohibit the transfer of cash or the assumption of liabilities by BRC if such
action will adversely impact the financial stability of BRC and the prior
approval of the New Jersey Commission is required to incur indebtedness and
guarantees of affiliated indebtedness by BRC involving amounts greater than $25
million.
If it were determined that New Jersey gaming laws were violated by BRC, BRC
could be subject to fines or its casino license could be limited, conditioned,
suspended or revoked. In addition, if a security holder of Starwood Hotels, ITT,
Caesars, CNJ or BRC is found disqualified but does not dispose of the
securities, the New Jersey Commission is authorized to take any necessary action
to protect the public interest, including the suspension or revocation of the
casino license. The New Jersey Commission, however, will not take any action
against Starwood Hotels, ITT, Caesars, CNJ or BRC in connection with a
disqualified holder if the New Jersey Commission finds that (i) Starwood Hotels
has provided in its corporate and trust charters that Starwood Hotels'
securities are held subject to the condition that, if a holder is found to be
disqualified by the New Jersey Commission pursuant to the provisions of the New
Jersey Act, such holder shall dispose of its interest in Starwood Hotels; (ii)
Starwood Hotels has made a good faith effort, including the prosecution of all
legal remedies, to comply with any order of the New Jersey Commission requiring
the divestiture of the interest held by the disqualified holder; and, (iii) such
disqualified holder does not have the ability to control Starwood Hotels, ITT,
Caesars, CNJ or BRC or to elect one or more members of the Board of Directors,
the Board of Trustees or the respective boards of directors of ITT, Caesars, CNJ
or BRC. If BRC's license is revoked, not renewed or suspended for a period in
excess of 120 days, the New Jersey Commission is empowered to appoint a
conservator to operate, and to dispose of, BRC's casino/hotel facilities. If a
conservator operates the casino/hotel facilities, payments to shareholders would
be limited to a "fair return" on their investment, with any excess going to the
State of New Jersey. If a conservator is appointed, the conservator's charges
and expenses become a lien against the property which has priority over all
prior and subsequent liens. Any suspension or revocation of the licenses or
approvals, or the appointment of a conservator would have a material adverse
effect on BRC.
Mississippi Gaming Regulation. Gaming in Mississippi can be legally
conducted only on vessels of a certain minimum size either in navigable waters
of counties bordering the Mississippi River or in the waters of the State of
Mississippi which lie adjacent to the coastline of the three counties bordering
the Gulf of Mexico. STC possesses a license for the ownership and operation of
The Sheraton Casino & Hotel in Robinsonville, Tunica County, Mississippi issued
by the Mississippi Commission pursuant to the Mississippi Act. The Mississippi
Act does not restrict the amount or percentage of space on a vessel that may be
utilized for casino gaming; the Mississippi Act also does not limit the number
of licenses that the Mississippi Commission can grant for a particular area.
Starwood Hotels, ITT and STC are required to submit detailed financial,
operating and other reports to the Mississippi Commission. Substantially all
loans, leases, sales of securities and similar financing transactions entered
into by Starwood Hotels, ITT or by STC must be reported to or approved by the
Mississippi Commission. Starwood Hotels, ITT and STC are also required
periodically to submit detailed financial and operating reports to the
Mississippi Commission and to furnish any other information which the
Mississippi Commission may require.
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Each of the directors, officers and certain key employees of Starwood
Hotels, ITT and STC who are actively and directly engaged in the administration
or supervision of casino gaming in Mississippi, or who have any other
significant involvement with the activities of STC, must be found suitable
therefor and may be required to be licensed by the Mississippi Commission. A
finding of suitability is comparable to licensing, and both require the
submission of detailed personal and financial information followed by a thorough
investigation. An application for licensing may be denied for any cause deemed
reasonable by the Mississippi Commission. Changes in licensed positions must be
reported to the Mississippi Commission. In addition to its authority to deny an
application for a license, the Mississippi Commission has the authority to
disapprove a change in corporate position. If the Mississippi Commission finds a
director, officer or key employee of Starwood Hotels, ITT or STC unsuitable for
licensing or unsuitable to continue having a relationship with Starwood Hotels,
ITT or STC, such entity is required to suspend, dismiss and sever all
relationships with such person. Starwood Hotels, ITT and STC have similar
obligations with regard to any person who fails or refuses to file appropriate
applications. Each gaming employee must obtain a work permit; the Mississippi
Commission may refuse to issue a work permit to a gaming employee (i) if the
employee has committed larceny, embezzlement or any other crime of moral
turpitude or knowingly violated the Mississippi Act or the regulations of the
Mississippi Commission; or (ii) for any other reasonable cause.
Mississippi gaming licenses are not transferable and must be renewed
periodically. The Mississippi Commission is empowered to deny, limit, condition,
revoke and/or suspend any license, finding of suitability or registration, and
to fine any person as it deems reasonable and in the public interest, subject to
the due process considerations of notice and an opportunity for a hearing. The
Mississippi Commission may fine any licensee or other person that is subject to
the Mississippi Act up to $100,000 for each violation of the Mississippi Act
that is the subject of an initial complaint and up to $250,000 for each
violation of the Mississippi Act that is the subject of any subsequent
complaint.
License fees and taxes, computed in various ways depending on the type of
casino gaming involved, are payable to the State of Mississippi and to the
counties and cities in which gaming operations are located. Generally, these
fees and taxes are based on a percentage of the gross gaming revenues received
by the casino operation, the number of slot machines operated by such casino, or
the number of table games operated by such casino. Moreover, several local
governments have been authorized to impose either additional gross fees on
adjusted gross gaming revenues or, alternatively, per person boarding fees and
annual license fees based on the number of gaming devices aboard the vessel.
License fees paid to the State of Mississippi are allowed as a credit against
Mississippi state income taxes.
In all other material respects, casino gaming regulation in Mississippi is
similar to the regulation of casino gaming in Nevada and New Jersey.
Ontario Gaming Regulation. Windsor Casino Limited ("WCL"), which is
half-owned by Caesars and which operates the casino in Windsor, Ontario, Canada,
is required to comply with licensing requirements similar to Nevada and New
Jersey and is also subject to operational regulation by the Province of Ontario.
Pursuant to the Ontario Act, the Registrar of the Ontario Commission must
approve any change in the directors or officers of WCL. The Ontario Act also
provides that the Ontario Commission may require the submission of certain
disclosures and informational material from any person who has an interest in
WCL. Starwood Hotels will submit in a timely manner to the Registrar the
required disclosures and informational material.
Under the Ontario Act, no person may provide goods or services for a casino
or other business operated by, on behalf of or under contract with the Ontario
Casino Corporation unless, among other things, that person is registered as a
supplier under the Ontario Act. The Registrar has the power, subject to the
Ontario Act, to grant, renew, suspend or revoke registrations. The Registrar is
entitled to make such inquiries and conduct such investigations as are necessary
to determine that applicants for registration meet the requirements of the
Ontario Act and to require information or material from any person who has an
interest in an applicant for registration as a registrant. The criteria to be
considered in connection with registration under the Ontario Act include
financial responsibility, integrity, honesty and the public interest. The
Registrar may, at any time,
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48
subject to the provisions of the Ontario Act, revoke, suspend or refuse to renew
WCL's registration under the Ontario Act.
Nova Scotia Gaming Regulation. Sheraton Casino Nova Scotia ("SCNS"), the
subsidiary of ITT that owns and operates the casino in the City of Halifax, Nova
Scotia, and operates the casino in the City of Sydney, Nova Scotia, is required
to comply with licensing requirements similar to the Province of Ontario and is
also subject to operational regulation by the Province of Nova Scotia.
Under the Nova Scotia Act, the Director of Registration of the Nova Scotia
Commission must be notified, within 15 days, of any change in the officers or
directors of SCNS. SCNS is also required to file a disclosure form with the
Director of Registration within 15 days of (i) a person acquiring a beneficial
interest in the business of SCNS; (ii) a person exercising control, either
directly or indirectly, over the business of SCNS; or (iii) a person providing
financing, either directly or indirectly, to the business of SCNS. The Nova
Scotia Act also provides that the Director of Registration may require
information or material from SCNS or any person who has an interest in SCNS.
Starwood Hotels has or will submit on a timely basis all required disclosure
forms and informational materials as applicable.
Indiana Gaming Regulation. As a result of Caesars' planned riverboat
casino development in Harrison County, Indiana, Starwood Hotels and ITT are
subject to the gaming regulations in force in that state. Indiana currently
imposes regulations on gaming companies similar to, and in Starwood Hotels'
opinion, no more restrictive than, the gaming regulations in force in Nevada and
New Jersey.
The riverboat also must comply with U.S. Coast Guard requirements as to
boat design, on-board facilities, equipment, personnel and safety and must hold
a Certificate of Seaworthiness or must be approved by the American Bureau of
Shipping for stabilization and flotation. The U.S. Coast Guard requirements
establish design standards, set limits on the operation of the vessel and
require individual licensing of all personnel involved with the operation of the
vessel. Loss of the vessel's Certificate of Seaworthiness or the American Bureau
of Shipping approval would preclude its use as a floating casino. The land-based
facilities developed and used in connection with the riverboat are subject to
local zoning and building codes.
Under the Indiana Act and regulations prior approval of the ITT Merger was
not required and Starwood Hotels must file for approval of the ITT Merger within
45 days of the closing of the ITT Merger. Starwood Hotels will file all required
applications in a timely manner.
Provisions of the Corporation's Articles of Incorporation Related to Casino
Gaming. The Articles of Incorporation provide that (i) all Starwood Hotels'
securities are subject to redemption to the extent necessary to prevent the
loss, or to secure the reinstatement, of any casino gaming license held by any
of Starwood Hotels' subsidiaries in any jurisdiction within or without the
United States; (ii) all Starwood Hotels' securities are held subject to the
condition that if a holder is found by a gaming authority in any jurisdiction to
be disqualified or unsuitable pursuant to any gaming law, such holder will be
required to dispose of all such securities; failing such disposition, the
Corporation may redeem the securities at the lesser of their market price or the
disqualified holder's original purchase price; and (iii) it is unlawful for any
such disqualified person to (a) receive payments of interest or dividends on any
such securities; (b) exercise, directly or indirectly, any rights conferred by
any such securities; or (c) receive any remuneration in any form, for services
rendered or otherwise, from the subsidiary that holds the gaming license in the
applicable jurisdiction.
ITEM 3. LEGAL PROCEEDINGS.
There are various legal actions pending against the Company, some of which
involve claims for substantial amounts. Although there can be no assurance as to
the ultimate outcome of any litigation involving the Company, managements of the
Trust and the Corporation do not believe that any pending legal proceeding will
have, after taking into account the Company's existing insurance coverage,
indemnification rights and provisions for such liabilities, a material adverse
effect on the consolidated financial condition of the Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
THE TRUST
On December 12, 1997, the Trust held its 1997 annual meeting of
shareholders (the "Trust Meeting"). At the Trust Meeting, the shareholders of
the Trust (i) approved the Company's acquisition of Westin by the Company
pursuant to the Westin Transaction Agreement; (ii) approved an amendment to the
Declaration of Trust changing the name of the Trust and increasing the number of
authorized shares of beneficial ownership of the Trust; (iii) elected to the
Board of Trustees Jean-Marc Chapus, Bruce W. Duncan and Barry S. Sternlicht,
each to serve for a three-year term; and (iv) approved the amendment and
restatement of the Starwood Hotels & Resorts 1995 Long-Term Incentive Plan (the
"Trust's LTIP"). Messrs. Stuart M. Rothenberg, Barry S. Sternlicht, Steven R.
Goldman, Roger S. Pratt, Stephen R. Quazzo, Madison F. Grose, and George J.
Mitchell continued to serve as Trustees following the Trust Meeting.
The following table sets forth, with respect to each matter voted upon at
the Trust Meeting, the number of votes cast for, the number of votes cast
against, and the number of votes abstaining (or, with respect to the election of
Trustees, the number of votes withheld) with respect to such matter:
VOTES VOTES VOTES
FOR AGAINST ABSTENTIONS WITHHELD
---------- --------- ----------- --------
Acquisition of Westin......................... 40,620,168 31,988 42,251
Amendment of the Declaration of Trust......... 40,610,170 36,130 48,083
Election of Trustees:
Jean-Marc Chapus............................ 44,832,723 51,063
Bruce W. Duncan............................. 44,840,223 43,563
Barry S. Sternlicht......................... 44,830,743 53,043
Amendment and Restatement of the Starwood
Hotels & Resorts 1995 Long-Term Incentive
Plan........................................ 36,442,273 4,171,142 80,991
THE CORPORATION
On December 12, 1997, the Corporation held its 1997 annual meeting of
stockholders (the "Corporation Meeting"). At the Corporation Meeting, the
stockholders of the Corporation (i) approved the Company's acquisition of Westin
pursuant to the Westin Transaction Agreement; (ii) approved an amendment to the
Articles of Incorporation changing the name of the Corporation and increasing
the number of authorized Corporation Shares; (iii) elected as Directors Jonathan
D. Eilian and Barry S. Sternlicht, each to serve for a three-year term; and (iv)
approved the amendment and restatement of the Starwood Hotels & Resorts
Worldwide, Inc. 1995 Long-Term Incentive Plan (the "Corporation's LTIP").
Messrs. Juergen Bartels, Barry S. Volpert, Michael A. Leven, Daniel H. Stern,
Bruce M. Ford, Graeme W. Henderson, Earle F. Jones and Daniel W. Yih continued
to serve as Directors following the Corporation Meeting.
The following table sets forth, with respect to each matter voted upon at
the Corporation Meeting, the number of votes cast for, the number of votes cast
against, and the number of votes abstaining (or, with respect to the election of
Directors, the number of votes withheld) with respect to such matter:
VOTES VOTES VOTES
FOR AGAINST ABSTENTIONS WITHHELD
---------- --------- ----------- --------
Acquisition of Westin......................... 40,613,653 30,271 51,000
Amendment of the Articles of Incorporation.... 40,600,579 37,075 57,269
Election of Directors:
Jonathan D. Eilian.......................... 44,839,367 44,419
Barry S. Sternlicht......................... 44,827,160 56,626
Amendment and Restatement of the Starwood
Hotels & Resorts Worldwide, Inc. 1995 Long-
Term Incentive Plan......................... 35,110,792 5,487,347 83,478
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PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Paired Shares are traded principally on the New York Stock Exchange
(the "NYSE") under the symbol "HOT."
The following table sets forth, for the fiscal periods indicated, the high
and low sales prices per Paired Share on the NYSE Composite Tape.
HIGH LOW
------ ------
1997
Fourth quarter............................................. $60.38 $52.13
Third quarter.............................................. $57.44 $41.56
Second quarter............................................. $42.81 $34.25
First quarter.............................................. $45.88 $34.50
1996
Fourth quarter............................................. $36.75 $27.42
Third quarter.............................................. $27.92 $22.08
Second quarter............................................. $25.75 $21.17
First quarter.............................................. $23.25 $19.67
HOLDERS
As of March 27, 1998, there were approximately 47,936 holders of record of
Paired Shares, including approximately 25,883 holders of record of ITT Shares
converted into Paired Shares in connection with the ITT Merger who have not yet
surrendered their certificates.
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DISTRIBUTIONS MADE/DECLARED
The following table sets forth certain information with respect to
distributions made by the Trust during the years ended December 31, 1997 and
1996:
DISTRIBUTIONS RETURN OF CAPITAL
MADE GAAP Basis (a)
------------- -----------------
1997
Fourth quarter.............................................. $0.48(b) $0.23
Third quarter............................................... $0.48 $0.48
Second quarter.............................................. $0.39 $0.01
First quarter............................................... $0.39 $0.21
1996
Fourth quarter.............................................. $0.39(c)(d) $0.22
Third quarter............................................... $0.33 $0.14
Second quarter.............................................. $0.33 --
First quarter............................................... $0.31 $0.11
- ---------------
(a) Represents distributions per Paired Share in excess of net income per Paired
Share on a generally accepted accounting principles ("GAAP") basis, and is
not the same as return of capital on a tax basis.
(b) The Trust declared a distribution for the fourth quarter of 1997 to
shareholders of record on December 31, 1997. The distribution was paid in
January 1998.
(c) The Trust declared a distribution for the fourth quarter of 1996 to
shareholders of record on December 30, 1996. The distribution was paid in
January 1997.
(d) During the fourth quarter of 1996, the Trust and the Corporation each
declared a three-for-two stock split in the form of a 50% stock dividend
payable to shareholders of record on December 30, 1996. The stock dividend
was paid in January 1997.
The Corporation has not paid any cash dividends since its organization and
does not anticipate that it will make any such distributions in the foreseeable
future. Under the terms of the Company's current credit facilities, the Trust is
generally permitted to distribute to its shareholders on an annual basis cash in
an amount equal to the greater of (i) 55% of adjusted funds from operations (as
defined) for any four consecutive calendar quarters and (ii) the minimum amount
necessary to maintain the Trust's tax status as a REIT.
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ITEM 6. SELECTED FINANCIAL DATA.
The following data sets forth certain financial information for each of the
Trust and the Corporation, and the Trust and the Corporation on a combined
basis. This information is based on and should be read in conjunction with the
financial statements and the notes thereto appearing elsewhere in this Joint
Annual Report.
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA
Revenue:
Trust................................. $270,768 $115,059 $ 44,023 $ 21,671 $ 20,342
Corporation........................... 913,688 410,156 149,184 110,962 114,828
Combined(1)........................... 933,583 428,538 161,716 113,997 117,155
Income (Loss) before Extraordinary
Items:
Trust(2).............................. $ 50,747 $ 33,589 $ 12,864 $ (3,465) $ (3,889)
Corporation(2)........................ (9,223) (7,715) (1,739) (1,198) (3,143)
-------- -------- -------- -------- --------
Combined.............................. $ 41,524 $ 25,874 $ 11,125 $ (4,663) $ (7,032)
Income (Loss) from Continuing
Operations:
Trust(2).............................. $ 47,295 $ 33,589 $ 10,709 $ (3,465) $ (3,889)
Corporation(2)........................ (9,223) (6,638) (1,739) (1,198) (3,143)
-------- -------- -------- -------- --------
Combined.............................. $ 38,072 $ 26,951 $ 8,970 $ (4,663) $ (7,032)
Income (Loss) before Extraordinary Items
Per Share/Paired Share(3):
Trust................................. $ 1.10 $ 1.15 $ 1.10 $ (1.14) $ (1.28)
Corporation(4)........................ (0.20) (0.26) (0.15) (0.39) (1.04)
Combined(4)........................... 0.90 0.88 0.95 (1.53) (2.32)
Income (Loss) from Continuing Operations
Per Share/Paired Share(3):
Trust................................. $ 1.03 $ 1.14 $ 0.92 $ (1.14) $ (1.28)
Corporation(4)........................ (0.20) (0.22) (0.15) (0.39) (1.04)
Combined(4)........................... 0.83 0.92 0.77 (1.53) (2.32)
Income (Loss) from Continuing Operations
Per Share/Paired Share Assuming
Dilution(3):
Trust................................. $ 0.97 $ 1.12 $ 0.92 $ (1.14) $ (1.28)
Corporation(4)........................ (0.20) (0.22) (0.15) (0.39) (1.04)
Combined(4)........................... 0.78 0.90 0.77 (1.53) (2.32)
AT DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA
Total Assets:
Trust.............................. $2,772,423 $1,233,366 $425,737 $162,245 $232,845
Corporation........................ 558,651 185,192 120,721 48,626 49,993
Combined(1)........................ 3,009,464 1,312,740 459,994 183,955 195,352
Total Debt:
Trust.............................. $1,439,294 $ 477,603 $119,200 $146,734 $156,526
Corporation........................ 448,330 107,781 90,749 40,664 101,846
Combined(1)........................ 1,566,014 479,566 123,485 160,482 170,886
Shareholders' Equity (Deficit):
Trust.............................. $ 982,626 $ 569,300 $204,728 $ 10,450 $ 72,205
Corporation........................ 38,997 23,361 10,740 (1,742) (58,879)
---------- ---------- -------- -------- --------
Combined........................... 1,021,623 592,661 215,468 8,708 13,326
Paired Shares outstanding at end of
period(3).......................... 51,346 40,078 20,697 3,033 3,033
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AS OF AND FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
----------- --------- --------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CASH FLOW AND DIVIDEND DATA
Net cash provided by (used in)
operating activities:
Trust.............................. $ 176,671 $ 61,589 $ 11,267 $ 4,455 $ 3,136
Corporation........................ (19,738) 12,578 5,144 4,438 2,396
Combined........................... 156,933 74,167 16,411 8,893 5,532
Net cash provided by (used in)
investing activities:
Trust.............................. $(1,217,133) $(726,427) $(175,506) $ 8,239 $ 2,474
Corporation........................ (93,230) (33,774) (44,003) 215 (4,426)
Combined(1)........................ (1,220,138) (746,800) (181,995) 4,489 (3,645)
Net cash provided by (used in)
financing activities:
Trust.............................. $ 1,046,470 $ 667,938 $ 164,694 $(13,357) $(7,307)
Corporation........................ 104,996 34,190 42,671 (4,577) (1,138)
Combined(1)........................ 1,061,241 688,727 169,851 (13,969) (6,752)
Cash distributions to shareholders --
Trust.............................. $ 98,554 $ 46,218 $ 9,265 -- --
Corporation........................ 1,054 -- -- -- --
Cash distributions per share --
Trust(3)........................... $ 1.74 $ 1.36 $ 0.62 -- --
Corporation........................ -- -- -- -- --
- ---------------
(1) The individual amounts with respect to the Trust and Corporation do not add
to Combined amounts due to accounting elimination entries.
(2) For the Trust, includes gains (losses) on sales in the amount of $3,171,000,
$4,290,000, ($125,000), $432,000 and ($53,000) for the years ended December
31, 1997, 1996, 1995, 1994 and 1993, respectively; a charge for the
settlement of Treasury locks of $25,000,000 for the year ended December 31,
1997; and provisions for investment losses of $759,000 and $2,369,000 in the
years ended December 31, 1994 and 1993, respectively. For the Corporation,
includes gains on sales of $3,864,000, $24,000 and $74,000 for the years
ended December 31, 1997, 1994 and 1993, respectively.
(3) As adjusted for a one-for-six reverse stock split in June 1995 and a
three-for-two stock split in January 1997.
(4) Options to purchase approximately 2.3 million Paired Shares and 557,000
Paired Shares and restricted stock grants of approximately 329,000 Paired
Shares and 85,000 Paired Shares were outstanding during 1997 and 1996,
respectively,but were not included in the computation of earnings per share
assuming dilution for the Corporation because the effect would have been
antidilutive. Accordingly, the individual amounts with respect to the Trust
and Corporation may not add to the Combined amounts for 1997 and 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
HISTORICAL RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
THE TRUST
Rents from the Corporation, which are based largely on hotel revenues,
increased $146.9 million for the year ended December 31, 1997, as compared to
the corresponding period of 1996. The increase was primarily
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the result of rents earned by the Trust on the 40 hotels acquired by the Trust
during 1997. (See "Other Acquisitions -- 1997 Acquisitions" included in Item 1
of this Joint Annual Report.) The increase was also the result of earning a full
year of rents by the Trust on hotels acquired by the Trust during 1996 (the
"1996 Acquired Hotels"). The investment in the 1997 Acquired Hotels and the 1996
Acquired Hotels accounted for increased rents for the year ended December 31,
1997 of $87.4 million and $61.0 million, respectively, as compared to the
corresponding period in 1996. In addition, rents earned by the Trust from
continuously owned properties leased to the Corporation decreased by $1.5
million for the year ended December 31, 1997, as compared to the corresponding
period in 1996, due to 1997 and 1996 sales of hotel assets.
Interest from the Corporation increased by $7.3 million for the year ended
December 31, 1997, as compared to the corresponding period of 1996. The increase
in interest income was primarily a result of interest relating to first
mortgages on the Westin Regina Portfolio, which was acquired by the Corporation
in August 1997 and interest on the first mortgage on the Midland Hotel, which
hotel was acquired by the Corporation in March 1996.
Interest from mortgage and other notes amounted to $13.7 million for the
year ended December 31, 1997, as compared to $11.3 million for the corresponding
period in 1996. The increase resulted from the purchase during 1996 of debt, a
portion of which was secured by the 305-room Holiday Inn in Milpitas, California
and which was repaid in December 1997, and a first mortgage note secured by the
King 8 which was received as partial consideration for the sale of the Trust's
interest in the King 8 in the fourth quarter of 1996. The increase was offset in
part by principal amortization.
Other income for the year ended December 31, 1997 includes a $1.2 million
gain (net of related expenses) realized in conjunction with the sale of
securities.
Interest expense increased by $41.8 million for the year ended December 31,
1997, as compared to the corresponding period of 1996. The increase was due to
borrowings under the Doral Mortgage Note, the BPP Mortgage, the Tax Exempt
Bonds, the Stamford Note, and the Crowne Plaza Note used to acquire the 1996
Acquired Hotels and the 1997 Acquired Hotels. The increase was offset by the net
proceeds from the offerings of Paired Shares made in 1997 used to partially fund
the acquisition of the above-mentioned properties.
Depreciation and amortization expense increased by $57.6 million during the
year ended December 31, 1997, as compared to the corresponding period of 1996,
principally due to the acquisition of the 1997 Acquired Hotels and a full year
of depreciation expense relating to the 1996 Acquired Hotels.
Administrative and general expenses for the year ended December 31, 1997,
increased by $8.1 million to $12.2 million, as compared to $4.1 million for the
corresponding period of 1996. The increase resulted predominantly from expenses
related to the Trust's LTIP and the increase in payroll costs commensurate with
the Company's growth.
Net income for the year ended December 31, 1997 includes a $25 million
charge relating to an accrual for a settlement of three interest rate protection
agreements which expired on January 30, 1998 and were settled in January 1998.
The Company did not issue the debt anticipated by such agreements due to various
factors including its financing of the ITT Merger. Net income also includes an
extraordinary loss of $4.4 million before minority interest resulting from early
extinguishment of debt. The extraordinary loss represents financing costs
associated with the Company's existing indebtedness which was retired upon
entering into the $1.2 Billion Facility (as defined below).
Minority interest represents primarily the interest of the Starwood
Partners and other limited partners in the Realty Partnership for the year ended
December 31, 1997, $2.7 million relating to the 41.8% minority interest of a
third party in the joint venture that owns the Boston Park Plaza hotel and $1.4
million relating to the minority interest of a third party in the joint venture
that owns the Doral Court and Doral Tuscany hotels.
THE CORPORATION
Hotel revenues increased by $503.8 million for the year ended December 31,
1997, as compared to the corresponding period of 1996. The assumption of
management of the 1997 Acquired Hotels and the addition
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of the Westin Regina Portfolio and the Turnberry Hotel and Golf Resort resulted
in an increase in hotel revenues of $270.3 million for the year ended December
31, 1997. The remaining increase of $233.5 million for the year ended December
31, 1997, is attributable to the full year impact of revenues from the 1996
Acquired Hotels and other continuously owned properties.
Hotel gross margin for the year ended December 31, 1997, was $274.8
million, or 30.9% of hotel revenues, as compared to $110.1 million, or 28.6% of
hotel revenues, for the same period of 1996.
Gaming revenues for the year ended December 31, 1997 as compared to the
corresponding period of 1996 decreased by $8.6 million to $15.0 million. Gaming
gross margin for the year ended December 31, 1997 was a loss of $1.5 million, as
compared to a profit of $1.8 million for the corresponding period in 1996. The
decrease in gaming revenues and the decline in gaming gross margin predominately
resulted from operations at Bourbon Street, which was sold on September 12,
1996. The real property of the King 8 was also sold in 1996 for approximately
$18.8 million. The sale of the personal property of the King 8, for $3 million,
is scheduled to close following the receipt by the purchaser or his designee of
required gaming approval. HICN, a subsidiary of the Corporation, leases the real
property from the purchaser and has agreed to continue to operate the hotel and
casino while the purchaser obtains required gaming licenses and approvals.
Management fees and other income for the year ended December 31, 1997,
includes $1.1 million of management fee income from the joint venture that owns
the Boston Park Plaza hotel and $2.5 million of management fee income from the
HEI Managed Hotels.
Administrative and general expenses for the year ended December 31, 1997,
increased to $15.0 million or 1.6% of revenues as compared to $12.4 million or
3.0% of revenues for the corresponding period of 1996. The increase was
primarily a result of increases in payroll costs commensurate with the Company's
growth, the assumption of management of hotels and expenses incurred as a result
of the Corporation's LTIP. Administrative and general expenses for the year
ended December 31, 1996, included a $1.9 million charge for costs relating to
the relocation of the corporate office from Los Angeles, California to Phoenix,
Arizona.
Depreciation and amortization expense increased by $12.1 million for the
year ended December 31, 1997, as compared to the corresponding period of 1996.
The increase was primarily a result of depreciation relating to hotels acquired
by the Corporation.
Minority interest represents primarily the interest of the Starwood
Partners and other limited partners in the Operating Partnership and
approximately $2.9 million related to the 41.8% minority interest of a third
party in the joint venture that owns the Boston Park Plaza hotel.
For more information with respect to rent and interest paid to the Trust
during the years ended December 31, 1997 and 1996, see "The Trust" immediately
above.
EXTERNAL GROWTH
During the year ended December 31, 1997, the Company acquired equity
interests in 44 hotels containing more than 12,800 rooms at a combined cost
exceeding $1.4 billion. For a list of the hotels acquired during 1997, see
"Other Acquisitions -- 1997 Acquisitions" included in Item 1 of this Joint
Annual Report.
INTERNAL GROWTH
On a same-store-sales basis, including the results of all hotels acquired
prior to December 31, 1997 except the Doral Inn in New York City, New York,
which underwent a substantial renovation during 1997, and three hotels held for
sale (the Milwaukee Sheraton in Milwaukee, Wisconsin; the Bay Valley Hotel &
Resort in Bay City, Michigan; and the Tyee Hotel in Olympia, Washington), for
the period from their respective dates of acquisition (if acquired in 1997) as
compared to the same period in 1996, REVPAR for the year ended December 31,
1997, increased 8.0% from $67.33 to $72.69 over the same period in 1996. The
increase in REVPAR resulted from an increase in ADR of 8.6%, from $96.16 to
$104.41, while the occupancy rate decreased slightly to 69.6% from 70.0%.
Excluding the Doral Inn and the three hotels held for sale as well as
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six hotels in Atlanta, Georgia whose results are not comparable to 1996 due to
the nonrecurrence of the Olympic games, REVPAR increased 9.4% to $73.31 from
$67.00 in the corresponding period in 1996.
The overall increase in REVPAR for the year ended December 31, 1997, was
largely attributable to the strong increase in REVPAR at the Company's upscale
hotels. These hotels experienced an increase in REVPAR of 8.5% for the year
ended December 31, 1997, as compared to the corresponding period of 1996. ADR
for the Company's upscale hotels increased 8.1% for the year ended December 31,
1997, as compared to the corresponding period in 1996.
The following tables summarize average occupancy, ADR and REVPAR for the
Company's 99 owned and operated (including owned but third-party managed hotels
and including the Acquired Properties and properties acquired by the Corporation
for the period beginning with their respective dates of acquisition and ending
at the end of each period; and excluding the Doral Inn and the three hotels held
for sale), non-gaming hotels for the years ended December 31, 1997 and 1996:
YEAR ENDED
DECEMBER 31,
-----------------
1997 1996
------- ------
95 NON-GAMING HOTELS:
Occupancy rate.............................................. 69.6% 70.0%
ADR......................................................... $104.41 $96.16
REVPAR...................................................... $ 72.69 $67.33
REVPAR % change............................................. 8.0%
YEAR ENDED
DECEMBER 31,
-----------------
1997 1996
------- ------
78 UPSCALE/LUXURY HOTELS:
Occupancy rate.............................................. 69.5% 69.3%
ADR......................................................... $108.07 $99.99
REVPAR...................................................... $ 75.14 $69.26
REVPAR % change............................................. 8.5%
YEAR ENDED
DECEMBER 31,
----------------
1997 1996
------ ------
17 MIDSCALE/ECONOMY HOTELS:
Occupancy rate.............................................. 70.1% 73.9%
ADR......................................................... $85.62 $77.63
REVPAR...................................................... $60.03 $57.39
REVPAR % change............................................. 4.6%
Management believes that increases in REVPAR resulted primarily from
increases in demand due to continued favorable economic conditions which have
resulted in increased business and leisure travel throughout the United States,
while the supply of hotel rooms has not increased as rapidly, particularly in
major urban locations. Revenue increases for the year were greatest at the
recently renovated Radisson Park Central in Dallas, Texas; the recently acquired
properties in the Southern California and New England regions; and the three
resort properties in Mexico. REVPAR declined significantly at the Doral Inn in
New York, New York, which was partially closed for renovation during the year.
Management believes that there are several important factors that have
contributed to the improved profitability of hotel properties, including
increased ADR and effective cost management. Because a substantial portion of
the hotels' operating costs and expenses are generally fixed, the Company
derives substantial operating leverage from increases in revenue. However, the
Company's continued investment in full-service properties has led to a larger
component of food and beverage revenue when compared to the same period last
year. Despite the larger food and beverage component, the Company's continued
focus on
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increasing gross margins through cost containment and cost reductions resulted
in increases in gross margins of 340 basis points from 33.6% to 37.0% for the
year ended December 31, 1997.
During the year ended December 31, 1997, consistent with its business
objective to capture the economic benefits otherwise retained by a third-party
operator, the Company assumed management of a total of 48 hotels including 38
hotels acquired during the period. Management believes that the assumption of
direct control over the operations of these hotels will allow the Company to
effectively use the experience of management to improve operations.
During the year ended December 31, 1997, the Company completed an
approximately $12.0 million renovation of the Radisson Park Central hotel in
Dallas, Texas; an approximately $6.0 million renovation of the Westin in
Washington, DC; an approximately $5.0 million renovation of the Edmond Meany
Tower hotel in Seattle, Washington; an approximately $4.0 million renovation of
the Westin Tampa Airport in Tampa, Florida; an approximately $7.0 million
renovation of the Sheraton Colony Square hotel in Atlanta, Georgia; and an
approximately $5.7 million renovation of the Westin Guest Suites at the
Philadelphia International Airport in Philadelphia, Pennsylvania. Renovations
have also been scheduled and should be completed in 1998 and 1999 for the
Terrace Garden in Atlanta, Georgia (approximately $8.5 million); the Atlanta
Marque in Atlanta, Georgia (approximately $6.8 million); the Days Inn at the
Philadelphia Airport (approximately $3.4 million); the Midland Hotel in Chicago,
Illinois (approximately $13.0 million); and the Park Plaza hotel in Boston,
Massachusetts (approximately $49.2 million).
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RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
THE TRUST
Rents from the Corporation, which are based largely on hotel revenues,
increased $60.9 million for the year ended December 31, 1996, as compared to the
corresponding period of 1995. The increase was primarily the result of rents
earned by the Trust on the 1996 Acquired Hotels. The investment in the 1996
Acquired Hotels accounted for increased rents of $59.7 million for the year
ended December 31, 1996, as compared to the corresponding period in 1995. In
addition, rents earned by the Trust from continuously owned properties leased to
the Corporation increased by $1.2 million for the year ended December 31, 1996,
as compared to the corresponding period in 1995.
Interest from the Corporation increased by $4.3 million for the year ended
December 31, 1996, as compared to the corresponding period of 1995. The increase
in interest income was primarily a result of interest on the mortgage interests
relating to the Milwaukee Sheraton Hotel, which mortgage interests were
purchased by the Trust in July 1995, and interest on the first mortgage of the
Midland Hotel, which hotel was acquired by the Corporation in March 1996.
Interest from mortgage and other notes amounted to $11.2 million for the
year ended December 31, 1996, as compared to $10.8 million for the corresponding
period in 1995. The increase resulted from the purchase during the year of debt,
a portion of which is secured by the 305-room Holiday Inn in Milpitas,
California, offset in part by principal amortization.
Other income for the year ended December 31, 1996 included a $290,000 gain
(net of related expenses) realized in conjunction with the sale of securities
which were purchased in contemplation of acquiring a portfolio of hotel
properties and a $750,000 gain (net of related expenses) realized in connection
with the sale of other securities. Also included in other income is $314,500
recorded as a result of a litigation settlement.
Interest expense increased by $10.7 million for the year ended December 31,
1996, as compared to the corresponding period of 1995. The increase was due to
borrowings under loan and credit facilities, the Doral Mortgage and the BPP
Mortgage, used to acquire the above mentioned properties offset by the net
proceeds from offerings of Paired Shares made in 1996 used to partially fund the
acquisition of the above mentioned properties.
Depreciation and amortization expense increased by $33.5 million during the
year ended December 31, 1996, as compared to the corresponding period of 1995,
principally due to the acquisition of the 1996 Acquired Hotels.
Administrative and general expenses for the year ended December 31, 1996
increased by $1.7 million to $4.1 million, as compared to $2.4 million for the
corresponding period of 1995. The increase resulted predominantly from expenses
related to the Trust's LTIP as well as costs incurred relating to the
investigation of hotels which ultimately were not acquired. Administrative and
general expenses includes payments of approximately $242,000 to a former officer
of the Trust pursuant to his separation agreement with the Trust.
Minority interest represents primarily the interest of the Starwood
Partners in the Realty Partnership for the year ended December 31, 1996, and the
41.8% minority interest of a third party in the joint venture that owns the
Boston Park Plaza hotel.
THE CORPORATION
Hotel revenues increased by $263.9 million for the year ended December 31,
1996, as compared to the corresponding period of 1995. The assumption of
management of the 1996 Acquired Hotels and the addition of the 652-room Doral
Inn in New York, New York; the 293-room Radisson Marque hotel in Winston-Salem,
North Carolina and the 257-room Midland Hotel in Chicago, Illinois resulted in
increases in hotel revenues of $249.1 million for the year ended December 31,
1996. The remaining increase of $14.8 million for the year ended December 31,
1996 is attributable to other continuously owned properties.
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Hotel gross margin for the year ended December 31, 1996 was $110.1 million,
or 28.6% of hotel revenues, as compared to $36.2 million, or 29.9% of hotel
revenues, for the same period of 1995. The decrease in gross margin was
primarily due to the increase in the food and beverage revenue component of
total hotel revenue resulting from the Company's continued investment in
full-service hotels offset, in part, by increases in REVPAR and the termination
of third-party management agreements.
Gaming revenues for the year ended December 31, 1996 as compared to the
corresponding period of 1995 decreased by $3.3 million to $23.6 million. Gaming
gross margin for the year ended December 31, 1996 was $1.8 million or 8% of
gaming revenues, as compared to $2.7 million or 10% of gaming revenues, for the
corresponding period in 1995. The decrease in gaming revenues and the decline in
gaming gross margin predominately resulted from the sale of the Bourbon Street
hotel/casino and the real property of the other gaming asset, the King 8 in
1996.
Management fees and other income for the year ended December 31, 1996
includes a $314,500 litigation settlement and $953,500 of management fee income
from the joint venture that owns the Boston Park Plaza hotel.
Administrative and general expenses for the year ended December 31, 1996
increased to $12.4 million or 3.0% of revenues as compared to $3.3 million or
2.2% of revenues for the corresponding period of 1995. The increase was
primarily a result of increases in payroll costs commensurate with the Company's
growth, the assumption of management of hotels previously operated by third
parties, and expenses related to the Corporation's LTIP. Administrative and
general expenses for the year ended December 31, 1996 included a $1.9 million
charge relating to costs incurred in relocating the corporate office from Los
Angeles, California to Phoenix, Arizona.
Depreciation and amortization expense increased by $6.7 million for the
year ended December 31, 1996, as compared to the corresponding period of 1995.
The increase was primarily a result of depreciation relating to hotels acquired
by the Corporation.
Minority interest represents primarily the interest of the Starwood
Partners in the Operating Partnership and the 41.8% minority interest of a third
party in the joint venture that owns the Boston Park Plaza hotel.
Net income for the year ended December 31, 1996, includes an extraordinary
gain of $1.5 million before minority interest resulting from early
extinguishment of debt. The extraordinary gain resulted from the early payoff,
at a discount, of a note secured by the Milwaukee Sheraton. In addition, the
Corporation purchased the remaining equity interest for $240,000 and became the
100% owner of the hotel.
For more information with respect to rent and interest paid to the Trust
during the years ended December 31, 1996 and 1995, see "The Trust" immediately
above.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW PROVIDED BY OPERATING ACTIVITIES
The principal source of cash to be used to fund the Company's operating
expenses, interest expense, recurring capital expenditures and distribution
payments by the Trust will be cash flow provided by operating activities. The
Company anticipates that cash flow provided by operating activities will provide
the necessary funds on a short and long-term basis to meet operating cash
requirements including all distributions to shareholders by the Trust. During
the first quarter of 1997, the Trust paid a distribution of $0.39 per share for
the fourth quarter of 1996. During the second quarter of 1997, the Trust paid a
distribution of $0.39 per share for the quarter ending March 31, 1997. During
the third quarter of 1997, the Trust paid a distribution of $0.39 per share for
the quarter ended June 30, 1997. During the fourth quarter of 1997, the Trust
paid a distribution of $0.48 per share for the quarter ended September 30, 1997
and declared a distribution of $0.48 per share for the quarter ended December
31, 1997. This distribution was paid on January 26, 1998.
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CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
The Company intends to finance the acquisition of additional hotel
properties, hotel renovations and capital improvements and provide for general
corporate purposes through its credit facilities described below, through
additional lines of credit, and when market conditions warrant, to issue
additional equity or debt securities.
Loans and Credit Facilities. In March 1996, the Realty Partnership entered
into a $24 million, one-year, non-recourse secured term loan (the "Term Loan")
to fund the acquisition of the 257-room Midland Hotel in Chicago, Illinois; in
April 1996, the amount of the Term Loan was increased to $94 million. The Term
Loan was secured by nine properties of the Company, but was non-recourse to the
Realty Partnership. The Term Loan accrued interest at a rate equal to one-, two-
or three-month LIBOR, at the Company's option, plus (a) 1.95% for the first $24
million of borrowings and (b) 1.75% for the balance of amounts borrowed under
the Term Loan. The maturity date of the Term Loan was extended to October 1997
with a right to further extend at the Company's option to April 1998. In
September 1997, the Company retired the Term Loan with a portion of the proceeds
from the $1.2 Billion Facility (defined below).
In March 1996, the joint venture that owns the Boston Park Plaza ( in which
the Company holds a 58.2% interest) refinanced a mortgage secured by the Boston
Park Plaza with a new non-recourse mortgage due July 2003 (the "BPP Mortgage")
in the amount of $25 million with the Life Insurance Company of Georgia. The BPP
Mortgage bears interests at an annual interest rate of 8.4%; as of December 31,
1997, the balance outstanding under the BPP Mortgage was $24.8 million.
In July 1996, the maturity date of the Company's mortgage loan funding
facility with Lehman Brothers, Inc. ("Lehman Brothers" and such facility the
"Mortgage Facility"), which was secured by six notes receivable, was extended
from January 25, 1997 to July 25, 1997 and, in July 1997, was further extended
to October 1997. In September 1997, the Company retired the Mortgage Facility
with a portion of the proceeds from the $1.2 Billion Facility.
In August 1996, the Company entered into a facility with an affiliate of
Goldman, Sachs & Co. ("Goldman, Sachs" and such facility the "Goldman Facility")
for a one-year (extendible to 18 months) loan of up to $300 million to fund a
portion of the acquisition cost of a portfolio of nine hotels acquired from
Hotels of Distinction Ventures, Inc. (the "HOD Portfolio") and for general
corporate purposes. The Goldman Facility bore interest at one-month LIBOR plus
1.75% (2.75% during the six-month extension period), and was secured by a
portfolio of eight hotels acquired from a financial institution and the HOD
Portfolio. In September 1997, the Company retired the Goldman Facility with a
portion of the proceeds from the $1.2 Billion Facility.
In September 1996, upon the acquisition of the Doral Court and Doral
Tuscany in New York, the Company assumed liability under and amended the terms
of a mortgage note with The Sumitomo Trust and Banking Co., Ltd. (the "Doral
Mortgage Note"). As amended, the Doral Mortgage Note is recourse to the Realty
Partnership, bears interest at an annual rate of 7.64% and is due September
2001. As of December 31, 1997, the balance outstanding under the Doral Mortgage
Note was $27.4 million.
In February 1997, the Corporation issued (and the Trust guaranteed)
tax-exempt bonds (the "Tax Exempt Bonds") due October 2013 in the aggregate
principal amount of $39.5 million. The Tax Exempt Bonds, which bear interest at
a rate of 6.5%, were issued at a discount to yield 6.7% per year and are secured
by two hotels of the Company located at the Philadelphia International Airport.
Net proceeds from the Tax Exempt Bonds of approximately $37.6 million were used
to partially fund the acquisition of the 578-room Days Inn in Chicago, Illinois.
As of December 31, 1997, the balance outstanding under the Tax Exempt Bonds was
$39.5 million.
In February 1997, in connection with the acquisition of the HEI Portfolio,
the Company obtained a short-term loan from the Prudential Insurance Company of
America on behalf of Prudential Property Investment Separate Account II in the
principal amount of $97.5 million (the "Prudential Loan"). The Prudential Loan
bore interest at a rate of 7.0% per annum and was originally due May 30, 1997.
During the second quarter of 1997, the Company extended the maturity date of the
Prudential Loan to July 14, 1997. In July 1997, the
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Company refinanced the Prudential Loan with a portion of the proceeds from the
$200 Million Facility (as defined below).
On June 12, 1997, the Company acquired ownership and operational control of
the 480-room Stamford Sheraton Hotel in Stamford, Connecticut. In connection
with this transaction, the Company executed a $10.25 million mortgage note (the
"Stamford Note") in favor of Lehman Brothers and certain of its affiliates. The
Stamford Note is secured by the Stamford Sheraton Hotel, bears interest at LIBOR
plus 225 basis points and matures on January 31, 2000. As of December 31, 1997,
the balance outstanding under the Stamford Note was $10.25 million.
In July 1997, the Company entered into a $200 million three-year unsecured
term loan facility arranged by Bankers Trust Company (the "$200 Million
Facility"). Proceeds from the $200 Million Facility, which bore interest at
one-, two- or three-month LIBOR plus 1.75% per annum, were used to repay the
Prudential Loan and for other acquisitions. In September 1997, the Company
retired the $200 Million Facility with a portion of the proceeds from the $1.2
Billion Facility.
On August 5, 1997, in connection with the acquisition of the Westin Regina
Portfolio, the Company obtained a $118.75 million loan from Bancomer, SA (the
"Bancomer Loan"). The Bancomer Loan is secured by mortgages on the Westin Regina
Portfolio, bears interest at one-month LIBOR plus 169 basis points and matures
on May 14, 1998. As of December 31, 1997, the balance outstanding under the
Bancomer Loan was $118.75 million.
On September 10, 1997, the Company obtained a $1.2 billion three-year
unsecured revolving credit and term loan facility (the "$1.2 Billion Facility").
The $1.2 Billion Facility was arranged and structured by Bankers Trust Company
and co-arranged by affiliates of Lehman Brothers with Bank Boston and Bank of
Montreal. The $1.2 Billion Facility was structured as a $600 million unsecured
revolving credit facility and a $600 million term loan. At closing, the Company
used proceeds from the $1.2 Billion Facility to retire approximately $650
million of its existing indebtedness and to fund the acquisition of the Flatley
Portfolio for approximately $470 million. As of December 31, 1997, the balance
outstanding under the $1.2 Billion Facility was $1.183 billion.
On September 24, 1997, in connection with the acquisition of the 439-room
Crowne Plaza Hotel in New Orleans, Louisiana, the Company entered into a $29.0
million mortgage loan agreement with Hibernia National Bank (the "Crowne Plaza
Mortgage"). The Crowne Plaza Mortgage is secured by the Crowne Plaza Hotel in
New Orleans, bears interest at one-month LIBOR plus 200 basis points and matures
on September 1, 2002. As of December 31, 1997, the balance outstanding under the
Crowne Plaza Mortgage was $29.0 million.
On December 31, 1997, in connection with the Westin Merger, certain assets
of the Westin Companies were transferred to the Corporation. As consideration
for such asset transfers, the Corporation has executed and delivered to the
Westin Companies certain promissory notes in an aggregate principal amount of
approximately $125.7 million. The notes bear interest at 6% per annum, were
acquired by the Trust as part of the Westin Merger on January 2, 1998 and are
currently payable on demand.
On January 2, 1998, the Company obtained a $2.265 billion credit facility
(the "$2.2 Billion Facility") from a group of lenders led by Bankers Trust
Company and The Chase Manhattan Bank to fund the cash portion of the purchase of
Westin for approximately $178 million and to repay an aggregate of approximately
$1.0 billion of outstanding debt of Westin and of the Company under the $1.2
Billion Facility.
On February 23, 1998, the Company obtained two additional credit facilities
($5.6 billion in total) with Lehman Brothers, Bankers Trust Company and The
Chase Manhattan Bank to fund the cash portion of the ITT Merger consideration,
to refinance a portion of the Company's existing indebtedness (including
indebtedness outstanding under the $2.2 Billion Facility) and to provide funds
for general corporate purposes. These facilities are comprised of a $3.1 billion
senior secured credit facility (the "$3.1 Billion Facility") and a $2.5 billion,
five-year increasing rates notes facility (the "IRN Facility").
The $3.1 Billion Facility has three tranches: a $1.0 billion, one year term
loan, a $1.0 billion, a five year term loan, and a $1.1 billion, five-year
revolving credit facility. The Corporation, the Trust and certain of their
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respective direct and indirect subsidiaries may be designated as borrowers or
co-borrowers under all or a portion of the $3.1 Billion Facility. The interest
rate for the $3.1 Billion Facility is one-, two- or three-month LIBOR, at the
Company's option, plus 187.5 basis points for the four months ending June 24,
1998, one-, two-or three-month LIBOR plus 162.5 basis points for the two months
ending August 24, 1998, and thereafter is determined pursuant to a pricing
"grid" with rates based on the Company's leverage and/or senior unsecured debt
rating. Quarterly amortization of the five-year term loan begins in the third
year, with total amortization of 10%, 20% and 70% of the principal amount over
the third, forth and fifth year, respectively. Repayment of amounts borrowed
under the $3.1 Billion Facility is guaranteed by the Trust and the Corporation
and substantially all of their respective significant subsidiaries (including
the Partnerships) other than gaming subsidiaries, and is secured by a pledge of
all the capital stock, partnership interests and other equity interests of the
guarantor subsidiaries.
The IRN facility consists of a single drawdown senior increasing rate,
non-amortizing five-year term loan for $2.5 billion. The Corporation is the
borrower under the IRN Facility; the Trust and all subsidiaries of the
Corporation and the Trust that are borrowers or guarantors of the $3.1 Billion
Facility are guarantors of the IRN Facility. The IRN Facility is secured equally
and ratably by all the collateral securing the $3.1 Billion Facility and is pari
passu in right of payment with all other senior indebtedness of the borrower and
the guarantors, including the $3.1 Billion Credit Facility. Amounts borrowed
under the IRN Facility bear interest at one-, two- or three-month LIBOR plus 175
basis points for the three months ending May 24, 1998, with the interest rate
increasing by 50 basis points every three months thereafter, up to a maximum
rate of one-, two-or three-month LIBOR plus 375 basis points.
Recent Stock Sales. On March 26, 1997, the Company sold 3,000,000 Paired
Shares at a net price to the Company of approximately $43.35 per share in a
public offering. The net proceeds of approximately $130.0 million were used, in
part, to fund the acquisitions of the 264-suite Marriott Suites Hotel in San
Diego, California, the 172-room Raphael Hotel in Chicago, Illinois and the
130-room Tremont Hotel in Chicago, Illinois, and for general corporate purposes.
On October 2, 1997, the Company completed the sale of approximately 2.5
million Paired Shares at the net price of $53.00 per Paired Share to a group of
institutional buyers in a direct placement. Net proceeds from this sale of
approximately $131.6 million were used to repay existing indebtedness.
On October 15, 1997, the Company sold to Union Bank of Switzerland ("UBS")
2,185,000 Paired Common Shares (the "UBS Shares"), in a private placement, at a
net price of $57.25 per share. Net proceeds of this offering (after payment of a
customary placement fee to UBS) were used to repay existing indebtedness.
Separately, the Company entered into a Forward Stock Agreement with UBS
(the "UBS Price Adjustment Agreement"). The UBS Price Adjustment Agreement
provides for a settlement payment to be made, in the form of Paired Shares, by
the Company to UBS, or by UBS to the Company, based on the market price of the
UBS Shares over a specified unwind period, as compared to a "Forward Price" (as
defined, but essentially equal to $57.25 per Paired Share, plus an implicit
interest factor less dividends declared on the UBS Shares, in each case during
the term of the UBS Price Adjustment Agreement).
The Company has the right at any time during a preliminary term of one year
to elect to deliver or receive Paired Shares in settlement of the UBS Price
Adjustment Agreement. The Company has the further right, but not the obligation,
to settle by repurchasing for cash all of the UBS Shares at the Forward Price.
The Company has the obligation to settle the UBS Price Adjustment Agreement at
the end of one year unless UBS agrees to extend its term. UBS has the right to
cause an earlier settlement upon the occurrence of certain events of default or
a substantial decline in the market price of the Paired Shares. The Company has
the right under the UBS Price Adjustment Agreement to settle the Company's
obligation (if any) by making a cash payment, but cannot compel UBS to settle
UBS's obligation through the payment of cash to the Company.
In the event that at various quarterly dates during the term of the UBS
Price Adjustment Agreement the Forward Price is higher than the then current
market price of the Paired Common Stock, the Company is obligated to deliver
additional Paired Shares (or at the Company's election, cash) to UBS to be held
as
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security for the Company's settlement obligation. In February 1998 the Company
paid $7,835,000 to UBS as such security. The Company may, prior to April 15,
1998, deliver Paired Shares to UBS and receive the return of the Company's cash
deposit. Any and all Paired Shares delivered as security will be issued and
outstanding when delivered and will adjust the Forward Price in accordance with
the formula contained in the UBS Price Adjustment Agreement.
Upon final settlement of the UBS Price Adjustment Agreement, the Company is
obligated to pay a placement fee based on the amount of the net stock
settlement, if any, as well as an unwind accretion fee equal to one-half of the
settlement amount multiplied by an interest factor calculated for the number of
actual days the UBS Price Adjustment Agreement was in effect prior to final
settlement.
The Company is required to cause to be registered under the Securities Act
of 1933, for resale by UBS, the Paired Shares sold to UBS on October 15, 1997
and the Paired Shares issued or issuable to UBS under the UBS Price Adjustment
Agreement.
On February 24, 1998, the Company sold an aggregate of 4,641,000 Paired
Shares to Merrill Lynch International, NMS Services, Inc. and Lehman Brothers
Inc. (collectively, the "February Purchasers"), in a private placement, for
$245.0 million. The Company paid the February Purchasers a customary placement
fee.
Separately, the Company entered into agreements (the "February Price
Adjustment Agreements") with the February Purchasers (and with Merrill Lynch,
Pierce, Fenner & Smith Incorporated, NationsBanc Montgomery Securities LLC and
Lehman Brothers Finance S.A., each of which is an affiliate of a February
Purchaser) with terms that are essentially the same as the terms of the UBS
Price Adjustment Agreement, except that (i) under the February Price Adjustment
Agreements, the Company does not have any right to deliver cash in settlement of
its obligation to deliver Paired Shares or any right to repurchase the shares
sold to the February Purchasers, and (ii) the Forward Price under the February
Price Adjustment Agreements is based on a price of $53.875 per share.
The Company is required to cause to be registered under the Securities Act
of 1933, for resale by the February Purchasers, the Paired Shares sold to the
February Purchasers on February 24, 1998 and the Paired Shares issued or
issuable to the February Purchasers under the February Price Adjustment
Agreements.
Treasury Locks. The Company from time to time has entered into interest
rate protection agreements ("Treasury Locks") as a means of managing interest
rate exposure on anticipated transactions. The Treasury Locks have the effect of
fixing the base rate of interest for long-term debt that the Company intends to
issue. The Treasury Locks provide that, on their settlement date, the Company
will receive or pay an amount that will depend upon whether the interest rate
for ten-year Treasury Notes in effect on that date (the "Treasury Rate") has
increased or declined since the dates the Company entered into the Treasury
Locks. If by the settlement date the related debt has been issued by the
Company, these amounts will be capitalized and amortized over the term of such
debt as an increase or decrease in interest expense. To the extent that the
Company has not issued the related debt by the settlement date, the Company will
be required to recognize the amount so paid or received as, respectively, gain
or loss from continuing operations. In addition, if any time prior to the
settlement date the Company changes its intention with respect to the issuance
of the related debt, the Company will be required to recognize gain or loss as
if the settlement had occurred at that time. The amount of such unrecognized
gain or loss fluctuates with the Treasury Rate.
In order for the amount paid or received to be deferred under such
agreements, and therefore treated as a hedge, the Company must determine that it
is probable that the future issuance of debt anticipated by the contract will
occur. In order to assess whether this criterion has been met, the Company
reviews current projections to determine if the issuance of such debt is still
in line with the Company's plans and whether the Company has the ability to
issue such debt.
On May 27, 1997, the Company entered into an interest rate protection
agreement which had the effect of fixing the base rate of interest at 6.773% for
debt with an aggregate notional principal amount of $100 million and a term to
maturity of five years. On October 10, 1997, the Company extended the settlement
date to January 30, 1998, which had the effect of fixing the base rate of
interest at 6.9105% for debt that the Company intended to issue in the first
quarter of 1998.
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On July 29, 1997, the Company extended the settlement date of a previously
transacted interest rate protection agreement to January 30, 1998, which had the
effect of fixing the base rate of interest at 6.09725% for debt that the Company
intended to issue in the first quarter of 1998 with an aggregate notional
principal amount of $100 million and a term to maturity of seven years.
On July 29, 1997, the Company extended the settlement date of a previously
transacted interest rate protection agreement to January 30, 1998, which had the
effect of fixing the base rate of interest at 6.95% for debt that the Company
intended to issue in the first quarter of 1998 with an aggregate notional
principal amount of $150 million and a term to maturity of 10 years.
During the fourth quarter of 1997, the Company determined that, due to
various factors including its financing plans related to the ITT Merger, the
Company no longer intended to issue the debt anticipated by the interest rate
hedging agreements described above. Accordingly, the Company recorded a charge
in the amount of $25 million for the year ended December 31, 1997 and in January
1998 settled the three Treasury Locks for approximately $22.4 million.
CAPITAL IMPROVEMENTS
As previously discussed, during the year ended December 31, 1997, the
Company completed an approximately $16 million renovation of the Radisson Park
Central hotel in Dallas, Texas; an approximately $7 million renovation of the
Westin in Washington, DC; an approximately $6 million renovation of the Edmond
Meany Tower hotel in Seattle, Washington; an approximately $4 million renovation
of the Westin Tampa Airport in Tampa, Florida; an approximately $8 million
renovation of the Sheraton Colony Square hotel in Atlanta, Georgia; and an
approximately $6 million renovation of the Westin Guest Suites at the
Philadelphia International Airport in Philadelphia, Pennsylvania. Renovations
have also been scheduled and should be completed in 1998 and 1999 for the
Terrace Garden in Atlanta, Georgia (approximately $9 million); the Atlanta
Marque in Atlanta, Georgia (approximately $7 million); the Days Inn at the
Philadelphia Airport (approximately $4 million); the Midland Hotel in Chicago,
Illinois (approximately $13.0 million); and the Park Plaza Hotel in Boston,
Massachusetts (approximately $49.2 million). Major and minor renovations,
expansions and upgrades of other hotels are also being contemplated. In
addition, the Company intends to develop new hotels on a selective basis.
Sources of capital for major renovations, expansions and upgrades of hotels as
well as new construction are expected to be: (i) excess funds from operations,
(ii) additional debt financing, and (iii) additional equity raised in the public
and private markets.
Between January 1, 1995 and December 31, 1997, the Company invested over
$2.5 billion in hotel assets (including approximately $157 million in capital
expenditures for the year ended December 31, 1997); an additional $16.4 billion
was invested in connection with the acquisitions of Westin and ITT. As part of
its investment strategy, the Company plans to acquire additional hotels. Future
acquisitions are expected to be funded through further draws under the Company's
current credit facilities, draws under new lines of credit, issuance of
long-term debt on either a secured or unsecured basis, issuance of limited
partnership interests in the Realty Partnership and the Operating Partnership
exchangeable for Paired Shares and the issuance of additional equity or debt
securities. The Company intends to incur additional indebtedness in a manner
consistent with its policy of maintaining a Debt-to-Total Market Capitalization
Ratio (defined as total debt outstanding divided by the sum of total debt
outstanding and the fair market value of the Paired Shares on a fully diluted
basis, after giving effect to the conversion of outstanding Units) of not more
than 50%.
As of December 31, 1997, the Company had approximately $1.57 billion
aggregate principal amount of debt outstanding and approximately 10% of the
Company's owned hotels were encumbered by debt. Substantially all of this debt
is subject to cross-default provisions (subject to certain limitations). As of
March 30, 1998, the Company had approximately $8.1 billion aggregate principal
amount of debt outstanding; see "Cash Flows from Investing and Financing
Activities" immediately above. Although the Company's governing documents do not
provide any limitations on the incurring of indebtedness, as discussed above,
management currently plans to maintain a Debt-to-Total Market Capitalization
Ratio of no more than 50%. During the year ended December 31, 1997, the
Company's Debt-to-Total Market Capitalization Ratio did not exceed 50%.
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Management believes that the Company will have access to capital resources
sufficient to satisfy the cash requirements of each of the Trust and the
Corporation and to expand and develop their business in accordance with their
strategy for future growth.
FUNDS FROM OPERATIONS
Management believes that funds from operations ("FFO") is one measure of
financial performance of an equity REIT such as the Trust. Combined FFO (as
defined by the National Association of Real Estate Investment Trusts)(1) for the
year ended December 31, 1997, grew by 130% to $190.1 million, compared to
combined FFO of $82.7 million for the corresponding period in 1996. The
following table shows the calculation of historical combined FFO for the
indicated periods:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---------- ---------
(IN THOUSANDS)
Income before extraordinary item and minority interest...... $ 60,208 $36,112
Depreciation and amortization............................... 125,446 55,745
Amortization of financing costs............................. (4,079) (4,548)
Minority interest -- consolidated joint ventures............ (9,483) (2,121)
Gain on sales of hotel assets............................... (7,035) (4,290)
Corporate relocation costs.................................. -- 1,850
Treasury lock settlement.................................... 25,000 --
-------- -------
Funds From Operations....................................... $190,057 $82,748
======== =======
FFO includes $5.5 million and $3.1 million of interest income recognized in
excess of the interest received on mortgage notes receivable (as a result of the
notes having been purchased at a discount) for the years ended December 31, 1997
and 1996, respectively.
YEAR 2000
Many computer systems were originally designed to recognize calendar years
by their last two digits. Calculations performed using these shortened fields
may not work properly with dates from the year 2000 and beyond. The Company is
undertaking a review and an evaluation of its existing computerized systems as
part of a program to bring all such systems into Year 2000 compliance. As a part
of this evaluation, the Company expects that its central reservation system will
be Year 2000 compliant by the end of the third quarter of 1998. The Company is
also communicating with vendors of the Company's third-party software to obtain
Year 2000 compliance certification. The Company expects, to the extent
necessary, to either modify or upgrade third-party software to ensure Year 2000
compliance.
The Company has not yet determined the total cost of modifications to its
computerized systems; however, based upon the review and evaluations conducted
to date, the Company believes the costs associated with this process will not
have a material adverse effect on the Company's results of operations or
liquidity.
- ---------------
(1) Management and industry analysts generally consider funds from operations to
be one measure of the financial performance of an equity REIT that provides
a relevant basis for comparison among REITs and FFO is presented to assist
investors in analyzing the performance of the Company. FFO is defined as
income before minority interest (computed in accordance with generally
accepted accounting principles), excluding gains (losses) from debt
restructuring and sales of property, and real estate related depreciation
and amortization (excluding amortization of financing costs). FFO does not
represent cash generated from operating activities in accordance with
generally accepted accounting principles and is not necessarily indicative
of cash available to fund cash needs. FFO should not be considered an
alternative to net income as an indication of the Company's financial
performance or as an alternative to cash flows from operating activities as
a measure of liquidity.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this Item are
included in Item 14 of this Joint Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. TRUSTEES, DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS.
TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST
The Board of Trustees currently has nine members, each of whom serves a
three-year term. The following table sets forth, for each of the members of the
Board of Trustees as of the date of this Joint Annual Report, the class of
Trustees to which such Trustee has been elected and certain other information
regarding the Trustees and executive officers of the Trust.
TRUSTEES WHOSE TERMS EXPIRE AT THE 2000 ANNUAL MEETING
NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE TRUSTEE SINCE
------------ -------------------------------------------- --------------
Jean-Marc Chapus (38)......... Managing Director and Portfolio Manager of November 1997
Trust Company of the West and President of
TCW/Crescent Mezzanine L.L.C., a private
investment fund, since March 1995. Prior to
that time, Mr. Chapus was a Managing
Director and Principal of Crescent Capital
Corporation with primary responsibility for
the firm's private lending and private
placement activities. Mr. Chapus was a
Director of the Corporation from August 1995
to November 1997, and is currently a member
of the Board of Directors of Home Asset
Management Company and Firstamerica
Automotive, Inc.
Bruce W. Duncan (46).......... President and Chief Executive Officer of The August 1995
Cadillac Fairview Corporation Limited since
December 1995. From October 1994 to December
1995, President of Blakely Capital, Inc., a
private firm focusing on investments in real
estate and telecommunications. From 1992 to
April 1994, Mr. Duncan was President and
Co-Chief Executive Officer of JMB
Institutional Realty Corporation and from
1984 to 1991 Executive Vice President of JMB
Realty Corporation. Mr. Duncan is a member
of the Board of Directors of the Canadian
Institute of Public Real Estate Companies,
the Urban Land Institute and the Board of
Trustees of Kenyon College.
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NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE TRUSTEE SINCE
------------ -------------------------------------------- --------------
Stuart M. Rothenberg (34)..... Managing Director in the Real Estate January 1998
Principal Investment Area of Goldman, Sachs
and the head of acquisitions for that
company's Whitehall Real Estate Funds. Over
the past 10 years, Mr. Rothenberg has held
various management and other positions with
Goldman, Sachs. Mr. Rothenberg is a director
of The Archon Group, Gestion d'Actifs
Haussmann and The Wellsford Whitehall,
L.L.C.
Pursuant to the Westin Transaction
Agreement, the Trust has agreed to include
Mr. Rothenberg (and such successors to Mr.
Rothenberg as shall be designated by The
Goldman Sachs Group, L.P. ("GS Group") or an
affiliate thereof designated by GS Group) on
each management slate of nominees to the
Board of Trustees. This right to designate a
Trustee will expire if affiliates of the GS
Group sell (to unaffiliated persons) more
than 75% of the securities of the Company
received by affiliates of the GS Group in
the transactions provided for in the Westin
Transaction Agreement (or securities of the
Company issued in exchange for such
securities).
Barry S. Sternlicht (37)...... Chairman and Chief Executive Officer of the December 1994
Trust. Mr. Sternlicht is the founder and
General Manager of Starwood Capital Group,
L.L.C., and was a co-founder in 1991 of its
predecessor Starwood Capital Group, L.P. Mr.
Sternlicht also has been the President and
Chief Executive Officer of Starwood Capital
Group, L.P. since its formation. Mr.
Sternlicht is currently the Chairman of the
Board of Directors of the Corporation, a
Trustee of each of Equity Residential
Properties Trust (a multi-family REIT) and
Starwood Financial Trust (a REIT), and a
Director of each of U.S. Franchise Systems
and ITT Educational. Mr. Sternlicht is on
the Board of Governors of National
Association of Real Estate Investment Trusts
("NAREIT") and is a member of the Urban Land
Institute and of the National Multi-Family
Housing Council. Mr. Sternlicht is a member
of the Board of Directors of the Council for
Christian and Jewish Understanding, is a
member of the Young Presidents Organization
and is on the Board of Directors of Junior
Achievement for Fairfield County,
Connecticut.
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TRUSTEES WHOSE TERMS EXPIRE AT THE 1999 ANNUAL MEETING
NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE TRUSTEE SINCE
------------ -------------------------------------------- --------------
Steven R. Goldman (36)........ Executive Vice President of Acquisition and September 1996
Development of the Trust since March 1998.
Mr. Goldman was Senior Vice President of the
Trust from September 1996 through March 1998
and Senior Vice President of the Corporation
from March 1995 to September 1996. Mr.
Goldman was a Vice President of Starwood
Capital Group, L.P. specializing in hotel
acquisitions and hotel asset management from
August 1993 to February 1995. From 1990 to
1993, he was Senior Development Manager of
Disney Development Company, the real estate
investment development and management
division of The Walt Disney Company.
Roger S. Pratt (45)........... Managing Director and Senior Portfolio February 1997
Manager of Prudential Real Estate Investors.
Since January 1992, Mr. Pratt has been the
portfolio manager for Prudential Property
Investment Separate Account II, a real
estate fund managed by Prudential Real
Estate Investors for pension fund clients.
Mr. Pratt has been with The Prudential
Insurance Company of America ("Prudential")
for more than 15 years, serving in a variety
of roles in development, asset management,
hotel management and administration. Mr.
Pratt is a member of the American Institute
of Certified Planners and serves on the
Multi-Family Council of the Urban Land
Institute. He is also a trustee of the
George Street Playhouse. Mr. Pratt is the
designee of Prudential on the Board of
Trustees pursuant to a Contribution
Agreement dated as of January 15, 1997,
which entitles Prudential to be represented
on the Board of Trustees for so long as
Prudential meets certain share ownership
criteria.
Stephen R. Quazzo (38)........ Managing Director, Chief Executive Officer August 1995
and co-founder of Transwestern Investment
Company, L.L.C., a real estate principal
investment firm, since March 1996. From
April 1991 to March 1996, Mr. Quazzo was
President of Equity Institutional Investors,
Inc., a subsidiary of Equity Group
Investments, Inc., a Chicago-based holding
company controlled by Samuel Zell. Mr.
Quazzo is an advisory board member of City
Year Chicago.
TRUSTEES WHOSE TERMS EXPIRE AT THE 1998 ANNUAL MEETING
Madison F. Grose (44)......... Managing Director and General Counsel of December 1994
Starwood Capital Group, L.L.C. (and its
predecessor entities) since July 1992. From
November 1983 through June 1992, he was a
Partner in the law firm of Pircher, Nichols
& Meeks. Mr. Grose is currently a Trustee of
Starwood Financial Trust.
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TRUSTEES WHOSE TERMS EXPIRE
AT THE 1999 ANNUAL MEETING
NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE TRUSTEE SINCE
--------------------------- -------------------------------------------- --------------
George J. Mitchell (64)....... Special Counsel to the law firm of Verner, November 1997
Liipfert, Bernhard, McPherson and Hand since
January 1995. Senator Mitchell served as a
United States Senator from January 1980 to
January 1995. While in the Senate, Senator
Mitchell served on the Finance, Veterans
Affairs and Environment and Public Works
Committees, and was the Majority Leader from
1989 to 1995. Senator Mitchell serves as a
director of The Walt Disney Company, Federal
Express Corporation, Xerox Corporation and
UNUM Corporation. In addition, Senator
Mitchell serves as Chairman of the
International Crisis Group, a non-profit
organization dedicated to the prevention of
crises in international affairs. From 1995
to 1997, Senator Mitchell served as the
Special Advisor to the President of the
United States on economic initiatives in
Ireland. At the request of the British and
Irish Governments, he served as Chairman of
the International Commission on Disarmament
in Northern Ireland, and now serves as
Chairman of the peace negotiations in
Northern Ireland. Senator Mitchell serves as
Chairman of the Ethics Committee of the U.S.
Olympic Committee and as Chairman of the
National Health Care Commission created by
the Pew Charitable Foundation.
The executive officers of the Trust serve at the pleasure of the Board of
Trustees. There is no family relationship among any of the Trustees or executive
officers of the Trust.
DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION
The Board of Directors of the Corporation consists of 10 members, each of
whom serves for a three-year term. The following table sets forth, for each of
the members of the Corporation's Board of Directors as of the date of this Joint
Annual Report, the class of Directors to which such Director has been elected
and certain other information regarding such Director.
DIRECTORS WHOSE TERMS EXPIRE AT THE 2000 ANNUAL MEETING
NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE DIRECTOR SINCE
------------ -------------------------------------------- --------------
Juergen Bartels (57).......... Chief Executive of the Company's Hotel Group January 1998
since March 1998. From May 1995 to March
1998, Chairman and Chief Executive Officer
of Westin Hotels & Resorts. Prior to joining
Westin, Mr. Bartels was the President and
Chief Executive Officer of Carlson
Hospitality Group, Inc. ("Carlson"), which
controls Radisson Hotels International,
T.G.I. Friday's restaurants and Country Inns
and Suites. Prior to joining Carlson in
1983, Mr. Bartels was the President of
Ramada's worldwide holding company and
founder of Ramada Renaissance Hotels.
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NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE DIRECTOR SINCE
------------ -------------------------------------------- --------------
Jonathan D. Eilian (30)....... Managing Director of Starwood Capital Group, August 1995
L.L.C. (and a senior executive of its
predecessor entities) since its formation in
September 1991. Prior to being a founding
member of Starwood Capital, Mr. Eilian
served as an Associate for JMB Realty
Corporation, a real estate investment firm,
and for The Palmer Group, L.P., a private
investment firm specializing in corporate
acquisitions. Mr. Eilian is currently a
Trustee of Starwood Financial Trust.
Barry S. Sternlicht (37)...... Chairman and Chief Executive Officer of the December 1994
Trust. Mr. Sternlicht is the founder and
General Manager of Starwood Capital Group,
L.L.C., and was a co-founder in 1991 of its
predecessor Starwood Capital Group, L.P. Mr.
Sternlicht also has been the President and
Chief Executive Officer of Starwood Capital
Group, L.P. since its formation. Mr.
Sternlicht is currently the Chairman of the
Board of Directors of the Corporation, a
Trustee of each of ITT Educational Services,
Inc., Equity Residential Properties Trust
and Starwood Financial Trust, and a director
of U.S. Franchise Systems. Mr. Sternlicht is
on the Board of Governors of NAREIT and is a
member of the Urban Land Institute and of
the National Multi-Family Housing Council.
Mr. Sternlicht is a member of the Board of
Directors of the Council for Christian and
Jewish Understanding, is a member of the
Young Presidents Organization and is on the
Board of Directors of Junior Achievement for
Fairfield County, Connecticut.
Barry S. Volpert (38)......... Managing Director in the Principal January 1998
Investment Area of Goldman, Sachs. Over the
past 11 years, Mr. Volpert has held various
other management positions with that
company. Mr. Volpert is a director of Elifin
S.A. (Luxembourg), Insilco Corp. and
Rockefeller Center Properties, Inc.
DIRECTORS WHOSE TERMS EXPIRE AT THE 1999 ANNUAL MEETING
Michael A. Leven (60)......... Chairman of the Board, President and Chief August 1995
Executive Officer of U.S. Franchise Systems,
a hotel franchising and development company,
since September 1995. From October 1990 to
September 1995, Mr. Leven was President and
Chief Operating Officer of Holiday Inn
Worldwide. Mr. Leven is a director of U.S.
Franchise Systems and Servico, Inc. Mr.
Leven is also a member of the Board of
Governors, the Chairman of the BioMedical
Services Board and a member of the Executive
Committee, of the American Red Cross.
Daniel H. Stern (37).......... President of Reservoir Capital Group, November 1997
L.L.C., a New York based investment
management firm, since July 1997. Mr. Stern
was a Trustee of the Trust from August 1995
to November 1997. From December 1992 to July
1997, Mr. Stern was President of Ziff
Brothers Investments, L.L.C., a diversified
investment management firm.
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NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE DIRECTOR SINCE
------------ -------------------------------------------- --------------
DIRECTORS WHOSE TERMS EXPIRE AT THE 1998 ANNUAL MEETING
Bruce M. Ford (58)............ President of F.K.B. Management Corporation, September 1983
a hotel and restaurant management company,
since 1988. Member of Gibson 25 Associates,
LLC, a hotel developer, since March 1995.
President of Ford Management Corporation, a
hotel/motel management and development
company, since June 1988. President of FST
and Associates from 1988 until August 1997.
Prior to that time, Mr. Ford was Senior Vice
President of Operations of Ramada Inns.
Graeme W. Henderson (64)...... Chairman of the Trust from July 1989 to September 1986
December 1994 and Trustee of the Trust from
September 1986 to December 1994. He has been
a private investor since January 1990. Prior
to January 1990, Mr. Henderson was President
of Henderson Consulting, Inc., a private
financial consulting firm. Mr. Henderson has
been President of Capstan, Inc. (formerly
Seymour, Inc.), a manufacturer of machine
tool controls, since 1982. Mr. Henderson is
currently a director of Capital Southwest
Corporation.
Earle F. Jones (71)........... Mr. Jones was the Chairman of the Board of September 1985
Directors of the Corporation from February
1989 to September 1997. He has been
Co-Chairman since 1988 of MMI Hotel Group, a
hotel company. From 1967 to 1968, Mr. Jones
was President of the International
Association of Holiday Inns and served two
terms as a director. Mr. Jones is a Trustee
and Chairman of Communications Improvement
Trust, whose beneficiaries are public
broadcasting and Tougaloo College Trust, a
member of the Board of Trustees for each of
Millsap College and the Catholic Foundation
and Co-Chairman of the Mississippi Olympic
Committee. Mr. Jones is a general partner of
Orlando Plaza Suite Hotel, Ltd-A, which
filed a petition under Chapter 11 of the
U.S. Bankruptcy Code in May 1996. An order
confirming the debtor's plan of
reorganization was issued by the court on
January 27, 1997.
Daniel W. Yih (39)............ A general partner of Chilmark Partners, L.P. August 1995
since June 1995. Mr. Yih served as interim
Chief Financial Officer of Midway Airlines
(from September 1995 to December 1995),
President of Merco-Savory, Inc., a
manufacturer of food preparation equipment
(from March 1995 to June 1995) and as a
senior executive of Welbilt Corporation
(from September 1993 to March 1995).
Pursuant to the Westin Transaction Agreement, the Corporation has agreed to
include Barry S. Volpert (and such successors to Mr. Volpert as shall be
designated by the GS Group or an affiliate thereof) and Juergen Bartels (to the
extent he continues as Chief Executive Officer) on each management slate of
nominees to the Board of Directors. This right to designate Directors of the
Corporation will expire if affiliates of the GS Group sell (to unaffiliated
persons) more than 50% of the securities of the Company received by affiliates
of the GS Group in the transactions provided for in the Westin Transaction
Agreement (or securities of the Company issued in exchange therefor).
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The following table includes certain information with respect to each of
the Corporation's current executive officers other than Mr. Bartels:
NAME AGE POSITION(S) WITH THE CORPORATION
---- --- --------------------------------
Susan R. Bolger...................... 44 Executive Vice President of Human Resources
Ronald C. Brown...................... 43 Executive Vice President and Chief Financial
Officer
Theodore W. Darnall.................. 40 Executive Vice President, Hotel Operations,
North America
Susan R. Bolger. Ms. Bolger has been Executive Vice President of Human
Resources of the Corporation since March 1998 and was Senior Vice President of
Human Resources of the Corporation from September 1996 to March 1998. From
November 1994 to September 1996, she was Corporate Vice President of Human
Resources for Wyndham Hotels and Resorts; prior to that time, she was Vice
President for Human Resources for Arrow Industries, a division of Conagra.
Ronald C. Brown. Mr. Brown has been Executive Vice President and Chief
Financial Officer of the Corporation since March 1998 and was Senior Vice
President and Chief Financial Officer of the Trust from July 1995 through March
1998. Prior to joining the Trust, Mr. Brown was President of Sonoran Hotel
Advisors, L.L.C., a hotel REIT advisory firm, from August 1994 to July 1995.
From December 1993 to August 1994, Mr. Brown was President of Doubletree
Corporation, a public hotel operating company. From December 1990 to December
1993, Mr. Brown was Executive Vice President and Chief Financial Officer, and
from April 1992, Chairman and Chief Executive Officer, of Doubletree Hotels
Corporation. From March 1988 to April 1992, Mr. Brown was Vice
President -- Finance & Accounting and Chief Financial Officer, and then
Executive Vice President and Chief Financial Officer, for Canadian Pacific
Hotels Corporation, a hotel operating company. Mr. Brown is also the Vice
Chairman and a Director of Phoenix Children's Hospital.
Theodore W. Darnall. Mr. Darnall was named the Corporation's Executive
Vice President, Hotel Operations, North America in March 1998. From April 1996
to March 1998 he served as the Executive Vice President and Chief Operating
Officer of the Corporation. Prior to joining the Corporation, Mr. Darnall served
as the Senior Vice President -- Operations of Interstate Hotel Company from
August 1995 to April 1996. Prior to that time, he served as the Regional Vice
President -- Operations of Interstate Hotel Company.
The executive officers of the Corporation serve at the pleasure of the
Board of Directors. There is no family relationship among any of the Directors
or executive officers of the Corporation.
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ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
THE TRUST
The following table provides certain summary information concerning the
compensation paid for the fiscal years ended December 31, 1997, 1996 and 1995 to
the Trust's Chief Executive Officer and each person serving as an executive
officer of the Trust during the year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
---------------------------
RESTRICTED
STOCK
ANNUAL COMPENSATION AWARD(S) SECURITIES
--------------------- ---------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) OPTIONS(#)(2) COMPENSATION($)
--------------------------- ---- --------- --------- ---------- ------------- ---------------
Barry S. Sternlicht........... 1997 307,500 2,650,00 400,000
Chairman and Chief 1996 181,252 250,000 956,250(3) 1,554,000
Executive Officer 1995 91,667 150,000 625,500
Gary M. Mendell(4)............ 1997 319,368 300,000
President
Ronald C. Brown(5)............ 1997 200,000 250,000 40,000
Senior Vice President and 1996 175,000 100,000 540,000(6) 85,500 163,963(7)
Chief Financial Officer 1995 66,666 65,000 82,500
Steven R. Goldman(8).......... 1997 200,000 250,000 50,000
Senior Vice President 1996 43,750 75,000 900,000(9) 90,000 44,112(7)
- ---------------
(1) Value is calculated by multiplying the number of shares by the closing
market price of the Paired Shares on the date of grant.
(2) For additional information with respect to these options, see "Option
Exercises and Holdings" below.
(3) In February 1996, Mr. Sternlicht received restricted stock awards in the
form of two warrants to purchase an aggregate of 45,000 Paired Shares at an
exercise price of $0.67 per Paired Share. One warrant was exercisable in
full on the grant date; the second warrant became exercisable in full in
January 1997; and the exercisability of both warrants generally was
conditioned upon Mr. Sternlicht's continued employment by the Trust. Mr.
Sternlicht exercised both of these warrants in full in 1997, and the
restricted stock issued upon these exercises has fully vested. Dividends
were paid to Mr. Sternlicht with respect to this restricted stock award. The
value of such Paired Shares at December 31, 1997 was $2,604,375, based on
the closing price of the Paired Shares on the NYSE on such date ($57.875).
(4) Mr. Mendell became an officer of the Trust in January 1997 and resigned such
position in March 1998.
(5) Mr. Brown became an officer of the Trust in July 1995; in March 1998 he
resigned this position to become an executive officer of the Corporation.
(6) Mr. Brown was granted a restricted stock award of 22,500 Paired Shares in
August 1996. Such restricted stock award was originally scheduled to vest in
annual installments during the three years ended August 12, 1999. In
accordance with the change of control provisions of the Trust's LTIP, upon
the consummation of the ITT Merger, such restricted stock award vested in
full. Dividends were paid to Mr. Brown with respect to such restricted stock
award. As of December 31, 1997, the value of such 22,500 Shares was
$1,302,188, based on the closing price of the Paired Shares on the NYSE on
such date ($57.875).
(7) Amount shown reflects taxable reimbursement of relocation expenses.
(8) Mr. Goldman became an executive officer of the Trust in September 1996.
Prior to September 1996, Mr. Goldman was an officer of the Corporation. For
services rendered during 1996, the Corporation paid Mr. Goldman $131,250 in
salary and a bonus of $25,000.
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(9) Mr. Goldman was granted a restricted stock award of 37,500 Paired Shares in
August 1996. Such restricted stock award was originally scheduled to vest in
annual installments during the three years ended August 12, 1999. In
accordance with the change of control provisions of the Trust's LTIP, upon
the consummation of the ITT Merger, such restricted stock award vested in
full. Dividends were paid to Mr. Goldman with respect to such restricted
stock award. As of December 31, 1997, the value of such 37,500 Paired Shares
was $2,170,313 based on the closing price of the Paired Shares on the NYSE
on such date ($57.875).
THE CORPORATION
The following table provides certain summary information concerning the
compensation paid for the fiscal years ended December 31, 1997, 1996 and 1995 to
the Corporation's Chief Executive Officer and each person serving as an
executive officer of the Corporation during the year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
---------------------------
RESTRICTED
STOCK
ANNUAL COMPENSATION AWARD(S) SECURITIES
-------------------- ---------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) OPTIONS(#)(2) COMPENSATION($)
--------------------------- ---- --------- -------- ---------- ------------- ---------------
Eric A. Danziger(3)............ 1997 365,000 375,000
President and Chief 1996 175,711 150,000 2,455,451(4) 300,000 201,312(5)
Executive Officer
Theodore W. Darnall(6)......... 1997 269,000 250,000 40,000
Executive Vice-President 1996 191,790 137,500 1,000,011(7) 150,000 41,758(5)
and Chief Operating Officer
Steven R. Goldman(8)........... 1996 131,250 25,000
Senior Vice President 1995 114,583 75,000 69,000 19,800(9)
Alan M. Schnaid................ 1997 110,000 120,000 25,000
Vice President and Corporate 1996 85,228 22,500 9,750 69,918(10)
Controller 1995 55,000 8,500 6,750
- ---------------
(1) Value is calculated by multiplying the number of shares by the closing
market price of the Paired Shares on the date of grant.
(2) For information with respect to these options, see "Options Exercises and
Holdings" below.
(3) Mr. Danziger became an officer of the Corporation in July 1996 and resigned
in February 1998.
(4) Mr. Danziger was granted a restricted stock award of 100,222 Paired Shares
in August 1996. Such restricted stock award was originally scheduled to
vest in annual installments over the three years ended June 27, 1999. In
accordance with the provisions of Mr. Danziger's employment contract, upon
the termination of Mr. Danziger's employment with the Corporation, such
restricted stock award vested in full. Dividends were paid to Mr. Danziger
with respect to such restricted stock award. As of December 31, 1997, the
value of such 101,222 Paired Shares was $5,800,348.25, based on the closing
price of the Paired Shares on the NYSE on such date ($57.875).
(5) Amount shown reflects taxable reimbursement of relocation expenses.
(6) Mr. Darnall became an officer of the Corporation in April 1996.
(7) Mr. Darnall was granted a restricted stock award of 45,283 Paired Shares in
August 1996. Such restricted stock award was originally scheduled to vest
in annual installments over the three years ended April 26, 1999. In
accordance with the change of control provisions of the Corporation's LTIP,
upon the consummation of the ITT Merger, such restricted stock award vested
in full. Dividends were paid to Mr. Darnall with respect to such restricted
stock award. As of December 31, 1997, the value of such 45,283 Paired
Shares was $2,620,753.63, based on the closing price of the Paired Shares
on the NYSE on such date ($57.875).
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(8) Mr. Goldman resigned as an officer of the Corporation in September 1996, at
which time he became an executive officer of the Trust. During 1996, the
Trust paid Mr. Goldman $43,750 in salary and a bonus of $75,000, and
reimbursed Mr. Goldman on a taxable basis for $44,112 of relocation
expenses.
(9) Amount shown reflects cash paid by the Corporation for housing allowance.
(10) Amount shown reflects $46,635 for relocation allowance and $23,303 for
taxable reimbursement of relocation expenses.
OPTION GRANTS
The following table shows, as to each executive officer of the Trust and
each executive officer of the Corporation named in the Summary Compensation
Tables above, certain information concerning the options granted to that officer
during the year ended December 31, 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
---------------------------------------------------------
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE
SECURITIES OPTIONS/ AT ASSUMED ANNUAL RATES OF
UNDERLYING SARS GRANTED STOCK PRICE APPRECIATION
OPTIONS/ TO EMPLOYEES EXERCISE FOR OPTION TERM*
SARS IN LAST PRICE ---------------------------
NAME GRANTED FISCAL YEAR ($/SH.) EXPIRATION DATE 5%($) 10%($)
---- ---------- ------------ -------- ------------------ ------------ ------------
Barry S. Sternlicht.... 400,000 23.15 53.00 September 25, 2007 13,332,566 33,787,340
Ronald C. Brown........ 40,000 2.32 53.00 September 25, 2007 1,333,257 3,378,734
Steven R. Goldman...... 50,000 2.89 53.00 September 25, 2007 1,666,571 4,223,418
Theodore W. Darnall.... 40,000 2.32 53.00 September 25, 2007 1,333,257 3,378,734
Alan M. Schnaid........ 10,000 0.58 38.50 March 3, 2007 242,124 613,591
15,000 0.87 53.00 September 25, 2007 499,971 1,267,025
Gary M. Mendell........ 300,000 17.36 37.417 February 14, 2007 7,059,405 17,889,918
- ---------------
* The dollar gains under these columns result from calculations assuming 5% and
10% growth rates as set by the Securities and Exchange Commission and are not
intended to forecast future price appreciation of the Paired Shares. The gains
reflect a future value based upon growth at these prescribed rates. The
Company did not use an alternative formula for a grant date valuation, an
approach that would state gains at present, and therefore lower, value. The
Company is not aware of any formula that will determine with reasonable
accuracy a present value based on future unknown or volatile factors.
It is important to note that options have value to recipients, including the
listed executives, only if the price of the Paired Shares advances beyond the
grant date price shown in the table during the effective option period.
The per Paired Share exercise price of each option listed in the table
above is equal to the fair market value of a Paired Share on the day that option
was granted. Each of the options listed in the table above (other than the
option granted to Mr. Mendell) originally was to become exercisable in three
equal annual installments commencing on the first anniversary of the option
grant date. In accordance with the change of control provisions of the LTIPs,
upon consummation of the ITT Merger, all of these options became immediately
exercisable for the full amount of Paired Shares subject thereto. The option
granted to Mr. Mendell originally became exercisable as to one-fifth of the
shares subject thereto on each of the second, third and fourth anniversaries of
the option grant date, and as to the balance of these shares on the fifth
anniversary of the grant date. Upon the termination of Mr. Mendell's employment
with the Corporation, the option became exercisable in full.
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OPTION EXERCISES AND HOLDINGS
The following table provides certain information with respect to the
options held as of December 31, 1997 by the executive officers of the Trust and
the executive officers of the Corporation named in the Summary Compensation
Tables above.
AGGREGATED OPTION/SAR EXERCISES IN 1997
AND DECEMBER 31, 1997 OPTION VALUES
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FISCAL OPTIONS/SARS
VALUE YEAR-END(#) AT FISCAL YEAR-END($)(*)
SHARES ACQUIRED REALIZED --------------------------- ---------------------------
NAME ON EXERCISE(#)(1) ($)(*) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------------- -------- ----------- ------------- ----------- -------------
Barry S. Sternlicht..... 794,001 1,785,499 30,613,742 50,853,584
Gary M. Mendell......... 0 300,000 0 6,126,900
Ronald C. Brown......... 6,153 139,981 64,847 137,000 2,604,987 3,756,318
Steven R. Goldman....... 66,500 142,500 2,710,028 3,618,647
Eric A. Danziger........ 62,500 237,500 2,083,750 7,983,838
Theodore W. Darnall..... 25,000 165,000 893,918 4,525,660
Alan M. Schnaid......... 5,500 33,750 212,121 594,601
- ---------------
(*) Value is calculated by subtracting the exercise price from the assumed fair
market value of the Paired Shares underlying the option at December 31, 1997
and multiplying the result by the number of shares for which the option is
"in the money." Fair market value was calculated based upon the average of
the high and low sales prices of the Paired Shares as reported by the NYSE
at December 31, 1997 ($57.84). There is no assurance that if and when any
such option is exercised, the option will have this value.
COMPENSATION OF TRUSTEES AND DIRECTORS
On the last day of March, July, September and December of each calendar
year, each Trustee and each Director then in office who is not an employee of
the Trust or the Corporation is awarded, under the Trust's LTIP or the
Corporation's LTIP, as applicable, and on a current or deferred basis at the
election of such Trustee or Director, that number of Paired Shares (rounded to
the nearest whole share) equal to one-quarter of the "Annual Fee" (as defined
below) divided by the fair market value of a Paired Share on the immediately
preceding December 31 (a "Fee Award"); provided, however, that the number of
Paired Shares issued in payment of such Annual Fee may be reduced, at the option
of the recipient, by up to one-half to the extent that such Trustee or Director
indicates in advance his or her election to receive cash (a "Cash Election") in
such amount in lieu of Paired Shares prior to such immediately preceding
December 31 or, with respect to any person who becomes a non-employee Trustee or
Director subsequent to that date, within 10 days of becoming such a Trustee or
Director. In addition, on or before each December 31 (or in the case of a person
who first becomes a Trustee or Director subsequent to December 31, within 10
days of becoming a Trustee or Director), a Trustee or Director may, by written
notice to the Trust or Corporation, elect to defer receipt of any or all of the
Paired Shares to be received as a Fee Award or the cash to be received pursuant
to a Cash Election. Effective January 1, 1998, the Annual Fee was increased from
$25,000 to $50,000; to the extent that any award to be made to a Trustee or
Director exceeds the maximum amount constituting a Fee Award under the
applicable LTIP, such award will take the form of a discretionary grant.
On June 30, 1997, each non-employee Trustee and Director received options
to purchase 4,500 Paired Shares at an exercise price of $42.8125 per Paired
Share, the fair market value of a Paired Share on that date. On June 30, 1998
and on June 30 of each subsequent year, each non-employee Trustee or Director
will also receive options to purchase 4,500 Paired Shares at an exercise price
per share equal to the fair market value of a Paired Share on the first business
day prior to the date of grant.
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In addition to the compensation described above, each non-employee Trustee
or Director receives a fee of $750 (or, in the case of telephonic meetings,
$500) for each meeting in which he participates and a fee of $500 ($1,000 per
meeting for committee chairmen) for each committee meeting in which he
participates. Mr. Jones also received an additional fee of $2,500 per year
(prorated) for his services as Chairman of the Board of Directors. All Trustees
and Directors are reimbursed for out-of-pocket expenses incurred in attending
meetings of the Board of Trustees or the Board of Directors.
EMPLOYMENT AND COMPENSATION AGREEMENTS WITH EXECUTIVE OFFICERS
The Trust
In February 1998, Barry S. Sternlicht and the Trust entered into an amended
and restated employment agreement pursuant to which Mr. Sternlicht has agreed to
continue to serve as the Chairman and Chief Executive Officer of the Trust until
at least December 31, 1999. The amended and restated employment agreement
provides that Mr. Sternlicht will receive a minimum annual base salary of
$1,000,000 and a guaranteed minimum bonus for 1998 of $1,325,000. In addition,
the Trust will purchase for Mr. Sternlicht a $10,000,000 life insurance policy
on his life, and will pay to Mr. Sternlicht cash in an amount equal to the
amount of any excise tax imposed on him as a result of the accelerated vesting
of certain outstanding stock options. Mr. Sternlicht also will receive a cash
payment in respect of taxes payable by Mr. Sternlicht as a result of the vesting
of the restricted stock award granted in August 1996 to Starwood Capital under
the Trust's LTIP. In connection with such modifications, Mr. Sternlicht waived
the accelerated vesting (as a result of the ITT Merger or the Westin Merger) of
all awards to him under the Trust's LTIP that otherwise would have vested in
1998; such awards accordingly will vest in accordance with their terms, as
modified.
Mr. Sternlicht's employment is terminable by the Trust with or without
cause. In the event Mr. Sternlicht's employment by the Trust is terminated by
the Trust other than for "cause" or by Mr. Sternlicht for "good reason" (each as
defined), the Trust has agreed to pay to Mr. Sternlicht as a severance benefit
an amount equal to two times the sum of his annual base salary then in effect
plus the average of his bonus for the preceding two years. In addition, all then
unvested awards made to Mr. Sternlicht under the Trust's LTIP will vest in full,
subject to certain exceptions.
In connection with the execution and delivery of the amended and restated
employment agreement, the Trust granted to Mr. Sternlicht an option under the
Trust's LTIP to purchase 2,500,000 Paired Shares, exercisable at $54.69 per
Paired Share (the market value of a Paired Share on the date of grant); this
option vests in three equal annual installments, subject generally to Mr.
Sternlicht's continued employment by the Trust. Until June 30, 1998, and subject
to certain limitations, Mr. Sternlicht may transfer the right to purchase an
aggregate of up to 500,000 of the Paired Shares subject to this option.
In connection with the HEI Acquisition, Gary M. Mendell and the Trust
entered into an employment agreement dated as of January 15, 1997, pursuant to
which Mr. Mendell was employed as the President of the Trust and elected as a
member of the Board of Trustees. Pursuant to the employment agreement, Mr.
Mendell received a minimum base salary of $365,000 and annual incentive
compensation; in addition, he was granted (i) an option to purchase 300,000
Paired Shares exercisable at $37.417 per Paired Share (the market value of a
Paired Share on the date of grant), which option vests in five equal annual
increments beginning on the second anniversary of the grant date, and (ii) a
performance award under the Trust's LTIP entitling him to receive all
distributions paid on the Paired Shares if certain performance criteria are
satisfied over the five-year period ended December 5, 2001. Mr. Mendell's
employment by the Trust was terminable by either party with or without cause,
and was terminated by Mr. Mendell in March 1998. As a result of such
termination, Mr. Mendell is entitled to a payment equal to the sum of his most
recent annual base salary plus $255,500 and the immediate vesting of the option
and the related performance award.
As of March 25, 1998, Steven R. Goldman and the Trust entered into a new
employment agreement in connection with Mr. Goldman's assuming the new position
of Executive Vice President, Acquisitions and Development, for the Trust. Under
the new agreement, Mr. Goldman's annual salary will be $325,000, with a bonus to
be determined in accordance with a new plan that is expected to be considered by
the Board of Trustees, and an additional retention bonus of one year's salary
(at the current base salary level) conditioned upon Mr. Goldman's staying with
the Trust at least one year after the closing of the ITT Merger.
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Mr. Goldman will also receive, conditioned upon Mr. Goldman's staying with the
Trust for the same one-year period, a cash payment in respect of taxes payable
by Mr. Goldman as a result of the vesting of the restricted stock award granted
to Mr. Goldman in August 1996. The Trust also undertakes to recommend to the
Option Committee of the Board of Trustees that Mr. Goldman be granted an option
under the Trust's LTIP at an exercise price equal to the fair market value of
Paired Shares on the date of grant; the option will be for such number of Paired
Shares as is determined by the Option Committee and will vest over a three-year
period. In addition, the new agreement calls for the Trust to pay (i) Mr.
Goldman's reasonable out-of-pocket expenses in connection with his relocation to
the Fairfield/Westchester county area, (ii) relocation costs relating to a
third-party purchase of Mr. Goldman's home in Phoenix to facilitate an expedient
relocation and (iii) mortgage duplication expenses for a period not to exceed
six months. The Trust also has agreed to make a five-year, non-interest-bearing
loan to Mr. Goldman in the amount of $400,000, to be secured by a second
mortgage on Mr. Goldman's new home in the Fairfield/Westchester county area. Mr.
Goldman's employment is terminable by the Trust or Mr. Goldman with or without
cause. In the event his employment is terminated by the Trust without cause or
by Mr. Goldman due to breach by the Trust, Mr. Goldman will be entitled to
severance benefits of one year's base salary and the accelerated vesting of all
outstanding options.
The Corporation
As of March 19, 1998, Juergen Bartels and the Corporation entered into an
employment agreement in connection with Mr. Bartels's assuming the new position
of Chief Executive Officer of the Hotel Group for the Corporation. Under the
agreement, Mr. Bartels's annual salary will be $525,000, with a bonus to be
determined in accordance with a new bonus plan expected to be considered by the
Board of Directors. The Corporation also undertakes to recommend to the Option
Committee of the Board of Directors that Mr. Bartels be granted an option under
the Corporation's LTIP at an exercise price equal to the fair market value of a
Paired Share on the date of grant; the option will be for such number of Paired
Shares as is determined by the Option Committee and will vest over a three-year
period. In addition, the employment agreement calls for the Corporation to pay
(i) Mr. Bartels's reasonable out-of-pocket expenses in connection with his
relocation to the Fairfield/Westchester county area and (ii) relocation costs
relating to a third-party purchase of Mr. Bartels's home in Seattle to
facilitate an expedient relocation. Mr. Bartels's employment is terminable by
the Corporation or Mr. Bartels with or without cause. In the event his
employment is terminated by the Corporation without cause or by Mr. Bartels due
to breach by the Corporation, Mr. Bartels will be entitled to severance benefits
of one year's base salary and the accelerated vesting of all outstanding
options.
Eric A. Danziger and the Corporation entered into an employment agreement
dated as of June 27, 1996, pursuant to which Mr. Danziger was employed as
President and Chief Executive Officer of the Corporation at an annual salary of
$365,000 and was guaranteed a minimum bonus of $150,000 for 1996. Mr. Danziger
also received an option to purchase up to 187,500 Paired Shares at a price of
$24.50 per Paired Share (the fair market value of the Paired Shares on the date
of grant) and a restricted stock award of 100,222 Paired Shares. (See "The
Corporation -- Summary Compensation Table" above.) The Corporation also
reimbursed Mr. Danziger for expenses incurred in connection with moving his
residence from Dallas, Texas to Phoenix, Arizona, and provided Mr. Danziger with
a one-year non-interest bearing loan for $150,000 secured by a second mortgage
on his new residence in Phoenix. This loan was paid in full by Mr. Danziger in
February 1998. As a result of the termination of Mr. Danziger's employment in
February 1998, Mr. Danziger is entitled to severance benefits of one year's base
salary and the immediate vesting of all outstanding options and restricted stock
awards.
As of March 25, 1998, Theodore W. Darnall and the Corporation entered into
a new employment agreement in connection with Mr. Darnall's assuming the new
position of Executive Vice President of Hotel Operations for the Corporation.
Under the new agreement, Mr. Darnall's annual salary will be $350,000, with a
bonus to be determined in accordance with the anticipated new bonus plan, and an
additional retention bonus of one year's salary (at the current base salary
level) conditioned upon Mr. Darnall's staying with the Corporation at least one
year after the closing of the ITT Merger. Mr. Darnall will also receive,
conditioned upon Mr. Darnall's staying with the Corporation for the same
one-year period, a cash payment in respect of taxes payable by Mr. Darnall as a
result of the vesting of the restricted stock award originally granted to
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Mr. Darnall in August 1996. The Corporation also undertakes to recommend to the
Option Committee of the Board of Directors that Mr. Darnall be granted an option
under the Corporation's LTIP at an exercise price equal to the fair market value
of a Paired Share on the date of grant; the option will be for such number of
Paired Shares as is determined by the Option Committee and will vest over a
three-year period. In addition, the new agreement calls for the Corporation to
pay (i) Mr. Darnall's reasonable out-of-pocket expenses in connection with his
relocation to the Fairfield/Westchester county area and (ii) relocation costs in
connection with a third-party purchase of Mr. Darnall's home in Phoenix to
facilitate an expedient relocation. The Corporation also has agreed to make a
five-year, non-interest-bearing loan to Mr. Darnall in the amount of $600,000,
to be secured by a second mortgage on Mr. Darnall's new home in the
Fairfield/Westchester county area. Mr. Darnall's employment is terminable by the
Corporation or Mr. Darnall with or without cause. In the event his employment is
terminated by the Corporation without cause or by Mr. Darnall due to breach by
the Corporation, Mr. Darnall will be entitled to severance benefits of one
year's base salary and the accelerated vesting of all outstanding options.
In March 1998, Ronald C. Brown resigned as an officer of the Trust and
became an executive officer of the Corporation; see "Directors and Executive
Officers of the Corporation" included in Item 10 of this Joint Annual Report. As
of March 10, 1998, Ronald C. Brown and the Corporation entered into a new
employment agreement in connection with Mr. Brown's assuming the new position of
Executive Vice President and Chief Financial Officer for the Corporation. Under
the new agreement, Mr. Brown's annual salary will be $325,000, with a bonus to
be determined in accordance with the anticipated new bonus plan. Mr. Brown also
will receive, conditioned upon Mr. Brown's staying with the Corporation at least
one year after the closing of the ITT Merger, a cash payment in respect of taxes
payable by Mr. Brown as a result of the vesting of the restricted stock award
originally granted to Mr. Brown in August 1996. The Corporation also undertakes
to recommend to the Options Committee of the Board of Directors that Mr. Brown
be granted an option under the Corporation's LTIP at an exercise price equal to
the fair market value of a Paired Share on the date of grant; the option will be
for such number of Paired Shares as is determined by the Option Committee and
will vest over a three-year period. Mr. Brown's employment is terminable by the
Corporation or Mr. Brown with or without cause. In the event his employment is
terminated by the Corporation without cause or by Mr. Brown due to breach by the
Corporation, Mr. Brown will be entitled to severance benefits of one year's base
salary and the accelerated vesting of all outstanding options.
As of March 2, 1998, Susan R. Bolger and the Corporation entered into a new
employment agreement in connection with Ms. Bolger's assuming the new position
of Executive Vice President of Human Resources for the Corporation. Under the
new agreement, Ms. Bolger's annual salary will be $300,000, with a bonus to be
determined in accordance with the anticipated new bonus plan. For 1998 Ms.
Bolger is guaranteed a minimum bonus equal to 50% of her base salary prorated
for the calendar year, an additional bonus of $75,000 in respect of calendar
year 1997, and an additional retention bonus of one year's salary (at the
current base salary level) conditioned upon Ms. Bolger's staying with the
Corporation at least one year after the closing of the ITT Merger. Ms. Bolger
will also receive, conditioned upon Ms. Bolger's staying with the Corporation
for the same one-year period, a cash payment in respect of taxes payable by Ms.
Bolger as a result of the vesting of the restricted stock award granted to Ms.
Bolger in August 1996. The Corporation also undertakes to recommend to the
Option Committee of the Board of Directors that Ms. Bolger be granted an option
under the Corporation's LTIP at an exercise price equal to the fair market value
of a Paired Share on the date of grant; the option will be for such number of
Paired Shares as is determined by the Option Committee and will vest over a
three-year period. In addition, the new agreement calls for the Corporation to
pay (i) Ms. Bolger's reasonable out-of-pocket expenses in connection with his
relocation to the Fairfield/Westchester county area, (ii) relocation costs in
connection with a third-party purchase of Ms. Bolger's home in Phoenix to
facilitate an expedient relocation and (iii) mortgage duplication expenses for a
period not to exceed six months. The Corporation also has agreed to make a
five-year, non-interest-bearing loan to Ms. Bolger in the amount of $400,000, to
be secured by a second mortgage on Ms. Bolger's new home in the
Fairfield/Westchester county area. Ms. Bolger's employment is terminable by the
Corporation or Ms. Bolger with or without cause. In the event her employment is
terminated by the Corporation without cause or by Ms. Bolger due to breach by
the Corporation, Ms. Bolger will be entitled to severance benefits of one year's
base salary and the accelerated vesting of all outstanding options.
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COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION
During early 1997, the Compensation Committee of the Board of Trustees (the
"Trust Compensation Committee") was comprised of Messrs. Sternlicht, Grose and
William E. Simms. Mr. Simms resigned from the Board of Trustees in June 1997.
Based on informal discussions, the Trust Compensation Committee made
recommendations to the Board of Trustees regarding the compensation of the
Trust's executive officers other than Mr. Sternlicht. The Option Committee of
the Board of Trustees (whose members during 1997 were Messrs. Duncan, Quazzo and
(from November 1997) Chapus) made recommendations during 1997 to such Board
regarding Mr. Sternlicht's compensation. Based in part on the recommendations of
the Trust Compensation Committee and, as to Mr. Sternlicht, the Trust Option
Committee, the Board of Trustees made decisions with respect to the compensation
of the Trust's executive officers. Messrs. Sternlicht and Goldman, who are
executive officers of the Trust and members of the Board of Trustees, did not
participate at meeting of the Trustees in discussions or votes with respect to
their own compensation.
During most of 1997, the Compensation Committee of the Board of Directors
(the "Corporation Compensation Committee") was made up of Messrs. Sternlicht,
Jones and Chapus. Mr. Chapus resigned from the Board of Directors and became a
Trustee of the Trust in November 1997. The Corporation Compensation Committee
met informally during 1997 to discuss the compensation of the Corporation's
executive officers. Based in part on the recommendations of the Corporation
Compensation Committee, the Board of Directors made decisions with respect to
the compensation of the Corporation's executive officers. Mr. Danziger did not
participate at meetings of the Directors in discussions or votes with respect to
his own compensation.
Mr. Sternlicht, the Chairman and Chief Executive Officer and a Trustee of
the Trust and the Chairman of the Board of Directors of the Corporation, serves
as a director of U.S. Franchise Systems, Inc. Michael A. Leven, a Director of
the Corporation, serves as Chairman of the Board and Chief Executive Officer of
U.S. Franchise Systems, Inc.
Mr. Sternlicht controls and has been the President and Chief Executive
Officer of Starwood Capital since its formation. Mr. Stern is an affiliate of a
limited partner of Starwood Capital. For information with respect to certain
transactions involving the Company and Starwood Capital, see "Starwood Capital"
included in Item 13 of this Joint Annual Report, which information is
incorporated in this item by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
CERTAIN BENEFICIAL OWNERS
To the knowledge of the Trust and the Corporation, as of March 27, 1998, no
person owned beneficially 5% or more of the Paired Shares, except as follows:
AMOUNT PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED CLASS(1)
------------------------------------ ------------------ ----------
Starwood Capital Group, L.L.C.,
its affiliated entities and Barry S. Sternlicht........... 10,223,750(2) 5.3%(2)
Three Pickwick Plaza, Suite 250
Greenwich, CT 06830
FMR Corp.................................................... 6,589,082(3) 3.6%(3)
82 Devonshire Street
Boston, MA 02109
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(1) Based on the number of Paired Shares outstanding on March 27, 1998.
(2) Based on information in Amendment No. 2 to Schedule 13D dated December 31,
1996 filed by Starwood Capital Group, L.L.C., Barry S. Sternlicht, BSS
Capital Partners, L.P., Sternlicht Holdings II, Inc., Harveywood Hotel
Investors, L.P., Starwood Hotel Investors II-L.P., Starwood Opportunity Fund
II, L.P. and Firebird Consolidated Partners, L.P. (collectively, the
"Starwood Partners"), and additional information provided to the Company,
Mr. Sternlicht may be deemed to beneficially own, directly or
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through entities controlled by him, 467,069 Paired Shares and may be deemed
to have either sole or shared power to vote and dispose of such Paired
Shares. Mr. Sternlicht may also be deemed to beneficially own 1,763,167
Paired Shares subject to presently exercisable options. Mr. Sternlicht
holds, directly or through trusts created by him for the benefit of members
of his family, Units that are exchangeable for an aggregate of 508,120
Paired Shares. Starwood Partners may be deemed to hold shares of Class A EPS
and shares of Class B EPS that are exchangeable for an aggregate of
4,014,809 Paired Shares, and Units that are exchangeable for an aggregate of
3,470,585 Paired Shares. The amount beneficially owned and the percent of
class calculated assumes that Starwood Capital Group, its affiliated
entities and Mr. Sternlicht exchange Units for Paired Shares to the maximum
extent permitted within the Ownership Limit Provision.
(3) Based on information contained in Amendment No. 2 to Schedule 13G dated
February 14, 1998, filed by FMR Corp. and certain affiliates, 5,962,833
Paired Shares are held by Fidelity Management & Research Company, a wholly
owned subsidiary of FMR Corp. ("FMRC") and 626,249 Paired Shares are held by
Fidelity Management Trust Company, a wholly owned subsidiary of FMR Corp.
("FMTC"). FMR Corp. has sole voting power with respect to 626,249 Paired
Shares and dispositive power with respect to 6,589,082 Paired Shares.
The amount beneficially owned and the percent of class shown do not include
11,159,400 ITT Shares held by FMRC and 363,622 ITT Shares held by FMTC (as
reported in Amendment No. 3 to Schedule 13G dated February 14, 1998, filed
with respect to ITT Corporation), constituting approximately 9.8% of the ITT
Shares outstanding on February 23, 1998. Such Amendment No. 3 also reported
that FMR Corp. had sole voting power with respect to 287,922 ITT Shares and
dispositive power with respect to 11,523,022 ITT Shares. The Company
believes, based upon the foregoing report, that not less than 10,673,476
Paired Shares were issued to FMR Corp. in connection with the ITT Merger.
Based on additional information provided to the Company, all Paired Shares
reported as held by, or believed by the Company to have been issued to, FMR
and its affiliates are held by various separate entities no one of which,
directly or by attribution, holds in excess of 8.0% of the outstanding
Paired Shares.
TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST
The following table sets forth the beneficial ownership of Paired Shares as
of March 27, 1998, by each Trustee and each executive officer of the Trust named
in the Summary Compensation Table included in Item 11 hereof who owns Paired
Shares and by all Trustees and executive officers of the Trust as a group.
Except as otherwise provided below, each beneficial owner has sole voting and
investment power with respect to all Paired Shares beneficially owned.
AMOUNT PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED CLASS(1)
------------------------ ------------------ ----------
Ronald C. Brown............................................. 121,806(2) (3)
Jean-Marc Chapus............................................ 24,680(4) (3)
Bruce W. Duncan............................................. 37,999(5) (3)
Steven R. Goldman........................................... 222,116(6) (3)
Madison F. Grose............................................ 214,174(7) (3)
Gary M. Mendell............................................. 935,612(8) (3)
George J. Mitchell.......................................... 2,910(9) (3)
Roger S. Pratt.............................................. 4,534,187(10) 2.4%
Stephen R. Quazzo........................................... 29,627(11) (3)
Stuart M. Rothenberg........................................ 4,394,371(12) 2.3%
Barry S. Sternlicht......................................... 10,223,750(13) 5.3%
All Trustees and officers as a group........................ 20,741,232(14) 10.3%
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(1) Based on the number of Paired Shares outstanding on March 27, 1998,
including any exercise of options to purchase Paired Shares or any exchange
of Units for Paired Shares.
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(2) Includes 85,500 Paired Shares subject to presently exercisable options.
(3) Less than 1%.
(4) Includes 22,500 Paired Shares subject to presently exercisable options.
(5) Includes 22,500 Paired Shares subject to presently exercisable options.
(6) Includes 159,000 Paired Shares subject to presently exercisable options and
Units that are exchangeable for 22,616 Paired Shares.
(7) Includes 120,000 Paired Shares subject to presently exercisable options,
EPS that are exchangeable for an aggregate of 3,223 Paired Shares, and
Units that are exchangeable for an aggregate of 43,299 Paired Shares. Also
includes shares of EPS that are exchangeable for an aggregate of 25,990
Paired Shares and Units that are exchangeable for an aggregate of 2,382
Paired Shares, all owned by Mr. Grose's wife.
(8) Includes 300,000 Paired Shares subject to presently exercisable options and
Units that are exchangeable for an aggregate of 599,112 Paired Shares. Also
includes Units owned by a limited partnership of which Mr. Mendell is
general partner and exchangeable for 36,500 Paired Shares.
(9) Includes 2,910 Paired Shares subject to presently exercisable options.
(10) Includes 4,500 Paired Shares subject to presently exercisable options. Also
includes 2,775,680 Paired Shares and Units that are exchangeable for an
aggregate of 1,754,007 Paired Shares, all of which are owned by Prudential
on behalf of Prudential Property Investment Separate Account II ("PRISA
II"); by virtue of his investment control over PRISA II, Mr. Pratt may be
deemed to have an indirect pecuniary interest in these Units and Paired
Shares. Does not include 508,720 Paired Shares held by Prudential on behalf
of other accounts.
(11) Includes 22,500 Paired Shares subject to presently exercisable options,
6,430 Paired Shares owned by a trust of which Mr. Quazzo is settlor and
over which he shares investment control, and 397 Paired Shares owned by a
trust of which Mr. Quazzo's wife is settlor and over which she exercises
some investment control.
(12) Includes 2,219 Paired Shares subject to presently exercisable options. Also
includes shares of EPS that are exchangeable for an aggregate of 4,188,035
Paired Shares and Units that are exchangeable for an aggregate of 194,861
Paired Shares, all of which may be deemed to be owned by Goldman, Sachs and
The Goldman Sachs Group, L.P. through certain investment partnerships; Mr.
Rothenberg is a managing director of Goldman, Sachs & Co. and may be deemed
to have an indirect pecuniary interest in such securities. Mr. Rothenberg
has disclaimed beneficial ownership of these securities except to the
extent of his pecuniary interest therein.
(13) See Note (2) under "Certain Beneficial Owners" above. Includes (i) 467,069
Paired Shares that may be deemed to be beneficially owned by Mr.
Sternlicht, either directly or through entities controlled by him; (ii)
1,763,167 Paired Shares subject to presently exercisable options; (iii)
shares of EPS that may be deemed to be beneficially owned by Mr.
Sternlicht, either directly or through entities controlled by him, that are
exchangeable for an aggregate of 4,014,809 Paired Shares; and (iv) Units
that may be deemed to be beneficially owned by Mr. Sternlicht, either
directly or through entities controlled by him, that are exchangeable for
an aggregate of 3,978,705 Paired Shares. Mr. Sternlicht has disclaimed
beneficial ownership of all such Paired Shares, shares of EPS and Units
except to the extent of his actual pecuniary interest therein. By virtue of
his service as both a Trustee of the Trust and a Director of the
Corporation, Mr. Sternlicht's options, Paired Shares, shares of EPS and
Units are listed and totaled both here and in the chart below.
(14) Includes 2,529,796 Paired Shares that may be acquired upon the exercise of
presently exercisable options, 8,232,057 Paired Shares issuable upon the
exchange of shares of EPS and 6,631,482 Paired Shares issuable upon the
exchange of Units.
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DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION
The following table sets forth the beneficial ownership of Paired Shares as
of March 27, 1998, by each Director and each executive officer of the
Corporation named in the Summary Compensation Table included in Item 11 hereof
who owns Paired Shares and by all Directors and executive officers of the
Corporation as a group. Except as otherwise provided below, each beneficial
owner has sole voting and investment power with respect to all Paired Shares
beneficially owned.
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED CLASS(1)
------------------------ ------------------ ----------
Juergen Bartels............................................. 815,269(2) (3)
Eric A. Danziger............................................ 400,222(4) (3)
Theodore W. Darnall......................................... 196,783(5) (3)
Jonathan D. Eilian.......................................... 123,680(6) (3)
Bruce M. Ford............................................... 24,332(7) (3)
Graeme W. Henderson......................................... 25,072(8) (3)
Earle F. Jones.............................................. 32,178(9) (3)
Michael A. Leven............................................ 23,180(10) (3)
Alan M. Schnaid............................................. 24,250(11) (3)
Daniel H. Stern............................................. 23,180(12) (3)
Barry S. Sternlicht......................................... 10,223,750(13) 5.3%
Barry S. Volpert............................................ 4,394,371(14) 2.3%
Daniel W. Yih............................................... 25,611(15) (3)
All Directors and officers as a group....................... 15,931,656(16) 8.0%
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(1) Based on the number of Paired Shares outstanding on March 27, 1998,
including any exercise of options to purchase Paired Shares or any exchange
of Units for Paired Shares.
(2) Includes shares of EPS that are exchangeable for an aggregate of 815,269
Paired Shares.
(3) Less than 1%.
(4) Includes 300,000 Paired Shares subject to presently exercisable options.
(5) Includes 150,000 Paired Shares subject to presently exercisable options.
(6) Includes 120,000 Paired Shares subject to presently exercisable options.
(7) Includes 22,500 Paired Shares subject to presently exercisable options and
85 Paired Shares owned by Mr. Ford's wife.
(8) Includes 22,500 Paired Shares subject to presently exercisable options.
(9) Includes 13,500 Paired Shares subject to presently exercisable options.
(10) Includes 22,500 Paired Shares subject to presently exercisable options.
(11) Includes 24,250 Paired Shares subject to presently exercisable options.
(12) Includes 22,500 Paired Shares subject to presently exercisable options.
(13) See Note (2) under "Certain Beneficial Owners" above. Includes (i) 467,069
Paired Shares that may be deemed to be beneficially owned by Mr.
Sternlicht, either directly or through entities controlled by him; (ii)
1,763,167 Paired Shares subject to presently exercisable options; (iii)
shares of EPS that may be deemed to be beneficially owned by Mr.
Sternlicht, either directly or through entities controlled by him, that are
exchangeable for an aggregate of 4,014,809 Paired Shares; and (iv) Units
that may be deemed to be beneficially owned by Mr. Sternlicht, either
directly or through entities controlled by him, that are exchangeable for
an aggregate of 3,978,705 Paired Shares. Mr. Sternlicht has disclaimed
beneficial ownership of all such Paired Shares, shares of EPS and Units
except to the extent of his actual pecuniary interest therein. By virtue of
his service as both a Director of the Corporation and a Trustee of the
Trust, Mr. Sternlicht's options, Paired Shares, shares of EPS and Units are
listed and totaled both here and above.
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(14) Includes 2,219 Paired Shares subject to presently exercisable options. Also
includes shares of EPS that are exchangeable for an aggregate of 4,188,035
Paired Shares and Units that are exchangeable for an aggregate of 194,861
Paired Shares, all of which may be deemed to be owned by Goldman, Sachs &
Co. and The Goldman Sachs Group, L.P. through certain investment
partnerships; Mr. Volpert is a managing director of Goldman, Sachs & Co.
and may be deemed to have an indirect pecuniary interest in such
securities. Mr. Volpert has disclaimed beneficial ownership of these
securities except to the extent of his pecuniary interest therein.
(15) Includes 22,500 Paired Shares subject to presently exercisable options.
(16) Includes 2,185,636 Paired Shares that may be acquired upon the exercise of
presently exercisable options, 9,018,113 Paired Shares issuable upon the
exchange of shares of EPS and 4,173,566 Paired Shares issuable upon the
exchange of Units.
COMPLIANCE WITH THE REPORTING REQUIREMENTS OF SECTION 16(A)
Section 16(a) of the Exchange Act requires the Trustees, Directors and
executive officers of the Company, and persons who own more than 10 percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission initial reports of ownership and reports of changes in
ownership of Paired Shares and other equity securities of the Company. Trustees,
Directors, officers and greater than 10 percent shareholders are required to
furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1997, all
Section 16(a) filing requirements applicable to its Trustees, Directors,
officers and greater than 10 percent beneficial owners were complied with for
the most recent fiscal year and prior fiscal years, with the exception that
through inadvertence, Mr. Sternlicht in 1994 did not include in his Form 3 an
indirect pecuniary interest in Paired Shares held by a partnership that he may
be deemed to indirectly control, and omitted in 1995 to file two Forms 4
reporting the indirect pecuniary interest in Units exchangeable for Paired
Shares acquired in exchange for assets contributed to the Partnerships in the
Reorganization by limited partnerships that Mr. Sternlicht may be deemed to
indirectly control. A Form 5 reporting these holdings and transactions was
promptly filed by Mr. Sternlicht after the oversight was discovered. The Company
believes that all such holdings and transactions were properly and timely
reported by Mr. Sternlicht on Schedule 13D and amendments thereto, and that all
such holdings and transactions have been properly and timely disclosed in the
Company's proxy statements and annual reports.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Starwood Capital
Barry Sternlicht, the Chairman and Chief Executive Officer and a Trustee of
the Trust and the Chairman of the Board of Directors of the Corporation,
controls and has been the President and Chief Executive Officer of Starwood
Capital since its formation. In addition, Madison Grose, a Trustee of the Trust,
is the General Counsel of Starwood Capital, and Messrs. Grose and Jonathan
Eilian, a Director of the Corporation, are Managing Directors of, and hold
indirect interests in, Starwood Capital. As of March 27, 1998, Starwood Capital
and its affiliates and Mr. Sternlicht beneficially owned 5.2% of the Paired
Shares then outstanding on a fully diluted basis. See "Security Ownership of
Certain Beneficial Owners and Management -- Certain Beneficial Owners" in Item
12 of this Joint Annual Report. Daniel Stern, a Director of the Corporation,
also is an affiliate of a limited partner of Starwood Capital.
Starwood Capital Reimbursement Agreement. Starwood Capital and the Company
have agreed that subject to approval by the independent Trustees or Directors,
as appropriate, the Company will reimburse Starwood Capital for its
out-of-pocket expenses and internal costs (including allocation of overhead) for
services provided to the Company, other than internal costs of Starwood Capital
for services of senior management of Starwood Capital or (effective August 12,
1997) services of any employee of Starwood
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Capital. Starwood Capital's engagement to act as financial advisor to the
Company in connection with the ITT Merger was not subject to this reimbursement
limitation.
Starwood Capital Noncompete. In connection with the Reorganization,
Starwood Capital agreed (the "Starwood Capital Noncompete") that it would not
compete within the United States directly or indirectly with the Realty
Partnership or the Operating Partnership and would present to the Partnerships
all acquisitions of (i) fee or ground interests or other equity interests in
hotels in the United States and (ii) debt interests in hotels in the United
States where it is anticipated that the equity will be acquired by the debt
holder within one year from the acquisition of such debt. During the term of the
Starwood Noncompete, Starwood Capital is not to acquire any such interest. The
term of the Starwood Noncompete is until the later of July 1998 or the time at
which no officer, director, general partner or employee of Starwood Capital is
on either the Board of Trustees or the Board of Directors (subject to exception
for certain reorganizations, mergers or other combination transactions with
unaffiliated parties). During 1997, the Company granted a limited number of
waivers of the Starwood Noncompete. On February 20, 1997, the Board of Trustees
and the Board of Directors granted a waiver of the Starwood Noncompete to an
affiliate of Starwood Capital to permit such affiliate to purchase a fixed
stream of lease payments and residuals in a portfolio of hotels formerly leased
to and operated by Red Lion Hotels. On May 19, 1997 the Board of Trustees and
the Board of Directors granted a waiver of the Starwood Noncompete to Starwood
Capital to permit an affiliate of Starwood Capital to invest in certain
time-share properties in Mexico. On July 25, 1997 the Board of Trustees and the
Board of Directors granted Starwood Capital a waiver of the Starwood Noncompete
to permit an affiliate of Starwood Capital to sell its interest in the Davidson
Hotel Properties 15-hotel portfolio, taking into account the fact that such a
sale would result in the termination of any option the Company might have to
purchase such portfolio. On September 8, 1997 the Board of Trustees and the
Board of Directors waived the Starwood Noncompete to the extent necessary to
permit an affiliate of Starwood Capital to purchase and immediately resell the
Radisson Golden Triangle Hotel in Raleigh, North Carolina. On September 25,
1997, the Board of Trustees and the Board of Directors approved a waiver of the
Starwood Noncompete with respect to the proposed purchase of the Hillsborough
Days Inn by an affiliate of Starwood Capital.
As described below, Starwood Capital owned an interest in Westin. Prior to
the Westin acquisition, the Trust and the Corporation entered into an agreement
with Westin pursuant to which Westin agreed that during the period in which an
officer, director, general partner or employee of Starwood Capital is on either
the Board of Trustees or the Board of Directors, and Starwood Capital
co-controlled Westin, Westin would not acquire or seek to acquire hotel equity
interests in the United States, other than certain specified acquisitions,
including, without limitation, minority equity investments made in connection
with Westin's acquisition of a management contract. The Trust and the
Corporation each waived the foregoing restriction to the extent applicable with
respect to a hotel property in the U.S. Virgin Islands. The Trust and the
Corporation also agreed that under certain circumstances, if Westin were
prohibited from consummating an opportunity that was not being independently
pursued by the Trust and the Corporation prior to such prohibition, the Trust
and the Corporation would not pursue such opportunity for 270 days after such
prohibition. Upon the consummation of the Westin Merger, the agreements with
Westin described in this paragraph were terminated.
Acquisition of Westin. Prior to the Westin Merger, Starwood Capital and
certain of its affiliates and certain Trustees, Directors and executive officers
had interests in Westin as follows:
(i) WHWE held an approximately 50% voting (an approximately 35.16%
interest in profits) Class A membership interests in W&S LLC, which owned
in excess of 99% of the outstanding equity securities of each of Westin
Worldwide, Seattle, Lauderdale, Atlanta, St. John and Denver (the "Westin
Subsidiaries"). The majority of the interests in WHWE were held by
investment funds under the indirect control of The Goldman Sachs Group,
L.P. The Goldman Sachs. Group, L.P. nay be deemed to have been the
beneficial owners of the shares held by WHWE and Messrs. Volpert and
Rothenberg may be deemed to have been the beneficial owners of the shares
of Westin Worldwide and a similar proportion number of shares of the other
Westin Subsidiaries beneficially owned by WHWE or The Goldman Sachs Group,
L.P. through partnership in or employment by Goldman Sachs or one or more
of its affiliates; however, such beneficial ownership was disclaimed.
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(ii) Starwood Capital, through certain of its affiliates, was the
general partner of Woodstar, which held an approximately 50% voting
interest (an approximately 35.23% interest in profits) in WHWE. Starwood
Capital and, therefore, Mr. Sternlicht, may be deemed to have been the
beneficial owner of the shares held by Woodstar Investor Partnership, a
privately held real property investment partnership.
(iii) Mr. Stern was a director of Westin immediately prior to the
Westin Merger, and Mr. Sternlicht had been a director of Westin prior to
September 1997.
(iv) Mr. Bartels held a 2.69% Class A interest in the profits of the
LLC and accordingly may be deemed to have been the beneficial owner of
2.69% of Westin Worldwide and a similar proportional number of shares of
the other Westin Subsidiaries; however, Mr. Bartels disclaimed such
beneficial ownership.
(v) Messrs. Sternlicht, Grose and Eilian were investors in, and Mr.
Stern was an affiliate of an investor in, Marswood, a partner in Woodstar.
In connection with the Westin Merger, all of the outstanding shares of
Westin Worldwide were canceled and the Members received their proportionate
shares (which approximated their respective profit interests in the LLC) of the
shares of Class A EPS and the shares of Class B EPS that were issued in the
Westin merger. In connection with the Subsidiary Contributions, the Members
received their proportionate shares (which approximated their profit interests
in the LLC ) of the Class A RP Units and the Class B OP Units that were issued
in connection with the Subsidiary Contributions.
Other Westin Relationships. Starwood Capital and its affiliates hold a 37%
interest in a golf course management company that currently manages one golf
course that is associated with a Westin hotel and a 20% interest in a Mexican
company that operates timeshare resorts adjacent to the three Westin hotels that
make up the Westin Regina Portfolio. Individuals affiliated with Starwood
Capital, including individuals who are Trustees and Directors, and certain other
affiliates of Starwood Capital hold a 75% interest in the company that operates
the Westin Innisbrook Resort and the Tamarron Hilton.
Acquisition of ITT. Starwood Hotels engaged Starwood Capital to act as
financial advisor to the Company in connection with the transactions
contemplated by the ITT Merger Agreement. Starwood Capital received a fee of
$17.5 million (of which $10.5 million was paid in cash and $7 million was paid
in Paired Shares) plus a tax gross-up payment of $5 million upon the closing of
the ITT Merger as full consideration for services rendered in connection with
the ITT Merger and related dispositions. Pursuant to its engagement by Starwood
Hotels, the principals of Starwood Capital led the structuring and negotiations
of the ITT Merger, conducted and coordinated the due diligence investigation
(including conducting management interviews, reviewing and analyzing financial
data and visiting properties), advised and procured financing, oversaw the
implementation of the public and investor relations and political lobbying
campaigns, coordinated the receipt of gaming regulatory approvals and
coordinated legal and tax advice. In addition, the principals of Starwood
Capital have led and continue to lead negotiations for the disposition of
non-strategic ITT assets, including the disposition of ITT World Directories,
and are advising Starwood Hotels with respect to the integration of both ITT and
Westin into Starwood Hotels.
Trademark License. Starwood Capital has granted to the Company an
exclusive, non-transferable royalty-free license to use the "Starwood" name and
trademarks in connection with the hotel and hospitality services business in
North America, and to use the "Starwood" name in its corporate name worldwide,
in perpetuity.
Loans to Officers
During 1996, the Corporation made a $150,000 non-interest-bearing loan to
Eric A. Danziger, President and Chief Executive Officer of the Corporation,
secured by a second mortgage on Mr. Danziger's residence in Phoenix, Arizona.
The loan was repaid in full in February 1998.
During 1996, the Corporation made a $266,000 non-interest-bearing loan to
Theodore W. Darnall, then Executive Vice President and Chief Operating Officer
(and currently) Executive Vice President of the Hotel
85
87
Group of the Corporation. The loan is secured by a second mortgage on Mr.
Darnall's residence in Phoenix, Arizona. Upon the sale of Mr. Darnall's home in
Pittsburgh in 1997, $116,000 of the loan was repaid. The unpaid loan balance of
$150,000 matures upon termination of Mr. Darnall's employment with the
Corporation.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Joint Annual
Report:
1. The financial statements and financial statements schedules listed
in the Index to Financial Statements and Financial Statements Schedules
following the signature pages hereof.
2. Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
2.1 Formation Agreement, dated as of November 11, 1994, among
the Trust, the Corporation, Starwood Capital and the
Starwood Partners (incorporated by reference to Exhibit 2 to
the Trust's and the Corporation's Joint Current Report on
Form 8-K dated November 16, 1994(1)).
2.2 Form of Amendment No. 1 to Formation Agreement, dated as of
July 1995, among the Trust, the Corporation and the Starwood
Partners (incorporated by reference to Exhibit 10.23 to the
Trust's and the Corporation's Joint Registration Statement
on Form S-2 filed with the SEC on June 29, 1995
(Registration Nos. 33-59155 and 33-59155-01) (the "S-2
Registration Statement")).
2.3 Transaction Agreement, dated as of September 8, 1997, by and
among the Trust, the Corporation, Realty Partnership,
Operating Partnership, WHWE L.L.C., Woodstar Investor
Partnership ("Woodstar"), Nomura Asset Capital Corporation,
Juergen Bartels, Westin Hotels & Resorts Worldwide, Inc.,
W&S Lauderdale Corp., W&S Seattle Corp., Westin St. John
Hotel Company, Inc., W&S Denver Corp., W&S Atlanta Corp. and
W&S Hotel L.L.C. (incorporated by reference to Exhibit 2 to
the Trust's and the Corporation's Joint Current Report on
Form 8-K dated September 9, 1997, as amended by the Form
8-K/A dated December 18, 1997).
2.4 Amended and Restated Agreement and Plan of Merger, dated as
of November 12, 1997, by and among the Corporation, the
Trust, Chess Acquisition Corp. ("Chess") and ITT
(incorporated by reference to Exhibit 2.1 to the Trust's and
the Corporation's Joint Current Report on Form 8-K dated
November 13, 1997).
3.1 Declaration of Trust of the Trust, amended and restated as
of June 6, 1988, as amended through February 23, 1998.(3)
3.2 Articles of Incorporation of the Corporation, amended and
restated as of February 1, 1995, as amended through March
19, 1998.(3)
3.3 Amended and Restated Trustee's Regulations of the Trust, as
amended through December 18, 1997.(3)
3.4 Amended and Restated Bylaws of the Corporation, as amended
through December 18, 1997.(3)
4.1 Pairing Agreement, dated June 25, 1986, between the Trust
and the Corporation (incorporated by reference to Exhibit
4.1 to the Trust's and the Corporation's Joint Annual Report
on Form 10-K for the year ended December 31, 1994 (the "1994
Form 10-K")).
4.2 Amendment No. 1 to the Pairing Agreement, dated as of
February 1, 1995, between the Trust and the Corporation
(incorporated by reference to Exhibit 4.2 to the Trust's and
the Corporation's Joint Annual Report on Form 10-K for the
year ended December 31, 1995 (the "1995 Form 10-K")).
4.3 Amendment No. 2 to the Pairing Agreement, dated as of
January 2, 1998, between the Trust and the Corporation.(3)
10.1 Form of Second Amended and Restated Limited Partnership
Agreement for Realty Partnership, dated November 14, 1997,
among the Trust and the limited partners of Realty
Partnership, together with the First Amendment thereto,
dated January 1, 1998, and Certificate of Admission of
Realty Partnership, effective January 2, 1998.(3)
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88
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.2 Form of Second Amended and Restated Limited Partnership
Agreement for Operating Partnership, dated November 14,
1997, among the Corporation and the limited partners of
Operating Partnership, together with the First Amendment
thereto, dated January 1, 1998, and Certificate of Admission
of Operating Partnership, effective January 2, 1998.(3)
10.3 Form of Amended and Restated Lease Agreement, entered into
as of January 1, 1993, between the Trust as Lessor and the
Corporation (or a subsidiary) as Lessee (incorporated by
reference to Exhibit 10.19 to the Trust's and the
Corporation's Joint Annual Report on Form 10-K for the year
ended December 31, 1992).
10.4 Form of Stock Purchase Agreement, dated as of February 23,
1998, between the Trust and the Corporation.(3)
10.5 Amended and Restated Employment Agreement, dated as of
February 17, 1998, between the Trust and Barry S.
Sternlicht, together with an amendment, dated as of March
11, 1998.(2)(3)
10.6 Non-Qualified Stock Option Agreement, dated as of February
17, 1998, between the Trust and Barry S. Sternlicht.(2)(3)
10.7 Employment Agreement, dated March 2, 1998, between the
Corporation and Susan R. Bolger.(2)(3)
10.8 Employment Agreement, dated March 25, 1998, between the
Corporation and Ronald C. Brown.(2)(3)
10.9 Employment Agreement, dated March 25, 1998, between the
Corporation and Juergen Bartels.(2)(3)
10.10 Employment Agreement, dated March 25, 1998, between the
Corporation and Theodore W. Darnall.(2)(3)
10.11 Employment Agreement, dated March 25, 1998, between the
Trust and Steven R. Goldman.(2)(3)
10.12 Employment Agreement, dated June 27, 1996, between the
Corporation and Eric A. Danziger (incorporated by reference
to Exhibit 10.4 to the Trust's and the Corporation's Joint
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1996 (the "1996 Form 10-Q2").(2)
10.13 Employment Agreement, dated as of January 15, 1997, between
the Trust and Gary M. Mendell (incorporated by reference to
Exhibit 10.1 to the Trust's and the Corporation's Joint
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1997 (the "1997 Form 10-Q1").(2)
10.14 Separation Agreement, dated June 18, 1996, between the Trust
and Jeffrey C. Lapin (incorporated by reference to Exhibit
10.5 to the 1996 Form 10-Q2).(2)
10.15 Starwood Hotels & Resorts 1995 Long-Term Incentive Plan
(Amended and Restated as of November 12, 1997) (the "Trust
LTIP") (incorporated by reference to Exhibit C to the
Trust's and the Corporation's Joint Proxy Statement, dated
November 12, 1997 (the "1997 Proxy Statement")).(2)
10.16 Starwood Hotels & Resorts Worldwide, Inc., 1995 Long-Term
Incentive Plan (Amended and Restated as of November 12,
1997) (the "Corporation LTIP") (incorporated by reference to
Exhibit D to the 1997 Proxy Statement).(2)
10.17 Form of Indemnification Agreement and Amendment No. 1 to
Indemnification Agreement between the Trust and each of its
Trustees and executive officers (incorporated by reference
to Exhibit 10.7 to the 1995 Form 10-K).(2)
10.18 Form of Indemnification Agreement and Amendment No. 1 to
Indemnification Agreement between the Corporation and each
of its Directors and executive officers (incorporated by
reference to Exhibit 10.8 to the 1995 Form 10-K).(2)
10.19 Form of Amendment No. 2 to Indemnification Agreement, dated
June 26, 1997, between the Trust and each of its Trustees
and executive officers (incorporated by reference to Exhibit
10.1 to the Trust's and the Corporation's Joint Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1997 (the "1997 Form 10-Q2")).(2)
10.20 Form of Amendment No. 2 to Indemnification Agreement, dated
June 26, 1997, between the Corporation and each of its
Directors and executive officers (incorporated by reference
to Exhibit 10.2 to the 1997 Form 10-Q2).(2)
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89
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.21 Form of Westin/HOT Agreement, dated as of May 1995, among
W&S Hotel L.L.C., W&S Hotel Holding Corp., Westin Hotel
Company, Realty Partnership, Operating Partnership, WHWE
L.L.C. and Woodstar Limited Partnership (incorporated by
reference to Exhibit 10.24 to the S-2 Registration
Statement).
10.22 Form of Trademark License Agreement, dated as of December
10, 1997, between Starwood Capital and the Trust.(3)
10.23 Exchange Rights Agreement, dated as of January 1, 1995,
among the Trust, the Corporation, Realty Partnership,
Operating Partnership and the Starwood Partners
(incorporated by reference to Exhibit 2B to the Trust's and
the Corporation's Joint Current Report on Form 8-K dated
January 31, 1995 (the "Formation Form 8-K")).
10.24 Registration Rights Agreement, dated as of January 1, 1995,
among the Trust, the Corporation and Starwood Capital
(incorporated by reference to Exhibit 2C to the Formation
Form 8-K).
10.25 Amended and Restated Loan Agreement, dated as of April 26,
1996, among Realty Partnership, CP Hotel Realty Partnership
Limited Partnership ("CP Hotel"), Midland Building
Corporation ("Midland"), the Trust and Lehman Capital
(incorporated by reference to Exhibit 10.31 to the Trust's
and the Corporation's Joint Annual Report on Form 10-K for
the year ended December 31, 1996, as amended by the Form
10-K/A dated April 25, 1997, and by the Form 10-K/A dated
December 18, 1997 (collectively, the "1996 Form 10-K")).
10.26 Form of Amendment No. 2, dated as of April 25, 1997, to
Amended and Restated Loan Agreement among Realty
Partnership, the Trust, CP Hotel, Midland and Lehman Capital
(incorporated by reference to Exhibit 10.3 to the 1997 Form
10-Q2).
10.27 Purchase and Sale Agreement, dated as of May 3, 1996, among,
inter alia, 730 Cal Hotel Properties II, Inc., Cal Hotel
Properties I Associates, Realty Partnership and Operating
Partnership (incorporated by reference to Exhibit 10.6 to
the 1996 Form 10-Q2).
10.28 Exchange Rights Agreement, dated as of June 3, 1996, among
the Trust, the Corporation, Realty Partnership, Operating
Partnership, Philadelphia HIR Limited Partnership and
Philadelphia HSR Limited Partnership (incorporated by
reference to Exhibit 10.1 to the 1996 Form 10-Q2).
10.29 Registration Rights Agreement, dated as of June 3, 1996,
among the Trust, the Corporation and Philadelphia HSR
Limited Partnership (incorporated by reference to Exhibit
10.2 to the 1996 Form 10-Q2).
10.30 Asset Purchase Agreement, dated as of March 25, 1996,
between Hotels of Distinction, Inc., and Realty Partnership
(effective July 3, 1996) (incorporated by reference to
Exhibit 10.7 to the 1996 Form 10-K).
10.31 Loan Agreement, dated as of August 16, 1996, between the
Realty Partnership and the Trust, as the borrower, and
Goldman Sachs Mortgage Company, as lender (incorporated by
reference to Exhibit 10.33 to the 1996 Form 10-K).
10.32 Contribution Agreement, dated as of January 15, 1997, by and
among HEI Hotels, L.L.C., Westport Management, L.L.C.,
Savior Limited Partnership, Judith Rushmore, Orna L.
Shulman, Murray Dow, Steve Mendell, Gary Mendell, Zapco
Communications, Inc., Westport Hospitality, Inc., the
Corporation and Operating Partnership (incorporated by
reference to Exhibit 10.3 to the 1997 Form 10-Q1).
10.33 Contribution Agreement, dated as of January 15, 1997, by and
among, inter alia, Realty Partnership, Operating
Partnership, the Trust, the Corporation, Prudential HEI
Joint Venture and Gary M. Mendell (incorporated by reference
to Exhibit 10.4 to the 1997 Form 10-Q1).
10.34 Units Exchange Rights Agreement, dated as of February 14,
1997, by and among, inter alia, the Trust, the Corporation,
Realty Partnership, Operating Partnership and the Starwood
Partners.(3)
10.35 Class A Exchange Rights Agreement, dated as of February 14,
1997, by and among, inter alia, the Trust, the Corporation,
Operating Partnership and the Starwood Partners.(3)
10.36 Promissory Note, dated as of February 14, 1997, by Realty
Partnership and the Trust, the Corporation, and Operating
Partnership, in favor of The Prudential Insurance Company of
America ("Prudential"), on behalf of Prudential Property
Investment Separate Account II ("PRISA II") (incorporated by
reference to Exhibit 10.2 to the 1997 Form 10-Q1).
10.37 Form of letter, dated April 9, 1997, from Realty Partnership
and the Trust to PRISA II extending the maturity date of the
Promissory Note, dated as of February 14, 1997 (incorporated
by reference to Exhibit 10.4 to the 1997 Form 10-Q2).
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90
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.38 Form of Amendment to Purchase Money Promissory Note, dated
April 26, 1997, between Realty Partnership and the Trust in
favor of Prudential, on behalf of PRISA II (incorporated by
reference to Exhibit 10.5 to the 1997 Form 10-Q2).
10.39 Form of Amendment No. 2 to Purchase Money Promissory Note,
dated May 28, 1997, between Realty Partnership and the Trust
in favor of Prudential, on behalf of PRISA II (incorporated
by reference to Exhibit 10.6 to the 1997 Form 10-Q2).
10.40 Amended and Restated Installment Sale Agreement, dated as of
February 1, 1997, between Philadelphia Authority for
Industrial Development and Realty Partnership (incorporated
by reference to Exhibit 10.5 to the 1997 Form 10-Q1).
10.41 Exchange Rights Agreement, dated as of March 11, 1997, among
the Corporation, the Trust, Realty Partnership, Operating
Partnership and the Hermitage, L.P.(3)
10.42 Registration Rights Agreement, dated as of March 11, 1997,
among the Corporation, the Trust, Realty Partnership,
Operating Partnership and the Hermitage, L.P.(3)
10.43 Credit Agreement, dated as of August 18, 1997, among SLT
Mexico, S. de R.L. de C.V., as Borrower, Realty Partnership
and the Trust, as Guarantors, the Lenders party thereto and
Bancomer, S.A., Cayman Islands Branch, as Agent.(3)
10.44 Purchase and Sale Agreement, dated as of July 18, 1997, by
and among, inter alia, Thomas J. Flately, Tara Hotel
Management Co. LLC, Realty Partnership and Operating
Partnership (incorporated by reference to Exhibit 2 to the
Trust's and the Corporation's Joint Current Report on Form
8-K dated September 10, 1997, as amended by the Form 8-K/A
dated December 18, 1997).
10.45 Credit Agreement, dated as of September 10, 1997, between
Realty Partnership and the Trust and BTC, Lehman Capital,
BankBoston, N.A., and Bank of Montreal (incorporated by
reference to Exhibit 10.1 to the Trust's and the
Corporation's Joint Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997, as amended by the
Form 10-Q/A dated November 10, 1997 (as so amended, the
"1997 Form 10-Q3")).
10.46 Purchase Agreement, dated as of October 10, 1997, by and
among the Trust, the Corporation, UBS Limited, Union Bank of
Switzerland, London Branch and UBS Securities LLC.(3)
10.47 ISDA Master Agreement and Forward Stock Contract, each dated
as of October 13, 1997, by and among the Trust, the
Corporation, UBS Limited, Union Bank of Switzerland, London
Branch and UBS Securities LLC.(3)
10.48 Loan Agreement, dated as of December 29, 1997, among
Woodstar, the Lenders party thereto, BT Alex. Brown
Incorporated ("Alex Brown") and Chase Securities Inc. as
Arranging Agents and BTC and Chase Bank as Administrative
Agents.(3)
10.49 Loan Agreement, dated as of December 29, 1997, among WHWE
L.L.C., the Lenders party thereto, Alex Brown and Chase
Securities Inc. as Arranging Agents and BTC and Chase Bank
as Administrative Agents.(3)
10.50 Exchange Rights Agreement, dated as of January 2, 1998,
among, inter alia, the Trust, Realty Partnership and
Woodstar.(3)
10.51 Exchange Rights Agreement, dated as of January 2, 1998,
among, inter alia, the Corporation, Operating Partnership
and Woodstar.(3)
10.52 Registration Rights Agreement, dated as of January 2, 1998,
among, inter alia, the Trust, the Corporation, and
Woodstar.(3)
10.53 Purchase and Sale Agreement and Joint Escrow Instructions,
dated as of December 30, 1997, by and among the Corporation,
the Trust and New Remington Partners.(3)
10.54 Stock Agreement and Registration Rights Agreement, each
dated as of January 15, 1998 by and among the Corporation,
the Trust and New Remington Partners.(3)
10.55 Purchase and Sale Agreement and Joint Escrow Instructions,
dated as of December 30, 1997, by and among the Corporation,
the Trust and Savannah Limited Partnership.(3)
10.56 Stock Agreement and Registration Rights Agreement, each
dated as of January 15, 1998, by and among the Corporation,
the Trust and Savannah Limited Partnership.(3)
10.57 Purchase and Sale Agreement and Joint Escrow Instructions,
dated as of December 30, 1997, by and among the Corporation,
the Trust and N.Y. Overnight Partners, L.P.(3)
10.58 Stock Agreement and Registration Rights Agreement, each
dated as of January 15, 1998, by and among the Corporation,
the Trust and N.Y. Overnight Partners, L.P.(3)
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91
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.59 Purchase and Sale Agreement and Joint Escrow Instructions,
dated as of December 30, 1997, by and among the Corporation,
the Trust and D.C. Overnight Partners, L.P.(3)
10.60 Stock Agreement and Registration Rights Agreement, each
dated as of January 15, 1998, by and among the Corporation,
the Trust and D.C. Overnight Partners, L.P.(3)
10.61 Credit Agreement, dated as of February 23, 1998, among the
Trust, Realty Partnership, the Corporation, Chess (and ITT
as its successor by merger), certain additional borrowers,
various lenders, BTC and The Chase Manhattan Bank ("Chase
Bank"), as Administrative Agents, and Lehman Paper and Bank
of Montreal, as Syndication Agents (incorporated by
reference to Exhibit 10.1 to the Trust's and the
Corporation's Joint Current Report on Form 8-K dated
February 23, 1998 (the "ITT Form 8-K")).
10.62 First Amendment to the Credit Agreement, dated as of March
3, 1998, among the Trust, Realty Partnership, the
Corporation, ITT, the lenders party to the Credit Agreement,
BTC and The Chase Manhattan Bank, as Administrative Agents,
and Lehman Paper and Bank of Montreal, as Syndication
Agents, and the new lenders (incorporated by reference to
Exhibit 10.2 to the ITT Form 8-K).
10.63 Pledge and Security Agreement, dated as of February 23,
1998, executed and delivered by the Trust, the Corporation
and the other Pledgors party thereto, in favor of BTC as
Collateral Agent.(3)
10.64 Senior Secured Increasing Rate Note Agreement, dated as of
February 23, 1998, by and among the Corporation, the Trust,
the Guarantors named therein and the Lenders named therein
(incorporated by reference to Exhibit 10.3 to the ITT Form
8-K).
10.65 Loan Agreement, dated as of February 23, 1998, between the
Trust and the Corporation, together with Promissory Note
executed in connection therewith, by the Corporation to the
order of the Trust, in the principal amount of
$3,282,000,000.(3)
10.66 Loan Agreement, dated as of February 23, 1998, between the
Trust and the Corporation, together with Promissory Note
executed in connection therewith, by the Corporation to the
order of the Trust, in the principal amount of
$100,000,000.(3)
10.67 Loan Agreement, dated as of February 23, 1998, between the
Trust and the Corporation, together with Promissory Note
executed in connection therewith, by the Corporation to the
order of the Trust, in the principal amount of
$50,000,000.(3)
10.68 Purchase Agreement, dated as of February 23, 1998, by and
among the Trust, the Corporation, Lehman Brothers Inc. and
Lehman Brothers Finance S.A., together with Price Adjustment
Agreement entered into in connection therewith.(3)
10.69 Purchase Agreement, dated as of February 23, 1998, by and
among the Trust, the Corporation, NationsBanc Montgomery
Securities LLC and NMS Services, Inc., together with Price
Adjustment Agreement entered into in connection
therewith.(3)
10.70 Purchase Agreement, dated as of February 23, 1998, by and
among the Trust, the Corporation, Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Merrill Lynch International,
together with Price Adjustment Agreement entered into in
connection therewith.(3)
11.0 Combined statement regarding computation of per share
earnings (incorporated by reference to Exhibit 11 on the
First Quarter 10-Q).
21.1 Subsidiaries of the Trust.(3)
21.2 Subsidiaries of the Corporation.(3)
21.3 Subsidiaries of ITT Corporation.(3)
23. Consent of Coopers & Lybrand L.L.P.(3)
27.1 Financial Data Schedule for Starwood Hotels & Resorts
Worldwide, Inc.(3)
27.2 Financial Data Schedule for Starwood Hotels & Resorts(3)
- ---------------
(1) The SEC file numbers of all filings made by the Trust and the Corporation
pursuant to the Securities
Act of 1934, as amended, and referenced herein are: 1-6828 (the Trust) and
1-7959 (the Corporation).
(2) Management contract or compensatory plan or arrangement required to be filed
as an exhibit hereto pursuant to Item 14(c) of Form 10-K.
(3) Filed herewith.
90
92
(b) Reports on Form 8-K.
During the fourth quarter of 1997, the Trust and the Corporation filed the
following Joint Current Reports on Form 8-K:
On October 21, 1997, the Company filed a Joint Current Report on Form 8-K
(as amended by the Form 8-K/A dated October 29, 1997) reporting under Item 5 the
execution and delivery of the ITT Merger Agreement.
On November 13, 1997, the Company filed a Joint Current Report on Form 8-K
(as amended by the Form 8-K/A dated December 18, 1997 and the Form 8-K/A dated
January 7, 1998) to file, under Item 7, pro forma financial statements in
connection with the Westin Merger.
On November 13, 1997, the Company filed a Joint Current Report on Form 8-K
to report under Item 5 of Form 8-K the amendment of the ITT Merger Agreement.
On December 18, 1997, the Company filed a Form 8-K/A dated December 18,
1997 as an amendment to a Joint Current Report on Form 8-K, dated February 10,
1997, which was filed to report under Item 5 the acquisition of HEI.
On December 18, 1997, the Company filed a Joint Current Report on Form
8-K/A amending the Joint Current Report on Form 8-K dated September 9, 1997,
which was filed to report under Item 5 the Company's acquisition of the Flatley
Portfolio.
On December 18, 1997, the Company filed a Joint Current Report on Form
8-K/A amending the Joint Current Report on Form 8-K dated September 10, 1997,
which was filed to report under Item 5 the entering into of the Westin Merger
Agreement.
91
93
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STARWOOD HOTELS & RESORTS
By: /s/ BARRY S. STERNLICHT
------------------------------------
Barry S. Sternlicht,
Chairman and Chief Executive Officer
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ BARRY S. STERNLICHT Chairman, Chief Executive Officer March 31, 1998
- --------------------------------------------------- and Trustee (Principal Executive,
Barry S. Sternlicht Financial and Accounting Officer)
Trustee March , 1998
- ---------------------------------------------------
Steven R. Goldman
/s/ JEAN-MARC CHAPUS Trustee March 31, 1998
- ---------------------------------------------------
Jean-Marc Chapus
/s/ BRUCE W. DUNCAN Trustee March 31, 1998
- ---------------------------------------------------
Bruce W. Duncan
Trustee March , 1998
- ---------------------------------------------------
Madison F. Grose
Trustee March , 1998
- ---------------------------------------------------
George J. Mitchell
/s/ ROGER S. PRATT Trustee March 31, 1998
- ---------------------------------------------------
Roger S. Pratt
/s/ STEPHEN R. QUAZZO Trustee March 31, 1998
- ---------------------------------------------------
Stephen R. Quazzo
/s/ STUART M. ROTHENBERG Trustee March 31, 1998
- ---------------------------------------------------
Stuart M. Rothenberg
92
94
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STARWOOD HOTELS & RESORTS
WORLDWIDE, INC.
By: /s/ RONALD C. BROWN
------------------------------------
Ronald C. Brown,
Executive Vice President and
Chief Financial Officer
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ BARRY S. STERNLICHT Chairman of the Board of March 31, 1998
- --------------------------------------------------- Directors and Director
Barry S. Sternlicht
/s/ RONALD C. BROWN Executive Vice President and March 31, 1998
- --------------------------------------------------- Chief Financial Officer
Ronald C. Brown (Principal Financial and
Accounting Officer)
/s/ JUERGEN BARTELS Chief Executive, Hotel Operating March 31, 1998
- --------------------------------------------------- Group and Director (Principal
Juergen Bartels Executive Officer)
/s/ JONATHAN D. EILIAN Director March 31, 1998
- ---------------------------------------------------
Jonathan D. Eilian
/s/ BRUCE M. FORD Director March 31, 1998
- ---------------------------------------------------
Bruce M. Ford
Director March , 1998
- ---------------------------------------------------
Graeme W. Henderson
/s/ EARLE F. JONES Director March 31, 1998
- ---------------------------------------------------
Earle F. Jones
/s/ MICHAEL A. LEVEN Director March 31, 1998
- ---------------------------------------------------
Michael A. Leven
Director March , 1998
- ---------------------------------------------------
Daniel H. Stern
Director March , 1998
- ---------------------------------------------------
Barry S. Volpert
/s/ DANIEL W. YIH Director March 31, 1998
- ---------------------------------------------------
Daniel W. Yih
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95
STARWOOD HOTELS & RESORTS
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
AS OF DECEMBER 31, 1997 AND 1996
AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1997
INDEPENDENT AUDITOR'S REPORT................................ F-2
STARWOOD HOTELS & RESORTS AND STARWOOD HOTELS & RESORTS
WORLDWIDE, INC.:
Combined Consolidated Balance Sheets................... F-3
Combined Consolidated Statements of Operations......... F-4
Combined Consolidated Statements of Cash Flows......... F-5
Combined Consolidated Statements of Shareholders'
Equity................................................ F-6
STARWOOD HOTELS & RESORTS:
Consolidated Balance Sheets............................ F-7
Consolidated Statements of Operations.................. F-8
Consolidated Statements of Cash Flows.................. F-9
Consolidated Statements of Shareholders' Equity........ F-10
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.:
Consolidated Balance Sheets............................ F-11
Consolidated Statements of Operations.................. F-12
Consolidated Statements of Cash Flows.................. F-13
Consolidated Statements of Shareholders' Equity........ F-14
NOTES TO FINANCIAL STATEMENTS............................... F-15
SCHEDULES:
Schedule III -- Real Estate and Accumulated
Depreciation.......................................... F-51
Schedule IV -- Mortgage Loans on Real Estate........... F-58
F-1
96
INDEPENDENT AUDITOR'S REPORT
To the Boards of Trustees and Directors and Shareholders of
Starwood Hotels & Resorts and Starwood Hotels & Resorts Worldwide, Inc.:
We have audited the accompanying separate and combined consolidated
financial statements and financial statement schedules of Starwood Hotels &
Resorts (a Maryland real estate investment trust) and its subsidiaries (the
"Trust") and Starwood Hotels & Resorts Worldwide, Inc. (a Maryland corporation)
and its subsidiaries (the "Corporation"), collectively the "Company," as of
December 31, 1997 and 1996, and for each of the three years in the period ended
December 31, 1997, listed in the foregoing index to financial statements and
financial statement schedules. These financial statements and financial
statement schedules are the responsibility of the Trust's and the Corporation's
managements. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such separate and combined financial statements present
fairly, in all material respects, the financial position of the Company and the
financial position of the Trust and the Corporation at December 31, 1997 and
1996, and the respective results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
February 27, 1998
F-2
97
STARWOOD HOTELS & RESORTS AND
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
COMBINED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
ASSETS
Hotel assets held for sale -- net........................... $ 37,924 $ 21,644
Hotel assets -- net......................................... 2,590,939 1,100,030
---------- ----------
2,628,863 1,121,674
Mortgage notes receivable -- net............................ 51,197 90,741
Investments................................................. 1,698 948
---------- ----------
Total real estate investments..................... 2,681,758 1,213,363
Cash and cash equivalents................................... 23,462 25,426
Accounts, interest and rents receivable..................... 77,687 43,278
Notes receivable -- net..................................... 35,856 2,930
Inventories, prepaid expenses and other assets.............. 190,701 27,743
---------- ----------
$3,009,464 $1,312,740
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Collateralized notes payable and lines of credit............ $1,221,727 $ 422,334
Mortgage and other notes payable............................ 344,287 57,232
Accounts payable and other liabilities...................... 121,164 57,296
Distributions payable....................................... 30,374 19,258
---------- ----------
1,717,552 556,120
---------- ----------
Commitments and contingencies
MINORITY INTEREST........................................... 270,289 163,959
---------- ----------
SHAREHOLDERS' EQUITY
Trust common shares of beneficial interest at December 31,
1997 and 1996; $.01 par value; authorized 100,000,000
shares; outstanding 51,346,000 and 40,078,000 at December
31, 1997 and 1996, respectively........................... 513 401
Corporation common stock at December 31, 1997 and 1996; $.01
par value; authorized 100,000,000 shares; outstanding
51,346,000 and 40,078,000 at December 31, 1997 and 1996,
respectively.............................................. 513 401
Additional paid-in capital.................................. 1,335,532 827,760
Distributions in excess of earnings......................... (314,935) (235,901)
---------- ----------
1,021,623 592,661
---------- ----------
$3,009,464 $1,312,740
========== ==========
See accompanying notes to financial statements.
F-3
98
STARWOOD HOTELS & RESORTS AND
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
REVENUE
Rooms..................................................... $577,318 $260,175 $ 87,270
Food and beverage......................................... 248,072 94,816 26,609
Other..................................................... 63,524 30,119 7,371
-------- -------- --------
Total hotel revenue............................... 888,914 385,110 121,250
Gaming.................................................... 15,003 23,630 26,929
Interest from mortgage and other notes.................... 13,680 11,262 10,905
Rents from leased hotel properties and income from
investments............................................ 883 822 791
Management fees and other income.......................... 8,068 3,424 1,966
Gain (loss) on sale of real estate investments............ 7,035 4,290 (125)
-------- -------- --------
933,583 428,538 161,716
-------- -------- --------
EXPENSES
Rooms..................................................... 141,872 67,017 37,121
Food and beverage......................................... 181,430 72,696 19,520
Other..................................................... 290,852 135,302 28,376
-------- -------- --------
Total hotel expenses.............................. 614,154 275,015 85,017
Gaming.................................................... 16,499 21,834 24,242
Interest.................................................. 65,035 23,337 13,138
Depreciation and amortization............................. 125,446 55,745 15,469
Administrative and general................................ 27,241 16,495 5,712
Treasury lock settlement.................................. 25,000 -- --
-------- -------- --------
873,375 392,426 143,578
-------- -------- --------
Income before minority interest........................... 60,208 36,112 18,138
Minority interest......................................... 18,684 10,238 7,013
-------- -------- --------
Income before extraordinary items......................... 41,524 25,874 11,125
Extraordinary items due to early extinguishment of debt
(net of $971,000, $413,000 and $163,000 minority
interest, respectively)................................ (3,452) 1,077 (2,155)
-------- -------- --------
NET INCOME........................................ $ 38,072 $ 26,951 $ 8,970
======== ======== ========
EARNINGS PER PAIRED SHARE
Income before extraordinary items......................... $ 0.90 $ 0.88 $ 0.95
Extraordinary items....................................... (0.07) 0.04 (0.18)
-------- -------- --------
NET INCOME PER PAIRED SHARE....................... $ 0.83 $ 0.92 $ 0.77
======== ======== ========
EARNINGS PER PAIRED SHARE ASSUMING DILUTION
Income before extraordinary items......................... $ 0.85 $ 0.86 $ 0.95
Extraordinary items....................................... (0.07) 0.04 (0.18)
-------- -------- --------
NET INCOME PER PAIRED SHARE ASSUMING DILUTION..... $ 0.78 $ 0.90 $ 0.77
======== ======== ========
Weighted Average Number of Paired Shares.................... 46,022 29,204 11,657
======== ======== ========
Weighted Average Number of Paired Shares Assuming
Dilution.................................................. 48,663 29,884 11,710
======== ======== ========
See accompanying notes to financial statements.
F-4
99
STARWOOD HOTELS & RESORTS AND
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
TWELVE MONTHS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 38,072 $ 26,951 $ 8,970
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest..................................... 18,684 10,238 7,013
Extraordinary items due to early extinguishment of
debt................................................ 3,452 (1,077) 2,155
Depreciation and amortization......................... 125,446 55,745 15,469
Accretion of discount................................. (5,530) (3,140) (3,285)
Deferred interest..................................... -- -- 649
Provision for doubtful accounts....................... 1,293 1,044 470
Warrants and paired shares issued as compensation..... 3,400 -- --
(Gain) loss on sale of real estate investments........ (7,035) (4,290) 125
Changes in operating assets and liabilities:
Increase in accounts receivable, inventories, prepaid
expenses and other assets........................... (77,300) (46,676) (21,805)
Increase in accounts payable and other liabilities.... 56,451 35,372 6,650
----------- --------- ---------
Net cash provided by operating activities........ 156,933 74,167 16,411
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of hotel properties.......................... (1,100,401) (720,969) (160,880)
Improvements and additions to hotel assets............... (157,258) (27,775) (5,331)
Purchase of investments.................................. (1,450) (1,871) --
Sale of investments...................................... 940 3,764 --
Net proceeds from sale of real estate investments........ 18,549 21,991 --
Purchase of mortgage and other notes receivable.......... (34,200) (25,206) (19,795)
Principal received on mortgage and other notes
receivable............................................ 53,682 3,266 6,825
Reorganization costs..................................... -- -- (2,814)
----------- --------- ---------
Net cash used in investing activities............ (1,220,138) (746,800) (181,995)
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under collateralized notes payable and lines
of credit............................................. 1,864,328 367,561 119,100
Borrowings under mortgage and other notes payable........ 101,755 3,497 9,637
Payments on collateralized notes payable and lines of
credit................................................ (1,064,980) (64,327) (102,899)
Principal payments on mortgage and other notes payable... (98,667) (1,535) (104,722)
Net proceeds from equity offerings....................... 383,081 429,618 245,701
Contributed capital and adjustments...................... 1,056 131 13,599
Stock repurchase......................................... (25,724) -- --
Distributions paid....................................... (99,608) (46,218) (9,265)
Purchase of warrants..................................... -- -- (1,300)
----------- --------- ---------
Net cash provided by financing activities........ 1,061,241 688,727 169,851
----------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... (1,964) 16,094 4,267
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD... 25,426 9,332 5,065
----------- --------- ---------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD......... $ 23,462 $ 25,426 $ 9,332
=========== ========= =========
See accompanying notes to financial statements.
F-5
100
STARWOOD HOTELS & RESORTS AND
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
COMBINED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
TRUST SHARES CORPORATION ADDITIONAL DISTRIBUTIONS TOTAL
OF BENEFICIAL COMMON PAID-IN IN EXCESS OF SHAREHOLDERS'
INTEREST STOCK CAPITAL EARNINGS EQUITY
------------- ----------- ---------- ------------- -------------
Balance December 31, 1994........ $ 12,133 $ 1,213 $ 210,251 $(214,889) $ 8,708
Decrease in par value to
$0.01....................... (12,012) (1,092) 13,104 -- --
One-for-six reverse stock
split....................... (101) (101) 202 -- --
Contributed capital............ -- -- 59,120 -- 59,120
Equity offerings............... 118 118 245,465 -- 245,701
Minority interest.............. -- -- (92,735) -- (92,735)
Net income..................... -- -- -- 8,970 8,970
Distributions.................. -- -- -- (12,996) (12,996)
Warrant purchase............... -- -- (1,300) -- (1,300)
-------- ------- ---------- --------- ----------
Balance December 31, 1995........ 138 138 434,107 (218,915) 215,468
Three-for-two stock dividend... 135 135 (270) -- --
Contributed capital............ -- -- 7,783 -- 7,783
Equity offerings............... 128 128 429,362 -- 429,618
Net income..................... -- -- -- 26,951 26,951
Distributions.................. -- -- -- (43,937) (43,937)
Change in minority interest.... -- -- (43,222) -- (43,222)
-------- ------- ---------- --------- ----------
Balance December 31, 1996........ 401 401 827,760 (235,901) 592,661
Contributed capital............ 53 53 233,558 -- 233,664
Equity offerings............... 63 63 382,955 -- 383,081
Stock repurchase............... (4) (4) (12,493) (13,223) (25,724)
Net income..................... -- -- -- 38,072 38,072
Distributions.................. -- -- -- (103,883) (103,883)
Change in minority interest.... -- -- (96,248) -- (96,248)
-------- ------- ---------- --------- ----------
Balance December 31, 1997........ $ 513 $ 513 $1,335,532 $(314,935) $1,021,623
======== ======= ========== ========= ==========
See accompanying notes to financial statements.
F-6
101
STARWOOD HOTELS & RESORTS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
ASSETS
Hotel assets held for sale -- net........................... $ 16,591 $ 12,615
Hotel assets -- net......................................... 2,293,947 988,309
---------- ----------
2,310,538 1,000,924
Mortgage notes receivable -- net............................ 51,197 90,741
Mortgage notes receivable -- Corporation.................... 241,432 88,077
Investments................................................. 1,451 948
---------- ----------
Total real estate investments..................... 2,604,618 1,180,690
Cash and cash equivalents................................... 9,818 3,810
Accounts, interest and rents receivable..................... 5,203 12,617
Notes receivable -- net..................................... 35,255 2,237
Notes receivable -- Corporation............................. 80,178 17,741
Prepaid expenses and other assets........................... 37,351 16,271
---------- ----------
$2,772,423 $1,233,366
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Collateralized notes payable and lines of credit............ $1,221,727 $ 422,334
Mortgage and other notes payable............................ 217,567 55,269
Accounts payable and other liabilities...................... 61,135 9,200
Distributions payable....................................... 30,250 19,258
---------- ----------
1,530,679 506,061
---------- ----------
Commitments and contingencies
MINORITY INTEREST........................................... 259,118 158,005
---------- ----------
SHAREHOLDERS' EQUITY
Trust common shares of beneficial interest at December 31,
1997 and 1996; $.01 par value; authorized 100,000,000
shares; outstanding 51,346,000 and 40,078,000 at December
31, 1997 and 1996, respectively........................... 513 401
Additional paid-in capital.................................. 1,211,196 729,276
Distributions in excess of earnings......................... (229,083) (160,377)
---------- ----------
982,626 569,300
---------- ----------
$2,772,423 $1,233,366
========== ==========
See accompanying notes to financial statements.
F-7
102
STARWOOD HOTELS & RESORTS
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
TWELVE MONTHS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
--------- --------- --------
REVENUE
Rents from Corporation.................................... $234,537 $ 87,593 $26,730
Interest from Corporation................................. 16,336 9,084 4,761
Interest from mortgage and other notes.................... 13,680 11,262 10,792
Rents from leased hotel properties and income from
investments............................................ 883 822 791
Other income.............................................. 2,161 2,008 1,074
Gain (loss) on sale of real estate investments............ 3,171 4,290 (125)
-------- -------- -------
270,768 115,059 44,023
-------- -------- -------
EXPENSES
Interest.................................................. 64,872 23,088 12,429
Depreciation and amortization............................. 100,151 42,517 8,977
Administrative and general................................ 12,212 4,134 2,439
Treasury lock settlement.................................. 25,000 -- --
-------- -------- -------
202,235 69,739 23,845
-------- -------- -------
Income before minority interest........................... 68,533 45,320 20,178
Minority interest......................................... 17,786 11,731 7,314
-------- -------- -------
Income before extraordinary items......................... 50,747 33,589 12,864
Extraordinary items due to early extinguishment of debt
(net of $971,000 and $163,000 minority interest in 1997
and 1995, respectively)................................ (3,452) -- (2,155)
-------- -------- -------
NET INCOME........................................ $ 47,295 $ 33,589 $10,709
======== ======== =======
EARNINGS PER SHARE
Income before extraordinary items......................... $ 1.10 $ 1.15 $ 1.10
Extraordinary items....................................... (0.07) -- (0.18)
-------- -------- -------
NET INCOME PER SHARE.............................. $ 1.03 $ 1.15 $ 0.92
======== ======== =======
EARNINGS PER SHARE ASSUMING DILUTION
Income before extraordinary items......................... $ 1.04 $ 1.12 $ 1.10
Extraordinary items....................................... (0.07) -- (0.18)
-------- -------- -------
NET INCOME PER SHARE ASSUMING DILUTION............ $ 0.97 $ 1.12 $ 0.92
======== ======== =======
Weighted Average Number of Shares........................... 46,022 29,204 11,657
======== ======== =======
Weighted Average Number of Shares Assuming Dilution......... 48,663 29,884 11,710
======== ======== =======
See accompanying notes to financial statements.
F-8
103
STARWOOD HOTELS & RESORTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
TWELVE MONTHS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 47,295 $ 33,589 $ 10,709
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest....................................... 17,786 11,731 7,314
Extraordinary items due to early extinguishment of
debt.................................................. 3,452 -- 2,155
Depreciation and amortization........................... 100,151 42,517 8,977
Accretion of discount................................... (5,530) (3,140) (3,285)
Deferred interest....................................... -- -- 649
Deferred interest -- Corporation........................ (7,935) (2,055) --
Warrants and paired shares issued as compensation....... 3,177 -- --
(Gain) loss on sale of real estate investments.......... (3,171) (4,290) 125
Changes in operating assets and liabilities:
Increase in rent and interest receivable, prepaid
expenses and other assets............................. (23,072) (18,649) (17,056)
Increase in accounts payable and other liabilities...... 44,518 1,886 1,679
----------- --------- ---------
Net cash provided by operating activities.......... 176,671 61,589 11,267
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of hotel properties........................... (1,033,305) (699,438) (118,896)
Improvements and additions to hotel assets................ (116,994) (15,661) (4,660)
Purchase of investments................................... (1,443) (1,871) --
Sale of investments....................................... 940 3,764 --
Net proceeds from sale of real estate investments......... 10,271 21,991 --
Purchase of mortgage and other notes receivable........... (34,200) (25,012) (19,795)
Purchase of mortgage notes receivable -- Corporation...... (27,000) (18,216) --
Principal received on mortgage and other notes
receivable.............................................. 47,823 3,201 6,766
Reorganization costs...................................... -- -- (1,407)
Net change in notes receivable -- Corporation............. (63,225) 4,815 (37,514)
----------- --------- ---------
Net cash used in investing activities.............. (1,217,133) (726,427) (175,506)
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under collateralized notes payable and lines of
credit.................................................. 1,864,328 367,561 119,100
Borrowings under mortgage and other notes payable......... 101,755 2,829 9,637
Payments on collateralized notes payable and lines of
credit.................................................. (1,064,980) (64,327) --
Principal payments on mortgage and other notes payable.... (97,767) (35) (198,158)
Net proceeds from equity offerings........................ 363,952 408,000 233,418
Contributed capital and adjustments....................... 2,174 128 11,197
Stock repurchase.......................................... (24,438) -- --
Distributions paid........................................ (98,554) (46,218) (9,265)
Purchase of warrants...................................... -- -- (1,235)
----------- --------- ---------
Net cash provided by financing activities.......... 1,046,470 667,938 164,694
----------- --------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 6,008 3,100 455
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD.... 3,810 710 255
----------- --------- ---------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD.......... $ 9,818 $ 3,810 $ 710
=========== ========= =========
See accompanying notes to financial statements.
F-9
104
STARWOOD HOTELS & RESORTS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
TRUST SHARES ADDITIONAL DISTRIBUTIONS TOTAL
OF BENEFICIAL PAID-IN IN EXCESS OF SHAREHOLDERS'
INTEREST CAPITAL EARNINGS EQUITY
------------- ---------- ------------- -------------
Balance January 1, 1995................... $ 12,133 $ 146,059 $(147,742) $ 10,450
Decrease in par value to $0.01.......... (12,012) 12,012 -- --
One-for-six reverse stock split......... (101) 101 -- --
Contributed capital..................... -- 52,495 -- 52,495
Equity offerings........................ 118 233,300 -- 233,418
Minority interest....................... -- (88,113) -- (88,113)
Net income.............................. -- -- 10,709 10,709
Distributions........................... -- -- (12,996) (12,996)
Warrant purchase........................ -- (1,235) -- (1,235)
-------- ---------- --------- ---------
Balance December 31, 1995................. 138 354,619 (150,029) 204,728
Three-for-two stock dividend............ 135 (135) -- --
Contributed capital..................... -- 7,780 -- 7,780
Equity offerings........................ 128 407,872 -- 408,000
Net income.............................. -- -- 33,589 33,589
Distributions........................... -- -- (43,937) (43,937)
Change in minority interest............. -- (40,860) -- (40,860)
-------- ---------- --------- ---------
Balance December 31, 1996................. 401 729,276 (160,377) 569,300
Contributed capital..................... 53 220,309 -- 220,362
Equity offerings........................ 63 363,888 -- 363,951
Stock repurchase........................ (4) (11,869) (12,565) (24,438)
Net income.............................. -- -- 47,295 47,295
Distributions........................... -- -- (103,436) (103,436)
Change in minority interest............. -- (90,408) -- (90,408)
-------- ---------- --------- ---------
Balance December 31, 1997................. $ 513 $1,211,196 $(229,083) $ 982,626
======== ========== ========= =========
See accompanying notes to financial statements.
F-10
105
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
ASSETS
Hotel assets held for sale -- net........................... $ 21,333 $ 9,029
Hotel assets -- net......................................... 296,992 111,721
-------- --------
318,325 120,750
Investments................................................. 247 --
-------- --------
Total real estate investments..................... 318,572 120,750
Cash and cash equivalents................................... 13,644 21,616
Accounts receivable......................................... 72,484 30,661
Notes receivable............................................ 601 693
Inventories, prepaid expenses and other assets.............. 153,350 11,472
-------- --------
$558,651 $185,192
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage and other notes payable............................ $126,720 $ 1,963
Mortgage notes payable -- Trust............................. 241,432 88,077
Notes payable -- Trust...................................... 80,178 17,741
Accounts payable and other liabilities...................... 60,029 48,096
Distributions payable....................................... 124 --
-------- --------
508,483 155,877
-------- --------
Commitments and contingencies
MINORITY INTEREST........................................... 11,171 5,954
-------- --------
SHAREHOLDERS' EQUITY
Corporation common stock at December 31, 1997 and 1996; $.01
par value; authorized 100,000,000 shares; outstanding
51,346,000 and 40,078,000 at December 31, 1997 and 1996,
respectively.............................................. 513 401
Additional paid-in capital.................................. 124,336 98,484
Accumulated deficit......................................... (85,852) (75,524)
-------- --------
38,997 23,361
-------- --------
$558,651 $185,192
======== ========
See accompanying notes to financial statements.
F-11
106
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
REVENUE
Rooms.................................................... $577,318 $260,175 $ 87,270
Food and beverage........................................ 248,072 94,816 26,609
Other.................................................... 63,524 30,119 7,371
-------- -------- --------
Total hotel revenue.............................. 888,914 385,110 121,250
Gaming................................................... 15,003 23,630 26,929
Interest from notes receivable........................... -- -- 113
Management fees and other income......................... 5,907 1,416 892
Gain on sale of real estate investments.................. 3,864 -- --
-------- -------- --------
913,688 410,156 149,184
-------- -------- --------
EXPENSES
Rooms.................................................... 141,872 67,017 37,121
Food and beverage........................................ 181,430 72,696 19,520
Other.................................................... 290,852 135,302 28,376
-------- -------- --------
Total hotel expenses............................. 614,154 275,015 85,017
Gaming................................................... 16,499 21,834 24,242
Rent -- Trust............................................ 234,537 87,593 26,730
Interest -- Trust........................................ 16,336 9,084 4,761
Interest -- other........................................ 163 249 709
Depreciation and amortization............................ 25,295 13,228 6,492
Administrative and general............................... 15,029 12,361 3,273
-------- -------- --------
922,013 419,364 151,224
-------- -------- --------
Loss before minority interest............................ (8,325) (9,208) (2,040)
Minority interest........................................ 898 (1,493) (301)
-------- -------- --------
Loss before extraordinary items.......................... (9,223) (7,715) (1,739)
Extraordinary items due to early extinguishment of debt
(net of $413,000 minority interest)................... -- 1,077 --
-------- -------- --------
NET LOSS......................................... $ (9,223) $ (6,638) $ (1,739)
======== ======== ========
LOSS PER SHARE
Loss before extraordinary items.......................... $ (0.20) $ (0.26) $ (0.15)
Extraordinary items...................................... -- 0.04 --
-------- -------- --------
NET LOSS PER SHARE............................... $ (0.20) $ (0.22) $ (0.15)
======== ======== ========
LOSS PER SHARE ASSUMING DILUTION
Loss before extraordinary items.......................... $ (0.20) $ (0.26) $ (0.15)
Extraordinary items...................................... -- 0.04 --
-------- -------- --------
NET LOSS PER SHARE ASSUMING DILUTION............. $ (0.20) $ (0.22) $ (0.15)
======== ======== ========
Weighted Average Number of Shares.......................... 46,022 29,204 11,657
======== ======== ========
Weighted Average Number of Shares Assuming Dilution........ 46,022 29,204 11,657
======== ======== ========
See accompanying notes to financial statements.
F-12
107
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................. $ (9,223) $ (6,638) $ (1,739)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Minority interest..................................... 898 (1,493) (301)
Extraordinary items due to early extinguishment of
debt................................................ -- (1,077) --
Depreciation and amortization......................... 25,295 13,228 6,492
Deferred interest -- Trust............................ 7,935 2,055 --
Paired shares issued as compensation.................. 223 -- --
Gain on sale.......................................... (3,864) -- --
Provision for doubtful accounts....................... 1,293 1,044 470
Changes in operating assets and liabilities:
Increase in accounts receivable, inventories, prepaid
expenses and other assets........................... (54,228) (28,027) (4,749)
Increase in accounts payable and other liabilities.... 11,933 33,486 4,971
-------- -------- --------
Net cash provided by (used in) operating
activities..................................... (19,738) 12,578 5,144
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of hotel properties.......................... (67,096) (21,531) (21,551)
Improvements and additions to hotel assets............... (40,264) (12,114) (21,104)
Purchase of investments.................................. (7) -- --
Changes in investments................................... -- -- --
Net proceeds from sale of real estate investments........ 8,278 -- --
Purchase of notes receivable............................. -- (194) --
Principal received on notes receivable................... 5,859 65 59
Reorganization costs..................................... -- -- (1,407)
-------- -------- --------
Net cash used in investing activities............ (93,230) (33,774) (44,003)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under mortgage and other notes payable........ -- 668 --
Borrowings under mortgage notes payable -- Trust......... 27,000 18,216 --
Principal payments on mortgage and other notes payable... (900) (1,500) (9,463)
Net proceeds from equity offerings....................... 19,129 21,618 12,283
Contributed capital and adjustments...................... (1,118) 3 2,402
Stock repurchase......................................... (1,286) -- --
Distributions paid....................................... (1,054) -- --
Purchase of warrants..................................... -- -- (65)
Net change in notes payable -- Trust..................... 63,225 (4,815) 37,514
-------- -------- --------
Net cash provided by financing activities........ 104,996 34,190 42,671
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... (7,972) 12,994 3,812
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD... 21,616 8,622 4,810
-------- -------- --------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD......... $ 13,644 $ 21,616 $ 8,622
======== ======== ========
See accompanying notes to financial statements.
F-13
108
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
CORPORATION ADDITIONAL DISTRIBUTIONS TOTAL
COMMON PAID-IN IN EXCESS OF SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
----------- ---------- ------------- -------------
Balance January 1, 1995..................... $ 1,213 $ 64,192 $(67,147) $(1,742)
Decrease in par value to $0.01............ (1,092) 1,092 -- --
One-for-six reverse stock split........... (101) 101 -- --
Contributed capital....................... -- 6,625 -- 6,625
Equity offerings.......................... 118 12,165 -- 12,283
Minority interest......................... -- (4,622) -- (4,622)
Net loss.................................. -- -- (1,739) (1,739)
Warrant purchase.......................... -- (65) -- (65)
------- -------- -------- -------
Balance December 31, 1995................... 138 79,488 (68,886) 10,740
Contributed capital....................... -- 3 -- 3
Three-for-two stock split................. 135 (135) -- --
Equity offerings.......................... 128 21,490 -- 21,618
Net loss.................................. -- -- (6,638) (6,638)
Change in minority interest............... -- (2,362) -- (2,362)
------- -------- -------- -------
Balance December 31, 1996................... 401 98,484 (75,524) 23,361
Contributed capital....................... 53 13,249 -- 13,302
Equity offerings.......................... 63 19,067 -- 19,130
Stock repurchase.......................... (4) (624) (658) (1,286)
Net loss.................................. -- -- (9,223) (9,223)
Distributions............................. -- -- (447) (447)
Change in minority interest............... -- (5,840) -- (5,840)
------- -------- -------- -------
Balance December 31, 1997................... $ 513 $124,336 $(85,852) $38,997
======= ======== ======== =======
See accompanying notes to financial statements.
F-14
109
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS.
General
The accompanying financial statements include the accounts of Starwood
Hotels & Resorts and its subsidiaries (the "Trust") and Starwood Hotels &
Resorts Worldwide, Inc. and its subsidiaries (the "Corporation" and, together
with the Trust, the "Company"). The Trust was formed in 1969 and elected to be
taxed as a real estate investment trust ("REIT") under the Internal Revenue
Code. In 1980, the Trust formed the Corporation and made a distribution to the
Trust's shareholders of one share of common stock of the Corporation (a
"Corporation Share") for each common share of beneficial interest of the Trust
(a "Trust Share"). Trust Shares and Corporation Shares are paired on a
one-for-one basis and, pursuant to an agreement between the Trust and the
Corporation, may be held or transferred only in units ("Paired Shares")
consisting of one Trust Share and one Corporation Share.
As of December 31, 1997, the Company owned and operated primarily upscale
hotels located throughout the United States, Mexico and Scotland and leased and
operated one hotel/casino in Las Vegas, Nevada. The hotels, ranging in size from
90 to 960 rooms, offer services to both business and leisure travelers.
Reorganization
Effective January 1, 1995 (the "Reorganization Date"), the Trust and the
Corporation consummated a reorganization (the "Reorganization") with a
predecessor of Starwood Capital Group, L.L.C. ("Starwood Capital") and certain
affiliates of Starwood Capital (together with Starwood Capital, the "Starwood
Partners").
The Reorganization involved a number of related transactions that occurred
simultaneously on the Reorganization Date. Such transactions included (i) the
formation of SLT Realty Limited Partnership (the "Realty Partnership") and the
contribution by the Trust to the Realty Partnership of substantially all the
properties and assets of the Trust, at book value, subject to substantially all
the liabilities of the Trust (including the senior debt of the Trust), in
exchange for a 28.3% interest as general partner in the Realty Partnership, (ii)
the contribution by the Starwood Partners to the Realty Partnership of
approximately $12.6 million in cash in addition to certain hotel properties and
first mortgage notes, at book value, in exchange for limited partnership units
representing the remaining 71.7% interest in the Realty Partnership, (iii) the
formation of SLC Operating Limited Partnership (the "Operating Partnership," and
together with the Realty Partnership, the "Partnerships") and the contribution
by the Corporation of all its properties and operating assets (except gaming
assets, which are to be contributed upon approval by Nevada gaming authorities),
subject to substantially all liabilities, to the Operating Partnership, in
exchange for a 28.3% interest as general partner in the Operating Partnership,
and (iv) the contribution by the Starwood Partners to the Operating Partnership
of approximately $1.4 million in cash in addition to furniture, fixtures and
equipment of the hotel properties, at book value, in exchange for limited
partnership units representing the remaining 71.7% interest in the Operating
Partnership.
In addition, on March 24, 1995, a Starwood Partner exchanged $12 million of
senior debt of the Trust for additional limited partnership units of the Realty
Partnership and the Operating Partnership. After giving effect to the
Reorganization and this exchange of senior debt, the Trust had a 25.4% general
partnership interest in the Realty Partnership, the Corporation had a 25.4%
general partnership interest in the Operating Partnership, and the Starwood
Partners held limited partnership interests representing the remaining 74.6%
interest in each of the Realty Partnership and the Operating Partnership.
On July 6, 1995, the Company completed the 1995 Offering (see Note
19 -- Shareholders' Equity). Net proceeds of the 1995 Offering were contributed
by the Trust and the Corporation to the Realty Partnership and the Operating
Partnership, respectively. After giving effect to the 1995 Offering, the Trust
and the
F-15
110
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Corporation had a majority general partnership interest in the Realty
Partnership and the Operating Partnership, respectively. Accordingly, the Realty
Partnership and the Operating Partnership are included in the consolidated
financial statements of the Trust and the Corporation, respectively.
2. SIGNIFICANT ACCOUNTING POLICIES.
Cash and cash equivalents
Cash and cash equivalents are defined as cash on hand and in banks plus all
short-term investments with a maturity, at the date of purchase, of three months
or less.
Investments
Gains and losses on sales of investments are calculated based on the
specific identification method and are recognized at the time the investments
are sold.
Inventories
Inventories, consisting primarily of food and beverage, are stated at the
lower of cost or market with cost determined on a first-in, first-out basis.
Debt issuance costs
The costs incurred in connection with certain of the Company's debt
financings are included in prepaid expenses and other assets and are being
amortized using the effective interest method over the term of the related debt.
Hotel assets
Hotel assets are stated at the lower of cost or fair value and are
depreciated using the straight-line method over estimated useful lives of 20 to
30 years for buildings and improvements and 3 to 12 years for furniture,
fixtures and equipment. Amounts allocated to leasehold interests are amortized
using the straight-line method over the lease terms.
The Company evaluates the carrying values of each of the Company's hotel
assets on a quarterly basis for any possible impairment. For each hotel asset
not held for sale, the expected undiscounted future cash flows of the asset
(generally over a five-year period) are compared to the net book values of the
asset. If the expected undiscounted future cash flows are less than the net book
value of the asset, the excess of the net book value over the estimated fair
value is charged to current earnings. When an asset is identified by management
as held for sale, the Company discontinues depreciating the asset and estimates
the fair value of such asset. If in management's opinion the fair value of a
hotel asset which has been identified for sale is less than the net book value
of the asset, a reserve for losses is established. Fair value is determined
based upon discounted cash flows of the hotel assets at rates (approximately
10%) deemed reasonable for the type of property and prevailing market
conditions, appraisals and, if appropriate, current estimated net sales proceeds
from pending offers.
A gain or loss is recorded to the extent the amounts ultimately received
for the sale of hotel assets differ from the adjusted book values of the hotel
assets. Gains and losses on sales of hotel assets are recognized at the time the
hotel assets are sold provided there is reasonable assurance of the
collectibility of the sales price and any future activities to be performed by
the Company relating to the hotel assets sold are insignificant.
F-16
111
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Mortgage notes receivable
Interest income is not accrued for delinquent loans or loans for which
collectibility is uncertain and the fair value of the underlying property
collateralizing the loan is less than the outstanding principal and accrued
interest. An allowance for loss is established based upon an analysis of the net
realizable value of the underlying property collateralizing the loan.
Intangible assets
Intangible assets are included in other assets and are amortized on a
straight-line basis using lives ranging from 5 to 40 years based on management's
assessment of the future value of the intangible assets. The intangible assets
are valued based on market studies of the assets purchased. The Company
evaluates the carrying values of intangible assets in the same manner that it
evaluates the carrying values of hotel assets.
Derivatives
The Company enters into interest-rate protection agreements to manage
interest rate exposure on anticipated transactions. The differential to be paid
or received under these agreements is accrued consistent with the terms of the
agreements and market interest rates and is recognized in interest expense over
the term of the related debt using the effective interest method (the accrual
accounting method). The related amounts payable to or receivable from
counterparties are included in other liabilities or assets. The fair value of
the swap agreements and changes in the fair value as a result of changes in
market interest rates are not recognized in the financial statements.
In order for the amounts paid or received to be deferred under such
agreements, and therefore treated as a hedge, the Company must determine that it
is probable that the future issuance of debt anticipated by the contract will
occur. In order to assess whether this criteria has been met, the Company
reviews current projections to determine if the issuance of such debt is in line
with the Company's plans and whether the Company has the ability to issue such
debt.
Interest-rate protection agreements associated with debt for which the
Company deems issuance to be improbable are recorded as an asset or liability at
fair value with changes in fair value reported as treasury lock settlement on
the statements of operations (the fair value method).
Hotel revenue
Revenue is recognized as earned. Earned is generally defined as the date
upon which a guest occupies a room and/or utilizes the hotel's services. Ongoing
credit evaluations are performed and potential credit losses are expensed at the
time the account receivable is estimated to be uncollectible. Historically,
credit losses have not been material to the hotels' results of operations.
Gaming revenue
Gaming revenue includes the net win from gaming activities, as well as
room, food and beverage and other revenues, net of promotional allowances for
the Company's gaming properties.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-17
112
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform with the 1997 financial statement presentation.
Principles of consolidation
The combined consolidated financial statements reflect the consolidated
financial statements of the Trust and the Corporation. The consolidated
financial statements of the Trust and the Corporation reflect the activities of
Starwood Hotels & Resorts and its subsidiaries and Starwood Hotels & Resorts
Worldwide, Inc. and its subsidiaries, respectively. All material intercompany
balances and transactions between the consolidated Trust and the consolidated
Corporation have been eliminated in the combined consolidated financial
statements.
Earnings (loss) per share
All earnings per share amounts for all periods have been presented and,
where appropriate, restated to conform to Statement of Financial Accounting
Standards No. 128, Earnings per Share (SFAS 128). The weighted average number of
shares and Paired Shares were determined as if the six-for-one reverse stock
split that occurred June 19, 1995 and the three-for-two stock split that
occurred on January 27, 1997 were both effective January 1, 1995. Historical per
share and per Paired Share information has been restated accordingly.
The outstanding limited partnership units of the Realty Partnership and the
Operating Partnership have been excluded from the diluted earnings per share
calculations as there would be no effect on the amounts since the minority
interests' share of income would also be added back to net income.
Share option plans
The Company has elected to apply APB Opinion 25 and related Interpretations
in accounting for its share option plans. However, the Company discloses pro
forma compensation cost consistent with Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123).
Impact of recently issued accounting standards
In February 1997, the Securities and Exchange Commission issued Financial
Reporting Release No. 48, Disclosure of Accounting Policies for Derivative
Financial Instruments and Derivative Commodity Instruments and Disclosure of
Quantitative and Qualitative Information about Market Risk Inherent in
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments (FRR 48). FRR 48 requires clarification and expansion of
existing disclosures in the footnotes to the financial statements for derivative
financial instruments, other financial instruments and derivative commodity
instruments, as defined therein. These disclosures are required in filings that
include financial statements for periods ending after June 15, 1997 and,
accordingly, have been included herein in the footnotes to the Company's
financial statements for the year ended December 31, 1997.
Additionally, the amendments expand existing disclosure requirements to
include quantitative and qualitative discussions with respect to market risk
inherent in market risk sensitive instruments. These amendments are designed to
provide additional information about market risk sensitive instruments which
investors can use to better understand and evaluate market risk exposures of
registrants, including the
F-18
113
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company. These disclosures, subject to certain market capitalization
requirements, as defined, are effective for filings that include annual
financial statements for years ending after September 15, 1998.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income (SFAS 130), which establishes standards for the reporting and display of
comprehensive income and its components. This statement requires a separate
statement to report the components of comprehensive income for each period
reported. The provisions of this statement are effective for fiscal years
beginning after December 15, 1997. Management believes this statement will
require expanded disclosure in the Company's financial statements.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information (SFAS 131), which establishes standards for the way public business
enterprises report information about operating segments in annual financial
statements and requires those enterprises to report selected information about
operating segments in interim financial reports issued to shareholders. This
statement is effective for financial statements for periods beginning after
December 15, 1997. Management believes this statement will require expanded
disclosure in the Company's financial statements.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK.
At December 31, 1997 and 1996, the Company had significant amounts in banks
that were in excess of federally insured amounts.
The financial position of the Company at December 31, 1997 and 1996
includes certain financial instruments which may have a fair value that is
different from the value currently reflected on the financial statements. The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practical to estimate that value.
However, considerable judgment is necessary to interpret market data and develop
the related estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that could be realized upon
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Investments
Fair value is based on market prices for the last day of the period if the
investment trades on quoted exchanges. For non-traded investments, fair value
was estimated based on the underlying value of the investment.
Mortgage and other notes receivable
For adjustable rate mortgages, fair value approximates carrying value due
to the variable nature of the interest rates. For fixed rate mortgages, fair
value is determined based upon discounted cash flows from the note at rates
deemed reasonable for the type of note and prevailing market conditions,
appraisals and, if appropriate, current estimated net sales proceeds from
pending offers.
Collateralized notes payable, lines of credit, mortgage and other notes
payable
For adjustable rate debt, fair value approximates carrying value due to the
variable nature of the interest rates. For fixed rate debt, fair value is
determined based upon discounted cash flows for the debt at rates deemed
reasonable for the type of debt and prevailing market conditions and, if
appropriate, the length to maturity for the debt.
F-19
114
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following balances represent the carrying amount and fair value of the
Trust's financial instruments as of December 31, 1997 and 1996 (in thousands):
1997 1996
--------------------- -------------------
FOOTNOTE CARRYING FAIR CARRYING FAIR
REFERENCE AMOUNT VALUE AMOUNT VALUE
--------- ---------- ------- -------- -------
Investments............... Note 5 $ 1,451 $ --(4) $ 948 $ 2,085
Notes receivable.......... -- 35,255 --(2) 2,237 --(2)
Mortgage notes
receivable --
variable................ Note 14 10,344 --(1) 45,228 --(1)
Mortgage notes
receivable -- fixed..... Note 14 40,853 40,187(3) 45,513 47,800
Collateralized notes
payable and lines of
credit.................. Note 11 1,221,727 --(1) 422,334 --(1)
Mortgage and other notes
payable................. Note 12 217,567 --(1) 55,269 --(1)
The following balances represent the carrying amount and fair value of the
Corporation's financial instruments as of December 31, 1997 and 1996 (in
thousands):
1997 1996
--------------------- -------------------
FOOTNOTE CARRYING FAIR CARRYING FAIR
REFERENCE AMOUNT VALUE AMOUNT VALUE
--------- ---------- ------- -------- -------
Investments............... Note 5 $ 247 $ 253 $ -- $ --
Notes receivable.......... -- 601 601 693 693
Mortgage and other notes
payable................. Note 12 126,720 --(2) 1,963 --(1)
- ---------------
(1) The carrying value approximates fair value due to the interest rates being
variable or in line with market rates.
(2) The carrying value approximates fair value due to the short-term nature.
(3) These mortgage notes are collateralized by the hotel property which has a
fair value that is at least equal to the carrying value.
(4) The carrying value approximates fair value based on market prices and the
value of the underlying collateral.
4. INTANGIBLE ASSETS.
A summary of intangible assets at December 31 is as follows (in thousands):
TRUST CORPORATION
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
Organizational costs................ $ 3,541 $ 3,541 $ 3,541 $ 3,541
Management company.................. -- -- 14,500 --
Accumulated amortization............ (2,110) (1,373) (2,714) (1,373)
------- ------- ------- -------
Intangible assets, net.............. $ 1,431 $ 2,168 $15,327 $ 2,168
======= ======= ======= =======
5. INVESTMENTS.
For the year ended December 31, 1997, the Trust recorded a $1.2 million
gain (net of related expenses) realized in conjunction with the sale of
securities.
F-20
115
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
For the year ended December 31, 1996, the Trust recorded a $290,000 gain
(net of related expenses) realized in conjunction with the sale of securities
which were purchased in contemplation of acquiring a portfolio of hotel
properties and a $750,000 gain (net of related expenses) realized in connection
with the sale of securities.
6. ALLOWANCE FOR ACCOUNTS RECEIVABLE.
For the years ended December 31, 1997 and 1996, the Corporation recorded an
allowance for doubtful accounts of approximately $2.9 million and $1.5 million,
respectively.
7. INCOME TAXES.
The Trust has elected to be treated as a REIT under the provisions of the
Internal Revenue Code ("IRC") beginning with the 1995 year. As a result, the
Trust will not be subject to Federal income tax on its taxable income at
corporate rates to the extent it distributes annually 100% of its taxable income
to its shareholders and complies with certain other requirements.
Components of deferred income taxes for the Corporation as of December 31,
1997 and 1996 are as follows (in thousands):
1997 1996
-------- --------
Deferred income tax assets:
Net operating loss carryforwards..................... $ 7,574 $ 7,574
Investments in partnerships.......................... 2,725 2,725
Property and equipment............................... 3,669 745
Other................................................ 2,267 251
-------- --------
Total deferred income tax assets.................. 16,235 11,295
Valuation allowance.................................... (16,235) (11,295)
-------- --------
Net deferred income tax................................ $ -- $ --
======== ========
As of December 31, 1997, the Corporation had net operating loss carry
forwards ("NOL") for federal income tax purposes of approximately $22.3 million.
The NOL expires in various years beginning in 2006 through 2011.
The utilization of the Corporation's NOL will be limited by the provisions
of IRC Section 382. A valuation allowance is provided for the full amount of the
NOL as the realization of tax benefits from the NOL is not assured.
8. EXTRAORDINARY ITEMS.
During 1997, the Trust recognized an extraordinary loss of $4.4 million
before minority interest resulting from early extinguishment of debt. The
extraordinary loss represents financing costs associated with the Trust's then
existing indebtedness that was retired upon entering into a new $1.2 billion
credit facility (the "$1.2 Billion Facility").
During 1996, the Corporation repaid a note secured by the Milwaukee
Sheraton at a discount of approximately $1.5 million. As a result, the
Corporation recognized an extraordinary gain from early extinguishment of debt
of $1.5 million before minority interest.
Under the terms of a Credit Agreement dated January 28, 1993 (the "1993
Credit Agreement"), the Trust restructured its debt existing at such time.
Management concluded that restructuring represented a
F-21
116
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
"troubled debt restructuring" as defined under generally accepted accounting
principles and, accordingly, upon execution of the 1993 Credit Agreement,
accrued all known current or future identifiable debt restructuring costs as of
December 31, 1992. Upon execution of an Amended and Restated Credit Agreement
dated March 24, 1995 (the "1995 Credit Agreement"), the Realty Partnership
recognized extraordinary income of approximately $1.3 million relating to the
extinguishment of debt under the terms of the 1993 Credit Agreement,
representing the remaining amount of the accrual at March 24, 1995.
Additionally, in July 1995, the Realty Partnership repaid existing indebtedness
borrowed under the 1995 Credit Agreement and recorded an extraordinary charge to
net income of approximately $3.6 million relating to the extinguishment of such
debt.
9. LOAN RESTRUCTURING COSTS.
All restructuring costs in relation to the "troubled debt restructuring"
referred to in Note 8 were expensed as incurred. In 1993, upon execution of the
definitive debt restructuring agreement, $700,000 was paid by the Trust to
certain institutional lenders and approximately $4.0 million was added to the
loan balance under the terms of a credit agreement for restructuring costs due
the institutional lenders for legal and other experts. Previously accrued
restructuring costs of $611,000 were paid during the year ended December 31,
1995. As disclosed in Note 8 above, an additional $1.3 million of previously
accrued restructuring costs was recognized as extraordinary income during 1995.
At December 31, 1997 and 1996, there were no accrued loan restructuring costs
included in accounts payable and other liabilities.
10. SUPPLEMENTAL CASH FLOW DISCLOSURE.
Interest paid in cash by the Trust, net of amounts capitalized, for the
years ended December 31, 1997, 1996 and 1995 was approximately $55.7 million,
$21.5 million and $15.2 million, respectively. Interest paid in cash by the
Corporation in the years ended December 31, 1997, 1996 and 1995 was
approximately $16.5 million, $9.3 million and $1.3 million, respectively.
Dividends declared by the Trust in December 1997 and 1996 of approximately
$30.3 million and $19.3 million were paid in January 1998 and 1997,
respectively.
Interest expense incurred by the Corporation of approximately $3.0 million
on intercompany debt with the Trust was deferred in the year ended December 31,
1995.
A summary of non-cash items incurred by the Trust in the years ended
December 31, 1997, 1996 and 1995 is as follows:
Investing and operating activities
1997:
- Additional payments to the seller of the Westin Grand, Washington, DC,
of $3.0 million were accrued.
- Severance payments of $4.3 million, relating to the acquisition of HEI
Hotels L.L.C. and certain related hotels and management contracts (the
"HEI Portfolio"), were accrued.
Investing activities
1997:
- Approximately $2.1 million (net of $229,000 of accumulated depreciation)
in furniture, fixtures and equipment was received from the Corporation
increasing the intercompany payable by the same amount.
F-22
117
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1996:
- Approximately $3.9 million (net of $116,000 of accumulated depreciation)
in furniture, fixtures and equipment was received from the Corporation
increasing the intercompany payable by the same amount.
- Approximately $19.8 million in mortgage notes receivable (net of
discounts of $3.4 million and allowances of $224,000) was reclassified
in conjunction with the acquisition of the equity of the Westin Hotel,
Washington, DC.
- Approximately $7.3 million in collateralized notes receivable was issued
in conjunction with the sale of the King 8 Hotel & Casino.
1995:
- Approximately $7.2 million (net of accumulated depreciation) in
furniture, fixtures and equipment was transferred to the Corporation
increasing the intercompany receivable by the same amount.
Investing and financing activities
1997:
- Approximately $29.0 million in mortgage debt was assumed in conjunction
with the acquisition of the New Orleans Crowne Plaza Hotel.
- Approximately $10.3 million in mortgage debt was assumed and $137,000 of
mortgage notes receivable was reclassified in conjunction with the
acquisition of the Stamford Sheraton Hotel.
- Approximately $215.0 million in limited partnership units and Paired
Shares was issued in conjunction with the acquisition of the HEI
Portfolio.
- Approximately $9.4 million in limited partnership units was issued in
conjunction with the acquisition of the Nashville Hermitage Hotel.
- Acquisitions of hotel properties were adjusted by approximately $2.1
million representing the minority interest in the Westwood Marquis
hotel.
- Approximately $118.8 million in mortgage debt was assumed in conjunction
with the acquisition of the three Westin Regina Resorts in Mexico (the
"Westin Reginas").
1996:
- Approximately $1.7 million in partnership units were issued in
conjunction with the acquisition of the Days Inn and Doubletree Guest
Suites in Philadelphia, PA.
- A one-time grant of approximately $6.0 million in restricted stock was
made in conjunction with the acquisition of a portfolio of eight upscale
and luxury full-service hotels containing 3,141 total rooms acquired
from an institutional seller (the "Institutional Portfolio").
- Approximately $25.0 million in mortgage debt was assumed in conjunction
with the acquisition of the Boston Park Plaza hotel.
- Approximately $27.4 million in mortgage debt and $2.9 million in
accounts payable and other liabilities was assumed in conjunction with
the acquisition of the Doral Court and the Doral Tuscany.
F-23
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STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- Acquisitions of hotel properties of approximately $29.5 million were
reduced representing the minority interest in the Boston Park Plaza
hotel.
1995:
- In conjunction with the Reorganization in 1995, the Starwood Partners
contributed approximately $30.2 million (net of $474,000 of
depreciation) in land and buildings, approximately $49.2 million (net of
discounts of approximately $24.9 million and allowances of approximately
$2.9 million) in mortgage notes receivable and approximately $52.9
million (net of $6.0 million of debt forgiven by the Starwood Partners)
in long-term debt obligations for limited partnership units in the
Realty Partnership.
- A Starwood Partner exchanged approximately $12.0 million of senior debt
for partnership units of the Realty Partnership.
A summary of non-cash items incurred by the Corporation in the years ended
December 31, 1997, 1996 and 1995 is as follows:
Operating and financing activities
1997:
- In conjunction with the January 1998 acquisition of Westin Hotels &
Resorts Worldwide, Inc. ("Westin Hotels & Resorts") and certain
affiliates (collectively, "Westin" and such acquisition, the "Westin
Acquisition"), other assets including a wholly owned captive insurance
company and wholly owned payroll companies were purchased in December
1997 with a note payable to Westin Hotels & Resorts for approximately
$125.7 million (see Note 26 -- Subsequent Events).
Investing and financing activities
1997:
- Approximately $2.1 million (net of $229,000 of accumulated depreciation)
in furniture, fixtures and equipment was transferred to the Trust
increasing the intercompany receivable by the same amount.
- In conjunction with the acquisition of the Westin Regina Portfolio,
mortgage notes payable to the Trust increased by approximately $118.8
million.
1996:
- Approximately $3.9 million (net of $116,000 of accumulated depreciation)
in furniture, fixtures and equipment was transferred to the Trust
increasing the intercompany receivable by the same amount.
1995:
- In conjunction with the Reorganization in 1995, the Starwood Partners
contributed approximately $3.7 million (net of $757,000 of depreciation)
of furniture, fixtures and equipment for limited partnership units of
the Operating Partnership.
- A Starwood Partner exchanged approximately $12.0 million of senior debt
for partnership units of the Operating Partnership.
- Approximately $7.2 million (net of accumulated depreciation) in
furniture, fixtures and equipment was received from the Trust increasing
the intercompany payable by the same amount.
F-24
119
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. COLLATERALIZED NOTES PAYABLE AND REVOLVING LINES OF CREDIT.
The following is a summary of the Trust's credit facilities (the
"Facilities") as of December 31, 1997 and 1996 (in thousands):
AMOUNT AMOUNT
AMOUNT OF OUTSTANDING OUTSTANDING
FACILITY/LENDER EXPIRATION DATE FACILITY AT 12/31/97 AT 12/31/96 INTEREST TERMS
--------------- ------------------ ---------- ----------- ----------- -------------------------
$1.2 Billion Facility/Bankers Trust
Company............................. September 10, 2000 $1,200,000 $1,183,000 $ -- One-, two-, or
three-month LIBOR + 1.75%
Tax Exempt Bonds..................... October 2013 39,470 38,727 -- 6.70%
Goldman Facility/Goldman Sachs....... August 16, 1997 300,000 -- 140,000 One-month LIBOR + 1.75%
Acquisition Facility/Lehman
Brothers............................ October 1, 1998 135,000 -- 117,800 One-, two-, or
three-month LIBOR +
1.625%
Term Loan/Lehman Brothers............ April 26, 1997 93,960 -- 93,960 One-, two-, or
three-month LIBOR + 1.95%
for $23.96 million &
+1.75% for $70 million
Mortgage Facility/Lehman Brothers.... July 25, 1997 71,000 -- 70,600 One-month LIBOR + 1.75%
---------- ---------- --------
Totals............................... $1,839,430 $1,221,727 $422,360
========== ========== ========
FACILITY/LENDER COLLATERAL
--------------- -----------------------
$1.2 Billion Facility/Bankers Trust
Company............................. Unsecured
Tax Exempt Bonds..................... Westin Philadelphia and
Days Inn Philadelphia
Goldman Facility/Goldman Sachs....... Certain properties of
the Company
Acquisition Facility/Lehman
Brothers............................ Certain properties of
the Company
Term Loan/Lehman Brothers............ Certain properties of
the Company
Mortgage Facility/Lehman Brothers.... Certain mortgage loans
Totals...............................
At December 31, 1997 and 1996, unused commitments on the Facilities were
$17.0 million and $177.6 million, respectively.
At December 31, 1997, all Facilities outstanding at December 31, 1996 have
been repaid. At December 31, 1997, the only Facility that had covenants was the
$1.2 Billion Facility. This Facility required that the Company maintain a
specified debt service ratio, loan to value ratio, and minimum net worth. In
addition, the $1.2 Billion Facility placed restrictions on distributions and
required the Trust to maintain its REIT status. As of December 31, 1997 and
1996, the Company was in compliance with its covenants.
On May 27, 1997, the Company entered into an interest rate protection
agreement which had the effect of fixing the base rate of interest at 6.773% for
debt with an aggregate notional principal amount of $100 million and a term to
maturity of five years. On October 10, 1997, the Company rolled this position to
January 30, 1998, which had the effect of fixing the base rate of interest at
6.9105%. The actual interest rate was to be determined by reference to this base
rate. As of December 31, 1997, the Company determined that it did not intend to
issue debt using this treasury lock agreement and, accordingly, accrued $6.6
million. In January 1998, the Company settled this treasury lock agreement.
On July 29, 1997, the Company rolled a previously transacted interest rate
protection agreement to January 30, 1998, which had the effect of fixing the
base rate of interest at 6.09725% for debt that the Company intended to issue in
the first quarter of 1998 with an aggregate notional principal amount of $100
million and a term to maturity of seven years. The actual interest rate was to
be determined by reference to this base rate. As of December 31, 1997, the
Company determined that it did not intend to issue debt using this treasury lock
agreement and, accordingly, accrued $3.2 million. In January 1998, the Company
settled this treasury lock agreement.
On July 29, 1997, the Company rolled a previously transacted interest rate
protection agreement to January 30, 1998, which had the effect of fixing the
base rate of interest at 6.95% for debt that the Company intended to issue in
the first quarter of 1998 with an aggregate notional principal amount of $150
million and a term to maturity of ten years. The actual interest rate was to be
determined by reference to this base rate. As
F-25
120
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of December 31, 1997, the Company determined that it did not intend to issue
debt using this treasury lock agreement and, accordingly, accrued $15.2 million.
In January 1998, the Company settled this treasury lock agreement.
12. MORTGAGE AND OTHER NOTES PAYABLE.
At December 31, 1997 and 1996, the Trust had the following outstanding
mortgage and other notes payable (in thousands):
FACILITY/LENDER DUE DATE 1997 1996 INTEREST TERMS
--------------- -------------- -------- ------- -------------------------
Bancomer Note/
Bancomer SA......... May 1998 $118,750 $ -- One-, two- or three-month
LIBOR + 1.69%
Crowne Plaza Note/
Hibernia National
Bank................ September 2002 29,000 -- One-month LIBOR + 2.00%
Doral Mortgage/
Sumitomo............ September 2001 27,375 27,375 7.64%
BPP Mortgage/ Georgia
Life................ July 2003 24,797 25,000 8.42%
Stamford Note/ Lehman
Brothers............ January 2000 10,250 -- One-month LIBOR + 2.25%
Term Note/Westin
Hotels & Resorts.... November 1999 7,395 2,830 Non-interest bearing
Other................. -- 64 Various
-------- -------
Total Mortgage and
Other Notes
Payable............. $217,567 $55,269
======== =======
The Company intends to extend the terms of the Bancomer Note due in May
1998 or refinance this facility.
Minimum principal payments on the Trust's indebtedness for the years ending
December 31 are due as follows (in thousands):
1998 1999 2000 2001 2002 THEREAFTER
-------- ------ ------- ------- ------- ----------
Total........................... $119,274 $7,965 $10,870 $28,049 $29,733 $21,676
At December 31, 1997 and 1996, the Corporation had the following
outstanding mortgage and other notes payable (in thousands):
FACILITY/LENDER DUE DATE 1997 1996 INTEREST TERMS
--------------- ------------ -------- ------ --------------
Westin Hotels & Resorts.................. January 1998 $125,657 $ -- 6.00%
First Mortgage Note...................... 1997 -- 341 9.75%
Other Notes Payable...................... 69 449 Various
Capital Leaseholds....................... 994 1,173 Various
-------- ------
Total Mortgage and Other Notes Payable... $126,720 $1,963
======== ======
F-26
121
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Minimum lease and principal payments on the Corporation's indebtedness for
the years ending December 31 are due as follows (in thousands):
MINIMUM FUTURE PRINCIPAL PAYMENTS
YEAR LEASE PAYMENTS DUE UNDER NOTES
---- -------------- ------------------
1998........................................ $ 244 $125,726
1999........................................ 244 --
2000........................................ 244 --
2001........................................ 100 --
2002........................................ 100 --
Thereafter.................................. 400 --
------ --------
Total............................. 1,332 $125,726
========
Amount representing interest................ (338)
------
Future minimum lease payments............... $ 994
======
At December 31, 1997 and 1996, the Corporation had approximately $1.2
million in assets (less $388,000 and $233,000, respectively, in accumulated
amortization) recorded under capital leaseholds. Such amounts are included in
furniture, fixtures and equipment.
13. SALES OF REAL ESTATE INVESTMENTS AND RESERVE FOR LOSSES.
During the year ended December 31, 1997, the Company sold its interests in
four hotel assets: the Radisson Marque Hotel located in Winston-Salem, North
Carolina; the Best Western located in Las Cruces, New Mexico; the Best Western
Airport located in El Paso, Texas; and the Best Western located in Savannah,
Georgia. The Radisson Marque was sold for approximately $7.6 million in cash
recognizing a loss of approximately $614,000. The Las Cruces, El Paso and
Savannah properties were sold concurrent with the Company's acquisition of the
Crowne Plaza Hotel in New Orleans, Louisiana, for approximately $12.0 million in
cash recognizing a loss of approximately $314,000.
For the year ended December 31, 1997, the Trust recognized a gain of $3.2
million on sales of real estate investments including $2.5 million resulting
from the payoff of the mortgage notes receivable relating to properties located
in Atlantic City, New Jersey, and $322,000 resulting from the payoff of the
mortgage note receivable relating to a property located in Milpitas, California.
For the year ended December 31, 1997, the Corporation recognized a gain of $3.9
million on sales of real estate investments including $4.5 million resulting
from the payoff of notes receivable relating to a property located in Milpitas,
California.
For the year ended December 31, 1997, the Trust accrued a loss of $1.8
million on three of its hotels held for sale at December 31, 1997. The loss was
calculated by subtracting the offer amount from the net book value of the hotel
assets. These hotels were subsequently sold in February 1998.
During the year ended December 31, 1996, the Company sold its interests in
three hotel assets: the Best Western Columbus North located in Columbus, Ohio;
the Bourbon Street Hotel & Casino located in Las Vegas, Nevada; and the King 8
Hotel & Casino located in Las Vegas, Nevada. The Columbus property was sold for
an all cash price of approximately $3.1 million. The Bourbon Street property was
sold for an all cash price of $7.6 million. The King 8 Hotel & Casino real
property was sold for $18.8 million, consisting of $11.6 million in cash and a
$7.2 million promissory note collateralized by the hotel and the casino. The
note bears interest at 13.5% per annum through November 5, 1997, 14.5% per annum
through November 5, 1998, 15.5% per annum through November 5, 1999 and 16.5% per
annum thereafter. Accrued interest on the note is due monthly with all unpaid
principal and accrued interest due in May 2000. The $7.2 million note was repaid
F-27
122
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
in 1997. The personal property and casino equipment of the King 8 Hotel & Casino
will be sold for approximately $3.0 million to the hotel purchaser following
receipt by the purchaser of required gaming approvals. A subsidiary of the
Corporation, Hotel Investors Corporation of Nevada, leases the real property
from the purchaser and has agreed to continue to operate the hotel and casino to
the earlier of when the purchaser or his designee obtains required gaming
licenses and approvals or June 30, 1998.
During the year ended December 31, 1996, the Company sold an office
building adjacent to the Doubletree Guest Suites located in Lexington, Kentucky,
for an all cash price of approximately $675,000.
For the year ended December 31, 1996, the Trust recognized a gain of
approximately $4.3 million and the Corporation recognized no gain or loss on
sales of real estate investments.
During the year ended December 31, 1995, the Company did not sell any of
its real estate investments. 14. MORTGAGE NOTES RECEIVABLE.
A summary of the Trust's mortgage notes receivable at December 31 is as
follows (in thousands):
1997 1996
-------------------------------- --------------------------------
FIXED(1) VARIABLE(2) TOTAL FIXED(1) VARIABLE(2) TOTAL
-------- ----------- ------- -------- ----------- -------
First mortgage............... $40,953 $10,344 $51,297 $45,479 $45,228 $90,707
Second, third, fourth
mortgage................... -- -- -- 134 -- 134
Allowance for loan loss...... (100) (100)
------- -------
Total.............. $51,197 $90,741
======= =======
Aggregate principal payments under the mortgage notes receivable at
December 31, 1997 are as follows (in thousands):
1998 1999 2000 2001 2002 THEREAFTER
------ ------- ------ ------ ------- ----------
Total.................... $7,429 $15,231 $3,664 $3,966 $31,213 $1,492
- ---------------
(1) The fixed rate first mortgages had interest rates ranging from 8.0% to 10.0%
per annum at December 31, 1997 and 1996. The one fixed rate second mortgage
note had an interest rate of 7.0% per annum at December 31, 1996.
(2) The variable first mortgages had an interest rate of 6.97% per annum at
December 31, 1997 and 6.81% to 13.5% per annum at December 31, 1996.
15. MILWAUKEE SHERATON.
In December 1985, the Trust sold its interest in the Milwaukee Sheraton to
Milwaukee Brookfield Limited Partnership ("Brookfield"). In connection with the
sale, the Trust received a second mortgage note from Brookfield.
In July 1991, ownership and operation of the Milwaukee Sheraton was
reorganized and ownership of the hotel was transferred from Brookfield to
Moorland Hotel Limited Partnership ("MHLP"), a limited partnership in which the
Corporation (the sole general partner) at such time had a 51% interest and
Brookfield (the sole limited partner) at such time had the remaining 49%
interest. The operations of MHLP have been consolidated into the Corporation's
financial statements from the date of reorganization, and accordingly, the Trust
has recorded the notes receivable from MHLP as notes receivable from the
Corporation (see accompanying Schedule IV). The Corporation and MHLP entered
into an agreement for the Corporation to manage the property.
F-28
123
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During 1996, the Corporation purchased the remaining 49% interest in MHLP
for $240,000 and assumed all outstanding MHLP debt. Also in 1996, the
Corporation negotiated the repayment of all third-party debt at a discount of
$1.5 million. As a result, the Corporation recorded an extraordinary gain from
early extinguishment of debt (see Extraordinary Items in Note 8).
16. HOTEL PROPERTIES.
A summary of hotel assets at December 31 is as follows (in thousands):
TRUST CORPORATION
------------------------ --------------------
1997 1996 1997 1996
---------- ---------- -------- --------
Land......................... $ 354,901 $ 164,472 $ 22,311 $ 3,111
Buildings and improvements... 1,797,944 807,918 246,069 93,876
Furniture, fixtures and
equipment.................. 261,584 85,717 115,692 68,395
Construction in progress..... 61,737 16,939 19,679 3,525
Accumulated depreciation and
amortization............... (161,459) (70,654) (85,038) (47,769)
Reserve for losses........... (4,169) (3,469) (388) (388)
---------- ---------- -------- --------
Hotel assets -- net..... $2,310,538 $1,000,924 $318,325 $120,750
========== ========== ======== ========
17. REAL ESTATE INVESTMENTS AND INTERCOMPANY TRANSACTIONS.
At December 31, 1997, the Trust owned equity interests in 96 hotels. Of
that number, ninety properties were owned in fee and six were held pursuant to
long-term leases.
Ninety-three of the Trust's hotels are leased to the Corporation.
As of December 31, 1997, three hotels were leased to and operated by
Imperial Hotels Corporation, formerly Vagabond Inns, Inc. pursuant to ground
leases. These hotels were subsequently sold in February 1998. As of December 31,
1997, five of the hotels leased by the Corporation from the Trust were managed
by third-party operators. The management agreements are for various terms,
expiring between 1999 and 2009, and are subject to certain cancellation
provisions. One management agreement has management fees calculated as a
percentage of operating profit, whereas the other agreements provide for base
management fees that range from 3% to 3.5% of gross revenues with incentive
management fees based upon hotel profitability.
The leases between the Trust and the Corporation are generally long-term
and provide for annual base, or minimum rents, plus contingent, or percentage
rents based on the gross revenues of the properties and are accounted for as
operating leases. The leases are "triple-net" in that the lessee is generally
responsible for paying all operating expenses of the properties, including
maintenance, insurance and real property taxes. Total rental expense paid by the
Corporation to the Trust under such leases was approximately $234.5 million,
$87.6 million and $26.7 million for the years ended December 31, 1997, 1996 and
1995, respectively, of which approximately $98.9 million, $26.8 million and $5.4
million was contingent. The lessee is also generally responsible for any
payments required pursuant to underlying ground leases.
The Trust's minimum future rents at December 31, 1997 to be received under
non-cancelable operating leases for the years ending December 31 are as follows
(in thousands):
1998 1999 2000 2001 2002 THEREAFTER
-------- -------- ------- ------- ------ ----------
Corporation.......... $218,912 $201,983 $98,662 $19,548 $7,570 $23,949
-------- -------- ------- ------- ------ -------
Total........... $218,912 $201,983 $98,662 $19,548 $7,570 $23,949
======== ======== ======= ======= ====== =======
F-29
124
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Corporation's minimum future rents at December 31, 1997 to be received
under non-cancelable operating leases for the years ending December 31 are as
follows (in thousands):
1998 1999 2000 2001 2002 THEREAFTER
------ ------ ------ ---- ---- ----------
Other......................... $2,378 $1,882 $1,551 $837 $550 $1,933
------ ------ ------ ---- ---- ------
Total.................... $2,378 $1,882 $1,551 $837 $550 $1,933
====== ====== ====== ==== ==== ======
The Corporation's minimum future rents at December 31, 1997 payable under
non-cancelable operating leases for the years ended December 31 are as follows
(in thousands):
1998 1999 2000 2001 2002 THEREAFTER
-------- -------- -------- ------- ------ ----------
Trust................ $218,912 $201,983 $ 98,662 $19,548 $7,570 $23,949
Other................ 4,589 3,389 2,692 2,144 1,927 72,486
-------- -------- -------- ------- ------ -------
Total........... $223,501 $205,372 $101,354 $21,692 $9,497 $96,435
======== ======== ======== ======= ====== =======
The Corporation is committed under its leases with the Trust to pay the
rents payable with respect to ground leases which expire in 1999 through 2067,
including renewal options. The ground leases generally provide for a minimum
rent plus a percentage of gross revenues of the properties in excess of the
minimum rent. Future minimum lease payments under the ground leases are included
in other rents payable in the table above. The Trust is the primary obligor
under the leases; however, the Corporation as lessee/operator of the hotels
makes payments under these leases directly to the lessors. Rent expense incurred
by the Corporation as a lessee/operator under these ground leases was
approximately $2.0 million, $871,000 and $739,000 in the years ended December
31, 1997, 1996 and 1995, respectively.
The Corporation leases certain equipment for the hotel's operations under
various lease agreements. The leases extend for varying periods through 2014 and
generally are for a fixed amount each month. Future minimum lease payments under
the non-cancelable operating leases are also included in other rents payable in
the table above.
The Trust's rents receivable from leased hotel properties at December 31
are summarized as follows (in thousands):
1997 1996 1995
------- ---- ----
Corporation:
Minimum....................................... $16,666 $ -- $ --
Contingent.................................... 4,240 510 --
------- ---- ----
20,906 510 --
------- ---- ----
Other:
Contingent.................................... 413 373 362
------- ---- ----
413 373 362
------- ---- ----
Total.................................... $21,319 $883 $362
======= ==== ====
F-30
125
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Corporation's indebtedness to the Trust at December 31,
1997 and 1996 is as follows (in thousands):
FOOTNOTE
REFERENCE 1997 1996
--------- -------- --------
Intercompany Mortgage Notes:
Doral Lease Obligation............................ Note 17 $ 40,250 $ 40,250
MHLP Mortgage Notes............................... Note 15 31,785 29,611
Midland Hotel..................................... 19,975 18,216
Westin Regina Resort -- Cancun.................... 42,335 --
Westin Regina Resort -- Los Cabos................. 54,693 --
Westin Regina Resort -- Puerto Vallarta........... 25,327 --
Turnberry Hotel and Golf Resort................... 27,067 --
-------- --------
Total Intercompany Mortgage Notes......... 241,432 88,077
General Intercompany Notes.......................... 80,178 17,741
-------- --------
Total Intercompany Indebtedness........... $321,610 $105,818
======== ========
Effective January 1, 1995, the general intercompany notes bear interest at
prime plus 2% with interest payable monthly and are due on January 1, 2000.
On September 20, 1995, the Realty Partnership purchased land for $3.0
million and mortgage notes receivable collateralized by the Doral Inn for $40.3
million. The mortgage note bears interest at 9.5% and matures on October 1,
2006. The Realty Partnership also entered into a long-term lease agreement with
SBK Delaware Realty Holdings, L.L.C. ("SBK"), the owners of the Doral Inn, to
lease SBK the land for $240,000 per year. Simultaneously, the Operating
Partnership entered into a long-term lease agreement with SBK to lease the land
and the building for $240,000 per year, plus the debt service on the mortgage
held by the Realty Partnership. The Operating Partnership lease agreement
includes a clause under which SBK is paid a management fee of 0.5% of gross
revenues. Under certain circumstances, SBK may be entitled to a share of hotel
profits above certain thresholds. The Realty Partnership has the option of
acquiring the building for the value of the mortgage note plus $400,000 after
ten years. It is management's intention to exercise that option. The Operating
Partnership has recorded the transaction as a capitalized lease with an
intercompany obligation to the Realty Partnership.
18. STOCK-BASED COMPENSATION AND EMPLOYEE BENEFITS.
Warrants to purchase Paired Shares
In 1996, two restricted stock awards were granted in the form of warrants
to purchase 22,500 Paired Shares each at an exercise price of $0.67. The Company
recognized $515,000 and $500,000 in compensation expense during 1997 and 1996,
respectively, related to the grant of these warrants. The warrants were
exercised in 1997.
At December 31, 1995, there were outstanding 414,993 warrants to purchase
Paired Shares at an exercise price of $67.80 per Paired Share through September
15, 1996. At the expiration date, each 100 warrants were convertible into one
Paired Share. Pursuant to the warrant agreement, the warrants were converted
into 3,954 Paired Shares and 196 fractional warrants were paid in cash at the
then current market value of a single Paired Share.
F-31
126
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Restricted stock awards
The Company recognized approximately $2.2 million and $811,000 in
compensation expense during 1997 and 1996, respectively, related to the grant of
218,714 restricted stock awards granted in 1996 with a weighted average fair
value at the date of grant of $23.60 with a three-year vesting period.
In 1996, the Company granted a restricted stock award of 250,870 Paired
Shares in connection with the acquisition of the Institutional Portfolio. Such
restricted stock award vests as to two-thirds of such amount on August 12, 1997
and as to the remaining amount on August 12, 1998. The fair value of the
restricted stock (approximately $6 million based on the Paired Share closing
price on the date of award) at the date of grant was capitalized to hotel
assets.
Share option plans
The Trust and the Corporation each adopted Incentive and Non-Qualified
Share Option Plans in 1986 which provided for the purchase of up to an aggregate
of 175,000 Paired Shares by Trustees, Directors, officers and employees pursuant
to option grants. During the year ended December 31, 1995, the Trust and the
Corporation granted options to purchase 85,338 Paired Shares at exercise prices
ranging from $11.00 to $14.50 per Paired Share. Such options, which have
exercise prices equal to the Paired Shares' fair market value on the date of
grant, vest over three years.
During 1995, the Trust and the Corporation each also adopted a 1995 Share
Option Plan (the "Plans") which provided for the purchase of Paired Shares by
Trustees, Directors, officers, employees, consultants and advisors, pursuant to
option grants. The aggregate number of Paired Shares subject to options which
were available to be granted under the Plans was approximately 2.4 million plus
8% of any additional partnership units or Paired Shares issued subsequent to
August 17, 1995 (other than Paired Shares issued in exchange for partnership
units, Paired Shares issued pursuant to employee benefit plans or Paired Shares
that were previously issued and re-acquired by the Trust or the Corporation).
During 1996, the Trust and the Corporation each adopted an amendment and
restatement of their respective 1995 Share Option Plans (as amended, the
"LTIPs"). The LTIPs increased the number of Paired Shares which may be issued
pursuant to awards granted under each LTIP to approximately 6.4 million and
provided for the grant of Paired Shares that are subject to performance measures
or restriction periods and performance awards in tandem with certain Paired
Options to be paid in cash subject to performance measures. The LTIPs also
reduced the automatic annual grant of Paired Options (as defined) to Trustees
and Directors from options for 9,000 Paired Shares to options for 4,500 Paired
Shares and provides for the annual fee of Trustees and Directors to be paid in
Paired Shares, subject to each Trustee's and Director's option to receive up to
half in cash and to defer receipt of such annual fee until after terminating
service with the Company.
During 1997, the Trust and the Corporation each adopted a further amendment
and restatement of their respective LTIPs. The LTIP amendments increased the
number of Paired Shares for which awards may be granted under each LTIP to
approximately 9.85 million.
Under the provisions of SFAS 123, no compensation cost has been recognized
for the Company's stock option plans. However, had compensation cost for the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the method of
SFAS 123, the Company's net income and earnings per Paired Share would have been
reduced to the pro forma amounts indicated below.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for 1997 and 1996, respectively (the
F-32
127
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
statement is effective for grants starting in 1995): dividend yield of 3.96% and
3.9%, expected volatility of 30.36% and 57.21%, risk-free interest rate of U.S.
zero coupon bonds with time to maturity approximately equal to the options'
average time to exercise, and expected lives of the full vesting period for each
option.
COMBINED COMBINED
1997 1996
-------- --------
Net Income (in thousands)
Pro forma.............................................. $25,677 $16,908
Earnings per Paired Share
Pro forma.............................................. $ 0.56 $ 0.57
Earnings per Paired Share Assuming Dilution
Pro forma.............................................. $ 0.53 $ 0.56
During the years ended December 31, 1997 and 1996, the Trust and the
Corporation granted options under the LTIPs to purchase approximately 1.7
million and 2.9 million Paired Shares, respectively, to Trustees, Directors,
officers and employees, at exercise prices ranging from $34.75 to $57.44 and
$15.33 to $26.50 per Paired Share during 1997 and 1996, respectively. At
December 31, 1997, outstanding options granted under all plans of the Trust and
Corporation (including options granted to officers and directors of a company
previously acquired by the Trust) aggregated approximately 5.6 million Paired
Shares. At December 31, 1997, options for approximately 1.9 million Paired
Shares were fully vested with exercise prices ranging from $11.00 to $61.50 per
Paired Share.
A summary of the Company's stock option activity and related information
for the years ended December 31 follows:
1997 1996 1995
--------------------------- --------------------------- ---------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
(000'S) EXERCISE PRICE(1) (000'S) EXERCISE PRICE(1) (000'S) EXERCISE PRICE(1)
------- ----------------- ------- ----------------- ------- -----------------
Outstanding --
beginning of
year............... 4,195 $21.06 1,503 $15.70 38 $20.46
Granted.............. 1,716 $43.57 2,890 $23.60 1,485 $15.45
Exercised............ (203) $17.12 (99) $11.96 (16) $ 4.66
Cancellations........ (129) $27.96 (99) $22.85 (4) $15.33
----- ----- -----
Outstanding -- end of
year............... 5,579 $26.78 4,195 $21.06 1,503 $15.70
===== ===== =====
Exercisable -- end of
year............... 1,877 $22.21 681 $17.39 195 $16.63
===== ===== =====
- ---------------
(1) The weighted average exercise price equals weighted average fair value at
date of grant as all options were granted at fair market value on the date
of grant.
F-33
128
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's outstanding and exercisable options and related
information at December 31, 1997 follows:
OPTIONS OUTSTANDING
--------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVERAGE --------------------------
RANGES OF OPTIONS REMAINING WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
EXERCISE PRICES (000'S) CONTRACTUAL LIFE EXERCISE PRICE (000'S) EXERCISE PRICE
- --------------- ------- ---------------- ---------------- ------- ----------------
$ 0.00 - $15.33 1,061 7.30 $15.32 757 $15.32
$16.25 - $22.92 721 7.99 $21.20 291 $20.72
$23.92 - $23.92 1,687 8.61 $23.92 325 $23.92
$24.25 - $38.50 1,345 8.35 $33.22 444 $30.66
$40.63 - $61.50 765 9.65 $50.98 60 $44.44
----- -----
5,579 8.37 $26.78 1,877 $22.21
===== =====
401(k) savings plan
Effective April 1, 1997, the Company implemented the Star Saver 401(k)
savings plan ("401(k) Plan"), which is a voluntary, defined contribution plan.
All employees are eligible to participate in the 401(k) Plan following
completion of one year of continuous service with the Company. Each participant
may contribute on a pre-tax basis between 1% and 15% of such participant's
compensation. The Company makes matching contributions on the participant's
behalf equal to 100% of each dollar contributed by the participant up to the
first 2% of the participant's compensation plus 50% of each dollar contributed
by the participant up to an additional 2% of the participant's compensation. The
Company made matching contributions of approximately $1.6 million for the year
ended December 31, 1997.
19. SHAREHOLDERS' EQUITY.
Preferred shares
The Corporation has 10.0 million authorized preferred shares, $0.01 par
value, none of which were issued or outstanding at December 31, 1997.
The Offerings
At December 31, 1997 and 1996, minority interest includes the 18.8% and
18.2%, respectively, limited partnership interests of the Realty Partnership and
the Operating Partnership, the 41.8% limited partnership interest in the joint
venture that owns the Boston Park Plaza, and various other interests in joint
ventures. The minority interest is adjusted to its relative ownership interest
at year end by reclassification from additional paid-in capital. The total
number of units outstanding were approximately 63.3 million and 49.0 million at
December 31, 1997 and 1996, respectively.
On March 26, 1997, the Company completed a public offering of 3.0 million
Paired Shares (the "March 1997 Offering"). Net proceeds of approximately $130.0
million were contributed by the Trust and the Corporation to the Realty
Partnership and the Operating Partnership, respectively.
On October 2, 1997, the Company sold approximately 2.5 million Paired
Shares (the "October 1997 Direct Placement") to a group of institutional buyers
in a direct placement. Net proceeds of approximately $131.6 million were
contributed by the Trust and the Corporation to the Realty Partnership and the
Operating Partnership, respectively.
On October 15, 1997, the Company sold approximately 2.2 million Paired
Shares (the "UBS Shares") to Union Bank of Switzerland ("UBS") in a private
placement (the "October 1997 UBS Placement" and
F-34
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STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
together with the March 1997 Offering and the October 1997 Direct Placement, the
"1997 Offerings"). Net proceeds of approximately $125.0 million were contributed
by the Trust and the Corporation to the Realty Partnership and the Operating
Partnership, respectively.
Separately, the Company entered into a Forward Stock Agreement with UBS.
(See Note 20 -- Commitments and Contingencies).
On April 12, 1996, the Company completed a public offering of 3.0 million
Paired Shares (the "April 1996 Offering"). Net proceeds of the April 1996
Offering of approximately $62.4 million were contributed by the Trust and the
Corporation to the Realty Partnership and the Operating Partnership,
respectively.
On August 12, 1996, the Company completed a public offering (the "August
1996 Offering") of 16.2 million Paired Shares at a price of $23.92 per Paired
Share. Net proceeds of approximately $367.2 million were contributed by the
Trust and the Corporation to the Realty Partnership and the Operating
Partnership, respectively.
On July 6, 1995, the Company completed a public offering (the "1995
Offering") of 17.7 million Paired Shares at a price of $15.33 per Paired Share.
Net proceeds of the 1995 Offering of approximately $245.7 million were
contributed by the Trust and the Corporation to the Realty Partnership and the
Operating Partnership, respectively.
F-35
130
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Earnings per share
The following sets forth the computation of basic and diluted earnings per
share for the years ended December 31 (in thousands except per share data):
1997 1996 1995
----------------------------------- ----------------------------------- ---------------------
COMBINED(1) TRUST CORPORATION COMBINED(1) TRUST CORPORATION COMBINED(1) TRUST
----------- ------- ----------- ----------- ------- ----------- ----------- -------
NUMERATOR:
Numerator for basic and
diluted earnings per
share/Paired
Share -- income (loss)
before extraordinary
items...................... $41,524 $50,747 $(9,223) $25,874 $33,589 $(7,715) $11,125 $12,864
Extraordinary items.......... (3,452) (3,452) -- 1,077 -- 1,077 (2,155) (2,155)
------- ------- ------- ------- ------- ------- ------- -------
Numerator for basic and
diluted earnings per
share/Paired Share --income
(loss) from continuing
operations................. $38,072 $47,295 $(9,223) $26,951 $33,589 $(6,638) $ 8,970 $10,709
======= ======= ======= ======= ======= ======= ======= =======
DENOMINATOR:
Denominator for basic
earnings per share/Paired
Share -- weighted-average
shares..................... 46,022 46,022 46,022 29,204 29,204 29,204 11,657 11,657
Effect of dilutive
securities:
Employee stock
options(2)............... 2,310 2,310 -- 557 557 -- 53 53
Restricted stock awards.... 329 329 -- 85 85 -- -- --
Deferred stock grants...... 2 2 -- -- -- -- -- --
Warrants................... -- -- -- 38 38 -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Dilutive potential common
shares..................... 2,641 2,641 -- 680 680 -- 53 53
Denominator for earnings per
share/Paired Share assuming
dilution................... 48,663 48,663 46,022 29,884 29,884 29,204 11,710 11,710
======= ======= ======= ======= ======= ======= ======= =======
Earnings (loss) per
share/Paired Share before
extraordinary items........ $ 0.90 $ 1.10 $ (0.20) $ 0.88 $ 1.15 $ (0.26) $ 0.95 $ 1.10
Earnings (loss) per
share/Paired Share from
continuing operations...... $ 0.83 $ 1.03 $ (0.20) $ 0.92 $ 1.15 $ (0.22) $ 0.77 $ 0.92
Earnings (loss) per
share/Paired Share before
extraordinary items
assuming dilution.......... $ 0.85 $ 1.04 $ (0.20) $ 0.86 $ 1.12 $ (0.26) $ 0.95 $ 1.10
Earnings (loss) per
share/Paired Share from
continuing operations
assuming dilution.......... $ 0.78 $ 0.97 $ (0.20) $ 0.90 $ 1.12 $ (0.22) $ 0.77 $ 0.92
1995
-----------
CORPORATION
-----------
NUMERATOR:
Numerator for basic and
diluted earnings per
share/Paired
Share -- income (loss)
before extraordinary
items...................... $(1,739)
Extraordinary items.......... --
-------
Numerator for basic and
diluted earnings per
share/Paired Share --income
(loss) from continuing
operations................. $(1,739)
=======
DENOMINATOR:
Denominator for basic
earnings per share/Paired
Share -- weighted-average
shares..................... 11,657
Effect of dilutive
securities:
Employee stock
options(2)............... --
Restricted stock awards.... --
Deferred stock grants...... --
Warrants................... --
-------
Dilutive potential common
shares..................... --
Denominator for earnings per
share/Paired Share assuming
dilution................... 11,657
=======
Earnings (loss) per
share/Paired Share before
extraordinary items........ $ (0.15)
Earnings (loss) per
share/Paired Share from
continuing operations...... $ (0.15)
Earnings (loss) per
share/Paired Share before
extraordinary items
assuming dilution.......... $ (0.15)
Earnings (loss) per
share/Paired Share from
continuing operations
assuming dilution.......... $ (0.15)
For the Corporation, the following dilutive securities were not included in
the computation of earnings per share assuming dilution because the effect would
have been antidilutive (in thousands):
1997 1996 1995
----- ---- ----
Employee stock options(2).............................. 2,310 557 53
Restricted stock awards................................ 329 85 --
Deferred stock grants.................................. 2 -- --
Warrants............................................... -- 38 --
----- --- --
Total antidilutive securities for the
Corporation................................ 2,641 680 53
===== === ==
F-36
131
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
For additional disclosures regarding stock-based compensation, see Note 18.
- ---------------
(1) The individual amounts with respect to the Trust and the Corporation do not
add to the Combined amounts in the computation of earnings per share
assuming dilution due to the exclusion of antidilutive securities for the
Corporation.
(2) For 1997, 169,576 antidilutive weighted shares/Paired Shares have been
excluded.
20. COMMITMENTS AND CONTINGENCIES.
Year 2000
Many computer systems were originally designed to recognize calendar years
by their last two digits. Calculations performed using these shortened fields
may not work properly with dates from the year 2000 and beyond. The Company is
undertaking a review and an evaluation of its existing computerized systems as
part of a program to bring all such systems into Year 2000 compliance. As a part
of this evaluation, the Company expects that its central reservation system will
be Year 2000 compliant by the end of the third quarter of 1998. The Company is
also communicating with vendors of the Company's third-party software to obtain
Year 2000 compliance certification. The Company expects, to the extent
necessary, to either modify or upgrade third-party software to ensure Year 2000
compliance.
The Company has not yet determined the total cost of modifications to its
computerized systems; however, based upon the review and evaluations conducted
to date, the Company believes the costs associated with this process will not
have a material adverse effect on the Company's results of operations or
liquidity.
Stock commitment
In October 1997, the Company entered into a Forward Stock Agreement with
UBS (the "UBS Price Adjustment Agreement"). The UBS Price Adjustment Agreement
provides for a settlement payment to be made, in the form of Paired Shares, by
the Company to UBS, or by UBS to the Company, based on the market price of the
UBS Shares over a specified unwind period, as compared to a "Forward Price" (as
defined, but essentially equal to $57.25 per Paired Share, plus an implicit
interest factor less dividends declared on the UBS Shares, in each case during
the term of the UBS Price Adjustment Agreement).
The Company has the right at any time during a preliminary term of one year
to elect to deliver or receive Paired Shares in settlement of the UBS Price
Adjustment Agreement. The Company has the further right, but not the obligation,
to settle by repurchasing for cash all of the UBS Shares at the Forward Price.
The Company has the obligation to settle the UBS Price Adjustment Agreement at
the end of one year unless UBS agrees to extend its term. UBS has the right to
cause an earlier settlement upon the occurrence of certain events of default or
a substantial decline in the market price of the Paired Shares. The Company has
the right under the UBS Price Adjustment Agreement to settle the Company's
obligation (if any) by making a cash payment, but cannot compel UBS to settle
UBS's obligation through the payment of cash to the Company.
In the event that at various quarterly dates during the term of the UBS
Price Adjustment Agreement the Forward Price is higher than the then current
market price of the Paired Shares, the Company is obligated to deliver
additional Paired Shares (or at the Company's election, cash) to UBS to be held
as security for the Company's settlement obligation. In February 1998, the
Company paid $7,835,000 to UBS as such security. The Company may, prior to April
15, 1998, deliver Paired Shares to UBS and receive the \return of the Company's
cash deposit. Any and all Paired Shares delivered as security will be issued and
outstanding when delivered and will adjust the Forward Price in accordance with
the formula contained in the UBS Price Adjustment Agreement.
F-37
132
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Upon final settlement of the UBS Price Adjustment Agreement, the Company is
obligated to pay a placement fee based on the amount of the net stock
settlement, if any, as well as an unwind accretion fee equal to one-half of the
settlement amount multiplied by an interest factor calculated for the number of
actual days the UBS Price Adjustment Agreement was in effect prior to final
settlement.
The Company is required to cause to be registered under the Securities Act
of 1933 for resale by UBS, the Paired Shares sold to UBS on October 15, 1997 and
the Paired Shares issued or issuable to UBS under the UBS Price Adjustment
Agreement.
Litigation
There are various legal actions pending against the Company, some of which
involve claims for substantial amounts. Although there can be no assurance as to
the ultimate outcome of any litigation involving the Company, managements of the
Trust and the Corporation do not believe that any pending legal proceeding will
have, after taking into account the Company's existing insurance coverage,
indemnification rights and provisions for such liabilities, a material adverse
effect on the consolidated financial condition of the Company.
During the year ended December 31, 1995, the Trust and the Corporation
completed settlements of two purported class action complaints and one complaint
which was purportedly brought on behalf of the Trust and the Corporation
(collectively, the "Shareholder Actions"). Holders of an aggregate of 299,750
Paired Shares (approximately 0.7% of the outstanding Paired Shares as of
December 31, 1996), all of which were owned by Mr. Leonard Ross and his
affiliates (collectively, "Ross"), opted out of the Shareholder Actions and did
not share in the settlement.
Ross threatened to bring a separate action alleging similar causes of
action as those alleged in the Shareholder Actions as well as other alleged
causes of action. In November 1994, Ross assigned to Starwood Capital all of his
claims against the Trust and Corporation. In connection with such assignment,
Starwood Capital agreed to purchase all of Ross's Paired Shares at Ross's
election during a 60-day period beginning in December 1995, at a price of $22.50
per Paired Share (as adjusted for the three-for-two stock split in January 1997)
subject to certain adjustments. Starwood Capital, as the assignee of Ross's
claims against the Trust and the Corporation, agreed that the maximum amount
Starwood Capital may recover under such claims would not exceed an aggregate of
$1.8 million and the Trust and the Corporation agreed to toll the statute of
limitations respecting such claims until January 31, 1996. The Trust and
Corporation also agreed that under certain circumstances they may be obligated
severally to indemnify Starwood Capital with respect to Starwood Capital's
obligations to Ross, up to a maximum of $1.8 million, upon receipt of a full
release from Starwood Capital of all of the claims assigned by Ross.
Ross elected to sell his Paired Shares, and in January 1996, those Paired
Shares were sold to a third-party through Merrill Lynch. The Paired Shares were
sold at a price of $19.75 per Paired Share (as adjusted for the three-for-two
stock split in January 1997); the Trust and Corporation paid Starwood Capital
approximately $1.4 million in the aggregate pursuant to their indemnity
obligations, and Starwood Capital released the Trust and the Corporation from
all the claims assigned to it by Ross.
Environmental matters
The Company is subject to certain requirements and potential liabilities
under various federal, state and local environmental laws, ordinances and
regulations ("Environmental Laws"). For example, a current or previous owner or
operator of real property may become liable for the costs of removal or
remediation of hazardous or toxic substances on, under or in such property. Such
laws often impose liability without regard to whether the owner or operator knew
of, or was responsible for, the presence of such hazardous or toxic
F-38
133
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
substances. The presence of hazardous or toxic substances may adversely affect
the owner's ability to sell or rent such real property or to borrow using such
real property as collateral. Persons who arrange for the disposal or treatment
of hazardous or toxic wastes may be liable for the costs of removal or
remediation of such wastes at the treatment, storage or disposal facility,
regardless of whether such facility is owned or operated by such person. The
Company uses certain substances and generates certain wastes that may be deemed
hazardous or toxic under applicable Environmental Laws, and the Company from
time to time has incurred, and in the future may incur, costs related to
cleaning up contamination resulting from historic uses of certain of the
Company's current or former properties or the Company's treatment, storage or
disposal of wastes at facilities owned by others. Other Environmental Laws
require abatement or removal of certain asbestos-containing materials ("ACMs")
(limited quantities of which are present in various building materials such as
spray-on insulation, floor coverings, ceiling coverings, tiles, decorative
treatments and piping located at certain of the Company's hotels) in the event
of damage or demolition, or certain renovations or remodeling. These laws also
govern emissions of and exposure to asbestos fibers in the air. Environmental
Laws also regulate polychlorinated biphenyls ("PCBs"), which may be present in
electrical equipment. A number of the Company's hotels have underground storage
tanks ("USTs") and equipment containing chlorofluorocarbons ("CFCs"); the
operation and subsequent removal or upgrading of certain USTs and the use of
equipment containing CFCs also are regulated by Environmental Laws. In
connection with the Company's ownership, operation and management of its
properties, the Company could be held liable for the costs of remedial or other
action with respect to PCBs, USTs or CFCs.
Environmental Laws are not the only source of environmental liability.
Under the common law, owners and operators of real property may face liability
for personal injury or property damage because of various environmental
conditions such as alleged exposure to hazardous or toxic substances (including,
but not limited to, ACMs, PCBs and CFCs), poor indoor air quality, radon and
poor drinking water quality.
Although the Company has incurred and expects to incur remediation and
other environmental costs during the ordinary course of operations, management
anticipates that such costs will not have a material adverse effect on the
operations or financial condition of the Company.
Franchise Agreements
Seventy-three of the 102 hotel properties in which the Trust had an equity
interest at December 31, 1997, were operated at such time pursuant to franchise
or license agreements ("Franchise Agreements") including 14 with Westin and 13
with Sheraton. The Franchise Agreements generally require the payment of a
monthly royalty fee based on gross room revenue and various other fees
associated with certain marketing or advertising and centralized reservation
services, also generally based on gross room revenues.
The Franchise Agreements have various durations but generally may be
terminated upon not more than three years' prior notice or upon payment of
certain specified fees.
The Franchise Agreements generally contain specific standards for, and
restrictions and limitations on, the operation and maintenance of the hotels
which are established by the franchisors to maintain uniformity in the system
created by each such franchisor. Such standards generally regulate the
appearance of the hotel, quality and type of goods and services offered,
signage, and protection of marks. Compliance with such standards may from time
to time require significant expenditures for capital improvements.
The Franchise Agreements also generally contain financial reporting
requirements relating to the calculation of royalty and other fees and insurance
requirements with respect to specified liabilities, approved coverage limits and
minimum insurance company rating.
The Franchise Agreements generally require the consent of the franchisor to
a transfer of an interest in the applicable franchise, and both the consent of
the franchisor and the execution of a new franchise
F-39
134
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
agreement in the event of a transfer of all or controlling portion of the
franchisee under the relevant Franchise Agreement. In addition, some Franchise
Agreements may require payment of an initial fee upon establishment of a
franchise relationship.
The Company intends to convert many of its hotels to a Westin or Sheraton
brand.
Performance bonds and restricted cash
The Corporation is required to post performance bonds or cash collateral
for certain obligations. At December 31, 1997 and 1996, the Corporation had
posted performance bonds totaling approximately $786,000 and $780,000,
respectively, to cover such obligations; however, no amounts had been drawn
against such bonds. These amounts are included in inventories, prepaid expenses
and other assets and are restricted as to use at December 31, 1997 and 1996.
21. RELATED PARTY TRANSACTIONS.
Starwood Capital
The Company and Starwood Capital have agreed that, subject to approval by
the independent Trustees or Directors, as appropriate, Starwood Capital will be
reimbursed for out-of-pocket costs and expenses for any services provided to the
Company. Prior to August 12, 1996, Starwood Capital was also reimbursed for its
internal costs (including allocation of overhead) for services provided to the
Company, provided that, where such costs were currently expensed by the Company,
such reimbursement could not exceed $250,000 for the twelve months ending June
30, 1996. In connection with the acquisition of the Institutional Portfolio in
August 1996, the Trust granted Starwood Capital a restricted stock award of
250,870 Paired Shares (an approximate value of $6.0 million based on the Paired
Share closing price on the date of award). Effective August 12, 1996, the
Company's reimbursement arrangement with Starwood Capital was changed so as to
eliminate reimbursements for internal costs of Starwood Capital for any services
of senior management of Starwood Capital (subject to the same annual limitation
of $250,000 as set forth above for services of employees of Starwood Capital
other than such senior management) and after one year, for any services of any
employee of Starwood Capital.
The Company engaged Starwood Capital to act as its financial advisor in
connection with the ITT Merger. This engagement is not subject to the
reimbursement arrangement described above.
During 1997, the Company did not make any reimbursements to Starwood
Capital for internal costs. During 1996, the Company reimbursed Starwood Capital
for $414,000 of internal costs, of which $226,000 related to 1995. Aside from
Starwood Capital's internal costs, during 1996, Starwood Capital incurred
approximately $199,000 of costs paid directly by the Company to third-party
vendors for services provided to the Company, representing costs associated with
the Reorganization, the Offerings and hotel acquisitions.
Westin
At December 31, 1997, Starwood Capital owned an interest in Westin, which
owns equity interests in domestic and international hotels and manages,
franchises or represents hotels worldwide. On January 2, 1998, pursuant to a
Transaction Agreement dated September 8, 1997, the Company acquired Westin (see
Note 26 -- Subsequent Events).
As of December 31, 1997, the Company converted six hotels to Westins. In
connection with the conversions, at December 31, 1997 and 1996, the Trust had
interest-free indebtedness to Westin of $7.4 million and $2.8 million,
respectively, to cover certain conversion and termination costs.
F-40
135
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On December 19, 1997, the Trust loaned approximately $2.0 million and $1.1
million to Westin WC Sport L.L.C. ("WC Sport") and Westin MV Sport L.L.C. ("MV
Sport"), respectively, wholly owned subsidiaries of Westin, under two separate
note agreements. The loans, which are included in other assets, bear interest at
the 90-day LIBOR rate and mature as to principal and accrued interest on
December 22, 1998. On January 2, 1998, in conjunction with the Westin
Acquisition, WC Sport and MV Sport were acquired by the Trust thereby
eliminating these notes receivable.
On December 29, 1997, the Trust loaned $34.2 million to W&S Atlanta Corp.
("Atlanta"), a wholly owned subsidiary of Westin. The loan bears interest at the
Prime lending rate to be paid monthly and matures on December 2, 1998. On
January 2, 1998, in conjunction with the Westin Acquisition, Atlanta's note
payable to the Trust was assumed by the Corporation.
On December 31, 1997, the Corporation purchased other assets valued at
approximately $125.7 million from Westin entering into a note payable to Westin
for the same amount bearing interest at 6.0%. On January 2, 1998, the note
matured and was paid in conjunction with the Westin Acquisition.
During 1997, in conjunction with the Westin Acquisition, the Company paid
Daniel W. Yih, Director of the Corporation, and Stephen R. Quazzo, Trustee of
the Trust, each $200,000 in cash and an award of 5,000 Paired Shares (an
approximate value of $220,000 each based on the Paired Share closing price on
the date of award) as compensation for acting as Chairmen of the Special
Committees.
Loans to officers and former officers
At December 31, 1997, the Trust has a receivable of approximately $268,000
from an officer of the Trust, Steven R. Goldman, for tax withholdings paid by
the Trust on Mr. Goldman's behalf related to the vesting of restricted stock.
At December 31, 1997 and 1996, the Trust holds an $800,000 uncollateralized
note receivable from a former President and Chief Executive Officer of the
Trust. The principal amount of the note receivable is due in 1999 and bears
interest due annually at 10%.
During 1996, the Corporation made a $150,000 non-interest bearing bridge
loan to an officer of the Corporation, Eric A. Danziger, secured by a second
mortgage on Mr. Danziger's residence in Phoenix, Arizona. The bridge loan
matured in September 1997 and was repaid in February 1998.
During 1996, the Corporation made a $266,000 non-interest bearing bridge
loan to an officer of the Corporation, Theodore W. Darnall. The bridge loan is
secured by a second mortgage on Mr. Darnall's residence in Phoenix, Arizona.
During 1997, the bridge loan matured as to $100,000 upon the sale of Mr.
Darnall's home in Pittsburgh at which time $116,000 of the loan was repaid. The
unpaid balance of $150,000 matures upon termination of Mr. Darnall's employment
with the Corporation.
During 1995, the Trust loaned $250,000 to a former officer of the Trust.
The loan has a term of 10 years and bears interest, to be paid quarterly, at the
lowest applicable rate prescribed by IRC Section 1274(d). At December 31, 1997,
the loan had an applicable rate of 6.6% and was current. During 1997, the Trust
forgave $150,000 of the loan pursuant to a separation agreement with such
officer.
22. INDUSTRY SEGMENT INFORMATION.
Gaming
The Corporation operated in two segments of the hospitality industry, hotel
and gaming. The hotel segment consists of room, food and beverage and other
revenues recognized in connection with the operation of hotels owned by the
Corporation or under lease from the Trust, and income from management contracts.
F-41
136
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has disclosed these segments in the combined and separate statements
of operations. The gaming segment consists of net win from casino operations, as
well as room, food and beverage and other revenues recognized in connection with
the operation of the two hotel/casinos under lease from the Trust or a third
party unaffiliated with Starwood Hotels. For the years ended December 31, 1997
and 1996, the gaming segment was not a material component of the Corporation's
operations. As a result, 1997 and 1996 segment information relating to gaming is
not disclosed herein. The following information summarizes revenue and operating
results for the gaming segment for the year ended December 31, 1995 (in
thousands):
YEAR ENDED
DECEMBER 31, 1995
-----------------
GAMING:
Revenue:
Casino................................................. $14,009
Rooms.................................................. 4,682
Food and beverage...................................... 5,155
Other.................................................. 5,313
Less promotional allowances............................ (2,230)
-------
Gaming revenues........................................ 26,929
-------
Expenses:
Casino................................................. 6,156
Rooms.................................................. 2,220
Food and beverage...................................... 4,896
Other (including undistributed operating expenses and
fixed charges)....................................... 10,970
-------
Expenses of gaming operations.......................... 24,242
Rent to Trust.......................................... 2,400
Depreciation and amortization.......................... 205
-------
Total expenses......................................... 26,847
-------
Operating income............................................ $ 82
=======
A reconciliation of the combined segment operating income to the net loss
of the Corporation is as follows (in thousands):
YEAR ENDED
DECEMBER 31, 1995
-----------------
Hotel operating income...................................... $ 5,419
Gaming operating income..................................... 82
-------
Combined operating income................................... 5,501
Interest and other income................................... 632
Interest expense............................................ (5,470)
Corporate expenses.......................................... (2,703)
-------
Loss before minority interest.......................... $(2,040)
=======
F-42
137
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Additional financial data by industry segment for the Corporation is as
follows (in thousands):
YEAR ENDED
DECEMBER 31, 1995
-----------------
DEPRECIATION AND AMORTIZATION:
Hotel................................................ $5,126
Gaming............................................... 205
Corporate and other.................................. 1,161
------
Total...................................... $6,492
======
The Trust is an owner/lessor of real property and does not "operate" in
different segments, and is therefore not subject to disclosure by segment. The
Trust's net investment (initial cost less accumulated depreciation and provision
for loss) in the two Las Vegas hotel/casinos was approximately $20.5 million at
December 31, 1995. The Trust sold its interest in the two properties during
1996.
Foreign operations
In 1997, the Corporation purchased four hotels located in Mexico and
Scotland. The foreign segment consists of hotel revenue and expense from foreign
hotels. The following information summarizes revenue and operating results for
the foreign segment for the year ended December 31, 1997 (in thousands):
YEAR ENDED
DECEMBER 31, 1997
-----------------
FOREIGN OPERATIONS:
Hotel revenue:
Rooms........................................... $11,447
Food and beverage............................... 5,588
Other........................................... 1,973
-------
Foreign hotel revenues.......................... 19,008
-------
Hotel expenses:
Rooms........................................... 1,899
Food and beverage............................... 3,190
Other........................................... 7,779
-------
Foreign hotel expenses.......................... 12,868
Interest -- Trust............................... 3,681
Depreciation and amortization................... 2,847
-------
Foreign expenses................................ 19,396
-------
Operating income..................................... $ (388)
=======
F-43
138
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the consolidated segment results to the net loss of the
Corporation is as follows (in thousands):
YEAR ENDED
DECEMBER 31, 1997
-----------------
Domestic hotel operating income............................. $ 1,035
Foreign hotel operating loss................................ (388)
Gaming operating loss....................................... (1,646)
--------
Consolidated operating income............................... (999)
Management fees and other income............................ 5,907
Gain on sale of real estate investments..................... 3,864
Depreciation and amortization -- Corporate.................. (2,068)
Corporate expenses.......................................... (15,029)
--------
Loss before minority interest.......................... $ (8,325)
========
Additional financial data by industry segment for the Corporation is as
follows (in thousands):
YEAR ENDED
DECEMBER 31, 1997
-----------------
REVENUE:
Domestic hotel.............................................. $869,906
Foreign hotel............................................... 19,008
--------
Total............................................. $888,914
========
IDENTIFIABLE ASSETS:
Domestic hotel.............................................. $313,816
Foreign hotel............................................... 189,411
Corporate................................................... 55,424
--------
Total............................................. $558,651
========
CAPITAL EXPENDITURES:
Domestic hotel.............................................. $ 54,090
Foreign hotel............................................... 185,293
Corporate................................................... 8,629
--------
Total............................................. $248,012
========
DEPRECIATION AND AMORTIZATION:
Domestic hotel.............................................. $ 20,380
Foreign hotel............................................... 2,847
Corporate................................................... 2,068
--------
Total............................................. $ 25,295
========
F-44
139
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
23. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED).
COMBINED TRUST CORPORATION
-------------------- ------------------ --------------------
1997 1996 1997 1996 1997 1996
-------- -------- ------- ------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
First Quarter
Revenue..................... $172,719 $ 60,579 $49,087 $18,801 $167,113 $ 57,486
Net income (loss)........... 7,786 4,090 12,183 7,142 (4,397) (3,052)
Net income (loss) per
share/Paired Share....... 0.19 0.20 0.29 0.35 (0.10) (0.15)
Net income (loss) per
share/Paired Share
Assuming Dilution........ 0.18 0.20 0.28 0.35 (0.10) (0.15)
Second Quarter
Revenue..................... $223,149 $ 82,665 $60,913 $18,959 $219,550 $ 79,871
Net income.................. 18,135 9,598(2) 16,844 5,600 1,291 3,998(2)
Net income (loss) per
share/Paired Share....... 0.40 0.41 0.37 0.24 0.03 0.17
Net income per share/Paired
Share Assuming
Dilution................. 0.38 0.41 0.35 0.24 0.03 0.17
Third Quarter
Revenue..................... $236,920 $122,138 $70,760 $30,565 $232,712 $119,695
Net income (loss)........... (1,127)(1) 6,099 2,092(1) 7,608 (3,219) (1,509)
Net income (loss) per
share/Paired Share....... (0.03) 0.18 0.04 0.23 (0.07) (0.05)
Net income (loss) per
share/Paired Share
Assuming Dilution........ (0.03) 0.19 0.04 0.23 (0.07) (0.05)
Fourth Quarter
Revenue..................... $300,795 $163,156 $90,008 $46,734 $294,313 $153,104
Net income (loss)........... 13,278(3) 7,164 16,176(3) 13,239 (2,898)(3) (6,075)
Net income (loss) per
share/Paired Share....... 0.26 0.18 0.32 0.33 (0.06) (0.15)
Net income (loss) per
share/Paired Share
Assuming Dilution........ 0.25 0.17 0.30 0.32 (0.06) (0.15)
- ---------------
(1) During the quarter ended September 30, 1997, the Trust recorded an
extraordinary loss of approximately $3.5 million (net of minority interest
of $971,000) relating to extinguishment of debt (see Note 8).
(2) During the quarter ended June 30, 1996, the Corporation recorded an
extraordinary gain of approximately $1.1 million (net of minority interest
of $413,000) relating to extinguishment of debt (see Note 8).
(3) During the quarter ended December 31, 1997, the Company recorded
depreciation adjustments related to cost segregation studies performed on
properties acquired in 1997 which resulted in a decrease in depreciation
expense of approximately $27.4 million for the Trust and an increase in
depreciation expense of $1.7 million for the Corporation. The Trust recorded
a loss on anticipated treasury lock settlements of approximately $25.0
million (see Note 11 for further discussion). The Trust recorded an
adjustment of approximately $2.6 million in the fourth quarter for 1997
executive bonuses.
F-45
140
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
24. PURCHASE BUSINESS COMBINATIONS.
The following represents all purchase business combinations for the year
ending December 31, 1997:
DATE OF PURCHASE PRICE
HOTEL(1) PURCHASE(4) (000'S)(7)
-------- ----------- --------------
Deerfield Beach Hilton..................................... 01/08/97 $ 11,500
Radisson Denver South...................................... 01/20/97 21,750
The HEI Owned Hotels consisting of: 312,000
Sheraton Hotel........................................... 02/14/97
Omni Waterside Hotel..................................... 02/14/97
BWI Airport Marriott..................................... 02/14/97
Crowne Plaza Edison...................................... 02/14/97
Courtyard by Marriott Crystal City....................... 02/14/97
Charleston Hilton........................................ 02/14/97
Park Ridge Hotel......................................... 02/14/97
Sonoma County Hilton..................................... 02/14/97
Novi Hilton.............................................. 02/14/97
Embassy Suites........................................... 02/14/97
Days Inn Chicago........................................... 02/21/97 48,000
Westin Hermitage........................................... 03/11/97 15,800(5)
Hotel De La Poste.......................................... 03/12/97 16,000
San Diego Marriott Suites.................................. 04/03/97 32,500
Tremont Hotel.............................................. 04/04/97 14,400
Raphael Hotel.............................................. 05/07/97 17,750
Sheraton Stamford.......................................... 06/12/97 14,600
Westin Southfield -- Detroit............................... 07/10/97 40,000
Westin Regina Portfolio consisting of: 133,000(3)
Westin Regina Resort -- Cancun........................... 08/21/97
Westin Regina Resort -- Los Cabos........................ 08/21/97
Westin Regina Resort -- Puerto Vallarta.................. 08/21/97
The Flatley Portfolio consisting of: 469,970
Wayfarer Inn............................................. 09/11/97
Sheraton Tara Hotel -- Braintree......................... 09/11/97
Tara's Ferncroft Conf. Resort............................ 09/11/97
Sheraton Tara Hotel -- Framingham........................ 09/11/97
Tara's Cape Codder Hotel................................. 09/11/97
Tara Hyannis Hotel & Resort.............................. 09/11/97
Sheraton Tara Lexington Inn.............................. 09/11/97
Colonial Hilton and Resort............................... 09/11/97
Merrimack Hotel & Conference Center...................... 09/11/97
Sheraton Tara Hotel -- Nashua............................ 09/11/97
Sheraton Tara Hotel -- Newton............................ 09/11/97
Sheraton Tara Hotel -- Parsippany........................ 09/11/97
Sheraton Tara Hotel -- South Portland.................... 09/11/97
Tara Stamford Hotel...................................... 09/11/97
Sheraton Tara Airport Hotel.............................. 09/11/97
Crowne Plaza............................................... 09/23/97 58,750(6)
One Washington Circle...................................... 09/30/97 19,000
Radisson Plaza & Suite Hotel............................... 10/30/97 54,000
Westin Aquila.............................................. 12/08/97 14,000
Westin Mission Hills Resort................................ 12/15/97 118,000(2)
Turnberry Hotel and Golf Resort............................ 12/23/97 51,500(3)
----------
$1,462,520
==========
F-46
141
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On February 14, 1997, in addition to the acquisition of the ten hotels
referred to above as the HEI Owned Hotels from PRISA II, an institutional real
estate investment fund managed by Prudential Real Estate Investors, and HEI
Hotels LLC ("HEI"), a Westport, Connecticut based hotel operating company, the
Company also completed the acquisition of HEI (together with the HEI Owned
Hotels, the "HEI Portfolio"). The Company paid $112 million in cash and notes
and the remainder in limited partnership interests in the Realty Partnership and
the Operating Partnership exchangeable for 6.548 million Paired Shares of the
Trust and Corporation (valued for purposes of the transaction at approximately
$215 million). See Note 4 for discussion on the value of the HEI Management
Company, an intangible asset. The HEI Portfolio also included contracts to
manage the following nine hotels: Sheraton Gateway Houston Airport, Ontario
Airport Hilton, Grand Junction Hilton, Danbury Hilton & Towers, Residence Inn By
Marriott, Long Island Sheraton Hotel, Wilmington Hilton Hotel, Ramada Hotel
Bethesda and The Pavillion Towers Hotel.
- ---------------
(1) The Trust acquired a 100% equity interest in each of these hotel properties
except for the Westin Mission Hills Resort (see footnote (2) below), the
Westin Regina Portfolio and Turnberry Hotel & Golf Resort (see footnote (3)
below).
(2) Represents 100% interest. The Trust acquired a 95% interest in a joint
venture that acquired the property.
(3) The Corporation acquired a 100% equity interest in these hotel properties.
(4) The results of operations are included in the Corporation for the period
from date of purchase through December 31, 1997.
(5) The purchase price consists of approximately $6.4 million in cash and
limited partnership interests in Realty & Operating exchangeable for 233,106
Paired Shares (valued for the purpose of this transaction at $9.4 million).
(6) The purchase price consists of approximately $29.0 million in assumed debt,
approximately $17.8 million in cash and approximately $12.0 million for the
sale of three of the Company's hotels (see further information in Note 13).
(7) For all purchases, the Company records the allocation of the purchase price
between Land, Building and Furniture, Fixtures and Equipment based upon the
purchase agreements, if applicable, or based upon a cost segregation study.
25. COMBINED PRO FORMA FINANCIAL INFORMATION (UNAUDITED).
Due to the impact of the 44 hotels acquired by the Company in 1997 and the
1997 Offerings, the following combined pro forma statements of operations are
presented to supplement the historical statements of operations. These combined
pro forma statements reflect the 1997 Offerings and the acquisitions of the HEI
Portfolio and the Flatley Portfolio as if they occurred on January 1, 1996:
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
------------ ----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Revenues............................................. $1,054,178 $694,066
Net income........................................... $ 29,036 $ 7,540
Net income per share................................. $ 0.58 $ 0.26
Net income per share assuming dilution............... $ 0.55 $ 0.25
F-47
142
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
26. SUBSEQUENT EVENTS (UNAUDITED).
Acquisition of Westin
On January 2, 1998, pursuant to a Transaction Agreement dated as of
September 8, 1997 (the "Westin Transaction Agreement"), among WHWE L.L.C.
("WHWE"), Woodstar Investor Partnership ("Woodstar"), Nomura Asset Capital
Corporation ("Nomura"), Juergen Bartels (Mr. Bartels together with WHWE,
Woodstar and Nomura, the "Members"), Westin Worldwide, W&S Lauderdale Corp.
("Lauderdale"), W&S Seattle Corp. ("Seattle"), Westin St. John Hotel Company,
Inc. ("St. John"), W&S Denver Corp. ("Denver"), W&S Atlanta Corp. ("Atlanta"),
W&S Hotel L.L.C. ("W&S LLC" and, together with Westin, the "Westin Companies"),
the Trust, the Realty Partnership, the Corporation and the Operating
Partnership, the Company acquired Westin.
Pursuant to the terms of the Transaction Agreement,
(i) Westin Worldwide merged into the Trust (the "Westin Merger"). In
connection with the Westin Merger, all of the issued and outstanding shares
of capital stock of Westin Worldwide (other than shares held by Westin and
its subsidiaries or by the Company) were converted into an aggregate of
6,285,783 Class A Exchangeable Preferred Shares, par value $.01 per share
(the "Class A EPS"), of the Trust and 5,294,783 Class B Exchangeable
Preferred Shares, liquidation value $38.50 per share (the "Class B EPS" and
together with the Class A EPS, the "EPS"), of the Trust and cash in the
amount of $177.9 million;
(ii) The stockholders of Lauderdale, Seattle and Denver contributed
all of the outstanding shares of such companies to the Realty Partnership.
In exchange for such contribution and after giving effect to the deemed
exchange of certain units, the Realty Partnership issued to such
stockholders an aggregate of 470,309 limited partnership units of the
Realty Partnership and the Trust issued to such stockholders an aggregate
of 127,534 shares of Class B EPS. In addition, in connection with the
foregoing share contribution, the Realty Partnership assumed, repaid or
refinanced the indebtedness of Lauderdale, Seattle and Denver and assumed
$84.2 million of indebtedness incurred by the Members prior to such
contributions; and
(iii) The stockholders of Atlanta and St. John contributed all of the
outstanding shares of such companies to the Operating Partnership. In
exchange for such contribution and after giving effect to the deemed
exchange of certain units, the Operating Partnership issued to such
stockholders an aggregate of 312,741 limited partnership units of the
Operating Partnership and the Trust issued to such stockholders an
aggregate of 80,415 shares of Class B EPS. In addition, in connection with
the foregoing share contributions, the Operating Partnership assumed,
repaid or refinanced indebtedness of Atlanta and St. John and assumed $3.4
million of indebtedness incurred by the Members prior to such
contributions.
The aggregate principal amount of debt assumed by the Company pursuant to
the Westin Transaction Agreement was approximately $1.0 billion.
The shares of Class A EPS, the shares of Class B EPS and the limited
partnership interests issued in connection with the Westin Merger and the
contribution of Seattle, Lauderdale, Denver, St. John and Atlanta to the
Partnerships are directly or indirectly exchangeable on a one-to-one basis
(subject to certain adjustments) for Paired Shares (subject to the right of the
Company to elect to pay cash in lieu of issuing such shares). The limited
partnership interests also are exchangeable on a one-to-one basis for shares of
Class B EPS. The shares of Class B EPS have a liquidation preference of $38.50
per share and provide the holders with the right, from and after the fifth
anniversary of the closing date of the Westin acquisition, to require the Trust
to redeem such shares at a price of $38.50.
F-48
143
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On January 2, 1998, the Company obtained a $2.265 billion credit facility
(the "$2.2 Billion Facility") from a group of lenders led by Bankers Trust
Company and the Chase Manhattan Bank to fund the cash portion of the purchase of
Westin for approximately $178 million and to repay an aggregate of approximately
$1.0 billion of outstanding debt of Westin and of the Company under the $1.2
Billion Facility.
Acquisition of ITT
On February 23, 1998, pursuant to an Amended and Restated Agreement and
Plan of Merger dated as of November 12, 1997 (the "ITT Merger Agreement") among
the Corporation, Chess Acquisition Corp., a newly formed Nevada corporation and
a subsidiary of the Corporation ("Merger Sub"), the Trust and ITT, the Company
acquired ITT.
Pursuant to the terms of the ITT Merger Agreement, Merger Sub was merged
with and into ITT (the "ITT Merger"), whereupon the separate corporate existence
of Merger Sub ceased and ITT continued as the surviving corporation. As a result
of the ITT Merger, ITT was owned jointly by the Trust and the Corporation.
Immediately after the effective time of the ITT Merger, the Corporation
purchased all of the common stock, no par value, of ITT ("ITT Common Stock")
owned by the Trust for a combination of cash and notes. After such purchase, ITT
became a wholly owned subsidiary of the Corporation.
Under the terms of the ITT Merger Agreement, each outstanding share of ITT
Common Stock, together with the associated right to purchase shares of Series A
Participating Cumulative Preferred Stock of ITT (the "Rights" and, together with
the ITT Common Stock, "ITT Shares"), other than those that were converted into
cash pursuant to a cash election by the holder (and other than ITT Shares owned
directly or indirectly by ITT or Starwood Hotels, which shares were canceled),
was converted into 1.543 Paired Shares. Pursuant to cash election procedures,
approximately 35,195,664 ITT Shares, representing approximately 30% of the
outstanding ITT Shares, were converted into $85 in cash per share. In addition,
each ITT Share was converted into additional cash consideration in the amount of
$.37493151, which amount represents the interest that would have accrued
(without compounding) on $85 at an annual rate of 7% during the period from and
including January 31, 1998 to but excluding the date of the closing (February
23, 1998). The aggregate value of the ITT acquisition in cash, Paired Shares and
assumed debt was approximately $14.6 billion.
On February 23, 1998, the Company obtained two additional credit facilities
($5.6 billion in total) with Lehman Brothers, Bankers Trust and The Chase
Manhattan Bank to fund the cash portion of the ITT Merger consideration, to
refinance a portion of the Company's existing indebtedness (including
indebtedness outstanding under the $2.2 Billion Facility) and to provide funds
for general corporate purposes. These facilities are comprised of a $3.1 billion
senior secured credit facility (the "$3.1 Billion Facility") and a $2.5 billion,
five-year increasing rates notes facility (the "IRN Facility").
The $3.1 Billion Facility has three tranches: a $1.0 billion, one year term
loan, a $1.0 billion, a five year term loan, and a $1.1 billion, five-year
revolving credit facility. The Corporation, the Trust and certain of their
respective direct and indirect subsidiaries may be designated as borrowers or
co-borrowers under all or a portion of the $3.1 Billion Facility. The interest
rate for the $3.1 Billion Facility is one-, two- or three-month LIBOR, at the
Company's option, plus 187.5 basis points for the four months ending June 24,
1998, one-, two-or three-month LIBOR plus 162.5 basis points for the two months
ending August 24, 1998, and thereafter is determined pursuant to a pricing
"grid" with rates based on the Company's leverage and/or senior unsecured debt
rating. Quarterly amortization of the five-year term loan begins in the third
year, with total amortization of 10%, 20% and 70% of the principal amount over
the third, forth and fifth year, respectively. Repayment of amounts borrowed
under the $3.1 Billion Facility is guaranteed by the Trust and the Corporation
and substantially all of their respective significant subsidiaries (including
the Partnerships) other than gaming subsidiaries, and is secured by a pledge of
all the capital stock, partnership interests and other equity interests of the
guarantor subsidiaries.
F-49
144
STARWOOD HOTELS & RESORTS
AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The IRN facility consists of a single drawdown senior increasing rate,
non-amortizing five-year term loan for $2.5 billion. The Corporation is the
borrower under the IRN Facility; the Trust and all subsidiaries of the
Corporation and the Trust that are borrowers or guarantors of the $3.1 Billion
Facility are guarantors of the IRN Facility. The IRN Facility is secured equally
and ratably by all the collateral securing the $3.1 Billion Facility and is pari
passu in right of payment with all other senior indebtedness of the borrower and
the guarantors, including the $3.1 Billion Credit Facility. Amounts borrowed
under the IRN Facility bear interest at one-, two- or three-month LIBOR plus 175
basis points for the three months ending May 24, 1998, with the interest rate
increasing by 50 basis points every three months thereafter, up to a maximum
rate of one-, two-or three-month LIBOR plus 375 basis points.
In conjunction with the acquisition of ITT, the Amended and Restated
Declaration of Trust of the Trust was further amended increasing the authorized
shares of beneficial interests in the Trust to 1.35 billion shares. The charter
of the Corporation was amended increasing the authorized stock of the
Corporation to 1.35 billion shares.
In conjunction with the acquisition of ITT, the Company sold an aggregate
of 4,641,000 Paired Shares to Merrill Lynch International, NMS Services, Inc.
and Lehman Brothers Inc. (collectively, the "February Purchasers"), in a private
placement, for approximately $245.0 million. The Company paid the February
Purchasers a customary placement fee.
Separately, the Company entered into agreements (the "February Price
Adjustment Agreements") with the February Purchasers (and with Merrill Lynch,
Pierce, Fenner & Smith Incorporated, NationsBanc Montgomery Securities LLC and
Lehman Brothers Finance S.A., each of which is an affiliate of a February
Purchaser) with terms that are essentially the same as the terms of the UBS
Price Adjustment Agreement, except that (i) under the February Price Adjustment
Agreements, the Company does not have any right to deliver cash in settlement of
its obligation to deliver Paired Shares or any right to repurchase the Shares
sold to the February Purchasers, and (ii) the Forward Price under the February
Price Adjustment Agreements is based on a price of $53.875 per share.
The Company is required to cause to be registered under the Securities Act
of 1933, for resale by the February Purchasers the Paired Shares sold to the
February Purchasers on February 24, 1998 and the Paired Shares issued or
issuable to the February Purchasers under the February Price Adjustment
Agreement.
Other
On January 15, 1998, the Company completed the purchase of four Sheraton
Hotel assets with 916 hotel rooms located in Aspen, Colorado; Houston, Texas;
Washington, DC; and New York, New York for $334 million, which consists of
approximately $150 million in cash and 3.718 million Paired Shares of the Trust
and the Corporation (valued for purposes of this transaction at approximately
$184 million).
F-50
145
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
STARWOOD HOTELS & RESORTS
DECEMBER 31, 1997
(IN THOUSANDS)
GROSS AMOUNT BOOK
INITIAL COST TO COSTS SUBSEQUENT TO VALUE
COMPANY ACQUISITION AT DECEMBER 31, 1997
------------------------ ---------------------- -----------------------
(1) (3)
(1) ACCUMULATED
BUILDING AND BUILDING AND BUILDING AND DEPRECIATION &
DESCRIPTION LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS AMORTIZATION
----------- -------- ------------ ------- ------------ -------- ------------ --------------
HOTEL ASSETS:
Embassy Suites Phoenix
Airport -- Phoenix, AZ........... $ 2,889 $ 11,658 $ 877 $ 2,889 $ 12,535 $ 5,645
Tempe Embassy Suites -- Tempe,
AZ............................... 1,000 14,458 179 1,000 14,637 1,165
Hotel Park Tucson -- Tucson, AZ.... 1,800 7,911 108 1,800 8,019 523
Plaza Hotel & Conference
Center -- Tucson, AZ............. 350 4,357 574 350 4,931 1,521
Sheraton Hotel -- Long Beach, CA... 4,280 27,390 4,280 27,390 1,270
Westin Los Angeles Airport -- Los
Angeles, CA...................... 8,800 22,397 1,651 8,800 24,048 1,634
Westwood Marquis Hotel &
Gardens -- Westwood, CA.......... 5,250(4) 23,558(4) 3,049 5,250 26,607 1,294
Clarion at San Francisco
Airport -- Millbrae, CA.......... 7,210 19,537 139 7,210 19,676 1,630
Palm Desert Embassy Suites -- Palm
Desert, CA....................... 2,790 9,309 94 2,790 9,403 618
Doubletree Club Hotel -- Rancho
Bernardo, CA..................... 1,256 6,275 17 1,256 6,292 624
Westin Mission Hills
Resort -- Rancho Mirage, CA...... 14,149 85,374 14,149 85,374 359
Vagabond Inn -- Rosemead, CA....... 700 2,100 700 2,100 1,135
Vagabond Inn -- Sacramento, CA..... 700 3,200 700 3,200 1,408
San Diego Marriott Suites -- San
Diego, CA........................ 2,200 27,243 2,200 27,243 1,021
Westin Horton Plaza San
Diego -- San Diego, CA........... 6,500 35,732 1,191 6,500 36,923 2,554
Sonoma County Hilton -- Santa Rosa,
CA............................... 1,830 15,208 1,830 15,208 698
Vagabond Inn -- Woodland Hills,
CA............................... 1,200 3,200 1,200 3,200 1,408
Radisson Denver South -- Denver,
CO............................... 2,270 17,000 2,270 17,000 777
Sheraton Stamford -- Stamford,
CT............................... 375 16,443 375 16,443 431
Tara Stamford Hotel -- Stamford,
CT............................... 8,951 41,410 8,951 41,410 689
Deerfield Beach
Hilton -- Deerfield, FL.......... 1,510 8,862 1,510 8,862 436
Doubletree Guest Suites Cypress
Creek -- Ft. Lauderdale, FL...... 3,050 17,718 423 3,050 18,141 1,482
Wyndham Hotel at Ft. Lauderdale
Airport -- Dania, FL............. 2,910 17,017 915 2,910 17,932 1,210
Gainesville Radisson
Hotel -- Gainesville, FL......... 1,002 3,759 1,932 1,002 5,691 1,857
Westin Tampa Airport -- Tampa,
FL............................... 2,340 16,941 1,557 2,340 18,498 1,442
Holiday Inn -- Albany, GA.......... 796 4,980 361 796 5,341 1,477
Embassy Suites Hotel -- College
Park, GA......................... 1,530 19,177 1,530 19,177 892
Lenox Inn -- Atlanta, GA........... 4,383 4,197 155 4,383 4,352 308
Marque of Atlanta -- Atlanta, GA... 3,780 15,777 350 3,780 16,127 1,053
YEAR OF DATE
DESCRIPTION CONSTRUCTION ACQUIRED LIFE
----------- ------------ -------- ----
HOTEL ASSETS:
Embassy Suites Phoenix
Airport -- Phoenix, AZ........... 1981 12/13/83 35
Tempe Embassy Suites -- Tempe,
AZ............................... 1984 07/25/95 35
Hotel Park Tucson -- Tucson, AZ.... 1986 08/16/96 35
Plaza Hotel & Conference
Center -- Tucson, AZ............. 1971 09/16/86 35
Sheraton Hotel -- Long Beach, CA... 1988 02/14/97 30
Westin Los Angeles Airport -- Los
Angeles, CA...................... 1986 08/12/96 35
Westwood Marquis Hotel &
Gardens -- Westwood, CA.......... 1969 12/30/96 35
Clarion at San Francisco
Airport -- Millbrae, CA.......... 1962 04/25/96 35
Palm Desert Embassy Suites -- Palm
Desert, CA....................... 1985 08/16/96 35
Doubletree Club Hotel -- Rancho
Bernardo, CA..................... 1988 01/01/95 35
Westin Mission Hills
Resort -- Rancho Mirage, CA...... 1987 12/15/97 30
Vagabond Inn -- Rosemead, CA....... 1974 09/16/86 35
Vagabond Inn -- Sacramento, CA..... 1975 09/16/86 35
San Diego Marriott Suites -- San
Diego, CA........................ 1989 04/03/97 30
Westin Horton Plaza San
Diego -- San Diego, CA........... 1987 08/12/96 35
Sonoma County Hilton -- Santa Rosa,
CA............................... 1984 02/14/97 30
Vagabond Inn -- Woodland Hills,
CA............................... 1973 09/16/86 35
Radisson Denver South -- Denver,
CO............................... 1986 01/20/97 30
Sheraton Stamford -- Stamford,
CT............................... 1985 06/12/97 30
Tara Stamford Hotel -- Stamford,
CT............................... 1984 09/11/97 30
Deerfield Beach
Hilton -- Deerfield, FL.......... 1985 01/08/97 30
Doubletree Guest Suites Cypress
Creek -- Ft. Lauderdale, FL...... 1985 04/26/96 35
Wyndham Hotel at Ft. Lauderdale
Airport -- Dania, FL............. 1985 08/12/96 35
Gainesville Radisson
Hotel -- Gainesville, FL......... 1974 11/24/86 35
Westin Tampa Airport -- Tampa,
FL............................... 1987 04/26/96 35
Holiday Inn -- Albany, GA.......... 1989 06/08/89 35
Embassy Suites Hotel -- College
Park, GA......................... 1989 02/14/97 30
Lenox Inn -- Atlanta, GA........... 1965 10/31/95 35
Marque of Atlanta -- Atlanta, GA... 1980 08/16/96 35
F-51
146
SCHEDULE III (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
STARWOOD HOTELS & RESORTS
DECEMBER 31, 1997
(IN THOUSANDS)
GROSS AMOUNT BOOK
INITIAL COST TO COSTS SUBSEQUENT TO VALUE
COMPANY ACQUISITION AT DECEMBER 31, 1997
------------------------ ---------------------- -----------------------
(1)
(1)
BUILDING AND BUILDING AND BUILDING AND
DESCRIPTION LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS
----------- -------- ------------ ------- ------------ -------- ------------
Sheraton Colony Square -- Atlanta,
GA............................... 2,000 25,285 4,146 2,000 29,431
Terrace Garden Hotel -- Atlanta,
GA............................... 5,875 19,944 476 5,875 20,420
Westin Atlanta North at
Perimeter -- Atlanta, GA......... 5,370 41,977 674 5,370 42,651
Arlington Park Hilton -- Arlington
Heights, IL...................... 5,500 6,877 571 5,500 7,448
Days Inn Lake Shore
Drive -- Chicago, IL............. 11,280 30,857 11,280 30,857
Raphael Hotel -- Chicago, IL....... 2,950 12,837 2,950 12,837
Tremont Hotel -- Chicago, IL....... 3,170 9,980 3,170 9,980
Radisson Plaza & Suite
Hotel -- Indianapolis, IN........ 8,236 41,049 8,236 41,049
Harvey Hotel -- Wichita, KS........ 341 3,571 337 341 3,908
Doubletree Guest
Suites -- Lexington, KY.......... 1,237 9,573 319 1,237 9,892
Crowne Plaza -- New Orleans, LA.... 8,820 43,557 8,820 43,557
Hotel De La Poste -- New Orleans,
LA............................... 1,730 12,463 1,730 12,463
Park Plaza Hotel -- Boston, MA..... 21,000(4) 66,619(4) 1,768 21,000 68,387
Sheraton Tara Hotel -- Braintree,
MA............................... 8,034 38,103 8,034 38,103
Tara's Ferncroft Conference
Resort -- Danvers, MA............ 12,315 43,466 12,315 43,466
Sheraton Tara Hotel -- Framingham,
MA............................... 7,905 37,463 7,905 37,463
Cape Codder -- Hyannis, MA......... 1,602 7,121 1,602 7,121
Hotel & Resort -- Hyannis, MA...... 4,459 15,708 4,459 15,708
Sheraton Tara Lexington
Inn -- Lexington, MA............. 3,136 12,639 3,136 12,639
Colonial Hilton and
Resort -- Lynnfield, MA.......... 14,107 43,600 14,107 43,600
Sheraton Needham -- Needham, MA.... 3,040 14,167 74 3,040 14,241
Sheraton Tara Hotel -- Newton,
MA............................... 17,884 17,884
Westin Waltham Hotel -- Waltham,
MA............................... 5,000 31,703 198 5,000 31,901
BWI Airport Marriott -- Baltimore,
MD............................... 3,600 36,291 3,600 36,291
Holiday Inn
Calverton -- Beltsville, MD...... 1,636 8,489 9 215 1,645 8,704
Sheraton Tara Hotel -- South
Portland, ME..................... 2,708 12,504 2,708 12,504
Bay Valley Hotel & Resort -- Bay
City, MI......................... 2,500 5,472 2 1,407 2,502 6,879
Novi Hilton -- Novi, MI............ 1,800 29,456 1,800 29,456
Westin Southfield
Detroit -- Southfield, MI........ 1,700 32,508 1,700 32,508
Doubletree Mall of
America -- Bloomington, MN....... 2,890 30,491 352 2,890 30,843
Sheraton Metrodome -- Minneapolis,
MN............................... 1,830(4) 13,759 211 1,830 13,970
SCHEDULE III (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
STARWOOD HOTELS & RESORTS
DECEMBER 31, 1997
(IN THOUSANDS)
(3)
ACCUMULATED
DEPRECIATION & YEAR OF DATE
DESCRIPTION AMORTIZATION CONSTRUCTION ACQUIRED LIFE
----------- -------------- ------------ -------- ----
Sheraton Colony Square -- Atlanta,
GA............................... 2,056 1973 07/18/95 35
Terrace Garden Hotel -- Atlanta,
GA............................... 1,452 1975 10/31/95 35
Westin Atlanta North at
Perimeter -- Atlanta, GA......... 2,972 1986 08/12/96 35
Arlington Park Hilton -- Arlington
Heights, IL...................... 455 1968 08/16/96 35
Days Inn Lake Shore
Drive -- Chicago, IL............. 1,280 1965 02/21/97 30
Raphael Hotel -- Chicago, IL....... 426 1929 05/07/97 30
Tremont Hotel -- Chicago, IL....... 362 1974 04/04/97 30
Radisson Plaza & Suite
Hotel -- Indianapolis, IN........ 341 1983 10/30/97 30
Harvey Hotel -- Wichita, KS........ 358 1974 01/01/95 35
Doubletree Guest
Suites -- Lexington, KY.......... 956 1989 01/01/95 35
Crowne Plaza -- New Orleans, LA.... 543 1984 09/23/97 30
Hotel De La Poste -- New Orleans,
LA............................... 517 1973 03/12/97 30
Park Plaza Hotel -- Boston, MA..... 6,548 1927 01/24/96 35
Sheraton Tara Hotel -- Braintree,
MA............................... 634 1971 09/11/97 30
Tara's Ferncroft Conference
Resort -- Danvers, MA............ 485 1978 09/11/97 30
Sheraton Tara Hotel -- Framingham,
MA............................... 622 1973 09/11/97 30
Cape Codder -- Hyannis, MA......... 118 1975 09/11/97 30
Hotel & Resort -- Hyannis, MA...... 261 1967 09/11/97 30
Sheraton Tara Lexington
Inn -- Lexington, MA............. 210 1958 09/11/97 30
Colonial Hilton and
Resort -- Lynnfield, MA.......... 725 1966 09/11/97 30
Sheraton Needham -- Needham, MA.... 939 1986 08/16/96 35
Sheraton Tara Hotel -- Newton,
MA............................... 496 1968 09/11/97 30
Westin Waltham Hotel -- Waltham,
MA............................... 2,248 1990 08/12/96 35
BWI Airport Marriott -- Baltimore,
MD............................... 1,678 1988 02/14/97 30
Holiday Inn
Calverton -- Beltsville, MD...... 595 1987 11/30/95 35
Sheraton Tara Hotel -- South
Portland, ME..................... 208 1973 09/11/97 30
Bay Valley Hotel & Resort -- Bay
City, MI......................... 2,768 1973 05/10/84 35
Novi Hilton -- Novi, MI............ 1,354 1985 02/14/97 30
Westin Southfield
Detroit -- Southfield, MI........ 813 1987 07/10/97 30
Doubletree Mall of
America -- Bloomington, MN....... 2,158 1975 08/12/96 35
Sheraton Metrodome -- Minneapolis,
MN............................... 917 1980 09/05/96 35
F-52
147
SCHEDULE III (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
STARWOOD HOTELS & RESORTS
DECEMBER 31, 1997
(IN THOUSANDS)
GROSS AMOUNT BOOK
INITIAL COST TO COSTS SUBSEQUENT TO VALUE
COMPANY ACQUISITION AT DECEMBER 31, 1997
------------------------ ---------------------- -----------------------
(1)
(1)
BUILDING AND BUILDING AND BUILDING AND
DESCRIPTION LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS
----------- -------- ------------ ------- ------------ -------- ------------
St. Louis Embassy Suites -- St.
Louis, MO........................ 2,330 14,895 111 2,330 15,006
Ritz Carlton Kansas City -- Kansas
City, MO......................... 9,420 29,990 21 9,420 30,011
Omni Hotel -- Chapel Hill, NC...... 500 8,920 97 500 9,017
Westin Aquila -- Omaha, NE......... 1,783 10,776 1,783 10,776
Wayfarer Inn -- Bedford, NH........ 2,151 10,036 2,151 10,036
Merrimack Hotel & Conference
Center -- Merrimack, NH.......... 595 2,597 595 2,597
Sheraton Tara Hotel -- Nashua,
NH............................... 4,345 20,036 4,345 20,036
Crowne Plaza Edison -- Edison,
NJ............................... 1,700 17,045 1,700 17,045
Sheraton Tara Hotel -- Parsippany,
NJ............................... 11,077 55,232 11,077 55,232
Marriott Forrestal Village
Hotel -- Princeton, NJ........... 3,150 14,724 60 3,150 14,784
Best Western Airport
Inn -- Albuquerque, NM........... 5,165 189 5,354
Doral Court -- New York, NY........ 6,060(4) 12,673(4) 1,132 6,060 13,805
Doral Inn -- New York, NY.......... 3,112 3,112
Doral Tuscany -- New York, NY...... 1,700(4) 9,723(4) 816 1,700 10,539
Days Inn City Center -- Portland,
OR............................... 1,900 3,768 120 563 2,020 4,331
Riverside Inn -- Portland, OR...... 1,300 3,375 120 2,921 1,420 6,296
Allentown Hilton -- Allentown,
PA............................... 1,200 5,343 126 1,200 5,469
Park Ridge Hotel -- King of
Prussia, PA...................... 3,111 21,896 3,111 21,896
Days Inn Airport -- Philadelphia,
PA............................... 1,900 1,672 397 1,900 2,069
Westin Philadelphia International
Airport -- Philadelphia, PA...... 2,850 12,400 987 2,850 13,387
Ritz Carlton
Philadelphia -- Philadelphia,
PA............................... 5,220 25,072 198 5,220 25,270
Sheraton Tara Airport
Hotel -- Warwick, RI............. 2,095 9,707 2,095 9,707
Charleston Hilton
North -- Charleston, SC.......... 2,600 17,368 2,600 17,368
Westin Hermitage -- Nashville,
TN............................... 2,350 11,824 2,350 11,824
Radisson Park Central -- Dallas,
TX............................... 11,832 1,830 12,359 1,830 24,191
Doubletree Guest Suites DFW
Airport -- Irving, TX............ 3,080 21,707 539 3,080 22,246
Courtyard by Marriott Crystal
City -- Arlington, VA............ 3,740 23,695 3,740 23,695
Omni Waterside Hotel -- Norfolk,
VA............................... 5,200 40,913 5,200 40,913
Residence Inn Tyson's
Corner -- Vienna, VA............. 1,418 4,119 568 1,418 4,687
Tyee Hotel -- Olympia, WA(2)....... 1,008 1,562 (63) 1,097 945 2,659
SCHEDULE III (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
STARWOOD HOTELS & RESORTS
DECEMBER 31, 1997
(IN THOUSANDS)
(3)
ACCUMULATED
DEPRECIATION & YEAR OF DATE
DESCRIPTION AMORTIZATION CONSTRUCTION ACQUIRED LIFE
----------- -------------- ------------ -------- ----
St. Louis Embassy Suites -- St.
Louis, MO........................ 990 1985 08/16/96 35
Ritz Carlton Kansas City -- Kansas
City, MO......................... 2,110 1973 08/12/96 35
Omni Hotel -- Chapel Hill, NC...... 822 1981 04/07/95 35
Westin Aquila -- Omaha, NE......... 45 1924 12/08/97 30
Wayfarer Inn -- Bedford, NH........ 167 1966 09/11/97 30
Merrimack Hotel & Conference
Center -- Merrimack, NH.......... 43 1979 09/11/97 30
Sheraton Tara Hotel -- Nashua,
NH............................... 333 1980 09/11/97 30
Crowne Plaza Edison -- Edison,
NJ............................... 781 1987 02/14/97 30
Sheraton Tara Hotel -- Parsippany,
NJ............................... 919 1987 09/11/97 30
Marriott Forrestal Village
Hotel -- Princeton, NJ........... 963 1987 08/29/96 35
Best Western Airport
Inn -- Albuquerque, NM........... 1,912 1980 09/16/86 35
Doral Court -- New York, NY........ 792 1927 09/19/96 35
Doral Inn -- New York, NY.......... 1927 09/20/95 35
Doral Tuscany -- New York, NY...... 610 1935 09/19/96 35
Days Inn City Center -- Portland,
OR............................... 1,480 1962 09/16/86 35
Riverside Inn -- Portland, OR...... 1,407 1964 09/16/86 35
Allentown Hilton -- Allentown,
PA............................... 355 1981 08/16/96 35
Park Ridge Hotel -- King of
Prussia, PA...................... 1,020 1973 02/14/97 30
Days Inn Airport -- Philadelphia,
PA............................... 124 1984 06/28/96 35
Westin Philadelphia International
Airport -- Philadelphia, PA...... 988 1985 06/01/96 35
Ritz Carlton
Philadelphia -- Philadelphia,
PA............................... 1,775 1990 08/12/96 35
Sheraton Tara Airport
Hotel -- Warwick, RI............. 162 1979 09/11/97 30
Charleston Hilton
North -- Charleston, SC.......... 791 1983 02/14/97 30
Westin Hermitage -- Nashville,
TN............................... 489 1910 03/11/97 30
Radisson Park Central -- Dallas,
TX............................... 6,437 1972 09/09/88 35
Doubletree Guest Suites DFW
Airport -- Irving, TX............ 1,814 1985 04/26/96 35
Courtyard by Marriott Crystal
City -- Arlington, VA............ 1,098 1990 02/14/97 30
Omni Waterside Hotel -- Norfolk,
VA............................... 1,880 1976 02/14/97 30
Residence Inn Tyson's
Corner -- Vienna, VA............. 1,982 1984 07/01/84 35
Tyee Hotel -- Olympia, WA(2)....... 783 1961 02/17/87 35
F-53
148
SCHEDULE III (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
STARWOOD HOTELS & RESORTS
DECEMBER 31, 1997
(IN THOUSANDS)
GROSS AMOUNT BOOK
INITIAL COST TO COSTS SUBSEQUENT TO VALUE
COMPANY ACQUISITION AT DECEMBER 31, 1997
------------------------ ---------------------- -----------------------
(1)
(1)
BUILDING AND BUILDING AND BUILDING AND
DESCRIPTION LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS
----------- -------- ------------ ------- ------------ -------- ------------
Days Inn Town Center -- Seattle,
WA............................... 1,733 288 2,021
Edmond Meany Tower
Hotel -- Seattle, WA(2).......... 1,700 6,270 120 4,631 1,820 10,901
Sixth Avenue Inn -- Seattle, WA.... 2,720 210 2,930
Capitol Hill Suites -- Washington,
DC............................... 1,276 6,868 385 1,276 7,253
One Washington Circle -- Washington
DC............................... 2,850 14,343 2,850 14,343
Westin Washington,
DC -- Washington, DC............. 8,470 22,422 5,907 8,470 28,329
-------- ---------- ------- ------- -------- ----------
$352,763 $1,740,022 $ 2,138 $57,922 $354,901 $1,797,944
======== ========== ======= ======= ========
Land............................... 354,901
Furniture, fixtures & equipment.... 261,584
Construction in progress........... 61,737
----------
$2,476,166
==========
SCHEDULE III (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
STARWOOD HOTELS & RESORTS
DECEMBER 31, 1997
(IN THOUSANDS)
(3)
ACCUMULATED
DEPRECIATION & YEAR OF DATE
DESCRIPTION AMORTIZATION CONSTRUCTION ACQUIRED LIFE
----------- -------------- ------------ -------- ----
Days Inn Town Center -- Seattle,
WA............................... 1,628 1957 09/16/86 13
Edmond Meany Tower
Hotel -- Seattle, WA(2).......... 2,575 1932 09/16/86 35
Sixth Avenue Inn -- Seattle, WA.... 2,453 1959 09/16/86 13
Capitol Hill Suites -- Washington,
DC............................... 697 1955 01/01/95 35
One Washington Circle -- Washington
DC............................... 175 1964 09/30/97 30
Westin Washington,
DC -- Washington, DC............. 2,330 1984 01/04/96 35
--------
$114,986
Land...............................
Furniture, fixtures & equipment.... 50,642
Construction in progress...........
--------
$165,628
========
- ---------------
(1) As of December 31, 1997, real estate and furniture, fixtures and equipment
have a cost for federal income tax purposes which reasonably approximates
their carrying value.
(2) Land costs represent costs allocated to leasehold interest in land.
(3) Includes reserve for losses discussed in Notes 1 and 13 of Notes to the
Financial Statements.
(4) Certain amounts may have been adjusted due to cost segregation studies and
other adjustments.
F-54
149
SCHEDULE III (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
STARWOOD HOTELS & RESORTS
A reconciliation of the Trust's investment in real estate, furniture and
fixtures and related accumulated depreciation is as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ---------- --------
(IN THOUSANDS)
REAL ESTATE AND FURNITURE AND FIXTURES:
Balance at beginning of period.......................... $1,075,047 $ 305,637 $188,608
Additions during period:
Acquisitions....................................... 1,295,429 803,895 100,749
Contributed properties............................. -- -- 30,642
Improvements....................................... 116,994 15,661 4,660
Transfer of Properties............................. 2,372 4,014 --
Deductions during period:
Sale of properties................................. (13,676) (54,160) --
Transfer of properties............................. -- -- (19,022)
---------- ---------- --------
Balance at end of period................................ $2,476,166 $1,075,047 $305,637
========== ========== ========
ACCUMULATED DEPRECIATION:
Balance at beginning of period.......................... $ 74,123 $ 64,027 $ 71,899
Additions during period:
Depreciation expense............................... 95,018 39,137 7,674
Contributed properties............................. -- -- 890
Transfer of properties............................. 229 116 --
Deductions during period:
Sale of properties................................. (3,742) (29,157) --
Transfer of properties............................. -- -- (16,436)
---------- ---------- --------
Balance at end of period................................ $ 165,628 $ 74,123 $ 64,027
========== ========== ========
F-55
150
SCHEDULE III (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
DECEMBER 31, 1997
(IN THOUSANDS)
COSTS SUBSEQUENT TO GROSS AMOUNT BOOK VALUE
INITIAL COST TO COMPANY ACQUISITION AT DECEMBER 31, 1997
----------------------- ------------------- ------------------------
(1)
(1)
BUILDING AND BUILDING AND BUILDING AND
DESCRIPTION LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS
----------- ------- ------------ ---- ------------ -------- -------------
HOTEL ASSETS:
Corporate office -- Phoenix, AZ................ $ 243 $ 243
Plaza Hotel & Conference Center -- Tucson,
AZ........................................... $ 595 383 978
Midland Hotel -- Chicago, IL................... $ 1,551(4) 17,215 11,879 $ 1,551 29,094
Best Western Airport Inn -- Albuquerque, NM.... 325 47 372
Doral Inn -- New York, NY...................... 33,948 5,208 39,156
Days Inn City Center -- Portland, OR........... 2,185 2,185
Riverside Inn -- Portland, OR.................. 2,123(4) 2,123
Days Inn Town Center -- Seattle, WA............ 429(4) 429
Edmond Meany Tower Hotel -- Seattle, WA........ 3,437(4) 3,437
Sixth Avenue Inn -- Seattle, WA................ 1,515(4) 1,515
Milwaukee Marriott -- Brookfield, WI(3)........ 2,500 17,422 3,706 2,500 21,128
Westin Washington, DC -- Washington, DC........ 345 345
Westin Regina Resort -- Cancun, Mexico......... 4,200 37,197 4,200 37,197
Westin Regina Resort -- Cabo San Lucas,
Mexico....................................... 5,392 47,991 5,392 47,991
Westin Regina Resort -- Puerto Vallarta,
Mexico....................................... 2,500 22,261 2,500 22,261
Turnberry Hotel and Golf Resort -- Ayreshire,
Scotland..................................... 6,168 37,615 6,168 37,615
------- -------- -- ------- ------- --------
$22,311 $224,603 $0 $21,466 $22,311 $246,069
======= ======== == ======= ======= ========
Land........................................... 22,311
Furniture, fixtures & equipment................ 115,692
Construction in progress....................... 19,679
--------
$403,751
========
(2)
ACCUMULATED
DEPRECIATION & YEAR OF DATE
DESCRIPTION AMORTIZATION CONSTRUCTION ACQUIRED LIFE
----------- -------------- ------------ -------- ----
HOTEL ASSETS:
Corporate office -- Phoenix, AZ................ $ 4 N/A N/A 30
Plaza Hotel & Conference Center -- Tucson,
AZ........................................... 277 1971 09/16/86 35
Midland Hotel -- Chicago, IL................... 20,038 1934 03/22/96 35
Best Western Airport Inn -- Albuquerque, NM.... 130 1980 09/16/86 35
Doral Inn -- New York, NY...................... 2,545 1927 09/20/95 35
Days Inn City Center -- Portland, OR........... 702 1962 09/16/86 35
Riverside Inn -- Portland, OR.................. 682 1964 09/16/86 35
Days Inn Town Center -- Seattle, WA............ 358 1957 09/16/86 13
Edmond Meany Tower Hotel -- Seattle, WA........ 1,105 1932 09/16/86 35
Sixth Avenue Inn -- Seattle, WA................ 1,321 1959 09/16/86 13
Milwaukee Marriott -- Brookfield, WI(3)........ 4,097 1972 07/01/91 35
Westin Washington, DC -- Washington, DC........ 181 1984 01/04/96 35
Westin Regina Resort -- Cancun, Mexico......... 617 1991 08/21/97 30
Westin Regina Resort -- Cabo San Lucas,
Mexico....................................... 795 1994 08/21/97 30
Westin Regina Resort -- Puerto Vallarta,
Mexico....................................... 368 1992 08/21/97 30
Turnberry Hotel and Golf Resort -- Ayreshire,
Scotland..................................... 1905 12/23/97 30
-------
$33,220
=======
Land...........................................
Furniture, fixtures & equipment................ 52,206
Construction in progress.......................
-------
$85,426
=======
- ---------------
(1) As of December 31, 1997, real estate and furniture, fixtures and equipment
have a cost for federal income tax purposes which reasonably approximates
their carrying value.
(2) Includes reserve for losses discussed in Notes 1 and 13 of Notes to the
Financial Statements.
(3) Land costs represent costs allocated to leasehold interest in land.
(4) Certain amounts may have been adjusted due to cost segregation studies and
other adjustments.
F-56
151
SCHEDULE III (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
A reconciliation of the Corporation's investment in real estate, furniture
and fixtures and related accumulated depreciation is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
REAL ESTATE AND FURNITURE AND FIXTURES:
Balance at beginning of period............................. $168,907 $134,722 $ 51,741
Additions during period:
Acquisitions.......................................... 185,293 29,939 38,396
Contributed properties................................ 22,455 -- 4,459
Improvements.......................................... 40,264 12,114 21,104
Transfer of properties................................ -- -- 19,022
Deductions during period:
Transfer of properties................................ (2,372) (4,014) --
Sale of properties.................................... (10,796) (3,854) --
-------- -------- --------
Balance at end of period................................... $403,751 $168,907 $134,722
======== ======== ========
ACCUMULATED DEPRECIATION:
Balance at beginning of year............................... $ 48,157 $ 39,374 $ 17,266
Additions during period:
Depreciation expense.................................. 23,419 12,191 5,269
Transfer of properties................................ -- -- 16,436
Contributed properties................................ 15,980 -- 403
Deductions during period:
Transfer of properties................................ (229) (116) --
Sale of properties.................................... (1,901) (3,292) --
-------- -------- --------
Balance at end of period................................... $ 85,426 $ 48,157 $ 39,374
======== ======== ========
F-57
152
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
STARWOOD HOTELS AND RESORTS
DECEMBER 31, 1997
(IN THOUSANDS)
PRINCIPAL AMOUNT
ORIGINAL OF LOANS SUBJECT
FACE CARRYING TO DELINQUENT
INTEREST FINAL PRIOR AMOUNT OF AMOUNT OF PRINCIPAL OR
DESCRIPTION RATE MATURITY PERIODIC PAYMENT LIENS MORTGAGES MORTGAGES(1) INTEREST
----------- ---------- -------- ---------------- ----- --------- ------------ ----------------
First Mortgages:
Vagabond
Inns -- Modesto,
CA................... 10.00% 2006 (3) no $ 1,995 $ 1,126
Ramada Inn -- Tucker,
GA................... 9.00% 1998 16,700(4) no 1,985 1,878
Ramada
Inn -- Jacksonville,
FL................... 9.00% 2001 18,500(5) no 2,300 2,252
Ramada
Inn -- Fayetteville,
NC................... 9.00% 2006 9,100(6) no 800 668
Ramada
Suites -- Secaucus,
NJ................... (2) 1999 Adjustable(7) no 13,813 10,344
Harvey Hotel
Addison -- Dallas,
TX................... 8.00% 2002 323,600(8) no 11,250 6,900
Harvey Bristol
Suites -- Dallas,
TX................... 8.00% 2002 517,800(9) no 18,000 11,079
Harvey DFW Airport
Hotel -- Dallas,
TX................... 8.00% 2002 805,500(10) no 28,000 17,050
Second Mortgages:
Harvey Hotel
Addison -- Dallas,
TX................... Prin. Only 2002 1,900(11) yes 75 --
Harvey Bristol
Suites -- Dallas,
TX................... Prin. Only 2002 4,800(12) yes 190 --
Harvey DFW Airport
Hotel -- Dallas,
TX................... Prin. Only 2002 1,800(13) yes 72 --
Allowance for loan
losses................... (100)
-------- --------
$ 78,480 $ 51,197
======== ========
Intercompany Mortgage Loans
First Mortgages:
Midland
Hotel -- Chicago,
IL................... 10.00% 1999 (14) no $ 17,000 $ 19,975
Milwaukee
Sheraton -- Milwaukee,
WI (Aetna)........... 10.50% 1998 (15) no 10,000 8,494
Milwaukee
Sheraton -- Milwaukee,
WI (Aetna
Addition)............ 1998 (15) yes 600
Doral Inn -- New York,
NY................... 9.50% 2006 (16) no 40,250 40,250
Westin Regina
Resort -- Cancun,
Mexico............... (17) 1998 (17) no 41,088 42,335
Westin Regina
Resort -- Cabo San
Lucas, Mexico........ (17) 1998 (17) no 53,081 54,693
Westin Regina
Resort -- Puerto
Vallarta, Mexico..... (17) 1998 (17) no 24,581 25,327
Turnberry Hotel and
Golf Resort --
Ayreshire,
Scotland............. 10.00% 2000 (18) no 27,000 27,067
Third Mortgages:
Milwaukee
Sheraton -- Milwaukee,
WI................... 10.50% 1998 (15) yes 1,000 1,000
Fourth Mortgages:
Milwaukee
Sheraton -- Milwaukee,
WI................... 10.50% 1998 (15) yes 12,667 21,691
-------- --------
$226,667 $241,432
======== ========
(Continued)
F-58
153
- ---------------
(1) As of December 31, 1997, the aggregate cost (before allowance for loan
losses) for federal income tax purposes is not significantly different from
that used for book purposes.
(2) The interest rate is the ninety-day LIBOR plus 1.25% or prime rate, at
borrower's option. At December 31, 1997, the rate was 6.97%.
(3) The note provides for monthly payments of interest plus additional annual
payments based on a percentage of the hotel's sales, a portion of which is
applied to principal. On April 29, 1996, the borrower exercised its right
under the terms of the note to extend the maturity of the note to June
2006.
(4) Principal and interest due monthly based on a 25-year amortization schedule
with unpaid principal of approximately $1.8 million due in June 1998.
(5) Principal and interest due monthly based on a 30-year amortization schedule
with unpaid principal of approximately $2.2 million due in December 2001.
(6) Principal and interest due monthly based on a 12-year amortization schedule
with unpaid principal of $9,000 due in December 2006.
(7) Principal and interest due monthly. Principal amount adjusts annually based
on note schedule. The note carrying amount is net of approximately $1.7
million discount.
(8) Principal and interest due quarterly based on note schedule. The note
carrying amount is net of approximately $2.0 million discount. A 25%
participation on both the first and second mortgages was sold to a third
party in 1995.
(9) Principal and interest due quarterly based on note schedule. The note
carrying amount is net of approximately $3.1 million discount.
(10) Principal and interest due quarterly based on note schedule. The note
carrying amount is net of approximately $5.0 million discount.
(11) Forty equal principal payments of $125,125 each of which the Realty
Partnership has a 1.5% interest. The note carrying amount is net of $47,000
allowance. The face amount represents the Realty Partnership's 1.5%
interest in the mortgage loan. The remaining payment amounts are passed
through to the participants.
(12) Forty equal principal payments of $237,500 each of which the Realty
Partnership has a 2% interest. The note carrying amount is net of $95,000
allowance. The face amount represents the Realty Partnership's 2% interest
in the mortgage loan. The remaining payment amounts are passed through to
the participants.
(13) Forty equal principal payments of $90,000 each of which the Realty
Partnership has a 2% interest. The note carrying amount is net of $36,000
allowance. The face amount represents the Realty Partnership's 2% interest
in the mortgage loan. The remaining payment amounts are passed through to
the participants.
(14) Interest only payable monthly. Principal and all accrued and unpaid
interest are due March 1999.
(15) In June 1997, the maturity of the notes was extended to June 1998.
(16) One hundred thirty-two equal installments of interest only. Principal and
all accrued and unpaid interest are due October 2006.
(17) The interest rate is the ninety-day LIBOR plus 2.69%. At December 31, 1997,
the rate was 8.34%. Principal and all accrued and unpaid interest are due
May 1998.
(18) Interest only payable monthly. Principal and all accrued and unpaid
interest are due December 2000.
(Continued)
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154
SCHEDULE IV (CONTINUED)
RECONCILIATION OF MORTGAGE LOANS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
Balance at beginning of period.............................. $90,741 $79,261 $14,049
Additions --
New mortgage loans........................................ -- 31,289 71,779
Amortization of discount.................................. 5,575 3,140 3,285
Deductions --
Principal repayments...................................... (45,245) (22,949) (6,940)
Allowance for loan loss................................... 126 -- (2,912)
------- ------- -------
Balance at end of period.................................... $51,197 $90,741 $79,261
======= ======= =======
INTERCOMPANY MORTGAGE LOANS
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- ------- -------
Balance at beginning of period.............................. $ 88,077 $68,486 $16,916
Additions --
New mortgage loans........................................ 145,750 18,216 50,073
Accrued interest (1)...................................... 7,935 2,055 2,010
Deductions --
Principal repayments...................................... (330) (680) (513)
-------- ------- -------
Balance at end of period.................................... $241,432 $88,077 $68,486
======== ======= =======
- ---------------
(1) Per mortgage loan agreements, the borrowers are not required to pay monthly
interest if the cash flows are insufficient. Thus, the Trust has accrued
interest on the notes.
F-60