<PAGE> 1
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(AMENDMENT NO. 6)
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Sec. 240.14a-11(c) or Sec. 240.14a-12
Hotel Investors Trust
Hotel Investors Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Hotel Investors Trust
Hotel Investors Corporation
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(j)(2).
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
N/A
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transactions applies:
N/A
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
The filing fee has been calculated pursuant to Rule 0-11(c)(2) under the
Exchange Act and is equal to $2,600.40, or 1/50 of 1% of $13,002,000,
the aggregate book value of the estimated 31.1% partnership interests in
the Realty Partnership and the Operating Partnership (as each is defined
in the Joint Proxy Statement) to be received by the Trust and the
Corporation, respectively, in exchange for the contributions of their
respective assets.
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
N/A
- --------------------------------------------------------------------------------
Set forth the amount on which the filing fee is calculated and state how it was
determined.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement no.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
[HOTEL INVESTORS LOGO]
<TABLE>
<S> <C>
HOTEL INVESTORS TRUST HOTEL INVESTORS CORPORATION
11845 WEST OLYMPIC 11845 WEST OLYMPIC BOULEVARD
BOULEVARD SUITE 560
SUITE 550 LOS ANGELES, CALIFORNIA 90064
LOS ANGELES, CALIFORNIA
90064
</TABLE>
IMPORTANT SPECIAL MEETINGS
DECEMBER 15, 1994
NOVEMBER 11, 1994
Dear Fellow Investors:
You are cordially invited to attend the Special Meeting of Shareholders of
Hotel Investors Trust (the "Trust") and the Special Meeting of Stockholders of
Hotel Investors Corporation (the "Corporation")(collectively, the "Companies"),
scheduled to be held on December 15, 1994. The Special Meetings will be held at
the Embassy Suites Hotel, 1515 North 44th Street, Phoenix, Arizona 85008, at
11:00 a.m. and 11:30 a.m., respectively.
At the Special Meetings, investors will be asked to approve a proposed
reorganization with Starwood Capital Group, L.P. and its affiliates
("Starwood"). The reorganization will pool the assets of the Trust and
Corporation with certain assets of Starwood, creating an entity with interests
in 47 hotels in 21 states. Starwood is a real estate investment organization
which acquires equity and debt interests in hotels and other real estate. Since
1991, Starwood has made over $700 million in real estate investments, including
hotel investments exceeding $300 million since 1992. The reorganization will
enlarge and diversify the Companies' portfolio of hotel assets, improve the
financial stability of the Companies and their ability to refinance existing
debt, and position the Companies for access to capital markets.
Pursuant to the reorganization, at the Special Meetings a new Board of
Trustees of the Trust and a new Board of Directors of the Corporation will be
elected, including nominees designated by Starwood who would constitute a
majority of each Board.
The Board of Trustees of the Trust and the Board of Directors of the
Corporation have carefully reviewed and considered these transactions.
Furthermore, Salomon Brothers Inc, a nationally recognized investment banking
firm, has rendered an opinion to the Board of Trustees of the Trust and the
Board of Directors of the Corporation that the reorganization is fair, from a
financial point of view, to the shareholders of the Trust and the stockholders
of the Corporation, other than Starwood. Investors are urged to read and give
their prompt attention to the Joint Proxy Statement which explains in detail the
reorganization proposal, as well as the advantages and disadvantages of the
proposal.
THE BOARD OF TRUSTEES OF THE TRUST AND THE BOARD OF DIRECTORS OF THE
CORPORATION, BY UNANIMOUS VOTES, HAVE EACH DETERMINED THAT THE REORGANIZATION
PROPOSAL IS IN THE BEST INTEREST OF INVESTORS AND RECOMMEND A VOTE "FOR" THE
PROPOSAL.
Your vote is important, regardless of the number of shares you own.
Remember, failure to vote is equivalent to a vote AGAINST the reorganization.
Accordingly, you are urged to promptly sign, date and mail your enclosed proxy.
<PAGE> 3
If you have any questions, or need assistance in voting, please call D.F.
King & Co., Inc. which is assisting us at (800) 488-8035.
On behalf of the Trustees and Directors, thank you for your continued
support.
Sincerely,
JEFFREY C. LAPIN
-----------------------
Jeffrey C. Lapin
Chief Executive Officer
Hotel Investors Trust
KEVIN E. MALLORY
-----------------------
Kevin E. Mallory
Executive Vice President
Hotel Investors Corporation
<PAGE> 4
[HOTEL INVESTORS LOGO]
HOTEL INVESTORS TRUST
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To the Shareholders of Hotel Investors Trust:
Notice is hereby given that a Special Meeting of Shareholders (the "Trust
Meeting") of Hotel Investors Trust, a Maryland real estate investment trust (the
"Trust"), will be held at the Embassy Suites Hotel, 1515 North 44th Street,
Phoenix, Arizona 85008, on December 15, 1994 at 11:00, a.m. local time, for the
following purposes:
1. To consider and vote upon a proposal relating to a reorganization (the
"Reorganization") involving the Trust, Hotel Investors Corporation (the
"Corporation") and Starwood Capital Group, L.P. and its affiliates ("Starwood")
pursuant to which, among other things, (a) the Trust will become the sole
general partner of a limited partnership (the "Realty Partnership") to which the
Trust will contribute all of its assets (subject to substantially all of its
liabilities, including the Senior Debt (as defined herein) of the Trust) in
exchange for an approximate 28.3% interest in the Realty Partnership, and
Starwood will become a 71.7% limited partner of the Realty Partnership, (b) the
Trust will be authorized to issue, upon the exchange of all limited partnership
interests in the Realty Partnership initially held by Starwood, shares of
Beneficial Interest ("Trust Shares") of the Trust representing up to
approximately 71.7% of the issued and outstanding Trust Shares, (c) the Board of
Trustees of the Trust will be authorized to effect a reverse stock split of the
Trust Shares, and (d) the Trust will amend its Declaration of Trust to, among
other things (i) change the name of the Trust to "Starwood Lodging Trust", (ii)
create a classified Board of Trustees, (iii) increase the number of authorized
Trust Shares and change the par value of the Trust Shares from $1.00 par value
to $.01 par value, (iv) eliminate the provision limiting the principal amount of
Trust borrowing to no more than 300% of the net assets of the Trust; (v)
eliminate the provisions prohibiting the Trust from (A) making any investment in
real property in an amount that exceeds 40% of the sum of the Trust's net worth
and subordinated indebtedness, (B) making any investment in unimproved
non-income producing real property that exceeds 10% of the Trust's assets and
(C) investing in certain types of assets or engaging in certain other
activities, (vi) eliminate the cumulative voting provisions of the Declaration
of Trust and (vii) update the provisions of the Declaration of Trust which are
designed to allow the Trust to qualify as a REIT for federal income tax purposes
(the further amendment of which provisions would require the affirmative vote of
holders owning two-thirds of the outstanding Trust Shares). Shareholders of the
Trust are being given the opportunity to vote separately, if they so desire, on
the portions of the Reorganization Proposal described in clauses (ii) and (vi)
above.
2. To elect a new Board of Trustees of the Trust, including nominees
designated by Starwood who would constitute a majority of the Board.
3. To consider and vote upon the ratification of the selection of Deloitte
& Touche LLP as the independent public accountants of the Trust for the Trust's
1994 fiscal year.
4. To transact such other business as may properly come before the Trust
Meeting or any adjournment thereof.
Only holders of record of Trust Shares at the close of business on November
7, 1994 are entitled to receive notice of, and to vote at, the Trust Meeting and
any adjournment thereof.
<PAGE> 5
SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE TRUST MEETING IN PERSON.
HOWEVER, WHETHER OR NOT YOU EXPECT TO ATTEND, YOU ARE URGED TO READ THE
ACCOMPANYING JOINT PROXY STATEMENT AND THEN COMPLETE, SIGN AND DATE THE ENCLOSED
PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. IT IS
IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING, AND YOUR PROMPTNESS
WILL ASSIST US IN AVOIDING ADDITIONAL SOLICITATION COSTS. IF YOU RECEIVE MORE
THAN ONE PROXY CARD BECAUSE YOU OWN SHARES REGISTERED IN DIFFERENT NAMES OR AT
DIFFERENT ADDRESSES, EACH CARD SHOULD BE SIGNED AND RETURNED.
By Order of the Board of Trustees
SHERWIN L. SAMUELS
-----------------------
Sherwin L. Samuels
Secretary
November 11, 1994
Los Angeles, California
<PAGE> 6
[HOTEL INVESTORS LOGO]
HOTEL INVESTORS CORPORATION
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To the Stockholders of Hotel Investors Corporation:
Notice is hereby given that a Special Meeting of Stockholders (the
"Corporation Meeting") of Hotel Investors Corporation, a Maryland corporation
(the "Corporation"), will be held at the Embassy Suites Hotel, 1515 North 44th
Street, Phoenix, Arizona 85008 on December 15, 1994 at 11:30 a.m., local time,
for the following purposes:
1. To consider and vote upon a proposal relating to a reorganization (the
"Reorganization") involving the Corporation, Hotel Investors Trust (the "Trust")
and Starwood Capital Group, L.P. and its affiliates ("Starwood") pursuant to
which, among other things, (a) the Corporation and its subsidiaries will become
the general partners of a limited partnership (the "Operating Partnership") to
which the Corporation and its subsidiaries will contribute all of their
operating assets (subject to substantially all of their liabilities) in exchange
for an approximate 28.3% interest in the Operating Partnership, and Starwood
will become a 71.7% limited partner of the Operating Partnership, (b) the
Corporation will be authorized to issue, upon the exchange of all limited
partnership interests in the Operating Partnership initially held by Starwood,
shares of Common Stock ("Corporation Shares") of the Corporation representing up
to approximately 71.7% of the issued and outstanding Corporation Shares, (c) the
Board of Directors of the Corporation will be authorized to effect a reverse
stock split of the Corporation Shares, and (d) the Corporation will amend its
Articles of Incorporation to, among other things (i) change the name of the
Corporation to "Starwood Lodging Corporation", (ii) create a classified Board of
Directors and provide for removal of directors only for cause, (iii) increase
the number of authorized Corporation Shares and change the par value of the
Corporation Shares from $.10 par value to $.01 par value, (iv) eliminate the
cumulative voting provisions of the Articles of Incorporation and (v) update the
provisions of the Articles of Incorporation which are designed to allow the
Trust to qualify as a REIT for federal income tax purposes (the further
amendment of which provisions would require the affirmative vote of holders
owning two-thirds of the outstanding Corporation Shares). Stockholders of the
Corporation are being given the opportunity to vote separately, if they so
desire, on the portions of the Reorganization Proposal described in clauses (ii)
and (iv) above.
2. To elect a new Board of Directors of the Corporation, including
nominees designated by Starwood who would constitute a majority of the Board.
3. To consider and vote upon the ratification of the selection of Deloitte
& Touche LLP as the independent public accountants of the Corporation for the
Corporation's 1994 fiscal year.
4. To transact such other business as may properly come before the
Corporation Meeting or any adjournment thereof.
Only holders of record of Corporation Shares at the close of business on
November 7, 1994 are entitled to receive notice of, and to vote at, the
Corporation Meeting and any adjournment thereof.
STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE CORPORATION MEETING IN
PERSON. HOWEVER, WHETHER OR NOT YOU EXPECT TO ATTEND, YOU ARE URGED TO READ THE
ACCOMPANYING JOINT PROXY STATEMENT AND THEN COMPLETE, SIGN AND DATE THE ENCLOSED
PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. IT IS
IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING, AND YOUR PROMPTNESS
WILL ASSIST US IN AVOIDING ADDITIONAL SOLICI-
<PAGE> 7
TATION COSTS. IF YOU RECEIVE MORE THAN ONE PROXY CARD BECAUSE YOU OWN SHARES
REGISTERED IN DIFFERENT NAMES OR AT DIFFERENT ADDRESSES, EACH CARD SHOULD BE
SIGNED AND RETURNED.
By Order of the Board of Directors
KEVIN E. MALLORY
----------------------
Kevin E. Mallory
Executive Vice President
November 11, 1994
Los Angeles, California
<PAGE> 8
[HOTEL INVESTORS LOGO]
<TABLE>
<S> <C>
HOTEL INVESTORS TRUST HOTEL INVESTORS CORPORATION
11845 WEST OLYMPIC 11845 WEST OLYMPIC BOULEVARD
BOULEVARD SUITE 560
SUITE 550 LOS ANGELES, CALIFORNIA 90064
LOS ANGELES, CALIFORNIA
90064
</TABLE>
------------------------
JOINT PROXY STATEMENT
------------------------
SPECIAL MEETINGS OF SHAREHOLDERS AND STOCKHOLDERS
TO BE HELD ON DECEMBER 15, 1994
This Joint Proxy Statement is being furnished to shareholders of Hotel
Investors Trust, a Maryland real estate investment trust (the "Trust"), and
stockholders of Hotel Investors Corporation, a Maryland corporation (the
"Corporation"), in connection with the solicitation of proxies by the Trust's
Board of Trustees (the "Board of Trustees") and the Corporation's Board of
Directors (the "Board of Directors") for use at the Trust's Special Meeting of
Shareholders (the "Trust Meeting") and the Corporation's Special Meeting of
Stockholders (the "Corporation Meeting" and, together with the Trust Meeting,
the "Special Meetings"), respectively, to be held on December 15, 1994, at the
times and place and for the purposes specified in the accompanying Notices of
Special Meeting, and at any adjournment(s) of such meetings.
The Shares of Beneficial Interest, par value $1.00 per share, of the Trust
("Shares") and the shares of Common Stock, par value $.10 per share, of the
Corporation ("Shares") are "paired" and may only be held and transferred in
units consisting of one Trust Share and one Corporation Share (a "Paired
Share"). The Trust, the Corporation and the Corporation's subsidiaries are
sometimes referred to herein as "Hotel Investors" or the "Companies".
At the Special Meetings, shareholders of the Trust and stockholders of the
Corporation will each be voting on, among other things, a proposal (the
"Reorganization Proposal") relating to a reorganization (the "Reorganization")
involving the Trust, the Corporation and Starwood Capital Group, L.P. and its
affiliates (collectively, "Starwood"). Pursuant to the Reorganization, the Trust
will become the sole general partner of SLT Realty Limited Partnership (the
"Realty Partnership") and Starwood will be the limited partner. The Trust will
contribute to the Realty Partnership all of the assets of the Trust (subject to
substantially all of its liabilities, including the Senior Debt of the Trust) in
exchange for a 28.3% interest in the Realty Partnership. Starwood will
contribute to the Realty Partnership cash and other assets, subject to certain
liabilities, in exchange for the remaining approximate 71.7% interest in the
Realty Partnership.
Pursuant to the Reorganization, the Corporation and its subsidiaries will
become the general partners of SLC Operating Limited Partnership (the "Operating
Partnership") and Starwood will be the limited partner. The Corporation and its
subsidiaries will contribute to the Operating Partnership all of their operating
assets (subject to substantially all of their liabilities) in exchange for a
28.3% interest in the Operating Partnership. Such assets will be contributed
upon the consummation of the Reorganization, except for certain gaming assets
which will be contributed upon receipt of certain regulatory approvals. Starwood
will contribute to the Operating Partnership cash and other assets, subject to
certain liabilities, in exchange for the remaining approximate 71.7% interest in
the Operating Partnership.
The limited partner interests of Starwood in the Realty Partnership and the
Operating Partnership (collectively, the "Partnerships") will be exchangeable
for, at the option of the Trust and the Corporation, either cash or Paired
Shares representing up to approximately 71.7% of the Paired Shares after the
Reorganization.
As part of the Reorganization, a new Board of Trustees of the Trust and a
new Board of Directors of the Corporation will be elected, including nominees
designated by Starwood who would constitute a majority of each Board. See "The
Reorganization."
The Trust and the Corporation are also seeking ratification of the
appointment of their independent public accountants for 1994.
This Joint Proxy Statement and the related form of proxy are first being
sent or given to shareholders of the Trust and stockholders of the Corporation
on or about November 11, 1994.
THE DATE OF THIS JOINT PROXY STATEMENT IS NOVEMBER 11, 1994.
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................................................................... 3
Introduction and Voting Rights........................................................ 22
The Reorganization Proposal........................................................... 24
The Reorganization.................................................................... 26
The Partnerships...................................................................... 54
Certain Federal Income Tax Consequences............................................... 59
Adoption of Amendments to Trust Declaration and Restated Articles of Incorporation.... 71
Election of Trustees of the Trust..................................................... 76
Election of Directors of the Corporation.............................................. 79
Independent Public Accountants........................................................ 81
Price Ranges of Paired Shares; Dividends.............................................. 82
Security Ownership of Certain Beneficial Owners and Management........................ 83
Executive Compensation................................................................ 86
Report on Executive Compensation...................................................... 89
Compensation Committee Interlocks and Insider Participation........................... 90
Shareholder Return Performance........................................................ 90
Certain Relationships and Related Transactions........................................ 91
Shareholder Proposals for Next Annual Meetings........................................ 93
Independent Auditors.................................................................. 94
Index to Financial Statements......................................................... F-1
</TABLE>
Exhibits:
<TABLE>
<S> <C>
Exhibit A -- Text of Amendments to Amended and Restated Declaration of Trust of the
Trust
Exhibit B -- Amended and Restated Articles of Incorporation of the Corporation
Exhibit C -- Opinion of Salomon Brothers Inc
</TABLE>
2
<PAGE> 10
SUMMARY
Certain significant matters discussed in this Joint Proxy Statement are
summarized below. This summary is not intended to be complete and is qualified
in all respects by reference to the more detailed information appearing in this
Joint Proxy Statement, including the Exhibits hereto. Shareholders of the Trust
and stockholders of the Corporation are urged to review carefully the entire
Joint Proxy Statement, including the Exhibits hereto. The information in this
Joint Proxy Statement assumes a one-for-seven reverse stock split. As described
herein, after the consummation of the Reorganization, the Board of Trustees of
the Trust and the Board of Directors of the Corporation will determine the
actual ratio for the reverse stock split within a range of six to ten.
SPECIAL MEETINGS
DATE, TIME AND PLACE....... The Special Meetings are to be held on December 15,
1994 at 11:00 and 11:30 a.m., local time, at the
Embassy Suites Hotel, 1515 North 44th Street,
Phoenix, Arizona 85008.
PURPOSES OF THE SPECIAL
MEETINGS................. The purposes of the Special Meetings are to
consider and vote upon:
1. The approval of a proposal (the
"Reorganization Proposal") to consummate the
Reorganization. Approval of the Reorganization
Proposal will authorize, among other things, the
following actions:
(a) the contribution by the Trust to the
Realty Partnership of all of the properties and
assets of the Trust (subject to substantially all
of its liabilities, including the Senior Debt (as
defined herein) of the Trust);
(b) the contribution by the Corporation and
its subsidiaries to the Operating Partnership of
all of their properties and operating assets
(subject to substantially all of their
liabilities), including the contribution of certain
gaming assets and liabilities upon receipt of
certain regulatory approvals described herein;
(c) a reverse split (the "Reverse Split") of
the Paired Shares in which a number of Paired
Shares outstanding at the effective date of the
Reverse Split (such number to be not less than six
nor more than ten, as determined by the Board of
Trustees and the Board of Directors) will be
changed into one Paired Share;
(d) the adoption of certain amendments to the
Amended and Restated Declaration of Trust which (i)
change the name of the Trust to "Starwood Lodging
Trust"; (ii) create a classified Board of Trustees
of the Trust; (iii) increase the number of
authorized Trust Shares to 100 million, after
giving effect to the Reverse Split, and change the
par value of the Trust Shares from $1.00 par value
to $.01 par value; (iv) eliminate the provision
limiting the principal amount of Trust borrowing to
no more than 300% of the net assets of the Trust;
(v) eliminate the provisions prohibiting the Trust
from (A) making any investment in real property in
an amount that exceeds 40% of the sum of the
Trust's net worth and subordinated indebtedness and
(B) making any investment in unimproved non-income
producing real property that exceeds 10% of the
Trust's assets and (C) investing in certain types
of assets or engaging in certain other activities;
(vi) eliminate the cumulative voting provisions of
the Declaration of Trust; and (vii) update the
provisions of the Declara-
3
<PAGE> 11
tion of Trust which are designed to allow the Trust
to qualify as a real estate investment trust for
federal income tax purposes ("REIT");
(e) the adoption of amended and restated
Articles of Incorporation of the Corporation which
(i) change the name of the Corporation to "Starwood
Lodging Corporation"; (ii) create a classified
Board of Directors of the Corporation and provide
for removal of directors only for cause; (iii)
increase the number of authorized Corporation
Shares to 100 million, after giving effect to the
Reverse Split, and change the par value of the
Corporation Shares from $.10 par value to $.01 par
value; (iv) eliminate the cumulative voting
provisions of the Articles of Incorporation; and
(v) update the provisions of the Articles of
Incorporation which are designed to allow the Trust
to qualify as a REIT;
(f) the issuance, upon the exchange of all
limited partner interests in the Realty Partnership
and the Operating Partnership held by Starwood, of
Paired Shares representing up to approximately
71.7% of the Paired Shares after such exchanges;
and
(g) the contribution by the Trust to the
Realty Partnership and the contribution by the
Corporation to the Operating Partnership of
substantially all of the net proceeds of the
proposed underwritten public offering of Paired
Shares described under "The Reorganization -- The
Offering."
2. The election of a new Board of Trustees of
the Trust and a new Board of Directors of the
Corporation in connection with the Reorganization,
including nominees designated by Starwood who would
constitute a majority of each Board. If the new
Board of Trustees is so elected and the
Reorganization Proposal is approved at the Special
Meetings, such new Board will assume office
immediately, even if the Reorganization is not
consummated. If the new Board of Directors is so
elected and the Reorganization Proposal is approved
at the Special Meetings, such new Board will take
office upon the receipt of certain regulatory
approvals described herein, even if the
Reorganization is not consummated. If such new
Boards are not so elected or if the Reorganization
Proposal is not so approved, the current Trustees
of the Trust and Directors of the Corporation will
continue as such.
3. Shareholders of the Trust are being given the
opportunity to vote separately, if they so desire,
on the following portions of the Reorganization
Proposal:
(a) the creation of a classified Board of
Trustees of the Trust as described in Item 1(d)(ii)
above; and
(b) the elimination of the cumulative voting
provisions of the Trust Declaration as described in
Item 1(d)(vi) above.
Stockholders of the Corporation are being given the
opportunity to vote separately, if they so desire,
on the following portions of the Reorganization
Proposal:
(a) the creation of a classified Board of
Directors of the Corporation as described in Item
1(e)(ii) above;
4
<PAGE> 12
(b) the amendment to the Articles of
Incorporation of the Corporation to provide for
removal of directors only for cause as described in
Item 1(e)(ii) above; and
(c) the elimination of the cumulative voting
provisions of the Articles of Incorporation as
described in Item 1(e)(iv) above.
4. The ratification of the selection of Deloitte
& Touche LLP ("Deloitte & Touche") as the
independent auditors of each of the Trust and the
Corporation for the 1994 fiscal year.
5. Such other business as may properly come
before the Special Meetings.
Adoption of each portion of the Reorganization
Proposal (as well as the election of the new Board
of Trustees of the Trust and a new Board of
Directors of the Corporation) is a condition to the
obligations to consummate the Reorganization,
including those portions of the Reorganization
Proposal which are to be voted on separately as
described in item 3 above. The parties have the
right (but not the obligation) to waive conditions
to the Reorganization which are not satisfied,
including if certain portions of the Reorganization
Proposal are not adopted at the Special Meetings.
RECORD DATE................ Only holders of record of Trust Shares at the close
of business on November 7, 1994 are entitled to
notice of and to vote at the Trust Meeting and only
holders of record of Corporation Shares at the
close of business on November 7, 1994 are entitled
to notice of and to vote at the Corporation
Meeting.
THE REORGANIZATION
PARTIES:
The Trust................ The Trust, which invests in fee, ground leasehold
and mortgage loan interests, currently holds
interests in 37 hotel properties throughout the
United States, including two hotel-casinos in
Nevada. The principal executive offices of the
Trust are located at 11845 West Olympic Boulevard,
Suite 550, Los Angeles, California 90064.
The Corporation.......... The Corporation operates hotel properties (directly
and through its wholly-owned subsidiaries),
including two hotel-casinos in Nevada, which it
generally leases from the Trust. The principal
executive offices of the Corporation are located at
11845 West Olympic Boulevard, Suite 560, Los
Angeles, California 90064.
Paired Structure of Hotel
Investors................ The Trust Shares and the Corporation Shares are
"paired" and may only be held and transferred in
units consisting of one Trust Share and one
Corporation Share (a "Paired Share"). Because all
but three of the properties presently owned by the
Trust are leased to the Corporation, holders of
Paired Shares participate in both the ownership and
operational aspects of the hotel business. For
purposes of qualifying as a REIT, a company may not
operate hotels and therefore the ability to
participate in both the ownership and operation of
hotel assets with the benefits of REIT status is
unique to the "paired share" structure. The
Internal Revenue Code permits a REIT to have a
"paired share"
5
<PAGE> 13
structure only if, like the Trust, it was part of a
"paired share" structure before July 1, 1983. The
"paired share" structure of the Trust and the
Corporation will continue after the Reorganization.
Starwood................. The Companies will have the benefit of a
significant investment by Starwood, a company with
substantial experience in owning and acquiring
hotel properties. Starwood intends for the
Partnerships to be, and so long as an officer,
director, partner or employee of Starwood is on the
Board of either the Trust or the Corporation the
Partnership will be, the exclusive vehicle through
which Starwood will continue to pursue hotel equity
investments in the United States after the
consummation of the Reorganization. Starwood is a
privately held real estate investment organization
which acquires equity and debt interests in hotel
properties, multifamily residential properties and
single family developable land throughout the
United States, among other categories of assets.
Since 1991, Starwood and its predecessors have been
involved with transactions involving over 100
properties with an aggregate investment exceeding
$700 million (on a cost basis). Starwood's
principal investors are high net worth families and
institutions. Starwood has acquired interests in
over 8,000 hotel rooms in 44 properties at a cost
exceeding $300 million since 1992.
Starwood currently has 27 employees, including 17
experienced real estate, finance and acquisition
professionals, most of whom have invested
substantial personal capital in Starwood's
investments. As of November 7, 1994, Starwood owned
approximately 2.5% of the outstanding Paired
Shares. In addition, an affiliate of Starwood is
the general partner of a partnership that has the
right to acquire approximately $74.0 million of the
Trust's senior secured indebtedness (the "Senior
Debt"). The principal executive offices of Starwood
are located at Three Pickwick Plaza, Suite 250,
Greenwich, Connecticut 06830.
PRINCIPAL FEATURES OF THE
REORGANIZATION:
The Realty Partnership... SLT Realty Limited Partnership (the "Realty
Partnership") will be formed in connection with the
Reorganization, with the Trust as its sole general
partner and Starwood as its limited partner. The
Trust will contribute to the Realty Partnership all
of its assets (subject to substantially all of its
liabilities, including the Senior Debt) in exchange
for an approximate 28.3% interest in the Realty
Partnership, subject to adjustment. Starwood will
contribute to the Realty Partnership cash and
equity and debt interests in hotels in exchange for
limited partnership interests ("Realty Units") in
the Realty Partnership representing the remaining
approximate 71.7% interest in the Realty
Partnership, subject to adjustment.
As the sole general partner of the Realty
Partnership, the Trust will make all decisions on
behalf of the Realty Partnership, except that at
any time that Starwood owns or controls at least
15% of all outstanding Units in the Realty
Partnership, the Trust may not undertake on behalf
of the Realty Partnership certain "Major Decisions"
(such as a merger or consolidation of, or a
transfer of all or substantially all of the assets
of, the Realty Partnership or a sale of assets
having a book value of 25% or more of the total
book value of the assets of the Realty Partnership)
without the prior written consent of Starwood. For
accounting purposes
6
<PAGE> 14
neither the Trust nor Starwood will unilaterally
control the Realty Partnership. After the
Reorganization, the Trust will conduct all of its
business and operations through the Realty
Partnership.
The Operating
Partnership.............. SLC Operating Limited Partnership (the "Operating
Partnership") will be formed in connection with the
Reorganization, with the Corporation and its
subsidiaries as its general partners and Starwood
as its limited partner. The Corporation and its
subsidiaries will contribute to the Operating
Partnership all of their operating assets (subject
to substantially all of their liabilities),
including the interests in the leases of the
Trust's properties, in exchange for an approximate
28.3% interest in the Operating Partnership,
subject to adjustment. Starwood will contribute to
the Operating Partnership cash, hotel furnishings,
equipment and other assets, subject to certain
liabilities, in exchange for limited partnership
interests ("Operating Units") in the Operating
Partnership representing the remaining approximate
71.7% interest in the Operating Partnership,
subject to adjustment. Subject to the consent of
the lenders of the Companies, approximately $63
million of the intercompany debt owed by the
Corporation and its subsidiaries to the Trust will
be cancelled prior to the formation of the
Operating Partnership. In consideration of such
cancellation, up to $25 million of the Senior Debt
of the Realty Partnership will be guaranteed by the
Corporation.
After the Reorganization, a subsidiary of the
Corporation will continue to hold and operate its
gaming assets, liabilities and operations, pending
receipt of necessary regulatory approvals of the
Nevada Gaming Commission. Upon the earlier of
receipt of such approvals or such time as such
approvals are no longer required (such event being
referred to as "Gaming Approval"), such subsidiary
will transfer such assets and liabilities (the
"Gaming Assets") to a limited partnership owned 99%
by the Operating Partnership and 1% by such
subsidiary. If all or any portion of the Gaming
Assets are disposed of prior to the receipt of
Gaming Approval, the net proceeds of such
disposition will be contributed to such limited
partnership upon receipt thereof. If Gaming
Approval is not received on or prior to December
31, 1995, then on such date such subsidiary will
contribute to such limited partnership cash equal
to the value of any Gaming Assets not contributed
prior to such date. The value of such Gaming Assets
will be agreed to by the Corporation and Starwood
or, if they are unable to agree, such value will be
determined by independent appraisers selected by
the Board of Directors of the Corporation and
Starwood. No additional interests in the Operating
Partnership will be issued upon the transfer of
either the Gaming Assets, such net proceeds or such
cash. Prior to receipt of the Gaming Approval, the
current Board of Directors of the Corporation will
continue to serve as such and upon receipt of the
Gaming Approval the new Board of Directors elected
at the Corporation Meeting will commence their
terms. See "Election of Trustees of the Trust" and
"Election of Directors of the Corporation."
Prior to receipt of the Gaming Approval, the
Operating Partnership will be managed by a
management committee consisting of the new Board of
Directors elected at the Corporation Meeting. After
receipt of the Gaming Approval the Corporation will
manage the business of the Operating Partnership as
the managing general partner of the Operating
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<PAGE> 15
Partnership. As managing general partner, the
Corporation will make all decisions on behalf of
the Operating Partnership, except that at any time
that Starwood owns or controls at least 15% of all
outstanding Units in the Operating Partnership, the
Corporation may not undertake on behalf of the
Operating Partnership certain "Major Decisions"
(such as a merger or consolidation of, or a
transfer of all or substantially all of the assets
of, the Operating Partnership or a sale of assets
having a book value of 25% or more of the total
book value of the assets of the Operating
Partnership), without the prior written consent of
Starwood. For accounting purposes, neither the
Corporation nor Starwood will unilaterally control
the Operating Partnership. After the
Reorganization, the Operating Partnership will
lease from the Realty Partnership the hotel
properties which the Corporation and its
subsidiaries presently lease from the Trust and
certain properties acquired by the Realty
Partnership from Starwood, and the Operating
Partnership may lease from the Realty Partnership
and operate hotel properties acquired by the Realty
Partnership in the future.
Exchange of Units........ Holders of Realty Units and Operating Units
(collectively, the "Units") will have the right to
tender any or all of the Units held by them to the
Trust and the Corporation. Units may be tendered
only in pairs, consisting of one Realty Unit and
one Operating Unit. The Trust and the Corporation
will have the option to deliver, in exchange for
each pair of Units tendered, either one Paired
Share, cash equal to the market value of one Paired
Share at the time of such tender or a combination
of cash and Paired Shares. The right to tender for
Paired Shares is subject to certain limitations,
including (i) a prohibition on such tender if the
Trust would not qualify following such tender as a
REIT (including the requirement that no holder
(other than certain current holders) of Paired
Shares own, directly, indirectly or constructively,
more than 8.0% of the outstanding Paired Shares
(the "REIT Ownership Limitation")) and (ii) prior
to receipt of Gaming Approval, a requirement for 90
days written notice to the Trust and the
Corporation prior to any exchange of Units for
Paired Shares that would result in the holder
beneficially owning more than 4.9% of the
outstanding Paired Shares. As a result of the REIT
Ownership Limitation and Starwood's current
ownership of approximately 2.5% of the outstanding
Paired Shares, immediately after the Reorganization
is consummated, Starwood would not be able to
receive upon exchange of its Units more than 5.5%
of the then outstanding Paired Shares. In addition,
prior to the receipt of the Gaming Approval,
Starwood would not be able to own, directly or
indirectly, more than 4.9% of the outstanding
Paired Shares.
If the Trust and the Corporation do not issue
Paired Shares upon a tender of Units because of the
REIT Ownership Limitation, the tendering holder
may, subject to certain limitations, cause the
Trust and the Corporation to effect a registered
public offering of an equivalent number of Paired
Shares. The proceeds of such offering would be used
to purchase such tendered Units.
8
<PAGE> 16
Upon consummation of the Reorganization, the ownership structure of the
Companies and the Partnerships will be as follows:(1)
[CHART]
- ---------------
(1) Does not reflect any issuance of additional Units to Starwood upon any
exchange by Starwood of up to $12,000,000 of outstanding Senior Debt that
Starwood may acquire on or before six months from the approval of the
Reorganization Proposal. An affiliate of Starwood is the general partner of
a partnership which has the right to acquire approximately $74.0 million of
Senior Debt. If such Units are issued, then (i) the percentages of each of
the Trust and the Corporation owned by current holders (other than Starwood)
after the Unit exchange would be approximately 24.8% and (ii) the
percentages of each of the Trust and the Corporation owned by Starwood after
the Unit exchange would be approximately 75.2%. Any such Units issued
pursuant to such exchange would be exchangeable for Paired Shares on the
same basis as other Units issued to Starwood in connection with the
Reorganization.
(2) Because of the REIT Ownership Limitation, Starwood can only exchange Units
which will cause Starwood to receive in exchange therefor not more than an
additional 5.5% of the outstanding Paired Shares, bringing its Paired Share
ownership to 8.0%.
Amendments to Declaration
of Trust................. In connection with the Reorganization, the Trust
proposes to amend the Amended and Restated
Declaration of Trust of the Trust to, among other
things: (i) change the name of the Trust to
"Starwood Lodging Trust"; (ii) create a classified
Board of Trustees of the Trust; (iii) increase the
number of authorized Trust Shares to 100 million,
after giving effect to the reverse stock split
described below, and change the par value of the
Trust Shares from $1.00 par value to $.01 par
value; (iv) eliminate the provision limiting the
principal amount of Trust borrowing to no more than
300% of the net assets of the Trust; (v) eliminate
the provisions prohibiting the Trust from (A)
making any investment in real property in an amount
that exceeds 40% of the sum of the Trust's net
worth and subordinated indebtedness and (B) making
any investment in unimproved non-income producing
real property that exceeds 10% of the Trust's
assets and (C) investing in certain types of assets
or engaging in certain activities; (vi) eliminate
the cumulative
9
<PAGE> 17
voting provisions of the Declaration of Trust; and
(vii) update the provisions of the Declaration of
Trust which are designed to allow the Trust to
qualify as a REIT for federal income tax purposes
(the further amendment of which provisions would
require the affirmative vote of holders owning
two-thirds of the outstanding Trust Shares).
If approved, the amendments are expected to be
effected upon the consummation of the
Reorganization, except that the increase in the
number of authorized Trust Shares will be effected
immediately after the effectiveness of the Reverse
Split, which may occur after the consummation of
the Reorganization.
Shareholders of the Trust are being asked to
approve and adopt such amendments (the "Trust
Amendments") which are attached to this Joint Proxy
Statement as Exhibit A.
Amendments to Articles of
Incorporation............ In connection with the Reorganization, the
Corporation proposes to amend its Articles of
Incorporation of the Corporation to: (i) change the
name of the Corporation to "Starwood Lodging
Corporation"; (ii) create a classified Board of
Directors of the Corporation and provide for
removal of directors only for cause; (iii) increase
the number of authorized Corporation Shares to 100
million, after giving effect to the reverse stock
split described below, and change the par value of
the Corporation Shares from $.10 par value to $.01
par value; (iv) eliminate the cumulative voting
provisions of the Articles of Incorporation and (v)
update the provisions of the Articles of
Incorporation which are designed to allow the Trust
to qualify as a REIT for federal income tax
purposes (the further amendment of which provisions
would require the affirmative vote of holders
owning two-thirds of the outstanding Corporation
Shares).
If approved, the amendments will be effected upon
the consummation of the Reorganization, except that
the increase in the number of authorized
Corporation Shares will be effected immediately
after the effectiveness of the Reverse Split, which
may occur after the consummation of the
Reorganization.
Stockholders of the Corporation are being asked to
approve and adopt the Amended and Restated Articles
of Incorporation (the "Restated Articles") attached
to this Joint Proxy Statement as Exhibit B, which
reflects such amendments.
Election of New Boards... Pursuant to the Reorganization, a new Board of
Trustees of the Trust and a new Board of Directors
of the Corporation will be elected. If the new
Board of Trustees is so elected and the
Reorganization Proposal is approved at the Special
Meetings, such new Board will assume office
immediately, even if the Reorganization is not
consummated. If the new Board of Directors is so
elected and the Reorganization Proposal is approved
at the Special Meetings, such new Board will take
office upon the receipt of certain regulatory
approvals described herein, even if the
Reorganization is not consummated. If such new
Boards are not so elected or if the Reorganization
Proposal is not so approved, the current Trustees
of the Trust and Directors of the Corporation will
continue as such. See "Election of Trustees of the
Trust" and "Election of Directors of the
Corporation."
10
<PAGE> 18
Reverse Stock Split...... In connection with the Reorganization, the Board of
Trustees of the Trust and the Board of Directors of
the Corporation will be authorized to effect the
Reverse Split, in which a number of Paired Shares
outstanding at the effective date of the Reverse
Split (such number to be not less than six nor more
than ten, as determined by the Board of Trustees
and the Board of Directors) will be changed into
one Paired Share. The purpose of the Reverse Split
would be to increase the liquidity and
marketability of the Paired Shares by raising the
trading price per Paired Share and attracting
investors and brokers who would otherwise be
reluctant to deal in a lower-priced stock, and to
facilitate public offerings of Paired Shares after
the Reorganization. Fractional shares resulting
from the Reverse Split will be redeemed for cash as
described herein.
The Board of Trustees and the Board of Directors
will be authorized to determine the applicable
ratio and effective date of the Reverse Split. The
Reverse Split will be effected by amendments to the
Declaration of Trust and the Articles of
Incorporation, which will be filed immediately
prior to the effective date of the Reverse Split.
Promptly after the effective date of the Reverse
Split, a letter of transmittal will be mailed to
holders of Paired Shares containing instructions
relating to the surrender of outstanding
certificates for Paired Shares in exchange for new
certificates representing the Paired Shares after
giving effect to the Reverse Split. Share
certificates should not be surrendered until the
letter of transmittal is received.
OPERATIONS AFTER
THE REORGANIZATION:
Business and
Properties............... If the Reorganization is completed, the Trust will
be one of the largest publicly traded REITs
investing exclusively in hotel properties and the
Realty Partnership will own interests in 47 hotels
located in 21 states throughout the United States.
After the Reorganization, the Trust and the
Corporation will have a total equity capitalization
(based on a thirty day average of the market value
of Paired Shares at November 7, 1994 and assuming
the exchange of all Units for Paired Shares) of
approximately $126.4 million and a total market
capitalization (the total equity capitalization
plus the principal amount of all indebtedness) of
approximately $339.3 million, as compared with the
total equity capitalization and total market
capitalization for the Trust and the Corporation of
approximately $21.5 million (based on a thirty day
average of the market value of Paired Shares at
June 13, 1994, the date of the first public
announcement of the Reorganization) and
approximately $190.1 million, respectively, prior
to the Reorganization. Following the
Reorganization, the Realty Partnership will own fee
or ground leasehold interests in over 5,900 rooms
and the Operating Partnership will operate over
5,600 rooms. After the Reorganization, the pro
forma net loss and pro forma funds from operations
of the Partnerships for the year ended December 31,
1993 will be ($1,232,000) and $12,965,000,
respectively, as compared with the historical net
loss and funds from operations of the Companies for
such year of ($7,032,000) and $4,548,000. Funds
from operations (as defined herein) 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. Funds from
operations should not be considered an alternative
to net income as an indication of the Companies'
financial performance or
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<PAGE> 19
as an alternative to cash flows from operating
activities as a measure of liquidity.
After the Reorganization, the Partnerships will be
the exclusive vehicle through which Starwood will
continue to pursue hotel equity investments in the
United States. Starwood is currently negotiating
the acquisition of several hotels, hotel portfolios
and related assets. Such acquisitions are subject
to further negotiation and numerous conditions and
there can be no assurance that any such
acquisitions will be completed. The Trust and the
Corporation have agreed that Starwood may
consummate any acquisition which is subject to an
executed letter of intent or contract prior to the
Reorganization, which acquisition relates to a
group of five or more properties with a total value
in excess of $100 million. Starwood will have the
right to operate any such properties and the
Partnerships will not have the right to acquire any
such properties from Starwood.
Business Objectives...... The primary business objectives and operating
strategy following the Reorganization will be to
(i) replace the existing Senior Debt and mortgage
debt with a more stable, lower cost capital
structure and (ii) increase per share funds from
operations and amounts available for distribution
to shareholders by continuing to improve hotel
operations and through the opportunistic
acquisition of additional hotels.
Distributions............ Following the Reorganization, the operations of the
Realty Partnership are expected to generate
sufficient cash flow from operations to enable the
Trust to make distributions to holders of Trust
Shares. Any such distributions would be subject to
the consent of the Companies' lenders. The holder
of a majority of the Senior Debt has agreed, among
other things, to permit distributions necessary to
preserve the Trust's REIT status.
Management............... Following the Reorganization, the Trust and the
Corporation will have access to the expertise of
Starwood's real estate, finance and acquisition
professionals. In connection with the
Reorganization, a new Board of Trustees of the
Trust will be elected and a new Board of Directors
of the Corporation will be elected and, in the case
of the Corporation, assume office effective upon
the receipt of the Gaming Approval.
REASONS FOR THE
REORGANIZATION........... The principal reasons for the Reorganization are as
follows:
- The Reorganization will result in the ownership
and operation, through the Partnerships, of
interests in 47 hotel assets located in 21 states
throughout the United States. Accordingly, the
continuing ownership interest of the holders of
Paired Shares will represent an investment in an
enterprise with a significantly larger and more
diversified portfolio of hotel assets. After the
Reorganization, the Partnerships will have
improved debt service coverage ratios, a
substantially reduced debt to market
capitalization ratio and an increased total
equity capitalization.
- The enhanced financial stability resulting from
the Reorganization increases the likelihood that
the Trust and the Corporation will be able to
access new capital to repay the existing Senior
Debt and other mortgage indebtedness and to
finance future growth through public offerings or
through refinancings on more favorable terms. See
"The Offering."
- The structure of the Reorganization (including
Starwood's significant percentage ownership after
the Reorganization, Starwood's agreement
12
<PAGE> 20
that the Partnerships will be the exclusive
vehicle through which Starwood will continue to
pursue hotel equity investments in the United
States, and other elements of the Reorganization)
is intended to align the interests of Starwood
with those of the holders of Paired Shares and
demonstrates Starwood's long-term commitment to
the Partnerships and its desire to continue to
make real estate acquisitions through the
Partnerships.
- The operations of the Realty Partnership
following the Reorganization are expected to
generate sufficient cash flow from operations to
enable the Trust to make distributions to holders
of the Trust Shares. Any such distributions would
be subject to the consent of the Companies'
lenders. The holder of a majority of the Senior
Debt has agreed, among other things, to permit
distributions necessary to preserve the Trust's
REIT status.
- The possible adverse consequences to the Trust
and the Corporation of failing to consummate the
Reorganization, including the possibility of a
default on the Senior Debt and the lack of
desirable alternatives to the Reorganization.
- The approximate 28.3% general partner interest in
the Realty Partnership and the Operating
Partnership to be received by the Trust and the
Corporation, respectively, in exchange for the
respective contributions of all their assets.
- The contributions by Starwood to the Realty
Partnership and the Operating Partnership. The
cash contribution to the Partnerships by Starwood
of approximately $5,000,000 will be available to,
among other things, pay the expenses of the
Reorganization and provide liquidity for other
corporate purposes.
- The creation of the Partnerships and the control
of the Trust and the Corporation over the
Partnerships will give the Trust and the
Corporation the option of using either Paired
Shares or Units (in addition to cash) in
connection with future acquisitions, thus
increasing the alternatives available to offer to
potential sellers of hotels and allowing the
Trust and the Corporation to offer potential
sellers continued participation on a tax deferred
basis through the use of Units.
- The Reorganization will enable the respective
managements of the Trust and the Corporation to
concentrate their efforts more directly on
enhancing the business of the Partnerships and
thereby increasing shareholder and stockholder
value, instead of expending a significant amount
of time and effort on compliance with and
restructuring of the terms of the Senior Debt.
- The holder of approximately $74.0 million of the
Senior Debt has agreed, among other matters, that
in the event the Reorganization is consummated,
(i) current restrictions under the Senior Debt on
the acquisition of additional assets by the
Companies and the Partnerships shall be removed
and (ii) other provisions in the documents
evidencing the Senior Debt will be modified so as
to facilitate the qualification of the Trust as a
REIT (for example, elimination of the requirement
that the Trust and Corporation be merged with
consequent loss of the unique Paired Share
structure and loss of the Trust's REIT status,
permitting distributions necessary to preserve
the Trust's REIT status and permitting the
forgiveness of certain intercompany loans from
the Trust to the Corporation). Such holder has
also issued a commitment
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<PAGE> 21
(subject to completion of due diligence) to
extend financing to be used to purchase the
remainder of the Senior Debt from the only other
holder of the Senior Debt, in the event that a
similar agreement is not obtained from such other
holder.
Interests of the Starwood
Group in Matters to be
Voted On................. Starwood and its affiliates will receive certain
benefits in connection with the Reorganization,
including the following:
- Ownership of Units and Paired Shares resulting in
a 71.7% interest on a fully diluted basis in the
Companies.
- The new Board of Trustees of the Trust and the
new Board of Directors of the Corporation to be
elected in connection with the Reorganization
include nominees designated by Starwood who would
constitute a majority of each Board.
- Barry S. Sternlicht, the founder, President and
CEO of Starwood, will become the Chairman and
Chief Executive Officer of the Trust.
- Starwood will have the right to exchange up to
$12,000,000 of outstanding Senior Debt which it
may acquire, for additional Units in the
Partnerships.
- Starwood will have the potential for improved
liquidity upon exchange of Units for Paired
Shares, resulting from its investment in a
publicly held entity, as well as increased
diversification of its investment.
- Upon consummation of the Reorganization, Starwood
will receive notes issued by the Partnerships
which would be payable only if the Trust and the
Corporation consummate a public offering of
Paired Shares within 18 months following the
consummation of the Reorganization, which
offering results in the receipt by the Trust and
the Corporation of gross proceeds of not less
than $150 million. The amount payable under such
notes will be equal to three-fourths of one
percent of the sum of the total market value of
all Paired Shares (assuming the conversion of all
Units) upon consummation of such offering and the
principal amount of indebtedness of the
Partnerships at such time.
Interest of Trustees,
Directors and Officers of
the Trust and the
Corporation in the
Matters to be Voted On... Because the officers and Trustees of the Trust and
the officers and Directors of the Corporation would
be covered by a release which may be granted in
respect of certain claims against the Trust, the
Corporation and such officers, they have an
interest in the provisions pursuant to which such a
release may be granted. See "The Reorganization --
Representations and Warranties; Indemnification."
CONSEQUENCES OF FAILURE TO
APPROVE THE
REORGANIZATION........... If the Reorganization Proposal is not approved by
the requisite votes of shareholders of the Trust
and stockholders of the Corporation, the
Reorganization will not be consummated. Although
neither the Trust nor the Corporation is able to
predict the exact consequences of failing to
consummate the Reorganization, the following
consequences may result:
- The Trust and the Corporation would be required
to complete the restructuring of the Senior Debt
pursuant to the Credit Agreement by,
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<PAGE> 22
among other things, seeking the approval of the
shareholders and stockholders to merge the Trust
and the Corporation, thereby eliminating the
unique "paired share" structure (which cannot be
duplicated under current law) and the ability of
the Trust to be taxed as a REIT.
- Even if the restructuring of the Senior Debt is
completed, the Trust and the Corporation would
face uncertainty as to their ability to make
scheduled repayments of the Senior Debt, as
restructured. Sales of a significant number of
hotel properties would be necessary to make such
repayments and no assurances can be given that
such sales could be made on terms that are
favorable to the Trust or the Corporation, or for
amounts sufficient to allow for such repayments.
- Even if the restructuring of the Senior Debt were
completed, without the addition of the Starwood
assets contemplated by the Reorganization, it is
unlikely that the Companies could refinance the
Senior Debt and it is unlikely that the holders
of the Senior Debt would agree to remove
restrictions on the acquisition of additional
assets by the Companies absent a substantial
capital infusion. The ability to obtain an
alternative substantial capital infusion to that
proposed by Starwood would be significantly and
adversely affected by the Companies' compliance
with the provisions of the Senior Debt which
would require the merger of the Trust and the
Corporation, with consequent loss of the unique
"paired share" structure and of REIT status by
the Trust.
CERTAIN CONSIDERATIONS..... The Reorganization has certain effects on the
current holders of Paired Shares, including the
substantial dilution of the percentage ownership
interests of such holders, and the effects of
certain of the amendments to the Trust Declaration
of the Trust and the Articles of Incorporation of
the Corporation being effected as a part of the
Reorganization. If all of the Units issued by the
Partnerships in connection with the Reorganization
are exchanged for Paired Shares, current holders of
Paired Shares would hold only 27.6% of the then
outstanding Paired Shares. If the new Board of
Trustees is elected and the Reorganization Proposal
is approved at the Special Meetings, such new Board
will take office immediately, even if the
Reorganization is not consummated. If the new Board
of Directors is elected and the Reorganization
Proposal is approved at the Special Meetings, such
new Board will take office upon the receipt of
certain gaming regulatory approvals described
herein, even if the Reorganization is not
consummated. In addition, the amendments to the
Declaration of Trust to be effected in connection
with the Reorganization would, among other things,
eliminate certain current restrictions on
borrowings and investments by the Trust. The
Reorganization could have certain other possible
effects on holders of Paired Shares, including the
possible effect on the trading price of Paired
Shares or sales of Paired Shares (or the perception
that such sales could occur) as a result of an
exchange of Units, the ability of Starwood to
exercise significant control over the affairs of
the Trust, the Corporation and the Partnerships,
and certain conflicts of interest between the
Trust, the Corporation, the Partnerships and
Starwood. In addition, Starwood has only recently
acquired many of the Starwood Assets to be
contributed by Starwood, and therefore Starwood
does not have an established operating history with
respect to those Assets. Certain of the Starwood
Assets were purchased by Starwood in situations
where the previous owner had
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<PAGE> 23
overleveraged those Assets. See "The
Reorganization -- Certain Effects of the
Reorganization."
RECOMMENDATION OF THE BOARD
OF TRUSTEES AND THE BOARD
OF DIRECTORS............. THE BOARD OF TRUSTEES OF THE TRUST AND THE BOARD OF
DIRECTORS OF THE CORPORATION HAVE UNANIMOUSLY
APPROVED THE REORGANIZATION PROPOSAL AND RECOMMEND
THAT SHAREHOLDERS OF THE TRUST AND STOCKHOLDERS OF
THE CORPORATION, RESPECTIVELY, VOTE FOR APPROVAL OF
THE REORGANIZATION PROPOSAL. Such recommendation is
based on a number of factors discussed herein. See
"The Reorganization -- Recommendation of the Board
of Trustees and the Board of Directors; Reasons for
the Reorganization."
OPINION OF FINANCIAL
ADVISOR.................. Salomon Brothers Inc has delivered a written
opinion to the Trust's Board of Trustees and the
Corporation's Board of Directors, dated the date of
this Joint Proxy Statement, to the effect that, as
of its date, the Reorganization is fair, from a
financial point of view, to the shareholders of the
Trust and the stockholders of the Corporation,
other than Starwood. A copy of such opinion is
attached to this Joint Proxy Statement as Exhibit
C.
TAX CONSEQUENCES TO HOLDERS
OF PAIRED SHARES......... Holders of Paired Shares should not recognize any
gain or loss as a result of the Reorganization,
except for holders receiving cash in lieu of
fractional Paired Shares as a result of the Reverse
Split. See "Certain Federal Income Tax
Consequences."
CONDITIONS TO THE
REORGANIZATION........... The respective obligations of each of the Trust,
the Corporation and Starwood to consummate the
Reorganization are subject to the satisfaction or
waiver of certain conditions, including the
approval by the shareholders of the Trust and the
stockholders of the Corporation of the
Reorganization Proposal and the election of the new
Board of Trustees and the new Board of Directors
described herein. After the Reorganization and upon
the receipt of the Gaming Approval, a subsidiary of
the Corporation will transfer to a subsidiary of
the Operating Partnership the Gaming Assets. See
"The Reorganization -- Conditions to the
Reorganization."
The holder of a majority of the Senior Debt has
given its consent to the Reorganization and has
also issued a commitment (subject to completion of
due diligence) to extend financing to be used to
purchase the Senior Debt held by the only other
holder of the Senior Debt, in the event that such
other holder does not consent to the
Reorganization.
CLOSING DATE............... The Reorganization will not be consummated until
after the conditions to the Reorganization have
been satisfied or waived. The Companies currently
expect the Reorganization to be consummated shortly
after the Reorganization Proposal is approved.
ACCOUNTING TREATMENT....... The Trust and the Corporation will account for
their respective investments in the Realty
Partnership and the Operating Partnership under the
equity method of accounting, in accordance with
generally accepted accounting principles.
NO APPRAISAL RIGHTS........ The holders of Paired Shares will not have any
appraisal or dissenters' rights in connection with
the Reorganization under applicable law.
16
<PAGE> 24
VOTE REQUIRED.............. Approval of the Reorganization Proposal will
require the affirmative vote of the holders of a
majority of the outstanding Trust Shares entitled
to vote at the Trust Meeting and of the holders of
a majority of the outstanding Corporation Shares
entitled to vote at the Corporation Meeting. As of
November 7, 1994, Trustees and officers of the
Trust as a group had the right to vote an aggregate
of 77,270 Trust Shares (representing approximately
.6% of the Trust Shares outstanding on such date)
and Starwood had the right to vote an aggregate of
299,600 Trust Shares (representing approximately
2.5% of the Trust Shares outstanding on such date).
As of November 7, 1994 Directors and officers of
the Corporation as a group had the right to vote an
aggregate of 32,000 Corporation Shares
(representing approximately .2% of the Corporation
Shares outstanding on such date) and Starwood had
the right to vote an aggregate of 299,600
Corporation Shares (representing approximately 2.5%
of the Corporation Shares outstanding on such
date). All of the foregoing holders have indicated
that they intend to vote all such shares held by
them in favor of the Reorganization Proposal.
PROPOSED PUBLIC OFFERING... The Trust and the Corporation intend to file with
the Securities and Exchange Commission a
registration statement relating to a proposed
public offering of Paired Shares (the "Offering")
after the consummation of the Reorganization.
Completion of the Offering is not a condition to
the Reorganization and there can be no assurance
that the Offering will be consummated. If the
Reorganization is not consummated, the Offering
will not be completed and Merrill Lynch & Co.
("Merrill Lynch"), the lead manager for the
Offering, has indicated that its willingness to
proceed with the Offering is contingent on a
successful consummation of the Reorganization with
Starwood. The terms and timing of any Offering
which may be effected will be established through
negotiations among the Trust, the Corporation,
Merrill Lynch and the other underwriters for the
Offering. Such terms are subject to change in all
respects without further notice to or approval by
holders of Paired Shares. The proceeds of the
Offering will be contributed by the Trust and the
Corporation to the Realty Partnership and the
Operating Partnership, respectively, in exchange
for additional interests in such partnerships and
those proceeds are expected to be used primarily to
repay indebtedness (including the Senior Debt and
the Starwood Notes described below), for
acquisitions of additional properties, for certain
capital improvements to hotel properties and for
other corporate purposes. Approval of the
Reorganization Proposal will include the approval
of such contributions by the Trust and the
Corporation. Starwood will not offer or sell Paired
Shares in connection with the Offering and will
agree not to offer, sell, contract to sell or
otherwise dispose of any Units or Paired Shares
acquired in exchange for Units for a period after
the consummation of the Offering without the
consent of Merrill Lynch, the Trust and the
Corporation.
Upon consummation of the Reorganization, Starwood
will receive notes ("Starwood Notes") issued by the
Partnerships which would be payable only if the
Trust and the Corporation consummate a public
offering of Paired Shares within 18 months
following the consummation of the Reorganization,
which offering results in the receipt by the Trust
and the Corporation of gross proceeds of not less
than $150 million. The amount payable under such
notes shall be equal to three-fourths of one
percent (.75%) of the sum of the total market value
of all Paired Shares (assuming the conversion of
all Units) upon consummation of such
17
<PAGE> 25
offering and the principal amount of indebtedness
of the Partnerships at such time.
ELECTION OF TRUSTEES AND DIRECTORS
ELECTION OF TRUSTEES AND
DIRECTORS; CUMULATIVE
VOTING................... Pursuant to the Reorganization, a new Board of
Trustees of the Trust and a new Board of Directors
of the Corporation will be elected, including
nominees designated by Starwood who would
constitute a majority of each Board after the
Reorganization. Such nominees will be elected to
the classes of Trustees or Directors whose terms
expire either in 1995, 1996 or 1997, as described
herein. If the new Board of Trustees is so elected
and the Reorganization Proposal is approved at the
Special Meetings, such new Board will assume office
immediately, even if the Reorganization is not
consummated. If the new Board of Directors is so
elected and the Reorganization Proposal is approved
at the Special Meetings, such new Board will take
office upon receipt of the Gaming Approval
necessary for such directors to take office, even
if the Reorganization is not consummated. Pending
receipt of such Gaming Approval, the present Board
of Directors of the Corporation will continue to
serve as such. If such new Boards are not so
elected or if the Reorganization Proposal is not so
approved, the current Trustees of the Trust and
Directors of the Corporation will continue as such.
Shareholders of the Trust are entitled to cast, for
each Trust Share held of record on the record date,
a number of votes equal to the number of Trustees
to be elected and may cast such votes for one
nominee or distribute such votes among two or more
nominees. Stockholders of the Corporation are
entitled to cast, for each Corporation Share held
of record on the record date, a number of votes
equal to the number of Directors to be elected and
may cast such votes for one nominee or distribute
such votes among two or more nominees. It is a
condition to Starwood's obligation to consummate
the Reorganization that each of its nominees are so
elected, and the election of such nominees is
conditioned upon the consummation of the
Reorganization. See "Election of Directors of the
Corporation" and "Election of Trustees of the
Trust." As part of the Reorganization Proposal the
cumulative voting provisions of the Trust
Declaration and the Articles of Incorporation will
be eliminated.
RATIFICATION OF INDEPENDENT
PUBLIC ACCOUNTANTS....... Shareholders of the Trust and stockholders of the
Corporation are being asked to consider and vote
upon the ratification of the selection of Deloitte
& Touche as the independent public accountants for
the Trust and the Corporation for the 1994 fiscal
year. See "Independent Public Accountants."
18
<PAGE> 26
COMBINED SELECTED FINANCIAL DATA
The following table sets forth selected combined historical and pro forma
financial information for the Trust, the Corporation, the Realty Partnership and
the Operating Partnership. The following information should be read in
conjunction with (i) the historical financial statements and notes thereto for
the Trust and the Corporation, (ii) Management's Discussion and Analysis of
Financial Condition and Results of Operations, both of which are included in the
Companies' Joint Annual Report on Form 10-K for the year ended December 31,
1993, as amended (the "Hotel Investors Form 10-K") and the Companies' Joint
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, as amended
(the "Hotel Investors Form 10-Q") each of which accompanies this Joint Proxy
Statement, and (iii) the pro forma financial statements and notes thereto of the
Companies and the Partnerships, which are included elsewhere in this Joint Proxy
Statement. The historical operating information of the Trust and the Corporation
for each of the years in the five-year period ended December 31, 1993 have been
derived from financial statements audited by Deloitte & Touche, independent
certified public accountants, whose report with respect to the information as of
December 31, 1992 and 1993 and each of the years in the three-year period ended
December 31, 1993 is included in the Hotel Investors Form 10-K. The historical
operating information for the six-month periods ended June 30, 1994 and 1993 has
been derived from the unaudited financial statements of the Trust and the
Corporation which are included in the Hotel Investors Form 10-Q. In the opinion
of management, the historical financial information for the six-month periods
ended June 30, 1994 and 1993 includes all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the information set forth
herein. The results of operations for the interim period are not necessarily
indicative of results for the full year.
The pro forma operating information is presented as if the Reorganization
had occurred at the beginning of the period presented and pro forma balance
sheet information is presented as if the Reorganization had occurred on the date
thereof. In management's opinion, all adjustments necessary to reflect the
effects of the Reorganization have been made. The unaudited Pro Forma Selected
Financial Data are not necessarily indicative of what the actual financial
position of the Companies and Partnerships would have been at June 30, 1994, nor
does it purport to represent the future financial position and results of
operations for future periods.
19
<PAGE> 27
SUMMARY SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------
PRO FORMA
STARWOOD PRO FORMA
LODGING SLT & SLC COMBINED
COMBINED COMBINED HOTEL INVESTORS
--------- --------- -----------------------
1994 1994 1994 1993
--------- --------- -------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
OPERATING DATA:
REVENUE
Income from investment in Partnership(1).......... $1,059 $ $ $
Hotel............................................. 49,963 41,894 43,081
Gaming............................................ 14,313 14,313 13,483
Interest from mortgage and other notes............ 4,812 762 692
Rents from other leased hotel properties.......... 463 463 461
Management fees and other income.................. 308 308 406
Gain (loss) on sales of hotel assets.............. 592 592 108
------ ------- ------- -------
1,059 70,451 58,332 58,231
------ ------- ------- -------
EXPENSES
Hotel operations.................................. 37,095 31,124 33,819
Gaming operations................................. 12,159 12,159 11,608
Interest.......................................... 10,148 8,458 7,541
Depreciation and amortization..................... 5,321 4,013 4,413
Administrative and operating...................... 1,980 1,980 2,330
Loan restructuring................................
Provision for losses..............................
------ ------- ------- -------
66,703 57,734 59,711
------ ------- ------- -------
Net income (loss)................................. $1,059 $ 3,748 $ 598 $(1,480)
====== ======= ======= =======
Net income (loss) per share(2).................... $ 0.58 $ 0.32 $ (0.85)
====== ======= =======
OTHER DATA:
Funds from operations(3).......................... $ 8,477 $ 4,019 $ 2,825
EBITDA(4)......................................... $18,625 $12,477 $10,366
Total number of rooms(5).......................... 5,900 5,400 5,600
Average daily room rate........................... $ 70.86 $ 53.04 $ 52.78
Average occupancy................................. 66.6% 67.9% 64.5%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
PRO FORMA
STARWOOD PRO FORMA
LODGING SLT & SLC
COMBINED COMBINED HOTEL INVESTORS COMBINED
---------- --------- --------------------------------------------------------
1993 1993 1993 1992 1991 1990 1989
---------- --------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUE
Income from investment in Partnership(1)... $ (349) $ $ $ $ $ $
Hotel...................................... 102,392 86,903 88,812 85,156 85,515 83,231
Gaming..................................... 27,505 27,505 26,150 22,609 25,439 25,631
Interest from mortgage and other notes..... 9,602 1,412 1,348 1,761 2,813 3,748
Rents from other leased hotel properties... 839 839 947 936 942 1,008
Management fees and other income........... 475 475 1,186 1,376 2,315 1,845
Gain (loss) on sales of hotel assets....... 21 21 (787) 1,598 156
------ -------- -------- -------- -------- -------- --------
(349) 140,834 117,155 117,656 113,436 117,024 115,619
------ -------- -------- -------- -------- -------- --------
EXPENSES
Hotel operations........................... 80,014 68,132 68,620 65,963 65,223 62,224
Gaming operations.......................... 24,055 24,055 23,699 21,948 23,995 22,629
Interest................................... 18,567 15,187 14,208 16,458 16,408 15,640
Depreciation and amortization.............. 11,849 9,232 10,196 11,688 14,850 13,899
Administrative and operating............... 5,212 5,212 6,365 6,086 5,987 5,765
Loan restructuring......................... 10,892 3,797
Provision for losses....................... 2,369 2,369 3,419 9,580 18,147 55,801
------ -------- -------- -------- -------- -------- --------
142,066 124,187 137,399 135,520 144,610 175,958
------ -------- -------- -------- -------- -------- --------
Net income (loss).......................... $ (349) $ (1,232) $ (7,032) $(19,743) $(22,084) $(27,586) $(60,339)
====== ======== ======== ======== ======== ======== ========
Net income (loss) per share(2)............. $(0.20) $ (4.06) $ (11.39) $ (12.74) $ (15.92) $ (34.81)
====== ======== ======== ======== ======== ========
OTHER DATA:
Funds from operations(3)................... $ 12,965 $ 4,548 $ 5,551 $ 1,383 $ 5,411 $ 9,205
EBITDA(4).................................. $ 31,532 $ 19,735 $ 19,759 $ 17,841 $ 21,819 $ 24,845
Total number of rooms(5)................... 5,900 5,400 5,700 6,700 6,700 6,700
Average daily room rate.................... $ 74.68 $ 52.80 $ 52.20 $ 51.95 $ 52.15 $ 53.37
Average occupancy.......................... 63.8% 64.9% 63.4% 62.0% 63.9% 64.6%
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
---------------------------------- ----------------------------------------------------
PRO FORMA
STARWOOD PRO FORMA HOTEL
LODGING SLT & SLC INVESTORS
COMBINED COMBINED COMBINED HOTEL INVESTORS COMBINED
---------- --------- --------- ----------------------------------------------------
1994 1994 1994 1993 1992 1991 1990 1989
---------- --------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in Operating Partnership...... $11,285 $ $ $ $ $ $ $
Total real estate investments............ 11,285 256,331 172,379 179,172 187,753 200,540 218,896 246,302
Total assets............................. 12,975 281,296 192,344 195,352 210,945 221,917 240,998 263,414
Total long-term debt..................... 212,933 168,674 170,886 170,297 171,271 106,651 92,841
Shareholders' equity/Partners' capital... 11,285 56,938 13,935 13,326 20,351 40,083 62,104 96,671
</TABLE>
20
<PAGE> 28
- ---------------
(1) Income from investment in Partnerships is recognized in proportion to the
Trust's and the Corporation's 28.3% partnership interests in the Realty
Partnership and the Operating Partnership, respectively, using the equity
method.
(2) Net income (loss) per share has been computed using the weighted average
number of common and common equivalent shares outstanding which, for periods
with net income, includes the dilutive effect of stock options and warrants
outstanding. Weighted average shares outstanding have been adjusted to give
effect to an assumed 1-for-7 reverse stock split in connection with the
Reorganization and the cancellation of certain warrants.
(3) 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 it is presented to assist
investors in analyzing the performance of the Companies. Funds from
operations before minority interest is defined as net income (computed in
accordance with generally accepted accounting principles), excluding gains
(losses) from debt restructuring and sales of property, provision for
losses, and depreciation and amortization (excluding amortization of
financing costs). Funds from operations 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. Funds from operations should not be considered an alternative to net
income as an indication of the Companies' financial performance or as an
alternative to cash flows from operating activities as a measure of
liquidity.
(4) Management considers earnings before interest, taxes, depreciation and
amortization ("EBITDA") to be one measure of the cash flows from operations
of the Companies before debt service that provides a relevant basis for
comparison among REITs and it is presented to assist investors in analyzing
the performance of the Companies. EBITDA is defined as net income excluding
gains and losses from debt restructuring and sales of property, provision
for losses, interest and depreciation and amortization. EBITDA should not be
considered as an alternative to net income as an indication of the
Companies' and Partnerships' financial performance or to cash flows from
operating activities as a measure of liquidity, nor is it necessarily
indicative of sufficient cash flow to fund all of the Companies' and
Partnerships' needs.
(5) Does not include 3,000 rooms related to hotels which secure mortgage notes
held by the Realty Partnership.
21
<PAGE> 29
INTRODUCTION AND VOTING RIGHTS
MATTERS TO BE CONSIDERED
The Trust Meeting. At the Trust Meeting, the shareholders of the Trust
will consider and vote upon (i) the Reorganization Proposal, (ii) the election
of a new Board of Trustees of the Trust in connection with the Reorganization,
(iii) the ratification of the selection of Deloitte & Touche as the independent
auditors of the Trust for the 1994 fiscal year, and (iv) such other business as
may properly come before the Trust Meeting or any adjournment thereof. In
addition, shareholders of the Trust are also being given the opportunity to vote
separately, if they so desire, on the portions of the Reorganization Proposal
relating to (i) the creation of a classified Board of Trustees of the Trust and
(ii) the elimination of the cumulative voting provisions of the Trust
Declaration.
The Board of Trustees is not aware of any matter that will be presented at
the Trust Meeting other than as described above. If any other matter is
presented at the Trust Meeting or any adjournment thereof, the persons named as
proxies on the enclosed proxy card will, in the absence of shareholder
instructions to the contrary, vote the Trust Shares for which such persons have
voting authority in accordance with their best judgment on such matter.
The Corporation Meeting. At the Corporation Meeting, the stockholders of
the Corporation will consider and vote upon (i) the Reorganization Proposal,
(ii) the election of a new Board of Directors of the Corporation in connection
with the Reorganization, (iii) the ratification of the selection of Deloitte &
Touche as the independent auditors of the Corporation for the 1994 fiscal year
and (iv) such other business as may properly come before the Corporation Meeting
or any adjournment thereof. In addition, stockholders of the Corporation are
also being given the opportunity to vote separately, if they so desire, on the
portions of the Reorganization Proposal relating to (i) the creation of a
classified Board of Directors of the Corporation, (ii) the amendment to the
Articles of Incorporation of the Corporation to provide for removal of directors
only for cause and (iii) the elimination of the cumulative voting provisions of
the Articles of Incorporation.
The Board of Directors is not aware of any matter that will be presented at
the Corporation Meeting other than as described above. If any other matter is
presented at the Corporation Meeting or any adjournment thereof, the persons
named as proxies on the enclosed proxy card will, in the absence of stockholder
instructions to the contrary, vote the Corporation Shares for which such persons
have voting authority in accordance with their best judgment on such matter.
VOTING RIGHTS
The Trust. The Board of Trustees has fixed the close of business on
November 7, 1994 as the record date (the "Trust Record Date") for the
determination of shareholders entitled to notice of, and to vote on each matter
presented at, the Trust Meeting and any adjournment thereof. On November 7,
1994, there were outstanding and entitled to vote 12,132,948 Trust Shares held
of record by approximately 2,140 persons. The Trust Shares are the only
outstanding class of voting securities of the Trust and each shareholder of the
Trust will be entitled to one vote for each Trust Share held of record by such
shareholder on the Trust Record Date on each matter that may properly come
before the Trust Meeting, except that in the election of Trustees of the Trust,
shareholders have cumulative voting rights, pursuant to which they are entitled
to vote, for each such Trust Share, a number of votes equal to the number of
Trustees to be elected and may cast such votes for one nominee or distribute
such votes among two or more nominees.
A majority of the outstanding Trust Shares must be present, either in
person or by duly executed proxy, at the Trust Meeting in order to constitute a
quorum for the transaction of business. Trust Shares that are present at the
Trust Meeting by proxy but as to which the persons named as proxies on the
enclosed proxy card were instructed to abstain from voting will be deemed
present at the Trust Meeting.
As of November 7, 1994, Trustees and officers of the Trust as a group had
the right to vote an aggregate of 77,270 Trust Shares, representing
approximately .6% of the Trust Shares outstanding on such date and Starwood had
the right to vote an aggregate of 299,600 Trust Shares, representing
approximately 2.5% of the
22
<PAGE> 30
Trust Shares outstanding on such date. All such Trustees and officers and
Starwood have indicated that they intend to vote all such shares held by them in
favor of the Reorganization Proposal.
The Corporation. The Board of Directors has fixed the close of business on
November 7, 1994 as the record date (the "Corporation Record Date") for the
determination of stockholders entitled to notice of, and to vote on each matter
presented at, the Corporation Meeting or any adjournment thereof. On November 7,
1994, there were outstanding and entitled to vote 12,132,948 Corporation Shares
held of record by approximately 2,140 persons. The Corporation Shares are the
only outstanding class of voting securities of the Corporation, and each
stockholder of the Corporation will be entitled to one vote for each Corporation
Share held of record by such stockholder on the Corporation Record Date on each
matter that may properly come before the Corporation Meeting, except that in the
election of Directors of the Corporation, stockholders have cumulative voting
rights, pursuant to which they are entitled to vote, for each such Corporation
Share, a number of votes equal to the number of Directors to be elected and may
cast such votes for one nominee or distribute such votes among two or more
nominees.
A majority of the outstanding Corporation Shares must be present, either in
person or by duly executed proxy, at the Corporation Meeting in order to
constitute a quorum for the transaction of business. Corporation Shares that are
present at the Corporation Meeting by proxy but as to which the persons named as
proxies on the enclosed proxy card were instructed to abstain from voting will
be deemed present at the Corporation Meeting.
As of November 7, 1994, Directors and officers of the Corporation as a
group had the right to vote an aggregate of 32,000 Corporation Shares,
representing approximately .2% of the Corporation Shares outstanding on such
date and Starwood had the right to vote an aggregate of 299,600 Corporation
Shares, representing approximately 2.5% of the Corporation Shares outstanding on
such date. All such Directors and officers and Starwood have indicated that they
intend to vote all such shares held by them in favor of the Reorganization
Proposal.
PROXIES
The Trust. Each Trust Share represented at the Trust Meeting by a duly
executed proxy solicited by the Board of Trustees will, unless such proxy
previously has been revoked, be voted at the Trust Meeting in accordance with
the shareholder instructions specified thereon. If no instructions are
specified, such Trust Shares will be voted FOR approval of the Reorganization
Proposal, FOR the election of the nominees to the Board of Trustees named herein
and FOR the ratification of the selection of Deloitte & Touche as the
independent auditors of the Trust for the 1994 fiscal year. In the absence of
instructions to the contrary, proxies solicited by the Board will be voted in
favor of each of such nominees or, in the discretion of the persons named as
proxies, cumulative voting rights will be exercised to elect as many of such
nominees as possible.
If a quorum is not present at the time the Trust Meeting is convened, or if
for any other reason the Board of Trustees believes that the Trust Meeting
should be adjourned, the Trust Meeting may be adjourned with or without a vote
of the shareholders. If the Board of Trustees proposes to adjourn the Trust
Meeting by a vote of the shareholders, the persons named as proxies on the
enclosed proxy card will vote all Trust Shares for which such persons have
voting authority in favor of such adjournment.
A shareholder of the Trust may revoke any proxy given to the Board of
Trustees pursuant to this solicitation at any time prior to exercise of such
proxy by (i) filing with the Secretary of the Trust an instrument of revocation
bearing a date later than the date of the proxy, (ii) duly executing a
subsequent proxy relating to the same Trust Shares and delivering such proxy to
the Secretary of the Trust, or (iii) attending the Trust Meeting and voting in
person. Any instrument of revocation should be sent to Hotel Investors Trust,
11845 West Olympic Blvd., Suite 550, Los Angeles, California 90064, Attention:
Jayne C. Gordon.
The Corporation. Each Corporation Share represented by a duly executed
proxy solicited by the Board of Directors will, unless such proxy previously has
been revoked, be voted at the Corporation Meeting in accordance with the
stockholder instructions specified thereon. If no instructions are specified,
such
23
<PAGE> 31
Corporation Shares will be voted FOR approval of the Reorganization Proposal (as
defined below), FOR the election of the nominees to the Board of Directors named
herein and FOR the ratification of the selection of Deloitte & Touche as the
independent auditors of the Corporation for the 1994 fiscal year. In the absence
of instructions to the contrary, proxies solicited by the Board will be voted in
favor of each of such nominees or, in the discretion of the persons named as
proxies, cumulative voting rights will be exercised to elect as many of such
nominees as possible.
If a quorum is not present at the time the Corporation Meeting is convened,
or if for any other reason the Board of Directors believes that the Corporation
Meeting should be adjourned, the Corporation Meeting may be adjourned with or
without a vote of the stockholders. If the Board of Directors proposes to
adjourn the Corporation Meeting by a vote of the stockholders, the persons named
as proxies on the enclosed proxy card will vote all Corporation Shares for which
those persons have voting authority in favor of such adjournment.
A stockholder of the Corporation may revoke any proxy given to the Board of
Directors pursuant to this solicitation at any time prior to exercise of such
proxy by (i) filing with the Secretary of the Corporation an instrument of
revocation bearing a date later than the date of the proxy, (ii) duly executing
a subsequent proxy relating to the same Corporation Shares and delivering such
proxy to the Secretary of the Corporation, or (iii) attending the Corporation
Meeting and voting in person. Any instrument of revocation should be sent to:
Hotel Investors Corporation, 11845 West Olympic Blvd., Suite 560, Los Angeles,
California 90064, Attention: Jayne C. Gordon.
SOLICITATION OF PROXIES
The expenses of this solicitation of proxies by the Board of Trustees and
the Board of Directors, including the costs of preparing and mailing this Joint
Proxy Statement, will be borne by the Trust and the Corporation. In addition to
solicitation by use of the mails, proxies may be solicited in person or by
telephone, telegram or other appropriate means of communication by Trustees,
Directors, officers and employees of the Trust or the Corporation. Such
individuals will receive no additional compensation for, but may be reimbursed
for their out-of-pocket expenses incurred in connection with, such solicitation.
The Trust and the Corporation have engaged the services of D.F. King & Co., Inc.
to solicit proxies and to assist in the distribution of proxy materials for a
fee estimated not to exceed $20,000, plus reimbursement of reasonable
out-of-pocket expenses. The Trust and the Corporation will reimburse persons
holding Paired Shares in their names or the names of their nominees but not
owning such shares beneficially (such as brokerage houses, banks and other
fiduciaries) for out-of-pocket expenses incurred in forwarding soliciting
materials to the beneficial owners of such shares. All of the foregoing fees and
expenses will be paid or reimbursed in equal parts by the Trust and the
Corporation.
THE REORGANIZATION PROPOSAL
The portion of the Reorganization Proposal which requires approval by the
shareholders of the Trust is as follows:
(a) the contribution by the Trust to the Realty Partnership of all of
the properties and assets of the Trust (subject to substantially all of its
liabilities, including the Senior Debt) for an approximate 28.3% general
partner interest in the Partnership, subject to adjustment;
(b) the adoption of amendments to the Amended and Restated Declaration
of Trust in the form attached to this Joint Proxy Statement as Exhibit A;
(c) the issuance, upon the exchange of the Realty Units held by
Starwood, of Trust Shares representing up to approximately 71.7% of the
issued and outstanding Trust Shares after such exchange, subject to
adjustment;
(d) the authority of the Board of Trustees to effect a reverse stock
split of the Trust Shares in which a number of Trust Shares outstanding at
the effective date of such reverse stock split (such number to be
24
<PAGE> 32
not less than six nor more than ten, as determined by such Board) will be
changed into one Trust Share; and
(e) the contribution by the Trust to the Realty Partnership of the net
proceeds to the Trust of the Offering which may be effected after the
Reorganization (see "The Reorganization -- the Offering"), in exchange for
a number of Realty Units in the Realty Partnership equal to the number of
Paired Shares sold in the Offering.
The portion of the Reorganization Proposal which requires approval of the
stockholders of the Corporation is as follows:
(a) the contribution by the Corporation and its subsidiaries to the
Operating Partnership of all or part of their properties and operating
assets (subject to substantially all of their liabilities) for an
approximate 28.3% general partner interest in the Operating Partnership,
subject to adjustment, and the contribution to the Operating Partnership of
the remainder of their properties, assets and liabilities upon receipt of
certain regulatory approvals described herein;
(b) the adoption of an amended and restated certificate of
incorporation of the Corporation in the form attached to this Joint Proxy
Statement as Exhibit B;
(c) the issuance, upon the exchange of the Operating Units held by
Starwood, of Corporation Shares representing up to approximately 71.7% of
the issued and outstanding Corporation Shares after such exchange, subject
to adjustment; and
(d) the authority of the Board of Directors to effect a reverse stock
split of the Corporation Shares in which a number of Corporation Shares
outstanding at the effective date of such reverse stock split (such number
to be not less than six nor more than ten, as determined by such Board)
will be changed into one Corporation Share; and
(e) the contribution by the Corporation to the Operating Partnership
of the net proceeds to the Corporation of the Offering which may be
effected after the Reorganization (see "The Reorganization -- the
Offering"), in exchange for a number of Operating Units in the Operating
Partnership equal to the number of Paired Shares sold in the Offering.
In addition, as part of the Reorganization and as a condition to the
consummation of the Reorganization, a new Board of Trustees of the Trust and a
new Board of Directors of the Corporation will be elected, including nominees of
Starwood who would constitute a majority of each Board after the Reorganization.
See "Election of Trustees of the Trust" and "Election of Directors of the
Corporation."
No portion of the Reorganization Proposal will be implemented unless the
Reorganization is consummated, and consummation of the Reorganization is subject
to approval of the Reorganization Proposal in its entirety by the requisite
votes of the holders of Trust Shares and Corporation Shares and the election of
such new Board of Trustees and such new Board of Directors. If the
Reorganization Proposal is so approved, the Trust and the Corporation will have
the authority to complete the Reorganization upon the terms generally described
in this Joint Proxy Statement, subject to such amendments and modifications as
the Board of Trustees or the Board of Directors, as the case may be, shall
approve. As described herein, certain portions of the Reorganization Proposal
will be implemented after the consummation of the Reorganization, including the
contribution by a subsidiary of the Corporation of its gaming assets,
liabilities and operations after certain regulatory approvals have been
received. See "The Reorganization -- Properties Contributed to the Operating
Partnership." The terms of the Reorganization may be amended or modified from
those described in this Joint Proxy Statement.
Approval of the Reorganization Proposal will require the affirmative vote
of the holders of a majority of the outstanding Trust Shares entitled to vote at
the Trust Meeting and the affirmative vote of the holders of a majority of the
outstanding Corporation Shares entitled to vote at the Corporation Meeting.
Accordingly, shares which are voted to abstain from voting on the approval of
the Reorganization Proposal and shares which are not voted with respect to such
approval (including broker non-votes) will have the legal effect of a vote
against such approval.
25
<PAGE> 33
THE REORGANIZATION
The following description of the Reorganization describes certain
agreements and does not purport to be complete and is qualified in its entirety
by reference to such agreements.
PRINCIPAL FEATURES OF THE REORGANIZATION
The Reorganization will involve a number of related transactions that will
occur simultaneously on the date of the consummation of the Reorganization (the
"Closing Date") pursuant to the terms of a Formation Agreement (the "Formation
Agreement") among the Trust, the Corporation and Starwood. Such transactions
include (i) the contribution by the Trust to the Realty Partnership of all of
its properties and assets, subject to substantially all of its liabilities (the
"Trust Assets"), (ii) the contribution by Starwood to the Realty Partnership of
approximately $4,200,000 in cash and certain hotel properties and first mortgage
notes (the "Starwood Realty Assets"), (iii) the contribution by the Corporation
and its subsidiaries to the Operating Partnership of all of their properties and
operating assets, subject to substantially all of their liabilities (the
"Corporation Assets"), (iv) the contribution by Starwood to the Operating
Partnership of approximately $800,000 in cash, furnishings and equipment of the
hotel properties included in the Starwood Realty Assets and other assets (the
"Starwood Operating Assets"), (v) subject to the consent of the lenders of the
Companies, the cancellation of approximately $63 million of intercompany debt
owed by the Corporation and its subsidiaries to the Trust, in consideration for
the guarantee by the Corporation of up to $25 million of the Senior Debt, and
(vi) the execution and delivery by the Trust, the Corporation, the Partnerships
and Starwood of agreements providing for the Reorganization.
PARTIES TO THE REORGANIZATION
The Trust. The Trust, which invests in fee, ground leasehold and mortgage
loan interests, currently holds interests in 37 hotel properties throughout the
United States. The principal executive offices of the Trust are located at 11845
West Olympic Boulevard, Suite 550, Los Angeles, California 90064.
The Corporation. The Corporation operates hotel properties (directly and
through its wholly-owned subsidiaries) which it leases from the Trust. The
principal executive offices of the Corporation are located at 11845 West Olympic
Boulevard, Suite 560, Los Angeles, California 90064.
The Trust Shares and the Corporation Shares are "paired" and may only be
held and transferred in units consisting of one Trust Share and one Corporation
Share (a "Paired Share"). Because all but three of the properties presently
owned by the Trust are leased to the Corporation, holders of Paired Shares
participate in both the ownership and operational aspects of the hotel business.
This "paired" structure will continue after the Reorganization.
Starwood. Starwood is a privately held real estate investment organization
which acquires equity and debt interests in hotel properties, multifamily
residential properties and single family developable land throughout the United
States, among other categories of assets. Since 1991, Starwood and its
predecessors have been involved with transactions involving over 100 properties
with an aggregate investment exceeding $700 million (on a cost basis).
Starwood's principal investors are high net worth families and institutions.
Starwood has acquired investments in over 8,000 hotel rooms in 44 properties at
a cost exceeding $300 million since 1992. Starwood currently has 27 employees,
including 17 experienced real estate, finance and acquisition professionals,
most of whom have invested substantial personal capital in Starwood's
investments. As of November 7, 1994, Starwood owned approximately 2.5% of the
outstanding Paired Shares. In addition, an affiliate of Starwood is the general
partner of a partnership that has the right to acquire approximately $74.0
million of the Senior Debt. The principal executive offices of Starwood are
located at Three Pickwick Plaza, Suite 250, Greenwich, Connecticut 06830.
26
<PAGE> 34
FORMATION AND STRUCTURE OF THE PARTNERSHIPS
The Realty Partnership will be named "SLT Realty Limited Partnership." On
the Closing Date the Trust will contribute to the Realty Partnership the Trust
Assets in exchange for a general partner interest in the Realty Partnership
representing an approximate 28.3% interest in the Realty Partnership on the
Closing Date and Starwood will contribute to the Realty Partnership the Starwood
Realty Assets in exchange for Realty Units representing an approximate 71.7%
interest in the Realty Partnership on the Closing Date.
The Operating Partnership will be named "SLC Operating Limited
Partnership." On the Closing Date the Corporation and its subsidiaries will
contribute to the Operating Partnership the Corporation Assets (except that the
Gaming Assets will not be contributed until receipt of certain regulatory
approvals as described under "-- Properties Contributed to the Operating
Partnership") in exchange for general partner interests in the Operating
Partnership representing an approximate 28.3% interest in the Operating
Partnership on the Closing Date and Starwood will contribute to the Operating
Partnership the Starwood Operating Assets in exchange for Operating Units
representing an approximate 71.7% interest in the Operating Partnership on the
Closing Date.
Under the terms of the Reorganization, Starwood may elect at any time prior
to the Closing Date to receive Paired Shares directly from the Trust and the
Corporation in lieu of Units in an amount that would result in Starwood holding
no more than 4.9% of the total outstanding Paired Shares. If Starwood exercises
such option, the number of Units to be received by Starwood in the
Reorganization shall be reduced on a one-for-one basis and Starwood shall pay
directly to the Trust and the Corporation in cash a proportionate amount of the
total assets to be contributed to the Partnerships in the Reorganization and the
assets so contributed to the Partnerships shall be reduced.
If Starwood acquires Senior Debt within six months from the approval of the
Reorganization Proposal, it will exchange up to $12,000,000 of Senior Debt for
up to an additional approximate 3.0% of the outstanding Realty Units and
Operating Units. An affiliate of Starwood is the general partner of a
partnership which has the right to acquire approximately $74.0 million of Senior
Debt. Any such Units issued pursuant to such exchange would be exchangeable for
Paired Shares on the same basis as other Units issued to Starwood in connection
with the Reorganization.
The Realty Units and the Operating Units (the "Units") will (subject to the
REIT Ownership Limitation) be exchangeable, together but not separately, for, at
the option of the Trust and the Corporation, either cash or Paired Shares
representing up to approximately 71.7% of the Paired Shares issued and
outstanding after the Reorganization.
Upon the consummation of the Reorganization, the structure of the Companies
and the Partnerships will be as follows1:
27
<PAGE> 35
[CHART]
- ---------------
(1) Does not reflect any issuance of additional Units to Starwood upon any
exchange by Starwood of up to $12,000,000 of outstanding Senior Debt that
Starwood may acquire on or before six months from the approval of the
Reorganization Proposal. An affiliate of Starwood is the general partner of
a partnership which has the right to acquire approximately $74.0 million of
Senior Debt. If such Units are issued, then (i) the percentages of each of
the Trust and the Corporation owned by the current holders (other than
Starwood) after the Unit exchange would be approximately 24.8% and (ii) the
percentages of each of the Trust and the Corporation owned by Starwood after
the Unit exchange would be approximately 75.2%. Any such Units issued
pursuant to such exchange would be exchangeable for Paired Shares on the
same basis as other Units issued to Starwood in connection with the
Reorganization.
(2) Because of the REIT Ownership Limitation Starwood may only exchange Units
which will cause Starwood to receive in exchange therefor not more than an
additional 5.5% of the outstanding Paired Shares, bringing its Paired Share
ownership to 8.0%.
PROPERTIES CONTRIBUTED TO THE REALTY PARTNERSHIP
The Trust Assets to be contributed by the Trust to the Realty Partnership
constitute all of the assets and properties of the Trust, subject to
substantially all of its liabilities. The Trust owns fee interests (or long term
leaseholds) in 26 hotels and two hotel/casinos, holds nine third-party
promissory notes secured by mortgages on ten additional hotels, and holds two
promissory notes secured by a hotel which is partly owned by the Corporation.
The Trust also holds intercompany debt of the Corporation and its subsidiaries,
up to approximately $63 million of which, subject to the approval of the lender
of the companies, will be cancelled as part of the Reorganization. For further
information with respect to the assets and properties of the Trust, see the
Hotel Investors Form 10-K which accompanies this Joint Proxy Statement. The only
obligations and liabilities of the Trust which will not be assumed by the Realty
Partnership are the obligations and liabilities of the Trust pursuant to the
Formation Agreement and the other agreements entered into in connection with the
Reorganization, including the Trust's indemnification obligations under the
Formation Agreement. See"-- Representations and Warranties; Indemnification."
28
<PAGE> 36
Starwood will contribute to the Realty Partnership the Starwood Realty
Assets (together with associated liabilities), which consist of the following:
- Approximately $4,200,000 in cash.
- a mixed-use property located in Lexington, Kentucky and including a
155-suite hotel known as the French Quarters Suites (all of which will be
leased by the Realty Partnership to the Operating Partnership after the
Reorganization and will be managed by the Operating Partnership after the
Reorganization), as well as an approximate 12,000 rentable square foot
office building and approximately 38,000 gross leasable square feet of
retail space, subject to the assumption by the Realty Partnership of
related indebtedness in the aggregate principal amount of $1,517,000,
which indebtedness is also secured by mortgages on the Albany Holiday Inn
and the Capitol Hill Suites, referred to below, and is cross defaulted
and cross collateralized with the $6,800,000 mortgage indebtedness
secured by the Doubletree Club Rancho Bernardo, referred to below. The
French Quarters Suites was developed in 1989.
- a 152-suite property located in Washington, D.C., known as the Capitol
Hill Suites (which will be leased by the Realty Partnership to the
Operating Partnership after the Reorganization and will be managed by the
Operating Partnership after the Reorganization). The Capitol Hill Suites
was constructed in 1955 and underwent a $1.2 million renovation in 1992
through 1994.
- a 209-room hotel located in Rancho Bernardo, California, known as the
Doubletree Club Rancho Bernardo (which will be leased by the Realty
Partnership to the Operating Partnership after the Reorganization and
will be managed by the Operating Partnership), subject to the assumption
by the Realty Partnership of related indebtedness in the aggregate
principal amount of $6,800,000, which indebtedness is cross defaulted and
cross collateralized with the $1,517,000 mortgage indebtedness secured by
the French Quarters Suites (and related mixed-use property), the Capitol
Hill Suites, and the Albany Holiday Inn, all referenced above. The
Doubletree Club Rancho Bernardo was constructed in 1987.
- a 151-room hotel located in Albany, Georgia, known as the Albany Holiday
Inn purchased by Starwood from the Trust pursuant to the Albany Agreement
described under "The Reorganization -- Albany Agreement" (which hotel
will be leased by the Realty Partnership to the Operating Partnership
after the Reorganization and will be managed by the Operating Partnership
after the Reorganization). The Albany Holiday Inn was constructed in
1989.
- a 259-room hotel located in Wichita, Kansas, known as the Harvey Wichita
Inn, subject to the assumption by the Realty Partnership of related
indebtedness in the aggregate principal amount of $2,250,000. The hotel
was constructed in 1974 and underwent a $2 million renovation in 1994.
Starwood will guarantee that the cash flow from the hotel (which is
defined for purposes of the guarantee as gross revenues (on a cash basis)
received by the Operating Partnership from the hotel, less management
fees and capital expenditures for the hotel) will be at least $700,000 in
the first year after the Closing, $800,000 in the second year after the
Closing and $900,000 in the third year after the Closing (with such cash
flow in excess of those amounts being applied to reduce the guaranteed
amount in later years). The hotel had a net operating loss for the year
ended December 31, 1993 of ($420,841). For a statement of cash flows for
the hotel, see the Statement of Cash Flows for Starwood Wichita
Investors, L.P. The Operating Partnership has agreed to assume the
existing management contract for the hotel. That management contract can
be terminated on 60 days notice if the hotel does not meet certain
performance standards, although the Operating Partnership has agreed not
to terminate that contract during the three-year guarantee period without
Starwood's consent.
- first mortgage notes in the aggregate principal amount of approximately
$55,200,000 at June 30, 1994 (subject to the assumption by the Realty
Partnership of related indebtedness in the aggregate principal amount of
approximately $30,700,000), which are secured by (i) a 506-room hotel in
Dallas, Texas known as the Harvey DFW Airport Hotel, (ii) a 429-room
hotel in Addison, Texas known as the Harvey Addison Hotel and (iii) a
295-room hotel in Dallas, Texas known as the Harvey Bristol Suites. Those
hotels were constructed between 1985 and 1988.
29
<PAGE> 37
- a first mortgage note in the aggregate principal amount of approximately
$12,500,000 at June 30, 1994, which is secured by a 151-room hotel in
Secaucus, New Jersey known as the Ramada Suites which was constructed in
1990.
- first mortgage notes in the aggregate principal amount of approximately
$11,500,000 at June 30, 1994, which are secured by a 203-room hotel in
Atlantic City, New Jersey, known as the Atlantic City Quality Inn, as
well as by an adjacent parking lot and certain additional collateral,
subject to the assumption by the Realty Partnership of related
indebtedness in the aggregate principal amount of approximately
$9,000,000, which indebtedness is also secured by the Ramada Suites first
mortgage note and the Atlantic City Inn (and related collateral) first
mortgage note, all referenced above. The Atlantic City Quality Inn was
constructed in 1986.
The French Quarters Suites asset was acquired pursuant to a court order
authorizing the sale by the Commissioner of Insurance of the State of Kentucky
on behalf of Kentucky Central Life Insurance Company on August 5, 1994. The
hotel is located at the Intersection of Richmond Road, a major city artery, and
the I-4 Beltline, approximately three miles from downtown Lexington. The
Lexington Airport is approximately ten miles away, the University of Kentucky is
approximately four miles away, and the hotel caters primarily to business
travelers and university visitors. The hotel had an Average Daily Rate ("ADR"),
occupancy, and net operating income, excluding debt service ("NOI") of $79, 67%,
and $941,771 (net of pro forma depreciation of $573,000), respectively, for the
year ended December 31, 1993. The hotel, attached retail, and office complex was
appraised for $15,600,000 in June, 1993.
The Capitol Hill Suites was acquired from Marine Midland Bank on July 14,
1994. The seller had previously acquired the hotel through foreclosure. The
hotel is located approximately two blocks east of the Capitol Building and
caters primarily to legislators and aides, lobbyists, and Capitol Hill business
travelers. The hotel had ADR, occupancy, and NOI of $90, 63%, and $831,065 (net
of pro forma depreciation of $335,000), respectively, for the year ended
December 31, 1993.
The Doubletree Club Rancho Bernardo hotel was acquired pursuant to a
bankruptcy court ordered sale on September 16, 1994. The hotel is located in
Rancho Bernardo, a suburb of San Diego, California and caters primarily to
business travelers. The hotel had ADR, occupancy, and NOI of $63.60, 60.1%, and
$375,150 (net of pro forma depreciation of $383,000), respectively, for the year
ended December 31, 1993.
The Harvey Wichita Hotel was acquired from an affiliate of Travelers
Insurance Company on December 17, 1993. The seller had previously acquired the
hotel through foreclosure. The hotel is located at the intersection of Kellogg
Road and Rock Road, across from the Town East Mall, one of the highest traffic
count intersections in Kansas. The hotel caters primarily to business travelers
and mall-related travelers. The hotel had ADR, occupancy, and a net operating
loss of $44, 58.6%, and ($946,841) (which includes pro forma depreciation of
$526,000), respectively, for the year ended December 31, 1993.
The three Harvey Hotel mortgages were acquired together from the FDIC on
October 15, 1993. The notes were restructured by the FDIC in December 1992 and
have since remained performing. Starwood acquired these mortgages, and as of
November 7, 1994, all payments of principal and interest due during this period
have been paid, and none of the three mortgages are currently in default.
Starwood believes that it was able to acquire these mortgages at a significant
discount because it paid all cash and because the seller gave limited
information regarding the underlying collateral and offered minimal
representations and warranties. The three hotels were constructed between 1985
and 1988.
The Bristol Suites is an all-suites property located at Highway 635 at Coit
Road and caters to business travelers and groups. For the year ended December
31, 1993, ADR and occupancy at the Bristol Suites was $80.32 and 77.1%,
respectively. The hotel was appraised for $29,000,000 in March, 1994. The
Addison Harvey is located on Highway 635 at Midway Road and caters primarily to
business travellers and groups. For the year ended December 31, 1993, ADR and
occupancy at the Addison Harvey Hotel was $58.12 and 77.5%, respectively. The
hotel was appraised for $28,000,000 in March, 1994. The DFW Harvey Hotel is
located on Highway 114 at the intersection of Esters Road approximately 1.5
miles from the north entrance of the DFW International Airport and caters
primarily to the DFW Airport submarket. For the year ended December 31, 1993,
ADR and occupancy at the DFW Harvey Hotel was $67.37 and 78.4%, respectively.
The hotel was appraised for $41,500,000 in March, 1994.
30
<PAGE> 38
The Ramada Secaucus mortgage note and the Atlantic City Quality Inn
mortgage notes were contained in a portfolio of over 20 mortgage notes
encumbering 17 different hotel assets with an aggregate outstanding principal
balance exceeding $100 million which was acquired from Midlantic Bank on
September 27, 1993. The majority of the notes in this portfolio were
nonperforming or subperforming at the time of acquisition. The seller of the
loans marketed the portfolio only to all cash buyers and offered only minimal
representations and warranties to the buyer. Starwood believes these distressed
selling conditions allowed Starwood to acquire the portfolio at a significant
discount to the outstanding aggregate principal balance outstanding. During the
period of Starwood's ownership, and as of November 7, 1994, all payments of
principal and interest due during this period have been paid, and neither the
Ramada Secaucus mortgage note or the Atlantic City Quality Inn notes are
currently in default.
The Secaucus Ramada Suites hotel was built in 1989. The asset is located
approximately five miles to the east of the Meadowlands Sports Complex. The
collateral consists of a first leasehold mortgage interest (the ground lease,
which expires on June 11, 2062, provides for annual base ground rent of $151,000
plus 10% of room revenues in excess of $3,548,500). Unaudited financial
statements for the fiscal year ended June 30, 1994 submitted by the borrower
indicate an ADR and occupancy of $84.04 and 76.1%, respectively.
The Atlantic City Quality Inn hotel was built in 1986. The asset is located
approximately one block from the Resorts International Hotel and Casino and
approximately three blocks from the Trump Taj Mahol Hotel and Casino. Unaudited
financial statements for the year ended December 31, 1993 submitted by the
borrower indicate an ADR and occupancy of $65.85 and 61.6%, respectively.
The contributions of the hotel properties by Starwood to the Realty
Partnership will not include certain operating assets, furnishings or equipment,
all of which will be contributed by Starwood to the Operating Partnership.
PROPERTIES CONTRIBUTED TO THE OPERATING PARTNERSHIP
The Corporation Assets to be contributed by the Corporation and its
subsidiaries to the Operating Partnership constitute all of their properties and
operating assets, subject to substantially all of their liabilities. Such
Corporation Assets and liabilities will be contributed upon the consummation of
the Reorganization, except that a subsidiary of the Corporation will continue to
hold and operate its gaming assets, liabilities and operations, pending receipt
of necessary regulatory approvals of the Nevada Gaming Commission. Upon the
earlier of receipt of such approvals or such time as such approvals are no
longer required (such event being referred to as "Gaming Approval"), such
subsidiary will transfer such assets and liabilities (the "Gaming Assets") to a
limited partnership owned 99% by the Operating Partnership, as limited partner,
and 1% by such subsidiary, as general partner. If all or any portion of the
Gaming Assets are disposed of prior the receipt of Gaming Approval, the net
proceeds of such disposition will be contributed to such limited partnership
upon receipt thereof. If Gaming Approval is not received on or prior to December
31, 1995, then on such date such subsidiary will contribute to such limited
partnership cash equal to the value of any Gaming Assets not disposed of prior
to such date. The value of such Gaming Assets will be agreed to by the
Corporation and Starwood or, if they are unable to agree, such value will be
determined by independent appraisers selected by the Board of Directors of the
Corporation and Starwood. No additional interests in the Operating Partnership
will be issued upon the transfer of either the Gaming Assets, such net proceeds
or such cash. In addition, the Corporation will contribute to the Operating
Partnership any dividends or other distributions declared or paid by such
subsidiary to the Corporation prior to the receipt of Gaming Approval. The only
obligations and liabilities of the Corporation which will not be assumed by the
Operating Partnership are the obligations and liabilities of the Corporation
pursuant to the Formation Agreement and the other agreements entered into in
connection with the Reorganization, including the Corporation's indemnification
obligations under the Formation Agreement. See "-- Representations and
Warranties; Indemnification."
The Corporation leases 23 of the 26 hotel properties currently owned by the
Trust and owns certain other assets. For further information with respect to the
assets of the Corporation, see the Hotel Investors Form 10-K which accompanies
this Joint Proxy Statement.
Starwood will contribute to the Operating Partnership the Starwood
Operating Assets, which consist of approximately $800,000 of cash, $5,612,000 of
certain operating assets (including furnishings and equipment)
31
<PAGE> 39
of the French Quarters, Capitol Hill Suites, Albany Holiday Inn, Doubletree
Rancho Bernardo and Harvey Wichita hotels contributed by Starwood to the Realty
Partnership. Those leases will be similar to the current leases from the Trust
to the Corporation.
FINANCIAL INFORMATION WITH RESPECT TO THE STARWOOD ASSETS
The following table sets forth unaudited balance sheet information as of
June 30, 1994 with respect to the assets (net of certain liabilities) to be
contributed by Starwood to the Partnerships and unaudited results of operations
for the six months ended June 30, 1994 and the year ended December 31, 1993 for
the assets and liabilities to be contributed by Starwood to the Partnerships.
UNAUDITED BALANCE SHEET INFORMATION(1):
<TABLE>
<CAPTION>
JUNE 30, 1994
-------------
<S> <C>
ASSETS
Hotel assets, net............................................... $35,115,000
Mortgage notes receivable, net.................................. 48,837,000
-----------
Total real estate investments......................... 83,952,000
-----------
Advance Related to Albany Holiday Inn........................... 6,000,000
-----------
Cash and cash equivalents....................................... 5,000,000
-----------
94,952,000
===========
LIABILITIES
Mortgage and other notes payable................................ $50,259,000
-----------
44,693,000
===========
</TABLE>
UNAUDITED STATEMENTS OF OPERATIONS(2):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1994 DECEMBER 31, 1993
---------------- -----------------
<S> <C> <C>
REVENUE
Hotel....................................... $ 8,069,000 $15,489,000
Interest from mortgage and other notes...... 4,050,000 8,190,000
----------- -----------
Total Revenue..................... 12,119,000 23,679,000
----------- -----------
EXPENSES
Hotel Operations............................ 5,971,000 11,882,000
Interest -- other........................... 1,998,000 3,995,000
Depreciation and Amortization............... 908,000 1,817,000
----------- -----------
Total Expenses.................... 8,877,000 17,694,000
----------- -----------
NET INCOME........................ $ 3,242,000 $ 5,985,000
=========== ===========
</TABLE>
32
<PAGE> 40
- ---------------
(1) Reflects the historical cost of the assets (net of certain liabilities)
contributed by Starwood. Starwood has acquired four hotel properties which
will be contributed, as follows:
<TABLE>
<CAPTION>
COST YEAR NUMBER
PROPERTY LOCATION BASIS(1)(3) ENCUMBRANCE BUILT OF ROOMS
------------------ -------------------- ------------ ----------- ------ --------
<S> <C> <C> <C> <C> <C>
Capitol Hill
Suites Washington, D.C. $ 8,610,000 -- 1955 152
French Quarters
Suites(2) Lexington, KY 12,400,000 $ 1,517,000 1989 155
Doubletree Hotel Rancho Bernardo, CA 8,317,000 6,800,000 1987 209
Harvey Wichita Inn Wichita, KS 5,788,000 2,250,000 1969 259
------------ -----------
$ 35,115,000 $10,567,000
============ ===========
</TABLE>
- ---------------
(1) $5,612,000 of costs related to the properties will be contributed to
the Operating Partnership.
(2) Includes 38,000 square feet of retail space and 12,000 square feet of
office space.
(3) The allocation of the cost basis as determined based on estimated fair
market value is as follows:
<TABLE>
<CAPTION>
CAPITOL HILL FRENCH QUARTERS DOUBLETREE HARVEY WICHITA
SUITES HOTEL SUITES HOTEL HOTEL
------------ --------------- ---------- --------------
<S> <C> <C> <C> <C>
Land.......................... $ 2,000,000 $ 1,350,000 $1,500,000 $ 341,000
Building...................... 5,760,000 9,550,000 5,717,000 3,285,000
Furniture, Fixtures & 850,000 1,500,000 1,100,000 2,162,000
Equipment...................
----------- ----------- ---------- ----------
Total......................... $ 8,610,000 $12,400,000 $8,317,000 $5,788,000
=========== =========== ========== ==========
</TABLE>
Hotel assets are depreciated using the straight line method over estimated
lives of thirty-five years for buildings and improvements and five years
for furniture, fixtures, and equipment.
Subsequent to June 30, 1994, Starwood purchased from the Trust the
Albany Holiday Inn, with a net book value of $5,200,000, for $6,000,000 in
cash. The cash proceeds from the sale were used by the Trust to make a
principal paydown on the Senior Debt. In connection with the
Reorganization, Starwood will contribute the property to the Realty
Partnership. Because Starwood has the right to sell the hotel back to the
Trust for the purchase price plus a 10% return on its investment, the
transaction will be recorded as a financing.
The mortgage notes receivable, acquired in 1993 at a discount, consist
of the following:
Three performing mortgage notes to affiliated borrowers collateralized
by three full service hotels (aggregating 1,230 rooms) in the Dallas, Texas
area. The mortgage notes, maturing on December 31, 2002, are
cross-collateralized and have cost bases and outstanding principal balances
at June 30, 1994 as follows:
<TABLE>
<CAPTION>
OUTSTANDING
PRINCIPAL
BALANCE COST BASIS REFERENCE
------------ ----------- ----------
<S> <C> <C> <C>
COLLATERAL:
Harvey Hotel Addison........................... $10,843,000 $ 7,345,000 (a)
Harvey Hotel Bristol........................... 17,350,000 11,739,000 (b)
Harvey Hotel DFW............................... 26,988,000 18,260,000 (c)
----------- -----------
$55,181,000 $37,344,000
----------- -----------
OTHER MORTGAGE NOTES:
Atlantic City Quality Inn...................... $11,523,000 $ 4,185,000 (d)
Secaucus, New Jersey Ramada.................... 12,518,000 7,308,000 (d)
----------- -----------
$79,222,000 $48,837,000
=========== ===========
</TABLE>
33
<PAGE> 41
- ---------------
(a) Represents a first mortgage note bearing interest at 8% (which was
purchased at a discount which reflects a 16.1% effective rate) payable
quarterly in arrears. The mortgage note has a 15-year amortization
period and a balloon payment at maturity.
(b) Represents a first mortgage note bearing interest at 8% (which was
purchased at a discount which reflects a 16.1% effective rate) payable
quarterly in arrears. The mortgage note has a 15-year amortization
period and a balloon payment at maturity.
(c) Represents a first mortgage note bearing interest at 8% (which was
purchased at a discount which reflects a 16.1% effective rate) payable
quarterly in arrears. The mortgage note has a 15-year amortization
period and a balloon payment at maturity.
Aggregate operating revenues and expenses on the underlying assets of
the notes were $21,976,000 and $15,631,000, respectively, for the six
months ended June 30, 1994 and $40,023,000 and $30,449,000,
respectively, for the year end December 31, 1993.
(d) The mortgage notes bear interest at various rates (which were purchased
at a discount, which reflects a 19.1% aggregate effective rate) and are
payable monthly in arrears, except that for the months of November 1994
through April 1995, debt service for the Atlantic City Quality Inn
shall accrue and be payable from excess cash flow. Commencing May 1,
1995 fixed payments of debt service shall be required to be resumed.
The mortgages mature between 1996 and 2010.
NOTES PAYABLE CONSISTS OF THE FOLLOWING:
(a) A $30,692,000 note issued in connection with the acquisition of the
Harvey mortgage notes receivable under the terms of a Loan Agreement
with a third party dated October 15, 1993. The note is nonrecourse and
matures on January 31, 2003 and bears interest on a monthly basis at
variable rates based on the London Interbank Offer Rate (LIBOR)
Eurodollar rate plus 3%. The LIBOR rate at June 30, 1994 was 4.875%.
(b) A $9,000,000 note relating to the other mortgage notes. The note bears
interest at variable rates based on the LIBOR rate plus 4%. Interest is
payable monthly in arrears and the note matures in 1995.
(c) $8,317,000 cross defaulted and cross collateralized indebtedness
relating to the acquisition of the DoubleTree Rancho Bernardo
($6,800,000) the French Quarters Suites ($1,517,000) and the Albany
Holiday Inn. The note bears interest at variable rates based on the
LIBOR rate plus 2.5%. Interest is payable monthly in arrears and the
note matures in 1995.
(d) A $2,250,000 construction loan funded in 1994 and used to renovate the
Harvey Wichita Hotel bearing interest at 7.75% during the construction
period. At the end of the construction period, the loan will be
converted to a permanent financing with an annual interest rate of 7.5%
fixed for a five year term, or prime + 1% adjusted annually with a
ceiling of 10% and a maximum annual adjustment of 1%.
(2) Reflects the pro forma statement of operations of the assets and liabilities
contributed by Starwood for the six months ended June 30, 1994 and the year
ended December 31, 1993. Interest income and expense is reflected as if
Starwood had contributed the related mortgage notes receivable and notes
payable as of January 1, 1993.
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<PAGE> 42
The following table sets forth the number of Paired Shares outstanding at
June 30, 1994, the combined net tangible book value of the Trust and the
Corporation at June 30, 1994, the number of Paired Shares held by Starwood after
giving effect to the Reorganization, the net book value as of June 30, 1994 of
the assets contributed to the Partnerships by Starwood, and the net book value
of the average contribution per Paired Share based on total contributions:
<TABLE>
<CAPTION>
BOOK VALUE
OF AVERAGE
PAIRED SHARES BOOK VALUE OF TOTAL CONTRIBUTION
OR UNITS(1) CONTRIBUTIONS PER PAIRED
------------------- ------------------------- SHARE OR
NUMBER PERCENT(5) AMOUNT PERCENT(5) UNIT
--------- ------- ------------- ------- ----------
<S> <C> <C> <C> <C> <C>
Paired Shares outstanding prior to the
Reorganization...................... 1,733,279 28.3% $11,285,000(2) 20.2%(5) $ 6.51
Units issued to Starwood in connection
with the Reorganization(3).......... 4,396,884 71.7% 44,693,000(4) 79.8%(5) $10.16
--------- ----- ---------- -----
TOTAL................................. 6,130,163 100.0% $55,978,000 100.0% $ 9.13
========= ===== ========== =====
</TABLE>
- ---------------
(1) Assumes exchange of all Units for Paired Shares.
(2) Reflects the combined net tangible book value of the Company at June 30,
1994 without giving effect to the Reorganization.
(3) Based on exchange of one Paired Share for each Unit.
(4) Reflects the net tangible book value at June 30, 1994 of the assets
contributed to the Partnerships by Starwood.
(5) The percentages of book value differ from the percentage ownership of Paired
Shares or Units because the book value of the contributions of the Companies
and Starwood was determined based on historical cost and the percentages of
Paired Shares or Units to be held after the Reorganization by the current
holders of Paired Shares and by Starwood was determined by negotiation
between the Companies and Starwood.
35
<PAGE> 43
TRUST ASSETS CONTRIBUTED TO THE REALTY PARTNERSHIP
The following table summarizes certain information regarding the Trust
Assets to be contributed to the Realty Partnership:
HOTEL ASSETS
<TABLE>
<CAPTION>
12 MONTHS ENDED
JUNE 30, 1994
# OF DATE -------------------
HOTEL STATE ROOMS ACQUIRED ADR OCCUPANCY
- -------------------------------- ------------------- ----- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Embassy Suites.................. Phoenix, AZ 227 1983 $ 81.95 72.64%
Plaza Hotel..................... Tucson, AZ 149 1983 44.85 83.70
Bay Valley Hotel & Resort....... Bay Valley, MI 151 1984 64.67 62.95
Best Western Airport Inn(1)..... Albuquerque, NM 120 1984 54.41 86.54
Best Western Mesilla Valley
Inn........................... Las Cruces, NM 166 1982 43.00 74.84
Ramada Inn(1)................... Fayetteville, NC 138 1986 31.24 37.73
Best Western Inn................ Columbus, OH 180 1992 42.49 67.73
Days Inn-Portland............... Portland, OR 173 1984 48.36 69.78
The Riverside Inn............... Portland, OR 137 1984 64.30 75.92
Dallas Park Center(1)........... Dallas, TX 445 1972 59.08 49.63
Days Inn Town Center(1)......... Seattle, WA 90 1984 59.65 80.86
The Meany Tower Hotel........... Seattle, WA 155 1984 66.52 73.48
The Sixth Avenue Inn(1)......... Seattle, WA 166 1984 66.07 75.92
Tyee Hotel...................... Olympia, WA 155 1987 61.41 54.38
Milwaukee Marriott(3)........... Milwaukee, WI 396 1990 65.56 73.82
Vagabond Inn-Rosemead(2)........ Rosemead, CA 102 1974 37.12 47.26
Vagabond Inn-Sacramento(2)...... Sacramento, CA 108 1975 56.50 75.73
Vagabond Inn-Woodland
Hills(2)...................... Woodland Hills, CA 101 1973 47.91 89.94
Best Western Riverfront
Airport....................... Savannah, GA 142 1986 48.18 57.61
Best Western Airport............ El Paso, TX 175 1985 34.97 80.01
Residence Inn................... Tysons Corner, VA 96 1984 100.42 77.79
Bourbon Street Hotel & Casino... Las Vegas, NV 150 1988 31.80 89.16
King 8 Gambling Hall Hotel &
Casino........................ Las Vegas, NV. 300 1988 32.58 85.32
</TABLE>
- ---------------
(1) These hotels are owned subject to long-term ground leases.
(2) The Vagabond Inns are leased to a third party, and are the only existing
hotel assets not leased to the Corporation.
(3) The Corporation has a 51% general partnership interest in this hotel and the
Trust holds third and fourth mortgages of $1,161,000 and $14,865,000,
respectively.
ASSIGNMENT AGREEMENT
Starwood has received an assignment of certain claims (the "Assigned
Claims") of Leonard M. Ross and his affiliates ("Ross"), who currently hold
approximately 9.8% of the outstanding Paired Shares and had opted out of the
settlement by the Trust and the Corporation of certain shareholder litigation
described in Item 3 of the Hotel Investors 10-K accompanying this Joint Proxy
Statement. Virtually all other shareholders of the Trust and the Corporation
were bound by such settlement. In addition to preserving his rights to institute
an action against the Companies and the other defendants with respect to the
matters covered by such settlement, Ross had threatened to separately institute
such an action and had threatened to assert other alleged causes of action
against the Companies.
36
<PAGE> 44
Pursuant to the Assignment Agreement, Ross also granted a proxy to vote
Ross' 170,057 Paired Shares (as adjusted for an assumed 1-for-7 Reverse Split).
Starwood has agreed to purchase those Paired Shares, at Ross' election, in a
60-day period beginning on the earlier of the year after the consummation of the
Reorganization or December 15, 1995, at a price of $39.375 (as adjusted for an
assumed 1-for-7 Reverse Split) per Paired Share. Starwood may also elect to
purchase such Paired Shares at the same time and on the same terms. Ross has
agreed not to purchase or sell any Paired Shares during such period and not more
than 4.9% thereafter.
As described under "The Reorganization -- Representations and Warranties;
Indemnification", the Trust and the Corporation have agreed that under certain
circumstances they will indemnify and hold harmless Starwood in respect of
certain losses in respect of the Assignment Agreement and the Partnerships will
reimburse the Trust and the Corporation for amounts paid in respect of such
indemnification obligation.
ADJUSTMENTS TO INTERESTS IN THE PARTNERSHIPS
The Formation Agreement provides for adjustments to the percentage
interests of the Trust and Starwood in the Realty Partnership and of the
Corporation and Starwood in the Operating Partnership on or prior to the Closing
Date. The percentage interests of Starwood in each of the Partnerships will be
increased in the event of a reduction prior to the Closing Date of the principal
amount of the indebtedness to be assumed by the Realty Partnerships in
connection with the first mortgage notes secured by the Harvey Hotels or the
indebtedness to be assumed by the Realty Partnership in connection with the
first mortgage notes secured by the Atlantic City hotel and the Secaucus Ramada
Suites hotel.
The Formation Agreement provides that the percentage interests of any
partner in the Partnerships will be decreased if any assets which are to be
contributed by such partner are not contributed, but if such decrease would
cause the aggregate percentage interests of Starwood to be less than 51%,
Starwood will contribute additional assets in order to cause such aggregate
percentage interests to be equal to 51%. Any such additional assets would be
subject to the reasonable approval of the Trust and the Corporation. The
Formation Agreement also provides that no adjustments will be made to the
percentage interests of the Trust and the Corporation in the Partnerships to the
extent that the percentage interests of the Trust and the Corporation would be
reduced below 25%.
OPERATION OF THE PARTNERSHIPS
If the Reorganization is completed, the Trust will be one of the largest
publicly traded REITs investing exclusively in hotel properties and the Realty
Partnership will own interests in 47 hotels located in 21 states throughout the
United States. After the Reorganization, the Trust and the Corporation will have
a total equity capitalization (based on a thirty day average of the market value
of Paired Shares at November 7, 1994 and assuming the exchange of all Units for
Paired Shares) of $126.4 million and a total market capitalization (the total
equity capitalization plus the principal amount of all indebtedness) of $339.3
million, as compared with the total equity capitalization and total market
capitalization for the Trust and the Corporation of approximately $21.5 million
(based on a thirty day average of the market value of Paired Shares at June 13,
1994, the date of the first public announcement of the Reorganization) and
approximately $190.1 million, respectively, prior to the Reorganization.
Following the Reorganization, the Realty Partnership will own fee or ground
leasehold interests in over 5,900 rooms and the Operating Partnership will
operate over 5,600 rooms. After the Reorganization, the net loss and funds from
operations of the Partnerships for the year ended December 31, 1993 will be
($1,232,000) and $12,965,000, respectively, as compared with the historical pro
forma net loss and pro forma funds from operations of the Companies for such
year of ($7,032,000) and $4,548,000. Funds from operations 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. Funds from operations should not be considered an alternative
to net income as an indication of the
37
<PAGE> 45
Companies' financial performance or as an alternative to cash flows from
operating activities as a measure of liquidity.
BUSINESS OBJECTIVES
The primary business objectives and operating strategy following the
Reorganization will be to (i) replace the existing Senior Debt and mortgage debt
with a more stable lower cost capital structure and (ii) increase per share
funds from operations and amounts available for distribution to shareholders by
continuing to improve hotel operations and through the opportunistic acquisition
of additional hotels.
Following the Reorganization, the Trust will be the sole general partner of
the Realty Partnership and as such will make all decisions on behalf of the
Realty Partnership, except that at any time that Starwood owns or controls at
least 15% of the outstanding Units in the Realty Partnership, the Trust may not
undertake on behalf of the Realty Partnership certain "Major Decisions" without
the prior written consent of Starwood. After the Reorganization, the Trust will
conduct all of its business and operations through the Realty Partnership.
All future real estate acquisitions by the Trust will be made through the
Realty Partnership.
After the Reorganization, the Partnerships will be the exclusive vehicle
through which Starwood will continue to pursue equity hotel investments in the
United States. So long as any officer, director or general partner of, or any
other person employed by, Starwood remains on either the Board of Trustees of
the Trust or the Board of Directors of the Corporation, Starwood has agreed that
it will not compete, directly or indirectly, with the Partnerships and that it
will present to the Partnerships all acquisitions of (i) fee 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 interest. During the term of
such non-competition agreement Starwood will not acquire any such fee interest
or debt interests. Starwood is currently negotiating the acquisition of several
hotels, hotel portfolios and other related assets, some of which are of
significant size. Such acquisitions are subject to further negotiation and
numerous conditions and there can be no assurance that any such acquisitions
will be completed. The Trust and the Corporation have agreed that Starwood may
consummate any acquisition which is subject to an executed letter of intent or
contract prior to the Reorganization, which acquisition relates to a group of
five or more properties with a total value in excess of $100 million (an
"Existing Acquisition"). Starwood will have the right to operate any such
properties and the Partnerships will not have the right to acquire any such
properties from Starwood.
Prior to receipt of the Gaming Approval, the Operating Partnership will be
managed by a management committee the members of which are identical to the
members of the new Board of Directors elected at the Corporation Meeting. While
awaiting the Gaming Approval, the Corporation's existing management and Board of
Directors will be responsible for the operation and control of the Gaming
Assets, and the management committee will be prohibited from any influence or
control of the Gaming Assets. After receipt of the Gaming Approval the
Corporation will manage the business of the Operating Partnership as the
managing general partner of the Operating Partnership. As managing general
partner, the Corporation will make all decisions on behalf of the Operating
Partnership, except that at any time that Starwood owns or controls at least 15%
of the outstanding Units in the Operating Partnership, the Corporation may not
undertake on behalf of the Operating Partnership certain "Major Decisions"
without the prior written consent of Starwood. See "The Partnerships." After the
Reorganization, the Corporation will conduct all of its business and operations
through the Operating Partnership and will lease from the Realty Partnership the
hotel properties which the Corporation and its subsidiaries currently lease from
the Trust, and certain properties acquired by the Realty Partnership from
Starwood. The Operating Partnership may also lease from the Realty Partnership
and operate hotel properties acquired by the Realty Partnership in the future.
EXCLUDED ASSETS
Although the Partnerships are succeeding to the hotel equity investment
business of Starwood, there are certain fee interests, debt interest or other
investments held by Starwood (the "Excluded Assets") which are not being
contributed to the Partnerships by Starwood because those Excluded Assets either
(i) are subject to
38
<PAGE> 46
contractual restrictions preventing transfers or (ii) are inconsistent with the
investment objectives of the Partnerships. Certain Excluded Assets do not
currently, but may in the future, compete with the Partnerships if the
Partnerships were to invest in hotel properties in the same markets or of the
same types as the Excluded Assets. However, with respect to each Excluded Asset,
subject to obtaining all material required third party and partner consents and
approvals, the Partnerships will have the option, at any time or times prior to
the earlier of five years from the consummation of the Reorganization and the
expiration of the term of Starwood's noncompetition period described above, to
acquire the interests of Starwood in one or more Excluded Assets for a cash
purchase price equal to the fair market value of such Excluded Asset, as
determined by agreement between the Partnerships and Starwood (or, if they are
unable to agree, by independent appraisers selected by the Trust, the
Corporation and Starwood). The Trust and the Corporation have agreed that such
option to acquire Excluded Assets will not apply to any Existing Acquisition.
REVERSE SPLIT
In connection with the Reorganization, the Board of Trustees of the Trust
and the Board of Directors of the Corporation will be authorized to effect a
reverse split of the Paired Shares (the "Reverse Split"), in which a number of
Paired Shares outstanding at the effective date of the reverse Split (such
number to be not less than six nor more than ten, as determined by the Board of
Trustees and the Board of Directors) will be changed into one Paired Share. The
Board of Trustees and the Board of Directors will also be authorized to
determine the effective date of the Reverse Split. The Reverse Split will be
effected by amendments to the Declaration of Trust and the Articles of
Incorporation, which amendments will be filed (together with amendments to
reflect the increase in the authorized Trust Shares and Corporation Shares
described under "Adoption of Amendments to Trust Declaration and Restated
Articles of Incorporation") immediately prior to the effective date of the
Reverse Split.
The purpose of the Reverse Split is to increase the liquidity and
marketability of the Paired Shares by raising the trading price per Paired Share
and attracting investors and brokers who would otherwise be reluctant to deal in
a lower-priced stock, and to facilitate public offerings of Paired Shares after
the Reorganization. Fractional shares resulting from the Reverse Split will be
redeemed for cash equal to such fraction multiplied by the market price of a
Paired Share.
The Reverse Split would not affect the percentage ownership interest or
proportional voting power of any holder of Paired Shares, except for minor
differences resulting from the redemption of fractional shares for cash.
Promptly after the effective date of the Reverse Split, a letter of
transmittal will be mailed to holders of Paired Shares containing instructions
relating to the surrender of outstanding certificates for Paired Shares in
exchange for new certificates representing the Paired Shares after giving effect
to the Reverse Split. Share certificates should not be surrendered until the
letter of transmittal is received.
The Trust and the Corporation each have outstanding warrants and options to
purchase Paired Shares. Upon the Reverse Split, each such warrant and option
will be adjusted so that the holder thereof will be entitled to receive upon the
exercise thereof the number of Paired Shares which such holder would have owned
or been entitled to receive after the Reverse Split if such warrant or option
had been exercised immediately prior to the Reverse Split.
RECOMMENDATIONS OF THE BOARD OF TRUSTEES AND THE BOARD OF DIRECTORS; REASONS FOR
THE REORGANIZATION
THE BOARD OF TRUSTEES OF THE TRUST AND THE BOARD OF DIRECTORS OF THE
CORPORATION HAVE UNANIMOUSLY APPROVED THE REORGANIZATION PROPOSAL AND RECOMMEND
THAT SHAREHOLDERS OF THE TRUST AND STOCKHOLDERS OF THE CORPORATION VOTE FOR
APPROVAL OF THE REORGANIZATION PROPOSAL.
39
<PAGE> 47
The recommendations of the Board of Trustees and the Board of Directors are
based on a number of factors, including the following:
- The Reorganization will result in the ownership and operation, through
the Partnerships, of interests in 47 hotel assets located in 21 states
throughout the United States. Accordingly, the continuing ownership
interest of the holders of Paired Shares will represent an investment in
an enterprise with a significantly larger and more diversified hotel
portfolio. After the Reorganization, the Partnerships will have improved
debt service coverage ratios, a substantially reduced debt to market
capitalization ratio and an increased total equity capitalization.
- The enhanced financial stability resulting from the Reorganization
increases the likelihood that the Trust and the Corporation will be able
to access new capital to repay the existing Senior Debt and other
mortgage indebtedness and to finance future growth through financings on
more favorable terms. See "The Reorganization -- The Offering."
- The structure of the Reorganization (including Starwood's significant
percentage ownership after the Reorganization, Starwood's agreement that
the Partnerships will be the exclusive vehicle through which Starwood
will continue to pursue hotel equity investments in the United States,
and other elements of the Reorganization) is intended to align the
interests of Starwood with those of the holders of Paired Shares and
demonstrates Starwood's long-term commitment to the Partnerships and its
desire to continue to make real estate acquisitions through the
Partnerships.
- The operations of the Realty Partnership following the Reorganization are
expected to generate sufficient cash flow from operations to enable the
Trust to make distributions to holders of the Trust Shares, although
there can be no assurance that the Trust can or will make such
distributions. Any such distributions would be subject to the consent of
the Companies' Lenders. The holder of a majority of the Senior Debt has
agreed, among other things, to permit distributions necessary to preserve
the Trust's REIT status.
- The possible adverse consequences to the Trust and the Corporation of
failing to consummate the Reorganization, including the possibility of a
default on the Senior Debt and the lack of desirable alternatives to the
Reorganization available to the Trust and the Corporation and the risks
involved in pursuing those alternatives under current conditions. See
"The Reorganization -- Consequences of Failure to Consummate the
Reorganization."
- The approximate 28.3% general partner interest in the Realty Partnership
and the Operating Partnership to be received by the Trust and the
Corporation, respectively, in exchange for the respective contributions
of all their operating assets.
- The contributions by Starwood to the Realty Partnership and the Operating
Partnership. The cash contribution to the Partnerships by Starwood of
approximately $5,000,000 in the aggregate, will be available for, among
other things, the payment of expenses of the Reorganization and for other
corporate purposes.
- The creation of the Partnerships and the control of the Trust and the
Corporation over the Partnerships will give the Trust and the Corporation
the option of using either Paired Shares or Units (in addition to cash)
in connection with future acquisitions, thus increasing the alternatives
available to offer to potential sellers of hotels and allowing the Trust
and the Corporation to offer potential sellers continued participation on
a tax deferred basis through the use of Units.
- The Reorganization will enable the respective managements of the Trust
and the Corporation to concentrate their efforts more directly on
enhancing the business of the Partnerships and thereby increasing
shareholder and stockholder value, instead of expending a significant
amount of time and effort on compliance with and restructuring of the
terms of the Senior Debt.
- The holder of approximately $74.0 million of the Senior Debt has agreed,
among other matters, that in the event the Reorganization is consummated,
(i) current restrictions under the Senior Debt on the acquisition of
additional assets by the Companies and the Partnerships shall be removed,
and (ii) other
40
<PAGE> 48
provisions in the documents evidencing the Senior Debt will be modified
so as to facilitate the qualification of the Trust as a REIT (e.g.,
elimination of the requirement that the Trust and Corporation be merged
with consequent loss of the unique Paired Share structure and loss of the
Trust's REIT status, permitting distributions necessary to preserve the
Trust's REIT status and permitting the forgiveness of certain
intercompany loans from the Trust to the Corporation). Such holder has
also issued a commitment (subject to completion of due diligence) to
extend financing to be used to purchase or refinance the remainder of the
Senior Debt from the only other holder of the Senior Debt, in the event
that a similar agreement is not obtained from such other holder.
- The recent trading prices of the Paired Shares after the announcement of
the Reorganization, as compared with the historical trading prices of
Paired Shares prior to such announcement. See "Price Ranges of Paired
Shares; Dividends".
- The written opinion of Salomon Brothers Inc, the financial advisor to the
Trust and the Corporation, that the Reorganization is fair, from a
financial point of view, to holders of Trust Shares and Corporation
Shares, other than Starwood.
OPINION OF TRUST'S AND CORPORATION'S FINANCIAL ADVISOR
Salomon Brothers Inc ("Salomon Brothers") has delivered a written opinion
to the Trust's Board of Trustees and the Corporation's Board of Directors, dated
the date of this Joint Proxy Statement, to the effect that, as of such date, the
Reorganization is fair, from a financial point of view, to the shareholders of
the Trust and the stockholders of the Corporation, other than Starwood. No
limitations were imposed by the Board of Trustees or the Board of Directors upon
Salomon Brothers with respect to the investigations made or the procedures
followed by it in rendering such opinion.
In conducting its analysis and arriving at its opinion, Salomon Brothers
reviewed and analyzed, among other things, the following: (i) the Formation
Agreement; (ii) the Credit Agreement; (iii) this Joint Proxy Statement; (iv) the
Joint Annual Report to Shareholders and Annual Report on Form 10-K for each of
the years in the three-year period ended December 31, 1993 and the Joint
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, each as
amended; (v) certain other internal information, primarily financial in nature,
including projections prepared by the managements of the Companies, concerning
the business, assets and operations of the Companies, furnished to Salomon
Brothers by the management of the Companies for purposes of Salomon Brothers'
analysis, (vi) certain publicly available information concerning the trading of,
and the trading market for, the Paired Shares; (vii) certain internal
information, primarily financial in nature, including projections prepared by
the management of Starwood, concerning the business, assets and operations of
Starwood furnished to Salomon Brothers by Starwood for purposes of Salomon
Brothers' analysis, (viii) certain publicly available information with respect
to the Trust, the Corporation, Starwood and certain other companies that Salomon
Brothers believes to be comparable to the Trust and the Corporation and the
trading markets for certain of such other companies' securities; (ix) certain
publicly available information concerning the nature and terms of certain other
transactions that Salomon Brothers believed to be reasonably comparable to the
Reorganization or otherwise; (x) the identification of prospective buyers, the
solicitation of proposals and the participation in discussions with third
parties concerning their interest in a potential transaction with the Companies;
and (xi) such other information, financial studies, analyses and investigations
and financial, economic and market criteria which it deemed relevant. Salomon
Brothers also met with certain officers and employees of the Trust, the
Corporation and Starwood to discuss the foregoing as well as other matters
Salomon Brothers believed to be relevant to its inquiry. In this connection,
Salomon Brothers relied upon the representations of the managements of the
Companies that the Companies were unable to restructure or refinance the Senior
Debt on terms more favorable than currently exist.
In connection with its review, Salomon Brothers assumed and relied upon the
accuracy and completeness of, but it did not assume any responsibility for
independent verification of, the financial and other information provided to it
or publicly available. With respect to financial projections, Salomon Brothers
assumed that they have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the managements of the Trust, the
Corporation and Starwood as to the future financial performance of the Trust,
41
<PAGE> 49
the Corporation and Starwood, respectively. Salomon Brothers expressed no view
as to such projections or the assumptions on which they are based. In addition,
Salomon Brothers did not assume any responsibility for or obtain any independent
evaluations or appraisals of any of the properties or facilities of the Trust,
the Corporation or Starwood. Salomon Brothers understood that the Companies are
contemplating obtaining financing through the Offering (as hereinafter defined)
and that completion of the Offering is not a condition to the Reorganization.
Salomon Brothers participated in negotiations and reviewed the terms of the
Reorganization, which were determined by arm's length negotiation among the
Trust, the Corporation and Starwood.
The full text of the opinion of Salomon Brothers which sets forth the
assumptions made, matters considered and limits on the review undertaken by
Salomon Brothers, is attached as Exhibit C to this Joint Proxy Statement and
incorporated by reference herein. Shareholders of the Trust and stockholders of
the Corporation are urged to read carefully such opinion in its entirety.
Salomon Brothers' opinion is limited to the fairness, from a financial point of
view, of the Reorganization to the stockholders of the Corporation and the
shareholders of the Trust, other than Starwood and does not address the
Companies' underlying business decision to effect the Reorganization or
constitute a recommendation to any shareholder or stockholder as to how such
shareholder or stockholder should vote with respect to the Reorganization. For
purposes of its opinion, Salomon Brothers analyzed the Reorganization as a whole
and has not analyzed any terms of the Reorganization on an individual basis.
Salomon Brothers is an internationally recognized investment banking firm
and regularly engages in the valuation of businesses and their securities in
connection with mergers and acquisitions and for other purposes. The Board of
Trustees and Board of Directors selected Salomon Brothers to act as their
financial advisor on the basis of Salomon Brothers' international reputation and
its familiarity with the Trust and the Corporation and the real estate, hotel
and gaming industries in general. In the course of its business, Salomon
Brothers may trade the securities of the Companies for its own account and for
the accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
The Companies have over the past five years paid Salomon Brothers fees
aggregating $350,000, and have agreed to pay to Salomon Brothers an additional
fee equal to $1,950,000 and a fee to Smith Barney Inc. equal to $500,000, in
each case upon consummation of the Reorganization in consideration for their
services in connection with the Reorganization. The Companies have also agreed
to reimburse Salomon Brothers for its out-of-pocket expenses, including
reasonable fees and disbursements of counsel. The Companies have agreed to
indemnify Salomon Brothers and its affiliates, their respective directors,
officers, partners, agents and employees and each person, if any, controlling
Salomon Brothers or any of its affiliates against certain liabilities, including
certain liabilities under the federal securities laws, relating to or arising
out of its engagement. The Companies have also engaged Salomon Brothers to
render an opinion with respect to the relative valuation of the securities of
the Trust and the Corporation, for which engagement Salomon Brothers will be
paid a fee of $250,000.
CONSIDERATIONS AND EVENTS LEADING TO THE REORGANIZATION
Beginning in 1991, the Trust defaulted on bank borrowings and at December
31, 1992 the Trust was in default under borrowings totalling approximately $135
million. In addition to seeking to restructure the indebtedness, the Trust and
the Corporation considered other alternatives, such as refinancing the
indebtedness, bulk sale of their assets, seeking third party equity financing,
as well as bankruptcy.
As a result of the financial condition of the Trust and the Corporation and
the general lack of interest of financial institutions in making hotel loans,
the Trust and the Corporation determined that they could not refinance the
indebtedness. In addition, the Trust and the Corporation determined that at that
time a bulk sale of the Trust and the Corporation assets would not maximize the
value of the properties to shareholders. After litigation and prolonged
negotiations with their lenders, the Trust and the Corporation also considered
bankruptcy as an alternative to restructuring the indebtedness, but determined
that restructuring the indebtedness provided the best possibility for the Trust
and the Corporation to continue in business and to maximize value to
shareholders over a longer term.
Pursuant to a Credit Agreement dated as of January 28, 1993, as amended
(the "Credit Agreement"), the Trust restructured the approximately $128,223,000
principal amount of previously unsecured indebtedness
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(the "Senior Debt") owed to two banks and three insurance companies (the
"Lenders") as a term loan and revolving credit facility.
The Credit Agreement requires that the debt restructuring take place in
three closings, the first two of which have been completed. At the first
closing, the Lenders were granted direct and indirect security interests in and
liens on substantially all of Hotel Investors' hotel and other assets (including
substantially all of Hotel Investors' cash) to secure repayment of the term loan
and revolving credit facility. At the second closing, the Trust acquired all of
the assets formerly held by United States Equity & Mortgage Trust, which had
been 95%-owned by the Trust.
At the third closing, among other things, the final maturity date of the
restructured indebtedness was to be extended to April 30, 1998. The third
closing was conditioned upon, among other things, the Trust and the Corporation
seeking the approval of their respective shareholders and stockholders for a
merger between the Trust and the Corporation in which the "paired share"
structure of Hotel Investors was to be eliminated. On August 6, 1993, the Trust
and the Corporation filed with the Commission a form of preliminary proxy
statement to solicit proxies to effect such a merger. Such proxy statement was
not finalized or mailed to holders of Paired Shares. The Trust and the holders
of the Senior Debt have since agreed to successive extensions of the maturity of
the Senior Debt and of the date for the third closing and currently such
maturity and closing date have been extended to May 31, 1995.
Throughout 1993 the Trust and the Corporation and their respective Boards
continued to explore and evaluate various alternatives, including seeking an
equity investor or a partner for the businesses of the Trust and the Corporation
to better enable the Trust to refinance the Senior Debt.
Beginning in the second quarter of 1993 the Board of Trustees authorized
management of the Trust, with the assistance of the Trust's investment bankers,
to explore and discuss possible transactions between the Trust and various
interested parties, including a partnership of which Starwood was a partner.
During the second half of 1993 and early in 1994, management of the Trust and
representatives of the Trust's investment bankers continued discussions with
Starwood and the other partners of such partnership and contacted and solicited
indications of interest from a number of other potential partners. The
respective Boards of the Trust and the Corporation held a number of meetings at
which they received updates of the status of the contacts, further reviewed
alternatives available to the Trust and the Corporation and directed management
to continue to explore the indications of interest.
In January and February of 1994 representatives of the Trust, the Lenders
and potential partners, including Starwood, met to discuss the possibility of
the Lenders agreeing to the repayment of the Senior Debt at a discount in
connection with a transaction involving the Trust. During this period and
thereafter the management of the Trust and the Trust's investment bankers
continued to engage in discussions with a number of potential equity investors
and partners.
On May 20, 1994, Starwood purchased approximately $21 million of the Senior
Debt from one of the Lenders pursuant to a public auction by that Lender.
During May and the first two weeks of June, the Companies and Starwood
engaged in further discussions and in an extended series of negotiations with
respect to the terms of the Reorganization. The Companies also engaged in a
review and due diligence investigation of the properties included in the
Starwood Realty Assets.
On June 7 and 10, 1994 the Board of Trustees and the Board of Directors met
at length to consider the terms of the Reorganization and a memorandum of
understandings containing such terms. After reviewing the terms of the
Reorganization and considering, among other things, the oral presentations by
their investment bankers, the Board of Trustees and the Board of Directors each
unanimously approved the Reorganization on a preliminary basis and authorized
management to proceed with the Reorganization pursuant to the terms of the
memorandum of understanding. The definitive approval of the Reorganization was
subject to, among other things, the negotiation and review of definitive
agreements providing for the Reorganization and the receipt of the written
opinion of Salomon Brothers described under "-- Opinion of Trust's and
Corporation's Financial Advisor."
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On June 13, 1994 the Trust and the Corporation publicly announced that they
had entered into the memorandum of understandings.
On August 25, 1994, a third party purchased $74.0 million of the Senior
Debt (including the Senior Debt previously held by Starwood) from all but one of
the Lenders. An affiliate of Starwood is the general partner of a partnership
that has the right to acquire such Senior Debt from such third party.
On August 1, 1994, the Trust made a scheduled repayment of principal of the
Senior Debt of $8 million. In addition, pursuant to the Trust's election, it
made an additional payment of principal of the Senior Debt of $4 million, which
additional payment caused the cancellation of certain warrants for Paired Shares
(which has an exercise price of $0.625 per Paired Share) which had previously
been issued to the Lenders in connection with the restructuring of the Senior
Debt.
On August 31, 1994, the holders of the Senior Debt agreed to a further
extension to May 31, 1995 of the maturity of the Senior Debt and the closing
date for the third closing under the Credit Agreement.
On November 10, 1994, the Board of Trustees of the Trust and the Board of
Directors of the Corporation approved the Formation Agreement and authorized the
Trust and the Corporation, respectively, to enter into the Formation Agreement.
In addition, on such date the Boards of Trustees and the Board of Directors took
action to exempt the Trust and the Corporation, respectively, from the "business
combinations" and "control share acquisition" statutes of Maryland law.
CERTAIN CONSIDERATIONS
The Reorganization has certain effects on the current holders of Paired
Shares, including the following:
- The substantial dilution of the percentage ownership interests of current
holders of Paired Shares. Although the current holders of Paired Shares
will continue to hold all of the outstanding Paired Shares immediately
following the Reorganization, such holders will then hold, through the
Trust and the Corporation, an approximate 28.3% interest in the business
of a much larger enterprise.
- The amendments to the Articles of Incorporation of the Corporation and
the Trust Declaration of the Trust will make it more difficult to change
the composition of the Board of Directors of the Corporation and the
Board of Trustees of the Trust in a relatively short period of time, may
increase the likelihood that incumbent directors and trustees will retain
their positions and may discourage transactions which might be desirable
for holders of Paired Shares. In addition, those amendments eliminate
certain restrictions on borrowings and investments by the Trust. See
"Adoption of Amendments to the Trust Declaration and Restated Articles of
Incorporation."
The Reorganization also could have certain other possible effects on
holders of Paired Shares, including the following:
- Sales of Paired Shares as a result of an exchange of Units (or the
perception that such sales could occur) could adversely affect the
trading prices for the Paired Shares after the Reorganization. Although
the recent and historical trading prices of Paired Shares were considered
in determining the terms of the Reorganization, there can be no assurance
that the trading price of the Paired Shares following the Reorganization
will not be less than the current trading price of the Paired Shares,
whether as a result of such sales of Paired Shares, such perception or
otherwise.
- If the new Board of Trustees is elected and the Reorganization Proposal
is approved at the Special Meetings, such new Board will take office
immediately, even if the Reorganization is not consummated. If the new
Board of Directors is elected and the Reorganization Proposal is approved
at the Special Meetings, such new Board will take office upon the receipt
of certain gaming regulatory approvals described herein, even if the
Reorganization is not consummated. In such event, Starwood would have
designated a majority of the members of both Boards, even though the
Reorganization would not have been consummated.
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- The dilution of voting control of current holders of Paired Shares upon
exchange of Units for Paired Shares. If Starwood were to exchange all of
its Units for Paired Shares (although, because of the REIT Ownership
Limitation it could not do so at one time), the current holders of Paired
Shares would then hold only 28.3% of the then outstanding Paired Shares.
Consequently, the ability of current holders of Paired Shares to
thereafter determine matters submitted to a vote of holders of Paired
Shares, including the election of directors and the approval of
extraordinary transactions such as the Reorganization, would be
diminished substantially. If Starwood does not exchange its Units for
Paired Shares, then Starwood's voting power with respect to matters
submitted to a vote of holders of Paired Shares (including the election
of Trustees of the Trust and Directors of the Corporation) would be equal
to its percentage holding of the outstanding Paired Shares. Even if,
however, Starwood does not exchange its Units for Paired Shares, for the
reasons described below Starwood will have the ability to exercise
significant influence over the affairs of the Trust, the Corporation and
the Partnerships.
Although the REIT Ownership Limitation limits Starwood's direct and
indirect ownership at any time to 8.0% of the outstanding Paired Shares,
the holders of such Paired Shares might suffer substantial dilution if,
within the limits of the REIT Ownership Limitation, Starwood over time
exchanged its Units for Paired Shares and sold such Paired Shares in a
public offering or in private transactions.
- Because of the ownership of Units by Starwood and the rights of the
holders of such Units, and because a majority of the Trustees of the
Trust and a majority of the directors of the Corporation upon
consummation of the Reorganization would be persons nominated by
Starwood, Starwood will have the ability to exercise significant
influence over the affairs of the Trust, the Corporation and the
Partnerships, which influence might not be consistent with the interests
of the current holders of Paired Shares.
- The Reorganization will result in the creation of certain conflicts of
interest between Hotel Investors and Starwood. For example, prior to the
exchange by Starwood of Units for Paired Shares, Starwood will experience
different and possibly more adverse tax consequences than the Trust and
its shareholders upon the sale of certain properties or the restructuring
or sale of certain mortgage loans. Therefore, Starwood may be opposed to
the sale of such properties or the restructuring of the loans even though
such a sale or restructuring might otherwise be in the best interest of
the Trust and its present shareholders. An affiliate of Starwood is also
the general partner of a partnership that has the right to acquire
approximately $74.0 million of the Senior Debt and there may arise
certain conflicts of interest between Hotel Investors, the Partnerships
and Starwood as a result thereof. In addition, Starwood's objectives
regarding the pricing, structure and timing of any such sale may differ
from the objectives of the present shareholders of the Trust and
stockholders of the Corporation or current management of the Trust and
the Corporation. So long as Starwood holds or controls Senior Debt, any
determination by the Board of Trustees of the Trust in connection with
the Senior Debt is subject to the approval of a majority of the
Disinterested Members of the Board of Trustees of the Trust as described
under "The Reorganization -- Amendments to the Code of Regulations and
By-Laws."
- The percentage ownership interests of the Trust and Starwood in the
Realty Partnership and of the Corporation and Starwood in the Operating
Partnership were determined based on negotiations between the parties and
no independent appraisals of the Trust Assets, the Corporation Assets,
the Starwood Realty Assets or the Starwood Operating Assets to be
contributed to the Partnerships were obtained in connection with such
determination. There can be no assurance that the value of such ownership
interests of the Trust, the Corporation and Starwood following the
Reorganization accurately reflects the value of the assets contributed in
exchange for such interests.
- Because Starwood only recently acquired many of the Starwood Assets to be
contributed by Starwood, Starwood does not have an established operating
history with respect to those Assets. Certain of the Starwood Assets were
purchased by Starwood in situations where the previous owner had
overleveraged those Assets.
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CONSEQUENCES OF FAILURE TO CONSUMMATE THE REORGANIZATION
If the Reorganization Proposal is not approved by the requisite votes of
shareholders of the Trust and stockholders of the Corporation, the
Reorganization will not be consummated. Although neither the Trust nor the
Corporation is able to predict the exact consequences of failing to consummate
the Reorganization, the Trust and the Corporation each anticipates that it would
attempt to complete the restructuring of the Senior Debt pursuant to the Credit
Agreement by, among other things, seeking the approval of the shareholders of
the Trust and the stockholders of the Corporation to merge the Trust and the
Corporation, which merger would eliminate the unique "paired share" structure,
which under current law cannot be duplicated, and the ability of the Trust to be
taxed as a REIT. See "The Reorganization -- Considerations and Events Leading to
the Reorganization." No assurance can be given that such restructuring could or
would be completed.
The maturity of the Senior Debt has been extended to May 31, 1995 and to
date the Trust has made scheduled repayments of the Senior Debt. However, even
if the restructuring of the Senior Debt were to be completed, no assurance can
be given that the Trust or the Corporation would be able to make scheduled
repayments of the Senior Debt, as restructured. Sales of a significant number of
hotel properties would be required in order to raise the funds necessary to make
such repayments and no assurance can be given that such sales could be made on
terms that are favorable to the Trust or the Corporation or for amounts
sufficient to allow such repayments. If scheduled repayments on the Senior Debt
are not made when due, the ability of the Trust and the Corporation to continue
as going concerns would be substantially in doubt. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the
accompanying Hotel Investors 10-K.
Even if the restructuring of the Senior Debt were completed, without the
addition of the Starwood assets contemplated by the Reorganization, it is
unlikely that the Companies could refinance the Senior Debt and it is unlikely
that the holders of the Senior Debt would agree to remove restrictions on the
acquisition of additional assets by the Companies absent a substantial capital
infusion. The ability to obtain an alternative substantial capital infusion to
that proposed by Starwood would be significantly and adversely affected by the
Companies' compliance with the provisions of the Senior Debt which would require
the merger of the Trust and the Corporation, with consequent loss of the "paired
share" structure and of REIT status by the Trust.
In addition, if the Reorganization is not consummated, each of the Trust
and the Corporation may also consider other alternatives to reduce its
indebtedness and to repay the Senior Debt, although in the past few years the
respective Boards of the Trust and the Corporation have considered and explored
various alternatives and have determined that such alternatives either were not
available or were not in the best interests of the shareholders of the Trust and
the stockholders of the Corporation. See "The Reorganization -- Considerations
and Events Leading to the Reorganization." For example, the Trust explored
effecting a refinancing of the Senior Debt and obtaining a significant equity
infusion but concluded that such a refinancing or equity infusion either was not
available or was not available on reasonable terms.
AMENDMENTS TO CODE OF REGULATIONS AND BY-LAWS
In connection with the Reorganization, the Trust will amend its Code of
Regulations and the Corporation will amend its By-Laws, in each case to provide
that, in addition to any affirmative vote required either by law, the
Partnership Agreements, the Trust Declaration of the Trust or the Articles of
Incorporation of the Corporation, any Transaction (as described below) involving
the Trust, the Corporation (or any of its subsidiaries) or either of the
Partnerships shall require the affirmative vote of a majority of the members
("Disinterested Members") of the Board of Trustees of the Trust (in the case of
a Transaction involving the Trust or the Realty Partnership) or the Board of
Directors of the Corporation (in the case of a Transaction involving the
Corporation or the Operating Partnership) who are not employees, officers,
directors, Affiliates or Associates (as each is defined in the Securities
Exchange Act of 1934) of, the Interested Person who or which is a party to the
Transaction.
A "Transaction" is defined as any contract, sale, lease, exchange,
mortgage, transfer or disposition to or with, or any other transaction with, any
Interested Person (including, without limitation, any election with respect to
the method of payment for an exchange of Units for Paired Shares, or any action
to be taken by the
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Trust, the Corporation or either Partnership with respect to the Senior Debt).
An "Interested Person" is any person or entity who or which is the beneficial
owner, directly or indirectly, of 5% or more of the outstanding Paired Shares or
the outstanding Realty Units or Operating Units or who or which is an Affiliate
or Associate of the Trust, the Corporation or either of the Partnerships.
The foregoing provisions may be amended or repealed only by a majority of
the Trustees or Directors, as the case may be, who are not employees, officers,
directors, Affiliates or Associates of the Trust, the Corporation, the
Partnerships or any Interested Person.
CONDITIONS TO THE REORGANIZATION
The respective obligations of each of the Trust, the Corporation and
Starwood to consummate the Reorganization are subject to the satisfaction or
waiver of the following conditions: (i) the absence of injunctions or other
legal restraints or prohibitions, (ii) the receipt of all necessary governmental
and regulatory approvals and necessary consents (including the consent of the
holders of the Senior Debt), (iii) the execution and delivery of agreements to
be entered into in connection with the Reorganization and (iv) the approval by
the shareholders of the Trust and the stockholders of the Corporation of the
Reorganization Proposal, including the election of the new Board of Trustees and
the new Board of Directors.
The obligations of the Trust and the Corporation to consummate the
Reorganization are also subject to the satisfaction or waiver of the following
conditions: (i) the accuracy of the representations and warranties of Starwood
contained in the Formation Agreement, (ii) the absence of a material adverse
effect on the Starwood Realty Assets or the Starwood Operating Assets, taken as
a whole, between the date of the Formation Agreement and the Closing Date and
(iii) the receipt by the Trust and the Corporation of certain legal opinions and
certificates. In addition, the obligations of Starwood to consummate the
Reorganization are subject to the satisfaction or waiver of the following
conditions: (i) the accuracy of the representations and warranties of the Trust
and of the Corporation contained in the Formation Agreement, (ii) the absence of
a material adverse effect on the Trust and the Corporation, taken as a whole,
between the date of the Formation Agreement and the Closing Date, and (iii) the
receipt by Starwood of certain legal opinions and certificates.
The holder of a majority of the Senior Debt has consented to the
Reorganization. Although the other holder of the Senior Debt has not consented
to the Reorganization, such majority holder of the Senior Debt has issued a
commitment (subject to completion of due diligence) to extend financing to be
used to purchase the Senior Debt held by the only other holder of the Senior
Debt, in the event that such other holder does not consent to the
Reorganization.
As described herein, the contribution by a subsidiary of the Corporation of
the Gaming Assets not contributed or transferred to the Operating Partnership on
the Closing Date is subject to receipt of Gaming Approval. Upon receipt of
Gaming Approval, such subsidiary will transfer such Gaming Assets and such
liabilities to a limited partnership owned 99% by the Operating Partnership and
1% by such subsidiary. No additional interests in the Operating Partnership will
be issued upon such transfer. Additionally, although the stockholders' election
of the new Board of Directors is a condition of the Reorganization, the new
Board of Directors will not assume office until receipt of Gaming Approval.
AMENDMENT; TERMINATION AND FEES
The Formation Agreement may be terminated (including the obligations of the
parties thereunder to effect the Reorganization) prior to the Closing Date (i)
by the mutual consent of the Trust, the Corporation and Starwood, (ii) by the
Trust or the Corporation upon a material breach of the Formation Agreement by
Starwood (after Starwood has been given a reasonable opportunity to cure such
breach) or if any condition to consummation of the Reorganization by the Trust
or the Corporation is not satisfied or waived at such time as it is no longer
possible to satisfy such condition, (iii) by Starwood upon a material breach by
the Trust or the Corporation of the Formation Agreement (after the Trust or the
Corporation has been given a reasonable opportunity to cure such breach) or if
any condition to Starwood's consummation of the Reorganization is not satisfied
or waived at such time as it is no longer possible to satisfy such condition,
(iv) by the Trust, the Corporation or Starwood if the Reorganization is not
consummated on or before January 31, 1995 (the
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"Outside Date"), subject to Starwood's right to extend the Outside Date to March
31, 1995 to facilitate approval of the Reorganization Proposal by the
shareholders of the Trust and the stockholders of the Corporation (except that
prior to March 31, 1995 no party may terminate the Formation Agreement pursuant
to such provision if that party is then in material breach of its
representations or covenants in the Formation Agreement) or (v) by the
Corporation or the Trust if they enter into an agreement with any party other
than Starwood which is not consistent with the obligations of the Trust or the
Corporation set forth in the Formation Agreement or with the consummation of the
Reorganization, so long as the Trust and the Corporation materially complied
with the provisions described under "No Solicitation".
The Formation Agreement provides that except as described below each of the
parties thereto will bear its own costs and expenses incurred in connection with
the Reorganization. If the Reorganization is consummated, the Partnerships will
reimburse Starwood for Starwood's reasonable out-of-pocket expenses incurred in
connection with the Reorganization. In addition, if (i) the Formation Agreement
is terminated by the Trust or the Corporation pursuant to the provisions
described in clause (v) of the preceding paragraph, or (ii) if the Formation
Agreement is terminated by Starwood pursuant to the provisions described in
clause (iv) of the preceding paragraph and either (a) the Special Meetings have
not been held (unless they were not held because of reasons beyond the
reasonable control of the Companies) or (b) the Companies are then engaged in
substantive negotiations with persons other than Starwood with respect to a
Proposal (as defined below under "-- No Solicitation") (such terminations of the
Formation Agreement being referred to as "Qualifying Terminations"), then
Starwood shall be entitled to a fee of $3,500,000 and reimbursement of its
reasonable, out-of-pocket expenses incurred in connection with the
Reorganization and Starwood may elect to cause the Trust to repurchase the
Albany Holiday Inn as described in "The Reorganization -- Albany Agreement."
REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
The Formation Agreement contains various representations and warranties of
the Trust and the Corporation. These include representations and warranties of
each of the Trust and the Corporation as to (i) its organization, good standing
and power to carry on its business, (ii) its authorized and outstanding shares,
(iii) its authority to enter into and consummate the Reorganization and the
enforceability of the agreements entered into by the Trust and the Corporation,
(iv) the absence of certain conflicts between the consummation of the
Reorganization and certain documents, agreements, and instruments, (v) the
absence of undisclosed materially adverse litigation or proceedings and (vi) the
accuracy of reports and statements filed with the Commission since May 1, 1991
and of the financial statements included therein. In addition the Formation
Agreement contains representations of the Trust with respect to the Trust Assets
and of the Corporation with respect to the Corporation Assets as to the absence
of undisclosed materially adverse structural, mechanical, HVAC, environmental,
zoning or title conditions and a representation of the Trust as to its
eligibility to qualify to elect to be taxed as a REIT for the taxable year
ending December 31, 1995.
The Formation Agreement also contains representations and warranties of
Starwood, including representations and warranties as to (i) its organization,
good standing and power to carry on its business, (ii) its authority to enter
into and consummate the Reorganization and the enforceability of the agreements
entered into by Starwood, (iii) the absence of certain conflicts between the
consummation of the Reorganization and certain documents, agreements and
instruments, (iv) the acquisition of Units by Starwood for investment purposes,
(v) the absence of undisclosed materially adverse litigation or proceedings,
(vi) the absence of undisclosed materially adverse structural, mechanical, HVAC,
environmental, zoning or title conditions relating to the Starwood Realty Assets
or the Starwood Operating Assets and (vii) the accuracy of information and
financial statements supplied by Starwood for inclusion in this Joint Proxy
Statement.
Each of the Trust, the Corporation and Starwood has agreed (severally and
not jointly) to indemnify and hold harmless each other and the Partnerships (and
their respective subsidiaries, affiliates and successors) from all liabilities,
losses or damages and reasonable out-of-pocket expenses incurred in connection
with (i) its breach or failure to perform its obligations in the Formation
Agreement and (ii) any breach of any representation or warranty made by it in
the Formation Agreement or any other agreement entered into by it in connection
with the Reorganization; provided that the Trust will not so indemnify the
Corporation and the
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Corporation will not so indemnify the Trust. In addition, the Trust has agreed
to indemnify for liabilities, losses, damages or expenses in connection with the
Trust's termination of its REIT status for the years 1991 through 1994 and
Starwood has agreed to indemnify for liabilities, losses, damages or expenses in
connection with certain other matters. The Formation Agreement provides that
each of the Trust and the Corporation will only have an indemnification
obligation as described in this paragraph to the extent that the aggregate
covered liabilities, losses, damages or expenses of the Trust and the
Corporation exceed $100,000 and provides that Starwood will only have an
indemnification obligation as described in this paragraph to the extent that
covered liabilities, losses, damages or expenses of Starwood exceed $100,000.
The aggregate indemnification obligation of the Trust and the Corporation as
described in this paragraph is limited to $5,000,000 in the aggregate and the
aggregate indemnification obligation of Starwood as described in this paragraph
is limited to $5,000,000 in the aggregate.
The Trust and the Corporation have also agreed that if the Formation
Agreement is terminated other than based on a material breach of the Formation
Agreement by Starwood (i) they will severally indemnify and hold harmless
Starwood (and its subsidiaries, affiliates and successors) against liabilities,
losses or damages and reasonable out-of-pocket expenses incurred in connection
with any action, suit or proceeding brought by a holder of Paired Shares (other
than Ross in connection with the Assignment Agreement) against Starwood relating
to the Reorganization and (ii) if within 60 days after such termination of the
Formation Agreement the Trust and the Corporation receive from Starwood a full
release (the "Release") of the Assigned Claims assigned to Starwood pursuant to
the Assignment Agreement, then the Trust and the Corporation will indemnify and
hold harmless Starwood and its affiliates against liabilities, losses or damages
and reasonable out-of-pocket expenses under or in respect of the Assignment
Agreement described under "The Reorganization -- Assignment Agreement" (other
than, in each case, to the extent such liabilities, losses, damages or expenses
arose from a breach by Starwood of the Formation Agreement, any other agreement
entered into in connection with the Reorganization, or such Assignment Agreement
or a breach of any fiduciary duty by Starwood); provided that the aggregate
indemnification obligation of the Trust and the Corporation under the provisions
described in clause (ii) is limited to $1,800,000.
As described above under "The Reorganization -- Assignment Agreement", if
the Reorganization is consummated, the Trust and the Corporation will indemnify
and hold harmless to the extent described in clause (i) in the preceding
paragraph and if prior to December 15, 1995 the Trust and the Corporation
receive the Release, they will also indemnify and hold harmless to the extent
described in clause (ii) in the preceding paragraph. In addition, if the
Reorganization is consummated Starwood has agreed that any recovery with respect
to the Assigned Claims shall not exceed $1,800,000, and the Trust and the
Corporation have agreed to toll the expiration of the limitations period in
respect of the Assigned Claims until January 31, 1996. The Realty Partnership
and the Operating Partnership will reimburse the Trust and the Corporation,
respectively, for all amounts paid in respect of such indemnification
obligations. Because the officers and Trustees of the Trust and the officers and
Directors of the Corporation would be covered by any Release given by Starwood,
they have an interest in the above-described provisions of the Formation
Agreement and the Assignment Agreement.
The Formation Agreement provides that the representations and warranties
contained in the Formation Agreement survive until the first anniversary of the
Closing (except for the representation of the Trust with respect to its
eligibility to qualify to elect to be taxed as a REIT for the taxable year
ending December 31, 1995, which survives until the second anniversary of the
Closing), at which time such representations terminate, and that any claim in
respect of those representations and warranties must be asserted in writing
prior to such termination.
The Formation Agreement and the Partnership Agreements provide that if the
Reorganization is consummated, an indemnifying party may elect to make an
indemnification payment by transferring Units in lieu of making a cash payment.
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COVENANTS PRIOR TO THE CLOSING
The Trust and the Corporation and Starwood have each agreed that prior to
the Closing Date they will carry on their respective businesses with respect to
the properties to be contributed by them to the Partnerships only in the
ordinary course and will not enter into any material transaction with respect to
such properties other than in the ordinary course.
The Trust and the Corporation have also agreed that except as contemplated
by the Formation Agreement, without the prior written consent of Starwood (not
to be unreasonably withheld) they will not (i) take or omit to take any action
to cause the Trust to fail to be eligible to elect and qualify to be taxed as a
REIT for the taxable year ending December 31, 1995, (ii) voluntarily dispose of
any portion of the Trust Assets or of the Corporation Assets except for sales of
certain hotel properties on terms specified in the Formation Agreement, (iii)
refinance any of the Trust Assets or of the Corporation Assets, except for
refinancings to meet "balloon" payments on maturing debt (with Starwood having
the right to provide such refinancings on terms at least as favorable to the
Companies as they would otherwise receive), (iv) except as provided in the
Formation Agreement, incur any costs or expenses not in accordance with capital
or operating budgets approved by Starwood, (v) acquire additional real estate or
other assets, (vi) issue or agree to issue new debt securities, other than
modifications and amendments to the Senior Debt and debt securities which would
not prevent the Companies from performing their obligations under the Formation
Agreement, and the proceeds of which debt securities are used to meet scheduled
amortization payments (with Starwood having the right of first opportunity to
purchase such debt securities), (vii) issue or agree to issue new equity
securities, other than Paired Shares pursuant to existing options or warrants or
newly granted employee options for not more than 100,000 Paired Shares (which
are exercisable at not less than the current market price at the time of
issuance) and other than equity securities which would not prevent the Companies
from performing their obligations under the Formation Agreement, and the
proceeds of which equity securities are used to meet scheduled amortization
payments (with Starwood having the right of first opportunity to purchase such
equity securities) and (viii) declare or pay any dividends or other
distributions to holders of Paired Shares or repay indebtedness except pursuant
to the terms of such indebtedness.
Starwood has also agreed that except as contemplated by the Formation
Agreement, it will not, without the prior written consent of the Companies (not
to be unreasonably withheld), (i) voluntarily dispose of any portion of the
Starwood Realty Assets or the Starwood Operating Assets, (ii) refinance the
indebtedness of Starwood to be assumed by the Partnerships unless such
refinancing is on terms no less favorable to the Partnerships than the current
terms of such indebtedness or (iii) except as provided in the Formation
Agreement, incur any costs or expenses with respect to the Starwood Realty
Assets or the Starwood Operating Assets not in accordance with capital or
operating budgets approved by the Trust.
ALBANY AGREEMENT
On August 30, 1994 pursuant to an Asset Purchase Agreement among the Trust,
the Corporation and an affiliate of Starwood (the "Albany Agreement"), the
Starwood affiliate purchased from the Trust the 151-room hotel located in
Albany, Georgia known as the Albany Holiday Inn, for a purchase price of
$6,000,000. The lease of the Albany property from the Trust to the Corporation
was cancelled in return for the payment of a portion of the purchase price to
the Corporation and the Albany property was transferred to the Starwood
affiliate free of such lease. The Starwood affiliate will contribute the Albany
property to the Realty Partnership as part of the Starwood Realty Assets and
will contribute certain furnishings, equipment and other assets with respect to
such property to the Operating Partnership as part of the Starwood Operating
Assets.
If the Trust and the Corporation become obligated to pay to Starwood the
fee described under "-- Amendment; Termination and Fees," Starwood may elect to
cause the Trust to repurchase such property for an amount equal to such purchase
price plus the excess, if any, of 10% simple interest on the equity invested by
the Starwood affiliate pursuant to such purchase over any net cash flow (over
debt service) received by the Starwood affiliate from such property.
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CERTAIN COVENANTS AFTER THE CLOSING DATE
The Formation Agreement provides for certain agreements between the parties
after the Closing Date. The Formation Agreement provides that none of the Trust,
the Corporation, the Realty Partnership or the Operating Partnership will assert
against Starwood any claim of equitable subordination or other lender liability
claims or defenses against holders of the Senior Debt based on the transactions
contemplated by the Formation Agreement, the presence on the Board of Trustees
or the Board of Directors of nominees of Starwood or any action taken by such
trustees or directors as such or the employment by the Trust or the Corporation
of employees who are affiliates of Starwood or any actions taken by such
employees as such.
Pursuant to the Formation Agreement Starwood has agreed that so long as
Starwood or any affiliate of Starwood shall have any interest in the Senior Debt
(other than solely as a result of Starwood's interests in the Partnerships), any
affiliate or associate of Starwood on the Board of Trustees or the Board of
Directors shall, and on the Closing Date Starwood shall, as a condition to the
closing under the Formation Agreement, use its best efforts to secure their
agreement to abstain from voting upon and excuse and absent themselves from any
deliberations relating to any pending or threatened defaults or any action to be
taken by the Trust, the Corporation or the Partnerships in respect of any
pending or threatened defaults under or in respect of the Senior Debt.
The Formation Agreement provides that from and after the consummation of
the Reorganization, each of the Trust and the Corporation shall, and Starwood
shall use its best efforts to cause the Trust and the Corporation to, indemnify,
defend and hold harmless the respective present officers, directors and
employees of the Trust and the Corporation and any of their respective
subsidiaries against all losses, expenses, claims, damages or liabilities
arising out of actions or omissions occurring on or prior to the Reorganization
(including, without limitation, the Reorganization) to the full extent permitted
or required under applicable law (and shall also advance expenses as incurred to
the fullest extent permitted under applicable law, provided that the person to
whom expenses are advanced provides an undertaking to repay such advances if it
is ultimately determined that such person is not entitled to indemnification).
The Formation Agreement also provides that all rights to indemnification,
including provisions relating to advances of expenses incurred in defense of any
action or suit, existing in favor of the present directors, officers and
employees of the Trust and the Corporation or any of their respective
subsidiaries (collectively, the "Indemnified Parties") as provided in the Trust
Declaration and the Articles of Incorporation or ByLaws of the Corporation or
pursuant to other agreements, as in effect as of the date of the Formation
Agreement, shall survive the consummation of the Reorganization and shall
continue in full force and effect. Each of the Trust and the Corporation shall,
and Starwood shall use its best efforts to cause the Trust and the Corporation
to, maintain in effect for not less than seven years the current policies of
directors' and officers' liability insurance maintained by the Trust and the
Corporation with respect to matters occurring prior to the consummation of the
Reorganization. The foregoing indemnification provisions may include
indemnification for securities law liabilities and, to the extent permitted
under Maryland law, for wilful misconduct and criminal violations. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers or persons controlling the Companies pursuant
to the foregoing provisions, the Companies have been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
Maryland law provides for certain limitations on indemnification.
NO SOLICITATION
The Trust and the Corporation have agreed that from and after the date of
the Formation Agreement, except as otherwise permitted by the Formation
Agreement, they will not, and will instruct their respective officers and
directors not to, solicit or otherwise engage in any discussions or negotiations
with any person other than Starwood relating to any "Proposal" (as defined
below); provided that the Trust or the Corporation and their respective officers
and directors may engage in discussions or negotiations with any person (if
neither the Trust nor the Corporation solicited such discussions or negotiations
on or after June 2, 1994) if the Board of Trustees or the Board of Directors
determines in good faith upon advice of legal counsel that a failure to engage
in such negotiations could reasonably be expected to involve a breach of
fiduciary duties under applicable law. A "Proposal" is a recapitalization or
restructuring of the Trust and the Corporation, the creation of any UPREIT, a
sale, disposition or refinancing of all or portions of the Trust Assets, the
issuance of
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additional debt or equity securities of the Trust or the Corporation, the
transfer in one transaction or a series of related transactions of more than 10%
of the existing debt or equity securities of the Trust or the Corporation or the
appointment to the Board of Trustees or the Board of Directors of trustees or
directors designated by a single person or entity or its affiliates, other than
Starwood and its affiliates pursuant to the Formation Agreement; provided that
any transaction permitted under the provisions described under "-- Covenants
Prior to Closing" or consented to by Starwood shall not be a "Proposal".
ACCOUNTING TREATMENT
Each partner in the Partnerships (including the Trust and the Corporation)
will account for its respective investment in the Realty Partnership and the
Operating Partnership under the equity method of accounting, in accordance with
generally accepted accounting principles. For accounting purposes, neither the
Trust nor Starwood will unilaterally control the Realty Partnership and neither
the Corporation nor Starwood will unilaterally control the Operating
Partnership.
REGULATORY APPROVALS
The Corporation's gaming operations in Nevada are subject to the licensing
and regulatory control of the Nevada Gaming Commission (the "Nevada
Commission"), the Nevada State Gaming Control Board (the "Nevada Board"), and
the County of Clark ("Clark County"). The Nevada Commission, the Nevada Board
and Clark County are collectively referred to as the Nevada Gaming Authorities.
The Corporation's wholly-owned subsidiary, Hotel Investors Corporation of
Nevada ("HICN"), which operates two nonrestricted gaming facilities in Las
Vegas, Nevada, must be licensed by the Nevada Gaming Authorities. The
Corporation is registered by the Nevada Commission as a publicly traded
corporation and was found suitable as the sole shareholder of HICN, and as such
is subject to certain regulatory requirements. The Trust has been found suitable
as the landlord of HICN.
No person may become a stockholder of, or receive any percentage of profits
from, HICN without first obtaining licenses and approvals from the Nevada Gaming
Authorities. Officers, directors and key employees of the Corporation who are
actively and directly involved in gaming activities of HICN may be required to
be licensed or found suitable by the Nevada Gaming Authorities. The Nevada
Gaming Authorities may deny an application for licensing or a finding of
suitability for any cause they deem reasonable. If the Nevada Gaming Authorities
were to find an officer, director or key employee unsuitable for licensing or
continued association with the Corporation or HICN, the companies involved would
have to sever all relationships with such person.
Any beneficial owner of the Corporation's voting securities, regardless of
the number of shares owned, may be required to file an application, be
investigated, and have his suitability as a beneficial owner of the
Corporation's voting securities determined if the Nevada Commission has reason
to believe that such ownership would be inconsistent with the declared policies
of the State of Nevada. The Nevada Gaming Control Act (the "Nevada Act")
requires any person who acquires more than 5% of the Corporation's voting
securities to report the acquisition to the Nevada Commission. The Nevada Act
requires beneficial owners of more than 10% of the Corporation's voting
securities to apply to the Nevada Commission for a finding of suitability within
30 days after the Chairman of the Nevada Board mails written notice requiring
such filing. If the beneficial owner of voting securities who must be found
suitable is a corporation, partnership, trust, or other business entity, it must
submit detailed business and financial information including a list of
beneficial owners. The applicant for such a finding of suitability must pay all
costs incurred by the Nevada Gaming Authorities in conducting any such
investigation.
Under certain circumstances, an "institutional investor," as defined in the
regulations of the Nevada Commission, that acquires more than 10%, but not more
than 15%, of the Corporation's voting securities may apply to the Nevada
Commission for a waiver of such finding of suitability if such institutional
investor holds the voting securities only for investment purposes. An
institutional investor shall 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
purposes of causing, directly or indirectly, the election of a majority of the
members of the Board of Directors of the Corporation, or any change in the
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Corporation's corporate charter, bylaws, management, policies or operations of
the Corporation, or any of its gaming affiliates, or any other action that the
Nevada Commission finds to be inconsistent with holding the Corporation's voting
securities only for investment purposes.
The Corporation may not make a public offering of its securities without
the prior approval of the Nevada Commission if the securities or the proceeds
therefrom are intended to be used by the Corporation to construct, acquire or
finance gaming facilities in Nevada, or to retire or extend the Corporation's
obligations incurred for such purposes. Such approval, if given, does not
constitute a financing recommendation or approval by the Nevada Commission or
the Nevada Board as to the accuracy or adequacy of the prospectus or the
investment merits of the securities. Any representation to the contrary is
unlawful.
Changes in control of the Corporation through merger, consolidation, stock
or asset acquisitions, management or consulting agreements, or any act or
conduct by a person or entity whereby control of the Corporation is obtained,
may not occur without the prior approval of the Nevada Commission. Persons or
entities seeking to acquire control of the Corporation must satisfy the Nevada
Board and the Nevada Commission in a variety of stringent standards prior to
assuming control of such registered company. The Nevada Commission may also
require controlling stockholders, officers, directors and other persons having a
material relationship or involvement with an entity proposing to acquire
control, to be investigated and licensed or found suitable as part of the
approval process relating to the control acquisition transaction.
The Nevada Act requires approval by the Nevada Board of the gaming
regulatory disclosure statements in this Joint Proxy Statement.
As described elsewhere in this Joint Proxy Statement, the gaming regulatory
requirements discussed above will affect the ability of Hotel Investors to
complete certain aspects of the Reorganization by the Closing Date.
Consequently, the contribution by HICN of the Gaming Assets (and the transfer of
certain liabilities to be retained by HICN) to the Operating Partnership will
occur after the Closing Date upon receipt of certain licenses or approvals by
the Nevada Gaming Authorities, which is expected to occur approximately six to
nine months after the Closing. Likewise, the election of the new Board of
Directors of the Corporation will be effective upon receipt of certain licenses
or approvals by the Nevada Commission. Approval of the Nevada Commission is not
required for the Offering, because the proceeds of that offering will not be
used by the Corporation to construct, acquire or finance gaming facilities in
Nevada, or to retire or extend the Corporation's obligations incurred for such
purposes. On September 7, 1994, the Corporation's application for administrative
approval of this Joint Proxy Statement was granted by the Nevada Board.
If the required licenses or approvals of the Nevada Gaming Authorities are
not received on or before December 31, 1995, then on such date HICN will
contribute to the Operating Partnership cash equal to the fair value of the
Gaming Assets on such date.
For a further discussion of other aspects of Nevada gaming regulation and
control, see "Business -- Licensing and Regulation" of the Hotel Investors 10-K.
NO APPRAISAL RIGHTS
The holders of Paired Shares will not have any appraisal or dissenters'
rights in connection with the Reorganization under applicable law.
THE OFFERING
The Trust and the Corporation intend to file with the Securities and
Exchange Commission a registration statement relating to a proposed public
offering of Paired Shares (the "Offering") after the consummation of the
Reorganization. Completion of the Offering is not a condition to the
Reorganization and there can be no assurance that the Offering will be
consummated. If the Reorganization is not consummated, the Offering will not be
completed and Merrill Lynch & Co. ("Merrill Lynch"), the lead manager for the
Offering, has confirmed that its willingness to proceed with the Offering is
contingent on a successful consummation of the Reorganization with Starwood. The
terms and timing of any Offering which may be effected will be established
through negotiations among the Trust, the Corporation, Merrill Lynch and the
other underwriters
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for the Offering. Such terms are subject to change in all respects without
further notice to or approval by holders of Paired Shares. The proceeds of any
Offering will be contributed by the Trust and the Corporation to the Realty
Partnership and the Operating Partnership, respectively, in exchange for
additional interests in such partnerships and those proceeds are expected to be
used primarily to repay indebtedness (including the Senior Debt and the Starwood
Notes described below), for acquisitions of additional properties, for certain
capital improvements to hotel properties and for other corporate purposes.
Approval of the Reorganization Proposal will include the approval of the
contributions by the Trust and the Corporation of the proceeds of the Offering.
Starwood will not offer or sell any Paired Shares in connection with the
Offering and will agree not to offer, sell, contract to sell or otherwise
dispose of any Units or Paired Shares acquired in exchange for Units for a
period after the consummation of the Offering without the consent of Merrill
Lynch, the Trust and the Corporation.
Upon consummation of the Reorganization, Starwood will receive notes
("Starwood Notes") issued by the Partnerships which would be payable only if the
Trust and the Corporation consummate a public offering of Paired Shares within
18 months following the consummation of the Reorganization, which offering
results in the receipt by the Trust and the Corporation of gross proceeds of not
less than $150 million. The amount payable under such notes shall be equal to
three fourths of one percent (.75%) of the sum of the total market value of all
Paired Shares (assuming conversion of all outstanding Units) upon consummation
of such offering and the principal amount of indebtedness of the Partnerships at
such time.
THE ACQUISITION FACILITY
The Realty Partnership has engaged in preliminary negotiations with respect
to an acquisition facility (the "Acquisition Facility") with an institutional
lender which would only be consummated if the Offering is consummated. If
consummated, the Acquisition Facility would be available, subject to customary
conditions, to finance acquisitions by the Realty Partnership and for other
corporate purposes, including working capital. The Realty Partnership will be
the borrower under any Acquisition Facility, and borrowings thereunder would be
recourse to the Trust as general partner of the Realty Partnership. As security
for any such borrowings, the Trust anticipates that the lender would be granted
a first mortgage lien on certain existing hotel properties of the Realty
Partnership and may be granted first mortgage liens on other properties acquired
by the Realty Partnership. The obtaining of the Acquisition Facility is not a
condition to the consummation of the Reorganization and there can be no
assurance that an Acquisition Facility will be established or, if established,
as to any of the terms thereof.
THE PARTNERSHIPS
The following description of the Partnerships describes certain provisions
of the Partnership Agreements of the Realty Partnership and the Operating
Partnership (the "Partnership Agreements") and other agreements to be entered
into in connection with the Reorganization and does not purport to be complete
and is qualified in its entirety by reference to the Partnership Agreements and
such other agreements.
FORMATION AND CAPITALIZATION
Each of the Partnerships will be formed under the Delaware Revised Uniform
Limited Partnership Act (the "RULPA"). The Realty Partnership will be named "SLT
Realty Limited Partnership" and on the Closing Date the Trust will contribute to
the Realty Partnership the Trust Assets in exchange for an approximate 28.3%
interest in the Realty Partnership and Starwood will contribute to the Realty
Partnership approximately $4,200,000 in cash plus the Starwood Realty Assets in
exchange for Realty Units representing the remaining approximate 71.7% interest
in the Realty Partnership.
The Operating Partnership will be named "SLC Operating Limited Partnership"
and the Corporation and its subsidiaries will contribute to the Operating
Partnership the Corporation Assets in exchange for an approximate 28.3% interest
in the Operating Partnership and Starwood will contribute to the Operating
Partnership approximately $800,000 in cash plus the Starwood Operating Assets in
exchange for Operating Units representing the remaining approximate 71.7%
interest in the Operating Partnership. The Gaming
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Assets will continue to be held by HICN, pending receipt of Gaming Approval.
Upon the receipt of Gaming Approval, HICN will transfer such Gaming Assets to a
limited partnership owned 99% by the Operating Partnership, as limited partner,
and 1% by such subsidiary, as general partner. If all or any portion of the
Gaming Assets are disposed of prior to the receipt of Gaming Approval, the net
proceeds of such disposition will be contributed to such limited partnership
upon receipt thereof. If Gaming Approval is not received on or prior to December
31, 1995, then on such date HICN will contribute to such limited partnership
cash equal to the value of any Gaming Assets not disposed of prior to such date.
The value of such Gaming Assets will be agreed upon by the Corporation and
Starwood or, if they are unable to agree, such value will be determined by
independent appraisers selected by the Board of Directors of the Corporation and
Starwood. No additional interests in the Operating Partnership will be issued
upon the transfer of either the Gaming Assets, such net proceeds or such cash.
After the consummation of the Reorganization, the principal executive
offices of the Realty Partnership will be located at 11845 West Olympic
Boulevard, Suite 550, Los Angeles, California 90064 (telephone number (310)
575-3900) and the principal executive offices of the Operating Partnership will
be located at 11845 West Olympic Boulevard, Suite 560, Los Angeles, California
90064 (telephone number (310) 575-3900). For further information on the
formation and capitalization of the Partnerships, see "The
Reorganization -- Properties Contributed to the Realty Partnership", "Properties
Contributed to the Operating Partnership" and "The Reorganization -- Formation
and Structure of the Partnerships."
OPERATION OF THE PARTNERSHIPS
After the Reorganization, the Trust will be the sole general partner of,
and will conduct all of its business and operations through, the Realty
Partnership. After the receipt of Gaming Approval, the Corporation will be the
managing general partner of, and will conduct all of its business and operations
through, the Operating Partnership. The Operating Partnership will lease from
the Realty Partnership the hotel properties which the Corporation and its
subsidiaries presently lease from the Trust, certain properties acquired by the
Realty Partnership from Starwood, and the Operating Partnership may lease from
the Realty Partnership and operate hotel properties acquired by the Realty
Partnership in the future.
As the respective general partners of the Realty Partnership and the
Operating Partnership following the Reorganization, the Trust and the
Corporation will manage all of the business and affairs of the Realty
Partnership and the Operating Partnership, respectively. Except with respect to
Major Decisions described below, the Trust and the Corporation will have full
and complete power, authority and discretion to take all action necessary or
appropriate to carry out the business of the Realty Partnership and the
Operating Partnership, respectively.
The Trust and the Corporation will not undertake on behalf of the Realty
Partnership and the Operating Partnership, respectively, any of the following
"Major Decisions" without the prior consent of Starwood: (i) make a general
assignment for the benefit of creditors or appoint or acquiesce in the
appointment of a custodian, receiver or trustee for all or any part of the
assets of such Partnership, (ii) institute any proceedings for bankruptcy on
behalf of such Partnership, (iii) except in connection with the dissolution and
winding up of such Partnership, agree to or consummate a merger or consolidation
of such Partnership or the voluntary sale or other transfer of all or
substantially all of such Partnership's assets in a single transaction or
related series of transactions (without limiting the transactions which will not
be deemed to be a voluntary sale or transfer, the foreclosure of a mortgage lien
on any real estate or the grant by such Partnership of a deed in lieu of
foreclosure for such real estate shall not be deemed to be such a voluntary sale
or other transfer); (iv) sell, in one transaction or a series of related
transactions, an asset or assets of such Partnership having a book value of 25%
or more of the total book value of the assets of such Partnership or (v)
dissolve such Partnership. Such consent will be required at any time that
Starwood owns or controls at least 15% of all Units in the Realty Partnership or
the Operating Partnership, respectively.
Pursuant to the Partnership Agreements, the limited partners of the
Partnerships agree that in the event of any conflict in the fiduciary duties
owed by the Trust to its shareholders or by the Corporation to its stockholders
and, as general partners of the Partnerships, to such limited partners, the
Trust or the
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Corporation, as the case may be, will fulfill its duties to such limited
partners by acting in the best interests of such shareholders and stockholders.
TERM AND DISSOLUTION
The term of each of the Partnerships shall be until December 31, 2094
unless sooner dissolved and terminated in the case of (i) the sale or other
disposition of all or substantially all of the assets of such Partnership
(unless the general partner of such Partnership elects to continue the business
of such Partnership as provided in its Partnership Agreement), (ii) the written
election to dissolve such Partnership by the general partners thereof and
limited partners holding in the aggregate more than 50% of the total number of
issued and outstanding Units of such Partnership held by limited partners, (iii)
the dissolution, termination, withdrawal, retirement or bankruptcy of a general
partner of such Partnership, unless such Partnership's business is continued as
provided in its Partnership Agreement and (iv) the entry of a decree of judicial
dissolution of such Partnership pursuant to the RULPA.
DISTRIBUTIONS AND REIMBURSEMENT
The Trust will have the authority in its discretion to cause the Realty
Partnership to make distributions from time to time to the partners of the
Realty Partnership; provided that the Trust may distribute sufficient amounts to
enable the Trust to pay shareholder dividends that will satisfy the REIT
Requirements. The Corporation will have the authority in its discretion to cause
the Operating Partnership to make distributions from time to time to the
partners of the Operating Partnership.
The Realty Partnership will reimburse the Trust for all expenses of the
Trust incurred in connection with the business of the Realty Partnership and the
Operating Partnership will reimburse the Corporation for all expenses of the
Corporation incurred in connection with the business of the Operating
Partnership.
In the event of a dissolution of either of the Partnerships, the assets of
such Partnership will be liquidated and (after payment of creditors and
establishment of any reserves to provide for contingent liabilities) distributed
to holders of Units in accordance with the positive balances in their capital
accounts. In the event of the dissolution, liquidation or winding up of either
Partnership after the consummation of the Reorganization and prior to the
occurrence of (i) the consummation of the first public offering of securities
subsequent to the consummation of the Reorganization of such Partnership, the
Trust or the Corporation or (ii) the consummation of a private placement of
securities that reduces the outstanding balance of the Senior Debt by at least
one-half, then the distributions to holders of Units will be made (a) to limited
partners who are affiliates of Starwood until such limited partners have
received 55% of their capital contributions to such Partnership and (b) then, to
holders of Units in proportion to their capital contributions less the
distributions described in clause (a), and (c) thereafter, in accordance with
the remaining positive balances in holders' capital accounts.
OFFERINGS OF PAIRED SHARES
Each of the Partnership Agreements provides that the net proceeds of all
offerings of Paired Shares by the Trust and the Corporation (including the
Offering) will be contributed to the Partnerships, in accordance with the
Issuance Percentages (as defined below) from time to time. Upon such
contribution, the Realty Partnership will issue to the Trust and the Operating
Partnership will issue to the Corporation an additional number of Units in such
Partnership equal to the number of such Paired Shares so offered. The
Partnership Agreements provide that upon the contribution of cash to a
Partnership (other than in connection with such an offering of Paired Shares) by
a partner, such Partnership will issue Units of such Partnership equal to the
amount of such cash divided by the fair market value of such a Unit prior to
such contribution.
The Partnership Agreements also provide that the net proceeds of all
offerings of debt securities by the Trust or the Corporation will be loaned by
the Trust or the Corporation, as the case may be, to the Realty Partnership or
the Operating Partnership, as the case may be.
LIMITED PARTNER RIGHTS
Pursuant to agreements to be entered into in connection with the
Reorganization, Starwood, as holder of Units, will have certain rights to tender
all or a portion of the Units held by it to the Trust and the Corporation
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for exchange, and certain rights to require the Trust and the Corporation to
register under the Securities Act, any Paired Shares which may be issued upon
such exchange under the Securities Act. The Partnership Agreements provide that
Starwood may transfer such rights upon a transfer of Units.
Exchange Rights
Pursuant to an Exchange Rights Agreement (the "Exchange Rights Agreement")
to be entered into on the Closing Date among the Trust, the Corporation,
Starwood, the Realty Partnership and the Operating Partnership, subject to the
limitations described below, holders of Units will have the right to tender to
the Trust and the Corporation all or a portion of the Units held by such holder.
Each tender of a Realty Unit must be accompanied by a tender of an Operating
Unit and each tender of an Operating Unit must be accompanied by a tender of a
Realty Unit. The Trust and the Corporation will have the option to pay for such
tendered Units either (i) by delivering Paired Shares to such tendering holders
as described below (the "Paired Share Option"), (ii) with available cash or
borrowed funds (the "Cash Option") or (iii) by delivering a combination of
Paired Shares and cash (the "Combined Option"). The Trust and the Corporation
currently intend to pay for tendered Units by electing the Paired Share Option.
The election by the Trust and the Corporation between those options must be
made by a majority of each of their respective Disinterested Members. If the
Trust and the Corporation are unable to agree on the option to be elected within
15 days after the tender of Units, they shall be deemed to have elected the Cash
Option. If the Trust and the Corporation elect the Paired Share Option or the
Combined Option and if, as a result of the REIT Ownership Limitation, the
tendering holder cannot receive the full number of Paired Shares otherwise
issuable pursuant to such Option, such tender shall be automatically reduced so
that after such tender the tendering holder receives the maximum number of
Paired Shares that such holder can receive without violating the REIT Ownership
Limitation. In such circumstance, a tendering holder may, subject to certain
limitations, cause the Trust and the Corporation to effect a registered public
offering of a number of Paired Shares equal to the number of Paired Shares which
could not be so issued as a result of the REIT Ownership Limitation. The
proceeds of such offering would be used to purchase such tendered Units, as
described under "-- Registration Rights Agreement."
Prior to the receipt of Gaming Approval, holders of Units must, as a
condition to tender of Units, give not less than 90 days' notice to the Trust
and the Corporation of their intent to tender Units which would result in
Starwood beneficially owning in excess of 4.9% of the outstanding Paired Shares.
After receipt of Gaming Approval, no such 90 day notice will be required.
Paired Share or Combined Option. If the Trust and the Corporation elect
the Paired Share Option or the Combined Option, they will deliver to the
tendering holder within 15 days after the related tender (the "Exchange Date"),
for each Realty Unit and Operating Unit tendered for which Paired Shares are to
be delivered, one Trust Share and one Corporation Share, respectively, subject
to adjustment as described below. The Trust Shares and Corporation Shares so
delivered will be "paired" to the same extent as other outstanding Paired
Shares.
The number of Paired Shares issuable upon exchange of Units is subject to
adjustment from time to time after the Closing Date in the event that the Trust
and the Corporation pay a dividend or make a distribution in Paired Shares to
holders of Paired Shares, subdivide the outstanding Paired Shares into a greater
number of Paired Shares or combine the outstanding Paired Shares into a smaller
number of Paired Shares (including the Reverse Split). The number of Paired
Shares for which Units are then exchangeable shall be adjusted so that the
holder thereof is entitled to receive the number of Paired Shares which such
holder would have owned immediately following such action had such Units been
exchanged immediately prior thereto.
The Partnership Agreements also provide that if the Trust and the
Corporation grant, issue or sell, on a pro rata basis to all holders of Paired
Shares, options, convertible securities or rights (collectively, "Purchase
Rights") to purchase shares of stock, warrants, securities or other property,
then each holder of Units shall be entitled to acquire rights that are
substantially similar in amount, tone and tenor to the Purchase Rights which
such holder would have received if its Units had been exchanged for Paired
Shares immediately prior to such grant, issue or sale. Other than as described
above, no further adjustments shall be made for any issuance of Paired Shares or
any other event.
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Cash or Combined Option. If the Trust and the Corporation elect the Cash
Option or the Combined Option, they will deliver to the tendering holder within
20 days after the related tender, an amount of cash in respect of each Paired
Share for which cash is to be paid equal to the average closing price per share
of the Paired Shares on the NYSE for the ten trading day period ending on the
day before the date of the related tender.
In connection with any such payment of cash, unless otherwise agreed by the
Trust and the Corporation from time to time by action of a majority of each of
their respective Disinterested Members, the Trust will pay 95% of such aggregate
cash payment and the Corporation will pay 5% of such aggregate cash payment
(such percentages, as they may be amended from time to time pursuant to such an
agreement, being called the "Issuance Percentages").
The Exchange Rights Agreement provides that no Units shall be accepted for
exchange (i) if as a result of such tender the Trust would not satisfy the REIT
Requirements in any respect or (ii) prior to the expiration or termination of
any applicable waiting period under the Hart Scott Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act").
Registration Rights Agreement
Pursuant to a Registration Rights Agreement (the "Registration Rights
Agreement") to be entered into on the Closing Date among the Trust, the
Corporation and Starwood, the Trust and the Corporation have granted
registration rights with respect to Paired Shares which may be acquired upon
exchange of Units. Pursuant to such registration rights, Starwood, on behalf of
holders of Units exchangeable for not less than 100,000 (after giving effect to
the Reverse Split) Paired Shares may, subject to certain limitations, require
the Trust and the Corporation to effect up to four registrations of Paired
Shares under the Securities Act, including shelf registrations of Paired Shares
under the Securities Act (any such shelf registrations to be maintained until no
Paired Shares are required to be registered under the Registration Rights
Agreement).
In addition, if the Trust and the Corporation do not issue Paired Shares
upon a tender of Units because of the REIT Ownership Limitation, the tendering
holder may each such time, subject to certain limitations, require the Trust and
the Corporation to effect a registered public offering under the Securities Act
of an equivalent number of Paired Shares. The net proceeds of such offering
(after underwriting discounts and selling commissions) would be used to purchase
such tendered Units.
Starwood also has rights, subject to certain exemptions and limitations, to
request that the Trust and the Corporation include such Paired Shares in other
registrations of Paired Shares by the Trust and the Corporation under the
Securities Act ("Incidental Registrations").
All expenses incident to such registrations (other than underwriting
discounts and selling commissions and fees and expenses of counsel to the
selling holders) are to be borne by the Trust and the Corporation in accordance
with their respective Issuance Percentages.
The Registration Rights Agreement specifies certain times during which a
registration of Paired Shares cannot be initiated, including the 90-day period
after the Trust and the Corporation effect a registration of Paired Shares and
the 90-day period after a holder of Units delivers a demand for registration
that is not withdrawn.
The Trust and the Corporation have the right to delay any public offering
of Paired Shares pursuant to the Registration Rights Agreement for a period of
up to 90 days, if either the Trust or the Corporation determines that an earlier
sale would be materially adverse to the Trust and its shareholders or the
Corporation and its stockholders. Furthermore, if the underwriters used in
connection with a public offering in an Incidental Registration, advise the
Trust and the Corporation that marketing factors require a limitation on the
number of Paired Shares to be sold at a given time, the size of such offering
will be reduced by decreasing the number of Paired Shares to be sold by the
holders of Units.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
of the Reorganization and the Reverse Split. Sidley & Austin has acted as tax
counsel to the Trust and the Corporation in connection with the Reorganization
and the Reverse Split, has reviewed the following discussion and is of the
opinion that it fairly summarizes the material federal income tax consequences
to a holder of Paired Shares. This summary is for information purposes only and
is not tax advice. Except as discussed below, no ruling or determination letters
from the Internal Revenue Service ("IRS") will be requested by the Company on
any tax issue connected with the Reorganization and the Reverse Split. It is a
condition to the consummation of the Reorganization and the Reverse Split that
the Company receive opinions of Sidley & Austin as to certain federal income tax
consequences. The opinions of Sidley & Austin will be based upon the Internal
Revenue Code of 1986, as amended (the "Code"), as currently in effect,
applicable Treasury Regulations thereunder and judicial and administrative
interpretations thereof, all of which are subject to change, including changes
that may be retroactive, and upon certain customary assumptions and
representations. Opinions of counsel are not binding on the IRS or the courts.
Accordingly, no assurance can be given that the IRS will not challenge the
propriety of one or more of the tax opinions or positions described herein or
that such a challenge would not be successful.
This summary does not purport to deal with all aspects of taxation that may
be relevant to particular holders of Paired Shares in light of their personal
investment or tax circumstances. The discussion below does not address foreign,
state, or local tax consequences, nor does it specifically address the tax
consequences to taxpayers subject to special treatment under the federal income
tax laws (including dealers in securities, foreign persons, life insurance
companies, tax-exempt organizations, financial institutions, and taxpayers
subject to the alternative minimum tax). The discussion below assumes that the
Paired Shares are or will be held as capital assets within the meaning of
Section 1221 of the Code. No assurance can be given that legislative, judicial
or administrative changes will not affect the accuracy of any statements in this
Proxy Statement with respect to transactions entered into or contemplated prior
to the effective date of such changes.
EACH HOLDER OF PAIRED SHARES IS ADVISED TO CONSULT HIS OR HER OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE
REORGANIZATION AND THE REVERSE SPLIT, INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES AND OF POTENTIAL CHANGES IN THE APPLICABLE
TAX LAWS.
FEDERAL INCOME TAXATION OF THE TRUST
BACKGROUND
In 1980, prior to the establishment of the Corporation and the pairing of
its shares with the shares of the Trust, the IRS issued a Private Letter Ruling
(the "Ruling") to the Trust in which the IRS held that the pairing of the Trust
Shares and the Corporation Shares and the operation of the Corporation would not
preclude the Trust from qualifying as a REIT. Subsequent to the issuance of the
Ruling (i) the IRS announced that it would no longer issue rulings to the effect
that a REIT whose shares are paired with those of a non-REIT will qualify as a
REIT if the activities of the paired entities are integrated, and (ii) Congress,
in 1984, enacted Section 269B of the Code, which treats a REIT and a non-REIT,
the shares of which were not paired on or before June 30, 1983, as one entity
for purposes of determining whether either company qualifies as a REIT. Section
269B of the Code has not applied to the Trust and the Corporation (since the
Trust Shares and the Corporation Shares were paired prior to that date), and the
Ruling's conclusions were not adversely affected thereby.
The Trust recently discovered that it may not have met all of the
requirements for maintenance of REIT status for prior years. In order to resolve
this problem and be able to complete the Reorganization in a timely fashion, the
Trust requested and received a determination letter from the IRS (the "IRS
Letter"). The IRS Letter provides that the Trust's failure to comply with
certain requirements for maintenance of REIT status
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terminated its election to be taxed as a REIT beginning with the Trust's taxable
year ended December 31, 1991 and permits the Trust to re-elect to be taxed as a
REIT commencing with its taxable year ended December 31, 1995. The IRS Letter
also directs the Trust to file amended federal income tax returns for its
taxable years ended December 31, 1991 and 1992 as a C corporation (and not as a
REIT) and to file its federal income tax returns for its taxable years ended
December 31, 1993 and 1994 as a C corporation. Because the Trust had net losses
for federal income tax purposes and did not pay any dividends during its taxable
years ended December 31, 1991, 1992 and 1993 and expects to incur a net loss for
federal income tax purposes and not pay any dividends for its taxable year
ending December 31, 1994, the IRS Letter should not result in the Trust owing
any federal income tax and the holders of Paired Shares should not be adversely
affected for these years.
GENERAL
The Trust plans to make an election to be taxed as a REIT under Sections
856 through 860 of the Code and applicable Treasury Regulations (the "REIT
Requirements" or "REIT Provisions"), commencing with its taxable year ending
December 31, 1995. The Trust believes that, commencing with its taxable year
ending December 31, 1995, it will be organized and will operate in such a manner
as to qualify for taxation as a REIT under the Code. The Trust intends to
continue to operate in such a manner, but no assurance can be given that it will
operate in a manner so as to qualify or remain qualified as a REIT.
The REIT Provisions are highly technical and complex. The following sets
forth the material aspects of the REIT Provisions that govern the federal income
tax treatment of a REIT and its stockholders. This summary is qualified in its
entirety by the REIT Provisions and administrative and judicial interpretations
thereof.
In the opinion of Sidley & Austin, commencing with the Trust's taxable year
ending December 31, 1995, and assuming that the actions contemplated herein are
completed by the Trust in a timely fashion, the Trust will be organized in
conformity with the requirements for qualification as a REIT, and its proposed
method of operation will enable it to meet the requirements for qualification
and taxation as a REIT under the Code. It must be emphasized that Sidley &
Austin's opinion is based on the IRS Letter and various assumptions and is
conditioned upon certain representations made by the Trust and the Corporation
as to factual matters. In particular, Sidley & Austin's opinion is based upon
the factual representations of the Trust concerning its business and properties
as set forth in this Proxy Statement and assumes that the actions described in
this Proxy Statement are completed in a timely fashion. Moreover, such
qualification and taxation as a REIT depends upon the Trust's ability to meet,
through actual annual operating results, certain distribution levels, specified
diversity of stock ownership, and various other qualification tests imposed
under the Code, as discussed below. The annual operating results will not be
reviewed by Sidley & Austin. Accordingly, no assurance can be given that the
actual results of the Trust's operation for any particular taxable year will
satisfy such requirements. Further, the anticipated federal income tax treatment
described in this Proxy Statement may be changed, perhaps retroactively, by
legislative, administrative, or judicial action at any time. For a discussion of
the tax consequences of failure to qualify as a REIT, see "-- Federal Income
Taxation of the Trust -- Failure to Qualify".
As long as the Trust qualifies for taxation as a REIT, it generally will
not be subject to federal corporate income taxes on net income that it currently
distributes to stockholders. This treatment substantially eliminates the "double
taxation" (once at the corporate level and again at the stockholder level) that
generally results from investment in a regular corporation.
Even if the Trust qualifies for taxation as a REIT, however, it may be
subject to federal income or excise tax as follows. First, the Trust will be
taxed at regular corporate rates on any undistributed REIT taxable income (as
discussed below), including undistributed net capital gains. Second, under
certain circumstances, the Trust may be subject to the "alternative minimum tax"
on its items of tax preference, if any. Third, if the Trust has (i) net income
from the sale or other disposition of "foreclosure property" (which is, in
general, property acquired on foreclosure or otherwise on default on a loan
secured by such property or a lease of such property) or (ii) other
non-qualifying income from foreclosure property, it will be subject to tax at
the highest
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corporate rate on such income. Fourth, if the Trust has net income from
"prohibited transactions" (which are, in general, certain sales or other
dispositions of property, other than foreclosure property, held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Trust should fail to satisfy the 75% gross
income test or the 95% gross income test (as discussed below), but has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Trust fails the 75% or
95% test, multiplied by a fraction intended to reflect the Trust's
profitability. Sixth, if the Trust should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Trust will be subject to a
4% excise tax on the excess of such required distributions over the amounts
actually distributed. Seventh, pursuant to Notice 88-19, if the Trust has a net
unrealized built-in gain, with respect to any asset (a "Built-in Gain Asset")
held by the Trust on January 1, 1995 or acquired by the Trust from a corporation
that is or has been a C corporation (i.e., generally a corporation subject to
full corporate-level tax) in certain transactions in which the basis of the
Built-in Gain Asset in the hands of the Trust is determined by reference to the
basis of the asset in the hands of the C corporation, and the Trust recognizes
gain on the disposition of such asset through the Realty Partnership during the
10-year period (the "Recognition Period") beginning on January 1, 1995 with
respect to assets held by the Trust on such date or, with respect to other
assets, the date on which such asset was acquired by the Trust, then, to the
extent of the Built-in Gain (i.e., the excess of (a) the fair market value of
such asset over (b) the Trust's adjusted basis in such asset, determined as of
the beginning of the Recognition Period), such gain will be subject to tax at
the highest corporate rate pursuant to Treasury Regulations that have not yet
been promulgated. The results described above with respect to the recognition of
Built-in Gain assume that the Trust will make an election pursuant to Notice
88-19. The Trust believes that it will have Built-In-Gain Assets as of January
1, 1995 and, thus, sales of assets by the Trust or the Realty Partnership after
1994 could result in a federal income tax liability to the Trust.
REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, the Trust must elect to be so treated and must meet
on a continuing basis certain requirements (as discussed below) relating to the
Trust's organization, sources of income, nature of assets, and distribution of
income to shareholders.
The Code defines a REIT as a corporation, trust or association: (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for the REIT Provisions; (iv) that is neither a financial institution nor an
insurance company subject to certain provisions of the Code; (v) the beneficial
ownership of which is held by 100 or more persons; (vi) during the last half of
each taxable year not more than 50% in value of the outstanding stock of which
is owned, directly or indirectly, by five or fewer individuals (defined in the
Code to include certain entities); (vii) as of the close of the taxable year,
has no earnings and profits accumulated in any non-REIT year; (viii) is not
electing to be taxed as a REIT prior to the fifth taxable year which begins
after the first taxable year for which its REIT status terminated or was revoked
or the IRS has waived the applicability of such waiting period; and (ix) that
meets certain other tests, described below, regarding the nature of its income
and assets. The REIT Provisions provide that conditions (i) to (iv), inclusive,
must be met during the entire taxable year and that condition (v) must be met
during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. Conditions (v) and
(vi) will not apply until after the first taxable year for which an election is
made by the REIT to be taxed as a REIT.
The Trust has sufficient shareholders to satisfy condition (v) and believes
its shareholders satisfy condition (vi). In addition, the Trust Amendments and
the Restated Articles provide for restrictions regarding the transfer and
ownership of shares, which restrictions are intended to assist the Trust in
continuing to satisfy the share ownership requirements described in conditions
(v) and (vi) above. Such transfer and ownership restrictions are described in
"Adoption of Amendments to Trust Declaration and Restated Articles of
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Incorporation -- REIT Ownership Limitations". The Trust believes that, as of
January 1, 1995, it will satisfy condition (vii) and, based on the IRS Letter,
it will satisfy condition (viii).
Pursuant to applicable Treasury Regulations, in order to elect to be taxed
as a REIT, the Trust must maintain certain records and request certain
information from its shareholders designed to disclose the actual ownership of
its shares. The Trust has represented that it will comply with these
requirements.
The Trust may not elect to become a REIT unless its taxable year is the
calendar year. The Trust's taxable year is the calendar year.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT is deemed to own its proportionate share of
the assets of the partnership and is deemed to be entitled to the income of the
partnership attributable to such share. In addition, the character of the assets
and gross income of the partnership shall retain the same character in the hands
of the REIT for purposes of the REIT Requirements, including satisfying the
gross income tests and the asset tests, described below. Thus, the Trust's
proportionate share of the assets, liability and items of income of the Realty
Partnership will be treated as assets, liabilities and items of income of the
Trust for purposes of applying the requirements described herein, provided that
the Realty Partnership is treated as a partnership for federal income tax
purposes. See "-- Federal Income Tax Aspects of the Partnerships".
Paired Shares. Section 269B of the Code provides that if the shares of a
REIT and a non-REIT are paired then the REIT and the non-REIT shall be treated
as one entity for purposes of determining whether either company qualifies as a
REIT. If Section 269B applied to the Trust and the Corporation, then the Trust
would not be able to satisfy the gross income tests (described below) and thus
would not be eligible to be taxed as a REIT. This provision does not apply,
however, if the shares of the REIT and the non-REIT were paired on or before
June 30, 1983 and the REIT was taxable as a REIT on or before June 30, 1983. As
a result of this grandfathering rule, Section 269B has not applied to the Trust
and the Corporation. The grandfathering rule does not, by its terms, require
that the Trust be taxed as a REIT at all times after June 30, 1983. In the
opinion of Sidley & Austin, the IRS Letter and the termination of the Trust's
REIT election for the taxable years ended December 31, 1991 through 1994 will
not result in Section 269B becoming applicable to the Trust. There are, however,
no judicial or administrative authorities interpreting this grandfathering rule.
Therefore, the opinion of Sidley & Austin is based solely on the literal
language of the statutory grandfathering rule.
Even though Section 269B of the Code does not apply to the Trust and the
Corporation, the IRS could assert that the Trust and the Corporation should be
treated as one entity under general tax principles. In general, such an
assertion should only be upheld if the separate corporate identities are a sham
or unreal. Not all of the trustees of the Trust are also directors of the
Corporation and no individual serves as an officer of both the Trust and the
Corporation. In addition, the Trust, and the Corporation and each Partnership
have separate creditors and are subject to different state law licensing and
regulatory requirements. The Trust and the Corporation have represented that
they and the Partnerships will each maintain separate books and records and all
material transactions among them have been and will be negotiated and structured
with the intention of achieving an arm's-length result. Based on the foregoing,
Sidley & Austin is of the opinion that the separate corporate identities of the
Trust and the Corporation will be respected.
Due to the paired structure, the Trust, the Corporation and the
Partnerships are controlled by the same interests. As a result, the IRS could,
pursuant to Section 482 of the Code, seek to distribute, apportion or allocate
gross income, deductions, credits or allowances between or among the Trust, the
Corporation and the Partnerships if it determines that such distribution,
apportionment or allocation is necessary in order to prevent evasion of taxes or
to clearly reflect income. The Trust and the Corporation have represented that
all material transactions between them and among them and the Partnerships have
been and will be negotiated and structured with the intention of achieving an
arm's-length result. As a result, the potential application of Section 482 of
the Code should not have a material effect on the Trust or the Corporation.
Income Tests. In order to maintain qualification as a REIT, the Trust must
annually satisfy three gross income requirements (the "gross income tests").
First, at least 75% of the Trust's gross income (excluding
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gross income from prohibited transactions) for each taxable year must consist of
defined types of income derived directly or indirectly from investments relating
to real property or mortgages on real property (including "rents from real
property," as described below, and in certain circumstances, interest) or from
certain types of qualified temporary investments. Second, at least 95% of the
Trust's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived from the same items which qualify under the
75% income test and from dividends, interest, and gain from the sale or
disposition of stock or securities that do not constitute dealer property or
from any combination of the foregoing. Third, short-term gain from the sale or
other disposition of stock or securities, gain from prohibited transactions and
gain on the sale or other disposition of real property held for less than four
years (apart from involuntary conversions and sales of foreclosure property)
must represent less than 30% of the Trust's gross income (including gross income
from prohibited transactions) for each taxable year.
Rents received or deemed to be received by the Trust (or the Realty
Partnership) will qualify as "rents from real property" for purposes of the
gross income tests only if several conditions are met. First, the amount of rent
must not be based in whole or in part on the income or profits of any person.
However, an amount received or accrued generally will not be excluded from the
term "rents from real property" solely by reason of being based on a fixed
percentage or percentages of receipts or sales (or items thereof). Second, the
Code provides that rents received from a tenant will not qualify as "rents from
real property" in satisfying the gross income tests if the REIT, or a direct or
indirect owner of 10% or more of the REIT, directly or indirectly, owns 10% or
more of such tenant (a "Related Party Tenant"). Third, if rent attributable to
personal property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then the portion of
rent attributable to such personal property will not qualify as "rents from real
property". Finally, a REIT may provide services to its tenants and the income
will qualify as "rents from real property" only if the services are of a type
that a tax-exempt organization can provide to its tenants without causing its
rental income to be unrelated business taxable income under the Code. Services
that would give rise to unrelated business taxable income if provided by a
tax-exempt organization ("Prohibited Services") must be provided by an
"independent contractor" who is adequately compensated and from whom the REIT
does not derive any income. Payments for services furnished (whether or not
rendered by an independent contractor) that are not customarily provided to
tenants in properties of a similar class in the geographic market in which the
REIT's property is located will not qualify as "rents from real property".
After the Reorganization, substantially all of the Trust's income will be
derived from its partnership interest in the Realty Partnership. The Realty
Partnership will lease for a fixed period all but three of its interests in its
hotels and associated property to the Operating Partnership and will lease three
hotels and associated property to an unrelated person (the "Leases"). The Leases
are net leases which generally provide for payment of rent equal to the greater
of a fixed rent or a percentage rent. The percentage rent is calculated by
multiplying fixed percentages of the gross room revenues and, for certain
hotels, fixed percentages of other types of gross revenues in excess of certain
levels.
In order for the rents paid under the Leases to constitute "rents from real
property", the Leases must be respected as true leases for federal income tax
purposes and not treated as service contracts, joint ventures or some other type
of arrangement. The determination of whether the Leases are true leases depends
upon an analysis of all of the surrounding facts and circumstances. In making
such a determination, courts have considered a variety of factors, including the
intent of the parties, the form of the agreement, the degree of control over the
property that is retained by the property owner and the extent to which the
property owner retains the risk of loss with respect to the property. In
addition, Section 7701(e) of the Code provides that a contract that purports to
be a service contract (or a partnership agreement) is treated instead as a lease
of property if the contract is properly treated as such, taking into account all
relevant factors, including whether or not: (i) the service recipient is in
physical possession of the property; (ii) the service recipient controls the
property; (iii) the service recipient has a significant economic or possessory
interest in the property; (iv) the service provider does not bear any risk of
substantially diminished receipts or substantially increased expenditures if
there is nonperformance under the contract; (v) the service provider does not
use the property concurrently to provide significant services to entities
unrelated to the service recipient; and (vi) the total contract price does not
substantially exceed the total rental value of the property for the contract
period. Since
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the determination whether a service contract should be treated as a lease is
inherently factual, the presence or absence of any single factor may not be
dispositive in every case.
Sidley & Austin is of the opinion that the Leases will be treated as true
leases for federal income tax purposes. This opinion is based, in part, on the
following facts: (i) the Realty Partnership and the lessees intend for their
relationship to be that of lessor and lessee and each such relationship will be
documented by a lease agreement; (ii) the lessees will have the right to
exclusive possession and use and quiet enjoyment of the leased premises during
the term of the Leases; (iii) the lessees will bear the cost of, and be
responsible for, day-to-day maintenance and repair of the leased premises, other
than the cost of certain capital expenditures, and will dictate how the leased
premises are operated and maintained; (iv) the lessees will bear all of the
costs and expenses of operating the leased premises during the term of the
Leases; (v) the term of the Leases is less than the economic life of the leased
premises and the lessees do not have purchase options with respect to the leased
premises; (vi) the lessees are required to pay substantial fixed rent during the
term of the Leases; and (vii) each lessee stands to incur substantial losses or
reap substantial profits depending on how successfully it operates the leased
premises.
Investors should be aware, however, that there are no controlling
authorities involving leases with terms substantially the same as the Leases.
Therefore, the opinion of Sidley & Austin is based upon an analysis of the facts
and circumstances and upon rulings and judicial decisions involving situations
that are analogous. If any significant Lease is recharacterized as a service
contract or partnership agreement, rather than as a true lease, the Trust would
not be able to satisfy either the 75% or 95% gross income tests and, as a
result, would lose its REIT status.
In order for rent payments under the Leases to qualify as "rents from real
property", the rent must not be based on the income or profits of any person.
The percentage rent under the Leases will qualify as "rents from real property"
if it is based on percentages of receipts or sales and the percentages (i) are
fixed at the time the Leases are entered into, (ii) are not renegotiated during
the term of the Leases in a manner that has the effect of basing percentage rent
on income or profits, and (iii) conform with normal business practice. More
generally, percentage rent will not qualify as "rents from real property" if,
considering the Leases and all the surrounding circumstances, the arrangement
does not conform with normal business practice, but is in reality used as a
means of basing the percentage rent on income or profits. Since the Trust and
the Corporation have represented that there is no plan or arrangement to
renegotiate any of the Leases and the Leases conform with normal business
practice, the percentage rent will be treated as "rents from real property"
under this requirement. The Trust has further represented with respect to hotel
properties that the Realty Partnership may acquire in the future that it will
not charge rent that is based in whole or in part on the income or profits of
any person (except by reason of being based on a fixed percentage of receipts or
sales, as described above).
Another requirement for rent payments under a Lease to constitute "rents
for real property" is that the rent attributable to personal property under the
Lease must not be greater than 15% of the rent received under the Lease. For
this purpose, rent attributable to personal property is the amount that bears
the same ratio to the total rent for the taxable year as the average of the
adjusted basis of the personal property at the beginning and at the end of the
taxable year bears to the average of the aggregate adjusted basis of both the
real property and personal property leased under, or in connection with, such
Lease. The Realty Partnership will, under the Leases, be leasing certain
personal property to the Operating Partnership. The Trust believes that under
each of the Leases less than 15% of the total rent is attributable to personal
property and, as a result, no portion of such rent will be treated as being for
rental of personal property for purposes of the 75% and 95% gross income tests.
If the IRS were to successfully assert that with respect to one or more of the
Leases rent attributable to personal property is greater than 15% of the total
rent, then it is possible that the Trust would not be able to satisfy either the
75% or 95% gross income tests and, as a result, would lose its REIT status. With
respect to both the Leases and future acquisitions, the Trust has represented
that it will monitor the 15% test to ensure continued qualification as a REIT.
A third requirement for qualification of rent under the Leases as "rents
from real property" is that the Trust must not own, directly or constructively,
10% or more of the Operating Partnership. In such event, the rent paid to the
Realty Partnership by the Operating Partnership with respect to property leased
by the Realty
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Partnership to the Operating Partnership would not qualify as income of the type
that can be received by a REIT. In order to prevent such a situation, which
would likely result in the disqualification of the Trust as a REIT, the Trust
Amendments and the Restated Articles (as well as the partnership agreements)
contain restrictions on the amount of Trust Shares and Corporation Shares that
any one person can own. These restrictions generally provide that any attempt by
any one person to actually or constructively acquire 8.0% or more of the
outstanding Paired Shares will be ineffective. See "Adoption of Amendments to
Trust Declaration and Restated Articles of Incorporation -- REIT Ownership
Limitations". However, notwithstanding such restrictions, because the Code's
constructive ownership rules for purposes of the 10% ownership limit are broad
and it is not possible to continually monitor direct and indirect ownership of
Paired Shares, it is possible that some person may at some time own sufficient
Paired Shares to cause the termination of the Trust's REIT status.
Finally, rent under the Leases will not qualify as "rents from real
property" if either the Trust or the Realty Partnership renders or furnishes
Prohibited Services to the occupants of the Realty Partnership's properties. So
long as the Leases are treated as true leases, neither the Trust nor the Realty
Partnership should be treated as rendering or furnishing Prohibited Services to
the occupants of the Realty Partnership's properties.
Based on the foregoing, Sidley & Austin is of the opinion that the rent
payable under the Leases will be treated as "rents from real property" for
purposes of the 75% and 95% gross income tests. There can, however, be no
assurance that the IRS will not successfully assert a contrary position or that
there will not be a change in circumstances (such as the entering into of new
leases) which would result in a portion of the rent received to fail to qualify
as "rents from real property." In such case, it is possible that the Trust would
not be able to satisfy either the 75% or 95% gross income test and, as a result,
would lose its REIT status.
For purposes of the gross income tests, the term "interest" generally does
not include any amount received or accrued (directly or indirectly) if the
determination of such amount depends in whole or in part on the income or
profits of any person. However, an amount received or accrued generally will not
be excluded from the term "interest" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. The Realty Partnership will hold
notes and may advance money from time to time to tenants for the purpose of
financing tenant improvements, making real estate loans or holding or acquiring
additional notes. As of January 1, 1995, none of the notes held by the Realty
Partnership will provide for the payment of any amount based on the income or
profits of any person other than amounts based on a fixed percentage or
percentages of receipts or sales. In addition, the Trust has represented that
neither the Trust nor the Realty Partnership intends to charge interest that
will depend in whole or in part on the income or profits of any person or to
make loans (not secured in substantial part by real estate mortgages) in amounts
that could jeopardize the Trust's compliance with the 75% and 5% asset tests,
discussed below. To the extent the notes held by the Realty Partnership are
secured by real property, the interest received or accrued with respect to such
notes should be treated as qualifying income for both the 75% and the 95% gross
income tests. Certain of the notes held by the Realty Partnership are not
secured by real property. Interest received or accrued with respect to such
notes should be treated as qualifying income for the 95% gross income test but
should not be treated as qualifying income for the 75% gross income test.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% income test necessary to qualify as a REIT, and the
net income from that transaction is subject to a 100% tax. The Trust believes
that no asset owned by it or by the Realty Partnership is held for sale to
customers and that sale of any such property will not be in the ordinary course
of business of the Trust or the Realty Partnership. Whether property is held
"primarily for sale to customers in the ordinary course of a trade or business"
and, therefore, is subject to the 100% tax, depends on the facts and
circumstances in effect from time to time, including those related to a
particular property. The Trust and the Realty Partnership will attempt to comply
with the terms of safe-harbor provisions in the Code prescribing when asset
sales will not be characterized as prohibited transactions. Complete assurance
cannot be given, however, that the Trust can comply with the safe-harbor
provisions of the Code or that the Trust or the Realty Partnership can avoid
owning property that may be characterized as property held "primarily for sale
to customers in the ordinary course of business."
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If the Trust fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions generally will be available if the Trust's failure to meet such tests
is due to reasonable cause and not willful neglect, the Trust attaches a
schedule of the sources of its income to its tax return, and any incorrect
information on the schedule was not due to fraud with intent to evade tax. It is
not possible to state whether in all circumstances the Trust would be entitled
to the benefit of these relief provisions. As discussed above in "-- Federal
Income Taxation of the Trust -- General", even if these relief provisions apply,
a tax would be imposed with respect to the excess net income. No similar
mitigation provision applies if the Trust fails the 30% income test. In such
case, the Trust will cease to qualify as a REIT.
Asset Tests. In order to maintain qualification as a REIT, the Trust, at
the close of each quarter of its taxable year, must also satisfy three tests
relating to the nature of its assets. First, at least 75% of the value of the
Trust's total assets must be represented by real estate assets (including (i)
its allocable share of real estate assets held by partnerships in which the
Trust owns an interest and (ii) stock or debt instruments held for not more than
one year purchased with the proceeds of a stock offering or long-term (at least
five years) debt offering of the Trust), cash, cash items and government
securities. Second, not more than 25% of the Trust's total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Trust may not exceed 5% of the value of the Trust's
total assets, and the Trust may not own more than 10% of any one issuer's
outstanding voting securities.
The Trust anticipates that commencing with its taxable year ending December
31, 1995 it will be able to comply with the asset tests. Substantially all of
the Trust's investments will be in properties owned by the Realty Partnership,
at least 75% of which will represent qualifying real estate assets. A
substantial portion of the indebtedness of the Operating Partnership to the
Realty Partnership may not be qualifying assets for purposes of the 75% asset
test. However, such portion will not exceed 5% of the value of the Realty
Partnership and thus will not cause the Trust to fail the 5% asset test.
After initially meeting the asset tests at the close of any quarter, the
Trust will not lose its status as a REIT for failure to satisfy the asset tests
at the end of a later quarter solely by reason of changes in asset values. If
the failure to satisfy the asset tests results from an acquisition of securities
or other property during a quarter, the failure can be cured by disposition of
sufficient non-qualifying assets within 30 days after the close of that quarter.
The Trust intends to maintain adequate records of the value of its assets to
ensure compliance with the asset tests and to take such actions within 30 days
after the close of any quarter as may be required to cure any non-compliance.
Annual Distribution Requirements. The Trust, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its shareholders in an amount at least equal to (i) the sum of (a) 95% of the
Trust's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Trust's net capital gain) and (b) 95% of the net income (after
tax), if any, from foreclosure property, minus (ii) the sum of certain items of
non-cash income. In addition, if the Trust disposes of any Built-in Gain Asset
during its Recognition Period, the Trust will be required, pursuant to IRS
regulations that have not yet been promulgated, to distribute at least 95% of
the Built-in Gain (after tax), if any, recognized on the disposition of such
asset. Distributions must be paid in the taxable year to which they relate, or
in the following taxable year if declared before the Trust timely files its tax
return for such year and if paid on or before the first regular dividend payment
after such declaration. To the extent that the Trust does not distribute all of
its net capital gain or distributes at least 95%, but less than 100%, of its
"REIT taxable income", as adjusted, it will be subject to tax thereon at regular
ordinary and capital gain corporate tax rates.
Furthermore, if the Trust should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain income for such year, and (iii) any undistributed
taxable income from prior periods, the Trust will be subject to a 4% excise tax
on the excess of such required distribution over the amounts actually
distributed.
The Trust intends to make timely distributions sufficient to satisfy the
annual distribution requirements and to the extent practical, avoid payment of
material amounts of federal income or excise tax by the Trust.
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The Credit Agreement prohibits the Trust from making distributions to its
shareholders. The Trust expects that this restriction will not apply during 1995
and future years as a result of either negotiations with the Lenders or through
refinancing the Senior Debt. If the Trust is not successful, then the
restrictions on payment of dividends could cause the Trust to fail to satisfy
the annual distribution requirements.
It is possible, however, that the Trust, from time to time, may experience
timing differences between the actual receipt of income and actual payment of
deductible expenses and the inclusion of such income and deduction of such
expenses in arriving at REIT taxable income. In addition, it is also possible
that, from time to time, the Trust may be allocated a share of net capital gain
attributable to the sale of depreciated property that exceeds its allocable
share of cash attributable to that sale. In such cases, the Trust may not have
sufficient cash or other liquid assets to meet the distribution requirements
described above. In order to meet the distribution requirements in such cases,
the Trust (or the Realty Partnership) may find it necessary to arrange for
short-term or possible long-term borrowings or to pay dividends in the form of
taxable stock dividends.
Under certain circumstances, the Trust may be able to rectify a failure to
meet the above distribution requirements for a year by paying "deficiency
dividends" to shareholders in a later year, which may be included in the Trust's
deduction for dividends paid for the earlier year. Thus, the Trust may be able
to avoid being taxed on amounts distributed as deficiency dividends; however,
the Trust will be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If the Trust fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Trust will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which the
Trust fails to qualify will not be deductible by the Trust nor will they be
required to be made. As a result, the Trust's failure to qualify as a REIT could
reduce the cash available for distribution by the Trust to its shareholders. In
addition, if the Trust fails to qualify as a REIT, all distributions to
shareholders will be taxable as ordinary income to the extent of the Trust's
current and accumulated earnings and profits, and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends-received deduction. Unless entitled to relief under specific statutory
provisions, the Trust will also be disqualified from taxation as a REIT for the
four taxable years following the year during which qualification was lost. It is
not possible to state whether in all circumstances the Trust would be entitled
to such statutory relief.
PROPOSED PARTNERSHIP ANTI-ABUSE RULE
The IRS recently proposed regulations that provide an anti-abuse rule (the
"Anti-Abuse Rule") under the partnership provisions of the Code (the
"Partnership Provisions"). Under the Anti-Abuse Rule, as proposed, if a
partnership is formed or availed of in connection with a transaction with a
principal purpose of substantially reducing the present value of the partners'
aggregate federal tax liability in a manner that is inconsistent with the intent
of the Partnership Provisions, the IRS can disregard the form of the transaction
and recast it for federal tax purposes. The Anti-Abuse Rule states that the
intent of the Partnership Provisions is to permit taxpayers to conduct business
for joint economic profit through a flexible arrangement that accurately
reflects the partners' economic agreement without incurring an entity level tax.
The proposed regulation goes on to provide that the Partnership Provisions are
not intended to permit taxpayers (i) to structure transactions using a
partnership to achieve tax results that are inconsistent with the underlying
economic arrangements of the parties or the substance of the transactions or
(ii) to use the existence of a partnership to avoid the purposes of other
provisions of the Code. The purposes for structuring a transaction involving a
partnership are determined based on all of the facts and circumstances. The
Anti-Abuse Rule is proposed to be effective for transactions relating to a
partnership occurring on or after May 12, 1994.
The Anti-Abuse Rule has been severely criticized and may be significantly
modified prior to publication as a final regulation. In addition, officials at
the IRS and the Treasury Department have stated publicly that the Anti-Abuse
Rule is not intended to apply to the situation where a REIT is a partner in a
partnership.
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Sidley & Austin is of the opinion that the Reorganization is not inconsistent
with the Partnership Provisions and that the Anti-Abuse Rule, even if adopted in
its present form, should not apply to either the Realty Partnership or the
Operating Partnership. Nevertheless, because the Anti-Abuse Rule is potentially
extremely broad in application and no definitive guidance has been issued, it is
possible that the IRS could attempt to apply the Anti-Abuse Rule to the
Reorganization.
FEDERAL INCOME TAX ASPECTS OF THE PARTNERSHIPS
GENERAL
After the Reorganization, substantially all of the Trust's assets will be
held through the Realty Partnership and, once Gaming Approval is received,
substantially all of the Corporation's (and its subsidiaries') assets will be
held through the Operating Partnership. In general, partnerships are
"pass-through" entities that are not subject to federal income tax. Rather,
partners are allocated their proportionate shares of the items of income, gain,
loss, deduction and credit of a partnership, and are subject to tax thereon,
without regard to whether the partners receive a distribution from the
partnership. The Trust will include in its income its allocable share of the
foregoing partnership items for purposes of the various REIT income tests and in
the computation of its REIT taxable income. Moreover, for purposes of the REIT
asset tests, the Trust will include its proportionate share of assets held by
the Realty Partnership.
ENTITY CLASSIFICATION
The Trust's interest in the Realty Partnership and the Corporation's (and
its subsidiaries') interest in the Operating Partnership involve special tax
considerations, including the possibility of a challenge by the IRS of the
status of either Partnership as a partnership (as opposed to an association
taxable as a corporation) for federal income tax purposes. If a Partnership were
to be treated as an association, it would be taxable as a corporation and,
therefore, subject to an entity level tax on its income. Such an entity level
tax would substantially reduce the amount of cash available for distribution to
holders of Paired Shares. In addition, if the Realty Partnership were to be
taxable as a corporation, the character of the Trust's assets and items of gross
income would change and preclude the Trust from satisfying the asset tests and
possibly the income tests under the Code, and in turn would prevent the Trust
from qualifying as a REIT. Furthermore, any change in the status of the Realty
Partnership or the Operating Partnership for tax purposes might be treated as a
taxable event in which case the Trust or the Corporation might incur a tax
liability without any related cash distributions.
An organization formed as a partnership will be treated as a partnership
for federal income tax purposes rather than as a corporation only if it has no
more than two of the four corporate characteristics that the applicable Treasury
Regulations use to distinguish a partnership from a corporation for federal
income tax purposes. Neither Partnership has requested or intends to request, a
ruling from the IRS that it will be treated as a partnership for federal income
tax purposes. Instead, Sidley & Austin will deliver its opinion that, based on
the provisions of the Partnership Agreements, and certain factual assumptions
and representations described in the opinion, both the Realty Partnership and
the Operating Partnership will be classified as partnerships for federal income
tax purposes. Unlike a private letter ruling, an opinion of counsel is not
binding on the IRS, and no assurance can be given that the IRS will not
challenge the status of either Partnership as a partnership for federal income
tax purposes. If such a challenge were sustained by a court, the subject
Partnership could be treated as an association taxable as a corporation for
federal income tax purposes. In addition, the opinion of Sidley & Austin is
based on existing law, which is to a great extent the result of administrative
and judicial interpretation. No assurance can be given that administrative or
judicial changes would not modify the conclusions expressed in the opinion.
PARTNERSHIP ALLOCATIONS
Although a partnership agreement will generally determine the allocation of
income and losses among partners, such allocations will be disregarded for tax
purposes if they do not comply with the provisions of
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Section 704(b) of the Code and the Treasury Regulations promulgated thereunder.
Generally, Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder require that partnership allocations must respect the economic
arrangement of the partners.
If an allocation is not recognized for federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. The Partnerships' allocations of
taxable income and loss are intended to comply with the requirements of Section
704(b) of the Code and the Treasury Regulations promulgated thereunder.
TAX ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTIES
Pursuant to Section 704(c) of the Code, income, gain, loss and deduction
attributable to appreciated or depreciated property that is contributed to a
partnership in exchange for an interest in the partnership, must be allocated in
a manner such that the contributing partner is charged with, or benefits from,
respectively, the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain or
unrealized loss is generally equal to the difference between the fair market
value of the contributed property at the time of contribution and the adjusted
tax basis of such property at the time of contribution (a "Book-Tax
Difference"). Such allocations are solely for federal income tax purposes and do
not affect the book capital accounts or other economic or legal arrangements
among the partners. The Realty Partnership will be formed by way of
contributions of the Trust's property and certain property held by Starwood. The
Operating Partnership will be formed by way of contributions of the
Corporation's (and its subsidiaries') property and cash and assets from
Starwood. Consequently, the Partnership Agreements require such allocations with
respect to such contributed property to be made in a manner consistent with
Section 704(c) of the Code.
In general, the partners of the Partnerships will be allocated depreciation
deductions for tax purposes that are different than such deductions would be if
determined on a pro rata basis. The effect of such allocations likely will be to
reduce the depreciation deductions allowed to the Trust as compared with the
depreciation allowed if the Reorganization did not take place. However, the
Trust still will not have a liability for federal income tax on its net income
provided it qualifies as a REIT and distributes an amount equal to its net
income as discussed above. In addition, in the event of the disposition of any
of the contributed assets that have a Book-Tax Difference, all income
attributable to such Book-Tax Difference will generally be allocated to the
contributing partner, and other partners will generally be allocated only their
share of capital gains attributable to appreciation, if any, occurring after the
creation of the Partnerships. The foregoing allocations will tend to eliminate
the Book-Tax Difference over the life of the Partnerships. However, the special
allocation rules of Section 704(c) of the Code do not always entirely eliminate
the Book-Tax Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. Thus, the carryover basis of the contributed assets
in the hands of the Partnerships may cause the Trust or the Corporation, as the
case may be, to be allocated lower depreciation and other deductions, and
possibly an amount of taxable income in the event of a sale of such contributed
assets in excess of the economic or book income allocated to it as a result of
such sale. This may cause the Trust or the Corporation to recognize taxable
income in excess of cash proceeds, which, in the case of the Trust, might
adversely affect the Trust's ability to comply with the REIT distribution
requirements. See "-- Federal Income Taxation of the Trust -- Annual
Distribution Requirements". The foregoing principles also apply in determining
the earnings and profits of the Trust and the Corporation for purposes of
determining the portion of distributions taxable as dividend income. The
application of these rules over time may result in a higher portion of
distributions being taxed as dividends than would have occurred had the Trust
and the Corporation purchased the contributed assets at their agreed values.
The Treasury Regulations under Section 704(c) of the Code allow
partnerships to use any reasonable method of accounting for Book-Tax Differences
so that the contributing partner receives the tax benefits and burdens of any
built-in gain or loss associated with the contributed property. The Partnerships
have determined to use the "traditional method" (which is specifically approved
in the Treasury Regulations) for accounting for Book-Tax Differences with
respect to the properties initially contributed to the Partnerships.
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The Partnerships have not determined which of the alternative methods of
accounting for Book-Tax Differences will be elected with respect to any
properties contributed to the Partnerships in the future.
SALE OF THE PARTNERSHIPS' PROPERTY
Generally, any gain realized by a partnership on the sale of property held
by it for more than one year will be long-term capital gain, except for any
portion of such gain that is treated as depreciation recapture. However, the
Trust's share of any gain realized by the Realty Partnership on the sale of any
property held by the Realty Partnership as inventory or other property held
primarily for sale to customers in the ordinary course of the Realty
Partnership's trade or business will be treated as income from a prohibited
transaction that is subject to a 100% penalty tax. See "-- Federal Income Tax
Consequences of the Trust -- Requirements for Qualification -- Income Tests".
Such prohibited transaction income may also have an adverse effect upon the
Trust's ability to satisfy the income tests for qualification as a REIT. Under
existing law, whether property is held as inventory or primarily for sale to
customers in the ordinary course of a partnership's trade or business is a
question of fact that depends on all the facts and circumstances with respect to
the particular transaction. The Realty Partnership intends to hold its
properties for investment with a view to long-term appreciation, to engage in
the business of acquiring, developing, owning, and operating the properties (and
other hotel properties) and to make such occasional sales of its properties,
including peripheral land, as are consistent with the Realty Partnership's
investment objectives.
FEDERAL INCOME TAX CONSEQUENCES OF THE RESTRUCTURING OF THE INTERCOMPANY DEBT
As part of the Reorganization, approximately $63 million of the
indebtedness of the Corporation to the Trust will be cancelled. This
cancellation should result in a loss to the Trust and cancellation of
indebtedness income to the Corporation and its subsidiaries. Because the
Corporation and its subsidiaries are insolvent for federal income tax purposes
and have substantial net operating loss carryforwards, the cancellation of
indebtedness income is not expected to result in the Corporation's consolidated
group owing a material amount of federal income tax. However, the cancellation
of indebtedness income will cause a substantial reduction in the Corporation's
consolidated groups' net operating loss carryforwards and possibly other tax
attributes. Because the Trust expects to re-elect REIT status for 1995, the
Trust is not expected to be able to effectively utilize the loss carryforwards
resulting from this transaction.
FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF PAIRED SHARES
The Reorganization will not result in the recognition of gain or loss to
the holders of Paired Shares. Holders of Trust Shares should be treated as
holding shares of a REIT commencing with the taxable year ending December 31,
1995.
The Reverse Split will not result in gain or loss to the holders of Paired
Shares, except for any cash that is received in lieu of a fractional Paired
Share. A holder of Paired Shares who receives cash in lieu of a fractional
Paired Share will recognize taxable gain or loss in an amount equal to the
difference between the amount of cash received and the portion of the adjusted
tax basis of the Paired Shares allocable to such fractional Paired Share. Such
gain or loss will be capital gain or loss, provided that the Paired Shares were
held as capital assets at the time of the Reverse Split and will be long-term
capital gain or loss if the Paired Shares were held for more than one year at
the time of the Reverse Split.
OTHER TAX CONSEQUENCES
The Trust, the Corporation and the holders of Paired Shares may be subject
to state or local taxation in various jurisdictions, including those in which it
or they transact business or reside. The state and local tax treatment of the
Trust, the Corporation and the holders of Paired Shares may not conform to the
federal income tax consequences discussed above. CONSEQUENTLY, HOLDERS OF PAIRED
SHARES SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE EFFECT OF STATE AND
LOCAL TAX LAWS ON THE REORGANIZATION AND THE REVERSE SPLIT.
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ADOPTION OF AMENDMENTS TO TRUST DECLARATION
AND RESTATED ARTICLES OF INCORPORATION
On November 10, 1994, the Board of Trustees of the Trust adopted the
amendments to the Amended and Restated Declaration of Trust of the Trust
attached to this Joint Proxy Statement as Exhibit A (the "Trust Amendments") and
directed that the Trust Amendments be submitted for consideration at the Trust
Meeting. On November 10, 1994, the Board of Directors of the Corporation adopted
the amended and restated Articles of Incorporation of the Corporation attached
to this Joint Proxy Statement as Exhibit B (the "Restated Articles") and
directed that the Restated Articles be submitted for consideration at the
Corporation Meeting. The Restated Articles contain and combine the provisions of
the Articles of Incorporation currently in effect and also reflect the
amendments summarized herein.
The following is a summary of the amendments effected by the Trust
Amendments and the Restated Articles. Such summary is qualified in its entirety
by the full text of the Trust Amendments and the Restated Articles.
CHANGE OF NAMES
The Trust Amendments change the name of the Trust to "Starwood Lodging
Trust" and the Restated Articles change the name of the Corporation to "Starwood
Lodging Corporation". Each of the respective Boards of the Trust and the
Corporation believes that the name changes will more accurately reflect the
affiliation of the Trust and the Corporation with Starwood, particularly because
Starwood will own a 71.7% limited partner interest in each of the Realty
Partnership and the Operating Partnership and, subject to the REIT Ownership
Limitation, will have the right to exchange those limited partnership interests
for Paired Shares representing approximately 71.7% of the issued and outstanding
Paired Shares after the Reorganization. See "The Reorganization" and "The
Partnerships".
CLASSIFIED BOARDS; REMOVAL
The Trust Amendments and the Restated Articles each provide for the
respective Boards of the Trust and the Corporation to be divided into three
classes serving staggered terms so that the initial terms will expire either at
the 1995, 1996 or 1997 annual shareholder meetings of the Trust and the
Corporation. Starting with the 1995 annual meeting, one class will be elected
each year for three-year terms. See "Election of Trustees of the Trust" and
"Election of Directors of the Corporation" for a description of the classes of
the Trust and the Corporation and the nominees to each class to be elected at
the Special Meetings.
The classified board provisions will have the effect of making it more
difficult for shareholders to change the composition of the Board of Trustees of
the Trust and the Board of Directors of the Corporation in a relatively short
period of time. At least two annual meetings of shareholders, instead of one,
generally will be required to effect a change in a majority of the Boards. Such
a delay may help ensure that the Boards of the Trust and the Corporation and the
shareholders, if confronted by a holder attempting to force an extraordinary
transaction, such as a stock repurchase at a premium above market prices or a
proxy contest, will have sufficient time to review the proposal and appropriate
alternatives to the proposal and to act in what they believe are the best
interests of their respective shareholders.
The classified board provisions could have the effect of discouraging a
third party from attempting to gain control of the Trust and the Corporation,
even though such an attempt might appear to be beneficial to the Trust and the
Corporation and holders of Paired Shares. The classified board provisions could
thus increase the likelihood that incumbent trustees and directors will retain
their positions. In addition, because the classified board provisions are
designed to discourage accumulations of large blocks of stock by purchasers
whose objective is to have such stock repurchased at a premium, the classified
board provisions could tend to reduce temporary fluctuations in the market price
that could be caused by accumulations of large blocks of Paired Shares.
The Trust and the Corporation believe that the classified board provisions
will help to assure the continuity and stability of the Board of Trustees and
the Board of Directors, respectively, and their respective
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business strategies and policies because generally a majority of trustees and
directors at any given time will have had prior experience as such. The Trust
and the Corporation each believes that continuity and stability are particularly
important in light of the changes effected by the Reorganization. The classified
board provisions also will help assure that the Board of Trustees of the Trust
and the Board of Directors of the Corporation, if confronted with an unsolicited
proposal from a third party that has acquired a block of the Paired Shares, will
have sufficient time to review the proposal and appropriate alternatives and to
seek the best available result for their respective shareholders.
The Restated Articles provide that directors may be removed only for cause
upon the affirmative vote of two-thirds of all votes entitled to be cast for
election. Currently, directors may be removed with or without cause by such
two-thirds vote. Pursuant to Maryland law, Trustees of the Trust will continue
to be subject to removal by a two-thirds vote of shareholders, with or without
cause. Any director or trustee elected by the stockholders to a vacant
trusteeship or directorship will hold office for a term expiring at the annual
meeting at which the term of office of the class to which they have been
appointed expires. These provisions will preclude stockholders of the
Corporation from removing incumbent directors without cause. Maryland law grants
stockholders of a Maryland corporation the right, together with the Board of
Directors of the Corporation, to fill a vacancy which results from the removal
of a director. In the case of the Trust, however, shareholders may not fill
vacancies created by such removal.
CHANGES IN AUTHORIZED SHARES
Current Provisions. The Trust Declaration of the Trust currently
authorizes the Trust to issue 30,000,000 shares of beneficial interests in the
Trust. The Trust Declaration specifically designates Trust Shares, with a par
value of $1.00 per share, and grants to the Trustees the power to create and
authorize the issuance of shares of beneficial interest in one or more other
classes or series ("Trust Preferred Shares"), with or without par value, having
such voting rights, such rights to dividends and distributions and rights in
liquidation, such conversion, exchange and redemption rights, and such
designations, preferences and participations and other limitations or
restrictions as are not prohibited by the Trust Declaration or applicable law
and as are specified by the Trustees in their discretion. No such class or
series of Trust Preferred Shares has been established.
The Articles of Incorporation of the Corporation currently provide for
authorized capital stock of the Corporation of 40,000,000 shares, consisting of
10,000,000 shares of preferred stock, par value $1.00 per share, and 30,000,000
Corporation Shares, with a par value of $0.10 per share. The preferred stock is
issuable in classes or series with such rights, preferences, privileges and
restrictions as the Board of Directors of the Corporation may determine,
including voting rights, redemption provisions, dividend rates, liquidation
preferences and conversion rights. No such class or series of preferred stock
has been established.
Amendments. The Trust Amendments and the Restated Articles effect three
types of amendments to the authorized capital stock of the Trust and the
Corporation, respectively: (i) an increase of the number of authorized shares,
(ii) a change in the designated classes of stock to $.01 par value and (iii)
creation of additional classes of stock to effect the provisions described under
"-- REIT Ownership Limitations".
Specifically, the Trust Amendments provide that the Trust may issue 135
million shares of beneficial interests in the Trust, including (i) 100 million
Trust Shares, with a par value of $.01 per share, (ii) 20 million Excess Trust
Shares, with a par value of $.01 per share ("Excess Common Trust Shares") and
(iii) 5 million Excess Preferred Shares, with a par value of $.01 per share
("Excess Preferred Trust Shares" and, together with the Excess Common Trust
Shares, the "Excess Trust Shares"). The Trustees would continue to have the
power to create or authorize Trust Preferred Shares, as described above.
The Restated Articles provide that the authorized capital stock of the
Corporation consists of 135 million shares, consisting of (i) 10 million shares
of preferred stock, with a par value of $.01 per share ("Corporation Preferred
Stock"), (ii) 100 million shares of common stock, with a par value of $.01 per
share ("Corporation Common Stock"), (iii) 20 million shares of Excess Common
Stock, with a par value of $.01 per share ("Excess Corporation Common Stock"),
and (iv) 5 million shares of Excess Preferred Stock, with a par value of $.01
per share ("Excess Corporation Preferred Stock" and, together with the Excess
Corporation Common
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<PAGE> 80
Stock, the "Excess Corporation Stock"). The Board of Directors would continue to
have the power to create and authorize Corporation Preferred Stock, as described
above.
Increase in Authorized Shares. In connection with the Reorganization, the
Trust and the Corporation will reserve for issuance upon exchange of Units
issued to Starwood 4,396,884 Paired Shares. See "The Partnerships". If the
Offering is consummated, the Trust and the Corporation will issue additional
Paired Shares pursuant thereto. See "The Reorganization -- the Offering". In
order to complete these transactions and to provide for the possible future
issuance, without further action by the holders of Trust Shares or Corporation
Shares, of additional Paired Shares in connection with future financings, stock
dividends or distributions, employee stock plans and other issuances, as
described above, the Trust Amendments increase the authorized number of shares
of beneficial interest in the Trust and the Restated Articles increase the
authorized Corporation Shares, in each case to 100 million.
Holders of Trust Shares and Corporation Shares do not have preemptive
rights with respect to the issuance of additional shares. Accordingly, any
issuance of authorized but unissued shares could have the effect of diluting the
earnings per share and book value per share of currently outstanding shares.
Neither the Trust nor the Corporation currently has plans to issue any shares
following the Reorganization, other than upon exchange of Units, upon exercise
of employee, trustee or director stock options and pursuant to the Offering.
Changes in Par Value. The Trust Amendments and the Restated Articles
change the par value of the Trust Shares, the Corporation Shares and the
preferred stock of the Corporation so that each such class will have a par value
of $.01 per share. The change to $.01 par value will have no practical effect on
holders of Paired Shares.
Authorization of Excess Stock. As described above, the Trust Amendments
and the Restated Articles create additional classes of Excess Trust Shares and
Excess Corporation Stock. The purposes and terms of such additional classes of
stock are described under "-- REIT Ownership Limitations".
REIT OWNERSHIP LIMITATIONS
The current Declaration of Trust of the Trust and the current Articles of
Incorporation of the Corporation provide that if the Board of Trustees or the
Board of Directors, respectively, shall at any time and in good faith be of the
opinion that direct or constructive ownership of shares of the Trust or of the
Corporation has or may become concentrated to an extent which would cause the
Trust to fail to qualify or to be disqualified to be taxed as a REIT under the
Code, or would cause any rent paid to the Trust to fail to qualify or to be
disqualified as "rent from real properties," as defined by the Code, the Board
of Trustees shall have the power to call for purchase from any shareholder of
the Trust, and the Board of Directors shall have the power to call for purchase
from any stockholder of the Corporation, such number of shares as is sufficient
in the opinion of the Trustees or the Directors to maintain or bring the direct
or indirect ownership of shares into conformity with the Code, and to refuse to
register any proposed transfer of shares which would result in the Trust's being
unable to conform to the requirements of the Code. Thus, the Trust and the
Corporation have the power to repurchase shares from any shareholder of the
Trust or stockholder of the Corporation who actually or constructively owns 10%
or more of the outstanding Paired Shares and to refuse to register any transfer
of shares which would result in a holder actually or constructively owning 10%
or more of the outstanding Paired Shares.
Because it is advantageous for the Trust to be eligible to qualify to be
taxed as a REIT for 1995 and future years, the Trust Amendments and the Restated
Articles update and replace the provisions described in the preceding paragraph
by adding new provisions (the "Ownership Limit Provisions") to the Trust
Declaration and the Restated Articles which the Board of Trustees and the Board
of Directors believe will more effectively restrict the acquisition of shares of
capital stock of the Trust and the Corporation to prevent the Trust's failing to
qualify to be taxed as a REIT under the Code.
The Ownership Limit Provisions provide that, subject to certain exceptions
specified in the Trust Declaration and the Restated Articles, no shareholder may
own, or be deemed to own by virtue of the
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<PAGE> 81
attribution provisions of the Code, more than 8.0% of capital stock, whether
measured by vote, value or number of Paired Shares (other than for existing
shareholders as of the date of the Trust Declaration and the Restated Articles,
who may not so own or be deemed to own more than the greater of 8.0% and the
number of Paired Shares owned on the Closing Date) of the outstanding Paired
Shares, Corporation Preferred Stock or Trust Preferred Stock (collectively,
"Preferred Stock") which may be issued or any combination thereof. The Board of
Trustees and the Board of Directors may waive the Ownership Limit Provisions if
evidence satisfactory to the Board of Trustees and the Board of Directors and
the tax counsel to the Companies is presented that such ownership will not
jeopardize the Trust's status as a REIT for 1995 and future years. As a
condition of such waiver, each of the Board of Trustees and the Board of
Directors may require opinions of counsel satisfactory to it and/or an
undertaking from the applicant with respect to preserving the REIT status of the
Trust. If shares which would cause the Trust to be beneficially owned by fewer
than 100 persons are issued or transferred to any person, such issuance or
transfer shall be null and void and the intended transferee will acquire no
rights to the stock. Any acquisition of capital stock of the Trust or the
Corporation and continued holding or ownership of capital stock of the Trust or
the Corporation constitutes, under the Trust Amendments and the Restated
Articles, a continuous representation of compliance with the Ownership Limit
Provisions.
In the event of a purported transfer or other event that would, if
effective, result in the ownership of Paired Shares or shares of Preferred Stock
in violation of the Ownership Limit Provisions, such transfer with respect to
that number of shares that would be owned by the transferee in excess of the
Ownership Limit Provisions would be deemed void ab initio and such Paired Shares
or shares of Preferred Stock would automatically be exchanged for Excess Shares
or Excess Preferred Stock, respectively (collectively, "Excess Stock"),
authorized by the Trust Declaration and the Restated Articles, according to
rules set forth in the Trust Declaration and the Restated Articles, to the
extent necessary to ensure that the purported transfer or other event does not
result in ownership of Paired Shares or shares of Preferred Stock or Excess
Stock in violation of the Ownership Limit Provisions. Any purported transferee
or other purported holder of Excess Stock is required to give written notice to
the Trust and the Corporation of a purported transfer or other event that would
result in the issuance of Excess Stock.
Any Excess Trust Shares and Excess Corporation Stock which may be issued
will be "paired" in the same manner that the Trust Shares and the Corporation
Shares are currently paired. Excess Stock is not treasury stock but rather
continues as issued and outstanding capital stock of the Trust and the
Corporation. While outstanding, Excess Stock will be held in trust. The trustees
of such trusts shall be appointed by the Trust and the Corporation and shall be
independent of the Trust, the Corporation and the holder of Excess Stock. The
beneficiary of such trusts shall be one or more charitable organizations
selected by the trustee. If, after the purported transfer or other event
resulting in an exchange of Paired Shares or shares of Preferred Stock for
Excess Stock and prior to the discovery by the Trust and the Corporation of such
exchange, dividends or distributions are paid with respect to the Paired Shares
or shares of Preferred Stock that were exchanged for Excess Stock, then such
dividends or distributions are to be repaid to the trustee upon demand for
payment to the charitable beneficiary. While Excess Stock is held in trust, an
interest in that trust may be transferred by the trustee only to a person whose
ownership of Paired Shares or shares of Preferred Stock will not violate the
Ownership Limit Provisions, at which time the Excess Stock will be automatically
exchanged for the same number of Paired Shares or shares of Preferred Stock of
the same type and class as the Paired Shares or shares of Preferred Stock for
which the Excess Stock was originally exchanged. The Trust Declaration and the
Restated Articles contain provisions that are designed to ensure that the
purported transferee or other purported holder of the Excess Stock may not
receive in return for such a transfer an amount that reflects any appreciation
in the Paired Shares or shares of Preferred Stock for which such Excess Stock
was exchanged during the period that such Excess Stock was outstanding. Any
amount received by a purported transferee or other purported holder in excess of
the amount permitted to be received must be turned over to the charitable
beneficiary of the Trust. If the foregoing restrictions are determined to be
void or invalid by virtue of any legal decision, statute, rule or regulation,
then the intended transferee or holder of any Excess Stock may be deemed, at the
option of the Trust and the Corporation, to have acted as an agent on behalf of
the Trust and the Corporation in acquiring or holding such Excess Stock and to
hold such Excess Stock on behalf of the Trust and the Corporation.
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<PAGE> 82
The Trust Declaration and the Restated Articles further provide that the
Trust and the Corporation may purchase, for a period of 90 days during the time
the Excess Stock is held in trust, all or any portion of the Excess Stock from
the original transferee-shareholder at the lesser of the price paid for the
Paired Shares or shares of Preferred Stock by the purported transferee (or if no
notice of such purchase price is given, at a price to be determined by the Board
of Trustees and the Board of Directors, in their sole discretion, but no lower
than the lowest market price of such stock (based on the market price of the
Paired Shares or shares of Preferred Stock) at any time during the period in
which the Excess Stock is held in trust) and the closing market price for the
Paired Shares or shares of Preferred Stock on the date the Trust and the
Corporation exercise their option to purchase. The 90-day period begins on the
date of the violative transfer if the original transferee-shareholder gives
notice to the Trust and the Corporation of the transfer or (if no notice is
given) the date the Board of Trustees and the Board of Directors determine that
a violative transfer has been made.
The Ownership Limit Provisions will not be removed automatically even if
the REIT provisions of the Code are changed so as to no longer contain any
ownership concentration limitation or if the ownership concentration limitation
is increased. Except as otherwise described above, any change in the REIT
Ownership Limitation would require an amendment to the Trust Declaration and the
Articles of Incorporation. Amendments to the Ownership Limit Provisions will
require the affirmative vote of holders owning two-thirds of the outstanding
Trust Shares and Corporation Shares, respectively. Amendments to the Trust
Declaration and to the Articles of Incorporation generally require the
affirmative vote of holders owning a majority of the outstanding Trust Shares
and Corporation Shares, respectively. In addition to preserving the Trust's
status as a REIT, the REIT Ownership Limitation may have the effect of
precluding an acquisition of control of the Trust and the Corporation without
the approval of the Board of Trustees and the Board of Directors.
All persons who own, directly or by virtue of the attribution provisions of
the Code, 5% or more (or such other percentage as may be required by the Code or
regulations promulgated thereunder) of the outstanding Paired Shares, Preferred
Stock or Excess Stock must file an affidavit with the Trust and the Corporation
containing the information specified in the Trust Amendment and the Restated
Articles before January 30 of each year. In addition, each shareholder shall
upon demand be required to disclose to the Trust and the Corporation in writing
such information with respect to the direct, indirect and constructive ownership
of shares as the Board of Trustees or the Board of Directors deems necessary to
comply with the provisions of the Trust Amendment and the Restated Articles or
the Code applicable to a REIT or to comply with the requirements of any taxing
authority or governmental agency.
If the Reorganization is consummated, certificates representing shares of
any class of stock issued after the Closing Date will bear a legend referring to
the restrictions described above.
ELIMINATION OF CUMULATIVE VOTING
The holders of Trust Shares and Corporation Shares are presently permitted
to cumulate their votes in the election of trustees of the Trust and directors
of the Corporation, respectively. Pursuant to the cumulative voting provisions,
each holder is entitled to cast, for every share held, a number of votes equal
to the number of directors to be elected. Each such holder may cast such whole
number of votes for one nominee, or distribute such whole number of votes among
two or more nominees in any manner. See "Election of Trustees of the Trust" and
"Election of Directors of the Corporation". The Trust Amendments and the
Restated Articles each eliminate the cumulative voting provisions.
One of the principal effects of cumulative voting is to make it more likely
that an individual or group of individuals who own less than a plurality of the
voting stock would be able to obtain representation on a board of trustees or a
board of directors. Such an individual or group may have interests and goals
which are not consistent with and might be in conflict with those of a majority
of shareholders. The Board of Trustees of the Trust and the Board of Directors
of the Corporation each believe that each Trustee and Director should represent
the interests of all shareholders, rather than the interests of any special
constituency, and that the presence on the Board of one or more directors
representing such a constituency could disrupt and impair the efficient
management of the Trust and the Corporation.
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<PAGE> 83
The elimination of cumulative voting could discourage accumulations of
large blocks of stock and therefore could tend to reduce temporary fluctuations
in the market price that could be caused by accumulations of large blocks of
Paired Shares.
ELIMINATION OF LIMITATIONS ON BORROWINGS AND INVESTMENTS
The Trust Declaration currently provides, among other things, that (i) the
Trustees of the Trust shall not incur borrowings in a principal amount in excess
of 300% of the net assets of the Trust, (ii) the Trust shall not make any
investments in real property or obligations secured by liens on real property in
an amount (after deducting the principal amount of any participations in such
investment disposed of by the Trust to other investors) exceeding 40% of the sum
of the Trust's net worth and indebtedness which is subordinated to other
indebtedness of the Trust, (iii) the Trust shall not invest more than 10% of the
total assets of the Trust in the ownership of, or participations in the
ownership of, or in first mortgage loans on, unimproved non-income producing
real property, (iv) the Trust shall not invest in commodities, foreign
currencies, bullion or chattels (except as required in the day-to-day business
of the Trust or in connection with its investments), real estate contracts for
sale in excess of a value of 1% of the total assets of the Trust (not including
holding contracts of sale as security for loans made by the Trust and the
ownership of such contracts of sale upon foreclosure of, or realization upon,
such security interests), (v) the Trust shall not engage in any short sale,
issue "redeemable securities" (as defined in the Investment Company Act of 1940)
or hold securities in any real estate investment trust which, to the actual
knowledge of the Trustees, is then holding investments or engaging in activities
prohibited to the Trustees, (vi) the Trust shall not engage in trading
activities (as compared with investment activities) or engage in the business of
underwriting or agency distribution of securities issued by others (other than
selling participations in mortgage loans or interests in real property) and
(vii) the Trust is permitted to invest the Trust estate exclusively in
securities of national hotel companies and that other types of investments may
be made in the accommodations field if, in the opinion of the Trustees, such
investments are more advantageous than available investments in the
accommodations field.
The Trust Amendments eliminate the restrictions described in the preceding
paragraph. The Board of Trustees of the Trust believe that the elimination of
those restrictions will provide the Trustees with the greater flexibility in
managing the Trust and permit the Trust to make a greater variety of investments
allowed for a REIT.
EFFECTIVENESS OF AMENDMENTS
If approved, the Trust Amendments and the Restated Articles are expected to
be effected upon the consummation of the Reorganization, except that the
increase in the authorized Trust Shares and the authorized Corporation Shares
described above under "-- Changes in Authorized Shares -- Increase in Authorized
Shares" will be effected immediately after the effectiveness of the Reverse
Split, which will occur after the consummation of the Reorganization.
ELECTION OF TRUSTEES OF THE TRUST
At the Trust Meeting, shareholders of the Trust will vote on the election
of a new Board of Trustees consisting of five Trustees. Three of the nominees to
the Board of Trustees named herein have been designated by Starwood pursuant to
the terms of the Formation Agreement. If the Reorganization Proposal is approved
at the Special Meetings, each Trustee so elected will hold office commencing
thereafter (regardless of whether the Reorganization is consummated) and until
such Trustee's successor is elected and has qualified.
As described above, the Reorganization Proposal includes the adoption of
the Trust Amendments, which would create a "classified" Board of Trustees. The
nominees named below have been nominated to serve for the terms designated
below, assuming that the Reorganization Proposal is adopted.
In addition, if the Offering is consummated, the Board of Trustees intends
to increase the size of the Board by two and to fill the vacancies created
thereby with independent Trustees not affiliated with the Trust, the
Corporation, the Partnerships or Starwood.
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<PAGE> 84
NOMINEES FOR TRUSTEE
The following table sets forth, for each nominee for Trustee, the class of
Trustees to which such nominee is nominated, the name and age of such nominee,
the principal occupation or employment of such nominee during the past five
years and the principal business of such nominee's employer, other directorships
held by such nominee and the year in which such nominee first became a Trustee
of the Trust.
NOMINEES FOR TRUSTEES WHOSE
TERMS EXPIRE IN 1995
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND AGE AND BUSINESS EXPERIENCE
- --------------------------------- -------------------------------------------------------------
<S> <C>
Madison F. Grose (41)............ Executive Vice President and General Counsel of Starwood (and
its predecessor entity) since July 1992. From November 1983
through June 1992, Partner of the law firm of Pircher,
Nichols & Meeks.
Earle F. Jones (68).............. Director since 1985 and Chairman of the Board of Directors of
the Corporation since February 1989. Co-chairman since 1988
of MMI Hotel Group, a hotel company. President from 1967 to
1968 of the International Association of Holiday Inns and
served two terms as a director. Trustee and Chairman of
Communications Improvement Trust, whose beneficiaries are
public broadcasting and Tougaloo College, member of the Board
of Trustees for Millsaps College and the Catholic Foundation
and Co-Chairman of the Mississippi Olympic Committee.
</TABLE>
NOMINEES FOR TRUSTEES WHOSE
TERMS EXPIRE IN 1996
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND AGE AND BUSINESS EXPERIENCE
- -------------------------------- --------------------------------------------------------------
<S> <C>
Jeffrey C. Lapin (38)........... President and Chief Executive Officer of the Trust since May
1991 and Trustee since September 1992. Prior to that time,
Vice President (from January 1988) and Secretary (from
September 1986) of the Trust. Prior to 1986 Mr. Lapin was a
real estate attorney at Mitchell, Silberberg & Knupp in Los
Angeles. Mr. Lapin has over ten years of experience in the
hotel REIT industry.
Jonathan Eilian (26)............ Senior Vice President of Starwood, specializing in hotel
acquisitions and multiple asset pool bids, since October 1991.
Acquisitions associate for JMB Realty Corporation, a real
estate investment firm, and the Palmer Group, L.P., a firm
specializing in the acquisition of small businesses. In 1991,
received an MBA from the Wharton Graduate School of Business,
which he attended since 1989.
</TABLE>
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<PAGE> 85
NOMINEE FOR TRUSTEE WHOSE
TERM EXPIRES IN 1997
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND AGE AND BUSINESS EXPERIENCE
- --------------------------------- -------------------------------------------------------------
<S> <C>
Barry S. Sternlicht (34)......... President and CEO of Starwood (and its predecessor entity)
since September 1991. Prior to that time, Vice President and
then Senior Vice President (from 1989 to 1991) of JMB Realty
Corporation, a real estate investment firm. Currently, a
Trustee of each of Equity Residential Properties Trust, a
multi-family REIT, and Angeles Participating Mortgage Trust,
a REIT.
</TABLE>
The Board of Trustees of the Trust recommends that shareholders of the
Trust vote FOR the election of such nominees.
VOTES REQUIRED AND CUMULATIVE VOTING
Pursuant to the Declaration of Trust of the Trust, each shareholder of the
Trust (or such shareholder's proxy) entitled to vote upon the election of
Trustees shall be entitled to cast, for every Trust Share held of record on the
Trust Record Date, a number of votes equal to the number of Trustees to be
elected. Each such shareholder (or such shareholder's proxy) may cast such whole
number of votes for one nominee, or distribute such whole number of votes among
two or more nominees in any manner. The five nominees receiving the highest
number of votes will be elected. Accordingly, shares which are voted to abstain
from voting on the election of Trustees and shares which are not voted with
respect to the election of Trustees (including broker non-votes) will not affect
the outcome of the election of Trustees of the Trust.
In the absence of instructions to the contrary, proxies solicited by the
Board of Trustees will be voted in favor of each of the nominees named above as
nominees for Trustee or, in the discretion of the persons named as proxies,
cumulative voting rights will be exercised to elect as many of such nominees as
possible. In the event that any of the nominees, each of whom has expressed an
intention to serve if elected, fails to stand for election, the persons named as
proxies in the accompanying proxy may vote for a substitute nominee in their
discretion.
BOARD COMMITTEES
The Board of Trustees has established Executive, Audit, Compensation and
Nominating Committees, the principal functions of which are described below.
Because the Board of Trustees met frequently during 1993, it did not utilize
Board Committees and the functions which would be performed by such Committees
were performed by the entire Board of Trustees.
The Executive Committee is currently comprised of Graeme Henderson and
Sherwin Samuels, each of whom is currently a Trustee. To the extent permitted by
law, the Executive Committee is authorized to exercise the powers of the Board
of Trustees with respect to the management of the business and affairs of the
Trust between meetings of the Board of Trustees.
The Audit Committee is currently comprised of Mr. Henderson. The Audit
Committee has the following powers, duties and functions: (i) to select the firm
of independent public accountants to audit the consolidated financial statements
of the Trust and its subsidiaries, subject to the approval of the Board of
Trustees, (ii) to discuss with such independent public accountants the scope and
results of their audit, (iii) to discuss with such independent public
accountants, and with the management of the Trust, the Trust's financial
accounting and reporting principles, policies and practices and the adequacy of
the Trust's accounting, financial and operating controls and (iv) to report to
the Board of Trustees with respect to the foregoing, at such times and in such
manner as the Board of Trustees shall determine.
The Compensation Committee is currently comprised of Mr. Henderson. The
Compensation Committee has the authority to make recommendations to the Board of
Trustees with respect to the salaries and other
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<PAGE> 86
compensation to be paid to the executive officers of the Trust and to administer
the Trust's employee benefit plans.
The Nominating Committee is currently composed of Mr. Henderson. The
Nominating Committee recommends to the Board nominees for trustees of the Trust.
The Nominating Committee will consider nominees recommended by shareholders of
the Trust. The provisions of the Trust Regulations for nominating individuals
for election as a Trustee are described under "Shareholder Proposals for Next
Annual Meetings."
During 1993, the Board of Trustees of the Trust held 13 meetings and the
other Board Committees did not meet. Each of the Trustees of the Trust attended
at least 75% of the total number of meetings of the Board and of all Board
committees on which such Trustee served.
ELECTION OF DIRECTORS OF THE CORPORATION
At the Corporation Meeting, stockholders of the Corporation will vote on
the election of a new Board of Directors consisting of three directors. Two of
the nominees to the Board of Directors named herein have been designated by
Starwood pursuant to the terms of the Formation Agreement. If the Reorganization
Proposal is approved at the Special Meetings, each Director so elected will hold
office commencing upon the receipt of Gaming Approval which is required for such
Directors to serve on the Board (regardless of whether the Reorganization is
consummated), and until such director's successor is elected and has qualified.
Pending receipt of Gaming Approval, the current Directors of the Corporation
will continue as such and the Operating Partnership will be managed by a
management committee consisting of the nominees for Director named below. While
awaiting Gaming Approval, the Corporation's existing management and Board of
Directors will be responsible for the operation and control of the Gaming
Assets, and the management committee comprised of the members of the new Board
of Directors will be prohibited from any influence or control of the Gaming
Assets.
As described above, the Reorganization Proposal includes the adoption of
the Restated Articles, which would create a "classified" Board of Directors. The
nominees named below have been nominated to serve for the terms designated
below, assuming that the Reorganization Proposal is adopted.
In addition, if the Offering is consummated, the Board of Directors intends
to increase the size of the Board by two and to fill the vacancies created
thereby with independent directors not affiliated with the Corporation, the
Partnership or Starwood.
NOMINEES FOR DIRECTOR
The following table sets forth, for each nominee for Director, the class of
Directors to which such nominee is nominated, the name and age of such nominee,
the principal occupation or employment of such nominee during the past five
years and the principal business of such nominee's employer, other directorships
held by such nominee and the year in which such nominee first became a Director
of the Corporation.
NOMINEE FOR DIRECTOR WHOSE
TERM EXPIRES IN 1995
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND AGE AND BUSINESS EXPERIENCE
- --------------------------------- -------------------------------------------------------------
<S> <C>
Bruce M. Ford (54)............... Director since 1983. President and Managing Partner of F.K.B.
Management Corporation, a restaurant management company,
since January 1988. President of Ford Management Corporation,
a hotel/motel management and development company, since June
1988. Prior to that time, Mr. Ford was Senior Vice President
of Operations of Ramada Inns. Mr. Ford's career reflects 34
years of experience in the hotel industry.
</TABLE>
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<PAGE> 87
NOMINEE FOR DIRECTOR WHOSE
TERM EXPIRES IN 1996
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND AGE AND BUSINESS EXPERIENCE
- --------------------------------- -------------------------------------------------------------
<S> <C>
Steven Robert Goldman (33)....... Vice President of Starwood, specializing in hotel
acquisitions and hotel asset management, since August 1993.
From 1990 to 1993, Senior Development Manager of Disney
Development Company, the real estate investment, development
and management division of the Walt Disney Company. From 1986
to 1990, Director of Development of the Hyatt Development
Corporation.
</TABLE>
NOMINEE FOR DIRECTOR WHOSE
TERM EXPIRES IN 1997
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND AGE AND BUSINESS EXPERIENCE
- --------------------------------- -------------------------------------------------------------
<S> <C>
Barry S. Sternlicht (34)......... President and CEO of Starwood (and its predecessor entity)
since September 1991. Prior to that time, Vice President and
then Senior Vice President (from 1989 to 1991) of JMB Realty
Corporation, a real estate investment firm. Currently, a
Trustee of each of Equity Residential Properties Trust, a
multi-family REIT, and Angeles Participating Mortgage Trust,
a REIT.
</TABLE>
The Board of Directors of the Corporation recommends that stockholders of
the Corporation vote FOR the election of such nominees.
VOTES REQUIRED AND CUMULATIVE VOTING
Pursuant to the Articles of Incorporation of the Corporation, in the
election of Directors of the Corporation, each stockholder of the Corporation
(or such stockholder's proxy) entitled to vote upon the election of Directors is
entitled to cast, for every Corporation Share held of record on the Corporation
Record Date, a number of votes equal to the number of Directors to be elected.
Each such stockholder (or such stockholder's proxy) may cast such whole number
of votes for one nominee, or distribute such whole number of votes among two or
more nominees in any manner. The three nominees receiving the highest number of
votes will be elected. Accordingly, shares which are voted to abstain from
voting on the election of Directors and shares which are not voted with respect
to the election of Directors (including broker non-votes) will not affect the
outcome of the election of Directors of the Corporation.
In the absence of instructions to the contrary, proxies solicited by the
Board of Directors will be voted in favor of the election of each of the
nominees named above as nominees for Director or, in the discretion of the
persons named as proxies, cumulative voting rights will be exercised to elect as
many of such nominees as possible. In the event that any of the nominees, each
of whom has expressed an intention to serve if elected, fails to stand for
election (an event not now anticipated), the persons named as proxies in the
accompanying proxy may vote for a substitute nominee in their discretion.
BOARD COMMITTEES
The Board of Directors has established Executive, Audit, Compensation and
Nominating Committees, the principal functions of which are described below.
Because the Board of Directors met frequently during 1993, the Board did not
utilize Committees and the functions that would have been performed by such
Committees were performed by the entire Board of Directors.
To the extent permitted by law, the Executive Committee is authorized to
exercise the power of the Board of Directors with respect to the management of
the business and affairs of the Corporation between meetings of the Board of
Directors, except that the Executive Committee may not declare dividends or
80
<PAGE> 88
distributions on stock, issue stock, recommend to the stockholders any action
which requires stockholder approval, adopt, amend or repeal By-laws or approve
any merger or share exchange which does not require shareholder approval. The
Board of Directors does not currently have an Executive Committee.
The Audit Committee is currently comprised of Messrs. Ford and Jones. The
Audit Committee has the following powers, duties and functions: (i) to select
the firm of independent public accountants to audit the consolidated financial
statements of the Corporation and its subsidiaries, subject to the approval of
the Board of Directors, (ii) to discuss with such independent accountants the
scope and results of their audit, (iii) to discuss with such independent public
accountants, and with the management of the Corporation, the Corporation's
financial accounting and reporting principles, policies and practices and the
adequacy of the Corporation's accounting, financial and operating controls and
(iv) to report to the Board of Directors with respect to the foregoing, at such
times and in such manner as the Board of Directors shall determine.
The Compensation Committee is currently comprised of Messrs. Ford and
Jones. The Compensation Committee has the authority to make recommendations to
the Board of Directors with respect to the salaries and other compensation to be
paid to the executive officers of the Corporation and administers the
Corporation's employee benefit plans.
The Nominating Committee is composed of Mr. Jones. The Nominating Committee
recommends to the Board nominees for Directors of the Corporation. The
Nominating Committee will consider nominees recommended by stockholders of the
Corporation. The provisions of the By-Laws of the Corporation for nominating
individuals for election as a Director are described under "Shareholder
Proposals for Next Annual Meetings".
During 1993, the Board of Directors of the Corporation held 12 meetings and
the other Board Committees did not meet. Each of the Directors of the
Corporation attended at least 75% of the meetings of the Board.
INDEPENDENT PUBLIC ACCOUNTANTS
The Trust. The Board of Trustees of the Trust, on the recommendation of
the Audit Committee, has appointed Deloitte & Touche as independent public
accountants to audit the financial statements of the Trust for the year ended
December 31, 1994. Deloitte & Touche has served as the principal independent
accountants for the Trust since September 1986.
Ratification of the selection of Deloitte & Touche as the Trust's
independent public accountants will require the affirmative vote of the holders
of a majority of the Trust Shares present and voting at the Trust Meeting and
ratification at the Corporation Meeting of the selection of Deloitte & Touche as
the Corporation's independent public accountants.
If the shareholders of the Trust or the stockholders of the Corporation do
not ratify the selection of Deloitte & Touche, or if such firm should decline to
act or otherwise become incapable of acting, or if the employment should be
discontinued, the Board of Trustees, on the recommendation of the Audit
Committee, will appoint substitute independent public accountants.
The Board of Trustees recommends a vote FOR the proposal to ratify the
selection of Deloitte & Touche as the Trust's independent public accountants for
1994. Proxies solicited by the Board of Trustees will be so voted unless
shareholders specify otherwise.
A member of Deloitte & Touche is expected to be present at the Trust
Meeting, will have an opportunity to make a statement if so desired, and will be
available to respond to appropriate questions.
The Corporation. The Board of Directors of the Corporation, on the
recommendation of the Audit Committee, has appointed Deloitte & Touche as
independent public accountants to audit the consolidated financial statements of
the Corporation and its subsidiaries for the year ended December 31, 1994.
Deloitte & Touche has served as the principal independent accountants for the
Corporation since September 1986.
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<PAGE> 89
Ratification of the selection of Deloitte & Touche as the Corporation's
independent public accountants will require the affirmative vote of the holders
of a majority of the Corporation Shares present and voting at the Corporation
Meeting and ratification at the Trust Meeting of the selection of Deloitte &
Touche as the Trust's independent public accountants. Accordingly, shares which
are voted to abstain from voting on such ratification and shares which are not
voted with respect to such ratification (including broker non-votes) will have
the legal effect of a vote against such ratification.
If the stockholders of the Corporation or the shareholders of the Trust do
not ratify the selection of Deloitte & Touche or if such firm should decline to
act or otherwise become incapable of acting, or if its employment should be
discontinued, the Board of Directors, on the recommendation of the Audit
Committee, will appoint substitute independent public accountants.
The Board of Directors recommends a vote FOR the proposal to ratify the
selection of Deloitte & Touche as the Corporation's independent public
accountants for 1994. Proxies submitted by the Board of Directors will be so
voted unless stockholders specify otherwise.
A member of Deloitte & Touche is expected to be present at the Corporation
Meeting, will have an opportunity to make a statement if so desired, and will be
available to respond to appropriate questions.
PRICE RANGES OF PAIRED SHARES; DIVIDENDS
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. Such sales prices have been adjusted for an assumed 1-for-7
Reverse Split.
<TABLE>
<CAPTION>
1994 HIGH LOW
---- ------- -------
<S> <C> <C>
First quarter................................................ $17.500 $13.125
Second quarter............................................... $21.125 $11.375
Third Quarter................................................ $23.625 $20.125
Fourth Quarter (through November 7, 1994).................... $21.000 $20.125
1993
----
First quarter................................................ $12.250 $ 7.000
Second quarter............................................... $17.500 $ 8.750
Third quarter................................................ $21.875 $11.375
Fourth quarter............................................... $23.625 $14.000
1992
----
First quarter................................................ $12.250 $ 5.250
Second quarter............................................... $12.250 $ 3.500
Third quarter................................................ $ 9.625 $ 3.500
Fourth quarter............................................... $ 9.625 $ 8.125
</TABLE>
On June 10, 1994, the last trading day prior to the announcement of the
execution of the memorandum of understandings providing for the Reorganization,
the high and low sale prices per Paired Share on the NYSE Composite Tape were
$14.875 and $12.714, respectively (in each case after adjusting for an assumed
1-for-7 Reverse Split). The high and low prices per Paired Share on the NYSE
Composite Tape on November 7, 1994 were $20.125 and $19.25, respectively (in
each case after adjusting for an assumed 1-for-7 Reverse Split).
As of November 7, 1994, there were approximately 2,140 holders of record of
Paired Shares.
No distribution was made by the Trust during 1993 or 1992. The Credit
Agreement prohibits the Trust from making distributions to its shareholders, and
no distribution is expected to be made during 1994. The
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<PAGE> 90
Corporation has not paid any cash dividends since its organization. Future
earnings, if any, are expected to be applied to the repayment of the
Corporation's outstanding indebtedness.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Certain Beneficial Owners. To the knowledge of the Trust and the
Corporation, no person owns beneficially 5% or more of the Paired Shares, except
as follows:
<TABLE>
<CAPTION>
AMOUNT
BENEFICIALLY PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) CLASS(2)
----------------------------------------------------------- ------------ ----------
<S> <C> <C>
Leonard M. Ross
1011 N. Beverly Dr.
Beverly Hills, CA 90210(3)............................... 170,057 9.8%
RRH Capital Management, Inc.
1270 Avenue of the Americas
New York, NY 10020(4).................................... 106,621(4) 6.2%
R. B. Haave Associates, Inc.
270 Madison Avenue
New York, NY 10016(5).................................... 107,000 6.2%
U.S. Bancorp
United States Bank of Oregon
111 S.W. Fifth Avenue Portland,
Oregon 97204(6).......................................... 99,526 5.7%
</TABLE>
- ---------------
(1) Share amounts have been adjusted for an assumed 1-for-7 Reverse Split.
(2) Based on the number of Paired Shares outstanding on November 7, 1994.
(3) Based on information contained in Amendment No. 8 to Schedule 13D dated
February 22, 1991. Mr. Ross has sole dispositive power with respect to all
of these shares; however, 129,971 of these shares are pledged to the Pacific
Bank, along with other securities, as collateral for a previously unsecured
loan. Mr. Ross has granted a proxy to vote all such shares and Starwood may
purchase any or all of such shares under certain circumstances. See "The
Reorganization -- Assignment Agreement."
(4) Based on information contained in Schedule 13G dated February 11, 1993. RRH
Capital Management, Inc. has sole dispositive power with respect to all, and
does not have voting power with respect to any, of these shares.
(5) Based on information contained in Schedule 13G dated February 7, 1994, R.B.
Haave Associates, Inc. has sole dispositive power and voting power with
respect to all of these shares.
(6) Based on information contained in Schedule 13G dated February 11, 1994. The
securities are held by the Trust Group of the United States Bank of Oregon
which has sole voting power with respect to all, and does not have
dispositive power with respect to any, of these shares.
Trustees and Officers of the Trust. The following table sets forth the
beneficial ownership of the Paired Shares as of November 7, 1994 by each Trustee
and each executive officer of the Trust named in the Summary Cash Compensation
Table included under "Executive Compensation" below who owns Paired Shares and
by all Trustees and executive officers of the Trust as a group, in each case
after giving effect to an assumed 1-for-7 Reverse Split. Except as otherwise
provided below, each beneficial owner has sole voting and investment power with
respect to all shares beneficially owned.
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<PAGE> 91
<TABLE>
<CAPTION>
AMOUNT PERCENT
BENEFICIALLY OF
NAME OF BENEFICIAL OWNER OWNED CLASS(1)
---------------------------------------------------------------- ------------ --------
<S> <C> <C>
Jeffrey C. Lapin................................................ 13,392(2) (3)
Michael W. Mooney............................................... 3,571(4) (3)
Sherwin L. Samuels.............................................. 14,072(5) (3)
Graeme W. Henderson............................................. 7,357(6) (3)
All Trustees and officers as a group............................ 38,392(7) (3)
</TABLE>
- ---------------
(1) Based on the number of Paired Shares outstanding on November 7, 1994.
(2) Includes 11,429 shares issuable upon exercise of presently exercisable
options and 714 shares owned in a pension plan of which Mr. Lapin is sole
trustee and beneficiary.
(3) Less than 1%.
(4) Includes 3,571 shares issuable upon exercise of presently exercisable
options.
(5) Includes 2,046 shares held in a segregated account for the benefit of Mr.
Samuels by a pension plan trust; 1,071 shares acquired by Mr. Samuels
pursuant to a Trust share purchase plan; 8,000 shares issuable upon exercise
of presently exercisable options; and 143 shares issuable upon exercise of
paired warrants issued by the Trust and the Corporation. Does not include 50
shares owned by Mr. Samuels's son (of which shares Mr. Samuels disclaims
beneficial ownership).
(6) Includes 29 shares owned in a Keogh plan, 714 shares owned in a pension plan
of which Mr. Henderson is sole trustee and beneficiary, 714 shares acquired
pursuant to a Trust share purchase plan and 2,286 shares issuable upon
exercise of paired warrants issued by the Trust and the Corporation.
(7) Includes 23,185 shares that may be acquired upon the exercise of presently
exercisable options, 1,785 shares acquired by Trustees pursuant to a Trust
share purchase plan and 2,429 shares issuable upon exercise of paired
warrants issued by the Trust and the Corporation. Does not include shares
owned by Mr. Samuels' son (see note (5) above).
Directors and Officers of the Corporation. The following table sets forth
the beneficial ownership of the Paired Shares as of November 7, 1994 by each
Director and each executive officer of the Corporation named in the Summary Cash
Compensation Table included under "Executive Compensation" below who owns Paired
Shares and by all Directors and executive officers of the Corporation as a
group, in each case after giving effect to an assumed 1-for-7 Reverse Split.
Except as otherwise provided below, each beneficial owner has sole voting and
investment power with respect to all Paired Shares beneficially owned.
<TABLE>
<CAPTION>
NUMBER
OF SHARES PERCENT
BENEFICIALLY OF
NAME OF BENEFICIAL OWNER OWNED CLASS(1)
---------------------------------------------------------------- ------------ --------
<S> <C> <C>
Kevin E. Mallory................................................ 3,664(2) (3)
Bruce M. Ford................................................... 1,801(4) (3)
Earle F. Jones.................................................. 928(5) (3)
Graeme W. Henderson............................................. 7,357(6) (3)
All Directors and Officers as a group........................... 13,750(7) (3)
</TABLE>
- ---------------
(1) Based on the number of Shares outstanding on November 7, 1994.
(2) Includes 3,571 shares issuable upon exercise of presently exercisable
options.
(3) Less than 1%.
(4) Includes 1,357 shares acquired pursuant to a Corporation share purchase plan
and 345 shares issuable upon exercise of paired warrants issued by the Trust
and the Corporation, 24 of which are owned by Mr. Ford's wife.
(5) Includes 714 shares acquired pursuant to a Corporation share purchase plan
and 71 shares issuable upon exercise of paired warrants issued by the Trust
and the Corporation.
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<PAGE> 92
(6) Includes 42 shares owned in a Keogh Plan, 714 shares owned in a pension plan
of which Mr. Henderson is trustee and beneficiary, 714 shares acquired
pursuant to a Trust share purchase plan and 2,286 shares issuable upon
exercise of paired warrants issued by the Trust and the Corporation.
(7) Includes 3,571 shares issuable upon exercise of presently exercisable
options, 2,785 shares acquired by Directors pursuant to the Trust's and the
Corporation's share purchase plans and 2,703 shares issuable upon exercise
of paired warrants issued by the Trust and the Corporation.
EXECUTIVE OFFICERS OF THE TRUST AND THE CORPORATION
The following table includes certain information with respect to each of
the Trust's current executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE TRUST
- ------------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Jeffrey C. Lapin................................. 37 President and Trustee
Michael W. Mooney................................ 48 Vice President and Chief Financial Officer
</TABLE>
Jeffrey C. Lapin. Mr. Lapin has been the President and Chief Executive
Officer of the Trust since May 1991 and a Trustee since September 1992. Prior to
that time he was Vice President (from January 1988) and Secretary (from
September 1986) of the Trust. Prior to 1986 Mr. Lapin was a real estate attorney
at Mitchell, Silberberg & Knupp in Los Angeles. Mr. Lapin has over ten years of
experience in the hotel REIT industry.
Michael W. Mooney. Mr. Mooney has been Vice President and Chief Financial
Officer since July 1992. From March 1992 to July 1992 he was a Director of
Finance of RELCO Industries, a real estate development company. From August 1990
to March 1992, he was Director of Finance of Dorn-Platz, Inc., a real estate
brokerage company. From July 1989 to August 1990, Mr. Mooney was an independent
real estate consultant. Prior to that time, he was Executive Vice President and
Chief Financial Officer of Gibraltar Savings. Mr. Mooney's career reflects a
total of 23 years of experience in real estate finance.
After the Reorganization, Mr. Sternlicht will become the Chairman and Chief
Executive Officer of the Trust and Mr. Lapin will continue to be the President
and Chief Operating Officer of the Trust.
The following table includes certain information with respect to each of
the Corporation's current executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE CORPORATION
- ------------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Kevin E. Mallory................................. 35 Executive Vice President
Leslie R. King................................... 52 Vice President of Operations
</TABLE>
Kevin E. Mallory. Mr. Mallory has been Executive Vice President since July
1992. From December 1991 to July 1992 he was President of Merit Hotel Group, a
hotel development and consulting company. From September 1989 to November 1991,
he was Development Director, Westin Hotels & Resorts, a hotel management
Company. Prior to that time he was Assistant Vice President and Asset Manager,
VMS Realty Partners, a real estate syndicator. Mr. Mallory's career reflects 15
years of experience in the hotel industry.
Leslie R. King. Mr. King has been Vice President of Operations of the
Corporation since 1992. From June 1991 to August 1992, Mr. King was Chief
Operating Officer of Spring Garden Brewing Company, a restaurant and brewery
service company. From May 1988 to June 1991, Mr. King was Chief Executive
Officer of and Consultant to eight single hotel companies under common
management. Prior to 1988, Mr. King was Senior Vice President of Operations
Support for Red Lion Hotels & Inns. He was named Vice President in 1982 and
Executive Vice President in 1984. Mr. King's career comprises 26 years of hotel
and restaurant industry experience.
85
<PAGE> 93
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The Trust. The following table provides certain summary information
concerning the compensation paid to the Trust's President and Chief Executive
Officer and each other executive officer of the Trust whose total compensation
for 1993 exceeded $100,000 for services rendered in all capacities to the Trust
for the fiscal years ended December 31, 1993, 1992 and 1991.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
------------------------- OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SARS (#) COMPENSATION
------------------------------------ ----- --------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Jeffrey C. Lapin.................... 1993 $ 170,834 $20,000
President and 1992 150,792 7,143(1) $ 23,585(2)
Chief Executive 1991 120,333 51,438(3)
Michael W. Mooney................... 1993 140,416 11,667
Vice President Chief 1992 61,026 3,571(1)
Financial Officer 1991
</TABLE>
- ---------------
(1) For information with respect to this option, see "Option Exercises and
Holdings" below. Share amounts have been adjusted for an assumed 1-for-7
Reverse Split.
(2) Amount shown reflects cash paid for unused vacation.
(3) Amount shown reflects monies distributed upon the termination of the Trust's
profit-sharing plan.
The Corporation. The following table provides certain summary information
concerning the compensation paid to each executive officer of the Corporation
whose total compensation for 1993 exceeded $100,000 for services rendered in all
capacities to the Corporation for the fiscal years ended December 31, 1993, 1992
and 1991.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
------------------------------ OPTIONS/
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SARS (#)
------------------------------------------ ----- --------- -------- ------------
<S> <C> <C> <C> <C>
Kevin E. Mallory.......................... 1993 $ 140,416 $ 11,667
Executive Vice President 1992 63,718 3,571(1)
1991
</TABLE>
- ---------------
(1) For information with respect to this option, see "Option Exercises and
Holdings" below. Share amount has been adjusted for an assumed 1-for-7
Reverse Split.
OPTION GRANTS
There were no options or stock appreciation rights granted to the executive
officers named in the Summary Compensation Table of the Trust or the Corporation
during the year ended December 31, 1993 or through the date of this Joint Proxy
Statement.
86
<PAGE> 94
OPTION EXERCISES AND HOLDINGS
The following table provides information with respect to the options held
as of December 31, 1993 by the executive officers of the Trust and the executive
officers of the Corporation named in the Summary Compensation Tables above. No
options were exercised by any of those executive officers during 1993.
AGGREGATED OPTION/SAR EXERCISES IN 1993
AND DECEMBER 31, 1993 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED
OPTIONS/SARS AT FISCAL VALUE OF UNEXERCISED
YEAR-END(1) IN-THE-MONEY OPTIONS/SARS(2)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jeffrey C. Lapin......................... 9,048 2,381 $56,333 $28,167
Michael W. Mooney........................ 2,393 1,178 28,308 13,943
Kevin E. Mallory......................... 2,393 1,178 28,308 13,943
</TABLE>
- ---------------
(1) Share amounts have been adjusted for an assumed 1-for-7 Reverse Split.
(2) Value is defined as market price of the Paired Shares at December 31, 1993
less exercise price of the option. The average of the high and low market
prices of the Paired Shares at December 31, 1993 was $17.08 (as adjusted for
an assumed 1-for-7 Reverse Split).
COMPENSATION OF TRUSTEES/DIRECTORS
Each Trustee or Director who is not also an officer of the Trust or the
Corporation will receive annual Trustee's or Director's fees of $12,000 and will
be reimbursed for any out-of-pocket expenses incurred in attending meetings of
the Board of Trustees or the Board of Directors. The Chairman of each Board will
receive an additional fee of $2,500 per year. In addition, each non-officer
Trustee or Director will receive a fee of $750 for each meeting in which he
participates (or, in the case of telephonic meetings, $500) and a fee of $500
for each committee meeting in which he participates ($1,000 per meeting for
committee chairman).
SHARE PURCHASE AGREEMENTS
Prior to December 1989, the Trust and the Corporation maintained share
purchase plans pursuant to which Trustees, Directors, officers and employees of
the Trust or the Corporation were granted rights to purchase Paired Shares from
the Trust and the Corporation at prices based upon the then fair market value of
the Paired Shares. A purchaser of Paired Shares under a share purchase plan made
a cash down payment equal to 10% of the purchase price and executed a promissory
note in favor of the Trust or the Corporation for the balance. Certificates
evidencing Paired Shares purchased under a share purchase plan were pledged to
the Trust or the Corporation as collateral to secure payment of the promissory
note. Prior to the satisfaction of the obligations represented by the note, the
purchaser was entitled to vote the Paired Shares held in pledge, but not to
transfer the purchaser's interest in those shares.
As of November 7, 1994, the only share purchase agreements remaining in
effect were those between the Trust and each of Messrs. Henderson and Samuels
and between the Corporation and each of Messrs. Jones and Ford. Effective on the
earlier of January 31, 1995 and the consummation of the Reorganization, the
share purchase agreements with Messrs. Henderson, Samuels and Ford will be
terminated and the non-recourse indebtedness thereunder will be cancelled (an
aggregate of $56,250 with respect to Mr. Henderson, $82.391 with respect to Mr.
Samuels, and $108,784 with respect to Mr. Ford). In addition, the Paired Shares
pledged in respect of such indebtedness will be either released from such
pledge, to the extent that such Paired Shares had been paid for (an aggregate of
136 Paired Shares with respect to Mr. Henderson, 225 Paired Shares with respect
to Mr. Samuels, and 186 Paired Shares with respect to Mr. Ford (such Share
amounts have been adjusted for an assumed 1-for-7 Reverse Split)) or forfeited
by the individual, to the extent such Paired Shares had not been paid for.
87
<PAGE> 95
The share purchase agreement between Ronald A. Young (a former officer of
the Corporation and a former director of the Corporation and trustee of the
Trust) and the Corporation was terminated in connection with his December 1992
resignation as an officer of the Corporation, and the 1,429 Paired Shares
(adjusted for an assumed 1-for-7 Reverse Split) acquired by Mr. Young pursuant
to that agreement were assigned by him to the Corporation. The share purchase
notes of Mr. Young ($112,500) and of other former officers, employees and
directors who had resigned or been terminated prior to December 31, 1993 (an
aggregate of $63,917) were written off at December 31, 1993.
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
In July 1992, the Trust entered into an 18-month employment agreement with
Mr. Lapin and a 12-month employment agreement with Mr. Mooney providing for Mr.
Lapin to render services to the Trust as its President and Chief Executive
Officer and Mr. Mooney to render services to the Trust as its Chief Financial
Officer. In December 1993, the terms of the employment agreements with Mr. Lapin
and Mr. Mooney were extended for an additional eighteen months. The employment
agreements with Messrs. Lapin and Mooney provide that they will receive annual
salaries of $190,000 and $150,000, respectively, and such annual bonuses, if
any, as the Board of Trustees of the Trust may determine; each of Messrs. Lapin
and Mooney also is eligible to participate in all employee benefit plans and
fringe benefits, if any, that the Trust makes available to its other executive
officers. The employment of Messrs. Lapin and Mooney pursuant to the employment
agreements may be terminated by the Trust at any time; provided, however, that
if either such officer's employment is terminated without cause (as defined) or
if Mr. Lapin voluntarily terminates his employment as a result of the diminution
of his responsibilities or other breach of the employment agreement by the
Trust, the terminated officer will be entitled to receive the lesser of (i) that
officer's salary for the then-remaining term of the employment agreement or (ii)
$95,000 (Mr. Lapin) or $75,000 (Mr. Mooney).
As of the Closing Date, the employment agreement with Mr. Lapin will be
terminated and he will enter into a new two-year employment agreement with the
Trust providing for him to render services to the Trust as its President and
Chief Operating Officer. The employment agreement will provide for an annual
salary of $200,000 in 1995 and $225,00 in 1996, annual bonuses to be determined
by the Board of Trustees (not less than $75,000 per year), the grant of options
to purchase 250,000 Paired Shares (before giving effect to the Reverse Split)
which will be exercisable at fair market value on the date of grant and which
will vest at a rate no longer than the most rapid rate of vesting of options
granted to any other executive during the term of the employment agreement. The
employment agreement will provide that Mr. Lapin may terminate his employment
for "Good Reason," as defined in the employment agreement and including an
assignment of duties which are in any significant respect inconsistent with his
position, a substantial alteration in his responsibilities, a breach of the
agreement by the Trust, removal from office without cause (as defined),
relocation of the Trust's principal executive offices a change in the
composition of 51% of the Trustees, a decision by the Board that the Trust shall
merge, sell or dispose of all or substantially of its assets, dissolve or
liquidate, or the failure of Mr. Lapin to be a member of the Board of Trustees,
other than for cause (as defined). If Mr. Lapin so terminates his employment, he
will be entitled to receive a lump sum payment equal to the base salary and
bonuses that would have been payable had he continued to be employed for the
remainder of the term of the agreement, and all fringe benefits to which he
would have been entitled through the remainder of the term of the agreement
(other than stock options or stock loans not granted prior to the date of
termination).
In July 1992, the Corporation entered into a 12-month employment agreement
with Mr. Mallory providing for Mr. Mallory to render services to the Corporation
as a senior executive officer. In December 1993, the terms of the employment
agreement with Mr. Mallory were extended for an additional eighteen months. The
employment agreement with Mr. Mallory provides that he will receive an annual
salary of $150,000 and such annual bonus, if any, as the Corporation's Board of
Directors may determine, and will be eligible to participate in all employee
benefit plans and fringe benefits, if any, that the Corporation makes available
to its other executive officers. Mr. Mallory's employment pursuant to the
employment agreement may be terminated by the Corporation at any time; provided,
however, that if his employment is terminated
88
<PAGE> 96
without cause (as defined), Mr. Mallory will be entitled to receive the lesser
of his salary for the then-remaining term of the employment agreement or
$75,000.
REPORT ON EXECUTIVE COMPENSATION
The Board of Directors of the Corporation and the Board of Trustees of the
Trust have furnished the following report on executive compensation. Although
the Boards of the Corporation and the Trust make independent compensation
decisions with respect to their respective executive officers, as described
herein the Boards follow similar compensation policies and typically measure the
performance of their respective executive officers based in large part on the
performance of Hotel Investors as a whole.
In determining executive compensation, the Board of Directors of the
Corporation and the Board of Trustees of the Trust have attempted to align the
compensation received by executive officers to the performance and financial
condition of Hotel Investors and to the achievement of individual performance
goals. The compensation decisions have also been designed to provide executive
compensation opportunities which will attract, motivate and retain qualified
executive officers.
In furtherance of these objectives, the Trust and the Corporation have in
the past entered into employment agreements with executive officers which
provide for executive compensation and compensation pursuant to related plans
which afford the executive compensation opportunities which are tied to the
attainment of performance goals and to appreciation of the market price of the
Paired Shares.
The primary components of executive compensation consist of annual
compensation, which includes base salaries and annual bonuses, and long-term
compensation through the grant of options to purchase Paired Shares. Through
these components the Corporation and the Trust attempt to provide for total
compensation that is competitive with other comparable positions. Individual
compensation is subject to variation based on financial, strategic and
individual performance. The respective Boards of the Corporation and the Trust
consider the total compensation (earned or potentially earned) in establishing
each element of compensation.
The base salary levels of executive officers are determined periodically by
evaluating the performance of the executive officers and their contributions to
the Trust and the Corporation, their responsibilities, experience and potential;
and compensation practices for comparable positions at other companies. The
annual bonuses are determined in the discretion of the respective Boards of the
Trust and the Corporation, based on individual financial performance.
The long-term incentive compensation of executive officers currently
consists exclusively of grants of options to purchase Paired Shares. The option
grants are designed to develop and encourage stock ownership by executive
officers, to reward long-term business success and to develop a parallel
interest between executive officers and holders of Paired Shares. Option grants
only have value if the market price of the Paired Shares increases from the date
of grant and, in general, vest and become exercisable over time, in order to
encourage retention of the executive officer. In determining the amounts and
terms of grants of options to individual officers, the respective Boards of the
Corporation and the Trust take into account the responsibilities, performance
and anticipated contributions of the officers, as well as the compensation
practices for comparable positions at other companies.
<TABLE>
<S> <C>
Board of Directors of Board of Trustees
the Corporation: of the Trust:
Bruce M. Ford Graeme W. Henderson
Graeme W. Henderson Jeffrey C. Lapin
Earle F. Jones Sherwin L. Samuels
</TABLE>
89
<PAGE> 97
COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION
During fiscal year 1993, the Board of Directors of the Corporation and the
Board of Trustees of the Trust made decisions with respect to executive
compensation of the executive officers of the Trust and the Corporation,
respectively. Mr. Young, who was the President and Chief Executive Officer of
the Corporation prior to the end of January, 1993, served on the Board of
Directors of the Corporation and the Board of Trustees of the Trust, and
participated in decisions related to compensation of executive officers of the
Corporation and the Trust. Mr. Lapin, who is an executive officer of the Trust
and is on the Board of Trustees of the Trust, participated in decisions related
to the compensation of Mr. Mooney; Messrs. Samuels and Henderson, who are
officers of the Trust and are on the Board of Trustees of the Trust,
participated in decisions related to the compensation of Messrs. Lapin and
Mooney.
SHAREHOLDER RETURN PERFORMANCE
Set forth below is a line graph comparing the cumulative total shareholder
return on the Paired Shares against the cumulative total return on the Standard
and Poor's Corporation Composite -- 500 Stock Index (the "S&P 500 Index") and
the Standard & Poor's Corporation Hotel/Motel Composite Index (the "S&P
Hotel/Motel Index") for the five fiscal years beginning January 1, 1989 and
ending December 31, 1993. The graph assumes that the value of the investments
was 100 on December 31, 1988 and that all dividends and other distributions were
reinvested.
COMPARISON OF SHAREHOLDER RETURNS AMONG HOTEL INVESTORS,
THE S&P 500 INDEX AND THE S&P HOTEL/MOTEL INDEX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD HOTEL S&P 500 S&P HOTEL/
(FISCAL YEAR COVERED) INVESTORS INDEX MOTEL INDEX
<S> <C> <C> <C>
1988 100 100 100
1989 79 132 131
1990 17 128 50
1991 13 166 66
1992 15 179 93
1993 38 197 172
</TABLE>
90
<PAGE> 98
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT OBLIGATIONS OF WESTERN HOST
General. Prior to December 31, 1992, Western Host, Inc., a wholly owned
subsidiary of the Corporation, managed six hotels owned by limited partnerships
of which Messrs. John F. Rothman and Ronald A. Young are general partners; one
hotel owned by a general partnership whose sole partners, are Messrs. Young and
Rothman, and one hotel owned by a partnership of which Western Host is the sole
general partner and whose limited partners are affiliates of Messrs. Young and
Rothman. Mr. Rothman was a Trustee of the Trust and a Director of the
Corporation, and the Trust's President and Chief Executive Officer, from
September 1986 until March 1990; Mr. Young was the Corporation's President and
Chief Executive Officer, from December 1986 through December 1992, a Director of
the Corporation from December 1986 until February 1994 and a Trustee of the
Trust from June 1988 until February 1994.
For its services as manager of these eight hotels described above (the
"Western Host Hotels"), Western Host in each case received a management fee that
generally was based upon the gross revenues, cash flows and/or operating profits
of the hotel or the partnership that owned that property. For supervisory
services rendered by Western Host in connection with any refurbishment or
remodelling program or any construction of additional hotel guest rooms or other
facilities at a Western Host Hotel, Western Host received a supervisory fee
equal to 5% of the direct cost of such refurbishment, remodelling or
construction. Western Host also acted as the purchasing agent with respect to
certain furniture, fixtures and equipment and certain operating supplies
required by a Western Host Hotel. To the extent these services were rendered
other than in connection with a refurbishment, remodelling and/or construction
program for which Western Host was entitled to a supervisory fee, Western Host
was entitled to charge a fee ranging from 5% to 10% of the actual cost of the
items purchased as the estimated cost incurred by Western Host in providing
those services.
In lieu of the partnerships that owned the Western Host Hotels (the
"Western Host Partnerships") employing full-time bookkeepers at the
partnership's respective properties, Western Host provided bookkeeping services
and received a bookkeeping service fee. The fee was computed by adding together
all direct labor costs incurred by Western Host in providing those services to
all hotels that Western Host manages and allocating to each Western Host Hotel a
pro rata portion of those costs, based on the number of rooms in that hotel as
compared with the number of rooms in all hotels managed by Western Host.
Since January 1, 1993, Western Host's day-to-day management obligations
with respect to the Western Host Hotels have been performed on Western Host's
behalf by Westland Hotel Corporation ("Westland"), a company owned by Mr. Young
and of which he is president and chief executive officer.
Management Fees Paid to Western Host; Certain Borrowings. Western Host is
one of the general partners, together with Messrs. Young and Rothman, of Western
Host Pasadena Partners (which owns a hotel in Pasadena, California) and Western
Host San Francisco Partners (which owns a hotel in San Francisco, California).
Western Host was the sole general partner of Western Host Santa Maria Partners,
which prior to July 1993 owned a hotel in Santa Maria, California.
Pursuant to the applicable partnership agreement, Western Host was entitled
to receive for its management services (i) with respect to the Pasadena
property, a minimum management fee equal to 5% of the hotel's gross receipts,
plus an incentive management fee equal to 30% of the hotel's cash flow,
subordinated to an annual preferred return to limited partners of that
partnership, and (ii) with respect to the San Francisco property, a management
fee equal to all distributions made to limited partners of Western Host San
Francisco Partners in excess of a specified preferred annual return on
investment to those limited partners. As a general partner of these Western Host
Partnerships, Western Host was contingently liable for the liabilities and
obligations of each partnership and its hotel.
For its services as manager of the Santa Maria property, Western Host was
entitled to receive a fee equal to 5% of that hotel's gross revenues; as the
general partner of the Western Host Partnership that owned this hotel, Western
Host also received 30% of all cash distributions made by that partnership.
91
<PAGE> 99
In July 1993, the hotel owned by Western Host Santa Maria Partners was sold
for $140,000 in cash, all of which was paid to Western Host, and $450,000 of
previously reserved indebtedness owed by the Santa Maria Partners to the
Corporation was canceled.
Western Host was responsible, pursuant to management agreements, for the
management of one hotel located in Stockton, California owned by a general
partnership of which Messrs. Young and Rothman are the general partners and four
hotels owned by limited Partnerships of which Messrs Young and Rothman are the
general partners. These partnerships are Western Host Bakersfield Partners
(which owns a hotel in Bakersfield, California), Western Host Fresno Partners
(which owns a hotel in Fresno, California), Western Host Monterey Partners
(which owns a hotel in Monterey, California), and Western Host Properties (which
owns a hotel in Modesto, California).
For its services as manager of the property in Stockton, Western Host was
entitled to a management fee equal to 4% of the hotel's gross receipts; for its
services as manager of the properties in Bakersfield, Fresno, Monterey, and
Modesto, Western Host is entitled to a minimum management fee equal to 4% of the
hotel's revenues, plus an incentive management fee based on the profits and cash
flows of each hotel.
Since January 1, 1993 all of the management fees and other compensation
payable to Western Host by the Western Host Partnerships were collected by
Westland on Western Host's behalf. For Westland's services in managing the
day-to-day operations of the Western Host Hotels, Westland was entitled to
retain from the amounts paid by the Western Host partnerships a submanagement
fee equal to 3% of each Western Host Hotel's operating revenues.
For the year ended December 31, 1993, management fees and other
compensation paid or payable to Western Host by the Western Host Partnerships
and/or Westland after payment of Westland's submanagement fee totaled $308,000.
At December 31, 1993 $242,000 of such compensation remained outstanding and had
not been accrued. In connection with the settlement of litigation described
below, $120,000 was paid in full settlement of such $242,000 amount.
As of December 31, 1993, the Western Host Partnerships and/or Westland owed
to Western Host and the Corporation, costs of refurbishments and amounts
advanced for the expenses of the managed Western Host hotels totalling $100,000,
which amount was included in Inventories, prepaid expenses and other assets at
December 31, 1993.
Restrictions on Competition; Term of Management Arrangements. The
management agreements for the hotels located in Modesto and Monterey provided
that Western Host may not own or manage another hotel within a 25-mile radius of
each hotel. Similar provisions (with a five-mile radius) are contained in the
management agreements for the hotels in Fresno and Bakersfield and in the
partnership agreement pursuant to which Western Host manages the Pasadena
property.
Each of Western Host's management agreements with a Western Host
Partnership (other than the management agreement for the Stockton hotel)
originally provided for the right of that partnership to terminate the agreement
at any time on 60 days' prior notice. The management agreement for the hotel in
Stockton provided that such agreement was month-to-month and could be terminated
by either Western Host or Messrs. Rothman and Young at any time.
Western Host had the right and obligation to manage the hotels owned by
each of Western Host San Francisco Partners and Western Host Pasadena Partners
as long as Western Host remained a general partner of that Partnership. However,
the partnership agreement for Western Host San Francisco Partners provided that
certain transfers of voting securities of Western Host would terminate Western
Host's right to manage the hotel owned by that partnership and to receive future
management fees unless, either prior or subsequent to the transfer, a
majority-in-interest of the limited partners of the partnership consented to the
transfer. Although the Corporation's December 1986 acquisition of Western Host
may have constituted such a transfer, the consent of the limited partners of
Western Host San Francisco Partners with respect to that transfer was not
solicited.
92
<PAGE> 100
Each of the management agreements between Western Host and Westland could
be canceled by Western Host at any time upon 30 days' notice.
In connection with the settlement of shareholder litigation (see Item 3 of
the Hotel Investors 10-K accompanying this Joint Proxy Statement), Messrs.
Rothman and Young caused each of the Western Host Partnerships (other than
Western Host Santa Maria Partners) to terminate Western Host's management
obligations with respect to that partnership's hotel, indemnified the
Corporation and Western Host against all claims that might be made against
Western Host in connection with its status as a general partner of Western Host
Santa Maria Partners, Western Host Pasadena Partners and Western Host San
Francisco Partners or in connection with any fact or circumstance occurring
since January 1, 1993 with respect to any of the Western Host Hotels, and
delivered to the Corporation an irrevocable letter of credit in the amount of
$800,000. If final settlement of the shareholder litigation is achieved within
one year from the date the letter of credit was delivered to the Corporation,
Western Host will agree to accept the termination of its management obligations
with respect to the Western Host Hotels and will be entitled to draw on the
letter of credit. If final settlement of the shareholder litigation is not
consummated within the one-year period the letter of credit would be returned to
Messrs. Rothman and Young, and the Corporation and Western Host would be free to
pursue all claims, if any, they might have against Messrs. Young and Rothman and
the Western Host Partnerships in connection with the termination of Western
Host's management obligations. In addition, $120,000 of the management fees and
all costs and amounts advanced to the partnerships which were payable to Western
Host were paid in full settlement of such amounts due at December 31, 1993.
OTHER RELATIONSHIPS
Sherwin L. Samuels, the Senior Vice President, General Counsel, Secretary
and a Trustee of the Trust, is a partner through a professional corporation of
the law firm of Sidley & Austin. Sidley & Austin provides legal services to the
Trust, the Corporation and Western Host.
For information with respect to the Share Purchase Agreements of Messrs.
Henderson, Samuels, Jones and Ford see "Executive Compensation -- Share Purchase
Agreements." For information with respect to the employment agreements of
Messrs. Lapin, Mooney and Mallory see "Executive Compensation -- Employment
Agreements."
SHAREHOLDER PROPOSALS FOR NEXT ANNUAL MEETINGS
Stockholder proposals to be considered for inclusion in the proxy
soliciting material for the 1995 Annual Meeting of Stockholders of the
Corporation must be received by the Corporation not later than January 15, 1995.
Shareholder proposals to be considered for inclusion in the proxy
soliciting material for the 1995 Annual Meeting of Shareholders of the Trust
must be received by the Trust not later than January 15, 1995.
Pursuant to Section 4A of Article I and Section 13 of Article III of the
Trustees' Regulations and Section 7 of Article II and Section 1A of Article III
of the Corporation's Bylaws, a shareholder of the Trust or a stockholder of the
Corporation who intends at an annual meeting of shareholders or stockholders to
nominate one or more individuals for election at such meeting as a Trustee or
Director, or to present to a meeting of shareholders or stockholders one or more
other items of business, must notify the Trust or the Corporation of the same
not more than 75 days nor less than 50 days before the date of the meeting (or,
if less than 60 days' advance notice or prior public disclosure of the meeting
date is provided, within 10 days after such notice is mailed or such prior
public disclosure of the meeting date is provided, whichever occurs first). A
copy of the Trustees' Regulations or the Corporation's Bylaws, as the case may
be, which documents set forth the information that must be included in any such
notice, will be furnished without charge to any owner of Paired Shares upon
written or oral request made to Jayne C. Gordon, Shareholder Relations, Hotel
Investors Trust, 11845 West Olympic Blvd., Suite 550, Los Angeles, California
90064, telephone number: (310) 575-3900 or Jayne C. Gordon, Shareholder
Relations, Hotel Investors Corporation, 11845 West Olympic Blvd., Suite 560, Los
Angeles, California 90064, telephone number: (310) 575-3900.
93
<PAGE> 101
INDEPENDENT AUDITORS
The separate and combined financial statements and related financial
statement schedules of Hotel Investors Trust and Hotel Investors Corporation as
of December 31, 1993 and 1992 and for each of the three years in the period
ended December 31, 1993 incorporated by reference in this Joint Proxy Statement
have been audited by Deloitte & Touche, independent auditors, as stated in their
reports which are incorporated by reference herein. The financial statements for
the Doubletree Club Hotel of Rancho Bernardo as of December 31, 1993 and for the
year ended December 31, 1993 included in this Joint Proxy Statement have been
audited by Deloitte & Touche, independent auditors, as stated in their report
which is included in this Joint Proxy Statement.
The financial statements for Starwood Wichita Investors, L.P., The French
Quarter Square Limited and Capitol Hill Holdings, Inc. as of December 31, 1993
and for the year ended December 31, 1993 included in the Joint Proxy Statement
have been audited by Price Waterhouse LLP, independent auditors, as stated in
their reports which are included in this Joint Proxy Statement.
The name "Hotel Investors Trust" is the designation of Hotel Investors
Trust and its Trustees (as Trustees but not personally) under a Declaration of
Trust dated August 25, 1969, as amended and restated, and all persons dealing
with Hotel Investors Trust must look solely to Hotel Investors Trust's property
for the enforcement of any claims against Hotel Investors Trust, as the
Trustees, officers, agents and security holders of Hotel Investors Trust assume
no personal obligations of Hotel Investors Trust, and their respective
properties shall not be subject to claims of any person relating to such
obligation.
By Order of the Board of Trustees
HOTEL INVESTORS TRUST
SHERWIN L. SAMUELS
----------------------------------
November 11, 1994 Sherwin L. Samuels
Secretary
By Order of the Board of Directors
HOTEL INVESTORS CORPORATION
KEVIN E. MALLORY
----------------------------------
November 11, 1994 Kevin E. Mallory
Executive Vice President
94
<PAGE> 102
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STARWOOD LODGING TRUST AND STARWOOD LODGING
CORPORATION -- PRO FORMA (UNAUDITED)
Pro Forma Separate and Combined Balance Sheets as of June 30, 1994.................... F-2
Pro Forma Separate and Combined Statements of Operations for the six months ended
June 30, 1994....................................................................... F-5
Pro Forma Separate and Combined Statements of Operations for the year ended
December 31, 1993................................................................... F-7
SLT REALTY L.P. AND SLC OPERATING L.P. -- PRO FORMA (UNAUDITED)
Pro Forma Separate and Combined Balance Sheets as of June 30, 1994.................... F-9
Pro Forma Separate and Combined Statements of Operations for the six months ended
June 30, 1994....................................................................... F-14
Pro Forma Separate and Combined Statements of Operations for the year ended
December 31, 1993................................................................... F-16
STARWOOD WICHITA INVESTORS, L.P.
Report of Independent Accountants..................................................... F-18
Balance Sheets as of December 31, 1993 and June 30, 1994.............................. F-20
Statement of Operations............................................................... F-21
Statement of Changes in Partners' Capital............................................. F-22
Statement of Cash Flows............................................................... F-23
Notes to Financial Statements......................................................... F-24
THE FRENCH QUARTER SQUARE LIMITED
Report of Independent Accountants..................................................... F-28
Schedule of Operating Revenue and Certain Expenses.................................... F-29
Notes to Schedules of Operating Revenue and Certain Expenses.......................... F-30
CAPITOL HILL HOLDINGS, INC.
Statements of Operations and Retained Earnings (Deficit).............................. F-32
Balance Sheets as of December 31, 1993 and June 30, 1994.............................. F-33
Statements of Cash Flows.............................................................. F-34
Notes to Financial Statements......................................................... F-35
DOUBLETREE CLUB HOTEL OF RANCHO BERNARDO
Independent Auditors' Report.......................................................... F-37
Balance Sheets as of June 30, 1994 and December 31, 1993.............................. F-38
Statements of Operations and Owners' Equity........................................... F-39
Statements of Cash Flows.............................................................. F-40
Notes to Financial Statements......................................................... F-41
</TABLE>
F-1
<PAGE> 103
STARWOOD LODGING TRUST AND
STARWOOD LODGING CORPORATION
PRO FORMA SEPARATE AND COMBINED BALANCE SHEETS
JUNE 30, 1994
(UNAUDITED)
The following unaudited Pro Forma Separate and Combined Balance Sheets are
presented as if the Reorganization in which the Trust and Corporation will
contribute substantially all of their assets (subject to substantially all of
their liabilities) in exchange for 28.3% general partnership interests in SLT
Realty L.P. and SLC Operating L.P. (the "Partnerships") and Starwood will
contribute cash and other assets, subject to certain liabilities, in exchange
for 71.7% limited partnership interests in the Partnerships had occurred on June
30, 1994.
The unaudited Pro Forma Combined Balance Sheets should be read in
conjunction with the Separate and Combined Historical Financial Statements of
Hotel Investors Trust and Hotel Investors Corporation and Notes thereto which
are incorporated herein by reference. In management's opinion, all adjustments
necessary to reflect the effects of the Reorganizations have been made.
The unaudited Pro Forma Combined Balance Sheets are not necessarily
indicative of what the actual financial position of the Companies would have
been at June 30, 1994, nor does it purport to represent the future financial
position of the Companies.
F-2
<PAGE> 104
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
UNAUDITED SEPARATE AND COMBINED PRO FORMA BALANCE SHEETS
JUNE 30, 1994
<TABLE>
<CAPTION>
PRO FORMA
HOTEL STARWOOD HOTEL
INVESTORS PRO FORMA LODGING INVESTORS PRO FORMA
TRUST ADJUSTMENTS TRUST CORPORATION ADJUSTMENTS
-------------------------------------------------- -----------------------------
(A) (B) (C) (D) (E)
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in Partnership........... $ $ 8,025,000 (F) $ 8,025,000 $ $ 3,260,000 (F)
------------ ------------- ------------- ------------ -------------
Hotel assets held for sale, net..... 12,678,000 (12,678,000) 932,000 (932,000)
Hotel assets, net................... 112,387,000 (112,387,000) 35,287,000 (35,287,000)
------------ ------------- ------------- ------------ -------------
125,065,000 (125,065,000) 36,219,000 (36,219,000)
Mortgage notes receivable, net...... 10,791,000 (10,791,000)
Investment in joint venture hotel
properties........................ 293,000 (293,000) 11,000 (11,000)
------------ ------------- ------------- ------------ -------------
Total real estate
investments............... 136,149,000 (128,124,000) 8,025,000 36,230,000 (32,970,000)
------------ ------------- ------------- ------------ -------------
Cash and cash equivalents........... 1,468,000 (1,468,000) 6,687,000 (6,687,000)
Accounts receivable................. 702,000 (702,000) 845,000 4,996,000 (4,996,000)
845,000 (F) 845,000 (F)
Notes receivable -- Corporation..... 89,535,000 (89,535,000)
Notes receivable, net............... 1,016,000 (1,016,000) 651,000 (651,000)
Prepaid expenses and other assets... 709,000 (709,000) 3,736,000 (3,736,000)
------------ ------------- ------------- ------------ -------------
$229,579,000 $(220,709,000) $ 8,870,000 $ 52,300,000 $ (48,195,000)
============ ============= ============= ============ =============
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
LIABILITIES
Secured notes payable & revolving
line of credit.................... $127,397,000 $(127,397,000) $ $ $
Mortgage and other notes payable.... 27,144,000 (27,144,000) 14,133,000 (14,133,000)
Notes payable -- Trust.............. 89,535,000 (89,535,000)
Accounts payable and other
liabilities....................... 2,688,000 (2,688,000) 845,000 7,047,000 (7,047,000)
845,000 (F) 845,000 (F)
------------ ------------- ------------- ------------ -------------
157,229,000 (156,384,000) 845,000 110,715,000 (109,870,000)
------------ ------------- ------------- ------------ -------------
Commitment and contingencies(H)
SHAREHOLDERS' EQUITY (DEFICIT)
Trust shares of beneficial interest
(pro forma), $0.01 par value;
authorized 100,000,000 shares;
outstanding 1,733,278 shares...... 12,133,000 (12,116,000) (G) 17,000
Corporation common stock (pro
forma), $0.01 par value;
authorized 100,000,000 shares;
outstanding 1,733,278 shares...... 1,213,000 (1,196,000)(G)
Additional paid-in capital.......... 204,640,000 12,116,000 (G) 216,756,000 5,857,000 1,196,000 (G)
Share purchase notes................ (280,000) (280,000)
Accumulated deficit................. (144,143,000) (63,000,000)(B) (208,468,000) (65,485,000) 63,000,000 (E)
(1,325,000)(F) (1,325,000)(F)
------------ ------------- ------------- ------------ -------------
72,350,000 (64,325,000) 8,025,000 (58,415,000) 61,675,000
------------ ------------- ------------- ------------ -------------
$229,579,000 $(220,709,000) $ 8,870,000 $ 52,300,000 $ (48,195,000)
============ ============= ============= ============ =============
<CAPTION>
PRO FORMA HISTORICAL PRO FORMA
STARWOOD HOTEL STARWOOD
LODGING INVESTORS LODGING
CORPORATION COMBINED COMBINED
----------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Investment in Partnership........... $ 3,260,000 $ $ 11,285,000
----------- ------------- -------------
Hotel assets held for sale, net..... 13,610,000
Hotel assets, net................... 147,674,000
----------- ------------- -------------
161,284,000
Mortgage notes receivable, net...... 10,791,000
Investment in joint venture hotel
properties........................ 304,000
----------- ------------- -------------
Total real estate
investments............... 3,260,000 172,379,000 11,285,000
----------- ------------- -------------
Cash and cash equivalents........... 8,155,000
Accounts receivable................. 845,000 5,698,000 1,690,000
Notes receivable -- Corporation.....
Notes receivable, net............... 1,667,000
Prepaid expenses and other assets... 4,445,000
----------- ------------- -------------
$ 4,105,000 $ 192,344,000 $ 12,975,000
=========== ============= =============
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
LIABILITIES
Secured notes payable & revolving
line of credit.................... $ $ 127,397,000 $
Mortgage and other notes payable.... 41,277,000
Notes payable -- Trust..............
Accounts payable and other
liabilities....................... 845,000 9,735,000 1,690,000
----------- ------------- -------------
845,000 178,409,000 1,690,000
----------- ------------- -------------
Commitment and contingencies(H)
SHAREHOLDERS' EQUITY (DEFICIT)
Trust shares of beneficial interest
(pro forma), $0.01 par value;
authorized 100,000,000 shares;
outstanding 1,733,278 shares...... 12,133,000 17,000
Corporation common stock (pro
forma), $0.01 par value;
authorized 100,000,000 shares;
outstanding 1,733,278 shares...... 17,000 1,213,000 17,000
Additional paid-in capital.......... 7,053,000 210,497,000 223,809,000
Share purchase notes................ (280,000) (280,000)
Accumulated deficit................. (3,810,000) (209,628,000) (212,278,000)
----------- ------------- -------------
3,260,000 13,935,000 11,285,000
----------- ------------- -------------
$ 4,105,000 $ 192,344,000 $ 12,975,000
=========== ============= =============
</TABLE>
The accompanying notes are an integral part of the pro forma combined balance
sheets.
F-3
<PAGE> 105
- ---------------
(A) Reflects the historical balance sheet of Hotel Investors Trust as of June
30, 1994.
(B) Reflects the contribution at historical cost of the assets and liabilities
of the Trust to SLT Realty L.P. and the related investment and the
forgiveness of approximately $63,000,000 of indebtedness of Hotel Investors
Corporation to Hotel Investors Trust.
(C) The Trust and the Corporation are the general partner and managing general
partner of the Realty Partnership and the Operating Partnership,
respectively. As a condition to the Reorganization, Starwood will have the
right to nominate a majority of the respective Board members of the Trust
and the Corporation upon the Reorganization. Neither the Trust nor the
Corporation is considered to have unilateral control of the Realty
Partnership or the Operating Partnership for accounting purposes. Therefore,
Starwood Lodging Trust and Starwood Lodging Corporation will account for
their respective investments in the Realty Partnership and the Operating
Partnership under the equity method of accounting in accordance with
generally accepted accounting principles.
(D) Reflects the historical balance sheet of Hotel Investors Corporation as of
June 30, 1994.
(E) Reflects the contribution at historical cost of the assets and liabilities
of the Corporation to the SLC Operating L.P. and the related investment and
the forgiveness of approximately $63,000,000 of indebtedness by Hotel
Investors Trust.
(F) Starwood has received an assignment of certain claims (the "Assigned
Claims") of Leonard M. Ross and his affiliates ("Ross"). Ross had opted out
of the settlement by the Trust and the Corporation of certain shareholder
litigation described in Item 3 of the Hotel Investors 10-K accompanying this
Joint Proxy Statement. Virtually all other shareholders of the Trust and the
Corporation were bound by such settlement. In addition to preserving his
rights to institute an action against the Companies and the other defendants
with respect to the matters covered by such settlement, Ross had threatened
to separately institute such an action and had threatened to assert other
alleged causes of action against the Companies. Starwood has agreed to
purchase Ross' Paired Shares, at Ross' election, in a 60-day period
beginning on the earlier of the year after the consummation of the
Reorganization or December 15, 1995, at a price of $39.375 (as adjusted for
an assumed 1-for-7 Reverse Split) per Paired Share. Starwood may also elect
to purchase such Paired Shares at the same time and on the same terms.
During the third quarter of 1994, the Trust and the Corporation will record
a charge to income (which charge is not reflected in the accompanying pro
forma statement of operations) of $1,325,000 and $1,325,000, respectively,
the estimated fair market value of the agreement, as determined by an
investment banker using an option pricing model.
If the Reorganization is consummated and the Trust and the Corporation
receive, prior to December 15, 1995, a full release from Starwood for the
Assigned Claims, the Trust and the Corporation will indemnify Starwood
against any liabilities incurred under the Assignment Agreement up to a
maximum of $1,800,000. If the Reorganization is consummated, Starwood has
agreed that any recovery with respect to the Assigned Claims will be limited
to $1,800,000 and the Trust and the Corporation have agreed to toll the
expiration of the limitations period in respect of the Assigned Claims until
January 31, 1996.
The estimated fair value of the Assignment Agreement has been charged to
accumulated deficit with a corresponding reduction in the investment in
partnership in the pro forma balance sheet, as the Assigned Claims were
asserted against the Trust and the Corporation. In addition, a liability has
been established for the present value of the expected indemnification for
$845,000 for both the Trust and the Corporation. The Realty Partnership and
the Operating Partnership will reimburse the Trust and the Corporation,
respectively, for all amounts paid in respect of such indemnification
obligation. Therefore, the Partnership's pro forma balance sheets each
reflect a liability of $845,000 to reimburse the Trust and the Corporation,
with a corresponding charge to Partners capital. To the extent that the
amount of the ultimate indemnification, if any, is less than $1,800,000 the
difference will be reflected in the income of the respective Partnerships.
(G) Reflects a one for seven reverse stock split in connection with the
Reorganization and revision of the par value of authorized shares.
(H) Upon consummation of the Reorganization, Starwood will receive notes issued
by the Partnerships which would be payable only if the Trust and the
Corporation consummate a public offering of Paired Shares within 18 months
following the consummation of the Reorganization, which offering results in
the receipt by the Trust and the Corporation of gross proceeds of not less
than $150 million. The amount payable under such notes shall be equal to
three fourths of one percent (.75%) of the sum of the total market value of
all Paired Shares (assuming conversion of all units) upon consummation of
such offering and the principal amount of indebtedness of the Partnerships
at such time. Such notes are not included in the pro forma financial
statements as they are contingent upon the consummation of a public offering
at a future date.
F-4
<PAGE> 106
STARWOOD LODGING TRUST AND
STARWOOD LODGING CORPORATION
PRO FORMA SEPARATE AND COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND THE YEAR ENDED DECEMBER 31, 1993
(UNAUDITED)
The following unaudited Pro Forma Separate and Combined Statements of
Operations are presented as if the Reorganization in which the Trust and
Corporation will contribute substantially all of their assets (subject to
substantially all of their liabilities) in exchange for 28.3% general
partnership interests in SLT Realty L.P. and SLC Operating L.P. (the
"Partnerships") and Starwood will contribute cash and other assets, subject to
certain liabilities, in exchange for 71.7% limited partnership interests in the
Partnerships had occurred on January 1, 1993.
The unaudited Pro Forma Combined Statements of Operations should be read in
conjunction with the Combined Historical Financial Statements of Hotel Investors
Trust and Hotel Investors Corporation and Notes thereto which are incorporated
herein by reference. In management's opinion, all adjustments necessary to
reflect the effects of the Reorganizations have been made.
The unaudited Pro Forma Statements of Operations are not necessarily
indicative of what actual results of operations of the Companies would have been
assuming the Reorganizations had occurred on January 1, 1993, nor do they
purport to represent the Companies' results of operations for future periods.
F-5
<PAGE> 107
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
UNAUDITED SEPARATE AND COMBINED PRO FORMA STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
PRO FORMA
HOTEL STARWOOD HOTEL
INVESTORS PRO FORMA LODGING INVESTORS PRO FORMA
TRUST ADJUSTMENTS TRUST CORPORATION ADJUSTMENTS
------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
(A) (B) (C) (D)
REVENUE
Income from investment in Partnership................. $ $ 1,052,000 $1,052,000 $ $ 7,000
Hotel................................................. 41,894,000 (41,894,000)
Gaming................................................ 14,313,000 (14,313,000)
Rents from Corporation................................ 8,456,000 (8,456,000)
Interest from Corporation............................. 841,000 (841,000)
Interest from mortgage and other notes................ 738,000 (738,000) 24,000 (24,000)
Rents from other leased hotel properties.............. 463,000 (463,000)
Management fees and other income...................... 119,000 (119,000) 189,000 (189,000)
Gain on sale of hotel assets.......................... 579,000 (579,000) 13,000 (13,000)
----------- ------------ ---------- ----------- ------------
11,196,000 (10,144,000) 1,052,000 56,433,000 (56,426,000)
----------- ------------ ---------- ----------- ------------
EXPENSES
Hotel operations...................................... 31,124,000 (31,124,000)
Gaming operations..................................... 12,159,000 (12,159,000)
Rent -- Trust......................................... 8,456,000 (8,456,000)
Interest -- Trust..................................... 841,000 (841,000)
Interest -- other..................................... 7,775,000 (7,775,000) 683,000 (683,000)
Depreciation and amortization......................... 2,565,000 (2,565,000) 1,448,000 (1,448,000)
Administrative and operating.......................... 722,000 (722,000) 1,258,000 (1,258,000)
----------- ------------ ---------- ----------- ------------
11,062,000 (11,062,000) 55,969,000 (55,969,000)
----------- ------------ ---------- ----------- ------------
NET INCOME (LOSS)............................. $ 134,000 $ 918,000 $1,052,000 $ 464,000 $ (457,000)
=========== ============ ========== =========== ============
NET INCOME (LOSS)
PER SHARE(E)................................ $ 0.07 $ 0.57 $ 0.25
=========== ========== ===========
<CAPTION>
PRO FORMA HISTORICAL PRO FORMA
STARWOOD HOTEL STARWOOD
LODGING INVESTORS LODGING
CORPORATION COMBINED COMBINED
----------- ---------- -----------
(A) (B) (C)
<S> <C> <C> <C>
REVENUE
Income from investment in Partnership................. $7,000 $ $1,059,000
Hotel................................................. 41,894,000
Gaming................................................ 14,313,000
Rents from Corporation................................
Interest from Corporation.............................
Interest from mortgage and other notes................ 762,000
Rents from other leased hotel properties.............. 463,000
Management fees and other income...................... 308,000
Gain on sale of hotel assets.......................... 592,000
------ ----------- ----------
7,000 58,332,000 1,059,000
------ ----------- ----------
EXPENSES
Hotel operations...................................... 31,124,000
Gaming operations..................................... 12,159,000
Rent -- Trust.........................................
Interest -- Trust.....................................
Interest -- other..................................... 8,458,000
Depreciation and amortization......................... 4,013,000
Administrative and operating.......................... 1,980,000
------ ----------- ----------
57,734,000
------ ----------- ----------
NET INCOME (LOSS)............................. $7,000 $ 598,000 $1,059,000
====== =========== ==========
NET INCOME (LOSS)
PER SHARE(E)................................ $ 0.00 $ 0.32 $ 0.58
====== =========== =========
</TABLE>
The accompanying notes are an integral part of the pro forma separate and
combined statements of operations.
F-6
<PAGE> 108
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
UNAUDITED SEPARATE AND COMBINED PRO FORMA STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
PRO FORMA
HOTEL STARWOOD HOTEL
INVESTORS PRO FORMA LODGING INVESTORS PRO FORMA
TRUST ADJUSTMENTS TRUST CORPORATION ADJUSTMENTS
------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
(A) (B) (C) (D)
REVENUE
Income (loss) from investment in Operating Partnership..... $ $ 795,000 $795,000 $ $ (1,144,000)
Hotel...................................................... 86,903,000 (86,903,000)
Gaming..................................................... 27,505,000 (27,505,000)
Rents from Corporation..................................... 16,481,000 (16,481,000)
Interest from Corporation.................................. 1,534,000 (1,534,000)
Interest from mortgage and other notes..................... 1,288,000 (1,288,000) 124,000 (124,000)
Rents from other leased hotel properties................... 839,000 (839,000)
Management fees and other income........................... 253,000 (253,000) 222,000 (222,000)
Gain (loss) on sales of hotel assets....................... (53,000) 53,000 74,000 (74,000)
----------- ------------ -------- ------------ -------------
20,342,000 (19,547,000) 795,000 114,828,000 (115,972,000)
----------- ------------ -------- ------------ -------------
EXPENSES
Hotel operations........................................... 68,132,000 (68,132,000)
Gaming operations.......................................... 24,055,000 (24,055,000)
Rent -- Trust.............................................. 16,481,000 (16,481,000)
Interest -- Trust.......................................... 1,534,000 (1,534,000)
Interest -- other.......................................... 14,020,000 (14,020,000) 1,167,000 (1,167,000)
Depreciation and amortization.............................. 5,630,000 (5,630,000) 3,602,000 (3,602,000)
Administrative and operating............................... 2,212,000 (2,212,000) 3,000,000 (3,000,000)
Provision for losses....................................... 2,369,000 (2,369,000)
----------- ------------ -------- ------------ -------------
24,231,000 (24,231,000) 117,971,000 (117,971,000)
----------- ------------ -------- ------------ -------------
NET INCOME (LOSS).................................. $(3,889,000) $ 4,684,000 $795,000 $ (3,143,000) $ 1,999,000
=========== ============ ======== ============ =============
NET INCOME (LOSS) PER SHARE(E)..................... $ (2.24) $ 0.43 $ (1.81)
=========== ======== ============
<CAPTION>
PRO FORMA HISTORICAL PRO FORMA
STARWOOD HOTEL STARWOOD
LODGING INVESTORS LODGING
CORPORATION COMBINED COMBINED
----------- ----------- ---------
<S> <C> <C> <C>
REVENUE
Income (loss) from investment in Operating Partnership..... $(1,144,000) $ $(349,000)
Hotel...................................................... 86,903,000
Gaming..................................................... 27,505,000
Rents from Corporation.....................................
Interest from Corporation..................................
Interest from mortgage and other notes..................... 1,412,000
Rents from other leased hotel properties................... 839,000
Management fees and other income........................... 475,000
Gain (loss) on sales of hotel assets....................... 21,000
----------- ------------ ---------
(1,144,000) 117,155,000 (349,000)
----------- ------------ ---------
EXPENSES
Hotel operations........................................... 68,132,000
Gaming operations.......................................... 24,055,000
Rent -- Trust..............................................
Interest -- Trust..........................................
Interest -- other.......................................... 15,187,000
Depreciation and amortization.............................. 9,232,000
Administrative and operating............................... 5,212,000
Provision for losses....................................... 2,369,000
----------- ------------ ---------
124,187,000
----------- ------------ ---------
NET INCOME (LOSS).................................. $(1,144,000) $ (7,032,000) $(349,000)
=========== ============ =========
NET INCOME (LOSS) PER SHARE(E)..................... $ (0.66) $ (4.06) $ (0.20)
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of the pro forma separate and
combined statements of operations.
F-7
<PAGE> 109
- ---------------
(A) Reflects the historical statements of operations of Hotel Investors Trust
for the six months ended June 30, 1994 and the year ended December 31, 1993.
(B) Reflects the elimination of the revenues and expenses of the Trust recorded
in SLT Realty L.P. and the recognition of the related investment income
(loss).
(C) Reflects the historical statements of operations of Hotel Investors
Corporation for the six months ended June 30, 1994 and the year ended
December 31, 1993.
(D) Reflects the elimination of the revenues and expenses of the Corporation
recorded in the SLC Operating L.P. and the recognition of the related
investment income (loss).
(E) Net income (loss) per share has been computed using the weighted average
number of common and common equivalent shares outstanding which, for periods
with net income, includes the dilutive effect of stock options and warrants
outstanding. Weighted average shares outstanding have been adjusted to give
effect to an assumed 1-for-7 reverse stock split in connection with the
Reorganization and the cancellation of certain warrants.
(F) Starwood has received an assignment of certain claims (the "Assigned
Claims") of Leonard M. Ross and his affiliates ("Ross"). Ross had opted out
of the settlement by the Trust and the Corporation of certain shareholder
litigation described in Item 3 of the Hotel Investors 10-K accompanying this
Joint Proxy Statement. Virtually all other shareholders of the Trust and the
Corporation were bound by such settlement. In addition to preserving his
rights to institute an action against the Companies and the other defendants
with respect to the matters covered by such settlement, Ross had threatened
to separately institute such an action and had threatened to assert other
alleged causes of action against the Companies.
Starwood has agreed to purchase Ross' Paired Shares, at Ross' election, in a
60-day period beginning on the earlier of the year after the consummation of
the Reorganization or December 15, 1995, at a price of $39.375 (as adjusted
for an assumed 1-for-7 Reverse Split) per Paired Share. Starwood may also
elect to purchase such Paired Shares at the same time and on the same terms.
During the third quarter of 1994, the Trust and the Corporation will record
a charge to income (which charge is not reflected in the accompanying pro
forma statements of operations) of $1,325,000 and $1,325,000, respectively,
the estimated fair market value of the agreement, as determined by an
investment banker using an option pricing model.
If the Reorganization is consummated and the Trust and the Corporation
receive, prior to December 15, 1995, a full release from Starwood for the
Assigned Claims, the Trust and the Corporation will indemnify Starwood
against any liabilities incurred under the Assignment Agreement up to a
maximum of $1,800,000. If the Reorganization is consummated, Starwood agreed
that any recovery with respect to the Assigned Claims will be limited to
$1,800,000 and, the Trust and the Corporation have agreed to toll the
expiration of the limitation period in respect of the Assigned Claims until
January 31, 1996.
The estimated fair value of the Assignment Agreement has been charged to
accumulated deficit with a corresponding reduction in the investment in
partnership in the pro forma balance sheet, as the Assigned Claims were
asserted against the Trust and the Corporation. In addition, a liability has
been established for the present value of the expected indemnification for
$845,000 for both the Trust and the Corporation. The Realty Partnership and
the Operating Partnership will reimburse the Trust and the Corporation,
respectively, for all amounts paid in respect of such indemnification
obligation. Therefore, the Partnership's pro forma balance sheets each
reflect a liability of $845,000 to reimburse the Trust and the Corporation,
with a corresponding charge to Partners capital. To the extent that the
amount of the ultimate indemnification, if any, is less than $1,800,000, the
difference will be reflected in the income of the respective Partnerships.
F-8
<PAGE> 110
SLT REALTY L.P. AND SLC OPERATING L.P.
PRO FORMA SEPARATE AND COMBINED BALANCE SHEETS
JUNE 30, 1994
(UNAUDITED)
The following unaudited Pro Forma Separate and Combined Balance Sheets are
presented as if the Reorganizations in which the Trust and Corporation will
contribute substantially all of their assets (subject to substantially all of
their liabilities) in exchange for 28.3% general partnership interests in SLT
Realty L.P. and SLC Operating L.P. (the "Partnerships") and Starwood will
contribute cash and other assets, subject to certain liabilities, in exchange
for 71.7% limited partnership interests in the Partnerships had occurred on June
30, 1994.
The unaudited Pro Forma Combined Balance Sheets should be read in
conjunction with the Separate and Combined Historical Financial Statements of
Hotel Investors Trust and Hotel Investors Corporation and Notes thereto which
are incorporated herein by reference. In management's opinion, all adjustments
necessary to reflect the effects of the Reorganizations have been made.
The unaudited Pro Forma Combined Balance Sheets are not necessarily
indicative of what the actual financial position of the Partnerships would have
been at June 30, 1994, nor does it purport to represent the future financial
position of the Partnerships.
F-9
<PAGE> 111
SLT REALTY LP AND SLC OPERATING LP
UNAUDITED SEPARATE AND COMBINED PRO FORMA BALANCE SHEETS
JUNE 30, 1994
<TABLE>
<CAPTION>
HOTEL PRO FORMA HOTEL
INVESTORS PRO FORMA SLT REALTY INVESTORS
TRUST STARWOOD ADJUSTMENTS PARTNERSHIP CORPORATION STARWOOD
-------------------------------------------------------------- -------------------------
(A) (B) (C) (D) (B) (C)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Hotel assets held for sale, net..... $ 12,678,000 $ $ $ 12,678,000 $ 932,000 $
Hotel assets, net................... 112,387,000 29,503,000 141,890,000 35,287,000 5,612,000
------------- ----------- ------------ ------------ ------------ ----------
125,065,000 29,503,000 154,568,000 36,219,000 5,612,000
Mortgage notes receivable, net...... 10,791,000 48,837,000 59,628,000
Investment in joint venture hotel
properties......................... 293,000 293,000 11,000
------------- ----------- ------------ ------------ ------------ ----------
Total real estate investments...... 136,149,000 78,340,000 214,489,000 36,230,000 5,612,000
Cash and cash equivalents........... 1,468,000 4,195,000 (2,000,000)(E) 3,663,000 6,687,000 805,000
Accounts receivable................. 702,000 702,000 4,996,000
Notes receivable -- Corporation..... 89,535,000 (63,000,000)(F) 26,535,000
Notes receivable, net............... 1,016,000 1,016,000 651,000
Prepaid expenses and other assets... 709,000 2,000,000 (E) 2,709,000 3,736,000
------------- ----------- ------------ ------------ ------------ ----------
$ 229,579,000 $82,535,000 $(63,000,000) $249,114,000 $ 52,300,000 $6,417,000
============== ============ ============= ============= ============= ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
LIABILITIES
Secured notes payable & revolving
line of credit..................... $ 127,397,000 $ $ (6,000,000)(G) $121,397,000 $ $
Mortgage and other notes payable.... 27,144,000 50,259,000 77,403,000 14,133,000
Notes payable -- Trust.............. 89,535,000
Accounts payable and other
liabilities........................ 2,688,000 845,000 (I) 3,533,000 7,047,000
------------- ----------- ------------ ------------ ------------ ----------
157,229,000 50,259,000 (5,155,000) 202,333,000 110,715,000
------------- ----------- ------------ ------------ ------------ ----------
Commitments and contingencies(J)
PARTNERS' CAPITAL................... 32,276,000 9,350,000 (H) 46,781,000 6,417,000
6,000,000 (G)
(845,000)(I)
----------- ------------ ------------ ----------
32,276,000 14,505,000 46,781,000 6,417,000
----------- ------------ ------------ ----------
SHAREHOLDERS' EQUITY (DEFICIT)
Trust shares of beneficial interest,
$0.01 par value, authorized
110,000,000 shares; outstanding
12,729,278 shares.................. $ 12,133,000 (12,133,000)(H)
Corporation common stock, $0.01 par
value, authorized 100,000,000
shares; outstanding 12,729,278
shares............................. 1,213,000
Additional paid-in capital.......... 204,640,000 (204,640,000)(H) 5,857,000
Share purchase notes................ (280,000) 280,000 (H)
Accumulated deficit................. (144,143,000) 144,143,000 (H)(F) (65,485,000)
------------- ----------- ------------ ------------ ------------ ----------
72,350,000 (72,350,000) (58,415,000)
------------- ----------- ------------ ------------ ------------ ----------
$ 229,579,000 $82,535,000 $(63,000,000) $249,114,000 $ 52,300,000 $6,417,000
============== ============ ============= ============= ============= ===========
<CAPTION>
HISTORICAL
PRO FORMA HOTEL PRO FORMA
PRO FORMA OPERATING INVESTORS SLT & SLC
ADJUSTMENTS PARTNERSHIP ELIMINATIONS COMBINED COMBINED
------------ ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Hotel assets held for sale, net..... $ $ 932,000 $ 13,610,000 $ 13,610,000
Hotel assets, net................... 40,899,000 147,674,000 182,789,000
------------ ----------- ------------- ------------
41,831,000 161,284,000 196,399,000
Mortgage notes receivable, net...... 10,791,000 59,628,000
Investment in joint venture hotel
properties......................... 11,000 304,000 304,000
------------ ----------- ------------- ------------
Total real estate investments...... 41,842,000 172,379,000 256,331,000
Cash and cash equivalents........... (2,000,000)(E) 5,492,000 8,155,000 9,155,000
Accounts receivable................. 4,996,000 5,698,000 5,698,000
Notes receivable -- Corporation..... (26,535,000)
Notes receivable, net............... 651,000 1,667,000 1,667,000
Prepaid expenses and other assets... 2,000,000 (E) 5,736,000 4,445,000 8,445,000
------------ ----------- ------------- ------------
$58,717,000 $ 192,344,000 $281,296,000
============ =========== ============= ============
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
LIABILITIES
Secured notes payable & revolving
line of credit..................... $ $ $ 127,397,000 $121,397,000
Mortgage and other notes payable.... 14,133,000 41,277,000 91,536,000
Notes payable -- Trust.............. (63,000,000)(F) 26,535,000 (26,535,000)
Accounts payable and other
liabilities........................ 845,000 (I) 7,892,000 9,735,000 11,425,000
------------ ----------- ------------- ------------
(62,155,000) 48,560,000 178,409,000 224,358,000
------------ ----------- ------------- ------------
Commitments and contingencies(J)
PARTNERS' CAPITAL................... 4,585,000 (H) 10,157,000 56,938,000
(845,000)(I)
------------ ----------- ------------
3,740,000 10,157,000 56,938,000
------------ ----------- ------------
SHAREHOLDERS' EQUITY (DEFICIT)
Trust shares of beneficial interest,
$0.01 par value, authorized
110,000,000 shares; outstanding
12,729,278 shares.................. 12,133,000
Corporation common stock, $0.01 par
value, authorized 100,000,000
shares; outstanding 12,729,278
shares............................. (1,213,000)(H) 1,213,000
Additional paid-in capital.......... (5,857,000)(H) 210,497,000
Share purchase notes................ (280,000)
Accumulated deficit................. 65,485,000 (H)(F) (209,628,000)
------------ ----------- ------------- ------------
58,415,000 13,935,000
------------ ----------- ------------- ------------
$58,717,000 $ 192,344,000 $281,296,000
============ =========== ============= ============
</TABLE>
The accompanying notes are an integral part of the pro forma separate and
combined balance sheets.
F-10
<PAGE> 112
- ---------------
(A) Reflects the historical balance sheet of Hotel Investors Trust as of June
30, 1994.
(B) Reflects the historical cost of the assets (net of certain liabilities)
contributed by Starwood. Starwood has acquired four hotel properties which
will be contributed, as follows:
<TABLE>
<CAPTION>
COST YEAR NUMBER
PROPERTY LOCATION BASIS(1)(3) ENCUMBRANCE BUILT OF ROOMS
-------- -------- ----------- ----------- ----- --------
<S> <C> <C> <C> <C> <C>
Capitol Hill
Suites Washington, D.C. $ 8,610,000 -- 1955 152
French Quarters Lexington, KY 12,400,000 $ 1,517,000 1989 155
Suites(2)
Doubletree Hotel Rancho Bernardo, CA 8,317,000 6,800,000 1987 209
Harvey Wichita Inn Wichita, KS 5,788,000 2,250,000 1969 259
----------- -----------
$35,115,000 $10,567,000
=========== ===========
</TABLE>
--------------------
(1) $5,612,000 of costs related to the properties will be contributed to
the Operating Partnership.
(2) Includes 38,000 square feet of retail space and 12,000 square feet of
office space. Budgeted capital expenditures for the twelve months
following the consummation of the Reorganization are $306,000.
(3) The allocation of the cost basis as determined based on estimated fair
market value is as follows:
<TABLE>
<CAPTION>
CAPITOL HILL FRENCH QUARTERS DOUBLETREE HARVEY WICHITA
SUITES HOTEL SUITES HOTEL HOTEL
------------ --------------- ---------- --------------
<S> <C> <C> <C> <C>
Land.............................. $2,000,000 $ 1,350,000 $1,500,000 $ 341,000
Building.......................... 5,760,000 9,550,000 5,717,000 3,285,000
Furniture, Fixtures & Equipment... 850,000 1,500,000 1,100,000 2,162,000
---------- ----------- ---------- ----------
Total............................. $8,610,000 $12,400,000 $8,317,000 $5,788,000
========== =========== ========== ==========
</TABLE>
Hotel assets are depreciated using the straight line method over estimated
lives of thirty-five years for buildings and improvements and five years
for furniture, fixtures, and equipment.
Subsequent to June 30, 1994, Starwood purchased from the Trust the Albany
Holiday Inn, with a net book value of $5,200,000, for $6,000,000 in cash.
The cash proceeds from the sale were used by the Trust to make a principal
paydown on the Secured Notes Payable. In connection with the
Reorganization, Starwood will contribute the property to SLT Realty LP.
Because Starwood has the right to sell the hotel back to the Trust for the
purchase price plus a 10% return on its investment, the transaction will be
recorded as a financing. The pro forma balance sheets reflects the Trust as
owning the Albany Holiday Inn.
The mortgage notes receivable, acquired in 1993 at a discount, consist of
the following:
Three performing mortgage notes to affiliated borrowers collateralized by
three full service hotels (aggregating 1,230 rooms) in the Dallas, Texas
area. The mortgage notes, maturing on December 31, 2002, are
cross-collateralized, are guaranteed by certain persons and have cost bases
and outstanding principal balances at June 30, 1994 as follows:
<TABLE>
<CAPTION>
OUTSTANDING
PRINCIPAL
COLLATERAL BALANCE COST BASIS REFERENCE
---------- ----------- ----------- ---------
<S> <C> <C> <C>
Harvey Hotel Addison $10,843,000 $ 7,345,000 (a)
Harvey Hotel Bristol 17,350,000 11,739,000 (b)
Harvey Hotel DFW 26,988,000 18,260,000 (c)
----------- -----------
$55,181,000 $37,344,000
----------- -----------
Other Mortgage Notes:
Atlantic City Quality Inn $11,523,000 $ 4,185,000 (d)
Secaucus, New Jersey Ramada 12,518,000 7,308,000 (d)
----------- -----------
$79,222,000 $48,837,000
=========== ===========
</TABLE>
F-11
<PAGE> 113
--------------------
(a) Represents a first mortgage note bearing interest at 8% (which was
purchased at a discount which reflects a 16.1% effective rate) payable
quarterly in arrears. The mortgage note is non-recourse, has a 15-year
amortization period and a balloon payment at maturity.
(b) Represents a first mortgage note bearing interest at 8% (which was
purchased at a discount which reflects a 16.1% effective rate) payable
quarterly in arrears. The mortgage note is non-recourse, has a 15-year
amortization period and a balloon payment at maturity.
(c) Represents a first mortgage note bearing interest at 8% (which was
purchased at a discount which reflects a 16.1% effective rate) payable
quarterly in arrears. The mortgage note is non-recourse, has a 15-year
amortization period and a balloon payment at maturity.
Aggregate operating revenues and expenses on the underlying assets of
the notes were $21,976,000 and $15,631,000, respectively, for the six
months ended June 30, 1994 and $40,023,000 and $30,449,000,
respectively, for the year end December 31, 1993.
(d) The mortgage notes bear interest at various rates (which were purchased
at a discount, which reflects a 19.1% aggregate effective rate) and are
payable monthly in arrears, except that for the months of November 1994
through April 1995, debt service of the Atlantic City Quality Inn shall
accrue and be payable from excess cash flow. Commencing May 1, 1995
fixed payments of debt service shall be required to be resumed. The
mortgages are non-recourse and mature between 1996 and 2010.
(e) Aggregate principal payments due for total pro forma notes receivable
for the years ended June 30 are $4,222,000 in 1995, $4,822,000 in 1996,
$5,262,000 in 1997, $5,296,000 in 1998, $3,673,000 in 1999 and
$36,353,000 thereafter.
Notes payable consists of the following:
(a) A $30,692,000 note issued in connection with the acquisition of the
Harvey mortgage notes receivable under the terms of a Loan
Agreement with a third party dated October 15, 1993. The note is
nonrecourse and matures on January 31, 2003 and bears interest on a
monthly basis at variable rates based on the London Interbank Offer
Rate (LIBOR) Eurodollar rate plus 3%. The LIBOR rate at June 30,
1994 was 4.875%.
(b) A $9,000,000 note relating to the other mortgage notes. The note
bears interest at variable rates based on the LIBOR rate plus 4%.
Interest is payable monthly in arrears and the note matures in
1995.
(c) $8,317,000 cross defaulted and cross collateralized indebtedness
relating to the acquisition of the DoubleTree Rancho Bernardo
($6,800,000), the French Quarters Suites ($1,517,000) and the
Albany Holiday Inn. The note bears interest at variable rates based
on the LIBOR rate plus 2.5%. Interest is payable monthly in arrears
and the note matures in 1995.
(d) A $2,250,000 construction loan funded in 1994 and used to renovate
the Harvey Wichita Hotel bearing interest at 7.75% during the
construction period. At the end of the construction period, the
loan will be converted to a permanent financing with an annual
interest rate of 7.5% fixed for a five year term, or prime + 1%
adjusted annually with a ceiling of 10% and a maximum annual
adjustment of 1%.
(e) Aggregate principal payments due for total pro forma notes payable
for the years ended June 30 are $9,672,000 in 1995, $26,580,000 in
1996, $11,766,000 in 1997, $3,074,000 in 1998, $5,074,000 in 1999,
and thereafter $35,370,000.
(C) The Trust and the Corporation are the general partner and managing general
partner of the Realty Partnership and the Operating Partnership,
respectively and as such will be liable for the obligations of the Realty
Partnership and the Operating Partnership, respectively. As a condition to
the Reorganization, Starwood will have the right to nominate a majority of
the respective Board members of the Trust and the Corporation upon the
Reorganization. Neither the Trust nor the Corporation is considered to have
unilateral control of the Realty Partnership or the Operating Partnership
for accounting purposes.
F-12
<PAGE> 114
Therefore, the assets and liabilities of SLT Realty Partnership and SLC
Operating Partnership have been accounted for based on the historical costs
of the contributed assets and liabilities of Hotel Investors Trust, Hotel
Investors Corporation and Starwood Capital Group, L.P.
(D) Reflects the historical balance sheet of Hotel Investors Corporation as of
June 30, 1994.
(E) Reflects the payment of organization costs related to the formation of the
Realty Partnership.
(F) Reflects the forgiveness of intercompany debt.
(G) Reflects the advance related to the Albany Holiday Inn Hotel subsequently
contributed by Starwood Capital Group, L.P. and the related payment of debt.
(H) Reflects the establishment of the Partners' capital accounts.
(I) Starwood has received an assignment of certain claims (the "Assigned
Claims") of Leonard M. Ross and his affiliates ("Ross"). Ross had opted out
of the settlement by the Trust and the Corporation of certain shareholder
litigation described in Item 3 of the Hotel Investors 10-K accompanying
this Joint Proxy Statement. Virtually all other shareholders of the Trust
and the Corporation were bound by such settlement. In addition to
preserving his rights to institute an action against the Companies and the
other defendants with respect to the matters covered by such settlement,
Ross had threatened to separately institute such an action and had
threatened to assert other alleged causes of action against the Companies.
Starwood has agreed to purchase Ross' Paired Shares, at Ross' election, in
a 60-day period beginning on the earlier of the year after the consummation
of the Reorganization or December 15, 1995, at a price of $39.375 (as
adjusted for an assumed 1-for-7 Reverse Split) per Paired Share. Starwood
may also elect to purchase such Paired Shares at the same time and on the
same terms. During the third quarter of 1994, the Trust and the Corporation
will record a charge to income (which charge is not reflected in the
accompanying pro forma statements of operations) of $1,325,000 and
$1,325,000, respectively, the estimated fair market value of the agreement,
as determined by an investment banker using an option pricing model.
If the Reorganization is consummated and the Trust and the Corporation
receive, prior to December 15, 1995, a full release from Starwood for the
Assigned Claims, the Trust and the Corporation will indemnify Starwood
against any liabilities incurred under the Assignment Agreement up to a
maximum of $1,800,000. If the Reorganization is consummated, Starwood
agreed that any recovery with respect to the Assigned Claims will be
limited to $1,800,000, and the Trust and the Corporation have agreed to
toll the expiration of the limitations period in respect of the Assigned
Claims until January 31, 1996.
The estimated fair value of the Assignment Agreement has been charged to
accumulated deficit with a corresponding reduction in the investment in
partnership in the pro forma balance sheet, as the Assigned Claims were
asserted against the Trust and the Corporation. In addition, a liability
has been established for the present value of the expected indemnification
for $845,000 for both the Trust and the Corporation. The Realty Partnership
and the Operating Partnership will reimburse the Trust and the Corporation,
respectively, for all amounts paid in respect of such indemnification
obligation. Therefore, the Partnership's pro forma balance sheets each
reflect a liability of $845,000 to reimburse the Trust and the Corporation,
with a corresponding charge to Partners capital. To the extent that the
amount of the ultimate indemnification, if any, is less than $1,800,000,
the difference will be reflected in the income of the respective
Partnerships.
(J) Upon consummation of the Reorganization, Starwood will receive notes issued
by the Partnerships which would be payable only if the Trust and the
Corporation consummate a public offering of Paired Shares within 18 months
following the consummation of the Reorganization, which offering results in
the receipt by the Trust and the Corporation of gross proceeds of not less
than $150 million. The amount payable under such notes shall be equal to
three fourths of one percent (.75%) of the sum of the total market value of
all Paired Shares (assuming conversion of all units) upon consummation of
such offering and the principal amount of indebtedness of the Partnerships
at such time. Such notes are not included in the pro forma financial
statements as they are contingent upon the consummation of a public
offering at a future date.
F-13
<PAGE> 115
SLT REALTY L.P. AND SLC OPERATING L.P.
PRO FORMA SEPARATE AND COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND THE YEAR ENDED DECEMBER 31, 1993
(UNAUDITED)
The following unaudited Pro Forma Separate and Combined Statements of
Operations are presented as if the Reorganization in which the Trust and
Corporation will contribute substantially all of their assets (subject to
substantially all of their liabilities) in exchange for 28.3% general
partnership interests in SLT Realty L.P. and SLC Operating L.P. (the
"Partnerships") and Starwood will contribute cash and other assets, subject to
certain liabilities, in exchange for 71.7% limited partnership interests in the
Partnerships had occurred on January 1, 1993.
The unaudited Pro Forma Combined Statements of Operations should be read in
conjunction with the Combined Historical Financial Statements of Hotel Investors
Trust and Hotel Investors Corporation and Notes thereto which are incorporated
herein by reference. In management's opinion, all adjustments necessary to
reflect the effects of the Reorganizations have been made.
The unaudited Pro Forma Statements of Operations are not necessarily
indicative of what actual results of operations of the Partnerships would have
been assuming the Reorganizations had occurred on January 1, 1993, nor do they
purport to represent the Partnerships' results of operations for future periods.
F-14
<PAGE> 116
SLT REALTY LP AND SLC OPERATING LP
UNAUDITED SEPARATE AND COMBINED PRO FORMA STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
HOTEL PRO FORMA HOTEL
INVESTORS PRO FORMA SLT REALTY INVESTORS PRO FORMA
TRUST STARWOOD ADJUSTMENTS PARTNERSHIP CORPORATION ADJUSTMENTS
--------------------------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
(A) (B) (C)
REVENUE
Hotel........................... $ 8,069,000 $(8,069,000)(D) $41,894,000 $8,069,000(D)
Gaming.......................... 14,313,000
Rents from Corporation.......... $ 8,456,000 1,775,000 (E) $10,231,000
Interest from Corporation....... 841,000 841,000
Interest from mortgage and
other notes................... 738,000 4,050,000 4,788,000 24,000
Rents from other leased hotel
properties.................... 463,000 463,000
Management fees and other
income........................ 119,000 119,000 189,000
Gain on sales of hotel assets... 579,000 579,000 13,000
----------- ----------- ----------- ----------- ----------- ----------
11,196,000 12,119,000 (6,294,000) 17,021,000 56,433,000 8,069,000
----------- ----------- ----------- ----------- ----------- ----------
EXPENSES
Hotel operations................ 5,971,000 (5,971,000)(D) 31,124,000 5,971,000(D)
Gaming operations............... 12,159,000
Rent -- Trust................... 8,456,000 1,775,000(E)
Interest -- Trust............... 841,000
Interest -- other............... 7,775,000 1,998,000 (308,000)(F) 9,465,000 683,000
Depreciation and amortization... 2,565,000 347,000 200,000 (G) 3,112,000 1,448,000 200,000(G)
561,000(D)
Administrative and
operating..................... 722,000 722,000 1,258,000
----------- ----------- ----------- ----------- ----------- ----------
11,062,000 8,316,000 (6,079,000) 13,299,000 55,969,000 8,507,000
----------- ----------- ----------- ----------- ----------- ----------
NET INCOME (LOSS)....... $ 134,000 $ 3,803,000 $ (215,000) $ 3,722,000 $ 464,000 $ (438,000)
=========== =========== =========== =========== =========== ===========
<CAPTION>
PRO FORMA
SLC HISTORICAL PRO FORMA
OPERATING INVESTORS SLT & SLC
PARTNERSHIP ELIMINATIONS COMBINED COMBINED
----------------------------------------------------
<S> <C> <C> <C> <C>
(A) (B) (C)
REVENUE
Hotel........................... $49,963,000 $41,894,000 $49,963,000
Gaming.......................... 14,313,000 14,313,000 14,313,000
Rents from Corporation.......... $(10,231,000)
Interest from Corporation....... (841,000)
Interest from mortgage and
other notes................... 24,000 762,000 4,812,000
Rents from other leased hotel
properties.................... 463,000 463,000
Management fees and other
income........................ 189,000 308,000 308,000
Gain on sales of hotel assets... 13,000 592,000 592,000
----------- ----------- -----------
64,502,000 58,332,000 70,451,000
----------- ----------- -----------
EXPENSES
Hotel operations................ 37,095,000 31,124,000 37,095,000
Gaming operations............... 12,159,000 12,159,000 12,159,000
Rent -- Trust................... 10,231,000 (10,231,000)
Interest -- Trust............... 841,000 (841,000)
Interest -- other............... 683,000 8,458,000 10,148,000
Depreciation and amortization... 2,209,000 4,013,000 5,321,000
Administrative and
operating..................... 1,258,000 1,980,000 1,980,000
----------- ----------- -----------
64,476,000 57,734,000 66,703,000
----------- ----------- -----------
NET INCOME (LOSS)....... $ 26,000 $ 598,000 $ 3,748,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the pro forma separate and
combined statements of operations.
F-15
<PAGE> 117
SLT REALTY LP AND SLC OPERATING LP
UNAUDITED SEPARATE AND COMBINED PRO FORMA STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
HOTEL PRO FORMA HOTEL
INVESTORS PRO FORMA SLT REALTY INVESTORS PRO FORMA
TRUST STARWOOD ADJUSTMENTS PARTNERSHIP CORPORATION ADJUSTMENTS
----------- ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
(A) (B) (C)
REVENUE
Hotel..................... $15,489,000 $(15,489,000)(D) $ $ 86,903,000 $15,489,000(D)
Gaming.................... 27,505,000
Rents from Corporation.... $16,481,000 2,987,000 (E) 19,468,000
Interest from Corporation. 1,534,000 1,534,000
Interest from mortgage and
other notes............. 1,288,000 8,190,000 9,478,000 124,000
Rents from other leased
hotel properties........ 839,000 839,000
Management fees and other
income.................. 253,000 253,000 222,000
Gain (loss) on sales of
hotel assets............ (53,000) (53,000) 74,000
----------- ----------- ------------- ----------- ------------ -----------
20,342,000 23,679,000 (12,502,000) 31,519,000 114,828,000 15,489,000
----------- ----------- ------------- ----------- ------------ -----------
EXPENSES
Hotel operations.......... 11,882,000 (11,882,000)(D) 68,132,000 11,882,000(D)
Gaming operations......... 24,055,000
Rent -- Trust............. 16,481,000 2,987,000(E)
Interest -- Trust......... 1,534,000
Interest -- other......... 14,020,000 3,995,000 (615,000)(F) 17,400,000 1,167,000
Depreciation and
amortization............ 5,630,000 695,000 400,000 (G) 6,725,000 3,602,000 400,000(G)
1,122,000(D)
Administrative and
operating............... 2,212,000 2,212,000 3,000,000
Provision for losses...... 2,369,000 2,369,000
----------- ----------- ------------- ----------- ------------ -----------
24,231,000 16,572,000 (12,097,000) 28,706,000 117,971,000 16,391,000
----------- ----------- ------------- ----------- ------------ -----------
NET INCOME (LOSS). $(3,889,000) $ 7,107,000 $ (405,000) $ 2,813,000 $ (3,143,000) $ (902,000)
=========== =========== ============= =========== ============ ===========
<CAPTION>
PRO FORMA
SLC HISTORICAL PRO FORMA
OPERATING INVESTORS SLT & SLC
PARTNERSHIP ELIMINATIONS COMBINED COMBINED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(A) (B) (C)
REVENUE
Hotel..................... $102,392,000 $ 86,903,000 $102,392,000
Gaming.................... 27,505,000 27,505,000 27,505,000
Rents from Corporation.... (19,468,000)
Interest from Corporation. (1,534,000)
Interest from mortgage and
other notes............. 124,000 1,412,000 9,602,000
Rents from other leased
hotel properties........ 839,000 839,000
Management fees and other
income.................. 222,000 475,000 475,000
Gain (loss) on sales of
hotel assets............ 74,000 21,000 21,000
------------ ------------ ------------
130,317,000 117,155,000 140,834,000
------------ ------------ ------------
EXPENSES
Hotel operations.......... 80,014,000 68,132,000 80,014,000
Gaming operations......... 24,055,000 24,055,000 24,055,000
Rent -- Trust............. 19,468,000 (19,468,000)
Interest -- Trust......... 1,534,000 (1,534,000)
Interest -- other......... 1,167,000 15,187,000 18,567,000
Depreciation and
amortization............ 5,124,000 9,232,000 11,849,000
Administrative and
operating............... 3,000,000 5,212,000 5,212,000
Provision for losses...... 2,369,000 2,369,000
------------ ------------ ------------
134,362,000 124,187,000 142,066,000
------------ ------------ ------------
NET INCOME
(LOSS).......... $ (4,045,000) $ (7,032,000) $ (1,232,000)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the pro forma separate and
combined statements of operations.
F-16
<PAGE> 118
- ---------------
(A) Reflects the historical statements of operations of Hotel Investors Trust
for the six months ended June 30, 1994 and the year ended December 31, 1993.
Operations for properties sold or pending sale are not considered material
to the pro forma presentation.
(B) Reflects the pro forma statement of operations of the assets and liabilities
contributed by Starwood Capital Group for the six months ended June 30, 1994
and the year ended December 31, 1993. Pro forma interest income and expense
is reflected as if Starwood had contributed the related mortgage notes
receivable and notes payable as of January 1, 1993.
(C) Reflects the historical statement of operations of Hotel Investors
Corporation for the six months ended June 30, 1994 and the year ended
December 31, 1993. Operations for properties sold or pending sale are not
considered material to the pro forma presentation.
(D) Reflects the pro forma operating revenues, expenses and depreciation of the
hotel assets contributed by Starwood leased to SLC Operating Partnership.
(E) Reflects rents on the hotel assets contributed by Starwood leased to SLC
Operating Partnership. The leases between the Trust and the Corporation
provide for annual base or minimum rents, plus contingent or percentage
rents based on the gross revenue of the properties and are accounted for as
operating leases.
(F) Reflects the reduction of interest expense as a result of the $6,000,000
debt payment from the proceeds of the sale of the Albany Holiday Inn to
Starwood.
(G) Reflects the amortization of organization costs related to the formation of
the Partnerships over a five year period.
(H) Starwood has guaranteed the cash flow from the Harvey Wichita Hotel (which
is defined for purposes of the guarantee as cash received by the Operating
Partnership from the hotel, less management fees and capital expenditures
for the hotel) in the amount of $700,000, $800,000 and $900,000 for the
three years following the Reorganization. Related payments, if any, will be
accounted for as a reduction in the basis of the property decreasing
depreciation expense over the remaining life of the assets. No adjustments
for the guarantee have been made as any payments to be received are
dependent upon the future operations of the hotel which are not expected to
be comparable to the historical operations reflected in the pro forma
periods.
F-17
<PAGE> 119
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Starwood Wichita Investors, L.P.
In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in partners' capital and of cash flows present fairly,
in all material respects, the financial position of Starwood Wichita Investors,
L.P. at December 31, 1993 and the results of its operations and its cash flows
for the period December 17, 1993 (inception) to December 31, 1993, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of Starwood Wichita Investors, L.P.'s management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
October 28, 1994
Dallas, Texas
F-18
<PAGE> 120
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Starwood Wichita Investors, L.P.
In our opinion, the accompanying statements of operations, of changes in
division equity/(deficit) and of cash flows present fairly, in all material
respects, the results of operations and cash flows for the Wichita East Hotel
for the period January 1, 1993 to December 19, 1993, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of Wichita East Hotel management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
October 28, 1994
Dallas, Texas
F-19
<PAGE> 121
STARWOOD WICHITA INVESTORS, L.P.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1993 1994
------------ -----------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents.......................................... $ 28,542 $ 75,576
Accounts receivable, net of allowance for doubtful accounts ($812
at December 31, 1993 and $2,250 at June 30, 1994;
respectively).................................................... 38,838 211,680
Inventories........................................................ 125,419 100,843
Fixed assets, net of accumulated depreciation (Note 4)............. 3,538,202 3,326,568
Other.............................................................. 71,677 102,850
---------- ----------
Total assets............................................. $3,802,678 $3,817,517
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable -- trade.......................................... $ 73,999 $ 64,826
Accounts payable -- related parties................................ 1,306 58,579
Accrued compensation............................................... 52,046 32,304
Accrued taxes other than income.................................... 68,915 108,994
Other accrued liabilities.......................................... 29,246 34,294
Capital lease obligations (Note 5)................................. 145,136 136,301
---------- ----------
Total liabilities........................................ 370,648 435,298
---------- ----------
Partners' capital (Note 6)......................................... 3,432,030 3,382,219
---------- ----------
Total liabilities and partners' capital.................. $3,802,678 $3,817,517
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 122
STARWOOD WICHITA INVESTORS, L.P.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR FOR THE PERIOD
FOR THE PERIOD FOR THE PERIOD DECEMBER 17, 1993 FOR THE PERIOD
JANUARY 1, 1993 TO JANUARY 1, 1993 TO (INCEPTION) TO JANUARY 1, 1994 TO
JUNE 30, 1993 DECEMBER 19, 1993 DECEMBER 31, 1993 JUNE 30, 1994
------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues:
Rooms......................... $1,309,649 $2,409,409 $ 23,944 $1,306,700
Food and beverage............. 393,318 791,811 9,002 392,337
Telephone..................... 48,216 107,832 868 73,531
Other......................... 35,115 78,569 2,185 36,933
---------- ---------- -------- ----------
1,786,298 3,387,621 35,999 1,809,501
Cost of sales -- distributed
operating expenses:
Rooms......................... 405,852 868,308 19,938 486,379
Food and beverage............. 394,315 859,543 18,779 412,683
Telephone..................... 25,235 66,571 1,242 47,002
Other......................... 16,777 30,720 276 17,309
---------- ---------- -------- ----------
Operating department income..... 944,119 1,562,479 (4,236) 846,128
---------- ---------- -------- ----------
Undistributed operating
expenses:
Administrative and general.... 321,851 594,711 10,616 229,352
Advertising and promotion..... 146,108 352,041 9,221 231,999
Property operation and
maintenance................ 325,766 693,351 22,056 307,931
---------- ---------- -------- ----------
793,725 1,640,103 41,893 769,282
---------- ---------- -------- ----------
Fixed charges:
Depreciation.................. 227,143 422,555 18,236 216,484
Real estate taxes and
insurance.................. 105,802 135,607 2,327 72,897
Other charges................. 75,933 157,876 1,278 12,276
---------- ---------- -------- ----------
Operating loss for the period... (258,484) (793,662) (67,970) (224,811)
Other income.................... -- 118,430 -- --
Closing costs on sale of
property...................... -- (21,756) -- --
---------- ---------- -------- ----------
Net loss........................ $ (258,484) $ (696,988) $(67,970) $ (224,811)
========== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 123
STARWOOD WICHITA INVESTORS, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
FOR THE PERIOD
DECEMBER 17, 1993
(INCEPTION) TO
DECEMBER 31, 1993
--------------------
<S> <C>
Partners' capital, beginning of period..................................... $ -0-
Partners' contributed capital.............................................. 3,500,000
Net loss for period........................................................ (67,970)
----------
Partners' capital, end of period........................................... $3,432,030
==========
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1994 TO
JUNE 30, 1994
--------------------
(UNAUDITED)
<S> <C>
Partners' capital, beginning of period..................................... $3,432,030
Partners' contributed capital.............................................. 175,000
Net loss for period........................................................ (224,811)
----------
Partners' capital, end of period........................................... $3,382,219
==========
</TABLE>
STATEMENT OF CHANGES IN DIVISION EQUITY/(DEFICIT) (PREDECESSOR)
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1993
TO JUNE 30, 1993
--------------------
(UNAUDITED)
<S> <C>
Division equity, beginning of period....................................... $3,884,613
Net loss for period........................................................ (258,484)
----------
Division equity, end of period............................................. $3,626,129
==========
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1993 TO
DECEMBER 19, 1993
--------------------
<S> <C>
Division equity, beginning of period....................................... $ 3,884,613
Capital withdrawal......................................................... (3,287,797)
Net loss for period........................................................ (696,988)
-----------
Division deficit, end of period............................................ $ (100,172)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 124
STARWOOD WICHITA INVESTORS, L.P.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR FOR THE PERIOD
FOR THE PERIOD FOR THE PERIOD DECEMBER 17, 1993 FOR THE PERIOD
JANUARY 1, 1993 TO JANUARY 1, 1993 TO (INCEPTION) TO JANUARY 1, 1994 TO
JUNE 30, 1993 DECEMBER 19, 1993 DECEMBER 31, 1993 JUNE 30, 1994
------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating
activities:
Net loss..................... $(258,484) $ (696,988) $ (67,970) $(224,811)
Adjustments to reconcile net
loss from operations to
net cash used in operating
activities:
Depreciation.............. 227,143 422,555 18,236 216,484
Closing costs on sale of
property................ -- 21,756 -- --
Change in operating assets
and liabilities:
Accounts receivable..... (116,424) (83,753) (38,838) (172,842)
Inventory............... (11,596) 101,636 (125,419) 24,576
Other assets............ 152,187 215,103 (71,677) (88,968)
Accounts payable........ 32,779 175,035 75,305 105,895
Accrued liabilities..... (154,150) (313,508) 150,207 25,385
--------- ----------- ----------- ---------
Net cash used in
operating
activities......... (128,545) (158,164) (60,156) (114,281)
Cash flows from investing
activities:
Capital expenditures......... (2,139) (152,240) 3,411,302) (4,850)
Proceeds from sale of
property.................. -- 3,287,797 -- --
--------- ----------- ----------- ---------
Net cash provided
by/(used in)
investing
activities......... (2,139) 3,135,557 3,411,302) (4,850)
Cash flows from financing
activities:
Division equity withdrawal... -- 3,287,797) -- --
Partners' capital
contribution.............. -- -- 3,500,000 175,000
Capital lease payments....... (2,826) (11,302) -- (8,835)
--------- ----------- ----------- ---------
Net cash provided
by/(used in)
financing
activities......... (2,826) (3,299,099) 3,500,000 166,165
Net increase in cash........... $(133,510) $ (321,706) $ 28,542 $ 47,034
Cash at beginning of period.... 379,864 379,864 -- 28,542
--------- ----------- ----------- ---------
Cash at end of period.......... $ 246,354 $ 58,158 $ 28,542 $ 75,576
========= =========== =========== =========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period
for:
Interest..................... $ 2,067 $ 8,269 $ -0- $ 5,844
Income taxes................. -0- -0- -0- -0-
</TABLE>
SUPPLEMENTARY SCHEDULES OF NONCASH ACTIVITIES
In addition to the capital assets purchased, the Partnership assumed
certain capital lease obligations entered into by the Predecessor. See Note 5
for further discussion of the assumed capital leases.
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 125
STARWOOD WICHITA INVESTORS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993
1. ORGANIZATION
Starwood Wichita Investors, L.P. (the "Partnership"), a Delaware limited
partnership, was formed on December 17, 1993 for the purpose of acquiring
interests in real estate investments. Starwood Opportunity Fund II, L.P.
("SOFII") is the general partner with 1% interest. SOF-II is also a limited
partner owning 89% with the remaining 10% interest owned by Wichita Harvey
Partners, Ltd. ("Harvey"). The Partnership acquired the Wichita East Hotel from
The Travelers Insurance Company on December 20, 1993. The Travelers Insurance
Company (the "Predecessor"), a Connecticut corporation, acquired the real estate
property through bankruptcy proceedings and held the hotel until they sold it to
the Partnership on December 20, 1993. Although the Partnership was formed on
December 17, 1993, the operations of the hotel are not included in the
Partnership's accounts until the hotel changed ownership on December 20, 1993.
The operations of the hotel are included in the Predecessor financial records
through December 19, 1993. The hotel is operated under a management agreement
with Harvey Hotel Management Corporation and has 150 rooms.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Statements
The interim financial data for the six month periods ended June 30, 1994
and 1993 are unaudited; however, in the opinion of management, the interim data
includes all adjustments, consisting only of normal recurring adjustments
necessary for a fair statement of the results for the periods. The results of
operations and of cash flows for the six month periods ended June 30, 1994 and
1993 are not necessarily indicative of the results for a full year.
Cash and cash equivalents
For purpose of reporting cash flows, cash and cash equivalents include cash
in banks and cash on hand.
Fixed assets
Fixed assets are stated at the lower of cost or net realizable value. Net
realizable value is measured by management on a periodic basis and is determined
by estimating the future cash flows of the property less the costs of holding
and disposal. Depreciation is provided using accelerated methods over the
estimated useful lives of the related assets, generally five to 39 years. The
costs of repairs and minor renewals that do not significantly extend the life of
the property and equipment are normally expensed as incurred. The costs of major
renovation projects are capitalized and depreciated over the related period of
benefit.
Inventories
Food, linen, china, liquor and other inventories are valued at the lower of
cost or market on a first-in, first-out basis.
Income Taxes
No provision for income taxes is necessary in the financial statements of
the Partnership because, as a partnership, it is generally not subject to
federal or state income taxes and the tax effects of its activities flow through
to the partners.
No provision for income tax is provided in the Predecessor financial
statements as the hotel is represented as a stand alone entity with no prior
history. Therefore, the loss incurred for the period January 1, 1993 to December
19, 1993 is assumed to have no carry back period or benefit.
F-24
<PAGE> 126
STARWOOD WICHITA INVESTORS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
3. RELATED PARTY TRANSACTIONS
The Partnership has signed a management agreement with Harvey Hotel
Management Corporation, a related party to Harvey. The Partnership will pay
Harvey Hotel Management Corporation a management fee for operating the hotel.
For the period from December 20, 1993 to December 31, 1994, the agreement
provides an incentive fee which shall be equal to 20% of the "net operating
income" (as defined in the agreement to exclude depreciation, amortization,
interest, capital expenditures, and management fees). The incentive fee is
subordinate to distributions to owners. For years ending after December 31,
1994, the management fee will be the lesser of $100,000 or total excess cash
flows, as defined in the management agreement, plus 25% of the excess cash flow
after deducting the amount specified above for incentive fees. During the period
December 20, 1993 through December 31, 1993, no management fee was incurred. The
Predecessor had Harvey Hotel Management Corporation manage the operations of the
real estate property during the period January 1, 1993 to December 19, 1993.
Management and marketing expenses paid to Harvey Hotel Management Corporation
for the period were approximately $160,000.
The management agreement also details a preference fee to be paid to Harvey
Hotel Management Corporation upon the sale or refinancing of the hotel. The
agreement states that net sale (or refinancing) proceeds will be distributed to
the owners until they have received a return of their capital contributions,
plus an internal rate of return of 15% (as defined) on those contributions.
After the return of capital, Harvey Hotel Management Corporation will receive a
preference fee equal to 20% of the remaining proceeds.
4. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1993
------------
<S> <C>
Land............................................................ $ 341,130
Building and improvements....................................... 1,934,512
Furniture and equipment......................................... 1,135,660
Equipment under capital leases.................................. 145,136
------------
3,556,438
Less: accumulated depreciation.................................. (18,236)
------------
$3,538,202
==========
</TABLE>
The land, building and furniture was purchased for approximately $3,400,000
on December 20, 1993. The purchase price was allocated based on the estimated
relative fair value of the individual assets. In addition, furniture and
equipment was completely inventoried on the acquisition date.
Depreciation expense for the period December 20, 1993 to December 31, 1993
was $18,236 and includes depreciation on the assets recorded under capital
leases.
5. LEASES
The Partnership assumed certain capital equipment leases in the operation
of the real estate property which extend through 2000. At the end of the lease
term the Partnership has the option to purchase the equipment at the fair market
value of the equipment. The implicit interest rate on capital leases is 9%.
F-25
<PAGE> 127
STARWOOD WICHITA INVESTORS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Capital lease obligations are summarized below for the years ending
December 31:
<TABLE>
<S> <C>
1994.............................................................. $ 31,089
1995.............................................................. 31,089
1996.............................................................. 31,089
1997.............................................................. 31,089
1998.............................................................. 31,089
Thereafter........................................................ 41,452
--------
196,897
Less estimated executory cost included in capital leases.......... (10,969)
--------
Net minimum lease payments under capital leases................... 185,928
Less amount representing interest................................. (40,792)
--------
Present value of net minimum lease payments under capital
leases.......................................................... $145,136
========
</TABLE>
The Partnership leases various equipment under operating leases for use in
the operation of the property. Minimum rental commitments under noncancellable
leases are as follows at December 31:
<TABLE>
<S> <C>
1994............................................................... $ 8,666
1995............................................................... 7,688
1996............................................................... 4,752
1997............................................................... 4,752
-------
Total minimum lease payments....................................... $25,858
=======
</TABLE>
Rent expense for the period January 1, 1993 to December 19, 1993 was
$6,253, and totalled $280 for the remainder of the year.
The Partnership leases space to various tenants for a hotel gift shop, hair
salon, airline ticket outlet and a rooftop antenna. The minimum lease rental
income under noncancelable leases for 1993 was approximately $11,600. The leases
expire on various dates from 1994 to 1999.
6. PARTNERS' CAPITAL
At December 31, 1993, total partners' capital comprised:
<TABLE>
<CAPTION>
CAPITAL PARTNERS'
CONTRIBUTIONS NET LOSS CAPITAL
------------- -------- ----------
<S> <C> <C> <C>
SOF-II (90%)............................ $3,150,000 $(61,173) $3,088,827
Harvey (10%)............................ 350,000 (6,797) 343,203
---------- -------- ----------
$3,500,000 $(67,970) $3,432,030
========== ======== ==========
</TABLE>
Net loss of the Partnership is allocated to the partners, on a prorata
basis, in accordance with the Partnership Agreement.
The Partnership Agreement states that partner contributions will be limited
to $5,340,000 for SOF-II and $600,000 for Harvey. The Agreement requires that
contributions be made on a prorata basis, as needed for hotel renovations or
operations.
F-26
<PAGE> 128
STARWOOD WICHITA INVESTORS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
7. SUBSEQUENT EVENTS
During 1994, the partners funded $175,000 to be used for purposes of
working capital and hotel renovations.
On April 15, 1994, the Partnership entered into a construction loan with
Bank IV Kansas for the purpose of renovating the property. The construction loan
is for $2,250,000 and carries an interest rate of 7.75% during the construction
period. The Partnership paid a commitment fee in the amount of $15,000 to secure
this financing. At the end of the construction period, the loan will be
converted to permanent financing with an annual interest rate of 7.75% fixed for
a five year term, or prime plus 1%, adjusted annually with ceiling of 10% and a
maximum annual adjustment of 1%. No amount had been drawn on this loan as of
June 30, 1994.
F-27
<PAGE> 129
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of the Starwood Capital Group
We have audited the accompanying schedule of operating revenue and certain
expenses of The French Quarter Square Limited (the Properties) for the year
ended December 31, 1993. This schedule is the responsibility of the Properties'
management. Our responsibility is to express an opinion on this schedule based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the schedule of operating revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the schedule. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall schedule
presentation. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying schedule of operating revenue and certain expenses was
prepared on the basis described in Note 1 and is not intended to be a complete
presentation of the Properties' revenues and expenses.
In our opinion, the schedule of operating revenue and certain expenses
audited by us presents fairly, in all material respects, the operating revenue
and certain expenses of The French Quarter Square Limited, on the basis
described in Note 1, for the year ended December 31, 1993, in conformity with
generally accepted accounting principles.
PRICE WATERHOUSE LLP
Dallas, Texas
October 27, 1994
F-28
<PAGE> 130
THE FRENCH QUARTER SQUARE LIMITED
SCHEDULE OF OPERATING REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR
FOR THE PERIOD FOR THE FOR THE PERIOD FOR THE PERIOD
JANUARY 1, TO YEAR ENDED JANUARY 1, TO JUNE 15 TO
JUNE 30, 1993 DECEMBER 31, 1993 JUNE 14, 1994 JUNE 30, 1994
-------------- ----------------- -------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenue:
Rooms................................. $1,587,244 $3,280,411 $1,464,461 $135,528
Food and beverage..................... 559,878 1,165,305 520,086 49,944
Telephone and other................... 87,526 167,231 111,094 3,858
Rental................................ 312,396 721,356 259,077 17,007
Expense reimbursements................ 3,000 6,266 37,671 1,269
---------- ---------- ---------- --------
2,550,044 5,340,569 2,392,389 207,606
---------- ---------- ---------- --------
Certain expenses (Note 1):
Cost of sales -- rooms................ 347,927 725,628 376,538 24,278
Cost of sales -- food and beverage.... 482,131 971,205 456,470 44,698
Cost of sales -- telephone and
other.............................. 65,470 130,877 55,089 4,375
General and administrative............ 212,886 500,146 265,686 6,250
Marketing............................. 210,874 399,519 190,986 10,317
Energy costs.......................... 122,068 260,755 117,285 7,835
Management fees....................... 126,164 271,313 119,475 9,523
Real estate taxes..................... 95,267 186,509 90,256 7,700
Insurance and property operations..... 142,798 297,398 174,175 6,766
Common area maintenance............... 17,067 36,318 21,530 721
Other expenses........................ 25,989 46,130 41,103 506
---------- ---------- ---------- --------
1,848,641 3,825,798 1,908,593 122,969
---------- ---------- ---------- --------
Operating revenue in excess of certain
expenses.............................. $ 701,403 $1,514,771 $ 483,796 $ 84,637
========== ========== ========== ========
</TABLE>
The accompanying notes are an integral part of this schedule.
F-29
<PAGE> 131
THE FRENCH QUARTER SQUARE LIMITED
NOTES TO SCHEDULE OF OPERATING REVENUE AND CERTAIN EXPENSES
DECEMBER 31, 1993
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying schedule of operating revenue and certain expenses relates
to the operations of The French Quarter Square Limited (the Properties) located
in Lexington, Kentucky. Construction was completed on the Properties in 1989.
The Properties consist of a 155 room hotel, a 37,500 square foot shopping center
and a 12,000 square foot office building. The shopping center and office space
were completed in 1988 and the hotel was completed in 1989.
Basis of presentation
This schedule was prepared for the partners of Starwood Capital Group (the
Partners), who acquired the Properties in an acquisition from Kentucky Central
Life Insurance Company on August 1, 1994. Kentucky Central Life Insurance
Company received the Properties through a deed in lieu of foreclosure on June
15, 1994. Prior to ownership by Kentucky Central Life Insurance Company, the
Properties were owned by The French Quarter Square Limited (Predecessor), a
Kentucky limited partnership, which had filed for protection under Chapter 11
Bankruptcy on September 21, 1993. The Partners are contemplating selling these
properties to Hotel Investors Inc. for inclusion in a real estate investment
trust portfolio. Accordingly, certain expenses, which may not be comparable to
the expenses expected to be incurred in the proposed future operations of the
Properties, have been excluded under the assumption that the potential
transaction described above will be consummated. Expenses excluded consist of
depreciation and valuation adjustments to the building and improvements,
interest expense on certain debt to acquire and develop the Properties, and
amortization of expenses not directly related to the proposed future operations
of the Properties.
Interim Statements
The interim financial data for the six month period ended June 30, 1993 and
the period from January 1, 1994 to June 15, 1994 as well as the period from June
15, 1994 to June 30, 1994 are unaudited; however, in the opinion of management,
the interim data includes all adjustments, consisting only of normal recurring
adjustments and eliminations necessary for a fair presentation of the results
for the periods. The schedule of operating revenue and certain expenses for the
six month period ended June 30, 1993 and for the period January 1, 1994 to June
15, 1994 as well as the period from June 15, 1994 to June 30, 1994 are not
necessarily indicative of the results for a full year.
Revenue and expense recognition
The accompanying schedule of operating revenue and certain expenses has
been prepared on the accrual basis of accounting.
Room revenue for the hotel is recognized when earned. Rental revenue on the
office building and shopping center is recognized on a straight line basis over
the terms of the leases. Percentage rents paid on the retail space are
recognized when earned.
2. RELATED PARTY TRANSACTIONS
Payments totalling approximately $150,000, for management fees and leasing
commissions incurred prior to January 1, 1993, were paid to Graves/Turner
Developments, a related party, on various dates between September 2, 1993 and
September 21, 1993. In addition, approximately $271,000 in management fees were
incurred and paid to French Quarter Properties Inc. and Graves/Turner
Developments for management services rendered during the year ended December 31,
1993.
F-30
<PAGE> 132
THE FRENCH QUARTER SQUARE LIMITED
NOTES TO SCHEDULE OF OPERATING REVENUE AND CERTAIN EXPENSES (CONTINUED)
DECEMBER 31, 1993
3. FUTURE MINIMUM RENTALS UNDER OPERATING LEASES
The retail and office properties are leased under operating leases with
initial noncancellable contracts starting at thirty six months. Some leases
provide for tenant reimbursement of certain common area maintenance expenses,
insurance and real estate taxes on a monthly basis.
A summary of the future minimum rentals to be received under noncancelable
operating leases is as follows:
<TABLE>
<S> <C>
Year ending December 31,
1994............................................................. $ 361,864
1995............................................................. 300,508
1996............................................................. 185,213
1997............................................................. 144,024
1998............................................................. 94,524
Thereafter....................................................... 7,502
----------
$1,093,635
=========
</TABLE>
Often the retail leases require additional rent to be paid based on a
percentage of sales exceeding a specified level.
4. SUBSEQUENT EVENTS (UNAUDITED)
The Properties were purchased by Berl Holdings L.P., an affiliate of the
Starwood Capital Group in August 1994 for $12,400,000. The purchaser has
allocated the purchase price as follows:
<TABLE>
<S> <C>
Buildings....................................................... $ 9,550,000
Land............................................................ 1,350,000
Furniture and fixtures.......................................... 1,500,000
-----------
$12,400,000
==========
</TABLE>
The purchaser estimates that the buildings have a useful life of 35 years
and the furniture and fixtures have a useful life of 5 years. Depreciation will
be provided using the straight line method over the estimated lives of the
assets. For the year ended December 31, 1993, proforma depreciation expense,
calculated using the allocated purchase price, lives and methods outlined would
be approximately $573,000. For the six month period ended June 30, 1993 the
proforma depreciation would be approximately $286,000. For the period January 1,
1994 to June 14, 1994 the proforma depreciation expense would be $262,000 and
for the period June 15, 1994 to June 30, 1994 proforma depreciation expense
would be $24,000.
The management companies of the properties did not make any capital
expenditures during the period January 1, 1993 to June 15, 1994.
Leasing commissions in the amounts of $44,000 on the office building and
$48,500 on the retail space were paid during the year ended December 31, 1993.
No leasing commissions were paid during the period January 1, 1994 to June 30,
1994.
F-31
<PAGE> 133
CAPITOL HILL HOLDINGS, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED SIX MONTHS
ENDED DECEMBER 31, ENDED
JUNE 30, 1993 1993 JUNE 30, 1994
------------- ----------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues:
Suites............................................ $1,687,721 $3,146,322 $1,747,125
Telephone......................................... 54,397 101,665 53,782
Other............................................. 80,232 147,330 50,916
---------- ---------- ----------
1,822,350 3,395,317 1,851,823
Departmental expenses:
Suites............................................ 439,496 875,318 442,708
Telephone......................................... 22,486 47,705 22,637
Other............................................. 26,640 48,232 19,724
---------- ---------- ----------
488,622 971,255 485,069
---------- ---------- ----------
Gross profit........................................ 1,333,728 2,424,062 1,366,754
Other expenses:
General and administrative........................ 180,563 418,513 196,392
Advertising and promotion......................... 98,350 210,317 93,612
Utilities......................................... 64,176 133,693 63,702
Maintenance and repairs........................... 97,893 185,766 115,024
Insurance and taxes............................... 74,527 152,834 22,645
Depreciation...................................... 126,800 253,600 164,138
Management fees (Note 3).......................... 75,164 156,874 81,092
---------- ---------- ----------
717,473 1,511,597 736,605
---------- ---------- ----------
Net income.......................................... 616,255 912,465 630,149
Retained earnings, beginning...................... 397,976 397,976 605,061
Distributions to stockholder, net................. (550,099) (705,380) (489,555)
---------- ---------- ----------
Retained earnings (deficit), ending............... $ 464,132 $ 605,061 $ 745,655
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 134
CAPITOL HILL HOLDINGS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1993 1994
------------ -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash............................................................. $ 91,175 $ 220,441
Accounts receivable:
Guest and city ledger......................................... 111,067 93,220
Other......................................................... 22,320 46,119
Less: Allowance for doubtful accounts......................... 2,676 2,676
---------- ----------
130,711 136,663
Inventory, at cost................................................. 51,097 51,461
Other current assets............................................... 20,543 11,048
---------- ----------
Total current assets..................................... 293,526 419,613
---------- ----------
Fixed assets:
Land............................................................. 2,258,000 2,258,000
Building......................................................... 5,042,000 5,042,000
Building improvements............................................ 598,117 756,104
Furniture, fixtures and equipment................................ 419,093 509,978
---------- ----------
8,317,210 8,566,082
Less: Accumulated depreciation................................... 523,591 687,729
---------- ----------
7,793,619 7,878,353
---------- ----------
Total assets............................................. $8,087,145 $8,297,966
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................................................. $ 141,597 $ 170,456
Accrued payroll and related taxes................................ 20,243 53,087
Other accrued expenses........................................... 20,244 28,768
---------- ----------
Total current liabilities................................ 182,084 252,311
---------- ----------
Stockholder's equity:
Common stock, $1.00 par value; 100 shares authorized and
outstanding................................................... 100 100
Paid-in-capital.................................................. 7,299,900 7,299,900
Retained earnings................................................ 605,061 745,655
---------- ----------
Total stockholder's equity............................... 7,905,061 8,045,655
---------- ----------
Total liabilities and stockholder's equity............... $8,087,145 $8,297,966
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 135
CAPITOL HILL HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1993 YEAR ENDED JUNE 30, 1994
(UNAUDITED) DECEMBER 31, 1993 (UNAUDITED)
------------- ----------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 616,255 $ 912,465 $ 630,149
--------- ---------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense.......................... 126,800 253,600 164,138
Gain on sale of fixed assets.................. -- (3,821) --
Changes in assets and liabilities:
Accounts receivable........................... (51,622) 16,238 (5,952)
Inventory..................................... 4,403 7,727 (364)
Other current assets.......................... 1,679 (3,249) 9,495
Accounts payable.............................. 82,175 41,351 28,859
Accrued payroll and related taxes............. 5,161 (27,116) 32,844
Other accrued expenses........................ 17,683 (63,389) 8,524
--------- ---------- ---------
Total adjustments.......................... 186,279 221,341 237,544
--------- ---------- ---------
Net cash provided by operating activities....... 802,534 1,133,806 867,693
--------- ---------- ---------
Cash flows from investing activities:
Building improvements.............................. (271,131) (384,910) (157,988)
Furniture, fixtures and equipment purchased........ (66,610) (142,973) (90,884)
Proceeds from sale of fixed assets................. -- 3,821 --
--------- ---------- ---------
Net cash used for investing activities.......... (337,741) (524,062) (248,872)
--------- ---------- ---------
Cash flows from financing activities:
Distributions to stockholder....................... (550,099) (705,380) (489,555)
--------- ---------- ---------
Net cash used for financing activities.......... (550,099) (705,380) (489,555)
--------- ---------- ---------
Net increase (decrease) in cash...................... (85,306) (95,636) 129,266
Cash at beginning of year............................ 186,811 186,811 91,175
--------- ---------- ---------
Cash at end of year.................................. $ 101,505 $ 91,175 $ 220,441
========= ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 136
CAPITOL HILL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993
NOTE 1 -- ORGANIZATION
On August 5, 1991, Capitol Hill Hotel Corp. (the Corporation) was formed
and incorporated in the state of Delaware. The Corporation was a wholly-owned
subsidiary of Marine Midland Realty Credit Corporation (see subsequent event
Note 5). On December 15, 1991, the Corporation amended its Articles of
Incorporation to change its name to Capitol Hill Holdings, Inc.
The Corporation was formed to take title to property in connection with a
foreclosure settlement agreement dated August 14, 1991 between the Corporation
and Capitol Hill Associates, Ltd., the former owner of the property.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of accounting
The accompanying financial statements have been prepared using the accrual
basis of accounting.
Cash and cash equivalents
The Corporation considers highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Fixed assets
Fixed assets are stated at the lower of cost or net realizable value. Net
realizable value is measured by management on a periodic basis and is determined
by estimating the future cash flows of the property less the cost of holding and
disposal. Building, building improvements, furniture and fixtures and equipment
are depreciated using the straight-line method over estimated lives ranging from
5 to 31 1/2 years. The costs of repairs and minor renewals that do not
significantly extend the life of the property and equipment are normally
expensed as incurred. The costs of major renovation projects are capitalized and
depreciated over the related period of benefit.
During 1992, the predecessor owner adjusted the basis of the land and
buildings to reflect their fair market value and upon foreclosure recorded these
assets at $7.3 million.
Income taxes
The Corporation is a participant in a joint venture under which the venture
partner is ascribed substantially all the results of operations for tax
purposes. The venture partner is a foreign corporation which has substantial
losses for which no benefit had previously been realized. Accordingly, no
provision for income taxes is provided in the accompanying financial statements.
NOTE 3 -- MANAGEMENT AGREEMENT
On January 1, 1992, the Corporation entered into a management agreement
with Hospitality Partners (Hospitality). The agreement provides for a monthly
management fee of 10% of adjusted net operating income, as defined in the
agreement. The agreement also provides for an incentive management fee equal to
20% of net operating income in excess of $1,000,000. The management and
incentive management fees for the year ended December 31, 1993 were $125,738 and
$31,136, respectively.
F-35
<PAGE> 137
CAPITOL HILL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
During the year ended December 31, 1993, the Corporation paid $45,600 to
Hospitality for certain accounting services provided to the Corporation.
NOTE 4 -- INTERIM STATEMENTS
The interim financial data for the six month periods ended June 30, 1994
and 1993 are unaudited; however, in the opinion of management, the interim data
includes all adjustments, consisting only of normal recurring adjustments and
eliminations necessary for a fair statement of the results of the periods. The
results of operations for the six month periods ended June 30, 1994 and 1993 are
not necessarily indicitive of the results for a full year.
NOTE 5 -- SUBSEQUENT EVENT
In August 1994 the Corporation, including substantially all real and
personal property, was sold to a third party for approximately $8.8 million.
F-36
<PAGE> 138
INDEPENDENT AUDITORS' REPORT
Board of Directors
Maruko, Inc.
We have audited the accompanying balance sheet of the Doubletree Club Hotel of
Rancho Bernardo (the "Hotel"), which was owned by Maruko, Inc. ("Maruko") and
individual Japanese investors, as of December 31, 1993, and the related
statements of operations and owners' equity and of cash flows for the year then
ended. These financial statements are the responsibility of the Hotel's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Doubletree Club Hotel of Rancho Bernardo
at December 31, 1993, and the results of its operations and its cash flows in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, Maruko applied for
protection from creditors under the Corporate Reorganization Law in Japan on
August 29, 1991 and under Chapter 11 with the United States Bankruptcy Court on
October 30, 1991. On July 1, 1994 and February 3, 1994 the courts approved
Maruko's reorganization plan in Japan and in the United States, respectively. As
part of the proceedings, the Hotel was sold on September 16, 1994.
DELOITTE & TOUCHE LLP
Los Angeles, California
October 24, 1994
F-37
<PAGE> 139
DOUBLETREE CLUB HOTEL OF RANCHO BERNARDO
BALANCE SHEETS
JUNE 30, 1994 AND DECEMBER 31, 1993
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
----------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS;
Cash and cash equivalents (Note 1)............................. $ 531,660 $ 283,062
Accounts receivable, less allowance for doubtful accounts of
$6,372 in 1994 and $5,772 in 1993........................... 152,757 65,999
Due from Operator (Note 2)..................................... 126,000
Inventories (Note 1)........................................... 13,644 10,124
Prepaid expenses............................................... 1,159 2,499
---------- ----------
Total current assets................................... 699,220 487,684
RESTRICTED CASH (Note 2)......................................... 383,226 328,394
PROPERTY AND EQUIPMENT, Net (Notes 1 and 4)...................... 7,864,272 8,091,886
OTHER ASSETS..................................................... 529 529
---------- ----------
TOTAL............................................................ $8,947,247 $8,908,493
========== ==========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................... $ 32,384 $ 21,445
Due to Operator (Note 2)....................................... 26,276 17,206
Accrued expenses, including pre-petition liabilities of $59,618
in 1994 and 1993............................................ 220,767 221,780
---------- ----------
Total current liabilities.............................. 279,427 260,431
OWNERS' EQUITY................................................... 8,667,820 8,648,062
---------- ----------
TOTAL............................................................ $8,947,247 $8,908,493
========== ==========
</TABLE>
See notes to financial statements.
F-38
<PAGE> 140
DOUBLETREE CLUB HOTEL OF RANCHO BERNARDO
STATEMENTS OF OPERATIONS AND OWNERS' EQUITY
SIX-MONTH PERIODS ENDED JUNE 30, 1994 AND 1993 AND YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
JUNE 30,
------------------------- DECEMBER 31,
1994 1993 1993
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES:
Room................................................ $1,591,048 $1,414,972 $2,914,592
Food and beverage................................... 112,538 101,806 197,863
Telephone........................................... 105,040 91,423 173,716
Other............................................... 36,890 18,992 49,251
---------- ---------- ------------
Total revenues.............................. 1,845,516 1,627,193 3,335,422
---------- ---------- ------------
COST OF SALES:
Room................................................ 353,846 314,495 647,623
Food and beverage................................... 80,765 74,496 143,377
Telephone........................................... 29,566 22,669 48,957
Other............................................... 9,479 7,814 15,249
---------- ---------- ------------
Total cost of sales......................... 473,656 419,474 855,206
---------- ---------- ------------
1,371,860 1,207,719 2,480,216
---------- ---------- ------------
EXPENSES:
Operating (Note 2).................................. 575,298 571,822 1,118,253
General and administrative.......................... 224,582 234,591 437,602
Management and royalty fees (Note 2)................ 91,458 81,075 166,211
Depreciation........................................ 227,614 229,455 462,348
---------- ---------- ------------
Total expenses.............................. 1,118,952 1,116,943 2,184,414
---------- ---------- ------------
NET INCOME............................................ 252,908 90,776 295,802
OWNERS' EQUITY:
Beginning of period................................. 8,648,062 9,007,939 9,007,939
Distributions (Note 5).............................. (233,150) (223,600) (655,679)
---------- ---------- ------------
End of period......................................... $8,667,820 $8,875,115 $8,648,062
========= ========= ==========
</TABLE>
See notes to financial statements.
F-39
<PAGE> 141
DOUBLETREE CLUB HOTEL OF RANCHO BERNARDO
STATEMENTS OF CASH FLOWS
SIX-MONTH PERIODS ENDED JUNE 30, 1994 AND 1993 AND
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
JUNE 30
----------------------- DECEMBER 31,
1994 1993 1993
--------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 252,908 $ 90,776 $ 295,802
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................... 227,614 229,455 462,348
Provision for doubtful accounts................... 600 1,098
Changes in operating assets and liabilities:
Accounts receivable............................. (87,358) (24,743) (6,548)
Due from Operator............................... 126,000
Inventories..................................... (3,520) 1,520 (246)
Prepaid expenses................................ 1,340 (1,895) 1,296
Accounts payable................................ 10,939 (4,294) 1,109
Due to Maruko, Inc. ............................ 41,850 26,400 44,321
Due to Operator................................. 9,070 5,631 585
Accrued expenses................................ (1,103) 27,731 (1,384)
--------- --------- ------------
Net cash provided by operating activities.... 578,430 350,581 798,381
--------- --------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................... (8,709) (36,576)
Increase in restricted cash.......................... (54,832) (48,987) (106,699)
--------- --------- ------------
Net cash used in investing activities........ (54,832) (57,696) (143,275)
--------- --------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES --
Distributions........................................ (275,000) (250,000) (700,000)
--------- --------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 248,598 42,885 (44,894)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......... 283,062 327,956 327,956
--------- --------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............... $ 531,660 $ 370,841 $ 283,062
========= ========= ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES --
Amounts due to Maruko, Inc. of $41,850 and $26,400
for the six-month periods ended June 30, 1994 and
1993, respectively, and $44,321 for the year ended
December 31, 1993 were credited to owners' equity
(see Notes 3 and 5).
</TABLE>
See notes to financial statements.
F-40
<PAGE> 142
DOUBLETREE CLUB HOTEL OF RANCHO BERNARDO
NOTES TO FINANCIAL STATEMENTS
SIX-MONTH PERIODS ENDED JUNE 30, 1994 AND 1993 AND
YEAR ENDED DECEMBER 31, 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General Information -- The Doubletree Club Hotel of Rancho Bernardo (the
"Hotel") was owned jointly by Maruko, Inc. ("Maruko"), a Japanese corporation,
and individual Japanese investors. Compri Management Corporation No. 8 (the
"Operator") operated the Hotel under management and franchise agreements with
Maruko (see Note 2).
Maruko applied to the Tokyo District Court for protection from creditors
under the Corporation Reorganization Law on August 29, 1991 and under Chapter 11
with the United States Bankruptcy Court on October 30, 1991. On July 1, 1994,
the Tokyo District Court approved Maruko's plan for reorganization under the
Corporation Reorganization Law in Japan, and on February 3, 1994, the United
States Bankruptcy Court approved Maruko's application for reorganization under
Chapter 11. As part of the bankruptcy proceedings, Maruko sold the Hotel on
September 16, 1994.
Interim Financial Statements -- The unaudited interim financial statements
of the Hotel have been prepared on the basis of generally accepted accounting
principles and, in the opinion of management, reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation for
the periods presented. The results of operations and cash flows for interim
periods are not necessarily indicative of results for the full year.
Cash and Cash Equivalents -- The Hotel considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
Inventories -- Inventories, consisting primarily of food and beverage, are
stated at the lower of cost or market. Cost is determined on the first-in,
first-out method.
Property and Equipment -- Property and equipment are stated at the lower of
cost or not realizable value. Depreciation is computed on the straight-line and
accelerated methods over the estimated useful lives of the respective assets.
Income Taxes -- No provision has been made for income taxes in the
financial statements, as any taxable income or loss of the Hotel is included in
the income tax returns of Maruko and the individual Japanese investors.
2. MANAGEMENT AND FRANCHISE AGREEMENTS
The management fee is computed in accordance with the terms of the
management agreement dated June 29, 1990. The management fee consists of a base
fee of 5% of gross revenue, as defined, and a 10% incentive fee on the amount by
which net operating income, as defined, exceeds $1,500,000. The franchise
agreement requires a royalty fee of 3% of gross room revenues. However, this fee
is deductible from the aforementioned 5% base management fee. The management and
royalty fees amounted to $91,458 and $81,075 for the six-month periods ended
June 30, 1994 and 1993, respectively, and $166,211 for the year ended December
31, 1993. No incentive fee was earned.
The franchise agreement requires the Hotel to contribute 3% of gross room
revenues to the Operator for marketing services. This fee, which is included in
operating expenses, amounted to approximately $48,000 and $43,000 for the
six-month periods ended June 30, 1994 and 1993, respectively, and $88,000 for
the year ended December 31, 1993.
F-41
<PAGE> 143
DOUBLETREE CLUB HOTEL OF RANCHO BERNARDO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX-MONTH PERIODS ENDED JUNE 30, 1994 AND 1993 AND
YEAR ENDED DECEMBER 31, 1993
The Operator provides centralized accounting and data processing services
to the Hotel in accordance with the management agreement. The cost of these
services amounted to $24,000 for each of the six-month periods ended June 30,
1994 and 1993 and $48,000 for the year ended December 31, 1993.
The management agreement includes a provision for the establishment of a
fund for replacement of furniture and fixtures, equal to 3% of gross revenues.
The fund is classified as restricted cash in the accompanying balance sheets.
The $126,000 due from the Operator in 1993 was noninterest bearing and was
paid in 1994.
Upon the sale of the Hotel, the management and franchise agreements were
terminated.
3. RELATED PARTIES
Maruko paid $41,850 and $26,400 for the six-month periods ended June 30,
1994 and 1993, respectively, and $44,321 for the year ended December 31, 1993
for various expenses on behalf of the Hotel (see Note 5).
4. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993 LIVES
---------- ------------ ----------------
<S> <C> <C> <C>
Land and improvements................. $1,510,346 $1,510,346
Building and improvements............. 5,701,382 5,701,382 10 to 40 years
Furniture and equipment............... 2,342,324 2,342,324 3 to 40 years
---------- ------------
9,554,052 9,554,052
Less accumulated depreciation......... 1,689,780 1,462,166
---------- ------------
$7,864,272 $8,091,886
========= ==========
</TABLE>
5. DISTRIBUTIONS
Certain amounts payable to Maruko will not be settled by cash payments.
Accordingly, such amounts have been credited to owners' equity (see Note 3). The
Hotel distributed $275,000, $250,000 and $700,000 in each to Maruko for the
six-month periods ended June 30, 1994 and 1993 and for the year ended December
31, 1993, respectively.
F-42
<PAGE> 144
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Joint Proxy Statement is accompanied by a copy of the Companies' Joint
Annual Report on Form 10-K for the year ended December 31, 1993, as amended by
Form 10-K/A amendments dated September 28, 1994, November 3, 1994 and November
9, 1994 (the "Hotel Investors Form 10-K").
The following documents previously filed by the Companies with the
Securities and Exchange Commission (the "Commission") pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), are incorporated herein
by reference:
1. The Hotel Investors Form 10-K;
2. The Joint Quarterly Report on Form 10-Q filed by the Companies for the
period ended June 30, 1994, as amended by a Form 10-Q/A amendments dated
September 28, 1994 and November 3, 1994; and
3. The Joint Current Report on Form 8-K dated June 13, 1994.
All documents filed by the Companies pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date hereof and prior to the
date of the Special Meetings shall be deemed to be incorporated by reference
herein and to be part hereof from the date any such document is filed.
Any statements contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document which also is incorporated by reference
herein) modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed to constitute a part hereof except as so modified
or superseded. All information appearing in this Joint Proxy statement is
qualified in its entirety by the information and financial statements (including
notes thereto) appearing in the documents incorporated herein by reference,
except to the extent set forth in the immediately preceding statement.
THIS JOINT PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE
NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS, OTHER
THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY INCORPORATED BY
REFERENCE THEREIN, ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM THIS JOINT PROXY STATEMENT IS DELIVERED UPON WRITTEN
OR ORAL REQUEST TO JAYNE C. GORDON, SHAREHOLDER RELATIONS, HOTEL INVESTORS
TRUST, 11845 WEST OLYMPIC BLVD., SUITE 550, LOS ANGELES, CALIFORNIA 90064
(TELEPHONE NUMBER: (310) 575-3900). IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BEFORE DECEMBER 1, 1994.
No person is authorized to give any information or to make any
representations with respect to the matters described in this Joint Proxy
Statement other than those contained herein. Any information or representations
with respect to such matters not contained herein must not be relied upon as
having been authorized by the Trust or the Corporation. This Joint Proxy
Statement does not constitute the solicitation of a proxy in any jurisdiction to
or from any person to whom it is unlawful to make such solicitation in such
jurisdiction. The delivery of this Joint Proxy Statement shall not, under any
circumstances, create any implication that there has been no change in the
affairs of the Trust or the Corporation since the date hereof or that the
information in this Joint Proxy Statement is correct as of any time subsequent
to the date hereof.
<PAGE> 145
EXHIBIT A TO JOINT PROXY STATEMENT
AMENDED PORTIONS OF DECLARATION OF TRUST
CHANGE OF NAME:
Section 1.1 of the Amended and Restated Declaration of Trust is hereby
amended and restated to read in its entirety as follows:
1.1. Name. The name of the Trust shall be "Starwood Lodging Trust". As
far as practicable and except as otherwise provided in this Declaration,
the Trustees shall conduct the Trust's activities, execute all documents,
and sue or be sued in the name of Hotel Investors Trust, or in their names
as Trustees of Hotel Investors Trust.
CLASSIFIED BOARD PROVISIONS:
Section 2.1 of the Amended and Restated Declaration of Trust is hereby
amended and restated to read in its entirety as follows:
2.1. Number, Term of Office, Qualifications of Trustees. There shall
be no less than three (3) nor more than fifteen (15) Trustees. The initial
Trustees shall be the signatories to this Declaration as originally
executed. Within the limits set forth in this Section 2.1, the number of
Trustees may be fixed, increased or decreased from time to time by the
Trustees at any particular time provided however that, subject to the
provisions of Section 2.3, each Trustee shall hold office until the
expiration of his term and until the election and qualification of his
successor. Trustees may be re-elected. The Trustee shall be an individual
at least twenty-one (21) years of age who is not under legal disability.
Such individual shall qualify as a trustee when he has either signed the
Declaration or agreed in writing to be bound by it. Unless otherwise
required by law, no Trustee shall be required to give bond, surety or
security in any jurisdiction for the performance of any duties or
obligations hereunder. The Trustees, in their capacity as trustees, shall
not be required to devote their entire time to the business and affairs of
the Trust.
The Trustees shall be divided, with respect to the time for which they
severally hold office, into three classes, as nearly equal in number as
reasonably possible, with the term of office of the first class to expire
at the 1995 Annual Meeting of Shareholders, the term of office of the
second class to expire at the 1996 Annual Meeting of Shareholders and the
term of office of the third class to expire at the 1997 Annual Meeting of
Shareholders, with each Trustee to hold office until his or her successor
shall have been duly elected and qualified. At each Annual Meeting of
Shareholders, commencing with the 1995 Annual Meeting, (i) Trustees elected
to succeed those Trustees whose terms then expire shall be elected for a
term of office to expire at the third succeeding Annual Meeting of
Shareholders after their election, with each Trustee to hold office until
his or her successor shall have been duly elected and qualified, and (ii)
if authorized by a resolution of the Board of Trustees, Trustees may be
elected to fill any vacancy on the Board of Trustees, regardless of how
such vacancy shall have been created.
FILLING VACANCIES IN THE BOARD:
Section 2.4 of the Amended and Restated Declaration of Trust is hereby
amended and restated to read in its entirety as follows:
2.4 Vacancies. If any or all of the Trustees cease to be Trustees
hereunder, whether by reason of resignation, removal, incapacity, death or
otherwise, such event shall not terminate the Trust or affect its
continuity. Until vacancies are filled, the remaining Trustee or Trustees,
if any (even though less than three (3)), may exercise the powers of the
Trustees hereunder. Vacancies occurring among the Trustees (including
vacancies created by increases in number) may be filled by a majority of
the remaining Trustees, though less than a quorum, or by a sole remaining
Trustee, and the person so appointed shall hold office for a term expiring
at the Annual Meeting of Shareholders at which the term of office of the
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<PAGE> 146
class to which they have been appointed expires and until his successor is
elected and qualified. If at any time there shall be no Trustees in office,
successor Trustees shall be elected by the Shareholders as provided in
Section 6.7.
ELIMINATION OF LIMITATIONS ON BORROWINGS AND INVESTMENTS:
Section 5.2 of the Amended and Restated Declaration of Trust is hereby
amended and restated to read in its entirety as follows:
[INTENTIONALLY OMITTED.]
Section 5.3 of the Amended and Restated Declaration of Trust is hereby
amended and restated to read in its entirety as follows:
[INTENTIONALLY OMITTED.]
Section 5.6 of the Amended and Restated Declaration of Trust is hereby
amended and restated to read in its entirety as follows:
[INTENTIONALLY OMITTED.]
CHANGES IN AUTHORIZED SHARES:
Section 6.1 of the Amended and Restated Declaration of Trust is hereby
amended and restated to read in its entirety as follows:
6.1. Shares. The units into which the beneficial interests in the
Trust will be divided shall be designated as Shares consisting of (a)
100,000,000 Trust Shares with a par value of $0.01 per share and having
equal dividend, distribution, liquidation and other rights but without
preference, pre-emptive, appraisal, conversion or exchange rights of any
kind, (b) 20,000,000 Excess Trust Shares with a par value of $0.01 per
share and having the rights provided in Article VI hereof and (c) 5,000,000
Excess Preferred Shares with a par value of $0.01 per share and having the
rights provided in Article VI hereof; provided, however, that the Trustees
may, in their discretion create and authorize the issuance of Shares of
Beneficial Interest evidencing units of beneficial interest in the Trust of
one or more additional classes, or one or more series within any such
class, with or without par value, having such voting rights, such rights to
dividends, distributions and in liquidation, such conversion, exchange and
redemption rights, and such designations, preferences, participation, and
other limitations or restrictions, as shall not be prohibited by this
Declaration or the Real Estate Investment Trust provisions of the Internal
Revenue Code or the laws of the State of Maryland and as shall be specified
by the Trustees in their discretion in a resolution or resolutions duly
adopted by the Trustees and recorded within the State of Maryland in such
public offices as this Declaration and any amendments shall have been
recorded in accordance with Section 9.8 of this Declaration. As used
herein, the term "Shares" shall mean and include (i) the Trust Shares,
Excess Trust Shares and Excess Preferred Shares, and (ii) from and after
the issuance of Shares of any other and additional classes of Shares of
Beneficial Interest, so created and authorized by the Trustees, such Shares
of Beneficial Interest. The certificates evidencing the Shares shall be in
such form and signed (manually or by facsimile) on behalf of the Trust in
such manner as the Trustees may from time to time prescribe or as may be
prescribed in the Trustees' Regulations. The certificates shall be
negotiable and title thereto and to the Shares represented thereby shall be
transferred by assignment and delivery thereof to the same extent and in
all respects as a share certificate of a Maryland corporation. There shall
be no more than 135,000,000 Shares issued. The Shares may be issued for
such consideration as the Trustees shall determine or by way of share
dividend or share split in the discretion of the Trustees. Shares
reacquired by the Trust shall no longer be deemed outstanding and shall
have no voting or other rights unless and until reissued. Shares reacquired
by the Trust may be cancelled and restored to the status of authorized and
unissued Shares by action of the Trustees. All Shares shall be fully paid
and non-
A-2
<PAGE> 147
assessable by or on behalf of the Trust upon receipt of full consideration
for which then have been issued or without additional consideration if
issued by way of share dividend or share split.
ELIMINATION OF CUMULATIVE VOTING:
The last sentence of the first paragraph of Section 6.7 of the Amended and
Restated Declaration of Trust is hereby amended and restated to read in its
entirety as follows:
Whenever any action is to be taken by the Shareholders, such action shall,
except as otherwise required by this Declaration or by law, be authorized
by a majority of the votes cast at a meeting of Shareholders by holders of
Shares entitled to vote thereon.
Section 6.8 of the Amended and Restated Declaration of Trust is hereby
amended to read in its entirety as follows:
6.8 Proxies. Whenever the vote or consent of Shareholders is required
or permitted under this Declaration, such vote or consent may be given
either directly by the Shareholder or to a proxy in the form prescribed in
the Trustee's Regulations. The Trustees may solicit such proxies from the
Shareholders or any of them in any manner requiring or permitting the
Shareholders' vote or consent.
REIT OWNERSHIP LIMITATIONS:
Section 6.12 of the Amended and Restated Declaration of Trust is hereby
amended and restated to read in its entirety as follows:
6.12 Restrictions on Transfer.
(a) Definitions. The following terms shall have the following
meanings:
"Beneficial Ownership" shall mean ownership of Shares by a
Person who would be treated as an owner of such Shares directly,
indirectly or constructively through the application of Section
318(a) of the Code, as modified by Section 856(d)(5) of the Code, or
Section 544 of the Code, as modified by Section 856(h) of the Code.
The terms "Beneficial Owner", "Beneficially Owns" and "Beneficially
Owned" shall have correlative meanings.
"Charitable Beneficiary" shall mean the organization or
organizations described in Section 170(c)(2) and 501(c)(3) of the
Code selected by the Excess Share Trustee.
"Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
"Excess Shares" shall mean the Excess Trust Shares and the
Excess Preferred Shares.
"Excess Share Trust" shall mean the trust created pursuant to
Section 6.13 hereof.
"Excess Share Trust Beneficiary" shall mean a beneficiary of the
Excess Share Trust as determined pursuant to Section 6.13 hereof.
"Excess Share Trustee" shall mean Nina Matis or any successor
appointed pursuant to Section 6.13 hereof.
"Market Price" of any class of Shares on any date shall mean the
average of the Closing Price for the five (5) consecutive trading
days ending on such date, or if such date is not a trading date, the
five consecutive trading days preceding such date. The "Closing
Price" on any date shall mean (i) the last sale price, regular way,
or, in case no such sale takes place on such day, the average of the
closing bid and asked prices, regular way, in either case as reported
in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the New York
Stock Exchange, or (ii) if such class of Shares is not listed or
admitted to trading on the New York Stock Exchange, as reported in
the principal consolidated transaction reporting system with respect
to securities listed on the principal national securities exchange on
which such class of Shares is listed or admitted to trading, or
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<PAGE> 148
(iii) if such class of Shares is not listed or admitted to trading on
any national securities exchange, the last quoted price, or if not so
quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of
Securities Dealers, Inc. Automated Quotation System or, if such
system is no longer in use, the principal other automated quotations
system that may then be in use, or (iv) if such class of Shares is
not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a
market in such class of Shares selected by the Trustees.
"Ownership Limit" shall mean (i) in the case of a Person other
than an Existing Holder (as defined below) Beneficial Ownership of
more than eight percent (8.0%), by value, vote or number, of the
Shares and (ii) in the case of a Person who or which was the
Beneficial Owner, as of December , 1994 [date of amendment of Trust
Declaration] (the "Amendment Date"), of more than 8.0% (by vote,
value or number) of the Shares (any such Person being referred to as
an "Existing Holder"), a percentage (by vote, value or number) equal
to the lesser of (a) 9.9% and (b) the percentage of Shares
Beneficially Owned by such Existing Holder as of the Amendment Date;
provided that if, at any time and from time to time after the
Amendment Date, the percentage of Shares Beneficially Owned by an
Existing Holder shall decrease (whether by reason of a disposition by
such Existing Holder, an increase in the number of outstanding Shares
or otherwise), then from and after the time of such decrease the
Ownership Limit in the case of such Existing Holder shall be a
percentage (by vote, value or number) equal to the greater of (x)
8.0% and (y) the percentage of Shares Beneficially Owned by such
Existing Holder after giving effect to such decrease.
"Purported Beneficial Holder" shall mean, with respect to any
event (other than a purported Transfer) which results in Excess
Shares, the Person for whom the Purported Record Holder held Shares
that were, pursuant to Section 6.12(c) hereof, automatically
converted into Excess Shares upon the occurrence of such event.
"Purported Beneficial Transferee" shall mean, with respect to
any purported Transfer which results in Excess Shares, the purported
beneficial transferee for whom the Purported Record Transferee would
have acquired Shares if such Transfer had been valid under Section
6.12(b) hereof.
"Purported Record Holder" shall mean, with respect to any event
(other than a purported Transfer) which results in Excess Shares, the
record holder of the Shares that were, pursuant to Section 6.12(c)
hereof, automatically converted into Excess Shares upon the
occurrence of such event.
"Purported Record Transferee" shall mean, with respect to any
purported Transfer which results in Excess Shares, the record holder
of the Shares if such Transfer had been valid under Section 6.12(b)
hereof.
"Restriction Termination Date" shall mean the first day of the
taxable year for which the Trustees have determined to terminate the
Trust's status as a REIT.
"Transfer" shall mean any sale, transfer, gift, hypothecation,
pledge, assignment, device or other disposition of Shares (including
(i) the granting of any option or interest similar to an option
(including an option to acquire an option or any series of such
options) or entering into any agreement for the sale, transfer or
other disposition of Shares or (ii) the sale, transfer, assignment or
other disposition of any securities or rights convertible into or
exchangeable for Shares), whether voluntary or involuntary, whether
of record, constructively or beneficially and whether by operation of
law or otherwise. For purposes of this definition, whether securities
or rights are convertible or exchangeable for Shares shall be
determined in accordance with Sections 318 and 544 of the Code.
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(b) Restrictions on Transfers and Other Events. On or after the
Restriction Termination Date, the provisions of Sections 6.12 and 6.13
hereof shall be of no further force and effect. Prior to the Restriction
Termination Date and except as provided in Section 6.12(i) hereof:
(1) No Person shall Beneficially Own Shares in excess of the
Ownership Limit;
(2) Any Transfer that, if effective, would result in any Person
Beneficially Owning Shares in excess of the Ownership Limit shall be
void ab initio as to the Transfer of that number of Shares which
would be otherwise Beneficially Owned by such Person in excess of the
Ownership Limit and the intended transferee shall acquire no rights
in such Shares in excess of the Ownership Limit;
(3) Any Transfer that, if effective, would result in the Shares
being Beneficially Owned by fewer than one hundred (100) Persons
(determined without reference to any rules of attribution) shall be
void ab initio and the intended transferee shall acquire no rights in
such Shares; and
(4) Any Transfer of Shares that, if effective, would result in
the Trust being "closely held" within the meaning of Section 856(h)
of the Code shall be void ab initio as to the Transfer of that number
of Shares which would cause the Trust to be "closely held" within the
meaning of Section 856(h) of the Code and the intended transferee
shall acquire no rights in such Shares.
(c) Conversion into Excess Shares.
(1) If, notwithstanding the other provisions contained in this
Article VI, at any time prior to the Restriction Termination Date,
there is a purported Transfer or other event such that any Person
would Beneficially Own Shares in excess of the Ownership Limit, then,
except as otherwise provided in Section 6.12(i) hereof, such Shares
which would be in excess of the Ownership Limit (rounded up to the
nearest whole share), shall automatically be converted into that
number of shares of Excess Trust Shares or Excess Preferred Shares,
as appropriate, equal to the number of Shares being converted, as
further described in Section 6.12(c)(3) hereof. Such conversion shall
be effective as of the close of business on the business day prior to
the date of the Transfer or other event.
(2) If, notwithstanding the other provisions contained in this
Article VI, at any time prior to the Restriction Termination Date,
there is a purported Transfer or other event which, if effective,
would cause the Trust to become "closely held" within the meaning of
Section 856(h) of the Code, then the Shares being Transferred or
which are otherwise affected by such event and which, in either case,
would cause, when taken together with all other Shares, the Trust to
be "closely held" within the meaning of Section 856(h) of the Code
(rounded up to the nearest whole share) shall automatically be
converted into that number of Excess Trust Shares or Excess Preferred
Shares, as appropriate, equal to the number of Shares being
converted, as further described in Section 6.12(c)(3) hereof. Such
conversion shall be effective as of the close of business on the
business day prior to the date of the Transfer or change in capital
structure.
(3) Upon conversion of Trust Shares or Preferred Shares into
Excess Shares pursuant to this Section 6.12(c), Trust Shares shall be
converted into Excess Trust Shares and Preferred Shares shall be
converted in Excess Preferred Shares.
(d) Remedies for Breach. If the Trustees or their designees shall
at any time determine in good faith that a purported Transfer or other
event has taken place in violation of Section 6.12(b) hereof or that a
Person intends to acquire or has attempted to acquire Beneficial
Ownership of any Shares in violation of Section 6.12(b) hereof, the
Trustees or their designees may take such action as they deem advisable
to refuse to give effect to or to prevent such Transfer or other event,
including, but not limited to, refusing to give effect to such Transfer
or other event on the books of the Trust or instituting proceedings to
enjoin such Transfer or other event or transaction; provided,
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however, that any Transfers or attempted Transfers (or, in the case of
events other than a Transfer, Beneficial Ownership) in violation of
Section 6.12(b) hereof shall be void ab initio and automatically result
in the conversion described in Section 6.12(c)(3) hereof, irrespective
of any action (or non-action) by the Trustees or their designees.
(e) Notice of Restricted Transfer. Any Person who acquires or
attempts to acquire Shares in violation of Section 6.12(b) hereof, or
any Person who is a purported transferee such that Excess Shares result
under Section 6.12(c) hereof, shall immediately give written notice to
the Trust of such Transfer, attempted Transfer or other event and shall
provide to the Trust such other information as the Trust may request in
order to determine the effect, if any, of such Transfer or attempted
Transfer or other event on the Trust's status as a REIT.
(f) Owners Required to Provide Information. Prior to the
Restriction Termination Date:
(1) Every Beneficial Owner of five percent (5%) or more, by
vote, value or number, or such lower percentages as required pursuant
to regulations under the Code, of the outstanding Shares shall,
before January 30 of each year, give written notice to the Trust
stating the name and address of such Beneficial Owner, the general
ownership structure of such Beneficial Owner, the number of shares of
each class of Shares Beneficially Owned, and a description of how
such Shares are held.
(2) Each Person who is a Beneficial Owner of Shares and each
Person (including the shareholder of record) who is holding Shares
for a Beneficial Owner shall provide on demand to the Trust such
information as the Trust may request from time to time in order to
determine the Trust's status as a REIT and to ensure compliance with
the Ownership Limit and the REIT requirements of the Code and the
regulations published thereunder.
(g) Remedies Not Limited. Subject to Section 6.12(l) hereof,
nothing contained in this Article VI shall limit the authority of the
Trustees to take such other action as they deem necessary or advisable
to protect the Trust and the interests of its Shareholders by
preservation of the Trust's status as a REIT and to ensure compliance
with the Ownership Limit.
(h) Ambiguity. In the case of an ambiguity in the application of
any of the provisions of this Section 6.12 or Section 6.13, including
any definition contained in Section 6.12(a) hereof, the Trustees shall
have the power to determine the application of the provisions of this
Section 6.12 and Section 6.13 with respect to any situation based on the
facts known to them.
(i) Exception. The Trustees upon receipt of a ruling from the
Internal Revenue Service or an opinion of tax counsel, satisfactory to
them in their sole and absolute discretion, in each case to the effect
that the Trust's status as a REIT will not be jeopardized, may exempt a
Person from the Ownership Limit if the Trustees obtain such
representations and undertakings from such Person as are reasonably
necessary to ascertain that such Person's Beneficial Ownership of Shares
will not jeopardize the Trust's status as a REIT.
(j) Legend. Until the Restriction Termination Date, each
certificate for the respective class of Shares shall bear the following
legend:
The Shares represented by this certificate are subject to
restrictions on transfer. Unless excepted by the Trustees, no Person
may (1) Beneficially Own Shares in excess of 8.0% of the outstanding
Shares, by value, vote or number, determined as provided in the
Trust's Declaration of Trust, as the same may be amended from time to
time (the "Declaration"), and computed with regard to all outstanding
Shares and, to the extent provided by the Code, all Shares issuable
under existing options and exchange rights that have not been
exercised; or (2) Beneficially Own Shares which would result in the
Trust being "closely held". Unless so excepted, any acquisition of
Shares and continued holding of ownership constitutes a continuous
representation of compliance with the above limitations, and any
Person who attempts to Beneficially Own Shares in excess of the above
limitations has an affirmative obligation to notify the Trust
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immediately upon such attempt. If the restrictions on transfer are
violated, the transfer will be void ab initio and the Shares
represented hereby will be automatically converted into Excess Shares
that will be held in trust. Excess Shares may not be transferred at a
profit and may be purchased by the Trust. In addition, certain
Beneficial Owners must give written notice as to certain information
on demand and on an annual basis. All terms not defined in this
legend have the meanings provided in the Declaration. The Trust will
mail without charge to any requesting shareholder a copy of the
Declaration, including the express terms of each class and series of
the authorized Shares of the Trust, within five (5) days after
receipt of a written request therefor.
(k) Severability. If any provision of this Article VI or any
application of any such provision is determined to be invalid by any
Federal or state court having jurisdiction over the issues, the validity
of the remaining provisions shall not be affected, and other
applications of such provision shall be affected only to the extent
necessary to comply with the determination of such court.
(l) New York Stock Exchange Transactions. Nothing in this Article
VI shall preclude the settlement of any transaction entered into through
the facilities of the New York Stock Exchange.
(m) Amendment of Sections 6.12 or 6.13. Notwithstanding any other
provisions of this Declaration or any provision of law which might
otherwise permit a lesser vote or no vote, but in addition to any
affirmative vote of the holders of any particular class or series of
Shares required by law or this Declaration, the affirmative vote of the
holders of at least two-thirds (2/3) of the voting power of all the
then-outstanding Shares, voting together as a single class, shall be
required to alter, amend or repeal this Section 6.12 or Section 6.13.
Section 6.13 of the Amended and Restated Declaration of Trust is hereby
amended and restated to read in its entirety as follows:
6.13 Excess Shares.
(a) Ownership In Trust. Upon any purported Transfer or other event
that results in Excess Shares pursuant to Section 6.12(c) hereof, such
Excess Shares shall be deemed to have been transferred to Nina Matis (or
any successor Excess Share Trustee), as Excess Share Trustee of the
Excess Share Trust for the benefit of such Excess Share Trust
Beneficiary or Beneficiaries and the Charitable Beneficiary effective as
of the close of business on the business day prior to the date of the
Transfer or other event. Excess Shares so held in trust shall be issued
and outstanding shares of the Trust. The Purported Record Transferee or
Purported Record Holder shall have no rights in such Excess Shares. The
Purported Beneficial Transferee or Purported Beneficial Holder shall
have no rights in such Excess Shares except as provided in Section
6.13(e). Nina Matis, or any successor Excess Share Trustee, may resign
by appointing a person independent of the Trust, Corporation or any
Excess Share Trust Beneficiary as the Excess Share Trustee. The Excess
Share Trustee shall, from time to time, designate one or more charitable
organization or organizations as the Charitable Beneficiary.
(b) Dividend Rights. Excess Shares shall be entitled to the same
dividends determined as if no conversion into Excess Shares had
occurred. Any dividend or distribution paid prior to the discovery by
the Trust that the Shares have been converted into Excess Shares shall
be repaid to the Excess Share Trust upon demand. Any dividend or
distribution declared but unpaid shall be paid to the Excess Share
Trust. All dividends received or other income earned by the Excess Share
Trust shall be paid over to the Charitable Beneficiary.
(c) Rights Upon Liquidation. Excess Shares shall not be entitled to
receive any portion of the assets of the Trust on the liquidation or
dissolution of the Trust. Upon conversion of Excess Shares into Shares
pursuant to Section 6.13(e) hereof, such shares shall be entitled to
receive their pro rata share of the assets of the Trust as a result of
the liquidation or dissolution of the Trust.
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(d) Voting Rights. The Excess Share Trustee shall vote the Excess
Shares which shall have the same voting rights as the Shares into which
they are to be converted pursuant to Section 6.13(e) hereof. Any vote
cast by the Purported Beneficial Transferee or Purported Record
Transferee will, at the election of the Excess Share Trustee, be void ab
initio.
(e) Restrictions On Transfer; Designation of Excess Share Trust
Beneficiary. (1) Excess Shares shall not be transferrable. The Excess
Share Trustee may freely designate an Excess Share Trust Beneficiary of
all or any portion of the beneficial interest in the Excess Share Trust
(representing the number of Excess Shares held by the Excess Share Trust
attributable to a purported Transfer or other event that results in
Excess Shares and designated as to number and class of shares pursuant
to the notice provision of this Section 6.13(e)(1)), if the Excess
Shares held in the Excess Share Trust would not be Excess Shares in the
hands of such Excess Share Trust Beneficiary. If the Excess Shares
resulted from a purported Transfer, the Purported Beneficial Transferee
shall receive a payment from the Excess Share Trustee that reflects a
price per share for such Excess Shares equal to the lesser of (A) the
price per share received by the Excess Share Trustee and (B) (x) the
price per share such Purported Beneficial Transferee paid for the Share
of Beneficial Interest in the purported Transfer that resulted in the
Excess Shares, or (y) if the Purported Beneficial Transferee did not
give value for such shares of Excess Shares (through a gift, devise or
other transaction), a price per share of Excess Shares equal to the
Market Price of the Shares on the date of the purported Transfer that
resulted in the Excess Shares. If the Excess Shares resulted from an
event other than a purported Transfer, the Purported Beneficial Holder
shall receive a payment from the Excess Share Trustee that reflects a
price per share of Excess Shares equal to the lesser of (A) the price
per share received by the Excess Share Trustee and (B) the Market Price
of the Shares on the date of the event that resulted in Excess Shares.
Upon such transfer of an interest in the Excess Share Trust, the
corresponding shares of Excess Shares in the Excess Share Trust shall be
automatically converted into such number of Shares (of the same class as
the shares that were converted into such Excess Shares) as is equal to
the number of shares of Excess Shares, and such Shares shall be
transferred of record to the Excess Share Trust Beneficiary of the
interest in the Excess Share Trust designated by the Excess Share
Trustee as described above if such Shares would not be Excess Shares in
the hands of such Excess Share Trust Beneficiary. Prior to any transfer
of any interest in the Excess Share Trust, the Trust must have waived in
writing its purchase rights, if any, under Section 6.13(f) hereof. Any
funds received by the Excess Share Trustee in excess of the funds
payable to the Purported Beneficial Holder or the Purported Beneficial
Transfer shall be paid to the Charitable Beneficiary. The Trust shall
pay the costs and expenses of the Excess Share Trustee.
(2) Notwithstanding the foregoing, if a Purported Beneficial
Transferee, Purported Beneficial Holder or Excess Share Trustee receives
a price for designating an Excess Share Trust Beneficiary of an interest
in the Excess Share Trust that exceeds the amounts allowable under
Section 6.13(e)(1) hereof, such Purported Beneficial Transferee or
Purported Beneficial Holder shall be personally liable to, and shall
pay, or cause the Excess Share Trust Beneficiary of the interest in the
Excess Share Trust to pay, such excess to the Excess Share Trustee who
shall pay over such excess to the Charitable Beneficiary.
(3) Notwithstanding the foregoing, if the provisions of this
Section 6.13(e) are determined to be void or invalid by virtue of any
legal decision, statute, rule or regulation, then the Purported
Beneficial Transferee or Purported Beneficial Holder of any shares of
Excess Shares may be deemed, at the option of the Trust, to have acted
as an agent on behalf of the Trust, in acquiring or holding such Excess
Shares and to hold such Excess Shares on behalf of the Trust.
(f) Purchase Right in Excess Shares. Excess Shares shall be deemed
to have been offered for sale by the Excess Share Trustee to the Trust,
or its designee, at a price per Excess Share equal to (i) in the case of
Excess Shares resulting from a purported Transfer, the lesser of (A) the
price per share of the Shares in the transaction that created such
Excess Shares (or, in the case of devise or gift, the Market Price of
the Shares at the time of such devise or gift), or (B) the lowest Market
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Price of the class of Shares which resulted in the Excess Shares at any
time after the date such shares were converted into Excess Shares and
prior to the date the Trust, or its designee, accepts such offer or (ii)
in the case of Excess Shares resulting from an event other than a
purported Transfer, the lesser of (A) the Market Price of the Shares on
the date of such event or (B) the lowest Market Price for Shares which
resulted in the Excess Shares at any time from the date of the event
resulting in such Excess Shares and prior to the date the Trust, or its
designee, accepts such offer. The Trust shall have the right to accept
such offer for a period of ninety (90) days after the later of (i) the
date of the Transfer which resulted in such Excess Shares and (ii) the
date the Trustees determine in good faith that a Transfer or other event
resulting in Excess Shares has occurred, if the Trust does not receive a
notice of such Transfer or other event pursuant to Section 6.12(e)
hereof.
Section 6.14 of the Amended and Restated Declaration of Trust is hereby
amended and restated to read in its entirety as follows:
6.14 Pairing. Beginning at the time that the payment of a distribution
in kind to the Shareholders of the Trust of the shares of common stock of
Starwood Lodging Corporation, a Maryland corporation ("Corporation"), shall
have occurred ("effective time of the restriction"), and continuing
thereafter until such time as the limitation on transfer provided for in
the Pairing Agreement to be entered into by the Trust and the Corporation
shall be terminated:
(a) The Trust Shares having a par value of $0.01 per share shall
not be transferable, and shall not be transferred on the books of the
Trust, unless (1) a simultaneous transfer is made by the same transferor
to the same transferee, or (2) such transfer has previously arranged
with the Corporation for the acquisition by the transferee, of a like
number of shares of the Corporation and such shares and Trust Shares are
paired with one another.
(b) Each certificate evidencing ownership of Trust Shares issued
and not canceled prior to the effective time of the restriction shall be
deemed to evidence a like number of shares of common stock of the
Corporation.
(c) Any registered holder of a certificate evidencing ownership of
Trust Shares issued prior to the effective time of the restriction may,
upon request and presentation of said certificate to the Corporation's
transfer agent, obtain in substitution therefor a certificate or
certificates registered in such holder's name evidencing the same number
of shares of common stock of the Corporation and a like number of Trust
Shares.
(d) A legend shall be placed on the face of each certificate
evidencing ownership of Trust Shares issued after the effective time of
the restriction, referring to the restrictions on transfer set forth
herein.
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EXHIBIT B TO JOINT PROXY STATEMENT
ARTICLES OF AMENDMENT AND
RESTATEMENT OF ARTICLES OF INCORPORATION
FIRST: The name of the corporation ("Corporation") is:
Starwood Lodging Corporation
SECOND: The purposes for which the Corporation is formed are as follows:
(a) To lease hotels, to acquire hotels, to manage hotels and other
real property, either directly or by entering into management contracts, to
perform services relating to real estate and to engage in other activities
involving hotels and other real estate.
(b) To engage in any lawful act or activity for which corporations may
be organized under, and to have and exercise any and all powers or
privileges now or hereafter conferred by, the Maryland General Corporation
Law or any Act amendatory thereof or supplemental thereto or in
substitution therefor.
THIRD: The post office address of the principal office of the Corporation
in Maryland is:
CT Corporation
32 South Street
Baltimore, Maryland 21202
FOURTH: The name and post office address of the resident agent of the
Corporation in Maryland is:
CT Corporation
32 South Street
Baltimore, Maryland 21202
FIFTH: The total number of shares of capital stock which the Corporation
has authority to issue is one hundred thirty five million (135,000,000) shares,
consisting of (a) one hundred million (100,000,000) shares of common stock with
a par value of $0.01 per share, (b) ten million (10,000,000) shares of preferred
stock with a par value of $0.01 per share, (c) twenty million (20,000,000)
shares of excess common stock with a par value of $0.01 per share and (d) five
million (5,000,000) shares of excess preferred stock with a par value of $0.01
per share. The preferred stock may be issued in such series and with such
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and redemption provisions, if any,
as may be fixed by the Board of Directors. The excess common stock and the
excess preferred stock shall have the rights provided in the NINTH Article
hereof. The aggregate par value of all shares of stock which the Corporation has
authority to issue is One Million Three Hundred Fifty Thousand Dollars
($1,350,000).
SIXTH: (a) The Corporation shall have three Directors, which number may be
changed from time to time in such manner as the By-Laws of the Corporation shall
provide. The Directors shall be divided, with respect to the time for which they
severally hold office, into three classes, as nearly equal in number as
reasonably possible, with the term of office of the first class to expire at the
1995 annual meeting of stockholders, the term of office of the second class to
expire at the 1996 annual meeting of stockholders and the term of office of the
third class to expire at the 1997 annual meeting of stockholders, with each
director to hold office until his or her successor shall have been duly elected
and qualified. At each annual meeting of stockholders, commencing with the 1995
annual meeting, (i) Directors elected to succeed the class of Directors whose
terms then expire shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders after their election, with each
director of the class to hold office until his or her successor shall have been
duly elected and qualified, and (ii) except as otherwise required by law, if
authorized by a resolution of the Board of Directors, Directors may be elected
to fill any vacancy on the Board of Directors, regardless of how such vacancy
shall have been created.
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(b) Except as otherwise required by law, unless the Board of Directors
otherwise determines, newly created Directorships resulting from any increase in
the authorized number of Directors or any vacancies on the Board of Directors
resulting from any cause shall be filled only by a majority vote of the
Directors then in office, though less than a quorum, and Directors so chosen
shall hold office for a term expiring at the annual meeting of stockholders at
which the term of office of the class to which they have been elected expires
and until such Director's successor shall have been duly elected and qualified.
No decrease in the numbers of authorized Directors constituting the entire Board
of Directors shall shorten the term of any incumbent Director.
SEVENTH: Notwithstanding the provisions of the SIXTH Article or any
limitations on removal of Directors, the stockholders of the Corporation may
remove any director, but only for cause, and only by the affirmative vote of
two-thirds (2/3) of all the votes entitled to be cast for the election of
Directors.
EIGHTH: No holder of capital stock of the Corporation shall be entitled as
a matter of right to subscribe for, purchase or receive any part of any new or
additional issue of capital stock of any class or any options or warrants for
such stock or any rights to subscribe to or purchase such stock or securities
convertible into or exchangeable for such stock whether now or hereafter
authorized or whether issued for money, for a consideration other than money, or
for no consideration.
NINTH: Restrictions on the transferability of stock of the Corporation are
as follows:
(a) Subject to paragraphs (b), (c) and (d) of this NINTH Article, upon
surrender to the Corporation or to any transfer agent of the Corporation of
a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, the Corporation, or its
transfer agent, shall issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon the
Corporation's books.
(b) Beginning at the time that the payment of a distribution in kind
of the shares of common stock of the Corporation shall have occurred
("effective time of the restriction"), and continuing thereafter until such
time as the limitation on transfer provided for in the Pairing Agreement to
be entered into by Starwood Lodging Trust, a Maryland real estate
investment trust ("SLT"), and the Corporation shall be terminated:
(i) The shares of common stock of the Corporation shall not be
transferable, and shall not be transferred on the books of the
Corporation unless (1) a simultaneous transfer of a like number of
shares of SLT is made by the same transferor to the same transferee, or
(2) such transferor has previously arranged with SLT for the acquisition
by the transferee of a like number of shares of SLT, and in each case
such shares are paired with one another.
(ii) Each certificate evidencing ownership of shares of SLT issued
and not cancelled prior to the effective time of the restriction shall
be deemed to evidence a like number of shares of common stock of the
Corporation.
(iii) Any registered holder of a certificate evidencing ownership
of shares of SLT issued prior to the effective time of the restriction
may, upon request and presentation of such certificate to the
Corporation's transfer agent, obtain in substitution therefor a
certificate or certificates registered in such holder's name evidencing
the same number of shares of common stock of the Corporation and a like
number of shares of SLT.
(iv) A legend shall be placed on the face of each certificate
evidencing ownership of shares of common stock of the Corporation issued
after the effective time of the restriction, referring to the
restrictions on transfer set forth herein.
(c) Restrictions on Transfer.
(i) Definitions. The following terms shall have the following
meanings:
"Beneficial Ownership" shall mean ownership of shares of capital
stock by a Person who would be treated as an owner of such shares of
capital stock directly, indirectly or constructively through
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the application of Section 318(a) of the Code, as modified by Section
856(d)(5) of the Code, or Section 544 of the Code, as modified by
Section 856(h) of the Code. The terms "Beneficial Owner", "Beneficially
Owns" and "Beneficially Owned" shall have correlative meanings.
"Charitable Beneficiary" shall mean the organization or
organizations described in Sections 170(c)(2) and 501(c)(3) of the Code
selected by the Excess Share Trustee.
"Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
"Excess Shares" shall mean the excess common stock and the excess
preferred stock.
"Excess Share Trust" shall mean the trust created pursuant to
paragraph (d) of this NINTH Article.
"Excess Share Trust Beneficiary" shall mean a beneficiary of the
Excess Share Trust as determined pursuant to paragraph (d) of this NINTH
Article.
"Excess Share Trustee" shall mean Nina Matis or any successor
appointed pursuant to paragraph (d) of this NINTH Article.
"Market Price" of any class of shares of capital stock on any date
shall mean the average of the Closing Price for the five (5) consecutive
trading days ending on such date, or if such date is not a trading date,
the five consecutive trading days preceding such date. The "Closing
Price" on any date shall mean (1) the last sale price, regular way, or,
in case no such sale takes place on such day, the average of the closing
bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange,
or (2) if such class of shares of capital stock is not listed or
admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which
such class of shares of capital stock is listed or admitted to trading,
or (3) if such class of shares of capital stock is not listed or
admitted to trading on any national securities exchange, the last quoted
price, or if not so quoted, the average of the high bid and low asked
prices in the over-thecounter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotation System or,
if such system is no longer in use, the principal other automated
quotations system that may then be in use, or (4) if such class of
shares of capital stock is not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a
professional market maker making a market in such class of shares of
capital stock selected by the Board of Directors.
"Ownership Limit" shall mean (i) in the case of a Person other than
an Existing Holder (as defined below), Beneficial Ownership of more than
eight percent (8.0%), by value, vote or number, of the shares of capital
stock and (ii) in the case of a Person who or which was the Beneficial
Owner, as of December , 1994 [date of Restatement of Articles] (the
"Amendment Date"), of more than 8.0% (by vote, value or number) of the
shares of capital stock (any such Person being referred to as an
"Existing Holder"), a percentage (by vote, value or number) equal to the
lesser of (a) 9.9% and (b) the percentage of shares of capital stock
Beneficially Owned by such Existing Holder as of the Amendment Date;
provided that if, at any time and from time to time after the Amendment
Date, the percentage of shares of capital stock Beneficially Owned by an
Existing Holder shall decrease (whether by reason of a disposition by
such Existing Holder, an increase in the number of outstanding shares of
capital stock or otherwise), then from and after the time of such
decrease the Ownership Limit in the case of such Existing Holder shall
be a percentage (by vote, value or number) equal to the greater of (x)
8.0% and (y) the percentage of shares of capital stock Beneficially
Owned by such Existing Holder after giving effect to such decrease.
"Person" shall mean any individual, corporation, partnership, joint
stock company or association, joint venture, association, company,
trust, bank, limited liability company, estate, foundation or other
entity and any government, agency or political subdivision thereof.
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"Purported Beneficial Holder" shall mean, with respect to any event
(other than a purported Transfer) which results in Excess Shares, the
Person for whom the Purported Record Holder held shares of capital stock
that were, pursuant to paragraph (c)(iii) of this NINTH Article,
automatically converted into Excess Shares upon the occurrence of such
event.
"Purported Beneficial Transferee" shall mean, with respect to any
purported Transfer which results in Excess Shares, the purported
beneficial transferee for whom the Purported Record Transferee would
have acquired shares of capital stock if such Transfer had been valid
under paragraph (c)(ii) of this NINTH Article.
"Purported Record Holder" shall mean, with respect to any event
(other than a purported Transfer) which results in Excess Shares, the
record holder of the shares of capital stock that were, pursuant to
paragraph (c)(iii) of this NINTH Article, automatically converted into
Excess Shares upon the occurrence of such event.
"Purported Record Transferee" shall mean, with respect to any
purported Transfer which results in Excess Shares, the record holder of
the shares of capital stock if such Transfer had been valid under
paragraph (c)(ii) of this NINTH Article.
"REIT" shall mean a real estate investment trust for federal income
tax purposes.
"Restriction Termination Date" shall mean the first day of the
taxable year for which the Trustees of SLT have determined to terminate
SLT's status as a REIT.
"Transfer" shall mean any sale, transfer, gift, hypothecation,
pledge, assignment, device or other disposition of shares of capital
stock (including (1) the granting of any option or interest similar to
an option (including an option to acquire an option or any series of
such options) or entering into any agreement for the sale, transfer or
other disposition of shares of capital stock or (2) the sale, transfer,
assignment or other disposition of any securities or rights convertible
into or exchangeable for shares of capital stock), whether voluntary or
involuntary, whether of record, constructively or beneficially and
whether by operation of law or otherwise. For purposes of this
definition, whether securities or rights are convertible or exchangeable
for capital stock shall be determined in accordance with Sections 318
and 544 of the Code.
(ii) Restrictions on Transfers and Other Events. On or after the
Restriction Termination Date, the provisions of paragraphs (c) and (d)
of this NINTH Article shall be of no further force and effect. Prior to
the Restriction Termination Date and except as provided in subparagraph
(ix) below:
(1) No Person shall Beneficially Own shares of capital stock in
excess of the Ownership Limit;
(2) Any Transfer that, if effective, would result in any Person
Beneficially Owning shares of capital stock in excess of the
Ownership Limit shall be void ab initio as to the Transfer of that
number of shares of capital stock which would be otherwise
Beneficially Owned by such Person in excess of the Ownership Limit
and the intended transferee shall acquire no rights in such shares of
capital stock in excess of the Ownership Limit;
(3) Any Transfer that, if effective, would result in the shares
of capital stock being Beneficially Owned by fewer than one hundred
(100) Persons (determined without reference to any rules of
attribution) shall be void ab initio and the intended transferee
shall acquire no rights in such shares of capital stock; and
(4) Any Transfer of shares of capital stock that, if effective,
would result in the Corporation being "closely held" within the
meaning of Section 856(h) of the Code (applied as if the Corporation
was a REIT) shall be void ab initio as to the Transfer of that number
of shares of capital stock which would cause the Trust to be "closely
held" within the meaning of
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Section 856(h) of the Code and the intended transferee shall acquire
no rights in such shares of capital stock.
(iii) Conversion into Excess Shares.
(1) If, notwithstanding the other provisions contained in this
NINTH Article, at any time prior to the Restriction Termination Date,
there is a purported Transfer or other event such that any Person
would Beneficially Own shares of capital stock in excess of the
Ownership Limit, then, except as otherwise provided in subparagraph
(ix) below, such shares of capital stock which would be in excess of
the Ownership Limit (rounded up to the nearest whole share), shall
automatically be converted into that number of shares of excess
common stock or excess preferred stock, as appropriate, equal to the
number of shares of capital stock being converted, as further
described in clause (3) below. Such conversion shall be effective as
of the close of business on the business day prior to the date of the
Transfer or other event.
(2) If, notwithstanding the other provisions contained in this
NINTH Article, at any time prior to the Restriction Termination Date,
there is a purported Transfer or other event which, if effective,
would cause the Corporation to become "closely held" within the
meaning of Section 856(h) of the Code (applied as if the Corporation
was a REIT), then the shares of capital stock being Transferred or
which are otherwise affected by such event and which, in either case,
would cause, when taken together with all other shares of capital
stock, the Corporation to be "closely held" within the meaning of
Section 856(h) of the Code (rounded up to the nearest whole share)
shall automatically be converted into that number of shares of excess
common stock or excess preferred stock, as appropriate, equal to the
number of shares of capital stock being converted, as further
described in clause (3) below. Such conversion shall be effective as
of the close of business on the business day prior to the date of the
Transfer or change in capital structure.
(3) Upon conversion of common stock or preferred stock into
Excess Shares pursuant to subparagraph (iii), common stock shall be
converted into excess common stock and preferred stock shall be
converted in excess preferred stock.
(iv) Remedies for Breach. If the Board of Directors or its
designees shall at any time determine in good faith that a purported
Transfer or other event has taken place in violation of paragraph
(c)(ii) of this NINTH Article or that a Person intends to acquire or has
attempted to acquire Beneficial Ownership of any shares of capital stock
in violation of paragraph (c)(ii) of this NINTH Article, the Board of
Directors or its designees may take such action as it deems advisable to
refuse to give effect to or to prevent such Transfer or other event,
including, but not limited to, refusing to give effect to such Transfer
or other event on the books of the Corporation or instituting
proceedings to enjoin such Transfer or other event or transaction;
provided, however, that any Transfers or attempted Transfers (or, in the
case of events other than a Transfer, Beneficial Ownership) in violation
of paragraph (c)(ii) of this NINTH Article, shall be void ab initio and
automatically result in the conversion described in paragraph (c)(iii),
irrespective of any action (or non-action) by the Board of Directors or
its designees.
(v) Notice of Restricted Transfer. Any Person who acquires or
attempts to acquire shares of capital stock in violation of paragraph
(c)(ii) of this NINTH Article, or any Person who is a purported
transferee such that Excess Shares result under paragraph (c)(iii),
shall immediately give written notice to the Corporation of such
Transfer, attempted Transfer or other event and shall provide to the
Corporation such other information as the Corporation may request in
order to determine the effect, if any, of such Transfer or attempted
Transfer or other event on the SLT's status as a REIT.
(vi) Owners Required to Provide Information. Prior to the
Restriction Termination Date:
(1) Every Beneficial Owner of five percent (5%) or more, by
value, vote or number, or such lower percentages as required pursuant
to regulations under the Code (applied as if the
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Corporation was a REIT), of the outstanding shares of capital stock
shall, before January 30 of each year, give written notice to the
Corporation stating the name and address of such Beneficial Owner,
the general ownership structure of such Beneficial Owner, the number
of shares of each class of capital stock Beneficially Owned, and a
description of how such shares are held.
(2) Each Person who is a Beneficial Owner of shares of capital
stock and each Person (including the shareholder of record) who is
holding shares of capital stock for a Beneficial Owner shall provide
on demand to the Corporation such information as the Corporation may
request from time to time in order to ensure compliance with the
Ownership Limit and SLT's compliance with the REIT requirements of
the Code and the regulations published thereunder.
(vii) Remedies Not Limited. Subject to paragraph (c)(xii) of this
NINTH Article, nothing contained in this NINTH Article shall limit the
authority of the Board of Directors to take such other action as it
deems necessary or advisable to protect SLT and the interests of the
Corporation's stockholders by preservation of the SLT's status as a REIT
and to ensure compliance with the Ownership Limit.
(viii) Ambiguity. In the case of an ambiguity in the application
of any of the provisions of this paragraph (c) or paragraph (d),
including any definition contained in subparagraph (c)(i), the Board of
Directors shall have the power to determine the application of the
provisions of this paragraph (c) or paragraph (d) with respect to any
situation based on the facts known to them.
(ix) Exception. The Board of Directors upon receipt of a ruling
from the Internal Revenue Service or an opinion of tax counsel,
satisfactory to them in their sole and absolute discretion, in each case
to the effect that the SLT's status as a REIT will not be jeopardized,
may exempt a Person from the Ownership Limit if the Board of Directors
obtains such representations and undertakings from such Person as are
reasonably necessary to ascertain that such Person's Beneficial
Ownership of shares of capital stock will not jeopardize SLT's status as
a REIT.
(x) Legend. Until the Restriction Termination Date, each
certificate for the respective class of shares of capital stock shall
bear the following legend:
The shares of capital stock represented by this certificate are
subject to restrictions on transfer. Unless excepted by the Board of
Directors, no Person may (1) Beneficially Own shares of capital stock
in excess of 8.0% of the outstanding shares of capital stock, by
value, vote or number, determined as provided in the Corporation's
Articles of Incorporation, as the same may be amended from time to
time (the "Articles"), and computed with regard to all outstanding
shares of capital stock and, to the extent provided by the Code, all
shares of capital stock issuable under existing options and exchange
rights that have not been exercised; or (2) Beneficially Own shares
of capital stock which would result in the Trust being "closely
held". Unless so excepted, any acquisition of shares of capital stock
and continued holding of ownership constitutes a continuous
representation of compliance with the above limitations, and any
Person who attempts to Beneficially Own shares of capital stock in
excess of the above limitations has an affirmative obligation to
notify the Corporation immediately upon such attempt. If the
restrictions on transfer are violated, the transfer will be void ab
initio and the shares of capital stock represented hereby will be
automatically converted into Excess Shares that will be held in
trust. Excess Shares may not be transferred at a profit and may be
purchased by the Corporation. In addition, certain Beneficial Owners
must give written notice as to certain information on demand and on
an annual basis. All terms not defined in this legend have the
meanings provided in the Articles. The Corporation will mail without
charge to any requesting stockholder a copy of the Articles,
including the express terms of each class and series of the
authorized shares of capital stock of the Corporation, within five
(5) days after receipt of a written request therefor.
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(xi) Severability. If any provision of this NINTH Article or any
application of any such provision is determined to be invalid by any
Federal or state court having jurisdiction over the issues, the validity
of the remaining provisions shall not be affected, and other
applications of such provision shall be affected only to the extent
necessary to comply with the determination of such court.
(xii) New York Stock Exchange Transactions. Nothing in this NINTH
Article shall preclude the settlement of any transaction entered into
through the facilities of the New York Stock Exchange.
(d) Excess Shares.
(i) Ownership In Trust. Upon any purported Transfer or other event
that results in Excess Shares pursuant to paragraph (c)(iii) of this
NINTH Article, such Excess Shares shall be deemed to have been
transferred to Nina Matis (or any successor Excess Share Trustee), as
Excess Share Trustee of the Excess Share Trust for the benefit of such
Excess Share Trust Beneficiary or Beneficiaries and the Charitable
Beneficiary effective as of the close of business on the business day
prior to the date of the Transfer or other event. Excess Shares so held
in trust shall be issued and outstanding shares of the Corporation. The
Purported Record Transferee or Purported Record Holder shall have no
rights in such Excess Shares. The Purported Beneficial Transferee or
Purported Beneficial Holder shall have no rights in such Excess Shares
except as provided in paragraph (d)(v). Nina Matis, or any successor
Excess Share Trustee, may resign by appointing a person independent of
the Trust, Corporation or any Excess Share Trust Beneficiary as the
Excess Share Trustee. The Excess Share Trustee shall, from time to time,
designate one or more charitable organization or organizations as the
Charitable Beneficiary.
(ii) Dividend Rights. Excess Shares shall be entitled to the same
dividends determined as if no conversion into Excess Shares had
occurred. Any dividend or distribution paid prior to the discovery by
the Corporation that the shares of capital stock have been converted
into Excess Shares shall be repaid to the Excess Share Trust upon
demand. Any dividend or distribution declared but unpaid shall be paid
to the Excess Share Trust. All dividends received or other income earned
by the Excess Share Trust shall be paid over to the Charitable
Beneficiary.
(iii) Rights Upon Liquidation. Excess Shares shall not be entitled
to receive any portion of the assets of the Corporation on the
liquidation or dissolution of the Corporation. Upon conversion of Excess
Shares into shares of capital stock pursuant to paragraph (d)(v), such
shares shall be entitled to receive their pro rata share of the assets
of the Corporation as a result of the liquidation or dissolution of the
Corporation.
(iv) Voting Rights. The Excess Share Trustee shall vote the Excess
Shares which shall have the same voting rights as the shares of capital
stock into which they are to be converted pursuant to paragraph (d)(v).
Any vote cast by the Purported Beneficial Transferee or Purported Record
Transferee will, at the option of the Excess Share Trustee, be void ab
initio.
(v) Restrictions On Transfer; Designation of Excess Share Trust
Beneficiary. (1) Excess Shares shall not be transferrable. The Excess
Share Trustee may freely designate an Excess Share Trust Beneficiary of
all or any portion of the beneficial interest in the Excess Share Trust
(representing the number of Excess Shares held by the Excess Share Trust
attributable to a purported Transfer or other event that results in
Excess Shares and designated as to number and class of shares pursuant
to the notice provision of this clause), if the Excess Shares held in
the Excess Share Trust would not be Excess Shares in the hands of such
Excess Share Trust Beneficiary. If the Excess Shares resulted from a
purported Transfer, the Purported Beneficial Transferee shall receive a
payment from the Excess Share Trustee that reflects a price per share
for such Excess Shares equal to the lesser of (A) the price per share
received by the Excess Share Trustee and (B) (x) the price per share
such Purported Beneficial Transferee paid for the Share of Beneficial
Interest in the purported Transfer that resulted in the Excess Shares,
or (y) if the Purported Beneficial Transferee did not give value for
such shares of Excess Shares (through a gift,
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devise or other transaction), a price per share of Excess Shares equal
to the Market Price of the shares of capital stock on the date of the
purported Transfer that resulted in the Excess Shares. If the Excess
Shares resulted from an event other than a purported Transfer, the
Purported Beneficial Holder shall receive a payment from the Excess
Share Trustee that reflects a price per share of Excess Shares equal to
the lesser of (A) the price per share received by the Excess Share
Trustee or (B) the Market Price of the shares of capital stock on the
date of the event that resulted in Excess Shares. Upon such transfer of
an interest in the Excess Share Trust, the corresponding shares of
Excess Shares in the Excess Share Trust shall be automatically converted
into such number of shares of common or preferred stock (of the same
class as the shares that were converted into such Excess Shares) as is
equal to the number of shares of Excess Shares, and such shares of
common or preferred stock shall be transferred of record to the Excess
Share Trust Beneficiary of the interest in the Excess Share Trust
designated by the Excess Share Trustee as described above if such shares
of capital stock would not be Excess Shares in the hands of such Excess
Share Trust Beneficiary. Prior to any transfer of any interest in the
Excess Share Trust, the Corporation must have waived in writing its
purchase rights, if any, under paragraph (d)(vi). Any funds received by
the Excess Share Trustee in excess of the funds payable to the Purported
Beneficial Holder or the Purported Beneficial Transferor shall be paid
to the Charitable Beneficiary. The Corporation shall pay the costs and
expenses of the Excess Share Trustee.
(2) Notwithstanding the foregoing, if a Purported Beneficial
Transferee, Purported Beneficial Holder or the Excess Share Trustee
receives a price for an interest in the Excess Share Trust that exceeds
the amounts allowable under paragraph (d)(v)(1) of this NINTH Article,
such Purported Beneficial Transferee or Purported Beneficial Holder
shall be personally liable to, and shall pay, or cause the Excess Share
Trust Beneficiary of the interest in the Excess Share Trust to pay, such
excess to the Excess Share Trustee who shall pay over such excess to the
Charitable Beneficiary.
(3) Notwithstanding the foregoing, if the provisions of this
paragraph (d)(v) are determined to be void or invalid by virtue of any
legal decision, statute, rule or regulation, then the Purported
Beneficial Transferee or Purported Beneficial Holder of any shares of
Excess Shares may be deemed, at the option of the Corporation, to have
acted as an agent on behalf of the Corporation, in acquiring or holding
such Excess Shares and to hold such Excess Shares on behalf of the
Corporation.
(vi) Purchase Right in Excess Shares. Excess Shares shall be
deemed to have been offered for sale by the Excess Share Trustee to the
Corporation, or its designee, at a price per Excess Share equal to (I)
in the case of Excess Shares resulting from a purported Transfer, the
lesser of (A) the price per share of the shares of capital stock in the
transaction that created such Excess Shares (or, in the case of devise
or gift, the Market Price of the shares of capital stock at the time of
such devise or gift), or (B) the lowest Market Price of the class of
shares of capital stock which resulted in the Excess Shares at any time
after the date such shares were converted into Excess Shares and prior
to the date the Corporation, or its designee, accepts such offer or (II)
in the case of Excess Shares resulting from an event other than a
purported Transfer, the lesser of (A) the Market Price of the shares of
capital stock on the date of such event or (B) the lowest Market Price
for shares of capital stock which resulted in the Excess Shares at any
time from the date of the event resulting in such Excess Shares and
prior to the date the Corporation, or its designee, accepts such offer.
The Corporation shall have the right to accept such offer for a period
of ninety (90) days after the later of (i) the date of the Transfer
which resulted in such Excess Shares and (ii) the date the Board of
Directors determines in good faith that a Transfer or other event
resulting in Excess Shares has occurred, if the Corporation does not
receive a notice of such Transfer or other event pursuant to paragraph
(c)(v) of this NINTH Article.
(e) Notwithstanding any other provision of these Articles of
Incorporation or any provision of law which might otherwise permit a lesser
vote or no vote, but in addition to any affirmative vote of the holders of
any particular class or series of capital stock required by law or these
Articles of Incorporation, the affirmative vote of the holders of at least
two-thirds (2/3) of the voting power of all the then-
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outstanding shares of capital stock of the Corporation, voting together as
a single class, shall be required to alter, amend or repeal this NINTH
Article.
TENTH: The Corporation shall indemnify (A) its directors and officers,
whether serving the Corporation or at its request any other entity, to the full
extent required or permitted by the General Laws of the State of Maryland now or
hereafter in force, including the advance of expenses under the procedures and
to the full extent permitted by law and (B) other employees and agents to such
extent as shall be authorized by the Board of Directors or the Corporation's
By-Laws and be permitted by law. The foregoing rights of indemnification shall
not be exclusive of any other rights to which those seeking indemnification may
be entitled. The Board of Directors may take such action as is necessary to
carry out these indemnification provisions and is expressly empowered to adopt,
approve and amend from time to time such by-laws, resolutions or contracts
implementing such provisions or such further indemnification arrangements as may
be permitted by law. No amendment of the charter of the Corporation or repeal of
any of its provisions shall limit or eliminate the right to indemnification
provided hereunder with respect to acts or omissions occurring prior to such
amendment or repeal.
ELEVENTH: The provisions for the regulation of the internal affairs of the
Corporation are to be stated in the Bylaws of the Corporation, as the same may
be amended from time to time.
TWELFTH: Any amendments to these Articles of Incorporation shall be
approved by the stockholders of the Corporation by the affirmative vote of a
majority of all the votes entitled to be cast on the matter.
THIRTEENTH: The Corporation shall not consummate a consolidation, merger,
share exchange or sale, lease, exchange or other transfer of all or
substantially all of its assets, the stockholder approval of which is required
by applicable law, unless such transaction is approved by the stockholders of
the Corporation by the affirmative vote of a majority of all the votes entitled
to be cast on the matter.
FOURTEENTH: To the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted from time to time, no director or
officer of the Corporation shall be liable to the Corporation or its
stockholders for money damages. No amendment to these Articles of Incorporation
or repeal of any of its provisions shall limit or eliminate the effect of this
FOURTEENTH Article with respect to any act or omission which occurs prior to
such amendment or repeal.
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EXHIBIT C TO JOINT PROXY STATEMENT
(Salomon Letterhead)
November 11, 1994
Hotel Investors Corporation (Salomon Bros. Logo)
11845 W. Olympic Boulevard
Suite 560
Los Angeles, California 90064
Hotel Investors Trust
11845 W. Olympic Boulevard
Suite 550
Los Angeles, California 90064
Members of the Board and Trustees:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the holders of shares of Beneficial Interest,
$1.00 par value (the "Beneficial Shares"), of Hotel Investors Trust, a Maryland
real estate investment trust (the "Trust"), and the holders of shares of Common
Stock, $0.10 par value (the "Common Shares" and together with the Beneficial
Shares, the "Paired Shares"), of Hotel Investors Corporation, a Maryland
corporation (the "Corporation" and collectively with the Trust, the
"Companies"), other than Starwood Capital Group, L.P., a Delaware limited
partnership and its affiliates (collectively, "Starwood"), of a proposed
transaction involving the Companies pursuant to the Formation Agreement dated
November 11, 1994 among the Companies and Starwood (the "Agreement").
As more specifically set forth in the Agreement, and subject to the terms
and conditions thereof, the Trust will become the sole general partner of SLT
Realty Limited Partnership, a Delaware limited partnership (the "Realty
Partnership"), and Starwood will be the limited partner of the Realty
Partnership. The Trust will contribute to the Realty Partnership all of the
assets of the Trust (subject to substantially all of its liabilities, including
the Senior Debt (as defined in the Agreement)) in exchange for an approximate
28.275% interest in the Realty Partnership, subject to adjustment as set forth
in the Agreement. Starwood will contribute to the Realty Partnership cash and
equity and debt interests in hotels, subject to certain liabilities, in exchange
for limited partnership interests ("Realty Units") representing the remaining
approximate 71.725% interest in the Realty Partnership, subject to adjustment as
set forth in the Agreement. After the Reorganization (as defined below), the
Trust will conduct all of its business and operations through the Realty
Partnership. Pursuant to the Reorganization, the Corporation and its
subsidiaries will become the general partners of SLC Operating Limited
Partnership, a Delaware limited partnership (the "Operating Partnership"), and
Starwood will be the limited partner of the Operating Partnership. The
Corporation and its subsidiaries will contribute to the Operating Partnership
all of their operating assets (subject to substantially all of their
liabilities) in exchange for an approximate 28.275% interest in the Operating
Partnership, subject to adjustment as set forth in the Agreement. Such assets
will be contributed upon the consummation of the Reorganization, except for
certain gaming assets and liabilities which will be contributed upon receipt of
certain regulatory approvals. Starwood will contribute to the Operating
Partnership cash and other assets, subject to certain liabilities, in exchange
for limited partnership interests ("Operating Units") representing the remaining
approximate 71.725% interest in the Operating Partnership, subject to adjustment
as set forth in the Agreement. After the Reorganization, the Operating
Partnership will lease from the Realty Partnership the hotel properties which
the Corporation and its subsidiaries presently lease from the Trust and certain
properties acquired by the Realty Partnership from Starwood and may lease from
the Realty Partnership and operate hotel properties acquired by the Realty
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Partnership in the future. Holders of Realty Units and Operating Units
(collectively, the "Units") will have the right, subject to certain limitations,
to tender to the Trust and the Corporation any or all of the Units held by them
in exchange for, at the option of the Trust and the Corporation, either cash,
Paired Shares or a combination of cash and Paired Shares representing up to
approximately 71.725% of the Paired Shares issued and outstanding after the
Reorganization, subject to adjustment as set forth in the Agreement. The
transactions described above are hereinafter collectively referred to as the
"Reorganization."
In arriving at our opinion, we have reviewed, analyzed, and relied upon
material bearing upon the financial and operating conditions and prospects of
the Companies and Starwood and material prepared in connection with the
Reorganization, and we have considered such financial and other factors as we
deemed appropriate under the circumstances, including, among other things, the
following: (i) the Agreement; (ii) the Credit Agreement dated as of January 28,
1993 among the Trust and the Senior Lenders (as defined therein), as amended;
(iii) the Joint Proxy Statement of the Companies relating to the Reorganization;
(iv) the Joint Annual Report to Shareholders and Annual Report on Form 10-K for
each of the years in the three-year period ended December 31, 1993, as amended,
and the Joint Quarterly Report on Form 10-Q for the quarter ended June 30, 1994,
as amended, of the Trust and the Corporation; (v) certain other internal
information, primarily financial in nature, including projections prepared by
the managements of the Companies concerning the business, assets and operations
of the Companies, furnished to us by the managements of the Companies for
purposes of our analysis; (vi) certain publicly available information concerning
the trading of, and the trading market for, the Paired Shares; (vii) certain
internal information, primarily financial in nature, including projections
prepared by the management of Starwood, concerning the business, assets and
operations of Starwood furnished to us by the management of Starwood for
purposes of our analysis; (viii) certain publicly available information with
respect to the Trust, the Corporation, Starwood and certain other companies that
we believe to be comparable to the Trust and the Corporation and the trading
markets for certain of such other companies' securities; (ix) certain publicly
available information concerning the nature and terms of certain other
transactions which we believe to be reasonably comparable to the Reorganization
or otherwise; and (x) the identification of prospective buyers, the solicitation
of proposals and the participation in discussions with third parties concerning
their interest in a potential transaction with the Companies. We have also met
with certain officers and employees of the Trust, the Corporation and Starwood
to discuss the foregoing as well as other matters we believe relevant to our
inquiry. In this connection, we have also relied upon the representations of the
managements of the Companies that the Companies were unable to restructure or
refinance their Senior Debt on terms more favorable than currently exist.
In conducting our review and arriving at our opinion, we have assumed and
relied upon the accuracy and completeness of, but we have not assumed any
responsibility for independent verification of, the financial and other
information provided to us or publicly available. With respect to financial
projections, we have assumed that they have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
managements of the Trust, the Corporation and Starwood as to future financial
performances of the Trust, the Corporation and Starwood, respectively. We
express no view as to such projections or the assumptions on which they are
based. We have not assumed any responsibility for or obtained any independent
evaluations or appraisals of the properties or facilities of the Trust, the
Corporation or Starwood. We understand that the Companies are contemplating
obtaining financing through an equity public offering which is anticipated to
occur subsequent to consummation of the Reorganization (the "Offering") and that
completion of the Offering is not a condition to the Reorganization.
In conducting our analysis and arriving at our opinion as expressed herein,
we have taken into account our assessment of general economic, market and
financial conditions and our experience in similar transactions, as well as our
experience in securities valuation in general. Our opinion necessarily is based
on conditions as they exist and can be evaluated on the date hereof. Our opinion
as expressed herein is limited to the fairness, from a financial point of view,
of the Reorganization to the stockholders of the Corporation and the
shareholders of the Trust, other than Starwood and does not address the
Companies' underlying business decision to effect the Reorganization or
constitute a recommendation to any Corporation stockholder or Trust shareholder
as to how such holder should vote with respect to the Reorganization. For
purposes of this opinion, we have analyzed the
C-2
<PAGE> 165
Reorganization as a whole and have not analyzed any of the terms of the
Reorganization on an individual basis.
We have acted as financial advisor to the Board of Directors of the
Corporation and the Board of Trustees of the Trust in connection with the
Reorganization and will receive a fee for our services. In the past, we have
performed certain investment banking services for the Companies and have
received fees for such services. In the ordinary course of our securities
business, we may trade the Paired Shares for our own account and the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
It is understood that this letter is solely for the benefit and use of the
Boards of Directors and Trustees of the Companies in their consideration of the
Agreement and may not be relied upon by any other person or used for any other
purpose.
Based upon and subject to the foregoing, we are of the opinion as
investment bankers that, as of the date hereof, the Reorganization is fair, from
a financial point of view, to the stockholders of the Corporation and the
shareholders of the Trust, other than Starwood.
Very truly yours,
SALOMON BROTHERS INC
C-3
<PAGE> 166
APPENDIX TO JOINT PROXY STATEMENT FILED IN
ELECTRONIC FORMAT, PURSUANT TO
ITEM 304(A) OF REGULATION S-T
------------------------------------------
Pursuant to Item 304(a) of Regulation S-T, the following is a narrative
description of the charts referred to on pages 9 and 28 of the Joint Proxy
Statement (the "Charts"). Pursuant to Item 304(b)(2), such description shall
be deemed a part of the filing of the Joint Proxy Statement but shall not be
subject to the liability and anti-fraud provisions of the Federal securities
laws.
Each of the Charts depicts the ownership structure and partners of the
Partnership after the Reorganization, which structure is described in the text
of the Joint Proxy Statement on pages 6-8, 27 and elsewhere in the Joint Proxy
Statement.
The Charts list the following percentage ownership of the Trust and the
Corporation after the Reorganization:
Percentage Percentage
Before Unit After Unit
Owners Exchange Exchange
------ ----------- ----------
Current holders (other 97.5% 27.6%
than Starwood)
Starwood 2.5% 72.4%
The Charts also list the following percentage ownership of each of the
Partnerships after the Reorganization:
Percentage Percentage
Before Unit After Unit
Owners Exchange Exchange
------ ----------- ----------
The Trust (in the case of 28.3% 100.0%
the Realty Partnership)
or the Corporation (in
the case of the Operating
Partnership)
Starwood 71.7% 0%
<PAGE> 167
PROXY
HOTEL INVESTORS TRUST
HOTEL INVESTORS CORPORATION
PROXY FOR SPECIAL MEETINGS OF SHAREHOLDERS AND STOCKHOLDERS
TO BE HELD DECEMBER 15, 1994
The undersigned shareholder of Hotel Investors Trust (the "Trust") and
stockholder of Hotel Investors Corporation (the "Corporation") hereby
acknowledges receipt of the Notice of Special Meeting of Shareholders of the
Trust and the Notice of Special Meeting of Stockholders of the Corporation (the
"Special Meetings") and the accompanying Joint Proxy Statement relating to the
above-referenced Special Meetings, and hereby appoints, with full power of
substitution in each, each of the following persons as attorneys and proxies of
the undersigned: (a) with respect to the undersigned's shares of the Trust,
Jeffrey C. Lapin and Michael W. Mooney and (b) with respect to the undersigned's
shares of the Corporation, Kevin E. Mallory and Bruce M. Ford.
Said proxies are hereby given authority, as appropriate, to represent and to
vote all shares of beneficial interest of the Trust and all shares of common
stock of the Corporation held of record by the undersigned and which the
undersigned may be entitled to vote at the Special Meetings to be held on
December 15, 1994 at the Embassy Suites Hotel, 1515 North 44th Street, Phoenix,
Arizona, at 11:00 a.m. and 11:30 a.m., respectively, and at any and all
adjournments or postponements thereof, on behalf of the undersigned on the
following matters and in the manner designated below:
THE BOARD OF TRUSTEES OF THE TRUST RECOMMENDS A VOTE "FOR" PROPOSALS 1, 2, 3, 4
AND 5.
1. THE REORGANIZATION PROPOSAL. Approval by shareholders of the Trust of the
Reorganization Proposal (as defined in the Joint Proxy Statement).
Shareholders who wish to vote on the Reorganization Proposal should mark
one of the following boxes:
/ / FOR / / AGAINST / / ABSTAIN
Shareholders are also being given the opportunity to vote separately, if
they so desire, on the following portions of the Reorganization Proposal
by marking the appropriate box for each of the following Items 2
and 3. Adoption of each portion of the Reorganization Proposal (including
the Items 2 and 3 below) is a condition to the Reorganization, as more
particularly described in the Joint Proxy Statement. The parties to the
Reorganization have the right, but not the obligation, to waive conditions
to the Reorganization which are not satisfied.
2. Approval by shareholders of the Trust of amendments to the Declaration of
Trust to create a classified Board of Trustees.
/ / FOR / / AGAINST / / ABSTAIN
3. Approval by shareholders of the Trust of amendments to the Declaration of
Trust to eliminate the cumulative voting provisions thereof.
/ / FOR / / AGAINST / / ABSTAIN
4. ELECTION OF TRUSTEES. To elect each of the following nominees as Trustees
of the Trust: Madison F. Grose, Earle F. Jones, Jeffrey C. Lapin, Jonathan
Eilian and Barry S. Sternlicht.
/ / FOR all of the nominees / / WITHHOLD
Instruction: To withhold authority to vote for any nominee, write that
nominee's name in the space provided:
---------------------------------------------------------------------------
Instruction: Unless otherwise specified in the space below, this proxy
shall authorize the proxies named herein to cumulate all votes which the
undersigned is entitled to cast at the Special Meetings for, and to
allocate such votes among, one or more of the nominees listed above (other
than those nominees (if any) for whom authority to vote is withheld) as
such proxies shall determine, in their sole and absolute discretion, in
order to maximize the number of such nominees elected as Trustees of the
Trust. To specify a different method of cumulative voting, write "Cumulate
For" and the number of votes and the name(s) of the nominees(s) in the
space provided below:
---------------------------------------------------------------------------
5. RATIFICATION OF ACCOUNTANTS. To ratify the selection of Deloitte & Touche
LLP as the independent public accountants of the Trust for the Trust's 1994
fiscal year.
/ / FOR / / AGAINST / / ABSTAIN
THE BOARD OF DIRECTORS OF THE CORPORATION RECOMMENDS A VOTE "FOR" PROPOSALS 6,
7, 8, 9, 10 AND 11.
6. THE REORGANIZATION PROPOSAL. Approval by stockholders of the Corporation of
the Reorganization Proposal (as defined in the Joint Proxy Statement).
Stockholders who wish to vote on the Reorganization Proposal should mark
one of the following boxes:
/ / FOR / / AGAINST / / ABSTAIN
Stockholders are also being given the opportunity to vote separately, if they
so desire, on the following portions of the Reorganization Proposal by marking
the appropriate box for each of the following Items 7 through 9. Adoption of
each portion of the Reorganization Proposal (including the Items 7 through 9
below) is a condition to the Reorganization, as more particularly described in
the Joint Proxy Statement. The parties to the Reorganization have the right,
but not the obligation, to waive conditions to the Reorganization which are not
satisfied.
(Continued on reverse side)
<PAGE> 168
(Continued)
7. Approval by stockholders of the Corporation of amendments to the Articles
of Incorporation to create a classified Board of Directors.
/ / FOR / / AGAINST / / ABSTAIN
8. Approval by stockholders of the Corporation of amendments to the Articles
of Incorporation to provide for removal of Directors only for cause.
/ / FOR / / AGAINST / / ABSTAIN
9. Approval by stockholders of the Corporation of amendments to the Articles
of Incorporation to eliminate the cumulative voting provisions thereof.
/ / FOR / / AGAINST / / ABSTAIN
10. ELECTION OF DIRECTORS. To elect each of the following nominees as
Directors of the Corporation: Bruce M. Ford, Steven R. Goldman and Barry
S. Sternlicht.
/ / FOR all of the nominees / / WITHHOLD
Instruction: To withhold authority to vote for any nominee, write that
nominee's name in the space provided:
-------------------------------------------------------------------------
Instruction: Unless otherwise specified in the space below, this proxy
shall authorize the proxies named herein to cumulate all votes which the
undersigned is entitled to cast at the Special Meetings for, and to
allocate such votes among, one or more of the nominees listed above (other
than those nominees (if any) for whom authority to vote is withheld) as
such proxies shall determine, in their sole and absolute discretion, in
order to maximize the number of such nominees elected as Directors of the
Corporation. To specify a different method of cumulative voting, write
"Cumulate For" and the number of votes and the name(s) of the
nominees(s) in the space provided below:
-------------------------------------------------------------------------
11. RATIFICATION OF ACCOUNTANTS. To ratify the selection of Deloitte & Touche
LLP as the independent public accountants of the Corporation for the
Corporation's 1994 fiscal year.
/ / FOR / / AGAINST / / ABSTAIN
12. In their discretion, the proxies are authorized to vote on such other
matters as may come before either of the Special Meetings.
This proxy is solicited by the Board of Directors of the Corporation
and the Board of Trustees of the Trust and when properly executed, the shares
represented hereby will be voted in the manner directed herein by the
undersigned. If no direction is made, this proxy will be voted FOR the approval
of Reorganization Proposal as a whole (Proposals 1 and 6 above), FOR the
election of all nominees named above as Trustees of the Trust, FOR the election
of all nominees named above as Directors of the Corporation, and FOR the
ratification of the selection of Deloitte & Touche LLP as independent public
accountant. If no direction is made with respect to election of directors or
trustees, the holders of this proxy will be authorized to cumulate votes, as
described in the Instructions under Proposals 4 and 10 above.
Dated: , 1994
-------------------------------
(Signature)
-------------------------------
(Signature if held jointly)
Note: Please date and sign
exactly as your name(s) appear
on this proxy card. If shares
are registered in more than
one name, all such persons
should sign. A corporation
should sign in its full
corporate name by a duly
authorized officer, stating
his title. When signing as
attorney, executor,
administrator, trustee or
guardian, please sign in your
official capacity and give
your full title as such. If a
partnership, please sign in
the partnership name by an
authorized person.
. .
PLEASE SIGN, DATE AND MAIL THIS PROXY CARD PROMPTLY
USING THE ENCLOSED SELF-ADDRESSED, POSTAGE PREPAID ENVELOPE
