<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 9, 1997
Commission File Number: 1-6828
STARWOOD LODGING
TRUST
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction
of incorporation or organization)
52-0901263
(I.R.S. employer identification no.)
2231 East Camelback Road., Suite 410
Phoenix, Arizona 85016
(Address of principal executive
offices, including zip code)
(602) 852-3900
(Registrant's telephone number,
including area code)
Commission File Number: 1-7959
STARWOOD LODGING CORPORATION
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction
of incorporation or organization)
52-1193298
(I.R.S. employer identification no.)
2231 East Camelback Road, Suite 400
Phoenix, Arizona 85016
(Address of principal executive
offices, including zip code)
(602) 852-3900
(Registrant's telephone number,
including area code)
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<PAGE> 2
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ITEM 5. OTHER EVENTS
On September 8, 1997, a Transaction Agreement (the "Transaction
Agreement") was entered into among Starwood Lodging Trust (the "Trust"), SLT
Realty Limited Partnership (the "Realty Partnership"), Starwood Lodging
Corporation (the "Corporation") and SLC Operating Limited Partnership (the
"Operating Partnership" and, together with the Trust, the Realty Partnership and
the Corporation, the "Starwood Companies"), WHWE L.L.C. ("WHWE"), Woodstar
Investor Partnership ("Woodstar"), Nomura Asset Capital Corporation ("Nomura"),
Juergen Bartels ("Bartels" and, together with WHWE, Woodstar and Nomura, the
"Members"), Westin Hotels & Resorts Worldwide, Inc. ("Westin Worldwide"), W&S
Lauderdale Corp. ("Lauderdale"), W&S Seattle Corp. ("Seattle"), Westin St. John
Hotel Company, Inc. ("St. John"), W&S Denver Corp. ("Denver"), W&S Atlanta Corp.
("Atlanta" and, together with Westin Worldwide, Lauderdale, Seattle, St. John
and Denver, "Westin") and W&S Hotel L.L.C. (the "LLC" and, together with Westin,
the "Westin Companies"). Westin owns, manages, franchises and represents 108
hotels and resorts, with approximately 47,800 rooms in 23 countries worldwide.
The Transaction Agreement provides that Westin Worldwide will be merged
into the Trust (the "Merger"). In connection with the Merger, all of the issued
and outstanding shares of capital stock of Westin Worldwide (other than
dissenting shares and shares held by Westin and its subsidiaries or shares held
by the Starwood Companies and their subsidiaries) will be converted into an
aggregate of 6,285,783 Class A Exchangeable Preferred Shares, par value $.01 per
share (the "Class A EPS"), of the Trust and 5,294,783 Class B Exchangeable
Preferred Shares, liquidation value $38.50 per share (the "Class B EPS"), of the
Trust and cash in the amount of $177.926 million. The Transaction Agreement
provides for an adjustment to the cash consideration paid in connection with the
Merger under certain circumstances, including adjustments based on the aggregate
indebtedness and working capital of Westin on the closing date and the capital
expenditures made by Westin between the date the Transaction Agreement was
signed and the closing date. The Transaction Agreement also permits Westin
Worldwide to make a cash dividend in an amount up to $160 million to its
stockholders during 1997, which dividend Westin Worldwide had determined that it
expected to make prior to the execution of the Transaction Agreement and
irrespective of the closing under the Transaction Agreement.
The Transaction Agreement also contemplates that the stockholders of
Lauderdale, Seattle and Denver will contribute all of the outstanding shares of
such companies to the Realty Partnership and that the Realty Partnership will
issue to such stockholders an aggregate of 597,844 units of the Realty
Partnership. In addition, in connection with the foregoing share contributions,
the Realty Partnership will assume, repay or refinance the indebtedness of
Lauderdale, Seattle and Denver and assume up to $147.2 million of indebtedness
incurred by the Members prior to such contributions. The Transaction Agreement
also permits Lauderdale and Seattle to make cash dividends in an aggregate
amount up to $6 million to their stockholders during 1997, which dividends
Lauderdale and Seattle had determined that they expected to make prior to the
execution of the Transaction Agreement and irrespective of the closing under the
Transaction Agreement. The Transaction Agreement also permits Denver to make a
cash dividend to its stockholders in an amount equal to Denver's earnings and
profits for 1997, which dividend Denver had determined that it expected to make
prior to the execution of the Transaction Agreement and irrespective of the
closing under the Transaction Agreement. In the event that Denver makes any such
cash dividend, the cash portion of the consideration to be paid in connection
with the Merger will be decreased by an amount equal to the amount of such
dividend.
The Transaction Agreement also contemplates that the stockholders of
Atlanta and St. John will contribute all of the outstanding shares of such
companies to the Operating Partnership and that the Operating Partnership will
issue to such stockholders an aggregate of 393,156 units of the Operating
Partnership. In addition, prior to the foregoing share contributions, the
Operating Partnership will assume, repay or refinance indebtedness of Atlanta
and St. John and assume up to $6 million of indebtedness expected to be incurred
by the Members prior to such contributions. The Transaction Agreement also
contemplates that prior to the closing date, the Realty Partnership will lend
Atlanta approximately $34.2 million and permits Atlanta to pay a dividend of
such amount to its stockholders, which dividend Atlanta had determined that it
expected to make prior to the execution of the Transaction Agreement and
irrespective of the closing under the Transaction Agreement.
The Class A EPS, Class B EPS and partnership units to be issued in
connection with the Merger and the contribution of Seattle, Lauderdale, Denver,
St. John and Atlanta to the Realty Partnership and the Operating Partnership
will provide the holders thereof with substantially the same economics as, and
will be exchangeable on a one-for-one basis (subject to certain adjustments)
for, the paired shares of the Trust and the Corporation.
In addition, the shares of Class B EPS and the partnership units to be
issued in the transactions contemplated by the Transaction Agreement will
provide a liquidation preference of $38.50 and provide the holders with a right
from and after the fifth anniversary of the Closing Date to require the Trust to
redeem such shares of Class B EPS and such partnership units at a price of
$38.50.
The closing is subject to numerous conditions, including, among other
things, that the Transaction Agreement shall have been duly approved by holders
of the paired shares of the Trust and the Corporation, the waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act shall have expired or been
terminated, an opinion shall have been delivered by counsel to the Starwood
Companies with respect to certain tax matters, there shall have been no change
in the general economic, financial or market conditions in the United States
that materially and adversely affects the ability of the Starwood Companies to
obtain the financing necessary to consummate the transactions contemplated by
the Transaction Agreement and the owners of hotels party to management,
franchise or similar agreements with the Westin Companies from whom consents,
approvals or authorizations are required to be obtained in connection with the
consummation of the transactions contemplated by the Transaction Agreement shall
not have delivered written notices of their intention to terminate agreements
that would account for $8 million or more of the projected revenues for 1998.
The Transaction Agreement provides that if the Transaction Agreement is
terminated under certain circumstances, the Starwood Companies will be required
to pay the Westin Companies a termination fee of $5 million and all costs and
expenses incurred by the Westin Companies and the Members in connection with the
Transaction Agreement and the transactions contemplated thereby in an amount not
to exceed $5 million.
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Businesses to be Acquired. See Index
to Financial Statements (page F-1).
(b) Pro Forma Financial Information. See Index to Financial
Statements (page F-1).
EXHIBITS.
2 Transaction Agreement, dated as of September 8, 1997, by and
among WHWE L.L.C., Woodstar Investor Partnership, Nomura Asset
Capital Corporation, Juergen Bartels, Westin Hotels & Resorts
Worldwide, Inc., W&S Lauderdale Corp., W&S Seattle Corp., Westin
St. John Hotel Company, Inc., W&S Denver Corp., W&S Atlanta
Corp., W&S Hotel L.L.C., Starwood Lodging Trust, SLT Realty
Limited Partnership, Starwood Lodging Corporation and SLC
Operating Limited Partnership.
23 Consent of Arthur Andersen LLP
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
each Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
STARWOOD LODGING TRUST STARWOOD LODGING CORPORATION
By: /s/ Ronald C. Brown By: /s/ Alan M. Schnaid
----------------------------- ------------------------------
Ronald C. Brown Alan M. Schnaid
Senior Vice President and Vice President and Corporate
Chief Financial Officer Controller
Principal Accounting Officer
Date: December __, 1997
<PAGE> 5
INDEX TO FINANCIAL STATEMENTS
STARWOOD LODGING TRUST AND STARWOOD
LODGING CORPORATION -- PRO FORMA (UNAUDITED)
<TABLE>
<S> <C>
Starwood Lodging Trust and Starwood Lodging Corporation
Unaudited Combined Consolidated Pro Forma Balance Sheet as
of June 30, 1997.......................................... F-3
Starwood Lodging Trust Unaudited Consolidated Pro Forma
Balance Sheet as of June 30, 1997......................... F-4
Starwood Lodging Corporation Unaudited Consolidated Pro
Forma Balance Sheet as of June 30, 1997................... F-5
Notes to the Unaudited Combined Consolidated and Separate
Consolidated Pro Forma Balance Sheets as of June 30,
1997...................................................... F-6
Starwood Lodging Trust and Starwood Lodging Corporation
Unaudited Combined Consolidated Pro Forma Statement of
Operations for the six months ended June 30, 1997......... F-10
Starwood Lodging Trust Unaudited Consolidated Pro Forma
Statement of Operations for the six months ended June 30,
1997...................................................... F-11
Starwood Lodging Corporation Unaudited Consolidated Pro
Forma Statement of Operations for the six months ended
June 30, 1997............................................. F-12
Starwood Lodging Trust and Starwood Lodging Corporation
Unaudited Combined Consolidated Pro Forma Statement of
Operations for the year ended December 31, 1996........... F-13
Starwood Lodging Trust Unaudited Consolidated Pro Forma
Statement of Operations for the year ended December 31,
1996...................................................... F-14
Starwood Lodging Corporation Unaudited Consolidated Pro
Forma Statement of Operations for the year ended December
31, 1996.................................................. F-15
Notes to the Unaudited Combined Consolidated and Separate
Consolidated Pro Forma Statements of Operations for the
six months ended June 30, 1997 and the year ended December
31, 1996.................................................. F-16
W&S HOTEL L.L.C. AND SUBSIDIARIES
Consolidated Balance Sheets................................. F-22
Consolidated Statements of Operations....................... F-23
Predecessor Business Combined Statements of Operations...... F-24
Consolidated Statements of Members' Equity.................. F-25
Predecessor Business Combined Statements of Changes in Net
Assets.................................................... F-26
Consolidated Statements of Cash Flows....................... F-27
Predecessor Business Combined Statements of Cash Flows...... F-28
Notes to Financial Statements............................... F-29
</TABLE>
F-1
<PAGE> 6
STARWOOD LODGING TRUST AND
STARWOOD LODGING CORPORATION
PRO FORMA COMBINED CONSOLIDATED AND
SEPARATE CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
(UNAUDITED)
The following unaudited Pro Forma Combined Consolidated and Separate
Consolidated Balance Sheets are presented as if the acquisition of W&S Hotel
L.L.C. ("LLC") and its subsidiaries (together "Westin") consisting of Westin
Hotels & Resorts Worldwide, Inc. ("Westin Worldwide"), W&S Lauderdale Corp.
("Lauderdale"), W&S Seattle Corp. ("Seattle"), Westin St. John Hotel Company,
Inc. ("St. John"), W&S Denver Corp. ("Denver"), and W&S Atlanta Corp.
("Atlanta"), had occurred as of June 30, 1997.
The unaudited Pro Forma Combined Consolidated and Separate Consolidated
Balance Sheets should be read in conjunction with the Separate Consolidated and
Combined Consolidated Historical Financial Statements of Starwood Lodging Trust
(the "Trust") and Starwood Lodging Corporation (the "Corporation," and
collectively with the Trust, the "Company") and the Notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996,
and the unaudited separate and combined financial statements and related notes
of the Company included in its Quarterly Report on Form 10-Q for the quarters
ended March 31, 1997 and June 30, 1997 incorporated by reference in this Proxy
Statement. In management's opinion, all pro forma adjustments necessary to
reflect the effects of the acquisition of Westin have been made.
The unaudited Pro Forma Combined Consolidated and Separate Consolidated
Balance Sheets are not necessarily indicative of what the actual financial
position of the Company would have been at June 30, 1997, nor do they purport to
represent the future financial position of the Company.
F-2
<PAGE> 7
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
UNAUDITED COMBINED CONSOLIDATED PRO FORMA BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
STARWOOD STARWOOD
LODGING WESTIN PRO FORMA LODGING
COMBINED ACQUISITION ADJUSTMENTS COMBINED
---------- ----------- ----------- ---------
(A) (B)
<S> <C> <C> <C> <C>
ASSETS
Hotel assets held for sale, net....................... $ 21,637 $ $ $ 21,637
Hotel assets, net..................................... 1,624,340 874,618 2,498,958
---------- ---------- --------- ----------
1,645,977 874,618 2,520,595
Mortgage notes receivable, net........................ 80,053 80,053
Investments........................................... 440 75,850 76,290
---------- ---------- --------- ----------
Total real estate investments..................... 1,726,470 950,468 2,676,938
Cash and cash equivalents............................. 42,039 178,000 42,039
(178,000)
Accounts, interest and rent receivable................ 61,270 61,270
Notes receivable, net................................. 2,744 14,076 16,820
Inventories, prepaid expenses and other assets........ 42,368 865,056 180,000(E) 1,087,424
---------- ---------- --------- ----------
$1,874,891 $1,829,600 $ 180,000 $3,884,491
========== ========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Collateralized notes payable and revolving lines of
credit.............................................. $ 568,037 $1,030,093 $(500,000)(C) $1,276,130
178,000
Mortgage and other notes payable...................... 139,356 139,356
Accounts payable and other liabilities................ 64,887 180,000(E) 244,887
Distributions payable................................. 22,745 22,745
---------- ---------- --------- ----------
795,025 1,208,093 (320,000) 1,683,118
---------- ---------- --------- ----------
Commitments and contingencies.........................
MINORITY INTEREST..................................... 262,958 48,993 60,851(C) 372,802
---------- ---------- --------- ----------
Class B Exchangeable preferred pro forma
shares; $.01 par value; authorized
10,000,000; outstanding 5,294,783, at
redemption value................................... 203,849 203,849
SHAREHOLDERS' EQUITY
Trust shares of beneficial interest,
$.01 par value; authorized 100,000,000 shares;
outstanding 45,555,188, 56,255,188 pro forma...... 456 107(C) 563
$.01 par value; authorized 10,000,000 Class A
Exchangeable preferred pro forma shares;
outstanding 6,285,783............................. 63 63
Corporation common stock,
$.01 par value; authorized 100,000,000 shares;
outstanding 45,555,188, 56,255,188 pro forma...... 456 107(C) 563
Additional paid-in capital............................ 1,091,757 368,602 438,935(C) 1,899,294
Accumulated deficit................................... (275,761) (275,761)
---------- ---------- --------- ----------
816,908 368,665 439,149 1,624,722
---------- ---------- --------- ----------
$1,874,891 $1,829,600 $ 180,000 $3,884,491
========== ========== ========= ==========
</TABLE>
F-3
<PAGE> 8
STARWOOD LODGING TRUST
UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
STARWOOD WESTIN PRO FORMA STARWOOD
LODGING TRUST ACQUISITION ADJUSTMENTS LODGING TRUST
------------- ----------- ----------- -------------
(A) (B)
<S> <C> <C> <C> <C>
ASSETS
Hotel assets held for sale, net.................. $ 19,851 $ $ $ 19,851
Hotel assets, net................................ 1,511,145 694,118 2,205,263
---------- ---------- --------- ----------
1,530,996 694,118 2,225,114
Mortgage notes receivable, net................... 80,053 80,053
Mortgage notes receivable Corporation............ 89,930 89,930
Investments...................................... 440 69,850 70,290
---------- ---------- --------- ----------
Total real estate investments.................. 1,701,419 763,968 2,465,387
Cash and cash equivalents........................ 4,324 178,000 25,000(D) 4,324
(178,000) (25,000)(D)
Rent and interest receivable..................... 12,805 12,805
Notes receivable, net............................ 1,980 14,076 16,056
Notes receivable Corporation..................... 50,310 294,184 (25,000)(D) 319,494
Prepaid expenses and other assets................ 12,889 726,295 739,184
---------- ---------- --------- ----------
$1,783,727 $1,798,523 $ (25,000) $3,557,250
========== ========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Collateralized notes payable and revolving lines
of credit...................................... $ 568,037 $1,030,093 $(475,000)(C) $1,276,130
178,000 (25,000)(D)
Mortgage and other notes payable................. 137,913 137,913
Accounts payable and other liabilities........... 21,760 21,760
Distributions payable............................ 22,646 22,646
---------- ---------- --------- ----------
750,356 1,208,093 (500,000) 1,458,449
---------- ---------- --------- ----------
Commitments and contingencies....................
MINORITY INTEREST................................ 251,977 46,543 56,912(C) 355,432
---------- ---------- --------- ----------
Class B Exchangeable preferred pro forma shares;
$.01 par value; authorized 10,000,000;
outstanding 5,294,783; at redemption
value......................................... 203,849 203,849
SHAREHOLDERS' EQUITY
Trust shares of beneficial interest,
$.01 par value; authorized 100,000,000 shares;
outstanding 45,555,188, 56,255,188 pro
forma........................................ 456 107(C) 563
$.01 par value; authorized 10,000,000 Class A
Exchangeable preferred pro forma shares;
outstanding 6,285,783........................ 63 63
Additional paid-in capital....................... 977,212 339,975 417,981(C) 1,735,168
Accumulated deficit.............................. (196,274) (196,274)
---------- ---------- --------- ----------
781,394 340,038 418,088 1,539,520
---------- ---------- --------- ----------
$1,783,727 $1,798,523 $ (25,000) $3,557,250
========== ========== ========= ==========
</TABLE>
F-4
<PAGE> 9
STARWOOD LODGING CORPORATION
UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
STARWOOD PRO FORMA
LODGING WESTIN PRO FORMA STARWOOD LODGING
CORPORATION ACQUISITION ADJUSTMENTS CORPORATION
----------- ----------- ----------- ----------------
(A) (B)
<S> <C> <C> <C> <C>
ASSETS
Hotel assets held for sale, net.............. $ 1,786 $ $ $ 1,786
Hotel assets, net............................ 113,195 180,500 293,695
-------- -------- -------- --------
114,981 180,500 295,481
Investments.................................. 6,000 6,000
-------- -------- -------- --------
Total real estate investments........... 114,981 186,500 301,481
Cash and cash equivalents.................... 37,715 25,000(D) 37,715
(25,000)(D)
Accounts and interest receivable............. 48,465 48,465
Notes receivable, net........................ 764 764
Inventories, prepaid expenses and other
assets..................................... 29,479 138,761 180,000(E) 348,240
-------- -------- -------- --------
$231,404 $325,261 $180,000 $736,665
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage and other notes payable............. $ 1,443 $ $ $ 1,443
Mortgage notes payable Trust................. 89,930 89,930
Notes payable Trust.......................... 50,310 294,184 (25,000)(D) 319,494
Accounts payable and other liabilities....... 43,127 180,000(E) 223,127
Distributions payable........................ 99 99
-------- -------- -------- --------
184,909 294,184 155,000 634,093
-------- -------- -------- --------
Commitments and contingencies................
MINORITY INTEREST............................ 10,981 2,450 3,939 (C),(D 17,370
-------- -------- -------- --------
SHAREHOLDERS' EQUITY
Corporation common stock,
$.01 par value; authorized 100,000,000
shares; outstanding 45,555,188,
56,255,188 pro forma.................... 456 107 (C),(D 563
Additional paid-in capital................... 114,545 28,627 20,954 (C),(D 164,126
Accumulated deficit.......................... (79,487) (79,487)
-------- -------- -------- --------
35,514 28,627 21,061 85,202
-------- -------- -------- --------
$231,404 $325,261 $180,000 $736,665
======== ======== ======== ========
</TABLE>
F-5
<PAGE> 10
STARWOOD LODGING TRUST AND
STARWOOD LODGING CORPORATION
NOTES TO THE UNAUDITED COMBINED CONSOLIDATED AND
SEPARATE CONSOLIDATED PRO FORMA BALANCE SHEETS
AS OF JUNE 30, 1997
NOTE 1. BASIS OF PRESENTATION
(A) The Trust and the Corporation have unilateral control of SLT Realty
Limited Partnership ("Realty") and SLC Operating Limited Partnership
("Operating" and together with Realty the "Partnerships"), respectively, and,
therefore, the historical financial statements of Realty and Operating are
consolidated with those of the Trust and the Corporation. Unless the context
otherwise requires, all references herein to the "Company" refer to the Trust
and the Corporation, and all references to the "Trust" and the "Corporation"
include the Trust and the Corporation and those entities respectively owned or
controlled by the Trust or the Corporation, including Realty and Operating,
respectively.
NOTE 2. WESTIN ACQUISITION
(B) On September 9, 1997, the Company announced the execution of a
definitive agreement to acquire W&S Hotel L.L.C. (the "LLC" and, together with
its subsidiaries, "Westin") and its subsidiaries for approximately $1.829
billion. The subsidiaries of the LLC consist of: Westin Worldwide, Lauderdale,
Seattle, St. John, Denver and Atlanta. As part of the acquisition, Westin
Worldwide will be merged into the Trust, the stock of Seattle, Lauderdale and
Denver (which own the Westin Hotel Seattle, the Westin Hotel Fort Lauderdale and
the Westin Hotel Tabor Center, respectively) will be contributed to Realty and
the stock of Atlanta and St. John (which own the Westin Peachtree Plaza and the
Westin Resort, St. John, respectively) will be contributed to Operating. Also as
part of the acquisition, certain assets of Westin Worldwide, including portions
of its management and franchising operations, and of Seattle, Lauderdale and
Denver are expected either to be transferred to the Corporation and Operating or
transferred into subsidiaries in which the Trust will own nonvoting preferred
stock and less than 10% of the voting stock and the Corporation will own more
than 90% of the voting stock.
The pro forma adjustments allocate Westin's assets between the Trust and
the Corporation in accordance with the terms of the acquisition. The assets were
allocated based upon the results of a valuation performed by an independent
accounting firm. As a result, all the properties owned by Westin (other than the
Westin Peachtree Plaza and the Westin Resort, St. John) are combined with the
Trust and the remaining assets of Westin are combined with the Corporation. The
following is a list of the hotels that are wholly-owned by Westin:
<TABLE>
<CAPTION>
NAME CITY STATE TOTAL ROOMS
---- ---- ----- -----------
<S> <C> <C> <C>
Hotels owned as of December 31, 1996
The Westin Hotel Seattle...................... Seattle Washington 865
The Westin San Francisco Airport.............. San Francisco California 388
The Westin Hotel Cincinnati................... Cincinnati Ohio 448
The Westin Galleria and Oaks.................. Houston Texas 891
The Westin South Coast Plaza.................. Orange County California 396
The Westin Hotel Fort Lauderdale.............. Ft. Florida 293
Lauderdale
The Cherry Creek Inn.......................... Denver Colorado 320
-----
Sub-total................................ 3,601
-----
</TABLE>
F-6
<PAGE> 11
<TABLE>
<CAPTION>
NAME CITY STATE/TERRITORY TOTAL ROOMS
---- ---- --------------- -----------
<S> <C> <C> <C>
Hotels acquired since January 1, 1997
The Westin Hotel Indianapolis................. Indianapolis Indiana 573
The Westin Hotel Tabor Center................. Denver Colorado 420
The Westin Peachtree Plaza.................... Atlanta Georgia 1,068
The Westin Resort............................. St. John U.S. Virgin Islands 285
-----
Sub-total................................ 2,346
-----
Total.................................... 5,947
=====
</TABLE>
In addition, Westin has joint venture interests in the following
properties:
<TABLE>
<CAPTION>
NAME/OWNERSHIP PERCENTAGE CITY STATE/PROVINCE TOTAL ROOMS
------------------------- ---- -------------- -----------
<S> <C> <C> <C>
The Westin Hotel O'Hare (49%)................. Chicago Illinois 525
The Westin Hotel Galleria (20%)............... Dallas Texas 431
The Westin Office Building (25%).............. Seattle Washington N/A(1)
The Westin London (10%)....................... London Ontario 329
</TABLE>
- -------------------------
(1) contains approximately 350,000 square feet
The acquisition price for Westin is expected to be allocated as follows (in
thousands):
<TABLE>
<CAPTION>
TRUST CORPORATION COMBINED
---------- ----------- ----------
<S> <C> <C> <C>
Wholly owned assets.................................... $ 694,118 $180,500 $ 874,618
Joint venture assets................................... 69,850 6,000 75,850
Notes receivable....................................... 14,076 -- 14,076
Other assets(1)........................................ 726,295 138,761 865,056
---------- -------- ----------
Total assets...................................... $1,504,339 $325,261 $1,829,600
========== ======== ==========
</TABLE>
- ---------------
(1) Other assets includes the value of existing management contracts, certain
intangible assets, and an amount allocated to a wholly owned captive
insurance company.
As partial consideration for the acquisition of Westin, the Company intends
to issue 6,285,783 shares of newly created Class A Exchangeable Preferred Stock
with an aggregate value of approximately $310.8 million (using the closing stock
price of $49.4375 per paired share on September 8, 1997) and 5,294,783 shares of
newly created Class B Exchangeable Preferred Stock with an aggregate value of
approximately $261.8 million (using the closing stock price of $49.4375 per
paired share on September 8, 1997). The Company also intends to issue 991,000
limited partnership units of the Partnerships with an aggregate value of
approximately $49.0 million (using the closing stock price of $49.4375 per
Paired Share on September 8, 1997), exchangeable on a one for one basis for
Class B Exchangeable Preferred Stock or paired shares. The Corporation expects
to borrow approximately $294.2 million from the Trust to partially finance the
acquisition of assets allocable to the Corporation.
Finally, the consideration includes the assumption of approximately
$1.030 billion of debt and the cash payment of approximately $178.0 million. The
cash portion will be drawn down under the Company's revolving line of credit.
The Company expects to refinance some of Westin's debt to obtain credit terms
similar to the Company's existing credit facilities.
F-7
<PAGE> 12
NOTE 3. PRO FORMA ADJUSTMENTS
(C) The Company expects to issue, in a take-down from a shelf registration
statement to be filed with the Securities and Exchange Commission in connection
with a public offering, approximately 10.7 million Paired Shares of the Company
at an initial offering price of $49.4375 per paired share (using the closing
price per Paired Share on September 8, 1997) (the "Offering"). Total combined
net proceeds from the Offering of approximately $500 million, including
approximately $60.9 million attributable to minority interest, will be used
partially to fund the acquisition of Westin and to pay down existing
indebtedness.
(D) Reflects proceeds from the Offering to the Corporation which will be
used to reduce intercompany indebtedness to the Trust and will be used by the
Trust to pay down existing third-party indebtedness.
(E) Reflects estimated deferred tax liability expected to be recorded as a
result of the Westin acquisition.
F-8
<PAGE> 13
STARWOOD LODGING TRUST AND
STARWOOD LODGING CORPORATION
PRO FORMA COMBINED CONSOLIDATED AND
SEPARATE CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND THE
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
The following Unaudited Combined Consolidated and Separate Consolidated Pro
Forma Statements of Operations for the six months ended June 30, 1997 and the
year ended December 31, 1996 give effect to the pending acquisition of Westin as
of January 1, 1996. The pro forma information is based upon historical
information and does not purport to present what actual results would have been
had such transaction, in fact, occurred at January 1, 1996, or to project
results for any future period. Historical Starwood Lodging Trust and Starwood
Lodging Corporation results are for the six months ended June 30, 1997 and the
year ended December 31, 1996. The historical Westin results are for the six
months ended June 30, 1997 and the year ended December 31, 1996.
Historical Starwood Lodging Trust and Starwood Lodging Corporation results
include the results of the properties acquired in 1996 (the Westin in
Washington, D.C. -- acquired on January 4, a 58.2% interest in the Park Plaza in
Boston, Massachusetts -- acquired on January 24, the Doubletree Guest Suites DFW
Airport in Irving, Texas, the Doubletree Guest Suites in Ft. Lauderdale, Florida
and the Westin Hotel in Tampa, Florida -- all three acquired on April 26, the
Midland Hotel in Chicago, Illinois -- acquired on March 22, the Clarion Hotel --
San Francisco Airport in Milbrae, California -- acquired on April 25, the Westin
at the Philadelphia International Airport in Philadelphia, Pennsylvania --
acquired on June 3, the Days Inn in Philadelphia, Pennsylvania -- acquired on
July 1, a portfolio of 8 hotels owned by an institution consisting of the Ritz
Carlton in Kansas City, Missouri, the Ritz Carlton in Philadelphia,
Pennsylvania, the Westin Hotel in Waltham, Massachusetts, the Westin LAX in Los
Angeles, California, the Westin Horton Plaza in San Diego, California, the
Westin Hotel Concourse in Atlanta, Georgia, the Doubletree Grand at Mall of
America in Bloomington, Minnesota and the Wyndham Hotel in Ft. Lauderdale,
Florida -- all acquired on August 12, a portfolio of 9 hotels owned by Hotels of
Distinction Ventures, Inc. consisting of the Hotel Park Tucson in Tucson,
Arizona, the Embassy Suites in Palm Desert, California, the Marque in Atlanta,
Georgia, the Arlington Park Hilton in Arlington Heights, Illinois, the Sheraton
Needham in Needham, Massachusetts, the Sheraton Minneapolis Metrodome in
Minneapolis, Minnesota, the Embassy Suites in St. Louis, Missouri, the Radisson
Marque in Winston-Salem, North Carolina (this property was sold in April, 1997)
and the Allentown Hilton in Allentown, Pennsylvania -- all acquired on August 16
except the Sheraton Minneapolis Metrodome which closed on September 5, the
Marriott Forrestal Village in Princeton, New Jersey -- acquired on August 29,
the Doral Court and Doral Tuscany both in New York, New York -- acquired on
September 19, and a 93.5% interest in the Westwood Marquis Hotel & Gardens in
Westwood, California -- acquired on December 31) and the properties acquired in
1997 (the Deerfield Beach Hilton in Deerfield Beach, Florida -- acquired on
January 8, the Radisson Denver South in Denver, Colorado -- acquired on January
17, the Embassy Suites Hotel in Atlanta, Georgia, the BWI Airport Marriott in
Baltimore, Maryland, the Charleston Hilton North in Charleston, South Carolina,
the Crowne Plaza Edison in Edison, New Jersey, the Courtyard by Marriott Crystal
City in Arlington, Virginia, the Novi Hilton in Novi, Michigan, the Omni
Waterside Hotel in Norfolk, Virginia, the Park Ridge Hotel in King of Prussia,
Pennsylvania, the Sheraton Hotel in Long Beach, California, and the Sonoma
County Hilton in Santa Rosa, California -- all acquired on February 14, the Days
Inn Lake Shore Drive in Chicago, Illinois -- acquired February 21, the Hermitage
Suites Hotel in Nashville, Tennessee -- acquired on March 11, the Hotel De La
Poste in New Orleans, Louisiana -- acquired on March 12, the San Diego Marriott
Suites in San Diego, California -- acquired on April 3, the Tremont Hotel in
Chicago, Illinois -- acquired on April 4, the Raphael Hotel in Chicago,
Illinois -- acquired May 7, and the Stamford Sheraton in Stamford,
Connecticut -- acquired on June 9) from their respective dates of acquisition.
F-9
<PAGE> 14
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
UNAUDITED COMBINED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
STARWOOD
LODGING W & S HOTEL LLC PRO FORMA
COMBINED & SUBSIDIARIES PRO FORMA STARWOOD LODGING
(A) (B) ADJUSTMENTS COMBINED
---------- --------------- ----------- ----------------
<S> <C> <C> <C> <C>
REVENUE
Hotel operations:
Rooms.............................. $249,231 $ 64,107 $ 24,222 $337,560
Food & beverage.................... 100,894 30,836 12,641 144,371
Other.............................. 26,670 7,464 2,683 36,817
-------- -------- -------- --------
Total.......................... 376,795 102,407 39,546(C) 518,748
Gaming............................... 7,727 7,727
Interest from mortgage and other
notes.............................. 7,213 1,953 9,166
Rent from leased hotel properties and
income from investments............ 441 657 1,098
Management fees and other income..... 4,196 40,231 (954)(G) 43,473
Gain (loss) on sales of real estate
investments........................ (504) 20,969 20,465
-------- -------- -------- --------
395,868 166,217 38,592 600,677
-------- -------- -------- --------
EXPENSES
Hotel operations:
Rooms.............................. 60,619 13,465 5,773 79,857
Food & beverage.................... 75,481 21,827 8,780 106,088
Other.............................. 124,374 42,827 13,124 180,325
-------- -------- -------- --------
260,474 78,119 27,677(C) 366,270
(954)(G) (954)
(1,005)(H) (1,005)
-------- -------- -------- --------
Total.......................... 260,474 78,119 25,718 364,311
Gaming............................... 8,248 8,248
Interest............................. 23,311 44,699(I) 49,510
(18,500)(J)
Depreciation and amortization........ 54,387 50,281(K) 104,668
Administrative and general........... 13,548 7,853 21,401
-------- -------- -------- --------
359,968 85,972 102,198 548,138
-------- -------- -------- --------
Income before income taxes and
minority interest.................. 35,900 80,245 (63,606) 52,539
Provision for income taxes........... 9,004(L) 9,004
-------- -------- -------- --------
Income before minority interest...... 35,900 $ 80,245 $(72,610) 43,535
======== ========
Minority interest (M)................ 9,891 13,769
-------- --------
Net income........................... $ 26,009 $ 29,766
======== ========
Net income per Paired Share (N)...... $ 0.56 $ 0.43
======== ========
Weighted average number of Paired
Shares............................. 46,063 68,344
======== ========
</TABLE>
F-10
<PAGE> 15
STARWOOD LODGING TRUST
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
STARWOOD LODGING W & S HOTEL LLC PRO FORMA
TRUST & SUBSIDIARIES PRO FORMA STARWOOD LODGING
(A) (B) ADJUSTMENTS TRUST
---------------- --------------- ----------- ----------------
<S> <C> <C> <C> <C>
REVENUE
Rents from Corporation.......... $95,505 $ $ 23,190(D) $118,695
Interest from Corporation....... 5,290 14,132(E) 19,422
Interest from mortgage and other
notes......................... 7,213 1,953 9,166
Rent from leased hotel
properties and income from
investments................... 441 657 1,098
Other income.................... 1,551 1,551
Gain on sale of real estate
investments................... 20,969 20,969
------- ------- -------- --------
110,000 23,579 37,322 170,901
------- ------- -------- --------
EXPENSES
Interest........................ 23,260 44,699(I) 49,459
(18,500)(J)
Depreciation and amortization... 42,801 43,494(K) 86,295
Administrative and general...... 5,117 5,117
------- ------- -------- --------
71,178 69,693 140,871
------- ------- -------- --------
Income before minority
interest...................... 38,822 23,579 (32,371) 30,030
======= ========
Minority interest (M)........... 9,760 10,900
------- --------
Net income...................... $29,062 $ 19,130
======= ========
Net income per share (N)........ $ 0.63 $ 0.28
======= ========
Weighted average number
of shares..................... 46,063 68,344
======= ========
</TABLE>
F-11
<PAGE> 16
STARWOOD LODGING CORPORATION
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
STARWOOD PRO FORMA
LODGING W & S HOTEL LLC PRO FORMA STARWOOD LODGING
CORPORATION & SUBSIDIARIES ADJUSTMENTS CORPORATION
----------- --------------- ----------- ----------------
(A) (B)
<S> <C> <C> <C> <C>
REVENUE
Hotel operations:
Rooms............................ $249,231 $ 64,107 $ 24,222 $337,560
Food & beverage.................. 100,894 30,836 12,641 144,371
Other............................ 26,670 7,464 2,683 36,817
-------- -------- -------- --------
Total......................... 376,795 102,407 39,546(C) 518,748
Gaming............................. 7,727 7,727
Management fees and other income... 2,645 40,231 (954)(G) 41,922
Loss on sales of real estate
investments...................... (504) (504)
-------- -------- -------- --------
386,663 142,638 38,592 567,893
-------- -------- -------- --------
EXPENSES
Hotel operations:
Rooms............................ 60,619 13,465 5,773 79,857
Food & beverage.................. 75,481 21,827 8,780 106,088
Other............................ 124,374 42,827 13,124 180,325
-------- -------- -------- --------
260,474 78,119 27,677(C) 366,270
(954)(G) (954)
(1,005)(H) (1,005)
-------- -------- -------- --------
Total......................... 260,474 78,119 25,718 364,311
Gaming............................. 8,248 8,248
Rent Trust......................... 95,505 23,190(D) 118,695
Interest Trust..................... 5,290 14,132(E) 19,422
Interest........................... 51 51
Depreciation and amortization...... 11,586 6,787(K) 18,373
Administrative and general......... 8,431 7,853 16,284
-------- -------- -------- --------
389,585 85,972 69,827 545,384
-------- -------- -------- --------
Income (loss) before income taxes
and minority..................... (2,922) 56,666 (31,235) 22,509
Provision for income taxes......... 9,004(L) 9,004
-------- -------- -------- --------
Income before minority interest.... (2,922) $ 56,666 $(40,239) 13,505
======== ========
Minority interest(M)............... 131 2,869
-------- --------
Net income (loss).................. $ (3,053) $ 10,636
======== ========
Net income (loss) per share(N)..... $ (0.07) $ 0.15
======== ========
Weighted average number of
shares........................... 46,063 68,344
======== ========
</TABLE>
F-12
<PAGE> 17
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
UNAUDITED COMBINED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL W & S HOTEL PRO FORMA
STARWOOD LODGING LLC PRO FORMA STARWOOD LODGING
COMBINED & SUBSIDIARIES ADJUSTMENTS COMBINED
---------------- -------------- ----------- ----------------
(A) (B)
<S> <C> <C> <C> <C>
REVENUE
Hotel operations:
Rooms................................... $260,175 $102,091 $ 65,559 $427,825
Food & beverage......................... 94,816 52,036 33,551 180,403
Other................................... 30,119 14,245 7,743 52,107
-------- -------- --------- --------
Total............................... 385,110 168,372 106,853(C) 660,335
Gaming.................................... 23,630 23,630
Interest from mortgage and other notes.... 11,262 1,712 12,974
Rent from leased hotel properties and
income from investments................. 822 5,036 (3,406)(F) 2,452
Management fees and other income.......... 3,424 69,693 (753)(G) 72,364
Gain on sales of real estate
investments............................. 4,290 4,290
-------- -------- --------- --------
428,538 244,813 102,694 776,045
-------- -------- --------- --------
EXPENSES
Hotel operations:
Rooms................................... 67,017 23,221 15,655 105,893
Food & beverage......................... 72,696 36,569 23,503 132,768
Other................................... 135,302 73,270 35,759 244,331
-------- -------- --------- --------
275,015 133,060 74,917(C) 482,992
(753)(G) (753)
(997)(H) (997)
-------- -------- --------- --------
Total............................... 275,015 133,060 73,167 481,242
Gaming.................................... 21,834 21,834
Interest.................................. 23,337 89,397(I) 75,734
(37,000)(J)
Depreciation and amortization............. 55,745 86,986(K) 142,731
Administrative and general................ 16,495 23,990 40,485
-------- -------- --------- --------
392,426 157,050 212,550 762,026
-------- -------- --------- --------
Income before income taxes and
minority interest....................... 36,112 87,763 (109,856) 14,019
Provision for income taxes................ 9,803(L) 9,803
-------- -------- --------- --------
Income before minority interest........... 36,112 $ 87,763 $(119,659) 4,216
======== =========
Minority interest (M)..................... 10,238 2,460
-------- --------
Net income................................ $ 25,874 $ 1,756
======== ========
Net income per Paired Share (N)........... $ 0.87 $ 0.03
======== ========
Weighted average number of Paired
Shares.................................. 29,884 52,165
======== ========
</TABLE>
F-13
<PAGE> 18
STARWOOD LODGING TRUST
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
STARWOOD LODGING W & S HOTEL LLC PRO FORMA STARWOOD
TRUST & SUBSIDIARIES ADJUSTMENTS LODGING TRUST
---------------- --------------- ----------- -------------
(A) (B)
<S> <C> <C> <C> <C>
REVENUE
Rents from Corporation............. $ 87,593 $ $ 38,394(D) $125,987
Interest from Corporation.......... 9,084 28,264(E) 37,348
Interest from mortgage and other
notes............................ 11,262 1,712 12,974
Rent from leased hotel properties
and income from investments...... 822 5,036 (3,406)(F) 2,452
Other income....................... 2,008 2,008
Gain on sale of real estate
investments...................... 4,290 4,290
-------- ------ -------- --------
115,059 6,748 63,252 185,059
-------- ------ -------- --------
EXPENSES
Interest........................... 23,088 89,397(I) 75,485
(37,000)(J)
Depreciation and amortization...... 42,517 73,411(K) 115,928
Administrative and general......... 4,134 4,134
-------- ------ -------- --------
69,739 125,808 195,547
-------- ------ -------- --------
Income (loss) before minority
interest......................... 45,320 $6,748 $(62,556) (10,488)
====== ========
Minority interest (M).............. 11,731 (498)
-------- --------
Net income (loss).................. $ 33,589 $ (9,990)
======== ========
Net income (loss) per share (N).... $ 1.12 $ (0.19)
======== ========
Weighted average number of
shares........................... 29,884 52,165
======== ========
</TABLE>
F-14
<PAGE> 19
STARWOOD LODGING CORPORATION
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
STARWOOD PRO FORMA
LODGING W & S HOTEL LLC PRO FORMA STARWOOD LODGING
CORPORATION & SUBSIDIARIES ADJUSTMENTS CORPORATION
----------- --------------- ----------- ----------------
(A) (B)
<S> <C> <C> <C> <C>
REVENUE
Hotel operations:
Rooms.................................. $260,175 $102,091 $ 65,559 $427,825
Food & beverage........................ 94,816 52,036 33,551 180,403
Other.................................. 30,119 14,245 7,743 52,107
-------- -------- -------- --------
Total.............................. 385,110 168,372 106,853(C) 660,335
Gaming................................... 23,630 23,630
Management fees and other income......... 1,416 69,693 (753)(G) 70,356
-------- -------- -------- --------
410,156 238,065 106,100 754,321
-------- -------- -------- --------
EXPENSES
Hotel operations:
Rooms.................................. 67,017 23,221 15,655 105,893
Food & beverage........................ 72,696 36,569 23,503 132,768
Other.................................. 135,302 73,270 35,759 244,331
-------- -------- -------- --------
275,015 133,060 74,917(C) 482,992
(753)(G) (753)
(997)(H) (997)
-------- -------- -------- --------
Total.............................. 275,015 133,060 73,167 481,242
Gaming................................... 21,834 21,834
Rent -- Trust............................ 87,593 38,394(D) 125,987
Interest -- Trust........................ 9,084 28,264(E) 37,348
Interest................................. 249 249
Depreciation and amortization............ 13,228 13,575(K) 26,803
Administrative and general............... 12,361 23,990 36,351
-------- -------- -------- --------
419,364 157,050 153,400 729,814
-------- -------- -------- --------
Income (loss) before income taxes and
minority interest...................... (9,208) 81,015 (47,300) 24,507
Provision for income taxes............... 9,803(L) 9,803
-------- -------- -------- --------
Income before minority interest.......... (9,208) $ 81,015 $(57,103) 14,704
======== ========
Minority interest (M).................... (1,493) 2,958
-------- --------
Net income (loss)........................ $ (7,715) $ 11,746
======== ========
Net income (loss) per share (N).......... $ (0.26) $ 0.22
======== ========
Weighted average number of shares........ 29,884 52,165
======== ========
</TABLE>
F-15
<PAGE> 20
STARWOOD LODGING TRUST AND
STARWOOD LODGING CORPORATION
NOTES TO THE UNAUDITED COMBINED CONSOLIDATED AND
SEPARATE CONSOLIDATED PRO FORMA STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND THE
YEAR ENDED DECEMBER 31, 1996
NOTE 1. BASIS OF PRESENTATION
The Trust and the Corporation have unilateral control of SLT Realty Limited
Partnership ("Realty") and SLC Operating Limited Partnership ("Operating" and,
together with Realty, the "Partnerships"), respectively, and, therefore, the
historical financial statements of Realty and Operating are consolidated with
those of the Trust and the Corporation. Unless the context otherwise requires,
all references herein to the "Company" refer to the Trust and the Corporation,
and all references to the "Trust" and the "Corporation" include the Trust and
the Corporation and those entities respectively owned or controlled by the Trust
or the Corporation, including Realty and Operating.
NOTE 2. PRO FORMA ADJUSTMENTS
(A) Reflects the Company's historical statements of operations. Results of
operations for properties sold or pending sale are not considered material to
the pro forma presentation. The historical statements of operations for the year
ended December 31, 1996 exclude the impact of extraordinary items.
(B) Reflects Westin's historical statements of operations excluding
depreciation and amortization, interest expense and provision for income taxes
which are reflected as pro forma adjustments. The following is a reconciliation
of the historical results of Westin in the pro forma statements of operations to
the unaudited statement of operations for the six months ended June 30, 1997 and
to the audited statement of operations for the year ended December 31, 1996:
<TABLE>
<S> <C>
FOR THE SIX MONTHS ENDED JUNE 30, 1997:
Income before depreciation and amortization, interest and
provision for income taxes per pro forma combined
statement of operations................................... $80,245
Depreciation and amortization............................... 23,311
Interest expense............................................ 21,690
Provision for income taxes.................................. 14,556
-------
Net income per unaudited statement of operations............ $20,688
=======
FOR THE YEAR ENDED DECEMBER 31, 1996:
Income before depreciation and amortization, interest and
provision for income taxes per pro forma combined
statement of operations................................... $87,763
Depreciation and amortization............................... 42,566
Interest expense............................................ 41,965
Provision for income taxes.................................. 3,904
-------
Net loss per audited statement of operations................ $ (672)
=======
</TABLE>
F-16
<PAGE> 21
Listed below are the effects each wholly-owned hotel had on the Combined
Pro Forma Statements of Operations for the six months ended June 30, 1997 and
the year ended December 31, 1996 (in thousands):
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
EXCESS OF
REVENUES
HOTEL REVENUES EXPENSES OVER EXPENSES
----- -------- -------- -------------
<S> <C> <C> <C>
The Westin Hotel Seattle.............................. $ 21,191 $16,270 $ 4,921
The Westin Hotel San Francisco Airport................ 12,441 8,506 3,935
The Westin Hotel Cincinnati........................... 10,085 7,778 2,307
The Westin Hotel Galleria and Oaks.................... 23,211 19,794 3,417
The Westin South Coast Plaza.......................... 10,334 8,600 1,734
The Westin Hotel Fort Lauderdale...................... 6,118 4,715 1,403
The Cherry Creek Inn.................................. 3,889 2,713 1,176
The Westin Hotel Indianapolis (acquired March 4,
1997)............................................... 9,557 6,167 3,390
The Westin Hotel Tabor Center (acquired June 24,
1997)............................................... 550 244 306
The Westin Peachtree Plaza (acquired June 4, 1997).... 5,031 3,332 1,699
The Westin Resort St. John (acquired May 15,
1997)(1)............................................
-------- ------- -------
Total............................................ $102,407 $78,119 $24,288
======== ======= =======
</TABLE>
- ---------------
(1) Hotel closed for renovation due to hurricane damage.
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
EXCESS OF
REVENUES
OVER
HOTEL REVENUES EXPENSES EXPENSES
----- -------- -------- ---------
<S> <C> <C> <C>
The Westin Hotel Seattle................................. $ 45,547 $ 32,013 $13,534
The Westin Hotel San Francisco Airport................... 21,905 16,463 5,442
The Westin Hotel Cincinnati.............................. 20,672 16,014 4,658
The Westin Hotel Galleria and Oaks....................... 43,880 39,018 4,862
The Westin South Coast Plaza............................. 18,147 15,106 3,041
The Westin Hotel Fort Lauderdale......................... 11,500 9,665 1,835
The Cherry Creek Inn..................................... 6,721 4,781 1,940
-------- -------- -------
Total............................................... $168,372 $133,060 $35,312
======== ======== =======
</TABLE>
F-17
<PAGE> 22
Listed below are the effects each joint venture had on the Combined Pro
Forma Statements of Operations for the six months ended June 30, 1997 and the
year ended December 31, 1996 (in thousands):
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
WESTIN
O'HARE GALLERIA SIXTH & VINWEST HOTEL
HOTEL HOTEL VIRGINIA LONDON
VENTURE VENTURE PROPERTIES ONTARIO, INC.(1) TOTAL
------- -------- ---------- ---------------- -----
<S> <C> <C> <C> <C> <C>
Operating revenues........................ $15,330 $15,049 $5,304 $3,105 $38,788
Operating expenses........................ 11,652 9,843 2,550 2,905 26,950
Depreciation and amortization............. 1,456 1,850 1,368 284 4,958
------- ------- ------ ------- -------
Operating income.......................... 2,222 3,356 1,386 (84) 6,880
Interest expense.......................... 1,172 2,891 1,147 117 5,327
Other expense............................. (19) (39) (58)
------- ------- ------ ------- -------
Net income (loss)....................... 1,050 484 278 (201) 1,611
------- ------- ------ ------- -------
Westin Ownership percentage............... 49% 20% 25% 10%
------- ------- ------ ------- -------
Westin Share.............................. $ 510 $ 97 $ 70 $ (20) $ 657
======= ======= ====== ======= =======
</TABLE>
- -------------------------
(1) Westin acquired an interest in this property in February, 1997.
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
WESTIN
ARIZONA O'HARE GALLERIA SIXTH &
BILTMORE HOTEL HOTEL VIRGINIA
PARTNERS(1) VENTURE VENTURE PROPERTIES TOTAL
----------- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
Operating revenues.......................... $55,653 $29,395 $30,586 $8,446 $124,080
Operating expenses.......................... 39,847 22,268 20,124 4,067 86,306
Depreciation and amortization............... 5,298 2,029 3,344 2,114 12,785
------- ------- ------- ------ --------
Operating income............................ 10,508 5,098 7,118 2,265 24,989
Interest expense............................ 5,851 2,214 5,638 2,418 16,121
Other expense............................... 150 150
------- ------- ------- ------ --------
Net income (loss)......................... 4,657 2,884 1,330 (153) 8,718
------- ------- ------- ------ --------
Westin Ownership percentage................. 50% 49% 20% 25%
------- ------- ------- ------ --------
2,328 1,402 266 (38) 3,958
Preferred return............................ 1,078 1,078
------- ------- ------- ------ --------
Westin Share................................ $ 3,406 $ 1,402 $ 266 $ (38) $ 5,036
======= ======= ======= ====== ========
</TABLE>
- -------------------------
(1) Ownership interest sold in February, 1997 (see footnotes F and H below).
(C) Since January 1, 1997 Westin has acquired four hotel properties
including the 573-room Westin Hotel Indianapolis in Indianapolis, Indiana
acquired on March 4, 1997; the 285-room Westin Resort, St. John on the U.S.
Virgin Islands acquired on May 15, 1997; the 1,068-room Westin Peachtree Plaza
in Atlanta, Georgia acquired on June 4, 1997; and the 420-room Westin Hotel
Tabor Center in Denver, Colorado acquired on June 24, 1997.
F-18
<PAGE> 23
Listed below are the pro forma adjustments necessary to show the effect on
the results of operation of the acquired hotels as if they had been acquired at
January 1, 1996:
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
EXCESS OF
REVENUES
OVER
HOTEL REVENUES EXPENSES EXPENSES
----- -------- -------- ---------
<S> <C> <C> <C>
The Westin Hotel Tabor Center............................... $11,854 $ 8,531 $ 3,323
The Westin Hotel Indianapolis............................... 3,215 2,832 383
The Westin Peachtree Plaza.................................. 24,477 16,314 8,163
The Westin Resort St. John(1)...............................
------- ------- -------
Total..................................................... $39,546 $27,677 $11,869
======= ======= =======
</TABLE>
- -------------------------
(1) Hotel closed for renovation due to hurricane damage.
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
EXCESS OF
REVENUES
OVER
HOTEL REVENUES EXPENSES EXPENSES
----- -------- -------- ---------
<S> <C> <C> <C>
The Westin Hotel Tabor Center............................... $ 23,131 $16,456 $ 6,675
The Westin Hotel Indianapolis............................... 25,606 18,276 7,330
The Westin Peachtree Plaza.................................. 58,116 40,185 17,931
The Westin Resort St. John(1)...............................
-------- ------- -------
Total..................................................... $106,853 $74,917 $31,936
======== ======= =======
</TABLE>
- -------------------------
(1) Hotel closed for renovation due to hurricane damage.
(D) The Trust intends to lease the hotels it will acquire to the
Corporation under leases that 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.
(E) Reflects interest expense on funds borrowed by the Corporation from the
Trust to acquire certain assets in the Westin transaction including the Westin
Peachtree Plaza in Atlanta, Georgia and the Westin Resort St. John on the U.S.
Virgin Islands.
(F) Reflects the elimination of joint venture income related to the sale,
during February 1997, of Westin's 50% ownership investment in the Biltmore Hotel
Partners.
(G) Reflects the elimination of franchise fees paid by the Company to
Westin on six Westin hotels owned by the Company as of June 30, 1997 including
the Westin Los Angeles Airport in Los Angeles, California; the Westin Horton
Plaza in San Diego, California; the Westin Washington in Washington, DC; the
Westin Tampa Airport in Tampa, Florida; the Westin Atlanta North in Atlanta,
Georgia; and the Westin Waltham in Waltham, Massachusetts.
(H) Reflects the elimination of franchise fees incurred by the Company on
hotels the Company intends to convert to Westins. These franchise fees represent
franchise fees incurred from the date the hotel was
F-19
<PAGE> 24
acquired until the end of each period presented and therefore may not represent
a full period of franchise fees expense.
(I) Reflects the addition of interest expense at the Company's current
weighted average borrowing rate (7.4%) on the $1.030 billion of assumed debt and
the $178.0 million cash drawn down to acquire Westin.
(J) Reflects the reduction of interest expense due to the pay down of
approximately $500.0 million of debt with the net proceeds of a public offering
of approximately 10.7 million Paired Shares at $49.4375 per Paired Share (using
the closing price per Paired Share on September 8, 1997).
(K) Reflects depreciation and amortization expense on the Company's basis
in the assets acquired in the Westin transaction.
(L) Reflects the estimated income tax expense on the pro forma Corporation
results using an effective income tax rate of 40%.
(M) Reflects the minority interests of the partners in the income of the
Partnerships.
(N) Net income (loss) per Paired Share has been computed using the weighted
average number of paired shares and equivalent paired shares outstanding and
includes Class A and Class B Exchangeable Preferred Stock expected to be issued
as partial consideration for the Westin acquisition (see footnote B to the
Unaudited Combined Consolidated and Separate Consolidated Pro Forma Balance
Sheets) and common stock expected to be issued pursuant to a public offering
(see footnote K above). All Paired Share information has been adjusted to
reflect a 3-for-2 stock split effective January 27, 1997.
F-20
<PAGE> 25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
W&S Hotel L.L.C.:
We have audited the accompanying consolidated balance sheets of W&S Hotel
L.L.C. (a Delaware limited liability company) and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of operations,
members' equity and cash flows for the year ended December 31, 1996 and for the
period from acquisition (May 12, 1995) through December 31, 1995. We have also
audited the accompanying combined statements of operations, changes in net
assets and cash flows of the predecessor business (as defined in Note 1) for the
year ended December 31, 1994, and for the period from January 1, 1995 through
May 12, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of W&S Hotel
L.L.C. and subsidiaries as of December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for the year ended December 31,
1996 and for the period from acquisition (May 12, 1995) through December 31,
1995, and the combined results of operations, changes in net assets and cash
flows of the predecessor business for the year ended December 31, 1994, and for
the period from January 1, 1995 through May 12, 1995, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington,
February 14, 1997
F-21
<PAGE> 26
W & S HOTEL L.L.C.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995
-------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents, including $4,022 of
restricted cash in 1997............................. $ 10,472 $ 10,642 $ 22,677
Receivables:
Guest and trade accounts, less allowance for
doubtful accounts of $2,027, $1,937 and $1,481.... 43,974 32,621 23,799
Accounts due from affiliates........................ 1,427 2,098 638
Refundable taxes.................................... 1,721 2,852 643
Other............................................... 13,388 13,582 12,992
---------- -------- --------
Net receivables................................ 60,510 51,153 38,072
Deferred income taxes.................................... 1,731 1,731 5,889
Inventories.............................................. 1,479 1,119 972
Prepaid expenses and other............................... 6,348 4,940 2,475
---------- -------- --------
Total current assets........................... 80,540 69,585 70,085
Noncurrent receivables................................... 17,108 12,139 1,734
Noncurrent receivables from affiliates................... 14,160 12,771 3,343
Investments in partnerships.............................. 14,590 31,427 50,551
Property and equipment, net.............................. 561,069 259,875 254,879
Intangible and other assets, net, including restricted
deposits of $7,333, $4,264 and $350.................... 368,776 388,240 392,628
---------- -------- --------
$1,056,243 $774,037 $773,220
========== ======== ========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Note payable........................................... $ 292 $ 2,506 $ 2,824
Current maturities of long-term debt................... 11,119 1,863 377
Trade accounts payable................................. 12,139 12,754 8,519
Accrued expenses....................................... 62,345 62,673 57,702
Payable to affiliates.................................. 4,265 3,038 2,948
Income taxes........................................... 9,218 1,204 1,198
Other.................................................. 4,020 1,437 979
---------- -------- --------
Total current liabilities...................... 103,398 85,475 74,547
---------- -------- --------
Long-term obligations:
Long-term debt......................................... 647,366 432,132 440,299
Other.................................................. 48,930 47,725 48,635
---------- -------- --------
Total long-term obligations.................... 696,296 479,857 488,934
---------- -------- --------
Deferred income taxes.................................... 117,665 126,251 128,560
---------- -------- --------
Equity:
Members' equity........................................ 139,263 82,775 81,447
Equity adjustment from foreign currency translation.... (379) (321) (268)
---------- -------- --------
Total equity................................... 138,884 82,454 81,179
---------- -------- --------
Commitments and contingencies............................
$1,056,243 $774,037 $773,220
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-22
<PAGE> 27
W & S HOTEL L.L.C.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS)
<TABLE>
<CAPTION>
MAY 12, 1995
SIX MONTHS ENDED YEAR ENDED THROUGH
------------------------------ DECEMBER 31, DECEMBER 31,
JUNE 30, 1997 JUNE 30, 1996 1996 1995
------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenues:
Rooms..................................... $ 64,107 $ 49,208 $102,091 $ 60,352
Food and beverage......................... 30,836 25,442 52,036 32,869
Hotel management services................. 30,331 25,484 50,854 26,517
Hotel management services from
affiliates............................. 4,876 3,357 7,662 3,089
Other departmental and operating
revenues............................... 12,488 12,310 25,422 15,975
-------- -------- -------- --------
Total operating revenues............. 142,638 115,801 238,065 138,802
-------- -------- -------- --------
Operating expenses:
Rooms..................................... 13,465 11,260 23,221 14,169
Food and beverage......................... 21,827 17,796 36,569 23,373
General, administrative and marketing..... 24,655 26,507 51,748 35,748
Property maintenance and energy........... 7,808 6,963 14,390 9,210
Rent...................................... 6,166 5,205 10,898 4,947
Depreciation and amortization............. 23,311 20,996 42,566 25,548
Local taxes and insurance................. 5,769 3,884 8,267 4,955
Other..................................... 5,913 5,459 11,128 7,987
-------- -------- -------- --------
Total operating expenses............. 108,914 98,070 198,787 125,937
-------- -------- -------- --------
Operating income..................... 33,724 17,731 39,278 12,865
-------- -------- -------- --------
Other income (expense):
Interest expense.......................... (21,690) (21,155) (41,965) (28,391)
Interest income........................... 1,953 767 1,712 1,348
Gain on disposals......................... 20,969 -- -- --
Share of earnings of partnerships......... 657 4,499 5,036 55
Foreign exchange loss..................... (99) (29) (127) (188)
Gain on curtailment of management
retirement plan........................ -- -- -- 4,186
Miscellaneous............................. (270) 106 (702) (82)
-------- -------- -------- --------
Other income (expense)............... 1,520 (15,812) (36,046) (23,072)
-------- -------- -------- --------
Income (loss) before income taxes......... 35,244 1,919 3,232 (10,207)
Income tax expense (benefit)................ 14,556 2,318 3,904 (653)
-------- -------- -------- --------
Net income (loss).................... $ 20,688 $ (399) $ (672) $ (9,554)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE> 28
PREDECESSOR BUSINESS
COMBINED STATEMENTS OF OPERATIONS
(THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1, 1995
THROUGH YEAR ENDED
MAY 12, 1995 DECEMBER 31, 1994
--------------- -----------------
<S> <C> <C>
Operating revenues:
Rooms..................................................... $32,149 $ 87,387
Food and beverage......................................... 18,743 51,257
Hotel management services................................. 13,444 32,306
Hotel management services from affiliates................. 1,475 4,058
Other departmental and operating revenues................. 8,339 23,258
------- --------
Total operating revenues............................. 74,150 198,266
------- --------
Operating expenses:
Rooms..................................................... 8,401 22,113
Food and beverage......................................... 14,831 40,186
General, administrative and marketing..................... 18,633 47,381
Property maintenance and energy........................... 5,317 14,841
Rent...................................................... 2,596 7,117
Depreciation and amortization............................. 9,448 27,168
Local taxes and insurance................................. 3,376 7,777
Other..................................................... 3,169 12,410
------- --------
Total operating expenses............................. 65,771 178,993
------- --------
Operating income..................................... 8,379 19,273
------- --------
Other income (expense):
Interest expense.......................................... (7,103) (14,954)
Interest income........................................... 999 2,045
Gain on disposals......................................... 93 15,822
Share of earnings (losses) of partnerships................ 2,464 (1,893)
Foreign exchange loss..................................... (35) (22)
Miscellaneous............................................. 879 1,223
------- --------
Other income (expense)............................... (2,703) 2,221
------- --------
Income before income taxes........................... 5,676 21,494
Income tax expense.......................................... 3,532 15,943
------- --------
Net income........................................... $ 2,144 $ 5,551
======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE> 29
W&S HOTEL L.L.C.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
FOR THE PERIOD FROM MAY 12, 1995 THROUGH DECEMBER 31, 1995,
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
(THOUSANDS)
<TABLE>
<CAPTION>
CLASS A MEMBERS CLASS B MEMBER TOTAL
--------------- -------------- -----
<S> <C> <C> <C>
Balance, May 12, 1995............................... $ -- $ -- $ --
Capital contributions............................. 95,640 1 95,641
Less notes receivable for equity contributions.... (4,640) -- (4,640)
Net loss.......................................... (9,553) (1) (9,554)
--------- --------- ---------
Balance, December 31, 1995.......................... 81,447 -- 81,447
Collection of notes receivable for equity
contributions.................................. 2,000 -- 2,000
Net loss.......................................... (672) -- (672)
--------- --------- ---------
Balance, December 31, 1996.......................... 82,775 -- 82,775
Capital contributions............................. 35,800 -- 35,800
Net income........................................ 20,688 20,688
--------- --------- ---------
Balance, June 30, 1997.............................. $ 139,263 $ -- $ 139,263
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE> 30
PREDECESSOR BUSINESS
COMBINED STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994 AND
FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH MAY 12, 1995
(THOUSANDS)
<TABLE>
<S> <C>
Net assets, December 31, 1993............................... $290,953
Net income................................................ 5,551
Returns to owner of predecessor business.................. (66,532)
Intercompany tax-sharing agreement recorded as contributed
capital................................................ 13,283
--------
Net assets, December 31, 1994............................... 243,255
Capital contributions..................................... 19,946
Net income................................................ 2,144
Returns to owner of predecessor business.................. (21,623)
Intercompany tax-sharing agreement recorded as contributed
capital................................................ 660
--------
Net assets, May 12, 1995.................................... $244,382
========
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE> 31
W & S HOTEL L.L.C.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS)
<TABLE>
<CAPTION>
MAY 12, 1995
SIX MONTHS ENDED YEAR ENDED THROUGH
------------------------------ DECEMBER 31, DECEMBER 31,
JUNE 30, 1997 JUNE 30, 1996 1996 1995
------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ 20,688 $ (399) $ (672) $ (9,554)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.............. 23,311 20,996 42,566 25,548
Deferred income tax benefit................ (8,142) (162) (727) (3,128)
Gain on disposal........................... (20,969) -- -- --
Gain on curtailment of management
retirement plan......................... -- -- -- (4,186)
Share of (earnings) losses of partnerships,
net of distributions received........... 528 (2,432) (1,658) 3,314
Deferred compensation...................... 8 -- 206 2,040
Pension and other postretirement benefits
greater than plan contributions......... 184 291 44 819
Increase (decrease) in estimated insurance
claims payable.......................... (3,488) (2,190) (2,576) 397
Net change in noncurrent receivables for
interest and management fees............ (1,453) (1,470) (3,402) (656)
Change in assets and liabilities, net of
effects from the purchase of the predecessor
business and hotels:
Receivables, excluding current maturities
of noncurrent receivables............... (2,394) (4,865) (13,978) (40)
Trade accounts payable..................... (2,844) 763 3,865 1,489
Accrued expenses........................... (4,644) 391 11,182 11,389
Other net changes in operating assets and
liabilities............................. 9,194 (2,194) (1,935) (94)
-------- -------- -------- --------
Net cash provided by operating activities.... 9,979 8,729 32,915 27,338
-------- -------- -------- --------
Cash flows from investing activities:
Payments for purchase of the predecessor
business, net of cash acquired of $402 in
1995......................................... -- (6,081) (6,143) (88,637)
Payments for purchase of hotels, net of cash
acquired of $4,811........................... (68,189) -- -- --
Proceeds from sale of investment in
partnership.................................. 50,518 -- -- --
Return of investment in partnership............ -- -- 22,000 --
Investments in partnerships.................... (8,520) (146) -- --
Acquisition of property and equipment.......... (12,137) (10,249) (20,317) (5,729)
Acquisition of management contracts............ (1,382) (728) (4,878) (43)
Investment in software......................... (2,738) (1,529) (5,370) (4,442)
Net (increase) decrease in noncurrent
receivables and investments.................. (4,105) (3,528) (16,638) 23
Additions to other assets...................... (2,519) -- (3,711) (539)
-------- -------- -------- --------
Net cash used in investing activities........ (49,072) (22,261) (35,057) (99,367)
-------- -------- -------- --------
Cash flows from financing activities:
Capital contributions.......................... 35,800 2,000 2,000 91,001
Net decrease in notes payable.................. (2,214) (2,279) (318) (738)
Proceeds from long-term debt................... 13,563 -- -- 4,669
Repayment of long-term obligations............. (8,226) (210) (11,575) (226)
-------- -------- -------- --------
Net cash provided by (used in) financing
activities................................. 38,923 (489) (9,893) 94,706
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... (170) (14,021) (12,035) 22,677
Cash and cash equivalents, beginning of period... 10,642 22,677 22,677 --
-------- -------- -------- --------
Cash and cash equivalents, end of period....... $ 10,472 $ 8,656 $ 10,642 $ 22,677
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE> 32
PREDECESSOR BUSINESS
COMBINED STATEMENTS OF CASH FLOWS
(THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1, 1995
THROUGH YEAR ENDED
MAY 12, 1995 DECEMBER 31, 1994
--------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 2,144 $ 5,551
Adjustments to reconcile net income to net cash provided
by
(used in) operating activities:
Depreciation and amortization.......................... 9,448 27,168
Deferred income tax expense (benefit).................. 1,183 (1,463)
Losses (gains) on investments and noncurrent
receivables.......................................... 101 (14,917)
Benefit of intercompany tax-sharing agreement recorded
as contributed capital............................... 660 13,283
Share of (earnings) losses of partnerships, net of
distributions received............................... (2,464) 2,282
Pension and other postretirement benefits greater than
(less than) plan contributions....................... (27) 936
Increase (decrease) in estimated insurance claims
payable.............................................. (410) 1,221
Net change in noncurrent receivables for interest and
management fees...................................... 50 (899)
Change in assets and liabilities:
Receivables, excluding current maturities of noncurrent
receivables.......................................... (6,784) 2,052
Trade accounts payable................................. (4,381) 2,010
Accrued expenses....................................... 5,337 4,819
Other net changes in operating assets and
liabilities.......................................... (7,026) (2,981)
-------- -------
Net cash provided by (used in) operating
activities...................................... (2,169) 39,062
-------- -------
Cash flows from investing activities:
Acquisition of property and equipment..................... (537) (8,277)
Investment in software.................................... (489) --
Net (increase) decrease in noncurrent receivables and
investments............................................ (5,177) 16,145
-------- -------
Net cash provided by (used in) investing
activities...................................... (6,203) 7,868
-------- -------
Cash flows from financing activities:
Capital contributions..................................... 19,946 --
Returns to owner of predecessor business.................. (21,623) (66,532)
Net increase (decrease) in notes payable.................. (2,336) 6,828
Proceeds from long-term debt.............................. -- 2,900
Repayment of long-term obligations........................ (398) (1,640)
-------- -------
Net cash used in financing activities............. (4,411) (58,444)
-------- -------
Net decrease in cash and cash equivalents................... (12,783) (11,514)
Cash and cash equivalents, beginning of period.............. 13,185 24,699
-------- -------
Cash and cash equivalents, end of period.................... $ 402 $13,185
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE> 33
W&S HOTEL L.L.C.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. BASIS OF PRESENTATION
W&S Hotel L.L.C. (the LLC) acquired the stock of Westin Hotel Company and
certain additional subsidiaries and affiliates on May 12, 1995 (the
acquisition). Prior to the acquisition, the LLC had no material operations. The
consolidated financial statements of the LLC include the results of operations
of the acquired enterprises since the acquisition. The combined financial
statements of the predecessor business include the results of operations of the
acquired enterprises prior to the purchase but exclude businesses and assets not
acquired. The LLC and the predecessor business are collectively referred to in
these notes as the Company.
The accompanying interim consolidated financial statements of the LLC have
been prepared by the LLC without audit. Certain information and footnote
disclosures normally included in financial statements presented in accordance
with generally accepted accounting principles have been condensed or omitted.
All amounts and disclosures included in the notes for the six months ended June
30, 1997 and 1996, and as of June 30, 1997 are unaudited. Management of the LLC
believes the disclosures made are adequate to make the information presented not
misleading. However, the interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto.
In the opinion of management of the LLC, the accompanying interim unaudited
consolidated financial statements reflect all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial position
of the LLC as of June 30, 1997 and the results of operations and cash flows for
the six months ended June 30, 1997 and 1996. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal and
short-term variations.
2. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. DESCRIPTION OF BUSINESS
The Company operates in the lodging industry under the name of Westin
Hotels & Resorts. It owns, manages, franchises and represents upscale hotels and
resorts in locations worldwide. Substantially all owned hotels and partnerships
are located in the United States. Operating revenues from hotel operations
consist of rooms, food and beverage and other operating department revenues
generated by owned hotels. Operating revenues from management services are
primarily for management, franchise and related services provided to nonowned
hotels.
The Company also provides workers' compensation, property, general and
automobile liability coverage to the owned and managed hotels through its wholly
owned subsidiary, Westel Insurance Company.
B. MEMBERS' EQUITY
The LLC is a limited liability company formed on November 21, 1994, under
the laws of Delaware. It shall continue until December 31, 2044, unless
terminated sooner.
There are Class A members and a Class B member in the LLC. The Class A
members are Woodstar Investor Partnership, an affiliate of the Starwood Capital
Group L.P.; WHWE L.L.C., an affiliate of Goldman, Sachs & Co.; and a senior
executive of the Company. Nomura Asset Capital Corporation is the sole Class B
member. Members' liability is limited to their respective capital contributions.
Concurrence of the Class B member is required for certain decisions.
Earnings and losses of the LLC after a preferred return are generally
allocated to each member in accordance with their respective percentage
interests, but losses are allocated first to members with positive equity
balances. The percentage interests totaled 73% for Class A members and 27% for
the Class B member. Generally, distributions of net proceeds from operations and
excess refinancing proceeds are made to the
F-29
<PAGE> 34
Class A members to the extent of interest on their unreturned capital
contributions, and thereafter, to all members in proportion to their respective
percentage interests.
The original Class A members have committed to contribute capital up to
$132,000,000 no later than May 12, 1998. As of December 31, 1996, these members
had contributed cash of $93,000,000 and notes of $2,640,000. In lieu of
receiving distributions, the Class A members have reduced their remaining
capital commitment by approximately $18,000,000 through December 31, 1996. There
are significant restrictions on the ability to transfer the Class A members'
interests. The remaining capital commitment and additional contributions were
funded during the six months ended June 30, 1997 in connection with hotel
acquisitions.
C. CONSOLIDATION
The consolidated and combined financial statements include the accounts of
the Company and the acquired subsidiaries. The consolidated and combined
statements of operations also include the Company's share of net income from
partnerships. All significant intercompany transactions and accounts have been
eliminated.
D. ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
E. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid debt
instruments bearing floating interest rates and other short-term investments
purchased with a maturity of three months or less.
F. GUEST AND TRADE RECEIVABLES
In the ordinary course of business, the Company extends credit to guests of
owned hotels, primarily business travelers. In addition, the Company extends
credit to managed and franchised hotels located principally in North America and
Asia for the payment of management and marketing fees and for reimbursement of
payroll and other expenses.
G. INVENTORIES
Inventories include food, beverage and supplies and are valued at the lower
of cost (first-in, first-out) or replacement market.
H. INVESTMENTS IN PARTNERSHIPS
The Company's investments in partnerships that are not majority-owned or
controlled are accounted for using the equity method.
I. PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment are provided using
the straight-line method over the assets' estimated useful lives as follows:
<TABLE>
<S> <C>
Buildings and leasehold
improvements...................... Shorter of 5-45 years or remaining lease
term
Furniture, fixtures and equipment... 2-12 years
Expendable supplies................. 2-4 years
</TABLE>
The Company uses an annual group method of depreciation. Under this method,
individual assets are not specifically identified for purposes of determining
retirements. Fully depreciated asset groups are written off the year after they
are fully depreciated. Proceeds from miscellaneous sales of depreciable property
and equipment are credited to accumulated depreciation.
F-30
<PAGE> 35
Expendable supplies include linens, china, silverware and glassware. They
are depreciated to 50% of the cost of initial stock. Replacements are expensed
when purchased.
Maintenance and repairs, including the cost of minor replacements, are
charged to property maintenance expense accounts. The cost of additions and
betterments of property are capitalized to property and equipment accounts.
Interest incurred during the construction or renovation of hotels and
related facilities is capitalized and amortized over the estimated useful lives
of the assets. No interest was capitalized in 1996, 1995 or 1994. In the six
months ended June 30, 1997, capitalized interest totaled $411,000.
J. INTANGIBLE AND OTHER ASSETS
Intangible and other assets include management contracts, goodwill,
software and deferred loan costs. Management contracts represent the allocation
of the Company's acquisition cost based on the estimated present value of income
primarily from management agreements, less accumulated amortization. The direct
costs incurred to obtain a management or franchise agreement are also
capitalized. Goodwill represents the excess of the Company's acquisition cost
over the net fair value of assets acquired and liabilities assumed, less
accumulated amortization. Deferred loan costs and computer software are stated
at cost, less accumulated amortization. Capitalized cost for computer software
includes both external and internal labor costs directly attributable to the
development of software.
The costs incurred to acquire management contracts are amortized using the
straight-line method over the lives of the contracts. Goodwill is amortized
using the straight-line method. Deferred loan costs are amortized using the
straight-line method, which approximates the effective interest method over the
contractual terms of the related indebtedness. Software costs are amortized
using the straight-line method over the estimated economic lives of the
software, not to exceed seven years. Estimated useful lives are as follows:
<TABLE>
<CAPTION>
W&S HOTEL L.L.C. PREDECESSOR BUSINESS
---------------- --------------------
<S> <C> <C>
Management contracts......................... 5-15 years 25 years
Goodwill..................................... 40 years 40 years
Deferred loan costs.......................... 2-7 years N/A
Software..................................... 2-7 years 7 years
</TABLE>
The estimated lives of the management contracts include the weighted
averages of the remaining contract periods as of the respective business
acquisition dates. The predecessor owner acquisition occurred in 1988.
Management periodically assesses the carrying value of intangible assets to
determine whether any changes in estimated useful lives have occurred.
K. LONG-LIVED ASSETS
The recoverability of management contract costs, goodwill and hotel
investments are periodically evaluated to determine whether such costs will be
recovered from future operations. Evaluations of goodwill are based on estimated
undiscounted cashflow. Management contracts and hotel investments are
individually evaluated based on undiscounted cashflow. If the undiscounted
amounts are insufficient to recover the recorded assets, then the estimated
amounts are discounted to determine the revised carrying value and a write-down
for the difference is recorded.
L. DERIVATIVE FINANCIAL INSTRUMENTS
The company enters into interest-rate protection agreements to manage
well-defined interest rate risk and does not use them for trading or speculative
purposes. The Company's agreements are with major international financial
institutions that are expected to fully perform under the terms of the
agreements thereby reducing the credit risk from the transactions.
F-31
<PAGE> 36
Fees paid for interest-rate protection agreements are recorded ratably as
interest expense over the terms of the agreements and the related impact on the
Company's cash flows is included in cash flows from operating activities.
Gains or losses on interest-rate protection agreements that the Company
considers hedges, including hedges of anticipated refinancing transactions, are
deferred. In order for gains or losses for anticipated refinancing transactions
to be deferred the Company must determine, by reviewing its ability and intent
to refinance, that it is probable that the anticipated refinancing will occur.
If the Company concludes that an interest rate protection agreement no longer
qualifies as a hedge, gains or losses would be recorded as other income
(expense) at each reporting date based on the amount that would have been paid
or received to settle the agreement on the reporting date.
M. INCOME TAXES
The members of the LLC are required to include their respective share of
profits and losses in their separate income tax returns. Income taxes reflected
in the financial statements relate to taxable corporations owned by the LLC
included in the consolidated financial statements.
The operations of the predecessor business have been included in the
consolidated tax returns of the predecessor owner and its affiliates. Income
taxes for the predecessor business have been computed assuming the Company was a
stand-alone entity.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and to operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on the deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
N. FOREIGN CURRENCY TRANSLATION
The financial statements include foreign currency amounts attributed to
foreign subsidiaries and branches that have been translated into U.S. dollars
using year-end exchange rates for assets and liabilities and average annual
rates for revenues and expenses. Translation gains or losses arising from
fluctuations in the year-end exchange rates are recorded as equity adjustments
from foreign currency translations. Foreign exchange gains or losses recorded in
the statements of operations include actual foreign exchange transactions and
the effect of exchange rate fluctuations on assets or liabilities that are
denominated in currencies other than their own.
O. ADVERTISING COSTS
The Company expenses the production costs of advertising the first time the
advertising takes place.
P. EQUITY-BASED COMPENSATION
The Company accounts for its equity-based compensation following the fair
value accounting provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation. The predecessor
business did not have equity-based compensation arrangements.
3. BUSINESS ACQUISITION
On May 12, 1995, the LLC acquired all of the stock of Westin Hotel Company
and certain additional investments, which are collectively referred to as the
predecessor business. The acquisition has been accounted for using the purchase
method of accounting. Accordingly, the total cost has been allocated to the
assets purchased and the liabilities assumed based upon the fair values at the
date of acquisition. The purchase price in excess of the estimated fair value of
the net assets acquired was $154,079,000 and has been recorded as goodwill.
Valuation allowances for deferred tax assets resulting principally from net
operating losses and foreign tax credit carryforwards were recorded as part of
the acquisition. If those net operating losses or foreign
F-32
<PAGE> 37
tax credits are used, goodwill will be reduced accordingly. A summary of the
acquisition of the predecessor business follows:
<TABLE>
<CAPTION>
(THOUSANDS)
<S> <C>
Purchase price of net assets acquired....................... $ 537,700
Less purchase price adjustments............................. (27,420)
Transaction costs........................................... 20,063
---------
Total cost............................................. 530,343
Less:
Long-term debt............................................ (439,284)
Unexpended proceeds from long-term debt................... 4,669
Current liabilities assumed............................... (445)
Interest earned on earnest money deposit.................. (101)
Cash acquired............................................. (402)
---------
Net cash paid for acquisition in 1995 and 1996.............. $ 94,780
=========
</TABLE>
4. CASH MANAGEMENT
The Company invests cash in excess of operating needs in short-term
investments in which its funds are available upon request. Under the program,
participants' cash receipts are deposited in a centralized bank account. The
full amount of the funds in the centralized account is available for use by the
participants in their normal operations. Interest income or expense is allocated
to participants that are not wholly owned based upon their net funds deposited
or borrowed under the program. The interest rate is based upon the average yield
of investments in the centralized account.
At December 31, 1996 and 1995, the payable to affiliates includes
$3,010,000 and $2,503,000, respectively, representing net cash transfers under
the hotel cash management program.
5. OTHER CURRENT RECEIVABLES
A summary of other current receivables at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(THOUSANDS)
<S> <C> <C>
Reimbursable payroll costs.................................. $ 9,428 $ 5,483
Indemnified taxes recoverable from predecessor owner........ 1,324 5,566
Other....................................................... 2,830 1,943
------- -------
$13,582 $12,992
======= =======
</TABLE>
6. NONCURRENT RECEIVABLES
Noncurrent receivables are due primarily from hotels located in North
America and the Pacific Rim, which have entered into management agreements with
the Company. The following is a summary of noncurrent receivables as of December
31:
<TABLE>
<CAPTION>
1996 1995
---- ----
(THOUSANDS)
<S> <C> <C>
Partially secured hotel loan (including accrued interest of
$187), interest at 10%. Repayment is monthly from
available cash flow, as defined. The loan is guaranteed by
the hotel owner and real estate. The loan maturity
coincides with the life of the management agreement, which
has an initial five-year term through 2001, and three
five-year renewal periods................................. $ 9,910 $ --
</TABLE>
F-33
<PAGE> 38
<TABLE>
<CAPTION>
1996 1995
---- ----
(THOUSANDS)
<S> <C> <C>
Management fees, collection deferred pursuant to management
agreement terms and conditions (including interest of $304
in 1996 and 1995), net of unamortized discounts of $574 in
1996 and $652 in 1995, based on imputed interest rates of
8.875% to 13.5%, and net of allowances for doubtful
accounts of $425 in 1996 and $325 in 1995. Payments are
due upon availability of funds............................ 975 780
Other notes and noncurrent receivables (including interest
of $341 in 1996 and $40 in 1995), net of unamortized
discounts of $976 in 1996 and $143 in 1995. Interest rates
are from zero to prime plus 2%, and maturities range from
1997 to 2024.............................................. 1,304 1,050
------- ------
12,189 1,830
Less current maturities (included in other current
receivables).............................................. 50 96
------- ------
$12,139 $1,734
======= ======
</TABLE>
Noncurrent receivables from affiliates include amounts due primarily from
partially owned hotels located in North America and an advertising association.
The following is a summary of noncurrent receivables from affiliates as of
December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
(THOUSANDS)
<S> <C> <C>
Management fees, collection deferred pursuant to management
agreement terms and conditions, net of unamortized
discounts of $3,297 in 1996 and $2,223 in 1995, based on
imputed interest rates ranging from 8.875% to 13.5%.
Payments are due upon availability of funds............... $ 7,104 $3,343
Note receivable from WHR Advertising Association; interest
rate at prime; final payment due in 1999.................. 5,167 --
Other....................................................... 500 --
------- ------
$12,771 $3,343
======= ======
</TABLE>
During 1996 the Company loaned funds to WHR Advertising Association (the
Association), a cooperative corporation which coordinates advertising and
related promotional activities on behalf of hotels worldwide that are operated
subject to either a management or a franchise agreement and whose owners are
Association members. The Company's owned hotels are Association members, and
represent 14% of the Association's voting interests. The Company does not have
an equity interest in the Association and does not control the Association's
board of directors. The loan will be repaid from contributions by members of the
Association.
F-34
<PAGE> 39
7. INVESTMENTS IN PARTNERSHIPS
Summarized financial information of investments in partnerships accounted
for by the equity method follows (amounts for partnerships investments include
the effects of purchase allocation, dollars in thousands):
<TABLE>
<CAPTION>
WESTIN
BILTMORE O'HARE GALLERIA SIXTH &
HOTEL HOTEL HOTEL VIRGINIA LCWW
PARTNERS VENTURE VENTURE PROPERTIES PARTNERS TOTAL
-------- ------- -------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Assets
Current assets.................. $ 9,757 $ 6,698 $ 5,713 $ 1,178 $ -- $ 23,346
Noncurrent assets............... 119,039 40,295 54,297 37,525 836 251,992
-------- ------- ------- ------- ---- --------
$128,796 $46,993 $60,010 $38,703 $836 $275,338
======== ======= ======= ======= ==== ========
Liabilities and Equity
Current liabilities............. $ 14,127 $ 5,125 $ 5,755 $ 1,433 $ -- $ 26,440
Long-term obligations........... 65,079 34,097 50,503 31,581 -- 181,260
-------- ------- ------- ------- ---- --------
79,206 39,222 56,258 33,014 -- 207,700
Equity.......................... 49,590 7,771 3,752 5,689 836 67,638
-------- ------- ------- ------- ---- --------
$128,796 $46,993 $60,010 $38,703 $836 $275,338
======== ======= ======= ======= ==== ========
The Company's investment........ $ 24,795 $ 4,041 $ 751 $ 1,422 $418 $ 31,427
======== ======= ======= ======= ==== ========
As of December 31, 1995
Assets
Current assets.................. $ 10,612 $ 4,918 $ 3,636 $ 604 $ -- $ 19,770
Noncurrent assets............... 120,140 40,859 54,487 38,309 -- 253,795
-------- ------- ------- ------- ---- --------
$130,752 $45,777 $58,123 $38,913 $ -- $273,565
======== ======= ======= ======= ==== ========
Liabilities and Equity
Current liabilities............. $ 11,945 $34,197 $ 4,145 $ 1,054 $ -- $ 51,341
Long-term obligations........... 51,873 3,692 51,555 32,017 -- 139,137
-------- ------- ------- ------- ---- --------
63,818 37,889 55,700 33,071 -- 190,478
Equity.......................... 66,934 7,888 2,423 5,842 -- 83,087
-------- ------- ------- ------- ---- --------
$130,752 $45,777 $58,123 $38,913 $ -- $273,565
======== ======= ======= ======= ==== ========
The Company's investment........ $ 44,466 $ 4,139 $ 485 $ 1,461 $ -- $ 50,551
======== ======= ======= ======= ==== ========
For the year ended December 31, 1996:
Operating revenues................. $ 55,653 $29,395 $30,586 $ 8,446 $ -- $124,080
Operating expenses................. 39,847 22,268 20,124 4,067 -- 86,306
Depreciation and amortization...... 5,298 2,029 3,344 2,114 -- 12,785
-------- ------- ------- ------- ---- --------
Operating income.............. 10,508 5,098 7,118 2,265 -- 24,989
Interest expense................... (5,851) (2,214) (5,638) (2,418) -- (16,121)
Other expense...................... -- -- (150) -- -- (150)
-------- ------- ------- ------- ---- --------
Net income (loss)............. $ 4,657 $ 2,884 $ 1,330 $ (153) $ -- $ 8,718
======== ======= ======= ======= ==== ========
Company ownership percentage....... 50% 49% 20% 25% --
$ 2,328 $ 1,402 $ 266 $ (38) $ -- $ 3,958
Preferred return.............. 1,078 -- -- -- -- 1,078
-------- ------- ------- ------- ---- --------
The Company's share........... $ 3,406 $ 1,402 $ 266 $ (38) $ -- $ 5,036
======== ======= ======= ======= ==== ========
</TABLE>
F-35
<PAGE> 40
<TABLE>
<CAPTION>
WESTIN
BILTMORE O'HARE GALLERIA SIXTH &
HOTEL HOTEL HOTEL VIRGINIA
PARTNERS VENTURE VENTURE PROPERTIES TOTAL
-------- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
For the period from May 12, 1995 through
December 31, 1995:
Operating revenues.................... $ 19,554 $18,199 $17,879 $ 4,608 $ 60,240
Operating expenses.................... 17,348 13,386 12,771 2,013 45,518
Depreciation and amortization......... 2,636 1,613 2,134 1,274 7,657
-------- ------- ------- ------- --------
Operating income (loss).......... (430) 3,200 2,974 1,321 7,065
Interest expense...................... (2,321) (1,520) (3,619) (1,824) (9,284)
Other income (expense)................ -- 92 (223) -- (131)
-------- ------- ------- ------- --------
Net income (loss)................ $ (2,751) $ 1,772 $ (868) $ (503) $ (2,350)
======== ======= ======= ======= ========
Company ownership percentage.......... 50% 49% 20% 25%
$ (1,376) $ 862 $ (174) $ (126) $ (814)
Preferred return................. 869 -- -- -- 869
-------- ------- ------- ------- --------
The Company's share.............. $ (507) $ 862 $ (174) $ (126) $ 55
======== ======= ======= ======= ========
For the period from January 1, 1995
through May 12, 1995:
Operating revenues.................... $ 22,286 $ 9,236 $10,182 $ 3,025 $ 44,729
Operating expenses.................... 13,365 7,969 7,759 1,520 30,613
Depreciation and amortization......... 2,200 773 395 291 3,659
-------- ------- ------- ------- --------
Operating income................. 6,721 494 2,028 1,214 10,457
Interest expense...................... (1,540) (867) (2,049) (1,046) (5,502)
Other income (expense)................ -- 44 (24) -- 20
-------- ------- ------- ------- --------
Net income (loss)................ $ 5,181 $ (329) $ (45) $ 168 $ 4,975
======== ======= ======= ======= ========
The Company's share.............. $ 2,591 $ (160) $ (9) $ 42 $ 2,464
======== ======= ======= ======= ========
For the year ended December 31, 1994:
Operating revenues.................... $ 39,606 $25,938 $27,304 $ 6,755 $ 99,603
Operating expenses.................... 30,196 21,016 20,236 2,866 74,314
Depreciation and amortization......... 4,940 1,066 1,079 755 7,840
-------- ------- ------- ------- --------
Operating income................. 4,470 3,856 5,989 3,134 17,449
Interest expense...................... (3,787) (3,220) (5,938) (2,886) (15,831)
Other income (expense)................ (5,285) 65 (284) -- (5,504)
-------- ------- ------- ------- --------
Net income (loss)................ $ (4,602) $ 701 $ (233) $ 248 $ (3,886)
======== ======= ======= ======= ========
The Company's share.............. $ (2,248) $ 340 $ (47) $ 62 $ (1,893)
======== ======= ======= ======= ========
</TABLE>
The LLC had a 50% ownership interest in Biltmore Hotel Partners, which
owned the Arizona Biltmore located in Phoenix, Arizona. Additionally, the LLC
received a preferred return on invested capital of $22,000,000. This amount,
which had previously been included in investments in partnerships, was repaid to
the LLC during the year ended December 31, 1996. In February 1997, the LLC sold
its interest in Biltmore Hotel Partners for $50,518,000. This transaction
generated a pretax gain of approximately $20,969,000, and net proceeds after a
required repayment of long-term debt were approximately $44,000,000. The net
proceeds from this transaction have been utilized to fund a portion of the
Company's hotel acquisitions.
The Company has an approximate 49% ownership interest in the Westin O'Hare
Hotel Venture located at the O'Hare Airport in Chicago, Illinois, a 20%
ownership interest in the Galleria Hotel Venture located in Dallas, Texas, a 25%
ownership interest in Sixth & Virginia Properties (The Westin Office Building)
located in Seattle, Washington, and an approximate 23% interest in LCWW Partners
(The Westin La Cantera currently under development in San Antonio, Texas). The
Company has agreed to fund 50% of certain predevelopment costs of The Westin La
Cantera.
F-36
<PAGE> 41
Additionally, a subsidiary of the Company is the general partner and has an
effective ownership interest of approximately 8% in Westin Hotels Limited
Partnership (WHLP), which owns The Westin Michigan Avenue in Chicago and The
Westin St. Francis in San Francisco, but has reduced the investment basis and
share of earnings to zero because of priorities associated with other investor
returns. At December 31, 1996, WHLP had assets of $263,148,000 and equity of
$68,381,000. At December 31, 1995, WHLP had assets of $246,698,000 and equity of
$61,403,000. WHLP had revenues of $110,950,000, $51,791,000, $45,453,000 and
$99,388,000 and net income (loss) of $6,978,000, $4,244,000, ($2,531,000) and
$1,444,000 for the year ended December 31, 1996, the period from May 12, 1995
through December 31, 1995, the period from January 1, 1995 through May 12, 1995
and the year ended December 31, 1994, respectively.
Investments include unamortized cost in excess of the Company's share of
the net assets of partnerships of $22,818,000 at December 31, 1996 ($19,700,000
is attributable to the investment in Biltmore Hotel Partners) and $32,230,000 at
December 31, 1995. This amount is being amortized into income over the lives of
the underlying assets.
Partnership distributions totaled $25,378,000 in 1996 (including
$22,000,000 from the Biltmore Hotel Partners); $3,369,000 from May 12, 1995
through December 31, 1995; none from January 1, 1995 through May 12, 1995; and
$389,000 in 1994.
During 1994, two investments in hotel companies located in Singapore, which
were less than 20% owned, were sold for gross proceeds of $28,363,000, resulting
in a gain of $16,404,000, net of a sales commission of $3,091,000 paid to an
associated company.
8. PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995
-------- ------------ ------------
(THOUSANDS)
<S> <C> <C> <C>
Buildings and leasehold improvements........ $451,052 $206,713 $201,385
Furniture, fixtures and equipment........... 83,422 45,938 27,199
Expendable supplies......................... 8,604 3,931 3,931
-------- -------- --------
543,078 256,582 232,515
Less accumulated depreciation and
amortization.............................. 42,149 30,014 11,081
-------- -------- --------
500,929 226,568 221,434
Construction in progress.................... 3,468 2,307 2,445
Land........................................ 56,672 31,000 31,000....
-------- -------- --------
Net property and equipment............. $561,069 $259,875 $254,879
======== ======== ========
</TABLE>
Depreciation expense totaled $18,850,000 in 1996; $11,074,000 from May 12,
1995 through December 31, 1995; $3,084,000 from January 1, 1995 through May 12,
1995; and $8,793,000 in 1994. Depreciation expense for the six months ended June
30, 1997 and June 30, 1996 totaled $12,117,000 and $8,937,000, respectively.
9. HOTEL ACQUISITIONS
On March 4, 1997 the Company acquired a 573 room hotel located in
Indianapolis, Indiana for approximately $57,945,000. The acquisition was funded
with existing cash of $10,345,000 and indebtedness of $47,600,000 secured by the
hotel.
On May 15, 1997 the Company acquired a 285 room resort located on Great
Cruz Bay in St. John, U.S. Virgin Islands for approximately $30,254,000. The
acquisition was funded with existing cash of $10,254,000 and indebtedness of
$20,000,000 secured by the resort.
F-37
<PAGE> 42
On June 4, 1997 the Company purchased mortgage notes secured by a 1,068
room hotel in Atlanta, Georgia for approximately $113,600,000. The acquisition
of the notes resulted in operating and ownership control of the hotel. The
purchase was funded with $90,000,000 of debt secured by the hotel and
$23,600,000 of cash primarily from LLC Class A member contributions and the
issuance of Subordinated Notes.
On June 24, 1997 the Company acquired a 420 room hotel in Denver, Colorado
for approximately $77,190,000. The purchase was funded with $53,200,000 of debt
secured by the hotel and $23,990,000 of cash primarily from Class A member
contributions and the issuance of Subordinated Notes.
The acquisitions have been accounted for under the purchase method of
accounting. The purchase price allocations have been completed on a preliminary
basis, subject to adjustment should new or additional facts become known.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and the hotels acquired in
1997 as if the acquisitions had occurred on January 1, 1996:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------- YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1997 1996 1996
-------- -------- ------------
(THOUSANDS)
<S> <C> <C> <C>
Operating revenues...................... $180,840 $165,595 $337,838
Net income (loss)....................... $ 21,148 $ (433) $ 630
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as additional depreciation
expense as a result of a step-up in the basis of fixed assets and increased
interest expense on acquisition debt. They do not purport to be indicative of
the results of operations which actually would have resulted had the
acquisitions occurred on January 1, 1996, or of future results of operations of
the consolidated entities.
10. INTANGIBLE AND OTHER ASSETS
A summary of intangible and other assets at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(THOUSANDS)
<S> <C> <C>
Management contracts, less accumulated amortization of
$24,464 and $9,428...................................... $203,517 $213,513
Goodwill, less accumulated amortization of $6,210 and
$2,410.................................................. 147,869 148,392
Prepaid pension and postretirement benefits............... 18,483 17,620
Deferred loan costs, less accumulated amortization of
$4,577 and $1,793....................................... 2,283 4,947
Software, less accumulated amortization of $468 and
$843.................................................... 11,086 7,100
Restricted deposits....................................... 4,264 350
Other, net................................................ 738 706
-------- --------
$388,240 $392,628
======== ========
</TABLE>
F-38
<PAGE> 43
A summary of intangible asset amortization expenses follows:
<TABLE>
<CAPTION>
MAY 12, JANUARY 1,
1995 1995
THROUGH THROUGH
DECEMBER 31, MAY 12,
1996 1995 1995 1994
---- ------------ ---------- ----
(THOUSANDS)
<S> <C> <C> <C> <C>
Management contracts.................. $15,036 $9,428 $3,807 $10,542
Goodwill.............................. 3,800 2,410 2,189 6,161
Deferred loan costs................... 2,784 1,793 -- --
Software.............................. 2,096 843 368 1,672
</TABLE>
11. ACCRUED EXPENSES
A summary of accrued expenses at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(THOUSANDS)
<S> <C> <C>
Salaries, wages and benefits............................... $27,012 $21,331
Self-insurance and current portion of estimated insurance
claims payable........................................... 14,284 16,904
Estimated liability for frequent guest programs............ 5,537 5,149
Accrued interest........................................... 5,087 5,102
Other...................................................... 10,753 9,216
------- -------
$62,673 $57,702
======= =======
</TABLE>
F-39
<PAGE> 44
12. LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995
-------- ------------ ------------
(THOUSANDS)
<S> <C> <C> <C>
Senior Credit Facility, interest at LIBOR plus 1.65%,
varying principal payments due through 2002............. $331,000 $ -- $ --
Senior Secured Notes, average interest at LIBOR plus
3.25%, due 1997......................................... -- 326,625 337,000
Subordinated Notes, interest at LIBOR plus 2.5%, due
2002.................................................... 111,656 102,284 102,284
Mortgages and other secured notes incurred in connection
with hotel acquisitions, interest at 8.56% to 9.214% and
LIBOR plus 2.75%, interest rate adjustments occur on
specified dates for two notes and on optional repayment
dates during 2009-2011 for all notes, varying principal
payments due through maturity in 2020 to 2023........... 181,613 -- --
Secondary secured obligations incurred in connection with
hotel acquisitions, interest at LIBOR plus 2.5% and
LIBOR plus 2.56% increasing to a maximum rate of defined
US treasury security yields plus 6.06%, varying
principal payments due through maturity in 2002 to
2005.................................................... 28,453 -- --
Other, including capital lease obligations of $5,201,
$4,495 and $742......................................... 5,763 5,086 1,392
-------- -------- --------
658,485 433,995 440,676
Less current maturities................................... 11,119 1,863 377
-------- -------- --------
$647,366 $432,132 $440,299
======== ======== ========
</TABLE>
Substantially all property and equipment is pledged as security under the
long-term debt agreements.
There are restrictive covenants under the Subordinated Notes and under the
Senior Secured Notes which were repaid in 1997 as discussed below. These
covenants include maintaining specified levels of debt service coverage and
earnings before interest, taxes, depreciation and amortization and permit
dividends or capital distributions to be made to or by the LLC only if the
Company has complied with the terms of the long-term debt agreements.
In May 1997, the Company elected not to exercise its option to extend the
due date of the Senior Secured Notes and repaid the notes with the proceeds of a
$331,000,000 Senior Credit Facility led by Goldman Sachs Credit Partners L.P..
This facility is comprised of a revolving facility of $50,152,000, and a term
facility of $280,848,000. The revolving facility matures in February 2002 and
the term facility matures in May 2002 and contains similar security and
restrictive covenants as the former Senior Secured Notes. The Senior Credit
Facility also contains restrictive covenants that require minimum levels of net
worth and certain leverage and interest coverage ratios.
The loans incurred in 1997 are secured by the acquired hotel property and
equipment. The loan agreements typically require the hotel to fund reserves for
taxes, insurance, and debt service (current restricted cash) and for capital
replacement (noncurrent restricted assets). The acquired resort located in the
U.S. Virgin Islands has a total loan facility of $29,500,000. The resort will
borrow the remaining $9,500,000 in connection with a renovation.
F-40
<PAGE> 45
Annual maturities of long-term debt outstanding at June 30, 1997 were as
follows:
<TABLE>
<CAPTION>
(THOUSANDS)
-----------
<S> <C>
Six months ending December 31, 1997......................... $ 2,466
Year ending December 31:
1998................................................... 21,405
1999................................................... 37,632
2000................................................... 59,536
2001................................................... 88,838
2002 and thereafter.................................... 448,608
</TABLE>
During 1995, in connection with its borrowing under the Senior Secured
Notes, the Company entered into an interest-rate protection agreement with the
lender, which is the sole class B member of the LLC. On the basis of interest
rates as of December 31, 1996, the settlement amount due to the lender would
have been approximately $5,449,000 had the Company repaid the outstanding
principal of the Senior Secured Notes on December 31, 1996.
The Company accounted for the interest-rate protection agreement as a hedge
against its anticipated future refinancing debt risk. Accordingly, the Company
deferred recognition of changes in the estimated settlement amount of the
agreement. In connection with the repayment of the Senior Secured Notes, the
Company settled the interest rate protection agreement associated with the
Senior Secured Notes for an insignificant amount.
The interest rate protection agreement also required that the Company pay
an interest-rate management fee equal to an annual rate of .93 percent of the
Senior Secured Note amount. This fee, which was approximately $3,098,000 in 1996
and $2,002,000 from May 12, 1995 to December 31, 1995, is included in interest
expense.
The predecessor owner borrowed funds when it acquired the predecessor
business. The related interest cost has not been included in the predecessor
business financial statements as that debt has not been assumed by the LLC and
there are no ongoing guarantees or pledges of the Company's assets relating to
that debt.
13. INCOME TAXES
Income tax expense (benefit) includes the following components:
<TABLE>
<CAPTION>
MAY 12, 1995 JANUARY 1, 1995
THROUGH THROUGH
1996 DECEMBER 31, 1995 MAY 12, 1995 1994
---- ----------------- --------------- ----
(THOUSANDS)
<S> <C> <C> <C> <C>
Current:
Federal..................................... $1,847 $ 897 $ 785 $14,018
State....................................... 423 110 516 1,936
Foreign..................................... 2,361 1,468 1,048 1,452
------ ------- ------ -------
4,631 2,475 2,349 17,406
------ ------- ------ -------
Deferred:
Federal..................................... (625) (3,720) 1,227 504
State....................................... (388) 592 (44) (1,967)
Foreign..................................... 286 -- -- --
------ ------- ------ -------
(727) (3,128) 1,183 (1,463)
------ ------- ------ -------
Total income tax expense (benefit)............ $3,904 $ (653) $3,532 $15,943
====== ======= ====== =======
</TABLE>
F-41
<PAGE> 46
A reconciliation of the United States federal statutory rate to the
Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
MAY 12, 1995 JANUARY 1, 1995
THROUGH THROUGH
1996 DECEMBER 31, 1995 MAY 12, 1995 1994
---- ----------------- --------------- ----
(THOUSANDS)
<S> <C> <C> <C> <C>
U.S. federal statutory rate................... 35.0% 35.0% 35.0% 35.0%
Increase (decrease) in tax rate resulting
from:
U.S. state taxes............................ 2.4 (3.9) 6.5 1.8
Foreign taxes............................... 38.7 (0.1) -- 4.6
Nondeductible expense including goodwill
amortization............................. 46.4 (23.4) 35.2 20.7
Change in valuation allowances.............. (1.7) (1.2) (13.6) 10.5
Other....................................... -- -- (0.9) 1.6
----- ------ ----- ----
Effective tax rate............................ 120.8% 6.4% 62.2% 74.2%
===== ====== ===== ====
</TABLE>
The Company had previously recorded an income tax benefit for foreign tax
credits generated in the period from May 12, 1995 through December 31, 1995. The
Company could not claim these credits in its 1995 federal income tax return and
has recorded additional income tax expense of approximately $950,000 for this
item in 1996.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31
follow:
<TABLE>
<CAPTION>
1996 1995
---- ----
(THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Current assets......................................... $ -- $ 865
Investments in partnerships............................ 37,783 34,772
Property and equipment................................. 19,391 24,489
Intangible and other assets............................ 95,025 96,223
-------- --------
Total deferred tax liabilities.................... 152,199 156,349
-------- --------
Deferred tax assets:
Current assets......................................... 151 --
Noncurrent receivables................................. 3,873 3,815
Current liabilities.................................... 5,223 9,904
Long-term debt......................................... 411 1,955
Other long-term obligations............................ 11,848 11,718
Federal, state and local net operating loss
carryforwards....................................... 8,462 9,070
Foreign tax credit carryforwards....................... 16,965 18,991
Alternative minimum tax credit carryforwards........... 2,443 2,457
General business credit carryforwards.................. 855 1,189
-------- --------
Total deferred tax assets......................... 50,231 59,099
Valuation allowance............................... (22,552) (25,421)
-------- --------
Net deferred tax asset............................ 27,679 33,678
-------- --------
Net deferred tax liability............................... $124,520 $122,671
======== ========
</TABLE>
At December 31, 1996, the LLC's taxable subsidiaries had net operating
losses available for carryforward to future years of $10,722,000 for federal
income tax purposes that will expire in the years 2005 through 2010. The LLC's
taxable subsidiaries also had net operating losses available for carryforward to
future years relating to various city and state tax jurisdictions that aggregate
$63,824,000 and expire in the years 1997 through 2011.
F-42
<PAGE> 47
The foreign tax credits available for carryforward to future years of
$16,965,000 will expire in the years 1999 through 2001. Foreign tax credits
totaling $2,886,000 expired during 1996, and $860,000 of 1996 foreign tax
credits have been carried forward.
The Company's alternative minimum tax credit carryforwards of $2,443,000
may be used indefinitely to reduce future regular federal income taxes to the
extent regular federal income taxes exceed alternative minimum tax. The general
business credits available for carryforward to future years of $855,000 will
expire in the years 2002 through 2011.
Substantially all of the Company's valuation allowance is for net operating
loss and tax credit carryforwards generated through May 12, 1995. Future tax
benefits from these net operating loss and tax credit carryforwards for which a
valuation allowance has been provided will reduce goodwill. During 1996 goodwill
was reduced by $472,000 for tax benefits from operating loss carryforwards.
The Company's valuation allowance decreased by a net $2,869,000 during
1996. This decrease was principally due to the expiration of tax credits and net
operating loss carryforwards for which a valuation allowance had previously been
provided.
The Company's valuation allowance increased by $125,000 from May 12, 1995
through December 31, 1995, decreased by $769,000 from January 1, 1995 through
May 12, 1995 and increased by $2,253,000 during 1994. The changes in the
valuation allowance were primarily due to the net generation or utilization of
federal and state operating losses during the respective periods.
The LLC is indemnified by the predecessor owner, subject to $2,000,000 to
be paid by the LLC after an agreed amount of current taxes are paid, against
taxes for periods prior to the acquisition. The LLC has recorded the $2,000,000
obligation in deferred income tax liabilities.
14. OTHER LONG-TERM OBLIGATIONS
A summary of other long-term obligations at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(THOUSANDS)
<S> <C> <C>
Estimated insurance claims payable.......................... $26,349 $28,925
Accrued pension and postretirement liability................ 17,121 15,869
Other....................................................... 4,255 3,841
------- -------
$47,725 $48,635
======= =======
</TABLE>
During the period from May 12, 1995 through December 31, 1995, the Company
awarded deferred compensation to executives of $2,040,000. The amounts are
included in other long-term obligations.
15. ESTIMATED INSURANCE CLAIMS PAYABLE
Under a captive insurance program, the Company provides insurance coverage
for workers' compensation, automobile and general liability claims arising at
hotel properties owned or managed by the Company through policies written
directly and through assumed reinsurance arrangements. Estimated insurance
claims payable represent outstanding claims and those estimated to have been
incurred but not reported based upon historical loss experience. Actual costs
may vary from estimates based on trends of losses for filed claims and claims
estimated to be incurred but not yet filed.
A summary of estimated insurance claims payable follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995
-------- ------------ ------------
(THOUSANDS)
<S> <C> <C> <C>
Estimated insurance claims payable......................... $30,961 $34,449 $37,825
Less current portion (included in accrued expenses)........ 8,100 8,100 8,900
------- ------- -------
Noncurrent portion (included in other long-term
obligations)............................................. $22,861 $26,349 $28,925
======= ======= =======
</TABLE>
F-43
<PAGE> 48
At December 31, 1996, standby letters of credit amounting to $23,000,000
had been issued to provide collateral for the estimated claims. The letters of
credit are guaranteed by the predecessor owner.
Underwriting profit with respect to the captive insurance program amounted
to $3,250,000 and $3,333,000 for the six months ended June 30, 1997 and 1996,
respectively, $7,335,000 in 1996; $4,330,000 from May 12, 1995 through December
31, 1995; $2,381,000 from January 1, 1995 through May 12, 1995; and $3,607,000
in 1994. Amounts related to premium income are included in other departmental
and operating revenues. Claims expenses are included in other operating
expenses.
16. PENSIONS
The Company sponsors two domestic defined benefit plans and several defined
contribution plans. The Company has determined that it will primarily use
defined contribution plans to provide retirement benefits to employees.
In December 1995, the Company amended its qualified noncontributory defined
benefit plan for management employees (Management Retirement Plan) to curtail
any further benefit accruals beyond December 31, 1995. All benefits earned under
the plan were vested at December 31, 1995. The plan has not been terminated. The
Company recognized a curtailment gain of $4,186,000 in accordance with SFAS No.
88, Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Terminated Benefits, in the May 12, 1995 through December
31, 1995 consolidated statement of operations.
A noncontributory, nonqualified Supplemental Executive Retirement Plan
provides benefits for certain executives. The plan is unfunded apart from
general assets of the Company.
The Company also sponsors a qualified investment and profit-sharing plan
covering domestic employees that meet certain minimum service requirements.
Participants are able to contribute a portion of their compensation to the plan.
The Company matches participant contributions up to a certain portion of
participant base pay. The Company also makes profit-sharing contributions to the
plan based on a portion of participants' base pay. The amount of expense for
investment matching and profit sharing totaled $1,300,000 in 1996; $1,157,000
from May 12, 1995 through December 31, 1995; $659,000 from January 1, 1995
through May 12, 1995; and $1,652,000 in 1994.
The Company sponsors nonqualified deferred compensation plans for
executives. The Company makes matching contributions based on participant
contributions and percentages of compensation. One of the executive deferred
compensation plans also provides a fixed rate of return to participants. The
costs of the executive deferred compensation plans are not significant.
A summary of the components of pension cost for the defined benefit plans
follows:
<TABLE>
<CAPTION>
MAY 12, JANUARY 1,
1995 1995
THROUGH THROUGH
DECEMBER 31, MAY 12,
1996 1995 1995 1994
---- ------------ ---------- ----
(THOUSANDS)
<S> <C> <C> <C> <C>
Service cost.......................... $ 520 $ 592 $ 342 $ 1,160
Interest cost......................... 2,577 1,666 1,002 2,614
Actual loss (return) on plan assets... (4,313) (3,813) (2,389) 476
Net amortization and deferral......... 1,757 2,197 1,427 (3,477)
------- ------- ------- -------
Net pension cost...................... $ 541 $ 642 $ 382 $ 773
======= ======= ======= =======
</TABLE>
F-44
<PAGE> 49
The funded status and amounts reflected in the Company's consolidated
balance sheet at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
SUPPLEMENTAL SUPPLEMENTAL
MANAGEMENT EXECUTIVE MANAGEMENT EXECUTIVE
RETIREMENT RETIREMENT RETIREMENT RETIREMENT
PLAN PLAN PLAN PLAN
---------- ------------ ---------- ------------
(THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations
Vested benefit obligation................... $23,186 $ 8,732 $22,388 $ 7,808
======= ======== ======= ========
Accumulated benefit obligation.............. $23,186 $ 8,732 $22,388 $ 7,808
======= ======== ======= ========
Plan assets at fair value..................... $36,955 $ -- $33,795 $ --
Projected benefit obligation.................. 23,186.. 13,686 22,388 10,999
------- -------- ------- --------
Projected benefit obligation less than (in
excess of) plan assets...................... 13,769 (13,686) 11,407 (10,999)
Unrecognized net loss (gain) from past
experience which differed from assumptions
and from effects of changes in
assumptions................................. (1,130) 2,843 -- 1,362
------- -------- ------- --------
Prepaid pension cost included in intangible
and other assets (accrued pension liability
included in other long-term obligations).... $12,639 $(10,843) $11,407 $ (9,637)
======= ======== ======= ========
</TABLE>
Plan assets at December 31 were invested as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Common stock................................................ 66% 65%
Long-term bonds............................................. 34 34
Real estate................................................. -- 1
</TABLE>
The actuarial present value of the projected benefit obligation of the
Supplemental Executive Retirement Plan was determined assuming an increase in
future compensation levels of 6.0% and 6.5% at December 31, 1996 and 1995,
respectively. Because benefits were frozen on December 31, 1995, no assumption
for increases in future compensation levels was required in order to determine
the present value of the projected benefit obligation of the Management
Retirement Plan. An expected long-term rate of return on plan assets of 8.5% was
used in each period. A discount rate of 7.5% was used during 1994 and was
increased to 8.5% on December 31, 1994. It was subsequently reduced to 7.5% on
December 31, 1995, and remains unchanged on December 31, 1996. The changes in
the discount rate and future compensation levels have not had a significant
impact on net pension costs.
17. OTHER POSTRETIREMENT BENEFITS
The Company sponsors two defined benefit postretirement plans that cover
certain domestic salaried employees. One plan provides life insurance, and the
other provides medical and dental benefits. The noncontributory life insurance
plan is fully funded and the related assets are invested in short-term U.S.
government securities. The postretirement health care plan is contributory, with
retiree contributions adjusted annually, and contains other cost-sharing
features such as deductibles and coinsurance. The Company funds the health plan
on a pay-as-you-go basis.
F-45
<PAGE> 50
Net periodic postretirement benefit costs are as follows:
<TABLE>
<CAPTION>
MAY 12, 1995 JANUARY 1, 1995
THROUGH THROUGH
1996 DECEMBER 31, 1995 MAY 12, 1995 1994
---- ----------------- --------------- ----
(THOUSANDS)
<S> <C> <C> <C> <C>
LIFE
Service costs of benefits earned............... $ 203 $ 100 $ 55 $ 199
Interest cost on accumulated postretirement
benefit obligation........................... 234 149 89 251
Actual return on plan assets................... (476) (338) (191) (1,096)
Net amortization and deferral.................. (6) 20 (96) 364
----- ------- ----- -------
Net periodic postretirement benefit cost
(benefit).................................... $ (45) $ (69) $(143) $ (282)
===== ======= ===== =======
MEDICAL AND DENTAL
Service costs of benefits earned............... $ 306 $ 365 $ 202 $ 629
Interest cost on accumulated postretirement
benefit obligation........................... 222 277 166 489
Net amortization and deferral.................. (327) -- 55 310
----- ------- ----- -------
Net periodic postretirement benefit cost....... $ 201 $ 642 $ 423 $ 1,428
===== ======= ===== =======
</TABLE>
The plans' funded status at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
MEDICAL MEDICAL
LIFE AND DENTAL LIFE AND DENTAL
---- ---------- ------- ----------
(THOUSANDS)
<S> <C> <C> <C> <C>
Accumulated postretirement benefit obligation......... $(3,410) $(3,336) $(3,938) $(5,941)
Plan assets........................................... 9,348 -- 9,431 --
Unrecognized net loss (gain).......................... (94) (2,942) 720 (291)
------- ------- ------- -------
Prepaid (accrued) postretirement benefit cost included
in intangible and other assets (accrued
postretirement benefit cost included in other
long-term obligations).............................. $ 5,844 $(6,278) $ 6,213 $(6,232)
======= ======= ======= =======
</TABLE>
For measurement purposes, a 7.0% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1996; the rate was assumed
to decrease gradually to 5% by 2016 and remain at that level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rates by
one percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1996 by $709,000 and the aggregate of the
service and interest cost components of net periodic postretirement benefit cost
for the year then ended by $129,000.
An expected long-term rate of return on plan assets of 5% was used in 1996.
An expected long-term rate of return on plan assets of 5.7% was used in each of
the other periods. A discount rate of 7.5% was used during 1994 and was
increased to 8.5% on December 31, 1994. It was subsequently reduced to 7.5% on
December 31, 1995, and remains unchanged on December 31, 1996. The changes in
the discount rate have not had a significant impact on postretirement benefit
costs.
F-46
<PAGE> 51
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the Company's financial instruments approximate fair
value as determined by the Company, using appropriate market information and
valuation methodologies, as noted below. Considerable judgment is required to
develop the estimates of fair value. Thus, the estimates provided below as of
December 31 are not necessarily indicative of the amounts that could be realized
in a current market exchange.
<TABLE>
<CAPTION>
CARRYING AMOUNT
AND FAIR VALUE
--------------------
1996 1995
---- ----
(THOUSANDS)
<S> <C> <C>
Financial assets:
Current
Cash and cash equivalents.............................. $ 10,642 $ 22,677
Guest and trade accounts receivable.................... 32,621 23,799
Accounts due from affiliates........................... 2,098 638
Refundable taxes....................................... 2,852 643
Other current receivables.............................. 13,582 12,992
Noncurrent
Noncurrent receivables excluding current portion....... 12,139 1,734
Noncurrent receivables from affiliates................. 12,771 3,343
Restricted cash included in intangible and other
assets................................................ 4,264 350
Financial liabilities:
Current
Note payable........................................... 2,506 2,824
Trade accounts payable................................. 12,754 8,519
Accrued expenses....................................... 48,255 42,025
Payable to affiliates.................................. 3,038 2,948
Income taxes........................................... 1,204 1,198
Other current liabilities.............................. 1,053 842
Noncurrent
Long-term debt including current portion............... 433,995 440,676
Miscellaneous items included in other long-term
obligations........................................... 2,362 2,086
</TABLE>
Current financial assets -- The carrying amounts of these items approximate
fair value because of the short maturity of these instruments.
Noncurrent financial assets -- The fair values have been estimated using
the expected future cash flows, discounted at market interest rates.
Current financial liabilities -- The carrying amounts of these items
approximate fair value because of the short maturity of these instruments.
Long-term debt -- The carrying amounts approximate fair value because
interest rates on these instruments change with market interest rates.
Other long-term obligations -- The fair values have been estimated using
the expected future cash flows, discounted at market interest rates.
F-47
<PAGE> 52
19. COMMITMENTS AND CONTINGENCIES
As of June 30, 1997, the Company had capital commitments as follows:
<TABLE>
<S> <C>
Capital expenditures........................................ $14,454,000
Loans and investments for new hotel management and franchise
agreements................................................ 15,224,000
Other....................................................... 2,500,000
-----------
Total commitments...................................... $32,178,000
===========
</TABLE>
Approximately $12,725,000 of capital expenditures will be funded from
mortgage loans and capital leases.
The Company has also guaranteed its proportionate share of a joint venture
indebtedness totaling $2,800,000 and has provided operating cash flow guarantees
to a partnership and a managed hotel totaling $7,500,000.
In January 1996 the Company, its Chief Executive Officer and a consultant
of the Company were named defendants in a lawsuit filed by Radisson Hotels
International, Inc. (Radisson). Radisson has asserted claims for patent
infringement, trade secret misappropriation, unfair competition and breach of
contract. The Company has filed motions for summary judgment seeking to
invalidate the patent and dismiss the other claims. The Company has indemnified
its consultant for Radisson's patent infringement claim. The plaintiff claims
substantial damages, but the Company believes that the alleged damages are
unsupported, the patent is invalid, and the case is without merit. The Company
intends to vigorously defend itself in these matters.
The Company is also a defendant in various lawsuits which are incidental to
its business. Management believes that the ultimate resolution of these matters
will not have a material effect on the Company's financial position or results
of operations.
The Company operates in Asia subject to an exclusive license granted by the
predecessor owner to manage, franchise and invest in hotels in Asia under the
Westin Hotels & Resorts name. The license has an initial term of ten years
commencing from May 12, 1995, with additional renewal provisions of up to 30
years at the Company's option provided certain conditions are met. Commencing in
May 1999, the Company has an option to acquire the rights, title and interest in
this license agreement for $90,000,000 plus certain adjustments. The purchase
option requires a cash payment of $60,000,000 plus a $30,000,000 20-year
promissory note. The exercise of this purchase option can be accelerated by the
predecessor owner if the Company acquires a controlling interest in a hotel
management company in the Asia territory.
20. MANAGEMENT AND SERVICE AGREEMENTS
The Company provides management and related services to owned and nonowned
hotels under agreements with terms generally ranging from 2 to 30 years. Fees
paid to the Company are based primarily upon percentages of the hotels' gross
operating revenues or gross operating profits as defined in the agreements.
F-48
<PAGE> 53
The Company also maintains a corporate sales and marketing program. The
hotels reimburse the Company pro rata for marketing services, including all
costs in connection with hotel reservations. A financial summary of marketing
activities follows:
<TABLE>
<CAPTION>
MAY 12, 1995 JANUARY 1, 1995
THROUGH THROUGH
1996 DECEMBER 31, 1995 MAY 12, 1995 1994
---- ----------------- --------------- ----
(THOUSANDS)
<S> <C> <C> <C> <C>
Total expenses................. $35,550 $20,700 $11,572 $30,800
Hotel reimbursements........... 27,144 16,710 9,588 24,685
Hotel reimbursements from
affiliates................... 3,741 2,137 972 3,365
------- ------- ------- -------
Net cost (included in general,
administrative and marketing
expenses).................... $ 4,665 $ 1,853 $ 1,012 $ 2,750
======= ======= ======= =======
</TABLE>
The net cost reflects the Company's pro rata share of sales, marketing and
hotel reservation costs.
Additionally, under the agreements, the Company generally provides hotels
with the services of certain full-time employees. The Company is reimbursed for
these employees' salaries and related benefits.
Management and representation fees to partnerships carried on the equity
basis of accounting are at terms that are comparable to fees under similar
agreements with unrelated third parties.
21. OPERATING LEASE OBLIGATIONS
Operating lease agreements cover land, hotel buildings, office space,
furniture and equipment at several locations. Lease terms generally provide that
the Company is to pay minimum rentals, taxes, insurance, maintenance and
utilities associated with the leased properties, as well as rentals based upon
percentages of operating profits or revenues. Rent expense pursuant to
percentages of operating profits totaled $3,215,000 and $1,618,000 for the six
months ended June 30, 1997 and 1996, respectively. Additionally, percentage rent
expense totaled $3,633,000 for the year ended 1996 and was not material for 1995
or 1994.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
(THOUSANDS)
<S> <C>
Year ending December 31:
1997................................................... $ 7,604
1998................................................... 7,195
1999................................................... 6,499
2000................................................... 6,328
2001................................................... 5,746
2002 and thereafter.................................... 32,603
-------
Total minimum lease payments................................ $65,975
=======
</TABLE>
A portion of the minimum lease payments are recovered as part of the
marketing services reimbursement.
22. EQUITY-BASED COMPENSATION
During the period from May 12, 1995 to December 31, 1995, the LLC awarded
equity-based compensation to certain key employees. The equity-based
compensation arrangements consist of options granted to acquire up to 5% of the
outstanding equity of the LLC or its subsidiaries. The options vest over a
five-year period and may be exercised upon the earlier of five years or a change
in control in or liquidation of the LLC. The option strike prices increase from
initial strike prices based on the fair value of the LLC at the date of
employment, at annual rates ranging from 15% to 25%, with a weighted average
rate of increase of 18%. Additional options were granted during 1996
representing approximately .25% of the total outstanding
F-49
<PAGE> 54
equity of the LLC or its subsidiaries. These options may be exercised based on
the estimated fair value of the LLC or its subsidiaries at the grant date,
increasing annually by 10% with similar vesting provisions as the options
granted in 1995. All options granted were outstanding at December 31, 1996.
Twenty percent of the options granted prior to December 31, 1995 were vested at
December 31, 1996. No options were exercisable and no options were exercised,
forfeited or expired during the period from May 12, 1995 to December 31, 1996.
The LLC estimates the fair value of its stock options following the
provisions of SFAS 123, Accounting for Stock-Based Compensation. Under the
provisions of SFAS 123, the fair value of the LLC's increasing strike price
options is calculated based on the difference between a risk-free interest rate
that corresponds to the option period and the rate of increase of the option
strike price. Since the rates of increase exceed the risk-free interest rates of
5.4% at December 31, 1995 and 6.2% at December 31, 1996, the fair value of the
options at the time of the award was zero. Accordingly, no compensation expense
has been reflected in the accompanying financial statements. At December 31,
1996, the Company believes the market value of the LLC's equity subject to
option exceeds the corresponding option exercise price.
23. SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes noncash financing and investing activities
and other cash flow information:
<TABLE>
<CAPTION>
SIX MONTHS MAY 12, 1995 JANUARY 1, 1995
ENDED THROUGH THROUGH
JUNE 30, 1997 1996 DECEMBER 31, 1995 MAY 12, 1995 1994
------------- ---- ----------------- --------------- ----
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Noncash investing and financing
activities:
Members' equity issued to
executives........................ $ -- $ -- $ 4,640 $ -- $ --
Less outstanding notes receivable
from executives for members'
equity............................ -- -- (4,640) -- --
======== ======= ======== ====== =======
Total noncash members equity
issued............................ $ -- $ -- $ -- $ -- $ --
======== ======= ======== ====== =======
Capital lease obligations incurred
or assumed in connection with
hotel acquisitions................ $ 1,698 $ 4,888 $ 474 $ 32 $ 387
======== ======= ======== ====== =======
Long-term debt issued in connection
with acquisitions, net of
unexpended proceeds............... $210,800 $ -- $434,615 $ -- $ --
======== ======= ======== ====== =======
Senior Secured Notes paid with
proceeds of Senior Credit Facility
issued............................ $324,500 $ -- $ -- $ -- $ --
======== ======= ======== ====== =======
Senior Credit Facility issued....... $331,000 $ -- $ -- $ -- $ --
======== ======= ======== ====== =======
Deferred loan costs................. $ 6,500 $ -- $ 6,740 $ -- $ --
======== ======= ======== ====== =======
Cash paid for:
Interest............................ $ 23,804 $41,981 $ 23,401 $8,574 $14,100
======== ======= ======== ====== =======
Taxes............................... $ 13,554 $ 6,432 $ 2,499 $1,670 $ 3,375
======== ======= ======== ====== =======
</TABLE>
Noncash financing and investing activities during the six months ended June
30, 1996 were not material.
24. SUBSEQUENT EVENTS (UNAUDITED)
In August 1997, the Company terminated its postretirement life insurance
plan. The insurance obligations were settled through the purchase of
nonparticipating single premium insurance contracts, and the remaining plan
assets totaling approximately $6,500,000 were transferred to a voluntary
employee benefit association (VEBA) to fund future medical expenses.
Additionally, the Company amended its postretirement medical plan to exclude a
substantial portion of its employees. A limited number of qualified employees
and
F-50
<PAGE> 55
retirees will continue to receive this benefit. The Company estimates that the
impact of these benefit plan changes will result in a pretax gain of
approximately $2,400,000.
Additionally, the Company has approved the termination of the management
retirement plan. The Company plans to settle the accumulated obligations through
nonparticipating insurance contracts. The Company anticipates that this
settlement, which is subject to regulatory approval, will result in a pre-tax
loss of approximately $4,000,000. This transaction is expected to be completed
in 1998.
Subsequent to June 30, 1997, the Company entered into an interest-rate
protection agreement for a notional amount of $112,500,000 related to the Senior
Credit Facility. This agreement, which terminates in June 2000, provides for
interest rate protection in the event that floating interest rates exceed
certain levels.
Subsequent to June 30, 1997 and pursuant to a private placement, the
Company offered shares in certain affiliates of Westin Hotel Company to certain
officers of the Company. The Company has received approximately $2,000,000 of
refundable deposits for these shares, but the subscriptions for such shares have
yet to be accepted by such affiliates of Westin Hotel Company. The offering may
be cancelled or postponed by the Company at any time before completion; in the
event the offering is cancelled or postponed, the purchase price deposits that
have been received by such affiliates of Westin Hotel Company in respect of such
offering would be refunded.
In September 1997, the boards of managers and directors of the members of
the LLC entered into a transaction agreement to sell the stock of Westin Hotel
Company and its affiliates that are currently owned by the LLC. This sale, which
is scheduled to be completed in January 1998, includes substantially all assets,
liabilities and operations that are presently owned by the LLC.
F-51
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 14, 1997 on the consolidated financial statements of W&S
Hotel LLC and the combined financial statements of the predecessor business
included in this Form 8-K/A, into Starwood Lodging Trust and Starwood Lodging
Corporation previously filed registration statements on Forms S-3 (Files No.
333-13411 and 333-22219) and on Form S-8 (File No. 333-02721).
ARTHUR ANDERSEN LLP
Seattle, Washington
December 16, 1997
