<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1998.
REGISTRATION NOS. 333-49953 AND 333-49953-01
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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<TABLE>
<S> <C>
STARWOOD HOTELS & RESORTS STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND MARYLAND
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (STATE OR OTHER JURISDICTION OF INCORPORATION OR
ORGANIZATION) ORGANIZATION)
52-0901263 52-1193298
(I.R.S. EMPLOYER IDENTIFICATION NO.) (I.R.S. EMPLOYER IDENTIFICATION NO.)
777 WESTCHESTER AVENUE 777 WESTCHESTER AVENUE
WHITE PLAINS, NEW YORK 10604 WHITE PLAINS, NEW YORK 10604
(914) 640-8100 (914) 640-8100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE
OFFICES) OFFICES)
BARRY S. STERNLICHT RONALD C. BROWN
CHAIRMAN AND CHIEF EXECUTIVE VICE PRESIDENT AND
EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
STARWOOD HOTELS & RESORTS STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
777 WESTCHESTER AVENUE 2231 EAST CAMELBACK ROAD, SUITE 400
WHITE PLAINS, NEW YORK 10604 PHOENIX, ARIZONA 85016
(914) 640-8100 (602) 852-3900
(NAME, AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE (NAME, AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE) INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
COPIES TO:
LAURA A. LOFTIN, ESQ.
KENNETH H. LEVIN, ESQ.
SIDLEY & AUSTIN
555 WEST FIFTH STREET
LOS ANGELES, CALIFORNIA 90013
(213) 896-6000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement is declared effective.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than Securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE AGGREGATE PRICE PER MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PAIRED COMMON SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
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Shares of beneficial interest,
$0.01 par value, of Starwood
Hotels & Resorts, paired with
shares of common stock, $0.01 par
value, of Starwood Hotels &
Resorts Worldwide, Inc. ("Paired 8,300,000 Paired
Common Shares") Common Shares $29.97 $248,751,000 $73,382(1)
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</TABLE>
(1) Calculated pursuant to Rule 457(c) under the Securities Act of 1933, as
amended (the "Securities Act") and was based on the average of the high and
low prices for the Paired Common Shares on the New York Stock Exchange on
September 16, 1998. Includes filing fee of $72,056 previously paid and
carried forward pursuant to Rule 429 under the Securities Act.
----------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 23, 1998
PROSPECTUS
8,300,000 PAIRED COMMON SHARES
STARWOOD HOTELS & RESORTS STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
Starwood Hotels & Resorts (the "Trust") and Starwood Hotels & Resorts
Worldwide, Inc. (the "Corporation") are, together with their respective
subsidiaries, the largest real estate investment trust in the United States and
one of the world's leading hotel operating companies, respectively. The shares
of beneficial interest, par value $.01 per share, of the Trust (the "Trust
Shares") and the shares of common stock, par value $.01 per share, of the
Corporation (the "Corporation Shares") are "paired" and trade as units
consisting of one Trust Share and one Corporation Share (a "Paired Common
Share"). The Trust elected to be taxed as a real estate investment trust for
federal income tax purposes (a "REIT") commencing with its tax year ended
December 31, 1995 and intends to continue to so qualify. To ensure that the
Trust continues to so qualify, ownership by any person is limited to 8.0% of the
Paired Common Shares, subject to certain exceptions.
This Prospectus relates to the offer and sale from time to time of up to (i)
an aggregate of 4,641,000 Paired Common Shares (the "Original Shares") that were
originally issued by the Trust and the Corporation (together with their
respective subsidiaries, the "Company" or "Starwood Hotels") to Merrill Lynch
International ("MLI") and Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S" and together with MLI, the "Merrill Lynch Parties"), NMS Services,
Inc. ("NMSSI") and Lehman Brothers Inc. ("LBI" and LBI together with the Merrill
Lynch Parties and NMSSI, the "Purchasers") on February 24, 1998 at a cash price
of $52.798 per share (which price reflected a two percent discount from the last
reported sale price of the Paired Common Shares on the date of purchase); and
(ii) up to an aggregate of 3,659,000 additional Paired Common Shares (the
"Additional Shares" and together with the Original Shares, the "Shares") that
may be issued by the Trust and the Corporation to the Merrill Lynch Parties,
NMSSI and Lehman Brothers Finance S.A. ("LBF") through its agent LBI, pursuant
to three Agreements each dated February 23, 1998 (the "Price Adjustment
Agreements"). Each Price Adjustment Agreement provides that the Purchaser or its
affiliate party thereto will sell, as directed by the Trust and the Corporation
and on or before February 24, 1999, in one or more transactions and using one or
more of the methods specified in such Price Adjustment Agreement, a sufficient
number of Paired Common Shares to achieve net sales proceeds equal to the
aggregate market value of the Original Shares purchased by that Purchaser on the
date of purchase, plus a forward accretion component of LIBOR plus 1.75% and,
minus an adjustment for dividends paid on the purchased Paired Common Shares, in
each case during the term of such Price Adjustment Agreement. LBI has
transferred its Original Shares to its wholly owned subsidiary, Lehman Brothers
Special Financing Inc. ("LBSF" and LBSF together with LBI and LBF, the "Lehman
Parties"). The Merrill Lynch Parties, NMSSI, the Lehman Parties and such
affiliates are referred to collectively as the "Underwriters."
The precise numbers of Paired Common Shares that will be required to be sold
pursuant to the Price Adjustment Agreements will depend primarily on the market
prices of the Paired Common Shares at the time of settlement. If the number of
the Paired Common Shares so required to be sold is greater than the number of
Original Shares as a result of a decrease in the market prices of the Paired
Common Shares, the Trust and the Corporation will be required to issue to the
Underwriters, at a cash price of $.01 per share, additional Paired Common Shares
equal in number to the difference. If the number of Paired Common Shares so
required to be sold is less than the number of Original Shares as a result of an
increase in the market prices of the Paired Common Shares, the Underwriters will
be required to deliver to the Trust and the Corporation that number of Paired
Common Shares equal to the difference. In addition, each Underwriter has the
right to cause the sale of all or a portion of the purchased Paired Common
Shares in the event the market prices of the Paired Common Shares decline below
certain levels.
The sale or distribution to investors of all or any portion of the Paired
Common Shares offered hereby may be effected from time to time by the
Underwriters on behalf of the Company directly, indirectly to or through brokers
or dealers or in a distribution by one or more additional underwriters on a firm
commitment or best efforts basis, on the New York Stock Exchange (the "NYSE"),
in the over-the-counter market, on any national securities exchange on which the
Paired Common Shares are listed or traded, in privately negotiated transactions,
through sales involving a distribution reinvestment plan of the Company or
otherwise, at fixed prices, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices. It is
anticipated that the Shares will be sold principally to or through LBI, MLPF&S
and NationsBanc Montgomery Securities LLC ("NMS LLC"). Except as described
above, the Company will not receive any of the proceeds from the sale of Paired
Common Shares by the Underwriters.
The Underwriters and any broker or dealer to whom any of the Shares are sold
may be deemed to be underwriters within the meaning of the Securities Act with
respect to the Shares offered hereby, and any profit realized by any of them,
together with the returns to the Underwriters and the purchase price discounts
described above may be deemed to be underwriting commissions. In connection with
a sale of Shares, such compensation together with the following information will
be set forth in one or more supplements to this Prospectus (each a "Prospectus
Supplement"): the number of Paired Common Shares to be sold, the purchase price,
the public offering price, if applicable, the names of each additional
underwriter, agent or broker-dealer, if any, participating in such offering and
any applicable purchase price, fee, commission or discount arrangement between
or among them. See "Plan of Distribution." No Paired Common Shares may be sold
without delivery of a Prospectus Supplement describing the method and terms of
the offering of such securities.
The Paired Common Shares are listed on the NYSE under the symbol "HOT." On
September 22, 1998, the last reported sale price of the Paired Common Shares on
the NYSE was $32.00 per Paired Common Share.
SEE "RISK FACTORS" ON PAGE 7 FOR A DESCRIPTION OF CERTAIN MATERIAL RISKS
AND UNCERTAINTIES WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE PAIRED COMMON SHARES OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION, THE NEVADA GAMING
COMMISSION, THE NEVADA STATE GAMING CONTROL BOARD, THE NEW JERSEY CASINO CONTROL
COMMISSION OR THE MISSISSIPPI GAMING COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION, THE NEVADA GAMING
COMMISSION, THE NEVADA STATE GAMING CONTROL BOARD, THE NEW JERSEY CASINO CONTROL
COMMISSION OR THE MISSISSIPPI GAMING COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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The date of this Prospectus is , 1998.
<PAGE> 3
AVAILABLE INFORMATION
The Trust and the Corporation (together with their respective subsidiaries,
the "Company" or "Starwood Hotels") are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith file reports, proxy or information statements
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy or information statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Regional Offices of the Commission at Seven World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials can also be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. The Commission maintains a
site on the World Wide Web at http://www.sec.gov that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission. Such reports, proxy or information
statements and other information concerning the Trust and the Corporation can
also be inspected and copied at the offices of the New York Stock Exchange,
Public Reference Section, 20 Broad Street, New York, New York 10005.
The Trust and the Corporation have filed with the Commission a registration
statement on Form S-3 under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Paired Common Shares offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain portions of which have been omitted as permitted by the rules
and regulations of the Commission. Statements contained in this Prospectus as to
the contents of any contract or other document filed as an exhibit to the
Registration Statement are not necessarily complete, and in each instance,
reference is made to the copy of such contract or document so filed, each such
statement being qualified in all respects by such reference. For further
information with respect to the Trust, the Corporation and the securities
offered hereby, reference is made to the Registration Statement and exhibits
thereto.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by the Trust and the Corporation
(Commission File Nos. 1-6828 and 1-7959) with the Commission under the Exchange
Act are incorporated in this Prospectus by reference and are made a part hereof:
1. The Joint Annual Report on Form 10-K for the fiscal year ended December 31,
1997, (the "Starwood Hotels Form 10-K").
2. The Joint Quarterly Report on Form 10-Q for the quarters ended March 31, 1998
and June 30, 1998.
3. The Joint Current Reports on Form 8-K dated January 2, 1988, February 3,
1998, February 23, 1998 February 24, 1998, April 24, 1998 and August 26,
1998.
4. The description of the Paired Common Shares contained in the Registration
Statement on Form 8-A filed on October 3, 1986.
Each document filed by the Trust or the Corporation (i) subsequent to the
date of the initial Registration Statement of which this Prospectus is a part
and prior to the effectiveness of such Registration Statement and (ii)
subsequent to the date of this Prospectus, in each case pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act and prior to termination of the
offering made hereby, shall be deemed to be incorporated by reference in this
Prospectus and shall be part hereof from the date of filing of such document.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained in this
Prospectus (in the case of a statement in a previously-filed document
incorporated or deemed to be incorporated by reference herein), or in any other
subsequently filed document that is also incorporated or deemed to be
incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
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Copies of all documents incorporated herein by reference, other than
exhibits to such documents not specifically incorporated by reference therein,
will be provided without charge to each person to whom this Prospectus is
delivered, upon oral or written request to Starwood Hotels & Resorts Worldwide,
Inc., 2231 E. Camelback Road, Suite 400, Phoenix, Arizona 85016; Attention: Alan
M. Schnaid, telephone number 602-852-3900.
FORWARD-LOOKING STATEMENTS
This Prospectus contains, or incorporates by reference, certain statements
that may be deemed "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. All statements
relating to the Company's objectives, strategies, plans, intentions and
expectations, and all statements (other than statements of historical facts)
that address actions, events or circumstances that the Company or its management
expects, believes or intends will occur in the future, are forward-looking
statements. All such forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially from historical results or
those anticipated in the forward-looking statements, including, without
limitation, risks and uncertainties associated with the following: the Company's
proposed restructuring in response to certain recently adopted legislation
relating to the Trust's ability to continue to qualify as a paired-share REIT
and obtain the related tax treatment; the Company's integration of the assets
and operations of ITT Corporation ("ITT") and Westin Hotels & Resorts Worldwide,
Inc. ("Westin Worldwide") and its affiliates (collectively, "Westin");
completion of future acquisitions; the availability of capital for acquisitions
and for renovations; the ability to maintain existing management, franchise or
representation agreements and to obtain new agreements on favorable terms;
competition within the lodging industry and the gaming industry; the cyclicality
of the real estate business, the hotel business and the gaming business; general
real estate and economic conditions; and the other risks and uncertainties set
forth in this Prospectus under the caption "Risk Factors" and in the annual,
quarterly and current reports and proxy statements of the Trust and the
Corporation incorporated by reference herein. The Company undertakes no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
THE COMPANY
The Corporation and the Trust are, together with their subsidiaries, one of
the world's leading hotel operating companies and one of the largest real estate
investment trusts in the United States, respectively. The Corporation conducts
its hotel business both directly and through its subsidiaries ITT Sheraton
Corporation ("Sheraton") and Ciga, S.P.A. ("Ciga"), and engages in the gaming
business principally through its subsidiary Caesars World, Inc. ("Caesars").
Through the Sheraton, Westin, The Luxury Collection, St. Regis, Ciga, Four
Points Hotels and Caesars brand names, Starwood Hotels is represented in most
major markets of the world. As of June 30, 1998, Starwood Hotels owned equity
interests in approximately 215 hotel and gaming properties, held mortgage
interests in eight hotel properties, operated approximately 175 hotel properties
on behalf of third-party owners and earned franchise fees by licensing one of
its brand names to approximately 260 hotel properties.
Prior to January 1, 1998, the Trust and the Corporation conducted
substantially all of their respective businesses and operations through SLT
Realty Partnership (the "Realty Partnership") and SLC Operating Partnership (the
"Operating Partnership" and together with the Realty Partnership, the
"Partnerships"). The Trust is the sole general partner of the Realty
Partnership; the Corporation is the sole general partner of the Operating
Partnership. As of the date of this Prospectus, the Trust owns an approximately
94.1% general partnership interest in the Realty Partnership and the Corporation
owns an approximately 84.1% general partnership interest in the Operating
Partnership. The remaining interests in the Partnerships are owned predominantly
by Starwood Capital Group, L.L.C. and certain of its affiliates. As of December
31, 1997, the Realty Partnership held fee interests, ground leaseholds and
mortgage loan interests in 120 hotel properties containing over 32,800 rooms
located in 34 states throughout the United States and the District of Columbia,
and in Mexico and Scotland. The Operating Partnership leased from the Realty
Partnership all but four of the
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96 hotel properties owned in fee or held pursuant to long-term leases by the
Realty Partnership. In addition, the Operating Partnership owned, as of December
31, 1997, the Milwaukee Sheraton, the Midland Hotel in Chicago, Illinois, the
three Westin Regina Resorts in Cabo San Lucas, Cancun and Puerto Vallarta,
Mexico and the Turnberry Hotel and Golf Resort in Ayreshire, Scotland, all
subject to mortgages to the Trust, and managed nine hotels for third-party
owners.
At December 31, 1997, the Trust owned (directly or through its
subsidiaries) fee or ground leasehold interests in 102 hotel properties and
mortgage interests in another eight hotel properties, and 98 of these hotels
were leased to the Corporation or one of its subsidiaries. Of these hotels, 90
hotels were leased to the Corporation or one of its subsidiaries and 12 hotels
were managed by third-party operators, including four hotels leased to third
parties. In addition, the Corporation managed nine hotels for third-party
owners. In furtherance of the Company's strategy to enhance, expand and
diversify its hotel portfolio and to develop or acquire global brands, on
January 2, 1998, the Company acquired Westin and on February 23, 1998, the
Company acquired ITT.
The Trust was organized in 1969 as a Maryland real estate investment trust.
The Trust's executive offices are located at 777 Westchester Avenue, White
Plains, New York 10604; telephone (914) 640-8100. The Corporation is a Maryland
corporation formed in 1980. The Corporation's executive offices are located at
777 Westchester Avenue, White Plains, New York 10604; telephone (914) 640-8100.
Proposed Restructuring
On August 26, 1998, the Trust and the Corporation announced that the Board
of Trustees of the Trust and the Board of Directors of the Corporation (the
"Boards") had approved a proposal to restructure the Trust and the Corporation
(the "Restructuring").
In the Restructuring, a newly organized, wholly owned subsidiary of the
Corporation will merge into the Trust, with the result that the Trust will
become a subsidiary of the Corporation and each outstanding common share of
beneficial interest in the Trust (a "Trust Share") will be converted into one
share of newly created, non-voting Class B Share of beneficial interest in the
Trust. Holders of Class B Shares will be entitled to receive a non-cumulative
annual dividend of $.60 per share (which amount will increase by 15% per year,
subject to certain conditions) to the extent the dividend is declared by the
Board of Trustees of the Trust. Each Class B Share will be attached to and trade
as a unit with the share of the Corporation's common stock that had been
"paired" with the Trust Share converted into that Class B Share.
Upon consummation of the Restructuring, Barry S. Sternlicht, currently
Chairman and Chief Executive Officer of the Trust, will become Chairman and
Chief Executive Officer of the Corporation, and Richard D. Nanula, currently the
Corporation's President and Chief Executive Officer, will become President and
Chief Operating Officer of the Corporation.
Consummation of the Restructuring is expected to occur in January 1999 and
is subject to, among other conditions, approval of the transaction by (i) the
holders of a majority of the Trust's outstanding Trust Shares and two classes of
outstanding exchangeable preferred shares (voting as a single class) and (ii)
the holders of a majority of the Corporation's outstanding Common Stock, and the
receipt of certain regulatory and third-party consents and approvals.
In connection with the Restructuring, Starwood Hotels will incur a
non-recurring special charge of approximately $1 billion, substantially all of
which will represent a deferred tax liability that will result from the
combination as required by the Statement of Financial Accounting Standards No.
109.
Acquisition of ITT
On February 23, 1998, pursuant to an Amended and Restated Agreement and
Plan of Merger dated as of November 12, 1997, among the Trust, the Corporation,
Chess Acquisition Corp., a newly formed, wholly owned subsidiary of the Company
("Chess"), and ITT, Chess was merged with and into ITT (the "ITT Merger"). As a
result of the ITT Merger, ITT became a wholly owned subsidiary of the
Corporation, and all then outstanding shares of the common stock, no par value,
of ITT ("ITT Common Stock"), together with
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the associated preferred share purchase rights (other than shares held by ITT or
the Company), were converted into the right to receive an aggregate of
126,716,121 Paired Common Shares and $2.992 billion in cash. In addition, each
holder of shares of ITT Common Stock became entitled to receive, for each share
of ITT Common Stock converted in the ITT Merger, additional cash consideration
in the amount of $0.37 as interest for the period from January 31, 1998 through
February 23, 1998.
In connection with the ITT Merger, the Company borrowed an aggregate of
approximately $5.6 billion from a group of financial institutions arranged by
Bankers Trust Company, Chase Securities Inc. and Lehman Brothers Inc., which
borrowings were used to fund the cash portion of the acquisition price of ITT
and to refinance a portion of the Company's and ITT's existing indebtedness.
ITT conducts its hotel and gaming business through its subsidiaries
Sheraton, Ciga and Caesars. ITT's revenues from hotel operations are derived
worldwide from hotels that are owned, leased or managed by Sheraton under the
brand names "Sheraton" and "The Luxury Collection" and ITT's 70.3% ownership
interest in Ciga, which owns a group of luxury hotels in Europe. ITT also earns
franchise fees by licensing the "Sheraton" and "Four Points Hotels" brands to
owners of independent hotels. ITT's gaming operations are marketed under either
the "Caesars" or "Sheraton" brand name and service mark and as of December 31,
1997 were conducted at the Desert Inn Resort & Casino (which the Company is
currently seeking to sell) and Caesars Palace in Las Vegas, Nevada, Caesars
Atlantic City in Atlantic City, New Jersey, Caesars Tahoe in Stateline, Nevada,
The Sheraton Casino & Hotel in Tunica County, Mississippi; and various other
casino/ hotel operations outside the United States.
In June 1998, the Company sold 13,050,000 shares of common stock of ITT
Educational Services, Inc., the subsidiary that conducted ITT's post-secondary
technical education business, in a public offering at a price of $24.25 per
share. The Company's proceeds from the sale of approximately $315 million were
used to reduce outstanding indebtedness. In February 1998, ITT disposed of its
telephone directories publishing business (conducted through ITT's subsidiary
ITT World Directories, Inc.) to VNU, an international publishing and information
company based in The Netherlands, for a total gross consideration valued at $2.1
billion. Proceeds from the disposition of ITT World Directories were used in
part to acquire certain outstanding indebtedness of Starwood Hotels.
Acquisition of Westin
On January 2, 1998, pursuant to a Transaction Agreement dated as of
September 8, 1997 (the "Westin Transaction Agreement") among the Trust, the
Realty Partnership, the Corporation, the Operating Partnership, 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 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 W&S Hotel L.L.C., the Company acquired Westin.
As of December 31, 1997, Westin owned, managed, franchised or represented
97 luxury or upscale hotel and resort properties worldwide, excluding 15 Westin
hotels owned by the Company. Westin's primary business strategy is to provide,
for its own hotels and to the other owners of Westin's hotel and resort
properties, focused, responsive, high quality marketing, reservations,
management and, as appropriate, franchise services that are designed to increase
the operating revenues and profitability of the properties and to increase hotel
and resort customer satisfaction.
As of December 31, 1997, the Westin portfolio (excluding 15 Westin hotels
owned by the Company) consisted of 12 owned hotels with approximately 5,900
rooms, five joint ventures with approximately 3,200 rooms, 37 managed hotels
with approximately 20,500 rooms, 28 franchised hotels with approximately 8,400
rooms and 15 represented hotels with approximately 5,300 rooms. Westin's hotel
and resort properties are located throughout the United States and in Argentina,
Brazil, Canada, China, England, France, Germany, Guatemala, Indonesia, Japan,
Korea, Malaysia, Mexico, the Netherlands, Panama, the Philippines, Portugal,
Singapore, Switzerland and Thailand.
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Pursuant to the terms of the Westin Transaction Agreement:
(i) Westin Worldwide merged into the Trust (the "Westin Merger"). In
connection with the Westin Merger, all of the issued and outstanding shares
of capital stock of Westin Worldwide (other than shares held by Westin and
its subsidiaries or by the Company) were converted into an aggregate of
6,285,783 Class A Exchangeable Preferred Shares, par value $.01 per share
(the "Class A EPS"), of the Trust, 5,294,783 Class B Exchangeable Preferred
Shares, liquidation value $38.50 per share (the "Class B EPS" and together
with the Class A EPS, the "EPS"), of the Trust and $177.9 million in cash;
(ii) The stockholders of Lauderdale, Seattle and Denver contributed
all of the outstanding shares of such companies to the Realty Partnership.
In exchange for such contribution and after giving effect to the deemed
exchange of certain units, the Realty Partnership issued to such
stockholders an aggregate of 470,309 limited partnership units of the
Realty Partnership and the Trust issued to such stockholders an aggregate
of 127,534 shares of Class B EPS. In addition, in connection with the
foregoing share contribution, the Realty Partnership assumed, repaid or
refinanced the indebtedness of Lauderdale, Seattle and Denver and assumed
$84.2 million of indebtedness incurred by the Members prior to such
contributions; and
(iii) The stockholders of Atlanta and St. John contributed all of the
outstanding shares of such companies to the Operating Partnership. In
exchange for such contribution and after giving effect to the deemed
exchange of certain units, the Operating Partnership issued to such
stockholders an aggregate of 312,741 limited partnership units of the
Operating Partnership and the Trust issued to such stockholders an
aggregate of 80,415 shares of Class B EPS. In addition, in connection with
the foregoing share contributions, the Operating Partnership assumed,
repaid or refinanced indebtedness of Atlanta and St. John and assumed $3.4
million of indebtedness incurred by the Members prior to such
contributions.
The aggregate principal amount of debt assumed by the Company pursuant to
the Westin Transaction Agreement was approximately $1.0 billion.
The shares of Class A EPS, the shares of Class B EPS and the limited
partnership interests issued in connection with the Westin Merger and the
contribution of Seattle, Lauderdale, Denver, St. John and Atlanta to the
Partnerships are directly or indirectly exchangeable on a one-to-one basis
(subject to certain adjustments) for Paired Common Shares (subject to the right
of the Company to elect to pay cash in lieu of issuing such shares). The limited
partnership interests also are exchangeable on a one-to-one basis for shares of
Class B EPS. The shares of Class B EPS have a liquidation preference of $38.50
per share and provide the holders with the right, from and after the fifth
anniversary of the closing date of the Westin Merger, to require the Trust to
redeem such shares at a price of $38.50 per share.
Share Repurchase Program
Since April 1998, Starwood Hotels has maintained share repurchase programs
pursuant to which the Company may repurchase from time to time Paired Common
Shares having an aggregate market value at the time of purchase of up to
$1,135,000,000. Such repurchases may be made on the NYSE or otherwise from time
to time at prices deemed advantageous by the Executive Committees of the Trust's
Board of Trustees and the Corporation's Board of Directors, and also may include
the repurchase of shares issued in forward equity transactions, including
outstanding Shares, and transactions in derivatives (such as the sale of put
options) of Paired Common Shares. As of September 22, 1998, approximately 8.2
million Paired Common Shares have been repurchased pursuant to this program at
an average price per Paired Common Share of $38.17.
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RISK FACTORS
Prospective purchasers of the Paired Common Shares offered hereby should
consider carefully the following factors before acquiring the securities offered
hereby:
RECENT LEGISLATION
The Internal Revenue Service Restructuring and Reform Act of 1998 ("H.R.
2676") was enacted on July 22, 1998. H.R. 2676 limits the "grandfathering" from
the anti-pairing rules of Section 269B(a)(3) of the Internal Revenue Code of
1986, as amended (the "Code"), that the Company has enjoyed the benefits of
since 1984. (See "Federal Income Tax Considerations -- Federal Income Taxation
of the Trust -- Recent Legislation.") The Company intends to restructure its
organization and mode of operation in response to H.R. 2676 such that H.R. 2676
will cease to apply to the Company. See "The Company -- Proposed Restructuring."
No assurance can be given that H.R. 2676 and/or such restructuring will not have
a material adverse effect on the operations, financial condition or prospects of
the Company.
FAILURE TO MANAGE RAPID GROWTH
The full benefits of the Company's acquisition of Westin, ITT and of the
other hotel properties acquired during 1997 and thereafter will require the
integration of administrative, finance, sales and marketing organizations; the
coordination of sales efforts; and the implementation of appropriate operations,
financial and management systems and controls in order to realize the
efficiencies, revenue enhancements and cost reductions that are expected from
such acquisitions. Although the Company's management team has experience
integrating acquisitions, none of the prior acquisitions have been of comparable
magnitude to, or included the breadth of operations involved in, the acquisition
of Westin or ITT. The diversion of management attention, as well as any other
difficulties which may be encountered in the transition and integration process,
could have an adverse impact on the revenue and operating results of the
Company. There can be no assurance that the Company will be able to integrate
successfully the operations of the acquired properties with those of the Company
or that anticipated synergies will be realized or, if realized, that such
synergies will occur when anticipated.
The Company's future success and its ability to manage future growth
depends in large part upon the efforts of its senior management and its ability
to attract and retain key officers and other highly qualified personnel.
Competition for such personnel is intense. Since January 1996, the Company has
experienced significant changes in its senior management, including executive
officers. There can be no assurance that the Company will continue to be
successful in attracting and retaining qualified personnel. Accordingly, there
can be no assurance that the Company's senior management will be able
successfully to execute and implement the Company's growth and operating
strategies.
TAX RISKS
Failure to Qualify as a REIT. The Trust believes that it has operated so as
to qualify as a REIT under the Code, commencing with the Trust's taxable year
ended December 31, 1995, and the Trust intends to continue to so operate. No
assurance, however, can be given that the Trust will remain qualified as a REIT.
Qualification as a REIT involves the application of highly technical and complex
Code provisions for which there are only limited judicial or administrative
interpretations. The complexity of these provisions is greater in the case of a
REIT that owns hotels and leases them to a corporation with which its stock is
paired. As a result, the Trust is likely to encounter a greater number of
interpretive issues under the REIT qualification rules, and more such issues
which lack clear guidance, than are other REITs. The determination of various
factual matters and circumstances not entirely within the Trust's control may
affect its ability to qualify as a REIT. In addition, no assurance can be given
that new legislation (in addition to H.R. 2676), new regulations, administrative
interpretations or court decisions will not significantly change the tax laws
with respect to qualification as a REIT or the federal income tax consequences
of such qualification. Furthermore, the qualification of the Trust as a REIT
will depend on the Trust's continuing ability to meet various requirements
concerning, among other things, the ownership of Paired Shares and other equity
securities of the Trust, the
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nature of the Trust's assets, the sources of its income and the amounts of its
distributions to its shareholders. In connection with the acquisition of Westin
in January 1998 and ITT in February 1998, the Trust acquired new assets and
operations (including the leasing of newly acquired assets, loans to the
Corporation and the ownership of certain corporations that own hotels or
intangible assets). By increasing the complexity of the Company's operations,
these assets and operations may make it more difficult for the Trust to continue
to satisfy the REIT qualification requirements.
Until the completion of the Restructuring, the Trust's ability to qualify
as a REIT is also dependent on its continued exemption from the anti-pairing
rules of Section 269B(a)(3) of the Code. Section 269B(a)(3) would ordinarily
prevent a company from qualifying as a REIT if its stock is paired with the
stock of another company whose activities are inconsistent with REIT status,
such as the Corporation. The "grandfathering rules" governing Section 269B(a)(3)
generally provide, however, that, except to the extent provided by H.R. 2676,
Section 269B(a)(3) does not apply to a paired REIT if the shares of the REIT and
its paired operating company were paired on or before June 30, 1983 and the REIT
was taxable as a REIT on or before June 30, 1983. There are, however, no
judicial or administrative authorities interpreting the grandfathering rules
governing Section 269B(a)(3).
If in any taxable year the Trust were to fail to qualify as a REIT, the
Trust would not be allowed a deduction for distributions to shareholders in
computing its taxable income and would be subject to federal income tax on its
taxable income at regular corporate rates. Unless entitled to relief under
certain Code provisions, the Trust would also be disqualified from treatment as
a REIT for the four taxable years following the year during which qualification
was lost. The failure of the Trust to qualify as a REIT would reduce its net
earnings available for distribution to shareholders because of the additional
tax liability to the Trust for the year or years involved. In addition,
distributions would no longer be required to be made. To the extent that
distributions to shareholders would have been made in anticipation of the Trust
qualifying as a REIT, the Trust might be required to borrow funds or to
liquidate certain of its investments to pay the applicable tax. The failure to
qualify as a REIT would also constitute a default under certain debt obligations
of the Trust.
Required Distributions to Shareholders. In order to obtain and retain REIT
status, the Trust must distribute to its shareholders at least 95% of its REIT
taxable income (excluding any net capital gain). In addition, the Trust will be
subject to tax on its undistributed net taxable income and net capital gain, and
a 4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by the Trust with respect to any calendar year are less than
the sum of (i) 85% of the Trust's ordinary income, (ii) 95% of its capital gain
net income for that year and (iii) 100% of its undistributed income from prior
years. The Trust intends to make distributions to its shareholders to comply
with the distribution requirements of the Code and to avoid federal income taxes
and the nondeductible federal excise tax. The Trust (or the Realty Partnership)
could be required to borrow funds on a short-term basis to meet the REIT
distribution requirements, which borrowing may not otherwise be advisable for
the Company.
Distributions by the Trust and Corporation will be determined by the
Trust's Board of Trustees (the "Board of Trustees") or the Corporation's Board
of Directors (the "Board of Directors"), as applicable, and will depend on a
number of factors, including the amount of cash available for distributions, the
Company's financial condition, decisions by either such board to reinvest funds
rather than to distribute such funds, the Company's capital expenditures, the
annual distribution requirements under the REIT provisions of the Code (in the
case of the Trust) and such other factors as either Board deems relevant. For
federal income tax purposes, distributions paid to shareholders may consist of
ordinary income, capital gains (in the case of the Trust), nontaxable return of
capital, or a combination thereof.
DEBT FINANCING
As a result of incurring debt, the Company is subject to the following
risks associated with debt financing: (i) the risk that cash flow from
operations will be insufficient to meet required payments of principal and
interest; (ii) the risk that (to the extent that the Company maintains floating
rate indebtedness) interest rates will fluctuate; and (iii) the agreements
governing the Company's loan and credit facilities contain covenants imposing
certain limitations on the Company's ability to acquire and dispose of assets.
In addition, although
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the Company anticipates that it will be able to repay or refinance its existing
indebtedness and any other indebtedness when it matures, there can be no
assurance that the Company will be able to do so or that the terms of such
refinancings will be favorable.
In connection with the acquisitions of Westin and ITT, the Company incurred
a substantial amount of additional debt, thereby increasing its exposure to the
risks associated with debt financing. The Company's increased leverage may have
important consequences, including the following: (i) the ability of the Company
to obtain additional financing for acquisitions, working capital, capital
expenditures or other purposes, if necessary, may be impaired or such financing
may not be available on terms favorable to the Company, (ii) a substantial
decrease in operating cash flow or an increase in expenses of the Company could
make it difficult for the Company to meet its debt service requirements and
force it to modify its operations; (iii) the Company's higher level of debt and
resulting interest expense may place it at a competitive disadvantage with
respect to certain competitors with lower amounts of indebtedness and/or higher
credit ratings; and (iv) the Company's greater leverage may make it more
vulnerable to a downturn in its business or in the economy generally.
LIMITS ON CHANGE OF CONTROL AND OWNERSHIP LIMITATION
Ownership Limitation. In order for the Trust to maintain its qualification
as a REIT, not more than 50% in value of its outstanding shares may be owned,
directly or indirectly, by five or fewer individuals (which term is defined in
the Code to include certain entities) at any time during the last half of the
Trust's taxable year. Furthermore, actual or constructive ownership of a
sufficient number of the Paired Shares could cause the Operating Partnership or
the Corporation to become a "related party tenant" of the Trust, which would
result in the loss of the Trust's REIT status. In order to help preserve the
Trust's REIT status, the Declaration of Trust and the Articles of Incorporation
prohibit actual or constructive ownership by any one person or group of related
persons of more than 8.0% of the shares of the Trust or the Corporation, whether
measured by vote, value or number of shares (the "Ownership Limit"). Generally,
the Paired Common Shares owned by related or affiliated persons will be
aggregated and certain options and warrants will be treated as exercised for
purposes of the Ownership Limit.
The constructive ownership rules of the Code are extensive and complex and
may cause Paired Common Shares owned, directly or indirectly, by certain direct
or indirect partners in any partnership, including the direct and indirect
owners of interests in the Realty Partnership and the Operating Partnership, and
other classes of related individuals and/or entities, to be deemed to be
constructively owned by one individual or entity. As a result, the acquisition
of less than 8.0% of the Paired Common Shares (or the acquisition of an interest
in an entity which owns Paired Shares) by an individual or entity could cause
that individual or entity (or another individual or entity) to own
constructively in excess of 8.0% of the Paired Common Shares, and thus subject
such Paired Common Shares to the Ownership Limit. Direct or constructive
ownership in excess of the Ownership Limit would cause the violative transfer or
ownership to be void, or cause such shares to be converted into "excess shares,"
which have limited economic rights, to the extent necessary to ensure that the
purported transfer or other event does not result in a violation of the
Ownership Limit. Notwithstanding the Ownership Limit, given the breadth of the
Code's constructive ownership rules and that it is not possible for the Trust
and the Corporation continuously to monitor direct and constructive ownership of
Paired Common Shares, it is possible that an individual or entity could at some
time constructively own sufficient Paired Common Shares to cause termination of
the Trust's REIT status.
Limits on Change of Control. Certain provisions of the Trust's declaration
of trust, as amended (the "Declaration of Trust"), and the Corporation's
articles of incorporation, as amended (the "Articles of Incorporation"),
including, without all limitation, those providing for the ability to issue
preferred shares and the maintenance of staggered terms for Trustees and
Directors, may have the effect of discouraging a third party from making an
acquisition proposal for the Trust and the Corporation and may thereby delay,
defer or prevent a change in control under circumstances that could otherwise
give the holders of Paired Common Shares or other equity securities of the
Company the opportunity to realize a premium over then-prevailing market prices.
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INFLUENCE BY STARWOOD CAPITAL
Individuals employed by or otherwise affiliated with Starwood Capital
Group, L.L.C. ("Starwood Capital") hold two positions on the Board of Trustees
and two positions on the Board of Directors. Although the Company has a policy
requiring a majority of its Trustees and Directors to be "independent," Starwood
Capital may have the ability to exercise certain influence over the affairs of
the Company. Barry S. Sternlicht is the President and Chief Executive Officer
of, and controls, Starwood Capital. Mr. Stenlicht also is a Trustee of the Trust
and the Chairman and Chief Executive Officer of the Trust. In addition, Mr.
Stenlicht is Chairman of the Board of Directors of the Corporation. As a
consequence, Mr. Stenlicht has the ability to exercise certain influence over
the affairs of the Company. Starwood Capital and certain of its officers own
limited partnership interests in the Realty Partnership and the Operating
Partnership ("Units") that are exchangeable for Paired Common Shares. As a
result, and due to its different tax situation, prior to the exchange of its
Units into Paired Common Shares, Starwood Capital's objectives regarding the
pricing, structure and timing of any sale of certain properties or the
restructuring or sale of certain mortgage loans may differ from the objectives
of the shareholders of the Company or current management of the Company.
RISKS RELATING TO HOTEL OPERATIONS
Operating Risks. The properties of the Company are subject to all operating
risks common to the hotel industry. These risks include changes in general
economic conditions (as described below); decreases in the level of demand for
rooms and related services; cyclical over-building in the hotel industry,
restrictive changes in zoning and similar land use laws and regulations or in
health, safety and environmental laws, rules and regulations; the inability to
obtain property and liability insurance fully to protect against all losses or
to obtain such insurance at reasonable rates; and changes in travel patterns. In
addition, the hotel industry is highly competitive. The properties of the
Company compete with other hotel properties in their geographic markets, and
some of the Company's competitors may have substantially greater marketing and
financial resources than the Company.
Acquisition Risks. The Company competes for acquisition opportunities with
other owners of hotel properties, some of which may have substantially greater
financial resources than the Company. These competitors may generally be able to
accept more risk than the Company can prudently manage. Competition may
generally reduce the number of suitable investment opportunities offered to the
Company and increase the bargaining power of property owners seeking to sell.
Further, management believes that the Company will face competition for
acquisition opportunities from entities organized for purposes substantially
similar to the objectives of the Company.
Seasonality of Hotel Business. The hotel industry is seasonal in nature.
This seasonality may cause quarterly fluctuations in the operating results of
the Company and the market prices of the Paired Shares.
Capital Intensive Business. The Company's properties are capital intensive
and, in order to remain attractive and competitive, must be well maintained as
well as periodically modernized and refurbished. This creates an on-going need
for capital and, to the extent such capital expenditures may not be funded from
cash generated by the Company, financial results may be sensitive to the cost
and availability of funds.
REAL ESTATE INVESTMENT RISKS
General Risks. Real property investments are subject to varying degrees of
risk. The investment returns available from equity investments in real estate
depend in large part on the amount of income earned and capital appreciation
generated by the related properties as well as the expenses incurred.
In addition, income from properties and real estate values are also
affected by a variety of other factors, such as governmental regulations and
applicable laws (including real estate, zoning, tax and eminent domain laws),
interest rate levels and the availability of financing. For example, existing or
new real estate, zoning or tax laws can make it more expensive and/or time
consuming to develop real property or expand, modify or renovate hotels.
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Governments can, under eminent domain laws, take real property, sometimes
for less compensation than the owner believes the property is worth. When
prevailing interest rates increase, the expense of acquiring, developing,
expanding or renovating real property increases, and values decrease as it
becomes more difficult to sell property because the number of potential buyers
decreases. Similarly, as financing becomes less available, it becomes more
difficult both to acquire real property and, because of the diminished number of
potential buyers, to sell real property. Any of these factors could have a
material adverse impact on the Company's results of operations or financial
condition, as well as on the Trust's ability to make distributions to its
shareholders.
In addition, equity real estate investments, such as the investments held
by the Company and any additional properties that may be acquired by the
Company, are relatively illiquid. If the properties of the Company do not
generate revenue sufficient to meet operating expenses, including debt service
and capital expenditures, the income of the Company and the Trust's ability to
make distributions to shareholders will be adversely affected.
Hotel Development. The Company intends to develop hotel properties as
suitable opportunities arise and is currently developing several upscale hotels.
New project development is subject to a number of risks, including risks of
construction delays or cost overruns that may increase project costs; receipt of
zoning, occupancy and other required governmental permits and authorization; and
the incurring of development costs that are not pursued to completion. There can
to no assurance that any development project will be completed in a timely
manner or within budget.
Possible Liability Relating to Environmental Matters. Under various
federal, state, local and foreign environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may become
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability without regard
to whether the owner or operator knew of, or was responsible for, the presence
of such hazardous or toxic substances. The presence of hazardous or toxic
substances, or the failure properly to remediate such substances when present,
may adversely affect the owner's ability to sell or rent such real property or
to borrow using such real property as collateral. Persons who arrange for the
disposal or treatment of hazardous or toxic wastes may be liable for the costs
of removal or remediation of such wastes at the disposal or treatment facility,
regardless of whether such facility is owned or operated by such person. Other
federal, state, local and foreign laws, ordinances and regulations require
abatement or removal of certain asbestos-containing materials in the event of
demolition or certain renovations or remodeling and govern emissions of and
exposure to asbestos fibers in the air. The operation and subsequent removal of
certain underground storage tanks also are regulated by federal, state, local
and foreign laws.
RISKS RELATING TO GAMING OPERATIONS
Regulation of Gaming Operations. The Company owns and operates a number of
casino gaming facilities, including Caesars Palace and The Desert Inn Resort &
Casino in Las Vegas, Nevada; Caesars Atlantic City in Atlantic City, New Jersey;
and Caesars Tahoe in Stateline, Nevada. Other gaming facilities are located in
Nevada, New Jersey, Delaware, Indiana and Mississippi; in four foreign
countries; and on cruise ships operating in international waters. Each of these
gaming operations is subject to extensive licensing, permitting and regulatory
requirements administered by various governmental entities. Typically, gaming
regulatory authorities have broad powers with respect to the licensing of gaming
operations, and may revoke, suspend, condition or limit the gaming approvals and
licenses of the Company and its gaming subsidiaries, impose substantial fines
and take other actions, any of which could have a material adverse effect on the
business and the value of the Company's hotel/casinos. Directors, officers and
certain key employees of the Company and its gaming subsidiaries are subject to
licensing or suitability determinations by various gaming authorities. If any of
such gaming authorities were to find a person occupying any such position
unsuitable, the Company would be required to sever its relationship with that
person.
Increased Gaming Competition. The Company faces significant domestic and
international competition from both established casinos and newly emerging
gaming operations. Proposals have been made for a
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significant number of casinos, both land-based and those involving vessels on
navigable waters, in a number of jurisdictions and large metropolitan areas.
Legalization of gaming in additional jurisdictions may also provide
opportunities for expansion by the Company's competitors that could adversely
affect the Company's existing gaming operations. The Company believes that the
adoption of legalized gaming in any jurisdiction near Nevada (particularly
California or other states in the southwestern United States) or near New Jersey
(particularly New York or Pennsylvania) or the advent of gaming on nearby Native
American lands could have a material adverse effect on the Company's operations
in Las Vegas and Atlantic City.
Risks Associated with High-End Gaming. There are risks associated with the
high end gaming business that currently comprises a portion of the Company's
Caesars Palace and Desert Inn operations. High-end gaming is more volatile than
other forms of gaming, and variances attributable to high-end gaming could,
under certain circumstances, have a positive or negative impact on cash flow,
earnings and other financial measures in a particular quarter. In addition, a
substantial portion of the Company's table gaming revenues from its Caesars
Palace and Desert Inn operations is attributable to the play of a relatively
small number of international customers. The loss of, or a reduction in play of,
the most significant of such customers could have an adverse effect on the
Company's future operating results.
FOREIGN OPERATIONS AND CURRENCY FLUCTUATIONS
The Company has significant international operations, including, as of
March 1, 1998, 31 owned properties in Europe, two properties owned in Africa/the
Middle East, 15 properties owned in Latin America and three properties owned in
Asia/Pacific. International operations generally are subject to various
political and other risks that are not present in U.S. operations, including,
among other things, the risk of war or civil unrest, expropriation and
nationalization. In addition, certain international jurisdictions restrict the
repatriation of non-U.S. earnings. Various international jurisdictions also have
laws limiting the right and ability of non-U.S. entities to pay dividends and
remit earnings to affiliated companies unless specified conditions have been
met. In addition, sales in international jurisdictions typically are made in
local currencies, which subjects the Company to risks associated with currency
fluctuations. Currency devaluations and unfavorable changes in international
monetary and tax policies and other changes in the international regulatory
climate and international economic conditions could materially adversely affect
the Company's profitability and financing plans. Other than Italy, where the
Company is subject to certain risks due to currency fluctuations, the Company's
properties are geographically diversified and not concentrated in any particular
region.
POTENTIAL DILUTIVE EFFECT OF ISSUANCE OF PAIRED COMMON SHARES WITH PURCHASE
PRICE ADJUSTMENT MECHANISM
Each Price Adjustment Agreement provides that the Underwriter party thereto
will sell, as directed by the Trust and the Corporation or, at certain price
levels (as described below), in its own discretion, on or before February 24,
1999, in one or more transactions and using one or more of the methods specified
in such Price Adjustment Agreement, a sufficient number of Paired Common Shares
to achieve net sales proceeds (net of brokerage or underwriting commissions or
resale spreads) equal to the aggregate market value (the "Reference Price") of
the portion of the Original Shares being sold (the "Settlement Shares") on the
date of purchase, plus a forward accretion component of LIBOR plus 1.75%, minus
an adjustment for dividends paid on the purchased Paired Common Shares, in each
case through the date of such sale.
If the number of Paired Common Shares so required to be sold is greater
than the number of Original Shares as a result of a decrease in the market
prices of the Paired Common Shares, the Trust and the Corporation are required
to issue additional Paired Common Shares to the Underwriters at a cash price of
$.01 per share. In addition, if during specified periods prior to settlement of
the Trust's and the Corporation's obligations under the Price Adjustment
Agreements the Paired Common Shares trade at market prices that are less than
the prices specified in those agreements, the Trust and the Corporation also are
required to issue to the Underwriters, at a cash price of $.01 per share,
additional Paired Common Shares as security for the performance of the Company's
settlement obligations. Since such issuances would be for nominal additional
consideration, they would have a dilutive effect on the Trust's and the
Corporation's shareholders and
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stockholders. This dilution increases as the market price of the Paired Common
Shares declines further below the Reference Price.
As of the date of this Prospectus, the Company has issued 2,221,742
Additional Shares to the Underwriters as security for the performance of the
Company's settlement obligations. In the event that the market price for the
Paired Common Shares at the time of settlement with an Underwriter is lower than
the Reference Price, the Trust and the Corporation will have to deliver
additional Paired Common Shares to such Underwriter. Based on the closing price
of a share of Paired Common Shares on the NYSE on September 22, 1998, the Trust
and the Corporation would be required to deliver to the Underwriters an
additional 978,000 Paired Common Shares for an aggregate of approximately 3.2
million of the Additional Shares as full settlement of the Trust's and the
Corporation's obligations under the Price Adjustment Agreements.
Additionally, when the market price of the Paired Common Shares closes at
or below the following prices for any given day, the Underwriters have the right
to cause the sale of the following portions of the Settlement Shares:
$37.7125-25%; $35.0188-50%; $33.6719-75%; $32.3250-100%. Since the issuance of
the Original Shares on February 24, 1998, the closing price of the Paired Common
Shares has been as low as $29.9375, which entitles the Underwriters to require
settlement of 100% of the transaction.
POSSIBLE LIABILITY OF TRUST SHAREHOLDERS
Both the Maryland statute governing real estate investment trusts formed
under the laws of that state and the Declaration of Trust provide that no
shareholder of the Trust will be personally liable for any obligations of the
Trust solely as a result of such shareholder's status as a shareholder of the
Trust. The Declaration of Trust further provides that the Trust shall indemnify
each shareholder against any claim or liability to which the shareholder may
become subject by reason of being or having been a shareholder. In addition, it
is the Trust's policy to include a clause in its contracts which provides that
shareholders assume no personal liability for obligations entered into on behalf
of the Trust. However, with respect to tort claims, contractual claims where
shareholder liability is not so negated, claims for taxes and certain statutory
liabilities, the shareholders may, in some jurisdictions, be personally liable
to the extent that such claims are not satisfied by the Trust. Inasmuch as the
Trust does and will carry public liability insurance which it considers
adequate, any risk of personal liability to shareholders is limited to
situations in which the Trust's assets plus insurance coverage would be
insufficient to satisfy the claims against the Trust and its shareholders.
RISKS RELATING TO GENERAL ECONOMIC CONDITIONS
The Company's hotel and gaming operations may be adversely affected by
moderate or severe economic downturns, including conditions which may be
isolated to one or more geographic regions. As a result, the Company's ability
to achieve or sustain substantial improvements in funds from operations and
other important financial tests may be adversely affected by general economic
conditions.
Further, an economic downturn in the countries from which the Company's
gaming operations draw high-end international customers could cause a reduction
in the frequency of visits and the revenues generated by such customers.
Similarly, the collectibility of receivables from international gaming customers
could be adversely affected by future business or economic trends, or by
significant events, in the countries in which such customers reside.
RISKS RELATING TO ACTS OF GOD AND WAR
The Company's financial and operating performance may be adversely affected
by acts of God, such as natural disasters, in both the locations in which the
Company owns and/or operates significant properties and areas of the world from
which the Company draws a large number of customers. Similarly, wars, political
unrest and other forms of civil strife may cause the Company's results to differ
materially from predicted results.
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<PAGE> 15
RISKS RELATING TO YEAR 2000
Many computer systems were originally designed to recognize calendar years
by the last two digits in the date code field. Beginning in the year 2000, these
date code fields will need to accept four digit entries to distinguish
twenty-first century dates from twentieth century dates. As a result, in less
than two years, the computerized systems, which include information and
non-information technology systems, and applications used by the Company will
need to be reviewed and evaluated to ensure all such financial, information and
operational systems are Year 2000 compliant.
State of Readiness
The Company is addressing the year 2000 compliance issue by focusing on its
central facilities, which include all of its non-operating facilities, and its
gaming and hotel properties separately.
The Company has identified the critical, central facility business
applications that will be affected by the Year 2000, conducted the discovery and
assessment stages of the reservations and communication system applications and
assembled a team to implement modifications or upgrades, as necessary, and to
test results. The majority of the central facility applications passed the final
testing, which was performed by internal personnel and independent third parties
in the second quarter of 1998. The Company is in the process of communications
with others with whom it does significant business to determine their readiness
for Year 2000 compliance and expect to complete a validation process with a
third party reservation information service provider with which the Company has
a material relationship during the third quarter of 1998. The Company is in the
last phase of assessing its hardware components at its central facilities, all
of which are expected to be modified or upgraded, as necessary, to ensure Year
2000 compliance by the second quarter of 1999.
The Company has entered into a consulting agreement with an independent
third party to perform an inventory and assessment of all of its computerized
systems and applications for its gaming operations. This inventory and
assessment will determine the resources needed, necessary modifications or
upgrades, vendor Year 2000 compliance, remediation plan and the time-frame for
the gaming operations to become Year 2000 compliant, and is expected to be
completed in the third and fourth quarters of 1998.
The Company has completed the initial assessment of the applications and
hardware at its owned, leased, managed and joint venture hotel properties. In
the third quarter of 1998, validation tools and resources will be deployed to
the hotel properties. Once the test statistics for the hotel property
applications and hardware are collected, the information will be sent to an
independent third party for Year 2000 compliance verification. Based on the
results of the compliance verification, the remediation efforts will be
addressed by the third quarter of 1999 to ensure Year 2000 compliance.
Year 2000 Project Costs
The Company estimates that total costs for the Year 2000 compliance review,
evaluation, assessment and remediation efforts for the central facilities and
the hotel properties are not expected to be in excess of $20 million. Of this
amount, $1 million had been expended as of June 30, 1998, and an additional $4
million is expected to be incurred in the remainder of 1998.
Starwood Year 2000 Risks
Since all major computerized systems and applications have been tested and
reservations for the year 2000 have been accepted, the Company believes that it
has addressed any risks related to its reservation function. The remaining risks
relate to the non-critical business applications and support hardware for the
central facilities. A failure of these systems to become Year 2000 compliant
could disrupt the timeliness or the accuracy of management information provided
by the central facilities.
There can be no assurance that the efforts related to the gaming and hotel
properties will be sufficient to make these properties' computerized systems and
applications Year 2000 compliant in a timely manner or that the allocated
resources will be sufficient. A failure to become Year 2000 compliant could
affect the integrity of the gaming and hotel property guest check-in, billing
and accounting functions. Certain physical hotel
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<PAGE> 16
property machinery and equipment could also fail resulting in safety risks and
customer dissatisfaction. Additionally, regarding the gaming properties, in
particular, failure of the gaming systems to become Year 2000 compliant could
result in the inefficient processing of operational gaming information and the
malfunction of computerized gaming machines.
Contingency Plan
The Company is in the process of developing its contingency plan for the
central facilities and the gaming and hotel properties to provide for the most
reasonably likely worst case scenarios regarding Year 2000 compliance. This
contingency plan is expected to be completed in 1999.
USE OF PROCEEDS
On February 24, 1998, the Trust and the Corporation sold the Original
Shares to each of the Purchasers, in separate transactions, for an aggregate
cash purchase price of $81,677,733, which price reflected a two percent discount
from the last reported sale price of the Paired Common Shares on the date of
purchase. The net proceeds of such sale were used by the Company to repay
outstanding indebtedness. Pursuant to the Price Adjustment Agreements,
additional Paired Common Shares may be issued by the Trust and the Corporation
at a cash price of $.01 per share, as described under "Plan of Distribution."
Except as described above, the net proceeds to the Trust and the Corporation
from the sale of the shares of Paired Common Stock representing the Original
Shares and any Additional Shares will be used by the Company to pay the
Underwriters in satisfaction of its obligations under each of the Price
Adjustment Agreements. In the event that the net proceeds to the Trust and the
Corporation from such sale exceeds the Company's obligations, the amount and use
of such proceeds will be described in the Prospectus Supplement relating to the
offer and sale of such shares.
PRICE RANGE OF PAIRED COMMON SHARES AND DISTRIBUTIONS
The Paired Common Shares are listed on the New York Stock Exchange under
the symbol "HOT." The following table sets forth, for the fiscal periods
indicated, the high and low sales prices per Paired Common Share on the NYSE and
distributions to shareholders for the fiscal periods indicated.
<TABLE>
<CAPTION>
PRICE(A)
--------------------
PERIOD HIGH LOW DISTRIBUTIONS
------ ------ ------ -------------
<S> <C> <C> <C>
1998
Third Quarter
(through September 22, 1998)........ $49.19 $29.18 --
Second Quarter........................ $57.56 $44.44 $0.52
First Quarter......................... $57.75 $51.82 $0.52
1997
Fourth Quarter........................ $60.38 $52.13 $0.48(b)
Third Quarter......................... $57.44 $41.38 $0.48
Second Quarter........................ $42.81 $34.25 $0.39
First Quarter......................... $45.88 $34.50 $0.39
1996
Fourth Quarter........................ $36.75 $27.42 $0.39(c)
Third Quarter......................... $27.92 $22.08 $0.33
Second Quarter........................ $25.75 $21.17 $0.33
First Quarter......................... $23.25 $19.67 $0.31
</TABLE>
- ---------------
(a) During the fourth quarter of 1996, the Trust and the Corporation each
declared a three-for-two stock split in the form of a 50% stock dividend
payable to shareholders of record on December 30, 1996. The stock dividend
was paid in January 1997. The high and low prices set forth in the table
have been adjusted to reflect the stock split.
(b) The Trust declared a distribution for the fourth quarter of 1997 to
shareholders of record on December 31, 1997. The distribution was paid in
January 1998.
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<PAGE> 17
(c) The Trust declared a distribution for the fourth quarter of 1996 to
shareholders of record on December 30, 1996. The distribution was paid in
January 1997.
On September 22, 1998, the last reported sales price for the Paired Common
Shares on the NYSE was $32.00 per Paired Common Share. As of September 22, 1998,
there were approximately 38,166 holders of record of Paired Common Shares,
including approximately 12,541 holders of record of ITT Shares converted into
Paired Common Shares in connection with the ITT Merger who have not yet
surrendered their certificates.
In order to maintain its qualification as a REIT, the Trust must make
annual distributions to its shareholders of at least 95% of its taxable income
(which does not include net capital gains). Under certain circumstances, the
Trust may be required to make distributions in excess of cash available for
distribution in order to meet such distribution requirements. In such event, the
Trust (or the Realty Partnership) would seek to borrow the amount of the
deficiency or sell assets to obtain the cash necessary to make the distributions
necessary to retain the Trust's qualification as a REIT for federal income tax
purposes.
Under the terms of the Company's current credit facilities, the Trust is
generally permitted to make cash distributions to the Trust's shareholders on an
annual basis in an amount equal to the greater of (1) 85% of adjusted funds from
operations (as defined) for any four consecutive calendar quarters, and (2) the
minimum amount necessary to maintain the Trust's tax status as a REIT.
Distributions made by the Trust will be determined by its Board of Trustees
and will depend on a number of factors, including the amount of cash flow from
operations, the Trust's financial condition, capital expenditure requirements
for the Company's properties, the annual distribution requirements under the
REIT provisions of the Code and such other factors as the Board of Trustees
deems relevant. The Board of Trustees of the Trust has determined that
commencing with the dividend paid for the fourth quarter of 1998, the Trust's
current per share dividend of $.52 per quarter will decrease to $.15 per quarter
($.60 on an annual basis). The dividend rate may be changed by the Board of
Trustees at any time.
The Corporation has not paid any cash dividends since its organization and
does not currently anticipate that it will make any such distributions in the
foreseeable future.
PLAN OF DISTRIBUTION
On February 24, 1998, the Trust and the Corporation issued and sold
1,547,000 Paired Common Shares at a cash purchase price of $52.798 per share
(which price reflected a two percent discount from the last reported sale price
of the Paired Common Shares on the date) to each of (i) the Merrill Lynch
Parties, (ii) NMSSI and (iii) LBI (which transferred such shares to LBSF),
pursuant to three separate Purchase Agreements each dated February 23, 1998 (the
"Purchase Agreements").
Each Price Adjustment Agreement provides that the Underwriter or
Underwriters party thereto will sell, as directed by the Trust and the
Corporation and on or before February 24, 1999, in one or more transactions and
using one or more of the methods specified in such Price Adjustment Agreement, a
sufficient number of Paired Common Shares to achieve net sales proceeds (net of
brokerage or underwriting commissions or resale spreads) equal to the aggregate
market value of the Original Shares purchased by that Underwriter (or an
affiliate) on the date of purchase, plus a forward accretion component equal to
LIBOR plus 1.75% and minus an adjustment for dividends paid on the purchased
Paired Common Shares, in each case during the term of such Price Adjustment
Agreement. The precise numbers of Paired Common Shares that will be required to
be sold pursuant to the Price Adjustment Agreements will depend primarily on the
market prices of the Paired Common Shares at the time of settlement. If the
number of Paired Common Shares so required to be sold is greater than the number
of Original Shares as a result of a decrease in the market prices of the Paired
Common Shares, the Trust and the Corporation will be required to issue to the
Underwriters, at a cash price of $.01 per share, that number of Additional
Shares equal to the difference. If the number of Paired Common Shares so
required to be sold is less than the number of Original Shares as a result of an
increase in the market prices of the Paired Common Shares, the Underwriters will
be required to deliver to the Trust and the Corporation that number of Paired
Common Shares equal to the difference. In addition, if the market
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<PAGE> 18
price of the Paid Common Shares closes at or below the following prices for any
given day, the Underwriters have the right to cause the sale of the following
portions of the Settlement Shares: $37.125 - 25%; $35.0188 - 50%; $33.6719 - 75%
and $32.3250 - 100%. Since the issuance of the Original Shares on February 24,
1998, the closing market price of the Paired Common Shares has been as low as
$29.9375, which entitles the Underwriters to require settlement of 100% of the
transaction.
The sale or distribution to investors of all or any portion of the Paired
Common Shares offered hereby may be effected from time to time by the
Underwriters on behalf of the Company directly, indirectly to or through brokers
or dealers or in a distribution by one or more additional underwriters on a firm
commitment or best efforts basis, on the NYSE, in the over-the-counter market,
on any national securities exchange in which the Paired Common Shares are listed
or traded, in privately negotiated transactions, through sales involving a
distribution reinvestment plan of the Company or otherwise, at fixed prices, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. It is anticipated that the
Shares will be sold principally to or through (i) in the case of the Merrill
Lynch Parties, through MLPF&S (ii) in the case of NMSSI, through NMS LLC, and
(iii) in the case of the Lehman Parties, through LBI, each of which is a
registered broker dealer. Except as described above, the Company will not
receive any of the proceeds from the sale of the Original Shares or any
Additional Shares.
The Underwriters and any broker or dealer to whom any of the Shares are
sold may be deemed to be underwriters within the meaning of the Securities Act
with respect to the Shares offered hereby, and any profit realized by any of
them, together with the returns to the Purchasers and the purchase price
discounts described above may be deemed to be underwriting commissions. In
connection with a sale of Shares by the Underwriters, such compensation together
with the following information will be set forth in one or more Prospectus
Supplements: the number of Paired Common Shares to be sold, the purchase price,
the public offering price, if applicable, the names of each additional
underwriter, agent or broker-dealer, if any, participating in such offering and
any applicable purchase price, fee, commission or discount arrangement between
or among them. No Paired Common Shares may be sold without delivery of a
Prospectus Supplement describing the method and terms of the offering of such
securities.
Pursuant to the Price Adjustment Agreements, the methods by which the
Shares may be sold or distributed include the following: (i) an underwritten
fixed-price offering, (ii) a privately negotiated sale involving at least a
block (as defined in Rule 10b-18 under the Exchange Act) of the Paired Common
Shares, (iii) a sale into the existing trading market for the Paired Common
Shares effected in order to approximate the volume-weighted average price of the
Paired Common Shares on the NYSE on the relevant date, (iv) an offering at other
than (x) a fixed price on or through the facilities of the NYSE or (y) to or
through a market-maker otherwise than on the NYSE, and (v) sales to any
distribution reinvestment plan now or hereafter established by the Company, or
to any agent acting on behalf of such plan, for sale to participants in such
plan. In effecting sales, brokers or dealers engaged by the Underwriters may
arrange for other brokers or dealers to participate. Any public offering price
and any discount or concessions allowed or reallowed or paid to dealers may be
changed from time to time. The Underwriters may from time to time deliver all or
a portion of the Shares to cover a short sale or sales or upon the exercise,
settlement or closing of a call equivalent position or a put equivalent
position.
The Company has agreed in the Purchase Agreements to indemnify the
Underwriters and any broker or dealer to or through whom any of the Shares are
sold against certain civil liabilities, including liabilities under the
Securities Act or to contribute to payments an Underwriter may be required to
make in respect thereof. Other underwriters, brokers, dealers or agents may be
entitled, under note agreements with the Company, to indemnification against and
contribution toward certain civil liabilities, including liabilities under the
Securities Act.
The Company will pay all reasonable expenses in connection with the
registration of the Shares. The Underwriters will pay any brokerage or
underwriting commissions and taxes of any kind (including, without limitation,
transfer taxes) with respect to any disposition, sale or transfer of the Shares,
and legal, accounting and other expenses incurred by the Underwriters.
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<PAGE> 19
In connection with the sale or distribution of the Shares, the rules of the
Commission permit any underwriter to engage in certain transactions that
stabilize the price of the Paired Common Shares. Such transactions may consist
of bids or purchases for the purpose of pegging, fixing or maintaining the price
of the Paired Common Shares.
If any underwriter creates a short position in the Paired Common Shares in
connection with the sale or distribution of the Shares (i.e., if the underwriter
sells more Paired Common Shares than are set forth on the cover page hereof),
such underwriter may reduce that short position by purchasing Paired Common
Shares in the open market.
In the case of an underwritten offering of the Shares, any managing
underwriter(s) may also impose a penalty bid on certain underwriters and selling
group members. This means that, if any managing underwriter purchases Paired
Common Shares in the open market to reduce any underwriter's short position, or
to stabilize the price of the Paired Common Shares, such managing underwriter
may reclaim the amount of the selling concession from any such underwriters and
selling group members who sold those Shares.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
None of the Company, any Underwriter or any other underwriter makes any
representation or prediction as to the direction or magnitude of any effect that
any of the transactions described above may have on the price of the Paired
Common Shares. In addition, none of the Company, any Underwriter or any other
underwriter makes any representation that any underwriter will engage in any
such transaction or that any such transaction, once commenced, will not be
discontinued without notice.
The Underwriters and/or certain of their affiliates, from time to time,
provide investment banking and financial advisory services to the Company, for
which customary compensation has been paid by the Company.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax
considerations that may be relevant to a prospective holder of Paired Common
Shares. This summary is for information purposes only and is not tax advice.
Except as discussed below, no ruling or determination letters from the Internal
Revenue Service (the "IRS") or opinions of counsel have been rendered or will be
requested by the Company on any tax issue connected with this Registration
Statement. This summary is based upon the Code, as currently in effect,
applicable Treasury Regulations thereunder and judicial and administrative
interpretations thereof, all of which are subject to change, including changes
that may be retroactive. No assurance can be given that the IRS will not
challenge the propriety of one or more of the tax positions described herein or
that such a challenge would not be successful.
The discussion below addresses federal income tax considerations to holders
of Paired Common Shares. This summary does not purport to deal with all aspects
of taxation that may be relevant to particular holders of Paired Common Shares
in light of their personal investment or tax circumstances. Sidley & Austin,
counsel for the Company, has opined, as of September 23, 1998, on certain
federal income tax consequences with respect to the Paired Common Shares for the
Company and the shareholders and stockholders of the Company. Such opinion has
been filed as an exhibit to the Registration Statement. Sidley & Austin has
advised the Company that such opinion is not binding on the IRS or any court and
no assurance can be given that the IRS will not challenge the propriety of part
or all of such opinion or that such a challenge would not be successful. Such
opinion of Sidley & Austin relies upon and is premised on the accuracy of
statements and representations of the Company concerning its business and
properties, ownership, organization, sources of income, future operations,
levels of distributions and recordkeeping, and the judgments of the Company with
respect to the fair market value of its real estate assets, the relative value
of the Trust Shares and the Corporation Shares to the value of the Paired Common
Shares, the reasonableness of the guaranty fee paid by
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<PAGE> 20
the Corporation to the Trust with respect to indebtedness incurred by the
Corporation in connection with the acquisition of ITT, and the ability of the
Corporation to have arranged for debt financing for the ITT Merger without a
guaranty of the Trust. Such statements and representations by the Company are
attached to and incorporated by reference into Sidley & Austin's opinion letter.
Except as specifically provided, the discussion below does not address foreign,
state or local tax consequences, nor does it specifically address the tax
consequences to taxpayers subject to special treatment under the federal income
tax laws (including dealers in securities, foreign persons, life insurance
companies, tax-exempt organizations, financial institutions, and taxpayers
subject to the alternative minimum tax). The discussion below assumes that the
Paired Common Shares are or will be held as "capital assets" within the meaning
of Section 1221 of the Code. No assurance can be given that legislative,
judicial or administrative changes will not affect the opinions contained in the
Sidley & Austin opinion letter and/or the accuracy of any statements in this
Prospectus with respect to transactions entered into or contemplated prior to
the effective date of such changes.
EACH PROSPECTIVE PURCHASER OF SECURITIES IS URGED TO CONSULT HIS, HER OR
ITS OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM, HER OR IT OF
THE PURCHASE, OWNERSHIP AND SALE OF SECURITIES.
FEDERAL INCOME TAXATION OF THE TRUST
Background
In 1980, prior to the establishment of the Corporation and the pairing of
its shares with the shares of the Trust, the IRS issued a Private Letter Ruling
(the "Ruling") to the Trust in which the IRS held that the pairing of the Trust
Shares and the Corporation Shares and the operation of the Corporation would not
preclude the Trust from qualifying as a REIT. The Ruling does not impose any
continuing limitations on the Trust or the Corporation. Subsequent to the
issuance of the Ruling, (i) the IRS announced that it would no longer issue
rulings to the effect that a REIT whose shares are paired with those of a
non-REIT will qualify as a REIT if the activities of the paired entities are
integrated, and (ii) Congress, in 1984, enacted Section 269B(a)(3) of the Code,
which treats a REIT and a non-REIT, the paired shares of which were not paired
on or before June 30, 1983, as one entity for purposes of determining whether
either company qualifies as a REIT. Section 269B(a)(3) of the Code has not
applied to the Trust and the Corporation (since the Trust Shares and the
Corporation Shares were paired prior to that date), and the Ruling's conclusions
were not adversely affected thereby.
In 1994, the Trust requested and received a determination letter from the
IRS (the "IRS Letter"). The IRS Letter provided that the Trust's failure to send
the shareholder demand letters required by the REIT Provisions (defined below)
terminated its election to be taxed as a REIT beginning with the Trust's taxable
year ended December 31, 1991 and permitted the Trust to re-elect to be taxed as
a REIT commencing with its taxable year ended December 31, 1995. The IRS Letter
also directed the Trust to file amended federal income tax returns for its
taxable years ended December 31, 1991 and 1992 as a C corporation (and not as a
REIT) and to file its federal income tax returns for its taxable years ended
December 31, 1993 and 1994 as a C corporation. The Trust has filed such returns.
Because the Trust had net losses for federal income tax purposes and did not pay
any dividends during its taxable years ended December 31, 1991, 1992, 1993 and
1994, the IRS Letter did not result in the Trust owing any federal income tax.
The Trust has instituted REIT compliance controls that are intended to prevent
the reoccurrence of any such failure to comply with the reporting and
recordkeeping requirements for REITs.
Recent Legislation
H.R. 2676 was enacted on July 22, 1998. H.R. 2676 limits the grandfathering
from the anti-pairing rules of Section 269B(a)(3) of the Code that the Company
has enjoyed the benefits of since 1984. Under H.R. 2676, for purposes of the
gross income tests for qualification as a REIT, the anti-pairing rules of
Section 269B(a)(3) of the Code generally would apply to interests in real
property acquired directly or indirectly after March 26, 1998 by the Trust or
the Corporation, or a subsidiary or partnership in which a 10% or greater
interest is owned by the Trust or the Corporation (collectively, the "REIT
Group"), unless (i) the
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<PAGE> 21
interests in real property are acquired pursuant to a written agreement binding
on March 26, 1998 and at all times thereafter or (ii) the acquisition of such
interests in real property was described in a public announcement or in a filing
with the Commissioner on or before March 26, 1998. H.R. 2676 also provides that
an interest in real property held by the REIT Group that is not subject to the
anti-pairing rules of Section 269B(a)(3) of the Code would become subject to
such rules in the event an improvement to such interest in real property is
placed in service after December 31, 1999 that changes the use of the property
and the cost of such improvement is greater than 200% of (x) the undepreciated
cost of the property (prior to the improvement) or (y) in the case of property
acquired where there is a substituted basis, the fair market value of the
property on the date it was acquired by the REIT Group. There is an exception
for improvements placed in service before January 1, 2004 pursuant to a binding
contract in effect as of December 31, 1999 and at all times thereafter.
The Company intends to restructure its organization and mode of operation
such that the restrictions of H.R. 2676 will not prevent the Company from
acquiring additional interests in real property. See "The Company -- Proposed
Restructuring." The Company has represented to Sidley & Austin that prior to the
completion of such restructuring, the Company will monitor the acquisition of
interests in real property by the REIT Group to ensure that such acquisitions do
not prevent the Trust from qualifying for taxation as a REIT.
General
The Trust has elected to be taxed as a REIT under Sections 856 through 860
of the Code and applicable Treasury Regulations (the "REIT Provisions"),
commencing with its taxable year ended December 31, 1995. The Trust believes
that, commencing with such taxable year, it was organized and has operated in
such a manner so as to qualify for taxation as a REIT and the Trust intends to
continue to operate in such a manner; however no assurance can be given that the
Trust has qualified as a REIT or will continue to so qualify.
The REIT Provisions are highly technical and complex. The following sets
forth the material aspects of the REIT Provisions that govern the federal income
tax treatment of a REIT and its shareholders. This summary is qualified in its
entirety by the REIT Provisions and administrative and judicial interpretations
thereof.
Sidley & Austin has rendered an opinion to the effect that, commencing with
the Trust's taxable year ended December 31, 1995, the Trust was organized and
has operated in conformity with the REIT Provisions, and its proposed method of
operation will enable it to continue to comply with the REIT Provisions for its
taxable year ending December 31, 1998 and future taxable years. It must be
emphasized that such qualification and taxation as a REIT depends upon the
Trust's ability to meet, through actual annual operating results, certain
distribution levels, specified diversity of stock ownership, and various other
qualification tests imposed under the REIT Provisions, as discussed below. The
Trust's annual operating results will not be reviewed by Sidley & Austin.
Accordingly, no assurance can be given that the actual results of the Trust's
operation for any particular taxable year will satisfy such requirements.
Further, the anticipated federal income tax treatment described in this
Prospectus may be changed, perhaps retroactively, by legislative,
administrative, or judicial action at any time. See "-- Recent Legislation"
above. For a discussion of the tax consequences of failure to qualify as a REIT,
see "-- Failure to Qualify," below.
As long as the Trust qualifies for taxation as a REIT, except in the
circumstances set forth in the following paragraph, it will not be subject to
federal corporate income taxes on net income that it currently distributes to
shareholders. This treatment substantially eliminates the "double taxation"
(once at the corporate level and again at the shareholder level) that generally
results from investment in a regular corporation.
Even if the Trust qualifies for taxation as a REIT, however, it will be
subject to federal income or excise tax in the following circumstances. First,
the Trust will be taxed at regular corporate rates on any undistributed REIT
taxable income (as discussed below), including undistributed net capital gains.
Second, under certain circumstances, the Trust will be subject to the
"alternative minimum tax" on its items of tax preference, if any. Third, if the
Trust has (i) net income from the sale or other disposition of "foreclosure
property" (which is, in general, property acquired on foreclosure or otherwise
on default on a loan secured by such property or a
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<PAGE> 22
lease of such property) or (ii) other non-qualifying income from foreclosure
property, it will be subject to tax at the highest corporate rate on such
income. Fourth, if the Trust has net income from "prohibited transactions"
(which are, in general, certain sales or other dispositions of property, other
than foreclosure property, held primarily for sale to customers in the ordinary
course of business), such income will be subject to a 100% tax. Fifth, if the
Trust should fail to satisfy the 75% gross income test or the 95% gross income
test (as discussed below), but nonetheless maintains its qualification as a REIT
because certain other requirements are met, it will be subject to a 100% tax on
the net income attributable to the greater of the amount by which the Trust
fails the 75% or 95% test, multiplied by a fraction intended to reflect the
Trust's profitability. Sixth, if the Trust should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Trust will be subject to a
4% excise tax on the excess of such required distributions over the amounts
actually distributed. Seventh, pursuant to IRS Notice 88-19, if the Trust has a
net unrealized built-in gain, with respect to any asset (a "Built-in Gain
Asset") held by the Trust on January 1, 1995 or acquired by the Trust from a
corporation that is or has been a C corporation (i.e., generally a corporation
subject to full corporate-level tax) in certain transactions in which the basis
of the Built-in Gain Asset in the hands of the Trust is determined by reference
to the basis of the asset in the hands of the C corporation, and the Trust
directly or indirectly recognizes gain on the disposition of such asset during
the 10-year period (the "Recognition Period") beginning on January 1, 1995 with
respect to assets held by the Trust on such date or, with respect to other
assets, the date on which such asset was acquired by the Trust, then, to the
extent of the Built-in Gain (i.e., the excess of (a) the fair market value of
such asset over (b) the Trust's adjusted basis in such asset, determined as of
the beginning of the Recognition Period), such gain will be subject to tax at
the highest regular corporate rate pursuant to Treasury Regulations that have
not yet been promulgated. The results described above with respect to the
recognition of Built-in Gain assume that the Trust will make an election
pursuant to IRS Notice 88-19 with respect to assets acquired by the Trust from a
corporation that is or has been a C corporation. The Trust believes that it had
Built-in-Gain Assets as of January 1, 1995 and that it acquired additional
Built-in-Gain Assets as a result of the acquisition of Westin and, thus, direct
or indirect sales of such Built-in-Gain Assets by the Trust after 1994 in excess
of available loss carryforwards will result in a federal income tax liability to
the Trust.
Requirements for Qualification
To qualify as a REIT, the Trust must elect to be so treated and must meet
on a continuing basis certain requirements (as discussed below) relating to the
Trust's organization, sources of income, nature of assets, and distribution of
income to shareholders.
The Code defines a REIT as a corporation, trust or association: (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for the REIT Provisions; (iv) that is neither a financial institution nor an
insurance company subject to certain provisions of the Code; (v) the beneficial
ownership of which is held by 100 or more persons; (vi) during the last half of
each taxable year not more than 50% in value of the outstanding stock of which
is owned, directly or indirectly, by five or fewer individuals (defined in the
Code to include certain entities); (vii) as of the close of the taxable year,
has no earnings and profits accumulated in any non-REIT year; (viii) is not
electing to be taxed as a REIT prior to the fifth taxable year which begins
after the first taxable year for which its REIT status terminated or was revoked
or the IRS has waived the applicability of such waiting period; (ix) that has
the calendar year as its taxable year; and (x) that meets certain other tests,
described below, regarding the nature of its income and assets. The REIT
Provisions provide that conditions (i) to (iv), inclusive, must be met during
the entire taxable year and that condition (v) must be met during at least 335
days of a taxable year of 12 months, or during a proportionate part of a taxable
year of less than 12 months. Conditions (v) and (vi) do not apply until after
the first taxable year for which an election is made by the REIT to be taxed as
a REIT.
The Trust believes that it satisfies conditions (i) through (x) described
in the immediately preceding paragraph. The Trust believes that the dividends
paid and to be paid by the Trust and its predecessors will
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enable the Trust to satisfy condition (vii) above. In addition, the Declaration
of Trust and the Articles of Incorporation provide for restrictions regarding
the transfer and ownership of shares, which restrictions are intended to assist
the Trust in continuing to satisfy the share ownership requirements described in
conditions (v) and (vi) above. See "Risk Factors -- Limits on Change of Control
and Ownership Limitation." With respect to its taxable years which ended before
January 1, 1998, in order to maintain its election to be taxed as a REIT, the
Trust must also maintain certain records and request certain information from
its shareholders designed to disclose the actual ownership of its stock. The
Trust believes that it has complied and will comply with these requirements.
If a REIT owns a "Qualified REIT Subsidiary," the Code provides that such
Qualified REIT Subsidiary is disregarded for federal income tax purposes, and
all assets, liabilities and items of income, deduction and credit of the
Qualified REIT Subsidiary are treated as assets, liabilities and such items of
the REIT itself. A Qualified REIT Subsidiary is a corporation all of the capital
stock of which is owned by the REIT and, for taxable years beginning on or
before August 5, 1997, has been owned by the REIT from the commencement of such
corporation's existence. Unless the context otherwise requires, all references
to the Trust in this "Federal Income Tax Considerations" section include the
Trust's Qualified REIT Subsidiaries.
As part of the acquisition of Westin, the Realty Partnership acquired
substantially all of the stock of Seattle, Lauderdale, and Denver, which
corporations intend to elect to be taxed as REITs (the "Subsidiary REITs"). The
Subsidiary REITs will not be treated as Qualified REIT Subsidiaries and will be
subject to the REIT Provisions as described in this section. Also, as a part of
the acquisition of Westin, certain of the assets of Westin, including third
party management, franchise and representation agreements and certain trademarks
and other intangible property, are held by corporations (the "Management
Subsidiaries") of which the Trust owns all of the nonvoting stock and voting
stock comprising less than 10% of the outstanding voting stock of each
Management Subsidiary. The remainder of the voting stock of the Management
Subsidiaries is owned by the Corporation. The Management Subsidiaries will not
be treated as Qualified REIT Subsidiaries.
In the case of a REIT that is a partner in a partnership, the REIT
Provisions provide that the REIT is deemed to own its proportionate share of the
assets of the partnership based on the REIT's capital interest in the
partnership and is deemed to be entitled to the income of the partnership
attributable to such proportionate share. In addition, the character of the
assets and gross income of the partnership shall retain the same character in
the hands of the REIT for purposes of satisfying the gross income tests and the
asset tests, described below. Similar treatment applies with respect to
lower-tier partnerships which the REIT indirectly owns through its interests in
higher-tier partnerships. Thus, the Trust's proportionate share of the assets,
liabilities and items of income of the Realty Partnership and the other
partnerships and limited liability companies in which the Trust owns a direct or
indirect interest (collectively, the "Realty Subsidiary Entities"), will be
treated as assets, liabilities and items of income of the Trust for purposes of
applying the gross income tests and the asset tests described below, provided
that the Realty Partnership and the Realty Subsidiary Entities are treated as
partnerships for federal income tax purposes. See "-- Federal Income Tax Aspects
of the Partnerships and the Subsidiary Entities" below. Sidley & Austin has
advised the Company, however, that if the gross income test and the asset test
described below were applied to partnerships in a manner different from that
described in this paragraph, then the Trust might not be able to satisfy one or
more of the gross income tests or asset tests and, in such a case, the Trust
would lose its REIT status.
Paired Common Shares. Section 269B(a)(3) of the Code provides that if a
REIT and a non-REIT are "stapled entities," as such term is defined in Section
269B(c)(2), then the REIT and the non-REIT shall be treated as one entity for
purposes of determining whether either company qualifies as a REIT. The term
"stapled entities" means any group of two or more entities if more than 50% in
value of the beneficial ownership in each of such entities consists of "stapled
interests" (e.g., paired shares). If Section 269B(a)(3) applied to the Trust and
the Corporation, then the Trust would not be able to satisfy the gross income
tests (described below) and thus would not be eligible to be taxed as a REIT.
Except to the extent provided in H.R. 2676, Section 269B(a)(3) does not apply if
the shares of a REIT and a non-REIT were paired on or before June 30, 1983 and
the REIT was taxable as a REIT on or before June 30, 1983. As a result of this
grandfathering rule, Section 269B(a)(3) has not applied to the Trust and the
Corporation. This grandfathering rule does not, by its terms, require that the
Trust be taxed as a REIT at all times after June 30, 1983. Sidley & Austin has
rendered an opinion to the effect that the termination of the Trust's REIT
election for the
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taxable years ended December 31, 1991 through 1994 did not result in Section
269B(a)(3) becoming applicable to the Trust. There are, however, no judicial or
administrative authorities interpreting this grandfathering rule. Therefore,
Sidley & Austin's opinion is based solely on the literal language of the
statutory grandfathering rule. If the Restructuring occurs, it is expected that
the Trust and the Corporation will no longer be "stapled entities" and thus
Section 269B(a)(3) will continue not to apply to the Trust and the Corporation.
Sidley & Austin has advised the Company that, even though Section
269B(a)(3) of the Code does not apply to the Trust and the Corporation, the IRS
could assert that the Trust and the Corporation should be treated as one entity
under general tax principles. In general, such an assertion would only be upheld
if the separate corporate identities of the Trust and the Corporation are a sham
or unreal. Not all of the trustees of the Trust are also directors of the
Corporation. In addition, the Trust, the Corporation, the Realty Partnership,
the Operating Partnership, the Realty Subsidiary Entities and the partnerships
or limited liability companies owned in whole or in part by the Operating
Partnership (collectively, the "Operating Subsidiary Entities") have separate
creditors and are subject to different state law licensing and regulatory
requirements. The Trust and the Corporation have represented that they and the
Realty Partnership, the Operating Partnership, and the entities in which they
own a direct or indirect interest will each maintain separate books and records
and all material transactions among them have been and will be negotiated and
structured with the intention of achieving an arm's-length result. Sidley &
Austin has rendered an opinion to the effect that, based on the foregoing, the
separate corporate identities of the Trust and the Corporation will be
respected.
The Trust, the Corporation, the Realty Partnership, the Operating
Partnership and certain of the entities in which they own a direct or indirect
interest are controlled by the same interests. As a result, the IRS could,
pursuant to Section 482 of the Code, seek to distribute, apportion or allocate
gross income, deductions, credits or allowances between or among them if it
determines that such distribution, apportionment or allocation is necessary in
order to prevent evasion of taxes or to clearly reflect income. The Trust and
the Corporation believe that all material transactions between them and among
them and the Realty Partnership, the Operating Partnership, and the entities in
which they own a direct or indirect interest have been and will be negotiated
and structured with the intention of achieving an arm's-length result. As a
result, the potential application of Section 482 of the Code should not have a
material effect on the Trust or the Corporation. Application of Section 482 of
the Code depends on whether, as a factual matter, transactions between commonly
controlled entities are at arm's-length. As a result, no opinion of counsel can
be given with respect to the potential application of Section 482 of the Code.
Income Tests. In order to maintain qualification as a REIT, the Trust must
annually satisfy certain gross income requirements (the "gross income tests").
First, at least 75% of the Trust's gross income (excluding gross income from
prohibited transactions) for each taxable year must consist of defined types of
income derived directly or indirectly from investments relating to real property
or mortgages on real property (including "rents from real property," as
described below, and in certain circumstances, interest) or from certain types
of qualified temporary investments. Second, at least 95% of the Trust's gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived from the same items which qualify under the 75% income test
and from dividends, interest, and gain from the sale or disposition of stock or
securities that do not constitute dealer property or from any combination of the
foregoing. Pursuant to H.R. 2676, prior to the effective date of the
Restructuring, with respect to certain interests in real property acquired after
March 26, 1998, the Trust and the Corporation will be treated as a single entity
for purposes of the gross income tests.
Rents received or deemed to be received by the Trust will qualify as "rents
from real property" for purposes of the gross income tests only if several
conditions are met. First, the amount of rent must not be based in whole or in
part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "rents from real property"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales (or items thereof). Second, the Code provides that rents received from
a tenant will not qualify as "rents from real property" in satisfying the gross
income tests if the REIT, or a direct or indirect owner of 10% or more of the
REIT directly or indirectly, owns 10% or more of such tenant (a "Related Party
Tenant"). Third, if rent attributable to personal property, leased in connection
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with a lease of real property, is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to such personal property
will not qualify as "rents from real property." Finally, if a REIT renders or
furnishes services to its tenants, the income will qualify as "rents from real
property" only if the services are of a type that a tax-exempt organization can
provide to its tenants without causing its rental income to be unrelated
business taxable income under the Code. Services that would give rise to
unrelated business taxable income if provided by a tax-exempt organization
("Prohibited Services") must be provided by an "independent contractor" who is
adequately compensated and from whom the REIT does not derive any income.
Payments for services furnished (whether or not rendered by an independent
contractor) that are not customarily provided to tenants in properties of a
similar class in the geographic market in which the REIT's property is located
will not qualify as "rents from real property." The provision of Prohibited
Services by a REIT in connection with a lease of real property will not cause
the rent to fail to qualify as "rents from real property" unless the amount
treated as received for the Prohibited Services exceeds 1% of all amounts
received or accrued during the taxable year directly or indirectly by the REIT
with respect to such property.
A substantial portion of the Trust's income will be derived from its
partnership interests in the Realty Partnership and the Realty Subsidiary
Entities and its ownership of the Subsidiary REITs. The Trust, the Realty
Partnership, the Realty Subsidiary Entities and the Subsidiary REITs currently
lease for a fixed period all of their fee and leasehold interests in their
hotels and associated property to the Corporation, the Operating Partnership,
the Operating Subsidiary Entities or to unrelated persons (the "Leases"). If the
Restructuring occurs, substantially all of the Leases to the Operating
Partnership and the Operating Subsidiary Entities will be transferred to the
Corporation as of December 31, 1998. The Leases are net leases which generally
provide for payment of rent equal to the greater of a fixed rent or a percentage
rent. The percentage rent is determined by calculating a fixed percentage of the
gross room revenues and adding, for certain hotels, fixed percentages of other
types of gross revenues in excess of certain levels.
In order for the rents paid under the Leases to constitute "rents from real
property," the Leases must be respected as true leases for federal income tax
purposes and not treated as service contracts, joint ventures or some other type
of arrangement. The determination of whether the Leases are true leases depends
upon an analysis of all of the surrounding facts and circumstances. In making
such a determination, courts have considered a variety of factors, including the
intent of the parties, the form of the agreement, the degree of control over the
property that is retained by the property owner and the extent to which the
property owner retains the risk of loss with respect to the property.
Sidley & Austin has rendered an opinion to the effect that the Leases will
be treated as true leases for federal income tax purposes, which opinion is
based, in part, on the following facts: (i) the lessors and the lessees intend
for their relationship to be that of lessor and lessee and each such
relationship will be documented by a lease agreement; (ii) the lessees will have
the right to exclusive possession and use and quiet enjoyment of the leased
premises during the term of the Leases; (iii) the lessees will bear the cost of,
and be responsible for, day-to-day maintenance and repair of the leased
premises, other than the cost of certain capital expenditures, and will dictate
how the leased premises are operated and maintained; (iv) the lessees will bear
all of the costs and expenses of operating the leased premises during the term
of the Leases; (v) the term of the Leases is less than the economic life of the
leased premises and the lessees do not have purchase options with respect to the
leased premises; (vi) the lessees are required to pay substantial fixed rent
during the term of the Leases; and (vii) each lessee stands to incur substantial
losses or reap substantial profits depending on how successfully it operates the
leased premises.
Investors should be aware, however, that there are not controlling
authorities involving leases with terms substantially the same as the Leases.
Therefore, the opinion of Sidley & Austin is based upon an analysis of the facts
and circumstances and upon rulings and judicial decisions involving situations
that are analogous. If any significant Lease is recharacterized as a service
contract or a partnership agreement, rather than as a true lease, the Trust
would not be able to satisfy either the 75% or 95% gross income tests or, in the
case of the recharacterization of a Lease of a Subsidiary REIT, one or more of
the asset tests, and, as a result, would lose its REIT status.
In order for rent payments under the Leases to qualify as "rents from real
property," the rent must not be based on the income or profits of any person.
The percentage rent under the Leases will qualify as "rents from
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real property" if it is based on percentages of receipts or sales and the
percentages (i) are fixed at the time the Leases are entered into; (ii) are not
renegotiated during the term of the Leases in a manner that has the effect of
basing percentage rent on income or profits; and (iii) conform with normal
business practice. More generally, percentage rent will not qualify as "rents
from real property" if, considering the Leases and all the surrounding
circumstances, the arrangement does not conform with normal business practice,
but is in reality used as a means of basing the percentage rent on income or
profits. The Trust and the Corporation believe that the Leases conform with
normal business practice and the percentage rent will be treated as "rents from
real property" under this requirement. The Trust has represented that, with
respect to hotel properties that it may directly or indirectly acquire in the
future, the Trust will not charge rent that is based in whole or in part on the
net income or profits of any person (except by reason of being based on a fixed
percentage of receipts or sales, as described above).
Another requirement for rent payments under a Lease to constitute "rents
from real property" is that the rent attributable to personal property under the
Lease must not be greater than 15% of the rent received under the Lease. For
this purpose, rent attributable to personal property is the amount that bears
the same ratio to the total rent for the taxable year as the average of the
adjusted basis of the personal property at the beginning and at the end of the
taxable year bears to the average of the aggregate adjusted basis of both the
real property and personal property leased under, or in connection with, such
lease. If with respect to a sufficient number of the Leases rent attributable to
personal property is greater than 15% of the total rent, then the Trust would
not be able to satisfy either the 75% or 95% gross income tests, or, in the case
of a Lease of a Subsidiary REIT, one or more of the assets tests, and, as a
result, would lose its REIT status. With respect to both the Leases and future
acquisitions, the Trust has represented that it will monitor the 15% test to
ensure continued qualification as a REIT.
A third requirement for qualification of rent under the Leases as "rents
from real property" is that neither the Trust nor any Subsidiary REIT may own,
directly or constructively, 10% or more of any tenant under a Lease. If the
Trust or any Subsidiary REIT were to own directly or indirectly, 10% or more of
such tenant, the tenant would be a Related Party Tenant and the rent paid by the
tenant with respect to the leased property would not qualify as income of the
type that can be received by a REIT. In order to prevent such a situation, which
would likely result in the disqualification of the Trust as a REIT, the
Declaration of Trust and the Articles of Incorporation contain restrictions on
the amount of Trust Shares and Corporation Shares that any one person can own.
These restrictions generally provide that any attempt by any one person to
actually or constructively acquire 8.0% or more of the outstanding Paired Common
Shares will be ineffective. See "Risk Factors -- Limits on Change of Control and
Ownership Limitation." Sidley & Austin has advised the Company, however, that
notwithstanding such restrictions, because the Code's constructive ownership
rules for purposes of the 10% ownership limit are broad and it is not possible
to continually monitor direct and indirect ownership of Paired Common Shares, it
is possible for a person to own sufficient Paired Common Shares to cause the
termination of the Trust's REIT status. The Trust, the Realty Partnership, the
Realty Subsidiary Entities and the Subsidiary REITs currently lease all of their
fee and leasehold interests in their hotels and associated property to the
Corporation, the Operating Partnership, the Operating Subsidiary Entities or to
unrelated persons. If the Restructuring occurs, effective as of December 31,
1998, substantially all of the Leases to the Operating Partnership and the
Operating Subsidiary Entities will be transferred to the Corporation. Sidley &
Austin is of the opinion that, after the Restructuring, the Corporation will not
be a Related Party Tenant with respect to the Trust or the Subsidiary REITs.
Finally, rent under the Leases will not qualify as "rents from real
property" if the Trust or any Subsidiary REIT renders or furnishes Prohibited
Services to the occupants of the properties (subject to a de minimis rule) other
than through an independent contractor from whom the Trust or such Subsidiary
REIT does not derive any income. So long as the Leases are treated as true
leases, neither the Trust nor any Subsidiary REIT will be treated as rendering
or furnishing Prohibited Services to the occupants of the properties as a result
of the Leases. Sidley & Austin has advised the Company that if the IRS were to
successfully assert that one or more of the Management Subsidiaries were
providing Prohibited Services to the Corporation or to any entity in which the
Corporation directly or indirectly owns an interest, or was managing or
operating any assets owned directly or indirectly by the Trust, then, in certain
cases, the Trust would not be able to satisfy either
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the 75% or 95% gross income test, or one or more of the asset tests, and, as a
result, would lose its REIT status.
A corporation cannot qualify as an independent contractor if more than 35%
of the total combined voting power of its stock is owned directly or indirectly
by one or more persons who own 35% or more of the REIT. Therefore, after the
Restructuring, certain entities owned directly or indirectly by the Corporation
will not qualify as independent contractors. The Corporation has represented
that any Prohibited Services to be provided by any non-independent contractor
entity will not be rendered or furnished by or on behalf of the Trust.
Based on the foregoing, Sidley & Austin has rendered an opinion to the
effect that the rent payable under the Leases will be treated as "rents from
real property" for purposes of the 75% and 95% gross income tests. There can,
however, be no assurance that the IRS will not successfully assert a contrary
position or that there will not be a change in circumstances (such as the
entering into of new leases) which would result in a portion of the rent
received to fail to qualify as "rents from real property." If such failures were
in sufficient amounts, the Trust or a Subsidiary REIT would not be able to
satisfy either the 75% or 95% gross income test and, as a result, would lose its
REIT status.
For purposes of the gross income tests, the term "interest" generally does
not include any amount received or accrued (directly or indirectly) if the
determination of such amount depends in whole or in part on the income or
profits of any person. However, an amount received or accrued generally will not
be excluded from the term "interest" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. The Trust, the Realty
Partnership and certain of the Realty Subsidiary Entities hold notes and may
advance money from time to time to tenants for the purpose of financing tenant
improvements, making real estate loans or holding or acquiring additional notes.
None of the notes currently held by the Trust, the Realty Partnership or the
Realty Subsidiary Entities provide for the payment of any amount based on the
income or profits of any person other than amounts based on a fixed percentage
or percentages of receipts or sales. In addition, none of the Trust, the Realty
Partnership or the Realty Subsidiary Entities intend to charge interest that
will depend in whole or in part on the income or profits of any person or to
make loans (not secured in substantial part by real estate mortgages) in amounts
that could jeopardize the Trust's compliance with the 75% and 5% asset tests,
discussed below. Accordingly, to the extent the notes held by the Trust, the
Realty Partnership or the Realty Subsidiary Entities are secured by real
property, the interest received or accrued with respect to such notes will be
treated as qualifying income for both the 75% and the 95% gross income tests.
Certain of the notes held by the Trust and the Realty Partnership are not
secured by real property and, with respect to such notes that are secured by
real property (including notes issued in connection with the acquisition of
ITT), it is possible that the amount of such notes will exceed the fair market
value of the real property security therefor. To the extent such notes are not
secured by real property, interest received or accrued with respect to such
notes will be treated as qualifying income for the 95% gross income test but
will not be treated as qualifying income for the 75% gross income test. However,
the Company believes that the amount of such interest will not cause the Trust
to fail to satisfy the 75% gross income test.
As part of the acquisition of ITT, the Trust guaranteed certain
indebtedness of the Corporation. The fees paid to the Trust for such guarantee
are unlikely to be treated as qualifying income for either the 75% or the 95%
gross income tests. However, the Company believes that the amount of such fees
will not cause the Trust to fail to satisfy either the 75% or the 95% gross
income test.
The net income from a prohibited transaction is subject to a 100% tax. The
Trust believes that no asset directly or indirectly owned by it is held for sale
to customers and that the sale of any such property will not be in the ordinary
course of business of the Trust, the Realty Partnership or any Realty Subsidiary
Entity.
If the Trust fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it will nevertheless qualify as a REIT for such year
if it is entitled to and receives relief under certain provisions of the Code.
No assurance can be given that the Trust would be entitled to the benefit of
these relief provisions. Even if these relief provisions apply, a tax would be
imposed with respect to the excess net income.
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Asset Tests. In order to maintain qualification as a REIT, a REIT, at the
close of each quarter of its taxable year, must also satisfy three tests
relating to the nature of its assets. First, at least 75% of the value of the
REIT's total assets must be represented by "real estate assets" (including stock
or debt instruments held for not more than one year purchased with the proceeds
of a stock offering or long-term (at least five years) debt offering of the
REIT), cash, cash items and government securities and shares of REITs. Second,
not more than 25% of the REIT's total assets may be represented by securities
other than those in the 75% asset class. Third, of the investments included in
the 25% asset class, the value of any one issuer's securities owned by the REIT
may not exceed 5% of the value of the REIT's total assets, and the REIT may not
own more than 10% of any one issuer's outstanding voting securities.
The Trust believes that commencing with its taxable year ended December 31,
1995 it has complied with the asset tests. A substantial portion of the Trust's
investments are in properties owned by the Realty Partnership and the Realty
Subsidiary Entities, at least 75% of which represent qualifying real estate
assets. A portion of the indebtedness of the Corporation and the Operating
Partnership to the Trust and the Realty Partnership may not be qualifying assets
under the 75% asset test. However, such portion does not exceed 5% of the value
of the assets of the Trust and, thus, will not cause the Trust to fail the 5%
asset test.
The Trust owns all of the nonvoting stock and less than 10% of the voting
stock of each Management Subsidiary. The Trust, however, does not directly own
more than 10% of the voting securities of any Management Subsidiary. The Trust
also acquired, as a result of the acquisition of Westin, certain intangible
assets of Westin. The Trust believes that, as of the end of each calendar
quarter commencing with the calendar quarter ending March 31, 1998, the value of
the securities of each Management Subsidiary held directly by the Trust and the
Trust's pro rata share of the value of the securities of each Management
Subsidiary held indirectly through the Realty Partnership will not exceed 5% of
the value of the Trust's total assets and that not more than 25% of the value of
the Trust's total assets will consist of assets other than "real estate assets,"
cash and cash items (including receivables), government securities and shares of
REITs. The Trust's belief is based in part upon its analysis of the estimated
values of the various securities and other assets owned by the Trust and the
Realty Partnership. There can be no assurance, however, that the IRS will not
successfully assert that certain securities held by the Trust or the Realty
Partnership cause the Trust to fail either the 5% or 10% asset tests or that
less than 75% of the value of the Trust's total assets consists of "real estate
assets," cash and cash items (including receivables), government securities and
shares of REITs.
After meeting the asset tests at the close of any quarter, the Trust will
not lose its status as a REIT for failure to satisfy the asset tests at the end
of a subsequent quarter solely by reason of changes in asset values. If the
failure to satisfy the asset tests results from an acquisition of securities or
other property during a quarter, the failure can be cured by disposition of
sufficient non-qualifying assets within 30 days after the close of that quarter.
The Trust intends to maintain adequate records of the value of its assets to
ensure compliance with the asset tests and to take such actions within 30 days
after the close of any quarter as may be required to cure any non-compliance.
Annual Distribution Requirements. The Trust, in order to qualify as a REIT,
is required to distribute dividends (other than capital gain dividends) to its
shareholders in an amount at least equal to (i) the sum of (a) 95% of the
Trust's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Trust's net capital gain) and (b) 95% of the net income (after
tax), if any, from foreclosure property, minus (ii) the sum of certain items of
non-cash income. In addition, if the Trust directly or indirectly disposes of
any Built-in Gain Asset during its Recognition Period, the Trust will be
required, pursuant to Treasury Regulations that have not yet been promulgated,
to distribute at least 95% of the Built-in Gain (after tax), if any, recognized
on the disposition of such asset. Distributions must be paid in the taxable year
to which they relate, or in the following taxable year if declared before the
Trust timely files its tax return for such year and if paid on or before the
first regular dividend payment after such declaration. To the extent that the
Trust does not distribute all of its net capital gain or distributes at least
95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be
subject to tax thereon at regular ordinary and capital gain corporate tax rates.
Furthermore, if the Trust should fail to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain income for such year, and (iii) any
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<PAGE> 29
undistributed taxable income from prior periods, the Trust will be subject to a
4% excise tax on the excess of such required distribution over the amounts
actually distributed.
The Trust intends to make timely distributions sufficient to satisfy the
annual distribution requirements. It is possible, however, that the Trust, from
time to time may not have sufficient cash or other liquid assets to meet the
distribution requirements described above. In order to meet the distribution
requirements in such cases, the Trust, the Realty Partnership or a Subsidiary
REIT may find it necessary to arrange for short-term or possibly long-term
borrowings.
Under certain circumstances, the Trust will be permitted to rectify a
failure to meet the distribution requirements for a year by paying "deficiency
dividends" to shareholders in a later year, which would be included in the
Trust's deduction for dividends paid for the earlier year. In such case, the
Trust would be able to avoid being taxed on amounts distributed as deficiency
dividends; however, the Trust will be required to pay interest based upon the
amount of any deduction taken for deficiency dividends.
Failure to Qualify
If the Trust fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Trust will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which the
Trust fails to qualify will not be deductible by the Trust nor will they be
required to be made. As a result, the Trust's failure to qualify as a REIT could
reduce the cash available for distribution by the Trust to its shareholders. In
addition, if the Trust fails to qualify as a REIT, all distributions to
shareholders will be taxable as ordinary income to the extent of the Trust's
current and accumulated earnings and profits, and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends-received deduction. Unless entitled to relief under specific statutory
provisions, the Trust will also be disqualified from taxation as a REIT for the
four taxable years following the year during which qualification was lost. It is
not possible to state whether in all circumstances the Trust would be entitled
to such statutory relief.
FEDERAL INCOME TAXATION OF THE CORPORATION
The Corporation is subject to federal income tax on its taxable income. A
portion of the interest paid or accrued by the Corporation with respect to its
indebtedness to the Trust or to the Realty Partnership may not be currently
deductible. The amount of any such deferred interest deductions for a taxable
year will depend on the amount and sources of income and expense of the
Corporation and the extent to which the holders of Paired Common Shares are
exempt from federal income tax. No opinion of counsel is being rendered on the
deductibility of such interest expense because no controlling legal authority
exists with respect to the application of the relevant sections of the Code to
such interest expense.
FEDERAL INCOME TAXATION OF HOLDERS OF PAIRED COMMON SHARES
Federal Income Taxation of Taxable U.S. Holders
As used herein, the term "U.S. Shareholder" means a holder of Paired Common
Shares who is: (i) a citizen or resident of the United States; (ii) a
corporation, partnership, or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof; or (iii) an
estate or trust the income of which is subject to U.S. federal income taxation
regardless of its source. As long as the Trust qualifies as a REIT,
distributions made to the Trust's U.S. Shareholders up to the amount of the
Trust's current or accumulated earnings and profits (and not designated as
capital gain dividends) will be taken into account by such U.S. Shareholders as
ordinary income and will not be eligible for the dividends-received deduction
for corporations. Distributions that are properly designated by the Trust as
capital gain dividends will be taxed as long-term capital gain (to the extent
they do not exceed the Trust's actual net capital gain for the taxable year)
without regard to the period for which the U.S. Shareholder has held its stock.
However, corporate holders will, in certain circumstances, be required to treat
up to 20% of certain capital gain dividends as ordinary income, and capital
gains dividends are not eligible for the dividends-received deduction. Certain
capital gain dividends will be taxed at different rates, depending on the type
of gain recognized by the Trust.
28
<PAGE> 30
Distributions in excess of the Trust's current and accumulated earnings and
profits will not be taxable to a U.S. Shareholder to the extent that they do not
exceed the adjusted basis of the U.S. Shareholder's Trust Shares, but rather
will reduce the adjusted basis of such Trust Shares. To the extent that such
distributions exceed the adjusted basis of a U.S. Shareholder's Trust Shares
they will be included in income as long-term capital gain (or short-term capital
gain if the shares have been held for one year or less). In addition, any
dividend declared by the Trust in October, November or December of any year
payable to a holder of record on a specified date in any such month will be
treated as both paid by the Trust and received by the holder on December 31 of
such year, provided that the dividend is actually paid by the Trust during
January of the following calendar year.
If the Trust elects to retain and pay tax on its net capital gains, the
Trust's U.S. Shareholders will be required to include their proportionate share
of the undistributed long-term capital gains in income and will receive a credit
for their share of the tax paid by the Trust. The basis of the Trust's U.S.
Shareholders' Trust Shares would be increased by a corresponding amount.
The Trust will be treated as having sufficient earnings and profits to
treat as a dividend any distribution by the Trust up to the amount required to
be distributed in order to avoid imposition of the 4% excise tax discussed
above. In such a case, U.S. Shareholders will be required to treat certain
distributions that would otherwise result in a tax-free return of capital as
taxable distributions. Moreover, any "deficiency dividend" will be treated as a
"dividend" (either as ordinary or capital gain dividend, as the case may be),
regardless of the Trust's earnings and profits.
Distributions from the Trust and gain from the disposition of the Trust
Shares will not be treated as passive activity income and, therefore, U.S.
Shareholders will not be able to apply any "passive losses" against such income.
Dividends from the Trust (to the extent they do not constitute a return of
capital) will generally be treated as investment income for purposes of the
investment interest expense limitation. Gain from the disposition of shares and
capital gains dividends will not be treated as investment income unless the U.S.
Shareholders elect to have the gain taxed at ordinary income rates.
Distributions from the Corporation up to the amount of the Corporation's
current or accumulated earnings and profits will be taken into account by U.S.
Shareholders as ordinary income and will be eligible for the dividends-received
deduction for corporations. Distributions in excess of the Corporation's current
and accumulated earnings and profits will not be taxable to a U.S. Shareholder
to the extent that they do not exceed the adjusted basis of the U.S.
Shareholder's Corporation Shares, but rather will reduce the adjusted basis of
such Corporation Shares. To the extent that such distributions exceed the
adjusted basis of a U.S. Shareholder's Corporation Shares they will be included
in income as long-term capital gain (or short-term capital gain if the stock has
been held for one year or less).
In general, a U.S. Shareholder will realize capital gain or loss on the
disposition of Paired Common Shares equal to the difference between the amount
realized on such disposition and the U.S. Shareholder's adjusted basis in such
Paired Common Shares. Such gain or loss will generally constitute long-term
capital gain or loss if the U.S. Shareholder held such Paired Common Shares for
more than one year. However, any loss upon a sale or exchange of Trust Shares by
a U.S. Shareholder who has held such shares for six months or less (after
applying certain holding period rules) will be treated as a long-term capital
loss to the extent of distributions from the Trust that are treated by such U.S.
Shareholder as long-term capital gain.
For U.S. Shareholders who are individuals, the maximum capital gains tax
rate for sales of Paired Common Shares will be: (i) 20%, if such shares have
been held for more than 12 months, or (ii) 18%, if such shares have been held
for more than five years and the holding period for such shares begins after
December 31, 2000. The eligibility of capital gains dividends for lower capital
gains tax rates is subject to special rules.
U.S. Shareholders will not be permitted to include in their individual
income tax returns any net operating losses or capital losses of the Trust or
the Corporation.
29
<PAGE> 31
Federal Taxation of Tax-Exempt Holders of Paired Common Shares
The IRS has ruled that amounts distributed as dividends by a REIT to a
tax-exempt employee's pension trust do not constitute unrelated business taxable
income ("UBTI"). Based on this ruling and the analysis therein, distributions by
the Trust will not, subject to certain exceptions described below, be UBTI to a
qualified plan, IRA or other tax-exempt entity (a "Tax-Exempt Shareholder")
provided the Tax-Exempt Shareholder has not held its shares as "debt financed
property" within the meaning of the Code and the shares are not otherwise used
in an unrelated trade or business of the Tax-Exempt Shareholder. Similarly,
income from the sale of Trust Shares will not, subject to certain exceptions
described below, constitute UBTI unless the Tax-Exempt Shareholder has held such
Trust Shares as a dealer (under Section 512(b)(5)(B) of the Code) or as "
debt-financed property" within the meaning of Section 514 of the Code. Revenue
rulings are interpretive in nature and subject to revocation or modification by
the IRS.
For Tax-Exempt Shareholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans, exempt from federal income taxation under Sections
501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code respectively, income from an
investment in the Trust will constitute UBTI unless the organization is able to
deduct properly amounts set aside or placed in reserve for certain purposes so
as to offset the income generated by its investment in the Trust. Such
prospective investors should consult their tax advisors concerning these
"set-aside" and reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" will (subject to a de minimis exception) be treated as UBTI
as to any trust that (i) is described in Section 401(a) of the Code, (ii) is
tax-exempt under Section 501(a) of the Code, and (iii) holds more than 10% (by
value) of the interests in the REIT. The Trust does not expect to be a "pension
held REIT" within the meaning of the Code.
Federal Taxation of Non-U.S. Holders of Paired Common Shares
The rules governing United States federal income taxation of the ownership
and disposition of stock by persons that are, for purposes of such taxation,
non-resident alien individuals, foreign corporations, foreign partnerships, or
foreign estates or trusts (collectively, "Non-U.S. Shareholders") are complex,
and no attempt is made herein to provide more than a brief summary of such
rules. Accordingly, the discussion does not address all aspects of United States
federal income tax and does not address state, local or foreign tax consequences
that may be relevant to a Non-U.S. Shareholder in light of its particular
circumstances. Prospective Non-U.S. Shareholders should consult with their own
tax advisors to determine the effect of federal, state, local, and foreign
income tax laws with regard to an investment in Paired Common Shares, including
any reporting requirements.
Treasury Regulations were issued on October 14, 1997 (the "1997 Final
Regulations") that will affect the United States federal income taxation of
distributions by the Trust or Corporation to Non-U.S. Shareholders. The 1997
Final Regulations are generally effective for payments made after December 31,
1999. In addition, the 1997 Final Regulations will replace a number of current
tax certification forms (including IRS Form W-8 and IRS Form 4224) with a
single, revised IRS Form W-8 (which, in certain circumstances, requires more
information than previously required). The discussion below does not include a
complete discussion of the 1997 Final Regulations, and prospective Non-U.S.
Shareholders are urged to consult their tax advisors concerning the tax
consequences of their investment in light of the 1997 Final Regulations.
In general, a Non-U.S. Shareholder will be subject to regular United States
income tax with respect to its investment in Paired Common Shares if the income
or gain attributable to such investment is "effectively connected" with the
Non-U.S. Shareholder's conduct of a trade or business in the United States. A
corporate Non-U.S. Shareholder that receives income that is (or is treated as)
effectively connected with a United States trade or business may also be subject
to the branch profits tax under Section 884 of the Code, which is payable in
addition to regular United States corporate income tax. The following discussion
will apply to Non-U.S. Shareholders whose income or gain attributable to such
investment in Paired Common Shares is not so effectively connected.
30
<PAGE> 32
Distributions. Distributions by the Trust to a Non-U.S. Shareholder that
are neither attributable to gain from sales or exchanges by the Trust of United
States real property interests nor designated by the Trust as capital gains
dividends and distributions by the Corporation will be treated as dividends of
ordinary income to the extent that they are made out of current or accumulated
earnings and profits of the Trust or the Corporation, as the case may be. Such
distributions ordinarily will be subject to United States withholding tax on a
gross basis at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty. Any such amounts withheld should be creditable
against the Non-U.S. Shareholder's United States federal income tax liability.
Distributions in excess of current or accumulated earnings and profits of
the Trust or the Corporation, as the case may be, will not be taxable to a
Non-U.S. Shareholder to the extent that they do not exceed the adjusted basis of
the Non-U.S. Shareholder's Trust Shares or Corporation Shares, as the case may
be, but rather will reduce the adjusted basis of such shares. To the extent that
such distributions exceed the adjusted basis of a Non-U.S. Shareholder's Trust
Shares or Corporation Shares, as the case may be, they will give rise to gain
from the sale or exchange of Non-U.S. Shareholder's Paired Common Shares if the
Non-U.S. Shareholder otherwise would be subject to tax on any gain from the sale
or other disposition of Paired Common Shares, as described below. Distributions
to Non-U.S. Shareholders that reduce the adjusted basis of Trust Shares or
Corporation Shares and distributions to Non-U.S. Shareholders that exceed the
adjusted basis of Trust Shares or Corporation Shares will ordinarily be subject
to a withholding tax on a gross basis at a 10% rate, regardless of whether such
distributions result in gain to the Non-U.S. Shareholder. The Trust or the
Corporation, as the case may be, are permitted to apply to the IRS for a
certificate that reduces or eliminates this withholding tax. Any such amounts
withheld will be creditable against the Non-U.S. Shareholder's United States
federal income tax liability.
If it cannot be determined at the time a distribution is made whether or
not such distribution will be in excess of current or accumulated earnings and
profits, the distribution will generally be treated as a dividend for
withholding purposes. However, amounts thus withheld are generally refundable if
it is subsequently determined that such distribution was, in fact, in excess of
current or accumulated earnings and profits of the Trust or the Corporation, as
the case may be. The Trust and the Corporation expect to withhold United States
income tax at the rate of 30% on the gross amount of any such distributions made
to a Non-U.S. Shareholder unless (i) a lower rate is provided for under an
applicable tax treaty and the shareholder files the required form evidencing
eligibility for that reduced rate with the Trust and the Corporation, or (ii)
the Non-U.S. Shareholder files an IRS Form 4224 with the Trust and the
Corporation claiming that the distribution is "effectively connected" income.
Distributions to a Non-U.S. Shareholder that are attributable to gain from
sales or exchanges by the Trust of United States real property interests will
cause the Non-U.S. Shareholder to be treated as recognizing such gain as income
effectively connected with a United States trade or business. Non-U.S.
Shareholders would thus generally be taxed at the same rates applicable to U.S.
Shareholders (subject to any applicable alternative minimum tax and a special
alternative minimum tax in the case of non-resident alien individuals). Also,
such gain would be subject to a 30% branch profits tax in the hands of a
Non-U.S. Shareholder that is a corporation, that is not entitled to an exemption
under a tax treaty. The Trust is required to withhold and remit to the IRS 35%
of any distribution that could be designated a capital gains dividend. That
amount is creditable against the Non-U.S. Shareholder's United States federal
income tax liability.
Sale of Paired Common Shares. Gain recognized by a Non-U.S. Shareholder
upon a sale or other disposition of Paired Common Shares generally will not be
subject to United States federal income tax, if (i) in the case of Trust Shares,
the Trust is a "domestically controlled REIT" or (ii) (A) the Paired Common
Shares are regularly traded on an established securities market (e.g., the NYSE,
where the Paired Common Shares are currently traded) and (B) the Selling
Non-U.S. Shareholder held 5% or less of the outstanding Paired Common Shares at
all times during the specified period, unless, in the case of a Non-U.S.
Shareholder who is a non-resident alien individual, such individual is present
in the United States for 183 days or more and certain other conditions apply. A
domestically controlled REIT is defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by foreign persons. The Trust believes that it
qualifies as a domestically controlled REIT.
31
<PAGE> 33
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
Under certain circumstances, U.S. Shareholders will be subject to backup
withholding at a rate of 31% on payments made with respect to, or on cash
proceeds of a sale or exchange of, Paired Common Shares. Backup withholding will
apply only if the holder: (i) fails to furnish its taxpayer identification
number ("TIN") (which, for an individual, would be his or her Social Security
number); (ii) furnishes an incorrect TIN; (iii) is notified by the IRS that the
holder has failed to report properly payments of interest and dividends; or (iv)
under certain circumstances, fails to certify, under penalty of perjury, that
the holder has furnished a correct TIN and has not been notified by the IRS that
the holder is subject to backup withholding for failure to report interest and
dividend payments. Backup withholding will not apply with respect to payments
made to certain exempt recipients, such as corporations and tax-exempt
organizations. In addition, the Trust and the Corporation will be required to
withhold a portion of capital gain distributions made to any holders who fail to
certify their non-foreign status. Additional issues may arise pertaining to
information reporting and withholding with respect to Non-U.S. Shareholders and
each Non-U.S. Shareholder is urged to consult his or her tax advisor with
respect to any such information reporting and withholding requirements.
FEDERAL INCOME TAX ASPECTS OF THE PARTNERSHIPS AND THE SUBSIDIARY ENTITIES
A substantial portion of the Trust's assets are held directly or indirectly
through the Realty Partnership and a substantial portion of the Corporation's
assets are held directly or indirectly through the Operating Partnership.
The Realty Partnership, the Operating Partnership, the Realty Subsidiary
Entities and the Operating Subsidiary Entities involve special tax
considerations, including the possibility of a challenge by the IRS of the
status of any of such partnerships or limited liability companies taxable as a
partnership (as opposed to an association taxable as a corporation) for federal
income tax purposes. If any of such partnerships or limited liability companies
were to be treated as an association, they would be taxable as a corporation
and, therefore, subject to an entity level tax on its income. Such an entity
level tax would substantially reduce the amount of cash available for
distribution to holders of Paired Common Shares. In addition, if the Realty
Partnership or certain Realty Subsidiary Entities were to be taxable as a
corporation, the Trust would not qualify as a REIT. Furthermore, any change in
the status of a partnership or limited liability company for tax purposes might
be treated as a taxable event in which case the Trust or the Corporation might
incur a tax liability without any related cash distributions.
PARTNERSHIP ANTI-ABUSE RULE
The IRS has published regulations that provide an anti-abuse rule (the
"Anti-Abuse Rule") under the partnership provisions of the Code (the
"Partnership Provisions"). Under the Anti-Abuse Rule, if a partnership is formed
or availed of in connection with a transaction a principal purpose of which is
to reduce substantially the present value of the partners' aggregate federal tax
liability in a manner that is inconsistent with the intent of the Partnership
Provisions, the IRS can recast the transaction for federal tax purposes to
achieve tax results that are consistent with the intent of the Partnership
Provisions. This analysis is to be made based on all facts and circumstances.
The Anti-Abuse Rule states that the intent of the Partnership Provisions
incorporates the following requirements: (i) the partnership must be bona fide
and each partnership transaction or series of related transactions must be
entered into for a substantial business purpose; (ii) the form of each
partnership transaction must be respected under substance over form principles;
and (iii) with certain exceptions, the tax consequences under the Partnership
Provisions to each partner of partnership operations and the transactions
between the partner and the partnership must accurately reflect the partner's
economic agreement and clearly reflect the partner's income.
Sidley & Austin has rendered an opinion to the effect that the Company's
structure is not inconsistent with the intent of the Partnership Provisions and
that, therefore, the IRS will not be able to invoke the Anti-Abuse Rule to
recast the structure of the Company for federal income tax purposes. This
opinion is based on examples contained in the Anti-Abuse Rule. However, because
no controlling legal authority exists, no assurance can be given that the IRS or
a court will concur with such opinion.
32
<PAGE> 34
The Anti-Abuse Rule also provides that, unless a provision of the Code or
the Treasury Regulations prescribes the treatment of a partnership as an entity,
in whole or in part, and that treatment and the ultimate tax results, taking
into account all the relevant facts and circumstances, are clearly contemplated
by that provision, the IRS can treat a partnership as an aggregate of its
partners, in whole or in part, as appropriate to carry out the purpose of any
provision of the Code or the Treasury Regulations. Treatment of either
Partnership or any of the Subsidiary Entities, in whole or in part, as an
aggregate rather than an entity is unlikely to materially change the federal tax
consequences to any partner. In addition, the REIT Provisions generally treat a
partnership as an aggregate rather than an entity for purposes of applying the
income and asset tests. Therefore, the Anti-Abuse Rule should not have a
material adverse effect on the federal income tax consequences to any partner or
on the ability of the Trust to qualify as a REIT.
OTHER TAX CONSEQUENCES
The Company and the holders of Paired Common Shares may be subject to
state, local or foreign taxation in various jurisdictions, including those in
which it or they transact business or reside. The state, local or foreign tax
treatment of the Trust, the Corporation and the holders of Paired Common Shares
may not conform to the federal income tax consequences discussed above.
CONSEQUENTLY, HOLDERS OF PAIRED COMMON SHARES SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS ON THE
PURCHASE, OWNERSHIP AND SALE OF PAIRED COMMON SHARES.
LEGAL MATTERS
Piper & Marbury, Baltimore, Maryland has passed upon the validity of the
issuance of the Paired Common Shares offered pursuant to this Prospectus.
EXPERTS
The separate and combined financial statements and financial statement
schedules of the Trust and the Corporation as of December 31, 1997 and 1996 and
for each of the three years in the period ended December 31, 1997 appearing in
the Starwood Hotels Form 10-K and incorporated herein by reference have been
audited by PricewaterhouseCoopers LLP, independent auditors, as stated in their
reports also incorporated by reference herein. Such financial statements and
financial statement schedules have been incorporated by reference herein in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of ITT as of December 31, 1997 and
1996 and for each of the three years in the period ended December 31, 1997, the
combined financial statements of Westin Worldwide as of and for the year ended
December 31, 1997, and the consolidated financial statements of W&S Hotel L.L.C.
as of and for the year ended December 31, 1996 and for the period from
acquisition (May 12, 1995) through December 31, 1995, incorporated by reference
in this registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included in reliance upon the authority of said firm as experts
in giving said reports. Reference is made to the report dated February 12, 1998
on the consolidated financial statements of ITT, which includes an explanatory
paragraph with respect to the change in the method of accounting for start-up
costs as explained in the Notes to the Financial Statements.
33
<PAGE> 35
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- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY AGENT, DEALER OR
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE SECURITIES OF THE
COMPANY OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES BY ANYONE IN ANY JURISDICTION
WHERE SUCH AN OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Forward-Looking Statements............ 3
The Company........................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 15
Price Range of Paired Common Shares
and Distributions................... 15
Plan of Distribution.................. 16
Federal Income Tax Considerations..... 18
Legal Matters......................... 33
Experts............................... 33
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
8,300,000
PAIRED COMMON SHARES
STARWOOD HOTELS &
RESORTS
STARWOOD HOTELS &
RESORTS WORLDWIDE, INC.
------------------------
PROSPECTUS
------------------------
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 36
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Registration Fee............................................ $ 72,056
Printing Fees and Expenses.................................. 5,000
Legal fees and Expenses..................................... 35,000
Accounting Fees and Expenses................................ 5,000
Miscellaneous............................................... 10,000
--------
Total............................................. $127,056
========
</TABLE>
- ---------------
* Expenses are estimated except for the registration fee.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Corporation's charter and the Amended and Restated Declaration of the
Trust provide that the Corporation and the Trust, respectively, shall indemnify,
to the fullest extent permitted by law, all persons who may be indemnified
pursuant to the Maryland General Corporation Law (the "MGCL") and Title 8 of the
Corporations and Associations Article of the Annotated Code of Maryland (the
"Maryland REIT Law"), respectively. The MGCL requires a corporation or a
Maryland real estate investment trust (a "Maryland REIT") (unless its charter or
declaration provides otherwise, which the Corporation Articles and the Trust
Declaration do not) to indemnify a director, trustee or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation or Maryland REIT to indemnify its present and former
directors, trustees and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a) the
act or omission of the director, trustee or officer was material to the matter
giving rise to the proceeding and (i) was committed in bad faith or (ii) was the
result of active and deliberate dishonesty, (b) the director, trustee or officer
actually received an improper personal benefit in money, property or services or
(c) in the case of any criminal proceeding, the director, trustee or officer had
reasonable cause to believe that the act or omission was unlawful. However,
under the MGCL, a Maryland corporation or a Maryland REIT may not indemnify for
an adverse judgment in a suit by or in the right of the corporation or the
Maryland REIT or for a judgment of liability on the basis that personal benefit
was improperly received, unless in either case a court orders indemnification
and then only for expenses. In addition, the MGCL permits a corporation or a
Maryland REIT to advance reasonable expenses to a director, trustee or officer
upon the receipt by the corporation or the Maryland REIT of (a) a written
affirmation by the director, trustee or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the corporation
and (b) a written undertaking by or on his behalf to repay the amount paid or
reimbursed by the corporation or the Maryland REIT if it shall ultimately be
determined that the standard of conduct was not met.
The Company has entered into indemnification agreements with its directors,
trustees and executive officers providing for the maintenance of directors,
trustees and officers liability insurance, subject to certain conditions, and
the indemnification of and advancement of expenses to such directors, trustees
and executive officers.
II-1
<PAGE> 37
ITEM 16. EXHIBITS.
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
5.1* Opinion of Piper & Marbury L.L.P.
8.1 Opinion of Sidley & Austin.
10.1* Purchase Agreement, dated as of February 23, 1998 by and
among the Trust, the Corporation, Lehman Brothers Inc. and
Lehman Brothers Finance S.A., together with Price Adjustment
Agreement entered into in connection therewith (incorporated
by reference to Exhibit 10.68 of the Starwood Hotels Form
10-K).
10.2* Purchase Agreement, dated as of February 23, 1998, by and
among the Trust, the Corporation, NationsBanc Montgomery
Securities LLC and NMS Services, Inc., together with Price
Adjustment Agreement entered into in connection therewith
(incorporated by reference to Exhibit 10.69 of the Starwood
Hotels Form 10-K).
10.3* Purchase Agreement, dated as of February 23, 1998, by and
among the Trust, the Corporation, Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Merrill Lynch International,
together with Price Adjustment Agreement entered into in
connection therewith (incorporated by reference to Exhibit
10.70 of the Starwood Hotels Form 10-K).
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Sidley & Austin (included in Exhibit 8.1).
23.4* Consent of Piper & Marbury L.L.P. (included in Exhibit 5.1).
24.1* Powers of Attorney (contained in the signature pages
hereto).
</TABLE>
- ---------------
* Previously filed.
ITEM 17. UNDERTAKINGS.
(a) Each of the undersigned Registrants hereby undertakes that insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of such Registrant
pursuant to the provisions described in Item 15 above, or otherwise, such
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrants of expenses
incurred or paid by a director, officer or controlling person of the Registrants
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, each Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned Registrants hereby further undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end
II-2
<PAGE> 38
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) (Section
230-424(b) of 17 C.F.R.) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
Registration Statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Commission by the Registrants
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrants hereby further undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrants' annual reports pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned Registrants further undertake that:
(a) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrants pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE> 39
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this amendment to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of White Plains, State of New York, on the 23rd day of September, 1998.
STARWOOD HOTELS & RESORTS
By: /s/ BARRY S. STERNLICHT
------------------------------------
Barry S. Sternlicht
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment has been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<C> <S> <C>
/s/ BARRY S. STERNLICHT Chairman, Chief Executive September 23, 1998
- --------------------------------------------------- Officer and Trustee
Barry S. Sternlicht (Principal Executive,
Financial and Accounting
Officer)
* Trustee September 23, 1998
- ---------------------------------------------------
Jean-Marc Chapus
* Trustee September 23, 1998
- ---------------------------------------------------
Bruce W. Duncan
* Trustee September 23, 1998
- ---------------------------------------------------
Madison F. Grose
* Trustee September 23, 1998
- ---------------------------------------------------
George J. Mitchell
* Trustee September 23, 1998
- ---------------------------------------------------
Roger S. Pratt
</TABLE>
II-4
<PAGE> 40
<TABLE>
<C> <S> <C>
* Trustee September 23, 1998
- ---------------------------------------------------
Stephen R. Quazzo
* Trustee September 23, 1998
- ---------------------------------------------------
Stuart M. Rothenberg
* Trustee September 23, 1998
- ---------------------------------------------------
Raymond S. Troubh
*By: /s/ BARRY S. STERNLICHT
---------------------------------------------
Barry S. Sternlicht
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 41
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing a Form S-3 and has duly caused this amendment to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Phoenix, State of Arizona, on the 23rd day of September, 1998.
STARWOOD HOTELS & RESORTS
WORLDWIDE, INC.
By: /s/ RONALD C. BROWN
------------------------------------
Ronald C. Brown
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment has been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<C> <S> <C>
* Director September 23, 1998
- ---------------------------------------------------
Barry S. Sternlicht
/s/ RICHARD D. NANULA President, Chief Executive September 23, 1998
- --------------------------------------------------- Officer and Director
Richard D. Nanula (Principal Executive
Officer)
/s/ RONALD C. BROWN Executive Vice President and September 23, 1998
- --------------------------------------------------- Chief Financial Officer
Ronald C. Brown (Principal Financial and
Accounting Officer)
* Director September 23, 1998
- ---------------------------------------------------
Juergen Bartels
Director September , 1998
- ---------------------------------------------------
Brenda C. Barnes
Director September , 1998
- ---------------------------------------------------
Jonathan D. Eilian
Director September , 1998
- ---------------------------------------------------
Bruce M. Ford
</TABLE>
II-6
<PAGE> 42
<TABLE>
<C> <S> <C>
Director September , 1998
- ---------------------------------------------------
Graeme W. Henderson
* Director September 23, 1998
- ---------------------------------------------------
Earle F. Jones
* Director September 23, 1998
- ---------------------------------------------------
Michael A. Leven
Director September , 1998
- ---------------------------------------------------
Daniel H. Stern
* Director September 23, 1998
- ---------------------------------------------------
Barry S. Volpert
* Director September 23, 1998
- ---------------------------------------------------
Daniel W. Yih
</TABLE>
*By: /s/ RONALD C. BROWN
---------------------------------
Ronald C. Brown
Attorney-in-Fact
II-7
<PAGE> 43
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
5.1* Opinion of Piper & Marbury L.L.P.
8.1 Opinion of Sidley & Austin.
10.1* Purchase Agreement, dated as of February 23, 1998 by and
among the Starwood Hotels & Resorts (the "Trust"), Starwood
Hotels & Resorts Worldwide, Inc. (the "Corporation"), Lehman
Brothers Inc. and Lehman Brothers Finance S.A., together
with Price Adjustment Agreement entered into in connection
therewith (incorporated by reference to Exhibit 10.68 of the
Joint Annual Report of the Trust and the Corporation for the
year ended December 31, 1997 (the "Starwood Hotels Form
10-K")).
10.2* Purchase Agreement, dated as of February 23, 1998, by and
among the Trust, the Corporation, NationsBanc Montgomery
Securities LLC and NMS Services, Inc., together with Price
Adjustment Agreement entered into in connection therewith
(incorporated by reference to Exhibit 10.69 of the Starwood
Hotels Form 10-K).
10.3* Purchase Agreement, dated as of February 23, 1998, by and
among the Trust, the Corporation, Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Merrill Lynch International,
together with Price Adjustment Agreement entered into in
connection therewith (incorporated by reference to Exhibit
10.70 of the Starwood Hotels Form 10-K).
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Sidley & Austin (included in Exhibit 8.1).
23.4* Consent of Piper & Marbury L.L.P. (included in Exhibit 5.1).
24.1* Powers of Attorney (contained in the signature pages
hereto).
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
EXHIBIT 8.1
[SIDLEY & AUSTIN LETTERHEAD]
September 23, 1998
Starwood Hotels & Resorts
777 Westchester Avenue
White Plains, New York 10604
Starwood Hotels & Resorts Worldwide, Inc.
777 Westchester Avenue
White Plains, New York 10604
Re: Starwood Hotels & Resorts
Starwood Hotels & Resorts Worldwide, Inc.
Registration Statement on Form S-3
Registration Nos. 333-49953 and 333-49953-01
Ladies and Gentlemen:
We have acted as special counsel to Starwood Hotels & Resorts, a
Maryland real estate investment trust (the "Trust"), and Starwood Hotels &
Resorts Worldwide, Inc., a Maryland corporation (the "Corporation" and, together
with the Trust, the "Company"), in connection with the preparation of the
Registration Statement on Form S-3 of the Company, as initially filed with the
Securities and Exchange Commission (the "Commission") on April 10, 1998 (as
thereafter amended from time to time and together with all exhibits thereto, the
"Registration Statement"). This opinion is being furnished in accordance with
the requirements of Item 16 of Form S-3 and Item 601(b)(8) of Regulation S-K
under the Securities Act of 1933, as amended (the "Act"). Capitalized terms used
but not otherwise defined herein have the respective meanings set forth in the
Registration Statement.
Our opinion is based upon an examination of the Registration
Statement, and such other documents as we have deemed necessary or appropriate
as a basis therefor. In our examination, we have assumed the legal capacity of
all natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified, conformed, or photostatic
<PAGE> 2
SIDLEY & AUSTIN LOS ANGELES
Starwood Hotels & Resorts
Starwood Hotels & Resorts Worldwide, Inc.
September 23, 1998
Page 2
copies, and the authenticity of the originals of such copies. As to any facts
material to this opinion that we did not independently establish or verify, we
have relied upon the detailed statements and representations of the Company set
forth in its letters to us dated the date of this opinion, which letters are
attached hereto and incorporated by reference herein. Our opinion is premised on
the accuracy of such letters, statements and representations.
I. ANALYSIS AND DISCUSSION
1. In General
The analysis and discussion set forth in the summary contained in the
Registration Statement under the caption "Federal Income Tax Considerations" is
hereby incorporated by reference as though set forth herein in its entirety.
2. Section 269B of the Code
Section 269B(a)(3) of the Code provides that, for purposes of
determining whether any stapled entity is a REIT, all entities which are stapled
entities with respect to each other shall be treated as one entity. Section
269B(c) of the Code defines the term "stapled entities" to mean any group of two
or more entities if more than 50 percent in value of the beneficial ownership in
each of such entities consists of interests where, by reason of form of
ownership, restrictions on transfer, or other terms or conditions, the transfer
of one of such interests causes or requires the transfer of the other of such
interests.
The Trust and the Corporation are "stapled entities" within the
meaning of Section 269B(c) of the Code. Therefore, if Section 269B(a)(3) were to
apply to the Trust and the Corporation, they would be treated as one entity for
purposes of determining whether the Trust is a REIT. In such case, the Trust
would not satisfy either the 75 percent or the 95 percent gross income tests
provided in Sections 856(c)(2) and (3) of the Code and the Trust would not
qualify as a REIT.
Section 136(c)(3) of the Deficit Reduction Act of 1984, P.L. 98-369
(the "1984 Tax Act"), however, provides that Section 269B(a)(3) of the Code
shall not apply in determining the application of Sections 856 through 859 of
the Code to any REIT which is part of a group of stapled entities if:
(A) all members of such group were stapled entities as of June 30,
1983, and
(B) as of June 30, 1983, such group included one or more REITs.
<PAGE> 3
SIDLEY & AUSTIN LOS ANGELES
Starwood Hotels & Resorts
Starwood Hotels & Resorts Worldwide, Inc.
September 23, 1998
Page 3
No regulations, rulings or published cases have been issued or decided
interpreting Section 136(c)(3) of the 1984 Tax Act.
Section 269B(a)(3) of the Code does not apply to the Trust because the
Trust and the Corporation were stapled entities on June 30, 1983 and the Trust
was a REIT on such date. Section 136(c)(3) of the 1984 Tax Act does not, by its
terms, require the Trust to have been a REIT at all times after June 30, 1983 in
order for Section 269B(a)(3) of the Code not to apply. Therefore, the
termination of the Trust's status as a REIT for the taxable years ended December
31, 1991 through 1994 did not result in Section 269B(a)(3) of the Code applying
to the Trust for the taxable year ending December 31, 1995, nor will it result
in Section 269B(a)(3) of the Code applying to the Trust for future taxable
years. Because there are no judicial or administrative authorities interpreting
Section 136(c)(3) of the 1984 Tax Act, this conclusion is based solely on the
literal language of this provision.
However, the Internal Revenue Service Restructuring and Reform Act of
1998 ("H.R. 2676"), which was enacted on July 22, 1998, repeals the
grandfathering of the Company from the application of Section 269B(a)(3) of the
Code with respect to certain acquisitions of interests in real property
occurring after March 26, 1998.
II. OPINION
In rendering our opinion, we have considered the applicable provisions
of the Code, Regulations, judicial decisions, administrative rulings and other
applicable authorities, in each case as in effect on the date hereof. The
statutory provisions, regulations, decisions, rulings and other authorities on
which this opinion is based are subject to change, and such changes could apply
retroactively. Opinions of counsel are not binding on the IRS or on any court.
Accordingly, no assurance can be given that the IRS will not challenge the
propriety of one or more of the opinions set forth in the following paragraphs
or that such a challenge would not be successful.
Based on and subject to the foregoing, we are of the opinion that the
discussion set forth in the section of the Registration Statement entitled
"Federal Income Tax Considerations" constitutes, in all material respects, a
fair and accurate summary of the federal income tax consequences that are likely
to be material to the Company and to its shareholders and stockholders and
constitutes the opinion of Sidley & Austin to the extent so stated in such
section.
Other than as expressly stated above, we express no opinion on any
issue relating to the Company or to any investment therein or under any other
law. We are
<PAGE> 4
SIDLEY & AUSTIN LOS ANGELES
Starwood Hotels & Resorts
Starwood Hotels & Resorts Worldwide, Inc.
September 23, 1998
Page 4
furnishing this opinion to you for the Company's benefit in connection with the
filing of the Registration Statement with the Commission and this opinion is not
to be used, circulated, quoted, or otherwise referred to for any other purpose
without our written permission. This opinion is expressed as of the date hereof,
and we disclaim any undertaking to advise you of any subsequent changes of the
matters stated, represented, or assumed herein or any subsequent changes in
applicable law, regulations or interpretations thereof.
We consent to the filing of this opinion as Exhibit 8.1 to the
Registration Statement and to the reference to Sidley & Austin therein under the
caption "Legal Matters." In giving this consent, we do not hereby admit that we
are within the category of persons whose consent is required under Section 7 of
the Act or the rules or regulations of the Commission promulgated thereunder.
Very truly yours,
Sidley & Austin
<PAGE> 5
STARWOOD HOTELS & RESORTS
777 WESTCHESTER AVENUE
WHITE PLAINS, NEW YORK 10604
September 23, 1998
Sidley & Austin
555 West Fifth Street
Los Angeles, California 90013
Re: Tax Opinion
Ladies and Gentlemen:
In connection with the opinion letter (the "Opinion Letter") to be
provided by Sidley & Austin in connection with the preparation of the
Registration Statement on Form S-3 of the Company, as initially filed with the
Securities and Exchange Commission on April 10, 1998 (as thereafter amended from
time to time and together with all exhibits thereto, the "Registration
Statement") and recognizing that Sidley & Austin will rely on this letter in
providing the Opinion Letter, the undersigned, an officer of Starwood Hotels &
Resorts (the "Trust"), duly appointed by the Board of Trustees of the Trust and
acting as such, hereby certifies the following, to the best knowledge of the
Trust, as of the date hereof. Insofar as such certification pertains to any
person other than the Trust, such certification is only as to the knowledge of
the undersigned without specific inquiry. Capitalized terms used but not defined
herein have the meaning provided in the Registration Statement. References to
the Trust and the Corporation include their respective subsidiaries.
1. Each of the following documents has been (or will be) duly
authorized, executed, and delivered, and has not been amended or further amended
after the noted date:
a. The Trust's Declaration of Trust dated August 25, 1969, as
amended and restated as of June 6, 1988, as further amended as of
February 1, 1995, as further amended as of January 2, 1998, and as
further amended as of February 23, 1998;
b. The letter ruling issued by the Internal Revenue Service (the
"IRS") to the Trust dated January 4, 1980;
<PAGE> 6
Sidley & Austin
September 23, 1998
Page 2
c. The letter from the IRS to the Trust dated August 15, 1994,
concerning the termination of the Trust's election to be taxed as a
REIT (the "IRS Letter");
d. The Certificate of Limited Partnership of SLT Realty Limited
Partnership (the "Realty Partnership") dated December 9, 1994, as
corrected as of December 20, 1994, as amended as of March 30, 1995 and
as amended and restated as of July 5, 1995;
e. The Second Amended and Restated Limited Partnership Agreement
of the Realty Partnership dated as of November 14, 1997, as amended as
of January 1, 1998, and as further amended as of January 2, 1998 (the
"Realty Agreement");
f. The Formation Agreement dated as of November 11, 1994, among
the Trust, the Corporation, Starwood Capital Group, L.P., Berl
Holdings, L.P., Starwood Apollo Hotel Partners I, L.P., Starwood
Apollo Hotel Partners VIII, L.P., Starwood Apollo Hotel Partners IX,
L.P., and Starwood Nomura Hotel Investors, L.P. as amended to the date
hereof, and the exhibits and schedules attached thereto;
g. The organizational documents and the limited partnership
agreement or limited liability company agreement, as the case may be,
for each of the limited partnerships and limited liability companies
in which the Trust owns a direct or indirect interest (the "Realty
Subsidiary Entities"), as amended to the date hereof;
h. The Westin Transaction Agreement;
i. The Amended and Restated Agreement and Plan of Merger; and
j. Any other documents we have furnished you in connection with
your issuance of your opinion.
2. During its taxable year ended December 31, 1995 and during each of
its taxable years ending after December 31, 1995, each of the Trust, the Realty
Partnership and the Realty Subsidiary Entities has operated and will operate in
such a manner that will make each representation set forth below true for such
years or for the period set forth in such representation.
<PAGE> 7
Sidley & Austin
September 23, 1998
Page 3
3. The Trust will not make any amendments to its organizational
documents after the date hereof that would affect the Trust's qualification as a
real estate investment trust as defined in Section 856(a) of the Internal
Revenue Code of 1986, as amended (the "Code").
4. Each partner of the Realty Partnership, and each partner or member
of the Realty Subsidiary Entities that is a corporation or other entity has a
valid legal existence.
5. Each partner and each member of the Realty Partnership and the
Realty Subsidiary Entities has full power, authority, and legal right to enter
into and perform the terms of the Realty Agreement or the partnership or limited
liability company agreements, as the case may be, of each Realty Subsidiary
Entity, and the transactions contemplated thereby.
6. No actions will be taken by the Trust, any Realty Subsidiary Entity
or the partners or the members of any of them that would have the effect of
altering the facts upon which your opinion is based.
7. The Trust has filed amended federal income tax returns for its
taxable years ended December 31, 1991 and 1992 reflecting that it did not
qualify as a real estate investment trust (a "REIT") and was taxable as a C
corporation. The Trust has filed its federal income tax returns for its taxable
years ended December 31, 1993 and 1994 reflecting that it did not qualify as a
REIT and was taxable as a C corporation.
8. At all times on or after January 1, 1995, the Trust was and will be
managed by the Board of Trustees and, except for immaterial amounts, the paired
shares and other equity securities of the Trust and the Corporation (the
"Shares") were and will be transferable. At all times after December 31, 1997,
each Subsidiary REIT will be managed by its board of directors and we will not
agree to any changes to the certificate of incorporation, by-laws or other
relevant documents that would result in the stock of each Subsidiary REIT not
being transferable.
9. The Trust timely elected to be a REIT for its taxable year ending
December 31, 1995, computed its taxable income as a REIT on its federal income
tax return for that taxable year, and filed IRS Form 1120-REIT with a copy of
the IRS Letter attached thereto properly and timely electing REIT status and has
not terminated or revoked such election. The Subsidiary REITs will timely file
IRS Forms 1120-REIT for their taxable years ending December 31, 1998, will
timely elect to be taxed as REITs for such year and will not terminate or revoke
such elections.
<PAGE> 8
Sidley & Austin
September 23, 1998
Page 4
10. The Trust has timely filed its income tax return for its taxable
year ended December 31, 1996, and will timely file its income tax returns for
subsequent taxable years reflecting that it has qualified as a REIT and will not
terminate or revoke its election to be taxed as a REIT.
11. The Trust, as of December 31, 1994, did not have any accumulated
earnings and profits. As of December 31, 1998, the Trust will not have any
earnings and profits accumulated in any year in which the Trust, or any
corporation to whose earnings and profits the Trust succeeded by operation of
Section 381 of the Code, was not a REIT. No Subsidiary REIT, as of December 31,
1997, had any accumulated earnings and profits.
12. The Trust timely made an election pursuant to IRS Notice 88-19,
1988-2 C.B. 486, to apply rules similar to those of Section 1374 of the Code for
its taxable year ended December 31, 1995 and the Trust and the Subsidiary REITs
will each make such an election for their taxable years ending December 31,
1998.
13. The Paired Common Shares were paired prior to June 30, 1983, and
at all times thereafter. The Trust elected to be taxed as a REIT for its taxable
year that included June 30, 1983.
14. The following requirements are now and will continue to be met by
any person which provides services with respect of or to any tenant of a
property in which the Trust, the Realty Partnership, the Realty Subsidiary
Entities and, commencing with the taxable year ending December 31, 1998, the
Subsidiary REITs own an interest (the "Properties"):
a. None of the Trust, the Realty Partnership, any Realty
Subsidiary Entity or any Subsidiary REIT presently derives or
receives, or will derive or receive, any income from such person;
b. Such person will not furnish or render any services on behalf
of the Trust, the Realty Partnership, the Realty Subsidiary Entities
or any Subsidiary REIT or under the direction or control of the Trust,
the Realty Partnership, the Realty Subsidiary Entities or any
Subsidiary REIT;
c. Such person was, is and will be adequately compensated for its
services; and
<PAGE> 9
Sidley & Austin
September 23, 1998
Page 5
d. If such person is an individual, he or she is not and will not
be an officer of the Trust, the Realty Partnership, any Realty
Subsidiary Entity or any Subsidiary REIT.
15. Beneficial ownership of the Trust was held by 100 or more persons
for at least 335 days of the taxable years ended December 31, 1995, 1996 and
1997 and will be held by 100 or more persons for at least 335 days of each
taxable year ending after December 31, 1997. Beneficial ownership of each
Subsidiary REIT will be held by 100 or more persons for at least 335 days of
each taxable year ending after December 31, 1998.
16. At no time during the last half of the Trust's taxable years ended
December 31, 1995, 1996 and 1997 and at no time during the last half of each of
the Trust's taxable years ending after December 31, 1997, were or will more than
50 percent in value of the Trust Shares be owned, directly or indirectly (within
the meaning of Section 544 of the Code, as modified by Section 856(h)(1)(B) of
the Code), by or for the benefit of five or fewer individuals. At no time during
the last half of each Subsidiary REIT's taxable years ending after December 31,
1998, were or will more than 50 percent in value of the stock of any Subsidiary
REIT be owned, directly or indirectly (within the meaning of Section 544 of the
Code, as modified by Section 856(h)(1)(B) of the Code), by or for the benefit of
five or fewer individuals.
17. During the Trust's taxable years ended December 31, 1995, 1996 and
1997 and during each of the Trust's taxable years ending after December 31,
1997, at least 95 percent of the gross income of the Trust and each Subsidiary
REIT, determined after application of Treas. Reg. Section 1.856-3(g), excluding
gross income from the sale of property held as inventory or held primarily for
sale to customers in the ordinary course of the trade or business of the Trust,
each Realty Subsidiary Entity and each Subsidiary REIT, as the case may be
("Prohibited Income"), was and will be derived from:
a. Dividends;
b. Interest;
c. Rents from real property;
d. Gain from the sale or other disposition of stock, securities,
and real property (including interests in real property and interests
in mortgages on real property) that is not Prohibited Income;
<PAGE> 10
Sidley & Austin
September 23, 1998
Page 6
e. Abatements and refunds of taxes on real property;
f. Income and gain derived from foreclosure property as defined
in Section 856(e) of the Code ("Foreclosure Property");
g. Amounts (other than amounts the determination of which depends
in whole or in part on the income or profits of any person) received
or accrued as consideration for entering into agreements (i) to make
loans secured by mortgages on real property or on interests in real
property or (ii) to purchase or lease real property (including
interests in real property and interests in mortgages on real
property);
h. Gain from the sale or other disposition of real estate assets
(including regular and residual interests in real estate mortgage
investment conduits ("REMICs")) that is not Prohibited Income;
i. Payments under bona fide interest rate swap or cap agreements
entered into by any of the Trust or any Realty Subsidiary Entity to
hedge variable rate indebtedness that it incurred to acquire or carry
real estate assets (including regular and residual interests in
REMICs, to the extent provided in Section 856(c)(5)(E) of the Code)
("Qualified Hedging Contracts")(1); and
j. Gain from the sale or other disposition of Qualified Hedging
Contracts.
18. During the Trust's taxable years ended December 31, 1995,
1996 and 1997 and during each of the Trust's taxable years ending
after December 31, 1997, and during each Subsidiary REIT's taxable
years ending on or after December 31, 1998, at least 75 percent of the
gross income of the Trust and each Subsidiary REIT, determined after
application of Treas. Reg. Section 1.856-3(g) (excluding Prohibited
Income) was and will be derived from:
- ----------
(1) For taxable years ending after December 31, 1997, Qualified Hedging
Contracts will include any interest rate swap or cap agreement, option, futures
contract, forward rate agreement, or any similar financial instrument, entered
into in a transaction to reduce the interest rate risks with respect to any
indebtedness incurred or to be incurred to acquire or carry real estate assets.
<PAGE> 11
Sidley & Austin
September 23, 1998
Page 7
a. Rents from real property (excluding any interest accrued on
such rents);
b. Interest on obligations secured by mortgages on real property
or on interests in real property (including interests on regular or
residual interests in REMICs, to the extent provided in Section
856(c)(5)(E) of the Code);
c. Gain from the sale or other disposition of real property
(including interests in real property and interests in mortgages on
real property) that was not Prohibited Income;
d. Dividends or other distributions on, and gain (other than
Prohibited Income) from the sale or other disposition of, transferable
shares in other REITs;
e. Abatements and refunds of taxes on real property;
f. Income and gain (other than Prohibited Income) derived from
Foreclosure Property;
g. Amounts (other than amounts the determination of which depends
in whole or in part on the income or profits of any person) received
or accrued as consideration for entering into agreements (i) to make
loans secured by mortgages on real property or on interests in real
property or (ii) to purchase or lease real property (including
interests in real property and interests in mortgages on real
property);
h. Gain (other than Prohibited Income) from the sale or other
disposition of real estate assets (including regular and residual
interests in REMICs, to the extent provided in Section 856(c)(5)(E) of
the Code); and
i. Income that is (i) attributable to stock or a debt instrument,
(ii) attributable to the temporary investment of amounts received in
exchange for Trust Shares (other than Trust Shares issued pursuant to
a dividend reinvestment plan) or in a public offering of debt
obligations of the Trust which have maturities of at least five years,
and (iii) received or accrued during the one-year period beginning on
the date on which the Trust received such amounts.
19. The leases entered into by the Realty Partnership, the Realty
Subsidiary Entities and the Subsidiary REITs with the Operating Partnership, the
limited partnerships
<PAGE> 12
Sidley & Austin
September 23, 1998
Page 8
or limited liability companies owned in whole or in part by the Operating
Partnership (the "Operating Subsidiary Entities") and others and that will be
transferred to the Corporation (the "Leases") provide and will continue to
provide that rent is the greater of a fixed amount or a percentage amount that
is either fixed or based on a percentage of receipts or sales derived with
respect to the property (the "Percentage Rent"). The percentages used to compute
the Percentage Rent (i) will not be renegotiated during the term of the Leases
in a manner that has the effect of basing the Percentage Rent on income or
profits of any person and (ii) will conform with normal business practices.
20. The parties to each Lease intend for their relationship to be that
of lessor and lessee, or sublessor and sublessee, as the case may be, and each
current relationship is and each future relationship shall be documented by a
lease agreement; the lessees or sublessees, as the case may be, have and shall
have the right to exclusive possession and use and quiet enjoyment of the leased
premises during the term of the Leases; the lessees bear and will bear the cost
of, and are or will be responsible for, day-to-day maintenance and repair of the
leased premises, other than the cost of certain capital expenditures, and
dictate and will dictate how the leased premises are operated and maintained;
the lessees or sublessees, as the case may be, bear and will bear all of the
costs and expenses of operating the leased premises during the term of the
Leases; the term of each Lease is less than the economic life of the leased
premises and the lessees do not have purchase options with respect to the leased
premises; the lessees or sublessees, as the case may be, are required to pay
substantial fixed rent during the term of the Leases; and each lessee or
sublessee, as the case may be, stands to incur substantial losses or reap
substantial profits depending on how successfully it operates the leased
premises.
21. The Trust has monitored and will monitor the terms of each lease
entered into or assumed by it, the Realty Partnership, any Realty Subsidiary
Entity and each Subsidiary REIT to ensure that the amount of rent attributable
to personal property received or accrued by the Realty Partnership, the Realty
Subsidiary Entities and each Subsidiary REIT does not cause the Trust or any
Subsidiary REIT to fail to satisfy the gross income tests of Sections 856(c)(2)
and (3) of the Code.
22. During the Trust's taxable years ended December 31, 1995, 1996 and
1997 and during each of the Trust's taxable years ending after December 31,
1997, the Trust, determined after application of Treas. Reg. Section 1.856-3(g),
and, for taxable years ending on or after December 31, 1998, the Subsidiary
REITs, did not and will not receive or accrue, directly or indirectly, any rent,
interest, contingency fees, or other amounts that were determined in whole or in
part with reference to the income or profits derived by any person (excluding
amounts received (i) as rents that are (A) based solely on a percentage
<PAGE> 13
Sidley & Austin
September 23, 1998
Page 9
or percentages of receipts or sales and the percentage or percentages are fixed
at the time the leases are entered into, are not renegotiated during the term of
the leases in a manner that has the effect of basing rent on income or profits,
and conform with normal business practices or (B) attributable to qualified
rents from subtenants as provided in Section 856(d)(6) of the Code, and (ii) as
interest that was (A) based solely on a fixed percentage or percentages of
receipts or sales or (B) attributable to qualified rents received or accrued by
debtors as provided by Section 856(f)(2) of the Code).
23. During the Trust's taxable years ended December 31, 1995, 1996,
and 1997, the Trust and, for the taxable year ending on December 31, 1998, the
Trust and the Subsidiary REITs did not and will not own, directly or indirectly
(within the meaning of Section 856(d)(5) of the Code), 10 percent or more, by
voting power, value or number, of the shares of the Corporation or 10 percent or
more of the assets or net profits of the Operating Partnership or any Operating
Subsidiary Entity, except that for taxable years ending after December 31, 1997,
the Trust may own 100 percent of the stock of a subsidiary corporation. For
taxable years ending after December 31, 1998, the Trust and the Subsidiary REITs
will continue not to own, directly or indirectly (within the meaning of Section
856(d)(5) of the Code), 10 percent or more, by voting power, value or number, of
the shares of the Corporation. The Trust and, for taxable years ending on or
after December 31, 1998, the Subsidiary REITs did not and will not receive or
accrue, directly or indirectly, any rents from any of the following:
a. A corporation of which the Trust or any Subsidiary REIT owns,
directly or indirectly (within the meaning of Section 856(d)(5) of the
Code), 10 percent or more of the stock, by voting power or number of
shares; or
b. A non-corporate entity in which the Trust or any Subsidiary
REIT owns, directly or indirectly (within the meaning of Section
856(d)(5) of the Code), 10 percent or more of the assets or net
profits.
24. The Trust currently enforces and will continue to enforce the
provisions of its Declaration of Trust, the Realty Agreement and the partnership
or limited liability company agreements, as the case may be, of the Realty
Subsidiary Entities concerning any and all restrictions on ownership of the
Shares. Each Subsidiary REIT will enforce any and all restrictions in its
articles of incorporation concerning restrictions on ownership of its stock.
<PAGE> 14
Sidley & Austin
September 23, 1998
Page 10
25. During the Trust's taxable years ended December 31, 1995, 1996 and
1997, less than 30 percent of the gross income of the Trust, determined after
application of Treas. Reg. Section 1.856-3(g), was derived from the sale or
other disposition of:
a. Stock, Qualified Hedging Contracts, or other securities held
for less than one year;
b. Property in a transaction that generates Prohibited Income; or
c. Real property (including interests in real property, interests
in mortgages on real property, regular and residual interests in
REMICs, and mortgage pass-through securities) held for less than four
years other than (i) property compulsorily or involuntarily converted
to another form as a result of its destruction (in whole or in part),
seizure, requisition, or condemnation (or the threat or imminence
thereof) and (ii) Foreclosure Property.
26. At the close of each quarter of a taxable year commencing with the
quarter ended March 31, 1995, (i) at least 75 percent of the value of the total
assets of the Trust were and will be represented by real estate assets
(including interests in mortgages on real property and interests in REMICs, to
the extent provided in Section 856(c)(5)(E) of the Code), cash and cash items
(including receivables), and government securities (the "75 Percent Test") and
(ii) with respect to the securities of the Trust not included under the 75
Percent Test, (A) not more than five percent of the value of the Trust's total
assets did and will consist of the securities of any one issuer (excluding the
Trust's interest in the Realty Partnership, the Realty Subsidiary Entities, the
Subsidiary REITs or any corporation with respect to which the Trust has directly
held 100 percent of the stock at all times during such corporation's existence)
and (B) not more than 10 percent of the outstanding voting securities of any one
issuer (excluding the Trust's interest in the Realty Partnership, the Realty
Subsidiary Entities, the Subsidiary REITs or any corporation with respect to
which the Trust has directly held 100 percent of the stock at all times during
such corporation's existence)(2) will be held by the Trust. At the close of each
quarter of a taxable year commencing with the quarter ended March 31, 1998, (i)
at least 75 percent of the value of the total assets of each Subsidiary REIT
will be represented by real estate assets (including interests in mortgages on
real property and interests in REMICs, to the extent provided in Section
856(c)(5)(E) of the Code), cash and cash items (including receivables), and
- --------
(2) For taxable years ending after December 31, 1997, a REIT may own 100
percent of the stock of a subsidiary corporation at the close of any quarter.
<PAGE> 15
Sidley & Austin
September 23, 1998
Page 11
government securities and (ii) with respect to the securities of each Subsidiary
REIT not included under the 75 Percent Test, (A) not more than five percent of
the value of each Subsidiary REIT's total assets will consist of the securities
of any one issuer (excluding each Subsidiary REIT's interest in any corporation
with respect to which the Subsidiary REIT holds 100 percent of the stock) and
(B) not more than 10 percent of the outstanding voting securities of any one
issuer (excluding each Subsidiary REIT's interest in any corporation with
respect to which the Subsidiary REIT holds 100 percent of the stock) will be
held by any Subsidiary REIT. With respect to this representation, the assets of
the Trust and the Subsidiary REITs will be as determined pursuant to Treas. Reg.
Section 1.856-3(g) and the term "value" means (i) fair value as determined in
good faith by the Board of Trustees of the Trust or the board of directors of
each Subsidiary REIT, as the case may be, or (ii) in the case of securities for
which market quotations are readily available, the market value of such
securities.
27. With respect to each loan secured by real estate held by the
Trust, the Realty Partnership or any Realty Subsidiary Entity the amount of the
loan has not exceeded and does not exceed the fair market value of the real
property security therefor, except by amounts which would not cause the Trust to
fail to satisfy the asset tests of Section 856(c)(4) of the Code or the gross
income test of Section 856(c)(3) of the Code.
28. The Trust and each Subsidiary REIT maintains and will continue to
maintain until the expiration of any applicable statute of limitations period
sufficient records as to its investments to be able to show that it complies
with the asset tests described above.
29. None of the Management Subsidiaries will provide Prohibited
Services to any of the Corporation, the Operating Subsidiary Entities, Atlanta
or St. John or will manage or operate any assets owned directly or indirectly by
the Trust, the Realty Partnership or any Subsidiary REIT.
30. During the Trust's taxable years ended December 31, 1995, 1996 and
1997 and during each of the Trust's taxable years ending after December 31,
1997, the deduction for dividends paid by the Trust (as defined in Section 561
of the Code, but without regard to capital gain dividends, as defined in Section
857(b)(3)(C) of the Code) has equaled or exceeded or will equal or exceed (i)
the sum of (A) 95 percent of the Trust's real estate investment trust taxable
income (as defined in Section 857(b)(2) of the Code, but without regard to the
deduction for dividends paid and excluding any net capital gain) and (B) 95
percent of the excess of its net income from Foreclosure Property over the tax
imposed on such income by Section 857(b)(4)(A) of the Code, minus (ii) any
<PAGE> 16
Sidley & Austin
September 23, 1998
Page 12
excess noncash income (as determined under Section 857(e) of the Code). During
the taxable years of the Subsidiary REITs ending on or after December 31, 1998,
the deduction for dividends paid by each Subsidiary REIT (as defined in Section
561 of the Code, but without regard to capital gain dividends, as defined in
Section 857(b)(3)(C) of the Code) will equal or exceed (i) the sum of (A) 95
percent of each Subsidiary REIT's real estate investment trust taxable income
(as defined in Section 857(b)(2) of the Code, but without regard to the
deduction for dividends paid and excluding any net capital gain) and (B) 95
percent of the excess of its net income from Foreclosure Property over the tax
imposed on such income by Section 857(b)(4)(A) of the Code, minus (ii) any
excess noncash income (as determined under Section 857(e) of the Code). For
purposes of this paragraph, the deduction for dividends paid shall be determined
after the application of Section 857(d)(3) of the Code.
31. At all times after December 31, 1994, the dividends paid by the
Trust have been paid and will be paid in respect of each class of stock pro
rata, with no preference to any share as compared with other shares of the same
class. At all times after December 31, 1997, the dividends paid by each of the
Subsidiary REITs will be paid in respect of each class of stock pro rata, with
no preference to any share as compared with other shares of the same class.
32. On or before January 30, 1996, 1997 and 1998, the Trust demanded
written statements from each record shareholder of one percent or more of its
stock (or, if the Trust has 2,000 or more shareholders of record of its stock on
any dividend record date, each record shareholder of five percent or more of its
stock) setting forth the following information:
a. The actual owners of the Trust's stock (i.e., the persons who
are required to include in gross income in their returns the dividends
received on the stock); and
b. The maximum number of shares of the Trust (including the
number and face value of securities convertible into stock of the
Trust) that were considered owned, directly or indirectly (within the
meaning of Section 544 of the Code, as modified by Section
856(h)(1)(B) of the Code), by each of the actual owners of any of the
Trust's stock at any time during the last half of the Trust's taxable
year.
33. The Trust will maintain the written statements described in the
preceding paragraph and the Trust and the Subsidiary REITs will keep and
maintain all records
<PAGE> 17
Sidley & Austin
September 23, 1998
Page 13
required pursuant to Treas. Reg. Section 1.857-8 in the internal revenue
district in which they are required to file their federal income tax returns,
and the statements and records will be available for inspection by the IRS until
the expiration of any applicable statute of limitations period.
34. The shareholder demand letters sent in January 1996 were sent by
the Corporation for the benefit of and at the request and under the direction
and control of the Trust.
35. The Trust will continue to, and the Subsidiary REITs will, use the
calendar year as their taxable year.
36. Not all of the trustees of the Trust are also directors of the
Corporation, and some of the directors of the Corporation are not trustees of
the Trust.
37. The Trust, the Realty Partnership, each Realty Subsidiary Entity
and each Subsidiary REIT each maintain separate books and records.
38. The Trust, the Realty Partnership, the Realty Subsidiary Entities
and each Subsidiary REIT (and any other entity in which the Trust directly or
indirectly holds an interest) do not and will not furnish or render any services
to the Corporation, the Operating Partnership, any Operating Subsidiary Entity,
Atlanta or St. John.
39. At all times, material transactions among the Trust, the
Corporation, the Realty Partnership, the Realty Subsidiary Entities, the
Operating Partnership, the Operating Subsidiary Entities, the Subsidiary REITs,
Atlanta and St. John, or any of them, have been and will be negotiated and
structured with the intention of achieving an arm's-length result.
40. The Realty Partnership and each Realty Subsidiary Entity is
operated and will continue to be operated in accordance with the enabling
statute of the jurisdiction under which it is organized, its organizational
documents and its partnership or limited liability company agreement, as the
case may be.
41. The partnership or limited liability company agreement, as the
case may be, of the Realty Partnership and each Realty Subsidiary Entity will
remain in substantially the same form as it is upon the date of this letter and
will not be amended in any manner which would affect your opinion.
<PAGE> 18
Sidley & Austin
September 23, 1998
Page 14
42. No general partner is acting as an agent of any limited partner in
connection with the investments by the limited partners in, and operations of,
the Realty Partnership or any Realty Subsidiary Entity that is a limited
partnership. The Trust will be active in the management of the Realty
Partnership and will be independent of the limited partners.
43 No member is acting as an agent of any other member in connection
with the investments by the members in, and operations of, any Realty Subsidiary
Entity that is a limited liability company. The Trust and the Realty Partnership
will be active in the management of the Realty Subsidiary Entities.
44. The transactions in which the partners and members acquired
interests in the Realty Partnership and the Realty Subsidiary Entities are not
required to be registered under the Securities Act of 1933, as amended.
45. The Realty Partnership will not have more than 100 Partners.
46. The interests in each of the Realty Partnership and each Realty
Subsidiary Entity will not be traded on an established securities market or be
readily tradeable on a secondary market (or the substantial equivalent thereof).
47. The Realty Partnership and the Realty Subsidiary Entities intend
to hold assets for investment with a view to long-term appreciation, to engage
in the business of acquiring, developing, owning, and operating hotel properties
and interests in hotels and to make such occasional sales of such properties,
including peripheral land, as are consistent with the investment objectives of
the Realty Partnership and the Realty Subsidiary Entities.
48. Neither the Realty Partnership nor any Realty Subsidiary Entity
has elected or will elect to be classified as an association for federal tax
purposes.
49. The Realty Partnership and each Realty Subsidiary Entity that was
in existence prior to January 1, 1997 claimed or will claim classification as a
partnership for federal tax purposes for all periods prior to January 1, 1997
during which it was in existence.
50. The Trust expects to own in excess of 20 percent of the
partnership interests of the Realty Partnership throughout the life of the
Realty Partnership.
<PAGE> 19
Sidley & Austin
September 23, 1998
Page 15
51. The intent of the partners and the members of the Realty
Partnership and the Realty Subsidiary Entities is to conduct joint business and
investment activities through a flexible economic arrangement without incurring
an entity-level tax.
52. The Realty Partnership and the Realty Subsidiary Entities are each
bona fide and each transaction or series of related transactions will be entered
into for a substantial business purpose.
53. The payment of cash in lieu of fractional Paired Common Shares in
connection with any merger, stock dividend or other transaction was not and will
not be separately bargained for consideration and was or will be made solely for
the purpose of saving the Trust and the Corporation the expense and
inconvenience of issuing fractional Paired Common Shares or Exchangeable
Preferred Shares.
54. Westin Worldwide, Seattle, Lauderdale and Denver each declared and
paid a dividend prior to and independent of the closing date of the Westin
Merger and neither the amount nor the source of funds for such dividends was
dependent on the occurrence of the closing date of the Westin Merger.
55. The Westin Merger was consummated in compliance with the material
terms of the Westin Transaction Agreement, and none of the material terms and
conditions therein were waived or modified.
56. The ratio for the exchange of shares of Westin Worldwide (the
"Worldwide Shares") for Exchangeable Preferred Shares and cash in the Westin
Merger was negotiated through arm's-length bargaining.
57. There is no plan by the Members to sell, exchange or otherwise
dispose of a number of Exchangeable Preferred Shares received pursuant to the
Westin Merger that would reduce the Members' ownership of Exchangeable Preferred
Shares to a number of shares having a value as of January 2, 1998 of less than
50 percent of the value of all of the formerly outstanding Worldwide Shares as
of January 2, 1998. For purposes of this representation, Worldwide Shares
exchanged for cash or exchanged for cash in lieu of fractional Exchangeable
Preferred Shares were treated as outstanding Worldwide Shares as of January 2,
1998. Moreover, Worldwide Shares and Exchangeable Preferred Shares held by the
Members and otherwise sold, redeemed or disposed of prior or subsequent to
January 2, 1998 were considered in making this representation.
<PAGE> 20
Sidley & Austin
September 23, 1998
Page 16
58. The Trust has no plan to reacquire any of the Exchangeable
Preferred Shares issued pursuant to the Westin Merger.
59. The Trust has no plan to sell or otherwise dispose of any of the
assets of Westin Worldwide acquired in the Westin Merger, except for
dispositions (i) in the ordinary course of business, or (ii) that are necessary
to ensure that the representations set forth herein are accurate, or (iii) in
transactions described in Section 368(a)(2)(C) of the Code.
60. The Trust has continued and will continue the historic business of
Westin Worldwide and has used and will continue to use a significant portion of
Westin Worldwide's historic business assets in a business.
61. Except as set forth in the Westin Transaction Agreement, the
Westin Companies paid their expenses incurred in connection with the Westin
Merger. Westin Worldwide did not pay any of the expenses of the Members incurred
in connection with the Westin Merger.
62. There is no intercorporate indebtedness existing between the Trust
and Westin Worldwide that was issued, acquired, or will be settled at a
discount.
63. Westin Worldwide was not an investment company as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
64. Westin Worldwide was not under the jurisdiction of a court in a
Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code.
65. As of January 2, 1998, the fair market value of the assets of
Westin Worldwide exceeded the sum of its liabilities (including any liabilities
to which its assets are subject).
66. The ITT Merger was consummated in compliance with the material
terms of the Amended and Restated Agreement and Plan of Merger, and none of the
material terms and conditions therein was waived or modified.
67. As of February 23, 1998, the fair market value of the real estate
assets of ITT that serve as security for the indebtedness of the Corporation to
the Trust exceeded $3,200,000,000.
<PAGE> 21
Sidley & Austin
September 23, 1998
Page 17
68. As of February 23, 1998, the fair market value of the Corporation
Shares and the fair market value of the Trust Shares relative to the total fair
market value of the Paired Common Shares was 30 percent and 70 percent,
respectively.
69. The 0.25 percent per annum fee received by the Trust for its
guarantee of the third party indebtedness incurred by the Corporation in
connection with the ITT Merger is reasonable as to each of the Trust and the
Corporation.
70. As of February 23, 1998, the Corporation could have arranged debt
financing for the acquisition of ITT without the credit support provided by a
guaranty by the Trust.
71. The Trust, the Realty Partnership, and the Realty Subsidiary
Entities have not directly or indirectly acquired any "nonqualified real
property interests," as defined in Section 7002 of H.R. 2676 and do not intend
to directly or indirectly acquire any such "nonqualified real property
interests" unless such acquisition would not cause the Trust to fail the gross
income tests of Section 856(c)(2) or (c)(3) of the Code. None of the Trust, the
Realty Partnership, or the Realty Subsidiary Entities directly or indirectly
holds or intends to directly or indirectly acquire any "nonqualified
obligations" as defined in Section 7002 of H.R. 2676.
72. Where the foregoing representations involve matters of law, you
have explained to us the relevant and material legal authority to which such
representations relate.
<PAGE> 22
Sidley & Austin
September 23, 1998
Page 18
The undersigned fully understands that Sidley & Austin will be relying
on the accuracy and completeness of the statements made in this letter in
rendering the opinion contained in the Opinion Letter, and the undersigned has
examined such records and other documents and made such inquiries and
investigation as the undersigned deemed necessary to obtain sufficient actual
knowledge to support the representations made herein.
Very truly yours,
STARWOOD HOTELS
& RESORTS
By: /s/ DANIELLE KILPATRICK
----------------------------
Name: Danielle Kilpatrick
Title: Authorized Signatory
<PAGE> 23
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
777 WESTCHESTER AVENUE
WHITE PLAINS, NEW YORK 10604
September 23, 1998
Sidley & Austin
555 West Fifth Street
Los Angeles, California 90013
Re: Tax Opinion
Ladies and Gentlemen:
In connection with the opinion letter (the "Opinion Letter") to be
provided by Sidley & Austin in connection with the preparation of the
Registration Statement on Form S-3 of the Company, as initially filed with the
Securities and Exchange Commission on April 10, 1998 (as thereafter amended from
time to time and together with all exhibits thereto, the "Registration
Statement") and recognizing that Sidley & Austin will rely on this letter in
providing the Opinion Letter, the undersigned, an officer of Starwood Hotels &
Resorts Worldwide, Inc. (the "Corporation"), duly appointed by the Board of
Directors of the Corporation and acting as such, hereby certifies the following,
to the best knowledge of the Corporation, as of the date hereof. Insofar as such
certification pertains to any person other than the Corporation, such
certification is only as to the knowledge of the undersigned without specific
inquiry. Capitalized terms used but not defined herein have the meaning provided
in the Registration Statement. References to the Trust and the Corporation
include their respective subsidiaries.
1. Each of the following documents has been (or will be) duly
authorized, executed, and delivered, and has not been amended or further amended
after the noted date:
a. The Articles of Incorporation of the Corporation as amended
and restated as of February 1, 1995, as amended as of January 2, 1998,
and as further amended as of February 23, 1998;
b. The Certificate of Limited Partnership of the Operating
Partnership dated as of December 13, 1994, as corrected as of December
20, 1994, as amended as of March 30, 1995, as amended and restated as
of July 5, 1995, and as further amended as of November 14, 1997;
<PAGE> 24
Sidley & Austin
September 23, 1998
Page 2
c. The Second Amended and Restated Limited Partnership Agreement
of the Operating Partnership dated as of November 14, 1997, as amended
as of January 1, 1998, and as further amended as of January 2, 1998
(the "Operating Agreement");
d. The organizational documents and the limited partnership
agreement or limited liability company agreement, as the case may be,
for each of the limited partnerships and limited liability companies
in which the Corporation owns a direct or indirect interest (the
"Operating Subsidiary Entities"), as amended to the date hereof;
e. The Westin Transaction Agreement;
f. The Amended and Restated Agreement and Plan of Merger; and
g. Any other documents we have furnished you in connection with
your issuance of your opinion.
2. During its taxable years ended December 31, 1995, 1996 and 1997 and
during each of its taxable years ending after December 31, 1997, each of the
Corporation, the Operating Partnership and the Operating Subsidiary Entities has
operated and will operate in such a manner that will make each representation
set forth below true for such years or for the period set forth in such
representation.
3. The Corporation will not make any amendments to its organizational
documents after the date hereof that would affect the Trust's qualification as a
real estate investment trust as defined in Section 856(a) of the Internal
Revenue Code of 1986, as amended (the "Code").
4. Each partner of the Operating Partnership and of an Operating
Subsidiary Entity that is a partnership and each member of an Operating
Subsidiary Entity that is a limited liability company that is a corporation or
other entity has a valid legal existence.
5. Each partner and each member, as the case may be, has full power,
authority, and legal right to enter into and perform the terms of the Operating
Agreement or the partnership or limited liability company agreements of the
Operating Subsidiary Entities, as the case may be, and the transactions
contemplated thereby.
<PAGE> 25
Sidley & Austin
September 23, 1998
Page 3
6. No actions will be taken by the Corporation, the Operating
Partnership, or any Operating Subsidiary Entity or the partners or the members
of any of them that would have the effect of altering the facts upon which your
opinion is based.
7. The Paired Common Shares were paired prior to June 30, 1983, and at
all times thereafter.
8. Not all of the trustees of the Trust are also directors of the
Corporation, and some of the directors of the Corporation are not trustees of
the Trust.
9. The Corporation, the Operating Partnership, each Operating
Subsidiary Entity, Atlanta and St. John each maintain separate books and
records.
10. The Trust, the Realty Partnership, the Realty Subsidiary Entities
and the Subsidiary REITs do not and will not furnish or render any services to
the Corporation, the Operating Partnership, any of the Operating Subsidiary
Entities, Atlanta or St. John. The Operating Partnership or any Operating
Subsidiary Entity that furnishes or renders any services to the Corporation is
not furnishing or rendering such services for or on behalf of the Trust.
11. At all times, material transactions among the Trust, the
Corporation, the Realty Partnership, the Realty Subsidiary Entities, the
Subsidiary REITs, the Operating Partnership, the Operating Subsidiary Entities,
Atlanta or St. John, or any of them, have been and will be negotiated and
structured with the intention of achieving an arm's-length result.
12. The Operating Partnership and the Operating Subsidiary Entities
are each bona fide and each transaction or series of related transactions will
be entered into for a substantial business purpose.
13. The payment of cash in lieu of fractional Paired Common Shares in
connection with any merger, stock dividend or other transaction was not and will
not be separately bargained for consideration and was or will be made solely for
the purpose of saving the Trust and the Corporation the expense and
inconvenience of issuing fractional Paired Common Shares or Exchangeable
Preferred Shares.
14. As of February 23, 1998, the fair market value of the real estate
assets of ITT that serve as security for the indebtedness of the Corporation to
the Trust exceeded $3,200,000,000.
<PAGE> 26
Sidley & Austin
September 23, 1998
Page 4
15. As of February 23, 1998, the fair market value of the Corporation
Shares and the fair market value of the Trust Shares relative to the total fair
market value of the Paired Common Shares was 30 percent and 70 percent,
respectively.
16. The 0.25 percent per annum fee received by the Trust for its
guarantee of the third party indebtedness incurred by the Corporation in
connection with the ITT Merger is reasonable as to the Trust and the
Corporation.
17. As of February 23, 1998, the Corporation could have arranged debt
financing for the acquisition of ITT without the credit support provided by a
guaranty of the Trust.
18. The ITT Merger was consummated in compliance with the material
terms of the Amended and Restated Agreement and Plan of Merger, and none of the
material terms and conditions therein was waived or modified.
19. The Corporation, the Operating Partnership, each Operating
Subsidiary Entity, Atlanta and St. John have not directly or indirectly acquired
any "nonqualified real property interests," as defined in Section 7002 of H.R.
2676 and do not intend to directly or indirectly acquire any such "nonqualified
real property interests" unless such acquisition would not cause the Trust to
fail the gross income tests of Section 856(c)(2) or (c)(3) of the Code. None of
the Corporation, the Operating Partnership, each Operating Subsidiary Entity,
Atlanta or St. John directly or indirectly holds or intends to directly or
indirectly acquire any "nonqualified obligations" as defined in Section 7002 of
H.R. 2676.
20. No stock or securities will be issued for services rendered to or
for the benefit of the Corporation in connection with the Restructuring. No
stock or securities will be issued for indebtedness of the Corporation that is
not evidenced by a security or for interest on indebtedness of the Corporation
which accrued on or after the beginning of the holding period of the holders of
Trust Shares for the debt.
21. The Trust Shares are common stock and are not "section 306" stock
within the meaning of Section 306(c) of the Code.
22. The Restructuring is not the result of the solicitation by a
promoter, broker, or investment house.
23. No liabilities of the holders of Trust Shares will be assumed by
the Corporation pursuant to the Restructuring.
<PAGE> 27
Sidley & Austin
September 23, 1998
Page 5
24. There is no indebtedness between the Corporation and the holders
of Trust Shares and there will be no indebtedness created in favor of the
holders of Trust Shares as a result of the Restructuring.
25. The Restructuring will occur under a plan agreed upon before the
transaction in which the rights of the parties are defined.
26. All exchanges pursuant to the Restructuring will occur on
approximately the same date.
27. There is no plan or intention on the part of the Corporation to
redeem or otherwise reacquire any stock or indebtedness to be issued pursuant to
the Restructuring.
28. Taking into account any issuance of additional shares of
Corporation stock; any issuance of stock for services; the exercise of any
Corporation stock rights, warrants, or subscriptions; a public offering of
Corporation stock; and the sale, exchange, transfer by gift, or other
disposition of any of the stock of the Corporation to be received in the
Restructuring, the holders of Trust Shares will be in control of the Corporation
within the meaning of Section 368(c) of the Code.
29. The Corporation will remain in existence and retain and use the
property held by it as a result of the Restructuring in a trade or business.
30. There is no plan or intention by the Corporation to dispose of the
Trust Shares held by it as a result of the Restructuring other than in the
normal course of business operations.
31. Each of the parties to the Restructuring will pay its, his or her
own expenses, if any, incurred in connection with the Restructuring.
32. The Corporation is not an investment company within the meaning of
Section 351(e)(1) of the Code and Section 1.351-1(c)(1)(ii) of the Regulations.
33. The Corporation is not a "personal service corporation" within the
meaning of Section 269A of the Code.
34. Where the foregoing representations involve matters of law, you
have explained to us the relevant and material legal authority to which such
representations relate.
<PAGE> 28
Sidley & Austin
September 23, 1998
Page 6
The undersigned fully understands that Sidley & Austin will be relying
on the accuracy and completeness of the statements made in this letter in
rendering the opinion contained in the Opinion Letter, and the undersigned has
examined such records and other documents and made such inquiries and
investigation as the undersigned deemed necessary to obtain sufficient actual
knowledge to support the representations made herein.
Very truly yours,
STARWOOD HOTELS & RESORTS
WORLDWIDE, INC.
By: /s/ RONALD C. BROWN
----------------------------------
Name: Ronald C. Brown
Title: Executive Vice President and
Chief Financial Officer
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement
on Amendment No. 1 to Form S-3 (File Nos. 333-49953 and 333-49953-01) of our
report dated February 27, 1998, on our audits of the financial statements and
financial statement schedules appearing in the Joint Annual Report of Starwood
Hotels & Resorts (formerly Starwood Lodging Trust) and Starwood Hotels & Resorts
Worldwide, Inc. (formerly Starwood Lodging Corporation) on Form 10-K. We also
consent to the reference to our firm under the caption "Experts".
PRICEWATERHOUSECOOPERS
LLP
Newport Beach, California
September 23, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this Registration Statement on Form S-3 of our report dated
February 12, 1998 on the consolidated financial statements and financial
statement schedule of ITT Corporation, and our report dated March 11, 1998 on
the combined financial statements of Westin Hotels & Resorts Worldwide, Inc.,
the consolidated financial statements of W&S Hotel L.L.C., and the combined
financial statements of the predecessor business included in Starwood Hotels &
Resorts and Starwood Hotels & Resorts Worldwide, Inc. Joint Current Report on
Form 8-K dated February 23, 1998 and to all references to our Firm included in
this Registration Statement.
ARTHUR ANDERSEN LLP
New York, New York
September 23, 1998
