<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
<TABLE>
<S> <C>
COMMISSION FILE NUMBER: 1-6828 COMMISSION FILE NUMBER: 1-7959
STARWOOD HOTELS & RESORTS STARWOOD HOTELS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS & RESORTS
CHARTER) WORLDWIDE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS
CHARTER)
MARYLAND MARYLAND
(STATE OR OTHER JURISDICTION (STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION) OF INCORPORATION OR ORGANIZATION)
52-0901263 52-1193298
(I.R.S. EMPLOYER IDENTIFICATION NO.) (I.R.S. EMPLOYER IDENTIFICATION NO.)
777 WESTCHESTER AVENUE 777 WESTCHESTER AVENUE
WHITE PLAINS, NY 10604 WHITE PLAINS, NY 10604
(ADDRESS OF PRINCIPAL EXECUTIVE (ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES, INCLUDING ZIP CODE) OFFICES, INCLUDING ZIP CODE)
(914) 640-8100 (914) 640-8100
(REGISTRANT'S TELEPHONE NUMBER, (REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE) INCLUDING AREA CODE)
</TABLE>
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
175,521,662 common shares of beneficial interest, par value $0.01 per
share, of Starwood Hotels & Resorts paired with 175,521,662 shares of common
stock, par value $0.01 per share, of Starwood Hotels & Resorts Worldwide, Inc.,
outstanding as of November 5, 1998.
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<PAGE> 2
ITEM 1. FINANCIAL STATEMENTS
In response to comments received from the Securities and Exchange
Commission, 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, "Starwood Hotels"
or the "Company"), hereby amend Item 1 of Part I of their Joint Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998 (the "Third Quarter 1998
10-Q") by:
(1) deleting the Combined Consolidated Statements of Income for the Three
and Nine Months Ended September 30, 1998 and 1997 of the Trust and the
Corporation appearing on page 4 therein and inserting in lieu thereof
the following:
1
<PAGE> 3
STARWOOD HOTELS & RESORTS AND
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
COMBINED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ------------------
1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
Revenues.................................................... $2,286 $1,458 $6,296 $4,273
Costs and expenses:
Salaries, benefits and other operating.................... 1,657 1,110 4,614 3,242
Selling, general and administrative....................... 261 151 706 485
Restructuring and other special charges................... 240 -- 240 58
Depreciation and amortization............................. 143 64 414 198
------ ------ ------ ------
2,301 1,325 5,974 3,983
------ ------ ------ ------
(15) 133 322 290
Interest expense, net of interest income of $5 and $4 for
the three months ended September 30, 1998 and 1997,
respectively, and $22 and $13 for the nine months ended
September 30, 1998 and 1997, respectively................. (196) (27) (439) (70)
Gain on sale of Alcatel Alsthom shares...................... -- -- -- 183
Gain on investment in Madison Square Garden................. -- -- 31 200
Miscellaneous income (expense), net......................... (3) (14) 6 (33)
------ ------ ------ ------
(214) 92 (80) 570
Income tax (expense) benefit................................ 109 (46) 79 (246)
Minority equity............................................. 4 (3) (2) (3)
------ ------ ------ ------
Income (loss) from continuing operations.................... (101) 43 (3) 321
Discontinued operations:
Net income (loss) from operations, net of taxes and
minority interest of $1 and $27 for the three months
ended September 30, 1998 and 1997, respectively, and $5
and $39 for the nine months ended September 30, 1998 and
1997, respectively...................................... -- 15 (9) 14
Gain on sale of Educational Services, Inc. shares, net of
taxes and minority interest of $100..................... -- -- 153 --
Gain on disposition of World Directories, net of taxes and
minority interest of $15 and $543 for the three and nine
months ended September 30, 1998, respectively........... 24 -- 972 --
Cumulative effect of accounting change, net of tax
benefit of $6............................................. -- -- -- (11)
------ ------ ------ ------
Net income (loss)........................................... $ (77) $ 58 $1,113 $ 324
====== ====== ====== ======
Basic earnings per Paired Share:
Income (loss) from continuing operations.................. $(0.56) $ 0.34 $(0.10) $ 2.55
Income from discontinued operations....................... 0.13 0.12 5.97 0.11
Cumulative effect of accounting change.................... -- -- -- (0.09)
------ ------ ------ ------
Net income (loss)........................................... $(0.43) $ 0.46 $ 5.87 $ 2.57
====== ====== ====== ======
Diluted earnings per Paired Share:
Income (loss) from continuing operations.................. $(0.56) $ 0.34 $(0.10) $ 2.51
Income from discontinued operations....................... 0.13 0.11 5.97 0.11
Cumulative effect of accounting change.................... -- -- -- (0.09)
------ ------ ------ ------
Net income (loss)........................................... $(0.43) $ 0.45 $ 5.87 $ 2.53
====== ====== ====== ======
Weighted average number of Paired Shares.................... 188 126 187 126
====== ====== ====== ======
Weighted average number of equivalent Paired Shares......... 188 128 187 128
====== ====== ====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statements.
2
<PAGE> 4
(2) deleting the Combined Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 of the Trust and the Corporation
appearing on page 6 therein and inserting in lieu thereof the
following:
STARWOOD HOTELS & RESORTS AND
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1997
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 1,113 $ 324
Exclude:
Discontinued operations --
Net (income) loss from operations......................... 9 (14)
Gain on sale of World Directories and Educational
Services, Inc........................................... (1,125) --
Cumulative effect of accounting change...................... -- 11
------- -------
Income (loss) from continuing operations.................... (3) 321
Adjustments to income (loss) from continuing operations:
Depreciation and amortization............................. 414 198
Amortization of deferred loan costs....................... 15 --
Non-cash portion of restructuring and other special
charges................................................. 150 --
Provision for doubtful receivables........................ 31 28
Minority equity in net income............................. 2 3
Equity income, net of dividends received.................. (17) --
Gain on sale of real estate and investments -- pretax..... (58) (410)
Changes in working capital:
Accounts receivable....................................... (93) (30)
Inventories............................................... 2 (2)
Accounts payable.......................................... 15 (30)
Accrued expenses.......................................... (279) 119
Accrued and deferred income taxes........................... (111) 10
Other, net.................................................. (40) (24)
------- -------
Cash from continuing operations........................... 28 183
------- -------
Cash used for discontinued operations..................... -- (10)
------- -------
Cash from operating activities............................ 28 173
------- -------
INVESTING ACTIVITIES
Additions to plant, property and equipment.................. (694) (762)
Proceeds from sale of real estate and investments........... 2,811 1,618
Collection of Cablevision note receivable................... -- 169
Acquisitions, net of acquired cash.......................... (60) (284)
Employee benefit trust...................................... 146 (119)
Other, net.................................................. (286) (20)
------- -------
Cash from investing activities............................ 1,917 602
------- -------
FINANCING ACTIVITIES
Short-term debt, net........................................ 504 (154)
Long-term debt issued....................................... 2,454 665
Long-term debt repaid....................................... (1,481) (1,088)
Proceeds from equity offering............................... 245 --
Dividends paid.............................................. (3,249) --
Stock repurchases........................................... (343) --
Other, net.................................................. (16) 25
------- -------
Cash used for financing activities........................ (1,886) (552)
------- -------
Exchange rate effect on cash and cash equivalents........... -- (5)
------- -------
Increase in cash and cash equivalents....................... 59 218
Cash and cash equivalents -- beginning of period............ 201 205
------- -------
Cash and cash equivalents -- end of period.................. $ 260 $ 423
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for --
Interest.................................................. $ 392 $ 39
======= =======
Income taxes, net of refunds.............................. $ 47 $ 231
======= =======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statements.
3
<PAGE> 5
(3) deleting the Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 1998 of the Corporation appearing on page 11 therein and
inserting in lieu thereof the following:
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
Revenues................................................. $2,285 $6,294
Costs and expenses:
Salaries, benefits and other operating................. 1,657 4,614
Selling, general and administrative.................... 255 694
Rent and interest, Trust............................... 180 435
Restructuring and other special charges................ 240 240
Depreciation and amortization.......................... 109 305
------ ------
2,441 6,288
------ ------
(156) 6
Interest expense, net of interest income of $1 and $15... (192) 427
Gain on sale of Madison Square Garden.................... -- 31
Miscellaneous income (expense)........................... (3) 6
------ ------
(351) (384)
Income tax benefit....................................... 109 80
Minority equity.......................................... 13 16
------ ------
Loss from continuing operations.......................... (229) (288)
Discontinued operations:
Net loss from operations, net of taxes and minority
interest of $1 and $5............................... -- (9)
Gain on sale of Educational Services, Inc. shares, net
of taxes and minority interest of $100.............. -- 153
Gain on disposition of World Directories, net of taxes
and minority interest of $15 and $543 for the three
and nine months ended September 30, 1998,
respectively........................................ 24 972
------ ------
Net income (loss)........................................ $ (205) $ 828
====== ======
Basic earnings per share:
Loss from continuing operations........................ $(1.22) $(1.54)
Income from discontinued operations.................... 0.13 5.97
------ ------
Net income (loss)........................................ $(1.09) $ 4.43
====== ======
Diluted earnings per share:
Loss from continuing operations........................ $(1.22) $(1.54)
Income from discontinued operations.................... 0.13 5.97
------ ------
Net income (loss)........................................ $(1.09) $ 4.43
====== ======
Weighted average number of shares........................ 188 187
====== ======
Weighted average number of equivalent shares............. 188 187
====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statements.
4
<PAGE> 6
(4) deleting the Consolidated Statement of Cash Flows for the Nine Months
Ended September 30, 1998 appearing on page 13 therein and inserting in
lieu thereof the following:
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
<S> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 828
Exclude:
Discontinued operations --
Net loss from operations.................................. 9
Gain on sale of World Directories and Educational
Services, Inc........................................... (1,125)
-------
Loss from continuing operations............................. (288)
Adjustments to loss from continuing operations:
Depreciation and amortization............................. 305
Amortization of deferred loan costs....................... 15
Non-cash portion of restructuring and other special
charges................................................. 150
Provision for doubtful receivables........................ 31
Minority equity in net income............................. (16)
Equity income, net of dividends received.................. (17)
Gain on divestments -- pretax............................. (58)
Changes in working capital:
Accounts receivable....................................... (85)
Inventories............................................... 2
Accounts payable.......................................... 5
Accrued expenses.......................................... (266)
Accrued and deferred taxes................................ (111)
Other, net................................................ (42)
-------
Cash used for operating activities........................ (375)
-------
INVESTING ACTIVITIES
Additions to plant, property and equipment.................. (555)
Proceeds from divestments................................... 2,561
Acquisitions, net of acquired cash.......................... (47)
Employee benefit trust...................................... 146
Other, net.................................................. (11)
-------
Cash from investing activities............................ 2,094
-------
FINANCING ACTIVITIES
Short-term debt, net........................................ 504
Long-term debt issued, net.................................. 2,442
Long-term debt repaid....................................... (1,481)
Notes payable, Trust........................................ (45)
Proceeds from equity offering............................... 74
Dividends paid.............................................. (3,036)
Stock repurchases........................................... (103)
Other, net.................................................. (24)
-------
Cash used for financing activities........................ (1,669)
-------
Increase in cash and cash equivalents....................... 50
Cash and cash equivalents -- beginning of period............ 201
-------
Cash and cash equivalents -- end of period.................. $ 251
=======
Supplemental disclosures of cash flow information:
Cash paid during the period for --
Interest.................................................. $ 377
=======
Income taxes, net of refunds.............................. $ 46
=======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
5
<PAGE> 7
(5) deleting Note 6 to the Financial Statements in its entirety and
inserting in lieu thereof the following:
NOTE 6. RESTRUCTURING AND OTHER SPECIAL CHARGES
During the third quarter of 1998, the Company recorded pretax charges
totaling approximately $240 million relating to restructuring and other special
charges. The charges represent a portion of the approximate $1.2 billion
restructuring and other special charges that the Company announced in August
1998.
The third quarter 1998 restructuring and other special charges consist of
the following:
<TABLE>
<CAPTION>
NON-CASH CASH EXPENDITURES
CHARGES EXPENDITURES ACCRUED TOTAL
-------- ------------ ------------ -----
<S> <C> <C> <C> <C>
Write-down of assets..................... $115 $-- $ -- $115
ITT Merger-related costs................. 20 20 85 125
---- --- ---- ----
Total.......................... $135 $20 $ 85 $240
==== === ==== ====
</TABLE>
Write-Down of Assets
The restructuring and special charges include the write-down of assets that
include investments in a hotel in Kuala Lampur, Malaysia; a mortgage note
receivable secured by a hotel in Paris, France; an investment in a shared
services center established by ITT in 1997 which was closed by the Company
following the ITT Merger; and certain receivable balances in the Company's
gaming division primarily related to Asian customers. These assets were
primarily ITT assets and were written down primarily as a result of certain
worldwide economic conditions indicating a reduced value for these assets.
ITT Merger Related Costs
The restructuring and special charges include costs related to the ITT
Merger consisting primarily of severance payments and relocation costs for ITT
employees and certain costs to integrate the companies, including costs to
integrate the Company's frequent guest programs and to close down duplicate
facilities.
In addition, during the third quarter of 1998, the Company recorded a
non-recurring charge to selling, general and administrative expense of
approximately $30 million primarily associated with the vesting, during the
quarter, of certain restricted stock granted earlier in the year to the new
President and Chief Executive Officer of the Corporation. Also during the third
quarter of 1998, the Company recorded a $40 million non-recurring charge to
interest expense associated with the settlement of certain forward interest swap
agreements (see Note 10).
During the first quarter of 1997, ITT recorded pretax charges totaling $58
million to restructure and rationalize operations at its World Headquarters. Of
the total pretax charge, approximately $28 million represented severance and
other related employee termination costs associated with the elimination of
nearly 115 positions worldwide. The balance of the restructuring charge ($30
million pretax) related primarily to asset write-offs, lease commitments and
termination penalties. With the exception of the remaining lease commitments,
substantially all of these costs have been paid.
(6) deleting the third paragraph in Note 10 to the Financial Statements in
its entirety and inserting in lieu thereof the following:
A long-term debt offering that the Company was contemplating was delayed
due to market conditions and the Restructuring. As a result, certain of the
Company's forward interest rate swaps with a notional amount of $500 million no
longer correlated with this anticipated indebtedness. In accordance with the
Company's accounting policies, these forward interest rate swaps were marked to
market by the Company and, as such, the Company recognized a loss of $40
million, which is included in interest expense in the third quarter of 1998 (see
Note 6). These contracts were terminated by the Company.
6
<PAGE> 8
(7) deleting the Unaudited Condensed Combined Consolidated Pro Forma Statements
of Income for the Three and Nine Months Ended September 30, 1998 of the
Trust and the Corporation appearing on pages 27 and 28 therein and inserting
in lieu thereof the following:
STARWOOD HOTELS & RESORTS AND
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
UNAUDITED CONDENSED COMBINED CONSOLIDATED
PRO FORMA STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
The following unaudited condensed combined consolidated pro forma statement
of income for the three months ended September 30, 1998 gives effect as of
January 1, 1998 to the ITT Merger, the acquisition of Westin and certain asset
sales. The pro forma information is based upon historical information as
described in Note 1 of the Notes to Financial Statements and does not purport to
present what actual results would have been had such transactions, in fact,
occurred at January 1, 1998, or to project results for any future period.
Historical results are for the three months ended September 30, 1998.
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------
DESERT PRO
HISTORICAL INN(B) OTHERS FORMA
---------- ------ ------ -----
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues......................................... $2,286 $(27) $ -- $2,259
Costs and expenses:
Salaries, benefits and other operating......... 1,657 (28) -- 1,629
Selling, general and administrative............ 261 -- (22)(i) 239
Restructuring and other special charges........ 240 -- -- 240
Depreciation and amortization.................. 143 (5) -- 138
------ ---- ----- ------
2,301 (33) (22) 2,246
------ ---- ----- ------
(15) 6 22 13
Interest expense, net............................ (196) -- 13(d) (178)
5(f)
Miscellaneous expense, net....................... (3) -- -- (3)
------ ---- ----- ------
(214) 6 40 (168)
Income tax benefit (expense)..................... 109 (2) (18) 89
Minority equity.................................. 4 -- -- 4
------ ---- ----- ------
Income (loss) from continuing operations......... $ (101) $ 4 $ 22 $ (75)
====== ==== ===== ======
Basic earnings per Paired Share:
Loss from continuing operations................ $(0.56) $(0.38)
====== ======
Diluted earnings per Paired Share:
Loss from continuing operations................ $(0.56) $(0.38)
====== ======
Weighted average number of Paired Shares......... 188 188
====== ======
Weighted average number of equivalent Paired
Shares......................................... 188 188
====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
pro forma statement.
7
<PAGE> 9
STARWOOD HOTELS & RESORTS AND
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
UNAUDITED CONDENSED COMBINED CONSOLIDATED
PRO FORMA STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
The following unaudited condensed combined consolidated pro forma statement
of income for the nine months ended September 30, 1998 gives effect as of
January 1, 1998 to the ITT Merger, the acquisition of Westin and certain asset
sales. The pro forma information is based upon historical information as
described in Note 1 of the Notes to Financial Statements and does not purport to
present what actual results would have been had such transactions, in fact,
occurred at January 1, 1998, or to project results for any future period.
Historical results are for the nine months ended September 30, 1998.
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------
STARWOOD DESERT
HISTORICAL HOTELS(A) INN(B) OTHERS PRO FORMA
---------- --------- ------ ------ ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues................................. $6,296 $437 $ (87) $ -- $6,646
Costs and expenses:
Salaries, benefits and other
operating........................... 4,614 325 (92) -- 4,847
Selling, general and administrative.... 706 42 -- (31)(h)(i) 717
Restructuring and other special
charges............................. 240 -- -- -- 240
Depreciation and amortization.......... 414 43 (12) 13(g) 458
------ ---- ----- ---- ------
5,974 410 (104) (18) 6,262
------ ---- ----- ---- ------
322 27 17 18 384
Interest expense, net.................... (439) (25) -- (39)(c) (434)
57(d)
3(e)
9(f)
Gain on investment in Madison Square
Garden................................. 31 -- -- -- 31
Miscellaneous income, net................ 6 4 2 -- 12
------ ---- ----- ---- ------
(80) 6 19 48 (7)
Income tax benefit (expense)............. 79 (2) (6) (20) 51
Minority equity.......................... (2) 1 -- -- (1)
------ ---- ----- ---- ------
Income (loss) from continuing
operations............................. $ (3) $ 5 $ 13 $ 28 $ 43
====== ==== ===== ==== ======
Basic earnings per Paired Share:
Income (loss) from continuing
operations.......................... $(0.10) $ 0.15
====== ======
Diluted earnings per Paired Share:
Income (loss) from continuing
operations.......................... $(0.10) $ 0.15
====== ======
Weighted average number of Paired
Shares................................. 187 187
====== ======
Weighted average number of equivalent
Paired Shares.......................... 187 189
====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
pro forma statement.
8
<PAGE> 10
(8) deleting Note (d) in the Notes to Unaudited Condensed Combined Consolidated
Pro Forma Statements of Income of the Trust and the Corporation appearing on
page 29 therein and inserting in lieu thereof the following:
(d) Represents reduction of interest expense, using an average rate of 7.5%, for
the paydown of the term loans with proceeds from actual or planned asset
dispositions as if the dispositions had occurred on January 1, 1998. The
actual dispositions include the disposition of WD for gross proceeds of $2.1
billion to VNU in February 1998; the sale of ITT's interest in WBIS+,
Channel 31 in New York City, to Paxson for gross proceeds of $128 million in
March 1998; the exercise of one of the two "put" options in April 1998
pursuant to which Cablevision purchased one-half of ITT's 7.81% interest in
MSG for gross proceeds of $94 million; the sale of an aircraft for gross
proceeds of $39 million in April 1998; and the sale of approximately 13
million shares of Educational Services for gross proceeds of $315 million in
June 1998. The planned asset dispositions include the exercise of the
remaining "put" option with Cablevision or MSG, the sale of the Company's
remaining 35% interest in Educational Services through various alternatives
including a private placement or a registered public offering of its shares
and the sale of the Desert Inn. The pro forma net proceeds of the planned
dispositions, after certain costs and income taxes, would reduce debt by
approximately $735 million. The Company believes that the planned
dispositions are probable as required by Regulation S-X, Rule 11-01(a).
(9) deleting the Unaudited Funds from Operations of the Trust and the
Corporation appearing on page 30 therein and inserting in lieu thereof the
following:
STARWOOD HOTELS & RESORTS AND
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
UNAUDITED FUNDS FROM OPERATIONS
Management believes that funds from operations ("FFO") (as defined by the
National Association of Real Estate Investment Trusts)(1) is one measure of
financial performance of an equity REIT such as the Trust. Because ITT was never
an equity REIT, it did not calculate FFO. Accordingly, set forth below is a
comparison of pro forma FFO for the three- and nine-month periods ended
September 30, 1998 (see the unaudited condensed combined consolidated pro forma
statements of income and the notes thereto beginning on page 28 for an
explanation of the pro forma adjustments) and the combined historical FFO of
Starwood Hotels for the same periods in 1997.
Combined pro forma FFO for the three months ended September 30, 1998 grew
by 502% to $295 million, compared to combined historical FFO of $49 million as
reported by Starwood Hotels for the corresponding period in 1997. Combined pro
forma FFO for the nine months ended September 30, 1998 grew by 422% to $700
million compared to combined historical FFO of $134 million as reported by
Starwood Hotels for the corresponding period of 1997. The following table shows
the calculation of pro forma combined FFO for the
9
<PAGE> 11
three and nine months ended September 30, 1998 and historical combined FFO as
reported by Starwood Hotels for the three and nine months ended September 30,
1997 (in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- ---------- --------- ----------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Income (loss) from continuing operations
before minority interest............... $(79) $ 3 $ 44 $ 39
Minority interest in consolidated joint
ventures............................... (3) (4) (7) (6)
Depreciation and amortization............ 138 50 458 101
Depreciation and amortization for
unconsolidated joint ventures.......... 2 -- -- --
Deferred taxes........................... (78) -- (77) --
Gain on sale of real estate and
investments............................ (1) -- (50) --
Preopening costs......................... 9 -- 35 --
Restructuring and other special
charges................................ 240 -- 240 --
Other non-recurring items, net(2)........ 67 -- 57 --
---- --- ---- ----
Funds from Operations.................... $295 $49 $700 $134
==== === ==== ====
</TABLE>
- ---------------
(1) Management and industry analysts generally consider FFO to be one measure of
the financial performance of an equity REIT that provides a relevant basis
for comparison among REITs, and FFO is presented to assist investors in
analyzing the performance of the Company. FFO is defined as income (computed
in accordance with generally accepted accounting principles), excluding
gains (losses) from debt restructuring and sales of property, real estate
related depreciation and amortization (excluding amortization of financing
costs) and other non-recurring items. FFO does not represent cash generated
from operating activities in accordance with generally accepted accounting
principles and is not necessarily indicative of cash available to fund cash
needs. FFO should not be considered an alternative to net income as an
indication of the Company's financial performance or as an alternative to
cash flows from operating activities as a measure of liquidity.
(2) Other non-recurring items consist primarily of costs associated with the
settlement of certain forward interest rate swap agreements and to the
vesting of certain restricted stock awards (see note 6).
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This amendment contains certain statements that may be deemed
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements contained herein include, but are not limited to,
statements relating to the Company's objectives, strategies and plans, and all
statements (other than statements of historical fact) that address actions,
events or circumstances that the Company or its management expects, believes or
intends will occur in the future. Forward-looking statements are not guarantees
of future performance and involve risks and uncertainties that could cause
actual results to differ materially from historical results or those anticipated
at the time the forward-looking statements are made, including, without
limitation, risks and uncertainties associated with the following: the
Restructuring; the Trust's continued ability to qualify for taxation as a REIT;
the Company's integration of the assets and operations of ITT and Westin;
completion of future acquisitions and dispositions; the availability of capital
for acquisitions and for renovations; execution of hotel and casino renovation
and expansion programs; the ability to maintain existing management, franchise
or representation agreements and to obtain new agreements on current terms;
competition within the lodging industry and the gaming industry; the cyclicality
of the real estate business, the hotel business and the gaming business; foreign
exchange fluctuations; general real estate and national and international
economic conditions; political, financial and economic conditions and
uncertainties in countries in which the Company owns property or operates; the
ability of the Company, owners of properties it manages or franchises and others
with which it does business to address the Year 2000 issue, and the costs
associated therewith; the adoption by several European countries of the euro as
their national currency; and the other risks and uncertainties set forth in the
annual, quarterly and current reports and proxy statements of the Trust and the
Corporation. 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.
AMENDMENTS
In response to comments received from the Securities and Exchange
Commission, the Company hereby amends Item 2 of Part I of the Third Quarter 1998
10-Q by:
(1) deleting the last paragraph under the caption "Continuing Operations"
in the section titled "Results of Operations" and inserting in lieu
thereof the following:
Interest expense for the three and nine months ended September 30, 1998,
net of a $40 million non-recurring charge relating to the settlement of certain
forward interest swap agreements (see Note 6 to the combined consolidated
financial statements) and interest income, increased to $156 million and $399
million, respectively, when compared to $27 million and $70 million in the same
periods of 1997. The increase relates primarily to the debt incurred to finance
the ITT Merger. See "Liquidity and Capital Resources."
(2) deleting the paragraph under the caption "Restructuring and Other
Special Charges" in the section titled "Results of Operations" and
inserting in lieu thereof the following:
During the third quarter of 1998, the Company recorded pretax charges of
approximately $240 million relating to restructuring and other special charges.
The charges consist of costs relating to the write-down of assets, the ITT
Merger and other non-recurring costs (see Note 6 to unaudited combined
consolidated financial statements on page 20).
(3) deleting the section with the caption "Risks Relating to Year 2000"
under the section "Other Matters" and inserting in lieu thereof the
following:
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
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computerized systems, which include information and non-information technology
systems, and applications used by the Company will need to be reviewed,
evaluated and modified or replaced, if necessary, 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 separately
focusing on its central facilities, which include all of its non-operating
facilities, and on its gaming and hotel properties.
The Company has identified the critical central facility business
applications that may be affected by the Year 2000 as the reservation system
application, including the frequent stay programs, and communication system
applications. The Company has conducted the discovery and assessment stages on
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 communicating with others with
whom it does significant business to determine their readiness of Year 2000
compliance. During the third quarter of 1998 the Company successfully completed
a validation process with an independent third-party reservation information
service provider with which the Company has a material relationship. This
validation process consisted of testing of the internal code and conducting over
9,000 test cases on the applicable systems. The specific testing included a
three-step process comprised of baseline tests, Year 2000 date tests and code
enhancement tests.
The Company is in the 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 third 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 the Company's
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 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 were deployed to the
hotel properties. The validation tools consisted of asset management tools for
analysis of all applications and data checking tools for testing and patch
application purposes. The domestic Year 2000 team, which is scheduled to visit
each domestic hotel property, is comprised of independent consultants and five
individuals from the Company that are dedicated to the Year 2000 project. Each
of the international properties has appointed internal personnel to address Year
2000 compliance and has access to such independent consultants, if necessary.
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 Company expects to address remediation efforts by the third
quarter of 1999.
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
owned hotel and gaming properties should not exceed $20 million, although there
can be no assurance that actual costs will not exceed this amount. Of this
amount, $1.5 million had been expended as of September 30, 1998, and an
additional $3.5 million is expected to be spent in the remainder of 1998.
Starwood Year 2000 Risks
Since all major computerized central facilities reservation systems and
applications have been tested and reservations for the year 2000 have been
accepted, the Company believes that it has addressed all material
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risks related to its reservation function. The remaining risks relate to the
non-critical business applications, support hardware for the central facilities
and embedded systems at the properties owned or managed by the Company. A
failure of certain 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 property machinery and
equipment could also fail resulting in safety risks and customer
dissatisfaction. Additionally, failure of the gaming properties' systems to
become Year 2000 compliant could result in the inefficient processing of
operational gaming information and the malfunction of computerized gaming
machines.
The Company has asked substantially all of its significant vendors and
service providers to provide reasonable assurances as to those parties' Year
2000 state of readiness. Risk assessments and contingency plans, where required,
will be finalized in the first six months of 1999. To the extent that vendors
and service providers do not provide satisfactory evidence that their products
and services are Year 2000 compliant, the Company will seek to obtain the
necessary products and services from alternative sources. There can be no
assurance, however, that Year 2000 remediation by vendors and service providers
will be completed timely or that qualified replacement vendors and service
providers will be available, and any failure of such third parties' systems
could have a material adverse impact on the Company's computer systems and
operations.
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
STARWOOD HOTELS & RESORTS STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
/s/ BARRY STERNLICHT /s/ RONALD C. BROWN
- -------------------------------------------- --------------------------------------------
Barry Sternlicht Ronald C. Brown
Chairman and Chief Executive Officer Executive Vice President and
Chief Financial Officer
</TABLE>
Date: November 30, 1998
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