<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 10, 1998.
REGISTRATION NOS. 333- AND 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
<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.)
2231 E. CAMELBACK ROAD, SUITE 410 2231 E. CAMELBACK ROAD, SUITE 400
PHOENIX, ARIZONA 85016 PHOENIX, ARIZONA 85016
(602) 852-3900 (602) 852-3900
(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 OFFICER EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
STARWOOD HOTELS & RESORTS STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
2231 E. CAMELBACK ROAD, SUITE 410 2231 E. CAMELBACK ROAD, SUITE 400
PHOENIX, ARIZONA 85016 PHOENIX, ARIZONA 85016
(602) 852-3900 (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
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
------------------------
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. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
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>
- ---------------------------------------------------------------------------------------------------------------------------------
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 2,785,000 Paired
Common Shares") Common Shares $52.63 $146,574,550 $43,240
=================================================================================================================================
</TABLE>
(1) The fee was calculated pursuant to Rule 457(c) under the Securities Act of
1933 and was based on the average of the high and low prices for the Paired
Common Shares on the New York Stock Exchange on April 9, 1998.
----------------------------
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.
================================================================================
<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 APRIL 10, 1998
PROSPECTUS
2,785,000 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 as a REIT. 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.
All of the Paired Common Shares offered hereby may be sold from time to
time by the shareholder specified in this Prospectus or its successors in
interest (the "Selling Shareholder"). See "Selling Shareholder." The Trust and
the Corporation will not receive any of the proceeds from the sale of the Paired
Common Shares in this offering.
The sale or distribution of all or any portion of the Paired Common Shares
offered hereby may be effected from time to time by the Selling Shareholder
directly, indirectly to or through brokers or dealers or in a distribution by
one or more underwriters on a firm commitment or best efforts basis, on 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 market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices. See
"Plan of Distribution."
The Paired Common Shares offered hereby may be offered for sale and sold by
the Selling Shareholder from time to time as described under the caption "Plan
of Distribution." To the extent required, the number of Paired Common Shares to
be sold, the purchase price, the public offering price, if applicable, the name
of any underwriter, agent or broker-dealer, and any applicable commissions,
discounts or other items constituting compensation to such underwriters, agents
or broker-dealers with respect to a particular offering will be set forth in a
supplement or supplements to this Prospectus (each, a "Prospectus Supplement")
or in a post-effective amendment to the registration statement of which this
Prospectus is a part. The aggregate proceeds to the Selling Shareholder from the
sale of the Paired Common Shares offered hereby generally will be the purchase
price of the Paired Common Shares sold less (i) the aggregate commissions,
discounts and other compensation, if any, paid by the Selling Shareholder to
underwriters, agents or broker-dealers and (ii) certain other expenses of the
offering and sale of the Shares that will be the responsibility of the Selling
Shareholder. See "Selling Shareholder."
The Paired Common Shares are listed on the New York Stock Exchange ("NYSE")
under the symbol "HOT." On April 9, 1998, the last reported sale price of the
Paired Common Shares on the NYSE was $52.625 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.
------------------------
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.
------------------------
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 (the "Registration Statement") 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 Current Reports on Form 8-K dated January 2, 1988, February 3,
1998, February 23, 1988 and February 24, 1998.
3. 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.
2
<PAGE> 4
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: certain
recently proposed legislation relating to the Trust's ability to continue to
qualify as a paired-share REIT and 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 the largest real estate
investment trust in the United States, respectively. The Corporation conducts
its hotel business both directly and through its subsidiaries ITT Sheraton
Corporation ("Sheraton") and Ciga, S.P.A. ("Ciga"), and engages in the gaming
business principally through its subsidiary Caesars World, Inc. ("Caesars").
Through the Sheraton, Westin, The Luxury Collection, St. Regis, Ciga, Four
Points Hotels and Caesars brand names, Starwood Hotels is represented in most
major markets of the world. As of March 30, 1998, Starwood Hotels owned equity
interests in approximately 220 hotel properties, held mortgage interests in
eight hotel properties, operated approximately 180 hotel properties on behalf of
third-party owners and earned franchise fees by licensing one of its brand names
to approximately 240 hotel properties.
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 Company owns an
approximately 94.1% general partnership interest in each of the Partnerships.
The remaining 5.9% interest in each of the Partnerships is 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 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
3
<PAGE> 5
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 102 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 2231 East Camelback Road, Suite
410, Phoenix, Arizona 85016; telephone (602) 852-3900. The Corporation is a
Maryland corporation formed in 1980. The Corporation's executive offices are
located at 2231 East Camelback Road, Suite 400, Phoenix, Arizona 85016;
telephone (602) 852-3900.
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 outstanding shares of the common stock, no par value, of
ITT ("ITT Common Stock"), together with 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 Caesars Palace and the Desert Inn Resort & Casino 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.
As of the date of this Prospectus, ITT is seeking to sell The Desert Inn
Resort & Casino, and the Company is exploring a range of disposition strategies
for ITT's 83.3% equity interest in ITT Educational Services, Inc. ("ITT
Educational"), the subsidiary that conducts ITT's post-secondary technical
education business. As a part of this disposition strategy, on February 13,
1998, ITT Educational filed a registration statement with the Commission for the
sale by ITT of up 12,650,000 shares of the common stock of ITT Educational. 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.
4
<PAGE> 6
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 and 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, together with Westin Worldwide, Lauderdale, Seattle, St. John and Denver,
"Westin") 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 Hotel Company, originally founded as Western Hotels in 1930, became
Western International Hotels in 1963 and adopted the Westin name and logo in the
late 1970's. Westin grew from its initial 17 hotels located in the Pacific
Northwest to 82 properties when it was acquired by W&S Hotel L.L.C. in May 1995,
and grew to 97 luxury or upscale hotel and resort properties (excluding 15
properties owned by the Company) throughout the world at December 31, 1997
through a combination of Westin's own development efforts and working with other
hotel owners to enable Westin to serve as manager, franchisor or representative.
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.
Pursuant to the terms of the Westin Transaction Agreement:
(i) Westin Worldwide merged into the Trust (the "Westin Merger"). In
connection with the Westin Merger, all of the issued and outstanding shares
of capital stock of Westin Worldwide (other than shares held by Westin and
its subsidiaries or by the Company) were converted into an aggregate of
6,285,783 Class A Exchangeable Preferred Shares, par value $.01 per share
(the "Class A EPS"), of the Trust and 5,294,783 Class B Exchangeable
Preferred Shares, liquidation value $38.50 per share (the "Class B EPS" and
together with the Class A EPS, the "EPS"), of the Trust and $177.9 million
in cash;
(ii) The stockholders of Lauderdale, Seattle and Denver contributed
all of the outstanding shares of such companies to the Realty Partnership.
In exchange for such contribution and after giving effect to the deemed
exchange of certain units, the Realty Partnership issued to such
stockholders an aggregate of 470,309 limited partnership units of the
Realty Partnership and the Trust issued to such stockholders an aggregate
of 127,534 shares of Class B EPS. In addition, in connection with the
foregoing share contribution, the Realty Partnership assumed, repaid or
refinanced the indebtedness of Lauderdale, 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
5
<PAGE> 7
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.
6
<PAGE> 8
RISK FACTORS
Prospective purchasers of the Paired Common Shares offered hereby should
consider carefully the following factors before acquiring the securities offered
hereby:
RECENTLY PROPOSED LEGISLATION
On March 26, 1998, the Chairman of the Ways and Means Committee of the
United States House of Representatives and the Chairman of the Finance Committee
of the United States Senate introduced identical bills ("H.R. 3558") that would,
if enacted, limit the ability of the Company to manage or operate real property
that it acquires after March 26, 1998. The provisions of H.R. 3558 were added to
the IRS Restructuring Bill that was reported out of the Senate Finance Committee
in April 1998. If enacted H.R. 3558 would make it difficult for the Company to
acquire and operate hotels after March 26, 1998 in the same manner as the
Company has in the past. As a result, enactment of H.R. 3558 could have a
material adverse effect on the results of operations, financial condition and
prospects of the Company. No assurance can be given that H.R. 3558 will not be
enacted in its current form or that other new legislation, regulations or
administrative interpretations with respect to the grandfathering of the Company
will not be adopted. The Company is evaluating its options in the event that
H.R. 3558 (or a similar measure) were to be adopted.
FAILURE TO MANAGE RAPID GROWTH
The full benefits of the Company's acquisition of Westin, 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 Internal Revenue Code of 1986, as amended (the
"Code"), commencing with the Trust's taxable year ended December 31, 1995, and
the Trust intends to continue to so operate. No assurance, however, can be given
that the Trust will remain qualified as a REIT. Qualification as a REIT involves
the application of highly technical and complex Code provisions for which there
are only limited judicial or administrative interpretations. The complexity of
these provisions is greater in the case of a REIT that owns hotels and leases
them to a corporation with which its stock is paired. As a result, the Trust is
likely to encounter a greater number of interpretive issues under the REIT
qualification rules, and more such issues which lack clear guidance, than are
other REITs. The determination of various factual matters and circumstances not
entirely within the Trust's control may affect its ability to qualify as a REIT.
In addition, no assurance can be given that new legislation, new regulations,
administrative interpretations of court decisions will not significantly
7
<PAGE> 9
change the tax laws with respect to qualification as a REIT or the federal
income tax consequences of such qualification. Furthermore, the qualification of
the Trust as a REIT will depend on the Trust's continuing ability to meet
various requirements concerning, among other things, the ownership of Paired
Shares and other equity securities of the Trust, the nature of the Trust's
assets, the sources of its income and the amounts of its distributions to its
shareholders. In connection with the acquisition of Westin in January 1998 and
ITT in February 1998, the Trust acquired new assets and operations (including
the leasing of newly acquired assets, loans to the Corporation and the ownership
of certain corporations that own hotels or intangible assets). By increasing the
complexity of the Company's operations, these assets and operations may make it
more difficult for the Trust to continue to satisfy the REIT qualification
requirements.
The Trust's ability to qualify as a REIT is also dependent on its continued
exemption from the anti-pairing rules of Section 269B(a)(3) of the Code. Section
269B(a)(3) would ordinarily prevent a company from qualifying as a REIT if its
stock is paired with the stock of another company whose activities are
inconsistent with REIT status, such as the Corporation. The "grandfathering
rules" governing Section 269B(a)(3) generally provide, however, that Section
269B(a)(3) does not apply to a paired REIT if the shares of the REIT and its
paired operating company were paired on or before June 30, 1983 and the REIT was
taxable as a REIT on or before June 30, 1983. There are, however, no judicial or
administrative authorities interpreting the grandfathering rules governing
Section 269B(a)(3).
If in any taxable year the Trust were to fail to qualify as a REIT, the
Trust would not be allowed a deduction for distributions to shareholders in
computing its taxable income and would be subject to federal income tax on its
taxable income at regular corporate rates. Unless entitled to relief under
certain Code provisions, the Trust would also be disqualified from treatment as
a REIT for the four taxable years following the year during which qualification
was lost. The failure of the Trust to qualify as a REIT would reduce its net
earnings available for distribution to shareholders because of the additional
tax liability to the Trust for the year or years involved. In addition,
distributions would no longer be required to be made. To the extent that
distributions to shareholders would have been made in anticipation of the Trust
qualifying as a REIT, the Trust might be required to borrow funds or to
liquidate certain of its investments to pay the applicable tax. The failure to
qualify as a REIT would also constitute a default under certain debt obligations
of the Trust.
Required Distributions to Shareholders. In order to obtain and retain REIT
status, the Trust must distribute to its shareholders at least 95% of its REIT
taxable income (excluding any net capital gain). In 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
8
<PAGE> 10
will fluctuate; and (iii) the agreements governing the Company's loan and credit
facilities contain covenants imposing certain limitations on the Company's
ability to acquire and dispose of assets. In addition, although the Company
anticipates that it will be able to repay or refinance its existing indebtedness
and any other indebtedness when it matures, there can be no assurance that the
Company will be able to do so or that the terms of such refinancings will be
favorable.
In connection with the acquisitions of Westin and ITT, the Company incurred
a substantial amount of additional debt, thereby increasing its exposure to the
risks associated with debt financing. The Company's increased leverage may have
important consequences, including the following: (i) the ability of the Company
to obtain additional financing for acquisitions, working capital, capital
expenditures or other purposes, if necessary, may be impaired or such financing
may not be available on terms favorable to the Company, (ii) a substantial
decrease in operating cash flow or an increase in expenses of the Company could
make it difficult for the Company to meet its debt service requirements and
force it to modify its operations; (iii) the Company's higher level of debt and
resulting interest expense may place it at a competitive disadvantage with
respect to certain competitors with lower amounts of indebtedness and/or higher
credit ratings; and (iv) the Company's greater leverage may make it more
vulnerable to a downturn in its business or in the economy generally.
LIMITS ON CHANGE OF CONTROL AND OWNERSHIP LIMITATION
Ownership Limitation. In order for the Trust to maintain its qualification
as a REIT, not more than 50% in value of its outstanding shares may be owned,
directly or indirectly, by five or fewer individuals (which term is defined in
the Code to include certain entities) at any time during the last half of the
Trust's taxable year. Furthermore, actual or constructive ownership of a
sufficient number of the Paired Common 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
9
<PAGE> 11
Shares or other equity securities of the Company the opportunity to realize a
premium over then-prevailing market prices.
INFLUENCE BY STARWOOD CAPITAL
Individuals employed by or otherwise affiliated with Starwood Capital
Group, L.L.C. ("Starwood Capital") hold two positions on the Board of Trustees
and two positions on the Board of Directors. Although the Company has a policy
requiring a majority of its Trustees and Directors to be "independent," Starwood
Capital may have the ability to exercise certain influence over the affairs of
the Company. Barry S. Sternlicht is the President and Chief Executive Officer
of, and controls, Starwood Capital. Mr. Sternlicht also is a Trustee of the
Trust and the Chairman and Chief Executive Officer of the Trust. In addition,
Mr. Sternlicht is Chairman of the Board of Directors of the Corporation. As a
consequence, Mr. Sternlicht has the ability to exercise certain influence over
the affairs of the Company. Starwood Capital and certain of its 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 Common 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
10
<PAGE> 12
tax laws can make it more expensive and/or time consuming to develop real
property or expand, modify or renovate hotels.
Governments can, under eminent domain laws, take real property, sometimes
for less compensation than the owner believes the property is worth. When
prevailing interest rates increase, the expense of acquiring, developing,
expanding or renovating real property increases, and values decrease as it
becomes more difficult to sell property because the number of potential buyers
decreases. Similarly, as financing becomes less available, it becomes more
difficult both to acquire real property and, because of the diminished number of
potential buyers, to sell real property. Any of these factors could have a
material adverse impact on the Company's results of operations or financial
condition, as well as on the Trust's ability to make distributions to its
shareholders.
In addition, equity real estate investments, such as the investments held
by the Company and any additional properties that may be acquired by the
Company, are relatively illiquid. If the properties of the Company do not
generate revenue sufficient to meet operating expenses, including debt service
and capital expenditures, the income of the Company and the Trust's ability to
make distributions to shareholders will be adversely affected.
Hotel Development. The Company intends to develop hotel properties as
suitable opportunities arise and is currently developing several upscale hotels.
New project development is subject to a number of risks, including risks of
construction delays or cost overruns that may increase project costs; receipt of
zoning, occupancy and other required governmental permits and authorization; and
the incurring of development costs that are not pursued to completion. There can
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.
11
<PAGE> 13
Increased Gaming Competition. The Company faces significant domestic and
international competition from both established casinos and newly emerging
gaming operations. Proposals have been made for a significant number of casinos,
both land-based and those involving vessels on navigable waters, in a number of
jurisdictions and large metropolitan areas. Legalization of gaming in additional
jurisdictions may also provide opportunities for expansion by the Company's
competitors that could adversely affect the Company's existing gaming
operations. The Company believes that the adoption of legalized gaming in any
jurisdiction near Nevada (particularly California or other states in the
southwestern United States) or near New Jersey (particularly New York or
Pennsylvania) or the advent of gaming on nearby Native American lands could have
a material adverse effect on the Company's operations in Las Vegas and Atlantic
City.
Risks Associated with High-End Gaming. There are risks associated with the
high end gaming business that currently comprises a portion of the Company's
Caesars Palace and Desert Inn operations. High-end gaming is more volatile than
other forms of gaming, and variances attributable to high-end gaming could,
under certain circumstances, have a positive or negative impact on cash flow,
earnings and other financial measures in a particular quarter. In addition, a
substantial portion of the Company's table gaming revenues from its Caesars
Palace and Desert Inn operations is attributable to the play of a relatively
small number of international customers. The loss of, or a reduction in play of,
the most significant of such customers could have an adverse effect on the
Company's future operating results.
FOREIGN OPERATIONS AND CURRENCY FLUCTUATIONS
The Company has significant international operations, including, as of
March 1, 1998, 31 owned properties in Europe, two properties owned in Africa/the
Middle East, 15 properties owned in Latin America and three properties owned in
Asia/Pacific. International operations generally are subject to various
political and other risks that are not present in U.S. operations, including,
among other things, the risk of war or civil unrest, expropriation and
nationalization. In addition, certain international jurisdictions restrict the
repatriation of non-U.S. earnings. Various international jurisdictions also have
laws limiting the right and ability of non-U.S. entities to pay dividends and
remit earnings to affiliated companies unless specified conditions have been
met. In addition, sales in international jurisdictions typically are made in
local currencies, which subjects the Company to risks associated with currency
fluctuations. Currency devaluations and unfavorable changes in international
monetary and tax policies and other changes in the international regulatory
climate and international economic conditions could materially adversely affect
the Company's profitability and financing plans. Other than Italy, where the
Company is subject to certain risks due to currency fluctuations, the Company's
properties are geographically diversified and not concentrated in any particular
region.
POSSIBLE LIABILITY OF TRUST SHAREHOLDERS
Both the Maryland statute governing real estate investment trusts formed
under the laws of that state 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
12
<PAGE> 14
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.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Paired Common Shares offered hereby, all of which proceeds will be received by
the Selling Shareholders. See "Selling Shareholders."
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
Second Quarter (through April 9,
1998)............................... $54.00 $52.63 --
First Quarter......................... $57.75 $51.82 $0.48
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.
(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 April 9, 1998, the last reported sales price for the Paired Common
Shares on the NYSE was $52.625 per Paired Common Share. As of March 27, 1998,
there were approximately 47,936 holders of record of
13
<PAGE> 15
Paired Common Shares, including approximately 25,883 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). Thus, the Trust intends to continue
to pay regular quarterly dividends. 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.
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 Realty Partnership'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.
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.
The Corporation has not paid any cash dividends since its organization and
does not anticipate that it will make any such distributions in the foreseeable
future.
14
<PAGE> 16
SELLING SHAREHOLDER
This Prospectus relates to (i) the offer and sale from time to time of
2,185,000 Paired Common Shares (the "Original Shares") by UBS Limited, which
Original Shares were issued pursuant to a Purchase Agreement between the
Company, Union Bank of Switzerland, London Branch ("UBS/LB") and UBS Limited
dated as of October 15, 1997 (the "Purchase Agreement"), and (ii) the offer and
sale from time to time of up to 600,000 Paired Common Shares (the "Forward
Shares" and, together with the Original Shares, the "Shares") by UBS/LB, which
Forward Shares may be issued pursuant to a Price Adjustment Agreement between
the Company and UBS/LB dated October 13, 1997 (the "Price Adjustment Agreement")
UBS Limited and UBS/LB are referred to herein collectively as the "Selling
Shareholder." It is unknown if, when, or in what amounts the Selling Shareholder
may offer the Shares for sale. There is no assurance that the Selling
Shareholder will sell any or all of the Shares.
The Company cannot determine at this time whether it will issue any
additional Paired Common Shares as Forward Shares or, if any such shares are
issued, the number thereof. However, the Company has determined to include
600,000 Forward Shares in the Registration Statement and this Prospectus. There
can be no assurance that the Company will not issue more than 600,000 Forward
Shares; any such additional Forward Shares will be registered by the Company
pursuant to a separate registration statement.
This Prospectus has been prepared pursuant to the Company's obligations
under the Purchase Agreement. In accordance with the Purchase Agreement, which
contains customary representations and warranties relating to the Company, this
Prospectus and the Registration Statement relates to sales of the Shares by the
Selling Shareholder, subject to the terms and conditions set forth in the
Purchase Agreement.
In addition, in the Purchase Agreement the Company has agreed to indemnify
the Selling Shareholder 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 the Selling Shareholder may be
required to make in respect thereof.
Because the Selling Shareholder may offer all or some of the Shares, and
because there are currently no agreements, arrangements or understandings with
respect to the sale of any of the Shares that will be held by the Selling
Shareholder after completion of the offering, no estimate can be given as to the
principal amount of the Shares that will be held by the Selling Shareholder
after completion of the offering.
The Selling Shareholder has not held any position or office or held any
other material relationship with the Company or any of its affiliates within the
past three years, other than (i) UBS Limited, which pursuant to the Purchase
Agreement purchased the Shares for $57.25 per Share, (ii) UBS/LB, which does not
currently own any Paired Common Shares, but which has entered into, the Price
Adjustment Agreement, and (iii) UBS Securities LLC, which received from the
Company a placement fee equal to 2% of the gross proceeds of the sale of the
Shares to UBS Limited.
The Price Adjustment Agreement provides for a settlement payment to be
made, in the form of Paired Shares, by the Company to UBS, or by UBS to the
Company, based on the market price of the Shares over a specified unwind period,
as compared to a "Forward Price" (as defined, but essentially equal to $57.25
per Paired Share, plus an implicit interest factor less dividends declared on
the Shares, in each case during the term of the Price Adjustment Agreement).
The Selling Shareholder and any broker or dealer to or through 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 profits
realized by the Selling Shareholder or such brokers or dealers may be deemed to
be underwriting commissions. Brokers' commissions and dealers' discounts, taxes
and other selling expenses to be borne by the Selling Shareholder are not
expected to exceed normal selling expenses for sale. The registration of the
Shares under the Securities Act shall not be deemed an admission by the Selling
Shareholder or the Company that the Selling Shareholder are underwriters for
purposes of the Securities Act of any Shares offered under this Prospectus.
15
<PAGE> 17
The following chart shows, according to the Company's records, the number
of Paired Common Shares currently held by the Selling Shareholder and the number
of Shares being offered hereby:
<TABLE>
<CAPTION>
NUMBER OF
PAIRED
NUMBER OF PAIRED COMMON SHARES
COMMON SHARES BENEFICIALLY OWNED
NAME OF BENEFICIAL OWNER NUMBER PERCENT(1) TO BE SOLD AFTER THE OFFERING(2)
------------------------ --------- ---------- ---------------- ---------------------
<S> <C> <C> <C> <C>
UBS Limited(3)..................... 2,785,000(4) 1.2% 2,785,000(4) 0
</TABLE>
- ---------------
(1) Based on the number of Paired Common Shares outstanding on March 27, 1998.
(2) Assumes all of the Paired Common Shares offered hereby are sold.
(3) UBS Limited is a United Kingdom affiliate of UBS.
(4) Includes 600,000 Paired Common Shares that may be issued pursuant to the
Price Adjustment Agreement.
PLAN OF DISTRIBUTION
The sale or distribution of all or any portion of the Shares may be
effected from time to time by the Selling Shareholder directly, indirectly
through brokers or dealers or in a distribution by one or more underwriters on a
firm commitment or best efforts basis, on the NYSE, in the over-the-counter
market, on any other national securities exchange on which the Paired Common
Shares are listed or traded, in privately negotiated transactions or otherwise,
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
Selling Shareholder will sell the Shares principally to or through UBS
Securities LLC, a registered broker-dealer that is an affiliate of the Selling
Shareholder. The Company will not receive any of the proceeds from the sale of
the Shares.
The methods by which the Shares may be sold or distributed include, without
limitation, (i) a block trade (which may involve crosses) in which the broker or
dealer so engaged will attempt to sell the Shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction, (ii)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus, (iii) exchange distributions and/or
secondary distributions in accordance with the rules of the NYSE, (iv) ordinary
brokerage transactions and transactions in which the broker solicits purchasers,
(v) pro rata distributions as part of the liquidation and winding up of the
affairs of the Selling Shareholder, and (vi) privately negotiated transactions.
The Selling Shareholder 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.
In connection with a sale of Paired Common Shares, the following
information will, to the extent then required, be provided in the Prospectus
Supplement relating to such sale or in a post-effective amendment to the
registration statement of which this Prospectus is a part: the number of Paired
Common Shares to be sold, the purchase price, the public offering price, if
applicable, the name of any underwriter, agent or broker-dealer, and any
applicable commissions, discounts or other items constituting compensation to
such underwriters, agents or broker-dealers with respect to the particular sale.
The Company will pay all expenses in connection with the registration of
the Shares. The Selling Shareholder will pay for any brokerage or underwriting
commissions and taxes of any kind (including, without limitation, transfer
taxes) with respect to any sale or other disposition or transfer of the Shares.
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
16
<PAGE> 18
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 April , 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 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 will 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 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 Acquisition
without a guaranty of the Trust. 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 OR HER OWN
TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER 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)
17
<PAGE> 19
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.
Recently Proposed Legislation
On March 26, 1998, the Chairman of the Ways and Means Committee of the
United States House of Representatives and the Chairman of the Finance Committee
of the United States Senate introduced identical bills ("H.R. 3558") that would,
if enacted, limit the ability of the Company to manage or operate real property
that it acquires after March 26, 1998. The provisions of H.R. 3558 were added to
the IRS Restructuring Bill that was reported out of the Senate Finance Committee
in April 1998. If enacted, H.R. 3558 would make it difficult for the Company to
acquire and operate hotels after March 26, 1998 in the same manner as the
Company has in the past. As a result, enactment of H.R. 3558 could have a
material adverse effect on the results of operations, financial condition and
prospects of the Company. No assurance can be given that H.R. 3558 will not be
enacted in its current form or that other new legislation, regulations or
administrative interpretations with respect to the grandfathering of the Company
will not be adopted. The Company is evaluating its options in the event that
H.R. 3558 (or a similar measure) were to be adopted.
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. 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 "-- Recently Proposed 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
18
<PAGE> 20
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) will not apply until after
the first taxable year for which an election is made by the REIT to be taxed as
a REIT.
The Trust 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
19
<PAGE> 21
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, 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 or
the Realty Partnership own all of the nonvoting preferred stock and common 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 the
shares of a REIT and a non-REIT are paired, then the REIT and the non-REIT shall
be treated as one entity for purposes of determining whether either company
qualifies as a REIT. If Section 269B(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. Section
269B(a)(3) does not apply, however, if the shares of the REIT and the non-REIT
were paired on or before June 30, 1983 and the REIT was taxable as a REIT on or
before June 30, 1983. As a result of this grandfathering rule, Section
269B(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 IRS Letter and the termination of the Trust's REIT election for the
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
20
<PAGE> 22
administrative authorities interpreting this grandfathering rule. Sidley &
Austin's opinion is based solely on the literal language of the statutory
grandfathering rule.
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 and no individual serves as an officer of both the Trust and 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. Based on the
foregoing, the Company believes that the separate corporate identities of the
Trust and the Corporation will be respected.
Due to the paired structure, the Trust, the Corporation, 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.
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. Third, for taxable years beginning on or before August 5, 1997,
short-term gain from the sale or other disposition of stock or securities, gain
from prohibited transactions and gain on the sale or other disposition of real
property held for less than four years (apart from involuntary conversions and
sales of foreclosure property) must represent less than 30% of the Trust's gross
income (including gross income from prohibited transactions) for each taxable
year.
Rents received or deemed to be received by the Trust will qualify as "rents
from real property" for purposes of the gross income tests only if several
conditions are met. First, the amount of rent must not be based in whole or in
part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "rents from real property"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales (or items thereof). Second, the Code provides that rents received from
a tenant will not qualify as "rents from real property" in satisfying the gross
income tests if the REIT, or a direct or indirect owner of 10% or more of the
REIT directly or indirectly, owns 10% or more of such tenant (a "Related Party
Tenant"). Third, if rent attributable to personal property, leased in connection
with a lease of real property, is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to such personal property
will not qualify as "rents from real property." Finally, if a REIT provides
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
21
<PAGE> 23
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." For taxable years beginning
after August 5, 1997, 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 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"). 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 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
22
<PAGE> 24
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. 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 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 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 the Corporation, the Operating
Partnership or any Operating Subsidiary Entity or any other tenant under a
Lease. If the Trust or any Subsidiary REIT were to own directly or indirectly,
10% or more of such tenant, 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." However,
notwithstanding such restrictions, because the Code's constructive ownership
rules for purposes of the 10% ownership limit are broad and it is not possible
to continually monitor direct and indirect ownership of Paired Common Shares, it
is possible for a person to own sufficient Paired Common Shares to cause the
termination of the Trust's REIT status.
Finally, rent under the Leases will not qualify as "rents from real
property" if either the Trust, the Realty Partnership, any Realty Subsidiary
Entity, any Subsidiary REIT or any Management Subsidiary renders or furnishes
Prohibited Services to the occupants of the properties (subject to a de minimis
rule for taxable years beginning after August 5, 1997). So long as the Leases
are treated as true leases, none of the Trust, the Realty Partnership, any
Realty Subsidiary Entity, any Subsidiary REIT or any Management Subsidiary will
be treated as rendering or furnishing Prohibited Services to the occupants of
the properties as a result of the Leases. The Trust believes that neither it nor
any entity in which it directly or indirectly owns an interest or from which it
receives income will be providing Prohibited Services to the Corporation or to
any entity in which the Corporation directly or indirectly owns an interest, or
will be managing or operating any assets owned directly or indirectly by the
Trust. 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 the 75% or 95% gross income
test, or one or more of the asset tests, and, as a result, would lose its REIT
status.
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,
23
<PAGE> 25
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.
For taxable years beginning on or before August 5, 1997, any gross income
derived from a prohibited transaction is taken into account in applying the 30%
income test necessary to qualify as a REIT. In addition, the net income from
that 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. No similar mitigation provision
applies if the Trust fails the 30% income test for a taxable year beginning
prior to January 1, 1998. In such case, the Trust will cease to qualify as a
REIT.
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
24
<PAGE> 26
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 (or the Realty Partnership) owns all of the nonvoting stock and
less than 10% of the voting stock of each Management Subsidiary. Neither the
Trust nor the Realty Partnership, however, directly owns 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 undistributed taxable
income from prior periods, the Trust will be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed.
The Trust intends to make timely distributions sufficient to satisfy the
annual distribution requirements and, to the extent practical, avoid payment of
material amounts of federal income or excise tax by the Trust. 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 may be able 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
25
<PAGE> 27
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.
FEDERAL INCOME TAXATION OF HOLDERS OF PAIRED COMMON SHARES
Deemed Distributions
The IRS could assert that a significant portion of the third party debt
incurred by the Corporation to finance its purchase of shares of ITT from the
Trust as part of the ITT acquisition should properly be treated for tax purposes
as debt of the Trust. If a portion of the third party debt were so
recharacterized, the Trust would be treated as making a deemed distribution of
such proceeds to its shareholders, who would be deemed to immediately
recontribute such proceeds to the Corporation. Similarly, repayments of such
portion of the third party debt by the Corporation would be deemed distributions
of the repaid funds by the Corporation to its stockholders followed by deemed
contributions of such amounts to the Trust. With respect to issuances of Paired
Common Shares, the IRS could also assert that a deemed distribution of cash or
other property occurs if the relative value of the Trust Shares and the
Corporation Shares were determined to be in a different ratio than the ratio
used to determine the number of ITT shares to be sold by the Trust to the
Corporation. For federal income tax purposes, any such deemed distributions
would be taxed to a holder of Paired Common Shares as a dividend to the extent
of the allocable portion of the distributing entity's earnings and profits, and
then as a return of capital to the extent of such shareholder's adjusted basis
in his or her shares in the distributing entity and thereafter, as gain from the
sale or exchange of the applicable shares. Each entity's earnings and profits
would be allocable to its deemed distributions in the same proportion as such
deemed distributions bear to the sum of the actual and deemed distributions made
to shareholders of such entity in such taxable year. Any gain recognized by a
shareholder with respect to a deemed distribution would be treated as capital
gain, and shareholders who are individuals may be entitled to lower capital
gains tax rates depending on the holding period of their Paired Common Shares.
Deemed distributions would likely result in shareholders being allocated more of
the earnings and profits of the distributing entity, and consequently
recognizing more taxable income, than in the absence of deemed distributions.
26
<PAGE> 28
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 them 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 holder 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. Distributions in excess of the Trust's current and
accumulated earnings and profits will not be taxable to a holder to the extent
that they do not exceed the adjusted basis of the holder'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 holder'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.
For taxable years beginning after August 5, 1997, 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, holders 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,
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
holders 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 holder to the
extent that they do not exceed the adjusted basis of the holder'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 holder'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 holder's adjusted basis in such Paired
Common Shares. Such gain or loss will generally constitute long-term capital
gain or loss if the holder held such Paired Common Shares for more than one
year. However, any loss upon a sale or exchange
27
<PAGE> 29
of Trust Shares by a holder 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 holder 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) 28%, if such shares have
been held for more than 12 but not more than 18 months, (ii) 20%, if such shares
have been held for more than 18 months, or (iii) 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.
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" shall (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. Due to the Ownership Limit, 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. The discussion below does not include a complete discussion of the 1997
Final Regulations, and prospective
28
<PAGE> 30
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 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 will 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 investment in Paired Common Shares is not so effectively
connected.
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.
29
<PAGE> 31
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.
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 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, it would be taxable as a corporation and,
therefore, subject to an entity level tax on its income. Such an entity level
tax would substantially reduce the amount of cash available for distribution to
holders of Paired Common Shares. In addition, if the Realty Partnership or any
Realty Subsidiary Entity 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
30
<PAGE> 32
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.
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
Sidley & Austin, Los Angeles, California, has passed upon the validity of
the issuance of the Paired Common Shares offered pursuant to this Prospectus.
Lawyers at Sidley & Austin participating in this offering on behalf of such firm
own or hold options to purchase an aggregate of approximately 22,500 Paired
Common Shares. Sidley & Austin has relied upon the opinion of Piper & Marbury
L.L.P., Baltimore, Maryland, as to certain matters of Maryland law.
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 Coopers & Lybrand L.L.P., 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.
31
<PAGE> 33
======================================================
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....................... 13
Price Range of Paired Common Shares
and Distributions................... 13
Selling Shareholder................... 15
Plan of Distribution.................. 16
Federal Income Tax Considerations..... 16
Legal Matters......................... 31
Experts............................... 31
</TABLE>
======================================================
======================================================
2,785,000
PAIRED COMMON SHARES
STARWOOD HOTELS &
RESORTS
STARWOOD HOTELS &
RESORTS WORLDWIDE, INC.
------------------------
PROSPECTUS
------------------------
======================================================
<PAGE> 34
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Registration Fee............................................ $43,240
Printing Fees and Expenses.................................. 5,000
Legal Fees and Expenses..................................... 25,000
Accounting Fees and Expenses................................ 5,000
Miscellaneous............................................... 10,000
-------
Total............................................. 88,240
=======
</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> 35
ITEM 16. EXHIBITS.
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
5.1+ Opinion of Sidley & Austin.
5.2 Opinion of Piper & Marbury L.L.P.
8.1+ Opinion of Sidley & Austin.
10.1 Purchase Agreement, dated as of October 10, 1997, by and
among the Trust, the Corporation, UBS Limited, Union Bank of
Switzerland, London Branch and UBS Securities LLC
(incorporated by reference to Exhibit 10.46 to the Starwood
Hotels Form 10-K).
10.2 ISDA Master Agreement and Forward Stock Contract, each dated
as of October 13, 1997, by and among the Trust, the
Corporation, UBS Limited, Union Bank of Switzerland, London
Branch and UBS Securities LLC (incorporated by reference to
Exhibit 10.47 to the Starwood Hotels Form 10-K).
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Sidley & Austin (included in Exhibits 5.1 and
8.1).
23.3 Consent of Piper & Marbury L.L.P. (included in Exhibit 5.2).
24.1 Powers of Attorney (contained in the signature pages
hereto).
</TABLE>
- ---------------
+ To be filed by amendment or pursuant to a Current Report on Form 8-K.
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 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
II-2
<PAGE> 36
(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> 37
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 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Phoenix, State of Arizona, on the 9th day of April,
1998.
STARWOOD HOTELS & RESORTS
By: /s/ BARRY S. STERNLICHT
------------------------------------
Barry S. Sternlicht
Chairman and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature to the Registration Statement appears below
hereby appoints Barry S. Sternlicht, Madison F. Grose and Sherwin L. Samuels,
and each of them, as his attorneys-in-fact, with full power of substitution and
resubstitution, to execute in the name and on behalf of such person,
individually and in the capacity stated below, and to file all amendments and
post-effective amendments to this Registration Statement, which amendment or
amendments may make such changes in and additions to this Registration Statement
as such attorneys-in-fact may deem necessary or appropriate.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement 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 Officer April 9, 1998
- --------------------------------------------------- and Trustee (Principal
Barry S. Sternlicht Executive, Financial and
Accounting Officer)
/s/ JEAN-MARC CHAPUS Trustee April 9, 1998
- ---------------------------------------------------
Jean-Marc Chapus
/s/ BRUCE W. DUNCAN Trustee April 9, 1998
- ---------------------------------------------------
Bruce W. Duncan
Trustee April 9, 1998
- ---------------------------------------------------
Madison F. Grose
/s/ GEORGE J. MITCHELL Trustee April 9, 1998
- ---------------------------------------------------
George J. Mitchell
/s/ ROGER S. PRATT Trustee April 9, 1998
- ---------------------------------------------------
Roger S. Pratt
</TABLE>
II-4
<PAGE> 38
<TABLE>
<C> <S> <C>
/s/ STEPHEN R. QUAZZO Trustee April 9, 1998
- ---------------------------------------------------
Stephen R. Quazzo
/s/ STUART M. ROTHENBERG Trustee April 9, 1998
- ---------------------------------------------------
Stuart M. Rothenberg
/s/ RAYMOND S. TROUBH Trustee April 9, 1998
- ---------------------------------------------------
Raymond S. Troubh
</TABLE>
II-5
<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 a Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Phoenix, State of Arizona, on the 9th day of April,
1998.
STARWOOD HOTELS & RESORTS
WORLDWIDE, INC.
By: /s/ RONALD C. BROWN
------------------------------------
Ronald C. Brown
Executive Vice President and
Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature to the Registration Statement appears below
hereby appoints Ronald C. Brown and Alan M. Schnaid, and each of them, as his
attorneys-in-fact, with full power of substitution and resubstitution, to
execute in the name and on behalf of such person, individually and in the
capacity stated below, and to file all amendments and post-effective amendments
to this Registration Statement, which amendment or amendments may make such
changes in and additions to this Registration Statement as such
attorneys-in-fact may deem necessary or appropriate.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement 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 of the Board of April 9, 1998
- --------------------------------------------------- Directors and Director
Barry S. Sternlicht
/s/ RONALD C. BROWN Executive Vice President and April 9, 1998
- --------------------------------------------------- Chief Financial Officer
Ronald C. Brown (Principal Financial and
Accounting Officer)
/s/ JUERGEN BARTELS Chief Executive, Hotel April 9, 1998
- --------------------------------------------------- Operating Group and Director
Juergen Bartels (Principal Executive Officer)
Director April , 1998
- ---------------------------------------------------
Brenda C. Barnes
Director April , 1998
- ---------------------------------------------------
Jonathan D. Eilian
</TABLE>
II-6
<PAGE> 40
<TABLE>
<C> <S> <C>
Director April , 1998
- ---------------------------------------------------
Bruce M. Ford
Director April , 1998
- ---------------------------------------------------
Graeme W. Henderson
/s/ EARLE F. JONES Director April 9, 1998
- ---------------------------------------------------
Earle F. Jones
/s/ MICHAEL A. LEVEN Director April 9, 1998
- ---------------------------------------------------
Michael A. Leven
Director April , 1998
- ---------------------------------------------------
Daniel H. Stern
/s/ BARRY S. VOLPERT Director April 9, 1998
- ---------------------------------------------------
Barry S. Volpert
/s/ DANIEL W. YIH Director April 9, 1998
- ---------------------------------------------------
Daniel W. Yih
</TABLE>
II-7
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
5.1+ Opinion of Sidley & Austin.
5.2 Opinion of Piper & Marbury L.L.P.
8.1+ Opinion of Sidley & Austin.
10.1 Purchase Agreement, dated as of October 10, 1997, by and
among Starwood Hotels & Resorts (the "Trust"), Starwood
Hotels & Resorts Worldwide, Inc. (the "Corporation"), UBS
Limited, Union Bank of Switzerland, London Branch and UBS
Securities LLC (incorporated by reference to Exhibit 10.46
to the Joint Annual Report on Form 10-K of the Trust and the
Corporation for the year ended December 31, 1997 (the
"Starwood Hotels Form 10-K")).
10.2 ISDA Master Agreement and Forward Stock Contract, each dated
as of October 13, 1997, by and among the Trust, the
Corporation, UBS Limited, Union Bank of Switzerland, London
Branch and UBS Securities LLC (incorporated by reference to
Exhibit 10.47 to the Starwood Hotels Form 10-K).
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Sidley & Austin (included in Exhibits 5.1 and
8.1).
23.3 Consent of Piper & Marbury L.L.P. (included in Exhibit 5.2).
24.1 Powers of Attorney (contained in the signature pages
hereto).
</TABLE>
- ---------------
+ To be filed by amendment or pursuant to a Current Report on Form 8-K.
<PAGE> 1
EXHIBIT 5.2
[PIPER & MARBURY L.L.P. LETTERHEAD]
April 10, 1998
Starwood Hotels & Resorts
2231 E. Camelback Road, Suite 410
Phoenix, Arizona 85016
Starwood Hotels & Resorts Worldwide, Inc.
2231 E. Camelback Road, Suite 400
Phoenix, Arizona 85016
Ladies and Gentlemen:
We have acted as special Maryland counsel in connection with the joint
registration statement on Form S-3 (the "Registration Statement") to be filed
by Starwood Hotels & Resorts, a Maryland real estate investment trust (the
"Trust"), and Starwood Hotels & Resorts Worldwide, Inc., a Maryland corporation
(the "Corporation"), relating to the registration of an aggregate of 2,785,000
shares of beneficial interest, $.01 par value, of the Trust (the "Trust
Shares") and 2,785,000 shares of common stock, $.01 par value, of the
Corporation (the "Corporation Shares"), which are "paired" and traded as units
consisting of one Trust Share and one Corporation Share (the "Paired Shares"),
issued in connection with the Purchase Agreements (as defined below).
In our capacity as special Maryland counsel, we have reviewed the
following:
(a) The Declaration of Trust of the Trust, as amended to date, certified by an
officer of the Trust (the "Declaration of Trust");
(b) The Charter of the Corporation, as amended to date, certified by an officer
of the Corporation (the "Charter");
(c) A copy of the Trustees' Regulations of the Trust as in effect on the date
hereof (the "Trustees' Regulations");
<PAGE> 2
Starwood Hotels & Resorts
Starwood Hotels & Resorts Worldwide, Inc.
April 10, 1998
Page 2
(d) A copy of the By-laws of the Corporation as in effect on the date hereof
(the "Corporation By-laws");
(e) The Purchase Agreement dated as of October 10, 1997 among the Trust, UBS
Limited, Union Bank of Switzerland, London Branch and UBS Securities LLC
and the ISDA Master Agreement and Forward Stock Contract, each dated as of
October 13, 1997, executed in connection therewith (collectively, the
"Purchase Agreements");
(f) The Registration Statement, as amended to date;
(g) Certified resolutions of the Board of Trustees of the Trust;
(h) Certified resolutions of the Board of Directors of the Corporation;
(i) A good standing certificate for the Trust, of recent date, issued by the
Maryland State Department of Assessments and Taxation (the "Department");
(j) A good standing certificate for the Corporation, of recent date, issued by
the Department;
(k) An Officer's Certificate of the Trust dated as of the date hereof as to
certain factual matters (the "Trust Officer's Certificate");
(l) An Officer's Certificate of the Corporation dated as of the date hereof as
to certain factual matters (the "Corporation Officer's Certificate"); and
(m) Such other documents as we have considered necessary to the rendering of
the opinions expressed below.
In such examination, we have assumed, without independent investigation,
the genuineness of all signatures, the legal capacity of all individuals who
have executed any of the aforesaid documents, the authenticity of all documents
submitted to us as originals, the conformity with originals of all documents
submitted to us as copies and that all public records received are accurate and
complete. As to factual matters, we have relied upon the Trust Officer's
Certificate and the Corporation Officer's Certificate and have not independently
verified the matters stated therein.
<PAGE> 3
Starwood Hotels & Resorts
Starwood Hotels & Resorts Worldwide, Inc.
April 10, 1998
Page 3
We assume also that the issuance of the Trust Shares and the Corporation
Shares to be offered from time to time will be pursuant to the terms of the
Purchase Agreements and in accordance with the Declaration of Trust and the
Charter, respectively, and applicable Maryland law. We further assume that
prior to the issuance of any Corporation Shares and Trust Shares there will
exist, under the Declaration of Trust or the Charter, as the case may be, the
requisite number of authorized but unissued Corporation Shares or Trust Shares,
as the case may be.
Based upon the foregoing, we are of the opinion that:
1. The Trust has been duly formed and is validly existing as a real
estate investment trust in good standing under the laws of the State of
Maryland.
2. The Corporation has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Maryland.
3. The Paired Shares have been duly authorized, and when issued and paid
for in accordance with the Purchase Agreements, will be validly issued, fully
paid and nonassessable.
The opinions expressed above are limited to the law of Maryland, exclusive
of the securities or "blue sky" laws of the State of Maryland. We assume no
obligation to supplement this opinion if any applicable laws change after the
date hereof or if we become aware of any facts that might change the opinions
expressed herein after the date hereof. We hereby consent to the filling of
this opinion as Exhibit 5.2 to the Registration Statement and to the reference
to our firm in the Registration Statement.
Very truly yours,
Piper & Marbury L.L.P.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in this registration statement
on Form S-3 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."
COOPERS & LYBRAND L.L.P.
Phoenix, AZ
April 10, 1998
