<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 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)
RONALD C. BROWN ALAN M. SCHNAID
SENIOR VICE PRESIDENT AND VICE PRESIDENT AND CORPORATE CONTROLLER
CHIEF FINANCIAL OFFICER STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
STARWOOD HOTELS & RESORTS 2231 E. CAMELBACK ROAD, SUITE 400
2231 E. CAMELBACK ROAD, SUITE 410 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 OFFERING PRICE 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 & 10,572,045 Paired
Resorts Worldwide, Inc.......... Common Shares $52.41 $554,080,879 $163,454
=================================================================================================================================
</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 March 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 MARCH 10, 1998
PROSPECTUS
10,572,045 PAIRED COMMON SHARES
STARWOOD HOTELS & RESORTS STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
Starwood Hotels & Resorts (the "Trust") and Starwood Hotels & Resorts
Worldwide, Inc. (the "Corporation" and, with the Trust, the "Company") is a
fully integrated owner/operator of a portfolio of primarily full-service hotels.
All of the securities offered hereby (the "Offering") consist of shares of the
Trust (the "Trust Shares") and shares of the Corporation (the "Corporation
Shares") which are "paired" and trade as units consisting of one Trust Share and
one Corporation Share (the "Paired Common Shares"). The Trust elected to be
taxed as a real estate investment trust for federal income tax purposes (a
"REIT") commencing with its tax year ended December 31, 1995 and intends to
continue to so qualify. To ensure that the Trust qualifies as a REIT, 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 shareholders specified in this Prospectus or their successors in
interest (the "Selling Shareholders"). See "Selling Shareholders." The Company
will not receive any of the proceeds from the sale of the Paired Common Shares
in this offering.
The Paired Common Shares are listed on the New York Stock Exchange ("NYSE")
under the symbol "HOT." On March 9, 1998, the last reported sale price of the
Paired Common Shares on the NYSE was $51.875 per Paired Common Share.
SEE "RISK FACTORS" ON PAGES 8 TO 13 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS 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 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 Company has 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 Company (SEC 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,
1996, as amended by the Form 10-K/A dated April 25, 1997 and the Form 10-K/A2
dated December 18, 1997 (collectively, the "Starwood Lodging Form 10-K").
2. The Joint Quarterly Reports on Form 10-Q for the periods ended March 31,
1997, June 30, 1997 and September 30, 1997 (as amended by the Form 10-Q/A
dated November 10, 1997).
3. The Joint Current Reports on Form 8-K dated February 10, 1997 (as amended by
the Form 8-K/A dated December 18, 1997), February 14, 1997, March 20, 1997,
March 21, 1997, September 9, 1997 (and Exhibit 2 thereto) (as amended by the
Form 8-K/A dated December 18, 1997), September 10, 1997 (as amended by the
Form 8-K/A dated December 18, 1997), October 21, 1997 (as amended by the Form
8-K/A dated October 29, 1997), November 12, 1997 (as amended by the Form
8-K/A dated December 18, 1997 and the Form 8-K/A dated January 7, 1998),
November 13, 1997, January 15, 1988, February 3, 1998, February 24, 1998,
March 6, 1998 and March 10, 1998.
4. The description of the Company's Paired Common Shares contained in the
Company's 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
2
<PAGE> 4
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 or any accompanying Prospectus Supplement.
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.
3
<PAGE> 5
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus, including documents incorporated by reference herein,
contains "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Such statements include
statements regarding intent, beliefs or current expectations with respect to the
matters discussed in this Prospectus. Shareholders are cautioned that such
forward-looking statements involve known and unknown risks and uncertainties,
and that actual results may differ materially from those in the forward-looking
statements as a result of various uncertainties and other factors, including,
without limitation, certain risks associated with integration of the Company's
acquisition of ITT Corporation and Westin Hotels & Resorts Worldwide, Inc. and
its affiliates; 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 current terms; competition within the lodging industry and the gaming
industry; the cyclicality of the real estate business, the hotel business and
the gaming business; real estate and economic conditions; the continuing ability
of the Trust to qualify as a REIT and other risks described in this Prospectus
and in the annual, quarterly and current reports and proxy statements of the
Trust and the Corporation incorporated by reference herein.
THE COMPANY
The Company is a fully integrated owner/operator of primarily full-service
hotels and a "paired share REIT." The Company consists of the Trust, which has
owned hotel assets since 1969, and the Corporation, which has managed hotel
assets since 1980; the common shares of the Trust and the Corporation are
"paired" or "stapled" together on a one-for-one basis and may only be held or
transferred as Paired Common Shares. As of December 31, 1997, the Company owned,
operated and managed a geographically diversified portfolio of hotel assets,
including fee, ground lease and first mortgage interests in 121 hotel properties
containing over 33,000 rooms located in 34 states, the District of Columbia,
Mexico and the United Kingdom. Ninety-eight of such hotels are operated under
licensing, membership, franchise or management agreements with national hotel
organizations, including Westin(TM), Marriott(TM), Hilton(TM), Sheraton(TM),
Omni(TM), Doubletree(TM), Embassy Suites(R), Ritz Carlton(TM), Harvey(TM),
Radisson(TM), Holiday Inn(R), Residence Inn(TM), Days Inn(TM), Best Western(TM),
Ramada(TM), Clarion and Quality Inn(TM). None of the foregoing organizations
(other than Westin or Sheraton) nor any of their respective parents,
subsidiaries, divisions or affiliates has endorsed or approved this Prospectus.
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, whose business consists of leasing hotels and making loans to the
Operating Partnership; the Corporation is the managing general partner of the
Operating Partnership, which owns and operates hotels, including hotels leased
from the Realty Partnership; the Operating Partnership also manages hotels owned
by third parties and franchises hotels. As of the date of this Prospectus, the
Company owns an approximately 93.6% general partnership in each of the
Partnerships. The remaining 6.4% interest in each of the Partnerships is owned
predominantly by Starwood Capital Group, L.L.C. and certain of its affiliates
("Starwood Capital").
Under the REIT qualification requirements of the Internal Revenue Code of
1986, as amended (the "Code"), and the United States Treasury regulations
promulgated thereunder (the "Treasury Regulations"), REITs generally must lease
their hotels to third party lessee/operators. Since such leases must be
structured so that the third party operator captures a portion of each hotel's
current cash flow and future growth, the shareholders of a typical hotel REIT do
not receive all of the economic benefits of both hotel ownership and hotel
operations. Leases may create conflicts of interest between the REIT and the
operator of each hotel, particularly when insiders of the REIT own an economic
interest in the operator. The "paired share" structure eliminates potential
conflicts of interest between the hotel owner and the hotel operator. The
Company's shareholders own both the owner, the Trust, and the lessee/operator,
the Corporation, of the Company's hotels. Therefore, the Company's shareholders
retain the economic benefits of both the lease payments received by the Trust
and the operating profits realized by the Corporation while maintaining the tax
benefits
4
<PAGE> 6
of the Trust's REIT status. Although the Code has prohibited the pairing of
shares between a REIT and an operating company since 1983, this rule does not
apply to the Company because its paired structure has existed since 1980.
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.
In furtherance of the Company's strategy to enhance, expand and diversify
its hotel portfolio and to develop or acquire one or more global brands, on
January 2, 1998 the Company acquired Westin Hotels & Resorts Worldwide, Inc. and
certain affiliated entities (collectively, "Westin"), and on February 23, 1998
the Corporation acquired ITT Corporation ("ITT").
Acquisition of ITT
On February 23, 1998, pursuant to an Amended and Restated 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 ITT
Sheraton Corporation ("Sheraton"), Ciga, S.p.A ("Ciga") and Caesars World, Inc.
("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. As of December 31, 1997, Sheraton and Ciga owned or leased
approximately 65 hotels in 18 countries and Sheraton managed or had agreements
to manage approximately 130 additional hotels and had approximately 215
franchised properties. 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 and Casino in Las
Vegas (Nevada), Caesars Atlantic City in Atlantic City (New Jersey), Caesars
Tahoe in Stateline, Nevada, the Sheraton Casino in Tunica, Mississippi; and
various other casino/hotel operations in Halifax and Sydney, Nova Scotia; Lima,
Peru; Cairo, Egypt; Windsor, Ontario and Townsville, Australia.
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 post-secondary technical education business, including a public
offering of a portion of ITT's 83.3% equity interest in ITT Educational
Services, Inc. ("ITT Educational"), the subsidiary that conducts such business.
As a part of this disposition strategy, on February 13, 1998, ITT Educational
filed a registration statement with the Securities and Exchange 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
5
<PAGE> 7
World Directories were used in part to acquire certain indebtedness of the Trust
and thereby reduce the Company's debt incurred to fund the acquisition of ITT.
Acquisition of Westin
On January 2, 1998, pursuant to a Transaction Agreement (the "Transaction
Agreement") among the Trust, the Realty Partnership, the Corporation and the
Operating Partnership (collectively, the "Starwood Entities"), 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 Starwood Entities acquired Westin.
As of December 31, 1997, Westin owned, managed, franchised or represented
97 first class hotel and resort properties worldwide. 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.
Of the 97 Westin properties worldwide, 37 are managed, 28 are franchised
and 5 are represented (i.e. Westin provides reservation and marketing services,
but does not allow the hotel to use the Westin name). Of the managed hotels,
Westin is the 100% owner of, or has a controlling or significant interest in, 11
properties (six of which are fee simple real property ownership, two of which
are the ownership of the hotel subject to a ground lease and three of which are
leaseholds) and is a minority owner of five properties. In addition, Westin owns
and operates the Cherry Creek Inn in Denver, Colorado, and owns a 25% interest
in an office building in Seattle, Washington, which serves as the corporate
headquarters of Westin. Westin provides reservation and marketing services to
the represented hotels, but does not allow these properties to use the Westin
name.
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. It 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 its current 108 first class hotel and resort properties throughout the world
through a combination of its 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 Transaction Agreement, Westin Worldwide was 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 and shares held by Westin and its subsidiaries or shares held by the
Starwood Entities and their subsidiaries) were converted into an aggregate of
6,285,783 Class A Exchangeable Preferred Shares, par value $.01 per share, of
the Trust ("Class A EPS"), 5,294,783 Class B Exchangeable Preferred Shares, par
value $.01 per share, of the Trust ("Class B EPS") and cash in the amount of
$177.9 million. The Transaction Agreement provided for an adjustment to the cash
consideration paid in connection with the Westin Merger under certain
circumstances, including adjustments based on the aggregate indebtedness and
working capital of Westin on the closing date and the capital expenditures made
by Westin between the date the Transaction Agreement was signed and the closing
date.
Concurrent with the Westin Merger, (i) the stockholders of Lauderdale,
Seattle and Denver contributed all the outstanding shares of such companies to
the Realty Partnership; (ii) the Realty Partnership issued to such stockholders
an aggregate of 597,844 units of limited partnership interest of the Realty
Partnership. In addition, the Realty Partnership assumed, repaid or refinanced
the indebtedness of Lauderdale, Seattle and Denver and assumed $147.2 million of
indebtedness incurred by the Members prior to such contributions; (iii) the
stockholders of Atlanta and St. John contributed all the outstanding shares of
such companies to the
6
<PAGE> 8
Operating Partnership and the Operating Partnership issued to such stockholders
an aggregate of 393,156 units of limited partnership interest of the Operating
Partnership; (iv) the Operating Partnership assumed or repaid the indebtedness
of Atlanta and St. John, and assumed $6.0 million of indebtedness incurred by
the Members prior to such contributions; and (v) the Realty Partnership loaned
Atlanta approximately $34.2 million.
The Class A EPS, Class B EPS and limited partnership units in the
Partnership ("Units") issued in connection with the Westin Merger and the
contribution of Seattle, Lauderdale, Denver, St. John and Atlanta to the Realty
Partnership and the Operating Partnership are directly or indirectly
exchangeable on a one-for-one basis (subject to certain adjustments for Paired
Shares, subject to the right of the Company to elect to pay cash in lieu of
issuing such shares. The limited partnership units are also exchangeable for
shares of Class B EPS on a one-for-one basis. In addition, shares of Class B EPS
have a liquidation preference of $38.50 and provide the holders with certain
rights to require the Trust to redeem such shares of at a price of $38.50 after
the fifth anniversary of the closing date of the Westin Merger.
7
<PAGE> 9
RISK FACTORS
Prospective investors should consider carefully the following factors, in
addition to other information contained in this Prospectus, in connection with
an investment in the Paired Common Shares offered hereby.
FAILURE TO MANAGE RAPID GROWTH. The full benefits of the acquisition of
Westin and ITT will require the integration of each company's administrative,
finance, sales and marketing organizations, the coordination of each company's
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. This
will require substantial attention from the Company's management. 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 the operations of Westin, ITT and the Company
successfully or that anticipated synergies between the companies will be
realized or, if realized, the timing thereof.
In addition, to successfully implement its acquisition strategy the Company
must integrate the hotels it has acquired during the last few years. During such
period, the Company also entered geographic markets (including Mexico, Scotland
and the United Kingdom) where it previously did not have any properties. As a
result, the consolidation of functions and integration of departments, systems
and procedures of acquired properties with the Company's existing operations
presents a significant management challenge, and the failure to integrate such
properties into the Company's management and operating structures could have a
material adverse effect on the results of operations and financial condition of
the Company.
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 executive 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
the hiring of a new Chief Executive Officer and Chief Operating Officer of the
Corporation and a new President of the Trust. 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 to successfully execute or implement the Company's
growth and operating strategies.
TAX RISKS
Failure to Qualify as a REIT. The Trust believes that it has operated so as
to qualify as a REIT under the Code, commencing with its taxable year ended
December 31, 1995 and 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 or court decisions will not
significantly change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification. Furthermore, the
qualification of the Trust as a REIT will depend on the Trust's continuing
ability to meet various requirements concerning, among other things, the
ownership of Paired Common Shares, the nature of its assets, the source of its
income and the amount 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
8
<PAGE> 10
to satisfy the REIT qualification requirements. For information with respect to
the REIT requirements, see "Federal Income Tax Considerations -- Federal Income
Taxation of the Trust."
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). In addition, in February 1998 the Clinton Administration
proposed several provisions that would limit the operations of REITs, including
a provision that, if enacted, would limit the ability of the Company to manage
property that it acquires after the effective date of such proposal and make it
difficult for the Company to acquire hotels in the future in the same manner as
the Company has in the past. The Chairman of the House Ways and Means Committee
of the United States House of Representatives announced in November 1997 that,
although he has no plan to repeal the existing "grandfathering" of paired share
REITs such as that of the Trust, the staff of the Committee will look into the
issue of whether restrictions should be placed on such REITs. No assurance can
be given that new legislation, new regulations or administrative interpretations
with respect to the grandfathering rules will not be adopted. The adoption of
any such legislation, regulations or administrative interpretations could have a
material adverse effect on the results of operations, financial condition and
prospects of the Company. See "Federal Income Tax Considerations."
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 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 it with respect to any calendar year are less than the sum
of (i) 85% of its 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 or the Corporation's Board of Directors (together the
"Boards"), 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 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.
9
<PAGE> 11
LIMITS ON CHANGE OF CONTROL AND OWNERSHIP LIMITATION
Limits on Change of Control. Certain provisions of the Trust's Declaration
of Trust (the "Declaration of Trust") and the Corporation's Articles of
Incorporation (the "Articles of Incorporation") including, without limitation,
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 give
the holders of Paired Common Shares the opportunity to realize a premium over
the then-prevailing market prices.
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 (as 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 Limitation.
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 Common 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 to continuously 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.
INFLUENCE BY STARWOOD CAPITAL. Individuals employed by or otherwise
affiliated with Starwood Capital hold two positions on the Board of Trustees and
two positions on the Board of Directors. Accordingly, 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 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 affiliates) own
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.
DEBT FINANCING. As a result of incurring debt, the Company is subject to
the following risks associated with debt financing: (i) that cash flow from
operations will be insufficient to meet required payments of principal and
interest, and (ii) to the extent that the Company maintains floating rate
indebtedness that
10
<PAGE> 12
interest rates will fluctuate. 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 it will be able to do so or that
the terms of such refinancings will be favorable to the Company.
In addition, 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 (iv) the Company's greater leverage may make it more
vulnerable to a downturn in its business or the economy generally.
POSSIBLE LIABILITY OF TRUST SHAREHOLDERS. Both the Maryland statute
governing real estate investment trusts formed under the laws of that state (the
"Maryland REIT Law") and the Declaration of Trust provide that no shareholder of
the Trust will be personally liable for any obligation of the Trust solely as a
result of his 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 his
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 its insurance coverage would be insufficient to satisfy the claims
against the Trust and its shareholders.
HOTEL INDUSTRY RISKS
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; 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 secure property and liability
insurance to fully 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 greater financial
resources that 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 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.
Franchise Agreement Risks. At December 31, 1997, the majority of the
Company's hotels were operated pursuant to franchise or license agreements.
Franchise agreements generally contain specific standards for, and restrictions
and limitations on, the operation and maintenance of a hotel property in order
to maintain uniformity in the system created by the franchisor. In addition,
compliance with such standards may require a franchisee to make significant
capital expenditures or otherwise incur significant expenses. Certain of the
franchise agreements require the Company to obtain the consent of the franchisor
to certain matters, including certain securities offerings.
11
<PAGE> 13
Seasonality of Hotel Business. The hotel industry is seasonal in nature.
Generally, hotel revenues are greater in the second and third quarters than in
the first and fourth quarters. As a result, the Trust may be required from time
to time to borrow to provide funds necessary to make quarterly distributions.
Regulation of Gaming Operations. The Company owns and operates a number of
casino gaming facilities, including Caesars Palace 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 five foreign countries and on cruise ships operating
in international waters. Each of these gaming operations is subject to certain
licensing, permitting and other regulatory requirements administered by various
governmental entities. Typically, gaming regulatory agencies possess broad
powers with respect to the licensing of gaming operations, and may revoke,
suspend, condition or limit the gaming approvals and licenses of the Corporation
and its gaming subsidiaries, impose substantial fines and take other actions,
any of which could have a material adverse effect on the Company's business and
the value of the Company's hotel/casinos. Directors, officers and certain key
employees of the Corporation 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 Corporation might be required to sever its relationships with
that person.
REAL ESTATE INVESTMENT RISKS
GENERAL. Real property investments are subject to varying degrees of risk.
The investment returns available from equity investments in real estate depend
in large part on the amount of income earned and capital appreciation generated
by the related properties as well as the expenses incurred. In addition, income
from properties and real estate values are also affected by a variety of other
factors, such as governmental regulations and applicable laws (including real
estate, zoning, tax and eminent domain laws), interest rate levels and the
availability of financing. For example, existing or new real estate, zoning or
tax laws can make it more expensive and/or time consuming to develop real
property or expand, modify or renovate hotels. 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 real
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 its
ability to make distributions to its shareholders and the value of the Paired
Common Shares.
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 its ability to make
distributions to its shareholders will be adversely affected.
HOTEL DEVELOPMENT. The Company intends to develop hotel properties as
suitable opportunities arise and is currently developing three 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 authorizations;
the incurrence of development costs that are not pursued to completion. There
can be 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 and local 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
12
<PAGE> 14
rent such real property or to borrow using such 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 and local 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 and state
laws.
FOREIGN OPERATIONS AND CURRENCY FLUCTUATIONS
The Company has significant international operations, including as of March
1, 1988, 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 growth plans. Other than Italy, where the
Company is subject to certain risks due to currency fluctuation, the Company's
properties are geographically diversified and not concentrated in any particular
region.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Paired Common Shares. All of the 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 (after giving
effect to the three-for-two stock split effected in January 1997).
<TABLE>
<CAPTION>
PRICE
--------------------
PERIOD HIGH LOW DISTRIBUTIONS
------ ------ ------ -------------
<S> <C> <C> <C>
1998
First Quarter (through March 9)....... $57.75 $51.82 $0.48
1997
Fourth Quarter........................ $60.38 $52.13 $0.48
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
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>
On March 9, 1998, the last reported sales price for the Paired Common
Shares on the NYSE was $51.875 per Paired Common Share. As of February 28, 1998,
there were approximately 15,834 holders of record of Paired Common Shares.
13
<PAGE> 15
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 lines of credit, 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 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 dividends in the periods set forth in the
table above and does not anticipate that it will make any such distributions in
the foreseeable future.
14
<PAGE> 16
SELLING SHAREHOLDERS
The Paired Common Shares offered by this Prospectus are offered for the
account of the Selling Shareholders.
Selling Shareholders, including Prudential Property Investment Account II
("PRISA II"), that beneficially own approximately 62% of the Paired Common
Shares offered hereby have informed the Company that as of the date of this
Prospectus, they have no current intent to sell any such Paired Common Shares.
However, such Selling Shareholders have reserved the right to exchange any of
their Units for Paired Common Shares or to sell any Paired Common Shares without
further notice to the Company or the making of any change or supplement to this
Prospectus.
The following table and the notes thereto set forth information, as of the
date of this Prospectus, relating to the beneficial ownership (as defined in
Rule 13d-3 of the Exchange Act) of the Company's equity securities by each
Selling Shareholder:
<TABLE>
<CAPTION>
NUMBER OF
PAIRED
NUMBER OF PAIRED COMMON SHARES
COMMON SHARES BENEFICIALLY OWNED
NAME OF BENEFICIAL OWNERS NUMBER PERCENT(1) TO BE SOLD AFTER THE OFFERING(2)
------------------------- --------- ---------- ---------------- ---------------------
<S> <C> <C> <C> <C>
The Prudential Insurance Company of
America, on behalf of PRISA
II(3).............................. 4,529,517(4) 2.4% 4,529,517 0
Aspen Enterprises International
Holdings, Ltd.(5).................. 3,088,372 1.7% 3,088,372 0
Gary Mendell(6)...................... 935,612 * 599,112 300,000
Ellen-Jo Mendell(7).................. 635,612(4) * 521,617 0
Stephen Mendell(8)................... 635,612(4) * 113,995 0
Polestar Limited(5).................. 539,535 * 539,535 0
Zapco Holdings, Inc.................. 331,291 * 331,291 0
Judith K. Rushmore................... 298,667(4) * 298,667 0
The Hermitage L.P.................... 233,106 * 233,106 0
Murray Dow II(9)..................... 183,913(4) * 33,913 150,000
Moonbeam Enterprises International,
Ltd.(5)............................ 89,696 * 89,696 0
Philadelphia HSR, L.P................ 72,601 * 72,601 0
Gary Mendell Family Limited
Partnership........................ 36,500 * 36,500 0
Westport Hospitality, Inc............ 31,831(4) * 31,831 0
Felix Cacciato(10)................... 23,767 * 3,767 20,000
Orna L. Shulman...................... 20,962 * 20,962 0
Arthur Green(11)..................... 19,172 * 2,505 16,667
Zapco Holdings, Inc.
Deferred Comp. Plan Trust.......... 18,126 * 18,126 0
Mark Rosinsky(12).................... 5,839 * 1,253 3,334
Randi Rosinsky(13)................... 5,839 * 1,252 3,334
Michael Hall(14)..................... 4,655 * 1,321 3,334
John Daily........................... 2,161 * 2,161 0
Thomas Clearwater.................... 497 * 497 0
Harvey Moore......................... 224 * 224 0
Tracy Driscoll....................... 224 * 224 0
</TABLE>
- ---------------
* Less than one percent.
(1) Based on the number of Paired Common Shares outstanding on February 28,
1998.
15
<PAGE> 17
(2) Constitutes for each such Selling Shareholder less than one percent of the
number of Paired Common Shares outstanding on February 28, 1998. Assumes
that all Paired Common Shares offered hereby are sold by the Selling
Shareholders.
(3) PRISA II is a commingled separate account managed by Prudential Real Estate
Investors ("PREI"), a division of The Prudential Insurance Company of
America ("Prudential"). Roger S. Pratt, a trustee of the Trust since
February 1997, is a Managing Director and Senior Portfolio Manager of PREI
and the portfolio manager for PRISA II. As of February 28, 1998,
Prudential, directly or indirectly through one or more subsidiaries,
beneficially owned an additional 508,720 Paired Common Shares held by other
accounts and may from time to time have beneficial ownership of additional
Paired Common Shares; PRISA II disclaims beneficial ownership of any such
additional Paired Common Shares because the voting and disposition of any
such shares is not controlled by PRISA II or PREI.
(4) Includes "Class A" limited partnership units of the Operating Partnership
that are exchangeable for Paired Common Shares.
(5) As disclosed in the Schedule 13D dated January 15, 1998 and filed with the
Commission by Aspen Enterprises International Holdings, Inc., Polestar
Limited and Moonbeam Enterprises International, Ltd., His Excellency the
Sheikh Abdulaziz bin Ibrahim Al Ibrahim is deemed to control this holder
for purposes of the Exchange Act and thus is a beneficial owner of the
Paired Common Shares held by this holder.
(6) Gary M. Mendell has been the President and a Trustee of the Trust since
February 1997. Includes 36,500 Paired Common Shares held of record by The
Gary Mendell Family Limited Partnership, of which Mr. Mendell is General
Partner, and options to purchase 300,000 Paired Common Shares. Does not
include 31,831 Paired Common Shares held of record by Westport Hospitality,
Inc., of which Mr. Mendell is President, as to which Mr. Mendell disclaims
beneficial ownership.
(7) Includes 113,995 Paired Common Shares owned by Ms. Mendell's spouse,
Stephen Mendell.
(8) Includes 521,617 Paired Common Shares owned by Mr. Mendell's spouse,
Ellen-Jo Mendell.
(9) Includes options to purchase 150,000 Paired Common Shares.
(10) Includes options to purchase 20,000 Paired Common Shares.
(11) Includes options to purchase 16,667 Paired Common Shares.
(12) Includes options to purchase 3,334 Paired Common Shares and 1,252 Paired
Common Shares held of record by Mr. Rosinsky's spouse, Randi Rosinsky.
(13) Includes 4,587 Paired Common Shares beneficially owned by Ms. Rosinsky's
spouse, Mark Rosinsky.
(14) Includes options to purchase 3,334 Paired Common Shares.
16
<PAGE> 18
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax
considerations that may be relevant to a prospective holder of Paired Common
Shares. This summary is for information purposes only and is not tax advice.
Except as discussed below, no ruling or determination letters from the Internal
Revenue Service (the "IRS") or opinions of counsel have been rendered or will be
requested by the Company on any tax issue connected with this Registration
Statement. This summary is based upon the Code, as currently in effect,
applicable Treasury Regulations thereunder and judicial and administrative
interpretations thereof, all of which are subject to change, including changes
that may be retroactive. No assurance can be given that the IRS will not
challenge the propriety of one or more of the tax positions described herein or
that such a challenge would not be successful.
The discussion below addresses federal income tax considerations to holders
of Paired Common Shares. This summary does not purport to deal with all aspects
of taxation that may be relevant to particular holders of Paired Common Shares
in light of their personal investment or tax circumstances. 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 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 PAIRED COMMON SHARES 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 PAIRED COMMON SHARES, INCLUDING THE FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND
SALE AND OF POTENTIAL CHANGES IN THE APPLICABLE TAX LAWS.
FEDERAL INCOME TAXATION OF THE TRUST
BACKGROUND
In 1980, prior to the establishment of the Corporation and the pairing of
its shares with the shares of the Trust, the IRS issued a Private Letter Ruling
(the "Ruling") to the Trust in which the IRS held that the pairing of the Trust
Shares and the Corporation Shares and the operation of the Corporation would not
preclude the Trust from qualifying as a REIT. The Ruling does not impose any
continuing limitations on the Trust or the Corporation. Subsequent to the
issuance of the Ruling, (i) the IRS announced that it would no longer issue
rulings to the effect that a REIT whose shares are paired with those of a
non-REIT will qualify as a REIT if the activities of the paired entities are
integrated, and (ii) Congress, in 1984, enacted Section 269B(a)(3) of the Code,
which treats a REIT and a non-REIT, the paired shares of which were not paired
on or before June 30, 1983, as one entity for purposes of determining whether
either company qualifies as a REIT. Section 269B(a)(3) of the Code has not
applied to the Trust and the Corporation (since the Trust Shares and the
Corporation Shares were paired prior to that date), and the Ruling's conclusions
were not adversely affected thereby.
In 1994, the Trust requested and received a determination letter from the
IRS (the "IRS Letter"). The IRS Letter provided that the Trust's failure to send
the shareholder demand letters required by the REIT Provisions (defined below)
terminated its election to be taxed as a REIT beginning with the Trust's taxable
year ended December 31, 1991 and permitted the Trust to re-elect to be taxed as
a REIT commencing with its taxable year ended December 31, 1995. The IRS Letter
also directed the Trust to file amended federal income tax returns for its
taxable years ended December 31, 1991 and 1992 as a C corporation (and not as a
REIT) and to file its federal income tax returns for its taxable years ended
December 31, 1993 and 1994 as a
17
<PAGE> 19
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. In February 1998, the Clinton Administration proposed several provisions
that would limit the operations of REITs, including a provision that, if
enacted, would limit the ability of the Company to manage property that it
acquires after the effective date of such proposal and make it more difficult
for the Company to acquire hotels in the future in the same manner as the
Company has in the past. In addition, the Chairman of the Ways and Means
Committee of the United States House of Representatives announced in November
1997 that, although he has no plan to repeal the existing "grandfathering" of
paired share REITs such as that of the Trust, the staff of the Committee will
look into the issue of whether restrictions should be placed on such REITs. No
assurance can be given that new legislation, new regulations or new
administrative interpretations with respect to the grandfathering rules will not
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.
The Trust believes 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. 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 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
18
<PAGE> 20
(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 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
19
<PAGE> 21
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. 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 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. There are, however, no judicial or administrative
authorities interpreting this grandfathering rule. Based solely on the literal
language of the statutory grandfathering rule the Trust believes 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.
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
20
<PAGE> 22
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 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
21
<PAGE> 23
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.
The Trust believes that the Leases will be treated as true leases for
federal income tax purposes, 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. 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 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
22
<PAGE> 24
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. 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, the Trust believes that the rent payable under the
Leases will be treated as "rents from real property" for purposes of the 75% and
95% gross income tests. There can, however, be no assurance that the IRS will
not successfully assert a contrary position or that there will not be a change
in circumstances (such as the entering into of new leases) which would result in
a portion of the rent received to fail to qualify as "rents from real property."
If such failures were in sufficient amounts, the Trust or a Subsidiary REIT
would not be able to satisfy either the 75% or 95% gross income test and, as a
result, would lose its REIT status.
For purposes of the gross income tests, the term "interest" generally does
not include any amount received or accrued (directly or indirectly) if the
determination of such amount depends in whole or in part on the income or
profits of any person. However, an amount received or accrued generally will not
be excluded from the term "interest" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. The Trust, the Realty
Partnership and certain of the Realty Subsidiary Entities hold notes and may
advance money from time to time to tenants for the purpose of financing tenant
improvements, making real estate loans or holding or acquiring additional notes.
None of the notes currently held by the Trust, the Realty Partnership or the
Realty Subsidiary Entities provide for the payment of any amount based on the
income or profits of any person other than amounts based on a fixed percentage
or percentages of receipts or sales. In addition, none of the Trust, the Realty
Partnership or the Realty Subsidiary Entities intend to charge interest
23
<PAGE> 25
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 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
24
<PAGE> 26
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 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
25
<PAGE> 27
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.
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
26
<PAGE> 28
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 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.
27
<PAGE> 29
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,
1998. The discussion below does not include a complete discussion of the 1997
Final Regulations, and prospective Non-U.S. Shareholders are urged to consult
their tax advisors concerning the tax consequences of their investment in light
of the 1997 Final Regulations.
In general, a Non-U.S. Shareholder will be subject to regular United States
income tax with respect to its investment in Paired Common Shares if 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
28
<PAGE> 30
capital gains dividends and distributions by the Corporation will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Trust or the Corporation, as the case
may be. Such distributions ordinarily will be subject to United States
withholding tax on a gross basis at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty. Any such amounts withheld should
be creditable against the Non-U.S. Shareholder's United States federal income
tax liability.
Distributions in excess of current or accumulated earnings and profits of
the Trust or the Corporation, as the case may be, will not be taxable to a
Non-U.S. Shareholder to the extent that they do not exceed the adjusted basis of
the Non-U.S. Shareholder's Trust Shares or Corporation Shares, as the case may
be, but rather will reduce the adjusted basis of such shares. To the extent that
such distributions exceed the adjusted basis of a Non-U.S. Shareholder's Trust
Shares or Corporation Shares, as the case may be, they will give rise to gain
from the sale or exchange of Non-U.S. Shareholder's Paired Common Shares if the
Non-U.S. Shareholder otherwise would be subject to tax on any gain from the sale
or other disposition of Paired Common Shares, as described below. Distributions
to Non-U.S. Shareholders that reduce the adjusted basis of Trust Shares or
Corporation Shares and distributions to Non-U.S. Shareholders that exceed the
adjusted basis of Trust Shares or Corporation Shares will ordinarily be subject
to a withholding tax on a gross basis at a 10% rate, regardless of whether such
distributions result in gain to the Non-U.S. Shareholder. The Trust or the
Corporation, as the case may be, are permitted to apply to the IRS for a
certificate that reduces or eliminates this withholding tax. Any such amounts
withheld will be creditable against the Non-U.S. Shareholder's United States
federal income tax liability.
If it cannot be determined at the time a distribution is made whether or
not such distribution will be in excess of current or accumulated earnings and
profits, the distribution will generally be treated as a dividend for
withholding purposes. However, amounts thus withheld are generally refundable if
it is subsequently determined that such distribution was, in fact, in excess of
current or accumulated earnings and profits of the Trust or the Corporation, as
the case may be. The Trust and the Corporation expect to withhold United States
income tax at the rate of 30% on the gross amount of any such distributions made
to a Non-U.S. Shareholder unless (i) a lower rate is provided for under an
applicable tax treaty and the shareholder files the required form evidencing
eligibility for that reduced rate with the Trust and the Corporation, or (ii)
the Non-U.S. Shareholder files an IRS Form 4224 with the Trust and the
Corporation claiming that the distribution is "effectively connected" income.
Distributions to a Non-U.S. Shareholder that are attributable to gain from
sales or exchanges by the Trust of United States real property interests will
cause the Non-U.S. Shareholder to be treated as recognizing such gain as income
effectively connected with a United States trade or business. Non-U.S.
Shareholders would thus generally be taxed at the same rates applicable to U.S.
Shareholders (subject to any applicable alternative minimum tax and a special
alternative minimum tax in the case of non-resident alien individuals). Also,
such gain would be subject to a 30% branch profits tax in the hands of a
Non-U.S. Shareholder that is a corporation, that is not entitled to an exemption
under a tax treaty. The Trust is required to withhold and remit to the IRS 35%
of any distribution that could be designated a capital gains dividend. That
amount is creditable against the Non-U.S. Shareholder's United States federal
income tax liability.
Sale of Paired Common Shares. Gain recognized by a Non-U.S. Shareholder
upon a sale or other disposition of Paired Common Shares generally will not be
subject to United States federal income tax, if (i) in the case of Trust Shares,
the Trust is a "domestically controlled REIT" or (ii) (A) the Paired Common
Shares are regularly traded on an established securities market (e.g., the NYSE,
where the Paired Common Shares are currently traded) and (B) the Selling
Non-U.S. Shareholder held 5% or less of the outstanding Paired Common Shares at
all times during the specified period, unless, in the case of a Non-U.S.
Shareholder who is a non-resident alien individual, such individual is present
in the United States for 183 days or more and certain other conditions apply. A
domestically controlled REIT is defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by foreign persons. The Trust believes that it
qualifies as a domestically controlled REIT.
29
<PAGE> 31
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
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.
The Company believes that its 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. No assurance can be given that the IRS or a court will
concur with the Company's position, which is based on examples contained in the
Anti-Abuse Rule.
30
<PAGE> 32
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.
PLAN OF DISTRIBUTION
The Paired Common Shares covered by this Prospectus (the "Shares") may be
sold from time to time by the Selling Shareholders. Such sales may be made in
one or more of the following transactions: (i) to underwriters who will acquire
the Shares for their own account and resell such shares in one or more
transactions, including negotiated transactions, at a fixed price or at varying
prices determined at the time of sale, with any initial public offering price
and any discount or concession allowed or re-allowed or paid to dealers subject
to change from time to time; (ii) through brokers or dealers, acting as
principal or agent, in transactions (which may involve block transactions) on
the New York Stock Exchange or other stock exchanges in ordinary brokerage
transactions, in negotiated transactions or otherwise, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at negotiated prices or otherwise (including without limitation sales in
transactions that comply with the volume and manner of sale provisions contained
in paragraphs (e) and (f) of Rule 144 under the Securities Act ("Rule 144")); or
(iii) directly or indirectly through brokers or agents in private sales at
negotiated prices, or in any combination of such methods of sale. This
Prospectus may be supplemented or amended from time to time to describe a
specific plan of distribution.
In connection with the distribution of the Shares or otherwise, a Selling
Shareholder may: (i) enter into hedging transactions with broker-dealers or
other persons, and in connection with such transactions, broker-dealers or other
persons may engage in short sales of Paired Common Shares in the course of
hedging the positions they assume with such Selling Shareholder; (ii) sell
Paired Common Shares short and redeliver the Shares to close out such short
positions; (iii) and/or enter into option or other transactions with
broker-dealers or other persons that require the delivery to such broker-dealer
or other persons of the Shares, which Paired Common Shares such broker-dealer or
other financial institution may (subject to any applicable transfer restriction
contained in an agreement between such Selling Shareholder and the Company)
resell pursuant to this Prospectus as supplemented or amended to reflect such
transaction. In addition to the foregoing, a Selling Shareholder may, from time
to time, enter into other types of hedging transactions.
A Selling Shareholder may from time to time, after the effective date of
the Registration Statement, transfer shares to a donee, sucessor or other person
other than for value, and such transfers will not be made pursuant to this
Prospectus. To the extent permitted by applicable law, this Prospectus shall
cover sales by such transferee. To the extent required by the terms of any
agreement between the Company and such Selling
31
<PAGE> 33
Shareholder and applicable law, the Company may supplement or amend this
Prospectus to include such transferee as an additional named selling
shareholder.
Underwriters participating in any offering may receive underwriting
discounts and commissions, discounts or concessions may be allowed or re-allowed
or paid to dealers, and brokers or agents participating in such transactions may
receive brokerage or agent's commissions or fees, all in amounts to be
negotiated in connection with sales pursuant hereto. The underwriter, agent or
dealer utilized in the sale of the Shares will not confirm sales to accounts
over which such persons exercise discretionary authority. In effecting sales of
the Shares, brokers or dealers engaged by a Selling Shareholder may arrange for
other brokers or dealers to participate. Brokers or dealers may receive
compensation in the form of commissions or discounts from a Selling Shareholder
and may receive commission from the purchases of the Shares for whom such
broker-dealers may act as agents, all in amounts to be negotiated, including
immediately prior to the sale.
The Selling Shareholders and all underwriters, dealers or agents, if any,
who participate in the distribution of the Shares may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with such
sales, and any profit on the sale of such Shares by such Shareholders, and all
discounts, commissions or concessions received by such underwriters, dealers or
agents, if any (whether received from a Selling Shareholder and/or from the
purchasers of the Shares for whom those dealers or agents may act as agents),
may be deemed to be underwriting discounts and commissions under the Securities
Act.
Certain of the above-described underwriters, dealers, brokers or agents may
engage in transactions with, or perform services for, the Company and its
affiliates in the ordinary course of business.
Upon the Company being notified by a Selling Shareholders that any
agreement or arrangement has been entered into with a broker-dealer for the sale
of Shares through a block trade, special offering or secondary distribution or a
purchase by a broker-dealer, to the extent required by applicable law a
supplement to this Prospectus will be distributed that will set forth the
name(s) of the participating underwriters, dealers or agents, the aggregate
amount of the Shares being so offered and the terms of the offering, including
all underwriting discounts, commissions and other items constituting
compensation from, and the resulting net proceeds to, such Selling Shareholder,
all discounts, commissions or concessions allowed or re-allowed or paid to
dealers, if any, and, if applicable, the purchase price to be paid by any
underwriter for the Shares purchased from such Selling Shareholder.
The Selling Shareholders and other persons participating in the
distribution of the Shares will be subject to applicable provisions of the
Exchange Act and the rules and regulations of the Commission thereunder,
including, without limitation, Regulation M, which provisions may limit the
timing of the purchase and sale of shares by a Selling Shareholder.
Shares that qualify for sale pursuant to Rule 144 may be sold under Rule
144 rather than pursuant to this Prospectus. In addition, a Selling Shareholder
may devise, gift or otherwise transfer the Shares by means not described herein,
in which event such transfer will not be pursuant to this Prospectus.
Under agreements that have been entered into by the Company with the
Selling Shareholders, the Selling Shareholders are entitled to indemnification
by the Company against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act, and to contribution with respect
to payments which the Selling Shareholders may be required to make in respect
thereof. The Company may, in connection with an underwritten distribution of
Shares, enter into agreements with underwriters, dealers and agents who
participate in such distribution that provide for similar indemnification and
contribution.
The Company has agreed to bear the expenses of registration of the Shares
and other costs and expenses incurred by the Selling Shareholders in connection
with the sale of the Shares, except for costs and expenses of Selling
Shareholders' counsel and accountants, brokerage commissions and charges, and
income taxes and stock transfer taxes due.
No trustee, director, officer or agent of the Company is expected to be
involved in soliciting offers to purchase the Paired Common Shares offered
hereby, and no such person will be compensated by the
32
<PAGE> 34
Company for the sale of any of such Paired Common Shares. Certain officers of
the Company may assist such representatives of the Selling Shareholders in such
efforts but will not be compensated therefor.
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 Starwood Lodging Trust and Starwood Lodging Corporation as of
December 31, 1996 and 1995 and for each of the two years then ended, appearing
in the Company's Joint Annual Report on Form 10-K, as amended, for the year
ended December 31, 1996; the consolidated financial statements of Westport
Holdings, L.L.C. as of January 2, 1997, and for the year then ended, appearing
in the Company's Joint Current Report on Form 8-K dated February 10, 1997, as
amended; and the combined financial statements of Flatley Hotels as of December
31, 1996 and for the year then ended, appearing in the Company's Joint Current
Report on Form 8-K dated September 10, 1997, as amended, incorporated by
reference in this Prospectus, 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.
The separate and combined financial statements and financial statement
schedules of Starwood Lodging Trust and Starwood Lodging Corporation for the
year ended December 31, 1994, incorporated by reference in this Prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report also incorporated by reference herein. Such financial statements and
financial statement schedules have been incorporated by reference herein in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The combined financial statements of Pru-HEI Hotel Group incorporated in
this Prospectus by reference to the Company's Joint Current Report on Form 8-K
dated February 10, 1997 incorporated by reference in this Prospectus, have been
so incorporated in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of W&S Hotel L.L.C. and the combined
financial statements of the predecessor business included in the Company's Joint
Current Report on Form 8-K dated September 9, 1997 (as amended by Form 8-K dated
December 18, 1997), to the extent and for the periods indicated in their report,
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are incorporated herein in
reliance upon the authority of said firm as experts in giving said reports.
The consolidated financial statements of ITT Corporation as of December 31,
1996 and 1995, and for each of the three years in the period ended December 31,
1996, included in the Company's Joint Current Report on Form 8-K dated November
12, 1997 (as amended by the Form 8-K/A dated December 18, 1997 and the Form
8-K/A dated January 7, 1998) have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are incorporated herein in reliance upon the authority of such firm
as experts in giving said reports.
33
<PAGE> 35
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS 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 REGISTERED
SECURITIES OF THE COMPANY OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE PAIRED COMMON SHARES 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>
PROSPECTUS
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Special Note Regarding Forward-Looking
Statements.......................... 4
The Company........................... 4
Risk Factors.......................... 8
Use of Proceeds....................... 13
Price Range of Paired Common Shares
and Distributions................... 14
Selling Shareholders.................. 15
Federal Income Tax Considerations..... 17
Plan of Distribution.................. 31
Legal Matters......................... 33
Experts............................... 33
</TABLE>
======================================================
======================================================
10,572,045
PAIRED COMMON SHARES
STARWOOD HOTELS &
RESORTS
STARWOOD HOTELS &
RESORTS WORLDWIDE, INC.
------------------------
PROSPECTUS
------------------------
======================================================
<PAGE> 36
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Registration Fee............................................ $165,286
Printing and Engraving Expenses............................. 50,000
Legal fees and Expenses..................................... 60,000
Accounting Fees and Expenses................................ 30,000
Fees and Expenses of Transfer Agent......................... 5,000
Miscellaneous............................................... 27,214
--------
Total............................................. $337,500
========
</TABLE>
- ---------------
* Expenses are estimated except for the registration fee.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Corporation's charter and the Amended and Restated Declaration of the
Trust provide that the Corporation and the Trust, respectively, shall indemnify,
to the fullest extent permitted by law, all persons who may be indemnified
pursuant to the Maryland General Corporation Law (the "MGCL") and Title 8 of the
Corporations and Associations Article of the Annotated Code of Maryland (the
"Maryland REIT Law"), respectively. The MGCL requires a corporation or a
Maryland real estate investment trust (a "Maryland REIT") (unless its charter or
declaration provides otherwise, which the Corporation Articles and the Trust
Declaration do not) to indemnify a director, trustee or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation or Maryland REIT to indemnify its present and former
directors, trustees and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a) the
act or omission of the director, trustee or officer was material to the matter
giving rise to the proceeding and (i) was committed in bad faith or (ii) was the
result of active and deliberate dishonesty, (b) the director, trustee or officer
actually received an improper personal benefit in money, property or services or
(c) in the case of any criminal proceeding, the director, trustee or officer had
reasonable cause to believe that the act or omission was unlawful. However,
under the MGCL, a Maryland corporation or a Maryland REIT may not indemnify for
an adverse judgment in a suit by or in the right of the corporation or the
Maryland REIT or for a judgment of liability on the basis that personal benefit
was improperly received, unless in either case a court orders indemnification
and then only for expenses. In addition, the MGCL permits a corporation or a
Maryland REIT to advance reasonable expenses to a director, trustee or officer
upon the receipt by the corporation or the Maryland REIT of (a) a written
affirmation by the director, trustee or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the corporation
and (b) a written undertaking by or on his behalf to repay the amount paid or
reimbursed by the corporation or the Maryland REIT if it shall ultimately be
determined that the standard of conduct was not met.
The Company has entered into indemnification agreements with its directors,
trustees and executive officers providing for the maintenance of directors,
trustees and officers liability insurance, subject to certain conditions, and
the indemnification of and advancement of expenses to such directors, trustees
and executive officers.
II-1
<PAGE> 37
ITEM 16. EXHIBITS.
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
2.1 Amended and Restated Agreement and Plan of Merger dated as
of November 12, 1997, among the Trust, the Corporation,
Chess Acquisition Corp. and ITT Corporation (incorporated by
reference to Exhibit A to the Joint Proxy
Statement/Prospectus dated January 14, 1998, included in the
Company's Registration Statement on Form S-4 (Registration
Statement Nos. 333-39409 and 39409-01). Schedules to the
foregoing agreement have been omitted but will be furnished
to the Securities and Exchange Commission on request.
2.2 Transaction Agreement dated as of September 8, 1997, among
the Trust, the Corporation, and inter alia, WHWE L.L.C.
(incorporated by reference to Exhibit 2 to the Company's
Current Report on Form 8-K dated September 25, 1997).
5.1+ Opinion of Sidley & Austin.
5.2+ Opinion of Piper & Marbury L.L.P.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Price Waterhouse LLP.
23.4 Consent of Arthur Andersen LLP.
23.5 Consent of Arthur Andersen LLP.
23.6+ Consent of Counsel (included in Exhibits 5.1 and 5.2).
24.1 Powers of Attorney (contained in 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
II-2
<PAGE> 38
Commission pursuant to Rule 424(b) (Section 230-424(b) of 17 C.F.R.) if, in
the aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
Registration Statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Commission by the Registrants
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrants hereby further undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrants' annual reports pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned Registrants further undertake that:
(a) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrants pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE> 39
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Phoenix, State of Arizona, on the 10th day of March,
1998.
STARWOOD HOTELS & RESORTS
By: /s/ RONALD C. BROWN
------------------------------------
Ronald C. Brown
Senior 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 Madison F. Grose, 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 March 10, 1998
- --------------------------------------------------- and Trustee (Principal
Barry S. Sternlicht Executive Officer)
/s/ GARY M. MENDELL President and Trustee March 10, 1998
- ---------------------------------------------------
Gary M. Mendell
/s/ RONALD C. BROWN Senior Vice President and Chief March 10, 1998
- --------------------------------------------------- Financial Officer (Principal
Ronald C. Brown Financial and Accounting
Officer)
/s/ STEVEN R. GOLDMAN Senior Vice President March 10, 1998
- --------------------------------------------------- and Trustee
Steven R. Goldman
/s/ JEAN-MARC CHAPUS Trustee March 10, 1998
- ---------------------------------------------------
Jean-Marc Chapus
/s/ BRUCE W. DUNCAN Trustee March 10, 1998
- ---------------------------------------------------
Bruce W. Duncan
</TABLE>
II-4
<PAGE> 40
<TABLE>
<C> <S> <C>
/s/ MADISON F. GROSE Trustee March 10, 1998
- ---------------------------------------------------
Madison F. Grose
/s/ GEORGE J. MITCHELL Trustee March 10, 1998
- ---------------------------------------------------
George J. Mitchell
/s/ ROGER S. PRATT Trustee March 10, 1998
- ---------------------------------------------------
Roger S. Pratt
/s/ STEPHEN R. QUAZZO Trustee March 10, 1998
- ---------------------------------------------------
Stephen R. Quazzo
/s/ STUART M. ROTHENBERG Trustee March 10, 1998
- ---------------------------------------------------
Stuart M. Rothenberg
</TABLE>
II-5
<PAGE> 41
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing a Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Phoenix, State of Arizona, on the 10th day of March,
1998.
STARWOOD HOTELS & RESORTS
WORLDWIDE, INC.
By: /s/ THEODORE W. DARNALL
------------------------------------
Theodore W. Darnall
Executive Vice President and
Chief Operating Officer
POWER OF ATTORNEY
Each person whose signature to the Registration Statement appears below
hereby appoints Theodore W. Darnall 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 March 10, 1998
- --------------------------------------------------- and Director
Barry S. Sternlicht
/s/ THEODORE W. DARNALL Executive Vice President and March 10, 1998
- --------------------------------------------------- Chief Operating Officer
Theodore W. Darnall (Principal Executive Officer)
/s/ ALAN M. SCHNAID Vice President and Corporate March 10, 1998
- --------------------------------------------------- Controller (Principal
Alan M. Schnaid Financial and Accounting
Officer)
/s/ JUERGEN BARTELS Director March 10, 1998
- ---------------------------------------------------
Juergen Bartels
/s/ JONATHAN D. EILIAN Director March 10, 1998
- ---------------------------------------------------
Jonathan D. Eilian
</TABLE>
II-6
<PAGE> 42
<TABLE>
<C> <S> <C>
/s/ BRUCE M. FORD Director March 10, 1998
- ---------------------------------------------------
Bruce M. Ford
/s/ GRAEME W. HENDERSON Director March 10, 1998
- ---------------------------------------------------
Graeme W. Henderson
/s/ EARLE F. JONES Director March 10, 1998
- ---------------------------------------------------
Earle F. Jones
/s/ MICHAEL A. LEVEN Director March 10, 1998
- ---------------------------------------------------
Michael A. Leven
/s/ DANIEL H. STERN Director March 10, 1998
- ---------------------------------------------------
Daniel H. Stern
/s/ BARRY S. VOLPERT Director March 10, 1998
- ---------------------------------------------------
Barry S. Volpert
/s/ DANIEL W. YIH Director March 10, 1998
- ---------------------------------------------------
Daniel W. Yih
</TABLE>
II-7
<PAGE> 43
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
2.1 Amended and Restated Agreement and Plan of Merger dated as
of November 12, 1997, among Starwood Hotels & Resorts (the
"Trust"), Starwood Hotels & Resorts Worldwide, Inc. (the
"Corporation"), Chess Acquisition Corp. and ITT Corporation
(incorporated by reference to Exhibit A to the Joint Proxy
Statement/Prospectus dated January 14, 1998, included in the
Trust's and the Corporation's Registration Statement on Form
S-4 (Registration Statement Nos. 333-39409 and 39409-01).
Schedules to the foregoing agreement have been omitted but
will be furnished to the Securities and Exchange Commission
on request.
2.2 Transaction Agreement dated as of September 8, 1997, among
the Trust, the Corporation, and inter alia, WHWE L.L.C.
(incorporated by reference to Exhibit 2 to the Trust's and
the Corporation's Current Report on Form 8-K dated September
25, 1997).
5.1+ Opinion of Sidley & Austin.
5.2+ Opinion of Piper & Marbury L.L.P.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Price Waterhouse LLP.
23.4 Consent of Arthur Andersen LLP.
23.5 Consent of Arthur Andersen LLP.
23.5+ Consent of Counsel (included in Exhibits 5.1 and 5.2).
24.1 Powers of Attorney (contained in signature pages hereto).
</TABLE>
- ---------------
+ To be filed by amendment or pursuant to a Current Report on Form 8-K.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in the Registration Statement
of Starwood Hotels & Resorts (formerly Starwood Lodging Trust) and Starwood
Hotels and Resorts Worldwide, Inc. (formerly Starwood Lodging Corporation) on
Form S-3 being filed under the Securities Act of 1933, as amended, of our report
dated February 21, 1997 appearing in the Annual Report on Form 10-K, as amended,
of Starwood Lodging Trust and Starwood Lodging Corporation (collectively, the
"Company") for each of the two years ended December 31, 1996, of our report
dated February 6, 1997 on the financial statements for Westport Holdings, L.L.C.
for the year ended January 2, 1997, appearing in the Company's Joint Current
Report on Form 8-K dated February 14, 1997, as amended, and of our report dated
August 29, 1997 (except for Note 9 for which the date is September 10, 1997) on
our audit of the financial statements of The Flatley Hotels for the year ended
December 31, 1996, appearing in the Company's Current Report on Form 8-K dated
September 10, 1997, as amended. We also consent to the reference to our firm
under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Los Angeles, California
March 9, 1998
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of Starwood Hotels & Resorts (formerly Starwood Lodging Trust) and Starwood
Hotels and Resorts Worldwide, Inc. (formerly Starwood Lodging Corporation) (the
"Companies") on Form S-3 of our report dated March 24, 1995 on the separate and
combined financial statements and financial statement schedules of the Companies
appearing in the Companies' Annual Report on Form 10-K/A2 for the year ended
December 31, 1996 and to the reference to us under the heading "Experts" in the
Prospectus which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 9, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 of our report dated
February 10, 1997 relating to the combined financial statements of Pru-HEI Hotel
Group, which appears in the Current Report on Form 8-K of Starwood Lodging Trust
and Starwood Lodging Corporation dated February 10, 1997. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
Price Waterhouse LLP
New York, New York
March 9, 1998
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this registration statement on Form S-3 of our report dated
February 14, 1997, on the consolidated financial statements of W&S Hotel L.L.C.
and the combined financial statements of the predecessor business included in
the Joint Current Report as amended of Starwood Lodging Trust and Starwood
Lodging Corporation dated September 9, 1997, and to all references to our firm
included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington
March 9, 1998
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this registration statement on Form S-3 of our report dated
January 23, 1997, (except with respect to the matters discussed in the
Subsequent Events note as to which the date is March 27, 1997), included in the
Joint Current Report on Form 8-K dated November 12, 1997 of Starwood Lodging
Trust and Starwood Lodging Corporation (as amended by the Form 8-K/A dated
December 18, 1997 and the Form 8-K/A dated January 7, 1998), and to all
references to our firm included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
New York, New York
March 9, 1998
