-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Le/ASbgHH6DtitP9LDl4x68K4cBlzzd0vk5Lh3APtSSMcoz/PA8T02pra/ygn/yJ 5p2G04n+lDEv97yFRgvCug== 0000912057-95-004985.txt : 199506300000912057-95-004985.hdr.sgml : 19950630 ACCESSION NUMBER: 0000912057-95-004985 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19950629 SROS: AMEX SROS: BSE SROS: CSE SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARWOOD LODGING TRUST CENTRAL INDEX KEY: 0000048595 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 520901263 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-59155 FILM NUMBER: 95550479 BUSINESS ADDRESS: STREET 1: 11845 W OLYMPIC BLVD STREET 2: SUITE 550 CITY: LOS ANGELES STATE: CA ZIP: 90064 BUSINESS PHONE: 3105753900 MAIL ADDRESS: STREET 1: 11845 W OLYMPIC BLVD STREET 2: SUITE 550 CITY: LOS ANGELES STATE: CA ZIP: 90064 FORMER COMPANY: FORMER CONFORMED NAME: HOTEL INVESTORS TRUST /MD/ DATE OF NAME CHANGE: 19930506 FORMER COMPANY: FORMER CONFORMED NAME: HOTEL INVESTORS TRUST DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: HOTEL INVESTORS DATE OF NAME CHANGE: 19800720 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARWOOD LODGING CORP CENTRAL INDEX KEY: 0000316206 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 521193298 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-59155-01 FILM NUMBER: 95550480 BUSINESS ADDRESS: STREET 1: 11845 W OLYMPIC BLVD STREET 2: SUITE 560 CITY: LOS ANGELES STATE: CA ZIP: 90064 BUSINESS PHONE: 3105753900 MAIL ADDRESS: STREET 1: 11845 W OLYMPIC BLVD STREET 2: SUITE 560 CITY: LOS ANGELES STATE: CA ZIP: 90064 FORMER COMPANY: FORMER CONFORMED NAME: HOTEL INVESTORS CORP DATE OF NAME CHANGE: 19920703 S-2/A 1 S-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 29, 1995 REGISTRATION NOS. 33-59155 AND 33-59155-01 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- AMENDMENT NO. 2 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- STARWOOD LODGING TRUST STARWOOD LODGING CORPORATION (Exact name of registrant as specified (Exact name of registrant as specified in its governing instruments) in its governing instruments) 11845 West Olympic Blvd., Suite 550 11845 West Olympic Blvd., Suite 560 Los Angeles, California 90064 Los Angeles, California 90064 (310) 575-3900 (310) 575-3900 (Address of principal executive offices) (Address of principal executive offices) --------------------- Maryland Maryland (State or other jurisdiction (State or other jurisdiction of incorporation or organization) of incorporation or organization) 52-0901263 52-1193298 (I.R.S. employer identification no.) (I.R.S. employer identification no.) JEFFREY C. LAPIN KEVIN E. MALLORY President and Chief Operating Officer Executive Vice President 11845 West Olympic Blvd., Suite 550 11845 West Olympic Blvd., Suite 560 Los Angeles, California 90064 Los Angeles, California 90064 (310) 575-3900 (310) 575-3900 (Name and address of agent for service) (Name and address of agent for service) COPIES TO: SHERWIN L. SAMUELS, Esq. JAMES M. ASHER, Esq. Sidley & Austin ROBERT E. KING, JR., Esq. 555 West Fifth Street Rogers & Wells Los Angeles, California 90013 200 Park Avenue (213) 896-6000 New York, New York 10166 (212) 878-8000
--------------------- 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. /X/ --------------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE Convertible Notes Due , 1995................... $269,639,063 $92,978.99(2) Shares of beneficial interest, $0.01 par value, of Starwood Lodging Trust(3) PAIRED WITH Shares of common stock, $0.01 par value of Starwood Lodging Corporation(3)............................................ -- --
(1) Includes convertible notes (and Paired Shares into which such notes are convertible) as to which the Registrants have granted the Underwriters an option solely to cover over-allotments. (2) A fee of $96,124.82 has already been paid. The fee was calculated pursuant to Rule 457(c) under the Securities Act and was based on the average of the high and low prices for the Paired Shares on the New York Stock Exchange on May 5, 1995. (3) Such shares become deliverable upon conversion of the convertible notes being registered hereby. --------------------- 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CROSS REFERENCE SHEET
ITEM NUMBER AND CAPTION LOCATION OF HEADING IN PROSPECTUS - ------------------------------------------------------------- -------------------------------------------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus................... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus....................................... Inside Front Cover Page; Outside Back Cover 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........................ Prospectus Summary; Risk Factors 4. Use of Proceeds................................... Use of Proceeds 5. Determination of Offering Price................... Underwriting 6. Dilution.......................................... Dilution 7. Selling Security Holders.......................... Not Applicable 8. Plan of Distribution.............................. Underwriting 9. Description of Securities to be Registered........ Capital Stock 10. Interests of Named Experts and Counsel............ Experts; Legal Matters 11. Information with respect to Registrant............ Prospectus Summary; Price Ranges of Paired Shares; Selected Financial Information; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business and Property; Management; Partnerships; Principal Shareholders; Shares Available for Future Sale; Financial Statements. 12. Incorporation of Certain Information by Reference........................................ Incorporation by Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities... Not Applicable
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 CONSISTUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY 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 PRELIMINARY PROSPECTUS DATED JUNE 29, 1995 PROSPECTUS 10,250,000 PAIRED SHARES STARWOOD LODGING STARWOOD LODGING TRUST STARWOOD LODGING CORPORATION ------------ Starwood Lodging Trust (the "Trust") and Starwood Lodging Corporation (the "Corporation" and, with the Trust, the "Company") own and operate hotels. The Trust, which intends to qualify as a real estate investment trust for federal income tax purposes (a "REIT"), is self-administered and, upon completion of the offering contemplated hereby (the "Offering"), will hold fee interests, ground leaseholds and mortgage loan interests in 47 hotel properties containing approximately 9,440 rooms located in 20 states throughout the United States. The Corporation operates hotel properties that it leases from the Trust. The securities offered hereby, all of which are being offered by the Company, consist of shares of the Trust and shares of the Corporation which are "paired" and traded as units consisting of one Trust share and one Corporation share (the "Paired Shares"). The Trust is the only publicly traded REIT with a paired share structure investing in hotel properties. Upon completion of the Offering, approximately 33% of the Paired Shares on a fully diluted basis would be owned by Starwood Capital Group, L.P. and its affiliates, subject to the ownership limitation provisions described herein. The Trust intends to pay regular quarterly distributions of $.47 per Paired Share, beginning with a distribution for the period from the closing date of the Offering through September 30, 1995. The Paired Shares are listed on the New York Stock Exchange under the symbol "HOT." A recent price of the Paired Shares on the New York Stock Exchange is set forth under the heading "Price Ranges of Paired Shares." Prior to the completion of the Offering, the Company will effect a reverse stock split. The public offering price of the Paired Shares offered hereby is expected to be between $22.50 and $24.50 per Paired Share. SEE "RISK FACTORS" PAGE 12 FOR CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMPANY. ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) Per Paired Share(3)...................... $ $ $ Total(4)................................. $ $ $
(1) The Company has agreed to indemnify the Underwriters against certain liabilities under the Securities Act of 1933. See "Underwriting." (2) Before deducting estimated expenses of $ payable by the Company. (3) The Paired Shares offered hereby will be issued automatically upon conversion of convertible notes being acquired by the Underwriters from the Company. The price per Paired Share equals the conversion price of the convertible notes. See "Convertible Notes." (4) The Company has granted the Underwriters an option to purchase additional notes convertible into up to an additional 1,537,500 Paired Shares to cover over-allotments. If all of such convertible notes are purchased, the total Price to Public, Underwriting Discount and Proceeds to the Company will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The Paired Shares are being offered by the several Underwriters, subject to prior sale, when, as and if the convertible notes are delivered to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the Paired Shares offered hereby will be made in New York, New York on or about , 1995. ------------------------ MERRILL LYNCH & CO. BEAR, STEARNS & CO. INC. ALEX. BROWN & SONS INCORPORATED LEHMAN BROTHERS PRUDENTIAL SECURITIES INCORPORATED SMITH BARNEY INC. -------------- The date of this Prospectus is , 1995. [MAP OF HOTEL LOCATIONS] [PHOTOGRAPH OF ASSETS] IF A TERM SHEET (AS CONTEMPLATED BY RULE 434 UNDER THE SECURITIES ACT OF 1933) IS DELIVERED IN CONNECTION WITH THE OFFERING CONTEMPLATED HEREBY, THIS PRELIMINARY PROSPECTUS, TOGETHER WITH SUCH TERM SHEET, SHALL TOGETHER CONSTITUTE THE PROSPECTUS UNDER THE SECURITIES ACT OF 1933. RECIPIENTS OF THIS PRELIMINARY PROSPECTUS SHOULD THEREFORE RETAIN IT FOR REFERENCE. NEITHER THE NEVADA GAMING COMMISSION NOR THE NEVADA STATE GAMING CONTROL BOARD HAS PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE INVESTMENT MERITS OF THE SECURITIES OFFERED HEREBY. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE PAIRED SHARES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. Embassy Suites - Tempe Photo of Interior Courtyard Embassy Suites, Tempe AZ Capitol Hill Exterior Photo of Porte Cochieve - Capitol Hill Suites, Washington D.C. Sheraton Colony Square Exterior Photo - Sheraton Colony Square Hotel, Atlanta GA Riverside Inn Exterior Photo - Riverside Inn Portland, OR Omni Europa Photo of Garden Court and Exterior Omni Europa Hotel, Chapel Hill, NC Doubletree Hotel Exterior Photo, Doubletree Hotel, Rancho Bernardo, CA French Quarter Suites Exterior Photo, French Quarter Suites Hotel, Lexington KY Plaza Hotel & Conference Center Exterior Photo Plaza Hotel Tucson, AZ Radisson Hotel Photo of Exterior Courtyard and Pool Radisson Gainesville, FL Residence Inn Photo of Courtyard and Exterior Residence Inn, Tysons Corner, VA Harvey Hotel Exterior Photo Harvey Hotel Wichita, KS Holiday Inn Courtyard & Exterior Photo Holiday Inn, Albany, GA TABLE OF CONTENTS
PAGE --------- PROSPECTUS SUMMARY.................... 1 The Company......................... 1 Risk Factors........................ 2 The Hotel Industry.................. 3 Business Objectives and Growth Strategy........................... 4 Business and Properties............. 5 Structure of the Company............ 6 The Offering........................ 8 Distributions....................... 8 Tax Status of the Company........... 8 Summary Combined Selected Financial Data............................... 9 RISK FACTORS.......................... 12 Tax Risks........................... 12 Offering Price May Not Reflect Values of the Assets............... 13 Effects of Various Factors on Share Price.............................. 13 Ownership Limitation and Limits on Change of Control.................. 13 Influence of Starwood Capital....... 15 Hotel Industry Risks................ 15 Real Estate Investment Risks........ 17 Risk of Debt Financing; Prior Defaults........................... 19 Certain Assets Recently Acquired.... 20 Limitation on Starwood Capital and Westin Obligations................. 20 Possible Liability of Trust Shareholders....................... 20 Net Losses.......................... 21 Dilution Experienced by Purchasers in Offering........................ 21 Changes in Investment and Financing Policies Without Shareholder Approval........................... 21 THE COMPANY........................... 21 USE OF PROCEEDS....................... 23 DISTRIBUTION POLICY................... 24 PRICE RANGES OF PAIRED SHARES......... 27 CAPITALIZATION........................ 28 DILUTION.............................. 29 SELECTED COMBINED FINANCIAL DATA...... 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA FINANCIAL STATEMENTS.... 32 Pro Forma Results from Operations-- For the Year Ended December 31, 1994............................... 32 Funds From Operations............... 33 Liquidity and Capital Resources..... 33 PAGE --------- Seasonality......................... 34 Inflation........................... 34 EBITDA--Earnings Before Interest, Taxes, Depreciation and Amortization....................... 34 BUSINESS OBJECTIVES AND GROWTH STRATEGY............................. 34 Business Objectives................. 34 Acquisition Strategies.............. 34 Operating Strategies................ 35 Development Strategy................ 36 Financing Strategies................ 36 Implementation of Strategies........ 36 Starwood Capital.................... 38 BUSINESS AND PROPERTIES............... 39 The Hotel Industry.................. 39 The Hotel Assets.................... 40 Owned Hotels........................ 40 Mortgage Notes Receivables.......... 42 Atlantic City Quality Inn/Secaucus Ramada Suites...................... 42 Harvey Notes........................ 42 Seller Financing.................... 42 Industry Segmentation............... 43 Hotel Operating Leverage............ 44 Geographic Diversification.......... 45 National Franchise Affiliations..... 46 Operations.......................... 46 Excluded Assets and Related Matters............................ 48 Environmental Matters............... 49 Regulation and Licensing............ 50 Insurance........................... 52 Employees........................... 52 THE ACQUISITION FACILITY AND OTHER FINANCING............................ 53 STRUCTURE OF THE COMPANY.............. 54 General............................. 54 Formation of the Partnerships and the Reorganization................. 54 Management of the Partnerships...... 55 Term and Dissolution................ 57 Distributions and Reimbursement..... 57 Offerings of Paired Shares.......... 57 Limited Partner Rights.............. 57 Issuance of Additional Units........ 59 POLICIES WITH RESPECT TO CERTAIN ACTIVITIES........................... 59 Investment Policies................. 59 Disposition......................... 60 Financing........................... 60 Conflicts of Interest............... 61
i
PAGE --------- Other Policies...................... 62 MANAGEMENT............................ 62 Trustees and Executive Officers of the Trust.......................... 62 Directors and Executive Officers of the Corporation.................... 63 Classified Boards; Removal.......... 65 Independent Board Approval.......... 65 Board Committees.................... 65 Compensation of Trustees/Directors................. 66 Liability and Indemnity of Directors and Trustees....................... 66 Summary of Cash and Certain Other Compensation....................... 67 Stock Options....................... 68 Agreements with Executive Officers........................... 70 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................... 71 PRINCIPAL SHAREHOLDERS................ 73 SHARES AVAILABLE FOR FUTURE SALE...... 74 CAPITAL STOCK......................... 75 General............................. 75 Paired Shares....................... 76 The Pairing Agreement............... 76 Exchange Rights..................... 77 1986 Warrants....................... 77 Options............................. 77 Preemptive Rights................... 77 Maryland Takeover Legislation....... 78 PAGE --------- Ownership Limits; Restrictions on Transfer; Repurchase and Redemption of Shares.......................... 78 Dissolution of Trust................ 80 Amendment to the Declaration of Trust.............................. 80 Transfer Agent for Paired Shares.... 80 FEDERAL INCOME TAX CONSIDERATIONS..... 80 Federal Income Taxation of the Trust.............................. 81 Federal Income Taxation of the Corporation........................ 89 Federal Income Taxation of Holders of Paired Shares................... 89 Information Reporting Requirements and Backup Withholding............. 92 Federal Income Tax Aspects of the Partnerships....................... 92 Other Tax Consequences.............. 95 ERISA CONSIDERATIONS.................. 95 Fiduciary and Prohibited Transaction Considerations..................... 95 Plan Asset Issue.................... 96 CONVERTIBLE NOTES..................... 97 UNDERWRITING.......................... 99 EXPERTS............................... 100 LEGAL MATTERS......................... 101 ADDITIONAL INFORMATION................ 101 INFORMATION INCORPORATED BY REFERENCE............................ 101 GLOSSARY.............................. 102 INDEX TO FINANCIAL STATEMENTS......... F-1
ii PROSPECTUS SUMMARY THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES (I) A ONE FOR SIX REVERSE STOCK SPLIT THAT WILL BECOME EFFECTIVE PRIOR TO THE CONSUMMATION OF THE OFFERING, (II) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND (III) A PUBLIC OFFERING PRICE OF $23.50 PER PAIRED SHARE (WHICH IS THE MIDPOINT OF THE RANGE SET FORTH ON THE COVER PAGE). SUCH INFORMATION ALSO GIVES EFFECT TO THE CONSUMMATION AS OF JANUARY 1, 1995 OF THE REORGANIZATION DESCRIBED BELOW UNDER "STRUCTURE OF THE COMPANY." UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES TO THE "COMPANY" REFER TO THE TRUST AND THE CORPORATION, AND ALL REFERENCES TO THE "TRUST" AND TO THE "CORPORATION" INCLUDE THE TRUST AND THE CORPORATION AND THOSE ENTITIES RESPECTIVELY OWNED OR CONTROLLED BY THE TRUST OR THE CORPORATION, INCLUDING SLT REALTY LIMITED PARTNERSHIP (THE "REALTY PARTNERSHIP") AND SLC OPERATING LIMITED PARTNERSHIP (THE "OPERATING PARTNERSHIP"). THE REALTY PARTNERSHIP AND THE OPERATING PARTNERSHIP ARE REFERRED TO COLLECTIVELY AS THE "PARTNERSHIPS." REFERENCES HEREIN TO "THE COMPLETION OF THE OFFERING" INCLUDE THE APPLICATION OF THE PROCEEDS OF THE OFFERING. OTHER THAN WHEN USED IN THE FINANCIAL STATEMENTS INCLUDED HEREIN, THE TERM "ON A FULLY DILUTED BASIS" ASSUMES THE EXCHANGE BY STARWOOD CAPITAL GROUP, L.P., AND CERTAIN OF ITS AFFILIATES (COLLECTIVELY, "STARWOOD CAPITAL") OF ALL OF THEIR EXCHANGEABLE INTERESTS IN THE PARTNERSHIPS FOR PAIRED SHARES BUT NOT THE EXERCISE OF OUTSTANDING OPTIONS OR WARRANTS. SEE "GLOSSARY" FOR DEFINITIONS OF CERTAIN TERMS USED IN THIS PROSPECTUS. THE COMPANY The Company was recently reorganized to combine and expand the hotel investment and operating businesses of the Company and Starwood Capital. Management believes that the Company's unique "paired share" ownership structure gives it a competitive advantage over other hotel REITs and other hotel owner/ operators with respect to owning and operating hotels, as discussed below. The Company has owned hotel assets since 1969 and has managed hotel assets since 1980. Starwood Capital has been an active opportunistic investor in the hotel industry over the last three years. Upon completion of the Offering, the Company will own, operate and manage a geographically diversified portfolio of hotel assets (the "Hotel Assets"), including fee, ground lease and first mortgage interests in 47 hotel properties, comprising over 9,440 rooms located in 20 states. Thirty-six of such hotels are operated under licensing or franchise agreements with national hotel organizations, including Marriott-TM-, Embassy Suites-TM-, Omni-TM-, Doubletree-TM-, Radisson-TM-, Residence Inn-TM-, Holiday Inn-TM-, Sheraton-TM-, Best Western-TM-, Days Inn-TM-, Ramada-TM-, Quality Inn-TM- and Harvey-TM-. As a fully integrated owner/operator of hotels, the Company will continue to make opportunistic hotel acquisitions and to improve performance of its existing portfolio through aggressive management. The Company expects to expand and diversify its hotel portfolio by continuing to acquire hotels, primarily in the upscale and mid-scale segments, at prices which are below replacement costs, and that have attractive yields on investment which the Company believes can be sustained and improved over time. Consistent with its strategy, the Company has recently acquired the Omni Hotel in Chapel Hill, North Carolina and agreed to acquire the Embassy Suites in Tempe, Arizona and the Sheraton Colony Square in Atlanta, Georgia. The Company continually evaluates its portfolio and will sell assets when appropriate. The Company is actively pursuing the acquisition of other upscale and mid-scale hotels, and is currently negotiating a credit facility of $160 million, which will enable the Company to aggressively pursue and complete hotel acquisitions. See "The Acquisition Facility and Other Financing." The Company's paired share ownership structure is unique for a hotel REIT because its shareholders own both the owner, the Trust, and the 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 of the Trust's REIT status. The pairing arrangement creates total commonality of ownership, as the shares of beneficial interest of the Trust (the "Trust Shares") and the Common Stock of the Corporation (the "Corporation Shares") are paired on a one for one basis and may only be held or transferred as units consisting of one Trust Share and one Corporation Share ("Paired Shares"). 1 Under the REIT qualification requirements of the Internal Revenue Code (the "Code"), REITs generally must lease their hotels to third party 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. 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 Share structure has existed since 1980. The Trust is the only publicly traded hotel REIT which has the Paired Share structure. For the twelve consecutive quarters through December 1994, the hotel industry has experienced demand increases, producing an aggregate increase in room night demand of 11.2%. During such period, net supply has only increased by 3.8%. Between 1993 and 1994, room demand, occupancy and room sales increased more rapidly in both upscale and mid-scale segments than lower-scale segments of the hotel industry. The Company intends to focus on the acquisition, repositioning or refranchising, and operation of upscale and mid-scale hotels. Management of the Company has improved the Company's portfolio's performance during the two-year period ended December 31, 1994, despite certain restrictions imposed by the Company's lenders. During such period, the Company's management increased REVPAR (room revenue per available room, or total room revenues divided by available rooms) by 8.7%, and increased EBITDA (as defined below) by 20.5% on the 21 continuously owned and operated properties. Upon the restructuring of the Company's debt in March 1995, restrictions imposed by prior lenders were removed and management now has more flexibility to acquire hotels and reinvest in its existing hotels. The Company anticipates continued internal growth from improving market conditions, improved property operations, renovations and reaffiliations. Upon completion of the Offering, Starwood Capital will own approximately 32.9% of the Company's equity (having a value of $141 million, assuming a public offering price of $23.50 per Paired Share, which is the midpoint of the range set forth on the cover page) on a fully diluted basis. Starwood Capital is a private real estate investment firm that since 1991 has acquired in excess of $1.25 billion (at cost) of real estate assets. Starwood Capital's investors include its principals and employees, certain high net worth families, three of the ten largest U.S. corporate pension funds and other institutional investors. During the past three years, Starwood Capital acquired over $575 million (at cost) of interests in hotel assets from insurance companies, banks, distressed borrowers, the Resolution Trust Corporation, the Federal Deposit Insurance Corporation and others. In January 1995, the Company completed a reorganization in which Starwood Capital contributed to the Company several hotels, hotel mortgages, cash and other related assets (the "Reorganization"). Starwood Capital has entered into a non-competition agreement with the Company relating to the acquisition of new equity interests in hotel properties in the United States. See "Structure of the Company--Management of the Partnerships." Starwood Capital's experienced real estate acquisition and finance professionals, with their network of industry contacts, will continue to assist management in identifying acquisition opportunities and attractive sources of capital. Upon completion of the Offering, the Company will have a Ratio of Debt-to-Total Market Capitalization (as defined below) of approximately 9.5%. The Company intends that such ratio not exceed 50%. RISK FACTORS Prospective investors should carefully consider the matters discussed in the section entitled "Risk Factors" prior to making an investment decision regarding the Paired Shares offered hereby. Some of the significant considerations include: -The Company is subject to various tax risks, including taxation of the Trust as a corporation if it fails to qualify as a REIT, which could adversely affect the ability of the Trust to make expected distributions to shareholders. The Trust did not qualify as a REIT during its 1991 through 1994 taxable years. 2 -The aggregate market value of the Paired Shares may exceed the aggregate fair market value of the Company's portfolio. -The organizational documents of the Trust and the Corporation contain certain provisions that may inhibit a change in control, including a limitation (intended to protect the Trust's ability to qualify as a REIT) on direct, indirect or constructive ownership by any one person or related group of persons of more than 8.0% of the Paired Shares (the "Ownership Limitation"), authorization of the issuance of preferred stock and the existence of classified Boards. -Starwood Capital and Barry S. Sternlicht, the President and Chief Executive Officer of Starwood Capital, may have the ability to exercise influence over the affairs of the Company. There may be certain conflicts of interest between the interests of Starwood Capital and other shareholders of the Company because Starwood Capital will experience different tax consequences upon the sale by the Company of certain properties. -The Company is subject to the risks associated with the hotel industry, including operating risks, competition from other hotels, risks associated with franchise license agreements, the seasonality of the hotel business, the concentration of the Company in a single industry and the special risks associated with the gaming business. -The Company incurred losses in recent years and could experience such losses in the future. -The purchasers of Paired Shares in the Offering will experience immediate dilution of $8.40 per Paired Share in the net tangible book value of the Paired Shares on a fully diluted basis. THE HOTEL INDUSTRY The hotel industry, which is one of the most management-intensive sectors of the real estate industry, has been characterized over the last 15 years by increased product segmentation and by greater marketing and cost control sophistication. However, even as the importance of sophisticated management has grown, it has continued to be common in the industry for hotel owners to rely on fee-oriented third parties to manage their hotels. The Company believes that, as an integrated owner/operator focused on maximizing long-term operating profits and asset values, rather than maximizing fees, it will distinguish itself from owners who rely on third-party managers. The hotel industry is now recovering from severe disparity in the growth of supply and demand that produced real decreases in average daily rates ("ADRs"), widening losses, and numerous foreclosures. The rapid rise in room supply in excess of demand that occurred throughout the 1980s drove occupancies and ultimately industry profitability downward. The oversupply in the hotel industry resulted from special circumstances in the 1980s, including readily available financing and tax incentives which were favorable to development of new hotels. In the late 1980s, equity sources became scarce due to changes in the tax law and the withdrawal of traditional lending sources. Between 1991 and 1994, new hotel room supply has increased at an annual rate of only 1.2%, as shown in the graphs on the following page. Historically, growth in demand for hotel rooms has been dependent on the overall health of the national economy. Demand for hotel rooms grew steadily during the 1980s. Growth in room demand fell as the national economy entered a recession in 1990, and has since resumed growth. The combination of minimal new room supply and increasing demand has resulted in the growth over the last three years in occupancy and ADR as shown in the graphs below. If the trends shown were to continue, the Company believes that further increases in ADR and occupancy would result. 3 EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
SUPPLY AND DEMAND GROWTH AVERAGE OCCUPANCY Room Supply Room Demand % % YEAR % YEAR 1990 3.55 2.17 1990 62.3 1990 1991 2.5 -0.24 1991 60.6 1991 1992 1.35 3.08 1992 61.7 1992 1993 1.04 3.32 1993 63 1993 1994 1.39 4.5 1994 65 1994 AVERAGE DAILY RATE $ 1990 58.45 1991 58.81 1992 59.64 1993 61.67 1994 64.09
Source: Smith Travel Research BUSINESS OBJECTIVES AND GROWTH STRATEGY The Company's primary objective is to increase per share funds from operations in order to maximize long-term total returns to shareholders. The Company's mission is to offer consistent high quality accommodations and service at competitive rates in order to provide superior value to its customers. ACQUISITION STRATEGIES. Since the Reorganization, the Company has acquired or agreed to acquire and assume management of three upscale, full service hotels, consistent with the following strategies: -Concentrating on the upscale and mid-scale industry segments. New supply is limited in these segments while numerous opportunities exist to buy at significant discounts to replacement cost at attractive EBITDA multiples. -Acquiring assets where existing management contracts can be terminated, allowing the Company to utilize its experienced management team and exploit the advantages of its Paired Share structure. -Focusing on markets in which the Company currently operates, or new markets which have favorable demographics, stable demand generators or barriers to new supply. -Utilizing Starwood Capital's network of real estate and finance industry contacts to identify opportunistic situations where the Company's liquidity, and its ability to acquire distressed debt, issue partnership units or turn around poorly managed properties, provide a competitive advantage. OPERATING STRATEGIES. The Company believes its existing portfolio possesses significant operating leverage. As industry conditions continue to improve, the Company will seek continued cash flow growth by implementing the following strategies: -Increasing operating efficiency by eliminating third party managers and installing the Company's experienced management team and on-line systems. -Improving profitability by completing major renovations at certain properties, such as the Dallas Park Central, Portland Riverside Inn, Lexington French Quarter Suites and the Capitol Hill Suites. -Maximizing portfolio performance by reaffiliating and repositioning certain properties, such as the Seattle Meany Tower, the Tucson Plaza, the Lexington French Quarter Suites and the Capitol Hill Suites. -Selling assets inconsistent with the Company's growth objectives and minimizing exposure to gaming-related operations. DEVELOPMENT STRATEGY. The Company may expand the number of rooms at certain high occupancy hotels and, in the future, may selectively develop new hotels in certain submarkets. FINANCING STRATEGY. The Company is negotiating a $160 million acquisition credit facility and a $45 million mortgage loan repurchase financing and currently intends to maintain a Ratio of Debt-to-Total Market Capitalization of less than 50%. See "The Acquisition Facility and Other Financing." 4 BUSINESS AND PROPERTIES The Company is a fully integrated owner and operator of hotels located throughout the United States. Upon completion of the Offering, the Company will own fee or long-term leasehold interests in 32 hotels, including two hotel/casinos (collectively, the "Owned Hotels"), and 13 performing promissory notes secured by mortgages (the "Mortgage Note Receivables") on 15 additional hotels. OWNED HOTELS
TWELVE MONTHS ENDED MARCH 31, 1995 NUMBER OF YEAR ------------------------- HOTEL LOCATION ROOMS ACQUIRED ADR OCCUPANCY - ------------------------------------------------- -------------------- ----------- --------- --------- -------------- UPSCALE: Embassy Suites................................... Phoenix, AZ 227 1983 $ 82.89 77.0% Embassy Suites(1)................................ Tempe, AZ 224 1995 89.13 81.5 Doubletree....................................... Rancho Bernardo, CA 209 1995 66.81 66.9 Capitol Hill Suites.............................. Washington, DC 152 1995 91.98 67.9 Radisson Hotel................................... Gainesville, FL 195 1986 59.82 58.9 Sheraton Colony Square(1)........................ Atlanta, GA 462 1995 87.30 73.6 Harvey Wichita................................... Wichita, KS 259 1995 54.58 58.3 French Quarter Suites............................ Lexington, KY 155 1995 77.88 70.8 Omni Chapel Hill................................. Chapel Hill, NC 168 1995 77.20 68.2 Omaha Marriott(2)................................ Omaha, NE 303 1982 88.63 78.8 Milwaukee Marriott(3)............................ Milwaukee, WI 393 1990 68.57 70.5 Residence Inn.................................... Tysons Corner, VA 96 1984 98.86 86.7 ----- --------- --- Subtotal/Weighted Average...................... 2,843 $ 77.80 71.4% MID-SCALE: Plaza Hotel(4)................................... Tucson, AZ 149 1983 $ 47.45 76.0% Holiday Inn...................................... Albany, GA 151 1989 56.00 81.5 Best Western Riverfront.......................... Savannah, GA 142 1986 46.63 59.2 Bay Valley Resort................................ Bay City, MI 151 1984 61.60 65.1 Best Western Airport Inn(4)...................... Albuquerque, NM 123 1984 54.76 86.9 Best Western Mesilla Valley...................... Las Cruces, NM 166 1982 43.21 73.3 Best Western..................................... Columbus, OH 180 1992 42.70 70.0 Riverside Inn.................................... Portland, OR 137 1984 65.75 78.9 Dallas Park Central(4)........................... Dallas, TX 445 1972 58.87 33.7 Best Western Airport............................. El Paso TX 175 1985 35.08 81.8 Meany Tower Hotel................................ Seattle, WA 155 1984 69.77 73.0 Sixth Avenue Inn(4).............................. Seattle, WA 166 1984 70.15 75.7 WestCoast Tyee Hotel............................. Olympia, WA 155 1987 60.87 57.7 ----- --------- --- Subtotal/Weighted Average...................... 2,295 $ 55.02 65.5% ECONOMY: Vagabond Inn-Rosemead............................ Rosemead, CA 102 1974 $ 37.33 38.2% Vagabond Inn-Sacramento.......................... Sacramento, CA 108 1975 56.86 60.5 Vagabond Inn-Woodland Hills...................... Woodland Hills, CA 101 1973 47.83 58.7 Days Inn......................................... Portland, OR 173 1984 54.08 74.8 Days Inn Town Center(4).......................... Seattle, WA 90 1984 60.05 80.6 ----- --------- --- Subtotal/Weighted Average...................... 574 $ 51.46 63.7% GAMING: Bourbon Street Hotel & Casino.................... Las Vegas, NV 150 1988 $ 34.18 89.5% King 8 Hotel & Casino............................ Las Vegas, NV 300 1988 32.77 81.0 ----- --------- --- Subtotal/Weighted Average...................... 450 $ 33.24 83.8% TOTAL/WEIGHTED AVERAGE ALL OWNED HOTELS................................ 6,162 $ 63.61 69.4% ----- --------- --- ----- --------- ---
- --------------- (1) Acquisition of this hotel is pending. (2) The Trust holds a 5% general partnership interest in this hotel. (3) The Corporation holds a 51% general partnership interest in this hotel and, following the Offering, the Trust will hold $27.2 million in first mortgages on this hotel. (4) These hotels are owned subject to long-term ground leases expiring in the years 1997 through 2029. 5 RECENT ACQUISITIONS Since the completion of its debt refinancing in March 1995, the Company has, consistent with its acquisition strategy, acquired or agreed to acquire the following properties: -On April 6, 1995 the Company acquired and assumed management of the Omni Chapel Hill Hotel, a 168-room upscale hotel located near Research Triangle Park, University of North Carolina and the Duke University Medical Center. -The Company expects contemporaneously with the Offering to acquire and assume management of the Sheraton Colony Square, a 462-room upscale highrise hotel which is part of a major office and retail mixed use development located at the center of midtown Atlanta. -The Company expects contemporaneously with the Offering to acquire and assume management of the Embassy Suites in Tempe, Arizona, a 224 all-suite upscale hotel located near Arizona State University. MORTGAGE NOTE RECEIVABLES The Company owns 13 performing mortgage notes secured by 15 hotels. In the future, the Company will continue to invest in mortgage notes as a strategy for ultimately acquiring the underlying hotel property as well as provide seller financing in select circumstances consistent with the Company's disposition strategies. The current portfolio as of March 31, 1995 includes: a $11.3 million 8% note, with an outstanding balance of $10.5 million and a carrying value of $7.4 million, secured by the Harvey Hotel (Addison) maturing in 2002 (the three Harvey notes are cross-collateralized and personally guaranteed by the borrowers); an $18 million 8% note, with an outstanding balance of $16.8 million and a carrying value of $11.9 million, secured by the Harvey Bristol Suites (Dallas) maturing in 2002; a $28 million 8% note, with a $25.9 million outstanding balance and a carrying value of $18.5 million, secured by the Harvey Hotel (DFW) and maturing in 2002; a $12.9 million prime-based floating rate tax-exempt note with a balance of $11.4 million and a carrying value of $4.2 million, secured by the Quality Inn Atlantic City (New Jersey) and maturing in 2010; and a $13.8 million LIBOR-based floating rate note with a balance of $12.4 million and a carrying value of $7.9 million, secured by the Ramada Suites Secaucus (New Jersey) maturing in 1999. Historically, the Company has provided seller financing of up to 80% of the sales price as a means of facilitating its operating strategy to dispose of assets with limited growth prospects. The Company currently holds eight seller notes secured by 10 hotels with an aggregate outstanding balance of $12.6 million, a weighted average interest rate of 9.2% and a weighted average maturity in 2000. STRUCTURE OF THE COMPANY The Trust and the Corporation are separate entities, the shares of which are owned, through the Paired Share structure, by the same shareholders. See "Principal Shareholders" and "Capital Stock--The Pairing Agreement." The Company's ownership interests in the Hotel Assets are held by, and the operating functions for the Assets are performed through, the Realty Partnership and the Operating Partnership, respectively. The Trust controls the Realty Partnership as the sole general partner, and the Corporation controls the Operating Partnership as the managing general partner (subject to, in the case of the Gaming Assets, receipt of certain regulatory approvals). See "Structure of the Company--Management of the Partnerships." Starwood Capital is the limited partner of the Partnerships. Subject to the Ownership Limitation, units of partnership interest in the Partnerships ("Units") held by Starwood Capital are (subject to certain restrictions) exchangeable one-for-one for Paired Shares except that prior to receipt of certain regulatory approvals, Starwood Capital's ownership of Paired Shares may not exceed 4.9% of the outstanding Paired Shares. See "Business and Properties--Regulation and Licensing." 6 The ownership structure of the Company after the completion of the Offering will be as follows: [MAP] - --------------- (1) The percentages in this table set forth under the heading "Percentage After Unit Exchange" assume that all remaining Units held by Starwood Capital have been exchanged for Paired Shares. However, prior to receipt of certain regulatory approvals, Starwood Capital's ownership of Paired Shares may not exceed 4.9% of the outstanding Paired Shares. See "Business and Properties-- Regulation and Licensing. In addition, even after receipt of such regulatory approvals, because of the Ownership Limitation, Starwood Capital can only exchange Units which will cause Starwood Capital to receive in exchange therefor not more than an additional 7.6% of the outstanding Paired Shares, bringing its Paired Share ownership to 8.0%. 7 THE OFFERING Paired Shares Offered Hereby................. 10,250,000 shares (1) Paired Shares Outstanding After the 18,215,736 shares (2) Offering..................................... Use of Proceeds.............................. The net proceeds of the Offering, which are estimated to be approximately $217.7 million, will be used to repay a substantial portion of the Company's indebtedness, acquire certain additional hotel properties, make capital improvements, pay certain amounts owed to Starwood Capital and for general business purposes. New York Stock Exchange Symbol............... HOT
- ------------ (1) Assumes the Underwriters' over-allotment option to purchase up to 1,537,500 Paired Shares is not exercised. See "Underwriting." (2) Includes 5,943,578 Paired Shares which are issuable upon the exchange of Units held by Starwood Capital. See "Structure of the Company--Limited Partner Rights--Exchange Rights." Excludes 93,083 Paired Shares issuable pursuant to outstanding options and 276,662 Paired Shares issuable pursuant to warrants which expire in 1996 and which have an exercise price of $101.70 per Paired Share. DISTRIBUTIONS Following the completion of the Offering, the Trust intends to make regular quarterly distributions to its shareholders. The distribution for the period commencing on the closing date of the Offering and ending on September 30, 1995, is expected to be approximately equivalent to a quarterly distribution of $.47 per Paired Share and an annual distribution of $1.88 per Paired Share, or an annual distribution of 8%, assuming an offering price of $23.50 per Paired Share (which is the midpoint of the range set forth on the cover page). The Trust does not expect to change its estimated distribution rate if the Underwriters' over-allotment option is exercised. The Company established its initial distribution based upon its estimate of the cash available for distribution after the Offering under present conditions. See "Distribution Policy" for information regarding the basis for the estimate. The Trust intends to maintain its initial distribution rate for at least 12 months following the consummation of the Offering, unless actual results of operations, economic conditions or other factors differ from the assumptions used in calculating the estimate. The Trust anticipates that its cash available for distribution, and the amount it distributes to shareholders, will exceed earnings and profits for federal income tax purposes due to non-cash expenses, primarily depreciation and amortization and non-cash interest expense to be incurred by the Trust. The Trust has not made a distribution since 1990 and the Corporation has never made a distribution. The Corporation does not intend to make any distributions to its shareholders in the foreseeable future. All available cash is expected to be used by the Operating Partnership to repay indebtedness to the Realty Partnership. TAX STATUS OF THE COMPANY The Trust intends to qualify to be taxed as a REIT, commencing with its taxable year ending December 31, 1995. As a REIT, the Trust generally will not be taxed at the trust level on its taxable income that it distributes to its shareholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distribute at least 95% of its REIT taxable income (which does not include net capital gains). Failure to qualify as a REIT will render the Trust subject to tax on its taxable income at corporate rates and distributions to shareholders in any such year will not be deductible by the Trust. The Code prohibits paired share arrangements for REITs that were not paired before 1983. 8 Application of this rule would prevent the Trust from qualifying to be taxed as a REIT; however, because the Trust Shares and the Corporation Shares were paired prior to 1983, this prohibition does not apply to the Trust and the Corporation. See "Federal Income Tax Considerations--Federal Income Taxation of the Trust--Requirements for Qualification--Paired Shares." The Trust was taxed as a REIT beginning in 1969 through and including its taxable year ended December 31, 1990. The Trust did not qualify as a REIT for its taxable years ended December 31, 1991 through 1994 primarily due to its failure to comply with certain procedural requirements of the Code. Because the Trust had net losses for tax purposes for its taxable years ended December 31, 1991 through 1994, the Trust did not owe any federal income tax for such years. The Trust has received a letter from the Internal Revenue Service (the "IRS") permitting it to re-elect to be taxed as a REIT commencing with its taxable year ending December 31, 1995. Although the Trust does not intend to request a ruling from the IRS as to its REIT status, the Trust has obtained the opinion of Sidley & Austin, legal counsel to the Trust and the Corporation, that, commencing with its taxable year ending December 31, 1995, the Trust will be organized in conformity with the requirements for qualification as a REIT, and the Trust's proposed method of operation will enable it to qualify to be taxed as a REIT under the Code, which opinion is based on certain assumptions and representations and will not be binding on the IRS or any court. Even if the Trust qualifies as a REIT, the Trust may be subject to certain state and local taxes on its income and property and to federal income and excise taxes in certain limited circumstances. See "Federal Income Tax Considerations--Federal Income Taxation of the Trust" and "Risk Factors--Tax Risks--Failure to Qualify as a REIT." The Corporation will be subject to federal and state tax on its taxable income at regular corporate rates. SUMMARY COMBINED SELECTED FINANCIAL DATA The following table sets forth selected combined historical and pro forma financial information for the Company. The following information should be read in conjunction with (i) the historical financial statements and notes thereto for the Company, (ii) Management's Discussion and Analysis of Financial Condition and Results of Operations, and (iii) the pro forma financial statements and notes thereto for the Company, which are included elsewhere in this Prospectus. The historical operating information of the Company as of December 31, 1994 and 1993 and for each of the three years in the period ended December 31, 1994 have been derived from audited financial statements which are included elsewhere in this Prospectus. The comparable data as of December 31, 1992, 1991 and 1990 and for the years ended December 31, 1991 and 1990 have been derived from financial statements that are not required to be included in this Prospectus. In the opinion of management, the financial data as of March 31, 1995 and for the three months ended March 31, 1995 and 1994 include all adjustments necessary to present fairly the information set forth therein. The pro forma operations data and other data for the three months ended March 31, 1995 and for the year ended December 31, 1994 have been prepared as if the Offering and the acquisition of the hotel properties acquired or to be acquired and (with respect to the December 31, 1994 data) the Reorganization had been consummated at the beginning of the period presented, and the pro forma balance sheet data has been prepared as if the Offering and the acquisition of the hotel properties acquired or to be acquired had been consummated on March 31, 1995. The pro forma financial information is not necessarily indicative of what the actual financial position and results of operations of the Company would have been as of and for the periods indicated, nor does it purport to represent the Company's future financial position and results of operations. 9 STARWOOD LODGING SUMMARY COMBINED SELECTED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA AND ROOM INFORMATION)
FOR THE THREE MONTHS ENDED MARCH 31, AS OF AND FOR THE YEAR ENDED DECEMBER 31, ------------------------------- ---------------------------------------------------------------- PRO PRO FORMA HISTORICAL FORMA HISTORICAL --------- -------------------- --------- ----------------------------------------------------- 1995 1995(4) 1994 1994 1994 1993 1992 1991 1990 --------- --------- --------- --------- --------- --------- --------- --------- --------- OPERATING DATA: REVENUE Hotel......................... $ 30,908 $ 22,781 $ 20,586 $ 125,767 $ 82,668 $ 86,903 $ 88,812 $ 85,156 $ 85,515 Gaming........................ 6,669 6,669 7,188 27,981 27,981 27,505 26,150 22,609 25,439 Interest from mortgage and other notes.................. 2,586 2,581 355 10,069 1,554 1,412 1,348 1,761 2,813 Rents from other leased hotel properties................... 159 159 150 927 927 839 947 936 942 Management fees and other income....................... 61 61 59 411 411 475 1,186 1,376 2,315 Gain (loss) on sales of hotel assets....................... (113) (113) -- 456 456 21 (787) 1,598 -- --------- --------- --------- --------- --------- --------- --------- --------- --------- 40,270 32,138 28,338 165,611 113,997 117,155 117,656 113,436 117,024 --------- --------- --------- --------- --------- --------- --------- --------- --------- EXPENSES Hotel operations.............. 21,077 16,280 15,568 90,639 60,829 68,132 68,620 65,963 65,223 Gaming operations............. 6,021 6,021 5,993 24,454 24,454 24,055 23,699 21,948 23,995 Interest...................... 841 5,827 4,125 3,365 17,606 15,187 14,208 16,458 16,408 Depreciation and amortization................. 4,426 2,863 2,066 18,130 8,161 9,232 10,196 11,688 14,850 Administrative and operating.................... 1,072 1,068 921 4,289 4,203 4,729 6,177 6,086 5,987 Shareholder litigation expense...................... -- -- -- 2,648 2,648 483 188 -- -- Loan restructuring............ -- -- -- -- -- -- 10,892 3,797 -- Provision for losses.......... -- -- -- 759 759 2,369 3,419 9,580 18,147 --------- --------- --------- --------- --------- --------- --------- --------- --------- 33,437 32,059 28,673 144,284 118,660 124,187 137,399 135,520 144,610 --------- --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) before minority interest in Partnership...... 6,833 79 (335) 21,327 (4,663) (7,032) (19,743) (22,084) (27,586) Minority interest in Partnership(1)............... 2,230 94 -- 6,959 -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) before extraordinary item........... 4,603 (15) (335) 14,368 (4,663) $ (7,032) $ (19,743) $ (22,084) $ (27,586) Extraordinary item............ -- 363 -- -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss)............. $ 4,603 $ 348 $ (335) $ 14,368 $ (4,663) $ (7,032) $ (19,743) $ (22,084) $ (27,586) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss) per share... $ 0.38 $ 0.17 $ (0.17) $ 1.17 $ (2.31) $ (3.48) $ (9.73) $ (10.92) $ (13.65) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- BALANCE SHEET DATA: Total real estate investments.................. $ 310,679 $ 246,113 $ 165,496 $ 179,172 $ 187,753 $ 200,540 $ 218,896 Total assets.................. 340,719 279,765 183,955 195,352 210,945 221,917 240,998 Total debt.................... 44,874 198,555 160,482 170,886 170,297 171,271 166,651 Shareholders' equity.......... 189,418 7,756 8,708 13,326 20,351 40,083 62,104 OTHER DATA: Funds from operations(2)...... $ 11,372 $ 3,055 $ 1,731 $ 42,408 $ 6,449 $ 5,031 $ 5,739 $ 1,383 $ 5,411 EBITDA(3)..................... $ 12,213 $ 8,882 $ 5,856 $ 45,773 $ 24,055 $ 20,218 $ 19,947 $ 17,841 $ 21,819 EBITDA margin (% of total revenues).................... 30% 28% 21% 28% 21% 17% 17% 16% 19% Cash flows from: Operating activities........ $ (686) $ 1,630 $ 8,893 $ 5,532 $ 4,690 $ (6,158) $ 6,262 Investing activities........ (1,738) (531) 4,489 (3,645) (1,514) 12,159 (7,058) Financing activities........ 9,479 50 (13,969) (6,752) (1,255) (7,139) 6,442 Dividends..................... -- -- -- -- -- -- $ 7,644 Dividends per share........... -- -- -- -- -- -- $ 0.63 Number of hotel rooms (Hotel Assets)...................... 9,440 8,586 7,059 9,618 6,409 7,059 7,423 7,549 8,068 Revenue per available room (Owned Hotels)............... $ 43.58 $ 40.42 $ 38.36 $ 43.59 $ 38.60 $ 35.66 $ 33.07 $ 30.86 $ 32.07 Average daily room rate (Owned Hotels)...................... $ 64.86 $ 61.30 $ 57.06 $ 62.99 $ 55.55 $ 54.53 $ 53.04 $ 52.04 $ 52.94 Average occupancy (Owned Hotels)...................... 67% 66% 67% 69% 69% 65% 62% 59% 61%
- --------------- (1) Represents the 32.6% minority interest in the Partnerships which Starwood Capital will own after the Offering for the pro forma periods ended December 31, 1994 and March 31, 1995 and the 71.7% minority interest in the Partnerships for the historical period ended March 31, 1995. 10 (2) Management and industry analysts generally consider funds from operations to be one measure of the financial performance of an equity REIT that provides a relevant basis for comparison among REITs and it is presented to assist investors in analyzing the performance of the Company. Funds from operations is defined as income before minority interest (computed in accordance with generally accepted accounting principles), excluding gains (losses) from debt restructuring and sales of property, provision for losses, and real estate related depreciation and amortization (excluding amortization of financing costs). Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs. Funds from operations should not be considered an alternative to net income as an indication of the Company's financial performance or as an alternative to cash flows from operating activities as a measure of liquidity. Funds from operations include $801,000 and $236,000 of interest income recognized in excess of the actual cash received on mortgage note receivables (as a result of the notes being purchased at a discount) secured by the Atlantic City Quality Inn and by the Secaucus Ramada Suites for the three months ended March 31, 1995 and the year ended December 31, 1994. (3) Management considers EBITDA to be one measure of the cash flows from operations of the Company before debt service that provides a relevant basis for comparison among REITs and it is presented to assist investors in analyzing the performance of the Company. EBITDA is defined as income before minority interest excluding gains and losses from debt restructuring and sales of property, provision for losses, interest and depreciation and amortization. EBITDA should not be considered as an alternative to net income as an indication of the Company's financial performance or to cash flows from operating activities as a measure of liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's needs. (4) The historical combined information of the Company presented for the three months ended March 31, 1995 reflects the consolidation of the Partnerships into the Trust and the Corporation in order to facilitate a comparison with the prior historical information of the Company and the pro forma information. 11 RISK FACTORS Prospective investors should carefully consider, among other factors, the matters described below. TAX RISKS FAILURE TO QUALIFY AS A REIT. The Trust intends to operate so as to qualify as a REIT under the Code commencing with its taxable year ending December 31, 1995. Although the Trust believes that it will be organized and will operate in such a manner, no assurance can be given that the Trust will qualify or remain qualified as a REIT. The Trust did not qualify as a REIT during its taxable years ended December 31, 1991 through 1994. 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. 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 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. Although the Trust has obtained the opinion of Sidley & Austin, counsel to the Trust, that, based on certain assumptions and representations, the Trust will qualify as a REIT, such legal opinion is not binding on the IRS or any court. Furthermore, the validity of the opinion and the qualification of the Trust as a REIT will depend on the Trust's continuing ability to meet various requirements concerning, among other things, the ownership of Paired Shares, the nature of its assets, the source of its income and the amount of its distributions to its shareholders. 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. As a result, the funds available for distribution to the Trust's shareholders would be reduced for each of the years involved. Although the Trust intends to operate in a manner designed to qualify as a REIT commencing with its taxable year ending December 31, 1995, it is possible that future economic, market, legal, tax or other considerations may cause the Board of Trustees to revoke the REIT election. See "Federal Income Tax Considerations." 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. Differences in timing between the receipt of income and the payment of expenses in arriving at taxable income, the seasonality of the hotel industry and the effect of required debt amortization payments could require the Trust (or the Realty Partnership) 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 will be determined by the Board of Trustees and will be dependent on a number of factors, including the amount of cash available for distribution, the Trust's financial condition, any decision by the Board of Trustees to reinvest funds rather than to distribute such funds, the Trust's capital expenditures, the REIT distribution requirements and such other factors as the Board of Trustees deems relevant. See "Federal Income Tax Considerations." CLASSIFICATION OF THE PARTNERSHIPS. The Company has obtained an opinion of Sidley & Austin, counsel to the Company, that the Partnerships will be classified as partnerships for federal income tax purposes. If a Partnership were not to be classified as a partnership for federal income tax purposes, such Partnership 12 would be taxable as a corporation which would reduce distributions to the Company's shareholders. In addition, if the Realty Partnership were to be taxable as a corporation, the Trust would not qualify to be taxed as a REIT. See "Federal Income Tax Considerations--Federal Income Tax Aspects of the Partnerships." OWNERSHIP LIMITATION. See "--Ownership Limitation and Limits on Change of Control" for a description of the ownership limitation required to maintain REIT status. OFFERING PRICE MAY NOT REFLECT VALUES OF THE ASSETS The value of the Company, for purposes of determining the public offering price of the Paired Shares, has not been determined on a property-by-property basis. Rather, the focus of the valuation has been on pro forma adjusted funds from operations and estimated cash available for distribution, the Company's potential for growth and the other factors set forth under "Underwriting." It is possible that the aggregate market value of the Paired Shares may exceed the aggregate fair market value of the Company's portfolio. EFFECTS OF VARIOUS FACTORS ON SHARE PRICE SHARES AVAILABLE FOR FUTURE SALE. Sales of a substantial number of Paired Shares, or the perception that such sales could occur, could adversely affect prevailing market prices for Paired Shares. Up to 5,943,578 additional Paired Shares may be issued in the future as a result of the potential exchange of Units by Starwood Capital. See "Structure of the Company--Limited Partner Rights--Exchange Rights." 882,333 Paired Shares have been reserved for issuance upon the exercise of options granted pursuant to the share option plans of the Trust and the Corporation and 276,662 Paired Shares have been reserved for issuance pursuant to the publicly issued warrants which have an exercise price equal to $101.70 per Paired Share and which expire in 1996 (the "1986 Warrants"). See "Management--Stock Options" and "Capital Stock." With certain exceptions, Starwood Capital will not be permitted to offer, sell, contract to sell or otherwise dispose of any Units or Paired Shares for a period of twelve months after the closing of the Offering without the consent of Merrill Lynch and the Company. At the conclusion of the twelve-month period, all Units or Paired Shares held by Starwood Capital or issuable to Starwood Capital in exchange for Units may be sold. Starwood Capital has agreed with various of its investors who hold indirect interests in the Units, that Units and/or Paired Shares for which Units are exchanged will be distributed in kind to such investors. Following any such distribution, Starwood Capital will not control any such investor's decision as to the exchange or sale of such investor's Units or Paired Shares. By way of illustration, if all Units held by Starwood Capital were currently distributed, Starwood Capital would control less than half of the Units currently controlled by it. See "Shares Available for Future Sale" and "Structure of the Company--General--Limited Partner Rights--Registration Rights." No prediction can be made regarding the effect that future sales of Paired Shares will have on the market prices of Paired Shares. OTHER FACTORS AFFECTING SHARE PRICE. The market value of the Paired Shares could be substantially affected by general market conditions, including changes in interest rates. An increase in market interest rates may lead purchasers of the Paired Shares to demand a higher annual yield on the price paid for shares from dividend distributions by the Company, which could adversely affect the market price of the Paired Shares. Moreover, numerous other factors, such as government regulatory action and modification of tax laws, could have a significant effect on the future market price of the Paired Shares. Although the Paired Shares are listed on the New York Stock Exchange, there can be no assurance that an active trading market for the Paired Shares will exist. OWNERSHIP LIMITATION AND LIMITS ON CHANGE OF CONTROL Certain provisions of the Trust's Declaration of Trust and the Corporation's Articles of Incorporation may have the effect of discouraging a third party from making an acquisition proposal for the Trust and the Corporation and may thereby inhibit a change in control under circumstances that could give the holders of Paired 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). Furthermore, actual or constructive ownership of a sufficient number of the Paired Shares could cause the Operating Partnership or the Corporation to become a related 13 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 Trust's Declaration of Trust and the Corporation's Articles of Incorporation prohibit actual or constructive ownership by any one person or group of related persons of more than 8.0% (other than for existing shareholders who owned in excess of 8.0% as of the date of the Reorganization, who may not own more than the lesser of 9.9%, or the number of Paired Shares they held on such date) of the Paired Shares (the "Ownership Limitation"). Generally, the Paired 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 Ownership Limitation will not be automatically removed even if the REIT provisions of the Code are changed so as to no longer contain any ownership concentration limitation or if the ownership concentration limitation is increased. Any change in the Ownership Limitation would require an amendment to the Trust's Declaration of Trust and to the Corporation's Articles of Incorporation. Such amendments would require approval of the Board of Trustees, the Board of Directors and the affirmative vote of holders owning not less than two-thirds of the outstanding Paired Shares. The constructive ownership rules of the Code are extensive and complex and may cause Paired Shares owned, directly or indirectly, by all 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 Shares (or the acquisition of an interest in an entity which owns Paired Shares) by an individual or entity could cause that individual or entity (or another individual or entity) to own constructively in excess of 8.0% of the Paired Shares, and thus subject such Paired Shares to the Ownership Limitation. Direct or constructive ownership in excess of the Ownership Limitation would cause the violative transfer or ownership to be void, or cause such shares to be converted into Excess Shares (defined herein), which have limited economic rights. Notwithstanding the Ownership Limitation, 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 Shares, it is possible that an individual or entity could at some time constructively own sufficient Paired Shares to cause termination of the Trust's REIT status. PREFERRED STOCK. The Trust's Declaration of Trust authorizes the Board of Trustees to issue up to 135 million shares, of which 110 million shares (less any Trust Shares) may be preferred stock, and to establish the preferences and rights (including voting rights) of any preferred stock issued. The Corporation's Articles of Incorporation authorize the Board of Directors to issue up to 10 million shares of preferred stock and to establish the preferences and rights (including voting rights) of any shares issued. See "Capital Stock--The Pairing Agreement--Preferred Shares." No such shares will be issued or outstanding as of the closing of the Offering. The power to issue preferred shares could have the effect of delaying or preventing a change in control of the Company even if a change in control were in the shareholders' interest, although the Company has no intent of issuing preferred shares for that purpose. CLASSIFIED BOARD. The Board of Trustees of the Trust and the Board of Directors of the Corporation have each been divided into three classes. The terms of the classes will expire in 1995, 1996 and 1997, respectively. Beginning in 1995, as the term of each class expires, trustees and directors for that class will be elected for a three-year term and the trustees and directors in the other two classes will continue in office. The staggered terms for Trustees and Directors may affect the shareholders' ability to change control of the Company even if a change in control were in the shareholders' interests. Directors of the Corporation may be removed only for cause upon the affirmative vote of two-thirds of the votes entitled to be cast for election. Trustees of the Trust are subject to removal with or without cause by the affirmative vote of two-thirds of the votes entitled to be cast for election. Any Trustee or Director appointed to a vacant trusteeship or directorship will hold office for a term expiring at the annual meeting at which the class to which they have been appointed expires. These provisions preclude shareholders of the Corporation from removing incumbent directors without cause. Maryland law grants shareholders of a 14 Maryland corporation the right, together with the board of directors, to fill vacancies created by the removal of a director. In the case of the Trust, however, the shareholders may not fill vacancies created by such removal with their own nominees. INFLUENCE OF STARWOOD CAPITAL Individuals employed by or otherwise affiliated with Starwood Capital hold two positions on the Board of Trustees of the Trust and two positions on the management committee of the Operating Partnership and will hold two positions on the Board of Directors of the Corporation subject to receipt of certain regulatory approvals. See "Management--Trustees and Executive Officers of the Trust" and "Management--Directors and Executive Officers of the Corporation." Accordingly, although the Company has a policy requiring a majority of its trustees and directors to be "independent" (see "Policies with Respect to Certain Activities-- Conflicts of Interest--Independent Board Approval"), Starwood Capital may have the ability to exercise certain influence over the affairs of the Company. Prior to the exchange by Starwood Capital of all of its Units for Paired Shares, Starwood Capital will experience different, and possibly more adverse, tax consequences than the Company and its shareholders upon the sale of certain properties or the restructuring or sale of certain mortgage loans. Therefore, Starwood Capital may be opposed to the sale of such properties or the restructuring or sale of the loans even though such a sale or restructuring might otherwise be in the best interest of the Company and its present shareholders. In addition, Starwood Capital's objectives regarding the pricing, structure and timing of any such sale may differ from the objectives of the shareholders of the Company or current management 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 Chief Executive Officer of the Trust. In addition, Mr. Sternlicht is a member of the management committee of the Operating Partnership and, upon the receipt of certain regulatory approvals, he will be a Director of the Corporation. As a consequence, Mr. Sternlicht has the ability to exercise certain influence over the affairs of the Company. The Reorganization was consummated pursuant to the terms of the Formation Agreement and other related agreements pursuant to which, among other things, Starwood Capital contributed cash, certain hotel properties and first mortgage notes to the Company. The principal rights which remain in favor of the Company relating to such contributions relate to the indemnification by Starwood Capital with respect to such contributions and the noncompetition agreement of Starwood Capital. See "Structure of the Company--Formation of the Partnerships and the Reorganization" and "Structure of the Company--Management of the Partnerships." Starwood Capital's aggregate liability in respect of such indemnification is limited to $5,000,000. To the extent that the Company chooses to enforce its rights under the Formation Agreement or any related agreement, it may determine to pursue available remedies, such as actions for damages or injunctive relief, less vigorously than it otherwise might because of its desire to maintain its ongoing relationship with Starwood Capital and related persons. Certain hotel assets not contributed by Starwood Capital to the Company in the Reorganization (the "Excluded Assets") owned by Starwood Capital do not currently, but may in the future compete with the Company if the Company were to invest in hotel properties in the same markets as such Excluded Assets. The Company has an option, under certain conditions, to purchase the Excluded Assets. The Company has adopted a policy that, as a general matter, it does not intend to acquire the Excluded Assets, except as described herein. See "Business and Properties--Excluded Assets and Related Matters." 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; competition from other hotels, motels and recreational properties; the recurring need for renovations, refurbishment and improvements of hotel properties; 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. 15 COMPETITION. The hotel industry is highly competitive. The properties of the Company compete with other hotel properties in their geographic markets. Some of the Company's competitors may have substantially greater marketing and financial resources than the Company. The Company may compete for acquisition opportunities with entities which have substantially greater financial resources than the Company. These entities may generally be able to accept more risk than the Company can prudently manage. Competition may generally reduce the number of suitable investment opportunities offered to the Company and increase the bargaining power of property owners seeking to sell. Further, management believes that it will face competition for acquisition opportunities from entities organized for purposes substantially similar to the objectives of the Company. FRANCHISE AGREEMENT RISKS. Upon completion of the Offering, all but eleven of the Company's Hotel Assets will be operated pursuant to existing franchise or license agreements (the "Franchise 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. Such standards are often subject to change over time, in some cases at the discretion of the franchisor, and may restrict a franchisee's ability to make improvements or modifications to a hotel property without the consent of the franchisor. In addition, compliance with such standards could require a franchisee to incur significant expenses or capital expenditures. Certain of the Franchise Agreements covering the Company's hotel properties expire or terminate, without specified renewal rights, at various times and have terms of differing lengths, some as short as one calendar year. As a condition to renewal, the Franchise Agreements frequently contemplate a renewal application process, which may require substantial capital improvements to be made to the hotel which would have the effect of reducing funds available for distribution by the Company. In addition, certain of the Franchise Agreements require the Company to obtain the consent of the franchisor to certain matters, including the Offering. Although the Company has received or is seeking consents under such agreements, the failure to obtain any such consent could be grounds for termination of such Franchise Agreements. 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. This seasonality can be expected to cause quarterly fluctuations in the revenues of the Company. As a result, the Trust may be required from time to time to borrow to provide funds necessary to make quarterly distributions. INVESTMENT CONCENTRATION IN SINGLE INDUSTRY. The current strategy of the Company is to concentrate its efforts in the hotel industry. The Company will not seek to invest in assets selected to reduce the risks associated with an investment in real estate in the hotel industry, and will be subject to risks inherent in investments in a single industry. GAMING. The Company's casino gaming facilities located in Las Vegas, Nevada are subject to extensive licensing and regulatory control by the Nevada Gaming Commission (the "Nevada Commission") and other Nevada authorities. These regulatory authorities have broad powers with respect to the licensing of gaming operations, and may revoke, suspend, condition or limit the gaming approvals and licenses of the Corporation and its gaming subsidiary, impose substantial fines and take other actions, any of which could have a material adverse affect on the Corporation's business and the going concern value of the Trust's hotel/ casinos. Directors, officers and certain key employees of the Corporation and its gaming subsidiary are subject to licensing or suitability determinations by the Nevada Commission and local gaming authorities. If the Nevada Commission were to find a person occupying any such position unsuitable, the Corporation would be required to sever its relationship with that person. Any beneficial holder of the Corporation's voting securities may be required to file an application, be investigated, and have his suitability as a holder of such securities determined if the Nevada Commission has reason to believe that such ownership would be inconsistent with the policies of the State of Nevada. Any person who acquires more than 5% of the Corporation Shares must report such acquisition to the Nevada Commission. Beneficial owners of more than 10% of the Corporation Shares must apply to be found suitable by the Nevada Commission. In addition, changes in control of the Corporation may not occur without the prior approval of the Nevada 16 Commission. The Company must file an application with the Nevada Commission and local gaming authorities requesting authority to consummate certain portions of the Reorganization, including the transfer of the Company's gaming assets to the Operating Partnership, licensure of the Operating Partnership and certain of the Company's officers and directors, and the related change of control of the Corporation as a result of the recent election of certain Directors of the Corporation. See "Structure of the Company--Formation of the Partnerships and the Reorganization" and "--Management of the Partnerships" and "Management-- Directors and Executive Officers of the Corporation." In the event such licenses and approval are not received, the Company may determine to dispose of such gaming assets. For a further discussion of these and other aspects of Nevada gaming regulations and control, see "Business and Properties--Regulation and Licensing." The operation of hotel/casinos in the Las Vegas area is highly competitive. The number of hotel rooms and casinos in the Las Vegas area has increased substantially in recent years. Competition for gaming customers also comes from other areas of the country, where gaming facilities have proliferated. Competition among hotel/casinos in Las Vegas involves not only the quality of casino, room, restaurant and convention facilities, but also room, food and beverage prices. The level of gaming activity at the Company's hotel/casinos varies significantly from time to time, principally as a result of general economic conditions and marketing efforts by, and occupancy rates at, the large hotel/casinos on the Las Vegas strip and other similar facilities in the general Las Vegas area. REAL ESTATE INVESTMENT RISKS GENERAL RISKS. Real property investments are subject to varying degrees of risk. The investment returns available from equity investments in real estate depend in large part on the amount of income earned and capital appreciation generated by the related properties as well as the expenses incurred. 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. Certain significant expenditures associated with an investment in real estate (such as mortgage payments, real estate taxes and maintenance costs) generally are not reduced when circumstances cause a reduction in revenue from the investment. 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 and tax laws), interest rate levels and the availability of financing. ILLIQUIDITY OF REAL ESTATE INVESTMENTS. 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. Such illiquidity limits the ability of the Company to vary its portfolio in response to changes in economic or other conditions. UNINSURED LOSS. The Company will carry comprehensive liability, fire and extended insurance covering all of the properties owned or operated by the Company, with policy specifications and insured limits customarily carried for similar properties. There are, however, certain types of losses (such as from wars or acts of God) that generally are not insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose capital invested in such properties, as well as the anticipated future revenues from such properties, while remaining obligated for any mortgage indebtedness or other financial obligations related to such properties. Any such loss would adversely affect the Company. Management believes that the properties currently held by the Company are adequately insured in accordance with industry standards. With respect to those properties in which the Company holds an interest through a mortgage position, the borrowers under such mortgage are obligated to the Company to maintain insurance on such properties and to arrange for the Company to be covered as a named insured on such policies. The face amount and scope of such insurance coverage may be less comprehensive than the Company would carry if it held the fee interest in such property directly. Accordingly, in such circumstances, or in the event that the borrowers under such mortgages fail to maintain required coverage, uninsured or underinsured losses may occur, which could have an adverse impact on the Company's cash flow or financial condition. 17 ACQUISITION RISKS. There can be no assurance that the Company will be able to implement its investment strategies successfully or that its property portfolio will expand at all, or at any specified rate or to any specified size. In addition, investment in additional hotel assets is subject to a number of risks. In particular, investments are expected to be financed with funds drawn under the Acquisition Facility, which would subject the Company to the risks described in "Risk Factors--Risk of Debt Financing; Prior Defaults." The Company does not intend to limit its investments to the markets in which the Hotel Assets are currently located. Consequently, to the extent that it elects to invest in additional markets, the Company will also be subject to the risks associated with investment in new markets, with which management may have relatively little experience and familiarity. Investment in additional hotel assets also entails other risks associated with real estate investment generally. DEVELOPMENT RISKS. The Company may, in the future, elect to engage in hotel development activities. See "Business Objectives and Growth Strategy--Operating Strategies." To the extent that the Company engages in such development activities, it will be subject to the risks normally associated with such activities. Such risks include, without limitation, risks relating to the availability and timely receipt of zoning and other regulatory approvals, the cost and timely completion of construction (including risks from causes beyond the Company's control, such as weather or labor conditions or material shortages) and the availability of both construction and permanent financing on favorable terms. These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent completion of development activities once undertaken, any of which could have an adverse effect on the financial condition and results of operations of the Company and on the amount of funds available for distribution to shareholders. INVESTMENTS IN MORTGAGE POSITIONS. The Company may invest in performing, non-performing and subperforming mortgages, generally as part of a strategy for ultimately acquiring the underlying property. In general, investments in mortgages include the risk that borrowers may not be able to make debt service payments or to pay principal when due, the risk that the value of mortgaged property may be less than the amounts owed, and the risk that interest rates payable on mortgages may be lower than the Company's cost of funds. In addition, borrowers may contest enforcement of foreclosure or other remedies, seek bankruptcy protection against such enforcement and/or bring claims for lender liability in response to actions to enforce mortgage obligations. If any of the above occurred, funds from operations and the Company's ability to make expected distributions to shareholders could be adversely affected. 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 rent such real property or to borrow using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic wastes may be liable for the costs of removal or remediation of such wastes at the disposal or treatment facility, regardless of whether such facility is owned or operated by such person. Other federal, state 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. In connection with its ownership, operation and management of its properties, the Company could be held liable for the costs of remedial action with respect to such regulated substances or tanks or related claims. Future remediation costs are not expected to have a material adverse effect on the Company's results of operations or financial position and compliance with environmental laws has not had and is not expected to have a material effect on the capital expenditures, earnings or competitive position of the Company. See "Business and Properties--Environmental Matters." ASBESTOS. Limited quantities of asbestos-containing materials ("ACMs") are present in various building materials such as floor coverings, acoustical tiles and decorative treatments located at certain hotel properties. The ACMs present at the hotel properties are generally in good condition, and possess low 18 probabilities for disturbance. The Company has implemented comprehensive operations and maintenance plans for hotel properties where ACMs are present or reasonably suspected. Property, custodial and maintenance staff workers have been trained to deal effectively with the in-place maintenance of ACMs. ACMs will be properly removed by the Company in the ordinary course of renovation and all damaged ACMs will be replaced immediately; however, in certain circumstances, the Company may determine to encapsulate rather than remove damaged ACMs. TRANSFORMERS. All of the hotel properties have electrical transformers located on site. According to federal regulations, transformers that have not been tested for polychlorinated biphenyls ("PCBs") are not considered PCB transformers. For regulatory purposes, however, such transformers must be considered to be PCB contaminated. Several hotel properties have transformers which contain or may contain PCBs. COSTS OF ADA COMPLIANCE. Under the Americans with Disabilities Act of 1990 (the "ADA"), "public accommodations" such as hotels are required to meet certain federal requirements related to access and use by persons with disabilities. Compliance with the ADA requirements could require both structural and non- structural changes to the properties of the Company and noncompliance could result in imposition of fines by the United States government or an award of damages to private litigants. Because the ADA became effective in 1992, the extent of its application to and its impact on the Company is uncertain. The Company believes that it has completed a substantial portion of the changes necessary to comply with the ADA and expects to complete all such changes which are currently contemplated prior to the end of 1995. It is possible that the Company could incur additional costs in complying with the ADA. If required changes involve additional expenditures, or must be made on a more accelerated basis than the Company currently anticipates, the ability to make expected distributions could be adversely affected. LIMITATION ON CONTROL OF PARTIALLY OWNED PROPERTIES. The Company owns partial interests in the Milwaukee Marriott Hotel and the Omaha Marriott Hotel (in addition to its holdings of mortgage notes). See "Business and Properties--The Hotel Assets." As a general partner in the partnerships holding such properties, the Company may have certain fiduciary responsibilities to other partners in those partnerships, which it will need to consider when making decisions that affect those properties (including decisions regarding sale, refinancing and the timing and amount of distributions therefrom). In addition, instead of acquiring properties directly in the future, the Company may invest as a co-venturer or partner. In such event, the Company may be at risk if other partners or co-venturers fail to fund their share of required capital contributions. In many instances, co-venturers or partners have equal control over the operation of joint venture assets and may have economic or business interests or goals which are inconsistent with the business interests or goals of the Company. However, the Company will seek to maintain sufficient control of such joint ventures to permit the Company's objectives to be achieved. The Company cannot assess the percentage of funds which the Company will invest in such joint venturers or partnerships, as such will depend on the opportunities identified and pursued by the Company. RISK OF DEBT FINANCING; PRIOR DEFAULTS Certain significant expenditures, including, in particular, mortgage payments and other indebtedness, related to real estate investments are generally not reduced when circumstances cause a reduction in income from the investment. Should such events occur, the Company's income and funds available for distribution would be adversely affected. Upon the completion of the Offering and the application of the proceeds therefrom, the Company will have approximately $45 million of indebtedness, representing a Ratio of Debt-to-Total Market Capitalization of approximately 9.5%. The Trust is currently negotiating for a $160 million line of credit to be provided by Lehman Brothers Holdings Inc., an affiliate of one of the Underwriters, and a $45 million mortgage loan repurchase financing to be provided by Lehman Commercial Paper Inc., an affiliate of such Underwriter. It is expected that $42 million will be outstanding on such mortgage loan repurchase financing at the consummation of the Offering. See "The Acquisition Facility and Other Financing." 19 As a result of incurring debt, the Company would be subject to the risks normally associated with debt financing, including the risk that cash flow from operations will be insufficient to meet required payments of principal and interest, the risk that existing debt will not be able to be refinanced or that the terms of such refinancings will not be as favorable to the Company and the risk that necessary capital expenditures for such purposes as renovations and other improvements will not be able to be financed on favorable terms or at all. In addition, the Company will be subject to the risk that its interest expense may increase upon the refinancing of existing debt if interest rates increase, which could adversely affect the ability to make distributions. From time to time in the past, the Trust was in default under its senior indebtedness (which is being repaid in full from the proceeds of the Offering) and was required to renegotiate such indebtedness in order to avoid foreclosure or other actions by the lenders. There can be no assurance that the Company will not default on indebtedness in the future. Neither the Trust's Declaration of Trust nor the Corporation's Articles of Incorporation contain any limitation on the amount or percentage of indebtedness the Corporation or the Trust may incur. Accordingly, the Boards could alter or eliminate the current policy limiting the amount of borrowing. See "Policies With Respect to Certain Activities--Financing." CERTAIN ASSETS RECENTLY ACQUIRED The Company has only recently acquired certain of the Hotel Assets and therefore the Company does not have an established operating history with respect to those Hotel Assets. Certain of the Hotel Assets contributed by Starwood Capital in the Reorganization were purchased by Starwood Capital in situations where the previous owner had over-leveraged those Hotel Assets. LIMITATION ON STARWOOD CAPITAL AND WESTIN OBLIGATIONS Starwood Capital has agreed that, subject to certain exceptions and limitations, for the longer of three years from the consummation of the Offering or the time at which no officer, director, general partner or employee of Starwood Capital is on either the Board of Trustees of the Trust or the Board of Directors of the Corporation, Starwood Capital will not compete with the Partnerships (the "Starwood Noncompete") and will present to the Partnerships certain investments in hotel properties in the United States. Mr. Sternlicht has also agreed to be bound to a similar noncompete agreement. See "Structure of the Company-- Management of the Partnerships." The termination of either of those noncompete agreements and the exceptions to and limitations thereon could have a material adverse effect on the Company. In addition, Starwood Capital owns an interest in the Westin Hotel Company and certain affiliates ("Westin"), which own equity interests in domestic and international hotels and which manage, franchise or represent hotels worldwide. The Company has entered into an agreement (the "Westin Agreement") with Westin pursuant to which Westin has agreed that, subject to certain exceptions and limitations, Westin will not acquire or seek to acquire United States hotel equity interests. See "Business and Properties--Excluded Assets and Related Matters" and "Structure of the Company--Management of the Partnership." The termination of the Westin Agreement and the exceptions to and limitations on the Westin Agreement could have a material adverse effect on the Company. In addition, the Company has agreed that under certain circumstances if Starwood Capital prohibits Westin from consummating an opportunity which was not being independently pursued by the Company prior to such prohibition, then the Company will not pursue such opportunity for a period of 270 days after such prohibition. 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 Trust's 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 Trust's 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 liability, the shareholders may, in some jurisdictions, be personally liable to the extent that 20 such claims are not satisfied by the Trust. Inasmuch as the Trust 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. NET LOSSES The Company incurred net losses for accounting purposes, on a combined basis, in each of the last five years. There can be no assurance that the Company will not experience net losses in the future. DILUTION EXPERIENCED BY PURCHASERS IN THE OFFERING The purchasers of the Paired Shares offered hereby will experience immediate dilution of $8.40 per Paired Share in the net tangible book value of the Paired Shares on a fully diluted basis. See "Dilution." CHANGES IN INVESTMENT AND FINANCING POLICIES WITHOUT SHAREHOLDER APPROVAL The investment and financing policies of the Company, and their policies with respect to certain other activities, including acquisitions, debt, capitalization, distributions, REIT status and operating policies, will be determined by the Board of Trustees of the Trust or the Board of Directors of the Corporation. Since the Trust is the sole general partner of the Realty Partnership and the Corporation will be the managing general partner of the Operating Partnership, the Board of Trustees of the Trust and the Board of Directors of the Corporation will also be able to establish policies for the Partnerships. Although neither the Board of Trustees of the Trust nor the Board of Directors of the Corporation has any present intention to do so, they may, by the approval of a majority of the independent Trustees or Directors, as the case may be, amend or revise these policies from time to time without notice to or a vote of the shareholders of the Trust or the Corporation. A change in these policies could adversely affect the financial condition or results of operations of the Trust or the Corporation. See "Policies with Respect to Certain Activities." Accordingly, shareholders will have no control over changes in these policies of the Trust, the Corporation or the Partnerships, except through their ability to elect new members to the Board of Trustees and the Board of Directors. THE COMPANY The Company was recently reorganized to combine and expand the hotel investment and operating businesses of the Company and Starwood Capital. Management believes that the Company's unique "paired share" ownership structure gives it a competitive advantage over other hotel REITs and other hotel owner/ operators with respect to owning and operating hotels, as discussed below. The Company has owned hotel assets since 1969 and has managed hotel assets since 1980. Starwood Capital has been an active opportunistic investor in the hotel industry over the last three years. Upon completion of the Offering, the Company will own, operate and manage a geographically diversified portfolio of hotel assets (the "Hotel Assets"), including fee, ground lease and first mortgage interests in 47 hotel properties, comprising over 9,440 rooms located in 20 states. Thirty-six of such hotels are operated under licensing or franchise agreements with national hotel organizations, including Marriott-TM-, Embassy Suites-TM-, Omni-TM-, Doubletree-TM-, Radisson-TM-, Residence Inn-TM-, Holiday Inn-TM-, Sheraton-TM-, Best Western-TM-, Days Inn-TM-, Ramada-TM-, Quality Inn-TM- and Harvey-TM-. As a fully integrated owner/operator of hotels, the Company will continue to make opportunistic hotel acquisitions and to improve performance of its existing portfolio through aggressive management. The Company expects to expand and diversify its hotel portfolio by continuing to acquire hotels, primarily in the mid-scale and upscale segments, at prices which are below replacement costs, and that have attractive yields on investment which the Company believes can be sustained and improved over time. Consistent with its strategy, the Company has recently acquired the Omni Hotel in Chapel Hill, North Carolina and agreed to acquire the Embassy Suites in Tempe, Arizona, and the Sheraton Colony Square in Atlanta, Georgia. The Company continually evaluates its portfolio and will sell assets when appropriate. The Company is actively pursuing the acquisition of other upscale and mid-scale hotels, and is currently negotiating a credit facility of $160 million, which will enable the Company to aggressively pursue and complete hotel acquisitions. See "The Acquisition Facility and Other Financing." 21 The Company's paired share ownership structure is unique for a hotel REIT because its shareholders own both the owner -- the Trust, and the 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 of the Trust's REIT status. The pairing arrangement creates total commonality of ownership, as the shares of beneficial interest of the Trust and the Common Stock of the Corporation are paired on a one for one basis and may only be held or transferred as units consisting of one Trust Share and one Corporation Share ("Paired Shares"). Under the REIT qualification requirements of the Code, REITs generally must lease their hotels to third party 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. 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 Share structure has existed since 1980. The Trust is the only publicly traded hotel REIT which has the Paired Share structure. For the twelve consecutive quarters through December 1994, the hotel industry has experienced demand increases, producing an aggregate increase in room night demand of 11.2%. During such period, net supply has only increased by 3.8%. Between 1993 and 1994, room demand, occupancy and room sales increased more rapidly in both upscale and mid-scale segments than lower-scale segments. The Company intends to focus on the acquisition, repositioning or refranchising and operation of upscale and mid-scale hotels. Management of the Company has improved the portfolio's performance during the two-year period ended December 31, 1994, despite certain restrictions imposed by the Company's lenders. During such period, the Company's management increased REVPAR (room revenue per available room, or total room revenues divided by available rooms) by 8.7% and increased EBITDA (net income excluding gains and losses from debt restructuring and sales of property, provision for losses, interest and depreciation and amortization) by 20.5% on the 21 continuously owned and operated properties. Upon the restructuring of the Company's debt in March 1995, restrictions imposed by prior lenders were removed and management now has more flexibility to acquire hotels and reinvest in its existing hotels. The Company anticipates continued internal growth from improving market conditions, improved property operations, renovations and reaffiliations. Upon completion of the Offering, Starwood Capital will own approximately 32.9% of the Company's equity (having a value of $141 million, assuming a public offering price of $23.50 per Paired Share, which is the midpoint of the range set forth on the cover page) on a fully diluted basis. Starwood Capital is a private real estate investment firm that since 1991 has acquired in excess of $1.25 billion (at cost) of real estate assets. Starwood Capital's investors include its principals and employees, certain high net worth families, three of the ten largest U.S. corporate pension funds and other institutional investors. During the past three years, Starwood Capital acquired over $575 million (at cost) of interests in hotel assets from insurance companies, banks, distressed borrowers, the Resolution Trust Corporation, the Federal Deposit Insurance Corporation and others. In January 1995, the Company completed the Reorganization in which Starwood Capital contributed to the Company several hotels, hotel mortgages, cash and other related assets. Starwood Capital has entered into a noncompetition agreement with the Company relating to the acquisition of new equity interests in hotel properties in the United States. See "Structure of the Company--Management of the Partnerships." Starwood Capital's experienced real estate acquisition and finance professionals, with their network of industry contacts, will continue to assist management in identifying acquisition opportunities and attractive sources of capital. 22 Upon completion of the Offering, the Company will have a ratio of debt to total capitalization (I.E., total consolidated debt of the Company as a percentage of the market value of all outstanding shares assuming the exchange of all exchangeable securities for shares, plus total consolidated debt ("Ratio of Debt-to-Total Market Capitalization")), of approximately 9.5%. The Company intends that such ratio not exceed 50%. Each Partnership is a Delaware limited partnership formed in 1994. The Trust conducts all of its business and operations through the Realty Partnership, and the Corporation, upon receipt of certain regulatory approvals, will conduct all of its business and operations through the Operating Partnership, which leases from the Realty Partnership all but three of the hotel properties owned by the Realty Partnership. The Company currently expects that future real estate acquisitions by the Trust will generally be made through the Realty Partnership and will be leased to and operated by the Operating Partnership. The Trust is the sole general partner of the Realty Partnership. Upon the receipt of certain regulatory approvals, the Corporation will be the managing general partner of the Operating Partnership. Starwood Capital is the limited partner of each Partnership. Certain assets are or may be held by partnerships or limited liability companies owned or controlled by the Company. See "Structure of the Company--General" and "--Management of the Partnerships." The gaming business of the Corporation is operated through a wholly-owned subsidiary of the Corporation, Hotel Investors Corporation of Nevada ("HI Nevada"), which operates two hotel/casinos located in Las Vegas, Nevada. See "Structure of the Company." On June 29, 1995, the Company entered into an agreement to sell the Bourbon Street Hotel & Casino in Las Vegas, Nevada to Crown Casino Corporation for a total price of $10 million. The Company would continue to operate the hotel and casino under a lease for up to 18 months pending licensing of the buyer by Nevada Gaming Authorities. The buyer's obligations under the agreement are conditioned on a satisfactory due diligence investigation and other customary conditions. There can be no assurance that the transaction will be completed. The Trust was organized in 1969 as a Maryland real estate investment trust. The Trust's executive offices are located at 11845 West Olympic Blvd., Suite 550, Los Angeles, California 90064; telephone (310) 575-3900. The Corporation is a Maryland corporation formed in 1980. The Corporation's executive offices are located at 11845 West Olympic Blvd., Suite 560, Los Angeles, California 90064; telephone (310) 575-3900. USE OF PROCEEDS The net proceeds to the Company from the Offering (after deducting expenses of the Offering estimated to be approximately $23.2 million) are estimated to be approximately $217.7 million (approximately $251.0 million if the Underwriters' over-allotment option is exercised in full). The Company will contribute the entire net proceeds from the Offering to the Realty Partnership and the Operating Partnership in return for a number of Units in each Partnership equal to the number of Paired Shares sold in the Offering. The Realty Partnership will receive 95%, or $206.8 million, of the net proceeds of the Offering. The Operating Partnership will receive 5%, or $10.9 million, of the net proceeds of the Offering. In addition the Realty Partnership will borrow $42 million under the Financing. The Company will use the foregoing, together with cash on hand ($12.1 million at March 31, 1995) as follows: approximately $205.4 million to repay existing indebtedness, which indebtedness has a weighted average interest rate of approximately 9.26% and a weighted average maturity of four years as of March 31, 1995 including $10.0 million used by the Realty Partnership to purchase the first trust deed on the Operating Partnership's Milwaukee hotel; approximately $53.9 million for acquisition of fee assets; and $0.8 million for other miscellaneous uses. If the Underwriters' over-allotment option is exercised in full, the additional net proceeds therefrom of $33.3 million will be contributed to the Partnerships for 1,537,500 additional Units and will reduce amounts outstanding under the Financing. 23 Pending application of the net proceeds, the Realty Partnership and the Operating Partnership will invest such portion of the net proceeds in interest-bearing accounts and short-term, interest-bearing securities, which, in the case of the Realty Partnership, are consistent with the Trust's intention to qualify for taxation as a REIT. Such investments may include, for example, obligations of the Government National Mortgage Association, other governmental and government agency securities, certificates of deposit, interest-bearing bank deposits and mortgage loan participations. DISTRIBUTION POLICY Following the completion of the Offering, the Trust intends to make regular quarterly distributions to its shareholders. The distribution for the period commencing on the closing date of the Offering and ending on September 30, 1995, is expected to be approximately equivalent to a quarterly distribution of $.47 per Paired Share and an annual distribution of $1.88 per Paired Share, or an annual distribution of 8%, assuming an offering price of $23.50 per Paired Share (which is the midpoint of the range set forth on the cover page). The Trust does not expect to change its estimated distribution rate if the Underwriters' over-allotment option is exercised. Neither the Trust nor the Corporation currently makes distributions to its shareholders. The Trust's previous senior debt, which was refinanced in March 1995, prohibited the Company from making distributions. Although the current loan agreements of the Companies (which are being repaid with the proceeds of the Offering) may contain provisions which restrict but do not prohibit distributions, management of the Company does not expect to agree to any provisions that would materially affect the Company's ability to make distributions. The estimate of cash available for distribution is based on pro forma net income of the Trust and the Corporation for the 12 months ended March 31, 1995, as adjusted for the impact of the Offering, the acquisition of the hotels acquired after such date and other known events. Except as reflected in the following table and the notes thereto, investing and financing activities are not expected to have a material adverse effect on cash available for distribution. See "Management's Discussion and Analysis of Pro Forma Financial Statements." In addition, distributions which are required in order to maintain the Trust's REIT status are not expected to limit cash available for investing and financing activities due to the availability of cash from the Acquisition Facility. See "The Acquisition Facility and Other Financing." The Acquisition Facility may be retired in whole or in part from the proceeds of public or private issuances of equity or debt securities and may be refinanced in whole or in part with fixed-rate financing. Because the Trust expects to distribute a substantial portion of the estimated cash available for distribution as described below, it expects that any funds required to repay any such refinanced debt or to fund investing and financing activities (in excess of recurring capital expenditures) will be raised primarily through further borrowings or from the issuance of additional equity or debt securities. The Trust believes its estimate of cash available for distribution constitutes a reasonable basis for setting the initial distribution, and the Trust expects to maintain its initial distribution rate for at least 12 months following the consummation of the Offering, unless actual results of operations, economic conditions or other factors differ from the assumptions used in calculating the estimate. The actual return that the Trust will realize may vary significantly from the estimate and will be affected by a number of factors, including the revenues received from its properties, the operating expenses of the Trust, the interest expense incurred on borrowings, interest earned on working capital and unanticipated capital expenditures. Because of the short- term effects of seasonal variations on the Company's operations, additional borrowings may be made in order to meet REIT distribution requirements on a quarterly basis. The estimate of cash available for distribution is being made solely for the purpose of setting the initial distribution amount and is not intended to be a projection or prediction of the Trust's results of operations. Pro forma results of operations do not purport to present the actual results that can be expected for future periods. No assurance can be given that the Trust's estimate will prove accurate. The Trust anticipates that its cash available for distribution, and the amount it distributes to shareholders, will exceed earnings and profits for federal income tax purposes due to non-cash expenses, primarily 24 depreciation and amortization and non-cash interest expense to be incurred by the Trust. The distribution for the 12 months following consummation of the Offering is expected to be approximately 89.6% of the estimated cash available for distribution by the Trust, respectively, for such period. The Trust estimates that it will be required to make approximately $2.4 million of distributions for the calendar year 1995 in order to maintain its REIT status. Based on the expected initial distribution amount and the Trust's anticipated taxable income, it is expected that approximately 17% of the distributions expected to be made during the 12 months following the consummation of the Offering will constitute a return of capital for federal income tax purposes. The following table illustrates the adjustments made by the Company to its combined pro forma net income for the 12 months ended December 31, 1994 to estimate the Trust's initial annual distributions. Cash available to the Corporation will be available to the Trust as a result of payments by the Corporation to the Trust with respect to outstanding intercompany indebtedness.
(IN THOUSANDS, EXCEPT DISTRIBUTION PER SHARE AND PAYOUT RATIOS) ----------------- Pro forma net income for the year ended December 31, 1994...................................... $ 14,368 Minority interest in Partnerships.............................................................. 6,959 ------- Pro forma income before minority interest for the year ended December 31, 1994................. 21,327 Adjustments: Less: Pro forma income before minority interest for the three months ended March 31, 1994.... (5,765) Plus: Pro forma income before minority interest for the three months ended March 31, 1995.... 6,833 ------- Pro forma income before minority interests for the 12 months ended March 31, 1995.............. 22,395 Non-cash adjustments: Depreciation and amortization(1)............................................................. 17,996 Other non-cash adjustments(2)................................................................ 3,064 ------- Pro forma funds from operations for the 12 months ended March 31, 1995 (3)..................... 43,455 Adjustments: Non-cash interest income(4).................................................................. (770) Reserve for recurring capital expenditures(5)................................................ (4,464) ------- Estimated cash available for distribution...................................................... $ 38,221 ------- ------- Expected annual distribution: To shareholders.............................................................................. 23,072 To Unitholders............................................................................... 11,174 ------- Expected annual distribution................................................................... $ 34,246 ------- ------- Expected annual distribution per share......................................................... $ 1.88 ------- ------- Expected cash available for distribution payout ratio(6)....................................... 89.6% ------- -------
- ------------ (1) Represents real estate depreciation expense of $16.8 million and amortization of reorganization expenses of $1.2 million related to the formation of the Partnerships. (2) Includes non-cash items recognized in income for the period presented as follows: $759,000 provision for losses on assets subsequently sold and $2,648,000 shareholder litigation expense (see "Certain Relationships and Related Transactions--Ross Agreement") net of $343,000 gain on sales of hotel assets. (3) Funds from operations, as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), represents income (loss) before minority interest (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of 25 property, plus real estate related depreciation and amortization (excluding amortization of financing costs), and after adjustments for unconsolidated partnerships and joint ventures. Funds from operations, therefore, does not represent cash generated from operating activities in accordance with generally accepted accounting principles and should not be considered an alternative to net income as an indication of the Company's performance or to cash flows from operating activities as a measure of liquidity or the ability to pay distributions. Management and industry analysts generally consider funds from operations to be one measure of the financial performance of an equity REIT that provides a relevant basis for comparison among REITs and it is presented to assist investors in analyzing the performance of the Company. (4) Represents the elimination of the effect of interest income recognized in excess of the actual cash received on mortgage notes receivable (as a result of the notes being purchased at a discount) secured by the Atlantic City Quality Inn and by the Secaucus Ramada Suites for the three months ended March 31, 1995 and the year ended December 31, 1994. See "Business and Properties--Mortgage Note Receivables." (5) Represents reserves for estimated recurring capital expenditures primarily for furniture, fixtures and equipment and for building and improvements preservation other than major renovations. This amount was calculated based on 5% of pro forma room revenues for the twelve month period ended March 31, 1995 in the amount of $89,284,000. Recurring pro forma capital expenditures on the Owned Hotels for the years ended December 31, 1994 and 1993 were $4,656,000 and $4,413,000, respectively. See "Business Objectives and Growth Strategy -- Implementation of Strategies" for management's plans for additional capital expenditures. (6) Calculated by dividing the estimated initial annual distributions by the estimated adjusted cash available for distribution. The Company's estimated pro forma funds from operations payout ratio, which is calculated by dividing the estimated initial annual dividends by the estimated pro forma funds from operations, is 78.8%. The Trust believes that the amounts not distributed will be sufficient to cover (i) recurring capital expenditures and (ii) other unforeseen cash needs. The Trust also will have available to it for such purposes available borrowing capacity under the Acquisition Facility and a portion of the net proceeds from the Offering. In order to maintain its qualification as a REIT, the Trust must make annual distributions to its shareholders of at least 95% of its taxable income (which does not include net capital gains). Under certain circumstances, the Trust may be required to make distributions in excess of cash available for distribution in order to meet such distribution requirements. In such event, the Trust (or the Realty Partnership) would seek to borrow the amount of the deficiency or sell assets to obtain the cash necessary to make the distributions necessary to retain the Trust's qualification as a REIT for federal income tax purposes. 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 Realty Partnership's properties, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Trustees deems relevant. For a discussion of the tax treatment of distributions to holders of Trust Shares, see "Federal Income Tax Considerations - -- Federal Income Taxation of the Trust" and "-- Federal Income Taxation of the Holders of Paired Shares." The Trust has not made a distribution to its shareholders since September 1990. The Corporation has not made any distributions since its inception and does not anticipate that it will make any such distributions in the foreseeable future. All available cash is expected to be used by the Operating Partnership to repay indebtedness to the Realty Partnership. 26 PRICE RANGES OF PAIRED SHARES The Paired Shares are traded principally on the New York Stock Exchange (the "NYSE") under the symbol "HOT." The following table sets forth, for the fiscal periods indicated, the high and low sales prices per Paired Share on the NYSE (after giving effect to an assumed one for six reverse stock split prior to the closing of the Offering).
PERIOD PRICE - ------------------------------ ----------------------- 1995 HIGH LOW --------- --- Second Quarter (through June 8)........................... $ 24 $ 21 3/4 First Quarter................. $26 1/4 $ 15 1994 Fourth Quarter................ $20 1/4 $ 15 3/4 Third Quarter................. $20 1/4 $ 17 1/4 Second Quarter................ $ 18 $ 9 3/4 First Quarter................. $ 15 $ 11 1/4 1993 Fourth Quarter................ $20 1/4 $ 12 Third Quarter................. $18 3/4 $ 9 3/4 Second Quarter................ $ 15 $ 7 1/2 First Quarter................. $10 1/2 $ 6
The high and low prices per Paired Share on the NYSE on June 8, 1995 were $23 1/4 and $21 3/4, respectively (after giving effect to an assumed one for six reverse stock split). As of June 6, 1995, there were approximately 2,056 holders of record of Paired Shares. Neither the Trust nor the Corporation has paid any dividends in the periods set forth in the table above. 27 CAPITALIZATION The combined capitalization of the Trust and the Corporation as of March 31, 1995, and the pro forma capitalization as adjusted to reflect the completion of the Offering (assuming no exercise of the Underwriters' overallotment option) is set forth below. The information set forth below should be read in conjunction with the combined historical financial statements and notes thereto, the unaudited pro forma financial information and notes thereto and the discussion set forth in "Management's Discussion and Analysis of Pro Forma Financial Statements," in each case included elsewhere in this Prospectus.
MARCH 31, 1995 ----------------------- HISTORICAL PRO FORMA ---------- ----------- (IN THOUSANDS) DEBT Secured notes payable.................................................................... $ 130,360 $ 42,000 Mortgage and other notes payable......................................................... 68,195 2,874 ---------- ----------- Total long-term debt..................................................................... 198,555 44,874 ---------- ----------- MINORITY INTEREST........................................................................ 58,887 91,617 ---------- ----------- SHAREHOLDERS' EQUITY Trust shares of beneficial interest, $.01 par value; authorized 100,000,000 shares; outstanding 2,022,158 shares; 12,272,158 pro forma...................................... 20 123 Corporation Common Stock; $.01 par value; authorized 100,000,000 shares; outstanding 2,022,158 shares; 12,272,158 pro forma.................................................. 20 123 Excess shares(1) Additional paid-in capital............................................................... 222,257 407,038 Accumulated deficit...................................................................... (214,541) (217,866) ---------- ----------- Total equity......................................................................... 7,756 189,418 ---------- ----------- Total capitalization................................................................. $ 265,198 $ 325,909 ---------- ----------- ---------- -----------
- ------------ (1) The Trust has authorized Excess Common Shares and Excess Preferred Shares of 20,000,000 and 5,000,000, respectively, none outstanding. The Corporation has authorized Excess Common Stock and Excess Preferred Stock of 20,000,000 and 5,000,000, respectively, none outstanding. 28 DILUTION At March 31, 1995, the Company had a combined net tangible book value of approximately $57.8 million or $7.26 per Paired Share (assuming for this purpose the exchange of all Units held by Starwood Capital for Paired Shares without regard to the Ownership Limitation). Without taking into account any other changes in such pro forma net tangible book value after March 31, 1995 other than to give effect to the completion of the Offering at a public offering price of $23.50 per Paired Share (the midpoint of the range set forth on the cover page, before deducting underwriting discounts and commissions and estimated offering expenses payable by the Company) the pro forma net tangible book value at March 31, 1995 would have been approximately $275.0 million or $15.10 per Paired Share (assuming for this purpose the exchange of all Units held by Starwood Capital for Paired Shares without regard to the Ownership Limitation). This amount represents an immediate increase in pro forma net tangible book value per Paired Share of $7.84 to holders of Paired Shares previously outstanding and an immediate dilution in pro forma net tangible book value per share to new investors of approximately $8.40 per Paired Share. The following table illustrates this dilution: Assumed public offering price per Paired Share(1).................... $ 23.50 Net tangible book value per Paired Share as of March 31, 1995........ $ 7.26 Increase in net tangible book value per Paired Share attributable to the Offering........................................................ $ 7.84 --------- Pro forma net tangible book value per Paired Share after completion of the Offering(2).................................................. 15.10 --------- Dilution per Paired Share purchased in the Offering(3)............... $ 8.40 --------- ---------
- ------------ (1) Before deducting underwriting discount and estimated expenses of the Offering. (2) Net tangible book value per Paired Share is determined by subtracting total combined liabilities from total combined tangible assets and dividing the remainder by the number of Paired Shares and Units that will be outstanding after the Offering. SELECTED COMBINED FINANCIAL DATA The following table sets forth selected combined historical and pro forma financial information for the Company. The following information should be read in conjunction with (i) the historical financial statements and notes thereto for the Company, (ii) Management's Discussion and Analysis of Financial Condition and Results of Operations, and (iii) the pro forma financial statements and notes thereto for the Company, which are included elsewhere in this Prospectus. The historical operating information of the Company as of December 31, 1994 and 1993 and for each of the three years in the period ended December 31, 1994 have been derived from audited financial statements which are included elsewhere in this Prospectus. The comparable data as of December 31, 1992, 1991 and 1990 and for the years ended December 31, 1991 and 1990 have been derived from financial statements that are not required to be included in this Prospectus. In the opinion of management, the financial data as of March 31, 1995 and for the three months ended March 31, 1995 and 1994 include all adjustments necessary to present fairly the information set forth therein. The pro forma operations data and other data for the three months ended March 31, 1995 and for the year ended December 31, 1994 have been prepared as if the Offering and the acquisition of the hotel properties acquired or to be acquired and (with respect to the December 31, 1994 data) the Reorganization had been consummated at the beginning of the period presented, and the pro forma balance sheet data has been prepared as if the Offering and the acquisition of the hotel properties acquired or to be acquired had been consummated on March 31, 1995. The pro forma financial information is not necessarily indicative of what the actual financial position and results of operations of the Company would have been as of and for the periods indicated, nor does it purport to represent the Company's future financial position and results of operations. 29 STARWOOD LODGING SUMMARY COMBINED SELECTED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA AND ROOM INFORMATION)
FOR THE THREE MONTHS ENDED MARCH 31, AS OF AND FOR THE YEAR ENDED DECEMBER 31, --------------------------------- ------------------------------------------------------- PRO FORMA HISTORICAL PRO FORMA HISTORICAL ----------- -------------------- ----------- ------------------------------------------ 1995 1995(4) 1994 1994 1994 1993 1992 1991 ----------- --------- --------- ----------- --------- --------- --------- --------- OPERATING DATA: REVENUE Hotel.............................. $ 30,908 $ 22,781 $ 20,586 $ 125,767 $ 82,668 $ 86,903 $ 88,812 $ 85,156 Gaming............................. 6,669 6,669 7,188 27,981 27,981 27,505 26,150 22,609 Interest from mortgage and other notes............................. 2,586 2,581 355 10,069 1,554 1,412 1,348 1,761 Rents from other leased hotel properties........................ 159 159 150 927 927 839 947 936 Management fees and other income... 61 61 59 411 411 475 1,186 1,376 Gain (loss) on sales of hotel assets............................ (113) (113) -- 456 456 21 (787) 1,598 ----------- --------- --------- ----------- --------- --------- --------- --------- 40,270 32,138 28,338 165,611 113,997 117,155 117,656 113,436 ----------- --------- --------- ----------- --------- --------- --------- --------- EXPENSES: Hotel operations................... 21,077 16,280 15,568 90,639 60,829 68,132 68,620 65,693 Gaming operations.................. 6,021 6,021 5,993 24,454 24,454 24,055 23,699 21,948 Interest........................... 841 5,827 4,125 3,365 17,606 15,187 14,208 16,458 Depreciation and amortization...... 4,426 2,863 2,066 18,130 8,161 9,232 10,196 11,688 Administrative and operating....... 1,072 1,068 921 4,289 4,203 4,729 6,177 6,086 Shareholder litigation expense..... -- -- -- 2,648 2,648 483 188 -- Loan restructuring................. -- -- -- -- -- -- 10,892 3,797 Provision for losses............... -- -- -- 759 759 2,369 3,419 9,580 ----------- --------- --------- ----------- --------- --------- --------- --------- 33,437 32,059 28,673 144,284 118,660 124,187 137,399 135,520 ----------- --------- --------- ----------- --------- --------- --------- --------- Income (loss) before minority interest in Partnership........... 6,833 79 (335) 21,327 (4,663) (7,032) (19,743) (22,084) Minority interest in Partnership(1).................... 2,230 94 -- 6,959 -- -- -- -- ----------- --------- --------- ----------- --------- --------- --------- --------- Income (loss) before extraordinary item.............................. 4,603 (15) (335) 14,368 (4,663) (7,032) (19,743) (22,084) Extraordinary item................. -- 363 -- -- -- -- -- -- ----------- --------- --------- ----------- --------- --------- --------- --------- Net income (loss).................. $ 4,603 $ 348 $ (355) $ 14,368 $ (4,663) $ (7.032) $ (19,743) $ (22,084) ----------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- --------- ----------- --------- --------- --------- --------- Net income (loss) per share........ $ 0.38 $ 0.17 $ (0.17) $ 1.17 $ (2.31) $ (3.48) $ (9.73) $ (10.92) ----------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- --------- ----------- --------- --------- --------- --------- BALANCE SHEET DATA: Total real estate investments...... $ 310,679 $ 246,113 $ 165,496 $ 179,172 $ 187,753 $ 200,540 Total assets....................... 340,719 279,765 183,955 195,352 210,945 221,917 Total debt......................... 44,874 198,555 160,482 170,886 170,297 171,271 Shareholders' equity............... 189,418 7,756 8,708 13,326 20,351 40,083 OTHER DATA: Funds from operations(2)........... $ 11,372 $ 3,055 $ 1,731 $ 42,408 $ 6,449 $ 5,031 $ 5,739 $ 1,383 EBITDA(3).......................... $ 12,213 $ 8,882 $ 5,856 $ 45,773 $ 24,055 $ 20,218 $ 19,947 $ 17,841 EBITDA margin (% of total revenues)......................... 30% 28% 21% 28% 21% 17% 17% 16% Cash flows from: Operating activities............. $ (686) $ 1,630 -- $ 8,893 $ 5,532 $ 4,690 $ (6,158) Investing activities............. (1,738) (531) -- 4,489 (3,645) (1,514) 12,159 Financing activities............. 9,479 50 -- (13,969) (6,752) (1,255) (7,139) Dividends.......................... -- -- -- -- -- -- -- Dividends per share................ -- -- -- -- -- -- -- Number of hotel rooms (Hotel Assets)........................... 9,440 8,586 7,059 9,618 6,409 7,059 7,423 7,549 Revenue per available room (Owned Hotels)........................... $ 43.58 $ 40.42 $ 38.36 $ 43.59 $ 38.60 $ 35.66 $ 33.07 $ 30.86 Average daily room rate (Owned Hotels)........................... $ 64.86 $ 61.30 $ 57.06 $ 62.99 $ 55.55 $ 54.53 $ 53.04 $ 52.04 Average occupancy (Owned Hotels)... 67% 66% 67% 69% 69% 65% 62% 59% 1990 --------- OPERATING DATA: REVENUE Hotel.............................. $ 85,515 Gaming............................. 25,439 Interest from mortgage and other notes............................. 2,813 Rents from other leased hotel properties........................ 942 Management fees and other income... 2,315 Gain (loss) on sales of hotel assets............................ -- --------- 117,024 --------- EXPENSES: Hotel operations................... 65,223 Gaming operations.................. 23,995 Interest........................... 16,408 Depreciation and amortization...... 14,850 Administrative and operating....... 5,987 Shareholder litigation expense..... -- Loan restructuring................. -- Provision for losses............... 18,147 --------- 144,610 --------- Income (loss) before minority interest in Partnership........... (27,586) Minority interest in Partnership(1).................... -- --------- Income (loss) before extraordinary item.............................. (27,586) Extraordinary item................. -- --------- Net income (loss).................. $ (27,586) --------- --------- Net income (loss) per share........ $ (13.65) --------- --------- BALANCE SHEET DATA: Total real estate investments...... $ 218,896 Total assets....................... 240,998 Total debt......................... 166,651 Shareholders' equity............... 62,104 OTHER DATA: Funds from operations(2)........... $ 5,411 EBITDA(3).......................... $ 21,819 EBITDA margin (% of total revenues)......................... 19% Cash flows from: Operating activities............. $ 6,262 Investing activities............. (7,058) Financing activities............. 6,442 Dividends.......................... $ 7,644 Dividends per share................ $ 0.63 Number of hotel rooms (Hotel Assets)........................... 8,068 Revenue per available room (Owned Hotels)........................... $ 32.07 Average daily room rate (Owned Hotels)........................... $ 52.94 Average occupancy (Owned Hotels)... 61%
- --------------- (1) Represents the 32.6% minority interest in the Partnerships which Starwood Capital will own after the Offering for the pro forma periods ended December 31, 1994 and March 31, 1995 and the 71.7% minority interest in the Partnerships for the historical period ended March 31, 1995. 30 (2) Management and industry analysts generally consider funds from operations to be one measure of the financial performance of an equity REIT that provides a relevant basis for comparison among REITs and it is presented to assist investors in analyzing the performance of the Company. Funds from operations is defined as income before minority interest (computed in accordance with generally accepted accounting principles), excluding gains (losses) from debt restructuring and sales of property, provision for losses, and real estate related depreciation and amortization (excluding amortization of financing costs). Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs. Funds from operations should not be considered an alternative to net income as an indication of the Company's financial performance or as an alternative to cash flows from operating activities as a measure of liquidity. Funds from operations include $801,000 and $236,000 of interest income recognized in excess of the actual cash received on mortgage note receivables (as a result of the notes being purchased at a discount) secured by the Atlantic City Quality Inn and by the Secaucus Ramada Suites for the three months ended March 31, 1995 and the year ended December 31, 1994. (3) Management considers EBITDA to be one measure of the cash flows from operations of the Company before debt service that provides a relevant basis for comparison among REITs and it is presented to assist investors in analyzing the performance of the Company. EBITDA is defined as income before minority interest excluding gains and losses from debt restructuring and sales of property, provision for losses, interest and depreciation and amortization. EBITDA should not be considered as an alternative to net income as an indication of the Company's financial performance or to cash flows from operating activities as a measure of liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's needs. (4) The historical combined information of the Company presented for the three months ended March 31, 1995 reflects the consolidation of the Partnerships into the Trust and the Corporation in order to facilitate a comparison with the prior historical information of the Company and the pro forma information. 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA FINANCIAL STATEMENTS PRO FORMA RESULTS OF OPERATIONS--FOR THE YEAR ENDED DECEMBER 31, 1994 On a pro forma basis, after giving effect to the Reorganization, the acquisition of hotel properties acquired or to be acquired after the Reorganization and the Offering, pro forma income before minority interest of the Company for the year ended December 31, 1994 was $21.3 million, as compared to a historical net loss of $4.7 million for such year. During 1994, pro forma hotel revenues increased by $43.1 million or 52.1%, to $125.8 million and hotel expenses increased by $29.8 million or 49.0% to $90.6 million. The increases represent the effects of (i) the contribution by Starwood Capital of the Doubletree Hotel located in Rancho Bernardo, California; the Capitol Hill Suites located in Washington, D.C.; the Harvey Wichita located in Wichita, Kansas and the French Quarter Suites located in Lexington, Kentucky; (ii) the recently acquired Omni Hotel located in Chapel Hill, North Carolina; and the two hotels which the Company has recently agreed to acquire, which are the 224-all suite Embassy Suites located in Tempe, Arizona and the 462-room Sheraton Colony Square located in Atlanta, Georgia; and (iii) in the case of hotel expenses, the elimination of third-party management fees at five continuously owned hotels (as well as five hotels which were contributed or acquired) offset partly by increases in the Company's general and administrative expenses, resulting in a net expense reduction of approximately $2.4 million. The following table summarizes, for the Owned Hotels, average occupancy, average room rates and revenue per available room on a pro forma basis in comparison to historical amounts for the year ended December 31, 1994:
HISTORICAL PRO FORMA ----------- ----------- Occupancy Rate............................................................................ 69.0% 69.3% Average Room Rate......................................................................... $ 55.55 $ 62.99 Revenue Per Available Room................................................................ $ 38.60 $ 43.59
Hotel expenses as a percentage of hotel revenues decreased from 73.6% to 72.1%; net operating income from hotel operations increased 61.0% from $21.8 million to $35.1 million. Interest from mortgage and other notes increased from $1.6 million for the historical year ended December 31, 1994 to $10.1 million on a pro forma basis, an increase of $8.5 million. The increase in interest income represents the additional interest from the five Mortgage Note Receivables contributed by Starwood Capital in the Reorganization. Interest expense decreased from $17.6 million to $3.4 million on a pro forma basis after applying a portion of the proceeds from the Offering to pay off $205.4 million of indebtedness. See "--Liquidity and Capital Resources" below. Depreciation and amortization expense increased from $8.2 million to $18.1 million on a pro forma basis as a result of the addition of the hotels discussed above and $1.2 million of amortization of costs relating to the Reorganization. 32 FUNDS FROM OPERATIONS Management believes that FFO is one measure of the financial performance of an equity REIT. Funds from operations, on a pro forma basis, increased to $42.4 million from $6.4 million on a historical basis for the year ended December 31, 1994 and to $11.4 million from $3.1 million for the three months ended March 31, 1995. The following table shows the calculation of funds from operations for the indicated periods:
THREE MONTHS ENDED TWELVE MONTHS ENDED MARCH 31, 1995 DECEMBER 31, 1994 ------------------------ ------------------------ PRO FORMA HISTORICAL PRO FORMA HISTORICAL ----------- ----------- ----------- ----------- (IN THOUSANDS) Net income (loss) before minority interest........................ $ 6,833 $ 79 $ 21,327 $ (4,663) Depreciation and amortization..................................... 4,426 2,863 18,130 8,161 Gain (loss) on sales of hotel assets.............................. 113 113 (456) (456) Other adjustments (1)............................................. -- -- 3,407 3,407 ----------- ----------- ----------- ----------- FUNDS FROM OPERATIONS (2)..................................... $ 11,372 $ 3,055 $ 42,408 $ 6,449 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
- --------------- (1) Includes non-cash items recognized in income for the period: $759,000 provision for losses on assets subsequently sold and $2,648,000 shareholder litigation expense. (2) Management and industry analysts generally consider funds from operations to be one measure of the financial performance of an equity REIT that provides a relevant basis for comparison among REITs and it is presented to assist investors in analyzing the performance of the Company. Funds from operations is defined as income before minority interest (computed in accordance with generally accepted accounting principles), excluding gains (losses) from debt restructuring and sales of property, provision for losses, and real estate related depreciation and amortization (excluding amortization of financing costs). Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs. Funds from operations should not be considered an alternative to net income as an indication of the Company's financial performance or as an alternative to cash flows from operating activities as a measure of liquidity. Funds from operations include $801,000 and $236,000 of interest income recognized in excess of the actual cash received on mortgage note receivables (as a result of the notes being purchased at a discount) secured by the Atlantic City Quality Inn and by the Secaucus Ramada Suites for the three months ended March 31, 1995 and the year ended December 31, 1994. LIQUIDITY AND CAPITAL RESOURCES On a pro forma basis as of March 31, 1995 after giving effect to the Offering and the application of the proceeds of the Offering as set forth in "Use of Proceeds", the Company's mortgage indebtedness will consist primarily of obligations pursuant to the Financing. The Company's Ratio of Debt-to-Total Market Capitalization would be approximately 9.5% on a pro forma basis as of March 31, 1995. As part of its investment strategy, the Company plans to acquire additional hotels in the future. The Company has recently acquired the 168-room Omni Hotel located in Chapel Hill, North Carolina, and expects to acquire the 224-room Embassy Suites in Tempe, Arizona, and the 462-room Sheraton Colony Square in Atlanta, Georgia. Future acquisitions are expected to have a positive impact on Funds from Operations. The Company expects to fund future acquisitions through use of the Acquisition Facility or other borrowings and the issuance of additional Paired Shares or additional Partnership Units to raise additional equity capital. The source of capital to be used to fund the Company's operating expenses, interest expense, and recurring capital expenses will be cash flow provided by operating activities. The Company anticipates that its cash flow provided by operating activities will provide the necessary funds on a short and long term basis for its operating expenses, interest expense on outstanding indebtedness, recurring capital expenditures (estimated at $4.5 million for the twelve months ended March 31, 1995 based on five percent of pro forma room revenues of $89.3 million) and all distributions to shareholders. Sources of capital for major building renovations and expansions are expected to be obtained from: (i) excess funds from operations; (ii) additional debt financing, and (iii) additional equity raised in the public and private markets. The Company intends to incur additional indebtedness in a manner consistent with its policy of maintaining a Ratio of Debt-to-Total Market Capitalization of not more than 50%. Management believes that it will have access to capital resources sufficient to satisfy the Company's cash requirements and expand and develop its business in accordance with its strategy for future growth. 33 SEASONALITY Demand is affected by normally recurring seasonal patterns. For most of the Company's hotels, demand is higher in the spring and summer months (April through September) than during the remainder of the year. Accordingly, the Company's operations are seasonal in nature, with lower revenue, operating profit and cash flow in the first and fourth quarters due to decreased travel during the winter months. INFLATION The rate of inflation as measured by changes in the average consumer price index has not had a material effect on the revenues or operating results of the Company during the three most recent fiscal years. EBITDA--EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION Management believes that there are several important factors that contribute to the ability of the Company to improve profitability of its hotel properties, including increased average occupancy, average rate and effective cost management. Each of these factors has a significant effect on EBITDA. While management believes that Funds from Operations will be the principal factor considered by the Board of Directors in determining the amount of cash distributions the Company will make to stockholders (see "Distribution Policy"), management further believes that EBITDA is an effective measure of operating performance because: (1) it is industry practice to evaluate hotel properties based on operating income before interest, depreciation and amortization, which is generally equivalent to EBITDA, and (2) EBITDA is unaffected by the debt and equity structure of the property owner. Neither Funds from Operations nor EBITDA (i) represents cash flow from operations as defined by generally accepted accounting principles, (ii) is necessarily indicative of cash available to fund all cash flow needs or (iii) should be considered as an alternative to net income for purposes of evaluating the Company's operating performance. EBITDA for the hotel properties owned and operated by the Company increased from $21.8 million or 26% of hotel revenues, for the historical year ended December 31, 1994 to $35.1 million, or 28% of hotel revenues, on a pro forma basis and increased from $6.5 million, or 29% of hotel revenues, for the historical period ended March 31, 1995 to $9.8 million, or 32% of hotel revenues, on a pro forma basis for the same period. BUSINESS OBJECTIVES AND GROWTH STRATEGY BUSINESS OBJECTIVES The Company's primary objective is to increase per share funds from operations and to maximize the long-term total return to its shareholders. The Company believes it can accomplish these objectives by continuing to acquire attractively-priced mid-scale and upscale hotels, and continuing to refurbish existing hotels and improve hotel operations. The Company intends to maximize the advantages of its Paired Share structure by operating the hotels it owns, thereby eliminating the economic costs and conflicts of interest which arise when hotels are leased to third party operators. The Company's mission is to be a cost-efficient owner of quality accommodations providing superior service and value to the consumer. Since completing its Reorganization with Starwood Capital on January 31, 1995, the Company has implemented its acquisition and operating strategies by acquiring, or agreeing to acquire, three upscale, full service hotels containing 854 rooms, by initiating major renovations at the Company's Dallas Park Central Hotel and Portland Riverside Inn, and by assuming management of several owned hotels. ACQUISITION STRATEGIES Management will seek to expand and diversify the hotel portfolio by continuing to acquire hotels, primarily in the mid-scale and upscale industry segments, in selected markets throughout the United States. The Company believes the current environment for hotel acquisitions is attractive for a well capitalized, opportunistic investor due to the historical overbuilding, deflated values, and relative illiquidity that presently characterize the hotel market. Management seeks to acquire well located and constructed hotels at significant discounts to replacement cost and at attractive returns with potential for cash flow growth and 34 long term capital appreciation. Starwood Capital's experience and extensive real estate and finance industry contacts will be used to identify opportunistic situations and negotiate acquisitions using some of the following criteria: UPSCALE AND MID-SCALE PROPERTIES. The Company will concentrate its acquisition efforts on properties which are or can be affiliated with such hotel chains as Marriott-TM-, Embassy Suites-TM-, Westin-TM-, Hyatt-TM-, Hilton-TM-, Sheraton-TM-, Omni-TM-, Radisson-TM-, Doubletree-TM-, Residence Inn-TM-, Le Meridien-TM-, Intercontinental-TM- and others because management believes: - these segments offer numerous opportunities to acquire hotels for significant discounts to replacement cost and at attractive multiples of EBITDA; - current supply growth remains low and new construction of these types of hotels is generally more costly and requires longer lead times to plan, finance, and construct than lower scale hotels; and - the Company is experienced in acquiring and operating these types of properties. ABILITY TO SELF-MANAGE. The Company intends to acquire hotels where it can immediately assume the management thereof because: - self-management enables the Company to capture the economic benefits otherwise retained by a third-party operator; - self-management enables the Company to directly control the operations of those hotels; - in the case of "turn-around" situations, the Company believes its management team is experienced in implementing renovations, expansions, hotel chain affiliations and other techniques which improve cash flow and asset values; and - the Company does not intend to manage properties in which the Company does not have a substantial economic interest. PREFERRED MARKETS. The Company intends to target acquisitions of hotels in markets: - where favorable demographic trends exist, such as population, job and corporate growth; - near historically stable demand generators, such as major universities, medical centers, government agencies and major office complexes; - near the Company's existing hotels, where the Company can draw on its knowledge of local market conditions and may realize operating efficiencies from ownership of multiple properties; or - where barriers to new supply exist such as restrictive zoning or scarcity of land. OPPORTUNISTIC SITUATIONS. The Company will seek investments where competitive bidding can be minimized and where: - the Company can employ its ready access to capital to satisfy sellers who require certainty and speed to close a sale; - the Company's ability to offer partnership units will permit it to satisfy owners who seek to dispose of properties on a tax-deferred basis to such owners; or - hotel equity can either be acquired or controlled through the purchase of debt. OPERATING STRATEGIES The Company continually seeks to improve the profitability of its hotel assets using the following strategies: SELF MANAGEMENT. Substantially all of the Company's hotels are operated by the Company, and the Company intends to manage most of the remaining hotels at the earliest practicable date. The Company's mission is to offer consistent high quality accommodations and service at competitive rates in order to provide superior value to its customers. When the Company assumes the management of a hotel, it seeks to become a cost-efficient provider of quality accommodations and service by standardizing and upgrading 35 reporting and control systems and implementing its computerized on-line accounting system, establishing consistent performance-based compensation programs for hotel-level managers, and ensuring that proper preventive maintenance and cost saving energy upgrades are timely installed. MAJOR CAPITAL RENOVATIONS. Major renovations have been completed at the Milwaukee Marriott and the Harvey Wichita and cash flows have improved substantially. With the proceeds of the Offering, renovations are expected to begin in 1995 at the Dallas Park Central, the Portland Riverside Inn and the Lexington French Quarter Suites and the Capitol Hill Suites. Management believes these renovations will significantly increase the cash flows of these hotels. See "--Implementation of Strategies" below. REAFFILIATIONS AND MINOR RENOVATIONS. Management believes operating performance at several of the Company's hotels can be improved through modest upgrading of the hotel's physical plant or from the affiliation with a national franchise and reservation system. The Company has executed with Radisson a franchise agreement for the Dallas Park Central, and is considering franchise reaffiliations for its Lexington French Quarter Suites, Tucson Plaza and Seattle Meany Tower hotels. REDEPLOYMENT OF CAPITAL. The Company has historically sold and intends, if appropriate, to sell assets in the future if they exhibit limited upside potential. The Company is exploring several alternatives for its gaming assets. See "The Company." DEVELOPMENT STRATEGY The Company may expand the number of rooms at certain high occupancy hotels and, in the future, may selectively develop new hotels in certain submarkets. FINANCING STRATEGIES The Company believes that in order to continue to maximize the value of its shareholders' equity and to execute its growth strategies, it is essential to implement and periodically review a diversified financing strategy that (i) incorporates long-term, secured and unsecured corporate debt, (ii) minimizes exposure to fluctuations of interest rates, and (iii) maintains maximum flexibility to manage the Company's short-term cash needs. Furthermore, the Company believes that its capital structure will be conducive to and allow flexibility for the aggressive growth which the Company seeks to achieve. Management currently plans to maintain a conservative Ratio of Debt-to-Total Market Capitalization that does not exceed 50%. Upon consummation of the Offering, the Company's Ratio of Debt-to-Total Market Capitalization will be approximately 9.5%. The Company believes that a conservative leverage policy, coupled with a diversified portfolio of assets, will position the Company to access flexible and cost-efficient forms of financing in the capital markets. IMPLEMENTATION OF STRATEGIES Since completing its Reorganization on January 31, 1995, the Company has implemented its acquisition and operating strategies by acquiring or agreeing to acquire approximately $65 million of upscale, full service hotels containing 854 rooms, and by planning major renovations at several of the Company's Owned Hotels, as described below: OMNI CHAPEL HILL. On April 6, 1995, the Company completed the acquisition and assumed management of the Omni Chapel Hill Hotel, a 168-room upscale hotel located near such stable demand generators as the University of North Carolina, Raleigh Research Triangle Park and the Duke University Medical Center. The Omni has historically experienced annual occupancy levels lower than its competitors (56% vs. 64% and 65% vs. 68% in 1993 and 1994, respectively) and management believes that this situation can be reversed given the quality of the hotel relative to the competition and the hotel's potential ability to attract a greater share of weekend demand due to its proximity to the University of North Carolina. In addition, the Company believes that the opportunity exists to increase REVPAR through increased penetration in the corporate segment of the market. This potential is evidenced by the more than 13 percent increase in REVPAR for the full array of hotels (I.E., all product types) in 1994 in the Chapel Hill-Raleigh Durham market area as compared to 1993 and a compound annual growth rate in excess of 10 percent since 1991. Consistent with the Company's acquisition strategies, management believes the purchase price of $10.5 36 million (approximately $64,000 per room) represents an estimated 29% discount to an estimated replacement cost (in excess of $90,000 per room) and an attractive yield of 14.3% on pro forma net cash flow for the twelve months ended March 31, 1995. SHERATON COLONY SQUARE. On May 22, 1995, the Company agreed to acquire and assume management of the Sheraton Colony Square, a 462-room upscale high-rise hotel with 36,000 square feet of meeting space which is part of a major mixed use development located at the center of midtown Atlanta, including 66,000 square feet of office, 140,000 square feet of service-oriented retail and 1,668 underground parking spaces. Midtown is known as the cultural center of Atlanta and contains in excess of 9 million square feet of office space, with tenants such as The Coca-Cola Company, IBM, Bell South and AT&T. The Sheraton Colony Square achieved a 67% and 72% occupancy rate and a $81 and $87 ADR in 1993 and 1994, respectively. This represented a 14% increase in REVPAR year over year. In 1994, Atlanta was ranked second out of the country's 25 largest hotel markets in REVPAR growth (7.2%) and fifth in room sales growth (11.9%). The hotel is being acquired from an insurance company which previously acquired the hotel through foreclosure. After closing, the hotel will be managed by the Company subject to a franchise agreement with Sheraton. Consistent with the Company's acquisition strategy, management believes that the purchase price of $34.0 million (approximately $74,500 per room) represents an attractive yield of 11.0% on pro forma net cash flow for the twelve months ended March 31, 1995 with the potential for increased cash flow, particularly as market demand is stimulated by Atlanta's 1996 Olympic Games. The purchase price also represents an estimated 31% discount to replacement cost of approximately $50 million. The Company believes it can enhance operating profitability through a reduction in operating expenses and the elimination of costs related to a third-party manager. The Company expects to complete the acquisition of the Sheraton Colony Square contemporaneously with the Offering. EMBASSY SUITES TEMPE. On April 30, 1995, the Company agreed to acquire the Embassy Suites in Tempe, Arizona, a 224 all suite, upscale property located near Arizona State University. Tempe is an upscale section of Phoenix which in 1994 ranked number one out of the country's 25 largest markets in ADR growth (8.2%) and number one in room sales growth (13.6%). The hotel is being acquired from a liquidating publicly traded limited partnership on a privately negotiated basis. After closing, the Company intends to manage the property subject to an Embassy Suites franchise agreement. Consistent with its investment strategies, management believes the purchase price of $19.2 million (approximately $86,600 per room) represents an attractive yield of 11.9% on pro forma net cash flow for the twelve months ended March 31, 1995 and represents a 20% discount to its estimated replacement cost of $24.5 million. Because the hotel is located within close proximity of the Company's Phoenix Embassy Suites, management believes this acquisition may enhance revenues of both properties by sharing demand overflow, and may result in increased operating efficiencies. The Company expects to complete the acquisition of the Embassy Suites contemporaneously with the Offering. FURTHER ACQUISITIONS. In addition, the Company is negotiating the acquisition of several hotels, including a hotel in New York, New York with in excess of 500 rooms, at a cost of approximately $40 million. DALLAS PARK CENTRAL HOTEL CONVERSION. In 1994, after losing its franchise affiliation due to the Company's inability to make necessary capital improvements prior to the refinancing of the Company's senior debt, the hotel's EBITDA was negative $165,000 and its occupancy fell to 42%. For the twelve months ended March 31, 1995, the hotel had negative cash flow of $445,000 which is a reduction of the Company's Funds from Operations. With proceeds of the Offering, the Company plans to commence a $3.7 million major renovation and conversion of the Park Central Hotel to a Radisson. The 445-room high-rise hotel is located in North Dallas. Room sales in Dallas increased at double digit rates in 1994 fueled by increases in both ADR (5.4%) and occupancy (5.0%). Historically, when maintained in better condition and with the benefits of a national affiliation, the property generated EBITDA in excess of $1.0 million. Management believes upgrading the rooms and public space, combined with the Radisson national franchise affiliation and reservation services, will enable the hotel to increase its REVPAR and EBITDA towards its historical levels. Upon completion of the Offering, the Company plans to terminate the hotel's existing third-party manager, assume operations and complete the renovations. 37 RIVERSIDE INN RENOVATION. The Company has planned an approximately $1 million renovation scheduled to begin in November 1995 with proceeds of the Offering. The 137-room Riverside Inn is located in downtown Portland, Oregon, and is currently considered a mid-scale property. Due to the current disparity in average rates between the mid-scale and upscale segments in the Portland market, management believes that a repositioning of the property to the lower end of the upscale market should result in significant increases of REVPAR and EBITDA. In addition, such repositioning would facilitate affiliation with a national franchise if appropriate. FRENCH QUARTER SUITES REAFFILIATION. This 155-room upscale hotel is located in Lexington, Kentucky. With proceeds of the Offering, the Company intends to implement a substantial refurbishment which will enable the property to franchise with a national all suites franchise system. Franchises currently under consideration by management include Embassy Suites, Doubletree Suites and Marriott Suites. Management believes this refurbishment, combined with a franchise affiliation, will enable the hotel to increase its REVPAR and EBITDA. OTHER MINOR IMPROVEMENTS. In addition to the major capital renovations described above, the Company will reserve a portion of the Offering proceeds to complete other refurbishments of the Company's hotels, primarily those located in the Western United States. The Company intends to upgrade and improve the exterior facade and public areas of these hotels, including landscaping, exterior lighting, and exterior building treatments. The Company believes that such improvements will enhance curb appeal and help to attract additional transient guests. In addition, the Company intends to reappoint rooms where such upgrades will enhance the competitive position of the properties. These minor improvements are expected to result in improved portfolio performance. ELIMINATION OF THIRD-PARTY MANAGERS. Consistent with the Company's strategy of self-management, the Company intends to terminate as soon as practicable the seven remaining third-party management contracts on its existing and newly acquired hotels. Of such management contracts, all but one may be terminated in 1995. The management contracts are all subject to certain performance standards. The Company has been and is assuming management of those properties which were or are managed by third parties. Management expects to open an Atlanta office during the second quarter of 1995, the cost of which has been included in calculated pro forma general and administrative expenses. IMPROVEMENTS TO ASSETS ACQUIRED IN REORGANIZATION. Consistent with the Company's acquisition strategy, each of the Owned Hotels which the Company acquired pursuant to the Reorganization, as well as each of the Hotel Assets securing the Mortgage Note Receivables which the Company acquired pursuant to the Reorganization, are upscale hotels and well positioned in relatively attractive markets. Such Owned Hotels were acquired during late 1993 and 1994 by Starwood Capital using a variety of techniques for gaining control of the properties, such as: the acquisition of debt at a discount followed by the purchase of the equity; acquisition at a courthouse foreclosure sale; negotiated acquisition from a bank which previously foreclosed on the asset; and the acquisition from an insurance company of a money-losing hotel which had previously lost its franchise affiliation. Each hotel was acquired during a period of operational disruption from owners inexperienced in hotel operation, and the Company has controlled these properties for a limited time. Nevertheless, REVPAR and EBITDA increased by 13.1% and 85.5%, respectively, at these properties during the first quarter of 1995 over the corresponding quarter of 1994. Upon completion of the Offering, the Company may attempt to acquire two Note Hotels which secure Mortgage Note Receivables which the Company acquired pursuant to the Reorganization. The Ramada Suites in Secaucus, New Jersey, is an eight-story, 151 all suites hotel built in 1990 which is located near the New Jersey Meadowlands complex. The Quality Inn is a 203-room high-rise hotel located approximately two blocks from the Trump Taj Mahal and the Resorts International Casinos in Atlantic City, New Jersey. The Company is currently pursuing the acquisition of other hotel first mortgages as a strategy to acquire fee interests in upscale and mid-scale hotel properties which meet the Company's acquisition criteria. See "-- Acquisition Strategies." STARWOOD CAPITAL Starwood Capital was formed to identify and acquire real estate related assets on behalf of its principals, employees and investors. These initial investors primarily included several private families each with a net worth exceeding $100 million. Today, Starwood Capital manages in excess of $575 million on behalf of its 38 principals, employees, twelve domestic and international high net worth families and three of the ten largest U.S. corporate pension funds. Starwood Capital has become one of the most active opportunistic buyers of real estate assets in the United States. Each of the Company's pending and completed acquisitions was identified by Starwood Capital, which will continue to assist the Company in identifying and structuring opportunistic hotel acquisitions and in accessing alternative sources of potentially lower cost capital, such as secured and unsecured corporate debt. Starwood Capital and its predecessor ("Starwood") have previously implemented aggressive acquisition strategies with respect to various recovering real estate asset classes. For example, in 1991, Starwood recognized improving trends in the United States multi-family markets, which, like the hotel industry today, included dramatic reductions in the growth of new supply, increasing demand, the ability to acquire assets at significant discounts to replacement cost, and ultimately increasing rents, industry profitability and property values. Between 1992 and 1993, Starwood was one of the most active multi-family buyers in the United States, aggressively acquiring approximately 6,000 properties throughout the United States in 23 separate transactions. Starwood contributed substantially all of such portfolio at the initial public offering of Equity Residential Properties Trust, a New York Stock Exchange listed company ("EQR"), and at the consummation of the EQR offering was the second largest equity holder. Mr. Sternlicht is a member of the Board of Directors of EQR. Starwood utilized similar investment techniques in acquiring multi-family properties as it has used in acquiring hotels. In addition to its hotel and multi-family investment activities, Starwood has acquired interests in nine single family land developments, seven office buildings and two industrial properties through 80 separate transactions. In total, Starwood has acquired in excess of $1.25 billion (at cost) of real estate-related assets and has produced substantial returns for its investors. There can be no assurance that Starwood will continue to achieve substantial returns on its investments. BUSINESS AND PROPERTIES THE HOTEL INDUSTRY The hotel industry, which is one of the most management intensive sectors of the real estate industry, has been characterized over the last 15 years by increased product segmentation and by greater marketing and cost control sophistication. However, even as the importance of sophisticated management has grown, it has continued to be common in the industry for hotel owners to rely on fee-oriented third parties to manage their hotels. The Company believes that, as an integrated owner/operator focused on maximizing long-term operating profits and asset values, rather than maximizing fees, it will distinguish itself from owners who rely on third-party managers. The hotel industry is now recovering from severe disparity in the growth of supply and demand that produced decreases in real ADRs, widening losses, and numerous hotel failures. The rapid rise in room supply that occurred throughout the 1980s drove ADRs and ultimately industry profitability downward; however, 1993 marked the reversal of this trend and real ADRs have been rising since that time, as shown below. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
HOTEL INDUSTRY PROFITABILITY AND ROOM SUPPLY 1983-1994 Aggregate Profits & Losses for Year Hotels Room Supply 1982 $2,500,000 2372 1983 1,900,000 2400 1984 1,700,000 2436 1985 100,000 2504 1986 -900,000 2587 1987 -1,100,000 2685 1988 -1,300,000 2797 1989 -2,100,000 2898 1990 -5,700,000 2997 1991 -2,800,000 3071 1992 0 3111 1993 2,400,000 3142 1994 4,600,000 3186 HOTEL INDUSTRY PROFITABILITY AND ROOM SUPPLY 1983-1994 AVERAGE ADR % Change GROWTH ???? Year Year in ADR ROOM SUPPLY 1982 1982 1983 1983 $2,000,000 28000 1984 1984 2,500,000 36000 1985 1985 1,120,000 68000 1986 1986 1,280,000 83000 1987 1987 -90,000 98000 1988 1988 -60,000 111000 1989 1989 1,140,000 100415 1990 1990 -2,380,000 102935 1991 1991 -3,600,000 75096 1992 1992 -1,620,000 41455 1993 1993 -390,000 32559 1994 1994 910,000 43845
Source: Smith Travel Research/ Source: Smith Travel Research Laventhol Horwath 39 The oversupply in the hotel industry resulted from special circumstances in the early 1980s, including readily available financing and tax incentives which were favorable for the development of new hotels. Market conditions in terms of occupancy, ADR and demand growth based upon projected national economic expansion supported the cost of new development. However, the greatest contributors to new hotel development were readily available financing from a recently deregulated banking industry and certain tax incentives prior to the Tax Reform Act of 1986 which were not dependent upon the financial success of the underlying asset. In the late 1980s, equity financing sources became scarce due to the changes in the tax law and the withdrawal of traditional lending sources. Between 1991 and 1994, new hotel room supply has increased at an annual rate of only 1.2%, as shown below. Historically, demand for hotel rooms has depended upon the overall health of the national economy as measured by Gross Domestic Product ("GDP") and employment. During the 1980s, demand for rooms grew steadily; however, room demand fell sharply as the national economy entered a recession in 1990. Compound annual growth in GDP averaged only 1.4% from 1989 to 1992, and unemployment increased from 5.3% to 7.4%. The weak overall economy resulted in lower individual wages and reduced corporate profits and inhibited both individual and corporate travel. Coupled with the effects of the Gulf War conflict in 1991, these factors contributed to an industry-wide hotel occupancy rate of 60.8%, the lowest rate in more than a decade. Since early 1992, the economy has rebounded, compound annual growth in GDP has averaged 3.6%, and by 1994, industry-wide occupancy has risen to 65.2%. The positive effects of minimal new room supply and steadily increasing demand over the last three years upon occupancy and ADR is shown in the tables below. If the trends shown were to continue, the Company believes that further increases in ADR and occupancy would result. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
SUPPLY AND DEMAND GROWTH AVERAGE OCCUPANCY Room Supply Room Demand % % YEAR % YEAR 1990 3.55 2.17 1990 62.3 1990 1991 2.5 -0.24 1991 60.6 1991 1992 1.35 3.08 1992 61.7 1992 1993 1.04 3.32 1993 63 1993 1994 1.39 4.5 1994 65 1994 AVERAGE DAILY RATE $ 1990 58.45 1991 58.81 1992 59.64 1993 61.67 1994 64.09
Source: Smith Travel Research THE HOTEL ASSETS The Hotel Assets consist of a diversified portfolio located throughout the United States and represent several industry segments and numerous franchise affiliations. Although the Company intends to focus its future growth primarily in the upscale and mid-scale segments, the Company has investments in upscale, mid-scale, economy and gaming properties. The Hotel Assets are located near a variety of demand generators, including major employment centers, universities, airports, and tourist-oriented markets with convenient access to interstate highways, airports and rail transportation. OWNED HOTELS The table on the following page sets forth certain summary information regarding the Owned Hotels. 40
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------ OCCUPANCY ADR % ------------------------------- --------- HOTEL LOCATION # OF ROOMS YEAR OPENED YEAR ACQUIRED 1992 1993 1994 1992 - ----------------------- ------------------- ----------- ----------- ------------- --------- --------- --------- --------- UPSCALE: Embassy Suites......... Phoenix, AZ 227 1981 1983 $ 70.63 $ 74.04 $ 80.23 68.1 Embassy Suites(1)...... Tempe, AZ 224 1984 1995 73.83 76.24 83.37 75.5 Doubletree(2).......... Rancho Bernardo, CA 209 1988 1995 63.77 63.62 65.68 60.3 Capitol Hill Suites(2)............. Washington, DC 152 1981 1995 84.93 89.60 91.93 52.9 Radisson Hotel......... Gainesville, FL 195 1974 1986 57.07 56.63 59.89 55.1 Sheraton Colony Square(1)(2).......... Atlanta, GA 462 1973 1995 77.88 81.47 86.57 66.4 Harvey Wichita(3)(2)... Wichita, KS 259 1974 1995 57.10 43.92 50.62 54.4 French Quarter Suites(2)............. Lexington, KY 155 1989 1995 81.41 81.64 84.40 64.9 Omni Chapel Hill....... Chapel Hill, NC 168 1981 1995 60.97 67.35 74.54 50.1 Omaha Marriott(4)...... Omaha, NE 303 1982 1982 82.57 82.56 87.21 70.8 Milwaukee Marriott(5)........... Milwaukee, WI 393 1972 1990 69.63 71.99 67.91 58.2 Residence Inn.......... Tysons Corner, VA 96 1984 1984 97.63 103.07 99.68 84.1 ----- --------- --------- --------- --------- SUBTOTAL/WEIGHTED AVERAGE 2,843 $ 72.22 $ 73.17 $ 76.56 63.1 ----- --------- --------- --------- --------- ----- --------- --------- --------- --------- MID-SCALE: Plaza Hotel(6)......... Tucson, AZ 149 1971 1983 $ 47.22 $ 45.05 $ 46.12 63.6 Holiday Inn............ Albany, GA 151 1989 1989 55.00 56.96 56.06 74.0 Best Western Riverfront(2)......... Savannah, GA 142 1971 1986 43.40 46.21 47.27 55.2 Bay Valley Resort...... Bay City, MI 151 1973 1984 65.33 66.39 62.22 53.8 Best Western Airport Inn(6)................ Albuquerque, NM 123 1980 1984 50.90 52.38 54.45 76.1 Best Western Mesilla Valley Inn............ Las Cruces, NM 166 1974 1982 40.41 41.67 42.74 58.4 Best Western North(2).............. Columbus, OH 180 1974 1992 41.61 42.12 42.34 72.1 Riverside Inn.......... Portland, OR 137 1964 1984 62.42 63.96 64.69 78.5 Dallas Park Central(2)(6)......... Dallas, TX 445 1972 1972 61.91 62.34 59.97 58.8 Best Western Airport... El Paso, TX 175 1974 1985 34.67 35.56 34.76 73.9 Meany Tower Hotel...... Seattle, WA 155 1932 1984 81.04 76.29 70.47 59.0 Sixth Avenue Inn(6).... Seattle, WA 166 1959 1984 73.14 72.37 70.04 57.1 WestCoast Tyee Hotel... Olympia, WA 155 1961 1987 54.79 56.28 60.63 66.6 ----- --------- --------- --------- --------- SUBTOTAL/WEIGHTED AVERAGE 2,295 $ 55.42 $ 55.83 $ 55.09 64.2 ----- --------- --------- --------- --------- ----- --------- --------- --------- --------- ECONOMY: Vagabond Inn(7)........ Rosemead, CA 102 1974 1974 $ 37.06 $ 38.14 $ 37.47 52.5 Vagabond Inn(7)........ Sacramento, CA 108 1975 1975 51.48 52.17 55.89 67.4 Vagabond Inn(7)........ Woodland Hills, CA 101 1973 1973 42.15 43.68 46.72 69.1 Days Inn............... Portland, OR 173 1962 1984 60.31 57.50 53.12 60.1 Days Inn Towne Center(6)............. Seattle, WA 90 1957 1984 60.81 60.85 60.99 70.6 ----- --------- --------- --------- --------- SUBTOTAL/WEIGHTED AVERAGE 574 $ 51.40 $ 51.15 $ 50.97 63.4 ----- --------- --------- --------- --------- ----- --------- --------- --------- --------- GAMING: Bourbon Street Hotel & Casino................ Las Vegas, NV 150 1964 1988 $ 30.24 $ 31.63 $ 32.89 86.5 King 8 Gambling Hall Hotel/Casino.......... Las Vegas, NV 300 1974 1988 25.23 29.46 32.80 75.3 ----- --------- --------- --------- --------- SUBTOTAL/WEIGHTED AVERAGE 450 26.90 30.18 32.83 79.0 ----- --------- --------- --------- --------- ----- --------- --------- --------- --------- TOTAL/WEIGHTED AVERAGE 6,162 $ 60.71 $ 61.52 $ 62.99 64.7 ----- --------- --------- --------- --------- ----- --------- --------- --------- --------- REVPAR ------------------------------- HOTEL 1993 1994 1992 1993 1994 - ----------------------- --------- --------- --------- --------- --------- UPSCALE: Embassy Suites......... 71.9 75.6 $ 48.08 $ 53.20 $ 60.63 Embassy Suites(1)...... 81.7 82.8 55.74 62.29 68.99 Doubletree(2).......... 60.8 65.6 38.45 38.68 43.09 Capitol Hill Suites(2)............. 63.3 64.1 44.96 56.72 58.93 Radisson Hotel......... 62.2 59.4 31.46 35.21 35.57 Sheraton Colony Square(1)(2).......... 67.4 72.4 51.71 54.91 62.64 Harvey Wichita(3)(2)... 58.6 57.7 31.06 25.74 29.21 French Quarter Suites(2)............. 71.5 69.4 52.85 58.37 58.57 Omni Chapel Hill....... 56.4 64.8 30.55 37.99 48.28 Omaha Marriott(4)...... 76.0 76.2 58.46 62.75 66.42 Milwaukee Marriott(5)........... 54.5 69.8 40.50 39.24 47.42 Residence Inn.......... 78.2 83.0 82.07 80.55 82.70 --------- --------- --------- --------- --------- SUBTOTAL/WEIGHTED AV 66.1 70.1 $ 45.57 $ 48.36 $ 53.65 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- MID-SCALE: Plaza Hotel(6)......... 74.5 77.1 $ 30.04 $ 33.54 $ 35.58 Holiday Inn............ 73.6 78.9 40.72 41.92 44.23 Best Western Riverfront(2)......... 54.6 56.9 23.95 25.23 26.92 Bay Valley Resort...... 52.1 63.5 35.17 34.62 39.53 Best Western Airport Inn(6)................ 80.2 86.4 38.72 41.98 47.02 Best Western Mesilla Valley Inn............ 70.6 71.2 23.58 29.44 30.42 Best Western North(2).............. 66.2 70.3 30.00 27.88 29.76 Riverside Inn.......... 78.5 78.1 49.02 50.21 50.49 Dallas Park Central(2)(6)......... 62.4 42.3 36.40 38.89 25.37 Best Western Airport... 70.3 80.4 25.60 25.01 27.96 Meany Tower Hotel...... 61.5 71.2 47.78 46.92 50.14 Sixth Avenue Inn(6).... 61.7 75.1 41.78 44.67 52.57 WestCoast Tyee Hotel... 61.8 57.4 36.49 34.78 34.78 --------- --------- --------- --------- --------- SUBTOTAL/WEIGHTED AV 66.0 66.3 $ 35.60 $ 36.86 $ 36.53 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ECONOMY: Vagabond Inn(7)........ 43.7 38.8 $ 19.46 $ 16.68 $ 14.53 Vagabond Inn(7)........ 58.5 62.5 34.68 30.49 34.93 Vagabond Inn(7)........ 58.3 69.0 29.13 25.44 32.26 Days Inn............... 63.2 70.6 36.25 36.32 37.51 Days Inn Towne Center(6)............. 75.3 79.4 42.96 45.81 48.40 --------- --------- --------- --------- --------- SUBTOTAL/WEIGHTED AV 59.9 64.5 $ 32.57 $ 30.62 $ 32.89 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- GAMING: Bourbon Street Hotel & Casino................ 92.2 90.1 $ 26.15 $ 29.16 $ 29.62 King 8 Gambling Hall Hotel/Casino.......... 82.0 81.6 18.99 24.15 26.76 --------- --------- --------- --------- --------- SUBTOTAL/WEIGHTED AV 85.4 84.4 21.25 25.77 27.71 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- TOTAL/WEIGHTED AVERA 66.9 69.2 $ 39.29 $ 41.15 $ 43.59 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ----------------- (1) Acquisition of this hotel is pending. (2) This hotel is currently managed by third parties. The Corporation intends to terminate these management arrangements by the end of 1995. See "Business and Properties--Operations." (3) Starwood Capital has guaranteed that the cash flow of this hotel (which is defined for purposes of the guarantee as gross revenues (on a cash basis) received by the Operating Partnership from the hotel, less management fees and capital expenditures of the hotel) will be at least $700,000 in the first year after January 1, 1995, $800,000 in the second year and $900,000 in the third year, with such cash flow in excess of those amounts being applied to reduce the guaranteed amounts in later years. (4) The Trust owns a 5% general partnership interest in this hotel. 41 (5) The Corporation owns a 51% general partnership interest in this hotel and, following the Offering, the Trust will hold $27.2 million in first mortgages on this hotel. (6) These hotels are owned subject to ground leases expiring between 1997 through 2029. (7) These hotels are leased to a third party and are the only existing hotel assets not leased to the Corporation. For 1994 compared to 1993, the average occupancy rate of the Owned Hotels increased from 66.8% to 69.2%; average ADR increased from $61.41 to $62.99; and average REVPAR increased from $41.01 to $43.59. For the twelve months ended March 31, 1995, the Company derived 88% of total gross revenues for the Owned Hotels from the upscale and mid-scale market segments. MORTGAGE NOTE RECEIVABLES The Company owns 13 performing mortgage notes secured by 15 hotels. The following table summarizes information pertaining to the Mortgage Note Receivables and the hotels securing the notes: MORTGAGE NOTES/HOTELS SECURING NOTES
FOR THE YEAR ENDED DECEMBER 31, 1994 -------------------------------------- MORTGAGE NOTES -------------------------------------------------------- HOTELS SECURING NOTES 3/31/95 STATED 3/31/95 -------------------------------------- BALANCE INTEREST BASIS(1) MATURITY ADR OCCUPANCY REVPAR --------- --------------------- --------- ----------- --------- -------------- ----------- Harvey Hotel--Addison(3)....... 10,472,433 8.0% 7,426,361 12/31/02 $ 64.90 78.6% $ 51.00 Harvey Bristol Suite--Dallas(3).............. 16,796,557 8.0% 11,870,769 12/31/02 85.00 79.4 67.50 Harvey Hotel--DFW(3)........... 25,949,135 8.0% 18,465,418 12/31/02 73.60 81.1 59.70 Quality Inn--Atlantic City..... 11,412,358 80% X Prime 4,238,717 10/1/10 66.50 60.8 40.40 Ramada Suites--Secaucus........ 12,447,783 LIBOR + 1.25% 7,993,315 9/1/99 91.38 72.4 66.16 Other Seller Financing(2)...... 12,583,925 9.6 % 12,583,925 3/31/00 41.90 52.0 21.80 --------- --------- --------- --- ----------- Total/Wtd. Avg................. 89,662,191 62,578,505 $ 71.84 72.6 % $ 53.27 --------- --------- --------- --- ----------- --------- --------- --------- --- -----------
- ----------------- (1) Represents the Company's carrying value as of 3/31/95. (2) Total and weighted averages for eight notes secured by 10 hotels (see "--Seller Financing"). (3) Notes are cross-collateralized and cross-defaulted. ATLANTIC CITY QUALITY INN/SECAUCUS RAMADA SUITES The Atlantic City and Secaucus mortgage note receivables are secured by a mid-scale and an upscale hotel, respectively, control of which the Company may obtain in the future. The underlying assets are well located, fundamentally sound hotel properties that are overleveraged as a result of indebtedness incurred during the 1980s, which debt the Company acquired at a discount from par in the Reorganization. The note on the Atlantic City Quality Inn is a tax-exempt note issued by a municipal authority. HARVEY NOTES The Harvey mortgage note receivables are cross-collateralized and cross-defaulted and the related collateral are very high quality assets. The Harvey Notes have EBITDA interest coverage exceeding 2:1, and are guaranteed by several individuals whose certified financial statements indicate combined net worths exceeding $50 million. These notes amortize over a 15-year life and mature in 2002. The Company acquired these notes in the Reorganization at a discount to par, and believes that there is a high likelihood that these notes may be repaid prior to maturity. Furthermore, the Company believes that there is an active secondary market for quality mortgages of this type which may represent an opportunity to redeploy the Company's capital with higher expected returns. SELLER FINANCING The Company has historically provided seller financing as a means of disposing of low growth, limited upside hotels. The current portfolio of seller notes is comprised of seven first mortgages and one second mortgage. All notes are currently performing and the Company's collection ratio has historically been in excess of 90%, despite the generally high leverage ratio of seller financing. 42 INDUSTRY SEGMENTATION The Company segments the hotel industry into the following categories: luxury, upscale, mid-scale, budget, economy and gaming. These segments and the Company's involvement in each are described below: LUXURY. The luxury segment generally includes such chains as Ritz Carlton-TM-, Four Seasons-TM- and Regent-TM-. The Company believes luxury properties generally have the highest replacement cost, generate the highest ADRs, have the highest fixed costs and are the most cyclical of all hotel segments. While these assets can generally be acquired in today's environment at substantial discounts to replacement cost and do enjoy high barriers to new supply, the Company believes the high-profile nature of such properties and their current investment appeal as trophy properties make them difficult to acquire at attractive current or projected EBITDA multiples. According to Smith Travel and Coopers & Lybrand, this segment comprises only 13% of total industry rooms with an average ADR and occupancy of $109.83 and 72.0%, respectively, for the year ended December 31, 1994. The Company does not currently own any luxury properties. UPSCALE. Upscale hotel chains generally include such chains as Marriott-TM-, Embassy Suites-TM-, Radisson-TM-, Sheraton-TM-, Omni-TM-, Doubletree-TM-, Crowne Plaza-TM-,and, at the highest end of this segment, Hyatt-TM- and Westin-TM-. The Company believes this is generally the most attractive segment in which to own, operate and acquire hotels. These properties are predominantly full service, operationally more complex, more expensive to build and hence enjoy stronger barriers to new supply and are generally more desirable than economy, budget and mid-scale properties. The Company believes minimal construction is occurring in this industry segment, while demand is increasing. The Company also believes that upscale hotel properties can generally be purchased at significant discounts to replacement cost, and in general at greater discounts than mid-scale, economy and budget hotels. The Company also believes that it is difficult to justify the cost of new construction of an upscale hotel in a submarket where competitive properties are trading for significant discounts to replacement cost. The demand profile of this segment is also attractive. These types of properties largely cater to business travelers, who the Company believes may be less price sensitive, more predictable, and hence more desirable customers than the transient/leisure travelers. According to Smith Travel and Coopers & Lybrand, upscale hotels comprise approximately 24% of all rooms in the United States with an average ADR and occupancy of $74.32 and 68.0%, respectively, for the year ended December 31, 1994. The Company believes that each of the Owned Hotels contributed to the Company by Starwood Capital in the Reorganization may be classified as an upscale hotel. In addition, each hotel acquired or expected to be acquired since the Reorganization (I.E., the Omni Chapel Hill, the Tempe Embassy Suites and the Sheraton Colony Square) may be classified as an upscale hotel. The Company believes 46% of the Owned Hotels' rooms fall within this segment with an average ADR and occupancy of $76.56 and 70.1%, respectively, for the year ended December 31, 1994. The Company expects to increase this upscale room share as it continues implementing its acquisition strategy. MID-SCALE. Mid-scale hotel chains generally include such chains as Holiday Inn-TM-, Hampton Inn-TM-, Ramada Inn-TM-, Courtyard-TM- and higher quality Best Westerns-TM-. These hotels generally include both full and limited service facilities, have moderate barriers to new supply, are generally less operationally complex than upscale properties (particularly in the case of limited service facilities), are somewhat cheaper and easier to plan and construct than upscale hotels, and cater to both business and leisure customers. The Company believes that this segment is experiencing minimal new construction in its full service component, but moderate growth in new supply in the limited service component. In general, these assets can be purchased for smaller discounts to replacement cost than upscale properties. According to Smith Travel and Coopers & Lybrand, the mid-scale segment comprises approximately 27% of all rooms in the United States with an average ADR and occupancy of $56.78 and 65.3%, respectively, for the year ended December 31, 1994. The Company believes 37% of the Owned Hotels' rooms fall in this category, with an average ADR and occupancy of $55.09 and 66.3%, respectively, including several independent hotels which the Company believes may affiliate with mid-scale chains. In its acquisition strategy, the Company has targeted this segment albeit with less emphasis than the upscale segment. 43 BUDGET AND ECONOMY SEGMENTS. These segments include such chains as Days Inn, Shoney's Inn, Fairfield Inn, Super 8, Knights Inn, Motel 6, Red Roof Inn and Budgetel. They are generally limited service, the lowest in operational complexity and have the lowest barriers to new supply. The Company believes these segments are experiencing the highest levels of new construction in the industry. The Company believes these levels of new supply, if demand growth slows, may eventually place downward pressures on REVPAR and profitability for these hotels. Furthermore, the Company believes that average prices paid for hotels in these segments are approaching estimated replacement costs which may make new development appear to be an attractive alternative investment to the purchase of existing properties. The Company believes that these assets typically have the lowest level of operating leverage and exhibit lower construction quality and hence more rapid deterioration than higher end properties. According to Smith Travel and Coopers & Lybrand, the economy and budget segments comprise approximately 17% and 20% of all rooms, respectively, with average ADRs of $44.21 and $33.99, respectively, and occupancies of 62.1% and 61.6%, respectively, for the year ended December 31, 1994. Prior to the Offering, the Company has sold 12 hotels in past 3 years which operate primarily in these segments. The Company believes only 9% of the Owned Hotels' rooms currently fall within these segments and does not intend to acquire budget or economy hotels. GAMING. The Company owns two fee simple interests in gaming hotels which comprise approximately 7% of the total rooms in the Company's portfolio. Both properties are located in Las Vegas and target local customers, tourists and, at the King 8 Hotel (which features 280 available semi-trailer parking spaces), truckers. Both properties attract customers through their casual, friendly environment, low-priced food and wide variety of popular slot machines. Combined, the properties contained approximately 21,500 square feet of gaming space. The King 8 is located on approximately 20 acres of land (including eight acres of undeveloped land) approximately 1,000 yards from the new 5,000-room MGM Grand Hotel. The Company intends to explore various strategic alternatives with regard to its gaming assets designed to minimize the Company's exposure to this segment. See "The Company." The following table summarizes certain information with respect to the distribution of the Owned Hotels within the three primary market segments:
FOR THE 12 MONTHS ENDED MARCH 31, 1995 -------------------------------- NUMBER NUMBER PRO FORMA % OF TOTAL MARKET SEGMENT OF HOTELS OF ROOMS GROSS REVENUES GROSS REVENUES - ------------------------------------- ------------- ----------- -------------- ---------------- Upscale.............................. 12 2,843 $ 83,653,565 57.3% Mid-scale............................ 13 2,295 44,273,677 30.3% Economy.............................. 5 574 8,931,077 6.1% Gaming............................... 2 450 9,145,376 6.3% -- ----- -------------- ----- Total............................ 32 6,162 $146,003,695 100.0% -- -- ----- -------------- ----- ----- -------------- -----
HOTEL OPERATING LEVERAGE Because a large percentage of hotel costs are fixed, hotels generally possess significant operating leverage. Operating leverage enables a property to increase profits more rapidly than revenues, and to increase profit margins as revenues rise. According to PKF Consulting Trends in the Hotel Industry hotel income in 1992 and 1993 grew more rapidly than room sales, as shown on the graph on the following page. 44 EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
ROOM REVENUES OPERATING INCOME $ $ 1991 -3 -10 1992 2.2 10.4 1993 4.2 11.3 1991 3 -0.9 1992 4.7 8.9 1993 3 11.1
Source: PKF Consulting, Trends in the Hotel Industry In general, upscale and mid-scale hotels generally possess greater fixed costs and therefore greater operating leverage than lower scale hotels. Because 83% of the Company's Owned Hotel rooms fall in the upscale and mid-scale segments, and because management intends to continue to acquire additional hotels in these segments, management believes its portfolio is well positioned to improve cash flow and margins as its revenues increase. GEOGRAPHIC DIVERSIFICATION The geographic distribution of the Hotel Assets throughout the United States reflects the Company's belief that geographic diversification, especially with respect to hotels, helps to insulate the portfolio from local market fluctuations that are typical for the hotel industry. The following table summarizes certain information with respect to the distribution of the Hotels throughout the United States:
NUMBER NUMBER % OF STATE OF ASSETS OF ROOMS TOTAL ROOMS - ------------------------- ------------ -------------- -------------------- Texas.................... 6 2,058 21.8% Georgia.................. 6 1,233 13.1 California............... 6 720 7.6 Florida.................. 3 628 6.7 Arizona.................. 3 600 6.4 Washington............... 4 566 6.0 Nevada................... 2 450 4.8 Wisconsin................ 1 393 4.2 New Jersey............... 2 354 3.8 Oregon................... 2 310 3.3 North Carolina........... 2 306 3.2 Nebraska................. 1 303 3.2 New Mexico............... 2 289 3.1 Kansas................... 1 259 2.7 Missouri................. 1 237 2.5 Ohio..................... 1 180 1.9 Kentucky................. 1 155 1.6 Washington, D.C. ........ 1 152 1.6 Michigan................. 1 151 1.6 Virginia................. 1 96 1.0 -- ----- ----- Totals............... 47 9,440 100.0% -- -- ----- ----- ----- -----
45 NATIONAL FRANCHISE AFFILIATIONS The Company generally believes that franchise affiliations provide certain advantages to hotels. Such advantages include brand recognition access to national reservations systems, national direct sales efforts and national volume purchasing agreements, and technical and business assistance. Thirty-six of the Company's hotel properties are represented by a national or regional franchise system. The use of multiple franchise systems provides the Company with further diversification, less dependence on the continued popularity of one brand and less vulnerability to new requirements of any individual franchise system. The Company expects to focus its franchise affiliations on upscale and mid-scale hotel chains. The following chart summarizes certain information with respect to the franchise affiliations of the Owned Hotels:
12 MONTHS NUMBER ENDING 3/31/95 % OF FRANCHISE SYSTEMS OF ROOMS GROSS REVENUES GROSS REVENUES - ------------------------------------------------------------ ----------- -------------- ----------------- Marriott.................................................... 696 $ 25,465,836 17.1% Sheraton.................................................... 462 16,594,987 11.1 Embassy Suites.............................................. 451 13,131,850 8.8 Best Western................................................ 786 12,210,533 8.2 Radisson.................................................... 640 9,089,427 6.1 Days Inn.................................................... 263 5,904,993 4.0 Omni........................................................ 168 4,771,197 3.2 Harvey...................................................... 259 4,429,749 3.0 West Coast.................................................. 155 4,226,464 2.8 Double Tree................................................. 209 3,958,817 2.7 Residence Inn............................................... 96 3,120,770 2.1 Vagabond.................................................... 311 3,026,084 2.0 Holiday Inn................................................. 151 2,919,788 2.0 ----- -------------- --- Subtotal................................................ 4,647 $108,850,495 73.1% ----- -------------- --- ----- -------------- ---
OPERATIONS The Company employs over 2,200 on-site personnel and an aggregate of 20 corporate staff with expertise in all facets of hotel operations, including operations, marketing, facilities management, management, accounting, acquisitions, human resources, management information systems and other areas. LEASES. All but three of the Realty Partnership's Owned Hotels are leased to the Operating Partnership or HI Nevada. Each of the leases between the Realty Partnership and the Operating Partnership (the "Intercompany Leases") provide for the lessee's payment of annual minimum rent in a specified amount plus additional rent based on a percentage of the gross revenues (or items thereof) of the leased property. The Intercompany Leases existing in December 1992 were amended and restated at such time and have an average term of seven years. The Intercompany Leases are "triple-net"--I.E., the lessee is generally responsible for paying all operating expenses of the hotel property, including maintenance and repair costs, insurance premiums and real estate and personal property taxes, and for making all rental and other payments required pursuant to any underlying ground lease. The lessee is also generally responsible for any payments required pursuant to underlying ground leases. As lessee, the Operating Partnership retains all of the profits, net of rents and other expenses, and bears all risk of losses, generated by the hotel property's operations. In addition to the Intercompany Leases to the Corporation, the Realty Partnership's three Vagabond Inns are leased to a third party. The leases expire in 1999, 2007 and 2008. The lease expiring in 1999 has options to extend the term of the lease for two additional five year periods. Each of these leases provides for the payment of percentage rent equal to 26% of room revenues against specified minimum rents. The leases are "triple net." MANAGEMENT. Twenty-one of the 29 hotel properties leased by the Realty Partnership to the Operating Partnership are operated directly by the Operating Partnership, and the remaining eight are managed by seven independent hotel management companies. The Company intends where feasible to terminate these 46 managers and to have the Operating Partnership manage all of the Realty Partnership's hotel properties. All but two of the agreements expire during 1995. The Operating Partnership, the general partner of the partnership that owns that Milwaukee Marriott, also operates the Milwaukee Marriott. Each management agreement with a third party provides that the management company has the exclusive right to direct the operations of the hotel subject to that agreement. The management company is responsible for maintaining and making all necessary repairs to the managed hotel, hiring, training and supervising all hotel employees, and performing all hotel bookkeeping and other administrative duties. Each management company is required to submit to the Operating Partnership for its approval an annual budget that includes proposed capital expenditures, and the management company makes only those capital expenditures that are approved by the Operating Partnership. The Operating Partnership is required to make available to each management company sufficient working capital to permit that company to operate the managed property. For their services in managing the Company's hotels, each third-party management company receives a management fee that equals a specified percentage (generally 2-3%) of the gross revenues of the managed hotel, plus additional incentive fees based upon the hotel's operating profits. Two management agreements expire in 1995, one in 1996, one may be terminated on 30 days' notice, two may be terminated on 60 days' notice and one has a remaining term in excess of two years. A majority of these agreements may be canceled by the Operating Partnership prior to expiration if, among other things, the managed hotel is sold or fails to make a specified operating profit. FRANCHISE AGREEMENTS. All but eleven of the Company's hotel properties are currently operated pursuant to the Franchise Agreements. The Company believes that franchises (including hotel licenses) generally provide advantages to hotels through the use of advertising on a much broader scale than would be possible for an individual hotel or small group of hotels, nationally recognized brand names, nationally accessible reservations systems, technical and business assistance to the individual franchisee and substantial buying power over approved suppliers. The Franchise Agreements generally require the payment of a monthly royalty fee based on gross sales and various other marketing fees associated with certain marketing or advertising and centralized reservation service funds, usually based on gross sales. Such fees may vary between individual hotels within a franchise system based on the type of marks, restaurants or other aspects of the franchise system used. The Franchise Agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of the hotels which are established by the franchisors to maintain uniformity in the system created by each such franchisor. Such standards generally regulate the hours of operation, maintenance, appearance and cleanliness, quality and type of goods and services offered, signage and protection of marks. Compliance with such standards could require significant expenditures for capital improvements. Ongoing training costs, requirements to purchase only from approved suppliers, financial reporting requirements, insurance requirements and various covenants not to compete imposed upon the franchisee are other common terms in the Franchise Agreements. Such financial reporting requirements often stipulate the maintenance of books and records, the monthly reporting of sales and other operating data, quarterly or semi-annual unaudited financial statements and, in some cases, annual financial statements audited by an independent certified public accountant. Required insurance usually must cover both the franchisor and franchisee with respect to certain specified liabilities, must fall within certain approved coverage limits and be written by an approved insurance company. The Franchise Agreements generally require the consent of the franchisor to a transfer of an interest in the applicable franchise, and both the consent of the franchisor and the execution of a new franchise agreement in the event of a transfer of all or controlling portion of the franchisee under the relevant Franchise Agreement. In addition, some franchise agreements may require payment of an initial fee upon establishment of a franchise relationship. 47 EXCLUDED ASSETS AND RELATED MATTERS The Excluded Assets were not contributed by Starwood Capital to the Company in the Reorganization because they either (i) are subject to contractual restrictions preventing transfers or (ii) are inconsistent with the investment objectives of the Company. The Excluded Assets consist of the following:
STARWOOD CAPITAL DESCRIPTION OF EXCLUDED ASSETS OWNERSHIP % - ------------------------------------------------------------------- ---------------- Portfolio of one hotel and subperforming mortgage notes secured by nine hotels............................................ 50% Portfolio of 14 Hotels............................................. 49% Portfolio of 3 subordinated mortgage notes......................... 83-98%(1) Portfolio of subordinated REMIC pass-through certificates secured by nine hotels............................................ 73-100% Equity participation interest in the Boca Raton Resort, Boca Raton, Florida............................................... 5% $500,000 subordinated note secured by the Boca Raton Resort, Boca Raton, Florida............................................... 100% Minority partnership interest in Marriott Residence Inn, Houston, Texas.................................................... 25% Minority partnership interest in Arlington Hilton, Arlington, Texas............................................................. 23% Hampton Inn, Colchester, Vermont................................... 80%
- ------------ (1) The Company owns a 2% interest in these assets. The Partnerships have an option (the "Partnership Option"), exercisable at any time or times prior to the earlier of January 31, 2000 and the expiration of the Starwood Noncompete, subject to receipt of required third-party consents and approvals, to acquire the interests of Starwood Capital in one or more Excluded Assets for a cash purchase price equal to the fair market value of such Excluded Assets, as determined by agreement between the Partnerships and Starwood Capital (or, if they are unable to agree, by independent appraisers selected by the Independent Trustees and Directors of the Trust and the Corporation, on the one hand and Starwood Capital, on the other hand). The Company has adopted a policy that, as a general matter, it does not intend to acquire the Excluded Assets, except that consideration may be given at the appropriate time and under appropriate circumstances to the exercise of the Partnership Option in respect of (i) the 49% interest in a portfolio of 14 hotels or (ii) one or more other Excluded Assets where failure to exercise the option is likely to result in the Company owning hotel assets that compete with Excluded Assets. Any exercise of the Partnership Option will be subject to the Company's receipt of an opinion from a qualified, independent third party advisor to the Company that the purchase price being paid by the Company and the other terms of such acquisition are fair to the shareholders of the Company other than Starwood Capital and its affiliates and related parties. Certain co-partners' equity interests in the portfolio of 14 fee simple-owned hotels described in the table above may be acquired (or Starwood Capital's interest could be sold) pursuant to the exercise of a buy/ sell agreement between Starwood Capital and such co-partners after June, 1995. Starwood Capital has agreed that if the buy/sell is exercised, during the term of the Starwood Noncompete, and Starwood Capital becomes obligated to acquire such co-partners' equity interests, then, during the term of the Starwood Noncompete, the Company may elect, by majority vote of the Independent Trustees and Directors, to acquire such co-partner's equity interests at the buy/sell price. The Partnership Option may be employed to acquire Starwood Capital's interest in this portfolio as described in the preceding paragraph. The portfolio of three subordinated notes (the "Harvey Second Mortgages") are secured by the same hotels which secure three first mortgage notes that were contributed by Starwood Capital to the Company as part of the Reorganization. In addition, the Company owns a 2% interest in the Harvey Second Mortgages 48 which it acquired in the Reorganization. The Company and Starwood Capital are entering into an intercreditor agreement with respect to such mortgage notes which will give the Company control over the exercise of remedies in the event of a default under the Harvey Second Mortgages. Starwood Capital also owns other interests in hotels which are not subject to the Partnership Option. Starwood Capital has acquired an interest in Westin, in a joint venture with an affiliate of Goldman, Sachs & Co. The Company agreed, as a part of the Reorganization, that Starwood Capital's interest in Westin would not be contributed to the Partnerships by Starwood Capital and would not be an Excluded Asset or subject to either the Partnership Option or the Starwood Noncompete. Such determination was based on the following: the investment objectives are different, as Westin is primarily seeking third-party management, franchise or representation agreements; Westin will be highly leveraged and does not expect to generate cash for distribution; and Westin's structure primarily generates income which does not qualify for REIT purposes. The Company and Starwood Capital have entered into the Westin Agreement with Westin pursuant to which Westin has agreed that, subject to certain exceptions and limitations, Westin will not acquire or seek to acquire domestic United States hotel equity interests. See "Structure of the Company--Management of the Partnerships." Starwood Capital is the sponsor of an investment fund that has, as its principal investment purpose, the origination or acquisition of performing real estate debt and debt-related interests, which may include performing debt interests collateralized by hotel assets (such entity, together with any future similar such entity being herein referred to as the "Starwood Debt Funds"). Interests from time to time held by the Starwood Debt Funds shall not be subject to the aforesaid purchase option and are not included in the above description of Excluded Assets. However, during any period in which the Starwood Noncompete is in force, Starwood Capital has agreed that the Starwood Debt Funds shall not initiate or acquire loans collateralized by hotel assets where it is anticipated that the underlying equity will be acquired by the debt holder within one year from the acquisition of such debt. In addition, during such period, Starwood Capital has agreed that it will not allow any Starwood Debt Funds to sell or contribute any interests to the Company, including debt positions or equity interests obtained by the Starwood Debt Funds under, pursuant to or by reason of the holding of debt positions. ENVIRONMENTAL MATTERS In the latter part of 1991, the Company obtained preliminary or "Phase I" environmental site assessments with respect to the Trust's hotel properties and the Milwaukee Marriott Hotel. These assessments covered all of the Company's fee interests (excluding interests acquired from Starwood Capital and the additional hotels acquired since the Reorganization), as well as hotels securing mortgage interests other than Dallas Viscount, Modesto Vagabond and Jefferson City Ramada Inn. The potential for environmental impairment was assessed as moderate to high only at the Embassy Suites Hotel in Phoenix, Arizona. According to the assessment of that property, petroleum hydrocarbons are present in the land beneath this hotel; however, the Trust could not determine without further investigation the extent of the potential contamination or whether this contamination resulted from the underground storage tanks placed on the property by the property's former owner or from similar tanks located on land adjacent to the property, which tanks are known to have suffered leakage. A magnetic survey conducted on the property did not detect the continuing existence of the underground storage tanks on the Company's property, and the environmental consultant did not recommend that any further action be taken. Phoenix municipal authorities have indicated an awareness of possible groundwater contamination in the area, but to date have taken no action. A tank leak test conducted at the Bourbon Street Hotel in early 1992 revealed no evidence of leakage. A release of petroleum from an underground storage tank at the Bay Valley Hotel and Resort was reported to the appropriate state agency in 1992. After the tank and surrounding soils were removed, additional soils and groundwater testing was performed, which revealed environmental contamination in a localized area. Environmental testing has been performed to identify the vertical and horizontal extent of the contamination released from the tank. The consultant has proposed to remedy the contamination through installation of a groundwater pump and treatment system to capture and treat impacted groundwater and excavation of 49 about 390 cubic yards of impacted soil. Amendments to the relevant environmental clean-up laws, which have recently been introduced in the Michigan Legislature, may reduce the extent or magnitude of the clean-up that may be required at the site. The consultant's recommendations were made upon the basis of existing law, and did not take into account the proposed legislative amendments. After the Company assesses the impact of any amendments that may be enacted to the relevant statutes, the Company will perform whatever remediation is required by law. Any further remediation costs that are incurred may be reimbursed by a Michigan environmental fund, although there can be no assurance that the fund will have sufficient resources to pay all claims made against it. If the Company does not receive reimbursement for future remediation costs, the Company will bear those costs. "Phase I" environmental site assessments were performed between 1992 and 1994 in connection with the mortgage assets contributed to the Realty Partnership by Starwood Capital. In addition, Starwood Capital has contributed to the Realty Partnership fee interests in four hotels for which "Phase I" environmental site assessments were performed between 1993 and 1994. The potential for environmental impairment was assessed as low to moderate at each of the four hotels. The Company has not been identified by the U.S. Environmental Protection Agency or any similar state agency as a responsible or potentially responsible party for, nor has it been the subject of any governmental proceeding with respect to, any hazardous waste contamination. If the Trust or the Corporation were to be identified as a responsible party, it would in most circumstances be strictly liable, jointly and severally with other responsible parties, for environmental investigation and clean-up costs incurred by the government and, to a more limited extent, by private persons. Based upon the environmental reports described above, the Company believes that a substantial number of its Hotels incorporate potentially asbestos-containing materials. Under applicable current Federal, state and local laws, asbestos need not be removed from or encapsulated in a hotel unless and until the hotel is renovated or remodeled. Based upon the above-described environmental reports and testing and facts known to the management of the Company, future remediation costs are not expected to have a material adverse effect on the Company's results of operations or financial position or cash flows and compliance with environmental laws has not had and is not expected to have a material effect on the capital expenditures, earnings or competitive position of the Company. REGULATION AND LICENSING The ownership and operation of the Company's casino gaming facilities in Nevada are subject to extensive licensing and regulatory control of the Nevada Commission, the Nevada State Gaming Control Board (the "Nevada Board") and the Clark County Liquor and Gaming Licensing Board (the "Clark County Board," and together with the Nevada Commission and the Nevada Board, the "Nevada Gaming Authorities"). The Corporation is registered with the Nevada Commission as a publicly traded corporation and has been found suitable by the Nevada Gaming Authorities as the sole shareholder of HI Nevada to own all of the outstanding capital stock of HI Nevada. HI Nevada, which operates two non-restricted gaming facilities in Las Vegas, Nevada, must be licensed by the Nevada Gaming Authorities. The Corporation and HI Nevada have obtained from the Nevada Commission the various registrations, approvals, permits and licenses required in order to engage in gaming activities in Nevada. The Trust was found suitable by the Nevada Commission to be the landlord of HI Nevada. No person may become a stockholder of, or receive any percentage of profits from, HI Nevada without first obtaining licenses and approvals from the Nevada Gaming Authorities. Officers, directors and key employees of the Corporation who are actively and directly involved in gaming activities of HI Nevada may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing or a finding of suitability for any cause they deem reasonable. If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable 50 for licensing or continued association with the Corporation or HI Nevada, the companies involved would have to sever all relationships with such person. Prior approval of the Nevada Commission is required for the sale, assignment, transfer, pledge or other disposition of any security issued by HI Nevada. Any beneficial holder of the Corporation's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a holder of such securities determined if the Nevada Commission has reason to believe that such ownership would be inconsistent with the policies of the State of Nevada. Any person who acquires more than 5% of the Corporation's voting securities must report such acquisition to the Nevada Commission. Beneficial owners of more than 10% of the Corporation's voting securities must apply to the Nevada Commission for a finding of suitability within 30 days after the Chairman of the Nevada Board mails written notice requiring such filing. If the beneficial owner of voting securities who must be found suitable is a corporation, partnership, trust, or other business entity, it must submit detailed business and financial information including a list of beneficial owners. The applicant for such a finding of suitability must pay all costs incurred by the Nevada Gaming Authorities in conducting any such investigation. Under certain circumstances, an "institutional investor," as defined in the regulations of the Nevada Commission, that acquires more than 10%, but not more than 15%, of the Corporation's voting securities may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities only for investment purposes. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purposes of causing, directly or indirectly, the election of a majority of the members of the Board of Directors of the Corporation, or any change in the Corporation's corporate charter, bylaws, management, policies or operations of the Corporation, or any of its gaming affiliates, or any other action that the Nevada Commission finds to be inconsistent with holding the Corporation's voting securities only for investment purposes. Changes in the control of the Corporation or HI Nevada through a merger, consolidation, acquisition of assets, management or consulting agreements or any form of takeover cannot occur without the prior approval of the Nevada Commission. Entities or persons seeking to acquire control of the Corporation must satisfy the Nevada Board and Nevada Commission in a variety of stringent standards prior to assuming control of the Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. As described herein, the contribution by HI Nevada to the Operating Partnership of its gaming assets (and the transfer of certain liabilities retained by HI Nevada) not contributed or transferred to the Operating Partnership upon consummation of the Reorganization is subject to receipt of certain licenses and approvals from the Nevada Gaming Authorities. Likewise, the Directors of the Corporation elected on December 15, 1994 will not take office until either of certain licenses and approvals are received from the Nevada Commission or until such licenses and approvals shall no longer be required. Upon the receipt of such licenses and approvals, such gaming assets will be transferred to a partnership 99% owned by the Operating Partnership, as the limited partner and 1% by HI Nevada, as the general partner and the Directors of the Corporation elected on December 15, 1994 will take office. If all or any portion of the gaming assets are disposed of prior to the receipt of such gaming approvals, then the net proceeds of such disposition will be contributed to such limited partnership upon receipt thereof. If the required licenses and approvals of the Nevada Gaming Authorities are not received on or before December 31, 1996, the gaming assets and related liabilities retained by HI Nevada will not be contributed to such Partnership and on such date HI Nevada will contribute to the Operating Partnership cash equal to the value of the gaming assets not disposed of prior to such date. No additional interests in the Operating Partnership will be issued upon the transfer of either the gaming assets or proceeds of the disposition thereof or upon the contribution of cash to the Operating Partnership in lieu of such transfers. See "Structure of the Company--Formation of the Partnerships and the Reorganization." Approvals may be required from the Nevada Commission before the Corporation may make exceptional repurchases of securities above current market price, and before a corporate acquisition opposed by 51 management can be consummated. Nevada's gaming regulations also require prior approval of the Nevada Commission in the event of a Corporation plan of recapitalization proposed by the board of directors in opposition to a tender offer made directly to shareholders for the purpose of acquiring control of the Corporation. Nevada law prohibits the Corporation from making a public offering of its securities without the approval of the Nevada Commission if any part of the proceeds of the offering is to be used to finance the construction, acquisition or operation of gaming facilities in Nevada, or to retire or extend obligations incurred by the Corporation for one or more such purposes. The Offering is not subject to the requirement of prior approval by the Nevada Commission because as discussed herein none of the proceeds will be used by the Corporation to construct, acquire or finance gaming facilities in Nevada or to retire or extend the Corporation's obligations incurred for such purposes. Starwood Capital has agreed with the Nevada Gaming Authorities that prior to such time as the required licenses and approvals are obtained or are no longer required, it will not own, directly or indirectly, more than 4.9% of the issued and outstanding Paired Shares at any time. INSURANCE The Company intends to continue to carry comprehensive liability, fire (at replacement cost), flood, extended coverage and business interruption insurance with respect to each of its properties, with policy specifications, limits, and deductibles customarily carried for similar properties. See "Business and Properties--Operations--Franchise Agreements." While the Company believes that its insurance coverage is adequate, there are certain types of extraordinary losses, which may be either uninsurable or not economically insurable. Should an uninsured loss occur, the Company could lose both its investment in and anticipated profits and cash flow from a property and would continue to be obligated on any mortgage indebtedness on the property. See "Risk Factors--Real Estate Investment Risks--Uninsured Loss." The Company does not carry earthquake insurance. With respect to those properties in which the Company holds an interest through a mortgage position, the borrowers under such mortgage are obligated to the Company to maintain insurance on such properties and to arrange for the Company to be covered as a named insured on such policies. The face amount and scope of such insurance coverage may be less comprehensive than the Company would carry if it held the fee interest in such property directly. Accordingly, in such circumstances, or in the event that the borrowers under such mortgages fail to maintain required coverage, uninsured or underinsured losses may occur, which could have an adverse impact on the Company's cash flow or financial condition. EMPLOYEES As of March 31, 1995, the Trust had 3 employees and the Corporation had approximately 2,240 employees. The Company is subject to two collective bargaining agreements at one of its hotels. 52 THE ACQUISITION FACILITY AND OTHER FINANCING The Realty Partnership is negotiating a 3-year, $160 million secured revolving credit facility to be provided by Lehman Brothers Holdings Inc., an affiliate of one of the Underwriters (the "Acquisition Facility"), under which the Company, through the Realty Partnership, may borrow to finance the acquisition of additional hotel properties, hotel renovations, capital improvements and for general corporate purposes. Interest on amounts drawn under the Acquisition Facility float at 1.625% over the one, two or three month LIBOR (at the Company's option). The Acquisition Facility will be secured by certain properties of the Company and may be secured by other properties acquired by the Company, all on a cross-collateralized basis. The Acquisition Facility may be retired in whole or in part from the proceeds of public or private issuances of equity or debt securities by the Company and may be refinanced in whole or in part with fixed-rate financing. The closing of the Acquisition Facility is subject to a variety of conditions, including the negotiation of definitive documents and the syndication of $60 million of the facility amount. The amount of the Acquisition Facility may be lower than anticipated. The Realty Partnership has received a commitment from Lehman Commercial Paper Inc., an affiliate of one of the Underwriters, to provide a $45 million, 18 month repurchase financing (the "Financing") secured by certain mortgage loans owned by the Company. Interest on the Financing will be 1.5% over the one- month LIBOR for the first 12 months of the Financing, and 1.75% over the one-month LIBOR thereafter. It is expected that $42 million will be outstanding on the Financing at the closing of the Offering. The closing of the Financing is subject to a variety of conditions, including the negotiation of definitive documents. See "Underwriting." 53 STRUCTURE OF THE COMPANY GENERAL The Trust and the Corporation are separate entities, the shares of which are owned, through the "Paired Share" structure, by the same shareholders. See "Principal Shareholders" and "Capital Stock--The Pairing Agreement." The Company's ownership interests in the Hotel Assets are held through the Realty Partnership and all operating functions for the Hotel Assets, other than certain gaming assets described below, are performed through the Operating Partnership. The Trust controls the Realty Partnership as the sole general partner, and the Corporation controls the Operating Partnership as the managing general partner (subject, in the case of the Gaming Assets, to receipt of certain regulatory approvals and subject to the rights of the management committee until the receipt of such approval). Starwood Capital is a limited partner of the Partnerships. Starwood Capital has agreed with various of its investors who hold indirect interests in the Units, that Units and/or Paired Shares for which Units are exchanged will be distributed in kind to such investors. Following any such distribution, Starwood Capital will not control any such investor's decision as to the exchange or sale of such investor's Units or Paired Shares. By way of illustration, if all Units held by Starwood Capital were currently distributed, Starwood Capital would control less than half of the Units currently controlled by it. Units held by Starwood Capital are (subject to certain restrictions) exchangeable one-for-one for Paired Shares. See "--Limited Partner Rights--Exchange Rights." FORMATION OF THE PARTNERSHIPS AND THE REORGANIZATION Each of the Partnerships was formed under the Delaware Revised Uniform Limited Partnership Act ("RULPA"). Pursuant to the Reorganization, the Trust contributed to the Realty Partnership all of its properties and assets, subject to substantially all of its liabilities (although the Trust agreed to indemnify the Realty Partnership and Starwood Capital against certain liabilities) (the "Trust Assets") in exchange for a general partner interest in the Realty Partnership and Starwood Capital contributed to the Realty Partnership cash, certain hotel properties and first mortgage notes (the "Starwood Realty Assets") and certain indebtedness of the Realty Partnership in exchange for a limited partner interest in the Realty Partnership. In addition, the Corporation and its subsidiaries contributed to the Operating Partnership certain properties and operating assets, subject to certain liabilities (the "Corporation Assets") in exchange for general partner interests in the Operating Partnership and Starwood Capital contributed to the Operating Partnership cash, furnishings and equipment of the hotel properties included in the Starwood Realty Assets, and other hotel operating assets (the "Starwood Operating Assets") in exchange for a limited partner interest in the Operating Partnership. The remaining assets and properties of the Corporation will be contributed to an affiliate of the Operating Partnership upon receipt of certain regulatory approvals. See "Business and Properties--Regulation and Licensing." The aggregate number of Units allocated to Starwood Capital and the interests of the Trust and the Corporation and their subsidiaries and the other terms of the Reorganization were determined by arm's length negotiation among the Trust, the Corporation and Starwood Capital. Independent appraisals were not obtained for the purpose of determining the terms of the Reorganization. The Reorganization was approved by the shareholders of the Trust and the Corporation at meetings held on December 15, 1994 and was consummated on January 31, 1995. As part of the Reorganization, (i) the name of the Trust was changed to "Starwood Lodging Trust" from "Hotel Investors Trust" and the name of the Corporation was changed to "Starwood Lodging Corporation" from "Hotel Investors Corporation" and (ii) the Declaration of Trust of the Trust and the Articles of Incorporation of the Corporation were amended to (a) create classified Boards for the Trust and the Corporation, (b) increase the authorized shares of capital of the Trust and the Corporation, and (c) to effect certain other changes to such documents. After completion of the Reorganization, three of the mortgages owned by the Realty Partnership (together with the indebtedness related thereto) were contributed to SLT Realty Company, a Delaware limited liability company, and Starlex LLC, a New York limited liability company, was formed to hold certain future acquisitions of interests in hotels (collectively, the "LLCs"). The Realty Partnership is the managing member of the LLCs and holds a 99% interest. The Trust and Starwood Capital (in the case of SLT Realty Company) hold the remaining 1% interest. 54 The ownership structure of the Company after the completion of the Offering will be as follows: [MAP] - ------------ (1) The percentages in this table set forth under the heading "Percentage After Unit Exchange" assume that all remaining Units held by Starwood Capital have been exchanged for Paired Shares. However, prior to receipt of certain regulatory approvals, Starwood Capital's ownership of Paired Shares may not exceed 4.9% of the outstanding Paired Shares. See "Business and Properties--Regulation and Licensing." In addition, even after receipt of such regulatory approvals, because of the Ownership Limitation, Starwood Capital can only exchange Units which will cause Starwood Capital to receive in exchange therefor not more than an additional 7.6% of the outstanding Paired Shares, bringing its Paired Share ownership to 8.0%. MANAGEMENT OF THE PARTNERSHIPS The Trust is the sole general partner of, and conducts all of its business and operations, including all real estate acquisitions, through, the Realty Partnership. Upon receipt of the Gaming Approvals, the Corporation will be the managing general partner of, and will conduct all of its business and operations through, the Operating Partnership. Prior to receipt of the Gaming Approvals, the Operating Partnership is being managed by a management committee the members of which are identical to the members of the Corporation Board of Directors that will hold office upon receipt of the Gaming Approvals. While awaiting the Gaming Approvals, the Corporation's existing management and Board of Directors will be responsible for the operation and control of the Gaming Assets and the management committee will be prohibited from any 55 influence or control of the Gaming Assets. After receipt of the Gaming Approvals, the management committee will be disbanded, the Corporation will be the managing general partner of the Operating Partnership and the Board of Directors of the Corporation will have authority to make decisions on behalf of the Corporation with respect to the Operating Partnership. See "Business and Properties--Regulation and Licensing." As the general partner and, once the management committee has been disbanded, managing general partner of the Realty Partnership and the Operating Partnership, respectively, the Trust and the Corporation manage all of the business and affairs of the Realty Partnership and the Operating Partnership, respectively. The Trust and the Corporation (or the management committee of the Operating Partnership) have full and complete power, authority and discretion to make all decisions on behalf of the Realty Partnership and the Operating Partnership and to take all action necessary or appropriate to carry out the business of the Realty Partnership and the Operating Partnership, respectively. Pursuant to the Starwood Noncompete contained in the Formation Agreement, Starwood Capital will not compete within the United States, directly or indirectly, with the Partnerships and will present to the Partnerships all acquisitions of (i) fee or ground lease interests and other equity interests in hotels in the United States and (ii) debt interests in hotels in the United States where it is anticipated that the equity will be acquired by the debt holder within one year from the acquisition of such debt. During the term of the Starwood Noncompete, Starwood Capital will not acquire any such interest. The foregoing restrictions do not apply to: (i) the Excluded Assets, Westin and additional investments by Starwood Capital therein; (ii) the Permitted Westin Investments made through Westin; and (iii) acquisitions of warrants, equity participations or similar rights incidental to a debt investment by a Starwood Debt Fund. The term of the Starwood Noncompete is until the later of (i) the third anniversary of the closing of the Offering or (ii) the time at which no officer, director, general partner or employee of Starwood Capital is on either the Board of Trustees of the Trust or the Board of Directors of the Corporation. The Company, Starwood Capital and Westin have agreed, pursuant to the Westin Agreement, that during the period in which an officer, director, general partner or employee of Starwood Capital is on either the Board of Trustees of the Trust or the Board of Directors of the Corporation and Starwood Capital co-controls Westin (the "Westin Restriction Period"), Westin will not acquire or seek to acquire United States hotel equity interests (directly or indirectly), other than: (i) minority equity investments (i.e., less than 50% of total equity investment) made in connection with Westin's acquiring, extending or modifying management contracts, leases or franchise or representation agreements, (ii) equity interests that are a minority position (i.e., less than 50% of the total asset value at the time of acquisition) of its acquisition of a hotel management company or the assets of such a hotel management company acquired by Westin, (iii) acquisitions where the Company co-invests or has the opportunity to co-invest on the same basis as the other owners of Westin, with management to be agreed upon and with Westin to be the franchisor, (iv) equity investments made in any asset currently subject to a management, franchise or representation agreement or (v) additional investments which Westin may make in its currently held assets (collectively, the "Permitted Westin Investments"). During the Westin Restriction Period, if Starwood Capital vetoes Westin's consummation of a Permitted Westin Investment or of certain other opportunities, and all the other owners of Westin desire to pursue such opportunity, then the Company will not pursue such opportunity independently of Westin for a period of 270 days after such veto, unless the Company was pursuing such opportunity independently prior to Starwood Capital's veto. Mr. Sternlicht has agreed that, during the term of the Starwood Noncompete, he will recuse himself from Westin's decision-making process with respect to any opportunity pursued by Westin that is also being pursued by the Company. Starwood Capital has agreed that, where a co-investment opportunity with Westin is rejected by the Company, Starwood Capital will exercise any applicable rights to require that such investment be made in a separate joint venture in which Starwood Capital shall not make any investment. Westin has also agreed that for up to three years if the Company seeks a Westin franchise for one of its hotels, the annual franchise and marketing fees will not exceed 80% of those charged on other recently 56 franchised Westin domestic hotels (but no less than 4.75% of gross room revenues). The continued availability of such fee structure for additional hotels is subject to the Company's having at least three franchised Westin hotels at the end of one year and six at the end of two years. Pursuant to the Partnership Agreements, the limited partners agree that in the event of any conflict in the fiduciary duties owed by the Company to its shareholders and, as the general partner of the Partnerships, to such limited partners, the Company will fulfill its fiduciary duties to such limited partners by acting in the best interest of the Company's shareholders. TERM AND DISSOLUTION The term of each of the Partnerships shall be until December 31, 2094 unless sooner dissolved and terminated in the case of (i) the sale or other disposition of all or substantially all of the assets of such Partnership (unless such Partnership elects to continue the business of such Partnership as provided in its Partnership Agreement), (ii) the written election to dissolve such Partnership by the general partners thereof, (iii) the dissolution, termination, withdrawal, retirement, expulsion or bankruptcy of the last remaining general partner of such Partnership, unless such Partnership's business is continued as provided in its Partnership Agreement and (iv) the entry of a decree of judicial dissolution of such Partnership pursuant to the RULPA. DISTRIBUTIONS AND REIMBURSEMENT The Trust has the authority in its discretion to cause the Realty Partnership to make distributions from time to time to the partners of the Realty Partnership. The Corporation has the authority in its discretion to cause the Operating Partnership to make distributions from time to time to the partners of the Operating Partnership. The Realty Partnership will reimburse the Trust for all expenses of the Trust incurred in connection with the business of the Realty Partnership, and the Operating Partnership will reimburse the Corporation for all expenses of the Corporation incurred in connection with the business of the Operating Partnership. In the event of a dissolution of either of the Partnerships, the assets of such Partnership will be liquidated and (after payment of creditors and establishment of any reserves to provide for contingent liabilities) distributed to holders of Units in accordance with the positive balances in their capital accounts. OFFERINGS OF PAIRED SHARES Each of the Partnership Agreements provides that the net proceeds of all offerings of Paired Shares by the Company (including the Offering) will be contributed to the Partnerships in accordance with the Issuance Percentages (as defined below) from time to time. Upon such contribution, the Realty Partnership will issue to the Trust and the Operating Partnership will issue to the Corporation an additional number of Units in such Partnership equal to the number of such Paired Shares so offered. The Partnership Agreements provide that upon the contribution of cash to a Partnership (other than in connection with such an offering of Paired Shares) by a partner, such Partnership will issue Units of such Partnership equal to the amount of such cash divided by the fair market value of such a Unit prior to such contribution. The Partnership Agreements also provide that the net proceeds of all offerings of debt securities by the Trust or the Corporation will be loaned by the Trust or the Corporation, as the case may be, to the Realty Partnership or the Operating Partnership, as the case may be. LIMITED PARTNER RIGHTS Pursuant to agreements entered into in connection with the Reorganization, Starwood Capital, as holder of Units, has certain rights to tender all or a portion of the Units held by it to the Company for exchange, and certain rights to require the Company to register under the Securities Act of 1933, as amended (the "Securities Act"), any Paired Shares which may be issued upon such exchange. The Partnership Agreements provide that Starwood Capital may transfer such rights upon a transfer of Units. EXCHANGE RIGHTS. Pursuant to an Exchange Rights Agreement (the "Exchange Rights Agreement") entered into among the Company, Starwood Capital, the Realty Partnership and the Operating Partnership, subject to the limitations described below, Starwood Capital will have the right to tender to the Company all 57 or a portion of the Units held by such holder. Each tender must consist of an equal number of Realty Units and Operating Units. The Company will have the option to pay for such tendered Units either (i) by delivering Paired Shares to such tendering holders as described below (the "Paired Share Option"), (ii) with available cash or borrowed funds (the "Cash Option") or (iii) by delivering a combination of Paired Shares and cash (the "Combined Option"). The Company currently intends, to the extent permitted, to pay for tendered Units by electing the Paired Share Option. The election by the Company among those options must be made by a majority of each of their respective Disinterested Members. See "Capital Stock--Paired Shares." If the Trust and the Corporation are unable to agree on the option to be elected within 15 days after the tender of Units, they shall be deemed to have elected the Cash Option. If the Paired Share Option or the Combined Option is elected and if, as a result of the Ownership Limitation, the tendering holder cannot receive the full number of Paired Shares otherwise issuable pursuant to such Option, such tender shall be automatically reduced so that after such tender the tendering holder receives the maximum number of Paired Shares that such holder can receive without violating the Ownership Limitation plus cash for those of the Paired Shares with respect to which the Company has elected the Cash Option. In such circumstance, a tendering holder may, subject to certain limitations, require the Company to effect a registered public offering of a number of Paired Shares equal to the number of Paired Shares which could not be so issued as a result of the Ownership Limitation. The proceeds of such offering would be used to purchase such tendered Units as described below under "-- Registration Rights." Prior to receipt of Gaming Approval, Starwood Capital must, as a condition to the tender of Units, give not less than 90 days' notice to the Company of their intent to tender Units which would result in Starwood Capital holding more than 4.9% of the outstanding Paired Shares. After receipt of Gaming Approval, no such 90 days notice will be required. See "Business and Properties--Regulation and Licensing." PAIRED SHARE OR COMBINED OPTION. If the Paired Share Option or the Combined Option is elected, the Company will deliver to the tendering holder within 15 days after the related tender (the "Exchange Date"), for each Unit of the Realty Partnership and Unit of the Operating Partnership tendered for which Paired Shares are to be delivered, one Trust Share and one Corporation Share, respectively, subject to adjustment as described below. The Trust Shares and the Corporation Shares so delivered will be "paired" to the same extent as other outstanding Paired Shares. The Partnership Agreements also provide that if the Company grants, issues or sells, on a pro rata basis to all holders of Paired Shares, options, convertible securities or rights (collectively, "Purchase Rights") to purchase shares of stock, warrants, securities or other property, then each holder of Units shall be entitled to acquire rights that are substantially similar in amount, tone and tenor to the Purchase Rights which such holder would have received if its Units had been exchanged for Paired Shares immediately prior to such grant, issue or sale. The Exchange Rights Agreement provides that no Units shall be accepted for exchange (i) if as a result of such exchange the Trust would violate the Ownership Limitation or (ii) prior to the expiration or termination of any applicable waiting period under the Hart Scott Rodino Antitrust Improvements Act of 1976, as amended. CASH OR COMBINED OPTION. If the Cash Option or the Combined Option is elected, the Company will deliver to the tendering holder within 20 days after the related tender, an amount of cash in respect of each Paired Share for which cash is to be paid equal to the average closing price per share of the Paired Shares on the NYSE for the ten trading day period ending on the day before the date of the related tender. In connection with any such payment of cash, unless otherwise agreed by the Trust and the Corporation from time to time by action of a majority of each of their respective Disinterested Members, the Trust will pay 95% of such aggregate cash payment and the Corporation will pay 5% of such aggregate cash payment (such percentages, as they may be amended from time to time pursuant to such agreement, being called the "Issuance Percentages"). 58 REGISTRATION RIGHTS. Pursuant to a Registration Rights Agreement (the "Registration Rights Agreement") entered into between the Company and Starwood Capital, the Company has granted registration rights with respect to Paired Shares which may be acquired upon exchange of Units. Pursuant to such registration rights Starwood Capital may, subject to certain limitations, require the Company to effect up to four registrations of Paired Shares under the Securities Act including shelf registrations of Paired Shares under the Securities Act (any shelf registrations to be maintained until no Paired Shares are required to be registered under the Registration Rights Agreement), in each case at the expense of the Company (other than underwriting discounts and selling commissions and fees and expenses of counsel to Starwood Capital). In addition, if the Company does not issue Paired Shares upon a tender of Units because of the Ownership Limitation, the tendering holder may each such time, subject to certain limitations, require the Company to effect a registered public offering under the Securities Act of an equal number of Paired Shares. The net proceeds of such offering (after underwriting discounts and selling commissions) would be used to purchase such tendered Units. Starwood Capital also has rights, subject to certain exemptions and limitations, to request that the Company include such Paired Shares in other registrations of Paired Shares by the Company under the Securities Act. The Registration Rights Agreement specifies certain times during which a registration of Paired Shares cannot be initiated, including the 90-day period after the Company affects a registration of Paired Shares and the 90-day period after a holder of Units delivers a demand for registration that is not withdrawn. ISSUANCE OF ADDITIONAL UNITS Each Partnership may issue additional units of general and/or limited partner interests. Such additional units may be issued upon such terms and under such circumstances as the general partner or managing general partner of the applicable Partnership may determine. There are no limitations on the ability of the general partner or managing general partner of the Partnerships to issue additional units of partnership interest. POLICIES WITH RESPECT TO CERTAIN ACTIVITIES The following is a discussion of the policies of the Company with respect to investments, financing and certain other activities. The policies with respect to these activities have been determined by the Board of Trustees of the Trust and the Board of Directors of the Corporation and may be amended or revised from time to time at the discretion of the Board of Trustees or the Board of Directors, as the case may be, without notice to or a vote of the shareholders of the Company, except that changes in certain policies with respect to conflicts of interest must be consistent with legal requirements. INVESTMENT POLICIES The Board of Trustees and the executive officers of the Trust are responsible for managing the Trust's investments. The Trust does not intend to engage the services of an investment advisor. INVESTMENTS IN REAL ESTATE OR INTERESTS IN REAL ESTATE. The investment objectives of the Company are to increase cash flow and the value of the properties and, generally, to acquire established income-producing hotel properties with cash flow growth potential. Additionally, where prudent and possible, the Company will seek to upgrade the existing properties and any newly acquired properties. The business of the Company will be focused principally on hotel properties. The policy of the Company is to acquire assets primarily for current income generation and long-term value appreciation. Although none is currently planned, the Company may in the future engage in select development opportunities in certain submarkets which may require the Company to add development staff. The Company may purchase or lease properties for long-term investment, expand and improve the properties presently owned, or sell such properties, in whole or in part, when circumstances warrant. The Company also may participate with other entities in property ownership, through joint venture or other types of co-ownership. Equity investments may be subject to existing mortgage financing and other indebtedness or investments which have priority over the equity interest of the Trust or the Corporation. 59 All the activities of the Company will be conducted through the Partnerships, except that prior to the receipt of the Gaming Approvals the gaming operations of the Corporation will be conducted through HI Nevada. The Trust or the Corporation may also hold temporary cash investments from time to time pending investment or distribution to shareholders. While the Company emphasizes equity real estate investments, it may, in its discretion, invest in mortgages, stock of other REITs or other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities and other real estate interests. Such mortgage investments may include participating or convertible mortgages or secured or unsecured preferential advances or loans. In any event, the Company does not intend that its investments in securities will require it to register as an "investment company" under the Investment Company Act of 1940, and the Company would divest securities before such registration would be required. In addition, the Company generally does not intend (i) to acquire mortgage investments in the future except where it provides seller financing on sales of its assets or where it is likely that hotel equity can be acquired or controlled through the acquisition of debt nor (ii) to pursue management of hotels in which the Company will not own a substantial economic interest. The Trust Declaration provides that the Board of Trustees generally may amend the investment policies set forth in the Trust Declaration at any time without the consent of the Trust's shareholders. Section 8-302 of the Maryland REIT Law provides that a real estate investment trust must hold, either directly or through other entities, at least 75% of the value of its assets in real estate assets, mortgages or mortgage related securities, governmental securities, cash and cash equivalent items, including high-grade short-term securities and receivables. DISPOSITION The Company continuously reviews its properties to determine which properties should be retained and which should be disposed of. The Company may decide to dispose of a particular property at any time. The Company recently sold the Jacksonville, Florida Holiday Inn and the Fayetteville, North Carolina Ramada Inn. FINANCING The Company currently has a policy of incurring not more than a 50% Ratio of Debt-to-Total Market Capitalization. The Ratio of Debt-to-Total Market Capitalization is equal to the total combined debt of the Company (which does not include intercompany debt), divided by the sum of the market value of all issued and outstanding Paired Shares (assuming the exchange of all Units for Paired Shares) and the total combined debt of the Company. Upon completion of the Offering, the Ratio of Debt-to-Total Market Capitalization of the Company will be approximately 9.5%, based on an assumed offering price of $23.50 per Paired Share (which is the midpoint of the range set forth on the cover page). Since the Ratio of Debt-to-Total Market Capitalization may be affected by factors outside the control of the Company, such as fluctuations in the market value of the outstanding Paired Shares, the achievement of such ratio at the time of incurrence of debt does not ensure that the Company will be able to maintain such ratio. The organizational documents of the Company do not limit the amount or percentage of indebtedness that they may incur. The Company could borrow up to approximately $383.2 million, in addition to indebtedness expected to be outstanding upon completion of the Offering, without exceeding the 50% Ratio of Debt-to-Total Market Capitalization, assuming a market value per Paired Share equal to the public offering price set forth on the cover page of this Prospectus. The Company may from time to time modify its debt policy in light of then current economic conditions and other factors. If the Board of Trustees of the Trust or the Board of Directors of the Corporation determines that additional funding is required, the Company may raise such funds through additional equity offerings, debt financing or retention of cash flow (subject to provisions in the Code concerning taxability of undistributed REIT income), or a combination of these methods. Additional borrowings may be made through any of the Company or the Partnerships and may be incurred in the form of secured or unsecured borrowings. Additional borrowings may be recourse, non-recourse or cross-collateralized and may contain cross-default provisions. The proceeds from any borrowings may be used for the payment of distributions, for working capital, to make loans to the Partnerships, to 60 refinance existing indebtedness, to finance acquisitions, expansions or development of new properties or for other purposes. See "Federal Income Tax Considerations--Federal Income Taxation of the Trust--Requirements for Qualification--Annual Distribution Requirements." As long as the Partnerships are in existence, the proceeds of all common equity capital raised by the Company will be contributed to the Partnerships in exchange for Units in the Partnerships in accordance with the Issuance Percentages, as they may be amended from time to time. CONFLICTS OF INTEREST POLICIES OF BOARD OF TRUSTEES AND BOARD OF DIRECTORS. The Board of Trustees of the Trust and the Board of Directors of the Corporation have adopted a policy that any contract or transaction between the Trust or the Corporation, as the case may be, and one or more of its trustees, directors or officers, or between the Trust or the Corporation, as the case may be, and any other entity in which one or more of its trustees, directors or officers are directors or officers, or have a financial interest, must be approved by a majority of the disinterested trustees or directors after the material facts as to the relationship or interest and as to the contract or transaction are disclosed or are known to them. INDEPENDENT BOARD APPROVAL. The Trust's Trustees' Regulations and the Corporation's Bylaws provide that a majority of the Board of the Trust and a majority of the Board of the Corporation, as the case may be, will be Independent Trustees/Directors, as applicable. An "Independent Trustee/Director" is a trustee of the Trust or a director of the Corporation, as the case may be, who is not employed by or affiliated with Starwood Capital or the Company. In addition, the Trust's Trustees' Regulations and the Corporation's Bylaws, in each case, provide that, in addition to any affirmative vote required either by law, the Partnership Agreements, the Declaration of Trust of the Trust or the Articles of Incorporation of the Corporation, any Transaction (as described below) involving the Trust, the Corporation (or any of their respective subsidiaries) or either of the Partnerships shall require the affirmative vote of a majority of the members ("Disinterested Members") of the Board of Trustees of the Trust (in the case of a Transaction involving the Trust or the Realty Partnership) or the Board of Directors of the Corporation (in the case of a Transaction involving the Corporation or the Operating Partnership following receipt of Gaming Approval) who are not employees, officers, directors, Affiliates or Associates (as each is defined in the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of, the Interested Person who or which is a party to the Transaction. A "Transaction" is defined as any contract, sale, lease, exchange, mortgage, transfer or disposition to or with, or any other transaction with, any Interested Person (including, without limitation, any election with respect to the method of payment for an exchange of Units). An "Interested Person" is any person or entity who or which is the beneficial owner, directly or indirectly, of 5% or more of the outstanding Paired Shares or the outstanding Realty Units or Operating Units or who or which is an Affiliate or Associate of the Trust, the Corporation or either of the Partnerships. The Declaration of Trust of the Trust requires that at least a majority of the Board of Trustees be independent of any national hotel chain. The foregoing provisions may be amended or repealed only by a majority of trustees or directors, as the case may be, who are not employees, officers, Affiliates or Associates of the Trust, the Corporation, the Partnerships or any Interested Person. POLICIES APPLICABLE TO ALL TRUSTEES AND DIRECTORS. Under the law of Maryland, each trustee of the Trust and each director of the Corporation is obligated to offer to the Trust or the Corporation, as the case may be, any business opportunity (with certain limited exceptions) which comes to him and which the Trust or the Corporation, as the case may be, could reasonably be expected to have an interest in developing or acquiring. In addition, under the MGCL, any contract or transaction between a corporation and any director or any entity in which the director has a material financial interest will be void or voidable unless (a) it is approved, after disclosure of the interest, by the affirmative vote of a majority of disinterested directors or by the affirmative vote of a majority of the votes cast by disinterested stockholders, or (b) it is fair and reasonable to the corporation. While the Maryland law governing the Trust does not have a comparable statutory provision, the Trust has adopted a comparable policy. 61 OTHER POLICIES At all times, the Trust intends to make investments in such a manner as to be consistent with the requirements of the Code to qualify as a REIT unless, because of circumstances or changes in the Code (or other applicable law, rules or regulations), the Board of Trustees determines to revoke the Trust's REIT election. The Trust and the Corporation do not intend to underwrite securities of other issuers or actively trade in loans or other investments. The Trust and the Corporation have authority to offer Paired Shares or other securities and to repurchase or otherwise re-acquire their shares or any other securities and may engage in such activities in the future. In addition, the Partnerships have the authority to issue additional Units or other securities and to repurchase Units or other securities and may do so in the future. Except as described herein, none of the Trust, the Corporation or the Partnerships have any outstanding loans to their respective officers, directors or trustees. The Trust, the Corporation and the Partnerships have made and may make loans to joint ventures in which they participate in order to meet working capital needs. MANAGEMENT TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST The following table sets forth certain information with respect to each of the members of the Trust's Board of Trustees and each of the Trust's executive officers:
TERM NAME AGE POSITION(S) WITH THE TRUST EXPIRES - ------------------------------ --- -------------------------------------------------------- ----------- Barry S. Sternlicht........... 34 Chairman, Trustee and Chief Executive Officer 1997 Jeffrey C. Lapin.............. 38 President, Chief Operating Officer and Trustee 1996 Michael W. Mooney............. 48 Vice President and Chief Financial Officer N/A Bruce W. Duncan............... 43 Trustee(1) 1997 Madison F. Grose.............. 41 Trustee 1995 Stephen R. Quazzo............. 35 Trustee(1) 1996 William E. Simms.............. 51 Trustee(1) 1995 Daniel H. Stern............... 34 Trustee(1) 1997
- ------------ (1) Will become a Trustee upon completion of the Offering. The principal occupation for the last five years of each trustee or executive officer of the Trust is set forth below: BARRY S. STERNLICHT. Mr. Sternlicht is Chairman and Chief Executive Officer of the Trust. He was founder of Starwood Capital (and co-founder of its predecessor entity in September 1991) and has been the President and CEO of Starwood Capital Group, L.P. since its formation. Prior to forming Starwood Capital, he was Vice President and then Senior Vice President (from 1989 to 1991) of JMB Realty Corporation, a real estate investment firm. Mr. Sternlicht is currently a Trustee of each of Equity Residential Properties Trust, a multifamily REIT, and Angeles Participating Mortgage Trust, a REIT. JEFFREY C. LAPIN. Mr. Lapin is President and Chief Operating Officer of the Trust. Mr. Lapin was the President and Chief Executive Officer of the Trust from May 1991 to December 1994 and has been a Trustee since September 1992. Prior to that time he was Vice President (from January 1988) and Secretary (from September 1986) of the Trust. Prior to 1986 Mr. Lapin was a real estate attorney at Mitchell, Silberberg & Knupp in Los Angeles. Mr. Lapin is a director of THQ, Inc., a licensee of Nintendo products. Mr. Lapin has over ten years of experience in the hotel REIT industry. MICHAEL W. MOONEY. Mr. Mooney has been Vice President and Chief Financial Officer since July 1992. From March 1992 to July 1992 he was a Director of Finance of RELCO Industries, a real estate development company. From August 1990 to March 1992, he was Director of Finance of Dorn-Platz, Inc., a real estate 62 brokerage company. From July 1989 to August 1990, Mr. Mooney was an independent real estate consultant. Prior to that time, he was Executive Vice President and Chief Financial Officer of Gibraltar Savings. Mr. Mooney has indicated an intention to leave the Trust to pursue other opportunities subsequent to the June 1995 expiration of his employment agreement. The Company is currently seeking a sucessor to Mr. Mooney as Chief Financial Officer. BRUCE W. DUNCAN. Mr. Duncan has been President since October 1994 of Blakely Capital, Inc., a private firm focusing on investments in real estate and telecommunications. From 1992 to October 1994, Mr. Duncan was President and Co-Chief Executive Officer of JMB Institutional Realty Corporation and from 1984 to 1991 Executive Vice President of JMB Realty Corporation. Mr. Duncan holds an MBA from the University of Chicago. Mr. Duncan is on the Board of Directors of Northwestern Memorial Management Corp., a for profit subsidiary of Northwestern Memorial Hospital and is on the Board of Trustees of Kenyon College. MADISON F. GROSE. Mr. Grose has been Executive Vice President and General Counsel of Starwood Capital (and its predecessor entity) since July 1992. From November 1983 through June 1992, he was a partner in the law firm of Pircher, Nichols & Meeks. STEPHEN R. QUAZZO. Mr. Quazzo has been President since April 1991 of Equity Institutional Investors, Inc. a subsidiary of Equity Group Investments, Inc., a Chicago based holding company controlled by Samuel Zell. Prior to that time, Mr. Quazzo was a Vice President of Goldman, Sachs & Co., responsible for the firm's real estate investment banking activities in the Midwest. Mr. Quazzo is a member of the Urban Land Institute. WILLIAM E. SIMMS. Mr. Simms is president of the Reinsurance Division of Transamerica Occidental Life Insurance Company and a member of its board of directors. Over the past 24 years, he has held various other management positions with that company. He is active in civic organizations, such as the Charlotte Urban League, the Charlotte Mecklenburg Hospital Authority, Queens College, the Mint Museum, the Museum of the New South and the Arts and Science Council, and is a part owner of the new Carolina Panthers National Football League team. Mr. Simms is a director of NationsBank of North and South Carolina. DANIEL H. STERN. Mr. Stern is a co-founder and President of Ziff Brothers Investments, L.L.C., a diversified New York based investment management firm. Prior to co-founding Ziff Brothers Investments in December 1992, Mr. Stern was the Co-Managing Director of William A.M. Burden & Co., a private investment management firm where he was responsible for asset allocation and investment policy. Mr. Stern is a member of the Board of Directors of Commodore Media, Inc. DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION The following table sets forth certain information with respect to each of the members of the Corporation's Board of Directors, and each of the Corporation's executive officers.
TERM NAME AGE POSITION(S) WITH THE CORPORATION EXPIRES - --------------------------------- --- ----------------------------------------------------- ----------- Earle F. Jones................... 68 Chairman of the Board of Directors 1995 and Director(1) Kevin E. Mallory................. 36 Executive Vice President N/A Leslie R. King................... 52 Vice President of Operations N/A Jean-Marc Chapus................. 37 Director(2) 1996 Jonathan D. Eilian............... 27 Director(2) 1997 Bruce M. Ford.................... 54 Director(3) 1995 Steven R. Goldman................ 34 Director and Senior Vice President(2) 1996 Graeme W. Henderson.............. 61 Director(3) 1995 Michael A. Leven................. 57 Director(2) 1996 Barry S. Sternlicht.............. 34 Director(2) 1997 Daniel W. Yih.................... 37 Director(2) 1995
- ------------ (1) Current director who continues in office after receipt of Gaming Approval. (2) Becomes a director upon receipt of Gaming Approval. (3) Serves as a director until Gaming Approval is received. 63 The principal occupation for the last five years of each director or executive officer of the Corporation is set forth below: EARLE F. JONES. Mr. Jones has been a Director of the Corporation since 1985 and Chairman of the Board of Directors of the Corporation since February 1989. He has been Co-Chairman of MMI Hotel Group, a hotel company, since 1988. From 1967 to 1968, Mr. Jones was President of the International Association of Holiday Inns and served two terms as a Director. Mr. Jones is a Trustee and Chairman of Communications Improvement Trust, whose beneficiaries are public broadcasting and Tougaloo College Trust, a member of the Board of Trustees for Millsaps College and the Catholic Foundation, and Co-Chairman of the Mississippi Olympic Committee. KEVIN E. MALLORY. Mr. Mallory has been Executive Vice President of the Corporation since July 1992. From December 1991 to July 1992 he was President of Merit Hotel Group, a hotel development and consulting company. From September 1989 to November 1991, he was Development Director, Westin Hotels & Resorts, a hotel management Company. Prior to that time he was Assistant Vice President and Asset Manager of VMS Realty Partners, a real estate syndicator. Mr. Mallory's career reflects 15 years of experience in the hotel industry. LESLIE R. KING. Mr. King has been Vice President of Operations of the Corporation since 1992. From June 1991 to August 1992, Mr. King was Chief Operating Officer of Spring Garden Brewing Company, a restaurant and brewery service company. From May 1988 to June 1991, Mr. King was Chief Executive Officer of and Consultant to eight single hotel companies under common management. Prior to 1988, Mr. King was Senior Vice President of Operations Support for Red Lion Hotels & Inns. (He was named Vice President in 1982 and Executive Vice President in 1984.) Mr. King's career comprises 26 years of hotel and restaurant industry experience. JEAN-MARC CHAPUS. Mr. Chapus has been a Managing Director since January 1994 and Principal since December 1991 of Crescent Capital Company and has primary responsibility for the firm's private lending and private placement activities. He is also a Managing Director of the High Yield Bond Group of Trust Company of the West since March 1995. From 1986 to 1991, Mr. Chapus served as First Vice President at Drexel Burnham Lambert Incorporated. From 1982 to 1984, Mr. Chapus was a member of the mergers and acquisitions department at Lehman Brothers Kuhn Loeb Incorporated. JONATHAN D. EILIAN. Mr. Eilian has been Vice President and then Senior Vice President of Starwood Capital (and its predecessor entity) since its formation in September 1991. Prior to that time he was Acquisitions Associate for JMB Realty Corporation, a real estate investment firm, and for The Palmer Group, L.P., a private investment firm specializing in corporate acquisitions. Mr. Eilian received an MBA from the Wharton Graduate School of Business in 1991. BRUCE M. FORD. Mr. Ford has been a Director of the Corporation since 1983. He has been President and Managing Partner of F.K.B. Management Corporation, a restaurant management company, since January 1988 and President of Ford Management Corporation, a hotel/motel management and development company, since June 1988. Prior to that time, Mr. Ford was Senior Vice President of Operations of Ramada Inns. STEVEN R. GOLDMAN. Mr. Goldman has been a Senior Vice President of the Corporation since March 1995. Mr. Goldman was a Vice President of Starwood Capital, specializing in hotel acquisitions and hotel asset management, from August 1993 to February 1995. From 1990 to 1993, he was Senior Development Manager of Disney Development Company, the real estate investment development and management division of the Walt Disney Company. From 1986 to 1990, Mr. Goldman was Director of Development of The Hyatt Development Corporation. GRAEME W. HENDERSON. Mr. Henderson has been a Director of the Corporation since March 1990. He was Chairman of the Trust from July 1989 to December 1994 and Trustee of the Trust from September 1986 to December 1994. He has been an independent financial consultant since January 1990. Prior to 64 January 1990, Mr. Henderson has been President of Henderson Consulting, Inc., a private financial consulting firm. Mr. Henderson has been a President of Capstan, Inc. (Formerly Seymour, Inc.), a manufacturer of machine tool controls, since 1982. Mr. Henderson is currently a Director of Capital Southwest Corporation. MICHAEL A. LEVEN. Mr. Leven has been President and Chief Operating Officer of Holiday Inn Worldwide since November 1990. Prior to that time he was President of Days Inn (from 1985 to 1990), a senior executive, including President and Chief Operating Officer, of Americana Hotels (from 1976 to 1985) and an executive at Dunfey Family Hotels (1973 to 1976) and Sonesta Hotels (1961 to 1973). Mr. Leven is also a member of the Board of Advisors of the American Red Cross. DANIEL W. YIH. Mr. Yih is a general partner of Chilmark Partners, L.P. (since June 1995). Mr. Yih had served as president of Merco-Savory, Inc., a manufacturer of food preparation equipment (since March 1995) and as a senior executive of Welbilt Corporation (from September 1993 to March 1995). Prior to that time, Mr. Yih served as an associate of Kohlberg & Co. Mr. Yih is also a member of the Board of Directors of Scott Sports Group Inc. For information with respect to the principal occupation and business experience of Mr. Sternlicht, see "--Trustees and Executive Officers of the Trust," above. Prior to receipt of Gaming Approvals, the Operating Partnership will be managed by a management committee of the Operating Partnership consisting of the members of the Board of Directors who will take office upon receipt of Gaming Approvals. After receipt of Gaming Approvals, the Corporation will have authority to make decisions with respect to the Operating Partnership. See "Structure of the Company-- Management of the Partnerships." CLASSIFIED BOARDS; REMOVAL The Boards of the Trust and the Corporation are divided into three classes serving staggered terms so that the terms expire either at the 1995, 1996 or 1997 annual shareholders meetings. Starting with the 1995 annual meetings, one class will be elected each year for three-year terms. Holders of Paired Shares have no cumulative voting rights for the election of trustees and directors. The executive officers of the Trust and the Corporation serve at the pleasure of the Board of Trustees or the Board of Directors, as the case may be, subject in the case of Messrs. Lapin, Mooney and Mallory to the provisions of their respective employment agreements with the Trust and the Corporation, as applicable. See "--Agreements with Executive Officers" below. There is no family relationship among any of the Trustees, Directors or executive officers of the Trust or the Corporation. Directors of the Corporation may be removed only for cause upon the affirmative vote of two-thirds of the votes entitled to be cast for election. Trustees of the Trust may be removed with or without cause by the affirmative vote of two-thirds of the votes entitled to be cast for election. Any Trustee or Director appointed to a vacant trusteeship or directorship will hold office for a term expiring at the annual meeting at which the class to which they have been appointed expires. These provisions preclude shareholders of the Corporation from removing incumbent directors without cause. Maryland law grants shareholders of a Maryland corporation the right, together with the board of directors, to fill vacancies created by the removal of a director. In the case of the Trust, however, the shareholders may not fill vacancies created by such removal with their own nominees. INDEPENDENT BOARD APPROVAL For information regarding independent board approval requirements, see "Policies with Respect to Certain Activities--Conflicts of Interest--Independent Board Approval." BOARD COMMITTEES The Board of Trustees of the Trust and the Board of Directors of the Corporation has established Executive, Audit, Compensation and Nominating Committees, the principal functions of which are described below. EXECUTIVE COMMITTEE. To the extent permitted by law, the Executive Committee is authorized to exercise the powers of the applicable Board with respect to the management of the business and affairs of the 65 Trust or the Corporation, as the case may be, between meetings of the Board, except that the Executive Committee of the Corporation may not declare dividends or distributions on stock, issue stock, recommend to the stockholders any action which requires stockholder approval, adopt, amend or repeal the Corporation's Bylaws, or approve any merger or share exchange which does not require stockholder approval. The Board of Directors of the Corporation does not currently have an Executive Committee. AUDIT COMMITTEE. The Audit Committee has the following powers, duties and functions: (i) to select the firm of independent public accountants to audit the consolidated financial statements of the Company and its subsidiaries, subject to the approval of the applicable Board, (ii) to discuss with such independent public accountants the scope and results of their audit, (iii) to discuss with such independent public accountants, and with the management of the Company, the Company's financial accounting and reporting principles, policies and practices and the adequacy of the Company's accounting, financial and operating controls and (iv) to report to the applicable Board with respect to the foregoing, at such times and in such manner as such Board shall determine. COMPENSATION COMMITTEE. The Compensation Committee has the authority to make recommendations to the applicable Board with respect to the salaries and other compensation to be paid to the executive officers of the Company and to administer the Company's employee benefit plans. NOMINATING COMMITTEE. The Nominating Committee recommends to the applicable Board nominees for trustees of the Trust and directors of the Corporation. Upon the completion of the Offering, the Boards will appoint the members of the Executive, Audit, Compensation and Nominating Committees. In connection with the settlement of two purported class actions, the Trust's Board of Trustees and the Corporation's Board of Directors have established a joint transaction committee of Independent Trustees and Directors to make recommendations to those Boards with respect to any transaction proposed by management having a fair market value of $20 million or more. COMPENSATION OF TRUSTEES/DIRECTORS Each Trustee or Director who is not also an officer of the Trust or the Corporation receives annual trustee's or director's fees of $6,000 (other than directors of the Corporation who serve as such until Gaming Approval is received, who will continue to receive annual director's fees of $12,000) and is reimbursed for any out-of-pocket expenses incurred in attending meetings of the Board of Trustees or the Board of Directors. Each Trustee and Director (other than directors of the Corporation who serve as such until Gaming Approval is received) will also receive options to purchase Paired Shares at the public offering price. See "--Stock Options." The Chairman of each Board receives an additional fee of $2,500 per year. In addition, each non-officer Trustee or Director receives a fee of $750 for each meeting in which he participates (or, in the case of telephonic meetings, $500) and a fee of $500 for each committee meeting in which he participates ($1,000 per meeting for committee chairman). Trustees and Directors may also receive additional options to purchase Paired Shares. See "--Stock Options" below. LIABILITY AND INDEMNITY OF DIRECTORS AND TRUSTEES Maryland law provides that a corporation's charter or a real estate investment trust's declaration of trust may include a provision eliminating or limiting the personal liability of a director, trustee or officer to the corporation or real estate investment trust or its shareholders, as the case may be, for money damages except (i) to the extent that it is proved that the person actually received an improper benefit or profit in money, property, or services, for the amount of the benefit or profit in money, property, or services actually received or (ii) to the extent that a judgment or other final adjudication adverse to the person is entered in a proceeding based on a finding that the person's action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. The Corporation's Articles of Incorporation and the Trust's Declaration of Trust provide that the Corporation's directors and officers and the Trust's trustees and officers are shielded from personal liability for money damages to the fullest extent permitted by the Maryland law. 66 Under the MGCL, a corporation and under the Maryland REIT Law, a real estate investment trust may indemnify any director, officer or trustee made a party to any proceeding unless it is established that (i) the director's, officer's or trustee's act or omission was material to the cause of action and was committed in bad faith or resulted from active and deliberate dishonesty, (ii) the director, officer or trustee actually received an improper benefit in money, property or services, or (iii) in the case of criminal proceedings, the director, officer or trustee had reasonable cause to believe the act or omission was unlawful. The Corporation's Articles of Incorporation and the Trust's Declaration of Trust provide that the Corporation and the Trust will indemnify their officers, directors and trustees. The Company has entered into indemnification agreements with its directors, trustees and executive officers providing for the maintenance of directors and officers liability insurance subject to certain conditions, and the indemnification of and advancement of expenses to such directors, trustees and executive officers and the Company intends to enter into such indemnification agreement with its directors, trustees and executive officers in the future. As part of the Reorganization, each of the Trust and the Corporation agreed to, and Starwood Capital agreed to use its best efforts to cause the Trust and the Corporation to, indemnify, defend and hold harmless the respective officers, trustees, directors and employees of the Trust and the Corporation and any of their respective subsidiaries (at the time the Formation Agreement was executed) against all losses, expenses, claims, damages or liabilities arising out of actions or omissions occurring on or prior to the Reorganization (including, without limitation, the Reorganization) to the full extent permitted or required under applicable law (and to advance expenses as incurred to the fullest extent permitted under applicable law, provided that the person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such person is not entitled to indemnification). Each of the Trust and the Corporation also agreed to, and Starwood Capital agreed to use its best efforts to cause the Trust and the Corporation to, maintain in effect for not less than seven years the current policies of directors' and officers' liability insurance maintained by the Trust and the Corporation with respect to matters occurring prior to the consummation of the Reorganization. The foregoing indemnification provisions may include indemnification for securities law liabilities and, to the extent permitted under Maryland law, for wilful misconduct and criminal violations. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed 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. Maryland law provides for certain limitations on indemnification. In addition to the foregoing, the Formation Agreement also provides that all rights to indemnification, including provisions relating to advances of expenses incurred in defense of any action or suit, existing in favor of directors, officers and employees of the Trust and the Corporation or any of their respective subsidiaries at the time the Formation Agreement was executed would survive the consummation of the Reorganization and continue in full force and effect. SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION THE TRUST. The following table provides certain summary information concerning the compensation paid to the Trust's President and Chief Executive Officer and each other executive officer of the Trust whose total compensation for 1994 exceeded $100,000 for services rendered in all capacities to the Trust for the fiscal years ended December 31, 1994, 1993 and 1992. 67 SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS --------------------- ------------------ NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS (#) ALL OTHER - -------------------------------------------------- --------- ---------- --------- ------------------ ------------ Jeffrey C. Lapin 1994 $ 190,000 $ 75,000 2,000(2) $ 23,545(3) President and Chief Executive Officer(1) 1993 170,834 20,000 8,333(2) 1992 150,792 Michael W. Mooney 1994 150,000 20,000 1,500(2) Vice President and Chief Financial Officer 1993 140,416 11,667 4,167(2) 1992 61,026
- ------------ (1) On January 31, 1995, Mr. Lapin became President and Chief Operating Officer of the Trust and Barry S. Sternlicht became Chairman and Chief Executive Officer of the Trust. As of that date, Mr. Sternlicht is paid compensation at the rate of $100,000 per year. (2) For information with respect to this option, see "--Stock Options," below. Share amount has been adjusted for an assumed one-for-six reverse stock split. (3) Amount shown reflects cash paid for unused vacation. THE CORPORATION. The following table provides certain summary information concerning the compensation paid to each executive officer of the Corporation whose total compensation for 1994 exceeded $100,000 for services rendered in all capacities to the Corporation for the fiscal years ended December 31, 1994, 1993 and 1992. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS --------------------- ------------------ NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS (#) - ---------------------------------------------------- --------- ---------- --------- ------------------ Kevin E. Mallory 1994 $ 150,000 $ 37,500 1,500(1) Executive Vice President 1993 140,416 11,667 4,167(1) 1992 63,718
- ------------ (1) For information with respect to this option, see "--Stock Options," below. Share amount has been adjusted for an assumed one-for-six reverse stock split. STOCK OPTIONS As of December 31, 1994, employee stock options issued by the Corporation to purchase 51,417 Paired Shares were outstanding and employee stock options issued by the Trust to purchase 51,417 Paired Shares were outstanding. The following table provides information with respect to the options held as of December 31, 1994 by the executive officers of the Trust and the executive officers of the Corporation named in the Summary Compensation Tables above. No options were exercised by any of those executive officers during 1994. 68 AGGREGATED OPTION/SAR EXERCISES IN 1994 AND DECEMBER 31, 1994 OPTION VALUES
NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF OPTIONS/SARS AT FISCAL UNEXERCISED IN-THE-MONEY YEAR-END (#)(1) OPTIONS/SARS ($)(2) ---------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------------------------------------- ----------- --------------- ----------- --------------- Jeffrey C. Lapin.......................................... 13,333 2,000 109,500 2,280 Michael W. Mooney......................................... 4,167 1,500 54,750 1,710 Kevin E. Mallory.......................................... 4,167 1,500 54,750 1,710
- ------------ (1) Share amounts have been adjusted for an assumed one-for-six reverse stock split. (2) Value is defined as market price of the Paired Shares at December 31, 1994 less exercise price of the option. The average of the high and low market prices of the Paired Shares at December 31, 1994 was $17.64 (adjusted to reflect an assumed one-for-six reverse stock split). The Company will adopt, effective upon the closing of the Offering, its 1995 Share Option Plan (the "1995 Option Plan"). The 1995 Option Plan is currently expected to be submitted to the shareholders of the Company at the next meeting of the shareholders. Pursuant to the 1995 Option Plan, certain officers, trustees, directors and key employees of the Company may be offered the opportunity to acquire an aggregate of up to 1,450,000 Paired Shares through the grant of share options ("Paired Options"), including non-qualified share options and, for key employees, incentive share options within the meaning of Section 422 of the Code. Such Paired Options will consist of options to purchase shares of the Corporation and the Trust. The 1995 Option Plan will be administered by committees of the Trust and the Corporation ("Option Committees") consisting of three or more "disinterested" trustees or directors, respectively. No Options granted pursuant to the 1995 Option Plan shall be exercisable at a price per Paired Share less than fair market value at the date of grant. All Options granted under the 1995 Option Plan will vest as follows: one-third, one year after the date of initial grant; one-third two years following such date; and the remaining one-third three years following such grant, except for Options granted to directors and trustees, which will fully vest on the date of grant. The Option Committees are expected to make initial grants to key employees and others of Paired Options to purchase up to 733,500 Paired Shares at an exercise price equal to the initial public offering price of the Paired Shares in the Offering. The following table sets forth the Options expected to be granted to executive officers on the closing of the Offering.
NUMBER OF PAIRED SHARES UNDERLYING NAME OPTIONS - ---------------------------------------------------------------------------------------- ------------------------ Barry S. Sternlicht..................................................................... 411,000(1) Jeffrey C. Lapin........................................................................ 25,000 Kevin E. Mallory........................................................................ 30,000 Steven R. Goldman....................................................................... 40,000 Leslie R. King.......................................................................... 15,000
- ------------ (1) Mr. Sternlicht has indicated that he intends to share approximately one-half of the economic benefits associated with those Options with approximately ten officers and employees of Starwood Capital, including Messrs. Eilian and Grose, in amounts and on terms to be determined. 69 As part of the 733,500 Paired Options described above, it is expected that the Option Committees will make separate grants of Paired Options to purchase 50,000 Paired Shares to each of Messrs. Eilian and Grose on the same terms as those set forth above, for services rendered to the Company in connection with the Offering. In addition, it is expected that the Option Committees will make an initial grant to each director and trustee of Paired Options to purchase 6,000 Paired Shares at an exercise price equal to the initial public offering price of the Paired Shares in the Offering. Each director and trustee will also automatically be granted annually, nonqualified Paired Options to purchase 6,000 Paired Shares. Such options shall be fully exercisable on and after their date of grant and shall expire ten years after the date of grant. The 1995 Option Plan will terminate ten years after its effective date unless terminated earlier by the Board of Trustees of the Trust and the Board of Directors of the Corporation. However, termination will not affect Options previously granted. Any Options which had vested prior to such a termination would remain exercisable by the holder thereof. The Boards may amend the 1995 Option Plan subject to any shareholder approval which may be required for any amendment to the 1995 Option Plan, including in connection with compliance with Rule 16b-3 promulgated under Section 16(b) of the Exchange Act. The Paired Shares available under the 1995 Option Plan will be registered under a Form S-8 registration statement to be filed within 12 months after the effective date of the registration statement relating to the Paired Shares offered hereby. The 1995 Option Plan shall be administered by the Option Committees. The Option Committees will interpret the 1995 Option Plan, adopt rules relating thereto and determine the terms and provisions of Options. The Option Committees will also make appropriate adjustments in the event of any stock split, stock dividend, recapitalization, merger, consolidation or if the property or other shares of beneficial interest of the Company are acquired by another corporation or the Company is reorganized, liquidated or impacted by an extraordinary transaction. AGREEMENTS WITH EXECUTIVE OFFICERS EMPLOYMENT AGREEMENTS. The Trust has employment agreements with Messrs. Lapin and Mooney, and the Corporation has an employment agreement with Mr. Mallory which provide that they will receive annual salaries in 1995 of $200,000, $150,000 and $150,000, respectively, and such annual bonuses, if any, as the Boards of the Trust and the Corporation may determine. Mr. Lapin's employment agreement expires on January 31, 1997; Mr. Mooney's employment agreement expires June, 1995; and Mr. Mallory's employment agreement expires June, 1995. Mr. Lapin is entitled to an annual bonus of not less than $75,000 and was granted options to purchase 41,667 Paired Shares at an exercise price equal to $16.50 per Paired Share (the fair market value of the Paired Shares on the date of grant) and will vest at a rate no longer than the most rapid rate of vesting of options granted to any other executive during the term of his employment agreement. Mr. Lapin's annual salary will increase to $225,000 in 1996. Each of Messrs. Lapin, Mooney and Mallory also is eligible to participate in all employee benefit plans and fringe benefits, if any, the Trust or the Corporation makes available to its other executive officers. The employment of Messrs. Mooney and Mallory pursuant to the employment agreements may be terminated by the Trust or Corporation, respectively at any time; provided, however, that if either such officer's employment is terminated without cause (as defined) the terminated officer will be entitled to receive the lesser of (i) that officer's salary for the then-remaining term of the employment agreement or (ii) $75,000 (in the case of Messrs. Mooney or Mallory). Mr. Lapin may terminate his employment for "Good Reason" as defined in the employment agreement including an assignment of duties inconsistent with his position, a substantial alteration of his responsibilities, a breach of the agreement by the Trust, removal from office without cause (as defined), relocation of the Trust's principal executive offices, a change in the composition of 51% of the Trustees, a decision by the Board of Trustees that the Trust shall merge, sell or dispose of all or substantially all of its assets, dissolve or liquidate, or the failure of Mr. Lapin to be a member of the Board of Trustees other than for cause (as defined). If Mr. Lapin so terminates his employment, he will be entitled to receive a lump sum payment equal to the base salary and 70 bonuses that would have been payable had he continued to be employed for the remainder of the term of the employment agreement, and all fringe benefits to which he would have been entitled through the remainder of the term of the employment agreement (other than stock options or stock loans not granted prior to the date of termination). Mr. Mooney has indicated an intention to leave the Trust to pursue other opportunities subsequent to the June 1995 expiration of his employment agreement. The Trust has agreed to pay Mr. Mooney compensation at his current rate for an additional six months in connection with the transition to a new chief financial officer. Pursuant to Mr. Lapin's employment agreement, the Trust will loan or cause to be loaned $250,000 to Mr. Lapin. The loan will have a term of 10 years, will bear interest at the lowest applicable rate prescribed by section 1274(d) of the Code and will be unsecured. Mr. Lapin will have the right at any time to repay the loan (plus interest and any collection costs) by delivering Paired Shares for credit at the rate per Paired Share of one-half of the price to the public of Paired Shares in the Offering. NON-COMPETITION AGREEMENTS. The Company has entered into non-competition agreements with its executive officers, which prohibits them from engaging directly or indirectly in the hotel business during the period they are officers of the Company. The Company has also entered into the Starwood Noncompete with Starwood Capital (see "Structure of the Company--Management of the Partnerships") and a similar agreement with Barry S. Sternlicht. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS REORGANIZATION. See "Structure of the Company--Formation of the Partnerships and the Reorganization" for a description of certain transactions between Starwood Capital and the Company in connection with the Reorganization. Barry S. Sternlicht, the President and Chief Executive Officer of the general partners of Starwood Capital is also the Chairman and Chief Executive Officer of the Trust and is a trustee of the Trust, a director of the Corporation and on the management committee of the Operating Partnership. CERTAIN REIMBURSEMENTS AND PAYMENTS TO STARWOOD CAPITAL. The Company has reimbursed Starwood Capital for approximately $700,000 of legal and other out-of-pocket expenses and other costs incurred by Starwood Capital associated with the Reorganization. Starwood Capital and the Company have agreed that, subject to approval by the Independent Trustees or Directors, as appropriate, Starwood Capital will be reimbursed for out-of-pocket costs and expenses for any services provided to the Company. Starwood Capital will also be reimbursed for its internal cost (including allocation of overhead) for services provided to the Company, provided that, where such costs are currently expensed by the Company, such reimbursement will not exceed $250,000 in the year ending June 30, 1996. Starwood Capital provided to the Company $9.6 million, of which $6.5 million has been repaid, of interim financing in order to enable the Company to acquire the Omni Chapel Hill Hotel in Chapel Hill, North Carolina. See "Business Objectives and Growth Strategy--Implementation of Strategies." The remaining indebtedness is subordinated and bears interest at a rate of 12%. The Company also received a $5 million unsecured loan from Starwood Capital to fund the deposit of the Sheraton Colony Square acquisition. This loan bears interest at 12%. Both loans will be repaid from the proceeds of the Offerings. See "Use of Proceeds." As part of the consideration to Starwood Capital in connection with the Reorganization (which was approved by the shareholders of the Trust and the Corporation in December 1994), the Partnerships agreed to pay an amount to Starwood Capital only if the Trust and the Corporation consummated a public offering of Paired Shares prior to June 30, 1996, which offering results in the receipt by the Trust and the Corporation of gross proceeds of not less than $150 million. Assuming a public offering price of $23.50 per Paired Share (which is the midpoint of the range set forth on the cover page), such payment would be approximately $3.5 million. Such payment will be made from the proceeds of the Offering. See "Use of Proceeds." ROSS AGREEMENT. In November, 1994, Starwood Capital entered into an agreement (the "Ross Agreement") with Leonard Ross and his affiliates ("Ross"). Ross held approximately 9.8% of the outstanding Paired Shares and had opted out of the settlement by the Company of certain shareholder litigation 71 unrelated to the Reorganization or Starwood Capital. Virtually all other shareholders of the Company were bound by such settlement. In addition to preserving his rights to institute an action against the Company with respect to the matters covered by such settlement, Ross had threatened to assert other alleged causes of action against the Company. The Ross Agreement was entered into in settlement of the threatened litigation by Ross and provides for an assignment to Starwood Capital of Ross' claims. Starwood Capital also received a proxy to vote Ross' Paired Shares and Starwood Capital has agreed to purchase those Paired Shares, at Ross' election, in a 60-day period beginning on December 15, 1995, at a price of $33.75 (as adjusted for an assumed one-for-six reverse stock split) per Paired Share. Starwood Capital may also elect to purchase such Paired Shares at the same time and on the same terms. In December 1994, Ross sold 33,167 (as adjusted for the reverse stock split) of the Paired Shares, which remain subject to such purchase agreement. Ross has agreed not to purchase or sell any Paired Shares during the period specified for the purchase of his Paired Shares and not more than 4.9% thereafter. The Company agreed to indemnify and hold harmless Starwood Capital (and its subsidiaries, affiliates and successors) against liabilities, losses or damages and reasonable out-of-pocket expenses (i) incurred in connection with any action, suit or proceeding brought by a holder of Paired Shares against Starwood Capital relating to the Reorganization or (ii) under or in respect of the Ross Agreement (other than, in each case, to the extent such liabilities, losses, damages or expenses arose from a breach by Starwood Capital of any agreement entered into in connection with the Reorganization, or the Ross Agreement or a breach of any fiduciary duty by Starwood Capital); PROVIDED that the aggregate indemnification obligation of the Company under the provisions described in clause (ii) is limited to $1,800,000. The Partnerships have agreed to reimburse the Company for costs incurred pursuant to such indemnification obligation. SENIOR DEBT RELATED TRANSACTIONS. In May 1994, Starwood Capital purchased (at a discount) approximately $21 million of the Company's senior debt at a public auction by the institutional holder of such debt. In August 1994, an affiliate of Merrill Lynch (the "New Lender") purchased $74 million of the Company's senior debt, including the senior debt previously held by Starwood Capital, pursuant to a privately negotiated transaction and at a discount. In conjunction with such purchase by the New Lender, it entered into an agreement (the "Swap Agreement") providing that (i) Starwood Capital could acquire such senior debt within a specified period at the New Lender's cost basis and (ii) the excess of debt service payments made by the Company on such senior debt over the New Lender's cost basis, together with a specified return thereon, would be payable to Starwood Capital. In March 1995, the Company's senior debt was refinanced by the New Lender and the Swap Agreement was terminated, with Starwood Capital receiving (a) the return of $13.1 million of cash collateral which it had deposited as security for its obligations in respect of the Swap Agreement, (b) additional cash of $2.7 million, (c) $12 million of the Company's senior debt and (d) certain warrants attendant to the senior debt. As required by the Formation Agreement, Starwood Capital contributed such senior debt to the Partnerships in exchange for 813,880 Units of the Partnerships (see "Structure of the Company--Formation of the Partnerships and the Reorganization"). The Company has paid $786,000 to Starwood Capital to cancel certain warrants relating to the senior debt in accordance with the requirements of such senior debt. SHARE PURCHASE AGREEMENTS. Prior to December 1989, the Company maintained share purchase plans pursuant to which Trustees, Directors, officers and employees of the Company were granted rights to purchase Paired Shares from the Trust and the Corporation at prices based upon the then fair market value of the Paired Shares. A purchaser of Paired Shares under a share purchase plan made a cash down payment equal to 10% of the purchase price and executed a promissory note in favor of the Company for the balance. Certificates evidencing Paired Shares purchased under a share purchase plan were pledged to the Company as collateral to secure payment of the promissory note. Prior to the satisfaction of the obligations represented by the note, the purchaser was entitled to vote the Paired Shares held in pledge, but could not transfer the purchaser's interest in those shares. During 1994, the share purchase agreements between the Company and each of Messrs. Henderson, Samuels and Ford were terminated and the non-recourse indebtedness thereunder was cancelled (an aggregate of $56,250 with respect to Mr. Henderson, $82,391 with respect to Mr. Samuels, $108,784 with respect to Mr. Ford). In addition, the Paired Shares pledged in respect of such 72 indebtedness were either released from such pledge, to the extent that such indebtedness had been repaid (an aggregate of 224 Paired Shares for which $20,625 was paid with respect to Mr. Henderson, 357 Paired Shares for which $39,922 was paid with respect to Mr. Samuels, and 466 Paired Shares for which $45,279 was paid with respect to Mr. Ford) or were forfeited by the individual, to the extent such indebtedness had not been repaid. PRINCIPAL SHAREHOLDERS The following table sets forth information as of June 8, 1995, but after giving effect to the Offering, regarding the beneficial ownership of the Paired Shares by (i) each person known by the Company to be the beneficial owner of more than five percent of the Paired Shares, (ii) each director and executive officer of the Corporation and (iii) each trustee and executive officer of the Trust. Each beneficial owner has sole voting and investment power with respect to all Paired Shares beneficially owned, except as otherwise set forth in the notes to the table. All share amounts have been adjusted for an assumed one-for-six reverse stock split.
PAIRED SHARES TO BE BENEFICIALLY OWNED(1) ASSUMING EXCHANGE BY STARWOOD CAPITAL OF ALL PAIRED SHARES TO BE OF ITS UNITS FOR PAIRED SHARES AND CONSUMMATION BENEFICIALLY OWNED(1) OF THE OFFERING (1) ----------------------------- ----------------------- PERCENT OF PERCENT OF NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT CLASS AMOUNT CLASS - -------------------------------------------------------------- -------------- ------------- ---------- ----------- Starwood Capital and Barry S. Sternlicht(2)................... 49,933 (7) 5,993,511 32.9% U.S. Bancorp(4)............................................... 166,000 8.2% 166,000 (7) Leonard M. Ross(3)............................................ 165,233 8.2% 165,233 (7) Edward J. Okay and Dorothy P. Okay(5)......................... 125,000 6.2% 125,000 (7) Jeffrey C. Lapin.............................................. 57,958(6) (7) 57,958 (7) Michael W. Mooney............................................. 5,667(8) (7) 5,667 (7) Graeme W. Henderson........................................... 7,974(9) (7) 7,974 (7) Kevin E. Mallory.............................................. 5,775 10) (7) 5,775 (7) Bruce M. Ford................................................. 736 11) (7) 736 (7) Earle F. Jones................................................ 6,000 12) (7) 6,000 (7) Bruce W. Duncan............................................... 5,000 (7) 5,000 (7) Stephen R. Quazzo............................................. 167 (7) 167 (7) All Trustees, Directors and Officers as a Group............... 139,210 13) 6.9% 6,082,788 33.4%
- ------------ (1)Does not include 733,500 Paired Shares subject to Options to be granted pursuant to the 1995 Option Plan. See "Management--Stock Options." (2)The business address for Starwood Capital and Mr. Sternlicht is c/o Starwood Capital Group, L.P., Three Pickwick Plaza, Suite 250, Greenwich, CT 06830. Based on information contained in a Schedule 13D dated January 31, 1995, filed by Starwood Capital, Barry S. Sternlicht and the following Starwood Capital entities: Starwood Opportunity Fund II, L.P. ("SOFI II"), Firebird Consolidated Partners, L.P., Woodstar Partners, I, L.P., Starwood-Huntington Partners, L.P., Starwood/Wichita Investors, L.P., Starwood-Nomura Hotel Investors, L.P., Starwood-Apollo Hotel Partners IX, L.P., Starwood Apollo Hotel Partners VIII, L.P. and Berl Holdings, L.P. Such Schedule 13D reports that SOFI II owns 49,933 Paired Shares and that SOFI II and Mr. Sternlicht have the power to vote and dispose of such shares and that the Starwood Capital entities hold units in the Realty Partnership and the Operating Partnership which are, subject to the 8.0% Ownership Limit, exchangeable for an aggregate of 5,943,578 Paired Shares (approximately 74.6% of the outstanding Paired Shares after such exchange, without giving effect to the Offerings). Such Schedule 13D reports that because of the 8.0% Ownership Limit, the Starwood Capital entities cannot beneficially own more than 8.0% of the outstanding Paired Shares. The amount beneficially owned and the percent of class assumes that Starwood Capital entities exchange units for Paired Shares to the maximum extent permitted within the ownership limit provisions. Does not include Paired Shares beneficially owned by Mr. Ross. See Note (3) below. 73 (3)The business address for Mr. Ross is 1011-1/2 N. Beverly Dr., Beverly Hills, CA. Based on information contained in Amendment No. 10 to Schedule 13D dated February 22, 1991. 151,633 of these shares are pledged to the Pacific Bank, along with other securities, as collateral for a previously unsecured loan. Pursuant to the Ross Agreement, Starwood Capital has agreed to purchase Ross' Paired Shares (and, in addition 33,167 Paired Shares sold by Ross in December 1994) at Ross' election during a 60-day period beginning in December 1995, at a price of $33.75 per Paired Share. Starwood Capital has a proxy from Ross to vote all of such Paired Shares, and may also elect to purchase such Paired Shares at the same time on the same terms. See "Certain Relationships and Related Transactions." (4)The business address for U.S. Bancorp is 111 S.W. Fifth Avenue, Portland, OR 97204. Based on information contained in Schedule 13G dated February 10, 1995, the securities are held by Qualivest Capital Management, Inc. (a wholly-owned subsidiary of U.S. Bancorp) and the Trust Group of the United States Bank of Oregon in the amount of 79,950 and 86,050 shares, respectively. U.S. Bancorp has sole dispositive power with respect to 154,250 shares and sole voting power with respect to all of these shares. (5)The address for Edward J. and Dorothy P. Okay is 111 Quayside Drive, Jupiter, FL 33477. Based on information contained in a Schedule 13D dated January 4, 1995. Edward J. Okay has sole voting power and shares dispositive power with Dorothy P. Okay with respect to all of these shares. (6)Includes 27,889 shares subject to presently exercisable options and 833 shares owned in a pension plan of which Mr. Lapin is sole trustee and beneficiary. Does not include approximately 10,600 Paired Shares which Mr. Lapin has indicated his intention to buy in the Offering. (7)Less than 1%. (8)Includes 4,667 shares subject to presently exercisable options. (9)Includes 50 shares owned in a Keogh plan and 2,667 shares subject to paired warrants issued by the Trust and the Corporation. (10)Includes 4,667 shares subject to presently exercisable options. (11)Includes 404 shares subject to paired warrants issued by the Trust and the Corporation, 29 of which are owned by Mr. Ford's wife. (12)Includes 83 shares subject to paired warrants issued by the Trust and the Corporation. (13)Includes 38,056 shares that may be acquired upon the exercise of presently exercisable options, shares issued or to be issued pursuant to the 1995 Option Plan and 3,154 shares subject to the 1986 Warrants. SHARES AVAILABLE FOR FUTURE SALE Upon the completion of the Offering, there will be 12,272,158 outstanding Paired Shares, 5,943,578 Paired Shares reserved for issuance upon exchange of Units, 882,333 Paired Shares reserved for issuance upon the exercise of outstanding options and 276,662 Paired Shares reserved for issuance upon the exercise of the 1986 Warrants. Starwood Capital is entitled to exchange its Units for Paired Shares on a one-for-one basis or, at the option of the Company, cash or a combination of Paired Shares and cash. Upon exchange of its Units, Starwood Capital would, subject to the Ownership Limitation, be entitled to the receipt of an additional 5,943,578 Paired Shares. The Paired Shares issued in the Offering will be freely tradeable by persons other than "Affiliates" of the Company without restriction under the Securities Act, subject to the Ownership Limitation. See "Capital Stock--Ownership Limits; Restrictions on Transfer; Repurchase and Redemption of Shares." The Paired Shares which may be issued to Starwood Capital upon exchange of its Units will be "restricted" securities under the meaning of Rule 144 promulgated under the Securities Act ("Rule 144") and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including exemptions contained in Rule 144. As described below, the Company 74 granted Starwood Capital registration rights with respect to its Paired Shares. Starwood Capital has entered into a Lock-Up Agreement with the Underwriters pursuant to which, with limited exceptions, it is not permitted to offer, sell, contract to sell or otherwise dispose of any Units or Paired Shares for a twelve month period from the closing of the Offering without the consent of Merrill Lynch and the Company. See "Underwriting." In general, under Rule 144 as currently in effect, if two years have elapsed since the later of the date of acquisition of restricted shares from the Company or any "Affiliate" of the Company, as that term is defined under the Securities Act, the acquiror or subsequent holder thereof is entitled to sell within any three month period a number of shares that does not exceed the greater of 1% of the then outstanding Paired Shares or the average weekly trading volume of the Paired Shares during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales under Rule 144 also are subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. If three years have elapsed since the date of acquisition of restricted shares from the Company or from any "Affiliate" of the Company, and the acquiror or subsequent holder thereof is deemed not to have been an "Affiliate" of the Company at any time during the 90 days preceding a sale, such person would be entitled to sell such shares in the public market under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. The Company has agreed to file, as soon as practicable after the request of Starwood Capital, subject to certain limitations, one or more registration statements with the Commission for the purpose of registering the sale of Paired Shares issuable to Starwood Capital upon the exchange of its Units. Upon effectiveness of such registration statement, Starwood Capital may sell such shares in the secondary market without being subject to the volume limitations or other requirements of Rule 144. See "Structure of the Company-- Limited Partner Rights--Exchange Rights." No prediction can be made as to the effect, if any, that future sales of Paired Shares, or the availability of Paired Shares for future sale, will have on the market price prevailing from time to time. Sales of substantial amounts of Paired Shares, or the perception that such sales could occur, may affect adversely prevailing market prices of the Paired Shares. See "Risk Factors--Effect of Various Factors on Share Price." CAPITAL STOCK GENERAL The Trust's Declaration of Trust authorizes the Trust to issue 135 million shares of beneficial interests in the Trust, including (i) 100 million Trust Shares, with a par value of $0.01 per share, (ii) 20 million excess trust shares, with a par value of $0.01 per share ("Excess Common Trust Shares") and (iii) 5 million excess Preferred Shares, with a par value of $0.01 per share ("Excess Preferred Trust Shares" and, together with the Excess Common Trust Shares, the "Excess Trust Shares"). The Trust's Declaration of Trust grants the Board of Trustees the power to create and authorize the issuance of up to 110 million shares (less any Trust Shares) of preferred shares ("Trust Preferred Shares") in one or more classes or series, having such voting rights, such rights to dividends and distribution and rights in liquidation, such conversion, exchange and redemption rights and such designations, preferences and participations and other limitations and restrictions as are not prohibited by the Declaration of Trust or applicable law and as are specified by the Board of Trustees in its discretion. The Board of Trustees has not created or authorized any class or series of Preferred Shares. No Excess Trust Shares are outstanding. The Articles of Incorporation of the Corporation authorize the Corporation to issue 135 million shares, consisting of (i) 10 million shares of preferred stock, with a par value of $0.01 per share ("Corporation Preferred Stock"), (ii) 100 million Corporation Shares, (iii) 20 million shares of excess common stock, with a par value of $0.01 per share ("Excess Corporation Common Stock"), and (iv) 5 million shares of excess preferred stock, with a par value of $0.01 per share, ("Excess Corporation Preferred Stock" and, together with the Excess Corporation Common Stock, the "Excess Corporation Stock"). The Corporation Preferred Stock is issuable in classes or series with such rights, preferences, privileges and restrictions as the Board of 75 Directors of the Corporation may determine, including voting rights, redemption provisions, dividend rates, liquidation preferences and conversion rights. No such class or series of Corporation Preferred Stock has been established. No Excess Corporation Stock is outstanding. As of May 1, 1995 there were 2,022,158 (adjusted for an assumed one-for-six reverse stock split) Paired Shares outstanding. Each outstanding Paired Share entitles the holder to one vote on all matters presented to shareholders for a vote. The Trust and the Corporation have reserved for issuance 5,943,578 Paired Shares upon exchange of Units currently held by Starwood Capital. PAIRED SHARES All Paired Shares offered hereby will be duly authorized, fully paid and nonassessable. Subject to the preferential rights of any other shares or series of shares of beneficial interest and to the provisions of the Trust's Declaration of Trust regarding Excess Trust Shares and the Corporation's Articles of Incorporation regarding Excess Corporation Stock, holders of Paired Shares will be entitled to receive dividends if, as and when authorized and declared by the Board of Trustees of the Trust or the Board of Directors of the Corporation, as the case may be, out of assets legally available therefor and to share ratably in the assets of the Trust or the Corporation legally available for distribution to its shareholders in the event of its liquidation, dissolution or winding-up after payment of, or adequate provision for, all known debts and liabilities of the Trust or the Corporation. Subject to the provisions of the Trust's Declaration of Trust regarding Excess Trust Shares and the Corporation's Articles of Incorporation regarding Excess Corporation Stock, each outstanding Paired Share entitles the holder to one vote on all matters submitted to a vote of shareholders, including the election of trustees or directors, and, except as otherwise required by law or except as provided with respect to any other class or series of shares of beneficial interest, the holders of such Paired Shares will possess the exclusive voting power. There is no cumulative voting in the election of trustees or directors, which means that the holders of a majority of the outstanding Paired Shares can elect all of the trustees or directors then standing for election and the holders of the remaining shares of beneficial interest, if any, will not be able to elect any trustees or directors. Holders of Paired Shares have no conversion, sinking fund, redemption or preemptive rights to subscribe for any securities of the Trust or the Corporation, as the case may be. Subject to the provisions of the Trust's Declaration of Trust regarding Excess Shares and the Corporation's Articles of Incorporation regarding Excess Corporation Stock, Paired Shares will have equal dividend, distribution, liquidation and other rights, and will have no preference, exchange or, except as expressly required by the Maryland REIT Law and the MGCL, appraisal rights. THE PAIRING AGREEMENT The Trust and the Corporation have entered into an agreement dated June 25, 1980, as amended (the "Pairing Agreement") pursuant to which all outstanding Trust Shares and Corporation Shares are "paired" on a one-for-one basis. The following is a summary of certain provisions of the Pairing Agreement. This summary does not purport to be complete and is qualified in its entirety by reference to the text of the Pairing Agreement, a copy of which is incorporated by reference as an exhibit to the Registration Statement. TRANSFER OF PAIRED SHARES. Under the Pairing Agreement, Trust Shares are transferable only together with an equal number of Corporation Shares, and Corporation Shares are transferable only together with an equal number of Trust Shares. Certificates evidencing Trust Shares and Corporation Shares are required by the Pairing Agreement to include a reference to this transfer restriction. The Declaration of Trust of the Trust and the Corporation's Articles of Incorporation contain similar restrictions on the transfer of Trust Shares and Corporation Shares, as well as other restrictions on the transfer and ownership of Trust Shares and Corporation Shares. The Pairing Agreement also provides that any Excess Trust Shares and any Excess Corporation Stock which may be issued will be paired in the same manner as the Trust Shares and Corporation Shares are paired. See "--Ownership Limits; Restrictions on Transfer; Repurchase and Redemption of Shares" below. ISSUANCE OF SHARES. Under the Pairing Agreement, the Trust may not issue Trust Shares and the Corporation may not issue Corporation Shares unless provision is made for the acquisition by the same person of the same number of shares of the other entity. The Trust and the Corporation must agree on the 76 manner and basis of allocating the consideration to be received upon such issuance, or on the payment by one entity to the other of cash or other consideration in lieu of a portion of the consideration to be received upon issuance of such Paired Shares. SHARE DIVIDENDS, RECLASSIFICATION AND OTHER SIMILAR EVENTS. Neither the Trust nor the Corporation may declare or pay any dividend or other distribution payable in Trust Shares or Corporation Shares, issue any rights or warrants to purchase Trust Shares or Corporation Shares, or subdivide, combine or otherwise reclassify such Shares, unless the other entity concurrently takes the same action. AMENDMENT AND TERMINATION. The Pairing Agreement may be amended by the Board of Trustees of the Trust and the Board of Directors of the Corporation, provided that an amendment permitting the separate issuance and transfer of Trust Shares and Corporation Shares must be approved by a majority of each of the outstanding Trust Shares and the outstanding Corporation Shares. The Pairing Agreement may be terminated only with the affirmative vote of the holders of a majority of each of the outstanding Trust Shares and the outstanding Corporation Shares. Upon such termination, the Trust Shares and the Corporation Shares could be delisted by the NYSE if the Trust and the Corporation, respectively, did not as separate entities then meet the listing requirements of such Exchange. The Paired Shares currently outstanding are listed for trading on the NYSE. The Trust and the Corporation have applied to the NYSE to list the additional Paired Shares to be sold pursuant to the Offering and the Trust and the Corporation anticipate that such shares will be so listed. PREFERRED SHARES. The Trust may authorize and issue other classes or series of shares of beneficial interest in addition to the Trust Shares without the issuance by the Corporation of corresponding shares, and the Corporation may authorize and issue shares of Corporation Preferred Stock without the issuance by the Trust of corresponding shares. Furthermore, the Pairing Agreement does not limit the power of the Boards of the Trust and the Corporation to independently determine the rights, preferences and restrictions of such shares. EXCHANGE RIGHTS See "Structure of the Company--Limited Partner Rights--Exchange Rights" for a description of certain rights to tender Units to the Trust and the Corporation in exchange for Paired Shares. 1986 WARRANTS The 1986 Warrants consist of warrants of the Trust (the "1986 Trust Warrants") to purchase up to an aggregate of 276,662 Trust Shares at a purchase price of $98.64 per Trust Share, subject to adjustment upon certain events, and warrants of the Corporation (the "1986 Corporation Warrants") to purchase up to an aggregate of the same number of Corporation Shares at a purchase price of $3.06 per Corporation Share, subject to similar adjustment upon such events. The 1986 Trust Warrants and the 1986 Corporation Warrants are "paired" in the same manner as the Trust Shares and the Corporation Shares pursuant to the Pairing Agreement and may be held, transferred and exercised only in units consisting of one 1986 Trust Warrant and one 1986 Corporation Warrant (a "1986 Paired Warrant"). A holder of 1986 Paired Warrants, upon exercise thereof, must pay a purchase price of $101.70 per Paired Share purchased upon such exercise. The certificates representing 1986 Trust Warrants and 1986 Corporation Warrants ("Warrant Certificates") are "back-to-back" certificates pursuant to which the certificates evidencing 1986 Trust Warrants are printed on the reverse side of the certificates evidencing 1986 Corporation Warrants. The 1986 Paired Warrants expire in 1996, at which time each 1986 Paired Warrant is exchangeable for 1/100 of a Paired Share. OPTIONS See "Management--Stock Options" for a description of certain options to purchase Paired Shares issued to employees of the Trust and the Corporation. PREEMPTIVE RIGHTS Holders of Trust Shares and Corporation Shares do not have preemptive rights with respect to the issuance of additional shares. Accordingly, any issuance of authorized but unissued shares could have the effect of diluting the earnings per share and book value per share of currently outstanding shares. Neither the Trust nor the Corporation currently has plans to issue any shares, other than upon exchange of Units, upon exercise of warrants and employee, trustee, director or other stock options and pursuant to the Offering. 77 MARYLAND TAKEOVER LEGISLATION Under the MGCL, certain "business combinations" (including mergers, consolidations, share exchanges, or, in certain circumstances, asset transfers or issuances or reclassifications of equity securities) between a Maryland corporation or a Maryland real estate investment trust and any person who beneficially owns 10% or more of the voting power of the corporation's or trust's shares or an affiliate of the corporation or trust who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding voting shares of the corporation or trust (an "Interested Stockholder") or an affiliate thereof, are prohibited or restricted unless exempted. The Company has exempted all "business combinations" involving any party from the business combination provisions of the MGCL. Under Maryland law, under certain circumstances "control shares" of a Maryland corporation or a Maryland real estate investment trust acquired in a "control share acquisition" may have no voting rights. The Company has exempted all control share acquisitions involving any person from the MGCL. OWNERSHIP LIMITS; RESTRICTIONS ON TRANSFER; REPURCHASE AND REDEMPTION OF SHARES The Trust's Declaration of Trust and the Corporation's Articles of Incorporation provide that, subject to certain exceptions specified in the Declaration of Trust and the Articles of Incorporation, no shareholder may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 8.0% of the capital stock, whether measured by vote, value or number of Paired Shares (other than for shareholders who owned in excess of 8.0% as of the date the Reorganization closed, who may not so own or be deemed to own more than the lesser of 9.9% or the number of Paired Shares they held on such date) of the outstanding Paired Shares, Corporation Preferred Stock or Trust Preferred Stock (collectively, "Preferred Stock") which may be issued, or any combination thereof. The Board of Trustees and the Board of Directors may waive the Ownership Limitation if evidence satisfactory to the Board of Trustees and the Board of Directors and the tax counsel to the Trust and the Corporation is presented that such ownership will not jeopardize the Trust's status as a REIT. As a condition of such waiver, each of the Board of Trustees and the Board of Directors may require opinions of counsel satisfactory to it and/or an undertaking from the applicant with respect to preserving the REIT status of the Trust. If shares which would cause the Trust to be beneficially owned by fewer than 100 persons are issued or transferred to any person, such issuance or transfer shall be null and void and the intended transferee will acquire no rights to the stock. Any acquisition of capital stock of the Trust or the Corporation and continued holding or ownership of capital stock of the Trust or the Corporation constitutes, under the Declaration of Trust of the Trust and the Articles of Incorporation of the Corporation, a continuous representation of compliance with the Ownership Limitation. In the event of a purported transfer or other event that would, if effective, result in the ownership of Paired Shares or shares of Preferred Stock in violation of the Ownership Limitation, such transfer with respect to that number of shares that would be owned by the transferee in excess of the Ownership Limitation would be deemed void AB INITIO and such Paired Shares or shares of Preferred Stock would automatically be exchanged for Excess Shares or Excess Preferred Stock, respectively (collectively, "Excess Stock"), authorized by the Declaration of Trust and the Articles of Incorporation, according to rules set forth in the Declaration of Trust and the Articles of Incorporation, to the extent necessary to ensure that the purported transfer or other event does not result in ownership of Paired Shares or shares of Preferred Stock or Excess Stock in violation of the Ownership Limitation. Any purported transferee or other purported holder of Excess Stock is required to give written notice to the Trust and the Corporation of a purported transfer or other event that would result in the issuance of Excess Stock. Any Excess Trust Shares and Excess Corporation Stock which may be issued will be "paired" in the same manner that the Trust Shares and the Corporation Shares are currently paired. Excess Stock is not treasury stock but rather continues as issued and outstanding capital stock of the Trust and the Corporation. While outstanding, Excess Stock will be held in trust. The trustees of such trusts shall be appointed by the Trust and the Corporation and shall be independent of the Trust, the Corporation and the holder of Excess Stock. The beneficiary of such trust shall be one or more charitable organizations selected by the trustee. If, after the purported transfer or other event resulting in an exchange of Paired Shares or shares of Preferred 78 Stock for Excess Stock and prior to the discovery by the Trust and the Corporation of such exchange, dividends or distributions are paid with respect to the Paired Shares or shares of Preferred Stock that were exchanged for Excess Stock, then such dividends or distributions are to be repaid to the trustee upon demand for payment to the charitable beneficiary. While Excess Stock is held in trust, an interest in that trust may be transferred by the trustee only to a person whose ownership of Paired Shares or shares of Preferred Stock will not violate the Ownership Limitation, at which time the Excess Stock will be automatically exchanged for the same number of Paired Shares or shares of Preferred Stock of the same type and class as the Paired Shares or shares of Preferred Stock for which the Excess Stock was originally exchanged. The Trust's Declaration of Trust and the Articles of Incorporation of the Corporation contain provisions that are designed to ensure that the purported transferee or other purported holder of the Excess Stock may not receive in return for such a transfer an amount that reflects any appreciation in the Paired Shares or shares of Preferred Stock for which such Excess Stock was exchanged during the period that such Excess Stock was outstanding. Any amount received by a purported transferee or other purported holder in excess of the amount permitted to be received must be turned over to the charitable beneficiary of the trust. If the foregoing restrictions are determined to be void or invalid by virtue of any legal decision, statute, rule or regulation, then the intended transferee or holder of any Excess Stock may be deemed, at the option of the Trust and the Corporation, to have acted as an agent on behalf of the Trust and the Corporation in acquiring or holding such Excess Stock and to hold such Excess Stock on behalf of the Trust and the Corporation. The Trust's Declaration of Trust and the Articles of Incorporation of the Corporation further provide that the Trust and the Corporation may purchase, for a period of 90 days during the time the Excess Stock is held in trust, all or any portion of the Excess Stock from the original transferee-shareholder at the lesser of the price paid for the Paired Shares or shares of Preferred Stock by the purported transferee (or if no notice of such purchase price is given, at a price to be determined by the Board of Trustees and the Board of Directors, in their sole discretion, but no lower than the lowest market price of such stock (based on the market price of the Paired Shares or shares of Preferred Stock) at any time during the period in which the Excess Stock is held in trust) and the closing market price for the Paired Shares or shares of Preferred Stock on the date the Trust and the Corporation exercise their option to purchase. The 90-day period begins on the date of the violative transfer if the original transferee-shareholder gives notice to the Trust and the Corporation of the transfer or (if no notice is given) the date the Board of Trustees and the Board of Directors determine that a violative transfer has been made. The Ownership Limitation will not be removed automatically even if the REIT provisions of the Code are changed so as to no longer contain any ownership concentration limitation or if the ownership concentration limitation is increased. Except as otherwise described above, any change in the Ownership Limitation would require an amendment to the Declaration of Trust and the Articles of Incorporation. Amendments to the Declaration of Trust and the to the Articles of Incorporation generally require the affirmative vote of holders owning a majority of the outstanding Trust Shares and Corporation Shares respectively, except that changes to the Ownership Limitation require two-thirds approval. In addition to preserving the Trust's status as a REIT, the Ownership Limitation may have the effect of precluding an acquisition of control of the Trust and the Corporation without the approval of the Board of Trustees and the Board of Directors. All persons who own, directly or by virtue of the attribution provisions of the Code, 5% or more (or such other percentage as may be required by the Code or regulations promulgated thereunder) of the outstanding Paired Shares, Preferred Stock or Excess Stock must file an affidavit with the Trust and the Corporation containing the information specified in the Declaration of Trust and the Articles of Incorporation before January 30 of each year. In addition, each shareholder shall upon demand be required to disclose to the Trust and the Corporation in writing such information with respect to the direct, indirect and constructive ownership of shares as the Board of Trustees or the Board of Directors deems necessary to comply with the provisions of the Declaration of Trust and the Articles of Incorporation or the Code applicable to a REIT or to comply with the requirements of any taxing authority or governmental agency. 79 All certificates representing Paired Shares or Preferred Shares will bear a legend referring to the restrictions described above. DISSOLUTION OF TRUST Pursuant to its Declaration of Trust, the Trust cannot dissolve, unless approved by the affirmative vote or written consent of shareholders holding at least two-thirds of the shares entitled to vote on the matter. AMENDMENT TO THE DECLARATION OF TRUST The Trust's Declaration of Trust, including its provisions on classification of the Board of Trustees and removal of trustees, may be amended only by the affirmative vote of the holders of a majority of all of the votes entitled to be cast on the matter except in the case of amendments of the Ownership Limitation which requires the approval of the holders of two-thirds to the Trust Shares and the Corporation Shares, respectively. Pursuant to the Maryland REIT Law, a real estate investment trust generally cannot amend its Declaration of Trust, unless approved by the affirmative vote or written consent of shareholders holding at least two-thirds of the shares entitled to vote on the matter unless a lesser percentage (but not less than a majority of all the votes entitled to be cast on the matter) is set forth in the real estate investment trust's declaration of trust. A declaration of trust may permit the trustees to amend a declaration of trust from time to time to qualify as a real estate investment trust under the Code or the Maryland REIT Law without the affirmative vote or written consent of the shareholders. In addition the Board of the Trust may alter or modify the investment policies and restrictions contained in the Trust's Declaration of Trust without the consent of the Trust's the shareholders. The Trust's Declaration of Trust permits such action by a majority vote of the Board of Trustees. TRANSFER AGENT FOR PAIRED SHARES The Transfer Agent for the Paired Shares is First Interstate Bank, Ltd., Los Angeles, California. 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 Shares. Sidley & Austin has acted as tax counsel to the Trust and the Corporation in connection with the Offering and the Trust's election to be taxed as a REIT, has reviewed the following discussion and is of the opinion that it fairly summarizes the material federal income tax considerations to a holder of Paired 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 ("IRS") have been or will be requested by the Company on any tax issue connected with the Offering. The Company has received opinions of Sidley & Austin as to certain federal income tax consequences. The opinions of Sidley & Austin are based upon the Internal Revenue Code of 1986, as amended (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, and upon certain customary assumptions and representations. Opinions of counsel are not binding on the IRS or the courts. Accordingly, no assurance can be given that the IRS will not challenge the propriety of one or more of the tax opinions or positions described herein or that such a challenge would not be successful. This summary does not purport to deal with all aspects of taxation that may be relevant to particular holders of Paired 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 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. 80 EACH PROSPECTIVE PURCHASER OF PAIRED SHARES IS ADVISED 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 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. 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 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 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. The Trust recently discovered that it may not have met all of the requirements for maintenance of REIT status for prior years. In order to resolve this problem and be able to complete the Reorganization and the Offering in a timely fashion, in 1994, the Trust requested and received a determination letter from the IRS (the "IRS Letter"). The IRS Letter provides that the Trust's failure to comply with certain requirements for maintenance of REIT status terminated its election to be taxed as a REIT beginning with the Trust's taxable year ended December 31, 1991 and permits the Trust to re-elect to be taxed as a REIT commencing with its taxable year ending December 31, 1995. The IRS Letter also directed the Trust to file amended federal income tax returns for its taxable years ended December 31, 1991 and 1992 as a C corporation (and not as a REIT) and to file its federal income tax returns for its taxable years ended December 31, 1993 and 1994 as a C corporation. The Trust has filed such returns for its taxable years ended December 31, 1991, 1992 and 1993 and has received an extension of the time for filing such return for its taxable year ended December 31, 1994. 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 and the holders of Paired Shares should not be adversely affected for these years. GENERAL The Trust plans to make an election to be taxed as a REIT under Sections 856 through 860 of the Code and applicable Treasury Regulations (the "REIT Requirements" or "REIT Provisions"), commencing with its taxable year ending December 31, 1995. The Trust believes that, commencing with its taxable year ending December 31, 1995, it will be organized and will operate in such a manner as to qualify for taxation as a REIT under the Code. The Trust intends to continue to operate in such a manner, but no assurance can be given that it will operate in a manner so as to qualify or remain qualified as a REIT. 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 stockholders. This summary is qualified in its entirety by the REIT Provisions and administrative and judicial interpretations thereof. In the opinion of Sidley & Austin, commencing with the Trust's taxable year ending December 31, 1995, the Trust will be organized in conformity with the requirements for qualification as a REIT, and its proposed method of operation will enable it to meet the requirements for qualification and taxation as a REIT under the Code. It must be emphasized that Sidley & Austin's opinion is based on the IRS Letter and various assumptions and is conditioned upon certain representations made by the Trust and the Corporation as to factual matters. In particular, Sidley & Austin's opinion is based upon factual representations of the Trust 81 concerning its business and properties. Moreover, such qualification and taxation as a REIT depends upon the Trust's ability to meet, through actual annual operating results, certain distribution levels, specified diversity of stock ownership, and various other qualification tests imposed under the REIT Provisions, as discussed below. The Trust's annual operating results will not be reviewed by Sidley & Austin. Accordingly, no assurance can be given that the actual results of the Trust's operation for any particular taxable year will satisfy such requirements. Further, the anticipated federal income tax treatment described in this Prospectus may be changed, perhaps retroactively, by legislative, administrative, or judicial action at any time. For a discussion of the tax consequences of failure to qualify as a REIT, see "--Failure to Qualify." As long as the Trust qualifies for taxation as a REIT, it generally will not be subject to federal corporate income taxes on net income that it currently distributes to stockholders. This treatment substantially eliminates the "double taxation" (once at the corporate level and again at the stockholder level) that generally results from investment in a regular corporation. Even if the Trust qualifies for taxation as a REIT, however, it may be subject to federal income or excise tax as follows. 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 may 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 (as discussed below), but has nonetheless maintained its qualification as a REIT because certain other requirements have been 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 recognizes gain on the disposition of such asset through the Realty Partnership 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. The Trust believes that it will have Built-In-Gain Assets as of January 1, 1995 and, thus, sales of assets by the Trust or the Realty Partnership after 1994 could 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 82 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; and (ix) 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 has sufficient shareholders to satisfy condition (v) and believes its shareholders satisfy condition (vi). In addition, the Trust's Declaration of Trust and the Corporation's 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. Such transfer and ownership restrictions are described in "Capital Stock--Ownership Limits; Restrictions on Transfer; Repurchase and Redemption of Shares." The Trust believes that, as of January 1, 1995, it satisfied condition (vii) and, based on the IRS Letter, it satisfies condition (viii). Pursuant to applicable Treasury Regulations, in order to elect to be taxed as a REIT, the Trust must maintain certain records and request certain information from its stockholders designed to disclose the actual ownership of its stock. The Trust has represented that it will comply with these requirements. The Trust may not elect to become a REIT unless its taxable year is the calendar year. The Trust's taxable year is the calendar year. 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 and is deemed to be entitled to the income of the partnership attributable to such 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 the REIT Requirements, including 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 LLCs, respectively, will be treated as assets, liabilities and items of income of the Trust for purposes of applying the requirements described herein, provided that the Realty Partnership and the LLCs are treated as partnerships for federal income tax purposes. See "--Federal Income Tax Aspects of the Partnerships below." PAIRED SHARES. Section 269B 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 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 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 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. In the opinion of Sidley & Austin, the IRS letter and the termination of the Trust's REIT election for the taxable years ended December 31, 1991 through 1994 will not result in Section 269B becoming applicable to the Trust. There are, however, no judicial or administrative authorities interpreting this grandfathering rule. Therefore, the opinion of Sidley & Austin is based solely on the literal language of the statutory grandfathering rule. 83 Even though Section 269B 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 should only be upheld if the separate corporate identities are a sham or unreal. Not all of the trustees of the Trust are also directors of the Corporation and no individual serves as an officer of both the Trust and the Corporation. In addition, the Trust, and the Corporation and each Partnership and LLC 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 Partnerships and the LLCs 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, Sidley & Austin is of the opinion that the separate corporate identities of the Trust and the Corporation will be respected. Due to the paired structure, the Trust, the Corporation, the Partnerships and the LLCs 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 have represented that all material transactions between them and among them and the Partnerships and the LLCs 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 three 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, 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 (or the Realty Partnership) 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, a REIT may provide services to its tenants and 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." 84 Substantially all of the Trust's income will be derived from its partnership interest in the Realty Partnership. The Realty Partnership leases for a fixed period all but three of its fee and leasehold interests in its hotels and associated property to the Operating Partnership and leases three hotels and associated property to an unrelated person (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 calculated by multiplying fixed percentages of the gross room revenues and, 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. In addition, Section 7701(e) of the Code provides that a contract that purports to be a service contract (or a partnership agreement) is treated instead as a lease of property if the contract is properly treated as such, taking into account all relevant factors, including whether or not: (i) the service recipient is in physical possession of the property; (ii) the service recipient controls the property; (iii) the service recipient has a significant economic or possessory interest in the property; (iv) the service provider does not bear any risk of substantially diminished receipts or substantially increased expenditures if there is nonperformance under the contract; (v) the service provider does not use the property concurrently to provide significant services to entities unrelated to the service recipient; and (vi) the total contract price does not substantially exceed the total rental value of the property for the contract period. Since the determination whether a service contract should be treated as a lease is inherently factual, the presence or absence of any single factor may not be dispositive in every case. Sidley & Austin is of the opinion that the Leases will be treated as true leases for federal income tax purposes. This opinion is based, in part, on the following facts: (i) the Realty Partnership and the lessees intend for their relationship to be that of lessor and lessee and each such relationship will be documented by a lease agreement; (ii) the lessees will have the right to exclusive possession and use and quiet enjoyment of the leased premises during the term of the Leases; (iii) the lessees will bear the cost of, and be responsible for, day-to-day maintenance and repair of the leased premises, other than the cost of certain capital expenditures, and will dictate how the leased premises are operated and maintained; (iv) the lessees will bear all of the costs and expenses of operating the leased premises during the term of the Leases; (v) the term of the Leases is less than the economic life of the leased premises and the lessees do not have purchase options with respect to the leased premises; (vi) the lessees are required to pay substantial fixed rent during the term of the Leases; and (vii) each lessee stands to incur substantial losses or reap substantial profits depending on how successfully it operates the leased premises. Investors should be aware, however, that there are not controlling authorities involving leases with terms substantially the same as the Leases. Therefore, the opinion of Sidley & Austin is based upon an analysis of the facts and circumstances and upon rulings and judicial decisions involving situations that are analogous. If any significant Lease is recharacterized as a service contract or a partnership agreement, rather than as a true lease, the Trust would not be able to satisfy either the 75% or 95% gross income tests 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. Since the Trust and the Corporation have represented that there is no plan or arrangement to renegotiate any of the Leases and the 85 Leases conform with normal business practice, the percentage rent will be treated as "rents from real property" under this requirement. The Trust has further represented with respect to hotel properties that the Realty Partnership may acquire in the future that it will not charge rent that is based in whole or in part on the income or profits of any person (except by reason of being based on a fixed percentage of receipts or sales, as described above). Another requirement for rent payments under a Lease to constitute "rents from real property" is that the rent attributable to personal property under the Lease must not be greater than 15% of the rent received under the Lease. For this purpose, rent attributable to personal property is the amount that bears the same ratio to the total rent for the taxable year as the average of the adjusted basis of the personal property at the beginning and at the end of the taxable year bears to the average of the aggregate adjusted basis of both the real property and personal property leased under, or in connection with, such lease. Under the Leases, the Realty Partnership leases certain personal property to the tenants. The Trust believes that under each of the Leases less than 15% of the total rent is attributable to personal property and, as a result, no portion of such rent will be treated as being for rental of personal property for purposes of the 75% and 95% gross income tests. If the IRS were to successfully assert that with respect to one or more of the Leases rent attributable to personal property is greater than 15% of the total rent, then it is possible that the Trust would not be able to satisfy either the 75% or 95% gross income tests and, as a result, would lose its REIT status. With respect to both the Leases and future acquisitions, the Trust has represented that it will monitor the 15% test to ensure continued qualification as a REIT. A third requirement for qualification of rent under the Leases as "rents from real property" is that the Trust must not own, directly or constructively, 10% or more of the Operating Partnership (or any other tenant under a Lease). If the Trust were to own directly or indirectly, 10% or more of the Operating Partnership (or such tenant), the rent paid to the Realty Partnership by the Operating Partnership (or such tenant) with respect to property leased by the Realty Partnership to the Operating Partnership (or such tenant) 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 Trust 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 Shares will be ineffective. See "Capital Stock--Ownership Limits; Restrictions on Transfer; Repurchase, and Redemption of Shares." 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 Shares, it is possible that some person may at some time own sufficient Paired 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 or the Realty Partnership renders or furnishes Prohibited Services to the occupants of the Realty Partnership's properties. So long as the Leases are treated as true leases, neither the Trust nor the Realty Partnership should be treated as rendering or furnishing Prohibited Services to the occupants of the Realty Partnership's properties. Based on the foregoing, Sidley & Austin is of the opinion 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." In such case, it is possible that the Trust 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 Realty Partnership holds notes and may advance money from time to time to tenants 86 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 Realty Partnership or the LLCs 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 percentage of receipts or sales. In addition, the Trust has represented that none of the Trust, the Realty Partnership or the LLCs intend to charge interest that will depend in whole or in part on the income or profits of any person or to make loans (not secured in substantial part by real estate mortgages) in amounts that could jeopardize the Trust's compliance with the 75% and 5% asset tests, discussed below. To the extent the notes held by the Realty Partnership or the LLCs are secured by real property, the interest received or accrued with respect to such notes should be treated as qualifying income for both the 75% and the 95% gross income tests. Certain of the notes held by the Realty Partnership are not secured by real property. Interest received or accrued with respect to such notes should be treated as qualifying income for the 95% gross income test but should not be treated as qualifying income for the 75% gross income tax. However, the amount of such interest should not cause the Trust to fail to satisfy the 75% gross income test. Any gross income derived from a prohibited transaction is taken into account in applying the 30% income test necessary to qualify as a REIT, and the net income from that transaction is subject to a 100% tax. The Trust believes that no asset owned by it or by the Realty Partnership is held for sale to customers and that sale of any such property will not be in the ordinary course of business of the Trust or the Realty Partnership. Whether property is held "primarily for sale to customers in the ordinary course of a trade or business" and, therefore, is subject to the 100% tax, depends on the facts and circumstances in effect from time to time, including those related to a particular property. The Trust and the Realty Partnership will attempt to comply with the terms of safe-harbor provisions in the Code prescribing when asset sales will not be characterized as prohibited transactions. Complete assurance cannot be given, however, that the Trust can comply with the safe-harbor provisions of the Code or that the Trust or the Realty Partnership can avoid owning property that may be characterized as property held "primarily for sale to customers in the ordinary course of business." If the Trust fails to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may nevertheless qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. These relief provisions generally will be available if the Trust's failure to meet such tests is due to reasonable cause and not willful neglect, the Trust attaches a schedule of the sources of its income to its tax return, and any incorrect information on the schedule was not due to fraud with intent to evade tax. It is not possible to state whether in all circumstances the Trust would be entitled to the benefit of these relief provisions. As discussed above in "--General," 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. In such case, the Trust will cease to qualify as a REIT. ASSET TESTS. In order to maintain qualification as a REIT, the Trust, 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 Trust's total assets must be represented by real estate assets (including (i) its allocable share of real estate assets held by partnerships in which the Trust owns a direct or indirect interest and (ii) 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 Trust), cash, cash items and government securities. Second, not more than 25% of the Trust'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 Trust may not exceed 5% of the value of the Trust's total assets, and the Trust may not own more than 10% of any one issuer's outstanding voting securities. The Trust anticipates that commencing with its taxable year ending December 31, 1995 it will be able to comply with the asset tests. Substantially all of the Trust's investments will be in properties owned by the Realty Partnership, at least 75% of which will represent qualifying real estate assets. A substantial portion of the indebtedness of the Operating Partnership to 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 Realty Partnership and, thus, will not cause the Trust to fail the 5% asset test. 87 After initially 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 later 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 stockholders 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 (or the Realty Partnerships) disposes of any Built-in Gain Asset during its Recognition Period, the Trust will be required, pursuant to IRS 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 experience timing differences between the actual receipt of income and actual payment of deductible expenses and the inclusion of such income and deduction of such expenses in arriving at REIT taxable income. In addition, it is also possible that, from time to time, the Trust may be allocated a share of net capital gain attributable to the sale of depreciated property that exceeds its allocable share of cash attributable to that sale. In such cases, the Trust 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 (or the Realty Partnership) may find it necessary to arrange for short-term or possible long-term borrowings or to pay dividends in the form of taxable stock dividends. Under certain circumstances, the Trust may be able to rectify a failure to meet the above distribution requirements for a year by paying "deficiency dividends" to stockholders in a later year, which may be included in the Trust's deduction for dividends paid for the earlier year. Thus, the Trust may be able to avoid being taxed on amounts distributed as deficiency dividends; however, the Trust will be required to pay interest based upon the amount of any deduction taken for deficiency dividends. FAILURE TO QUALIFY If the Trust fails to qualify for taxation as a REIT in any taxable year, and the relief provisions do not apply, the Trust will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to shareholders in any year in which the Trust fails to qualify will not be deductible by the Trust nor will they be required to be made. As a result, the Trust's failure to qualify as a REIT could reduce the cash available for distribution by the Trust to its shareholders. In addition, if the Trust fails to qualify as a REIT, all distributions to shareholders will be taxable as ordinary income to the extent of the Trust's current and accumulated earnings and profits, and, subject to certain limitations of the Code, corporate distributees may be eligible for the dividends-received deduction. Unless 88 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 the common parent of an affiliated group of corporations filing a consolidated return (the "Corporation Group"). After the Gaming Approvals are received (see "Business and Properties--Regulation and Licensing"), substantially all of the Corporation Group's taxable income will consist of its distributive share of the Operating Partnership's taxable income. The Corporation Group will be subject to federal income tax on its taxable income. FEDERAL INCOME TAXATION OF HOLDERS OF PAIRED SHARES FEDERAL INCOME TAXATION OF TAXABLE U.S. HOLDERS As used herein, the term "U.S. Stockholder" means a holder of Paired Shares who: (i) is a citizen or resident of the United States; (ii) is 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) is 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. Stockholders 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 may 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. 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 shall 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. 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. As a result, holders may 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, stockholders may 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. Stockholders 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 89 adjusted basis of the holder's Corporation Stock, but rather will reduce the adjusted basis of such Corporation Stock. To the extent that such distributions exceed the adjusted basis of a holder's Corporation Stock 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. Stockholder will realize capital gain or loss on the disposition of Paired Shares equal to the difference between the amount realized on such disposition and the holder's adjusted basis in such Paired Shares. Such gain or loss will generally constitute long-term capital gain or loss if the holder held such Paired 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 required to be treated by such holder as long-term capital gain. U.S. Stockholders may not include in their individual income tax returns any net operating losses or capital losses of the Trust or the Corporation. FEDERAL TAXATION OF TAX-EXEMPT HOLDERS OF PAIRED 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 should not, subject to certain exceptions described below, be UBTI to a qualified plan, IRA or other tax-exempt entity (a "Tax-Exempt Stockholder") provided the Tax-Exempt Stockholder 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 Stockholder. Similarly, income from the sale of Trust Shares should not, subject to certain exceptions described below, constitute UBTI unless the Tax-Exempt Stockholder 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 IRS. For Tax-Exempt Stockholders 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. Tax-exempt pension funds that are described in Section 401(a) of the Code are referred to below as "qualified trusts." A REIT is a "pension held REIT" if (i) it would not have qualified as a REIT but for the fact that Section 856(h)(3) of the Code provides that stock owned by qualified trusts shall be treated, for purposes of the "not closely held" requirement, as owned by the beneficiaries of the trust (rather than by the trust itself), and (ii) either (a) at least one such qualified trust hold more than 25% (by value) of the interests in the real estate investment trust, or (b) one or more such qualified trusts, each of whom owns more than 10% (by value) of the interests in the REIT, hold in the aggregate more than 50% (by value) of the interests in the REIT. Due to the Ownership Limitation, the Trust should not be a "pension held REIT" within the meaning of the Code. FEDERAL TAXATION OF NON-U.S. HOLDERS OF PAIRED 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. Stockholders") 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 90 consequences that may be relevant to a Non-U.S. Stockholder in light of its particular circumstances. Prospective Non-U.S. Stockholders should consult with their own tax advisers to determine the effect of federal, state, local, and foreign income tax laws with regard to an investment in Paired Shares, including any reporting requirements. In general, a Non-U.S. Stockholder will be subject to regular United States income tax with respect to its investment in Paired Shares if such investment is "effectively connected" with the Non-U.S. Stockholder's conduct of a trade or business in the United States. A corporate Non-U.S. Stockholder that receives income that is (or is treated as) effectively connected with a United States trade or business may also be subject to the branch profits tax under Section 884 of the Code, which is payable in addition to regular United States corporate income tax. The following discussion will apply to Non-U.S. Stockholders whose investment in Paired Shares is not so effectively connected. DISTRIBUTIONS. Distributions by the Trust to a Non-U.S. Stockholder that are neither attributable to gain from sales or exchanges by the Trust of United States real property interests nor designated by the Trust as capital gains dividends and distributions by the Corporation will be treated as dividends of ordinary income to the extent that they are made out of current or accumulated earnings and profits of the Trust or the Corporation, as the case may be. Such distributions ordinarily will be subject to withholding of United States federal income tax on a gross basis (that is, without allowance of deductions) at a 30% rate or such lower rate as may be specified by an applicable income tax treaty, unless the dividends are treated as effectively connected with the conduct by the Non-U.S. Stockholder of a United States trade or business. Distributions in excess of current or accumulated earnings and profits of the Trust or the Corporation, as the case my be, will not be taxable to a Non-U.S. Stockholder to the extent that they do not exceed the adjusted basis of the Non-U.S. Stockholder's Trust Shares or Corporation Stock, 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. Stockholder's Trust Shares or Corporation Stock, as the case may be, they will give rise to gain from the sale or exchange of Non-U.S. Stockholder's Paired Shares if the Non-U.S. Stockholder otherwise would be subject to tax on any gain from the sale or other disposition of Paired Shares, as described below. 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. Stockholder unless (i) a lower rate is provided for under an applicable tax treaty and the stockholder files the required form evidencing eligibility for that reduced rate with the Trust and the Corporation, or (ii) the Non-U.S. Stockholder 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. Stockholder that are attributable to gain from sales of exchanges by the Trust of United States real property interests will cause the Non-U.S. Stockholder to be treated as recognizing such gain as income effectively connected with a United States trade or business. Non-U.S. Stockholders would thus generally be taxed at the same rates applicable to U.S. Stockholders (subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of non-resident alien individuals). Also, such gain may be subject to a 30% branch profits tax in the hands of a Non-U.S. Stockholder 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. Stockholder's United States federal income tax liability. SALE OF PAIRED SHARES. Gain recognized by a Non-U.S. Stockholder upon a sale or other disposition of Paired 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 Shares are regularly traded on an established securities market (E.G., the NYSE, where the Paired Shares are currently traded) and (B) the Selling Non-U.S. Stockholder held 5% or less of the outstanding Paired Shares at all times during a specified period, unless, in the case of a Non-U.S. Stockholder who is a non-resident alien individual, such individual 91 is present in the United States for 183 days or more and certain other conditions apply. A domestically controlled REIT is defined generally as a REIT in which at all times during a specified testing period less than 50% in value of the stock was held directly or indirectly by foreign persons. The Trust believes that it qualifies as a domestically controlled REIT. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING Under certain circumstances, U.S. Stockholders may 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 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 it has failed to report properly payments of interest and dividends; or (iv) under certain circumstances, fails to certify, under penalty of perjury, that it has furnished a correct TIN and has not been notified by the IRS that it 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 may 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. Stockholders and each Non-U.S. Stockholder should consult his or her tax advisor with respect to any such information reporting and withholding requirements. FEDERAL INCOME TAX ASPECTS OF THE PARTNERSHIP GENERAL Substantially all of the Trust's assets are held directly or indirectly through the Realty Partnership and, once the Gaming Approvals are received, substantially all of the Corporation's (and its subsidiaries') assets will be held through the Operating Partnership. In general, partnerships are "pass-through" entities that are not subject to federal income tax. Rather, partners are allocated their proportionate shares of the items of income, gain, loss, deduction and credit of a partnership, and are subject to tax thereon, without regard to whether the partners receive a distribution from the partnership. The Trust will include in its income its allocable share of the foregoing partnership items for purposes of the various REIT income tests and in the computation of its REIT taxable income. Moreover, for purposes of the REIT asset tests, the Trust will include its proportionate share of assets held by the Realty Partnership and the LLCs. ENTITY CLASSIFICATION The Trust's interest in the Realty Partnership, the Corporation's (and its subsidiaries') interest in the Operating Partnership, and the Trust's and the Realty Partnership's interests in the LLCs, involve special tax considerations, including the possibility of a challenge by the IRS of the status of either Partnership or the LLCs as a partnership (as opposed to an association taxable as a corporation) for federal income tax purposes. If a Partnership or an LLC 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 Shares. See "--Federal Income Taxation of the Corporation" above. In addition, if the Realty Partnership or an LLC were to be taxable as a corporation, the character of the Trust's assets and items of gross income would change and preclude the Trust from satisfying the asset tests and possibly the income tests under the Code, and in turn would prevent the Trust from qualifying as a REIT. Furthermore, any change in the status of the Realty Partnership, the Operating Partnership or an LLC 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. An organization formed as a partnership or as a limited liability company will be treated as a partnership for federal income tax purposes rather than as a corporation only if it has no more than two of the four corporate characteristics that the applicable Treasury Regulations use to distinguish a partnership from a corporation for federal income tax purposes. Neither the Partnerships nor the LLCs have requested or intend to request, a ruling from the IRS regarding treatment as a partnership for federal income tax purposes. Instead, Sidley & Austin has delivered its opinion that, based on the provisions of the Partnership 92 Agreements, and the Operating Agreement of the LLCs and certain factual assumptions and representations described in the opinion, the Realty Partnership, the Operating Partnership and the LLCs will be classified as partnerships for federal income tax purposes. Unlike a private letter ruling, an opinion of counsel is not binding on the IRS, and no assurance can be given that the IRS will not challenge the status of a Partnership or an LLC as a partnership for federal income tax purposes. If such a challenge were sustained by a court, the subject Partnership or LLC would be treated as an association taxable as a corporation for federal income tax purposes. In addition, the opinion of Sidley & Austin is based on existing law, which is to a great extent the result of administrative and judicial interpretation. No assurance can be given that administrative or judicial changes would not modify the conclusions expressed in the opinion. PARTNERSHIP ALLOCATIONS Although a partnership or operating agreement will generally determine the allocation of income and losses among partners, such allocations will be disregarded for tax purposes if they do not comply with the provisions of Section 704(b) of the Code and the Treasury Regulations promulgated thereunder. Generally, Section 704(b) of the Code and the Treasury Regulations promulgated thereunder require that partnership allocations must respect the economic arrangement of the partners. If an allocation is not recognized for federal income tax purposes, the item subject to the allocation will be reallocated in accordance with the partners' interests in the partnership, which will be determined by taking into account all of the facts and circumstances relating to the economic arrangement of the partners with respect to such item. The Partnerships' and the LLCs' allocations of taxable income and loss are intended to comply with the requirements of Section 704(b) of the Code and the Treasury Regulations promulgated thereunder. TAX ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTIES Pursuant to Section 704(c) of the Code, income, gain, loss and deduction attributable to appreciated or depreciated property that is contributed to a partnership in exchange for an interest in the partnership, must be allocated in a manner such that the contributing partner is charged with, or benefits from, respectively, the unrealized gain or unrealized loss associated with the property at the time of the contribution. The amount of such unrealized gain or unrealized loss is generally equal to the difference between the fair market value of the contributed property at the time of contribution and the adjusted tax basis of such property at the time of contribution (a "Book-Tax Difference"). Such allocations are solely for federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the partners. The Realty Partnership has been formed by way of contributions of the Trust's property and certain property held by Starwood Capital. The Operating Partnership has been formed by way of contributions of the Corporation's (and its subsidiaries') property and cash and assets from Starwood Capital. Consequently, allocations with respect to such contributed property must be made in a manner consistent with Section 704(c) of the Code. In general, the partners of the Partnerships will be allocated depreciation deductions for tax purposes that are different than such deductions would be if determined on a pro rata basis. The effect of such allocations likely will be to reduce the depreciation deductions allowed to the Trust and the Corporation as compared with the depreciation allowed if the Reorganization had not taken place. However, the Trust still will not have a liability for federal income tax on its net income provided it qualifies as a REIT and distributes an amount equal to its net income as discussed above. In addition, in the event of the disposition of any of the contributed assets that have a Book-Tax Difference, all income attributable to such Book-Tax Difference will generally be allocated to the contributing partner, and other partners will generally be allocated only their share of capital gains attributable to appreciation, if any, occurring after the creation of the Partnerships. The foregoing allocations will tend to eliminate the Book-Tax Difference over the life of the Partnerships. However, the special allocation rules of Section 704(c) of the Code do not always entirely eliminate the Book-Tax Difference on an annual basis or with respect to a specific taxable transaction such as a sale. Thus, the carryover basis of the contributed assets in the hands of the Partnerships may cause the Trust or the Corporation, as the case may be, to be allocated lower depreciation and other deductions, and possibly an amount of taxable income in the event of a sale of such contributed assets in excess of the 93 economic or book income allocated to it as a result of such sale. This may cause the Trust or the Corporation to recognize taxable income in excess of cash proceeds, which, in the case of the Trust, might adversely affect the Trust's ability to comply with the REIT distribution requirements. See "--Federal Income Taxation of the Trust--Requirements For Qualification--Annual Distribution Requirements". The foregoing principles also apply in determining the earnings and profits of the Trust and the Corporation for purposes of determining the portion of distributions taxable as dividend income. See "--Federal Income Taxation of Holders of Paired Shares". The application of these rules over time may result in a higher portion of distributions being taxed as dividends than would have occurred had the Trust and the Corporation contributed assets with an adjusted tax basis equal to their fair market values. The Treasury Regulations under Section 704(c) of the Code allow partnerships to use any reasonable method of accounting for Book-Tax Differences so that the contributing partner receives the tax benefits and burdens of any built-in gain or loss associated with the contributed property. The Partnerships have determined to use the "traditional method" (which is specifically approved in the Treasury Regulations) for accounting for Book-Tax Differences with respect to the properties initially contributed to the Partnerships. The Partnerships have not determined which of the alternative methods of accounting for Book-Tax Differences will be elected with respect to any properties contributed to the Partnerships in the future. SALE OF THE PARTNERSHIPS' PROPERTY Generally, any gain realized by a partnership on the sale of property held by it for more than one year will be long-term capital gain, except for any portion of such gain that is treated as depreciation recapture. However, the Trust's share of any gain realized by the Realty Partnership or an LLC on the sale of any property held by it as inventory or other property held primarily for sale to customers in the ordinary course of its trade or business will be treated as income from a prohibited transaction that is subject to a 100% penalty tax. See "--Federal Income Taxation of the Trust--Requirements for Qualification--Income Tests." Such prohibited transaction income may also have an adverse effect upon the Trust's ability to satisfy the income tests for qualification as a REIT. Under existing law, whether property is held as inventory or primarily for sale to customers in the ordinary course of a partnership's trade or business is a question of fact that depends on all the facts and circumstances with respect to the particular transaction. The Realty Partnership and the LLCs intend to hold their properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing, owning, and operating the properties (and other hotel properties) and to make such occasional sales of its properties, including peripheral land, as are consistent with their investment objectives. PARTNERSHIP ANTI-ABUSE RULE The IRS recently published regulations that provide an anti-abuse rule (the "Anti-Abuse Rule") under the partnership provisions of the Code (the "Partnership Provisions"). Under the Anti-Abuse Rule, if a partnership is formed or availed of in connection with a transaction a principal purpose of which is to reduce substantially the present value of the partners' aggregate federal tax liability in a manner that is inconsistent with the intent of the Partnership Provisions, the IRS can recast the transaction for federal tax purposes to achieve tax results that are consistent with the intent of the Partnership Provisions. This analysis is to be made based on all facts and circumstances. The Anti-Abuse Rule states that the intent of the Partnership Provisions incorporates the following requirements: (i) the partnership must be bona fide and each partnership transaction or series of related transactions must be entered into for a substantial business purpose; (ii) the form of each partnership transaction must be respected under substance over form principles; and (iii) with certain exceptions, the tax consequences under the Partnership Provisions to each partner of partnership operations and the transactions between the partner and the partnership must accurately reflect the partner's economic agreement and clearly reflect the partner's income. Sidley & Austin is of the opinion that the structure of the Company is not inconsistent with the intent of the Partnership Provisions and that, therefore, the IRS should not be able to invoke the Anti-Abuse Rule to recast the structure of the Company for federal income tax purposes. This opinion is based on examples contained in the Anti-Abuse Rule. However, no assurance can be given that the IRS or a court will concur with such opinion. 94 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, 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 REIT Requirements. Sidley & Austin is therefore of the opinion that 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 Shares may be subject to state or local taxation in various jurisdictions, including those in which it or they transact business or reside. The state and local tax treatment of the Trust, the Corporation and the holders of Paired Shares may not conform to the federal income tax consequences discussed above. CONSEQUENTLY, HOLDERS OF PAIRED SHARES SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON THE PURCHASE, OWNERSHIP AND SALE OF PAIRED SHARES. ERISA CONSIDERATIONS This section is a summary of certain matters arising under the Employee Retirement Income Security Act of 1974, as amended, together with applicable regulations ("ERISA"), and Section 4975 of the Code which a fiduciary of an "employee benefit plan" as defined in and subject to ERISA or of a "plan" as defined in Section 4975 of the Code who has investment discretion should consider before deciding to purchase Paired Shares (such "employee benefit plans" and "plans" being referred to herein as "Plans" and such fiduciaries with investment discretion being referred to herein as "Plan Fiduciaries"). The discussion below under "Plan Asset Issue" also should be considered by a prospective purchaser of Paired Shares that is not a Plan. This section is not intended to deal with all matters arising under ERISA or Section 4975 of the Code that may be relevant to a prospective purchaser of Paired Shares and does not include state law or other legal requirements applicable to governmental or church plans. The following statements regarding certain matters arising under ERISA and the Code are based on the provisions of ERISA and the Code as currently in effect and the existing administrative and judicial interpretations thereunder. No assurance can be given that administrative, judicial or legislative changes will not occur that could make such statements incorrect or incomplete. In general, the terms "employee benefit plan" as defined in ERISA and "plan" as defined in Section 4975 of the Code together refer to any plan or account of various types that provide retirement or welfare benefits to an individual or to an employer's employees and their beneficiaries. Such plans include, but are not limited to, corporate pension and profit sharing plans, so-called KEOGH plans for self-employed individuals (including partners), simplified employee pension plans and individual retirement accounts described in Section 408 of the Code, medical benefit plans, bank commingled trust funds and insurance company separate accounts for such plans and accounts and, under certain circumstances, the general account of an insurance company. FIDUCIARY AND PROHIBITED TRANSACTION CONSIDERATIONS Each Plan Fiduciary, before deciding to purchase Paired Shares, must be satisfied that such an investment is a prudent investment for the Plan, that the investments of the Plan, including an investment in Paired Shares, are diversified so as to minimize the risks of large losses, that an investment in Paired Shares complies with the documents of the Plan and related trust, and that an investment in Paired Shares complies with any other applicable requirements of ERISA or the Code. Plan Fiduciaries should also consider the entire discussion concerning federal income taxes under "Federal Income Tax Considerations" and the 95 discussion concerning shareholders' liability for obligations of the Trust under "Risk Factors--Possible Liability of Trust Shareholders," which are relevant to any decision by a Plan Fiduciary to purchase Paired Shares. Each Plan Fiduciary, before deciding to purchase Paired Shares, must also give appropriate consideration as to whether a prohibited transaction described in Section 406 of ERISA or Section 4975 of the Code would result from the Plan's purchase of Paired Shares and, if so, the availability of an exemption. Those prohibited transactions include various direct and indirect transactions, such as sales and loans, between a Plan and any person who with respect to the Plan is a "party in interest" as defined in Section 3(14) of ERISA or "disqualified person" as defined in Section 4975 of the Code, the use of the Plan's assets for the benefit of any such person, and any fiduciary of the Plan dealing with the Plan's assets in the fiduciary's own interest. The consequences of any such prohibited transaction, if no exemption applies, can include the imposition of excise taxes on the party in interest or disqualified person, the persons involved in the transaction having to rescind the transaction and pay an amount to the Plan for any losses realized by the Plan or profits realized by such persons, disqualification of any individual retirement account involved in the transaction with adverse tax consequences to the owner of such account, and other liabilities that can have a significant, adverse effect on such persons. For example, the Trust and the Corporation will contribute the entire net proceeds received by each of them from the sale of the Paired Shares to the Realty Partnership and Operating Partnership, respectively, which in turn will use such proceeds, in part, to repay indebtedness and for the acquisition of fee assets. See "Use Of Proceeds." Certain of the lenders with respect to such debt or sellers of such fee assets may be parties in interest or disqualified persons with respect to some Plans. Therefore, if any Paired Shares are purchased by a Plan or for the benefit of a Plan with respect to which such a lender or seller is a party in interest or a disqualified person, a prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code might be considered to occur. If such a purchase does result in a prohibited transaction, the Plan Fiduciary should not make the purchase unless an exemption applies. PLAN ASSET ISSUE The following paragraphs describe the rules applicable in determining whether the assets of the Trust or the Corporation will for purposes of ERISA and Section 4975 of the Code be considered assets of the Plans which purchase Paired Shares or for whose benefit Paired Shares are purchased (I.E., whether Trust and Corporation assets will be considered "Plan assets"). If the assets of the Trust or Corporation will be considered to be assets of such Plans, the assets of the Partnerships will also be considered to be assets of such Plans and transactions entered into by the Partnerships will be subject to the fiduciary and prohibited transaction considerations described above. If assets of the Trust and Corporation will be considered Plan assets, (i) a Plan Fiduciary must consider whether a purchase of Paired Shares will result in a violation of any of the fiduciary rules under ERISA and (ii) any prospective purchaser of Paired Shares must consider that prohibited transactions within the meaning of Section 406 of ERISA or Section 4975 of the Code will occur if assets of the Trust, Corporation or either of the Partnerships are involved in transactions that include persons who are "parties in interest" as defined in Section 3(14) of ERISA or "disqualified persons" as defined in Section 4975 of the Code with respect to such Plans or if a person who manages or controls assets of the Trust, Corporation or either of the Partnerships deals with those assets in that person's own interest. The possible consequences of any such prohibited transaction, if an exemption does not apply, are described above in the second paragraph under the heading "Fiduciary and Prohibited Transaction Considerations" and can have a significant adverse effect on the Partnerships, the Trust and the Corporation. A regulation issued by the United States Department of Labor under ERISA (the "Plan Asset Regulation") contains rules for determining when an investment by a Plan or for the benefit of a Plan in an equity interest in an entity, such as the Paired Shares, will result in the underlying assets of the entity being deemed assets of the Plan for purposes of ERISA and Section 4975 of the Code. Those rules provide that assets of the entity will not be assets of a Plan that purchases an equity interest therein if the equity interest qualifies as a "publicly-offered security" or any of certain other exceptions apply. 96 Under the Plan Asset Regulation, a "publicly-offered security" is a security that is (i) "freely transferable," (ii) part of a class of securities that is "widely-held," and (iii) either (a) part of a class of securities that is registered under Section 12(b) or 12(g) of the Exchange Act or (b) sold to a Plan as part of an offering of securities to the public pursuant to an effective registration statement under the Securities Act and the class of securities of which such security is a part is registered under the Exchange Act within 120 days (or such later time as may be allowed by the Securities and Exchange Commission) after the end of the fiscal year of the issuer during which the offering of such securities to the public occurred. Whether a security is considered "freely transferable" depends on the facts and circumstances of each case. If the security is part of an offering of which the minimum investment is $10,000 or less, any restriction on or prohibition against any transfer or assignment of such security for the purposes of preventing a termination or reclassification of the entity for federal or state tax purposes will not of itself ordinarily prevent the security from being considered freely transferable. A class of securities is considered "widely-held" only if it is a class of securities that is owned by 100 or more investors independent of the issuer and of one another. A class of securities will not fail to be widely-held solely because after the initial offering the number of independent investors falls below 100 as a result of events beyond the control of the issuer. The Trust and the Corporation believe that the Paired Shares to be sold pursuant to the Offering meet the criteria to be "publicly-offered securities" so that assets of the Trust and the Corporation should not be deemed assets of the Plans purchasing Paired Shares. First, the Trust and the Corporation believe that the Paired Shares will be considered to be freely transferable, as the minimum investment is less than $10,000 and the only restriction on their transfer is the Ownership Limitation. Second, the Trust and Corporation expect the Paired Shares to immediately after the Offering be held by substantially more than 100 investors and at least 100 or more of such investors to be independent of the Trust and the Corporation and of one another. Third, the Paired Shares are (i) part of a class of securities that is registered under Section 12(b) or 12(g) of the Exchange Act and (ii) are being sold pursuant to the Offering as part of an offering of securities to the public pursuant to an effective registration statement under the Securities Act and the class of securities of which the Paired Shares are a part is registered under the Exchange Act within 120 days after the end of the year of the Trust and the Corporation during which the offering of such securities to the public occurs. NEITHER THE TRUST NOR THE CORPORATION REPRESENTS THAT A PURCHASE OF PAIRED SHARES MEETS THE RELEVANT LEGAL REQUIREMENTS WITH RESPECT TO OR IS APPROPRIATE FOR ANY PARTICULAR "EMPLOYEE BENEFIT PLAN" AS DEFINED IN ERISA OR ANY "PLAN" AS DEFINED IN SECTION 4975 OF THE CODE. THE FIDUCIARY WITH INVESTMENT DISCRETION CONCERNING ANY EMPLOYEE BENEFIT PLAN OR PLAN SHOULD CONSULT WITH ITS OWN LEGAL ADVISOR AND OTHER APPROPRIATE ADVISORS REGARDING SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE AND STATE AND OTHER LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP OR SALE OF PAIRED SHARES BY SUCH EMPLOYEE BENEFIT PLAN OR PLAN IN LIGHT OF THE CIRCUMSTANCES OF THAT PARTICULAR EMPLOYEE BENEFIT PLAN OR PLAN. CONVERTIBLE NOTES In order to facilitate the Offering by the Company of Paired Shares, the Underwriters will purchase the Starwood Lodging Convertible Notes due , 1995 (the "Notes"). The Notes will be automatically converted into Paired Shares (at a conversion price equal to the public offering price of the Paired Shares) upon certification to the Trustee (defined below) of the transfer of beneficial ownership of the Notes to any person or entity which is not an Underwriter or a selected dealer in the offering or an affiliate of any of either. The automatic conversion will take place without physical delivery of the Notes to any transferee of an Underwriter, selected dealer or affiliate: such transferee will receive only a certificate for the Paired Shares issued upon such conversion. The structure of the Offering is designed to avoid the possibility that the Underwriters, selected dealers and the affiliates of either, or any of them, acquire 8.0% or more of the Paired Shares in violation of the Ownership Limitation. See "Capital Stock--Ownership Limits; Restrictions on Transfer; Repurchase and Redemption of Shares." 97 Because the Notes automatically will be converted into Paired Shares upon sale to the public, no market for the Notes is expected to develop. The following description of the Notes is provided in the event that any Notes are acquired and held by any Underwriter, selected dealer or affiliate of any of either, in whose hands the Notes do not automatically convert into Paired Shares. The Notes are to be issued under an indenture (the "Indenture") to be dated as of June 15, 1995 between the Company and First Interstate Bank as trustee (the "Trustee"). The following statements relating to the Notes and the Indenture are summaries, do not purport to be complete and are qualified in their entirety by reference to the Notes and the Indenture. The Notes will not bear interest. The Notes will be issued in registered form in denominations of the same dollar amount as a multiple of the public offering price of the Paired Shares and will be unsecured, several obligations of the Trust and the Corporation maturing on , 1995. At the option of the Company, the maturity date of the Notes may be extended at any time or from time to time, by written notice to the Trustee prior to the maturity date, including any extension thereof, to a date not later than , 1997. The Trust will be obligated to pay 95% of the Notes and the Corporation the balance in accordance with the allocation of the proceeds of the offering of the Paired Shares set forth under "Use of Proceeds." There are no redemption or sinking fund provisions applicable to the Notes and the Notes are not subject to redemption prior to maturity by the Company or either of them. The following are Events of Default under the Indenture: failure of the Trust or the Corporation to pay principal owing by it in respect of any Note when due; failure of Trust or the Corporation to comply with any of its other agreements in the Notes or the Indenture, continued for 90 days after notice is given as provided in the Indenture; and certain events of bankruptcy, insolvency or reorganization. If an Event of Default occurs and is continuing, either the Trustee or the holders of at least 25% in aggregate principal amount of the Notes outstanding may declare the entire principal amount of the Notes to be due and payable immediately. The Indenture provides that, subject to the duty of the Trustee during default to act with the required standard of care, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture unless it shall have received reasonable security and indemnity from the holders of the Notes against any costs, expenses or liabilities. Subject to such provisions for the indemnification of the Trustee, the holders of a majority in aggregate principal amount of the outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. The Indenture does not require the Company to furnish to the Trustee any periodic evidence as to the absence of any default under the Indenture or the compliance by the Company with the terms of the Indenture. The Indenture or the Notes may be amended or supplemented without the consent of the noteholders in certain circumstances and with the consent of holders at least a majority of the principal amount of the Notes at the time outstanding, subject to certain exceptions. Any past default, or compliance with any provision may be waived with the consent of the holders of a majority of the principal amount of the Notes at the time outstanding. 98 UNDERWRITING Subject to the terms and conditions set forth in a purchase agreement (the "Purchase Agreement") among the Company and each of the underwriters named below (the "Underwriters"), the Company has agreed to sell to each of the Underwriters named below for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Bear, Stearns & Co. Inc., Alex. Brown & Sons Incorporated, Lehman Brothers Inc., Prudential Securities Incorporated ("Prudential") and Smith Barney Inc. are acting as representatives (the "Representatives"), and each of the Underwriters severally has agreed, subject to the terms and conditions set forth therein, to purchase from the Company, Notes convertible into the respective number of Paired Shares set forth below opposite their respective names.
NUMBER OF U.S. UNDERWRITER PAIRED SHARES ------------- Merrill Lynch, Pierce, Fenner & Smith Incorporated................................................................... Bear, Stearns & Co. Inc. ................................................................ Alex. Brown & Sons Incorporated.......................................................... Lehman Brothers Inc...................................................................... Prudential Securities Incorporated....................................................... Smith Barney Inc......................................................................... ------------- Total.......................................................................... 10,250,000 ------------- -------------
In the Purchase Agreement, the Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all of the Notes being sold pursuant to such Purchase Agreement if any of such Notes are purchased. Under certain circumstances, the commitments of non-defaulting Underwriters may be increased. The Representatives have advised the Company that the Underwriters propose initially to offer the Notes (which will automatically be converted into Paired Shares upon purchase by the public) to the public at the initial price per Paired Share into which the Notes are convertible set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $. per Paired Share issuable upon conversion of the Notes purchased by such dealers. The Underwriters may allow, and such dealers may reallow, a discount not in excess of $. per Paired Share issuable upon conversion of the Notes purchased by such dealers on sales to certain other dealers. Upon completion of the Offering, the offering price per Paired Share issuable upon conversion of the Notes purchased by such dealers to the public and the concession and discount to dealers may be changed. The Company has granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase additional Notes convertible into up to 1,537,500 Paired Shares solely to cover over-allotments, if any, at the initial price per Paired Share into which the Notes are convertible to the public less the underwriting discount set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise this option, each Underwriter will be obligated, subject to certain conditions, to purchase approximately the same percentage of such additional Notes which the number of Paired Shares into which Notes to be purchased by it are convertible shown in the foregoing table bears to the Paired Shares initially offered hereby. In the Purchase Agreement, the Company has agreed to indemnify the several Underwriters against certain civil liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. The Purchase Agreement contains certain provisions that are designed to ensure that the underwriting complies with the Ownership Limitation. The executive officers of the Company and the Trustees and Directors of the Company and Starwood Capital have agreed not to offer, sell, contract to sell or otherwise dispose of any Paired Shares or any securities convertible into or exercisable for Paired Shares (except for issuances by the Company pursuant to the exchange of Units and for distribution of Units to parties who have direct or indirect interests in Starwood Capital who agree to be bound by the foregoing restrictions) for a period of one year after the 99 closing of the Offering without the prior written consent of Merrill Lynch and the Company (which consent of the Company must be approved by a majority of the Independent Trustees/Directors). The Company has agreed, subject to certain exceptions (including the exceptions referenced above, the issuance of Paired Shares pursuant to existing options and warrants, the grant of options under the 1995 Option Plan and in connection with acquisitions), not to offer, sell, contract to sell or otherwise dispose of any Paired Shares for a one-year period after the date of this Prospectus, without the prior written consent of Merrill Lynch. The Company and Starwood Capital have retained Merrill Lynch for financial advisory services in connection with the Reorganization and the Company owes Merrill Lynch a fee of $100,000. The Company is also obligated to pay Merrill Lynch an additional $50,000 in July 1995 and $50,000 in reimbursement of out-of-pocket expenses incurred in connection with its engagement. The Company has agreed to pay Merrill Lynch a fee for advisory services in connection with the Reorganization equal to 0.75% of the gross proceeds realized from the Offering, less $250,000. The Company retained Smith Barney for financial advisory services in connection with the Reorganization and paid Smith Barney a fee of $200,000 and owes Smith Barney additional fees of $350,000. Following a refinancing in March 1995 of senior debt of the Company previously held by the New Lender, an affiliate of Merrill Lynch, such New Lender holds the Company's senior indebtedness of $130.4 million. As part of such transaction, the Company paid to the New Lender a fee of approximately $2.3 million. All of the Company's senior debt is being repaid from the proceeds of the Offering. The New Lender also has an outstanding $6.3 million first mortgage loan secured by the Omni Chapel Hill, which bears interest at LIBOR plus 3% and is being repaid in full from the proceeds of the Offering. The New Lender was paid a fee of $63,000 in connection with such loan. See "Use of Proceeds" and "Certain Relationships and Related Transactions." Merrill Lynch from time to time provides investment banking and financial advisory services to Starwood Capital and has explored and continues to explore other business activities with Starwood Capital. The Sheraton Colony Square is being acquired from the parent of Prudential with $34.0 million of the proceeds of the Offering. The Acquisition Facility and the Financing are expected to be provided by affiliates of Lehman Brothers Inc. See "The Acquisition Facility and Other Financing." The Company will pay an affiliate of Lehman Brothers Inc. a fee of 1% of the maximum amount of the Acquisition Facility at the closing thereof, plus a fee of .25% per annum on the unfunded portion of the Acquisition Facility. If defaults were to occur under the Acquisition Facility or the Financing, the lenders would have the right to pursue various remedies, including foreclosure upon collateral, which could have a material adverse effect on the Company and the holders of the Paired Shares. EXPERTS The separate and combined financial statements and financial statement schedules of Starwood Lodging Trust and Starwood Lodging Corporation as of December 31, 1994 and 1993 and for each of the three years in the period ended December 31, 1994, and the financial statements of the Doubletree Club Hotel of Rancho Bernardo included in this Prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein. Such financial statements and financial statement schedules have been included herein in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. The financial statements of Embassy Suites--Tempe, Starwood Wichita Investors, L.P., Capital Hill Suites, and French Quarter Square and the Schedules of Operating Revenue and Certain Expenses for the French Quarter Square to the extent and for the periods included in their reports (which, with respect to French Quarter Square, contain an explanatory paragraph relating to certain litigation disputing the ownership of the underlying real property as more fully described in Note 7 to the financial statements), have been audited by Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of Sheraton Colony Square as of December 31, 1994 and 1993 and for each of the three years in the period ended December 31, 1994 have been audited by Ernst & Young LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. 100 LEGAL MATTERS Sidley & Austin, Chicago, Illinois, has passed upon the validity of the issuance of the Paired Shares offered pursuant to this Prospectus. In addition, the description of federal income tax consequences contained in this Prospectus entitled "Federal Income Tax Considerations" is based upon the opinion of Sidley & Austin. Lawyers at Sidley & Austin own or hold options to purchase an aggregate of 12,227 Paired Shares. Certain legal matters related to the Offering will be passed upon for the Underwriters by Rogers & Wells, New York, New York. Rogers & Wells acted as counsel to Starwood Capital in connection with the Reorganization. Sidley & Austin and Rogers & Wells will rely upon the opinion of Piper & Marbury, Baltimore, Maryland, as to matters of Maryland law. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement (of which this Prospectus is a part) on Form S-2 under the Securities Act with respect to the Paired 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 content of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference and the exhibits and schedules thereto. For further information regarding the Trust and the Corporation and the Paired Shares offered hereby, reference is hereby made to the Registration Statement and such exhibits and schedules. The Trust and the Corporation are subject to the informational requirements of the Securities Exchange Act of 1934 and, in accordance therewith, file reports, proxy or information statements and other information with the Commission. The Registration Statement, as well as such reports, proxy or information statements, schedules and other information filed by the Trust and the Corporation with the Commission can be inspected and copies obtained from the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: 75 Park Place, Room 1400, New York, New York 10007 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such reports, proxy or information statements and other information concerning the Trust and the Corporation can also be inspected at the offices of the New York Stock Exchange, Inc., Public Reference Section, 20 Broad Street, New York, New York 10005. The Trust and the Corporation intend to continue to furnish their shareholders with annual reports containing consolidated financial statements audited by its independent certified public accountants and with quarterly reports containing unaudited condensed consolidated financial statements for each of the first three quarters of each fiscal year. INFORMATION INCORPORATED BY REFERENCE The Company's Annual Report on Form 10-K for the year ended December 31, 1994, and the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 which has been filed by the Company with the Commission, is incorporated in this Prospectus by reference and is made a part hereof. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for all purposes to the extent that a statement contained in this Prospectus modifies or supersedes such statement. Copies of all documents incorporated 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 by such person to Jayne Gordon, Starwood Lodging Trust, 11845 West Olympic Blvd., Suite 550, Los Angeles, CA 90064. 101 GLOSSARY "ACMS" means asbestos-containing materials. "ACQUISITION FACILITY" means a line of credit of the Company which will be available to finance acquisitions by the Realty Partnership and for other corporate purposes, including working capital. "ADA" means the Americans with Disabilities Act of 1990. "ADR" means average daily rate. "ANTI-ABUSE RULE" means regulations of the IRS that provide an anti-abuse rule under the Partnership Provisions. "ASSETS" means the hotel assets of the Company. "BOARD OF TRUSTEES" means the Board of Trustees of the Trust. "BOARD OF DIRECTORS" means the Board of Directors of the Corporation. "BOARDS" means the Board of Trustees and the Board of Directors. "BOOK-TAX DIFFERENCE" means the difference between the fair market value of a contributed property at the time of contribution and the adjusted tax basis of such property at the time of contribution. "BUILT-IN-GAIN ASSET" means an asset held by the Trust on January 1, 1995 or acquired by the Trust from a current or former C corporation in certain transactions in which the basis of such asset in the hands of the Trust is determined by reference to the basis of the asset in the hands of the current or former C corporation, which asset has a fair market value in excess of its adjusted basis. "CASH OPTION" means the option of the Company to pay for Units tendered pursuant to the Exchange Rights Agreement with cash or borrowed funds. "CLARK COUNTY BOARD" means the Clark County Liquor and Gaming Licensing Board. "CODE" means Internal Revenue Code of 1986, as amended, together with applicable regulations. "COMBINED OPTION" means the option of the Company to pay for Units tendered pursuant to the Exchange Rights Agreement with a combination of Paired Shares and cash. "COMPANY" means collectively the Trust and the Corporation and those entities respectively owned or controlled by the Trust or the Corporation, including the Realty Partnership, the Operating Partnership and the LLCs. "CORPORATION" means Starwood Lodging Corporation, a Maryland corporation, and its subsidiaries. "CORPORATION ASSETS" means certain properties and assets of the Corporation, subject to certain liabilities, contributed to the Operating Partnership. "CORPORATION GROUP" means the affiliated group of corporations of which the Corporation is the common parent. "CORPORATION PREFERRED STOCK" means preferred stock, with a par value of $0.01 per share, of the Corporation. "CORPORATION SHARES" means the shares of common stock, par value $0.01 per share, of the Corporation. "DISINTERESTED MEMBERS" means a majority of the members of the Board of Trustees of the Trust or the Board of Directors of the Corporation, as applicable, who are not employees, officers, directors, Affiliates or Associates of the Interested Person who or which is a party to the Transaction. "EBITDA" means earnings before interest, taxes, depreciation and amortization. "EQR" means Equity Residential Properties Trust, a New York Stock Exchange listed company. 102 "ERISA" means the Employee Retirement Income Securities Act of 1974, as amended, together with applicable regulations. "EXCESS COMMON TRUST SHARES" means the Excess Shares, with a par value of $0.01 per share, of the Trust. "EXCESS CORPORATION COMMON STOCK" means the Excess Common Stock, with a par value of $0.01 per share, of the Corporation. "EXCESS CORPORATION PREFERRED STOCK" means the Excess Preferred Stock, with a par value of $0.01 per share, of the Corporation. "EXCESS PREFERRED TRUST SHARES" means the Excess Preferred Shares, with a par value of $0.01 per share, of the Trust. "EXCESS SHARES" means the Excess Common Trust Shares, the Excess Corporation Common Stock, the Excess Corporation Preferred Stock, the Excess Preferred Trust Shares and the Excess Trust Shares. "EXCESS TRUST SHARES" means the Excess Trust Shares with a par value of $0.01 per share. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "EXCHANGE DATE" means the date of tender of Units under the Paired Share Option or the Combined Option. "EXCHANGE RIGHTS AGREEMENT" means the Exchange Rights Agreement dated as of January 1, 1995 among the Trust, the Corporation, Starwood Capital, the Realty Partnership and the Operating Partnership. "EXCLUDED ASSETS" means certain properties and other assets of Starwood Capital not contributed to the Company at the closing of the Reorganization. "FINANCING" means a $45 million, 18 month repurchase financing comittment from Lehman Commercial Paper Inc. to the Realty Partnership. "FORMATION AGREEMENT" means the Formation Agreement dated as of November 11, 1994 among Hotel Investors Trust, Hotel Investors Corporation, Starwood Capital Group, L.P., Berl Holdings L.P., Starwood Apollo Hotel Partners I, L.P., Starwood Apollo Hotel Partners VIII, L.P., Starwood Apollo Hotel Partners IX, LP and Starwood Nomura Hotel Investors, L.P. and the related side letter. "FRANCHISE AGREEMENTS" means franchise or license agreements relating to all but eleven of the Company's Hotel Assets pursuant to which such assets will be operated. "GAMING APPROVAL" means certain necessary licenses and regulatory approvals of the Clark County Board, the Nevada Board, the Nevada Commission and local gaming authorities. "GAMING ASSETS" means the gaming assets and operations of a subsidiary of the Corporation. "GDP" means Gross Domestic Product. "GROSS INCOME TESTS" means the three gross income requirements the Trust must annually satisfy to maintain qualification as a REIT. "HARVEY SECOND MORTGAGES" means the portfolio of three subordinated notes which are secured by the same hotels which secure three mortgage notes that were contributed by Starwood Capital to the Company as part of the Reorganization. "HI NEVADA" means Hotel Investors Corporation of Nevada, a wholly-owned subsidiary of the Corporation. "HOTEL ASSETS" means the fee or long-term leasehold interests of the Company in 32 hotels, including two hotel/casinos and 13 third-party promissory notes secured by mortgages on 15 additional hotels. 103 "INDENTURE" means the Indenture of Trust to be dated as of June 15, 1995 between the Company and First Interstate Bank. "INDEPENDENT TRUSTEE/DIRECTOR" means a trustee of the Trust or a director of the Corporation, as the case may be, who is not employed by or affiliated with Starwood Capital or the Company. "INTERCOMPANY LEASES" means the leases between the Realty Partnership and the Operating Partnership. "INTERESTED PERSON" means any person or entity who or which is the beneficial owner, directly or indirectly, of 5% or more of the outstanding Paired Shares or the outstanding Realty Units or Operating Units or who or which is an Affiliate or Associate of the Trust, the Corporation or either of the Partnerships. "IRS" means the Internal Revenue Service. "IRS LETTER" means the determination letter dated August 15, 1994 from the IRS to the Trust. "ISSUANCE PERCENTAGES" means 95% with respect to the Trust and 5% with respect to the Corporation, as such percentages may be amended from time to time. "LEASES" means the Intercompany Leases and the leases for three hotels and associated property between the Realty Partnership and an unrelated person. "LIBOR" means the London Inter-Bank Offering Rate. "LLCS" means SLT Realty Company, L.L.C., a Delaware limited liability company, and Starlex LLC, a New York limited liability company. "MARYLAND REIT LAW" means the Maryland statute governing real estate investment trusts formed under Maryland law. "MERRILL LYNCH" means Merrill Lynch, Pierce, Fenner & Smith Incorporated. "MGCL" means the Maryland General Corporation Law, as amended. "MORTGAGE NOTES RECEIVABLES" means the 13 performing promissory notes secured by mortgages on 15 hotels. "NAREIT" means the National Association of Real Estate Investment Trusts. "NEVADA BOARD" means the Nevada State Gaming Control Board. "NEVADA COMMISSION" means the Nevada Gaming Commission. "NEVADA GAMING AUTHORITIES" means the Clark County Liquor and Gaming Licensing Board, the Nevada State Gaming Control Board and the Nevada Gaming Commission. "NEW LENDER" means the affiliate of Merrill Lynch which purchased $74 million of the Company's Senior Debt. "NON-U.S. STOCKHOLDERS" means non-resident alien individuals, foreign corporations, foreign partnerships, or foreign estates or trusts for purposes of federal income taxation of the ownership and disposition of stock. "NOTES" means the Convertible Notes Due , 1995 to be issued by the Trust and the Corporation. "NYSE" means the New York Stock Exchange, Inc. "OFFERING" means the Offering of 10,250,000 Paired Shares contemplated hereby. "OPERATING PARTNERSHIP" means SLC Operating Limited Partnership, a Delaware limited partnership. "OPTIONS" means the share options granted pursuant to the 1995 Option Plan. "OWNED HOTELS" means fee or long-term leasehold interests of the Company in 32 hotels including two hotel/casinos. 104 "OWNERSHIP LIMITATION" means the prohibition of actual or constructive ownership of more than 8.0% of the Paired Shares contained in the Corporation's Articles of Incorporation and the Trust's Declaration of Trust. "PAIRED SHARE" means a unit consisting of one Trust Share and one Corporation Share. "PAIRED SHARE OPTION" means the option of the Company to pay for Units tendered pursuant to the Exchange Right Agreement by delivering Paired Shares. "PAIRING AGREEMENT" means the Pairing Agreement dated June 25, 1980 between the Trust and the Corporation, as amended. "PARTNERSHIP AGREEMENTS" means the partnership agreements of the Realty Partnership and the Operating Partnership. "PARTNERSHIP OPTION" means the option of the Partnerships to acquire the interests of Starwood Capital in one or more Excluded Assets. "PARTNERSHIP PROVISIONS" means the partnership provisions of the Code. "PARTNERSHIPS" means the Realty Partnership and the Operating Partnership. "PCBS" means polychlorinated biphenyls. "PERMITTED WESTIN INVESTMENTS" means those investments in United States hotel equity interests which Westin may acquire pursuant to the Westin Agreement. "PROHIBITED SERVICES" means services that would give use to unrelated business taxable income if provided by a tax-exempt organization. "PURCHASE AGREEMENT" means the Purchase Agreement among the Company and the Underwriters. "PURCHASE RIGHTS" means any grant, issuance, or sale on a pro rata basis to all holders of Paired Shares, options, convertible securities or right to purchase shares of stock warrants, securities or property of the Company. "RATIO OF DEBT-TO-TOTAL MARKET CAPITALIZATION" means total consolidated debt of the Company as a percentage of the market value of all outstanding shares, assuming the exchange of all exchangeable securities for shares, plus total consolidated debt. "REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement dated as of January 1, 1995 among the Trust, the Corporation, and Starwood Capital. "REALTY PARTNERSHIP" means SLT Realty Limited Partnership, a Delaware limited partnership. "RECOGNITION PERIOD" means the ten-year period beginning on January 1, 1995 with respect to assets held by the Trust on such date or, with respect to other Built-in Gain Assets, the date on which such assets were acquired by the Trust. "REIT" means a real estate investment trust as defined in the Code. "REIT REQUIREMENTS OR PROVISIONS" means Sections 856 through 860 of the Code and applicable treasury regulations. "RELATED PARTY TENANT" means a tenant of which a REIT, or a direct or indirect owner of 10% or more of the REIT, directly or indirectly owns 10% or more. "REORGANIZATION" means a series of transactions between the Company and Starwood Capital, consummated as of January 1, 1995. "REVPAR" means room revenue per available room calculated as room revenues divided by rooms available. "ROSS" means Leonard Ross, an individual. 105 "ROSS AGREEMENT" means the agreement between Leonard Ross and his affiliates and Starwood Capital in settlement of threatened litigation by Ross. "RULE 144" means Rule 144 promulgated under the Securities Act. "RULING" means the Private Letter Ruling of the IRS to the Trust, dated January 4, 1980. "RULPA" means the Delaware Revised Uniform Limited Partnership Act. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SHAREHOLDER" means a holder of shares of beneficial interest in the Trust and a holder of shares of stock of the Corporation. "STARWOOD" means Starwood Capital and its predecessor. "STARWOOD AFFILIATE" means any person or entity which controls, is controlled solely by or is under common control with, Starwood Capital Group, L.P. "STARWOOD CAPITAL" means Starwood Capital Group, L.P., and the Starwood Affiliates. "STARWOOD DEBT FUNDS" means the current investment fund sponsored by Starwood Capital with a principal investment purpose of originating or acquiring performing real estate debt and debt-related interests, and any future similar such entity. "STARWOOD NONCOMPETE" means the agreement between the Starwood Capital and the Partnerships whereby Starwood Capital has agreed not to compete with the Partnerships. "STARWOOD OPERATING ASSETS" means cash, leases and other assets contributed by Starwood Capital and certain affiliates to the Operating Partnership. "STARWOOD REALTY ASSETS" means the cash, certain hotel properties and first mortgage hotel notes contributed by Starwood Capital to the Realty Partnership in the Reorganization. "SWAP AGREEMENTS" means the agreements entered into between Starwood Capital and the New Lender in connection with the purchase of senior debt previously owned by Starwood Capital. "TAX-EXEMPT STOCKHOLDER" means a qualified plan, IRA or other tax exempt entity. "TIN" means taxpayer identification number. "TRANSACTION" means any contract, sale, lease, exchange, mortgage, transfer or disposition to or with, or any transaction with, any Interested Person. "TRUST" means Starwood Lodging Trust, a Maryland real estate investment trust. "TRUST ASSETS" means all the properties and assets of the Trust, subject to substantially all of its liabilities, contributed to the Realty Partnership. "TRUST SHARES" means the shares of beneficial interest, par value $0.01 per share, of the Trust. "TRUSTEE" means First Interstate Bank, as trustee under the Indenture. "UBTI" means unrelated business taxable income, as defined in Section 512 of the Code and applicable treasury regulations. "UNITS" means limited partnership units of the Partnerships. "UNDERWRITERS" means the Underwriters named herein. "WESTIN" means the Westin Hotel Company and certain of its affiliates. "WESTIN AGREEMENT" means the agreement among the Company, Starwood Capital and Westin pursuant to which Westin has agreed, subject to certain exceptions and limitations, not to acquire or seek to acquire United States hotel equity interests. 106 "WESTIN INVESTORS" means Westin and the owners of Westin other than Starwood Capital. "WESTIN RESTRICTION PERIOD" means the period in which an officer, director, general partner or employee of Starwood Capital is on either of the Boards and Starwood Capital co-controls Westin. "1986 CORPORATION WARRANTS" means warrants of the Corporation to purchase up to an aggregate of 276,662 Corporation Shares at a purchase price of $3.06 per Corporation Share. "1986 WARRANTS" means a unit consisting of one 1986 Trust Warrant and one 1986 Corporation Warrant. Each 1986 Paired Warrant is exercisable at a price equal to $101.70 per Paired Share. "1986 TRUST WARRANTS" means warrants of the Trust to purchase up to an aggregate of 276,662 Trust Shares at a purchase price of $98.64 per Trust Share. "1995 SHARE OPTION PLANS" means the 1995 Share Option Plan of the Trust and the 1995 Share Option Plan of the Corporation. 107 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION--PRO FORMA Separate and Combined Balance Sheets at March 31, 1995.............................. F-4 Notes to Pro Forma Balance Sheets................................................... F-8 Separate and Combined Statements of Operations for the three months ended March 31, 1995 and the year ended December 31, 1994.......................................... F-10 Notes to Pro Forma Statements of Operations......................................... F-17 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION--HISTORICAL STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION: Combined Balance Sheets as of March 31, 1995 and December 31, 1994.................. F-19 Combined Statements of Operations for the three months ended March 31, 1995 and 1994............................................................................... F-20 Combined Statements of Cash Flows for the three months ended March 31, 1995 and 1994............................................................................... F-21 STARWOOD LODGING TRUST: Balance Sheets as of March 31, 1995 and December 31, 1994........................... F-22 Statements of Operations for the three months ended March 31, 1995 and 1994......... F-23 Statements of Cash Flows for the three months ended March 31, 1995 and 1994......... F-24 STARWOOD LODGING CORPORATION: Balance Sheets as of March 31, 1995 and December 31, 1994........................... F-25 Statements of Operations for the three months ended March 31, 1995 and 1994......... F-26 Statements of Cash Flows for the three months ended March 31, 1995 and 1994......... F-27 SLT REALTY LIMITED PARTNERSHIP AND SLC OPERATING LIMITED PARTNERSHIP: Combined Balance Sheet as of March 31, 1995......................................... F-28 Combined Statement of Operations for the three months ended March 31, 1995.......... F-29 Combined Statements of Cash Flows for the three months ended March 31, 1995......... F-30 SLT REALTY LIMITED PARTNERSHIP: Balance sheet as of March 31, 1995.................................................. F-31 Statement of Operations for the three months ended March 31, 1995................... F-32 Statement of Cash Flows for the three months ended March 31, 1995................... F-33 SLC OPERATING LIMITED PARTNERSHIP: Balance Sheet as of March 31, 1995.................................................. F-34 Statement of Operations for the three months ended March 31, 1995................... F-35 Statements of Cash Flows for the three months ended March 31, 1995.................. F-36 NOTES TO THE FINANCIAL STATEMENTS................................................... F-37 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION--HISTORICAL Independent Auditors' Report........................................................ F-40
F-1 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION: Combined Balance Sheets as of December 31, 1994 and 1993............................ F-41 Combined Statements of Operations for each of the three years in the period ended December 31, 1994.................................................................. F-42 Combined Statements of Cash Flows................................................... F-43 Combined Statements of Shareholders' Equity......................................... F-44 STARWOOD LODGING TRUST: Balance Sheets as of December 31, 1994 and 1993..................................... F-45 Statements of Operations for each of the three years in the period ended December 31, 1994........................................................................... F-46 Statements of Cash Flows............................................................ F-47 Statements of Shareholders' Equity.................................................. F-48 STARWOOD LODGING CORPORATION: Balance Sheets as of December 31, 1994 and 1993..................................... F-49 Statements of Operations for each of the three years in the period ended December 31, 1994........................................................................... F-50 Statements of Cash Flows............................................................ F-51 Statements of Shareholders' Deficit................................................. F-52 NOTES TO FINANCIAL STATEMENTS....................................................... F-53 SCHEDULES: Schedule III--Real Estate and Accumulated Depreciation.............................. F-75 Schedule IV--Mortgage Loans on Real Estate.......................................... F-79 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................... F-81 STARWOOD WICHITA INVESTORS, L.P.: Reports of Independent Accountants.................................................. F-90 Balance Sheet as of December 31, 1994 and 1993...................................... F-92 Statement of Operations............................................................. F-93 Statement of Changes in Partners' Capital/Division Equity (Deficit)................. F-94 Statement of Cash Flows............................................................. F-95 Notes to Financial Statements....................................................... F-96 THE FRENCH QUARTER SQUARE: Reports of Independent Accountants.................................................. F-100 Balance Sheet as of December 31, 1994............................................... F-101 Statement of Operations............................................................. F-102 Statement of Changes in Partners' Capital........................................... F-103 Statement of Cash Flows............................................................. F-104 Notes to Financial Statements....................................................... F-105 Report of Independent Accountant.................................................... F-108 Schedules of Operating Revenue and Certain Expenses................................. F-109 Notes to Financial Statements....................................................... F-110 CAPITOL HILL SUITES: Reports of Independent Accountants.................................................. F-112 Balance Sheet as of December 31, 1994 and 1993...................................... F-114 Statement of Operations............................................................. F-115 Statement of Changes in Division/Stockholders' Equity............................... F-116 Statement of Cash Flows............................................................. F-117 Notes to Financial Statements....................................................... F-118
F-2 DOUBLETREE CLUB HOTEL OF RANCHO BERNARDO: Independent Auditors' Report........................................................ F-120 Balance Sheets as of December 31, 1994 and 1993..................................... F-121 Statements of Operations and Owners' Equity......................................... F-122 Statements of Cash Flows............................................................ F-123 Notes to Financial Statements....................................................... F-124 EMBASSY SUITES--TEMPE: Report of Independent Accountants................................................... F-126 Balance Sheet as of March 31, 1995 (unaudited) and December 31, 1994 and 1993....... F-127 Statement of Operations............................................................. F-128 Statement of Changes in Partner's Capital........................................... F-129 Statement of Cash Flows............................................................. F-130 Notes to Financial Statements....................................................... F-131 SHERATON COLONY SQUARE HOTEL Independent Auditors' Report........................................................ F-134 Balance Sheets as of March 31, 1995 (unaudited) and December 31, 1994 and 1993...... F-135 Statements of Income................................................................ F-136 Statements of Owner's Equity........................................................ F-137 Statements of Cash Flows............................................................ F-138 Notes to Financial Statements....................................................... F-139
F-3 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION PRO FORMA SEPARATE AND COMBINED BALANCE SHEETS MARCH 31, 1995 (UNAUDITED) The following unaudited Pro Forma Separate and Combined Balance Sheets are presented as if the Offering of 10,250,000 paired shares at an assumed initial offering price of $23.50 per paired shared (which is the midpoint of the range set forth on the cover page) and the use of the net proceeds therefrom and certain property acquisitions, had all occurred on March 31, 1995. The unaudited Pro Forma Separate and Combined Balance Sheets should be read in conjunction with the Separate and Combined Historical Financial Statements of Starwood Lodging Trust and Starwood Lodging Corporation and Notes thereto which are included elsewhere in this Prospectus. In management's opinion, all adjustments necessary to reflect the effects of the Offering and the property acquisitions have been made. The unaudited Pro Forma Separate and Combined Balance Sheets are not necessarily indicative of what the actual financial position of the Companies would have been at March 31, 1995, nor does it purport to represent the future financial position of the Companies. F-4 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION UNAUDITED COMBINED PRO FORMA BALANCE SHEETS MARCH 31, 1995 ASSETS
PRO FORMA STARWOOD PRO FORMA LODGING ADJUSTMENTS COMBINED HISTORICAL ACQUIRED ------------------------- -------------- STARWOOD PROPERTIES LODGING ------------- COMBINED -------------- (B) (A) Hotel assets held for sale, net............. $ 8,495,000 $ -- $ -- $ 8,495,000 ------------- -------------- Hotel assets, net........................... 174,868,000 64,566,000 -- 239,434,000 -------------- ------------- ------------- -------------- 183,363,000 64,566,000 -- 247,929,000 Mortgage notes receivable, net.............. 62,479,000 -- 62,479,000 Investment in joint venture hotel properties................................. 271,000 -- -- 271,000 -------------- ------------- ------------- -------------- Total real estate investments........... 246,113,000 64,566,000 310,679,000 Cash and cash equivalents................... 12,120,000 (54,936,000) 53,469,000(C) 10,653,000 Accounts receivable......................... 6,927,000 241,000 -- 7,168,000 Notes receivable, net....................... 1,607,000 -- -- 1,607,000 Prepaid expenses and other assets........... 12,998,000 99,000 (2,485,000)(C)(D) 10,612,000 -------------- ------------- ------------- -------------- $ 279,765,000 $ 9,970,000 $ 50,984,000 $ 340,719,000 -------------- ------------- ------------- -------------- -------------- ------------- ------------- -------------- LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Secured notes payable and revolving line of $ (130,360,000)(C) credit..................................... $ 130,360,000 $ -- 42,000,000(C) $ 42,000,000 Mortgage and other notes payable............ 68,195,000 9,727,000 (75,048,000)(C) 2,874,000 Accounts payable and other liabilities...... 14,567,000 243,000 -- 14,810,000 -------------- ------------- ------------- -------------- 213,122,000 9,970,000 (163,408,000) 59,684,000 -------------- ------------- ------------- -------------- MINORITY INTEREST........................... 58,887,000 -- 32,730,000(E) 91,617,000 -------------- ------------- ------------- -------------- SHAREHOLDERS' EQUITY Trust shares of beneficial interest, $.01 par value; authorized 100,000,000 shares; outstanding 2,022,158 shares; 12,272,158 pro forma shares........................... 20,000 -- 103,000(C) 123,000 Corporation common stock, $0.01 par value; authorized 100,000,000 shares; outstanding 2,022,158 shares; 12,272,158 pro forma shares..................................... 20,000 -- 103,000(C) 123,000 Additional paid-in capital.................. 222,257,000 -- 217,511,000(C) 407,038,000 (32,730,000)(E) Accumulated deficit......................... (214,541,000) -- (317,000)(C) (217,866,000) (3,008,000)(D) -------------- ------------- ------------- -------------- 7,756,000 -- 181,662,000 189,418,000 -------------- ------------- ------------- -------------- $ 279,765,000 $ 9,970,000 $ 50,984,000 $ 340,719,000 -------------- ------------- ------------- -------------- -------------- ------------- ------------- --------------
The accompanying notes are an integral part of the pro forma balance sheets. F-5 STARWOOD LODGING TRUST UNAUDITED PRO FORMA BALANCE SHEETS MARCH 31, 1995 ASSETS
PRO FORMA STARWOOD PRO FORMA LODGING ADJUSTMENTS TRUST HISTORICAL ACQUIRED ------------------------- -------------- STARWOOD PROPERTIES LODGING ------------- TRUST -------------- (B) (A) Hotel assets held for sale, net....... $ 8,215,000 $ -- $ -- $ 8,215,000 Hotel assets, net..................... 137,583,000 53,946,000 -- 191,529,000 -------------- ------------- ------------- -------------- 145,798,000 53,946,000 -- 199,744,000 Mortgage notes receivable, net........ 62,479,000 -- -- 62,479,000 Investment in joint venture hotel properties........................... 254,000 -- -- 254,000 -------------- ------------- ------------- -------------- Total real estate investments..... 208,531,000 53,946,000 -- 262,477,000 Cash and cash equivalents............. 3,939,000 (44,165,000) 53,478,000(C) 3,261,000 (9,991,000)(C)(F) Accounts receivable................... 1,825,000 -- -- 1,825,000 Notes receivable -- Corporation....... 28,941,000 -- 9,868,000(F) 38,809,000 Notes receivable, net................. 998,000 -- -- 998,000 Prepaid expenses and other assets..... 6,311,000 97,000 (2,485,000)(C)(D) 3,923,000 -------------- ------------- ------------- -------------- $ 250,545,000 $ 9,878,000 $ 50,870,000 $ 311,293,000 -------------- ------------- ------------- -------------- -------------- ------------- ------------- -------------- LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Secured notes payable and revolving line of credit....................... $ 130,360,000 $ -- $ (130,360,000)(C) $ 42,000,000 42,000,000(C) Mortgage and other notes payable...... 54,549,000 9,727,000 (64,276,000)(C) -- Accounts payable and other liabilities.......................... 3,271,000 151,000 -- 3,422,000 -------------- ------------- ------------- -------------- 188,180,000 9,878,000 (152,636,000) 45,422,000 -------------- ------------- ------------- -------------- MINORITY INTEREST..................... 52,498,000 -- 34,171,000(E) 86,669,000 -------------- ------------- ------------- -------------- SHAREHOLDERS' EQUITY Trust shares of beneficial interest, $.01 par value; authorized 100,000,000 shares; outstanding 2,022,158 shares; 12,272,158 pro forma shares......................... 20,000 -- 103,000(C) 123,000 Additional paid-in capital............ 156,937,000 -- 206,728,000(C) 329,494,000 -- -- (34,171,000)(E) -- Accumulated deficit................... (147,090,000) -- (317,000)(C) (150,415,000) (3,008,000)(D) -------------- ------------- ------------- -------------- 9,867,000 -- 169,335,000 179,202,000 -------------- ------------- ------------- -------------- $ 250,545,000 $ 9,878,000 $ 50,870,000 $ 311,293,000 -------------- ------------- ------------- -------------- -------------- ------------- ------------- --------------
The accompanying notes are an integral part of the pro forma balance sheets. F-6 STARWOOD LODGING CORPORATION UNAUDITED PRO FORMA BALANCE SHEETS MARCH 31, 1995 ASSETS
PRO FORMA STARWOOD PRO FORMA LODGING ADJUSTMENTS CORPORATION HISTORICAL ACQUIRED ------------------- ------------- STARWOOD PROPERTIES LODGING ------------- CORPORATION ------------- (B) (A) Hotel assets held for sale, net............ $ 280,000 $ -- $ -- $ 280,000 Hotel assets, net.......................... 37,285,000 10,620,000 -- 47,905,000 ------------- ------------- ------------------- ------------- 37,565,000 10,620,000 -- 48,185,000 Mortgage notes receivable, net............. Investment in joint venture hotel properties................................ 17,000 -- -- 17,000 ------------- ------------- ------------------- ------------- Total real estate investments.......... 37,582,000 10,620,000 -- 48,202,000 Cash and cash equivalents.................. 8,181,000 (10,771,000) 9,982,000(C) 7,392,000 Accounts receivable........................ 5,102,000 241,000 -- 5,343,000 Notes receivable, net...................... 609,000 -- -- 609,000 Prepaid expenses and other assets.......... 6,687,000 2,000 -- 6,689,000 ------------- ------------- ------------------- ------------- $ 58,161,000 $ 92,000 $ 9,982,000 $ 68,235,000 ------------- ------------- ------------------- ------------- ------------- ------------- ------------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) LIABILITIES Mortgage and other notes payable........... 13,646,000 $ -- $ (904,000)(C) $ 2,874,000 -- -- (9,868,000)(F) -- Notes payable -- Trust..................... 28,941,000 -- 9,868,000(F) 38,809,000 Accounts payable and other liabilities..... 11,296,000 92,000 -- 11,388,000 ------------- ------------- ------------------- ------------- 53,883,000 92,000 (904,000) 53,071,000 ------------- ------------- ------------------- ------------- MINORITY INTEREST.......................... 6,389,000 -- (1,441,000)(E) 4,948,000 ------------- ------------- ------------------- ------------- SHAREHOLDERS' EQUITY (DEFICIT) Corporation common stock, $0.01 par value; authorized 100,000,000 shares; outstanding 2,022,158 shares; 12,272,158 pro forma shares.................................... 20,000 -- 103,000(C) 123,000 Additional paid-in capital................. 65,320,000 -- 10,783,000(C) 77,544,000 1,441,000(E) -- Accumulated deficit........................ (67,451,000) -- -- (67,451,000) ------------- ------------- ------------------- ------------- (2,111,000) -- 12,327,000 10,216,000 ------------- ------------- ------------------- ------------- $ 58,161,000 $ 92,000 $ 9,982,000 $ 68,235,000 ------------- ------------- ------------------- ------------- ------------- ------------- ------------------- -------------
The accompanying notes are an integral part of the pro forma balance sheets. F-7 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO UNAUDITED SEPARATE AND COMBINED PRO FORMA BALANCE SHEETS AT MARCH 31, 1995 HISTORICAL STARWOOD LODGING COMBINED (A) The Trust and the Corporation are the general partner and the managing general partner of the Realty Partnership and the Operating Partnership, respectively. As a condition to the Reorganization, Starwood received the right to nominate a majority of the respective Board members of the Trust and the Corporation. Neither the Trust nor the Corporation is currently considered to have unilateral control of the Realty Partnership or the Operating Partnership for accounting purposes. Therefore, the Trust and the Corporation have accounted for their investments in the Realty Partnership and the Operating Partnership under the equity method of accounting. At the time of the Offering, the respective Boards will be expanded to include additional independent members and the Starwood nominees will no longer represent a majority. Subsequent to the Offering, the Trust and the Corporation will have unilateral control of the respective Partnerships and therefore, the historical financial statements of the Partnerships will be consolidated with those of the Trust and the Corporation. The Trust's and the Corporation's equity investment in the Partnerships have been eliminated in the pro forma consolidated balance sheets. Historical paired share information has been adjusted to reflect a one-for-six reverse split to be effective prior to the Offering. ACQUIRED PROPERTIES (B) Subsequent to March 31, 1995 the Trust and the Corporation acquired the Omni Chapel Hill Hotel, a 168-room upscale hotel located in Chapel Hill, North Carolina and the Company expects to acquire the Sheraton Colony Square, a 462-room upscale high-rise hotel in Atlanta, Georgia and the Embassy Suites, a 224 all-suite upscale hotel located in Tempe, Arizona. The following summarizes the cost basis and related indebtedness of the properties acquired or to be acquired subsequent to March 31, 1995:
COST BASIS ---------------------------------------------- COMBINED TRUST CORPORATION ------------- ---------------- ------------- Omni Hotel............................................. $ 10,701,000 $ 10,166,000 $ 535,000 Embassy Suites......................................... 19,440,000 15,552,000 3,888,000 Colony Square.......................................... 34,425,000 28,228,000 6,197,000 ------------- ---------------- ------------- $ 64,566,000 $ 53,946,000 $ 10,620,000 ------------- ---------------- ------------- ------------- ---------------- -------------
INDEBTEDNESS ---------------------------------------------- COMBINED TRUST CORPORATION ------------- ---------------- ------------- Omni Hotel............................................. $ 9,727,000 $ 9,727,000(1) $ -- ------------- ---------------- ------------- ------------- ---------------- -------------
- ------------ (1) Includes a subordinated mortgage loan of $3.6 million due to an affiliate of Starwood Capital which loan is to be repaid with the proceeds of the Offering. PRO FORMA ADJUSTMENTS (C) The Company has filed a registration statement on Form S-2 with the Securities and Exchange Commission for the public offering (collectively, the "Offering") of 10,250,000 paired shares (exclusive F-8 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO UNAUDITED SEPARATE AND COMBINED PRO FORMA BALANCE SHEETS AT MARCH 31, 1995 (CONTINUED) of 1,537,500 paired shares subject to the Underwriters overallotment options) at an assumed initial offering price of $23.50 per paired share (which is the midpoint of the range set forth on the cover page). Application of the net proceeds from the Offering is as follows:
COMBINED TRUST CORPORATION --------------- --------------- ------------- Gross proceeds from Offering.......................... $ 240,875,000 $ 228,831,000 $ 12,044,000 Less offering costs (including $3,547,000 to Starwood Capital).................................. (23,168,000) (22,000,000) (1,158,000) --------------- --------------- ------------- Net proceeds from the Offerings....................... 217,717,000 206,831,000 10,886,000 Proceeds from the Acquisition Facility................ 42,000,000 42,000,000 -- Less: Repayment of secured notes payable................ (130,360,000) (130,360,000) -- Repayment or purchase of other mortgage notes payable.......................................... (75,048,000) (74,144,000) (904,000) Prepayment penalties on retired debt.............. (317,000) (317,000) -- Officer loan...................................... (250,000) (250,000) -- Other............................................. (273,000) (273,000) -- --------------- --------------- ------------- Net cash proceeds................................. $ 53,469,000 $ 43,487,000 $ 9,982,000 --------------- --------------- ------------- --------------- --------------- -------------
(D) Reflects the write-off of deferred financing costs of $3,008,000 related to the debt repaid from the proceeds of the Offering net of deferred financing costs of $150,000 relating to the Financing and $123,000 relating to the purchase of the first mortgage note on the Milwaukee Marriott property (see F below). (E) Reflects a reallocation between minority interest and shareholders' equity to reflect Starwood's 32.6% minority interest in the Partnerships after the Offering. (F) The Trust will purchase from a third party the first mortgage note on the Milwaukee Marriott property which is owned by a partnership in which the Operating Partnership is a 51% general partner for $9,868,000. F-9 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION PRO FORMA SEPARATE AND COMBINED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 AND THE THREE MONTHS ENDED MARCH 31, 1995 (UNAUDITED) The following unaudited Pro Forma Separate and Combined Statements of Operations are presented as if the Reorganization, the Offering and certain additional property acquisitions had all occurred at the beginning of the periods presented. The unaudited Pro Forma Separate and Combined Statements of Operations should be read in conjunction with the Separate and Combined Historical Financial Statements of Starwood Lodging Trust and Starwood Lodging Corporation and Notes thereto which are included elsewhere in this Prospectus. In management's opinion, all adjustments necessary to reflect the effects of the Reorganization, the Offering and certain additional property acquisitions have been made. The unaudited Pro Forma Separate and Combined Statements of Operations are not necessarily indicative of what actual results of operations of the Companies would have been nor do they purport to represent the Companies' results of operations for future periods. F-10 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION UNAUDITED COMBINED PRO FORMA STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994
PRO FORMA STARWOOD STARWOOD ACQUIRED PRO FORMA LODGING CAPITAL PROPERTIES ADJUSTMENTS COMBINED HISTORICAL ------------- ------------- ----------------- -------------- STARWOOD (B) (C) LODGING COMBINED -------------- (A) REVENUE Hotel............................... $ 82,668,000 $ 16,467,000 $ 26,632,000 $ -- $ 125,767,000 Gaming.............................. 27,981,000 -- -- -- 27,981,000 Interest from mortgage and other notes.............................. 1,554,000 8,496,000 -- 19,000(D) 10,069,000 Rents from other leased hotel properties......................... 927,000 -- -- -- 927,000 Management fees and other........... 411,000 -- -- -- 411,000 Gain (loss) on sales of hotel assets............................. 456,000 -- -- -- 456,000 -------------- ------------- ------------- ----------------- -------------- 113,997,000 24,963,000 26,632,000 19,000 165,611,000 -------------- ------------- ------------- ----------------- -------------- EXPENSES Hotel operations.................... 60,829,000 12,751,000 19,503,000 (2,444,000)(E) 90,639,000 Gaming operations................... 24,454,000 -- -- -- 24,454,000 Interest............................ 17,606,000 3,834,000 875,000 (22,228,000)(F) 3,365,000 3,278,000(F) Depreciation and amortization....... 8,161,000 2,496,000 6,253,000 1,220,000(G) 18,130,000 Administrative and operating........ 4,203,000 -- -- 86,000(E) 4,289,000 Shareholder litigation.............. 2,648,000 -- -- -- 2,648,000 Provision for losses................ 759,000 -- -- -- 759,000 -------------- ------------- ------------- ----------------- -------------- 118,660,000 19,081,000 26,631,000 (20,088,000) 144,284,000 -------------- ------------- ------------- ----------------- -------------- Income (loss) before minority interest in Partnerships........... (4,663,000) $ 5,882,000 $ 1,000 $ 20,107,000 21,327,000 ------------- ------------- ----------------- ------------- ------------- ----------------- Minority interest in Partnerships(H).................... -- 6,959,000 -------------- -------------- -------------- NET INCOME (LOSS)................... $ (4,663,000) $ 14,368,000 -------------- -------------- -------------- -------------- NET INCOME (LOSS) PER PAIRED SHARE(I)........................... $ (2.31) $ 1.17 -------------- -------------- -------------- --------------
The accompanying notes are an integral part of the pro forma statements of operations. F-11 STARWOOD LODGING TRUST UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994
PRO FORMA STARWOOD PRO FORMA LODGING ADJUSTMENTS TRUST HISTORICAL STARWOOD ACQUIRED ----------------- ------------- STARWOOD CAPITAL PROPERTIES LODGING ------------ ------------- TRUST ------------- (B) (C) (A) REVENUE Rents from Corporation............... $ 16,906,000 $ -- $ -- $ 8,349,000(J) $ 25,255,000 Interest from Corporation............ 1,730,000 -- -- 2,065,000(K) 3,795,000 Interest from mortgage and other notes............................... 1,512,000 8,496,000 -- 19,000(D) 10,027,000 Rents from other leased hotel properties.......................... 927,000 -- -- -- 927,000 Management fees and other............ 164,000 -- -- -- 164,000 Gain (loss) on sales of hotel assets.............................. 432,000 -- -- -- 432,000 ------------- ------------ ------------- ----------------- ------------- 21,671,000 8,496,000 -- 10,433,000 40,600,000 ------------- ------------ ------------- ----------------- ------------- EXPENSES Interest -- other.................... 16,265,000 3,834,000 875,000 (20,974,000)(F) 3,278,000 3,278,000(F) Depreciation and amortization........ 5,205,000 1,270,000 2,791,000 610,000(G) 9,876,000 Administrative and operating......... 1,583,000 -- -- -- 1,583,000 Shareholder litigation............... 1,324,000 -- -- -- 1,324,000 Provision for losses................. 759,000 -- -- -- 759,000 ------------- ------------ ------------- ----------------- ------------- 25,136,000 5,104,000 3,666,000 (17,086,000) 16,820,000 ------------- ------------ ------------- ----------------- ------------- Income (loss) before minority interest in Partnership............. (3,465,000) $ 3,392,000 $ (3,666,000) $ 27,519,000 23,780,000 ------------ ------------- ----------------- ------------ ------------- ----------------- Minority interest in Partnership(H)...................... -- 7,759,000 ------------- ------------- ------------- ------------- NET INCOME (LOSS).................... $ (3,465,000) $ 16,021,000 ------------- ------------- ------------- ------------- NET INCOME (LOSS) PER SHARE(I)....... $ (1.71) $ 1.31 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of the pro forma statements of operations. F-12 STARWOOD LODGING CORPORATION UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994
PRO FORMA STARWOOD PRO FORMA LODGING ADJUSTMENTS TRUST HISTORICAL STARWOOD ACQUIRED ----------------- -------------- STARWOOD CAPITAL PROPERTIES LODGING ------------- ------------- CORPORATION -------------- (B) (C) (A) REVENUE Hotel............................. $ 82,668,000 $ 16,467,000 $ 26,632,000 $ -- $ 125,767,000 Gaming............................ 27,981,000 -- -- -- 27,981,000 Interest from mortgage and other notes............................ 42,000 -- -- -- 42,000 Management fees and other......... 247,000 -- -- -- 247,000 Gain (loss) on sales of hotel assets........................... 24,000 -- -- -- 24,000 -------------- ------------- ------------- ----------------- -------------- 110,962,000 16,467,000 26,632,000 154,061,000 -------------- ------------- ------------- ----------------- -------------- EXPENSES Hotel operations.................. 60,829,000 12,751,000 19,503,000 (2,444,000)(E) 90,639,000 Gaming operations................. 24,454,000 -- -- -- 24,454,000 Rent--Trust....................... 16,906,000 -- -- 8,349,000(J) 25,255,000 Interest--Trust................... 1,730,000 -- -- 2,065,000(K) 3,795,000 Interest--other................... 1,341,000 -- -- (1,254,000)(F) 87,000 Depreciation and amortization..... 2,956,000 1,226,000 3,462,000 610,000(G) 8,254,000 Administrative and operating...... 2,620,000 -- -- 86,000(E) 2,706,000 Shareholder litigation............ 1,324,000 -- -- -- 1,324,000 -------------- ------------- ------------- ----------------- -------------- 112,160,000 13,977,000 22,965,000 7,412,000 156,514,000 -------------- ------------- ------------- ----------------- -------------- Income (loss) before minority interest in Partnership.......... (1,198,000) $ 2,490,000 $ 3,667,000 $ (7,412,000) (2,453,000) ------------- ------------- ----------------- ------------- ------------- ----------------- Minority interest in Partnership(H)................... -- (800,000) -------------- -------------- NET INCOME (LOSS)................. $ (1,198,000) $ (1,653,000) -------------- -------------- -------------- -------------- NET INCOME (LOSS) PER SHARE (I)... $ (0.59) $ (0.13) -------------- -------------- -------------- --------------
The accompanying notes are an integral part of the pro forma statements of operations. F-13 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION UNAUDITED COMBINED PRO FORMA STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1995
PRO FORMA STARWOOD PRO FORMA LODGING ADJUSTMENTS COMBINED HISTORICAL ACQUIRED ---------------- ------------- STARWOOD PROPERTIES LODGING ------------ COMBINED ------------- (B) (A) REVENUE Hotel.............................................. $ 22,781,000 $ 8,127,000 $ -- $ 30,908,000 Gaming............................................. 6,669,000 -- -- 6,669,000 Interest from mortgage and other notes............. 2,581,000 -- 5,000(D) 2,586,000 Rents from other leased hotel properties........... 159,000 -- -- 159,000 Management fees and other.......................... 61,000 -- -- 61,000 Gain (loss) on sales of hotel assets............... (113,000) -- -- (113,000) ------------- ------------ ---------------- ------------- 32,138,000 8,127,000 5,000 40,270,000 ------------- ------------ ---------------- ------------- EXPENSES Hotel operations................................... 16,280,000 5,206,000 (409,000)(E) 21,077,000 Gaming operations.................................. 6,021,000 -- -- 6,021,000 Interest........................................... 5,827,000 219,000 (6,024,000)(F) 841,000 819,000(F) Depreciation and amortization...................... 2,863,000 1,563,000 -- 4,426,000 Administrative and operating....................... 1,068,000 -- 4,000(E) 1,072,000 ------------- ------------ ---------------- ------------- 32,059,000 6,988,000 (5,610,000) 33,437,000 ------------- ------------ ---------------- ------------- Income (loss) before minority interest in Partnerships...................................... $ 79,000 $ 1,139,000 $ 5,615,000 6,833,000 ------------ ---------------- ------------ ---------------- Minority interest in Partnerships(H)............... 94,000 2,230,000 ------------- ------------- NET INCOME (LOSS).................................. $ (15,000) $ 4,603,000 ------------- ------------- ------------- ------------- NET INCOME (LOSS) PER PAIRED SHARE(I).............. $ (0.01) $ 0.38 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of the pro forma statements of operations. F-14 STARWOOD LODGING TRUST UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1995
PRO FORMA ADJUSTMENTS HISTORICAL ACQUIRED --------------- STARWOOD PROPERTIES LODGING ---------- TRUST ---------- (C) (A) REVENUE Rents from Corporation................................................................ $5,163,000 $ -- $1,571,000(J) Interest from Corporation............................................................. 767,000 -- 344,000(K) Interest from mortgage and other notes................................................ 2,566,000 -- 5,000(D) Rents from other leased hotel properties.............................................. 159,000 -- -- Management fees and other............................................................. 34,000 -- -- Gain (loss) on sales of hotel assets.................................................. (113,000) -- -- ---------- ---------- --------------- 8,576,000 -- 1,920,000 ---------- ---------- --------------- EXPENSES Interest--other....................................................................... 5,509,000 219,000 (5,728,000)(F) 819,000(F) Depreciation and amortization......................................................... 1,691,000 698,000 -- Administrative and operating.......................................................... 355,000 -- -- ---------- ---------- --------------- 7,555,000 917,000 (4,909,000) ---------- ---------- --------------- Income (loss) before minority interest in Partnership................................. $1,021,000 $ (917,000) $6,829,000 ---------- --------------- ---------- --------------- Minority interest in Partnership(H)................................................... 732,000 ---------- NET INCOME (LOSS)..................................................................... $ 289,000 ---------- ---------- NET INCOME (LOSS) PER SHARE(I)............................................................................. $ 0.14 ---------- ---------- PRO FORMA TRUST ----------- REVENUE Rents from Corporation................................................................ $ 6,734,000 Interest from Corporation............................................................. 1,111,000 Interest from mortgage and other notes................................................ 2,571,000 Rents from other leased hotel properties.............................................. 159,000 Management fees and other............................................................. 34,000 Gain (loss) on sales of hotel assets.................................................. (113,000) ----------- 10,496,000 ----------- EXPENSES Interest--other....................................................................... 819,000 Depreciation and amortization......................................................... 2,389,000 Administrative and operating.......................................................... 355,000 ----------- 3,563,000 ----------- Income (loss) before minority interest in Partnership................................. 6,933,000 Minority interest in Partnership(H)................................................... 2,262,000 ----------- NET INCOME (LOSS)..................................................................... $ 4,671,000 ----------- ----------- NET INCOME (LOSS) PER SHARE(I)............................................................................. $ 0.38 ----------- -----------
The accompanying notes are an integral part of the pro forma statements of operations. F-15 STARWOOD LODGING CORPORATION UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1995
PRO FORMA STARWOOD PRO FORMA LODGING ADJUSTMENTS CORPORATION STARWOOD ACQUIRED ----------------- ------------- LODGING PROPERTIES CORPORATION ------------ ------------- (B) (A) REVENUE Hotel............................................... $ 22,781,000 $ 8,127,000 $ -- $ 30,908,000 Gaming.............................................. 6,669,000 -- -- 6,669,000 Interest from mortgage and other notes.............. 15,000 -- -- 15,000 Management fees and other........................... 27,000 -- -- 27,000 ------------- ------------ ----------------- ------------- 29,492,000 8,127,000 -- 37,619,000 ------------- ------------ ----------------- ------------- EXPENSES Hotel operations.................................... 16,280,000 5,206,000 (409,000)(E) 21,077,000 Gaming operations................................... 6,021,000 -- -- 6,021,000 Rent--Trust......................................... 5,163,000 -- 1,571,000(J) 6,734,000 Interest--Trust..................................... 767,000 -- 344,000(K) 1,111,000 Interest--other..................................... 318,000 -- (296,000)(F) 22,000 Depreciation and amortization....................... 1,172,000 865,000 -- 2,037,000 Administrative and operating........................ 713,000 -- 4,000(E) 717,000 ------------- ------------ ----------------- ------------- 30,434,000 6,071,000 1,214,000 37,719,000 ------------- ------------ ----------------- ------------- Income (loss) before minority interest in Partnership........................................ (942,000) $ 2,056,000 $ (1,214,000) (100,000) ------------ ----------------- ------------ ----------------- Minority interest in Partnership(H)................. (638,000) (33,000) ------------- ------------- NET INCOME (LOSS)................................... $ (304,000) $ (67,000) ------------- ------------- ------------- ------------- NET INCOME (LOSS) PER SHARE(I)...................... $ (0.15) $ (0.01) ------------- ------------- ------------- -------------
The accompanying notes are an integral part of the pro forma statements of operations. F-16 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO THE UNAUDITED SEPARATE AND COMBINED PRO FORMA STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 AND THE THREE MONTHS ENDED MARCH 31, 1995 (A) Subsequent to the Offering, the Trust and the Corporation will have unilateral control of the Partnerships and, therefore, the historical financial statements of the Partnerships will be consolidated with those of the Trust and the Corporation. The Trust's and the Corporation's equity in income (loss) of the Partnerships have been eliminated in such consolidated statements of operations. (B) Reflects the pro forma statements of operations (reflecting Starwood's cost basis) of the assets and liabilities contributed by the Starwood Partners in the Reorganization. (C) Reflects the pro forma statements of operations (reflecting the Companies' cost basis) of the properties acquired or to be acquired by the Trust and the Corporation subsequent to March 31, 1995. (D) Reflects interest income on the officer loan at 7.78% per year. (E) The Corporation intends to operate all of the Companies' hotels and terminate all existing third party management contracts for properties currently owned or to be acquired at the earliest practicable date. Accordingly, certain costs directly attributable to existing third party management contracts included in the pro forma statements of operations have been eliminated. Such cost savings are reflected in the pro forma statements of operations as if such contracts had been canceled as of the beginning of the periods presented. Listed below are the hotels on which third party management contracts have been or are anticipated to be terminated and the related management and other fees incurred in each period.
FEES PAID (1) ------------------------ 12 MONTHS 3 MONTHS ENDED ENDED HOTEL 12/31/94 3/31/95 STATUS - ------------------------------------------ ------------ ---------- -------------------------------- Holiday Inn - Albany, GA.................. $ 160,000 $ 9,000 Terminated Best Western - Columbus, OH............... 156,000 33,000 Cancelable in 1995 Best Western - Savannah, GA............... 109,000 21,000 Cancelable in 1995 Radisson - Gainesville, FL................ 149,000 19,000 Cancelable in 1996 Park Central - Dallas, TX................. 342,000 34,000 Cancelable in 1995 Capital Hill - Washington, D.C............ 143,000 43,000 Cancelable in 1995 French Quarter - Lexington, KY............ 432,000 21,000 Terminated Doubletree - Rancho Bernardo, CA.......... 237,000 67,000 Cancelable in 1995 Colony Square - Atlanta, GA............... 624,000 139,000 Cancelable upon Acquisition Omni - Chapel Hill, NC.................... 92,000 23,000 Terminated ------------ ---------- $ 2,444,000 $ 409,000 ------------ ---------- ------------ ----------
- ------------ (1) Fees include base and incentive management fees as well as accounting fee chargebacks and other corporate costs. Pro Forma administrative and operating expenses reflect (i) increases in operating expenses resulting principally from the opening of a corporate office in Atlanta and (ii) decreases in operating expenses F-17 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO THE UNAUDITED SEPARATE AND COMBINED PRO FORMA STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 AND THE THREE MONTHS ENDED MARCH 31, 1995 (CONTINUED) resulting principally from a decrease in directors' and officers' liability insurance and the elimination of cash management fees paid to the Company's former lender. Such cost adjustments are reflected in the pro forma statements of operations as follows:
ADMINISTRATIVE AND OPERATING EXPENSES ----------------------- 12 MONTHS 3 MONTHS ENDED ENDED 12/31/94 3/31/95 ----------- ---------- Additional personnel costs and corporate travel........................... $ 386,000 $ 79,000 Decrease in directors' and officers' liability insurance.................. (200,000) (50,000) Decrease in cash management fees.......................................... (100,000) (25,000) ----------- ---------- $ 86,000 $ 4,000 ----------- ---------- ----------- ----------
(F) Reflects the elimination of historical and pro forma interest expense related to the debt repaid from the proceeds of the Offering and the addition of interest expense at LIBOR plus 1.5% on the amount to be outstanding pursuant to the Financing. (G) Reflects the amortization of organization costs related to the formation of the Partnerships over a five-year period. (H) Reflects Starwood Capital's 32.6% minority interest in the income of the Partnerships. (I) Net income (loss) per paired share has been computed using the weighted average number of paired shares and equivalent paired shares outstanding. All paired share information has been adjusted to reflect a one-for-six reverse split to be effective prior to the Offering. (J) Reflects rents on hotels contributed by Starwood Capital in the Reorganization and hotels acquired or to be acquired by the Companies subsequent to March 31, 1995. The leases between the Trust and the Corporation provide for annual base or minimum rents plus contingent or percentage rents based on the gross revenue of the properties and are accounted for as operating leases. (K) Reflects interest on the notes payable from the Corporation to the Trust at prime plus 3% for secured notes and prime plus 2% for unsecured notes. F-18 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION COMBINED BALANCE SHEETS ASSETS
DECEMBER 31, 1994 MARCH 31, --------------- 1995 --------------- (UNAUDITED) Investment in Partnerships.................................................. $ 6,761,000 $ -- Gaming assets, net.......................................................... 995,000 -- Hotel assets held for sale, net............................................. -- 8,585,000 Hotel assets, net........................................................... -- 142,600,000 --------------- --------------- 7,756,000 151,185,000 Mortgage notes receivable, net.............................................. -- 14,049,000 Investment in joint venture hotel properties................................ -- 262,000 --------------- --------------- Total real estate investments........................................... 7,756,000 165,496,000 Cash and cash equivalents................................................... -- 5,065,000 Accounts receivable......................................................... -- 4,040,000 Notes receivable, net....................................................... -- 1,627,000 Inventories, prepaid expenses and other assets.............................. -- 7,727,000 Due from Partnerships....................................................... 1,718,000 -- --------------- --------------- $ 9,474,000 $ 183,955,000 --------------- --------------- --------------- --------------- LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Secured notes payable and revolving line of credit.......................... $ -- $ 113,896,000 Mortgage and other notes payable............................................ -- 46,586,000 Accounts payable and other liabilities...................................... 1,718,000 14,765,000 --------------- --------------- 1,718,000 175,247,000 --------------- --------------- Commitments and contingencies SHAREHOLDERS' EQUITY Trust shares of beneficial interest, $0.01 par value; authorized 100,000,000 shares; outstanding 12,132,948 shares...................................... 121,000 12,133,000 Corporation Common stock, $0.01 par value; authorized 100,000,000 shares; outstanding 12,132,948 shares.............................................. 121,000 1,213,000 Additional paid-in-capital.................................................. 222,055,000 210,251,000 Accumulated deficit......................................................... (214,541,000) (214,889,000) --------------- --------------- 7,756,000 8,708,000 --------------- --------------- $ 9,474,000 $ 183,955,000 --------------- --------------- --------------- ---------------
See accompanying notes to financial statements. F-19 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, ---------------------------- 1995 1994 ------------- ------------- (UNAUDITED) REVENUE Equity in income of Partnerships before extraordinary items..................... $ 37,000 $ -- Hotel........................................................................... -- 20,586,000 Gaming.......................................................................... 6,669,000 7,188,000 Interest from mortgage and other notes.......................................... -- 355,000 Rents from leased hotel properties and income from joint ventures............... -- 150,000 Management fees and other....................................................... -- 59,000 ------------- ------------- 6,706,000 28,338,000 ------------- ------------- EXPENSES Hotel operations................................................................ 15,568,000 Gaming operations............................................................... 6,021,000 5,993,000 Rent--SLT Realty L.P............................................................ 600,000 -- Interest--other................................................................. -- 4,125,000 Interest--SLT Realty L.P........................................................ 37,000 -- Depreciation and amortization................................................... 63,000 2,066,000 Administrative and operating.................................................... -- 921,000 ------------- ------------- 6,721,000 28,673,000 ------------- ------------- Income (loss) before extraordinary items........................................ (15,000) (335,000) Equity in extraordinary items of Partnerships................................... 363,000 -- ------------- ------------- NET INCOME (LOSS)............................................................... $ 348,000 $ (335,000) ------------- ------------- ------------- ------------- EARNINGS PER PAIRED SHARE Income (loss) before extraordinary items........................................ $ 0.00 $ (0.03) Extraordinary items............................................................. 0.03 -- ------------- ------------- NET INCOME (LOSS) PER PAIRED SHARE.............................................. $ 0.03 $ (0.03) ------------- ------------- ------------- ------------- Weighted average number of paired shares........................................ 12,132,948 12,132,948 ------------- ------------- ------------- -------------
See accompanying notes to financial statements. F-20 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, --------------------------- 1995 1994 ------------- ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)................................................................. $ 348,000 $ (335,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity in income (loss) of Partnerships......................................... (400,000) -- Depreciation and amortization................................................... 63,000 2,066,000 Deferred interest............................................................... -- 478,000 Changes in assets and liabilities: Accounts receivable, inventories, prepaid expenses and other assets............. -- (120,000) Accounts payable and other liabilities.......................................... -- (459,000) ------------- ------------ Net cash provided by (used in) operating activities........................... 11,000 1,630,000 ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES Cash contributed to Partnerships.................................................. (3,189,000) -- Additions to hotel assets......................................................... -- (598,000) Net change in gaming assets....................................................... (1,887,000) -- Principal received on notes receivable............................................ -- 67,000 ------------- ------------ Net cash used in investing activities......................................... (5,076,000) (531,000) ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on mortgage and other notes payable............................ -- (237,000) Increase in secured notes payable and revolving line of credit.................... -- 276,000 Principal received on share purchase notes........................................ -- 11,000 ------------- ------------ Net cash provided by (used in) financing activities........................... -- 50,000 ------------- ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................. (5,065,000) 1,149,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................. 5,065,000 5,652,000 ------------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................ $ -- $ 6,801,000 ------------- ------------ ------------- ------------
See accompanying notes to financial statements. F-21 STARWOOD LODGING TRUST BALANCE SHEETS ASSETS
MARCH 31, DECEMBER 31, 1995 1994 --------------- --------------- (UNAUDITED) Investment in Partnership................................................... $ 9,867,000 $ -- Hotel assets held for sale, net............................................. -- 8,281,000 Hotel assets, net........................................................... -- 108,428,000 --------------- --------------- 9,867,000 116,709,000 Mortgage notes receivable, net.............................................. -- 14,049,000 Investment in joint venture hotel properties................................ -- 240,000 --------------- --------------- Total real estate investments............................................... 9,867,000 130,998,000 Cash and cash equivalents................................................... -- 255,000 Accounts receivable......................................................... -- 698,000 Notes receivable--Corporation............................................... -- 26,916,000 Notes receivable, net....................................................... -- 1,004,000 Inventories, prepaid expenses and other assets.............................. -- 2,374,000 Due from Partnership........................................................ 859,000 -- --------------- --------------- $ 10,726,000 $ 162,245,000 --------------- --------------- --------------- --------------- LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Secured notes payable and revolving line of credit.......................... $ -- $ 113,896,000 Mortgage and other notes payable............................................ -- 32,838,000 Accounts payable and other liabilities...................................... 859,000 5,061,000 --------------- --------------- 859,000 151,795,000 --------------- --------------- Commitments and contingencies SHAREHOLDERS' EQUITY Trust shares of beneficial interest, $0.01 par value; authorized 100,000,000 shares; outstanding 12,132,948 shares...................................... 121,000 12,133,000 Additional paid-in-capital.................................................. 156,836,000 146,059,000 Accumulated deficit......................................................... (147,090,000) (147,742,000) --------------- --------------- 9,867,000 10,450,000 --------------- --------------- $ 10,726,000 $ 162,245,000 --------------- --------------- --------------- ---------------
See accompanying notes to financial statements. F-22 STARWOOD LODGING TRUST STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, ---------------------------- 1995 1994 ------------- ------------- (UNAUDITED) REVENUE Equity in income of Partnership before extraordinary items...................... $ 289,000 $ -- Rents from Corporation.......................................................... -- 4,313,000 Interest from Corporation....................................................... -- 415,000 Interest from mortgage and other notes.......................................... -- 339,000 Rents from leased hotel properties and income from joint ventures............... -- 150,000 Management fees and other and income from joint venture......................... -- 26,000 ------------- ------------- 289,000 5,243,000 ------------- ------------- EXPENSES Interest........................................................................ -- 3,779,000 Depreciation and amortization................................................... -- 1,252,000 Administrative and operating.................................................... -- 366,000 ------------- ------------- -- 5,397,000 ------------- ------------- Income (loss) before extraordinary items........................................ 289,000 (154,000) Equity in extraordinary items of Partnership.................................... 363,000 -- ------------- ------------- NET INCOME (LOSS)............................................................... $ 652,000 $ (154,000) ------------- ------------- ------------- ------------- EARNINGS PER SHARE Income (loss) before extraordinary items........................................ $ 0.02 $ (0.01) Extraordinary items............................................................. 0.03 -- ------------- ------------- NET INCOME (LOSS) PER SHARE..................................................... $ 0.05 $ (0.01) ------------- ------------- ------------- ------------- Weighted average number of shares............................................... 12,132,948 12,132,948 ------------- ------------- ------------- -------------
See accompanying notes to financial statements. F-23 STARWOOD LODGING TRUST STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, -------------------------- 1995 1994 ----------- ------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss).................................................................. $ 652,000 $ (154,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity in income (loss) of Partnership........................................... (652,000) -- Depreciation and amortization.................................................... -- 1,252,000 Deferred interest................................................................ -- 478,000 Changes in assets and liabilities: Accounts receivable, inventories, prepaid expenses and other assets.............. -- 550,000 Accounts payable and other liabilities........................................... -- (1,079,000) ----------- ------------- Net cash provided by (used in) operating activities............................ 1,047,000 ----------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Cash contributed to Partnership.................................................... (255,000) -- Additions to hotel assets.......................................................... -- (258,000) Principal received on mortgage and other notes receivable.......................... -- 54,000 Net changes in notes receivable--Corporation....................................... -- (1,344,000) ----------- ------------- Net cash used in investing activities.......................................... (255,000) (1,548,000) ----------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on mortgage and other notes payable............................. -- (188,000) Increase in secured notes payable and revolving line of credit..................... -- 276,000 Principal received on share purchase notes......................................... -- 11,000 ----------- ------------- Net cash provided by (used in) financing activities............................ -- 99,000 ----------- ------------- DECREASE IN CASH AND CASH EQUIVALENTS.............................................. (255,000) (402,000) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................... 255,000 918,000 ----------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD......................................... $ -- $ 516,000 ----------- ------------- ----------- -------------
See accompanying notes to financial statements. F-24 STARWOOD LODGING CORPORATION BALANCE SHEETS ASSETS
MARCH 31, DECEMBER 31, 1995 1994 -------------- -------------- (UNAUDITED) Investment in Partnership...................................................... $ (3,106,000) $ -- Gaming Assets, net............................................................. 995,000 -- Hotel assets held for sale, net................................................ -- 304,000 Hotel assets, net.............................................................. -- 34,172,000 -------------- -------------- (2,111,000) 34,476,000 Investment in joint venture hotel properties................................... -- 22,000 -------------- -------------- Total real estate investments.................................................. (2,111,000) 34,498,000 Cash and cash equivalents...................................................... -- 4,810,000 Accounts receivable............................................................ -- 3,342,000 Notes receivable, net.......................................................... -- 623,000 Inventories, prepaid expenses and other assets................................. -- 5,353,000 Due from Partnership........................................................... 859,000 -- -------------- -------------- $ (1,252,000) $ 48,626,000 -------------- -------------- -------------- -------------- LIABILITIES AND SHAREHOLDERS' DEFICIT LIABILITIES Mortgage and other notes payable............................................... $ -- $ 13,748,000 Notes payable--Trust........................................................... -- 26,916,000 Accounts payable and other liabilities......................................... 859,000 9,704,000 -------------- -------------- 859,000 50,368,000 -------------- -------------- Commitments and contingencies SHAREHOLDERS' DEFICIT Corporation common stock, $0.01 par value; authorized 100,000,000 shares; outstanding 12,132,948 shares................................................. 121,000 1,213,000 Additional paid-in-capital..................................................... 65,219,000 64,192,000 Accumulated deficit............................................................ (67,451,000) (67,147,000) -------------- -------------- (2,111,000) (1,742,000) -------------- -------------- $ (1,252,000) $ 48,626,000 -------------- -------------- -------------- --------------
See accompanying notes to financial statements. F-25 STARWOOD LODGING CORPORATION STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, ---------------------------- 1995 1994 ------------- ------------- (UNAUDITED) REVENUE Equity in loss of Partnership................................................... $ (252,000) $ -- Hotel........................................................................... -- 20,586,000 Gaming.......................................................................... 6,669,000 7,188,000 Interest from mortgage and other notes.......................................... -- 16,000 Management fees and other....................................................... -- 33,000 ------------- ------------- 6,417,000 27,823,000 ------------- ------------- EXPENSES Hotel operations................................................................ -- 15,568,000 Gaming operations............................................................... 6,021,000 5,993,000 Rent--Trust/Realty Partnership.................................................. 600,000 4,313,000 Interest--Trust/Realty Partnership.............................................. 37,000 415,000 Interest--other................................................................. -- 346,000 Depreciation and amortization................................................... 63,000 814,000 Administrative and operating.................................................... -- 555,000 ------------- ------------- 6,721,000 28,004,000 ------------- ------------- NET INCOME (LOSS)............................................................... $ (304,000) $ (181,000) ------------- ------------- ------------- ------------- NET INCOME (LOSS) PER SHARE..................................................... $ (0.03) $ (0.01) ------------- ------------- ------------- ------------- Weighted average number of shares............................................... 12,132,948 12,132,948 ------------- ------------- ------------- -------------
See accompanying notes to financial statements. F-26 STARWOOD LODGING CORPORATION STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, --------------------------- 1995 1994 ------------- ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net loss.......................................................................... $ (304,000) $ (181,000) Adjustments to reconcile net loss to net cash provided by operating activities: Equity in loss of Partnership................................................... 252,000 -- Depreciation and amortization................................................... 63,000 814,000 Changes in assets and liabilities: Accounts receivable, inventories, prepaid expenses and other assets............. -- (670,000) Accounts payable and other liabilities.......................................... -- 620,000 ------------- ------------ Net cash provided by (used in) operating activities........................... 11,000 583,000 ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES Cash contributed to Partnership................................................... (2,934,000) -- Net change in gaming assets....................................................... (1,887,000) -- Additions to hotel assets......................................................... -- (339,000) Principal received on notes receivable............................................ -- 13,000 ------------- ------------ Net cash used in investing activities......................................... (4,821,000) (326,000) ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net change in notes payable--Trust................................................ -- 1,344,000 Principal payments on mortgage and other notes payable............................ -- (49,000) ------------- ------------ Net cash provided by (used in) financing activities........................... -- 1,295,000 ------------- ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................. (4,810,000) 1,552,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................. 4,810,000 4,734,000 ------------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................ $ -- $ 6,286,000 ------------- ------------ ------------- ------------
See accompanying notes to financial statements. F-27 SLT REALTY LIMITED PARTNERSHIP AND SLC OPERATING LIMITED PARTNERSHIP COMBINED BALANCE SHEET ASSETS
MARCH 31, 1995 -------------- (UNAUDITED) Hotel assets held for sale, net................................................................... $ 8,215,000 Hotel assets--net................................................................................. 174,660,000 -------------- 182,875,000 Mortgage notes receivable, net.................................................................... 62,479,000 Investment in joint venture hotel properties...................................................... 271,000 -------------- Total real estate investments..................................................................... 245,625,000 Cash and cash equivalents......................................................................... 9,581,000 Accounts receivable............................................................................... 6,406,000 Notes receivable--Corporation..................................................................... 1,446,000 Notes receivable, net............................................................................. 1,607,000 Inventories, prepaid expenses and other assets.................................................... 12,268,000 -------------- $ 276,933,000 -------------- -------------- LIABILITIES AND PARTNERS' EQUITY LIABILITIES Secured notes payable............................................................................. $ 130,360,000 Mortgage and other notes payable.................................................................. 68,155,000 Accounts payable and other liabilities............................................................ 12,770,000 -------------- 211,285,000 -------------- PARTNERS' EQUITY.................................................................................. 65,648,000 -------------- $ 276,933,000 -------------- --------------
See accompanying notes to financial statements. F-28 SLT REALTY LIMITED PARTNERSHIP AND SLC OPERATING LIMITED PARTNERSHIP COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 ------------- (UNAUDITED) REVENUE Hotel.............................................................................................. $ 22,781,000 Interest from mortgage and other notes............................................................. 2,581,000 Rent--Corporation.................................................................................. 600,000 Interest from Corporation.......................................................................... 37,000 Management fees and other.......................................................................... 61,000 Rents from leased hotel properties................................................................. 159,000 Gain (loss) on sale................................................................................ (113,000) ------------- 26,106,000 ------------- EXPENSES Hotel operations................................................................................... 16,280,000 Interest........................................................................................... 5,827,000 Depreciation and amortization...................................................................... 2,800,000 Administrative and operating....................................................................... 1,068,000 ------------- 25,975,000 ------------- Income before extraordinary items.................................................................. 131,000 Extraordinary items................................................................................ 1,284,000 ------------- NET INCOME......................................................................................... $ 1,415,000 ------------- -------------
See accompanying notes to financial statements. F-29 SLT REALTY LIMITED PARTNERSHIP AND SLC OPERATING LIMITED PARTNERSHIP COMBINED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1995 -------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income........................................................................................ $ 1,415,000 Extraordinary items............................................................................... (1,284,000) Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization................................................................... 2,800,000 Accretion of discount on mortgage notes receivable.............................................. (753,000) Deferred interest............................................................................... 649,000 Loss on sales................................................................................... 113,000 Changes in operating assets and liabilities: Accounts receivable, inventories, prepaid expenses and other assets............................. (5,901,000) Accounts payable and other liabilities.......................................................... 1,726,000 -------------- Net cash used in operating activities......................................................... (1,235,000) -------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to hotel assets......................................................................... (453,000) Decrease in mortgage notes receivable............................................................. 1,460,000 Principal received on notes receivable............................................................ 20,000 Increase in notes receivable--Corporation......................................................... (221,000) Reorganization costs.............................................................................. (2,786,000) -------------- Net cash used in investing activities......................................................... (1,980,000) -------------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on mortgage and other notes payable............................................ (32,413,000) Borrowings under secured notes payable............................................................ 27,461,000 Capital contributions............................................................................. 18,012,000 Borrowings under mortgage and other notes payable................................................. 250,000 Purchase of warrants.............................................................................. (514,000) -------------- Net cash provided by financing activities..................................................... 12,796,000 -------------- INCREASE IN CASH AND CASH EQUIVALENTS............................................................. 9,581,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................................. -- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................................ $ 9,581,000 -------------- --------------
See accompanying notes to financial statements. F-30 SLT REALTY LIMITED PARTNERSHIP BALANCE SHEET ASSETS
MARCH 31, 1995 -------------- (UNAUDITED) Hotel assets held for sale, net................................................................... $ 8,215,000 Hotel assets--net................................................................................. 137,583,000 -------------- 145,798,000 Mortgage notes receivable, net.................................................................... 62,479,000 Investment in joint venture hotel properties...................................................... 254,000 -------------- Total real estate investments..................................................................... 208,531,00 Cash and cash equivalents......................................................................... 3,939,000 Accounts receivable............................................................................... 1,825,000 Notes receivable--SLC Operating L.P............................................................... 27,495,000 Notes receivable--Corporation..................................................................... 1,446,000 Notes receivable, net............................................................................. 998,000 Prepaid expenses and other assets................................................................. 6,311,000 -------------- $ 250,545,000 -------------- -------------- LIABILITIES AND PARTNERS' EQUITY LIABILITIES Secured notes payable............................................................................. $ 130,360,000 Mortgage and other notes payable.................................................................. 54,549,000 Accounts payable and other liabilities............................................................ 3,271,000 -------------- 188,180,000 -------------- PARTNERS' EQUITY.................................................................................. 62,365,000 -------------- $ 250,545,000 -------------- --------------
See accompanying notes to financial statements. F-31 SLT REALTY LIMITED PARTNERSHIP STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 ------------ (UNAUDITED) REVENUE Rents from Corporation.............................................................................. $ 600,000 Rents from SLC Operating L.P........................................................................ 4,563,000 Interest from SLC Operating L.P..................................................................... 730,000 Interest from Corporation........................................................................... 37,000 Interest from mortgage and other notes.............................................................. 2,566,000 Rent from other leased hotel properties............................................................. 159,000 Other............................................................................................... 34,000 Gain (loss) on sale................................................................................. (113,000) ------------ 8,576,000 ------------ EXPENSES Interest............................................................................................ 5,509,000 Depreciation and amortization....................................................................... 1,691,000 Administrative and operating........................................................................ 355,000 ------------ 7,555,000 ------------ Income before extraordinary items................................................................... 1,021,000 Extraordinary items................................................................................. 1,284,000 ------------ NET INCOME.......................................................................................... $ 2,305,000 ------------ ------------
See accompanying notes to financial statements. F-32 SLT REALTY LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1995 -------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income........................................................................................ $ 2,305,000 Extraordinary items............................................................................... (1,284,000) Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization................................................................... 1,691,000 Accretion of discount on mortgage notes receivable.............................................. (753,000) Deferred interest............................................................................... 649,000 Loss on sale.................................................................................... 113,000 Deferred interest--Corporation.................................................................. (463,000) Changes in operating assets and liabilities: Accounts receivable, prepaid expenses and other assets.......................................... (3,656,000) Accounts payable and other liabilities.......................................................... 272,000 -------------- Net cash used in operating activities......................................................... (1,126,000) -------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to hotel assets......................................................................... (453,000) Decrease in mortgage notes receivable............................................................. 1,460,000 Principal received on mortgage and other notes receivable......................................... 6,000 Net change in notes receivable--SLC Operating L.P................................................. (1,341,000) Net change in notes receivable--Corporation....................................................... (221,000) Reorganization costs.............................................................................. (1,393,000) -------------- Net cash used in investing activities......................................................... (1,942,000) -------------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on mortgage and other notes payable............................................ (32,413,000) Borrowings under secured notes payable............................................................ 27,461,000 Capital contributions............................................................................. 12,223,000 Borrowings under mortgage and other notes payable................................................. 250,000 Purchase of warrants.............................................................................. (514,000) -------------- Net cash provided by financing activities..................................................... 7,007,000 -------------- INCREASE IN CASH AND CASH EQUIVALENTS............................................................. 3,939,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................................. -- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................................ $ 3,939,000 -------------- --------------
See accompanying notes to financial statements. F-33 SLC OPERATING LIMITED PARTNERSHIP BALANCE SHEET ASSETS
MARCH 31, 1995 ------------- (UNAUDITED) Hotel assets--net.................................................................................. $ 37,077,000 Investment in joint venture hotel properties....................................................... 17,000 ------------- Total real estate investments.................................................................. 37,094,000 Cash and cash equivalents.......................................................................... 5,642,000 Accounts receivable................................................................................ 4,581,000 Notes receivable................................................................................... 609,000 Inventories, prepaid expenses and other assets..................................................... 5,957,000 ------------- $ 53,883,000 ------------- ------------- LIABILITIES AND PARTNERS' EQUITY LIABILITIES Mortgage and other notes payable................................................................... $ 13,606,000 Notes payable--SLT Realty L.P...................................................................... 27,495,000 Accounts payable and other liabilities............................................................. 9,499,000 ------------- 50,600,000 PARTNERS' EQUITY................................................................................... 3,283,000 ------------- $ 53,883,000 ------------- -------------
See accompanying notes to financial statements. F-34 SLC OPERATING LIMITED PARTNERSHIP STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 ------------- (UNAUDITED) REVENUE Hotel.............................................................................................. $ 22,781,000 Interest from notes receivable..................................................................... 15,000 Management fees and other income................................................................... 27,000 ------------- 22,823,000 ------------- EXPENSES Hotel operations................................................................................... 16,280,000 Rent--SLT Realty L.P............................................................................... 4,563,000 Interest--SLT Realty L.P........................................................................... 730,000 Interest--other.................................................................................... 318,000 Depreciation and amortization...................................................................... 1,109,000 Administrative and operating....................................................................... 713,000 ------------- 23,713,000 ------------- NET LOSS........................................................................................... $ (890,000) ------------- -------------
See accompanying notes to financial statements. F-35 SLC OPERATING LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1995 ------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net loss........................................................................................... $ (890,000) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.................................................................... 1,109,000 Deferred interest--SLT Realty L.P................................................................ 463,000 Changes in operating assets and liabilities: Accounts receivable, inventories, prepaid expenses and other assets.............................. (2,245,000) Accounts payable and other liabilities........................................................... 1,454,000 ------------- Net cash used in operating activities.......................................................... (109,000) ------------- CASH FLOWS FROM INVESTING ACTIVITIES Principal received on notes receivable............................................................. 14,000 Reorganization costs............................................................................... (1,393,000) ------------- Net cash used in investing activities.......................................................... (1,379,000) ------------- CASH FLOWS FROM FINANCING ACTIVITIES Capital contributions.............................................................................. 5,789,000 Net changes in notes payable--SLT Realty L.P....................................................... 1,341,000 ------------- Net cash provided by financing activities...................................................... 7,130,000 ------------- INCREASE IN CASH AND CASH EQUIVALENTS.............................................................. 5,642,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................................... -- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD......................................................... $ 5,642,000 ------------- -------------
See accompanying notes to financial statements. F-36 STARWOOD LIMITED PARTNERSHIP AND SLC OPERATING LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 1. INTERIM FINANCIAL STATEMENTS The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with Rule 10-01 of Regulation S-X. Accordingly, these statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management of the Trust and the Corporation, all adjustments necessary for a fair presentation have been included. The financial statements presented herein have been prepared in accordance with the accounting policies described in the registrants' Joint Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994 Form 10-K"), and should be read in conjunction therewith. 2. REORGANIZATION Effective January 1, 1995 (the "Closing Date"), the Trust and the Corporation consummated the previously announced reorganization (the "Reorganization") with Starwood Capital Group, L.P. ("Starwood Capital") and certain affiliates of Starwood Capital (the "Starwood Partners"). The Reorganization involved a number of related transactions that occurred simultaneously as of the Closing Date. Such transactions included (i) the contribution by the Trust to SLT Realty Limited Partnership (the "Realty Partnership") of all of the properties and assets of the Trust subject to substantially all of the liabilities of the Trust (including the Senior Debt of the Trust), in exchange for an approximate 28.3% interest as a general partner in the Realty Partnership, (ii) the contribution by the Starwood Partners to the Realty Partnership of approximately $12,600,000 in cash and certain hotel properties and first mortgage notes, in exchange for limited partnership units representing the remaining approximate 71.7% interest in the Realty Partnership, (iii) the contribution by the Corporation and its subsidiaries to SLC Operating Limited Partnership (the "Operating Partnership") of all of their properties and operating assets (except for their gaming assets, which are to be contributed upon approval by Nevada Gaming Authorities), subject to substantially all of their liabilities, in exchange for an approximate 28.3% interest as a general partner in the Operating Partnership, and (iv) the contribution by the Starwood Partners to the Operating Partnership of approximately $1,400,000 in cash and furnishing and equipment of the hotel properties, in exchange for limited partnership units representing the remaining approximate 71.7% interest in the Operating Partnership. At March 31, 1995 gaming assets to be contributed to the Operating Partnership upon approval of the Nevada Gaming Authorities consist of assets of $4,278,000, net of liabilities of $3,283,000 including notes payable to the Realty Partnership of $1,446,000. In addition, on March 24, 1995 a Starwood Partner exchanged $12 million of Senior Debt for additional limited partnership units of the Realty Partnership and the Operating Partnership. After giving effect to the Reorganization and the subsequent exchange of Senior Debt, the Trust has an approximate 25.4% interest in the Realty Partnership and the Corporation has an approximate 25.4% interest in the Operating Partnership, and the Starwood Partners hold limited partnership interests representing the remaining approximate 74.6% interest in each of the Realty Partnership and the Operating Partnership. 3. DEBT RESTRUCTURING On March 24, 1995, the Realty Partnership and the Trust entered into an Amended and Restated Credit Agreement (the "New Credit Agreement") pursuant to which the Realty Partnership borrowed approximately $132 million (the "Loan") which was used primarily to refinance all outstanding Senior Debt (after the exchange by a Starwood Partner of $12 million of Senior Debt for units of the Realty Partnership and the Operating Partnership described above) and approximately $27 million of first mortgage debt. The Loan matures on April 1, 1997 (subject to the Realty Partnership's option to extend such maturity for 12 months subject to a principal payment of $10 million and on certain other conditions) and bears interest at a rate based on LIBOR plus 3%. In connection with the refinancing, the Realty Partnership paid $514,000 to one of the Senior Lenders and a portion of the Lender Warrants were cancelled. In connection with the New Credit F-37 STARWOOD LIMITED PARTNERSHIP AND SLC OPERATING LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. DEBT RESTRUCTURING (CONTINUED) Agreement, the remaining Lender Warrants Issued in connection with the prior Credit Agreement (the "Prior Credit Agreement") could be cancelled upon the payment to a Starwood Partner of a $786,000 cancellation fee. Effective March 31, 1995 the Realty Partnership issued an unsecured note payable to the Starwood Partner and the remaining Lender Warrants were cancelled. Prior to maturity there are no mandatory principal payments on the Loan, except that (i) if the Realty Partnership sells or refinances a hotel property or mortgage note (other than certain notes contributed by the Starwood Partners aggregating approximately $53 million (the "Harvey Notes")), it must reduce the principal of the Loan by at least 125% of the portion of the Loan allocated to such property or note and (ii) the net proceeds of any public offering (or private offerings to the extent the net proceeds thereof exceed $60 million) of equity interests in the Trust, the Corporation, the Realty Partnership or the Operating Partnership must be used to reduce the principal of the Loan until such principal is equal to or less than 50% of the fair mark value of the assets which secure the Loan. The Loan is secured by first priority liens on substantially all of the assets of the Realty Partnership, other than the Harvey Notes. Up to $58 million of the obligations under the Loan is guaranteed by the Operating Partnership, which guaranty is secured by first priority liens on substantially all of the assets of the Operating Partnership. Each of the Trust and the Corporation, as general partner, is secondarily liable for the obligations under the Loan of the Realty Partnership and the Operating Partnership, respectively. The New Credit Agreement contains covenants that are similar to, but in general less restrictive than, those contained in the prior Credit Agreement, including (i) a requirement that the Realty Partnership and the Operating Partnership maintain a minimum combined net worth as defined ($40 million at March 31, 1995). The New Credit Agreement also restricts the ability of the Realty Partnership to incur other indebtedness. The Realty Partnership may, prior to January 1, 1996, borrow up to an additional $75 million to finance the acquisition of hotel properties and to refinance debt that is senior to the Loan. Each such acquisition loan will be in an amount equal to the lesser of (i) 60% of the purchase price (in the case of an acquisition) or (ii) 70% of the property's value (as determined by the lender), will be made on the same terms as the Loan and will be secured by a first priority lien on the related hotel property. 4. INVESTMENT IN PARTNERSHIPS The Trust and the Corporation will account for their respective investment in the Realty Partnership and the Operating Partnership under the equity method of accounting, in accordance with generally accepted accounting principles. For accounting purposes, neither the Trust nor Starwood Capital unilaterally controls the Realty Partnership and neither the Corporation nor Starwood Capital unilaterally controls the Operating Partnership. The condensed unaudited separate and combined financial information of the Realty Partnership and the Operating Partnership as of March 31, 1995 and for the three months then ended are presented on pages 13 through 21 contained herein. F-38 STARWOOD LIMITED PARTNERSHIP AND SLC OPERATING LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma separate and combined condensed financial information for the three months ended March 31, 1994 is presented as if the Reorganization had occurred on January 1, 1994.
TRUST CORPORATION COMBINED ------------ ------------- ------------- STARWOOD LODGING Income (loss) from investment in Partnership............... $ 423,000 $ (228,000) $ 195,000 Net income (loss) per share................................ $ .04 $ (.02) $ 0.02 REALTY OPERATING COMBINED ------------ ------------- ------------- SLT REALTY AND SLT OPERATING PARTNERSHIPS Revenues................................................... $ 8,112,000 $ 31,581,000 $ 34,193,000 Expenses................................................... 6,617,000 32,387,000 33,504,000 ------------ ------------- ------------- Net income (loss).......................................... $ 1,495,000 $ (806,000) $ 689,000 ------------ ------------- ------------- ------------ ------------- -------------
6. EXTRAORDINARY ITEM Effective January 28, 1993, the Trust restructured its debt under the terms of the Prior Credit Agreement. Management concluded that this debt restructuring represented a "troubled debt restructuring" as defined under generally accepted accounting principles, and accordingly, upon execution of the Prior Credit Agreement accrued all known current or future identifiable debt restructuring costs as of December 31, 1992. In the first quarter of 1995, upon execution of the New Credit Agreement the Realty Partnership recognized extraordinary income of $1,284,000 relating to the extinguishment of the debt under the terms of the Prior Credit Agreement, representing the remaining amount of the accrual recorded at March 24, 1995. F-39 INDEPENDENT AUDITORS' REPORT To the Boards of Trustees and Directors and Shareholders of Starwood Lodging Trust and Starwood Lodging Corporation: We have audited the accompanying separate and combined financial statements of Starwood Lodging Trust (a Maryland real estate investment trust) (the "Trust") and Starwood Lodging Corporation (a Maryland corporation) and its subsidiaries (the "Corporation"), collectively the "Companies", as of December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994, listed in the foregoing index to financial statements and financial statement schedules. Our audits also included the financial statement schedules listed in the foregoing index to financial statements and financial statement schedules. These financial statements and financial statement schedules are the responsibility of the Trust's, the Corporation's and the Companies' managements. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such separate and combined financial statements present fairly, in all material respects, the financial position of the Companies and the financial position of the Trust and the Corporation at December 31, 1994 and 1993, and the respective results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Los Angeles, California March 24, 1995 F-40 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION COMBINED BALANCE SHEETS ASSETS
DECEMBER 31, DECEMBER 31, 1994 1993 --------------- --------------- Hotel assets held for sale--net............................................. $ 8,585,000 $ 16,631,000 Hotel assets--net........................................................... 142,600,000 150,618,000 --------------- --------------- 151,185,000 167,249,000 Mortgage notes receivable--net.............................................. 14,049,000 11,642,000 Investment in joint venture hotel properties................................ 262,000 281,000 --------------- --------------- Total real estate investments........................................... 165,496,000 179,172,000 Cash and cash equivalents................................................... 5,065,000 5,652,000 Accounts receivable......................................................... 4,040,000 4,360,000 Notes receivable--net....................................................... 1,627,000 1,717,000 Inventories, prepaid expenses and other assets.............................. 7,727,000 4,451,000 --------------- --------------- $ 183,955,000 $ 195,352,000 --------------- --------------- --------------- --------------- LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Secured notes payable and revolving line of credit.......................... $ 113,896,000 $ 128,802,000 Mortgage and other notes payable............................................ 46,586,000 42,084,000 Accounts payable and other liabilities...................................... 14,765,000 11,140,000 --------------- --------------- 175,247,000 182,026,000 --------------- --------------- Commitments and contingencies SHAREHOLDERS' EQUITY Trust shares of beneficial interest, $1.00 par value; authorized 30,000,000 shares; outstanding 12,132,948 shares...................................... 12,133,000 12,133,000 Corporation common stock, $0.10 par value; authorized 30,000,000 shares; outstanding 12,132,948 shares.............................................. 1,213,000 1,213,000 Additional paid-in capital.................................................. 210,251,000 210,497,000 Share purchase notes........................................................ -- (291,000) Accumulated deficit......................................................... (214,889,000) (210,226,000) --------------- --------------- 8,708,000 13,326,000 --------------- --------------- $ 183,955,000 $ 195,352,000 --------------- --------------- --------------- ---------------
See accompanying notes to financial statements. F-41 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ---------------------------------------------- 1994 1993 1992 -------------- -------------- -------------- REVENUE Hotel........................................................... $ 82,668,000 $ 86,903,000 $ 88,812,000 Gaming.......................................................... 27,981,000 27,505,000 26,150,000 Interest from mortgage and other notes.......................... 1,554,000 1,412,000 1,348,000 Management fees and other income................................ 411,000 475,000 1,186,000 Rents from leased hotel properties and income from joint ventures....................................................... 927,000 839,000 947,000 Gain (loss) on sales of hotel assets............................ 456,000 21,000 (787,000) -------------- -------------- -------------- 113,997,000 117,155,000 117,656,000 -------------- -------------- -------------- EXPENSES Hotel operations................................................ 60,829,000 68,132,000 68,620,000 Gaming operations............................................... 24,454,000 24,055,00 23,699,000 Interest........................................................ 17,606,000 15,187,000 14,208,000 Depreciation and amortization................................... 8,161,000 9,232,000 10,196,000 Administrative and operating.................................... 4,203,000 4,729,000 6,177,000 Loan restructuring costs........................................ -- -- 10,892,000 Shareholder litigation.......................................... 2,648,000 483,000 188,000 Provision for losses............................................ 759,000 2,369,000 3,419,000 -------------- -------------- -------------- 118,660,000 124,187,000 137,399,000 -------------- -------------- -------------- NET LOSS........................................................ $ (4,663,000) $ (7,032,000) $ (19,743,000) -------------- -------------- -------------- -------------- -------------- -------------- NET LOSS PER PAIRED SHARE....................................... $ (0.38) $ (0.58) $ (1.63)
See accompanying notes to financial statements. F-42 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, --------------------------------------------- 1994 1993 1992 -------------- ------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss.......................................................... $ (4,663,000) $ (7,032,000) $ (19,743,000) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization................................... 8,161,000 9,232,00 10,196,000 Deferred interest............................................... 3,610,000 3,287,000 -- (Gain) loss on sales of hotel assets............................ (456,000) (21,000) 787,000 Provision for investment losses................................. 759,000 2,369,000 3,419,000 Changes in assets and liabilities: Accounts receivable, inventories and prepaid expenses........... (86,000) 2,118,000 14,000 Accounts payable and other liabilities.......................... 1,568,000 (4,421,000) 10,017,000 -------------- ------------- -------------- Net cash provided by (used in) operating activities........... 8,893,000 5,532,000 4,690,000 -------------- ------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to hotel assets......................................... (2,941,000) (6,577,000) (2,990,000) Net proceeds from sales of assets................................. 12,536,000 6,130,000 488,000 Increase in notes receivable...................................... (6,270,000) (1,985,000) -- Principal received on notes receivable............................ 2,451,000 409,000 1,006,000 Reorganization costs.............................................. (1,287,000) -- -- Other intangible assets........................................... -- (47,000) (18,000) Acquisition of minority interest/hotels........................... -- (1,575,000) -- -------------- ------------- -------------- Net cash provided by (used in) investing activities........... 4,489,000 (3,645,000) (1,514,000) -------------- ------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on mortgage and other notes payable............ (1,498,000) (1,666,000) (1,146,000) Borrowings under mortgage and other notes......................... 6,000,000 632,000 -- Principal payments on secured notes payable and revolving line of credit........................................................... (18,516,000) (5,695,000) -- Payments to minority shareholders................................. -- (28,000) (111,000) Principal received on share purchase notes........................ 45,000 5,000 2,000 -------------- ------------- -------------- Net cash provided by (used in) financing activities........... (13,969,000) (6,752,000) (1,255,000) -------------- ------------- -------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. (587,000) (4,865,000) 1,921,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................... 5,652,000 10,517,000 8,596,000 -------------- ------------- -------------- CASH AND CASH EQUIVALENTS AT END OF YEAR.......................... $ 5,065,000 $ 5,652,000 $ 10,517,000 -------------- ------------- -------------- -------------- ------------- --------------
See accompanying notes to financial statements. F-43 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
TRUST SHARES OF CORPORATION ADDITIONAL SHARE TOTAL BENEFICIAL COMMON PAID-IN PURCHASE ACCUMULATED SHAREHOLDERS' INTEREST STOCK CAPITAL NOTES DEFICIT EQUITY ---------- ----------- ----------- --------- ------------ ------------- Balance January 1, 1992................... $12,133,000 $1,213,000 $210,673,000 $(485,000) $(183,451,000) $40,083,000 Principal payments and reductions of share purchase notes................... -- -- -- 11,000 -- 11,000 Net loss................................ -- -- -- -- (19,743,000) (19,743,000) ---------- ----------- ----------- --------- ------------ ------------- Balance December 31, 1992................. 12,133,000 1,213,000 210,673,000 (474,000) (203,194,000) 20,351,000 Principal payments and reductions of share purchase notes................... -- -- (176,000) 183,000 -- 7,000 Net loss................................ -- -- -- -- (7,032,000) (7,032,000) ---------- ----------- ----------- --------- ------------ ------------- Balance December 31, 1993................. 12,133,000 1,213,000 210,497,000 (291,000) (210,226,000) 13,326,000 Principal payments and reductions of share purchase notes................... -- -- (246,000) 291,000 -- 45,000 Net loss................................ -- -- -- -- (4,663,000) (4,663,000) ---------- ----------- ----------- --------- ------------ ------------- Balance December 31, 1994................. $12,133,000 $1,213,000 $210,251,000 $ -- $(214,889,000) $ 8,708,000 ---------- ----------- ----------- --------- ------------ ------------- ---------- ----------- ----------- --------- ------------ -------------
See accompanying notes to financial statements. F-44 STARWOOD LODGING TRUST BALANCE SHEETS ASSETS
DECEMBER 31, DECEMBER 31, 1994 1993 --------------- --------------- Hotel assets held for sale--net............................................. $ 8,281,000 $ 15,699,000 Hotel assets--net........................................................... 108,428,000 114,219,000 --------------- --------------- 116,709,000 129,918,000 Mortgage notes receivable--net.............................................. 14,049,000 11,642,000 Investment in joint venture hotel properties................................ 240,000 276,000 --------------- --------------- Total real estate investments........................................... 130,998,000 141,836,000 Cash and cash equivalents................................................... 255,000 918,000 Accounts receivable......................................................... 698,000 1,011,000 Notes receivable--Corporation............................................... 26,916,000 87,486,000 Notes receivable--net....................................................... 1,004,000 1,025,000 Prepaid expenses and other assets........................................... 2,374,000 569,000 --------------- --------------- $ 162,245,000 $ 232,845,000 --------------- --------------- --------------- --------------- LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Secured notes payable and revolving line of credit.......................... $ 113,896,000 $ 128,802,000 Mortgage and other notes payable............................................ 32,838,000 27,724,000 Accounts payable and other liabilities...................................... 5,061,000 4,114,000 --------------- --------------- 151,795,000 160,640,000 --------------- --------------- Commitments and contingencies SHAREHOLDERS' EQUITY Trust shares of beneficial interest, $1.00 par value; authorized 30,000,000 shares; outstanding 12,132,948 shares...................................... 12,133,000 12,133,000 Additional paid-in capital.................................................. 146,059,000 204,640,000 Share purchase notes........................................................ (291,000) Accumulated deficit......................................................... (147,742,000) (144,277,000) --------------- --------------- 10,450,000 72,205,000 --------------- --------------- $ 162,245,000 $ 232,845,000 --------------- --------------- --------------- ---------------
See accompanying notes to financial statements. F-45 STARWOOD LODGING TRUST STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------------------------- 1994 1993 1992 ------------- ------------- ------------- REVENUE Rents from Corporation.............................................. $ 16,906,000 $ 16,481,000 $ 21,177,000 Interest from Corporation........................................... 1,730,000 1,534,000 4,123,000 Interest from mortgage and other notes.............................. 1,512,000 1,288,000 1,101,000 Rents from other leased hotel properties and income from joint ventures........................................................... 927,000 839,000 947,000 Other income........................................................ 164,000 253,000 227,000 Gain (loss) on sales of hotel assets................................ 432,000 (53,000) (791,000) ------------- ------------- ------------- 21,671,000 20,342,000 26,784,000 ------------- ------------- ------------- EXPENSES Interest............................................................ 16,265,000 14,020,000 12,959,000 Depreciation and amortization....................................... 5,205,000 5,630,000 6,794,000 Administrative and operating........................................ 1,583,000 1,948,000 2,350,000 Shareholder litigation.............................................. 1,324,000 264,000 188,000 Loan restructuring costs............................................ -- -- 10,892,000 Provision for losses................................................ 759,000 2,369,000 3,419,000 ------------- ------------- ------------- 25,136,000 24,231,000 36,602,000 ------------- ------------- ------------- NET LOSS............................................................ $ (3,465,000) $ (3,889,000) $ (9,818,000) ------------- ------------- ------------- ------------- ------------- ------------- NET LOSS PER SHARE.................................................. $ (0.28) $ (0.32) $ (0.81)
See accompanying notes to financial statements. F-46 STARWOOD LODGING TRUST STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, -------------------------------------------- 1994 1993 1992 -------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss............................................................ $ (3,465,000) $ (3,889,000) $ (9,818,000) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization..................................... 5,205,000 5,630,000 6,794,000 Deferred interest................................................. 3,610,000 2,243,000 -- (Gain)/loss on sales of hotel assets.............................. (432,000) 53,000 791,000 Provision for losses.............................................. 759,000 2,369,000 3,419,000 Changes in operating assets and liabilities: Rent and interest receivable--Corporation......................... (1,730,000) (1,519,000) (8,238,000) Accounts receivable and prepaid expenses.......................... (54,000) 1,037,000 115,000 Accounts payable and other liabilities............................ 562,000 (2,788,000) 9,710,000 -------------- ------------- ------------- Net cash provided by (used in) operating activities............. 4,455,000 3,136,000 2,773,000 -------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to hotel assets........................................... (2,270,000) (1,372,000) (1,700,000) Net proceeds from sales of assets................................... 11,719,000 5,360,000 189,000 Increase in mortgage notes receivable............................... (6,270,000) (1,985,000) -- Principal received on mortgage and other notes receivable........... 2,382,000 353,000 957,000 Reorganization costs................................................ (1,287,000) -- -- Other intangible assets............................................. -- -- (18,000) Net changes in notes receivable--Corporation........................ 3,965,000 1,693,000 411,000 Acquisition of minority interest.................................... -- (1,575,000) -- -------------- ------------- ------------- Net cash provided by (used in) investing activities............. 8,239,000 2,474,000 (161,000) CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on mortgage and other notes payable.............. (886,000) (1,594,000) (754,000) Principal payments on secured notes payable and revolving line of credit............................................................. (18,516,000) (5,695,000) -- Borrowings under mortgage and other notes payable................... 6,000,000 -- -- Payments to minority shareholders................................... -- (18,000) (97,000) Principal received on share purchase notes.......................... 45,000 -- 1,000 -------------- ------------- ------------- Net cash provided by (used in) financing activities............. (13,357,000) (7,307,000) (850,000) -------------- ------------- ------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... (663,000) (1,697,000) 1,762,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR...................... 918,000 2,615,000 853,000 -------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF YEAR............................ $ 255,000 $ 918,000 $ 2,615,000 -------------- ------------- ------------- -------------- ------------- -------------
See accompanying notes to financial statements. F-47 STARWOOD LODGING TRUST STATEMENTS OF SHAREHOLDERS' EQUITY
SHARES OF ADDITIONAL SHARE TOTAL BENEFICIAL PAID-IN PURCHASE ACCUMULATED SHAREHOLDERS' INTEREST CAPITAL NOTES DEFICIT EQUITY ------------- -------------- ----------- --------------- -------------- Balance January 1, 1992................... $ 12,133,000 $ 204,816,000 (191,000) $ (130,570,000) $ 86,188,000 Principal payments and reductions of share purchase notes................... -- -- 1,000 -- 1,000 Net loss................................ -- -- -- (9,818,000) (9,818,000) ------------- -------------- ----------- --------------- -------------- Balance December 31, 1992................. 12,133,000 204,816,000 (190,000) (140,388,000) 76,371,000 Principal payments, reductions and transfer of share purchase notes from the Corporation--net................... -- (176,000) (101,000) -- (277,000) Net loss................................ -- -- -- (3,889,000) (3,889,000) ------------- -------------- ----------- --------------- -------------- Balance December 31, 1993................. 12,133,000 204,640,000 (291,000) (144,277,000) 72,205,000 Forgiveness of intercompany debt........ -- (58,335,000) -- (58,335,000) Principal payments and reductions of share purchase notes................... -- (246,000) 291,000 -- 45,000 Net loss................................ -- -- -- (3,465,000) (3,465,000) ------------- -------------- ----------- --------------- -------------- Balance December 31, 1994................. $ 12,133,000 $ 146,059,000 $ -- $ (147,742,000) $ 10,450,000 ------------- -------------- ----------- --------------- -------------- ------------- -------------- ----------- --------------- --------------
See accompanying notes to financial statements. F-48 STARWOOD LODGING CORPORATION BALANCE SHEETS ASSETS
DECEMBER 31, DECEMBER 31, 1994 1993 -------------- -------------- Hotel assets held for sale--net............................................... $ 304,000 $ 932,000 Hotel assets--net............................................................. 34,172,000 36,399,000 -------------- -------------- 34,476,000 37,331,000 Investment in joint venture hotel properties.................................. 22,000 5,000 -------------- -------------- Total real estate investments............................................... 34,498,000 37,336,000 Cash and cash equivalents..................................................... 4,810,000 4,734,000 Accounts receivable........................................................... 3,342,000 3,349,000 Notes receivable.............................................................. 623,000 692,000 Inventories, prepaid expenses and other assets................................ 5,353,000 3,882,000 -------------- -------------- $ 48,626,000 $ 49,993,000 -------------- -------------- -------------- -------------- LIABILITIES AND SHAREHOLDERS' DEFICIT LIABILITIES Mortgage and other notes payable.............................................. $ 13,748,000 $ 14,360,000 Notes payable--Trust.......................................................... 26,916,000 87,486,000 Accounts payable and other liabilities........................................ 9,704,000 7,026,000 -------------- -------------- 50,368,000 108,872,000 -------------- -------------- Commitments and contingencies SHAREHOLDERS' DEFICIT Corporation common stock, $0.10 par value; authorized 30,000,000 shares; outstanding 12,132,948 shares.............................................. 1,213,000 1,213,000 Additional paid-in capital.................................................. 64,192,000 5,857,000 Accumulated deficit......................................................... (67,147,000) (65,949,000) -------------- -------------- (1,742,000) (58,879,000) -------------- -------------- $ 48,626,000 $ 49,993,000 -------------- -------------- -------------- --------------
See accompanying notes to financial statements. F-49 STARWOOD LODGING CORPORATION STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ---------------------------------------------- 1994 1993 1992 -------------- -------------- -------------- REVENUE Hotel........................................................... $ 82,668,000 $ 86,903,000 $ 88,812,000 Gaming.......................................................... 27,981,000 27,505,000 26,150,000 Interest from notes receivable.................................. 42,000 124,000 247,000 Management fees and other income................................ 247,000 222,000 959,000 Gain (loss) on sales of hotel assets............................ 24,000 74,000 4,000 -------------- -------------- -------------- 110,962,000 114,828,000 116,172,000 -------------- -------------- -------------- EXPENSES Hotel operations................................................ 60,829,000 68,132,000 68,620,000 Gaming operations............................................... 24,454,000 24,055,000 23,699,000 Rent--Trust..................................................... 16,906,000 16,481,000 21,177,000 Interest--Trust................................................. 1,730,000 1,534,000 4,123,000 Interest--other................................................. 1,341,000 1,167,000 1,249,000 Depreciation and amortization................................... 2,956,000 3,602,000 3,402,000 Administrative and operating.................................... 2,620,000 2,781,000 3,827,000 Shareholder litigation.......................................... 1,324,000 219,000 -- -------------- -------------- -------------- 112,160,000 117,971,000 126,097,000 -------------- -------------- -------------- NET LOSS........................................................ $ (1,198,000) $ (3,143,000) $ (9,925,000) -------------- -------------- -------------- -------------- -------------- -------------- NET LOSS PER SHARE.............................................. $ (0.10) $ (0.26) $ (0.82)
See accompanying notes to financial statements. F-50 STARWOOD LODGING CORPORATION STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------------------- 1994 1993 1992 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss............................................................. $ (1,198,000) $ (3,143,000) $ (9,925,000) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization........................................ 2,956,000 3,602,000 3,402,000 Deferred interest.................................................... -- 1,044,000 -- Gain on sales of hotel assets........................................ (24,000) (74,000) (4,000) Changes in operating assets and liabilities: Accounts receivable, inventories and prepaid expenses................ (32,000) 1,081,000 (101,000) Rent and interest payable--Trust..................................... 1,730,000 1,519,000 8,238,000 Accounts payable and other liabilities............................... 1,006,000 (1,633,000) 307,000 ------------- ------------- ------------- Net cash provided by (used in) operating activities.............. 4,438,000 2,396,000 1,917,000 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to hotel assets............................................ (671,000) (5,205,000) (1,290,000) Net proceeds from sales of hotel assets.............................. 817,000 770,000 299,000 Increase in other assets............................................. -- (47,000) -- Principal received on notes receivable............................... 69,000 56,000 49,000 ------------- ------------- ------------- Net cash provided by (used in) investing activities.............. 215,000 (4,426,000) (942,000) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in notes payable--Trust................................... (3,965,000) (1,693,000) (411,000) Principal payments on mortgage and other notes payable............... (612,000) (72,000) (392,000) Borrowings under mortgage and other notes............................ -- 632,000 -- Payments to minority shareholders.................................... -- (10,000) (14,000) Principal received on share purchase note............................ -- 5,000 1,000 ------------- ------------- ------------- Net cash provided by (used in) financing activities.............. (4,577,000) (1,138,000) (816,000) ------------- ------------- ------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................... 76,000 (3,168,000) 159,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....................... 4,734,000 7,902,000 7,743,000 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF YEAR............................. $ 4,810,000 $ 4,734,000 $ 7,902,000 ------------- ------------- ------------- ------------- ------------- -------------
See accompanying notes to financial statements. F-51 STARWOOD LODGING CORPORATION STATEMENTS OF SHAREHOLDERS' DEFICIT
ADDITIONAL SHARE TOTAL PAID-IN PURCHASE ACCUMULATED SHAREHOLDERS' COMMON STOCK CAPITAL NOTES DEFICIT DEFICIT ------------ ------------- ---------- -------------- -------------- Balance January 1, 1992.......................... $ 1,213,000 $ 5,857,000 $ (17,000) $ (52,881,000) $ (45,828,000) Principal payments and reductions of share purchase notes................................ -- -- 1,000 -- 1,000 Net loss....................................... -- -- -- (9,925,000) (9,925,000) ------------ ------------- ---------- -------------- -------------- Balance December 31, 1992........................ 1,213,000 5,857,000 (16,000) (62,806,000) (55,752,000) Principal payments, reductions and transfer of share purchase notes to the Trust............. -- -- 16,000 -- 16,000 Net loss....................................... -- -- -- (3,143,000) (3,143,000) ------------ ------------- ---------- -------------- -------------- Balance December 31, 1993........................ 1,213,000 5,857,000 -- (65,949,000) (58,879,000) Forgiveness of intercompany debt............... -- 58,335,000 -- -- 58,335,000 Net loss....................................... -- -- -- (1,198,000) (1,198,000) ------------ ------------- ---------- -------------- -------------- Balance December 31, 1994........................ $ 1,213,000 $ 64,192,000 $ -- $ (67,147,000) $ (1,742,000) ------------ ------------- ---------- -------------- -------------- ------------ ------------- ---------- -------------- --------------
See accompanying notes to financial statements. F-52 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. GENERAL The accompanying financial statements include the accounts of Starwood Lodging Trust (the "Trust"), formerly Hotel Investors Trust, and Starwood Lodging Corporation and its subsidiaries (the "Corporation"), formerly Hotel Investors Corporation. The Trust was formed as a real estate investment trust ("REIT") under the Internal Revenue Code in 1969. In 1980, the Trust formed the Corporation and made a distribution to the Trust's shareholders of one share of common stock of the Corporation for each share of beneficial interest of the Trust. The shares of the Trust and the shares of the Corporation are paired on a one-for-one basis, and can only be transferred in units ("Paired Shares") consisting of the same number of shares of the Trust and of the Corporation. The combined financial statements include the accounts of the Trust and the Corporation (the "Companies"). All material intercompany balances and transactions have been eliminated in the combined and separate consolidated financial statements. The intercompany balances and transactions which have been eliminated in arriving at the combined balance sheets and combined statements of operations include the elimination of notes receivable from the Corporation recorded on the Trust's balance sheets, and the related notes payable to the Trust recorded on the Corporation's balance sheets. Rent and interest income recorded on the Trust's statements of operations are eliminated against the related rent and interest expense on the Corporation's statements of operations. The Companies own and operate hotels located throughout the United States and two hotel/casinos in Las Vegas, Nevada. The hotels range in size from 90 to 445 rooms and offer services to both business and transient travelers. HOTEL ASSETS Hotel assets are stated at the lower of cost or the amounts described below and are depreciated using straight-line and declining-balance methods over estimated useful lives of five to forty years for buildings and improvements and three to twelve years for furniture, fixtures and equipment. Amounts allocated to leasehold interests are amortized using the straight-line method over lease terms of ten to forty years. The Trust and the Corporation estimate the fair values of each of their hotel assets on a quarterly basis. For hotel assets not held for sale, the expected undiscounted future cash flows of the assets (generally over a five-year period), on a hotel-by-hotel basis, are compared to the net book values of the assets. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value is charged to current earnings. When it is the opinion of management that the fair value of a hotel which has been identified for sale is less than the net book value of the hotel, a reserve for losses is established. Fair value is determined based upon discounted cash flows of the properties at rates (11.0% to 14.5%) deemed reasonable for the type of property and prevailing market conditions, appraisals and, if appropriate, current estimated net sales proceeds from pending offers. A gain or loss is recorded to the extent the amounts ultimately received differ from the adjusted book values of the hotel assets. Gains on sales of hotel assets are recognized at the time the hotel assets are sold provided there is reasonable assurance of the collectability of the sales price and any future activities to be performed by the Companies relating to the hotel assets sold are insignificant. Losses on sales of hotel assets are recognized at the time the hotel assets are sold. F-53 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (CONTINUED) A summary of hotel assets at December 31, 1994 and 1993 is as follows (in thousands):
TRUST CORPORATION ---------------------- ---------------------- 1994 1993 1994 1993 ---------- ---------- ---------- ---------- Land and leasehold interests in land.................... $ 41,184 $ 47,204 $ 13,796 $ 15,378 Buildings and improvements.............................. 122,300 148,460 22,315 22,545 Furniture, fixtures and equipment....................... 25,124 28,506 15,630 16,867 Accumulated depreciation and amortization............... (48,699) (51,487) (16,877) (14,828) Reserve for losses...................................... (23,200) (42,765) (388) (2,631) ---------- ---------- ---------- ---------- Hotel assets--net................................... $ 116,709 $ 129,918 $ 34,476 $ 37,331 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
MORTGAGE NOTES RECEIVABLE If a loan becomes delinquent or upon the occurrence of other events it becomes known that the collectability of a specific loan is uncertain, interest income is no longer accrued and an allowance for loss is established based upon an analysis of the net realizable value of the underlying property collateralizing the loan. PROVISION FOR LOSSES Provision for losses for the years ended December 31, 1994, 1993 and 1992 are as follows:
TRUST 1994 1993 1992 - ---------------------------------------------------------------- ---------- ------------ ------------ Hotel assets.................................................... $ 439,000 $ 2,369,000 $ 3,196,000 Mortgage notes receivable....................................... 320,000 -- 223,000 ---------- ------------ ------------ $ 759,000 $ 2,369,000 $ 3,419,000 ---------- ------------ ------------ ---------- ------------ ------------
STATEMENTS OF CASH FLOWS Cash and cash equivalents are defined as cash on hand and in banks plus all short-term investments with a maturity, at the date of purchase, of three months or less. Interest paid in cash by the Trust in the years ended December 31, 1994, 1993, and 1992 was $12,736,000, $13,205,000 and $12,992,000, respectively. Interest paid in cash by the Corporation in the years ended December 31, 1994, 1993, and 1992 was $1,342,000, $140,000 and $1,536,000, respectively. The Corporation deferred interest of $1,730,000, $1,519,000 and $1,667,000 on its intercompany debt with the Trust in the years ended December 31, 1994, 1993, and 1992 respectively. In December 1993, the Corporation transferred $278,000 of share purchase loans to the Trust and reduced notes payable--Trust. During 1993, $4,032,000 of accrued loan restructuring costs (included in accounts payable and other liabilities at December 31, 1992) was added to the loan balance of the secured notes payable and revolving line of credit. During 1994, outstanding share purchase notes of $246,000 were canceled and charged to additional paid-in capital. Paired Shares which secured the portion of the principal canceled on the original notes were returned to the Companies. F-54 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (CONTINUED) In December 1994, the Trust forgave $58,335,000 of notes payable to the Trust by the Corporation and its subsidiaries. Because of the common ownership of the Trust and the Corporation, the Trust charged the amount of debt forgiven and the Corporation credited such amount to additional paid-in capital of the Trust and Corporation, respectively. INVENTORIES Inventories are stated at the lower of cost or market with cost determined on a first-in, first-out basis. ORGANIZATION COSTS Organization costs related to the formation of each of the Partnerships in the amount of $1,672,000 for the Trust and $1,672,000 for the Corporation are included in inventories, prepaid expenses and other assets and will be amortized over a five-year period beginning in January 1995. (See Note 12.) GAMING REVENUE Gaming revenue relates to the two hotel/casinos and includes the net win from gaming activities, as well as room, food, beverage and other revenues, net of promotional allowances. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of estimated fair value was determined by available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash and cash equivalents, accounts receivable and accounts payable and other liabilities are carried at amounts which reasonably approximate their fair value. Fixed rate mortgage notes receivable of $14,049,000 for the Trust at December 31, 1994 have a fair value of $13,488,000 as estimated based upon debt with similar terms and maturities. The carrying value of fixed rate mortgage notes receivable at December 31, 1993 approximated their fair value as their interest rates approximated rates available for similar transactions at that date. The carrying value of the secured notes payable and revolving line of credit approximate fair value as the related interest rates are variable. Fixed rate notes payable with carrying values of $32,838,000 and $13,748,000 for the Trust and Corporation, respectively, at December 31, 1994 have a fair value of $34,442,000 and $11,648,000 as estimated based on debt with similar terms and maturities. Fixed rate notes payable with carrying values of $27,724,000 and $14,360,000 for the Trust and Corporation, respectively, at December 31, 1993 had a fair value of $28,507,000 and $13,110,000 as estimated based on debt with similar terms and maturities. INCOME TAXES The Trust and the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", effective January 1, 1993. This Statement supersedes Accounting Principles Board Opinion No. 11 which the Trust and the Corporation had previously applied. The adoption of SFAS No. 109 did not have a material effect on the financial statements of the Trust or the Corporation. The Trust was taxed as a REIT beginning in 1969 through and including its taxable year ended December 31, 1990. During 1994, the Trust discovered that it may not have qualified as a REIT in 1991 through 1994 due to its failure to comply with certain procedural requirements of the Internal Revenue Code. The Trust requested and received a letter from the Internal Revenue Service providing that the Trust's F-55 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (CONTINUED) election to be taxed as a REIT terminated beginning with the Trust's taxable year ended December 31, 1991 and permitting the Trust to re-elect to be taxed as a REIT commencing with its taxable year ending December 31, 1995. The Trust intends to elect to be taxed as a REIT, commencing with its taxable year ending December 31, 1995. Because the Trust had net losses for income tax purposes in 1991 through 1994, the Trust does not owe any federal income tax for such years. Components of deferred income taxes as of December 31, 1994 and 1993 are as follows:
1994 1993 ----------------------------- ------------------------------ TRUST CORPORATION TRUST CORPORATION -------------- ------------- -------------- -------------- Deferred income tax assets: Operating loss carryforwards............ $ 28,910,000 $ -- $ 10,018,000 $ 19,740,000 Losses from investments in partnerships........................... -- 2,133,000 -- 1,659,000 Property and equipment.................. 3,041,000 -- 6,586,000 1,224,000 Other................................... 476,000 492,000 -- 162,000 -------------- ------------- -------------- -------------- Total deferred income tax assets........ 32,427,000 2,625,000 16,604,000 22,785,000 -------------- ------------- -------------- -------------- Total deferred income taxes............. 32,427,000 2,625,000 16,604,000 22,785,000 -------------- ------------- -------------- -------------- Valuation allowance..................... (32,427,000) (2,625,000) (16,604,000) (22,785,000) -------------- ------------- -------------- -------------- Net deferred income tax................. $ -- $ -- $ -- $ -- -------------- ------------- -------------- -------------- -------------- ------------- -------------- --------------
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and income tax purposes and operating loss and tax credit carryforwards. A valuation allowance is recorded if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized. As of December 31, 1994, the Trust had net operating loss carryforwards for federal income tax purposes of approximately $82,600,000 which expire in various years beginning in 2006 through 2009. LOAN RESTRUCTURING COSTS Management of the Trust concluded that the debt restructuring discussed in Note 2 represented a "troubled debt restructuring" as defined under generally accepted accounting principles, and accordingly, all restructuring costs have been expensed as incurred. The Trust expensed loan restructuring costs of $10,892,000 in the year ended December 31, 1992. In 1993, upon execution of the definitive debt restructuring agreement, $700,000 was paid by the Trust to the certain institutional lenders and $4,032,000 was added to the loan balance under the terms of a credit agreement for restructuring costs due the institutional lenders for legal and other experts. Previously accrued restructuring costs of $778,000 and $3,152,000 were paid during the years ended December 31, 1994 and 1993, respectively. At December 31, 1994, $1,895,000 of accrued loan structuring costs are included in accounts payable and other liabilities. NET LOSS PER SHARE Net loss per share is based on the weighted average number of common and common equivalent shares outstanding during the year which is on a Paired Share basis for purposes of the combined financial statements. Outstanding options and warrants are included as common equivalent shares using the treasury stock method when the effect is dilutive. The weighted average number of shares and Paired Shares used in determining net loss per share and per Paired Share was 12,132,948 for the years ended December 31, 1994, 1993 and 1992. F-56 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (CONTINUED) RECLASSIFICATIONS Certain reclassifications have been made to the 1993 and 1992 financial statements to conform with the 1994 financial statement presentation. 2. SENIOR NOTES PAYABLE AND REVOLVING LINE OF CREDIT AND DEBT RESTRUCTURING. As of March 31, 1991, the Trust was in default under the Trust's line of credit and the senior note agreements due to the Trust's failure to comply with certain financial covenants and to collect certain rents from the Corporation. As a result of such defaults, upon the April 30, 1991 expiration of the revolving line of credit provided by the Trust's line of credit, the five-year secured term loan originally contemplated by the Trust's line of credit was not made available to the Trust, and the entire amount of borrowings then outstanding under the Trust's line of credit was deemed due and payable. DEBT RESTRUCTURING--Effective January 28, 1993, the Trust executed a definitive credit agreement (as subsequently amended, the "Credit Agreement") that restructured the Trust's then outstanding borrowings from two banks (the "Banks") and three insurance companies (together with the Banks, the "Institutional Lenders") as a $12,500,000 revolving line of credit with one of the Banks (the "Revolving Line of Credit") and a $115,723,000 term loan (the "Term Loan", and together with the Revolving Line of Credit, the "Senior Debt"). The terms of the Credit Agreement required that the debt restructuring take place in three phases, the first two of which were completed in 1993. At the first closing (the "First Closing"), effective January 28, 1993, the Institutional Lenders were granted or assigned for security direct and indirect liens on and security interests in substantially all of the assets of the Trust and the Corporation (other than the assets held by United States Equity & Mortgage Trust, the Trust's 95%-owned subsidiary ("U.S. Equity")). At the First Closing, the Trust and the Corporation also entered into a warrant agreement (as amended, the "Warrant Agreement") that originally provided that the Trust and the Corporation (or, if the merger of the Trust and the Corporation described below (the "Merger") occurs, the surviving company) would issue to the Institutional Lenders at the Third Closing (as defined below) 10-year warrants (the "Warrants") to purchase that number of shares equal to 9.9% (or if the Merger has occurred; 15%) of the Paired Shares then outstanding at an exercise price of $.625 per share. The second closing under the Credit Agreement (the "Second Closing") was held on March 29, 1993 at which time the Trust acquired all of the assets of U.S. Equity for $1,575,000 eliminating the minority interest of $676,000 and increasing hotel assets by $899,000. At the Second Closing, the Institutional Lenders were granted liens on and security interests in the five hotels and substantially all of the other assets formerly owned by U.S. Equity and acquired by the Trust. At an interim closing held on February 28, 1994 (the "Interim Closing"), the Credit Agreement was amended to, among other things, collaterally assign to the Institutional Lenders security interests in and liens on substantially all of the intercompany leases and the monies received by the Corporation in connection with the operation of those hotels, and the Warrant Agreement was amended to provide for the immediate issuance to the Institutional Lenders of Warrants for an aggregate of 1,333,143 Paired Shares at the exercise price originally provided for in the Warrant Agreement. On August 31, 1994, one-third of the Warrants were canceled as a result of the Trust's cumulative principal payments in excess of $13,000,000. Interest on the principal amounts outstanding under the Credit Agreement notes was originally at a stated rate of prime plus 2%. However, because the Merger had not occurred on or prior to the 300th day after the First Closing, the stated interest rate was increased to prime plus 3% from November 24, 1993 until the Merger takes place. The Trust has the option to pay interest at a lesser rate, if applicable, of 8.0% per F-57 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SENIOR NOTES PAYABLE AND REVOLVING LINE OF CREDIT AND DEBT RESTRUCTURING. (CONTINUED) annum from September 1, 1994 through August 31, 1997, and 9.0% per annum from September 1, 1997 through April 30, 1998, with the difference between the interest accrued and the interest paid being added monthly to the principal amount of the Restructured Debt. The related weighted average interest rate on borrowings outstanding as of December 31, 1994 and 1993 was 11.5% and 9%, respectively. The Credit Agreement requires the Companies to maintain a specified minimum adjusted net worth and a specified minimum ratio of cash to cash interest plus capital expenditures, as defined. At December 31, 1994 the Trust was in compliance with these covenants. In addition, the Credit Agreement contains covenants that restrict, among other things, the Trust's ability to acquire or dispose of assets, to make investments and to incur additional indebtedness, and that prohibit the payment of distributions to shareholders. In addition to imposing operating restrictions and reporting requirements, the Credit Agreement establishes daily operating cash thresholds, as defined. If these thresholds are exceeded by the Trust and the Corporation, the excess amounts must be applied to reduce the borrowings then outstanding under the Revolving Line of Credit, but amounts so applied are available for future borrowings. Subsequent to the Reorganization (see Note 12), all amounts outstanding under the Credit Agreement were repaid with the proceeds from the New Credit Agreement. 3. HOTEL SALES AND RESERVE FOR LOSSES. During the year ended December 31, 1992, the Trust and the Corporation sold their interests in three hotel assets, the Days Inn Texas Stadium, Irving, Texas, the Best Western Merrimack Inn, Merrimack, New Hampshire and the Days Inn, Spartanburg, South Carolina. The Irving property was sold in March 1992 for $1,950,000, consisting of $172,000 in net cash proceeds and a $1,650,000 promissory note secured by the hotel. The Merrimack property was sold for $1,800,000, consisting of $259,000 in net cash proceeds and a $1,440,000 promissory note secured by the hotel. The Spartanburg property was sold for $875,000, consisting of $57,000 in net cash proceeds and a $775,000 promissory note secured by the hotel. The Irving note bears interest at 9% per annum with accrued interest and principal due monthly based on a 30-year amortization schedule, with all unpaid principal and interest due in March 1997. The Merrimack note, which was canceled in December 1994 (see Note 4), bore interest at 9% per annum with accrued interest and principal due monthly based on a 30-year amortization schedule, with all unpaid principal and interest due in July 1997. The Spartanburg note, which was paid off in May 1994, bore interest at 9% per annum with interest and principal due monthly based on a 30-year amortization schedule, with all unpaid principal and interest due in September 1998. During 1992, the Trust recognized a loss of $791,000 and the Corporation recognized a gain of $4,000 on sales of hotel assets, including a $91,000 discount recorded by the Trust resulting from the early payoff in 1992 of the mortgage note receivable relating to the Brunswick, Georgia property sold in 1991. In 1992, the Trust recorded a provision for investment losses of $3,196,000 which reflected the deterioration of hotel values located in the Southeast, and the acceptance of offers for the sale of hotels at amounts lower than net book value. During the year ended December 31, 1993, the Companies sold their interests in four hotel assets, the Best Western located in Smyrna, Georgia, the Vantage Hotel located in Tucker, Georgia, the Best Western Motor Hotel in Santa Maria, California, and the Ramada Inn-Westport in St. Louis, Missouri. The Smyrna property was sold for an all cash price of $1,600,000. The Tucker property was sold for $2,485,000, consisting of approximately $500,000 in cash and a $1,985,000 promissory note secured by the hotel. The Tucker note bears interest at 9% per annum with accrued interest and principal due monthly based upon a 25-year amortization schedule, with all unpaid principal and interest due in June 1998. The Santa Maria property was sold for an all cash price of $140,000. The St. Louis property was sold for an all cash price of $2,500,000. F-58 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. HOTEL SALES AND RESERVE FOR LOSSES. (CONTINUED) For the year ended December 31, 1993, the Trust recognized a loss of $53,000 and the Corporation recognized a gain of $74,000 on sales of hotel assets. In 1993, the Trust recorded a provision for investment losses of $2,369,000 primarily as a result of the acceptance of offers for the sale of hotels at amounts lower than net book value. During the year ended December 31, 1994, the Companies sold their interests in five hotel assets, the Best Western South located in Austin, Texas, the Sheraton Hotel located in New Port Richey, Florida, the Holiday Inn in Brunswick, Georgia, the Holiday Inn in Jacksonville, Florida and the Ramada Inn in Fayetteville, North Carolina. The Austin property was sold pursuant to eminent domain proceedings for the purpose of highway construction to an agency of the State of Texas for an all cash price of $3,594,000. The New Port Richey and Brunswick properties were sold together for $4,306,000, consisting of approximately $1,236,000 in cash and a $3,070,000 promissory note secured by the hotels. The New Port Richey/Brunswick note bears interest at 8% per annum for the first twelve months and 9.25% thereafter, with accrued interest and principal due monthly based upon a 25-year amortization schedule, with all unpaid principal and interest due in August 2001. The Jacksonville property was sold for $3,200,000, consisting of approximately $900,000 in cash and a $2,300,000 promissory note secured by the hotel. The Jacksonville note bears interest at 9% per annum with accrued interest and principal due monthly based upon a 30-year amortization schedule, with all unpaid principal and interest due in December 2001. The Fayetteville property was sold for $1,000,000, consisting of approximately $200,000 in cash and a $800,000 promissory note secured by the hotel. The Fayetteville note bears interest at 9% per annum with accrued interest and principal due monthly based upon a 12-year amortization schedule, with all unpaid principal and interest due in December 2006. In connection with the Reorganization (see Note 12), the Holiday Inn located in Albany, Georgia was sold to Starwood Capital Group, L.P. for an all cash purchase price of $6,000,000. The transaction was accounted for as a financing and Starwood Capital Group, L.P. subsequently contributed the property to the Partnerships. No gain or loss was recorded on the sale. For the year ended December 31, 1994, the Trust recognized a gain of $224,000 and the Corporation recognized a gain of $24,000 on sales of hotel assets, including a $55,000 discount recorded by the Trust resulting from the early payoff in 1994 of the mortgage note receivable related to the Spartanburg, South Carolina property sold in 1992. In 1994, the Trust recorded a provision for investment losses of $439,000 primarily as a result of the acceptance of offers for the sale of hotels at amounts lower than net book value. 4. MORTGAGE NOTES RECEIVABLE. COLUMBUS BEST WESTERN NORTH In January 1992, in settlement of various disputes between the Trust, the Corporation as the general partner of Columbus Hotel Limited Partnership and its limited partners, and in lieu of foreclosure by the Trust on a $6,127,000 mortgage, ownership of the Columbus Best Western North was transferred to the Trust. The fair value of the hotel assets received by the Trust upon cancellation of its note approximated the net carrying value of the mortgage note receivable at December 31, 1991. BEST WESTERN MERRIMACK INN In 1992, the Trust sold the Best Western Merrimack Inn in Merrimack, New Hampshire to Orient Investment Limited. In connection with such sale, Orient executed and delivered to the Trust a promissory note (the "Orient Note") in an original principal amount of $1,440,000, secured by a first mortgage on the property. The outstanding principal balance of the Orient Note was due August 1997, and bore interest at 9%. During 1994, Orient defaulted on the Orient Note and the Trust accelerated the indebtedness evidenced by the Orient Note. In September 1994, the Trust initiated foreclosure proceedings and recorded a F-59 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. MORTGAGE NOTES RECEIVABLE. (CONTINUED) provision for investment losses of $320,000, resulting in a net book value of $983,000. The property was subsequently sold to a third party in December 1994 for net proceeds of $1,191,000 and the Trust recorded a gain on sale of $208,000. OTHER At December 31, 1991, the Trust held a $223,000 note secured by a second mortgage on a shopping center which was foreclosed upon by the first mortgage holder during the year ended December 31, 1992, resulting in the cancellation of the Trust's second mortgage and the recording of a provision for investment losses. At December 31, 1994, in addition to the MHLP notes discussed in Note 5, the Trust held nine promissory notes secured by mortgages. Eight notes ($13,915,000 in aggregate principal amount at December 31, 1994), representing nine hotels, are secured by first mortgages, and one note ($234,000 in aggregate principal amount at December 31, 1994), is secured by a second mortgage. The notes have fixed interest rates ranging from 8% to 11% per annum, and two of the notes (representing three properties) provide for contingent interest based on a percentage of gross revenues of the properties securing such notes. The maturity dates of the notes range from 1996 to 2017. Aggregate principal payments under the mortgage notes receivable due within one year of December 31, 1994 are $256,000. As of December 31, 1994 and 1993, the reserve for investment losses for the mortgage notes receivable amounted to $100,000 and $140,000, respectively. 5. MILWAUKEE MARRIOTT HOTEL. In December 1985, the Trust sold its interest in the Milwaukee Marriott Hotel to Milwaukee Brookfield Limited Partnership ("Brookfield"). In connection with the sale, the Trust received a second mortgage note from Brookfield. In July 1991, ownership and operation of the Milwaukee Marriott was reorganized and ownership of the hotel was transferred from Brookfield to Moorland Hotel Limited Partnership, ("MHLP"), a limited partnership in which the Corporation has a 51% interest and is the sole general partner and Brookfield is the sole limited partner. The operations of MHLP are consolidated into the Corporation's financial statements from the date of reorganization and, accordingly, the Trust has recorded the note receivable from MHLP as a note receivable from the Corporation. The Corporation and MHLP entered into an agreement for the Corporation to manage the property. In addition, MHLP entered into an assignment and forbearance agreement with Marriott Corporation ("Marriott"), the franchisor. This agreement, among other things, required MHLP to renovate the hotel to Marriott standards. The renovation was completed in January 1994. During 1992, MHLP, Aetna Life Insurance Company ("Aetna"), the holder of the first mortgage on the Milwaukee Marriott (the "Aetna Note"), Marriott, the Trust, the Corporation, and Brookfield and various partners of Brookfield reached agreements arranging financing for the renovation of the Milwaukee Marriott and restructuring of debt for MHLP. Effective December 1, 1992, Aetna agreed to defer for the period December 1, 1992 through November 30, 1993, the monthly principal and interest payments on its first mortgage note, which accrues interest at 11.25% per annum, with the deferred interest added to principal monthly. Beginning December 1, 1993, the loan amortizes in equal monthly installments over a period of 17 years at 10% interest per annum until January 1, 1996, at which time all unpaid interest and principal are due, including appreciation interest ("Appreciation Interest"). Appreciation Interest is defined as 50% of the aggregate principal reduction in F-60 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. MILWAUKEE MARRIOTT HOTEL. (CONTINUED) the Aetna mortgage from December 1, 1993 until the loan is due in full as provided in the agreement. The amount of the Aetna Note outstanding totaled $9,899,000 and $10,017,000 at December 31, 1994 and 1993, respectively. Marriott agreed to loan MHLP $750,000 secured by a second deed of trust on the hotel for the purchase of equipment from a Marriott subsidiary. The second mortgage note bore interest at 9% per annum, payable monthly beginning May 31, 1993 through April 30, 1994, at which time fixed monthly payments of principal and interest of approximately $49,000 became due until December 31, 1994, at which time all unpaid interest and principal were due. In 1994, Marriott agreed to extend the note bearing interest at 10% per annum beginning January 1, 1995 at which time fixed monthly payments of principal and interest of approximately $31,000 become due until June 30, 1995, at which time all unpaid interest and principal are due. The Trust agreed to loan MHLP $1,000,000 to be used to complete the renovation of the Milwaukee Marriott. The loan is secured by a third deed of trust on the hotel and bears interest at 10.5% per annum, payable monthly. Under certain circumstances as defined in the agreement, interest is deferred and added to the principal of the note monthly. The third mortgage note outstanding totaled $1,225,000 and $1,102,000 as of December 31, 1994 and 1993, respectively. The Trust may declare due and payable the principal balance and any unpaid accrued interest thereon at any time through the maturity date of the note of January 1, 1996. The second mortgage note held by the Trust of $11,000,000 was modified as of December 31, 1992 by adding deferred and previously unpaid interest of $1,667,000 to principal due under the note and converting the note to a fourth mortgage note. Further, $1,607,000 and $1,417,000 of interest at 10.5% per annum for the years ended December 31, 1994 and 1993, respectively, was deferred monthly and added to principal due under the loan. The fourth mortgage note outstanding totaled $15,691,000 and $14,084,000 as of December 31, 1994 and 1993. Interest is payable monthly unless deferred under the provisions of the loan agreement until January 1, 1996, at which time all remaining unpaid interest and principal are due. The Corporation agreed to defer and convert to a note up to $250,000 of management fees due under its management agreement with MHLP for a period of up to twelve months commencing with base management fees due after January 1, 1993. The deferred fees bear interest at 9% per annum, which were added to the principal balance of the note through December 1, 1993. Thereafter, the note is due in twelve equal monthly installments of principal and interest commencing on January 1, 1994 at 12% interest per annum. All unpaid interest and principal was due and paid December 1, 1994. The $600,000 original loan made by GSI Acquisition Company, L.P., a limited partner of Brookfield, ("GSI"), was modified as of December 31, 1992, by converting deferred and previously unpaid interest of approximately $86,000 to principal. For the years ending December 31, 1994 and 1993 interest at 10.5% per annum was deferred monthly and added to the principal balance, which balance totals $849,000 and $762,000 at December 31, 1994 and 1993, respectively. Thereafter, interest is payable monthly unless deferred under the provisions of the agreement until January 1, 1996, at which time all remaining unpaid interest and principal are due. The Trust evaluates the collectability of the notes receivable secured by the Milwaukee Marriott Hotel at the end of each quarter. Factors considered by the Trust in performing the evaluations included the discounted estimated future cash flow (at 11.0%) over a five-year period. The Corporation evaluates the recoverability of the net book value of the property at the end of each quarter. Factors considered by the Corporation in performing the evaluation included the undiscounted estimated future cash flow of the property over a five-year period. Based upon the evaluations no provision for losses was required. F-61 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. REAL ESTATE INVESTMENTS AND INTERCOMPANY TRANSACTIONS. At December 31, 1994, the Trust owned equity interests in twenty-four hotels, including two hotel/ casinos. Of that number, eighteen properties were owned in fee, five were held pursuant to long-term leases and one was owned through a 5% general partnership interest in a joint venture that owns the Omaha Marriott Hotel. Twenty-one of the Trust's hotels (including the two hotel/casinos) are leased to the Corporation or its subsidiaries. Three hotels have been leased to and are operated by Imperial Hotel Corporation, formerly Vagabond Inns, Inc. The Omaha Marriott Hotel has been leased to an affiliate of the Corporation, and is managed by Marriott pursuant to a long-term management agreement. As of December 31, 1994, five of the hotels leased by the Corporation from the Trust are being managed by third-party operators. The third-party management agreements are generally for three-year terms expiring in 1995, subject to certain cancellation provisions. Base management fees range from 2% to 2 1/2% of gross revenues with incentive management fees based upon hotel profitability. The leases are generally long-term and generally provide for annual base, or minimum rents, plus contingent, or percentage rents based on the gross revenues of the properties and are accounted for as operating leases. The leases are "triple-net" in that the lessee is generally responsible for paying all operating expenses of the properties, including maintenance, insurance and real property taxes. The lessee is also generally responsible for any payments required pursuant to underlying ground leases. Most leases provide for cancellation by the Trust in the event that the Trust does not earn a specified rent, or by the lessee (including the Corporation) in the event the lessee does not earn a specified net operating profit. As of December 31, 1994 and 1993, the Corporation was indebted to the Trust for an aggregate of $26,916,000 and $87,486,000, respectively, (including the MHLP mortgage notes of $16,916,000 and $15,186,000 as of December 31, 1994 and December 31, 1993, respectively see Note 5). The debt to the Trust bore interest at various rates ranging from 6.5% to 12% at December 31, 1992. Effective January 1, 1993, the Trust and Corporation modified the leases between the Trust and the Corporation to, among other things, adjust the rents payable by the Corporation, and restructured the Corporation's existing borrowings from the Trust to include all outstanding borrowings plus accrued but unpaid rent of $448,000 and interest as of December 31, 1992. The borrowings, were non-interest bearing for the years ended December 31, 1994 and 1993. In December 1994, the Trust forgave $58,335,000 of notes receivable payable to the Trust by the Corporation and its subsidiaries. Effective January 1, 1995 the remaining notes, which are due on demand, bear interest at prime plus 2% with interest payable monthly. Rents accrued by the Trust from leased hotel properties are summarized as follows (in thousands):
YEARS ENDED DECEMBER 31, ------------------------------- 1994 1993 1992 --------- --------- --------- Corporation: Minimum.............................................................. $ 14,373 $ 14,184 $ 18,136 Contingent........................................................... 2,533 2,297 3,041 --------- --------- --------- 16,906 16,481 21,177 --------- --------- --------- Other: Minimum.............................................................. 437 437 437 Contingent........................................................... 490 402 510 --------- --------- --------- 927 839 947 --------- --------- --------- Total.............................................................. $ 17,833 $ 17,320 $ 22,124 --------- --------- --------- --------- --------- ---------
F-62 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. REAL ESTATE INVESTMENTS AND INTERCOMPANY TRANSACTIONS. (CONTINUED) Minimum future rents at December 31, 1994 due under non-cancelable operating leases for the years ending December 31 are as follows (in thousands):
1995 1996 1997 1998 1999 THEREAFTER --------- --------- --------- --------- --------- ----------- Corporation.......................... $ 12,982 $ 10,342 10,342 $ 10,342 $ 10,342 $ 27,385 Other................................ 437 437 437 426 178 105 --------- --------- --------- --------- --------- ----------- Total............................ $ 13,419 $ 10,779 $ 10,779 $ 10,768 $ 10,520 $ 27,490 --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- -----------
The Corporation is committed under its leases with the Trust to pay the rents payable with respect to seven ground leases which expire in 1997 through 2029, including renewal options. The leases generally provide for a minimum rent plus a percentage of gross revenues of the properties in excess of the minimum rent. Future minimum lease payments under the leases are approximately $319,000 per year through 1999, and $6,960,000 thereafter. The Trust is the primary obligor under the leases; however, the Corporation as lessee/operator of the hotels makes payments under these leases directly to the lessors. Rent expense incurred by the Corporation as a lessee/operator under these leases was $879,000, $854,000 and $787,000, in the years ended December 31, 1994, 1993 and 1992, respectively. In addition, the Trust is committed under an office lease. Future minimum lease payments under the office lease are $85,000 in 1995. 7. MORTGAGE AND OTHER NOTES PAYABLE. At December 31, 1994, the Trust had outstanding six mortgage notes payable which are secured by seven of the Trust's hotels, with a net book value at December 31, 1994 of $55,027,000. At December 31, 1994 and 1993, the Trust had the following outstanding debt obligations:
DECEMBER 31, DECEMBER 31, 1994 1993 ------------- ------------- Mortgage Notes: 11.75% first mortgage note, due in 2015, callable by lender in 1995, 2000, 2005, or 2010................................................ $ 6,349,000 $ 6,417,000 12.875% first mortgage note, due in 1997............................ 9,173,000 9,478,000 12.625% first mortgage note, due in 1995............................ 4,075,000 4,195,000 9.25% first mortgage note, due in 1995.............................. 1,854,000 2,010,000 10.25% first mortgage note, due in 2001............................. 5,148,000 5,447,000 9.0% first mortgage note, due in 1997............................... 139,000 177,000 ------------- ------------- Total mortgage notes payable...................................... 26,738,000 27,724,000 Advance from Starwood Capital Group, L.P.......................... 6,000,000 -- Other............................................................. 100,000 -- ------------- ------------- Total mortgage and other notes payable.......................... $ 32,838,000 $ 27,724,000 ------------- ------------- ------------- -------------
As described in Note 3, in August 1994 Starwood Capital Group, L.P. acquired the Trust's Albany, Georgia property for $6,000,000. Interest expense ($313,000 in 1994) related to the advance is the greater of the net cash flow of the property or 10% until such time as the property is contributed to the Partnerships (see Note 12). Aggregate principal payments, excluding the advance from Starwood Capital Group, L.P. due for the years ending December 31 are $14,499,000 in 1995, $2,290,000 in 1996, $5,994,000 in 1997, $447,000 in 1998, $493,000 in 1999, and $3,115,000 thereafter. F-63 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. MORTGAGE AND OTHER NOTES PAYABLE. (CONTINUED) At December 31, 1994 and 1993, the Corporation had the following outstanding debt obligations:
DECEMBER 31, DECEMBER 31, 1994 1993 ------------- ------------- Secured by Milwaukee Marriott Hotel: 10.0% first mortgage note, due 1996................................. $ 9,899,000 $ 10,017,000 9.0% second mortgage note, due 1995................................. 358,000 754,000 10.5% fifth mortgage note, interest only, due 1996.................. 849,000 762,000 12.0% sixth mortgage note, interest only (to the extent of available cash flow), due 1996............................................... 2,000,000 2,000,000 9-10% notes payable, due 1995-1996.................................. 164,000 297,000 ------------- ------------- 13,270,000 13,830,000 Other: 9.75% first mortgage note, due 1997................................. 403,000 438,000 Obligations under capital leases.................................... 75,000 92,000 ------------- ------------- Total mortgage and other notes payable............................ $ 13,748,000 $ 14,360,000 ------------- ------------- ------------- -------------
At December 31, 1994, the Milwaukee Marriott Hotel had a net book value of $22,951,000. Minimum lease and principal payments on the Corporation's indebtedness for the years ending December 31 are due as follows:
MINIMUM FUTURE PRINCIPAL PAYMENTS YEAR LEASE PAYMENTS DUE UNDER NOTES - --------------------------------------------------------------- ---------------- ------------------ 1995........................................................... $ 47,000 $ 792,000 1996........................................................... 21,000 12,557,000 1997........................................................... 6,000 324,000 1998........................................................... 9,000 -- ------- ------------------ Total...................................................... 83,000 $ 13,673,000 ------------------ ------------------ Amount representing interest................................... 8,000 ------- Future minimum lease payments.................................. $ 75,000 ------- -------
At December 31, 1994 and 1993 the Corporation had $175,000 and $1,222,000, respectively, in assets (less $117,000, and $828,000, respectively, in accumulated amortization) recorded under capital leases. Such amounts are included in furniture, fixtures and equipment. 8. SHAREHOLDERS' EQUITY. WARRANTS TO PURCHASE PAIRED SHARES At December 31, 1994, there were outstanding 1,659,974 warrants to purchase Paired Shares at an exercise price of $16.95 per Paired Share through September 1996. Additional warrants were issued to the Institutional Lenders under the terms of the Credit Agreement (See Note 2). SHARE OPTION PLANS The Trust and the Corporation each have Incentive and Non-Qualified Share Option Plans which provide for the purchase of up to an aggregate of 700,000 Paired Shares by Trustees, Directors, officers and employees pursuant to option grants. During the year ended December 31, 1994, the Trust and the Corporation granted options to purchase 99,000 Paired Shares at an exercise price of $2.75 per Paired Share. During the year ended December 31, 1993, the Trust and the Corporation granted options to purchase 20,000 Paired Shares at an exercise price of $2.625 per Paired Share. During the year ended December 31, F-64 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. SHAREHOLDERS' EQUITY. (CONTINUED) 1992, the Trust and Corporation granted options to purchase 100,000 Paired Shares at an exercise price of $.75 per Paired Share. Such options, which are granted at fair market value on the date of grant, vest over three years. No options have been exercised as of December 31, 1994. At December 31, 1994, outstanding options granted under all plans of the Trust and Corporation (including options granted to officers and directors of a company previously acquired by the Trust) aggregated 308,500 Paired Shares. At December 31, 1994, options for 203,667 Paired Shares are fully vested with exercise prices ranging from $.75 to $22.68 per Paired Share. SHARE PURCHASE PLANS Prior to December 1989, the Trust and the Corporation each had a Share Purchase Plan, whereby an aggregate of 200,000 Paired Shares were available to be purchased by Trustees, Directors, officers and employees at their fair market value on the date of sale with monies borrowed from the Trust or Corporation. In December 1989, the Trust's Board of Trustees and the Corporation's Board of Directors voted to terminate the Share Purchase Plans for purposes of prospective eligibility, and to irrevocably waive the right of the Trust and the Corporation to accelerate the payment of a note executed by a participating Trustee or Director upon termination of such participant's relationship with the Companies. In January 1991, the Companies entered into agreements with certain Trustees and Directors who had agreements outstanding pursuant to the Share Purchase Plans to which each such Board member agreed to stand for re-election as a Trustee or Director at the next annual shareholders' meeting if requested to do so by their respective Boards, or if the Boards did not so request, to act, for a period of up to two years and at mutually agreed upon times and places, as an advisor to the Trust or the Corporation on matters within such Board member's experience and expertise, and the Trust or the Corporation agreed that any outstanding promissory note executed by such Board member in partial payment for Paired Shares purchased under the Share Purchase Plans would be amended to cause such promissory note to be without recourse to the maker. In March 1992, certain of the aforementioned notes were restructured to bear an annual interest rate of 8% as of February 2, 1992, with such notes to be payable interest only from February 2, 1992 until February 15, 1995, at which time the principal and interest accrued would become payable in equal monthly installments over a ten-year period. The share purchase agreement between a former officer and director and the Corporation was terminated in connection with his December 31, 1992 resignation as an officer of the Corporation, and the 10,000 Paired Shares acquired pursuant to that agreement were assigned by him to the Corporation. The share purchase note in the amount of $112,500, was written off at December 31, 1993. The share purchase notes of other former officers, directors and employees aggregating $63,500 were also written off at December 31, 1993. During 1994, the remaining outstanding share purchase notes of $246,000 were canceled. PREFERRED SHARES The Corporation has 10,000,000 authorized preferred shares, $1.00 par value, none of which are issued or outstanding. 9. COMMITMENTS AND CONTINGENCIES. LITIGATION In late 1991 and early 1992, three complaints were filed against the Trust and the Corporation and certain other related persons (the "Shareholder Actions"). As amended, two of the complaints allege that the Trust and the Corporation, a Director and officer of the Corporation and a former officer/Trustee of the F-65 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. COMMITMENTS AND CONTINGENCIES. (CONTINUED) Trust violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") and Federal and California securities laws and acted fraudulently in connection with the Trust's and the Corporation's public disclosures with respect to the Trust's purchase of its two hotel/casinos and the Ramada Inn in Indian Wells, California. Both of these complaints sought class action certification. The third complaint was filed purportedly on behalf of the Trust and the Corporation and alleged that certain former and present Trustees and Directors breached their fiduciary duties in connection with the purchase of the Ramada Inn in Indian Wells and the two hotel/casinos. On July 20, 1994, the United States District Court for the Southern District of California entered a Final Judgment of Dismissal With Prejudice ("Final Judgment") of the two purported class actions filed in that Court. Pursuant to the Final Judgment, the District Court, among other things, approved the settlement set forth in stipulations of settlement ("Stipulation") entered into among the plaintiffs and defendants in the Shareholder Actions, as well as the insurance company that issued the Companies' directors and officers policy applicable to the period to which Shareholder Actions relate. Under the Final Judgment, all claims that were or might have been made in the Shareholder Actions are deemed released as of the Effective Date (as defined in the Stipulation), and a $3,250,000 cash settlement fund was to be established which, after the deduction of fees and costs to plaintiffs' counsel, will be distributed to qualified members of the certified plaintiff classes according to an allocation formula that includes a calculation based on certain shares that opted out of the settlement. Of the settlement fund, $2,500,000 will be paid by the insurance company, $400,000 will be paid by the Companies, and $350,000 will be paid by former officers of the Companies. Upon completion of the claims administration process, any funds remaining, up to a limit of $325,000, shall be returned to the parties who contributed to the settlement fund on a pro rata basis. The parties contributing to the settlement fund have previously established a separate $45,000 fund to be used for purposes of notifying the classes and otherwise administering the settlement. Legal fees and other costs incurred by the defendants in the Shareholder Actions prior to October 12, 1993 will be paid by the Companies; subsequent defense costs will be paid by the insurance company. Holders of approximately 1,199,000 Paired Shares opted out of the settlement. The Stipulation also requires that the Trust's Board of Trustees and the Corporation's Board of Directors establish a joint transaction committee of independent Trustees and Directors to make recommendations to those Boards with respect to any transaction proposed in the future by management and having a fair market value of $20 million or more. In connection with the settlement of the Shareholder Actions, Messrs. Young and Rothman and certain of their affiliated partnerships have terminated the management agreements that existed between those partnerships and the Corporation's subsidiary, Western Host, Inc. (the "Management Contracts"), and Western Host, Inc. ("Western Host") has agreed to forbear from disputing such action and has withdrawn as a general partner of two additional affiliated partnerships. In satisfaction of any damages that the Companies may incur as a result of the termination of the Management Contracts, Messrs. Rothman and Young have provided to the Companies an irrevocable letter of credit in the amount of $800,000 which has a one-year term. Upon final Court approval of the Shareholder Actions, proceeds from the letter of credit would be paid to the Companies, and the parties to the Management Contracts, former officers of the Companies and the Companies, will release all of their respective claims related to the termination of the Management Contracts. F-66 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. COMMITMENTS AND CONTINGENCIES. (CONTINUED) ROSS SETTLEMENT AGREEMENT Subsequent to the settlement of the Shareholder Actions described above, Leonard M. Ross and his affiliates ("Ross"), who hold 1,190,400 Paired Shares and had opted out of the settlement, had threatened litigation against the Trust and the Corporation. In October 1994, Starwood Capital Group, L.P. ("Starwood Capital") entered into an agreement with Ross to settle the threatened litigation in which Starwood Capital agreed to purchase Ross' paired shares, at Ross' election, in a 60-day period beginning on the earlier of the first anniversary of the closing of the Reorganization or December 15, 1995 at a price of $5.625. Starwood Capital also has the right to elect to purchase such paired shares at the same time and on the same terms. The Trust and Corporation have also agreed that under certain circumstances they may be obligated severally to indemnify Starwood Capital with respect to Starwood Capital's obligations to Ross, up to a maximum of $1.8 million, upon receipt of a full release from Starwood Capital of all of the claims assigned by Ross. The estimated fair value of the put/call provisions of the Ross settlement agreement at the time of the agreement was approximately $2,648,000 and was charged against the earnings of the Trust and Corporation in 1994. ENVIRONMENTAL MATTERS In connection with the Debt Restructuring (see Note 2), the Trust obtained in the latter part of 1991 preliminary or "Phase I" environmental site assessments with respect to the Trust's hotel properties and the Milwaukee Marriott Hotel. The potential for environmental impairment was assessed as moderate to high only at the Embassy Suites Hotel in Phoenix, Arizona. According to the assessment of that property, petroleum hydrocarbons are present in the land beneath this hotel; however, the Trust could not determine without further investigation the extent of the potential contamination or whether this contamination resulted from the underground storage tanks placed on the property by the property's former owner or from similar tanks located on land adjacent to the property, which tanks are known to have suffered leakage. A magnetic survey conducted on the property did not detect the continuing existence of the underground storage tanks on the Companies' property, and the environmental consultant did not recommend that any further action be taken. Phoenix municipal authorities have indicated an awareness of possible ground water contamination in the area, but to date have taken no action. A tank leak test conducted at the Bourbon Street Hotel in early 1992 revealed no evidence of leakage. A release of petroleum from an underground storage tank at the Bay Valley Hotel and Resort was reported to the appropriate state agency in 1992. After the tank and surrounding soils were removed, additional soils and groundwater testing was performed, which revealed environmental contamination in a localized area. The environmental testing has been performed to identify the extent of the contamination released from the tank. The consultant has proposed to remedy the contamination through installation of a groundwater pump and treatment system to capture and treat impacted groundwater and excavation of impacted soil. Amendments to the relevant environmental clean-ups laws, which have recently been introduced in the Michigan Legislature, may reduce the extent or magnitude of the clean-up that may be required at the site. The consultant's recommendations were made upon the basis of existing law, and did not take into account the proposed legislative amendments. After the Trust and the Corporation assess the impact of any amendments that may be enacted to the relevant statutes, the Trust and the Corporation will perform whatever remediation is required by law. Any further remediation costs that are incurred may be reimbursed by a Michigan environmental fund, although there can be no assurance that the fund will have sufficient resources to pay all claims made against it. If the Trust and the Corporation do not receive reimbursement for future remediation costs, the Realty Partnership will bear those costs. F-67 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. COMMITMENTS AND CONTINGENCIES. (CONTINUED) Neither the Trust nor the Corporation has been identified by the U.S. Environmental Protection Agency or any similar state agency as a responsible or potentially responsible party for, nor have the Companies been the subject of any governmental proceeding with respect to, any hazardous waste contamination. If the Companies were to be identified as a responsible party, the Trust and the Corporation in most circumstances would be strictly liable, jointly and severally with other responsible parties, for environmental investigation and clean-up costs incurred by the government and, to a more limited extent by private persons. Managements of the Trust and the Corporation expect that the cost of any required remediation would be the responsibility of the Trust. Based upon environmental reports, the Trust believes that a substantial number of its hotel properties incorporate potentially asbestos-containing materials. Under applicable current Federal, state and local laws, asbestos need not be removed from or encapsulated in a hotel unless and until the hotel is renovated or remodeled. The removal of asbestos from portions of the Milwaukee Marriott Hotel required in connection with the renovation of that property has been completed. Based upon the above-described environmental testing and facts known to management of the Trust and the Corporation, future remediation costs, if any, are not expected to have a material adverse effect on the Trust's and the Corporation's results of operations or financial position and compliance with environmental laws has not had and is not expected to have a material effect on the capital expenditures, earnings or competitive position of the Trust and the Corporation. PERFORMANCE BONDS AND RESTRICTED CASH The Corporation is required to post performance bonds or cash collateral as security for certain obligations. At December 31, 1994 and 1993, the Corporation had posted performance bonds totaling approximately $747,000 and $738,000, respectively, to cover such obligations; however, no amounts had been drawn against such bonds. At December 31, 1994, inventories, prepaid expenses and other assets include $246,000 and $1,606,000 for the Trust and the Corporation, respectively, which were restricted as to use. At December 31, 1993, inventories, prepaid expenses and other assets include $145,000 and $2,006,000 for the Trust and the Corporation, respectively, which were restricted as to use. Other than the performance bonds, the restricted cash of the Corporation primarily is the cash of MHLP (see Note 5). 10. RELATED PARTY TRANSACTIONS. The Corporation, through its subsidiary Western Host, Inc. ("Western Host") managed seven properties owned by partnerships of which Ronald A. Young, former President and Chief Executive Officer and Director of the Corporation, is a general partner (the "Western Host Partnerships"). The Corporation accrued management fees and administrative services fees pursuant to such management agreements of approximately $863,000 during the year ended December 31, 1992. TERMINATION AGREEMENT AND MANAGEMENT SUBCONTRACTS--Effective December 29, 1992, Mr. Young and the Corporation entered into a termination agreement whereby Mr. Young tendered his resignation as President and Chief Executive Officer. Under the terms of the agreement, Mr. Young received payment of accrued vacation pay in the amount of $54,000 and assigned to the Corporation the ownership of the 10,000 Paired Shares which secured the non-recourse promissory note in the amount of $121,000, including interest, which was issued in connection with the 1987 Share Purchase Plan (See Note 8). In addition, Western Host agreed to subcontract its duties under the management contracts for six of the Western Host Partnerships to Westland Hotel Corporation, a hotel management company formed by Mr. Young. In connection with the settlement of the Shareholder Actions (see Note 9), the management contracts were terminated. F-68 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. RELATED PARTY TRANSACTIONS. (CONTINUED) As of December 31, 1993, the Western Host Partnerships and/or Westland owed Western Host and/or the Corporation $100,000 representing amounts advanced for the expenses of the managed Western Host hotels which was paid in 1994. At December 31, 1994, the Trust holds an $800,000 unsecured note receivable from John Rothman, the former President and Chief Executive Officer of the Trust. The principal amount of the note receivable is due in 1999 and bears interest due annually at 10%. The Companies incurred legal fees from law firms in which a Trustee and officer of the Trust was or currently is a partner during the years ended December 31, 1994, 1993 and 1992 totaling $940,000, $235,000, and $955,000, respectively. 11. INDUSTRY SEGMENT INFORMATION. The Corporation operates in two segments of the hospitality industry, hotel and gaming. The hotel segment consists of room, food and beverage and other revenues recognized in connection with the operation of hotels owned by the Corporation or under lease from the Trust, and income from management contracts. The gaming segment consists of net win from casino operations, as well as room, food and F-69 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. INDUSTRY SEGMENT INFORMATION. (CONTINUED) beverage and other revenues recognized in connection with the operation of the two hotel/casinos under lease from the Trust. The following information summarizes revenue and operating results by industry segment:
YEARS ENDED DECEMBER 31, ------------------------------------------- 1994 1993 1992 ------------- ------------- ------------- HOTEL: Revenue: Room.................................................... $ 56,387,000 $ 58,917,000 $ 60,068,000 Food and beverage....................................... 21,603,000 23,337,000 23,975,000 Other................................................... 4,678,000 4,649,000 4,769,000 ------------- ------------- ------------- Hotel revenue........................................... 82,668,000 86,903,000 88,812,000 Management fees......................................... 247,000 90,000 952,000 ------------- ------------- ------------- Total revenue........................................... 82,915,000 86,993,000 89,764,000 ------------- ------------- ------------- Expenses: Rooms................................................... 25,177,000 27,633,000 29,094,000 Food and beverage....................................... 16,364,000 15,116,000 15,256,000 Other (including undistributed operating expenses and fixed charges)......................................... 19,288,000 25,383,000 24,270,000 Rent to Trust........................................... 14,506,000 14,081,000 17,612,000 Depreciation and amortization........................... 2,072,000 3,060,000 3,086,000 Allocated Corporate overhead............................ 1,001,000 950,000 1,600,000 ------------- ------------- ------------- Total expenses.......................................... 78,408,000 86,223,000 90,918,000 ------------- ------------- ------------- Operating income (loss)................................... $ 4,507,000 $ 770,000 $ (1,154,000) ------------- ------------- ------------- ------------- ------------- ------------- GAMING: Revenue: Casino.................................................. $ 15,137,000 $ 14,861,000 $ 14,461,000 Room.................................................... 4,516,000 4,305,000 3,709,000 Food and beverage....................................... 5,166,000 5,226,000 5,396,000 Other................................................... 5,506,000 5,370,000 4,930,000 Less promotional allowances............................. (2,344,000) (2,257,000) (2,346,000) ------------- ------------- ------------- Gaming revenues......................................... 27,981,000 27,505,000 26,150,000 ------------- ------------- ------------- Expenses: Casino.................................................. 6,308,000 6,019,000 5,852,000 Rooms................................................... 2,156,000 2,042,000 1,894,000 Food and beverage....................................... 4,514,000 4,564,000 4,888,000 Other (including undistributed operating expenses and fixed charges)......................................... 11,476,000 11,430,000 11,065,000 ------------- ------------- ------------- Expenses of gaming operations........................... 24,454,000 24,055,000 23,699,000 Rent to Trust........................................... 2,400,000 2,400,000 3,565,000 Depreciation and amortization........................... 382,000 477,000 262,000 ------------- ------------- ------------- Total expenses.......................................... 27,236,000 26,932,000 27,526,000 ------------- ------------- ------------- Operating income (loss)................................... $ 745,000 $ 573,000 $ (1,376,000) ------------- ------------- ------------- ------------- ------------- -------------
F-70 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. INDUSTRY SEGMENT INFORMATION. (CONTINUED) A reconciliation of the combined segment operating income (loss) to the net loss of the Corporation is as follows:
YEARS ENDED DECEMBER 31, ------------------------------------------- 1994 1993 1992 ------------- ------------- ------------- Combined operating income (loss)........................... $ 5,252,000 $ 1,343,000 $ (2,530,000) Interest and other income.................................. 66,000 330,000 258,000 Interest expense........................................... (3,071,000) (2,701,000) (5,372,000) Corporate expenses (3,445,000) (2,115,000) (2,281,000) ------------- ------------- ------------- Net income (loss)........................................ (1,198,000) (3,143,000) (9,925,000) ------------- ------------- ------------- ------------- ------------- -------------
Additional financial data by industry segment for the Corporation is as follows:
YEARS ENDED DECEMBER 31, ------------------------------------------- 1994 1993 1992 ------------- ------------- ------------- IDENTIFIABLE ASSETS: Hotel................................................... $ 40,357,000 $ 41,712,000 $ 43,620,000 Gaming.................................................. 3,710,000 3,743,000 4,059,000 Corporate and other..................................... 4,559,000 4,538,000 5,932,000 ------------- ------------- ------------- Total................................................... $ 48,626,000 $ 49,993,000 $ 53,611,000 ------------- ------------- ------------- ------------- ------------- ------------- CAPITAL EXPENDITURES: Hotel................................................... $ 421,000 $ 4,859,000 $ 1,160,000 Gaming.................................................. 221,000 220,000 123,000 Corporate and other..................................... 29,000 126,000 7,000 ------------- ------------- ------------- Total................................................... $ 671,000 $ 5,205,000 $ 1,290,000 ------------- ------------- ------------- ------------- ------------- ------------- DEPRECIATION AND AMORTIZATION: Hotel................................................... $ 2,072,000 $ 3,060,000 $ 3,086,000 Gaming.................................................. 389,000 477,000 262,000 Corporate and other..................................... 495,000 65,000 54,000 ------------- ------------- ------------- Total................................................... $ 2,956,000 $ 3,602,000 $ 3,402,000 ------------- ------------- ------------- ------------- ------------- -------------
The Trust is an owner/lessor of real property and does not "operate" in different segments, and is therefore not subject to disclosure by segment. The Trust's net investment (initial cost less accumulated depreciation and provision for loss) in the two Las Vegas hotel/casinos was $21,306,000, and $22,798,000 December 31, 1994 and 1993, respectively. 12. REORGANIZATION AND DEBT REFINANCING. REORGANIZATION Effective January 1, 1995 (the "Closing Date"), the Trust and the Corporation consummated the previously announced reorganization (the "Reorganization") with Starwood Capital Group, L.P. ("Starwood Capital") and certain affiliates of Starwood Capital (the "Starwood Partners"). The Reorganization involved a number of related transactions that occurred simultaneously on the Closing Date. Such transactions included (i) the contribution by the Trust to SLT Realty Limited Partnership (the "Realty Partnership") of all of the properties and assets of the Trust including substantially all of the liabilities of the Trust (including the Senior Debt of the Trust ), in exchange for an approximate 28.3% interest as a general partner in the Realty Partnership, (ii) the contribution by the Starwood Partners to the F-71 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 12. REORGANIZATION AND DEBT REFINANCING. (CONTINUED) Realty Partnership of approximately $12,600,000 in cash and certain hotel properties and first mortgage notes, in exchange for limited partnership units representing the remaining approximate 71.7% interest in the Realty Partnership, (iii) the contribution by the Corporation and its subsidiaries to SLC Operating Limited Partnership (the "Operating Partnership") of all of their properties and operating assets (except for their gaming assets, which are to be contributed upon approval by Nevada gaming authorities), subject to substantially all of their liabilities, in exchange for an approximate 28.3% interest as a general partner in the Operating Partnership, and (iv) the contribution by the Starwood Partners to the Operating Partnership of approximately $1,400,000 in cash and furnishings and equipment of the hotel properties, in exchange for limited partnership units representing the remaining approximate 71.7% interest in the Operating Partnership. Each partner in the Partnerships (including the Trust and the Corporation) will account for its respective investment in the Realty Partnership and the Operating Partnership under the equity method of accounting, in accordance with generally accepted accounting principles. For accounting purposes, neither the Trust nor Starwood Capital unilaterally control the Realty Partnership and neither the Corporation nor Starwood Capital unilaterally control the Operating Partnership. The following unaudited pro forma separate and combined condensed financial information is presented as if the Reorganization in which the Trust and Corporation contributed substantially all of their assets (subject to substantially all of their liabilities) in exchange for 28.3% general partnership interests in the Realty Partnership and the Operating Partnership (the "Partnerships") and the Starwood Partners contributed cash and other assets, subject to certain liabilities, in exchange for 71.7% limited partnership interests in the Partnerships had occurred on December 31, 1994 for balance sheet information and on January 1, 1994 for income statement information.
DECEMBER 31, 1994 (IN THOUSANDS) ----------------------------------- TRUST CORPORATION COMBINED ---------- ----------- ---------- STARWOOD LODGING Investment in Partnership......................................... $ 10,450 $ (1,742) $ 8,708 Income from investment in Partnership............................. 824 (742) 82 Net income per share.............................................. $ 0.07 $ (0.06) $ 0.01 REALTY OPERATING COMBINED ---------- ----------- ---------- SLT REALTY AND SLC OPERATING PARTNERSHIPS Hotel assets, net................................................. $ 147,080 $ 38,177 $ 185,258 Total real estate investments..................................... 210,229 38,199 248,428 Total assets...................................................... 254,044 55,502 282,630 Total debt........................................................ 200,298 40,664 214,046 Partners' capital................................................. 49,166 4,206 53,372 Revenues.......................................................... $ 33,189 $ 127,421 $ 138,708 Expenses.......................................................... 30,273 130,044 138,415 Net income (loss)................................................. 2,916 (2,623) 293
In addition, on March 24, 1995, a Starwood Partner exchanged $12 million of Senior Debt for additional limited partnership units of the Realty Partnership and the Operating Partnership. After giving effect to the Reorganization and such subsequent exchange of Senior Debt, the Trust has an approximate 25.4% interest in the Realty Partnership and the Corporation has an approximate 25.4% F-72 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 12. REORGANIZATION AND DEBT REFINANCING. (CONTINUED) interest in the Operating Partnership, and the Starwood Partners hold limited partnership interests representing the remaining approximate 74.6% interest in each of the Realty Partnership and the Operating Partnership. DEBT REFINANCING On March 24, 1995, the Realty Partnership and the Trust entered into an Amended and Restated Credit Agreement (the "New Credit Agreement") pursuant to which the Realty Partnership borrowed approximately $132 million (the "Loan") which was used primarily to refinance all outstanding Senior Debt (after the exchange by a Starwood Partner of $12 million of Senior Debt for units of the Realty Partnership and the Operating Partnership described above) and approximately $27 million of first mortgage debt. The Loan matures on April 1, 1997 (subject to the Realty Partnership's option to extend such maturity for 12 months subject to a principal payment of $10 million and on certain other conditions) and bears interest at a rate based on LIBOR plus 3%. In connection with the New Credit Agreement, the Warrants issued in connection with the prior Credit Agreement may be canceled upon the payment to a Starwood Partner of a $786,000 cancellation fee. Prior to maturity there are no mandatory principal payments on the loan, except that (i) if the Realty Partnership sells or refinances a hotel property or mortgage note (other than certain notes contributed by the Starwood Partners aggregating approximately $53 million (the "Harvey Notes")), it must reduce the principal of the Loan by at least 125% of the portion of the Loan allocated to such property or note and (ii) the net proceeds of any public offering (or private offerings to the extent the net proceeds thereof exceed $60 million) of equity interests in the Trust, the Corporation, the Realty Partnership or the Operating Partnership must be used to reduce the principal of the Loan until such principal is equal to or less than 50% of the fair market value of the assets which secure the Loan. The Loan is secured by first priority liens on substantially all of the assets of the Realty Partnership, other than the Harvey Notes. Up to $58 million of the obligations under the Loan is guaranteed by the Operating Partnership, which guaranty is secured by first priority liens on substantially all of the assets of the Operating Partnership. Each of the Trust and the Corporation, as general partner, is secondarily liable for the obligations under the Loan of the Realty Partnership and the Operating Partnership, respectively. The New Credit Agreement contains covenants that are similar to, but in general less restrictive than, those contained in the prior Credit Agreement, including (i) a requirement that the Realty Partnership and the Operating Partnership maintain a minimum combined net worth as defined ($40 million at March 24, 1995) The New Credit Agreement also restricts the ability of the Realty Partnership to incur other indebtedness. The Realty Partnership may, prior to January 1, 1996, borrow up to an additional $75 million to finance the acquisition of hotel properties and to refinance debt that is senior to the Loan. Each such acquisition loan will be in an amount equal to the lesser of (i) 60% of the purchase price (in the case of an acquisition) and (ii) 70% of the property's value (as determined by the lender), will be made on the same terms as the Loan and will be secured by a first priority lien on the related hotel property. F-73 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 13. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
COMBINED TRUST CORPORATION --------------------------- -------------------------- ---------------------- 1994 1993 1994 1993 1994 1993 --------------- ---------- -------------- ---------- ---------- ---------- FIRST QUARTER Revenue.................. $28,338,000 $27,831,000 $5,243,000 $5,082,000 $27,823,000 $27,253,000 Net income (loss)........ (335,000) (1,366,000) (154,000) (208,000) (181,000) (1,158,000) Net income (loss) per share................... (0.03) (0.11) (0.01) (0.02) (0.01) (0.10) SECOND QUARTER Revenue.................. $29,994,000 $30,310,000 $5,953,000 $5,477,000 $28,610,000 $29,421,000 Net income (loss)........ 933,000 (204,000) 288,000 41,000 645,000 (245,000) Net income (loss) per share................... 0.08 (0.02) 0.02 0.00 0.05 (0.02) THIRD QUARTER Revenue.................. $29,666,000 $30,530,000 $5,737,000 $5,198,000 $28,809,000 $29,998,000 Net income (loss)........ (2,715,000)(1) (1,268,000) (2,313,000)(1) (1,412,000) (402,000) 144,000 Net income (loss) per share................... (0.22) (0.10) (0.19) (0.12) (0.03) 0.01 FOURTH QUARTER Revenue.................. $25,999,000 $28,484,000 $4,738,000 $4,585,000 $25,720,000 $28,156,000 Net loss................. (2,546,000) (4,194,000) (1,286,000) (2,310,000) (1,260,000) (1,884,000) Net loss per share....... (0.21) (0.35) (0.11) (0.19) (0.10) (0.16)
- --------------- (1) During the quarter ended September 30, 1994, the Trust recorded a provision for investment losses of $759,000 and the Trust and the Corporation each recorded a provision of $1,324,000 for expenses related to the settlement of shareholder litigation (see Note 9). (2) During the quarter ended September 30, 1993, the Trust recorded a provision for investment losses of $1,167,000. During the quarter ended December 31, 1993, the Trust recorded a provision for investment losses of $1,202,000 and the Trust and the Corporation each recorded a provision of $219,000 for expenses expected to be incurred upon settlement of shareholder litigation. (See Note 9.) F-74 SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1994
COSTS SUBSEQUENT TO INITIAL COST TO COMPANY ACQUISITION STARWOOD LODGING TRUST ------------------------ ------------ BUILDING AND BUILDING AND DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS - -------------------------------------------- ---------------- ----------- ------------ ------------ HOTEL ASSETS: Embassy Suites--Phoenix, AZ................. $ 9,173,000 $ 2,889,000 $11,658,000 $ 564,000 Plaza Hotel--Tucson, AZ..................... --(2) 898,000 3,809,000 66,000 Vagabond Inn--Rosemead, CA.................. -- 700,000 2,100,000 -- Vagabond Inn--Sacramento, CA................ -- 700,000 3,200,000 -- Vagabond Inn--Woodland Hills, CA............ -- 1,200,000 3,200,000 -- Hilton Inn--Gainesville, FL................. -- 1,002,000 3,759,000 1,582,000 Holiday Inn--Albany, GA..................... 6,000,000 796,000 4,980,000 123,000 Best Western Riverfront Inn--Savannah, GA... -- 431,000 3,745,000 200,000 Bay Valley Hotel--Bay City, MI.............. 4,075,000 2,501,000 5,472,000 1,193,000 Bourbon Street Hotel and Casino--Las Vegas, NV......................................... -- 8,435,000 8,668,000 5,446,000 King 8 Hotel and Casino--Las Vegas, NV...... 139,000 5,396,000 13,579,000 1,938,000 Best Western Airport Inn--Albuquerque, NM... --(3) 285,000 4,880,000 12,000 Best Western Mesilla Valley Inn--Las Cruces, NM......................................... -- 1,150,000 3,295,000 28,000 Columbus Best Western--Columbus, OH......... -- 854,000 2,300,000 27,000 Portland Inn--Portland, OR.................. 1,854,000 1,900,000 3,768,000 239,000 Riverside Inn--Portland, OR................. -- 1,300,000 3,375,000 235,000 Marriott Park Central--Dallas, TX........... 5,148,000(3) 3,814,000 8,018,000 591,000 Best Western Airport Inn--El Paso, TX....... -- 1,400,000 3,409,000 85,000 Residence Inn--Tysons Corner, VA............ 6,349,000 1,418,000 4,119,000 455,000 Days Inn Town Center--Seattle, WA........... -- 250,000 1,483,000 18,000 Meany Tower Hotel--Seattle, WA.............. --(3) 1,700,000 6,270,000 207,000 Sixth Avenue Inn--Seattle, WA............... -- 1,150,000 1,570,000 31,000 Tyee Motor Inn--Tumwater, WA................ --(3) 1,008,000 1,562,000 969,000 ---------------- ----------- ------------ ------------ $ 32,738,000 $41,177,000 $108,219,000 $14,009,000 ---------------- ----------- ------------ ------------ ---------------- ----------- ------------ ------------ - ----------------- GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD ------------------------ (4) STARWOOD LODGING TRUST (1) (1) ACCUMULATED BUILDING AND DEPRECIATION & YEAR OF DATE DESCRIPTION LAND IMPROVEMENTS AMORTIZATION CONSTRUCTION ACQUIRED LIFE - -------------------------------------------- ----------- ------------ -------------- ------------ ------------ ---- HOTEL ASSETS: Embassy Suites--Phoenix, AZ................. $ 2,889,000 $12,223,000 $ 3,690,000 1981 12/13/83 35 Plaza Hotel--Tucson, AZ..................... 898,000 3,875,000 1,147,000 1971 9/16/86 35 Vagabond Inn--Rosemead, CA.................. 700,000 2,100,000 524,000 1974 9/16/86 35 Vagabond Inn--Sacramento, CA................ 700,000 3,200,000 754,000 1975 9/16/86 35 Vagabond Inn--Woodland Hills, CA............ 1,200,000 3,200,000 754,000 1973 9/16/86 35 Hilton Inn--Gainesville, FL................. 1,002,000 5,341,000 1,157,000 1974 11/24/86 35 Holiday Inn--Albany, GA..................... 796,000 5,103,000 848,000 1989 6/9/89 35 Best Western Riverfront Inn--Savannah, GA... 431,000 3,946,000 1,815,000 1971 12/11/86 35 Bay Valley Hotel--Bay City, MI.............. 2,501,000 6,666,000 2,001,000 1973 5/10/84 35 Bourbon Street Hotel and Casino--Las Vegas, NV......................................... 8,435,000 14,172,000 13,918,000 1964/1975 2/01/88 35 King 8 Hotel and Casino--Las Vegas, NV...... 5,396,000 15,532,000 8,225,000 1974/1979 2/1/88 35 Best Western Airport Inn--Albuquerque, NM... 285,000 4,892,000 1,212,000 1980 9/16/86 35 Best Western Mesilla Valley Inn--Las Cruces, NM......................................... 860,000 3,320,000 827,000 1974 9/16/86 35 Columbus Best Western--Columbus, OH......... 854,000 2,327,000 197,000 1971 1/24/92 35 Portland Inn--Portland, OR.................. 2,020,000 4,008,000 898,000 1962 9/16/86 35 Riverside Inn--Portland, OR................. 1,420,000 3,610,000 807,000 1964 9/16/86 35 Marriott Park Central--Dallas, TX........... 3,815,000 8,608,000 4,435,000 1972 9/09/88 35 Best Western Airport Inn--El Paso, TX....... 1,400,000 3,494,000 815,000 1974 9/16/86 35 Residence Inn--Tysons Corner, VA............ 1,418,000 4,574,000 1,326,000 1984 7/01/84 35 Days Inn Town Center--Seattle, WA........... 250,000 1,500,000 1,305,000 1957 9/16/86 13 Meany Tower Hotel--Seattle, WA.............. 1,820,000 6,477,000 1,489,000 1932 9/16/86 35 Sixth Avenue Inn--Seattle, WA............... 1,150,000 1,601,000 1,797,000 1959 9/16/86 13 Tyee Motor Inn--Tumwater, WA................ 944,000 2,531,000 528,000 1961 2/17/87 35 ----------- ------------ -------------- $41,184,000 $122,300,000 $ 50,469,000 ----------- ------------ -------------- ----------- ------------ -------------- - -----------------
(1) As of December 31, 1994, real estate and furniture and equipment have a cost of $189,367,000 for federal tax income purposes. Land.................... 41,184,000 -- (2) Land Cost includes costs allocated to leasehold interest in land of $548,000 Furniture and at the Tucson property. Equipment.............. 25,124,000 21,429,000 (3) Land costs represents costs allocated to ------------ -------------- leasehold interest in land. Total hotels and land (4) Includes reserve for losses discussed in under lease............ $188,608,000(5) $ 71,899,000 Notes 1 and 3 of Notes to the Financial Statements. ------------ -------------- ------------ -------------- (5) Substantially all properties are encumbered by the Secured Notes Payable and Revolving Line of Credit.
(Continued) F-75 SCHEDULE III (CONTINUED) REAL ESTATE AND ACCUMULATED DEPRECIATION A reconciliation of the Trust's investment in real estate, furniture and fixtures and related accumulated depreciation is as follows:
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------- 1994 1993 1992 ----------------------- --------------------------- --------------------------- REAL ESTATE AND FURNITURE AND FIXTURES Balance at beginning of period............... $ 224,170,000 $ 246,356,000 $ 258,902,000 Additions during period: Acquisitions............................... Improvements............................... 2,270,000 1,372,000 9,384,000 U.S. Equity Step-up in Basis................. -- 899,000 -- Reclass of construction in progress.......... -- -- (113,000) Deductions during period: Sales of properties........................ (37,832,000) (24,457,000) (21,817,000) ----------------------- ------------- ------------- Balance at end of Period..................... 188,608,000 224,170,000 246,356,000 ----------------------- ------------- ------------- ----------------------- ------------- ------------- ACCUMULATED DEPRECIATION: Balance at beginning of period............... $ 94,252,000 $ 105,338,000 $ 108,134,000 Additions--depreciation expense.............. 5,205,000 5,630,000 6,753,000 Deductions--sales of properties.............. (27,997,000) (19,085,000) (12,746,000) Provision for investment losses: St. Louis, MO.............................. 858,000 (1)(3 -- Dallas, TX................................. 459,000(3) -- Jacksonville, FL........................... 389,000(3) 272,000(3) 1,050,000(2)(3) Savannah, GA............................... 300,000(3) 760,000(2)(3) New Port Richey, FL........................ 200,000 (1)(3 Brunswick, GA.............................. 150,000 (1)(3 440,000(2)(3) Fayetteville, NC........................... 50,000(3) 100,000 (1)(3 Cumberland, GA............................. 697,000(2)(3) Northlake, GA.............................. 250,000(2)(3) Rosemead, CA............................... 30,000(3) -- ----------------------- ------------- ------------- 439,000 2,369,000 3,197,000 ----------------------- ------------- ------------- Balance at end of period..................... $ 71,899,000 $ 94,252,000 $ 105,338,000 ----------------------- ------------- ------------- ----------------------- ------------- -------------
- ------------ (1) Provision for loss was recorded primarily as a result of all cash offers to sell hotels, previously identified for sale, at amounts lower than their current net book values. (2) Provision for loss was recorded as a result of the deterioration of hotels in the Southeast and the acceptance of offers for the sale of hotels at amounts less than net book value. (3) Provision for loss was recorded as a result of the difference between the net book value of properties which had been identified for sale and their estimated fair values. (Continued) F-76 SCHEDULE III (CONTINUED) REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1994
COSTS SUBSEQUENT TO INITIAL COST TO COMPANY ACQUISITION HOTEL INVESTORS CORPORATION ------------------------- ------------ BUILDING AND BUILDING AND DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS - -------------------------------------------- ---------------- ------------ ------------ ------------ HOTEL ASSETS: Embassy Suites--Phoenix, AZ................. $ -- $ -- $ -- $ 45,000 Plaza Hotel--Tucson, AZ..................... -- 595,000 -- -- Hilton Inn--Gainesville, FL................. -- -- -- 39,000 Holiday Inn--Albany, GA..................... -- -- -- 64,000 Bay Valley Hotel--Bay City, MI.............. -- -- -- 179,000 Best Western North--Columbus, OH............ -- -- -- 61,000 Best Western Airport Inn--Albuquerque, NM... -- 325,000 -- -- Best Western Mesilla Valley Inn--Las Cruces, NM......................................... -- -- -- -- Portland Inn--Portland, OR.................. -- 2,185,000 -- 78,000 Riverside Inn--Portland, OR................. -- 2,123,000 87,000 26,000 Best Western Airport Inn--El Paso, TX....... -- -- -- 18,000 Residence Inn--Tysons Corner, VA............ -- -- -- 33,000 Days Inn Town Center--Seattle, WA........... -- 429,000 4,000 204,000 Meany Tower Hotel--Seattle, WA.............. -- 3,437,000 302,000 66,000 Sixth Avenue Inn--Seattle, WA............... -- 1,515,000 24,000 118,000 Best Western Inn--Savannah, GA.............. -- -- -- 47,000 Marriott Hotel--Milwaukee, WI............... $ 13,106,000 2,500,000 17,422,000 3,499,000 ---------------- ------------ ------------ ------------ $ 13,106,000 $ 13,109,000 $17,839,000 $ 4,477,000 ---------------- ------------ ------------ ------------ ---------------- ------------ ------------ ------------ - ----------------- GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD ------------------------ (2) HOTEL INVESTORS CORPORATION (1) (1) ACCUMULATED BUILDING AND DEPRECIATION & YEAR OF DATE DESCRIPTION LAND IMPROVEMENTS AMORTIZATION CONSTRUCTION ACQUIRED LIFE - -------------------------------------------- ----------- ------------ -------------- ------------ ------------ ---- HOTEL ASSETS: Embassy Suites--Phoenix, AZ................. $ -- $ 45,000 $ 7,000 1981 12/13/83 35 Plaza Hotel--Tucson, AZ..................... 978,000 182,000 1971 9/16/86 35 Hilton Inn--Gainesville, FL................. -- 39,000 11,000 1974 11/24/86 35 Holiday Inn--Albany, GA..................... -- 64,000 6,000 1989 6/9/89 35 Bay Valley Hotel--Bay City, MI.............. -- 179,000 25,000 1973 5/10/84 35 Best Western North--Columbus, OH............ 4,000 62,000 3,000 -- -- -- Best Western Airport Inn--Albuquerque, NM... 372,000 -- 80,000 1980 9/16/86 35 Best Western Mesilla Valley Inn--Las Cruces, NM......................................... 252,000 -- 25,000 1974 9/16/86 35 Portland Inn--Portland, OR.................. 2,185,000 78,000 480,000 1962 9/16/86 35 Riverside Inn--Portland, OR................. 2,124,000 113,000 507,000 1964 9/16/86 35 Best Western Airport Inn--El Paso, TX....... -- 18,000 3,000 1974 9/16/86 35 Residence Inn--Tysons Corner, VA............ -- 33,000 7,000 1984 7/01/84 35 Days Inn Town Center--Seattle, WA........... 429,000 208,000 257,000 1957 9/16/86 13 Meany Tower Hotel--Seattle, WA.............. 3,437,000 368,000 869,000 1932 9/16/86 35 Sixth Avenue Inn--Seattle, WA............... 1,515,000 142,000 779,000 1959 9/16/86 13 Best Western Inn--Savannah, GA.............. -- 47,000 2,000 1961 2/17/87 35 Marriott Hotel--Milwaukee, WI............... 2,500,000 20,920,000 1,964,000 ----------- ------------ -------------- $13,796,000 $22,316,000 $ 5,207,000 ----------- ------------ -------------- ----------- ------------ -------------- - -----------------
(1) As of December 31, 1994, real estate and furniture and equipment have a cost of $51,339,000 for federal tax income purposes. Land.................... 13,796,000 -- (2) Includes reserve for losses discussed in Notes 1 and 3 of Notes to the Financial Furniture and Statements. Equipment.............. 15,630,000 12,058,000 ------------ -------------- (3) Amount excludes $1,225,000 third trust Total hotels and land deed note payable to the Trust and under lease............ $15,691,000 fourth trust deed note payable. See Note 5 to Notes to Financial Statements. $51,742,000 $ 17,265,000 ------------ -------------- ------------ --------------
(Continued) F-77 SCHEDULE III (CONTINUED) REAL ESTATE AND ACCUMULATED DEPRECIATION A reconciliation of the Trust's investment in real estate, furniture and fixtures and related accumulated depreciation is as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1994 1993 1992 --------------- --------------- --------------- REAL ESTATE AND FURNITURE AND FIXTURES Balance at beginning of year...................................... $ 54,790,000 $ 51,972,000 $ 51,199,000 Additions during period: Improvements.................................................... 671,000 5,205,000 1,290,000 Acquisitions.................................................... Deductions: Reclass......................................................... -- 388,000 -- Sales of properties............................................. (3,720,000) (2,775,000) (517,000) --------------- --------------- --------------- Balance at end of year............................................ $ 51,741,000 $ 54,790,000 $ 51,972,000 --------------- --------------- --------------- --------------- --------------- --------------- ACCUMULATED DEPRECIATION: Balance at beginning of year...................................... $ 17,459,000 $ 15,413,000 $ 12,377,000 Additions--Depreciation expense................................... 2,956,000 3,602,000 3,373,000 Deductions--Sales of properties................................... (3,149,000) (1,842,000) (337,000) Reclass........................................................... -- 286,000 -- --------------- --------------- --------------- Balance at end of year............................................ $ 17,266,000 $ 17,459,000 $ 15,413,000 --------------- --------------- --------------- --------------- --------------- ---------------
(Concluded) F-78 SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 1994
INTEREST FINAL PERIODIC DESCRIPTION RATE MATURITY PAYMENT - ------------------------------------------------------------------------------------ ------------ ----------- ----------- STARWOOD LODGING TRUST First Mortgages: Vagabond Inns--Stockton and Modesto, CA............................................. 10.00% 1996 $ --(2) Ramada Inn--Jefferson City, MO...................................................... 11.00% 1997 --(3) Days Inn--Albany, GA................................................................ 10.00% 1996 12,554(5) Days Inn--Irving, TX................................................................ 9.00% 1997 13,276(8) Vantage Hotel--Tucker, GA........................................................... 9.00% 1998 9,000(9) Sheraton--New Port Richey, FL and Holiday Inn--Brunswick, GA........................ 8% 2001 --(6) Holiday Inn--Jacksonville, FL....................................................... 9% 2001 --(7) Ramada Inn--Fayetteville, NC........................................................ 9% 2006 --(10) Second Mortgages: Viscount Hotel--Dallas, TX.......................................................... 8.75% 2017 1,982(4) Allowance for loan losses........................................................... FACE AMOUNT CARRYING OF AMOUNT OF DESCRIPTION PRIOR LIENS MORTGAGES MORTGAGES (1) - ------------------------------------------------------------------------------------ ----------- ----------- -------------- STARWOOD LODGING TRUST First Mortgages: Vagabond Inns--Stockton and Modesto, CA............................................. no $ 1,995,000 $ 1,780,000 Ramada Inn--Jefferson City, MO...................................................... no 4,500,000 1,774,000 Days Inn--Albany, GA................................................................ no 1,050,000 745,000 Days Inn--Irving, TX................................................................ no 1,650,000 1,509,000 Vantage Hotel--Tucker, GA........................................................... no 1,985,000 1,952,000 Sheraton--New Port Richey, FL and Holiday Inn--Brunswick, GA........................ no 3,070,000 3,060,000 Holiday Inn--Jacksonville, FL....................................................... no 2,300,000 2,299,000 Ramada Inn--Fayetteville, NC........................................................ no 800,000 796,000 Second Mortgages: Viscount Hotel--Dallas, TX.......................................................... yes 264,000 234,000 Allowance for loan losses........................................................... -- (100,000) ----------- -------------- $17,614,000 $ 14,049,000 ----------- -------------- ----------- -------------- PRINCIPAL AMOUNT OF LOANS SUBJECT TO DELINQUENT PRINCIPAL OR DESCRIPTION INTEREST - ------------------------------------------------------------------------------------ ----------------- STARWOOD LODGING TRUST First Mortgages: Vagabond Inns--Stockton and Modesto, CA............................................. -- Ramada Inn--Jefferson City, MO...................................................... -- Days Inn--Albany, GA................................................................ -- Days Inn--Irving, TX................................................................ -- Vantage Hotel--Tucker, GA........................................................... -- Sheraton--New Port Richey, FL and Holiday Inn--Brunswick, GA........................ -- Holiday Inn--Jacksonville, FL....................................................... -- Ramada Inn--Fayetteville, NC........................................................ -- Second Mortgages: Viscount Hotel--Dallas, TX.......................................................... -- Allowance for loan losses........................................................... -- ----------------- -- ----------------- -----------------
- ----------------- (1) As of December 31, 1994, the aggregate cost (before allowance for loan losses) for federal income tax purposes is not significantly different from that used for book purposes. (2) The notes provide for monthly payments of interest plus additional annual payments based on a percentage of the hotels' sales, a portion of which is applied to principal. (3) Principal and interest due monthly based on a 30-year amortization schedule with unpaid principal of $1,750,000 due in January 1997. (4) Plus contingent interest of 4% of room sales of the hotel. (5) Principal and interest due monthly based on a 10-year amortization schedule with unpaid principal of $591,000 due in November 1996. (6) Principal and interest due monthly based on a 25-year amortization schedule with unpaid principal of $2,490,000 due in August 2001. (7) Principal and interest due monthly based on a 30-year amortization schedule with unpaid principal of $2,156,000 due in December 2001. (8) Principal and interest due monthly based on a 30-year amortization schedule with unpaid principal of $1,450,000 due in March 1997. (9) Principal and interest due monthly based on a 25-year amortization schedule with unpaid principal of $1,857,000 due in June 1998. (10) Principal and interest due monthly based on a 12-year amortization schedule with unpaid principal of $9,000 due in December 2006. (Continued) F-79 SCHEDULE IV (CONTINUED) RECONCILIATION OF MORTGAGE LOANS
YEARS ENDED DECEMBER 31, ------------------------------------------------- 1994 1993 1992 --------------- --------------- --------------- Balance at beginning of year.................................... $ 11,642,000 $ 10,010,000 $ 10,669,000 Additions-- New Mortgage Loans.............................................. 6,270,000 1,985,000 3,865,000 Deductions-- Principal Payments.............................................. (2,382,000) (353,000) (957,000) Amortization of discount........................................ -- -- -- Allowance for loan loss......................................... (320,000) -- (223,000) Discount for prepayment(2)...................................... (55,000 (3) -- (90,000)(2) Cancellation of Note(1)......................................... -- -- (3,254,000) Proceeds from foreclosure sale(4)............................... (1,106,000) -- -- --------------- --------------- --------------- Balance at end of year.......................................... $ 14,049,000 $ 11,642,000 $ 10,010,000 --------------- --------------- --------------- --------------- --------------- ---------------
- ------------ (1) In January 1992, in lieu of foreclosure, the Trust canceled its note and released its mortgage on the Columbus Best Western North. (2) In 1992, the Trust discounted the Note on the Brunswick, Georgia property as consideration for the early pay-off of the note. (3) In 1994, the Trust discounted the note on the Spartanburg, South Carolina property as consideration for the early payoff of the note. (4) In 1994, the Trust foreclosed on the Merrimack, New Hampshire property. (Concluded) F-80 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE REORGANIZATION On January 31, 1995 (the "Closing Date"), the Trust and the Corporation consummated a previously announced reorganization (the "Reorganization") with Starwood Capital Group, L.P. ("Starwood Capital") and certain affiliates of Starwood Capital (the "Starwood Partners") effective January 1, 1995. The Reorganization involved a number of related transactions that occurred simultaneously on the Closing Date. Such transactions included (i) the contribution by the Trust to SLT Realty Limited Partnership (the "Realty Partnership") of all of the properties and assets of the Trust, subject to substantially all of the liabilities of the Trust (including the senior debt (the "Senior Debt") of the Trust), in exchange for an approximate 28.3% interest as a general partner in the Realty Partnership, (ii) the contribution by the Starwood Partners to the Realty Partnership of approximately $12,600,000 in cash and certain hotel properties and first mortgage notes, in exchange for limited partnership units representing the remaining approximate 71.7% interest in the Realty Partnership, (iii) the contribution by the Corporation and its subsidiaries to SLC Operating Limited Partnership (the "Operating Partnership") of all of their properties and operating assets (except for their gaming assets, which are to be contributed upon approval by Nevada gaming authorities), subject to substantially all of their liabilities, in exchange for an approximate 28.3% interest as a general partner in the Operating Partnership, and (iv) the contribution by the Starwood Partners to the Operating Partnership of approximately $1,400,000 in cash and furnishings and equipment of the hotel properties, in exchange for limited partnership units representing the remaining approximate 71.7% interest in the Operating Partnership. In addition, on March 24, 1995 a Starwood Partner exchanged $12,000,000 of Senior Debt for additional limited partnership units of the Realty Partnership and the Operating Partnership. After giving effect to the Reorganization and the subsequent exchange of Senior Debt, the Trust has an approximate 25.4% interest in the Realty Partnership and the Corporation has an approximate 25.4% interest in the Operating Partnership, and the Starwood Partners hold limited partnership interests representing the remaining approximate 74.6% interest in each of the Realty Partnership and the Operating Partnership. The limited partnership units of the Realty Partnership and the Operating Partnership held by the Starwood Partners are (subject to the ownership limit provisions of the Trust and the Corporation) exchangeable by the Starwood Partners, for, at the option of the Trust and the Corporation, either cash, Paired Shares of the Trust and the Corporation representing up to approximately 74.6% of the Paired Shares after such exchange, or a combination of cash and such Paired Shares. The ownership limit provisions of the Trust and the Corporation are designed to preserve the status of the Trust as a REIT for tax purposes by providing that in general no shareholder may own, directly or indirectly, more than 8.0% of the outstanding Paired Shares. Since the Reorganization, the Trust has conducted all of its business and operations through the Realty Partnership. As of the closing of the Reorganization, the Realty Partnership held fee interests, ground leaseholds and mortgage loan interests in 43 hotel properties containing over 8,500 rooms located in 19 states throughout the United States. The Trust controls the Realty Partnership as the sole general partner of the Realty Partnership. After the Reorganization, the Corporation (together with its wholly-owned subsidiaries) has conducted all of its business and operations (other than its gaming operations) through the Operating Partnership. As of the closing of the Reorganization, the Operating Partnership leased from the Realty Partnership all but three of the hotel properties owned in fee or held pursuant to long-term leases by the Realty Partnership. Upon receipt of Nevada gaming regulatory approvals, the Corporation will control the Operating Partnership as its managing general partner. Prior to the receipt of such approvals, the Operating Partnership is F-81 being managed by a management committee, the members of which are identical to the members of the Board of Directors of the Corporation that will hold office upon receipt of Nevada gaming regulatory approvals. Prior to the receipt of Nevada gaming regulatory approvals, the gaming operations (which consist of two hotel/casinos located in Las Vegas, Nevada) are being operated through a wholly owned subsidiary of the Corporation. Upon receipt of such approvals (or such time as such approvals are no longer required), all of the assets and liabilities of such subsidiary (or, if those assets have been disposed of, the net proceeds of such disposition) will be transferred to a limited partnership owned 99% by the Operating Partnership, as limited partner, and 1% by such subsidiary, as general partner. 1995 DEBT REFINANCING On March 24, 1995, the Realty Partnership and the Trust entered into an Amended and Restated Credit Agreement (the "New Credit Agreement") pursuant to which the Realty Partnership borrowed approximately $132 million (the "Loan") which was used primarily to refinance all outstanding Senior Debt (after taking into account the exchange by a Starwood Partner of $12 million of Senior Debt for units of the Realty Partnership and the Operating Partnership described above) and approximately $27 million of first mortgage debt. The Loan matures on April 1, 1997 (subject to the Realty Partnership's option to extend such maturity for 12 months subject to a principal payment of $10 million and on certain other conditions) and bears interest at a rate based on LIBOR plus 3%. Prior to maturity there are no mandatory principal payments on the Loan, except that (i) if the Realty Partnership sells or refinances a hotel property or mortgage note (other than certain notes contributed by the Starwood Partners aggregating $53 million ("the Harvey notes")), it must reduce the principal of the Loan by at least 125% of the portion of the Loan allocated to such property or note and (ii) the net proceeds of any public offering (or private offerings to the extent the net proceeds thereof exceed $60 million) of equity interests in the Trust, the Corporation, the Realty Partnership or the Operating Partnership must be used to reduce the principal of the Loan until such principal is equal to or less than 50% of the fair market value of the assets which secure the Loan. The Loan is secured by liens on substantially all of the assets of the Realty Partnership, other than the Harvey notes. Up to $58 million of the obligations under the Loan is guaranteed by the Operating Partnership. Such guaranty is secured by first priority liens on substantially all of the assets of the Operating Partnership. Each of the Trust and the Corporation, as general partner, is secondarily liable for the obligations under the Loan of the Realty Partnership and the Operating Partnership, respectively. The New Credit Agreement contains covenants that are similar to, but in general less restrictive than, those contained in the Prior Credit Agreement described below, including (i) a requirement that the Realty Partnership and the Operating Partnership maintain a combined net worth at least equal to (a) $40 million, plus (b) 75% of the net proceeds of equity contributed to the Realty Partnership (unless used within six months to acquire hotel assets or that constitute equity in hotel assets, each of which will be governed by clause (c) below), plus (c) 50% of the net equity book value of hotel assets contributed to or acquired by the Realty Partnership during the term of the Loan; (ii) restrictions on the ability of the Realty Partnership to incur other indebtedness; and (iii) a right of the Realty Partnership and the Operating Partnership to pay distributions to its partners up to certain specific amounts and a right of the Trust and the Corporation to pay distributions to their shareholders. The Realty Partnership also has the right to acquire certain additional hotels that meet certain cash flow tests. The Realty Partnership may, prior to January 1, 1996, borrow up to an additional $75 million to finance the acquisition of hotel properties and to refinance debt that is senior to the Loan. Each such acquisition loan will be in an amount equal to the lesser of (i) 60% of the purchase price (in the case of an acquisition) or (ii) 70% of the property's value (as determined by the lender), will be made on the same terms as the Loan and will be secured by a lien on the related hotel property. F-82 PRIOR DEBT RESTRUCTURING Pursuant to a Credit Agreement dated as of January 28, 1993 (the "Prior Credit Agreement"), the Trust restructured approximately $128 million of Senior Debt as a term loan and revolving credit facility. The Senior Debt was assumed by the Realty Partnership as of the Closing Date. The Prior Credit Agreement required that the debt restructuring take place in three closings, the first two of which were completed in 1993. At the first two closings, among other things, the Trust and the Corporation granted liens and security interests on substantially all of the assets of the Trust and the Corporation and the Trust and the Corporation entered into a warrant agreement (the "Warrant Agreement") pursuant to which the Trust and the Corporation were to have issued ten-year warrants (the "Lender Warrants") to purchase a number of Paired Shares equal to 9.9% of the then outstanding Paired Shares, at an exercise price of $.625 per Paired Share. On February 28, 1994, the Prior Credit Agreement was amended to, among other things, collaterally assign to the lenders under the Prior Credit Agreement liens and security interests on substantially all of the intercompany leases between the Trust and the Corporation, and the Warrant Agreement was amended to provide for the issuance at such time of Lender Warrants for the aggregate of 1,333,143 Paired Shares at an exercise price of $.625 per Paired Share. On August 31, 1994, one-third of the Lender Warrants were canceled as a result of the Trust's cumulative principal payments in excess of $13,000,000. The Trust and the holders of the Senior Debt agreed to successive extensions of the maturity of the Senior Debt and of the date for the third closing under the Prior Credit Agreement to May 31, 1995. At the third closing, among other things, the Trust and the Corporation were to have merged. In connection with the refinancing, the Realty Partnership paid $514,000 to one of the Senior Lenders and a portion of the Lender Warrants were canceled. In connection with the New Credit Agreement, the remaining Lender Warrants could be canceled upon the payment to a Starwood Partner of a $786,000 cancellation fee. Effective March 31, 1995 the Realty Partnership issued an unsecured note payable to the Starwood Partner and the remaining warrants were canceled. The note is due and payable in August 1995. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 THE TRUST. Since the Reorganization, the Trust has conducted all of its business and operations through the Realty Partnership. The Trust's equity interest in income before extraordinary items, extraordinary items and net income for the three months ended March 31, 1995 of the Realty Partnership were $289,000 or $0.02 per share, $363,000 or $0.03 per share, and $652,000 or $0.05 per share, respectively. See the Trust and the Realty Partnership below for a comparison of the operating results of the Realty Partnership for the three months ended March 31, 1995 to the operating results of the Trust for the same period in 1994. THE TRUST AND THE REALTY PARTNERSHIP. Rents from the Operating Partnership and from the Corporation to the Realty Partnership totaled $5,163,000 for the three months ended March 31, 1995. Rents from the Corporation to the Trust totaled $4,313,000 for the same period in 1994. Rental income increased by $238,000 as a result of increased hotel revenues and therefore higher percentage rents from the hotels leased by the Operating Partnership and the Corporation from the Realty Partnership during 1995 which were leased by the Corporation from the Trust during 1994. An increase of $1,042,000 resulted from the Lexington, Kentucky; Rancho Bernardo, California; Washington, D.C.; and Wichita, Kansas hotels which were contributed by Starwood Capital to the Realty Partnership and are being leased by the Operating Partnership from the Realty Partnership effective January 1, 1995. The increases were offset by a decrease in rents of $430,000 resulting from the sale of hotels in Austin, Texas (April, 1994); New Port Richey, Florida (August 1994); Brunswick, Georgia (August 1994); Fayetteville, North Carolina (November 1994); and Jacksonville, Florida (November 1994). Interest income from the Operating Partnership and the Corporation to the Realty Partnership totaled $767,000 for the three months ended March 31, 1995. Interest from the Corporation to the Trust totaled $415,000 for the same period in 1994. As a result of the Trust's moratorium on interest payable to the Trust on the Corporation's debt to the Trust during 1994, no interest was paid or accrued during the three months ended March 31, 1994 other than on the mortgage notes held by the Trust which are secured by the F-83 Milwaukee Marriott Hotel. Following the cancellation of debt payable by the Corporation to the Trust, the remaining debt in the amount of $10,000,000 (excluding the Milwaukee notes) was contributed to the Realty Partnership by the Trust and was assumed from the Corporation by the Operating Partnership. The debt payable by the Operating Partnership and the Corporation to the Realty Partnership is payable on demand and bears interest at a rate of prime plus 2%. As a result, interest income from the Operating Partnership and the Corporation to the Realty Partnership increased by $304,000 for the three months ended March 31, 1995. Interest from mortgage notes and other notes amounted to $2,566,000 for the Realty Partnership and $339,000 for the Trust for the three months ended March 31, 1995 and 1994, respectively. An increase of $2,177,000 resulted from the notes receivable which were contributed by Starwood Capital to the Realty Partnership effective January 1, 1995. Interest expense for the Realty Partnership amounted to $5,509,000 and for the Trust amounted to $3,779,000 for the three months ended March 31, 1995 and 1994, respectively. An increase of $1,242,000 was a result of the assumption of the notes payable which were secured by the assets contributed by the Starwood Partners effective January 1, 1995 and $508,000 resulted from an increase in the interest rate payable on the Senior Debt. The increases were partially offset by a reduction in interest payable as a result of the January 31, 1995 payoff of a mortgage note having a principal amount of $4,075,000 which was secured by a hotel located in Bay Valley, Michigan. Depreciation and amortization expense amounted to $1,691,000 for the Realty Partnership and $1,252,000 for the Trust for the three months ended March 31, 1995 and 1994, respectively. The increase is a result of the addition of Starwood Capital contributed properties ($316,000) and the amortization of reorganization costs ($152,000) which are being amortized over five years. Loss on sale for the quarter ended March 31, 1995 reflects a discount of $113,000 resulting from the early payoff of the mortgage note receivable relating to the Irving, Texas property which was sold in 1992. As described above, effective January 28, 1993, the Trust restructured its debt under the terms of the Prior Credit Agreement. Management concluded that this debt restructuring represented a "troubled debt restructuring" as defined under generally accepted accounting principals, and accordingly, upon execution of the Prior Credit Agreement accrued all known current or future identifiable debt restructuring costs as of December 31, 1992. In the first quarter of 1995, the Realty Partnership recognized extraordinary income of $1,284,000 relating to the extinguishment of the debt under the terms of the Prior Credit Agreement, representing the remaining amount of the accrual recorded at March 24, 1995. THE CORPORATION. Since the Reorganization, the Corporation has conducted all of its business and operations through the Operating Partnership, except for the gaming business and operations. The Corporation's equity interest in the net loss was $(252,000) and its net loss was $(304,000) or $(.03) per share. See the Corporation and the Operating Partnership below for a comparison of the operating results of the Operating Partnership for the three months ended March 31, 1995 to the operating results of the Corporation for the same period of 1994. THE CORPORATION AND THE OPERATING PARTNERSHIP. Hotel revenues for the Operating Partnership were $22,781,000 and for the Corporation were $20,586,000 for the three months ended March 31, 1995 and 1994, respectively, representing an increase of $2,195,000. The hotel sales discussed above resulted in decreased revenue of $2,521,000. In March 1994, the franchise agreement and management agreement with Marriott Corporation for the Dallas property were terminated. The property is now being managed for the Corporation by Sage Hospitality, and is being operated as the Dallas Park Central Hotel. The property is in the process of being renovated at an estimated cost of $3.8 million and an agreement to operate the property as a Radisson Hotel has been entered into. Revenues at the Dallas property decreased by $1,290,000 from the first quarter of 1994. Revenues at the properties which continued to be leased by the Operating Partnership from the Realty Partnership, excluding Dallas, increased by $1,611,000; additional revenues totaling $4,395,000 were generated by the properties contributed to the Realty Partnership by Starwood Capital F-84 which are leased by the Operating Partnership. The following table summarizes average occupancy, average room rates and revenue per available room for properties which were leased by the Operating Partnership from the Realty Partnership at March 31, 1995:
FOR THE THREE MONTHS ENDED MARCH 31, -------------------- 1995 1994 --------- --------- Continuously owned including Dallas Park Central - ------------------------------------------------------------------------ Occupancy Rate.......................................................... 65.10% 64.20% Average Room Rate....................................................... $ 61.69 $ 56.45 Revenue per Available Room.............................................. $ 40.16 $ 36.24 Continuously owned excluding Dallas Park Central - ------------------------------------------------------------------------ Occupancy Rate.......................................................... 70.58% 64.17% Average Room Rate....................................................... $ 61.89 $ 55.89 Revenue per Available Room.............................................. $ 43.68 $ 35.86 All hotels including hotels contributed by Starwood Capital - ------------------------------------------------------------------------ Occupancy Rate.......................................................... 65.05% 64.20% Average Room Rate....................................................... $ 64.00 $ 56.45 Revenue per Available Room.............................................. $ 41.63 $ 36.24
Management believes the increasing revenues are a result of the general trend in the lodging industry resulting from increased leisure and business travel and the low level of new hotel construction. Gaming revenues for the first three months of 1995 were $6,669,000 as compared to $7,188,000 for the first three months of 1994. The decrease in gaming revenues at the two hotel/casinos is consistent with the trend in gaming revenues for similar types of hotel/casinos located in Las Vegas, Nevada. During late 1993, three large new hotel/casinos were opened in Las Vegas resulting in substantially increased travel to the Las Vegas area during the first quarter of 1994. During 1995, travel to the Las Vegas area has decreased compared to the same period in 1994. The decreased travel and customer traffic resulted in a lower level of gaming revenues. In addition, the two hotel/casinos experienced lower win percentages than during the same period of the prior year. Hotel expenses for the first quarter of 1995 were $16,280,000, or 71.5% of hotel revenues as compared to $15,568,000, or 75.6% of hotel revenues, for the first quarter of 1994. The decrease in hotel expenses as a percentage of hotel revenues is a result of the sale of the hotels discussed above, such hotels having lower operating margins than other hotels being operated by the Operating Partnership. Gaming expenses were $6,021,000, or 90.3% of gaming revenues, as compared to $5,993,000, or 83.4% of gaming revenues, for the three months ended March 31, 1995 and 1994, respectively. The increase in gaming expenses is primarily the result of higher labor costs. The higher gaming expenses and the lower gaming revenues discussed above resulted in the increase in gaming expenses as a percentage of gaming revenues. Depreciation expense amounted to $1,172,000 for the Operating Partnership and the Corporation and $814,000 for the Corporation for the three months ended March 31, 1995 and 1994, respectively. The increase is a result of the addition of furniture and equipment at the properties contributed by the Starwood Partners ($306,000) and the amortization of reorganization costs ($152,000) which are being amortized over five years. Administrative and operating expenses amounted to $713,000 for the Operating Partnership and $555,000 for the Corporation for the three months ended March 31, 1995 and 1994, respectively. The increase is primarily a result of salary increases for corporate staff, a larger number of corporate employees, and a higher allocation of the Operating Partnership's share of the combined insurance expense of the Partnerships. For information with respect to rent and interest to the Realty Partnership and to the Trust during the three months ended March 31, 1995 and 1994, see "Realty Partnership and Trust" above. F-85 RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 THE TRUST. Rents from the Corporation totaled $16,906,000 and $16,481,000 for the years ended December 31, 1994 and 1993, respectively. The increase was due to higher hotel revenues for the hotels leased by the Corporation from the Trust (which resulted in higher percentage rents) offset by a decrease in rental income of $802,000 resulting from the sale of hotels in Tucker, Georgia (June 1993), St. Louis, Missouri (December 1993), Austin, Texas (April 1994), New Port Richey, Florida (August 1994), Brunswick, Georgia (August 1994), Fayetteville, North Carolina (November 1994) and Jacksonville, Florida (November 1994). Interest from the Corporation increased to $1,730,000 from $1,534,000 for the years ended December 31, 1994 and 1993, respectively. The increase in interest income was a result of the higher amounts outstanding under the Milwaukee notes, which increased from $15,186,000 at December 31, 1993 to $16,916,000 at December 31, 1994. For additional information with respect to Rents and Interest from the Corporation in future periods, see "Liquidity and Capital Resources" below. Interest from mortgage and other notes receivable increased by $224,000 for the year ended December 31, 1994 as compared to 1993. The increase resulted from the higher balances outstanding from the additional notes received upon sales of the hotel properties discussed above and the receipt of the final payment which was due from Northview Corporation, the interest on such note having been previously deferred. The Trust and the Corporation periodically estimate the value of their hotel assets and compare these values to the net book values of the hotel assets. For hotel assets not held for sale, the undiscounted future cash flows of the assets (generally over a five-year period) on a hotel-by-hotel basis, are compared to the net book value of the assets; and if the undiscounted future cash flows are less than the net book value of the assets, the excess of the net book values over the estimated fair values is charged to current earnings. When it is the opinion of management that the fair value of a hotel that has been identified for sale is less than the net book value of the hotel, a reserve for losses is established. Fair value is determined based upon the discounted cash flow of the properties at rates (generally ranging from 11.0% to 14.5%) deemed reasonable for the type of property and prevailing market conditions, and, if appropriate, then current net proceeds of sale from pending offers. In determining whether to accept an offer for the sale of a property, management considers the fairness of the offer in comparison to the value of the property, the terms of the offer, and whether the offer is all cash or includes seller financing. Gains on sales of hotel assets for the year ended December 31, 1994 totaling $432,000 reflected the sales of hotels discussed above and $208,000 related to the in substance foreclosure and subsequent all cash sale of the underlying property collateralizing the Trust's mortgage note receivable on the Ramada Inn in Merrimack, New Hampshire. Interest expense totaled $16,265,000 and $14,020,000 for the years ended December 31, 1994 and 1993, respectively, an increase of $2,245,000. The increase was primarily due to an increase in the average interest rate under the Prior Credit Agreement, such rate varying with the prime rate charged by one of the Senior Lenders. The sales of the properties discussed above and an increase in the provision for investment losses are the primary reasons for the decline in depreciation and amortization expense of $425,000 between 1994 and 1993. Administrative and operating expenses totaled $1,583,000 and $1,948,000 for the years ended December 31, 1994 and 1993, respectively, a decrease of $365,000. The decrease was primarily the result of lower insurance expense and professional fees unrelated to the debt restructuring. During 1994 a provision for investment losses (a non-cash charge to operations) totaling $759,000 was recorded. The provision included $439,000 which was recorded as a result of the acceptance of offers to sell the Jacksonville and Fayetteville properties, which had previously been identified for sale at amounts lower than the then current net book values. The provision also included $320,000 which was established based upon an analysis of the net realizable value of the underlying property collateralizing the Trust's mortgage note receivable on the Ramada Inn in Merrimack, New Hampshire. F-86 See Note 9 of Notes to Financial Statements for a description of an agreement between Leonard M. Ross and his affiliates ("Ross") and Starwood Capital with respect to certain claims of Ross purchased by Starwood Capital and an agreement by Starwood Capital in the future to purchase the Paired Shares of the Trust and Corporation owned by Ross at a price of $5.625 per Paired Share. Starwood Capital may also elect to purchase such Paired Shares at the same time and on the same terms. During 1994, the Trust and the Corporation recorded a charge to shareholder litigation expense of $1,324,000 and $1,324,000, respectively, the estimated fair market value of the agreement, as determined by an investment banker using an option pricing model. No distributions were made by the Trust for the years ended December 31, 1994 or 1993. The Trust's net loss totaled $(3,465,000), or $(0.28) per share, and $(3,889,000), or $(0.32) per share, for the years ended December 31, 1994 and 1993, respectively. THE CORPORATION. Hotel revenues totaled $82,669,000 and $86,903,000 for the years ended December 31, 1994 and 1993, respectively, representing a decrease of $4,234,000. The hotel sales described under the caption "The Trust" above resulted in decreased revenue of $5,342,000. In March 1994, the franchise agreement and management agreement with Marriott Corporation for the Dallas property were terminated. The property is now being managed for the Corporation by Sage Hospitality, and is being operated as the Dallas Park Central Hotel. Revenues at the Dallas property decreased by $3,776,000. The decrease from property sales and the Dallas property were offset by increased revenues of $4,884,000 at the properties which continued to be leased from the Trust by the Corporation, including an increase of $1,516,000 at the Milwaukee Marriott, which was renovated during 1993. The following table summarizes average occupancy and average room rates for properties which were operated by the Corporation under lease from the Trust at December 31, 1994:
YEARS ENDED DECEMBER 31, ---------------------- 1994 1993 ---------- ---------- Including Dallas Park Central: - ------------------------------------------------------------------- Occupancy Rate..................................................... 68.03% 65.32% Average Room Rate.................................................. $ 59.85 $ 60.30 Excluding Dallas Park Central: - ------------------------------------------------------------------- Occupancy Rate..................................................... 71.76% 65.75% Average Room Rate.................................................. $ 59.84 $ 59.88
Management of the Corporation believes that the increases in the average occupancy rate resulted primarily from more favorable economic conditions which have created increased business and pleasure travel throughout the United States and improved operational systems. Gaming revenues totaled $27,981,000 and $27,505,000 for the years ended December 31, 1994 and 1993, respectively. For information regarding the carrying value of properties held for sale, see the Trust above. Gain on sales of hotel assets totaled $24,000 and $74,000 for the years ended December 31, 1994 and 1993, respectively, reflecting the property sales described above. Hotel expenses totaled $60,829,000 and $68,132,000, or 73.6% and 78.4% of hotel revenues, for the years ended December 31, 1994 and 1993, respectively. The decreases in hotel expenses as a percentage of hotel revenue are primarily due to the lower cost of operating the Dallas property (see discussion of hotel revenues above) where operating expenses have historically been higher than at other hotel properties, the improved operating margin resulting from the renovation of the Milwaukee Marriott discussed above and the effect of the sale of the properties having higher operating costs as a percentage of revenues than properties that continue to be operated by the Corporation. Gaming expenses totaled $24,454,000 and $24,055,000, or 87.4% and 87.5% of gaming revenues, for the years ended December 31, 1994 and 1993, respectively. F-87 For information with respect to rent and interest to the Trust during the years ended December 31, 1994 and 1993, see "The Trust--Results of Operations for the Years Ended December 31, 1994 and 1993" above. Administrative and operating expenses decreased by $161,000, or 6%, for the year ended December 31, 1994 as compared to 1993. The decrease was primarily the result of a reduction in the level of corporate staff. The Corporation's net loss totaled $(1,198,000), or $(0.10) per share, in 1994, as compared to $(3,143,000), or $(0.26) per share, for 1993. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992 THE TRUST. Rents from Corporation totaled $16,481,000 and $21,177,000 for the years ended December 31, 1993 and 1992, respectively. Approximately $1,106,000 of the decrease in rents resulted from the sale of hotels in Irving, Texas (March 1992), Merrimack, New Hampshire (July 1992), Spartanburg, South Carolina (September 1992), Smyrna, Georgia (January 1993), Tucker, Georgia (June 1993), and St. Louis, Missouri (December 1993). The remaining decrease was primarily due to the amendment of eighteen of the leases with the Corporation effective January 1, 1993, which reduced the fixed and percentage rents payable by the Corporation. Interest from the Corporation decreased to $1,534,000 from $4,123,000 for the years ended December 31, 1993 and 1992, respectively. The decrease in interest income was a result of the January 1, 1993 restructuring of intercompany borrowings and advances made to the Corporation, with the exception of the Milwaukee notes, into non-interest bearing demand notes for calendar years 1993 and 1994, with interest at prime plus 2% payable monthly thereafter. Interest from mortgage and other notes receivable increased by $187,000 for the year ended December 31, 1993 as compared to 1992. The increase resulted from the additional interest income related to the mortgage notes delivered to the Trust in connection with the sales of the hotel properties located in Irving, Texas, Merrimack, New Hampshire, Spartanburg, South Carolina, and Tucker, Georgia, having original principal balances of $1,650,000, $1,440,000, $775,000, and $1,985,000, respectively. As described above, effective January 28, 1993, the Trust restructured its debt. Management concluded that this debt restructuring represented a "troubled debt restructuring" as defined under generally accepted accounting principles, and accordingly, upon execution of the definitive agreement, accrued all known current or future identifiable debt restructuring costs as of December 31, 1992. No additional loan restructuring costs were incurred during the year ended December 31, 1993. Interest expense totaled $14,020,000 and $12,959,000 for the years ended December 31, 1993 and 1992, respectively, an increase of $1,061,000. The increase was primarily due to an increase in the average interest rate and an increase in the borrowings outstanding under the Term Loan and Revolving Line of Credit. The sales of the properties discussed above and an increase in the provision for investment losses are the primary reasons for the decline in depreciation and amortization expense of $1,164,000 between 1993 and 1992. Administrative and operating expenses totaled $1,948,000 and $2,350,000 for the years ended December 31, 1993 and 1992, respectively, a decrease of $402,000. The decrease was primarily the result of lower legal and professional fees unrelated to the debt restructuring. During 1993, a provision for investment losses (a non-cash charge to operations) totaling $2,369,000 was recorded primarily as a result of the acceptance of all cash offers to sell hotels previously identified for sale at amounts lower than the then current net book values, (which cash was used to meet the next principal payment due under the terms of the Credit Agreement) and the continuing deterioration of hotel values in the Southeast. No distributions were made by the Trust for the years ended December 31, 1993 or 1992. The Trust's net loss totaled $(3,889,000), or $(0.32) per share, and $(9,818,000), or $(.08) per share, for the years ended December 31, 1993 and 1992, respectively. F-88 THE CORPORATION. Hotel revenues totaled $86,903,000 and $88,812,000 for the years ended December 31, 1993 and 1992, respectively, representing a decrease of $1,909,000. The hotel sales described under the caption "The Trust" above resulted in decreased revenue of $2,373,000, which was partially offset by increased revenues of $835,000 resulting from increased average occupancy and average room rates for properties which continue to be operated by the Corporation and leased from the Trust. The following table summarizes average occupancy and average room rates for properties which were operated by the Corporation under lease from the Trust at December 31, 1993 and 1992:
YEARS ENDED DECEMBER 31, -------------------- 1993 1992 --------- --------- Occupancy Rate.......................................................... 63% 59% Average Room Rate....................................................... $ 56.59 $ 53.18
Management of the Corporation believes that the improved national economic trends experienced during 1993 resulted in increased business and pleasure travel and related increases in average occupancy rates and average room rates. Gaming revenues totaled $27,505,000 and $26,150,000 for the years ended December 31, 1993 and 1992, respectively. Management believes the increased revenue of $1,355,000 at the two gaming facilities is a result of increased customer travel to the Las Vegas area, and in particular, increased customer traffic due to the close proximity of the King 8 Hotel and Casino to several large hotel/casinos completed during 1993. Management fees and other income decreased by $737,000 to $222,000 for the year ended December 31, 1993 as compared to 1992. The decreases were primarily a result of the subcontracting of the management obligations of Western Host with respect to seven hotels not owned by the Trust, to Westland Hotel Corporation. For additional information pertaining to the subcontracts, see Note 10 of the Notes to Financial Statements. For information regarding the carrying value of properties held for sale, see the Trust above. Gain on sales of hotel assets totaled $74,000 and $4,000 for the years ended December 31, 1993 and 1992, respectively, reflecting the property sales described above. Hotel expenses totaled $68,132,000 and $68,620,000, or 78% and 77% of hotel revenues, for the years ended December 31, 1993 and 1992, respectively. The increase in hotel expenses as a percentage of hotel revenues is principally attributable to the payment of management fees to third party operators under the 11 management contracts entered into in December 1992 and increased revenues and expenses at the Dallas Marriott Park Central where operating expenses are typically higher as a percentage of revenues than at other hotel properties operated by or for the Corporation. Gaming expenses totaled $24,055,000 and $23,699,000, or 87% and 91% of gaming revenues, for the years ended December 31, 1993 and 1992, respectively. Increased gaming revenues, coupled with improved casino win percentages, resulted in the decreases in gaming expenses as a percentage of gaming revenues. For information with respect to rent and interest to the Trust during the years ended December 31, 1993 and 1992, see "The Trust--Results of Operations for the Years Ended December 31, 1993 and 1992" above. Administrative and operating expenses decreased by $1,046,000, or 27%, for the year ended December 31, 1993 as compared to 1992. The decrease is primarily the result of a reduction in the level of corporate staff. Shareholder litigation expenses include an accrual of $219,000 at December 31, 1993 in connection with the settlement of the Shareholder Actions. The Corporation's net loss totaled $(3,143,000), or $(0.26) per share, in 1993, as compared to $(9,925,000), or $(0.82) per share, for 1992. F-89 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Starwood Wichita Investors, L.P.: In our opinion, the accompanying balance sheet and the related statements of operations, of changes in partners' capital and of cash flows present fairly, in all material respects, the financial position of Starwood Wichita Investors, L.P. at December 31, 1994 and 1993 and the results of its operations and its cash flows for the year ended December 31, 1994 and the period December 17, 1993 (inception) to December 31, 1993, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Starwood Wichita Investors, L.P.'s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP January 27, 1995 Dallas, Texas F-90 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Starwood Wichita Investors, L.P.: In our opinion, the accompanying statements of operations, of changes in division equity/(deficit) and of cash flows present fairly, in all material respects, the results of operations and cash flows for the Wichita East Hotel for the period January 1, 1993 to December 19, 1993, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Wichita East Hotel management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP October 28, 1994 Dallas, Texas F-91 STARWOOD WICHITA INVESTORS, L.P. BALANCE SHEET ASSETS
DECEMBER 31, -------------------------- 1994 1993 ------------ ------------ Cash and cash equivalents.......................................................... $ 96,648 $ 28,542 Accounts receivable, net of allowance for doubtful accounts ($3,149 at December 31, 1994 and $812 at December 31, 1993, respectively)................................. 201,636 38,838 Inventories........................................................................ 106,132 125,419 Fixed assets, net of accumulated depreciation (Note 4)............................. 5,129,816 3,538,202 Other.............................................................................. 130,016 71,677 ------------ ------------ Total assets................................................................... $ 5,664,248 $ 3,802,678 ------------ ------------ ------------ ------------ LIABILITIES AND PARTNERS' CAPITAL Accounts payable--trade............................................................ $ 59,941 $ 73,999 Accounts payable--related parties.................................................. 57,671 1,306 Accrued compensations.............................................................. 41,224 52,046 Accrued taxes other than income.................................................... 104,072 68,915 Other accrued liabilities.......................................................... 70,485 29,246 Capital lease obligations (Note 5)................................................. 126,968 145,136 Long-term debt (Note 6)............................................................ 2,121,535 -- ------------ ------------ Total liabilities.............................................................. 2,581,896 370,648 ------------ ------------ Partners' capital (Note 7)......................................................... 3,082,352 3,432,030 ------------ ------------ Total liabilities and partners' capital........................................ $ 5,664,248 $ 3,802,678 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. F-92 STARWOOD WICHITA INVESTORS, L.P. STATEMENT OF OPERATIONS
PREDECESSOR FOR THE FOR THE PERIOD FOR THE PERIOD DECEMBER 17, PERIOD JANUARY 1, 1993 JANUARY 1, 1993 TO (INCEPTION) 1994 TO DECEMBER 19, TO DECEMBER DECEMBER 31, 1993 31, 1993 1994 ------------- ------------- ------------- Revenues: Rooms............................................................. $ 2,409,409 $ 23,944 $ 2,763,850 Food and beverage................................................. 791,811 9,002 1,017,421 Telephone......................................................... 107,832 868 148,404 Other............................................................. 78,569 2,185 52,694 ------------- ------------- ------------- 3,387,621 35,999 3,982,369 Cost of sales--distributed operating expenses: Rooms............................................................. 868,308 19,938 1,006,473 Food and beverage................................................. 859,543 18,779 1,052,438 Telephone......................................................... 66,571 1,242 78,832 Other............................................................. 30,720 276 -- ------------- ------------- ------------- 1,562,479 (4,236) 1,844,626 ------------- ------------- ------------- Operating department income: Undistributed operating expenses: Administrative and general........................................ 594,711 10,616 510,017 Advertising and promotion......................................... 352,041 9,221 504,959 Property operation and maintenance................................ 693,351 22,056 629,468 ------------- ------------- ------------- 1,640,103 41,893 1,644,444 ------------- ------------- ------------- Fixed charges: Depreciation...................................................... 422,555 18,236 501,095 Real estate taxes and insurance................................... 135,607 2,327 138,515 Interest.......................................................... -- -- 67,080 Other charges..................................................... 157,876 1,278 18,170 ------------- ------------- ------------- Operating loss for the period....................................... (793,662) (67,970) (524,678) Other income........................................................ 118,430 -- -- Loss on sale........................................................ (21,756) -- -- ------------- ------------- ------------- Net loss for the period............................................. $ (696,988) $ (67,970) $ (524,678) ------------- ------------- ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements. F-93 STARWOOD WICHITA INVESTORS, L.P. STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE PERIOD DECEMBER 17, 1993 (INCEPTION) TO DECEMBER 31, 1993 ------------- Partners' capital, beginning of period............................................................. $ -- Partners' contributed capital...................................................................... 3,500,000 Net loss for period................................................................................ (67,970) ------------- Partners' capital, end of period................................................................... $ 3,432,030 ------------- ------------- FOR THE PERIOD JANUARY 1, 1994 TO DECEMBER 31, 1994 ------------- Partners' capital, beginning of period............................................................. $ 3,432,030 Partners' contributed capital...................................................................... 175,000 Net loss for period................................................................................ (524,678) ------------- Partners' capital, end of period................................................................... $ 3,082,352 ------------- ------------- STATEMENT OF CHANGES IN DIVISION EQUITY (DEFICIT) (PREDECESSOR) FOR THE PERIOD JANUARY 1, 1993 TO DECEMBER 19, 1993 ------------- Division equity, beginning of period............................................................... $ 3,884,613 Capital withdrawal................................................................................. (3,287,797) Net loss for period................................................................................ (696,988) ------------- Division deficit, end of period.................................................................... $ (100,172) ------------- -------------
The accompanying notes are an integral part of these financial statements. F-94 STARWOOD WICHITA INVESTORS, L.P. STATEMENT OF CASH FLOWS
PREDECESSOR FOR THE FOR THE PERIOD FOR THE PERIOD DECEMBER 17, PERIOD JANUARY 1, 1993 JANUARY 1, 1993 TO (INCEPTION) 1994 TO DECEMBER 19, TO DECEMBER DECEMBER 31, 1993 31, 1993 1994 ------------- ------------- ------------- Cash flows from operating activities: Net loss.......................................................... $ (696,988) $ (67,970) $ (524,678) Adjustments to reconcile net loss from operations to net cash used in operating activities: Depreciation.................................................... 422,555 18,236 501,095 Loss on sale of property........................................ 21,756 -- -- Change in operating assets...................................... Accounts receivable............................................. (83,753) (38,838) (167,796) Inventory....................................................... 101,636 (125,419) 19,287 Other assets.................................................... 215,103 (71,677) (104,711) Accounts payable................................................ 175,035 75,305 138,121 Accrued liabilities............................................. (313,508) 150,207 21,133 ------------- ------------- ------------- Net cash used in operating activities......................... (158,164) (60,156) (117,549) Cash flows from investing activities: Capital expenditures.............................................. (152,240) (3,411,302) (2,237,848) Proceeds from sale of property.................................... 3,287,797 -- -- ------------- ------------- ------------- Net cash provided by/(used in) investing activities........... 3,135,557 (3,411,302) (2,237,848) Cash flows from financing activities: Division equity withdrawal........................................ (3,287,797) 3,500,000 -- Partners' capital contribution.................................... -- -- 175,000 Capital lease payments............................................ (11,302) -- 126,968 Proceeds from long-term debt...................................... -- -- 2,121,535 ------------- ------------- ------------- Net cash provided by/(used in) financing activities........... (3,299,099) 3,500,000 2,423,503 Net increase (decrease) in cash..................................... $ (321,706) $ 28,542 $ 68,106 Cash at beginning of period......................................... 379,864 -- 28,542 ------------- ------------- ------------- Cash at end of period............................................... $ 58,158 $ 28,542 $ 96,648 ------------- ------------- ------------- ------------- ------------- ------------- SUPPLEMENTAL DISCLOSURES OF CASH Cash paid during the period for: Interest............................................................ $ 8,269 $ -- $ 67,080 Income taxes........................................................ -- -- --
SUPPLEMENTARY SCHEDULES OF NON-CASH ACTIVITIES In addition to the capital assets purchased, the Partnership assumed certain capital obligations entered into by the Predecessor. See Note 5 for further discussion of the assumed capital leases. *Cash balances include cash held in escrow related to the long-term debt. The accompanying notes are an integral part of these financial statements. F-95 STARWOOD WICHITA INVESTORS, L.P. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION Starwood Wichita Investors, L.P. (the "Partnership"), a Delaware limited partnership, was formed on December 17, 1993 for the purpose of acquiring interests in real estate investments. Starwood Opportunity Fund II, L.P. ("SOF-II") is the general partner with 1% interest. SOF-II is also a limited partner owning 89% with the remaining 10% interest owned by Wichita Harvey Partners, Ltd. ("Harvey"). The Partnership acquired the Wichita East Hotel from The Travelers Insurance Company on December 20, 1993. The Travelers Insurance Company (the "Predecessor"), a Connecticut corporation, acquired the real estate property through bankruptcy proceedings and held the hotel until they sold it to the Partnership on December 20, 1993. Although the Partnership was formed and had activity on December 17, 1993, the operations of the hotel are not included in the Partnership's accounts until the hotel changed ownership on December 20, 1993. The operations of the hotel are included in the Predecessor financial records through December 19, 1993. The hotel is operated under a management agreement with Harvey Hotel Management Corporation and has 259 rooms. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS For purpose of reporting cash flows, cash and cash equivalents include cash in banks and cash on hand. FIXED ASSETS Fixed assets are stated at cost. Depreciation is provided using accelerated methods over the estimated useful lives of the related assets, generally five to 39 years. The costs of repairs and minor renewals that do not significantly extend the life of the property and equipment are normally expensed as incurred. The costs of major renovation projects are capitalized and depreciated over the related period of benefit. INVENTORIES Food, linen, china, liquor and other inventories are valued at the lower of cost or market on a first-in, first-out basis. INCOME TAXES No provision for income taxes is necessary in the financial statements of the Partnership because, as a partnership, it is generally not subject to federal or state income taxes and the tax effects of its activities flow through to the partners. No provision for income tax is provided in the Predecessor financial statements as the hotel is represented as a stand-alone entity with no prior history. Therefore, the loss incurred for the period January 1, 1993 to December 19, 1993 is assumed to have no carryback period or benefit. 3. RELATED PARTY TRANSACTIONS The Partnership has signed a management agreement with Harvey Hotel Management Corporation, a related party to Harvey. The Partnership will pay Harvey Hotel Management Corporation a management fee for operating the hotel. For the period from December 20, 1993 to December 31, 1994, the agreement provides an incentive fee which shall be equal to 20% of the "net operating income" (as defined in the agreement to exclude depreciation, amortization, interest, capital expenditures, and management fees). The incentive fee is subordinate to distributions to owners. For years ending after December 31, 1994, the management fee will be the lesser of $100,000 or total excess cash flows, as defined in the management agreement, plus 25% of the excess cash flow after deducting the amount specified above for incentive fees. For the year ended December 31, 1994 and during the period December 20, 1993 through December 31, 1993, no management fee was incurred. The Predecessor had Harvey Hotel Management Corporation manage the operations of the real estate property during the period January 1, 1993 to December 19, 1993. Management and marketing expenses paid to Harvey Hotel Management Company for the period were approximately $160,000. F-96 STARWOOD WICHITA INVESTORS, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. RELATED PARTY TRANSACTIONS (CONTINUED) The management agreement also details a preference fee to be paid to Harvey Hotel Management Corporation upon the sale or refinancing of the hotel. The agreement states that net sale (or refinancing) proceeds will be distributed to the owners until they have received a return of their capital contributions, plus an internal rate of return of 15% (as defined) on those contributions. After the return of capital, Harvey Hotel Management Corporation will receive a preference fee equal to 20% of the remaining proceeds. 4. FIXED ASSETS Fixed assets consist of the following:
DECEMBER 31, -------------------------- 1994 1993 ------------ ------------ Land........................................................... $ 341,130 $ 341,130 Building and improvements...................................... 3,536,875 1,934,512 Furniture and equipment........................................ 1,627,006 1,135,660 Equipment under capital leases................................. 144,136 145,136 ------------ ------------ 5,649,147 3,556,438 Less: accumulated depreciation................................. (519,331) (18,236) ------------ ------------ $ 5,129,816 $ 3,538,202 ------------ ------------ ------------ ------------
Depreciation expense for the year ended December 31, 1994 was $501,095 and includes depreciation on assets recorded under capital leases. Depreciation expense for the period December 20, 1993 to December 31, 1993 was $18,236. The land, building and furniture was purchased for approximately $3,500,000 on December 20, 1993. 5. LEASES The Partnership assumed certain capital equipment leases in the operation of the real estate property which extend through 2000. At the end of the lease term the Partnership has the option to purchase the equipment at the fair market value of the equipment. Capital lease obligations are summarized below for the years ending December 31: 1995.............................................................. $ 29,357 1996.............................................................. 29,357 1997.............................................................. 29,357 1998.............................................................. 29,357 1999.............................................................. 29,357 Thereafter........................................................ 9,786 --------- Net minimum lease payments under capital leases................... 156,571 Less amount representing interest payments under capital leases... (29,603) --------- Present value of net minimum lease payments under capital leases........................................................... $ 126,968 --------- ---------
F-97 STARWOOD WICHITA INVESTORS, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. LEASES (CONTINUED) The Partnership leases various equipment under operating leases for use in the operation of the property. Minimum rental commitments under non-cancelable leases are as follows at December 31: 1995............................................................... $ 7,688 1996............................................................... 4,752 1997............................................................... 1,386 --------- Total minimum lease payments....................................... $ 13,826 --------- ---------
Rent expense for the year ended December 31, 1994 was $3,915. Rent expense for the period January 1, 1993 to December 19, 1993 was $6,253, and totaled $280 for the remainder of the year. The Partnership leases space to various tenants for a hotel gift shop, hair salon, and a rooftop antenna. The minimum lease rental income under non-cancelable leases for 1994 was approximately $8,666. The leases expire on various dates from 1995 to 1999. 6. LONG-TERM DEBT On April 15, 1994, the Partnership entered into a construction loan with Bank IV Kansas for the purpose of renovating the property. The construction loan is for $2,250,000 and carries an interest rate of 7.75% during the construction period. The Partnership paid a commitment fee in the amount of $15,000 to secure this financing. The loan, totaling $2,121,535, was converted to permanent financing with an annual interest rate of 7.75% fixed for a five-year term. A balloon payment in the amount of $1,466,490 is due January 1, 2000. Payments of principal and interest are due monthly and total $22,675. Principal repayments during each of the next five years are as follows: 1995............................................................ $ 111,587 1996............................................................ 120,549 1997............................................................ 130,230 1998............................................................ 140,690 1999............................................................ 151,989 2000............................................................ 1,466,490 --------- Total........................................................... $2,121,535 --------- ---------
7. PARTNERS' CAPITAL At December 31, 1994, total partners' capital was comprised of the following:
PARTNERS' CAPITAL PARTNERS' CAPITAL CONTRIBUTIONS NET LOSS CAPITAL ------------ ------------- ----------- ------------ SOF-II (90%).................................... $ 3,088,827 $ 157,500 $ (472,210) $ 2,774,117 Harvey (10%).................................... 343,203 17,500 (52,468) 308,235 ------------ ------------- ----------- ------------ $ 3,432,030 $ 175,000 $ (524,678) $ 3,082,352 ------------ ------------- ----------- ------------ ------------ ------------- ----------- ------------
Net loss of the Partnership is allocated to the partners, on a pro rata basis, in accordance with the Partnership Agreement. The Partnership Agreement states that partner contributions will be limited to $5,340,000 for SOF-II and $600,000 for Harvey. The Agreement requires that contributions be made on a pro rata basis, as needed for hotel renovations or operations. F-98 STARWOOD WICHITA INVESTORS, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. SUBSEQUENT EVENT Effective January 1, 1995 pursuant to a Plan of Reorganization executed on February 1, 1995, the Property and related hotel operations, subject to related secured mortgage obligations, along with other real estate assets, mortgage receivables and cash were transferred into two newly formed Operating Partnerships between Hotel Investors Trust/Hotel Investors Corporation (a real estate investment trust and a corporation trading publicly on a paired basis) and certain entities controlled by the Starwood Capital Group and/or its affiliates (including Starwood Wichita Investors, L.P.) in exchange for majority interest of the Operating Partnership interests. Concurrently with these transactions, Hotel Investors Trust/Hotel Investors Corporation contributed substantially all of their net assets and operations into the Operating Partnerships and changed their names to Starwood Lodging Trust and Starwood Lodging Corporation, respectively. Pursuant to the terms of this Agreement, Starwood Capital Group has guaranteed the Operating Partnerships certain aggregate minimum cash flows from operations after capital expenditures of the property it contributed for a three year period expiring December 31, 1997. F-99 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Starwood Capital Group: In our opinion, the accompanying balance sheet and the related statement of operations, of changes in partners' capital and of cash flows present fairly, in all material respects, the financial position of The French Quarter Square at December 31, 1994 and the results of its operations and its cash flows for the period August 1, 1994 to December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of The French Quarter Square's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. The accompanying financial statements of the French Quarter Square have been prepared assuming that the Partnership owns its properties. As discussed in Note 7, a lawsuit had been filed which disputes this ownership. In May, 1995, the Kentucky Supreme Court upheld a lower court approval of the transaction in which the properties were acquired. The ultimate outcome of any potential appeal to this ruling cannot be determined at present. No provision for any liability that may result upon adjudication has been made in the accompanying financial statements. PRICE WATERHOUSE LLP March 3, 1995 Except Note 7, which is as of May 11, 1995 Dallas, Texas F-100 THE FRENCH QUARTER SQUARE BALANCE SHEET DECEMBER 31, 1994 ASSETS Cash and cash equivalents...................................................... $ 214,517 Accounts receivable............................................................ 104,820 Inventories.................................................................... 25,868 Prepaid expenses............................................................... 117,398 Fixed assets, net of accumulated depreciation (Note 3)......................... 12,053,911 Other.......................................................................... 50,561 ----------- Total assets............................................................... $12,567,075 ----------- ----------- LIABILITIES AND PARTNERS' CAPITAL Accounts payable--trade........................................................ $ 105,162 Accrued sales and use taxes.................................................... 55,826 Accrued payroll................................................................ 26,948 Other accrued liabilities...................................................... 19,327 Deferred revenue............................................................... 70,023 Notes payable.................................................................. 47,369 Debt allocation (Note 5)....................................................... 898,000 ----------- Total liabilities.......................................................... 1,222,655 ----------- Contingencies and uncertainties (Note 7)....................................... -- Partners' capital.............................................................. 11,344,420 ----------- Total liabilities and partners' capital.................................... $12,567,075 ----------- -----------
The accompanying notes are an integral part of these financial statements. F-101 THE FRENCH QUARTER SQUARE STATEMENT OF OPERATIONS FOR THE PERIOD AUGUST 1, 1994 TO DECEMBER 31, 1994 Revenues: Rooms......................................................................... $1,415,866 Food and beverage............................................................. 422,650 Telephone and other........................................................... 124,381 Rental........................................................................ 290,010 Expense reimbursements........................................................ 49,939 ---------- 2,302,846 ---------- Cost of sales--distributed operating expenses: Rooms......................................................................... 340,427 Food and beverage............................................................. 429,269 Telephone..................................................................... 31,191 Other......................................................................... 19,798 ---------- 820,685 ---------- 1,482,161 ---------- Operating department income: Undistributed operating expenses: Administrative and general.................................................. 284,568 Advertising and promotion................................................... 162,019 Property operation and maintenance.......................................... 245,622 ---------- 692,209 ---------- Fixed charges: Depreciation.................................................................. 311,856 Real estate taxes and insurance............................................... 75,615 Interest...................................................................... 24,000 ---------- 411,471 ---------- Net income for the period....................................................... $ 378,481 ---------- ----------
The accompanying notes are an integral part of these financial statements. F-102 THE FRENCH QUARTER SQUARE STATEMENT OF CHANGES IN PARTNERS' CAPITAL FOR THE PERIOD AUGUST 1, 1994 TO DECEMBER 31, 1994 Partners' capital, beginning of period......................................... $13,454,003 Distributions to partners...................................................... (2,915,035) Contributions from partners.................................................... 426,971 Net income for period.......................................................... 378,481 ----------- Partners' capital, end of period............................................... $11,344,420 ----------- -----------
The accompanying notes are an integral part of these financial statements. F-103 THE FRENCH QUARTER SQUARE STATEMENT OF CASH FLOWS FOR THE PERIOD AUGUST 1, 1994 TO DECEMBER 31, 1994 Cash flows from operating activities: Net income.................................................................... $ 378,481 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................................................................ 311,856 Change in operating assets and liabilities Accounts receivable....................................................... (104,820) Inventory................................................................. (25,868) Other assets.............................................................. (167,959) Accounts payable.......................................................... 105,162 Accrued liabilities....................................................... 102,101 Deferred revenue.......................................................... 70,023 ---------- Net cash provided by operating activities............................... 668,976 ---------- Cash flows from financing activities: Distributions to partners..................................................... (2,915,035) Contributions from partners................................................... 426,971 Note payable.................................................................. 47,369 Debt allocation............................................................... 898,000 ---------- Net cash used in financing activities................................... (1,542,695) Net decrease in cash............................................................ (873,719) ---------- Cash at beginning of period..................................................... 1,088,236 ---------- Cash at end of period........................................................... $ 214,517 ---------- ----------
The accompanying notes are an integral part of these financial statements. F-104 THE FRENCH QUARTER SQUARE NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION The French Quarter Square (the "Partnership") owns and operates a 155 room hotel, a 37,500 square foot shopping center and a 12,000 square foot office building (the "Properties") located in Lexington, Kentucky. The shopping center and office space were completed in 1988 and the hotel was completed in 1989. On August 4, 1994, for an aggregate purchase price of approximately $14.8 million, Berl Holdings, L.P. ("Berl") in combination with one of its limited partners, Starwood Opportunity Fund II, L.P. ("SOF II"), acquired the Properties, a nearby warehouse, 7.4 acres of undeveloped land and certain monetary interests of Kentucky Central Life Insurance Company in the operating accounts of the real estate and other amounts due them under a settlement agreement with the previous owners with respect to the mortgage. The purchase price, less the estimated value of the monetary interests acquired, was allocated by management between the real assets acquired by Berl and those acquired by SOF II (the warehouse and the undeveloped land) and, thereafter, between the land, building and improvements, and furniture, and equipment based on the relative estimated fair value of the individual property components. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statements include the accounts of the Properties, as included in the financial records of Berl, as if it were a separate legal entity and these records have been prepared using generally accepted accounting principles. CASH AND CASH EQUIVALENTS For purpose of reporting cash flows, cash and cash equivalents include cash in banks and cash on hand. FIXED ASSETS Fixed assets are stated at cost. Depreciation is provided using accelerated methods over the estimated useful lives of the related assets, generally five to 39 years. The costs of repairs and minor renewals that do not significantly extend the life of the building and improvements are normally expensed as incurred. The costs of major renovation projects are capitalized and depreciated over the related period of benefit. INVENTORIES Food, linen, china, liquor and other inventories are valued at the lower of cost or market on a first-in, first-out basis. REVENUE RECOGNITION Hotel revenues are recognized when earned. Office and retail revenues are recognized on a straight-line basis over the life of the respective leases. INCOME TAXES No provision for income taxes is necessary in the financial statements of the Partnership because, as a partnership, it is generally not subject to federal or state income taxes and the tax effects of its activities flow through to the partners. F-105 THE FRENCH QUARTER SQUARE NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. FIXED ASSETS Fixed assets consist of the following at December 31, 1994: Land........................................................... $ 1,236,576 Building and improvements...................................... 10,060,739 Furniture and equipment........................................ 1,068,452 ----------- 12,365,767 Less: accumulated depreciation................................. (311,856) ----------- $12,053,911 ----------- -----------
Depreciation expense for the period August 1, 1994 to December 31, 1994 was $311,856. 4. LEASES The office and retail properties are leased under operating leases with initial non-cancellable contracts starting at thirty-six months. Some leases provide for tenant reimbursement of certain common area maintenance expenses, insurance and real estate taxes on a monthly basis. A summary of the future minimum rentals to be received under non-cancellable operating leases is as follows: Year ending December 31: 1995............................................................ $ 503,443 1996............................................................ 378,871 1997............................................................ 305,724 1998............................................................ 292,641 1999............................................................ 252,370 Thereafter...................................................... 1,266,913 ---------- $2,999,962 ---------- ----------
Certain retail leases require percentage rents to be paid after sales for individual retailers have reached a specified level. 5. JOINT BORROWING DEBT ALLOCATION Berl, through its interest in Starwood-Huntington Partners, L.P. ("Starwood-Huntington"), a majority owned affiliated partnership, acquired the fee title to the Doubletree Club Hotel of Rancho Bernardo, California which was financed in part through a $6.8 million mortgage on the acquired property. The remaining purchase price was financed through a $1.95 million borrowing by Berl secured by the French Quarter hotel property and two other hotel properties owned by Berl. The proceeds of this borrowing were contributed by Berl into Starwood-Huntington. The two mortgages contain cross-default provisions which effectively cross-collateralize all four hotel properties. The mortgage loans accrue interest at LIBOR plus 2.5%, payable monthly. Principal is due upon maturity in September, 1995. It is contemplated that the mortgage will be repaid with proceeds from a public offering made by Hotel Investors Trust. A pro rata portion of the Berl loan and the related interest expense have been reflected in these financial statements based on the relative 1994 acquisition prices of the Properties. 6. SUBSEQUENT EVENT Effective January 1, 1995, pursuant to a Plan of Reorganization executed on February 1, 1995, the Properties, subject to related secured mortgage obligations, along with other real estate assets, mortgage receivables and cash were transferred into two newly formed Operating Partnerships between Hotel Investors Trust/Hotel Investors Corporation (a real estate investment trust and a corporation trading publicly on a F-106 THE FRENCH QUARTER SQUARE NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. SUBSEQUENT EVENT (CONTINUED) paired basis) and certain entities controlled by Starwood Capital Group, LP (including Berl and Starwood-Huntington) in exchange for a majority of the Operating Partnership's interests. Concurrently with these transactions, Hotel Investors Trust/Hotel Investors Corporation contributed substantially all of their net assets and operations into the Operating Partnerships and changed their name to Starwood Lodging Trust and Starwood Lodging Corporation, respectively. 7. CONTINGENCIES AND UNCERTAINTIES Kentucky Central Life Insurance Company ("KCL") sold the hotel, office and retail property to Berl. This sale was part of a pooled asset sale conducted by the Kentucky Insurance Commissioner as rehabilitator of KCL. At the time of the sale, the Kentucky Circuit Court had approved the sale, and KCL had appealed such approval. These appeals were transferred to the Kentucky Supreme Court. On May 11, 1994, the Kentucky Supreme Court unanimously upheld the circuit court's approval. KCL has the right to file for reconsideration of the case with the Kentucky Supreme Court or it may file a petition for certiorari with the United States Supreme Court within ninety days. Neither Berl or SOF II are party to this litigation. In the event that the Commissioner loses this appeal and the sales are voided, Berl and SOF II have secured return of their purchase price by escrowing the proceeds at closing and by obtaining title insurance affirmatively covering this risk. F-107 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of the Starwood Capital Group: We have audited the accompanying schedules of operating revenue and certain expenses of the French Quarter Square (the "Properties") for the period January 1 to July 31, 1994 and the year ended December 31, 1993. These schedules are the responsibility of the Properties' management. Our responsibility is to express an opinion on these schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the schedules of operating revenue and certain expenses are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall schedule presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying schedules of operating revenue and certain expenses were prepared on the basis described in Note 1 and is not intended to be a complete presentation of the Properties' revenues and expenses. In our opinion, the schedules of operating revenue and certain expenses audited by us present fairly, in all material respects, the operating revenue and certain expenses of the French Quarter Square, on the basis described in Note 1, for the period January 1 to July 31, 1994 and the year ended December 31, 1993, in conformity with generally accepted accounting principles. PRICE WATERHOUSE LLP Dallas, Texas March 3, 1995 F-108 THE FRENCH QUARTER SQUARE SCHEDULES OF OPERATING REVENUE AND CERTAIN EXPENSES FOR THE PERIOD JANUARY 1 TO JULY 31, 1994 AND THE YEAR ENDED DECEMBER 31, 1993
FOR THE FOR THE PERIOD YEAR ENDED JANUARY 1 TO DECEMBER 31, 1993 JULY 31, 1994 ----------------- --------------- Operating revenue: Rooms................................................................... $ 3,280,411 $ 1,898,664 Food and beverage....................................................... 1,165,305 654,654 Telephone and other..................................................... 167,231 76,034 Rental.................................................................. 721,356 278,223 Expense reimbursements.................................................. 6,266 36,819 ----------------- --------------- 5,340,569 2,944,394 ----------------- --------------- Certain expenses (Note 1): Cost of sales........................................................... 1,827,710 1,125,362 General and administrative.............................................. 500,146 316,673 Marketing............................................................... 399,519 240,699 Energy costs............................................................ 260,755 149,274 Management fees......................................................... 271,313 147,685 Real estate taxes....................................................... 186,509 -- Insurance and property operations....................................... 297,398 169,444 Common area maintenance................................................. 36,318 18,912 Other expenses.......................................................... 46,130 32,658 ----------------- --------------- 3,825,798 2,200,707 ----------------- --------------- Operating revenue in excess of certain expenses........................... $ 1,514,771 $ 743,687 ----------------- --------------- ----------------- ---------------
The accompanying notes are an integral part of these financial statements. F-109 THE FRENCH QUARTER SQUARE NOTES TO THE FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying schedule of operating revenue and certain expenses relates to the operations of the French Quarter Square (the Properties) located in Lexington, Kentucky. The Properties consist of a 155 room hotel, a 37,500 square foot shopping center and a 12,000 square foot office building. The shopping center and office space were completed in 1988 and the hotel was completed in 1989. BASIS OF PRESENTATION This schedule was prepared for the partners of Starwood Capital Group (the Partners), who acquired the Properties in an acquisition from Kentucky Central Life Insurance Company on August 1, 1994. Kentucky Central Life Insurance received the properties through a deed in lieu of foreclosure on June 15, 1994. Prior to ownership by Kentucky Central Life Insurance Company, the Properties were owned by French Quarter Square Limited (Predecessor), a Kentucky limited partnership, who had filed for protection under Chapter 11 Bankruptcy on September 21, 1993. The Partners are contemplating selling these properties to Hotel Investors Inc. for inclusion in a real estate investment trust portfolio. Accordingly, certain expenses which may not be comparable to the expenses expected to be incurred in the proposed future operations of the Properties, have been excluded under the assumption that the potential transaction described above will be consummated. Expenses excluded consist of depreciation and valuation adjustments to the building and improvements, interest expense on certain debt incurred by the Properties to acquire and develop the property, and amortization of expenses not directly related to the proposed future operations of the Hotel. REVENUE AND EXPENSE RECOGNITION The accompanying schedule of operating revenue and certain expenses has been prepared on the accrual basis of accounting. Rooms revenue for the hotel is recognized daily on a check-in basis. Rental revenue for the office and shopping center is recognized on a monthly basis. All other revenue is recognized when earned. 2. RELATED PARTY TRANSACTIONS During the seven-month period ended July 31, 1994 and the year ended December 31, 1993, the hotel incurred approximately $400,000 and $240,000, respectively, in charges from French Quarter Properties Inc. (a related party) for marketing and management services. Payments totaling approximately $150,000, for management fees and leasing commissions incurred prior to January 1, 1993, were paid to Graves/Turner Developments on various dates between September 2, 1993 and September 21, 1993. In addition, approximately $16,000 and $271,000, respectively, in management fees were incurred and paid to Graves/Turner Development for management services rendered during the seven-month period ended July 31, 1994 and the year ended December 31, 1993, respectively. 3. FUTURE MINIMUM RENTALS UNDER OPERATING LEASES The Property is leased under operating leases with initial non-cancellable contracts starting at thirty- six months. Some leases provide for tenant reimbursement of certain common area maintenance expenses, insurance and real estate taxes on a monthly basis. F-110 THE FRENCH QUARTER SQUARE NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 3. FUTURE MINIMUM RENTALS UNDER OPERATING LEASES (CONTINUED) A summary of the future minimum rentals to be received under non-cancellable operating leases is as follows:
YEAR ENDING DECEMBER 31, - -------------------------------------------------------------------------------- 1995............................................................................ $ 503,443 1996............................................................................ 378,871 1997............................................................................ 305,724 1998............................................................................ 292,641 1999............................................................................ 252,370 Thereafter...................................................................... 1,266,913 ------------ $ 2,999,962 ------------ ------------
Several of the retail leases require percentage rents to be paid after sales for individual retailers have reached a specified level. F-111 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Berl Holdings, L.P.: In our opinion, the accompanying balance sheet and the related statement of operations and retained earnings and of cash flows present fairly, in all material respects, the financial position of Capitol Hill Suites at December 31, 1994, and the results of its operations and its cash flows for the period July 14, 1994 (acquisition) to December 31, 1994 in conformity with generally accepted accounting principles. These financial statements are the responsibility of Capitol Hill Suites' management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with generally accepted auditing standards which requires that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Washington, DC March 2, 1995 F-112 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Berl Holdings, L.P. In our opinion, the accompanying balance sheet at December 31, 1993 and the related statement of operations, changes in stockholder's equity and of cash flows present fairly, in all material respects, the financial position and results of operations and cash flows for Capitol Hill Suites for the period January 1, 1994 to July 13, 1994, and the year ended December 31, 1993, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Capitol Hill Suites' management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with generally accepted auditing standards which requires that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Washington, DC March 2, 1995 F-113 CAPITOL HILL SUITES BALANCE SHEET ASSETS
DECEMBER 31, -------------------------- (PREDECESSOR) 1994 1993 ------------ ------------ Cash.............................................................................. $ 192,335 $ 91,175 Accounts receivable............................................................... 64,142 130,711 Inventory, at cost................................................................ 57,206 51,097 Other............................................................................. 29,736 20,543 Fixed assets: Land............................................................................ 1,275,528 2,258,000 Building and building improvements.............................................. 6,713,347 5,640,117 Furniture, fixtures and equipment............................................... 719,724 419,093 ------------ ------------ 8,708,599 8,317,210 Less: Accumulated depreciation.................................................... 204,124 523,591 ------------ ------------ 8,504,475 7,793,619 ------------ ------------ Total assets.................................................................. $ 8,847,894 $8,087,145 ------------ ------------ ------------ ------------ LIABILITIES AND DIVISION EQUITY Accounts payable.................................................................. $ 139,422 $ 141,597 Accounts payroll.................................................................. 40,596 20,243 Other accrued expenses............................................................ 54,238 20,244 Mortgage payable (Note 3)......................................................... 617,000 -- ------------ ------------ Total liabilities............................................................. 851,256 182,084 ------------ ------------ Division equity................................................................... 7,996,638 7,905,061 ------------ ------------ Total liabilities and division equity......................................... $ 8,847,894 $ 8,087,145 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. F-114 CAPITOL HILL SUITES STATEMENT OF OPERATIONS
FOR THE PERIOD PREDECESSOR FOR JULY 14, 1994 THE PERIOD PREDECESSOR (ACQUISITION) TO JANUARY 1, 1994 YEAR ENDED DECEMBER 31, TO JULY 13, DECEMBER 31, 1994 1994 1993 ---------------- --------------- ------------ Revenues: Suites............................................. $1,412,222 $1,856,654 $3,146,322 Telephone.......................................... 50,196 58,061 101,665 Other.............................................. 50,618 56,455 147,330 ---------------- --------------- ------------ 1,513,036 1,971,170 3,395,317 ---------------- --------------- ------------ Departmental expenses: Suites............................................. 416,777 519,190 875,318 Telephone.......................................... 18,340 22,642 47,705 Other.............................................. 16,796 20,368 48,232 ---------------- --------------- ------------ 451,913 562,200 971,255 ---------------- --------------- ------------ Gross profit......................................... 1,061,123 1,408,970 2,424,062 ---------------- --------------- ------------ Other expenses: General and administrative......................... 166,206 222,244 418,513 Advertising and promotion.......................... 81,992 110,942 210,317 Utilities.......................................... 57,921 66,962 133,693 Maintenance and repairs............................ 93,454 124,995 185,766 Insurance and taxes................................ 74,234 60,518 152,834 Depreciation and amortization...................... 204,124 154,575 253,600 Management fees.................................... 40,888 102,562 156,874 Other.............................................. 6,696 3,865 ---------------- --------------- ------------ 725,515 846,663 1,511,597 ---------------- --------------- ------------ Income from hotel operations......................... 335,608 562,307 912,465 Interest expense..................................... 16,000 -- -- Other................................................ -- 95,238 -- ---------------- --------------- ------------ Net income........................................... $ 319,608 $ 467,069 $ 912,465 ---------------- --------------- ------------ ---------------- --------------- ------------
The accompanying notes are an integral part of these financial statements. F-115 CAPITOL HILL SUITES STATEMENT OF CHANGES IN DIVISION EQUITY
FOR THE PERIOD JULY 14, 1994 (ACQUISITION) TO DECEMBER 31, 1994 ----------------- Contributed capital............................................................................ $ 8,515,307 Capital withdrawal............................................................................. (838,277) Net income for period.......................................................................... 319,608 ----------------- Division equity, ending........................................................................ $ 7,996,638 ----------------- -----------------
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (PREDECESSOR) FOR THE PERIOD JANUARY 1, 1994 TO JULY 13, 1994 -------------- Stockholders' equity, beginning............................................. $7,905,061 Capital withdrawal.......................................................... (8,315,397) Distributions to stockholder, net........................................... (194,268) Net income for period....................................................... 467,069 -------------- Stockholders' equity, ending................................................ $ (137,535) -------------- -------------- FOR THE PERIOD JANUARY 1, 1993 TO DECEMBER 31, 1993 -------------- Stockholders' equity, beginning............................................. $7,697,976 Distributions to stockholder, net........................................... (705,380) Net income for period....................................................... 912,465 -------------- Stockholders' equity, ending................................................ $7,905,061 -------------- --------------
The accompanying notes are an integral part of these financial statements. F-116 CAPITOL HILL SUITES STATEMENTS OF CASH FLOWS
FOR THE PREDECESSOR PERIOD JULY FOR THE 14, 1994 PERIOD PREDECESSOR (ACQUISITION) JANUARY 1, YEAR ENDED TO DECEMBER 1994 TO JULY DECEMBER 31, 1994 13, 1994 31, 1993 ----------- ------------ ----------- Cash flows from operating activities: Net income........................................... $ 319,608 $ 467,069 $ 912,465 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization...................... 204,124 154,575 253,600 Gain on sale of fixed assets....................... -- -- (3,821) Changes in assets and liabilities: (Increase) decrease in accounts receivable......... (14,104) 130,711 16,238 (Increase) decrease in inventory................... (5,745) 51,097 7,727 (Increase) decrease in other....................... (7,183) 20,543 (3,249) Increase (decrease) in accounts payable............ 139,422 (141,597) 41,351 Decrease in accrued payroll........................ (7,131) (20,243) (27,116) Decrease in other accrued expenses................. (10,279) (20,244) (63,389) ----------- ------------ ----------- Net cash provided by operating activities........ 618,712 641,911 1,133,806 ----------- ------------ ----------- Cash flows from investing activities: Capital expenditures............................... (8,720,407) (264,557) (527,883) Proceeds from sale of fixed assets................. -- 8,315,397 3,821 ----------- ------------ ----------- Net cash (used in) provided by investing activities...................................... (8,720,407) 8,050,840 (524,062) ----------- ------------ ----------- Cash flows from financing activities: Partners' capital contribution..................... 8,515,307 -- -- Proceeds from mortgage borrowings.................. 617,000 -- -- Capital withdrawal................................. (838,277) (8,315,397) -- Distributions to stockholder, net.................. -- (194,268) (705,380) ----------- ------------ ----------- Net cash provided by (used in) financing activities...................................... 8,294,030 (8,509,665) (705,380) Net increase (decrease) in cash...................... 192,335 183,086 (95,636) Cash, beginning...................................... -- 91,175 186,811 ----------- ------------ ----------- Cash, ending......................................... $ 192,335 $ 274,261 $ 91,175 ----------- ------------ ----------- ----------- ------------ -----------
The accompanying notes are an integral part of these financial statements. F-117 CAPITOL HILL SUITES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1994 1. ORGANIZATION. Capitol Hill Suites (the Property), a 152 room suites hotel located in Washington D.C., was acquired by Berl Holdings, L.P. (Berl) on July 14, 1994 from Capitol Hill Holdings, Inc. (the Predecessor) which had acquired the Property from a subsidiary of Marine Midland Realty Credit Corporation, in 1991. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. BASIS OF PRESENTATION The accompanying financial statements include the accounts of the Property, as included in the financial records of Berl and the Predecessor, as if it were a separate legal entity and have been prepared using the accrual basis of accounting. CASH AND CASH EQUIVALENTS The Property considers highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. INVENTORY Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out method. FIXED ASSETS Fixed assets are recorded at the lower of cost or net realizable value based on fair value allocations as determined by management at the acquisition date. Building and building improvements, furniture and fixtures and equipment are depreciated using the straight-line method over estimated lives ranging from 5 to 30 years. The costs of repairs and minor renewals that do not significantly extend the life of the property and equipment are normally expensed as incurred. The costs of major renovation projects are capitalized and depreciated over the related period of benefit. INCOME TAXES At December 31, 1994, the Property is owned by a partnership, as such, the Property is not subject to federal or state income taxes; the tax effect of the property's activities accrues to its partners. Accordingly, no provision or benefit for income taxes is necessary in the financial statements for the period from July 14, 1994 to December 31, 1994. The Predecessor corporation is a participant in a joint venture under which the venture partner is allocated substantially all of the results of operations for tax purposes. The venture partnership is a foreign corporation which has substantial losses for which no benefit had previously been realized. Accordingly, no provision or benefit for federal or state income taxes is provided for in the financial statements for the periods ended December 31, 1993 and July 13, 1994. 3. MORTGAGE PAYABLE. Berl through its interest in Starwood-Huntington Partners, L.P. ("Starwood-Huntington"), a majority owned affiliated partnership, acquired the fee title to the Doubletree Club Hotel of Rancho Bernardo, California for $8.25 million which was financed in part through a $6.8 million mortgage on the acquired property. The remaining purchase price was financed through a $1.95 million borrowing by Berl secured by the Property and two other hotel properties owned by Berl. The proceeds of this borrowing were contributed by Berl into Starwood-Huntington. The two mortgages contain cross-default provisions, which effectively cross-collateralize all four hotel properties. The mortgage loans accrue interest at LIBOR plus 2.5%, payable monthly. Principal is due upon maturity in September, 1995. A pro rata portion of the Berl loan and the related interest expense have been reflected in these financial statements based on the relative 1994 acquisition prices of the three properties securing the loan. F-118 CAPITOL HILL SUITES NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 4. MANAGEMENT AGREEMENT. The property has a management agreement with Hospitality Partners (Hospitality), a minority limited partner in Berl. The agreement provides for a monthly management fee of 8.5% (10% under predecessor) of adjusted net operating income, as defined in the agreement. The agreement also provides for an incentive fee equal to 20% of adjusted net operating income, as defined by the agreement, in excess of certain thresholds, which were increased concurrent with the acquisition described in Note 1. The management and incentive fees for the period July 14, 1994 to December 31, 1994 the period January 1, 1994 to July 13, 1994 and the year ended December 31, 1993, approximated $41,000, $103,000 and $157,000, respectively. During the period July 14, 1994 through December 31, 1994, the period January 1, 1994 through July 13, 1994, and the year ended December 31, 1993, $20,000, $25,000 and $45,600, respectively was paid to Hospitality for certain accounting services provided to the Suites. 5. SUBSEQUENT EVENT. Effective January 1, 1995 pursuant to a Plan of Reorganization executed on February 1, 1995, the Property and related hotel operations, subject to related secured mortgage obligations, along with other real estate assets, mortgage receivables and cash were transferred into two newly formed Operating Partnerships between Hotel Investors Trust/Hotel Investors Corporation (a real estate investment trust and a corporation trading publicly on a paired basis) and certain entities controlled by the Starwood Capital Group and/or its affiliates (including Berl and Starwood-Huntington) in exchange for majority interest of the Operating Partnerships interests. Concurrently with these transactions, Hotel Investors Trust/Hotel Investors Corporation contributed substantially all of their net assets and operations into the Operating Partnerships and changed their names to Starwood Lodging Trust and Starwood Lodging Corporation, respectively. F-119 INDEPENDENT AUDITORS' REPORT To Starwood Lodging Trust and Starwood Lodging Corporation: We have audited the accompanying balance sheets of the Doubletree Club Hotel of Rancho Bernardo (the "Hotel") as of December 31, 1994 and 1993, and the related statements of operations and owners' equity and of cash flows for the periods September 16, 1994 to December 31, 1994 and January 1, 1994 to September 15, 1994 and for the year ended December 31, 1993. These financial statements are the responsibility of the Hotel's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Doubletree Club Hotel of Rancho Bernardo at December 31, 1994 and 1993, and the results of its operations and its cash flows for the periods September 16, 1994 to December 31, 1994 and January 1, 1994 to September 15, 1994 and for the year ended December 31, 1993 in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, the Hotel was acquired by Starwood-Huntington Partners, L.P. on September 16, 1994 in a transaction accounted for as a purchase. As a result of the acquisition, the financial statements for the period subsequent to the acquisition are presented on a different basis of accounting than that in the preceding periods and are therefore not directly comparable. DELOITTE & TOUCHE LLP Los Angeles, California March 24, 1995 F-120 DOUBLETREE CLUB HOTEL OF RANCHO BERNARDO BALANCE SHEETS DECEMBER 31, 1994 AND 1993 ASSETS
SUCCESSOR PREDECESSOR ------------ ------------- DECEMBER 31, --------------------------- 1994 1993 ------------ ------------- CURRENT ASSETS: Cash and cash equivalents (Note 1)................................................ $ 190,217 $ 283,062 Accounts receivable, less allowance for doubtful accounts of $12,240 in 1994 and $5,772 in 1993................................................................... 91,913 65,999 Due from Operator (Note 2)........................................................ -- 126,000 Deferred financing costs, net of accumulated amortization of $22,750.............. 54,964 -- Inventories (Note 1).............................................................. 11,227 10,124 Prepaid expenses.................................................................. 29,311 2,499 ------------ ------------- Total current assets.......................................................... 377,632 487,684 Restricted cash (Note 2).......................................................... -- 328,394 Property and equipment, Net (Notes 1 and 4)....................................... 8,180,392 8,091,886 Other assets...................................................................... -- 529 ------------ ------------- TOTAL......................................................................... $ 8,558,024 $ 8,908,493 ------------ ------------- ------------ ------------- LIABILITIES AND OWNERS' EQUITY CURRENT LIABILITIES: Accounts payable.................................................................. $ 104,955 $ 21,445 Due to Operator (Note 2).......................................................... 17,206 Accrued expenses, including pre-petition liabilities of $59,618 in 1993........... 166,785 221,780 Notes payable (Note 5)............................................................ 6,800,000 -- ------------ ------------- Total current liabilities..................................................... 7,071,740 260,431 OWNERS' EQUITY.................................................................... 1,486,284 8,648,062 ------------ ------------- TOTAL......................................................................... $ 8,558,024 $ 8,908,493 ------------ ------------- ------------ -------------
The accompanying notes are an integral part of these financial statements. F-121 DOUBLETREE CLUB HOTEL OF RANCHO BERNARDO STATEMENTS OF OPERATIONS AND OWNERS' EQUITY PERIODS SEPTEMBER 16, 1994 TO DECEMBER 31, 1994 AND JANUARY 1, 1994 TO SEPTEMBER 15, 1994 AND YEAR ENDED DECEMBER 31, 1993
SUCCESSOR PREDECESSOR --------------- ----------------------------- SEPTEMBER 16 TO JANUARY 1 TO DECEMBER 31, SEPTEMBER 15, DECEMBER 31, 1994 1994 1993 --------------- --------------- ------------ REVENUES: Rooms......................................................... $ 868,926 $ 2,392,008 $2,914,592 Food and beverage............................................. 46,354 134,854 197,863 Telephone..................................................... 50,525 146,027 173,716 Other......................................................... 31,647 82,917 49,251 --------------- --------------- ------------ Total revenues.............................................. 997,452 2,755,806 3,335,422 --------------- --------------- ------------ COST OF SALES: Rooms......................................................... 174,129 512,552 647,623 Food and beverage............................................. 53,379 129,125 143,377 Telephone..................................................... 14,402 37,228 48,957 Other......................................................... 3,585 12,693 15,249 --------------- --------------- ------------ Total cost of sales......................................... 245,495 691,598 855,206 --------------- --------------- ------------ 751,957 2,064,208 2,480,216 --------------- --------------- ------------ EXPENSES: Operating (Note 2)............................................ 327,135 874,208 1,118,253 General and administrative.................................... 127,293 341,633 437,602 Management and royalty fees (Note 2).......................... 49,937 138,008 166,211 Depreciation and amortization................................. 219,302 329,037 462,348 Interest...................................................... 156,378 -- -- --------------- --------------- ------------ Total expenses.............................................. 880,045 1,682,886 2,184,414 --------------- --------------- ------------ NET (LOSS) INCOME............................................... (128,088) 381,322 295,802 OWNERS' EQUITY.................................................. -- -- -- Beginning of period........................................... 1,688,780 8,648,062 9,007,939 Contributions................................................. 246,290 -- -- Distributions, net (Note 6)................................... (320,698) (107,966) (655,679) --------------- --------------- ------------ End of period................................................. $ 1,486,284 $ 8,921,418 $8,648,062 --------------- --------------- ------------ --------------- --------------- ------------
The accompanying notes are an integral part of these financial statements. F-122 DOUBLETREE CLUB HOTEL OF RANCHO BERNARDO STATEMENTS OF CASH FLOWS PERIODS SEPTEMBER 16, 1994 TO DECEMBER 31, 1994 AND JANUARY 1, 1994 TO SEPTEMBER 15, 1994 AND YEAR ENDED DECEMBER 31, 1993
SUCCESSOR PREDECESSOR ------------------ ---------------------------------- FOR THE PERIOD FOR THE PERIOD SEPTEMBER 16, 1994 JANUARY 1, 1994 FOR THE YEAR (ACQUISITION TO TO SEPTEMBER ENDED DECEMBER 31, 15, DECEMBER 31, 1994 1994 1993 ------------------ --------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income.......................................... $ (128,088) $ 381,322 $ 295,802 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization.............................. 219,302 329,037 462,348 Provision for doubtful accounts............................ 12,240 12,334 1,098 Changes in operating assets and liabilities: Accounts receivable........................................ 29,204 (90,683) (6,548) Due from Operator.......................................... -- 126,000 -- Inventories................................................ 1,377 (2,481) (246) Prepaid expenses and other assets.......................... (29,311) 2,502 1,296 Deferred financing costs................................... (77,714) -- -- Accounts payable........................................... 104,955 124,867 1,109 Due to Maruko, Inc......................................... -- 32,136 44,321 Due to Operator............................................ -- 2,896 585 Accrued expenses........................................... 135,500 51,781 (1,384) ------------------ --------------- ----------------- Net cash provided by operating activities................ 267,465 969,711 798,381 ------------------ --------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Hotel....................................... (8,488,779) -- -- Purchase of property and equipment......................... (2,841) (1,900) (36,576) Increase in restricted cash................................ -- (78,365) (106,699) ------------------ --------------- ----------------- Net cash used in investing activities.................... (8,491,620) (80,265) (143,275) ------------------ --------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Owner's capital contribution............................... 1,935,070 -- -- Distributions.............................................. (320,698) (275,000) (700,000) Increase in notes payable.................................. 6,800,000 -- -- ------------------ --------------- ----------------- Net cash provided by (used in) financing activities...... 8,414,372 (275,000) (700,000) ------------------ --------------- ----------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... 190,217 614,446 (44,894) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............... -- 283,062 327,956 ------------------ --------------- ----------------- CASH AND CASH EQUIVALENTS, END OF PERIOD..................... $ 190,217 $ 897,508 $ 283,062 ------------------ --------------- ----------------- ------------------ --------------- -----------------
See notes to financial statements. (Continued) SUPPLEMENTAL DISCLOSURE OF NONCASH AND FINANCING ACTIVITIES: Amounts due to Maruko, Inc. of $167,034 and $44,321 were credited to owners' equity in the period ended September 15, 1994 and the year ended December 31, 1993, respectively. On September 16, 1994, Starwood-Huntington Partners, L.P. purchased the Hotel for $8,488,779. In conjunction with the acquisition, assets acquired and liabilities assumed were as follows: Fair value of assets acquired................................... $8,520,184 Cash paid....................................................... $8,488,779 Liabilities assumed............................................. $ 31,405
The accompanying notes are an integral part of these financial statements. F-123 DOUBLETREE CLUB HOTEL OF RANCHO BERNARDO NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. GENERAL INFORMATION The Doubletree Club Hotel of Rancho Bernardo (the "Hotel") was owned jointly by Maruko, Inc. ("Maruko"), a Japanese corporation, and individual Japanese investors. Compri Management Corporation No. 8 (the "Operator") operated the Hotel under management and franchise agreements with Maruko (see Note 2). Maruko applied to the Tokyo District Court for protection from creditors under the Corporation Reorganization Law on August 29, 1991 and under Chapter 11 with the United States Bankruptcy Court on October 30, 1991. On July 1, 1994, the Tokyo District Court approved Maruko's plan for reorganization under the Corporation Reorganization Law in Japan, and on February 3, 1994, the United States Bankruptcy Court approved Maruko's application for reorganization under Chapter 11. As part of the bankruptcy proceedings, Maruko sold the Hotel to Starwood--Huntington Partners, L.P. on September 16, 1994. Effective January 1, 1995 the assets and liabilities of the Hotel were contributed by Starwood-- Huntington Partners, L.P. to SLT Realty L.P. and SLC Operating L.P., in exchange for partnership interests. CASH AND CASH EQUIVALENTS The Hotel considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. INVENTORIES Inventories, consisting primarily of food and beverage, are stated at the lower of cost or market. Cost is determined on the first-in, first-out method. PROPERTY AND EQUIPMENT Property and equipment are stated at the lower of cost or net realizable value. Depreciation is computed on the straight-line and accelerated methods over the estimated useful lives of the respective assets. INCOME TAXES No provision has been made for income taxes in the financial statements, as any taxable income or loss of the Hotel is included in the income tax returns of Maruko and the individual Japanese investors for the periods ending on or before September 15, 1994, and of Starwood--Huntington Partners, L.P. for the period September 16, 1994 through December 31, 1994. 2. MANAGEMENT AND FRANCHISE AGREEMENTS. The management fee consists of a base fee of 5% of gross revenue, as defined, and a 10% incentive fee on the amount by which net operating income, as defined, exceeds $1,500,000. The franchise agreement requires a royalty fee of 3% of gross room revenues. However, this fee is deductible from the aforementioned 5% base management fee. The management and royalty fees amounted to $49,937 and $138,008 for the periods September 16, 1994 to December 31, 1994 and January 1, 1994 to September 15, 1994, respectively, and $166,211 for the year ended December 31, 1993. No incentive fee was earned. The franchise agreement requires the Hotel to contribute 3% of gross room revenues to the Operator for marketing services. This fee, which is included in operating expenses, amounted to approximately $26,000 and $72,000 for the periods September 16, 1994 to December 31, 1994 and January 1, 1994 to September 15, 1994, respectively, and $88,000 for the year ended December 31, 1993. The Operator provides centralized accounting and data processing services to the Hotel in accordance with the management agreement. The cost of these services amounted to $12,000 and $36,000 for the periods September 16, 1994 to December 31, 1994 and January 1, 1994 to September 15, 1994 and $48,000 for the year ended December 31, 1993. F-124 DOUBLETREE CLUB HOTEL OF RANCHO BERNARDO NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. MANAGEMENT AND FRANCHISE AGREEMENTS. (CONTINUED) The management agreement with Maruko included a provision for the establishment of a fund for replacement of furniture and fixtures, equal to 3% of gross revenues. The fund is classified as restricted cash in the accompanying balance sheets. The $126,000 due from the Operator in 1993 was non-interest bearing and was paid in 1994. 3. RELATED PARTIES. Maruko paid $167,034 for the period ended September 15, 1994 and $44,321 for the year ended December 31, 1993 for various expenses on behalf of the Hotel (see Note 6). 4. PROPERTY AND EQUIPMENT. Property and equipment are summarized as follows:
DECEMBER 31, -------------------------- 1994 1993 LIVES ------------ ------------ ---------------- Land and improvements..................................... $ 1,255,872 $ 1,510,346 Building and improvements................................. 6,221,530 5,701,382 10 to 40 years Furniture and equipment................................... 899,542 2,342,324 3 to 10 years ------------ ------------ 8,376,944 9,554,052 Less accumulated depreciation............................. 196,552 1,462,166 ------------ ------------ $ 8,180,392 $ 8,091,886 ------------ ------------ ------------ ------------
5. NOTES PAYABLE. At the time of the purchase of the Hotel, Starwood--Huntington Partners, L.P. obtained a note payable to Lexington Mortgage Company. The note, which bears interest at LIBOR plus 2.5% (10.25% at December 31, 1994), is due in October 1995. Interest paid in the period ended December 31, 1994 was $108,210. 6. DISTRIBUTIONS. Certain amounts payable to Maruko will not be settled by cash payments. Accordingly, such amounts have been credited to owners' equity (see Note 3). The Hotel distributed $275,000 and $700,000 in cash to Maruko for the period January 1, 1994 to September 15, 1994, and for the year ended December 31, 1993, respectively. F-125 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Starwood Capital Group In our opinion, the accompanying balance sheet and the related statements of operations, of changes in partners' capital and of cash flows present fairly, in all material respects, the financial position of Embassy Suites--Tempe at December 31, 1994 and 1993 and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Embassy Suites--Tempe's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP May 25, 1995 Dallas, Texas F-126 EMBASSY SUITES--TEMPE BALANCE SHEET ASSETS
DECEMBER 31 ---------------------------- 1994 1993 MARCH 31, ------------- ------------- 1995 ------------- (UNAUDITED) Cash and cash equivalents........................................... $ 708,063 $ 454,221 $ 406,687 Accounts receivable, net of allowance for doubtful accounts ($2,000 at December 31, 1994 and December 31, 1993......................... 515,291 274,701 321,431 Accounts receivable--affiliated company (Note 7).................... -- 31,347 -- Fixed assets, net of accumulated depreciation (Note 4).............. 10,885,640 10,930,111 11,184,706 Other............................................................... 50,616 38,529 8,044 ------------- ------------- ------------- TOTAL ASSETS.................................................... $ 12,159,610 $ 11,728,909 $ 11,920,868 ------------- ------------- ------------- ------------- ------------- ------------- LIABILITIES AND PARTNERS' CAPITAL Accounts payable--trade............................................. $ 25,187 $ 21,956 $ 33,986 Accounts payable--affiliated company (Note 7)....................... 48,842 -- 7,520 Accrued taxes other than income..................................... 131,113 135,042 141,725 Other accrued liabilities........................................... 280,436 307,420 207,894 Long-term debt (Note 6)............................................. -- -- 7,002,613 ------------- ------------- ------------- TOTAL LIABILITIES............................................... 485,578 464,418 7,393,738 Partners' capital................................................... 11,674,032 11,264,491 4,527,130 ------------- ------------- ------------- TOTAL LIABILITIES AND PARTNER'S CAPITAL......................... $ 12,159,610 $ 11,728,909 $ 11,920,868 ------------- ------------- ------------- ------------- ------------- -------------
The accompanying notes to financial statements are an integral part of these statements. F-127 EMBASSY SUITES--TEMPE STATEMENT OF OPERATIONS
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, -------------------------- -------------------------- 1995 1994 1994 1993 ------------ ------------ ------------ ------------ (UNAUDITED) REVENUES: Rooms.................................................. $ 2,070,585 $ 1,772,264 $ 5,651,321 $ 5,091,528 Other.................................................. 113,421 94,893 373,192 315,158 ------------ ------------ ------------ ------------ 2,184,006 1,867,157 6,024,513 5,406,686 COST OF SALES--DISTRIBUTED OPERATING EXPENSES: Rooms.................................................. 165,584 163,628 664,183 603,711 Guest Services......................................... 127,985 95,982 387,516 317,438 Complimentary breakfast and bar........................ 79,903 91,223 358,823 353,353 Other.................................................. 43,640 42,079 186,044 162,029 ------------ ------------ ------------ ------------ OPERATING DEPARTMENT INCOME:............................. 1,766,894 1,474,245 4,427,947 3,970,155 ------------ ------------ ------------ ------------ Undistributed operating expenses: Administrative and general............................. 110,173 101,451 428,052 399,655 Sales and advertising.................................. 149,063 158,875 545,929 510,119 Maintenance and repair................................. 64,087 62,100 278,338 225,641 Energy costs........................................... 46,223 45,229 267,166 244,774 Management fees........................................ 88,838 75,592 283,718 219,962 Franchise fees......................................... 82,823 70,713 225,453 203,292 ------------ ------------ ------------ ------------ OPERATING REVENUE BEFORE FIXED CHARGES................... 1,225,687 960,285 2,399,291 2,166,712 ------------ ------------ ------------ ------------ FIXED CHARGES: Depreciation........................................... 160,661 143,705 622,589 621,491 Real estate taxes and insurance........................ 67,457 102,023 299,838 286,525 Interest............................................... -- 114,760 208,507 631,024 Other charges.......................................... 8,051 11,838 28,735 34,459 ------------ ------------ ------------ ------------ OPERATING INCOME..................................... 989,518 587,959 1,239,622 593,213 ------------ ------------ ------------ ------------ NONOPERATING REVENUE: Restaurant rent........................................ 25,000 25,000 100,000 90,714 Interest income........................................ 6,992 2,861 19,480 11,207 Other income........................................... 3,093 2,836 11,161 21,947 ------------ ------------ ------------ ------------ NET INCOME........................................... $ 1,024,603 $ 618,656 $ 1,370,263 $ 717,081 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes to financial statements are an integral part of these statements. F-128 EMBASSY SUITES--TEMPE STATEMENT OF CHANGES IN PARTNERS' CAPITAL Partners' capital, January 1, 1993............................................. $4,663,644 Partners' distributions........................................................ (853,595) Net income for year............................................................ 717,081 ---------- Partners' capital, December 31, 1993........................................... 4,527,130 Partners' distributions........................................................ (1,682,680) Partners' contributions........................................................ 7,049,778 Net income for year............................................................ 1,370,263 ---------- Partners' capital, December 31, 1994........................................... 11,264,491 Partners' distributions........................................................ (615,062) Net income for three month period (unaudited).................................. 1,024,603 ---------- Partners' capital, March 31, 1995.............................................. $11,674,032 ---------- ----------
The accompanying notes to financial statements are an integral part of these statements. F-129 EMBASSY SUITES--TEMPE STATEMENT OF CASH FLOWS
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ------------------------- -------------------------- 1995 1994 1994 1993 ------------ ----------- ------------ ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.............................................. $ 1,024,603 $ 618,656 $ 1,370,263 $ 717,081 Adjustments to reconcile net cash used in operating activities: Depreciation.......................................... 160,661 143,705 622,589 621,491 Changes in operating assets and liabilities: Accounts receivable................................. (240,590) (226,395) 46,730 (6,033) Accounts payable.................................... (27,682) 66,668 80,813 40,701 Other assets........................................ (12,087) (4,382) (30,485) (94,978) ------------ ----------- ------------ ------------ Net cash provided by operating activities......... 904,905 598,252 2,089,910 1,278,262 Cash flows from investing activities: Capital expenditures................................ (116,190) (68,151) (367,994) (498,090) ------------ ----------- ------------ ------------ Net cash used in investing activities............. (116,190) (68,151) (367,994) (498,090) Cash flows from financing activities: Distributions to partners........................... (615,062) (389,109) (1,682,680) (853,595) Partners' capital contribution...................... -- -- 7,049,778 -- Amounts due to or from affiliates................... 80,189 4,738 (38,867) (3,732) Repayment of long-term debt......................... -- -- (7,002,613) -- ------------ ----------- ------------ ------------ Net cash used in financing activities............. (534,873) (384,371) (1,674,382) (857,327) NET (DECREASE) INCREASE IN CASH........................... 253,842 145,730 47,534 (77,155) CASH AT BEGINNING OF PERIOD*.............................. 454,221 406,687 406,687 483,842 ------------ ----------- ------------ ------------ CASH AT END OF PERIOD*.................................... $ 708,063 $ 552,417 $ 454,221 $ 406,687 ------------ ----------- ------------ ------------ ------------ ----------- ------------ ------------
- ------------ *Cash balances include cash of $193,353 and $265,076 at December 31, 1994 and 1993, respectively, held in an account as replacement reserve for capital expenditures as described in Note 7. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest..................................... $ -0- $ 114,760 $ 208,507 $ 631,024 Income taxes................................. $ -0- $ -0- $ -0- $ -0-
The accompanying notes to financial statements are an integral part of these statements. F-130 EMBASSY SUITES--TEMPE NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1994 AND 1993 1. ORGANIZATION Embassy Suites--Tempe (the "Hotel") is one of several properties owned by MRI Business Properties Fund, Ltd. III (the "Partnership"), a publicly traded limited partnership organized under the laws of the state of California. The managing general partner is Montgomery Realty Company--85, a California general partnership and the associate general partner is MRI Associates, Ltd. III, a limited partnership. The general partners of Montgomery Realty Company--85 are Fox Realty Investors ("FRI"), a California general partnership and Montgomery Realty Corporation, a California Corporation. The Partnership was organized on June 28, 1984, but did not commence operations until December 1985. The Partnership acquired the Hotel in 1986. On December 6, 1993, NPI Equity Investments II, Inc. ("MGP") became the managing partner of FRI and assumed operational control over Fox Capital Management Corporation. As a result, MGP became responsible for the operation and management of the business and affairs of the Partnership. On October 12, 1994, National Property Investors, Inc. ("NPI"), the parent of MGP sold one-third of the stock of NPI to an affiliate of Apollo Real Estate Advisors, L.P. The Partnership is contemplating selling the Hotel to certain entities controlled by Starwood Capital Group and/or its affiliates. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statements include the accounts of the Hotel, as if it were a separate legal entity. They have been prepared using the accrual basis of accounting. CASH AND CASH EQUIVALENTS For purpose of reporting cash flows, cash and cash equivalents include cash in banks, cash on hand, replacement reserve cash accounts, and all highly liquid investments purchased with an original maturity of three months or less. FIXED ASSETS Fixed assets are stated at cost. Depreciation is provided using accelerated methods over the estimated useful lives of the related assets, generally five to 39 years. The costs of repairs and minor renewals that do not significantly extend the life of the property and equipment are normally expensed as incurred. The costs of major renovation projects are capitalized and depreciated over the related period of benefit. The Hotel will be written down to net realizable value if and when management believes that the unamortized cost cannot be recovered through operations. REVENUE RECOGNITION Revenue is recognized when earned. Ongoing credit evaluations are performed and an allowance for potential credit loss is provided against the portion of accounts receivable which is estimated to be uncollectible. INCOME TAXES No provision for income taxes is necessary in the financial statements of the Hotel because, as the Hotel operates as part of a partnership, it is generally not subject to federal or state income taxes and the tax effects of its activities flow through to the partners. F-131 EMBASSY SUITES--TEMPE NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 AND 1993 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INTERIM STATEMENTS The interim financial data for the three months ended March 31, 1995 and 1994 is unaudited; however, in the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments and eliminations necessary for a fair statement of the financial position of the Hotel. The results of operations and of cash flows for the three month periods ended March 31, 1995 and 1994 are not necessarily indicative of the results for the full year. 3. RELATED PARTY TRANSACTIONS On January 1, 1993 Metric Management, Inc., a company which is not affiliated with the general partner began providing certain property and portfolio management services to the Partnership under an amended partnership agreement. See note 7. 4. FIXED ASSETS Fixed assets consist of the following:
DECEMBER 31, ---------------------------- 1994 1993 ------------- ------------- Land........................................................ $ 2,516,103 $ 2,516,103 Building and improvements................................... 10,069,610 10,069,610 Furniture and equipment..................................... 1,931,334 1,902,223 China, glass, silver, linen................................. 20,830 21,805 ------------- ------------- 14,537,877 14,509,741 Less: accumulated depreciation.............................. (3,607,766) (3,325,035) ------------- ------------- $ 10,930,111 $ 11,184,706 ------------- ------------- ------------- -------------
Depreciation expense for the year ended December 31, 1994 and 1993 was $622,589 and $621,491 and includes amortization of china, linen, silver and glass. 5. LEASES The Hotel leases space to tenants for a hotel gift shop and restaurant. The Partnership entered into a ten year lease beginning February 1, 1990 with a five year extension option for the Hotel restaurant. The lease has a fixed rent of $100,000 per year. The lease also stipulates a percentage rent equal to three percent of gross sales less the fixed rent paid. In addition to fixed and percentage rent, the Hotel is entitled to 50% of the gross profits, as defined, from the restaurant. The Partnership entered into a 60 month lease on October 1, 1990 for the Hotel gift shop. The annual base rent is $4,800. A percentage rent, in the amount of 10% of gross sales, is specified. The lease rental income under noncancelable leases for 1994 and 1993 was $110,761 and $101,343, respectively. Minimum rental commitments under noncancelable leases are as follows at December 31: 1995.............................................................. $ 103,600 1996.............................................................. 100,000 1997.............................................................. 100,000 1998.............................................................. 100,000 1999.............................................................. 100,000 --------- Total minimum lease revenue................................... $ 503,600 --------- ---------
F-132 EMBASSY SUITES--TEMPE NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 AND 1993 5. LEASES (CONTINUED) The Hotel satisfied all rental commitments on operating leases during the years ended December 31, 1994 and 1993. Rental expenses for all operating leases were $25,899 and $37,165 in 1994 and 1993, respectively. 6. LONG-TERM DEBT On December 11, 1986, the Partnership, on behalf of the Hotel, entered into a note agreement with Heller Financial, Inc. in the original amount of $7,000,000. The note, which was secured by the property, was repaid without penalty by a partner contribution on June 3, 1994. Interest was 9% at December 31, 1993 and then, per the terms of the agreement, changed to prime plus one percent. 7. MANAGEMENT AND FRANCHISE AGREEMENTS On December 11, 1986 the Partnership, on behalf of the Hotel, entered into a management agreement with Embassy Suites, Inc. The agreement is for a ten year period. The agreement establishes a replacement reserve fund for capital expenditures in the initial amount of three percent of gross revenues. The agreement was amended in 1993 to increase the required reserve to 5% of gross revenues. Management fees and franchise fees are both paid to Embassy Suites, Inc. Franchise fees are four percent of gross suite revenue, as defined, payable monthly. Management fees are four percent of adjusted gross revenue, as defined, payable monthly. The agreement also specifies an incentive management fee in the amount of twenty five percent of adjusted cash flow, as defined, payable annually. Management fees were $283,718 and $219,962 for the years ending December 31, 1994 and 1993, respectively. Franchise fees were $225,453 and $203,292 for the years ending December 31, 1994 and 1993, respectively. F-133 INDEPENDENT AUDITORS' REPORT To the Boards of Trustees and Directors Starwood Lodging Trust and Starwood Lodging Corporation We have audited the accompanying balance sheets of the Sheraton Colony Square Hotel (the Hotel) as of December 31, 1994 and 1993, and the related statements of income, owner's equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Hotel's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Hotel as of December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Ernst & Young LLP May 25, 1995 Los Angeles, California F-134 SHERATON COLONY SQUARE BALANCE SHEETS ASSETS
DECEMBER 31 -------------------- 1994 1993 MARCH 31, --------- --------- 1995 ----------- (UNAUDITED) (IN THOUSANDS) CURRENT ASSETS: Cash......................................................................... $ 1,033 $ 574 $ 1,235 Accounts receivable.......................................................... 1,142 938 560 Inventory.................................................................... 572 556 474 Other........................................................................ 139 87 130 ----------- --------- --------- TOTAL CURRENT ASSETS....................................................... 2,886 2,155 2,399 HOTEL PROPERTY, NET............................................................ 18,824 19,203 20,200 ----------- --------- --------- $ 21,710 $ 21,358 $ 22,599 ----------- --------- --------- ----------- --------- --------- LIABILITIES AND OWNER'S EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses........................................ $ 1,377 $ 1,233 $ 1,210 Current portion of capital lease obligation.................................. 47 62 58 ----------- --------- --------- TOTAL CURRENT LIABILITIES.................................................. 1,424 1,295 1,268 CAPITAL LEASE OBLIGATION....................................................... 235 235 297 OWNER'S EQUITY................................................................. 20,051 19,828 21,034 ----------- --------- --------- $ 21,710 $ 21,358 $ 22,599 ----------- --------- --------- ----------- --------- ---------
See accompanying notes to financial statements. F-135 SHERATON COLONY SQUARE STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31, -------------------- ------------------------------- 1995 1994 1994 1993 1992 --------- --------- --------- --------- --------- (UNAUDITED) (IN THOUSANDS) REVENUES: Rooms...................................................... $ 3,024 $ 2,755 $ 10,541 $ 9,240 $ 8,653 Food and beverage.......................................... 1,345 1,226 4,615 4,135 3,991 Telephone.................................................. 193 177 728 626 566 Other...................................................... 81 77 317 252 295 --------- --------- --------- --------- --------- TOTAL.................................................... 4,643 4,235 16,201 14,253 13,505 --------- --------- --------- --------- --------- DEPARTMENTAL COSTS AND EXPENSES: Rooms...................................................... 686 614 2,546 2,405 2,283 Food and beverage.......................................... 999 948 3,764 3,612 3,216 Telephone.................................................. 82 79 290 311 326 Other...................................................... 22 22 91 186 170 --------- --------- --------- --------- --------- Total.................................................... 1,789 1,663 6,691 6,514 5,995 --------- --------- --------- --------- --------- 2,854 2,572 9,510 7,739 7,510 --------- --------- --------- --------- --------- OTHER EXPENSES: General and administrative................................. 375 406 1,583 1,386 1,295 Depreciation............................................... 385 370 1,481 1,481 1,419 Utilities.................................................. 240 251 950 947 882 Advertising and sales...................................... 216 264 908 937 857 Repairs and maintenance.................................... 189 198 782 719 715 Management and incentive fees.............................. 139 127 624 428 405 Real estate and personal property taxes.................... 145 133 574 530 510 Franchise fees............................................. 152 94 386 210 147 Property insurance......................................... 40 38 158 129 123 --------- --------- --------- --------- --------- Total.................................................... 1,881 1,881 7,446 6,767 6,353 --------- --------- --------- --------- --------- NET INCOME............................................... $ 973 $ 691 $ 2,064 $ 972 $ 1,157 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
See accompanying notes to financial statements. F-136 SHERATON COLONY SQUARE STATEMENTS OF OWNER'S EQUITY
(IN THOUSANDS) Balance--January 1, 1992........................................................................... $ 19,739 Contributions.................................................................................... 1,939 Distributions.................................................................................... (1,591) Net income....................................................................................... 1,157 ------------- Balance--December 31, 1992......................................................................... 21,244 Contributions.................................................................................... 1,248 Distributions.................................................................................... (2,430) Net income....................................................................................... 972 ------------- Balance--December 31, 1993......................................................................... 21,034 Contributions.................................................................................... 680 Distributions.................................................................................... (3,950) Net income....................................................................................... 2,064 ------------- Balance--December 31, 1994......................................................................... 19,828 Distributions (unaudited)........................................................................ (750) Net income (unaudited)........................................................................... 973 ------------- Balance--March 31, 1995 (unaudited)................................................................ $ 20,051 ------------- -------------
See accompanying notes to financial statements. F-137 SHERATON COLONY SQUARE STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31, -------------------- ------------------------------- 1995 1994 1994 1993 1992 --------- --------- --------- --------- --------- (UNAUDITED) (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income.................................................. $ 973 $ 691 $ 2,064 $ 972 $ 1,157 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.............................................. 385 370 1,481 1,481 1,419 Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable................................... (204) (371) (377) 346 271 Inventories........................................... (16) (58) (82) (149) (11) Other Assets.......................................... (52) (6) 43 (43) (26) Accounts payable and accrued expenses................. 145 189 22 (406) 78 --------- --------- --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 1,231 815 3,151 2,201 2,888 --------- --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Improvements and additions to hotel property................ (7) (489) (484) (1,388) (2,147) --------- --------- --------- --------- --------- NET CASH (USED IN) INVESTING ACTIVITIES....................... (7) (489) (484) (1,388) (2,147) --------- --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowing on capital lease obligation....................... -- -- -- 374 -- Repayments of capital lease obligation...................... (15) (14) (58) (20) -- Owner's contributions....................................... -- -- 680 1,248 1,939 Owner's distributions....................................... (750) (700) (3,950) (2,430) (1,591) --------- --------- --------- --------- --------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES........... (765) (714) (3,328) (828) 348 --------- --------- --------- --------- --------- NET CHANGE IN CASH............................................ 459 (388) (661) (15) 1,089 CASH AT BEGINNING OF YEAR..................................... 574 1,235 1,235 1,250 161 --------- --------- --------- --------- --------- CASH AT END OF YEAR........................................... $ 1,033 $ 847 $ 574 $ 1,235 $ 1,250 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
See accompanying notes to financial statements. F-138 SHERATON COLONY SQUARE NOTES TO FINANCIAL STATEMENTS (DECEMBER 31, 1994, 1993, AND 1992) 1. ORGANIZATION The Sheraton Colony Square is a 27-story, 462-room hotel located in Atlanta, Georgia (the Hotel). The Hotel is part of a mixed-use commercial and residential complex (the Complex) owned by the Prudential Insurance Company of America (Prudential). Starwood Lodging Trust and Starwood Lodging Corporation (Starwood) expect to acquire the Hotel from Prudential in conjunction with the completion of a proposed public offering. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statements present the accounts of the Hotel, as included in the financial records of Prudential, using the accrual basis of accounting, and are not intended to be a complete presentation of the legal entity which owns the Hotel. INVENTORIES Inventories, consisting of room linen and supplies and food and beverage, are recorded at the lower of cost or market. Cost is determined using the first-in, first-out method. HOTEL PROPERTY Hotel property is recorded at cost and is depreciated using the straight-line method over the estimated useful lives of the respective assets, as follows:
YEARS --------- Building and improvements............................................................. 20-35 Furniture, fixtures and equipment..................................................... 3-10
Maintenance and repairs are charged to operations as incurred, and major renovations are capitalized and depreciated over the related period of benefit. UTILITIES, REAL ESTATE TAXES AND PROPERTY INSURANCE Prudential allocates certain common expenses of the Complex and property insurance to the Hotel, based on estimates as follows:
ALLOCATED EXPENSE BASIS OF ALLOCATION - ----------------------------------------------------- --------------------------------------- Utilities (central plant)............................ Usage for the Hotel (35% in 1994) Real estate taxes.................................... Appraised value (33% in 1994) Property insurance................................... Square footage and claims made
INCOME TAXES No provision has been made for federal or state income taxes in the accompanying financial statements since any taxable income or loss of the Hotel is included in the income tax returns of Prudential. UNAUDITED INTERIM FINANCIAL INFORMATION The unaudited interim financial information as of March 31, 1995, and for the three months ended March 31, 1995 and 1994, include all normal, recurring adjustments which are, in the opinion of management, necessary to a fair presentation of the Hotel's financial position and results of operations for the interim periods presented. F-139 SHERATON COLONY SQUARE NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. HOTEL PROPERTY Hotel property consists of the following:
DECEMBER 31, ------------------------------ 1994 1993 MARCH 31, 1995 -------------- -------------- -------------- (UNAUDITED) Land................................................... $ 980,000 $ 980,000 $ 980,000 Building and improvements.............................. 25,297,000 25,290,000 24,487,000 Furniture, fixtures and equipment...................... 11,021,000 11,036,000 11,355,000 -------------- -------------- -------------- 37,298,000 37,306,000 36,822,000 Less: accumulated depreciation....................... (18,474,000) (18,103,000) (16,622,000) -------------- -------------- -------------- $ 18,824,000 $ 19,203,000 $ 20,200,000 -------------- -------------- -------------- -------------- -------------- --------------
Hotel property does not include the parking structure and central plant which are part of the Complex. 4. CAPITAL LEASE OBLIGATION The future annual principal payments on the capital lease obligation for telephone equipment at December 31, 1994 are as follows:
YEAR - ---------------------------------------------------------------------------------- 1995.............................................................................. $ 62,000 1996.............................................................................. 67,000 1997.............................................................................. 72,000 1998.............................................................................. 96,000 ---------- $ 297,000 ---------- ----------
5. MANAGEMENT AND FRANCHISE AGREEMENTS The Hotel is managed by Interstate Hotel Corporation (IHC). IHC receives a base management fee of 3% of gross revenues and may receive incentive management fees of an additional 20% of annual operating profit, as defined, in excess of a base amount. Incentive fees earned were $138,000 in 1994 and none during 1993 and 1992. The Hotel is operated pursuant to a franchise agreement with Sheraton Inns, Inc. (Sheraton). Sheraton receives royalties of specified percentages of gross room revenues. The franchise agreement has a term of 15 years, ending in July 2005. 6. CONCENTRATION OF CREDIT RISK The Company maintains its unrestricted cash in demand deposit accounts at financial institutions. The combined account balances at each institution periodically exceed FDIC insurance coverage, and as a result there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. F-140 - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED 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 UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OR 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 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
PAGE ----- Prospectus Summary............................. 1 Risk Factors................................... 12 The Company.................................... 21 Use of Proceeds................................ 23 Distribution Policy............................ 24 Price Range of Paired Shares................... 27 Capitalization................................. 28 Dilution....................................... 29 Selected Combined Financial Data............... 29 Management's Discussion and Analysis of Pro Forma Financial Statements................... 32 Business Objectives and Growth Strategies...... 34 Business and Properties........................ 39 The Acquisition Facility and Other Financing... 53 Structure of the Company....................... 54 Policies with Respect to Certain Activities.... 59 Management..................................... 62 Certain Relationships and Related Transactions................................. 71 Principal Shareholders......................... 73 Shares Available for Future Sale............... 74 Capital Stock.................................. 75 Federal Income Tax Considerations.............. 80 ERISA Considerations........................... 95 Convertible Notes.............................. 97 Underwriting................................... 99 Experts........................................ 100 Legal Matters.................................. 101 Additional Information......................... 101 Information Incorporated by Reference.......... 101 Glossary....................................... 102 Index to Financial Statements.................. F-1
10,250,000 PAIRED SHARES STARWOOD LODGING TRUST STARWOOD LODGING CORPORATION PAIRED SHARES -------------------- PROSPECTUS -------------------- MERRILL LYNCH & CO. BEAR, STEARNS & CO. INC. ALEX. BROWN & SONS INCORPORATED LEHMAN BROTHERS PRUDENTIAL SECURITIES INCORPORATED SMITH BARNEY INC. , 1995 - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Registration Fee.............................................. $ 92,978.90 NASD Fee...................................................... 30,500.00 NYSE Listing Fee.............................................. 65,300.00 Printing and Engraving Expenses............................... 500,000.00 Legal Fees and Expenses....................................... 450,000.00 Accounting Fees and Expenses.................................. 300,000.00 Blue Sky Fees and Expenses.................................... 20,000.00 Miscellaneous................................................. 221.10 Total......................................................... 1,009,000.00
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Certain provisions of the MGCL provide that the Company may, and in some circumstances must, indemnify the trustees, directors and officers of the Company against liabilities and expenses incurred by such person by reason of the fact that such person was serving in such capacity, subject to certain limitations and conditions set forth in the statute. The Corporation's Articles of Incorporation and the Trust's Declaration of Trust provide that the Corporation and Trust shall indemnify its directors, trustees and officers to the extent permitted by the MGCL. 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. ITEM 16. EXHIBITS. The following exhibits are filed herewith or incorporated herein by reference. Documents indicated by an asterisk (*) are filed herewith.
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- -------------------------------------------------------------------------------- 1.1 Form of Purchase Agreement among the Trust, the Corporation, the Partnerships and the Underwriters. 2. Formation Agreement dated as of November 11, 1994 among the Trust, the Corporation, Starwood Capital Group, L.P., Berl Holdings L.P., Starwood Apollo Hotel Partners I, L.P., Starwood Apollo Hotel Partners VIII, L.P., Starwood Apollo Hotel Partners IX, LP and Starwood Nomura Hotel Investors, L.P. (incorporated by reference to Exhibit 2 to the Trust's and the Corporation's Joint Current Report on Form 8-K dated November 16, 1994 (the "November 1994 Form 8-K")). 3.1 Amended and Restated Declaration of Trust of the Trust dated June 6, 1988, as amended (incorporated by reference to Exhibit 3A to the Trust's and the Corporation's Joint Current Report on Form 8-K dated January 31, 1995 (the "January 1995 Form 8-K")). 3.2 Amendment and Restatement of Articles of Incorporation of the Corporation, as amended (incorporated by referenced to Exhibit 3B to the January 1995 Form 8-K). 3.3 Trustees' Regulations of the Trust, as amended (incorporated by referenced to Exhibit 3.3 to the Trust's and the Corporation's Joint Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994 Form 10-K")). 3.4 By-laws of the Corporation, as amended (incorporated by reference to Exhibit 3.4 to the 1994 Form 10-K). 4.1 Form of Indenture for Convertible Notes.
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EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- -------------------------------------------------------------------------------- 4.2 Form of Convertible Notes (included in Exhibit 4.1). 5. Opinion of Counsel. 8. Opinion of Tax Counsel. 10.1 Pairing Agreement dated June 25, 1980 between the Trust and the Corporation, as amended (incorporated by reference to Exhibit 4.1 to the 1994 Form 10-K). 10.2 Form of Warrant Agreement dated as of September 16, 1986, between the Trust and City National Bank ("CNB") (incorporated by reference to Exhibit 4.3 to the Trust's and the Corporation's Registration Statement on Form S-4 (the "S-4 Registration Statement") filed with the Securities and Exchange Commission (the "SEC") on August 1, 1986 (Registration No. 33-7694)). 10.3 Form of Warrant Agreement dated as of September 16, 1986, between the Corporation and CNB (incorporated by reference to Exhibit 4.3A to the S-4 Registration Statement). 10.4 Incentive and Non-Qualified Share Option Plan (1986) of the Trust (incorporated by reference to Exhibit 10.8 to the Trust and the Corporation's Joint Annual Report on Form 10-K for the year ended August 31, 1986 (the "1986 Form 10-K")). 10.5 Corporation Stock Non-Qualified Stock Option Plan (1986) of the Trust (incorporated by reference to Exhibit 10.9 to the 1986 Form 10-K). 10.6 Stock Option Plan (1986) of the Corporation (incorporated by reference to Exhibit 10.10 to the 1986 Form 10-K). 10.7 Trust Shares Option Plan (1986) of the Corporation (incorporated by reference to Exhibit 10.11 to the 1986 Form 10-K). 10.8 Form of Indemnification Agreement dated as of February 3, 1992, between the Trust and each of Messrs. Ronald A. Young, John D. Morrissey, Graeme W. Henderson, and Jeffrey C. Lapin (incorporated by reference to Exhibit 10.29 to the Trust's and the Corporation's Joint Annual Report on Form 10-K for the year ended December 31, 1991 (the "1991 Form 10-K")). 10.9 Form of Indemnification Agreement dated as of February 3, 1992, between the Corporation and each of Messrs. Young, Henderson, Ford, Earle M. Jones and William H. Ling (incorporated by reference to Exhibit 10.30 to the 1991 Form 10-K). 10.10 Executive Employment Agreement dated as of January 31, 1995, between the Trust and Mr. Lapin (incorporated by reference to Exhibit 10.12 to the 1994 Form 10-K). 10.11 Executive Employment Agreement dated as of July 19, 1992, between the Trust and Michael W. Mooney (incorporated by reference to Exhibit 10.4 to the Trust's and the Corporation's Joint Current Report on Form 8-K dated September 25, 1992 (the "September 1992 8-K")). 10.12 First Amendment to Executive Employment Agreement dated as of March 18, 1993, between the Trust and Michael W. Mooney (incorporated by reference to Exhibit 10.16 to the Trust's and the Corporation's Joint Annual Report on Form 10-K for the year ended December 31, 1993 (the "1993 Form 10-K")). 10.13 Amendment No. 2 to Executive Employment Agreement dated as of December 15, 1993, between the Trust and Michael W. Mooney (incorporated by reference to Exhibit 10.17 to the 1993 Form 10-K). 10.14 Executive Employment Agreement dated as of July 19, 1992, between the Corporation and Kevin E. Mallory (incorporated by reference to Exhibit 10.5 to the September 1992 8-K).
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EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- -------------------------------------------------------------------------------- 10.15 First Amendment to Executive Employment Agreement dated as of March 18, 1993, between the Trust and Kevin E. Mallory (incorporated by reference to Exhibit 10.19 to the 1993 Form 10-K). 10.16 Amendment No. 2 to Executive Employment Agreement dated as of December 15, 1993, between the Trust and Kevin E. Mallory (incorporated by reference to Exhibit 10.20 to the 1993 Form 10-K). 10.17 Form of Amended and Restated Lease Agreement entered into as of January 1, 1993, between the Trust as Lessor and the Corporation (or a subsidiary) as Lessee (incorporated by reference to Exhibit 10.19 to the 1992 Form 10-K). 10.18 Amended and Restated Credit Agreement dated as of March 24, 1995 ("Credit Agreement"), among the Trust and the Realty Partnership, on the one hand, and Bankers Trust Company as successor Collateral Agent to Wells Fargo Bank, National Association and Merrill Lynch Mortgage Capital, Inc. as assignee of John Hancock Mutual Life Insurance Company, John Hancock Variable Life Insurance Company, Connecticut Mutual Life Insurance Company, The First National Bank of Boston and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.24 to the 1994 Form 10-K). 10.19 Exchange Rights Agreement made as of January 1, 1995 among the Trust, the Corporation, the Realty Partnership, the Operating Partnership and each of the partners of the Partnerships (incorporated by reference as Exhibit 2B to the January 1995 Form 8-K). 10.20 Registration Rights Agreement dated as of January 1, 1995 among the Trust, the Corporation and Starwood Capital (incorporated by reference as Exhibit 2C to the January 1995 Form 8-K). 10.21 Amended and Restated Limited Partnership Agreement for the Realty Partnership among the Trust and Starwood Capital dated as of December 15, 1994. 10.22 Amended and Restated Limited Partnership Agreement for the Operating Partnership among the Corporation and Starwood Capital dated as of December 15, 1994. 10.23 Form of Amendment No. 1 to Formation Agreement among the Trust, the Corporation and Starwood Capital Group, L.P. 10.24 Form of Westin/HOT Agreement among W&S Hotel L.L.C., W&S Hotel Holding Corp., Westin Hotel Company, SLT Realty Limited Partnership, SLC Operating Limited Partnership, WHWE L.L.C. and Woodstar Investor Partnership. 23. Consent of Independent Public Accountants. 23.1 Consent of Counsel (included in Exhibits 5 and 8). 24. Powers of Attorney (contained in the signature pages hereto). 26. Form T-1 of Trustee for the Notes.
(b)Financial Statement Schedules. The financial statement schedules are included in the Prospectus. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, trustees, officers and controlling persons of the registrant pursuant to the provisions described in Item 15, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange II-3 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 registrant of expenses incurred or paid by a director, trustee, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, trustee, officer or controlling person in connection with the securities being registered, the 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. The registrant hereby undertakes: (1) For purposes of determining any liability under the Act, the information omitted from the form of Prospectus filed as part of the Registration Statement in reliance upon Rule 430A and contained in the form of Prospectus filed by the registrant pursuant to the Rule 424(b) (1) or (4) or 497(h) under the Act shall be deemed to be part of the Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, 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-4 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-2 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California on the 28th day of June, 1995. STARWOOD LODGING TRUST By: /s/ JEFFREY C. LAPIN ----------------------------------- Jeffrey C. Lapin PRESIDENT AND CHIEF OPERATING OFFICER 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.
SIGNATURES - --------------------------------------------------- /s/ BARRY S. STERNLICHT* ---------------------------------------- Chairman, Chief Executive Officer and June 28, 1995 Barry S. Sternlicht Trustee (Principal Executive Officer) /s/ JEFFREY C. LAPIN ---------------------------------------- President, Chief Operating Officer and June 28, 1995 Jeffrey C. Lapin Trustee /s/ MICHAEL W. MOONEY* ---------------------------------------- Vice President (Principal Financial and June 28, 1995 Michael W. Mooney Accounting Officer) /s/ MADISON F. GROSE* ---------------------------------------- Trustee June 28, 1995 Madison F. Grose /s/ JONATHAN EILIAN* ---------------------------------------- Trustee June 28, 1995 Jonathan Eilian /s/ EARLE F. JONES* ---------------------------------------- Trustee June 28, 1995 Earle F. Jones
*By: /s/ JEFFREY C. LAPIN - -------------------------------------- Jeffrey C. Lapin ATTORNEY-IN-FACT II-5 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-2 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California on the 28th day of June, 1995. STARWOOD LODGING CORPORATION By: /s/ KEVIN E. MALLORY ----------------------------------- Kevin E. Mallory EXECUTIVE VICE PRESIDENT 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.
SIGNATURES - --------------------------------------------------- /s/ KEVIN E. MALLORY ---------------------------------------- Executive Vice President (Principal June 28, 1995 Kevin E. Mallory Executive Officer) /s/ KENNETH J. BIEHL ---------------------------------------- (Principal Financial and Accounting June 28, 1995 Kenneth J. Biehl Officer) /s/ EARLE F. JONES* ---------------------------------------- Director June 28, 1995 Earle F. Jones /s/ GRAEME W. HENDERSON* ---------------------------------------- Director June 28, 1995 Graeme W. Henderson /s/ BRUCE M. FORD* ---------------------------------------- Director June 28, 1995 Bruce M. Ford
*By: /s/ KEVIN E. MALLORY ---------------------------------- Kevin E. Mallory ATTORNEY-IN-FACT II-6 CONSENT OF INDEPENDENT AUDITORS We consent to the use in this Joint Registration Statement of Starwood Lodging Trust and Starwood Lodging Corporation on Form S-2 of our report on the separate and combined financial statements and financial statement schedules of Starwood Lodging Trust and Starwood Lodging Corporation dated March 24, 1995, and our report on the financial statements of the Doubletree Club Hotel of Rancho Bernardo dated March 24, 1995, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. Deloitte & Touche LLP Los Angeles, California June 9, 1995 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-2 of our reports as of the dates and relating to the financial statements or schedules of operating revenue and certain expenses, as applicable, of the properties listed below which appear in such Prospectus:
PROPERTY DATE OF REPORT - ------------------------------------------------------------------------- ------------------- Starwood Wichita Investors, L.P.......................................... January 27, 1995 Except Note 7, which is as of March 3, 1995 The French Quarter Square................................................ Capital Hill Suites...................................................... March 2, 1995 Embassy Suites--Tempe.................................................... May 25, 1995
We also consent to the reference to us under the headings "Experts". PRICE WATERHOUSE LLP Dallas, Texas June 8, 1995 CONSENT OF INDEPENDENT AUDITORS We consent to the use in this Joint Registration Statement of Starwood Lodging Trust and Starwood Lodging Corporation on Form S-2 of our report on the financial statements of the Sheraton Colony Square Hotel dated May 25, 1995, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. Ernst & Young LLP Los Angeles, California June 8, 1995 EX-1.1 2 EXHIBIT 1.1 Exhibit 1.1 FORM OF PURCHASE AGREEMENT 10,250,000 PAIRED SHARES* STARWOOD LODGING TRUST STARWOOD LODGING CORPORATION (A MARYLAND REAL ESTATE INVESTMENT TRUST) (A MARYLAND CORPORATION) SHARES OF BENEFICIAL INTEREST COMMON STOCK (PAR VALUE $.01 PER SHARE) (PAR VALUE $.01 PER SHARE) PURCHASE AGREEMENT June __, 1995 MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED BEAR, STEARNS & CO. INC. ALEX. BROWN & SONS INCORPORATED LEHMAN BROTHERS INC. PRUDENTIAL SECURITIES INCORPORATED SMITH BARNEY INC. as Representatives of the several Underwriters c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Merrill Lynch World Headquarters North Tower World Financial Center New York, New York 10281 Ladies and Gentlemen: Each of Starwood Lodging Trust, a Maryland real estate investment trust (the "Trust"), Starwood Lodging Corporation, a Maryland corporation (the "Corporation"), SLT Realty Limited Partnership, a Delaware limited partnership (the "Realty Partnership") and SLC Operating Limited Partnership, a Delaware limited partnership (the "Operating Partnership" and collectively with the Trust, the Corporation, the Realty Partnership, the Operating Partnership being sometimes hereinafter collectively referred to as the "Transaction Entities" and individually as a "Transaction Entity") confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Bear, Stearns & Co. Inc. ("Bear Stearns"), Alex. Brown & Sons Incorporated - ---------------- * The Paired Shares are issuable upon conversion of 10,250,000 units of Convertible Notes due December 15, 1995 of the Trust and the Corporation. ("Alex Brown"), Lehman Brothers Inc. ("Lehman"), Prudential Securities Incorporated ("Prudential") and Smith Barney Inc. ("Smith Barney") and each of the other Underwriters named in Schedule A hereto (collectively, the "Underwriters," which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Merrill Lynch, Bear Stearns, Alex Brown, Lehman, Prudential and Smith Barney are acting as representatives (in such capacity, Merrill Lynch, Bear Stearns, Alex Brown, Lehman, Prudential and Smith Barney shall hereinafter be referred to as the "Representatives"), with respect to the sale by the Trust and the Corporation, acting severally and not jointly, and the purchase by the Underwriters, acting severally and not jointly, of an aggregate of 10,250,000 units of Convertible Notes due December 15, 1995 (individually, a "Note" and collectively, the "Notes") of the Trust and the Corporation, which are convertible into an aggregate of 10,250,000 shares of beneficial interest, par value $.01 per share of the Trust (the "Trust Shares") PAIRED WITH 10,250,000 shares of common stock, par value $.01 per share, of the Corporation (the "Corporation Shares") and with respect to the grant by the Trust and the Corporation, acting severally and not jointly, to the Underwriters, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of Notes convertible into an aggregate of 1,537,500 additional Trust Shares PAIRED WITH 1,537,500 additional Corporation Shares to cover over-allotments, in each case except as may otherwise be provided in the Pricing Agreement (as hereinafter defined). Each Note shall consist of one or more whole units. The Notes shall be non-interest bearing and shall evidence the several obligations of the Trust and the Corporation in the respective principal amounts to be set forth in the Pricing Agreement. The Notes are to be issued under an indenture dated as of June 15, 1995 (the "Indenture") entered into by the Trust and the Corporation with First Interstate Bank, Ltd., as Trustee (the "Trustee"), and are due December 15, 1995 unless the maturity thereof is extended as provided in the Indenture. The 10,250,000 units of Notes (the "Initial Securities") convertible into the same number of Trust Shares PAIRED WITH Corporation Shares to be purchased by the Underwriters and all or any part of the units of Notes convertible into Trust Shares PAIRED WITH Corporation Shares subject to the option described in Section 2(b) hereof (the "Option Securities") are collectively hereinafter called the "Securities." Trust Shares and Corporation Shares are issued and sold, severally and not jointly, by the Trust and the Corporation, respectively, and upon conversion of the Notes evidencing the Securities to be purchased hereunder, will be offered to the public in units consisting of one Trust Share and one Corporation Share, which are "paired" for transfer and trading purposes pursuant to the Pairing Agreement dated as of June 25, 1980 (the "Pairing Agreement") between the Trust and the Corporation, as amended through the date hereof (each such unit is referred to herein as a "Paired Share," and collectively as "Paired Shares"). Each Note shall be automatically converted into the number of Paired Shares equal to the number of units comprising such Note upon certification to the Trustee of (i) the sale of beneficial ownership of such Note to a person who is not an Underwriter or a dealer (a "Dealer") which has executed a Merrill Lynch Standard Dealer Agreement (a "Standard Dealer Agreement") and participates in the sale of the Securities, or an affiliate of such an Underwriter or Dealer as defined in Section 2(c) hereof, or (ii) the sale in a regular way transaction on the New York Stock Exchange of the Paired Shares to be issued upon the conversion of such Note during the period in which such Underwriters and Dealers have agreed (in the Standard Dealer Agreement and in the Merrill Lynch Master Agreement Among Underwriters with respect to the offering and sale of the Securities) that they and their affiliates will not purchase Paired Shares for their own account. Prior to the purchase of the Securities and public offering of the Paired Shares to be issued upon conversion of the Notes evidencing the Securities by the several Underwriters, the Trust and the Corporation, on the one hand, and the Representatives, on the other hand, acting on behalf of the several Underwriters, shall enter into an agreement substantially in the form of Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may take the form of an exchange of any standard form of written telecommunication between the Trust and the Corporation, on the one hand, and the Representatives, on the other hand, and shall specify such applicable information as is indicated in Exhibit A hereto. The sale of the Securities to the Underwriters and the offering of the Paired Shares to be issued upon conversion of the Notes evidencing the Securities will be governed by this Agreement, as supplemented by the Pricing Agreement. From and after the date of the execution and delivery of the Pricing Agreement, this Agreement shall be deemed to incorporate the Pricing Agreement. 2 The Trust and the Corporation have filed with the U.S. Securities and Exchange Commission (the "Commission") a joint registration statement on Form S-2 (Nos. 33-59155 and 33-59155-01) and a related preliminary prospectus for the registration of the Securities and the Paired Shares to be issued upon conversion of the Notes under the Securities Act of 1933, as amended (the "1933 Act"), and such amendments thereto, if any, and such amended preliminary prospectuses as may have been required to the date hereof, and will file such additional amendments thereto and such amended prospectuses as may hereafter be required. Such joint registration statement (as amended, if applicable) and the prospectus constituting a part thereof (including in each case the information, if any, deemed to be part thereof pursuant to Rule 430A(b) and/or Rule 434 of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations")), as from time to time amended or supplemented pursuant to the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"), or otherwise, are hereinafter referred to as the "Registration Statement," and the "Prospectus," respectively, except that if any revised prospectus shall be provided to the Underwriters by the Trust and the Corporation for use in connection with the offering of the Paired Shares to be issued upon conversion of the Notes which differs from the Prospectus on file at the Commission at the time the Registration Statement becomes effective (whether or not such revised prospectus is required to be filed by the Trust and the Corporation pursuant to Rule 424(b) of the 1933 Act Regulations) the term "Prospectus" shall refer to such revised prospectus from and after the time it was provided to the Underwriters for such use. Any registration statement (including any supplement thereto or information which is deemed part thereof) filed by the Trust and the Corporation under Rule 462(b) of the 1933 Act Regulations (a "Rule 462(b) Registration Statement") shall be deemed to be part of the "Registration Statement," as defined herein, and any prospectus (including any amendment or supplement thereto or information which is deemed part thereof) included in such registration statement shall be deemed to be part of the "Prospectus," as defined herein. All references in this Agreement to financial statements and schedules and other information which is "contained," "included" or "stated" in the Registration Statement or the Prospectus (and all other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information included in the Registration Statement or the Prospectus and which is or is deemed to be incorporated by reference in the Registration Statement or the Prospectus, as the case may be; and all references in this Agreement to amendments or supplements to the Registration Statement or the Prospectus shall be deemed to mean and include the filing of any document under the 1934 Act which is or is deemed to be incorporated by reference in the Registration Statement or the Prospectus, as the case may be. Capitalized terms used but not otherwise defined herein shall have the meanings given to those terms in the Prospectus. The Transaction Entities understand that the Underwriters propose to make a public offering of the Paired Shares issuable upon conversion of the Notes evidencing the Securities as soon as the Representatives deem advisable after the Registration Statement becomes effective and the Pricing Agreement has been executed and delivered. SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE TRANSACTION ENTITIES. (a) Each of the Transaction Entities represents and warrants, jointly and severally, to each Underwriter as of the date hereof and as of the date of the Pricing Agreement (such latter date being hereinafter referred to as the "Representation Date") as follows: (i) At the time the Registration Statement became effective and at the Representation Date, the Registration Statement complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and does not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus, at the Representation Date (unless the term "Prospectus" refers to a prospectus which has been provided to the Underwriters by the Trust and the Corporation for use in connection with the offering of Paired Shares to be issued upon conversion of Notes evidencing the Securities which differs from the Prospectus on file at the Commission at the time the Registration Statement becomes effective, in which case at the time it is first provided to the Underwriters for such use) and at the Closing Time referred to in Section 2 hereof, will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and will not include any untrue 3 statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that the representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or the Prospectus made in reliance upon and in conformity with information furnished to the Trust or the Corporation in writing by any Underwriter through the Representatives expressly for use in the Registration Statement or Prospectus. If a Rule 462(b) Registration Statement is required in connection with the offering and sale of the Securities, the Trust and the Corporation have complied or will comply with the requirements of Rule 111 under the 1933 Act Regulations relating to the payment of filing fees therefor. (ii) The documents incorporated or deemed to be incorporated by reference in the Prospectus pursuant to Item 12 of Form S-2 under the 1933 Act, at the time they were or hereafter are filed with the Commission, complied and will comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission under the 1934 Act (the "1934 Act Regulations"), and, when read together with the other information in the Prospectus, at the time the Registration Statement became effective and as of the Representation Date, did not and will not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (iii) Deloitte & Touche LLP, Price Waterhouse LLP and Ernst & Young LLP, the accounting firms that certified the financial statements and supporting schedules included or incorporated by reference in the Registration Statement and the Prospectus, each are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iv) The financial statements (including the notes thereto) included or incorporated by reference in the Registration Statement and the Prospectus present fairly the financial position of the respective entity or entities presented therein at the respective dates indicated and the results of their operations for the respective periods specified; except as otherwise stated in the Registration Statement, said financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis; and the supporting schedules included in the Registration Statement present fairly the information required to be stated therein. The financial information and data included in the Registration Statement and the Prospectus present fairly the information included therein and have been prepared on a basis consistent, except as may be noted therein, with that of the financial statements included in the Registration Statement and the Prospectus and the books and records of the respective entities or group presented therein. The pro forma financial information included in the Prospectus has been prepared in accordance with the applicable requirements of the 1933 Act, the 1933 Act Regulations (including, without limitation, Rule 11- 02 of Regulation S-X of the Commission) with respect to pro forma financial information and includes all adjustments necessary to present fairly the pro forma financial position of the Trust and the Corporation at the respective dates indicated and the results of operations for the respective periods specified. (v) No stop order suspending the effectiveness of the Registration Statement has been issued and, to the knowledge of the Transaction Entities, no proceeding for that purpose has been instituted or threatened by the Commission or by the state securities authority of any jurisdiction. No order preventing or suspending the use of the Prospectus has been issued and, to the knowledge of the Transaction Entities, no proceeding for that purpose has been instituted or threatened by the Commission or by the state securities authority of any jurisdiction. (vi) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (A) there has been no adverse change in the condition, financial or otherwise, or in the earnings, assets, business affairs or business prospects of 4 the Transaction Entities and their respective subsidiaries, considered as one enterprise, or in the fee, ground lease and mortgage interests or other adverse event, in hotel properties which the Transaction Entities and their respective subsidiaries will own and/or operate as of the Closing Time (the "Hotel Assets"), whether or not arising in the ordinary course of business, which would be material to the Transaction Entities and their respective subsidiaries, considered as one enterprise (anything which would be material to the Transaction Entities and their respective subsidiaries, considered as one enterprise, being hereinafter referred to as "Material"), (B) there have been no transactions or acquisitions entered into by the Transaction Entities or any of their respective subsidiaries, other than those in the ordinary course of business, which could reasonably be expected to be Material, (C) there has been no dividend or distribution of any kind declared, paid or made by the Trust or the Corporation on any class of its respective capital stock and (D) there has been no change in the capital stock of the Trust or the Corporation (except for issuances pursuant to outstanding options or warrants of the Trust or the Corporation), or the partnership interests of the Operating Partnership or the Realty Partnership or any increase in the indebtedness of the Transaction Entities, or any of their respective subsidiaries or in the indebtedness encumbering Hotel Assets which could reasonably be expected to be Material. (vii) The Trust has been duly formed and is validly existing as a real estate investment trust in good standing under the laws of the State of Maryland, with trust power and authority to own, lease and operate its properties and to conduct the business in which it is engaged or proposes to engage as described in the Prospectus and to enter into and perform its obligations under this Agreement and the Pricing Agreement and the other Operative Documents (as defined in subsection (xv) below) to which it is a party; and the Trust is duly qualified to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify would not reasonably have an adverse effect on the condition, financial or otherwise, or the earnings, assets or business affairs or business prospects of the Transaction Entities and their respective subsidiaries, considered as one enterprise, or the Hotel Assets which reasonably would be expected to be Material (a "Material Adverse Effect"). The Trust has no significant subsidiaries (other than the Realty Partnership) within the meaning of Regulation S-X under the 1933 Act. (viii) Each of the Corporation and its subsidiaries have each been duly incorporated and is validly existing as a corporation in good standing under the laws of their respective jurisdictions of incorporation (except with respect to those subsidiaries which are not significant subsidiaries, where such failure to be duly incorporated or to be in good standing could not reasonably be expected to have a Material Adverse Effect), with corporate power and authority to own, lease and operate its properties and to conduct the business in which it is engaged or proposes to engage as described in the Prospectus and to enter into and perform its obligations under this Agreement and the Pricing Agreement and the other Operative Documents to which it is a party; and each of the Corporation and its subsidiaries duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify could not reasonably be expected to have a Material Adverse Effect. The Corporation has no significant subsidiaries (other than the Operating Partnership and Hotel Investors Corporation of Nevada, a Nevada corporation) within the meaning of Regulation S-X under the 1933 Act. (ix) The Realty Partnership has been duly formed and is validly existing as a limited partnership in good standing under the laws of the State of Delaware, with partnership power and authority to own, lease and operate its properties, to conduct the business in which it is engaged and proposes to engage as described in the Prospectus and to enter into and perform its obligations under this Agreement and the other Operative Documents to which it is a party. The Realty Partnership is duly qualified or registered as a foreign partnership and is in good standing in each jurisdiction in which such qualification or registration is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or register could not reasonably be expected to have a Material Adverse Effect. The Trust is the sole general partner and Starwood Capital (as defined in subsection (xv) below) are the limited partners of the Realty Partnership. The agreement of limited partnership of the Realty 5 Partnership, as amended through the date hereof is in full force and effect, and the percentage interests of the partners in the Realty Partnership will be (at Closing) as set forth in the Prospectus. To the extent any portion of the over-allotment option described in Section 2(b) hereof is exercised at the Closing Time, the percentage interests of the partners in the Realty Partnership will be adjusted accordingly. Additionally, to the extent any portion of such over-allotment option is exercised subsequent to Closing Time, the Trust will contribute the proceeds from the sale of the Option Securities to the Realty Partnership in exchange for a number of units of partnership interest in the Realty Partnership ("Realty Units") equal to the number of Option Securities issued. The Realty Partnership has no significant subsidiaries within the meaning of Regulation S-X under the 1933 Act. (x) The Operating Partnership has been duly formed and is validly existing as a limited partnership in good standing under the laws of the State of Delaware, with partnership power and authority to own, lease and operate its properties, to conduct the business in which it is engaged and proposes to engage as described in the Prospectus and to enter into and perform its obligations under this Agreement and the other Operative Documents to which it is a party. The Operating Partnership is duly qualified or registered as a foreign partnership and is in good standing in each jurisdiction in which such qualification or registration is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or register could not reasonably be expected to have a Material Adverse Effect. The Corporation and certain of its wholly-owned subsidiaries are the general partners and Starwood Capital are the sole limited partners of the Operating Partnership. The agreement of limited partnership of the Operating Partnership, as amended through the date hereof, is in full force and effect, and the percentage interests of the partners in the Operating Partnership will be (at Closing) as set forth in the Prospectus. To the extent any portion of the over-allotment option described in Section 2(b) hereof is exercised at the Closing Time, the percentage interests of the partners in the Operating Partnership will be adjusted accordingly. Additionally, to the extent any portion of such over-allotment option is exercised subsequent to Closing Time, the Corporation will contribute the proceeds from the sale of the Option Securities to the Operating Partnership in exchange for a number of units of partnership interest in the Operating Partnership ("Operating Units," and collectively with Realty Units, "Units") equal to the number of Option Securities issued. The Operating Partnership have no significant subsidiaries within the meaning of Regulation S-X under the 1933 Act. (xi) The combined capitalization of each of the Trust and the Corporation is as set forth in the Prospectus under "Capitalization" (except for subsequent issuances, if any, pursuant to outstanding options and warrants of the Trust and the Corporation). All the issued and outstanding Trust Shares and Corporation Shares have been duly authorized and are validly issued, fully paid and non-assessable. No shares of the capital stock of either the Trust or the Corporation are reserved for any purpose except as disclosed in the Prospectus. Except as described in the Prospectus, there are no outstanding securities convertible into or exchangeable for Notes or any capital stock of the Trust or the Corporation and there are no outstanding options, rights (preemptive or otherwise) or warrants to purchase or to subscribe for Notes or shares of the capital stock or any other securities of the Trust or the Corporation. The Paired Shares issuable upon conversion of Units have been duly and validly authorized by all necessary corporate action and such Paired Shares, when issued upon such conversion or exercise, will be duly and validly issued, fully paid and non-assessable. (xii) The Securities have been duly authorized for issuance and sale to the Underwriters pursuant to the Indenture and this Agreement, and, when issued and delivered by the Trust and the Corporation pursuant to the Indenture and this Agreement against payment of the consideration set forth in the Pricing Agreement, will be validly issued, fully paid and non- assessable. The Paired Shares to be issued upon conversion of the Notes evidencing the Securities have been duly authorized for issuance upon such conversion and, when issued and delivered by the Trust and the Corporation upon such conversion, will be validly issued, fully-paid and non- assessable. Upon payment of the purchase price and delivery of the Securities in accordance herewith, each of the Underwriters will receive good, valid and marketable title to the Securities, free and clear of all security interests, mortgages, pledges, liens, 6 encumbrances, claims or equities. The Notes and Paired Shares to be issued in connection with the offering have been and will be offered and sold at or prior to the Closing Time in compliance with all applicable laws (including, without limitation, federal and state securities laws). The terms of the Notes and Paired Shares conform in all material respects to all statements and descriptions related thereto contained in the Prospectus. The form of stock certificates to be used to evidence the Paired Shares will be in due and proper form and will comply with all applicable legal requirements. The issuance of the Securities and the Paired Shares to be issued upon conversion of the Notes evidencing the Securities is not subject to any preemptive or other similar rights. (xiii) All the issued and outstanding Realty Units and the Operating Units have been duly authorized and are validly issued, fully paid and non-assessable and have been offered and sold or exchanged in compliance with all applicable laws (including, without limitation, federal and state securities laws). There are no outstanding securities convertible into or exchangeable for any Units and no outstanding options, rights (preemptive or otherwise) or warrants to purchase or to subscribe for Units. (xiv) None of the Transaction Entities or any of their respective subsidiaries is in violation of its declaration of trust, trustee's regulation of the trust, charter, by-laws, certificate of limited partnership, agreement of limited partnership or other governance documents, as the case may be, and none of the Transaction Entities or any of their respective subsidiaries is in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which such entity is a party or by which such entity may be bound, or to which any of its or its subsidiaries' property or assets is subject, except for such violations and defaults that could not reasonably be expected to have a Material Adverse Effect. (xv) (A) This Agreement has been duly and validly authorized, executed and delivered by each Transaction Entity and assuming due authorization, execution and delivery by the Representatives, is a valid and binding agreement of each of the Transaction Entities, enforceable against the Transaction Entities in accordance with its terms; (B) at the Representation Date, the Pricing Agreement will have been duly and validly authorized, executed and delivered by the Trust and the Corporation, and assuming due authorization, execution and delivery by the Representatives, will be a valid and binding agreement of the Trust and the Corporation, enforceable against the Trust and the Corporation in accordance with its terms; (C) the Indenture, at the Closing Time, will have been duly and validly authorized, executed and delivered by the Trust and the Corporation and, assuming due authorization, execution and delivery by the Trustee thereto, will be a valid and binding agreement, enforceable against the Trust and the Corporation in accordance with its terms; (D) the Amended and Restated Agreement of Limited Partnership of the Realty Partnership (the "Realty Partnership Agreement") and the Amended and Restated Agreement of Limited Partnership of the Operating Partnership (the "Operating Partnership Agreement"), at Closing Time, will have been duly and validly authorized, executed and delivered by the Trust and the Corporation and, assuming the due authorization, execution and delivery by the other parties thereto, will be valid and binding agreements, enforceable against the Trust and the Corporation, in accordance with their respective terms; (E) the Pairing Agreement has been duly and validly authorized, executed and delivered by each of the Trust and the Corporation and is a valid and binding agreement, enforceable against the Trust and the Corporation in accordance with its terms; and (F) the Formation Agreement dated as of November 11, 1994 as amended through the date hereof (the "Formation Agreement") among the Trust, the Corporation, Starwood Capital Group, L.P., Berl Holdings L.P., Starwood Apollo Hotel Partners I, L.P., Starwood Apollo Hotel Partners VIII, L.P., Starwood Apollo Hotel Partners IX, LP and Starwood Nomura Hotel Investors, L.P. (collectively, with the exception of the Trust and the Corporation, "Starwood Capital") has been duly and validly authorized, executed and delivered by each of the Trust and the Corporation; (G) Amendment No. 1 to the Formation Agreement ("Amendment No.1") by and among the parties to the Formation Agreement, at the Closing Time will have been duly and validly authorized, executed and delivered by each of the Trust and the Corporation and, assuming the due authorization, execution and delivery by the other parties thereto, each will be a valid and binding agreement, enforceable against the Trust and the Corporation in accordance with 7 its terms; (H) each of the non-competitive agreements between the Trust or the Corporation and each of its trustees or directors, as the case may be, executive officers and Barry S. Sternlicht (the "N.C. Agreements") at Closing Time will be duly and validly authorized, executed and delivered by the Trust or the Corporation and will be valid and binding agreement, enforceable against the Trust and the Corporation, in accordance with its terms; and (I) the Westin/Hot Agreement among W&S Hotel L.L.C., W&S Hotel Holding Company, the Realty Partnership, the Operating Partnership, WHWE L.L.C. and Woodstar Investor Partnership (the "Westin Agreement") has been duly and validly authorized, executed and delivered by each of the Realty Partnership and the Operating Partnership and is a binding agreement, enforceable against the Realty Partnership and the Operating Partnership in accordance with its terms. This Agreement, the Pricing Agreement, the Indenture, the Realty Partnership Agreement, the Operating Partnership Agreement, the Pairing Agreement, the Formation Agreement, Amendment No. 1 and the Westin Agreement are sometimes hereinafter collectively referred to as "Operative Documents." (xvi) The execution and delivery of each of the Operative Documents, the performance of the obligations set forth herein or therein, and the consummation of the transactions contemplated hereby or thereby or in the Prospectus by the Transaction Entities will not conflict with or constitute a breach or violation by such parties of, or default under, (A) any other Operative Documents; (B) any contract, indenture, mortgage, loan agreement, note, lease, joint venture or partnership agreement or other instrument or agreement to which such Transaction Entity is a party or by which they or, any of them, or any of their respective properties or other assets or any Hotel Asset may be bound or subject, which could reasonably be expected to have a Material Adverse Effect; (C) the declaration of trust, trustee's regulations of the trust, charter, by-laws, certificate of limited partnership or partnership agreement, as the case may be, of any Transaction Entity or (D) any applicable law, rule, order, administrative regulation or administrative or court decree, in each case except for conflicts, breaches, violations or defaults that, individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. (xvii) The Indenture has been duly qualified under the Trust Indenture Act. The Notes evidencing the Securities represent debt obligations of the Trust and the Corporation, which, to the their knowledge and information, are not subject to any subordination agreement (except to the extent provided in the Indenture), and do not entitle any holder thereof to any rights as a shareholder of either the Trust or the Corporation. Such Notes and the Indenture will not contain any provision which conditions the obligation of payment by the Trust and the Corporation thereunder or which subordinates the indebtedness evidenced thereby in right of payment to any other indebtedness of the Trust or the Corporation, except to the extent the Indenture provides for a priority for compensation and expenses of the Trustee over payments to holders of such Notes. (xviii) (a) No labor dispute with the employees of any Transaction Entity or any of their respective subsidiaries exists or, to the knowledge of the Transaction Entities is imminent, and (b) none of the Transaction Entities is aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors, which, in the case of either (a) or (b), could reasonably be expected to have a Material Adverse Effect. (xix) There is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Transaction Entities, threatened against or affecting any Transaction Entity or any of their respective subsidiaries, any Hotel Asset or any officer or director of the Trust or the Corporation or any of their respective subsidiaries, which is required to be disclosed in the Registration Statement or the Prospectus (other than as disclosed therein), or that, if determined adversely to any Transaction Entity, any Hotel Asset, or any such officer or director, will or could reasonably be expected to (A) have a Material Adverse Effect, or (B) materially and adversely affect the consummation of (i) the transactions contemplated by this Agreement or (ii) the acquisitions of the Sheraton Colony Square Hotel or the Tempe Embassy Suites (the "Acquisitions"). There are no pending legal or governmental proceedings to which any Transaction Entity or any of their respective subsidiaries is a party or of which they or any of their respective properties or assets or any Hotel Asset is the subject which are not described in the Prospectus, including ordinary routine litigation incidental to the business, that, considered in the aggregate, could reasonably be expected to have a Material Adverse Effect. There are no contracts or documents of any Transaction Entity or any of their respective subsidiaries which are required to be filed as exhibits to the Registration Statement by the 1933 Act or by the 1933 Act Regulations which have not been so filed. (xx) Commencing with their taxable years ending December 31, 1995, the Transaction Entities and their respective subsidiaries, are and will be organized and operated in conformity with the requirements for qualification of the Trust as a real estate investment trust under the Internal Revenue Code 8 of 1986, as amended (the "Code"), and the proposed method of operation of the Transaction Entities and their respective subsidiaries will enable the Trust to meet the requirements for taxation as a real estate investment trust under the Code. Section 269B(a)(3) of the Code does not and will continue not to apply to the Trust and the Corporation. (xxi) None of the Transaction Entities or any of their respective subsidiaries is, or at Closing Time will be, required to be registered under the Investment Company Act of 1940, as amended (the "1940 Act"). (xxii) The Transaction Entities and their respective subsidiaries own or possess, or can acquire on reasonable terms, the licenses, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names (collectively, "proprietary rights") presently employed by each of them in connection with the business now operated by them, and none of the Transaction Entities nor any of their respective subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any proprietary rights, or of any facts which would render any proprietary rights invalid or inadequate to protect the interest of such Transaction Entity or its subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, could reasonably be expected to have a Material Adverse Effect. (xxiii) No authorization, approval, consent or order of any court or governmental authority or agency or other entity or person is necessary in connection with the offering, issuance or sale of the Securities hereunder or the Paired Shares issuable upon conversion of the Securities contemplated by this Agreement, except as may be required under the 1933 Act or the 1933 Act Regulations, the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), state securities or real estate syndication laws or the by-laws and rules of the National Association of Securities Dealers, Inc. (the "NASD"), all of which have been obtained or will have been obtain prior to Closing Time or such as have been received prior to the date of this Agreement, and except for approval by the Nevada Gaming Commission of certain contributions by the Corporation to the Operating Partnership. (xxiv) Each of the Transaction Entities possesses such certificates, authorizations or permits issued by the appropriate local, state, federal or foreign regulatory agencies or bodies necessary to conduct the business now operated by it, or proposed to be conducted by it, and none of the Transaction Entities has received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could reasonably be expected to have a Material Adverse Effect. (xxv) Except as disclosed in the Prospectus, there are no persons with registration or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Trust and the Corporation under the 1933 Act. (xxvi) The Paired Shares to be issued upon conversion of the Notes evidencing the Securities have been approved for listing on the New York Stock Exchange upon notice of issuance. (xxvii) (A) The Transaction Entities or their respective subsidiaries have good and marketable title to their respective Hotel Assets free and clear of all liens, encumbrances, claims, security interests and defects, except such as are (i) described in the Prospectus, (ii) serving as security for loans described in the Prospectus, or (iii) not Material; (B) all liens, charges, encumbrances, claims or restrictions on or affecting any of the Hotel Assets and the assets of any Transaction Entity and their respective subsidiaries which are required to be disclosed in the Prospectus are disclosed therein; (C) none of the Transaction Entities or any of their respective subsidiaries is in default under any of the ground leases (as lessee), relating to, or any of the mortgages or other security documents or other agreements encumbering or otherwise recorded against, the Hotel Assets, and none of the Transaction Entities knows 9 of any event which, but for the passage of time or the giving of notice, or both, would constitute a default under any of such documents or agreements, other than such defaults that could not reasonably be expected to have a Material Adverse Effect; (D) each of the Hotel Assets complies with all applicable codes, laws and regulations (including, without limitation, building and zoning codes, laws and regulations and laws relating to access to the Hotel Assets), except for such failures to comply that could not, in the aggregate, reasonably be expected to have a Material Adverse Effect; and (E) none of the Transaction Entities has knowledge of any pending or threatened condemnation proceeding, zoning change, or other proceeding or action that will in any manner affect the size of, use of, improvements on, construction on or access to, the Hotel Assets, except such proceedings or actions that individually or in the aggregate could not reasonably have a Material Adverse Effect. (xxviii) Each of the Transaction Entities and their respective subsidiaries has obtained title insurance on such Transaction Entity's or subsidiary's fee and/or leasehold interests, as applicable, in each of the Hotel Assets, except for such failures to obtain title insurance that could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. (xxix) Except as disclosed in the Prospectus, and, except for activities, conditions, circumstances or matters that would not have a Material Adverse Effect; (A) to the knowledge of the Transaction Entities, the operations of the Transaction Entities are in compliance with all Environmental Laws and all requirements of applicable permits, licenses, approvals and other authorizations issued pursuant to Environmental Laws; (B) none of the Transaction Entities or any of their respective subsidiaries has caused or to the knowledge of the Transaction Entities suffered to occur any Release (as defined below) of any Hazardous Substance (as defined below) into the Environment (as defined below) on, in, under or from any Hotel Asset, and no condition exists on, in, under or, to the knowledge of the Transaction Entities, adjacent to any Hotel Asset that could result in the incurrence of liabilities or any violations of any Environmental Law (as defined below) in either case which reasonably would be Material or give rise to the imposition of any Lien (as defined below) under any Environmental Law; (C) none of the Transaction Entities or any of their respective subsidiaries has received any notice of a claim under or pursuant to any Environmental Law or under common law pertaining to Hazardous Substances on, in, under or originating from any Hotel Asset; (D) none of the Transaction Entities or any of their respective subsidiaries has received any notice from any Governmental Authority (as defined below) or other Person claiming any violation of any Environmental Law or evidencing the intent to undertake and/or requesting the investigation, remediation, clean-up or removal of any Hazardous Substance released into the Environment on, in, under or from any Hotel Asset; and (E) no Hotel Asset is included or, to the knowledge of the Transaction Entities, proposed for inclusion on the National Priorities List issued pursuant to CERCLA (as defined below) by the United States Environmental Protection Agency (the "EPA") or on the Comprehensive Environmental Response, Compensation, and Liability Information System database maintained by the EPA, and, to the knowledge of the Transaction Entities, has not otherwise been identified by the EPA as a potential CERCLA removal, remedial or response site or included or, to the knowledge of the Transaction Entities, proposed for inclusion on, any similar list of potentially contaminated sites pursuant to any other Environmental Law. As used herein, "Hazardous Substance" shall include any hazardous substance, hazardous waste, toxic substance, pollutant, hazardous material or similarly designated materials, including, without limitation, oil, petroleum or any petroleum-derived substance or waste, asbestos or asbestos-containing materials, PCBs, pesticides, explosives, radioactive materials, dioxins, urea formaldehyde insulation or any constituent of any such substance, pollutant or waste which is identified, regulated, prohibited or limited under any Environmental Law (including, without limitation, materials listed in the United States Department of Transportation Optional Hazardous Material Table, 49 C.F.R. Section 172.101, as the same may now or hereafter be amended, or in the EPA's List of Hazardous Substances and Reportable Quantities, 40 C.F.R. Part 302, as the same may now or hereafter be amended); "Environment" shall mean any surface water, drinking water, ground water, land surface, subsurface strata, river sediment, buildings, structures, and ambient, workplace and indoor and outdoor air; "Environmental Law" shall mean the 10 Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 C. Section 9601 et seq.) ("CERCLA"), the Resource Conservation and Recovery Act of 1976, as amended (42 C. Section 6901, et seq.), the Clean Air Act, as amended (42 C. Section 7401, et seq.), the Clean Water Act, as amended (33 C. Section 1251, et seq.), the Toxic Substances Control Act, as amended (15 C. Section 2601, et seq.), the Occupational Safety and Health Act of 1970, as amended (29 C. Section 651, et seq.), the Hazardous Materials Transportation Act, as amended (49 C. Section 1801, et seq.), and all other federal, state and local laws, ordinances, regulations, rules and orders relating to the protection of the environments or of human health from environmental effects; "Governmental Authority" shall mean any federal, state or local governmental office, agency or authority having the duty or authority to promulgate, implement or enforce any Environmental Law; "Lien" shall mean, with respect to any Hotel Asset, any mortgage, deed of trust, pledge, security interest, lien, encumbrance, penalty, fine, charge, assessment, judgment or other liability in, on or affecting such Hotel Asset; and "Release" shall mean any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, emanating or disposing of any Hazardous Substance into the Environment, including, without limitation, the abandonment or discard of barrels, containers, tanks (including, without limitation, underground storage tanks) or other receptacles containing or previously containing any Hazardous Substance or any release, emission, discharge or similar term, as those terms are defined or used in any Environmental Law. (xxx) Each of the Transaction Entities has filed all federal, state, local and foreign income tax returns which have been required to be filed (except in any case in which the failure to so file could not reasonably be expected to have a Material Adverse Effect), and has paid all taxes required to be paid and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable, except, in all cases, for any such tax, assessment, fine or penalty that is being contested in good faith. (b) Any certificate delivered hereunder or under any Operative Document and signed by any officer or authorized representative of any Transaction Entity and delivered to the Representatives or to counsel for the Underwriters shall be deemed a representation and warranty by such entity or person, as the case may be, to each Underwriter as to the matters covered thereby. SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING. (a) On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Trust and the Corporation, severally and not jointly, agree to sell to each Underwriter, severally and not jointly, and each Underwriter, severally and not jointly, agrees to purchase from the Trust and the Corporation, severally and not jointly, at the price per unit set forth in the Pricing Agreement, the number of Initial Securities set forth in Schedule A hereto opposite the name of such Underwriter (except as otherwise provided in the Pricing Agreement), plus any additional number of Initial Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof. If the Trust and the Corporation have elected not to rely upon Rule 430A under the 1933 Act Regulations, the public offering price of the Paired Shares to be issued upon conversion of the Notes evidencing the Securities and the purchase price per unit to be paid by the several Underwriters for the Securities will have each been determined and set forth in the Pricing Agreement, dated the date hereof, and an amendment to the Registration Statement and the Prospectus will be filed before the Registration Statement becomes effective. If the Trust and the Corporation have elected to rely upon Rule 430A under the 1933 Act Regulations, the purchase price per unit to be paid by the several Underwriters for the Securities shall be an amount equal to the public offering price per Paired Share to be issued upon conversion of the Notes evidencing the Securities, less an amount per unit to be determined by agreement between the Representatives, on the one hand, and the Trust and the Corporation, on the other hand. The public offering price per Paired Shares to be issued upon conversion of the Notes evidencing the Securities shall be a fixed price to be determined by agreement among the Representatives on the one hand, the Trust and the Corporation, on the other hand. Such public offering price and the purchase 11 price per unit, when so determined, shall be set forth in the Pricing Agreement. In the event that such prices have not been agreed upon and the Pricing Agreement has not been executed and delivered by all parties thereto by the close of business on the fourteenth business day following the date of this Agreement, this Agreement shall terminate forthwith, without liability of any party to any other party other than pursuant to Sections 6 and 7 hereof, unless otherwise agreed to by the Trust and the Corporation, on the one hand, and the Representatives, on the other hand. (b) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Trust and the Corporation, severally and not jointly, hereby grant an option to the Underwriters, severally and not jointly, to purchase up to an additional 1,537,500 units of Notes convertible into up to an additional 1,537,500 Paired Shares at the price per unit set forth in the Pricing Agreement. The option hereby granted will expire 30 days after the date hereof (or, if the Trust and the Corporation has elected to rely on Rule 430A under the 1933 Act Regulations, 30 days after the execution of the Pricing Agreement) and may be exercised in whole or in part from time to time only for the purpose of covering over- allotments which may be made in connection with the offering and distribution of the Initial Securities upon notice by the Representatives to the Trust and the Corporation setting forth the number of Option Securities as to which the several Underwriters are then exercising the option and the time and date of payment and delivery for such Option Securities. Any such time and date of delivery (a "Date of Delivery") shall be determined by the Representatives, but shall not be later than three full business days nor earlier than two full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined, unless otherwise agreed upon by the Representatives, on the one hand, and the Trust and the Corporation, on the other hand. If the option is exercised as to all or any portion of the Option Securities, the Option Securities shall be purchased by the Underwriters, severally and not jointly, in proportion to their respective Initial Securities underwriting obligations as set forth in Schedule A. (c) Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall be made at the office of Rogers & Wells, 200 Park Avenue, New York, New York 10166, or at such other place as shall be agreed upon by the Representatives, on the one hand, and the Trust and the Corporation, on the other hand, at 10:00 A.M. on the fourth business day (or the third business day if required under Rule 15c6-1 of the 1934 Act, or unless postponed in accordance with the provisions of Section 10) following the date the Registration Statement becomes effective (or, if the Trust and the Corporation has elected to rely upon Rule 430A of the 1933 Act Regulations, the fourth business day (or the third business day if required under Rule 15c6-1 of the 1934 Act) after execution of the Pricing Agreement), or such other time not later than ten business days after such date as shall be agreed upon by the Representatives, on the one hand, and the Trust and the Corporation, on the other hand (such time and date of payment and delivery being herein called "Closing Time"). Payment for the Initial Securities shall be divided between and paid to the Trust and the Corporation, respectively, in the same proportion of the aggregate principal amounts of the obligations of the Trust and the Corporation under the Notes representing the Initial Securities each bear to the other. In addition, in the event that any or all of the Option Securities are purchased by the Underwriters, payment of the purchase price for, and delivery of certificates for, such Option Securities shall be made at the above-mentioned offices of Rogers & Wells, or at such other place as shall be agreed upon by the Representatives, on the one hand, and the Trust and the Corporation, on the other hand, on each Date of Delivery as specified in the notice from the Representatives to the Trust and the Corporation. Payment shall be made to the Trust and the Corporation by certified or official bank check or checks drawn in New York Clearing House funds or similar next day funds payable to the order of the Trust and the Corporation, against delivery to the Representatives for the respective accounts of the Underwriters of certificates for the Notes representing the Securities to be purchased by them. Certificates for the Notes representing the Initial Securities and the Option Securities, if any, and the Paired Shares to be issued upon conversion of such Notes shall be in such denominations and registered in such names as the Representatives may request in writing at least two business days before the Closing Time or the relevant Date of Delivery, as the case may be. It is understood that each Underwriter has authorized the Representatives, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial Securities and the Option Securities, if any, which it has agreed to purchase. Merrill Lynch, Bear Stearns, Alex Brown, Lehman Brothers, Prudential and Smith Barney, individually and not as representatives of the Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Initial Securities or the Option Securities, if any, to be purchased by any Underwriter whose check has not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but any such payment shall not relieve such 12 Underwriter from its obligations hereunder. Where the Representatives have certified to the Trust and the Corporation on behalf on a Underwriter not less than three full business days prior to Closing Time or the relevant Date of Delivery (i) that the Securities to be purchased by such Underwriter hereunder at Closing Time or the relevant Date of Delivery have been sold to a person who is not an Underwriter or Dealer, or an affiliate (as hereinafter defined) of any thereof, or (ii) that while the transferee of record is an Underwriter or Dealer, or an affiliate of any thereof, such transferee is acquiring the Securities for purposes of record ownership only and the beneficial owner is not an Underwriter or Dealer, or an affiliate of any thereof, then, in either such case, the Trust and the Corporation, on the one hand, and the Representatives, on the other hand, shall cause the Notes evidencing such Securities to be delivered to the Trustee and the Trustee shall effect the conversion of such Notes and shall deliver to the Representatives certificates evidencing Paired Shares issued upon such conversion for delivery for the account of the beneficial owners thereof. As used herein, "affiliate" means, with respect to an Underwriter or Dealer, (A) a partner in or holder of 10% or more of the shares of such Underwriter or Dealer, (B) a person in which such Underwriter or Dealer holds 10% or more of the outstanding capital stock of such person or is a partner in such person, or (C) a family member of, or trust for, any such Underwriter, Dealer, partner or shareholder. The certificates for the Initial Securities and the Option Securities, if any, will be made available for examination and packaging by the Representatives not later than 10:00 A.M. on the last business day prior to the Closing Time or the relevant Date of Delivery, as the case may be in New York, New York. SECTION 3. COVENANTS OF THE TRANSACTION ENTITIES. Each of the Transaction Entities with each Underwriter as follows: (a) The Trust and the Corporation will notify the Representatives immediately of the following, and confirm the notice in writing, (i) the effectiveness of the Registration Statement and any amendment thereto (including any post-effective amendment), (ii) the receipt of any comments from the Commission relating to the Registration Statement or the Prospectus, (iii) any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, and (iv) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose. The Trust and the Corporation will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (b) The Trust and the Corporation will give the Representatives notice of their intention to file or prepare any amendment to the Registration Statement (including any post-effective amendment), any Rule 462(b) Registration Statement or any amendment or supplement to the Prospectus (including any revised prospectus which the Trust and the Corporation proposes for use by the Underwriters in connection with the offering of the Paired Shares to be issued upon conversion of the Notes evidencing the Securities which differs from the prospectus on file at the Commission at the time the Registration Statement becomes effective, whether or not such revised prospectus is required to be filed pursuant to Rule 424(b) of the 1933 Act Regulations, and any term sheet as contemplated by Rule 434 of the 1933 Act Regulations (a "Term Sheet")), will furnish the Representatives with copies of any such amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such amendment or supplement or use any such prospectus to which the Representatives or counsel for the Underwriters shall reasonably object. (c) The Trust and the Corporation will deliver to the Representatives as soon as possible, as many signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein and documents incorporated by reference therein) as the Representatives may reasonably request and will also deliver to the Representatives as many conformed copies of the Registration Statement as originally filed and of each amendment thereto (including documents incorporated by reference into the Prospectus but without exhibits) as the Representatives may reasonably request. 13 (d) The Trust and the Corporation will furnish to each Underwriter, from time to time during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request for the purposes contemplated by the 1933 Act or the 1934 Act or the respective applicable rules and regulations of the Commission thereunder. (e) If any event shall occur as a result of which it is necessary, in the reasonable opinion of counsel for the Underwriters, to amend or supplement the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, the Trust and the Corporation will forthwith amend or supplement the Prospectus (in form and substance reasonably satisfactory to counsel for the Underwriters) so that, as so amended or supplemented, the Prospectus will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time it is delivered to a purchaser, not misleading, and the Trust and the Corporation will furnish to the Underwriters a reasonable number of copies of such amendment or supplement. (f) The Trust and the Corporation will endeavor, in cooperation with the Underwriters, to qualify the Securities and the Paired Shares into which the Notes evidencing the Securities are convertible for offering and sale under the applicable securities laws of such states and other jurisdictions of the United States or foreign jurisdictions as the Representatives may reasonably designate; PROVIDED, HOWEVER, that neither the Trust nor the Corporation will be required to qualify as a foreign corporation, file a general consent to service of process in any such jurisdiction, subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject, or provide any undertaking or make any change in its charter or bylaws that the Trustees of the Trust and/or Board of Directors of the Corporation determines to be contrary to the best interests of the Trust and the Corporation and their respective shareholders. In each jurisdiction in which the Securities and the Paired Shares into which such Notes evidencing the Securities are convertible have been so qualified, the Trust and the Corporation will use all reasonable efforts to file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for so long a period (not longer than one year) as the Representatives may reasonably request for the distribution of the Securities. (g) The Trust and the Corporation will make generally available to their respective security holders as soon as practicable, but not later than 60 days after the close of the period covered thereby (90 days in the event that the close of such period is the close of the Trust's and the Corporation's fiscal year), an earnings statement (in form complying with the provisions of Rule 158 of the 1933 Act Regulations) covering a twelve month period beginning not later than the first day of the Trust's and the Corporation's fiscal quarter next following the "effective date" (as defined in said Rule 158) of the Registration Statement. (h) Each of the Trust and the Corporation will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectus under "Use of Proceeds." (i) If, at the time that the Registration Statement becomes effective, any information shall have been omitted therefrom in reliance upon Rule 430A and/or Rule 434 of the 1933 Act Regulations, then immediately following the execution of the Pricing Agreement, the Trust and the Corporation will prepare, and file or transmit for filing with the Commission in accordance with such Rule 430A and/or Rule 434 and Rule 424(b) of the 1933 Act Regulations, copies of an amended Prospectus, or, if required by such Rule 430A and/or Rule 434, a post-effective amendment to the Registration Statement (including an amended Prospectus), containing all information so omitted. If required, the Trust and the Corporation will prepare and file or transmit for filing a Rule 462(b) Registration Statement not later than the date of execution of the Pricing Agreement. If a Rule 462(b) Registration Statement is filed the Trust and the Corporation shall make payment of, or arrange for payment of, the additional registration fee owing to the Commission required by Rule 111 of the 1933 Act Regulations. 14 (j) The Trust and the Corporation, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to Sections 13, 14 or 15 of the 1934 Act within the time periods required by the 1934 Act and the 1934 Act Regulations. (k) The Trust and the Corporation will use their respective best efforts to maintain the listing of the Paired Shares on the New York Stock Exchange or another national securities exchange. (l) For the period one year from the Closing Time, the executive officers, trustees and directors of the Trust and the Corporation and Starwood Capital will not, without the prior written consent of Merrill Lynch, on the one hand, and the Trust and the Corporation, on the other hand, (which consent, in the case of the Trust and the Corporation, will be subject to the approval of the Trust's and the Corporation's Independent Trustees/Directors), offer, sell, contract to sell or otherwise dispose of any Paired Shares or Units or any security convertible into or exchangeable into or exercisable for Paired Shares (except for issuances by the Transaction Entities pursuant to the exchange of Units and for distribution of Units to the parties who have direct or indirect interests in Starwood Capital who agree to be bound to the restrictions contained herein). Any transferees of such shares or Units will be likewise prohibited from making any transfer of such shares or Units. (m) During a period of one year from the Closing Time, the Trust and the Corporation will not, without the prior written consent of Merrill Lynch, offer, sell, contract to sell or otherwise dispose of any Paired Shares or any security convertible into or exchangeable or exercisable for Paired Shares (except for (i) transfers of Units and for distribution of Units to parties who have direct or indirect interests in Starwood Capital who agree to be bound to the restrictions contained herein, (ii) the issuance of Units pursuant to outstanding options and warrants, (iii) the grant of options under the Trust's and the Corporation's 1995 Share Option Plan and (iv) in connection with acquisitions by the Transaction Entities). (n) During a period of one year from the Closing Time, the Realty Partnership and the Operating Partnership will not, without the prior written consent of Merrill Lynch, offer, sell, contract to sell or otherwise dispose of any Paired Shares or any security convertible into or exchangeable or exercisable for Paired Shares (except for (i) transfers of Units and for distribution of Units to parties who have direct or indirect interests in Starwood Capital who agree to be bound to the restrictions contained herein, (ii) the issuance of Paired Shares pursuant to outstanding options and warrants, (iii) the grant of options under the Trust's and the Corporation's 1995 Share Option Plan and (iv) in connection with acquisitions by the Transaction Entities). (o) The Trust will use its best effort to insure that it will qualify as a "real estate investment trust" under the Code for its taxable year ending December 31, 1995 and to continue to so qualify for subsequent years. The Transaction Entities, other than the Trust, and the subsidiaries of all Tranaction Entities (including the Trust), will take no action which could reasonably cause the Trust to fail to qualify as a "real estate investment trust" under the Code for the Trust's taxable year ending December 31, 1995 and to continue to so qualify for subsequent years. (p) For so long as the Company is subject to the 1934 Act, but in no event more than five years after the Closing Time, the Trust and the Corporation will put in place reasonable measures to insure the delivery to the Representatives, (i) promptly upon their being mailed or filed, copies of all current, regular and periodic reports of the Trust and the Corporation mailed to their respective shareholders or filed with any securities exchange or with the Commission or with any governmental authority succeeding to any of the Commission's functions, and (ii) such other information concerning the Transaction Entities as the Representatives reasonably request. 15 (q) Subject to the terms thereof, the Transaction Entities will do and perform their respective obligations under the Operative Documents to which they are parties to the extent required to consummate the transactions contemplated hereby. SECTION 4. PAYMENT OF EXPENSES; FINANCIAL ADVISORY FEE. (a) The Trust and the Corporation will pay all expenses incident to the performance of their respective obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement as originally filed and of each amendment thereto (including, without limitation, all reasonable expenses and disbursements of Rogers & Wells, counsel to the Underwriters, in connection with the preparation, printing and filing of the Registration Statement), (ii) the printing, or reproducing, and distributing to the Underwriters copies of this Agreement and the Pricing Agreement, (iii) the preparation, issuance and delivery of the certificates for the Notes evidencing the Securities and the Paired Shares to be issued upon conversion of such Notes to the Underwriters and the fees and expenses of the trustee and transfer agent, (iv) the fees and disbursements of the Trust's and the Corporation's counsel and accountants, (v) the qualification of the Securities (and the Paired Shares to be issued upon conversion of the Notes evidencing the Securities) under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey, (vi) the printing and delivery to the Underwriters of copies of the Registration Statement as originally filed and of each amendment thereto, of each preliminary prospectus, and of the Prospectus and any amendments or supplements thereto, (vii) the cost of printing, or reproducing, and delivering to the Underwriters copies of the Blue Sky Survey, (viii) the fee of the NASD, (ix) the fees and expenses incurred in connection with the listing of the Paired Shares on the New York Stock Exchange and (x) any transfer taxes imposed on the sale of the Securities to the several Underwriters or upon the conversion of the Notes into Paired Shares. (b) If this Agreement is cancelled or terminated by the Representatives in accordance with the provisions of Section 5 or Section 9(a)(i) hereof, the Trust and the Corporation shall reimburse the Underwriters for all of their reasonable out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Underwriters. (c) At Closing Time, the Trust and the Corporation shall pay to Merrill Lynch a fee (the "Financial Advisory Fee") in consideration of the financial advisory services provided to the Trust and the Corporation by Merrill Lynch in connection with the transactions contemplated by the Formation Agreement. The Financial Advisory Fee shall be equal to .75% of the gross proceeds from the sale of the Securities hereunder, less $250,000. Payment of the Financial Advisory Fee shall be made by certified or official bank check or similar next day funds payable to the order of Merrill Lynch. SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the Underwriters hereunder are subject to the accuracy, as of the date hereof and at Closing Time, of the representations and warranties of the Transaction Entities herein contained, to the performance by the Transaction Entities of their respective obligations hereunder, and to the following further conditions: (a) The Registration Statement shall have become effective not later than 5:30 P.M. on the date hereof, or with the consent of the Representatives, at a later time and date, not later, however, than 5:30 P.M. on the first business day following the date hereof, or at such later time and date as may be approved by a majority in interest of the Underwriters; and at Closing Time no stop order suspending the 16 effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission. If the Trust and the Corporation have elected to rely upon Rule 430A and/or Rule 434 of the 1933 Act Regulations, the price of the Paired Shares to be issued upon conversion of the Notes evidencing the Securities and any price-related information previously omitted from the effective Registration Statement pursuant to such Rule 430A shall have been transmitted to the Commission for filing pursuant to Rule 424(b) of the 1933 Act Regulations within the prescribed time period and, prior to Closing Time, the Trust and the Corporation shall have provided evidence satisfactory to the Representatives of such timely filing, or a post- effective amendment providing such information shall have been promptly filed and declared effective in accordance with the requirements of Rule 430A of the 1933 Act Regulations. If a Rule 462(b) Registration Statement is required, such Rule 462(b) Registration Statement shall have been transmitted to the Commission for filing and have become effective within the prescribed time period, and, prior to Closing Time, the Trust and the Corporation shall have provided to the Underwriters evidence of such filing and effectiveness in accordance with Rule 462(b) of the 1933 Act Regulations. (b) At Closing Time the Representatives shall have received: (1) The favorable opinions, each in form and substance satisfactory to counsel or the Underwriters, dated as of Closing Time of (A) Sidley & Austin, counsel for Transaction Entities, with respect to the matters set forth in items (v), (vi), (vii) (only with respect to the third and fourth sentences thereof), and (viii) - (xxi) (with respect to item (xviii) only part (A) thereof) below and (B) Piper & Marbury, Maryland counsel to the Transaction Entities, with respect to the matters set forth in items (i) - (iv), (vii) (only with respect to the first two sentences and the last sentence thereof) and (xviii)(B): (i) The Trust has been duly formed and is validly existing as a real estate investment trust in good standing under the laws of the State of Maryland. (ii) The Corporation and its subsidiaries have each been duly incorporated and is validly existing as a corporation in good standing under the laws of its respective jurisdiction of incorporation (except, with respect to those subsidiaries which are not significant subsidiaries, where the failure to be so validly existing as a corporation in good standing would not be reasonably expected to have a Material Adverse Effect). (iii) The Trust has the power and authority to own, lease and operate its properties, to conduct the business in which it is engaged or proposes to engage as described in the Prospectus and to enter into and perform its obligations under this Agreement and the other Operative Documents to which it is a party. The Trust is duly qualified to transact business and is in good standing in each jurisdiction that is shown in the Prospectus as a jurisdiction in which the Trust or the Realty Partnership manages, owns or leases real property, except where the failure to so qualify could not reasonably be expected to have a Material Adverse Effect. (iv) Each of the Corporation and its subsidiaries have the corporate power and authority to own, lease and operate its properties, to conduct the business in which it is engaged or proposes to engage as described in the Prospectus and to enter into and perform its obligations under this Agreement and the other Operative Documents to which it is a party. Each of the Corporation and its subsidiaries is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction that is shown in Prospectus as a jurisdiction in which such party or the Operating Partnership manages, owns or leases real property, except where the failure to so qualify would not reasonably be expected to have a Material Adverse Effect. 17 (v) Each of the Realty Partnership and the Operating Partnership has been duly formed and is validly existing as a limited partnership in good standing under the laws of the State of Delaware. Each of the Realty Partnership and the Operating Partnership has all requisite partnership power and authority to own, lease and operate its properties, to conduct the business in which it is engaged and proposes to engage as described in the Prospectus and to enter into and perform its obligations under this Agreement and the other Operative Documents to which it is a party. Each of the Realty Partnership and the Operating Partnership is duly qualified or registered as a foreign partnership and is in good standing in each jurisdiction that is shown in the Prospectus as a jurisdiction in which it manages, owns or leases real property, except where the failure to so qualify would not reasonably be expected to have a Material Adverse Effect. (vi) The Trust and the Corporation have duly authorized, issued and outstanding capital stock as set forth in the Prospectus under "Capitalization" (except for subsequent issuances, if any, pursuant to outstanding options and warrants of the Trust and the Corporation). All the issued and outstanding Paired Shares have been duly authorized and are validly issued, fully paid and non-assessable. To the knowledge of such counsel, no shares of capital stock of the Trust or the Corporation are reserved for any purpose except as disclosed in the Prospectus. To the knowledge of such counsel, except as described in the Prospectus, there are no outstanding securities convertible into or exchangeable for any capital stock of the Trust or the Corporation and there are no outstanding options, rights (preemptive or otherwise) or warrants to purchase or subscribe for Notes or shares of the capital stock or any other securities of the Trust or the Corporation, in each case from the Transaction Entities or any of their respective subsidiaries. The Paired Shares issuable upon conversion of Units have been duly and validly authorized by all necessary trust and corporate action and such Paired Shares, when issued upon such conversion or exercise will be duly and validly issued, fully paid and non- assessable. (vii) The Securities have been duly authorized for issuance and sale to the Underwriters pursuant to the Indenture and this Agreement and, when issued and delivered by the Trust and the Corporation pursuant to this Agreement against payment of the consideration set forth in the Pricing Agreement, will be validly issued, fully-paid and non-assessble. The Paired Shares to be issued upon conversion of the Notes evidencing the Securities have been duly authorized for issuance upon such conversion and, when issued and delivered by the Trust and the Corporation upon such conversion, will be validly issued, fully- paid and non-assessable. Each of the Underwriters is receiving good, valid and marketable title to the Securities, free and clear of all security interests, mortgages, pledges, liens, encumbrances, claims or equities. The Paired Shares to be issued upon conversion of the Notes evidencing the Securities have been duly authorized for issuance by all necessary trust and corporate action, and when issued and delivered by the Trust and the Corporation upon conversion of the Notes, will be validly issued, fully paid and non-assessable. The terms of the Notes and the Paired Shares conform in all material respects to the statements and descriptions related thereto contained in the Prospectus. The form of certificates evidencing the Paired Shares are in due and proper form and comply in all material respects with all applicable legal requirements. The issuance of the Securities (and the Paired Shares issuable upon conversion of the Notes evidencing the Securities) is not subject to any preemptive or other similar rights arising under the laws of the State of Maryland, the Declaration of Trust or Trustee's Regulation of Trust, the Articles of Incorporation or by-laws of the Corporation, or any Operative Document or agreement filed as exhibits to the Registration Statement of which such counsel is aware. 18 (viii) The Realty Units and Operating Units issued through the Closing Time, including, without limitation, the Realty Units and Operating Units issued to the Trust and the Corporation, respectively, were duly authorized for issuance by the Realty Partnership or the Operating Partnership, as the case may be, to the holders thereof, and are validly issued, fully paid and non-assessable. All such Units have been offered and sold at or prior to Closing Time in compliance with all applicable laws of the United States and the State of Delaware. The terms of the Units conform in all material respects to the statements and descriptions related thereto contained in the Prospectus. (ix) To the knowledge of such counsel, none of the Transaction Entities is in violation of its declaration of trust, charter, trustee's regulation of trust charter, by-laws, certificate of limited partnership or partnership agreement, as the case may be, and none of the Transaction Entities is in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, Operative Document or other instrument filed as exhibis to the Registration Statement to which such entity is a party or by which such entity may be bound, or to which any of the property or assets of such entity is subject, except for violations or defaults which in the aggregate could not reasonably have a Material Adverse Effect. (x) Each of the Operative Documents was duly and validly authorized, executed and delivered by the Transaction Entities, as applicable, and, assuming due authorization, execution and delivery by any party thereto which is not a Transaction Entity, is a valid and binding agreement of the Transaction Entities that are parties thereto, enforceable against the Transaction Entities that are parties thereto in accordance with its terms, except as such enforceability may be subject to (1) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or transfer or similar laws affecting creditors rights and (2) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (xi) The execution and delivery of each of the Operative Documents, the performance of the obligations set forth herein or therein, and the consummation of the transactions contemplated hereby or thereby or in the Prospectus by the Transaction Entities did not, do not and will not conflict with or constitute a breach or violation by such parties of, or default under: (1) any other Operative Documents; (2) any contract or other instrument filed as exhibits to the Registration Statement would reasonably be expected to have a Material Adverse Effect, and of which such counsel is aware; (3) the declaration of trust, trustee's regulation of trust, charter, by-laws, certificate of limited partnership or partnership agreement, as the case may be, of any Transaction Entity; or (4) any applicable law, rule or administrative regulation of the United States or the jurisdiction of its incorporation or formation; or (5) any order or administrative or court decree of which such counsel is aware, except in each case for breaches, violations or defaults that in the aggregate would not reasonably be expected to have a Material Adverse Effect. (xii) The Indenture has been duly qualified under the Trust Indenture Act. The Notes evidencing the Securities represent debt obligations of the Trust and the Corporation, which, to the knowledge of such counsel, are not subject to any subordination agreement (except to the extent provided in the Indenture), and do not entitle any holder thereof to any rights as a shareholder of either the Trust or the Corporation. Such Notes and the Indenture do not contain any provision which conditions the obligation of payment by the Trust and the Corporation thereunder or 19 which subordinates the indebtedness evidenced thereby in right of payment to any other indebtedness of the Trust or the Corporation, except to the extent the Indenture provides for a priority for compensation and expenses of the Trustee over payments to holders of such Notes. (xiii) Commencing with their taxable years ending December 31, 1995, the Transaction Entities and their respective subsidiaries are and will be organized in conformity with the requirements for qualification of the Trust as a real estate investment trust under the Code, and the proposed method of operation of the Transaction Entities and their respective subsidiaries will enable the Trust to meet the requirements for taxation as a real estate investment trust under the Code. The provisions of Section 269B(a)(3) of the Code does not and will continue not to apply to the Trust. (xiv) None of the Transaction Entities or any of their respective subsidiaries is, required to be registered under the 1940 Act. (xv) No authorization, approval, consent or order of any court or governmental authority or agency or, to the knowledge of such counsel, any other entity or person is necessary in connection with the offering, issuance or sale of the Securities hereunder or the Paired Shares issuable upon conversion of the Securities as contemplated by this Agreement, except as may be required under the 1933 Act, the 1933 Act Regulations or the Trust Indenture Act or the by-laws and rules of the NASD, or state securities laws, real estate syndication laws or such as have been received prior to the date of this Agreement. (xvi) To such counsel's knowledge, there is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending, or, threatened against or affecting any Transaction Entity, any Hotel Asset or any officer or director of the Trust or the Corporation, that, if determined adversely to any Transaction Entity, any Hotel Asset, or any such officer or director, will or could reasonably be expected to (A) have a Material Adverse Effect, or (B) materially and adversely affect the consummation of (i) the transactions contemplated by this Agreement or (ii) the Acquisitions. (xvii) At the time the Registration Statement became effective and at the Representation Date, (A) the Registration Statement (other than the financial statements and supporting schedules and other financial and statistical data included therein, as to which no opinion need be rendered) complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and (B) the preliminary Prospectus and the Term Sheet complied with Rule 434(b)(2). (xviii) The information in the Prospectus under (A) "Risk Factors -- Influence of Starwood Capital," "Structure of the Company", "Policies With Respect to Certain Activities, 20 "Certain Relationships and Related Transactions," "Shares Available for Future Sale", "Capital Stock", "Federal Income Tax Considerations" and "ERISA Considerations" and (B) "Risk Factors -- Possible Liabilities of Trust Shareholders" to the extent that it constitutes statements of law, descriptions of statutes, rules or regulations, summaries of documents, or legal conclusions, has been reviewed by them and is correct in all material respects and presents fairly the information required to be disclosed therein. (xix) To such counsel's knowledge, there are no contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto by the 1933 Act Regulations other than those described or referred to therein or filed as exhibits thereto, and the descriptions thereof or references thereto are accurate in all material respects. (xx) To such counsel's knowledge, except as disclosed in the Prospectus, there are no persons with registration or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Trust and the Corporation under the 1933 Act. (xxi) The Registration Statement is effective under the 1933 Act and, to the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission. In giving its opinion, such counsel may rely, (A) as to all matters of fact, upon certificates and written statements of officers, directors, partners and employees of and accountants for each of the Transaction Entities, (B) as to matters of Maryland law, on the opinion of Piper & Marbury, Baltimore, Maryland, which opinion shall be in form and substance reasonably satisfactory to counsel for the Underwriters, and (C) as to the good standing and qualification of the Transaction Entities to do business in any state or jurisdiction, upon certificates of appropriate government officials or opinions of counsel in such jurisdictions. Counsel need express no opinion with respect to the requirements of, or compliance with, any state securities or "Blue Sky" laws. In addition, Sidley & Austin shall state that in connection with the preparation of the Registration Statement and the Prospectus, Sidley & Austin has participated in conferences with officers and other representatives of the Trust and the Corporation and the independent public accountants for the Trust and the Corporation at which the contents of the Registration Statement and the Prospectus and related matters were discussed. On the basis of such participation and review, but without independent verification by such counsel of, and without assuming any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus or any amendments or supplements thereto, no facts have come to its attention that lead it to believe that (i) the Registration Statement, at the time such Registration Statement became effective and at the Representation Date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading or (ii) the Prospectus, as of its date or at Closing Time, contained or contains any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that Sidley & Austin need express no opinion with respect to the financial statements, schedules and other financial and statistical data included in the Registration Statement or the Prospectus). 21 (2) The favorable opinion, dated as of the Closing Time, of Rogers & Wells, counsel for the Underwriters, with respect to the matters set forth in (vii) (with respect to the first two sentences only), (x) (with respect to the Indenture, this Agreement and the Pricing Agreement only) and (xv) of subsection (b)(1) of this Section 5. In giving its opinion, Rogers & Wells may rely, (A) as to all matters of fact, upon certificates and written statements of officers and employees of and accountants for the Transaction Entities, (B) as to the good standing and qualification of the Company to do business in any state or jurisdiction, upon certificates of appropriate government officials or opinions of counsel in such jurisdictions, which opinions shall be in form and substance satisfactory to counsel for the Underwriters, and (C) as to certain matters of law, upon the opinions given pursuant to Section 5(b)(1) above. In addition, Rogers & Wells shall state that in connection with the preparation of the Registration Statement and the Prospectus, Rogers & Wells has participated in conferences with officers and other representatives of the Trust and the Corporation and the independent public accountants for the Trust and the Corporation at which the contents of the Registration Statement and the Prospectus and related matters were discussed. On the basis of such participation and review, but without independent verification by such counsel of, and without assuming any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus or any amendments or supplements thereto, no facts have come to its attention that lead it to believe that (i) the Registration Statement, at the time such Registration Statement became effective and at the Representation Date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading or (ii) the Prospectus, as of its date or at Closing Time, contained or contains any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that Rogers & Wells need express no opinion with respect to the financial statements, schedules and other financial and statistical data included in the Registration Statement or the Prospectus). (c) At Closing Time, (i) the Registration Statement and the Prospectus shall contain all statements that are required to be stated therein in accordance with the 1933 Act and the 1933 Act Regulations and in all material respects shall conform to the requirements of the 1933 Act and the 1933 Act Regulations, and neither the Registration Statement nor the Prospectus shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and no action, suit or proceeding at law or in equity shall be pending or, to the knowledge of any Transaction Entity, threatened against such entity, any Hotel Asset which would be required to be set forth in the Prospectus other than as set forth therein, (ii) there shall not have been, since the date hereof or since the respective dates as of which information is given in the Registration Statement and the Prospectus, any adverse change in the condition, financial or otherwise, or in the earnings, assets, business affairs or business prospects of the Transaction Entities whether or not arising in the ordinary course of business which would be Material, (iii) no proceedings shall be pending or to the knowledge of the Transaction Entities, threatened against any Transaction Entity, or any Hotel Asset before or by any federal, state or other commission, board or administrative agency wherein an unfavorable decision, ruling or finding might result in any adverse change in the condition, financial or otherwise, or in the earnings, assets, or business affairs of the Transaction Entities, and the Hotel Assets which would be Material, other than as set forth in the Prospectus, (iv) no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and, to the knowledge of the Transaction Entities, no proceedings for that purpose shall have been instituted or threatened by the Commission or by the state securities authority of any jurisdiction, and (v) the Representatives shall have received a certificate of the President or a Vice President of the Trust and the Corporation and of the chief financial or chief 22 accounting officer of each such entity, dated as of the Closing Time, evidencing compliance with the provisions of this subsection (c) and stating that the representations and warranties in Section 1 hereof are true and correct, with the same force and effect as though expressly made at and as of Closing Time. (d) At the time of the execution of this Agreement, the Representatives shall have received from each of Deloitte & Touche LLP, Price Waterhouse LLP and Ernst & Young LLP a letter dated such date, in form and substance satisfactory to the Representatives, to the effect that: (i) they are independent public accountants with respect to the Trust and the Corporation as required by the 1933 Act and the 1933 Act Regulations; (ii) it is their opinion that the financial statements and supporting schedules included in the Registration Statement and covered by their opinions therein comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations; (iii) based upon limited procedures set forth in detail in such letter, including a reading of the latest available interim financial statements of the Trust and the Corporation, a reading of the minute books of each of the Trust and the Corporation, inquiries of officials of the Trust and the Corporation responsible for financial and accounting matters and such other inquiries and procedures as may be specified in such letter, nothing has come to their attention which causes them to believe that (A) the unaudited financial statements and supporting schedules of the Trust and the Corporation included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations or are not in conformity with generally accepted accounting principles applied on a basis consistent with that of the audited financial statements included in the Registration Statement, (B) the operating data and balance sheet data set forth in the Prospectus under the captions "Prospectus Summary -- Summary Combined Selected Financial Data" and "Selected Combined Financial Data" were not determined on a basis consistent with that used in determining the corresponding amounts in the audited financial statements included in the Registration Statement, (C) the pro forma financial information included in the Registration Statement was not prepared in accordance with the applicable requirements of the 1933 Act or the 1933 Act Regulations with respect to pro forma financial information or was not determined on a basis consistent with that of the audited financial statements included in the Registration Statement or (D), with respect to the letter from Deloitte & Touche LLP, at a specified date not more than five days prior to the date of this Agreement, there has been any change in the capital stock of the Trust or the Corporation, or any increase in the debt of the Trust or the Corporation or any decrease in the net assets of the Trust or the Corporation, as compared with the amounts shown in the March 31, 1995 balance sheets of the Trust and the Corporation, included in the Registration Statement or, during the period from March 31, 1995 to a specified date not more than five days prior to the date of this Agreement, there were any decreases, as compared with the corresponding period in the preceding year, in revenues, net income or funds from operations of the Trust and the Corporation, except in all instances for changes, increases or decreases which the Registration Statement and the Prospectus disclose have occurred or may occur; and (iv) in addition to the examination referred to in their opinions and the limited procedures referred to in clause (iii) above, they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information which are included in the Registration Statement and Prospectus and which are specified by the Representatives, and have found such amounts, percentages and financial information to be in agreement with the relevant accounting, financial and other records of the Trust and the Corporation identified in such letter. (e) At Closing Time the Representatives shall have received from each of Deloitte & Touche LLP, Price Waterhouse LLP and Ernst & Young LLP, a letter, dated the Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (d) of this Section, except that the "specified date" referred to shall be a date not more than five days prior to Closing Time and, if the Trust and the Corporation has elected to rely on Rule 430A of the 1933 Act Regulations, to the further effect that they have carried out procedures as specified in clause (iv) of subsection (d) of this Section with respect to certain amounts, percentages and financial information specified by the Representatives and deemed to be a part of the Registration Statement pursuant to Rule 430A(b) and have found such amounts, percentages and financial information to be in agreement with the records specified in such clause (iv). 23 (f) At the Closing Time, the Paired Shares to be issued upon conversion of the Notes evidencing the Securities shall have been approved for listing on the New York Stock Exchange upon notice of issuance. (g) At Closing Time and at each Date of Delivery, if any, counsel for the Underwriters shall have been furnished with such documents and opinions as they may reasonably require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated and related proceedings, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Trust and the Corporation in connection with the issuance and sale of the Securities and the Paired Shares as herein contemplated shall be reasonably satisfactory in form and substance to the Representatives and counsel for the Underwriters. (h) At or prior to the Closing Time, the Representatives shall have received a letter agreement from Starwood Capital, and each executive officer, director and trustee of the Trust and the Corporation wherein such holder shall agree that for the period one year from the Closing Time, the executive officers, trustees and directors of the Trust and the Corporation and Starwood Capital will not, without the prior written consent of Merrill Lynch, on the one hand, and the Trust and the Corporation, on the other hand, (which consent, in the case of the Trust and the Corporation, will be subject to the approval of the Trust's and the Corporation's Independent Trustees/Directors), offer, sell, contract to sell or otherwise dispose of any Paired Shares or Units or any security convertible into or exchangeable into or exercisable for Paired Shares (except for issuances by the Transaction Entities pursuant to the exchange of Units and for distribution of Units to the parties who have direct or indirect interests in Starwood Capital who agree to be bound to the restrictions contained herein). Any transferees of such shares or Units will be likewise prohibited from making any transfer of such shares or Units. (i) In the event that the Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of the Option Securities, the representations and warranties of the Transaction Entities contained herein and the statements in any certificates furnished by the Transaction Entities hereunder shall be true and correct in all material respects as of each Date of Delivery and, at the relevant Date of Delivery, the Representatives shall have received: (1) A certificate, dated such Date of Delivery, of the President or a Vice President of each of the Trust and the Corporation and of the chief financial or chief accounting officer of each of such entity confirming that their respective certificates delivered at Closing Time pursuant to Section 5(c) hereof remain true and correct as of such Date of Delivery. (2) The favorable opinions of Sidley & Austin and Piper & Marbury, in form and substance reasonably satisfactory to counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(b)(1) hereof. (3) The favorable opinion of Rogers & Wells, counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(b)(2) hereof. (4) A letter from Deloitte & Touche LLP, Price Waterhouse LLP and Ernst & Young LLP, in form and substance reasonably satisfactory to the Representatives and dated such Date of Delivery, substantially the same in form and substance as the letter furnished to the Representatives pursuant to Section 5(e) hereof, except that the "specified date" in the letter furnished pursuant to this Section 5(i)(4) shall be a date not more than five days prior to such Date of Delivery. 24 If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement may be terminated by the Representatives by notice to the Trust and the Corporation at any time at or prior to Closing Time, and such termination shall be without liability of any party to any other party except as provided in Section 4 hereof. SECTION 6. INDEMNIFICATION. (a) Each of the Transaction Entities agrees, jointly and severally, to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the information deemed to be part of the Registration Statement pursuant to Rule 430A(b) of the 1933 Act Regulations, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to any Transaction Entity by any Underwriter expressly for use in the Registration Statement (or any amendment thereto) or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and PROVIDED, FURTHER, that this indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, liabilities, claims, damages or expenses purchased Securities or Paired Shares issued upon conversion of Notes evidencing the Securities, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if any Transaction Entity shall have furnished any such amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if such is required by law, at or prior to the written confirmation of the sale of such Paired Shares to such person and if the Prospectus (as so amended or supplemented) would have corrected the defect giving rise to such loss, liability, claim, damage or expense. (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever for which indemnification is provided under subsection (i) above if such settlement is effected with the prior written consent of the indemnifying party; and (iii) against any and all expense whatsoever, as incurred (including, subject to Section 6(c) hereof, the reasonable fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever for which indemnification is provided under subsection (i) above, to the extent that any such expense is not paid under (i) or (ii) above; (b) Each Underwriter severally agrees to indemnify and hold harmless the Transaction Entities, the Trust's and the Corporation's trustees and directors, as the case may be, and each of the Trust's and the Corporation's officers who signs the Registration Statement or any amendment thereto and each person, if any, who controls the Trust or the Corporation within the meaning of Section 15 of the 1933 Act, against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made 25 in the Registration Statement (or any amendment thereto) or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to any Transaction Entity by such Underwriter through the Representatives expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (c) Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any claims asserted against or any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability which it may have otherwise than on account of this indemnity agreement except to the extent the indemnifying party has been prejudiced in any material respect by such failure. An indemnifying party may participate at its own expense in the defense of any such action. If it so elects within a reasonable time after receipt of such notice, an indemnifying party, jointly with any other indemnifying parties receiving such notice, may assume the defense of such action with counsel chosen by it and reasonably approved by the indemnified parties defendant in such action, unless such indemnified parties reasonably object to such assumption on the ground that there may be legal defenses available to them which are different from or in addition to those available to such indemnifying party. If an indemnifying party assumes the defense of such action, the indemnifying parties shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. Anything in this Section 6 to the contrary notwithstanding, an indemnifying party shall not be liable for any settlement of any claim or action effected without its prior written consent; PROVIDED, that such consent was not unreasonably withheld. SECTION 7. CONTRIBUTION. In order to provide for just and equitable contribution in circumstances in which the indemnity agreement provided for in Section 6 hereof is for any reason held to be unenforceable by the indemnified parties although applicable in accordance with its terms, the Transaction Entities and the Underwriters shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by said indemnity agreement incurred by the Transaction Entities and the Underwriters (a) in such proportion as is appropriate to reflect the relative benefits received by the Transaction Entities and the Underwriters from the offering of the Securities, or (b) if the allocation provided by clause (a) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (a) above but also the relative fault (as determined by a court of competent jurisdiction or a panel of arbitration) of the Transaction Entities and the Underwriters in connection with the statements or omissions that resulted in such losses, liabilities, claims, damages, and expenses, as well as any other relevant equitable considerations. The relative benefits received by the Transaction Entities and the Underwriters shall be deemed to be in the same proportions as the total gross proceeds from the offering (before deducting expenses) received by the Trust and the Corporation bear to the total underwriting discount received by the Underwriters. The relative fault of the Transaction Entities and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Transaction Entities or by the Underwriters and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. The parties agree that it would not be just or equitable if contribution pursuant to this Section 7 were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay in respect of such losses, liabilities, claims, damages and expenses. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 26 The Underwriters' obligations to contribute pursuant to this Section 7 are several in proportion to their respective underwriting commitments and not joint. For purposes of this Section 7, the Transaction Entities shall be deemed one party and jointly and severally liable for any obligations hereunder. For purposes of this Section 7, each person, if any, who controls a Underwriter within the meaning of Section 15 of the 1933 Act, and any director, officer, employee or affiliate of a Underwriter or such controlling person, shall have the same rights to contribution as such Underwriter, and each person, if any, who controls the Transaction Entities within the meaning of Section 15 of the 1933 Act, or any director, officer, employee or affiliate of any Transaction Entity or such controlling person, shall have the same rights to contribution as the Transaction Entities. SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. All representations, warranties and agreements contained in this Agreement and the Pricing Agreement, or contained in certificates of officers or authorized representatives of the Transaction Entities submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or controlling person, or by or on behalf of the Transaction Entities and shall survive delivery of the Securities to the Underwriters. SECTION 9. TERMINATION OF AGREEMENT. (a) The Representatives may terminate this Agreement, by notice to the Trust and the Corporation, at any time at or prior to Closing Time (i) if there has been, since the date of this Agreement or since the respective dates as of which information is given in the Registration Statement, any material adverse change in the condition, financial or otherwise, or in the earnings, assets, business affairs or business prospects of the Transaction Entities and their respective subsidiaries, considered as one enterprise, or Hotel Assets, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or any outbreak of hostilities or escalation of existing hostilities or other calamity or crisis the effect of which on the financial markets of the United States is such as to make it, in the judgment of the Representatives, impracticable to market the Paired Shares to be issued upon conversion of the Notes evidencing the Securities or to enforce contracts for the sale of such Paired Shares or (iii) if trading in the Paired Shares has been suspended by the Commission or if trading generally on either the New York Stock Exchange or the American Stock Exchange has been suspended, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices for securities have been required, by either of said Exchanges or by order of the Commission or any other governmental authority, or if a banking moratorium has been declared by any Federal, New York or Maryland authorities. (b) If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Sections 4(a), 4(b) and 10 hereof. Notwithstanding any such termination, the provisions of Sections 4(a), 4(b), 6 and 7 shall remain in effect. SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS. If one or more of the Underwriters shall fail at Closing Time to purchase the Initial Securities which it or they are obligated to purchase under this Agreement and the Pricing Agreement (the "Defaulted Securities"), the Representatives shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representatives shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the Securities, each of the non-defaulting Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters, or (b) if the number of Defaulted Securities exceeds 10% of the Securities, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter. 27 No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement, either the Representatives, on the one hand, or the Trust and the Corporation, on the other hand, shall have the right to postpone Closing Time for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. SECTION 11. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be directed to the Representatives at Merrill Lynch World Headquarters, North Tower, World Financial Center, New York, New York 10281-1326, attention of Mr. Martin J. Cicco, Managing Director; notices to the Trust or the Realty Partnership shall be directed to either of them at c/o Starwood Lodging Trust, 11845 West Olympic Blvd., Suite 550, Los Angeles, California 90064, attention of Mr. Jeffrey C. Lapin, President, with a copy to Sidley & Austin, 555 West Fifth Street, Los Angeles, California 90013, attention of Sherwin L. Samuels, Esq.; notices to the Corporation or the Operating Partnership shall be directed to either of them c/o Starwood Lodging Corporation, 11845 West Olympic Blvd., Suite 560, Los Angeles, California 90064, attention of Mr. Kevin E. Mallory, Executive Vice President, with a copy to Sidley & Austin at the above address. SECTION 12. PARTIES. This Agreement and the Pricing Agreement shall each inure to the benefit of and be binding upon the parties hereto and their respective successors. Nothing expressed or mentioned in this Agreement or the Pricing Agreement is intended or shall be construed to give any person, firm or corporation, other than the Transaction Entities, the Underwriters and their respective successor and the persons referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or the Pricing Agreement or any provision herein or therein contained. This Agreement and the Pricing Agreement and all conditions and provisions hereof and thereof are intended to be for the sole and exclusive benefit of the parties hereto and thereto and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase. SECTION 13. THE TRUST. Each of the parties hereto acknowledge and agree that the name "Starwood Lodging Trust" is a designation of the Trust and its Trustees (as Trustees but not personally) under a Declaration of Trust dated August 25, 1969, as amended and restated, and all persons dealing with the Trust shall look solely to the Trust's assets for the enforcement of any claims against the Trust, and the Trustees, officers, agents and security holders of the Trust assume no personal liability for obligations entered into on behalf of the Trust, and their respective individual assets shall not be subject to the claims of any person relating to such obligations. SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT AND THE PRICING AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. 28 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Trust and the Corporation a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the Underwriters and the Transaction Entities in accordance with its terms. Very truly yours, STARWOOD LODGING TRUST By: ------------------------------------------ Name: STARWOOD LODGING CORPORATION By: ---------------------------------------- Name: SLT REALTY LIMITED PARTNERSHIP By: Starwood Lodging Trust its General Partner By: ------------------------------------------ Name: SLC OPERATING LIMITED PARTNERSHIP By: Starwood Lodging Corporation its General Partner By: ------------------------------------------ Name: CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED BEAR, STEARNS & CO. INC. ALEX. BROWN & SONS INCORPORATED LEHMAN BROTHERS INC. PRUDENTIAL SECURITIES INCORPORATED SMITH BARNEY INC. By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: ---------------------------------------------------- Authorized Signatory FOR THEMSELVES AND AS REPRESENTATIVES OF THE OTHER UNDERWRITERS NAMED IN SCHEDULE A HERETO. SCHEDULE A Number of Name of Underwriter Initial Securities ------------------- ------------------ Merrill Lynch, Pierce, Fenner & Smith Incorporated. . . . . . . . . . . . . . . . . . . Bear, Stearns & Co. Inc. . . . . . . . . . . . . . . . Alex. Brown & Sons Incorporated. . . . . . . . . . . . Lehman Brothers Inc. . . . . . . . . . . . . . . . . . Prudential Securities Incorporated . . . . . . . . . . Smith Barney Inc. . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . ---------- 10,250,000 ---------- ---------- Sch. A - 1 Exhibit A 10,250,000 PAIRED SHARES* STARWOOD LODGING TRUST STARWOOD LODGING CORPORATION (A MARYLAND REAL ESTATE INVESTMENT TRUST) (A MARYLAND CORPORATION) SHARES OF BENEFICIAL INTEREST COMMON STOCK (PAR VALUE $.01 PER SHARE) (PAR VALUE $.01 PER SHARE) PRICING AGREEMENT __________, 1995 MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED BEAR, STEARNS & CO. INC. ALEX. BROWN & SONS INCORPORATED LEHMAN BROTHERS INC. PRUDENTIAL SECURITIES INCORPORATED SMITH BARNEY INC. as Representatives of the several Underwriters named in the within-mentioned Purchase Agreement c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Merrill Lynch World Headquarters North Tower World Financial Center New York, New York 10281 Ladies and Gentlemen: Reference is made to the Purchase Agreement dated June ___, 1995 (the "Purchase Agreement") relating to the purchase by the several Underwriters named in Schedule A thereto, for whom Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc., Alex. Brown & Sons Incorporated, Lehman Brothers Inc., Prudential Securities Incorporated and Smith Barney Inc. are acting as representatives (the "Representatives"), of units of notes (the "Securities"), convertible on a one-for-one basis into shares of beneficial interest, par value $.01 per share ("Trust Shares") of Starwood Lodging Trust (the "Trust") PAIRED WITH shares of common stock, par value $.01 per share (the "Corporation Shares" and together with the Trust Shares, the "Paired Shares") of Starwood Lodging Corporation (the "Corporation"). Capitalized terms used but not defined herein have the meaning set forth in the Purchase Agreement. Pursuant to Section 2 of the Purchase Agreement, each of the Trust and the Corporation agrees with each Underwriter as follows: - ---------------- * The Paired Shares are issuable upon conversion of 10,250,000 units of Convertible Notes due December 15, 1995 of the Trust and the Corporation. 1 1. The public offering price per unit for the Securities, determined as provided in said Section 2, shall be $ __________. 2. The purchase price per unit for the Securities to be paid by the several Underwriters shall be $ ______, being an amount equal to the public offering price set forth above less $ ________ per Unit. 3. The several obligations of the Trust and the Corporation shall be ___% and ____%, respectively, of the principal amount of the Notes evidencing the Securities. Each of the parties hereto acknowledge and agree that the name "Starwood Lodging Trust" is a designation of the Trust and its Trustees (as Trustees but not personally) under a Declaration of Trust dated August 25, 1969, as amended and restated, and all persons dealing with the Trust shall look solely to the Trust's assets for the enforcement of any claims against the Trust, and the Trustees, officers, agents and security holders of the Trust assume no personal liability for obligations entered into on behalf of the Trust, and their respective individual assets shall not be subject to the claims of any person relating to such obligations. 2 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Trust and the Corporation a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the Underwriters, on the one hand, and the Trust and the Corporation, on the other hand, in accordance with its terms. Very truly yours, STARWOOD LODGING TRUST By: -------------------------------- Name: STARWOOD LODGING CORPORATION By: -------------------------------- Name: Confirmed and Accepted, as of the date first above written: MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED BEAR, STEARNS & CO. INC. ALEX. BROWN & SONS INCORPORATED LEHMAN BROTHERS INC. PRUDENTIAL SECURITIES INCORPORATED SMITH BARNEY INC. By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: ------------------------------------------------------- Authorized Signatory FOR THEMSELVES AND AS REPRESENTATIVES OF THE OTHER UNDERWRITERS NAMED IN THE PURCHASE AGREEMENT. EX-4.1 3 EXHIBIT 4.1 EXHIBIT 4.1 STARWOOD LODGING TRUST STARWOOD LODGING CORPORATION TO FIRST INTERSTATE BANK OF CALIFORNIA TRUSTEE --------------------- INDENTURE DATED AS OF JUNE 15, 1995 --------------------- [$242,400,000]* (WITH AN OVER-ALLOTMENT OPTION FOR AN ADDITIONAL [$36,360,000]*) NON-INTEREST BEARING CONVERTIBLE NOTES DUE DECEMBER 15, 1995 - ------------------ * TO BE UPDATED AT PRICING TO REFLECT THE AGGREGATE PUBLIC OFFERING PRICE OF THE PAIRED SHARES. RECONCILIATION AND TIE BETWEEN TIA OF 1939 AND INDENTURE, DATED AS OF JUNE 15, 1995 TRUST INDENTURE ACT SECTION INDENTURE SECTION ---------------- ----------------- Section 310(a)(1).................................. 608 (a)(2).............................. 608 (a)(3).............................. Not Applicable (a)(4).............................. Not Applicable (a)(5).............................. 608 (b)................................. 610 Section 311(a)..................................... 613(a) (b)................................. 613(b) (b)(2).............................. 703(a)(2), 703(b) Section 312(a)..................................... 701; 702(a) (b)................................. 702(b) (c)................................. 702(c) Section 313(a)..................................... 703(a) (b)................................. 703(b) (c)................................. 703(a), 703(b) (d)................................. 703(c) Section 314(a)..................................... 704 (b)................................. Not Applicable (c)(1).............................. 102 (c)(2).............................. 102 (c)(3).............................. Not Applicable (d)................................. Not Applicable (e)................................. 102 Section 315(a)..................................... 601(a) (b)................................. 602, 703(a)(6) (c)................................. 601(b) (d)................................. 601(c) (d)(1).............................. 601(a)(l) (d)(2).............................. 601(c)(2) (d)(3).............................. 601(c)(3) (e)................................. 514 Section 316(a)..................................... 101 (a)(1)(A)........................... 502, 512 (a)(1)(B)........................... 513 (a)(2).............................. Not Applicable (b)................................. 508 Section 317(a)(l).................................. 503 (a)(2).............................. 504 (b)................................. 1003 Section 318(a)..................................... 107 - --------------------- NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. -i- TABLE OF CONTENTS Page ---- Parties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Recitals of the Companies. . . . . . . . . . . . . . . . . . . . 1 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 101. Definitions: Act . . . . . . . . . . . . . . . . . . . . . . 1 Affiliate; control. . . . . . . . . . . . . . . . 2 Authenticating Agent. . . . . . . . . . . . . . . 2 Board of Directors. . . . . . . . . . . . . . . . 2 Board Resolution. . . . . . . . . . . . . . . . . 2 Business Day. . . . . . . . . . . . . . . . . . . 2 Commission. . . . . . . . . . . . . . . . . . . . 2 Company . . . . . . . . . . . . . . . . . . . . . 2 Company Request; Company Order. . . . . . . . . . 2 Corporate Trust Office. . . . . . . . . . . . . . 2 Event of Default. . . . . . . . . . . . . . . . . 3 Holder. . . . . . . . . . . . . . . . . . . . . . 3 Indenture . . . . . . . . . . . . . . . . . . . . 3 Maturity. . . . . . . . . . . . . . . . . . . . . 3 Officers' Certificate . . . . . . . . . . . . . . 3 Opinion of Counsel. . . . . . . . . . . . . . . . 3 Outstanding . . . . . . . . . . . . . . . . . . . 3 Paying Agent. . . . . . . . . . . . . . . . . . . 4 Person. . . . . . . . . . . . . . . . . . . . . . 4 Place of Payment. . . . . . . . . . . . . . . . . 4 Predecessor Security. . . . . . . . . . . . . . . 4 Responsible Officer . . . . . . . . . . . . . . . 4 Securities. . . . . . . . . . . . . . . . . . . . 4 Security Register and Security Registrar . . . . . . . . . . . . . . . . . . . 4 Significant Subsidiary. . . . . . . . . . . . . . 5 Stated Maturity . . . . . . . . . . . . . . . . . 5 Subsidiary. . . . . . . . . . . . . . . . . . . . 5 Trustee . . . . . . . . . . . . . . . . . . . . . 5 TIA . . . . . . . . . . . . . . . . . . . . . . 5 U. S. Government Obligations. . . . . . . . . . . 5 Vice President. . . . . . . . . . . . . . . . . . 6 - -------------------- NOTE: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. -ii- Section 102. Compliance Certificates and Opinions. . . . . . . 6 Section 103. Form of Documents Delivered to Trustee. . . . . . 6 Section 104. Acts of Holders . . . . . . . . . . . . . . . . . 7 Section 105. Notices, Etc., to Trustee and Companies . . . . . 8 Section 106. Notice to Holders; Waiver . . . . . . . . . . . . 8 Section 107. Conflict with TIA . . . . . . . . . . . . . . . . 8 Section 108. Effect of Headings and Table of Contents. . . . . 8 Section 109. Successors and Assigns. . . . . . . . . . . . . . 8 Section 110. Separability Clause . . . . . . . . . . . . . . . 9 Section 111. Benefits of Indenture . . . . . . . . . . . . . . 9 Section 112. Governing Law . . . . . . . . . . . . . . . . . . 9 Section 113. Legal Holidays. . . . . . . . . . . . . . . . . . 9 Section 114. Stockholders, Officers and Directors of Companies Exempt from Individual Liability. . . . 9 ARTICLE TWO SECURITY FORMS Section 201. Forms Generally . . . . . . . . . . . . . . . . . 9 Section 202. Form of Face of Security. . . . . . . . . . . . . 10 Section 203. Form of Reverse of Security . . . . . . . . . . . 11 Section 204. Form of Trustee's Certificate of Authentication . . . . . . . . . . . . . . . . 14 Section 205. Form of Conversion Notice . . . . . . . . . . . . 14 ARTICLE THREE THE SECURITIES Section 301. Title and Terms . . . . . . . . . . . . . . . . . 15 Section 302. Denominations . . . . . . . . . . . . . . . . . . 15 Section 303. Execution, Authentication, Delivery and Dating. . 15 Section 304. Temporary Securities. . . . . . . . . . . . . . . 16 Section 305. Registration, Registration of Transfer and Exchange . . . . . . . . . . . . . . 16 Section 306. Mutilated, Destroyed, Lost and Stolen Securities . . . . . . . . . . . . . . . . 17 Section 307. Persons Deemed Owners . . . . . . . . . . . . . . 19 Section 308. Cancellation. . . . . . . . . . . . . . . . . . . 19 -iii- ARTICLE FOUR SATISFACTION AND DISCHARGE Section 401. Satisfaction and Discharge of Indenture . . . . . 19 Section 402. Application of Trust Money. . . . . . . . . . . . 20 Section 403. Reinstatement . . . . . . . . . . . . . . . . . . 21 ARTICLE FIVE REMEDIES Section 501. Events of Default . . . . . . . . . . . . . . . . 21 Section 502. Acceleration of Maturity; Rescission and Annulment. . . . . . . . . . . . . 22 Section 503. Collection of Indebtedness and Suits for Enforcement by Trustee. . . . . . . . . . . . . . 23 Section 504. Trustee May File Proofs of Claim. . . . . . . . . 24 Section 505. Trustee May Enforce Claims Without Possession of Securities. . . . . . . . . . . . . 24 Section 506. Application of Money Collected. . . . . . . . . . 24 Section 507. Limitation on Suits . . . . . . . . . . . . . . . 25 Section 508. Unconditional Right of Holders to Receive Principal and to Convert . . . . . . . . . . . . 26 Section 509. Restoration of Rights and Remedies. . . . . . . . 26 Section 510. Rights and Remedies Cumulative. . . . . . . . . . 26 Section 511. Delay or Omission Not Waiver. . . . . . . . . . . 26 Section 512. Control by Holders. . . . . . . . . . . . . . . . 26 Section 513. Waiver of Past Defaults . . . . . . . . . . . . . 27 Section 514. Undertaking for Costs . . . . . . . . . . . . . . 27 Section 515. Waiver of Stay or Extension Laws. . . . . . . . . 27 ARTICLE SIX THE TRUSTEE Section 601. Certain Duties and Responsibilities . . . . . . . 28 Section 602. Notice of Defaults. . . . . . . . . . . . . . . . 29 Section 603. Certain Rights of Trustee . . . . . . . . . . . . 29 Section 604. Not Responsible for Recitals of Issuance of Securities . . . . . . . . . . . . 30 Section 605. May Hold Securities . . . . . . . . . . . . . . . 30 Section 606. Money Held in Trust . . . . . . . . . . . . . . . 31 Section 607. Compensation and Reimbursement. . . . . . . . . . 31 -iv- Section 608. Eligibility; Disqualification; Conflicting Interests . . . . . . . . . . . . . . . . . . . . 31 Section 609. Preferential Collection of Claim Against Companies . . . . . . . . . . . . . . . . 32 Section 610. Resignation and Removal; Appointment of Successor. . . . . . . . . . . . . 32 Section 611. Acceptance of Appointment by Successor. . . . . . 33 Section 612. Merger, Conversion, Consolidation or Succession to Business . . . . . . . . . . . . 33 Section 613. Appointment of Authenticating Agent . . . . . . . 33 ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANIES Section 701. Company to Furnish Trustee Names and Addresses of Holders. . . . . . . . . . 35 Section 702. Preservation of Information; Communications to Holders . . . . . . . . . . . . 35 Section 703. Reports by Trustee. . . . . . . . . . . . . . . . 36 Section 704. Reports by Companies. . . . . . . . . . . . . . . 36 ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE Section 801. Companies May Consolidate, Etc. on Certain Terms . . . . . . . . . . . . . . 36 Section 802. Successor Substituted . . . . . . . . . . . . . . 37 ARTICLE NINE SUPPLEMENTAL INDENTURES Section 901. Supplemental Indentures Without Consent of Holders. . . . . . . . . . . . . . . . 37 Section 902. Supplemental Indentures with Consent of Holders. . . . . . . . . . . . . . . . 38 Section 903. Execution of Supplemental Indentures. . . . . . . . . . . . . . . . . . . . 39 Section 904. Effect of Supplemental Indentures. . . . . . . . . . . . . . . . . . . . 39 Section 905. Conformity with TIA . . . . . . . . . . . . . . . 39 Section 906. Reference in Securities to Supplemental Indentures . . . . . . . . . . . . . 39 Section 907. Notice of Supplemental Indenture. . . . . . . . . 39 -v- ARTICLE TEN COVENANTS Section 1001. Payment of Securities . . . . . . . . . . . . . . 39 Section 1002. Maintenance of Office or Agency . . . . . . . . . 40 Section 1003. Money for Securities Payment to Be Held in Trust . . . . . . . . . . . . . . . 40 ARTICLE ELEVEN CONVERSION OF SECURITIES Section 1101. Conversion Privilege and Conversion Price . . . . . . . . . . . . . . . . . . . . . . 45 Section 1102. Conversion Procedure. . . . . . . . . . . . . . . 45 Section 1103. Fractions of Shares . . . . . . . . . . . . . . . 46 Section 1104. Adjustment for Change in Capital Stock. . . . . . 46 Section 1105. Notice of Adjustments of Conversion Price . . . . . . . . . . . . . . . . . . . . . . 50 Section 1106. Notice of Certain Corporate Action. . . . . . . . 50 Section 1107. Companies to Reserve Common Stock . . . . . . . . 51 Section 1108. Taxes on Conversions. . . . . . . . . . . . . . . 51 Section 1109. Covenant as to Stock. . . . . . . . . . . . . . . 51 Section 1110. Cancellation of Converted Securities. . . . . . . 51 Section 1111. Provisions in Case of Consolidation, Merger or Sale of Assets. . . . . . . . . . . . . 51 Section 1112. Trustee not Responsible for Determining Conversion Price or Adjustments . . . . . . . . . 52 TESTIMONIUM 59 SIGNATURES AND SEALS 59 ACKNOWLEDGMENTS 60 -vi- INDENTURE, dated as of June 15, 1995, among Starwood Lodging Trust, a Maryland real estate investment trust (the "Trust"), having its principal office at 11845 West Olympic Blvd., Suite 550, Los Angeles, California 90064, Starwood Lodging Corporation, a Maryland corporation (the "Corporation" and, together with the Trust, the "Companies"), having its principal office at 11845 West Olympic Blvd., Suite 560, Los Angeles, California 90064, and First Interstate Bank of California, a corporation duly organized and existing under the laws of the State of California, Trustee (herein called the "Trustee"). RECITALS OF THE COMPANIES The Companies have duly authorized the creation of an issue of Non- Interest Bearing Convertible Notes Due December 15, 1995 (herein called the "Securities") of the tenor and amount hereinafter set forth, and to provide therefor the Companies have duly authorized the execution and delivery of this Indenture. All things necessary to make the Securities, when executed by the Companies and authenticated and delivered hereunder and duly issued by the Companies, the valid obligations of the Companies and to make this Indenture a valid agreement of the Companies, in accordance with their and its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the acquisition of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 101. DEFINITIONS. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) all other terms used herein which are defined in the TIA, either directly or by reference therein, have the meanings assigned to them therein; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of this instrument; and (4) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. "Act," when used with respect to any Holder, has the meaning specified in Section 104. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Authenticating Agent" means any person authorized by the Trustee pursuant to Section 613 to act on behalf of the Trustee to authenticate Securities. "Board of Directors" means, with respect to the Trust, either the Board of Trustees of the Trust or any committee of the Board of Trustees of the Trust duly authorized to act on such matter, and, with respect to the Corporation, either the Board of Directors of the Corporation or any committee of the Board of Directors of the Corporation duly authorized to act on such matter. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Trust or the Corporation, as the case may be, to have been duly adopted by its Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day," when used with respect to any Place of Payment, means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in that Place of Payment are authorized or obligated by law (including any executive order) to close. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, as amended, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the TIA, then the body performing such duties at such time. "Company" means one or both, respectively, of the Persons named as "Companies" in the first paragraph of this instrument until a successor Person or Persons shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person or Persons. "Company Request" or "Company Order" means a written request or order signed in the name of each of the Companies by its Chairman of the Board, its President or any Vice President, and by its Treasurer, its Controller or its Secretary and delivered to the Trustee. "Corporate Trust Office" means the office of the Trustee in Los Angeles, California which shall be at 707 Wilshire Boulevard, or its office in the city in which it has its principal place of business at which at any particular time its corporate trust business shall be principally administered. "Event of Default" has the meaning specified in Section 501. "Holder" means a Person in whose name a Security is registered in the Security Register. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, for all purposes of this instrument and any such supplemental indenture, the provisions of the TIA that are deemed to be a part of and govern this instrument and any such supplemental indenture, respectively. -2- "Maturity," when used with respect to any Security, means the date on which the principal of such Security becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration. "Officers' Certificate" means a certificate delivered to the Trustee and signed by the Chairman of the Board, the President or any Vice President, and by the Treasurer, the Controller, or the Secretary of a Company. "Opinion of Counsel" means a written opinion of counsel, who may be an employee of or of counsel to a Company, and who shall be reasonably satisfactory to the Trustee. "Outstanding," when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (i) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities for whose payment (a) money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than a Company) in trust or set aside and segregated in trust by a Company (if a Company shall act as its own Paying Agent) for the Holders of such Securities or (b) money or U.S. Government Obligations as contemplated by Section 401 in the necessary amount have been theretofore deposited with the Trustee, in trust for the Holders of such Securities; and (iii) Securities which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Companies; PROVIDED, HOWEVER, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by a Company or any other obligor upon the Securities or any Affiliate of a Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not a Company or any other obligor upon the Securities or any Affiliate of a Company or of such other obligor. "Paired Shares" has the meaning specified in Section 1101. "Partnership" means SLT Realty Limited Partnership, a Delaware limited partnership or SLC Operating Limited Partnership, a Delaware limited partnership. "Paying Agent" means any Person authorized by the Companies to pay the principal of any Securities on behalf of the Companies. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Place of Payment" means the place where the principal of the Securities are payable as designated in or pursuant to Section 301. -3- "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "Responsible Officer," when used with respect to the Trustee, means the chairman or any vice-chairman of the board of directors, the chairman or any vice-chairman of the executive committee of the board of directors, the chairman of the trust committee, the president, any vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the cashier, any assistant cashier, any trust officer or assistant trust officer, the controller or any assistant controller or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Securities" has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture. "Security Register" and "Security Registrar" have the respective meanings specified in Section 305. "Significant Subsidiary" means any Subsidiary of a Company which at the time of determination (i) is a "significant subsidiary" within the meaning of Rule 405 of Regulation C of the rules and regulations prescribed by the Commission pursuant to the Securities Act of 1933, as in effect on the date of this Indenture and (ii) is consolidated for financial reporting purposes. "Stated Maturity", when used with respect to any Security, means the date specified in such Security as the fixed date on which the principal of such Security is due and payable. "Subsidiary" means any corporation more than 50% of the outstanding voting stock of which is at the time owned, directly or indirectly, by a Company or by one or more other Subsidiaries, or by a Company and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean or include each Person who is then a Trustee hereunder. "TIA" means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed, except as provided in Section 905. "U.S. Government Obligations" means securities which are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt; PROVIDED that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of U.S. Government Obligations or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt. -4- "Vice President," when used with respect to a Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president." Section 102. COMPLIANCE CERTIFICATES AND OPINIONS. Upon any application or request by a Company to the Trustee to take any action under any provision of this Indenture, such Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that, in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of each such individual, such condition or covenant has been complied with. Section 103. FORM OF DOCUMENTS DELIVERED TO TRUSTEE. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of a Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of a Company stating that the information with respect to such factual matters is in the possession of such Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. -5- Section 104. ACTS OF HOLDERS. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are received by the Trustee and, where it is hereby expressly required, to the Companies. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee and the Companies, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him or her the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (c) The ownership of Securities shall be proved by the Security Register. (d) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or a Company in reliance thereon, whether or not notation of such action is made upon such Security. (e) The Companies may, in the circumstances permitted by the TIA, fix any day as the record date for the purpose of determining the Holders entitled to give or take any request, demand, authorization, direction, notice, consent, waiver or other action, or to vote on any action, authorized or permitted to be given or taken by Holders. If not set by the Companies prior to the first solicitation of a Holder made by any person in respect of any such action, or, in the case of any such vote, prior to such vote, the record date for any such action or vote shall be the 30th day (or, if later, the date of the most recent list of Holders required to be provided pursuant to Section 701) prior to such first solicitation or vote, as the case may be. With regard to any record date, only the Holders on such date (or their duly designated proxies) shall be entitled to give or take, or vote on, the relevant action. Notwithstanding the foregoing, the Companies shall not set a record date for, and the provisions of this paragraph shall not apply with respect to, any Act by the Holders pursuant to Sections 501, 502, or 512. (f) Without limiting the foregoing, a Holder entitled hereunder to give or take any action hereunder with regard to any particular Security may do so with regard to all or any part of the principal amount of such Security of by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or on any different part of such principal amount. Section 105. NOTICES, ETC. TO TRUSTEE AND COMPANIES. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, -6- (1) the Trustee by any Holder or by a Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, or (2) a Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to such Company addressed to it at the address of its principal office specified in the first paragraph of this instrument: attention of the Treasurer, or at any other address previously furnished in writing to the Trustee by such Company. Section 106. NOTICE TO HOLDERS; WAIVER. Where this Indenture or any Security provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein or in such Security expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture or any Security provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. Section 107. CONFLICT WITH TIA. If any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in this Indenture by any of the provisions of the TIA, such required provision shall control. If any provision of this Indenture modifies or excludes any provision of the TIA that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. Section 108. EFFECT OF HEADINGS AND TABLE OF CONTENTS. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. Section 109. SUCCESSORS AND ASSIGNS. All covenants and agreements in this Indenture by a Company shall bind its successors and assigns, whether so expressed or not. Section 110. SEPARABILITY CLAUSE. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. -7- Section 111. BENEFITS OF INDENTURE. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture. Section 112. GOVERNING LAW. This Indenture and the Securities shall be governed by and construed in accordance with the laws of the State of California. Section 113. LEGAL HOLIDAYS. In any case where any Stated Maturity of any Security or the last date on which a Holder has the right to convert his Securities shall not be a Business Day at any Place of Payment then (notwithstanding any other provision of this Indenture or of the Securities) payment of principal or a conversion of the Securities need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on at the Stated Maturity, or on such last day for conversion. Section 114. STOCKHOLDERS, OFFICERS AND DIRECTORS OF COMPANIES EXEMPT FROM INDIVIDUAL LIABILITY. (a) No recourse under or upon any obligation, covenant or agreement contained in this Indenture, in any Security, or because of any indebtedness evidenced thereby, shall be had against any incorporator, as such or against any past, present or future stockholder, shareholder, officer, director or trustee, as such, of a Company or of any successor, either directly or through a Company or any successor, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, all such liability being expressly waived and released by the acceptance of the Securities by the Holders thereof and as part of the consideration for the issue of the Securities. Without limiting the generality of Section 114(a), each of the parties hereto acknowledges and agrees that and, by the acceptance of the Securities by the Holders thereof and as part of the consideration for the issue of the Securities, each Holder acknowledges and agrees that the name "Starwood Lodging Trust" is a designation of the Trust and its Trustees (as Trustees but not personally) under a Declaration of Trust dated August 25, 1969, as amended and restated, and all persons dealing with the Trust shall look solely to the Trust's assets for the enforcement of any claims against the Trust, and the Trustees, officers, agents and security holders of the Trust assume no personal liability for obligations entered into on behalf of the Trust, and their respective individual assets shall not be subject to the claims of any person relating to such obligations -8- ARTICLE TWO SECURITY FORMS Section 201. FORMS GENERALLY. The Securities and the Trustee's certificate of authentication thereon shall be in substantially the forms set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution of the Securities. The definitive Securities shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. Section 202. FORM OF FACE OF SECURITY. STARWOOD LODGING TRUST STARWOOD LODGING CORPORATION NON-INTEREST BEARING CONVERTIBLE NOTE DUE DECEMBER 15, 1995 THIS SECURITY IS NOT CONVERTIBLE INTO PAIRED SHARES SO LONG AS BENEFICIAL OWNERSHIP OF THIS NOTICE IS HELD BY (I) ANY PARTY TO THAT CERTAIN MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED MASTER AGREEMENT AMONG UNDERWRITERS DATED APRIL 15, 1985 (AS REVISED), (THE "AGREEMENT AMONG UNDERWRITERS") WHO PARTICIPATED IN THE ISSUANCE AND SALE OF THE NON-INTEREST BEARING CONVERTIBLE NOTES DUE DECEMBER 15, 1995 OF STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION (THE "SECURITIES"), (II) ANY PARTY TO A MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED STANDARD DEALER AGREEMENT WHO PARTICIPATED IN THE ISSUANCE AND SALE OF THE SECURITIES (THE PARTIES REFERRED TO IN (I) AND (II) ARE HEREIN REFERRED TO AS "UNDERWRITERS"), OR (III) ANY "UNDERWRITER AFFILIATE" (AS THAT TERM IS HEREINAFTER DEFINED). THIS SECURITY IS CONVERTIBLE BY ANY PERSON WHO IS NOT AN UNDERWRITER OR AN UNDERWRITER AFFILIATE AND WILL BE CONVERTED AUTOMATICALLY AS SET FORTH BELOW. No. __________ $_________ Starwood Lodging Trust, a Maryland real estate investment trust (the "Trust", which term shall include any successor person under the Indenture hereinafter referred to), for value received, hereby promises to pay the principal sum of $_______________ (95% of the principal amount hereof), and Starwood Lodging Corporation, a Maryland corporation (the "Corporation", which term shall include any successor person under the Indenture hereinafter referred to), for value received, hereby promises to pay the principal sum of $_____________ (5% of the principal amount hereof) to ________________, or -9- registered assigns, at the office of the Trustee hereinafter referred to, on December 15, 1995. At the option of the Trust and the Corporation (herein collectively referred to as the "Companies"), the maturity date of this Security may be extended, at any time or from time to time by written notice to the Trustee prior to the maturity date as theretofore extended, to a date not later than December 15, 1997. Such respective obligations of the Companies are several and not joint. This Security bears no interest and may not be redeemed by the Companies or either of them prior to its maturity. Payment of the principal of this Security will be made at the office or agency of the Companies maintained for that purpose in the City of Los Angeles, California, and in such other cities, if any, as the Companies may designate in writing to the Trustee, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. This Security will be automatically converted into one share of beneficial interest, par value $.01 per share, of the Trust and one share of common stock, par value $.01 per share, of the Corporation which are paired pursuant to the Pairing Agreement dated June 25, 1980, as amended (each such share of beneficial interest and share of common stock are herein together referred to as a "Paired Share"), for each $_________ principal amount of this Security (subject to adjustment in certain events as provided in the Indenture) upon certification to the Trustee, in substantially the form shown on the reverse side of this Security, of (i) the transfer of this Security to or for the benefit of any person who is not an Underwriter or an Underwriter Affiliate, or (ii) the sale of the Paired Shares issuable upon conversion of this Security in a regular-way transaction on the New York Stock Exchange during the period that Underwriters have agreed in the Agreement Among Underwriters and the Standard Dealer Agreement referred to above that they and their Underwriter Affiliates will not make purchases of such shares for their own accounts. As used herein "Underwriter Affiliate" means, with respect to any Underwriter, a partner in or holder of 10% or more of the shares of such Underwriter, a person in which such Underwriter holds 10% or more of the shares or is a partner, or a family member of, or trust for, any such Underwriter, partner or shareholder. NO SUCH CONVERSION SHALL RESULT UPON THE TRANSFER OF THIS SECURITY TO A PERSON WHO IS AN UNDERWRITER OR UNDERWRITER AFFILIATE, UNLESS THE UNDERWRITER OR UNDERWRITER AFFILIATE PROVIDES EVIDENCE SATISFACTORY TO THE COMPANIES AND THE TRUSTEE THAT THE BENEFICIAL OWNER IS NOT AN UNDERWRITER OR AN UNDERWRITER AFFILIATE AND THAT TITLE OF THE UNDERWRITER OR UNDERWRITER AFFILIATE IS ONLY FOR PURPOSES OF RECORD OWNERSHIP. Such conversion may take place at any time up to and including the maturity date of this Security. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. -10- IN WITNESS WHEREOF, each of the Companies has caused this instrument to be duly executed under its corporate seal. Dated: Attest: STARWOOD LODGING TRUST ____________________________ By ____________________________________ Secretary President Attest: STARWOOD LODGING CORPORATION ____________________________ By ____________________________________ Secretary Executive Vice President Section 203. FORM OF REVERSE OF SECURITY. This Security is one of a duly authorized issue of securities of the Companies designated as Non-Interest Bearing Convertible Notes due December 15, 1995 (herein called the "Securities"), limited in aggregate principal amount to [$278,760,000] (except as otherwise provided in the Indenture) issued and to be issued under an Indenture, dated as of June 15, 1995 (herein called the "Indenture"), between the Companies and First Interstate Bank of California, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Companies, the Trustee, and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. If an Event of Default shall occur and be continuing, the principal of the Securities may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Companies and the rights of the Holders of the Securities to be affected under the Indenture at any time by the Companies and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of a majority in aggregate principal amount of the Securities at the time Outstanding, on behalf of the Holders of all Securities, to waive compliance by the Companies with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. -11- No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the respective obligations of the Companies, which is absolute and unconditional, to pay the principal of this Security at the times, place and rate, and in the coin or currency, herein prescribed or to convert this Security as provided in the Indenture. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registerable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Companies in any place where the principal of this Security is payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Companies and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities are issuable only in registered form without coupons. As provided in the Indenture and subject to certain limitations therein set forth, Securities are exchangeable for a like aggregate principal amount of Securities of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Companies may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, each of the Companies, the Trustee and any agent of a Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither of the Companies, the Trustee nor any such agent shall be affected by notice to the contrary. No recourse under or upon any obligation, covenant or agreement contained in the Indenture, in this Security, or because of any indebtedness evidenced hereby, shall be had against any incorporator, as such or against any past, present or future stockholder, shareholder, officer, director or trustee, as such, of a Company or of any successor, either directly or through a Company or any successor, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, all such liability being expressly waived and released by the acceptance of this Security by the Holder hereof and as part of the consideration for the issue of the Securities. Without limiting the generality of the foregoing, by the acceptance of this Security by the Holder hereof such Holder acknowledges and agrees that the name "Starwood Lodging Trust" is a designation of the Trust and its Trustees (as Trustees but not personally) under a Declaration of Trust dated August 25, 1969, as amended and restated, and all persons dealing with the Trust shall look solely to the Trust's assets for the enforcement of any claims against the Trust, and the Trustees, officers, agents and security holders of the Trust assume no personal liability for obligations entered into on behalf of the Trust, and their respective individual assets shall not be subject to the claims of any person relating to such obligations. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. -12- Section 204. FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION. This is one of the Securities referred to in the within-mentioned Indenture. FIRST INTERSTATE BANK OF CALIFORNIA, as Trustee By ___________________________ Authorized Signer Section 205. FORM OF CONVERSION NOTICE. CONVERSION NOTICE The undersigned Holder of this Security hereby irrevocably exercises the option to convert this Security, or portion hereof below designated, into Paired Shares in accordance with the terms of the Indenture, and directs that the Paired Shares issuable and deliverable upon such conversion, together with any check in payment for fractional shares and any Securities representing any unconverted principal amount hereof, be issued and delivered to the undersigned unless a different name has been indicated below. If Paired Shares or Securities are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. By signing this Notice in the place provided below, you make the following certification and request to the Trustee: The undersigned certifies that (1) this Security (or the portion thereof indicated above) has been sold to a person who is not an Underwriter or Underwriter Affiliate (as defined on the other side of this Security) or, while the transferee of record is an Underwriter or Underwriter Affiliate, such transferee is acquiring the Security or portion thereof for purposes of record ownership only and the beneficial owner is not such an Underwriter or Underwriter Affiliate; or (2) the Paired Shares issuable upon the conversion of this Security have been sold in a regular-way transaction on the New York Stock Exchange during the period that Underwriters have agreed in the Agreement Among Underwriters and the Standard Dealer Agreement referred to on the other side of this Security that they and their Underwriter Affiliates will not make purchases of such shares for their own accounts. SIGNATURE The undersigned requests that the Trustee, as agent for the transferee of this Security (or the portion thereof indicated above) accept delivery of this Security, effect the conversion of this Security (or such portion) into Paired Shares in the case where conversion is requested, and deliver Securities in the case of a transfer of Securities and certificates for shares where a conversion is -13- requested, registered as indicated above, to the undersigned, for the account of and for delivery to such transferee. Signature of Transferor (Sign exactly as name appears on the other side of this Security) Date:_________________________ TRUSTEE'S ACKNOWLEDGEMENT The Trustee hereby acknowledges receipt of the foregoing instructions. In the case where conversion is requested, the Trustee acknowledges that it is holding this Security (or the portion thereof to be converted), and will hold the Paired Shares issued upon conversion of this Security until delivered as provided in the foregoing instructions, for the account of the transferee thereof. Date:_________________________ FIRST INTERSTATE BANK OF CALIFORNIA, as Trustee By:_____________________________________ If shares or Securities are to Principal amount to be converted be registered in the name of (if less than all): a Person other than the Holder, $________.00 please print such Person's name and address: ________________________________________ Social Security or other Taxpayer Identification Number ____________________________________________ Name ____________________________________________ Street Address ____________________________________________ City, State and Zip Code -14- ARTICLE THREE THE SECURITIES Section 301. TITLE AND TERMS. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to [$278,760,000] except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Sections 304, 305, 306, 906 or 1102. The Securities shall be known and designated as the "Non-Interest Bearing Convertible Notes Due December 15, 1995" of the Companies. Their Stated Maturity shall be December 15, 1995; PROVIDED that the Companies, acting jointly, may extend the Stated Maturity of the Securities on one or more occasions prior to the Stated Maturity thereof (including any Stated Maturity established by a prior extension), to a date not later than December 15, 1997, by written notice to the Trustee. The Securities shall not bear interest and shall not be redeemable prior to Maturity. The Securities shall be convertible as provided in Article Eleven. Section 302. DENOMINATIONS. The Securities shall be issued only in fully registered form without coupons. Section 303. EXECUTION, AUTHENTICATION, DELIVERY AND DATING. The Securities shall be executed on behalf of each Company by its Chairman of the Board, its President or one of its Vice Presidents, under its corporate seal reproduced thereon attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of a Company shall bind such Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Companies may deliver Securities executed by each Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with such Company Order shall either at one time or from time to time pursuant to such instructions as may be described therein authenticate and deliver such Securities as provided in this Indenture and not otherwise. Each Security shall be dated the date of its authentication. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. -15- Section 304. TEMPORARY SECURITIES. Pending the preparation of definitive Securities, the Companies may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities. If temporary Securities are issued, the Companies will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at the office or agency of the Companies in a Place of Payment, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities the Companies shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of authorized denominations. Until so exchanged the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. Section 305. REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE. The Companies shall cause to be kept at the Corporate Trust Office a register (the register maintained in such office and in any other office or agency of the Companies in a Place of Payment being herein sometimes collectively referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Companies shall provide for the registration of Securities and of transfers of Securities. The Trustee is hereby appointed "Security Registrar" for the purpose of registering Securities and transfers of Securities as herein provided. Upon surrender for registration of transfer of any Security at the office or agency of the Companies in a Place of Payment, the Companies shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities, of any authorized denominations and of a like aggregate principal amount. At the option of the Holder, Securities may be exchanged for other Securities of any authorized denominations and of a like aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Companies shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Companies, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by a Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Companies and the Security Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of Securities, but the Companies may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 304, 906 or 1107. -16- Section 306. MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES. If (i) any mutilated Security is surrendered to the Trustee or if there shall be delivered to the Companies and the Trustee evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) there shall be delivered to the Companies and the Trustee such security and indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Companies or the Trustee that such Security has been acquired by a bona fide purchaser, the Companies shall execute and upon its request the Trustee shall authenticate and deliver, in lieu of any such mutilated, destroyed, lost or stolen Security, a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Companies in their discretion may, instead of issuing a new Security, pay such Security. Upon the issuance of any new Security under this Section, the Companies may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Companies, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. Section 307. PERSONS DEEMED OWNERS. Prior to due presentment of a Security for registration of transfer, the Companies, the Trustee and any agent of a Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of such Security, and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Companies, the Trustee nor any agent of a Company or the Trustee shall be affected by notice to the contrary. Section 308. CANCELLATION. All Securities surrendered for payment, registration of transfer or exchange or conversion shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Companies, acting jointly, may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Companies may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly cancelled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be disposed of as directed by a Company Order. -17- ARTICLE FOUR SATISFACTION AND DISCHARGE Section 401. SATISFACTION AND DISCHARGE OF INDENTURE. This Indenture shall cease to be of further effect (except as to any surviving rights of registration of transfer or exchange or conversion of Securities herein expressly provided for), and the Trustee, at the expense of the Companies, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (1) either (A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306 and (ii) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Companies and thereafter repaid to the Companies or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or (B) all such Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, and the Companies, in the case of (i) or (ii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount of (a) money or (b) in the case of (ii) above U.S. Government Obligations which through the payment of interest and principal in respect thereof in accordance with their terms will provide not later than one day before the Stated Maturity money in an amount or (c) a combination of money and U.S. Government Obligations, in each case sufficient, in the opinion of a nationally recognized firm of independent certified public accountants expressed in a written certificate thereof delivered to the Trustee, to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity, as the case may be; (2) the Companies have paid or caused to be paid all other sums payable hereunder by the Companies; and (3) the Companies have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Companies to the Trustee under Section 607, the obligations of the Trustee to an Authenticating Agent under Section 614 and, if money or U.S. Government Obligations shall have been deposited with the Trustee pursuant -18- to subclause (B) of clause (1) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive. Section 402. APPLICATION OF TRUST MONEY. Subject to the provisions of the last paragraph of Section 1003, all money or U.S. Government Obligations deposited with the Trustee pursuant to Section 401 and all money received by the Trustee in respect of U.S. Government Obligations deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including a Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal for whose payment such money has been deposited with or received by the Trustee. All moneys deposited with the Trustee pursuant to Section 401 (and held by it or any Paying Agent) for the payment of Securities subsequently converted shall be returned to the Companies upon Company Request. Section 403. REINSTATEMENT. If the Trustee or the Paying Agent is unable to apply any money in accordance with this Article Four by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations of each of the Companies under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to this Article Four until such time as the Trustee or Paying Agent is permitted to apply all money held in trust with respect to the Securities; PROVIDED, HOWEVER, that if a Company makes any payment of principal of any Security following the reinstatement of its obligations, such Company shall be subrogated to the rights of the Holders of the Securities to receive such payment from the money so held in trust. ARTICLE FIVE REMEDIES Section 501. EVENTS OF DEFAULT. "Event of Default", wherever used herein, means any one of the following events: (1) default in the payment of the principal of any Security at its Maturity; or (2) default in the performance, or breach, of any covenant, agreement or warranty of a Company in this Indenture (other than a covenant, agreement or warranty a default in whose performance is elsewhere in this Section specifically dealt with) and continuance of such default for a period of 90 days after there has been given, by registered or certified mail, to each of the Companies by the Trustee or to each of the Companies and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities a written notice specifying such default and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (3) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of a Company, a Partnership or a Significant Subsidiary in an involuntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging a Company, a -19- Partnership or a Significant Subsidiary a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of a Company under any applicable Federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of a Company or a Significant Subsidiary or of any substantial part of a Company's, a Partnership's or a Significant Subsidiary's property, or ordering the winding up or liquidation of affairs, and the continuance of any such decree or order unstayed and in effect for a period of 90 consecutive days; or (4) the commencement by a Company, a Partnership or a Significant Subsidiary of a voluntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of a Company, a Partnership or a Significant Subsidiary in an involuntary case or proceeding under any such law, or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or state law, or the consent by it to the filing of such a petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of a Company, a Partnership or a Significant Subsidiary or of any substantial part of such Company's such Partnership's or such Significant Subsidiary's property, or the making of an assignment for a benefit of creditors, or the admission by it in writing of a Company's such Partnership's or such Significant Subsidiary's inability to pay its debts generally as they become due, or the taking of appropriate action by a Company, a Partnership or a Significant Subsidiary in furtherance of any such action. Section 502. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT. If an Event of Default occurs and is continuing, then in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities may declare the principal amount of all the Securities to be due and payable immediately, by a notice in writing to each of the Companies (and to the Trustee if given by Holders), and upon any such declaration such principal amount shall become immediately due and payable. At any time after such a declaration of acceleration has been made and before the Stated Maturity thereof, the Holders of a majority in principal amount of the Outstanding Securities, by written notice to each of the Companies and the Trustee, may rescind and annul such declaration and its consequences if (1) the Companies have paid or deposited with the Trustee a sum sufficient to pay (A) the principal of any Securities which have become due otherwise than by such declaration of acceleration, and (B) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default, other than the non-payment of the principal of Securities which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. -20- No such rescission shall affect any subsequent default or impair any right consequent thereon. Section 503. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE. Each of the Companies covenants that if default is made by it in the payment of the principal of any Securities at the Maturity thereof, such Company will, upon demand of the Trustee, pay to the Trustee, for the benefit of the Holders of such Securities, the whole amount then due and payable by it on such Securities for principal and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If a Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sum so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same, severally and not jointly, against such Company or any other obligor upon such Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of such Company or any other obligor upon such Securities, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of the Securities by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. Section 504. TRUSTEE MAY FILE PROOFS OF CLAIM. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to a Company or any other obligor upon the Securities or the property of a Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on such Company for the payment of overdue principal) shall be entitled and empowered, by intervention in such proceeding or otherwise, (i) to file and prove a claim for the whole amount of principal owing and unpaid by such Company in respect of the Securities and to file such other papers and documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (ii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding; PROVIDED, HOWEVER, that the Trustee may, on behalf of the -21- Holders, vote for the election of a trustee in bankruptcy or similar official and may be a member of the Creditors' Committee. Section 505. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF SECURITIES. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. Section 506. APPLICATION OF MONEY COLLECTED. Any money or other property collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: First: To the payment of costs and expenses of collection, including all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses and disbursements of the Trustee, its agents and counsel and all other amounts due the Trustee under Section 607; and Second: To the payment of the amounts then due and unpaid for principal of the Securities in respect of which or for the benefit of which such money or other property has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities. Third: The balance, if any, to the Companies, as their interests may appear. Section 507. LIMITATION ON SUITS. No Holder of any Security shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (2) the Holders of not less than 25% in principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable security and indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of security and offer of indemnity has failed to institute any such proceedings; and -22- (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities; it being understood and intended that no one or more Holders of Securities shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders. Section 508. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL AND TO CONVERT. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of such Security on the Stated Maturity expressed in such Security and to convert such Security in accordance with Article Eleven and to institute suit for the enforcement of any such payment and right to convert and such other rights shall not be impaired without the consent of such Holder. Section 509. RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, each of the Companies, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. Section 510. RIGHTS AND REMEDIES CUMULATIVE. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Section 511. DELAY OR OMISSION NOT WAIVER. No delay or omission of the Trustee or of any Holder of any Securities to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. Section 512. CONTROL BY HOLDERS. The Holders of a majority in principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, provided that (1) such direction shall not be in conflict with any rule of law or with this Indenture, and -23- (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction; and (3) (subject to the provisions of Section 601) the Trustee shall have the right to decline to follow any such direction if the Trustee, being advised by counsel, shall determine that the action or proceeding so directed may not lawfully be taken or if the Trustee in good faith shall determine that the action or proceedings so directed might involve the Trustee in personal liability or if the Trustee in good faith shall so determine that the actions or forebearances specified in or pursuant to such direction shall be unduly prejudicial to the interests of holders of the Securities not joining in the giving of said direction, it being understood that (subject to Section 601) the Trustee shall have no duty to ascertain whether or not such actions or forebearances are unduly prejudicial to such holders. Section 513. WAIVER OF PAST DEFAULTS. The Holders of not less than a majority in principal amount of the Outstanding Securities may on behalf of the Holders of all the Securities waive any past default hereunder and its consequences, except a default (1) in the payment of the principal of any Security, or (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security offered. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. Section 514. UNDERTAKING FOR COSTS. All parties to this Indenture agree, and each Holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by a Company, to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 25% in principal amount of the Outstanding Securities, or to any suit instituted by any Holder for the enforcement of the payment of the principal of any Security on or after the Stated Maturity expressed in such Security or for the enforcement of the right to convert any Security in accordance with Article Eleven. Section 515. WAIVER OF STAY OR EXTENSION LAWS. Each of the Companies covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and each of the Companies (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. -24- ARTICLE SIX THE TRUSTEE Section 601. CERTAIN DUTIES AND RESPONSIBILITIES. (a) Except during the continuance of an Event of Default: (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. (b) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise, as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that (1) this Subsection shall not be construed to limit the effect of Subsection (a) of this Section; (2) the Trustee shall not be liable for any error or judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (3) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a majority in principal amount of the Outstanding Securities relating to the time, method and place of conducting any proceedings for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and (4) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate security and indemnity against such risk or liability is not reasonably assured to it. (d) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section and subject to Sections 315 and 316 of the TIA. -25- Section 602. NOTICE OF DEFAULTS. Within 90 days after the occurrence of any default hereunder, the Trustee shall transmit by mail to all Holders of Securities, as their names and addresses appear in the Security Register, notice of such default hereunder known to the Trustee, unless such default shall have been cured or waived; provided, however, that, except in the case of a default in the payment of the principal of any Security, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interest of the Holders of Securities. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default. Section 603. CERTAIN RIGHTS OF TRUSTEE. Subject to the provisions of Section 601: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, officer's certificate, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of a Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of a Board of Directors may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (d) before the Trustee acts or refrains from acting the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security and indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) prior to the occurrence of an Event of Default hereunder and after the curing or waiving of all Events of Default, the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, officer's certificate, or other certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, appraisal, bond, debenture, note, coupon, security, or other paper or document unless requested in writing so to do by the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities; PROVIDED, that, if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expenses or liabilities as a condition to proceeding; the reasonable expenses of every such examination shall be paid by the Companies or, if advanced by the Trustee, shall be repaid by the Companies upon demand; -26- (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (h) the Trustee shall not be responsible for the computation of any adjustment to the conversion price or for any determination as to whether an adjustment is required; (i) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion, rights or powers conferred upon it by this Indenture; (j) the Trustee shall not be required to give any bond or surety in respect of the performance of its powers and duties hereunder; (k) the Trustee shall not be bound to ascertain or inquire as to the performance or observance of any covenants, conditions, or agreements on the part of a Company, except as otherwise set forth herein, but the Trustee may require of a Company full information and advice as to the performance of the covenants, conditions and agreements contained herein and shall be entitled in connection herewith to examine the books, records and premises of such Company; (l) the permissive rights of the Trustee to do things enumerated in this Indenture shall not be construed as a duty and the Trustee shall not be answerable for other than its negligence or willful default; and (m) except for (i) a default under Sections 501(a) or (b) hereof, or (ii) any other event of which the Trustee has "actual knowledge" and which event, with the giving of notice or the passage of time or both, would constitute an Event of Default under this Indenture, the Trustee shall not be deemed to have notice of any default or event unless specifically notified in writing of such event by a Company or the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities; as used herein, the term "actual knowledge" means the actual fact or statement of knowing, without any duty to make any investigation with regard thereto. Section 604. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Companies, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee shall not be accountable for the use or application by the Companies of Securities or the proceeds thereof. Section 605. MAY HOLD SECURITIES. The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of a Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 608 and 613, may otherwise deal with a Company with the same rights it would have if it were not Trustee, any Authenticating Agent, Paying Agent, Security Registrar or such other agent. Section 606. MONEY HELD IN TRUST. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed to in writing by the Companies and the Trustee. -27- Section 607. COMPENSATION AND REIMBURSEMENT. The Companies, acting jointly, agree (l) to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its gross negligence or wilful misconduct; and (3) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without gross negligence or wilful misconduct on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses of defending itself against or investigating any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligations of the Companies under this Section to compensate the Trustee, to pay or reimburse the Trustee for expenses, disbursements and advances and to indemnify and hold harmless the Trustee shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture. As security for the performance of such obligations of the Companies, the Trustee shall have a claim prior to the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of particular Securities, and the Securities are hereby subordinated to such prior claim. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Article Five hereof, the expenses (including reasonable fees and expenses of its counsel) and the compensation for the service in connection therewith are intended to constitute expense of administration under any applicable Bankruptcy law. Section 608. ELIGIBILITY; DISQUALIFICATION; CONFLICTING INTERESTS. The Trustee shall at all times satisfy the requirements of TIA Section 310(a)(1). The Trustee shall have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA Section 310(b). Section 609. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANIES. The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. Section 610. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 611. (b) The Trustee may resign at any time by giving written notice thereof to the Companies. If the instrument of acceptance by a successor Trustee required by Section 611 shall not have been delivered to the -28- Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of a majority in principal amount of the Outstanding Securities, delivered to the Trustee and to the Companies. (d) If at any time: (1) the Trustee shall fail to comply with Section 608 after written request therefor by a Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 608 and shall fail to resign after written request therefor by the Companies, acting jointly, or by any such Holder, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Companies, acting jointly, each by a Board Resolution, may remove the Trustee, or (ii) subject to Section 514, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee or Trustees. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Companies, acting jointly, each by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Companies and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 611, become the successor Trustee and supersede the successor Trustee appointed by the Companies. If no successor Trustee shall have been so appointed by the Companies or the Holders and accepted appointment in the manner required by Section 611, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Companies shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee by mailing written notice of such event by first-class mail, postage prepaid, to all Holders of Securities as their names and addresses appear in the Security Register. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. Section 611. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. (a) Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Companies and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of a Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. -29- (b) No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. Section 612. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. Section 613. APPOINTMENT OF AUTHENTICATING AGENT. The Trustee may appoint an Authenticating Agent or Agents, which shall be authorized to act on behalf of the Trustee to authenticate Securities issued upon the original issue and upon exchange, registration of transfer, partial conversion, or pursuant to Section 306, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to each of the Companies and shall at all times be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by Federal or State authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to each of the Companies. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to each of the Companies. Upon receiving such notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to each of the Companies and shall mail written notice of such appointment by first-class mail, postage prepaid, to all Holders as their names and addresses appear in the Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. -30- The Trustee agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section, and the Trustee shall be entitled to be reimbursed for such payments, subject to the provisions of Section 607. If an appointment is made pursuant to this Section, the Securities may have endorsed thereon, in addition to the Trustee's certificate of authentication, an alternate certificate of authentication in the following form: This is one of the Securities described in the within-mentioned Indenture. [_________________________] _____________________________________ As Trustee By___________________________________ As Authenticating Agent By___________________________________ Authorized Officer ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANIES Section 701. COMPANIES TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS. Each of the Companies will furnish or cause to be furnished to the Trustee (a) semi-annually, not later than fifteen days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such Regular Record Date, and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by such Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; provided, however, that so long as the Trustee is the Security Registrar no such list shall be required to be furnished. Section 702. PRESERVATION OF INFORMATION; COMMUNICATIONS TO HOLDERS. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 701 -31- and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished. (b) If three or more Holders (herein referred to as "applicants") apply in writing to the Trustee, and furnish to the Trustee reasonable proof that each such applicant has owned a security for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other Holders with respect to their rights under this Indenture or under the Securities and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within five Business Days after the receipt of such application, at its election, either (i) afford such applicants access to the information preserved at the time by the Trustee in accordance with Section 702(a), or (ii) inform such applicants as to the approximate number of Holders whose names and addresses appear in the information preserved at the time by the Trustee in accordance with Section 702(a), and as to the approximate cost of mailing to such Holders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Holder whose name and address appear in the information preserved at the time by the Trustee in accordance with Section 702(a) a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender the Trustee shall mail to such applicants and file with the Commission, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interest of the Holders or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Holders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Every Holder of Securities, by receiving and holding the same, agrees with each of the Companies and the Trustee that neither of the Companies nor the Trustee nor any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders in accordance with Section 702(b), regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 702(b). Section 703. REPORTS BY TRUSTEE. (a) The Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the TIA at the times and in the manner provided pursuant thereto. (b) A copy of each report at the time of its mailing to all Holders shall be filed with the Commission and each securities exchange on which the Securities of any Series are listed. Each of the Companies agrees promptly to notify the Trustee whenever the Securities become listed on any securities exchange and of any delisting thereof. -32- Section 704. REPORTS BY COMPANIES. Each of the Companies shall: (1) file with the Trustee, within 15 days after such Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which such Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934; or, if such Company is not required to file information, documents or reports pursuant to either of said Sections, then it shall file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Securities Exchange Act of 1934 in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (2) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by such Company with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; and (3) transmit by mail to all Holders, as their names and addresses appear in the Security Register, within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by such Company pursuant to paragraphs (1) and (2) of this Section as may be required by rules and regulations prescribed from time to time by the Commission. ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE Section 801. COMPANIES MAY CONSOLIDATE, ETC. ON CERTAIN TERMS. Neither Company shall consolidate with or merge into any Person or convey, transfer or lease its properties and assets as, or substantially as, an entirety to any Person, unless: (1) the Person formed by such consolidation or into which such Company is merged or the Person which acquires by conveyance, transfer, or lease the properties and assets of such Company as, or substantially as, an entirety shall be a corporation, partnership or trust organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and shall, by an indenture supplemental hereto executed and delivered to the Trustee, in form satisfactory to the Trustee, expressly assume the due and punctual payment of the principal of all the Securities and the performance of every covenant of this Indenture on the part of such Company to be performed or observed and shall have provided for conversion rights in accordance with Article Eleven. (2) immediately after such transaction, no Event of Default, or event which after notice or lapse of time, or both, would become an Event of Default, shall have occurred and be continuing; and -33- (3) such Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. Section 802. SUCCESSOR SUBSTITUTED. Upon any consolidation or merger or any conveyance, transfer or lease of the properties and assets of a Company as, or substantially as, an entirety to any Person in accordance with Section 801, the successor Person formed by such consolidation or into which such Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, such Company under this Indenture with the same effect as if such successor Person had been named as such Company herein, and thereafter, except in the case of a lease to another Person, the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Securities. ARTICLE NINE SUPPLEMENTAL INDENTURES Section 901. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS. Without the consent of any Holders, the Companies, acting jointly, each when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to a Company and the assumption by any such successor of the covenants of such Company herein and in the Securities; or (2) to add to the covenants of a Company for the benefit of the Holders of Securities or to surrender any right or power herein conferred upon a Company; or (3) to change or eliminate any of the provisions of this Indenture, provided that any such change or elimination shall become effective only when there is no Security Outstanding created prior to the execution of such supplemental indenture which is entitled to the benefit of such provision; or (4) to secure the Securities; or (5) to make provision with respect to the conversion rights of Holders pursuant to the requirements of Article Eleven; or (6) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture, provided such action shall not adversely affect the interests of the Holders of Securities in any material respect; or (7) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities. -34- Section 902. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS. With the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities, by Act of said Holders delivered to each of the Companies and the Trustee, the Companies, acting jointly, each when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of Securities under this Indenture; PROVIDED, HOWEVER, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby, (1) change the Stated Maturity of the principal of any such Security, or reduce the principal amount thereof or change any Place of Payment where, or the coin or currency in which, any such Security is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof or adversely affect the right to convert any Security as provided in Article Eleven (except as permitted by Section 901(5)), or (2) reduce the percentage in principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver provided for in this Indenture, or (3) modify any of the provisions of this Section or Section 513, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. Section 903. EXECUTION OF SUPPLEMENTAL INDENTURES. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Section 904. EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. Section 905. CONFORMITY WITH TIA. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the TIA as then in effect. -35- Section 906. REFERENCE IN SECURITIES TO SUPPLEMENTAL INDENTURES. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Companies, acting jointly, or the Trustee shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Companies, to any such supplemental indenture may be prepared and executed by the Companies and authenticated and delivered by the Trustee in exchange for Outstanding Securities. Section 907. NOTICE OF SUPPLEMENTAL INDENTURE. Promptly after the execution by each of the Companies and the Trustee of any supplemental indenture pursuant to Section 902, the Companies shall transmit to the Holders a notice setting forth the substance of such supplemental indenture. ARTICLE TEN COVENANTS Section 1001. PAYMENT OF SECURITIES. Each Company covenants and agrees, severally and not jointly, that it will duly and punctually pay the principal amount of the Securities shown thereon as owing by such Company in accordance with the terms of the Securities and this Indenture. Section 1002. MAINTENANCE OF OFFICE OR AGENCY. The Companies will maintain in each Place of Payment an office or agency where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer or exchange, where Securities may be surrendered for conversion and where notices and demands to or upon the Companies in respect of the Securities and this Indenture may be served. The Companies will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Companies shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and each of the Companies hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Companies may also from to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; PROVIDED, HOWEVER, that no such designation or rescission shall in any manner relieve a Company of its obligation to maintain an office or agency in each Place of Payment for such purposes. The Companies will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. Section 1003. MONEY FOR SECURITIES PAYMENTS TO BE HELD IN TRUST. If a Company shall at any time act as its own Paying Agent, it will, on or before each due date of the principal of any of the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. -36- Whenever a Company shall have one or more Paying Agents, it will, one business Day prior to each due date of the principal of any Securities, deposit with a Paying Agent a sum sufficient to pay the principal so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, and (unless such Paying Agent is the Trustee) such Company will promptly notify the Trustee of its action or failure so to act. Each Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (1) hold all sums held by it for the payment of the principal of Securities in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee notice of any default by a Company (or any other obligor upon the Securities) in the making of any payment of principal on the Securities; and (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Companies may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Companies or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Companies or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Companies, in trust for the payment of the principal of any Security and remaining unclaimed for two years after such principal has become due and payable shall be paid to the Companies on Company Request, or (if then held by the Companies) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Companies for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Companies as trustee thereof, shall thereupon cease; PROVIDED, HOWEVER, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Companies cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the City of New York, New York or to be mailed to such Holder or both, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the earlier of the date of such publication or such mailing, any unclaimed balance of such money then remaining will be repaid to the Companies. ARTICLE ELEVEN CONVERSION OF SECURITIES Section 1101. CONVERSION PRIVILEGE AND CONVERSION PRICE. Each Security (or a portion thereof) shall be automatically converted into Paired Shares upon surrender of such Security at any office or agency of the Companies maintained for that purpose pursuant to -37- Section 1002, accompanied by written notice of conversion and a certification from the Holder thereof, in substantially the form set forth on the reverse side of each Security, to the effect that: (i) the beneficial ownership of such Security (or a portion thereof) has been transferred to a person which is not (a) a party to that certain Merrill Lynch, Pierce, Fenner & Smith Incorporated Master Agreement Among Underwriters dated April 15, 1985 (as revised) (the "Agreement Among Underwriters") who participated in the issuance and sale of the Securities, (b) a party to a Merrill Lynch, Pierce, Fenner & Smith Incorporated Standard Dealer Agreement (the "Standard Dealer Agreement") who participated in the issuance and sale of the Securities, or (c) any Underwriter Affiliate (as defined below) of such a party; or (ii) the Paired Shares issuable upon the conversion of the Security (or a portion thereof) have been sold in a regular-way sale on the New York Stock Exchange during the period that the Underwriters (as defined in the Security) have agreed in the [Agreement Among Underwriters] and the [Standard Dealer Agreement] that they and their Underwriter Affiliates will not for their own accounts purchase Paired Shares. The number of Paired Shares issuable upon conversion of a Security is to be determined by dividing the principal amount of the Security by $__________. Only whole Paired Shares may be acquired in any conversion of a Security. "Paired Shares" means a unit consisting of one share of beneficial interest, par value $.01 per share, of the Trust ("Trust Shares") and one share of Common Stock, $.01 per share, of the Corporation ("Corporation Shares"), which are paired pursuant to the Pairing Agreement dated June 25, 1980, as amended, in each case as such securities exist on the date of this Indenture or as they may be constituted from time to time. "Underwriter Affiliate" for the purposes of this Article Eleven means with respect to any Underwriter (a) a partner in or holder of 10% or more of the shares of such Underwriter, (b) a person in which such Underwriter holds 10% or more of the shares or is a partner, or (c) a family member of, or trust for, any such Underwriter, partner or shareholder. Section 1102. CONVERSION PROCEDURE. Securities shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Securities for conversion in accordance with the foregoing provisions (the "Date of Conversion"), and at such time the rights of the Holders of such Securities as Holders shall cease, and the Person or Persons entitled to receive Paired Shares issuable upon conversion shall be treated for all purposes as the record holder or holders of such Paired Shares at such time. As promptly as practicable on or after the Date of Conversion, the Companies shall issue and shall deliver at such office or agency a certificate or certificates for the number of full Paired Shares issuable upon conversion, together with payment in lieu of any fraction of a share, as provided in Section 1103. In the case of any Security which is converted in part only, upon such conversion the Companies shall execute and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Companies, a new Security or Securities of authorized denominations in aggregate principal amount equal to the unconverted portion of the principal amount of such Security. Section 1103. FRACTIONS OF SHARES. No fractional Trust Shares or Corporation Shares shall be issued upon conversion of Securities. If more than one Security shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be issuable upon conversion thereof shall be computed on the basis of the -38- aggregate principal amount of the Securities (or specified portions thereof) so surrendered. Instead of any fractional Trust Share or Corporation Share which would otherwise be issuable upon conversion of any Security or Securities (or specified portions thereof), the Companies shall pay a cash adjustment in respect of such fraction in an aggregate amount equal to the same fraction of the market price per Paired Share (as determined by the Board of Directors or in any manner prescribed by the Board of Directors) at the close of business on the Date of Conversion. Section 11.04. ADJUSTMENT FOR CHANGE IN CAPITAL STOCK. If either the Trust or the Corporation: (1) pays a dividend in Trust Shares or Corporation Shares, respectively; (2) subdivides its outstanding Trust Shares or Corporation Shares, respectively, into a greater number of shares; (3) combines its outstanding Trust Shares or Corporation Shares, respectively, into a smaller number of shares; (4) distributes to all holders of its Trust Shares or Corporation Shares, respectively, shares of its capital stock other than its Trust Shares or Corporation Shares, respectively; or (5) issues by reclassification of its Trust Shares or Corporation Shares, respectively, any shares of its capital stock; then the conversion and the conversion price in effect immediately prior to such action shall be adjusted so that the Holder of any Security thereafter converted may receive the number of Paired Shares which such Holder would have owned immediately following such action if such Holder had converted the Security immediately prior to such action. For a dividend or distribution, the adjustment shall become effective immediately after the record date for the dividend or distribution. For a subdivision, combination or reclassification, the adjustment shall become effective immediately after the effective date of the subdivision, combination or reclassification. If after an adjustment a Holder of a Security upon conversion of it may receive shares of two or more classes of capital stock of a Company, such Company shall determine the allocation of the adjusted conversion price between or among the classes of such capital stock. After such allocation, the conversion prices of the classes of capital stock shall thereafter be subject to adjustment on terms comparable to those applicable to common stock in this Indenture. Section 1105. NOTICE OF ADJUSTMENTS OF CONVERSION PRICE. Whenever the conversion price is adjusted as herein provided: (a) the Companies shall compute the adjusted conversion price in accordance with Section 1104 and shall prepare a certificate signed by the Treasurer of each Company setting forth the adjusted conversion price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be filed with the Trustee and at each office or agency maintained for the purpose of conversion of Securities pursuant to Section 1002; and -39- (b) a notice stating that the conversion price has been adjusted and setting forth the adjusted conversion price shall forthwith be required, and as soon as practicable after it is required, such notice shall be mailed by the Companies to all Holders at their last addresses as they shall appear in the Security Register. Section 1106. COMPANIES TO RESERVE STOCK. Each of the Trust and the Corporation shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Trust Shares and Corporation Shares, respectively, for the purpose of effecting the conversion of Securities, the full number of Trust Shares and Corporation Shares, respectively, then issuable upon the conversion of all outstanding Securities. Section 1107. TAXES ON CONVERSIONS. The Companies will pay any and all taxes that may be payable in respect of the issue or delivery of Paired Shares on conversion of Securities pursuant hereto. The Companies shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of Paired Shares in a name other than that of the Holder of the Security or Securities to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Companies the amount of any such tax, or has established to the satisfaction of the Companies that such tax has been paid. Section 1108. COVENANT AS TO STOCK. Each of the Trust and the Corporation covenants that all Trust Shares and Corporation Shares, respectively, which may be issued by it upon conversion of Securities will upon issue be fully paid and nonassessable and, except as provided in Section 1107, it will pay all taxes, liens and charges with respect to the issue thereof. Section 1109. CANCELLATION OF CONVERTED SECURITIES. All Securities delivered for conversion shall be delivered to the Trustee to be cancelled by or at the direction of the Trustee, which shall dispose of the same as provided in Section 309. Section 1110. PROVISIONS IN CASE OF CONSOLIDATION, MERGER OR SALE OF ASSETS. In case of any consolidation of either Company with, or merger of either Company into, any other Person, any merger of another Person into either Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding Trust Shares or Corporation Shares of such Company) or any sale or transfer of all or substantially all of the assets of either Company, the Person formed by such consolidation or resulting from such merger or which acquires such assets, as the case may be, shall execute and deliver to the Trustee a supplemental indenture providing that the Holder of each Security then outstanding shall have the right thereafter to convert such Security into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer by a holder of the number of Paired Shares into which such Security might have been converted immediately prior to such consolidation, merger, sale or transfer. The above provisions of this Section shall similarly apply to successive consolidations, mergers, sales or transfers. Section 1111. TRUSTEE NOT RESPONSIBLE FOR DETERMINING CONVERSION PRICE OR ADJUSTMENTS. Neither the Trustee nor any conversion agent shall at any time be under any duty or responsibility to any Holder of any Security to determine whether any facts exist which may require any adjustment of the conversion price, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed, herein or in any supplemental indenture provided to be employed, in -40- making the same. Neither the Trustee nor any conversion agent shall be accountable with respect to the validity or value (or the kind of amount) of any Paired Shares or of any securities or property, which may at any time be issued or delivered upon the conversion of any Security; and neither the Trustee nor any conversion agent makes any representation with respect thereto. Neither the Trustee nor any conversion agent shall be responsible for any failure of a Company to make any cash payment or to issue, transfer or deliver any Paired Shares or stock certificates or other securities or property upon the surrender of any Security for the purpose of conversion, or, except as expressly herein provided, to comply with any of the covenants of a Company contained in Article Ten or this Article Eleven. _________________________ This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. -41- IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. Attest: STARWOOD LODGING TRUST ________________________________ By:________________________________ Secretary Attest: STARWOOD LODGING CORPORATION ________________________________ By:________________________________ Secretary Attest: FIRST INTERSTATE BANK OF CALIFORNIA, AS TRUSTEE ________________________________ By:________________________________ Secretary -42- State of _____________________) ) SS.: County of ____________________) On the __th day of June, 1995, before me personally came ____________________, to me known, who being by me duly sworn, did depose and say that he is ________________ of Starwood Lodging Trust, the trust described in and which executed the foregoing instrument; that he knows the seal of said trust; that the seal affixed to said instrument is such trust seal; that it was so affixed by authority of the Board of Trustees of said trust, and that he signed his name thereto by like authority. _____________________________________ Notary Public On the __th day of June, 1995, before me personally came ____________________, to me known, who being by me duly sworn, did depose and say that he is ________________ of Starwood Lodging Corporation, the corporation described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporation seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. _____________________________________ Notary Public On the __th day of June, 1995, before me personally came ____________, to me known, who being by me duly sworn, did depose and say that he/she is a Vice President of First Interstate Bank, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. _____________________________________ Notary Public -43-- EX-5 4 EXHIBIT 5 EXHIBIT 5 June 29, 1995 Starwood Lodging Corporation 11845 West Olympic Boulevard Suite 560 Los Angeles, CA 90064 Starwood Lodging Trust 11845 West Olympic Boulevard Suite 550 Los Angeles, CA 90064 Re: Convertible Notes due December 15, 1995 --------------------------------------- Ladies and Gentlemen: We refer to the Joint Registration Statement on Form S-2, File Nos. 33-59155 and 33-59155-01 (the "Registration Statement") filed by Starwood Lodging Trust (the "Trust") and Starwood Lodging Corporation (the "Corporation"), with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"), relating to the registration of (i) $269,639,063 principal amount of Convertible Notes of the Trust and the Corporation (the "Convertible Notes") and (ii) the shares of beneficial interest, $.01 par value per share, of the Trust (the "Trust Shares") and shares of common stock, $.01 par value per share, of the Corporation (such shares of beneficial interest, together with such shares of common stock being referred to as the "New Paired Shares") issuable upon conversion of the Convertible Notes. The Convertible Notes are to be issued under an Indenture dated as of June 15, 1995 (the "Indenture") between the Trust and the Corporation and First Interstate Bank, as Trustee (the "Trustee"). We are familiar with the proceedings to date with respect to the proposed offering and sale of the Convertible Notes and have examined such records, documents and questions of law, and satisfied ourselves as to such matters of fact, as we have considered relevant and necessary as a basis for this opinion. Starwood Lodging Corporation Starwood Lodging Trust June 29, 1995 Page 2 Based on the foregoing, we are of the opinion that: 1. The Corporation is duly incorporated and validly existing under the laws of the State of Maryland. 2. The Trust is duly organized and validly existing as a real estate investment trust under the laws of the State of Maryland. 3. The Trust and the Corporation each has power and authority to execute and deliver the Indenture and to authorize and sell the Convertible Notes. 4. The Convertible Notes will be legally issued and binding obligations of the Trust and the Corporation (except to the extent enforceability may be limited by applicable bankruptcy, insolvency, moratorium, fraudulent transfer or similar laws affecting the enforcement of creditors' rights generally and by the effect of general principles of equity, regardless of whether enforceability is considered in a proceeding in equity or at law) when (i) the Registration Statement, as finally amended, shall have become effective under the Securities Act and the Indenture shall have been qualified under the Trust Indenture Act of 1939, as amended, and duly executed and delivered by the Trust, the Corporation and the Trustee; (ii) each of the Trust's Board of Trustees or a duly authorized committee thereof and the Corporation's Board of Directors or a duly authorized committee thereof shall have duly adopted final resolutions authorizing the issuance and sale of the Convertible Notes as contemplated by the Registration Statement; and (iii) Convertible Notes shall have been duly executed and authenticated as provided in the Indenture and duly delivered to the purchasers thereof against payment of the agreed consideration therefor. 4. The New Paired Shares issued upon conversion of the Convertible Notes in accordance with the terms of the Convertible Notes and the Indenture will be legally issued, fully paid and non-assessable when certificates representing the New Paired Shares shall have been duly executed, countersigned and registered and duly delivered to the persons entitled thereto against payment of the agreed consideration therefor, as provided in the Indenture. Starwood Lodging Corporation Starwood Lodging Trust June 29, 1995 Page 3 Insofar as the opinions expressed herein relate to matters governed by the laws of the State of Maryland, we have not made an independent examination of such laws, but have relied exclusively as to such laws, subject to the exceptions, qualifications and limitations therein expressed, upon the opinion of Piper & Marbury of Baltimore, Maryland. We do not find it necessary for the purposes of this opinion to cover, and accordingly we express no opinion as to the application of the securities or blue sky laws of the various states to the sale of the Convertible Notes or the Paired Shares. We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to all references to our firm included in or made a part of the Registration Statement. Very truly yours, EX-8 5 EXHIBIT 8 EXHIBIT 8 June 29, 1995 Starwood Lodging Trust 11845 West Olympic Boulevard Suite 550 Los Angeles, California 90064 Starwood Lodging Corporation 11845 West Olympic Boulevard Suite 560 Los Angeles, California 90064 Ladies and Gentlemen: We have acted as counsel to Starwood Lodging Trust, a Maryland real estate investment trust (the "Trust") and Starwood Lodging Corporation, a Maryland corporation (the "Corporation"), in connection with the preparation of a Registration Statement on Form S-2 filed by the Trust and the Corporation with the Securities and Exchange Commission (the SEC") on the date hereof (the "Registration Statement"), in connection with the offering to the public of Paired Shares of the Trust and the Corporation. All capitalized terms used but not defined herein have the meaning provided in the Registration Statement. I. OPINIONS REQUESTED The Trust and the Corporation have requested our opinion as to whether: (a) As of the date of this letter, the summary contained in the Registration Statement under the caption "Federal Income Tax Considerations" fairly summarized the material federal income tax considerations to a holder of Paired Shares and constitutes the opinion of Sidley & Austin where and to the extent specifically so stated in such summary; (b) Commencing with the Trust's taxable year ending December 31, 1995, the Trust will be organized in conformity with the requirements for qualification as a real estate investment trust (a "REIT") pursuant to Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and the Treasury Regulations published thereunder (the "Regulations"), and the Company's proposed Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 2 method of operation will enable the Trust to meet the requirements for qualification and taxation as a REIT under the Code and Regulations; (c) Section 269B(a)(3) of the Code will continue not to apply to the Trust and the Corporation; (d) The separate corporate identities of the Trust and the Corporation will continue to be respected for federal income tax purposes; (e) The Leases are and will be treated as true leases for federal income tax purposes; (f) The rent payable under the Leases was, is and will be treated as "rents from real property" for purposes of Sections 856(c)(2) and (3) of the Code; (g) The structure of the Company is not inconsistent with the intent of Subchapter K of the Code and the Internal Revenue Service (the "Service") should not be able to invoke Treas. Reg. Section 1.701-2(b) to recast the structure of the Company for federal income tax purposes; (h) Treas. Reg. Section 1.701-2(e) should not have a material adverse effect on the federal income tax consequences to any partner of the Realty Partnership or the Operating Partnership or on the ability of the Trust to qualify as a REIT; (i) The SLT Realty Limited Partnership, a Delaware limited partnership (the "Realty Partnership"), and SLC Operating Limited Partnership, a Delaware limited partnership (the "Operating Partnership") will be classified as partnerships for federal income tax purposes; and (j) SLT Realty Company, L.L.C., a Delaware limited liability company ("SLT Company"), and Starlex LLC, a New York limited liability company ("Starlex"), will be classified as partnerships for federal income tax purposes. II. DOCUMENTS EXAMINED AND REPRESENTATIONS RECEIVED In connection with the opinions rendered below, we have examined the following documents: 1. The Declaration of Trust of the Trust; Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 3 2. The letter ruling issued by the Service to the Trust dated January 4, 1980; 3. The letter from the Service to the Trust dated August 15, 1994, concerning the termination of the Trust's election to be taxed as a REIT (the "IRS Letter"); 4. The Articles of Incorporation of the Corporation; 5. The Amended and Restated Limited Partnership Agreement of SLT Realty Limited Partnership (the "Realty Agreement"); 6. The Amended and Restated Limited Partnership Agreement of SLC Operating Limited Partnership (the "Operating Agreement"); 7. The Formation Agreement and the exhibits and schedules attached thereto; 8. The Certificate of Formation of SLT Company; 9. The Limited Liability Company Operating Agreement of SLT Company (the "SLT Company Agreement"); 10. The Articles of Organization of Starlex; 11. The Limited Liability Company Operating Agreement of Starlex (the "Starlex Agreement"); 12. The Registration Statement; and 13. Such other documents as we have deemed necessary or appropriate for purposes of this opinion. In connection with the opinions rendered below, we have relied upon the correctness of the following representations of the Trust, the Corporation, and their authorized representatives: 1. Each of the documents referred to above is authentic, if an original, or accurate, if a copy, and has not been amended or further amended, as the case may be. Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 4 2. The factual statements contained in the Registration Statement are correct in all material respects. 3. During its taxable year ending December 31, 1995 and subsequent taxable years, each of the Trust, the Corporation, the Realty Partnership, the Operating Partnership, SLT Company and Starlex will operate in such a manner that will make the representations set forth below true for such years. 4. Neither the Trust nor the Corporation will make any amendments to their organizational documents after the date of this opinion that would affect the Trust's qualification as a REIT for any taxable year. 5. Each partner of the Partnerships (a "Partner") and each member of SLT Company or Starlex (a "Member") that is a corporation or other entity has valid legal existence. 6. Each Partner and each Member, as the case may be, has full power, authority, and legal right to enter into and perform the terms of the Realty Agreement or the Operating Agreement or the SLT Company Agreement or the Starlex Agreement, as the case may be, and the transactions contemplated thereby. 7. No actions will be taken by the Trust, the Corporation, the Realty Partnership, the Operating Partnership, SLT Company or Starlex, or the Partners or the Members, after the date hereof that would have the effect of altering the facts upon which the opinions set forth below are based. 8. The Trust will continue to be managed by the Board of Trustees and the Paired Shares will continue to be transferable. 9. The Trust has filed amended federal income tax returns for its taxable years ended December 31, 1991, and 1992, reflecting that it did not qualify as a REIT and was taxable as a C corporation. The Trust has filed its federal income tax return for its taxable year ended December 31, 1993 reflecting that it did not qualify as a REIT and was taxable as a C corporation. The Trust has received an extension for filing its federal income tax return for its taxable year ended December 31, 1994 and will file such return reflecting that it did not qualify as a REIT and was taxable as a C corporation. 10. The Trust will timely elect to be a REIT for its taxable year ending December 31, 1995, compute its taxable income as a REIT on its federal income tax Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 5 return for that taxable year, file Service Form 1120-REIT with a copy of the IRS Letter attached thereto properly and timely electing REIT status and will not terminate or revoke such election. 11. As of December 31, 1994, the Trust did not have any accumulated earnings and profits. 12. The Trust will timely make an election pursuant to IRS Notice 88-19, 1988-2 C.B. 486, to apply rules similar to those in Section 1374 of the Code. 13. The Paired Shares were paired prior to June 30, 1983, and at all times thereafter. 14. The following requirements are now and will continue to be met by any person which provides services with respect of or to any tenant of a property in which the Realty Partnership, SLT Company, or Starlex owns an interest (the "Properties"): a. Such person does not and will not own, directly or indirectly (within the meaning of Section 856(d)(5) of the Code), more than 35 percent of the Trust Shares; b. If such person is a corporation, not more than 35 percent of its stock, measured by voting power or number of shares, or, if such person is a noncorporate entity, not more than 35 percent of the interest in its assets or net profits is or will be owned, directly or indirectly (within the meaning of Section 856(d)(5) of the Code), by one or more persons who own 35 percent or more of the Trust Shares; c. None of the Trust, the Realty Partnership and Starlex presently derives or receives, or will derive or receive, any income from such person; d. Such person was, is and will be adequately compensated for its services; and e. If such person is an individual, he or she is not and will not be an officer of the Trust, the Realty Partnership, SLT Company, or Starlex. 15. Beneficial ownership of the Trust was, is and will continue to be held by 100 or more persons for at least 335 days of each taxable year. Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 6 16. At no time during the last half of each taxable year beginning with the Trust's taxable year ending December 31, 1995 will more than 50 percent in value of the Trust Shares be owned, directly or indirectly (within the meaning of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code), by or for the benefit of five or fewer individuals. 17. During each taxable year ending after December 31, 1994, at least 95 percent of the gross income of the Trust, the Realty Partnership, SLT Company, and Starlex, excluding gross income from the sale of property held as inventory or held primarily for sale to customers in the ordinary course of the trade or business of the Trust, the Realty Partnership, SLT Company, or Starlex ("Prohibited Income"), was and will continue to be derived from: a. Dividends; b. Interest; c. Rents from the Leases; d. Gain from the sale or other disposition of stock, securities, and real property (including interests in real property and interests in mortgages on real property) that is not Prohibited Income; e. Abatements and refunds of taxes on real property; f. Income and gain derived from foreclosure property as defined in Section 856(e) of the Code ("Foreclosure Property"); g. Amounts (other than amounts the determination of which depends in whole or in part on the income or profits of any person) received or accrued as consideration for entering into agreements (i) to make loans secured by mortgages on real property or on interests in real property or (ii) to purchase or lease real property (including interests in real property and interests in mortgages on real property); h. Gain from the sale or other disposition of real estate assets (including regular and residual interests in real estate mortgage investment conduits ("REMICs")) that is not Prohibited Income; Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 7 i. Payments under bona fide interest rate swap or cap agreements entered into by any of the Trust, the Realty Partnership, SLT Company, or Starlex to hedge variable rate indebtedness that it incurred to acquire or carry real estate assets (including regular and residual interests in REMICS, to the extent provided in Section 856(c)(6)(E) of the Code) ("Qualified Hedging Contracts"); and j. Gain from the sale or other disposition of Qualified Hedging Contracts. 18. During each taxable year ending after December 31, 1994, at least 75 percent of the gross income of the Trust, the Realty Partnership, SLT Company, and Starlex (excluding Prohibited Income) was and will continue to be derived from: a. Rents from the Leases (excluding any interest accrued on such rents); b. Interest on obligations secured by mortgages on real property or on interests in real property (including interests on regular or residual interests in REMICS, to the extent provided in Section 856(c)(6)(E) of the Code); c. Gain from the sale or other disposition of real property (including interests in real property and interests in mortgages on real property) that was not Prohibited Income; d. Dividends or other distributions on, and gain (other than Prohibited Income) from the sale or other disposition of, transferable shares in other REITS; e. Abatements and refunds of taxes on real property; f. Income and gain (other than Prohibited Income) derived from Foreclosure Property; g. Amounts (other than amounts the determination of which depends in whole or in part on the income or profits of any person) received or accrued as consideration for entering into agreements (i) to make loans secured by mortgages on real property or on interests in real property or (ii) to purchase or lease real property (including interests in real property and interests in mortgages on real property); Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 8 h. Gain (other than Prohibited Income) from the sale or other disposition of real estate assets (including regular and residual interests in REMICS, to the extent provided in Section 856(c)(6)(E) of the Code); and i. Income that is (i) attributable to stock or a debt instrument, (ii) attributable to the temporary investment of amounts received by the Trust in exchange for Trust Shares (other than Trust Shares issued pursuant to a dividend reinvestment plan) or in a public offering of debt obligations of the Trust which have maturities of at least five years, and (iii) received or accrued during the one-year period beginning on the date on which the Trust received such amounts. 19. During each taxable year ending after December 31, 1994, any rent attributable to personal property that is leased under or in connection with the Leases will not exceed 15 percent of the total rent for the taxable year attributable to both the real and personal property leased under, or in connection with, the Leases, as determined pursuant to Section 856(d) of the Code. The Trust will continue to monitor the terms of each lease entered into after December 31, 1994, to ensure that the amount of rent attributable to personal property received or accrued by the Realty Partnership, SLT Company, and Starlex does not cause the Trust to fail to satisfy the gross income tests of Sections 856(c)(2) and (3) of the Code. 20. The Leases provide that rent is the greater of a fixed amount or a percentage amount that is either fixed or based on a percentage of receipts or sales derived with respect to the property (the "Percentage Rent"). The percentages used to compute the Percentage Rent (i) will not be renegotiated during the term of the Leases in a manner that has the effect of basing the Percentage Rent on income or profits of any person and (ii) will conform with normal business practices. 21. From and after January 1, 1995, the Trust, the Realty Partnership, SLT Company and Starlex did not and will not receive or accrue, directly or indirectly, any rent, interest, contingency fees, or other amounts that were determined in whole or in part with reference to the income or profits derived by any person (excluding amounts received (i) as rents from the Leases that are (A) based solely on a percentage or percentages of receipts or sales and the percentage or percentages are fixed at the time the leases are entered into, are not renegotiated during the term of the leases in a manner that has the effect of basing rent on income or profits, and conform with normal business practices or (B) attributable to qualified rents from subtenants as provided in Section 856(d)(6) of the Code, and (ii) as interest that was (A) based solely on a fixed percentage or percentages of receipts or sales or (B) Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 9 attributable to qualified rents received or accrued by debtors as provided by Section 856(f)(2) of the Code). 22. From and after January 1, 1995, the Trust did not and will not own, directly or indirectly (within the meaning of Section 856(d)(5) of the Code), 10 percent or more, by voting power, value or number, of the Corporation Shares or 10 percent or more of the assets or net profits of the Operating Partnership. The Trust did not and will not receive or accrue, directly or indirectly, any rents from Properties from any of the following: a. A corporation of which the Trust owns, directly or indirectly (within the meaning of Section 856(d)(5) of the Code), 10 percent or more of the stock, by voting power or number of shares; or b. A non-corporate entity in which the Trust owns, directly or indirectly (within the meaning of Section 856(d)(5) of the Code), 10 percent or more of the assets or net profits. 23. The Trust currently enforces and will continue to enforce the provisions of its Declaration of Trust, the Realty Agreement, the SLT Company Agreement, and the Starlex Agreement concerning any and all restrictions on ownership of Paired Shares. 24. The Corporation currently enforces and will continue to enforce the provisions of its Articles of Incorporation and of the Operating Agreement concerning restrictions on ownership of Paired Shares. 25. During each taxable year ending after December 31, 1994, less than 30 percent of gross income of the Trust, the Realty Partnership, SLT Company, and Starlex was, is and will be derived from the sale or other disposition of: a. Stock, Qualified Hedging Contracts, or other securities held for less than one year; b. Property in a transaction that generates Prohibited Income; or c. Real property (including interests in real property, interests in mortgages on real property, regular and residual interests in REMICS, and mortgage pass-through securities) held for less than four years other than (i) property compulsorily or involuntarily converted to another form as a result of its destruction Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 10 (in whole or in part), seizure, requisition, or condemnation (or the threat or imminence thereof) and (ii) Foreclosure Property. 26. At the close of the quarter of the taxable year commencing with the quarter ended March 31, 1995, (i) at least 75 percent of the value of the total assets of the Trust, the Realty Partnership, SLT Company and Starlex were and will be represented by real estate assets (including interest in mortgages on real property and interests in REMICS, to the extent provided in Section 856(c)(6)(E)) of the Code, cash and cash items (including receivables), and government securities (the "75 Percent Test") and (ii) with respect to the securities of the Trust, the Realty Partnership, SLT Company and Starlex not included under the 75 Percent Test, (A) not more than five percent of the value of their total assets did and will consist of the securities of any one issuer (excluding the Trust's interest in the Realty Partnership, SLT Company, or Starlex, or any corporation with respect to which the Trust has held 100 percent of the stock at all times during such corporation's existence) and (B) not more than 10 percent of the outstanding voting securities of any one issuer (excluding the Trust's interest in the Realty Partnership, SLT Company, or Starlex, or any corporation with respect to which the Trust has held 100 percent of the stock at all times during such corporation's existence) will be held by the Trust, the Realty Partnership, SLT Company, or Starlex. With respect to this representation, the Trust's assets have been and will be as determined pursuant to Treas. Reg. Section 1.856-3(g) and the term "value" means (i) fair value as determined in good faith by the Board of Trustees of the Trust or (ii) in the case of securities for which market quotations are readily available, the market value of such securities. 27. With respect to each loan secured by real estate held by the Trust, the Realty Partnership, SLT Company, or Starlex, the amount of the loan has not exceeded and does not exceed the fair market value of the real property security therefor, except by amounts which would not cause the Trust to fail to satisfy the asset tests of Section 856(c)(5) of the Code or the gross income test of Section 856(c)(3) of the Code. 28. The Trust maintains and will continue to maintain sufficient records as to its investments to be able to show that it complies with the asset tests described above. 29. For each taxable year ending after December 31, 1994, the deduction for dividends paid by the Trust (as defined in Section 561 of the Code, but without regard to capital gain dividends, as defined in Section 857(b)(3)(C) of the Code) will equal or exceed (i) the sum of (A) 95 percent of the Trust's real estate investment Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 11 trust taxable income (as defined in Section 857(b)(2) of the Code, but without regard to the deduction for dividends paid and excluding any net capital gain) and (B) 95 percent of the excess of its net income from Foreclosure Property over the tax imposed on such income by Section 857(b)(4)(A) of the Code, minus (ii) any excess noncash income (as determined under Section 857(e) of the Code). 30. The dividends paid by the Trust will be paid in respect of each class of stock pro rata, with no preference to any share as compared with other shares of the same class. 31. Within thirty days after the end of each taxable year commencing with the taxable year ending December 31, 1995, the Trust will demand written statements from each record shareholder of five percent or more of its stock (or, if the Trust has less than 2,000 and more than 200 shareholders of record of its stock on any dividend record date, each record shareholder of one percent or more of its stock) setting forth the following information: a. The actual owners of the Trust's stock (I.E., the persons who are required to include in gross income in their returns the dividends received on the stock); and b. The maximum number of shares of the Trust (including the number and face value of securities convertible into stock of the Trust) that were considered owned, directly or indirectly (within the meaning of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code), by each of the actual owners of any of the Trust's stock at any time during the last half of the Trust's taxable year. 32. The Trust will maintain the written statements described in the preceding paragraph and will keep and maintain any other records required pursuant to Treas. Reg. Section 1.857-8(a) in the internal revenue district in which the Trust is required to file its federal income tax return, and the statements and records will be available for inspection by the Service. 33. The Trust will continue to use the calendar year as its taxable year. 34. Not all of the trustees of the Trust are also directors of the Corporation, and some of the directors of the Corporation are not trustees of the Trust. No individual serves as an officer of both the Trust and the Corporation concurrently. Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 12 35. The Trust, the Corporation, the Realty Partnership, the Operating Partnership, SLT Company and Starlex all maintain separate books and records. 36. The Trust does not and will not furnish or render any services to the Corporation or to the Operating Partnership. 37. All material transactions among the Trust, the Corporation, the Realty Partnership, SLT Company and/or Starlex, or any of them, have been and will be negotiated and structured with the intention of achieving an arm's-length result. 38. The Realty Partnership is operated and will continue to be operated in accordance with the Delaware Revised Uniform Limited Partnership Act and the Realty Agreement and such agreement will remain in substantially the same form as it was on the date it was last amended and will not be further amended in any manner which would affect these opinions. 39. The Operating Partnership is operated and will continue to be operated in accordance with the Delaware Revised Uniform Limited Partnership Act and the Operating Agreement and such agreement will remain in substantially the same form as it was on the date it was last amended and will not be further amended in any manner which would affect these opinion. 40. SLT Company is operated and will continue to be operated in accordance with the Delaware Limited Liability Act, Del. Code, tit. 6, Sections 18-101 ET SEQ., as amended from time to time, and the SLT Company Agreement and such agreement will remain in substantially the same form as it is upon the date it was formed and will not be amended in any manner which would affect these opinions. 41. Starlex is operated and will continue to be operated in accordance with the New York Limited Liability Company Law, ch. 34 of the Consolidated Laws of New York, as amended from time to time, and the Starlex Agreement and such agreement will remain in substantially the same form as it is upon the date it was formed and will not be amended in any manner which would affect these opinions. 42. No general partner is acting as an agent of any limited partner in connection with the investments by the limited partners in, and operations of, the Partnerships. The Trust and the Corporation will be active in the management of the partnership of which they are a general partner and be independent of the limited partners. Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 13 43. No Member is acting as an agent of any other Member in connection with the investments by the Members in, and operations of, SLT Company and/or Starlex. Each Member will be active in the management of SLT Company and Starlex and be independent of any other Member or Members. 44. The transactions in which the Partners acquire interests in each Partnership and the transactions in which the Members acquire interests in SLT Company and Starlex are not required to be registered under the Securities Act of 1933, as amended. 45. None of the Realty Partnership, the Operating Partnership, SLT Company or Starlex will have more than 500 Partners or Members, as the case may be (taking into account as a partner each person who indirectly owns an interest in Realty Partnership, the Operating Partnership, SLT Company, or Starlex through a partnership, grantor trust, or S corporation). 46. The interests in each of the Realty Partnership, SLT Company and Starlex will not be traded on an established securities market (or the substantial equivalent thereof). 47. The Realty Partnership, SLT Company, and Starlex intend to hold the Properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing, owning, and operating the Properties (and other hotel properties and interests in hotels) and to make such occasional sales of the Properties, including peripheral land, as are consistent with the investment objectives of the Realty Partnership, SLT Company, and Starlex. 48. With respect to each of the Realty Partnership, the Operating Partnership, and Starlex, the ratio of the bases of (a) the assets that consist of debt obligations or interests therein for purposes of Section 7701(i) of the Code to (b) the total assets, will at all times be less than 80 percent. 49. Each of the Trust and the Corporation (and its subsidiaries) expect to own in excess of 20 percent of the partnership interests of their respective Partnership throughout the life of their respective Partnership. 50. The intent of the Partners and the Members is to conduct joint business and investment activities through a flexible economic arrangement without incurring an entity-level tax. Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 14 51. The Realty Partnership, the Operating Partnership, SLT Company, and Starlex are each bona fide and each partnership transaction or series of related transactions will be entered into for a substantial business purpose. After reasonable inquiry, we are not aware of any facts inconsistent with the representations set forth in Paragraphs 1 through 51 above. Furthermore, when such representations involve matters of law, we have explained to the representatives of the Trust and the Corporation the relevant and material Sections of the Code, the Regulations thereunder, published rulings of the Service, and other relevant authority to which such representations relate and are satisfied that the representatives of the Trust and the Corporation understand such provisions and are capable of making such representations. III. ANALYSIS AND DISCUSSION 1. IN GENERAL The analysis and discussion set forth in the summary contained in the Registration Statement under the caption "Federal Income Tax Considerations" is hereby incorporated by reference as though set forth herein in its entirety. 2. SECTION 269B OF THE CODE Section 269B(a)(3) of the Code provides that, for purposes of determining whether any stapled entity is a REIT, all entities which are stapled entities with respect to each other shall be treated as one entity. Section 269B(c) of the Code defines the term "stapled entities" to mean any group of two or more entities if more than 50 percent in value of the beneficial ownership in each of such entities consists of interests which, by reason of form of ownership, restrictions on transfer, or other terms or conditions, the transfer of one of such interests causes or requires the transfer of the other of such interests. The Trust and the Corporation are "stapled entities" within the meaning of Section 269B(c) of the Code. Therefore, if Section 269B(a)(3) were to apply to the Trust and the Corporation, they would be treated as one entity for purposes of determining whether the Trust is a REIT. In such case, the Trust would not satisfy either the 75 percent or the 95 percent gross income tests provided in Sections 856(c)(2) and (3) of the Code and the Trust would not qualify as a REIT. Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 15 Section 136(c)(3) of the Tax Reform Act of 1984, P.L. 98-369 (the "1984 Tax Act"), however, provides that Section 269B(a)(3) of the Code shall not apply in determining the application of Sections 856 through 859 of the Code to any REIT which is part of a group of stapled entities if: (A) all members of such group were stapled entities as of June 30, 1983, and (B) as of June 30, 1983, such group included one or more [REITs]. No regulations, rulings or cases have been issued interpreting Section 136(c)(3) of the 1984 Tax Act. Section 269B(a)(3) of the Code does not apply to the Trust because the Trust and the Corporation were stapled entities on June 30, 1983 and the Trust was a REIT on such date. Section 136(c)(3) of the 1984 Tax Act does not, by its terms, require the Trust to have been a REIT at all times after June 30, 1983 in order for Section 269B(a)(3) of the Code not to apply. Therefore, the termination of the Trust's status as a REIT for the taxable years ended December 31, 1991 through 1994 will not result in Section 269B(a)(3) of the Code applying to the Trust for the taxable year ending December 31, 1995 (or future taxable years). Because there are no judicial or administrative authorities interpreting Section 136(c)(3) of the 1984 Tax Act, this conclusion is based solely on the literal language of this provision. 3. CLASSIFICATION OF THE PARTNERSHIPS Sections 761(a) and 7701(a)(2) of the Code define a partnership generally as any unincorporated organization through or by means of which any business, financial operation, or venture is carried on and that is not a corporation, trust, or estate. The term "corporation" is defined in Section 7701(a)(3) of the Code as including "associations." Treas. Reg. Section 301.7701-3(b) provides that an organization that qualifies as a limited partnership under state law may be classified as a partnership or an association, and that the proper classification of such an organization is to be determined by applying the principles of Treas. Reg. Section 301.7701-2. Treas. Reg. Section 301.7701-2(a)(1) sets forth the following six major characteristics, which are generally indicative of a corporation and distinguish it from other organizations: (i) associates, (ii) an objective to carry on business and divide the gains therefrom, (iii) continuity of life, (iv) centralization of management, (v) liability for corporate debts limited to corporate property, and (vi) free transferability of interests. Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 16 Treas. Reg. Section 301.7701-2(a)(3) states that an unincorporated organization must have "more corporate characteristics than noncorporate characteristics" in order for it to be classified as an association taxable as a corporation. For purposes of this determination, however, characteristics common to both corporations and partnerships will not be considered. Thus, since the characteristics of having associates and an objective to carry on business and divide the gain therefrom are generally common to both corporations and partnerships, the determination of whether an organization possessing these two characteristics is to be treated for federal income tax purposes as a partnership will depend on the presence or absence of the other four characteristics, assuming that there are no "other factors" that are significant in determining its tax classification. Treas. Reg. Section 301.77012(a)(2). Both the courts and the Service have ruled that an organization must ordinarily have more than two of the four major non-common characteristics in order to be taxed as a corporation and that each of the four non-common characteristics is generally given equal weight in determining an entity's status as a corporation or partnership. SEE LARSON V. COMMISSIONER, 66 T.C. 159, 185 (1976), ACQ., 1979-1 C.B. 1 and ACQ., 1979-2 C.B. 2; ZUCKMAN V. UNITED STATES, 524 F.2d 729, 734 n.7, 744-45 (Ct. Cl. 1975); Rev. Rul. 88-76, 1988-2 C.B. 360. a. CONTINUITY OF LIFE. Treas. Reg. Section 301.7701-2(b)(1) states that an organization lacks continuity of life "if the death, insanity, bankruptcy, retirement, resignation or expulsion of any member" will cause a "dissolution of the organization." With respect to limited partnerships, "[i]f the death, insanity, bankruptcy, retirement, resignation, expulsion or other event of withdrawal of a general partner of a limited partnership causes a dissolution of the partnership, continuity of life does not exist . . . ." Treas. Reg. Section 301.7701- 2(b)(1). This regulation further provides that "continuity of life does not exist notwithstanding the fact that a dissolution of the limited partnership may be avoided, upon such an event of withdrawal of a general partner, by the remaining general partners agreeing to continue the partnership or by at least a majority in interest of the remaining partners agreeing to continue the partnership." Treas. Reg. Section 301.7701-2(b)(1). Section 3.2 of the Realty Agreement and the Operating Agreement provides that each Partnership will dissolve upon "the death, dissolution, termination, withdrawal, retirement, expulsion or Bankruptcy of a General Partner, unless the Partnership's business is continued as provided in Section 9.1 hereof." Section 9.1 of each Partnership Agreement provides that in the event of dissolution "(a) the remaining General Partners may elect to continue the Partnership business or (b) within 90 days thereafter, all of the remaining Partners (or, to the extent permitted under the Act, such lesser number or percentage of the Partners, but in no event less than a Majority-in-Interest of the Limited Partners) may elect Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 17 to continue the Partnership business by selecting a substitute General Partner, which substitute General Partner accepts such election and agrees to serve as General Partner." The Regulations also provide that a limited partnership subject to a statute corresponding to the Uniform Limited Partnership Act lacks continuity of life. Treas. Reg. Section 301.7701-2(b)(3). The Uniform Limited Partnership Act includes both the original Uniform Limited Partnership Act adopted in 1916 (the "ULPA") and the Revised Uniform Limited Partnership Act adopted by the National Conference of Commissioners on Uniform State Laws in 1976 (the "RULPA"). Treas. Reg. Section 301.7701-2(a)(5). The Service has determined that the Delaware Revised Uniform Limited Partnership Act as amended through August 1, 1990 corresponds to the ULPA for purposes of Treas. Reg. Section 301.7701-2. Rev. Rul. 95-2, 1995-1 I.R.B. 7. We have examined the relevant provisions of the Act as of the date hereof, particularly Section 17-801 thereof, and, while we are not admitted to practice law in Delaware, we are aware of no amendment to those provisions that would cause the Delaware RULPA as it presently exists to be considered materially different from the Delaware RULPA as amended through August 1, 1990 for purposes of the conclusion set forth in Revenue Ruling 95-2. We are therefore of the opinion that both the Realty Partnership and the Operating Partnership lack the corporate characteristic of continuity of life. b. CENTRALIZED MANAGEMENT. With respect to centralized management, the Regulations provide that "[a]n organization has centralized management if any person (or any group of persons which does not include all the members) has continuing exclusive authority to make the management decisions necessary to the conduct of the business for which the organization was formed." Treas. Reg. Section 301.7701- 2(c)(1). Limited partnerships subject to a statute corresponding to the ULPA generally do not have centralized management, but centralized management ordinarily does exist in such a limited partnership if substantially all of the interests in the partnership are owned by the limited partners. Treas. Reg. Section 301.7701-2(c)(4). The Service has indicated that it will not rule that a limited partnership lacks centralized management unless the limited partnership interests, excluding those held by general partners, do not exceed 80 percent of the total interests in the partnership. Rev. Proc. 89-12, Section 4.06, 1989-1 C.B. 798. If all or a specified group of the limited partners may remove a general partner, all the facts and circumstances must be taken into account in determining whether the partnership possesses centralized management. Treas. Reg. Section 301.7701-2(c)(4). However, a substantially restricted right of the limited partners to remove the general partner will not itself cause the partnership to possess centralized management. ID. The Service has indicated that it will consider all the facts and circumstances, including limited partner Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 18 control of the general partners (whether direct or indirect), in determining whether the partnership lacks centralized management for ruling purposes. Rev. Proc. 89-12, Section 4.06. With respect to the Realty Partnership, since the General Partner currently owns approximately 25 percent of the Realty Partnership and is expected to own in excess of 20 percent throughout the life of the Realty Partnership, the Limited Partners will not own substantially all of the interests in the Realty Partnership. In addition, the Limited Partners have no power to remove the General Partner of the Realty Partnership. The Limited Partners' control over the General Partner is also substantially circumscribed because the Trust's Declaration of Trust restricts each Limited Partner to owning not more than eight percent of the General Partner of the Realty Partnership. Thus, based on the foregoing facts, we are of the opinion that the Realty Partnership lacks the corporate characteristic of centralized management. The General Partners of the Operating Partnership currently own approximately 25 percent of the Operating Partnership and are expected to own in excess of 20 percent throughout the life of the Operating Partnership, and the Limited Partners have no power to remove a General Partner of the Operating Partnership. The Limited Partners' control over the General Partners is also substantially circumscribed by the Articles of Incorporation which restrict each Limited Partner to owning not more than eight percent of the Corporation. However, because of the restrictions imposed by the State of Nevada with respect to gaming operations, the Partners of the Operating Partnership have agreed that the Corporation will delegate its management responsibilities to a management committee until the Operating Partnership receives the necessary gaming approvals. Thereafter, the Corporation will manage the Operating Partnership in the same manner as the Trust manages the Realty Partnership. As a result of the initial existence of the management committee, we believe that the Operating Partnership is likely to possess the corporate characteristic of centralized management. c. LIMITED LIABILITY. An organization has the corporate characteristic of limited liability if under local law no member of the organization is personally liable for the debts of or claims against the organization. Treas. Reg. Section 301.7701- 2(d)(1). In the case of a limited partnership subject to a statute corresponding to the ULPA, personal liability exists with respect to each general partner, unless both of the following circumstances exist: (i) such general partner has no substantial assets (other than his interest in the limited partnership), and (ii) such general partner is merely a "dummy" acting as the agent of the limited partners. Treas. Reg. Section 301.7701-2(d)(2). SEE ALSO LARSON, 66 T.C. at 179-180; ZUCKMAN, 524 F.2d at 741. Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 19 The Service has indicated that it will rule that a partnership with corporate general partners will lack limited liability if the net worth of the corporate general partners equals at least 10 percent of the total contributions to the limited partnership (exclusive of its interest in the partnership) and is expected to continue to equal at least 10 percent of the total contributions throughout the life of the partnership. Rev. Proc. 89-12, Section 4.07, 1989-1 C.B. 798; Rev. Proc. 92-88, Section 4.03, 1992-2 C.B. 496. If the corporate general partner fails to satisfy this safe-harbor net worth test, the Service will rule that the partnership lacks the corporate characteristic of limited liability only if a general partner is shown to have substantial assets (exclusive of its interest in the partnership) or if "the general partners individually and collectively will act independently of the limited partners." Rev. Proc. 89-12, Section 4.07. With respect to the Realty Partnership, the General Partner will not satisfy the safe-harbor net worth test. The General Partner's failure to satisfy this test, however, does not result in the Realty Partnership's possessing the corporate characteristic of limited liability because the General Partner is not a "dummy" acting as an agent for the Limited Partners. The Trust's Board of Trustees serves at the discretion of and is responsible to the Trust's shareholders. In addition, the Trust's Declaration of Trust restricts each Limited Partner to owning not more than eight percent of the General Partner. As a result, the General Partner is independent of the Limited Partners and is not acting as an agent of the Limited Partners. Moreover, the General Partner has been actively engaged in the real estate business for many years, employs a regular staff that undertakes its real estate business activities, and has represented that it will be active in the management of the Realty Partnership. Based on these facts and representations, we are of the opinion that the General Partner is not a "dummy" acting as an agent for the Limited Partners, and as a result the Realty Partnership lacks the corporate characteristic of limited liability. The same conclusion applies to the Operating Partnership. As a result, we are of the opinion that the Operating Partnership also lacks the corporate characteristic of limited liability. d. FREE TRANSFERABILITY OF INTERESTS. The Regulations provide that the corporate characteristic of free transferability of interests is present in any situation in which each member of an organization "or those members owning substantially all of the interests in the organization have the power, without the consent of other members, to substitute for themselves in the same organization a person who is not a member of the organization." Treas. Reg. Section 301.7701-2(e). For free transferability of interests to exist, a member must be able, without the consent of other members, "to confer upon his substitute all the attributes of his interest in the organization." Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 20 ID. In particular, free transferability does not exist when a member can, without the consent of other members, assign its rights to profits but cannot assign its right to participate in management. ID. The Service has indicated that it will rule that a partnership lacks free transferability of interests if, throughout the life of the partnership, the partnership agreement expressly restricts the transferability of partnership interests representing more than twenty percent of all interests in partnership capital, income, gain, loss, deduction, and credit. Rev. Proc. 92-33, 1992-1 C.B. 782. Section 9.1 of the Realty Agreement and of the Operating Agreement provides that a General Partner shall not have the right to transfer all or any portion of its interest in the Partnership without the prior written consent of a majority of the Limited Partners, which consent may be given or withheld by the Limited Partners in their sole and absolute discretion. The General Partners currently own approximately 25 percent of the interests in the respective Partnership's items of capital, income, gain, loss, deduction, and credit, and are expected to own more than 20 percent of such interest in the respective Partnership throughout the life of the Partnership. Accordingly, no portion of the General Partners' interests in each Partnership will be freely transferable. Based on the foregoing, we are of the opinion that both Partnerships lack the corporate characteristic of free transferability. e. SUMMARY OF FACTORS. In summary, the Realty Partnership lacks the corporate characteristics of continuity of life, centralized management, limited liability, and free transferability. In addition, while the Operating Partnership is likely to possess the corporate characteristic of centralized management, it lacks the other three characteristics. Accordingly, it is our opinion that each of the Realty Partnership and the Operating Partnership will be classified as a partnership for federal income tax purposes and not as an association taxable as a corporation, under the existing Code, Regulations, administrative pronouncements, and case law. 4. CLASSIFICATION OF SLT COMPANY AND STARLEX The determination of whether a limited liability company ("LLC") is classified as a partnership for federal income tax purposes is made under the same rules as are applied for the classification of partnerships. In addition, Revenue Procedure 95-10, 1995-3 I.R.B. 20, specifies the conditions under which the Service will consider a ruling request that relates to classification of a domestic or foreign LLC as a partnership for federal tax purposes. Revenue Procedure 95-10 modifies Revenue Procedure 89-12, which specifies the conditions Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 21 under which the Service will consider a ruling request that relates to the classification of an organization as a partnership for federal tax purposes. Revenue Procedure 89-12 no longer applies to LLCs. The Service will consider a ruling request that relates to classification of an LLC as a partnership for federal tax purposes only if the LLC has at least two members. Whether the LLC has at least two members is based on all the facts and circumstances. According to the SLT Company Agreement, SLT Company has three members. According to the Starlex Agreement, Starlex has two members. The Service has held that the Delaware Limited Liability Act, Del. Code, tit. 6, Sections 18-101 ET SEQ. (the "Delaware LLC Act"), as of 1992, permitted an LLC to be classified as a partnership for tax purposes. Rev. Rul. 93-38, 1993-1 C.B. 233. We have examined the relevant provisions of Delaware LLC Act as of the date hereof, and, while we are not admitted to practice law in Delaware, we are aware of no amendment to those provisions that would cause the Delaware LLC Act as it presently exists to be considered materially different from the Delaware LLC Act as amended through 1992 for purposes of the conclusion set forth in Revenue Ruling 93-38. The Trust has represented that SLT Company was formed and is operating in accordance with the Delaware LLC Act. The Trust has further represented that Starlex was formed and is operating in accordance with the New York Limited Liability Company Law, ch. 34 of the Consolidated Laws of New York (the "New York LLC Act"), and the Starlex Agreement. a. CONTINUITY OF LIFE If management of an LLC is vested in all the members, and the controlling statute, or the operating agreement pursuant to the controlling statute, provides that the death, insanity, bankruptcy, retirement, resignation, or expulsion of any member dissolves the LLC without further action of the members, unless the LLC is continued by the consent of not less than a majority in interest of the remaining members, the Service generally will rule that the LLC lacks continuity of life. Rev. Proc. 95-10 Section 5.01(2). All the members must be subject to the specified dissolution events. ID. If the controlling statute, or the operating agreement pursuant to the controlling statute, provides that less than all of the dissolution events listed above with respect to the member-managers or the members dissolves the LLC, the Service will not rule that the LLC lacks continuity of life unless the taxpayer clearly establishes in the ruling request that the event or events selected provide a meaningful possibility of dissolution. ID. Treas. Reg. Section 301.7701-2(b)(1) states that an organization lacks continuity of life "if the death, insanity, bankruptcy, retirement, resignation or expulsion of any member" Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 22 will cause a "dissolution of the organization." With respect to limited partnerships, "[i]f the death, insanity, bankruptcy, retirement, resignation, expulsion or other event of withdrawal of a general partner of a limited partnership causes a dissolution of the partnership, continuity of life does not exist . . . ." Treas. Reg. Section 301.7701-2(b)(1). This regulation further provides that "continuity of life does not exist notwithstanding the fact that a dissolution of the limited partnership may be avoided, upon such an event of withdrawal of a general partner, by the remaining general partners agreeing to continue the partnership or by at least a majority in interest of the remaining partners agreeing to continue the partnership." ID. According to Section 3.2 of the SLT Company Agreement, SLT Company will dissolve upon the earliest to occur of December 31, 2094, or the "death, dissolution, termination, withdrawal, retirement, expulsion or Bankruptcy of a Member, unless all remaining Members consent in writing to the continuation of the business of the Company." We are therefore of the opinion that SLT Company lacks the corporate characteristic of continuity of life. According to Section 12.1 of the Starlex Operating Agreement, Starlex will dissolve upon "the Dissociation of any Member, unless at the time of Dissociation there are at least two remaining Members and the Company is continued with the consent of all the remaining Members." "Dissociation" is defined in Section 11.1 of the Starlex Operating Agreement as withdrawal, bankruptcy, death, adjudication of incompetence, dissolution, or termination of a Member. We are therefore of the opinion that Starlex lacks the corporate characteristic of continuity of life. b. CENTRALIZATION OF MANAGEMENT With respect to centralization of management, Revenue Procedure 95-10 states that if the controlling statute, or the operating agreement pursuant to the controlling statute, provides that the LLC is managed by the members exclusively in their membership capacity, the Service generally will rule that the LLC lacks centralized management. Rev. Proc. 95-10 Section 5.03(1). In addition, the Regulations provide that "[a]n organization has centralized management if any person (or any group of persons which does not include all the members) has continuing exclusive authority to make the management decisions necessary to the conduct of the business for which the organization was formed." Treas. Reg. Section 301.7701-2(c)(1). According to Section 6.1 of the SLT Company Agreement, "[m]anagement of the Company is fully vested in all the Members." We are therefore of the opinion that SLT Company lacks the corporate characteristic of centralization of management. According to Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 23 Section 6.1 of the Starlex Agreement, "[m]anagement of the Company shall be vested in all of its Members." We are therefore of the opinion that Starlex lacks the corporate characteristic of centralization of management. c. LIMITED LIABILITY The Service generally will not rule that an LLC lacks limited liability unless at least one assuming member validly assumes personal liability for all (but not less than all) obligations of the LLC, pursuant to express authority granted in the controlling statute. Rev. Proc. 95-10 Section 5.04. An organization has the corporate characteristic of limited liability if under local law no member of the organization is personally liable for the debts of or claims against the organization. Treas. Reg. Section 301.7701-2(d)(1). According to Section 18-303 of the Delaware LLC Act, the Members of a Delaware limited liability company are not liable for any of the obligations of the LLC. No Member of SLT Company has assumed liability for all the obligations of SLT Company. Therefore, SLT Company has the corporate characteristic of limited liability. According to Section 609(a) of the New York LLC Act, the Members of a New York limited liability company are not liable for any of the obligations of the LLC. No Member of Starlex has assumed liability for all the obligations of Starlex. Therefore, Starlex has the corporate characteristic of limited liability. d. FREE TRANSFERABILITY OF INTERESTS If the members of the LLC do not designate or elect one or more members as managers, and the controlling statute, or the operating agreement pursuant to the controlling statute, provides that each member, or those members owning more than 20 percent of all interests in the LLC's capital, income, gain, loss, deduction, and credit, does not have the power to confer upon a non-member all the attributes of the member's interests in the LLC without the consent of not less than a majority of the non-transferring members, the Service will generally rule that the LLC lacks free transferability of interests. Rev. Proc. 95-10 Section 5.02(2). Consent of a majority includes either a majority in interest, a majority of either the capital or profits interests in the LLC, or a majority determined on a per capita basis. Rev. Proc. 95-10 Section 5.03. The Service will not rule that the LLC lacks free transferability of interests unless the power to withhold consent to the transfer constitutes a meaningful restriction on the transfer of the interests. For example, a power to withhold consent to a transfer is not a meaningful restriction if the consent may not be unreasonably withheld. Rev. Proc. 95-10 Section 5.04. Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 24 The Regulations provide that the corporate characteristic of free transferability of interests is present in any situation in which each member of an organization "or those members owning substantially all of the interests in the organization have the power, without the consent of other members, to substitute for themselves in the same organization a person who is not a member of the organization." Treas. Reg. Section 301.7701-2(e). For free transferability of interests to exist, a member must be able, without the consent of other members, "to confer upon his substitute all the attributes of his interest in the organization." ID. Section 8.1 of the SLT Company Agreement provides that "[n]o Member shall be entitled to sell, assign, transfer or otherwise dispose of all or any portion of its Membership Interest without the written consent of all of the Members, which consent may be given or withheld in each Member's sole and absolute discretion." We are therefore of the opinion that SLT Company lacks the corporate characteristic of free transferability of interests. Section 10.3 of the Starlex Agreement provides that "a Membership Interest of any Member may not be transferred in whole or in part, and a transferee shall not have a right to become a Member unless. . . . [a]ll of the other Members shall have consented in writing to the transfer and substitution, which consent may be arbitrarily withheld by and such Member." However, because the only two members of Starlex are the Trust and the Realty Partnership, it is unclear whether Starlex lacks the corporate characteristic of free transferability of interests. e. SUMMARY OF FACTORS. In summary, each of SLT Company and Starlex lacks the corporate characteristics of continuity of life and centralized management. Accordingly, it is our opinion that each of SLT Company and Starlex will be classified as a partnership for federal income tax purposes and not as an association taxable as a corporation, under the existing Code, Regulations, administrative pronouncements, and case law. IV. OPINIONS Our opinions set forth in the following paragraph are 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, and upon the representations and documents referred to herein. Opinions of counsel are not binding on the Service or on any court. Accordingly, no Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 25 assurance can be given that the Service will not challenge the propriety of one or more of the opinions set forth in the following paragraph or that such a challenge would not be successful. Based upon and subject to all of the foregoing, we are of the opinion that: 1. As of the date of this letter, the summary contained in the Registration Statement under the caption "Federal Income Tax Considerations" fairly summarized the material federal income tax considerations to a holder of Paired Shares and constitutes the opinion of Sidley & Austin where and to the extent specifically so stated in such summary. 2. Commencing with its taxable year ending December 31, 1995, the Trust is organized in conformity with requirements for qualification as a REIT pursuant to Sections 856 through 860 of the Code and the Regulations and the Company's method of operation will enable the Trust to continue to meet the requirements for qualification and taxation as a REIT under the Code and Regulations. 3. Section 269B(a)(3) of the Code has not applied and will continue not to apply to the Trust and the Corporation. 4. The separate corporate identities of the Trust and the Corporation will be respected for federal income tax purposes. 5. The Leases will be treated as true leases for federal income tax purposes. 6. The rent payable under the Leases will be treated as "rents from real property" for purposes of Sections 856(c)(2) and (3) of the Code. 7. The structure of the Company is not inconsistent with the intent of Subchapter K of the Code and the Service should not be able to invoke Treas. Reg. Section 1.701-2(b) to recast the structure of the Company for federal income tax purposes. 8. Treas. Reg. Section 1.701-2(e) will not have a material adverse effect on the federal income tax consequences to any partner of the Realty Partnership or the Operating Partnership or on the ability of the Trust to qualify as a REIT. 9. The Realty Partnership and the Operating Partnership will be classified as partnerships for federal income tax purposes. Starwood Lodging Trust Starwood Lodging Corporation June 29, 1995 Page 26 10. SLT Company and Starlex will be classified as partnerships for federal income tax purposes. The foregoing opinions are limited to the federal income tax matters addressed herein, and no other opinions are rendered with respect to other federal tax matters or to any issues arising under the tax laws of any state, locality or other jurisdiction. We undertake no obligation to update the opinions expressed herein after the date of this letter. This opinion letter is solely for the information and use of the Corporation and the Trust, and may not be relied upon for any purpose by any other person without our express written consent. Sincerely yours, Sidley & Austin EX-10.21 6 EXHIBIT 10.21 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT OF SLT REALTY LIMITED PARTNERSHIP - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS ARTICLE 1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE 2 Continuation and Business of the Partnership . . . . . . . . . . 12 2.1 Continuation . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.2 Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.3 Character of the Business. . . . . . . . . . . . . . . . . . . . 12 2.4 Location of Principal Place of Business. . . . . . . . . . . . . 13 2.5 Registered Agent and Registered Office . . . . . . . . . . . . . 13 2.6 Restatement of Agreement . . . . . . . . . . . . . . . . . . . . 13 ARTICLE 3 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.1 Commencement . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.2 Dissolution. . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE 4 Capital Contributions. . . . . . . . . . . . . . . . . . . . . . 14 4.1 Capital Contributions; Units . . . . . . . . . . . . . . . . . . 14 4.2 Percentage Interests . . . . . . . . . . . . . . . . . . . . . . 15 4.3 Purchase Rights. . . . . . . . . . . . . . . . . . . . . . . . . 16 4.4 Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4.5 No Third Party Beneficiaries . . . . . . . . . . . . . . . . . . 16 4.6 No Interest on or Return of Capital Contribution . . . . . . . . 16 ARTICLE 5 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . 16 5.1 Indemnification of General Partner . . . . . . . . . . . . . . . 16 5.2 Indemnification of Limited Partners. . . . . . . . . . . . . . . 18 5.3 Notice of Claims . . . . . . . . . . . . . . . . . . . . . . . . 18 5.4 Third Party Claims . . . . . . . . . . . . . . . . . . . . . . . 18 5.5 Indemnification Pursuant to Formation Agreement. . . . . . . . . 19 ARTICLE 6 Allocations, Distributions and Other Tax and Accounting Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 6.1 Allocations. . . . . . . . . . . . . . . . . . . . . . . . . . . 20 6.2 Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.3 Books of Account . . . . . . . . . . . . . . . . . . . . . . . . 24 6.4 Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.5 Tax Elections and Returns. . . . . . . . . . . . . . . . . . . . 24 6.6 Tax Matters Partner. . . . . . . . . . . . . . . . . . . . . . . 25 -i- PAGE 6.7 Withholding Payments Required By Law . . . . . . . . . . . . . . 25 ARTICLE 7 Rights, Duties and Restrictions of the General Partner . . . . . 27 7.1 Powers and Duties of General Partner . . . . . . . . . . . . . . 27 7.2 [Intentionally Left Blank] . . . . . . . . . . . . . . . . . . . 30 7.3 Reimbursement of the General Partner . . . . . . . . . . . . . . 30 7.4 Outside Activities of the General Partner. . . . . . . . . . . . 30 7.5 Contracts with Affiliates. . . . . . . . . . . . . . . . . . . . 31 7.6 Title to Partnership Assets. . . . . . . . . . . . . . . . . . . 31 7.7 Reliance by Third Parties. . . . . . . . . . . . . . . . . . . . 31 7.8 Liability of the General Partner . . . . . . . . . . . . . . . . 32 7.9 Other Matters Concerning the General Partner . . . . . . . . . . 32 7.10 Operation in Accordance with REIT Requirements . . . . . . . . . 33 ARTICLE 8 Dissolution, Liquidation and Winding-Up. . . . . . . . . . . . . 33 8.1 Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.2 Distribution on Dissolution. . . . . . . . . . . . . . . . . . . 34 8.3 Documentation of Liquidation . . . . . . . . . . . . . . . . . . 34 ARTICLE 9 Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.1 General Partner. . . . . . . . . . . . . . . . . . . . . . . . . 35 9.2 Transfers by Limited Partners. . . . . . . . . . . . . . . . . . 36 9.3 Certain Restrictions on Transfer . . . . . . . . . . . . . . . . 37 9.4 Effective Dates of Transfers . . . . . . . . . . . . . . . . . . 38 9.5 Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 ARTICLE 10 Rights and Obligations of the Limited Partners . . . . . . . . . 39 10.1 No Participation in Management . . . . . . . . . . . . . . . . . 39 10.2 Bankruptcy of a Limited Partner. . . . . . . . . . . . . . . . . 39 10.3 No Withdrawal. . . . . . . . . . . . . . . . . . . . . . . . . . 39 10.4 Conflicts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 10.5 Provision of Information . . . . . . . . . . . . . . . . . . . . 40 10.6 Limited Partner Representative . . . . . . . . . . . . . . . . . 41 10.7 Power of Attorney. . . . . . . . . . . . . . . . . . . . . . . . 41 10.8 Ownership of Paired Shares . . . . . . . . . . . . . . . . . . . 42 10.9 Waiver of Fiduciary Duty . . . . . . . . . . . . . . . . . . . . 42 -ii- PAGE ARTICLE 11 Amendment of Partnership Agreement, Meetings . . . . . . . . . . 43 11.1 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 11.2 Meetings of the Partners; Notices to Partners. . . . . . . . . . 44 ARTICLE 12 General Provisions . . . . . . . . . . . . . . . . . . . . . . . 45 12.1 No Liability of Directors and Others . . . . . . . . . . . . . . 45 12.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 12.3 Controlling Law. . . . . . . . . . . . . . . . . . . . . . . . . 45 12.4 Execution of Counterparts. . . . . . . . . . . . . . . . . . . . 45 12.5 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . 46 12.6 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . 46 12.7 Paragraph Headings . . . . . . . . . . . . . . . . . . . . . . . 46 12.8 Gender, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 46 12.9 Number of Days . . . . . . . . . . . . . . . . . . . . . . . . . 46 12.10 Partners Not Agents. . . . . . . . . . . . . . . . . . . . . . . 46 12.11 Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 12.12 Waiver of Partition. . . . . . . . . . . . . . . . . . . . . . . 47 12.13 Starwood Lodging Trust . . . . . . . . . . . . . . . . . . . . . 47 -iii- LIST OF EXHIBITS EXHIBIT - ------- A List of Partners, Percentage Interests and Units B Notice Address of Partners -iv- THE LIMITED PARTNERSHIP INTERESTS REFERRED TO IN THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. REFERENCE IS MADE TO ARTICLE 9 OF THIS AGREEMENT FOR PROVISIONS RELATING TO VARIOUS RESTRICTIONS ON THE SALE OR OTHER TRANSFER OF THESE INTERESTS. AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT OF SLT REALTY LIMITED PARTNERSHIP THIS AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT (this "Agreement") is made and entered into this ____ day of __________, 1995 by and among Starwood Lodging Trust, a Maryland real estate investment trust, as general partner and the persons whose names are set forth on Exhibit A hereto, as such exhibit may be amended from time to time, as limited partners, pursuant to the provisions of the Delaware Revised Uniform Limited Partnership Act. A. Starwood Lodging Trust, Berl Holdings, L.P., Starwood-Apollo Hotel Partners VIII, L.P., Starwood-Apollo Hotel Partners IX, L.P., Starwood- Nomura Hotel Investors, L.P., Starwood/Wichita Investors, L.P., Starwood- Huntington Partners, L.P., and Woodstar Partners I, L.P., were the parties to that certain Limited Partnership Agreement of SLT Realty Limited Partnership, dated as of December 15, 1994 (the "Original Agreement"). B. Starwood Lodging Trust was formerly named "Hotel Investors Trust" and has changed its name to "Starwood Lodging Trust" and Starwood Lodging Corporation was formerly named "Hotel Investors Corporation" and has changed its name to Starwood Lodging Corporation". C. Firebird Consolidated Partners, L.P., was admitted as a limited partner of the Partnership pursuant to that certain Admission of Limited Partner, Consent and Amendment dated March 24, 1995 (the "Amendment"). D. On June 19, 1995, Starwood Lodging Trust effected a six-to-one reverse split of its outstanding shares. E. The parties hereto have agreed to amend and restate the Original Agreement, as amended by the Amendment, in its entirety to reflect the foregoing and to make other necessary or appropriate changes to the Original Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: ARTICLE 1 DEFINITIONS 1.1 DEFINITIONS. Except as otherwise herein expressly provided, the following terms and phrases shall have the meanings as set forth below: "ACCOUNTANTS" shall mean the national firm or firms of independent certified public accountants selected by the General Partner on behalf of the Partnership to audit the books and records of the Partnership and to prepare statements and reports in connection therewith. "ACT" shall mean the Delaware Revised Uniform Limited Partnership Act, as the same may hereafter be amended from time to time. "ADJUSTED CAPITAL ACCOUNT DEFICIT" shall mean, with respect to any Partner or holder of Units other than the General Partner, the deficit balance, if any, in such holder's Capital Account as of the end of any relevant fiscal year and after giving effect to the following adjustments: (a) credit to such Capital Account any amounts which such holder is obligated or treated as obligated to restore with respect to any deficit balance in such Capital Account pursuant to Section 1.704-1(b)(2)(ii)(c) of the Regulations, or is deemed to be obligated to restore with respect to any deficit balance pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations; and (b) debit to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Regulations. The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the requirements of the alternate test for economic effect contained in Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith. "ADMINISTRATIVE EXPENSES" shall mean: (a) all administrative and operating costs and expenses of the Partnership; (b) those administrative costs and expenses of the General Partner, including, but not limited to, salaries and other renumerations paid to -2- trustees, officers and employees of the General Partner and accounting and legal expenses undertaken by the General Partner on behalf or for the benefit of the Partnership; and (c) to the extent not included in clause (b) above, REIT Expenses. "AFFECTED GAIN" shall have the meaning set forth in Section 6.1(c)(ii) hereof. "AFFILIATE" shall mean, with respect to any Partner (or as to any other Person the Affiliates of whom are relevant for purposes of any of the provisions of this Agreement): (a) any member of the Immediate Family of such Partner or Person; (b) any trustee or beneficiary of a Partner which is a trust; (c) any trust for the benefit of any Person referred to in the preceding clauses (a) and (b); or (d) any Entity which directly or indirectly through one or more intermediaries, Controls, is Controlled by, or is under common Control with, any Partner or Person referred to in the preceding clauses (a) through (c). "AGREEMENT" shall mean this Limited Partnership Agreement, as amended, modified, supplemented or restated from time to time, as the context requires. "AMENDMENT" shall have the meaning set forth in Recital C hereof. "AUDITED FINANCIAL STATEMENTS" shall mean financial statements (balance sheet, statement of income, statement of partners equity and statement of cash flows) prepared in accordance with GAAP and accompanied by an independent auditor's report containing an opinion thereon. "BANKRUPTCY" shall mean, with respect to any Person: (a) the commencement by such Person of any petition, case or proceeding seeking relief under any provision or chapter of the federal Bankruptcy Code or any other federal or state law relating to insolvency, bankruptcy or reorganization; (b) an adjudication that such Person is insolvent or bankrupt; (c) the entry of an order for relief under the federal Bankruptcy Code with respect to such Person; (d) the filing of any such petition or the commencement of any such case or proceeding against such Person, unless such petition and the case or proceeding initiated thereby are dismissed within ninety (90) days from the date of such filing; or (e) the filing of an answer by such Person admitting the allegations of any such petition. "BUSINESS DAY" shall mean any day that is not a Saturday, Sunday or a day on which banking institutions in the State of California or the State of New York are authorized or obligated by law or executive order to close. "CAPITAL ACCOUNT" shall mean, as to any Partner or holder of Units, a book account maintained in accordance with the following provisions: (a) to each Partner's or holder of Unit's Capital Account there shall be credited the amount of cash contributed by the Partner or holder, the initial Gross Asset value of any other asset contributed by such Partner or holder to the capital of the -3- Partnership (net of liabilities secured by contributed property that the Partnership assumes or takes subject to), such Partner's or holder's distributive share of Net Income and any other items of income or gain allocated to such Partner or holder, the amount of any Partnership liabilities assumed by the Partner or holder or secured by distributed assets that such Partner or holder takes subject to and any other items in the nature of income or gain that are allocated to such Partner or holder pursuant to Section 6.1 hereof; and (b) to each Partner's or holder of Unit's Capital Account there shall be debited the amount of cash distributed to the Partner or holder, the Gross Asset Value of any Partnership asset distributed to such Partner or holder pursuant to any provision of this Agreement, such Partner's or holder's distributive share of Net Losses and any other items in the nature of expenses or losses that are allocated to such Partner pursuant to Section 6.1 hereof. In the event that a Partner's Partnership Interest or a holder of Unit's Units or portion thereof is transferred within the meaning of Section 1.704- 1(b)(2)(iv)(f) of the Regulations, the transferee shall succeed to the Capital Account of the transferor to the extent that it relates to the Partnership Interest, Units or portion thereof so transferred. In the event that the Gross Asset Values of Partnership assets are adjusted, as contemplated in paragraph (b) or (c) of the definition of "Gross Asset Value," the Capital Accounts of the Partners and holders of Units shall be adjusted to reflect the aggregate net adjustments as if the Partnership sold all of its properties for their fair market values and recognized gain or loss for federal income tax purposes equal to the amount of such aggregate net adjustment. This definition of Capital Accounts is intended to comply with the maintenance of capital account provisions of Section 1.704-1(b) of the Regulations and shall be interpreted and applied in a manner consistent therewith. "CAPITAL CONTRIBUTION" shall mean, with respect to any Partner, the amount of cash and the initial Gross Asset Value of any Contributed Property (net of liabilities to which such property is subject). "CERTIFICATE" shall mean the Certificate of Limited Partnership establishing the Partnership, as filed with the office of the Delaware Secretary of State, as amended from time to time in accordance with the terms of this Agreement and the Act. "CODE" shall mean the Internal Revenue Code of 1986, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of future law. "CONSENT OF THE LIMITED PARTNERS" shall mean the written consent of a Majority-In-Interest of the Limited Partners given in accordance with Section 11.2 hereof, which consent shall be obtained prior to the taking of any action for which it is required by this Agreement and may be given or withheld by a Majority-In-Interest of the Limited Partners, unless otherwise expressly provided herein, in their sole and absolute discretion. -4- "CONTRIBUTED PROPERTY" shall mean any property or other asset in such form as may be permitted by the Act, but excluding cash, contributed or deemed contributed to the Partnership with respect to the Partnership Interest held by each Partner. "CONTROL" shall mean the ability, whether by the direct or indirect ownership of shares or other equity interests, by contract or otherwise, to elect a majority of the directors of a corporation, to select the managing partner of a partnership, or otherwise to select, or have the power to remove and then select, a majority of those persons exercising governing authority over an Entity. In the case of a limited partnership, the sole general partner, all of the general partners to the extent each has equal management control and authority, or the managing general partner or managing general partners thereof shall be deemed to have control of such partnership and, in the case of a trust, any trustee thereof or any Person having the right to select any such trustee shall be deemed to have control of such trust. "DECLARATION OF TRUST" shall mean the Declaration of Trust of the General Partner dated August 25, 1969, as amended and restated as of June 6, 1988, and as further amended as of February 1, 1995, as the same may be amended, modified, supplemented, restated or superseded from time to time. "DEPRECIATION" shall mean, with respect to any asset of the Partnership for any fiscal year or other period, the depreciation or amortization, as the case may be, allowed or allowable for federal income tax purposes in respect of such asset for such fiscal year or other period, except that if the Gross Asset Value of an asset differs from its adjusted tax basis for federal income tax purposes at the beginning of such fiscal year or other period, Depreciation shall be an amount that bears the same ratio to such beginning book value as the federal income tax depreciation, amortization or other cost recovery deduction for such fiscal year or other period bears to such beginning adjusted tax basis and if such adjusted tax basis is zero, the Depreciation shall be based on the method of depreciation, amortization or other cost recovery deduction utilized in preparing the financial statements of the Partnership. "ENTITY" shall mean any general partnership, limited partnership, limited liability company, corporation, joint venture, trust, business trust, real estate investment trust or association. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time and as interpreted by the applicable regulations thereunder (or any corresponding provisions of succeeding laws and regulations). "EXCHANGE RIGHTS AGREEMENT" shall mean that certain Exchange Rights Agreement by and among Starwood Lodging Trust, Starwood Lodging Corporation and Starwood Capital Group, L.P., and dated as of December 15, 1994. "FORMATION AGREEMENT" shall mean that certain Formation Agreement by and among Starwood Lodging Trust, Starwood Lodging Corporation, Starwood Capital -5- Group, L.P., Berl Holdings, L.P., Woodstar Partners I, L.P., Starwood-Apollo Hotel Partners VIII, L.P., Starwood-Apollo Hotel Partners IX, L.P., Starwood- Nomura Hotel Investors, L.P., Starwood/Wichita Investors, L.P., and Starwood- Huntington Partners, L.P., and dated as of November 11, 1994, and any amendments or modifications thereof or side letters thereto. "GAAP" shall mean generally accepted accounting principles in effect from time to time. "GENERAL PARTNER" shall mean Starwood Lodging Trust, a Maryland real estate investment trust, its duly admitted successors and assigns and any other Person who is a general partner of the Partnership at the time of reference thereto. "GROSS ASSET VALUE" shall mean, with respect to any asset of the Partnership, such asset's adjusted basis for federal income tax purposes, except as follows: (a) the initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset at the time of its contribution as reasonably determined by the General Partner and the contributing Partner; (b) the Gross Asset values of all Partnership assets shall be adjusted to equal their respective gross fair market values, as reasonably determined by the General Partner, immediately prior to the following events: (i) a Capital Contribution (other than a DE MINIMIS Capital Contribution) to the Partnership by a new or existing Partner as consideration for a Partnership Interest; (ii) the distribution by the Partnership to a Partner of more than a DE MINIMIS amount of Partnership property as consideration for the redemption of a Partnership Interest; (iii) the liquidation of the Partnership within the meaning of Section 1.704-1(b)(2)(ii)(g) of the Regulations; and (iv) any other event as to which the General Partner reasonably determines that an adjustment is necessary or appropriate to reflect the relative economic interests of the Partners; (c) the Gross Asset Values of Partnership assets distributed to any Partner shall be the gross fair market values of such assets as reasonably determined by the General Partner as of the date of distribution; and (d) the Gross Asset Values of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets -6- pursuant to Sections 734(b) or 743(b) of the Code, but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Section 1.704-1(b)(2)(iv)(m) of the Regulations; PROVIDED, HOWEVER, that Gross Asset Values shall not be adjusted pursuant to this paragraph to the extent that the General Partner reasonably determines that an adjustment pursuant to paragraph (b) above is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this paragraph (d). At all times, Gross Asset Values shall be adjusted by any Depreciation taken into account with respect to the Partnership's assets for purposes of computing Net Income and Net Loss. Any adjustment to the Gross Asset Values of Partnership property shall require an adjustment to the Partner's Capital Accounts. "IMMEDIATE FAMILY" shall mean, with respect to any Person, such Person's spouse (then current or former), parents, parents-in-law, descendants, brothers and sisters (whether by whole or half-blood), first cousins, brothers-in-law and sisters-in-law (whether by whole or half-blood), ancestors and lineal descendants. "INDEMNITEE" shall mean any Person who is, or at any time on or after December 15, 1994 was, a (i) General Partner or (ii) employee, trustee, director, officer, stockholder or Liquidating Trustee of the Partnership or the General Partner. "LIEN" shall mean any liens, security interests, mortgages, deeds of trust, pledges, options, rights of first offer or first refusal and any other similar encumbrances of any nature whatsoever. "LIMITED PARTNER REPRESENTATIVE" shall have the meaning set forth in Section 10.6 hereof. "LIMITED PARTNERS" shall mean those Persons listed under the heading "Limited Partners" on the signature page hereto in their respective capacities as limited partners of the Partnership, their permitted successors or assigns as limited partners hereof, and any Person who, at the time of reference thereto, is a limited partner of the Partnership. "LIQUIDATING TRUSTEE" shall mean such individual or Entity which is selected as the Liquidating Trustee hereunder by the General Partner, which individual or Entity may include the General Partner or an Affiliate of the General Partner, provided that such Liquidating Trustee agrees in writing to be bound by the terms of this Agreement. The Liquidating Trustee shall be empowered to give and receive notices, reports and payments in connection with the dissolution, liquidation and/or winding up of the Partnership and shall hold and exercise such other rights and powers granted to the General Partner herein or under the Act as are necessary or required to conduct the winding-up and liquidation of the Partnership's affairs and to authorize all parties to deal with the Liquidating Trustee in connection with the dissolution, liquidation and/or winding-up of the Partnership. -7- "MAJORITY-IN-INTEREST OF THE LIMITED PARTNERS" shall mean Limited Partner(s) who hold in the aggregate more than fifty (50) percent of the Percentage Interests then allocable to and held by the Limited Partners, as a class (but excluding any Partnership Interests acquired by the General Partner or any Person controlled by the General Partner, or any Person holding as a nominee of the General Partner or any Person controlled by the General Partner). "MINIMUM GAIN ATTRIBUTABLE TO PARTNER NONRECOURSE DEBT" shall mean "partner nonrecourse debt minimum gain" as determined in accordance with Section 1.704-2(i)(2) of the Regulations. "NET CASH FLOW" shall mean, with respect to any fiscal period of the Partnership, the excess, if any, of "Receipts" over "Expenditures." For purposes hereof, the term "Receipts" means the sum of all cash receipts of the Partnership from all sources for such period and any amounts held as reserves as of the last day of such period which the General Partner reasonably deems to be in excess of reserves as determined below. The term "Expenditures" means the sum of (a) all cash expenditures of the Partnership for any purpose, including operating expenses and capital expenditures, for such period, (b) the amount of all payments of principal, premium, if any, and interest on account of any indebtedness of the Partnership, and (c) such additions to cash reserves as of the last day of such period as the General Partner deems necessary or appropriate for any capital, operating or other expenditure, including, without limitation, contingent liabilities; but the term "Expenditures" shall not include amounts paid from cash reserves previously established by the Partnership. "NET INCOME" or "NET LOSS" shall mean, for each fiscal year or other applicable period, an amount equal to the Partnerships's net income or loss for such year or period as determined for federal income tax purposes by the Accountants, determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a) of the Code shall be included in taxable income or loss), with the following adjustments: (a) by including as an item of gross income any tax-exempt income received by the Partnership; (b) by treating as a deductible expense any expenditure of the Partnership described in Section 705(a)(2)(B) of the Code (including amounts paid or incurred to organize the Partnership (unless an election is made pursuant to Section 709(b) of the Code) or to promote the sale of interests in the Partnership and by treating deductions for any losses incurred in connection with the sale or exchange of Partnership property disallowed pursuant to Section 267(a)(1) or Section 707(b) of the Code as expenditures described in Section 705(a)(2)(B) of the Code); (c) in lieu of depreciation, depletion, amortization and other cost recovery deductions taken into account in computing total income or loss, there shall be taken into account Depreciation; (d) gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of such property rather than its adjusted tax basis; (e) in the event of an adjustment of the Gross Asset Value of any Partnership asset which requires that the Capital Accounts of the Partnership be adjusted pursuant to Sections 1.704-1(b)(2)(iv)(e), (f) and (m) -8- of the Regulations, the amount of such adjustment is to be taken into account as additional Net Income or Net Loss pursuant to Section 6.1 hereof; and (f) excluding any items specially allocated pursuant to Section 6.1(b) hereof. "NONRECOURSE DEDUCTIONS" shall have the meaning set forth in Sections 1.704-2(b)(1) and (c) of the Regulations and shall be determined in accordance with Section 1.704-2(c) of the Regulations. "NONRECOURSE LIABILITIES" shall have the meaning set forth in Section 1.704-2(b)(3) of the Regulations. "OPERATING PARTNERSHIP" shall mean SLC Operating Limited Partnership, a Delaware limited partnership. "ORIGINAL AGREEMENT" shall have the meaning set forth in Recital A hereof. "PAIRED SHARES" shall mean one Share and one share common stock of SLC that are subject to a pairing agreement between the General Partner and SLC. "PARTNER NONRECOURSE DEBT" shall have the meaning set forth in Section 1.704-2(b)(4) of the Regulations. "PARTNER NONRECOURSE DEDUCTIONS" shall have the meaning set forth in Section 1.704-2(i)(2) of the Regulations and the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt shall be determined in accordance with the rules of Section 1.704-2(i) of the Regulations. "PARTNERS" shall mean the General Partner and the Limited Partners, their duly admitted successors or assigns or any Person who is a partner of the Partnership at the time of reference thereto. "PARTNERSHIP" shall mean the limited partnership formed under the Act pursuant to the Original Agreement and as continued pursuant to this Agreement and any successor thereto. "PARTNERSHIP INTEREST" shall mean the ownership interest of a Partner in the Partnership from time to time, including each Partner's Percentage Interest and such Partner's Units. "PARTNERSHIP MINIMUM GAIN" shall have the meaning set forth in Section 1.704-2(b)(2) of the Regulations and the amount of Partnership Minimum Gain (and any net increase or decrease thereof) for a fiscal year or other period shall be determined in accordance with the rules of Section 1.704-2(d) of the Regulations. -9- "PARTNERSHIP RECORD DATE" means the record date established by the General Partner for distribution of Net Cash Flow pursuant to Section 6.2 hereof, which record date shall be the same as the record date established by the General Partner for distribution to its shareholders of some or all of its portion of such distribution. "PERCENTAGE INTEREST" shall mean, with respect to any Partner, the percentage ownership interest of such Partner in such items of the Partnership as to which the term "Percentage Interests" is applied in this Agreement, as provided in Section 4.2 hereof. "PERSON" shall mean any natural person or Entity. "PROPERTY" shall mean any property acquired by or contributed to the Partnership or any property owned by an Entity in which the Partnership has an ownership interest. "PURCHASE RIGHTS" shall have the meaning set forth in Section 4.3 hereof. "REGISTRATION RIGHTS AGREEMENT" shall mean that certain Registration Rights Agreement by and among Starwood Lodging Trust, Starwood Lodging Corporation and Starwood Capital Group, L.P., and dated as of December 15, 1994. No provision of this Agreement shall be interpreted as granting any Partner or holder of Units registration rights or any rights or interest in or to the Registration Rights Agreement. "REGULATIONS" shall mean the income tax regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "REGULATORY ALLOCATIONS" shall have the meaning set forth in Section 6.1(b)(viii) hereof. "REIT" shall mean a real estate investment trust as defined in Section 856 of the Code. "REIT EXPENSES" shall mean all expenses which the Partnership hereby assumes and agrees to pay as incurred for the benefit of the Partnership, including (a) costs and expenses relating to the formation and continuation of the Partnership and continuity of existence of the General Partner, including taxes (other than the General Partner's federal and state income and franchise taxes, if any), fees and assessments associated therewith, any and all costs, expenses or fees payable to any director or trustee of the General Partner, (b) to the extent funded by the General Partner for payment by the Partnership, costs and expenses relating to any offer or registration of securities by the General Partner the net proceeds of which are to be contributed or loaned to the Partnership and all statements, reports, fees and expenses incidental thereto, including underwriting discounts and selling -10- commissions applicable to any such offer of securities, (c) costs and expenses associated with the preparation and filing of any periodic reports by the General Partner under federal, state or local laws or regulations, including filings with the SEC, (d) costs and expenses associated with compliance by the General Partner with laws, rules and regulations promulgated by any regulatory body, including the SEC, (e) costs and expenses incurred, directly or indirectly, by the General Partner pursuant to a settlement or other agreement between Leonard M. Ross and SCG and (f) all other costs of the General Partner incurred in the course of its business on behalf of the Partnership including, but not limited to, any indemnification obligations of the General Partner (other than indemnification obligations pursuant to Sections 9.1 and 9.2 of the Formation Agreement). "REIT REQUIREMENTS" shall mean the requirements for the General Partner to: (a) qualify as a REIT under the Code and Regulations; (b) avoid any federal income or excise tax liability; (c) retain its status as grandfathered pursuant to Section 132(c)(3) of the Deficit Reduction Act of 1984; and (d) retain the benefits of that certain private letter ruling issued by the Internal Revenue Service to the General Partner dated as of January 4, 1980. "REIT Requirements" shall also include the ownership limitation provisions set forth in Article VI of the Declaration of Trust. "RESTRICTED ENTITY" shall mean any "employee benefit plan" as defined in and subject to ERISA, any "plan" as defined in and subject to Section 4975 of the Code, or any entity any portion or all of the assets of which are deemed pursuant to United States Department of Labor Regulation Section 2510.3- 101 or otherwise pursuant to ERISA or the Code to be, for any purpose of ERISA or Section 4975 of the Code, assets of any such "employee benefit plan" or "plan" which invests in such entity. "RIGHTS" shall mean the rights of Limited Partners set forth in the Exchange Rights Agreement or the Registration Rights Agreement. No provision of this Agreement shall be interpreted as granting any Partner or holder of Units any Rights or any rights or interest in or to the Exchange Rights Agreement or the Registration Rights Agreement. "SCG" shall mean Starwood Capital Group, L.P., a Delaware limited partnership. "SEC" shall mean the United States Securities and Exchange Commission. "SECTION 704(c) TAX ITEMS" shall have the meaning set forth in Section 6.1(c)(iii) hereof. "SENIOR DEBT" shall mean the indebtedness issued pursuant to that certain Credit Agreement among Starwood Lodging Trust and certain institutional lenders, dated as of January 28, 1993, which indebtedness has been assumed by the Partnership as such indebtedness may be amended, modified or refinanced from time to time. -11- "SHARES" shall mean the common shares of beneficial interest, par value $0.01 per share, of the General Partner. "SLC" shall mean Starwood Lodging Corporation, a Maryland corporation. "TAX ITEMS" shall have the meaning set forth in Section 6.1(c)(i) hereof. "TAX PAYMENT LOAN" shall have the meaning set forth in Section 6.7(a) hereof. "UNITS" shall have the meaning set forth in Section 4.1(c) hereof. "WITHHOLDING TAX ACT" shall have the meaning set forth in Section 6.7(a) hereof. ARTICLE 2 CONTINUATION AND BUSINESS OF THE PARTNERSHIP 2.1 CONTINUATION. The parties hereto do hereby continue the limited partnership formed pursuant to the Original Agreement and pursuant to the provisions of the Act and upon the terms and conditions set forth herein. The parties hereto agree that the rights and liabilities of the Partners shall be as provided herein. The parties hereto shall immediately execute and deliver all certificates and other documents and do all filings, recording and publishing and other acts as in the judgment of the General Partner may be appropriate to comply with all of the requirements for the continuation of the Partnership as a limited partnership under the Act and the qualification of the Partnership in any jurisdiction in which the Partnership owns property or conducts business. 2.2 NAME. The name of the Partnership shall be SLT Realty Limited Partnership, or such other name as shall be chosen from time to time by the General Partner in its sole and absolute discretion; PROVIDED, HOWEVER, that the General Partner may not choose the name (or any derivative thereof) of any Limited Partner without the prior written consent of such Limited Partner. 2.3 CHARACTER OF THE BUSINESS. The purpose of the Partnership shall be to acquire, hold, own, develop, redevelop, construct, improve, maintain, operate, manage, sell, lease, rent, transfer, encumber, mortgage, convey, exchange and otherwise dispose of or deal with the Properties and any other real and personal property of all kinds; to undertake such other activities as may be necessary, desirable or appropriate to the business of the Partnership; to engage in such other activities as shall be necessary, desirable or appropriate to effectuate the foregoing purposes; and to otherwise engage in any enterprise or business in -12- which a limited partnership may engage or conduct under the Act. The Partnership shall have all powers necessary, desirable or appropriate to accomplish the purposes enumerated. In connection with the foregoing, but subject to the terms and conditions of this Agreement, the Partnership shall have full power and authority to enter into, perform and carry out contracts of any kind, to borrow money and to issue evidences of indebtedness, whether or not secured by Liens, and, directly or indirectly, to acquire and construct additional Properties necessary or useful in connection with its business. 2.4 LOCATION OF PRINCIPAL PLACE OF BUSINESS. The location of the principal place of business of the Partnership shall be at 11845 West Olympic Boulevard, Suite 550, Los Angeles, California 90064, or such other location as shall be selected from time to time by the General Partner in its sole and absolute discretion; PROVIDED, HOWEVER, that the General Partner shall notify the Limited Partners of any change in the location of the principal place of business of the Partnership within thirty (30) days thereafter. 2.5 REGISTERED AGENT AND REGISTERED OFFICE. The registered agent of the Partnership shall be The Corporation Trust Company or such other Person as the General Partner may select in its sole and absolute discretion. The registered office of the Partnership in the State of Delaware shall be c/o The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801 or such other location as the General Partner may from time to time select in its sole discretion; PROVIDED, HOWEVER, that the General Partner shall notify the Limited Partners of any change in the registered office or registered agent of the Partnership within thirty (30) days thereafter. 2.6 RESTATEMENT OF AGREEMENT. This Agreement amended and restates the Original Agreement and the Amendment in their entirety effective as of the date first above written and, effective as of such date, the Original Agreement and the Amendment shall be of no further force or effect. ARTICLE 3 TERM 3.1 COMMENCEMENT. The Partnership's term commenced upon the filing of the Certificate with the Secretary of State of Delaware on December 15, 1994. 3.2 DISSOLUTION. The Partnership shall continue until dissolved and terminated upon the occurrence of the earliest of the following events: (a) the death, dissolution, termination, withdrawal, retirement, expulsion or Bankruptcy of a General Partner, unless the Partnership's business is continued as provided in Section 9.1 hereof; -13- (b) the election to dissolve the Partnership made in writing by the General Partner; (c) the sale or other disposition of all or substantially all of the assets of the Partnership unless the General Partner elects to continue the Partnership business for the purpose of the receipt and the collection of indebtedness or the collection of any other consideration to be received in exchange for the assets of the Partnership (which activities shall be deemed to be part of the winding up of the affairs of the Partnership); (d) the entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Act, which decree is final and not subject to appeal; or (e) December 31, 2094. ARTICLE 4 CAPITAL CONTRIBUTIONS 4.1 CAPITAL CONTRIBUTIONS; UNITS. (a) As of the date first above written, the Partners have the Percentage Interests in the Partnership as set forth in Exhibit A which Percentage Interests shall be adjusted to the extent necessary to reflect properly exchanges, redemptions or conversions of Partnership Interests, Capital Contributions, the issuance of additional Partnership Interests or any other event having an effect on a Partner's Percentage Interest, in each case to the extent permitted by and in accordance with this Agreement. Except to the extent specifically set forth in this Agreement with respect to the General Partner, the Partners shall have no obligation to make any additional Capital Contributions or loans to the Partnership, even if the failure to do so could result in the Bankruptcy or insolvency of the Partnership or any other adverse consequence to the Partnership. (b) The General Partner shall, from time to time, contribute cash or Property to the Partnership such that the General Partner's Percentage Interest shall at all times be at least one (1) percent and the General Partner's Capital Account balance shall be at least the lesser of $500,000 or one (1) percent of the total positive Capital Account balances for the Partnership. (c) The interest of a Partner (or an assignee of a Partner) in capital, allocations of Net Income, Net Losses and distributions shall be evidenced by the issuance to such Partner (or assignee) of one or more "Units." The aggregate total of all Units outstanding and the ownership of Units by each Partner, as of the date of this Agreement, are as set forth on Exhibit A hereto. -14- (d) From time to time, the General Partner may cause the Partnership to issue additional Partnership Interests to existing or newly- admitted Partners in exchange for additional Capital Contributions (including Capital Contributions pursuant to Section 4.1(b)). If the General Partner contributes to the Partnership the net proceeds to the General Partner from any offering or sale of Paired Shares (including, without limitation, any issuance of Paired Shares pursuant to the exercise of options, warrants, convertible securities, or similar rights to acquire Paired Shares), the Partnership shall issue to the General Partner Units equal in number to the number of Paired Shares issued in such offering. (e) The General Partner is hereby authorized to cause the Partnership to issue Partnership Interests in one or more classes or one or more series of any of such classes, with such designations, preferences and relative, participating, optional or other special rights, powers and duties, including rights, powers and duties senior to the then-existing Partnership Interests and Units, as shall be determined by the General Partner in its sole and absolute discretion, including (i) the allocation of items of Partnership income, gain, loss, deduction and credit to each such class or series of Partnership Interests and (ii) the rights of each such class or series of Partnership Interests to share in Partnership distributions (including liquidating distributions); PROVIDED, HOWEVER, that no such additional Partnership Interests shall be issued to the General Partner unless (x) the additional Partnership Interests are issued in connection with an issuance of shares of the General Partner, which shares have designations, preferences and other rights, all such that the economic interests of such shares are substantially similar to the designations, preferences and other rights of the additional Partnership Interests issued to the General Partner in accordance with this Section 4.1(e) and (y) the General Partner contributes to the Partnership an amount equal to the net proceeds received by the General Partners in connection with the issuance of such shares. (f) In the event of any change in the outstanding number of Paired Shares by reason of any share dividend, split, reverse split, recapitalization, merger, consolidation or combination, the number of Units held by each Partner (or assignee) shall be proportionately adjusted such that, to the extent possible, one Unit remains the equivalent of one Share without dilution. It is the intent of the Partners that, to the extent possible, the number of Units held by the General Partner shall at all times equal the number of issued and outstanding Shares. (g) No fractional Units shall remain outstanding. In lieu of issuing a fractional Unit to a holder of Units, the number of Units to be held by such holder shall be rounded to the nearest whole Unit. 4.2 PERCENTAGE INTERESTS. The Percentage Interest of a Partner shall be equal to the percentage obtained by dividing (a) the number of Units held by such Partner (including Units held by assignees of such Partner who have not been admitted as Partners) by (b) the total number of issued and outstanding Units. -15- 4.3 PURCHASE RIGHTS. If the General Partner grants, issues or sells any options, convertible securities or rights to purchase shares, warrants, or other property PRO RATA to the record holders of Shares (collectively, "PURCHASE RIGHTS"), then the Partners shall, to the extent practicable and consistent with the other provisions of this Agreement, be entitled to acquire from the Partnership interests in the Partnership that are substantially similar in amount, tone and tenor to the Purchase Rights to which such Partners would be entitled if such Partners had converted their Partnership Interests into Paired Shares immediately prior to the grant, issue or sale of the Purchase Rights. 4.4 REDEMPTION. If the General Partner shall redeem any of its outstanding Shares (including the issuance of cash in lieu of fractional Shares), the Partnership shall concurrently therewith redeem an equal number of Units held by the General Partner for the same price as paid by the General Partner for the redemption of such Shares. Similar redemptions of interests of the General Partner in the Partnership shall occur if any other outstanding securities of the General Partner are redeemed or otherwise retired. 4.5 NO THIRD PARTY BENEFICIARIES. No creditor or other third party shall have the right to enforce any right or obligation of any Partner to make Capital Contributions or loans or to pursue any other right or remedy hereunder or at law or in equity, it being understood and agreed that the provisions of this Agreement shall be solely for the benefit of, and may be enforced solely by, the parties hereto and their respective successors and assigns. None of the rights or obligations of the Partners herein set forth to make Capital Contributions or loans to the Partnership shall be deemed an asset of the Partnership for any purpose by any creditor or other third party, nor may such rights or obligations be sold, transferred or assigned by the Partnership or pledged or encumbered by the Partnership to secure any debt or other obligation of the Partnership or of any of the Partners. 4.6 NO INTEREST ON OR RETURN OF CAPITAL CONTRIBUTION. No Partner shall be entitled to interest on its Capital Contribution or Capital Account. Except as provided herein or by law, no Partner shall have any right to demand or receive the return of its Capital Contribution. ARTICLE 5 INDEMNIFICATION 5.1 INDEMNIFICATION OF GENERAL PARTNER. (a) To the fullest extent permitted by law, the Partnership shall and does hereby indemnify an Indemnitee from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including reasonable legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings (including arbitration and mediation proceedings), civil, criminal, administrative or investigative, that relate, directly or indirectly, to the formation, -16- business or operations of the Partnership in which any Indemnitee may be involved, or is threatened to be involved, as a party, witness or otherwise, by reason of the fact that such Person was an Indemnitee, whether or not the same shall proceed to judgment or be settled or otherwise be brought to a conclusion, except only if and to the extent that it is finally adjudicated that the act or omission of the Indemnitee was material to the matter giving rise to the proceeding and was committed with fraud, gross negligence or willful misconduct. The termination of any proceeding by judgment, order or settlement does not create a presumption that the Indemnitee did not meet the requisite standard of conduct set forth in this Section 5.1(a). Any indemnification pursuant to this Section 5.1 shall be made only out of the assets of the Partnership and no Partner shall have any personal liability therefor. The provisions of this Section 5.1 are for the benefit of the Indemnitees, their heirs, successors, assigns, personal representatives and administrators, and shall not be deemed to create any rights for the benefit of any other Persons. The foregoing notwithstanding, the General Partner shall not be entitled to indemnification from the Partnership with respect to matters provided for in Sections 9.1 and 9.2 of the Formation Agreement. (b) Reasonable expenses incurred by an Indemnitee who is a party or witness in a proceeding shall be paid or reimbursed by the Partnership in advance of the final disposition of the proceeding upon receipt by the Partnership of (i) a written affirmation by the Indemnitee of the Indemnitee's good faith belief that the standard of conduct necessary for indemnification by the Partnership, as authorized in this Section 5.1, has been met, and (ii) a written undertaking by or on behalf of the Indemnitee to repay the amount paid or reimbursed if it shall ultimately be determined that such Indemnitee is not entitled to be indemnified hereunder. (c) The indemnification provided by this Section 5.1 shall be in addition to any other rights to which an Indemnitee may be entitled under any agreement, as a matter of law or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity. The Partnership shall purchase and maintain insurance, on behalf of the Indemnitees, against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership's activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement. An Indemnitee shall not be denied indemnification in whole or in part under this Section 5.1 solely because the Indemnitee had an interest in the transaction with respect to which the indemnification applies. (d) For purposes of this Section 5.1, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services by, it to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute fines within the meaning of this Section 5.1; and actions taken or omitted by the Indemnitee with respect to an employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participants and -17- beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Partnership. 5.2 INDEMNIFICATION OF LIMITED PARTNERS. From and after the date hereof, the Partnership shall indemnify and hold harmless each Limited Partner, its Affiliates, employees, officers, directors and agents against and from all liability, demands, claims, actions or causes of action, assessments, losses, fines, penalties, costs, damages and expenses (including, without limitation, reasonable attorneys' and accountants' fees and expenses) sustained or incurred by such Limited Partner or Affiliate or any assignee or successor thereof (including, without limitation, any permitted assignee of a Limited Partner under Article 9 hereof) as a result of or arising out of any action, suit or proceeding (including mediation and arbitration proceedings) (a) arising out of or relating to the operation of the Partnership's business or the Limited Partner being a Partner in the Partnership (excluding, specifically, actions, suits or proceedings arising out of actual or alleged breaches of a Partner's representations, warranties or covenants hereunder or pursuant to the Formation Agreement or arising out of acts by a Limited Partner other than in its capacity as such) and (b) naming a Limited Partner or any of its Affiliates as a party to such proceeding. Any indemnification pursuant to this Section 5.2 shall be made only out of the assets of the Partnership and no Partner shall have any personal liability therefor. The provisions of this Section 5.2 are for the benefit of the Limited Partners, their Affiliates, employees, officers, directors and agents, and shall not be deemed to create any rights for the benefit of any other Persons. 5.3 NOTICE OF CLAIMS. If any Person believes that it is entitled to indemnification under this Article 5, such Person shall so notify the Partnership promptly in writing describing such claim for indemnification, the amount thereof, if known, and the method of computation, all with reasonable particularity and containing a reference to the provisions of this Agreement in respect of which such claim shall have occurred; PROVIDED, HOWEVER, that the omission by such indemnified party to give notice as provided herein shall not relieve the Partnership of its indemnification obligation under this Article 5 except to the extent that the Partnership is materially damaged as a result of such failure to give notice. If any action at law or suit in equity is instituted by or against a third party with respect to which any of the Persons entitled to indemnification under this Article 5 intends to make a claim for indemnification under this Article 5, any such Person shall promptly notify the Partnership of such action or suit. Any Person entitled to indemnification hereunder shall use reasonable efforts to minimize the amount of any claim for indemnification hereunder. 5.4 THIRD PARTY CLAIMS. In the event of any claim for indemnification hereunder resulting from or in connection with any claim or legal proceeding by a third party, the indemnified Person shall give such notice thereof to the Partnership not later than twenty (20) business days prior to the time any response to the asserted claim is required, if possible, and in any event within fifteen (15) days following the date such indemnified Person has actual knowledge thereof; PROVIDED, HOWEVER, that the omission by such indemnified Person to give notice as provided herein shall not relieve the Partnership of its indemnification obligation under this Article 5 except to the extent that the Partnership is -18- materially damaged as a result of such failure to give notice. In the event of any such claim for indemnification resulting from or in connection with a claim or legal proceeding by a third party, the Partnership may, at its sole cost and expense, assume the defense thereof; PROVIDED, HOWEVER, that counsel for the Partnership, who shall conduct the defense of such claim or legal proceeding, shall be reasonably satisfactory to the indemnified Person; and PROVIDED, FURTHER, that if the defendants in any such actions include both the indemnified Persons and the Partnership and the indemnified Persons shall have reasonably concluded that there may be legal defenses or rights available to them which have not been waived and are in actual or potential conflict with those available to the Partnership, the indemnified Persons shall have the right to select one law firm reasonably acceptable to the Partnership to act as separate counsel, on behalf of such indemnified Persons, at the expense of the Partnership. Unless the indemnified Persons are represented by separate counsel pursuant to the second proviso of the immediately preceding sentence, if the Partnership assumes the defense of any such claim or legal proceeding, it shall not consent to entry of any judgment, or enter into any settlement, that (a) is not subject to indemnification in accordance with the provisions in this Article 5, (b) provides for injunctive or other non-monetary relief affecting the indemnified Persons or (c) does not include as an unconditional term thereof the giving by each claimant or plaintiff to such indemnified Persons of a release from all liability with respect to such claim or legal proceeding, without the prior written consent of the indemnified Persons (which consent, in the case of clauses (b) and (c), shall not be unreasonably withheld or delayed); and PROVIDED, FURTHER, that, unless the indemnified Persons are represented by separate counsel pursuant to the second proviso of the immediately preceding sentence, the indemnified Persons may, at their own expense, participate in any such proceeding with the counsel of their choice without any right of control thereof. So long as the Partnership is in good faith defending such claim or proceeding, the indemnified Persons shall not compromise or settle such claim or proceeding without the prior written consent of the Partnership, which consent shall not be unreasonably withheld or delayed. If the Partnership does not assume the defense of any such claim or litigation in accordance with the terms hereof, the indemnified Persons may defend against such claim or litigation in such manner as they may deem appropriate, including, without limitation, settling such claim or litigation (after giving prior written notice of the same to the Partnership and obtaining the prior written consent of the Partnership, which consent shall not be unreasonably withheld or delayed) on such terms as the indemnified Persons may deem appropriate, and the Partnership will promptly indemnify the indemnified Persons in accordance with the provisions of this Article 5. 5.5 INDEMNIFICATION PURSUANT TO FORMATION AGREEMENT. If any obligation pursuant to the indemnification provisions of Article IX of the Formation Agreement would otherwise require the indemnifying Person to make a cash payment to the indemnified Person then, subject to Article 9 hereof, in lieu of making all or any portion of such cash payment, the indemnifying Person may transfer Units of equivalent value to the indemnified Person. For purposes of the preceding sentence, the value of a Unit shall be treated as equal to ninety-five (95) percent of the average closing price of a Paired Share for the ten (10) trading day period commencing fifteen (15) trading days prior to the date the indemnifying Person would otherwise be required to pay cash to the indemnified Person. Indemnification through -19- the transfer of Units pursuant to this Section 5.5 may only be made if (a) indemnification through the transfer of an equal number of units of the Operating Partnership is being made pursuant to Section 5.5 of the Amended and Restated Limited Partnership Agreement of SLC Operating Limiting Partnership or (b) the indemnifying Person otherwise makes arrangements for the transfer to the indemnified Person (or its designee) of an equal number of units of the Operating Partnership. ARTICLE 6 ALLOCATIONS, DISTRIBUTIONS AND OTHER TAX AND ACCOUNTING MATTERS 6.1 ALLOCATIONS. The Net Income, Net Loss and other Partnership items shall be allocated pursuant to the provisions of this Section 6.1 hereto. (a) ALLOCATION OF NET INCOME AND NET LOSS. (i) NET INCOME. Except as otherwise provided herein, Net Income for any fiscal year or other applicable period shall be allocated in the following order and priority: (A) first, to the General Partner, until the cumulative Net Income allocated pursuant to this clause (i)(A) for the current and all prior periods equals the cumulative Net Loss allocated pursuant to the second sentence of clause (ii) hereof for all prior periods; and (B) thereafter, the balance of the Net Income, if any, shall be allocated to the holders of Units in accordance with their respective holdings of Units. (ii) NET LOSS. Except as otherwise provided herein, Net Loss of the Partnership for each fiscal year or other applicable period shall be allocated to the holders of Units in accordance with their respective holdings of Units. The preceding sentence notwithstanding, to the extent any Net Loss allocated to a holder would cause such a holder to have an Adjusted Capital Account Deficit as of the end of the fiscal year to which such Net Loss relates, such Net Loss shall not be allocated to such holder and instead shall be allocated to the General Partner. (b) SPECIAL ALLOCATIONS. Notwithstanding any provisions of Section 6.1(a) hereof, the following special allocations shall be made in the following order: (i) MINIMUM GAIN CHARGEBACK. Notwithstanding any other provision of this Article 6, if there is a net decrease in Partnership Minimum Gain for any Partnership fiscal year (except as a result of conversion or refinancing of Partnership indebtedness, certain capital contributions or revaluation of the Partnership property as -20- further outlined in Section 1.704-2(f) of the Regulations), each holder of Units shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to that holder's share of the net decrease in Partnership Minimum Gain as determined under Section 1.704-2(g) of the Regulations. The items to be so allocated shall be determined in accordance with Section 1.704-2(f) of the Regulations. This clause (i) is intended to comply with the minimum gain chargeback requirement in said section of the Regulations and shall be interpreted consistently therewith. Allocations pursuant to this clause (i) shall be made in proportion to the respective amounts required to be allocated to each holder of Units pursuant hereto. (ii) MINIMUM GAIN CHARGEBACK ATTRIBUTABLE TO PARTNER NONRECOURSE DEBT. Notwithstanding any other provision of this Article 6, if there is a net decrease in Minimum Gain Attributable to Partner Nonrecourse Debt during any fiscal year (other than due to the conversion, refinancing or other change in the debt instrument causing it to become partially or wholly nonrecourse, certain capital contributions, or certain revaluations of Partnership property (as further outlined in Section 1.704-2(i)(4) of the Regulations), each holder of Units shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to the holder's share of the net decrease in the Minimum Gain Attributable to Partner Nonrecourse Debt as determined under Section 1.704-2(i) of the Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and (j)(2) of the Regulations. This clause (ii) is intended to comply with the minimum gain chargeback requirement with respect to Partner Nonrecourse Debt contained in said section of the Regulations and shall be interpreted consistently therewith. Allocations pursuant to this clause (ii) shall be made in proportion to the respective amounts required to be allocated to each holder of Units. (iii) QUALIFIED INCOME OFFSET. In the event a holder of Units unexpectedly receives any adjustments, allocations or distributions described in Section 1.704-1(b)(2)(ii) (d)(4), (5), or (6) of the Regulations, and such holder has an Adjusted Capital Account Deficit, items of Partnership income and gain shall be specially allocated to such holder in an amount and manner sufficient to eliminate the Adjusted Capital Account Deficit as quickly as possible, provided that an allocation pursuant to this Section 6.1(b)(iii) shall be made only if and to the extent that such holder would have Adjusted Capital Account Deficit after all other allocations provided for in this Article VI have been tentatively made as if this Section 6.1(b)(iii) were not in the Agreement. This clause (iii) is intended to constitute a "qualified income offset" under Section 1.704-1(b)(2)(ii) (d) of the Regulations and shall be interpreted consistently therewith. (iv) GROSS INCOME ALLOCATION. In the event any holder of Units has a deficit Capital Account at the end of any fiscal year which is in excess of the sum of (x) the amount such holder is obligated to restore pursuant to any provision of this Agreement, and (y) the amount such holder is deemed to be obligated to restore pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations, each such holder shall be specially allocated items of Partnership income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section -21- 6.1(b)(iv) shall be made only if and to the extent that such holder would have a Capital Account Deficit in excess of such sum after all other allocations provided for in this Article 6 have been made as if Section 6.1(b)(iii) hereof and this Section 6.1(b)(iv) were not in the Agreement. (v) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions for any fiscal year or other applicable period shall be allocated to the holders of Units in accordance with their respective holdings of Units. For purposes of Section 1.752-3(a) (3) of the Regulations, "excess nonrecourse liabilities" shall be allocated among the holders of Units in proportion to their respective holdings of Units. (vi) PARTNER NONRECOURSE DEDUCTIONS. Partner Nonrecourse Deductions for any fiscal year or other applicable period shall be specially allocated to the holder of Units that bears the economic risk of loss with respect to the Partner Nonrecourse Debt in respect of which such Partner Nonrecourse Deductions are attributable (as determined under Sections 1.704-2(b) (4) and (i) (1) of the Regulations). (vii) SECTION 754 ADJUSTMENTS. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Section 734(b) or Section 743(b) of the Code is required, pursuant to Section 1.704-1(b)(2)(iv)(m)(2) or Section 1.704-1(b)(2)(iv)(m)(4) of the Regulations, to be taken into account in determining Capital Accounts, the amount of such adjustment to Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to holders of Units in accordance with their interests in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such sections of the Regulations. (viii) CURATIVE ALLOCATIONS. The Regulatory Allocations shall be taken into account in allocating other items of income, gain, loss, and deduction among the holders of Units so that, to the extent possible, the cumulative net amount of allocations of Partnership items under Sections 6.1(a) and (b) hereof shall be equal to the net amount that would have been allocated to each holder of Units if the Regulatory Allocations had not occurred. This subparagraph (viii) is intended to minimize to the extent possible and to the extent necessary any economic distortions which may result from application of the Regulatory Allocations and shall be interpreted in a manner consistent therewith. For purposes hereof, "REGULATORY ALLOCATIONS" shall mean the allocations provided under this Section 6.1(b) (other than this subparagraph) and allocations pursuant to the last sentence of Section 6.1(a)(ii) hereof. (ix) VARYING INTERESTS. In the event the number of Units outstanding during a fiscal year changes, the allocations pursuant to this Article 6 shall be made by the General Partner to take such varying interests into account in any reasonable manner permitted under the Code and the Regulations. -22- (c) TAX ALLOCATIONS. (i) GENERALLY. Subject to clauses (ii) and (iii) hereof, items of income, gain, loss, deduction and credit to be allocated for income tax purposes (collectively, "TAX ITEMS") shall be allocated among the holders of Units on the same basis as their respective book items. (ii) SECTIONS 1245/1250 RECAPTURE. If any portion of gain from the sale of property is treated as gain which is ordinary income by virtue of the application of Sections 1245 or 1250 of the Code ("AFFECTED GAIN"), then (A) such Affected Gain shall be allocated among the holders of Units in the same proportion that the depreciation and amortization deductions giving rise to the Affected Gain were allocated and (B) other Tax Items of gain of the same character that would have been recognized, but for the application of Sections 1245 and/or 1250 of the Code, shall be allocated away from those holders of Units who are allocated Affected Gain pursuant to clause (A) so that, to the extent possible, the other holders of Units are allocated the same amount, and type, of capital gain that would have been allocated to them had Sections 1245 and/or 1250 of the Code not applied. For purposes hereof, in order to determine the proportionate allocations of depreciation and amortization deductions for each fiscal year or other applicable period, such deductions shall be deemed allocated on the same basis as Net Income or Net Loss for such respective period. (iii) ALLOCATIONS RESPECTING SECTION 704(c) OF THE CODE AND REVALUATIONS. Property contributed to the Partnership shall be subject to Section 704(c) of the Code and the Regulations thereunder so that, notwithstanding paragraph (b) hereof, taxable gain from disposition, taxable loss from disposition and tax depreciation with respect to Partnership property that is subject to Section 704(c) of the Code and/or Section 1.704-1(b) (2) (iv) (f) of the Regulations (collectively "SECTION 704(c) TAX ITEMS") shall be allocated on a property by property basis in accordance with said Code Section and/or the Regulations thereunder, as the case may be. The allocation of Section 704(c) Tax Items shall be made pursuant to the "traditional method" of Section 1.704-3(b) of the Regulations. The General Partner will not specially allocate Tax Items (other than the Section 704(c) Tax Items) to cure for the effect of the ceiling rule. Allocations pursuant to this Section 6.1(c)(iii) are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, the Capital Account or share of Net Income, Net Loss, other items, or distributions of any holder of Units pursuant to any provision of this Agreement. (iv) TAX CREDITS AND OTHER ITEMS. Tax credits and other items shall be allocated in accordance with the holdings of Units to the extent permitted under Section 1.704-1(b)(4)(ii) of the Regulations or other applicable provision of the Code and Regulations and otherwise in accordance with such provisions. (v) SENIOR DEBT. Any income (including income from discharge of indebtedness), gain, correlative adjustments, loss, deduction or retirement or -23- other premium relating to the assumption of the Senior Debt by the Partnership, the repayment of or refinancing of the Senior Debt, the contribution of any portion of the Senior Debt to the Partnership or the defeasance of any portion of the Senior Debt as a result of the application of Section 108(e)(4) of the Code and the Regulations thereunder shall be specially allocated to the General Partner. 6.2 DISTRIBUTIONS. The General Partner shall cause the Partnership to distribute all, or such portion as the General Partner may in its reasonable discretion determine, of Net Cash Flow to the holders of Units who are holders on the Partnership Record Date with respect to such distribution. All such distributions shall be made pro rata in accordance with the holders' ownership of Units. Notwithstanding the foregoing, the General Partner is authorized to cause the Partnership to distribute sufficient amounts, pro rata by ownership of Units, to enable the General Partner to pay shareholder dividends that will satisfy the REIT Requirements. 6.3 BOOKS OF ACCOUNT. At all times during the continuance of the Partnership, the General Partner shall maintain or cause to be maintained full, true, complete and correct books of account in accordance with GAAP, using the calendar year as the fiscal and taxable year of the Partnership. In addition, the Partnership shall keep all records required to be kept pursuant to the Act. 6.4 REPORTS. The General Partner shall cause to be sent to the Limited Partners promptly after receipt of the same from the Accountants and in no event later than 105 days after the close of each fiscal year of the Partnership, copies of Audited Financial Statements for the Partnership, or of the General Partner if such statements are prepared solely on a consolidated basis with the General Partner, for the immediately preceding fiscal year of the Partnership. The Partnership shall also cause to be prepared such reports and/or information as are necessary for the General Partner to determine its qualification as a REIT and its compliance with REIT Requirements. 6.5 TAX ELECTIONS AND RETURNS. All elections required or permitted to be made by the Partnership under any applicable tax law shall be made by the General Partner in its sole and absolute discretion, except that the General Partner shall, if requested by a Limited Partner, file an election on behalf of the Partnership pursuant to Section 754 of the Code to adjust the basis of the Partnership property in the case of a transfer of a Partnership Interest or distribution from the Partnership, including transfers made in connection with the exercise of the Rights, made in accordance with the provisions of the Agreement. The General Partner shall cause the Accountants to prepare and submit to the Limited Partner Representative on or before July 15th of each year for review drafts of all federal and state income tax returns of the Partnership. If the Limited Partner Representative determines that any modifications to the tax returns of the Partnership should be considered, the Limited Partner Representative shall, within fifteen (15) days following receipt of such tax returns from the Accountants or the General Partner, indicate to the Accountants or to the General Partner the suggested revisions to the tax returns, which returns shall be resubmitted to the Limited Partner Representative for its review (but not approval). The Limited Partner -24- Representative shall complete their review of the resubmitted returns within ten (10) days after receipt thereof from the Accountants or the General Partner. The General Partner shall consult in good faith with the Limited Partner Representative regarding any proposed modifications to the tax returns of the Partnership. The General Partner shall be responsible for preparing and filing all federal and state tax returns for the Partnership and furnishing copies thereof to the Partners, together with required Partnership schedules showing allocations of tax items, copies of all within the period of time prescribed by law. The General Partner shall use reasonable efforts to make available to the holders of Units final K-1's not later than September 15 of each year. 6.6 TAX MATTERS PARTNER. The General Partner is hereby designated as the Tax Matters Partner within the meaning of Section 6231(a)(7) of the Code (and any corresponding provisions of state and local law) for the Partnership; PROVIDED, HOWEVER, that (a) in exercising its authority as Tax Matters Partner, the General Partner shall be limited by the provisions of this Agreement affecting tax aspects of the Partnership; (b) the General Partner shall consult in good faith with the Limited Partner Representative regarding the filing of an administrative adjustment request with respect to the Partnership before filing such request, it being understood, however, that the provisions hereof shall not be construed to limit the ability of any Partner, including the General Partner, to file an administrative adjustment request on its own behalf pursuant to Section 6227(a) of the Code; (c) the General Partner shall consult in good faith with the Limited Partner Representative regarding the filing of a petition for judicial review of an administrative adjustment request under Section 6228 of the Code, or a petition for judicial review of a final partnership administrative judgment under Section 6226 of the Code relating to the Partnership before filing such petition; (d) the General Partner shall give prompt notice to the Limited Partner Representative and any notice partners under Section 6231 of the Code of the receipt of any written notice that the Internal Revenue Service intends to examine or audit Partnership income tax returns for any year, receipt of written notice of the beginning of an administrative proceeding at the Partnership level relating to the Partnership under Section 6223 of the Code, receipt of written notice of the final Partnership administrative adjustment relating to the Partnership pursuant to Section 6223 of the Code, and receipt of any request from the Internal Revenue Service for waiver of any applicable statute of limitations with respect to the filing of any tax return by the Partnership; and (e) the General Partner shall promptly notify the Limited Partner Representative if the General Partner does not intend to file for judicial review with respect to the Partnership. Similar provisions shall apply in the case of any audit or examination by a state or local taxing authority. 6.7 WITHHOLDING PAYMENTS REQUIRED BY LAW. (a) Unless treated as a Tax Payment Loan (as hereinafter defined), any amount paid by the Partnership for or with respect to any holder of Units on account of any withholding tax or other tax payable with respect to the income, profits or distributions of the Partnership pursuant to the Code, the Regulations, or any state or local statute, regulation, notice, ruling or ordinance requiring such payment (a "WITHHOLDING TAX ACT") shall be treated as a distribution to such holder for all purposes of this Agreement, consistent -25- with the character or source of the income, profits or cash which gave rise to the payment or withholding obligation. To the extent that the amount required to be remitted by the Partnership under the Withholding Tax Act exceeds the amount then otherwise distributable to such holder, unless and to the extent that funds shall have been provided by such holder pursuant to the last sentence of this Section 6.7(a), the excess shall constitute a loan from the Partnership to such holder (a "TAX PAYMENT LOAN") which shall be payable upon demand and shall bear interest, from the date that the Partnership makes the payment to the relevant taxing authority, at the rate announced from time to time by Citibank, N.A. (or any successor thereto) as its "prime rate", plus four (4) percent per annum, compounded monthly (but in no event higher than the highest interest rate permitted by applicable law). So long as any Tax Payment Loan to any holder of Units or the interest thereon remains unpaid, the Partnership shall make future distributions due to such holder under this Agreement by applying the amount of any such distributions first to the payment of any unpaid interest on such Tax Payment Loan and then to the repayment of the principal thereof, and no such future distributions shall be paid to such holder until all of such principal and interest has been paid in full. If the amount required to be remitted by the Partnership under the Withholding Tax Act exceeds the amount then otherwise distributable to a holder of Units, the Partnership shall notify such holder at least five (5) Business Days in advance of the date upon which the Partnership would be required to make a Tax Payment Loan under this Section 6.7(a) (the "TAX PAYMENT LOAN DATE") and provide such holder the opportunity to pay to the Partnership, on or before the Tax Payment Loan Date, all or a portion of such deficit. (b) The General Partner shall have the authority to take all actions necessary to enable the Partnership to comply with the provisions of any Withholding Tax Act applicable to the Partnership and to carry out the provisions of this Section 6.7. Nothing in this Section 6.7 shall create any obligation on the General Partner to advance funds to the Partnership or to borrow funds from third parties in order to make any payments on account of any liability of the Partnership under a Withholding Tax Act. (c) In the event that a Tax Payment Loan is not paid by a holder of Units within thirty (30) days after written demand therefor is made by the General Partner, the General Partner may cause all distributions that would otherwise be made to such holder to be retained by the Partnership, or sell such holder's Units for sale proceeds, in each case up to the amount necessary to repay such Tax Payment Loan, including all accrued and unpaid interest therein, and such retained distributions or sale proceeds shall be applied against, first, the accrued interest on and, second, the principal of, such Tax Payment Loan. -26- ARTICLE 7 RIGHTS, DUTIES AND RESTRICTIONS OF THE GENERAL PARTNER 7.1 POWERS AND DUTIES OF GENERAL PARTNER. (a) The General Partner shall be responsible for the management of the Partnership's business and affairs. Except as otherwise herein expressly provided, the General Partner shall have, and is hereby granted, full and complete power, authority and discretion to take such action for and on behalf of the Partnership and in its name as the General Partner shall, in its sole and absolute discretion, deem necessary or appropriate to carry out the Partnership's business and the purposes for which the Partnership was organized. Except as otherwise expressly provided herein, the General Partner shall, on behalf of, and at the expense of, the Partnership, have the right, power and authority: (1) to manage, control, invest, reinvest, acquire by purchase, lease or otherwise, sell, contract to purchase or sell, grant, obtain, or exercise options to purchase, options to sell or conversion rights, assign, transfer, convey, deliver, endorse, exchange, pledge, mortgage, abandon, improve, repair, maintain, insure, lease for any term and otherwise deal with any and all property of whatsoever kind and nature, and wheresoever situated, in furtherance of the business or purposes of the Partnership; (2) to acquire, directly or indirectly, interests in real estate of any kind and of any type, and any and all kinds of interests therein (including, without limitation, Entities investing therein), and to determine the manner in which title thereto is to be held; to manage (directly or through property managers), insure against loss, protect and subdivide any of the real estate, interests therein or parts thereof; to improve, develop or redevelop any such real estate; to participate in the ownership and development of any property; to dedicate for public use, to vacate any subdivisions or parts thereof, to resubdivide, to contract to sell, to grant options to purchase or lease, to sell on any terms; to convey, mortgage, pledge or otherwise encumber said property, or any part thereof; to lease said property or any part thereof from time to time, upon any terms and for any period of time, and to renew or extend leases, to amend, change or modify the terms and provisions of any leases and to grant options to lease and options to renew leases and options to purchase; to partition or to exchange said real property, or any part thereof, for other real or personal property; to grant easements or charges of any kind; to release, convey or assign any right, title or interest in or about or easement appurtenant to said property or any part thereof; to construct and reconstruct, remodel, alter, repair, add to or take from buildings on any property in which the Partnership owns an interest; to insure any Person having an interest in or responsibility for the care, management or repair of such property; to direct the trustee of any land trust to mortgage, lease, convey or contract to convey the real estate held in such land trust or to execute and deliver deeds, mortgages, notes and any and all documents pertaining to the property subject to such land trust or in any matter regarding such trust; and to execute assignments of all or any part of the beneficial interest in such land trust; -27- (3) to employ, engage, indemnify or contract with or dismiss from employment or engagement Persons to the extent deemed necessary or appropriate by the General Partner for the operation and management of the Partnership business, including but not limited to contractors, subcontractors, engineers, architects, surveyors, mechanics, consultants, accountants, attorneys, insurance brokers, real estate brokers and others; (4) to enter into contracts on behalf of the Partnership, and to cause all Administrative Expenses to be paid; (5) to borrow or loan money, obtain or make loans and advances from and to any Person for Partnership purposes and to apply for and secure from or accept and grant to any Person credit or accommodations; to contract liabilities and obligations (including interest rate swaps, caps and hedges) of every kind and nature with or without security; and to repay, collect, discharge, settle, adjust, compromise or liquidate any such loan, advance, obligation or liability; (6) to grant security interests, mortgage, assign, deposit, deliver, enter into sale and leaseback arrangements or otherwise give as security or as additional or substitute security or for sale or other disposition any and all Partnership property, tangible or intangible, including, but not limited to, personal property and real estate and interests in land trusts, and to make substitutions thereof, and to receive any proceeds thereof upon the release or surrender thereof; to sign, execute and deliver any and all assignments, deeds, bills of sale and contracts and instruments in writing; to authorize, give, make, procure, accept and receive moneys, payments, property notices, demands, protests and authorize and execute waivers of every kind and nature; to enter into, make, execute, deliver and receive agreements, undertakings and instruments of every kind and nature; and generally to do any and all other acts and things incidental to any of the foregoing or with reference to any dealings or transactions which the General Partner may deem necessary, proper or advisable to effect or accomplish any of the foregoing or to carry out the business and purposes of the Partnership; (7) to acquire and enter into any contract of insurance (including, without limitation, general partner liability and partnership reimbursement insurance policies) which the General Partner may deem necessary or appropriate; (8) to conduct any and all banking transactions on behalf of the Partnership; to adjust and settle checking, savings and other accounts with such institutions as the General Partner shall deem appropriate; to draw, sign, execute, accept, endorse, guarantee, deliver, receive and pay any checks, drafts, bills of exchange, acceptances, notes, obligations, undertakings and other instruments for or relating to the payment of money in, into or from any account in the Partnership's name; to make deposits into and withdrawals from the Partnership's bank accounts and to negotiate or discount commercial paper, acceptances, negotiable instruments, bills of exchange and dollar drafts; -28- (9) to demand, sue for, receive and otherwise take steps to collect or recover all debts, rents, proceeds, interests, dividends, goods, chattels, income from property, damages and all other property, to which the Partnership may be entitled or which are or may become due the Partnership from any Person; to commence, prosecute or enforce, or to defend, answer or oppose, contest and abandon all legal proceedings in which the Partnership is or may hereafter be interested; and to settle, compromise or submit to arbitration any accounts, debts, claims, disputes and matters which may arise between the Partnership and any other Person and to grant an extension of time for the payment or satisfaction thereof on any terms, with or without security; (10) to acquire interests in and contribute money or property to any limited or general partnerships, joint ventures, subsidiaries or other entities as the General Partner deems desirable; (11) to maintain or cause to be maintained the Partnership's books and records; (12) to prepare and deliver, or cause to be prepared and delivered, all financial and other reports with respect to the operations of the Partnership, and preparation and filing of all tax returns and reports; (13) to do all things which are necessary or advisable for the protection and preservation of the Partnership's business and assets, and to execute and deliver such further instruments and undertake such further acts as may be necessary or desirable to carry out the intent and purposes of this Agreement and as are not inconsistent with the terms hereof; (14) subject to Section 7.5 hereof, to lease any or all of the Properties to SLC, the Operating Partnership or the Affiliates of either on such terms and conditions as the General Partner may from time to time agree; and (15) in general, to exercise all of the general rights, privileges and powers permitted to be had and exercised under the Act. To the extent the duties of the General Partner require expenditures of funds to be paid to third parties, the General Partner shall not have any obligations hereunder except to the extent that Partnership funds are reasonably available to it for the performance of such duties, and nothing herein contained shall be deemed to require the General Partner, in its capacity as such, to expend its individual funds for payment to third parties or to undertake any specific liability or litigation on behalf of the Partnership. (b) Notwithstanding the provisions of Section 7.1(a) hereof, the Partnership shall not take any action which (or fail to take any action, the omission of which), in the reasonable judgement of the General Partner, in its sole and absolute discretion, (i) could adversely affect the ability of the General Partner to qualify or continue -29- to qualify as a REIT, (ii) could subject the General Partner to any additional taxes under Section 857 or Section 4981 of the Code or other potentially adverse consequences under the Code, (iii) could otherwise violate the REIT Requirements or (iv) could violate any law or regulation of any governmental body or agency having jurisdiction over the General Partner or its securities, unless such action (or inaction) shall have been specifically consented to by the General Partner in writing. (c) Notwithstanding the provisions of Section 7.1(a) hereof, the Partnership shall not commingle its funds with those of any Affiliate or other entity; funds and other assets of the Partnership shall be separately identified and segregated; all of the Partnership's assets shall at all times be held by or on behalf of the Partnership, and, if held on behalf of the Partnership by another entity, shall at all times be kept identifiable (in accordance with customary usages) as assets owned by the Partnership; and the Partnership shall maintain its own separate bank accounts, payroll and books of account. (d) Without the consent of all the Limited Partners, the General Partner shall have no power to do any act in contravention of this Agreement or possess any Partnership property for other than a partnership purpose. 7.2 [Intentionally Left Blank] 7.3 REIMBURSEMENT OF THE GENERAL PARTNER. (a) Except as provided in this Section 7.3 and elsewhere in this Agreement (including the provisions of Articles 5, 6 and 8 hereof regarding distributions, payments and allocations to which it may be entitled), the General Partner shall not receive payments from or be compensated for its services as general partner of the Partnership. (b) The General Partner shall be reimbursed on a monthly basis, or such other basis as the General Partner may determine in its sole and absolute discretion, for all expenses it incurs relating to the ownership and operation of, or for the benefit of, the Partnership, including, without limitation, the Administrative Expenses. Such reimbursements shall be in addition to any reimbursement to the General Partner as a result of indemnification pursuant to Section 5.1 hereof. (c) The General Partner shall also be reimbursed for all expenses it incurs relating to the organization and formation of the Partnership, the General Partner's share of public offerings of Paired Shares by the General Partner and SLC to the extent included in REIT Expenses, and any other issuance of additional Partnership Interests. 7.4 OUTSIDE ACTIVITIES OF THE GENERAL PARTNER. The General Partner shall not directly or indirectly enter into or conduct any business other than (a) the ownership, acquisition and disposition of Partnership Interests as a General Partner or Limited Partner and the management of the business of the Partnership, and (b) such activities as are incidental thereto, including the General Partner's ownership directly or through a wholly- -30- owned subsidiary of an interest in a partnership or limited liability company in which the Partnership is a partner or member. All future acquisitions of real estate by the General Partner shall be made through and for the benefit of the Partnership. The General Partner agrees that the net proceeds of all offerings of securities by the General Partner shall be contributed to the Partnership (in the case of equity offerings) or loaned to the Partnership (in the case of debt offerings). 7.5 CONTRACTS WITH AFFILIATES. The Partnership may engage in transactions, enter into contracts with Affiliates, and lend money to or borrow money from Affiliates which are on terms fair and reasonable to the Partnership and no less favorable to the Partnership than would be obtained from unaffiliated third parties. The Partners hereby agree that the Partnership's leases and loans with the Operating Partnership, SLC and its Affiliates, as in effect on the date first above written, are on terms fair and reasonable to the Partnership and such terms are no less favorable to the Partnership than would be obtained from unaffiliated third parties. 7.6 TITLE TO PARTNERSHIP ASSETS. Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner or one or more nominees, as the General Partner may determine, including Affiliates of the General Partner. The General Partner hereby acknowledges and confirms that any Partnership assets for which legal title is held in the name of the General Partner or any nominee or Affiliate of the General Partner shall be held by the General Partner for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, however, that the General Partner shall use its best efforts to cause beneficial and record title to such assets to be vested in the Partnership as soon as reasonably practicable. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which legal title to such Partnership assets is held. 7.7 RELIANCE BY THIRD PARTIES. Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any contracts on behalf of the Partnership, and such Person shall be entitled to deal with the General Partner as if it were the Partnership's sole party in interest, both legally and beneficially. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (i) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect, (ii) the Person executing and delivering such certificate, document or instrument was duly authorized -31- and empowered to do so for and on behalf of the Partnership and (iii) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership. 7.8 LIABILITY OF THE GENERAL PARTNER. (a) Notwithstanding anything to the contrary set forth in this Agreement, the General Partner shall not be liable for monetary or other damages to the Partnership, any of the Partners or any assignee of any interest of any Partner for losses sustained or liabilities incurred as a result of errors in judgment or of any act or omission if the General Partner acted without fraud, gross negligence or willful misconduct. (b) The Limited Partners expressly acknowledge (i) that the General Partner is acting on behalf of the Partnership and the General Partner's shareholders collectively, (ii) that, subject to the terms and conditions of this Agreement, the General Partner may, but is under no obligation to, consider the separate interests of the Limited Partners (including, without limitation, the tax consequences to Limited Partners or any assignees thereof except as provided in this Agreement) in deciding whether to cause the Partnership to take (or decline to take) any actions, and (iii) that the General Partner shall not be liable for monetary damages for losses sustained, liabilities incurred, or benefits not derived by Limited Partners in connection with such decisions, provided that the General Partner acted without fraud, gross negligence or willful misconduct. (c) Subject to its obligations and duties as General Partner set forth in Section 7.1 hereof, the General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agents. The General Partner shall not be responsible for any fraud, willful misconduct or gross negligence on the part of any such agent appointed by it without fraud, gross negligence or willful misconduct. (d) Any amendment, modification or repeal of this Section 7.8 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the General Partner's liability to the Partnership and the Limited Partners under this Section 7.8 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may be asserted. 7.9 OTHER MATTERS CONCERNING THE GENERAL PARTNER. (a) The General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, or other document reasonably believed by it to be genuine and to have been signed or presented by the proper party or parties. -32- (b) The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the advice or opinion of such Persons as to matters which the General Partner reasonably believes to be within such Person's professional or expert competence and in accordance with such advice or opinion shall be prima facie evidence that such actions have been done or omitted in good faith. (c) The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and any attorney or attorneys-in-fact duly appointed by the General Partner. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform all and every act and duty which is permitted or required to be done by the General Partner hereunder. 7.10 OPERATION IN ACCORDANCE WITH REIT REQUIREMENTS. (a) The Partners acknowledge and agree the General Partner has the authority to cause the Partnership to be operated in a manner that will enable the General Partner to (i) satisfy the REIT Requirements and (ii) avoid the imposition of any federal income or excise tax liability on the General Partner. The General Partner has the authority to cause the Partnership to avoid taking any action which would result in the General Partner ceasing to satisfy the REIT Requirements or would result in the imposition of any federal income or excise tax liability on the General Partner. (b) Without the prior consent of the General Partner, no Limited Partner or holder of Units or any Affiliate shall take any action, including acquiring, directly or indirectly, an interest in any tenant of a Property (including, but not limited to, the Operating Partnership, SLC or the Affiliates of either), which would have, through the actual or constructive ownership of any tenant of any Property, the effect of causing the percentage of the gross income of the General Partner that fails to be treated as "rents from real property" within the meaning of Section 856(d)(2) of the Code to exceed such percentage on the date hereof. Each Limited Partner and holder of Units shall use its best efforts to notify the General Partner on a timely basis of any direct or indirect acquisition or potential direct or indirect acquisition of Paired Shares by such Limited Partner or holder or any Affiliate or direct or indirect owner of an interest in such Limited Partner or holder that could reasonably be expected to have such effect. ARTICLE 8 DISSOLUTION, LIQUIDATION AND WINDING-UP 8.1 ACCOUNTING. In the event of the dissolution, liquidation and winding-up of the Partnership, a proper accounting shall be made of the Capital Account of each holder -33- of Units and of the Net Income or Net Loss of the Partnership from the date of the last previous accounting to the date of dissolution. 8.2 DISTRIBUTION ON DISSOLUTION. (a) In the event of the dissolution and liquidation of the Partnership for any reason, the assets of the Partnership shall be liquidated for distribution in the following rank and order: payment of creditors of the Partnership, including creditors who are Partners or former Partners; (ii) establishment of reserves as provided by the Liquidating Trustee to provide for contingent liabilities, if any; and (iii) to the holders of Units in accordance with the positive balances in their Capital Accounts after giving effect to all contributions, distributions and allocations for all periods. Whenever the Liquidating Trustee reasonably determines that any reserves established pursuant to paragraph (ii) above are in excess of the reasonable requirements of the Partnership, the amount determined to be excess shall be distributed to the Partners in accordance with the provisions of this Section 8.2(a). No Partner or holder of Units shall be liable to any other Partner or holder of Units for a deficit balance in its Capital Account. (b) Notwithstanding the provisions of Section 8.2(a) hereof which require liquidation of the assets of the Partnership, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership the Liquidating Trustee determines that an immediate sale of part or all of the Partnership's assets would be impractical or would cause undue loss to the Partners, the Liquidating Trustee may, in its sole and absolute discretion, defer for a reasonable time liquidation of any assets except those necessary to satisfy liabilities of the Partnership (including to those Partners which are creditors of the Partnership) and/or, with the Consent of the Limited Partners, distribute to the Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 8.2(a) hereof, undivided interests in such Partnership assets as the Liquidating Trustee deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidating Trustee, such distributions in kind are in the best interest of the Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidating Trustee deems reasonable and equitable and to any agreements governing the operation of such properties at such time. The Liquidating Trustee shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt. 8.3 DOCUMENTATION OF LIQUIDATION. Upon the completion of the dissolution and liquidation of the Partnership, the Partnership shall terminate and the Liquidating Trustee -34- shall have the authority to execute and record any and all documents or instruments required to effect the dissolution, liquidation and termination of the Partnership. ARTICLE 9 TRANSFER 9.1 GENERAL PARTNER. The General Partner shall not withdraw from the Partnership and shall not sell, assign, pledge, encumber or otherwise dispose of all or any portion of its Partnership Interest or Units without the Consent of the Limited Partners which consent may be given or withheld in each Limited Partner's sole and absolute discretion. Upon any transfer of a Partnership Interest in accordance with the provisions of this Section 9.1, the transferee General Partner shall become vested with the powers and rights of the transferor General Partner, and shall be liable for all obligations and responsible for all duties of the General Partner, once such transferee has executed such instruments as may be necessary to effectuate such admission and to confirm the agreement of such transferee to be bound by all the terms and provisions of this Agreement with respect to the Partnership interest so acquired. It shall be a condition to any transfer otherwise permitted hereunder that the transferee assumes by express agreement (or pursuant to a statutory merger or consolidation wherein all obligations and liabilities of the General Partner are assumed by a successor trust or corporation by operation of law) all of the obligations of the transferor General Partner under this Agreement with respect to such transferred Partnership Interest and no such transfer (other than pursuant to a statutory merger or consolidation wherein all obligations and liabilities of the transferor General Partner are assumed by a successor trust or corporation by operation of law) shall relieve the transferor General Partner of its obligations under this Agreement without the Consent of the Limited Partners. In connection with any such permitted transfer, the successor General Partner shall be deemed admitted as such immediately prior to the effective time of the transfer from the transferor General Partner and shall continue the business of the Partnership without dissolution. If the General Partner withdraws or retires from the Partnership, in violation of this Agreement or otherwise, or dissolves, terminates or upon the Bankruptcy of the General Partner, (a) the remaining General Partners may elect to continue the Partnership business or (b) within 90 days thereafter, all of the remaining Partners (or, to the extent permitted under the Act, such lesser number or percentage of the Partners, but in no event less than a Majority-in-Interest of the Limited Partners) may elect to continue the Partnership business by selecting a substitute General Partner, which substitute General Partner accepts such election and agrees to serve as General Partner. Such successor General Partner shall thereupon succeed to the rights and obligations of the General Partner as provided in this Section 9.1. -35- 9.2 TRANSFERS BY LIMITED PARTNERS. (a) No Limited Partner shall have the right, directly or indirectly, to transfer all or any part of his Partnership Interest or Units to any Person without the prior written consent of the General Partner, which consent may be given or withheld by the General Partner in its sole and absolute discretion. The foregoing notwithstanding, the General Partner hereby grants the consents described in this Section 9.2 to the following categories of transfers, PROVIDED that any such transfer otherwise complies with all of the other provisions of this Article 9 (including, but not limited to, any additional consents required hereunder): (i) transfers of Units; (ii) transfers of Partnership Interests (whether outright or in trust) to members of a Partner's Immediate Family; (iii) transfers of Partnership Interests to a Person holding a direct or indirect interest in a Partner; (iv) transfers of Partnership Interests pursuant to an exercise of Rights; or (v) pledges to secure bona fide indebtedness. (b) It shall be a condition to any transfer (other than a pledge, encumbrance, hypothecation or mortgage) otherwise permitted hereunder that the transferee assume by operation of law or express agreement all of the obligations of the transferor under this Agreement (including, without limitation, under Article 9 hereof) with respect to such transferred Partnership Interest or Units and no such transfer (other than pursuant to a statutory merger or consolidation wherein all obligations and liabilities of the transferor are assumed by a successor corporation by operation of law) shall relieve the transferor of its obligations under this Agreement without the approval of the General Partner, in its reasonable discretion (it being understood that a transferor shall be deemed relieved from such obligations, without the necessity of any such approval, in respect of Partnership Interests transferred to the General Partner or the Partnership pursuant to the Exchange Rights Agreement). Upon such transfer, the transferee of a Partnership Interest shall be admitted as a Limited Partner and shall succeed to all of the rights of the transferor Limited Partner under this Agreement in the place and stead of such transferor Limited Partner (which succession, in the event of a pledge, may be entered into and become effective at the time of foreclosure or other realization of such pledge). The foregoing notwithstanding, a transferee of a Unit shall not be admitted as a substituted Limited Partner unless the General Partner consents, which consent may be given or withheld by the General Partner in its sole and absolute discretion. Any transferee, whether or not admitted as a substituted Limited Partner, shall succeed to the obligations of the transferor hereunder (unless such transfer is a pledge, encumbrance, hypothecation or mortgage or except as otherwise provided herein). (c) In addition to any other restrictions on transfer provided herein, no Partnership Interest or Units shall be transferable unless the transferor gives written notice of the proposed transfer which notice shall state, to the best of its knowledge, that such transfer will not violate any of the restrictions set forth in Section 9.3 hereof. (d) Any permitted transferee under Section 9.2 who is not admitted as a Limited Partner in accordance with this Article 9 or a transferee who only holds Units shall be considered an assignee for purposes of this Agreement. An assignee shall be -36- deemed to have had assigned to it, and shall be entitled to receive, distributions from the Partnership and the share of Net Income, Net Losses, and any other items of income, gain, loss, deduction and credit of the Partnership and rights attributable to the Partnership Interests assigned to such transferee, but shall not be deemed to be a holder of Partnership Interests for any other purpose under this Agreement, and shall not be entitled to vote such Partnership Interests in any matter presented to the Limited Partners for a vote. In the event any such transferee desires to make a further assignment of any such Partnership Interests, such transferee shall be subject to all the provisions of this Article 9 to the same extent and in the same manner as any Limited Partner desiring to make an assignment of Partnership Interests. (e) The Limited Partners acknowledge that neither the Partnership Interests nor the Units have been registered under any federal or state securities laws and, as a result thereof, they may not be sold or otherwise transferred, except in compliance with such laws. Notwithstanding anything to the contrary contained in this Agreement, no Partnership Interest or Units may be sold or otherwise transferred unless such transfer is exempt from registration under any applicable securities laws or such transfer is registered under such laws, it being acknowledged that the Partnership has no obligation to take any action which would cause any such Partnership Interests or Units to be registered. 9.3 CERTAIN RESTRICTIONS ON TRANSFER. In addition to any other restrictions on transfer herein contained, except with the consent of the General Partner, in no event may any transfer of a Partnership Interest or Units by any Person be made (a) to any person or Entity that lacks the legal right, power or capacity to own a Partnership Interest or Units; (b) in the event such transfer would cause the General Partner to cease to comply with the REIT Requirements; (c) if such transfer would cause a termination of the Partnership for federal income tax purposes; (d) if such transfer would, in the opinion of counsel to the Partnership, cause the Partnership to cease to be classified as a Partnership for federal income tax purposes; (e) if such transfer would result in the Partnership being treated as a "publicly traded partnership" or is effectuated through an "established securities market" or a "secondary market (or the substantial equivalent thereof)" within the meaning of Section 7704 of the Code and the Regulations thereunder; (f) in violation of the Hart- Scott-Rodino Antitrust Improvements Act of 1976; (g) if the General Partner reasonably believes that such transfer may (i) cause any portion or all of the assets of the Partnership to be deemed pursuant to United States Department of Labor Regulation Section 2510.3-101 or otherwise pursuant to ERISA or the Code to be for any purpose of ERISA or Section 4975 of the Code assets of any Restricted Entity, or (ii) cause a "prohibited transaction" (as defined in Section 4975(c) of the Code or within the meaning of Section 406 of ERISA) to occur, or (iii) cause the Partnership to become with respect to any Restricted Entity a "party in interest" (as defined in Section 3(14) of ERISA) or a "disqualified person" (as defined in Section 4975(e) of the Code) or (iv) cause the Partnership to be jointly and severally liable for any obligation arising under ERISA or the Code with respect to any "employee benefit plan" as defined in and subject to ERISA or any "plan" as defined in Section 4975 of the Code; or (h) if the intended transferee is a Restricted Entity. Any purported transfer described in this Section 9.3 shall be void AB INITIO. -37- 9.4 EFFECTIVE DATES OF TRANSFERS. (a) Transfers pursuant to this Article 9 may be made on any day, but for purposes of this Agreement, the effective date of any such transfer shall be (i) the first day of the month in which such transfer occurred if such transfer occurred on or prior to the fifteenth calendar day of a month, or (ii) the first day of the month immediately following the month in which such transfer occurred, if such transfer occurred after the fifteenth calendar day of a month, or such other date determined by the General Partner pursuant to such convention as may be administratively feasible and consistent with applicable law. (b) If any Partnership Interest or Unit is transferred or assigned in compliance with the provisions of this Article 9, on any day other than the first day of a calendar year, then Net Income, Net Loss, each item thereof and all other items attributable to such Partnership Interest or Unit for such year shall be allocated to the transferor, and, in the case of a transfer or assignment other than a redemption, to the transferee, by taking into account their varying interests during such year in accordance with Section 706(d) of the Code, using any method permitted thereunder. All distributions pursuant to Section 6.2 hereof attributable to such transferred Partnership Interests or Units (A) with respect to which the Partnership Record Date is before the effective date of such transfer (other than a pledge, encumbrance, hypothecation or mortgage) shall be made to the transferor, (B) with respect to the first Partnership Record Date after the effective date of such transfer (other than a pledge, encumbrance, hypothecation or mortgage) shall be paid to the transferor and to the transferee, ratably in accordance with their respective periods of ownership of the Partnership Interest or Units transferred during the period with respect to which such distribution is made, and (C) all distributions after those described in (A) and (B) shall be made to the transferee. 9.5 TRANSFER. (a) The term "transfer," when used in this Article 9 with respect to a Partnership Interest, shall be deemed to refer to a transaction by which a Person purports to assign its Partnership Interest or any portion thereof (including Units) to another Person, and includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition by law or otherwise. (b) The General Partner is hereby authorized on behalf of each of the Partners to amend this Agreement (including the schedules hereto) to reflect the admission of any transferee of a Partnership Interest as a substituted Limited Partner in accordance with the provisions of this Article 9. (c) No Partnership Interest or Unit shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article 9. Any transfer or purported transfer of a Partnership Interest not made in accordance with this Article 9 shall be null and void. -38- ARTICLE 10 RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS 10.1 NO PARTICIPATION IN MANAGEMENT. No Limited Partner, in its capacity as such, shall take part in the management of the Partnership's business, transact any business in the Partnership's name or have the power to sign documents for or otherwise bind the Partnership. Any rights expressly granted to the Limited Partners in this Agreement shall not be deemed to be rights relating to the management of the Partnership's business. 10.2 BANKRUPTCY OF A LIMITED PARTNER. The Bankruptcy of any Limited Partner shall not cause a dissolution of the Partnership, but the rights of such Limited Partner to share in the Net Profits or Net Losses of the Partnership and to receive distributions of Partnership funds shall, on the happening of such event, devolve on its successors or assigns, subject to the terms and conditions of this Agreement, and the Partnership shall continue as a limited partnership. In no event, however, shall such assignee(s) become a substituted Limited Partner except in accordance with Article 9 hereof. 10.3 NO WITHDRAWAL. No Limited Partner may withdraw from the Partnership without the prior written consent of the General Partner, other than as provided in Article 9 hereof. 10.4 CONFLICTS. The Partners recognize that the Limited Partners and their Affiliates have or may have other business interests, activities and investments, some of which may be in conflict or competition with the business of the Partnership, and that such Persons are entitled to carry on such other business interests, activities and investments. In deciding whether to take any actions in such capacity, such Limited Partners and their Affiliates may, but shall be under no obligation to, consider the separate interests of the Partnership and shall have no fiduciary obligations to the Partnership and shall not be liable for monetary damages for losses sustained, liabilities incurred or benefits not derived by the other Partners in connection with such actions except for damages for losses sustained or liabilities incurred which result from a Limited Partner breaching a representation, warranty or covenant hereunder or to the extent provided in the Formation Agreement; nor shall the Partnership or the General Partner be under any obligation to consider the separate interests of the Limited Partners and their Affiliates in such capacity or have any fiduciary obligations to the Limited Partners and their Affiliates in such capacity or be liable for monetary damages for losses sustained, liabilities incurred or benefits not derived by the Limited Partners and their Affiliates in such capacity arising from actions or omissions taken by the Partnership. The Limited Partners and their Affiliates may engage in or possess an interest in any other business or venture of any kind, independently or with others, on their own behalf or on behalf of other entities with which they are affiliated or associated, and such persons may engage in any activities, whether or not competitive with the Partnership, without any obligation to offer any interest in such activities to the Partnership or to any Partner. Neither the Partnership nor any Partner shall have any right, by virtue of this -39- Agreement, in or to such activities, or the income or profits derived therefrom, and the pursuit of such activities, even if competitive with the business of the Partnership, shall not be deemed wrongful or improper. Notwithstanding the foregoing, the provisions of this Section 10.4 shall not negate or impair any other written agreement between one or more of the Limited Partners and the General Partner or the Partnership (including Section 6.6 of the Formation Agreement) or any duties which a Limited Partner may have in such Limited Partner's capacity as an officer or director of the General Partner. 10.5 PROVISION OF INFORMATION. (a) With respect to any information required to be provided to the Limited Partners pursuant to Section 17-305 (or any successor thereto) of the Act: (i) the cost of preparing or providing any such information (including, without limitation, fees paid to any person or entity in connection therewith) shall be paid by the requesting Partner and in no event shall such information be required to be given to the requesting Partner until such payment has been made to the Partnership; (ii) in no event shall any financial statements of the Partnership be required to be provided except for such statements as have already been prepared or are otherwise required to be provided to the Limited Partners under this Agreement and in no event shall any statements which have been prepared be required to be audited, reviewed or otherwise examined by a certified public accountant, if the statements are not otherwise required to be so audited, reviewed or examined pursuant to the provisions of this Agreement; and (iii) in no event shall such information be required to be furnished until forty-five (45) days after such request and unless the information is already in the possession of the Partnership. (b) In addition to other rights provided by this Agreement or by the Act, each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner's interest as a limited partner in the Partnership, upon written demand with a statement of the purpose of such demand and at such Limited Partner's own expense (excluding copying and administrative expenses of the General Partner): (1) to obtain a copy of the most recent annual and quarterly reports and current reports on Form 8-K filed with the SEC by the General Partner pursuant to the Securities Exchange Act of 1934; (2) to obtain a copy of the Partnership's federal, state and local income tax returns for each fiscal year of the Partnership; (3) to obtain a current list of the name and last known business, residence or mailing address of each Partner; and (4) to obtain a copy of this Agreement and the Certificate, together with executed copies of all powers of attorney pursuant to which this Agreement and the Certificate have been executed. -40- (c) Notwithstanding any other provision of this Section 10.5, the General Partner may keep confidential from the Limited Partners, for such period of time as the General Partner determines in its sole and absolute discretion to be reasonable, any information that is not material to the Limited Partners and that (i) the General Partner reasonably believes to be in the nature of trade secrets or other information the disclosure of which the General Partner in good faith believes is not in the best interests of the Partnership or could damage the Partnership or its business or (ii) the Partnership is required by law or by agreements with an unaffiliated third party to keep confidential. 10.6 LIMITED PARTNER REPRESENTATIVE. SCG is hereby appointed as the Limited Partner Representative. A Majority-in-Interest of the Limited Partners shall have the right, at any time, within their sole discretion, to replace the Limited Partner Representative, or to appoint a temporary substitute to act for a Limited Partner Representative unable to act. Any appointment of a Limited Partner Representative made hereunder shall remain effective until rescinded in a writing delivered to the General Partner via certified mail, registered overnight express mail or telecopy, and the General Partner shall have the right and authority to rely (and shall be fully protected in so doing) on the actions taken and directions given by such Limited Partner Representative, without any further evidence of their authority or further action by the Limited Partners. The General Partner shall send copies of all notices received by it pursuant to Section 6.6 to each Limited Partner requesting the same. 10.7 POWER OF ATTORNEY. (a) Each Limited Partner constitutes and appoints the General Partner, any Liquidating Trustee and authorized officers and attorneys-in-fact of each, and each of those acting singly, in each case with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead to: execute, swear to, acknowledge, deliver, file and record in the appropriate public offices (i) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate and all amendments or restatements thereof) that the General Partner or the Liquidating Trustee deems appropriate or necessary to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and in all other jurisdictions in which the Partnership may conduct business or own property; (ii) all instruments that the General Partner deems appropriate or necessary to reflect any amendment, change, modification or restatement of this Agreement in accordance with its terms; (iii) all conveyances and other instruments or documents that the General Partner deems appropriate or necessary to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement, including, without limitation, a certificate of cancellation; and (iv) all instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to the provisions of this Agreement or the Capital Contribution of any Partner. (b) The foregoing power of attorney is irrevocable and a power coupled with an interest, in recognition of the fact that each of the Partners will be relying -41- upon the power of the General Partner to act as contemplated by this Agreement in any filing or other action by it on behalf of the Partnership, and it shall survive the death or incompetency of a Limited Partner to the effect and extent permitted by law, subsequent incapacity of any Limited Partner and the transfer of all or any portion of such Limited Partner's Partnership Interests and shall extend to such Limited Partner's heirs, successors, assigns and personal representatives. (c) Nothing contained in this Section 10.7 shall be construed as authorizing the General Partner to amend this Agreement except in accordance with Article 11 hereof. 10.8 OWNERSHIP OF PAIRED SHARES. (a) Each Limited Partner and holder of Units hereby agrees to provide the General Partner within fifteen (15) days of any written request therefor, a statement, to the best of its knowledge, describing the number of Paired Shares actually or constructively owned by such Limited Partner or holder of Units and all direct and indirect owners of such Limited Partner or holder for purposes of the REIT Requirements as determined under Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code, or Section 544 of the Code, as modified by Section 856(h) of the Code. (b) Each Limited Partner and holder of Units (i) hereby covenants that, without the prior written consent of the General Partner (which consent shall not be unreasonably withheld or delayed) it will not acquire and it will use all reasonable efforts to cause its direct or indirect owners not to acquire any Paired Shares or any rights to acquire Paired Shares and (ii) except to the extent that the General Partner provides prior written consent, hereby represents, warrants and covenants that (I) it is not and will not become a Restricted Entity, (II) no "prohibited transaction" (as defined in Section 4975(c) of the Code or within the meaning of Section 406 of ERISA) has occurred or will occur that would not have occurred or occur if the Limited Partner or holder of Units and its Affiliates were not Limited Partners and were not holders of Units, (III) the Partnership has not become and will not become with respect to any Restricted Entity a "party in interest" (as defined in Section 3(14) of ERISA) or a "disqualified person" (as defined in Section 4975(e) of the Code) which the Partnership would not have become or be if the Limited Partner or holder of Units and its Affiliates were not Limited Partners and were not holders of Units, and (IV) the Partnership has not and will not become jointly and severally liable for any obligations arising under ERISA or the Code with respect to any "employee benefit plan" as defined in and subject to ERISA or any "plan" as defined in the Code for which the Partnership has not become or would not be liable if the Limited Partner or holder of Units and its Affiliate were not Limited Partners and were not holders of Units. 10.9 WAIVER OF FIDUCIARY DUTY. Each Limited Partner and holder of Units hereby waives, to the maximum extent permitted under law, any and all fiduciary duties of the General Partner to each, all or any combination of them and hereby agrees that the -42- General Partner may, but is under no obligation to, take their interests into account in performing or refraining from performing any act permitted under this Agreement. ARTICLE 11 AMENDMENT OF PARTNERSHIP AGREEMENT, MEETINGS 11.1 AMENDMENTS. (a) This Agreement may not be amended unless such amendment is approved by the General Partner with the Consent of the Limited Partners, except as provided below in this Section 11.1. (b) Notwithstanding Section 11.1(a), the General Partner shall have the power, without the Consent of the Limited Partners but after five (5) Business Days notice to the Limited Partners, to amend this Agreement as may be required to facilitate or implement any of the following purposes: (1) to add to the obligations of the General Partner for the benefit of the Limited Partners; (2) to reflect the admission, substitution, termination, or withdrawal of Partners after the date hereof in accordance with Section 4.1(d) or Article 9 of this Agreement, provided that the General Partner shall not be required to give the notice referred to in the first paragraph of this subsection (b) in respect of a transfer of Partnership Interests or Units upon the exercise of Rights; (3) to set forth the rights, powers, duties, and preferences of the holders of any additional Partnership Interests issued pursuant to Article 4 hereof; (4) to reflect a change that is of an inconsequential nature and does not adversely affect the Limited Partners, or to cure any ambiguity, correct or supplement any provision in this Agreement not inconsistent with law or with other provisions, or make other changes with respect to matters arising under this Agreement that will not be inconsistent with law or with the provisions of this Agreement; (5) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law; and (6) to prevent all or any portion of the assets of the Partnership from being deemed pursuant to United States Department of Labor Regulation Section 2510.3-101 or otherwise pursuant to ERISA or the Code to be, for any purpose of ERISA or Section 4975 of the Code, assets of any Restricted Entity. -43- (c) Notwithstanding Sections 11.1(a) and (b) hereof, this Agreement shall not be amended without the prior written consent of each Partner adversely affected if such amendment would (i) convert a Limited Partner's interest in the Partnership into a general partner's interest, (ii) modify the limited liability of a Limited Partner, (iii) alter rights of the Partners to receive allocations and distributions pursuant to Article 6 or Section 8.2 hereof (except as permitted pursuant to Section 11.1(b)(3) hereof), (iv) alter or modify the Rights set forth in the Exchange Rights Agreement or the Registration Rights Agreement except in compliance therewith, (v) amend this Section 11.1(c), (vi) alter such Partner's rights to transfer its Partnership Interests or (vii) amend Section 7.8, 7.9, 10.8 or 11.2(e) hereof. 11.2 MEETINGS OF THE PARTNERS; NOTICES TO PARTNERS. (a) Meetings of Partners may be called by the General Partner or by any Limited Partner to act on any matter specified herein or in the Act to be voted on or consented to by the Partners. The call shall state the nature of the business to be transacted. Notice of any such meeting shall be given to all Partners not less than seven (7) Business Days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Whenever the vote or Consent of the Limited Partners is permitted or required under this Agreement, such vote or consent may be given at a meeting of Partners or may be given in accordance with the procedure prescribed in Section 11.2(b) hereof. (b) Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a written consent setting forth the action so taken is signed by the General Partner and such percentage or number of the Limited Partners as is expressly required by this Agreement. Such consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of the Partners. Such consent shall be filed with the General Partner and copies thereof delivered to all Partners. An action so taken shall be deemed to have been taken at a meeting held on the effective date so certified. (c) Each Limited Partner may authorize any Person or Persons to act for him by proxy on all matters in which a Limited Partner is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Limited Partner or his attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Limited Partner executing it. No such proxy and no such revocation shall be effective unless a copy thereof has been delivered to the General Partner. (d) Whenever the Consent of the Limited Partners is required hereunder, the General Partner shall provide a notice to each Partner who is a Limited Partner on the date the notice is given setting forth the matter(s) as to which it proposes to seek such consent at least five (5) Business Days in advance of the date upon which such consent is sought. -44- (e) The General Partner shall provide advance written notice to the Limited Partners of any proposed sale or refinancing, and will consult during normal business hours with any Limited Partner who requests in writing the right to consult with the General Partner with respect thereto. The General Partner also shall provide the Limited Partners with quarterly tax projections for the Partnership. In no event, however, will the General Partner be obligated to agree to any modifications to a proposed sale or refinancing which are suggested by a Limited Partner, nor will any Limited Partner have a veto right over any such proposed sale or refinancing. ARTICLE 12 GENERAL PROVISIONS 12.1 NO LIABILITY OF DIRECTORS AND OTHERS. Notwithstanding anything to the contrary contained herein, no recourse shall be had by the Partnership or any Partner against any trustee, director, shareholder, officer, employee, agent or attorney of the General Partner for any act or omission of the General Partner or any obligation or liability of the General Partner under this Agreement, and none of the foregoing shall have any personal liability for or with respect to any of the foregoing; PROVIDED that the foregoing shall not relieve any trustee, officer or director of the General Partner of any liability in his capacity as such. 12.2 NOTICES. All notices, offers or other communications required or permitted to be given pursuant to this Agreement shall be in writing and may be personally served or sent by United States mail and shall be deemed to have been given when delivered in person or three business days after deposit in United States mail, registered or certified, postage prepaid, and properly addressed, by or to the appropriate party. For purposes of this Section 12.2, the addresses of the parties hereto shall be as set forth on Exhibit B hereto. The address of any party hereto may be changed by a notice in writing given in accordance with the provisions hereof. 12.3 CONTROLLING LAW. This Agreement and all questions relating to its validity, interpretation, performance and enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the State of Delaware, notwithstanding any conflict-of-laws doctrines of such state or other jurisdiction to the contrary. Each of the parties hereto irrevocably submits and consents to the jurisdiction of the United States District Court for the Southern District of New York and the United States District Court for the Central District of California in connection with any action or proceeding arising out of or relating to this Agreement and irrevocably waives any immunity from jurisdiction thereof and any claim of proper venue, forum non conveniens or any similar basis to which it might otherwise be entitled in any such action or proceeding. 12.4 EXECUTION OF COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party -45- whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. 12.5 SEVERABILITY. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. 12.6 ENTIRE AGREEMENT. This Agreement (together with the Exhibits hereto) and the Formation Agreement contain the entire understanding among the parties hereto with respect to the subject matter hereof, and supersede all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The parties hereto intend that this Agreement be treated as a separate and distinct agreement and as not being part of any other agreement (other than the Formation Agreement), arrangement, partnership or joint venture. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. 12.7 PARAGRAPH HEADINGS. The paragraph headings in this Agreement are for convenience and they form no part of this Agreement and shall not affect its interpretation. 12.8 GENDER, ETC. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context indicates is appropriate. The term "including" shall mean "including, but not limited to." 12.9 NUMBER OF DAYS. In computing the number of days (other than Business Days and Trading Days) for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and holidays; PROVIDED, HOWEVER, that if the final day of any time period falls on a Saturday, Sunday or holiday on which national banks are or may elect to be closed, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or such holiday. 12.10 PARTNERS NOT AGENTS. Nothing contained herein shall be construed to constitute any Partner the agent of another Partner, except as specifically provided herein, or in any manner to limit the Limited Partners in the carrying on of their own respective businesses or activities. 12.11 ASSURANCES. Each of the Partners shall hereafter execute and deliver such further instruments and do such further acts and things as may be reasonably required -46- or useful to carry out the intent and purpose of this Agreement and as are not inconsistent with the terms hereof. 12.12 WAIVER OF PARTITION. Each Partner hereby waives any right such Partner may have to partition its interest in the Partnership or any property of the Partnership. 12.13 STARWOOD LODGING TRUST. The name "Starwood Lodging Trust" is a designation of Starwood Lodging Trust and its Trustees (as Trustees but not personally) under the Declaration of Trust, and all persons dealing with Starwood Lodging Trust shall look solely to Starwood Lodging Trust's assets for the enforcement of any claims against Starwood Lodging Trust, as the Trustees, officers, agents and security holders of Starwood Lodging Trust assume no personal liability for obligations entered into on behalf of Starwood Lodging Trust, and their respective individual assets shall not be subject to the claims of any person relating to such obligations. IN WITNESS WHEREOF, the parties hereto have executed this Agreement or caused this Agreement to be executed on their behalf as of the date first above written. GENERAL PARTNER: STARWOOD LODGING TRUST, a Maryland real estate investment trust By: ________________________________________ Jeffrey C. Lapin President and Chief Operating Officer LIMITED PARTNERS: STARWOOD-APOLLO HOTEL PARTNERS VIII, L.P. By SAHI, INC. General Partner By: __________________________________ Name: Title: -47- BERL HOLDINGS, L.P. By BERL HOLDINGS I, INC. General Partner By: __________________________________ Name: Title: STARWOOD-APOLLO HOTEL PARTNERS IX, L.P. By SAHI, INC. General Partner By: __________________________________ Name: Title: STARWOOD-NOMURA HOTEL INVESTORS, L.P. By SNHI, INC. General Partner By: __________________________________ Name: Title: -48- STARWOOD/WICHITA INVESTORS, L.P. By STARWOOD OPPORTUNITY FUND II, L.P. General Partner By STARWOOD CAPITAL GROUP, L.P. General Partner By BSS CAPITAL PARTNERS, L.P. General Partner By STERNLICHT HOLDINGS II, INC. General Partner By: _______________________ Name: Title: STARWOOD-HUNTINGTON PARTNERS, L.P. By SRL HOLDINGS, INC. General Partner By: __________________________________ Name: Title: WOODSTAR PARTNERS I, L.P. By STARWOOD CAPITAL GROUP, L.P. General Partner By BSS CAPITAL PARTNERS, L.P. General Partner By STERNLICHT HOLDINGS II, INC. General Partner By: _______________________ Name: Title: -49- FIREBIRD CONSOLIDATED PARTNERS, L.P., By STARWOOD OPPORTUNITY FUND II, L.P. General Partner By STARWOOD CAPITAL GROUP, L.P. General Partner By BSS CAPITAL PARTNERS, L.P. General Partner By STERNLICHT HOLDINGS, II, INC. General Partner By: _______________________ Name: Title: -50- EXHIBIT A LIST OF PARTNERS, PERCENTAGE INTERESTS AND UNITS Date: As of ___________, 1995 Name of Partner Percentage Interest Units - --------------- ------------------- ----- Starwood Lodging Trust 25.3857% 2,022,158 Starwood-Apollo Hotel 2.7439% 218,576 Partners VIII, L.P. Starwood-Apollo Hotel 2.1952% 174,861 Partners IX, L.P. Starwood-Nomura Hotel 10.9956% 875,876 Investors, L.P. Firebird Consolidated 10.2173% 813,880 Partners, L.P. Woodstar Partners I, L.P. 13.9383% 1,110,286 Starwood/Wichita 4.4612% 355,364 Investors, L.P. Berl Holdings, L.P. 28.8117% 2,295,063 Starwood-Huntington 1.2512% 99,671 Partners, L.P. - ----------------------- --------- --------- Totals 100.0000% 7,965,735 EXHIBIT B NOTICE ADDRESS OF PARTNERS
Name of Partner Notice Address - --------------- -------------- Starwood Lodging Trust 11845 West Olympic Boulevard Suite 550 Los Angeles, California 90064 Attention: Jeffrey C. Lapin, President Fax No.: (310) 575-9512 Starwood-Apollo Hotel Partners VIII, L.P. c/o Starwood Capital Group, L.P. Three Pickwick Plaza Suite 250 Greenwich, Connecticut 06830 Attention: Madison F. Grose, Esq. Fax No.: (203) 861-2101 Starwood-Apollo Hotel Partners IX, L.P. c/o Starwood Capital Group, L.P. Three Pickwick Plaza Suite 250 Greenwich, Connecticut 06830 Attention: Madison F. Grose, Esq. Fax No.: (203) 861-2101 Starwood-Nomura Hotel Investors, L.P. c/o Starwood Capital Group, L.P. Three Pickwick Plaza Suite 250 Greenwich, Connecticut 06830 Attention: Madison F. Grose, Esq. Fax No.: (203) 861-2101 Firebird Consolidated Partners, L.P. c/o Starwood Capital Group, L.P. Three Pickwick Plaza Suite 250 Greenwich, Connecticut 06830 Attention: Madison F. Grose, Esq. Fax No.: (203) 861-2101 Berl Holdings, L.P. c/o Starwood Capital Group, L.P. Three Pickwick Plaza Suite 250 Greenwich, Connecticut 06830 Attention: Madison F. Grose, Esq. Fax No.: (203) 861-2101 Woodstar Partners I, L.P. c/o Starwood Capital Group, L.P. Three Pickwick Plaza Suite 250 Greenwich, Connecticut 06830 Attention: Madison F. Grose, Esq. Fax No.: (203) 861-2101 Starwood/Wichita Investors, L.P. c/o Starwood Capital Group, L.P. Three Pickwick Plaza Suite 250 Greenwich, Connecticut 06830 Attention: Madison F. Grose, Esq. Fax No.: (203) 861-2101 Starwood-Huntington Partners, L.P. c/o Starwood Capital Group, L.P. Three Pickwick Plaza Suite 250 Greenwich, Connecticut 06830 Attention: Madison F. Grose, Esq. Fax No.: (203) 861-2101
EX-10.22 7 EXHIBIT 10.22 EXHIBIT 10.22 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT OF SLC OPERATING LIMITED PARTNERSHIP - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS ARTICLE 1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE 2 Continuation and Business of the Partnership. . . . . . . . . . 13 2.1 Continuation. . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.2 Name. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.3 Character of the Business . . . . . . . . . . . . . . . . . . . 13 2.4 Location of Principal Place of Business . . . . . . . . . . . . 13 2.5 Registered Agent and Registered Office. . . . . . . . . . . . . 14 2.6 Restatement of Agreement. . . . . . . . . . . . . . . . . . . . 14 ARTICLE 3 Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.1 Commencement. . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.2 Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE 4 Capital Contributions . . . . . . . . . . . . . . . . . . . . . 15 4.1 Capital Contributions; Units. . . . . . . . . . . . . . . . . . 15 4.2 Percentage Interests. . . . . . . . . . . . . . . . . . . . . . 16 4.3 Purchase Rights . . . . . . . . . . . . . . . . . . . . . . . . 16 4.4 Redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.5 No Third Party Beneficiaries. . . . . . . . . . . . . . . . . . 17 4.6 No Interest on or Return of Capital Contribution. . . . . . . . 17 ARTICLE 5 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 17 5.1 Indemnification of General Partners . . . . . . . . . . . . . . 17 5.2 Indemnification of Limited Partners . . . . . . . . . . . . . . 18 5.3 Notice of Claims. . . . . . . . . . . . . . . . . . . . . . . . 19 5.4 Third Party Claims. . . . . . . . . . . . . . . . . . . . . . . 19 5.5 Indemnification Pursuant to Formation Agreement . . . . . . . . 20 ARTICLE 6 Allocations, Distributions and Other Tax and Accounting Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 6.1 Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . 21 6.2 Distributions . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.3 Books of Account. . . . . . . . . . . . . . . . . . . . . . . . 25 6.4 Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 6.5 Tax Elections and Returns . . . . . . . . . . . . . . . . . . . 25 6.6 Tax Matters Partner . . . . . . . . . . . . . . . . . . . . . . 26 -i- PAGE 6.7 Withholding Payments Required By Law. . . . . . . . . . . . . . 26 ARTICLE 7 Rights, Duties and Restrictions of the General Partners . . . . 27 7.1 Powers and Duties of the Managing General Partner . . . . . . . 27 7.2 [Intentionally Left Blank]. . . . . . . . . . . . . . . . . . . 31 7.3 Reimbursement of the General Partners . . . . . . . . . . . . . 31 7.4 Outside Activities of the General Partners. . . . . . . . . . . 31 7.5 Contracts with Affiliates . . . . . . . . . . . . . . . . . . . 32 7.6 Title to Partnership Assets . . . . . . . . . . . . . . . . . . 32 7.7 Reliance by Third Parties . . . . . . . . . . . . . . . . . . . 32 7.8 Liability of the General Partners . . . . . . . . . . . . . . . 33 7.9 Other Matters Concerning the General Partners . . . . . . . . . 33 7.10 Operation of SLT in Accordance with REIT Requirements . . . . . 34 7.11 Replacement of Managing General Partner . . . . . . . . . . . . 34 7.12 Management Committee. . . . . . . . . . . . . . . . . . . . . . 34 ARTICLE 8 Dissolution, Liquidation and Winding-Up . . . . . . . . . . . . 35 8.1 Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . 35 8.2 Distribution on Dissolution . . . . . . . . . . . . . . . . . . 35 8.3 Documentation of Liquidation. . . . . . . . . . . . . . . . . . 36 ARTICLE 9 Transfer. . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.1 General Partners. . . . . . . . . . . . . . . . . . . . . . . . 36 9.2 Transfers by Limited Partners . . . . . . . . . . . . . . . . . 37 9.3 Certain Restrictions on Transfer. . . . . . . . . . . . . . . . 38 9.4 Effective Dates of Transfers. . . . . . . . . . . . . . . . . . 39 9.5 Transfer. . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 9.6 Nevada Gaming Control Act . . . . . . . . . . . . . . . . . . . 40 ARTICLE 10 Rights and Obligations of the Limited Partners. . . . . . . . . 41 10.1 No Participation in Management. . . . . . . . . . . . . . . . . 41 10.2 Bankruptcy of a Limited Partner . . . . . . . . . . . . . . . . 41 10.3 No Withdrawal . . . . . . . . . . . . . . . . . . . . . . . . . 41 10.4 Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 10.5 Provision of Information. . . . . . . . . . . . . . . . . . . . 42 10.6 Limited Partner Representative. . . . . . . . . . . . . . . . . 43 10.7 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . 43 10.8 Ownership of Paired Shares. . . . . . . . . . . . . . . . . . . 44 -ii- PAGE 10.9 Waiver of Fiduciary Duty. . . . . . . . . . . . . . . . . . . . 45 ARTICLE 11 Amendment of Partnership Agreement, Meetings. . . . . . . . . . 45 11.1 Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . 45 11.2 Meetings of the Partners; Notices to Partners . . . . . . . . . 46 ARTICLE 12 General Provisions. . . . . . . . . . . . . . . . . . . . . . . 47 12.1 No Liability of Directors and Others. . . . . . . . . . . . . . 47 12.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 12.3 Controlling Law . . . . . . . . . . . . . . . . . . . . . . . . 47 12.4 Execution of Counterparts . . . . . . . . . . . . . . . . . . . 48 12.5 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . 48 12.6 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . 48 12.7 Paragraph Headings. . . . . . . . . . . . . . . . . . . . . . . 48 12.8 Gender, Etc.. . . . . . . . . . . . . . . . . . . . . . . . . . 48 12.9 Number of Days. . . . . . . . . . . . . . . . . . . . . . . . . 48 12.10 Partners Not Agents . . . . . . . . . . . . . . . . . . . . . . 49 12.11 Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . . 49 12.12 Waiver of Partition . . . . . . . . . . . . . . . . . . . . . . 49 -iii- LIST OF EXHIBITS Exhibit - ------- A List of Partners, Percentage Interests and Units B Notice Address of Partners -iv- THE LIMITED PARTNERSHIP INTERESTS REFERRED TO IN THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. REFERENCE IS MADE TO ARTICLE 9 OF THIS AGREEMENT FOR PROVISIONS RELATING TO VARIOUS RESTRICTIONS ON THE SALE OR OTHER TRANSFER OF THESE INTERESTS. AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT OF SLC OPERATING LIMITED PARTNERSHIP THIS AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT (this "Agreement") is made and entered into this ____ day of ________, 1995 by and among Starwood Lodging Corporation, a Maryland corporation, as managing general partner and the persons whose names are set forth Exhibit A hereto, as such exhibit may be amended from time to time, as general and limited partners, pursuant to the provisions of the Delaware Revised Uniform Limited Partnership Act. A. Starwood Lodging Corporation, Berl Holdings, L.P., Starwood- Apollo Hotel Partners VIII, L.P., Starwood-Apollo Hotel Partners IX, L.P., Starwood-Nomura Hotel Investors, L.P., Starwood/Wichita Investors, L.P., Starwood-Huntington Partners, L.P., and Woodstar Partners I, L.P., were the parties to that certain Limited Partnership Agreement of SLC Operating Limited Partnership, dated as of December 15, 1994 (the "Original Agreement"). B. Starwood Lodging Corporation was formerly named "Hotel Investors Corporation" and has changed its name to "Starwood Lodging Corporation" and Starwood Lodging Trust was formerly named "Hotel Investors Trust" and has changed its name to "Starwood Lodging Trust". C. Firebird Consolidated Partners, L.P., was admitted as a limited partner of the Partnership pursuant to that certain Admission of Limited Partner, Consent and Amendment dated March 24, 1995 (the "Amendment"). D. On June 19, 1995, Starwood Lodging Corporation effected a six-to- one reverse split of its outstanding shares. E. The parties hereto have agreed to amend and restate the Original Agreement, as amended by the Amendment, in its entirety to reflect the foregoing and to make other necessary or appropriate changes to the Original Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: ARTICLE 1 DEFINITIONS 1.1 DEFINITIONS. Except as otherwise herein expressly provided, the following terms and phrases shall have the meanings as set forth below: "ACCOUNTANTS" shall mean the national firm or firms of independent certified public accountants selected by the Managing General Partner on behalf of the Partnership to audit the books and records of the Partnership and to prepare statements and reports in connection therewith. "ACT" shall mean the Delaware Revised Uniform Limited Partnership Act, as the same may hereafter be amended from time to time. "ADJUSTED CAPITAL ACCOUNT DEFICIT" shall mean, with respect to any Partner or holder of Units other than a General Partner, the deficit balance, if any, in such holder's Capital Account as of the end of any relevant fiscal year and after giving effect to the following adjustments: (a) credit to such Capital Account any amounts which such holder is obligated or treated as obligated to restore with respect to any deficit balance in such Capital Account pursuant to Section 1.704-1(b)(2)(ii)(c) of the Regulations, or is deemed to be obligated to restore with respect to any deficit balance pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations; and (b) debit to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Regulations. The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the requirements of the alternate test for economic effect contained in Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith. "ADMINISTRATIVE EXPENSES" shall mean: (a) all administrative and operating costs and expenses of the Partnership; (b) those administrative costs and expenses of a General Partner, including, but not limited to, salaries and other renumerations paid to -2- trustees, officers and employees of a General Partner and accounting and legal expenses undertaken by a General Partner on behalf or for the benefit of the Partnership; and (c) all expenses which the Partnership hereby assumes and agrees to pay as incurred for the benefit of the Partnership, including (i) costs and expenses relating to the formation and continuation of the Partnership and continuity of existence of the General Partners, including taxes (other than the General Partners' federal and state income and franchise taxes, if any), fees and assessments associated therewith, any and all costs, expenses or fees payable to any director or trustee of the General Partners, (ii) to the extent funded by a General Partner for payment by the Partnership, costs and expenses relating to any offer or registration of securities by a General Partner the net proceeds of which are to be contributed or loaned to the Partnership and all statements, reports, fees and expenses incidental thereto, including underwriting discounts and selling commissions applicable to any such offer of securities, (iii) costs and expenses associated with the preparation and filing of any periodic reports by the General Partners under federal, state or local laws or regulations, including filings with the SEC, (iv) costs and expenses associated with compliance by the General Partners with laws, rules and regulations promulgated by any regulatory body, including the SEC, (v) costs and expenses incurred, directly or indirectly, by any General Partner pursuant to a settlement or other agreement by and between Leonard M. Ross and SCG and (vi) all other costs of the General Partners incurred in the course of their business on behalf of the Partnership including, but not limited to, any indemnification obligations of a General Partner (other than indemnification pursuant to Section 9.1 and 9.2 of the Formation Agreement). "AFFECTED GAIN" shall have the meaning set forth in Section 6.1(c)(ii) hereof. "AFFILIATE" shall mean, with respect to any Partner (or as to any other Person the Affiliates of whom are relevant for purposes of any of the provisions of this Agreement): (a) any member of the Immediate Family of such Partner or Person; (b) any trustee or beneficiary of a Partner which is a trust; (c) any trust for the benefit of any Person referred to in the preceding clauses (a) and (b); or (d) any Entity which directly or indirectly through one or more intermediaries, Controls, is Controlled by, or is under common Control with, any Partner or Person referred to in the preceding clauses (a) through (c). "AGREEMENT" shall mean this Limited Partnership Agreement, as amended, modified, supplemented or restated from time to time, as the context requires. "AMENDMENT" shall have the meaning set forth in Recital C hereof. "ARTICLES OF INCORPORATION" shall mean the Amended and Restated Articles of Incorporation of the Managing General Partner, as the same may be amended, modified, supplemented, restated or superseded from time to time. "AUDITED FINANCIAL STATEMENTS" shall mean financial statements (balance sheet, statement of income, statement of partners equity and statement of cash flows) -3- prepared in accordance with GAAP and accompanied by an independent auditor's report containing an opinion thereon. "BANKRUPTCY" shall mean, with respect to any Person: (a) the commencement by such Person of any petition, case or proceeding seeking relief under any provision or chapter of the federal Bankruptcy Code or any other federal or state law relating to insolvency, bankruptcy or reorganization; (b) an adjudication that such Person is insolvent or bankrupt; (c) the entry of an order for relief under the federal Bankruptcy Code with respect to such Person; (d) the filing of any such petition or the commencement of any such case or proceeding against such Person, unless such petition and the case or proceeding initiated thereby are dismissed within ninety (90) days from the date of such filing; or (e) the filing of an answer by such Person admitting the allegations of any such petition. "BUSINESS DAY" shall mean any day that is not a Saturday, Sunday or a day on which banking institutions in the State of California or the State of New York are authorized or obligated by law or executive order to close. "CAPITAL ACCOUNT" shall mean, as to any Partner or holder of Units, a book account maintained in accordance with the following provisions: (a) to each Partner's or holder of Unit's Capital Account there shall be credited the amount of cash contributed by the Partner or holder, the initial Gross Asset value of any other asset contributed by such Partner or holder to the capital of the Partnership (net of liabilities secured by contributed property that the Partnership assumes or takes subject to), such Partner's or holder's distributive share of Net Income and any other items of income or gain allocated to such Partner or holder, the amount of any Partnership liabilities assumed by the Partner or holder or secured by distributed assets that such Partner or holder takes subject to and any other items in the nature of income or gain that are allocated to such Partner or holder pursuant to Section 6.1 hereof; and (b) to each Partner's or holder of Unit's Capital Account there shall be debited the amount of cash distributed to the Partner or holder, the Gross Asset Value of any Partnership asset distributed to such Partner or holder pursuant to any provision of this Agreement, such Partner's or holder's distributive share of Net Losses and any other items in the nature of expenses or losses that are allocated to such Partner pursuant to Section 6.1 hereof. In the event that a Partner's Partnership Interest or a holder of Unit's Units or portion thereof is transferred within the meaning of Section 1.704- 1(b)(2)(iv)(f) of the Regulations, the transferee shall succeed to the Capital Account of the transferor to the extent that it relates to the Partnership Interest, Units or portion thereof so transferred. In the event that the Gross Asset Values of Partnership assets are adjusted, as contemplated in paragraph (b) or (c) of the definition of "Gross Asset Value," the Capital Accounts of the Partners and holders of Units shall be adjusted to reflect the aggregate net adjustments as if the Partnership sold all of its properties for their fair market values and recognized gain or loss -4- for federal income tax purposes equal to the amount of such aggregate net adjustment. This definition of Capital Accounts is intended to comply with the maintenance of capital account provisions of Section 1.704-1(b) of the Regulations and shall be interpreted and applied in a manner consistent therewith. "CAPITAL CONTRIBUTION" shall mean, with respect to any Partner, the amount of cash and the initial Gross Asset Value of any Contributed Property (net of liabilities to which such property is subject). "CERTIFICATE" shall mean the Certificate of Limited Partnership establishing the Partnership, as filed with the office of the Delaware Secretary of State, as amended from time to time in accordance with the terms of this Agreement and the Act. "CODE" shall mean the Internal Revenue Code of 1986, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of future law. "COMMISSION" shall mean the Nevada Gaming Commission. "CONSENT OF THE LIMITED PARTNERS" shall mean the written consent of a Majority-In-Interest of the Limited Partners given in accordance with Section 11.2 hereof, which Consent shall be obtained prior to the taking of any action for which it is required by this Agreement and may be given or withheld by a Majority-In-Interest of the Limited Partners, unless otherwise expressly provided herein, in their sole and absolute discretion. "CONTRIBUTED PROPERTY" shall mean any property or other asset in such form as may be permitted by the Act, but excluding cash, contributed or deemed contributed to the Partnership with respect to the Partnership Interest held by each Partner. "CONTROL" shall mean the ability, whether by the direct or indirect ownership of shares or other equity interests, by contract or otherwise, to elect a majority of the directors of a corporation, to select the managing partner of a partnership, or otherwise to select, or have the power to remove and then select, a majority of those persons exercising governing authority over an Entity. In the case of a limited partnership, the sole general partner, all of the general partners to the extent each has equal management control and authority, or the managing general partner or managing general partners thereof shall be deemed to have control of such partnership and, in the case of a trust, any trustee thereof or any Person having the right to select any such trustee shall be deemed to have control of such trust. "DEPRECIATION" shall mean, with respect to any asset of the Partnership for any fiscal year or other period, the depreciation or amortization, as the case may be, allowed or allowable for federal income tax purposes in respect of such asset for such fiscal year or other period, except that if the Gross Asset Value of an asset differs from its adjusted -5- tax basis for federal income tax purposes at the beginning of such fiscal year or other period, Depreciation shall be an amount that bears the same ratio to such beginning book value as the federal income tax depreciation, amortization or other cost recovery deduction for such fiscal year or other period bears to such beginning adjusted tax basis and if such adjusted tax basis is zero, the Depreciation shall be based on the method of depreciation, amortization or other cost recovery deduction utilized in preparing the financial statements of the Partnership. "ENTITY" shall mean any general partnership, limited partnership, limited liability company, corporation, joint venture, trust, business trust, real estate investment trust or association. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time and as interpreted by the applicable regulations thereunder (or any corresponding provisions of succeeding laws and regulations). "EXCHANGE RIGHTS AGREEMENT" shall mean that certain Exchange Rights Agreement by and among Starwood Lodging Trust, Starwood Lodging Corporation and Starwood Capital Group, L.P., dated as of December 15, 1994. "FORMATION AGREEMENT" shall mean that certain Formation Agreement by and among Starwood Lodging Trust, Starwood Lodging Corporation, Starwood Capital Group, L.P., Berl Holdings, L.P., Woodstar Partners I, L.P., Starwood- Apollo Hotel Partners VIII, L.P., Starwood-Apollo Hotel Partners IX, L.P., Starwood-Nomura Hotel Investors, L.P., Starwood/Wichita Investors, L.P., and Starwood-Huntington Partners, L.P., and dated as of November 11, 1994, and any amendments or modifications thereof or side letters thereto. "GAAP" shall mean generally accepted accounting principles in effect from time to time. "GENERAL PARTNERS" shall mean those Persons listed under the heading "General Partners" on the signature pages hereto in their respective capacities as general partners of the Partnership, their permitted successors or assigns as general partners hereof, and any Person who, at the time of reference thereto, is a general partner of the Partnership. Unless the context clearly indicates to the contrary, the term "General Partner" shall include the Managing General Partner. "GROSS ASSET VALUE" shall mean, with respect to any asset of the Partnership, such asset's adjusted basis for federal income tax purposes, except as follows: (a) the initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset at the time of its contribution as reasonably determined by the Managing General Partner and the contributing Partner; -6- (b) the Gross Asset values of all Partnership assets shall be adjusted to equal their respective gross fair market values, as reasonably determined by the Managing General Partner, immediately prior to the following events: (i) a Capital Contribution (other than a DE MINIMIS Capital Contribution) to the Partnership by a new or existing Partner as consideration for a Partnership Interest; (ii) the distribution by the Partnership to a Partner of more than a DE MINIMIS amount of Partnership property as consideration for the redemption of a Partnership Interest; (iii) the liquidation of the Partnership within the meaning of Section 1.704-1(b)(2)(ii)(g) of the Regulations; and (iv) any other event as to which the Managing General Partner reasonably determines that an adjustment is necessary or appropriate to reflect the relative economic interests of the Partners; (c) the Gross Asset Values of Partnership assets distributed to any Partner shall be the gross fair market values of such assets as reasonably determined by the Managing General Partner as of the date of distribution; and (d) the Gross Asset Values of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Sections 734(b) or 743(b) of the Code, but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Section 1.704-1(b)(2)(iv)(m) of the Regulations; PROVIDED, HOWEVER, that Gross Asset Values shall not be adjusted pursuant to this paragraph to the extent that the Managing General Partner reasonably determines that an adjustment pursuant to paragraph (b) above is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this paragraph (d). At all times, Gross Asset Values shall be adjusted by any Depreciation taken into account with respect to the Partnership's assets for purposes of computing Net Income and Net Loss. Any adjustment to the Gross Asset Values of Partnership property shall require an adjustment to the Partner's Capital Accounts. "HICN" shall mean Hotel Investors Corporation of Nevada, a Nevada corporation. "HICN PARTNERSHIP" shall have the meaning providing in Section 4.1(f) hereof. -7- "IMMEDIATE FAMILY" shall mean, with respect to any Person, such Person's spouse (then current or former), parents, parents-in-law, descendants, brothers and sisters (whether by whole or half-blood), first cousins, brothers-in-law and sisters-in-law (whether by whole or half-blood), ancestors and lineal descendants. "INDEMNITEE" shall mean any Person who is, or at any time on or after December 15, 1994 was, a (i) General Partner, (ii) employee, trustee, director, officer, stockholder or Liquidating Trustee of the Partnership or a General Partner or (iii) member of the Management Committee. "LIEN" shall mean any liens, security interests, mortgages, deeds of trust, pledges, options, rights of first offer or first refusal and any other similar encumbrances of any nature whatsoever. "LIMITED PARTNER REPRESENTATIVE" shall have the meaning set forth in Section 10.6 hereof. "LIMITED PARTNERS" shall mean those Persons listed under the heading "Limited Partners" on the signature page hereto in their respective capacities as limited partners of the Partnership, their permitted successors or assigns as limited partners hereof, and any Person who, at the time of reference thereto, is a limited partner of the Partnership. "LIQUIDATING TRUSTEE" shall mean such individual or Entity which is selected as the Liquidating Trustee hereunder by the Managing General Partner, which individual or Entity may include the Managing General Partner or an Affiliate of the Managing General Partner, provided that such Liquidating Trustee agrees in writing to be bound by the terms of this Agreement. The Liquidating Trustee shall be empowered to give and receive notices, reports and payments in connection with the dissolution, liquidation and/or winding up of the Partnership and shall hold and exercise such other rights and powers granted to the Managing General Partner herein or under the Act as are necessary or required to conduct the winding-up and liquidation of the Partnership's affairs and to authorize all parties to deal with the Liquidating Trustee in connection with the dissolution, liquidation and/or winding-up of the Partnership. "MAJORITY-IN-INTEREST OF THE GENERAL PARTNERS" shall mean General Partner(s) who hold in the aggregate more than fifty (50) percent of the Percentage Interests then allocable to and held by the General Partners, as a class, including any Partnership Interests acquired by any Person controlled by a General Partner, or any person holding as a nominee of a General Partner or any Person controlled by a General Partner. "MAJORITY-IN-INTEREST OF THE LIMITED PARTNERS" shall mean Limited Partner(s) who hold in the aggregate more than fifty (50) percent of the Percentage Interests then allocable to and held by the Limited Partners, as a class (but excluding any Partnership Interests acquired by the General Partner, or any Person holding as a nominee of a General Partner or any Person controlled by a General Partner). -8- "MANAGEMENT COMMITTEE" shall mean Barry S. Sternlicht, Steven Robert Goldman, Bruce M. Ford and such other persons as they may appoint. "MANAGING GENERAL PARTNER" shall mean Starwood Lodging Corporation, a Maryland corporation, its duly admitted successors and assigns as managing general partner of the Partnership at the time of reference thereto. "MINIMUM GAIN ATTRIBUTABLE TO PARTNER NONRECOURSE DEBT" shall mean "partner nonrecourse debt minimum gain" as determined in accordance with Section 1.704-2(i)(2) of the Regulations. "NET CASH FLOW" shall mean, with respect to any fiscal period of the Partnership, the excess, if any, of "Receipts" over "Expenditures." For purposes hereof, the term "Receipts" means the sum of all cash receipts of the Partnership from all sources for such period and any amounts held as reserves as of the last day of such period which the Managing General Partner reasonably deems to be in excess of reserves as determined below. The term "Expenditures" means the sum of (a) all cash expenditures of the Partnership for any purpose, including operating expenses and capital expenditures for such period, (b) the amount of all payments of principal, premium, if any, and interest on account of any indebtedness of the Partnership, and (c) such additions to cash reserves as of the last day of such period as the Managing General Partner deems necessary or appropriate for any capital, operating or other expenditure, including, without limitation, contingent liabilities; but the term "Expenditures" shall not include amounts paid from cash reserves previously established by the Partnership. "NET INCOME" or "NET LOSS" shall mean, for each fiscal year or other applicable period, an amount equal to the Partnerships's net income or loss for such year or period as determined for federal income tax purposes by the Accountants, determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a) of the Code shall be included in taxable income or loss), with the following adjustments: (a) by including as an item of gross income any tax-exempt income received by the Partnership; (b) by treating as a deductible expense any expenditure of the Partnership described in Section 705(a)(2)(B) of the Code (including amounts paid or incurred to organize the Partnership (unless an election is made pursuant to Section 709(b) of the Code) or to promote the sale of interests in the Partnership and by treating deductions for any losses incurred in connection with the sale or exchange of Partnership property disallowed pursuant to Section 267(a)(1) or Section 707(b) of the Code as expenditures described in Section 705(a)(2)(B) of the Code); (c) in lieu of depreciation, depletion, amortization and other cost recovery deductions taken into account in computing total income or loss, there shall be taken into account Depreciation; (d) gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of such property rather than its adjusted tax basis; (e) in the event of an adjustment of the Gross Asset Value of any Partnership asset which requires that the Capital Accounts of the Partnership be adjusted pursuant to Sections 1.704-1(b)(2)(iv)(e), (f) and (m) -9- of the Regulations, the amount of such adjustment is to be taken into account as additional Net Income or Net Loss pursuant to Section 6.1 hereof; and (f) excluding any items specially allocated pursuant to Section 6.1(b) hereof. "NONRECOURSE DEDUCTIONS" shall have the meaning set forth in Sections 1.704-2(b)(1) and (c) of the Regulations and shall be determined in accordance with Section 1.704-2(c) of the Regulations. "NONRECOURSE LIABILITIES" shall have the meaning set forth in Section 1.704-2(b)(3) of the Regulations. "ORIGINAL AGREEMENT" shall have the meaning set forth in Recital A hereof. "PAIRED SHARES" shall mean one Share and one common share of beneficial interest of SLT that are subject to a pairing agreement between the Managing General Partner and SLT. "PARTNER NONRECOURSE DEBT" shall have the meaning set forth in Section 1.704-2(b)(4) of the Regulations. "PARTNER NONRECOURSE DEDUCTIONS" shall have the meaning set forth in Section 1.704-2(i)(2) of the Regulations and the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt shall be determined in accordance with the rules of Section 1.704-2(i) of the Regulations. "PARTNERS" shall mean the General Partners and the Limited Partners, their duly admitted successors or assigns or any Person who is a partner of the Partnership at the time of reference thereto. "PARTNERSHIP" shall mean the limited partnership formed under the Act pursuant to the Original Agreement and any successor thereto. "PARTNERSHIP INTEREST" shall mean the ownership interest of a Partner in the Partnership from time to time, including each Partner's Percentage Interest and such Partner's Units. "PARTNERSHIP MINIMUM GAIN" shall have the meaning set forth in Section 1.704-2(b)(2) of the Regulations and the amount of Partnership Minimum Gain (and any net increase or decrease thereof) for a fiscal year or other period shall be determined in accordance with the rules of Section 1.704-2(d) of the Regulations. "PARTNERSHIP RECORD DATE" means the record date established by the Managing General Partner for distribution of Net Cash Flow pursuant to Section 6.2 hereof, -10- which record date shall be the same as the record date established by the Managing General Partner for distribution to its shareholders of some or all of its portion of such distribution. "PERCENTAGE INTEREST" shall mean, with respect to any Partner, the percentage ownership interest of such Partner in such items of the Partnership as to which the term "Percentage Interests" is applied in this Agreement, as provided in Section 4.2 hereof. "PERSON" shall mean any natural person or Entity. "PROPERTY" shall mean any property acquired by or contributed to the Partnership. "PURCHASE RIGHTS" shall have the meaning set forth in Section 4.3 hereof. "REALTY PARTNERSHIP" shall mean SLT Realty Limited Partnership, a Delaware limited partnership. "REGISTRATION RIGHTS AGREEMENT" shall mean that certain Registration Rights Agreement by and among Starwood Lodging Trust, Starwood Lodging Corporation and Starwood Capital Group, L.P., and dated as of December 15, 1994. No provision of this Agreement shall be interpreted as granting any Partner or holder of Units registration rights or any rights or interest in or to the Registration Rights Agreement. "REGULATIONS" shall mean the income tax regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "REGULATORY ALLOCATIONS" shall have the meaning set forth in Section 6.1(b)(viii) hereof. "REIT" shall mean a real estate investment trust as defined in Section 856 of the Code. "REIT REQUIREMENTS" shall mean the requirements for SLT to: (a) qualify as a REIT under the Code and Regulations; (b) avoid any federal income or excise tax liability; (c) retain its status as grandfathered pursuant to Section 132(c)(3) of the Deficit Reduction Act of 1984; and (d) retain the benefits of that certain private letter ruling issued by the Internal Revenue Service to SLT dated as of January 4, 1980. "REIT Requirements" shall also include the ownership limitation provisions set forth in Article VI of the Declaration of Trust of SLT, dated August 25, 1969, as amended and restated as of June 6, 1988, and in TENTH Article of the Articles of Incorporation. -11- "RESTRICTED ENTITY" shall mean any "employee benefit plan" as defined in and subject to ERISA, any "plan" as defined in and subject to Section 4975 of the Code, or any entity any portion or all of the assets of which are deemed pursuant to United States Department of Labor Regulation Section 2510.3- 101 or otherwise pursuant to ERISA or the Code to be, for any purpose of ERISA or Section 4975 of the Code, assets of any such "employee benefit plan" or "plan" which invests in such entity. "RIGHTS" shall mean the rights of Limited Partners set forth in the Exchange Rights Agreement and the Registration Rights Agreement. No provision of this Agreement shall be interpreted as granting any Partner or holder of Units any Rights or any rights or interest in or to the Exchange Rights Agreement or the Registration Rights Agreement. "SCG" shall mean Starwood Capital Group, L.P., a Delaware limited partnership. "SEC" shall mean the United States Securities and Exchange Commission. "SECTION 704(c) TAX ITEMS" shall have the meaning set forth in Section 6.1(c)(iii) hereof. "SHARES" shall mean the common stock, par value $0.01 per share, of the Managing General Partner. "SLT" shall mean Starwood Lodging Trust, a Maryland real estate investment trust. "TAX ITEMS" shall have the meaning set forth in Section 6.1(c)(i) hereof. "TAX PAYMENT LOAN" shall have the meaning set forth in Section 6.7(a) hereof. "UNITS" shall have the meaning set forth in Section 4.1(c) hereof. "WITHHOLDING TAX ACT" shall have the meaning set forth in Section 6.7(a) hereof. -12- ARTICLE 2 CONTINUATION AND BUSINESS OF THE PARTNERSHIP 2.1 CONTINUATION. The parties hereto do hereby continue the limited partnership formed pursuant to the Original Agreement and pursuant to the provisions of the Act and upon the terms and conditions set forth herein. The parties hereto agree that the rights and liabilities of the Partners shall be as provided herein. The parties hereto shall immediately execute and deliver all certificates and other documents and do all filings, recording and publishing and other acts as in the judgment of the Managing General Partner may be appropriate to comply with all of the requirements for the formation of a limited partnership under the Act and the qualification of the Partnership in any jurisdiction in which the Partnership owns property or conducts business. 2.2 NAME. The name of the Partnership shall be SLC Operating Limited Partnership, or such other name as shall be chosen from time to time by the Managing General Partner in its sole and absolute discretion; PROVIDED, HOWEVER, that the Managing General Partner may not choose the name (or any derivative thereof) of any Limited Partner without the prior written consent of such Limited Partner. 2.3 CHARACTER OF THE BUSINESS. The purpose of the Partnership shall be to acquire, hold, own, develop, redevelop, construct, improve, maintain, operate, manage, sell, lease, rent, transfer, encumber, mortgage, convey, exchange and otherwise dispose of or deal with hotels and any other real and personal property of all kinds; to undertake such other activities as may be necessary, desirable or appropriate to the business of the Partnership; to engage in such other activities as shall be necessary, desirable or appropriate to effectuate the foregoing purposes; and to otherwise engage in any enterprise or business in which a limited partnership may engage or conduct under the Act. The Partnership shall have all powers necessary, desirable or appropriate to accomplish the purposes enumerated. In connection with the foregoing, but subject to the terms and conditions of this Agreement, the Partnership shall have full power and authority to enter into, perform and carry out contracts of any kind, to borrow money and to issue evidences of indebtedness, whether or not secured by Liens, and, directly or indirectly, to acquire and construct additional Properties necessary or useful in connection with its business. The character and general nature of the business to be conducted by the Partnership shall include, but not be limited to, the operation, management and the conduct of gaming in gaming establishments located on or within the premises known as the Bourbon Street Hotel and Casino and the King 8 Gambling Hall and Hotel, located at 120 East Flamingo Road, Las Vegas, Nevada, and 3330 West Tropicana Avenue, Las Vegas, Nevada, respectively. 2.4 LOCATION OF PRINCIPAL PLACE OF BUSINESS. The location of the principal place of business of the Partnership shall be at 11845 West Olympic Boulevard, Suite 560, Los Angeles, California 90064, or such other location as shall be selected from time to time by the Managing General Partner in its sole and absolute discretion; PROVIDED, HOWEVER, that -13- the Managing General Partner shall notify the Partners of any change in the location of the principal place of business of the Partnership within thirty (30) days thereafter. 2.5 REGISTERED AGENT AND REGISTERED OFFICE. The registered agent of the Partnership shall be The Corporation Trust Company or such other Person as the Managing General Partner may select in its sole and absolute discretion. The registered office of the Partnership in the State of Delaware shall be c/o The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801 or such other location as the Managing General Partner may from time to time select in its sole discretion; PROVIDED, HOWEVER, that the Managing General Partner shall notify the Partners of any change in the registered office or registered agent of the Partnership within thirty (30) days thereafter. 2.6 RESTATEMENT OF AGREEMENT. This Agreement amended and restates the Original Agreement and the Amendment in their entirety effective as of the date first above written and, effective as of such date, the Original Agreement and the Amendment shall be of no further force or effect. ARTICLE 3 TERM 3.1 COMMENCEMENT. The Partnership's term commenced upon the filing of the Certificate with the Secretary of State of Delaware on December 15, 1994. 3.2 DISSOLUTION. The Partnership shall continue until dissolved and terminated upon the occurrence of the earliest of the following events: (a) the death, dissolution, termination, withdrawal, retirement, expulsion or Bankruptcy of a General Partner, unless the Partnership's business is continued as provided in Section 9.1 hereof; (b) the election to dissolve the Partnership made in writing by the Managing General Partner; (c) the sale or other disposition of all or substantially all of the assets of the Partnership unless the Managing General Partner elects to continue the Partnership business for the purpose of the receipt and the collection of indebtedness or the collection of any other consideration to be received in exchange for the assets of the Partnership (which activities shall be deemed to be part of the winding up of the affairs of the Partnership); (d) the entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Act, which decree is final and not subject to appeal; or (e) December 31, 2094. -14- ARTICLE 4 CAPITAL CONTRIBUTIONS 4.1 CAPITAL CONTRIBUTIONS; UNITS. (a) As of the date first above written, the Partners have the Percentage Interests in the Partnership as set forth in Exhibit A which Percentage Interests shall be adjusted to the extent necessary to reflect properly exchanges, redemptions or conversions of Partnership Interests, Capital Contributions, the issuance of additional Partnership Interests or any other event having an effect on a Partner's Percentage Interest, in each case to the extent permitted by and in accordance with this Agreement. Except to the extent specifically set forth in this Agreement with respect to the General Partners, the Partners shall have no obligation to make any additional Capital Contributions or loans to the Partnership, even if the failure to do so could result in the Bankruptcy or insolvency of the Partnership or any other adverse consequence to the Partnership. (b) The General Partners shall, from time to time, contribute cash or Property to the Partnership such that the aggregate Percentage Interests of all General Partners shall at all times be at least one (1) percent and the aggregate Capital Account balances of all General Partners shall be at least the lesser of $500,000 or one (1) percent of the total positive Capital Account balances for the Partnership. (c) The interest of a Partner (or an assignee of a Partner) in capital, allocations of Net Income, Net Losses and distributions shall be evidenced by the issuance to such Partner (or assignee) of one or more "Units." The aggregate total of all Units outstanding and the ownership of Units by each Partner as of the date of this Agreement, are as set forth on Exhibit A hereto. (d) From time to time, the Managing General Partner may cause the Partnership to issue additional Partnership Interests to existing or newly- admitted Partners in exchange for additional Capital Contributions (including Capital Contributions pursuant to Section 4.1(b)). If the Managing General Partner contributes to the Partnership the net proceeds to the Managing General Partner from any offering or sale of Paired Shares (including, without limitation, any issuance of Paired Shares pursuant to the exercise of options, warrants, convertible securities, or similar rights to acquire Paired Shares), the Partnership shall issue to the Managing General Partner Units equal in number to the number of Paired Shares issued in such offering. (e) The Managing General Partner is hereby authorized to cause the Partnership to issue Partnership Interests in one or more classes or one or more series of any of such classes, with such designations, preferences and relative, participating, optional or other special rights, powers and duties, including rights, powers and duties senior to the then-existing Partnership Interests and Units, as shall be determined by the Managing -15- General Partner in its sole and absolute discretion, including (i) the allocation of items of Partnership income, gain, loss, deduction and credit to each such class or series of Partnership Interests and (ii) the rights of each such class or series of Partnership Interests to share in Partnership distributions (including liquidating distributions); PROVIDED, HOWEVER, that no such additional Partnership Interests shall be issued to the Managing General Partner unless (x) the additional Partnership Interests are issued in connection with an issuance of shares of the Managing General Partner, which shares have designations, preferences and other rights, all such that the economic interests of such shares are substantially similar to the designations, preferences and other rights of the additional Partnership Interests issued to the Managing General Partner in accordance with this Section 4.1(e) and (y) the Managing General Partner contributes to the Partnership an amount equal to the net proceeds received by the Managing General Partner in connection with the issuance of such shares. (f) As of the date first above written, HICN shall be issued the number of Units set forth on Exhibit A hereto. On or before December 31, 1995, HICN or the Managing General Partner, as appropriate, shall make contributions to the Partnership described in Section 6.3 of the Formation Agreement. At the election of the Managing General Partner, the assets and liabilities of HICN may be contributed to a limited partnership with HICN as the general partner holding a one (1) percent interest and the Partnership as the limited partner holding a ninety-nine (99) percent interest (the "HICN PARTNERSHIP"). (g) In the event of any change in the outstanding number of Paired Shares by reason of any share dividend, split, reverse split, recapitalization, merger, consolidation or combination, the number of Units held by each Partner (or assignee) shall be proportionately adjusted such that, to the extent possible, one Unit remains the equivalent of one Share without dilution. It is the intent of the Partners that, to the extent possible, the number of Units held by the General Partner shall at all times equal the number of issued and outstanding Paired Shares. (h) No fractional Units shall remain outstanding. In lieu of issuing a fractional Unit to a holder of Units, the number of Units to be held by such holder shall be rounded to the nearest whole Unit. 4.2 PERCENTAGE INTERESTS. The Percentage Interest of a Partner shall be equal to the percentage obtained by dividing (a) the number of Units held by such Partner (including Units held by assignees of such Partner who have not been admitted as Partners) by (b) the total number of issued and outstanding Units. 4.3 PURCHASE RIGHTS. If the Managing General Partner grants, issues or sells any options, convertible securities or rights to purchase shares, warrants, or other property PRO RATA to the record holders of Shares (collectively, "PURCHASE RIGHTS"), then the Partners shall, to the extent practicable and consistent with the other provisions of this Agreement, be entitled to acquire from the Partnership interests in the Partnership that are substantially similar in amount, tone and tenor to the Purchase Rights to which such Partners -16- would be entitled if such Partners had converted their Partnership Interests into Paired Shares immediately prior to the grant, issue or sale of the Purchase Rights. 4.4 REDEMPTION. If the Managing General Partner shall redeem any of its outstanding Shares (including the issuance of cash in lieu of fractional Shares), the Partnership shall concurrently therewith redeem an equal number of Units held by the Managing General Partner for the same price as paid by the Managing General Partner for the redemption of such Shares. Similar redemptions of interests of a General Partner in the Partnership in the Partnership shall occur if any other outstanding securities of a General Partner are redeemed or otherwise retired. 4.5 NO THIRD PARTY BENEFICIARIES. No creditor or other third party shall have the right to enforce any right or obligation of any Partner to make Capital Contributions or loans or to pursue any other right or remedy hereunder or at law or in equity, it being understood and agreed that the provisions of this Agreement shall be solely for the benefit of, and may be enforced solely by, the parties hereto and their respective successors and assigns. None of the rights or obligations of the Partners herein set forth to make Capital Contributions or loans to the Partnership shall be deemed an asset of the Partnership for any purpose by any creditor or other third party, nor may such rights or obligations be sold, transferred or assigned by the Partnership or pledged or encumbered by the Partnership to secure any debt or other obligation of the Partnership or of any of the Partners. 4.6 NO INTEREST ON OR RETURN OF CAPITAL CONTRIBUTION. No Partner shall be entitled to interest on its Capital Contribution or Capital Account. Except as provided herein or by law, no Partner shall have any right to demand or receive the return of its Capital Contribution. ARTICLE 5 INDEMNIFICATION 5.1 INDEMNIFICATION OF GENERAL PARTNERS. (a) To the fullest extent permitted by law, the Partnership shall and does hereby indemnify an Indemnitee from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including reasonable legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings (including arbitration and mediation proceedings), civil, criminal, administrative or investigative, that relate, directly or indirectly, to the formation, business or operations of the Partnership in which any Indemnitee may be involved, or is threatened to be involved, as a party, witness or otherwise, by reason of the fact that such Person was an Indemnitee, whether or not the same shall proceed to judgment or be settled or otherwise be brought to a conclusion, except only if and to the extent that it is finally adjudicated that the act or omission of the Indemnitee was material to the matter giving rise -17- to the proceeding and was committed with fraud, gross negligence or willful misconduct. The termination of any proceeding by judgment, order or settlement does not create a presumption that the Indemnitee did not meet the requisite standard of conduct set forth in this Section 5.1(a). Any indemnification pursuant to this Section 5.1 shall be made only out of the assets of the Partnership and no Partner shall have any personal liability therefor. The provisions of this Section 5.1 are for the benefit of the Indemnitees, their heirs, successors, assigns, personal representatives and administrators, and shall not be deemed to create any rights for the benefit of any other Persons. The foregoing notwithstanding, the General Partners shall not be entitled to indemnification from the Partnership with respect to matters provided for in Sections 9.1 and 9.2 of the Formation Agreement. (b) Reasonable expenses incurred by an Indemnitee who is a party or witness in a proceeding shall be paid or reimbursed by the Partnership in advance of the final disposition of the proceeding upon receipt by the Partnership of (i) a written affirmation by the Indemnitee of the Indemnitee's good faith belief that the standard of conduct necessary for indemnification by the Partnership, as authorized in this Section 5.1, has been met, and (ii) a written undertaking by or on behalf of the Indemnitee to repay the amount paid or reimbursed if it shall ultimately be determined that such Indemnitee is not entitled to be indemnified hereunder. (c) The indemnification provided by this Section 5.1 shall be in addition to any other rights to which an Indemnitee may be entitled under any agreement, as a matter of law or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity. The Partnership shall purchase and maintain insurance, on behalf of the Indemnitees, against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership's activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement. An Indemnitee shall not be denied indemnification in whole or in part under this Section 5.1 solely because the Indemnitee had an interest in the transaction with respect to which the indemnification applies. (d) For purposes of this Section 5.1, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services by, it to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute fines within the meaning of this Section 5.1; and actions taken or omitted by the Indemnitee with respect to an employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Partnership. 5.2 INDEMNIFICATION OF LIMITED PARTNERS. From and after the date hereof, the Partnership shall indemnify and hold harmless each Limited Partner, its Affiliates, employees, officers, directors and agents against and from all liability, demands, claims, -18- actions or causes of action, assessments, losses, fines, penalties, costs, damages and expenses (including, without limitation, reasonable attorneys' and accountants' fees and expenses) sustained or incurred by such Limited Partner or Affiliate or any assignee or successor thereof (including, without limitation, any permitted assignee of a Limited Partner under Article 9 hereof) as a result of or arising out of any action, suit or proceeding (including mediation and arbitration proceedings) (a) arising out of or relating to the operation of the Partnership's business or the Limited Partner being a Partner in the Partnership (excluding, specifically, actions, suits or proceedings arising out of actual or alleged breaches of a Partner's representations, warranties or covenants hereunder or pursuant to the Formation Agreement or arising out of acts by a Limited Partner other than in its capacity as such) and (b) naming a Limited Partner or any of its Affiliates as a party to such proceeding. Any indemnification pursuant to this Section 5.2 shall be made only out of the assets of the Partnership and no Partner shall have any personal liability therefor. The provisions of this Section 5.2 are for the benefit of the Limited Partners, their Affiliates, employees, officers, directors and agents, and shall not be deemed to create any rights for the benefit of any other Persons. 5.3 NOTICE OF CLAIMS. If any Person believes that it is entitled to indemnification under this Article 5, such Person shall so notify the Partnership promptly in writing describing such claim for indemnification, the amount thereof, if known, and the method of computation, all with reasonable particularity and containing a reference to the provisions of this Agreement in respect of which such claim shall have occurred; PROVIDED, HOWEVER, that the omission by such indemnified party to give notice as provided herein shall not relieve the Partnership of its indemnification obligation under this Article 5 except to the extent that the Partnership is materially damaged as a result of such failure to give notice. If any action at law or suit in equity is instituted by or against a third party with respect to which any of the Persons entitled to indemnification under this Article 5 intends to make a claim for indemnification under this Article 5, any such Person shall promptly notify the Partnership of such action or suit. Any Person entitled to indemnification hereunder shall use reasonable efforts to minimize the amount of any claim for indemnification hereunder. 5.4 THIRD PARTY CLAIMS. In the event of any claim for indemnification hereunder resulting from or in connection with any claim or legal proceeding by a third party, the indemnified Person shall give such notice thereof to the Partnership not later than twenty (20) business days prior to the time any response to the asserted claim is required, if possible, and in any event within fifteen (15) days following the date such indemnified Person has actual knowledge thereof; PROVIDED, HOWEVER, that the omission by such indemnified Person to give notice as provided herein shall not relieve the Partnership of its indemnification obligation under this Article 5 except to the extent that the Partnership is materially damaged as a result of such failure to give notice. In the event of any such claim for indemnification resulting from or in connection with a claim or legal proceeding by a third party, the Partnership may, at its sole cost and expense, assume the defense thereof; PROVIDED, HOWEVER, that counsel for the Partnership, who shall conduct the defense of such claim or legal proceeding, shall be reasonably satisfactory to the indemnified Person; and PROVIDED, FURTHER, that if the defendants in any such actions include both the indemnified -19- Persons and the Partnership and the indemnified Persons shall have reasonably concluded that there may be legal defenses or rights available to them which have not been waived and are in actual or potential conflict with those available to the Partnership, the indemnified Persons shall have the right to select one law firm reasonably acceptable to the Partnership to act as separate counsel, on behalf of such indemnified Persons, at the expense of the Partnership. Unless the indemnified Persons are represented by separate counsel pursuant to the second proviso of the immediately preceding sentence, if the Partnership assumes the defense of any such claim or legal proceeding, it shall not consent to entry of any judgment, or enter into any settlement, that (a) is not subject to indemnification in accordance with the provisions in this Article 5, (b) provides for injunctive or other non-monetary relief affecting the indemnified Persons or (c) does not include as an unconditional term thereof the giving by each claimant or plaintiff to such indemnified Persons of a release from all liability with respect to such claim or legal proceeding, without the prior written consent of the indemnified Persons (which consent, in the case of clauses (b) and (c), shall not be unreasonably withheld or delayed); and PROVIDED, FURTHER, that, unless the indemnified Persons are represented by separate counsel pursuant to the second proviso of the immediately preceding sentence, the indemnified Persons may, at their own expense, participate in any such proceeding with the counsel of their choice without any right of control thereof. So long as the Partnership is in good faith defending such claim or proceeding, the indemnified Persons shall not compromise or settle such claim or proceeding without the prior written consent of the Partnership, which consent shall not be unreasonably withheld or delayed. If the Partnership does not assume the defense of any such claim or litigation in accordance with the terms hereof, the indemnified Persons may defend against such claim or litigation in such manner as they may deem appropriate, including, without limitation, settling such claim or litigation (after giving prior written notice of the same to the Partnership and obtaining the prior written consent of the Partnership, which consent shall not be unreasonably withheld or delayed) on such terms as the indemnified Persons may deem appropriate, and the Partnership will promptly indemnify the indemnified Persons in accordance with the provisions of this Article 5. 5.5 INDEMNIFICATION PURSUANT TO FORMATION AGREEMENT. If any obligation pursuant to the indemnification provisions of Article IX of the Formation Agreement would otherwise require the indemnifying Person to make a cash payment to the indemnified Person then, subject to Article 9 hereof, in lieu of making all or any portion of such cash payment, the indemnifying Person may transfer Units of equivalent value to the indemnified Person. For purposes of the preceding sentence, the value of a Unit shall be treated as equal to five (5) percent of the average closing price of a Paired Share for the ten (10) trading day period commencing fifteen (15) trading days prior to the date the indemnifying Person would otherwise be required to pay cash to the indemnified Person. Indemnification through the transfer of Units pursuant to this Section 5.5 may only made if (a) indemnification through the transfer of an equal number of units of the Realty Partnership is being made pursuant to Section 5.5 of the Amended and Restated Limited Partnership Agreement of SLT Realty Limited Partnership or (b) the indemnifying Person otherwise makes arrangements for the transfer to the indemnified Person (or its designee) of an equal number of units of the Realty Partnership. -20- ARTICLE 6 ALLOCATIONS, DISTRIBUTIONS AND OTHER TAX AND ACCOUNTING MATTERS 6.1 ALLOCATIONS. The Net Income, Net Loss and other Partnership items shall be allocated pursuant to the provisions of this Section 6.1 hereto. (a) ALLOCATION OF NET INCOME AND NET LOSS. (i) NET INCOME. Except as otherwise provided herein, Net Income for any fiscal year or other applicable period shall be allocated in the following order and priority: (A) first, to the General Partners in accordance with their respective holdings of Units, until the cumulative Net Income allocated pursuant to this clause (i)(A) for the current and all prior periods equals the cumulative Net Loss allocated pursuant to the second sentence of clause (ii) hereof for all prior periods; and (B) thereafter, the balance of the Net Income, if any, shall be allocated to the holders of Units in accordance with their respective holdings of Units. (ii) NET LOSS. Except as otherwise provided herein, Net Loss of the Partnership for each fiscal year or other applicable period shall be allocated to the holders of Units in accordance with their respective holdings of Units. The preceding sentence notwithstanding, to the extent any Net Loss allocated to a holder would cause such a holder to have an Adjusted Capital Account Deficit as of the end of the fiscal year to which such Net Loss relates, such Net Loss shall not be allocated to such holder and instead shall be allocated to the General Partners in accordance with their respective holdings of Units. (b) SPECIAL ALLOCATIONS. Notwithstanding any provisions of Section 6.1(a) hereof, the following special allocations shall be made in the following order: (i) MINIMUM GAIN CHARGEBACK. Notwithstanding any other provision of this Article 6, if there is a net decrease in Partnership Minimum Gain for any Partnership fiscal year (except as a result of conversion or refinancing of Partnership indebtedness, certain capital contributions or revaluation of the Partnership property as further outlined in Section 1.704-2(f) of the Regulations), each holder of Units shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to that holder's share of the net decrease in Partnership Minimum Gain as determined under Section 1.704-2(g) of the Regulations. The items to be so allocated shall be determined in accordance with Section 1.704-2(f) of the Regulations. This clause (i) is intended to comply with the minimum gain chargeback requirement in said section of the Regulations and shall be interpreted consistently therewith. Allocations -21- pursuant to this clause (i) shall be made in proportion to the respective amounts required to be allocated to each holder of Units pursuant hereto. (ii) MINIMUM GAIN CHARGEBACK ATTRIBUTABLE TO PARTNER NONRECOURSE DEBT. Notwithstanding any other provision of this Article 6, if there is a net decrease in Minimum Gain Attributable to Partner Nonrecourse Debt during any fiscal year (other than due to the conversion, refinancing or other change in the debt instrument causing it to become partially or wholly nonrecourse, certain capital contributions, or certain revaluations of Partnership property (as further outlined in Section 1.704-2(i)(4) of the Regulations), each holder of Units shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to the holder's share of the net decrease in the Minimum Gain Attributable to Partner Nonrecourse Debt as determined under Section 1.704-2(i) of the Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and (j)(2) of the Regulations. This clause (ii) is intended to comply with the minimum gain chargeback requirement with respect to Partner Nonrecourse Debt contained in said section of the Regulations and shall be interpreted consistently therewith. Allocations pursuant to this clause (ii) shall be made in proportion to the respective amounts required to be allocated to each holder of Units. (iii) QUALIFIED INCOME OFFSET. In the event a holder of Units unexpectedly receives any adjustments, allocations or distributions described in Section 1.704-1(b)(2)(ii) (d)(4), (5), or (6) of the Regulations, and such holder has an Adjusted Capital Account Deficit, items of Partnership income and gain shall be specially allocated to such holder in an amount and manner sufficient to eliminate the Adjusted Capital Account Deficit as quickly as possible, provided that an allocation pursuant to this Section 6.1(b)(iii) shall be made only if and to the extent that such holder would have Adjusted Capital Account Deficit after all other allocations provided for in this Article VI have been tentatively made as if this Section 6.1(b)(iii) were not in the Agreement. This clause (iii) is intended to constitute a "qualified income offset" under Section 1.704-1(b)(2)(ii) (d) of the Regulations and shall be interpreted consistently therewith. (iv) GROSS INCOME ALLOCATION. In the event any holder of Units has a deficit Capital Account at the end of any fiscal year which is in excess of the sum of (x) the amount such holder is obligated to restore pursuant to any provision of this Agreement, and (y) the amount such holder is deemed to be obligated to restore pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations, each such holder shall be specially allocated items of Partnership income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 6.1(b)(iv) shall be made only if and to the extent that such holder would have a Capital Account Deficit in excess of such sum after all other allocations provided for in this Article 6 have been made as if Section 6.1(b)(iii) hereof and this Section 6.1(b)(iv) were not in the Agreement. (v) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions for any fiscal year or other applicable period shall be allocated to the holders of Units in -22- accordance with their respective holdings of Units. For purposes of Section 1.752-3(a) (3) of the Regulations, "excess nonrecourse liabilities" shall be allocated among the holders of Units in proportion to their respective holdings of Units. (vi) PARTNER NONRECOURSE DEDUCTIONS. Partner Nonrecourse Deductions for any fiscal year or other applicable period shall be specially allocated to the holder of Units that bears the economic risk of loss with respect to the Partner Nonrecourse Debt in respect of which such Partner Nonrecourse Deductions are attributable (as determined under Sections 1.704-2(b) (4) and (i) (1) of the Regulations). (vii) SECTION 754 ADJUSTMENTS. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Section 734(b) or Section 743(b) of the Code is required, pursuant to Section 1.704-1(b)(2)(iv)(m)(2) or Section 1.704-1(b)(2)(iv)(m)(4) of the Regulations, to be taken into account in determining Capital Accounts, the amount of such adjustment to Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to holders of Units in accordance with their interests in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such sections of the Regulations. (viii) CURATIVE ALLOCATIONS. The Regulatory Allocations shall be taken into account in allocating other items of income, gain, loss, and deduction among the holders of Units so that, to the extent possible, the cumulative net amount of allocations of Partnership items under Sections 6.1(a) and (b) hereof shall be equal to the net amount that would have been allocated to each holder of Units if the Regulatory Allocations had not occurred. This subparagraph (viii) is intended to minimize to the extent possible and to the extent necessary any economic distortions which may result from application of the Regulatory Allocations and shall be interpreted in a manner consistent therewith. For purposes hereof, "REGULATORY ALLOCATIONS" shall mean the allocations provided under this Section 6.1(b) (other than this subparagraph) and allocations pursuant to the last sentence of Section 6.1(a)(ii) hereof. (ix) VARYING INTERESTS. In the event the number of Units outstanding during a fiscal year changes, the allocations pursuant to this Article 6 shall be made by the Managing General Partner to take such varying interests into account in any reasonable manner permitted under the Code and the Regulations. (c) TAX ALLOCATIONS. (i) GENERALLY. Subject to clauses (ii) and (iii) hereof, items of income, gain, loss, deduction and credit to be allocated for income tax purposes (collectively, "TAX ITEMS") shall be allocated among the holders of Units on the same basis as their respective book items. -23- (ii) SECTIONS 1245/1250 RECAPTURE. If any portion of gain from the sale of property is treated as gain which is ordinary income by virtue of the application of Sections 1245 or 1250 of the Code ("AFFECTED GAIN"), then (A) such Affected Gain shall be allocated among the holders of Units in the same proportion that the depreciation and amortization deductions giving rise to the Affected Gain were allocated and (B) other Tax Items of gain of the same character that would have been recognized, but for the application of Sections 1245 and/or 1250 of the Code, shall be allocated away from those holders of Units who are allocated Affected Gain pursuant to clause (A) so that, to the extent possible, the other holders of Units are allocated the same amount, and type, of capital gain that would have been allocated to them had Sections 1245 and/or 1250 of the Code not applied. For purposes hereof, in order to determine the proportionate allocations of depreciation and amortization deductions for each fiscal year or other applicable period, such deductions shall be deemed allocated on the same basis as Net Income or Net Loss for such respective period. (iii) ALLOCATIONS RESPECTING SECTION 704(c) OF THE CODE AND REVALUATIONS. Property contributed to the Partnership shall be subject to Section 704(c) of the Code and the Regulations thereunder so that, notwithstanding paragraph (b) hereof, taxable gain from disposition, taxable loss from disposition and tax depreciation with respect to Partnership property that is subject to Section 704(c) of the Code and/or Section 1.704-1(b) (2) (iv) (f) of the Regulations (collectively "SECTION 704(c) TAX ITEMS") shall be allocated on a property by property basis in accordance with said Code Section and/or the Regulations thereunder, as the case may be. The allocation of Section 704(c) Tax Items shall be made pursuant to the "traditional method" of Section 1.704-3(b) of the Regulations. The Managing General Partner will not specially allocate Tax Items (other than the Section 704(c) Tax Items) to cure for the effect of the ceiling rule. Allocations pursuant to this Section 6.1(c)(iii) are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, the Capital Account or share of Net Income, Net Loss, other items, or distributions of any holder of Units pursuant to any provision of this Agreement. (iv) TAX CREDITS AND OTHER ITEMS. Tax credits and other items shall be allocated in accordance with the holdings of Units to the extent permitted under Section 1.704-1(b)(4)(ii) of the Regulations or other applicable provision of the Code and Regulations and otherwise in accordance with such provisions. (v) HICN PARTNERSHIP. Gross income equal to the distributions pursuant to the last sentence of Section 6.2 hereof shall be made to the holders of Units other than the General Partners. 6.2 DISTRIBUTIONS. The Managing General Partner shall cause the Partnership to distribute all, or such portion as the Managing General Partner may in its reasonable discretion determine, of Net Cash Flow to the holders of Units who are holders on the Partnership Record Date with respect to such distribution. All such distributions shall be made pro rata in accordance with the holders' ownership of Units. The foregoing -24- notwithstanding, the Partnership shall distribute to the holders of Units other than the General Partners an amount equal to the distributions by the HICN Partnership to HICN. 6.3 BOOKS OF ACCOUNT. At all times during the continuance of the Partnership, the Managing General Partner shall maintain or cause to be maintained full, true, complete and correct books of account in accordance with GAAP, using the calendar year as the fiscal and taxable year of the Partnership. In addition, the Partnership shall keep all records required to be kept pursuant to the Act. 6.4 REPORTS. The Managing General Partner shall cause to be sent to the Partners promptly after receipt of the same from the Accountants and in no event later than 105 days after the close of each fiscal year of the Partnership, copies of Audited Financial Statements for the Partnership, or of the Managing General Partner if such statements are prepared solely on a consolidated basis with the Managing General Partner, for the immediately preceding fiscal year of the Partnership. The Partnership shall also cause to be prepared such reports and/or information as are necessary for SLT to determine its qualification as a REIT and its compliance with REIT Requirements. 6.5 TAX ELECTIONS AND RETURNS. All elections required or permitted to be made by the Partnership under any applicable tax law shall be made by the Managing General Partner in its sole and absolute discretion, except that the Managing General Partner shall, if requested by a Partner, file an election on behalf of the Partnership pursuant to Section 754 of the Code to adjust the basis of the Partnership property in the case of a transfer of a Partnership Interest or distribution from the Partnership, including transfers made in connection with the exercise of the Rights, made in accordance with the provisions of the Agreement. The Managing General Partner shall cause the Accountants to prepare and submit to the Limited Partner Representative on or before July 15th of each year for review drafts of all federal and state income tax returns of the Partnership. If the Limited Partner Representative determines that any modifications to the tax returns of the Partnership should be considered, the Limited Partner Representative shall, within fifteen (15) days following receipt of such tax returns from the Accountants or the Managing General Partner, indicate to the Accountants or to the Managing General Partner the suggested revisions to the tax returns, which returns shall be resubmitted to the Limited Partner Representative for its review (but not approval). The Limited Partner Representative shall complete their review of the resubmitted returns within ten (10) days after receipt thereof from the Accountants or the Managing General Partner. The Managing General Partner shall consult in good faith with the Limited Partner Representative regarding any proposed modifications to the tax returns of the Partnership. The Managing General Partner shall be responsible for preparing and filing all federal and state tax returns for the Partnership and furnishing copies thereof to the Partners, together with required Partnership schedules showing allocations of tax items, copies of all within the period of time prescribed by law. The Managing General Partner shall use reasonable efforts to make available to the holders of Units final K-1's not later than September 15 of each year. -25- 6.6 TAX MATTERS PARTNER. The Managing General Partner is hereby designated as the Tax Matters Partner within the meaning of Section 6231(a)(7) of the Code (and any corresponding provisions of state and local law) for the Partnership; PROVIDED, HOWEVER, that (a) in exercising its authority as Tax Matters Partner, the Managing General Partner shall be limited by the provisions of this Agreement affecting tax aspects of the Partnership; (b) the Managing General Partner shall consult in good faith with the Limited Partner Representative regarding the filing of an administrative adjustment request with respect to the Partnership before filing such request, it being understood, however, that the provisions hereof shall not be construed to limit the ability of any Partner, including the Managing General Partner, to file an administrative adjustment request on its own behalf pursuant to Section 6227(a) of the Code; (c) the Managing General Partner shall consult in good faith with the Limited Partner Representative regarding the filing of a petition for judicial review of an administrative adjustment request under Section 6228 of the Code, or a petition for judicial review of a final partnership administrative judgment under Section 6226 of the Code relating to the Partnership before filing such petition; (d) the Managing General Partner shall give prompt notice to the Limited Partner Representative and any notice partners under Section 6231 of the Code of the receipt of any written notice that the Internal Revenue Service intends to examine or audit Partnership income tax returns for any year, receipt of written notice of the beginning of an administrative proceeding at the Partnership level relating to the Partnership under Section 6223 of the Code, receipt of written notice of the final Partnership administrative adjustment relating to the Partnership pursuant to Section 6223 of the Code, and receipt of any request from the Internal Revenue Service for waiver of any applicable statute of limitations with respect to the filing of any tax return by the Partnership; and (e) the Managing General Partner shall promptly notify the Limited Partner Representative if the Managing General Partner does not intend to file for judicial review with respect to the Partnership. Similar provisions shall apply in the case of any audit or examination by a state or local taxing authority. 6.7 WITHHOLDING PAYMENTS REQUIRED BY LAW. (a) Unless treated as a Tax Payment Loan (as hereinafter defined), any amount paid by the Partnership for or with respect to any holder of Units on account of any withholding tax or other tax payable with respect to the income, profits or distributions of the Partnership pursuant to the Code, the Regulations, or any state or local statute, regulation, notice, ruling or ordinance requiring such payment (a "WITHHOLDING TAX ACT") shall be treated as a distribution to such holder for all purposes of this Agreement, consistent with the character or source of the income, profits or cash which gave rise to the payment or withholding obligation. To the extent that the amount required to be remitted by the Partnership under the Withholding Tax Act exceeds the amount then otherwise distributable to such holder, unless and to the extent that funds shall have been provided by such holder pursuant to the last sentence of this Section 6.7(a), the excess shall constitute a loan from the Partnership to such holder (a "TAX PAYMENT LOAN") which shall be payable upon demand and shall bear interest, from the date that the Partnership makes the payment to the relevant taxing authority, at the rate announced from time to time by Citibank, N.A. (or any successor thereto) as its "prime rate", plus four (4) percent per annum, compounded monthly -26- (but in no event higher than the highest interest rate permitted by applicable law). So long as any Tax Payment Loan to any holder of Units or the interest thereon remains unpaid, the Partnership shall make future distributions due to such holder under this Agreement by applying the amount of any such distributions first to the payment of any unpaid interest on such Tax Payment Loan and then to the repayment of the principal thereof, and no such future distributions shall be paid to such holder until all of such principal and interest has been paid in full. If the amount required to be remitted by the Partnership under the Withholding Tax Act exceeds the amount then otherwise distributable to a holder of Units, the Partnership shall notify such holder at least five (5) Business Days in advance of the date upon which the Partnership would be required to make a Tax Payment Loan under this Section 6.7(a) (the "TAX PAYMENT LOAN DATE") and provide such holder the opportunity to pay to the Partnership, on or before the Tax Payment Loan Date, all or a portion of such deficit. (b) The Managing General Partner shall have the authority to take all actions necessary to enable the Partnership to comply with the provisions of any Withholding Tax Act applicable to the Partnership and to carry out the provisions of this Section 6.7. Nothing in this Section 6.7 shall create any obligation on the Managing General Partner to advance funds to the Partnership or to borrow funds from third parties in order to make any payments on account of any liability of the Partnership under a Withholding Tax Act. (c) In the event that a Tax Payment Loan is not paid by a holder of Units within thirty (30) days after written demand therefor is made by the Managing General Partner, the Managing General Partner may cause all distributions that would otherwise be made to such holder to be retained by the Partnership, or sell such holder's Units for sale proceeds, in each case up to the amount necessary to repay such Tax Payment Loan, including all accrued and unpaid interest therein, and such retained distributions or sale proceeds shall be applied against, first, the accrued interest on and, second, the principal of, such Tax Payment Loan. ARTICLE 7 RIGHTS, DUTIES AND RESTRICTIONS OF THE GENERAL PARTNERS 7.1 POWERS AND DUTIES OF THE MANAGING GENERAL PARTNER. (a) Subject to Section 7.12 hereof, the Managing General Partner shall be responsible for the management of the Partnership's business and affairs. Except as otherwise herein expressly provided, the Managing General Partner shall have, and is hereby granted, full and complete power, authority and discretion to take such action for and on behalf of the Partnership and in its name as the Managing General Partner shall, in its sole and absolute discretion, deem necessary or appropriate to carry out the Partnership's business and the purposes for which the Partnership was organized. Except as otherwise expressly -27- provided herein, the Managing General Partner shall, on behalf of, and at the expense of, the Partnership, have the right, power and authority: (1) to manage, control, invest, reinvest, acquire by purchase, lease or otherwise, sell, contract to purchase or sell, grant, obtain, or exercise options to purchase, options to sell or conversion rights, assign, transfer, convey, deliver, endorse, exchange, pledge, mortgage, abandon, improve, repair, maintain, insure, lease for any term and otherwise deal with any and all property of whatsoever kind and nature, and wheresoever situated, in furtherance of the business or purposes of the Partnership; (2) to acquire, directly or indirectly, interests in real estate of any kind and of any type, and any and all kinds of interests therein (including, without limitation, Entities investing therein), and to determine the manner in which title thereto is to be held; to manage (directly or through property managers), insure against loss, protect and subdivide any of the real estate, interests therein or parts thereof; to improve, develop or redevelop any such real estate; to participate in the ownership and development of any property; to dedicate for public use, to vacate any subdivisions or parts thereof, to resubdivide, to contract to sell, to grant options to purchase or lease, to sell on any terms; to convey, mortgage, pledge or otherwise encumber said property, or any part thereof; to lease said property or any part thereof from time to time, upon any terms and for any period of time, and to renew or extend leases, to amend, change or modify the terms and provisions of any leases and to grant options to lease and options to renew leases and options to purchase; to partition or to exchange said real property, or any part thereof, for other real or personal property; to grant easements or charges of any kind; to release, convey or assign any right, title or interest in or about or easement appurtenant to said property or any part thereof; to construct and reconstruct, remodel, alter, repair, add to or take from buildings on any property in which the Partnership owns an interest; to insure any Person having an interest in or responsibility for the care, management or repair of such property; to direct the trustee of any land trust to mortgage, lease, convey or contract to convey the real estate held in such land trust or to execute and deliver deeds, mortgages, notes and any and all documents pertaining to the property subject to such land trust or in any matter regarding such trust; and to execute assignments of all or any part of the beneficial interest in such land trust; (3) to employ, engage, indemnify or contract with or dismiss from employment or engagement Persons to the extent deemed necessary or appropriate by the Managing General Partner for the operation and management of the Partnership business, including but not limited to contractors, subcontractors, engineers, architects, surveyors, mechanics, consultants, accountants, attorneys, insurance brokers, real estate brokers and others; (4) to enter into contracts on behalf of the Partnership, and to cause all Administrative Expenses to be paid; (5) to borrow or loan money, obtain or make loans and advances from and to any Person for Partnership purposes and to apply for and secure from -28- or accept and grant to any Person credit or accommodations; to contract liabilities and obligations (including interest rate swaps, caps and hedges) of every kind and nature with or without security; and to repay, collect, discharge, settle, adjust, compromise or liquidate any such loan, advance, obligation or liability; (6) to grant security interests, mortgage, assign, deposit, deliver, enter into sale and leaseback arrangements or otherwise give as security or as additional or substitute security or for sale or other disposition any and all Partnership property, tangible or intangible, including, but not limited to, personal property and real estate and interests in land trusts, and to make substitutions thereof, and to receive any proceeds thereof upon the release or surrender thereof; to sign, execute and deliver any and all assignments, deeds, bills of sale and contracts and instruments in writing; to authorize, give, make, procure, accept and receive moneys, payments, property notices, demands, protests and authorize and execute waivers of every kind and nature; to enter into, make, execute, deliver and receive agreements, undertakings and instruments of every kind and nature; and generally to do any and all other acts and things incidental to any of the foregoing or with reference to any dealings or transactions which the Managing General Partner may deem necessary, proper or advisable to effect or accomplish any of the foregoing or to carry out the business and purposes of the Partnership; (7) to acquire and enter into any contract of insurance (including, without limitation, general partner liability and partnership reimbursement insurance policies) which the Managing General Partner may deem necessary or appropriate; (8) to conduct any and all banking transactions on behalf of the Partnership; to adjust and settle checking, savings and other accounts with such institutions as the Managing General Partner shall deem appropriate; to draw, sign, execute, accept, endorse, guarantee, deliver, receive and pay any checks, drafts, bills of exchange, acceptances, notes, obligations, undertakings and other instruments for or relating to the payment of money in, into or from any account in the Partnership's name; to make deposits into and withdrawals from the Partnership's bank accounts and to negotiate or discount commercial paper, acceptances, negotiable instruments, bills of exchange and dollar drafts; (9) to demand, sue for, receive and otherwise take steps to collect or recover all debts, rents, proceeds, interests, dividends, goods, chattels, income from property, damages and all other property, to which the Partnership may be entitled or which are or may become due the Partnership from any Person; to commence, prosecute or enforce, or to defend, answer or oppose, contest and abandon all legal proceedings in which the Partnership is or may hereafter be interested; and to settle, compromise or submit to arbitration any accounts, debts, claims, disputes and matters which may arise between the Partnership and any other Person and to grant an extension of time for the payment or satisfaction thereof on any terms, with or without security; -29- (10) to acquire interests in and contribute money or property to any limited or general partnerships, joint ventures, subsidiaries or other entities as the Managing General Partner deems desirable; (11) to maintain or cause to be maintained the Partnership's books and records; (12) to prepare and deliver, or cause to be prepared and delivered, all financial and other reports with respect to the operations of the Partnership, and preparation and filing of all tax returns and reports; (13) to do all things which are necessary or advisable for the protection and preservation of the Partnership's business and assets, and to execute and deliver such further instruments and undertake such further acts as may be necessary or desirable to carry out the intent and purposes of this Agreement and as are not inconsistent with the terms hereof; (14) subject to Section 7.5 hereof, to lease real or personal property from the Realty Partnership or its Affiliates on such terms and conditions as the Managing General Partner may from time to time agree; and (15) in general, to exercise all of the general rights, privileges and powers permitted to be had and exercised under the Act. To the extent the duties of the Managing General Partner require expenditures of funds to be paid to third parties, the Managing General Partner shall not have any obligations hereunder except to the extent that Partnership funds are reasonably available to it for the performance of such duties, and nothing herein contained shall be deemed to require the Managing General Partner, in its capacity as such, to expend its individual funds for payment to third parties or to undertake any specific liability or litigation on behalf of the Partnership. (b) Notwithstanding the provisions of Section 7.1(a) hereof, the Partnership shall not take any action which (or fail to take any action, the omission of which), in the reasonable judgement of the Managing General Partner, in its sole and absolute discretion, (i) could adversely affect the ability of SLT to qualify or continue to qualify as a REIT, (ii) could subject SLT to any additional taxes under Section 857 or Section 4981 of the Code or other potentially adverse consequences under the Code, (iii) could otherwise cause SLT to violate the REIT Requirements or (iv) could violate any law or regulation of any governmental body or agency having jurisdiction over the General Partners or their securities, unless such action (or inaction) shall have been specifically consented to by the Managing General Partner in writing. (c) Notwithstanding the provisions of Section 7.1(a) hereof, the Partnership shall not commingle its funds with those of any Affiliate or other entity; funds and other assets of the Partnership shall be separately identified and segregated; all of the -30- Partnership's assets shall at all times be held by or on behalf of the Partnership, and, if held on behalf of the Partnership by another entity, shall at all times be kept identifiable (in accordance with customary usages) as assets owned by the Partnership; and the Partnership shall maintain its own separate bank accounts, payroll and books of account. (d) Without the consent of all the Partners, the Managing General Partner shall have no power to do any act in contravention of this Agreement or possess any Partnership property for other than a partnership purpose. 7.2 [Intentionally Left Blank] 7.3 REIMBURSEMENT OF THE GENERAL PARTNERS. (a) Except as provided in this Section 7.3 and elsewhere in this Agreement (including the provisions of Articles 5, 6 and 8 hereof regarding distributions, payments and allocations to which it may be entitled), no General Partner shall receive payments from or be compensated for its services as general partner of the Partnership. (b) The General Partners shall be reimbursed on a monthly basis, or such other basis as the Managing General Partner may determine in its sole and absolute discretion, for all expenses incurred relating to the ownership and operation of, or for the benefit of, the Partnership, including, without limitation, the Administrative Expenses. Such reimbursements shall be in addition to any reimbursement to the General Partners as a result of indemnification pursuant to Section 5.1 hereof. (c) The General Partners shall also be reimbursed for all expenses incurred relating to the organization and formation of the Partnership, the General Partners' share of public offerings of Paired Shares by the General Partners and SLT to the extent included in Administrative Expenses, and any other issuance of additional Partnership Interests. 7.4 OUTSIDE ACTIVITIES OF THE GENERAL PARTNERS. The General Partners shall not directly or indirectly enter into or conduct any business other than (a) the ownership, acquisition and disposition of Partnership Interests as a General Partner or Limited Partner and the management of the business of the Partnership, and (b) such activities as are incidental thereto, including the Managing General Partner's ownership directly or through a wholly-owned subsidiary of an interest in a partnership or limited liability company in which the Partnership is a partner or member. All future acquisitions of real estate or of leasehold interests in hotels or management of hotels by any of the General Partners shall be made through and for the benefit of the Partnership. The Managing General Partner agrees that the net proceeds of all offerings of securities by the Managing General Partner shall be contributed to the Partnership (in the case of equity offerings) or loaned to the Partnership (in the case of debt offerings). This Section 7.4 shall not apply to HICN or the Managing General Partner's activities with respect to HICN prior to the earlier of the date it contributes its assets to the Partnership or January 1, 1996. -31- 7.5 CONTRACTS WITH AFFILIATES. The Partnership may engage in transactions, enter into contracts with Affiliates, and lend money to or borrow money from Affiliates which are on terms fair and reasonable to the Partnership and no less favorable to the Partnership than would be obtained from unaffiliated third parties. The Partners hereby agree that the Partnership's leases and loans with the Realty Partnership, as in effect on the date first above written, are on terms fair and reasonable to the Partnership and such terms are no less favorable to the Partnership than would be obtained from unaffiliated third parties. 7.6 TITLE TO PARTNERSHIP ASSETS. Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, a General Partner or one or more nominees, as the Managing General Partner may determine, including Affiliates of a General Partner. The General Partners hereby acknowledge and confirm that any Partnership assets for which legal title is held in the name of a General Partner or any nominee or Affiliate of a General Partner shall be held by such General Partner for the use and benefit of the Partnership in accordance with the provisions of this Agreement; PROVIDED, HOWEVER, that the General Partners shall use their best efforts to cause beneficial and record title to such assets to be vested in the Partnership as soon as reasonably practicable. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which legal title to such Partnership assets is held. 7.7 RELIANCE BY THIRD PARTIES. Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the Managing General Partner has full power and authority to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any contracts on behalf of the Partnership, and such Person shall be entitled to deal with the Managing General Partner as if it were the Partnership's sole party in interest, both legally and beneficially. In no event shall any Person dealing with the Managing General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the Managing General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the Managing General Partner shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (i) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect, (ii) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership and (iii) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership. -32- 7.8 LIABILITY OF THE GENERAL PARTNERS. (a) Notwithstanding anything to the contrary set forth in this Agreement, no General Partner shall be liable for monetary or other damages to the Partnership, any of the Partners or any assignee of any interest of any Partner for losses sustained or liabilities incurred as a result of errors in judgment or of any act or omission if such General Partner acted without fraud, gross negligence or willful misconduct. (b) The Limited Partners expressly acknowledge (i) that the General Partners are acting on behalf of the Partnership and the General Partners' shareholders collectively, (ii) that, subject to the terms and conditions of this Agreement, a General Partner may, but is under no obligation to, consider the separate interests of the Limited Partners (including, without limitation, the tax consequences to Limited Partners or any assignees thereof except as provided in this Agreement) in deciding whether to cause the Partnership to take (or decline to take) any actions, and (iii) that no General Partner shall be liable for monetary damages for losses sustained, liabilities incurred, or benefits not derived by Limited Partners in connection with such decisions, provided that such General Partner acted without fraud, gross negligence or willful misconduct. (c) Subject to their obligations and duties as General Partners set forth in Section 7.1 hereof, the General Partners may exercise any of the powers granted to them by this Agreement and perform any of the duties imposed upon them hereunder either directly or by or through agents. No General Partner shall be responsible for any fraud, willful misconduct or gross negligence on the part of any such agent appointed by it without fraud, gross negligence or willful misconduct. (d) Any amendment, modification or repeal of this Section 7.8 or any provision hereof shall be prospective only and shall not in any way affect the limitations on a General Partner's liability to the Partnership and the Partners under this Section 7.8 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may be asserted. 7.9 OTHER MATTERS CONCERNING THE GENERAL PARTNERS. (a) A General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, or other document reasonably believed by it to be genuine and to have been signed or presented by the proper party or parties. (b) A General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the advice or opinion of such Persons as to matters which such General Partner reasonably believes to be within such Person's professional or expert competence and in accordance with such advice or -33- opinion shall be prima facie evidence that such actions have been done or omitted in good faith. (c) A General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and any attorney or attorneys-in-fact duly appointed by the General Partner. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform all and every act and duty which is permitted or required to be done by the General Partner hereunder. 7.10 OPERATION OF SLT IN ACCORDANCE WITH REIT REQUIREMENTS. (a) The Partners acknowledge and agree that the ability of SLT to satisfy the REIT Requirements is a material inducement for the Realty Partnership to lease its real and personal property to the Operating Partnership and that the failure of SLT to satisfy the REIT Requirements is likely to have a material adverse effect on the Partnership. The Partners therefore acknowledge and agree that, in addition to the other provisions of this Agreement, so long as SLT desires to elect to be taxed as a REIT, the Partnership shall be operated in a manner that will enable SLT to (i) satisfy the REIT Requirements and (ii) avoid the imposition of any federal income or excise tax liability on SLT. So long as SLT desires to elect to be taxed as a REIT, the Partnership shall avoid taking any action which would result in SLT ceasing to satisfy the REIT Requirements or would result in the imposition of any federal income or excise tax liability on SLT. (b) Without the prior consent of the Managing General Partner, no Limited Partner or holder of Units or any Affiliate shall take any action, including acquiring, directly or indirectly, an interest in any tenant of a property owned by the Realty Partnership or by an Entity owned by the Realty Partnership (including, but not limited to, the Operating Partnership, SLC or the Affiliates of either), which would have, through the actual or constructive ownership of any tenant of any property, the effect of causing the percentage of the gross income of SLT that fails to be treated as "rents from real property" within the meaning of Section 856(d)(2) of the Code to exceed such percentage on the date hereof. Each Limited Partner and holder of Units shall use its best efforts to notify the Managing General Partner on a timely basis of any direct or indirect acquisition or potential direct or indirect acquisition of Paired Shares by such Limited Partner or holder or any Affiliate or direct or indirect owner of an interest in such Limited Partner or holder that could reasonably be expected to have such effect. 7.11 REPLACEMENT OF MANAGING GENERAL PARTNER. In the event the Managing General Partner is no longer a Partner (whether in accordance with the provisions of this Agreement or otherwise), a successor Managing General Partner, who shall be a General Partner, shall be appointed by a vote of the remaining General Partners. 7.12 MANAGEMENT COMMITTEE. The Managing General Partner hereby delegates all of its rights, duties and obligations under this Agreement with respect to the -34- management of the Partnership to the Management Committee. The Management Committee shall establish its rules and regulations for the management of the Partnership which rules and regulations shall be substantially similar to the Articles of Incorporation and By-Laws of the Managing General Partner. So long as the Management Committee has not been disbanded, the Managing General Partner shall take actions pursuant to this Agreement only as directed by the Management Committee. The Management Committee shall be disbanded upon the earlier of the receipt of the regulatory approvals described in Section 4.1(f) hereof or the disposition of the operating assets of HICN. Once the Management Committee has been disbanded it may not be reformed and this Section 7.12 shall be of no further force or effect. ARTICLE 8 DISSOLUTION, LIQUIDATION AND WINDING-UP 8.1 ACCOUNTING. In the event of the dissolution, liquidation and winding-up of the Partnership, a proper accounting shall be made of the Capital Account of each holder of Units and of the Net Income or Net Loss of the Partnership from the date of the last previous accounting to the date of dissolution. 8.2 DISTRIBUTION ON DISSOLUTION. (a) In the event of the dissolution and liquidation of the Partnership for any reason, the assets of the Partnership shall be liquidated for distribution in the following rank and order: (i) payment of creditors of the Partnership, including creditors who are Partners or former Partners; (ii) establishment of reserves as provided by the Liquidating Trustee to provide for contingent liabilities, if any; and (iii) to the holders of Units in accordance with the positive balances in their Capital Accounts after giving effect to all contributions, distributions and allocations for all periods. Whenever the Liquidating Trustee reasonably determines that any reserves established pursuant to paragraph (ii) above are in excess of the reasonable requirements of the Partnership, the amount determined to be excess shall be distributed to the Partners in accordance with the provisions of this Section 8.2(a). No Partner or holder of Units shall be liable to any other Partner or holder of Units for a deficit balance in its Capital Account. (b) Notwithstanding the provisions of Section 8.2(a) hereof which require liquidation of the assets of the Partnership, but subject to the order of priorities set -35- forth therein, if prior to or upon dissolution of the Partnership the Liquidating Trustee determines that an immediate sale of part or all of the Partnership's assets would be impractical or would cause undue loss to the Partners, the Liquidating Trustee may, in its sole and absolute discretion, defer for a reasonable time liquidation of any assets except those necessary to satisfy liabilities of the Partnership (including to those Partners which are creditors of the Partnership) and/or, with the Consent of the Limited Partners, distribute to the Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 8.2(a) hereof, undivided interests in such Partnership assets as the Liquidating Trustee deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidating Trustee, such distributions in kind are in the best interest of the Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidating Trustee deems reasonable and equitable and to any agreements governing the operation of such properties at such time. The Liquidating Trustee shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt. 8.3 DOCUMENTATION OF LIQUIDATION. Upon the completion of the dissolution and liquidation of the Partnership, the Partnership shall terminate and the Liquidating Trustee shall have the authority to execute and record any and all documents or instruments required to effect the dissolution, liquidation and termination of the Partnership. ARTICLE 9 TRANSFER 9.1 GENERAL PARTNERS. No General Partner shall withdraw from the Partnership or sell, assign, pledge, encumber or otherwise dispose of all or any portion of its Partnership Interest or Units without the Consent of the Limited Partners which consent may be given or withheld in each Partner's sole and absolute discretion. Upon any transfer of a Partnership Interest in accordance with the provisions of this Section 9.1, the transferee General Partner shall become vested with the powers and rights of the transferor General Partner, and shall be liable for all obligations and responsible for all duties of such General Partner, once such transferee has executed such instruments as may be necessary to effectuate such admission and to confirm the agreement of such transferee to be bound by all the terms and provisions of this Agreement with respect to the Partnership interest so acquired. It shall be a condition to any transfer otherwise permitted hereunder that the transferee assumes by express agreement (or pursuant to a statutory merger or consolidation wherein all obligations and liabilities of the General Partner are assumed by a successor trust or corporation by operation of law) all of the obligations of the transferor General Partner under this Agreement with respect to such transferred Partnership Interest and no such transfer (other than pursuant to a statutory merger or consolidation wherein all obligations and liabilities of the transferor General Partner are assumed by a successor trust or corporation by operation of law) shall relieve the transferor General Partner of its obligations under this Agreement without the Consent of the Limited Partners. In connection with any -36- such permitted transfer, the successor General Partner shall be deemed admitted as such immediately prior to the effective time of the transfer from the transferor General Partner and shall continue the business of the Partnership without dissolution. If a General Partner withdraws or retires from the Partnership, in violation of this Agreement or otherwise, or dissolves, terminates or upon the Bankruptcy of such General Partner, (a) the remaining General Partners may elect to continue the Partnership business or (b) within 90 days thereafter, all of the remaining Partners (or, to the extent permitted under the Act, such lesser number or percentage of the Partners, but in no event less than a Majority-in-Interest of the Limited Partners) may elect to continue the Partnership business by selecting a substitute General Partner, which substitute General Partner accepts such election and agrees to serve as General Partner. Such successor General Partner shall thereupon succeed to the rights and obligations of the General Partner as provided in this Section 9.1. 9.2 TRANSFERS BY LIMITED PARTNERS. (a) No Limited Partner shall have the right, directly or indirectly, to transfer all or any part of his Partnership Interest or Units to any Person without the prior written consent of the Managing General Partner, which consent may be given or withheld by the Managing General Partner in its sole and absolute discretion. The foregoing notwithstanding, the Managing General Partner hereby grants consents described in this Section 9.2 to the following categories of transfers by Limited Partners, PROVIDED that any such transfer otherwise complies with all of the other provisions of this Article 9 (including, but not limited to, any additional consents required hereunder): (i) transfers of Units; (ii) transfers of Partnership Interests (whether outright or in trust) to members of a Partner's Immediate Family; (iii) transfers Partnership Interests to a Person holding a direct or indirect interest in a Partner; (iv) transfers of Partnership Interests pursuant to an exercise of Rights; or (v) pledges to secure bona fide indebtedness. (b) It shall be a condition to any transfer by a Limited Partner (other than a pledge, encumbrance, hypothecation or mortgage) otherwise permitted hereunder that the transferee assume by operation of law or express agreement all of the obligations of the transferor under this Agreement (including, without limitation, under Article 9 hereof) with respect to such transferred Partnership Interest or Units and no such transfer (other than pursuant to a statutory merger or consolidation wherein all obligations and liabilities of the transferor are assumed by a successor corporation by operation of law) shall relieve the transferor of its obligations under this Agreement without the approval of the Managing General Partner, in its reasonable discretion (it being understood that a transferor shall be deemed relieved from such obligations, without the necessity of any such approval, in respect of Partnership Interests transferred to the Managing General Partner or the Partnership pursuant to the Exchange Rights Agreement). Upon such transfer, the transferee of a Partnership Interest shall be admitted as a Limited Partner and shall succeed to all of the rights of the transferor Limited Partner under this Agreement in the place and stead of such transferor Limited Partner (which succession, in the event of a pledge, may be entered into and become effective at the time of foreclosure or other realization of such pledge). The foregoing notwithstanding, a transferee of a Unit shall not be admitted as a Limited Partner -37- unless the Managing General Partner consents, which consent may be given or withheld by the Managing General Partner in its sole and absolute discretion. Any transferee, whether or not admitted as a substituted Limited Partner, shall succeed to the obligations of the transferor hereunder (unless such transfer is a pledge, encumbrance, hypothecation or mortgage or except as otherwise provided herein). (c) In addition to any other restrictions on transfer provided herein, no Partnership Interest or Units shall be transferable by a Limited Partner unless the transferor gives written notice of the proposed transfer which notice shall state to the best of its knowledge that such transfer will not violate any of the restrictions set forth in Section 9.3 hereof. (d) Any permitted transferee under Section 9.2 who is not admitted as a Limited Partner in accordance with this Article 9 or a transferee who only holds Units shall be considered an assignee for purposes of this Agreement. An assignee shall be deemed to have had assigned to it, and shall be entitled to receive, distributions from the Partnership and the share of Net Income, Net Losses, and any other items of income, gain, loss, deduction and credit of the Partnership and rights attributable to the Partnership Interests assigned to such transferee, but shall not be deemed to be a holder of Partnership Interests for any other purpose under this Agreement, and shall not be entitled to vote such Partnership Interests in any matter presented to the Limited Partners for a vote. In the event any such transferee desires to make a further assignment of any such Partnership Interests, such transferee shall be subject to all the provisions of this Article 9 to the same extent and in the same manner as any Limited Partner desiring to make an assignment of Partnership Interests. (e) The Limited Partners acknowledge that neither the Partnership Interests nor the Units have been registered under any federal or state securities laws and, as a result thereof, they may not be sold or otherwise transferred, except in compliance with such laws. Notwithstanding anything to the contrary contained in this Agreement, no Partnership Interest or Units may be sold or otherwise transferred unless such transfer is exempt from registration under any applicable securities laws or such transfer is registered under such laws, it being acknowledged that the Partnership has no obligation to take any action which would cause any such Partnership Interests or Units to be registered. 9.3 CERTAIN RESTRICTIONS ON TRANSFER. In addition to any other restrictions on transfer herein contained, except with the consent of the Managing General Partner, in no event may any transfer of a Partnership Interest or Units by any Person be made (a) to any person or Entity that lacks the legal right, power or capacity to own a Partnership Interest or Units; (b) in the event such transfer would cause SLT to cease to comply with the REIT Requirements; (c) if such transfer would cause a termination of the Partnership for federal income tax purposes; (d) if such transfer would, in the opinion of counsel to the Partnership, cause the Partnership to cease to be classified as a Partnership for federal income tax purposes; (e) if such transfer would result in the Partnership being treated as a "publicly traded partnership" or is effectuated through an "established securities market" or a -38- "secondary market (or the substantial equivalent thereof)" within the meaning of Section 7704 of the Code and the Regulations thereunder; (f) in violation of the Hart-Scott-Rodino Antitrust Improvements Act of 1976; (g) if the Managing General Partner reasonably believes that such transfer may (i) cause any portion or all of the assets of the Partnership to be deemed pursuant to United States Department of Labor Regulation Section 2510.3-101 or otherwise pursuant to ERISA to be for any purpose of ERISA or Section 4975 of the Code assets of any Restricted Entity, or (ii) cause a "prohibited transaction" (as defined in Section 4975(c) of the Code or within the meaning of Section 406 of ERISA) to occur, or (iii) cause the Partnership to become with respect to any Restricted Entity a "party in interest" (as defined in Section 3(14) of ERISA) or a "disqualified person" (as defined in Section 4975(e) of the Code) or (iv) cause the Partnership to be jointly and severally liable for any obligation arising under ERISA or the Code with respect to any "employee benefit plan" as defined in and subject to ERISA or any "plan" as defined in Section 4975 of the Code; or (h) if the intended transferee is a Restricted Entity. Any purported transfer described in this Section 9.3 shall be void AB INITIO. 9.4 EFFECTIVE DATES OF TRANSFERS. (a) Transfers pursuant to this Article 9 may be made on any day, but for purposes of this Agreement, the effective date of any such transfer shall be (i) the first day of the month in which such transfer occurred if such transfer occurred on or prior to the fifteenth calendar day of a month, or (ii) the first day of the month immediately following the month in which such transfer occurred, if such transfer occurred after the fifteenth calendar day of a month, or such other date determined by the Managing General Partner pursuant to such convention as may be administratively feasible and consistent with applicable law. (b) If any Partnership Interest or Unit is transferred or assigned in compliance with the provisions of this Article 9, on any day other than the first day of a calendar year, then Net Income, Net Loss, each item thereof and all other items attributable to such Partnership Interest or Unit for such year shall be allocated to the transferor, and, in the case of a transfer or assignment other than a redemption, to the transferee, by taking into account their varying interests during such year in accordance with Section 706(d) of the Code, using method permitted thereunder. All distributions pursuant to Section 6.2 hereof attributable to such transferred Partnership Interests or Units (A) with respect to which the Partnership Record Date is before the effective date of such transfer (other than a pledge, encumbrance, hypothecation or mortgage) shall be made to the transferor, (B) with respect to the first Partnership Record Date after the effective date of such transfer (other than a pledge, encumbrance, hypothecation or mortgage) shall be paid to the transferor and to the transferee, ratably in accordance with their respective periods of ownership of the Partnership Interest or Units transferred during the period with respect to which such distribution is made, and (C) all distributions after those described in (A) and (B) shall be made to the transferee. -39- 9.5 TRANSFER. (a) The term "transfer," when used in this Article 9 with respect to a Partnership Interest, shall be deemed to refer to a transaction by which a Person purports to assign its Partnership Interest or any portion thereof (including Units) to another Person, and includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition by law or otherwise. (b) The Managing General Partner is hereby authorized on behalf of each of the Partners to amend this Agreement (including the schedules hereto) to reflect the admission of any transferee of a Partnership Interest as a substituted Limited or General Partner in accordance with the provisions of this Article 9. (c) No Partnership Interest or Unit shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article 9. Any transfer or purported transfer of a Partnership Interest not made in accordance with this Article 9 shall be null and void. 9.6 NEVADA GAMING CONTROL ACT. (a) Notwithstanding anything to the contrary expressed or implied in this Agreement, the sale, assignment, transfer, pledge or other disposition of any interest in the Partnership is void unless approved in advance by the Commission. If at any time the commission finds that an individual owner of any interest in the Partnership is unsuitable to hold that interest, the Commission shall immediately notify the Partnership of that fact. The Partnership shall, within ten (10) days from the date that it receives the notice from the Commission, return to the unsuitable owner the amount of his capital account as reflected on the books of the Partnership. Beginning on the date when the Commission serves notice of a determination of unsuitability, pursuant to the preceding sentence, on the Partnership, it is unlawful for the unsuitable owner: (i) to receive any share of the profits or distributions of any cash or other property other than a return of capital as described above; (ii) to exercise, directly or through any trust or nominee, any voting right conferred by such interest; or (iii) to receive any remuneration in any form from the Partnership for services rendered or otherwise. (b) Any Limited Partner granted a delayed licensing by the Commission which Limited Partner is later found unsuitable by the Commission shall return all evidence of any ownership in the Partnership to the Partnership, at which time the Partnership shall refund to the unsuitable Limited Partner no more than the amount that such Limited Partner paid for his ownership interest in the Partnership, and the unsuitable Limited Partner shall no longer have any direct or indirect interest in the Partnership. (c) This Section 9.6 and the last sentence of Section 2.3 hereof shall apply only if the Partnership applies for and obtains a Nevada state gaming license and -40- only while such license is in effect. No such license shall be applied for or obtained by the Partnership without the Consent of the Limited Partners. ARTICLE 10 RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS 10.1 NO PARTICIPATION IN MANAGEMENT. No Limited Partner, in its capacity as such, shall take part in the management of the Partnership's business, transact any business in the Partnership's name or have the power to sign documents for or otherwise bind the Partnership. Any rights expressly granted to the Limited Partners in this Agreement shall not be deemed to be rights relating to the management of the Partnership's business. 10.2 BANKRUPTCY OF A LIMITED PARTNER. The Bankruptcy of any Limited Partner shall not cause a dissolution of the Partnership, but the rights of such Limited Partner to share in the Net Profits or Net Losses of the Partnership and to receive distributions of Partnership funds shall, on the happening of such event, devolve on its successors or assigns, subject to the terms and conditions of this Agreement, and the Partnership shall continue as a limited partnership. In no event, however, shall such assignee(s) become a substituted Limited Partner except in accordance with Article 9 hereof. 10.3 NO WITHDRAWAL. No Limited Partner may withdraw from the Partnership without the prior written consent of the Managing General Partner, other than as provided in Article 9 hereof. 10.4 CONFLICTS. The Partners recognize that the Limited Partners and their Affiliates have or may have other business interests, activities and investments, some of which may be in conflict or competition with the business of the Partnership, and that such Persons are entitled to carry on such other business interests, activities and investments. In deciding whether to take any actions in such capacity, such Limited Partners and their Affiliates may, but shall be under no obligation to, consider the separate interests of the Partnership and shall have no fiduciary obligations to the Partnership and shall not be liable for monetary damages for losses sustained, liabilities incurred or benefits not derived by the other Partners in connection with such actions except for damages for losses sustained or liabilities incurred which result from a Limited Partner breaching a representation, warranty or covenant hereunder or to the extent provided in the Formation Agreement; nor shall the Partnership or the General Partners be under any obligation to consider the separate interests of the Limited Partners and their Affiliates in such capacity or have any fiduciary obligations to the Limited Partners and their Affiliates in such capacity or be liable for monetary damages for losses sustained, liabilities incurred or benefits not derived by the Limited Partners and their Affiliates in such capacity arising from actions or omissions taken by the Partnership. The Limited Partners and their Affiliates may engage in or possess an interest in any other business or venture of any kind, independently or with others, on their own behalf or on behalf of other entities with which they are affiliated or associated, and such -41- persons may engage in any activities, whether or not competitive with the Partnership, without any obligation to offer any interest in such activities to the Partnership or to any Partner. Neither the Partnership nor any Partner shall have any right, by virtue of this Agreement, in or to such activities, or the income or profits derived therefrom, and the pursuit of such activities, even if competitive with the business of the Partnership, shall not be deemed wrongful or improper. Notwithstanding the foregoing, the provisions of this Section 10.4 shall not negate or impair any other written agreement between one or more of the Limited Partners and one or more of the General Partners or the Partnership (including Section 6.6 of the Formation Agreement) or any duties which a Limited Partner may have in such Limited Partner's capacity as an officer or director of a General Partner. 10.5 PROVISION OF INFORMATION. (a) With respect to any information required to be provided to the Partners pursuant to Section 17-305 (or any successor thereto) of the Act: (i) the cost of preparing or providing any such information (including, without limitation, fees paid to any person or entity in connection therewith) shall be paid by the requesting Partner and in no event shall such information be required to be given to the requesting Partner until such payment has been made to the Partnership; (ii) in no event shall any financial statements of the Partnership be required to be provided except for such statements as have already been prepared or are otherwise required to be provided to the Partners under this Agreement and in no event shall any statements which have been prepared be required to be audited, reviewed or otherwise examined by a certified public accountant, if the statements are not otherwise required to be so audited, reviewed or examined pursuant to the provisions of this Agreement; and (iii) in no event shall such information be required to be furnished until forty-five (45) days after such request and unless the information is already in the possession of the Partnership. (b) In addition to other rights provided by this Agreement or by the Act, each Partner shall have the right, for a purpose reasonably related to such Limited Partner's interest as a limited partner in the Partnership, upon written demand with a statement of the purpose of such demand and at such Partner's own expense (excluding copying and administrative expenses of the Managing General Partner): (1) to obtain a copy of the most recent annual and quarterly reports and current reports on Form 8-K filed with the SEC by the Managing General Partner pursuant to the Securities Exchange Act of 1934; (2) to obtain a copy of the Partnership's federal, state and local income tax returns for each fiscal year of the Partnership; (3) to obtain a current list of the name and last known business, residence or mailing address of each Partner; and -42- (4) to obtain a copy of this Agreement and the Certificate, together with executed copies of all powers of attorney pursuant to which this Agreement and the Certificate have been executed. (c) Notwithstanding any other provision of this Section 10.5, the Managing General Partner may keep confidential from the Limited Partners, for such period of time as the Managing General Partner determines in its sole and absolute discretion to be reasonable, any information is not material to the Limited Partners and that (i) the Managing General Partner reasonably believes to be in the nature of trade secrets or other information the disclosure of which the Managing General Partner in good faith believes is not in the best interests of the Partnership or could damage the Partnership or its business or (ii) the Partnership is required by law or by agreements with an unaffiliated third party to keep confidential. 10.6 LIMITED PARTNER REPRESENTATIVE. SCG is hereby appointed as the Limited Partner Representative. A Majority-in-Interest of the Limited Partners shall have the right, at any time, within their sole discretion, to replace the Limited Partner Representative, or to appoint a temporary substitute to act for a Limited Partner Representative unable to act. Any appointment of a Limited Partner Representative made hereunder shall remain effective until rescinded in a writing delivered to the Managing General Partner via certified mail, registered overnight express mail or telecopy, and the Managing General Partner shall have the right and authority to rely (and shall be fully protected in so doing) on the actions taken and directions given by such Limited Partner Representative, without any further evidence of their authority or further action by the Limited Partners. The Managing General Partner shall send copies of all notices received by it pursuant to Section 6.6 to each Limited Partner requesting the same. 10.7 POWER OF ATTORNEY. (a) Each Limited Partner and General Partner constitutes and appoints the Managing General Partner, any Liquidating Trustee and authorized officers and attorneys-in-fact of each, and each of those acting singly, in each case with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead to: execute, swear to, acknowledge, deliver, file and record in the appropriate public offices (i) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate and all amendments or restatements thereof) that the Managing General Partner or the Liquidating Trustee deems appropriate or necessary to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and in all other jurisdictions in which the Partnership may conduct business or own property; (ii) all instruments that the Managing General Partner deems appropriate or necessary to reflect any amendment, change, modification or restatement of this Agreement in accordance with its terms; (iii) all conveyances and other instruments or documents that the Managing General Partner deems appropriate or necessary to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement, -43- including, without limitation, a certificate of cancellation; and (iv) all instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to the provisions of this Agreement or the Capital Contribution of any Partner. (b) The foregoing power of attorney is irrevocable and a power coupled with an interest, in recognition of the fact that each of the Partners will be relying upon the power of the Managing General Partner to act as contemplated by this Agreement in any filing or other action by it on behalf of the Partnership, and it shall survive the death or incompetency of a Partner to the effect and extent permitted by law, subsequent incapacity of any Partner and the transfer of all or any portion of such Partner's Partnership Interests and shall extend to such Partner's heirs, successors, assigns and personal representatives. (c) Nothing contained in this Section 10.7 shall be construed as authorizing the Managing General Partner to amend this Agreement except in accordance with Article 11 hereof. 10.8 OWNERSHIP OF PAIRED SHARES. (a) Each Limited Partner and holder of Units hereby agrees to provide the Managing General Partner within fifteen (15) days of any written request therefor, a statement, to the best of its knowledge, describing the number of Paired Shares actually or constructively owned by such Limited Partner or holder of Units and all direct and indirect owners of such Limited Partner or holder for purposes of the REIT Requirements as determined under Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code, or Section 544 of the Code, as modified by Section 856(h) of the Code. (b) Each Limited Partner and holder of Units (i) hereby covenants that, without the prior written consent of the Managing General Partner (which consent shall not be unreasonably withheld or delayed) it will not acquire and it will use all reasonable efforts to cause its direct or indirect owners not to acquire any Paired Shares or any rights to acquire Paired Shares and (ii) except to the extent that the Managing General Partner provides prior written consent, hereby represents, warrants and covenants that (I) it is not and will not become a Restricted Entity, (II) no "prohibited transaction" (as defined in Section 4975(c) of the Code or within the meaning of Section 406 of ERISA) has occurred or will occur that would not have occurred or occur if the Limited Partner or holder of Units and its Affiliates were not Limited Partners and were not holders of Units, (III) the Partnership has not become and will not become with respect to any Restricted Entity a "party in interest" (as defined in Section 3(14) of ERISA) or a "disqualified person" (as defined in Section 4975(e) of the Code) which the Partnership would not have become or be if the Limited Partner or holder of Units and its Affiliates were not Limited Partners and were not holders of Units, and (IV) the Partnership has not and will not become jointly and severally liable for any obligations arising under ERISA or the Code with respect to any "employee benefit plan" as defined in and subject to ERISA or any "plan" as defined in the -44- Code for which the Partnership has not become or would not be liable if the Limited Partner or holder of Units and its Affiliate were not Limited Partners and were not holders of Units. 10.9 WAIVER OF FIDUCIARY DUTY. Each Limited Partner and holder of Units hereby waives, to the maximum extent permitted under law, any and all fiduciary duties of the Managing Partner and any other General Partner to each, all or any combination of them and hereby agrees that the Managing General Partner and the other General Partners may, but are under no obligation to, take their interests into account in performing or refraining from performing any act permitted under this Agreement. ARTICLE 11 AMENDMENT OF PARTNERSHIP AGREEMENT, MEETINGS 11.1 AMENDMENTS. (a) This Agreement may not be amended unless such amendment is approved by the Managing General Partner with the Consent of the Limited Partners, except as provided below in this Section 11.1. (b) Notwithstanding Section 11.1(a), the Managing General Partner shall have the power, without the Consent of the Limited Partners but after five (5) Business Days notice to the Partners, to amend this Agreement as may be required to facilitate or implement any of the following purposes: (1) to add to the obligations of the Managing General Partner for the benefit of the Limited Partners; (2) to reflect the admission, substitution, termination, or withdrawal of Partners after the date hereof in accordance with Section 4.1(d) or Article 9 of this Agreement, provided that the Managing General Partner shall not be required to give the notice referred to in the first paragraph of this subsection (b) in respect of a transfer of Partnership Interests or Units upon the exercise of Rights or in respect of the transactions described in Section 4.1(f); (3) to set forth the rights, powers, duties, and preferences of the holders of any additional Partnership Interests issued pursuant to Article 4 hereof; (4) to reflect a change that is of an inconsequential nature and does not adversely affect the Partners, or to cure any ambiguity, correct or supplement any provision in this Agreement not inconsistent with law or with other provisions, or make other changes with respect to matters arising under this Agreement that will not be inconsistent with law or with the provisions of this Agreement; -45- (5) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law; and (6) to prevent all or any portion of the assets of the Partnership from being deemed pursuant to United States Department of Labor Regulation Section 2510.3-101 or otherwise pursuant to ERISA or the Code to be, for any purpose of ERISA or Section 4975 of the Code, assets of any Restricted Entity. (c) Notwithstanding Sections 11.1(a) and (b) hereof, this Agreement shall not be amended without the prior written consent of each Partner adversely affected if such amendment would (i) convert a Limited Partner's interest in the Partnership into a General Partner's interest, (ii) modify the limited liability of a Limited Partner, (iii) alter rights of the Partners to receive allocations and distributions pursuant to Article 6 or Section 8.2 hereof (except as permitted pursuant to Section 11.1(b)(3) hereof), (iv) alter or modify the Rights set forth in the Exchange Rights Agreement or the Registration Rights Agreement except in compliance therewith, (v) amend this Section 11.1(c), (vi) alter such Partner's rights to transfer its Partnership Interests or (vii) amend Section 7.8, 7.9, 10.8 or 11.2(e) hereof. 11.2 MEETINGS OF THE PARTNERS; NOTICES TO PARTNERS. (a) Meetings of Partners may be called by any Partner to act on any matter specified herein or in the Act to be voted on or consented to by the Partners. The call shall state the nature of the business to be transacted. Notice of any such meeting shall be given to all Partners not less than seven (7) Business Days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Whenever the vote or Consent of the Limited Partners or Consent of the General Partners is permitted or required under this Agreement, such vote or consent may be given at a meeting of Partners or may be given in accordance with the procedure prescribed in Section 11.2(b) hereof. (b) Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a written consent setting forth the action so taken is signed by the Managing General Partner and such percentage or number of the Partners as is expressly required by this Agreement. Such consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of the Partners. Such consent shall be filed with the Managing General Partner and copies thereof delivered to all Partners. An action so taken shall be deemed to have been taken at a meeting held on the effective date so certified. (c) Each Partner may authorize any Person or Persons to act for him by proxy on all matters in which a Partner is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Partner or his attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. Every proxy shall -46- be revocable at the pleasure of the Partner executing it. No such proxy and no such revocation shall be effective unless a copy thereof has been delivered to the Managing General Partner. (d) Whenever the Consent of the Limited Partners is required hereunder, the Managing General Partner shall provide a notice to each Partner who is a Limited Partner on the date the notice is given setting forth the matter(s) as to which it proposes to seek such consent at least five (5) Business Days in advance of the date upon which such consent is sought. (e) The Managing General Partner shall provide advance written notice to the Limited Partners of any proposed sale or refinancing, and will consult during normal business hours with any Limited Partner who requests in writing the right to consult with the General Partner with respect thereto. The Managing General Partner also shall provide the Limited Partners with quarterly tax projections for the Partnership. In no event, however, will the Managing General Partner be obligated to agree to any modifications to a proposed sale or refinancing which are suggested by a Limited Partner, nor will any Limited Partner have a veto right over any such proposed sale or refinancing. ARTICLE 12 GENERAL PROVISIONS 12.1 NO LIABILITY OF DIRECTORS AND OTHERS. Notwithstanding anything to the contrary contained herein, no recourse shall be had by the Partnership or any Partner against any trustee, director, shareholder, officer, employee, agent or attorney of any General Partner for any act or omission of such General Partner or any obligation or liability of such General Partner under this Agreement, and none of the foregoing shall have any personal liability for or with respect to any of the foregoing; PROVIDED that the foregoing shall not relieve any trustee, officer or director of a General Partner of any liability in his capacity as such. 12.2 NOTICES. All notices, offers or other communications required or permitted to be given pursuant to this Agreement shall be in writing and may be personally served or sent by United States mail and shall be deemed to have been given when delivered in person or three business days after deposit in United States mail, registered or certified, postage prepaid, and properly addressed, by or to the appropriate party. For purposes of this Section 12.2, the addresses of the parties hereto shall be as set forth on Exhibit B hereto. The address of any party hereto may be changed by a notice in writing given in accordance with the provisions hereof. 12.3 CONTROLLING LAW. This Agreement and all questions relating to its validity, interpretation, performance and enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in -47- accordance with the laws of the State of Delaware, notwithstanding any conflict-of-laws doctrines of such state or other jurisdiction to the contrary. Each of the parties hereto irrevocably submits and consents to the jurisdiction of the United States District Court for the Southern District of New York and the United States District Court for the Central District of California in connection with any action or proceeding arising out of or relating to this Agreement and irrevocably waives any immunity from jurisdiction thereof and any claim of proper venue, forum non conveniens or any similar basis to which it might otherwise be entitled in any such action or proceeding. 12.4 EXECUTION OF COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. 12.5 SEVERABILITY. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. 12.6 ENTIRE AGREEMENT. This Agreement (together with the Exhibits hereto) and the Formation Agreement contain the entire understanding among the parties hereto with respect to the subject matter hereof, and supersede all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The parties hereto intend that this Agreement be treated as a separate and distinct agreement and as not being part of any other agreement (other than the Formation Agreement), arrangement, partnership or joint venture. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. 12.7 PARAGRAPH HEADINGS. The paragraph headings in this Agreement are for convenience and they form no part of this Agreement and shall not affect its interpretation. 12.8 GENDER, ETC. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context indicates is appropriate. The term "including" shall mean "including, but not limited to." 12.9 NUMBER OF DAYS. In computing the number of days (other than Business Days and Trading Days) for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and holidays; PROVIDED, HOWEVER, that if the final day of any time period falls on a Saturday, Sunday or holiday on which national banks are or may elect -48- to be closed, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or such holiday. 12.10 PARTNERS NOT AGENTS. Nothing contained herein shall be construed to constitute any Partner the agent of another Partner, except as specifically provided herein, or in any manner to limit the Limited Partners in the carrying on of their own respective businesses or activities. 12.11 ASSURANCES. Each of the Partners shall hereafter execute and deliver such further instruments and do such further acts and things as may be reasonably required or useful to carry out the intent and purpose of this Agreement and as are not inconsistent with the terms hereof. 12.12 WAIVER OF PARTITION. Each Partner hereby waives any right such Partner may have to partition its interest in the Partnership or any property of the Partnership. IN WITNESS WHEREOF, the parties hereto have executed this Agreement or caused this Agreement to be executed on their behalf as of the date first above written. GENERAL PARTNERS: STARWOOD LODGING CORPORATION, a Maryland corporation By:_________________________________________ Kevin E. Malloy Executive Vice President COLUMBUS OPERATORS, INC. By: _______________________________________ Name: _______________________________ Title: _______________________________ HOTEL INVESTORS OF ARIZONA, INC. By: _______________________________________ Name: _______________________________ Title: _______________________________ -49- HOTEL INVESTORS OF MICHIGAN, INC. By: _______________________________________ Name: _______________________________ Title: _______________________________ HOTEL INVESTORS OF VIRGINIA, INC. By: _______________________________________ Name: _______________________________ Title: _______________________________ WESTERN HOST, INC. By: _______________________________________ Name: _______________________________ Title: _______________________________ HOTEL INVESTORS CORPORATION OF NEVADA By: _______________________________________ Name: _______________________________ Title: _______________________________ HOTEL INVESTORS OF NEBRASKA, INC. By: _______________________________________ Name: _______________________________ Title: _______________________________ -50- LIMITED PARTNERS: BERL HOLDINGS, L.P. By BERL HOLDINGS I, INC. General Partner By: __________________________________ Name: Title: STARWOOD-APOLLO HOTEL PARTNERS VIII, L.P. By SAHI, INC. General Partner By: __________________________________ Name: Title: STARWOOD-APOLLO HOTEL PARTNERS IX, L.P. By SAHI, INC. General Partner By: __________________________________ Name: Title: STARWOOD-NOMURA HOTEL INVESTORS, L.P. By SNHI, INC. General Partner By: __________________________________ Name: Title: -51- STARWOOD/WICHITA INVESTORS, L.P. By STARWOOD OPPORTUNITY FUND II, L.P. General Partner By STARWOOD CAPITAL GROUP, L.P. General Partner By BSS CAPITAL PARTNERS, L.P. General Partner By STERNLICHT HOLDINGS II, INC. General Partner By: _______________________ Name: Title: STARWOOD-HUNTINGTON PARTNERS, L.P. By SRL HOLDINGS, INC. General Partner By: __________________________________ Name: Title: WOODSTAR PARTNERS I, L.P. By STARWOOD CAPITAL GROUP, L.P. General Partner By BSS CAPITAL PARTNERS, L.P. General Partner By STERNLICHT HOLDINGS II, INC. General Partner By: _______________________ Name: Title: -52- FIREBIRD CONSOLIDATED PARTNERS, L.P., By STARWOOD OPPORTUNITY FUND II, L.P. General Partner By STARWOOD CAPITAL GROUP, L.P. General Partner By BSS CAPITAL PARTNERS, L.P. General Partner By STERNLICHT HOLDINGS, II, INC. General Partner By: _______________________ Name: Title: -53- EXHIBIT A LIST OF PARTNERS, PERCENTAGE INTERESTS AND UNITS Date: As of ___________, 1995 Name of Partner Percentage Interest Units - --------------- ------------------- ----- Starwood Lodging Corporation 22.0825% 1,759,037 Columbus Operators, Inc. 0.5098% 40,605 Hotel Investors of Arizona, Inc. 0.5098% 40,605 Hotel Investors of Michigan, Inc. 0.5098% 40,605 Hotel Investors of Virginia, Inc. 0.5098% 40,605 Western Host, Inc. 0.5098% 40,605 Hotel Investors Corporation 0.5098% 40,605 of Nevada Hotel Investors of Nebraska, Inc. 0.2447% 19,491 Starwood-Apollo Hotel 2.7439% 218,576 Partners VIII, L.P. Starwood-Apollo Hotel 2.1952% 174,861 Partners IX, L.P. Starwood-Nomura Hotel 10.9956% 875,876 Investors, L.P. Firebird Consolidated 10.2173% 813,880 Partners, L.P. Woodstar Partners I, L.P. 13.9383% 1,110,286 Starwood/Wichita Investors, L.P. 4.4612% 355,364 Berl Holdings, L.P. 28.8117% 2,295,063 Starwood-Huntington Partners, L.P. 1.2512% 99,671 - ---------------------------------- -------- --------- Totals 100.0000% 7,965,735 EXHIBIT B NOTICE ADDRESS OF PARTNERS Name of Partner Notice Address Starwood Lodging Corporation 11845 West Olympic Boulevard Suite 560 Los Angeles, California 90064 Attention: Kevin E. Mallory, Executive Vice- President Fax No.: (310) 575-9512 Columbus Operators, Inc. Same as above. Hotel Investors of Arizona, Inc. Same as above. Hotel Investors of Michigan, Inc. Same as above. Hotel Investors of Virginia, Inc. Same as above. Western Host, Inc. Same as above. Hotel Investors Corporation of Nevada, Inc. Same as above. Hotel Investors of Nebraska, Inc. Same as above. Firebird Consolidated Partners, L.P. c/o Starwood Capital Group, L.P. Three Pickwick Plaza Suite 250 Greenwich, Connecticut 06830 Attention: Madison F. Grose, Esq. Fax No.: (203) 861-2101 Berl Holdings, L.P. Same as above. Starwood-Apollo Hotel Partners VIII, L.P. Same as above. Starwood-Apollo Hotel Partners IX, L.P. Same as above. Starwood-Nomura Hotel Investors, L.P. Same as above. Woodstar Partners I, L.P. Same as above. Starwood/Wichita Investors, L.P. Same as above. Starwood-Huntington Partners, L.P. Same as above. EX-10.23 8 EXHIBIT 10.23 EXHIBIT 10.23 AMENDMENT NO. 1 TO FORMATION AGREEMENT Amendment dated as of July __, 1995 (this "Amendment") to the Formation Agreement dated as of November 11, 1994, as supplemented by a letter agreement (the "Side Letter") of even date therewith (the "Formation Agreement") among Starwood Lodging Trust (formerly Hotel Investors Trust), a Maryland real estate investment trust (the "Trust"), Starwood Lodging Corporation (formerly Hotel Investors Corporation), a Maryland corporation (the "Corporation"), Starwood Capital Group, L.P., a Delaware limited partnership ("Starwood Capital"), and Berl Holdings, L.P., Starwood-Apollo Hotel Partners VIII, L.P., Starwood-Apollo Hotel Partners IX, L.P., Starwood-Nomura Hotel Investors, L.P., Starwood/Wichita Investors, L.P., Starwood-Huntington Partners, L.P. and Woodstar Partners I, L.P. (collectively, the "Starwood Partners"). WHEREAS, on the date hereof the Trust and the Corporation are consummating an underwritten public offering of the paired shares of the Trust and the Corporation; WHEREAS, the managing underwriters for such offering have requested that the parties hereto amend the Formation Agreement as set forth herein; WHEREAS, Starwood Capital is executing this Agreement on its own behalf and as attorney-in-fact for each of the Starwood Partners pursuant to Section 11.14 of the Formation Agreement; and WHEREAS, pursuant to and in compliance with Sections 11.10 and 11.14 of the Formation Agreement, the Trust, the Corporation, the Starwood Partners and Starwood Capital desire to amend the Formation Agreement as set forth in this Amendment. NOW, THEREFORE, in consideration of the premises and the mutual agreements set forth herein and in the Formation Agreement, the parties hereto agree as follows: SECTION 1. AMENDMENT OF SECTION 6.3 OF THE FORMATION AGREEMENT. Section 6.3 of the Formation Agreement is hereby amended to read in its entirety as follows: Section 6.3. FURTHER CONTRIBUTIONS. Pursuant to the provisions to be contained in the HIC Contribution Agreement and the Operating Partnership Agreement, upon the receipt of necessary Nevada Gaming Approvals with respect to the conveyance of the HICN Properties or such earlier time as such Nevada Gaming Approvals are no longer required ("HICN Approval"), HICN shall convey to the Operating Partnership or a subsidiary of the Operating Partnership all of the HICN Properties and all other assets of HICN, and the Operating Partnership or such subsidiary will assume all of the liabilities and obligations of HICN on such date. If all or a portion of the HICN Properties are disposed of prior to the receipt of the HICN Approval, then HIC or HICN shall contribute to the Operating partnership the net proceeds of such disposition, promptly upon receipt thereof. If the HICN Approval is not received on or prior to December 31, 1996, then on such date HIC or HICN will contribute to the Operating Partnership, with respect to any HICN Properties or other assets not previously disposed of, cash equal to the fair value of such HICN Properties and such other assets on December 31, 1996. Such fair value shall be conclusively determined by an independent appraiser selected by the Board of Directors of HIC. No additional interests in the Operating Partnership will be issued upon the transfer of any of the HICN Properties, such other assets, such net proceeds or such cash. HIC shall contribute to the Operating Partnership any dividends or other distributions declared or paid by HICN to HIC prior to the receipt of the HICN Approval, such contributions to be made upon receipt by HIC of such dividends or other distributions. Neither HIC nor HICN shall be entitled to any additional Units or Partnership Interests by reason of any such contribution. SECTION 2. AMENDMENT OF SECTION 6.5 OF THE FORMATION AGREEMENT. Section 6.5 of the Formation Agreement is hereby amended to read in its entirety as follows: Section 6.5. REIMBURSEMENT BY HIT AND HIC. In addition to the reimbursement for Acquisition Expenses described in SECTION 11.2(a), HIT, HIC the Realty Partnership or the Operating Partnership, as the case may be, will reimburse Starwood for Starwood's out-of-pocket costs and expenses for any services provided to HIT, HIC, the Realty Partnership or the Operating Partnership, as the case may be, respectively, by Starwood, subject to (i) in the case of reimbursement by HIT or the Realty Partnership, the approval by a majority of the members of the Board of Trustees of HIT (the "Independent Trustees") who are not employed by or affiliated with Starwood, HIT or HIC or (ii) in the case of reimbursement by HIC or the Operating Partnership, the approval by a majority of the Board of Directors of HIC (the "Independent Directors") who are not employed by or affiliated with Starwood, HIT or HIC, and (b) HIT, HIC, the Realty Partnership or the Operating Partnership, as the case may be, will reimburse Starwood for Starwood's internal costs (including allocation of overhead of Starwood) for services provided to HIT, HIC, the Realty Partnership or the Operating Partnership, as the case may be, respectively; PROVIDED that, where such internal costs are required to be currently expensed under generally -2- accepted accounting principles by HIT, HIC, the Realty Partnership or the Operating Partnership, as the case may be, such reimbursement pursuant to this clause (b) for the year ending June 30, 1996 will not exceed $250,000 in the aggregate. SECTION 3. AMENDMENT OF SECTION 6.6 OF THE FORMATION AGREEMENT. Section 6.6 of the Formation Agreement is hereby amended to read in its entirety as follows: Section 6.6. EXCLUSIVITY; EXCLUDED ASSETS. (a) Until the later of (x) July __, 1998 or (y) the time at which no officer, director or general partner of, or any other person employed by, any Starwood Party remains on either the Board of Trustees of HIT or the Board of Directors of HIC (the period from the date of this Agreement to the later of (x) or (y) above being referred to as the "Noncompete Period"), each of the Starwood Parties agrees that it will not compete within the United States, directly or indirectly, with the Realty Partnership, the Operating Partnership, HIT or HIC and that such Starwood Party will present to the Realty Partnership and the Operating Partnership all opportunities for acquisitions of (i) fee, ground lease interests or other equity interests in hotels in the United States and (ii) debt interests in hotels in the United States where it is anticipated that the equity will be acquired by the debt holder within one year from the acquisition of such debt interest. During the Noncompete Period none of the Starwood Parties or any Person controlled by a Starwood Party may acquire any such fee, ground lease or other equity interests or debt interests described in clauses (i) and (ii) above. The provisions of this Section 6.6(a) shall not apply to (A) Excluded Assets (as defined in Section 6.6(b)), (B) the interests of the Starwood Parties in the Westin Hotel Company and certain affiliates thereof ("Westin"), (C) additional investments by Starwood Capital in Excluded Assets and Westin, (D) Permitted Westin Investments (as defined in the Westin/HOT Agreement dated as of May __, 1995 by and among W&S Hotel L.L.C., W&S Hotel Holding Corp., the Realty Partnership, the Operating Partnership, WHWE LLC and Woodstar Investor Partnership) made through Westin and (E) acquisitions of warrants, equity participations or similar rights incidental to a debt investment by a Starwood Debt Fund (as defined in Section 6.6(d)). (b) Each Starwood Party hereby grants to the Partnerships the option, from and after the Closing Date and at any time or times prior to the earlier of (i) January 31, 2000 and (ii) the expiration of the Noncompete Period, to acquire the interest of such Starwood Party in one or more Excluded Assets (as defined below), subject to receipt of all required material third party and partner consents and approvals. Upon exercise of such option from time to time, -3- such Starwood Party shall use its best efforts to obtain such consents and approvals. Such acquisition by the Partnerships shall be made for a cash purchase price equal to the fair market value of the Excluded Assets being acquired, as determined by agreement between the Partnerships and such Starwood Party or, if they are unable to so agree within 30 days after the exercise of such option, such fair market value shall be equal to the average of the two closest of three appraisals of such fair market value, such appraisals to be performed by an independent appraiser selected by a majority of the Disinterested Members of HIT and HIC, an independent appraiser selected by Starwood and a third independent appraiser selected by agreement of such first two appraisers. HIT and HIC shall pay all costs and expenses of the appraiser selected by them and one-half of the costs and expenses of such third appraiser and Starwood shall pay all costs and expenses of the appraiser selected by it and one-half of the costs and expenses of such third appraiser. As used herein, "Excluded Assets" means those fee interests, debt interests or other investments in the hotel asset investment business of any Starwood Party or their commonly controlled affiliates existing on the Closing Date, all of which are described on SCHEDULE 6.6(b) hereto; it being understood that "Excluded Assets" shall not include the interests and investments described in clause (B) through (D), inclusive, of SECTION 6.6(a). (c) Starwood hereby agrees that in the event that the option to purchase or sell with respect to the portfolio of 14 fee-simple owned hotels included in the Excluded Assets described in SCHEDULE 6.6(b) hereto (the "Buy/Sell") is exercised during the Noncompete Period and Starwood becomes obligated to acquire equity interests in such portfolio, then during the Noncompete Period the Partnerships may elect (by majority vote of the Independent Trustees and majority vote of the Independent Directors) to acquire such equity interests at the purchase price pursuant to the Buy/Sell. (d) Starwood hereby agrees that during the Noncompete Period Starwood Mezzanine Investors, L.P. (and any future similar fund sponsored by Starwood that has, as its principal investment purpose, the origination or acquisition of performing real estate debt and debt-related interests, including performing debt interests collateralized by hotel assets) (such fund or any future similar fund being referred to as a "Starwood Debt Fund") shall not initiate or acquire loans collateralized by hotel assets where it is anticipated that the underlying equity will be acquired by the debt holder within one year from the acquisition of such debt. During the Noncompete Period Starwood will not allow any Starwood Debt Fund to sell or contribute any interests to HIT, HIC, the Realty Partnership or the Operating -4- Partnership (including debt positions or equity interests obtained by a Starwood Debt Fund under, pursuant to or by reason of the holding of debt positions). Interests held by a Starwood Debt Fund from time to time are not subject to the option pursuant to SECTION 6.6(b) above. SECTION 4. EFFECT OF AMENDMENT. Except as expressly set forth herein, this Amendment shall not by implication alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Formation Agreement, all of which shall continue in full force and effect. This Amendment shall supersede the Side Letter and upon the execution and delivery of this Amendment the Side Letter shall be of no further force or effect. All references in the Formation Agreement to "this Agreement" and the "Agreement" and all phrases of like import shall refer to the Formation Agreement as amended by this Amendment. The terms "hereof," "herein," "hereby" and other phrases of like import, as used in the Formation Agreement shall refer to the Formation Agreement as amended by this Amendment. SECTION 5. PARTIAL INVALIDITY. In case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision or provisions had never been contained herein. SECTION 6. EXECUTION IN COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be considered an original counterpart, and shall become a binding agreement when the Trust, the Corporation and Starwood Capital (on its own behalf and as attorney-in-fact for each of the Starwood Partners) shall have each executed one counterpart. SECTION 7. GOVERNING LAW. Except to the extent that Maryland law is mandatorily applicable to the rights and obligations of the shareholders of the Trust and the stockholders of the Corporation, this Amendment, and the application or interpretation thereof, shall be exclusively governed by its terms and by the internal laws of the State of New York, without regard to principles of conflicts of laws as applied in the State of New York or any other jurisdiction which, if applied, would result in the application of any laws other than the internal laws of the State of New York. SECTION 8. THE TRUST; STARWOOD GENERAL PARTNERS. Each of the parties hereto acknowledge and agree that (a) the name "Starwood Lodging Trust" is a designation of the Trust and its Trustees (as Trustees but not personally) under a Declaration of Trust dated August 25, 1969, as amended and restated, and all persons dealing with the Trust shall look solely to the Trust's -5- assets for the enforcement of any claims against the Trust, and the Trustees, officers, agents and security holders of the Trust assume no personal liability for obligations entered into on behalf of the Trust, and their respective individual assets shall not be subject to the claims of any person relating to such obligations and (b) all persons dealing with any Starwood Party (as defined in the Formation Agreement) shall look solely to the assets of such Starwood Party for the enforcement of any claims against such Starwood Party and the general partner of such Starwood Party, and the officers, agents and security holders of such general partner assume no personal liability for obligations entered into on behalf of such Starwood Party, and their respective individual assets shall not be subject to the claims of any person relating to such obligations. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. STARWOOD LODGING TRUST By:________________________________ Name: Title: STARWOOD LODGING CORPORATION By:________________________________ Name: Title: STARWOOD CAPITAL GROUP, L.P., By: BSS CAPITAL PARTNERS, L.P, general partner By: STERNLICHT HOLDINGS II, INC., general partner By:__________________________ Name: Title: -6- STARWOOD CAPITAL GROUP, L.P. (as attorney-in- fact for each of the Starwood Partners pursuant to Section 11.14 of the Formation Agreement) By: BSS CAPITAL PARTNERS, L.P, general partner By: STERNLICHT HOLDINGS II, INC., general partner By:__________________________ Name: Title: -7- EX-10.24 9 EXHIBIT 10.24 EXHIBIT 10.24 WESTIN/HOT AGREEMENT THIS AGREEMENT is made as of this ____ day of May, 1995, by and among, W&S HOTEL L.L.C., a Delaware limited liability company ("LLC"), W & S HOTEL HOLDING CORP., a Delaware corporation ("Holdco"), WESTIN HOTEL COMPANY, a Delaware corporation ("Westin"), SLT REALTY LIMITED PARTNERSHIP, a Delaware limited partnership ("SLT"), SLC OPERATING LIMITED PARTNERSHIP, a Delaware limited partnership ("SLC"), WHWE L.L.C., a Delaware limited liability company ("WHWE"), and WOODSTAR INVESTOR PARTNERSHIP, a Delaware general partnership ("Woodstar"). WITNESSETH, THAT WHEREAS: A. Westin is primarily in the business of performing hotel and hotel related services pursuant to management, franchise or representation agreements with respect to hotels located within and outside the United States, including the ownership and acquisition of real estate related assets; B. SLT is primarily in the business of owning equity interests in domestic United States hotels that are leased to and generally managed by SLC and SLC is primarily in the business of leasing hotels from SLT and generally managing them; C. WHWE and Woodstar have an indirect economic interest in Westin and affiliates of Woodstar have direct and indirect economic interests in SLT and SLC (individually and collectively, "Starwood Lodging"); D. The parties hereto recognize that each of Westin and Starwood Lodging may have opportunities from time to time with respect to which they compete or could compete or the pursuit of which opportunities by one or the other may be competitive with the pursuits and activities of the other (collectively, "Competitive Activities"); and E. The parties hereto desire to confirm and memorialize certain understandings and agreements with respect to certain Competitive Activities and as to certain other matters. NOW THEREFORE, in consideration of the foregoing and of other consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. CERTAIN DEFINITIONS. As used herein, the following terms have the meanings set forth therefor below: A. "[C]ONTROL" means, for all purposes set forth in this Agreement, the direct or indirect unilateral ability of one party (the "Controlling Party") either to veto or approve the pursuit of a business opportunity by another party (the "Controlled Party"), regardless of the percentage ownership which the Controlling Party may have in the Controlled Party, provided, however, that (i) the Controlling Party has some direct or indirect ownership interest in the Controlled Party and (ii) the business opportunity as to which such Controlling Party has veto or approval rights is an opportunity which the Controlled Party is permitted to pursue under its organizational documents. B. "CORPORATION" means Starwood Lodging Corporation, a Maryland corporation. C. "DISPUTE RESOLUTION COMMITTEE" means a committee of three members who shall be individuals, one to be chosen by the WHWE Group (the "WHWE Designee"), one to be chosen by the Starwood Lodging Group (the "Starwood Lodging Designee") and one to be chosen by each of the WHWE and Starwood Lodging Designees (the "Additional Designee"). No Designee shall be a member of any Group nor shall any Designee be in the employ of or under any contractual relationship with any Group. Designees shall be independent, third parties who are experienced in the resolution of commercial disputes. Each Group may replace its designee from time to time with a person meeting the qualifications set forth above and the WHWE Designee and Starwood Lodging Designee may replace the Additional Designee from time to time with a person meeting the qualifications set forth above. A designee may resign from the Dispute Resolution Committee at any time. The Westin Group shall pay the reasonable costs and expenses of the WHWE Designee, the Starwood Lodging Group shall pay the reasonable costs and expenses of the Starwood Lodging Designee and each of the Westin Group and the Starwood Lodging Group shall pay 50% of the reasonable costs and expenses of the Additional Designee. The Dispute Resolution committee shall be empowered to resolve all disputes among the parties hereto arising under this Agreement. All parties agree to cooperate fully with the Dispute Resolution Committee and to provide such documents, witnesses and information as the Dispute Resolution Committee may from time to time request in its proceedings, subject, however, to any party's right to withhold information or documents to the extent delivery of same would violate any legally recognized privilege, such as the attorney/client privilege, or would otherwise place the delivering party in violation of law or of other bona fide contractual or legal obligations or require the waiver of a constitutional or statutory right. The Dispute Resolution Committee may require affidavits and/or testimony under oath from appropriate persons as to factual matters relevant to its proceedings. The Dispute Resolution Committee shall have no power to award punitive damages nor to make any findings as to violation of law or the occurrence of fraud or willful misconduct. However, the Dispute Resolution Committee's -2- interpretations of this Agreement in respect of any disputes arising under this Agreement shall be binding and conclusive upon the parties hereto. The Dispute Resolution Committee's determinations shall be made by a majority vote of the members thereof. The parties hereto shall provide the Dispute Resolution Committee with such further assurances, insurances and/or indemnifications as the Dispute Resolution Committee may from time to time reasonably request. D. "EXCLUDED ASSETS" means certain assets of the Starwood Group that were not contributed to SLT or SLC pursuant to the terms of the Formation Agreement, including, but without limitation, Woodstar's interest in the Westin Group. E. "FORMATION AGREEMENT" means the Formation Agreement dated as of November 11, 1994 among the Trust (formerly Hotel Investors Trust), the Corporation (formerly Hotel Investors Corporation), Starwood Capital Group, L.P. ("Starwood") and various affiliates of Starwood, as modified by a letter agreement entered into concurrently therewith. F. "WHWE GROUP" means, individually and collectively, WHWE and any persons or entities controlled directly or indirectly by WHWE or which are under common direct or indirect control with WHWE or which control WHWE from time to time. The WHWE Group shall not include the Westin Group, the Starwood Lodging Group or the Starwood Group. The WHWE Group shall include, without limitation, those members designated by the WHWE Group. G. "GROUP" means a reference to any one or more of the WHWE Group, the Starwood Group, the Starwood Lodging Group or the Westin Group, as appropriate from the context of the reference. H. "LLC AGREEMENT" means that certain Amended and Restated Limited Liability Company Agreement of W&S Hotel L.L.C. of even date herewith. I. "MEMBER" has the meaning set forth in the LLC Agreement. J. "OFFERINGS" means the offerings of paired shares by Starwood Lodging contemplated by a Form S-2 Registration Statement filed by Starwood Lodging with the Securities and Exchange Commission on May 8, 1995, as such offerings may be modified from time to time. K. "PERMITTED WESTIN INVESTMENTS" means, individually and collectively: (i) minority equity investments (i.e., less than 50% of the total equity investment) made in connection with the Westin Group's acquiring, extending or modifying management contracts, leases or franchise or representation agreements, (ii) other equity interests acquired by the Westin Group that are a -3- minority portion (i.e., less than 50% of the total asset value a the time of acquisition) of its acquisition of a hotel management company or of the assets of such a hotel management company, (iii) acquisitions where the Starwood Lodging Group co-invests or has the opportunity to co-invest with the "Westin Investors" (which means, individually and collectively, the other owner or owners of the Westin Group, their affiliates or Westin), the opportunity to co- invest meaning an opportunity for the Starwood Lodging Group to acquire 50% of the total equity investment of the Starwood Lodging Group and the Westin Investors on the same basis and with the same rights as the Westin Investors, with management to be as agreed upon by the Starwood Lodging Group and the Westin Investors, and with Westin to be the franchisor, or (iv) equity investments made in any asset which is under management, franchise or representation agreements with the Westin Group as of the date hereof and where, at the time the initial equity investment is made by the Westin Group, such asset remains subject to such management, franchise or representation agreement. For purposes of this definition, "leases" shall mean one or more leases entered into with the Westin Group as lessee in lieu of a management agreement between the lessor and the Westin Group and where, in each case, a majority of the equity interest in the leased asset shall reside with unaffiliated third parties holding direct or indirect interests in the lessor. L. "RESTRICTED PERIOD" means, with respect to any particular Westin Opportunity, the period commencing with the vetoing by less than all of the Members of the consummation of such Westin Opportunity and ending on that date which is 270 days subsequent to the date such opportunity was vetoed by less than all of the Members. M. "STARWOOD DEBT FUND" means any investment fund sponsored by the Starwood Group from time to time that has, as its principal investment purposes, the origination or acquisition of performing real estate debt-related interests, which may include performing debt interests collateralized by hotel assets. N. "STARWOOD GROUP" means, individually and collectively, Starwood and any persons or entities controlled directly or indirectly by Starwood or which are under common direct or indirect control with Starwood or which control Starwood from time to time. The Starwood Group shall not include the Starwood Lodging Group, the WHWE Group or the Westin Group. The Starwood Group shall include, without limitation, those Members designated by the Starwood Group. O. "STARWOOD/HOT NON-COMPETE" means the agreement of the Starwood Group with Starwood Lodging that, during the Starwood/HOT Non-Compete Term and subject to the Starwood/HOT Non-Compete Exceptions, the Starwood Group will not compete, directly or indirectly, with Starwood Lodging and will present to Starwood Lodging all acquisitions of (i) fee or ground lease -4- interests and other equity interests in hotels in the United States and (ii) debt interests in hotels in the United States where it is anticipated that the equity will be acquired by the debt holder within one year from the acquisition of such debt. P. "STARWOOD/HOT NON-COMPETE EXCEPTIONS" means, individually and collectively, (i) the Excluded Assets and additional investments by the Starwood Group therein; (ii) increases in Westin Group assets that are permitted hereunder or pursuant to the terms of the Formation Agreement; and (iii) warrants, equity participations or similar rights that are incidental to a debt investment by a Starwood Debt Fund. Q. "STARWOOD/HOT NON-COMPETE TERM" means the period occurring from and after January 1, 1995 through the later to occur of (i) the third anniversary of the closing of the Offerings or (ii) the date as of which no officer, director, general partner or employee of the Starwood Group is on either the Board of Trustees of the Trust or the Board of Directors of the Corporation. R. "STARWOOD LODGING GROUP" means, individually and collectively, Starwood Lodging and persons or entities controlled directly or indirectly by Starwood Lodging or which are under common direct or indirect control with Starwood Lodging or which control Starwood Lodging from time to time. The Starwood Lodging Group shall not include the Starwood Group, the WHWE Group or the Westin Group. S. "TRUST" means Starwood Lodging Trust, a Maryland real estate investment trust. T. "WESTIN GROUP" means, individually and collectively, the LLC, Holdco and Westin and persons or entities controlled directly or indirectly by the LLC, Holdco or Westin, respectively, or which are under identical direct or indirect control with the LLC, Holdco or Westin, respectively. The Westin Group shall not include the Starwood Group, the WHWE Group or the Starwood Lodging Group. U. "WESTIN OPPORTUNITY" means any business opportunity or portion thereof (i) pursued by the Westin Group or (ii) which was presented to the Starwood Group or the WHWE Group exclusively for the benefit for the Westin Group, and which, in either case, is not being pursued independently by the Starwood Group, the Starwood Lodging Group or the WHWE Group. For purposes of this Agreement, an opportunity may be deemed to be independently pursued even though a Group's pursuit of same did not commence prior to or concurrently with the Westin Group's pursuit of same, but an opportunity shall not be deemed to be independently pursued by the Starwood Group, the Starwood Lodging Group or the WHWE Group, as appropriate, if the pursuit by any such Group involves (a) the use of proprietary information held by the -5- Westin Group that is not information otherwise available either (x) in the public domain or (y) to such Group directly and other than by reason of its interest in the Westin Group or (b) the intentional use by such Group of Westin Group employees or resources or (c) an opportunity that was presented to such Group exclusively for the benefit of the Westin Group. No opportunity shall be deemed to be a Westin Opportunity if the Westin Group's pursuit of same would violate the agreement of the Westin Group set forth in paragraph 2 below. 2. AGREEMENT RE PERMITTED WESTIN INVESTMENTS. During any period in which an officer, director, general partner or employee of the Starwood Group is on either the Board of Trustees of the Trust or the Board of Directors of the Corporation (herein, the "Board Period") and the Starwood Group controls the Westin Group, the Westin Group agrees that it will not seek to acquire or acquire domestic United States hotel equity interests (either directly or through the acquisition of debt where it is anticipated that the equity will be acquired by the debt holder within one year from the acquisition of such debt) other than Permitted Westin Investments. The previous sentence shall not be construed as imposing any limitations on the Westin Group's retention of its existing assets as of the date hereof or on its investing additional capital in such existing assets or on its increasing its investment in existing assets. Starwood Lodging agrees to notify the Westin Group and the WHWE Group promptly (i) of any termination of the Board Period and (ii) of any pursuit by the Westin Group of any opportunity which Starwood Lodging believes the Westin Group may be prohibited from pursuing pursuant to the operation of this paragraph 2. 3. LIMITATIONS AS TO INDEPENDENT PURSUIT OF WESTIN OPPORTUNITIES. (a) If a Member vetoes the Westin Group's consummation of a Westin Opportunity and less than all of the Members shall have vetoed the Westin Group's consummation of such Westin Opportunity, then the Group of which such vetoing Member is a member shall not pursue such opportunity independently of the Westin Group during the Restricted Period and the non-vetoing Members and the Group of which they are members may pursue such opportunity independently of the Westin Group. For purposes of this paragraph 3 and for determining the applicable Restricted Period, any veto by a Member shall be construed as a veto by all Members who are also members of the same Group and any abstentions or recusals shall be construed as a veto. (b) Without limitation on the foregoing, during the Board Period and so long as the Starwood Group controls the Westin Group, then if a Member who is also a member of the Starwood Group shall have vetoed the Westin Group's consummation of a Westin Opportunity and less than all of the Members shall have vetoed the Westin Group's consummation of a Westin -6- Opportunity and less than all of the Members shall have vetoed the Westin Group's consummation of such Westin Opportunity, Starwood Lodging Group shall not pursue such opportunity independently of the Westin Group during the Restricted Period. However, such restriction shall not apply if the Starwood Lodging Group was independently pursuing such opportunity prior to any veto thereof by a Member of the Westin Group (and, in such event, during the Board Period and so long as the Starwood Group controls the Westin Group, any Member who was also a member of the Starwood Group would be required to recuse itself under the provisions set forth in paragraph 4 below). Thus, by way of illustration only, and without limitation on the foregoing, an otherwise permissible independent pursuit of an opportunity by the Starwood Lodging Group shall not be pursued during the Restricted Period by the Starwood Lodging Group (unless the Starwood Lodging Group and the Westin Group expressly agree to a joint pursuit) if all of the following shall be true: (i) the pursuit would be during the Board Period; (ii) the Starwood Group controls the Westin Group; (iii) a Member who is also a member of the Starwood Group shall have vetoed the Westin Group's consummation of such opportunity; (iv) less than all of the Members shall have vetoed the Westin Group's consummation of such opportunity; and (v) at the time of such veto, the opportunity was a Westin Opportunity (i.e., it was not being independently pursued by any of the Starwood Group, the Starwood Lodging Group or the WHWE Group and the opportunity was a Permitted Westin Investment). The WHWE Group agrees to notify Starwood Lodging promptly of any termination of control over the Westin Group by the Starwood Group. 4. RECUSAL AS TO CERTAIN OPPORTUNITIES. During any period in which the Westin Group shall be pursing an opportunity and a Member or the Group of which it is a member (or, in the case of the Starwood Group, then during any period in which the Starwood/HOT Non-Compete shall be in effect, the Starwood Lodging Group) shall also be pursuing such opportunity, then the Group of which such Member is a member shall recuse itself from the Westin Group's decision- making with respect to such opportunity during such period. Any such recusal shall not be construed as modifying, abridging, waiving or releasing the agreements of the parties set forth in paragraph 2 above. 5. DISPUTE RESOLUTION COMMITTEE. In the event of any dispute among the parties hereto with respect to the interpretation or application of this Agreement, the parties hereto agree that such dispute shall be resolved by the Dispute Resolution Committee. Without limitation on the foregoing: (i) In the event that the Dispute Resolution Committee shall determine that the Westin Group's pursuit of an -7- opportunity is prohibited under paragraph 2 hereof, then the Westin Group shall either discontinue such pursuit or structure such pursuit in a manner which the Dispute Resolution Committee concludes is not violative of the provisions of said paragraph 2. (ii) The Dispute Resolution Committee shall resolve any disputes as to whether an opportunity is a Westin Opportunity or as to whether a Group's pursuit of an opportunity is an independent pursuit in accordance with the requirements of this Agreement. (iii) In the event that the Dispute Resolution Committee shall determine that the Starwood Lodging Group's pursuit of an opportunity is prohibited under paragraph 3 hereof, then the Starwood Lodging Group shall either discontinue or refrain from such pursuit or structure any such pursuit in a manner which the Dispute Resolution Committee concludes is not violative of the provisions of said paragraph 3. It is the parties stated intent to resolve any disputes with respect to the interpretation and implementation of this Agreement expeditiously and fairly to the interests of all parties and so as to prevent or mitigate any actual damages incurred by a party. The parties agree to cooperate fully with the Dispute Resolution committee to effect these goals. The parties hereto agree not to seek punitive damages against one another with respect to any matter resolved by the Dispute Resolution Committee; however, nothing herein shall be construed as a waiver or release of any rights which a party may have from time to time with respect to the fraud or willful misconduct of another party. 6. NOTICES. Notices hereunder shall be given in the same manner as notices are required to be given under the LLC Agreement, with notices to Starwood to be given in the same manner as notices to Woodstar thereunder, with notices to the LLC, Holdco and Westin to be given c/o both Woodstar and WHWE and with notices to Starwood Lodging to be given at the following address (until further written notice): 11845 West Olympic Blvd., Suite 550, Los Angeles, California 90064 Attention: Jeffrey C. Lapin (with a copy of any such notice being given concurrently to Starwood Capital Group, L.P., Three Pickwick Plaza, Suite 250, Greenwich, CT 06830 Attention: Barry S. Sternlicht). 7. WESTIN/HOT FRANCHISE AGREEMENT. Annexed hereto is a schedule of pre-agreed terms and provisions for any franchise agreement which the Westin Group may enter into with the Starwood Lodging Group. Such pre-agreed schedule shall not be construed as obligating any party to enter into any such franchise agreement and finalization of any such franchise agreement shall -8- be subject to the applicable parties' reaching agreement as to all terms and provisions not dealt with on such schedule. 8. CONFLICTS. In the event of any conflict or inconsistency between the terms and provisions of this Agreement and those of the LLC Agreement, the terms and provisions of this Agreement shall control. 9. SPECIAL AGREEMENT. In the event that any Member elects to structure an equity investment that is a Westin Opportunity with equity ownership in a separate joint venture pursuant to the terms of the LLC Agreement, then the interest that would otherwise be held by the Starwood Group may, at its direction and subject to the requirements of the Starwood/HOT Non- Compete, be held by any one or more of (i) the Starwood Group, (ii) the Starwood Lodging Group or (iii) investors or their affiliates who then have an interest in the Westin Group through the Starwood Group but who are not members of the Starwood Group and who are not bound by any applicable non-competition agreement or legal requirement to the Starwood Lodging Group (individually and collectively, "Starwood Investors"). In the event that as a result of the Starwood Group's exercise of such right, any Starwood Investors or the Starwood Lodging Group shall have control over such investment, then the provision of such control to such Starwood Investors or to the Starwood Lodging Group shall be subject to the WHWE Group's prior written approval, such approval not to be unreasonably withheld or delayed. In the event the Starwood Lodging Group declines to make such investment and, as a result of the Starwood/HOT Non- Compete, the Starwood Group is prohibited from making such investment, then the Starwood Lodging Group shall not object to the Starwood Investors making such investment without the Starwood Group. 10. COUNTERPART EXECUTION. This Agreement may be executed in counterparts, all of which shall constitute one and the same Agreement. The Westin Group (other than Westin) acknowledge that execution of this Agreement by Westin shall not occur until immediately after the acquisition by the Westin Group of an interest in Westin. The Westin Group (other than Westin) agree to cause such immediate execution of this Agreement by Westin. 11. CERTAIN EXCULPATION. The name "Starwood Lodging Trust" is a designation of the Trust and its Trustees (as Trustees but not personally) under a Declaration of Trust dated August 25, 1969, as amended and restated as of June 6, 1988 and as further amended, and all persons dealing with the Trust shall look solely to the Trust's assets for the enforcement of any claims against the Trust, as the Trustees, officers, agents and security holders of the Trust, in such respective capacities, assume no personal obligations of the Trust, and their respective -9- individual assets shall not be subject to the claims of any person relating to such obligations by reason of such capacity. IN WITNESS WHEREOF, the undersigned have entered into this Agreement as of the day and year first above written. W & S HOTEL, L.L.C., a Delaware limited liability company By:________________________ Name: Title: W & S HOTEL HOLDING CORP., a Delaware corporation By:_________________________ Name: Title: WESTIN HOTEL COMPANY, a Delaware corporation By:_________________________ Name: Title: SLT REALTY LIMITED PARTNERSHIP, a Delaware limited partnership By: STARWOOOD LODGING TRUST, its general partner By:_________________________ Name: Title: -10- SLC OPERATING LIMITED PARTNERSHIP, a Delaware limited partnership By: STARWOOD LODGING CORPORATION, general partner By:_________________________ Name: Title: WHWE L.L.C., a Delaware limited liability company By:__________________________ Name: Title: WOODSTAR INVESTOR PARTNERSHIP, a Delaware general partnership By: MARSWOOD INVESTORS, L.P., its general partner By: STARWOOD CAPITAL GROUP, L.P., its general partner By: BSS CAPITAL PARTNERS, L.P., its general partner By: STERNLICHT HOLDINGS II, INC., its general partner By:_________________________ Name: Title: -11- EX-26 10 EXHIBIT 26 EXHIBIT 26 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) ______________________________ FIRST INTERSTATE BANK OF CALIFORNIA (Exact name of trustee as specified in its charter) California 95-0593085 (Jurisdiction of Incorporation (I.R.S. Employer or organization Identification No.) if not a U.S. national bank) 707 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90017 (Address of principal executive offices) (Zip Code) William Souza, First Interstate Bancorp General Counsel 633 West Fifth Street, Los Angeles, California 90071 (213) 614-3337 (Name address and telephone number of agent for service) STARWOOD LODGING TRUST/STARWOOD LODGING CORPORATION (Exact name of obligor as specified in its charter) MARYLAND 52-0901263/52-1193298 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11845 Olympic Boulevard, Suite 550, Los Angeles, CA 90064 (Address of principal executive offices) (Zip Code) NON-INTEREST BEARING CONVERTIBLE NOTES (Title of the indenture securities) FORM T-1 Item 1. GENERAL INFORMATION. Furnish the following information as to the Trustee: (a) Name and address of each examining or supervising authority to which it is subject. STATE BANKING DEPARTMENT 235 Montgomery Street, San Francisco, California 94104 FEDERAL RESERVE BANK OF SAN FRANCISCO 101 Market Street, San Francisco, California 94105 FEDERAL DEPOSIT INSURANCE CORPORATION Washington, D.C. 20429 (b) Whether it is authorized to exercise corporate trust powers. Trustee is authorized to exercise corporate trust powers. Item 2. AFFILIATIONS WITH THE OBLIGOR. If the obligor is an affiliate of the Trustee, describe each such affiliation. No such affiliation. Item 3 through Item 15. Not applicable. Item 16. LIST OF EXHIBITS. *EXHIBIT 1. A copy of the Restated Articles of Incorporation of the Trustee as presently in effect (incorporated by reference to Exhibit T-1A on Form T-1, Securities and Exchange Commission File No. 2-91947). *EXHIBIT 2. A copy of the certificate of the Superintendent of Banks, State of California, authorizing First Interstate bank of California to commence business of banking (incorporated by reference to Exhibit T-1a(b) on Form T-1, Securities and Exchange Commission File No. 2-41187). *EXHIBIT 3. A copy of the certificate of the Superintendent of Banks, State of California, authorizing First Interstate Bank of California to transact trust banking business (incorporated by reference to Exhibit T-1A(b) on Form T-1, Securities and Exchange Commission File No. 2-41187). -1- A copy of the Certificate as to Merger of First Western Bank and Trust Company, San Francisco, California, into California Bank, Los Angeles, California (United California Bank after said Merger), and as to Purchase by First Western Bank and Trust Company, Los Angeles, California (New Bank) from said United California Bank of the Business of Certain Branches of the Former First Western Bank and Trust Company, San Francisco, California (incorporated by reference to Exhibit T-1A(c) on Form T-1, Securities and Exchange Commission File No. 2-41187). EXHIBIT 4. The By-Laws of the Trustee as presently in effect. * EXHIBIT 6. The consent of the Trustee required by Section 331(b) of the Trust Indenture Act of 1939 (incorporated by reference to Exhibit 6 on Form T-1, Securities and Exchange Commission File No. 2-41187). EXHIBIT 7. A copy of the latest report of condition of the Trustee published pursuant to law or the requirements of its supervising or examining authority. * Exhibits thus designated are incorporated herein by reference. These exhibits were previously filed by the Trustee with the Securities and Exchange Commission and are incorporated with the same respective designations in this statement by specific reference thereto. -2- SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee, First Interstate Bank of California, a corporation organized and existing under the laws of the state of California, has duly caused this Statement of Eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Los Angeles, State of California, on June 28, 1995. FIRST INTERSTATE BANK OF CALIFORNIA By: ----------------------------------- Carl Boyd Assistant Vice President -3- EXHIBIT 4 B Y - L A W S OF FIRST INTERSTATE BANK OF CALIFORNIA ARTICLE I MEETINGS OF SHAREHOLDERS SECTION 1. SHAREHOLDERS' ANNUAL MEETING: Annual meetings of Shareholders shall be held at the First Interstate World Center, 633 West Fifth Street, Los Angeles, California, or at such other California location as the shareholders or this Board shall direct. Annual meetings shall take place at one-fifteen on the third Monday in April of each year, if not a legal holiday, and if a legal holiday, then on the next succeeding day not a legal holiday. SECTION 2. NOTICE OF SHAREHOLDERS' ANNUAL MEETING: The notice of the annual meeting of the Shareholders shall be given by the Secretary, or in the event of his absence, refusal or failure to act, by an Assistant Secretary, or a Secretary Pro Tem appointed for that purpose by the Chairman of the Board, the President, or by any Vice President, or by the Executive Committee. Said notice shall be given in the manner and for the time required by law. SECTION 3. SPECIAL SHAREHOLDERS' MEETINGS: Special meetings of the shareholders shall be held at the principal executive office of the Corporation and may be called by order of the Chairman of the Board, the President, or by the Board of Directors, or at the request of the holders at the meeting which represent not less than one-tenth in amount of the shares of the capital stock of the Corporation issued and outstanding. Notice of special meetings of the shareholders shall be given by the Secretary, or in the case of his absence, refusal, or failure to act, by an Assistant Secretary, or Secretary Pro Tem appointed for that purpose by the Chairman of the Board, the President, or by any Vice President, or by the Executive Committee; such notice shall be given by mailing through the United States mails, postage prepaid, a written or printed notice thereof stating the time, place and general nature of the business to be transacted at the meeting, addressed to each shareholder of record entitled to vote at such meeting at the address of such shareholder appearing on the books of the Corporation, or given by the shareholder to the Corporation for the purpose of notice, or if no such address appears or is given, at the place where the principal executive office of the Corporation is located. Said notice shall be mailed by placing the same in any regular place of deposit for United States mail not less than ten (10) nor more than sixty (60) days before the day on which the meeting is to be held. SECTION 4. ADJOURNMENT OF SHAREHOLDERS' MEETINGS: Any meeting of the shareholders may be adjourned from time to time by the vote of a majority of the shares, the Sholders of which are either present in person or represented by proxy. 1 ARTICLE II MEETINGS OF DIRECTORS SECTION 1. ANNUAL MEETING: The Board of Directors shall meet for the purpose of organization, the election of officers, and the transaction of other business, immediately after each annual election of directors on the same day on which the shareholders' meeting at which they have been elected has been held. Notice of such meeting need not be given. SECTION 2. REGULAR MEETINGS OF DIRECTORS: The regular meetings of the Board shall be held at least once each calendar quarter at such hour and on such day during such month as shall from time to time be fixed by standing resolution of the Board, except during the month of April when the annual meeting shall constitute the regular meeting and shall be held immediately after the annual election of directors. In the event that the day fixed for a regular meeting of directors shall fall on a legal holiday, then such regular meeting shall be held at the same hour upon such day as the Board of Directors may previously designate by resolution, and if no such day be designated, the said meeting shall be held on the next succeeding day not a holiday. No notice of regular meetings of directors is required. SECTION 3. SPECIAL MEETINGS OF THE DIRECTORS: Special meetings of the Board may be called by the Chairman of the Board, the President, the Secretary or any two (2) directors. Notice of special meetings of the Board shall state the time and place of the meeting but need not state the purpose thereof. Such notice may be in writing and shall be sufficient if given by United States mail, telegraph, personal service or by telephone; if by mail then the notice shall be deposited, postage prepaid, in any regular place of deposit for United States mail in the City of Los Angeles at least four (4) days before the time of the meeting, addressed to the director at his last post office address as known to the officer giving the notice; if by telegraph then the telegram containing the notice shall be delivered to a telegraph office in the City of Los Angeles, transmission charges prepaid, at least twenty-four (24) hours before the time of the meeting, addressed to the director at his last post office address as known to the officer giving the notice; if by personal service or by telephonic means at least twenty-four (24) hours before the time of the meeting. A record of such notice, by whom given and the manner in which given shall be entered upon the minutes of any special meeting of the Board, and the said minutes on being read and approved at any subsequent meeting of the Board shall be presumptive upon the question of service. The attendance of any director at any meeting of the Board, without protest of lack of notice to him, either prior to or at the commencement of the meeting shall constitute a waiver of any such notice. A director may execute a waiver of notice of any meeting of the Board either before or after such meeting. SECTION 4. PLACE AND TIME OF MEETINGS OF DIRECTORS: Regular meetings of the Board shall be held without call or notice at such time and place as shall from time to time be fixed by standing resolution of the Board. Special meetings of the Board shall be held at the time and place stated in the notice of such meeting. 2 SECTION 5. ACTION WITHOUT MEETING: Any action by the Board may be taken without a meeting if all members of the Board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. SECTION 6. TELEPHONIC MEETINGS: A meeting of the Board of Directors or of any Committee thereof may be held through the use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in such a meeting shall constitute presence at such meeting. ARTICLE III DIRECTORS SECTION 1. Wherever in these By-Laws the term "BOARD" is used, the same is intended to designate the Board of Directors of the Corporation. Subject to limitations of the Articles of Incorporation, of these By-Laws, of the California General Corporation Law, and of the California Financial Code as to action to be authorized or approved by the shareholders, and subject to the duties of Directors as prescribed by these By-Laws, all corporate powers shall be exercised by or subject to the direction of, and business and affairs of the Corporation shall be managed by or under the direction of, the Board. Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the Board shall have the following powers: a. To control the election, the appointment, the authority, responsibility and the qualifications of all persons in charge of the business and the affairs of the Corporation. b. To cause to be kept a record of all their meetings and proceedings and of all the meetings of the shareholders, and to cause to be presented at the annual meeting of the shareholders a statement showing the assets and liabilities of the Corporation. c. To require from the officers and from other persons in charge of the business and affairs of the Corporation respectively, such bond or security as it may see fit for the faithful performance of their duties. d. To appoint such committees and members thereof as it may deem proper and to define the powers and duties of such committees, and to determine their compensation. e. Make any distribution to its shareholders at a rate or in a periodic amount or within a price range as it may deem proper and in a manner provided by law. f. To cause to be issued to the shareholders, in proportion to their several interests, certificates of stock not to exceed in the aggregate the authorized capital. 3 g. To fix by general and uniform resolution or resolutions the compensation of each director for serving as director and to make such changes therein from time to time as it may deem proper. SECTION 2. The authorized number of Directors of this Corporation shall not be less than eight (8) nor more than fifteen (15). The exact number of Directors shall be fixed, within these limits, by approval of the Board of Directors or the Shareholders, within the limits and in the manner prescribed by law. ARTICLE IV OFFICERS SECTION 1. NUMBER AND TITLES: The Corporation shall have (a) a Chairman of the Board, (b) a President, and (c) a Secretary. The Corporation may also have one or more Vice Chairmen, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, one or more Assistant Vice Presidents, one or more Assistant Cashiers, one or more Assistant Secretaries, a General Counsel, one or more Assistant General Counsel, one or more Managing Counsel, one or more Senior Counsel, one or more Counsel, one of more Assistant Counsel, two or more Trust Officers of whom one or more may be designated Senior Trust Officer, a General Auditor, one or more Audit Officers, a Chief Financial Officer, a Comptroller, one or more Financial Analysis Officers, one or more Accounting Officers, one or more Managers, one or more Assistant Managers, one or more Operations Officers, one or more Corporate Banking Officers, one or more Banking Officers, and one or more International Banking Officers. There may also be such other officers as may from time to time be designated by resolution of the Board of Directors. SECTION 2. APPOINTMENT AND TERM OF OFFICE: The Chairman of the Board, the President, the Vice Chairmen, the Executive Vice Presidents, the Senior Vice Presidents, the Secretary, the General Counsel, the Assistant General Counsel, the Senior Trust Officers, the General Auditor, the Chief Financial Officer and the Comptroller shall be chosen by the Board at the first meeting after the election of the Board and shall hold office at the pleasure of the Board. The Board may also appoint such officers from time to time at any regular or special meeting of the Board. All other officers designated by resolution of the Board as provided in Section 1, may be appointed by the Chairman of the Board or the President. All persons authorized to sign on behalf of the Corporation, other than officers, may be appointed by the Chairman of the Board, or the President. SECTION 3. CHAIRMAN OF THE BOARD: The Chairman of the Board shall preside at all meetings of the shareholders and all meetings of the Board and of the Executive Committee. He shall be the chief executive officer of the Corporation with general executive supervision of its business and affairs. He shall act as Chairman of all committees of which he is a member, except as may be provided in the resolution or order appointing such committee or committees. In the absence or disability of the Chairman of the Board, the following officers in the following order shall act in his stead: the President, an officer designated by the Chairman of the Board, an officer 4 designated by the Board of Directors or Executive Committee. In the absence or disability of the Chairman of the Board, the President, and all officers so designated, if any, the Board of Directors shall elect a temporary Chairman of the Board to act during such absence or disability of said officers. The Chairman of the Board shall at all times have on file with the Secretary his written designation of the officer from time to time so designated by him to act as the chief executive officer in his absence or disability and in the absence or disability of the President. SECTION 4. PRESIDENT: The President shall have such powers and duties as may be prescribed by these By-Laws, the Board, the Executive Committee or the Chairman of the Board. Subject to the authority of the Chairman of the Board, the President shall have general executive supervision of the business and affairs of the Corporation and shall be senior in authority to all officers other than the Chairman of the Board. In the absence or disability of the Chairman of the Board, the President shall exercise the powers and perform the duties of the Chairman of the Board. SECTION 5. VICE CHAIRMEN: The Vice Chairmen shall perform the duties imposed upon them by the By-Laws, the Board of Directors, the Executive Committee, the Chairman of the Board or the President. SECTION 6. EXECUTIVE VICE PRESIDENTS: The Executive Vice Presidents shall perform the duties imposed upon them by the By-Laws, the Board, the Executive Committee, the Chairman of the Board or the President. SECTION 7. SENIOR VICE PRESIDENTS: The Senior Vice Presidents shall perform the duties imposed upon them by the By-Laws, the Board, the Executive Committee, the Chairman of the Board or the President. SECTION 8. SECRETARY: The Secretary shall keep full and complete minutes of each meeting of the Board, of the Executive Committee and of the shareholders and give notice, as required, of all such meetings. He shall maintain custody of and keep such other records of the Corporation as are required by the Board and, generally, perform all duties which pertain to his office and which are required by the Board. SECTION 9. GENERAL AUDITOR: The General Auditor shall be responsible to the Board, through the Audit Committee, for the systems of internal audit and for testing and evaluating the systems of protective controls. The office of the General Auditor shall make such examinations and reports as the General Auditor deems advisable or as may be required by the Audit Committee. The General Auditor shall have the duty to report to the Chairman of the Board on all matters concerning which the General Auditor deems advisable or which the Chairman of the Board may request and shall perform such other duties as the Chairman of the Board may prescribe. Additionally, the General Auditor shall have the duty of reporting independently of all officers of the Corporation to the Audit Committee at least quarterly on all matters concerning which the General Auditor deems advisable or which the Audit Committee may request. 5 SECTION 10. CHIEF FINANCIAL OFFICER: The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, surplus and shares. He shall be responsible for all the money, funds and valuables belonging to the Corporation. He shall deposit all money and other valuables in the name of and to the credit of the Corporation with such depositories as are authorized by law. He shall render to the Chairman of the Board, the President and Board, whenever they request it, an account of all of his transactions as Chief Financial Officer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as are prescribed by the Board, the Executive Committee, the By-Laws, the Chairman of the Board or the President. SECTION 11. OTHER OFFICERS: Each other officer shall have such authority and perform such duties as are prescribed by the By-Laws, the Board, the Executive Committee, the Chairman of the Board or the President. ARTICLE V COMMITTEES OF THE BOARD OF DIRECTORS SECTION 1. EXECUTIVE COMMITTEE: There shall be an Executive Committee consisting of the Chairman of the Board, the President and at least three non-officer directors to be appointed for respective terms to be fixed by the Board. A majority of the members of the Committee shall constitute a quorum for the transaction of business. The Board may from time to time appoint an additional director or directors as an alternate member or members of the Committee to serve only at a meeting if there otherwise may not be a quorum present at such meeting. The alternate member or members so appointed shall act in the place and stead of any regular member or members who may be absent from such meeting. The Executive Committee shall have all of the powers and authority of the Board in the management of the business and affairs of the Corporation during the intervals between meetings of the Board, except the power to declare dividends and to adopt, amend or repeal By-Laws or as otherwise prohibited by law. The Executive Committee may establish and appoint such other committees not otherwise provided for by these By-Laws or the Board of Directors as it may deem advisable and may prescribe the powers and duties of such committees. The Chairman of the Board or a member of the Committee designated by the Chairman of the Board, shall preside over meetings of the Committee. Meetings of the Committee may be held at the call of the Chairman of the Board or the President or any two other members of the Committee at the time and place stated in the notice of such meeting. The transactions of any meetings of the Executive Committee however called or noticed or wherever held shall be as valid as though had at a meeting duly held after the regular call and notice, if a quorum 6 be present and if, either before or after the meeting each of the members of the Committee not present sign a written waiver of notice or a consent to the holding of such meeting or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the records of the Committee or made a part of the minutes of the meeting. SECTION 2. OTHER COMMITTEES: The Board of Directors may designate one or more committees from time to time, each consisting of two or more directors to serve at the pleasure of the Board. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. Any such committee, to the extent provided in the resolution of the Board of Directors shall have all the authority of the Board, except with respect to: a. The approval of any action for which shareholder approval is also required. b. The filling of vacancies on the Board or in any Committee. c. The fixing of compensation of the directors for serving on the Board or on any committee. d. The amendment or repeal of By-Laws or the adoption of new By-Laws. e. The amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable. f. A distribution to the shareholders of the corporation as defined in Section 166 of the California Corporations Code, except at a rate or in a periodic amount or within a price range determined by the Board. g. The appointment of other committees of the Board or the members thereof. h. The approval of any action for which the entire Board is required. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES (a) INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES. Each person who was or is a party or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director, officer or employee of the Corporation, or of any predecessor corporation, or is or was serving at the request of the Corporation as a director, officer, employee or other agent of another corporation or of a partnership, joint venture, trust or other enterprise (including service with respect to employee benefit plans), whether the basis of such proceeding is alleged action in an official capacity as a director, officer or employee or in any other capacity while serving as a director, officer or employee, shall be indemnified and held harmless by the Corporation to the fullest extent permissible 7 under California law and the Corporation's Articles of Incorporation, against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) actually and reasonably incurred or suffered by such person in connection therewith. Such indemnification shall continue as to a person who has ceased to be a director, officer or employee and shall inure to the benefit of his or her heirs, executors and administrators. Notwithstanding the foregoing, the Corporation shall indemnify any such person in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Article shall include the right to be paid by the Corporation the expenses incurred in defending any proceeding in advance of final disposition to the fullest extent permitted by law; provided, however, that the payment under this Article of such expenses in advance of the final disposition of a proceeding may be conditioned upon the delivery to the Corporation of such undertakings by or on behalf of such director, officer or employee to repay all amounts so advanced as may be required or permitted by law. (b) EXCLUSIONS. Notwithstanding the foregoing or any other provisions under this Article, the Corporation shall not be liable under this Article to indemnify a director, officer or employee against, or make any advances or other payments in connection with, any proceeding against a director, officer or employee based upon, arising out of, resulting from, relating to or in consequence of (1) transactions or activities in which such person gained or sought to gain, any improper personal profit or advantage, or (2) the intentional misconduct of such person which such person knew, or reasonably should have known, would violate the law or any policy of the Corporation or (3) the knowing fraud or deliberately dishonest actions of such person. (c) SUCCESSFUL DEFENSE. To the extent that a director, officer or employee has been successful on the merits in defense of any proceeding referred to in paragraph (a) or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection therewith. (d) NON-EXCLUSIVITY OF RIGHTS. The right to indemnification provided by this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, by-law, agreement, vote of shareholders or disinterested directors, or otherwise. ARTICLE VII CERTIFICATE OF STOCK Certificates for shares of the capital stock of the Corporation shall be of such form as the Board may prescribe and shall be signed by the President or a Vice President and the Secretary or an Assistant Secretary, or be authenticated by facsimiles of the signatures of the President and the Secretary, or by a facsimile of the signature of the President and the written signature of the Secretary or an Assistant Secretary. Every certificate authenticated by a facsimile of a signature must be countersigned by a transfer agent or transfer clerk, and be registered by an incorporated bank or trust company as registrar of transfers, before issuance. 8 ARTICLE VIII TRANSFER OF STOCK SECTION 1. Shares of the capital stock of the Corporation may be transferred by the holders thereof, or by attorney legally constituted, or by their legal representatives, by endorsement on the certificates of stock, but no such transfer shall be valid until the certificate is surrendered and acknowledgment made on the books of the Corporation. SECTION 2. No new certificates shall be issued for the surrendered certificates unless the surrendered certificates have been duly canceled. If a certificate shall be lost or destroyed, the Board or the Executive Committee may order a new certificate in lieu thereof issued upon such guaranty or indemnity of the person claiming the same as the Board or the Executive Committee may deem proper and satisfactory. SECTION 3. The Board may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders or entitled to receive any dividend or distribution, or any allotment of rights, or to exercise rights in respect to any change, conversion, or exchange of shares. The record date so fixed shall be not more than sixty (60) nor less than ten (10) days prior to the date of the meeting or event for the purposes of which it is fixed. When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at the meeting or to receive the dividend, distribution, or allotment of rights, or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after the record date. At any meeting of shareholders as to which the Board has not fixed a record date for the determination of the shareholders entitled to notice of and to vote at such meeting, only shareholders of record at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held shall be entitled to vote thereat. ARTICLE IX DEPOSITS SECTION 1. All deposits made by the shareholders shall be entitled to the same rights, privileges and benefits as those of other depositors. ARTICLE X SEAL SECTION 1. The seal of the Corporation shall be in such form as the Board may prescribe. In the execution on behalf of this Corporation of any instrument, document, writing, notice or paper it shall not be necessary to affix the corporate seal of this Corporation thereon, and any such instrument, document, writing, notice or paper when executed without said seal affixed thereon shall be of the same force and effect and as binding on this Corporation as if said corporate seal had been affixed 9 thereon in each instance. Said seal, if required, may be affixed, imprinted or reproduced by facsimile on any instrument or document, including certificates for shares of the stock of this Corporation. ARTICLE XI AMENDMENT TO BY-LAWS SECTION 1. Subject to the right of shareholders to adopt, amend or repeal By-Laws, as provided in Section 211 of the Corporations Code of California, By-Laws may be adopted, amended or repealed by the Board, except that a By-Law or amendment thereof changing the authorized number of directors may be adopted, amended or repealed by the Board only pursuant to Section 212 of said Corporations Code. I, Carl Boyd, Assistant Vice President of FIRST INTERSTATE BANK OF CALIFORNIA, a California corporation, hereby certify that the foregoing ten (10) pages represent a full, true and correct copy of the Code of By-Laws of First Interstate Bank of California as amended, and that the same is in full force and effect as of April 26, 1994. WITNESS my hand and the seal of said Corporation this 28th day of June, 1995. /S/ CARL BOYD ----------------------------------- Assistant Vice President of FIRST INTERSTATE BANK OF CALIFORNIA BYLAWS 10 EXHIBIT 7 First Interstate Bank of California Call Date: 03/31/95 ST-BK: 66-6 FFIEC: 031 1200 W. 7th St. Page RC-1 Los Angeles, CA 90017 Vendor ID: D Cert: 01226 11 Transit Number: 12200021 Consolidated Report of Condition for Insured Commercial and State-Chartered Savings Banks for September 30, 1994 All schedules are to be reported in thousands of dollars. Unless otherwise indicated, report the amount outstanding as of the last business day of the quarter. Schedule RC - Balance Sheet
C400 (- Dollar Amounts in Thousands ________________________________________________________________________________________________________________________ Assets RCFD 1. Cash and balances due from depository institutions (from Schedule RC-A): ---- a. Noninterest-bearing balances and currency and coin(1) 0081 3,148,682 1.a b. Interest-bearing balances(2) 0071 25,960 1.b 2. Securities a. Held-to-maturity securities (from Schedule RC-B, column A) 1754 5,875,376 2.a b. Available-for-sale securities(from Schedule RC-B, column D) 1773 63,831 2.b 3. Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and of its Edge and Agreement subsidiaries, and in IBF's: a. Federal funds sold 0276 1,565,150 3.a b. Securities purchased under agreements to resell 0277 0 3.b 4. Loans and Lease financing receivables: RCFD a. Loans and Leases, net of unearned income ---- (from Schedule RC-C) 2122 14,514,192 4.a b. LESS: Allowance for Loans and Lease losses 3123 444,436 4.b c. LESS: Allocated transfer risk reserve 3128 0 4.c d. Loans and Leases, net of unearned income, allowance, and reserve Item 4.a minus 4.b and 4.c) 2125 14,069,756 4.d 5. Assets held in trading accounts 3545 2,182 5. 6. Premises and fixed assets (including capitalized leases) 2145 406,481 6. 7. Other real estate owned (from Schedule RC-M) 2150 57,247 7. 8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) 2130 12,204 8. 9. Customers' liability to this bank on acceptances outstanding 2155 10,125 9. 10. Intangible assets (from Schedule RC-M) 2143 376,104 10. 11. Other assets (from Schedule RC-F) 2160 482,361 11. 12. Total assets (sum of items 1 through 11) 2170 26,095,459 12. - ---------------- (1) Includes cash items in process of collection and unposted debits. (2) Includes time certificates of deposit not held in trading accounts.
First Interstate Bank of California Call Date: 03/31/95 ST-BK: 66-6 FFIEC: 031 1200 W. 7th St. Page RC-2 Los Angeles, CA 90017 Vendor ID: D Cert: 01226 12 Transit Number: 12200021 Schedule RC - Continued
Dollar Amounts in Thousands ========================================================================================================== LIABILITIES 13. Deposits: RCON a. In domestic offices (sum of totals of columns A and C ---- from Schedule RC-E, Part I) 2200 20,732,183 13.a (1) Noninterest-bearing(1) 6631 8,268,476 13.a.1 (2) Interest-bearing 6636 12,463,707 13.a.2 RCFN b. In foreign offices, Edge and Agreement subsidiaries, and ---- IBFs (from Schedule RC-E, part II) 2200 230,354 13.b (1) Noninterest-bearing 6631 0 13.b.1 (2) Interest-bearing 6636 230,354 13.b.2 14. Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge RCFD and Agreement subsidiaries, and in IBFs: ---- a. Federal funds purchased 0278 2,338,979 14.a b. Securities sold under agreements to repurchase 0279 353,572 14.b RCON 15. a. Demand notes issued to the ---- U.S. Treasury 2840 0 15.a RCFD ---- b. Trading Liabilities 3548 0 15.b 16. Other borrowed money: a. With original maturity of one year or less 2332 3,990 16.a b. With original maturity of more than one year 2333 0 16.b 17. Mortgage indebtedness and obligations under capitalized Leases 2910 89,139 17. 18. Bank's Liability on acceptances executed and outstanding 2920 10,125 18. 19. Subordinated notes and debentures 3200 75,000 19. 20. Other Liabilities (from Schedule RC-G) 2930 288,715 20. 21. Total Liabilities (sum of items 13 through 20) 2948 24,122,057 21. 22. Limited-Life preferred stock and related surplus 3282 0 22. EQUITY CAPITAL 23. Perpetual preferred stock and related surplus 3838 0 23. 24. Common stock 3230 428,182 24. 25. Surplus (excluded all surplus related to preferred stock) 3839 664,694 25. 26. a. Undivided profits and capital reserve 3632 879,750 26.a b. Net unrealized holding gains (losses) on available-for-sale securities 8434 776 26.b 27. Cumulative foreign currency translation adjustments 3284 0 27. 28. Total equity capital (sum of items 23 through 27) 3210 1,973,402 28. 29. Total Liabilities, Limited-Life preferred stock, and equity capital (sum of items 21, 22, and 28) 3300 26,095,459 29. Memorandum To be reported only with the March Report of Condition. 1. Indicate in the box at the right the number of the statement below that best describes the most RFCD comprehensive level of auditing work performed for the bank ---- NUMBER by Independent external auditors as of any date during 1994 6724 2 M.1 1=Independent audit of the bank conducted in accordance 4=Director's examination of the bank performed by other with generally accepted auditing standards by a certified external auditors (may be required by state chartering public accounting firm which submits a report on the bank authority) 2=Independent audit of the bank's parent holding company 5=Review of the bank's financial statements by external conducted in accordance with generally accepted auditing auditors standards by a certified public accountant firm which submits a report on the consolidated holding company (but 6=Compilation of the bank's financial statements by not on the bank separately) external auditors 3=Directors' examination of the bank conducted in accordance 7=Other audit procedures (excluding tax preparation work) with generally accepted auditing standards by a certified public accounting firm (may be required by state charter- 8=No External audit work ing authority) _____________ (1) Includes total demand deposits and noninterest-bearing time and savings deposits.
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