-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QdKdMo2oJtvr9J65yn2vIphunoQTzgVNka4LINUEYxw44vnJ/t1pZodPRr7tPYXQ RYw1VSsIz35HdLXNo0wu3w== 0000950148-96-000308.txt : 19960304 0000950148-96-000308.hdr.sgml : 19960304 ACCESSION NUMBER: 0000950148-96-000308 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19960301 SROS: AMEX SROS: BSE SROS: CSX 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: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-06828 FILM NUMBER: 96530457 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: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-07959 FILM NUMBER: 96530458 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 10-K405/A 1 AMENDMENT TO FORM 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (AS AMENDED) /x/ JOINT ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1994 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _________ to __________ Commission File Number: 1-6828 Commission File Number: 1-7959 STARWOOD LODGING STARWOOD LODGING TRUST CORPORATION (Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter) Maryland Maryland (State or other jurisdiction (State or other jurisdiction of incorporation or organization) of incorporation or organization) 52-0901263 52-1193298 (I.R.S. employer identification no.) (I.R.S. employer identification no.) 11845 W. Olympic Blvd., Suite 550 Los Angeles, California 90064 11845 W. Olympic Blvd., Suite 560 (Address of principal executive Los Angeles, California 90064 offices, including zip code) (Address of principal executive offices, including zip code) (310) 575-3900 (Registrant's telephone number, (310) 575-3900 including area code) (Registrant's telephone number, including area code)
2 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------- ----------------------- Shares of Beneficial Interest, $0.01 par value, of Starwood Lodging Trust ("Trust Shares") paired with New York Stock Exchange Shares of Common Stock, $0.01 par value, of Starwood Lodging Corporation ("Corporation Shares") 1986 Warrants to purchase Trust Shares paired with American Stock Exchange 1986 Warrants to purchase Corporation Shares
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No . ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of each Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K /X/. As of March 24, 1995, the aggregate market value of the Registrants' voting stock held by non-affiliates(1) was $34,063,000. As of March 24, 1995, the Registrants had outstanding 12,132,948 Trust Shares and 12,132,948 Corporation Shares. - ---------------------- (1)For purposes of this Joint Annual Report only, includes all voting shares other than those held by the Registrants' Trustees or Directors and executive officers or by persons known to either Registrant to hold of record or beneficially 5% or more of such Registrant's voting shares. ================================================================================ 3
TABLE OF CONTENTS Item Number in Form 10-K PART I Page - ------- ---- 1. Business.................................................................... 1 2. Properties.................................................................. 8 3. Legal Proceedings........................................................... 25 4. Submission of Matters to a Vote of Security Holders......................... 26 PART II 5. Market for Registrants' Common Equity and Related Stockholder Matters...... 28 6. Selected Financial Data..................................................... 30 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................. 31 8. Financial Statements and Supplementary Data................................. 39 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................................. 39 PART III 10. Trustees, Directors and Executive Officers of the Registrants............... 39 11. Executive Compensation ..................................................... 43 12. Security Ownership of Certain Beneficial Owners and Management.............. 48 13. Certain Relationships and Related Transactions.............................. 50 PART IV 14. Exhibits, Financial Statements, Financial Statement Schedules and Reports on Form 8-K.................................................................... 54
4 PART I ITEM 1. BUSINESS. Starwood Lodging Trust, formerly Hotel Investors Trust (the "Trust"), was organized in 1969 as a Maryland real estate investment trust, and has invested in fee, ground leasehold and mortgage loan interests in hotel properties located throughout the United States. In order for the Trust to qualify for favorable tax status as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986 (the "Code"), the Trust has leased its properties to third party operators. In 1980, Starwood Lodging Corporation, formerly Hotel Investors Corporation (the "Corporation" and, together with the Trust, "Starwood Lodging"), was organized as a Maryland corporation and has leased hotel properties from the Trust since that date. Since 1980, the shares of beneficial interest of the Trust ("Trust Shares") and the shares of common stock of the Corporation ("Corporation Shares") have been "paired" on a one-for-one basis and may only be held or transferred in units consisting of one Trust Share and one Corporation Share ("Paired Shares"). The Code has prohibited the "pairing" of shares between a REIT and a management company since 1983. This rule does not apply to the Trust because its Paired Share structure has existed since 1980. At December 31, 1994, the Trust owned equity interests in twenty-four hotel properties, including two hotel/casinos. Eighteen of such 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. At such date, twenty of the Trust's hotels (including the two hotel/casinos) were leased to the Corporation or its subsidiaries, and five of those hotels were being managed by third-party operators. For information as to such interests and properties, see Item 2 of this Joint Annual Report. 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 1 5 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. As of the date of this Joint Annual Report, the structure of Starwood Lodging is as follows: [GRAPHIC] 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 2 6 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 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. Regulatory approvals are expected to be received by the end of 1997. See Item 10 of this Joint Annual Report. 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 $131.75 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 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 3 7 was guaranteed by the Operating Partnership, in consideration for the cancellation by the Realty Partnership of intercompany indebtedness. 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. Approximately $46.1 million of mortgage notes payable are senior to the Loan (see Note 7, "Mortgage and Other Notes Payable"). 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. See Item 5, "Distributions" of this Joint Annual Report. 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) 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 lien on the related hotel property. ACQUISITION STRATEGY Starwood Lodging intends to focus its acquisition strategy on full service and upper-end and limited service hotels. The Trust and the Corporation believe that hotels in those segments can be purchased at prices below replacement cost and offer better yields than hotels in other segments, and thus represent more stable long-term investments. Starwood Lodging will generally seek investments in hotels where management believes that such hotels' profits can be increased by the introduction of more professional and efficient management techniques or the injection of capital to cure deferred maintenance. Properties will be targeted throughout the United States, but Starwood Lodging will generally focus on markets located near other properties owned and operated by Starwood Lodging, markets with significant barriers to entry or markets with stable demand generators such as universities, government agencies or large companies. As of March 31, 1995, Starwood Lodging is evaluating numerous hotel properties for acquisition, and has made offers on ten properties in the aggregate amount of approximately $180 million. In addition, Starwood Lodging has entered into a definitive agreement to purchase the 172-room Omni Hotel located in Chapel Hill, North Carolina. Such transaction is expected to close on or before April 10, 1995. See Item 2, "Pending Hotel Acquisition" of this Joint Annual Report. 4 8 The Trust and the Corporation intend that the Operating Partnership lease and operate all hotels owned by the Realty Partnership. Accordingly, the Operating Partnership will seek to manage those hotels which are currently owned by the Realty Partnership and operated on behalf of the Operating Partnership by third-party management companies. The Operating Partnership generally intends that the management contracts with such third-party operators will be terminated and that all of such properties will be managed by the Operating Partnership by the end of 1995. 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 New Credit Agreement, the remaining Lender Warrants may be canceled upon the payment to a Starwood Partner of a $786,000 cancellation fee. TAX STATUS OF THE TRUST The Trust intends to elect to be taxed as a REIT, commencing with its taxable year ending December 31, 1995. 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 Code. The Trust requested and received a letter from the Internal Revenue Service providing that the Trust's 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 5 9 taxed as a REIT commencing with its taxable year ending December 31, 1995. Because the Trust had net losses for tax purposes for its 1991 through 1994 taxable years, the Trust does not owe any federal income tax for such years. OTHER INFORMATION For information as to the sale of hotel assets by the Trust and the Corporation in 1994, see Item 2 of this Joint Annual Report. Seasonality; Competition. 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 Trust and the Corporation. The hotel industry is highly competitive. The properties of the Trust and the Corporation compete with other hotel properties in their geographic markets. Many of the competitors of the Trust and the Corporation may have substantially greater marketing and financial resources than Starwood Lodging. The Trust and the Corporation may compete for acquisition opportunities with entities which have substantially greater financial resources than the Trust and the Corporation. These entities may generally be able to accept more risk than the Trust and the Corporation can prudently manage. Competition may generally reduce the number of suitable investment opportunities and increase the bargaining power of property owners seeking to sell. Further, management of the Trust believes that it will face competition for acquisition opportunities from entities organized for purposes substantially similar to the objectives of the Trust. Environmental Matters. In the latter part of 1991, the Trust and the Corporation 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 fee interests now held by the Realty Partnership (excluding interests acquired from the Starwood Partners), as well as hotels securing mortgage interests held by the Trust, 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 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. 6 10 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 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 Realty Partnership and the Operating Partnership 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 Realty Partnership and the Operating Partnership do not receive reimbursement for future remediation costs, the Realty Partnership 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 certain of the Starwood Partners. In addition, the Starwood Partners 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. Neither the Trust, the Corporation, the Realty Partnership nor the Operating Partnership 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 they been the subject of any governmental proceeding with respect to, any hazardous waste contamination. If the Trust, the Corporation, the Realty Partnership or the Operating Partnership were to be identified as a responsible party, they 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 Trust 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 managements of the Trust and the Corporation, future remediation costs are not expected to have a material adverse effect on the results of operations, financial position or cash flows of the Trust or the Corporation 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 or the Corporation. 7 11 Regulation and Licensing. The ownership and operation of the casino gaming facilities of the Corporation in Nevada are subject to extensive licensing and regulatory control by the Nevada Gaming Commission, the Nevada Sate Gaming Control Board and the Clark County Liquor and Gaming Licensing Board. See Item 2, "Regulation and Licensing" of this Joint Annual Report. Employees. As of December 31, 1994, the Trust had four employees and the Corporation had 1,881 employees. The Trust's executive offices are located at 11845 West Olympic Boulevard, Suite 550, Los Angeles, California 90064 (telephone (310) 575-3900) and the Corporation's executive offices are located at 11845 West Olympic Boulevard, Suite 560, Los Angeles, California 90064 (telephone (310) 575-3900). Financial information with respect to the two segments of the hospitality industry (hotels and gaming) in which the Corporation operates is included in Note 11 of the Notes to Financial Statements included in Item 8 of this Joint Annual Report. ITEM 2. PROPERTIES. At December 31, 1994, the Trust owned and the Corporation operated and managed, a portfolio of hotel assets, including fee, ground leasehold and first mortgage interests. At such date, all but three of the Trust's fee and ground leasehold hotels were leased to the Corporation or its subsidiaries pursuant to leases between the Trust and the Corporation (the "Intercompany Leases"). As described in Item 1 of this Joint Annual Report, upon the closing of the Reorganization, substantially all of the properties and assets of the Trust were contributed to the Realty Partnership and substantially all of the properties and assets of the Corporation and its subsidiaries (except for their gaming assets, which are to be contributed upon approval by Nevada gaming authorities) were contributed to the Operating Partnership. Accordingly, since the Reorganization the Trust has conducted all of its business and operations through the Realty Partnership and the Corporation has conducted all of its business and operations (other than its gaming operations) through the Operating Partnership. As of March 27, 1995, the Trust had an approximate 25.4% interest in the Realty Partnership and the Corporation had an approximate 25.4% interest in the Operating Partnership. Set forth below is information as to the assets and properties of the Trust prior to the Reorganization which (along with certain assets and properties described herein) were contributed to the Realty Partnership pursuant to the Reorganization and as to the assets and properties of the Corporation prior to the Reorganization which (along with certain assets and properties contributed by the Starwood Partners) were contributed to the Operating Partnership pursuant to the Reorganization. 8 12 THE TRUST AND THE REALTY PARTNERSHIP Equity Investments. As of December 31, 1994, the Trust had equity investments in twenty-four properties (including two hotel/casinos) containing a total of approximately 4,137 guest rooms. As of that date, the Trust owned fee interests in eighteen hotels and two hotel/casinos, and held five hotels pursuant to long-term ground leases. The Trust also had a 5% equity interest in, and was the general partner of, a limited partnership that owns the Omaha Marriott Hotel which contains approximately 303 guestrooms. Of the hotels in which the Trust has an equity interest, 15 operate under one of the following nationally recognized names: Holiday Inn(R), Days Inn(R), Best Western(R), Vagabond Inn(R), Marriott(R), Embassy Suites(R), Radisson Inn(R) and Residence Inn(R). Each of the Intercompany Leases provides 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 were amended and restated in December 1992 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 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, the three Vagabond Inns are leased to a third party. The leases expire in 2001, 2007 and 2008. The lease expiring in 2001 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." The following table sets forth the 1994, 1993 and 1992 average occupancy and room rates, and certain other information concerning the hotels owned by the Trust as of December 31, 1994 (which were subsequently contributed to the Realty Partnership at the closing of the Reorganization), and the hotels contributed to the Realty Partnership by the Starwood Partners at the closing of the Reorganization: 9 13
Year Constructed/ Property Year Acquired (1) Property Description -------- ----------------- -------------------- Properties owned by the Trust as of December 31, 1994: ARIZONA Embassy Suites 1981/1983 227 suites, restaurant, lounge and Phoenix, Arizona meeting facilities Plaza Hotel 1971/1983 149 guest rooms, restaurant, lounge and Tucson, Arizona (2) meeting facilities CALIFORNIA Vagabond Inn 1974/1974 102 guest rooms and restaurant Rosemead, California (3) Vagabond Inn 1975/1975 108 guest rooms and restaurant Sacramento, California (3) Vagabond Inn 1973/1973 101 guest rooms and restaurant Woodland Hills, California (3) FLORIDA Radisson Hotel 1974/1986 195 guest rooms, restaurant, lounge and Gainesville, Florida (4) meeting facilities GEORGIA Holiday Inn 1989/1989 151 guest rooms, restaurant, lounge and Albany, Georgia (5) meeting facilities
Years Ended December 31, ------------------------------------------------------------------------------------ Property 1994 1993 1992 1994 1993 1992 1994 1993 1992 -------- ---- ---- ---- ---- ---- ---- ---- ---- ---- Average Occupancy Average Room Revenue per Rate Rate Available Room ---------------------- ------------------------ -------------------------- Properties owned by the Trust as of December 31, 1994: ARIZONA Embassy Suites 76% 72% 68% $80.23 $74.04 $70.62 $60.63 $53.30 $48.02 Phoenix, Arizona Plaza Hotel 77% 74% 64% $46.12 $45.05 $47.22 $35.58 $33.34 $30.22 Tucson, Arizona (2) CALIFORNIA Vagabond Inn 39% 44% 52% $37.47 $38.14 $37.06 $14.54 $16.78 $19.27 Rosemead, California (3) Vagabond Inn 63% 60% 67% $55.89 $52.18 $51.48 $34.93 $31.31 $34.49 Sacramento, California (3) Vagabond Inn 69% 61% 69% $46.72 $43.70 $42.15 $32.24 $26.66 $29.08 Woodland Hills, California (3) FLORIDA Radisson Hotel 59% 62% 55% $59.89 $56.63 $57.07 $35.57 $35.11 $31.39 Gainesville, Florida (4) GEORGIA Holiday Inn 79% 74% 74% $56.06 $56.96 $54.99 $44.23 $42.15 $40.69 Albany, Georgia (5)
10 14
Year Constructed/ Property Year Acquired (1) Property Description -------- ----------------- -------------------- Best Western Riverfront Inn 1971/1986 142 guest rooms, restaurant, lounge and Savannah, Georgia (5) meeting facilities MICHIGAN Bay Valley Hotel & Resort 1973/1984 151 guest rooms, restaurant, lounge and Bay City, Michigan meeting facilities; 18-hole golf course and tennis club NEBRASKA Omaha Marriott Hotel 1982/1982 303 guest rooms, restaurant, lounge and Omaha, Nebraska (6) meeting facilities NEVADA Bourbon Street 1975/1988 150 guest rooms, restaurant, lounge and Las Vegas, Nevada casino King 8 Hotel and Gambling Hall 1974/1988 300 guest rooms, restaurant, lounge and Las Vegas, Nevada casino NEW MEXICO Best Western Airport Inn 1980/1984 120 guest rooms and leased restaurant Albuquerque, New Mexico (7) adjacent to property Best Western Mesilla Valley Inn 1974/1982 166 guest rooms, restaurant, lounge and Las Cruces, New Mexico meeting facilities
Years Ended December 31, -------------------------------------------------------------------------------- Property 1994 1993 1992 1994 1993 1992 1994 1993 1992 -------- ---- ---- ---- ---- ---- ---- ---- ---- ---- Average Occupancy Average Room Revenue per Rate Rate Available Room -------------------- -------------------------- -------------------------- Best Western Riverfront Inn 57% 55% 55% $47.27 $46.21 $43.40 $26.92 $25.42 $23.87 Savannah, Georgia (5) MICHIGAN Bay Valley Hotel & Resort 64% 52% 54% $62.22 $66.39 $65.32 $39.54 $34.52 $35.27 Bay City, Michigan NEBRASKA Omaha Marriott Hotel 76% 76% 71% $87.21 $82.56 $82.57 $66.45 $62.75 $58.62 Omaha, Nebraska (6) NEVADA Bourbon Street 90% 92% 86% $32.08 $30.65 $30.24 $28.90 $28.20 $26.01 Las Vegas, Nevada King 8 Hotel and Gambling Hall 82% 83% 75% $31.66 $27.71 $25.23 $25.83 $23.00 $18.92 Las Vegas, Nevada NEW MEXICO Best Western Airport Inn 86% 80% 76% $54.45 $52.38 $50.90 $47.02 $41.90 $38.68 Albuquerque, New Mexico (7) Best Western Mesilla Valley Inn 71% 71% 58% $42.74 $41.67 $40.40 $30.42 $29.59 $23.43 Las Cruces, New Mexico
11 15
Year Constructed/ Property Year Acquired (1) Property Description -------- ----------------- -------------------- OHIO Best Western North 1974/1992 180 guest rooms, restaurant, lounge and Columbus, Ohio (5) meeting facilities and sports club OREGON Days Inn City Center 1962/1984 173 guest rooms, restaurant, lounge and Portland, Oregon meeting facilities Riverside Inn 1964/1984 137 guest rooms, restaurant, lounge and Portland, Oregon meeting facilities TEXAS Park Central Hotel 1972/1972 445 guest rooms, restaurant, lounge and Dallas, Texas (8) meeting facilities Best Western Airport Inn 1974/1985 175 guest rooms and leased restaurant El Paso, Texas adjacent to property VIRGINIA The Residence Inn 1984/1984 96 suites with full kitchens and Tysons Corner, Virginia fireplaces
Years Ended December 31, -------------------------------------------------------------------------------------- Property 1994 1993 1992 1994 1993 1992 1994 1993 1992 -------- ---- ---- ---- ---- ---- ---- ---- ---- ---- Average Occupancy Average Room Revenue per Rate Rate Available Room -------------------- ---------------------------- ---------------------------- OHIO Best Western North 70% 66% 72% $42.34 $42.12 $41.61 $29.76 $27.80 $29.96 Columbus, Ohio (5) OREGON Days Inn City Center 71% 63% 60% $53.12 $57.50 $60.31 $37.51 $36.23 $36.19 Portland, Oregon Riverside Inn 78% 79% 79% $64.57 $63.76 $62.16 $50.40 $50.37 $49.11 Portland, Oregon TEXAS Park Central Hotel 42% 63% 59% $59.97 $62.52 $62.29 $25.38 $39.39 $36.75 Dallas, Texas (8) Best Western Airport Inn 80% 70% 74% $34.76 $35.56 $34.67 $27.96 $24.89 $25.66 El Paso, Texas VIRGINIA The Residence Inn 83% 78% 84% $99.47 $102.87 $97.51 $82.54 $80.24 $81.91 Tysons Corner, Virginia
12 16
Year Constructed/ Property Year Acquired (1) Property Description -------- ----------------- -------------------- WASHINGTON Days Inn Town Center 1957/1984 90 guest rooms, restaurant and lounge Seattle, Washington (9) Meany Tower Hotel 1932/1984 155 guest rooms, restaurant, lounge and Seattle, Washington meeting facilities, including ballroom Sixth Avenue Inn 1959/1984 166 guest rooms, restaurant, lounge and Seattle, Washington (10) meeting facilities Tyee Motor Inn 1961/1987 155 guest rooms, restaurant, lounge and Tumwater, Washington meeting facilities Properties contributed to the Realty Partnership by the Starwood Partners at the closing of the Reorganization: CALIFORNIA Doubletree Hotel 1988/1995 209 guest rooms, restaurant, lounge and Rancho Bernardo, California meeting facilities DISTRICT OF COLUMBIA Capitol Hill Suites 1955/1995 152 guest rooms Washington, D.C. KANSAS Harvey Wichita 1974/1995 259 guest rooms, restaurant, lounge and Wichita, Kansas meeting facilities
----------------------------------------------------------------------------- Property 1994 1993 1992 1994 1993 1992 1994 1993 1992 -------- ---- ---- ---- ---- ---- ---- ---- ---- ---- Average Occupancy Average Room Revenue per Rate Rate Available Room ------------------- -------------------------- -------------------------- WASHINGTON Days Inn Town Center 79% 75% 71% $60.99 $60.71 $60.81 $48.41 $45.53 $43.18 Seattle, Washington (9) Meany Tower Hotel 71% 62% 59% $70.40 $76.29 $81.04 $50.09 $47.30 $47.81 Seattle, Washington Sixth Avenue Inn 75% 62% 57% $69.93 $72.20 $72.85 $52.49 $44.76 $41.52 Seattle, Washington (10) Tyee Motor Inn 57% 62% 67% $60.63 $56.28 $54.78 $34.79 $34.89 $36.70 Tumwater, Washington Properties contributed to the Realty Partnership by the Starwood Partners at the closing of the Reorganization: CALIFORNIA Doubletree Hotel 66% 61% 60% $65.68 $63.62 $63.77 $43.09 $38.20 $38.26 Rancho Bernardo, California DISTRICT OF COLUMBIA Capitol Hill Suites 64% 63% 53% $91.93 $89.60 $84.93 $58.93 $56.71 $45.01 Washington, D.C. KANSAS Harvey Wichita 58% 59% 54% $50.62 $43.92 $57.10 $29.20 $25.70 $30.83 Wichita, Kansas
13 17
Year Constructed/ Property Year Acquired (1) Property Description - -------- ----------------- -------------------- KENTUCKY French Quarter Suites 1989/1995 155 guest rooms, restaurant, lounge, Lexington, Kentucky meeting facilities, retail and office space
Years Ended December 31, ------------------------------------------------------------------------------------- Property 1994 1993 1992 1994 1993 1992 1994 1993 1992 - -------- ---- ---- ---- ---- ---- ---- ---- ---- ---- Average Occupancy Average Room Revenue per Rate Rate Available Room -------------------- ---------------------------- ------------------------------ KENTUCKY French Quarter Suites 69% 72% 51% $84.40 $81.64 $77.07 $58.57 $57.98 $39.31 Lexington, Kentucky
14 18 - --------------------------- (1) "Year constructed" represents the calendar year in which construction of the property was completed; "Year acquired" represents the calendar year in which the Trust (or a predecessor) made its initial investment in the property. (2) Property is held subject to ground leases expiring in (assuming that renewal options are exercised) 2019. (3) Property is leased to Imperial Hotel Corporation. (4) Property is managed by Landcom Hospitality Management, Inc. See "The Corporation and the Operating Partnership" below. (5) Property is managed by Davidson Management Company. See "The Corporation and the Operating Partnership" below. (6) The Trust is the general partner of, and owns a 5% equity interest in, the limited partnership which owns the property. (7) Property is held subject to a ground lease expiring in 2029. (8) Property is held subject to a ground lease expiring in September 2020 and was managed by Marriott Corporation. The Marriott management agreement and the Marriott franchise agreement expired in March 1994. The property is managed by Sage Mountain View, Inc. and is operated as an independent hotel (the Park Central Hotel). (9) Property is subject to a ground lease expiring in October 2007, which is terminable by the ground lessor after September 1, 1999 upon six months' notice under certain circumstances. (10) Property is subject to a ground lease expiring in September 2008, but that is terminable by the ground lessor after September 1, 1999 upon six months' notice under certain circumstances. For information with respect to the six mortgage notes payable that as of December 31, 1994 were secured by seven of the Trust's hotels, see Note 7 of the Notes to Financial Statements included in Item 8 of this Joint Annual Report. As part of the Reorganization, the Realty Partnership assumed certain other mortgage notes payable, the terms of which are summarized as follows: A $39,013,000 note issued in connection with the acquisition of the Harvey mortgage notes receivable under the terms of a Loan Agreement with a third party dated October 15, 1993. The note is nonrecourse and matures on January 31, 2003 and bears interest on a monthly basis at variable rates based on the London Interbank Offer Rate ("LIBOR") Eurodollar rate plus 3%. A $2,122,000 construction loan funded in 1994 and used to renovate the Harvey Wichita Hotel. The note bears interest at 7.5%. Principal and interest is payable monthly and the notes matures in 2000. In addition, as part of the Reorganization, the Realty Partnership assumed other mortgage notes payable in the aggregate principal amount of $17,750,000, which notes were refinanced with the proceeds of the Loan pursuant to the New Credit Agreement. Mortgage and Other Loans. As of December 31, 1994, the Trust held nine promissory notes executed by third-party purchasers of its hotels, all of which are secured by mortgages (including deeds of trust) on ten hotels. Eight of the notes ($13,915,000 in aggregate principal amount at December 31, 1994) are secured by first mortgages; one note ($234,000 in principal amount as of December 31, 1994) is secured by a second mortgage. The notes have fixed interest rates that currently range from 8.0% 15 19 to 11.0% per annum, and two of the notes also provide for contingent interest based on a percentage of the gross revenues of the property securing such notes. The maturity dates of the notes range from 1996 to 2017. For additional information with respect to certain of the third-party promissory notes and the two promissory notes issued to the Trust by a partnership affiliated with the Corporation in connection with the Milwaukee Marriott Hotel, see Notes 4 and 5 of Notes to Financial Statements included in Item 8 of this Joint Annual Report. In December 1987, in connection with the Corporation's acquisition of the leasehold interest in the Trust's two Atlanta, Georgia area hotels (since sold) from an affiliated partnership, John F. Rothman, former president and chief executive officer of the Trust and general partner of the partnership, assumed certain obligations of such partnership, which obligations are evidenced by an unsecured promissory note to the Trust in the principal amount of $800,000. Interest on the outstanding principal amount of this note accrues interest at an annual rate of 10% and is payable annually; the entire principal amount of the note is due in December 1999. All of the mortgage notes described above were contributed by the Trust to the Realty Partnership in connection with the Reorganization. As of the effective date of the Reorganization, the Starwood Partners contributed to the Realty Partnership three mortgage notes from affiliated third-party borrowers collateralized by three full service hotels (aggregating 1,230 rooms) in the Dallas, Texas area. Those mortgage notes, together with two other mortgage notes contributed by the Starwood Partners to the Realty Partnership, had cost bases and outstanding principal balances at December 31, 1994 as follows:
Outstanding Principal Balance Cost Basis Reference ----------- ----------- ---------- COLLATERAL: Harvey Hotel Addison .................... $10,403,000 $7,226,000 (a) Harvey Hotel Bristol .................... 16,645,000 11,550,000 (a) Harvey Hotel DFW ........................ 25,892,000 17,967,000 (a) ----------- ----------- $52,940,000 $36,743,000 OTHER MORTGAGE NOTES: Atlantic City Quality Inn ............... $11,411,000 $4,365,000 (b) Seacaucus, New Jersey Ramada ............ 12,458,000 7,752,000 (b) ----------- ----------- $76,809,000 $48,860,000 =========== ===========
- ------------------ (a) Represents a first mortgage note bearing interest at 8% (which was purchased at a discount which reflects a 16.1% effective rate) payable quarterly in arrears. The mortgage note has a 15-year amortization period and a balloon payment at maturity. The mortgage notes mature on December 31, 2002 and are cross collateralized. 16 20 (b) The mortgage notes bear interest at various rates (which were purchased at a discount which reflected a 19.1% aggregate effective rate) and are payable monthly in arrears, except that for the months of November 1994 through April 1995, debt service for the Atlantic City Quality Inn is to accrue and be payable from excess cash flow. Commencing May 1, 1995 fixed payments of debt service is to be required to be resumed. The mortgages mature between 1996 and 2010. THE CORPORATION AND THE OPERATING PARTNERSHIP At December 31, 1994, fifteen of the twenty hotel properties leased by the Trust to the Corporation were operated directly by the Corporation, and the remaining five were managed by three independent hotel companies. After the Reorganization, fifteen of the twenty-four hotel properties leased by the Realty Partnership to the Operating Partnership are operated directly by the Operating Partnership, and the remaining nine are managed by seven independent hotel management companies. The Operating Partnership, the general partner of the partnership that owns the Milwaukee Marriott, also operates the Milwaukee Marriott. The following table sets forth the 1994, 1993 and 1992 average occupancy and room rates, and certain other information concerning the hotel owned by the Corporation (the Milwaukee Marriott Hotel) as of December 31, 1994.
Year Constructed/ Property Year Acquired Property Description - -------- ----------------- -------------------- Milwaukee Marriott, 1972/1990 393 guest rooms, restaurant, lounge Milwaukee, WI and meeting facilities
Years Ended December 31, ------------------------------------------------------------------------------ Property 1994 1993 1992 1994 1993 1992 1994 1993 1992 - -------- ---- ---- ---- ---- ---- ---- ---- ---- ---- Average Occupancy Average Room Revenue per Rate Rate Available Room ---------------------- --------------------- ---------------------- Milwaukee Marriott, 70% 55% 58% $67.91 $71.99 $69.63 $47.54 $39.39 $40.39 Milwaukee, WI
Management Agreements. 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 Realty 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 hotels, each third party management company receives a management fee that equals a specified percentage (generally 2% - 2-1/2%) of the gross revenues of the managed hotel, plus additional incentive fees based upon the hotel's operating profits. Two management agreements may be terminated upon 30 days notice; two management agreements expire in December 1995; and the third expires in October 1996. The agreements expiring in 1995 and 1996 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. The four management agreements relating to the properties contributed by the Starwood Partners will expire in February 1995, December 1998, April 1999 and January 2003. The management agreement expiring in 1998 and 1999 can be terminated upon sixty days notice. Franchise Agreements. All but nine of the hotel properties are currently operated pursuant to franchise or license agreements ("Franchise Agreements"). 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 17 21 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. Certain Property Sales and Other Transactions During the year ended December 31, 1994, the Trust and the Corporation sold their interests in the following five hotel assets: Best Western South-Austin, Texas. In April 1994, the Best Western South Hotel in Austin, Texas was sold pursuant to eminent domain proceedings for $3,594,000 in cash. Holiday Inn-Brunswick, Georgia and Sheraton Inn-New Port Richey, Florida. In August 1994, the Holiday Inn located in Brunswick, Georgia, and the Sheraton Inn located in New Port Richey, Florida were sold for $4,306,000, consisting of cash proceeds of $1,236,000 and the balance by delivery to the Trust of a $3,070,000 promissory note, secured by a first mortgage on the hotels. The principal balance of the note bears interest at an annual rate of 8% during the first twelve months and at a 9.25% annual rate thereafter; principal and interest are payable monthly based upon a 25-year amortization schedule, with all unpaid principal and interest due in 2001. Holiday Inn-Jacksonville, Florida. In November 1994, the Holiday Inn located in Jacksonville, Florida was sold for $3,200,000 consisting of cash proceeds of $900,000 and the balance by delivery to the Trust of a $2,300,000 promissory note, secured by a first mortgage on the hotel. The principal balance of the note bears interest at an annual rate of 9%; principal and 18 22 interest are payable in equal monthly installments based upon a 30-year amortization schedule, with all unpaid principal and interest due in 2001. Ramada Inn-Fayetteville, North Carolina. In November 1994, the Ramada Inn located in Fayetteville, North Carolina was sold for $1,000,000, consisting of cash proceeds of $200,000 and the balance by delivery to the Trust of a $800,000 promissory note, secured by a first mortgage on the hotel. The principal balance of the note bears interest at an annual rate of 9%; principal and interest are payable in equal monthly installments based upon a 12-year amortization schedule, with all unpaid principal and interest due in 2006. Mortgage Notes Payable Maturing During 1995 As of December 31, 1994, two mortgage notes payable secured by three of the hotels owned by the Trust were scheduled to mature during 1995. The amount outstanding under the notes was $5,930,000 at December 31, 1994 and the net book value of the properties securing the two notes was $17,004,000 at December 31, 1994. One of the notes, in the principal amount of $4,075,000 was paid in full by the Trust in January 1995. Management of the Trust is currently negotiating the refinancing of the remaining note. Marriott Park Central Hotel At December 31, 1993, the Marriott Park Central Hotel was managed by Marriott Corporation. In March 1994, the Marriott's management agreement and the Marriott franchise agreement expired. The property is now managed by Sage Mountain View, Inc. and is now operated as an independent hotel (the Park Central Hotel). Hotel Acquisition Subsequent to December 31, 1994 the Realty Partnership entered into a purchase commitment for the Omni Hotel, a 172-room full service hotel located in Chapel Hill, North Carolina for $10.5 million. Upon closing of the purchase, the Realty Partnership will lease the property to the Operating Partnership and the Operating Partnership will operate the hotel. Regulation and Licensing The ownership and operation of the casino gaming facilities of Starwood Lodging in Nevada are subject to extensive licensing and regulatory control of the Nevada Gaming Commission (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 gaming laws, regulations and supervisory procedures of Nevada seek to (i) prevent unsavory or unsuitable persons from having any direct or indirect involvement with gaming at any time or in any capacity; (ii) establish and maintain responsible accounting practices and procedures; (iii) maintain effective control over the financial practices of licensees, including establishing minimum procedures for internal fiscal affairs and the safeguarding of assets and 19 23 revenues, providing reliable record keeping and making periodic reports to the Nevada Gaming Authorities; (iv) prevent cheating and fraudulent practices; and (v) provide a source of state and local revenues through taxation and licensing fees. Changes in these laws, regulations and procedures could have an adverse effect on the Corporation's gaming operations. The Corporation is registered with the Nevada Commission as a publicly traded corporation and has been found suitable as a holding company by the Nevada Gaming Authorities to own all of the outstanding capital stock of Hotel Investors Corporation of Nevada, Inc. ("HICN"). HICN which operates two hotel/casinos, the King 8 Hotel, Gambling Hall & Truck Plaza (the "King 8") and the Bourbon Street Hotel & Casino ("Bourbon Street") must be licensed by the Nevada Gaming Authorities. The Corporation and HICN have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities in Nevada. The Trust was likewise found suitable by the Nevada Gaming Authorities to be the landlord of the King 8 and Bourbon Street. No person may become a stockholder of, or receive any percentage of profits from, HICN without first obtaining licenses and approvals from the Nevada Gaming Authorities. Prior approval of the Nevada Commission is required for the sale, assignment, transfer, pledge or other disposition of any security issued by HICN. The licenses and approvals held by HICN are not transferable and must be renewed periodically upon the payment of appropriate taxes and license fees. The licensing authorities have broad discretion with regard to the renewal of the licenses. The issuing agency may at any time revoke, suspend, condition, limit or restrict a license or approval to own stock in a corporate licensee for any cause deemed reasonable by the issuing agency. Substantial fines for each violation of gaming laws or regulations may be levied against HICN, the Corporation and the individuals involved. A violation under any one of the licenses held by HICN may be deemed a violation of one or more other licenses or approvals held by HICN. If HICN's licenses are revoked or suspended or are not renewed, the Nevada Commission may petition a Nevada district court to appoint a supervisor to operate the affected property until it is sold. When sold, the net proceeds would be paid to the Trust. The Trust could, however, under certain circumstances, receive only the reasonable rental value of any property earnings under the supervisor's management with any excess in earnings over the reasonable rental value of the property being forfeited to the State of Nevada. Suspension or revocation of the license of HICN, disapproval of the Corporation to own the stock of HICN or court appointment of a supervisor over operations of the King 8 or Bourbon Street would have a material adverse effect upon the Trust and the Corporation. Directors, officers and certain key employees of HICN must file license applications with the Nevada Gaming Authorities. Certain officers, directors and key employees of HICN are licensed by the Nevada Gaming Authorities, and any required license applications of the remaining officers, directors or key employees have been filed with the Nevada Board. An application for licensing may be denied for any cause deemed reasonable by the issuing agency. Changes in corporate management or executive positions must be reported to the Nevada Gaming Authorities. In addition to its authority to deny an application for a license, the Nevada Commission has jurisdiction to disapprove a change in a management or executive position with a regulated corporation. If the Nevada Gaming Authorities were to find a director, officer or key employee unsuitable for relicensing or unsuitable to continue having a relationship with HICN or 20 24 the Corporation, the Corporation and HICN would have to sever all relationships with that person. The Corporation and HICN would have similar obligations with regard to any person who refused to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada. Each gaming employee must obtain, and periodically renew, a work permit, which may be revoked upon the occurrence of certain specified events. HICN periodically must submit detailed financial and operating reports to the Nevada Commission, which are subject to routine audit by the Nevada Board. Substantially all loans, leases, sales of securities and similar financing transactions entered into by HICN must be reported to or approved by the Nevada Commission. The fiscal stability of HICN must be adequate to satisfy gaming financial obligations such as state and local government taxes and fees, and the payment of winning wagers to patrons. Failure to satisfy these gaming financial obligations is grounds for the Nevada Gaming Authorities to limit, condition, restrict, suspend or revoke the gaming licenses and approvals of HICN and the registration and approvals of the Corporation, or to impose administrative fines against HICN or the Corporation. As a registered publicly traded holding company found suitable as the sole stockholder of HICN, the Corporation is required periodically to submit detailed financial and operating reports to the Nevada Commission and to furnish any other information that the Nevada Commission or Nevada Board may require. The Corporation's directors, officers and key employees who are actively and directly engaged in the administration or supervision of gaming are subject to licensing and findings of suitability by the Nevada Commission. Certain of the Corporation's officers and directors have been licensed by the Nevada Commission. The finding of suitability is comparable to licensing, and both require submission of detailed personal background and personal financial information followed by a thorough investigation, and payment by the applicant of all investigative costs and charges. Any individual who is found to have a material relationship to or material involvement with the Corporation also may be required to be found suitable or be licensed and may be investigated. Key employees, controlling persons or others who exercise significant influence upon the management or affairs of the Corporation, or are actively engaged in the administration or supervision of gaming activities, may be deemed to have this type of a relationship or involvement. 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 beneficial holder of the Corporation's voting securities determined if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the state of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. Any person who acquires more than 5% of any class of voting securities of the Corporation must report the acquisition to the Nevada Commission. Beneficial owners of more than 10% of any class of the Corporation's voting securities must apply to be found suitable by the Nevada Commission within thirty days after the Chairman of the Nevada Board mails the written notice requiring such filing, and any beneficial owner of the Corporation's voting securities, whether or not such person is a controlling stockholder, may be required to be found suitable if the Nevada Commission has reason to believe that such ownership would be inconsistent with the 21 25 declared policy of the state of Nevada that licensed gaming be conducted honestly and competitively and that the gaming industry be free from criminal and corruptive elements. An "institutional investor" (as defined by the Regulations of the Nevada Commission) holding at least 10%, and in certain circumstances up to 15%, of the voting securities of the Corporation may apply for and hold a waiver of the mandatory suitability determination requirement prescribed by the Nevada Gaming Control Act. To qualify as an "institutional investor," a person or entity must satisfy one of several alternative criteria under the federal Securities Exchange Act of 1934, the Investment Company Act of 1940, or state and federal pension and retirement laws, as well as acquire and hold the voting securities for investment purposes in the ordinary course of business and not for the purpose of effecting any change of control in or the management or policies of the registered holding company or its gaming affiliates. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. A change in investment intent of an institutional investor must be reported to the Chairman of the Nevada Board within two business days of such change of intent. The Chairman of the Nevada Board may require an institutional investor to apply for a finding of suitability upon receipt of notice of change in investment intent, or at any time deemed necessary to protect the public interest. An aggrieved institutional investor may apply for Nevada Commission review of the decision of the Chairman of the Nevada Board ordering the filing of a suitability determination application. The Corporation or HICN must promptly report to the Nevada Commission any information that materially affects the institutional investor's eligibility to hold a waiver. If the stockholder who must be found suitable is a corporation, partnership or trust, that stockholder must submit detailed business and financial information including a list of beneficial owners. In addition, the Clark County Board has taken the position that it has the authority to approve all persons owning or controlling more than two percent of the stock of a gaming licensee or of any corporation controlling a gaming licensee. The applicant is required to pay all costs of investigation. Any stockholder found unsuitable by the Nevada Commission who directly or indirectly holds any beneficial or ownership interest in the Corporation's Common Stock beyond whatever period of time may be prescribed by the Nevada Commission may be guilty of a criminal offense. Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Commission or Chairman of the Nevada Board may be found unsuitable. The same restrictions that apply to a securityholder who is found unsuitable may be held to apply to a beneficial owner of the Corporation's securities if the record owner, after request, fails to identify the beneficial owner. The Corporation is subject to disciplinary action if, after receiving notice that a person is unsuitable to be a stockholder or to have any other relations with the Corporation or its gaming subsidiaries, the Corporation (i) pays the unsuitable person any dividend or interest upon any voting securities of the Corporation or makes any other unpermitted payment or distribution of any kind whatsoever; (ii) recognizes the 22 26 exercise, directly or indirectly, of any voting rights in the Corporation's securities by the unsuitable person; (iii) pays the unsuitable person any remuneration in any form for services rendered or otherwise, except in certain limited and specific circumstances; or (iv) fails to pursue all lawful efforts to require the unsuitable person to divest himself of his voting securities, including, if necessary, the immediate purchase by the Corporation of the voting securities for cash at fair market value. In addition, Nevada law requires that any holder or owner of a voting security who is found unsuitable by the Nevada Commission immediately offer those securities to the Corporation for purchase, which securities would be purchased by the Corporation for cash at fair market value within 10 days from the date the securities are offered. The Nevada Commission may, in its discretion, require the holder of any debt security of a corporation registered under the Nevada Gaming Control Act to file applications, be investigated and be found suitable to own the debt security of a registered corporation. If the Nevada Commission determines that a person is unsuitable to own such debt security, then pursuant to the Regulations of the Nevada Commission, the registered corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission it (i) pays to the unsuitable person any dividend, interest or other distribution whatsoever; (ii) recognizes any voting right of such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction. The Corporation is required to maintain a current and comprehensive stock ledger in the state of Nevada, which ledger may be examined by the Nevada Gaming Authorities at all reasonable times, but without notice. If any securities are held in trust, by an agent or by a nominee, the owner of record of those securities may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make this disclosure may be grounds for finding the owner of record unsuitable. The Corporation must render maximum assistance to the Nevada Gaming Authorities in determining the identity of the beneficial owner. The Nevada Commission has the power at any time to require that the Corporation's stock certificates bear a legend to the general effect that the securities of the Corporation are subject to the Nevada Gaming Control Act and the regulations of the Nevada Commission. However, to date, the Nevada Commission has not imposed such a requirement on the Corporation. The Clark County Board also claims jurisdiction to approve or disapprove holders of the Corporation's securities. The Nevada Gaming Authorities, through the power to regulate licensees and otherwise by Nevada law, have the power to impose additional restrictions on the holders of the Corporation's securities at any time. The Regulations of the Nevada Commission provide that changes in the control of the Corporation or HICN 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 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 23 27 proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. The Nevada Legislature has declared that some corporate acquisitions opposed by management, repurchases of securities and corporate defense tactics affecting corporate gaming licensees in Nevada, and publicly traded corporations affiliated with those licensees may be injurious to stable and productive corporate gaming operations. The Nevada Commission has established a regulatory scheme to ameliorate the potential adverse effects of these business practices upon Nevada's gaming industry and to advance Nevada's policy to (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals may be required from the Nevada Commission before the Corporation may make exceptional repurchases of securities above current market price (commonly referred to as "greenmail"), and before a corporate acquisition opposed by 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 for one or more such purposes. Approval of the public offering will not constitute a finding by the Nevada Commission as to the accuracy, adequacy or investment merit of the securities offered to the public. Any representation to the contrary is unlawful. The gaming regulatory requirements discussed above apply to certain aspects of the Reorganization. The contribution by HICN of the Gaming Assets (and the transfer of certain liabilities to be retained by HICN) to the Operating Partnership will occur on receipt of certain licenses or approvals by the Nevada Gaming Authorities. Likewise, the December 15, 1994, election of the new Board of Directors of the Corporation will be effective upon receipt of certain licenses or approvals by the Nevada Commission. In conjunction with applying for and obtaining such licenses and approvals, the Corporation has developed various policies and procedures subject to review, approval and oversight by the Nevada Board. The purpose of these corporate policies and procedures is to ensure compliance with the regulatory requirement that prior approval of the Nevada Commission is obtained for any transaction that would result in either Starwood Capital or Starwood Partners acquiring control of the Corporation or its Nevada gaming operations. The Corporation expects that these policies and procedures will be eliminated upon receipt of certain licenses and approvals from the Nevada Commission. If the required licenses or approvals of the Nevada Gaming Authorities are not received on or before December 31, 1995, then on such date HICN has agreed to contribute to the Operating Partnership cash equal to the fair value of the Gaming Assets on such date. License fees and taxes, computed in various ways depending on the type of gaming involved, are payable to the State of Nevada and to the County of Clark where HICN's gaming operations are conducted. Depending upon the particular fee or tax involved, these assessments 24 28 are payable either monthly, quarterly, or annually and are based upon either (i) a percentage of the gross gaming revenues received by the casino operations; (ii) the number of slot machines or other gaming devices operated by the casino; or (iii) the number of table games operated by the casino. A casino entertainment tax is also paid by the licensees where entertainment is furnished in connection with the selling of food or refreshments. The sale of alcoholic beverages by HICN is subject to licensing, control and regulation by the Clark County Board. Such liquor licenses are revocable and are not transferable. The Clark County Board has full power to limit, condition, suspend or revoke any liquor license, and any disciplinary action of this nature or license revocation would have a material adverse effect on HICN's gaming operations. ITEM 3. LEGAL PROCEEDINGS. During the year ended December 31, 1994, the Trust and the Corporation reached settlement agreements with respect to two purported class action complaints and one complaint which was purportedly brought on behalf of the Trust and the Corporation (collectively, the "Shareholder Actions"). The Shareholder Actions were brought in 1991 and 1992 in each case in connection with the Trust's purchase of its two hotel/casinos and the Ramada Inn in Indian Wells, California. The two purported class actions were filed in the United States District Court for the Southern District of California in August 1991 and February 1992 against the Trust, the Corporation and certain current and former officers, Directors and Trustees. The complaint alleged fraud, violations of federal and California securities laws, the federal Racketeer Influenced and Corrupt Organizations Act and ERISA. The actions sought compensatory damages, rescission and/or treble and exemplary damages plus interest, costs and attorney's fees and statutory damages under ERISA. The third action was filed in the Superior Court for the State of California for San Diego County in March 1992 against current and former officers, Directors and Trustees and alleged breach of fiduciary duty, gross negligence and corporate waste. The action sought compensatory damages, certain remuneration and costs. The plaintiffs and defendants in the Shareholder Actions entered into stipulations of settlement providing for the release of all claims that were or might have been made in the Shareholder Actions and provided for a $3,250,000 cash settlement fund which, after payment of fees and expenses of plaintiffs' counsel, will be distributed to the certified plaintiff classes. The Trust and the Corporation will pay $400,000 into the settlement fund, with the balance of the settlement being paid by the insurance company that issued the directors and officers policy applicable to the period to which the Shareholder Actions relate and by two former officers and Trustees of the Trust. The Trust and the Corporation have also agreed to pay the legal fees and other costs incurred prior to October 12, 1993 by the defendants in the Shareholder Actions. Holders of an aggregate of 1,199,000 Paired Shares opted out of the settlement. The stipulation 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. 25 29 In connection with the settlement of the Shareholder Actions, Messrs. Young and Rothman and certain of their affiliated partnerships terminated the management agreements that existed between those partnerships and the Corporation's subsidiary, Western Host, Inc. (the "Management Contracts"), and Western Host has agreed not to dispute such action and has withdrawn as a general partner of two additional affiliated partnerships. In satisfaction of any damages that the Trust and the Corporation may incur as a result of the termination of the Management Contracts, Messrs. Rothman and Young have provided to the Trust and the Corporation an irrevocable letter of credit having a one-year term in the amount of $800,000. Upon final court approval of the settlement of the Shareholder Actions, the proceeds from the letter of credit would be paid to the Trust and the Corporation, and the parties to the Management Contracts, Messrs. Rothman and Young and the Trust and the Corporation will release all of their respective claims related to the termination of the Management Contracts. Mr. Leonard Ross and his affiliates (collectively "Ross"), who as of December 31, 1994 held approximately 9.8% of the outstanding Paired Shares of the Trust and Corporation, opted out of the settlement of the Shareholder Actions. Ross threatened to bring a separate action alleging similar causes of action as those alleged in the Shareholder Actions as well as other alleged causes of action. Ross has assigned to Starwood Capital all of his claims against the Trust and Corporation. Starwood Capital has agreed to purchase all of Ross's Paired Shares at Ross's election during a 60-day period beginning in December 1995, at a price of $5.625 per Paired Share. Starwood Capital may also elect to purchase Ross's Paired Shares at the same time and on the same terms. Starwood Capital, as the assignee of Ross's claims against the Trust and the Corporation, has agreed that the maximum amount Starwood Capital may recover under such claims will not exceed an aggregate of $1.8 million and the Trust and the Corporation have agreed to toll the statute of limitations respecting such claims until January 31, 1996. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On December 15, 1994, the Trust held a special meeting of shareholders of the Trust (the "Trust Meeting") and the Corporation held a special meeting of stockholders of the Corporation (the "Corporation Meeting") to, among other things, approve the Reorganization and to elect new Boards of the Trust and the Corporation. At the Trust Meeting, shareholders of the Trust voted upon and approved (i) the Reorganization, (ii) the creation of a classified Board of Trustees, (iii) the elimination of the cumulative voting provisions of the Declaration of Trust of the Trust, (iv) the election as Trustees of the Trust of the following nominees: Mr. Madison F. Grose, Mr. Earle F. Jones, Mr. Jeffrey C. Lapin, Mr. Jonathan Eilian and Mr. Barry S. Sternlicht and (v) the ratification of Deloitte & Touche LLP as the independent public accountants of the Trust for the Trust's 1994 fiscal year. 26 30 The following sets forth, with respect to each matter voted upon at the Trust Meeting, the number of votes cast for, the number of votes cast against, and the number of votes abstaining (or, with respect to the election of Trustees, the number of votes withheld) with respect to the such matter:
Votes Votes Votes For Against Abstentions Withheld ---------- --------- ----------- -------- Approval of Reorganization 8,526,145 71,544 28,003 0 Creation of Classified Board 7,851,616 236,667 531,505 0 Elimination of Cumulative Voting 6,744,845 1,321,667 553,076 0 Election of Trustees: Madison F. Grose 10,977,824 0 0 107,111 Earle F. Jones 10,978,374 0 0 106,561 Jeffrey C. Lapin 10,978,524 0 0 106,411 Jonathan Eilian 10,977,324 0 0 107,611 Barry S. Sternlicht 10,977,324 0 0 107,611 Ratification of Accountants 10,928,974 67,619 36,862 0
There were no broker non-votes with respect to any such matter. At the Corporation Meeting, stockholders of the Corporation voted upon and approved (i) the Reorganization, (ii) the creation of a classified Board of Directors, (iii) the removal of Directors only for cause, (iv) the elimination of the cumulative voting provisions of the Articles of Incorporation of the Corporation, (v) the election as Directors of the Corporation of the following nominees: Mr. Bruce M. Ford, Mr. Steven Robert Goldman and Mr. Barry S. Sternlicht (such Directors to take office upon receipt of Gaming Approvals), and (vi) the ratification of Deloitte & Touche LLP as the independent public accountants for the Corporation's 1994 fiscal year. The following sets forth, with respect to each matter voted upon at the Corporation Meeting, the number of votes cast for, the number of votes cast against, and the number of votes abstaining (or, with respect to the election of Directors, the number of votes withheld) with respect to such matter: 27 31
Votes Votes Votes For Against Abstentions Withheld ---------- ---------- ----------- -------- Approval of Reorganization 8,497,026 94,136 36,594 0 Creation of Classified Board 7,835,418 239,775 543,606 0 Removal of Directors Only for Cause 8,126,923 411,531 82,345 0 Elimination of Cumulative Voting 6,731,734 1,331,753 555,248 0 Election of Directors: Bruce M. Ford 11,008,173 0 0 76,762 Steve Robert Goldman 11,008,173 0 0 76,762 Barry S. Sternlicht 11,006,973 0 0 77,962 Ratification of Accountants 10,984,196 43,642 56,031 0
There were no broker non-votes with respect to any such matter. PART II ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market Information 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 Composite Tape.
1994 High Low - ---- ----- ------ First quarter...................................... $2.50 $1.875 Second quarter..................................... $3.00 $1.625 Third quarter...................................... $3.375 $2.875 Fourth quarter..................................... $3.375 $2.625 1993 - ---- First quarter...................................... $1.75 $1.00 Second quarter..................................... $2.50 $1.25 Third quarter...................................... $3.125 $1.625 Fourth quarter..................................... $3.375 $2.00
28 32 Holders As of March 24, 1995, there were approximately 2,089 holders of record of Paired Shares. Distributions No distributions were made by the Trust during 1994 or 1993. The Prior Credit Agreement prohibited the Trust from making distributions to its shareholders. The Corporation has not paid any cash dividend since its organization. Under the terms of the New Credit Agreement, the Realty Partnership and the Operating Partnership are generally permitted to distribute to their partners on an annual basis an amount equal to the greatest of (1) 30% of the combined net income of the Realty Partnership and the Operating Partnership; (2) for the Realty Partnership only, an amount such that the Trust's proportionate share would be sufficient for the Trust to make distributions to its shareholders sufficient to maintain the Trust's tax status as a real estate investment trust; (3) 85% of the sum of (i) the combined taxable income of the partnerships plus (ii) an amount equal to the aggregate of all depreciation deducted in determining combined taxable income; or (4) $3,000,000, unless as a result of such distribution an event of default under the New Credit Agreement would occur. Amounts distributed to the Trust or the Corporation pursuant to the foregoing are generally permitted to be distributed to their shareholders. 29 33 ITEM 6 SELECTED FINANCIAL DATA. The following data sets forth certain financial information for the Trust, the Corporation, and the Trust and the Corporation on a combined basis. This information is based on and should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this Joint Annual Report.
(in thousands, except per share amounts) December 31, ----------------------------------------------------------------- 1994 1993 1992 1991 1990 --------- --------- --------- --------- --------- Operating Data Revenue: Trust ...................................................... $ 21,671 $ 20,342 $ 26,784 $ 29,550 $ 32,866 Corporation ................................................ 110,962 114,828 116,172 110,361 112,555 Combined (1) ............................................... 113,997 117,155 117,656 113,436 117,024 Net Income (Loss): Trust (2) .................................................. (3,465) (3,889) (9,818) (10,952) (13,362) Corporation (2) ............................................ (1,198) (3,143) (9,925) (11,132) (14,224) Combined ................................................... (4,663) (7,032) (19,743) (22,084) (27,586) Net Income (Loss) Per Share: Trust ...................................................... $ (0.28) $ (0.32) $ (0.81) $ (0.90) $ (1.10) Corporation ................................................ (0.10) (0.26) (0.82) (0.92) (1.17) --------- --------- --------- --------- --------- Combined ................................................... $ (0.38) $ (0.58) $ (1.63) $ (1.82) $ (2.27) ========= ========= ========= ========= ========= Balance Sheet Data Total Assets: Trust ...................................................... $ 162,245 $ 232,845 $ 245,540 $ 246,498 $ 266,487 Corporation ................................................ 48,626 49,993 53,611 55,807 31,946 Combined (1) ............................................... 183,955 195,352 210,945 221,917 240,998 Total Debt: Trust ...................................................... 146,734 156,526 157,541 158,295 165,730 Corporation ................................................ 40,664 101,846 100,246 66,873 44,960 Combined (1) ............................................... 160,482 170,886 170,297 171,271 166,591 Shareholders' Equity (Deficit): Trust ...................................................... 10,450 72,205 76,371 86,188 97,087 Corporation ................................................ (1,742) (58,879) (55,752) (45,828) (34,696) Combined ................................................... 8,708 13,326 20,351 40,083 62,104 Shares outstanding at end of period .......................... 12,133 12,133 12,133 12,133 12,133 Cash Flow and Dividend Data Net cash provided by (used in) operating activities: Trust ...................................................... $ 4,455 $ 3,136 $ 2,773 $ (8,812) $ 8,921 Corporation ................................................ 4,438 2,396 1,917 2,654 (2,659) Combined ................................................... 8,893 5,532 4,690 (6,158) 6,262
30 34 (in thousands, except per share amounts)
December 31, ---------------------------------------------------------------- 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- Net cash provided by (used in) investing activities: Trust ...................................................... $ 8,239 $ 2,474 $ (161) $ 12,889 $(17,621) Corporation ................................................ 215 (4,426) (942) 472 10,731 Combined (1) ............................................... 4,489 (3,645) (1,514) 12,159 (7,058) Net cash provided by (used in) financing activities: Trust ...................................................... (13,357) (7,307) (850) (7,507) 6,583 Corporation ................................................ (4,577) (1,138) (816) (834) (309) Combined (1) ............................................... (13,969) (6,752) (1,255) (7,139) 6,442 Dividends to shareholders - Trust (3) ................................................. $ 0 $ 0 $ 0 $ 0 $ 7,644 Dividends per share - - Trust (3) .................................................. $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.63
(1) Trust and Corporation amounts do not add to Combined amounts due to accounting elimination entries. (2) For the Trust, includes gains (losses) on sales of $432,000, ($53,000), ($791,000), and $390,000, for the years ended December 31, 1994, 1993, 1992 and 1991, respectively, and provisions for investment losses of $759,000, $2,369,000, $3,419,000, $8,867,000, and $15,100,000 in the years ended December 31, 1994, 1993, 1992, 1991, and 1990, respectively. For the Corporation, includes gains on sales of $24,000, $74,000, $4,000 and $1,208,000 for the years ended December 31, 1994, 1993, 1992, and 1991, respectively, and provisions for investment losses of $713,000 and $3,047,000 in the years ended December 31, 1991 and 1990, respectively. (3) Presented only for the Trust, as the Corporation did not pay dividends for the periods presented. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. As discussed in Item 1 of this Joint Annual Report under the caption "The Reorganization", the Trust and the Corporation consummated the Reorganization on the Closing Date effective as of January 1, 1995. Since the Reorganization, the Trust has conducted all of its business and operations through the Realty Partnership and the Corporation has conducted all of its business and operations (other than its gaming operations) through the Operating Partnership. The Trust controls the Realty Partnership as its sole general partner. The Corporation controls the Operating Partnership as its managing general partner, although prior to the receipt of gaming approvals, a management committee of the Operating Partnership will manage the Operating Partnership. As discussed in Item 1 of this Joint Annual Report under the caption "Debt Restructuring", on January 28, 1993, the Trust entered into the Prior Credit Agreement which restructured its previously unsecured notes payable to the holders of the Senior Debt. As discussed in Item 1 of this Joint Annual Report under the caption "1995 Debt Refinancing", on March 24, 1995 the Realty Partnership entered into the New Credit Agreement and borrowed $131.75 million which was used to refinance the Senior Debt and approximately $27 million of first mortgage debt. 31 35 Results of Operations for the Years Ended December 31, 1994 and 1993 The Trust. Rents from 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 information pertaining to such notes see Notes 4 and 5 of Notes to Financial Statements.) 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. For additional information regarding the terms of such sales of hotels see "Certain Property Sales and Related Transactions" included in Items 1 and 2 of this Joint Annual Report. 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 32 36 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. See Part I, Item 3, Legal Proceedings, of this Joint Annual Report 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. For information with respect to restrictions on distributions imposed by the Prior Credit Agreement and the New Credit Agreement see "Distributions - The Trust" included in Item 5 of this Joint Annual Report. 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 33 37 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:
Year Ended December 31, ------------------------------------- Including Dallas Park Central: 1994 1993 - ------------------------------ ------ ------ 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. 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 and "Liquidity and Capital Resources" below. 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. 34 38 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. For additional information regarding the lease amendments, see "Equity Investments" included in Part I, Item 2 of this Joint Annual Report. 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 prime plus 2% payable monthly thereafter. For additional information with respect to Interest from the Corporation in future periods, see "Liquidity and Capital Resources" below. 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. 35 39 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. For information with respect to restrictions on distributions imposed by the Prior Credit Agreement see "Distributions - The Trust" included in Part I, Item 5 of this Joint Annual Report. The Trust's net loss totaled $(3,889,000), or $(0.32) per share, and $(9,818,000), or $(.081) per share, for the years ended December 31, 1993 and 1992, respectively. 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 36 40 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 and Item 13 of this Joint Annual Report. 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 and "Liquidity and Capital Resources" below. 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 (see "Legal Proceedings" included in Part I, Item 3 of this Joint Annual Report). 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. Liquidity and Capital Resources The Trust - Prior to the Reorganization, the primary sources of liquidity for the Trust were cash generated from operations (i.e., its rents) and net proceeds from the sale of hotels. The primary demands on the Trust's capital resources were debt service payments, the funding of capital improvements to the Trust's properties, the making of additional loans and advances to the Corporation and the Trust's general and administrative expenses. Since the Reorganization, the Trust has conducted all of its business and operations through the Realty Partnership and its only source of liquidity will be cash distributions from the Realty Partnership. 37 41 Prior to December 31, 1994, it was necessary for the Trust to sell properties in order to comply with the principal payment requirements of the Prior Credit Agreement (see Note 3, "Hotel Sales and Reserves for Losses" on pages F-19 and F-20). As discussed in Item 1 of this Joint Annual Report under the caption "1995 Debt Refinancing" on March 24, 1995 the Realty Partnership entered into the New Credit Agreement and borrowed $131.75 million. The proceeds were used to refinance the Senior Debt and approximately $27 million of first mortgage debt. The Loan matures on April 1, 1997 and under certain conditions may be extended for an additional twelve months. The loan bears interest at a rate based on LIBOR plus 3%. In December 1994, the Trust canceled $58,335,000 of the notes receivable which were payable to the Trust by the Corporation and its subsidiaries. As part of the Reorganization, effective January 1, 1995, the Trust contributed the remaining notes to the Realty Partnership and the payment obligation was assumed by the Operating Partnership. Effective January 1, 1995, notes in the amount of $10,000,000, (excluding the MHLP notes, see Note 5 of Notes to Financial Statements) are due on demand and bear interest at prime plus 2% with interest payable monthly. As of January 1, 1995, the aggregate principal payments due during 1995 on the outstanding mortgage notes payable of the Realty Partnership amounted to $34,249,000, including four mortgage notes in the amount of $23,679,000 which mature during 1995. On January 31, 1995, upon closing of the Reorganization, a mortgage note in the amount of $4,075,000 which was due in 1995 was paid in full. On March 24, 1995, upon closing of the New Credit Agreement, mortgage notes in the amount of $17,750,000 which were due in 1995 were paid in full. Management of the Trust is in the process of negotiating an extension on the remaining mortgage note that matures during 1995 which had an outstanding principal balance of $1,854,000 as of December 31, 1994. The Realty Partnership intends to make during 1995, improvements that are necessary to maintain the properties in good condition, that are required by franchisors or applicable health and safety and other laws or to improve the competitive position of certain properties. Management believes that the necessary funds, expected to be provided primarily from cash flows from operating activities, are available and that the cost of such improvements to existing properties will amount to approximately $6,483,000 during 1995. Management believes that there will be sufficient cash available from operations to meet the obligations of the Realty Partnership in the twelve months following December 31, 1994. The Corporation. Prior to the Reorganization, the primary source of liquidity for the Corporation was cash generated from operations, i.e., from sales of rooms, food and beverages at the hotels and hotel/casinos the Corporation leased from the Trust and gaming revenues at the two Nevada properties. The primary demands on the Corporation's capital resources were the payment of rents and interest due to the Trust and the Corporation's general and administrative expenses. Since the Reorganization, the Corporation has conducted all of its business and operations, other than the gaming operations, through the Operating Partnership and its only source of liquidity will be cash distributions from the Operating Partnership. For information regarding the cancellation of notes payable by the Corporation to the Trust in December 1994, see the Trust above. 38 42 Management believes that there will be sufficient cash available from operations to meet the obligations of the Operating Partnership in the twelve months following December 31, 1994. Management believes that its hotels are adequately insured. For information with respect to potential hazardous waste contamination and the presence of asbestos at certain of the Realty Partnership's hotels and the possible impact thereof on the Trust's, the Realty Partnership's, the Corporation's and the Operating Partnership's financial position, see "Other Information - Certain Environmental Matters" included in Item 1 of this Joint Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and supplementary data required by this Item are included in Item 14 of this Joint Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. TRUSTEES, DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS. Trustees and Executive Officers of the Trust The following table sets forth, for each of the current members of the Trust's Board of Trustees as the date of this Joint Annual Report, the class of Trustees to which such Trustee has been elected, the name and age of such Trustee, the principal occupation or employment of such Trustee during the past five years and the principal business of such Trustee's employer, other directorships held by such Trustee and the year in which such Trustee first became a Trustee of the Trust. 39 43 Trustees Whose Terms Expire in 1995 Madison F. Grose (41)........ Trustee since December 1994. Executive Vice President and General Counsel of Starwood Capital (and its predecessor entity) since July 1992. From November 1983 through June 1992, Partner of the law firm of Pircher, Nichols & Meeks. Earle F. Jones (68).......... Director since 1985 and Chairman of the Board of Directors of the Corporation since February 1989. Co-Chairman since 1988 of MMI Hotel Group, a hotel company. President from 1967 to 1968 of the International Association of Holiday Inns and served two terms as a director. Trustee and Chairman of Communications Improvement Trust, whose beneficiaries are public broadcasting and Tougaloo College, Member of the Board of Trustees for Millsaps College and the Catholic Foundation and Co-Chairman of the Mississippi Olympic Committee. Trustees Whose Terms Expire in 1996 Jeffrey C. Lapin (38)........ Trustee since September 1992. President and Chief Operating Officer of the Trust since December 1994. President and Chief Executive Officer of the Trust from May 1991 to December 1994. Prior to that time, 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. Jonathan Eilian (27)......... Trustee since December 1994. Senior Vice President of Starwood Capital specializing in hotel acquisitions and multiple asset pool bids, since October 1991. 40 44 Trustee Whose Term Expires in 1997 Barry S. Sternlicht (34)..... Trustee, Chairman of the Board and Chief Executive Officer of the Trust and Director of the Corporation since December 1994. President and CEO of Starwood Capital (and its predecessor entity) since September 1991. Prior to that time, Vice President and then Senior Vice President (from 1989 to 1991) of JMB Realty Corporation, a real estate investment firm. Currently, a Trustee of each of Equity Residential Properties Trust, a multi-family real estate investment trust, and Angeles Participating Mortgage Trust, a real estate investment trust. The following table includes certain information with respect to each of the Trust's current executive officers other than Messrs. Sternlicht and Lapin:
Name Age Position(s) with the Trust ---- --- -------------------------- Michael W. Mooney ....................... 48 Vice President and Chief Financial Officer Sherwin L. Samuels ...................... 59 Secretary and General Counsel
Michael W. Mooney. Mr. Mooney has been Vice President and Chief Financial Officer since July 1992. From March 1992 to July 1992 he was 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 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. Sherwin L. Samuels. Mr. Samuels has been an officer and General Counsel since January 1987 and was a Trustee from April 1987 to December 1994. Since September 1992, he has been a Partner (through a professional corporation) of the law firm of Sidley & Austin. Prior to that time, he was a Partner (through a professional corporation) of the law firm of Mitchell, Silberberg & Knupp. The executive officers of the Trust serve at the pleasure of the Board of Trustees, subject in the case of Messrs. Lapin and Mooney to the provisions of their respective employment agreements with the Trust. (See "Employment Agreements with Executive Officers" included in Item 11 of this Joint Annual Report.) There is no family relationship among any of the Trustees or executive officers of the Trust. Directors and Executive Officers of the Corporation The current Board of Directors of the Corporation consists of Mr. Earle F. Jones, Mr. Bruce M. Ford, and Mr. Graeme W. Henderson. At the special meeting of stockholders of the Corporation held on December 15, 1994, the stockholders elected Messrs. Sternlicht, Ford 41 45 and Goldman as directors of the Corporation, such directors to take office upon the receipt of necessary regulatory approvals from the Nevada Gaming Authorities ("Gaming Approval"). Pending receipt of Gaming Approval, the current Directors of the Corporation will continue as such and the Operating Partnership will be managed by a management committee consisting of Messrs. Sternlicht, Ford and Goldman. While awaiting Gaming Approval, the Corporation's existing management and Board of Directors will be responsible for the operation and control of the gaming assets of the Corporation, and the management committee which is comprised of the newly elected directors will be prohibited from any influence or control of the gaming assets. The following table sets forth, for each of the current members of the Corporation's Board of Directors (other than Mr. Jones) as of the date of this Joint Annual Report, the name and age of such Director, the principal occupation or employment of such Director during the past five years and the principal business of such Director's employer, other directorships held by such Director and the year in which such Director first became a Director of the Corporation.
Name and Age Principal Occupation and Business Experience ------------ -------------------------------------------- Bruce M. Ford (54).............. Director since 1983. President and Managing Partner of F.K.B. Management Corporation, a restaurant management company, since January 1988. 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. Graeme W. Henderson (61) ....... Director of the Corporation since March 1990. Chairman of the Trust from July 1989 to December 1994 and Trustee of the Trust from September 1986 to December 1994. Independent financial consultant since January 1990. Prior to January 1990, President of Henderson Consulting, Inc., a private financial consulting firm. President of Capstan, Inc. (Formerly Seymour, Inc.), a manufacturer of machine tool controls, since 1982. Director of Capital Southwest Corporation.
The following table sets forth, for each of the current members of the management committee who will become the Board of Directors of the Corporation upon receipt of Gaming Approval (other than Mr. Sternlicht whose term will expire in 1997 and Mr. Ford whose term will expire in 1995) the name and age of such Director, the principal occupation or employment of such Director during the past five years and the principal business of such Director's employer, other directorships held by such Director and the year in which such Director first became a Director of the Corporation. 42 46 Director Whose Term Expires in 1996 Steven Robert Goldman (33) .. Director and Senior Vice President of the Corporation since December 1994. Vice President of Starwood Capital, specializing in hotel acquisitions and hotel asset management, since August 1993. From 1990 to 1993, Senior Development Manager of Disney Development Company, the real estate investment, development and management division of The Walt Disney Company. From 1986 to 1990, Director of Development of the Hyatt Development Corporation. The following table includes certain information with respect to each of the Corporation's current executive officers other than Mr. Goldman:
Name Age Position(s) with the Corporation ---- --- -------------------------------- Kevin E. Mallory .......................... 35 Executive Vice President Kenneth J. Biehl .......................... 40 Vice President and Controller
Kevin E. Mallory. Mr. Mallory has been Executive Vice President 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, VMS Realty Partners, a real estate syndicator. Kenneth J. Biehl. Mr. Biehl has been Vice President since December 1994 and Controller since April 1994. From January 1992 to April 1994 he was Senior Accountant with Kenneth Leventhal & Co., a public accounting firm. Prior to that time, he was Treasurer and Chief Financial Officer of Electronic Clearing House, Inc., a credit card services company. The executive officers of the Corporation serve at the pleasure of the Board of Directors, subject in the case of Mr. Mallory to the provisions of his employment agreement with the Corporation. (See "Employment Agreements with Executive Officers" included in Item 11 of this Joint Annual Report.) There is no family relationship among any of the Directors or executive officers of the Corporation. ITEM 11. EXECUTIVE COMPENSATION. Summary of Cash and Certain Other Compensation The Trust. The following table provides certain summary information concerning the compensation paid for the fiscal years ended December 31, 1994, 1993 and 1992 to the Trust's President and Chief Executive Officer and each other executive officer of the Trust whose 43 47 total compensation for 1994 exceeded $100,000 for services rendered in all capacities to the Trust.
SUMMARY COMPENSATION TABLE Long Term All Other Annual Compensation Compensation Compensation($) -------------------------------- ------------- --------------- Securities Name and Underlying Principal Options/ Position Year Salary($) Bonus($) SARs (#) - --------------------- ---- --------- --------- ------------- Jeffrey C. Lapin 1994 190,000 75,000 12,000(1) President and Chief 1993 170,834 20,000 Executive Officer 1992 150,792 50,000(1) 23,585(2) Michael W. Mooney 1994 150,000 20,000 9,000(1) Vice President and 1993 140,416 11,667 Chief Financial 1992 61,026 25,000(1) Officer
- ---------------------- (1) For information with respect to these options, see "Option Exercises and Holdings" below. (2) Amount shown reflects cash paid for unused vacation. The Corporation. The following table provides certain summary information concerning the compensation paid for the fiscal years ended December 31, 1994, 1993 and 1992 to each executive officer of the Corporation whose total compensation for 1994 exceeded $100,000 for services rendered in all capacities to the Corporation.
SUMMARY COMPENSATION TABLE -------------------------- Long Term Annual Compensation Compensation ------------------------------ ------------ Securities Name and Underlying Principal Options/ Position Year Salary($) Bonus($) SARs (#) - --------------------- ---- --------- -------- ----------- Kevin E. Mallory 1994 150,000 37,500 9,000(1) Executive Vice 1993 140,416 11,667 President 1992 63,718 25,000(1)
- --------------------- (1) For information with respect to these options, see "Option Exercises and Holdings" below. 44 48 Option Grants The following table shows, as to the executive officers of the Trust and the executive officer of the Corporation named in the Summary Compensation Tables above, information concerning the option granted to that officer during the year ended December 31, 1994.
OPTION/SAR GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS - ------------------------------------------------------------------------------------------------------------------------- Number of % of Total Securities Options/ Underlying SARs Options/ Granted to Potential Realizable Value at SARs Employees Exercise Assumed Annual Rates of Granted in Fiscal Price Expiration Stock Price Appreciation for Name (#) Year ($/Sh) Date Option Term - ---------- ---------- ---------- -------- ---------------- ----------------------------- 5% ($) 10% ($) ------- ------- Jeffrey C. Lapin 12,000(1) 12.1 $2.75(2) January 31, 2000 42,120 53,150 Michael W. Mooney 9,000(1) 9.1 $2.75(2) January 31, 2000 31,590 39,860 Kevin E. Mallory 9,000(1) 9.1 $2.75(2) January 31, 2000 31,590 39,860 - -----------------------------
(1) Options became exercisable as to one-third of the amount granted on January 31, 1995, and will become exercisable as to an additional one-third of the amount granted on January 31, 1996 and as to the remaining amount granted on January 31, 1997. (2) The $2.75 per Paired Share exercise price is equal to the fair market value of a Paired Share on the day the option was granted. Option Exercises and Holdings The following table provides information with respect to the options held as of December 31, 1994 by the executive officers of the Trust and the executive officer of the Corporation named in the Summary Compensation Tables above. No options were exercised by any of those executive officers during 1994.
AGGREGATED OPTION/SAR EXERCISES IN 1994 AND DECEMBER 31, 1994 OPTION VALUES - ----------------------------------------------------------------------------------------------------------- Number of Shares Underlying Unexercised Value of Unexercised In-the- Options/SARs at Fiscal Money Options/SARs Year-End (#) at Fiscal Year-End ($) (1) ------------------------------------------------------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ------------- ----------- ------------- Jeffrey C. Lapin 80,000 12,000 109,500 2,280 Michael W. Mooney 25,000 9,000 54,750 1,710 Kevin E. Mallory 25,000 9,000 54,750 1,710
45 49 - ----------------- (1) Value is defined as the market price of the Paired Shares at December 31, 1994 less the exercise price of the option. The average of the high and low market prices of the Paired Shares at December 31, 1994 was $2.94. 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 $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. 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 $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). Share Purchase Agreements Prior to December 1989, the Trust and the Corporation maintained share purchase plans pursuant to which Trustees, Directors, officers and employees of the Trust or the Corporation 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 Trust or the Corporation for the balance. Certificates evidencing Paired Shares purchased under a share purchase plan were pledged to the Trust or the Corporation 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 not to transfer the purchaser's interest in those shares. During 1994, the only share purchase agreements remaining in effect were those between the Trust and each of Mr. Henderson, a former trustee of the Trust and director of the Corporation, and Mr. Samuels, and between the Corporation and each of Messrs. Jones and Ford. During 1994, the share purchase agreements with Messrs. Henderson, Samuels and Ford were terminated and the non-recourse indebtedness thereunder was canceled (an aggregate of $56,250 with respect to Mr. Henderson, $82,391 with respect to Mr. Samuels, and $108,784 with respect to Mr. Ford). In addition, the Paired Shares pledged in respect of such indebtedness were either released from such pledge, to the extent that such Paired Shares had been paid for (an aggregate of 1,341 Paired Shares for which $20,625 was paid with respect to Mr. Henderson, 2,141 Paired Shares for which $32,922 was paid with respect to Mr. Samuels, and 2,793 Paired Shares for which $45,279 was paid with respect to Mr. Ford) or were forfeited by the individual, to the extent such Paired Shares had not been paid for. Employment Agreements with Executive Officers On January 31, 1995, the Trust entered into a 24-month employment agreement with Mr. Lapin for his services to the Trust as its President and Chief Operating Officer. The employment agreement provides for an annual salary of $200,000 in 1995 and $225,000 in 1996, annual bonuses to be determined by the Board of Trustees (not less than $75,000 per year), the 46 50 grant under the option plans of the Trust and the Corporation of options to purchase 250,000 Paired Shares which are exercisable at $2.75 per Paired Share (fair market value on the date of grant) and which vest at a rate no longer than the most rapid rate of vesting of options granted to any other executive during the term of the employment agreement. The employment agreement provides that Mr. Lapin may terminate his employment for "Good Reason", as defined in the employment agreement and including an assignment of duties which are in any significant respect inconsistent with his position, a substantial alteration in 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 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 bonuses that would have been payable had he continued to be employed for the remainder of the term of the agreement, and all fringe benefits to which he would have been entitled through the remainder of the term of the agreement (other than stock options or stock loans not granted prior to the date of termination). In July 1992, the Trust entered into a 12-month agreement with Mr. Mooney providing for Mr. Mooney to render services to the Trust as its Chief Financial Officer. In December 1993, the term of the employment agreement with Mr. Mooney was extended until June 1995. The employment agreement with Mr. Mooney provides that he will receive an annual salary of $150,000 and such annual bonus, if any, as the Trust's Board of Trustees may determine, and will be eligible to participate in all employee benefit plans and fringe benefits, if any, that the Trust makes available to its other executive officers. Mr. Mooney's employment pursuant to the employment agreement may be terminated by the Trust at any time; provided, however, that if his employment is terminated without cause (as defined), Mr. Mooney will be entitled to receive the lesser of his salary for the then remaining term of the employment agreement or $75,000. In July 1992, the Corporation entered into a 12-month employment agreement with Mr. Mallory providing for Mr. Mallory to render services to the Corporation as a senior executive officer. In December 1993, the term of the employment agreement with Mr. Mallory was extended until June 1995. The employment agreement with Mr. Mallory provides that he will receive an annual salary of $150,000 and such annual bonus, if any, as the Corporation's Board of Directors may determine, and will be eligible to participate in all employee benefit plans and fringe benefits, if any, that the Corporation makes available to its other executive officers. Mr. Mallory's employment pursuant to the employment agreement may be terminated by the Corporation at any time; provided, however, that if his employment is terminated without cause (as defined), Mr. Mallory will be entitled to receive the lesser of his salary for the then remaining term of the employment agreement or $75,000. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During fiscal year 1994, the Board of Directors of the Corporation and the Board of Trustees of the Trust made decisions with respect to executive compensation of the executive officers of the Trust and the Corporation, respectively. Mr. Lapin, who is an executive officer of the Trust and is on the Board of Trustees of the Trust, participated in decisions related to the 47 51 compensation of Mr. Mooney; and Mr. Samuels, who is an officer of the Trust and was a Trustee of the Trust, and Mr. Henderson, who is a director of the Corporation and was a Trustee of the Trust, participated in decisions related to the compensation of Messrs. Lapin and Mooney. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Certain Beneficial Owners. To the knowledge of the Trust and the Corporation, no person owns beneficially 5% or more of the Paired Shares, except as follows:
Name and Address Amount Percent of of Beneficial Owner Beneficially Owned Class (1) ------------------- ------------------ ---------- U.S. Bancorp 996,000 (2) 8.2% 111 S.W. Fifth Avenue Portland, OR 97204 Leonard M. Ross 991,400 (3) 8.2% 1011-1/2 North Beverly Drive Beverly Hills, CA 90210 Starwood Capital Group, L.P. and 1,055,039 (4) 8.0% affiliated entities Three Pickwick Plaza, Suite 250 Greenwich, CT 06830 Edward J. Okay and 750,000 (5) 6.2% Dorothy P. Okay, as joint tenants 111 Quayside Drive Jupiter, FL 33477
- --------------------------- (1) Based on the number of Paired Shares outstanding on March 27, 1995. (2) 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 479,700 and 516,300 shares, respectively. U.S. Bancorp has sole dispositive power with respect to 925,500 shares and voting power with respect to all of these shares. (3) Based on information contained in Amendment No. 10 to Schedule 13D dated February 22, 1991. Mr. Ross has sole voting and dispositive power with respect to all of these shares; however, 909,800 of these shares are pledged to the Pacific Bank, along with other securities, as collateral for a previously unsecured loan. See Part I, Item 3, Legal Proceedings, for a description of an agreement between Ross and Starwood Capital pursuant to which Starwood Capital has agreed to purchase Ross' Paired Shares at Ross' election during a 60-day period beginning in December 1995, at a price of $5.625 per Paired Share. Starwood Capital may also elect to purchase Ross' Paired Shares at the same time on the same terms. (4) Based on information contained in a Schedule 13D dated January 31, 1995 filed by Starwood Capital, Barry S. Sternlicht and the following Starwood Partners: 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 48 52 Partners IX, L.P., Starwood Apollo Hotel Partners VIII, L.P. and Berl Holdings, L.P. Such Schedule 13D reports that SOFI II owns 299,600 Paired Shares and that SOFI II and Mr. Sternlicht have the power to vote and dispose of such shares and that the Starwood Partners hold units in the Realty Partnership and the Operating Partnership which are, subject to the 8.0% Paired Share ownership limit, exchangeable for an aggregate of 35,661,254 Paired Shares (approximately 74.6% of the outstanding Paired Shares after such exchange). Such units were acquired in the Reorganization described in Part I, Item 1 of this Joint Annual Report. Such Schedule 13D reports that because of the 8.0% ownership limit, the Starwood Partners cannot beneficially own more than 8.0% of the outstanding Paired Shares. The amount beneficially owned and the percent of class assumes that Starwood Partners exchange units for Paired Shares to the maximum extent permitted within the ownership limit provision. (5) Based on information contained in 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. Trustees and Officers of the Trust. The following table sets forth the beneficial ownership of the Paired Shares as of March 27, 1995 by each Trustee and each executive officer of the Trust named in the Summary Cash Compensation Table included in Item 11 hereof who owns Paired Shares and by all Trustees and executive officers of the Trust as a group. Except as otherwise provided below, each beneficial owner has sole voting and investment power with respect to all shares beneficially owned.
Amount Name of Beneficially Percent of Beneficial Owner Owned Class (1) ---------------- ------------ ---------- Jeffrey C. Lapin 85,750 (3) (2) Michael W. Mooney 25,000 (4) (2) Sherwin L. Samuels 93,461 (5) (2) Earle F. Jones 6,500 (6) (2) Barry M. Sternlicht 1,055,039 (7) 8.0% All Trustees and officers as a group 1,215,750 (8) 9.6%
- --------------------- (1) Based on the number of paired shares outstanding on March 27, 1995, including the exchange of units for Paired Shares as discussed in note (7) below. (2) Less than 1%. (3) Includes 80,000 shares subject to presently exercisable options and 5,000 shares owned in a pension plan of which Mr. Lapin is sole trustee and beneficiary. (4) Includes 25,000 shares subject to presently exercisable options. (5) Includes 14,320 shares held in a segregated account for the benefit of Mr. Samuels by a pension plan trust and 56,000 shares subject to presently exercisable options and 1,000 shares issuable upon exercise of paired warrants issued by the Trust and the Corporation. Does not include 359 shares owned by Mr. Samuels's son (of which shares Mr. Samuels disclaims beneficial ownership). (6) Includes 500 shares issuable upon exercise of paired warrants issued by the Trust and the Corporation. (7) Mr. Sternlicht and SOFI II have the power to vote and dispose of 299,600 Paired Shares held by SOFI II. The remaining shares reported above are issuable upon exchange of units of the Realty Partnership and the Operating Partnership. Because of the 8.0% Paired Share ownership limit, the shares reported above do not include the remainder of the 35,661,254 Paired Shares (approximately 74.6% of the outstanding Paired Shares) issuable upon exchange of all of the units issued to the Starwood Partners in the aggregate. Such units were acquired in the Reorganization described in Part I, Item 1 of this Joint Annual Report. See Notes (3) and (4) under "Certain Beneficial Owners" above. (8) Includes 161,000 shares that may be acquired upon the exercise of presently exercisable options 1,500 shares issuable upon exercise of paired warrants issued by the Trust and the Corporation and 755,439 49 53 shares issuable upon exchange of units of the Realty Partnership and the Operating Partnership (see note (7) above). Does not include shares owned by Mr. Samuels' son (see note (5) above). Directors and Officers of the Corporation. The following table sets forth the beneficial ownership of paired shares as of March 27, 1994 by each Director and each executive officer of the Corporation named in the Summary Cash Compensation Table included in Item 11 hereof who owns paired shares and by all Directors and executive officers of the Corporation as a group. Except as otherwise provided below, each beneficial owner has sole voting and investment power with respect to all shares beneficially owned.
Name of Number of Shares Beneficial Owner Beneficially Owned Percent of ---------------- ------------------ Class (1) ---------- Kevin E. Mallory 25,650 (3) (2) Bruce M. Ford 4,414 (4) (2) Earle F. Jones 6,500 (5) (2) Graeme W. Henderson 47,841 (6) (2) Barry M. Sternlicht 1,055,039 (7) 8.0% All Directors and officers as a group 1,139,444 (8) 8.6%(2) - ------------------------- (1) Based on the number of shares outstanding on March 27, 1994, including the exchange of units as described in note (7) below. (2) Less than 1%. (3) Includes 25,000 shares subject to presently exercisable options. (4) Includes 2,422 shares issuable upon exercise of paired warrants issued by the Trust and the Corporation, 172 of which are owned by Mr. Ford's wife. (5) Includes 500 shares issuable upon exercise of paired warrants issued by the Trust and the Corporation. (6) Includes 300 shares owned in a Keogh Plan and 16,000 shares issuable upon exercise of paired warrants issued by the Trust and the Corporation. (7) Mr. Sternlicht and SOFI II have the power to vote and dispose of 299,600 Paired Shares held by SOFI II. The remaining shares reported above are issuable upon exchange of units of the Realty Partnership and the Operating Partnership. Because of the 8.0% Paired Share ownership limit, the shares reported above do not include the remainder of the 35,661,254 Paired Shares (approximately 74.6% of the outstanding Paired Shares) issuable upon exchange of all of the units issued to the Starwood Partners in the aggregate. Such units were acquired in the Reorganization described in Part I, Item 1 of this Joint Annual Report. See Notes (3) and (4) under "Certain Beneficial Owners" above. (8) Includes 25,000 shares that may be acquired upon the exercise of presently exercisable options, 2,422 shares issuable upon exercise of paired warrants issued by the Trust and the Corporation and 755,439 shares issuable upon exchange of units of the Realty Partnership and the Operating Partnership (see note (7) above).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Management Obligations of Western Host General. Prior to December 31, 1992, Western Host, Inc., a wholly owned subsidiary of the Corporation, managed six hotels owned by limited partnerships of which Messrs. John F. Rothman and Ronald A. Young are general partners, one hotel owned by a general 50 54 partnership whose sole partners are Messrs. Young and Rothman, and one hotel owned by a partnership of which Western Host is the sole general partner and whose limited partners are affiliates of Messrs. Young and Rothman. Mr. Rothman was a Trustee of the Trust and a Director of the Corporation, and the Trust's President and Chief Executive Officer, from September 1986 until March 1990; Mr. Young was the Corporation's President and Chief Executive Officer, from December 1986 through December 1992, a Director of the Corporation from December 1986 until February 1994 and a Trustee of the Trust from June 1988 until February 1994. For its services as manager of these eight hotels described above (the "Western Host Hotels"), Western Host in each case received a management fee that generally was based upon the gross revenues, cash flows and/or operating profits of the hotel or the partnership that owned that property. For supervisory services rendered by Western Host in connection with any refurbishment or remodeling program or any construction of additional hotel guest rooms or other facilities at a Western Host Hotel, Western Host received a supervisory fee equal to 5% of the direct cost of those refurbishments, remodeling or construction. Western Host also acted as the purchasing agent with respect to certain furniture, fixtures and equipment and certain operating supplies required by a Western Host Hotel. To the extent these services were rendered other than in connection with a refurbishment, remodeling and/or construction program for which Western Host was entitled to a supervisory fee, Western Host was entitled to charge a fee ranging from 5% to 10% of the actual cost of the items purchased as the estimated cost incurred by Western Host in providing those services. In lieu of the partnerships that owned the Western Host Hotels (the "Western Host Partnerships") employing full-time bookkeepers at the partnership's respective properties, Western Host provided bookkeeping services and received a bookkeeping service fee. The fee was computed by adding together all direct labor costs incurred by Western Host in providing those services to all hotels that Western Host manages and allocating to each Western Host Hotel a pro rata portion of those costs, based on the number of rooms in that hotel as compared with the number of rooms in all hotels managed by Western Host. Since January 1, 1993, Western Host's day-to-day management obligations with respect to the Western Host Hotels have been performed on Western Host's behalf by Westland Hotel Corporation ("Westland"), a company owned by Mr. Young and of which he is president and chief executive officer. Management Fees Paid to Western Host; Certain Borrowings. Western Host is one of the general partners, together with Messrs. Young and Rothman, of Western Host Pasadena Partners (which owns a hotel in Pasadena, California) and Western Host San Francisco Partners (which owns a hotel in San Francisco, California). Western Host was the sole general partner of Western Host Santa Maria Partners, which prior to July 1993 owned a hotel in Santa Maria, California. Pursuant to the applicable partnership agreement, Western Host was entitled to receive for its management services (i) with respect to the Pasadena property, a minimum management fee equal to 5% of the hotel's gross receipts, plus an incentive management fee equal to 30% of the hotel's cash flow, subordinated to an annual preferred return to limited partners of 51 55 that partnership, and (ii) with respect to the San Francisco property, a management fee equal to all distributions made to limited partners of Western Host San Francisco Partners in excess of a specified preferred annual return on investment to those limited partners. As a general partner of these Western Host Partnerships, Western Host is contingently liable for the liabilities and obligations of each partnership and its hotel. Western Host was responsible, pursuant to management agreements, for the management of one hotel located in Stockton, California owned by a general partnership of which Messrs. Young and Rothman are the general partners and four hotels owned by limited Partnerships of which Messrs Young and Rothman are the general partners. These partnerships are Western Host Bakersfield Partners (which owns a hotel in Bakersfield, California), Western Host Fresno Partners (which owns a hotel in Fresno, California), Western Host Monterey Partners (which owns a hotel in Monterey, California), and Western Host Properties (which owns a hotel in Modesto, California). For its services as manager of the property in Stockton, Western Host was entitled to a management fee equal to 4% of the hotel's gross receipts; for its services as manager of the properties in Bakersfield, Fresno, Monterey, and Modesto, Western Host is entitled to a minimum management fee equal to 4% of the hotel's revenues, plus an incentive management fee based on the profits and cash flows of each hotel. For the year ended December 31, 1993, all of the management fees and other compensation payable to Western Host by the Western Host Partnerships was collected by Westland on Western Host's behalf. For Westland's services in managing the day-to-day operations of the Western Host Hotels, Westland is entitled to retain from the amounts paid by the Western Host partnerships a submanagement fee equal to 3% of each Western Host Hotel's operating revenues. For the year ended December 31, 1993, management fees and other compensation paid or payable to Western Host by the Western Host Partnerships and/or Westland after payment of Westland's submanagement fee totaled $308,000. At December 31, 1993, $242,000 of such compensation remained outstanding and had not been received. In connection with the settlement of litigation, $120,000 was paid in full settlement of the $242,000 amount. As of December 31, 1993, the Western Host Partnerships and/or Westland owed to Western Host and the Corporation, costs of refurbishments and amounts advanced for the expenses of the managed Western Host hotels totaling $100,000, which was included in Inventories, prepaid expenses and other assets at December 31, 1993. Restrictions on Competition; Term of Management Arrangements. The management agreements for the hotels located in Modesto and Monterey provide that Western Host may not own or manage another hotel within a 25-mile radius of each hotel. Similar provisions (with a five-mile radius) are contained in the management agreements for the hotels in Fresno and Bakersfield and in the partnership agreement pursuant to which Western Host manages the Pasadena property. 52 56 Each of Western Host's management agreements with a Western Host Partnership (other than the management agreement for the Stockton hotel) originally provided for the right of that partnership to terminate the agreement at any time on 60 days' prior notice. The management agreement for the hotel in Stockton states that such agreement is month-to-month and may be terminated by either Western Host or Messrs. Rothman and Young at any time. Western Host had the right and obligation to manage the hotels owned by each of Western Host San Francisco Partners and Western Host Pasadena Partners as long as Western Host remains a general partner of that Partnership. However, the partnership agreement for Western Host San Francisco Partners provides that certain transfers of voting securities of Western Host will terminate Western Host's right to manage the hotel owned by that partnership and to receive future management fees unless, either prior or subsequent to the transfer, a majority-in-interest of the limited partners of the partnership consent to the transfer. Although the Corporation's December 1986 acquisition of Western Host may have constituted such a transfer, the consent of the limited partners of Western Host San Francisco Partners with respect to that transfer was not solicited. Each of the management agreements between Western Host and Westland could be canceled by Western Host at any time upon 30 days' notice. In connection with the settlement of shareholder litigation (see Item 3 - "Legal Proceeding"), Messrs. Rothman and Young caused each of the Western Host Partnerships (other than Western Host Santa Maria Partners) to terminate Western Host's management obligations with respect to that partnership's hotel, indemnified the Corporation and Western Host against all claims that might be made against Western Host in connection with its status as a general partner of Western Host Santa Maria Partners, Western Host Pasadena Partners and Western Host San Francisco Partners or in connection with any fact or circumstance occurring since January 1, 1993 with respect to any of the Western Host Hotels, and delivered to the Corporation an irrevocable letter of credit in the amount of $800,000. If final settlement of the shareholder litigation is achieved within one year from the date the letter of credit was delivered to the Corporation, Western Host will agree to accept the termination of its management obligations with respect to the Western Host Hotels and will be entitled to draw on the letter of credit. If final settlement of the shareholder litigation is not consummated within the one-year period the letter of credit would be returned to Messrs. Rothman and Young, and the Corporation and Western Host would be free to pursue all claims, if any, they might have against Messrs Rothman and Young and the Western Host Partnerships in connection with the termination of Western Host's management obligations. In addition, $120,000 of the management fees and all costs and amounts advanced to the partnerships which were payable to Western Host were paid in full settlement of such amounts due at December 31, 1993. Other Relationships Sherwin L. Samuels, the General Counsel and Secretary of the Trust, is a partner through a professional corporation of the law firm of Sidley & Austin. Sidley & Austin provides legal services to the Trust, the Corporation and Western Host. 53 57 As part of the consideration to Starwood Capital in connection with the Reorganization, 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. In connection with the Offering consummated on July 6, 1995, Starwood Lodging paid to Starwood Capital approximately $3.7 million. Such payment was made from proceeds of the Offering and was treated as a public offering cost. 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 and approximately $27 million of first mortgage debt). In connection with the refinancing, the Realty Partnership paid $514,000 to one of the Senior Lenders and a portion of the lender warrants issued in connection with the prior Credit Agreement (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 in the amount of $786,000 and the remaining Lender Warrants were canceled. The transactions relating to the cancellation of Lender Warrants were recorded as a reduction to paid-in capital. For information with respect to the Share Purchase Agreements of Messrs. Henderson, Samuels, Jones and Ford see "Share Purchase Agreements" contained in Item 11 of this Joint Annual Report. For information with respect to the employment agreements of Messrs. Lapin, Mooney and Mallory see "Employment Agreements with Executive Officers" contained in Item 11 of this Joint Annual Report. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed. Financial Statements and Financial Statement Schedules The financial statements and financial statements schedules listed in the Index to Financial Statements and Financial Statements Schedules following the signature pages hereof are filed as part of this Joint Annual Report.
Exhibits -------- Exhibit No. Description of Exhibit - ----------- ---------------------- 2.1 Formation Agreement dated as of November 11, 1994 among the Trust, the Corporation, Starwood Capital and the Starwood Partners (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).(1) 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) 3.2 Amendment and Restatement of Articles of Incorporation of the Corporation (incorporated by reference to Exhibit 3B to the Trust's and the Corporation's Joint Current Report on Form 8-K dated January 31, 1995) 3.3 Trustees' Regulations of the Trust, as amended. 3.4 By-laws of the Corporation, as amended.
(1) The Securities and Exchange Commission file numbers of all filings made pursuant to the Securities Act of 1934, as amended, and referenced herein are: 1-6828 (Starwood Lodging Trust) and 1-7959 (Starwood Lodging Corporation). 54 58
Exhibit No. Description of Exhibit - ----------- ---------------------- 4.1 Pairing Agreement dated June 25, 1986, between the Trust and the Corporation, as amended. 4.2 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)). 4.3 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). 4.4 Form of Warrant Agreement dated as of January 28, 1993, among the Trust and the Corporation, on the one hand, and 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, N.A. (collectively the "Lenders"), on the other hand (Exhibit N to the Credit Agreement listed as Exhibit 10.23 below) (incorporated by reference to Exhibit 10.33 to the Trust's and the Corporation's Joint Annual Report on Form 10-K for the year ended December 31, 1992 (the "1992 Form 10-K")). 4.5 First Amendment to Warrant Agreement dated as of February 28, 1994, among the Trust, the Corporation and the Lenders (incorporated by reference to Exhibit 4.5 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")). 10.1 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")).(2) 10.2 Corporation Stock Non-Qualified Stock Option Plan (1986) of the Trust (incorporated by reference to Exhibit 10.9 to the 1986 Form 10-K).(2) 10.3 Stock Option Plan (1986) of the Corporation (incorporated by reference to Exhibit 10.10 to the 1986 Form 10-K).(2) 10.4 Trust Shares Option Plan (1986) of the Corporation (incorporated by reference to Exhibit 10.11 to the 1986 Form 10-K).(2)
- ----------------------- (2) Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto pursuant to Item 14(c) of Form 10-K. 55 59
Exhibit No. Description of Exhibit - ----------- ---------------------- 10.5 Form of Share Purchase and Pledge Agreement and related Promissory Note entered into pursuant to the Share Purchase Plan (1987) of the Trust, together with forms of Amendments Nos. 1 and 2 thereto (incorporated by reference to Exhibit 10.10 to the Trust's and the Corporation's Joint Annual Report on Form 10-K for the year ended December 31, 1990 (the "1990 Form 10-K")).(2) 10.6 Form(s) of Amendment No. 3 to Share Purchase and Pledge Agreement(s) and related Promissory Note(s) entered into pursuant to the Share Purchase Plan (1987) of the Trust (incorporated by reference to Exhibit 10.11 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")).(2) 10.7 Form of Share Purchase and Pledge Agreement and related Promissory Note entered into pursuant to the Share Purchase Plan (1987) of the Corporation, together with forms of Amendments Nos. 1 and 2 thereto (incorporated by reference to Exhibit 10.11 to the 1990 Form 10-K.)(2) 10.8 Form of Amendment No. 3 to Share Purchase and Pledge Agreement(s) and related Promissory Note(s) entered into pursuant to the Share Purchase Plan (1987) of the Corporation (incorporated by reference to Exhibit 10.13 to the 1991 Form 10-K).(2) 10.9 Amendment No. 1 to Share Purchase Agreement and Note dated as of March 25, 1992, between the Corporation and Bruce M. Ford (incorporated by reference to the Exhibit 10.5 to the 1991 Form 10-K).(2) 10.10 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, Sherwin L. Samuels and Jeffrey C. Lapin (incorporated by reference to Exhibit 10.29 to the 1991 Form 10-K).(2) 10.11 Form of Indemnification Agreement dated as of February 3, 1992, between the Corporation and each of Messrs. Ronald A. Young, Graeme W. Henderson, Bruce M. Ford, Earle M. Jones and William H. Ling (incorporated by reference to Exhibit 10.30 to the 1991 Form 10-K).(2) 10.12 Executive Employment Agreement dated as of January 31, 1995, between the Trust and Jeffrey C. Lapin.(2) 10.13 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 Form 8-K")).(2)
56 60
Exhibit No. Description of Exhibit - ----------- ---------------------- 10.14 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 1993 Form 10-K).(2) 10.15 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).(2) 10.16 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 Form 8-K).(2) 10.17 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).(2) 10.18 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).(2) 10.19 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). 10.20 Exchange Rights Agreement dated as of January 1, 1995 among the Trust, the Corporation, the Realty Partnership, the Operating Partnership and the Starwood Partners (incorporated by reference to Exhibit 2B to the Trust's and the Corporation's Joint Current Report on Form 8-K dated January 31, 1995). 10.21 Registration Rights Agreement dated as of January 1, 1995 among the Trust, the Corporation and Starwood Capital (incorporated by reference to Exhibit 2C to the Trust's and the Corporation's Joint Current Report on Form 8-K dated January 31, 1995). 10.22 Limited Partnership Agreement for the Realty Partnership among the Trust and the Starwood Partners dated as of December 15, 1994 (incorporated by reference to Exhibit 2D to the Trust's and the Corporation's Joint Current Report on Form 8-K dated January 31, 1995). 10.23 Limited Partnership Agreement for the Operating Partnership among the Corporation and the Starwood Partners dated as of December 15, 1994 (incorporated by reference to Exhibit 2E to the Trust's and the Corporation's Joint Current Report on Form 8-K dated January 31, 1995).
57 61
Exhibit No. Description of Exhibit - ----------- ---------------------- 10.24 Amended and Restated Credit Agreement dated as of March 24, 1995 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. 21. Subsidiaries of the Corporation. Hotel Investors of Arizona, Inc. Hotel Investors of Nebraska, Inc. Hotel Investors of Michigan, Inc. Hotel Investors of Missouri, Inc. Hotel Investors Corporation of Nevada Hotel Investors of Virginia, Inc. Columbus Operators, Inc. Lyntex Properties, Inc. Western Host, Inc. 23. Consent of Independent Accountants. 27. Financial Data Schedule. (b) Reports on Form 8-K. During the fourth quarter of 1994, the Trust and the Corporation filed a Joint Current Report on Form 8-K dated November 16, 1994 reporting the completion of definitive agreements providing for the Reorganization.
58 62 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. STARWOOD LODGING TRUST (Registrant) Date: March 28, 1995 By: /s/ Jeffrey C. Lapin ---------------------- Jeffrey C. Lapin, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Jeffrey C. Lapin President, Chief March 28, 1995 - ---------------------------- Operating Officer and Trustee (Principal Executive Officer) Jeffrey C. Lapin /s/ Michael W. Mooney Vice President and March 28, 1995 - ---------------------------- Chief Financial Officer (Principal Financial and Accounting Officer) Michael W. Mooney /s/ Jonathan Eilian Trustee March 28, 1995 - ---------------------------- Jonathan Eilian /s/ Madison F. Grose Trustee March 28, 1995 - ---------------------------- Madison F. Grose /s/ Earle F. Jones Trustee March 28, 1995 - ---------------------------- Earle F. Jones /s/ Barry S. Sternlicht Trustee March 28, 1995 - ---------------------------- Barry S. Sternlicht
59 63 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. STARWOOD LODGING CORPORATION (Registrant) Date: March 28, 1995 By: /s/ Kevin E. Mallory ---------------------- Kevin E. Mallory, Executive Vice President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Kevin E. Mallory Executive Vice President March 28, 1995 - ---------------------------- (Principal Executive Officer) Kevin E. Mallory /s/ Kenneth J. Biehl Vice President March 28, 1995 - ---------------------------- (Principal Accounting Officer) Kenneth J. Biehl /s/Earle F. Jones Director March 28, 1995 - ---------------------------- Earle F. Jones /s/ Bruce M. Ford Director March 28, 1995 - ---------------------------- Bruce M. Ford /s/Graeme W. Henderson Director March 28, 1995 - ---------------------------- Graeme W. Henderson
60 64 STARWOOD LODGING TRUST STARWOOD LODGING CORPORATION INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES AS OF DECEMBER 31, 1994 AND 1993 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1994 INDEPENDENT AUDITORS' REPORT ................................................................................ F-1 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION: Combined Balance Sheets ............................................................................ F-2 Combined Statements of Operations .................................................................. F-3 Combined Statements of Cash Flows .................................................................. F-4 Combined Statements of Shareholders' Equity ........................................................ F-5 STARWOOD LODGING TRUST: Balance Sheets ..................................................................................... F-6 Statements of Operations ........................................................................... F-7 Statements of Cash Flows ........................................................................... F-8 Statements of Shareholders' Equity ................................................................. F-9 STARWOOD LODGING CORPORATION: Balance Sheets .................................................................................... F-10 Statements of Operations .......................................................................... F-11 Statements of Cash Flows .......................................................................... F-12 Statements of Shareholders' Deficit ............................................................... F-13 NOTES TO FINANCIAL STATEMENTS .............................................................................. F-14 SCHEDULES: Schedule III- Real Estate and Accumulated Depreciation ............................................ F-35 Schedule -IV Mortgage Loans on Real Estate ........................................................ F-39
65 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-1 66 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION COMBINED BALANCE SHEETS
December 31, December 31, 1994 1993 ------------- ------------- ASSETS 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-2 67 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 24,055,000 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-3 68 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 9,232,000 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-4 69 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 $ 0 $(214,889,000) $ 8,708,000 =========== ========== ============ ========= ============= ============
See accompanying notes to financial statements. F-5 70 STARWOOD LODGING TRUST BALANCE SHEETS
December 31, December 31, 1994 1993 ------------- ------------- ASSETS 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-6 71 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-7 72 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-8 73 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 $ 0 $(147,742,000) $10,450,000 =========== ============ ========= ============= ===========
See accompanying notes to financial statements. F-9 74 STARWOOD LODGING CORPORATION BALANCE SHEETS
December 31, December 31, 1994 1993 ------------ ------------ ASSETS 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-10 75 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-11 76 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 notes .. 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-12 77 STARWOOD LODGING CORPORATION STATEMENTS OF SHAREHOLDERS' DEFICIT
Additional Share Total Common Paid - in Purchase Accumulated Shareholders' 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 0 (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 $ 0 $(67,147,000) $ (1,742,000) ========== =========== ======== ============ ============
See accompanying notes to financial statements. F-13 78 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-14 79 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. F-15 80 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. 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 F-16 81 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 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 ------------ ------------ ------------ ------------ 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-17 82 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 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 F-18 83 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. 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 F-19 84 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 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% F-20 85 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 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 F-21 86 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. 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 F-22 87 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 ======== ======== ========
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. F-23 88 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. 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. F-24 89 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 excise 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, 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. F-25 90 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 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 (which amount was accrued as of December 31, 1993) was paid in May 1994 by the Companies, and $350,000 will be paid by former officers of the F-26 91 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 have been 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. All amounts relating to the Shareholder Actions paid or expected to be paid have been accrued and expensed as of December 31, 1994. 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. 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 F-27 92 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. 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). F-28 93 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. 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. F-29 94 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 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-30 95 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:
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 Realty Partnership of approximately $12,600,000 in cash and certain hotel properties and first mortgage notes, in exchange for limited partnership F-31 96 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) -------------------------------------------------- STARWOOD LODGING Trust Corporation Combined -------- ----------- -------- 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 SLT REALTY AND SLC OPERATING PARTNERSHIPS Realty Operating Combined -------- ----------- -------- Hotel assets, net .................................................... $147,080 $ 38,177 $185,258 Total real estate investments ........................................ 210,299 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% 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 F-32 97 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-33 98
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-34 99 SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1994
Costs Gross amount Subsequent to at which carried Initial Cost to Company Acquisition at close of period ------------------------- ------------- --------------------------- STARWOOD LODGING TRUST (1) (1) Building and Building and Building and Description Encumbrances Land Improvements Improvements Land Improvements - ------------------------------------ ------------ ---------- ------------ ------------- ----------- ------------ HOTEL ASSETS: Embassy Suites - Phoenix, AZ $9,173,000 $2,889,000 $ 11,658,000 $ 564,000 $2,889,000 $ 12,223,000 Plaza Hotel - Tucson, AZ (2) 898,000 3,809,000 66,000 898,000 3,875,000 Vagabond Inn - Rosemead, CA 700,000 2,100,000 700,000 2,100,000 Vagabond Inn - Sacramento, CA 700,000 3,200,000 700,000 3,200,000 Vagabond Inn - Woodland Hills, CA 1,200,000 3,200,000 1,200,000 3,200,000 Hilton Inn - Gainesville, FL 1,002,000 3,759,000 1,582,000 1,002,000 5,341,000 Holiday Inn - Albany, GA 6,000,000 796,000 4,980,000 123,000 796,000 5,103,000 Best Western Riverfront Inn - 431,000 3,745,000 200,000 431,000 3,946,000 Savannah, GA Bay Valley Hotel - Bay City, MI 4,075,000 2,501,000 5,472,000 1,193,000 2,501,000 6,666,000 Bourbon Street Hotel and Casino - Las Vegas, NV 8,435,000 8,668,000 5,446,000 8,435,000 14,172,000 King 8 Hotel and Casino - Las 139,000 5,396,000 13,579,000 1,938,000 5,396,000 15,532,000 Vegas, NV Best Western Airport Inn - Albuquerque, NM (3) 285,000 4,880,000 12,000 285,000 4,892,000 Best Western Mesilla Valley Inn - Las Cruces, NM 1,150,000 3,295,000 28,000 860,000 3,320,000 Columbus Best Western - Columbus, OH 854,000 2,300,000 27,000 854,000 2,327,000 Portland Inn - Portland, OR 1,854,000 1,900,000 3,768,000 239,000 2,020,000 4,008,000 Riverside Inn - Portland, OR 1,300,000 3,375,000 235,000 1,420,000 3,610,000 Marriott Park Central - Dallas, TX 5,148,000(3) 3,814,000 8,018,000 591,000 3,815,000 8,608,000 Best Western Airport Inn - El Paso, TX 1,400,000 3,409,000 85,000 1,400,000 3,494,000 Residence Inn - Tysons Corner, VA 6,349,000 1,418,000 4,119,000 455,000 1,418,000 4,574,000 Days Inn Town Center - Seattle, WA 250,000 1,483,000 18,000 250,000 1,500,000 Meany Tower Hotel - Seattle, WA (3) 1,700,000 6,270,000 207,000 1,820,000 6,477,000 Sixth Avenue Inn - Seattle, WA 1,150,000 1,570,000 31,000 1,150,000 1,601,000 Tyee Motor Inn - Tumwater, WA (3) 1,008,000 1,562,000 969,000 944,000 2,531,000 ----------- ----------- ------------ ----------- ----------- ------------ $32,738,000 $41,177,000 $108,219,000 $14,009,000 $41,184,000 $122,300,000 ----------- ----------- ------------ ----------- ----------- Land 41,184,000 Furniture and Equipment 25,124,000 ------------ Totel hotels and land under lease $188,608,000(5) ============
(4) Accumulated Depreciation & Year of Date Description Amortization Construction Acquired Life - ------------------------------------ ------------ ------------ -------- ---- HOTEL ASSETS: Embassy Suites - Phoenix, AZ $ 3,690,000 1981 12/13/83 35 Plaza Hotel - Tucson, AZ 1,147,000 1971 9/16/86 35 Vagabond Inn - Rosemead, CA 524,000 1974 9/16/86 35 Vagabond Inn - Sacramento, CA 754,000 1975 9/16/86 35 Vagabond Inn - Woodland Hills, CA 754,000 1973 9/16/86 35 Hilton Inn - Gainesville, FL 1,157,000 1974 11/24/86 35 Holiday Inn - Albany, GA 848,000 1989 6/9/89 35 Best Western Riverfront Inn - 1,815,000 1971 12/11/86 35 Savannah, GA Bay Valley Hotel - Bay City, MI 2,001,000 1973 5/10/84 35 Bourbon Street Hotel and Casino - Las Vegas, NV 13,918,000 1964/1975 2/01/88 35 King 8 Hotel and Casino - Las 8,225,000 1974/1979 2/1/88 35 Vegas, NV Best Western Airport Inn - Albuquerque, NM 1,212,000 1980 9/16/86 35 Best Western Mesilla Valley Inn - Las Cruces, NM 827,000 1974 9/16/86 35 Columbus Best Western - Columbus, OH 197,000 1971 1/24/92 35 Portland Inn - Portland, OR 898,000 1962 9/16/86 35 Riverside Inn - Portland, OR 807,000 1964 9/16/86 35 Marriott Park Central - Dallas, TX 4,435,000 1972 9/09/88 35 Best Western Airport Inn - El Paso, TX 815,000 1974 9/16/86 35 Residence Inn - Tysons Corner, VA 1,326,000 1984 7/01/84 35 Days Inn Town Center - Seattle, WA 1,305,000 1957 9/16/86 13 Meany Tower Hotel - Seattle, WA 1,489,000 1932 9/16/86 35 Sixth Avenue Inn - Seattle, WA 1,797,000 1959 9/16/86 13 Tyee Motor Inn - Tumwater, WA 528,000 1961 2/17/87 35 ----------- $50,469,000 Land Furniture and Equipment 21,429,000 ----------- Total hotels and land under lease $71,899,000 ===========
(1) As of December 31, 1994, real estate and furniture and equipment have a cost of $189,367,000 for federal tax income purposes. (2) Land cost includes costs allocated to leasehold interest in land of $548,000 at the Tucson property. (3) Land costs represents costs allocated to leasehold interest in land. (4) Includes reserve for losses discussed in 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-35 100 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-36 101 SCHEDULE III (Continued) REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1994 Costs Gross amount Subsequent to at which carried Initial Cost to Company Acquisition at close of period ------------------------- ------------- --------------------------- HOTEL INVESTORS CORPORATION (1) (1) (3) Building and Building and Building and Description Encumbrances Land Improvements Improvements Land Improvements - ------------------------------------ ------------ ----------- ------------ ------------- ----------- ------------ HOTEL ASSETS: Embassy Suites - Phoenix, AZ $45,000 $ 45,000 Plaza Hotel - Tucson, AZ $ 595,000 $ 978,000 Hilton Inn - Gainesville, FL 39,000 39,000 Holiday Inn - Albany, GA 64,000 64,000 Bay Valley Hotel - Bay City, MI 179,000 179,000 Best Western North - Columbus, OH 61,000 4,000 62,000 Best Western Airport Inn - Albuquerque, NM 325,000 372,000 Best Western Mesilla Valley Inn - Las Cruces, NM 252,000 Portland Inn - Portland, OR 2,185,000 78,000 2,185,000 78,000 Riverside Inn - Portland, OR 2,123,000 87,000 26,000 2,124,000 113,000 Best Western Airport Inn - El Paso, TX 18,000 18,000 Residence Inn - Tysons Corner, VA 33,000 33,000 Days Inn Town Center - Seattle, WA 429,000 4,000 204,000 429,000 208,000 Meany Tower Hotel - Seattle, WA 3,437,000 302,000 66,000 3,437,000 368,000 Sixth Avenue Inn - Seattle, WA 1,515,000 24,000 118,000 1,515,000 142,000 Best Western Inn - Savannah, GA 47,000 47,000 Marriott Hotel - Milwaukee, WI $13,106,000 2,500,000 17,422,000 3,499,000 2,500,000 20,920,000 ----------- ----------- ----------- ---------- ----------- ----------- $13,106,000 $13,109,000 $17,839,000 $4,477,000 $13,796,000 $22,316,000 ----------- ----------- ----------- ---------- ----------- Land 13,796,000 Furniture and Equipment 15,630,000 ---------- Total hotels and land under lease $51,742,000 ===========
(2) HOTEL INVESTORS CORPORATION Accumulated Depreciation & Year of Date Description Amortization Construction Acquired Life - ------------------------------------ ------------ ------------ -------- ---- HOTEL ASSETS: Embassy Suites - Phoenix, AZ $7,000 1981 12/13/83 35 Plaza Hotel - Tucson, AZ 182,000 1971 9/16/86 35 Hilton Inn - Gainesville, FL 11,000 1974 11/24/86 35 Holiday Inn - Albany, GA 6,000 1989 6/9/89 35 Bay Valley Hotel - Bay City, MI 25,000 1973 5/10/84 35 Best Western North - Columbus, OH 3,000 Best Western Airport Inn - Albuquerque, NM 80,000 1980 9/16/86 35 Best Western Mesilla Valley Inn - Las Cruces, NM 25,000 1974 9/16/86 35 Portland Inn - Portland, OR 480,000 1962 9/16/86 35 Riverside Inn - Portland, OR 507,000 1964 9/16/86 35 Best Western Airport Inn - El Paso, TX 3,000 1974 9/16/86 35 Residence Inn - Tysons Corner, VA 7,000 1984 7/01/84 35 Days Inn Town Center - Seattle, WA 257,000 1957 9/16/86 13 Meany Tower Hotel - Seattle, WA 869,000 1932 9/16/86 35 Sixth Avenue Inn - Seattle, WA 779,000 1959 9/16/86 13 Best Western Inn - Savannah, GA 2,000 1961 2/17/87 35 Marriott Hotel - Milwaukee, WI 1,964,000 ---------- $ 5,207,000 Land Furniture and Equipment 12,058,000 ----------- Total hotels and land under lease $17,265,000 ===========
(1) As of December 31, 1994, real estate and furniture and equipment have a cost of $51,339,000 for federal tax income purposes. (2) Includes reserve for losses discussed in Notes 1 and 3 of Notes to Financial Statements. (3) Amount excludes $1,225,000 third trust deed note payable to the Trust and $15,691,000 fourth trust deed note payable. See Note 5 of Notes to Financial Statements. (Continued) F-37 102 SCHEDULE III (Continued) REAL ESTATE AND ACCUMULATED DEPRECIATION A reconciliation of the Corporation'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-38 103 SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 1994
Principal amount Face Carrying of loans subject Interest Final Periodic Amount of Amount of to delinquent Description Rate Maturity Payment Prior Liens Mortgages Mortgages (1) principal or interest - ------------------------------------- -------- -------- ---------------------- ----------- ------------- --------------------- STARWOOD LODGING TRUST First Mortgages: Vagabond Inns - Stockton and Modesto, CA 10.00% 1996 (2) no $ 1,995,000 $ 1,780,000 Ramada Inn - Jefferson City, MO 11.00% 1997 (3) no 4,500,000 1,774,000 Days Inn - Albany, GA 10.00% 1996 $12,554 (5) no 1,050,000 745,000 Days Inn - Irving, TX 9.00% 1997 13,276 (8) no 1,650,000 1,509,000 Vantage Hotel - Tucker, GA 9.00% 1998 9,000 (9) no 1,985,000 1,952,000 Sheraton - New Port Richey, FL and Holiday Inn - Brunswick, GA 8% 2001 (6) no 3,070,000 3,060,000 Holiday Inn - Jacksonville, FL 9% 2001 (7) no 2,300,000 2,299,000 Ramada Inn - Fayetteville, NC 9% 2006 (10) no 800,000 796,000 Second Mortgages: Viscount Hotel - Dallas, TX 8.75% 2017 1,982 (4) yes 264,000 234,000 Allowance for loan losses (100,000) ----------- ----------- --------------------- $17,614,000 $14,049,000 =========== =========== =====================
(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-39 104 SCHEDULE IV (Continued) RECONCILIATION OF MORTGAGE LOANS
Year Year Year Ended Ended Ended December 31, December 31, 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 repayments (2,382,000) (353,000) (957,000) Amortization of discount Allowance for loan loss (320,000) (223,000) Discount for pre-payment (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-40 105
EXHIBIT INDEX Exhibit No. Description of Exhibit - ----------- ---------------------- 2.1 Formation Agreement dated as of November 11, 1994 among the Trust, the Corporation, Starwood Capital and the Starwood Partners (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).(1) 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) 3.2 Amendment and Restatement of Articles of Incorporation of the Corporation (incorporated by reference to Exhibit 3B to the Trust's and the Corporation's Joint Current Report on Form 8-K dated January 31, 1995) 3.3 Trustees' Regulations of the Trust, as amended. 3.4 By-laws of the Corporation, as amended. (1) The Securities and Exchange Commission file numbers of all filings made pursuant to the Securities Act of 1934, as amended, and referenced herein are: 1-6828 (Starwood Lodging Trust) and 1-7959 (Starwood Lodging Corporation).
106
Exhibit No. Description of Exhibit - ----------- ---------------------- 4.1 Pairing Agreement dated June 25, 1986, between the Trust and the Corporation, as amended. 4.2 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)). 4.3 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). 4.4 Form of Warrant Agreement dated as of January 28, 1993, among the Trust and the Corporation, on the one hand, and 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, N.A. (collectively the "Lenders"), on the other hand (Exhibit N to the Credit Agreement listed as Exhibit 10.23 below) (incorporated by reference to Exhibit 10.33 to the Trust's and the Corporation's Joint Annual Report on Form 10-K for the year ended December 31, 1992 (the "1992 Form 10-K")). 4.5 First Amendment to Warrant Agreement dated as of February 28, 1994, among the Trust, the Corporation and the Lenders. 10.1 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")).(2) 10.2 Corporation Stock Non-Qualified Stock Option Plan (1986) of the Trust (incorporated by reference to Exhibit 10.9 to the 1986 Form 10-K).(2) 10.3 Stock Option Plan (1986) of the Corporation (incorporated by reference to Exhibit 10.10 to the 1986 Form 10-K).(2) 10.4 Trust Shares Option Plan (1986) of the Corporation (incorporated by reference to Exhibit 10.11 to the 1986 Form 10-K).(2)
- ----------------------- (2) Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto pursuant to Item 14(c) of Form 10-K. 107
Exhibit No. Description of Exhibit - ----------- ---------------------- 10.5 Form of Share Purchase and Pledge Agreement and related Promissory Note entered into pursuant to the Share Purchase Plan (1987) of the Trust, together with forms of Amendments Nos. 1 and 2 thereto (incorporated by reference to Exhibit 10.10 to the Trust's and the Corporation's Joint Annual Report on Form 10-K for the year ended December 31, 1990 (the "1990 Form 10-K")).(2) 10.6 Form(s) of Amendment No. 3 to Share Purchase and Pledge Agreement(s) and related Promissory Note(s) entered into pursuant to the Share Purchase Plan (1987) of the Trust (incorporated by reference to Exhibit 10.11 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")).(2) 10.7 Form of Share Purchase and Pledge Agreement and related Promissory Note entered into pursuant to the Share Purchase Plan (1987) of the Corporation, together with forms of Amendments Nos. 1 and 2 thereto (incorporated by reference to Exhibit 10.11 to the 1990 Form 10-K.)(2) 10.8 Form of Amendment No. 3 to Share Purchase and Pledge Agreement(s) and related Promissory Note(s) entered into pursuant to the Share Purchase Plan (1987) of the Corporation (incorporated by reference to Exhibit 10.13 to the 1991 Form 10-K).(2) 10.9 Amendment No. 1 to Share Purchase Agreement and Note dated as of March 25, 1992, between the Corporation and Bruce M. Ford (incorporated by reference to the Exhibit 10.5 to the 1991 Form 10-K).(2) 10.10 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, Sherwin L. Samuels and Jeffrey C. Lapin (incorporated by reference to Exhibit 10.29 to the 1991 Form 10-K).(2) 10.11 Form of Indemnification Agreement dated as of February 3, 1992, between the Corporation and each of Messrs. Ronald A. Young, Graeme W. Henderson, Bruce M. Ford, Earle M. Jones and William H. Ling (incorporated by reference to Exhibit 10.30 to the 1991 Form 10-K).(2) 10.12 Executive Employment Agreement dated as of January 31, 1995, between the Trust and Jeffrey C. Lapin.(2) 10.13 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 Form 8-K")).(2)
108
Exhibit No. Description of Exhibit - ----------- ---------------------- 10.14 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 1993 Form 10-K).(2) 10.15 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).(2) 10.16 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 Form 8-K).(2) 10.17 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).(2) 10.18 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).(2) 10.19 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). 10.20 Exchange Rights Agreement dated as of January 1, 1995 among the Trust, the Corporation, the Realty Partnership, the Operating Partnership and the Starwood Partners (incorporated by reference to Exhibit 2B to the Trust's and the Corporation's Joint Current Report on Form 8-K dated January 31, 1995). 10.21 Registration Rights Agreement dated as of January 1, 1995 among the Trust, the Corporation and Starwood Capital (incorporated by reference to Exhibit 2C to the Trust's and the Corporation's Joint Current Report on Form 8-K dated January 31, 1995). 10.22 Limited Partnership Agreement for the Realty Partnership among the Trust and the Starwood Partners dated as of December 15, 1994 (incorporated by reference to Exhibit 2D to the Trust's and the Corporation's Joint Current Report on Form 8-K dated January 31, 1995). 10.23 Limited Partnership Agreement for the Operating Partnership among the Corporation and the Starwood Partners dated as of December 15, 1994 (incorporated by reference to Exhibit 2E to the Trust's and the Corporation's Joint Current Report on Form 8-K dated January 31, 1995).
109
Exhibit No. Description of Exhibit - ----------- ---------------------- 10.24 Amended and Restated Credit Agreement dated as of March 24, 1995 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. 21. Subsidiaries of the Corporation. Hotel Investors of Arizona, Inc. Hotel Investors of Nebraska, Inc. Hotel Investors of Michigan, Inc. Hotel Investors of Missouri, Inc. Hotel Investors Corporation of Nevada Hotel Investors of Virginia, Inc. Columbus Operators, Inc. Lyntex Properties, Inc. Western Host, Inc. 23. Consent of Independent Accountants. 27. Financial Data Schedule.
EX-3.3 2 TRUSTEE'S REGULATIONS OF THE TRUST 1 EXHIBIT 3.3 TRUSTEES' REGULATIONS STARWOOD LODGING TRUST ADOPTED AS OF AUGUST 15, 1969, AS AMENDED THROUGH JANUARY 31, 1995. 2 INDEX TO TRUSTEES' REGULATIONS OF STARWOOD LODGING TRUST
PAGE ---- ARTICLE I TRUSTEES SECTION 1. Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2. Qualifying Shares not Required . . . . . . . . . . . . . . . . . . 1 SECTION 3. Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 4. Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 5. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 6. Place of Meeting. . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 7. Organization Meeting . . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 8. Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 9. Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 10. Adjourned Meetings . . . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 11. Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 12. Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 13. Powers and Duties . . . . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 14. Transactions with Interested Persons . . . . . . . . . . . . . . . 3 ARTICLE II OFFICERS SECTION 1. Enumeration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 2. Powers and Duties of the Chairman . . . . . . . . . . . . . . . . . 7 SECTION 3. Powers and Duties of the President . . . . . . . . . . . . . . . . 7 SECTION 4. Powers and Duties of the Vice Presidents . . . . . . . . . . . . . 7 SECTION 5. Duties of the Secretary . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 6. Duties of the Treasurer . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE III SHAREHOLDERS SECTION 1. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 2. Place of Meeting . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 3. Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 4. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 4A. Nomination of Trustees . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 5. Adjourned Meetings . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 6. Notice of Regular or Special Meetings . . . . . . . . . . . . . . . 10 SECTION 7. Notice of Adjourned Meetings . . . . . . . . . . . . . . . . . . . 11
-i- 3
PAGE ---- SECTION 8. Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 9. Consent of Absentees . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 10. Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 11. No Cumulative Voting . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 12. Conduct of Meetings; Inspectors of Election . . . . . . . . . . . . 12 SECTION 13. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE IV MISCELLANEOUS SECTION 1. Record Dates and Closing of Transfer Books . . . . . . . . . . . . 14 SECTION 2. Inspection of Trust Records . . . . . . . . . . . . . . . . . . . . 15 SECTION 3. Inspection of Trustees' Regulations . . . . . . . . . . . . . . . . 15 SECTION 4. Representation of Shares of Corporations . . . . . . . . . . . . . 15 ARTICLE V SEAL ARTICLE VI AMENDMENTS SECTION 1. By Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 2. By Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE VII DEFINITIONS
-ii- 4 ARTICLE I TRUSTEES SECTION 1. NUMBER. There shall be not less than three (3) nor more than fifteen (15) Trustees; within such limits, the number of Trustees may be fixed, increased or decreased from time to time by the Trustees or the Shareholders. SECTION 2. QUALIFYING SHARES NOT REQUIRED. Trustees need not be Shareholders of the Trust. SECTION 3. QUORUM. A majority of the Trustees shall constitute a quorum. SECTION 4. ELECTION. The Trustees shall be divided, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as reasonably possible, with the term of office of the first class to expire at the 1995 Annual Meeting of Shareholders, the term of office of the second class to expire at the 1996 Annual Meeting of Shareholders and the term of office of the third class to expire at the 1997 Annual Meeting of Shareholders, with each Trustee to hold office until his or her successor shall have been duly elected and qualified. At each Annual Meeting of Shareholders, commencing with the 1995 Annual Meeting, (i) Trustees elected to succeed those Trustees whose terms then expire shall be elected for a term of office to expire at the third succeeding Annual Meeting of Shareholders after their election, with each Trustee to hold office until his or her successor shall have been duly elected and qualified, and (ii) if authorized by a resolution of the Board of Trustees, Trustees may be elected to fill any vacancy on the Board of Trustees, regardless of how such vacancy shall have been created. SECTION 5. VACANCIES. Vacancies occurring among the Trustees (including vacancies created by increases in number) may be filled by a majority of the remaining Trustees, though less than a quorum, or by a sole remaining Trustee, and the person so appointed shall hold office for a term expiring at the Annual Meeting of Shareholders at which the term of office of the class to which they have been appointed expires and until his successor is elected and qualified. SECTION 6. PLACE OF MEETING. Meetings of the Trustees shall be held at the principal office of the Trust or at such place within or without the State of Maryland as is fixed from time to time by resolution of the Trustees or by written consent of all Trustees. Whenever a place other than the principal office is fixed by resolution as the place at which future meetings are to be held, written notice thereof shall be sent not later than the following business day to all Trustees who were absent from the meeting at which the resolution was adopted. 5 SECTION 7. ORGANIZATION MEETING. Immediately following each Annual Meeting of Shareholders, a regular meeting of the Trustees shall be held for the purpose of organizing, electing officers, and transacting other business. Notice of such meetings need not be given. SECTION 8. REGULAR MEETINGS. Regular meetings of the Board of Trustees need not be held. SECTION 9. SPECIAL MEETINGS. Special meetings of the Trustees may be called at any time by the President, and the President shall call a special meeting at any time upon the written request of two (2) Trustees. Written notice of the time and place of a special meeting shall be given to each Trustee, either personally or by sending a copy thereof by mail or by telegraph, charges prepaid, to his address appearing on the books of the Trust or theretofore given by him to the Trust for the purpose of notice. In case of personal service, such notice shall be so delivered at least twenty-four (24) hours prior to the time fixed for the meeting. If such notice is mailed it shall be deposited in the United States mail in the place in which the principal office of the Trust is located at least seventy-two (72) hours prior to the time fixed for the holding of the meeting. If telegraphed, it shall be delivered to the telegraph company at least forty-eight (48) hours prior to the time fixed for the holding of the meeting. If notice is not so given by the Secretary, it may be given by the President, or the Trustees requesting the meeting may issue the call and give the notice. SECTION 10. ADJOURNED MEETINGS. A quorum of the Trustees may adjourn any Trustees' meeting to meet again at a stated day and hour. In the absence of a quorum a majority of the Trustees present may adjourn from time to time to meet again at a stated day and hour prior to the time fixed for the next regular meeting of the Trustees. The motion for adjournment shall be lodged with the records of the Trust. Notice of the time and place of an adjourned meeting need not be given to any Trustee if the time and place is fixed at the meeting adjourned. SECTION 11. WAIVER OF NOTICE. The transactions of any meeting of the Trustees, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if either before or after the meeting each of the Trustees not present signs 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 lodged with the Trust records or made a part of the minutes of the meeting. SECTION 12. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the Trustees may be taken without a meeting, if a majority of the Trustees shall -2- 6 individually or collectively consent in writing to such action. Such written consent or consents shall be lodged with the records of the Trust. Such action by written consent shall have the same force and effect as a vote of the Trustees adopted at a meeting duly called and held. SECTION 13. POWERS AND DUTIES. The powers and duties of the Trustees, in addition to the powers and duties set forth in the Declaration, are: (a) Selection and Removal of Officers, Agents and Employees. To select all the other officers, agents and employees of the Trust, to remove them at pleasure, either with or without cause, to prescribe for them duties consistent with the Declaration and the Trustees' Regulations, and to fix their compensation. (b) Authorization of Signatures. From time to time to designate the person or persons authorized to sign or endorse checks, drafts, or other orders for the payment of money, issued in the name of or payable to the Trust. (c) Fixing Principal Office and Place of Meetings. From time to time to change the location of the principal office of the Trust and from time to time to designate any place within or without the State of Maryland as the place at which meetings of Trustees or of the Shareholders shall be held. (d) Committees. To appoint as executive committee and other committees, and to delegate to the executive committee any of the powers and authority of the Trustees over the business and affairs of the Trust, except the power to declare dividends and to adopt, amend or repeal Trustees' Regulations. It is intended that the executive committee will review applications for loans approved by the Advisor and suggest changes in their terms; grant final approval subject to the stated conditions of the Board of Trustees, to applications which have been preliminarily approved by the Trustees: modify loan commitments when insubstantial changes are necessary; approve borrowings for terms of less than one year; and hire and set salaries for employees of the Trust. The Trustees shall have the power to prescribe the manner in which proceedings of the executive committee and other committees shall be conducted. The executive committee shall be composed of two or more Trustees. (e) General Powers. Generally to exercise such other powers as are usually vested in directors of corporations organized under the laws of the State of Maryland. SECTION 14. TRANSACTIONS WITH INTERESTED PERSONS. (a) Notwithstanding anything to the contrary contained in these -3- 7 Trustees' Regulations, in addition to any affirmative vote required either by law, the Partnership Agreement, the Declaration of Trust of the Trust or these Trustees' Regulations, any Transaction involving the Trust or any of its subsidiaries or the Realty Partnership shall require the affirmative vote of a majority of the Trustees ("Disinterested Members") on the Board of Trustees of the Trust who are not employees, officers, directors, Affiliates or Associates of the Interested Person who or which is a party to the Transaction. (b) As used in this Section 14: (i) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on January 1, 1995. (ii) A Person shall "Beneficially Own" and be the "Beneficial Owner" of any Paired Shares or Units: (A) which such Person or any of its Affiliates or Associates beneficially owns, directly or indirectly, within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as in effect on January 1, 1995; or (B) which such Person or any of its Affiliates or Associates has (I) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (II) the right to vote pursuant to any agreement, arrangement or understanding (but neither such Person nor any such Affiliate or Associate shall be deemed to be the Beneficial Owner of any Paired Shares or Units solely by reason of a revocable proxy granted for a particular meeting of shareholders, pursuant to a public solicitation of proxies for such meeting, and with respect to which Paired Shares or Units neither such Person nor any such Affiliate or Associate is otherwise deemed the Beneficial Owner); or (C) which are beneficially owned, directly or indirectly, within the meaning of the Rule 13d-3 under the Securities Exchange Act of 1934, as in effect on January 1, 1995, by any other Person with which such Person or any of its Affiliates or Associates has any agreement, arrangement or -4- 8 understanding for the purpose of acquiring, holding, voting (other than solely by reason of a revocable proxy as described in subparagraph (B) above) or disposing of any Paired Shares or Units. (iii) "Corporation" shall mean Starwood Lodging Corporation (formerly Hotel Investors Corporation), a Maryland corporation. (iv) "Interested Person" shall mean any Person who or which is the Beneficial Owner, directly or indirectly, of 5% or more of the outstanding Paired Shares or the outstanding Units or who or which is an Affiliate or Associate of the Trust, the Corporation or either of the Partnerships. For the purposes of determining whether a Person is an Interested Person, the number of Paired Shares or Units deemed to be outstanding shall include Paired Shares or Units deemed owned through application of paragraphs (A), (B) and (C) of paragraph (ii) above but shall not include any other unissued Paired Shares or Units which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. (v) "Paired Shares" shall mean the shares of common stock of the Corporation and the shares of beneficial interest of the Trust which are paired pursuant to the Pairing Agreement dated June 25, 1980 between the Trust and the Corporation, as it may be amended from time to time. (vi) "Partnership Agreement" shall mean the Limited Partnership Agreement of the Realty Partnership, as it may be amended from time to time. (vii) "Partnerships" shall mean the Realty Partnership and SLC Operating Limited Partnership, a Delaware limited partnership. (viii) "Person" shall mean any individual, limited partnership, general partnership, corporation, limited liability company or any other firm or entity. (ix) "Realty Partnership" shall mean SLT Realty Limited Partnership, a Delaware limited partnership. (x) "Transaction" shall mean 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 for Paired Shares, or any action to be taken -5- 9 by the Trust, the Corporation or the Partnership with respect to the senior debt of the Realty Partnership. (xi) "Units" shall have the meaning set forth in the Partnership Agreement. (d) A majority of the Disinterested Members shall have the power and duty to determine, on the basis of information known to them after reasonable inquiry, all facts necessary to determine compliance with this Section 14, including, without limitation, (i) whether a Person is an Interested Person, (ii) the number of Paired Shares or Units that any Person Beneficially Owns, and (iii) whether a Person is an Affiliate or Associate of another. A majority of the Disinterested Members shall have the right to demand that any Person who is reasonably believed to be an Interested Person (or who holds of record Paired Shares or Units that any Interested Person Beneficially Owns) supply the Corporation with complete information as to (i) the record owner(s) of all Paired Shares or Units that such Person who is reasonably believed to be an Interested Person Beneficially Owns, (ii) the number of, and class or series of, Paired Shares or Units that such Person who is reasonably believed to be an Interested Person Beneficially Owns and the number(s) of the certificate(s), if any, evidencing such Paired Shares or Units and (iii) any other factual matter relating to the applicability or effect of this Section 14, as may be reasonably requested of such Person, and such Person shall furnish such information within 10 days after receipt of such demand. (e) Nothing contained in this Section 14 shall be construed to relieve any Interested Person from any fiduciary obligation imposed by law. (f) Notwithstanding anything to the contrary contained in these Trustees' Regulations this Section 14 may be amended or repealed only by a majority of Trustees on the Board of Trustees of the Trust who are not employees, officers, Affiliates or Associates of the Trust, the Corporation, the Partnerships or any Interested Person. ARTICLE II OFFICERS SECTION 1. ENUMERATION. The officers of the Trust shall be a Chairman, a President, one or more Vice-Presidents, a Secretary, a Treasurer, and such other officers as are elected by the Trustees. Officers shall be elected by and shall hold office -6- 10 at the pleasure of the Trustees. Any two or more offices, except those of Chairman and President, President and Secretary, or President and Assistant Secretary, may be held by the same person. SECTION 2. POWERS AND DUTIES OF THE CHAIRMAN. The Chairman shall, if present, preside at all meetings of the Trustees and of the Shareholders and exercise and perform such other powers and duties as may be from time to time assigned to him by the Trustees. The Chairman shall have the power and authority to execute all written instruments on behalf of the Trust of every nature whatsoever. He shall be, ex officio, a member of all standing committees. SECTION 3. POWERS AND DUTIES OF THE PRESIDENT. The President shall be the chief executive officer of the Trust and, subject to the control of the Trustees, shall have general supervision, direction and control of the business of the Trust and its employees and shall have such other powers and duties as are usually vested in the office of president and chief executive officer of a corporation. The President shall have the power and authority to execute all written instruments on behalf of the Trust of every nature whatsoever. In the absence of the Chairman, he shall preside at all meetings of the Trustees and of the Shareholders. He shall be, ex officio, a member of all standing committees. SECTION 4. POWERS AND DUTIES OF THE VICE PRESIDENTS. In the absence or disability of the President, the Vice-Presidents in order of their rank as fixed by the Trustees or, if not ranked, the Vice-President designated by the Trustees, shall perform all of the duties of the President and when so acting shall have all the powers of and be subject to all of the restrictions upon the President. The Vice-Presidents shall have the power and authority to execute on behalf of the Trust all written instruments of every nature whatsoever. The Vice-Presidents shall have such other powers and perform such other duties as are prescribed for them from time to time by the Trustees. SECTION 5. DUTIES OF THE SECRETARY. The Secretary shall (a) Minutes. Keep full and complete minutes of the meetings of the Trustees and of the meetings of the Shareholders and give notice, as required, of all such meetings; (b) Trust Seal. Keep the seal of the Trust and affix the same to all instruments executed by the Trust which require it; -7- 11 (c) Records. Maintain custody of and keep the records of the Trust except such as are in the custody of the Treasurer; (d) General Duties. Generally, perform all duties which pertain to his office and which are required by the Trustees. SECTION 6. DUTIES OF THE TREASURER. The Treasurer shall (a) Books of Account. Maintain custody of and keep the books of account of the Trust; (b) Receipt, Deposit and Disbursement of Funds. Receive, deposit and disburse funds belonging to the Trust; (c) General Duties. Generally, perform all duties which pertain to his office and which are required by the Trustees. ARTICLE III SHAREHOLDERS SECTION 1. QUORUM. The presence in person or by proxy of Persons entitled to vote a majority of the voting shares at any meeting of Shareholders shall constitute a quorum. The Shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment notwithstanding the withdrawal of enough Shareholders to leave less than a quorum. SECTION 2. PLACE OF MEETING. Meetings of the Shareholders shall be held at the principal office of the Trust or at another convenient location within or without the State of Maryland as is designated by the Trustees or by the written consent of all Shareholders entitled to vote thereat, given either before or after the meeting and filed with the Secretary of the Trust. SECTION 3. ANNUAL MEETING. A regular annual meeting of the Shareholders shall be held subsequent to the delivery to all Shareholders entitled to vote thereat of the annual report for the preceding fiscal year. The annual meeting shall be held no later than the expiration of six calendar months following the end of each preceding fiscal year beginning with the first full fiscal year on such business day and at such time as shall be designated by the Trustees. -8- 12 SECTION 4. SPECIAL MEETINGS. Special meetings of the Shareholders may be held at any time for any purpose or purposes. Such special meetings may be called at any time by the President or by the Trustees or by any two or more Trustees, or by one or more Shareholders holding not less than 25% of the outstanding Shares of the Trust. SECTION 4A. NOMINATION OF TRUSTEES. Nominations of Persons for election as Trustees at an annual meeting of the Shareholders may be made at such meeting only by or at the direction of the Trustees, by any nominating committee or person(s) appointed by the Trustees, or by any Shareholder entitled to vote for the election of Trustees at the meeting who complies with the notice procedures set forth in this Section 4A. Any Shareholder entitled to vote for the election of Trustees may nominate one or more Persons for election as Trustee at a meeting of Shareholders only if written notice of such Shareholder's intent to make such nomination or nominations has been delivered personally to the Secretary at, or been mailed to the Secretary and received at, the principal executive offices of the Trust not less than 50 days nor more than 75 days prior to the meeting; provided, however, that in the event that less than 60 days' notice or prior public disclosure of the date of meeting is given or made to Shareholders, notice by the Shareholder to be timely must be so delivered or received not later than the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. Such Shareholder's notice to the Secretary shall set forth: (i) the name and address of the Shareholder who intends to make the nominations(s) and of the Person or Persons to be nominated; (ii) the class and number of Shares that are held of record, beneficially owned and represented by proxy by such Shareholder as of the record date for the meeting (if such date then shall have been made publicly available) and as of the date of such notice; (iii) a representation that such Shareholder intends to appear in person or by proxy at the meeting to nominate the Person or Persons specified in the notice; (iv) a description of any contract, arrangement or understanding between such Shareholder and each nominee and any other Person or Persons (naming such Person or Persons) pursuant to which the nomination or nominations are to be made by such Shareholder; (v) such other information regarding each nominee proposed by such Shareholder as would be required to be disclosed in a proxy statement used in a solicitation of proxies for the election of directors which solicitation was subject to the rules and regulations of the Securities and Exchange Commission (the "SEC") under Section 14 of the Securities Exchange Act of 1934 (the "Exchange Act"), as from time to time amended; and (vi) the consent of each nominee to serve as a Trustee if so elected. -9- 13 No Person shall be eligible for election as a Trustee unless as nominated in accordance with the procedures set forth herein. SECTION 5. ADJOURNED MEETINGS. Any meeting of Shareholders, whether or not a quorum is present, may be adjourned from day to day or from time to time by the vote of a majority of the Shares the holders of which are either present at the meeting or represented by proxy. The motion for adjournment shall be lodged with the records of the Trust. SECTION 6. NOTICE OF REGULAR OR SPECIAL MEETINGS. Written notice specifying the place, day and hour of any regular or special meeting, the general nature of the business to be transacted thereof, to the extent required by law, and all other matters required by law shall be given to each Shareholder of record entitled to vote, either personally or by sending a copy thereof by mail or telegraph to his address appearing on the books of the Trust or theretofore given by him to the Trust for the purpose of notice or, if no address appears or has been given, addressed to the place where the principal office of the Trust is situated. It shall be the duty of the Secretary to give notice of each Annual Meeting of the Shareholders at least ten (10) days and not more than forty (40) days before the date on which it is to be held. If notice is not so given by the Secretary, it may be given by any other officer. Within twenty (20) days after the Trust receives a Shareholder request for the calling of a special meeting, the Trustees shall designate the date on which such meeting is to be held and the Secretary shall give notice of such meeting. Any such special meeting shall be held on a date not earlier than the twentieth (20th) day, and not later than the ninetieth (90th) day, following the date on which such notice is given. If the date of such special meeting is not so fixed and notice thereof given within seven (7) days after the date such Shareholder request is received by the Trust, the date of such meeting may be fixed by the Person or Persons requesting the meeting, in which event notice of such meeting shall be given by such Person or Persons not less than seven (7), nor more than sixty (60), days before the date on which the meeting is to be held. Notwithstanding the foregoing, if as of the date a Shareholder request for a special meeting is received or within twenty (20) days thereafter, the Trustees have called or call a meeting of Shareholders (whether annual or special) for a purpose or purposes other than the purpose(s) stated in the Shareholder request, the Trustees need not call, and the Secretary need not give notice of, a separate and additional meeting of Shareholders for the purpose(s) stated in the Shareholder request if (i) the Trustees determine in good faith that calling such a separate and additional meeting would require the Trust to incur undue cost and expense, and (ii) the Secretary notifies both the requesting -10- 14 Shareholder(s) and all other Shareholders entitled to vote, within twenty (20) days after the Trust receives the Shareholder request, that the matter(s) proposed by the requesting Shareholder(s) to be considered at a special meeting may be proposed and considered at the meeting otherwise called by the Trustees. In addition, if not later than the thirtieth (30th) day prior to the date on which any special meeting called by the Trustees pursuant to a Shareholder request is to be held, the Trustees determine in good faith to present for consideration by the Shareholders of the Trust one or more matters other than those proposed by the requesting Shareholder(s) to be considered, the Trustees may postpone the previously called special meeting for a period of up to sixty (60) days following the date of which notice of such postponement is given. Notice of such postponement and of the additional matter(s) to be considered at such meeting shall be given by the Secretary to all Shareholders entitled to vote at the meeting not later than the thirtieth (30th) day prior to the originally scheduled meeting date. For purposes of this Section 6, a Shareholder request shall be deemed received by the Trust when delivered to an officer of the Trust in person or on the date on which such request is mailed to the Trust, duly addressed to its principal office. SECTION 7. NOTICE OF ADJOURNED MEETINGS. It shall not be necessary to give any notice of the time and place of any adjourned meeting or of the business to be transacted thereat other than by announcement at the meeting at which such adjournment is taken. SECTION 8. PROXIES. The appointment of a proxy or proxies shall be made by an instrument in writing executed by the Shareholder or his duly authorized agent and filed with the Secretary of the Trust. No proxy shall be valid after the expiration of eleven (11) months from the date of its execution unless the Shareholder executing it specifies therein the length of time for which it is to continue in force, which is no case shall exceed seven (7) years from the date of its execution. At a meeting of Shareholders all questions concerning the qualification of voters, the validity of proxies, and the acceptance or rejection of votes, shall be decided by the secretary of the meeting unless inspectors of election are appointed pursuant to Section 11 of this Article III, in which event such inspectors shall pass upon all questions and shall have all other duties specified in said section. SECTION 9. CONSENT OF ABSENTEES. The transactions of any meeting of Shareholders, either annual, special, or adjourned, however called and noticed, shall be as valid as though had at a meeting duly held after the regular call and notice if a quorum is present and, if either before or after the meeting, each Shareholder entitled to vote, not present in person -11- 15 or by proxy, signs 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 lodged with the Trust records or made a part of the minutes of the meeting. SECTION 10. VOTING RIGHTS. If no future date is fixed for the determination of the Shareholders entitled to vote at any meeting of Shareholders, only Persons in whose names Shares entitled to vote stand on the stock records of the Trust on the day of any meeting of Shareholders shall be entitled to vote at such meeting SECTION 11. NO CUMULATIVE VOTING. Shareholders shall not be entitled to cumulate votes in any elections of Trustees of the Trust. SECTION 12. CONDUCT OF MEETINGS; INSPECTORS OF ELECTION. The presiding officer at a meeting of the Shareholders shall have all power and authority vested in a presiding officer by law or practice, including, without limitation, the authority to determine whether the nomination of any person is made in compliance with applicable provisions of these Trustees' Regulations (and to refuse to acknowledge the nomination of any Person not made in such compliance); to determine whether any item of business proposed to be brought before the meeting has been properly brought (and to declare that any business not so brought shall be disregarded and not transacted); to establish rules pertaining to reasonable time limits and the amount of time that may be taken up in remarks by any Shareholder or group of Shareholders and otherwise pertaining to the conduct of the meeting; and to otherwise decide all matters relating to the conduct of the meeting. The presiding officer may appoint a parliamentarian and one presiding officer may appoint a parliamentarian and one or more sergeants-at-arms. The parliamentarian may advise the presiding officer upon matters relating to the conduct of the meeting. The sergeant- or sergeants-at-arms shall have authority to take any and all actions that such Persons deem necessary or appropriate to assure that the meeting is conducted with decorum and in an orderly manner, including, without limitation, authority to expel or cause the expulsion of any Person who the presiding officer determines is failing to comply with the rules concerning the conduct of, or is otherwise disrupting, the meeting. In advance of any meeting of the Shareholders, the Trustees may appoint any one or more Persons (other than nominees for office) to act as inspectors of election at the meeting or any adjournment thereof. If no inspector of election is so appointed, the presiding officer of the meeting may, and on the request of any Shareholder or his proxy shall, appoint one or more such inspectors of election. The number of inspectors shall be either one (1) or three (3), as determined by the presiding officer; provided, however, that if such inspector(s) is or are -12- 16 to be appointed at the meeting on the request of one or more Shareholders or proxies, the holders of a majority of Shares present (in person or by duly executed proxy) shall determine whether one (1) or three (3) inspectors are to be appointed. If the Person appointed as inspector or election fails to appear at the meeting or fails or refuses to act as inspector, the presiding officer of the meeting may, and upon the request of any Shareholder or his proxy shall, appoint a Person to fill that vacancy. The inspectors of election shall: (a) Determine the number of Shares outstanding and the voting power of each, the Shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; (b) Receive votes, ballots or consents; (c) Count and tabulate all vote or consents; (d) Determine and report to the Trust the results of the voting; and (e) Do any other acts that may be proper to conduct the election or vote with fairness to all Shareholders. On the request of the presiding officer of the meeting or of any Shareholder or his proxy, the inspector(s) of election shall make a report in writing of any question or other matter determined by him or them and execute a certificate of any facts found by him or them. If there are three (3) inspectors of election, the decision, act, report or certificate of a majority shall be effective in all respects as the decision, act, report or certificate of the inspectors." SECTION 13. BUSINESS. Except as may be otherwise provided by applicable law, the only business that shall be conducted at any meeting of the Shareholders (other than matters incident to the conduct of the meeting) shall be business brought before the meeting by or at the direction of the Trustees or by a Shareholder who complies with the procedures set forth in this Section 13. Except as otherwise provided by Section 4A of Article I of these Trustees' Regulations or by applicable law, the only business that shall be conducted at any meeting of the Shareholders shall (i) have been specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Trustees, (ii) otherwise be brought before such meeting by or at the direction of the Trustees or the presiding officer of the meeting, or (iii) be otherwise properly brought before the -13- 17 meeting by or on behalf of a Shareholder who shall have been a Shareholder of record on the record date for such meeting, who shall continue to be entitled to vote thereat, and who shall have complied with the procedures set forth in the remainder of this Section 13. In addition to any and all other applicable requirements, for business to be properly brought before a meeting of the Shareholders by a Shareholder, the Shareholder must have given timely notice thereof in writing to the Secretary. To be timely, a Shareholder's notice must be delivered personally or mailed to and received at, the principal executive offices of the Trust not less than 50 days nor any more than 75 days prior to the meeting of Shareholders at which such business is to be conducted; provided, however, that in the event that less than 60 days' notice or prior public disclosure of the date of the meeting is given or made to Shareholders, notice by the Shareholder to be timely must be so delivered or received not later than the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. A Shareholder's notice to the Secretary shall set forth (i) a description of each item of business the Shareholder proposes to bring before the meeting and the wording of the proposal, if any, to be submitted for a vote of the Shareholders with respect thereto; (ii) the name and address of the Shareholder; (iii) the class and number of Shares held of record, owned beneficially and represented by proxy by such Shareholder as of the record date for the meeting (if such date shall then have been publicly disclosed) and as of the date of such notice; and (iv) all other information that would be required to be included in a proxy statement filed with the SEC if, with respect to any such item of business, such Shareholder were a participant in a solicitation subject to Section 14 of the Exchange Act. ARTICLE IV MISCELLANEOUS SECTION 1. RECORD DATES AND CLOSING OF TRANSFER BOOKS. From time to time the Trustees may fix a future date, not exceeding fifty (50) days preceding the date of any meeting of Shareholders or the date fixed for the payment of any dividend or distribution or for the allotment of rights or when any change or conversion or exchange of Shares is to go into effect, as the record date for the determination of the Shareholders entitled to notice of and to vote at any such meeting or to receive any such dividend or distribution or any allotment of rights or to exercise the rights with respect to any such change, conversion or exchange of Shares. If a time is so fixed only Shareholders of record on the date so fixed shall be entitled to notice of and -14- 18 to vote at such meeting or to receive such dividend or distribution or allotment of rights or to exercise such rights, as the case may be, notwithstanding any transfer of Shares on the books of the Trust after the record date so fixed. SECTION 2. INSPECTION OF TRUST RECORDS. The share register or duplicate share register, the books of account, and the minutes of the proceedings of the Shareholders and Trustees shall be open to inspection upon the written demand of any Shareholder to the same extent as is permitted by the laws of Maryland for the inspection of corporate records by corporate shareholders. Such inspection may be made in person or by an agent or attorney and shall include the right to make extracts. Demand of inspection shall be made in writing upon the President, Secretary or Assistant Secretary of the Trust. SECTION 3. INSPECTION OF TRUSTEES' REGULATIONS. The Trustees shall keep at the principal office for the transaction of business of the Trust the original or a copy of the Trustees' Regulations as amended or otherwise altered to date, certified by the Secretary, which shall be open to inspection by the Shareholders at all reasonable times during office hours. SECTION 4. REPRESENTATION OF SHARES OF CORPORATIONS. The Chairman, the President or any Vice-President and the Secretary or Assistant Secretary of the Trust, acting either in person or by a proxy or proxies designated in a written instrument duly executed by said officers, are authorized to vote, represent, and exercise on behalf of the Trust all rights incident to any shares of any corporation standing in the name of the Trust. ARTICLE V SEAL The Trust shall have a seal containing the words: "Starwood Lodging Trust, Maryland, 1969." ARTICLE VI AMENDMENTS SECTION 1. BY SHAREHOLDERS. Except for any change for which a larger vote is required, these Trustees' Regulations may be amended or repealed or new or additional Trustees' -15- 19 Regulations may be adopted by the vote or written consent of Shareholders entitled to exercise a majority of the voting power of the Trust. SECTION 2. BY TRUSTEES. These Trustees' Regulations may be amended or repealed or new or additional Trustees' Regulations may be adopted by the vote or written consent of the Trustees. The power hereby delegated may be revoked by the vote or written consent of Shareholders entitled to exercise a majority of the voting power of the Trust. ARTICLE VII DEFINITIONS All terms defined in the Declaration of Trust of Starwood Lodging Trust dated as of August 15, 1969 as amended from time to time shall have the same meaning when used in these Trustees' Regulations. -16- EX-3.4 3 BY-LAWS OF THE CORP. 1 EXHIBIT 3.4 BY-LAWS OF STARWOOD LODGING CORPORATION (AS AMENDED THROUGH JANUARY 31, 1995) ARTICLE I OFFICES In addition to the required principal office, the Corporation may have such offices at such places, both within and without the State of Maryland, as the Board of Directors from time to time determines or as the business of the Corporation from time to time requires. ARTICLE II MEETINGS OF THE STOCKHOLDERS SECTION 1. ANNUAL MEETINGS. Annual meetings of the stockholders shall be held on such date and at such time during the period from September 1 to September 30 of each year and at such place in the United States (within or without the State of Maryland) as is designated from time to time by the Board of Directors and stated in the notice of the meeting. At each annual meeting the stockholders shall elect a Board of Directors and shall transact such other business as may properly be brought before the meeting. SECTION 2. SPECIAL MEETINGS. Unless otherwise prescribed by law, the Articles of Incorporation or these By-Laws, special meetings of the stockholders for any purpose or purposes may be called by the Board of Directors, the President or any two or more Directors, or by the Secretary upon the written request of stockholders owning not less than twenty-five percent (25%) of the shares of capital stock of the Corporation issued and outstanding and entitled to vote at any such meeting. Special meetings shall be held at such place in the United States (within or without the State of Maryland) as is designated by the Board of Directors and stated in the notice of the meeting. Requests for special meetings shall state the purpose or purposes of the proposed meeting. Unless requested by stockholders 2 entitled to cast a majority of all votes entitled to be cast at the meeting, a special meeting need not be called to consider any matter which is substantially the same as a matter voted on at any special meeting of the stockholders held during the preceding twelve (12) months. Within twenty (20) days after the Corporation receives a stockholder request for the calling of a special meeting, the Board of Directors shall designate the date on which such meeting is to be held and the Secretary shall give notice of such meeting. Any such special meeting shall be held on a date not earlier than the twentieth (20th) day, and not later than the ninetieth (90th) day, following the date on which such notice is given. Notwithstanding the foregoing, if as of the date a stockholder request for a special meeting is received or within twenty (20) days thereafter, the Board of Directors has called or calls a meeting of stockholders (whether annual or special) for a purpose or purposes other than the purpose(s) stated in the stockholder request, the Board of Directors need not call, and the Secretary need not give notice of, a separate and additional meeting of stockholders if (i) the Board of Directors determines in good faith that calling such a separate and additional meeting would require the Corporation to incur undue cost and expense, and (ii) the Secretary notifies both the requesting stockholder(s) and all other stockholders entitled to vote, within twenty (20) days after the Corporation receives the stockholder request, that the matter(s) proposed by the requesting stockholder(s) to be considered at a special meeting may be proposed and considered at the meeting otherwise called by the Board of Directors. In addition, if not later than the thirtieth (30th) day prior to the date on which any special meeting called by the Board of Directors pursuant to a stockholder request is to be held, the Board of Directors determines in good faith to present for consideration by the stockholders of the Corporation one or more matters other than those proposed by the requesting stockholder(s) to be so considered, the Board of Directors may postpone the previously called special meeting for a period of up to sixty (60) days following the date on which notice of such postponement is given. Notice of such postponement and of the additional matter(s) to be considered at such meeting shall be given by the Secretary not later than the thirtieth (30th) day prior to the originally scheduled meeting date. SECTION 3. PRESIDING OFFICERS. Meetings of the stockholders shall be presided over by the Chairman of the Board, or, if the Chairman is not present, by the President, or, if the President is not present, by a Vice President, or, if a Vice President is not present, such person who is chosen by the Board of Directors, or, if none, by a person to be chosen at the meeting by stockholders present in person or by proxy who own a -2- 3 majority of the shares of capital stock of the Corporation entitled to vote and be represented at such meeting. The secretary of meetings shall be the Secretary of the Corporation, or, if the Secretary is not present, an Assistant Secretary, or, if an Assistant Secretary is not present, such person as may be chosen by the Board of Directors, or, if none, such person who is chosen by the chairman of the meeting. The presiding officer at a meeting of the stockholders shall have all power and authority vested in a presiding officer by law or practice, including, without limitation, the authority to determine whether the nomination of any person is made in compliance with applicable provisions of these By-Laws (and to refuse to acknowledge the nomination of any person not made in such compliance); to determine whether any item of business proposed to be brought before the meeting has been properly brought (and to declare that any business not so brought shall be disregarded and not transacted); to establish rules pertaining to reasonable time limits and the amount of time that may be taken up in remarks by any stockholder or group of stockholders and otherwise pertaining to the conduct of the meeting; and to otherwise decide all matters relating to the conduct of the meeting. The presiding officer may appoint a parliamentarian and one or more sergeants-at-arms. The parliamentarian may advise the presiding officer upon matters relating to the conduct of the stockholders' meeting. The sergeant- or sergeants-at-arms shall have authority to take any and all actions that such persons deem necessary or appropriate to assure that the meeting is conducted with decorum and in an orderly manner, including, without limitation, authority to expel or cause the expulsion of any person who the presiding officer determines is failing to comply with the rules concerning the conduct of, or is otherwise disrupting, the meeting. SECTION 4. ADJOURNMENTS. Whether or not a quorum is present at any meeting of the stockholders, the stockholders entitled to vote thereat present in person or by proxy shall have the power to adjourn the meeting from time to time, without notice of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. Any business which might have been transacted at a meeting as originally called may be transacted at any meeting held after adjournment as provided in this Section 4, if a quorum is present in person or by proxy at such reconvened meeting. SECTION 5. PROXIES. Whenever the vote or consent of stockholders is required or permitted, such vote or consent may be given by a stockholder in person or by proxy. The appointment of a proxy or proxies shall be made by an instrument in writing executed by the stockholder or his duly authorized agent and filed with the Secretary of the Corporation. No proxy shall be valid after the expiration of eleven (11) months from the date of its execution unless the stockholder executing it specifies -3- 4 therein the length of time for which it is to continue in force. At a meeting of stockholders all questions concerning the qualification of voters, the validity of proxies, and the acceptance or rejection of votes, shall be decided by the secretary of the meeting unless inspectors of election are appointed pursuant to Section 6 of this Article II, in which event such inspectors shall pass upon all questions and shall have all other duties specified in said section. SECTION 6. INSPECTORS OF ELECTION. In advance of any meeting of the stockholders, the Board of Directors may appoint any one or more persons (other than nominees for office) to act as inspectors of election at the meeting or any adjournment thereof. If no inspector of election is so appointed, the presiding officer of the meeting may, and on the request of any stockholder or his proxy shall, appoint one or more such inspectors of election. The number of inspectors shall be either one (1) or three (3), as determined by the presiding officer; provided, however, that if such inspector(s) is or are to be appointed at the meeting on the request of one or more stockholders or proxies, the holders of a majority of the total number of shares represented at the meeting (in person or by duly executed proxy) shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector of election fails to appear at the meeting or fails or refuses to act as inspector, the presiding officer of the meeting may, and upon the request of any stockholder or his proxy shall, appoint a person to fill that vacancy. The inspectors of election shall: (a) Determine the number of shares of capital stock outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; (b) Receive votes, ballots or consents; (c) Count and tabulate all votes or consents; (d) Determine and report to the Corporation the results of the voting; and (e) Do any other acts that may be proper to conduct the election or vote with fairness to all stockholders. On request of the presiding officer of the meeting or of any stockholder or his proxy, the inspector(s) of election shall make a report in writing of any question or other matter determined by him or them and execute a certificate of any facts found by him or them. If there are three (3) inspectors of election, the decision, act, report or certificate of a majority shall be -4- 5 effective in all respects as the decision, act, report or certificate of the inspectors. SECTION 7. BUSINESS. Except as may be otherwise provided by applicable law, the only business that shall be conducted at any meeting of the stockholders (other than matters incident to the conduct of the meeting) shall be business brought before the meeting by or at the direction of the Board of Directors or by a stockholder who complies with the procedures set forth in this Section 7. Except as otherwise provided by Section 1A of Article III of these By-Laws or by applicable law, the only business that shall be conducted at any meeting of the stockholders shall (i) have been specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise be brought before such meeting by or at the direction of the Board of Directors or the presiding officer of the meeting, or (iii) be otherwise properly brought before the meeting by or on behalf of a stockholder who shall have been a stockholder of record on the record date for such meeting, who shall continue to be entitled to vote thereat, and who shall have complied with the procedures set forth in the remainder of this Section 7. In addition to any and all other applicable requirements, for business to be properly brought before a meeting of the stockholders by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary. To be timely, a stockholder's notice must be delivered personally or mailed to the received at, the principal executive offices of the Corporation not less than 50 days nor more than 75 days prior to the meeting of stockholders at which such business is to be conducted; provided, however, that in the event that less than 60 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so delivered or received not later than the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. A stockholder's notice to the Secretary shall set forth (i) a description of each item of business the stockholder proposes to bring before the meeting and the wording of the proposal, if any, to be submitted for a vote of the stockholders with respect thereto; (ii) the name and address of the stockholder; (iii) the class and number of shares of stock of the Corporation held of record, owned beneficially and represented by proxy by such stockholder as of the record date for the meeting (if such date shall then have been publicly disclosed) and as of the date of such notice; and (iv) all other information that would be required to be included in a proxy statement filed with the Securities and Exchange Commission (the "SEC") if, with respect to any such item of business, such stockholder were a participant in a solicitation subject to Section 14 of the -5- 6 Securities Exchange Act of 1934 (the "Exchange Act"), as from time to time amended. ARTICLE III DIRECTORS SECTION 1. NUMBER; TENURE. The number of directors of the Corporation shall be not less than three (3) nor more than fifteen (15), and, within these limits, may be fixed, increased or decreased from time to time by a majority of the entire Board of Directors, or by the stockholders, but no such action may affect the tenure of office of any director. The directors shall be divided, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as reasonably possible, with the term of office of the first class to expire at the 1995 annual meeting of stockholders, the term of office of the second class to expire at the 1996 annual meeting of stockholders, and the term of office of the third class to expire at the 1997 annual meeting of stockholders, with each director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders, commencing with the 1995 annual meeting, (i) directors elected to succeed the class of directors whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director of the class to hold office until his or her successor shall have been duly elected and qualified and (ii) except as otherwise required by law, if authorized by a resolution of the Board of Directors, directors may be elected to fill any vacancy on the Board of Directors, regardless of how such vacancy shall have been created. SECTION 1A. NOMINATION OF DIRECTORS. Nominations of persons for election to the Board of Directors at an annual meeting of the stockholders may be made at such meeting only by or at the direction of the Board of Directors, by any nominating committee or person(s) appointed by the Board of Directors, or by any stockholder entitled to vote for the election of Directors at the meeting who complies with the notice procedures set forth in this Section 1A. Any stockholder entitled to vote for the election of Directors may nominate one or more persons for election to the Board of Directors at a meeting only if written notice of such stockholder's intent to make such nomination or nominations has been delivered personally to the Secretary at, or been mailed to the Secretary and received at, the principal executive offices of the Corporation not less than 50 days nor more than 75 days prior -6- 7 to the meeting; provided, however, that in the event that less than 60 days' notice or prior public disclosure of the date of meeting is given or made to stockholders, notice by the stockholder to be timely must be so delivered or received not later than the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. Such stockholder's notice to the Secretary shall set forth: (i) the name and address of the stockholder who intends to make the nomination(s) and of the person or persons to be nominated; (ii) the class and number of shares of stock of the Corporation that are held of record, beneficially owned and represented by proxy by such stockholder as of the record date for the meeting (if such date then shall have been made publicly available) and as of the date of such notice; (iii) a representation that such stockholder intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iv) a description of any contract, arrangement or understanding between such stockholder and each nominee and any other person or persons (naming such person or person) pursuant to which the nomination or nominations are to be made by such stockholder; (v) such other information regarding each nominee proposed by such stockholder as would be required to be disclosed in a proxy statement used in a solicitation of proxies for the election of directors which solicitation was subject to the rules and regulations of the SEC under Section 14 of the Exchange Act; and (vi) the consent of each nominee to serve as a Director of the Corporation if so elected. No person shall be eligible for election as a Director of the Corporation unless nominated in accordance with the procedures set forth herein. SECTION 2. CHAIRMAN OF THE BOARD. The Chairman of the Board shall be chosen by the vote of a majority of the entire Board of Directors. The Chairman of the Board, if present, shall preside at all meetings of the stockholders and all meetings of the Board of Directors. The Chairman of the Board shall be, ex officio, a member of all standing committees, but shall not be an officer of the Corporation. SECTION 3. VACANCIES. Except as otherwise required by law, unless the Board of Directors otherwise determines, newly created directorships resulting from any increase in the authorized number of directors or any vacancies on the Board of Directors resulting from any cause shall be filled only by a majority vote of the directors then in office, though less than a quorum, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such director's successor shall have been duly elected and qualified. No decrease in the numbers of authorized -7- 8 directors constituting the entire Board of Directors shall shorten the term of any incumbent director. SECTION 4. RESIGNATION. Any director may resign at any time by giving written notice to the Board of Directors, the Chairman of the Board, the Present, or the Secretary of the Corporation. Unless otherwise specified in such written notice, a resignation shall take effect upon delivery thereof. A resignation need not be accepted in order for it to be effective. SECTION 5. PLACE OF MEETINGS. The Board of Directors may hold both regular and special meetings either within or without the State of Maryland, at such place as the Board of Directors from time to time deems advisable. SECTION 6. ANNUAL MEETING. The annual meeting of each newly elected Board of Directors shall be held immediately following the annual meeting of stockholders, for the purpose of electing officers and transacting other business. No notice to the newly elected directors of such meeting shall be necessary for such meeting to be lawful, provided a quorum is present. SECTION 7. REGULAR MEETINGS. Regular meetings of the Board of Directors need not be held. SECTION 8. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called at any time by the President, and the President shall call a special meeting at any time upon the written request of two (2) directors. Written notice of the time and place of a special meeting shall be given to each director, either personally or by sending a copy thereof by mail or by telegraph, charges prepaid, to his address appearing on the books of the Corporation or theretofore given by him to the Corporation for the purpose of notice. In case of personal service, such notice shall be so delivered at least twenty-four (24) hours prior to the time fixed for the meeting. If such notice is mailed it shall be deposited in the United States mail in the place in which the principal office of the Corporation is located at least seventy-two (72) hours prior to the time fixed for the holding of the meeting. If telegraphed, it shall be delivered to the telegraph company at least forty-eight (48) hours prior to the time fixed for the holding of the meeting. If notice is not so given by the Secretary, it may be given by the President, or the directors requesting the meeting may issue the call and give the notice. SECTION 9. ADJOURNMENTS. A quorum of the directors may adjourn any meeting of the Board of Directors to meet again at a stated day and hour. In the absence of a quorum a majority of the directors present may adjourn from time to time to meet again at a stated day and hour prior to the time fixed for the next regular meeting of the Board of Directors. Notice of the -8- 9 time and place of an adjourned meeting need not be given to any director of the time and place is fixed at the meeting adjourned. SECTION 10. COMPENSATION. Directors shall be entitled to such compensation for their services as directors as from time to time may be fixed by the Board of Directors. No director who receives compensation as a director shall be barred from serving the Corporation in any other capacity or from receiving compensation and reimbursement of reasonable expenses for any or all such other services. SECTION 11. ACTION BY CONSENT. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting and without prior notice if a written consent in lieu of such meeting which sets forth the action so taken is signed either before or after such action by all directors. All written consents shall be filed with the minutes of the Board's proceedings. SECTION 12. MEETINGS BY TELEPHONE OR SIMILAR COMMUNICATIONS. The Board of Directors may participate in meetings by means of conference telephone or similar communications equipment, whereby all directors participating in the meeting can hear each other at the same time, and participation in any such meeting shall constitute presence in person at such meeting. A written record shall be made of all actions taken at any meeting conducted by a means of a conference telephone or similar communications equipment. SECTION 13. TRANSACTIONS WITH INTERESTED PERSONS. (a) Notwithstanding anything to the contrary contained in these By-Laws, in addition to any affirmative vote required either by law, the Partnership Agreement, the Articles of Incorporation of the Corporation or these By-Laws, any Transaction involving the Corporation or these By-Laws, any Transaction involving the Corporation or any of its subsidiaries or the Operating Partnership shall require the affirmative vote of a majority of the directors ("Disinterested Members") on the Board of Directors of the Corporation who are not employees, officers, directors, Affiliates or Associates of the Interested Person who or which is a party to the Transaction. (b) As used in this Section 13: (i) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on January 1, 1995. (ii) A Person shall " Beneficially Own" and be the "Beneficial Owner" of any Paired Shares or Units: -9- 10 (A) which such Person or any of its Affiliates or Associates or Associates beneficially owns, directly or indirectly, within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as in effect on January 1, 1995; or (B) which such Person or any of its Affiliates or Associates has (I) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (II) the right to vote pursuant to any agreement, arrangement or understanding (but neither such Person nor any such Affiliate or Associate shall be deemed to be the Beneficial Owner of any Paired Shares of Units solely by reason of a revocable proxy granted for a particular meeting of stockholders, pursuant to a public solicitation of proxies for such meeting, and with respect to which Paired Shares or Units neither such Person not any such Affiliate or Associate is otherwise deemed the Beneficial Owner); or (C) which are beneficially owned, directly or indirectly, within the meaning of the Rule 13d-3 under the Securities Exchange Act of 1934, as in effect on January 1, 1995, by any other Person with which such Person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (other than solely by reason of a revocable proxy as described in subparagraph (B) above) or disposing of any Paired Shares or Units. (iii) "Interested Person" shall mean any Person who or which is the Beneficial Owner, directly or indirectly, of 5% or more the outstanding Paired Shares or the outstanding Units or who or which is an Affiliate or Associate of the Trust, the Corporation or either of the Partnerships. for the purposes of determining whether a Person is an Interested Person, the number of Paired Shares or Units deemed to be outstanding shall include Paired Shares or Units deemed owned through application of paragraphs (A), (B) and (C) of paragraph (ii) above but shall not include any other unissued Paired Shares or Units which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. -10- 11 (iv) "Operating Partnership" shall mean SLC Operating Limited Partnership, a Delaware limited partnership. (v) "Paired Shares" shall mean the shares of common stock of the Corporation and the shares of beneficial interest of the Trust which are paired pursuant to the Pairing Agreement dated June 25, 1980 between the Trust and the Corporation, as it may be amended from time to time. (vi) "Partnership Agreement" shall mean the Limited Partnership Agreement of the Operating Partnership, as it may be amended from time to time. (vii) "Partnerships" shall mean the Operating Partnership and SLT Realty Limited Partnership, a Delaware limited partnership. (viii) " Person" shall mean any individual, limited partnership, general partnership, corporation, limited liability company or any other firm or entity. (ix) "Transaction" shall mean 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 for Paired Shares or any action to be taken by the Corporation, the Trust or the Partnerships with respect to the senior debt of SLT Realty Limited Partnership. (x) "Trust" shall mean Starwood Lodging Trust (formerly Hotel Investors Trust), a Maryland real estate investment trust. (xi) "Units" shall have the meaning set forth in the Partnership Agreement. (d) A majority of the Disinterested Members shall have the power and duty to determine, on the basis of information known to them after reasonable inquiry, all facts necessary to determine compliance with this Section 13, including, without limitation, (i) whether a Person is an Interested Person, (ii) the number of Paired Shares or Units that any Person Beneficially Owns, and (iii) whether a Person is an Affiliate or Associate of another. A majority of the Disinterested Members shall have the right to demand that any Person who is reasonably believed to be an Interested Person (or who holds of record Paired Shares or Units that any Interested Person Beneficially Owns) supply the Corporation with complete information as to (i) the record owner(s) of all Paired Shares or Units that such Person who is reasonably believed to be an Interested Person Beneficially Owns, (ii) the number of, and class or series of, Paired Shares or Units that such Person who is reasonably believed to be an -11- 12 Interested Person Beneficially Owns and the number(s) of the certificate(s), if any, evidencing such Paired Shares or Units and (iii) any other factual matter relating to the applicability or effect of this Section 13, as may be reasonably requested of such Person, and such Person shall furnish such information within 10 days after receipt of such demand. (e) Nothing contained in this Section 13 shall be construed to relieve any Interested Person from any fiduciary obligation imposed by law. (f) Notwithstanding anything to the contrary contained in these By-Laws, this Section 13 may be amended or repealed only by a majority of directors on the Board of Directors of the Corporation who are not employees, officers, Affiliates or Associates of the Trust, the Corporation, the Partnerships or any Interested Person. ARTICLE IV COMMITTEES SECTION 1. EXECUTIVE COMMITTEE. (a) The Board of Directors may appoint two or more directors to constitute an Executive Committee. One of such directors shall be designated as Chairman of the Executive Committee. The Executive Committee shall have and may exercise all of the rights, powers and authority of the Board of Directors, except as expressly limited by the Maryland General Corporation Law, as amended from time to time. (b) The Executive Committee shall fix its own rules of procedure and shall meet at such times and at such place or places as it may determine. The Chairman of the Executive Committee, or, in the absence of a Chairman, a member of the Executive Committee chosen by a majority of the members present, shall preside at meetings of the Executive Committee, and another member thereof chosen by the Executive Committee shall act as secretary. A majority of the Executive Committee shall constitute a quorum for the transaction of business, and the affirmative vote of a majority of the members present at a meeting shall be required for any action of the Executive Committee. SECTION 2. OTHER COMMITTEES. The Board of Directors may appoint such other committees as it shall deem advisable and with such authority as the Board of Directors shall from time to time determine. -12- 13 SECTION 3. OTHER PROVISIONS REGARDING COMMITTEES. (a) The Board of Directors shall have the power at any time to fill vacancies in, change the membership of, or discharge any committee. (b) Members of any committee shall be entitled to such compensation for their services as from time to time may be fixed by the Board of Directors. No committee member who receives compensation as a member of any one or more committees shall be barred from serving the Corporation in any other capacity or from receiving compensation and reimbursement of reasonable expenses for any or all such other services. (c) Unless prohibited by law, the provisions of Section 11 and Section 12 of Article III shall apply to all committees from time to time created by the Board of Directors. ARTICLE V OFFICERS SECTION 1. POSITIONS. The officers of the Corporation shall be chosen by the Board of Directors and shall consist of a President, one or more Vice Presidents, a Secretary and a Treasurer. The Board of Directors also may choose one or more Assistant Secretaries and Assistant Treasurers and such other officers and agents at the Board from time to time deems necessary or appropriate. The Board of Directors may delegate to the President of the Corporation the authority to appoint any officer or agent of the Corporation and to fill a vacancy other than the President, Secretary or Treasurer. The election or appointment of any officer of the Corporation in itself shall not create contract rights for any such officer. All officers of the Corporation shall exercise such powers and perform such duties as from time to time shall be determined by the Board of Directors. Any two or more offices may be held by the same person except the offices of President and Vice President, President and Secretary, or President and Assistant Secretary. SECTION 2. TERM OF OFFICE; REMOVAL. Each officer of the Corporation shall hold office at the pleasure of the Board of Directors and any officer may be removed, with or without cause, at any time by the affirmative vote of a majority of the directors then in office, provided that any officer appointed by the President pursuant to authority delegated to the President by the Board of Directors may be removed, with or without cause, at any time whenever the President in his or her absolute discretion shall consider that the best interests of the Corporation shall be served by such removal. Vacancies (however caused) in any office may be filled for the unexpired portion of the term by the -13- 14 Board of Directors (or by the President in the case of a vacancy occurring in an office to which the President has been delegated the authority to make appointments). SECTION 3. COMPENSATION. The salaries of all officers of the Corporation shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving a salary by reason of the fact that he also receives from the Corporation compensation in any other capacity. SECTION 4. PRESIDENT. The President shall be the chief executive officer of the Corporation and, subject to the direction of the Board of Directors, shall have general charge of the business, affairs and property of the Corporation and general supervision over its other officers and agents. In general, the President shall perform all duties incident to the office of President of a stock corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. The President shall have the power and authority to execute all written instruments, of every nature, on behalf of the Corporation, and shall be, ex officio, a member of all standing committees. In the absence of the Chairman of the Board, the President shall preside at all meetings of the Board of Directors and of the stockholders. SECTION 5. VICE PRESIDENTS. In the absence or disability of the President, the Vice President (or in the event there is more than one, the Vice Presidents in order of their rank as fixed by the Board of Directors or, if not ranked, the Vice President designated by the Board of Directors), shall perform the duties and exercise the powers of the President. The Vice Presidents shall have the power and authority to execute on behalf of the Corporation all written instruments of every nature. A Vice President also generally shall assist the President and shall perform such other duties and have such other powers as from time to time may be prescribed by the Board of Directors. SECTION 6. SECRETARY. The Secretary shall attend all meetings of the Board of Directors and of the stockholders and shall record all votes and the proceedings of all meetings in a book to be kept for such purposes. The Secretary also shall perform like duties for the Executive Committee or other committees, if required by any such committee. The Secretary shall give (or cause to be given) notice of all meetings of the stockholders and all special meetings of the Board of Directors and shall perform such other duties as from time to time may be prescribed by the Board of Directors, the Chairman of the Board or the President. The Secretary shall have custody of the seal of the Corporation, shall have authority (as shall any Assistant Secretary) to affix the same to any instrument requiring it, and to attest the seal by his or her signature. The Board of Directors may give general authority to officers other than the -14- 15 Secretary or any Assistant Secretary to affix the seal of the Corporation and to attest the affixing thereof by his or her signature. SECTION 7. ASSISTANT SECRETARY. The Assistant Secretary, if any (or in the event there is more than one, the Assistant Secretaries in the order designated or, in the absence of any designation, the order of their election or appointment), in the absence or disability of the Secretary, shall perform the duties and exercise the powers of the Secretary. An Assistant Secretary shall perform such other duties and have such other powers as from time to time may be prescribed by the Board of Directors. SECTION 8. TREASURER. The Treasurer shall have the custody of the corporate funds, securities, other similar valuable effects, and evidences of indebtedness, shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation. The Treasurer shall disburse the funds of the Corporation in such manner as may be ordered by the Board of Directors from time to time and shall render to the Chairman of the Board, the President and the Board of Directors, at regular meetings of the Board or whenever any of them may so require, an account of all transactions and of the financial condition of the Corporation. SECTION 9. ASSISTANT TREASURER. The Assistant Treasurer, if any (or in the event there is more than one, the Assistant Treasurers in the order designated or, in the absence of any designation, in the order of their election or appointment), in the absence or disability of the Treasurer, shall perform the duties and exercise the powers of the Treasurer. An Assistant Treasurer shall perform such other duties and have such other powers as form time to time may be prescribed by the Board of Directors. ARTICLE VI NOTICES Except as otherwise specifically provided in these By-Laws, any notice required or permitted to be given to any director, officer, stockholder or committee member shall be given in writing, either personally or by first-class mail with postage prepaid, in either case addressed to the recipient at his or her address as it appears in the records of the Corporation. Personally delivered notices shall be deemed to be given at the time they are delivered at the address of the named recipient as -15- 16 it appears in the records of the Corporation, and mailed notices shall be deemed to be given at the time they are deposited in the United States mail. ARTICLE VII GENERAL PROVISIONS SECTION 1. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The President or any Vice President and the Secretary or Assistant Secretary of the Corporation shall have full power and authority to attend, act and vote at any meeting of security holders of other corporations in which the Corporation may hold securities, and at any such meeting shall possess and may exercise any and all rights and powers incident to the ownership of such securities which the Corporation possesses and has the power to exercise. SECTION 2. DIVIDENDS. Subject to the Maryland General Corporation Law, dividends upon the outstanding capital stock of the Corporation or other distributions may be declared by the Board of Directors at any annual, regular or special meeting and may be paid in cash, in property or in shares of the Corporation's capital stock. Stockholders shall have no right to any dividend or distribution unless and until declared by the Board of Directors. SECTION 3. REGISTERED STOCKHOLDERS. Except as otherwise provided by law, the Corporation shall be entitled to recognize the exclusive right of a person who is registered on its books as the owner of shares of its capital stock to receive dividends or other distributions (to the extent otherwise distributable or distributed) and to vote (in the case of voting stock) as such owner. The Corporation shall not be bound to recognize any equitable or legal claim to or interest in such shares on the part of any other person. The Corporation (or its transfer agent) shall not be required to send notices or dividends to a name or address other than the name or address of the stockholders appearing on the stock ledger maintained by the Corporation (or by the transfer agent or registrar, if any), unless any such stockholder shall have notified the Corporation (or the transfer agent or registrar, if any), in writing, of another name or address at least ten (10) days prior to the mailing of such notice or dividend. Nothing in these By-Laws shall be deemed to preclude the Corporation from inquiring as to the actual ownership of any shares of its capital stock, nor impose upon the Corporation or its transfer agent a duty, nor limit their rights to inquire into adverse claims. -16- 17 SECTION 4. LOST, STOLEN OR DESTROYED CERTIFICATE. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation which is claimed to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors, in its discretion, may require as a condition precedent to issuance that the owner of such lost, stolen or destroyed certificate, or his or her legal representative, advertise the same in such manner as the Board of Directors shall require and to deliver to the Corporation a bond in such sum, or other security in such form, as the Board of Directors may direct, as indemnity against any claim that may be made against the Corporation with respect to the certificate claimed to have been lost, stolen or destroyed. SECTION 5. RESERVES. The Board of Directors, in its sole discretion, may fix a sum which may be set aside or reserved over and above the paid-in capital of the Corporation as a reserve for any proper purpose, and from time to time may increase, diminish or vary such reserves. SECTION 6. FISCAL YEAR. The fiscal year of the Corporation shall be as determined from time to time by the Board of Directors. SECTION 7. SEAL. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its incorporation and the words "Corporate Seal" and "State of Maryland." SECTION 8. AMENDMENT OF THE BYLAWS. To the extent not prohibited by law, the Board of Directors shall have the power to adopt, alter and repeal these ByLaws, and to adopt new bylaws. The stockholders of the Corporation shall also have the power to alter and repeal these ByLaws, and to adopt new bylaws. -17- EX-4.1 4 PAIRING AGREEMENT 1 EXHIBIT 4.1 COMPOSITE COPY, AS AMENDED PAIRING AGREEMENT Agreement dated June 25, 1980, as amended as of February 1, 1995, between Starwood Lodging Trust, a Maryland real estate investment trust ("Trust"), and Starwood Lodging Corporation, a Maryland corporation ("Company"). WHEREAS, the Trust will acquire all the issued and outstanding shares of the Company and immediately declare a distribution in kind to the holders of shares of the Trust, consisting of one share of common stock of the Company for each issued share of beneficial interest of the Trust; and WHEREAS, the Trust and the Company wish to cause their shares to be paired, so that shares of beneficial interest of the Trust with a par value of $.01 per share ("Shares") are transferable only with an equal number of shares of common stock of the Company and vice versa: NOW, THEREFORE, in consideration of the mutual promises contained herein, the parties agree: 1. On and after the close of business on June 25, 1980 ("Effective Date"): (a) the Shares of the Trust and the shares of common stock of the Company shall not be transferable, and shall not be transferred on the respective books of either entity, unless in connection with a transfer the transferee acquires the same number of Shares of the Trust and shares of common stock of the Company; (b) upon presentation to the Trust's transfer agent of any certificate evidencing ownership of Shares of the Trust issued prior to the Effective Date duly endorsed for transfer or accompanied by a duly executed stock power, there shall be issued to the transferee a certificate or certificates evidencing both the number of Shares of the Trust so transferred and the same number of shares of common stock of the Company, and there shall be issued a certificate or certificates evidencing both any Shares of the Trust not transferred and the same number of shares of common stock of the Company; and (c) neither the Trust nor the Company shall issue or transfer or agree to issue or transfer any Shares of the Trust or shares of common stock of the Company unless 2 effective provision is made for the issuance or transfer to the same person of the same number of Shares of the Trust and shares of common stock of the Company and unless the Trust and the Company agree on the manner and basis of allocating the consideration to be received between the Trust and the Company or on the payment by one entity to the other of cash or other consideration in lieu of a portion of such consideration. 2. Each certificate issued after the Effective Date evidencing Shares of the Trust shall have printed on its reverse side a certificate evidencing the same number of shares of common stock of the Company and shall be in a form satisfactory to the American Stock Exchange. A legend shall be placed on the face or reverse side of each certificate evidencing ownership of Shares of the Trust and the shares of common stock of the Company issued on or after the Effective Date referring to the restrictions on transfer of the Shares of the Trust and the shares of common stock of the Company. 3. Promptly after the Effective Date, the Trust shall cause a Letter of Transmittal to be sent to each holder of record of Shares of the Trust at the Effective Date for use in forwarding the holder's certificate or certificates. Upon receipt from any such holder of a properly completed Letter of Transmittal accompanied by the appropriate certificate or certificates evidencing a number of Shares of the Trust, the Trust shall cause to be delivered promptly to such holder in substitution therefor a certificate or certificates registered in such holder's name evidencing both the same number of Shares of the Trust and the same number of shares of common stock of the Company. Until so surrendered, each certificate evidencing Shares of the Trust outstanding prior to the Effective Date shall be deemed, for all purposes to evidence ownership, in addition, of an equal number of shares of common stock of the Company provided, however, that the Trust and the Company may elect to refrain from paying a holder dividends or other distributions declared with respect to either the Shares of the Trust or shares of common stock of the Company until such holder surrenders his certificate, at which time the holder shall be paid the amount of the distributions, without interest, which theretofore became payable with respect to the number of Shares of the Trust and shares of common stock of the Company evidenced by such certificate. 4. Upon the exercise of any share option or conversion of any security, which, prior to the Effective Date, was issued by the Trust, the Company agrees that it will simultaneously issue a number of shares of common stock of the Company to the exercising optionee or converting security holder equal to the number of Shares of the Trust issued to the exercising optionee or converting security holder pursuant to such exercise or conversion, and the Trust agrees to make a payment to the Company -2- 3 or cause payment to be made to the Company, based on the relative fair value, at the time of the exercise or conversion, of a Share of the Trust and a share of common stock of the Company. 5. After the Effective Date, neither the Trust nor the Company shall declare or pay any distribution consisting in whole or in part of Shares of the Trust or shares of common stock of the Company, issue any securities convertible into such Shares or shares or issue rights or warrants to purchase such Shares or shares, or subdivide, combine or otherwise reclassify such Shares or shares, unless both the Trust and the Company take the action to the end that the outstanding Shares of the Trust and shares of common stock of the Company will be paired on a one-to-one basis as contemplated herein. 6. After the Effective Date, neither the Trust nor the Company will be a party to any merger, consolidation, sale of assets, liquidation or other form of reorganization pursuant to with either the Shares of the Trust or the shares of common stock of the Company are converted, redeemed or otherwise changed unless the other entity is also a party to such transaction. 7. The Trust and the Company agree to appoint the same banks or trust companies as transfer agents and the same banks or trust companies as registrars for the Shares of the Trust and shares of common stock of the Company. 8. The Company agrees to cause its shares of common stock to be promptly registered pursuant to Section 12 of the Securities Exchange Act of 1934. 9. The Trust and the Company shall use their best efforts to effect the listing of the shares of common stock of the Company on the American Stock Exchange. 10. This Agreement and the pairing contemplated herein may be terminated upon the affirmative vote of the holders of a majority of the outstanding Shares of the Trust and shares of common stock of the Company. In the event of termination, the parties agree to cooperate to effect a separation of the paired securities to permit the separate issuance and transfer thereof and, in that connection, appropriate provision shall be made to honor any outstanding commitments to issue additional Shares of the Trust and shares of common stock of the Company. 11. This Agreement may be amended by action of the Trustees of the Trust and the Board of Directors of the Company, provided that any such action must be approved by a majority of the outstanding Shares of the Trust and the shares of common stock of the Company if such amendment would permit a separation of the paired Shares of the Trust and shares of common stock of the Company. -3- 4 12. (a) In the event that (x) the Trust issues Excess Trust Shares, par value $.01 per share, of the Trust ("Excess Trust Shares") or the Company issues shares of Excess Common Stock, par value $.01 per share, of the Company ("Excess Common Shares"), and (y) the Shares and the shares of common stock of the Company which were converted into such Excess Trust Shares and such Excess Common Shares, respectively, were paired pursuant to this Agreement, then in addition to, and not in any respect in limitation of, the provisions of the Declaration of Trust of the Trust and the Amended and Restated Articles of Incorporation of the Company (as each may be amended from time to time): (i) such Excess Trust Shares and such Excess Common Shares shall not be transferable, and shall not be transferred on the respective books of either the Trust or the Company, unless in connection with a transfer the transferor transfers and the transferee acquires the same number of Excess Trust Shares and Excess Common Shares; (ii) neither the Trust nor the Company shall issue or transfer or agree to issue or transfer any Excess Trust Shares or Excess Common Shares unless effective provision is made for the issuance or transfer to the same person of the same number of Excess Trust Shares and Excess Common Shares; and (iii) each certificate evidencing Excess Trust Shares shall have printed on its reverse side a certificate evidencing the same number of Excess Common Shares. A legend shall be placed on the face or reverse side of each certificate evidencing ownership of Excess Trust Shares and Excess Common Shares referring to the restrictions on transfer of the Excess Trust Shares and Excess Common Shares. (b) In the event that (x) the Trust issues Excess Preferred Shares, par value $.01 per share, of the Trust ("Excess Preferred Shares") or the Company issues shares of Excess Preferred Stock, par value $.01 per shares, of the Company ("Excess Preferred Stock"), and (y) the shares of beneficial interest of the Trust and the shares of preferred stock of the Company which were converted into such Excess Preferred Shares and such Excess Preferred Stock, respectively, were paired pursuant to this Agreement, then in addition to, and not in any respect in limitation of, the provisions of the Declaration of Trust of the Trust and the Amended and Restated Articles of Incorporation of the Company (as each may be amended from time to time): (i) such Excess Preferred Shares and such Excess Preferred Stock shall not be transferable, and shall not be transferred on the respective books of either the Trust or the Company, unless in connection with a transfer the -4- 5 transferor transfers and the transferee acquires the same number of Excess Preferred Shares and Excess Preferred Stock; (ii) neither the Trust nor the Company shall issue or transfer or agree to issue or transfer any Excess Preferred Shares or Excess Preferred Stock unless effective provision is made for the issuance or transfer to the same person of the same number of Excess Preferred Shares and Excess Preferred Stock; and (iii) each certificate evidencing Excess Preferred Shares shall have printed on its reverse side a certificate evidencing the same number of Excess Preferred Stock. A legend shall be placed on the face or reverse side of each certificate evidencing ownership of Excess Preferred Shares and Excess Preferred Stock referring to the restrictions on transfer of the Excess Preferred Shares and Excess Preferred Stock. -5- 6 IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed as of the day and year first above written. STARWOOD LODGING TRUST By: --------------------------- STARWOOD LODGING CORPORATION By: --------------------------- -6- EX-10.12 5 EXECUTIVE EMPLOYMENT AGREEMENT 1 EXHIBIT 10.12 EXECUTIVE EMPLOYMENT AGREEMENT This Executive Employment Agreement ("Agreement") dated November ___, 1994 is entered into by and between Jeffrey C. Lapin ("Executive") and Hotel Investors Trust, a Maryland real estate investment trust ("the Company"). This Agreement is effective as of the Closing Date ("the Closing Date") set forth in Section 1.2 of that certain Formation Agreement dated November 11, 1994 by and between the Company, Hotel Investors Corporation ("HIC"), Starwood Capital Group, L.P. and others. The Company desires the continued services of the Executive in the capacity described below, on the terms and conditions and subject to the rights of termination hereinafter set forth, and the Executive is willing to accept such employment on such terms and conditions. In consideration of the mutual agreements hereinafter set forth, the Executive and the Company agree as follows: ARTICLE I Capacity and Services 1.1 The Company hereby employs the Executive as President and Chief Operating Officer of the Company to perform such executive and managerial duties commensurate with such office as he shall reasonably be directed by the Chief Executive Officer, if that position is held by Barry S. Sternlicht ("Sternlicht"), and otherwise by the Board of Trustees of the Company (the "Board of Trustees"). During the term of the Executive's employment hereunder, he shall devote his full business time and efforts to the business and affairs of the Company, shall use his best efforts to supply his skill and experience to perform his duties and to promote the interests of the Company and shall have no other employment without the prior approval of the Board of Trustees. 1.2 The principal office of the Company shall be located in Los Angeles, California at all times prior to December 31, 1995. 1.3 The Executive's duties and authority hereunder shall be commensurate with the title and status afforded him hereunder, taking into account the expected participation of Sternlicht in the management of the Company. During the term of the Executive's employment hereunder, the Company shall not hire or fire any officer of the Company without either a determination by the Board of Trustees or (except for the hiring or firing of the Chief Executive Officer) the prior consent of Executive. Execution Copy 2 1.4 The Executive hereby accepts such employment and agrees to render to the Company the services specified in this Article I and to be bound by the terms and conditions of this Agreement. ARTICLE II Term 2.1 The term of the Executive's employment hereunder shall commence on the Closing Date and expire on the second anniversary of the Closing Date (the "Termination Date") unless sooner terminated pursuant to Article VI hereof. ARTICLE III Compensation and Expenses 3.1 Base Salary. As compensation for the Executive's services during the term of the Executive's employment hereunder, the Company shall pay the Executive a base salary at the annual rate of $200,000 through the first anniversary of the Closing Date and $225,000 thereafter (the "Base Salary") payable in equal monthly installments or at such other times as the Executive and the Company shall agree. The Base Salary shall be reviewed at least annually by the Board of Trustees and may be increased as determined by the Board of Trustees if, and to the extent that, the Board of Trustees determines that the Executive's contribution to the Company warrant such increase. Executive's Base Salary shall not be decreased at any time during the term of his employment hereunder from the Base Salary then in effect. 3.2 Incentive Compensation. In addition to the Base Salary, the Company shall pay the Executive during the term of his employment hereunder an annual incentive bonus (the "Bonus"), in a lump-sum payment within 30 days of the end of each calendar year (excluding 1994) in an amount (no less than $75,000 respecting each of 1995 and 1996) determined in the discretion of the Board of Trustees based on the performance of the Executive and his contribution to the Company during such calendar year. 3.3 Expenses. The Company shall reimburse the Executive for all reasonable and necessary business expenses incurred by him in connection with the performance by him of his duties hereunder. 3.4 Vacation. The Executive shall be entitled to such number of vacation days in each calendar year as determined by the Company from time to time for its senior executives but not less than four weeks in each calendar year which may be accumulated or used by the Executive; provided, however, up to 8 -2- Execution Copy 3 weeks of unused vacation time may be accumulated by Executive and at his option be compensated for upon termination of his employment (at the rate of Base Salary then in effect). 3.5 Indemnification; Officers and Directors Insurance. As a trustee and officer of the Company, the Executive shall be entitled to the benefits of those provisions of the Declaration of Trust of the Company, as amended, which provide for indemnification of officers and trustees of the Company, and of the bylaws or the equivalent regulations of the Company. No such provision shall be amended to any way limit or reduce the extent of indemnification available to Executive as an officer or trustee of the Company. In addition, to the fullest extent permitted by law, the Company shall indemnify and save and hold harmless the Executive from and against any and all claims, demands, liabilities, costs and expenses, including judgments, fines or amounts paid on account thereof (whether in settlement or otherwise), and reasonable expenses, including attorneys fees actually and reasonably incurred (except only if and to the extent that such amounts shall be finally adjudged to have been caused by Executive's willful breach of the express provisions of this Agreement) to the extent that the Executive is made a party to or witness in any action, suit or proceeding or if a claim or liability is asserted against Executive (whether or not in the right of the Company), by reason of the fact that he was or is a trustee or officer or acted in such capacity on behalf of the Company, or by reason of or arising out of or resulting from entering into this Agreement or the rendering of services by the Executive pursuant to this Agreement, whether or not the same shall proceed to judgment or be settled or otherwise be brought to a conclusion. The Company shall advance to Executive on demand all reasonable expenses incurred by Executive in connection with the defense or settlement or any such claim, action, suit or proceeding, and Executive hereby undertakes to repay such amounts only if and to the extent that it shall be finally adjudged that the Executive is not entitled to be indemnified by the Company under this Agreement or under the Declaration of Trust or the bylaws or equivalent regulations of the Company as of the date hereof which govern indemnification of officers or trustees of the Company (but also giving effect only to future amendments which broaden or expand any such indemnification and obligations or right more favorably to Executive). Executive shall also be entitled to recover any cost of enforcing his rights under this Section (including without limitations reasonable attorneys fees and disbursements) in the event any amount payable hereunder is not paid within 30 days of written request therefor by Executive. The rights of Executive under this Section shall survive the termination of this Agreement and be applicable for so long as Executive may be subject to any claim, demand, liability, cost or expense against which this Section is intended to protect and indemnify him. -3- Execution Copy 4 Notwithstanding anything contained in this Agreement to the contrary (including the provisions of Article VI hereof), the Company shall, at no cost to the Executive, use its best efforts to at all times include the Executive during the term of the Executive's employment hereunder and for a period of not less than four years thereafter, as an insured under any directors and officers liability insurance policy maintained by the Company, which policy shall provide such coverage in such amounts as the Board of Trustees shall deem appropriate for coverage of all trustees and officers of the Company. 3.6 Other Employee Benefits. During the term of this Agreement, the Company shall pay the premium (not to exceed $9,000 annually) for the Executive to purchase and maintain a disability insurance policy, which policy shall guarantee to Executive the payment to him of amounts and benefits no less than those described in the attached letter dated October 27, 1994 from Mark L. Jacobson to Madison Grose, Esq., for the period of such disability. During the term of this Agreement, Executive shall also be entitled to participate in any benefit programs adopted from time to time by the Company for the benefit of any executive employee, and Executive shall be entitled to receive such other fringe benefits as may be granted to him from time to time by the Company's Board of Trustees. During the term of this Agreement, the Executive shall also be entitled to participate in any benefit plans relating to stock options, stock purchases, pension, thrift, profit sharing, life insurance, medical coverage for Executive and members of his family, education, or other retirement or employee benefits similar or dissimilar to the foregoing, available to any other executive employee of the Company, subject to any restrictions (including waiting periods) specified in such plans. Notwithstanding the foregoing, Executive shall participate in and receive the benefit of any and all fringe benefits made available to any other executive employee of the Company to at least the same extent and at least the same benefit as any other executive employee (this provision being intended to afford Executive "most favored nation" treatment with respect to any and all fringe benefits (all benefits other than cash salary, bonus, stock options and stock loans) granted to any executive employee of the Company). "Most favored nation treatment" for Executive shall not extend to stock options or stock loans, the minimal provisions for which are as set forth in this Agreement, or to salaries and bonuses; as to all such items, the Company reserves the right to award greater benefits to other executives without affording such greater benefits to Executive. Further, the Company agrees to adopt benefits and programs at least as beneficial for its executives as HIC adopts for its executives. 3.7 Stock Options. Executive shall be entitled to receive options to purchase 250,000 paired shares of the Company and HIC, as presently constituted, at a purchase price equal to market value on the date of grant (which shall be the Closing -4- Execution Copy 5 Date), exercisable for a period of 10 years, exercisable after termination of employment or expiration of the term of this Agreement for no less than one year. The aforesaid options for 250,000 paired shares shall be adjusted for any split or reverse split (i.e., reduced proportionately for any reverse split and increased proportionately for any split). The aforesaid options shall vest at a rate which is no longer than the most rapid rate of vesting of options granted to any other executive during the term of this Agreement. In the event such vesting period shall extend beyond the term of this Agreement, such options shall nonetheless continue to vest on behalf of Executive even after expiration or termination of this Agreement, except as provided in Article VI hereof, and shall in all events be exercisable for a period of at least one year following complete vesting of such options; and the foregoing provisions with respect to vesting and exercisability of options shall be applicable notwithstanding any provision or provisions to the contrary in any plan or agreement pursuant to which such options may be granted, these provisions accordingly for such purpose constituting an amendment to any such plan or agreement of the Company. However, options shall not vest to the extent that, at any time prior to the applicable vesting date, this Agreement shall have been terminated by the Company for "cause" (as hereinafter defined) or if and to the extent it shall be finally adjudged prior to a vesting date that Executive has materially breached his Article IV covenants following the termination of this Agreement. Stock options shall be subject to such other customary terms and provisions as are generally contained in option agreements received by other executives or Trustees of the Company. 3.8 Loan to Purchase Shares. At the first public offering by the Company occurring during the term of this Agreement, Executive shall have the right to purchase up to $250,000 of paired shares (at the offering price) and to receive a loan from the Company to purchase such shares (the "Stock Loan") in an amount equal to 100% of the purchase price for such shares. The Stock Loan: (i) shall be secured by a first lien pledge of the shares purchased with such Stock Loan, (ii) shall be evidenced by a note executed by Executive and such other documentation as the Company may reasonably require; (iii) shall be a recourse loan to Executive to the extent of 50% of the principal amount thereof from time to time and 50% of all interest thereon and all collection costs accruing from time to time; (iv) shall not exceed a principal amount of $250,000; (v) shall have a term of 10 years; (vi) shall bear interest at a rate equal to the lowest applicable federal rate (as defined in Section 1274(d) of the Internal Revenue Code of 1986, as amended) from time to time, with said interest to be paid quarterly in arrears; (vii) shall be prepayable in whole or in part at any time and from time to time without prepayment premium or penalty; (vii) shall be due on sale or other transfer at any time or from time to time of the collateral therefor (in a ratable amount of principal based on the number of paired shares so sold or -5- Execution Copy 6 transferred); and (viii) shall provide for delinquency charges and collection costs as are customary in loans of this nature; and (ix) shall provide that all dividends paid on the pledged shares in excess of the then maximum marginal tax rate (federal and state combined) on the taxable portions of such dividends will be used to pay interest and principal on the loan. In lieu of making the loan itself, the Company may cause a third party to make such loan. ARTICLE IV Restrictive Covenants 4.1 Other Business Ventures. In addition to the restriction from having other employment provided in Section 1.1 hereof, during the term of the Executive's employment hereunder the Executive shall not, without the prior approval of the Board of Trustees, directly or indirectly, engage in, represent, be connected with or have a financial interest in, any business which is or, to the best of his knowledge, is about to become competitive with the business of the Company; provided, however, that nothing herein contained shall be deemed to prohibit the Executive from being a passive investor owning up to 2% of any class of outstanding securities of any company whose stock is publicly traded, or from being a passive investor owning up to 10% of any other person, firm or corporation engaged in any business whatever. 4.2 Confidential Information. Except (i) in the course of his employment with the Company, (ii) as he may be required pursuant to any law or court order or similar process, or (iii) in connection with any claim by Executive against the Company, Executive shall not at any time during or after the term of Executive's employment hereunder, directly or indirectly disclose or use any confidential information or proprietary data with respect to the Company, HIC or any of their respective subsidiaries or Affiliates that is not otherwise in the public domain. In the event of any dispute between the Executive and the Company or between the Executive or the Company and others, Executive shall cooperate with the Company as to redaction or other protective measures with respect to any unnecessary public disclosure of any such confidential information or proprietary data. 4.3 Inducing of Company Employees. During the term of the Executive's employment hereunder, the Executive shall not, except in the course of the performance of his duties hereunder or with the prior approval of the Board of Trustees, in any way directly or indirectly induce or attempt to induce or otherwise counsel, advise or encourage any person to leave the employment of the Company. In addition, in the event that the Executive's employment hereunder shall be terminated pursuant to any of -6- Execution Copy 7 Section 6.1 or Section 6.3 hereof, the Executive shall not, with respect to any person or persons (other than his assistant, Jayne Gordon) who, to the Executive's best knowledge, was employed by the Company, HIC or their respective subsidiaries or SLT Realty Limited Partnership or SLC Operating Limited Partnership at any time during the period commencing six months prior to the date such termination becomes effective pursuant to Section 6.5 hereof ("Company Employee"): (i) for a period of 12 months following the date on which such termination becomes effective as aforesaid, in any way directly or indirectly hire, attempt to hire, or cause to be hired any Company Employee, without the prior approval of the Board of Trustees; and (ii) for a period of 12 months following the date on which such termination becomes effective as aforesaid, in any way directly or indirectly induce or attempt to induce or otherwise counsel, advise or encourage any Company Employee to leave the employment of the Company, HIC or their respective subsidiaries or SLT Realty Limited Partnership or SLC Operating Limited Partnership, without the prior approval of the Board of Trustees. 4.4 (Intentionally Omitted) 4.5 Default in Payment; Failure to Exercise. Notwithstanding anything contained in this Agreement to the contrary in the event that the Company shall have failed to make any required payment pursuant to Article VI hereof, and such failure to pay shall have continued for a period of 20 days after the date on which written notice specifying such failure and requiring the Company to remedy the same shall have been given to the Company by the Executive, then, without waiving any other rights the Executive may otherwise have with respect thereto, the Executive shall not be obligated to comply with any of the provisions of Section 4.3 hereof. ARTICLE V Representations and Warranties of Executive 5.1. The Executive hereby represents and warrants to the Company that the Executive is not aware of any presently existing fact, circumstance or event (including, without limitation, any health condition) which would preclude or restrict him from providing to the Company the services provided for in this Agreement, or which would give rise to any breach of any term or provision hereof or which could otherwise result in the termination of his employment hereunder for cause pursuant to Section 6.1 hereof. -7- Execution Copy 8 ARTICLE VI Termination 6.1 Termination of Employment for Cause. The Company shall have the right during the term of this Agreement to terminate this Agreement and the Executive's employment hereunder for cause if, and only if, the Board of Trustees shall give notice to the Executive of such termination pursuant to Section 6.5 hereof. "Cause," as used in this Agreement, shall mean the Executive's: (i) material breach of this Agreement, consisting of (x) any repeated gross or willful refusal, failure or neglect by the Executive fully and faithfully to perform his duties and fulfill his obligations under this Agreement (which shall include, without limitation, any such refusal, failure or neglect resulting from the Executive's excessive absenteeism not related to physical or mental illness), and (y) any material breach of the Executive's fiduciary duties under Maryland law as an officer or trustee of the Company; or (ii) conviction of a felony. In the event that the Executive's employment hereunder is terminated by the Company for cause in accordance with this Section 6.1, all of the Company's obligations under this Agreement shall forthwith cease and terminate on the date such termination shall become effective pursuant to Section 6.5 hereof, including, without limitation, any obligation to pay any compensation or provide any other benefit pursuant to Article III hereof; provided, however, that the Executive shall be entitled to receive (i) payment for any unpaid portion of the Base Salary then in effect pursuant to Section 3.1 hereof, prorated to the effective date of such termination, and (ii) payment or reimbursement of any expenses pursuant to Section 3.3 hereof which he would otherwise have been entitled to receive as of the effective date of such termination. 6.2 Death. In the event that the Executive shall die during the term of this Agreement, all of the Company's obligations under this Agreement shall terminate on the date of such death, except that the Executive's estate shall be entitled to receive (i) the Basic Benefits, and (ii) any Bonus with respect to any prior fiscal year which the Executive was entitled to receive as of the date of his death pursuant to Section 3.2 hereof but which the Company had not yet paid to the Executive as of such date, and (iii) payment or reimbursement of any expenses pursuant to Section 3.3 hereof which he would otherwise have been entitled to receive as of the effective date of such termination. -8- Execution Copy 9 6.3 Disability. In the event of the Executive's Disability during the term of this Agreement for any period (the "Disability Period") of at least six consecutive months, all of the Company's obligations under this Agreement shall forthwith cease and terminate if, and only if, the Company shall give the notice provided for in Section 6.5 hereof, in which case such termination shall become effective on the date set forth in such Section 6.5, except that the Executive shall be entitled to receive (i) the Basic Benefits, (ii) any Bonus with respect to any prior fiscal year which the Executive was entitled to receive pursuant to Section 3.2 hereof but which the Company had not yet paid to Executive, (iii) disability payments from the Company at the rate of $225,000 per annum, payable in equal monthly installments, until the earlier of ninety days after such effective date of termination or the date on which the Executive is entitled to begin receiving payments under the policy provided for in Section 3.6 hereof, and (iv) the Fringe Benefits. The term "Disability" as used in this Section 6.3 shall mean the inability of the Executive to perform his employment services hereunder by reason of physical or mental illness or incapacity, whether voluntary or involuntary and whether arising out of sickness, accident or otherwise. 6.4 Termination By Executive for Good Reason. Executive may terminate this Agreement for "Good Reason". For purposes of this Agreement, "Good Reason" shall mean the occurrence, without the Executive's express written consent, of any one or more of the following events: (i) The assignment of any duties which are in any significant respect inconsistent with Executive's status as Chief Operating Officer of the Company or a substantial alteration (including and without limitation any material diminution) in the nature or status of Executive's responsibilities involving the Company from those in effect at the Closing Date, which inconsistent assignment or substantial alteration is not remedied or cured forthwith following Executive's notification to the Company. (ii) Any failure by the Company to provide any of the compensation or benefits to be made available to the Executive under this Agreement, which is not cured forthwith following Executive's notification to the Company. (iii) Any other breach of the terms of this Agreement by the Company, which is not cured forthwith following Executive's notification to the Company. (iv) The removal or suspension from office without "cause" of the Executive as President and Chief Operating Officer of the Company or the failure without "cause" to elect or appoint the Executive as either the President and Chief Operating Officer -9- Execution Copy 10 or as the Chief Executive Officer, of the Company throughout the term of this Agreement. (v) The relocation of Company's principal executive offices to a location more than 25 miles from its location as of the Closing Date (unless the Executive shall not have given notice of termination under this clause (v) within 30 days subsequent to his receipt from the Company of formal notification that the Company's principal executive offices will be so relocated), or the Company's requiring Executive at any time to be based anywhere other than the Company's principal executive offices, except for required travel on the Company's business to an extent substantially consistent with Executive's present business travel obligations. (vi) If individuals who as of the date of the Closing Date constitute the Board of Trustees of the Company, cease for any reason to constitute at least 51% of such Board. (vii) A decision by the Board of Trustees after the Closing Date to the effect that the Company shall merge or consolidate, or sell, transfer or otherwise dispose of all or substantially all of its assets, or dissolve or liquidate. (viii) The failure of Executive for any reason other than "cause" to be a member of the Board of Trustees of the Company. In the event of any such termination, which shall become effective on the date set forth in Section 6.5 hereof, the Executive shall be entitled to receive the following (which, so long as Madison Grose, Esq. is a Trustee of the Company and is employed by and acts as Counsel to Starwood Capital Group, L.P. and Sternlicht, and otherwise in the absence of bad faith or willful breach by the Company, shall be Executive's sole and exclusive monetary remedy by reason of such termination due to the occurrence of such "Good Reason" event, it being agreed that, as actual damages would be difficult to measure or quantify and it would be impracticable to determine same, the following shall, so long as Madison Grose, Esq. is a Trustee of the Company and is employed by and acts as Counsel to Starwood Capital Group, L.P. and Sternlicht, and otherwise in the absence of bad faith or willful breach by the Company constitute liquidated damages for Executive by reason of such termination due to the occurrence of such "Good Reason" event): (i) The Basic Benefits (ii) The Lump Sum Payment (iii) The Fringe Benefits (b) As used in Article VI: -10- Execution Copy 11 (i) "Basic Benefits" shall mean (y) any unpaid portion of the Base Salary in effect as of the date termination of employment is effective, prorated to such effective date, (z) any Bonus for the then current fiscal year of the Company, prorated to such effective date. (ii) "Lump-Sum Payment" shall mean a single payment to be paid to the Executive by the Company, within five days from the date of termination, in an amount equal to the sum of (x) an amount equal to all Base Salary that would have been payable to Executive pursuant to this Agreement had the Executive continued to be employed for the remaining unexpired term of this Agreement and (y) an amount equal to all Bonuses that would have been payable to Executive respecting the remaining unexpired term of this Agreement as his annual Bonus for each year(s) or portion thereof of such remaining unexpired term, being equal, as to any year or fraction thereof of such remaining unexpired term, to (A) the greater of $6,250 or one-twelfth of Executive's Bonus for the most recently concluded fiscal year of the Company prior to the fiscal year of the Company in which the termination occurs, multiplied by (B) the number of whole and partial calendar months remaining in the unexpired term of this Agreement. (iii) "Fringe Benefits" shall mean all fringe benefits set forth in Sections 3.5 through 3.8 throughout the remaining unexpired term of the Agreement, as if the Executive's employment under the Agreement had not been terminated. If, as a result of termination of Executive's employment, Executive or his otherwise eligible dependents or beneficiaries shall become ineligible for benefits in any one or more of the Company's benefit plans, then throughout such remaining unexpired term of the Agreement, as if Executive's employment under the Agreement had not been terminated, the Company shall continue to provide the Executive and his eligible dependents or beneficiaries with benefits at a level at least equivalent to the level of benefits for which the Executive and his dependents and beneficiaries were eligible under such plans immediately prior to the termination date. "Fringe Benefits" shall also include, notwithstanding any provision of any applicable Company benefit plan or agreements (including but not limited to those relating to stock options, stock appreciation rights, restricted stock awards, stock purchases, pensions, thrift, profit sharing or other retirement or employee benefits) to the contrary, all rights to such benefits previously granted to Executive, which shall as of the termination date become immediately fully vested and exercisable by the Executive and shall remain exercisable for a period of not less than one year. These provisions of Section 6.4 shall be applicable, notwithstanding any provisions to the contrary in any such plans or agreements of the Company referred to above as of the date of termination. Notwithstanding the foregoing and in clarification thereof, Fringe Benefits shall not include the right to receive any stock options or stock loans -11- Execution Copy 12 which have not been granted to Executive prior to the date of termination. 6.4.1 Executive shall not be required in any way to mitigate the amount of any payment provided for in this Section 6.4, including but not limited to seeking other employment, nor shall the amount of any payment provided for in this Section 6.4 be reduced by any compensation or other income earned or received by Executive as the result of employment with another employer or otherwise after the date of termination of his employment hereunder. 6.5 Notice of Termination. The Company shall give notice to the Executive of any termination by the Company pursuant to any of Section 6.1 or Section 6.3 hereof, as the case may be, and such termination shall become effective (i) with respect to termination pursuant to Section 6.1 hereof, only if such notice is given within 30 days after the Chief Executive Officer or the Board of Trustees becomes aware of the occurrence of the "cause" referred to in Section 6.1, and if such notice is so given, on the date such notice is given, (ii) with respect to termination pursuant to Section 6.3 hereof, only if such notice is given within 30 days of the end of the Disability Period referred to in such Section 6.3 hereof, and if such notice is so given, on the thirtieth day after such notice is given. Termination pursuant to Section.6.2 hereof shall become effective immediately on the date of the Executive's death and no notice shall be required with respect to such termination. Termination by the Executive under Section 6.4 shall become effective 30 days after notice from Executive to Company. 6.6 Disputed Termination. If the Executive resigns his employment with the Company alleging in good faith as the basis for such resignation any of the grounds specified in Section 6.4 and if the Company then disputes Executive's rights to the payment of benefits under Section 6.4, the Company shall nonetheless continue to pay Executive the full compensation (including but not limited to his Base Salary, Bonus and Fringe Benefits) in effect on the date Executive provided notice of such resignation, and the Company shall continue the Executive as a participant in all compensation benefits and insurance plans in which the Executive was then a participant, until the earlier of the Termination Date or the date the dispute is finally resolved, either by mutual written agreement of the parties or by decree of a court of competent jurisdiction that is not appealable or with respect to which the time for appeal has expired and no appeal has been perfected. For purposes of this Section, there shall be a rebuttable presumption that an event occurred constituting "Good Reason" under Section 6.4 and that the Executive alleged such grounds in good faith. -12- Execution Copy 13 Article VIII Definitions In addition to the terms defined elsewhere in this Agreement, the following terns shall have the following meanings for purposes of this Agreement: 8.1. Affiliate. "Affiliate" shall mean, with respect to any specified individual or entity, any individual or entity that directly, or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, the individual or entity specified. 8.2. Closing Date. The "Closing Date" shall mean, the date of the closing to be held pursuant to the terms and conditions of the Formation Agreement. Article IX General 9.1 Governing Law. This Agreement shall be governed by, and construed, interpreted and enforced in accordance with, the internal laws of the State of California without reference to principles of conflict of laws. 9.2 Captions. The Article and Section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 9.3 Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements, arrangements and understandings, written or oral, between the parties hereto. Upon the Closing Date this Agreement shall supersede in its entirety all prior employment agreements between Executive and the Company. 9.4 No Other Representations. No representation, promise or inducement has been made by either party hereto that is not embodied in this Agreement, and neither party shall be bound by or liable for any alleged representation, promise or inducement not set forth herein. 9.5 Assignability. This Agreement is personal in its nature. Accordingly, this Agreement and the rights and obligations of the parties hereunder may not be assigned or delegated by either party, except to the extent, if any, that the Company's acting as general partner of SLT Realty Limited Partnership may be deemed an assignment by the Company. -13- Execution Copy 14 9.6 Amendments; Waivers. This Agreement may be amended, modified, superseded, cancelled, renewed or extended and the terms or covenants hereof may be waived, but only by a written instrument executed by Executive and the Company, or, in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect such party's right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 9.7 Termination of Agreement. Notwithstanding anything in this Agreement to the contrary, if the Closing to be held pursuant to the Formation Agreement shall not have taken place on or prior to February 28, 1995, this Agreement and all of the rights and obligations of the parties hereunder shall terminate and be null and void and of no force, and effect and neither of the parties hereto shall have any liability or obligation to the other. 9.8 Legal Expenses. Whether or not the Closing under the Formation Agreement shall take place, the Company shall pay or reimburse the Executive for all reasonable fees and disbursements of the Executive's counsel. In the event any arbitration or judicial determination becomes necessary of any dispute arising as to the parties' rights and obligations hereunder, the Company shall bear the reasonable attorneys fees and costs of Executive's counsel, except if and to the extent it shall be finally adjudged that such dispute was caused by Executive's willful breach of the express provisions of this Agreement. 9.9 Approval of the Board of Trustees. Whenever approval of the Board of Trustees shall be required to be obtained pursuant to this Agreement, such approval shall not be unreasonably withheld and shall be deemed to have been obtained if (i) evidenced by a resolution duly adopted by the Board of Trustees, (ii) otherwise set forth in any duly recorded minutes of any meeting of the Board of Trustees, or (iii) evidenced by any written instrument signed by any trustee (other than the Executive) on behalf of the Board of Trustees. 9.10 Severability. Any term or provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting any other term or provision hereof, and any such prohibition or unenforceability in any jurisdiction -14- Execution Copy 15 shall not invalidate or render unenforceable such term or provision in any other jurisdiction. 9.11 Notices. All notices and other communications required or provided for under this Agreement shall be in writing and shall be personally delivered or sent by registered or certified mail, postage prepaid, with return receipt requested, or sent by telegram, telex, telecopy or similar form of telecommunication, and shall be deemed to have been given when received. Any such notice or communication shall be addressed, (a) if to the Company or the Board of Trustees, to the office or residence of the Chief Executive Officer and any Trustee of the Company who shall not be an officer or employee of the Company, or to such other address and/or to the attention of such other person as the Board of Trustees shall have furnished to the Executive in writing, or (b) if to the Executive, to 1317 Palisades Drive, Pacific Palisades, California 90272, or to such other address as the Executive shall have furnished to the Compensation Committee in writing. 9.12 Beneficiaries. Whenever this Agreement provides for any payment to the Executives estate, such payment may be made instead to such beneficiary or beneficiaries as the Executive may have designated in writing and filed with the Company. The Executive shall have the right to revoke any such designation from time to time and to redesignate any beneficiary or beneficiaries by written notice to the Company. 9.13 Disclaimer. The name "Hotel Investors Trust" is a designation of a Maryland real estate investment trust and its trustees (as trustees but not personally) under a Declaration of Trust dated as of August 15, 1969, as amended, and all persons dealing with such trust must look solely to such trust property for enforcement of any claims against such trust, a the trustees officers, agents and security holders of such trust assume no personal liability for obligations entered into on behalf of such trust and the respective property shall not be subject to the claims of any person relating to any such obligations. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. The Company: HOTEL INVESTORS TRUST By: _____________________________________ Senior Vice President and Trustee -15- Execution Copy 16 The Executive: _________________________________________ Jeffrey C. Lapin -16- Execution Copy EX-10.24 6 AMENDED AND RESTATED CREDIT AGREEMENT 1 EXHIBIT 10.24 AMENDED AND RESTATED CREDIT AGREEMENT among STARWOOD LODGING TRUST (formerly known as Hotel Investors Trust) and SLT REALTY LIMITED PARTNERSHIP 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 ______________________________ Dated as of March 24, 1995 ______________________________ 2 TABLE OF CONTENTS DEFINITIONS ARTICLE 1. Amount and Terms of the Credit 1.1 Restructuring of Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 1.2 Assignment and Assumption; Third Closing Loans . . . . . . . . . . . . . . . . . . . . . . 26 1.3 Dating and Registration of Notes; Transfer of Third Closing Loans . . . . . . . . . . . . 27 1.4 Maturity Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 1.5 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 (a) Stated Rate . . . . . . . . . . . . . . . . . . . . . . . . . . 27 (b) Notice by Collateral Agent . . . . . . . . . . . . . . . . . . . 28 1.6 Additional Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 1.7 Acquisition Credit Facility; Severance of Loans . . . . . . . . . . . . . . . . . . . . . 28 1.8 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (a) Extension Fee . . . . . . . . . . . . . . . . . . . . . . . . . 29 (b) Service Charges . . . . . . . . . . . . . . . . . . . . . . . . 29 1.9 Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (a) Optional Prepayment . . . . . . . . . . . . . . . . . . . . . . 29 (b) Mandatory Prepayments . . . . . . . . . . . . . . . . . . . . . 30 (c) Notices of Prepayments . . . . . . . . . . . . . . . . . . . . . 31 (d) Formula for Application of Prepayments . . . . . . . . . . . . . 31 1.10 Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 1.11 Form and Terms of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 1.12 Pro Rata Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 1.13 Increased Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 1.14 Additional Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE 2. Use of Proceeds i 3
Page ---- ARTICLE 3. Representations and Warranties 3.1 Organization, Standing, etc. of the Borrower and the Other Companies; Authorization . . . 33 (a) Realty Partnership . . . . . . . . . . . . . . . . . . . . . . . 34 (b) Operating Partnership. . . . . . . . . . . . . . . . . . . . . . 34 3.2 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 3.3 Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 3.4 Financial Information; Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 3.5 Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 3.6 Material Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 3.7 Tax Returns and Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 3.8 Indebtedness, Liens and Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 3.9 Title to Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 3.10 Litigation, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 3.11 Authorization; Compliance with Other Instruments . . . . . . . . . . . . . . . . . . . . . 37 3.12 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 3.13 Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 3.14 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 3.15 Margin Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 3.16 Employee Retirement Income Security Act of 1974 . . . . . . . . . . . . . . . . . . . . . 39 3.17 Ownership of Borrower and SLT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 (a) Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 (b) SLT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 3.18 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 3.19 Trademarks, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 3.20 Burdensome Court Orders, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 3.21 Fire, Explosion, Labor Disputes, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 40 3.22 Binding Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 3.23 Lien Validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 3.24 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 3.25 Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 3.26 All Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 3.27 Certain Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
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Page ---- ARTICLE 4. Gaming Partnership 4.1 Consent to Transfer of Assets of HICN to Gaming Partnership . . . . . . . . . . . . . . . 42 (a) Security Documents . . . . . . . . . . . . . . . . . . . . . . . 42 (b) Operating Partnership Guaranty . . . . . . . . . . . . . . . . . 42 (c) Solvency Certificate . . . . . . . . . . . . . . . . . . . . . . 43 (d) Officer's Certificate . . . . . . . . . . . . . . . . . . . . . 43 (e) Local Counsel Opinion . . . . . . . . . . . . . . . . . . . . . 43 ARTICLE 5. Affirmative Covenants 5.1 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 (a) Annual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 (b) Quarterly . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 (c) Monthly . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 (d) Projections and Capital Expenditures Budget . . . . . . . . . . 46 (e) Auditors' Letters . . . . . . . . . . . . . . . . . . . . . . . 47 (f) Management Company Reports . . . . . . . . . . . . . . . . . . . 47 5.2 Other Information and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 (a) Communications With Shareholders . . . . . . . . . . . . . . . . 47 (b) Notices of Default on Other Documents . . . . . . . . . . . . . 48 (c) Notice of Litigation or Other Material Development . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 5.3 Legal Existence: Franchises: Compliance with Laws . . . . . . . . . . . . . . . . . . . . 50 5.4 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 5.5 Restoration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 5.6 Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 5.7 Payment of Other Indebtedness. etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 5.8 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 (a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 (b) Mortgage Notes . . . . . . . . . . . . . . . . . . . . . . . . . 56 (c) Additional Collateral . . . . . . . . . . . . . . . . . . . . . 56 (d) Management Contracts . . . . . . . . . . . . . . . . . . . . . . 57 5.9 Cash Management System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 5.10 Action Under Hazardous Materials Laws . . . . . . . . . . . . . . . . . . . . . . . . . . 58 5.11 Asbestos Monitoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 5.12 Appraisals and Marketing Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 5.13 Termination of Material Licenses and Material Agreements . . . . . . . . . . . . . . . . . 59 5.14 Covenant regarding Second Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
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Page ---- ARTICLE 6. Negative Covenants 6.1 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 6.2 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 6.3 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 6.4 Contingent Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 6.5 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 6.6 Intercompany Loans and Leases, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 6.7 Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 6.8 Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 6.9 Mergers and Consolidations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 6.10 Sale of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 6.11 Issuance of Additional Shares. etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 6.12 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 6.13 Prohibition on Sale of Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 6.14 Modification of Certain Documents, Agreements and Instruments . . . . . . . . . . . . . . 77 6.15 Employment and Compensation Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 6.16 Cash and Cash Equivalents Held by Other Companies . . . . . . . . . . . . . . . . . . . . 77 6.17 Management Companies and Management Contracts . . . . . . . . . . . . . . . . . . . . . . 78 6.18 Compliance with ERISA, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 6.19 No Additional Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 ARTICLE 7. Financial Covenants 7.1 Minimum Adjusted Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 7.2 Available Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 7.3 Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 ARTICLE 8. Defaults; Remedies 8.1 Events of Default: Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 8.2 Remedies on Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 ARTICLE 9. Setoff
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Page ---- ARTICLE 10. Expenses: Indemnification 10.1 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 10.2 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 10.3 Residual Indemnity Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 ARTICLE 11. Amendments and Waivers, etc. 11.1 Waivers in Writing, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 ARTICLE 12. Nature of the Senior Lender's Obligations ARTICLE 13. Limitation of Liability ARTICLE 14. Miscellaneous 14.1 Notices, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 14.2 Extensions of Time: Calculations. etc . . . . . . . . . . . . . . . . . . . . . . . . . . 88 (a) [OMITTED] . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 (b) Calculations . . . . . . . . . . . . . . . . . . . . . . . . . . 88 14.3 Successors and Assigns; Participations . . . . . . . . . . . . . . . . . . . . . . . . . . 89 14.4 Counterparts, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 14.5 Entire Agreement. etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 14.6 Construction of this Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 14.7 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 14.8 No Third-Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
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Page ---- 14.9 Choice of Law and Waiver of Jury . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 (a) Choice of Law . . . . . . . . . . . . . . . . . . . . . . . . . 93 (b) Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . 94 14.10 Exhibits and Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 14.11 Cross References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
EXHIBITS A-3A Form of Third Closing Residual Note A-3B Form of Third Closing State Note F-3 Form of Gaming Partnership Solvency Certificate K-3 Form of Operating Partnership Guaranty from Gaming Partnership O Form of Management Subordination Agreement V Form of Deviation Report W Form of Capital Expenditures Budget X Cash Management Memorandum Y Form of Management Contract vi 8 SCHEDULES 1.7 Terms of Acquisition Credit Facility 1.9 Aggregate Asset Value 3.1 Organization, Standing, etc. of Borrower 3.2 Subsidiaries 3.3 Qualifications 3.4 Financial Statements 3.5(a) Gaming Licenses and Alcohol Beverage Licenses 3.5(b) Exceptions to Material Licenses 3.6(a) Material Agreements 3.6(b) Exceptions to Material Agreements 3.7 Tax Returns and Payments 3.8(a) Indebtedness 3.8(b) Liens 3.8(c) Investments 3.8(d) Contingent Obligations 3.10 Litigation 3.11 Compliance with Other Instruments 3.14(c) Consents - General 3.16 Employee Benefit Plans 3.17(a) Capital Structure of Borrower 3.17(b) Capital Structure of SLT 3.18 Environmental Matters 3.19 Trademarks, etc. 3.21 Fire, Explosion, Labor Disputes, etc. 3.23 Lien Validity 3.24 Solvency 3.25 Accounts 3.26 Assets 4.2(q) Restructuring Plan 6.10 Minimum Release Prices 7 Illustrations of Calculation of Financial Covenants 14.11 Cross-Reference Table ATTACHMENTS I Address for Payments of Notes; Allocation of Payments on the Notes vii 9 AMENDED AND RESTATED CREDIT AGREEMENT (this "Agreement"), dated as of March 24, 1995, among Starwood Lodging Trust (formerly known as Hotel Investors Trust) ("SLT"), SLT Realty Limited Partnership (the "Realty Partnership"), Bankers Trust Company in its capacity as the collateral agent, its successors and assigns ("Collateral Agent") and Merrill Lynch Mortgage Capital Inc. ("Merrill" or the "Senior Lender") as assignee of and successor to The First National Bank of Boston, National Association, John Hancock Mutual Life Insurance Company, John Hancock Variable Life Insurance Company, Connecticut Mutual Life Insurance Company and Wells Fargo Bank, National Association. This Agreement amends and restates the terms and conditions of the Prior Credit Agreement (as hereinafter defined). Preliminary Statement SLT, Merrill (by way of its predecessors in interest) and the predecessor to the Collateral Agent entered into a Credit Agreement dated as of January 28, 1993, as amended (the "Prior Credit Agreement") pursuant to which the First Closing Loans and the Second Closing Loans were made to SLT. The Third Closing (as defined therein) was to have occurred on or before the date that was one hundred fifty (150) days after the date of the First Closing, which period was subject to extension as provided in the Prior Credit Agreement. As set forth in detail in the Formation Agreement, dated November 11, 1994, among SLT, Starwood Lodging Corporation ("SLC"), Starwood Capital Group, L.P. ("Starwood") and certain affiliates of Starwood, including any and all amendments or other modifications, supplements, extensions or renewals thereto or thereof that have been approved by the Senior Lender in writing, and together with the letter agreement, dated November 11, 1994, among SLT, SLC and Starwood (the "Formation Agreement"), SLT, SLC and Starwood have engaged in a transaction (the "Starwood Reorganization") which, in general, involved the transfer to the Realty Partnership of all or substantially all of the assets and liabilities of SLT, the transfer to SLC Operating Limited Partnership (the "Operating Partnership," and together with the Realty Partnership, the "Partnerships") of all or substantially all of the assets and liabilities of SLC other than HICN (as hereinafter defined) and each subsidiary of SLC, and the transfer of certain additional assets, subject to certain liabilities, of the Starwood Partners to the Realty Partnership and the Operating Partnership. The Starwood Reorganization was substantially completed pursuant to the Formation Agreement effective as of January 1, 1995. The transfer of certain of the assets (the "Gaming Assets") of one of the subsidiaries of SLC, Hotel Investors Corporation of Nevada ("HICN"), is subject to prior approval (such approvals collectively the "Nevada Gaming Approvals") by various Nevada regulatory authorities (collectively, the "Nevada Gaming Authorities"), which approvals have not been obtained as the date hereof. As part of the Starwood Reorganization, all of the assets, including the Gaming Assets, and liabilities of HICN have been retained by HICN until the Nevada Gaming Approvals have been received or are no longer necessary, at which time such Assets and liabilities will be transferred to a limited partnership (the "Gaming Partnership"), the partners of which will be the Operating Partnership and HICN. Pursuant to the Second Amendment to the Prior Credit Agreement, the Senior Lender has given its written consent to the Starwood Reorganization, the transfer of substantially all of 10 -2- the assets and liabilities of SLT, SLC and each Subsidiary of SLC other than HICN to the Partnerships, subject to the terms of this Agreement, the transfer of all of the assets and liabilities of HICN to the Gaming Partnership, and the modification of certain terms of the Prior Credit Agreement and of the other Loan Documents and Intercompany Loan Documents executed in connection therewith. The Senior Lender and the Borrower desire to amend and restate the Prior Credit Agreement in its entirety and to provide for, among other things, an additional advance to the Borrower in the amount of $13,436,672.08, the pledge of certain of the Starwood Assets, as defined herein, as additional security for the Loans, and the $75,000,000 Acquisition Credit Facility, as defined herein. The terms and conditions set forth herein and in the other Loan Documents and Intercompany Loan Documents being executed and delivered in connection herewith expressly provide for the continuation of all of the Required Liens and Intercompany Liens in all of the Assets, other than Excluded Assets and Excluded Intercompany Assets, of SLT, SLC and each SLC Subsidiary, whether such Assets were or are transferred to either of the Partnerships or the Gaming Partnership or retained by SLT, SLC or any SLC Subsidiary. In consideration hereof the parties hereto hereby agree as follows: DEFINITIONS As used herein, the following terms have the following respective meanings: "ACM" has the meaning set forth in Section 5.11. "ACM Requirements" means all Hazardous Materials Laws relating to the presence of ACM on any Hotel Property, and comparable state laws, rules and regulations, if any, to the extent relating to the presence of ACM on any Hotel Property, and the Occupational Safety and Health Act of 1970, as amended from time to time, and regulations thereunder and comparable state laws, rules and regulations, if any. "Acquisition Credit Facility" means the credit facility made available hereunder pursuant to the terms, conditions and consents set forth in Section 1.7 and Schedule 1.7. "Acquisition Loan" has the meaning set forth in subsection 1.7(a). "Adjusted London Interbank Offered Rate" means as to any Interest Period a rate per annum equal to the quotient obtained (rounded upward, if necessary, to 1/100 of 1%) by dividing (i) the applicable London Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar Reserve Percentage. "Adjusted Net Worth" means the combined partners' equity of the Borrower and of the Operating Partnership, determined in accordance with GAAP. 11 -3- "Affiliate" means, at any time, any Person that satisfies any one or more of the following criteria: (a)(i) any Person known to the Borrower to hold, of record or beneficially, five percent (5.00%) or more of the shares of beneficial interest or the shares of capital stock of SLT or SLC then outstanding, (ii) any Person then occupying the position of trustee or director of any of the Companies, (iii) any Person then occupying the position of officer of any of the Companies, or (iv) any Person then known to the Borrower to be controlled by or under direct or indirect common control with the Borrower or any other Company or controlled by any Person described in clauses (ii) or (iii) above (including Moorland Hotel Limited Partnership); (b) any general partner, limited partner or other holder of any of the Partnership Interests in the Borrower and/or the Operating Partnership and any Affiliate of any general partner, limited partner or holder of any of the Partnership Interests in the Borrower and/or the Operating Partnership, and (c) any Person then known to the Borrower to be controlled by or under direct or indirect common control with Starwood. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), means the possession, directly or indirectly, of the power to direct or to cause the direction of the management and policy of that Person, whether through the ownership of Voting Stock, a partnership interest or interests, by contract or otherwise. "Aggregate Asset Value" means as of any date of determination the combined total value of all the Assets then held by the Senior Lender as collateral for the Loans as each such value is set forth on Schedule 1.9. If the Borrower or any Company shall acquire a Hotel Property or Mortgage Note after the date hereof, pursuant to Article 6, the value of such Asset and all Assets acquired in connection therewith shall be determined by the Senior Lender. Schedule 1.9 shall be amended to include such value, provided the Senior Lender shall have a Required Lien encumbering such Asset. "Applicable Amount" has the meaning set forth in Section 6.7. "Appraisal" means an appraisal of a Hotel Property or an Indirect Hotel Property prepared by PKF Consulting who shall be M.A.I. approved and with appropriate state licenses (or such other Person as may be reasonably satisfactory to the Senior Lender) and that otherwise satisfies the requirements of all applicable statutes and regulations, if any, applicable at the time in question to the Senior Lender. "Asset" means any property or other asset of any kind that a Person owns, leases or otherwise has the right to possess or use, whether real, personal or mixed real and personal, whether tangible or intangible and whether such ownership or other interest exists on the date of this Agreement or is hereafter acquired. "Asset Sale" has the meaning set forth in Section 6.10. However, the granting of a security interest in, or the placing of a mortgage, deed of trust, deed to secure debt or other encumbrance on, an Asset shall in no event constitute an Asset Sale. "Available Cash" means for any period the Companies' consolidated net income or loss for such period, determined in accordance with GAAP, after restoring thereto amounts 12 -4- deducted for provision for investment losses, provision for income taxes, depreciation and amortization, losses on sales of hotel and hotel/casino Assets, interest paid or accrued with respect to the Loans and interest paid or accrued with respect to the other Indebtedness of SLT or the Realty Partnership for such period, other costs incurred by the Companies in connection with the execution and delivery hereof and performance of the Companies' obligations hereunder, costs incurred by the Companies in connection with the Starwood Reorganization, litigation and settlement costs and other extraordinary costs paid or accrued during or for such period and after subtracting therefrom amounts included for gain on sales of hotel and hotel/casino Assets and income tax benefits. "Bankruptcy Code" means the Bankruptcy Reform Act of 1978 (11 U.S.C. Sections 101-1330), as amended or supplemented from time to time, and any successor statute, and all of the rules issued or promulgated in connection therewith. "Borrower" means the Realty Partnership. However, SLT, the primary obligor with respect to the Loans prior to the Starwood Reorganization, shall remain fully liable for the payment and performance of the Realty Partnership's obligations under this Agreement, the Third Closing Notes and the other Loan Documents and Intercompany Loan Documents to the extent provided herein and therein. "Borrower's Residual General Intangibles" has the meaning set forth in the Mortgage Note Assignment. "Business Day" means (i) for all purposes, any day, excluding Saturday and Sunday and excluding any other day that shall be in New York, New York a legal holiday or a day on which banking institutions are authorized or required by law to close, and (ii) with respect to all notices and determinations in connection with, and payment of principal and interest on, the Loans, any day that is a Business Day described in (i) above and that is a day for trading by and between banks for U.S. dollar deposits in the interbank euro-dollar market. "Capital Expenditure" means any payment made directly or indirectly for the purpose of acquiring or constructing or restoring fixed assets, real property or equipment, which in accordance with GAAP, would be added as a debit to the fixed asset account of the Person making such expenditure, including amounts paid or payable as principal under any conditional sale or other title retention agreement or under any lease or other periodic payment arrangement which is of such a nature that payment obligations of the lessee or obligor thereunder would be required by GAAP to be capitalized and shown as liabilities on the balance sheet of such lessee or obligor. However, no payment pursuant to any ground lease, or hotel operating lease or Capital Lease shall be considered a Capital Expenditure. "Capital Expenditures Budget" has the meaning set forth in subsection 5.1(d). "Capital Lease" means any lease or other periodic payment arrangement in respect of property (real, personal or mixed) which, in accordance with GAAP, should be capitalized on 13 -5- the lessee's balance sheet or for which the amount of the asset and liability thereunder as if so capitalized should be disclosed in a note to such balance sheet. "Cash and Cash Equivalents" means all cash and/or cash equivalents derived from any source whatsoever, including all "instruments" (as defined in Section 9105 of the California Uniform Commercial Code), "checks" (as defined under Section 3104(2)(b) of the California Uniform Commercial Code), "drafts" (as defined pursuant to Section 3104(a) of the California Uniform Commercial Code), credit card or charge card receipts or other forms of payments for the provision of goods or services from any of the Hotel Properties or from other activities of any of the Companies, the collection or payment of which is normally accomplished through the deposit or delivery of such items with a commercial bank or other financial institution for payment and collection. However, Cash and Cash Equivalents of the Companies shall not include any amount or amounts paid to or on behalf of any Company pursuant to any policy of directors' (or trustees') and officers' insurance if and to the extent that such Cash and Cash Equivalents are required by the issuer or issuers of such policy to be, and such Cash and Cash Equivalents are, paid on behalf of insured trustees, directors or officers pursuant to one or more claims made pursuant to such policy (or if payment of such claim has already been advanced by such trustee, director or officer, reimbursed to such Person). "Cash Interest" means having the amount of interest required to be paid by the Borrower to the Senior Lender or paid or accrued to other holders of Indebtedness of the Companies during such period. "Cash Management Accounts" has the meaning set forth in the Cash Management Memorandum. "Cash Management Memorandum" means the memorandum attached hereto as Exhibit X describing the system agreed upon by SLT, the Realty Partnership and the Senior Lender to administer the Borrower's (and the other Companies') Cash and Cash Equivalents, including any and all amendments or other modifications or supplements thereto or thereof. "Cash Management System" has the meaning set forth in the Cash Management Memorandum. "Cash Threshold" means $10,000,000 in the aggregate in (a) Cash and Cash Equivalents (other than Excluded Cash) held in the aggregate by all Companies and deposited in the Cash Management Accounts, and (b) Liquid Investments held by the Companies or any of them. Nothing in this definition shall be construed as requiring any specific level of cash reserves or as requiring that amounts in excess of the Cash Threshold be applied to amortize the Loans. "Change of Control" means any of the following events, unless the Senior Lender by its consent deems any such event not to constitute a Change of Control : (i) the removal or replacement for any reason of SLT as the general partner of the Realty Partnership, (ii) the removal or replacement for any reason of SLC as the managing general partner of the 14 -6- Operating Partnership, (iii) the failure of a nominee of Starwood to be elected to, or at any time for any reason to serve as, a member of SLT's Board of Trustees, SLC's Board of Directors after receipt of the Nevada Gaming Approvals and, prior to receipt of the Nevada Gaming Approvals, the management committee of the Operating Partnership entrusted with control over decisions of the Operating Partnership other than with respect to the Gaming Assets or (iii) Starwood Partners' ceasing to own or control at least fifteen percent (15%) of the issued and outstanding units of limited partnership interests in the Realty Partnership, unless its ownership or control of such interests falls below such percentage as a result of (1) a public offering of equity securities by SLT, SLC or the Partnerships, (2) a merger permitted by Section 6.9 or (3) distribution of OP units with respect to the Partnerships by Starwood Partners pursuant to contracts entered into prior to the date hereof; provided, however, with respect to this clause (3) the fifteen percent (15%) requirement shall not be reduced below ten percent (10%). "Closing" means any of the First Closing, the Second Closing or the Third Closing. "Closing Date" means the date on which a Closing actually occurs. "Code" means the Internal Revenue Code of 1986, as amended. "Collateral" means all Assets now owned or hereafter acquired by the Borrower in which or upon which a Lien is granted, or for which an assignment for security is made, under the Security Documents. "Collateral Accounts" has the meaning set forth in the Cash Management Memorandum. "Collateral Agent" means Bankers Trust Company in its capacity as collateral agent for the Senior Lender hereunder and pursuant to a separate agreement, if any, as the same may be amended from time to time and any successor collateral agent selected by the Senior Lender in accordance with the terms of any such separate agreement. The Senior Lender may delegate any and all of the Senior Lender's rights, remedies and responsibilities under this Agreement to the Collateral Agent and the Borrower and the other Companies may rely on the statements and actions of the Collateral Agent in connection with the Loans as having the full and complete authority of the Senior Lender. "Company" means any of SLT, SLC, the Realty Partnership, the Operating Partnership and each Subsidiary of SLT, SLC, the Realty Partnership or the Operating Partnership. "Companies" means, collectively, SLT, SLC, the Partnerships and their respective Subsidiaries. "Condemnation" has the meaning set forth in subsection 5.5(a). 15 -7- "Confirmation of Position Agreement" means that certain Confirmation of Position Agreement dated as of January 28, 1993, among SLT, SLC and each of their respective Subsidiaries. "Consents" has the meaning set forth in Section 3.14. "Contingent Obligation" means as to any Person and without duplication of amounts, any obligation of such Person guaranteeing or intended to guarantee (whether guaranteed, endorsed, co-made, discounted or sold with recourse to such Person) any indebtedness, lease, dividend, reimbursement obligation relating to letters of credit, or other obligation ("primary obligation") of any other Person ("primary obligor") in any manner, whether directly or indirectly, including any obligation of such Person, irrespective of whether contingent, (a) to purchase any such primary obligation, (b) to advance or supply funds (whether in the form of a loan, advance, stock purchase, capital contribution or otherwise) (i) for the purchase, repurchase or payment of any such primary obligation or any Asset constituting direct or indirect security therefor, or (ii) to maintain working capital or equity capital of the primary obligor, or otherwise to maintain the net worth, solvency or other financial condition of the primary obligor, (c) to purchase or make payment for any Asset, securities, services or lease if such obligation is primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (d) to otherwise assure or hold harmless the owner of such primary obligation against loss in respect thereof. However, the Contingent Obligations of any Person shall not include (i) trade payables or accrued liabilities of such Person incurred in the ordinary course of business of such Person, (ii) endorsements of instruments for deposit or collection in the ordinary course of such Person's business, or (iii) indemnities arising in the ordinary course of such Person's business, including indemnities arising in connection with the sale or other disposition of Assets or in connection with the incurring of indebtedness. "Daily Cash Worksheet" has the meaning set forth in the Cash Management Memorandum. "Damage" has the meaning set forth in subsection 5.5(a). "Debt Service" means for any period all amounts payable by any of the Companies in respect of interest and scheduled amortization with respect to that Company's Indebtedness. "Default" means any event, breach, occurrence or failure of condition that, with the giving of notice or the expiration of any applicable grace period or both, would constitute an Event of Default. "Direct Note Collateral" has the meaning set forth in the Mortgage Note Assignment. "Earnings Projection" has the meaning set forth in paragraph (i)(B) of subsection 6.5(f). 16 -8- "Environmental Indemnity" means that certain Environmental Indemnity dated as of January 28, 1993, and executed by SLT in favor of the Senior Lender, including any and all amendments or other modifications, supplements, extensions or renewals thereto or thereof. "Environmental Situation" has the meaning set forth in Section 5.10. "ERISA" has the meaning set forth in Section 3.16. "ERISA Affiliates" means (i) any corporation that is a member of a "controlled group" of corporations (within the meaning of Section 414(b) of the Code) of which any Company is a member, (ii) any trade or business (whether or not incorporated) that is a member of a group of trades or businesses under "common control" (within the meaning of Section 414(c) of the Code) of which that Company is a member, and (iii) any member of an "affiliated service group" (within the meaning of Sections 414(m) and (o) of the Code) of which any Company, any corporation described in clause (i) of this paragraph or any trade or business described in clause (ii) of this paragraph is a member. "Euro-Dollar Margin" means 300 basis points. "Euro-Dollar Reference Bank" means a leading bank, as designated by the Collateral Agent, engaged in transactions in Euro- Dollar deposits in the international Eurocurrency market having an established place of business in London. Initially, the Euro- Dollar Reference Bank shall be any of the Bank of Tokyo, Ltd., Barclays Bank, plc, National Westminster Bank, plc and Bankers Trust Company. If any Euro-Dollar Reference Bank should be removed from the Telerate Service or in any other way fails to meet the qualifications of a Euro-Dollar Reference Bank, the Collateral Agent, in its sole discretion, may designate another bank meeting the criteria specified in above. "Euro-Dollar Reserve Percentage" means, for any day, the percentage (expressed as a decimal) that is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on the Third Closing Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any bank to United States residents). The Adjusted London Interbank Offered Rate shall be adjusted automatically on and as of the effective date of any change in the Euro-Dollar Reserve Percentage. The parties acknowledge that the Euro-Dollar Reserve Percentage on the Third Closing Date is -0-%. "Event of Default" has the meaning set forth in Section 8.1. "Excluded Asset" means (a) any Asset of SLT or the Borrower listed on Schedule 3.26; (b) any gaming license, liquor license or other governmental license or permit or deposit (including any extensions, renewals or replacements) as to which any applicable statute, rule, 17 -9- regulation, decision or other law precludes SLT or the Borrower from granting to the Collateral Agent for the benefit of the Senior Lender a Required Lien; (c) all Assets as to which any applicable statute, rule, regulation, decision or other law precludes SLT or the Borrower from granting to the Collateral Agent for the benefit of the Senior Lender a Required Lien; (d) any Asset subject to an equipment or other personal property lease which precludes SLT or the Borrower from granting to the Collateral Agent for the benefit of the Senior Lender a Required Lien; (e) the trust or corporate seal, the charter document or documents, the trustees' regulations or bylaws, the partnership agreement and certificates of limited partnership, the minute book or books, the share or stock book or books and the original tax returns or reports of the Borrower and SLT (or any predecessor of either), and the personnel files of the Borrower's and SLT's executive officers; (f) any Hotel Property that is defined as an Excluded Asset in paragraph (ii) of subsection 6.5(f) and any Hotel Property or Assets that have been refinanced as provided in subsection 6.2(i); (g) any Assets acquired in whole or in part with the proceeds of a Merrill Loan; (h) any other Asset as to which the Collateral Agent has elected in a writing delivered to the Borrower or SLT not to require the granting of a Required Lien; and (i) any Asset as to which an amount equal to the Minimum Release Price has been paid by the Borrower to the Senior Lender to amortize the Loans. The Senior Lender's determination that an Asset is an Excluded Asset as defined in this paragraph shall be conclusive absent manifest error. The Collateral Agent may from time to time request that the Borrower or SLT confirm in writing that any particular Asset (or category of Assets) in which the Borrower or SLT has any right, title or interest but which was previously disclosed as an Excluded Asset has become Collateral. However, the failure of the Borrower or SLT to execute any such requested confirmation shall in no way invalidate or otherwise impair any Required Lien in that Asset. "Excluded Cash" means, collectively, all Cash and Cash Equivalents of the Companies or any of them: (a) held in the form of surety bonds up to an aggregate of $700,000; (b) held in the form of utility and worker's compensation insurance deposits; or (c) held in the form of impounds for taxes and insurance or other liens or impounds pursuant to requirements of any Prior Mortgage Note or other liens encumbering the property of the Borrower. "Excluded Disposition" means any sale from inventory or of furniture, fixtures, equipment or similar property in the ordinary course of business or any disposition of obsolete property or equipment. However, if any such property or equipment sold or otherwise disposed of is necessary for the operation of the business of the Company disposing of the same, such property or equipment shall be promptly restored or replaced with other property or equipment having such value and utility as such Company shall reasonably determine necessary for the sound operation of the business of such Company, and such replacement 18 -10- property or equipment shall (unless such replacement property or equipment constitutes an Excluded Asset or Excluded Intercompany Asset) immediately upon acquisition by any of the Companies or installation in any Hotel Property become subject to the Required Liens or the Intercompany Liens, as applicable. Any transfer of title to a Hotel Property pursuant to an exercise of remedies by the holder of a Prior Mortgage Note also shall constitute an Excluded Disposition provided that any proceeds in excess of those necessary to satisfy the Prior Mortgage Note (up to the amount of the applicable Minimum Release Price) are paid to the Senior Lender for application to the Loans concurrently with such transfer of title. "Excluded Intercompany Asset" means (a) any Asset of any Company listed on Schedule 3.26; (b) any gaming license, liquor license or other governmental license or permit or deposit as to which any applicable statute, rule, regulation, decision or other law precludes the Company owning or otherwise having an interest in such Asset from granting to another Company an Intercompany Lien; (c) any Assets as to which any applicable statute, rule, regulation, decision or other law precludes any of the Companies owning or otherwise having an interest in such Asset from granting to another Company an Intercompany Lien; (d) any Asset subject to an equipment or other personal property lease that precludes the Company that is the lessee thereunder from granting to another Company an Intercompany Lien; or (iii) is cancelable by such Company without penalty; (e) the corporate seal, the charter document or documents, the bylaws, the partnership agreement and certificate of limited partnership, the minute book or books, the share or stock book or books and the original tax returns or reports of SLC (or any predecessor), the SLC Subsidiaries, the Operating Partnership and the Gaming Partnership and the personnel files of any Company's executive officers; (f) any Hotel Property that is defined as an Excluded Asset pursuant to paragraph (ii) of subsection 6.5(f) and any Hotel Property or other Assets that have been refinanced as in subsection 6.2(i); (g) any Asset acquired in whole or in part with the proceeds of a Merrill Loan; (h) any other Asset as to which the Collateral Agent has elected in a writing delivered to the Borrower not to cause to be granted an Intercompany Lien; and (i) any Asset of any of the Companies as to which an amount equal to the Minimum Release Price has been paid by the Borrower to the Senior Lender to amortize the Loans. The Senior Lender's determination that an Asset is an Excluded Intercompany Asset shall be conclusive absent manifest error. The Collateral Agent may from time to time request that the Borrower or SLT confirm in writing that any particular Asset (or category of Assets) in which the Borrower or SLT has an Intercompany Lien but that was previously disclosed as an Excluded Intercompany Asset has become Intercompany Collateral. However, the failure of the Borrower or SLT to execute any such requested confirmation shall in no way invalidate or otherwise impair any Intercompany Lien in that Asset. "Existing Mortgage Notes" means each of the promissory notes and other evidences of Indebtedness identified as "Existing Mortgage Notes" on Schedule 1 to the Mortgage Note Assignment, as each such note may from time to time, in accordance with the terms of this Agreement and the Mortgage Note Assignment, be amended or otherwise modified, renewed or extended, and all notes or other evidences of Indebtedness hereafter given in substitution or 19 -11- exchange therefor or replacement thereof, in accordance with the terms of this Agreement and the Mortgage Note Assignment. "Extended Termination Date" has the meaning set forth in subsection 1.4(a). "Extension Fee" has the meaning set forth in subsection 1.8(a). "Extension Option" has the meaning set forth in Section 1.4. "First Closing, First Closing Date and First Closing Notes" has the meanings set forth in the Prior Credit Agreement. "First Closing Loans" means the Loans made pursuant to the First Closing Notes. "Formation Agreement" has the meaning set forth in the recitals to this Agreement. "Franchise Agreement" means each of the franchise (or similar license) agreements for the operation of any Hotel Property to which any of the Companies is a party as of the date of the Third Closing, as each may from time to time, in accordance with the terms of this Agreement, be amended or otherwise modified, renewed or extended, together with any and all new franchise or license agreement(s) for the operation of any Hotel Property entered into by any of the Companies from and after the Third Closing Date, whether in substitution of or exchange for or replacement of a franchise or license agreement listed on Schedule 3.6(a) or otherwise, in accordance with the terms of this Agreement. "Future Mortgage Notes" means each of the promissory notes and other evidences of secured Indebtedness executed by a maker in favor of any of the Companies after January 28, 1993 and evidencing the unpaid portion of the purchase price of any of the Assets comprising a Hotel Property, as each may from time to time be or have been amended or otherwise modified, renewed or extended, and all notes or other evidences of Indebtedness hereafter given in substitution of or exchange therefor or replacement thereof, in each case in accordance with the terms of this Agreement (or the Prior Credit Agreement, as applicable) and the Mortgage Note Assignment. "GAAP" means generally accepted accounting principles, applied on a consistent basis. "Gaming Assets" has the meaning set forth in the recitals to this Agreement. "Gaming Partnership" has the meaning set forth in recitals to this Agreement. "Governmental Authority" means any nation or government, any federal, state, local or other political subdivision thereof, and any entity exercising executive, legislative, judicial, quasi-judicial, regulatory or administrative functions of or pertaining to government. 20 -12- "Ground Lease" means each ground lease to which any Company is a party of land upon which all or any substantial portion of any Hotel Property is located or that is otherwise material to the operation of such Hotel Property, as each may from time to time be amended or otherwise modified, renewed or extended, together with any and all new ground lease(s) of land upon which all or any substantial portion of any Hotel Property acquired by any Company from and after the date of this Agreement is located or that is otherwise material to the operation of such Hotel Property. "Harvey Notes" has the meaning given such term on Schedule 3.26. "Hazardous Materials" means any chemical, material or substance included in the definition of "hazardous substances," "hazardous wastes", "hazardous materials", "extremely hazardous waste", "restricted hazardous waste", or "toxic substances," or words of similar import under any applicable local, state or federal law or under the regulations adopted or publications promulgated pursuant thereto relating to pollution or protection of the environment, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sec. 9601, et. seq.; the Hazardous Materials Transportation Act, as amended, 49 U.S.C. Sec. 1801, et. seq.; the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Sec. 6901, et. seq.; and the Federal Water Pollution Control Act, as amended, 33 U.S.C. Sec. 1251, et. seq. "Hazardous Materials Activities" means any use, handling, transportation, production, management, release, emission, generation, removal, disposal, discharge or storage of Hazardous Materials. "Hazardous Materials Laws" means any federal, state or local laws, ordinances or regulations now or hereafter existing or enacted relating to Hazardous Materials (including without limitation, the use, handling, transportation, production, management, release, emission, generation, removal, disposal, discharge or storage thereof). "HIC" means SLC. "HIC Operating Account" has the meaning set forth in the Cash Management Memorandum. "HIT" means SLT. "HICN" has the meaning set forth in the recitals to this Agreement. "HIT Operating Account" has the meaning set forth in the Cash Management Memorandum. "Hotel Property" means each hotel, hotel/casino, retail space and/or office building now or hereafter owned or leased by SLT, the Realty Partnership or any other Company, including all Real Property, inventory, furnishings, equipment, fixtures, Franchise Agreements, Material 21 -13- Agreements and any and all other agreements, instruments, general intangibles, accounts, licenses (including Material Licenses), chattel paper, documents, books and records and other Assets specifically or primarily relating to such hotel, hotel/casino, retail space and/or office building whether such Assets are now or hereafter owned or leased by the SLT, the Realty Partnership or any other Company. "Hotel Specific Accounts" means as to each applicable Hotel Property each of the accounts described below as defined in the Cash Management Memorandum (i) if such Hotel Property is managed by one of the Companies, the Hotel Collection Account, Hotel Disbursement Account and any new Deposit Account created for purposes of depositing credit card receipts arising from the operations carried on at such Hotel Property; (ii) if such Hotel Property is the subject of a Management Agreement, then the applicable Local Disbursement Account, Local Deposit Account and Management Company Consolidation Account (but only if deposits to such Management Company Consolidation Account are limited solely to Cash and Cash Equivalents arising directly from the operations of such Hotel Property); (iii) if such Hotel Property is the Bourbon Street Hotel/Casino, then the Bourbon Street General Disbursement Account, Bourbon Street Cage Account, Bourbon Street Travel Agent's Commission Account and Bourbon Street Visa/MC Account; or (iv) if such Hotel Property is the King 8 Hotel/Casino and Truck Plaza, then the King 8 General Disbursement Account, King 8 Visa/MasterCard Account and King 8 Cage Account. "Improvements" means all buildings, structures and other improvements located or being constructed on any Real Property (specifically including any such property in which the Borrower or any other Company holds a leasehold estate). "Increased Capital Costs" has the meaning set forth in Section 1.13. "Indebtedness" means, as applied to any Person, the aggregate, without duplication, of (a) all items (except items of capital or surplus or of retained earnings) that in accordance with GAAP would be included in determining total liabilities as shown on the liability side of the balance sheet of such Person as of the date of which Indebtedness is to be determined, including any Capital Lease but excluding (i) any such items as would be included under the caption "Shareholders Equity" or "Partners Equity" on the liability side of such balance sheet or (ii) any Capital Lease the primary purpose of which is not intended to be a financing of real estate, improvements or personalty, and (b) all Indebtedness secured by any Lien to which any Asset owned or held by such Person is subject, whether or not the indebtedness secured thereby shall have been assumed but excluding all Contingent Obligations of such Person. "Indemnified Liabilities" has the meaning set forth in Section 10.2. "Indemnitee and Indemnitees" has the meaning set forth in Section 10.2. "Indirect Hotel Property" means a hotel or hotel/casino (including all real, personal and mixed property thereof) with respect to which SLT or the Borrower holds a Mortgage. 22 -14- "Initial Termination Date" has the meaning set forth in subsection 1.4(a). "Intercompany Collateral" means the Assets of the Companies that secure the Intercompany Liens. "Intercompany Lease" means a lease between SLT or the Realty Partnership, on the one hand, and SLC, a Subsidiary of SLC or the Operating Partnership, on the other hand. "Intercompany Liens" means the Liens granted and to be granted by the obligors of the Intercompany Notes to the obligees thereof to secure the payment of the Intercompany Notes, together with the Liens granted and to be granted to secure the Subsidiary Guaranties and the Operating Partnership Guaranties. "Intercompany Loan Documents" means, collectively, all Intercompany Notes, all Operating Partnership Guaranties, all Subsidiary Guaranties and all Intercompany Security Documents executed in connection with the perfection of any Lien in any Intercompany Collateral, including any and all amendments or other modifications, supplements, extensions or renewals thereto or thereof and any other document that recites that it is an "Intercompany Loan Document." "Intercompany Loans" means all outstanding intercompany advances, loans and extensions of credit by, among or to the Companies which are made and cross-collateralized to the extent feasible with the security given for the Intercompany Loans or otherwise governed by the terms of this Agreement. "Intercompany Notes" means all negotiable promissory notes payable by any of the Companies to any of the other Companies. "Intercompany Security Documents" means all agreements, documents or instruments delivered from time to time by any Person in connection with the transactions contemplated by this Agreement and granting or creating an Intercompany Lien in any Asset to secure any Subsidiary Guaranty, the Intercompany Loans or the Operating Partnership Guaranties, including any and all amendments, modifications, supplements, extensions or renewals thereto or thereof. "Intercreditor Agreement" means any agreement entered into on or after the Third Closing Date by and among the Senior Lenders (if at the time there is more than one Senior Lender) or by and among the Senior Lender or Senior Lenders and the Collateral Agent with respect to the transactions contemplated hereby. "Interest Period" means a period of thirty (30) days, provided that: (a) the initial Interest Period for the Loans shall commence on the date hereof and end on the last day of the month in which such date occurs, and each 23 -15- Interest Period occurring thereafter in respect of the Loans shall commence on the date on which the next preceding Interest Period expires; (b) if any Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day. However, if any Interest Period would otherwise expire on a day which is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; and (c) if any Interest Period begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period, such Interest Period shall end on the last Business Day of such calendar month. "Investment" means, as applied to any Person, any direct or indirect purchase or other acquisition by that Person of legal title to or a beneficial interest in stock or other securities of any other Person, or any direct or indirect loan, advance or capital contribution by the first Person to any other Person. "Lien" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind, including any conditional sale or other title retention agreement or any lease in the nature thereof, but excluding other imperfections of title. "Liquid Investments" means Investments described in subsection 6.3(b) (other than intercompany equity investments) and in subsections 6.3(c) through 6.3(f). "Loans" means the loans made by the Senior Lender pursuant to this Agreement, including the First Closing Loans, the Second Closing Loans, the Third Closing Loans and any Acquisition Loans. "Loan Documents" means collectively, this Agreement, the Notes, the Security Documents, the Subsidiary Guaranties, the Operating Partnership Guaranties, the Confirmation of Position Agreement, the Waiver and Release, the Solvency Certificates, the Environmental Indemnity, any certificate of any Responsible Officer of any of the Companies or any of such Companies general partner delivered to the Collateral Agent or any of the Senior Lender at any of the Closings or on any Pledge Date and any other document that recites that it is a "Loan Document." "London Interbank Offered Rate" applicable to any Interest Period means (i) the rate for deposits in dollars for a period of 30 days which appears on Telerate page 3750 as of 11:00 a.m. (New York time) on the date that is two Business Days before the first day of such Interest Period (each such date a "Euro-Dollar Interest Determination Date"); or (ii) if on any Euro-Dollar Interest Determination Date no quotation is given on the Telerate page 3750, the rate for deposits in dollars for a period of 30 days which appears on the display page designated as "LIBO" on the Reuters Monitor Money Rates Service (the "Reuters Screen LIBO Page") (or such other page as may replace the LIBO page on that service for the purposes of 24 -16- displaying London interbank offered rates of major banks); or (iii) if no quotation is given on the Reuters Screen LIBO Page, the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered by the Euro-Dollar Reference Banks in the London interbank market to the Euro-Dollar Interest Determination Date in an amount approximately equal to the principal amount of the Loans and for a period of time comparable to such Interest Period. "Major Damage and Major Condemnation" have the respective meanings set forth in subsection 5.5(d). "Maker" has the meaning set forth in the Mortgage Note Assignment. "Management Company" means any Person who from time to time is the manager or operator under any Management Contract, and any successor or assignee to or of such Person's rights thereunder. "Management Contract" means any contract or agreement between any of the Companies and any non-Company Person for the management of any Hotel Property, as amended, modified or restated from time to time. "Management Subordination Agreement" means a written agreement executed by a Management Company and in substantially the form of Exhibit O or such other form as shall be reasonably acceptable to the Senior Lender. "Margin Stock" has the meaning set forth in Article 2. "Material Adverse Change" means any adverse change in the condition or value of any one or more Hotel Properties, in the collectibility of any one or more Mortgage Notes or otherwise in the business, operations, Assets or financial condition of the Borrower or any of the other Companies, which change materially and adversely affects the ability of the Borrower to pay the principal of or interest on the Notes or any other amount due to the Senior Lender under this Agreement and the other Loan Documents, or materially impairs the rights and remedies of the Senior Lender under the Security Documents or the Intercompany Security Documents or the value of the Collateral and the Intercompany Collateral, in each case taken as a whole. "Material Adverse Effect" means (i) a loss in the value of any Hotel Property in an amount that exceeds the greater of $300,000 or seven percent (7.00%) of the value of such Hotel Property immediately prior to such loss; (ii) a material adverse change in the collectibility of any Mortgage Note with a then outstanding principal balance of more than $300,000; (iii) a material adverse change in the business, operations, Assets (other than as set forth in the immediately preceding clauses (i) and (ii)) or financial condition of the Borrower or of the Borrower and the other Companies taken as a whole; or (iv) a material adverse change in the ability of the Borrower or any of the other Companies to perform its obligations under, and/or to consummate the transactions contemplated to be consummated by such 25 -17- Company by, this Agreement and the other Loan Documents or Intercompany Loan Documents. "Material Agreements" means (i) Franchise Agreements; (ii) Ground Leases; (iii) Material Subleases; (iv) Intercompany Leases; (v) each equipment or personal property lease to which any Company is a party and that individually requires the expenditure of more than $25,000 by any Company in any year, has a remaining term of more than one year and is not cancelable by the Company party to the same without penalty; (vi) leases, partnership agreements and management agreements under which any of the Companies leases, manages or otherwise operates any hotel other than the limited partnership agreement of the Realty Partnership and the limited partnership agreement of the Operating Partnership and the Intercompany Leases; (vii) Management Contracts; (viii) Union Contracts binding on any of the Companies; (ix) each contract or other agreement that individually requires the expenditure of more than $25,000 by any Company and that is not cancelable by such Company without penalty or payment, whether or not such agreement has a remaining term of less than one year and is otherwise described in the immediately preceding clauses (i) through (viii); and (x) all executory construction, engineering, architectural, maintenance and other similar contacts or other agreements that individually requires the expenditure of more than $25,000 by any Company in any year, has a remaining term of more than one year and is not cancelable by such Company without penalty. "Material License" means each material certificate, permit and license of any Governmental Authority, including certificates of occupancy, innkeepers' licenses, liquor licenses and gaming licenses necessary for the Companies' operation in the ordinary course of business of each Hotel Property. "Material Sublease" means any sublease (or, if no Intercompany Lease exists for such Hotel Property, then any lease) to which any Company is a party now existing or hereafter created affecting any of the Hotel Properties with monthly rents (including basic and percentage) payable to any of the Companies in excess of $5,000 per month. "Merger" means the previously contemplated merger of SLT and SLC. "Merrill Loans" has the meaning set forth in subsection 1.7(a). "Minimum Aggregate Balances" has the meaning set forth in Section 6.16. "Minimum Amount" has the meaning set forth in paragraph (ii) of subsection 5.1(d). "Minimum Release Price" has the meaning set forth in Section 6.10. "Minor Damage and Minor Condemnation" have the respective meanings set forth in subsection 5.5(d). 26 -18- "Mixed-Use Property" means a Hotel Property as to which ten percent (10%) or more the total gross revenues of such property does not result from the operation of a hotel or casino. For the foregoing purposes income which is typically ancillary to the operation of a hotel or casino such as income from the operation of a restaurant, shops, parking lot, health club or other recreational facilities typically associated with the operation of a hotel or casino shall be deemed income from the operation of a hotel or casino. "Mortgage" means a mortgage, deed of trust, security deed, installment land sale contract or similar security interest creating a Lien against Real Property and Improvements. "Mortgage Note" and "Mortgage Notes" means, collectively, the Existing Mortgage Notes, the Future Mortgage Notes and the Starwood Mortgage Notes, or any other mortgage notes held by either of the Partnerships from time to time, but shall not include the Harvey Notes. "Mortgage Note Assignment" means the Collateral Assignment of Mortgage Notes dated as of January 28, 1993, between the Borrower and the Collateral Agent, including without limitation the Amendment to Collateral Assignment of Mortgage Notes dated as of the Third Closing Date and any and all other amendments or other modifications, supplements, extensions or renewals thereto or thereof. "Mortgage Note Security Documents" has the meaning set forth in the Mortgage Note Assignment. "Nevada Gaming Approvals" has the meaning set forth in the recitals to this Agreement. "Nevada Gaming Authorities" has the meaning set forth in the recitals to this Agreement. "Note" and "Notes" means the promissory note(s) issued by the Borrower to the Senior Lender on the First Closing Date, the Second Closing Date and the Third Closing Date, as the same may be amended from time to time, together with any notes issued in exchange therefor or in substitution thereof. "O&M Manual" means one of the Operations and Maintenance Procedures Manuals prepared by Dames & Moore in connection with the First Closing and containing the O&M Procedures. "O&M Procedures" means the procedures contained in the O&M Manuals for the monitoring, disclosure and, if required by applicable law, encapsulation and/or removal of all ACM present at the Best Western in Albuquerque, New Mexico, the Meany Tower in Seattle, Washington and the Portland Inn in Portland, Oregon. 27 -19- "Obligations" means all present and future obligations, indebtedness or liabilities of every kind or nature of the Borrower at any time and from time to time owed to the Collateral Agent or the Senior Lender (i) under any one or more of the Loan Documents, any amendments, extensions, restatements or renewals of, supplements to, or substitutions or replacements for, any one or more of the foregoing, or (ii) arising under successive transactions renewing, increasing, extending or continuing the obligations described in the immediately preceding clause (i), changing the interest rate or other terms thereof, or creating new or additional obligations after prior obligations have been in whole or in part satisfied, and without limiting the generality of the foregoing, including all such obligations, indebtedness and liabilities, whether for principal, interest (including interest that, but for the filing of a petition in bankruptcy with respect to the Borrower, would have accrued on the Obligations), reimbursement obligations, fees, costs, expenses, premiums, charges, attorneys' fees or indemnities, whether heretofore, now or hereafter made, incurred or created, whether voluntarily or involuntarily and however arising, whether secured or unsecured (and if secured, regardless of the nature or extent of the security), whether or not now due, whether absolute or contingent, liquidated or unliquidated, or determined or undetermined, whether the Borrower may be liable individually or jointly with others. "Operating Cash Threshold" means $7,000,000. Nothing in this definition shall be construed as requiring any specific level of cash reserves or as requiring that amounts in excess of the Operating Cash Threshold be applied to amortize the Loans. "Operating Partnership Guaranties" means, collectively, the Operating Partnership Guaranty by the Operating Partnership, the Operating Partnership Guaranty by SLC, the Operating Partnership Guaranty by HICN, the Operating Partnership Guaranty of Western Host, Inc. (each of the foregoing as delivered in connection with the Third Closing) and the Operating Partnership Guaranty by the Gaming Partnership (to be delivered by the Gaming Partnership as provided in Article IV). "PBGC" has the meaning set forth in Section 3.16. "Partnership Interests" means all right, title and interest of any partner in either the Realty Partnership, the Operating Partnership or the Gaming Partnership. "Partnerships" has the meaning set forth in the recitals to this Agreement. "Pass-Through Transfer" means a sale or other transfer (which may include one or more related, intermediate transfers in a whole loan format to one or more Affiliates of the Senior Lender) of all or a portion of the Loans to a trust or another Person as a part of a transaction that involves the sale of participation certificates evidencing an interest in such Loans or the public issuance or private placement of securities evidencing an interest in such Loans, which securities also may evidence an interest in other mortgage loans, may be issued through a REMIC and may, as a condition to their issuance, be required to be rated (which rating may be required to be "AA/Aa" or higher) by one or more Rating Agencies. 28 -20- "Permitted Closing Expenses" means for any (i) Asset Sale, (ii) issuance of any debt or equity security or (iii) renewal, extension or refinancing of Indebtedness, customary and reasonable expenses incurred in connection therewith, including brokers' and finders' fees and commissions, title premiums and other amounts paid or payable to title insurance companies, survey costs, recording and filing fees, documentary transfer Taxes, the cost of documentary stamps, escrow costs, points and other financing or refinancing fees, fees and expenses of counsel, accountants, investment bankers and consultants, customary prorations and the portion of any termination fee under any Management Contract required to be paid because of the sale of the Hotel Property being sold in such Asset Sale. However, Permitted Closing Expenses shall include payments and/or reimbursements of fees, commissions, expenses and/or costs to an Affiliate only if and to the extent permitted by Section 6.12. The Borrower expressly acknowledges and agrees, however, that only commercially reasonable franchise or management termination fees (no matter how designated) payable by any of the Companies in connection with any Asset Sale shall be included within the definition of Permitted Closing Expenses. "Permitted Deductions" means (x) in the case of any payment received on account of any Asset Sale or refinancing permitted hereunder, the amount of outstanding principal, interest and expenses paid to the holder of the Prior Mortgage Note secured by the Hotel Property or mortgage note that is the subject of such Asset Sale or refinancing permitted hereunder, and (y) in the case of any payment received on account of an Asset Sale or the issuance of any debt or equity security or refinancing of a Hotel Property or mortgage note Permitted Closing Expenses incurred in connection with that Asset Sale, securities issuance or refinancing. "Permitted Distributions" has the meaning set forth in Section 6.7. "Permitted Indebtedness" has the meaning set forth in Section 6.1. "Permitted Investments" has the meaning set forth in Section 6.3. "Permitted Liens" has the meaning set forth in Section 6.2. "Permitted Prior Mortgage" has the meaning set forth in paragraph (i) of subsection 6.10(b). "Person" means any natural person, corporation, limited partnership, general partnership, joint stock company, joint venture, association, company, trust, bank, trust company, land trust, business trust or other organization, irrespective of whether a legal entity, or any government, or agency or political subdivision thereof. "Plan" has the meaning specified in paragraph (i) of subsection 3.16(a). "Pledge Date" means the date on which a Hotel Property or a Mortgage Note has been or shall be acquired and Required Liens or Intercompany Liens granted in that Asset. 29 -21- "Prior Credit Agreement" has the meaning set forth in the recitals to this Agreement. "Prior Mortgage Note" means any evidence of any Indebtedness of any Company for borrowed money that is secured by a Permitted Lien against any Hotel Property or other Real Property and Improvements, which Permitted Lien is senior to the Required Liens, if any, against that Hotel Property or Real Property and Improvements. "Rating Agencies" means, in connection with any Pass-Through Transfer, any nationally recognized statistical rating organizations from which the Senior Lender or its Affiliate may seek a rating with respect to such Pass-Through Transfer. "Real Property" means all real property owned or leased by the Companies, whether owned or leased on the date of this Agreement or hereafter owned or leased, including all Improvements thereon, whether existing on the date of this Agreement or existing hereafter. "Relevant States" has the meaning set forth in subsection 15.6(h). "REMIC" means a "real estate mortgage investment conduit" as defined in Section 860D of the Code. "REO Subsidiary" means a Subsidiary owned by the Senior Lender that takes title to any of the Hotel Properties in a deed in lieu transaction or pursuant to the exercise of remedies under the Security Documents. "Reorganization Proxy Statement" means the joint proxy statement of SLT and SLC dated November 11, 1994. "Required Liens" has the meaning set forth in Section 1.10. "Residual Notes" means the promissory notes issued by the Borrower to the Senior Lender at the Third Closing in substantially the form of Exhibit A-3A. "Responsible Officer" means the president, chief executive officer, chief operating officer, chief financial officer, executive vice president, senior vice president, treasurer, controller, assistant treasurer or assistant controller of a Person (or, in the case of a partnership, of a general partner or, in the case of the Operating Partnership, the managing general partner, of that partnership). "Restoration Fund" has the meaning set forth in subsection 5.5(b). "Restricted Payment" means (a) any dividend or other distribution, direct or indirect, on or on account of partnership interests in a Partnership, shares of beneficial interest of SLT or shares of capital stock of SLC now or hereafter outstanding, and (b) any redemption, purchase or other acquisition, direct or indirect, of any of the above-described partnership interests or shares or of any warrant or right to purchase any such partnership interest or 30 -22- share, including the repurchase of any such partnership interest, shares or warrants or any refund of the purchase price thereof in connection with the exercise by the holder thereof of any right of rescission or similar remedies with respect thereto. "Restructuring Plan" means the plan described in Schedule 4.2(q). "Second Closing, Second Closing Date and Second Closing Notes" have the respective meanings set forth in the Prior Credit Agreement. "Second Closing Loans" means the Loans made pursuant to, and evidenced by, the Second Closing Notes. "Security Documents" means each of the security documents executed and delivered at the First Closing, the Second Closing, the Third Closing and all other agreements, documents or instruments delivered from time to time by any Person in connection with the transactions contemplated by this Agreement or any other Loan Document granting or creating a Required Lien in any Asset of the Borrower to secure any of the Obligations (other than Obligations under the Environmental Indemnity). "Senior Lender" has the meaning set forth in the preamble to this Agreement and includes without limitation all of the Senior Lender's successors and, assigns and all participants, if any, in the Loans. "Senior Lenders" means the Senior Lender. "Senior Lender's Expenses" has the meaning set forth in subsection 10.1(d). "SLC" has the meaning set forth in the recitals to this Agreement, and any reference to HIC in any Loan Document or Intercompany Loan Document shall mean SLC. "SLT" has the meaning set forth in the preamble to this Agreement, and any reference to HIT in any Loan Document or Intercompany Loan Document shall mean SLT. "Solvency Certificate" has the meaning set forth in subsection 4.1(c). "Solvent" means, as applied to any Person on any date, that on such date: (a) the present fair valuation of assets of such Person is greater than such Person's probable liabilities in respect of existing debts; (b) such Person does not intend to, and does not believe that it will, incur debts beyond such Person's ability to pay as such debts mature and (c) such Person is not engaged in business or a transaction, and is not about to engage in a business or transaction which business or transaction would leave such Person with assets remaining that would constitute unreasonably small capital after giving effect to the nature of the particular business or transaction. For purposes of this definition: (i) the "fair valuation" of any assets means the amount realizable within a reasonable time, either through collection or sale of such assets at their regular market value, which is the amount obtainable by a capable and diligent 31 -23- businessman from an interested buyer willing to purchase such assets within a reasonable time under ordinary circumstances and (ii) the term "debts" includes any legal liability, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent. "Stated Rate" has the meaning set forth in subsection 1.5(a). "Starwood" has the meaning set forth in the recitals to this Agreement. "Starwood Account" has the meaning set forth in the Cash Management Memorandum. "Starwood Assets" means the Starwood Hotels, the Starwood Mortgage Notes and all other Assets contributed to the Partnerships by the Starwood Partners prior to the Third Closing or thereafter and includes the membership interest in SLT Realty Company, L.L.C. owned by the Borrower and SLT. "Starwood Hotels" means those hotel (and mixed-use) properties contributed by the Starwood Partners to the Partnerships prior to the Third Closing or thereafter, including all Real Property, inventory, furnishings, equipment, fixtures, Franchise Agreements, Material Agreements and any and all other agreements, instruments, general intangibles, accounts, licenses (including Material Licenses), chattel paper, documents, books and records and other Assets specifically or primarily relating to each such hotel or mixed-use property, whether such Assets are now or hereafter owned or leased by a Partnership. "Starwood Mortgage Notes" means each of the secured promissory notes and other secured evidences of Indebtedness executed by a maker in favor of or endorsed or assigned to any of the Starwood Partners and contributed by the Starwood Partners to the Partnerships in connection with the Starwood Reorganization or thereafter, as each may from time to time be or have been amended or otherwise modified, renewed or extended, and all secured notes or other secured evidences of Indebtedness hereafter given in substitution of or exchange therefor or replacement thereof, in each case in accordance with the terms of this Agreement and the Mortgage Note Assignment (to the extent applicable). "Starwood Partners" means those affiliates of Starwood that are parties to the Formation Agreement. "Starwood Reorganization" means the transactions provided for in the Formation Agreement. "Subsidiary" means (i) as applied to the Borrower or the Operating Partnership, (x) any subsidiary of any general partner of the Borrower or the Operating Partnership and (y) the Gaming Partnership, and (ii) as applied to any other Person, any other Person of which more than 50% (by number of votes) of the outstanding Voting Stock (other than director's qualifying shares) is at the time owned, directly or indirectly, by such first Person or by one or more Subsidiaries of such first Person or by such first Person and one or more Subsidiaries of such first Person. However, none of Western Host Palm Springs Partners, a California limited 32 -24- partnership, SLT Realty Company L.L.C. and Moorland Hotel Limited Partnership shall be deemed a Subsidiary of SLT, SLC or either Partnership. Starwood and Starwood Partners are not Subsidiaries of the Borrower or the Operating Partnership. "Subsidiary Guaranty" means each of those certain Subsidiary Guaranties dated as of January 28, 1993, and executed by a Subsidiary of SLC. "Taxes" means any taxes, charges, fees, levies or other assessments based upon or measured by net or gross income, gross receipts, sales, use, ad valorem, transfer, franchise, withholding, payroll, employment, excise, occupation, premium, property, or conduct of business, together with any interest and penalties, additions to tax and additional amounts imposed by any federal, state, local or foreign taxing authority. "Third Closing, Third Closing Loans and Third Closing Notes" have the respective meanings set forth in Section 1.2. "Third Closing Date" has the meaning set forth in Section 1.1. "Title Insurer" means the title company or companies that issued or issue the Title Policy and any other title insurance company or companies selected by the Borrower and approved by the Senior Lender. "Title Policy" means the title insurance policies issued to the Collateral Agent for the benefit of the Senior Lender, at the First Closing and the Second Closing, including all endorsements and modifications or amendments to such policies or new title insurance policies, issued or made prior to or as of the Third Closing, and at any time any Hotel Property or Mortgage Note becomes subject to Required Liens, an ALTA standard form title insurance policy issued by the Title Insurer and complying with the written title instructions given from time to time by the Collateral Agent, for the benefit of the Collateral Agent, in accordance with this Agreement, insuring the validity and priority of the Required Liens with respect to such Hotel Property and of the assignment, as security for the Obligations (other than Obligations under the Environmental Indemnity), of such Mortgage Note payable to or held by the Borrower and the mortgage securing such Mortgage Note, (with such reinsurance or coinsurance as the Collateral Agent may reasonably require, any such reinsurance to be with direct access endorsements) or (if such title company is unable or unwilling to issue the same) by another Title Insurer, and which shall not contain exceptions for mechanics' liens, persons in occupancy or matters which would be shown by a survey except as specifically permitted by this Agreement or as specifically permitted in writing by the Senior Lender not to be unreasonably withheld, and shall contain (to the extent available with respect to such Hotel Property) such of the following endorsements as the Senior Lender, in its reasonable discretion, shall require: (i) comprehensive endorsement, (ii) variable rate of interest endorsement, (iii) usury endorsement, (iv) revolving credit endorsement, (v) doing business endorsement, (vi) tie-in endorsement; (vii) negative amortization endorsement; and (viii) such additional endorsements as the Senior Lender may reasonably require. However, such policy at the Borrower's option need not include as to such Hotel Property any additional 33 -25- endorsement or endorsement(s), the cost(s) of which (individually or in the aggregate), would increase the basic premium otherwise payable in respect of such Hotel Property by ten percent (10%) or more. "Total Loss" has the meaning set forth in subsection 5.5(d). "Under-Performing Asset" has the meaning set forth in paragraph (i)(B) of subsection 6.5(f). "Union Contract" means any union contract, collective bargaining agreement or multi-employer labor agreement. "Voting Stock" means securities (including shares of stock, partnership interests, shares of beneficial interest and the like) having ordinary voting power to elect a majority of the board of directors or board of trustees or to elect the general partner (or other governing body) of the Person in question, irrespective of whether or not at the time securities of any class or classes of such Person shall have or might have voting power by reason of the happening of any contingency. "Waiver and Release" means that certain Waiver and Release dated as of January 28, 1993, executed by the predecessors in interest of the Senior Lender in favor of SLT, SLC and certain of their respective Subsidiaries. "Warrant Agreement" means that certain Warrant Agreement dated as of January 28, 1993, among SLT, SLC and the predecessors in interest of the Senior Lender, including any and all amendments or other modifications, supplements, extensions or renewals thereto or thereof. "Warrants" means the warrants issued to the Senior Lenders pursuant to the Warrant Agreement. ARTICLE 1. Amount and Terms of the Credit 1.1 Restructuring of Indebtedness. The Borrower is indebted to the Senior Lender under the Second Closing Notes in the principal amount of $118,313,327.92. On the date hereof, the principal amount of the Loans has been increased by $13,436,672.08 so that the Third Closing Notes executed and delivered on the date hereof evidence the Loans in the aggregate principal amount of $131,750,000. In addition, the Senior Lender has advanced on the date hereof the sum of $12,000,000 and received from the Partnerships an unsecured promissory note in the amount of $11,400,000 and an unsecured promissory note of $600,000. Such unsecured notes shall not be governed by this Agreement and shall not be construed as Third Closing Notes. 34 -26- The Prior Credit Agreement is hereby amended and restated in its entirety as hereinafter set forth effective on the date hereof (the "Third Closing Date"). Without limiting the generality of the foregoing, the provisions of this Agreement shall supersede any and all covenants, conditions or other provisions of the Loan Documents or the Intercompany Loan Documents executed and delivered on or prior to the date hereof that conflict with or are inconsistent with the provisions of this Agreement. However, nothing in this Agreement is intended or shall be deemed to waive, limit or otherwise modify or affect any representation, warranty, covenant, condition or other provision of the Prior Credit Agreement or of any other Loan Document or Intercompany Loan Document executed and delivered prior to the Third Closing Date to the extent that such representation, warranty, covenant, condition or other provision relates to a fact, circumstance or event occurring prior to the Third Closing Date. 1.2 Assignment and Assumption; Third Closing Loans. (a) The Borrower shall fully pay, perform and discharge each and all of its duties, liabilities and obligations hereunder and under the Loan Documents and the Intercompany Loan Documents when due. The Realty Partnership shall issue on the date hereof to the Senior Lender promissory notes substantially in the forms of Exhibit A-3A and Exhibit A-3B (collectively, the "Third Closing Notes") in exchange and substitution for the Second Closing Notes and to evidence the increased indebtedness described in Section 1.1 (the indebtedness evidenced by the Third Closing Notes, the "Third Closing Loans"). The Second Closing Notes are hereby deemed automatically superseded and replaced by the Third Closing Notes. The Second Closing Notes shall be so marked and shall be held by the Collateral Agent until the Third Closing Loans and all other amounts due under the Loan Documents and the Intercompany Loan Documents have been paid in full. (b) Except as otherwise provided herein, nothing contained herein shall (i) discharge SLT from or result in a novation of any of its duties, liabilities or obligations under any of the Loan Documents or Intercompany Loan Documents or (iii) operate to diminish or impair in any manner the Required Liens or Intercompany Liens existing as of the date hereof. (c) The Realty Partnership hereby confirms: (i) it has assumed, effective as of January 1, 1995, all of the payment and performance obligations of HIT set forth in the Second Closing Notes, the Prior Credit Agreement, the Loan Documents and the Intercompany Loan Documents; and (ii) the Operating Partnership has assumed, effective January 1, 1995, all of the payment and performance obligations of SLC and the SLC Subsidiaries (other than HICN) set forth in the Prior Credit Agreement, the Loan Documents and the Intercompany Loan Documents, including, but not limited to any Subsidiary Guaranty, Consent to Assignment of Rents, Subordination, Estoppel, Attornment Agreement, as modified, and any guaranties or security agreements relating to any of the foregoing, 35 -27- and further has agreed to be bound by all of the terms and provisions of said agreements, all as though each of said agreements had been made, executed and delivered by the Operating Partnership. 1.3 Dating and Registration of Notes; Transfer of Third Closing Loans. Each Third Closing Note shall be dated as of the Third Closing Date and shall be in such denomination and registered in such name as the Senior Lender may request. The Senior Lender shall have the right but not the obligation, subject to compliance with applicable securities and other laws, to divide the Loans into one or more separate Loans evidenced by one or more separate Notes. 1.4 Maturity Date. (a) The term of the Third Closing Loans shall commence on the date hereof and shall terminate on April 1, 1997 (the "Initial Termination Date"). However, the Borrower shall have the option to extend the term of the Third Closing Loans (the "Extension Option") for a period of one (1) year after the Initial Termination Date to April 1, 1998 (the "Extended Termination Date"). The Extension Option shall be exercisable by the delivery by the Borrower to the Collateral Agent of irrevocable written notice not less than one (1) month prior to the Initial Termination Date, time being of the essence with respect to the delivery of the such notice. The Borrower's right to exercise the Extension Option shall be subject to the following terms and conditions: (i) no Event of Default shall have occurred and be continuing on the date the Borrower delivers the Extension Notice or on the Initial Termination Date; (ii) the Borrower shall have paid to the Senior Lender the Extension Fee pursuant to Section 1.8 and (iii) the Borrower shall make the Mandatory Prepayment required in paragraph (iv) of subsection 1.9(b). (b) If the Borrower does not exercise its Extension Option in accordance with subsection 1.4(a), the principal balance of the Loans outstanding, together with accrued unpaid interest thereon, shall be due and payable on the Initial Termination Date; if the Extension Option is exercised, the principal balance of the Loans, together with accrued unpaid interest thereon shall be due and payable on the Extended Termination Date. 1.5 Interest. (a) Stated Rate. The Third Closing Notes shall bear interest on the principal amount thereof outstanding during each Interest Period, at a rate per annum equal to the lesser of (i) the sum of the Euro-Dollar Margin and the applicable Adjusted London Interbank Offered Rate (the "Stated Rate") and (ii) the maximum rate permitted under applicable law. Interest shall be payable monthly in arrears, on the first Business Day of each month, on the basis of a 360-day year for the actual number of days elapsed. The first payment of interest on the outstanding principal balances of the Loans shall be due and payable on April 1, 1995. A payment of interest on the outstanding principal balances shall be due and payable on the first Business Day of each calendar month thereafter through the Initial Termination Date or, if the Extension Option is exercised, through the Extended Termination Date, on which date the Borrower shall pay in full the aggregate outstanding principal balances of the Loans, all 36 -28- accrued unpaid interest thereon and all other amounts payable with respect to the Loans or otherwise to the Senior Lender. (b) Notice by Collateral Agent. The Collateral Agent shall determine the Stated Rate for each Interest Period. The Collateral Agent shall give prompt notice to the Borrower and the Senior Lender of each Stated Rate so determined, and its determination thereof shall be conclusive in the absence of manifest error. 1.6 Additional Interest. Upon the occurrence and during the continuance of an Event of Default and in all events from and after the Initial Termination Date (or if the Extension Option has been exercised, the Extended Termination Date), the Third Closing Notes shall bear interest on the unpaid principal amount thereof, and on any overdue payment of interest thereon, at a rate per annum equal to the lesser of (i) three percent (3.00%) above the Stated Rate and (ii) the maximum rate permitted under applicable law. 1.7 Acquisition Credit Facility; Severance of Loans. (a) Until December 24, 1995, Merrill, in its individual capacity and not as a Senior Lender, shall either provide to the Borrower one or more additional loans as acquisition financing up to an aggregate of $75,000,000 or arrange for such loans to be provided by the Senior Lender. Any such loans, if made by the Senior Lender shall be made upon the terms and subject to the conditions set forth in the Terms of Acquisition Credit Facility set forth on Schedule 1.7 (the "Acquisition Credit Facility"). Such loans made by the Senior Lender shall be cross-collateralized, to the extent practicable, with the Loans. Any such loan by the Senior Lender is referred to herein as an "Acquisition Loan." The principal amount of each Acquisition Loan shall reduce the amount of the Acquisition Credit Facility specified above. (b) Notwithstanding the foregoing, any such loans described in the first sentence of subsection 1.7(a) above, if made by Merrill, in its individual capacity and not as a Senior Lender hereunder, or by any of its Affiliates shall be made under the Acquisition Credit Facility (any such loan, a "Merrill Loan"), except for those terms, provisions and conditions that Merrill may waive, in its sole discretion. The original principal amount of each Merrill Loan shall reduce the aggregate amount of the Acquisition Credit Facility specified above. The Senior Lenders hereby consent to the making of the Merrill Loans, which shall be the secured recourse obligations of the Borrower collateralized and guarantied in a manner similar to the Loans and the Intercompany Loans, provided that none of the Merrill Loans shall be cross-collateralized with the Loans made or Collateral and Intercompany Collateral granted, pursuant to this Agreement. Notwithstanding any other provisions of this Agreement, (i) the term "Cash and Cash Equivalents" shall be deemed not to include the proceeds of any Merrill Loan, (ii) any acquisition of Assets by any Company in whole or in part with the proceeds of a Merrill Loan shall be deemed a "Permitted Investment," (iii) any Assets so acquired shall be deemed "Excluded Assets" and "Excluded Intercompany Assets," (iv) any Liens in favor of Merrill, in its individual capacity and not as a Senior Lender, or any of its Affiliates with respect to any Assets so acquired shall be deemed "Permitted Liens" and (v) all Indebtedness of any Company to Merrill or any of its Affiliates in connection with any Merrill Loan shall be 37 -29- deemed "Permitted Indebtedness." Notwithstanding the provisions of subsection 5.8(c) (relating to additional Collateral) and any other provisions of this Agreement, the Senior Lender shall not have the right to elect to require that any Assets acquired by any Company in whole or in part with the proceeds of any Merrill Loan shall become part of the Collateral or Intercompany Collateral. (c) If Merrill is the sole Senior Lender under this Agreement and there are no participants in the Loans, Merrill may require that one or more Loans (or any portions thereof) made pursuant to this Credit Agreement be split and severed into one or more separate and distinct loans that are not cross-collateralized to the Assets securing the Loans. The Borrower agrees to cooperate and shall cause the Companies to cooperate in such severance. Any new loan created by the severance shall be governed by a credit agreement substantially similar to this Agreement and the loan documents and intercompany loan documents executed and delivered with respect thereto shall be substantially similar to the Loan Documents and the Intercompany Loan Documents. The principal balance of the Third Closing Notes shall be reduced by the applicable value of the Assets set forth in Schedule 1.9 and the Borrower shall execute and deliver a new separate note in such amount in connection with the new, severed loan. 1.8 Fees. (a) Extension Fee. If the Borrower exercises its Extension Option pursuant to Section 1.4, then, simultaneously with the delivery of the notice exercising such option, the Borrower shall pay to the Collateral Agent for the benefit of the Senior Lender a fee (the "Extension Fee") in an amount equal to one-half of one percent (0.50%) of the aggregate of the Loans outstanding on the date of the delivery of such notice, which balance shall be determined after reducing same for the mandatory prepayment of principal in connection with the exercise of the Extension Option as provided in paragraph (v) of subsection 1.9(a). (b) Service Charges. The Borrower shall pay from time to time to the Person at the time serving as manager of the Cash Management System the customary service charges of such Person for maintenance and administration of the Cash Management System. A copy of such service charges as in effect as of December 31, 1994 has been provided by Wells Fargo Bank, National Association, to SLT. 1.9 Prepayment. (a) Optional Prepayment. Upon not less than ten (10) Business Days' notice to the Senior Lender and the Collateral Agent, at its option the Borrower may permanently prepay the Third Closing Notes then outstanding in whole at any time or in part from time to time without penalty or premium. Any such prepayment of the principal amount of the Notes in part shall be in an aggregate principal amount of not less than $500,000. Any such prepayment shall include an additional amount equal to accrued interest on the amount prepaid to the date of such prepayment. 38 -30- (b) Mandatory Prepayments. From and after the Third Closing, the Borrower shall pay or cause to be paid each of the following amounts to the Senior Lender in a prepayment of principal of the Third Closing Notes together with the accrued interest thereon through the date of such prepayment: (i) If any of the Companies shall, directly or indirectly, receive any payment in Cash and Cash Equivalents on account of any public issuance of any debt or equity security or on account of any private issuance of any debt or equity security which when aggregated with all such other private issuances since December 31, 1994 exceeds $60,000,000, the Borrower shall immediately pay, or cause the Companies to pay an amount equal to all such proceeds received less Permitted Closing Expenses until the outstanding principal amounts of the Loans are reduced to an aggregate amount equal to 50% or less of the Aggregate Asset Value of all the Companies' Assets. (ii) An amount equal to the aggregate of all amounts received by any of the Companies during each fiscal quarter in respect of payments of principal of Mortgage Notes (but as to each Mortgage Note not in excess of the Minimum Release Price) or any other promissory notes payable to any of the Companies other than the Harvey Notes and the Intercompany Notes, on the earlier to occur of the last day of the fiscal quarter of the Borrower and the date on which the aggregate amount of such payments received by the Companies since the date of such then most recent prepayment exceeds $250,000. Interest received by any of the Companies in respect of the principal of the Mortgage Notes or of other promissory notes payable to any of the Companies may be retained by the Company receiving the same. (iii) If the Borrower or any of the Companies shall sell or refinance any Asset and in connection therewith shall seek the release of the Required Lien or Intercompany Lien on such Asset, if any, then, an amount equal to the amount of the Minimum Release Price in connection with that Asset; provided, however, that in the case of any sale of a Hotel Property in which a portion of the total consideration to the Companies is deferred or consists of a Future Mortgage Note, as provided in subsection 6.10(b), such amount shall be an amount at least equal to twenty-five percent (25%) of the applicable Minimum Release Price. (iv) If the Borrower exercises its Extension Option, on the Initial Termination Date, the amount of $10,000,000 as a prepayment of principal, which amount shall be increased pursuant to Schedule 1.7 with respect to Acquisition Loans which are cross-collateralized with the Third Closing Loans. 39 -31- (c) Notices of Prepayments. Concurrently with each prepayment made pursuant to this Section, the Collateral Agent and the Borrower shall furnish by facsimile transmission to the Senior Lender a notice showing in reasonable detail the amount paid with respect to each Note then outstanding and the manner of calculating the amount of each such prepayment. (d) Formula for Application of Prepayments. (i) All mandatory principal payments with respect to the Third Closing Loans shall be applied to principal on the Third Closing Notes. (ii) Notwithstanding anything to the contrary in this Agreement, no payment or prepayment of principal shall be applied to any Note other than the Residual Notes, except to the extent that (A) such payment or prepayment is made from the proceeds of Collateral securing such Note, (B) all of the Notes then outstanding are paid in full, or (C) such payment is made at a time when the Senior Lender's Residual Notes have no principal balance outstanding in which case such payment or prepayment may be applied in the Senior Lender's discretion to any of the Notes held by such Senior Lender. 1.10 Security. The Notes and the other Obligations other than Obligations under the Environmental Indemnity shall be secured by valid and perfected Liens that are first in priority, except for the Permitted Liens described in subsection 6.2(b) through the end of Section 6.2, in favor of the Collateral Agent for the benefit of the Senior Lender in all of the Assets of the Borrower and all of the Assets of SLT, except for Excluded Assets (collectively, the "Required Liens"). Each Intercompany Loan and each Operating Partnership Guaranty shall be secured by valid and perfected Liens that are first in priority except for Permitted Liens described in subsection 6.2(c) through the end of Section 6.2 and, in the case of each Intercompany Loan, in all the assets of the obligor as to each such Intercompany Loan and, in the case of each Operating Partnership Guaranty, in all the assets of the Company giving such Operating Partnership Guaranty, as applicable, except in each case for Excluded Intercompany Assets. 1.11 Form and Terms of Payment. All payments by the Borrower of principal of or interest on the Notes shall be made in immediately available funds at the addresses specified for such purpose by the Senior Lender on Attachment I or by such other method and/or at such other address as the Senior Lender shall have furnished to the Borrower in writing. Concurrently with each such payment, the Borrower shall furnish by facsimile transmission to the Senior Lender and the Collateral Agent a notice showing in reasonable detail the amount paid with respect to each Note then outstanding and the manner of calculating each such amount. If any payment of principal of or interest on the Notes shall become due on a day which is not a Business Day, such payment may be made on the next succeeding Business Day and such extension shall be included in computing interest in connection with such payment. 40 -32- 1.12 Pro Rata Treatment. If there is more than one Senior Lender, each payment and prepayment of the principal of the Notes shall be allocated to each Senior Lender as set forth on Attachment I. Such allocation may be changed with respect to any Senior Lender from time to time by notice to the Borrower from that Senior Lender and the transferee of that Senior Lender's interest of any portion of the Loans. 1.13 Increased Capital. If any Senior Lender shall have determined in good faith that compliance with any applicable law, rule, regulation, guideline, request or directive, whether or not having the force of law, which shall be imposed, issued or amended from and after the date of this Agreement by any governmental authority, central bank or comparable agency, has or would have directly or indirectly the effect of reducing the rate of return on the capital or assets of such Senior Lender or its participant as a consequence of its commitments or obligations hereunder, then from time to time, upon such Senior Lender's delivering a written demand therefor to the Collateral Agent and the Borrower setting forth its reasonable calculations, the Borrower shall pay to such Senior Lender on demand such additional amount or amounts ("Increased Capital Costs") as will compensate such Senior Lender for such reduction. However, (a) if the Collateral Agent or the applicable Senior Lender shall fail to notify the Borrower promptly after making such determination, the Borrower shall not be liable to pay to such Senior Lender any Increased Capital Costs relating to the period prior to such Senior Lender's notifying the Borrower. The determination by such Senior Lender of any such amount shall, in the absence of manifest error, be conclusive. If so requested by the Borrower, such Senior Lender shall demonstrate the basis for such determination. 1.14 Additional Costs. If any Governmental Authority shall: (a) subject any Senior Lender, directly or indirectly, to any tax, levy, impost, duty, charge, fee, deduction or withholding of any nature with respect to this Agreement, the Loans or any loan commitments maintained hereunder, other than Taxes; or (b) materially change the basis of taxation, except for changes in Taxes, directly or indirectly, of the principal of or the interest on any Loans or any other amounts payable to such Senior Lender under this Agreement; or (c) impose on any Senior Lender, directly or indirectly, any other conditions or requirements with respect to this Agreement, the Loans, any loan commitments maintained hereunder or any class of loans or commitments of which any of the Loans forms a part; and the result of any of the foregoing is: (i) to increase the cost to such Senior Lender, directly or indirectly, of making, funding, issuing, renewing, extending or maintaining any of the Loans; or 41 -33- (ii) to reduce the amount of principal, interest or other amount payable to such Senior Lender, directly or indirectly, hereunder on account of any of the Loans; or (iii) to require such Senior Lender, directly or indirectly, to make any payment or to forego any interest or other sum payable hereunder, the amount of which payment or foregone interest or other sum is calculated by reference to the gross amount of any sum receivable or deemed received by such Senior Lender from the Borrower hereunder; then, and in each such case, the Borrower shall, within ten (10) Business Days following receipt of notice from such Senior Lender including calculations of the amounts payable, pay to such Senior Lender such additional amounts as will be sufficient to compensate such Senior Lender for such additional cost, reduction, payment or foregone interest or other sum. The determination by such Senior Lender of any such amount shall, in the absence of manifest error, be conclusive. At the Borrower's request, such Senior Lender shall demonstrate the basis for such determination. ARTICLE 2. Use of Proceeds The Borrower shall not use, and shall not permit any other Company to use, directly or indirectly, any part of the proceeds of the Loans (a) for any purpose which would cause any of the representations or warranties of the Borrower set forth in this Agreement or any other Loan Document to be untrue when made or deemed to have been made, (b) for the purpose of making any Restricted Payment, (c) for the purpose of purchasing or carrying any "margin stock" within the meaning of Regulation G (12 CFR Part 207) or Regulation U (12 CFR Part 221) of the Board of Governors of the Federal Reserve System ("Margin Stock") or (d) for any purpose which would cause the violation of any covenant contained in Article 5, 6 or 7. ARTICLE 3. Representations and Warranties In order to induce the Senior Lender to agree to the amendment and restatement reflected in this Agreement and to accept the Third Closing Notes, the Borrower hereby makes the following representations and warranties to the Collateral Agent and the Senior Lender as of the Third Closing Date. All of such representations and warranties shall survive the execution and delivery of this Agreement and the other Loan Documents and Intercompany Loan Documents executed and delivered at the Third Closing. 3.1 Organization, Standing, etc. of the Borrower and the Other Companies; Authorization. Except as otherwise set forth on Schedule 3.1: 42 -34- (a) Realty Partnership. The Realty Partnership is a Delaware limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite partnership power and authority to own and operate its properties, to carry on its business as now conducted and proposed to be conducted, to enter into this Agreement and the other Loan Documents and Intercompany Loan Documents to be executed and delivered by the Realty Partnership, to issue the Third Closing Notes and to carry out the terms hereof and thereof. (b) Operating Partnership. The Operating Partnership is a Delaware limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite partnership power and authority to own and operate its properties, to carry on its business as now conducted and proposed to be conducted, to enter into the Loan Documents and Intercompany Loan Documents to be executed and delivered by the Operating Partnership and to carry out the terms thereof. (c) SLT. SLT is a real estate investment trust duly organized, validly existing and in good standing under the laws of the State of Maryland and has all requisite real estate investment trust power and authority to own and operate its properties, to carry on its business as now conducted and proposed to be conducted, to enter into this Agreement, the other Loan Documents and the Intercompany Loan Documents to be executed by SLT and to carry out the terms hereof and thereof. (d) SLC. SLC is a corporation duly organized, validly existing and in good standing under the laws of the State of Maryland and has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and proposed to be conducted, to enter into the Loan Documents and Intercompany Loan Documents to be executed by it and to carry out the terms thereof. (e) Authorization. The execution and delivery of and the performance by the Companies of their obligations under this Agreement, the other Loan Documents and the Intercompany Loan Documents, including the granting of the Required Liens and the Intercompany Liens, (a) have been duly authorized by all necessary real estate investment trust, corporate or partnership action on the part of the Borrower and each of the other Companies party thereto or bound thereby, and (b) will not result in any violation of or be in conflict with or constitute a default under any declaration of trust, articles of incorporation, partnership agreement, trustees regulations, by-laws or other organizational or similar charter document of any of the Companies. 3.2 Subsidiaries. Schedule 3.2 correctly sets forth as to (a) each Subsidiary of the Borrower or the Operating Partnership that is a corporation, that Subsidiary's name, the jurisdiction of that Subsidiary's incorporation, the number of shares of that Subsidiary's capital stock of each class outstanding and the number of such outstanding shares owned by each other Company, and (b) as to each Subsidiary of the Borrower or the Operating Partnership that is not a corporation, that Subsidiary's name, the jurisdiction of that Subsidiary's organization or formation and a detailed description of that Subsidiary's capital structure which description 43 -35- indicates the direct or indirect interest of the Borrower and/or the Operating Partnership in that Subsidiary. Except as otherwise set forth on Schedule 3.2, each Subsidiary of the Borrower and/or the Operating Partnership is a corporation, partnership or other entity duly organized, validly existing and in good standing under the laws of the jurisdiction of that Subsidiary's formation, and has all requisite real estate investment trust, corporate, partnership or other similar power and authority to own and operate that Subsidiary's properties, to carry on that Subsidiary's business as now conducted and as proposed to be conducted and to enter into the Loan Documents and/or the Intercompany Loan Documents to be executed by that Subsidiary. Except as otherwise set forth on Schedule 3.2, all of the outstanding shares of capital stock, partnership interests or other equity securities of each Subsidiary of the Borrower and/or of the Operating Partnership are validly issued, fully paid and nonassessable, and are owned by the Borrower and/or the Operating Partnership as and to the extent specified in Schedule 3.2, in each case free of any Lien, right of first refusal, preemptive right or option other than the Required Liens, the Intercompany Liens and other Permitted Liens. 3.3 Qualification. Except as otherwise set forth on Schedule 3.3, each of the Companies is duly qualified, licensed or otherwise authorized to do business and in good standing as a foreign real estate investment trust, corporation, partnership or other entity in each jurisdiction in which the character of the properties owned or the nature of the activities conducted by that Company makes such qualification, licensing or other authorization necessary. 3.4 Financial Information; Disclosure. SLT and the Realty Partnership have furnished the Senior Lender with the annual, quarterly and other reports listed in Schedule 3.4. The financial statements included in those reports have been prepared in accordance with GAAP applied on a consistent basis or in such financial statements themselves, and fairly present the financial position and results of operations of the Person or Persons to which those financial statements purport to relate as of the dates and for the periods indicated. Except as otherwise set forth on Schedule 3.4, since the end of the most recent fiscal period shown in any of such financial statements, there has not been any change in the business, results of operations, Assets or financial condition of any Company resulting in any Material Adverse Effect. Neither this Agreement, nor any report filed with the Securities and Exchange Commission and listed on Schedule 3.4 nor any of the financial statements included in the reports listed in Schedule 3.4, when this Agreement and such reports and financial statements are read as a whole, contains any materially untrue statement of a material fact or omits to state any material fact necessary to make the statements herein or therein contained not materially misleading. After giving effect to the disclosures made on Schedule 3.4, there are no circumstances involving any of the Companies or with respect to any Hotel Property or Mortgage Note or, to the knowledge of the Borrower, any Indirect Hotel Property, not disclosed by the Borrower to the Senior Lender in writing that, based upon facts and circumstances currently known to the Borrower or the Operating Partnership, will result in any Material Adverse Effect. The Borrower is not contemplating either the filing of a petition by the Borrower under the Bankruptcy Code or any other federal or state bankruptcy or insolvency law or the liquidation of all or a major portion of the Borrower's Assets. The 44 -36- Borrower has no knowledge of any Person contemplating the filing of any such petition against the Borrower. 3.5 Licenses. Schedule 3.5(a) accurately and completely lists each gaming license and each alcohol beverage license currently held by any of the Companies. Except as otherwise set forth in Schedule 3.5(b), each such gaming license, each such alcohol beverage license and all of the Material Licenses are validly issued and in full force and effect, and each of the Companies has fulfilled and performed in all material respects all of that Company's obligations with respect thereto and has all requisite real estate investment trust, corporate or partnership power and authority to operate thereunder. Except as otherwise set forth on Schedule 3.5(b), there is no outstanding notice from any Governmental Authority to the effect that any Company fails to hold any Material License necessary for that Company's operation of a Hotel Property or of any violation by any Company of any Material License (other than violations that are not material), and no such Material License is presently suspended or subject to any pending or overtly threatened legal, administrative or investigatory proceeding that could result in a suspension or revocation of such Material License. 3.6 Material Agreements. Schedule 3.6(a) accurately and completely lists all executory Material Agreements. Except as otherwise set forth on Schedule 3.6(b), neither the Borrower nor any of the other Companies is in default, nor does the Borrower know of any claim by any Person that the Borrower or any other Company is or, upon the passage of time or giving of notice or both, will be in default under any material term of any Material Agreement to which such Company is a party or by which that Company or any of its Assets may be bound, except for such defaults that will not result in a Material Adverse Effect. All of the Material Agreements are valid, subsisting agreements of the Companies party thereto and are in full force and effect. Except as otherwise set forth on Schedule 3.6(b), to the knowledge of the Borrower or the Operating Partnership, there exists no violation or breach of any material term of any Material Agreement on the part of any Person other than a Company that is a party to such agreement, which violation or breach will, or in the reasonable business judgment of the Borrower or the Operating Partnership based upon facts and circumstances currently known to the Borrower or the Operating Partnership, is likely to have a Material Adverse Effect. Except as otherwise set forth on Schedule 3.6(b), none of the Material Agreements listed therein contains any provision restricting the incurring of indebtedness by any of the Companies or that, in the reasonable business judgment of the Borrower or the Operating Partnership based upon facts and circumstances currently known to the Borrower or the Operating Partnership, is likely to result in a Material Adverse Effect. 3.7 Tax Returns and Payments. The Companies have each filed all tax returns required by law to be filed and have paid all Taxes, assessments and other governmental charges levied upon any of their respective Assets, income or franchises, other than those not yet delinquent and those, not substantial in aggregate amount, being or about to be contested as provided in Section 5.6 (relating to the payment of certain taxes). The charges, accruals and reserves on the books of the Companies in respect of their respective Taxes are adequate in the opinion of the Borrower to discharge all such tax liabilities. Except as otherwise set forth on Schedule 3.7, the Borrower does not know of any deficiency proposed, asserted, or assessed 45 -37- by any Governmental Authority in respect of Taxes against the Borrower or any of the other Companies that if paid would result in a Material Adverse Change. Neither the Borrower nor any of the other Companies is a party to, bound by or obligated under any tax sharing or similar agreement. 3.8 Indebtedness, Liens and Investments. Schedules 3.8(a), (b), (c) and (d) accurately and completely describe, as of the date or dates indicated therein, (a) all outstanding Indebtedness of the Companies to Persons other than the Senior Lender and other Companies in respect of borrowed money and the deferred purchase price of property, including all Capital Leases; (b) all existing Liens in respect of Assets of any of the Companies other than the Required Liens, the Intercompany Liens and Permitted Liens described in subsection 6.2(b) (relating to Liens securing an Intercompany Loan or a Subsidiary Guaranty, including Intercompany Liens) and, except for those Liens of record, in subsection 6.2(d) (relating to Liens for certain Taxes, certain Liens to secure performance, mechanics' and similar Liens, certain judgment Liens and certain other Liens); (c) all outstanding Investments of any of the Companies in any Person other than another Company; and (d) all existing Contingent Obligations of any of the Companies other than to the Senior Lender or the Collateral Agent under the Loan Documents or the Intercompany Loan Documents. 3.9 Title to Assets. Except as otherwise set forth on Schedule 3.8(b), each of the Companies has good and marketable title to all of the Real Property owned by that Company, and good title to or a valid leasehold interest in or other right to possess and use all of such Company's other Assets. None of such Assets is subject to any Lien or to an agreement to give any Lien, except the Permitted Liens. The Companies enjoy quiet possession under all Ground Leases, Intercompany Leases and equipment and personal property leases listed on Schedule 3.6(a) to which the Companies are parties as lessees. 3.10 Litigation, etc. Except as otherwise set forth on Schedule 3.10, there is no litigation, or any proceeding or investigation by any Governmental Authority, pending or presently overtly threatened against any of the Companies that (a) questions the validity or enforceability of this Agreement, the other Loan Documents or the Intercompany Loan Documents, or any action taken or required to be taken pursuant hereto or thereto; or (b) in the reasonable business judgment of the Borrower based upon facts and circumstances currently known to the Borrower, is likely to result in a Material Adverse Effect. 3.11 Authorization; Compliance with Other Instruments. The execution and delivery of and performance of the Companies' obligations under this Agreement, the other Loan Documents and the Intercompany Loan Documents, including the granting of the Required Liens and the Intercompany Liens; (a) will not result in any violation of or be in conflict with or constitute a default under any term of (i) any Material Agreement, Existing Mortgage Note, Prior Mortgage Note or other agreement or instrument to which any of the Companies is a party or by which any of the Companies is bound, (ii) any judgment, decree or order issued against any of the Companies, or (iii) to the knowledge of the Borrower or the Operating Partnership, any statute, rule or regulation of any Governmental Authority applicable to any of the Companies; and (b) will not result in the creation of any Lien upon any of the Assets of 46 -38- any of the Companies pursuant to any such term, except pursuant to this Agreement and the Security Documents and Intercompany Security Documents, or otherwise result in the acceleration of any Indebtedness or obligation of any of the Companies, except for, in the case of each of clauses (a) and (b), such conflicts, breaches, defaults, Liens and/or such accelerations of Indebtedness or obligations as are set forth on Schedule 3.11 or as will not, individually or in the aggregate, result in a Material Adverse Effect. Except as otherwise set forth on Schedule 3.11, none of the Companies is in violation of any term of that Company's declaration of trust, articles of incorporation, partnership agreement or other charter or other organizational document or trustees' regulations or by-laws or other similar document. 3.12 Compliance with Laws. Neither the Borrower nor any of the other Companies is in violation of any judgment, decree or order served on any Company, or any other judgment, decree, order, statute, rule or regulation of any Governmental Authority to which such Company or any of its Hotel Properties or Mortgage Notes is subject, the failure to comply with which would have a Material Adverse Effect. 3.13 Government Regulation. None of the Companies is: (a) an "investment company," or a company directly or indirectly "controlled" by or acting on behalf of an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended, or an "investment adviser" within the meaning of the Investment Advisers' Act of 1940, as amended; (b) a "Holding Company" or a "Subsidiary Company" of a "Holding Company", or an "affiliate" of a "Holding Company" or of a "Subsidiary Company" of a "Holding Company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended; or (c) subject to any other federal or state regulation limiting that Company's ability to incur the Obligations other than Obligations under the Environmental Indemnity or, in the case of any Company other than the Borrower, obligations incurred or to be incurred by that Company under the Intercompany Loan Documents to which that Company is a party. 3.14 Consents. Except for the orders, consents, approvals, other authorizations and filings specified in Schedule 3.14(c) and those orders, consents, approvals, other authorizations and filings obtained or given in connection with the Third Closing (and in connection with the First Closing and the Second Closing to the extent they are effective on the date hereof) none of the Companies is or was required to obtain any order, consent, approval or other authorization of, or required to give any notification to or make any other filing other than the filing of UCC financing statements, fixture filings and Mortgages with, any other Person, including any Governmental Authority and any other Person party to any Material Agreement, in connection with the Companies' execution and delivery of and performance of their obligations under any Loan Document or any Intercompany Loan Document, including the granting of the Required Liens and the Intercompany Liens granted on the date hereof and the performance of the Companies' other obligations under the Security Documents and the Intercompany Security Documents. All of the orders, consents, approvals, other authorizations and filings described in this Section 3.14 are herein referred to as the "Consents." 47 -39- 3.15 Margin Stock. None of the Companies owns or has any present intention of acquiring any Margin Stock. 3.16 Employee Retirement Income Security Act of 1974. (a) Except as otherwise set forth on Schedule 3.16, to the Borrower's knowledge: (i) Each "employee benefit plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), each "Plan" within the meaning of Section 4975(e)(1) of the Code (a "Plan") sponsored by a Company or an ERISA Affiliate, as defined below, of a Company, and each "multi-employer plan" within the meaning of Section 3(37) of ERISA to which any Company or any ERISA Affiliate of a Company makes contributions, complies in all material respects with all applicable provisions of ERISA and the Code; (ii) Neither any Company nor any ERISA Affiliate of a Company has incurred any material liability to the Pension Benefit Guaranty Corporation ("PBGC"), any "employee benefit plan" or any "Plan" on account of any of the following: any failure to meet the contribution requirements of such plan, any failure to meet minimum funding requirements of such plan, one or more transactions prohibited by Section 406 of ERISA, one or more "prohibited transactions" within the meaning of Section 4975(c) of the Code, any termination of a single employer plan, any partial or complete withdrawal from a "multi-employer plan", or the insolvency, reorganization or termination of any "multi- employer plan"; and (iii) No event has occurred or condition exists that presents a material risk that any Company or any ERISA Affiliate of a Company will incur any material liability on account of any of the foregoing circumstances. (b) The consummation of the transactions contemplated by this Agreement, will not result in any of the Companies' engaging in any transaction prohibited by Section 406 of ERISA, or any "prohibited transaction", for which an exemption is not available. Schedule 3.16 sets forth (i) all "employee benefit plans" and "Plans" of the Companies including any group or individual severance or other payment plans, (ii) whether or not such plans are funded in whole or in part and (iii) the amount of such funding or the amount of any unfunded obligation or liability under each of such plans. 3.17 Ownership of Borrower and SLT. (a) Borrower. Schedule 3.17(a) correctly sets forth a detailed description of the Borrower's capital structure, the number of Units, as defined in the Borrower's partnership agreement, outstanding and, to the knowledge of the Borrower, each Person who has the authority, directly or indirectly, to vote and/or transfer Percentage Interests, as also defined in the Borrower's partnership agreement, constituting five percent (5.00%) or more of all such 48 -40- Percentage Interests. Except as otherwise set forth in Schedule 3.17(a), the Borrower is not obligated in any manner to issue any one or more additional Units. (b) SLT. Schedule 3.17(b) correctly sets forth a detailed description of SLT's capital structure, the number of SLT's shares of beneficial interest outstanding and, to the knowledge of SLT, each Person who has the authority, directly or indirectly, to vote and/or transfer shares of beneficial interest of SLT constituting five percent (5.00%) or more of all such outstanding shares. All of those outstanding shares of beneficial interest are validly issued, fully paid and nonassessable. Except as otherwise set forth in Schedule 3.17(b), SLT is not obligated in any manner to issue any additional shares of beneficial interest. 3.18 Environmental Matters. The Senior Lender and the Collateral Agent have been furnished by the Borrower with a "Phase I" and/or a "Phase II" environmental survey or report with respect to each Hotel Property currently owned or leased by the Borrower or SLT (collectively, the "Environmental Surveys"). Except as otherwise set forth in the Environmental Surveys or in Schedule 3.18, the Borrower has no knowledge that the Companies' ownership or operation of the Hotel Properties or the current physical condition of any of the Hotel Properties violates any applicable Hazardous Materials Law, except for such violations as will not, individually or in the aggregate, result in a Material Adverse Effect. 3.19 Trademarks, etc. The Borrower and each of the other Companies own or hold licenses in all trademarks, trade names, copyrights, patents, patent rights and patent licenses that are necessary to conduct the Companies' respective businesses in all material respects as currently operated. The consummation of the transactions contemplated by this Agreement, the other Loan Documents and the Intercompany Loan Documents will not adversely alter or impair any of such rights of the Borrower or any of the other Companies, except as otherwise set forth on Schedule 3.19. Neither the Borrower nor any of the other Companies has been charged or is overtly being threatened to be charged with any infringement of, nor to the Borrower's knowledge has any Company infringed on, any unexpired trademark, trademark registration, trade name, patent, copyright, copyright registration or other proprietary right of any Person which infringement, in the reasonable business judgment of the Borrower based upon facts and circumstances currently known to the Borrower or the Operating Partnership, would if proved be likely to have a Material Adverse Effect. 3.20 Burdensome Court Orders, etc. The Borrower and the other Companies are not, individually or in combination, subject to any court order, writ, injunction or decree of any court or Governmental Authority that has had or, in the reasonable business judgment of the Borrower based upon facts and circumstances currently known to the Borrower or the Operating Partnership, is likely to have, a Material Adverse Effect. 3.21 Fire, Explosion, Labor Disputes, etc. Except as otherwise set forth on Schedule 3.21, no Hotel Property is presently affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy or other casualty, whether or not covered by insurance, that, in the reasonable 49 -41- business judgment of the Borrower based upon the facts and circumstances currently known to the Borrower, is likely to have a Material Adverse Effect. 3.22 Binding Obligations. This Agreement, the Notes and the other Loan Documents and the Intercompany Loan Documents executed and delivered at or prior to the Third Closing are the legally valid and binding obligations of the Company or Companies party thereto, enforceable against each such Company in accordance with those agreements' respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally. 3.23 Lien Validity. Except in each case as otherwise set forth in Schedule 3.23, each of the Required Liens and Intercompany Liens that has been granted by SLT and/or SLC in their respective Assets prior to the Third Closing Date has been validly created and perfected to the extent that each such Lien in such Assets can be perfected by the proper filing of financing statements and recordation of fixture filings, Mortgages and other applicable Security Documents and Intercompany Security Documents with the appropriate filing or recording officer in each of the necessary jurisdictions, and giving effect to the delivery to the Collateral Agent or its agent of the original share certificates so delivered at or in connection with the First Closing. Except as otherwise set forth in Schedule 3.23, the Required Liens and the Intercompany Liens granted or to be granted by the Realty Partnership and/or the Operating Partnership in their respective Assets, including the increases thereof, in the amounts accrued thereby, other than the Excluded Assets and Excluded Intercompany Assets, on or after the Third Closing Date have been or when granted shall be validly created and, upon the proper filing of financing statements and recordation of fixture filings, Mortgages and other applicable Security Documents and Intercompany Security Documents with the appropriate filing or recording officers in each of the necessary jurisdictions, and upon delivery of original share certificates and promissory notes to the Collateral Agent, those Required Liens and Intercompany Liens will be perfected to the extent that Liens in such Assets can be perfected by such filing, recordation and pledge. 3.24 Solvency. Subject to the assumptions set forth on Schedule 3.24, the Borrower and each of the other Companies is Solvent. Neither the execution and delivery of this Agreement or any of the other Loan Documents or Intercompany Loan Documents, nor the granting of the Required Liens or the Intercompany Liens, nor, based upon facts and circumstances known to the Borrower or the Operating Partnership, the consummation of any of the transactions contemplated by this Agreement to be consummated on or after the Third Closing Date, will in any way render the Borrower or any of such other Companies not Solvent. 3.25 Accounts. Schedule 3.25 accurately and completely describes each Cash Management Account, each Collateral Account and each other deposit account, demand, time or money market account or certificate of deposit currently maintained at any financial institution by any Company in which any Excluded Cash is held, including the name and address of each financial institution at which any such account is maintained. There is no 50 -42- account or certificate of deposit maintained or held by any of the Companies other than the accounts and certificates listed on Schedule 3.25. 3.26 All Assets. The Collateral subject to the Required Liens includes all Assets of the Borrower other than Excluded Assets, and the Intercompany Collateral includes all Assets of each Company that is an obligor under an Intercompany Note or a guarantor under a Subsidiary Guaranty other than, in each case, Excluded Intercompany Assets, shown on the latest balance sheets included in Schedule 3.4, except for Assets sold or otherwise disposed of in the ordinary course of business as heretofore conducted or as otherwise set forth on Schedule 3.26. Schedule 3.26 also indicates which of the Assets shown on such balance sheets constitute Excluded Assets or Excluded Intercompany Assets other than such Assets that may constitute Excluded Assets or Excluded Intercompany Assets solely at the election of the Senior Lender. 3.27 Certain Schedules. Set forth on Schedule 4.2(q) is a true and correct copy of the Restructuring Plan. Set forth on Schedule 7.3 are illustrations of the calculation of certain financial covenants set forth in this Agreement. ARTICLE 4. Gaming Partnership 4.1 Consent to Transfer of Assets of HICN to Gaming Partnership. Subject to the fulfillment or waiver by Senior Lender of each of the following conditions, Senior Lender shall consent to the transfer of the Assets of HICN to the Gaming Partnership: (a) Security Documents. The Borrower shall have, or shall have caused the Gaming Partnership and the Operating Partnership to have, executed, acknowledged and delivered to the Collateral Agent execute any agreements or other documents reasonably requested by the Collateral Agent or the Senior Lender in order to confirm matters relating to the Reorganization and to assume and perform the obligations or HICN in connection with the Third Closing, including without limitation an amendment to real property security documents in substantially the form executed the Borrower and the Operating Partnership in connection with the transfer of the other Hotel Properties to the Borrower and the Operating Partnership, and (ii) if and to the extent the Gaming Partnership then maintains any disbursement, deposit or other account in the name of the Gaming Partnership, such additional security documents as are necessary to perfect the Intercompany Liens in all Cash and Cash Equivalents of the Gaming Partnership and an amendment to the Cash Management Memorandum as necessary to reflect the transfer of any one or more deposit accounts to the Gaming Partnership. (b) Operating Partnership Guaranty. The Gaming Partnership shall have executed, acknowledged and delivered an Operating Partnership Guaranty in substantially the form of Exhibit K-3, a security agreement securing the Operating Partnership Guaranty in the 51 -43- form executed by the Operating Partnership at the Third Closing and related UCC-1 financing statements and other documents perfecting the Liens granted by such security agreement. (c) Solvency Certificate. The Gaming Partnership shall have delivered a certificate (a "Solvency Certificate") in substantially the form of Exhibit F-3, dated as of the date the Assets of HICN are transferred to the Gaming Partnership, signed by the chief financial officer of the general partner of the Gaming Partnership, certifying that the Gaming Partnership is Solvent as of the date of such Solvency Certificate. (d) Officer's Certificate. The Borrower shall have delivered an officer's certificate, dated as of the date the Assets of HICN are transferred to the Gaming Partnership, signed by a Responsible Officer of the general partner of the Borrower, certifying that the Nevada Gaming Approvals have been obtained and that true and correct copies of all such Nevada Gaming Approvals are attached to the certificate. (e) Local Counsel Opinion. The Borrower shall have delivered an opinion of the Companies' Nevada counsel, in form acceptable to the Collateral Agent, that all Gaming Approvals required by applicable law in connection with the transfer of Assets to the Gaming Partnership have been obtained. (f) Notwithstanding any other provision of this Agreement including the Restructuring Plan, the Senior Lender has not consented, nor shall it be deemed to have consented, to the transfer of any of the Assets of HICN to the Gaming Partnership prior to the fulfillment or waiver by Senior Lender of each of the foregoing conditions. ARTICLE 5. Affirmative Covenants The Borrower covenants and agrees that, until the payment in full all of the principal and interest on the Loans and all other sums due under the Loan Documents and Intercompany Loan Documents, the Borrower shall perform, and shall cause each of the other Companies to perform, each and all of the following covenants applicable to that Company, unless such performance shall be waived by the Senior Lender: 5.1 Financial Statements The Borrower shall furnish or cause to be furnished to Senior Lender: (a) Annual. Within ninety (90) days after the end of each fiscal year of the Realty Partnership and the Operating Partnership: (i) such financial statements as are required to be included in SLT's and SLC's annual report on Securities and Exchange Commission Form 10-K, which shall include audited financial statements of the Operating Partnership and the Realty Partnership, together with the opinion of 52 -44- Deloitte & Touche or other independent public accountants selected by the Borrower and satisfactory to the Senior Lender, whose approval shall not be unreasonably delayed or withheld, on the aforementioned financial statements, which opinion shall state that such financial statements have been prepared in accordance with GAAP and that the audit by such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards related to reporting; (ii) a statement signed by the accountants who have delivered the opinion described in the preceding paragraph to the effect that in connection with their examination of the financial statements to which such opinion relates such accountants have reviewed the provisions of this Agreement, specifically including the provisions of Sections 7.1 (relating to the covenant regarding Adjusted Net Worth) and 7.2 (relating to the covenant regarding Available Cash), and have no knowledge of any event or condition that constitutes a Default or Event of Default or, if such accountants have such knowledge, specifying the nature and period of existence thereof. However, in issuing such statement such accountants shall not be required to go beyond normal auditing procedures conducted in connection with the aforesaid opinion; and (iii) a certificate signed by the chief financial officer or controller of the general partner of the Borrower, and the chief financial officer or controller of the managing general partner of the Operating Partnership, separately identifying and describing all material Contingent Obligations of the Borrower and its Subsidiaries (if any) and of the Operating Partnership and its Subsidiaries. (b) Quarterly. Within forty-five (45) days after the end of each of the first three quarterly accounting periods in each fiscal year of the Borrower: (i) such financial statements as are required to be included in SLT's and SLC's quarterly report on Securities and Exchange Commission Form 10-Q (which will include the financial statements of the Operating Partnership and the Realty Partnership), signed by the chief financial officer of the general partner of the Borrower and the chief financial officer or controller of the managing general partner of the Operating Partnership; (ii) a report, specifying in reasonable detail any material developments with respect to any litigation, proceeding or investigation described in paragraph (ii) or (iii) of subsection 5.2(c), signed by a Responsible Officer of the general partner of the Borrower; and 53 -45- (iii) a report signed by the chief financial officer of the general partner of the Borrower, setting forth the status of the Companies' relations with franchisors, non-Company lessors and lienholders, and the status of the Borrower's efforts to maximize the value of each Mortgage Note with respect to which the mortgagor is in default and each Hotel Property owned by the Borrower with respect to which the ground lessee is in default. (c) Monthly. As soon as available, but in any event not later than forty-five (45) days after the end of each monthly accounting period in each fiscal year of the Borrower, or, in the case of each monthly accounting period ending in January, within seventy-five (75) days after the end of such period: (i) (A) unaudited balance sheets of the Borrower as at the end of such period and the related unaudited statements of income and partners' equity and the related consolidated statement of cash flows for such period and for the period from the beginning of the current fiscal year to the end of such period and (B)(I) the unaudited balance sheets of the Operating Partnership as at the end of such period and the related unaudited statements of income and partners' equity and the related consolidated statement of cash flows for such period and for the period from the beginning of the current fiscal year to the end of such period and (II) the unaudited combined and combining balance sheets of the Borrower and of the Operating Partnership as at the end of such period and the related unaudited combined and combining statements of income and partners' equity and related combined statement of cash flows for such period and for the period from the beginning of the current fiscal year to the end of such period, in each case setting forth in comparative form with respect to such combined financial statements, figures for the same period and portion of the previous fiscal year, signed by the chief financial officer of the general partner of the Borrower and the chief financial officer, the principal accounting officer or the controller of the managing general partner of the Operating Partnership; (ii) either (A) with respect to each Hotel Property and each Indirect Hotel Property, if any, operated during such period by any Company, an operating report prepared in accordance with the American Hotel & Motel Association's Uniform System of Accounts for Hotels, signed by a Responsible Officer of the Company responsible for the operations of the Hotel Property or Indirect Hotel Property in question, setting forth the revenues, expenses and cash flows of such Hotel Property or Indirect Hotel Property and including with respect to each Hotel Property in comparative form figures for such month as set forth in the Borrower's budget for such month or (B) with respect to each Hotel Property or Indirect Hotel Property operated by a Person other than a Company, a 54 -46- copy of any similar operating report with respect to such property received by the Borrower or any other Company from the Person responsible for the operations of such Hotel Property or Indirect Hotel Property; and (iii) a deviation report substantially in the form of Exhibit V on a cumulative year-to-date basis; (iv) a three-month monthly consolidated rolling cash receipts and cash disbursement forecast for the Companies taken as a whole, including a roll-forward of the corporate cash balance; and (v) the report required each month regarding the Mortgage Notes required by the Portfolio Management System as defined in the Mortgage Note Assignment. (vi) The Borrower shall use all reasonable efforts to deliver each of the annual, quarterly and monthly reports of information described above in a uniform complete package consisting of all related specified items. (d) Projections and Capital Expenditures Budget. Not more than thirty (30) days after the commencement of each fiscal year of the Borrower: (i) monthly projected balance sheets and statements of income, partners' equity and cash flows for the Borrower and for the Operating Partnership for such fiscal year, and annual projected statements of income and cash flows for each Hotel Property and each Indirect Hotel Property, in each case signed by the chief financial officer of the general partner of the Borrower and the chief financial officer of the managing general partner of the Operating Partnership, and promptly upon the preparation thereof any other significant projections that the Borrower or the Operating Partnership prepares and revisions of all such projections; and (ii) a Capital Expenditures budget in substantially the form of Exhibit W (a "Capital Expenditures Budget") for each Hotel Property as to which Capital Expenditures are proposed to be made by any of the Companies during such fiscal year, which Capital Expenditures Budget shall include allocations for Capital Expenditures necessary to comply with applicable Franchise Agreements, ground and other leases, management agreements and health and safety laws. Such Capital Expenditures Budget shall be subject to the approval of the Senior Lender, which approval shall not be unreasonably delayed or withheld and may not be withheld if such Capital Expenditures Budget (A) provides for the expenditure of an aggregate amount that does not exceed the sum of (1) five percent (5.00%) of the Companies' total hotel revenues for the previous fiscal 55 -47- year, (2) five percent (5.00%) of the Companies' total gaming revenues for the previous fiscal year and (3) $6,000,000 with respect to Capital Expenditures to be made prior to the Initial Termination Date for the Hotel Properties of Park Central, Dallas, Texas, French Quarter, Lexington, Kentucky, and Capitol Hill, Washington, D.C.. The Capital Expenditures Budget shall not be less than the sum of (a) three percent (3.00%) of the Companies' total hotel revenues for the previous fiscal year plus (b) one percent (1.00%) of the Companies' total gaming revenues for the previous fiscal year or such lower amount as the Collateral Agent shall reasonably approve (the "Minimum Amount"). Capital Expenditures shall be made to each Hotel Property at which Capital Expenditures are proposed to be made that are consistent with Capital Expenditures then customarily being made by prudent hotel owners/operators with respect to properties comparable to that Hotel Property. To the extent the Companies do not spend the Minimum Amount, the Companies shall reserve the unspent amount and spend such amount in the next succeeding fiscal year in addition to complying with that fiscal year's requirement. (e) Auditors' Letters. Promptly upon receipt thereof, a copy of each comment letter (and any supplement or supplements thereto) submitted to the management of the Borrower, the Operating Partnership, SLT or SLC in respect of that Company's internal control matters by that Company's independent public accountants in connection with an annual, interim or special audit of the financial statements of that Company made by such accountants. The Borrower shall obtain such a letter in connection with each of its annual audits. (f) Management Company Reports. The Borrower shall direct each Management Company to deliver to the Senior Lender, at the same time such document is delivered to the Borrower, a copy of each notice of default delivered by such Management Company to any of the Companies, and the Borrower shall provide upon the request of the Senior Lender a copy of any and all material reports and analysis received by the Borrower from any Management Company. 5.2 Other Information and Reports. The Borrower shall furnish or cause to be furnished to the Senior Lender: (a) Communications With Shareholders. Promptly following the mailing or other public distribution or release thereof, one (1) copy of (i) each annual, quarterly or other regular or periodic report including financial statements, notice of meeting or proxy statement sent by the Borrower, the Operating Partnership, SLT or SLC to each of that Company's partners, shareholders or stockholders, as applicable, (ii) any registration statement or prospectus filed by any of the Companies with any securities exchange or with the Securities and Exchange Commission or any successor agency, and (iii) any press release or other similar 56 -48- statement made available generally by any of the Companies to the public concerning material developments in such Company's business. (b) Notices of Default on Other Documents. Within five (5) Business Days after any Responsible Officer of the Borrower obtains knowledge that any party to any Material Agreement or any Material License or the holder of any evidence of material Indebtedness or other security of the Borrower or any of the other Companies, including any Prior Mortgage Note, has given notice of or taken any other material action with respect to, a claimed default or event of default by any of the Companies, a copy of any written notice received with respect to such claimed default or event of default, together with a certificate signed by the chief financial officer of the general partner of the Borrower specifying the notice given or action taken by such holder and the nature of the claimed default or event of default and what action the Borrower or such other Company as is claimed to have committed the default or event of default has taken and proposes to take with respect thereto. (c) Notice of Litigation or Other Material Development. Within five (5) Business Days after any Responsible Officer of the Borrower obtains knowledge of: (i) any condition or event that constitutes an Event of Default or, to the knowledge of the president, chief executive officer or chief financial officer of the general partner of the Borrower, a Default; (ii) any litigation, or any investigation or proceeding by any Governmental Authority, that (A) alleges any criminal conduct on the part of any of the Companies or any of their respective general partners, trustees, directors, officers, employees or agents in their capacity as such, (B) alleges any material violation by any of the Companies of any Hazardous Materials Law or (C) involves a claim against any of the Companies that arises other than in the ordinary course of business, as to which the insurance carrier has denied coverage or that is not covered by insurance and that seeks damages in an amount which, individually, or when aggregated with all other such claims not theretofore reported to the Senior Lender, is greater than or equal to $500,000; (iii) any other investigation of, or proceeding against, the Companies or any of them by any Governmental Authority, or any other litigation against the Companies that, in the reasonable business judgment of the Borrower, is likely to result in a Material Adverse Change; (iv) any material labor controversy resulting in or threatening to result in a strike against any of the Companies; (v) the adoption or termination by any Company of any Plan as defined by the Code or the occurrence of any "reportable event" as defined in ERISA as to any Plan of any Company; 57 -49- (vi) any written proposal by any Governmental Authority to acquire any Hotel Property or any material portion thereof, or any other material written communication, notice, order or report furnished, other than in the ordinary course of business, by any of the Companies to, or received by any of the Companies, other than in the ordinary course of business from the PBGC, the Department of Labor or any other Governmental Authority having jurisdiction over any of the Companies or their Assets; (vii) any change in the composition of the Board of Trustees of SLT, the Board of Directors of SLC or the executive officers of the general partner of the Borrower or the managing general partner of the Operating Partnership; or (viii) any Person's seeking to obtain or threatening in writing to seek to obtain a decree or order for relief with respect to the Borrower or any of the other Companies in an involuntary case under the Bankruptcy Code or any other federal or state bankruptcy, insolvency or other similar law now or hereafter in effect; the Borrower shall deliver to the Senior Lender and the Collateral Agent a certificate signed by a Responsible Officer of the Borrower specifying the nature and period of existence of such event or condition and what action the Borrower or, if appropriate, another Company or Companies has taken, is taking and proposes to take with respect thereto. The Borrower shall also furnish or cause to be furnished to the Senior Lender and the Collateral Agent such other information regarding the business, affairs and condition of the Companies as the Senior Lender or the Collateral Agent may from time to time reasonably request if and to the extent that such information is then readily available to the Borrower or another Company in the ordinary course of business without unreasonable cost or expense. In addition, the Borrower shall permit, and shall cause each of the other Companies to permit, at least once during each quarterly accounting period in each fiscal year of the Borrower, the Senior Lender, or if there is more than one Senior Lender, the Senior Lenders as a group, or the Collateral Agent on their behalf, through their respective agents and employees, to inspect the Companies' books and to make copies thereof and extracts therefrom and, to the fullest extent permitted by law, any of the Hotel Properties or other Assets of the Companies and to discuss the affairs, finances and accounts of the Companies with, and to be advised as to the same by, the Companies' respective executive officers and, at least once during each fiscal year of the Borrower, the Companies' independent public accountants, all at such reasonable times as the Senior Lender or the Collateral Agent may from time to time request. However, the Senior Lender or the Collateral Agent, as the case may be, shall notify the Borrower in advance of any discussion between any Senior Lender or the Collateral Agent and the Companies' accountants, and the Borrower shall have the right to be present during such discussions. The inspection rights of the Senior Lender and the Collateral Agent set forth in this Section shall be in addition to the inspection rights of the Collateral Agent under the Intercompany Security Documents. 58 -50- 5.3 Legal Existence: Franchises: Compliance with Laws. (a) The Borrower shall, and shall cause each of the other Companies to: maintain its existence and business (except as otherwise contemplated by the Restructuring Plan); maintain its licensing, qualification or other authorization to do business as a foreign partnership, foreign real estate investment trust, foreign corporation or other foreign business entity in all states where necessary for the conduct of such Company's business as from time to time conducted; maintain all Assets which are necessary for the conduct of such business now or hereafter owned, in good repair, working order and condition, ordinary wear and tear excepted; take all actions to maintain and keep in full force and effect all such Material Agreements and Material Licenses as are necessary for the conduct of such business; and, except as otherwise provided herein, comply in all material respects with all applicable statutes, rules, regulations and orders of, and all applicable restrictions imposed by, all Governmental Authorities in respect of the conduct of such business and the ownership of such Company's Assets. However, neither the Borrower nor any of the other Companies shall be required by reason of this Section to comply with any such statute, rule, regulation, order or restriction at any time while the Borrower or such other Company shall be contesting its obligation to do so in good faith by appropriate proceedings promptly initiated and diligently conducted, and if the Borrower or such other Company shall have set aside on its books such reserves, if any, with respect to that matter as are required by GAAP and deemed adequate by such Company and its independent public accountants. (b) The Borrower shall not, and shall not permit any of the other Companies to, engage in any business other than the businesses of hotel and hotel/casino ownership, operation and/or management as heretofore conducted and activities incidental thereto. The foregoing shall not be construed to prohibit the ownership or operation of a Mixed-Use Property; provided, however, that the aggregate non-hotel and non-casino gross revenues of Mixed-Use Properties shall not constitute more than ten percent (10%) of the gross revenues of all the Companies' Assets. In addition, the Borrower and the other Companies may acquire additional casino properties provided the total asset value of all casinos does not exceed twenty percent (20%) of the Aggregate Asset Value. 5.4 Insurance. (a) The Borrower shall maintain or cause to be maintained at the Borrower's expense with companies satisfactory to the Senior Lender, whose approval shall not be unreasonably delayed or withheld and shall not be withheld as to any Company rated A-VII or better in the most current issue of Best's Key Rating Guide, the following minimum insurance coverages, which coverages may be included as part of a blanket policy, insuring the Hotel Properties and other Assets of the Companies: (i) insurance that complies with the worker's compensation and employer's liability laws of all states in which the Borrower or any other Company shall have employees; (ii) comprehensive general liability insurance covering all operations of the Borrower and the other Companies and with a combined single limit of 59 -51- not less than $1,000,000 per occurrence for bodily injury, including death, and property damage; (iii) fire, extended coverage, vandalism and malicious mischief insurance in an amount not less than one hundred (100%) of the full replacement cost of the personal property and Improvements on the Real Property associated with the Hotel Properties and the Companies' other Assets, with deductibles not to exceed $100,000 for any one occurrence (or in the case of earthquake or flood insurance, ten percent (10%) of the total insurable value), with a replacement cost coverage endorsement, an agreed amount endorsement if requested by the Senior Lender, a contingent liability from operation of building laws endorsement, a demolition cost endorsement and an increased cost of construction endorsement ("full replacement cost", as used herein, meaning the cost of replacing the Improvements exclusive of the cost of excavations, foundations and footings below the lowest basement floor) and the Companies' personal property therein without deduction for physical depreciation thereof); (iv) umbrella liability insurance in addition to the coverage specified in (ii) above, in an amount not less than $10,000,000 per occurrence; (v) for each Hotel Property in an area designated by the Secretary of Housing and Urban Development as having special flood hazards, flood insurance on the Improvements included in such Hotel Property and any and all Company personal property used or to be used in connection therewith, up to the maximum limits of insurance available under the National Flood Insurance Program as authorized by the Flood Disaster Protection Act of 1973, as amended or recodified from time to time; (vi) business interruption insurance and/or loss of rental value insurance, as appropriate, payable for a period of twelve (12) months and sufficient to cover eighty percent (80%) of the gross income from the Hotel Properties for a period of twelve (12) months, as determined at the commencement of each insurance policy year; and (vii) products and completed operations, business automobile liability, liquor liability, personal and advertising injury liability, false arrest and libel and slander insurance. Notwithstanding the foregoing provisions of subparagraphs (iii), (v), (vi) and (vii), the Borrower shall, with respect to acquired mortgage notes and Existing Mortgage Notes, fully enforce the coverage (with the intention of attaining the maximum coverage allowed) and related terms provided for in the applicable mortgage note but which may be less coverage than specified above. 60 -52- (b) The Borrower shall furnish to the Collateral Agent originals or, if not available, certified copies of such policies of insurance upon execution hereof and upon the renewal or replacement of existing coverage or the obtaining of additional coverage. (c) Each insurance policy required by paragraphs (i), (ii) (iv) and (vii) of subsection 5.4(a) shall name the Collateral Agent, for the benefit of the Senior Lender, as an additional insured party with respect to the Collateral insured by such policy. Each insurance policy required by paragraphs (iii), (v) and (vi) of subsection 5.4(a) and any and all other policies applicable to the Collateral shall name the Collateral Agent, for the benefit of the Senior Lender, as a loss payee with respect to the Collateral and shall provide that all proceeds payable thereunder shall be paid to the Collateral Agent to be applied as provided herein. Except as may be otherwise approved by the Senior Lender, none of such insurance policies shall include any non- Company Assets. (d) Each insurance policy required by paragraphs (iii) and (v) of subsection 5.4(a) shall be on a non-reporting form basis and to the extent the same relates to the Collateral shall contain a provision (i) requiring the insurer to notify the Senior Lender and the Collateral Agent in writing at least ten (10) days in advance of any cancellation or material change in such policy; and (ii) stating that any loss otherwise payable thereunder shall be payable notwithstanding any change in title to or ownership of the covered Hotel Property after the event giving rise to the loss. (e) In the event of an insured loss to all or any portion of the Borrower's Assets which loss is estimated to be in an amount in excess of $200,000, the Borrower shall give immediate written and oral notice thereof to the Collateral Agent, and the Collateral Agent may make proof of loss with respect to the Collateral or Intercompany Collateral if not made promptly by the Borrower or another Company. However, any adjustment or proof of loss in excess of $200,000 shall require the prior written consent of the Senior Lender, which consent shall not be unreasonably delayed or withheld. Each insurance company concerned with the circumstances described in the immediately preceding sentence is hereby authorized and directed to make payment under such insurance to the Collateral Agent instead of to the Borrower and the Collateral Agent jointly, other than with respect to the return of unearned premiums which, except as otherwise provided in subsection 5.4(g), shall be returned to the Borrower. The Borrower irrevocably appoints the Collateral Agent as the Borrower's attorney-in-fact to endorse any draft for such payment, which appointment, being for security, is irrevocable. The Collateral Agent shall immediately, and in any event within ten (10) Business Days, notify the Borrower of the Collateral Agent's receipt of any payment pursuant to the immediately preceding sentence. (f) The proceeds of any business interruption insurance carried in accordance with paragraph 5.4(a)(vi) and paid to the Collateral Agent shall be promptly paid by the Collateral Agent to the Borrower. (g) All right, title and interest of the Borrower in and to the policies contemplated in this Section, and all renewals thereof, have been assigned pursuant to the 61 -53- Security Documents by the Borrower to the Collateral Agent as additional security for payment of the Obligations, other than Obligations under the Environmental Indemnity, to the extent permitted by applicable law and subject to the rights of the Borrower's insurance premium finance company, if any. The Borrower hereby agrees (i) to give notice of such assignment to the companies issuing such policies as herein required, and (ii) if an Event of Default shall have occurred and be continuing, any amount that would otherwise be available under said insurance policies to any of the Companies upon cancellation or termination of any of such policies or renewals, whether in the form of return of premiums or otherwise, shall be payable to the Collateral Agent as assignee thereof. 5.5 Restoration. (a) In the event that there occurs any damage to or destruction of any Improvements forming a part of any Hotel Property owned by the Borrower or SLT and subject to the Required Liens ("Damage") or that any portion of the Real Property or other Assets constituting such a Hotel Property is taken under the power of eminent domain (a "Condemnation") and such Damage or Condemnation constitutes Major Damage or a Major Condemnation or a Total Loss as hereinafter defined, then, except for such proceeds of any insurance as the Borrower may require in order to effect any demolition of the remaining portion of Improvements that may be required by applicable law, which proceeds shall be paid to the Borrower by the Senior Lender, the Senior Lender shall have the absolute right to (i) retain and apply the proceeds of any insurance or sums received as a result of such Condemnation, at its sole election, to principal payable on the Notes then outstanding; or (ii) require the Borrower to restore or repair, or cause to be repaired or otherwise restored, the damaged or taken Hotel Property or portion thereof according to plans and specifications approved by the Senior Lender and in accordance with the requirements of subsection 5.5(b), if and to the extent that such repair or restoration is then permitted by applicable law. However, if (i) such Damage or Condemnation does not constitute a Total Loss, (ii) no Event of Default has occurred and is continuing, (iii) the Borrower certifies to the Senior Lender that, in that Company's reasonable business judgment, there are sufficient net proceeds from insurance or sums received as a result of such Condemnation or from Company funds to complete repair or the restoration of the Improvements affected thereby to, in the case of a casualty, substantially the same value, condition and character as existed immediately prior to such damage or, in the case of a Condemnation, to such condition and character as shall permit the continued operation of such Hotel Property, and (iv) the insurer, in the case of an insured casualty loss, does not deny liability as to the insureds, the Senior Lender shall, if the Borrower shall so request, consent to the use of the net proceeds of any insurance or any sums received as the result of such Condemnation for restoration of such Hotel Property. In the event that there occurs any Minor Damage or Minor Condemnation as hereinafter defined to any Hotel Property owned or leased by the Borrower or SLT and subject to the Required Liens, the Borrower shall have the right to apply the proceeds of any insurance received as a result of such Minor Damage or sums received as a result of such Minor Condemnation to principal payable on the Notes then outstanding, or repair or restore or cause the restoration of the damaged or taken Hotel Property or portion thereof according to plans and specifications approved by the Senior Lender and in accordance with the requirements of subsection 5.5(b). 62 -54- (b) All restorations made pursuant to subsection 5.5(a) shall be conducted in accordance with the following conditions: (i) Prior to the commencement of restoration, if the cost to restore is anticipated to exceed $500,000, the architect, contracts, contractors, plans and specifications for the restoration shall have been approved in advance in writing by the Senior Lender, whose approval shall not be unreasonably delayed or withheld, and the Senior Lender shall have been provided with proof of the effective filing of a waiver of mechanics' liens so as to prevent to the maximum extent permitted by law such liens from attaching to such Hotel Property; (ii) Such restoration is then allowed by applicable law and all necessary permits and approvals shall have been obtained; (iii) The net proceeds of such insurance or condemnation award (the "Restoration Fund") shall have been deposited with the Collateral Agent, and any interest earned on such deposited funds shall be a part of and follow the Restoration Fund; (iv) At the time of any disbursement from the Restoration Fund, no Event of Default shall have occurred and be continuing, no mechanic's or material supplier's liens shall have been filed and remain undischarged, and a bring-down of title insurance with respect to the damaged or condemned Hotel Property shall have been delivered to the Collateral Agent; (v) Disbursements from the Restoration Fund shall be made by the Collateral Agent from time to time in an amount not exceeding the cost of the work completed since the last disbursement, upon receipt by the Collateral Agent of customary evidence of the stage of completion and of performance of the work in a good and workmanlike manner in accordance with the contracts, plans and specifications; and (vi) The Collateral Agent may retain ten percent (10%) of all requests for disbursements from the Restoration Fund as retainage until the restoration is fully completed. Notwithstanding the foregoing, no Restoration Fund shall be required in connection with Minor Damage or Minor Condemnation. (c) If the estimated cost of restoration, as determined by the Borrower in its reasonable business judgment from time to time and certified to the Senior Lender, exceeds the net amount of insurance proceeds or condemnation proceeds awarded for the cost of such restoration and deposited in the Restoration Fund, the amount of such excess shall be paid promptly, but in no event later than sixty (60) days after notification by the Collateral Agent, 63 -55- by the Borrower to the Collateral Agent to be added to the Restoration Fund. Any insurance or condemnation proceeds remaining in the Restoration Fund after completion of repairs or restoration, other than any retainage, shall be distributed by the Collateral Agent or the Borrower. Upon certification by the Borrower to the Senior Lender that all conditions under the applicable construction contract for the release of any retainage have been fulfilled, any such retainage shall be made available by the Collateral Agent to the Borrower and shall be used by the Borrower for payment of such construction costs. (d) For purposes of this Section 5.5, "Major Damage" or "Major Condemnation" shall mean a loss to the extent that the costs of repair or other restoration equal or exceed the lesser of (i) 15% of the appraised value of the damaged or taken Hotel Property or portion thereof based on the most recent insurance appraisal for such Hotel Property or, if there is no such insurance appraisal or in the case of a Major Condemnation, based on the most recent Appraisal of such Hotel Property, excluding land for any Major Damage only, and (ii) $500,000; "Minor Damage" or "Minor Condemnation" shall mean a loss to the extent that the costs of repair or other restoration do not exceed the lesser of (i) 15% of such appraised value and (ii) $500,000; and "Total Loss" shall mean a loss with respect to which replacement cost of the Improvements and personal property is greater than or equal to 80% of such appraised value of such Improvements and personal property. 5.6 Payment of Taxes. The Borrower shall, and shall cause each of the other Companies to, pay and discharge before delinquency or the imposition of any penalty or interest all Taxes imposed upon such Company or its income or upon any of that Company's Assets or upon any part thereof, as well as all lawful claims of any kind including claims for labor, materials and supplies that, if unpaid, might by law become a Lien, other than an inchoate Lien, upon such Company's Assets. However, neither the Borrower nor any of the other Companies shall be required to pay any such Taxes or claims if (i) the Lien securing such Taxes or claims shall remain inchoate or any statutory bond with respect to any Lien securing such delinquent Taxes or claims shall have been provided, (ii) the amount, applicability or validity of the Taxes or claim shall currently be contested in good faith by appropriate proceedings promptly initiated and diligently conducted, (iii) enforcement of the Lien is being stayed and (iv) the Borrower or such other Company shall have set aside on its books such reserves with respect to the Taxes or claim as are required by GAAP and deemed appropriate by such Company and its independent public accountants. Upon the request of the Senior Lender, the Borrower shall furnish to the Senior Lender copies of all federal income tax returns filed by the Borrower or the Operating Partnership within ten (10) Business Days after the filing thereof. 5.7 Payment of Other Indebtedness. etc. Except as to matters being contested in good faith and, where the Borrower deems necessary or appropriate, by appropriate proceedings, the Borrower shall, and shall cause each of the other Companies to, pay promptly when due or in conformance with customary trade terms all other material Indebtedness of that Company and perform in all material respects all other material obligations incident to the conduct of such Company's business, except as otherwise permitted under Section 6.6 (relating to Intercompany Loans and Leases). 64 -56- 5.8 Further Assurances. (a) General. From time to time the Borrower shall execute and deliver, or shall cause to be executed and delivered, such additional instruments, certificates or documents, and shall take all such additional actions, as may be necessary for the purposes of implementing or effectuating the provisions of this Agreement and the other Loan Documents or Intercompany Loan Documents, or of more fully perfecting or renewing the Senior Lender's rights with respect to the Collateral pursuant hereto or thereto. Upon the exercise by the Senior Lender of any power, right, privilege or remedy pursuant to this Agreement or any other Loan Document which exercise requires any consent, approval, registration, qualification or authorization of any Person, including any Governmental Authority, the Borrower shall, at its expense, execute and deliver, or shall cause the execution and delivery by the other Companies, and shall use all reasonable efforts to cause the execution and delivery by any other Governmental Authority or other Person of, all applications, certifications, instruments and other documents that the Senior Lender may require to be obtained for such consent, approval, registration, qualification or authorization. (b) Mortgage Notes. Without limiting the generality of the foregoing, the Borrower shall, as more fully set out in the Mortgage Note Assignment, assign to the Collateral Agent, as security for the Obligations other than Obligations under the Environmental Indemnity, all of the Borrower's right, title and interest in and to all Mortgage Notes, all Direct Note Collateral and all Borrower's Residual General Intangibles, in each case arising on account of any sale or other disposition of a Hotel Property after the Third Closing (except Excluded Assets), and such Mortgage Notes, Direct Note Collateral and Borrower's Residual General Intangibles shall constitute Collateral for all purposes hereof. The Borrower shall deliver to the Collateral Agent copies of all documents and instruments related to such Collateral upon the receipt of such documents or instruments by the Borrower or any of the other Companies. (c) Additional Collateral. (i) If: (A) the Borrower acquires any right, title or interest in any Asset other than an Excluded Asset, which Asset does not upon acquisition become subject to the Required Liens, or any Asset other than an Excluded Intercompany Asset is acquired by a non-Borrower Company that has granted Intercompany Liens, which Asset does not upon acquisition become subject to an Intercompany Lien, in each case by virtue of an after-acquired property clause in any then existing Security Document or Intercompany Security Document, (B) the Borrower prepays in full any Prior Mortgage Note applicable to any Hotel Property owned by the Companies and the holder of which Prior Mortgage Note had not previously consented to the granting of the Required Liens and/or Intercompany Liens (regardless of whether such holder has previously consented to the granting of second liens to the Collateral Agent for the benefit of the Senior Lender), or (C) the Senior Lender for any reason elects, in its sole and absolute discretion, to require that any Asset, that theretofore constituted an Excluded 65 -57- Asset or an Excluded Intercompany Asset solely at the election of the Senior Lender, become a part of the Collateral or the Intercompany Collateral, then the Borrower shall and/or shall cause each other Company with any right, title or interest in such Asset to execute, acknowledge and deliver to the Collateral Agent such additional Security Documents or Intercompany Security Documents as are necessary to grant and perfect the Required Lien or Intercompany Lien with respect to such Asset, which Security Documents or Intercompany Security Documents shall be in all material respects consistent in form and substance with the Security Documents or Intercompany Security Documents theretofore executed. (ii) If the Borrower or any of the Companies shall acquire one hundred percent (100%) of the ownership or operation of the Hotel Asset located in Milwaukee, Wisconsin, then if requested by the Senior Lender, the Borrower will cooperate with the Senior Lender to restructure the Moorland Debt so that the Indirect Hotel Property located in Milwaukee, Wisconsin shall be direct Collateral for the Loans or, if the ownership is acquired by a Company other than the Borrower, direct Intercompany Collateral for the Intercompany Loans, in each case in substitution for the currently existing pledge of the Moorland Debt. The Borrower's obligations under this paragraph (ii) shall be subject to the rights of any and all other lenders holding prior Liens secured by the Hotel Property and to the Companies' ability to grant the Required Liens and the Intercompany Liens in the Asset in compliance with the terms of the Companies agreements with such third party lenders. (d) Management Contracts. If at any time or from time to time any of the Companies enters into a new Management Contract, including replacing an existing Management Contract but excluding any Management Contract for a Hotel Property that is at the time in question an Excluded Asset, then the Borrower shall cause each Management Company that is a party thereto to execute, acknowledge and deliver a Management Subordination Agreement. 5.9 Cash Management System. The Borrower shall, and shall cause each of the other Companies and Management Companies to deposit all receipts, regardless of the form in which they are received, but excluding all receipts that constitute Excluded Assets or Excluded Intercompany Assets and all receipts from the operation of Hotel Property that is subject to a Prior Mortgage Note and that are required by the holder thereof to be deposited in an account other than the Cash Management Account, in the Cash Management Accounts and otherwise to comply with the terms and conditions of the Cash Management System described in the Cash Management Memorandum, subject to the provisions of Section 6.16 of this Agreement. Notwithstanding the foregoing, certain accounts not in the Cash Management System on the Third Closing Date are to be included in such system after the Third Closing Date as provided in Section 6.16 of this Agreement. 66 -58- 5.10 Action Under Hazardous Materials Laws. (a) Upon the Borrower's obtaining knowledge of (i) the presence on any Real Property of any Hazardous Materials in violation of applicable Hazardous Materials Laws, (ii) the conduct at such Real Property of Hazardous Materials Activity in violation of applicable Hazardous Materials Laws or (iii) the existence of any environmental liability on the part of the Borrower or any of the other Companies under applicable Hazardous Material Laws with respect to any Real Property (any of the foregoing items (i), (ii), and (iii), an "Environmental Situation"), which Environmental Situation, in the reasonable business judgment of the Borrower, is likely to result in a Material Adverse Change, the Borrower shall, at its sole cost and expense (A) promptly notify the Senior Lender, (B) take all material actions as shall be required by applicable Hazardous Materials Laws and (C) provide the Senior Lender upon its request from time to time with one or more reports as to the status of any such remediation efforts. (b) After reasonable notice to the Borrower, whether or not a Default or an Event of Default shall have occurred, the Senior Lender may, in its discretion for the purpose of assessing and ensuring the value of the Real Property, obtain one or more environmental assessments or audits of the Real Property prepared by a hydrogeologist, an independent engineer or other qualified consultant or expert approved by the Senior Lender to evaluate or confirm (i) whether any Hazardous Materials are present in the soil or water at any Real Property and (ii) whether the use and operation of Real Property complies with all Hazardous Materials Laws. Environmental assessments may include detailed visual inspections of any Real Property, including any and all storage areas, storage tanks, drains, dry wells and leaching areas, the taking of soil samples, surface water samples and ground water samples and any other investigations or analyses as the Senior Lender deems appropriate. With respect to any parcel of Real Property and all related Improvements, the first such environmental assessment requested by the Senior Lender after the Third Closing shall be obtained at the sole cost and expense of the Borrower. Any environmental assessments subsequently requested by the Senior Lender with respect to such parcel of Real Property shall be at the sole cost and expense of the Senior Lender. However, if (i) at the time of any such request, a Default or Event of Default shall have occurred and shall not have been cured, or (ii) such request is the result of an Environmental Situation that shall have come to the attention of the Senior Lender, then any such environmental assessments subsequently requested shall be obtained at the sole cost and expense of the Borrower. Each environmental assessment obtained pursuant to this subsection 5.10(b) at the cost and expense of the Borrower shall be prepared by the consultant or expert that prepared the environmental assessment of that Real Property provided by the Borrower prior to the Third Closing and to the extent practicable shall take the from of a update of the original environmental assessment. (Any reference to the Senior Lender in this subsection 5.10(b) shall be deemed to be a reference to the Senior Lenders collectively if at the applicable time there is more than one Senior Lender.) 5.11 Asbestos Monitoring. The Borrower shall comply with all of the O&M Procedures set forth in the O&M Manuals, and with all applicable laws, rules and regulations 67 -59- relating to the presence of asbestos or asbestos-containing materials ("ACM") on any of the Hotel Properties. 5.12 Appraisals and Marketing Studies. The Collateral Agent shall from time to time after the Third Closing, at the request of the Senior Lender, arrange for an Appraisal or market study of any Hotel Property and/or Indirect Hotel Property or a market study of the business of any Hotel Property and/or Indirect Hotel Property. In connection with any such Appraisal or any such market study, the Borrower shall furnish or cause to be furnished to the Person conducting such Appraisal or market study in a timely manner such information as is necessary to enable such Person to conduct and complete such Appraisal or market study. With respect to each Hotel Property and each Indirect Hotel Property, the first such Appraisal and, with respect to the businesses of such Hotel Property or such Indirect Hotel Property, the first such market study, requested by the Senior Lender after the Third Closing shall be obtained at the sole cost and expense of the Borrower. Any Appraisal requested after the first such requested Appraisal, and any market study requested after the first such requested market study, with respect to such Hotel Property or Indirect Hotel Property, shall be at the sole cost and expense of the Senior Lender. However, if at the time of any such request any Material Adverse Effect shall have occurred and be continuing with respect to such Hotel Property or Indirect Hotel Property or a Default or Event of Default shall have occurred and shall not have been cured, then any such subsequently requested Appraisal or market study shall be obtained at the sole cost and expense of the Borrower. Each Appraisal or market study obtained pursuant to this Section 5.12 at the cost and expense of the Borrower shall be prepared by the consultant or expert that prepared the Appraisal or market study of that Hotel Property or Indirect Property provided by the Borrower to the Senior Lender in connection with the Third Closing, if any, and may, if acceptable to the Senior Lender in its sole discretion, take the form of an update of that original Appraisal or market study. (Any reference to the Senior Lender in this Section 5.12 shall be deemed to be a reference to the Senior Lenders collectively if at the applicable time there is more than one Senior Lender.) 5.13 Termination of Material Licenses and Material Agreements. Except in connection with an Asset Sale pursuant to and in accordance with the provisions of Section 6.10 (relating to Sales of Assets) or an Excluded Disposition, the Borrower shall, and shall cause each of the other Companies to, keep in full force and effect and not terminate, surrender or amend any Material License or Material Agreement (other than any Intercompany Loan Document or Intercompany Lease, which items are governed by Section 6.6), the loss, termination, surrender or amendment of which would, after giving effect to any replacement license or agreement then or theretofore obtained, result in a Material Adverse Effect. 5.14 Covenant regarding Second Liens. Within sixty (60) days after the Third Closing Date, the Borrower shall use its best efforts to obtain a second mortgage Lien in the highest amount practical as a Required Lien on the Park Central Hotel, Dallas, Texas, and shall use its best efforts to execute and deliver all documentation in recordable form requested by the Senior Lender to grant to the Senior Lender such Lien. The Borrower shall also use its best efforts to obtain, with respect to the Best Western Airport Hotel, Albuquerque, New Mexico, the ground lessor's consent to increase the Required Lien amount with respect to a 68 -60- second mortgage Lien on such hotel, and shall satisfy the first mortgage on Embassy Suites, Phoenix, Arizona, which first mortgage amount shall be deposited as additional security for the Loans with the Senior Lender until payment can be made. ARTICLE 6. Negative Covenants The Borrower covenants and agrees that until payment in full of all principal of and interest on the Loans and all costs and expenses payable by the Borrower pursuant to Section 10.1 (relating to certain expenses of the Third Closing and certain other expenses), the Borrower shall, and shall cause each of the other Companies to, perform each and all of the following covenants applicable to it unless such compliance shall be waived by the Senior Lender: 6.1 Indebtedness. The Borrower shall not, and shall not permit any of the other Companies to, create, incur, assume or become or remain liable in respect of any Indebtedness, except the following (collectively, the "Permitted Indebtedness"): (a) Indebtedness to the Senior Lender hereunder; (b) Indebtedness consisting of Intercompany Loans. However, at all times such Intercompany Loans shall be evidenced by Intercompany Notes and all right, title and interest of the obligee of each such Intercompany Note in and to such note and the related Intercompany Collateral shall have been assigned to the Collateral Agent, for the benefit of the Senior Lender, as security for the Obligations (other than Obligations under the Environmental Indemnity); (c) Current liabilities (other than for borrowed money) incurred in the ordinary course of the Companies' respective businesses and in accordance with customary trade practices; (d) Indebtedness, if any, of the Companies existing as of the Third Closing and referred to in Schedule 3.8(a), in not more than the respective unpaid principal amounts thereof specified in such Schedule and all renewals, extensions or refinancings of any such Indebtedness in an amount not exceeding the lesser of (i) the principal amount thereof outstanding as of the Third Closing or (ii) the principal amount thereof remaining unpaid immediately prior to such renewal, extension or refinancing, together with, in each instance, Permitted Closing Expenses incurred in connection with the renewal, extension or refinancing (and any Indebtedness permitted under this subparagraph (d) may be recourse to the extent the same is recourse on the date hereof); (e) Indebtedness of the Companies in respect of Contingent Obligations to the extent permitted under Section 6.4, or in respect of any Operating Partnership Guaranty; 69 -61- (f) Indebtedness of a Partnership to SLT, SLC, a Subsidiary, incurred pursuant to Section 7.3 of the partnership agreement of the Realty Partnership or Section 7.3 of the partnership agreement for the Operating Partnership. However, (i) at the election of the Senior Lender such Indebtedness must be evidenced by an Intercompany Note and the other conditions set forth in subsection 6.1(b) (relating to Intercompany Loans) must be satisfied with respect to such Indebtedness, and (ii) at the time such Indebtedness is incurred, the general partner to which such Indebtedness is owed shall execute a subordination agreement, in form reasonably acceptable to the Senior Lender, subordinating such Indebtedness to the Loans; (g) Non-recourse Indebtedness incurred or assumed by the Partnerships in connection with the acquisition of Hotel Properties or other Assets after the Third Closing Date in accordance with the provisions of Section 6.5 or a non-recourse refinancing of such Indebtedness in a principal amount not exceeding the amount being refinanced; (h) With respect to a Hotel Property or a direct or indirect interest therein acquired by the Borrower or any other Company as permitted by, and subject to the conditions of, Section 6.5, any non-recourse Indebtedness to which such Hotel Property or a direct or indirect interest therein is subject to at the time of such acquisition or a non-recourse refinancing of such Indebtedness in a principal amount not exceeding the amount being refinanced; (i) Indebtedness, which may be recourse Indebtedness, incurred in connection with the Acquisition Credit Facility or the Merrill Loans, and additional loans similar to the Merrill Loans made by the originator of the Merrill Loans up to an aggregate amount of $50,000,000 after the expiration of the Acquisition Loan Facility, as provided in Schedule 1.7.; (j) Indebtedness of the Companies secured as permitted by, and subject to the provisions of, subsections 6.2(e) and 6.2(h) (which Section 6.2(h) obligations may be recourse); (k) Non-recourse Indebtedness of the Companies secured as permitted by, and subject to the provisions of, subsection 6.2(i); (l) Indebtedness of the Companies (which may be unsecured) incurred to Starwood or any Affiliate of Starwood concurrently with the execution and delivery of this Agreement in connection with the cancellation of the Warrants, and all extensions or renewals of the same. However, the maximum principal amount of such Indebtedness shall not exceed $800,000; (m) subject to the Borrower's and the other Companies' prior compliance with the provisions of paragraph (i) of subsection 1.9(b) in connection with the application of the proceeds of any public issuance of debt or equity securities, Indebtedness of the Partnerships to Starwood upon consummation of the Reorganization and which are payable 70 -62- only if (i) SLT and SLC consummate a public offering of shares of beneficial interest of SLT and shares of the common stock of SLC within eighteen (18) months following the consummation of the Reorganization and (ii) such offering results in the receipt by SLT and SLC of gross proceeds of not less than $150,000,000 and as otherwise described in the Reorganization Proxy Statement; and (n) obligations under ground leases, operating leases and Capital Leases which are not financing devices. 6.2 Liens. The Borrower shall not, and shall not permit any of the other Companies to, directly or indirectly, create, incur, assume or suffer to exist, any Lien, or any agreement to give or refrain from giving any Lien, with respect to any Asset now owned or hereafter acquired by the Borrower or any of the other Companies, except the following (collectively, the "Permitted Liens"): (a) Any Lien securing the Obligations (other than Obligations under the Environmental Indemnity), including the Required Liens; (b) Any Lien securing an Intercompany Loan or a Subsidiary Guaranty, including the Intercompany Liens, but only if all right, title and interest of the lienholder in and to such Lien shall have been assigned to the Collateral Agent, for the benefit of the Senior Lender, as security for the Obligations (other than Obligations under the Environmental Indemnity); (c) The Liens existing as of the Third Closing referred to in Schedule 3.8(b) as delivered at the Third Closing, or any Liens securing any renewal, extension or refinancing of the Indebtedness secured by any such Lien(s), but only if (i) such renewed, extended or refinanced Indebtedness, which may include revolving debt, is in an amount not exceeding the lesser of (A) the principal amount thereof secured as of the Third Closing Date or (B) the principal amount thereof remaining unpaid immediately prior to such renewal, extension or refinancing, in each case together with Permitted Closing Expenses incurred in connection with the renewal, extension or refinancing; and (ii) the Lien(s) securing such renewed, extended or refinanced Indebtedness, which may include revolving debt, are confined to the Assets originally encumbered or replacements thereof (or, in the case of renewed, extended or refinanced Prior Mortgage Note Indebtedness existing as of the Third Closing Date, the applicable Hotel Property (together with that Hotel Property's "Leases," "Hotel Occupancy Leases" and "Rents" as each such term is defined in the Absolute Assignment of Leases, if any, for the Hotel Property) and the Companies' Cash and Cash Equivalents contained from time to time solely in the Hotel Specific Accounts relating to the applicable Hotel Property). In any event, the Required Liens and Intercompany Liens, as applicable, shall be subordinate to any Lien securing any such renewed, extended or refinanced Indebtedness if and to the extent that the Required Liens and/or the Intercompany Liens, as applicable, were subordinate to the Lien(s) securing the renewed, extended or refinanced Indebtedness prior to such renewal, extension or refinancing. However, in the case of renewed, extended or refinanced Prior Mortgage Note Indebtedness existing as of the Third Closing Date, the Required Liens 71 -63- and/or the Intercompany Liens, as applicable, with respect to the applicable Hotel Property (together with the applicable Leases, Hotel Occupancy Leases and Rents and the Hotel Specific Accounts) shall be subordinate to any Liens(s) that secure such renewed, extended or refinanced Prior Mortgage Note Indebtedness and that are limited solely to the applicable Hotel Property, including that Hotel Property's Leases, Hotel Occupancy Leases, Rents and Hotel Specific Accounts. It is the intent of the foregoing provisions that the Borrower shall have the right to grant to the holder of the renewed, extended or refinanced Prior Mortgage Note Indebtedness existing as of the Third Closing Date such security therefor as is customarily granted to institutional mortgage lenders by owners and operators of hotel properties. (d) Liens for Taxes not yet delinquent or subject to interest or penalty or which are being contested in good faith as provided in Section 5.6 (relating to the payment of certain taxes); Liens in connection with workmen's compensation, unemployment insurance or other social security obligations; Liens securing the performance of bids, tenders, contracts, surety and appeal bonds; Liens to secure progress or partial payments and other Liens of like nature arising in the ordinary course of business of the Companies; mechanics', workmen's, materialmen's or other like Liens arising in the ordinary course of business of the Companies in respect of obligations which are not yet overdue or are being contested in good faith by appropriate proceedings promptly initiated and diligently conducted, and enforcement thereof is being stayed and with respect to which such Company shall have set aside on its books such reserves, if any, as are required by GAAP and deemed appropriate by such Company and its independent public accountants; Liens of or resulting from any judgment or award the time for the appeal or the hearing of which shall not have expired or in respect of which any of the Companies shall at any time in good faith be prosecuting an appeal or proceeding for a review and in respect of which a stay of execution pending such appeal or proceeding for review shall have been secured; as to Excluded Cash, the Liens described in clause (c) of the definition thereof; and other Liens incidental to the ordinary course of business of the Companies or to the ownership of their respective Assets (including survey exceptions, easements or reservations or rights of others for rights of way, utilities and other similar purposes, or zoning or other restrictions as to the use of real property), which were not incurred in connection with the borrowing of money or the obtaining of credit and which do not materially detract from the value of the Assets of the Companies or materially and adversely affect the use thereof in the operation of the Companies' respective businesses; (e) All Liens permitted under Section 9(b)(1) of the Mortgage Note Assignment; (f) All Liens granted in connection with the Acquisition Credit Facility or the Merrill Loans and additional loans similar to the Merrill Loans made by the originator of the Merrill Loans up to an aggregate $50,000,000 after the expiration of the Acquisition Loan Facility as provided in Schedule 1.7; (g) Liens referred to as Permitted Liens in paragraph (ii) of subsection 6.5(f) or otherwise permitted under Section 6.5; 72 -64- (h) Purchase money Liens, including Capital Leases the principal purpose of which is financing, created in respect of personal property or fixtures acquired by any of the Companies after the date hereof or existing in respect of personal property or fixtures so acquired at the time of acquisition thereof. However, (i) each such Lien shall at all times be confined solely to the item or items of property so acquired and (ii) the aggregate outstanding principal amount of Indebtedness secured by all such Liens shall at no time exceed the greater of $2,000,000 or one percent (1.00%) of the Aggregate Asset Value. However, if the aggregate principal amount of such Indebtedness is in excess of $2,000,000 with respect to any subsequent expenditures of $50,000 or more the Borrower shall use its best efforts to obtain a recognition agreement from such lienholder for the benefit of Senior Lender; (i) Liens of Mortgages or similar arrangements granted, given or incurred by a Company or Companies after the date hereof on one or more Hotel Properties to secure any refinancing of any Acquisition Loan or Merrill Loan up to the outstanding principal balance of such loan immediately prior to such refinancing. However, (A) in connection with any refinancing, upon the closing of such refinancing with respect to which the Senior Lender releases a Lien, an amount equal to the Minimum Release Price applicable to the transaction, with respect to such loan in connection with such Hotel Property or Properties shall have been paid by the Borrower to the Senior Lender in amortization of the Loans; and (B) the Borrower shall have furnished or caused to be furnished to the Senior Lender, copies of the agreements, instruments and other documents evidencing such Indebtedness and/or creating any such Lien or Liens, the terms of which documents, when read as a whole, be at least as favorable to the Borrower as the terms of the corresponding Security Documents or the security documents delivered in connection with any Merrill Loan. (j) Liens of lessors which have been granted by any of the Companies in connection with the acquisition of leasehold estates relating to a Hotel Property, provided such leasehold interest and the leases which create those interests are not principally financings. 6.3 Investments. The Borrower shall not, and shall not permit any of the other Companies to, directly or indirectly, make or permit to remain outstanding any Investment in any Person unless such Investment is one of the following and unless the Collateral Agent holds the Required Lien thereon (or if such Investment is held by any of the other Companies, the Borrower has an Intercompany Lien thereon, which has been assigned to the Collateral Agent, for the benefit of the Senior Lender, as security for the Obligations (other than Obligations under the Environmental Indemnity)) (collectively, the "Permitted Investments"): (a) extensions of trade credit by the Companies in the ordinary course of business in the operation of the Hotel Properties, but excluding any Intercompany Loans; 73 -65- (b) the Investments outstanding as of the Third Closing Date, if any, referred to in Schedule 3.8(c); (c) marketable direct obligations of the United States of America or of any department or agency thereof if backed by the full faith and credit of the United States of America, maturing not more than one year from the date of acquisition by any of the Companies thereof; (d) repurchase obligations with respect to any security described in subsection 6.3(c) above, provided that the long term unsecured debt obligations, or the short term deposit or debt obligations, of the party agreeing to repurchase such obligations are rated in the highest rating category of each of Standard & Poor's Corporation and Moody's Investors Service, Inc.; (e) securities bearing interest or sold at a discount for a term of no more than one year issued by any corporation incorporated under the laws of the United States of America or any state thereof, which securities have credit ratings from Standard & Poor's Corporation and Moody's Investors Service, Inc. of AAA and Aaa, respectively, at the time of such investment or contractual commitment providing for such investment; (f) commercial paper (including both non-interest-bearing discount obligations and interest-bearing obligations payable on demand or on a specified date not more than one year after the date of issuance thereof) having the highest credit ratings from Standard & Poor's Corporation at the time of such investment; (g) certificates of deposit, money market deposits, bankers' acceptances or other similar types of investments maturing not more than one year from the date of acquisition thereof and evidencing direct obligations of any commercial bank or trust company organized and operating in the United States or any state thereof or the District of Columbia, the debt securities of which are rated within the two (2) highest grades by either Standard & Poor's Corporation or Moody's Investors Service, Inc.; (h) Intercompany Loans permitted by subsection 6.1(b) (relating to Indebtedness in connection with Intercompany Loans); (i) Investments acquired in connection with Asset acquisitions permitted by Section 6.5 or otherwise permitted by this Agreement and Asset Sales permitted by Section 6.10; (j) loans or advances in the ordinary course of the Companies' businesses to trustees, directors, officers and employees for expenses (including moving expenses relating to a transfer) incidental to carrying on the respective businesses of the Companies. However, the aggregate principal amount of all such loans and advances outstanding shall at no time exceed $250,000; 74 -66- (k) acquisitions by one Company of the securities of another Company (including, but not limited to, shares of beneficial interest, shares of capital stock, membership interests and interests in the Partnerships and the Gaming Partnership subject to compliance with each of the conditions of Section 4 in the case of the Gaming Partnership) to the extent contemplated by the Restructuring Plan; (l) investments contributed to the Partnerships by the Starwood Partners pursuant to the Starwood Reorganization; (m) any investment in or origination of a Mortgage Note that is secured by a mortgage or mortgages encumbering one or more hotel properties or Mixed-Use Properties provided (i) no payment default has occurred under such Mortgage Note during the preceding twelve (12) month period; (ii) the hotel property or Mixed-Use Properties that are encumbered by the mortgage conform to the financial characteristics set forth in Section 6.5(f)(i)(A); (iii) the Borrower or any applicable Company shall grant a Required Lien or an Intercompany Lien on such Mortgage Note; (iv) the Senior Lender shall approve the mortgage loan servicer in connection with said Mortgage Note or, if the Borrower shall service the Mortgage Note itself, the Borrower shall service such Mortgage Note under standards approved by the Senior Lender; (v) the Mortgage Note together with all other such Mortgage Notes so acquired which are not first priority Liens shall not exceed ten (10%) percent of the Aggregate Asset Value. However, if (i) and (ii) above have not been complied with with respect to a particular Mortgage Note which the Borrower or any of the Companies intends to acquire, then the Borrower may purchase such Mortgage Note if the Borrower or any of the Companies can demonstrate to the reasonable satisfaction of the Senior Lender that the price of the Mortgage Note is adequately discounted to reflect the value as reasonably determined by the Senior Lender provided that the aggregate values of all such Mortgage Notes held by the Borrower and the Companies at any time shall not exceed ten percent (10%) of the Aggregate Asset Value. The Mixed-Use Property constraints contained in Section 5.3(b) shall apply with respect to investments in Mortgage Notes secured by Mixed-Use Properties. (n) investments permitted by subsection 6.5(h). 6.4 Contingent Obligations. The Borrower will not, and will not permit any of the other Companies to, directly or indirectly, create or become or be liable with respect to any Contingent Obligation, except: (a) Contingent Obligations existing as of the Third Closing Date and referred to on Schedule 3.8(d) as delivered at the Third Closing; (b) Any renewal, extension or refinancing of any Contingent Obligation described in subsection 6.4(a) in an amount not exceeding the lesser of (A) the amount thereof outstanding as of the Third Closing or (B) the amount thereof remaining unpaid immediately prior to such renewal, extension or refinancing, together with, in each instance, Permitted Closing Expenses incurred in respect of such renewal, extension or refinancing; 75 -67- (c) Contingent Obligations incurred in connection with Asset acquisitions permitted by Section 6.5 or Asset Sales permitted by Section 6.10; (d) Contingent Obligations incurred as of the Third Closing pursuant to the Partnerships' acquisition of the Starwood Assets; (e) Any renewal, extension or refinancing of any Contingent Obligation described in subsection 6.4(d) in an amount that together with the amount of all other Contingent Obligations described in subsection 6.4(d) then outstanding does not exceed the lesser of (A) the aggregate amount of Contingent Obligations described in subsection 6.4(d) outstanding as of the Third Closing or (B) the aggregate amount of Contingent Obligations described in subsection 6.4(d) remaining unpaid immediately prior to such renewal, extension or refinancing, together with, in each instance, Permitted Closing Expenses incurred in respect of such renewal, extension or refinancing; (f) Any guaranties of the Companies in connection with any Merrill Loan; and (g) the Contingent Obligation given in connection with the Harvey Notes. 6.5 Acquisitions. The Borrower will not, and will not permit any of the other Companies to, directly or indirectly, acquire (except in the ordinary course of business of the Companies) the Assets of any Person, except: (a) Assets acquired pursuant to the making of Capital Expenditures to the extent permitted by Section 6.8; (b) acquisitions of Assets of some or all of SLC's Subsidiaries and/or some or all of the Subsidiaries of the Operating Partnership, in each case by the Borrower, by the Operating Partnership, by another Subsidiary of SLC or by SLC; (c) Assets acquired from the Starwood Partners pursuant to the Starwood Reorganization; (d) Assets acquired pursuant to the Borrower's or SLT's exercise of any remedy under any Mortgage Note or the consummation of any deed in lieu of foreclosure transaction; (e) Assets acquired with the proceeds of an Acquisition Loan from the Senior Lender or the proceeds of a Merrill Loan; (f) Assets (other than those acquired with the proceeds of an Acquisition Loan or a Merrill Loan referred to in subsection 6.5(e)) that make up, are included in or acquired as a part of a Hotel Property or Mortgage Note if as to any such Hotel Property (or any Hotel Property relating to any Mortgage Note) each and all of the following conditions are satisfied: 76 -68- (i) (A) As of the date the definitive agreement to acquire those Assets is signed and as of the date of the closing thereunder, the Hotel Property's EBITDA (defined for this purpose as income from operations after deducting all expenses (including management expenses equal to the greater of the actual amount of such expenses and an amount equal to four percent (4.00%) of total gross revenues) other than interest, income taxes, depreciation and amortization and after elimination of all extraordinary items) for the immediately preceding 12 months is equal to or greater than 1.2 times the sum of: (1) the acquired Hotel Property's annualized debt service (defined for this purpose as principal and interest scheduled to be paid with respect to the 12-month period beginning on the scheduled acquisition date on any debt (other than the Loans) to which that property will be subject after the acquisition, with the interest to be paid calculated by dividing the total interest that will be payable with respect to the five-year period beginning on the scheduled acquisition date and dividing that amount by five), and (2) three percent (3.00%) of the property's total gross revenues from operations for the 12-month period ended on the acquisition date. (B) Notwithstanding the foregoing subparagraph (A) of this subsection 6.5(f), if the Borrower wishes to acquire Assets that make up, are included in or are to be acquired as a part of a Hotel Property and (1) such Hotel Property's EBITDA for the immediately preceding 12 months does not equal or exceed the amount provided in such subparagraph (A) (an "Under-Performing Asset"), (2) the outstanding principal amounts of the Loans then outstanding have been reduced to an aggregate amount equal to fifty percent (50%) or less of the Aggregate Asset Value, and (3) the EBITDA of all of the Companies Assets on a combined basis including the Hotel Property intended to be acquired shall comply with the requirements set forth in subparagraph (A) above, then, for purposes of determining whether the Borrower's acquisition of such Hotel Property would be permitted by the terms of this Section 6.5, the condition set forth in such subparagraph (A) shall nevertheless be deemed to have been complied with if the Borrower can demonstrate to the reasonable satisfaction of the Senior Lender that it is expected, based on pro forma financial information, that the EBITDA (as defined above) of the Hotel Property for the immediately ensuing 12 months will equal or exceed the amount provided in subparagraph (A) (the "Earnings Projection"). The Borrower shall acquire no more than two (2) Hotel Properties subject to an Earnings Projection. However, if the EBITDA of an acquired Hotel Property subject to an Earnings Projection equals or exceeds the Earnings Projection at any time before or after the first 77 -69- anniversary of such acquisition, the Borrower may thereafter acquire another such Hotel Property subject to an Earnings Projection such that the Company shall own no more than two (2) Hotel Properties at any time each of which either has not yet met its Earnings Projection or has failed to meet its Earnings Projection. In no event, however, shall the Company acquire Hotel Properties which are Under-Performing assets if following such acquisition, the applicable Asset values set forth on the Aggregate Asset Value Schedule 1.9 for all such Under-Performing Assets (including the proposed acquisition) would equal or exceed $15,000,000. However, if at the time of any proposed acquisition of an Under-Performing Asset (1) the outstanding principal amounts of the Loans then outstanding have been reduced to an aggregate amount equal to fifty percent (50%) or less of the Aggregate Asset Value and (2) the ratio of (a)(i) Available Cash plus (b) Capital Expenditures for the prior four (4) consecutive fiscal quarters of the Borrower to the sum of (b)(x) Cash Interest, (y) three percent (3%) of total gross revenues from Hotel Properties and (z) one percent (1%) of total gross revenue from casinos during such period is at least 2:1, then such Hotel Property may be acquired not subject to an Earnings Projection so long as the value of all such Hotel Properties so acquired (including any other Hotel Properties acquired subject to an Earnings Projection which has not yet been met) shall not at any time exceed an amount equal to twenty percent (20%) of the Aggregate Asset Value. Notwithstanding the foregoing, the 2:1 coverage test will not be deemed satisfied if, as a result of the acquisition of an Under-Performing Asset otherwise, permitted the 2:1 coverage test would not continue to be met following such acquisition. (ii) The Required Liens and the Intercompany Liens shall be granted by the Borrower in each Hotel Property or Mortgage Note acquired by the Borrower as permitted by this subsection 6.5(f). However, if and to the extent that any such Hotel Property or Mortgage Note is so acquired subject to any Indebtedness and the consent of the holder of that Indebtedness is required to grant the Required Liens and the Intercompany Liens in that Hotel Property or Mortgage Note, the Borrower shall use all reasonable efforts to obtain such consent. If such consent is obtained, the Borrower shall grant the Required Liens and the Intercompany Liens in that Hotel Property or Mortgage Note; if such consent is not obtained, that Hotel Property or Mortgage Note shall constitute an Excluded Asset and Excluded Intercompany Asset. All such Required Liens and Intercompany Liens shall be subordinate to the Liens granted to secure the repayment of any Indebtedness described above and to all extensions, renewals or refinancings, if any, of such Indebtedness the principal amounts of which do not exceed the then outstanding principal balances being extended, renewed or refinanced. All such Indebtedness or permitted refinancing thereof shall constitute 78 -70- Permitted Indebtedness and all Liens, if any, securing such Indebtedness or permitted refinancing shall constitute Permitted Liens. The Borrower shall not be deemed to have fulfilled the foregoing conditions until the Collateral Agent and its counsel have received the necessary due diligence materials to review in a reasonable time before the date upon which the requested closing of the acquisition is to occur; (g) Acquisitions of Assets described in subsection 6.3(m). Mortgage Notes originated pursuant to subsection 6.3(m) that are other than Mortgage Notes received in connection with a sale of Assets by the Companies may be financed or refinanced and such financing or refinancing may be secured by Liens on such Mortgage Notes; and (h) Assets constituting an interest in a business or property in a hotel-related field, including any hotel management company or hotel franchisor or an entity that owns Hotel Properties (where the ownership of the Companies in such entity is less than or equal to sixty-six percent (66%)). However, the terms of any such acquisition shall not include (i) any contingent obligations on the part of any of the Companies after the closing of such acquisition; or (ii) any obligation on the part of any of the Companies to make additional equity investments or meet capital calls in any Person after such acquisition, if deducting the present value of the aggregate of such obligations described in clauses (i) and (ii) above would result in an Adjusted Net Worth which is less than the minimum Adjusted Net Worth required in Section 7.1. In addition, such acquisition shall be subject to the prior consent of the Senior Lender based on, among other things, its sole but good faith determination as to whether such acquisition would have a Material Adverse Effect on any of the Companies, its business operations or income or on Adjusted Net Worth, and such determination may take into account, without limitation, whether such acquisition would constitute an evasion of any of the other requirements or limitations set forth in this Article VI. Subject to the foregoing, acquisitions permitted hereunder may be acquired subject to non-recourse secured indebtedness which indebtedness may be refinanced non-recourse from time to time. 6.6 Intercompany Loans and Leases, etc. The Borrower shall not, and shall not permit any of the other Companies to, effect any waiver, amendment or other modification to, or any restatement or termination of, any Intercompany Loan Document or Intercompany Lease, or effect any accrual, deferral or forgiveness of any obligation owing to the Borrower by any of the other Companies under any Intercompany Loan or Intercompany Lease. Notwithstanding the foregoing: (a) if and to the extent that from time to time, the gross revenues less the operating and other expenses of any obligor under any Intercompany Lease or Intercompany Note as then in effect shall be insufficient to pay all obligations as and when due thereunder, each such obligor and obligee shall be permitted to accrue or defer any such deficiency; and 79 -71- (b) Intercompany Leases may be terminated in connection with the sale of a Hotel Property (or an Excluded Disposition) pursuant to Section 6.10 (relating to Sale of Assets); and (c) if the Borrower so elects, the aggregate principal amount of the Intercompany Loans owing to the Borrower may be reduced (whether through amendment of one or more of said notes, waiver, forbearance, extinguishment or other form of termination or otherwise). However, (i) no Operating Partnership Guaranty shall be deemed amended, extinguished, decreased or in any way affected by any such reduction in the Intercompany Loans; and (ii) the Borrower shall not agree to any such reduction of the Intercompany Loans other than in connection with federal and state income tax requirements applicable to the maintenance of SLT's status under income tax laws as a real estate investment trust; and the Borrower shall comply as to the Moorland Debt with the provisions of paragraph (ii) of Subsection 5.8(c); and (d) none of the Companies shall be precluded from making advances or loans to any one or more other Companies in the ordinary course of business to the extent permitted under subsection 6.1(b) or to fund deficits under 6.6(a) or an acquisition permitted under Section 6.5. 6.7 Restricted Payments. The Borrower shall not, and shall not permit any of SLT, the Operating Partnership or SLC to, directly or indirectly declare, order, pay or make any Restricted Payment, or set aside any sum or Asset therefor, and shall not permit any of the other Companies to directly or indirectly declare, order, pay or make any dividend or distribution on or on account of its equity securities at any time outstanding or, in the case of any SLC Subsidiary that is a partnership, on partnership interests therein (or to redeem any such equity securities or partnership interests, as the case may be), except for the following ("Permitted Distributions"): (i) dividends and distributions by the SLC Subsidiaries to SLC, or by SLT Subsidiaries to SLT, pursuant to the Restructuring Plan; (ii) distributions by the Realty Partnership to its partners (including SLT) each fiscal year of the Realty Partnership in an aggregate amount that does not exceed the greatest of (A) the greatest of (x) thirty percent (30%) of the combined net income (determined for book purposes and without deduction for income tax liabilities, if any) of the Realty Partnership and the Operating Partnership, (y) $3,000,000, (B) an amount such that SLT's proportionate share of such amount shall be sufficient for SLT to make distributions to SLT's shareholders sufficient to maintain SLT's status for federal income tax purposes as a real estate investment trust, or (C) the Applicable Amount; (iii) distributions by the Operating Partnership to its partners each fiscal year of the Operating Partnership in an aggregate amount that does not exceed the greater of (x) thirty percent of the combined net income, determined as provided above, of the Realty Partnership and the Operating Partnership, (y) $3,000,000 or (z) the Applicable Amount; and (iv) such distributions of the Realty Partnership to its partners (including SLT) and the Operating Partnership to its partners (including SLC) to which the Senior Lender may from time to time consent. For purposes of this Section 6.7, Restricted Payments "required by applicable law to maintain SLT's status for federal income tax purposes as a real estate investment trust" shall include Restricted Payments necessary to satisfy the ninety-five percent (95%) distribution test 80 -72- of Section 857(a) of the Code. The "Applicable Amount" is defined as, for each fiscal year, an amount equal to eighty-five percent (85%) of the sum of (i) the combined taxable income of the Partnerships (determined for purposes of applying the ninety-five percent (95%) distribution test of Section 857(a) of the Code for the applicable fiscal year) plus (ii) an amount equal to the aggregate of all depreciation deducted in (i) above during the applicable fiscal year in determining the Partnerships' respective taxable income for such fiscal year. Amounts distributed to SLT or SLC pursuant to the foregoing may in turn be distributed or dividended to the shareholders of SLT or SLC, as appropriate. However, (A) the foregoing limitations on dividends and distributions shall not apply if, at the time of any such dividend or distribution, (1) the aggregate outstanding principal amounts of the Loans equals or is less than fifty percent (50%) of the Aggregate Asset Value and (2) no Event of Default has occurred and is continuing; and (B) there shall be no limitation of any redemption, purchase or other acquisition of any partnership interests, shares, warrants or rights included in the definition of Restricted Payments if at the time of such redemption, purchase or other acquisition No Event of Default has occurred and is continuing. Notwithstanding the foregoing, no distribution or dividend shall be permitted if as a result an Event of Default would occur under any provisions of this Agreement. 6.8 Capital Expenditures. Except as expressly provided to the contrary below, the Borrower shall not, and shall not permit any of the other Companies to, use Cash or Cash Equivalents of the Borrower or any of the other Companies to make any Capital Expenditure (except for emergency repairs and emergency replacements required in order to permit the continued operation of the Assets to which such repairs or restorations are made) other than in accordance with the Capital Expenditure Budget, and then only in accordance with the following terms and conditions: (a) Subject to any title retention agreements in connection with a transaction permitted under subsection 6.2(h), title to any Asset acquired pursuant to any such Capital Expenditure shall be vested in the Company operating the Hotel Property in respect of which said Asset was purchased (unless the Asset is a fixture installed in a Hotel Property, in which event title shall be vested in the Realty Partnership or SLT, as applicable) or as otherwise agreed to by the Senior Lender; (b) Any Asset (other than an Excluded Asset or Excluded Intercompany Asset) acquired pursuant to any such Capital Expenditure shall, immediately upon acquisition by any of the Companies and installation in any Hotel Property then subject to the Required Liens and the Intercompany Liens, also become subject to the Required Liens or the Intercompany Liens, as applicable; and (c) Each Capital Expenditure shall maintain or improve the value of the affected Hotel Property. 6.9 Mergers and Consolidations. The Borrower shall not, and shall not permit any of the other Companies to, enter into any merger or consolidation other than as contemplated by the Restructuring Plan or by the Mortgage Note Assignment with respect to an REO 81 -73- Nominee (as defined in the Mortgage Note Assignment) unless the Borrower and the Operating Partnership are the surviving entities, SLT continues to be the managing general partner of the Borrower, SLC continues to be the managing general partner of the Operating Partnership and the Borrower, after such merger or consolidation, continues to comply with Section 7.1 relating to its Adjusted Net Worth and otherwise complies with all the provisions of this Agreement. 6.10 Sale of Assets. The Borrower shall not, and shall not permit any of the other Companies to, directly or indirectly, sell, assign or lease or otherwise dispose of any Asset owned by such Company to a non-Company Person, other than non- real estate items sold in the ordinary course of business or in connection with permitted replacements of renovations or an Asset acquired in whole or in part with the proceeds of any Merrill Loan or a sale or other disposition that is an Excluded Disposition (an "Asset Sale"), unless each of the following conditions shall have been satisfied: (a) No Default or Event of Default shall have occurred and be continuing; (b) Such Asset is disposed of for a consideration and upon terms deemed by the Borrower (and any other Company disposing of any Asset in such transaction) to be fair and adequate and, with respect to any Hotel Property or Mortgage Note owned by the Borrower or SLT as of the date hereof or acquired hereafter, for a consideration that will result in payments to the Senior Lender (in the form of Cash and Cash Equivalents and principal payments pursuant to Mortgage Notes) of not less than the minimum release price (the "Minimum Release Price") applicable to such Hotel Property or Mortgage Note as specified on Schedule 6.10. (Subject to Section 14.10, the aggregate of the Minimum Release Prices, and the Minimum Release Price on an Asset by Asset basis, shall not exceed one hundred twenty-five percent (125%) of the allocated loan amount set forth on Schedule 1.9 in the aggregate, or on an Asset by Asset basis, except as set forth on the initial Schedule 6.10; and no loan amount allocated to a Mortgage Note shall exceed the outstanding principal balance of such Mortgage Note; and the Minimum Release Price for a Mortgage Note shall not exceed the greater of the outstanding principal balance of the Mortgage Note as of the date hereof or, if later, as of the date of acquisition of such Mortgage Note (subject to such added allowances as provided in Section 14.10.) On the closing of the sale of such Asset, the Borrower or such other Company disposing of such Asset shall pay to the Senior Lender an amount equal to the Minimum Release Price, as provided in paragraph (iii) of subsection 1.9(b). However, in the case of any sale of a Hotel Property in which a portion of the total consideration to the Companies for such sale is deferred or consists of a promissory note of the buyer, the economic terms of the Future Mortgage Note shall comply with the requirements specified in (i) below. The documentation for the Future Mortgage Note shall include each of the instruments, agreements and documents referred to in paragraph (ii) below. (i) Any Future Mortgage Note shall be pledged to the Senior Lender and shall provide the maximum term of such note shall be no more than seven (7) years; all principal payments with respect to such Future Mortgage Notes shall be paid to the Senior Lender to amortize the Loans 82 -74- as and to the extent provided in paragraph (ii) of subsection 1.9(b); such Future Mortgage Note shall not provide for payment of interest that results in negative amortization; the mortgage securing the Future Mortgage Note shall constitute a first lien on the Hotel Property of the mortgagor (unless there is prior mortgage debt secured by the underlying collateral that will be assumed or taken subject to by the buyer and that was not increased in connection with such sale (a "Permitted Prior Mortgage"), in which event the mortgage securing the Future Mortgage Note may be a second lien) and the loan-to-value ratio of the lien securing the Future Mortgage Note in combination with any Permitted Prior Mortgage shall not at closing exceed 80%; at least twenty five percent (25%) of the Minimum Release Price of the Hotel Property sold shall be paid in Cash or Cash Equivalents by the purchaser to the seller and then simultaneously paid in Cash or Cash Equivalents to the Senior Lender to amortize the Loans as and to the extent provided in paragraph (ii) of Subsection 1.9(b); the Cash or Cash Equivalents portion of the sale consideration, together with the lesser of the outstanding principal balance of the Future Mortgage Note or the market value of the Future Mortgage Note (which shall be discounted to present value using current market rates of interest equal to the comparable U.S. Treasury Bond issue plus 350 basis points) shall be equal to at least the applicable Minimum Release Price; and the aggregate market value of all such Future Mortgage Notes pledged to the Senior Lender at any one time shall not exceed $20,000,000. Notwithstanding, the foregoing, in the event a buyer acquires a Hotel Property with new acquisition indebtedness, then the liens securing same ("Acquisition Indebtedness Liens") may be prior to the security for the Future Mortgage Note (which in no event shall have a lower lien priority than a Second Lien) and the combined loan-to-value ratio with the Future Mortgage Note shall not be greater than eighty percent (80%) and with respect to the related sale twenty-five percent (25%) of the Minimum Release Price in Cash or Cash Equivalents requirement is increased by the amount of such Acquisition Indebtedness Lien. (ii) The documentation for the Future Mortgage Note shall include: (A) a Future Mortgage Note; (B) a Mortgage; (C) an assignment of rents and leases; (D) a security agreement and one or more UCC financing statements; 83 -75- (E) documentation for creating a security interest in the liquor license associated with the property sold, if such license is sold and to the extent that a granting of such security interest is permitted by applicable law; (F) a collateral assignment of the franchise agreement applicable to such Hotel Property, if the applicable franchisor routinely consents to such assignment and of the accounts receivable applicable to such Hotel Property; and (G) Where the original principal amount of a Future Mortgage Note is in excess of $3,000,000, (i) the Mortgage Note Security Documents either will require the applicable Maker (as defined in the Mortgage Note Assignment) to pay to the Borrower periodic installments for Taxes and insurance premiums (in which event such amounts will automatically become subject to the Required Lien of the Borrower's Security Agreement or other applicable Security Document) or to establish separate accounts, in which event such amounts will be subject to the Lien of the Mortgage Note Security Documents, but in either case only during any period in which a prior mortgage does not require same. The form of each of the agreements, instruments, provisions and documents described in subparagraphs (A) through (G) of this paragraph (ii) shall be subject to the approval of the Collateral Agent on behalf of the Senior Lender, such approval not to be unreasonably delayed or withheld. (c) In each sale of a Hotel Property (other than an Excluded Asset) involving a promissory note or the deferred payment of a portion of the total consideration for such sale, each of the applicable requirements of the Mortgage Note Assignment, if any, shall have been fulfilled. Upon the fulfillment of each of the conditions listed above in this Section 6.10, the Collateral Agent shall execute, acknowledge and deliver to the escrow agent for such Asset Sale (or if there is no such escrow agent, the Borrower's counsel), such documents as the Borrower shall reasonably require to evidence the release of the Required Liens and, to the extent the same have been assigned for security to the Collateral Agent, the Intercompany Liens against each item of Collateral and Intercompany Collateral included in such Asset Sale. 6.11 Issuance of Additional Shares. etc. The Borrower shall not, and shall not permit any of the other Companies to, directly or indirectly: (a) issue any additional shares of capital stock or beneficial interest (including treasury shares) or additional partnership interests (or options to acquire any such shares or partnership interests), whether now or hereafter authorized, other than (i) shares 84 -76- issued pursuant to the exercise of options outstanding as of January 28, 1993 (or extension(s), renewal(s) or replacement(s) thereof), (ii) shares issued pursuant to the exercise of options granted under or in connection with an employment agreement or other transaction permitted under Sections 6.10 (relating to transactions with Affiliates) or 6.15 (relating to certain employment and compensation matters), (iii) shares issued by a Subsidiary of SLT, the Realty Partnership, SLC or the Operating Partnership to that Subsidiary's parent entity and pledged, directly or indirectly and simultaneously with issuance, to the Collateral Agent, for the benefit of the Senior Lender, pursuant to the Security Documents and the Intercompany Security Documents, (iv) shares or Partnership Interests issued in connection with acquisitions of Assets permitted under Section 6.5, or (v) other shares (or other securities) of SLT, SLC, the Borrower or the Operating Partnership as long as the applicable provisions of paragraph (i) of Subsection 1.9(b) are complied with; or (b) except as permitted in subsection 6.11(a) above, sell, assign, pledge or otherwise encumber or dispose of any shares of capital stock or beneficial interest of any of the Subsidiaries of SLC (or options to acquire any such shares), or any partnership interests held by any of the Companies, other than as contemplated by the Restructuring Plan and except for the pledge of such shares and interests to the Collateral Agent, for the benefit of the Senior Lender. 6.12 Transactions with Affiliates. The Borrower shall not, and shall not permit any of the other Companies to, directly or indirectly, enter into any lease or other transaction, including any loan, advance, guarantee, credit accommodation, waiver of rights or amendments to existing transactions, transfers of assets, investments, distributions or similar transactions, with any Affiliate other than (a) has occurred pursuant to the Starwood Reorganization, (b) other transactions expressly described by the Restructuring Plan, including new Intercompany Leases, (c) employment and consulting agreements and other compensation arrangements permitted under Section 6.15, (d) other transactions (other than agreements and arrangements permitted under Section 6.15) on fair and reasonable terms no less favorable to the Borrower or such other Company as would obtain in a comparable arm's-length transaction with an unrelated Person, and no more favorable to the Affiliate than the Affiliate would have received on commercially reasonable terms and conditions in the marketplace generally, and (e) payments pursuant to any engagement of any counsel, accountant or investment banker that is, or to any law, accounting or investment banking firm, a member, partner or shareholder of which is, directly or through a professional corporation, an Affiliate. In addition, the Borrower shall not, and shall not permit any of the other Companies to, directly or indirectly purchase or acquire or otherwise enter into any transaction to purchase or acquire the legal or beneficial interest in any Prior Mortgage Note (in lieu of satisfaction thereof), without the Senior Lender's prior written consent. 6.13 Prohibition on Sale of Receivables. Except in connection with the sale of a Hotel Property in accordance with the provisions of Section 6.10 or a Hotel Property acquired in whole or in part with the proceeds of a Merrill Loan, the Borrower shall not, and shall not permit any of the other Companies to, sell, transfer, assign or otherwise dispose of with recourse or for less than the face value thereof any of the Companies' respective accounts 85 -77- receivable. However, nothing in this Section 6.13 shall prohibit the Borrower or any other Company from settling, compromising or similarly discounting accounts receivable in the ordinary course of such Company's business. 6.14 Modification of Certain Documents, Agreements and Instruments. Except as otherwise provided for in the Restructuring Plan, the Borrower shall not, and shall not permit any of the other Companies to, amend that Company's declaration of trust, articles or certificate of incorporation, partnership agreement, by-laws or other organizational or similar charter document, as applicable, without the prior written consent of the Senior Lender, which consent shall not be unreasonably delayed or withheld. 6.15 Employment and Compensation Matters. The Borrower shall not, and shall not permit any of the other Companies to, directly or indirectly, enter into any employment agreement, consulting agreement or other compensation arrangement with any officer, director or employee of the Borrower or of any of the other Companies, except for (i) agreements and arrangements terminable by the Company party thereto at will, and agreements and arrangements for a term, which, in either case must provide for not more than usual and customary compensation and employment benefits and (ii) that certain employment agreement between SLT and Mr. Lapin described in the Reorganization Proxy Statement. 6.16 Cash and Cash Equivalents Held by Other Companies. The Borrower hereby covenants that on or before the Third Closing Date it shall deliver and deposit into the HIT Operating Account and the HIC Operating Account (or such other account in California where the Senior Lender has a Required Lien or an Intercompany Lien) funds in an aggregate amount equal to at least two (2) month's interest payments on the Loans calculated at the then current Stated Rate, and shall maintain aggregate minimum balances in such accounts until after all of the Obligations shall have been paid in full equal to at least two (2) months interest payments on the Loans calculated at the Stated Rate, as the same may increase or decrease from time to time (the "Minimum Aggregate Balances"). For purposes of the Cash Management Memorandum, the definitions of "Cash Threshold" and "Operating Cash Threshold" shall be as provided in this Agreement. The Borrower agrees that the Cash Management Memorandum shall be amended, within ninety (90) days after the Third Closing Date, to include in the Cash Management System the accounts of the Hotel Properties included in the Starwood Assets. Upon the Third Closing, the Borrower and the Senior Lender shall instruct the manager of the Cash Management System that on and after the Third Closing Date, such manager shall continue to manage the Cash Management System in accordance with the terms of the Cash Management Memorandum but that, notwithstanding any provisions of the Cash Management Memorandum, provided no Event of Default has occurred and is continuing, such manager shall no longer routinely apply any funds in the HIT Operating Account and the HIC Operating Account to payment of the Loans. In addition, the Borrower and the Senior Lender shall inform the manager of the Borrower's obligation to maintain the Minimum Aggregate Balances in the HIT Operating Account and the HIC Operating Account and shall instruct such manager to permit withdrawals or transfers from such accounts only to the extent of the excess over the Minimum Aggregate Balances until after a Responsible Officer of the Senior Lender shall have certified to such manager that all of the Obligations have been paid in full. Once the Borrower 86 -78- has performed its covenant set forth above to fund the Minimum Aggregate Balances in the HIT Operating Account and the HIC Operating Account, and so long as such Minimum Aggregate Balances are maintained, the Borrower shall be permitted to transfer, dispose of or invest all other funds in all accounts in the Cash Management System in any manner not inconsistent with the terms of this Agreement the Loan Documents or the Intercompany Loan Documents. 6.17 Management Companies and Management Contracts. The Borrower shall not, and shall not permit any of the other Companies to, enter into any Management Contract other than with a Management Company and pursuant to a Management Contract (substantially in the form of Exhibit Y or another form reasonably acceptable to the Senior Lender) that has been approved by the Senior Lender, such approval not to be unreasonably withheld or delayed. However, the Senior Lender may withhold such consent in its sole and unfettered discretion if the Borrower shall not have delivered to the Senior Lender written acknowledgement of any proposed Management Company that the lien of the Management Contract is subordinate to all Liens granted under the Security Documents. 6.18 Compliance with ERISA, etc. The Borrower shall make, and shall cause all other Companies to make, all payments or contributions to Plans required under the terms of such Plans and in accordance with applicable minimum funding requirements of ERISA and the Code. The Borrower shall cause all Plans sponsored by the Companies to be maintained in material compliance with ERISA and the Code. The Borrower shall not engage, and shall not permit or suffer any other Company, or any Person entitled to indemnification or reimbursement from the Borrower or any other Company in respect of such transaction to engage, in any "prohibited transaction" for which an exemption is not available. No Company will terminate, and each Company will use all reasonable efforts to prevent the PBGC from terminating, any Plan, and no Company shall withdraw from any multi-employer Plan, in each case in any manner which in the reasonable business judgment of the Borrower, is likely to result in a Material Adverse Change. 6.19 No Additional Accounts. The Borrower shall not, and shall not permit any of the other Companies to, maintain any account at any financial institution other than the Cash Management Accounts, except accounts opened in connection with any Merrill Loan. However, any of the Companies shall be permitted to maintain one or more accounts into which Excluded Cash or Liquid Investments have been deposited, but only if such Company shall have, to the maximum extent permitted by any other party claiming an interest in the Excluded Cash or Liquid Investment, granted the Required Liens or the Intercompany Liens in such Company's interest in such Excluded Cash or Liquid Investment (except to the extent the same constitutes an Excluded Asset or an Excluded Intercompany Asset) and the Borrower shall take or assist the Collateral Agent in taking all steps necessary to perfect such Required Liens and Intercompany Liens. 87 -79- ARTICLE 7. Financial Covenants The Borrower covenants and agrees that, during the term of the Loans, the Borrower shall perform each and all of the following covenants: 7.1 Minimum Adjusted Net Worth. The Borrower shall not permit Adjusted Net Worth as at the last day of any fiscal quarter to be less than the sum of (a) $40,000,000, (b) 75% of the net proceeds of any equity contributed to the Borrower after the date hereof (other than equity contributed to the Borrower and used to acquire hotel assets within six months of contribution or which constitutes equity in contributed hotel assets both of which are governed by clause (c) following) and (c) 50% of the net equity book value of any hotel assets contributed to or acquired by Borrower after the Third Closing Date and prior to the Initial Termination Date or, if the Extension Option is exercised, the Extended Termination Date. 7.2 Available Cash. The Borrower shall not permit the ratio of the Companies' Available Cash for any period of four (4) consecutive quarters of the Borrower ending on or after January 1, 1995 to the sum of Cash Interest for, and Capital Expenditures made, during such period to be less than 1.075 to 1. 7.3 Illustrations. Schedule 7.3 constitutes a worksheet showing a calculation of Adjusted Net Worth and Available Cash. ARTICLE 8. Defaults; Remedies 8.1 Events of Default: Acceleration. If any of the following events (each an "Event of Default") shall occur: (a) The Borrower shall default (and shall not cure such default within five (5) Business Days thereafter) more than twice in any period of twelve (12) months in the payment of principal of or interest on any Note, whether at maturity or at a date fixed for the payment of any installment or prepayment thereof or any Commitment Fee; or (b) The Borrower shall default in the payment of any amount due under the Loan Documents or the Intercompany Loan Documents or any other amount due to the Senior Lender or the Collateral Agent from the Borrower hereunder or thereunder, and such default shall not have been remedied within three (3) Business Days after Senior Lender (or the Collateral Agent on its behalf) notifies the Borrower in writing of such default; or (c) The Borrower shall default in the performance of or compliance with any term contained herein and such default shall not have been remedied within thirty (30) days 88 -80- after written notice of such default has been given to the Borrower by the Senior Lender (or the Collateral Agent on its behalf); or (d) The Borrower or any of the other Companies that is a party to any of the other Loan Documents or any Intercompany Loan Documents shall default in the performance of or compliance with any term contained in any of the other Loan Documents or any Intercompany Loan Documents, and such default shall not have been remedied within (i) the period of grace, if any, specified therein or (ii) if no such period of grace is specified therein, thirty (30) days after written notice of such default has been given to the Borrower by the Senior Lender (or the Collateral Agent on its behalf). However, such 30-day cure period shall only apply if such default is capable of cure; or (e) Any representation or warranty made by the Borrower herein or in any other Loan Document or any Intercompany Loan Document shall have been false or incorrect in any material respect when made or deemed to have been made; or (f) The Borrower or any of the other Companies shall default in any payment due on any Indebtedness (other than Indebtedness evidenced by Prior Mortgage Notes) in respect of borrowed money, any Capital Lease or the deferred purchase price of property or in the performance of or compliance with any other material term of any evidence of such Indebtedness, any such Capital Lease or any such deferred purchase price agreement or of any mortgage, indenture or other agreement relating thereto, and such default shall continue for more than the period of grace, if any, specified therein, or applicable thereto and shall not have been waived pursuant thereto, and the effect of such default is to permit the holder of such Indebtedness (including by action of such holder of such Indebtedness or a trustee or receiver for such holder) to cause such Indebtedness to become due prior to its stated maturity or the exercise of default remedies, but only if the Borrower or any of the other Companies shall have received any notice of default or has knowledge of such default; or (g) Any holder of Indebtedness in respect of borrowed money, any lessor under any Capital Lease or the payee under any contract for the purchase of property (or any Person claiming under, by or through any such holder, lessor or payee) shall accelerate any payment of any obligation owing thereunder (or seek to exercise default remedies under or relating to such Indebtedness for borrowed money, Capital Lease or contract for purchase of property), but only if the amount of accelerated obligations and obligations as to which the exercise of default remedies has been sought in the aggregate exceeds $2,000,000. However, in calculating such $2,000,000 amount, the aggregate amount of all recourse claims for all Prior Mortgage Notes shall be included; or (h) Any of the Companies shall discontinue its business (except pursuant to the Restructuring Plan) or shall make an assignment for the benefit of creditors, or shall fail generally to pay that Company's debts as such debts become due, or shall apply for or consent to the appointment of or taking possession by a trustee, receiver or liquidator (or other similar official) of or for such Company or any substantial part of the Assets of such Company, or shall file a petition or commence a case under the Bankruptcy Code or any other applicable 89 -81- federal or state bankruptcy, insolvency or other similar law, or any of the Companies shall take any corporate or trust action to dissolve or liquidate any of the Companies (except pursuant to the Restructuring Plan); or (i) There shall be filed against any of the Companies an involuntary petition, or commenced against any of the Companies a case under the Bankruptcy Code or any other applicable federal or state bankruptcy, insolvency or other similar law, which petition or case is not dismissed within sixty (60) days after such filing or commencement, or there shall be entered any decree appointing a trustee, receiver or liquidator (or other similar official) of or for any of the Companies or any substantial part of the Assets of any of the Companies and such decree is not dismissed within thirty (30) days after entry of the same; or (j) A final judgment in an amount that, together with the amounts of all other outstanding final judgments against any of the Companies, if any, exceeds in the aggregate $2,000,000 (in each case net of any insurance proceeds or awards to be received in respect of the same) shall be rendered against any of the Companies and, within thirty (30) days after entry thereof, such judgment shall not have been discharged or execution thereof stayed pending appeal, or, within thirty (30) days after the expiration of any such stay, such judgment shall not have been discharged, or any such judgment shall not be discharged forthwith upon the commencement of proceedings to foreclose any Lien that may attach as security therefor and before any of the Assets of any of the Companies shall have been seized in satisfaction thereof; or (k) There shall occur any event or condition that results in a Material Adverse Change. However, it shall not be an Event of Default under this subsection 8.1(k) if such Material Adverse Change arose from the occurrence of an event of default described in subsections 18(b) or 18(d) of any of the Mortgages securing the Obligations, so long as the Collateral Agent has available the rights and remedies provided in the Security Documents and Intercompany Security Documents with respect to such an event of default; or (l) A Change of Control shall occur; or (m) Any Gaming License of any of the Companies shall be terminated or suspended and such suspension shall not have been lifted within thirty (30) days after receipt by the Borrower or such other Company of notice of such suspension other than in connection a sale of Assets related to such Gaining License and permitted by the terms of this Agreement; or (n) The Collateral Agent shall fail to have the Required Liens on any item of Collateral for the benefit of the Senior Lender or any Intercompany Lien shall be invalidated (unless such failure or invalidation results solely from action or inaction on the part of the Collateral Agent or any Senior Lender), and such failure or invalidation shall continue for fifteen (15) or more days after written notice thereof from any Senior Lender or the Collateral Agent to the Borrower. However, it shall not be an Event of Default if the Collateral Agent shall not have a Required Lien in any Collateral Account (as defined in the Cash Management 90 -82- Memorandum) or an Intercompany Lien in any Collateral Account shall be invalidated, if the Borrower has done or caused the other Companies to do all acts provided for or required by the Cash Management Memorandum; or (o) The Borrower shall fail, or shall fail to cause any other Company or fail to require any Management Company, to comply with any transfer of any Cash or Cash Equivalents required by the Cash Management System, which failure to transfer has not been cured within two (2) Business Days after delivery of written notice to the Borrower by the Manager of the Cash Management System; or (p) The Borrower shall fail to deliver the Daily Cash Worksheet for three (3) consecutive Business Days, which failure has not been cured by the delivery of all such delinquent Daily Cash Worksheets within three (3) Business Days after delivery of written notice to the Borrower by manager under the Cash Management System; or (q) The Borrower shall fail to deliver to the Collateral Agent a copy of any notice of default or notice of event of default given under any Prior Mortgage Note or loan or security document related thereto or any Ground Lease within five (5) Business Days after receipt of such notice by the Borrower; or (r) The Borrower shall fail to timely perform the covenant set forth in Section 5.14; then, if any Event of Default of the character described in subsections 8.1 (a), (b), (c), (d), (e), (f), (g), (j), (k), (l), (m) (n), (o), (p), (q) or (r) shall occur, the Senior Lender may, by written notice to the Borrower, declare the principal of and accrued interest in respect of its Notes to be forthwith due and payable, whereupon the principal of and accrued interest in respect of such Notes shall become forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrower. Upon the occurrence of an Event of Default of the character described in subsections 8.1(h) or 8.1(i), the principal of and accrued interest in respect of all the Notes shall become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrower. 8.2 Remedies on Default. In case any one or more Events of Default shall occur and be continuing, the Collateral Agent acting on behalf of the Senior Lender may proceed to protect, exercise and enforce its rights and remedies hereunder and under the other Loan Documents or Intercompany Loan Documents and any other rights and remedies provided by law or equity by an action at law, suit in equity or other appropriate judicial or non-judicial action, whether for the specific performance of any agreement contained herein or in any Note or other Loan Document or Intercompany Loan Document, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law. No course of dealing and no delay on the part of the Collateral Agent or the Senior Lender in exercising any right shall operate as a waiver thereof or otherwise prejudice the Senior Lender's rights. No right conferred hereby or by any Note or 91 -83- other Loan Document or Intercompany Loan Document upon the Senior Lender shall be exclusive of any other right referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. ARTICLE 9. Setoff In addition to all rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence and during the continuation of any Event of Default, Senior Lender and the Collateral Agent are hereby authorized by the Borrower at any time and from time to time, without prior notice to the Borrower or to any other Person (any such notice being hereby expressly waived) and without regard to the value of the Collateral, to set off and to apply any and all deposits (general, special, time or demand, including Indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other Indebtedness to the Borrower at any time held or owing by such Senior Lender or the Collateral Agent against and on account of the Obligations (other than Obligations under the Environmental Indemnity) of the Borrower to such party applying the setoff. ARTICLE 10. Expenses: Indemnification 10.1 Expenses. The Borrower shall pay or cause to be paid, within 30 (thirty) days after the Senior Lender or the Collateral Agent on its behalf shall have so requested and the Borrower shall have received customary documentation evidencing such costs and expenses, the costs and expenses described in subsections (a) through (d) below (collectively, the "Senior Lender's Expenses"). However, the Borrower shall not be obligated to make payments of any expenses in connection with routine servicing of the Loans: (a) reasonable and customary fees and disbursements of the respective counsel for each of the Senior Lender and the Collateral Agent, specifically including any local counsel retained by any such party, as well as the reasonable allocated costs of any in-house counsel of any of the foregoing, incurred after the Third Closing in connection with the negotiation, documentation, preparation and/or interpretation of this Agreement or any of the other Loan Documents and Intercompany Loan Documents, if any, (specifically including any amendments, consents or waivers hereafter requested by the Borrower); (b) all recording and filing fees, transfer and document stamp and similar Taxes which may be payable after the Third Closing in respect of the execution, delivery or filing or recordation of any of the Loan Documents and Intercompany Loan Documents, if any, (specifically including any amendments, consents or waivers thereof); and (c) all other reasonable and customary costs and expenses incurred by the Senior Lender or the Collateral Agent after the Third Closing in connection with the 92 -84- implementation of this Agreement and the other Loan Documents or Intercompany Loan Documents, if any, including costs and expenses reasonably incurred in connection with the non-routine administration (including the costs of Appraisals obtained at the Borrower's expense as provided in Section 5.12, if any) of any of the rights of the Senior Lender or the Collateral Agent under this Agreement or under any of the other Loan Documents, and Intercompany Loan Documents; (d) all other reasonable and customary costs and expenses incurred by the Senior Lender or the Collateral Agent at any time in connection with the enforcement of any of the rights of the Senior Lender or the Collateral Agent under this Agreement or under any of the other Loan Documents in the event of any Event of Default; 10.2 Indemnification. The Borrower hereby indemnifies, defends and holds harmless the Senior Lender and the Collateral Agent and any holder of any interest in the Notes, and the officers, directors, employees and agents of and counsel to the Senior Lender, the Collateral Agent and such holders (collectively, the "Indemnitees" and each individually, an "Indemnitee") from and against any and all liabilities, obligations, losses, damages, penalties, actions, causes of action, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including the reasonable fees and disbursements of counsel (including the allocated costs of in-house counsel of the Senior Lender or the Collateral Agent) for such Indemnitees in connection with any investigative, administrative or judicial action, suit or proceeding, whether or not such Indemnitee shall be designated a party thereto) that may be imposed on, incurred by or asserted against such Indemnitee, if and to the extent that the same arise from the transactions evidenced by the Loan Documents, the Intercompany Loan Documents, the Borrower's use or intended use of the proceeds of the Acquisition Loans, if any, the breach of any representation, warranty or covenant by any Company in any of the Loan Documents or any of the Intercompany Loan Documents, the consummation of the Starwood Reorganization or the Companies' consummation of the other transactions contemplated by this Agreement, including any matter relating to or arising out of the execution, delivery, filing or recordation of any of the Security Documents or the Intercompany Security Documents (collectively, the "Indemnified Liabilities"). However, (i) except as to the Indemnified Liabilities set forth in clause (iii) below, the Borrower shall have no obligation hereunder to any Indemnitee with respect to Indemnified Liabilities to the extent the same arise from any breach of any agreement made by such Indemnitee under this Agreement or from the gross negligence or willful misconduct of any Indemnitee, (ii) the rights of any Indemnitee hereunder against the Borrower in respect of any act or omission of any of the Borrower or any of the other Companies shall not be limited as a consequence of any act or omission of any other Indemnitee, and (iii) the Indemnified Liabilities shall include without limitation any and all claims against any Indemnitee arising from the Third Closing and the execution and delivery of this Agreement and any other Loan Documents or Intercompany Loan Document executed pursuant hereto or thereto or in connection herewith or therewith, including any claim that the granting of the Required Liens and/or Intercompany Liens by the Borrower or any of the other Companies tortiously interferes with the right of any other Person. Each Indemnitee shall promptly notify, or cause to be notified, the Borrower of (i) each action, suit or proceeding involving an Indemnified Liability that is served on such 93 -85- Indemnitee and (ii) each threatened action, suit or proceeding involving an Indemnified Liability of which the officer of such Indemnitee who is the named person for notices to be sent under the Loan Documents has written notice, but the failure to give prompt notice shall not adversely affect the indemnity rights granted to such Indemnitee herein except to the extent that the Borrower can establish that it has been prejudiced by such failure. If any investigative, judicial or administrative action, suit or proceeding arising from any of the foregoing is brought against any Indemnitee indemnified or intended to be indemnified pursuant to this Section 10.2, the Borrower, to the extent directed by the Indemnitees or intended Indemnitees, shall resist and defend such action, suit or proceeding or cause the same to be resisted and defended by counsel designated by the Indemnitees (which counsel shall be reasonably satisfactory to the Borrower, whose approval shall not be unreasonably delayed or withheld). Each Indemnitee shall use its best efforts to cooperate in the defense of any such action, suit or proceeding, but solely at the cost of the Borrower. To the extent that the undertaking to indemnify, pay and hold harmless set forth in this Section 10.2 may be unenforceable because it is violative of any law or public policy, the Borrower shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. The obligations of the Borrower under this Section 10.2 shall survive the termination of this Agreement and the discharge of the other Obligations. 10.3 Residual Indemnity Claims. Notwithstanding any provision in any Security Document or Intercompany Security Document requiring the trustee thereunder, the Collateral Agent (however designated) or the Senior Lender to release, cause to be released or consent to the release of any Required Lien or Intercompany Lien upon the payment in full in cash of the "Secured Obligations" as defined by such Security Document or Intercompany Security Document, the trustee, the Collateral Agent or the Senior Lender shall release, cause to be released or consent to the release of such Lien notwithstanding the fact that such Secured Obligations include continuing indemnification obligations at such time as all other Secured Obligations then due and payable in cash to the trustee, the Collateral Agent or any Senior Lender have been paid. However, if at that time indemnification is reasonably claimed by the Collateral Agent or the Senior Lender in accordance with the applicable indemnification provision or provisions of that Security Document or Intercompany Security Document and described in a written notice provided to the indemnifying Company in accordance with said indemnification provision or provisions, the trustee, the Collateral Agent or the Senior Lender may condition its or their release (or actions taken to cause, or consent to, such release) upon the delivery to the Collateral Agent of cash collateral (or other collateral acceptable to the Collateral Agent) in an amount (or, in the case of any noncash collateral, having a fair market value equal to 150% of the amount of the "Indemnified Liabilities" (as such term is defined in the applicable Security Document or Intercompany Security Document) for which indemnification has been claimed as aforesaid. 94 -86- ARTICLE 11. Amendments and Waivers, etc. 11.1 Waivers in Writing, etc. The failure of any of the parties hereto to insist upon the strict performance of any term, condition or other provision of this Agreement or any of the other Loan Documents or Intercompany Loan Documents or to exercise any right or remedy hereunder or thereunder shall not constitute a waiver by such party of any such term, condition or other provision or (as to the Borrower) any Default or Event of Default in connection therewith; and any waiver of any such term, condition or other provision or of any such Default or Event of Default shall not affect or alter this Agreement or any of the other Loan Documents or Intercompany Loan Documents, and each and every term, condition and other provision of this Agreement and the other Loan Documents and Intercompany Loan Documents shall, in such event, continue in full force and effect and shall be operative with respect to any other then existing or subsequent Default or Event of Default in connection therewith. No waiver by the Senior Lender shall be effective unless it is in writing, signed by the Senior Lender and delivered to the Borrower, and no waiver or approval by the Borrower shall be effective unless it is in writing, signed by the Borrower, and delivered to the Senior Lender. Similarly, no course of dealing or delay on the part of the Borrower in exercising any right or remedy to which the Borrower may be entitled as a result of any action or omission by the Senior Lender with respect to any Loan or otherwise in connection with this Agreement or any other Loan Document or Intercompany Loan Documents shall operate as a waiver of such right or otherwise prejudice the Borrower's rights. ARTICLE 12. Nature of the Senior Lender's Obligations The obligations of the Senior Lender or, if at the relevant time there is more than one Senior Lender, the Senior Lenders and the Collateral Agent under this Agreement and each of the other Loan Documents owed to the Borrower or any of the Companies are several as if each such Senior Lender and the Collateral Agent were a party to a separate agreement with the Borrower or such Company. None of the Senior Lender or the Collateral Agent shall be jointly or severally liable to the Borrower or any of the other Companies for any act or omission of the Collateral Agent. To the extent that the Senior Lender or the Collateral Agent fails to perform any of its obligations under this Agreement or any of the other Loan Documents to the Borrower or any of the other Companies, then the Collateral Agent may, in its own sole and absolute discretion and without any obligation whatsoever to do so, perform the obligations that such Senior Lender or the Collateral Agent shall have so failed to have performed. However, under no circumstances shall any act by such party in curing or attempting to cure such failure be deemed to have caused such party to have assumed an obligation to do the same. 95 -87- ARTICLE 13. Limitation of Liability The name "Starwood Lodging Trust" is a designation of SLT 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 SLT shall look solely to SLT's Assets for the enforcement of any claims against SLT, as the Trustees, officers, agents and security holders of SLT, in such respective capacities, assume no personal obligations of SLT, and their respective individual Assets shall not be subject to the claims of any Person relating to such obligations by reason of such capacity. All Persons dealing with the Partnership shall look solely to their Assets and the Assets of their general partners for the enforcement of any claims against the Partnerships, as the limited partners in the Partnerships assume no personal obligations of the Partnerships and their respective individual Assets shall not be subject to the claims of any Person relating to such obligations. Nothing in this Article 13 shall limit or impair: (i) the validity or enforceability of any Intercompany Loan, Intercompany Lien or Intercompany Loan Document; (ii) the rights of the Collateral Agent, including in its capacity as Secured Party, granted in any Loan Document to enforce any rights or remedies relating to any Intercompany Loan, Intercompany Lien or Intercompany Loan Document; (iii) the rights of the Collateral Agent or the Senior Lender under any Subsidiary Guaranty or any Security Document or Intercompany Security Document securing any of the guarantor's obligations under any Subsidiary Guaranty; or (iv) any other right of the Collateral Agent or Senior Lender against any Company other than SLT. ARTICLE 14. Miscellaneous 14.1 Notices, etc. All communications provided for herein shall be in writing delivered or mailed, as follows: (a) If to the Senior Lender or the Collateral Agent, in accordance with Attachment I hereto, with a copy to: Lawrence A. Swenson, Esq. Thacher, Proffitt & Wood Two World Trade Center New York, New York 10048 All communications required to be delivered to the Senior Lender hereunder or under any of the other Loan Documents or Intercompany Loan Documents and all other communications to the Senior Lender (unless pertaining solely to the Collateral) shall, unless otherwise expressly provided, be delivered in accordance with Attachment I hereto; and no 96 -88- such communication shall be effective as to Senior Lender unless a separate copy of such communication shall have been delivered to such Senior Lender. (b) If to SLT or Realty Partnership, to it at: 11845 West Olympic Blvd., Suite 550 Los Angeles, California 90064 Attention: Jeffrey C. Lapin, President with a copy to: Laura A. Loftin, Esq. Mitchell, Silberberg & Knupp 11377 West Olympic Boulevard, Suite 525 Los Angeles, California 90064 The address of any party may be changed at any time and from time to time and shall be the most recent such address furnished in writing by such party to each other party. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given hereunder to a Person specified on Attachment I shall be in writing, shall be addressed as specified thereon and may be delivered by hand or courier service or sent by telefacsimile, telecopied, telexed, or sent by courier service or United States mail, and shall be deemed to have been given (i) when delivered to the addressee by hand or by courier service, if delivered on a Business Day, or if delivered on a day other than a Business Day, on the next Business Day, or (ii) upon receipt of a telefacsimile or telex if received on a Business Day or, if received on a day other than a Business Day, on the next Business Day, or (iii) four (4) Business Days after deposit in the United States mail (registered or certified, with postage prepaid and properly addressed). For purposes hereof, the address of each Person named on Attachment I shall be as set forth below that Person's name on such Attachment unless and until notice of a change thereof is delivered as provided in this Section to each other Person named on such Attachment, whereupon notices shall be given to such other address. 14.2 Extensions of Time: Calculations. etc. (a) [OMITTED] (b) Calculations. Calculations hereunder shall be made and financial data required hereby shall be prepared, both as to classification of items and as to amounts, in accordance with GAAP recognized as such by the American Institute of Certified Public Accountants in the opinions and pronouncements of the Accounting Principles Board and statements and pronouncements of the Financial Accounting Standards Board, which principles and practices shall be consistently applied and in conformity with those used in the preparation of the financial statements referred to herein. In addition, all such calculations and financial 97 -89- data shall be prepared in accordance with the American Hotel and Motel Association's Uniform System of Accounts for Hotels, as the same shall be in effect from time to time. If (i) any changes in accounting principles from those used in the preparation of the financial statements referred to in this Agreement are hereafter occasioned by the promulgation of rules, regulations, pronouncements, or opinions of, or required by, the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or successors thereto or agencies with similar functions), or there shall occur any change in such Uniform System of Accounts for Hotels or in the Borrower's or any of the other Companies' fiscal or tax years and, as a result of any such change, there shall result a change in the method of calculating any of the financial covenants, negative covenants, standards, or other terms or conditions found in this Agreement, or (ii) the Borrower, for reasonable business purposes, shall desire to change such accounting principles or the application thereof (which change shall be consistent with accounting principles then in effect pursuant to rules, regulations, pronouncements or opinions of the Financial Accounting Standards Board or the American Institute of Certified Public Accountants and with such Uniform System of Accounts for Hotels) and such desired change would result in a change in the method of calculating any of the financial covenants, negative covenants, standard, or other terms and conditions found in this Agreement, then the parties hereto agree to enter into negotiations in order to amend such provisions so as to equitably reflect such changes with the desired result that the criteria for evaluating the financial condition of the Borrower and the other Companies shall be the same after such changes as if such changes had not been made. 14.3 Successors and Assigns; Participations. This Agreement and the other Loan Documents shall be binding upon and inure to the benefit of the successors and assigns of Borrower and the Senior Lender; provided that Borrower may not sell, assign or transfer any interest in the Loan Documents and the Intercompany Loan Documents, or any portion thereof, including, without limitation, Borrower's rights, title, interests, remedies, powers and duties hereunder or thereunder. The Senior Lender may, subject to compliance with applicable law, sell, assign, transfer, or otherwise dispose of all or any part of the Senior Lender's rights and benefits under each of the Notes, the Loan Documents and the Intercompany Loan Documents in a Pass-Through Transaction or otherwise or grant participations in the Notes. In the case of an assignment by the Senior Lender, (i) the assignee shall have, to the extent of such assignment, the same rights, benefits and obligations as it would have if it were the original "Senior Lender" hereunder, (ii) the Senior Lender shall be relieved of all obligations hereunder upon any such assignment, and (iii) upon any such substitution of the Senior Lender, an "Assignment and Acceptance" shall be executed by the new Senior Lender. In the case of a participation sold by the Senior Lender in the Notes, each participating lender shall be entitled to receive all information received by the Senior Lender under this Agreement; provided that Borrower and Collateral Agent shall have received written notice of the address of each such participating lender. Notwithstanding anything in this Agreement to the contrary, after an assignment by the Senior Lender, the "Senior Lender" (prior to the assignment) shall continue to have the benefits of any rights or indemnifications contained herein that it had during the period such party was "Senior Lender" hereunder. 98 -90- Senior Lender and the Collateral Agent severally agree to use their best efforts to maintain the confidentiality of the information obtained by such Senior Lender or its agents, except when required to disclose such information (i) for regulatory purposes; (ii) pursuant to legal process; (iii) to its attorneys, accountants and auditors; (iv) for the purpose of selling participations or interests in the Loans in accordance with the provisions of this Section 14.3; or (v) as necessary for the enforcement of the Senior Lender's or the Collateral Agent's rights hereunder. Notwithstanding the foregoing sentence concerning confidentiality, the Borrower and the other Companies (i) shall cooperate fully with the Senior Lender, any prospective assignee or participant, any Rating Agency or any party to any agreement executed in connection any sale of participations or other interests in the Loans with respect to all reasonable requests and due diligence procedures and to use their best efforts to facilitate such sale; and (ii) shall deliver, at their reasonable expense, for inclusion in any prospectus, private placement memorandum or other offering material or disclosure document such written information regarding the Borrower or any of the other Companies and their financial condition as shall be reasonably requested by the Senior Lender. All fees of Rating Agencies and all other costs and expenses in connection with any sale of participations or other interests in the Loans shall be paid by the Senior Lender. 14.4 Counterparts, etc. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all the counterparts shall together constitute one and the same instrument. Delivery of an executed counterpart hereof by telecopier shall be equally effective as delivery of an executed counterpart by hand, courier service or United States mail. Any party delivering an executed counterpart by telecopier shall thereafter also promptly deliver an executed counterpart by hand, courier service or United States mail, but the failure to deliver an executed counterpart by one of such other means shall not affect the validity, enforceability and binding effect of this Agreement. 14.5 Entire Agreement. etc. This Agreement (a) constitutes the entire agreement between or among the parties hereto relating to the subject matter hereof, (b) shall supersede and take the place of all negotiations, drafts, instruments, and written or oral communications purporting to be an agreement of the parties hereto relating to the subject matter hereof, and (c) is intended by each of the parties hereto to be the complete statement of the terms and conditions, and the final expression, of their agreement relating to the subject matter hereof. The terms and conditions of Attachment I hereto and of the Schedules and Exhibits referenced herein are incorporated herein and shall be deemed to be a part hereof, whether or not such documents are actually attached to this Agreement or constitute separate documents. 99 -91- 14.6 Construction of this Agreement. The following principles shall apply to the construction of this Agreement: (a) This Agreement shall not be construed in favor of one party rather than the other(s) based upon which party drafted the same, it being acknowledged that all parties hereto contributed substantially to the negotiation and preparation of this Agreement. (b) The headings contained herein are included for convenience of reference only and shall not affect the meaning or interpretation of this Agreement. Each parenthetical description of a Section, subsection, paragraph or subparagraph being referred to by cross-reference is included for convenience of reference only and is not intended to limit the substance of any such Section, subsection, paragraph or subparagraph being so referred to by cross-reference or to affect the meaning or interpretation of this Agreement. (c) No course of dealing, course of performance, trade usage or parol evidence of any nature shall be used to supplement or modify any term or condition of this Agreement. (d) Unless the context clearly requires otherwise, the words "hereof", "herein", "hereby", "hereunder" and other similar terms used in this Agreement refer to this Agreement as a whole and not exclusively to any particular provision of this Agreement. (e) Article, Section, subsection, Exhibit and Schedule references are to this Agreement unless otherwise specified. (f) Any reference in this Agreement to any of the following documents includes any and all alterations, amendments, extensions, modifications, renewals or supplements thereto or thereof, as applicable: this Agreement; the other Loan Documents and Intercompany Loan Documents; the Intercompany Notes; and the Mortgage Notes. (g) Any reference in this Agreement to the "knowledge" of any Person thereof shall mean such Person's actual, current knowledge, and shall further mean (A) in the case of each of SLT, SLC and each of their respective Subsidiaries, the actual, current knowledge of any of the Responsible Officers of that Company, (B) in the case of the Realty Partnership, the actual, current knowledge of any Responsible Officer of SLT, and (C) in the case of the Operating Partnership, the actual, current knowledge of any Responsible Officer of SLC. References herein to the foresight, contemplation, reasonable business judgment and the like of the Companies shall mean the foresight, contemplation, judgment or the like of such Companies' respective principal executive officers. (h) The Senior Lender shall have the right to require such changes to the terms of the definitive documents the forms of which constitute Exhibits to this Agreement (and all exhibits and schedules thereto) as may be necessary (A) to implement or effectuate the provisions of this Agreement or the Loan Documents (or to more fully perfect or renew the Borrower's rights under the Intercompany Loan Documents), including such changes as may 100 -92- be necessary to insure the effectiveness, perfection or priority of such documents under the laws of each of the Relevant States (as defined in the applicable Security Documents), or (B) to reflect the fact that the Starwood Reorganization was not contemplated by the Restructuring Plan as originally delivered to the Senior Lender, or other changes from time to time after the First Closing in the corporate or operational structure of or among the Companies; (ii) the Security Documents and Intercompany Security Documents executed on any Pledge Date, as may be necessary based on the review of the Starwood Assets conducted by the Senior Lender and/or the Collateral Agent prior to any Pledge Date to insure the effectiveness, perfection and priority of the Required Liens in the Starwood Realty Assets and the Required Liens and Intercompany Liens in the Starwood Operating Assets granted to the Collateral Agent, for the benefit of the Senior Lender, as of any Pledge Date; and (iii) as to the form of opinion letter attached hereto as Exhibit C, as may be necessary to reflect (A) changes necessitated by any changes made to the Loan Documents pursuant to either of the preceding subparagraphs (i) or (ii) of this subsection 14.6(h), (B) differences in the laws among the Relevant States or changes from time to time after the Third Closing in the law of any Relevant State, or (C) changes from time to time after the Third Closing in the corporate or operational structure of or among the Companies. (i) The word "including", as used in this Agreement, shall be construed as "including without limitation". (j) Any notice, certificate or other document (including any financial statement or other document containing financial information) required by the terms of this Agreement to be executed by a Responsible Officer or another officer of any of the Companies shall be executed by such officer in his or her capacity as such, solely on behalf of such Company and not in his or her individual capacity. (k) The words "ordinary course of business" to the extent used in this Agreement with respect to any Company or Companies without further modification, shall be construed as "ordinary course of business as heretofore conducted or as conducted or proposed to be conducted pursuant to the Restructuring Plan". (l) Except as otherwise provided in Sections 1.13 (relating to the payment of certain amounts upon reductions of certain returns on capital) and 1.14 (relating to certain additional costs), the words "rule" and "regulation" shall include only such rules and regulations compliance with which is required by applicable law. (m) Time is of the essence of each provision of this Agreement and all of the Loan Documents and Intercompany Loan Documents. (n) For purposes of this Agreement, Indebtedness with respect to which payments of principal and interest are non-recourse shall not be construed as recourse indebtedness solely by reason of such Indebtedness being subject to standard and customary recourse exceptions such as fraud, waste, misappropriations or environmental matters. 101 -93- 14.7 Severability. If any provision or provisions, or if any portion of any provision or provisions, contained in this Agreement is or are found by a court of competent jurisdiction to be in violation of any applicable local, state or federal ordinance, statute, law, administrative or judicial decision, or public policy, and if such court should declare any such portion, provision or provisions of this Agreement to be illegal, invalid, unlawful, void or unenforceable as written or applied, then it is the intent of the parties hereto (i) that such portion, provision or provisions shall be given force to the fullest possible extent that they are legal, valid and enforceable, including by virtue of any suspension or stay of such ruling pending appeal or other judicial review, by virtue of any reversal of such decision by a higher court or by reducing the amount or degree of any obligation or waiver which is unenforceably excessive by the minimum amount in order to make the same enforceable, (ii) that the remainder of this Agreement shall be construed as if such illegal, invalid, unlawful, void or unenforceable portion, provision or provisions were either not contained therein or not applied in such a manner as to be so unenforceable and (iii) that the rights, obligations and interests of the parties hereto under the remainder of this Agreement (including such portion, provision or provisions as otherwise applied) shall continue in full force and effect. 14.8 No Third-Party Beneficiaries. The provisions of this Agreement are solely for the purpose, and shall have the sole effect, of defining the relative rights and obligations of the parties hereto and may not be relied upon or enforced by any Person not a party hereto; no Person shall have third-party beneficiary rights hereunder. The Borrower hereby expressly acknowledges that the provisions of any Intercreditor Agreement are solely for the purpose, and shall have the sole effect, of defining the relative rights and obligations of the Senior Lender and the Collateral Agent and may not be relied upon or enforced by any Person not a party thereto (including the Borrower and the other Companies) and that no Person (including the Borrower and the other Companies) shall have third-party beneficiary rights thereunder. The Borrower hereby acknowledges and agrees that the Collateral Agent in taking or refraining from taking any action under this Agreement or any of the other Loan Documents shall act or refrain from acting on the instructions of such requisite number or percentage of the Senior Lenders (if at the relevant time there is more than one Senior Lender), as any Intercreditor Agreement may require and the Borrower shall have no obligation or right to inquire as to the authority of the Collateral Agent in taking or refraining from taking any such action. The Borrower further acknowledges and agrees that any reference in this Agreement or any of the other Loan Documents to the discretion, judgment or the like of the Collateral Agent shall mean the collective discretion, judgment or the like of such requisite number or percentage of the Senior Lenders as any Intercreditor Agreement may require and that whenever in any of the Loan Documents or Intercompany Loan Documents any standard of reasonableness is applied to the discretion, judgment or the like of the Collateral Agent, such standard shall be met if such collective discretion, judgment or the like meets such standard. 14.9 Choice of Law and Waiver of Jury Trial. (a) Choice of Law. THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO, SHALL BE DETERMINED UNDER, GOVERNED BY, AND 102 -94- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW. (b) Waiver of Jury Trial. TO THE MAXIMUM EXTENT PERMITTED BY LAW, EACH OF THE PARTIES HERETO HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY ACTION, CAUSE OF ACTION, CLAIM, DEMAND OR PROCEEDING ARISING UNDER OR WITH RESPECT TO THIS AGREEMENT OR IN ANY WAY CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE DEALINGS OF THE PARTIES WITH RESPECT TO THIS AGREEMENT OR THE TRANSACTIONS RELATED HERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING AND IRRESPECTIVE OF WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. TO THE MAXIMUM EXTENT PERMITTED BY LAW, EACH OF THE PARTIES HERETO HEREBY AGREES THAT ANY SUCH ACTION, CAUSE OF ACTION, CLAIM, DEMAND OR PROCEEDING SHALL BE DECIDED BY A COURT TRIAL WITHOUT A JURY AND THAT ANY PARTY MAY FILE AN ORIGINAL COUNTERPART OF THIS SECTION WITH ANY COURT OR OTHER TRIBUNAL AS EVIDENCE OF THE CONSENT OF ANY OTHER PARTY TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY. 14.10 Exhibits and Schedules. The Exhibits and Schedules referred to herein are those exhibits and schedules (i) attached to the Prior Credit Agreement (which Exhibits shall remain effective notwithstanding the fact that this Agreement amends and restates the Prior Credit Agreement), (ii) attached to this Agreement, which Exhibits and Schedules either have been, are being or will be delivered by the parties prior to, concurrently with or after the execution and delivery of this Agreement; and (iii) the Senior Lender in its reasonable discretion may correct errors in the determination of Aggregate Asset Value, and the Senior Lender may amend the allocated Loan amounts on Schedule 1.9 and the Minimum Release Prices subject to the constraints of this Agreement. The Senior Lender shall give prompt written notice to the Borrower of any such corrections or amendments accompanied by a full restatement of the affected schedule; provided, however, that the initial schedules as to Aggregate Asset Value, Minimum Release Prices and allocated loan amounts shall control notwithstanding the constraints in this Agreement, including Section 6.10. 14.11 Cross References. The Loan Documents, Intercompany Loan Documents, Security Documents and Intercompany Security Documents contain references to specific provisions of the Prior Credit Agreement and any subsequent modified, amended or restated versions thereof. Any such reference shall be deemed to be a reference to a corresponding provision of this Amended and Restated Credit Agreement as provided on Schedule 14.11. 103 -95- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as a sealed instrument as of the date first above written. STARWOOD LODGING TRUST SLT REALTY PARTNERSHIP By: Starwood Lodging Trust, By: its general partner -------------------------------- Jeffrey C. Lapin By: -------------------- Jeffrey C. Lapin President MERRILL LYNCH MORTGAGE CAPITAL INC. By: -------------------------- Name: Title: BANKERS TRUST COMPANY, as Collateral Agent By: -------------------------- Name: Title: EX-21 7 SUBSIDIARIES OF THE CORP. 1 EXHIBIT 21 Subsidiaries of the Corporation. Hotel Investors of Arizona, Inc. Hotel Investors of Nebraska, Inc. Hotel Investors of Michigan, Inc. Hotel Investors of Missouri, Inc. Hotel Investors Corporation of Nevada Hotel Investors of Virginia, Inc. Columbus Operators, Inc. Lyntex Properties, Inc. Western Host, Inc. EX-23 8 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Joint Registration Statement No. 33-14292 of Starwood Lodging Trust and Starwood Lodging Corporation (the "Companies") on Form S-8 of our report dated March 24, 1995 appearing in this Joint Annual Report on Form 10-K of Starwood Lodging Trust and Starwood Lodging Corporation for the year ended December 31, 1994. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Los Angeles, California March 24, 1995 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RELATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ON THE JOINT ANNUAL REPORT ON FORM 10K. 0000048595 STARWOOD LODGING TRUST 1 U.S. DOLLARS YEAR DEC-31-1994 JAN-1-1994 DEC-31-1994 1 4,810,000 0 3,965,000 0 5,375,000 0 51,353,000 (16,877,000) 48,626,000 9,704,000 40,664,000 1,213,000 0 0 (2,955,000) 48,626,000 0 110,962,000 0 107,765,000 1,324,000 0 3,071,000 (1,198,000) (1,198,000) (1,198,000) 0 0 0 (1,198,000) (0.10) 0
EX-27.1 10 FINANCIAL DATA SCEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RELATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ON THE JOINT ANNUAL REPORT ON F0RM 10K. 0000316206 STARWOOD LODGING COPRORATION 1 U.S. DOLLARS YEAR DEC-31-1994 JAN-1-1994 DEC-31-1994 1 255,000 0 42,667,000 0 2,374,000 0 165,648,000 (48,699,000) 162,245,000 5,061,000 146,734,000 12,133,000 0 0 (1,683,000) 162,245,000 0 21,671,000 0 6,788,000 1,324,000 759,000 16,265,000 (3,465,000) (3,465,000) (3,465,000) 0 0 0 (3,465,000) (0.28) 0
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