-----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, SNbVNOUng3vUL+aBP1ZsHHjEyBKWY2rcMmFGYkRHxBdlqZ98y3nNNw5j0pN0t5Gy bbWSccyef5+2Q6tEgb9+Jg== 0000950153-98-001474.txt : 19981201 0000950153-98-001474.hdr.sgml : 19981201 ACCESSION NUMBER: 0000950153-98-001474 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981130 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARWOOD HOTELS & RESORTS 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-Q/A SEC ACT: SEC FILE NUMBER: 001-06828 FILM NUMBER: 98761529 BUSINESS ADDRESS: STREET 1: 777 WESTCHESTER AVENUE STREET 2: STE 410 CITY: WHITE PLAINS STATE: NY ZIP: 10604 BUSINESS PHONE: 6028523900 MAIL ADDRESS: STREET 1: 2231 E CAMELBACK RD STREET 2: STE 410 CITY: PHOENIX STATE: AZ ZIP: 85016 FORMER COMPANY: FORMER CONFORMED NAME: STARWOOD LODGING TRUST DATE OF NAME CHANGE: 19950215 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARWOOD HOTEL & RESORTS WORLDWIDE INC 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-Q/A SEC ACT: SEC FILE NUMBER: 001-07959 FILM NUMBER: 98761530 BUSINESS ADDRESS: STREET 1: 777 WESTERCHESTER AVENUE STREET 2: SUITE 400 CITY: WHITE PLAINS STATE: NY ZIP: 10604 BUSINESS PHONE: 6028523900 MAIL ADDRESS: STREET 1: 2231 E CAMELBACK RD. 4TH FL STREET 2: SUITE 4O0 CITY: PHOENOX STATE: AZ ZIP: 85016 FORMER COMPANY: FORMER CONFORMED NAME: STARWOOD LODGING CORP DATE OF NAME CHANGE: 19950215 FORMER COMPANY: FORMER CONFORMED NAME: HOTEL INVESTORS CORP DATE OF NAME CHANGE: 19920703 10-Q/A 1 10-Q/A 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 1-6828 COMMISSION FILE NUMBER: 1-7959 STARWOOD HOTELS & RESORTS STARWOOD HOTELS (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS & RESORTS CHARTER) WORLDWIDE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MARYLAND MARYLAND (STATE OR OTHER JURISDICTION (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) OF INCORPORATION OR ORGANIZATION) 52-0901263 52-1193298 (I.R.S. EMPLOYER IDENTIFICATION NO.) (I.R.S. EMPLOYER IDENTIFICATION NO.) 777 WESTCHESTER AVENUE 777 WESTCHESTER AVENUE WHITE PLAINS, NY 10604 WHITE PLAINS, NY 10604 (ADDRESS OF PRINCIPAL EXECUTIVE (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) OFFICES, INCLUDING ZIP CODE) (914) 640-8100 (914) 640-8100 (REGISTRANT'S TELEPHONE NUMBER, (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INCLUDING AREA CODE)
Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 175,521,662 common shares of beneficial interest, par value $0.01 per share, of Starwood Hotels & Resorts paired with 175,521,662 shares of common stock, par value $0.01 per share, of Starwood Hotels & Resorts Worldwide, Inc., outstanding as of November 5, 1998. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 ITEM 1. FINANCIAL STATEMENTS In response to comments received from the Securities and Exchange Commission, Starwood Hotels & Resorts, a Maryland real estate investment trust (the "Trust"), and Starwood Hotels & Resorts Worldwide, Inc., a Maryland corporation (the "Corporation" and, together with the Trust, "Starwood Hotels" or the "Company"), hereby amend Item 1 of Part I of their Joint Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (the "Third Quarter 1998 10-Q") by: (1) deleting the Combined Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1998 and 1997 of the Trust and the Corporation appearing on page 4 therein and inserting in lieu thereof the following: 1 3 STARWOOD HOTELS & RESORTS AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC. COMBINED CONSOLIDATED STATEMENTS OF INCOME (IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------- ------------------ 1998 1997 1998 1997 ------ ------ ------- ------- Revenues.................................................... $2,286 $1,458 $6,296 $4,273 Costs and expenses: Salaries, benefits and other operating.................... 1,657 1,110 4,614 3,242 Selling, general and administrative....................... 261 151 706 485 Restructuring and other special charges................... 240 -- 240 58 Depreciation and amortization............................. 143 64 414 198 ------ ------ ------ ------ 2,301 1,325 5,974 3,983 ------ ------ ------ ------ (15) 133 322 290 Interest expense, net of interest income of $5 and $4 for the three months ended September 30, 1998 and 1997, respectively, and $22 and $13 for the nine months ended September 30, 1998 and 1997, respectively................. (196) (27) (439) (70) Gain on sale of Alcatel Alsthom shares...................... -- -- -- 183 Gain on investment in Madison Square Garden................. -- -- 31 200 Miscellaneous income (expense), net......................... (3) (14) 6 (33) ------ ------ ------ ------ (214) 92 (80) 570 Income tax (expense) benefit................................ 109 (46) 79 (246) Minority equity............................................. 4 (3) (2) (3) ------ ------ ------ ------ Income (loss) from continuing operations.................... (101) 43 (3) 321 Discontinued operations: Net income (loss) from operations, net of taxes and minority interest of $1 and $27 for the three months ended September 30, 1998 and 1997, respectively, and $5 and $39 for the nine months ended September 30, 1998 and 1997, respectively...................................... -- 15 (9) 14 Gain on sale of Educational Services, Inc. shares, net of taxes and minority interest of $100..................... -- -- 153 -- Gain on disposition of World Directories, net of taxes and minority interest of $15 and $543 for the three and nine months ended September 30, 1998, respectively........... 24 -- 972 -- Cumulative effect of accounting change, net of tax benefit of $6............................................. -- -- -- (11) ------ ------ ------ ------ Net income (loss)........................................... $ (77) $ 58 $1,113 $ 324 ====== ====== ====== ====== Basic earnings per Paired Share: Income (loss) from continuing operations.................. $(0.56) $ 0.34 $(0.10) $ 2.55 Income from discontinued operations....................... 0.13 0.12 5.97 0.11 Cumulative effect of accounting change.................... -- -- -- (0.09) ------ ------ ------ ------ Net income (loss)........................................... $(0.43) $ 0.46 $ 5.87 $ 2.57 ====== ====== ====== ====== Diluted earnings per Paired Share: Income (loss) from continuing operations.................. $(0.56) $ 0.34 $(0.10) $ 2.51 Income from discontinued operations....................... 0.13 0.11 5.97 0.11 Cumulative effect of accounting change.................... -- -- -- (0.09) ------ ------ ------ ------ Net income (loss)........................................... $(0.43) $ 0.45 $ 5.87 $ 2.53 ====== ====== ====== ====== Weighted average number of Paired Shares.................... 188 126 187 126 ====== ====== ====== ====== Weighted average number of equivalent Paired Shares......... 188 128 187 128 ====== ====== ====== ======
The accompanying notes to financial statements are an integral part of the above statements. 2 4 (2) deleting the Combined Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 of the Trust and the Corporation appearing on page 6 therein and inserting in lieu thereof the following: STARWOOD HOTELS & RESORTS AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC. COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------ 1998 1997 ------- ------- OPERATING ACTIVITIES Net income.................................................. $ 1,113 $ 324 Exclude: Discontinued operations -- Net (income) loss from operations......................... 9 (14) Gain on sale of World Directories and Educational Services, Inc........................................... (1,125) -- Cumulative effect of accounting change...................... -- 11 ------- ------- Income (loss) from continuing operations.................... (3) 321 Adjustments to income (loss) from continuing operations: Depreciation and amortization............................. 414 198 Amortization of deferred loan costs....................... 15 -- Non-cash portion of restructuring and other special charges................................................. 150 -- Provision for doubtful receivables........................ 31 28 Minority equity in net income............................. 2 3 Equity income, net of dividends received.................. (17) -- Gain on sale of real estate and investments -- pretax..... (58) (410) Changes in working capital: Accounts receivable....................................... (93) (30) Inventories............................................... 2 (2) Accounts payable.......................................... 15 (30) Accrued expenses.......................................... (279) 119 Accrued and deferred income taxes........................... (111) 10 Other, net.................................................. (40) (24) ------- ------- Cash from continuing operations........................... 28 183 ------- ------- Cash used for discontinued operations..................... -- (10) ------- ------- Cash from operating activities............................ 28 173 ------- ------- INVESTING ACTIVITIES Additions to plant, property and equipment.................. (694) (762) Proceeds from sale of real estate and investments........... 2,811 1,618 Collection of Cablevision note receivable................... -- 169 Acquisitions, net of acquired cash.......................... (60) (284) Employee benefit trust...................................... 146 (119) Other, net.................................................. (286) (20) ------- ------- Cash from investing activities............................ 1,917 602 ------- ------- FINANCING ACTIVITIES Short-term debt, net........................................ 504 (154) Long-term debt issued....................................... 2,454 665 Long-term debt repaid....................................... (1,481) (1,088) Proceeds from equity offering............................... 245 -- Dividends paid.............................................. (3,249) -- Stock repurchases........................................... (343) -- Other, net.................................................. (16) 25 ------- ------- Cash used for financing activities........................ (1,886) (552) ------- ------- Exchange rate effect on cash and cash equivalents........... -- (5) ------- ------- Increase in cash and cash equivalents....................... 59 218 Cash and cash equivalents -- beginning of period............ 201 205 ------- ------- Cash and cash equivalents -- end of period.................. $ 260 $ 423 ======= ======= Supplemental disclosures of cash flow information: Cash paid during the period for -- Interest.................................................. $ 392 $ 39 ======= ======= Income taxes, net of refunds.............................. $ 47 $ 231 ======= =======
The accompanying notes to financial statements are an integral part of the above statements. 3 5 (3) deleting the Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1998 of the Corporation appearing on page 11 therein and inserting in lieu thereof the following: STARWOOD HOTELS & RESORTS WORLDWIDE, INC. CONSOLIDATED STATEMENTS OF INCOME (IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 ------------------ ------------------ Revenues................................................. $2,285 $6,294 Costs and expenses: Salaries, benefits and other operating................. 1,657 4,614 Selling, general and administrative.................... 255 694 Rent and interest, Trust............................... 180 435 Restructuring and other special charges................ 240 240 Depreciation and amortization.......................... 109 305 ------ ------ 2,441 6,288 ------ ------ (156) 6 Interest expense, net of interest income of $1 and $15... (192) 427 Gain on sale of Madison Square Garden.................... -- 31 Miscellaneous income (expense)........................... (3) 6 ------ ------ (351) (384) Income tax benefit....................................... 109 80 Minority equity.......................................... 13 16 ------ ------ Loss from continuing operations.......................... (229) (288) Discontinued operations: Net loss from operations, net of taxes and minority interest of $1 and $5............................... -- (9) Gain on sale of Educational Services, Inc. shares, net of taxes and minority interest of $100.............. -- 153 Gain on disposition of World Directories, net of taxes and minority interest of $15 and $543 for the three and nine months ended September 30, 1998, respectively........................................ 24 972 ------ ------ Net income (loss)........................................ $ (205) $ 828 ====== ====== Basic earnings per share: Loss from continuing operations........................ $(1.22) $(1.54) Income from discontinued operations.................... 0.13 5.97 ------ ------ Net income (loss)........................................ $(1.09) $ 4.43 ====== ====== Diluted earnings per share: Loss from continuing operations........................ $(1.22) $(1.54) Income from discontinued operations.................... 0.13 5.97 ------ ------ Net income (loss)........................................ $(1.09) $ 4.43 ====== ====== Weighted average number of shares........................ 188 187 ====== ====== Weighted average number of equivalent shares............. 188 187 ====== ======
The accompanying notes to financial statements are an integral part of the above statements. 4 6 (4) deleting the Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1998 appearing on page 13 therein and inserting in lieu thereof the following: STARWOOD HOTELS & RESORTS WORLDWIDE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS)
NINE MONTHS ENDED SEPTEMBER 30, 1998 ------------------ OPERATING ACTIVITIES Net income.................................................. $ 828 Exclude: Discontinued operations -- Net loss from operations.................................. 9 Gain on sale of World Directories and Educational Services, Inc........................................... (1,125) ------- Loss from continuing operations............................. (288) Adjustments to loss from continuing operations: Depreciation and amortization............................. 305 Amortization of deferred loan costs....................... 15 Non-cash portion of restructuring and other special charges................................................. 150 Provision for doubtful receivables........................ 31 Minority equity in net income............................. (16) Equity income, net of dividends received.................. (17) Gain on divestments -- pretax............................. (58) Changes in working capital: Accounts receivable....................................... (85) Inventories............................................... 2 Accounts payable.......................................... 5 Accrued expenses.......................................... (266) Accrued and deferred taxes................................ (111) Other, net................................................ (42) ------- Cash used for operating activities........................ (375) ------- INVESTING ACTIVITIES Additions to plant, property and equipment.................. (555) Proceeds from divestments................................... 2,561 Acquisitions, net of acquired cash.......................... (47) Employee benefit trust...................................... 146 Other, net.................................................. (11) ------- Cash from investing activities............................ 2,094 ------- FINANCING ACTIVITIES Short-term debt, net........................................ 504 Long-term debt issued, net.................................. 2,442 Long-term debt repaid....................................... (1,481) Notes payable, Trust........................................ (45) Proceeds from equity offering............................... 74 Dividends paid.............................................. (3,036) Stock repurchases........................................... (103) Other, net.................................................. (24) ------- Cash used for financing activities........................ (1,669) ------- Increase in cash and cash equivalents....................... 50 Cash and cash equivalents -- beginning of period............ 201 ------- Cash and cash equivalents -- end of period.................. $ 251 ======= Supplemental disclosures of cash flow information: Cash paid during the period for -- Interest.................................................. $ 377 ======= Income taxes, net of refunds.............................. $ 46 =======
The accompanying notes to financial statements are an integral part of the above statement. 5 7 (5) deleting Note 6 to the Financial Statements in its entirety and inserting in lieu thereof the following: NOTE 6. RESTRUCTURING AND OTHER SPECIAL CHARGES During the third quarter of 1998, the Company recorded pretax charges totaling approximately $240 million relating to restructuring and other special charges. The charges represent a portion of the approximate $1.2 billion restructuring and other special charges that the Company announced in August 1998. The third quarter 1998 restructuring and other special charges consist of the following:
NON-CASH CASH EXPENDITURES CHARGES EXPENDITURES ACCRUED TOTAL -------- ------------ ------------ ----- Write-down of assets..................... $115 $-- $ -- $115 ITT Merger-related costs................. 20 20 85 125 ---- --- ---- ---- Total.......................... $135 $20 $ 85 $240 ==== === ==== ====
Write-Down of Assets The restructuring and special charges include the write-down of assets that include investments in a hotel in Kuala Lampur, Malaysia; a mortgage note receivable secured by a hotel in Paris, France; an investment in a shared services center established by ITT in 1997 which was closed by the Company following the ITT Merger; and certain receivable balances in the Company's gaming division primarily related to Asian customers. These assets were primarily ITT assets and were written down primarily as a result of certain worldwide economic conditions indicating a reduced value for these assets. ITT Merger Related Costs The restructuring and special charges include costs related to the ITT Merger consisting primarily of severance payments and relocation costs for ITT employees and certain costs to integrate the companies, including costs to integrate the Company's frequent guest programs and to close down duplicate facilities. In addition, during the third quarter of 1998, the Company recorded a non-recurring charge to selling, general and administrative expense of approximately $30 million primarily associated with the vesting, during the quarter, of certain restricted stock granted earlier in the year to the new President and Chief Executive Officer of the Corporation. Also during the third quarter of 1998, the Company recorded a $40 million non-recurring charge to interest expense associated with the settlement of certain forward interest swap agreements (see Note 10). During the first quarter of 1997, ITT recorded pretax charges totaling $58 million to restructure and rationalize operations at its World Headquarters. Of the total pretax charge, approximately $28 million represented severance and other related employee termination costs associated with the elimination of nearly 115 positions worldwide. The balance of the restructuring charge ($30 million pretax) related primarily to asset write-offs, lease commitments and termination penalties. With the exception of the remaining lease commitments, substantially all of these costs have been paid. (6) deleting the third paragraph in Note 10 to the Financial Statements in its entirety and inserting in lieu thereof the following: A long-term debt offering that the Company was contemplating was delayed due to market conditions and the Restructuring. As a result, certain of the Company's forward interest rate swaps with a notional amount of $500 million no longer correlated with this anticipated indebtedness. In accordance with the Company's accounting policies, these forward interest rate swaps were marked to market by the Company and, as such, the Company recognized a loss of $40 million, which is included in interest expense in the third quarter of 1998 (see Note 6). These contracts were terminated by the Company. 6 8 (7) deleting the Unaudited Condensed Combined Consolidated Pro Forma Statements of Income for the Three and Nine Months Ended September 30, 1998 of the Trust and the Corporation appearing on pages 27 and 28 therein and inserting in lieu thereof the following: STARWOOD HOTELS & RESORTS AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC. UNAUDITED CONDENSED COMBINED CONSOLIDATED PRO FORMA STATEMENT OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 The following unaudited condensed combined consolidated pro forma statement of income for the three months ended September 30, 1998 gives effect as of January 1, 1998 to the ITT Merger, the acquisition of Westin and certain asset sales. The pro forma information is based upon historical information as described in Note 1 of the Notes to Financial Statements and does not purport to present what actual results would have been had such transactions, in fact, occurred at January 1, 1998, or to project results for any future period. Historical results are for the three months ended September 30, 1998.
PRO FORMA ADJUSTMENTS ----------------------- DESERT PRO HISTORICAL INN(B) OTHERS FORMA ---------- ------ ------ ----- (IN MILLIONS, EXCEPT PER SHARE DATA) Revenues......................................... $2,286 $(27) $ -- $2,259 Costs and expenses: Salaries, benefits and other operating......... 1,657 (28) -- 1,629 Selling, general and administrative............ 261 -- (22)(i) 239 Restructuring and other special charges........ 240 -- -- 240 Depreciation and amortization.................. 143 (5) -- 138 ------ ---- ----- ------ 2,301 (33) (22) 2,246 ------ ---- ----- ------ (15) 6 22 13 Interest expense, net............................ (196) -- 13(d) (178) 5(f) Miscellaneous expense, net....................... (3) -- -- (3) ------ ---- ----- ------ (214) 6 40 (168) Income tax benefit (expense)..................... 109 (2) (18) 89 Minority equity.................................. 4 -- -- 4 ------ ---- ----- ------ Income (loss) from continuing operations......... $ (101) $ 4 $ 22 $ (75) ====== ==== ===== ====== Basic earnings per Paired Share: Loss from continuing operations................ $(0.56) $(0.38) ====== ====== Diluted earnings per Paired Share: Loss from continuing operations................ $(0.56) $(0.38) ====== ====== Weighted average number of Paired Shares......... 188 188 ====== ====== Weighted average number of equivalent Paired Shares......................................... 188 188 ====== ======
The accompanying notes to financial statements are an integral part of the above pro forma statement. 7 9 STARWOOD HOTELS & RESORTS AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC. UNAUDITED CONDENSED COMBINED CONSOLIDATED PRO FORMA STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 The following unaudited condensed combined consolidated pro forma statement of income for the nine months ended September 30, 1998 gives effect as of January 1, 1998 to the ITT Merger, the acquisition of Westin and certain asset sales. The pro forma information is based upon historical information as described in Note 1 of the Notes to Financial Statements and does not purport to present what actual results would have been had such transactions, in fact, occurred at January 1, 1998, or to project results for any future period. Historical results are for the nine months ended September 30, 1998.
PRO FORMA ADJUSTMENTS ----------------------------- STARWOOD DESERT HISTORICAL HOTELS(A) INN(B) OTHERS PRO FORMA ---------- --------- ------ ------ --------- (IN MILLIONS, EXCEPT PER SHARE DATA) Revenues................................. $6,296 $437 $ (87) $ -- $6,646 Costs and expenses: Salaries, benefits and other operating........................... 4,614 325 (92) -- 4,847 Selling, general and administrative.... 706 42 -- (31)(h)(i) 717 Restructuring and other special charges............................. 240 -- -- -- 240 Depreciation and amortization.......... 414 43 (12) 13(g) 458 ------ ---- ----- ---- ------ 5,974 410 (104) (18) 6,262 ------ ---- ----- ---- ------ 322 27 17 18 384 Interest expense, net.................... (439) (25) -- (39)(c) (434) 57(d) 3(e) 9(f) Gain on investment in Madison Square Garden................................. 31 -- -- -- 31 Miscellaneous income, net................ 6 4 2 -- 12 ------ ---- ----- ---- ------ (80) 6 19 48 (7) Income tax benefit (expense)............. 79 (2) (6) (20) 51 Minority equity.......................... (2) 1 -- -- (1) ------ ---- ----- ---- ------ Income (loss) from continuing operations............................. $ (3) $ 5 $ 13 $ 28 $ 43 ====== ==== ===== ==== ====== Basic earnings per Paired Share: Income (loss) from continuing operations.......................... $(0.10) $ 0.15 ====== ====== Diluted earnings per Paired Share: Income (loss) from continuing operations.......................... $(0.10) $ 0.15 ====== ====== Weighted average number of Paired Shares................................. 187 187 ====== ====== Weighted average number of equivalent Paired Shares.......................... 187 189 ====== ======
The accompanying notes to financial statements are an integral part of the above pro forma statement. 8 10 (8) deleting Note (d) in the Notes to Unaudited Condensed Combined Consolidated Pro Forma Statements of Income of the Trust and the Corporation appearing on page 29 therein and inserting in lieu thereof the following: (d) Represents reduction of interest expense, using an average rate of 7.5%, for the paydown of the term loans with proceeds from actual or planned asset dispositions as if the dispositions had occurred on January 1, 1998. The actual dispositions include the disposition of WD for gross proceeds of $2.1 billion to VNU in February 1998; the sale of ITT's interest in WBIS+, Channel 31 in New York City, to Paxson for gross proceeds of $128 million in March 1998; the exercise of one of the two "put" options in April 1998 pursuant to which Cablevision purchased one-half of ITT's 7.81% interest in MSG for gross proceeds of $94 million; the sale of an aircraft for gross proceeds of $39 million in April 1998; and the sale of approximately 13 million shares of Educational Services for gross proceeds of $315 million in June 1998. The planned asset dispositions include the exercise of the remaining "put" option with Cablevision or MSG, the sale of the Company's remaining 35% interest in Educational Services through various alternatives including a private placement or a registered public offering of its shares and the sale of the Desert Inn. The pro forma net proceeds of the planned dispositions, after certain costs and income taxes, would reduce debt by approximately $735 million. The Company believes that the planned dispositions are probable as required by Regulation S-X, Rule 11-01(a). (9) deleting the Unaudited Funds from Operations of the Trust and the Corporation appearing on page 30 therein and inserting in lieu thereof the following: STARWOOD HOTELS & RESORTS AND STARWOOD HOTELS & RESORTS WORLDWIDE, INC. UNAUDITED FUNDS FROM OPERATIONS Management believes that funds from operations ("FFO") (as defined by the National Association of Real Estate Investment Trusts)(1) is one measure of financial performance of an equity REIT such as the Trust. Because ITT was never an equity REIT, it did not calculate FFO. Accordingly, set forth below is a comparison of pro forma FFO for the three- and nine-month periods ended September 30, 1998 (see the unaudited condensed combined consolidated pro forma statements of income and the notes thereto beginning on page 28 for an explanation of the pro forma adjustments) and the combined historical FFO of Starwood Hotels for the same periods in 1997. Combined pro forma FFO for the three months ended September 30, 1998 grew by 502% to $295 million, compared to combined historical FFO of $49 million as reported by Starwood Hotels for the corresponding period in 1997. Combined pro forma FFO for the nine months ended September 30, 1998 grew by 422% to $700 million compared to combined historical FFO of $134 million as reported by Starwood Hotels for the corresponding period of 1997. The following table shows the calculation of pro forma combined FFO for the 9 11 three and nine months ended September 30, 1998 and historical combined FFO as reported by Starwood Hotels for the three and nine months ended September 30, 1997 (in millions):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 1998 1997 1998 1997 --------- ---------- --------- ---------- PRO FORMA HISTORICAL PRO FORMA HISTORICAL --------- ---------- --------- ---------- Income (loss) from continuing operations before minority interest............... $(79) $ 3 $ 44 $ 39 Minority interest in consolidated joint ventures............................... (3) (4) (7) (6) Depreciation and amortization............ 138 50 458 101 Depreciation and amortization for unconsolidated joint ventures.......... 2 -- -- -- Deferred taxes........................... (78) -- (77) -- Gain on sale of real estate and investments............................ (1) -- (50) -- Preopening costs......................... 9 -- 35 -- Restructuring and other special charges................................ 240 -- 240 -- Other non-recurring items, net(2)........ 67 -- 57 -- ---- --- ---- ---- Funds from Operations.................... $295 $49 $700 $134 ==== === ==== ====
- --------------- (1) Management and industry analysts generally consider FFO to be one measure of the financial performance of an equity REIT that provides a relevant basis for comparison among REITs, and FFO is presented to assist investors in analyzing the performance of the Company. FFO is defined as income (computed in accordance with generally accepted accounting principles), excluding gains (losses) from debt restructuring and sales of property, real estate related depreciation and amortization (excluding amortization of financing costs) and other non-recurring items. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered an alternative to net income as an indication of the Company's financial performance or as an alternative to cash flows from operating activities as a measure of liquidity. (2) Other non-recurring items consist primarily of costs associated with the settlement of certain forward interest rate swap agreements and to the vesting of certain restricted stock awards (see note 6). 10 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This amendment contains certain statements that may be deemed "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements contained herein include, but are not limited to, statements relating to the Company's objectives, strategies and plans, and all statements (other than statements of historical fact) that address actions, events or circumstances that the Company or its management expects, believes or intends will occur in the future. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated at the time the forward-looking statements are made, including, without limitation, risks and uncertainties associated with the following: the Restructuring; the Trust's continued ability to qualify for taxation as a REIT; the Company's integration of the assets and operations of ITT and Westin; completion of future acquisitions and dispositions; the availability of capital for acquisitions and for renovations; execution of hotel and casino renovation and expansion programs; the ability to maintain existing management, franchise or representation agreements and to obtain new agreements on current terms; competition within the lodging industry and the gaming industry; the cyclicality of the real estate business, the hotel business and the gaming business; foreign exchange fluctuations; general real estate and national and international economic conditions; political, financial and economic conditions and uncertainties in countries in which the Company owns property or operates; the ability of the Company, owners of properties it manages or franchises and others with which it does business to address the Year 2000 issue, and the costs associated therewith; the adoption by several European countries of the euro as their national currency; and the other risks and uncertainties set forth in the annual, quarterly and current reports and proxy statements of the Trust and the Corporation. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. AMENDMENTS In response to comments received from the Securities and Exchange Commission, the Company hereby amends Item 2 of Part I of the Third Quarter 1998 10-Q by: (1) deleting the last paragraph under the caption "Continuing Operations" in the section titled "Results of Operations" and inserting in lieu thereof the following: Interest expense for the three and nine months ended September 30, 1998, net of a $40 million non-recurring charge relating to the settlement of certain forward interest swap agreements (see Note 6 to the combined consolidated financial statements) and interest income, increased to $156 million and $399 million, respectively, when compared to $27 million and $70 million in the same periods of 1997. The increase relates primarily to the debt incurred to finance the ITT Merger. See "Liquidity and Capital Resources." (2) deleting the paragraph under the caption "Restructuring and Other Special Charges" in the section titled "Results of Operations" and inserting in lieu thereof the following: During the third quarter of 1998, the Company recorded pretax charges of approximately $240 million relating to restructuring and other special charges. The charges consist of costs relating to the write-down of assets, the ITT Merger and other non-recurring costs (see Note 6 to unaudited combined consolidated financial statements on page 20). (3) deleting the section with the caption "Risks Relating to Year 2000" under the section "Other Matters" and inserting in lieu thereof the following: RISKS RELATING TO YEAR 2000 Many computer systems were originally designed to recognize calendar years by the last two digits in the date code field. Beginning in the year 2000, these date code fields will need to accept four-digit entries to distinguish twenty-first century dates from twentieth century dates. As a result, in less than two years, the 11 13 computerized systems, which include information and non-information technology systems, and applications used by the Company will need to be reviewed, evaluated and modified or replaced, if necessary, to ensure all such financial, information and operational systems are Year 2000 compliant. State of Readiness The Company is addressing the Year 2000 compliance issue by separately focusing on its central facilities, which include all of its non-operating facilities, and on its gaming and hotel properties. The Company has identified the critical central facility business applications that may be affected by the Year 2000 as the reservation system application, including the frequent stay programs, and communication system applications. The Company has conducted the discovery and assessment stages on the reservations and communication system applications and assembled a team to implement modifications or upgrades, as necessary, and to test results. The majority of the central facility applications passed the final testing, which was performed by internal personnel and independent third parties in the second quarter of 1998. The Company is in the process of communicating with others with whom it does significant business to determine their readiness of Year 2000 compliance. During the third quarter of 1998 the Company successfully completed a validation process with an independent third-party reservation information service provider with which the Company has a material relationship. This validation process consisted of testing of the internal code and conducting over 9,000 test cases on the applicable systems. The specific testing included a three-step process comprised of baseline tests, Year 2000 date tests and code enhancement tests. The Company is in the phase of assessing its hardware components at its central facilities, all of which are expected to be modified or upgraded, as necessary, to ensure Year 2000 compliance by the third quarter of 1999. The Company has entered into a consulting agreement with an independent third party to perform an inventory and assessment of all of the Company's computerized systems and applications for its gaming operations. This inventory and assessment will determine the resources needed, necessary modifications or upgrades, vendor Year 2000 compliance, remediation plan and the time frame for the gaming operations to become Year 2000 compliant, and is expected to be completed in 1998. The Company has completed the initial assessment of the applications and hardware at its owned, leased, managed and joint venture hotel properties. In the third quarter of 1998, validation tools and resources were deployed to the hotel properties. The validation tools consisted of asset management tools for analysis of all applications and data checking tools for testing and patch application purposes. The domestic Year 2000 team, which is scheduled to visit each domestic hotel property, is comprised of independent consultants and five individuals from the Company that are dedicated to the Year 2000 project. Each of the international properties has appointed internal personnel to address Year 2000 compliance and has access to such independent consultants, if necessary. Once the test statistics for the hotel property applications and hardware are collected, the information will be sent to an independent third party for Year 2000 compliance verification. Based on the results of the compliance verification, the Company expects to address remediation efforts by the third quarter of 1999. Year 2000 Project Costs The Company estimates that total costs for the Year 2000 compliance review, evaluation, assessment and remediation efforts for the central facilities and owned hotel and gaming properties should not exceed $20 million, although there can be no assurance that actual costs will not exceed this amount. Of this amount, $1.5 million had been expended as of September 30, 1998, and an additional $3.5 million is expected to be spent in the remainder of 1998. Starwood Year 2000 Risks Since all major computerized central facilities reservation systems and applications have been tested and reservations for the year 2000 have been accepted, the Company believes that it has addressed all material 12 14 risks related to its reservation function. The remaining risks relate to the non-critical business applications, support hardware for the central facilities and embedded systems at the properties owned or managed by the Company. A failure of certain of these systems to become Year 2000 compliant could disrupt the timeliness or the accuracy of management information provided by the central facilities. There can be no assurance that the efforts related to the gaming and hotel properties will be sufficient to make these properties' computerized systems and applications Year 2000 compliant in a timely manner or that the allocated resources will be sufficient. A failure to become Year 2000 compliant could affect the integrity of the gaming and hotel property guest check-in, billing and accounting functions. Certain physical hotel property machinery and equipment could also fail resulting in safety risks and customer dissatisfaction. Additionally, failure of the gaming properties' systems to become Year 2000 compliant could result in the inefficient processing of operational gaming information and the malfunction of computerized gaming machines. The Company has asked substantially all of its significant vendors and service providers to provide reasonable assurances as to those parties' Year 2000 state of readiness. Risk assessments and contingency plans, where required, will be finalized in the first six months of 1999. To the extent that vendors and service providers do not provide satisfactory evidence that their products and services are Year 2000 compliant, the Company will seek to obtain the necessary products and services from alternative sources. There can be no assurance, however, that Year 2000 remediation by vendors and service providers will be completed timely or that qualified replacement vendors and service providers will be available, and any failure of such third parties' systems could have a material adverse impact on the Company's computer systems and operations. Contingency Plan The Company is in the process of developing its contingency plan for the central facilities and the gaming and hotel properties to provide for the most reasonably likely worst case scenarios regarding Year 2000 compliance. This contingency plan is expected to be completed in 1999. 13 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each Registrant has duly caused this amendment to be signed on its behalf by the undersigned thereunto duly authorized. STARWOOD HOTELS & RESORTS STARWOOD HOTELS & RESORTS WORLDWIDE, INC. /s/ BARRY STERNLICHT /s/ RONALD C. BROWN - -------------------------------------------- -------------------------------------------- Barry Sternlicht Ronald C. Brown Chairman and Chief Executive Officer Executive Vice President and Chief Financial Officer
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