-----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, UOqbyDN1ONX/Van/NkaFZKTPl8T/odC1TCx+bwlOW73Wr2yK1bVPuNprz48/uJzu yYrWfcXUrHbzULuqIDX0og== 0000950153-99-000671.txt : 19990518 0000950153-99-000671.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950153-99-000671 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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 SEC ACT: SEC FILE NUMBER: 001-07959 FILM NUMBER: 99628164 BUSINESS ADDRESS: STREET 1: 777 WESTERCHESTER AVENUE STREET 2: SUITE 400 CITY: WHITE PLAINS STATE: NY ZIP: 10604 BUSINESS PHONE: 9146408100 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 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 SEC ACT: SEC FILE NUMBER: 333-73069 FILM NUMBER: 99628165 BUSINESS ADDRESS: STREET 1: 777 WESTCHESTER AVENUE STREET 2: STE 410 CITY: WHITE PLAINS STATE: NY ZIP: 10604 BUSINESS PHONE: 9146408100 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 10-Q 1 10-Q 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 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: 1-7959 COMMISSION FILE NUMBER: 1-6828
STARWOOD HOTELS & RESORTS STARWOOD WORLDWIDE, INC. HOTELS & RESORTS (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CHARTER) MARYLAND MARYLAND (STATE OR OTHER JURISDICTION (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) OF INCORPORATION OR ORGANIZATION) 52-1193298 52-0901263 (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. 178,030,289 shares of common stock, par value $0.01 per share, of Starwood Hotels & Resorts Worldwide, Inc. attached to and traded together as Shares with 178,030,289 Class B shares of beneficial interest, par value $0.01 per share, of Starwood Hotels & Resorts, and 100 Class A shares of beneficial interest, par value $0.01 per share, of Starwood Hotels & Resorts, all outstanding as of May 14, 1999. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Starwood Hotels & Resorts Worldwide, Inc.: Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998......................................... 3 Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and 1998............................. 4 Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 1999 and 1998................ 5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998............................. 6 Starwood Hotels & Resorts: Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998......................................... 7 Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and for the Period from February 23, 1998 to March 31, 1998.................................... 8 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and for the Period from February 23, 1998 to March 31, 1998.................................... 9 Notes to Financial Statements............................... 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 16 Item 3. Quantitative and Qualitative Disclosures about Market Risk...................................................... 27 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 27 Item 2. Changes in Securities and Use of Proceeds................... 27 Item 4. Submission of Matters to a Vote of Security Holders......... 27 Item 6. Exhibits and Reports on Form 8-K............................ 28
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. The following unaudited consolidated financial statements of Starwood Hotels & Resorts Worldwide, Inc. ("Starwood") and Starwood Hotels & Resorts (the "Trust"), collectively referred to herein as the "Company," are provided pursuant to the requirements of this Item. In the opinion of management, all adjustments necessary for fair presentation, consisting of normal recurring adjustments, have been included. The consolidated financial statements presented herein have been prepared in accordance with the accounting policies described in the Company's Joint Annual Report on Form 10-K, as amended, for the year ended December 31, 1998 and should be read in conjunction therewith. See the notes to the consolidated financial statements for the basis of presentation. The consolidated financial statements should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. Results for the three months ended March 31, 1999 are not necessarily indicative of results to be expected for the full fiscal year ending December 31, 1999. 2 4 STARWOOD HOTELS & RESORTS WORLDWIDE, INC. CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31, 1999 1998 ----------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 180 $ 175 Accounts receivable, net of allowance for doubtful accounts of $54 and $55................................ 465 484 Inventories............................................... 58 58 Prepaid expenses and other................................ 84 75 ------- ------- Total current assets................................... 787 792 Investments................................................. 387 336 Plant, property and equipment, net.......................... 7,745 7,857 Goodwill and intangible assets, net......................... 2,728 2,714 Other assets................................................ 536 552 Net assets held for sale.................................... 43 63 Net assets of discontinued operations....................... 911 1,103 ------- ------- $13,137 $13,417 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 178 $ 169 Accrued expenses.......................................... 886 782 Short-term borrowings and current maturities of long-term debt................................................... 241 687 Other current liabilities................................. 173 183 ------- ------- Total current liabilities.............................. 1,478 1,821 Long-term debt.............................................. 5,942 5,802 Deferred income taxes....................................... 1,523 529 Other liabilities........................................... 383 384 Minority interest........................................... 222 244 ------- ------- 9,548 8,780 ------- ------- Equity put options.......................................... -- 32 ------- ------- Class B exchangeable preferred shares of the Trust, at redemption value of $38.50................................ 148 149 ------- ------- Commitments and contingencies Stockholders' equity: Class A exchangeable preferred shares of the Trust; $0.01 par value; authorized 30,000,000 shares; outstanding 4,134,658 and 4,373,457 at March 31, 1999 and December 31, 1998, respectively................................. -- -- Corporation common stock; $0.01 par value; authorized 1,050,000,000 shares; outstanding 177,331,866 and 175,574,135 shares at March 31, 1999 and December 31, 1998, respectively..................................... 2 2 Trust common shares of beneficial interest; $0.01 par value; authorized 1,200,000,000 shares; outstanding 175,574,135 shares at December 31, 1998................ -- 2 Trust Class B shares of beneficial interest; $0.01 par value; authorized 1,000,000,000 shares; outstanding 177,331,866 shares at March 31, 1999................... 2 -- Additional paid-in capital................................ 4,587 4,570 Cumulative translation and marketable securities adjustments............................................ (191) (120) Retained earnings (accumulated deficit)................... (959) 2 ------- ------- Total stockholders' equity............................. 3,441 4,456 ------- ------- $13,137 $13,417 ======= =======
The accompanying notes to financial statements are an integral part of the above statements. 3 5 STARWOOD HOTELS & RESORTS WORLDWIDE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, ------------------- 1999 1998 ------- ------ (UNAUDITED) REVENUES Owned, leased and consolidated joint venture hotels......... $ 770 $ 506 Management and franchise fees............................... 59 46 Unconsolidated joint ventures and other..................... 22 13 ------ ----- 851 565 ------ ----- COSTS AND EXPENSES Owned, leased and consolidated joint venture hotels......... 541 358 Selling, general and administrative......................... 48 42 Depreciation and amortization............................... 119 73 ------ ----- 708 473 ------ ----- 143 92 Interest expense, net of interest income of $5 and $7....... (120) (53) Gain on sale of real estate and investments................. 8 12 Miscellaneous expense....................................... (15) -- ------ ----- 16 51 Income tax expense, including a Reorganization charge of $936 -- see Note 1........................................ (942) (10) Minority equity in net loss................................. 1 1 ------ ----- Income (loss) from continuing operations.................... (925) 42 Discontinued operations: Net loss from operations, net of tax benefits of $0 and $7..................................................... -- (23) Net gain (loss) on dispositions, net of taxes of $121 and $514................................................... (7) 977 ------ ----- Net income (loss)........................................... $ (932) $ 996 ====== ===== EARNINGS PER SHARE -- BASIC Continuing operations....................................... $(4.86) $0.19 Discontinued operations..................................... (0.04) 5.06 ------ ----- Net income (loss)........................................... $(4.90) $5.25 ====== ===== EARNINGS PER SHARE -- DILUTED Continuing operations....................................... $(4.86) $0.19 Discontinued operations..................................... (0.04) 4.98 ------ ----- Net income (loss)........................................... $(4.90) $5.17 ====== ===== Weighted average number of Shares........................... 190 188 ====== ===== Weighted average number of Shares assuming dilution......... 190 191 ====== =====
The accompanying notes to financial statements are an integral part of the above statements. 4 6 STARWOOD HOTELS & RESORTS WORLDWIDE, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN MILLIONS)
THREE MONTHS ENDED MARCH 31, ------------------- 1999 1998 -------- ----- (UNAUDITED) Net income (loss)........................................... $ (932) $996 Other comprehensive income: Foreign currency translation adjustments -- Foreign currency translation arising during the period.... (71) (32) Reclassification adjustment for losses included in net income (loss).......................................... -- 33 ------- ---- (71) 1 ------- ---- Comprehensive income (loss)................................. $(1,003) $997 ======= ====
The accompanying notes to financial statements are an integral part of the above statements. 5 7 STARWOOD HOTELS & RESORTS WORLDWIDE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS)
THREE MONTHS ENDED MARCH 31, ---------------- 1999 1998 ----- ------- (UNAUDITED) OPERATING ACTIVITIES Net income (loss)........................................... $(932) $ 996 Exclude: Discontinued operations..................................... -- Net loss from operations.................................. -- 23 Net (gain) loss on dispositions........................... 7 (977) ----- ------- Income (loss) from continuing operations.................... (925) 42 Adjustments to income (loss) from continuing operations: Depreciation and amortization............................. 119 73 Amortization of deferred loan costs....................... 5 5 Non-cash portion of Reorganization charge................. 936 -- Provision for doubtful accounts........................... 1 1 Minority equity in net loss............................... (1) (1) Equity income, net of dividends received.................. (9) 2 Gain on sale of real estate and investments............... (8) (12) Changes in working capital: Accounts receivable....................................... (9) 3 Inventories............................................... (1) -- Accounts payable.......................................... 14 (7) Accrued expenses.......................................... 25 (252) Accrued and deferred income taxes........................... (70) (10) Other, net.................................................. (42) (36) ----- ------- Cash from (used for) continuing operations................ 35 (192) Cash from (used for) discontinued operations.............. 33 (136) ----- ------- Cash from (used for) operating activities................. 68 (328) ----- ------- INVESTING ACTIVITIES Additions to plant, property and equipment.................. (74) (73) Proceeds from asset sales................................... 342 2,066 Collection of notes receivable.............................. 42 19 Acquisitions, net of acquired cash.......................... -- 28 Investments................................................. (33) -- Employee benefit trust...................................... -- 35 Other, net.................................................. -- (6) ----- ------- Cash from investing activities............................ 277 2,069 ----- ------- FINANCING ACTIVITIES Short-term debt, net........................................ (533) 882 Long-term debt issued....................................... 948 807 Long-term debt repaid....................................... (707) (545) Proceeds from forward equity contracts...................... -- 245 Settlement of equity put options............................ (16) -- Dividends paid.............................................. (29) (3,036) Other, net.................................................. (3) (2) ----- ------- Cash used for financing activities........................ (340) (1,649) ----- ------- Increase in cash and cash equivalents....................... 5 92 Cash and cash equivalents -- beginning of period............ 175 201 ----- ------- Cash and cash equivalents -- end of period.................. $ 180 $ 293 ===== ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest.................................................. $ 99 $ 33 ===== ======= Income taxes, net of refunds.............................. $ 16 $ 5 ===== =======
The accompanying notes to financial statements are an integral part of the above statements. 6 8 STARWOOD HOTELS & RESORTS CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31, 1999 1998 ----------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ -- $ 12 Restricted cash........................................... 2 -- Accounts receivable....................................... 8 24 Receivable, Corporation................................... 42 42 Prepaid expenses and other................................ 5 3 ------ ------ Total current assets................................... 57 81 Investments, Corporation.................................... 1,057 1,057 Investments................................................. 87 86 Plant, property and equipment, net.......................... 4,440 4,411 Long-term receivables, net, Corporation..................... 2,628 2,583 Goodwill and intangible assets, net......................... 250 258 Other assets................................................ 137 152 Net assets held for sale.................................... -- 18 ------ ------ $8,656 $8,646 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 1 $ 6 Accrued expenses.......................................... 98 68 Short-term borrowings and current maturities of long-term debt................................................... 104 1 ------ ------ Total current liabilities.............................. 203 75 Long-term debt.............................................. 541 737 Minority interest........................................... 35 39 ------ ------ 779 851 ------ ------ Equity put options and forward equity contracts............. -- 23 ------ ------ Class B exchangeable preferred shares, at redemption value of $38.50................................................. 148 149 ------ ------ Commitments and contingencies Stockholders' equity: Class A exchangeable preferred shares; $0.01 par value; authorized 30,000,000 shares; outstanding 4,134,658 and 4,373,457 at March 31, 1999 and December 31, 1998, respectively........................................... -- -- Trust common shares of beneficial interest; $0.01 par value; authorized 1,200,000,000 shares; outstanding 175,574,135 shares at December 31, 1998................ -- 2 Class A shares of beneficial interest; $0.01 par value; authorized 5,000 shares; outstanding 100 shares at March 31, 1999......................................... -- -- Trust Class B shares of beneficial interest; $0.01 par value; authorized 1,000,000,000 shares; outstanding 177,331,866 shares at March 31, 1999................... 2 -- Additional paid-in capital................................ 7,567 7,557 Retained earnings......................................... 160 64 ------ ------ Total stockholders' equity............................. 7,729 7,623 ------ ------ $8,656 $8,646 ====== ======
The accompanying notes to financial statements are an integral part of the above statements. 7 9 STARWOOD HOTELS & RESORTS CONSOLIDATED STATEMENTS OF OPERATIONS (IN MILLIONS, EXCEPT PER SHARE DATA)
PERIOD FROM THREE MONTHS FEBRUARY 23, ENDED 1998 MARCH 31, TO MARCH 31, 1999 1998 ------------ ------------ (UNAUDITED) REVENUES Unconsolidated joint ventures and other..................... $ 5 $ 1 Rent and interest, Corporation.............................. 179 81 ----- ----- 184 82 ----- ----- COSTS AND EXPENSES Selling, general and administrative......................... -- 1 Depreciation and amortization............................... 44 17 ----- ----- 44 18 ----- ----- 140 64 Interest expense, net of interest income of $3 and $0....... (15) (3) Income tax expense.......................................... (1) -- ----- ----- Net income.................................................. $ 124 $ 61 ===== ===== Net income per share -- basic............................... $0.65 $0.29 ===== ===== Net income per share -- diluted............................. $0.61 $0.29 ===== ===== Weighted average number of shares........................... 190 188 ===== ===== Weighted average number of shares assuming dilution......... 200 191 ===== =====
The accompanying notes to financial statements are an integral part of the above statements. 8 10 STARWOOD HOTELS & RESORTS CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS)
PERIOD FROM THREE MONTHS FEBRUARY 23, ENDED 1998 MARCH 31, TO MARCH 31, 1999 1998 ------------ ------------ (UNAUDITED) OPERATING ACTIVITIES Net income.................................................. $ 124 $ 61 Adjustments to net income: Depreciation and amortization............................. 44 17 Equity income, net of dividends received.................. 5 -- Changes in working capital: Accounts receivable....................................... 1 2 Accounts payable.......................................... (5) (4) Accrued expenses.......................................... 23 (14) Other, net.................................................. (15) 8 ----- ----- Cash from operating activities............................ 177 70 ----- ----- INVESTING ACTIVITIES Additions to plant, property and equipment.................. (43) (16) Collection of notes receivable.............................. 42 -- Acquisitions, net of acquired cash.......................... -- 40 Notes receivable, Corporation............................... (442) (212) Other, net.................................................. -- (17) ----- ----- Cash used for investing activities........................ (443) (205) ----- ----- FINANCING ACTIVITIES Long-term debt issued....................................... 291 -- Long-term debt repaid....................................... (1) -- Proceeds from equity offering............................... -- 171 Dividends paid.............................................. (28) -- Other, net.................................................. (8) -- ----- ----- Cash from financing activities............................ 254 171 ----- ----- Increase (decrease) in cash and cash equivalents............ (12) 36 Cash and cash equivalents -- beginning of period............ 12 -- ----- ----- Cash and cash equivalents -- end of period.................. $ -- $ 36 ===== ===== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for interest.................... $ 11 $ 2 ===== =====
The accompanying notes to financial statements are an integral part of the above statements. 9 11 STARWOOD HOTELS & RESORTS WORLDWIDE, INC. AND STARWOOD HOTELS & RESORTS NOTES TO FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The accompanying consolidated balance sheets as of March 31, 1999 and December 31, 1998 and the consolidated statements of operations, comprehensive income and cash flows for the three months ended March 31, 1999 represent (i) Starwood Hotels & Resorts Worldwide, Inc. and its subsidiaries (the "Corporation"), inclusive of ITT Corporation and its subsidiaries ("ITT") and Starwood Hotels & Resorts and its subsidiaries (the "Trust"), and (ii) the Trust. Because the acquisition of ITT (the "ITT Merger") was treated as a reverse purchase for financial accounting purposes, the consolidated statements of operations, comprehensive income and cash flows for the three months ended March 31, 1998 include the accounts of ITT for the three months ended March 31, 1998 and the accounts of the Corporation and the Trust for the period from the closing of the ITT Merger on February 23, 1998 through March 31, 1998. The Trust was formed in 1969 and elected to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code (the "Code"). In 1980, the Trust formed the Corporation and made a distribution to the Trust's shareholders of one share of common stock, par value $0.01 per share, of the Corporation (a "Corporation Share") for each common share of beneficial interest, par value $0.01 per share, of the Trust (a "Trust Share"). Until January 6, 1999, the Corporation Shares and Trust Shares were paired on a one-for-one basis and, pursuant to an agreement between the Corporation and the Trust, could be held or transferred only in units ("Paired Shares") consisting of one Corporation Share and one Trust Share. At December 31, 1998, the combined Corporation and Trust entity was a "paired share REIT" under the grandfathering provisions of the Code. During 1998, Congress enacted tax legislation that has the effect of eliminating this grandfathering for certain interests in real property acquired after March 26, 1998. In response to this legislation, a reorganization of the Corporation and the Trust (the "Reorganization") was proposed by the Company and was approved by the Corporation and Trust shareholders on January 6, 1999. As a result of the Reorganization, the combined Corporation and Trust entity is no longer a "grandfathered paired share REIT." The Trust became a subsidiary of the Corporation, which holds all outstanding shares of the new Class A shares of beneficial interest in the Trust. Each outstanding Trust Share was converted into one share of the new non-voting Class B shares of beneficial interest in the Trust (a "Class B Share"). The Corporation Shares and the Class B Shares are attached on a one-for-one basis, and pursuant to an agreement between the Corporation and the Trust, may be transferred only in units ("Shares") consisting of one Corporation Share and one Class B Share. The Reorganization was accounted for as a reorganization of two companies under common control. As such, there was no revaluation of the assets and liabilities of the combining companies. Any further references in this filing to Starwood Hotels & Resorts Worldwide, Inc. ("Starwood" or the "Company") include the Trust and its subsidiaries. Unless otherwise stated herein, all information with respect to Shares refers to Shares since January 6, 1999 and to Paired Shares for periods before January 6, 1999. During the first quarter of 1999, the Company recorded pretax charges of $15 million for costs directly attributable to the Reorganization, such as legal, accounting and investment banking fees, which are included in miscellaneous expense in the accompanying 1999 consolidated income statement. As a result of the Reorganization, the Company also recorded a one-time charge of $936 million to establish a deferred tax liability relating to the difference between the book and tax basis in the assets of the Trust. This charge is included in income tax expense in the accompanying 1999 statement of operations. The Company, through its subsidiaries, is the general partner of, and holds an aggregate 84.6% partnership interest in, SLC Operating Limited Partnership (the "Operating Partnership") as of March 31, 1999. The Trust, through its subsidiaries, is the general partner of, and owns an aggregate 93.3% partnership interest in, SLT Realty Limited Partnership (the "Realty Partnership" and, together with the Operating Partnership, the "Partnerships") as of March 31, 1999. The Realty Partnership principally owns, directly or indirectly, fee, ground lease and mortgage loan interests in hotel properties. The Operating Partnership, 10 12 STARWOOD HOTELS & RESORTS WORLDWIDE, INC. AND STARWOOD HOTELS & RESORTS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) directly or indirectly, principally leases hotel properties from the Realty Partnership and also owns fee interests in other hotel properties and manages hotels for third parties. The units of these Partnerships ("LP Units") held by the limited partners of the respective Partnership ("Limited Partners") are exchangeable on a one-to-one basis for Shares of the Company. At March 31, 1999, there were approximately 13.1 million LP Units outstanding. For all periods presented, the LP Units are assumed to have been converted to Shares for purposes of calculating basic and diluted weighted average Shares outstanding. The Company is one of the largest hotel companies in the world and the Trust is one of the largest REITs in the United States. The hotel business is comprised of a worldwide hospitality network of approximately 700 full-service hotels primarily serving three markets: luxury, upscale and mid-price. The Company's hotel operations are represented on six continents and in nearly every major world market. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES EARNINGS PER SHARE. The following reconciliation of basic earnings per Share to diluted earnings per Share for income (loss) from continuing operations assumes the conversion of LP Units to Shares (in millions, except per Share data):
THREE MONTHS ENDED MARCH 31, ----------------------------------------------------------- 1999 1998 ---------------------------- --------------------------- PER PER EARNINGS SHARES SHARE EARNINGS SHARES SHARE -------- ------ ------ -------- ------ ----- Income (loss) from continuing operations........ $(925) $ 42 Dividends on Class A and Class B EPS............ (1) (6) ----- ------ Basic earnings (loss)........................... $(926) 190 $(4.86) $ 36 188 $0.19 ===== ====== ====== ===== Effect of dilutive securities: Employee stock options........................ -- 3 --- --- Diluted earnings (loss)......................... $(926) 190 $(4.86) $ 36 191 $0.19 ===== === ====== ====== === =====
As a result of antidilutive effects, approximately 8 million Class A and Class B Exchangeable Preferred Shares ("EPS") of the Trust, and approximately 1 million employee stock options and other common stock equivalents were not included in the computation of diluted earnings per Share for the three months ended March 31, 1999. Additionally, as a result of antidilutive effects, approximately 12 million Class A and Class B EPS of the Trust were not included in the computation of diluted earnings per Share for the three months ended March 31, 1998. RECLASSIFICATIONS. Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. 11 13 STARWOOD HOTELS & RESORTS WORLDWIDE, INC. AND STARWOOD HOTELS & RESORTS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3. DISCONTINUED OPERATIONS GAMING. In April 1999, management developed a formal plan to dispose of the Company's gaming operations. On April 27, 1999, the Company entered into a definitive agreement to sell its gaming operations for proceeds of approximately $3.0 billion to Park Place Entertainment Corporation (New York Stock Exchange ("NYSE"): PPE). This sale is expected to close prior to the end of 1999. This agreement excludes the Desert Inn, which the Company is attempting to sell separately. The Company continues to review expressions of interest in the Desert Inn and is currently in discussions with a potential buyer for the property. As a result of the definitive agreement to sell the gaming operations, excluding the Desert Inn, and the Company's formal plan to sell the Desert Inn, the accompanying consolidated financial statements have been restated to reflect the results of operations and net assets of the gaming segment as a discontinued operation. This restatement includes the allocation of long-term debt of $2.1 billion and the related interest expense of $40 million for each of the quarters ending March 31, 1999 and 1998, to the discontinued segment. This allocation was based upon the ratio of net gaming segment assets to the Company's total capitalization. During the first quarter of 1999, the Company provided for estimated after-tax losses on the disposal of the discontinued operations of $180 million ($158 million pretax), which includes anticipated operating results of approximately $50 million prior to the disposal. Summary financial information of the discontinued gaming operations is as follows (in millions) (unaudited):
MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ BALANCE SHEET DATA Total assets................................................ $ 3,566 $ 3,751 Total liabilities........................................... (515) (544) Allocated debt of the Company............................... (2,140) (2,140) ------- ------- Net assets of the discontinued gaming operations............ $ 911 $ 1,067 ======= =======
THREE MONTHS ENDED MARCH 31, ------------------------- 1999 1998 --------- ------------ INCOME STATEMENT DATA Revenues.................................................... $ 378 $ 319 Operating income............................................ $ 44 $ 20 Interest expense, including allocated interest of $40 in each period............................................... $ (44) $ (40) Income tax benefit.......................................... $ -- $ 4 Minority in net loss........................................ $ -- $ 1 Loss from discontinued operations........................... $ -- $ (15)
ITT EDUCATIONAL SERVICES, INC. In February 1999, the Company completed the sale of its remaining interest in ITT Educational Services, Inc. ("Educational Services"), selling 8.0 million shares of common stock of Educational Services in an underwritten public offering at a price per share of $34.00. Concurrently, Educational Services repurchased the Company's remaining 1.5 million shares of Educational Services common stock at $32.73 per share. Starwood received aggregate net proceeds of approximately $310 million from these transactions, which were used to repay a portion of the Company's outstanding debt. As a result of this sale, the Company recognized a gain of $173 million, net of taxes of $99 million in the first quarter of 1999. Net assets of discontinued operations includes $36 million related to Educational Services as of December 31, 1998. 12 14 STARWOOD HOTELS & RESORTS WORLDWIDE, INC. AND STARWOOD HOTELS & RESORTS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) ITT WORLD DIRECTORIES. In February 1998, the Company disposed of ITT World Directories ("WD"), the subsidiary through which ITT conducted its telephone directories publishing business, to VNU International B.V., a leading international publishing and information company based in the Netherlands, for gross consideration of $2.1 billion. The Company recorded a gain of $977 million, net of income taxes of $514 million, on the disposition. NOTE 4. UNAUDITED PRO FORMA RESULTS The following unaudited pro forma information reflects the ITT Merger, the acquisition ("Westin Merger") of Westin Hotels & Resorts Worldwide, Inc. and certain of its affiliates ("Westin") and certain actual and planned asset dispositions as if they occurred on January 1, 1998 and does not purport to present what actual results would have been had such transactions, in fact, occurred on January 1, 1998, or to project results for any future period (in millions, except per Share data):
THREE MONTHS ENDED MARCH 31, ------------------- 1999 1998 -------- ------- Revenues.................................................... $ 851 $ 826 Income (loss) from continuing operations.................... $ (900) $ 31 Net income (loss)........................................... $ (907) $ 985 Basic income (loss) from continuing operations per Share.... $(4.73) $0.13 Diluted income (loss) from continuing operations per Share..................................................... $(4.73) $0.12
NOTE 5. DISPOSITIONS In January 1999, the Company sold the International Golf Club in Bolton, Massachusetts for approximately $25 million in net cash proceeds and recognized a pretax gain of $6 million in first quarter 1999. At March 31, 1999, net assets held for sale in the accompanying consolidated balance sheet represented the Company's investment in Madison Square Garden, L.P. ("MSG"). In April 1999, the Company disposed of its remaining interest in MSG for net cash proceeds of approximately $87 million and estimates a pretax gain of $42 million. NOTE 6. RESTRUCTURING AND OTHER SPECIAL CHARGES In connection with the ITT Merger in 1998, the Company recorded restructuring and other special charges totaling $204 million (pretax) for (i) ITT Merger-related costs, (ii) write-down of certain assets and (iii) adjustments to ITT 1997 other special charges. At March 31, 1999, the Company had remaining accruals related to these 1998 restructuring and other special charges of approximately $30 million primarily related to costs to be incurred to integrate the Company's frequent guest programs and close down duplicate facilities, which will be paid out over the remainder of the year. During 1997, ITT recorded pretax charges totaling $260 million to restructure and rationalize operations at its World Headquarters and the headquarters of its field operations. Additionally, ITT recorded restructuring and other special charges in connection with the ITT Merger totaling $600 million. At March 31, 1999, the Company had remaining accruals related to these restructuring and other special charges of approximately $156 million primarily related to remaining lease commitments which expire through 2006, the settlement of certain employee benefits scheduled to be completed in the first quarter of 2000 and the tax reimbursements to be paid to former employees. 13 15 STARWOOD HOTELS & RESORTS WORLDWIDE, INC. AND STARWOOD HOTELS & RESORTS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7. DEBT In February 1999, the Company completed a $542 million long-term mortgage financing ("Mortgage Loan"), secured by the assets of the special purpose subsidiaries, which assets consist primarily of a portfolio of 11 hotels. This obligation bears interest at a blended rate of 6.98%, matures February 2009 and includes various restrictive covenants including, but not limited to, various cash restrictions and capital expenditure requirements. The proceeds from this facility were used to pay down the asset sale bridge loan under the Company's senior credit facility which included an asset sale bridge loan, a five-year term loan and a revolving credit facility ("Senior Credit Facility"). On March 8, 1999, the Company entered into an $83 million long-term debt obligation secured by mortgages on two international hotels. This obligation bears interest at LIBOR plus 1.35%, matures on March 8, 2006 and is subject to various restrictive financial covenants including maintaining a minimum debt service coverage ratio. The proceeds from this financing were used to pay down certain intercompany loans due from the international hotels. NOTE 8. EQUITY PUT OPTIONS As a part of its Share repurchase program, the Company sold equity put options during 1998 for $1.8 million in premiums, which options entitled the holder, at the expiration date, to sell one million Shares to the Company at contractually specified prices. During the first quarter of 1999, the Company repurchased 500,000 Shares for $16 million under certain of the equity put option contracts. As of March 31, 1999, all of the remaining equity put option contracts had expired. NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS The Company enters into interest rate swap agreements to manage interest rate fluctuations on its variable rate debt. The Company currently has five outstanding interest rate swap agreements under which the Company pays a fixed rate and receives variable rates of interest. The aggregate notional amount of these interest rate swaps was approximately $1.032 billion and the estimated unrealized loss on these interest rate swaps was approximately $24 million at March 31, 1999. Four of these five interest rate swap agreements, representing $1.0 billion of the total notional amount, are required by the terms of the Company's existing credit facilities. The unrealized loss represents the amount the Company would pay to terminate the swap agreements based on current interest rates. The Company enters into forward foreign exchange contracts to hedge the foreign currency exposure associated with the Company's foreign currency denominated assets and liabilities. The Company currently has two forward foreign exchange contracts outstanding with a dollar equivalent of the contractual amounts of these hedges at March 31, 1999 of approximately $48 million. These contracts mature on June 11, 1999. NOTE 10. BUSINESS SEGMENT INFORMATION The Company operates in three business segments within the hotel industry as follows: Owned -- Represents a worldwide network of owned, leased or consolidated joint venture hotels and resorts operated primarily under the Company's proprietary brand names including Sheraton, Westin, St. Regis/The Luxury Collection, Four Points and "W." Management and Franchise -- Represents fees earned on hotels managed worldwide, usually under long-term contracts with the hotel owner and franchise fees received in connection with the franchise of the Company's Sheraton, Westin and Four Points brand names. Other -- Represents primarily the Company's interest in unconsolidated joint ventures. 14 16 STARWOOD HOTELS & RESORTS WORLDWIDE, INC. AND STARWOOD HOTELS & RESORTS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company evaluates the performance of its segments based primarily on operating profit (losses) before selling, general and administrative expense, interest expense, depreciation and amortization and income taxes. Selling, general and administrative expense, interest expense, depreciation and amortization and income taxes are not allocated to segments as management does not evaluate this information at a segment level. The following table presents results of operations from continuing operations by segment for the three months ended March 31 (in millions):
MANAGEMENT TOTAL SIGNIFICANT OWNED AND FRANCHISE OTHER SEGMENTS CORPORATE ITEMS TOTAL ----- ------------- ----- -------- --------- ----------- ----- 1999 Revenues........................ $770 $59 $22 $851 $ -- $ -- $851 Operating profit (loss)......... $225 $60 $27 $312 $(48) $ 3(a) $143 (5)(b) (119)(c) Interest expense................ $125 $ -- $125 Interest income................. $ -- $ 5(b) $ 5 Depreciation and amortization... $ -- $ 119(c) $119 Income tax expense.............. $ 6 $ 936(e) $942 Capital expenditures............ $ 74 $-- $-- $ 74 $ -- $ -- $ 74 1998 Revenues........................ $747 $52 $27 $826 $ -- $(261)(d) $565 Operating profit (loss)......... $211 $53 $34 $298 $(53) $ 1(a) $ 92 (7)(b) (261)(d) 176(d) 11(d) (116)(c) 43(d) Interest expense................ $ 85 $ (25)(c) $ 60 Interest income................. $ -- $ 7(d) $ 7 Depreciation and amortization... $ -- $ 116(c) $ 73 (43)(d) Income tax expense.............. $ 12 $ (2)(d) $ 10 Capital expenditures............ $ 73 $-- $-- $ 73 $ -- $ -- $ 73
The following represents the Company's total assets (in millions):
MANAGEMENT TOTAL SIGNIFICANT OWNED AND FRANCHISE OTHER SEGMENTS CORPORATE ITEMS TOTAL ------- ------------- ----- -------- --------- ----------- ------- MARCH 31, 1999 Total assets................. $11,714 $147 $365 $12,226 $-- $ 911(f) $13,137 DECEMBER 31, 1998 Total assets................. $11,826 $153 $335 $12,314 $-- $1,103(f) $13,417
- --------------- (a) Represents minority interests in consolidated joint venture results which are not included by management in evaluating the operating profit. (b) Represents interest income earned by the Company, primarily from mortgage notes receivable secured by hotel properties, which management includes in other hotel operations in evaluating this segment. (c) Represents depreciation and amortization expense, which management does not evaluate in segment operating profit. (d) Represents the results of the Corporation and the Trust for the period of January 1, 1998 through the ITT Merger (February 23, 1998). These results are included by management in evaluating the results of the segments to provide for a meaningful comparison to 1999 results. (e) Represents the deferred tax charge recognized by the Company in connection with the Reorganization. (f) Represents the assets of the discontinued operations. 15 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FORWARD-LOOKING STATEMENTS 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 Reorganization; the Trust's continued ability to qualify for taxation as a REIT; completion of future acquisitions and dispositions, including the pending sale of the Company's gaming operations; the availability of capital for acquisitions and for renovations; execution of hotel 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; the cyclicality of the real estate business and the hotel 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 Company and the Trust. 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. RESULTS OF OPERATIONS To facilitate a meaningful comparison between periods, this Management's Discussion and Analysis focuses on the comparison of historical information for the three months ended March 31, 1999 with the Historical As Adjusted information for the three months ended March 31, 1999 and pro forma information for the periods covered, which management believes provides the most meaningful comparison among periods presented. The Historical As Adjusted information reflects the historical results of ITT, inclusive of Starwood and Westin, for the period from January 1, 1998 through March 31, 1998 as if the ITT Merger had taken place on January 1, 1998. The pro forma information reflects the ITT Merger and certain actual and planned asset dispositions as if they had occurred on January 1, 1998. Period-to-period comparisons of the Company's historical information are, in management's view, less relevant to an understanding of the Company due to the significance of the ITT Merger and the Westin Merger. 16 18 The following unaudited condensed consolidated pro forma statement of operations for the three months ended March 31, 1999 gives effect as of January 1, 1999 to certain actual and planned asset dispositions and certain cost savings relating to the ITT Merger. The pro forma information is based upon the historical financial information for the Company for the three months ended March 31, 1999 and the assumptions and adjustments set forth below. The pro forma information does not purport to present what actual results would have been had such transactions, in fact, occurred at January 1, 1999, or to project results for any future period. UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999
PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- --------- (IN MILLIONS, EXCEPT PER SHARE DATA) REVENUES Owned, leased and consolidated joint venture hotels......... $ 770 $ -- $ 770 Management and franchise fees............................... 59 -- 59 Unconsolidated joint ventures and other..................... 22 -- 22 ------ ------ ------ 851 -- 851 ------ ------ ------ COSTS AND EXPENSES Owned, leased and consolidated joint venture hotels......... 541 -- 541 Selling, general and administrative......................... 48 (7)(a) 41 Depreciation and amortization............................... 119 -- 119 ------ ------ ------ 708 (7) 701 ------ ------ ------ 143 7 150 Interest expense, net....................................... (120) 26(b) (85) 4(c) 5(d) Gain on sale of real estate and investments................. 8 -- 8 Miscellaneous expense....................................... (15) -- (15) ------ ------ ------ 16 42 58 Income tax expense.......................................... (942) (17) (959) Minority equity in net loss................................. 1 -- 1 ------ ------ ------ Income (loss) from continuing operations.................... $ (925) $ 25 $ (900) ====== ====== ====== Earnings per Share -- basic................................. $(4.86) $(4.73) ====== ====== Earnings per Share -- diluted............................... $(4.86) $(4.73) ====== ====== Weighted average number of Shares........................... 190 190 ====== ====== Weighted average number of Shares assuming dilution......... 190 190 ====== ======
- --------------- (a) Represents the estimated savings resulting from the combination of certain identified benefit plans as a result of the ITT Merger as if the new combined plans had been in place as of January 1, 1999. (b) Represents the reduction of interest expense assuming the paydown of the Company's senior secured notes facility ("Senior Secured Notes Facility") with the estimated $3.2 billion of proceeds from the pending sale of the Company's gaming operations (including Desert Inn), net of the interest allocated to discontinued operations in the historical results (see Note 3 in the notes to the consolidated financial statements). (c) Represents the reduction of interest expense assuming the paydown of a portion of the Senior Credit Facility with the net proceeds of approximately $397 million from the disposition of MSG and Educational Services as if the dispositions had occurred on January 1, 1999. (d) Represents reduced deferred loan fee amortization on debt assumed to have been paid down as of January 1, 1999 with proceeds from actual and planned asset dispositions. 17 19 The following unaudited condensed consolidated pro forma statement of operations for the three months ended March 31, 1998 gives effect as of January 1, 1998 to the ITT Merger and certain actual and planned asset dispositions. The pro forma information is based upon the total of historical information for the Company for the three months ended March 31, 1998 combined with the historical results for the Corporation (including Westin) and the Trust prior to the ITT Merger on February 23, 1998 ("Historical As Adjusted") and other assumptions and adjustments set forth below. This statement 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. UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998
OTHER PRO FORMA HISTORICAL PRO FORMA HISTORICAL STARWOOD(a) AS ADJUSTED ADJUSTMENTS PRO FORMA ---------- ----------- ----------- ----------- --------- (IN MILLIONS, EXCEPT PER SHARE DATA) REVENUES Owned, leased and consolidated joint venture hotels............ $ 506 $241 $747 $ -- $ 747 Management and franchise fees..... 46 6 52 -- 52 Unconsolidated joint ventures and other........................... 13 14 27 -- 27 ----- ---- ---- ---- ----- 565 261 826 -- 826 ----- ---- ---- ---- ----- COSTS AND EXPENSES Owned, leased and consolidated joint venture hotels............ 358 176 534 -- 534 Selling, general and administrative.................. 42 11 53 (4)(b) 49 Depreciation and amortization..... 73 43 116 11(c) 127 ----- ---- ---- ---- ----- 473 230 703 7 710 ----- ---- ---- ---- ----- 92 31 123 (7) 116 Interest expense, net............. (53) (25) (78) (39)(d) (79) 15(e) 19(f) 3(g) 1(h) Gain on sale of real estate and investments..................... 12 -- 12 -- 12 ----- ---- ---- ---- ----- 51 6 57 (8) 49 Income tax expense................ (10) (2) (12) (8)(i) (20) Minority equity in net loss....... 1 1 2 -- 2 ----- ---- ---- ---- ----- Income (loss) from continuing operations...................... $ 42 $ 5 $ 47 $(16) $ 31 ===== ==== ==== ==== ===== Earnings per Share -- basic....... $0.19 $0.13 ===== ===== Earnings per Share -- diluted..... $0.19 $0.12 ===== ===== Weighted average number of Shares.......................... 188 199 ===== ===== Weighted average number of Shares assuming dilution............... 191 203 ===== =====
- --------------- (a) Represents the historical results of the Corporation and the Trust, inclusive of Westin, for the period of January 1, 1998, through the closing of the ITT Merger on February 23, 1998. 18 20 (b) Represents the effects of termination of certain executives under contractual severance agreements, net of additional costs for new executives under employment contracts, removal of duplicate third-party consulting fees and termination of certain advertising contracts and rental agreements, less related termination fees. (c) Represents the amortization expense related to the goodwill and intangible assets recorded as a result of the purchase consideration exceeding the fair market value of the combined net assets of Starwood and Westin as if the transactions had taken place on January 1, 1998. (d) Represents the interest expense on the additional debt incurred to finance the ITT Merger for the period January 1, 1998 through February 23, 1998, at the Company's average borrowing rate. (e) Represents the reduction of interest expense assuming the paydown of a portion of the Senior Credit Facility with the net proceeds of approximately $970 million from the following asset dispositions, as if the dispositions had occurred on January 1, 1998. The dispositions include ITT's interest in WBIS+ Channel 31 in New York City, MSG, Educational Services, and the sale of an aircraft. (f) Represents the reduction of interest expense assuming the paydown of the Senior Secured Notes Facility with the estimated $3.2 billion of proceeds from the pending sale of the Company's gaming operations (including Desert Inn), net of the interest allocated to discontinued operations in the historical results (see Note 3 in the notes to the consolidated financial statements). (g) Represents the reduction of interest expense for the paydown of term loans with the net proceeds of $239 million from the sale of 4.6 million Shares on February 24, 1998 as if such offering had taken place on January 1, 1998. (h) Represents reduced deferred loan fee amortization on debt assumed to have been paid down as of January 1, 1998 with proceeds from the actual and planned asset dispositions described in (e) and (f) above. (i) Represents the adjustment needed to reflect an effective tax rate of 40% on historical net income and the pro forma adjustments, assuming the Reorganization had occurred effective January 1, 1998. HISTORICAL THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH HISTORICAL AS ADJUSTED THREE MONTHS ENDED MARCH 31, 1998 CONTINUING OPERATIONS Revenues. Revenues increased 3% to $851 million for the three months ended March 31, 1999 when compared to the corresponding period in 1998. The increase was primarily due to the 3% increase in revenues for the Company's owned, leased and consolidated joint venture hotels to $770 million for the three months ended March 31, 1999 when compared to $747 million in the corresponding period of 1998. The increase resulted primarily from the increase in revenues at the Company's 172 owned, leased and consolidated joint venture hotels (excluding minority interest in consolidated joint ventures) held in both periods ("172 Comparable Hotels"). The 5% increase in revenues at the 172 Comparable Hotels to $746 million for the three months ended March 31, 1999 when compared to $710 million in the same period in 1998 was offset, in part, by a $20 million decrease in revenues from eight hotels sold in May 1998. The increase in revenues at the 172 Comparable Hotels resulted from an increase in revenue per available room ("REVPAR") at these hotels of 4.4% to $96.45 for the three months ended March 31, 1999 when compared to the same period of 1998; an increase in average daily rate ("ADR") of 4.0% to $145.58 for the three months ended March 31, 1999 when compared to the corresponding 1998 period; and a slight increase in occupancy rates to 66.3% for the three months ended March 31, 1999 when compared to 66.0% in the same period of 1998. REVPAR at the Company's international owned, leased and consolidated joint venture hotels increased 4.4% for the three months ended March 31, 1999 when compared to the same period of 1998. REVPAR at owned, leased and consolidated joint venture properties in North America increased 4.5% for the three months ended March 31, 1999 when compared to the same period of 1998. Management and franchise fees earned by Starwood increased 13% to $59 million for the three months ended March 31, 1999 when compared to the same period of 1998. The increase resulted primarily from the addition of hotels to the Company's management and franchise system and the stronger performance at the Company's existing managed and franchised hotels. The Company added 22 hotels to the management and franchise system during the first quarter of 1999, offset by two hotels deleted from the system during the same quarter. 19 21 Revenues from unconsolidated joint ventures and other income decreased to $22 million for the three months ended March 31, 1999 from $27 million in the same period in 1998. The decrease resulted primarily from a decrease in earnings from unconsolidated joint ventures. Costs and Expenses. Costs and expenses for the Company's owned, leased and consolidated joint venture hotels increased 1% for the three months ended March 31, 1999 to $541 million when compared to the corresponding period of 1998. The increase in costs and expenses is due primarily to the reopening of hotels in late 1998 that were closed for renovations in early 1998. Selling, general and administrative expenses decreased to $48 million in the three months ended March 31, 1999 from $53 million in the corresponding period of 1998. The decrease is primarily due to savings associated with the ITT Merger and Westin Merger that resulted in the ITT World Headquarters closure in New York and a significant downsizing at the Westin office in Seattle, Washington and the Sheraton office in Boston, Massachusetts, offset by the increase in corporate employees at the Company's headquarters in White Plains, New York. EBITDA.(1) The Company's EBITDA from continuing operations increased 8% to $266 million in the three months ended March 31, 1999 when compared to $246 million in the corresponding period of 1998. The increase was primarily due to the improved results at the Company's 172 Comparable Hotels which increased 12% over the prior year. The increase in EBITDA at the 172 Comparable Hotels to $226 million in the three months ended March 31, 1999 when compared to $201 million in the corresponding period of 1998 was offset, in part, by the $9 million decrease in EBITDA as a result of the sale of eight hotels, in May 1998. The EBITDA improvement at the 172 Comparable Hotels was due primarily to the increase in ADR discussed above. EBITDA margins for these hotels increased 1.9 percentage points to 30.3% in the three months ended March 31, 1999 when compared to 1998. Starwood believes that the improvement in the EBITDA margin is attributable in part to the continued implementation of cost containment steps and the Company's ability to realize purchasing synergies as a result of the ITT Merger and the Westin Merger. Depreciation and Amortization. Depreciation and amortization expense increased to $119 million in the three months ended March 31, 1999 compared to $116 million in 1998. The increase was due to the commencement of depreciation on certain newly completed hotel projects. The increase was also attributed to the adoption by the Company in July 1998 of the estimated useful lives used by ITT for depreciation prior to the ITT Merger, offset by a reduction in depreciation expense as a result of the sale of eight hotels in May 1998. Net Interest Expense. Interest expense for the three months ended March 31, 1999, which is net of interest income of $5 million and $7 million and discontinued operations allocations of $40 million and $54 million in 1999 and 1998, respectively, increased to $120 million as compared to $78 million in 1998. The increase relates primarily to the debt incurred to finance the ITT Merger and Westin Merger and the repurchase of $800 million in Shares in 1998, offset by the reduction in debt from approximately $1.1 billion of proceeds from dispositions since the end of the first quarter of 1998. DISCONTINUED OPERATIONS Net loss from discontinued operations was $0.3 million in the 1999 quarter compared with a loss of $23 million in the 1998 quarter. These results include the allocation of pretax Corporate interest expense of $40 - --------------- (1) EBITDA is defined as income before miscellaneous expense, interest expense, income tax expense and depreciation and amortization expense. Non-recurring items and gains and losses from sales of real estate and investments are also excluded from EBITDA as these items do not impact operating results on a recurring basis. Management considers EBITDA to be one measure of the cash flows from operations of the Company before debt service that provides a relevant basis for comparison, and EBITDA is presented to assist investors in analyzing the performance of the Company. This information should not be considered as an alternative to any measure of performance as promulgated under generally accepted accounting principles, nor should it be considered as an indicator of the overall financial performance of the Company. The Company's calculation of EBITDA may be different from the calculation used by other companies and, therefore, comparability may be limited. 20 22 million and $54 million in the first quarter of 1999 and 1998, respectively. Results for the Company's gaming segment are included in discontinued operations in both periods. The first quarter 1998 results also include operating results of WD and Educational Services. Net gain (loss) on the disposition of discontinued operations in the first quarter of 1999 includes a net after-tax loss of $7 million from the disposition of discontinued operations compared with an after-tax gain of $977 million in the first quarter of prior year. The 1999 quarter includes, on an after-tax basis, a $173 million gain on the sale of the Company's remaining interest in Educational Services offset by an estimated $180 million loss on the pending disposition of the Company's gaming operations. Revenues from discontinued gaming operations increased 19% to $378 million for the three months ended March 31, 1999 when compared to the corresponding period of 1998. Costs and expenses from discontinued gaming operations for the three months ended March 31, 1999 increased 12% to $334 million when compared to the same period in 1998. The increase in revenue and costs and expenses resulted primarily from the opening of Caesars Indiana in November 1998. EBITDA from discontinued gaming operations for the three months ended March 31, 1999 was $88 million compared to $63 million in 1998. The increase in gaming EBITDA resulted from positive results at Caesars Palace in Las Vegas and the opening of Caesars Indiana. PRO FORMA THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH PRO FORMA THREE MONTHS ENDED MARCH 31, 1998 The above discussion and analysis regarding historical versus Historical As Adjusted results is applicable to the operating results of the Company on a pro forma basis except for selling, general and administrative expenses and interest expense. Therefore, the following discussion and analysis of pro forma results is provided to facilitate a meaningful comparison of these expenses between periods. CONTINUING OPERATIONS Costs and Expenses. Selling, general and administrative expenses decreased to $41 million in the three months ended March 31, 1999 from $49 million in the corresponding period of 1998. The decrease is primarily due to savings associated with the ITT Merger and Westin Merger that resulted in the ITT World Headquarters closure in New York and a significant downsizing at the Westin office in Seattle, Washington and the Sheraton office in Boston, Massachusetts, offset by the inclusion in selling, general and administrative expenses, in the first quarter of 1998, of a foreign exchange gain of $7 million. Net Interest Expense. Interest expense for the three months ended March 31, 1999, which is net of interest income of $5 million and $7 million and discontinued operations allocations of $40 million and $54 million in 1999 and 1998, respectively, increased to $85 million as compared to $79 million in 1998. The increase relates primarily to the debt incurred to finance the repurchase of approximately $800 million of the Company's Shares primarily in the second and third quarters of 1998 offset by the reduction in debt from the sale of eight hotels in May 1998 for $245 million in cash. SEASONALITY AND DIVERSIFICATION The hotel industry is seasonal in nature; however, the periods during which the Company's properties experience higher hotel revenue activities vary from property to property and depend principally upon location. The Company's revenues historically have been lower in the first quarter than in the second, third or fourth quarters. SAME-STORE OWNED HOTEL RESULTS The following table summarizes average occupancy, ADR and REVPAR on a year-to-year basis for the Company's same-store owned, leased and consolidated joint venture hotel properties for the three months ended March 31, 1999 and 1998. The results for the first quarter of 1999 and 1998 represent results for the 149 same-store owned, leased and consolidated joint venture hotels (excluding 3 seasonal hotels closed during 21 23 the quarter, 10 hotels under significant renovation during the first quarter of 1999 and 10 hotels under renovation during the first quarter of 1998). OWNED, LEASED AND CONSOLIDATED JOINT VENTURE HOTELS
THREE MONTHS ENDED MARCH 31, ------------------ PERCENTAGE 1999 1998 VARIANCE ------- ------- ---------- WORLDWIDE Number of hotels............................................ 149 149 Number of rooms............................................. 48,069 48,069 REVPAR...................................................... $ 99.30 $ 95.40 4.1% ADR......................................................... $145.57 $140.74 3.4% Occupancy................................................... 68.2% 67.8% 0.4% NORTH AMERICA Number of hotels............................................ 104 104 Number of rooms............................................. 34,677 34,677 REVPAR...................................................... $ 99.38 $ 95.24 4.3% ADR......................................................... $144.82 $140.67 3.0% Occupancy................................................... 68.6% 67.7% 0.9% INTERNATIONAL Number of hotels............................................ 45 45 Number of rooms............................................. 13,392 13,392 REVPAR...................................................... $ 99.08 $ 95.83 3.4% ADR......................................................... $147.67 $140.94 4.8% Occupancy................................................... 67.1% 68.0% (0.9)%
22 24 LIQUIDITY AND CAPITAL RESOURCES CASH FLOW PROVIDED BY OPERATING ACTIVITIES Cash flow from operating activities is the principal source of cash used to fund the Company's operating expenses, interest expense, recurring capital expenditures and distribution payments by the Trust. The Company anticipates that cash flow provided by operating activities will be sufficient to service short and long-term indebtedness, fund maintenance requirements and capital expenditures and meet operating cash requirements, including all distributions to shareholders. CASH FLOW FROM INVESTING AND FINANCING ACTIVITIES In addition to cash flow from operating activities, the Company intends to finance the acquisition of additional hotel properties, hotel renovations and capital improvements and provide for general corporate purposes through its credit facilities described below, through dispositions of certain non-core assets and, when market conditions warrant, through the issuance of additional equity or debt securities. During 1998, the Company completed over $2.9 billion in non-core asset divestitures. As of January 1, 1999 through the date of this filing, Starwood has completed over $465 million of non-core asset divestitures. Management expects to complete the sale of its gaming operations, including the Desert Inn, for aggregate proceeds of approximately $3.3 billion by year-end 1999. The proceeds from the actual divestitures have been used primarily to retire debt, and the Company plans to use the proceeds generated from future divestitures to pay down debt and for general corporate purposes. As a result of the Reorganization, Starwood will pay significantly more in federal income taxes, and will have the ability to retain significantly more earnings than was previously the case. Starwood anticipates that its enhanced ability to retain earnings will allow it to utilize cash flow from operating activities to fund maintenance, capital expenditures and acquisitions. DISTRIBUTIONS. In connection with the Reorganization, the Company reduced its quarterly dividend to be paid by the Trust to $0.15 per Share. During the first quarter of 1999, the Trust paid a distribution of $0.15 per Share for the fourth quarter of 1998. During the first quarter of 1998, the Trust paid a distribution of $0.48 per Share for the fourth quarter of 1997. 23 25 LOANS AND CREDIT FACILITIES. On February 23, 1998, Starwood obtained two credit facilities ($5.6 billion in total) with Lehman Brothers, Bankers Trust Company and The Chase Manhattan Bank to fund the cash portion of the ITT Merger consideration, to refinance a portion of the Company's existing indebtedness and to provide funds for general corporate purposes. These facilities are comprised of the Senior Credit Facility and the Senior Secured Notes Facility. Following is a summary of the Company's debt portfolio as of March 31, 1999:
AMOUNT AMOUNT OF OUTSTANDING AT INTEREST RATE AT AVERAGE FACILITY MARCH 31, 1999 INTEREST TERMS MARCH 31, 1999 MATURITY --------- -------------- -------------- ---------------- --------- (DOLLARS IN MILLIONS) FLOATING RATE DEBT Senior Credit Facility: Five-Year Term Loan............. $1,000 $ 1,000 LIBOR+1.25% 6.16% 3.9 years Revolving Credit Facility....... 1,100 455 LIBOR+1.25% 6.16% 3.9 years Senior Secured Notes Facility: Tranche One Loans............... 2,500 2,500 LIBOR+3.75% 8.66% 3.9 years Tranche Two Loans............... 1,000 1,000 LIBOR+2.75% 7.66% 3.9 years Mortgages and other............... 562 Various 6.24% 4.6 years Starwood interest rate swaps...... (1,032) 6.16% -- ------- Total/average..................... $ 4,485 7.89% 4.0 years ======= ==== =========
AMOUNT AMOUNT OF OUTSTANDING AT INTEREST RATE AT AVERAGE FACILITY MARCH 31, 1999 INTEREST TERMS MARCH 31, 1999 MATURITY --------- -------------- -------------- ---------------- ---------- (DOLLARS IN MILLIONS) FIXED RATE DEBT ITT public debt.................. $ 1,995 6.79% 8.4 years Caesars public debt.............. 150 8.88% 3.4 years Mortgages and other.............. 843 7.44% 12.4 years Starwood interest rate swaps..... 1,032 7.34% -- ------- ---- ---------- Total/average.................... $ 4,020 7.14% 9.2 years ======= ==== ========== TOTAL DEBT Total debt and average terms..... $ 8,505 7.54% 5.8 years ======= ==== ========== Less: debt allocated to discontinued gaming operations..................... $(2,322) ======= Total debt directly attributable to continuing operations....... $ 6,183 =======
A portion of the Senior Credit Facility that was scheduled to mature on February 23, 1999, in the aggregate amount of $542 million, was refinanced primarily with the proceeds from the Mortgage Loan transaction that was completed in February 1999. The Mortgage Loan matures on February 1, 2009, is secured by 11 domestic owned hotels and bears interest at a blended rate of 6.98%. On March 8, 1999, the Company entered into an $83 million long-term debt obligation secured by mortgages on two international hotels. This obligation bears interest at LIBOR plus 1.35%, matures on March 8, 2006 and is subject to various restrictive financial covenants including maintaining a minimum debt service coverage ratio. The proceeds from this financing were used to pay down certain intercompany loans due from the international hotels. Based upon the current level of operations, the proceeds from recent dispositions and the expected disposition of the gaming operations, together with available borrowings under the Revolving Credit Facility, 24 26 management believes that the Company's cash flow from operations will be adequate to meet the Company's anticipated requirements for working capital, capital expenditures, marketing and advertising expenditures, program and other discretionary investments, interest payments and scheduled principal payments for the foreseeable future, including at least the next three years. There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels or that currently anticipated improvements will be achieved. If Starwood is unable to generate sufficient cash flow from operations in the future to service the Company's debt, the Company may be required to sell assets, reduce capital expenditures, refinance all or a portion of its existing debt or obtain additional financing. The Company's ability to make scheduled principal payments, to pay interest on or to refinance the Company's indebtedness depends on its future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the hotel industry and to general economic, political, financial, competitive, legislative and regulatory factors beyond the Company's control. There can be no assurance that sufficient funds will be available to enable Starwood to service its indebtedness or to make necessary capital expenditures, marketing and advertising expenditures and program and other discretionary investments. STOCK SALES AND REPURCHASES On February 23, 1998, Starwood completed the ITT Merger. Each outstanding share of common stock of ITT ("ITT Common Stock"), other than those that were converted into cash pursuant to a cash election by the holder (and other than shares owned directly or indirectly by ITT or Starwood, which shares were canceled), was converted into 1.543 Shares. Pursuant to cash election procedures, approximately 35 million (pre-reverse acquisition) shares of ITT Common Stock, representing approximately 30% of the outstanding shares prior to the ITT Merger, were converted into $85 in cash per share. In addition, each share of ITT Common Stock was converted into additional cash consideration in the amount of $0.37493151. As a part of its Share repurchase program, the Company sold equity put options during 1998 for $1.8 million in premiums, which options entitled the holder, at the expiration date, to sell one million Shares to the Company at contractually specified prices. During the first quarter of 1999, the Company repurchased 500,000 Shares for $16 million under certain of the equity put option contracts. As of March 31, 1999, all of the remaining equity put option contracts had expired. OTHER MATTERS YEAR 2000 Many computer systems were originally designed to recognize calendar years by the last two digits in the date code field. Beginning with dates in the year 2000, these date code fields need to accept four-digit entries to distinguish twenty-first century dates from twentieth century dates ("Year 2000 Compliant"). As a result, the computerized systems, which include information technology and non-information technology systems, and applications used by the Company 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. Starwood is addressing the Year 2000 Compliance issue by separately focusing on the Company's central facilities, which include all of its non-operating facilities, and on the Company's hotel properties. Starwood has identified the critical central facility business applications that may be affected by the Year 2000, such 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 Company's core business applications passed the final testing, which was performed by internal personnel and independent third parties in the second quarter of 1998. This testing 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. An additional due diligence step will be performed during 25 27 the second quarter of 1999 which includes retesting the critical system processes to validate the previous Year 2000 Compliance status. Starwood is in the process of communicating with others with whom it does significant business to determine their Year 2000 Compliance. During 1998, Starwood and an independent third-party reservation information service provider, with whom the Company has a material relationship, began testing to ensure the compatibility of the Company's reservation system with the service provider's reservation services. Starwood and this service provider expect to complete their compatibility validation testing by the third quarter of 1999. Starwood is also 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. Starwood has completed the initial assessment of the applications and hardware at the Company's owned and managed hotel properties. In the third quarter of 1998, validation tools and resources were deployed to the hotel properties that did not have an existing program in place. These tools consisted of asset management tools for analysis of all applications and data checking tools for patch application purposes and testing Year 2000 readiness of the equipment. Any equipment failing the testing was automatically remediated. The domestic Year 2000 team, which is scheduled to visit each domestic hotel property, is comprised of independent consultants and five individuals from Starwood 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, Starwood expects to address remediation efforts by the third quarter of 1999. YEAR 2000 PROJECT COSTS. Starwood estimates that total costs for the Year 2000 Compliance review, evaluation, assessment and remediation efforts for the central facilities and owned hotel properties should not exceed $30 million, although there can be no assurance that actual costs will not exceed this amount. Of this amount, approximately $5 million had been expended as of March 31, 1999. 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, Starwood believes that it has addressed all significant risks related to the Company's 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. Starwood 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 planning scenarios, 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. Starwood is in the process of developing its contingency plan for the central facilities and the hotel properties to provide for the most reasonably likely worst case scenarios regarding Year 2000 Compliance. This contingency planning is expected to be completed by the third quarter of 1999. EUROPEAN UNION CURRENCY CONVERSIONS On January 1, 1999, 11 of the 15 member countries of the European Union (the "Participating Countries") established fixed conversion rates between their existing sovereign currencies and the Euro. Following the introduction of the Euro, the legacy currencies of the Participating Countries will remain legal 26 28 tender during a transition period ending on January 1, 2002. During the transition period, both the legacy currency and the Euro will be legal tender in the respective Participating Countries. During the transition period, currency conversions will be computed by a triangulation with reference to conversion rates between the respective currencies and the Euro. The Company currently operates in 10 of the 11 Participating Countries. The effect on the Company of the adoption of the Euro by the Participating Countries in which it operates is currently uncertain. However, it is possible that the Euro adoption will result in increased competition within the European market. In addition, a number of the Company's information systems are not currently Euro compliant. The Company is currently evaluating and updating its information systems to make them Euro compliant; however, there is no assurance that the Company or third-party vendors of applications used by the Company will successfully bring all of their systems into compliance. Failure of the Company or such third parties to do so could result in disruptions in the processing of transactions in Euros or computed by reference to the Euro. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. There were no material changes to the information provided in Item 7A in the Company's Joint Annual Report on Form 10-K regarding the Company's market risk. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is involved in various claims and lawsuits arising in the ordinary course of business, none of which, in the opinion of management, is expected to have a material adverse effect on the Company's consolidated financial position or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. As a part of its Share repurchase program, the Company sold equity put options during 1998 for $1.8 million in premiums, which options entitled the holder, at the expiration date, to sell one million Shares to the Company at contractually specified prices. During the first quarter of 1999, the Company repurchased 500,000 Shares for $16 million under certain of the equity put option contracts. As of March 31, 1999, all of the remaining equity put option contracts had expired. The offer and sale of these options was exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) thereof. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. THE CORPORATION On January 6, 1999, the Corporation held its 1998 annual meeting of stockholders (the "Corporation Meeting"). At the Corporation Meeting, the stockholders of the Corporation (i) approved the proposed Reorganization of Starwood pursuant to the Agreement and Plan of Restructuring, dated as of September 16, 1998 and amended as of November 30, 1998 (the "Reorganization Agreement"), among the Corporation, ST Acquisition Trust and the Trust; (ii) elected to the Board of Directors Bruce M. Ford, Graeme W. Henderson, Earle F. Jones and Daniel W. Yih, each to serve for a three-year term; and (iii) approved the amendment and restatement of the Starwood Hotels & Resorts Worldwide, Inc. 1995 Long-Term Incentive Plan. Ms. Brenda C. Barnes and Messrs. Juergen Bartels, Jonathan D. Eilian, Michael A. Leven, Richard D. Nanula, Daniel W. Stern, Barry S. Sternlicht and Barry S. Volpert continued to serve as Directors following the Corporation Meeting. The following table 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 the number 27 29 of votes withheld including, with respect to the Reorganization Proposal, broker non-votes) with respect to such matter:
VOTES FOR VOTES AGAINST ABSTENTIONS VOTES WITHHELD ----------- ------------- ----------- -------------- Reorganization Proposal................ 122,793,657 2,197,315 1,458,303 18,842,090 Election of Directors: Bruce M. Ford........................ 141,532,602 3,758,763 Graeme W. Henderson.................. 143,361,023 1,930,342 Earle F. Jones....................... 143,355,769 1,935,596 Daniel W. Yih........................ 143,353,789 1,937,576 Amendment and Restatement of the Starwood Hotels & Resorts Worldwide, Inc. 1995 Long-Term Incentive Plan... 135,739,957 8,179,955 1,371,453
THE TRUST On January 6, 1999, the Trust held its 1998 annual meeting of shareholders (the "Trust Meeting"). At the Trust Meeting, the shareholders of the Trust (i) approved the proposed Reorganization of Starwood pursuant to the Reorganization Agreement; (ii) elected to the Board of Trustees Madison F. Grose, George J. Mitchell and Stuart M. Rothenberg, each to serve for a three-year term; and (iii) approved the amendment and restatement of the Starwood Hotels & Resorts 1995 Long-Term Incentive Plan. Messrs. Jean-Marc Chapus, Bruce W. Duncan, Roger S. Pratt, Stephen R. Quazzo, Barry S. Sternlicht and Raymond S. Troubh continued to serve as Trustees following the Trust Meeting. The following table 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 the number of votes withheld including, with respect to the Reorganization Proposal, broker non-votes) with respect to such matter:
VOTES FOR VOTES AGAINST ABSTENTIONS VOTES WITHHELD ----------- ------------- ----------- -------------- Reorganization Proposal................ 131,088,497 2,145,203 1,428,932 18,842,091 Election of Trustees: Madison F. Grose..................... 149,748,375 3,756,348 George J. Mitchell................... 151,643,795 1,860,928 Stuart M. Rothenberg................. 151,657,789 1,846,934 Amendment and Restatement of the Starwood Hotels & Resorts 1995 Long- Term Incentive Plan.................. 143,004,896 8,964,757 1,535,070
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Amended and Restated Declaration of Trust of the Trust, amended and restated as of January 6, 1999, as amended through April 16, 1999.(1) 3.2 Charter of the Corporation, amended and restated as of February 1, 1995, as amended through March 26, 1999 (incorporated by reference to Exhibit 3.2 to the Corporation's and the Trust's Joint Annual Report on Form 10-K for the year ended December 31, 1998, as amended by the Form 10-K/A filed May 17, 1999 (as so amended, the "1998 Form 10-K")). 3.3 Bylaws of the Trust, as amended through April 16, 1999.(1) 3.4 Bylaws of the Corporation, as amended through April 15, 1999.(1)
28 30
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4.1 Amended and Restated Intercompany Agreement, dated as of January 6, 1999, between the Corporation and the Trust (incorporated by reference to Exhibit 3 to the Trust's Registration Statement on Form 8-A filed on December 21, 1998, except that on January 6, 1999, the Intercompany Agreement was executed and dated as of January 6, 1999). 4.2 Rights Agreement, dated as of March 15, 1999, between the Corporation and Chase Mellon Shareholder Services, L.L.C., as Rights Agent (incorporated by reference to Exhibit 4 to the Corporation's and the Trust's Joint Current Report on Form 8-K dated March 15, 1999). 10.1 Third Amended and Restated Limited Partnership Agreement for Realty Partnership, dated January 6, 1999, among the Trust and the limited partners of Realty Partnership (incorporated by reference to Exhibit 10.1 to the 1998 Form 10-K). 10.2 Third Amended and Restated Limited Partnership Agreement for Operating Partnership, dated January 6, 1999, among the Corporation and the limited partners of Operating Partnership (incorporated by reference to Exhibit 10.2 to the 1998 Form 10-K). 10.3 Seventh Amendment to the Credit Agreement, dated as of March 5, 1999, among the Trust, Realty Partnership, the Corporation, ITT, the lenders party to the Credit Agreement, Bankers Trust Company and The Chase Manhattan Bank, as Administrative Agents, and Lehman Commercial Paper Inc. and Bank of Montreal, as Syndication Agents (incorporated by reference to Exhibit 10.51 to the 1998 Form 10-K). 10.4 Loan Agreement, dated as of January 27, 1999, among the Borrowers named therein, as Borrowers, Starwood Operator I LLC, as Operator, and Lehman Brothers Holdings Inc. d/b/a/ Lehman Capital, a division of Lehman Brothers Holdings Inc. (incorporated by reference to Exhibit 10.58 to the 1998 Form 10-K). 10.5 Stock Purchase Agreement, dated as of April 27, 1999, among the Corporation, ITT Sheraton Corporation, Starwood Canada Corp., Caesars World, Inc., Sheraton Desert Inn Corporation, Sheraton Tunica Corporation and Park Place Entertainment Corporation.(1) 10.6 Separation Agreement, dated as of April 30, 1999, between the Corporation and Richard D. Nanula.(1) 27.1 Financial Data Schedule for the Corporation.(1) 27.2 Financial Data Schedule for the Trust.(1)
- --------------- (1) Filed herewith. (b) REPORTS ON FORM 8-K During the first quarter of 1999, Starwood filed the following Current Reports on Form 8-K: (i) Joint Current Report on Form 8-K dated December 31, 1998, reporting under Item 5 the execution by the Corporation of the First Indenture Supplement to the Amended and Restated Indenture dated as of December 19, 1995 (the "Indenture") between ITT, as issuer, and The First National Bank of Chicago, as trustee and guarantor of the Securities (as defined in the Indenture), issued pursuant to the Indenture with an aggregate outstanding principal amount of $2 billion. (ii) Joint Current Report on Form 8-K dated January 6, 1999, reporting under Items 1 and 2 the completion of the reorganization of Starwood in accordance with the Reorganization Agreement. (iii) Joint Current Report on Form 8-K dated March 15, 1999, reporting under Item 5 the adoption by the Corporation of the Rights Agreement and related amendments to its Bylaws. 29 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STARWOOD HOTELS & RESORTS STARWOOD HOTELS & RESORTS WORLDWIDE, INC. By: By: ------------------------------------------------- - ----------------------------------------------------- Barry S. Sternlicht Barry S. Sternlicht Chairman and Chief Executive Officer Chairman and Chief Executive Officer By: By: ------------------------------------------------- - ----------------------------------------------------- Ronald C. Brown Ronald C. Brown Vice President and Chief Financial Executive Vice President and and Accounting Officer Chief Financial Officer Date: ---------------------
30 32 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE - ------- ----------- ---- 3.1 Amended and Restated Declaration of Trust of the Trust, amended and restated as of January 6, 1999, as amended through April 16, 1999.(1) 3.2 Charter of the Corporation, amended and restated as of February 1, 1995, as amended through March 26, 1999 (incorporated by reference to Exhibit 3.2 to the Corporation's and the Trust's Joint Annual Report on Form 10-K for the year ended December 31, 1998, as amended by the Form 10-K/A filed May 17, 1999 (as so amended, the "1998 Form 10-K")). 3.3 Bylaws of the Trust, as amended through April 16, 1999.(1) 3.4 Bylaws of the Corporation, as amended through April 15, 1999.(1) 4.1 Amended and Restated Intercompany Agreement, dated as of January 6, 1999, between the Corporation and the Trust (incorporated by reference to Exhibit 3 to the Trust's Registration Statement on Form 8-A filed on December 21, 1998, except that on January 6, 1999, the Intercompany Agreement was executed and dated as of January 6, 1999). 4.2 Rights Agreement, dated as of March 15, 1999, between the Corporation and Chase Mellon Shareholder Services, L.L.C., as Rights Agent (incorporated by reference to Exhibit 4 to the Corporation's and the Trust's Joint Current Report on Form 8-K dated March 15, 1999). 10.1 Third Amended and Restated Limited Partnership Agreement for Realty Partnership, dated January 6, 1999, among the Trust and the limited partners of Realty Partnership (incorporated by reference to Exhibit 10.1 to the 1998 Form 10-K). 10.2 Third Amended and Restated Limited Partnership Agreement for Operating Partnership, dated January 6, 1999, among the Corporation and the limited partners of Operating Partnership (incorporated by reference to Exhibit 10.2 to the 1998 Form 10-K). 10.3 Seventh Amendment to the Credit Agreement, dated as of March 5, 1999, among the Trust, Realty Partnership, the Corporation, ITT, the lenders party to the Credit Agreement, Bankers Trust Company and The Chase Manhattan Bank, as Administrative Agents, and Lehman Commercial Paper Inc. and Bank of Montreal, as Syndication Agents (incorporated by reference to Exhibit 10.51 to the 1998 Form 10-K). 10.4 Loan Agreement, dated as of January 27, 1999, among the Borrowers named therein, as Borrowers, Starwood Operator I LLC, as Operator, and Lehman Brothers Holdings Inc. d/b/a/ Lehman Capital, a division of Lehman Brothers Holdings Inc. (incorporated by reference to Exhibit 10.58 to the 1998 Form 10-K). 10.5 Stock Purchase Agreement, dated as of April 27, 1999, among the Corporation, ITT Sheraton Corporation, Starwood Canada Corp., Caesars World, Inc., Sheraton Desert Inn Corporation, Sheraton Tunica Corporation and Park Place Entertainment Corporation.(1) 10.6 Separation Agreement, dated as of April 30, 1999, between the Corporation and Richard D. Nanula.(1) 27.1 Financial Data Schedule for the Corporation.(1) 27.2 Financial Data Schedule for the Trust.(1)
- --------------- (1) Filed herewith. EX-3.1 2 EX-3.1 1 EXHIBIT 3.1 AMENDED AND RESTATED DECLARATION OF TRUST OF STARWOOD HOTELS & RESORTS AS AMENDED THROUGH APRIL 16, 1999 2 AMENDED AND RESTATED DECLARATION OF TRUST OF STARWOOD HOTELS & RESORTS AS AMENDED THROUGH APRIL 16, 1999 TABLE OF CONTENTS
PAGE ARTICLE I. The Trust; Definitions..........................................................................1 1.1 Name............................................................................................1 1.2 Place of Business...............................................................................1 1.3 Nature of Trust.................................................................................1 1.4 Definitions.....................................................................................1 ARTICLE II. Trustees........................................................................................6 2.1 Number, Term of Office, Qualifications of Trustees..............................................6 2.2 Compensation and Other Remuneration.............................................................7 2.3 Resignation, Removal and Death of Trustees......................................................7 2.4 Vacancies.......................................................................................7 2.5 Successor and Additional Trustees...............................................................8 2.6 Actions by Trustees.............................................................................8 2.7 Executive Committee.............................................................................8 2.8 Names and Addresses of Trustees.................................................................8 2.9 Non-Affiliated Trustees.........................................................................8 ARTICLE III. Trustees' Powers................................................................................9 3.1 Power and Authority of Trustees.................................................................9 3.2 Specific Powers and Authorities.................................................................9 3.3 Bylaws.........................................................................................13 3.4 Additional Powers..............................................................................13 3.5 Incorporation..................................................................................13 ARTICLE IV. Advisor; Limitation on Operating Expenses......................................................14 4.1 Employment of Advisor..........................................................................14 4.2 Term...........................................................................................14 4.3 Restrictions on Advisor........................................................................14 4.4 Limitation on Operating Expenses...............................................................15 4.5 Sale of Shares of the Advisor..................................................................17 ARTICLE V. Investment Policy..............................................................................18 5.1 General Statement of Policy....................................................................18 5.2 Obligor's Default..............................................................................18 5.3 Changes Investment Policies and Restrictions...................................................18
- i - 3 ARTICLE VI. The Shares and Shareholders....................................................................19 6.1 Shares.........................................................................................19 6.2 Legal Ownership of Trust Estate................................................................20 6.3 Shares Deemed Personal Property................................................................20 6.4 Share Record: Issuance and Transferability Shares..............................................20 6.5 Dividends or Distributions to Shareholders.....................................................21 6.6 Transfer Agent, Dividend Distributing Agent and Registrar......................................21 6.7 Shareholders' Meeting..........................................................................21 6.8 Proxies........................................................................................22 6.9 Reports to Shareholders........................................................................22 6.10 Fixing Record Date.............................................................................22 6.11 Notice to Shareholders.........................................................................22 6.12 Restrictions on Transfer.......................................................................23 6.13 Excess Shares..................................................................................28 6.14 Intercompany Agreement.........................................................................31 6.15 Class A Exchangeable Preferred Shares..........................................................31 6.16 Class B Exchangeable Preferred Shares..........................................................50 6.17 Redemption.....................................................................................75 6.18 Class A Shares.................................................................................75 6.19 Class B Shares.................................................................................78 ARTICLE VII. Liability of Trustees, Shareholders and Officers, and Other Matters............................86 7.1 Exculpation of Trustee and Officers............................................................86 7.2 Limitation of Liability of Shareholders, Trustees and Officers.................................86 7.3 Express Exculpatory Clauses and Instruments....................................................87 7.4 Indemnification of Trustees, Officers, Employees and Other Agents..............................87 7.5 Right of Trustees and officers to Own Shares or Other Property and to Engage in Other Business....................................................................88 7.6 Transactions Between the Trustees and the Trust................................................88 7.7 Restriction of Duties and Liabilities..........................................................90 7.8 Persons Dealing with Trustees or Officers......................................................90 7.9 Reliance.......................................................................................90 7.10 Income Tax Status..............................................................................90 ARTICLE VIII. Duration, Amendment, Termination and Qualification of Trust....................................91 8.1 Duration of Trust..............................................................................91 8.2 Termination of Trust...........................................................................91 8.3 Amendment Procedure............................................................................92 8.4 Qualification Under the REIT Provisions of the Internal Revenue Code...........................92 ARTICLE IX. Miscellaneous..................................................................................92 9.1 Applicable Law.................................................................................92 9.2 Index and Headings for Reference Only..........................................................93 9.3 Successors in Interest.........................................................................93 9.4 Inspection of Records..........................................................................93
- ii - 4 9.5 Counterparts...................................................................................93 9.6 Provisions of the Trust in Conflict with Law or Regulations....................................93 9.7 Certifications.................................................................................94 9.8 Recording and Filing...........................................................................94 9.9 Resident Agent.................................................................................94
- iii - 5 AMENDED AND RESTATED DECLARATION OF TRUST ARTICLE I. The Trust; Definitions 1.1 Name. The name of the Trust shall be "Starwood Hotels & Resorts." As far as practicable and except as otherwise provided in this Declaration, the Trustees shall conduct the Trust's activities, execute all documents, and sue or be sued in the name of Starwood Hotels & Resorts, or in their names as Trustees of Starwood Hotels & Resorts. 1.2 Place of Business. The principal office of the Trust shall be in the State of New York. However, the Trustees may, from time to time, change such location and maintain other offices or places of business. 1.3 Nature of Trust. The Trust is a real estate investment trust organized under Title 8 of the Corporations and Associations Article of the Annotated Code of the State of Maryland. It is intended that the Trust shall carry on business as a "real estate investment trust" (hereinafter called "REIT" or "Real Estate Investment Trust") as described in the REIT Provisions of the Internal Revenue Code. The Trust is not a general partnership, limited partnership, limited liability company, joint venture, corporation or joint stock company or association (but nothing herein shall preclude the Trust from being taxed as an association under the REIT Provisions of the Internal Revenue Code) nor shall the Trustees or Shareholders or any of them for any purpose be, or be deemed to be treated in any way whatsoever to be, liable or responsible hereunder as partners or joint venturers. The relationship of the Shareholders to the Trustees shall be solely that of beneficiaries of the Trust and their rights shall be limited to those conferred upon them by this Declaration. 1.4 Definitions. The terms defined in this Section 1.4 whenever used in this Declaration shall, unless the context otherwise requires, have the respective meanings hereinafter specified in this Section 1.4. In this Declaration, words in the singular number include the plural and in the plural number include the singular. (a) Accommodations Field. "Accommodations Field" shall mean the hotel, motel, motor inn, restaurant, and lodgings field generally, and shall also be deemed to include activities, undertakings and businesses directly allied or connected with, or directly related to, hotels, motels, motor inns, restaurants or lodgings. (b) Advisor. "Advisor" shall mean the Person, if any, employed by the Trustees under the provisions of Article IV. (c) Affiliate. "Affiliate" shall mean (i) with respect to any Person, any other Person (A) which such Person directly or indirectly controls, is controlled by, or is under common control 6 with or (B) of which such Person is a director, officer, employee, partner or trustee or (C) of which such Person directly or indirectly owns, controls or holds with power to vote five percent (5%) or more of the outstanding voting securities or (D) which directly or indirectly owns, controls or holds with power to vote five percent (5%) or more of the outstanding voting securities of such Person and (ii) with respect to the Trust, the Advisor and any other investment adviser, manager or independent contractor (as that term is defined in Section 856(d)(3) of the Internal Revenue Code) of the Trust. (d) Annual Meeting of Shareholders. "Annual Meeting of Shareholders" shall have the meaning set forth in the first sentence of Section 6.7. (e) Annual Report. "Annual Report" shall have the meaning set forth in Section 6.9. (f) Appraisal. "Appraisal" shall mean the fair market value, as of the date of the appraisal, of Real Property in its existing state or in a state as to be created or improved, as determined by the Trustees or as determined by any bank, insurance company or other Person which makes appraisals in connection with its lending or services activities or as determined by a disinterested Person having no interest in the Real Property, provided, however, that any such Person is, in the sole judgment of the Trustees, properly qualified to make a determination; provided further, that an appraisal shall be included within the meaning of the term Appraisal as used herein upon which the Trustees may in good faith rely if it is made on behalf of a Person or Persons other than the Trust at or prior to the time of the investment by the Trust if the Trust is acquiring an interest (either in whole or in part) in the investment with respect to which such appraisal is or has been made. (g) Bylaws. "Bylaws" shall have the meaning set forth in Section 3.3. (h) Construction Loans. "Construction Loans" shall mean Mortgage Loans incurred to finance all or part of the cost of acquiring and improving land (including leaseholds therein) and the construction or improvement of buildings and other improvements thereon. (i) Declaration. "Declaration" shall mean this Declaration of Trust and all amendments or modifications thereof. References in this Declaration to "herein" and "hereunder" shall be deemed to refer to this Declaration and shall not be limited to the particular text, article or section in which such words appear. (j) Development Loans. "Development Loans" shall mean Mortgage Loans incurred to finance all or part of the cost of acquiring and improving vacant land and developing it into a site or sites suitable for the construction of buildings thereon or suitable for other residential, commercial, industrial or public uses. (k) Equity Investments. "Equity Investments" shall mean investments in Real Property (other than Mortgage Loans), or in borrowing or leasing entities or other organizations owning, operating or managing Real Property. - 2 - 7 (l) Equity Participations. "Equity Participations" shall mean participations acquired in connection with making any Real Property Investment, including, but not limited to, participations in contingent interests based upon operating revenues, participations in the ownership of Real Property, participations in rental based upon operating revenues or based upon a percentage of sales or room rents, or participations in the ownership of borrowing or leasing entities or other organizations owning, operating or managing Real Property. (m) First Mortgage. "First Mortgage" shall mean a Mortgage which takes priority or precedence over all other charges or liens upon the Real Property and which must be satisfied before such other charges are entitled to participate in the proceeds of any sale. Such priority shall not be deemed as abrogated by liens for taxes, or assessments which are not delinquent or remain payable without penalty, contracts (other than contracts for repayment of borrowed moneys), or leases, mechanic's and materialman's liens for work performed and materials furnished which are not in default or are in good faith being contested and other claims normally deemed in the same local jurisdiction not to abrogate the priority of a first mortgage. (n) First Mortgage Loans. "First Mortgage Loans" shall mean Mortgage Loans secured or collateralized at the time of acquisition thereof by the Trust by First Mortgages. (o) Interim Loans. "Interim Loans" shall mean Mortgage Loans secured or collateralized by Mortgages made on improved properties and having a maturity of three years or less. (p) Internal Revenue Code. "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (q) Junior Mortgage. "Junior Mortgage" shall mean any Mortgage (other than a Mortgage securing a Wrap-Around Mortgage Loan or a Mortgage securing the junior portion of a Mortgage Loan with respect to which a Senior Participation has been issued) which has the same priority or precedence over all charges or encumbrances on Real Property as is required for a First Mortgage, except that it is subject to the priority of one or more Mortgages which must be satisfied before such Junior Mortgage is entitled to participate in the proceeds of any sale or other disposition of such Real Property. (r) Junior Mortgage Loans. "Junior Mortgage Loans" shall mean Mortgage Loans (other than Wrap-Around Mortgage Loans and the junior portion of Mortgage Loans with respect to which a Senior Participation has been sold) secured or collateralized by Junior Mortgages. (s) Long Term. "Long Term" shall mean, when used with respect to a Mortgage Loan, a Mortgage Loan other than an Interim Loan or a Construction Loan and, when used with respect to any other Real Property Investment, shall mean such an investment which is not expected to be amortized in full within a period of three years from the date on which such investment is made. - 3 - 8 (t) Mortgage Loans. "Mortgage Loans" shall mean notes, debentures, bonds and other evidence of indebtedness or obligation which are negotiable or non-negotiable and which are secured or collateralized by Mortgages. (u) Mortgages. "Mortgages" shall mean mortgages, deeds of trust or other security deeds on Real Property or rights or interests in Real Property. (v) National Hotel Companies. "National Hotel Companies" shall mean Hilton Hotels Corporation, Marriott Corporation, Holiday Inns, Inc., TraveLodge International, Inc. and any other nationally known hotel companies which are engaged in operations in the Accommodations Field or the granting of franchises to other Persons with respect to such operations and the Affiliates of any of them. (w) Net Assets. "Net Assets" shall mean the "Total Assets of the Trust", after deducting therefrom all liabilities of the Trust; provided, however, that depreciable assets shall be included in such Assets at the lesser of either: (i) the cost of such Assets on the books of the Trust less depreciation thereof on a straight-line basis over the useful life of such Assets in accordance with generally accepted accounting principles, and in making such calculation the useful life of such Assets shall correspond to the useful life used as the basis of depreciation on the Trust's federal income tax returns; or (ii) fair market value of such Assets, in the judgment of the Trustees. (x) Person. "Person" shall mean and include individuals, corporations, limited partnerships, general partnerships, limited liability companies, joint stock companies or associations, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, real estate investment trusts, business trusts, or other entities and governments and agencies and political subdivisions thereof. (y) Real Property. "Real Property" shall mean and include land, rights in land, leasehold interests (including but not limited to interests of a lessor or lessee therein), and any building, structures, improvements, fixtures and equipment located on or used in connection with land, leasehold interests and rights in land or interest therein, but does not include Mortgages, Mortgage Loans or interests therein. (z) Real Property Investments. "Real Property Investments" shall mean and include investments in Real Property or in obligations secured, directly or indirectly, by liens on Real Property, including, but not limited to, Long-Term Mortgage Loans (with or without Equity Participations), Interim Loans, Development Loans, Construction Loans, First Mortgage Loans, Junior Mortgage Loans, Wrap-Around Mortgage Loans and Equity Investments in Real Property (including, but not limited to, land leaseback and leasehold mortgage loans, net lease financings and sale and leaseback transactions). - 4 - 9 (aa) REIT Provisions of the Internal Revenue Code. "REIT Provisions of the Internal Revenue Code" shall mean Part II, Subchapter M of Chapter 1, of the Internal Revenue Code of 1986, as now enacted or hereafter amended, or successor statutes and regulations promulgated thereunder. (bb) Securities. "Securities" shall mean any stock, shares, voting trust certificates, bonds, debentures, notes, or other evidences of indebtedness, or in general any instruments commonly known as "securities" or any certificates of interest, shares or participations in temporary or interim certificates for, receipts for, guarantees of, or warrants, options or rights to subscribe to, purchase or acquire any of the foregoing. (cc) Senior Participation. "Senior Participation" shall mean a participation or interest which shall have been sold by the Trust in a Mortgage Loan, on terms and conditions satisfactory to the Trustees, pursuant to which the participation sold takes priority or precedence as to charges and liens upon the mortgaged property and satisfaction out of the proceeds of any sale over the junior portion of the Mortgage Loan retained by the Trust; provided, however, that a participation sold in a Mortgage Loan shall not be deemed to be a Senior Participation as such term is used in this Declaration unless such Mortgage Loan, considered as a single Mortgage Loan including the junior portion retained by the Trust, would satisfy all of the requirements relating to the investment by the Trust in a First Mortgage Loan. (dd) Shares. "Shares" shall mean the shares of beneficial interest of the Trust as described in Section 6.1. (ee) Shareholders. "Shareholders" shall mean, as of any particular time, holders of record of outstanding Shares at such time. (ff) Total Assets of the Trust. "Total Assets of the Trust" shall mean the value of all the assets of the Trust Estate as such value appears on the most recent quarterly balance sheet of the Trust available to the Trustees. (gg) Trust. "Trust" shall mean the Trust created by this Declaration. (hh) Trustees. "Trustees" shall mean, as of any particular time Trustees holding office under this Declaration at such time, whether they be the Trustees named herein or additional or successor Trustees, and shall not include the officers, representatives or agents of the Trust, or the Shareholders, but nothing herein shall be deemed to preclude the Trustees from also serving as officers, representatives, or agents of the Trust, or owning Shares. (ii) Trust Estate. "Trust Estate" shall mean, as of any particular time, any and all property, real, personal, or otherwise, tangible or intangible, which is owned or held by the Trust or the Trustees, including, but not limited to, property which is transferred, conveyed or paid to the Trust or Trustees, and all rents, income, profits and gains therefrom. - 5 - 10 (jj) Wrap-Around Mortgage Loans. "Wrap-Around Mortgage Loans" shall mean Mortgage Loans which are subject to prior First Mortgages (which have been created prior to or simultaneously with the creation of the Wrap-Around Mortgage Loan) and are made on the basis of the current values of the mortgaged properties without regard to and without discharging the prior First Mortgages; provided, however, that a Mortgage Loan shall not be included in the term Wrap-Around Mortgage Loan for purposes of this Declaration unless the indebtedness evidenced by the Wrap-Around Mortgage Loan when added to the indebtedness evidenced by the prior First Mortgage and considered as a single First Mortgage Loan would comply in all respects with the requirements relating to an investment by the Trust in such a First Mortgage Loan. ARTICLE II. Trustees 2.1 Number, Term of Office, Qualifications of Trustees. The Trust shall have three (3) Trustees, which number may be changed from time to time in such manner as the Bylaws of the Trust shall provide. Unless otherwise required by law, no Trustee shall be required to give bond, surety or security in any jurisdiction for the performance of any duties or obligations hereunder. The Trustees, in their capacity as trustees, shall not be required to devote their entire time to the business and affairs of the Trust. 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 1999 Annual Meeting of Shareholders, the term of office of the second class to expire at the 2000 Annual Meeting of Shareholders and the term of office of the third class to expire at the 2001 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 1999 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. 2.2 Compensation and Other Remuneration. The Trustees shall be entitled to receive such reasonable compensation for their services as Trustees as they may determine from time to time. The Trustees, either directly or indirectly, shall also be entitled to receive remuneration for services rendered to the Trust in any other capacity. Such services may include, without limitation, services as an officer of the Trust, legal, accounting or other professional services, or services as a broker, transfer agent or underwriter, whether performed by a Trustee or any person - 6 - 11 affiliated with a Trustee. Notwithstanding the foregoing, except as provided in Section 7.6, no Trustee shall receive any fee or other remuneration, directly or indirectly, as a result of any sale of property to or purchase of property from the Trust. 2.3 Resignation, Removal and Death of Trustees. A Trustee may resign at any time by giving written notice in recordable form to the remaining Trustees at the principal office of the Trust. Such resignation shall take effect on the date such notice is given, or at any later time specified in the notice, without need for prior accounting. A Trustee may be removed at any time, with or without cause, by vote or written consent of holders of two-thirds (2/3rds) of the outstanding Shares entitled to vote thereon, or with cause by all remaining Trustees. A Trustee judged incompetent, or for whom a guardian or conservator has been appointed, shall be deemed to have resigned as of the date of such adjudication or appointment. Upon the resignation or removal of any Trustee, or his otherwise ceasing to be a Trustee, he shall execute and deliver such documents as the remaining Trustees shall require for the conveyance of any Trust property held in his name, and shall account to the remaining Trustee or Trustees, as they require, for all property which he holds as Trustee, and shall thereupon be discharged as Trustee. Upon the incapacity or death of any Trustee, his legal representative shall perform the acts set forth in the preceding sentence and the discharge mentioned therein shall run to such legal representative and to the incapacitated Trustee or the estate of the deceased Trustee, as the case may be. 2.4 Vacancies. If any or all of the Trustees cease to be Trustees hereunder, whether by reason of resignation, removal, incapacity, death or otherwise, such event shall not terminate the Trust or affect its continuity. Until vacancies are filled, the remaining Trustee or Trustees, if any (even though less than three (3)), may exercise the powers of the Trustees hereunder. 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. If at any time there shall be no Trustees in office, successor Trustees shall be elected by the Shareholders as provided in Section 6.7. 2.5 Successor and Additional Trustees. Any right, title and interest of the Trustees in and to the Trust Estate shall also vest in successor and additional Trustees upon their qualification, and they shall thereupon have all the rights and obligations of Trustees hereunder. Any such right, title and interest shall vest in the Trustees, whether or not conveyance documents have been executed and delivered pursuant to Section 2.3, or otherwise. 2.6 Actions by Trustees. A quorum for all meetings of the Trustees shall be a majority of the Trustees. Common or interested Trustees may be counted in determining the presence of a quorum at a meeting of the Trustees. Unless specifically provided otherwise in this Declaration, the Trustees may act by a vote or resolution at a meeting at which a quorum is present, or without a meeting by a written vote, resolution, or other writing consenting to said action, signed by the Trustees. Any agreement, deed, mortgage, lease or other instrument or writing executed by one - 7 - 12 or more of the Trustees, or by any authorized person, shall be valid and binding upon the Trustees and upon the Trust when ratified by action of the Trustees. 2.7 Executive Committee. The Trustees may appoint from among their own number an executive committee of two or more Trustees to whom they may delegate from time to time such of the powers of the Trustees as they may deem advisable. 2.8 Names of Trustees. The names of the Trustees of the Trust on the date hereof are as follows: Jean-Marc Chapus Stephen R. Quazzo Bruce W. Duncan Stuart M. Rothenberg Madison F. Grose Barry S. Sternlicht George J. Mitchell Raymond S. Troubh Roger S. Pratt 2.9 Non-Affiliated Trustees. Affiliates of the Advisor and of any National Hotel Company may be Trustees; however, there shall at all times be at least a majority of the Trustees who are not Affiliates of the Advisor or of any National Hotel Company or Affiliates of such Affiliates. If at any time, by reason of one or more vacancies, there shall not be at least a majority of such Trustees who are not such Affiliates, then within sixty (60) days after such vacancy occurs, the continuing Trustee or Trustees then in office shall elect, pursuant to Section 2.4, a sufficient number of other Persons who are not such Affiliates so that there shall be at least a majority of such Trustees in office. ARTICLE III. Trustees' Powers 3.1 Power and Authority of Trustees. The Trustees, subject only to the specific limitations contained in this Declaration, shall have without further or other authorization, and free from any power or control on the part of the Shareholders, full, absolute and exclusive power, control and authority over the Trust Estate and over the business and affairs of the Trust to the same extent as if the Trustees were the sole owners thereof in their own right, and to do all such acts and things as in their sole judgment and discretion are necessary or incidental to, or desirable, for the carrying out of any of the purposes of the Trust or conducting the business of the Trust. Any determination made in good faith by the Trustees of the purposes of the Trust or the existence of any power or authority hereunder shall be conclusive. In construing the provisions of this Declaration, presumption shall be in favor of the grant of powers and authority to the Trustees. The enumeration of any specific power or authority herein shall not be construed as limiting the general powers or authority or any other specified power or authority conferred herein upon the Trustees. 3.2 Specific Powers and Authorities. Subject only to the express limitations contained in this Declaration and in addition to any powers and authorities conferred by this Declaration or which the Trustees may have by virtue of any present or future statute or rule or law, the Trustees - 8 - 13 without any action or consent by the Shareholders shall have and may exercise at any time and from time to time the following powers and authorities which may or may not be exercised by them in their sole judgment and discretion and in such manner and upon such terms and conditions as they may from time to time deem proper: (a) To retain, invest and reinvest the capital or other funds of the Trust in real or personal property of any kind, all without regard to whether any such property is authorized by law for the investment of trust funds and to possess and exercise all the rights, powers and privileges appertaining to the ownership of the Trust Estate and to increase the capital of the Trust at any time by the issuance of additional Shares for such consideration as they deem appropriate. (b) For such consideration as they deem proper, to invest in, purchase or otherwise acquire for cash or other property or through the issuance of Shares or through the issuance of notes, debentures, bonds or other obligations of the Trust and hold for investment the entirety of any participating interest in notes, bonds, or other obligations which are secured by Mortgages. In connection with any such investment, purchase or acquisition, the Trustees shall have the power to acquire a share of rents, lease payments or other gross income from or a share of the profits from or a share in the equity or ownership of Real Property, either directly or through joint venture, general or limited partnership, or other lawful combinations or associations; to invest in loans secured by the pledge or transfer of mortgage obligations; to develop, operate, pool, utilize, grant production payments out of or lease or otherwise dispose of mineral, oil and gas properties and rights. (c) To sell, rent, lease, hire, exchange, release, partition, assign, mortgage, pledge, hypothecate, grant security interests in, encumber, negotiate, convey, transfer or otherwise dispose of any and all of the Trust Estate by deeds, trust deeds, assignments, bills of sale, transfers, leases, mortgages, financing statements, security agreements and other instruments for any of such purposes executed and delivered for and on behalf of the Trust or the Trustees by one or more of the Trustees or by a duly authorized officer, employee, agent or any nominee of the Trust. (d) To issue Shares, bonds, debentures, notes or other evidences of indebtedness which may be secured or unsecured and may be subordinated to any indebtedness of the Trust and may be convertible into Shares and which may include options, warrants and rights to subscribe to, purchase or acquire any of the foregoing, all without vote of or other action by the Shareholders to such Persons for such cash, property or other consideration (including Securities issued or created by, or interest in any Person) at such time or times and on such terms as the Trustees may deem advisable and to list any of the foregoing Securities issued by the Trust on any securities exchange and to purchase or otherwise acquire, hold, cancel, reissue, sell and transfer any of such Securities. (e) To enter into leases, contracts, obligations, and other agreements for a term extending beyond the term of office of the Trustees and beyond the possible termination of the Trust or for a lesser term. - 9 - 14 (f) To borrow money and give negotiable or non-negotiable instruments therefor; to guarantee, indemnify or act as surety with respect to payment or performance of obligations of third parties; to enter into other obligations on behalf of the Trust; and to assign, convey, transfer, mortgage, subordinate, pledge, grant security interests in, encumber or hypothecate the Trust Estate to secure any of the foregoing. (g) To lend money, whether secured or unsecured. (h) To create reserve funds for any purpose. (i) To incur and pay out of the Trust Estate any charges or expenses, and disburse any funds of the Trust, which charges, expenses or disbursements are, in the opinion of the Trustees, necessary or incidental to or desirable for the carrying out of any of the purposes of the Trust or conducting the business of the Trust, including, without limitation, taxes and other governmental levies, charges and assessments, of whatever kind or nature, imposed upon or against the Trustees in connection with the Trust or the Trust Estate or upon or against the Trust Estate or any part thereof, and for any of the purposes herein. (j) To deposit funds of the Trust in banks, trust companies, savings and loan associations and other depositories, whether or not such deposits will draw interest, the same to be subject to withdrawal on such terms and in such manner and by such Person or Persons (including any one or more Trustees, or officers, agents or representatives) as the Trustees may determine. (k) To possess and exercise all the rights, powers and privileges appertaining to the ownership of all or any Mortgages or Securities issued or created by, or interests in, any Person, forming part of the Trust Estate, to the same extent that an individual might, and, without limiting the generality of the foregoing, to vote or give any consent, request or notice, or waive any notice, either in person or by proxy or power of attorney, with or without power of substitution, to one or more Persons, which proxies and powers of attorney may be for meetings or action generally or for any particular meeting or action, and may include the exercise of discretionary powers. (l) To cause to be organized or assist in organizing any Person under the laws of any jurisdiction to acquire the Trust Estate or any part or parts thereof or to carry on any business in which the Trust shall directly or indirectly have any interest, and to sell, rent, lease, hire, convey, negotiate, assign, exchange or transfer the Trust Estate or any part or parts thereof to or with any such Person in exchange for the Securities thereof or otherwise, and to lend money to, subscribe for the Securities of, and enter into any contracts with, any such Person in which the Trust holds or is about to acquire Securities or any other interest. (m) To enter into joint ventures, general or limited partnerships and any other lawful combinations or associations. - 10 - 15 (n) To elect, appoint, engage or employ officers for the Trust (including a President, Secretary, Treasurer and such Vice Presidents and other officers as the Trustees may determine), who may be removed or discharged at the discretion of the Trustees, such officers to have such powers and duties, and to serve such terms, as may be prescribed by the Trustees or by the Bylaws; to engage or employ any Persons (including, subject to the provisions of Sections 7.5 and 7.6, any Trustee or officer and any Person in which any Trustee or officer is directly or indirectly interested or with which he is directly or indirectly connected) as agents, representatives, employees, or independent contractors (including, without limitation, real estate advisors, investment advisors, transfer agents, registrars, underwriters, accountants, attorneys at law, real estate agents, managers, appraisers, brokers, architects, engineers, construction managers, general contractors or otherwise) in one or more capacities, and to pay compensation from the Trust for services in as many capacities as such Person may be so engaged or employed; and, except as prohibited by law, to delegate any of the powers and duties of the Trustees to any one or more Trustees, agents, representatives, officers, employees, independent contractors or other Persons. The Trustees may elect one of the Trustees as Chairman, to preside at meetings of the Trustees and exercise such other powers and duties as the Trustees may from time to time assign to him; provided that the Chairman shall not be or act as an officer of the Trust. (o) To determine whether moneys, Securities or other assets received by the Trust shall be charged or credited to income or capital or allocated between income and capital, including the power to amortize or fail to amortize any part or all of any premium or discount, to treat any part or all of the profit resulting from the maturity or sale of any asset, whether purchased at a premium or at a discount, as income or capital, or apportion the same between income and capital, to apportion the sales price of any asset between income and capital, and to determine in what manner any expenses or disbursements are to be borne as between income and capital, whether or not in the absence of the power and authority conferred by this subsection such moneys, Securities or other assets would be regarded as income or as capital or such expense or disbursement would be charged to income or to capital; to treat any dividend or other distribution on any investment as income or capital or apportion the same between income and capital; to provide or fail to provide reserves for depreciation, amortization or obsolescence in respect of all or any part of the Trust Estate subject to depreciation, amortization or obsolescence in such amounts and by such methods as they shall determine; and to determine the method or form in which the accounts and records of the Trust shall be kept and to change from time to time such method or form. (p) To determine from time to time the value of all or any part of the Trust Estate and of any services, Securities, property or other consideration to be furnished to or acquired by the Trust, and from time to time to revalue all or any part of the Trust Estate in accordance with such appraisals or other information as are, in the Trustees' sole judgment, necessary and/or satisfactory. (q) To collect, sue for, and receive all sums of money coming due to the Trust, and to engage in, intervene in, prosecute, join, defend, compound, compromise, abandon or adjust, by arbitration or otherwise, any actions, suits, proceeding, disputes, claims, controversies, demands or other litigation relating to the Trust, the Trust Estate or the Trust's business and affairs, to - 11 - 16 enter into agreements therefor, whether or not any suit is commenced or claim accrued or asserted and, in advance of any controversy, to enter into agreements regarding arbitration, adjudication or settlement thereof. (r) To renew, modify, release, compromise, extend, consolidate, or cancel, in whole or in part, any obligation to or of the Trust. (s) To purchase and pay for out of the Trust Estate insurance contracts and policies insuring the Trust Estate against any and all risks and insuring the Trust and/or any or all of the Trustees, the Shareholders or officers against any and all claims and liabilities of every nature asserted by any Person arising by reason of any action alleged to have been taken or omitted by the Trust or by the Trustees, Shareholders, or officers. (t) To cause legal title to any of the Trust Estate to be held by and/or in the name of the Trustees, or except as prohibited by law, by and/or in the name of the Trust or one or more of the Trustees or any other Person, on such terms, in such manner, with such powers in such Person as the Trustees may determine, and with or without disclosure that the Trust or Trustees are interested therein. (u) To adopt a fiscal year for the Trust, and from time to time to change such fiscal year. (v) To adopt and use a seal (but the use of a seal shall not be required for the execution of instruments or obligations of the Trust). (w) To make, perform, and carry out, or cancel and rescind, contracts of every kind for any lawful purpose without limit as to amount, with any person, firm, trust, association, corporation, municipality, county, parish, state, territory, government or other municipal or governmental subdivision. These contracts shall be for such duration and upon such terms as the Trustees in their sole discretion shall determine. (x) To do all other such acts and things as are incident to the foregoing, and to exercise all powers which are necessary or useful to carry on the business of the Trust, to promote any of the purposes for which the Trust is formed, and to carry out the provisions of this Declaration. 3.3 Bylaws. The Trustees may make, adopt, amend or repeal regulations (the "Bylaws") containing provisions relating to the business of the Trust, the conduct of its business and affairs, its rights or powers and the rights or powers of its Shareholders, Trustees or officers not inconsistent with law or with this Declaration. 3.4 Additional Powers. The Trustees shall additionally have and may exercise all the powers conferred by the laws of the State of Maryland upon real estate investment trusts formed under such laws, insofar as such laws are not in conflict with the provisions of this Declaration. - 12 - 17 3.5 Incorporation. With the approval of the holders of a majority of the Shares entitled to vote in the matter, the Trustees may cause to be organized or assist in organizing a corporation or corporations under the laws of any jurisdiction or any other trust, partnership, association, or other Person to take over the Trust property or any part or parts thereof or to carry on any business in which the Trust shall directly or indirectly have any interest, and to sell, convey and transfer the Trust property or any part or parts thereof to any such corporation, trust, association, or other Person in exchange for the shares or securities thereof or otherwise, and to lend money to, subscribe for the shares or securities of, and enter into any contracts with any such corporation, trust, association, or other Person, or any corporation, trust, partnership, association, or other Person in which the Trust holds or is about to acquire shares or any other interest. The Trustees may also cause a merger or consolidation between the Trust or any successor thereto and any such corporation, trust, association or other Person if and to the extent permitted by law, provided that under the law then in effect, the federal income tax benefits available to Real Estate Investment Trusts, or substantially similar benefits, are also available to such corporation, trust, association or other Person. ARTICLE IV. Advisor; Limitation on Operating Expenses 4.1 Employment of Advisor. The Trustees are responsible for the general policies of the Trust and for such general supervision of the business and affairs of the Trust conducted by all officers, agents, employees, advisors, managers or independent contractors of the Trust as may be necessary to insure that such business and affairs conform to this Declaration. However, the Trustees shall not be required personally to conduct the business and affairs of the Trust, and consistent with their ultimate responsibility as stated above, the Trustees shall have the power to appoint, employ or contract with such Person or Persons (including one or more of themselves or any corporation, partnership, trust or other Person in which one or more of them may be directors, officers, stockholders, partners or trustees) as the Trustees may deem necessary or proper for the transaction of the business and affairs of the Trust. The Trustees may therefor employ or contract with such Person (herein referred to as the "Advisor") as an investment adviser and administrator of the affairs of the Trust and may grant or delegate such authority to the Advisor as the Trustees may in their sole discretion deem necessary or desirable without regard to whether such authority is normally granted or delegated by Trustees. The Trustees shall have the power to determine the terms and compensation of the Advisor or any other Person whom they may employ or with whom they may contract; provided, however, that any determination to employ or contract with any Trustee or any Person in which a Trustee may be a director, officer, stockholder, partner, employee or trustee shall be valid only if made, approved or ratified by a majority of the other Trustees. The Trustees may exercise broad discretion in allowing the Advisor to administer and regulate the operations of the Trust, to act as agent for the Trust, to execute documents on behalf of the Trustees, and to make executive decisions which conform to general policies and general principles previously established by the Trustees. - 13 - 18 4.2 Term. The Trustees shall not enter into any contract with the Advisor unless such contract has an initial term of one year and provides for annual renewal or extension thereafter. The Trustees shall not enter into such a contract with any Person unless such contract provides for renewal or extension thereof only by the affirmative vote of a majority of the Trustees who are not affiliated with the Advisor. Any such contract shall provide that it may be terminated (a) by the Trust upon sixty (60) days' written notice by unanimous vote of the Trustees who are not affiliated with the Advisor, (b) by the Advisor upon one hundred twenty (120) days' written notice by unanimous vote of the directors of the Advisor who are not Trustees or (c) by the holders of more than a majority of the shares of the Trust entitled to vote on the matter. 4.3 Restrictions on Advisor. The Advisor may administer the Trust as its sole and exclusive function or engage in other activities including the rendering of advice to other investors and the management of other investments. The Advisor shall not, however, without prior written consent of a majority of the Trustees, render advice or service to any other Real Estate Investment Trust, except that the Advisor may, with respect to any loan or other investment in which the Trust may participate or allot a participation, render advice and service, with or without remuneration, to each and every participant in such loan or other investment. 4.4 Limitation on Operating Expenses. Each contract made with the Advisor shall provide that, within 120 days after the end of any Fiscal Year which begins on a date following the effective date of the Trust's first Registration Statement filed under the Securities Act of 1933, the Advisor will refund to the Trust (or, at the election of the Trustees, reduce its compensation payable by) (A) the amount, if any, by which the Operating Expenses of the Trust during such Fiscal Year exceed the lesser of (a) 1.2% of the Average Value of Invested Assets for such Fiscal Year or (b) the greater of (i) 1.2% of the Month-end Average Net Assets of the Trust for such Fiscal Year or (ii) 25% of the Net Income of the Trust for such Fiscal Year and (B) the amount, if any, by which the aggregate of fees and expenses (including travel expenses and other out-of-pocket expenses) paid to Trustees who are not affiliates of the Advisor and expenses of the type referred to in clause (m) of the definition of Operating Expenses contained in this Section 4.4 during such Fiscal Year exceeded 0.3% of the Average Value of Invested Assets for such Fiscal Year. For purposes of this Section 4.4 the following terms shall have the meanings set forth below: (a) "Average Value" for any period shall mean the arithmetic average of the aggregate Value of the assets reflected in the computation at the close of the last business day of each month during the period to which such computation relates. (b) "Average Value of Invested Assets" shall mean the Average Value of the Trust's total assets (without deduction of any liabilities) plus the undisbursed commitments of the Trust in respect of closed loans or other closed investments, but excluding good will and other intangible assets, cash, cash items and obligations of municipal, state and the federal governments and governmental agencies (other than obligations secured by a lien on real property owned, or to be acquired, by such governments or governmental agencies and securities of the Federal Housing - 14 - 19 Administration, the Federal National Mortgage Administration, and other governmental agencies issuing securities backed by a pool of mortgages). (c) "Value" of an asset or assets shall mean the value of such asset or assets on the books of the Trust, reduced by provision for amortization, depreciation or depletion but before deducting any indebtedness or other liability in respect thereof. Depreciable assets shall be valued at the lesser of fair market value (in the judgment of the Trustees) or cost less straight line depreciation. (d) "Fiscal Year" shall mean any period for which an income tax return is submitted to the Internal Revenue Service and which is treated by the Internal Revenue Service as a reporting period. (e) "Net Income" for any period shall mean the net income of the Trust for such period computed on the basis of its results of operations for such period, after deduction of all expenses other than the regular, incentive and additional compensation payable to the Advisor or fees payable to any mortgage service, and excluding extraordinary items and gains and losses from the disposition of assets of the Trust. (f) "Month-End Average Net Assets" shall mean the Average Value of all the assets of the Trust minus all the liabilities of the Trust reflected in the computation at the close of each month during the period to which such computation relates. (g) "Operating Expenses" during any Fiscal Year shall mean the aggregate annual expenses of every character regarded as operating expenses in accordance with generally accepted accounting principles, as determined by the independent public or certified accountants who shall have reported on the financial statements of the Trust at the end of and for such Fiscal Year but excluding: (1) interest, discount and other costs of borrowed money; (2) taxes on income and taxes and assessments on real property and all other taxes (including license fees) applicable to the Trust; (3) legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing, engraving and other expenses and taxes incurred in connection with the issuance, distribution, transfer, registration and stock exchange listing of the Trust's securities; (4) fees and expenses (including travel expenses and other out-of-pocket expenses) paid to Trustees (other than fees paid to Trustees who are affiliates of the Advisor), independent contractors, consultants, managers, closing and disbursement agents, and other agents employed by or on behalf of the Trust (other than the Advisor); - 15 - 20 (5) expenses connected with the acquisition, disposition and ownership of real estate interests or mortgage loans or other property (including the costs of closing, foreclosure, insurance premiums, legal services, brokerage and sales commissions, maintenance, repair and improvement of property); (6) expenses of maintenance, up-keep and management of real estate equity interests and processing and servicing mortgage, construction and other loans; (7) insurance as required by the Trustees (including Trustees' liability insurance); (8) the expenses of organizing, revising, amending, converting, modifying or terminating the Trust; (9) expenses connected with payments of dividends or interest or distributions in cash or any other form made or caused to be made by the Trustees to holders of securities of the Trust; (10) all expenses connected with communications to holders of securities of the Trust and the other bookkeeping and clerical work necessary in maintaining relations with holders of securities, including the cost of printing and mailing certificates for securities and proxy solicitation materials and reports to holders of the Trust's securities; (11) the cost of any accounting, statistical, or bookkeeping equipment necessary for the maintenance of the books and records of the Trust; (12) transfer agent's, registrar's and indenture trustee's fees and charges; (13) legal, accounting and auditing fees and expenses incurred in connection with the administration and operation of the business of the Trust in the ordinary course of its business and not included in clauses (1) through (12) of this definition; and (14) depletion, depreciation, amortization and losses on disposition of investments and reserves therefor. All calculations made in accordance with this Section 4.4 shall be based upon statements (which may be unaudited, except as provided herein) prepared on an accrual basis consistent with generally accepted accounting principles, regardless of whether the Trust may also prepare statements on a different basis. 4.5 Sale of Shares of the Advisor. Any advisory agreement entered into by the Trustees with an Advisor shall contain, among other provisions, a provision permitting any transfer, directly or indirectly, of securities of the Advisor without the consent of the Trust or its shareholders and a waiver to the fullest extent permitted by law of any rights which the Trust or its shareholders might have to any income or profits realized on any such direct or indirect - 16 - 21 transfer by the transferor of such securities. By purchasing Shares of the Trust, each shareholder shall be deemed to have consented to any such transfer and to have expressly and irrevocably waived any interest in or rights to any such income or profits. Such waiver shall not be effective as to any transfer of a majority of the voting stock of the Advisor unless such transfer shall have been consented to by the holders of a majority of the Shares of the Trust entitled to vote on the matter. ARTICLE V. Investment Policy 5.1 General Statement of Policy. The Trust has been established to provide investors with the opportunity to invest in a portfolio of Real Property Investments consisting primarily of Long-Term Mortgage Loans with Equity Participations and Equity Investments in Real Property made in transactions not relating to the Trust's lending activities. The Trust may also make Construction Loans primarily in connection with Long-Term Real Property Investments. It is the policy of the Trust to concentrate its Real Property Investments in the Accommodations Field; however, other types of income producing Real Property Investments may be made by the Trust if, in the opinion of the Trustees, such investments are more advantageous to the Trust than available Real Property Investments in the Accommodations Field. In addition to the foregoing the Trust is empowered to make any other investment or engage in any other activity which does not adversely affect the Trust's status as a Real Estate Investment Trust under the REIT Provisions of the Internal Revenue Code. In each case the Trustees may make the Trust's investments or engage in an activity alone or in participation with others, including the granting of Senior Participations to other lenders. 5.2 Obligor's Default. Notwithstanding any provision of this Declaration, when an obligor to the Trust is in default under the terms of any obligation to the Trust, the Trustees shall have the power to pursue any remedies permitted by law which in their sole judgment are in the interest of the Trust, and the Trustees shall have the power to enter into any necessary investment, commitment or obligation of the Trust which results from the pursuit of such remedies or which is necessary or desirable to dispose of property acquired in the pursuit of such remedies. 5.3 Changes Investment Policies and Restrictions. Notwithstanding the foregoing provisions of this Article 5, the investment policies and the restrictions thereon set forth in Sections 5.1 through 5.3 of this Declaration may be altered or modified by the Trustees, or additional or substitute policies or restrictions may be adopted by the Trustees if they shall determine, and so specify in a duly adopted resolution, that the alteration or modification of such policies or restrictions or the adoption of additional or substitute policies or restrictions are in the best interests of the Trust and its Shareholders and are not prohibited by the REIT Provisions of the Internal Revenue Code and no consent or approval of, or other action by, Shareholders shall be required for any such alteration, modification or adoption. Any policy or restriction altered, modified, or adopted pursuant to this Section 5.3 shall be subject to subsequent alteration or modification only with the consent of Shareholders holding a majority of the outstanding Shares entitled to vote on such alteration or modification if the Trustees shall so specify in the resolution - 17 - 22 adopted with respect to such policy or restriction. Any resolution adopted by the Trustees pursuant to this Section 5.3 shall be recorded within the State of Maryland in such public offices as this Declaration and any amendments hereto shall have been recorded in accordance with Section 9.8 of this Declaration. ARTICLE VI. The Shares and Shareholders 6.1 Shares. The beneficial interest in the Trust is divided into Shares consisting only of (a) 5,000 Class A Shares with a par value of $0.01 per share and having the rights provided in this Article VI, (b) 1,000,000,000 Class B Shares with a par value of $0.01 per share and having the rights provided in this Article VI, (c) 200,000,000 Excess Trust Shares with a par value of $0.01 per share and having the rights provided in this Article VI, (d) 30,000,000 Class A Exchangeable Preferred Shares with a par value of $0.01 per share and having the rights provided in this Article VI, (e) 15,000,000 Class B Exchangeable Preferred Shares with a par value of $0.01 per share and having the rights provided in this Article VI, (f) 55,000,000 Trust Preferred Shares with a par value of $0.01 per share and having such rights as are specified by the Trustees pursuant to the proviso to this sentence and (g) 50,000,000 Excess Preferred Shares with a par value of $0.01 per share and having the rights provided in Article VI hereof; provided, however, that the Trustees may, in their discretion, classify or reclassify any unissued Shares of one or more classes, or one or more series within any class, by setting or changing the preferences, conversion and other rights, voting powers, limitations as to dividends or distributions, qualifications, or terms or conditions of redemption, as shall not be prohibited by this Declaration or the REIT Provisions of the Internal Revenue Code or the laws of the State of Maryland and as shall be specified by the Board of Trustees in their discretion in articles supplementary duly adopted by the Board of Trustees and filed and accepted for record with the State Department of Assessments and Taxation of Maryland. As used herein, the term "Shares" shall mean and include (i) the Class A Shares, Class B Shares, Excess Trust Shares, Class A Exchangeable Preferred Shares, Class B Exchangeable Preferred Shares, Trust Preferred Shares and Excess Preferred Shares, and (ii) from and after the issuance of Shares of any other and additional classes of Shares so created and authorized by the Trustees, such Shares. The certificates evidencing the Shares shall be in such form and signed (manually or by facsimile) on behalf of the Trust in such manner as the Trustees may from time to time prescribe or as may be prescribed in the Bylaws. The certificates shall be negotiable and title thereto and to the Shares evidenced thereby shall be transferred by assignment and delivery thereof to the same extent and in all respects as a share certificate of a Maryland corporation. The Shares may be issued for such consideration as the Trustees shall determine or by way of share dividend or share split in the discretion of the Trustees. Shares reacquired by the Trust shall no longer be deemed outstanding and shall have no voting or other rights unless and until reissued. Shares reacquired by the Trust constitute authorized but unissued Shares unless otherwise provided by action of the Trustees. All Shares shall be fully paid and non-assessable by or on behalf of the Trust upon receipt of full consideration for which they have been issued or without additional consideration if issued by way of share dividend or share split. The Board of Trustees may authorize the issuance from time to time of shares of beneficial interest of the Trust of any class or series, whether now or hereafter authorized, or securities or rights convertible into shares of beneficial interest of any class or series, whether now or hereafter authorized, for such - 18 - 23 consideration (whether in cash, property, past or future services, obligation for future payment or otherwise) as the Board of Trustees may deem advisable (or without consideration in the case of a share split, share dividend or contribution), subject to such restrictions or limitations, if any, as may be set forth in this Declaration or the Bylaws. 6.2 Legal Ownership of Trust Estate. The legal ownership of the Trust Estate and the right to conduct the business and affairs of the Trust are vested exclusively in the Trustees and the Shareholders shall have no interest therein other than beneficial interest in the Trust conferred by their Shares issued hereunder and they shall have no right to compel any partition, division, dividend or distribution of the Trust or any of the Trust Estate. 6.3 Shares Deemed Personal Property. The Shares shall be personal property and shall confer upon the holders thereof only the interest and rights specifically set forth in this Declaration. The death, insolvency or incapacity of a Shareholder shall not dissolve or terminate the Trust or affect its continuity nor give his legal representative any rights whatsoever, whether against or in respect of other Shareholders, the Trustees or the Trust Estate or otherwise except the sole right to demand and, subject to the provisions of this Declaration, the Bylaws and any requirements of law, to receive a new certificate for Shares registered in the name of such legal representative, in exchange for the certificate held by such Shareholder. 6.4 Share Record: Issuance and Transferability Shares. Records shall be kept by or on behalf of and under the direction of the Trustees, which shall contain the names and addresses of the Shareholders, the number of Shares held by them respectively, and the numbers of the certificates representing the Shares, and in which there shall be recorded all transfers of Shares. Certificates shall be issued, listed and transferred in accordance with the Bylaws. The Persons in whose names certificates are registered on the records of the Trust shall be deemed the absolute owners of the Shares represented thereby for all purposes of this Trust; but nothing herein shall be deemed to preclude the Trustees or officers, or their agents or representatives, from inquiring as to the actual ownership of Shares. Prior to due presentment for registration of transfer, the Trustees shall not be affected by any notice of such transfer, either actual or constructive. The receipt by the person in whose name any Shares are registered on the records of the Trust or of the duly authorized agent of such Person, or if such Shares are so registered in the names of more than one Person, the receipt of any one of such Persons, or of the duly authorized agent of such Person, shall be a sufficient discharge for all dividends or distributions payable or deliverable in respect of such Shares and from all liability to see to the application thereof. Shares shall be transferable on the records of the Trust only by the record holder thereof or by his agent thereunto duly authorized in writing upon delivery to the Trustees or a transfer agent of the certificate or certificates therefor, properly endorsed or accompanied by duly executed instruments of transfer and accompanied by all necessary documentary stamps together with such evidence of the genuineness of each such endorsement, execution or authorization and of other matters as may reasonably be required by the Trustees or such transfer agent. Upon such delivery, the transfer shall be recorded in the records of the Trust and a new certificate for the Shares so transferred shall be issued to the transferee and in case of a transfer of only a part of the Shares represented by any certificate, a new certificate for the balance shall be issued to the - 19 - 24 transferor. Any Person becoming entitled to any Shares in consequence of the death of a Shareholder or otherwise by operation of law shall be recorded as the holder of such Shares and shall receive a new certificate therefor but only upon delivery to the Trustees or a transfer agent of instruments and other evidence required by the Trustees or the transfer agent to demonstrate such entitlement, the existing certificate for such Shares and such necessary releases from applicable governmental authorities. In case of the loss, mutilation or destruction of any certificate for Shares, the Trustees may issue or cause to be issued a replacement certificate on such terms and subject to such rules and regulations as the Trustees may from time to time prescribe. Nothing in this Declaration shall impose upon the Trustees or a transfer agent a duty or limit their rights to inquire into adverse claims. 6.5 Dividends or Distributions to Shareholders. The Trustees may from time to time authorize and the Trust may pay to Shareholders such dividends or distributions in cash or other form, out of current or accumulated income, capital, capital gains, principal, surplus, proceeds from the increase or refinancing of Trust obligations, or from the sale of portions of the Trust Estate or from any other source as the Trustees in their discretion shall determine. Shareholders shall have no right to any dividend or distribution unless and until authorized by the Trustees. The Trustees shall furnish the Shareholders at the time of each such distribution with a statement in writing advising as to the source of funds so distributed or, if the source thereon has not then been determined, the communication shall so state and in such event the statement as to such source shall be sent to the Shareholders not later than sixty (60) days after the close of the fiscal year in which the distribution was made. 6.6 Transfer Agent, Dividend Distributing Agent and Registrar. The Trustees shall have power to employ one or more transfer agents, dividend disbursing agents and registrars and to authorize them on behalf of the Trust to keep records, to hold and disburse any dividends and distributions, and to have and perform in respect of all original issues and transfers of Shares, dividends and distributions and reports and communications to Shareholders, the powers and duties usually had and performed by transfer agents, dividend disbursing agents and registrars of a Maryland corporation. 6.7 Shareholders' Meeting. There shall be an annual meeting of the Shareholders (the "Annual Meeting of Shareholders") which shall be held at the principal office of the Trust, or at such other convenient location as may be determined by the Trustees or by the written consent of all Shareholders entitled to vote thereat, at such time as the Trustees shall determine, at which the Trustees shall be elected and any other proper business may be conducted. The Annual Meeting of Shareholders shall be held after delivery to the Shareholders of the Annual Report. At least ten (10) days and not more than forty (40) days notice shall be given of the time and place of the Annual Meeting of Shareholders. Special meetings of Shareholders may be called by the Trustees and shall be called upon the written request of Shareholders holding not less than twenty-five percent (25%) of the outstanding Shares of the Trust entitled to vote in the manner provided in the Bylaws. If there shall be no Trustees, the officers of the Trust shall promptly call a special meeting of the Shareholders for the election of successor Trustees. Notice of any special meeting shall state the purposes of the meeting. Holders of a majority of the outstanding Shares entitled to vote at any meeting represented in person or by proxy shall constitute a quorum at any such - 20 - 25 meeting. Whenever any action is to be taken by the Shareholders, such action shall, except as otherwise required by this Declaration or by law, be authorized by a majority of the votes cast at a meeting of Shareholders by holders of Shares entitled to vote thereon. Notwithstanding anything in this Declaration to the contrary, the Trust shall not consummate a merger, the shareholder approval of which is required by the applicable laws, unless such transaction is approved by the shareholders by the affirmative vote of a majority of all the votes entitled to be cast on the matter. The affirmative vote at a meeting of Shareholders of the holders of a majority of all outstanding Shares entitled to vote on the matter shall be required to approve the principal terms of the transaction and the nature and amount of the consideration involving any sale, lease, exchange or other disposition of more than 50% of the Trust Estate. Whenever Shareholders are required or permitted to take any action, such action may be taken without a meeting on written consent setting forth the action so taken, signed by the holders of a majority of all outstanding Shares entitled to vote thereon, or such larger proportion thereof as would be required for a vote of Shareholders at a meeting. The vote or consent of Shareholders shall not be required for the pledging, hypothecating, granting security interest in, mortgaging, or encumbering of all or any of the Trust Estate, or for the sale, lease, exchange or other disposition of less than 50% of the Trust Estate. 6.8 Proxies. Whenever the vote or consent of Shareholders is required or permitted under this Declaration, such vote or consent may be given by the Shareholder either directly or to a proxy in the form prescribed in the Bylaws. The Trustees may solicit such proxies from the Shareholders or any of them in any manner requiring or permitting the Shareholders' vote or consent. 6.9 Reports to Shareholders. Not later than ninety (90) days after the close of each fiscal year of the Trust, the Trustees shall mail a report of the business and operation of the Trust during such fiscal year to the Shareholders, which report shall constitute the accounting of the Trustees for such fiscal year. The report (herein "Annual Report") shall be in such form and have such content as the Trustees deem proper. The Annual Report shall include a balance sheet and a statement of income and surplus of the Trust. Such financial statement shall be accompanied by a certificate of an independent certified public accountant thereon, based on a full examination of the books and records of the Trust and made in accordance with generally accepted auditing procedure. A manually signed copy of the accountant's certificate shall be filed with the Trustees. A signed copy of the Annual Report and accountant's certificate shall be filed with the State Department of Assessments and Taxation of Maryland within ninety (90) days after the close of each fiscal year. 6.10 Fixing Record Date. The Bylaws may provide for fixing or, in the absence of such provision, the Trustees may fix, in advance, a date as the record date for determining the Shareholders entitled to notice of or to vote at any meeting of Shareholders or to express consent to any proposal without a meeting, or for the purpose of determining Shareholders entitled to receive payment of any dividend or distribution (whether before or after termination of the Trust) - 21 - 26 or any Annual Report or other communication from the Trustees, or for any other purpose. The record date so fixed shall be not less than five (5) days nor more than fifty (50) days prior to the date of the meeting or event for the purposes of which it is fixed. 6.11 Notice to Shareholders. Any notice of meeting or other notice, communication or report to any Shareholder shall be deemed duly delivered to such Shareholder when such notice, communication or report is deposited, with postage thereon prepaid, in the United States mail, addressed to such Shareholder at his address as it appears on the records of the Trust or is delivered in person to such Shareholder. 6.12 Restrictions on Transfer. (a) Definitions. The following terms shall have the following meanings: "Beneficial Ownership" shall mean ownership of Shares by a Person who would be treated as an owner of such Shares directly, indirectly or constructively through the application of Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code, or Section 544 of the Code, as modified by Section 856(h) of the Code. The terms "Beneficial Owner", "Beneficially Owns" and "Beneficially Owned" shall have correlative meanings. "Charitable Beneficiary" shall mean the organization or organizations described in Section 170(c)(2) and 501(c)(3) of the Code selected by the Excess Share Trustee. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Excess Shares" shall mean the Excess Trust Shares and the Excess Preferred Shares. "Excess Share Trust" shall mean the trust created pursuant to Section 6.13 hereof. "Excess Share Trust Beneficiary" shall mean a beneficiary of the Excess Share Trust as determined pursuant to Section 6.13 hereof. "Excess Share Trustee" shall mean Nina Matis or any successor appointed pursuant to Section 6.13 hereof. "Market Price" of any class of Shares on any date shall mean the average of the Closing Price for the five (5) consecutive trading days ending on such date, or if such date is not a trading date, the five consecutive trading days preceding such date. The "Closing Price" on any date shall mean (i) the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange, or (ii) - 22 - 27 if such class of Shares is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which such class of Shares is listed or admitted to trading, or (iii) if such class of Shares is not listed or admitted to trading on any national securities exchange, the last quoted price, or if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or, if such system is no longer in use, the principal other automated quotations system that may then be in use, or (iv) if such class of Shares is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in such class of Shares selected by the Trustees. "Ownership Limit" shall mean (i) in the case of a Person other than an Existing Holder (as defined below) Beneficial Ownership of more than eight percent (8.0%), by value, vote or number, of the Shares and (ii) in the case of a Person who or which was the Beneficial Owner, as of February 1, 1995 (the "Amendment Date"), of more than 8.0% (by vote, value or number) of the Shares (any such Person being referred to as an "Existing Holder"), a percentage (by vote, value or number) equal to the lesser of (a) 9.9% and (b) the percentage of Shares Beneficially Owned by such Existing Holder as of the Amendment Date; provided, that if, at any time and from time to time after the Amendment Date, the percentage of Shares Beneficially Owned by an Existing Holder shall decrease (whether by reason of a disposition by such Existing Holder, an increase in the number of outstanding Shares or otherwise), then from and after the time of such decrease the Ownership Limit in the case of such Existing Holder shall be a percentage (by vote, value or number) equal to the greater of (x) 8.0% and (y) the percentage of Shares Beneficially Owned by such Existing Holder after giving effect to such decrease. "Purported Beneficial Holder" shall mean, with respect to any event (other than a purported Transfer) which results in Excess Shares, the Person for whom the Purported Record Holder held Shares that were, pursuant to Section 6.12(c) hereof, automatically converted into Excess Shares upon the occurrence of such event. "Purported Beneficial Transferee" shall mean, with respect to any purported Transfer which results in Excess Shares, the purported beneficial transferee for whom the Purported Record Transferee would have acquired Shares if such Transfer had been valid under Section 6.12(b) hereof. "Purported Record Holder" shall mean, with respect to any event (other than a purported Transfer) which results in Excess Shares, the record holder of the Shares that were, pursuant to Section 6.12(c) hereof, automatically converted into Excess Shares upon the occurrence of such event. - 23 - 28 "Purported Record Transferee" shall mean, with respect to any purported Transfer which results in Excess Shares, the record holder of the Shares if such Transfer had been valid under Section 6.12(b) hereof. "Restriction Termination Date" shall mean the first day of the taxable year for which the Trustees have determined to terminate the Trust's status as a REIT. "Transfer" shall mean any sale, transfer, gift, hypothecation, pledge, assignment, devise or other disposition of Shares (including (i) the granting of any option or interest similar to an option (including an option to acquire an option or any series of such options) or entering into any agreement for the sale, transfer or other disposition of Shares or (ii) the sale, transfer, assignment or other disposition of any securities or rights convertible into or exchangeable for Shares), whether voluntary or involuntary, whether of record, constructively or beneficially and whether by operation of law or otherwise. For purposes of this definition, whether securities or rights are convertible or exchangeable for Shares shall be determined in accordance with Sections 318 and 544 of the Code. (b) Restrictions of Transfers and Other Events. On or after the Restriction Termination Date, the provisions of Sections 6.12 and 6.13 hereof shall be of no further force and effect. Prior to the Restriction Termination Date and except as provided in Section 6.12(i) hereof: (1) No Person shall Beneficially Own Shares in excess of the Ownership Limit; (2) Any Transfer that, if effective, would result in any Person Beneficially Owning Shares in excess of the Ownership Limit shall be void ab initio as to the Transfer of that number of Shares which would be otherwise Beneficially Owned by such Person in excess of the Ownership Limit and the intended transferee shall acquire no rights in such Shares in excess of the Ownership Limit; (3) Any Transfer that, if effective, would result in the Shares being Beneficially Owned by fewer than one hundred (100) Persons (determined without reference to any rules of attribution) shall be void ab initio and the intended transferee shall acquire no rights in such Shares; and (4) Any Transfer of Shares that, if effective, would result in the Trust being "closely held" within the meaning of Section 856(h) of the Code shall be void ab initio as to the Transfer of that number of Shares which would cause the Trust to be "closely held" within the meaning of Section 856(h) of the Code and the intended transferee shall acquire no rights in such Shares. (c) Conversion into Excess Shares. (1) If, notwithstanding the other provisions contained in this Article VI, at any time prior to the Restriction Termination Date, there is a purported Transfer or other - 24 - 29 event such that any Person would Beneficially Own Shares in excess of the Ownership Limit, then, except as otherwise provided in Section 6.12(i) hereof, such Shares which would be in excess of the Ownership Limit (rounded up to the nearest whole share), shall automatically be converted into that number of shares of Excess Trust Shares or Excess Preferred Shares, as appropriate, equal to the number of Shares being converted, as further described in Section 6.12(c)(3) hereof. Such conversion shall be effective as of the close of business on the business day prior to the date of the Transfer or other event. (2) If, notwithstanding the other provisions contained in this Article VI, at any time prior to the Restriction Termination Date, there is a purported Transfer or other event which, if effective, would cause the Trust to become "closely held" within the meaning of Section 856(h) of the Code, then the Shares being Transferred or which are otherwise affected by such event and which, in either case, would cause, when taken together with all other Shares, the Trust to be "closely held" within the meaning of Section 856(h) of the Code (rounded up to the nearest whole share) shall automatically be converted into that number of Excess Trust Shares or Excess Preferred Shares, as appropriate, equal to the number of Shares being converted, as further described in Section 6.12(c)(3) hereof. Such conversion shall be effective as of the close of business on the business day prior to the date of the Transfer or change in capital structure. (3) Upon conversion of Trust Shares or Preferred Shares into Excess Shares pursuant to this Section 6.12(c), Trust Shares shall be converted into Excess Trust Shares and Preferred Shares shall be converted in Excess Preferred Shares. (d) Remedies for Breach. If the Trustees or their designees shall at any time determine in good faith that a purported Transfer or other event has taken place in violation of Section 6.12(b) hereof or that a Person intends to acquire or has attempted to acquire Beneficial Ownership of any Shares in violation of Section 6.12(b) hereof, the Trustees or their designees may take such action as they deem advisable to refuse to give effect to or to prevent such Transfer or other event, including, but not limited to, refusing to give effect to such Transfer or other event on the books of the Trust or instituting proceedings to enjoin such Transfer or other event or transaction; provided, however, that any Transfers or attempted Transfers (or, in the case of events other than a Transfer, Beneficial Ownership) in violation of Section 6.12(b) hereof shall be void ab initio and automatically result in the conversion described in Section 6.12(c)(3) hereof, irrespective of any action (or non-action) by the Trustees or their designees. (e) Notice of Restricted Transfer. Any Person who acquires or attempts to acquire Shares in violation of Section 6.12(b) hereof, or any Person who is a purported transferee such that Excess Shares result under Section 6.12(c) hereof, shall immediately give written notice to the Trust of such Transfer, attempted Transfer or other event and shall provide to the Trust such other information as the Trust may request in order to determine the effect, if any, of such Transfer or attempted Transfer or other event on the Trust's status as a REIT. (f) Owners Required to Provide Information. Prior to the Restriction Termination Date: - 25 - 30 (1) Every Beneficial Owner of five percent (5%) or more, by vote, value or number, or such lower percentages as required pursuant to regulations under the Code, of the outstanding Shares shall, before January 30 of each year, give written notice to the Trust stating the name and address of such Beneficial Owner, the general ownership structure of such Beneficial Owner, the number of shares of each class of Shares Beneficially Owned, and a description of how such Shares are held. (2) Each Person who is a Beneficial Owner of Shares and each Person (including the shareholder of record) who is holding Shares for a Beneficial Owner shall provide on demand to the Trust such information as the Trust may request from time to time in order to determine the Trust's status as a REIT and to ensure compliance with the Ownership Limit and the REIT requirements of the Code and the regulations published thereunder. (g) Remedies Not Limited. Subject to Section 6.12(l) hereof, nothing contained in this Article VI shall limit the authority of the Trustees to take such other action as they deem necessary or advisable to protect the Trust and the interests of its Shareholders by preservation of the Trust's status as a REIT and to ensure compliance with the Ownership Limit. (h) Ambiguity. In the case of an ambiguity in the application of any of the provisions of this Section 6.12 or Section 6.13, including any definition contained in Section 6.12(a) hereof, the Trustees shall have the power to determine the application of the provisions of this Section 6.12 and Section 6.13 with respect to any situation based on the facts known to them. (i) Exception. The Trustees upon receipt of a ruling from the Internal Revenue Service or an opinion of tax counsel, satisfactory to them in their sole and absolute discretion, in each case to the effect that the Trust's status as a REIT will not be jeopardized, may exempt a Person from the Ownership Limit if the Trustees obtain such representations and undertakings from such Person as are reasonably necessary to ascertain that such Person's Beneficial Ownership of Shares will not jeopardize the Trust's status as a REIT. (j) Legend. Until the Restriction Termination Date, each certificate for the respective class of Shares shall bear the following legend: The Shares represented by this certificate are subject to restrictions on transfer. Unless excepted by the Trustees, no Person may (1) Beneficially Own Shares in excess of 8.0% of the outstanding Shares, by value, vote or number, determined as provided in the Trust's Declaration of Trust, as the same may be amended from time to time (the "Declaration"), and computed with regard to all outstanding Shares and, to the extent provided by the Code, all Shares issuable under existing options and exchange rights that have not been exercised; or (2) Beneficially Own Shares which would result in the Trust being "closely held". Unless so excepted, any acquisition of Shares and continued holding of ownership constitutes a continuous representation of compliance with the above limitations, and any Person who attempts to Beneficially Own Shares in excess of the above limitations has an affirmative obligation to notify the Trust immediately upon such - 26 - 31 attempt. If the restrictions on transfer are violated, the transfer will be void ab initio and the Shares represented hereby will be automatically converted into Excess Shares that will be held in trust. Excess Shares may not be transferred at a profit and may be purchased by the Trust. In addition, certain Beneficial Owners must give written notice as to certain information on demand and on an annual basis. All terms not defined in this legend have the meanings provided in the Declaration. The Trust will mail without charge to any requesting shareholder a copy of the Declaration, including the express terms of each class and series of the authorized Shares of the Trust, within five (5) days after receipt of a written request therefor. (k) Severability. If any provision of this Article VI or any application of any such provision is determined to be invalid by any Federal or state court having jurisdiction over the issues, the validity of the remaining provisions shall not be affected, and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court. (l) New York Stock Exchange Transactions. Nothing in this Article VI shall preclude the settlement of any transaction entered into through the facilities of the New York Stock Exchange. (m) Amendment of Sections 6.12 or 6.13 Notwithstanding any other provisions of this Declaration or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of Shares required by law or this Declaration, the affirmative vote of the holders of at least two-thirds (2/3) of the voting power of all the then outstanding Shares, voting together as a single class, shall be required to alter, amend or repeal this Section 6.12 or Section 6.13. 6.13 Excess Shares. (a) Ownership In Trust. Upon any purported Transfer or other event that results in Excess Shares pursuant to Section 6.12(c) hereof, such Excess Shares shall be deemed to have been transferred to Nina Matis (or any successor Excess Share Trustee), as Excess Share Trustee of the Excess Share Trust for the benefit of such Excess Share Trust Beneficiary or Beneficiaries and the Charitable Beneficiary effective as of the close of business on the business day prior to the date of the Transfer or other event. Excess Shares so held in trust shall be issued and outstanding shares of the Trust. The Purported Record Transferee or Purported Record Holder shall have no rights in such Excess Shares. The Purported Beneficial Transferee or Purported Beneficial Holder shall have no rights in such Excess Shares except as provided in Section 6.13(e). Nina Matis, or any successor Excess Share Trustee, may resign by appointing a person independent of the Trust, the Corporation (as defined in Section 6.14) or any Excess Share Trust Beneficiary as the Excess Share Trustee. The Excess Share Trustee shall, from time to time, designate one or more charitable organization or organizations as the Charitable Beneficiary. - 27 - 32 (b) Dividend Rights. Excess Shares shall be entitled to the same dividends determined as if no conversion into Excess Shares had occurred. Any dividend or distribution paid prior to the discovery by the Trust that the Shares have been converted into Excess Shares shall be repaid to the Excess Share Trust upon demand. Any dividend or distribution declared but unpaid shall be paid to the Excess Share Trust. All dividends received or other income earned by the Excess Share Trust shall be paid over to the Charitable Beneficiary. (c) Rights Upon Liquidation. Excess Shares shall not be entitled to receive any portion of the assets of the Trust on the liquidation or dissolution of the Trust. Upon conversion of Excess Shares into Shares pursuant to Section 6.13(e) hereof, such shares shall be entitled to receive their pro rata share of the assets of the Trust as a result of the liquidation or dissolution of the Trust. (d) Voting Rights. The Excess Share Trustee shall vote the Excess Shares which shall have the same voting rights as the Shares into which they are to be converted pursuant to Section 6.13(e) hereof. Any vote cast by the Purported Beneficial Transferee or Purported Record Transferee will, at the election of the Excess Share Trustee, be void ab initio. (e) Restrictions On Transfer; Designation of Excess Share Trust Beneficiary. (1) Excess Shares shall not be transferrable. The Excess Share Trustee may freely designate an Excess Share Trust Beneficiary of all or any portion of the beneficial interest in the Excess Share Trust (representing the number of Excess Shares held by the Excess Share Trust attributable to a purported Transfer or other event that results in Excess Shares and designated as to number and class of shares pursuant to the notice provision of this Section 6.13(e)(1)), if the Excess Shares held in the Excess Share Trust would not be Excess Shares in the hands of such Excess Share Trust Beneficiary. If the Excess Shares resulted from a purported Transfer, the Purported Beneficial Transferee shall receive a payment from the Excess Share Trustee that reflects a price per share for such Excess Shares equal to the lesser of (A) the price per share received by the Excess Share Trustee and (B) (x) the price per share such Purported Beneficial Transferee paid for the Share of Beneficial Interest in the purported Transfer that resulted in the Excess Shares, or (y) if the Purported Beneficial Transferee did not give value for such shares of Excess Shares (through a gift, devise or other transaction) a price per share of Excess Shares equal to the Market Price of the Shares on the date of the purported Transfer that resulted in the Excess Shares. If the Excess Shares resulted from an event other than a purported Transfer, the Purported Beneficial Holder shall receive a payment from the Excess Share Trustee that reflects a price per share of Excess Shares equal to the lesser of (A) the price per share received by the Excess Share Trustee and (B) the Market Price of the Shares on the date of the event that resulted in Excess Shares. Upon such transfer of an interest in the Excess Share Trust, the corresponding shares of Excess Shares in the Excess Share Trust shall be automatically converted into such number of Shares (of the same class as the shares that were converted into such Excess Shares) as is equal to the number of shares of Excess Shares, and such Shares shall be transferred of record to the Excess Share Trust Beneficiary of the interest in the Excess Share Trust designated by the - 28 - 33 Excess Share Trustee as described above if such Shares would not be Excess Shares in the hands of such Excess Share Trust Beneficiary. Prior to any transfer of any interest in the Excess Share Trust, the Trust must have waived in writing its purchase rights, if any, under Section 6.13(f) hereof. Any funds received by the Excess Share Trustee in excess of the funds payable to the Purported Beneficial Holder or the Purported Beneficial Transferor shall be paid to the Charitable Beneficiary. The Trust shall pay the costs and expenses of the Excess Share Trustee. (2) Notwithstanding the foregoing, if a Purported Beneficial Transferee, Purported Beneficial Holder or Excess Share Trustee receives a price for designating an Excess Share Trust Beneficiary of an interest in the Excess Share Trust that exceeds the amounts allowable under Section 6.13(e) (1) hereof, such Purported Beneficial Transferee or Purported Beneficial Holder shall be personally liable to, and shall pay, or cause the Excess Share Trust Beneficiary of the interest in the Excess Share Trust to pay, such excess to the Excess Share Trustee who shall pay over such excess to the Charitable Beneficiary. (3) Notwithstanding the foregoing, if the provisions of this Section 6.13(e) are determined to be void or invalid by virtue of any legal decision, statute, rule or regulation, then the Purported Beneficial Transferee or Purported Beneficial Holder of any shares of Excess Shares may be deemed, at the option of the Trust, to have acted as an agent on behalf of the Trust, in acquiring or holding such Excess Shares and to hold such Excess Shares on behalf of the Trust. (f) Purchase Right in Excess Shares. Excess Shares shall be deemed to have been offered for sale by the Excess Share Trustee to the Trust, or its designee, at a price per Excess Share equal to (i) in the case of Excess Shares resulting from a purported Transfer, the lesser of (A) the price per share of the Shares in the transaction that created such Excess Shares (or, in the case of devise or gift, the Market Price of the Shares at the time of such devise or gift), or (B) the lowest Market Price of the class of Shares which resulted in the Excess Shares at any time after the date such shares were converted into Excess Shares and prior to the date the Trust, or its designee, accepts such offer or (ii) in the case of Excess Shares resulting from an event other than a purported Transfer, the lesser of (A) the Market Price of the Shares on the date of such event or (B) the lowest Market Price for Shares which resulted in the Excess Shares at any time from the date of the event resulting in such Excess Shares and prior to the date the Trust, or its designee, accepts such offer. The Trust shall have the right to accept such offer for a period of ninety (90) days after the later of (i) the date of the Transfer which resulted in such Excess Shares and (ii) the date the Trustees determine in good faith that a Transfer or other event resulting in Excess Shares has occurred, if the Trust does not receive a notice of such Transfer or other event pursuant to Section 6.12(e) hereof. 6.14 Intercompany Agreement. Until the Amended and Restated Intercompany Agreement dated as of January 6, 1999 (as amended from time to time, the "Intercompany Agreement"), between the Trust and Starwood Hotels & Resorts Worldwide, Inc., a Maryland corporation (the "Corporation"), is terminated, the Trust shall comply in all material respects with - 29 - 34 the restrictions on transfer of its shares of beneficial interest and all other provisions set forth in the Intercompany Agreement. 6.15 Class A Exchangeable Preferred Shares Articles Supplementary 6.15.1. NUMBER OF SHARES AND DESIGNATION. The class of shares of beneficial interest in the Trust being created by these Articles Supplementary shall be designated as "Class A Exchangeable Preferred Shares", par value $.01 per share ("Class A EPS"), and 30,000,000 shall be the number of shares of Class A EPS constituting such class. 6.15.2. DEFINITIONS. For purposes of the Class A EPS, the following terms have the meanings indicated: "Affiliate" shall mean with respect to any Person, any other Person which directly or indirectly controls, is controlled by or is under common control with such Person. "Articles Supplementary" shall mean either this Article 6.15 or Article 6.16, as the case may be, of the Declaration. "Board of Trustees" shall mean the Board of Trustees of the Trust or any committee authorized by the Board of Trustees from time to time to exercise any of its powers or perform any of its responsibilities with respect to the Class A EPS. "Business Day" shall mean any day other than a Saturday, Sunday or a day on which state or federally chartered banking institutions in New York, New York are not required to be open. "Cash Equivalent" of Paired Shares or any other shares of beneficial interest or other securities of the Trust or any other issuer as of any date shall mean an amount of cash equal to (i) the average of the daily Current Market Prices per unit of such Paired Shares or other shares or securities during the five (5) consecutive Trading Days immediately preceding such date or (ii) if the Paired Shares or such other shares or securities are not publicly traded on such date, the fair market value of such Paired Shares or other securities as of such date as determined by the Board of Trustees in good faith (subject to the rights of the holders of the Class A EPS to request a valuation from a nationally recognized investment banking firm as provided in paragraph (g)(v) of Article 6.15.5 hereof). "Class A Articles Supplementary" shall mean this Article 6.15. "Class A Dividend Replacement Shares" shall have the meaning set forth in paragraph (d)(v) of Article 6.15.5 hereof. - 30 - 35 "Class A EPS" shall have the meaning set forth in Article 6.15.1 hereof. "Class A Exchange Notice" shall have the meaning set forth in paragraph (a)(i) of Article 6.15.5 hereof. "Class A Exchange Right" shall have the meaning set forth in paragraph (a)(i) of Article 6.15.5 hereof. "Class A Liquidation Preference" shall have the meaning set forth in paragraph (b) of Article 6.15.4 hereof. "Class A Liquidation Participation Right" shall have the meaning set forth in paragraph (a) of Article 6.15.4 hereof. "Class A Participation Dividend" shall have the meaning set forth in paragraph (a) of Article 6.15.3 hereof. "Class A Preferred Dividend" shall have the meaning set forth in paragraph (a) of Article 6.15.3 hereof. "Class A Underlying Corporation Shares" as of any time shall mean the Corporation Shares component of the Class A Underlying Paired Shares as of such time. "Class A Underlying Paired Shares" as of any time shall mean the Paired Shares (including, unless otherwise expressly provided herein, fractional units of Paired Shares) for which each share of Class A EPS is then exchangeable upon exercise of the Class A Exchange Right but excluding (except for the purposes of an actual exercise of the Class A Exchange Right) any Class A Dividend Replacement Shares. "Class A Underlying Trust Shares" as of any time shall mean the Trust Shares component of the Class A Underlying Paired Shares as of such time. "Class B Articles Supplementary" shall mean Article 6.16 of the Declaration of Trust pursuant to which the Trust has classified and designated 15,000,000 shares of beneficial interest in the Trust as "Class B Exchangeable Preferred Shares". "Class B EPS" shall mean the Class B Exchangeable Preferred Shares, par value $0.01 per share, of the Trust created pursuant to the Class B Articles Supplementary. "Class B Liquidation Preference" shall have the meaning set forth in paragraph (b) of Article 6.16.4 hereof. "Class B Liquidation Participation Right" shall have the meaning set forth in paragraph (a) of Article 6.16.4 hereof. - 31 - 36 "Class B Participation Dividend" shall have the meaning set forth in paragraph (a) of Article 6.16.3 hereof. "Class B Preferred Dividend" shall have the meaning set forth in paragraph (a) of Article 6.16.3 hereof. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Conditionally Declared Class A Dividend" shall have the meaning set forth in paragraph (b)(i) of Article 6.15.3 hereof. "Constituent Person" shall have the meaning set forth in paragraph (e)(ii) of Article 6.15.5 hereof. "Corporation" shall mean Starwood Lodging Corporation, a Maryland corporation, and any successor. "Corporation Common Adjustment Event" shall mean any of the following events that occurs after the Issue Date: (i) The payment by the Corporation of a dividend on the outstanding Corporation Shares that is payable in additional Corporation Shares; (ii) The subdivision of the outstanding Corporation Shares into a greater number of shares (whether by share split or otherwise); (iii) The combination of the outstanding Corporation Shares into a smaller number of shares (whether by reverse share split or otherwise); or (iv) The issuance of any shares of stock of the Corporation by reclassification of the Corporation Shares. "Corporation Common Distribution" shall mean any dividend or distribution paid or made by the Corporation (including, without limitation, any distribution of assets on any liquidation, dissolution or winding up of the Corporation) in respect of the Corporation Shares, other than a dividend or distribution that constitutes a Corporation Common Adjustment Event. In addition, a distribution to the holders of Corporation Shares of rights to subscribe for or purchase additional Corporation Shares under a shareholders protective rights plan or agreement shall not be deemed to constitute a Corporation Common Distribution to the extent that the Corporation makes provision so that such rights, to the extent still outstanding with respect to the outstanding Corporation Shares, shall be issued to the holders of any Corporation Shares issued upon exercise of the Class A Exchange Right (and, to the extent applicable, shall attach to such Corporation Shares) in an amount and manner and to the extent provided in such - 32 - 37 shareholders protective rights plans or agreements with respect to already outstanding Corporation Shares. "Corporation Shares" shall mean the shares of common stock, par value $.01 per share, of the Corporation or any stock of the Corporation into which such common stock may hereafter be changed. "Current Market Price" of publicly traded Paired Shares or any other shares of beneficial interest or other securities of the Trust or any other issuer as of any Trading Day shall mean the last reported sales price, regular way, on such day, or, if no sale takes place on such day, the average of the reported closing bid and asked prices on such day, regular way, in either case as reported on the NYSE or, if such shares or other securities are not listed or admitted for trading on the NYSE, on the principal national securities exchange on which such shares or other securities are listed or admitted for trading or, if not listed or admitted for trading on any national securities exchange, on the NASDAQ National Market or, if such shares or other securities are not quoted on such NASDAQ National Market, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for such shares or other securities on such day shall not have been reported through NASDAQ, the average of the bid and asked prices on such day as furnished by any NYSE member firm regularly making a market in such shares or other securities selected for such purpose by the Chief Executive Officer or Chief Financial Officer of the Trust or the Board of Trustees. "Declaration" shall mean the Amended and Restated Declaration of Trust of the Trust, as amended from time to time. "Delivered Shares" shall have the meaning set forth in paragraph (a)(ii) of Article 6.15.5 hereof. "Dividend Correspondence Ratio" shall have the meaning set forth in paragraph (b)(i) of Article 6.15.3 hereof. "Excess Shares" shall have the meaning set forth in paragraph (a)(ii) of Article 6.15.5 hereof. "Exchange Election Notice" shall have the meaning set forth in paragraph (a)(i) of Article 6.15.5 hereof. "Exchange Issuance Date" shall have the meaning set forth in paragraph (b) of Article 6.15.5 hereof. "Exchange Promissory Note" shall mean an unsecured promissory note of the Trust in such form as the Trust shall reasonably prescribe with a maturity date ninety (90) days after the date of issuance of such note. Such Exchange Promissory Note shall bear interest in an amount equal to the amount of any dividends paid during the period that - 33 - 38 such note remains outstanding on a number of Paired Shares equal to the number of Excess Shares for which such Exchange Promissory Note is being substituted pursuant to paragraph (a)(ii) of Article 6.15.5 hereof, which interest shall be payable on the dates of payment of the corresponding dividends. "Exchange Ratio" shall have the meaning set forth in paragraph (d)(i) of Article 6.15.5 hereof. "Issue Date" shall mean the first date on which any shares of Class A EPS are issued by the Trust. "Junior Dividend" means a dividend payable in respect of any class or series of shares of beneficial interest in the Trust over which the Class A Preferred Dividends have preference or priority as to the payment of dividends, including, without limitation, any Trust Common Dividend, any Class A Participation Dividend and any Class B Participation Dividend. "Junior Liquidating Distribution" shall mean any distribution of assets of the Trust in connection with a Liquidation Event to holders of any class or series of shares of beneficial interest in the Trust over which the Class A Liquidation Preference has preference or priority in the distribution of assets upon the occurrence of such Liquidation Event, including, without limitation, any such distribution of assets to holders of Trust Shares or in respect of the Class A Liquidation Participation Right or the Class B Liquidation Participation Right. "Junior Shares" shall mean the Trust Shares and any other class or series of shares of beneficial interest in the Trust now or hereafter issued and outstanding over which the Class A Preferred Dividends have full preference or priority in the payment of dividends or over which the Class A Liquidation Preference has full preference or priority in the distribution of assets on the occurrence of any Liquidation Event, including, without limitation, the Trust Shares but excluding the Class B EPS. "Liquidation Date" shall have the meaning set forth in paragraph (a) of Article 6.15.4 hereof. "Liquidation Event" shall mean any liquidation, dissolution or winding up of the affairs of the Trust, whether voluntary or involuntary. For the purposes hereof, (i) a consolidation or merger of the Trust with one or more entities, (ii) a statutory share exchange and (iii) a sale or transfer of all or substantially all of the Trust's assets shall not be deemed to be a Liquidation Event. "Non-Electing Shares" shall have the meaning set forth in paragraph (e)(ii) of Article 6.15.5 hereof. "NYSE" shall mean the New York Stock Exchange. - 34 - 39 "Offered Shares" shall have the meaning set forth in paragraph (a)(ii) of Article 6.15.5 hereof. "Ownership Limit" shall have the meaning set forth in Section 6.12 of the Declaration. "Paired Shares" shall mean units consisting of one Trust Share paired with one Corporation Share (subject to adjustment as contemplated provided in paragraph (e) of Article 6.15.5 hereof) and represented by a single share certificate, as provided in the Pairing Agreement dated as of June 25, 1980, between the Trust and the Corporation, as amended from time to time. "Paired Shares Adjustment Event" shall have the meaning set forth in paragraph (d)(i) of Article 6.15.5 hereof. "Parity Liquidation Preference" shall mean the liquidation preference of any class or series of shares of beneficial interest in the Trust that ranks on a parity with the Class A Liquidation Preference. "Parity Preferred Dividend" shall mean any dividend payable in respect of any class or series of shares of beneficial interest in the Trust that ranks on a parity in right of payment with the Class A Preferred Dividends, whether or not the dividend rate, dividend payment dates, liquidation preference, redemption rights, conversion or exchange rights or other features of such class or series are different from those of the Class A EPS. "Person" shall mean any individual, firm, partnership, corporation, limited liability company or other entity, and shall include any successor (by merger or otherwise) of such entity. "Registered Sale Option" shall have the meaning set forth in paragraph (a)(ii) of Article 6.15.5 hereof. "REIT Rules" shall mean the requirements (i) for the Trust to qualify as a real estate investment trust under the Code as set forth in Sections 856(a)(5) and 856(a)(6) of the Code and (ii) for the Corporation or any affiliate of the Corporation which is a tenant of the Trust to not be treated as a related party pursuant to Section 856(d)(2)(B) of the Code. "Requested Shares" shall have the meaning set forth in paragraph (a)(ii) of Article 6.15.5 hereof. "Securities Act" shall mean the Securities Act of 1933, as amended. - 35 - 40 "set apart for payment" shall be deemed to include, without any action other than the following, the recording by the Trust in its accounting ledgers of any accounting or bookkeeping entry which indicates, pursuant to a declaration of dividends or other distribution by the Board of Trustees, the allocation of funds to be so paid on any series or class of shares of beneficial interest of the Trust; provided, however, that if any funds for any class or series of Junior Shares or any class or series of shares of beneficial interest of the Trust ranking on a parity with the Class A EPS as to the payment of dividends are placed in a separate account of the Trust or delivered to a disbursing, paying or other similar agent, then "set apart for payment" with respect to the Class A EPS shall mean placing such funds in a separate account or delivering such funds to a disbursing, paying or similar agent. "Trading Day" with respect to publicly traded Paired Shares or any other shares of beneficial interest or other securities of the Trust or any other issuer shall mean any day on which the shares or other securities in question are traded on the NYSE, or if such shares or other securities are not listed or admitted for trading on the NYSE, on the principal national securities exchange on which such shares or other securities are listed or admitted, or if not listed or admitted for trading on any national securities exchange, on the NASDAQ National Market, or if such shares or other securities are not quoted on such NASDAQ National Market, in the applicable securities market in which such shares or other securities are traded. "Transaction" shall have the meaning set forth in paragraph (e)(ii) of Article 6.15.5 hereof. "Transfer Agent" shall mean ChaseMellon Shareholder Services, L.L.C. (or any successor thereof), or such other agent or agents of the Trust as may be designated by the Board of Trustees or their designee as the transfer agent for the Class A EPS and the Class B EPS. "Trust" shall mean Starwood Lodging Trust, a Maryland real estate investment trust, and any successor. "Trust Common Adjustment Event" shall mean any of the following events that occurs after the Issue Date: (i) The payment by the Trust of a dividend on the outstanding Trust Shares that is payable in additional Trust Shares; (ii) The subdivision of the outstanding Trust Shares into a greater number of shares (whether by share split or otherwise); (iii) The combination of the outstanding Trust Shares into a smaller number of shares (whether by reverse share split or otherwise); or - 36 - 41 (iv) The issuance of any shares of beneficial interest in the Trust by reclassification of the Trust Shares. "Trust Common Dividend" shall mean any dividend or distribution paid or made by the Trust pro rata on the outstanding Trust Shares other than (i) a distribution of assets of the Trust upon the occurrence of a Trust Liquidation Event or (ii) on a dividend or distribution that constitutes a Trust Common Adjustment Event. In addition, a distribution to the holders of shares of beneficial interest in the Trust of rights to subscribe for or purchase additional Trust Shares under a shareholders protective rights plan or agreement or any similar plan or agreement shall not be deemed to constitute a Trust Common Dividend to the extent that the Trust makes provision so that such rights, to the extent still outstanding with respect to the outstanding Trust Shares, shall be issued to the holders of any Trust Shares issued upon exercise of the Class A Exchange Right (and, to the extent applicable, shall attach to such Trust Shares) in an amount and manner and to the extent provided in such plans or agreements with respect to already outstanding Trust Shares. "Trust Shares" shall mean the common shares of beneficial interest in the Trust, par value $.01 per share, or any shares of beneficial interest in the Trust into which such common shares may be changed. "Westin Transaction Agreement" shall mean the Transaction Agreement dated as of September 8, 1997 among WHWE L.L.C., Woodstar Investor Partnership, Nomura Asset Capital Corporation, Juergen Bartels, W&S Hotel L.L.C., Westin Hotels & Resorts Worldwide, Inc., W&S Lauderdale Corp., W&S Seattle Corp., Westin St. John Hotel Company, Inc., W&S Denver Corp., W&S Atlanta Corp., the Trust, SLT Realty Limited Partnership, the Corporation and SLC Operating Limited Partnership, as such agreement may be amended from time to time. "Westin Transaction Securities" shall mean, with respect to a holder of Class A EPS or an Affiliate thereof, any shares of Class A EPS, shares of Class B EPS, Starwood Operating Partnership Units and Starwood Realty Partnership Units (as such terms are defined in the Westin Transaction Agreement) received by such holder or Affiliate pursuant to the Westin Transaction Agreement, together with any shares of Class B EPS, Class A EPS or Paired Shares (or other securities) issued upon exchange or conversion of any such Westin Transaction Securities. 6.15.3. DIVIDENDS. (a) In General. The holders of Class A EPS will be entitled (i) to receive a preferred dividend payable as described in paragraph (b) below (a "Class A Preferred Dividend"), when, as and if declared by the Board of Trustees out of assets of the Trust legally available for that purpose, based on the payment of any Corporation Common Distribution and (ii) to participate on the basis described in paragraph (c) below in any Trust Common Dividend, when, - 37 - 42 as and if declared by the Board of Trustees out of assets of the Trust available for that purpose (a "Class A Participation Dividend"). (b) Class A Preferred Dividend. (i) Upon the payment by the Corporation of any Corporation Common Distribution prior to the occurrence of a Liquidation Event, the right to receive a Class A Preferred Dividend will automatically accrue with respect to each share of Class A EPS as of the payment date for such Corporation Common Distribution in an amount equal to the value of the Corporation Common Distribution paid on each Corporation Share multiplied by the applicable Dividend Correspondence Ratio described below. To the extent that any Corporation Common Distribution consists of securities or other property (other than cash), the Trust will have the option of paying the corresponding Class A Preferred Dividend either (A) in the same form as such Corporation Common Distribution (i.e., by delivery of the same type of securities or other property as distributed in the Corporation Common Distribution), (B) in cash in an amount equal to the fair market value of such securities or other property as determined in good faith by the Board of Trustees (subject to the rights of the affected holders of Class A EPS to request a valuation from a nationally recognized investment banking firm as provided in paragraph (g)(v) of Article 6.15.5 hereof) or (C) a combination thereof. Each Class A Preferred Dividend will be cumulative from the payment date for the related Corporation Common Distribution and will be payable to holders of record of Class A EPS on such record date as shall be fixed by the Board of Trustees, which record date shall be the same as the record date for the corresponding Class B Preferred Dividend that will have accrued or will accrue based on such Corporation Common Distribution and not earlier than the record date for such Corporation Common Distribution. The Board of Trustees may, at any time between the declaration of a Corporation Common Distribution and the related payment date, declare a corresponding Class A Preferred Dividend conditioned on the actual payment of such Corporation Common Distribution (any such Class A Preferred Dividend being sometimes referred to herein as a "Conditionally Declared Class A Dividend" until such time as the corresponding Corporation Common Distribution is paid, at which time it will no longer be a Conditionally Declared Class A Dividend but will instead be deemed to be an accrued Class A Preferred Dividend). The "Dividend Correspondence Ratio" for the purposes of determining the amount of any Class A Preferred Dividend shall mean the number of Class A Underlying Corporation Shares for which each share of Class A EPS is exchangeable as of the record date for the related Corporation Common Distribution upon exercise of the Class A Exchange Right, as such number shall be proportionately adjusted to reflect any share dividend, share split, reverse share split or other combination or subdivision of the Class A EPS that becomes effective between (or, if the record date for such event is different from the effective date therefor, that has a record date that falls between) (A) the record date for the Corporation Common Distribution and (B) the date of payment of such Corporation Common Distribution or, if earlier, the record date for such Class A Preferred Dividend. (ii) So long as any shares of Class A EPS are outstanding: (A) no Junior Dividend may be declared or paid or set apart for payment unless all accrued Class A Preferred Dividends and Conditionally Declared Class A Dividends have been or are concurrently declared and paid, or declared and a sum sufficient for the payment thereof set apart for payment, (B) no - 38 - 43 Parity Preferred Dividend shall be declared or paid or set aside for payment unless a ratable portion of all accrued but unpaid Class A Preferred Dividends and Conditionally Declared Class A Dividends has been or is concurrently declared and paid, or declared and a sum sufficient for the payment thereof set apart for payment (with such ratable portion being based on the portion of the accrued but unpaid Parity Preferred Dividends being paid) and (C) no Junior Shares may be redeemed, purchased or otherwise acquired by the Trust (other than a redemption, purchase or other acquisition of Trust Shares made for purposes of and in compliance with requirements of an employee incentive or benefit plan of the Trust or any subsidiary or upon any exchange or redemption of other securities at the option of the holders thereof, or as required or permitted under Article VI of the Declaration) for consideration (or any moneys paid or made available for a sinking fund for the redemption of any Junior Shares), directly or indirectly (except for conversion into or exchange for Junior Shares) unless all accrued Class A Preferred Dividends and Conditionally Declared Class A Dividends have been or are concurrently declared and paid, or declared and a sum sufficient for the payment thereof set apart for payment. (c) Class A Participation Dividend. No Trust Common Dividend may be declared in respect of the Trust Shares unless the Board of Trustees concurrently declares a Class A Participation Dividend entitling each share of Class A EPS to receive an amount equal to the amount of the Trust Common Dividend declared on each Trust Share multiplied by the number of Class A Underlying Trust Shares for which each share of Class A EPS is then exchangeable upon exercise of the Class A Exchange Right as of the record date for such Trust Common Dividend. Such Class A Participation Dividend shall be payable on the same date on which the corresponding Trust Common Dividend is payable, shall be payable in the same form as the corresponding Trust Common Dividend and shall be paid to holders of record of the Class A EPS on the same record date as is fixed by the Board of Trustees for the payment of such Trust Common Dividend. 6.15.4. LIQUIDATION RIGHTS. (a) In General. Upon the occurrence of any Liquidation Event, the holders of Class A EPS will be entitled (i) to receive out of the assets of the Trust legally available for liquidating distributions to holders of shares of beneficial interests in the Trust, prior to the making of any Junior Liquidating Distribution, a liquidating distribution in an amount equal to the Class A Liquidation Preference described in paragraph (b) below determined as of the effective date of such Liquidation Event or, if no effective date is provided, as of the record date of the first liquidating distribution relating to such Liquidation Event (in either such case, the "Liquidation Date") and (ii) to participate on the basis described in paragraph (c) below in any liquidating distribution to holders of Trust Shares (the "Class A Liquidation Participation Right"). In determining whether a distribution (other than upon the occurrence of a Liquidation Event), by dividend, redemption or other acquisition of shares of beneficial interest in the Trust or otherwise, is permitted under Maryland law, amounts that would be needed, if the Trust were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of the holders of Class A EPS whose preferential rights upon dissolution are senior to those receiving the distribution shall not be added to the Trust's total liabilities. - 39 - 44 (b) Class A Liquidation Preference. The "Class A Liquidation Preference" of a share of Class A EPS as of the applicable Liquidation Date shall mean the sum of (A) the fair market value (as determined in good faith by the Board of Trustees, subject to the right of the holders of Class A EPS to request a valuation from a nationally recognized investment banking firm pursuant to paragraph (g)(v) of Article 6.15.5 hereof) as of such date of the number of Class A Underlying Corporation Shares for which each Class A EPS is exchangeable as of such date upon exercise of the Class A Exchange Right plus (B) the amount of any accrued but unpaid Class A Preferred Dividends in respect of each share of Class A EPS as of such date (other than any such accrued but unpaid Class A Preferred Dividends that have been declared with a record date prior to such Liquidation Date, which the Trust shall separately be obligated to pay to the holders of record of the Class A EPS as of such record date). Until each holder of shares of Class A EPS has received distributions equal to the Class A Liquidation Preference, no Junior Liquidating Distributions may be paid to holders of any other class or series of shares of beneficial interest in the Trust. Subject to the rights of the holders of shares of beneficial interest in the Trust with liquidation preferences ranking prior to or on a parity with the Class A Liquidation Preference, after payment shall have been made in full of the Class A Liquidation Preference as provided in this paragraph (b), Junior Liquidating Distributions may be paid to the holders of any shares of beneficial interest entitled to receive such distributions and the holders of the Class A EPS shall not be entitled to share therein except as provided in paragraph (c) of this Article 6.15.4. In the event that the assets of the Trust available for liquidating distributions to holders of shares of beneficial interest in the Trust in connection with any Liquidation Event are insufficient to pay the Class A Liquidation Preference on all outstanding Class A EPS and any Parity Liquidation Preferences in respect of any other classes or series of shares of beneficial interest in the Trust, then the holders of the Class A EPS and such other classes and series of shares of beneficial interest in the Trust shall share ratably in any such distribution of assets in proportion to the Class A Liquidation Preference and the Parity Liquidation Preferences to which they would otherwise be respectively entitled. (c) Class A Liquidation Participation Right. In addition to being entitled to receive the Class A Liquidation Preference, upon the occurrence of any Liquidation Event the holders of Class A EPS shall be entitled to participate, pursuant to the Class A Liquidation Participation Right, ratably with the holders of Trust Shares in any liquidating distributions to such holders. For such purpose, each share of Class A EPS shall be deemed to represent a number of Trust Shares equal to the number of Class A Underlying Trust Shares for which each share of Class A EPS could be exchanged upon exercise of the Class A Exchange Right as of the record date for such distribution. 6.15.5. EXCHANGE RIGHT. (a) Class A Exchange Right. (i) A holder of shares of Class A EPS shall have the right to exchange such shares in whole or in part at any time for fully paid and non-assessable Paired Shares to the extent described below (the "Class A Exchange Right"). A holder of shares of Class A EPS desiring to exchange such shares for Paired Shares shall surrender the certificate or certificates evidencing such shares, duly endorsed or assigned to the Trust or in blank, to the Transfer Agent together with a duly completed and executed exchange notice (a "Class A - 40 - 45 Exchange Notice") in such form as the Trust shall prescribe from time to time and such related certifications as the Trust may reasonably prescribe from time to time. Unless any Paired Shares to be issued in exchange for such shares of Class A EPS are to be issued in the same name as the name in which such shares of Class A EPS are registered, each share certificate surrendered shall be accompanied by instruments of transfer, in form reasonably satisfactory to the Trust, duly executed by the holder or such holder's duly authorized attorney and an amount sufficient to pay any applicable transfer or similar tax (or evidence reasonably satisfactory to the Trust demonstrating that such taxes have been paid). As promptly as practicable (and in any event within five (5) Business Days after receipt of a Class A Exchange Notice and such required certificates and documents, the Trust shall elect, pursuant to an election notice given to the exchanging holder (an "Exchange Election Notice"), to either: (i) deliver to such holder the number of Paired Shares corresponding to the number of shares of Class A EPS being exchanged based on the Exchange Ratio described in paragraph (d) of this Article 6.15.5 (including procuring the issuance by the Corporation of the Corporation Shares component of such Paired Shares) or (ii) pay to the holder the Cash Equivalent of such Paired Shares or (iii) a combination of (i) and (ii). (ii) If the delivery to such holder of the full number of Paired Shares requested to be delivered pursuant to the Class A Exchange Notice (the "Requested Shares") would result in a violation of either the Ownership Limit or the REIT Rules, the Trust may elect in the Exchange Election Notice to either (A) deliver to such holder the maximum number of Paired Shares that may be delivered without causing such a violation (the "Delivered Shares", with the number of Requested Shares in excess of the Delivered Shares being referred to herein as the "Excess Shares"), together with either the Cash Equivalent (determined as of the date of delivery of the applicable Class A Exchange Notice and the related certificates and other documents described above) of the Excess Shares or an Exchange Promissory Note in a principal amount equal to such Cash Equivalent or (B) deliver to such holder the Cash Equivalent (determined as of such notice delivery date) of the Requested Shares. Notwithstanding the foregoing, in the event that the delivery of the full number of Requested Shares pursuant to a Class A Exchange Notice would violate either the Ownership Limit or the REIT Rules because the exchanging Class A EPS holder, together with such holder's Affiliates (but without giving effect to any other applicable attribution rules under the Code), beneficially owns, as of the date the Exchange Election Notice is given, Paired Shares other than through the ownership of Westin Transaction Securities, the Trust will have the option (the "Registered Sale Option"), exercisable in the Exchange Election Notice, in lieu of delivering an Exchange Promissory Note in a principal amount equal to the Cash Equivalent of the Excess Shares, to procure the filing of a registration statement under the Securities Act, and to publicly offer and sell pursuant to such registration statement in such manner as the Trust in good faith determines to be appropriate a number of Paired Shares equal to the number of such Excess Shares (the "Offered Shares"), the net proceeds of which sale (after deducting any applicable underwriting discounts or commissions and the expenses of such offering) shall be paid to such holder. (iii) In the event that the issuance of the full number of Requested Shares upon any exercise of the Class A Exchange Right would violate either the Ownership Limit or the REIT Rules and either (i) the Trust elects to deliver the Delivered Shares together with an - 41 - 46 Exchange Promissory Note in a principal amount equal to the Cash Equivalent of the Excess Shares or (ii) the Trust exercises the Registered Sale Option, the holder of the shares of Class A EPS being exchanged will have the right to withdraw his or her Class A Exchange Notice as to the Excess Shares, which withdrawal must be made by written notice to the Transfer Agent within ten (10) Business Days after receipt of the Trust's Exchange Election Notice. (b) Delivery of Securities and Cash. If the Exchange Election Notice relating to an exercise of the Class A Exchange Right does not give rise to a withdrawal right pursuant to paragraph (a)(iii) above, such Exchange Election Notice shall be accompanied by the delivery of the Paired Shares and/or cash required to be delivered pursuant to such Exchange Election Notice. If the Exchange Election Notice does give rise to such a withdrawal right, but such right is not exercised by the exchanging holder, the Trust shall deliver the Paired Shares, Exchange Promissory Note and/or cash required to be delivered pursuant to such Exchange Election Notice within five (5) Business Days after the expiration of such withdrawal right. If the Exchange Election Notice includes the exercise of the Registered Sale Option, the proceeds from the sale of the Offered Shares shall be paid over to the applicable holder promptly upon receipt. Any cash payable to an exchanging holder hereunder shall be payable at the election of the Trust by check or by wire transfer to an account designated in writing by the exchanging holder, if one has been so designated. With respect to any Paired Shares to be issued pursuant to an Exchange Election Notice, the Trust shall issue and deliver (and shall cause the Corporation to issue and deliver) at the office of the Transfer Agent to the exchanging holder, or on his or her written order, a certificate or certificates for the number of full Paired Shares deliverable in accordance with the provisions of this Article 6.15.5, and any fractional interest in respect of a unit of Paired Shares arising upon such exercise of the Class A Exchange Right shall be settled as provided in paragraph (c) of this Article 6.15.5 (the date of delivery of such certificate or certificates being sometimes referred to herein as the "Exchange Issuance Date"). Any such Paired Shares issued upon such exercise shall be deemed to have been issued immediately prior to the close of business on the Exchange Issuance Date, and the Person or Persons in whose name or names any certificate or certificates for Paired Shares shall be issuable pursuant to such Class A Exchange Notice shall be deemed to have become the holder or holders of record of the Paired Shares represented thereby at such time on such date unless the share transfer records for the Paired Shares shall be closed on such date, in which event such Person or Persons shall be deemed to have become such holder or holders of record at the close of business on the next succeeding day on which such share transfer books are open. If less than the full number of shares of Class A EPS represented by the certificate or certificates surrendered to the Trust in connection with an exercise of the Class A Exchange Right are being exchanged pursuant to such exercise, the Trust shall also deliver to the exchanging holder a new certificate or certificates evidencing the excess shares not being exchanged. (c) Fractional Interests. No fractional Paired Share units or scrip evidencing fractions of Paired Shares shall be issued upon exercise of the Class A Exchange Right. Instead of any fractional interest in a unit of Paired Shares that would otherwise be deliverable upon such exercise, the Trust shall pay to the exchanging holder an amount in cash equal to the corresponding fraction of the Current Market Price of the Paired Shares on the Trading Day immediately preceding the Exchange Issuance Date. If more than one share of Class A EPS shall - 42 - 47 be surrendered for exchange at one time by the same holder, the number of full Paired Shares issuable upon exercise of the Class A Exchange Right shall be computed on the basis of the aggregate number of shares of Class A EPS so surrendered. (d) Exchange Ratio and Adjustments. (i) Initially, one unit of Paired Shares will be issuable upon exchange of each share of Class A EPS pursuant to the exercise of the Class A Exchange Right (the "Exchange Ratio"). If, at any time after the Issue Date, a Trust Common Adjustment Event shall occur in conjunction with the occurrence of a corresponding Corporation Common Adjustment Event as a result of which the number of outstanding Paired Shares is increased or decreased but neither the nature of the securities comprising the Paired Shares nor the ratio of outstanding Trust Shares to Common Shares is affected (a "Paired Shares Adjustment Event"), the Exchange Ratio in effect as of the close of business on the record date for such Paired Shares Adjustment Event or, if no such record date applies, the effective date of such Paired Shares Adjustment Event shall be adjusted so that a holder of shares of Class A EPS who thereafter exercises the Class A Exchange Right with respect to such shares will be entitled to receive upon such exercise the number of Paired Shares that such holder would have owned or have been entitled to receive after the happening of such Paired Shares Adjustment Event if such holder had exercised the Class A Exchange Right immediately prior to such record date or effective date. An adjustment pursuant to this subparagraph (i) shall become effective (subject to subparagraph (iv) below) immediately upon the opening of business on the Business Day next following the record date for the applicable Paired Shares Adjustment Event or, if no such record date applies, the Business Day next following the effective date of such Paired Shares Adjustment Event. (ii) No adjustment in the Exchange Ratio shall be required pursuant to subparagraph (i) above unless such adjustment would require a cumulative increase or decrease of at least one percent (1%) in such ratio; provided, however, that any adjustments that by reason of this subparagraph (ii) are not required to be made shall be carried forward and taken into account in any subsequent adjustment until made. All calculations of the Exchange Ratio under this paragraph (d) shall be made to the nearest one-tenth of a share (with .05 of a share being rounded upward). (iii) Notwithstanding any other provisions of this Article 6.15.5, the Trust shall not be required to make any adjustment to the Exchange Ratio based on any issuance of Paired Shares pursuant to any plan providing for the reinvestment of dividends or interest payable on securities of the Trust (or the Corporation) and the investment of additional optional amounts in Paired Shares under such plan. (iv) In any case in which this paragraph (d) provides that an adjustment to the Exchange Ratio shall become effective immediately following the record date for an event, the Trust may defer until the occurrence of such event (A) issuing to the holder of any shares of Class A EPS exchanged after such record date but before the occurrence of such event the additional Paired Shares (or the cash, Exchange Promissory Notes or other property to be delivered in lieu thereof pursuant to this Article 6.15.5) issuable pursuant to such exchange by reason of the - 43 - 48 adjustment required pursuant to this paragraph (d) in respect of such event and (B) paying to the exchanging holder any amount of cash in lieu of any fractional interest in Paired Shares pursuant to paragraph (c) of this Article 6.15.5. (v) If at the time of any exercise of the Class A Exchange Right there are any accrued but unpaid Class A Preferred Dividends or Class A Participation Dividends other than Class A Preferred Dividends or Class A Participation Dividends that have been declared with a record date prior to such exercise, the Exchange Ratio shall be adjusted so that the number of Paired Shares into which the shares of Class A EPS being exchanged are then exchangeable is increased by a number of Paired Shares (the "Class A Dividend Replacement Shares") equal to (A) the aggregate amount of such accrued but unpaid Class A Preferred Dividends and Class A Participation Dividends with respect to each share of Class A EPS being exchanged divided by (B) the Current Market Price of the Paired Shares during the five (5) Trading Days immediately preceding the date of delivery of the applicable Class A Exchange Notice and all related certificates and other documents. (e) Adjustments to Composition of Paired Shares Issuable Upon Exchange. (i) If, at any time after the Issue Date, a Trust Common Adjustment Event or a Corporation Common Adjustment Event shall occur other than as part of a Paired Shares Adjustment Event, each unit of Paired Shares issuable upon exercise of the Class A Exchange Right shall be adjusted (subject to subparagraph (iii) below) as of the close of business on the record date for such event or, if no such record date applies, the effective date of such event so as to consist of the number of Trust Shares, the number of Corporation Shares and the number of any other shares of beneficial interest in the Trust or shares of stock of the Corporation that a holder of one unit of Paired Shares would have held or have been entitled to receive after giving effect to such event. (ii) If, at any time after the Issue Date, the Trust or the Corporation shall become a party to any transaction, including, without limitation, a merger, consolidation, statutory share exchange, self tender offer for all or substantially all outstanding Trust Shares and/or Corporation Shares, sale of all or substantially all of the Trust's or the Corporation's assets or recapitalization of the Trust Shares and/or the Corporation Shares (but excluding any event constituting a Trust Common Adjustment Event or a Corporation Common Adjustment Event) (each of the foregoing being referred to herein as a "Transaction"), in each case as a result of which the outstanding Trust Shares and/or Corporation Shares shall be converted into or exchanged for the right to receive stock, securities or other property (including cash or any combination thereof), effective as of the effective date of such Transaction, each unit of Paired Shares issuable upon exercise of the Class A Exchange Right with respect to any shares of Class A EPS that are not converted into or exchanged for the right to receive stock, securities or other property in connection with such Transaction shall thereafter be deemed to consist of the kind and amount of shares of beneficial interest in the Trust, shares of stock of the Corporation and other securities and property (including cash or any combination thereof) that would have been held or receivable upon the consummation of such Transaction by a holder of a number of Paired Shares equal to the number of Class A Underlying Paired Shares for which one share of Class A EPS - 44 - 49 would have been exchangeable immediately prior to such Transaction, assuming such holder of Paired Shares (A) is not a Person with which the Trust or the Corporation consolidated or into which the Trust or the Corporation was merged or which merged into the Trust or the Corporation or to which such sale or transfer was made, as the case may be (a "Constituent Person"), or an Affiliate of a Constituent Person and (B) failed to exercise his or her rights of election, if any, as to the kind or amount of stock, securities and other property (including cash) receivable upon such Transaction (provided that if the kind or amount of stock, securities and other property (including cash) receivable upon such Transaction is not the same for each unit of Paired Shares held immediately prior to such Transaction by other than a Constituent Person or an Affiliate thereof and in respect of which such rights of election shall not have been exercised ("Non-Electing Shares"), then for the purposes of this subparagraph (ii) the kind and amount of stock, securities and other property (including cash) receivable upon such Transaction in respect of each Non-Electing Share shall be deemed to be the kind and amount so receivable per share by a plurality of the Non-Electing Shares). The provisions of this paragraph (e) shall similarly apply to successive transactions. (iii) In any case in which this paragraph (e) provides that an adjustment to the composition of the units of Paired Shares issuable upon exercise of the Class A Exchange Right shall become effective immediately following the record date for an event, the Trust may defer until the occurrence of such event (A) issuing to the holder of any shares of Class A EPS exchanged after such record date but before the occurrence of such event the additional Paired Shares (or the cash, Exchange Promissory Notes or other property to be delivered in lieu thereof pursuant to this Article 6.15.5) issuable pursuant to such exchange before giving effect to such adjustment and (B) paying to the exchanging holder any amount of cash in lieu of any fractional interest in Paired Shares pursuant to paragraph (c) of this Article 6.15.5. (f) Notice of Adjustments. Whenever the Exchange Ratio or the composition of a unit of Paired Shares is adjusted as provided in paragraph (d) or (e) above, the Trust shall promptly file with the Transfer Agent an officer's certificate setting forth the Exchange Ratio after such adjustment and, in the case of an adjustment pursuant to paragraph (e), describing the kind and amount of stock, securities and other property (including cash) then constituting a unit of Paired Shares. Such certificate shall also set forth a brief statement of the facts requiring such adjustment and shall be conclusive evidence of the correctness of such adjustment absent manifest error. Promptly after delivery of such certificate, the Trust shall prepare a notice of such adjustment setting forth the adjusted Exchange Ratio, the effective date of such adjustment and, in the case of an adjustment pursuant to paragraph (e), a description of the kind and amount of stock, securities and other property (including cash) then constituting a unit of Paired Shares, and shall mail such notice of such adjustment to the holder of each share of Class A EPS, and to the extent that any shares of Class B EPS are then outstanding to each holder of Class B EPS, at such holder's last address as shown on the share records of the Trust. (g) Miscellaneous Provisions. (i) There shall be no adjustment of the Exchange Ratio or the composition of the units of Paired Shares issuable upon exercise of the Class A Exchange Right in case of the - 45 - 50 issuance of any shares of beneficial interest in the Trust in a reorganization, acquisition or other similar transaction except as specifically set forth in this Article 6.15.5. (ii) If the Trust shall take any action affecting the Trust Shares or the Corporation shall take any action affecting the Corporation Shares, other than an action described in this Article 6.15.5, that in the opinion of the Board of Trustees would materially affect the exchange rights of the holders of the Class A EPS provided for in this Article 6.15.5, the Exchange Ratio and/or the composition of the units of Paired Shares may be adjusted, to the extent permitted by law, in such manner, if any, and at such time, as the Board of Trustees, in its sole discretion, may determine to be equitable in the circumstances. (iii) The Trust covenants that any Paired Shares issued upon exercise of the Class A Exchange Right will be validly issued, fully paid and non-assessable. The Trust shall reserve and shall at all times have reserved out of its authorized but unissued Trust Shares, solely for issuance pursuant to exercise of the Class A Exchange Right and shall use its best efforts to cause the Corporation to reserve and at all times have, solely for issuance pursuant to exercise of the Class A Exchange Right, sufficient Corporation Shares to permit the exercise of such Class A Exchange Right. The Trust shall use its best efforts to cause the Corporation not to close its transfer books so as to prevent the timely issuance of Corporation Shares upon the exercise of the Class A Exchange Right. The Trust shall not close its transfer books so as to prevent the timely issuance of Trust Shares upon the exercise of the Class A Exchange Right. The Trust shall pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of Paired Shares or other securities or property upon exercise of the Class A Exchange Right; provided, however, that the Trust shall not be required to pay any tax that may be payable in respect of any transfer involved in the issue or delivery of any Paired Shares or other securities or property in a name other than that of the holder of the shares of Class A EPS being exchanged, and no such issue or delivery shall be made unless and until the Person requesting such issue or delivery has paid to the Trust the amount of any such tax or established, to the reasonable satisfaction of the Trust, that such tax has been paid. (iv) Except as provided in paragraph (g)(v) below, any determination required or permitted to be made by the Board of Trustees by these Articles Supplementary shall be final, conclusive and binding on the holders of Class A EPS. (v) In the event that: (A) the Trust elects to pay the Cash Equivalent of Paired Shares or other securities pursuant to an exercise of the Class A Exchange Right and in connection therewith the Board of Trustees makes a determination of the value of the Paired Shares or other securities at a time when the Paired Shares or such other securities are not publicly traded, (B) the Trust elects to pay in cash a Class A Preferred Dividend corresponding to a Corporation Common Distribution in the form of securities or other property and in connection therewith the Board of Trustees makes a determination of the fair market value of such securities or other property or (C) the Board of Trustees makes a determination of the fair market value of Class A Underlying Corporation Shares for the purpose of determining the amount of the Class A Liquidation Preference in connection with a Liquidation Event, then the Trust shall deliver to each affected holder of Class A EPS a written notice (which, in the case of an exercise of the Class A - 46 - 51 Exchange Right may be set forth in the related Exchange Election Notice) setting forth the valuation determined by the Board of Trustees. At any time within ten (10) Business Days after receipt of such notice, any affected holder of Class A EPS may request in writing that the Trust obtain a written valuation of such Paired Shares, Class A Underlying Corporation Shares or other securities or property from an investment banking firm. Promptly after receipt of any such request, the Trust shall select a nationally recognized investment banking firm to perform such valuation and shall provide such investment banking firm with such relevant information as the Trust may have in relation thereto. Such investment banking firm shall be instructed to prepare a written valuation report within thirty (30) days after its appointment, and upon receipt of such valuation report, the Trust shall mail a copy to each affected holder of Class A EPS. If the valuation as determined by such investment banking firm is greater than the valuation as determined by the Board of Trustees, the Trust shall promptly pay the amount of such difference to each affected holder of Class A EPS. If, however, the valuation as determined by such investment banking firm is less than the valuation determined by the Board of Trustees, the Trust may at its option require each affected holder of Class A EPS to repay the amount of such difference to the Trust, which amount shall be so repaid by each such holder promptly after receipt of the Trust's request. The fees and expenses of such investment banking firm shall be paid by the Trust. 6.15.6. REACQUIRED SHARES TO BE RETIRED. All shares of Class A EPS which shall have been issued and reacquired in any manner by the Trust shall be restored to the status of authorized but unissued shares of beneficial interest in the Trust without designation as to class. 6.15.7. VOTING. (a) General Voting Rights. The holders of shares of Class A EPS shall be entitled to vote upon all matters upon which holders of Trust Shares have the right to vote, and shall be entitled to the number of votes equal to the largest whole number of Class A Underlying Trust Shares for which such shares of Class A EPS could be exchanged pursuant to the provisions of Article 6.15.5 hereof as of the record date for determination of the shareholders entitled to vote on such matters, or, if no such record date is established, as of the date such vote is taken or any written consent of shareholders is solicited, such votes to be counted together with all other shares of beneficial interest in the Trust having general voting powers and not separately as a class. (b) Special Voting Rights. So long as any shares of Class A EPS are outstanding, in addition to any other vote or consent of holders of such shares required by the Declaration or these Articles Supplementary, the affirmative vote of at least a majority of the votes entitled to be cast by the holders of all outstanding shares of Class A EPS, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for that purpose, shall be necessary for effecting or validating any amendment, alteration or repeal of any of the provisions of the Declaration or these Articles Supplementary that materially and adversely affects the voting powers, rights or preferences of the holders of the Class A EPS disproportionately (based on the - 47 - 52 number of Underlying Class A Trust Shares at the time) to the effect of such amendment, alteration or repeal on the holders of Trust Shares; provided, however, that (i) any amendment of the provisions of the Declaration so as to authorize or create, or to increase the authorized amount of, any class or series of shares of beneficial interest in the Trust, whether ranking prior to, on a parity with or junior to the Class A EPS shall not be deemed to materially and adversely affect the voting powers, rights or preferences of the holders of Class A EPS and (ii) no filing with the State Department of Assessments and Taxation of Maryland by the Trust in connection with a merger, consolidation or sale of all or substantially all of the assets of the Trust shall be deemed to be an amendment, alteration or repeal of any of the provisions of the Declaration or these Articles Supplementary unless such filing expressly purports to amend, alter or repeal one or more of such provisions. For the purposes of this paragraph (b), each share of Class A EPS will have one vote per share. 6.15.8. RECORD HOLDERS. The Trust and the Transfer Agent may deem and treat the record holder of any shares of Class A EPS as the true and lawful owner thereof for all purposes, and neither the Trust nor the Transfer Agent shall be affected by any notice to the contrary. 6.15.9. RESTRICTIONS ON OWNERSHIP AND TRANSFER. The Class A EPS constitute shares of beneficial interest in the Trust that are governed by and issued subject to all the limitations, terms and conditions of the Declaration applicable to shares of beneficial interest in the Trust generally, including, without limitation, the terms and conditions (including exceptions and exemptions) of Article VI of the Declaration applicable to shares of beneficial interest in the Trust. The foregoing sentence shall not be construed to limit the applicability to the Class A EPS of any other term or provision of the Declaration. No restrictions on the transferability of shares of Class A EPS shall be enforced by the Trust to the extent that such restrictions would otherwise cause the Trust to fail to meet the requirements of Section 856(a)(2) of the Code. 6.16 Class B Exchangeable Preferred Shares Articles Supplementary 6.16.1. NUMBER OF SHARES AND DESIGNATION. There are hereby designated 15,000,000 "Class B Exchangeable Preferred Shares", par value $.01 per share ("Class B EPS"). 6.16.2. DEFINITIONS. For purposes of the Class B EPS, the following terms have the meanings indicated: "Affiliate" shall mean with respect to any Person, any other Person which directly or indirectly controls, is controlled by or is under common control with such Person. - 48 - 53 "Articles Supplementary" shall mean either Article 6.15 or Article 6.16, as the case may be, of the Declaration. "Base Preference Amount" per share of Class B EPS as of any date shall mean the Stated Value per share as of such date. "Board of Trustees" shall mean the Board of Trustees of the Trust or any committee authorized by the Board of Trustees from time to time to exercise any of its powers or perform any of its responsibilities with respect to the Class B EPS. "Business Day" shall mean any day other than a Saturday, Sunday or a day on which state or federally chartered banking institutions in New York, New York are not required to be open. "Class A Articles Supplementary" shall mean Article 6.15 hereof pursuant to which the Trust has classified and designated 30,000,000 shares of beneficial interest in the Trust as "Class A Exchangeable Preferred Shares". "Class A EPS" means the Class A Exchangeable Preferred Shares, par value $0.01 per share, created by the Class A Articles Supplementary. "Class A EPS Adjustment Event" shall mean any of the following events that occurs after the Issue Date: (i) The payment by the Trust of a dividend on the outstanding Class A EPS that is payable in additional shares of Class A EPS; (ii) The subdivision of the outstanding Class A EPS into a greater number of shares (whether by share split or otherwise); (iii) The combination of the outstanding Class A EPS into a smaller number of shares (whether by reverse share split or otherwise); or (iv) The issuance of any shares of beneficial interest in the Trust by reclassification of the Class A EPS. "Class A Exchange Right" shall have the meaning set forth in paragraph (a) of Article 6.15.5 hereof. "Class A Liquidation Preference" shall have the meaning set forth in paragraph (b) of Article 6.15.4 hereof. "Class A Liquidation Participation Right" shall have the meaning set forth in paragraph (a) of Article 6.15.4 hereof. - 49 - 54 "Class A Participation Dividend" shall have the meaning set forth in paragraph (a) of Article 6.15.3 hereof. "Class A Preferred Dividend" shall have the meaning set forth in paragraph (a) of Article 6.15.3 hereof. "Class B Articles Supplementary" shall mean this Article 6.16. "Class B Conversion Notice" shall have the meaning set forth in paragraph (b)(ii) of Article 6.16.5 hereof. "Class B Conversion/Redemption Election Right" shall have the meaning set forth in Article 6.16.7 hereof. "Class B Conversion/Redemption Notice" shall have the meaning set forth in Article 6.16.7 hereof. "Class B Conversion Right" shall have the meaning set forth in paragraph (b)(i) of Article 6.16.5 hereof. "Class B Dividend Replacement Shares" shall have the meaning set forth in paragraph (e)(v) of Article 6.16.5 hereof. "Class B EPS" shall have the meaning set forth in Article 6.16.1 hereof. "Class B Liquidation Preference" shall have the meaning set forth in paragraph (b) of Article 6.16.4 hereof. "Class B Liquidation Participation Right" shall have the meaning set forth in paragraph (a) of Article 6.16.4 hereof. "Class B Participation Dividend" shall have the meaning set forth in paragraph (a) of Article 6.16.3 hereof. "Class B Preferred Dividend" shall have the meaning set forth in paragraph (a) of Article 6.16.3 hereof. "Class B Redemption Date" shall have the meaning set forth in paragraph (c)(ii) of Article 6.16.6 hereof. "Class B Redemption Notice" shall have the meaning set forth in paragraph (c)(ii) of Article 6.16.6 hereof. "Class B Redemption Right" shall have the meaning set forth in paragraph (a) of Article 6.16.6 hereof. - 50 - 55 "Class B Underlying Class A EPS" with respect to any shares of Class B EPS as of a specified date shall mean the number of shares of Class A EPS issuable on such date upon exercise of the Class B Conversion Right with respect to such shares of Class B EPS (including fractional interests but without taking into account any Class B Dividend Replace ment Shares except for the purposes of an actual exercise of the Class B Conversion Right). "Class B Underlying Corporation Shares" as of any time shall mean the Corporation Shares component of the Class B Underlying Paired Shares as of such time. "Class B Underlying Paired Shares" as of any time shall mean the Paired Shares for which each share of Class B EPS is then indirectly exchangeable assuming both (i) the conversion at such time of such share of Class B EPS into the corresponding number of shares of Class B Underlying Class A EPS upon exercise of the Class B Conversion Right and (ii) the simultaneous exchange of such shares of Class A EPS for Paired Shares (including, unless otherwise expressly provided herein, fractional shares but excluding any Class A Dividend Replacement Shares, as defined in paragraph (d)(v) of Article 6.15.5 hereof) upon exercise of the Class A Exchange Right. "Class B Underlying Trust Shares" as of any time shall mean the Trust Shares component of the Class B Underlying Paired Shares as of such time. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Conditionally Declared Class B Dividend" shall have the meaning set forth in paragraph (b)(i) of Article 6.16.3 hereof. "Constituent Person" shall have the meaning set forth in paragraph (f) of Article 6.16.5 hereof. "Conversion Ratio" shall have the meaning set forth in paragraph (e)(i) of Article 6.16.5 hereof. "Corporation" shall mean Starwood Lodging Corporation, a Maryland corporation, and any successor. "Corporation Common Adjustment Event" shall mean any of the following events that occurs after the Issue Date: (i) The payment by the Corporation of a dividend on the outstanding Corporation Shares that is payable in additional Corporation Shares; (ii) The subdivision of the outstanding Corporation Shares into a greater number of shares (whether by stock split or otherwise); - 51 - 56 (iii) The combination of the outstanding Corporation Shares into a smaller number of shares (whether by reverse stock split or otherwise); or (iv) The issuance of any shares of stock of the Corporation by reclassification of the Corporation Shares. "Corporation Common Distribution" shall mean any dividend or distribution paid or made by the Corporation (including, without limitation, any distribution of assets on any liquidation, dissolution or winding up of the Corporation) in respect of the Corporation Shares, other than a dividend or distribution that constitutes a Corporation Common Adjustment Event. In addition, a distribution to the holders of Corporation Shares of rights to subscribe for or purchase additional Corporation Shares under a shareholders protective rights plan or agreement shall not be deemed to constitute a Corporation Common Distribution to the extent that the Corporation makes provision so that such rights, to the extent still outstanding with respect to the outstanding Corporation Shares, shall be issued to the holders of any Corporation Shares issued upon exercise of the Class A Exchange Right (and, to the extent applicable, shall attach to such Corporation Shares) in an amount and manner and to the extent provided in such shareholders protective rights plans or agreements with respect to already outstanding Corporation Shares. "Corporation Shares" shall mean the shares of common stock, par value $.01 per share, of the Corporation or any stock of the Corporation into which such common stock may hereafter be changed. "Cross-Over Date" shall mean the fifth anniversary of the Issue Date, subject to extension as described in paragraph (a) of Article 6.16.9 hereof. "Current Market Price" of publicly traded Paired Shares or any other shares of beneficial interest or other securities of the Trust or any other issuer as of any Trading Day shall mean the last reported sales price, regular way, on such day, or, if no sale takes place on such day, the average of the reported closing bid and asked prices on such day, regular way, in either case as reported on the NYSE or, if such shares or other securities are not listed or admitted for trading on the NYSE, on the principal national securities exchange on which such shares or other securities are listed or admitted for trading or, if not listed or admitted for trading on any national securities exchange, on the NASDAQ National Market or, if such shares or other securities are not quoted on such NASDAQ National Market, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for such shares or other securities on such day shall not have been reported through NASDAQ, the average of the bid and asked prices on such day as furnished by any NYSE member firm regularly making a market in such security selected for such purpose by the Chief Executive Officer or Chief Financial Officer of the Trust or the Board of Trustees. "Declaration" shall mean the Amended and Restated Declaration of Trust of the Trust, as amended from time to time. - 52 - 57 "Default Rate Dividends" shall have the meaning set forth in paragraph (d) of Article 6.16.3 hereof. "Dividend Correspondence Ratio" shall have the meaning set forth in paragraph (b)(i) of Article 6.16.3 hereof. "Issue Date" shall mean the first date on which any Class B EPS are issued by the Trust. "Junior Dividend" means a dividend payable in respect of any class or series of shares of beneficial interest in the Trust over which the Class B Preferred Dividends have preference or priority as to the payment of dividends, including, without limitation, any Trust Common Dividend, any Class B Participation Dividend and any Class A Preferred Dividend and any Class A Participation Dividend. "Junior Liquidating Distribution" shall mean any distribution of assets of the Trust in connection with a Liquidation Event to holders of any class or series of shares of beneficial interest in the Trust over which the Class B Liquidation Preference has preference or priority in the distribution of assets upon the occurrence of such Liquidation Event, including, without limitation, any such distribution of assets to holders of Trust Shares or in respect of the Class B Liquidation Participation Right, the Class A Liquidation Preference or the Class A Liquidation Participation Right. "Junior Shares" shall mean the Trust Shares and any other class or series of shares of beneficial interest in the Trust now or hereafter issued and outstanding over which the Class B Preferred Dividends have full preference or priority in the payment of dividends or over which the Class B Liquidation Preference has full preference or priority in the distribution of assets on the occurrence of any Liquidation Event. Without limiting the generality of the foregoing, for the purposes hereof the Class A EPS and the Trust Shares constitute Junior Shares. "LIBOR" as of any date shall mean the rate of interest per annum for United States dollar deposits in the amount of $100,000,000 with a one-month maturity which appears on "Telerate Page 3750" (as defined below) as of 11:00 a.m. (London time) on such date; provided that if such rate is no longer published, an interest rate per annum equal to the arithmetic mean (rounded if necessary to the nearest one-hundredth of one percent (0.01%)) of the interest rates per annum for United States dollar deposits in such amount and with such a maturity quoted on Reuters Screen Page "LIBO" (or if such page on such service ceases to display such information, such other page as may replace it on that service for the purpose of displaying such information) as of 11:00 a.m. on such date (the rate determined as aforesaid being the "LIBO Screen Rate"). For such purposes, the term "Telerate Page 3750" shall mean the display designated as "Page 3750" on the Associated Press-Dow Jones Telerate Service (or such other page as may replace Page 3750 on the Associated Press-Dow Jones Telerate Service or such other service as may be nominated by the British Bankers' - 53 - 58 Association as the information vendor for the purpose of displaying British Bankers' Association interest rate settlement rates for United States dollar deposits). Any LIBOR rate determined on the basis of the rate displayed on Telerate Page 3750 or the LIBO Screen Rate determined in accordance with the foregoing provisions of this definition shall be subject to corrections, if any, made in such rate and displayed by the Associated Press-Dow Jones Telerate Service or Reuters, as applicable, within one hour of the time when such rate is first displayed by such service. For the purposes of paragraph (d) of Article 6.16.3, the LIBOR rate shall be determined in accordance with the foregoing as of the date on which an Uncured Default arises and on the nearest corresponding day of each subsequent calendar month and shall apply for the approximate one-month period between the date of such determination and the next succeeding date of determination. "Liquidation Date" shall have the meaning set forth in paragraph (a) of Article 6.16.4 hereof. "Liquidation Event" shall mean any liquidation, dissolution or winding up of the affairs of the Trust, whether voluntary or involuntary. For the purposes hereof, (i) a consolidation or merger of the Trust with one or more entities, (ii) a statutory share exchange and (iii) a sale or transfer of all or substantially all of the Trust's assets shall not be deemed to be a Liquidation Event. "Non-Electing Shares" shall have the meaning set forth in paragraph (f) of Article 6.16.5 hereof. "NYSE" shall mean the New York Stock Exchange. "Ownership Limit" shall have the meaning set forth in Section 6.12 of the Declaration. "Paired Shares" shall mean units consisting of one Trust Share paired with one Corporation Share (subject to adjustment as contemplated in paragraph (e) of Article 6.15.5 hereof) and represented by a single share certificate, as provided in the Pairing Agreement dated as of June 25, 1980, between the Trust and the Corporation, as amended from time to time. "Parity Liquidation Preference" shall mean the liquidation preference of any class or series of shares of beneficial interest in the Trust that ranks on a parity with the Class B Liquidation Preference. For such purposes: (i) the Base Preference Amount portion of the Class B Liquidation Preference will rank on a parity with the liquidation preferences of any class or series of Preferred Shares issued by the Trust (other than the Class A EPS to which said portion of the Class B Liquidation Preference will rank senior in liquidation preference), unless the articles supplementary creating such class or series provide that such class or series will rank junior to such portion of the Class B Liquidation Preference in the distribution of assets upon the occurrence of a Liquidation Event, and (ii) the Supplemental Preference Amount portion of the Class B Liquidation Preference will rank junior to the liquidation preferences of any class or series of Preferred Shares issued by the Trust (other than the Class - 54 - 59 A EPS), unless the articles supplementary creating such class or series provide that such class or series will rank junior to or on a parity with such portion of the Class B Liquidation Preference in the distribution of assets upon the occurrence of a Liquidation Event. "Parity Preferred Dividend" shall mean any dividend payable in respect of any class or series of shares of beneficial interest in the Trust that ranks on a parity in right of payment with the Class B Preferred Dividends, whether or not the dividend rate, dividend payment dates, liquidation preference or redemption price are different from those of the Class B EPS. "Person" shall mean any individual, firm, partnership, corporation, limited liability company or other entity, and shall include any successor (by merger or otherwise) of such entity. "Preferred Shares" shall mean any class or series of shares of beneficial interest in the Trust now or hereafter issued and outstanding that have preference or priority over Trust Shares in the payment of dividends or in the distribution of assets on the occurrence of any Liquidation Event. "Redemption Price" shall have the meaning set forth in paragraph (b)(i) of Article 6.16.6 hereof. "Registration Rights Agreement" means the Registration Rights Agreement entered into by the Trust, the Corporation and the other parties thereto pursuant to the Westin Transaction Agreement. "REIT Rules" shall mean the requirements (i) for the Trust to qualify as a real estate investment trust under the Code as set forth in Sections 856(a)(5) and 856(a)(6) of the Code and (ii) for the Corporation or any affiliate of the Corporation which is a tenant of the Trust to not be treated as a related party pursuant to Section 856(d)(2)(B) of the Code. "Securities Act" shall mean the Securities Act of 1933, as amended. "set apart for payment" shall be deemed to include, without any action other than the following, the recording by the Trust in its accounting ledgers of any accounting or bookkeeping entry which indicates, pursuant to a declaration of dividends or other distribution by the Board of Trustees, the allocation of funds to be so paid on any series or class of shares of beneficial interest in the Trust; provided, however, that if any funds for any class or series of Junior Shares or any class or series of shares of beneficial interest in the Trust ranking on a parity with the Class B EPS as to the payment of dividends are placed in a separate account of the Trust or delivered to a disbursing, paying or other similar agent, then "set apart for payment" with respect to the Class B EPS shall mean placing such funds in a separate account or delivering such funds to a disbursing, paying or similar agent. "Stated Value" of each share of Class B EPS shall initially mean Thirty-Eight Dollars and Fifty Cents ($38.50) per share. Upon the occurrence of any share split, reverse share split - 55 - 60 or other subdivision or combination of the Class B EPS subsequent to the Issue Date, the Stated Amount shall be proportionately adjusted as determined in good faith by the Board of Trustees. "Supplemental Preference Amount" shall have the meaning set forth in paragraph (b) of Article 6.16.4 hereof. "Trading Day" with respect to publicly traded Paired Shares or any other shares of beneficial interest or other securities of the Trust or any other issuer shall mean any day on which the securities in question are traded on the NYSE, or if such securities are not listed or admitted for trading on the NYSE, on the principal national securities exchange on which such securities are listed or admitted, or if not listed or admitted for trading on any national securities exchange, on the NASDAQ National Market, or if such securities are not quoted on such NASDAQ National Market, in the applicable securities market in which such securities are traded. "Transaction" shall have the meaning set forth in paragraph (f) of Article 6.16.5 hereof. "Transfer Agent" shall mean ChaseMellon Shareholder Services, L.L.C. (or any successor thereof), or such other agent or agents of the Trust as may be designated by the Board of Trustees or their designee as the transfer agent for the Class B EPS and the Class A EPS. "Trust" shall mean Starwood Lodging Trust, a Maryland real estate investment trust, and any successor. "Trust Common Adjustment Event" shall mean any of the following events that occurs after the Issue Date: (i) The payment by the Trust of a dividend on the outstanding Trust Shares that is payable in additional Trust Shares; (ii) The subdivision of the outstanding Trust Shares into a greater number of shares (whether by share split or otherwise); (iii) The combination of the outstanding Trust Shares into a smaller number of shares (whether by reverse share split or otherwise); or (iv) The issuance of any shares of beneficial interest in the Trust by reclassification of the Trust Shares. "Trust Common Dividend" shall mean any dividend or distribution paid or made by the Trust pro rata on the outstanding Trust Shares other than (i) a distribution of assets of the Trust upon the occurrence of a Trust Liquidation Event or (ii) a dividend or distribution that - 56 - 61 constitutes a Trust Common Adjustment Event. In addition, a distribution to the holders of shares of beneficial interest in the Trust of rights to subscribe for or purchase additional Trust Shares under a shareholders protective rights plan or agreement or any similar plan or agreement shall not be deemed to constitute a Trust Common Dividend to the extent that the Trust makes provision so that such rights, to the extent still outstanding with respect to the outstanding Trust Shares, shall be issued to the holders of any Trust Shares issued upon exercise of the Class A Exchange Right (and, to the extent applicable, shall attach to such Trust Shares) in an amount and manner and to the extent provided in such plans or agreements with respect to already outstanding Trust Shares. "Trust Conversion Notice" shall have the meaning set forth in paragraph (c)(ii) of Article 6.16.5 hereof. "Trust Conversion Right" shall have the meaning set forth in paragraph (c)(i) of Article 6.16.5 hereof. "Trust Redemption Date" shall have the meaning set forth in paragraph (b)(ii) of Article 6.16.6 hereof. "Trust Redemption Notice" shall have the meaning set forth in paragraph (b)(ii) of Article 6.16.6 hereof. "Trust Redemption Right" shall have the meaning set forth in paragraph (a) of Article 6.16.6 hereof. "Trust Shares" shall mean the common shares of beneficial interest in the Trust, par value $.01 per share, or any shares of beneficial interest in the Trust into which such common shares may be changed. "Uncured Default" shall have the meaning set forth in paragraph (a) of Article 6.16.9 hereof. "Westin Transaction Agreement" shall mean the Transaction Agreement dated as of September 8, 1997 among WHWE L.L.C., Woodstar Investor Partnership, Nomura Asset Capital Corporation, Juergen Bartels, W&S Hotel L.L.C., Westin Hotels & Resorts Worldwide, Inc., W&S Lauderdale Corp., W&S Seattle Corp., Westin St. John Hotel Company, Inc., W&S Denver Corp., W&S Atlanta Corp., the Trust, SLT Realty Limited Partnership, the Corporation and SLC Operating Limited Partnership, as such agreement may be amended from time to time. 6.16.3. DIVIDENDS. (a) In General. The holders of Class B EPS will be entitled (i) to receive a preferred dividend payable as described in paragraph (b) below (a "Class B Preferred Dividend"), when, as and if declared by the Board of Trustees out of assets of the Trust legally available for that purpose, based - 57 - 62 on the payment of any Corporation Common Distribution and (ii) to participate on the basis described in paragraph (c) below in any Trust Common Dividend, when, as and if declared by the Board of Trustees out of assets of the Trust available for that purpose (a "Class B Participation Dividend"). In certain circumstances, the holders of Class B EPS will also be entitled to receive a Default Rate Dividend, as provided in paragraph (d) below. (b) Class B Preferred Dividend. (i) Upon the payment by the Corporation of any Corporation Common Distribution prior to the occurrence of a Liquidation Event, the right to receive a Class B Preferred Dividend will automatically accrue with respect to each share of Class B EPS as of the payment date for such Corporation Common Distribution in an amount equal to the value of the Corporation Common Distribution paid on each Corporation Share multiplied by the applicable Dividend Correspondence Ratio described below. To the extent that any Corporation Common Distribution consists of securities or other property (other than cash), the Trust will have the option of paying the corresponding Class B Preferred Dividend either (A) in the same form as such Corporation Common Distribution (i.e., by delivery of the same type of securities or other property as distributed in the Corporation Common Distribution), (B) in cash in an amount equal to the fair market value of such securities or other property as determined in good faith by the Board of Trustees subject to the rights of the holders of the Class B EPS to request a valuation from a nationally recognized investment banking firm as provided in paragraph (h)(v) of Article 6.16.5 hereof or (C) a combination thereof. Each Class B Preferred Dividend will be cumulative from the payment date for the related Corporation Common Distribution and will be payable to holders of record of Class B EPS on such record date as shall be fixed by the Board of Trustees, which record date shall be the same as the record date for the corresponding Class A Preferred Dividend based on such Corporation Common Distribution and not earlier than the record date for such Corporation Common Distribution. The Board of Trustees may, at any time between the declaration of a Corporation Common Distribution and the related payment date, declare a corresponding Class B Preferred Dividend conditioned on the actual payment of such Corporation Common Distribution (any such Class B Preferred Dividend being sometimes referred to herein as a "Conditionally Declared Class B Dividend" until such time as the corresponding Corporation Common Distribution is paid, at which time it will no longer be deemed to be a Conditionally Declared Class B Dividend but will instead be deemed to be an accrued Class A Preferred Dividend). The "Dividend Correspondence Ratio" for the purposes of determining the amount of any Class B Preferred Dividend accrual shall mean the number of Class B Underlying Corporation Shares for which each share of Class B EPS is indirectly exchangeable as of the record date for the related Corporation Common Distribution upon exercise of the Class B Exchange Right, as such number shall be proportionately adjusted to reflect any share dividend, share split, reverse share split or other combination or subdivision of the Class B EPS or the Class A EPS that becomes effective between (or, if the record date for such event is different from the effective date therefor, that has a record date that falls between) (A) the record date for the Corporation Common Distribution and (B) the date of payment of such Corporation Common Distribution or, if earlier, the record date for such Class B Preferred Dividend. (ii) So long as any shares of Class B EPS are outstanding: (A) no Junior Dividend may be declared or paid or set apart for payment unless all accrued Class B Preferred - 58 - 63 Dividends and Conditionally Declared Class B Dividends have been or are concurrently declared and paid, or declared and a sum sufficient for the payment thereof set apart for payment, (B) no Parity Preferred Dividend shall be declared or paid or set aside for payment unless a ratable portion of all accrued but unpaid Class B Preferred Dividends and Conditionally Declared Class B Dividends has been or is concurrently declared and paid, or declared and a sum sufficient for the payment thereof set apart for payment (with such ratable portion being based on the portion of the accrued but unpaid Parity Preferred Dividends being paid) and (C) no Junior Shares may be redeemed, purchased or otherwise acquired by the Trust (other than a redemption, purchase or other acquisition of Trust Shares made for purposes of and in compliance with requirements of an employee incentive or benefit plan of the Trust or any subsidiary or upon any exchange or redemption of other securities at the option of the holders thereof, or as required or permitted under Article VI of the Declaration) for consideration (or any moneys paid or made available for a sinking fund for the redemption of any Junior Shares), directly or indirectly (except for conversion into or exchange for Junior Shares) unless all accrued Class B Preferred Dividends and Conditionally Declared Class B Dividends have been or are concurrently declared and paid, or declared and a sum sufficient for the payment thereof set apart for payment. (c) Class B Participation Dividend. No Trust Common Dividend may be declared in respect of the Trust Shares unless the Board of Trustees concurrently declares a Class B Participation Dividend entitling each share of Class B EPS to receive an amount equal to the amount of the Trust Common Dividend declared on each Trust Share multiplied by the number of Class B Underlying Trust Shares for which each share of Class B EPS is indirectly exchangeable upon exercise of the Class B Conversion Right as of the record date for such Trust Common Dividend. Such Class B Participation Dividend shall be payable on the same date on which the corresponding Trust Common Dividend is payable, shall be payable in the same form as the corresponding Trust Common Dividend and shall be paid to holders of record of the Class B EPS on the same record date as is fixed by the Board of Trustees for the payment of such Trust Common Dividend. (d) Default Rate Dividends. Notwithstanding the foregoing provisions of this Article 6.16.3 but subject to paragraph (b) of Article 6.16.9, upon the occurrence and during the continuation of any Uncured Default, dividends ("Default Rate Dividends") shall accrue with respect to the outstanding shares of Class B EPS in an amount equal to the product of (i) the Stated Value of each such share multiplied by (ii) an interest rate per annum equal to LIBOR plus four percent (4%). Any such Default Rate Dividends shall be cumulative, shall be deemed to constitute Class B Preferred Dividends for the purposes hereof and shall be payable quarterly on March 1, June 1, September 1 and December 1 of each year, when, as and if declared by the Board of Trustees out of assets of the trust legally available for that purpose; provided that, if, at any time when there are accrued but unpaid Default Rate Dividends on the Class B EPS, a Class B Preferred Dividend or Class B Participation Dividend accrues pursuant to paragraph (b) or (c) of this Article 6.16.3 in an amount per share that exceeds the amount of such accrued but unpaid Default Rate Dividends per share, the holders of shares of Class B EPS shall be entitled to receive such Class B Preferred Dividend or Class B Participation Dividend in accordance with the provisions of such paragraphs (b) and (c) and the Default Rate Dividends accrued through the date of accrual of such Class B Preferred Dividend or Class B Participation Dividend shall be reduced to zero (although additional Default Rate Dividends - 59 - 64 shall again commence to accrue immediately following such date of accrual to the extent that the Uncured Default continues unremedied). 6.16.4. LIQUIDATION RIGHTS. (a) In General. Upon the occurrence of any Liquidation Event, the holders of Class B EPS will be entitled (i) to receive out of the assets of the Trust legally available for liquidating distributions to holders of shares of beneficial interests in the Trust, prior to the making of any Junior Liquidating Distribution, a liquidating distribution in an amount equal to the Class B Liquidation Preference described in paragraph (b) below determined as of the effective date of such Liquidation Event or, if no effective date is provided, as of the record date of the first liquidating distribution relating to such Liquidation Event (in either such case, the "Liquidation Date") and (ii) to participate on the basis described in paragraph (c) below in any liquidating distribution to holders of Trust Shares (the "Class B Liquidation Participation Right"). In determining whether a distribution (other than upon the occurrence of a Liquidation Event), by dividend, redemption or other acquisition of shares of beneficial interest in the Trust or otherwise, is permitted under Maryland law, amounts that would be needed, if the Trust were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of the holders of Class A EPS whose preferential rights upon dissolution are senior to those receiving the distribution shall not be added to the Trust's total liabilities. (b) Class B Liquidation Preference. The "Class B Liquidation Preference" of a share of Class B EPS as of the applicable Liquidation Date shall mean the sum of (A) the Base Preference Amount as of such date and (B) the amount of any accrued but unpaid dividends in respect of each share of Class B EPS as of such date (other than any such accrued but unpaid Class B Preferred Dividends that have been declared with a record date prior to such Liquidation Date, which the Trust shall separately be obligated to pay to the holders of record of the Class B EPS as of such record date)(the "Supplemental Preference Amount"). Until each holder of shares of Class B EPS has received distributions equal to the Class B Liquidation Preference, no Junior Liquidating Distributions may be paid to holders of any other class or series of shares of beneficial interest in the Trust. Subject to the rights of the holders of shares of beneficial interest in the Trust with liquidation preferences ranking prior to or on a parity with the Class B Liquidation Preference, after payment shall have been made in full of the Class B Liquidation Preference as provided in this paragraph (b), Junior Liquidating Distributions may be paid to the holders of any shares of beneficial interest entitled to receive such distributions and the holders of the Class B EPS shall not be entitled to share therein except as provided in paragraph (c) of this Article 6.16.4. In the event that the assets of the Trust available for liquidating distributions to holders of shares of beneficial interest in the Trust in connection with any Liquidation Event are insufficient to pay the Class B Liquidation Preference on all outstanding Class B EPS and any Parity Liquidation Preferences in respect of any other classes or series of shares of beneficial interest in the Trust, then the holders of the Class B EPS and such other classes and series of shares of beneficial interest in the Trust shall share ratably in any such distribution of assets in proportion to the Class B Liquidation Preference and the Parity Liquidation Preferences to which they would otherwise be respectively entitled. (c) Class B Liquidation Participation Rights. In addition to being entitled to receive the Class B Liquidation Preference, upon the occurrence of any Liquidation Event the holders of - 60 - 65 Class B EPS shall be entitled to participate, pursuant to the Class B Liquidation Participation Right, ratably with the holders of Trust Shares in any liquidating distributions to such holders. For such purpose, each share of Class B EPS shall be deemed to represent a number of Trust Shares equal to the number of Class B Underlying Trust Shares for which each share of Class B EPS can be indirectly exchanged as of the record date for such distribution. 6.16.5. CONVERSION RIGHTS. (a) In General. Shares of Class B EPS shall be convertible into shares of Class A EPS (A) at the option of the holder upon exercise of the Class B Conversion Right at any time after the first anniversary of the Issue Date and on or prior to the first anniversary of the Cross-Over Date, to the extent provided in paragraph (b) of this Article 6.16.5, or (B) at the option of the Trust upon exercise of the Trust Conversion Right at any time after the Cross-Over Date, to the extent provided in paragraph (c) of this Article 6.16.5. In addition, as more specifically provided in Article 6.16.7 hereof, upon receipt of a Class B Conversion/Redemption Notice from any holder of shares of Class B EPS at any time after the first anniversary of the Cross-Over Date, the Trust will be required to elect to either exercise the Trust Conversion Right or the Trust Redemption Right with respect to the shares specified in such Class B Conversion/Redemption Notice. (b) Class B Conversion Right. (i) A holder of shares of Class B EPS shall have the right, exercisable in the manner described in paragraph (b)(ii) below, at such holder's option at any time after the first anniversary of the Issue Date and on or prior to the first anniversary of the Cross-Over Date, to convert such shares in whole or in part into fully paid and non-assessable shares of Class A EPS based on the applicable Conversion Ratio described in paragraph (e) of this Article 6.16.5 (the "Class B Conversion Right"); provided, however, that the Class B Conversion Right may not be exercised (A) with respect to any shares of Class B EPS that are already subject to a Trust Conversion Notice, (B) with respect to any shares of Class B EPS that are already subject to a Class B Redemption Notice or a Class B Conversion/Redemption Notice or (C) after the applicable Redemption Date if the Trust has already given a Trust Redemption Notice with respect to the applicable shares of Class B EPS, unless, in the case of either (B) or (C), the Trust shall default in its obligations hereunder arising as a result of such notice and such default shall not have been cured within ten (10) days thereafter. (ii) A holder of shares of Class B EPS desiring to exercise the Class B Conversion Right with respect to such shares shall surrender the certificate or certificates evidencing such shares, duly endorsed or assigned to the Trust or in blank, to the Transfer Agent together with a duly completed and executed conversion notice (a "Class B Conversion Notice") in such form as the Trust shall prescribe from time to time and such related certifications as the Trust may reasonably prescribe from time to time. Such form of Class B Conversion Notice will also permit the holder of the Class B EPS being converted to concurrently elect to exercise the Class A Exchange Right with respect to the Class A EPS Shares to be issued pursuant to the exercise of the Class B Conversion Right. Unless any shares of Class A EPS to be issued upon conversion of such shares of Class B EPS are to be issued in the same name as the name in which such shares of Class B EPS are registered, each share certificate surrendered shall be accompanied by instruments of transfer, in form reasonably - 61 - 66 satisfactory to the Trust, duly executed by the holder or such holder's duly authorized attorney and an amount sufficient to pay any applicable transfer or similar tax (or evidence reasonably satisfactory to the Trust demonstrating that such taxes have been paid). (iii) As promptly as practicable after receipt by the Transfer Agent of a Class B Conversion Notice and the certificates and other documents described above, the Trust shall issue and deliver at the office of the Transfer Agent to the holder of the shares of Class B EPS being converted, or on his or her written order, a certificate or certificates for the full number of shares of Class A EPS issuable upon such conversion in accordance with the provisions of this Article 6.16.5, and any fractional interest in respect of a share of Class A EPS resulting from such conversion shall be settled as provided in paragraph (d) of this Article 6.16.5; provided, however, that to the extent that the holder of shares of Class B EPS with respect to which the Class B Conversion Right has been exercised has simultaneously exercised the Class A Exchange Right with respect to the shares of Class A EPS issuable upon such conversion, no such certificate or certificates shall be issued with respect to such shares of Class A EPS (and there shall be no settlement of any such fractional interests), but such Class A Exchange Right shall be deemed to have been exercised with respect to such shares of Class A EPS (including any such fractional interests) as of the date of receipt of the Class B Conversion Notice and the certificates and other documents described above, and the rights and obligations of the Trust and such holder arising therefrom shall be governed by Article 6.15.5 hereof. If less than the full number of shares of Class B EPS represented by the certificate or certificates surrendered to the Trust are to be converted pursuant to an exercise of the Class B Conversion Right, the Trust shall also deliver to the holder a new certificate or certificates evidencing the excess shares not being converted. (iv) The conversion resulting from any exercise of the Class B Conversion Right shall be deemed to have been effected immediately prior to the close of business on the date of receipt by the Transfer Agent of the Class B Conversion Notice and the certificates and other documents described above, and the Person or Persons in whose name or names any certificate or certificates for shares of Class A EPS shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares of Class A EPS represented thereby at such time on such date, unless the sharetransfer books of the Trust for the Class A EPS shall be closed on such date, in which event such Person or Persons shall be deemed to have become such holder or holders of record at the close of business on the next succeeding day on which such sharetransfer books are open. - 62 - 67 (c) Trust Conversion Right. (i) Shares of Class B EPS will also be convertible at any time after the first anniversary of the Cross-Over Date in whole or in part at the option of the Trust into fully paid and non-assessable shares of Class A EPS based on the applicable Conversion Ratio described below (the "Trust Conversion Right"); provided, however, that the Trust Conversion Right may not be exercised with respect to any shares of Class B EPS with respect to which (A) the holder has already given a Class B Redemption Notice or a Class B Conversion Notice or (B) the Trust has already given a Trust Redemption Notice. (ii) The Trust Conversion Right may be exercised by the Trust giving written notice of such exercise to the holders of the shares of the Class B EPS with respect to which the Trust desires to exercise such right (a "Trust Conversion Notice"). (iii) The shares of Class B EPS of a holder specified in such Trust Conversion Notice shall be deemed to have been converted as of the date of the applicable Trust Conversion Notice into the full number of shares of Class A EPS issuable upon such conversion in accordance with the provisions of this Article 6.16.5, and any fractional interest in respect of a share of Class A EPS resulting from such conversion shall be settled as provided in paragraph (d) of this Article 6.16.5. The conversion provided for in this paragraph (c) shall be automatic without the requirement of any action on the part of the affected holders of shares of Class B EPS and whether or not the certificates evidencing such shares of Class B EPS are surrendered to the Trust or the Transfer Agent; provided that the Trust shall not be obligated to issue to any such holders certificates evidencing the shares of Class A EPS into which such Class B EPS shares have been converted until certificates evidencing the shares of Class B EPS held by such holder have been delivered to the Trust or the Transfer Agent. If less than the full number of shares of Class B EPS represented by the certificate or certificates surrendered to the Trust in connection with an exercise of the Trust Conversion Right have been converted pursuant to such exercise, the Trust shall also deliver to the holder a new certificate or certificates evidencing the excess shares not being converted. (d) Fractional Interests. No fractional shares or scrip evidencing fractions of shares of Class A EPS shall be issued upon exercise of the Class B Conversion Right or the Trust Conversion Right. Instead of any fractional interest in a share of Class A EPS that would otherwise be deliverable upon the conversion of shares of Class B EPS, the Trust shall pay to the holder of such shares of Class B EPS an amount in cash equal to the product of (A) such fraction, (B) the then current Exchange Ratio of Class A EPS for Paired Shares, as determined pursuant to the provisions of paragraph (d) of Article 6.15.5 hereof, and (C) the Current Market Price of the Paired Shares as of the Trading Day immediately preceding the date on which the applicable Class B Conversion Notice or Trust Conversion Notice (as applicable) and all related certificates and other documents were received by the Transfer Agent. (e) Conversion Ratio and Adjustments. (i) Initially, one share of Class A EPS will be issuable upon conversion of each share of Class B EPS pursuant to an exercise of the Class B Conversion Right or the Trust - 63 - 68 Conversion Right (the "Conversion Ratio"), which Conversion Ratio will be subject to adjustment from the Issue Date through the Cross-Over Date. After such date, the Conversion Ratio will be equal to the Class B Liquidation Preference (determined without taking into consideration any accrued but unpaid dividends other than Default Rate Dividends) as of the date of exercise of the Class B Conversion Right or the Trust Conversion Right, as applicable, divided by the product of (A) the number of Class A Underlying Paired Shares (including fractional interests) for which each share of Class A EPS is exchangeable as of such date pursuant to Article 6.15.5 hereof multiplied by (B) the Current Market Price of the Paired Shares as of such date. All calculations of the Conversion Ratio under this paragraph (e) shall be made to the nearest one-tenth of a share (with .05 of a share being rounded upward). (ii) If, at any time between the Issue Date and the Cross-Over Date, a Class A EPS Adjustment Event shall occur, the Conversion Ratio in effect as of the close of business on the record date for such Class A EPS Adjustment Event or, if no such record date applies, the effective date of such Class A EPS Adjustment Event shall be adjusted so that in connection with any exercise of the Class B Conversion Right or the Trust Conversion Right the shares of Class B EPS subject to such exercise will be converted into the number of shares of Class A EPS that such holder would have owned or been entitled to receive after the happening of such Class A EPS Adjustment Event if such Class B Conversion Right or Trust Conversion Right had been exercised immediately prior to such record date or effective date. An adjustment pursuant to this subparagraph (ii) shall become effective (subject to subparagraph (iv) below) immediately upon the opening of business on the Business Day next following the record date for the applicable Class A EPS Adjustment Event or, if no such record date applies, the Business Day next following the effective date of such Class A EPS Adjustment Event. (iii) No adjustment in the Conversion Ratio shall be required pursuant to subparagraph (ii) above unless such adjustment would require a cumulative increase or decrease of at least one percent (1%) in such ratio; provided, however, that any adjustments that by reason of this subparagraph (iii) are not required to be made shall be carried forward and taken into account in any subsequent adjustment until made. (iv) In any case in which subparagraph (ii) above provides that an adjustment to the Conversion Ratio shall become effective immediately following the record date for a Class A EPS Adjustment Event, the Trust may defer until the occurrence of such event (A) issuing to the holder of any shares of Class B EPS converted after such record date but before the occurrence of such event the additional shares of Class A EPS issuable pursuant to such conversion by reason of the adjustment required pursuant to subparagraph (ii) in respect of such Class A EPS Adjustment Event and (B) paying to such holder any amount of cash in lieu of any fractional interest in shares of Class EPS pursuant to paragraph (d) of this Article 6.16.5. (v) If at the time of any exercise of the Class B Conversion Right on or prior to the Cross-Over Date there are any accrued but unpaid Default Rate Dividends with respect to the shares of Class B EPS being converted, the Conversion Ratio shall be adjusted so that the number of shares of Class A EPS issuable upon such exercise is increased by a number of shares (the "Class B Dividend Replacement Shares", which term shall also be deemed to refer to any shares of Class A - 64 - 69 EPS issued upon exercise of the Class B Conversion Right in respect of accrued but unpaid Default Rate Dividends pursuant to subparagraph (ii) above) equal to (A) the amount of the accrued but unpaid Default Rate Dividends with respect to the shares of Class B EPS being exchanged divided by (B) the product of (1) the number of Paired Shares for which each share of Class A EPS is then exchangeable upon exercise of the Class A Exchange Right multiplied by (2) the Current Market Price of the Paired Shares during the five (5) Trading Days immediately preceding the date of delivery of the applicable Class B Conversion Notice or Trust Conversion Notice and all related certificates and other documents. (f) Effect of Mergers and Certain Other Transactions. If, at any time after the Issue Date, the Trust shall become a party to any transaction, including, without limitation, a merger, consolidation, statutory share exchange, self tender offer for all or substantially all outstanding Trust Shares, sale of all or substantially all of the Trust's assets or recapitalization of the Class A EPS (but excluding any event constituting a Class A EPS Adjustment Event)(each of the foregoing being referred to herein as a "Transaction"), in each case as a result of which the outstanding shares of Class A EPS shall be converted into or exchanged for the right to receive stock, securities or other property (including cash or any combination thereof), effective as of the effective date of such Transaction, each share of Class A EPS issuable upon exercise of the Class B Conversion Right or the Trust Conversion Right with respect to any shares of Class B EPS that are not converted into or exchanged for the right to receive stock, securities or other property in connection with such Transaction shall thereafter be deemed to consist of the kind and amount of shares of stock and other securities and property (including cash or any combination thereof) that would have been held or receivable upon the consummation of such Transaction by a holder of a number of shares of Class A EPS equal to the number of Class B Underlying Class A EPS Shares into which each share of Class B EPS would have been convertible immediately prior to such Transaction, assuming such holder of shares of Class A EPS (A) is not a Person with which the Trust consolidated or into which the Trust was merged or which merged into the Trust or to which such sale or transfer was made, as the case may be (a "Constituent Person"), or an Affiliate of a Constituent Person and (B) failed to exercise his or her rights of election, if any, as to the kind or amount of stock, securities and other property (including cash) receivable upon such Transaction (provided that if the kind or amount of stock, securities and other property (including cash) receivable upon such Transaction is not the same for each share of Class A EPS held immediately prior to such Transaction by other than a Constituent Person or an Affiliate thereof and in respect of which such rights of election shall not have been exercised ("Non-Electing Share"), then for the purposes of this subparagraph (ii) the kind and amount of stock, securities and other property (including cash) receivable upon such Transaction by each Non-Electing Share shall be deemed to be the kind and amount so receivable per share by a plurality of the Non-Electing Shares). The provisions of this paragraph (f) shall similarly apply to successive Transactions. (g) Notice of Adjustment. Whenever the Conversion Ratio or the nature and amount of the securities and other property issuable upon exercise of the Class B Conversion Right or the Trust Conversion Right is adjusted as provided in paragraph (e) or (f) above, the Trust shall promptly file with the Transfer Agent an officer's certificate setting forth the Conversion Ratio after such adjustment and, in the case of an adjustment pursuant to paragraph (f), describing the kind and amount of stock, securities and other property (including cash) thereafter issuable upon such exercise. Such certificate shall also set forth a brief statement of the facts requiring such adjustment and shall - 65 - 70 be conclusive evidence of the correctness of such adjustment absent manifest error. Promptly after delivery of such certificate, the Trust shall prepare a notice of such adjustment setting forth the adjusted Conversion Ratio, the effective date of such adjustment and, in the case of an adjustment pursuant to paragraph (f), a description of the kind and amount of stock, securities and other property (including cash) thereafter issuable upon exercise of the Class B Conversion Right or the Trust Conversion Right, and shall mail such notice of such adjustment to the holder of each share of Class B EPS at such holder's last address as shown on the sharerecords of the Trust. (h) Miscellaneous Provisions. (i) There shall be no adjustment of the Conversion Ratio in case of the issuance of any shares of beneficial interest in the Trust in a reorganization, acquisition or other similar transaction except as specifically set forth in this Article 6.16.5. (ii) If the Trust shall take any action affecting the Trust Shares or the Corporation shall take any action affecting the Corporation Shares, other than an action described in this Article 6.16.5, that in the opinion of the Board of Trustees would materially and adversely affect the conversion rights of the holders of the Class B EPS provided for in this Article 6.16.5, the Conversion Ratio may be adjusted, to the extent permitted by law, in such manner, if any, and at such time, as the Board of Trustees, in its sole discretion, may determine to be equitable in the circumstances. (iii) The Trust covenants that any shares of Class A EPS issued upon exercise of the Class B Conversion Right or the Trust Conversion Right will be validly issued, fully paid and non-assessable. The Trust shall reserve and shall at all times have reserved out of its authorized but unissued Class A EPS sufficient Class A EPS to permit the exercise of the Class B Conversion Right. The Trust shall also comply with its obligations under paragraph (g)(iii) of Article 6.15.5 hereof as if such shares of Class A EPS issuable upon exercise of the Class B Conversion Right were issued and outstanding. The Trust shall pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Class A EPS or other securities or property upon exercise of the Class B Conversion Right or the Trust Conversion Right; provided, however, that the Trust shall not be required to pay any tax that may be payable in respect of any transfer involved in the issue or delivery of any shares of Class A EPS or other securities or property in a name other than that of the holder of the shares of Class B EPS being converted, and no such issue or delivery shall be made unless and until the Person requesting such issue or delivery has paid to the Trust the amount of any such tax or established, to the reasonable satisfaction of the Trust, that such tax has been paid. (iv) Except as provided in paragraph (g)(v) below, any determination required or permitted to be made by the Board of Trustees by these Articles Supplementary shall be final, conclusive and binding on the holders of Class B EPS. (v) In the event that the Trust elects to pay in cash a Class B Preferred Dividend corresponding to a Corporation Common Distribution in the form of securities or other property and in connection therewith the Board of Trustees makes a determination of the fair market - 66 - 71 value of such securities or other property, the Trust shall deliver to each affected holder of Class B EPS a written notice setting forth the valuation determined by the Board of Trustees. At any time within ten (10) Business Days after receipt of such notice, any affected holder of Class B EPS may request in writing that the Trust obtain a written valuation of such securities or other property from an investment banking firm. Promptly after receipt of any such request, the Trust shall select a nationally recognized investment banking firm to perform such valuation and shall provide such investment banking firm with such relevant information as the Trust may have in relation thereto. Such investment banking firm shall be instructed to prepare a written valuation report within thirty (30) days after its appointment, and upon receipt of such valuation report, the Trust shall mail a copy to each affected holder of Class B EPS. If the valuation as determined by such investment banking firm is greater than the valuation as determined by the Board of Trustees, the Trust shall promptly pay the amount of such difference to each affected holder of Class B EPS. If, however, the valuation as determined by such investment banking firm is less than the valuation determined by the Board of Trustees, the Trust may at its option require each affected holder of Class B EPS to repay the amount of such difference to the Trust, which amount shall be so repaid by each such holder promptly after receipt of the Trust's request. The fees and expenses of such investment banking firm shall be paid by the Trust. 6.16.6. REDEMPTION RIGHTS. (a) In General. Shares of Class B EPS will be redeemable at the option of the Trust at any time after the Cross-Over Date in accordance with the provisions of paragraph (b) of this Article 6.16.6 (the "Trust Redemption Right") and will be redeemable at the option of the holders at any time during the period commencing on the Cross-Over Date and ending on the first anniversary of the Cross-Over Date in accordance with the provisions of paragraph (c) of this Article 6.16.6 (the "Class B Redemption Right"). Prior to the Cross-Over Date, shares of Class B EPS will not be redeemable at the option of either the Trust or the holder. In addition, as more specifically provided in Article 6.16.7 hereof, upon receipt of a Class B Conversion/Redemption Notice from any holder of shares of Class B EPS at any time after the first anniversary of the Cross-Over Date, the Trust will be required to elect to either exercise the Trust Conversion Right or the Trust Redemption Right with respect to the shares specified in such Class B Conversion/Redemption Notice. (b) Redemption at the Option of the Trust. (i) Pursuant to the Trust Redemption Right, shares of Class B EPS may be redeemed in cash in whole or in part at the option of the Trust at any time and from time to time (in the case of partial redemptions) after the Cross-Over Date at a redemption price (the "Redemption Price") equal to the Class B Liquidation Preference of such shares as of the applicable Trust Redemption Date; provided, however, that the Trust Redemption Right may not be exercised with respect to any shares of Class B EPS that are already subject to (A) a Trust Conversion Notice or (B) a Class B Conversion Notice or a Class B Redemption Notice. Such redemption shall be deemed to have been made as of the close of business on the applicable Trust Redemption Date, and after such Trust Redemption Date, provided that the Trust Redemption Price has been duly paid or set apart for payment, dividends shall cease to accrue on the shares of Class B EPS called for redemption, such shares shall no longer be deemed to be outstanding and all rights of the holders of such shares as - 67 - 72 shareholders of the Trust shall cease, except the right to receive the Redemption Price, without interest thereon, upon surrender of the certificates evidencing such shares. (ii) Notice of any exercise of the Trust Redemption Right (a "Trust Redemption Notice") shall be given to the holders of the shares of Class B EPS to be redeemed not less than ten (10) nor more than sixty (60) days prior to the date fixed for redemption (the "Trust Redemption Date"). Each Trust Redemption Notice shall be given by first class mail to each holder of shares to be redeemed at such holder's address as shown on the sharebooks of the Trust and shall specify (A) the Trust Redemption Date, (B) the number of shares of Class B EPS to be redeemed from such holder, (C) the Trust Redemption Price, (D) the place or places where certificates for the shares of Class B EPS to be redeemed are to be surrendered for payment of the Trust Redemption Price, (E) that dividends will cease to accrue on the shares of Class B EPS to be redeemed on the Redemption Date and (F) that the ability of the holders to exercise the Class B Conversion Right with respect to the shares to be redeemed will terminate on the Trust Redemption Date. If less than all outstanding shares of Class B EPS are to be redeemed upon exercise of the Trust Redemption Right, the shares to be redeemed shall be selected in such manner as the Trust deems appropriate. (iii) Upon receipt of a Trust Redemption Notice, each holder of shares of Class B EPS being redeemed shall surrender to the Transfer Agent a certificate or certificates evidencing such shares. As soon as practicable, and in any event within five (5) Business Days, after such surrender, the Trust shall pay the applicable Redemption Price to such holder and, if less than the full number of shares represented by the certificate or certificates so surrendered are to be redeemed, the Trust shall deliver to such holder a certificate or certificates evidencing the excess shares not being redeemed. The Redemption Price shall be payable at the election of the Trust by check or by wire transfer to an account designated in writing by the holder at least two (2) Business Days prior to the applicable Trust Redemption Date, if one has been so designated. (c) Redemption at the Option of the Holders. (i) Under the Class B Redemption Right, to the extent permitted under applicable law, each holder of shares of Class B EPS shall have the right, at his or her option, to require the Trust at any time or from time to time (in the case of partial redemptions) after the Cross-Over Date and on or prior to the first anniversary of the Cross-Over Date to redeem some or all of such shares in cash at the Redemption Price (determined as of the Class B Redemption Date); provided, however, that the Class B Redemption Right may not be exercised with respect to any shares of Class B EPS that are already subject to (A) a Trust Conversion Notice or a Trust Redemption Notice or (B) a Class B Conversion Notice. Such redemption shall be deemed to have been made as of the close of business on the applicable Class B Redemption Date, and after such Class B Redemption Date, provided that the Redemption Price has been duly paid or set apart for payment, dividends shall cease to accrue on the shares of Class B EPS surrendered for redemption, such shares shall no longer be deemed to be outstanding and all rights of the holders of such shares as shareholders of the Trust shall cease, except the right to receive the Redemption Price, without interest thereon. - 68 - 73 (ii) A holder of shares of Class B EPS may exercise the Class B Redemption Right with respect to some or all of such shares by surrendering a certificate or certificates evidencing the shares to be redeemed, duly endorsed or assigned to the Trust in blank, to the Transfer Agent accompanied by a written notice (a "Class B Redemption Notice") in such form as the Trust shall prescribe from time to time specifying the number of shares (which shall be a whole number) to be redeemed in accordance with the provisions of this paragraph (c). As soon as practicable, and in any event within five (5) Business Days, after receipt of a Class B Redemption Notice and the related certificates (the date of such receipt being sometimes referred to herein as the "Class B Redemption Date"), to the extent permitted under applicable law, the Trust shall pay the Redemption Price to the holder and, if less than the full number of shares of Class B EPS represented by the certificate or certificates surrendered together with such Class B Redemption Notice are to be redeemed, the Trust shall deliver to such holder a certificate or certificates evidencing the excess shares not being redeemed. The Redemption Price shall be payable at the election of the Trust by check or by wire transfer to an account designated in writing by the holder at least two (2) Business Days prior to the applicable Class B Redemption Date, if one has been so designated. 6.16.7. CLASS B CONVERSION/REDEMPTION ELECTION RIGHT. In addition to the Class B Conversion Right and the Class B Redemption Right, at any time after the first anniversary of the Cross-Over Date, each holder of shares of Class B EPS will have the right (the "Class B Conversion/Redemption Election Right"), upon written notice to the Trust in such form as the Trust shall prescribe from time to time (a "Class B Conversion/Redemption Notice"), to require that the Trust elect either to exercise the Trust Conversion Right or the Trust Redemption Right described below with respect to the shares of Class B EPS held by such holder and designated in the Class B Conversion/Redemption Notice; provided, however, that the Class B Conversion Right may not be exercised with respect to any shares of Class B EPS (A) with respect to which the holder has already given a Class B Redemption Notice or (B) after the applicable Redemption Date if the Trust has already given a Trust Redemption Notice with respect to such shares unless, in either such case, the Trust shall default in the payment of the applicable Redemption Price required to be paid pursuant to Article 6.16.6 above. Within five (5) Business Days after receipt of any such Class B Conversion/Redemption Notice, the Trust shall either give the relevant holder a Trust Conversion Notice or a Trust Redemption Notice with respect to the shares of Class B EPS specified in such Class B Conversion/Redemption Notice. 6.16.8. REACQUIRED SHARES TO BE RETIRED. All shares of Class B EPS which shall have been issued and reacquired in any manner by the Trust shall be restored to the status of authorized but unissued shares of beneficial interest in the Trust without designation as to class. 6.16.9. DEFAULT RIGHTS. (a) Consequences of Uncured Default. Subject to paragraph (b) of this Article 6.16.9, in the event that the Trust at any time defaults in its obligations with respect to any exercise of the Class B Redemption Right, the Class B Conversion Right or the Class B Conversion/Redemption - 69 - 74 Election Right, and such default shall continue for a period of thirty (30) days from the date that performance of such obligations was due (an "Uncured Default"), then: (i) the holders of the outstanding shares of Class B EPS will have the rights with respect to the election of two additional members of the Board of Trustees described in paragraph (c) of Article 6.16.10 hereof, (ii) the dividend rate on the Class B EPS will be increased as provided in paragraph (d) of Article 6.16.3 hereof, (iii) the Registration Rights Agreement will be amended to provide the holders of Class B EPS with registration rights thereunder and (iv) the Cross-Over Date (if not already past) will be extended by a number of days equal to the number of days that an Uncured Default continues unremedied. Any Uncured Default may be waived at any time by the holders of shares of Class B EPS constituting a majority of all shares of Class B EPS then outstanding. 6.16.10. VOTING. (a) General Voting Rights. The holders of shares of Class B EPS shall be entitled to vote upon all matters upon which holders of Trust Shares have the right to vote, and shall be entitled to the number of votes equal to the largest whole number of Class B Underlying Trust Shares for which such shares of Class B EPS could be indirectly exchanged (assuming the exercise of the Class B Conversion Right and the concurrent exercise of the Class A Exchange Right with respect to the shares of Class A EPS issuable upon exercise of such Class B Conversion Right) as of the record date for determination of the shareholders entitled to vote on such matters, or, if no such record date is established, as of the date such vote is taken or any written consent of shareholders is solicited, such votes to be counted together with all other shares of beneficial interest in the Trust having general voting powers and not separately as a class. (b) Special Voting Rights. So long as any shares of Class B EPS are outstanding, in addition to any other vote or consent of holders of such shares required by the Declaration or these Articles Supplementary, the affirmative vote of at least a majority of the votes entitled to be cast by the holders of all outstanding shares of Class B EPS, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for that purpose, shall be necessary for effecting or validating any amendment, alteration or repeal of any of the provisions of the Declaration or these Articles Supplementary that materially and adversely affects the voting powers, rights or preferences of the holders of the Class B EPS disproportionately (based on the number of Underlying Class B Trust Shares at the time) to the effect of such amendment, alteration or repeal on the holders of the Trust Shares; provided, however, that (i) any amendment of the provisions of the Declaration so as to authorize or create, or to increase the authorized amount of, any class or series of shares of beneficial interest in the Trust, whether ranking prior to, on a parity with or junior to the Class B EPS shall not be deemed to materially and adversely affect the voting powers, rights or preferences of the holders of Class B EPS and (ii) no filing with the State Department of Assessments and Taxation of Maryland by the Trust in connection with a merger, consolidation or sale of all or substantially all of the assets of the Trust shall be deemed to be an amendment, alteration or repeal of any of the provisions of the Declaration or these Articles Supplementary unless such filing expressly purports to amend, alter or repeal one or more of such provisions. For the purposes of this paragraph (b), each share of Class B EPS will have one vote per share. (c) Default Voting Rights. - 70 - 75 (i) Upon the occurrence of any Uncured Default, the number of trustees then constituting the Board of Trustees shall be increased by two and the holders of the outstanding shares of Class B EPS shall be entitled to elect the two additional trustees to serve on the Board of Trustees at any annual meeting of shareholders, or at a special meeting of the holders of Class B EPS then outstanding called as provided in subparagraph (ii) below. If such Uncured Default shall at any time cease to be continuing or shall be waived, then the right of the holders of the Class B EPS to elect such additional two trustees shall cease (but subject always to the same provision for the vesting of such voting rights upon the occurrence of any subsequent Uncured Default) and the terms of office of all persons elected as trustees by such holders shall forthwith terminate and the number of trustees constituting the Board of Trustees shall be reduced accordingly. For the purposes of this paragraph (c), each share of Class B EPS will have one vote per share. (ii) At any time after the voting power described in subparagraph (i) above shall have been vested in the holders of shares of Class B EPS, the Secretary of the Trust may, and upon the written request of any holder of Class B EPS (addressed to the Secretary at the principal office of the Trust) shall, call a special meeting of the holders of the Class B EPS for the election of the two trustees to be elected by them as herein provided, such call to be made by notice similar to that provided in the Bylaws of the Trust for a special meeting of the shareholders or as required by law. If any such special meeting required to be called as above provided shall not be called by the Secretary within twenty (20) days after receipt of such request, then any holder of shares of Class B EPS may call such meeting, upon the notice above provided and for that purpose shall have access to the sharebooks of the Trust. The trustees elected at any such special meeting shall hold office until the next annual meeting of the shareholders or special meeting held in lieu thereof if such office shall not have previously terminated as above provided. If any vacancy shall occur among the trustees elected by the holders of the Class B EPS, a successor shall be elected by the Board of Trustees, upon the nomination of the then-remaining trustee elected by the holders of the Class B EPS or the successor of such remaining trustee, to serve until the next annual meeting of the shareholders if such office shall not have previously terminated as provided above. 6.16.11. RECORD HOLDERS. The Trust and the Transfer Agent may deem and treat the record holder of any Class B EPS as the true and lawful owner thereof for all purposes, and neither the Trust nor the Transfer Agent shall be affected by any notice to the contrary. 6.16.11. RESTRICTIONS ON OWNERSHIP AND TRANSFER. The Class B EPS constitute shares of beneficial interest in the Trust that are governed by and issued subject to all the limitations, terms and conditions of the Declaration applicable to shares of beneficial interest in the Trust generally, including, without limitation, the terms and conditions (including exceptions and exemptions) of Article VI of the Declaration applicable to shares of beneficial interest in the Trust. The foregoing sentence shall not be construed to limit the applicability to the Class B EPS of any other term or provision of the Declaration. No restrictions on the transferability of shares of Class A EPS shall be enforced by the Trust to the extent that such - 71 - 76 restrictions would otherwise cause the Trust to fail to meet the requirements of Section 856(a)(2) of the Code. 6.17 Redemption. In the event that the Corporation shall redeem any shares of its stock pursuant to Article FIFTEENTH of the charter of the Corporation and such shares are subject to the limitation on transfer provided for in the Intercompany Agreement, the Trust shall simultaneously redeem, upon the terms of such Article FIFTEENTH, any Shares that are paired with such shares of the Corporation's stock pursuant to the Intercompany Agreement. 6.18 Class A Shares. 6.18.1. NUMBER OF SHARES AND DESIGNATION. The class of shares of beneficial interest in the Trust authorized by this Section 6.18.1 shall be designated as "Class A Shares", par value $.01 per share (the "Class A Shares"), and five thousand (5,000) shall be the number of Class A Shares constituting such class. 6.18.2. DEFINITIONS. For purposes of this Section 6.18, the following terms have the meanings indicated: "Board of Trustees" shall mean the Board of Trustees of the Trust or any committee authorized by the Board of Trustees from time to time to exercise any of its powers or perform any of its responsibilities with respect to the Class A Shares. "Class A EPS" shall mean the Class A Exchangeable Preferred Shares of the Trust. "Class A Liquidating Distribution" shall mean, after the occurrence of a Liquidation Event, the payment to the holders of the Class A Shares (and of any shares of beneficial interest in the Trust entitled to participate in such distributions received by the holders of Class A Shares) of a liquidating distribution, out of the assets of the Trust legally available for liquidating distributions to holders of shares of beneficial interests in the Trust, in the amount of the aggregate book value of the total equity of the Trust on December 31, 1998 less the amount of such book value represented by the Class A EPS and the Class B EPS as conclusively determined by the Trust's audited balance sheet as of December 31, 1998 included in the Trust's Annual Report on Form 10-K for the year ended December 31, 1998. "Class A Shares" shall have the meaning set forth in Section 6.18.1. "Class B EPS" shall mean the Class B Exchangeable Preferred Shares of the Trust. "Class B Shares" shall mean the Class B Shares of beneficial interest in the Trust, par value $.01 per share, or any shares of beneficial interest in the Trust into which such common shares may be changed. - 72 - 77 "Code" shall mean the Internal Revenue Code of 1986, as amended, or any successor thereto. "Declaration" shall mean the Amended and Restated Declaration of Trust of the Trust, as amended from time to time. "Junior Shares" shall mean the Class A Shares, the Class B Shares and any other shares of beneficial interest in the Trust that do not entitle the holders thereof to a liquidation preference with respect to the Class A Shares and the Class B Shares, but shall not include the Class A EPS or the Class B EPS. "Liquidation Event" shall mean any liquidation, dissolution or winding up of the affairs of the Trust, whether voluntary or involuntary. For the purposes hereof, (i) a consolidation or merger of the Trust with one or more entities, (ii) a statutory share exchange and (iii) a sale or transfer of all or substantially all the Trust's assets shall be deemed not to be a Liquidation Event. "Transfer Agent" shall mean ChaseMellon Shareholder Services, L.L.C. (or any successor thereof), or such other agent or agents of the Trust as may be designated by the Board of Trustees or their designee as the transfer agent for the Class B Shares. "Trust" shall mean Starwood Hotels & Resorts, a Maryland real estate investment trust, and any successor thereto. 6.18.3. DIVIDENDS. The Trustees may from time to time authorize and the Trust may pay to the holders of Class A Shares such dividends or distributions in cash or other form, out of current or accumulated income, capital, capital gains, principal, surplus, proceeds from the increase or refinancing of Trust obligations, or from the sale of portions of the assets of the Trust or from any other source as the Trustees in their discretion shall determine. Such holders shall have no right to any dividend or distribution unless authorized by the Trustees. 6.18.4. LIQUIDATION RIGHTS. Upon the occurrence of any Liquidation Event, the holders of Class A Shares (and of any shares of beneficial interest in the Trust entitled to participate in such distributions received by the holders of the Class A Shares) will be entitled to receive out of the assets of the Trust legally available for liquidating distributions to holders of shares of beneficial interests in the Trust, after the payment in full of any liquidation preference of any outstanding shares of beneficial interest in the Trust (other than Junior Shares), including the Class A EPS (to the extent of the Class A Liquidation Preference (as defined in Section 6.15.2)) and the Class B EPS (to the extent of the Class B Liquidation Preference (as defined in Section 6.16.2)), (i) the Class A Liquidating Distribution and (ii) a liquidating distribution in an amount equal to 90% of such assets remaining after the payment in full of the Class A Liquidating Distribution, with the remaining 10% of such assets to be distributed - 73 - 78 concurrently to the holders of the Class B Shares (and of any shares of beneficial interest in the Trust entitled to participate in such distributions received by the holders of Class B Shares, including the Class A EPS (to the extent of the Class A Liquidation Participation Right (as defined in Section 6.15.2)) and the Class B EPS (to the extent of the Class B Liquidation Participation Right (as defined in Section 6.16.2))). 6.18.5. REACQUIRED SHARES. All Class A Shares that shall have been issued and reacquired in any manner by the Trust shall be restored to the status of authorized but unissued shares of beneficial interest in the Trust without designation as to class. 6.18.6. VOTING. (a) General Voting Rights. Subject to Section 6.18.6(b), the holders of Class A Shares shall be entitled to vote upon all matters, including the election of Trustees (other than Trustees who may be elected from time to time by holders of one or more other classes or series of shares of beneficial interest in the Trust), properly presented to the shareholders of the Trust generally for a vote. (b) Special Voting Rights. So long as any Class A Shares are outstanding, in addition to any other vote or consent of holders of such shares required by the Declaration, the affirmative vote of at least a majority of the votes entitled to be cast by the holders of all outstanding Class A Shares, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for that purpose, shall be necessary for effecting or validating any amendment, alteration or repeal of any of the provisions of the Declaration that materially and adversely affects the rights of the holders of the Class A Shares. (c) Votes per Share. For the purposes of this Section 6.18.6, each Class A Share will have one vote per share. 6.18.7. RECORD HOLDERS. The Trust and the Transfer Agent may deem and treat the record holder of any Class A Shares as the true and lawful owner thereof for all purposes, and neither the Trust nor the Transfer Agent shall be affected by any notice to the contrary. 6.18.8. RESTRICTIONS ON OWNERSHIP AND TRANSFER. The Class A Shares constitute shares of beneficial interest in the Trust that are governed by and issued subject to all the limitations, terms and conditions of the Declaration applicable to shares of beneficial interest in the Trust generally, including, without limitation, the terms and conditions (including exceptions and exemptions) of Article VI of the Declaration applicable to shares of beneficial interest in the Trust. The foregoing sentence shall not be construed to limit the applicability to the Class A Shares of any other term or provision of the Declaration. No - 74 - 79 restrictions on the transferability of shares of Class A Shares shall be enforced by the Trust to the extent that such restrictions would otherwise cause the Trust to fail to meet the requirements of Section 856(a)(2) of the Code. 6.19 Class B Shares. 6.19.1. NUMBER OF SHARES AND DESIGNATION. The class of shares of beneficial interest in the Trust authorized by this Section 6.19 shall be designated as "Class B Shares", par value $.01 per share (the "Class B Shares"), and one billion (1,000,000,000) shall be the number of Class B Shares constituting such class. For purposes of Article VI, Sections 6.15 and 6.16, the Class B Shares shall be deemed to be the shares of beneficial interest in the Trust into which the Trust Shares are changed in the merger of ST Acquisition Trust into the Trust pursuant to the Articles of Merger accepted for record by the State Department of Assessments and Taxation of Maryland on January 6, 1999. 6.19.2. DEFINITIONS. For purposes of this Section 6.19, the following terms have the meanings indicated: "Affiliate" shall mean with respect to any Person, any other Person which directly or indirectly controls, is controlled by or is under common control with such Person. "Board of Trustees" shall mean the Board of Trustees of the Trust or any committee authorized by the Board of Trustees from time to time to exercise any of its powers or perform any of its responsibilities with respect to the Class B Shares. "Business Day" shall mean any day other than a Saturday, Sunday or a day on which state or federally chartered banking institutions in New York, New York are not required to be open. "Cash Equivalent" of Units or any other shares of beneficial interest or other securities of the Trust or any other issuer as of any date shall mean an amount of cash equal to (i) the average of the daily Current Market Prices per Unit or other shares or securities during the five (5) consecutive Trading Days immediately preceding such date or (ii) if the Units or such other shares or securities are not publicly traded on such date, the fair market value of Units or other shares or securities as of such date as determined by the Board of Trustees in good faith. "Class A Dividend" shall mean any dividend or distribution paid or made by the Trust pro rata on or with respect to the outstanding Class A Shares other than a distribution of assets of the Trust upon the occurrence of a Liquidation Event; provided that a distribution to the holders of shares of beneficial interest in the Trust of rights to subscribe for or purchase additional equity securities under a shareholders' protective rights plan or agreement or any similar plan or agreement shall be deemed not to constitute a Class A Dividend. - 75 - 80 "Class A EPS" shall mean the Class A Exchangeable Preferred Shares of the Trust. "Class A Liquidating Distribution" shall mean, after the occurrence of a Liquidation Event, the payment to the holders of the Class A Shares (and of any shares of beneficial interest in the Trust entitled to participate in such distributions received by the holders of Class A Shares) of a liquidating distribution, out of the assets of the Trust legally available for liquidating distributions to holders of shares of beneficial interests in the Trust, in the amount of the aggregate book value of the total equity of the Trust on December 31, 1998 less the amount of such book value represented by the Class A EPS and the Class B EPS as conclusively determined by the Trust's audited balance sheet as of December 31, 1998 included in the Trust's Annual Report on Form 10-K for the year ended December 31, 1998. "Class A Shares" shall mean the Class A Shares of beneficial interest in the Trust, par value $.01 per share, or any shares of beneficial interest in the Trust into which such common shares may be changed. "Class B EPS" shall mean the Class B Exchangeable Preferred Shares of the Trust. "Class B Shares" shall have the meaning set forth in Section 6.19.1. "Code" shall mean the Internal Revenue Code of 1986, as amended, or any successor thereto. "Common Shares and Equivalents" shall mean the Class A Shares, the Class B Shares, the Class A Underlying Trust Shares (as defined in Section 6.15.2), which shares shall be deemed outstanding to the extent the corresponding Class A EPS is outstanding, the Class B Underlying Trust Shares (as defined in Section 6.16.2), which shares shall be deemed outstanding to the extent the corresponding Class B EPS is outstanding, and any other shares of beneficial interest in the Trust that do not entitle the holders thereof to a liquidation preference with respect to the Class A Shares and the Class B Shares, but shall not include the Class A EPS or the Class B EPS. "Corporation" shall mean Starwood Hotels & Resorts Worldwide, Inc., a Maryland corporation, and any successor thereto. "Corporation Shares" shall mean the shares of common stock, par value $.01 per share, of the Corporation or any stock of the Corporation into which such common stock may hereafter be changed. "Current Market Price" of publicly traded Units or any other shares of beneficial interest or other securities of the Trust or any other issuer as of any Trading Day shall mean the last reported sales price, regular way, on such day, or, if no sale takes place on such day, the average of the reported closing bid and asked prices on such day, regular way, in either case as reported on the NYSE or, if such shares or other securities are not listed or admitted for trading on the NYSE, on the principal national securities exchange on which such shares - 76 - 81 or other securities are listed or admitted for trading or, if not listed or admitted for trading on any national securities exchange, on the NASDAQ National Market or, if such shares or other securities are not quoted on such NASDAQ National Market, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for such shares or other securities on such day shall not have been reported through NASDAQ, the average of the bid and asked prices on such day as furnished by any NYSE member firm regularly making a market in such shares or other securities selected for such purpose by the Chief Executive Officer or Chief Financial Officer of the Trust or the Board of Trustees. "Declaration" shall mean the Amended and Restated Declaration of Trust of the Trust, as amended from time to time. "Dividend Amount" shall mean an amount equal to $0.60 per Class B Share per annum; provided that such amount shall increase by 15% per annum commencing January 1, 2000 (rounded to the nearest $.01); provided further that if the Dividend Amount for any calendar year would (without giving effect to this proviso) exceed 25% (but be less than or equal to 35%) of FFO Per Share for the prior calendar year, then the Dividend Amount shall increase by 5% for such year (so rounded); provided further that if the Dividend Amount for such calendar year would (without giving effect to the preceding proviso) exceed 35% of FFO Per Share for such prior calendar year, then the Dividend Amount for such calendar year shall equal the Dividend Amount for such prior calendar year; and provided further that in no calendar year shall the Dividend Amount exceed an amount equal to 49% of the Taxable Income Per Share for the prior calendar year (so rounded). "Exchange Amount" shall have the meaning set forth in paragraph (a)(i) of Section 6.19.5. "Exchange Date" shall have the meaning set forth in paragraph (a)(ii) of Section 6.19.5. "Exchange Notice" shall have the meaning set forth in paragraph (a)(iii) of Section 6.19.5. "Exchange Issuance Date" shall have the meaning set forth in paragraph (a)(iv) of Section 6.19.5. "FFO Per Share" for any calendar year shall mean "funds from operations" of the Trust for such year, as such amount is calculated and publicly disclosed by the Trust from time to time, divided by the average number of Common Shares and Equivalents outstanding during such calendar year. "Intercompany Agreement" shall mean the Amended and Restated Intercompany Agreement dated as of January 6, 1999, between the Trust and the Corporation, as amended from time to time. - 77 - 82 "Issue Date" shall mean the first date on which any Class B Shares are issued by the Trust. "Junior Shares" shall mean the Class A Shares, the Class B Shares and any other shares of beneficial interest in the Trust that do not entitle the holders thereof to a liquidation preference with respect to the Class A Shares and the Class B Shares, but shall not include the Class A EPS or the Class B EPS. "Liquidation Event" shall mean any liquidation, dissolution or winding up of the affairs of the Trust, whether voluntary or involuntary. For the purposes hereof, (i) a consolidation or merger of the Trust with one or more entities, (ii) a statutory share exchange and (iii) a sale or transfer of all or substantially all the Trust's assets shall be deemed not to be a Liquidation Event. "NYSE" shall mean The New York Stock Exchange. "Person" shall mean any individual, firm, trust, partnership, corporation, limited liability company or other entity, and shall include any successor (by merger or otherwise) of such entity. "Securities Act" shall mean the Securities Act of 1933, as amended. "set apart for payment" shall be deemed to include, without any action other than the following, the recording by the Trust in its accounting ledgers of any accounting or bookkeeping entry which indicates, pursuant to a declaration of dividends or other distribution by the Board of Trustees, the allocation of funds to be so paid on any series or class of shares of beneficial interest of the Trust. "Taxable Income Per Share" for any calendar year shall mean the taxable income of the Trust under the Code as reported by the Trust to the Internal Revenue Service for such calendar year, divided by the average number of Common Shares and Equivalents outstanding during such calendar year. "Trading Day" with respect to publicly traded Units or any other shares of beneficial interest or other securities of the Trust or any other issuer shall mean any day on which the shares or other securities in question are traded on the NYSE, or if such shares or other securities are not listed or admitted for trading on the NYSE, on the principal national securities exchange on which such shares or other securities are listed or admitted, or if not listed or admitted for trading on any national securities exchange, on the NASDAQ National Market, or if such shares or other securities are not quoted on such NASDAQ National Market, in the applicable securities market in which such shares or other securities are traded. - 78 - 83 "Transfer Agent" shall mean ChaseMellon Shareholder Services, L.L.C. (or any successor thereof), or such other agent or agents of the Trust as may be designated by the Board of Trustees or their designee as the transfer agent for the Class B Shares. "Trust" shall mean Starwood Hotels & Resorts, a Maryland real estate investment trust, and any successor thereto. "Units" shall mean units consisting of one Class B Share and one Corporation Share (subject to adjustment as contemplated by the Intercompany Agreement) and represented by a single share certificate, as provided in the Intercompany Agreement. 6.19.3. DIVIDENDS. (a) General. The holders of Class B Shares are entitled to receive a noncumulative dividend in an amount per share equal to the Dividend Amount, when, as and if authorized by the Board of Trustees out of assets of the Trust legally available for that purpose. Each dividend will be noncumulative and will be payable to holders of record of Class B Shares on such record date as shall be fixed by the Board of Trustees. (b) Restriction on Class A Dividends. So long as any Class B Shares are outstanding, no Class A Dividend may be declared or paid or set apart for payment with respect to any fiscal quarter unless all accrued dividends on the Class B Shares with respect to such quarter have been or are concurrently declared and paid; provided, however, that the restriction on the payment of Class A Dividends set forth in this Section 6.19.3(b) shall not apply to the extent (x) that the Trust is restricted, under the terms of any bona fide loan or credit agreement or indenture relating to a borrowing by the Trust or the Corporation or any of their respective subsidiaries, from declaring or paying, with respect to any fiscal quarter, any dividend on the Class B Shares but not a Class A Dividend or (y) necessary, in the good faith judgment of the Board of Trustees, to permit the Trust to continue to qualify for taxation as a "real estate investment trust" under Section 856 of the Code. 6.19.4. LIQUIDATION RIGHTS. Upon the occurrence of any Liquidation Event, the holders of Class B Shares (and of any shares of beneficial interest in the Trust entitled to participate in such distributions received by the holders of the Class B Shares, including the Class A EPS (to the extent of the Class A Liquidation Participation Right (as defined in Section 6.15.2)) and the Class B EPS (to the extent of the Class B Liquidation Participation Right (as defined in Section 6.16.2))) will be entitled to receive out of the assets of the Trust legally available for liquidating distributions to holders of shares of beneficial interests in the Trust, after the payment in full of any liquidation preference of any outstanding shares of beneficial interest in the Trust (other than Junior Shares), including the Class A EPS (to the extent of the Class A Liquidation Preference (as defined in Section 6.15.2)) and the Class B EPS (to the extent of the Class B Liquidation Preference (as defined in Section 6.16.2)) and of the Class A Liquidating Distribution, a liquidating distribution in an amount equal to 10% of such assets, with the remaining 90% of such assets to be distributed concurrently to the holders of the Class A Shares (and - 79 - 84 of any shares of beneficial interest in the Trust entitled to participate in such distributions received by the holders of Class A Shares). 6.19.5. CORPORATION EXCHANGE RIGHT. (a) Corporation Exchange Right. (i) The Corporation shall have the right, to the extent permitted by the Intercompany Agreement, to exchange for all or any portion of the Class B Shares cash, Corporation Shares or other property with a fair market value, in the good faith judgment of the Board of Trustees, at least equal to the fair market value of the Class B Shares being exchanged (the "Exchange Amount"). (ii) Such exchange shall be deemed to have been made as of the close of business on the applicable date fixed by the Corporation for such exchange (the "Exchange Date") and after such Exchange Date, provided that the Exchange Amount has been duly paid or set apart for payment in full, dividends shall cease to accrue on the Class B Shares called for exchange, such shares shall be deemed no longer to be outstanding and all rights of the holders of such shares as shareholders of the Trust shall cease, except the right to receive the Exchange Amount, without interest thereon, upon surrender of the certificates evidencing such shares. (iii) Notice of any exchange (an "Exchange Notice") shall be given by the Corporation to the Trust not less than ten (10) nor more than sixty (60) days prior to the Exchange Date. Each Exchange Notice shall concurrently be given by the Corporation by first class mail to each holder of shares to be exchanged at such holder's address as shown on the sharebooks of the Trust and shall specify (A) the Exchange Date, (B) the number of Class B Shares to be exchanged in the aggregate and from such holder, (C) the Exchange Amount, specifying whether the Exchange Amount will be paid in cash, Corporation Shares or other property (and identifying such other property, if other property is to be exchanged), (D) the place or places where certificates for the Class B Shares to be exchanged are to be surrendered for payment of the Exchange Amount and (E) that dividends will cease to accrue on the Class B Shares to be exchanged on the Exchange Date. If less than all outstanding Class B Shares are to be exchanged, the shares to be exchanged shall be selected pro rata, by lot or in such other manner as the Trust deems appropriate. (iv) Upon receipt of an Exchange Notice, each holder of Class B Shares being exchanged shall surrender to the Transfer Agent a certificate or certificates evidencing such shares. As soon as practicable, and in any event within five (5) Business Days, after such surrender, the Trust shall cause the Corporation to pay the applicable Exchange Amount to such holder and, if less than the full number of shares represented by the certificate or certificates so surrendered are to be exchanged, the Trust shall promptly deliver to such holder a certificate or certificates evidencing the excess Class B Shares not being exchanged. The Trust shall cause the Corporation to deliver promptly to such holder a certificate or certificates evidencing the Corporation Shares previously evidenced by the certificate or certificates surrendered. The Exchange Amount, if payable in cash, shall be payable at the election of the Corporation by check or by wire transfer to an account designated in writing by the holder at least two (2) Business Days prior to the applicable Exchange - 80 - 85 Date, if one has been so designated; if the Exchange Amount is not payable in cash, then the Exchange Amount shall be payable in such manner as may be determined by the Corporation and set forth in the Exchange Notice. With respect to any Corporation Shares or other securities to be issued pursuant to such exchange, the Trust shall cause the Corporation or the issuer of such other securities to issue and deliver, at the office of the Transfer Agent to the exchanging holder, a certificate or certificates for the number of full Corporation Shares or other securities deliverable in accordance with the provisions of this Section 6.19.5, and any fractional interest in respect of a Corporation Share or other securities arising upon such exchange shall be settled as provided in paragraph (b) of this Section 6.19.5 (the date of delivery of such certificate or certificates being sometimes referred to herein as the "Exchange Issuance Date"). Any such Corporation Shares or other securities issued upon such exchange shall be deemed to have been issued immediately prior to the close of business on the Exchange Issuance Date, and the Person or Persons in whose name or names any certificate or certificates for Corporation Shares or other securities shall be issuable pursuant to such exchange shall be deemed to have become the holder or holders of record of the Corporation Shares or other securities represented thereby at such time on such date unless the share transfer records for the Corporation Shares or other securities shall be closed on such date, in which event such Person or Persons shall be deemed to have become such holder or holders of record at the close of business on the next succeeding day on which such share transfer books are open. (b) Fractional Interests. Unless otherwise determined by the Trust and set forth in the Exchange Notice, no fractional Corporation Shares or scrip evidencing fractions thereof shall be issued upon such exchange. Instead of any fractional interest in a Corporation Share that would otherwise be deliverable upon such exchange, the Trust shall cause the Corporation to pay to the exchanging holder an amount in cash equal to the corresponding fraction of the Current Market Price of the Units on the Trading Day immediately preceding the Exchange Issuance Date. If more than one Class B Share shall be surrendered for exchange at one time by the same holder, the number of full Corporation Shares issuable upon exchange shall be computed on the basis of the aggregate number of Class B Shares so surrendered. (c) Miscellaneous Provisions. (i) The Trust shall pay or cause to be paid any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of the Exchange Amount upon any such exchange; provided, however, that the Trust shall not be required to pay or cause to be paid any tax that may be payable in respect of any transfer involved in the issue or delivery of any Exchange Amount in a name or to any Person other than that of the holder of the Class B Shares being exchanged, and no such issue or delivery shall be made unless and until the Person requesting such issue or delivery has paid to the Trust the amount of any such tax or established, to the reasonable satisfaction of the Trust, that such tax has been paid. (ii) Any determination required or permitted to be made by the Board of Trustees by this Section 6.19.5 shall be final, conclusive and binding on the holders of Class B Shares. - 81 - 86 6.19.6. REACQUIRED SHARES. All Class B Shares that shall have been issued and reacquired in any manner by the Trust shall be restored to the status of authorized but unissued shares of beneficial interest in the Trust without designation as to class. 6.19.7. VOTING. (a) No General Voting Rights. Subject to Section 6.19.7(b), the holders of Class B Shares shall not be entitled to vote upon any matter regardless of whether holders of Class A Shares have the right to vote on such matter. (b) Special Voting Rights. So long as any Class B Shares are outstanding, in addition to any other vote or consent of holders of such shares required by the Declaration, the affirmative vote of at least a majority of the votes entitled to be cast by the holders of all outstanding Class B Shares, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for that purpose, shall be necessary for effecting or validating any amendment, alteration or repeal of any of the provisions of the Declaration that materially and adversely affects the rights of the holders of the Class B Shares disproportionately to the effect of such amendment, alteration or repeal on the holders of Class A Shares; provided, however, that (i) any amendment of the provisions of the Declaration so as to authorize or create, or to increase the authorized amount of, any class or series of shares of beneficial interest in the Trust, whether ranking prior to, on a parity with or junior to the Class B Shares shall be deemed not to materially and adversely affect the rights of the holders of Class B Shares and (ii) no filing with the State Department of Assessments and Taxation of Maryland or otherwise in connection with a merger, consolidation or sale of all or substantially all the assets of the Trust shall be deemed to be an amendment, alteration or repeal of any of the provisions of the Declaration unless such filing expressly purports to amend, alter or repeal this Section 6.19. For the purposes of this paragraph (b), each Class B Share will have one vote per share. 6.19.8. RECORD HOLDERS. The Trust and the Transfer Agent may deem and treat the record holder of any Class B Shares as the true and lawful owner thereof for all purposes, and neither the Trust nor the Transfer Agent shall be affected by any notice to the contrary. 6.19.9. RESTRICTIONS ON OWNERSHIP AND TRANSFER. The Class B Shares constitute shares of beneficial interest in the Trust that are governed by and issued subject to all the limitations, terms and conditions of the Declaration applicable to shares of beneficial interest in the Trust generally, including, without limitation, the terms and conditions (including exceptions and exemptions) of Article VI of the Declaration applicable to shares of beneficial interest in the Trust. The foregoing sentence shall not be construed to limit the applicability to the Class B Shares of any other term or provision of the Declaration. No restrictions on the transferability of shares of Class B Shares shall be enforced by the Trust to the - 82 - 87 extent that such restrictions would otherwise cause the Trust to fail to meet the requirements of Section 856(a)(2) of the Code. ARTICLE VII. Liability of Trustees, Shareholders and Officers, and Other Matters 7.1 Exculpation of Trustee and Officers. No Trustee, officer or agent of the Trust shall be liable or held to any personal liability whatsoever for an obligation or contract of the Trust. The provisions of section 2-405.1 of the Corporations and Associations Article of the Annotated Code of Maryland (as amended and interpreted from time to time, and any successor statute thereto), which sets forth the standard of care required of directors of corporations organized under the laws of the State of Maryland, and all other statutory or decisional law (as amended or interpreted from time to time) which sets forth the standard of care required of officers, employees and agents for corporations organized under the laws of the State of Maryland, shall be fully applicable to the Trust, and to the Trustees, officers, employees and agents of the Trust, as if the Trust were a corporation organized under the laws of the State of Maryland and its Trustees, officers, employees and agents were respectively, directors, officers, employees and agents of such corporation. Notwithstanding the foregoing, to the fullest extent permitted by Maryland statutory or decisional law, as amended or interpreted from time to time, no Trustee or officer of the Trust shall be liable to the Trust or its shareholders for money damages arising out of acts or omissions occurring on or after June 6, 1988; provided, however, that this provision shall not restrict or limit the liability of the Trust's Trustees or officers to the Trust or its shareholders (i) to the extent that it is proved that such Person actually received an improper benefit or profit in money, property or services, for the amount of the benefit or profit in money, property or services actually received, or (ii) to the extent that a judgment or final adjudication adverse to such Person is entered in a proceeding based on a finding in the proceeding that such Person's action, or failure to act, was the result of active and deliberate dishonesty which was material to the cause of action adjudicated in the proceeding. No amendment to this Section 7.1 or repeal of any of its provisions shall limit or eliminate the effect of this Section 7.1 with respect to any act or omission which occurs prior to such amendment or repeal. 7.2 Limitation of Liability of Shareholders, Trustees and Officers. The Trustees and officers in incurring any debts, liabilities or obligations, or in taking or omitting any other actions for or in connection with the Trust are, and shall be deemed to be, acting as Trustees or officers of the Trust and not in their own individual capacities. Except to the extent provided by applicable law, no Trustee, Shareholder, officer, employee or other agent shall be liable for any debt, claim, demand, judgment, decree, liability or obligation of any kind of, against or with respect to the Trust, arising out of any action taken or omitted for or on behalf of the Trust and the Trust shall be solely liable therefor and resort shall be had solely to the Trust Estate for the payment or performance thereof. Each Shareholder shall be entitled to pro rata indemnity from the Trust Estate if, contrary to the provisions hereof, such Shareholder shall be held to any personal liability. - 83 - 88 7.3 Express Exculpatory Clauses and Instruments. In all agreements, obligations, instruments, and actions in regard to the affairs of this Trust, this Trust and not the Shareholders, officers, or agents shall be the principal and entitled as such to enforce the same, collect damages, and take all other action. All such agreements, obligations, instruments, and actions shall be made, executed, incurred, or taken by or in the name and on behalf of this Trust or by the Trustees as Trustees hereunder, but not personally. All such agreements, obligations, and instruments shall acknowledge notice of this paragraph or shall refer to this Declaration and contain a statement to the effect that the name of this Trust refers to the Trustees as Trustees but not personally, and that no Trustee, Shareholder, officer, or agent shall be held to any personal liability thereunder; and neither the Trustees nor any officer or agent shall have any power or authority to make, execute, incur, or take any agreement, obligation, instrument or action unless the requirements of this paragraph are met; however, the omission of such provision from any such instrument shall not render the Shareholders or any Trustee or officer liable nor shall the Trustees or any officer of the Trust be liable to anyone for such omission. 7.4 Indemnification of Trustees, Officers, Employees and Other Agents. The provisions of Section 2-418 of the Corporations and Associations Article of the Annotated Code of Maryland (as amended and interpreted from time to time, and any successor statute thereto), which empowers a corporation organized under the laws of the State of Maryland to indemnify its directors, officers, employees and other agents against certain liabilities and obligations, and for the right of directors, officers, employees and other agents of such corporation to be so indemnified (as amended, interpreted and superseded, "Section 2-418"), shall be fully applicable to the Trust and to the Trustees, officers, employees and other agents of the Trust as if the Trust were a corporation organized under the laws of the State of Maryland and its Trustees, officers, employees and other agents were, respectively, directors, officers, employees and agents of such corporation. In each and every situation where the Trust may do so under said Section 2-418 or other applicable law, the Trust hereby obligates itself to so indemnify its Trustees, officers, employees and other agents, and in each case where the Trust must make certain investigations on a case-by-case basis prior to indemnification, the Trust hereby obligates itself to pursue such investigations diligently, it being the specific intention of this Section 7.4 to obligate the Trust to indemnify each Person whom the Trust may indemnify to the fullest extent permitted by Section 2-418 or by other applicable law at any time and from time to time. The rights accruing to any Person under these provisions shall not exclude any other right to which he may be lawfully entitled, nor shall anything contained herein restrict the right of the Trust to indemnify or reimburse such Person in any proper case even though not specifically provided for herein, nor shall anything contained herein restrict such right of a Trustee to contribution as may be available under applicable law. In addition, and without limiting the generality of the foregoing, the Trust shall have the power to purchase and maintain insurance on behalf of any Person entitled to indemnify hereunder against any liability asserted against him and incurred by him in a capacity mentioned above, or arising out of his status as such, whether or not the Trust would have the power to indemnify him against such liability under the provisions hereof. 7.5 Right of Trustees and Officers to Own Shares or Other Property and to Engage in Other Business. Any Trustee or officer may acquire, own, hold and dispose of Shares in the Trust, for his individual account, and may exercise all rights of a Shareholder to the same extent and in the same manner as if he were not a Trustee or officer. Any Trustee or officer may have personal - 84 - 89 business interests and may engage in personal business activities, which interest and activities may include the acquisition, syndication, holding, management, operation or disposition, for his own account or for the account of others, of interests in Mortgages, interests in Real Property, or interests in Persons engaged in the real estate business, including serving as a trustee or officer of any other Real Estate Investment Trust. Subject to the provisions of Article IV any Trustee or officer may be interested as a trustee, officer, director, stockholder, partner, member, advisor or employee of, or otherwise have a direct or indirect interest in, any Person who may be engaged to render advice or services to the Trust, and may receive compensation from such Person as well as compensation as Trustee, officer, or otherwise hereunder. None of these activities shall be deemed to conflict with his duties and powers as Trustee or officer. 7.6 Transactions Between the Trustees and the Trust. (a) If subsection (b) of this Section 7.6 is complied with, a contract or other transaction between the Trust and any corporation, firm or other entity in which any of the Trustees is a director or has a material financial interest is not void or voidable solely because of any one or more of the following: (i) the common directorship or interest; (ii) the presence of the Trustee at the meeting of the Board of Trustees or a committee of the Board of Trustees which authorizes, approves or ratifies the contract or transaction; or (iii) the counting of the vote of the Trustee for the authorization, approval or ratification of the contract or transaction. (b) Subsection (a) of this Section 7.6 applies if: (i) The fact of the common directorship or interest is disclosed or known to (a) the Board of Trustees or the committee, and the Board of Trustees or committee authorizes, approves or ratifies the contract or transaction by the affirmative vote of a majority of disinterested Trustees, even if the disinterested Trustees constitute less than a quorum; or (b) the shareholders entitled to vote, and the contract or transaction is authorized, approved or ratified by a majority of the votes cast by the shareholders entitled to vote other than the votes of shares owned of record or beneficially by the interested Trustee or corporation, firm or other entity; or (ii) The contract or transaction is fair and reasonable to the Trust. (c) Common or interested Trustees, or the Shares owned by them or by an interested corporation, firm or other entity, may be counted in determining the presence of a quorum at a meeting of the Board of Trustees or a committee of the Board of Trustees or at a meeting of the shareholders, as the case may be, at which the contract or transaction is authorized, approved or ratified. (d) If a contract or transaction is not authorized, approved or ratified in one of the ways provided for in subsection (b)(i) of this Section 7.6, the person asserting the validity of the contract or transactions bears the burden of proving that the contract or transaction was fair and reasonable to the Trust at the time it was authorized, approved or ratified. This subsection (d) does not apply - 85 - 90 to the fixing by the Board of Trustees of reasonable compensation for a Trustee, whether as a Trustee or in any other capacity. (e) Any procedures authorized by Section 7.4 of this Declaration shall be deemed to satisfy subsection (b)(i) of this Section 7.6. Any provision of this Declaration, the Bylaws or any contract, or any transaction, requiring or permitting indemnification of Trustees, including advances of expenses, is fair and reasonable to the Trust. (f) Any Trustee or officer, employee or agent of the Trust may acquire, own, hold and dispose of Securities of the Trust, for his individual account, and may exercise all rights of a holder of such Securities to the same extent and in the same manner as if he were not such a Trustee or officer, employee or agent. The Trustees shall use their reasonable best efforts to obtain through an Advisor or other Persons a continuing and suitable investment program, consistent with the investment policies and objectives of the Trust, and the Trustees shall be responsible for reviewing and approving or rejecting investment opportunities presented by the Advisor or such other Persons. So long as there is such Advisor or other Person, the Trustees shall have no responsibility for the origination of investment opportunities for the Trust. Any Trustee or officer, employee, or agent of the Trust may, in his personal capacity, or in a capacity of trustee, officer, director, stockholder, partner, member, advisor or employee of any Person, have business interests and engage in business activities in addition to those relating to the Trust, which interests and activities may include the acquisition, syndication, holding, management, operation or disposition, for his own account or for the account of such Person, of interests in Mortgages, interests in Real Property, or interests in Persons engaged in the real estate business, and each Trustee, officer, employee and agent of the Trust shall be free of any obligation to present to the Trust any investment opportunity which comes to him in any capacity other than solely as Trustee, officer, employee or agent of the Trust, even if such opportunity is of a character which, if presented to the Trust, could be taken by the Trust; provided, however, that the provisions of this sentence shall not extend to any of such Trustees or agents of the Trust who are affiliates of the Advisor, or to any officer or employee of the Trust or (at a time when there is no such Advisor or other Person providing an investment program for the Trust as aforesaid) to any Trustee of the Trust, in each case who is not acting as a trustee, officer, director, stockholder, partner, member, advisor or employee of any Person but is acting for his own personal account. Subject to the provisions of this Section 7.6, any Trustee or officer, employee or agent of the Trust may be interested as trustee, officer, director, stockholder, partner, member, advisor or employee of, or otherwise have a direct or indirect interest in, any Person who may be engaged to render advice or services to the Trust, and may receive compensation from such Person as well as compensation as Trustee, officer, employee or agent of the Trust or otherwise hereunder. None of the activities in this paragraph shall be deemed to conflict with his duties and powers as Trustee, officer, employee or agent of the Trust. (g) Nothing contained in this Declaration shall prohibit or in any way limit any person described in Section 3.2(n) of this Declaration from contracting with others for the performing of services similar or identical to those undertaken by such Person pursuant to this Declaration or from conducting the usual and normal business operations of such Person. The Trustees are not restricted by this Section 7.6 from forming a corporation, partnership, trust or other business association owned by the Trustees or by their nominees for the purpose of holding title to property of the Trust or - 86 - 91 managing property of the Trust providing the Trustees' motive for the formation of such business association is not their own enrichment. 7.7 Restriction of Duties and Liabilities. To the extent that the nature of this Trust (that is, a Maryland real estate investment trust) will permit, the duties and liabilities of Shareholders, Trustees and officers shall in no event be greater than the duties and liabilities of shareholders, directors and officers of a Maryland corporation. The Shareholders, Trustees and officers shall in no event have any greater duties or liabilities than those imposed by applicable law as shall be in effect from time to time. 7.8 Persons Dealing with Trustees or Officers. Any act of the Trustees or officers purporting to be done in their capacity as such, shall, as to any persons dealing with such Trustees or officers, be conclusively deemed to be within the purposes of this Trust and within the power of the Trustees and officers. No Person dealing with the Trustees or any of them, or with the authorized officers, agents or representatives of the Trust, shall be bound to see to the application, of any funds or property passing into their hands of control. The receipt of the Trustees, or any of them, or of authorized officers, agents, or representatives of the Trust, for moneys or other consideration, shall be binding upon the Trust. 7.9 Reliance. The Trustees and officers may consult with counsel and the advice or opinion of such counsel shall be full and complete personal protection to all of the Trustees and officers in respect to any action taken or suffered by them in good faith and in reliance on and in accordance with such advice or opinion. In discharging their duties, Trustees and officers, when acting in good faith, may rely upon financial statements of the Trust represented to them to be correct by the President or the officer of the Trust having charge of its books of account, or stated in a written report by an independent certified public accountant fairly to present the financial position of the Trust. The Trustees may rely, and shall be personally protected in acting, upon any instrument or other document believed by them to be genuine. 7.10 Income Tax Status. Anything to the contrary herein notwithstanding and without limitation of any rights of indemnification or non-liability of the Trustees herein, said Trustees by this Declaration make no commitment or representation that the Trust will qualify for the dividends paid deduction permitted by the Internal Revenue Code, by the Tax-General Article, Section 10-304 (or any successor provision) of the Annotated Code of Maryland, or by any Rules and Regulations hereunder pertaining to Real Estate Investment Trusts, in any given year. The failure of the Trust to qualify as a Real Estate Investment Trust under the Internal Revenue Code or under Maryland law shall not render the Trustees liable to the Shareholders or to any other person or in any manner operate to annul the Trust. ARTICLE VIII. Duration, Amendment, Termination and Qualification of Trust - 87 - 92 8.1 Duration of Trust. The Trust shall continue without limitation of time, unless terminated as provided in Section 8.2. 8.2 Termination of Trust. (a) The Trust may be terminated by the affirmative vote of the holders of two-thirds (2/3) in interest of all outstanding Shares entitled to vote thereon, at any meeting of Shareholders. Upon termination of the Trust: (i) The Trust shall carry on no business except for the purpose of winding up its affairs. (ii) The Trustees shall proceed to wind up the affairs of the Trust and all of the powers of the Trustees under this Declaration shall continue until the affairs of the Trust shall have been wound up, including the power to fulfill or discharge the contracts of the Trust, collect its assets, sell, convey, assign, exchange, transfer, or otherwise dispose of all or any part of the remaining Trust Estate to one or more persons at public or private sale for consideration which may consist in whole or in part of cash, securities or other property of any kind, discharge or pay its liabilities and do all other acts appropriate to liquidate its business; provided, that any sale, conveyance, assignment, exchange, transfer or other disposition of more than fifty percent (50%) of the Trust Estate shall require approval of the principal terms of the transaction and the nature and amount of the consideration by vote or consent of the holders of a majority of all the outstanding Shares entitled to vote thereon. (iii) After paying or adequately providing for the payment of all liabilities, and upon the receipt of such releases, indemnities, and refunding agreements as they deem necessary for their protection, the Trustees may distribute the remaining Trust Estate, in cash or in kind, or partly each, among the Shareholders, according to their respective rights. (b) After termination of the Trust and distribution to the shareholders as herein provided, the Trustees shall execute and lodge among the records of the Trust an instrument in writing, setting forth the fact of such termination, and the Trustees shall thereupon be discharged from all further liabilities and duties hereunder, and the rights and interests of all Shareholders shall thereupon cease. 8.3 Amendment Procedure. (a) This Declaration may be amended by the vote or written consent of Shareholders holding a majority of the outstanding Shares entitled to vote thereon. The Trustees may also amend this Declaration without the vote or consent of Shareholders as provided in Section 9.6. (b) A certification, in recordable form, signed by a majority of the Trustees, setting forth an amendment and reciting that it was duly adopted by the Shareholders or by the Trustees as aforesaid, or a copy of the Declaration, as amended, in recordable form, and executed by a majority of the Trustees, shall be conclusive evidence of such amendment when lodged among the records of the Trust. - 88 - 93 (c) Nothing contained in this Declaration shall permit the amendment of this Declaration to impair the exception from personal liability of the Shareholders, Trustees, officers, and agents of this Trust. 8.4 Qualification Under the REIT Provisions of the Internal Revenue Code. It is intended that the Trust shall qualify as a "real estate investment trust" under the REIT Provisions of the Internal Revenue Code during such period as the Trustees shall deem it advisable so to qualify the Trust. ARTICLE IX. Miscellaneous 9.1 Applicable Law. This Declaration has been executed and acknowledged by the Trustees with reference to the statutes and laws of the State of Maryland and the rights of all parties and the construction and effect of every provision hereof shall be subject to and construed according to statutes and laws of said State. 9.2 Index and Headings for Reference Only. The index and headings preceding the text, articles and sections hereof have been inserted for convenience and reference only and shall not be construed to affect the meaning, construction or effect of this Declaration. 9.3 Successors in Interest. This Declaration and the Bylaws shall be binding upon and inure to the benefit of the undersigned Trustees and their successors, assigns, heirs, distributees and legal representatives, and every Shareholder and his successors, assigns, heirs, distributees and legal representatives. 9.4 Inspection of Records. Trust records shall be available for inspection by Shareholders at the same time and in the same manner and to the extent that comparable records of a Maryland corporation would be available for inspection by corporate shareholders under the laws of the State of Maryland. Except as specifically provided for in this Declaration, Shareholders shall have no greater right than shareholders of a Maryland corporation to require financial or other information from the Trust, Trustees or officers. Any Federal or state securities administration, the State Department of Assessments and Taxation of Maryland, or other similar authority shall have the right, at reasonable times during business hours and for proper purposes, to inspect the books and records of the Trust. 9.5 Counterparts. This instrument may be simultaneously executed in several counterparts, each of which when so executed shall be deemed to be an original and such counterparts together shall constitute one in the same instrument, which shall be sufficiently evidenced by any such original counterparts. 9.6 Provisions of the Trust in Conflict with Law or Regulations. - 89 - 94 (a) The provisions of this Declaration are severable, and if the Trustees shall determine, with the advice of counsel, that any one or more of such provisions (the "Conflicting Provisions") are in conflict with the REIT Provisions of the Internal Revenue Code, with other applicable federal laws and regulations, or with the REIT provisions of the Annotated Code of Maryland, the Conflicting Provisions shall be deemed never to have constituted a part of the Declaration; provided, however, that such determination by the Trustees shall not affect or impair any of the remaining provisions of this Declaration or render invalid or improper any action taken or omitted (including but not limited to the election of Trustees) prior to such determination. A certification in recordable form signed by a majority of the Trustees setting forth any such determination and reciting that it was duly adopted by the Trustees, or a copy of this Declaration, with the Conflicting Provisions removed pursuant to such determination, in recordable form, signed by a majority of the Trustees, shall be conclusive evidence of such determination when lodged in the records of the Trust. The Trustees shall not be liable for failure to make any determination under this Section 9.6(a). Nothing in this Section 9.6(a) shall in any way limit or affect the right of the Shareholders to amend this Declaration as provided in Section 8.3(a). (b) If any provisions of this Declaration shall be held invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render invalid or unenforceable any other provision of this Declaration, and this Declaration shall be carried out as if any such invalid or unenforceable provision were not contained herein. 9.7 Certifications. The following certifications shall be final and conclusive as to any persons dealing with the Trust: (a) A certification of a vacancy among the Trustees by reason of resignation, removal, increase in the number of Trustees, incapacity, death or otherwise, when made in writing by majority of the remaining Trustees; (b) A certification as to the persons holding office as Trustees or officers at any particular time, when made in writing by the Secretary of the Trust or by any Trustee; (c) A certification that a copy of this Declaration or of the Bylaws is a true and correct copy thereof as then in force, when made in writing by the Secretary of the Trust or by any Trustee; (d) The certification referred to in Section 8.3(b) and 9.6(a) hereof; (e) A certification as to any action by Trustees, other than the above, when made in writing by the Secretary of the Trust, or by any Trustee. 9.8 Recording and Filing. A copy of this instrument and any other amendments to the Declaration shall be filed with the State Department of Assessments and Taxation of Maryland. This Declaration and any amendments may also be filed or recorded in such other places as the Trustees deem appropriate. - 90 - 95 9.9 Resident Agent. The name and post office address of the resident agent of the Trust in the State of Maryland is The Corporation Trust, 33 South Street, Baltimore, Maryland 21202. Said resident is a citizen of the State of Maryland actually residing therein. The resident agent may be removed, and a vacancy existing in such office for any reason may be filled by the Board of Trustees. - 91 - EX-3.3 3 EX-3.3 1 EXHIBIT 3.3 BYLAWS OF STARWOOD HOTELS & RESORTS (AS AMENDED AND RESTATED THROUGH APRIL 16, 1999) ARTICLE I TRUSTEES SECTION 1. NUMBER; TENURE. There shall be not less than three (3) nor more than twenty (20) Trustees; within such limits, the number of Trustees may be fixed, increased or decreased from time to time by the Trustees, but no such action may affect the tenure of office of any Trustee. SECTION 2. QUALIFYING SHARES NOT REQUIRED. No Trustee need be a Shareholder. 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 each Trustee to hold office until his or her successor shall have been duly elected and qualified. At each Annual Meeting of Shareholders (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 he or she has been appointed expires and until his or her successor is elected and qualified. SECTION 6. PLACE OF MEETING. Each meeting of the Trustees shall be held at such place within or without the State of Maryland as is fixed from time to time by resolution of the Trustees (or, in the absence of such resolution, as specified in the notice of such meeting). SECTION 7. ANNUAL MEETINGS. Promptly following each Annual Meeting of Share holders, a meeting of the Trustees shall be held for the purpose of 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. 2 SECTION 9. SPECIAL MEETINGS. Special meetings of the Trustees may be called at any time by the Chairman, and the Chairman 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 telecopier to his or her 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 or notice by telecopier, 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 at least seventy-two (72) hours prior to the time fixed for the holding of the meeting. Notice of a meeting may be given by the Chairman, the Trustees requesting the meeting or the Secretary. 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. 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 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) 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. 2 3 SECTION 14. EXECUTIVE COMMITTEE. (a) The Board of Trustees may appoint two or more trustees to constitute an Executive Committee. One of such trustees 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 Trustees, 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 15. OTHER COMMITTEES. The Board of Trustees may appoint such other commit tees as it shall deem advisable and with such authority as the Board of Trustees shall from time to time determine. SECTION 16. OTHER PROVISIONS REGARDING COMMITTEES. (a) The Board of Trustees 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 Trustees. No committee member who receives compensation as a member of any one or more committees shall be barred from serving the Trust 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 Sections 11, 12 and 17 of this Article I shall apply to all committees. SECTION 17. MEETINGS BY TELEPHONE OR SIMILAR COMMUNICATIONS. The Board of Trustees may participate in meetings by means of conference telephone or similar communications equipment, whereby all trustees 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 18. TRANSACTIONS WITH INTERESTED PERSONS. (a) Notwithstanding anything to the contrary contained in these 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 these Trustee's Regulations: (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 June 25, 1998 (the "Exchange Act"); 3 4 (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 Exchange Act; 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 Exchange Act, 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) "Corporation" shall mean Starwood Hotels & Resorts Worldwide, Inc., 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 amended from time to time. (vi) "Partnership Agreement" shall mean the Limited Partnership Agreement of the Realty Partnership, as amended from time to time. (vii) "Partnerships" shall mean the Realty Partnership and SLC Operating Limited Partnership, a Delaware limited partnership. 4 5 (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) "Shareholder" shall mean a Person that owns Paired Shares. (xi) "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 Trust, the Corporation or the Partnership with respect to the senior debt of the Realty Partnership. (xii) "Trust" means Starwood Hotels & Resorts, a Maryland real estate investment trust. (xiii) "Units" shall have the meaning set forth in the Partnership Agreement. (c) 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 18, 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 Trust 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 18, as may be reasonably requested of such Person, and such Person shall furnish such information within 10 days after receipt of such demand. (d) Nothing contained in this Section 18 shall be construed to relieve any Interested Person from any fiduciary obligation imposed by law. (e) Notwithstanding anything to the contrary contained in these Trustees' Regulations this Section 18 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. SECTION 19. INDEPENDENT TRUSTEES. Notwithstanding anything to the contrary contained in these Trustees' Regulations, not less than a majority of the Board of Trustees of the Trust shall be composed of "Independent Trustees." For purposes of this Section 19, an "Independent Trustee" is a Trustee of the Trust who is not employed by or an affiliate (as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act), of the Trust, the Corporation or Starwood Capital Group, L.L.C. 5 6 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 the Trustees. The Board of Trustees may delegate to the Chairman of the Trust the authority to appoint any officer or agent of the Trust and to fill a vacancy other than the President, Secretary or Treasurer, and may delegate to any other officer of the Trust the authority to appoint any officer or agent of the Trust having a lower rank than the officer making such appointment. Officers shall hold office at the pleasure of the Trustees, provided that any officer appointed by any other officer pursuant to authority delegated to such appointing officer by the Board of Trustees may be removed, with or without cause, at any time whenever such appointing officer in his or her absolute discretion shall consider that the best interests of the Trust shall be served by such removal. 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 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 chief executive officer of a corporation. 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, and shall be, ex officio, a member of all standing committees. SECTION 3. POWERS AND DUTIES OF THE PRESIDENT. The President shall have such duties and responsibilities for the supervision, direction and control of the Trust as may be delegated to the President by the Board of Trustees or the Chairman. 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, the President shall preside at all meetings of the Trustees and of the Shareholders, and 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 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. The Secretary shall perform all other duties that pertain to such office and which are required by the Trustees. SECTION 6. DUTIES OF THE CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall (i) maintain custody of and keep the books of account of the Trust; (ii) receive, deposit and disburse funds belonging to the Trust, and (iii) perform all other duties that pertain to such office and which are required by the Trustees. 6 7 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 on such date and at such time as may be fixed by the Board of Trustees. 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 Chairman or by the Trustees or by any two or more Trustees, or by one or more Shareholders holding not less than a majority of the outstanding Shares of the Trust. SECTION 5. 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 5. 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 earlier than the close of business on the 75th day nor later than the close of business on the 50th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date or if the Trust has not previously held an annual meeting, notice by the shareholder to be timely must be so delivered not earlier than the close of business on the 75th day prior to such annual meeting and not later than the close of business on the later of the 50th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the Trust. 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 7 8 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 Exchange Act, as from time to time amended; and (vi) the consent of each nominee to serve as a Trustee if so elected. No Person shall be eligible for election as a Trustee unless as nominated in accordance with the procedures set forth herein. SECTION 6. ADJOURNED MEETINGS. Whether or not a quorum is present at any meeting of Shareholders, the presiding officer at the meeting 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 6, if a quorum is present in person or by proxy at such reconvened meeting. SECTION 7. 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 or her 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 ninety (90) 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 inform the Shareholders who make the request of the reasonably estimated costs of preparing and mailing a notice of the meeting, and on payment of those costs to the Trust, notify each Shareholder entitled to notice of the 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 twenty (20) 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 twenty (20), 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 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 8 9 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 7, 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 8. 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 9. PROXIES. The appointment of a proxy or proxies shall be made by an instrument in writing executed by the Shareholder or his or her 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 13 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 10. 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 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 11. 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 12. NO CUMULATIVE VOTING. Shareholders shall not be entitled to cumulate votes in any elections of Trustees of the Trust. SECTION 13. 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 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 9 10 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 any Shareholder's 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 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 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 Shareholder or any Shareholder's proxy shall, appoint a Person to fill that vacancy. The inspector(s) 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 such Shareholder's 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 14. 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 14. Except as otherwise provided by Section 5 of this Article III 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 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 14. In addition to any and all other applicable requirements, for business to be properly brought before a meeting of the 10 11 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 (i) in the case of an annual meeting, not earlier than the close of business on the 75th day nor later than the close of business on the 50th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date or if the Trust has not previously held an annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 75th day prior to such annual meeting and not later than the close of business on the later of the 50th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the Trust, or (ii) in the case of a special meeting, within ten days of the earlier of (a) the date that notice of the meeting was mailed in accordance with this Article III or prior public disclosure of the date of the meeting was made or (b) the date that a request for a special meeting was made by a Shareholder in accordance with Section 7 of this Article III. 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. SECTION 15. INFORMAL ACTION BY SHAREHOLDERS. Any action required or permitted to be taken at a meeting of Shareholders may be taken without a meeting if there is filed with the records of Shareholders meetings a unanimous written consent which sets forth the action and is signed by each Shareholder entitled to vote on the matter and a written waiver of any right to dissent signed by each Shareholder entitled to notice of the meeting but not entitled to vote at it. ARTICLE IV MISCELLANEOUS SECTION 1. RECORD DATES AND CLOSING OF TRANSFER BOOKS. From time to time the Trustees may fix a future date as the record date for the purpose of making any proper determination with respect to Shareholders, including which Shareholders are entitled to notice of a meeting, to vote at a meeting, to receive a dividend or to be allocated other rights. Such record date may not be prior to the close of business on the day the record date is fixed. Except as may be otherwise set forth in the Section 2-511 of the Corporations and Associations Article, Annotated Code of Maryland, as in effect from time to time and as applicable to Maryland corporations, the record date for any determination shall not be more than 90 days before the date on which the action requiring the determination will be taken. If a record date is so fixed for a meeting, to receive a dividend or to be allocated other rights, only Shareholders of record on the date so fixed shall be entitled to notice of and to vote at such meeting or to receive such dividend or allotment of 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 11 12 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 for 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. SECTION 5. EXEMPTION FROM CONTROL SHARE ACQUISITION STATUTE. The provisions of Sections 3-701 to 3-709 of the Corporations and Associations Article of the Annotated Code of Maryland shall not apply to any shares of beneficial interest of the Trust now or hereafter held of record or beneficially held by any person whatsoever, it being the intent of this provision that the Trust opt out of the aforementioned sections in their entirety and that all persons and shares of beneficial interest held by such persons be exempted from such sections to the fullest extent permitted by Maryland law. ARTICLE V SEAL The Trust may have a seal containing the name of the Trust and the words "Maryland, 1969." ARTICLE VI AMENDMENTS These Trustees' Regulations may be amended or repealed or new or additional Trustees' Regulations may be adopted only by the vote or written consent of the Trustees, and the Shareholders shall not have any power to amend or repeal these Trustees' Regulations or to adopt new or additional Trustees' Regulations. ARTICLE VII DEFINITIONS All terms defined in the Declaration of Trust of Hotel Investors Trust dated as of August 15, 1969, as amended from time to time, shall have the same meaning when used in these Trustees' Regulations. 12 EX-3.4 4 EX-3.4 1 EXHIBIT 3.4 AMENDED AND RESTATED BYLAWS OF STARWOOD HOTELS & RESORTS WORLDWIDE, INC. (AS AMENDED AND RESTATED THROUGH APRIL 15, 1999) ARTICLE I OFFICES In addition to the required principal office, Starwood Hotels & Resorts Worldwide, Inc. (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 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 Directors and shall transact such other business as may properly be brought before the meeting. SECTION 2. SPECIAL MEETINGS. (a) General. The President, the Board of Directors, the Chairman of the Board or any two or more Directors may call special meetings of the stockholders. Subject to subsection (b) of this Section 2, special meetings of stockholders shall also be called by the Secretary upon the written request of the stockholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting. Such request shall state with reasonable specificity the purpose of such meeting and the matters proposed to be acted on at such meeting. (b) Stockholder Requested Special Meetings. (1) Any stockholder of record seeking to have stockholders request a special meeting shall, by sending written notice to the Secretary (the "Record Date Request Notice") by certified or registered mail, return receipt requested, request the Board of Directors to fix a record date to determine the stockholders entitled to request a special meeting (the "Request Record Date"). The Record Date Request Notice shall set forth the purpose of the meeting and the matters proposed to be acted on at it, shall be signed by one or more stockholders of record as of the date of signature (or their duly authorized proxies or other representatives), shall bear the date of signature of each such stockholder (or proxy or other representative) and shall set forth all information relating to each such stockholder that must be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14a-11 thereunder. Upon receiving the Record Date Request Notice, the Board of Directors may fix a Request Record Date. The Request Record Date shall not precede and shall not be more than ten Business Days (as defined below) after the close of business on the date upon which the resolution fixing the Request Record Date is adopted by the Board of Directors. If the Board of Directors, 2 within ten Business Days after the date on which a valid Record Date Request Notice is received, fails to adopt a resolution fixing the Request Record Date and make a public announcement of such Request Record Date, the Request Record Date shall be the close of business on the tenth Business Day after the first date on which the Record Date Request Notice is received by the Secretary. (2) In order for any stockholder to request a special meeting, one or more written requests for a special meeting signed by stockholders of record (or their duly authorized proxies or other representatives) as of the Request Record Date entitled to cast not less than a majority (the "Special Meeting Percentage") of all the votes entitled to be cast at such meeting (the "Special Meeting Request"), shall be delivered to the Secretary. The Special Meeting Request shall set forth with reasonable specificity the purpose of the meeting and the matters proposed to be acted on at it (which shall be limited to the matters set forth in the Record Date Request Notice received by the Secretary of the Corporation), shall bear the date of signature of each stockholder (or proxy or other representative) signing such request, shall set forth the name and address, as they appear in the Corporation's books, of each stockholder signing such request (or on whose behalf the Special Meeting Request is signed) and the class and number of shares of stock of the Corporation that are owned of record and beneficially by each such stockholder, shall be sent to the Secretary by certified or registered mail, return receipt requested, and shall be received by the Secretary within 60 days after the Request Record Date. Any requesting stockholder may revoke his, her or its request for a special meeting at any time by written revocation delivered to the Secretary. (3) The Secretary shall inform the requesting stockholders of the reasonably estimated cost of preparing and mailing the notice of meeting (including the Corporation's proxy materials). The Secretary shall not be required to call a special meeting upon stockholder request unless, in addition to the documents required by paragraph (2) of this Section 2(b), the Secretary receives from the requesting stockholders payment of such reasonably estimated cost of preparing and mailing the meeting notice. (4) Except as provided in the next sentence, any special meeting shall be held at such place, date and time as may be designated by the President, Board of Directors, Chairman of the Board or two or more Directors, whoever has called the meeting. In the case of any special meeting called by the Secretary upon the request of stockholders (a "Stockholder Requested Meeting"), such meeting shall be held at such place, date and time as may be designated by the Board of Directors; provided, however, that the date of any Stockholder Requested Meeting shall be not more than 75 days after the Meeting Record Date (as defined below); and provided further that if the Board of Directors fails to designate, within ten Business Days after the date that a valid Special Meeting Request is delivered to the Secretary (the "Delivery Date"), a date and time for a Stockholder Requested Meeting, then such meeting shall be held at 2:00 p.m. local time on the 100th day after the Delivery Date or, if such 100th day is not a Business Day, on the first preceding Business Day; and provided further that in the event that the Board of Directors fails to designate a place for a Stockholder Requested Meeting within ten Business Days after the Delivery Date, then such meeting shall be held at the principal executive offices of the Corporation. In fixing a date for any special meeting, the President, Board of Directors, Chairman of the Board, or the two or more Directors who called the meeting, may consider such factors as he, she or it deems relevant within the good faith exercise of business judgment, including, without limitation, the nature of the matters to be considered, the facts and circumstances surrounding any request for meeting and any plan of the Board of Directors to call an annual meeting or a special meeting. In the case of any Stockholder Requested Meeting, (i) the record date for such meeting (the "Meeting Record Date") shall be not later than the 25th day after the Delivery Date and (ii) if the Board of Directors fails to fix the Meeting Record Date within 25 days after the Delivery Date, then the close of business on such 25th day after the Delivery Date shall be the Meeting Record Date. 2 3 (5) If at any time as a result of written revocations of requests for the special meeting, stockholders of record (or their duly authorized proxies or other representatives) as of the Request Record Date entitled to cast less than the Special Meeting Request Percentage shall have delivered and not revoked requests for a special meeting, the Secretary may refrain from mailing the notice of the meeting or, if the notice of the meeting has been mailed, the Secretary may revoke the notice of the meeting at any time before ten days before the meeting provided that the Secretary has first sent to all other requesting stockholders written notice of such revocation and of intention to revoke the notice of the meeting. Any request for a special meeting received after a revocation of a notice of a meeting shall be considered a request for a new special meeting. (6) The Corporation may engage regionally or nationally recognized independent inspectors of elections to act as the agent of the Corporation for the purpose of promptly performing a ministerial review of the validity of any purported Special Meeting Request received by the Secretary. For the purpose of permitting the inspectors to perform such review, no such purported request shall be deemed to have been delivered to the Secretary until the earlier of (i) five Business Days after receipt by the Secretary of such purported request and (ii) such date as the independent inspectors certify to the Corporation that the valid requests received by the Secretary represent at least a majority of the issued and outstanding shares of stock that would be entitled to vote at such meeting. Nothing contained in this paragraph (6) shall in any way be construed to suggest or imply that the Board of Directors or any stockholder shall not be entitled to contest the validity of any request, whether during or after such five Business Day period, or to take any other action (including, without limitation, the commencement, prosecution or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation). (7) For purposes of these Bylaws, "Business Day" shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of Maryland are authorized or obligated by law or executive order to close. 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 by the President (as determined by the Board of Directors) or, if the Chairman of the Board and the President are 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 3 4 stockholders present in person or by proxy who own a 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 an Assistant Secretary or such other 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 Bylaws (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 presiding officer at the meeting 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 the stockholder's 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 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 any stockholder's 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 4 5 the request of any stockholder or any stockholder's 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 any stockholder's 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 7. NOMINATIONS AND PROPOSALS BY STOCKHOLDERS. (a) Annual Meetings of Stockholders. (1) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Directors or (iii) by any stockholder of the Corporation who was a stockholder of record both at the time of giving of notice provided for in this Section 7(a) and at the time of the annual meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 7(a). (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this Section 7, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for action by stockholders. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation (i) in the case of an annual meeting held on or prior to June 30, 1999, not earlier than the close of business on the 75th day prior to such annual meeting and not later than the close of business on the later of the 50th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the Corporation or (ii) in the case of an annual meeting held on or after July 1, 1999, not later than the close of business on the 75th day nor earlier than the close of business on the 100th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 100th day prior to such annual meeting and not later than the close of business on the later of the 75th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of a postponement or adjournment of an annual meeting to a later date or time commence a new time period for the giving of a stockholder's notice 5 6 as described above. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a Director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (x) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (y) the number of each class of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (a)(2) of this Section 7 to the contrary, in the event that the number of Directors to be elected to the Board of Directors is increased and there is no public announcement by the Corporation naming all the nominees for Director or specifying the size of the increased Board of Directors at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 7(a) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation. (b) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which Directors are to be elected (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) provided that the Board of Directors has determined that Directors shall be elected at such special meeting, by any stockholder of the Corporation who was a stockholder of record both at the time of giving of notice provided for in this Section 7(b) and at the time of the special meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 7(b). In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more Directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be) for election to such position as specified in the Corporation's notice of meeting, if the stockholder's notice containing the information required by paragraph (a) (2) of this Section 7 shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Directors to be elected at such meeting. In no event shall the public announcement of a postponement or adjournment of a special meeting to a later date or time commence a new time period for the giving of a stockholder's notice as described above. (c) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 7 (or have been appointed by the Directors to fill a vacancy pursuant to Article III, Section 4 of these Bylaws) shall be eligible to stand for election by the stockholders as Directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 7. The chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 7 and, if 6 7 any proposed nomination or business is not in compliance with this Section 7, to declare that such nomination or proposal shall be disregarded. (2) For purposes of this Section 7, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 7, a stockholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 7. Nothing in this Section 7 shall be deemed to affect any right of a stockholder to request inclusion of a proposal in, nor the right of the Corporation to omit a proposal from, the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. SECTION 8. INFORMAL ACTION BY STOCKHOLDERS. Any action required or permitted to be taken at a meeting of stockholders may be taken without a meeting if there is filed with the records of stockholders meetings a unanimous written consent which sets forth the action and is signed by each stockholder entitled to vote on the matter and a written waiver of any right to dissent signed by each stockholder entitled to notice of the meeting but not entitled to vote at it. ARTICLE III DIRECTORS SECTION 1. GENERAL POWERS. The business and affairs of the Corporation shall be managed under the direction of its Board of Directors. SECTION 2. NUMBER; TENURE. The number of directors of the Corporation shall be not less than three (3) nor more than twenty (20), and, within these limits, may be fixed, increased or decreased from time to time by a majority of the entire Board of Directors, 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 each director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders (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 3. 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 Board of Directors. The Chairman of the Board shall be, ex officio, a member of all standing committees, but shall not in the capacity as Chairman of the Board be deemed an officer of the Corporation. SECTION 4. 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 7 8 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 directors constituting the entire Board of Directors shall shorten the term of any incumbent director. SECTION 5. 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 6. PLACE OF MEETINGS. Each meeting of the Board of Directors shall be held at such place within or without the State of Maryland as is fixed from time to time by resolution of the Board of Directors (or, in the absence of such resolution, as specified in the notice of such meeting). SECTION 7. ANNUAL MEETING. Promptly following each Annual Meeting of Shareholders, a meeting of the Board of Directors shall be held for the purpose of electing officers and transacting other business. Notice of such meetings need not be given. SECTION 8. REGULAR MEETINGS. Regular meetings of the Board of Directors need not be held. SECTION 9. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board, and the Chairman of the Board 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 telecopier to his or her address appearing on the books of the Corporation or theretofore given by him or her to the Corporation for the purpose of notice. In case of personal service or notice by telecopier, 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 at least seventy-two (72) hours prior to the time fixed for the holding of the meeting. Notice of a meeting may be given by the Chairman of the Board, the Directors requesting the meeting or the Secretary. SECTION 10. 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 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 11. 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 12. 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. 8 9 SECTION 13. 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 14. TRANSACTIONS WITH INTERESTED PERSONS. (a) Notwithstanding anything to the contrary contained in these Bylaws, in addition to any affirmative vote required either by law, the Partnership Agreement, the Articles of Incorporation of the Corporation or these Bylaws, 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 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 Exchange Act. (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 or Associates beneficially owns, directly or indirectly, within the meaning of Rule 13d-3 under the Exchange Act; 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 Exchange Act, 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 9 10 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. (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 amended from time to time. (vi) "Partnership Agreement" shall mean the Limited Partnership Agreement of the Operating Partnership, as 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 Hotels & Resorts, a Maryland real estate investment trust. (xi) "Units" shall have the meaning set forth in the Partnership Agreement. (c) 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. (d) Nothing contained in this Section 14 shall be construed to relieve any Interested Person from any fiduciary obligation imposed by law. 10 11 (e) Notwithstanding anything to the contrary contained in these Bylaws, this Section 14 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. SECTION 15. WAIVER OF NOTICE. The transactions of any meeting of the Directors, 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 Directors 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 Corporation records or made a part of the minutes of the meeting. SECTION 16. INDEPENDENT DIRECTORS. Notwithstanding anything to the contrary contained in these Bylaws, not less than a majority of the Board of Directors of the Corporation shall be composed of "Independent Directors." For purposes of this Section 16, an "Independent Director" is a Director of the Corporation who is not employed by or an affiliate (as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act) of the Corporation, the Trust or Starwood Capital Group, L.L.C. 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 or such other person 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. 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. 11 12 (c) Unless prohibited by law, the provisions of Section 12, 13 and 15 of Article III shall apply to all committees. 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, and may delegate to any other officer of the Corporation the authority to appoint any officer or agent of the Corporation having a lower rank than the officer making such appointment. 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 another officer pursuant to authority delegated to such appointing officer by the Board of Directors may be removed, with or without cause, at any time whenever the appointing officer 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 Board of Directors (or by the appointing officer in the case of a vacancy occurring in an office to which the appointing officer 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 such officer 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 12 13 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 perform such 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 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 Bylaws, any notice required or permitted to be given to any director, officer, stockholder or committee member shall be given in writing, either personally, by telecopier 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 or telecopied notices shall be deemed to be given at the time they are delivered at the address of the named recipient as 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 13 14 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 Bylaws 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. 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. EXEMPTION FROM CONTROL SHARE ACQUISITION STATUTE. The provisions of Sections 3-701 to 3-709 of the Corporations and Associations Article of the Annotated Code of Maryland shall not apply to any shares of common stock of the Corporation now or hereafter held of record or beneficially held by any person whatsoever, it being the intent of this provision that the Corporation opt out of the aforementioned sections in their entirety and that all persons and shares of beneficial interest held by such persons be exempted from such sections to the fullest extent permitted by Maryland law. 14 15 ARTICLE VII AMENDMENTS These Bylaws may be amended or repealed or new or additional Bylaws may be adopted only by the vote or written consent of the Directors, and the stockholders shall not have any power to amend or repeal these Bylaws or to adopt new or additional Bylaws. 15 EX-10.5 5 EX-10.5 1 EXHIBIT 10.5 EXECUTION COPY ================================================================================ STOCK PURCHASE AGREEMENT dated as of April 27, 1999 by and among STARWOOD HOTELS & RESORTS WORLDWIDE, INC. ITT SHERATON CORPORATION, STARWOOD CANADA CORP. CAESARS WORLD, INC. SHERATON DESERT INN CORPORATION SHERATON TUNICA CORPORATION and PARK PLACE ENTERTAINMENT CORPORATION ================================================================================ 2 TABLE OF CONTENTS PAGE ARTICLE 1. PURCHASE AND SALE OF SHARES........................................2 Section 1.1. Purchase and Sale of Shares; Preliminary Transactions..............................................2 Section 1.2. Purchase Price............................................2 Section 1.3. Closing...................................................3 Section 1.4. Purchase Price Adjustment.................................4 ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY, PARENT AND SELLER.............................................................5 Section 2.1. Corporate Organization of Parent and Sellers..............6 Section 2.2. Corporate Organization of the Companies...................6 Section 2.3. Capital Stock of the Companies............................6 Section 2.4. Subsidiaries..............................................7 Section 2.5. Due Authorization.........................................8 Section 2.6. No Conflict...............................................8 Section 2.7. Financial Statements; Books and Records; Projections...............................................9 Section 2.8. Contracts; No Defaults...................................10 Section 2.9. Undisclosed Liabilities..................................11 Section 2.10. Absence of Certain Changes or Events.....................11 Section 2.11. Intellectual Property....................................12 Section 2.12. Litigation and Proceedings...............................13 Section 2.13. Employee Benefit Plans...................................13 Section 2.14. Labor Relations..........................................16 Section 2.15. Legal Compliance.........................................17 Section 2.16. Personal Property........................................17 Section 2.17. Real Property............................................17 Section 2.18. Environmental Matters....................................18 Section 2.19. Taxes....................................................19 Section 2.20. Governmental Authorities: Consents......................21 Section 2.21. Licenses, Permits and Authorizations.....................21 Section 2.22. Insurance................................................22 Section 2.23. Brokers' Fees............................................22 Section 2.24. Affiliate Transactions...................................22 Section 2.25. Year 2000 Compatibility..................................23 Section 2.26. Assets; Business Activities..............................23 Section 2.27. No Other Representations or Warranties...................23 ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF PURCHASER.......................23 Section 3.1. Corporate Organization of Purchaser......................23 Section 3.2. Due Authorization........................................23 Section 3.3. No Conflict..............................................24 Section 3.4. Litigation and Proceedings...............................24 Section 3.5. Governmental Authorities: Consents......................24 3 Section 3.6. Brokers' Fees............................................24 Section 3.7. Financial Capability.....................................24 Section 3.8. Securities Act...........................................25 Section 3.9. Investigation by Purchaser; Certain Financial Information; No Other Representations or Warranties......25 ARTICLE 4. COVENANTS AND AGREEMENTS OF PARENT, SELLER AND THE COMPANY........25 Section 4.1. Conduct of Business......................................25 Section 4.2. Inspection...............................................27 Section 4.3. HSR Act..................................................27 Section 4.4. No Solicitations.........................................28 Section 4.5. Notification.............................................28 Section 4.6. Certain Tax Matters......................................28 Section 4.7. Elimination of Intercompany Accounts and Arrangements.............................................29 Section 4.8. Financing Obligations....................................29 Section 4.9. Title Insurance Endorsement..............................29 Section 4.10. Cooperation with Financings..............................30 Section 4.11. Confidentiality..........................................30 ARTICLE 5. COVENANTS AND AGREEMENTS OF PURCHASER.............................31 Section 5.1. Certain Transactions.....................................31 Section 5.2. HSR Act..................................................31 Section 5.3. Notification.............................................31 ARTICLE 6. JOINT COVENANTS AND AGREEMENTS....................................32 Section 6.1. Support of Transaction...................................32 Section 6.2. Section 338 Election.....................................33 Section 6.3. Approvals................................................33 Section 6.4. Certain Employee Benefits Matters........................33 Section 6.5. Employment Agreements and Severance Obligations..........37 Section 6.6. Closings Under Certain Circumstances.....................37 Section 6.7. Ancillary Agreements.....................................39 Section 6.8. Post-Closing Cooperation.................................39 Section 6.9. Resignations.............................................39 Section 6.10. Bank Accounts............................................39 Section 6.11. Form of Instruments, Etc. to be Reasonably Satisfactory.............................................39 ARTICLE 7. CONDITIONS TO OBLIGATIONS.........................................40 Section 7.1. Conditions to Obligations of Purchaser, Parent, Seller and the Companies.................................40 Section 7.2. Conditions to Obligations of Purchaser...................40 Section 7.3. Conditions to the Obligations of Parent, Sellers and the Companies........................................41 ARTICLE 8. TERMINATION.......................................................41 ii 4 Section 8.1. Termination..............................................41 Section 8.2. Effect of Termination....................................42 ARTICLE 9. INDEMNIFICATION...................................................42 Section 9.1. Survival of Representations and Warranties...............42 Section 9.2. Indemnification by Purchaser.............................43 Section 9.3. Indemnification by Parent and Sellers....................44 Section 9.4. Losses Net of Insurance and Tax Benefits.................45 Section 9.5. No Right of Contribution.................................46 Section 9.6. Exclusive Remedy.........................................47 ARTICLE 10. TAX ALLOCATION AND INDEMNIFICATION................................47 Section 10.1. Preparation and Filing of Returns........................47 Section 10.2. Payment of Taxes.........................................48 Section 10.3. Refunds..................................................49 Section 10.4. Amendments to Tax Returns................................50 Section 10.5. Carrybacks...............................................50 Section 10.6. Indemnification for Taxes................................50 Section 10.7. Post-Closing Audits and Other Proceedings................51 Section 10.8. Transfer Taxes...........................................52 Section 10.9. Cooperation..............................................52 Section 10.10. Limitations..............................................52 ARTICLE 11. CERTAIN DEFINITIONS...............................................52 ARTICLE 12. MISCELLANEOUS.....................................................65 Section 12.1. Waiver...................................................65 Section 12.2. Notices..................................................65 Section 12.3. Assignment...............................................66 Section 12.4. Rights of Third Parties..................................66 Section 12.5. Expenses.................................................66 Section 12.6. Governing Law............................................67 Section 12.7. Captions; Counterparts...................................67 Section 12.8. Entire Agreement.........................................67 Section 12.9. Amendments...............................................67 Section 12.10. Publicity................................................67 Section 12.11. Construction.............................................67 Section 12.12. Dispute Resolution.......................................67 Section 12.13. Non-Hire.................................................68 Section 12.14. Insurance................................................68 Section 12.15. Specific Performance.....................................69 Section 12.16. Effectiveness............................................69 iii 5 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (this "Agreement") is entered into as of this 27th day of April, 1999 by and among Starwood Hotels & Resorts Worldwide, Inc., a Maryland corporation ("Parent"); ITT Sheraton Corporation, a Delaware corporation ("ITT Sheraton"), Sheraton Desert Inn Corporation, a Nevada corporation ("SDIC"), and Starwood Canada Corp., a body corporate under the laws of Canada ("Starwood Canada") (collectively, "Sellers"); Caesars World, Inc., a Florida corporation ("Caesars World") and Sheraton Tunica Corporation, a Delaware corporation ("Tunica") (each a "Company" and collectively, together with MEG, the "Companies"); and Park Place Entertainment Corp., a Delaware corporation ("Purchaser"). RECITALS: WHEREAS, ITT Sheraton is the sole record and beneficial owner of all of the issued and outstanding shares ("CWI Shares") of the common stock (the "Caesars World Common Stock"), of Caesars World; WHEREAS, Starwood Canada is the record and beneficial owner of partnership interests (the "Interests") representing a 95% economic ownership interest in MEG; WHEREAS, SDIC is the sole record and beneficial owner of all of the issued and outstanding shares (the "Tunica Shares") of the common stock (the "Tunica Common Stock") of Tunica; WHEREAS, as of the Closing Date ITT Sheraton and SDIC will collectively own all of the issued and outstanding CWI Shares and Tunica Shares (collectively, the "Shares"); WHEREAS, each Seller is an indirect wholly-owned subsidiary of Parent; WHEREAS, upon the terms and subject to the conditions set forth herein, Parent and Sellers desire to make the Preliminary Transfers and sell to Purchaser, and Purchaser desires to purchase from Seller, the Shares and the Interests; and WHEREAS, certain capitalized terms used herein have the meanings assigned to them in Article 11 hereof. AGREEMENT: In consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1 6 ARTICLE 1. PURCHASE AND SALE OF SHARES Section 1.1. Purchase and Sale of Shares; Preliminary Transactions. (a) Upon the terms and subject to the conditions contained herein (including Section 6.6), on the Closing Date, Sellers will sell, convey and transfer to Purchaser, and Purchaser will purchase and acquire from Sellers, the Shares and the Interests, free and clear of all Liens. (b) Prior to the conveyance of Shares pursuant to Section 1.1(a), (x) the interests of Parent and its Subsidiaries in the Excluded Companies and the Atlantic City Convention Center Sheraton Hotel shall be transferred to an entity other than the Companies and their Subsidiaries, and (y) Parent shall cause such transactions as may be necessary to effectuate the transfer of all of Parent's and its Affiliates' interests in the Sheraton Halifax Hotel to the Companies and their Subsidiaries (collectively, the "Preliminary Transfers"). The parties agree and acknowledge that it is the intent of the parties that following the Preliminary Transfers, the Companies and their Subsidiaries will hold all assets and liabilities primarily relating to the Business (other than the Excluded Assets and Retained Liabilities), and Parent and Sellers agree as part of the Preliminary Transfers (or, if discovered following the Closing, on a post-closing basis) to make additional transfers as may be reasonably necessary to effectuate the foregoing should the parties discover that assets and liabilities primarily relating to the Business (other than the Excluded Assets and Retained Liabilities) are held by Parent or its Affiliates other than the Companies and their Subsidiaries. For purposes of this Agreement, all references to the Companies' Subsidiaries or words of similar import shall (A) include all Affiliates of Parent that will be Subsidiaries of the Companies following the Preliminary Transfers and (B) exclude any other Affiliates of Parent. Section 1.2. Purchase Price. (a) The aggregate purchase price for the Shares and the Interests shall, subject to Section 1.2(b), be (i) Three Billion Dollars ($3,000,000,000) (the "Base Price"), plus (ii) the Net Working Capital Adjustment Amount (which may be positive or negative) determined in accordance with Section 1.4, minus (iii) the amount of Existing Capitalized Leases, plus (iv) the amount (the "Capital Expenditure Adjustment Amount") (which may be positive or negative) equal to (A) the actual amount of capital expenditures made by the Companies and their Subsidiaries during the period between the date hereof and Closing, which capital expenditures were made pursuant to and in accordance with the Company Capital Plan, less (B) the product of (x) $5 million and (y) the number of months during the period between the date hereof and Closing (pro-rated to take into account of any partial months during such period) (the "Purchase Price"). (b) The Purchase Price has been established based on the understanding that, as of the Closing Date, the Companies and their Subsidiaries will have no Financing Obligations other than the Existing Capitalized Leases, and Parent, Sellers and the Companies 2 7 have covenanted to discharge all such obligations as of the Closing. In the event any such Financing Obligations nevertheless remain in existence as of the Closing, then at Purchaser's sole and exclusive option, (y) the Purchase Price shall be reduced by the amount of such Financing Obligations (determined as the amount which Purchaser or the Company would be required to expend to repay and terminate such obligations as of the Closing, giving effect to the transactions contemplated hereby (the "Defeasance Amount")); or (z) such Financing Obligations shall be discharged by paying out of the Purchase Price the Defeasance Amount to the corresponding creditor(s). Section 1.3. Closing. (a) The consummation of the purchase and sale of the Shares and the Interests (the "Closing") shall take place at 10:00 a.m., local time, on the fifth (5) Business Day following the satisfaction of the conditions to the obligations of the parties set forth in Article 7 hereof (other than those conditions that by their nature are to be fulfilled at Closing), at the offices of Latham & Watkins, 885 Third Avenue, Suite 1000, New York, New York, or at such other time or place as Parent and Purchaser may agree in writing (the day on which the Closing takes place being referred to herein as the "Closing Date"). (b) At the Closing, subject to the provisions of Section 6.6, Sellers shall deliver or cause to be delivered to Purchaser (i) one or more stock certificates evidencing the Shares, duly endorsed in blank or accompanied by a stock power duly executed in blank, (ii) documents sufficient to convey all of the Interests to Purchaser, (iii) the other documents required to be delivered by Seller pursuant to Article 7 hereof, and (iv) any other documents or instruments necessary to evidence or effect any of the transactions contemplated hereunder. (c) At the Closing, subject to the provisions of Section 6.6, (i) Purchaser shall pay to Parent (as agent for the Sellers) the Closing Date Purchase Price by intra-bank transfer or wire transfer of immediately available funds to an account designated in writing by Parent, (ii) Purchaser shall deliver to Parent the documents required to be delivered by Purchaser pursuant to Article 7 hereof, and (iii) Purchaser shall deliver to Parent any other documents or instruments necessary to evidence or effect any of the transactions contemplated hereunder. (d) The parties acknowledge that the Net Working Capital Adjustment Amount and the Capital Expenditure Adjustment Amount will not be determinable until after Closing. Accordingly, notwithstanding anything else in this Article 1 to the contrary, for purposes of calculating the amount of the Closing Date Purchase Price payable on the Closing Date, the Base Price will be increased or decreased (as applicable) pursuant to the definition of Closing Date Purchase Price by the Estimated Net Working Capital Adjustment Amount and the Estimated Capital Expenditure Adjustment Amount. After the Closing, the parties will determine the Net Working Capital Adjustment Amount and the Capital Expenditure Adjustment Amount, and make such payments as are provided in Section 1.4. 3 8 Section 1.4. Purchase Price Adjustment. (a) Estimated Adjustment Amounts. Not later than five (5) Business Days prior to the Closing, Parent shall deliver to Purchaser its good faith estimate of the Net Working Capital of the Companies and their consolidated Subsidiaries as of the Closing Date (the "Estimated Closing Net Working Capital") and its good faith estimate of the Capital Expenditure Adjustment Amount (the "Estimated Capital Expenditure Adjustment Amount"), together with a reasonably detailed explanation of the calculation thereof. The "Estimated Net Working Capital Adjustment Amount", which may be positive or negative, shall mean (i) the Estimated Closing Net Working Capital, minus (ii) Twenty Five Million Dollars ($25,000,000) (the "Base Working Capital"). As set forth in Section 1.3(d), the Estimated Net Working Capital Adjustment Amount and the Estimated Capital Expenditure Adjustment Amount shall be used to calculate the Closing Date Purchase Price payable at Closing. (b) Closing Balance Sheet; Capital Expenditure Adjustment. As soon as reasonably practicable following the Closing Date, and in any event within seventy-five (75) days thereafter, Purchaser shall prepare and deliver to Parent (i) a combined balance sheet of the Companies and their consolidated Subsidiaries as of the close of business on the Closing Date (the "Closing Balance Sheet"), (ii) a calculation of the Net Working Capital as reflected on the Closing Balance Sheet (the "Closing Net Working Capital") and (iii) a calculation of the actual Capital Expenditure Adjustment Amount (together with reasonable back-up information providing the basis for such calculation). The Closing Balance Sheet shall be prepared in accordance with United States generally accepted accounting principles ("GAAP") and on a basis consistent with the preparation of the Reference Balance Sheet and shall fairly present the combined financial position of the Companies and their consolidated Subsidiaries as of the Closing, excluding any Excluded Assets and Retained Liabilities (but shall not include any "write-up" of assets as a result of the transactions contemplated hereby). Without limiting the generality of the foregoing, the Closing Balance Sheet shall contain reserves against receivables from casino customers that are calculated in accordance with the current practices of the Companies. (c) Disputes. Upon delivery of the Closing Balance Sheet, Purchaser will provide to Parent and Parent's accountants full access to the personnel and books and records of the Companies and their consolidated Subsidiaries, to the extent reasonably related to a review of the Closing Balance Sheet and the calculation of the Closing Net Working Capital and the Capital Expenditure Adjustment Amount. If Parent disagrees with the calculation of the Closing Net Working Capital, the Capital Expenditure Adjustment Amount or any element relevant thereto, it shall notify Purchaser of such disagreement in writing within forty five (45) days after its receipt of the Closing Balance Sheet and the calculation of the Capital Expenditure Adjustment Amount, which notice shall set forth in detail the particulars of such disagreement. In the event that Parent does not provide such a notice of disagreement within such forty five (45) day period, Parent shall be deemed to have accepted the Closing Balance Sheet and the calculation of the Closing Net Working Capital and the Capital Expenditure Adjustment Amount delivered by Purchaser, which shall be final, binding and conclusive for all purposes hereunder. In the event any such notice of disagreement is timely provided by Parent, Purchaser and Parent shall use their reasonable best efforts for a period of thirty (30) days (or such longer period as they may mutually agree) to resolve any disagreements with respect to the calculation of the Closing Net Working 4 9 Capital and the Capital Expenditure Adjustment Amount. If, at the end of such period, they are unable to resolve such disagreements, then an independent accounting firm of recognized national standing other than Purchaser's or Parent's independent auditors mutually selected by Parent and Purchaser (the "Auditor") shall resolve any remaining disagreements. The Auditor shall determine as promptly as practicable, but in any event within thirty (30) days of the date on which such dispute is referred to the Auditor, based solely on written submissions forwarded by Purchaser and Parent to the Auditor within ten (10) days following the Auditor's selection, whether the Closing Balance Sheet was prepared in accordance with the standards set forth in Section 1.4(b) and the calculation of the Capital Expenditure Adjustment Amount was made in accordance with the standards set forth in Section 1.2(a) and (only with respect to the remaining disagreements submitted to the Auditor) whether and to what extent (if any) the Closing Net Working Capital and the Capital Expenditure Adjustment Amount determination requires adjustment. The parties shall share ratably the fees and expenses of the Auditor as follows: (A) if the Auditor resolves all of the remaining items in dispute in favor of Purchaser (the amount so determined is referred to herein as the "low value"), Parent will be responsible for all of the fees and expenses of the Auditor; (B) if the Auditor resolves all of the remaining items in dispute in favor of the Seller (the amount so determined is referred to herein as the "high value"), Purchaser will be responsible for all of the fees and expenses of the Auditor; and (C) if the Auditor resolves some of the remaining items in dispute in favor of Purchaser and the rest of the remaining items in dispute in favor of Parent (the amount so determined is referred to herein as the "actual value"), Parent will be responsible for that fraction of the fees and expenses of the Auditor equal to (I) the difference between the high value and the actual value divided by (II) the difference between the high value and the low value, and Purchaser will be responsible for the remainder of the fees and expenses of the Auditor. The determination of the Auditor shall be final, conclusive and binding on the parties. The date on which the Closing Net Working Capital and the Capital Expenditure Adjustment Amount is finally determined in accordance with this Section 1.4(c) is referred as to the "Determination Date." (d) Payment. The "Net Working Capital Adjustment Amount," which may be positive or negative, shall mean (i) the Closing Net Working Capital minus (ii) the Base Working Capital. If the Net Working Capital Adjustment Amount plus the Capital Expenditure Adjustment Amount is greater than the Estimated Net Working Capital Adjustment Amount plus the Estimated Capital Expenditure Adjustment Amount (such difference, the "Increase Amount"), then within five (5) days after the Determination Date, Purchaser shall pay to Parent an additional amount equal to the Increase Amount, together with interest thereon calculated from the Closing Date to the date of payment at the Applicable Rate. If the Estimated Net Working Capital Adjustment Amount plus the Estimated Capital Expenditure Adjustment Amount is greater than the Net Working Capital Adjustment Amount plus the Capital Expenditure Adjustment Amount (such difference, the "Deficit Amount"), then within five (5) days after the Determination Date Parent shall pay to Purchaser an amount equal to the Deficit Amount, together with interest thereon calculated from the Closing Date to the date of payment at the Applicable Rate. ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY, PARENT AND SELLER 5 10 Parent, Sellers and the Companies, jointly and severally, represent and warrant to Purchaser, except as set forth in the disclosure letter delivered to Purchaser on or prior to the date of this Agreement (the "Parent Disclosure Letter") or as otherwise contemplated by this Agreement, as follows: Section 2.1. Corporate Organization of Parent and Sellers. Parent has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Maryland. Each of the Sellers has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of organization. Section 2.2. Corporate Organization of the Companies. Each of the Companies has been duly organized and is validly existing as a corporation or partnership, as applicable, in good standing (other than MEG) under the laws of its jurisdiction of organization and has the corporate or partnership power and authority, as applicable, to own and lease its properties and to conduct the Business as it is now being conducted. The copies of the Charter Documents of the Companies previously delivered by the Companies to Purchaser are true, correct and complete. Each of the Companies is duly licensed or qualified and in good standing as a foreign corporation or partnership, as applicable, in each jurisdiction in which the ownership of its property or the character of its activities is such as to require it to be so licensed or qualified, except where any failures to be so licensed or qualified would not, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Section 2.3. Capital Stock of the Companies. The Shares constitute all the authorized, issued and outstanding shares of capital stock of the Companies. The Shares have been duly authorized and validly issued and are fully paid and nonassessable and were not issued in violation of any preemptive rights. Except as set forth in Section 2.3 of the Parent Disclosure Letter, the Interests constitute all of the authorized, issued and outstanding equity interests of MEG. Except as set forth in Section 2.3 of the Parent Disclosure Letter and except for the Shares and the Interests, there are outstanding (i) no shares of capital stock or other voting securities of the Companies, (ii) no securities of the Companies convertible into or exchangeable for shares of capital stock, equity interests or other voting securities of the Companies; (iii) no subscription rights, options, warrants, calls, commitments, preemptive rights or other rights of any kind to acquire from the Companies, and no obligation of the Companies to issue or sell, any shares of capital stock, equity interests or other voting securities or any securities of the Companies convertible into or exchangeable for such capital stock, equity interests or voting securities, and (iv) no equity equivalents, interests in the ownership or earnings of, or stock appreciation, phantom stock or other similar rights of or with respect to the Companies. The Sellers are and on the Closing Date (prior to the consummation of the transactions contemplated by this Agreement) will be the sole record and beneficial owner of the Shares and the Interests. Upon consummation of the transactions contemplated in this Agreement, Purchaser will acquire good and valid title to the Shares and the Interests, free and clear of all Liens, and the Shares will be fully paid and nonassessable. 6 11 Section 2.4. Subsidiaries. (a) Set forth on Section 2.4(a) of the Parent Disclosure Letter is a list of all Subsidiaries of the Companies. Each Subsidiary of the Companies has been duly formed and is validly existing (except as will be cured prior to Closing) under the laws of the jurisdiction of its formation and has the corporate, limited liability company, or partnership power and authority, as applicable, to own or lease its properties and to conduct its business as it is now being conducted. The Companies have made available to Purchaser copies of the Charter Documents of each Subsidiary of the Company, and such copies are true, correct and complete except as disclosed on Section 2.4(a) of the Parent Disclosure Letter. Each such Subsidiary is duly licensed or qualified and in good standing in each jurisdiction in which its ownership of property or the character of its activities is such as to require such Subsidiary to be so licensed or qualified, except where any failures to be so licensed or qualified would not, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (b) All of the issued and outstanding shares of each Subsidiary's capital stock or other equity securities are duly authorized, validly issued and outstanding, and with respect to corporate Subsidiaries are fully paid and nonassessable, and, except as set forth on Section 2.4(b) of the Parent Disclosure Letter, are owned of record and beneficially by the Companies free and clear of any Liens. Except for the shares of capital stock or other equity securities owned by the Companies and as set forth on Section 2.4 of the Parent Disclosure Letter, there are outstanding (i) no shares of capital stock or other equity or voting securities of any Subsidiary of the Companies, (ii) no securities of any Subsidiary of the Companies convertible into or exchangeable for shares of capital stock or other equity or voting securities of any Subsidiary of the Companies; (iii) no subscription rights, options, warrants, calls, commitments, preemptive rights (other than preemptive rights imposed solely by statute) or other rights of any kind to acquire from any Subsidiary of the Companies, and no obligation of any Subsidiary of the Companies to issue or sell, any shares of capital stock or other equity or voting securities or any securities of such Subsidiary convertible into or exchangeable for such capital stock or other equity or voting securities, and (iv) no equity equivalents, interests in the ownership or earnings of, or stock appreciation, phantom stock or other similar rights of or with respect to any Subsidiary of the Companies. There are no outstanding obligations (contractual or otherwise) of the Companies or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock or any other securities of the type described in clauses (i)-(iv) of the preceding sentence. Notwithstanding the foregoing, the representations contained in this Section 2.4(b) shall not apply to Subsidiaries that are inactive, own no assets or are otherwise immaterial to the operation of the Business. (c) Section 2.4(c) of the Parent Disclosure Letter sets forth each material partnership, joint venture or other arrangement (a "Joint Venture") pursuant to which the Company or any of its Subsidiaries holds any equity interest (a "Joint Venture Interest") in any Person that is not a Subsidiary of the Company. Each such Joint Venture Interest has been duly authorized and validly issued, and is owned of record and beneficially by the Companies and the Subsidiaries as set forth in Section 2.4(c) of the Parent Disclosure Letter, free and clear of all Liens. 7 12 Section 2.5. Due Authorization. (a) Each of the Companies has the requisite corporate or partnership power and authority, as applicable, to execute and deliver this Agreement and each of the Ancillary Agreements to which it is a party and to perform all obligations to be performed by it hereunder and thereunder. The execution and delivery of this Agreement and each such Ancillary Agreement and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized and approved by each of the Companies and no other proceeding on its part is necessary to authorize this Agreement and each such Ancillary Agreement and the consummation of the transactions contemplated hereby and thereby. This Agreement has been duly and validly executed and delivered by each of the Companies, and constitutes a legally valid and binding obligation of each of the Companies, enforceable against each of the Companies in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity. Each Ancillary Agreement to which the Companies are a party upon being duly and validly executed and delivered by the Companies shall constitute a legally valid and binding obligation of the Companies, enforceable against the Companies in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity. (b) Each of Parent and the Sellers has the requisite corporate power and authority to execute and deliver this Agreement and each of the Ancillary Agreements to which it is a party and to perform all obligations to be performed by it hereunder and thereunder. The execution and delivery of this Agreement and each such Ancillary Agreement and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized and approved by Parent and the Sellers and no other proceeding on Parent's or the Sellers' part is necessary to authorize this Agreement and each such Ancillary Agreement and the consummation of the transactions contemplated hereby and thereby. This Agreement has been duly and validly executed and delivered by Parent and the Sellers, and constitutes a legally valid and binding obligation of Parent and the Sellers, enforceable against Parent and the Sellers in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity. Each Ancillary Agreement to which Parent or the Sellers is a party upon being duly and validly executed by Parent or the Sellers shall constitute a legally valid and binding obligation of Parent and the Sellers, enforceable against Parent and the Sellers in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity. Section 2.6. No Conflict. Except as set forth in Section 2.6 of the Parent Disclosure Letter, the execution and delivery of this Agreement and any Ancillary Agreement by Parent, the Sellers and the Companies, and the consummation of the transactions contemplated hereby and thereby by Parent, the Sellers and the Companies, does not and will not violate any provision of, or result in the breach of, or terminate any material rights or accelerate any material obligations of the Companies or their Subsidiaries under, or result in the creation of any Lien other than 8 13 Permitted Liens on the assets or properties of the Companies or their Subsidiaries pursuant to, (i) the Charter Documents of Parent, the Sellers, the Companies or any Subsidiary of the Companies, (ii) any Contract required to be listed in Section 2.8 of the Parent Disclosure Letter, or (iii) subject to matters described in Section 2.20, any order, judgment, decree, law, rule or regulation of any Governmental Authority, except, in the case of items referenced in clauses (ii) and (iii), to the extent that the occurrence of any of the foregoing would not, either individually or in the aggregate reasonably be expected to, (x) have a Material Adverse Effect or (y) materially impair the ability of Parent, the Sellers and the Companies to perform their respective obligations under this Agreement. Section 2.7. Financial Statements; Books and Records; Projections. (a) The Company has heretofore delivered to Purchaser true and correct copies of: (i) the unaudited combined and combining balance sheets of the Companies and their Subsidiaries as of December 31, 1998, and the related unaudited combined and combining statements of income and of cash flows for each of the fiscal years then ended (the "Annual Financial Statements"); and (ii) the unaudited combined and combining balance sheets of the Companies and their Subsidiaries as of March 31, 1999 and the related unaudited combined and combining statements of income and of cash flows for the period then ended (the "Interim Financial Statements"). (b) The financial statements listed in paragraph (a) above: (i) fairly present in all material respects the financial condition and the results of operations and changes in cash flow of the Companies and their Subsidiaries, on a combined and combining basis at the date of, and for the period referred to in, such financial statements, in accordance with GAAP (except for the absence of notes and as otherwise noted therein), subject to, in the case of the Interim Financial Statements, normal recurring year-end adjustments (the effect of which will not, individually or in the aggregate, be materially adverse to the Companies and their Subsidiaries); and (ii) reflect the application of GAAP consistent with past practices, except as disclosed in the notes to such financial statements or as otherwise indicated therein. (c) The parties acknowledge that the financial statements listed in paragraph 2.7(a) have been prepared on a combined and combining basis and do not, among other things, make pro forma adjustments to reflect cost increases or savings, or other such effects that might have resulted from the operation of the Companies and their Subsidiaries as a single entity during the periods presented. 9 14 Section 2.8. Contracts; No Defaults. (a) Section 2.8 of the Parent Disclosure Letter contains a listing of all Contracts described in clauses (i) through (xi) below to which the Companies or any of their Subsidiaries is a party other than (x) Contracts to be transferred with the Excluded Companies in connection with the Preliminary Transfers, (y) Contracts solely between the Companies and their Subsidiaries or among the Companies Subsidiaries and (z) Contracts between the Companies and their Subsidiaries on the one hand, and Parent or any of its Affiliates (other than the Companies and their Subsidiaries) on the other hand, which will be terminated on or prior to the Closing without any continuing obligation or liability of the Companies and their Subsidiaries. True, correct and complete copies of Contracts referred to in clauses (i) through (xi) below have been delivered to or made available to Purchaser. (i) each Contract involving performance of services or delivery of goods or materials by the Companies or any of their Subsidiaries of an amount or value in excess of $6,000,000 and with a term of 12 months or greater; (ii) each Contract involving performance of services or delivery of goods or materials to the Companies or any of their Subsidiaries of an amount or value in excess of $6,000,000 and with a term of 12 months or greater; (iii) each note, debenture or other Contract reflecting any Financing Obligation other than the Existing Capitalized Leases, including any Contract for future loans, credit or financing, entered into by the Companies or any of their Subsidiaries, either as lender or borrower which Financing Obligations is in excess of $1,000,000; (iv) each material lease, sub-lease or rental agreement pursuant to which the Company leases real property as lessee; (v) each material licensing agreement or other material Contract with respect to patents, trademarks, copyrights, or other Intellectual Property or Licensed IP Rights; (vi) each collective bargaining agreement or other Contract with any labor union or other labor organization relating to wages, hours and other conditions of employment in effect as of the date hereof; (vii) each material joint venture agreement, partnership agreement, or limited liability company agreement or other Contract (however named) involving a sharing of any material profits, losses, costs or liabilities by the Companies or any of their Subsidiaries with any other Person; (viii) each Contract that commits capital expenditures after the date hereof in an amount in excess of $500,000 (other than commitments reflected in the Company Capital Plan); 10 15 (ix) any material written warranty, guaranty or other similar Contract with respect to contractual performance extended by the Companies or any of their Subsidiaries other than in the ordinary course of business; (x) any Contract containing covenants which purport to materially restrict the Companies or any of their Subsidiaries from engaging in the Business; and (xi) any employment, change of control, severance, settlement, conciliation or similar Contract with respect to any Personnel and which may not be terminated at will, or by giving notice of 90 days or less, without cost or penalty. (b) Except as set forth on Section 2.8(b) of the Parent Disclosure Letter, each of the Contracts listed on Section 2.8 is in full force and effect, and neither the Companies nor any of their Subsidiaries (or, to the Knowledge of the Companies, any other party thereto) is in material breach or violation of, or material default under such Contracts. No condition exists or event has occurred which, with notice or lapse of time or both, would be reasonably likely to constitute a breach or violation of, or a default by the Companies or any of their Subsidiaries under, such Contracts by the Companies or any of their Subsidiaries, or, to the Knowledge of the Companies, any other party thereto except for such breaches or defaults which would not reasonably be expected to have a Material Adverse Effect. Section 2.9. Undisclosed Liabilities. Other than (a) environmental liabilities, which are the subject of Section 2.18, (b) liabilities or Actions which are the subject of Section 2.12 and (c) severance and retention liabilities which are the subject of Article 6, neither the Companies nor any of their Subsidiaries has any material liabilities or obligations (whether absolute or contingent, liquidated or unliquidated, or due or to become due) of a type required to be reflected or reserved for on a balance sheet prepared in accordance with GAAP or disclosed in the notes thereto, except for liabilities and obligations (i) reflected or reserved for on the Reference Balance Sheet or disclosed in the notes thereto, (ii) that have arisen since the date of the Reference Balance Sheet in the ordinary course of the operation of business, and consistent with past practice of the Companies and their Subsidiaries, which would not, either individually or in the aggregate, have a Material Adverse Effect or (iii) that are disclosed on Section 2.9 of the Parent Disclosure Letter. Section 2.10. Absence of Certain Changes or Events. Except with respect to the Preliminary Transfers and except as expressly contemplated by this Agreement or as set forth in Section 2.10 of the Parent Disclosure Letter, from December 31, 1998 to the date of this Agreement, there has not been any: (a) change which would reasonably be expected to have a Material Adverse Effect; (b) acquisition of any material assets of the Companies or their Subsidiaries (or any interest therein), except purchases of inventory, furnishings, equipment and other goods in the ordinary course of business and except for purchases pursuant to and in accordance with the Company Capital Plan; 11 16 (c) issuance or acquisition, directly or indirectly, by redemption or otherwise, of any shares of capital stock or other equity securities of the Companies or any of their Subsidiaries; (d) except in the ordinary course of business and consistent with past practices (i) increase in the compensation payable or to become payable by the Companies or their Subsidiaries to any of their respective officers or employees whose total compensation benefits and other payments for services rendered to the Companies or their Subsidiaries is currently at an annual rate of more than $200,000 (collectively, "Personnel") or (ii) material bonus (other than retention bonuses which are the responsibility of Sellers), incentive compensation, service award or other like benefit granted, made or accrued, contingently or otherwise, for or to the credit of any of the Personnel; (e) sale, lease, license, mortgage, encumbrance, Lien or other disposition of any material assets or properties of the Companies or their Subsidiaries, except for disposal and replacement of obsolete equipment in the ordinary course of business consistent with past practice; (f) except in the ordinary course of business, cancellation of any material indebtedness or waiver of any material claims or rights of the Companies or any of their Subsidiaries; (g) commitments for capital expenditures involving payments in excess of $1,000,000 individually (except for commitments pursuant to and in accordance with the Company Capital Plan); (h) material change in accounting methods or practices by the Company or its Subsidiaries; or (i) damage, destruction or loss (whether or not covered by insurance) of any material assets of the Companies and their Subsidiaries. Section 2.11. Intellectual Property. Section 2.11 of the Parent Disclosure Letter lists (i) each material patent, registered trademark, service mark or trade name or registered copyright and applications for any of the foregoing (collectively, "Intellectual Property") owned by the Companies and their Subsidiaries for use in connection with the Business and (ii) each agreement pursuant to which a material patent, trademark, service mark, trade name or copyright used or held for use in connection with the Business is licensed from others ("Licensed IP Rights"). Except as set forth on Section 2.11 of the Parent Disclosure Letter , (i) the Companies and their Subsidiaries own each such item of Intellectual Property free and clear of any Liens, except for Permitted Liens, and have the right to use such Intellectual Property in connection with the Business as currently conducted, (ii) within the last three years there has been no claim of infringement made, or to the Knowledge of the Companies, threatened against the Companies or any of their Subsidiaries relating to any item of Intellectual Property or Licensed IP Rights which would reasonably be expected to have a Material Adverse Effect, (iii) to the Knowledge of the Companies, no third party has interfered with, infringed upon, misappropriated, or violated in any 12 17 material respect any Intellectual Property or Licensed IP Rights which would reasonably be expected to have a Material Adverse Effect, and (iv) the Companies and their Subsidiaries have valid rights to use the Licensed IP Rights pursuant to Contracts which have been disclosed and made available to Purchaser. Section 2.12. Litigation and Proceedings. Except as set forth on Section 2.12 of the Parent Disclosure Letter, there are no Actions, or to the Knowledge of the Companies, investigations, before or by any court or Governmental Authority or before any arbitrator pending or, to the Knowledge of the Companies, threatened, against the Companies or any of their Subsidiaries (a) which would reasonably be expected to have a material adverse effect on the ability of Parent, Seller or the Companies to enter into and perform their obligations under this Agreement or have a Material Adverse Effect or (b) as of the date hereof, in which the reasonable likelihood for recovery of damages against the Companies and their Subsidiaries is in excess of $1,000,000 in any individual case. Except as set forth on Section 2.12 of the Parent Disclosure Letter, there is no unsatisfied judgment, order or decree (a) which would reasonably be expected to have a material adverse effect on the ability of the Companies to enter into and perform their obligations under this Agreement or have a Material Adverse Effect or (b) as of the date hereof requiring payment in excess of $1,000,000 or any open injunction binding upon the Companies or any of their Subsidiaries. Section 2.13. Employee Benefit Plans. (a) Disclosure; Delivery of Copies of Relevant Documents and Other Information. Section 2.13(a) of the Parent Disclosure Letter contains a complete list of Employee Plans other than Plans maintained by Foreign Subsidiaries and all material Plans maintained by Foreign Subsidiaries which cover or have covered within the last 5 years current or former employees, directors, officers or consultants of the Companies or any of their Subsidiaries (with respect to their relationship with such entities). Except as set forth in Section 2.13(a) of the Parent Disclosure Letter, true and complete copies of each of the following documents have been made available by the Company to Purchaser: (i) each material Welfare Plan and Pension Plan (and, if applicable, related trust agreements) which covers current or former employees, directors, officers or consultants of the Companies or any of their Subsidiaries (with respect to their relationship with such entities) and all amendments thereto, all summary plan descriptions thereof which have been distributed to the participants therein and all annuity contracts or other funding instruments and (ii) each material Benefit Arrangement which covers current or former employees, directors, officers or consultants of the Companies or any of their Subsidiaries (with respect to their relationship with such entities) including summary plan descriptions thereof which have been distributed to the participants therein. (b) Representations. (i) Pension Plans (A) Except as set forth on Section 2.13(a) of the Parent Disclosure Letter, neither the Companies nor any of their Subsidiaries currently maintains a Pension Plan. Except as set forth on Section 2.13(b)(i)(A) of the 13 18 Parent Disclosure Letter, none of the Companies or any of their Subsidiaries has any direct or indirect liability, contingent or otherwise, now or previously in existence with respect to any Pension Plan maintained by the Companies, any of their Subsidiaries, or any ERISA Affiliate that is subject to Title IV of ERISA which has not been satisfied. (B) The Starwood Hotels & Resorts Worldwide, Inc. Savings and Retirement Plan (the "Parent Savings Plan") and its related trust agreement, annuity contract or other funding instrument are qualified and tax-exempt under the provisions of Code Sections 401(a) (or 403(a), as appropriate) and 501(a) and have been so qualified during the period from their adoption to date. (C) Each Employee Plan that covers current or former employees, directors, officers or consultants of any Foreign Subsidiary (with respect to their relationship with such entity) has been maintained in substantial compliance with its terms and with the requirements prescribed by all applicable statutes, orders, rules and regulations (including without limitation any special provisions relating to the tax status of contributions to, earnings of or distributions from such Plans where each such Plan was intended to have such tax status) and has been maintained in good standing with applicable regulatory authorities. Neither the Companies nor any Subsidiary thereof has any direct or indirect liability, contingent or otherwise, for unpaid contributions with respect to any such Plan or an employee benefit plan of any foreign government. (ii) Multiemployer Plans (A) Neither the Company nor any ERISA Affiliate has, at any time, withdrawn from a Multiemployer Plan in a "complete withdrawal" or a "partial withdrawal" as defined in Sections 4203 and 4205 of ERISA, respectively, so as to result in a liability, contingent or otherwise (including without limitation the obligations pursuant to an agreement entered into in accordance with Section 4204 of ERISA), of the Company or any of its Subsidiaries. Neither the Company nor any ERISA Affiliate has engaged in, or is a successor or parent corporation to an entity that has engaged in, a transaction described in Section 4212(c) of ERISA. (B) All contributions required to be made by the Company or any ERISA Affiliate to each Multiemployer Plan have been made when due. (C) Neither the Companies nor any of their Subsidiaries has any direct or indirect liability, contingent or otherwise, with respect to any Multiemployer Plan to which the Companies or any ERISA Affiliate have contributed or been obligated to contribute. 14 19 (D) To the Knowledge of the Companies: (1) no Multiemployer Plan has been terminated or has been in reorganization under ERISA; (2) no proceeding has been initiated by any person (including the PBGC) to terminate any Multiemployer Plan; (3) a "mass withdrawal", as defined in PBGC Reg. Section 2640.7, with respect to any Multiemployer Plan has not occurred; and (4) the Companies and the ERISA Affiliates do not expect to withdraw in a "complete withdrawal" or "partial withdrawal" from any Multiemployer Plan. (iii) Welfare Plans (A) Each Welfare Plan maintained or contributed to by the Companies or any of their Subsidiaries (with respect to their relationship with such entities) has been maintained in compliance with its terms and, both as to form and operation, with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Welfare Plan, including without limitation ERISA and the Code. (B) Except as set forth on Section 2.13(b)(iii) of the Parent Disclosure Letter none of the Companies, any of their Subsidiaries or any Welfare Plan has any present or future obligation to make any payment to, or with respect to any present or former employee of the Companies or any of their Subsidiaries pursuant to, any retiree medical benefit plan, or other retiree Welfare Plan, and no condition exists which would prevent the Companies or any of their Subsidiaries from amending or terminating any such benefit plan or Welfare Plan. (C) There are no dependent care spending accounts or flexible spending accounts maintained by the Companies or any Subsidiaries thereof or covering any Employees in either case for which Purchaser will be responsible following the Closing Date. (iv) Benefit Arrangements. Each Benefit Arrangement which covers current or former employees, directors, officers or consultants of the Company or any of their Subsidiaries (with respect to their relationship with such entities) has been maintained in substantial compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Benefit Arrangement, including without limitation the Code. Except as set forth in Section 2.13(b)(iv) of the Parent Disclosure Letter, and except as provided by law, or pursuant to any collective bargaining agreement or other Contract with any labor union or other labor organization the employment of all persons presently employed or retained by the Companies or any of their Subsidiaries is terminable at will. (v) Fiduciary Duties and Prohibited Transactions. Neither the Companies, any of their Subsidiaries nor any plan fiduciary of any Welfare Plan or Pension Plan which covers current or former employees, directors, officers or consultants of the Companies or any ERISA Affiliate, has been assessed any material civil penalty under Section 502(l) of ERISA which has not been satisfied. To the Knowledge of the 15 20 Company, none of the Companies, any of their Subsidiaries, nor any Plan fiduciary of any Welfare Plan or Pension Plan which covers current or former employees, directors, officers or consultants of the Company or any ERISA Affiliate has (A) engaged in any transaction in violation of Sections 404 or 406 of ERISA or any "prohibited transaction," as defined in Section 4975(c)(1) of the Code, for which no exemption exists under Section 408 of ERISA or Section 4975(c)(2) or (d) of the Code, or (B) otherwise violated the provisions of Part 4 of Title I, Subtitle B of ERISA which, in either case, could reasonably be expected to lead to any material direct or indirect liability of the Companies or any of their Subsidiaries. Neither the Company nor any of its Subsidiaries has knowingly participated in a violation of Part 4 of Title I, Subtitle B of ERISA by any plan fiduciary of any Welfare Plan or Pension Plan (or other employee benefit plan subject to ERISA). (vi) Litigation. There is no action, order, writ, injunction, judgment or decree outstanding or claim, suit, litigation, proceeding, arbitral action, governmental audit or investigation relating to or seeking benefits under any Employee Plan (other than routine claims for benefits) that is pending or, to the Knowledge of the Companies, threatened or anticipated under which the Companies or any of their Subsidiaries could have liability which would reasonably be expected to have a Material Adverse Effect. (vii) No Amendments. Except as required by law, neither the Companies, Sellers, Parent nor any ERISA Affiliate has any announced plan or legally binding commitment to create any additional Employee Plans which are intended to cover current or former employees, directors, officers or consultants of the Companies or any of their Subsidiaries (with respect to their relationship with such entities) or to amend or modify any existing Employee Plan which covers or has covered current or former employees, directors, officers or consultants of the Companies or any of their Subsidiaries (with respect to their relationship with such entities). (viii) No Acceleration or Creation of Rights. Except as provided in Section 2.13(b)(viii) of the Parent Disclosure Letter, neither the execution and delivery of this Agreement by Parent, Sellers and the Companies nor the consummation of the transactions contemplated hereby will result in the acceleration or creation of any rights of any person to benefits under any Employee Plan (including, without limitation, the acceleration of the accrual or vesting of any benefits under any Pension Plan or the acceleration or creation of any rights under any severance, parachute or change in control agreement). Section 2.14. Labor Relations. Except as set forth in Section 2.14 of the Parent Disclosure Letter, during the past year, there has not been (a) any material strike, slowdown or organized work stoppage by any of the employees of the Company or any of its Subsidiaries, (b) to the Knowledge of the Companies, any application for certification of a collective bargaining representative or other effort to organize any such employees for the purpose of forming or joining a union, or (c) any material lockout of any employees by the Company or any of its Subsidiaries. 16 21 Section 2.15. Legal Compliance. Except with respect to matters set forth on Section 2.15, of the Parent Disclosure Letter and compliance with Environmental Laws (as to which certain representations and warranties are made pursuant to Section 2.18), each of the Companies and its Subsidiaries is in compliance with all laws (including rules, ordinances and regulations thereunder) of federal, state, local and foreign governments (and all agencies thereof) applicable thereto, including, without limitation, applicable Gaming Laws and Governmental Permits, except to the extent that any such noncompliance would not, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Section 2.16. Personal Property. Except as disclosed in Section 2.16, of the Parent Disclosure Letter the Companies and their Subsidiaries own, lease or otherwise have the legal right to use all material tangible personal property reflected in the Reference Balance Sheet or acquired in the ordinary course of business since the date of the Reference Balance Sheet which would have been required to be reflected on such Reference Balance Sheet if acquired on or prior to such date, other than tangible personal property disposed of in the ordinary course of business since such date (the "Tangible Personal Property"). The Companies and their Subsidiaries have good title to or, in the case of leased or subleased Tangible Personal Property, valid and subsisting leasehold interests in, all of the Tangible Personal Property, free and clear of all Liens, except Permitted Liens. The Companies and their Subsidiaries have caused the Tangible Personal Property when considered in the aggregate to be maintained in accordance with good business practice, and the material Tangible Personal Property when considered in the aggregate is in satisfactory operating condition ordinary wear and tear excepted. Section 2.17. Real Property. (a) Section 2.17 of the Parent Disclosure Letter identifies all Owned Real Property and Leased Real Property. The Companies and their Subsidiaries have good, valid and marketable fee simple title to the Owned Real Property, and valid leasehold interests in the Leased Real Property, free and clear of all Liens, except: (i) as disclosed on Section 2.17 of the Parent Disclosure Letter and (ii) for Permitted Liens. (b) The Companies and their Subsidiaries enjoy peaceful and undisturbed possession of all Leased Real Property. Except as disclosed on Section 2.17 of the Parent Disclosure Letter, to the Knowledge of the Companies, no material default exist with respect to any Leased Real Property. (c) Except as provided in Section 2.17 of the Parent Disclosure Letter: (i) every certificate, permit or license from any Governmental Authority having jurisdiction over any of the Owned Real Property and Leased Real Property and any agreement, easement or other right that is necessary to permit the lawful use and operation of the buildings and improvements on any of the Owned Real Property or Leased Real Property or that is necessary to permit the lawful use and operation of all driveways, roads and other means of egress and ingress to and from any of the Owned Real Property or Leased Real Property has been obtained and is in full force and effect, and there is no pending threat of modification or cancellation of any of same, except in each case for deviations from the foregoing set forth in this clause (i) which would not reasonably be expected to materially impair the continued use of such Owned Real Property or 17 22 Leased Real Property for the use currently being made thereof; (ii) there are no material structural defects relating to any Owned Real Property or Leased Real Property that would materially impair the continued use of such Owned Real Property or Leased Real Property for the use currently being made thereof; (iii) there are no Owned Real Property building systems that are not in working order so as to materially impair the continued use of such Owned Real Property or Leased Real Property for the use currently being made thereof; or (iv) no physical damage has occurred to any Owned Real Property that would have a material adverse effect on the continued use of such Owned Real Property or Leased Real Property for the use currently being made thereof for which there is no insurance in effect covering the full cost (subject to retention amounts) of the restoration. (d) The Owned Real Property and Leased Real Property is sufficiently supplied with utilities and other services as necessary for the operation of such facilities as currently operated including, without limitation, adequate water, storm and sanitary sewer, gas, electric, cable and telephone facilities, all of which run through public rights-of-way or perpetual private easements, requiring minimal payments, if any (except for deviations from the foregoing that would not materially impair the continued use of such Owned Real Property or Leased Real Property). (e) None of Parent, Sellers, the Companies or any of their Subsidiaries has received notice of any material special assessment relating to any Owned Real Property or Leased Real Property or any portion thereof, and neither Parent, Seller nor any Company has knowledge of any pending or threatened material special assessment. (f) There are no outstanding options or rights of first refusal to purchase all or a portion the Owned Real Property or Leased Real Property except as disclosed on Section 2.17 of the Parent Disclosure Letter. (g) Except the set forth on Section 2.17 of the Parent Disclosure Letter or reflected in the Company Capital Plan, there is no material construction at any of the Owned Real Property or Leased Real Property. No building or improvement, or the operation or maintenance thereof, violates in any way any restrictive covenant, or encroaches on any property owned by others that would have a material adverse effect on the continued use of such Owned Real Property or Leased Real Property for the use currently being made thereof. (h) Prior to the date hereof, to the Knowledge of the Companies, the Companies have delivered to Purchaser true and correct copies of all title reports, title policies and surveys currently in Parent's, each Seller's and each Company's possession for each respective parcel of Owned Real Property or Leased Real Property. Section 2.18. Environmental Matters. Except as set forth in Section 2.18 of the Parent Disclosure Letter: (a) For purposes of this Section 2.18 and the defined terms used herein, the term "Companies" shall include (i) the Companies and (ii) any Subsidiaries of the Companies. 18 23 (b) Each of the Companies: (i) is, and at all times during the preceding three years has been, in compliance in all respects with all applicable Environmental Laws; (ii) holds, and at all times during the preceding three years has held, all material Environmental Permits (each of which is in full force and effect) required for any current or intended operations or for any Facility; (iii) is, and at all times during the preceding three years has been, in compliance in all material respects with all of their Environmental Permits; and (iv) has not received any written correspondence indicating that any of their material Environmental Permits will not be renewed effective prior to the expiration of such Environmental Permit currently in effect, except, in each case for such noncompliances as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (c) None of the Companies have received any notice of alleged, actual or potential responsibility for, or any inquiry or investigation regarding, any environmental matter which liability arising therefrom would reasonably be expected to have a Material Adverse Effect. (d) Except with respect to such matters as have been fully and finally resolved and as to which there are no remaining obligations known or reasonably anticipated, none of the Companies have entered into or agreed to any consent decree, order, memorandum or settlement or other Contract, nor is any of the Companies subject to any judgment, decree, order, memorandum or settlement or other Contract, in any judicial, administrative, arbitral, or other forum, relating to any non-compliance with or liability under any Environmental Law which would reasonably be expected to have a Material Adverse Effect. (e) No Hazardous Materials (i) are located on, at, in, under or about any Facility or (ii) have been disposed of, or Released, to, from or at any Facility which would be reasonably likely to have a Material Adverse Effect. (f) The Companies have not assumed or retained, by contract or operation of law in connection with the sale or transfer of any assets or business, any liabilities arising from or associated with or otherwise in connection with such assets or business under any applicable Environmental Law which would be reasonably likely to have a Material Adverse Effect. (g) To the Knowledge of the Companies, true, complete and correct copies of all material written environmental reports, audits, investigations or assessments which have been conducted within the last five years and which are in the possession of Parent, any Seller or any Company in respect of any owned or leased Facility, by any attorney, environmental consultant, engineer or other third party engaged for such purpose, have been made available to Purchaser. Section 2.19. Taxes. (a) Filing of Tax Returns. All material Tax Returns required to be filed by any Taxpayer on or prior to the date hereof have been properly completed and filed on a timely basis and in correct form or appropriate extensions have been timely requested or granted. 19 24 (b) Payment of Taxes. With respect to all material Taxes imposed on any Taxpayer, or for which any Taxpayer is or could be liable, whether to taxing authorities (as, for example, under law) or to other persons or entities (as, for example, under tax allocation agreements), relating to taxable periods or portions of periods ending on or before the Closing Date, all such amounts required to be paid to taxing authorities or others on or before the date hereof have been paid or adequately reserved for on the Reference Balance Sheet. (c) Audit History. Except as set forth on Section 2.19 or Section 2.12 of the Parent Disclosure Letter, no material issues have been raised (and are currently pending) by any taxing authority in connection with any Tax Return of any Taxpayer. Except as set forth on Section 2.19 the Parent Disclosure Letter, no waivers of statutes of limitation with respect to any such Tax Returns have been given by the applicable Taxpayer that have not expired or been revoked and no waivers of statute of limitations have been requested from the applicable Taxpayer. Section 2.19 of the Parent Disclosure Letter also sets forth (i) the taxable years of each Company and each Subsidiary (other than Subsidiaries that are inactive, own no assets, and are otherwise immaterial to the operation of the Business) as to which the respective statutes of limitations with respect to Taxes have not expired, and (ii) with respect to such taxable years, those years for which examinations have been completed, those years for which examinations are presently being conducted, those years for which examinations have not been initiated, and those years for which required Tax Returns have not yet been filed. All deficiencies asserted or assessments made as a result of any examinations have been fully paid, or are being contested and an adequate reserve therefor has been established. (d) Liens. There are no Liens for Taxes (other than for current Taxes not yet due and payable and Taxes being contested pursuant to appropriate proceedings for which adequate reserves have been established) on any of the assets of the Companies or any of their Subsidiaries. (e) Safe Harbor Lease Property. None of the assets of the Companies or any of their Subsidiaries is property required to be treated as being owned by any other person pursuant to the "safe harbor lease" provisions of former Section 168(f)(8) of the Code. (f) Tax-Exempt Use Property. None of the assets of the Companies or any of their Subsidiaries is "tax-exempt use property" within the meaning of Section 168(h) of the Code. (g) Foreign Person. Parent is not, and other than ITT Canada, no Seller is a person other than a United States person within the meaning of the Code. (h) No Withholding. MEG does not own any asset which is a "United States real property interest" within the meaning of Section 897(c) of the Code. (i) Permanent Establishment. Except as set forth on Section 2.19 of the Parent Disclosure Letter, none of the Companies nor any of their Subsidiaries has a permanent establishment in any foreign country, as defined in any applicable tax treaty or convention between the United States and such foreign country. 20 25 (j) Existing Partnerships and Limited Liability Companies. With respect to each Company that is not a corporation, and each Subsidiary of each Company that is not a corporation, (i) each such entity has at all times during its existence claimed classification as a partnership, and not as an association or publicly traded partnership taxable as a corporation for federal and applicable state income tax purposes, and (ii) no such entity nor any member of such entity was notified in writing by any Taxing authority on or before May 8, 1996 that the classification of such entity as a partnership was under examination. (k) Private Letter Rulings. There are no private letter rulings in respect of any Tax pending between any Taxpayer and any taxing authority. (l) Tax Elections. All material elections with respect to federal Taxes affecting the Companies and their Subsidiaries made on or after January 1, 1996 are set forth in Section 2.19 of the Parent Disclosure Letter. (m) Section 341(f) Consent. None of the Companies nor any of their Subsidiaries has filed a consent pursuant to the collapsible corporation provisions of Section 341(f) of the Code (or any corresponding provision of state, local, or foreign income tax law) or agreed to have Section 341(f)(2) of the Code (or any corresponding provision of state, local, or foreign income tax law) apply to any disposition of any asset owned by it. (n) Adjustments under Section 481. Except as set forth on Section 2.19 of the Parent Disclosure Letter, none of the Companies nor any of their Subsidiaries has agreed to make nor is any such entity required to make any adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise. (o) International Boycott. None of the Companies nor any of their Subsidiaries has participated in an international boycott within the meaning of Section 999 of the Code. (p) Section 338(h)(10) Qualification. Parent is presently eligible to make an election under Section 338(h)(10) of the Code with respect to Tunica and each Subsidiary of Tunica that is a corporation. Section 2.20. Governmental Authorities: Consents. Assuming the truth and completeness of the representations and warranties of Purchaser contained in this Agreement, no material consent, approval or authorization of, or material designation, declaration or filing with, any Governmental Authority is required under applicable laws on the part of Parent or any Seller with respect to Parent's or the Sellers' execution or delivery of this Agreement or consummation of the transactions contemplated hereby, except for (i) applicable requirements of the HSR Act, (ii) the approval of Governmental Authorities under any Gaming Laws and (iii) as otherwise disclosed in Section 2.20 of the Parent Disclosure Letter. Section 2.21. Licenses, Permits and Authorizations. (a) All licenses, approvals, consents, franchises, authorizations, and other permits of, or with, any Governmental Authority, whether foreign, federal, state or local, 21 26 which are held by either the Company or any of its Subsidiaries, including all material authorizations under Environmental Laws and Gaming Laws ("Governmental Permits") are valid and in full force and effect and there are no proceedings pending or, to the Knowledge of the Companies, threatened that seek the revocation, cancellation, suspension or adverse modification thereof, except in each case as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Such Governmental Permits constitute all of the material licenses, franchises and other permits necessary to permit the Company or any of its Subsidiaries to own, operate, use and maintain their assets in the manner in which they are now operated and maintained and to conduct the Business as currently conducted. (b) Except as set forth on Section 2.21 of the Parent Disclosure Letter, and except to the extent that any deviations from the following would not, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect: (i) none of the Companies or any of their Subsidiaries has received, at any time during the past three years, any notice or other communication (whether oral or written) from any Governmental Authority or any other Person regarding (A) any actual, alleged, possible, or potential violation of or failure to comply with any term or requirement of any Governmental Permit, or (B) any actual, proposed, possible, or potential revocation, withdrawal, suspension, cancellation, termination of, or modification to any Governmental Permit; (ii) all applications required to have been filed for the renewal of the Governmental Permits have been duly filed on a timely basis with the appropriate Governmental Authority, and all other filings required to have been made with respect to such Governmental Permit have been duly made on a timely basis with the appropriate Governmental Authority. Section 2.22. Insurance. The activities and properties of the Companies and their Subsidiaries are covered by valid and currently effective insurance policies or programs of self-insurance in such types and amounts as are consistent with customary practices and standards of companies engaged in businesses similar to that of the Companies and their Subsidiaries. Section 2.23. Brokers' Fees. Except as set forth in Section 2.23 of the Parent Disclosure Letter (which fee constitutes a Retained Liability), no broker, finder, investment banker or other Person is entitled to any brokerage fee, finders' fee or other commission in connection with the transactions contemplated by this Agreement based upon arrangements made by Parent, Sellers, the Companies or any of their respective Affiliates. Section 2.24. Affiliate Transactions. Except (i) as set forth in Section 2.24 of the Parent Disclosure Letter, (ii) for intercompany accounts that will be eliminated at Closing and (iii) for payments under an individual's compensation arrangements and similar arrangements entered into in the ordinary course of business with the Companies or any of their Subsidiaries, none of Parent, the Sellers, their respective Affiliates or any officers or directors of any of the foregoing or any members of their families (collectively, "Affiliated Parties") is a party to any material agreement, understanding, indebtedness or proposed transaction with the Company or any of its Subsidiaries. 22 27 Section 2.25. Year 2000 Compatibility. The Companies have reviewed their consolidated operations to evaluate the extent to which the Companies will be affected by the Year 2000 Problem. The Companies do not anticipate incurring operating expenses or costs in connection with the actions that the Companies currently believe are necessary to address the Year 2000 Problem with respect to the Company and their Subsidiaries which would reasonably be expected to have a Material Adverse Effect. As a result of the aforementioned review, the Companies do not believe, that the Year 2000 Problem will have a Material Adverse Effect. The "Year 2000 Problem" as used herein means any risk that computer hardware or software used by the Companies and their Subsidiaries in the receipt, transmission, processing, manipulation, storage, retrieval, retransmission or other utilization of data or in the operation of mechanical or electrical systems of any kind will be incapable of recognizing or processing characters representing dates on or after January 1, 2000. Section 2.26. Assets; Business Activities. The assets of the Companies and their Subsidiaries constitute all of the material properties, assets and rights of Parent and its Affiliates used primarily in the conduct of the Business. Section 2.27. No Other Representations or Warranties. Except for the representations and warranties contained in this Agreement and the Ancillary Agreements, none of Parent, Sellers, the Companies nor any other Person makes any other express or implied representation or warranty on behalf of Parent, Sellers or otherwise in respect of the Parent, Sellers, the Companies and their Subsidiaries and the Business. Each of Parent and Sellers acknowledge it is not relying on any representation or warranty of Purchaser except as set forth in this Agreement and the Ancillary Agreements or of any other Person. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants to Parent, Sellers and the Companies as follows: Section 3.1. Corporate Organization of Purchaser. Purchaser has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. Section 3.2. Due Authorization. Purchaser has the requisite corporate power and authority to execute and deliver this Agreement and each of the Ancillary Agreements to which it is a party, and to perform all obligations to be performed by it hereunder and thereunder. The execution and delivery of this Agreement and each such Ancillary Agreement and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized and approved by Purchaser and no other proceeding on its part is necessary to authorize this Agreement and each such Ancillary Agreement and the consummation of the transactions contemplated hereby and thereby. This Agreement has been duly and validly executed and delivered by Purchaser, and constitutes a legally valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws 23 28 affecting creditors' rights generally and subject, as to enforceability, to general principles of equity. Each Ancillary Agreement to which Purchaser is a party upon being duly and validly executed and delivered by Purchaser shall constitute a legally valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity. Section 3.3. No Conflict. The execution and delivery of this Agreement and each of the Ancillary Agreements to which it is a party by Purchaser, and the consummation of the transactions contemplated hereby and thereby by Purchaser, does not and will not violate any provision of, or result in the breach of, any (i) Charter Documents of Purchaser, (ii) any material agreement, indenture or other instrument to which Purchaser or its Affiliates is a party or by which Purchaser or its Affiliates may be bound, or (iii) any order, judgment, decree, law, rule or regulation of any Governmental Authority, except, in the case of items referenced in clauses (ii) and (iii), to the extent that the occurrence of any of the foregoing would not, either individually or in the aggregate, materially interfere with the ability of Purchaser to perform its obligations under this Agreement. Section 3.4. Litigation and Proceedings. There are no Actions or, to the knowledge of Purchaser, investigations, before or by any court or Governmental Authority or before any arbitrator pending or, to the knowledge of Purchaser, threatened, against Purchaser or any of its Affiliates which, if determined adversely, would reasonably be expected to have a material adverse effect on the ability of Purchaser to enter into and perform its obligations under this Agreement. There is no unsatisfied judgment or any injunction binding upon Purchaser or any of its Affiliates which would reasonably be expected to have a material adverse effect on the ability of Purchaser to enter into and perform its obligations under this Agreement. Section 3.5. Governmental Authorities: Consents. Assuming the truth and completeness of the representations and warranties of Parent, Seller and the Companies contained in this Agreement, no material consent, approval or authorization of, or material designation, declaration or filing with, any Governmental Authority is required under applicable laws on the part of Purchaser with respect to Purchaser's execution or delivery of this Agreement or consummation of the transactions contemplated hereby, except for (i) applicable requirements of the HSR Act, (ii) the approval of Governmental Authorities under any Gaming Laws and (iii) as otherwise disclosed in Section 3.5 of the Parent Disclosure Letter. Section 3.6. Brokers' Fees. No broker, finder, investment banker or other Person is entitled to any brokerage fee, finders' fee or other commission in connection with the transactions contemplated by this Agreement based upon arrangements made by Purchaser or any of its Affiliates. Section 3.7. Financial Capability. Purchaser will have at the Closing sufficient funds to pay the Purchase Price (and any post-closing adjustments thereto) and all other amounts payable by the Purchaser at Closing and to perform its obligations hereunder following the Closing. 24 29 Section 3.8. Securities Act. Purchaser is acquiring the Shares and the Interests solely for the purpose of investment and not with a view to, or for sale in connection with, any distribution thereof in violation of the Securities Act. Purchaser acknowledges that the Shares and the Interests are not registered under any securities laws and that such Shares and the Interests may not be transferred or sold except pursuant to the registration and other provisions of applicable securities laws or pursuant to an applicable exemption therefrom. Section 3.9. Investigation by Purchaser; Certain Financial Information; No Other Representations or Warranties. (a) As part of its own investigation and evaluation of the Companies and their Subsidiaries and the Business, Purchaser has received or has reviewed operating, business and financial information including financial statements, forecasts, projections and other oral or written information and materials with respect to the Companies and their Subsidiaries and the Business made available by Parent or its representatives. There are assumptions and uncertainties inherent in projections and forecasts for the Companies and their Subsidiaries and the Business and Purchaser acknowledges that it is familiar with such assumptions and uncertainties. Purchaser has made its own evaluation of such financial information and acknowledges that neither Parent nor any other Person is making any representations or warranties with respect to such operating, business or financial information except for the specific representations and warranties set forth in this Agreement and the Ancillary Agreements. (b) Except for the representations and warranties contained in this Agreement and the Ancillary Agreements, neither Purchaser nor any other Person makes any other express or implied representation or warranty on behalf of the Purchaser. Purchaser acknowledges that it is not relying on any representation or warranty of Parent, Sellers, the Companies or of any other Person except as set forth in this Agreement and the Ancillary Agreements. ARTICLE 4. COVENANTS AND AGREEMENTS OF PARENT, SELLER AND THE COMPANY Section 4.1. Conduct of Business. (a) From the date hereof through the Closing except as (i) contemplated by this Agreement (including the Preliminary Transfers), or (ii) required by applicable law or any Contract described in Section 2.8 of the Parent Disclosure Letter or Employee Plan, or (iii) with the consent of the Purchaser (which shall not be unreasonably withheld or delayed), the Companies shall, and Parent and Sellers shall cause the Companies and each of their Subsidiaries to: (i) operate the business of the Companies and each of their Subsidiaries in the ordinary course, consistent with past practice; (ii) use their respective reasonable efforts to preserve intact the business organization of the Companies and their Subsidiaries, keep available to the 25 30 Companies and their Subsidiaries the services of the current officers, employees and agents of the Companies and their Subsidiaries and maintain the relations and good will with suppliers, customers, landlords, creditors, employees, and others having business relationships with the Companies or any of their Subsidiaries; and (iii) maintain property level cash and inventories in amounts consistent with past practice. (b) Without limiting the generality of Section 4.1(a), prior to the Closing, except as (i) contemplated by this Agreement (including the Preliminary Transfers), (ii) required by applicable law or any Contract described in Section 2.8 of the Parent Disclosure Letter or Employee Plan, or (iii) with the consent of Purchaser (which shall not be unreasonably withheld or delayed), the Companies shall not, and Parent and Sellers shall cause each of the Companies and each of their Subsidiaries not to: (i) issue, deliver, sell, pledge or otherwise encumber or amend any shares of its capital stock, any other voting or equity securities or any securities convertible into, or any rights, warrants or options to acquire, any such shares, interests, voting or equity securities or convertible securities; (ii) amend its Charter Documents; (iii) acquire or agree to acquire (A) by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any Person or other business organization or division thereof or (B) any other material assets, except purchases of inventory, furnishings, equipment and other goods in the ordinary course of business consistent with past practice or in accordance with the Company Capital Plan; (iv) sell, lease, license, mortgage or otherwise encumber or subject to any Lien other than Permitted Liens or otherwise dispose of any material assets, except for disposal and replacement of obsolete equipment in the ordinary course of business consistent with past practice; (v) make any material loans or advances (including, without limitation, furnishing any "markers") or capital contributions to, or investments in, any other Person other than (X) loans, advances or capital contributions to the Companies or any direct or indirect wholly-owned Subsidiary of any of the Companies or to any of the joint ventures in which the Companies or their Subsidiaries holds an interest to the extent such funding is reasonably required by such joint ventures, (Y) advances to employees or suppliers in the ordinary course of business consistent with past practice and (Z) extensions of credit to customers in the ordinary course of business and consistent with past practice; (vi) except as required to comply with applicable laws or any Employee Plan or any Contract, (A) adopt, enter into or terminate, any material Employee 26 31 Plan for the benefit or welfare of any director, officer or current or former employee, (B) materially increase in any manner the compensation or fringe benefits of, or pay any bonus to, any Personnel (except for normal increases or bonuses as contractually required pursuant to agreements disclosed on Section 2.8 of the Parent Disclosure Letter or payments under the Caesars Bonus Retention Program or other such retention programs for which Sellers are fully responsible or in the ordinary course of business consistent with past practice that, in the aggregate, do not result in a significant increase in benefits or compensation expenses to such Personnel of the Company and its Subsidiaries relative to the level in effect prior to such action), (C) except for payments or awards in cash permitted by clause (B), grant any awards under any bonus, incentive, performance or other compensation plan or arrangement or Employee Plan (including the grant of stock options, stock appreciation rights, stock based or stock related awards, performance units or restricted stock, or the removal of existing restrictions in any Employee Plans or agreements or awards made thereunder) or (D) take any action to fund or in any other way secure the payment of compensation or benefits under any Employee Plan other than in the ordinary course of business consistent with past practice; (vii) except in the ordinary course of business consistent with past practices, materially and adversely modify, amend or terminate any Contract set forth on Section 2.8 of the Parent Disclosure Letter or waive, release or assign any material rights or claims thereunder; (viii) conduct its business in a manner or take, or cause to be taken, any other action that would reasonably be expected to prevent or materially delay Parent, Sellers, the Companies or Purchaser from consummating the transactions contemplated hereby; (ix) except as required to comply with applicable laws or any Contract, enter into any Contract that would be required to be disclosed on Section 2.8 of the Parent Disclosure Letter or that is a significant real property lease or supply agreement which continues in effect for a period of more than 18 months (including, without limitation, any agreement relating to Forum III or Forum IV); (x) authorize any of, or commit or agree to take any of, the foregoing actions. Section 4.2. Inspection. Parent, Sellers and the Companies shall afford to Purchaser and its accountants, counsel and other representatives reasonable access during normal business hours and upon advance notice, to the properties, books, contracts, commitments, Tax Returns, records and appropriate officers and employees of the Companies and their Subsidiaries, and shall furnish such representatives with all such existing financial and operating data and other information concerning the affairs of the Companies and their Subsidiaries as they may reasonably request. Section 4.3. HSR Act. Subject to and in furtherance of Section 6.1, in connection with the transactions contemplated by this Agreement, Parent, Seller and the Company (and, to the 27 32 extent required, their Affiliates) shall comply promptly with the notification and reporting requirements of the HSR Act and use their reasonable best efforts to obtain early termination of the waiting period under the HSR Act. Parent, Seller and the Company shall substantially comply with any additional requests for information, including requests for production of documents and production of witnesses for interviews or depositions, by any Antitrust Authority. Section 4.4. No Solicitations. Neither Parent, Sellers nor the Companies will, directly or indirectly, (a) solicit any inquiries or proposals or enter into or continue any discussions, negotiations or agreements with a third party relating to (i) the sale or exchange of the Companies, or any of their Subsidiaries' capital stock, (ii) the merger of the Companies or any of their Subsidiaries with, or the direct or indirect disposition of any material assets of the Companies and their Subsidiaries or any portion of the Business to, any Person other than Purchaser or its Affiliates or (b) provide any assistance or any information to or otherwise cooperate with any Person in connection with any such inquiry, proposal or transaction. Parent, Sellers and the Companies agree to terminate any current discussions and negotiations with any party other than Purchaser with respect to any transaction of the kind described in clauses (a) (i) through (a) (ii) of the preceding sentence (a "Proposed Acquisition Transaction"). Section 4.5. Notification. Between the date of this Agreement and the Closing Date, Parent, Sellers and the Companies will promptly notify Purchaser in writing if Parent, Sellers, the Companies or any of their respective Subsidiaries becomes aware of any fact or condition that they believe causes or constitutes a breach of any of the representations and warranties of Parent, Sellers and the Companies as of the date of this Agreement, or if Parent, Sellers, the Companies or any of their respective Subsidiaries becomes aware of the occurrence after the date of this Agreement of any fact or condition that they believe would cause or constitute a breach of any such representation or warranty had such representation or warranty been made as of the time of occurrence or discovery of such fact or condition, unless in each case such breach of representation and warranty is reasonably expected by Parent, Sellers and the Companies to be cured prior to Closing. Any claim for a breach of covenant set forth in the previous sentence shall be made only for the incremental Losses due to the failure to comply with such covenant (and not for Losses due to the breach of the underlying representation and warranty). During the same period, Parent, Sellers and the Companies will promptly notify Purchaser of the occurrence of any breach of any covenant of Parent, Sellers or the Companies in this Article 4 or of the occurrence of any event that they believe may make the satisfaction of the conditions in Article 7 impossible or unlikely. Section 4.6. Certain Tax Matters. (a) Termination of Existing Tax-Sharing Agreements. All tax-sharing agreements or similar agreements with respect to or involving any Company or any of the Subsidiaries shall be terminated prior to the Closing Date, and, from and after the Closing Date, no such entity shall be bound thereby or have any liability thereunder for amounts due in respect of periods prior to the Closing Date. (b) Nonforeign Affidavit. As a condition precedent to the consummation of the transactions contemplated by this Agreement, all Sellers other than ITT Canada shall 28 33 furnish Purchaser an affidavit, stating, under penalty of perjury, that the indicated number is the transferor's United States taxpayer identification number and that the transferor is not a foreign person, pursuant to Section 1445(b)(2) of the Code. (c) Tax Elections. Other than elections contemplated by this Agreement, no new elections with respect to Taxes, or any changes in current elections with respect to Taxes, that would reasonably be expected to have a material adverse effect on any Company or any of their Subsidiaries shall be made after the date of this Agreement without the prior written consent of Purchaser which consent shall not be unreasonably withheld or delayed. Section 4.7. Elimination of Intercompany Accounts and Arrangements. Prior to the Closing, Parent, Sellers and the Companies shall cause the elimination of all intercompany indebtedness and all other intercompany accounts by and between the Companies or their Subsidiaries, on the one hand, and Parent, Sellers or any of their other Affiliates (other than the Companies and their Subsidiaries), on the other hand. Such intercompany accounts may be eliminated by means of settlement, setoff, capital contributions or distributions. Parent and its Affiliates are not obligated to effectuate such eliminations through use of cash if the objective could be achieved through setoff or capital contributions. Such elimination of intercompany accounts shall be in satisfaction of all amounts owed by the Parent, Sellers or any of its Affiliates (other than the Companies and their Subsidiaries) to the Companies and their Subsidiaries and all amounts owed by the Companies and its Subsidiaries to the Parent, Sellers or any of their Affiliates (other than the Companies and their Subsidiaries) in respect of such intercompany accounts. At Closing, Purchaser shall have received absolute and unconditional releases from Parent (on behalf of itself and each of its Affiliates (other than the Companies and their Subsidiaries)) of any and all claims with respect to intercompany accounts for payment to Parent and such Affiliates from the Company in form and substance reasonably satisfactory to the parties. At Closing, Parent shall have received absolute and unconditional releases from the Companies and their Subsidiaries of any and all claims with respect to such intercompany accounts for payment by Parent and its Affiliates (other than the Companies and their Subsidiaries) to the Companies and their Subsidiaries in form and substance reasonably satisfactory to the parties. Prior to Closing, Parent, Sellers and their Affiliates shall cause all agreements between Parent and its Affiliates (other than the Companies and their Subsidiaries) on the one hand and the Companies and their Subsidiaries on the other hand, to be terminated (including, without limitation, the lease with respect to the Sheraton Halifax Hotel), except for the Ancillary Agreements and the Note dated July 7, 1997 from Forum Ride Associates as maker to ITT Corporation as lender in the principal amount of approximately $23 million and the related loan agreement. Section 4.8. Financing Obligations. At or prior to the Closing, Parent and Sellers shall cause all material Financing Obligations (other than the Existing Capitalized Leases) of the Companies and their Subsidiaries to be redeemed, defeased or repaid or otherwise terminated. Section 4.9. Title Insurance Endorsement. Parent, Sellers, the Companies and their Subsidiaries agree to cooperate with Purchaser and its title insurance company, and to provide such title insurance company with affidavits and certificates as may be reasonably requested from such title insurance company (but in no event shall Parent, Sellers, Companies or their 29 34 Subsidiaries be required to provide an indemnity or hold harmless such title insurance company or Purchaser) in order to issue a (i) "Non Imputation Endorsement" in favor of Purchaser with respect to the existing title insurance held by the Company and its Subsidiaries with respect to the each parcel of the Owned Real Property and Leased Real Property and (ii) an endorsement making the Closing Date the effective date for each such title insurance policy. Section 4.10. Cooperation with Financings. Parent and Sellers agree that they will (and will cause the Companies and their Subsidiaries to) reasonably cooperate in providing information to Purchaser necessary for the preparation of any offering materials required to be prepared by or on behalf of Purchaser in connection with Purchaser's offering of securities, the syndication of Purchaser's senior credit facilities and any other financings undertaken by Purchaser in connection with the transactions contemplated hereby, to the extent information contained therein relates to the Business, the Companies or any of their Subsidiaries. Without limiting the generality of the foregoing, Parent and Sellers will use their reasonable efforts to cause the Companies' independent public accountants to cooperate with Purchaser and its independent public accountants in the preparation of such offering materials. In connection with the foregoing, Parent and Sellers will cause the Companies to deliver to Purchaser as soon as such financial statements may reasonably be made available by Parent and Sellers such consolidated interim financial statements (including notes thereto) of the Companies and their Subsidiaries as may reasonably be requested by Purchaser for inclusion in such offering materials. The costs and expenses for the preparation of any audit of such financial statements shall be paid by Purchaser promptly following delivery of such financial statements. Purchaser shall indemnify and hold harmless Parent and its Affiliates against any liability arising in connection with any information relating to the Business disclosed by Purchaser, any Affiliate of Purchaser or any of their respective officers, employees, advisers or agents to any third party financing source, including but not limited to: (1) any Person lending money to Purchaser or providing any direct or indirect financial assistance to Purchaser; (2) any equity or other financial investor in Purchaser or, together with Purchaser, in the Companies; and (3) in any offering materials prepared in connection with the financing of the Purchase Price. Section 4.11. Confidentiality. Each of Parent and the Sellers agrees that from and after the Closing Date, it shall, and shall use its reasonable efforts to cause its respective directors, officers, employees, advisors and Affiliates to, keep the Information (as defined below) confidential for a period of three years from the Closing Date, except that any Information required by law or legal or administrative process to be disclosed may be disclosed without violating the provisions of this Section 4.11. At Purchaser's request, Parent and Sellers shall use legal action, including the commencement of litigation if required, to enforce such confidentiality obligations, and Purchaser shall reimburse Parent and Sellers for out-of-pocket expenses (including the fees and expenses of counsel) incurred in connection with any such legal action. For purposes hereof, the term "Information" means all confidential and proprietary information that primarily relates to the Companies, the Subsidiaries or the Business (and not primarily to the assets, business or operations of Parent and its Affiliates other than the Companies and their Subsidiaries), other than any such information that is available to the public on the Closing Date, or thereafter becomes available to the public other than as a result of a breach of this Section 4.11, or is developed independently by Parent or Sellers or their respective Affiliates after the 30 35 Closing or is obtained from third parties who have no duty of confidentiality to Purchaser, the Companies or any of their Subsidiaries. ARTICLE 5. COVENANTS AND AGREEMENTS OF PURCHASER Section 5.1. Certain Transactions. Purchaser shall not, and shall not permit any of its Subsidiaries to, acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of or equity in, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets, if the entering into of a definitive agreement relating to or the consummation of such acquisition, merger or consolidation would reasonably be expected to (i) impose any material delay in the obtaining of, or significantly increase the risk of not obtaining, any authorizations, consents, orders, declarations or approvals of any Governmental Authority necessary to consummate the transactions contemplated by this Agreement or the expiration or termination of any applicable waiting period, (ii) significantly increase the risk of any Governmental Authority entering an order prohibiting the consummation of the transactions contemplated by this Agreement, (iii) significantly increase the risk of not being able to remove any such order on appeal or otherwise or (iv) materially delay or prevent the consummation of the transactions contemplated by this Agreement. Purchaser shall not conduct its business in a manner or take, or cause to be taken, any other action that would reasonably be expected to prevent or materially delay Parent, Sellers, the Companies or Purchaser from consummating the transactions contemplated hereby. Section 5.2. HSR Act. Subject to and in furtherance of Section 6.1, in connection with the transactions contemplated by this Agreement, Purchaser (and, to the extent required, its Affiliates) shall comply promptly with the notification and reporting requirements of the HSR Act and use their reasonable best efforts to obtain early termination of the waiting period under the HSR Act. Purchaser shall substantially comply with any additional requests for information, including requests for production of documents and production of witnesses for interviews or depositions, by an Antitrust Authority. Section 5.3. Notification. Between the date of this Agreement and the Closing Date, Purchaser will promptly notify Parent in writing if Purchaser or any of its Subsidiaries becomes aware of any fact or condition that it believes causes or constitutes a breach of any of the representations and warranties of Purchaser as of the date of this Agreement, or if Purchaser or any of its respective Subsidiaries becomes aware of the occurrence after the date of this Agreement of any fact or condition that it believes would cause or constitute a breach of any such representation or warranty had such representation or warranty been made as of the time of occurrence or discovery of such fact or condition, unless in each case such breach or representation or warranty is reasonably expected by Purchaser to be cured prior to Closing. Any claim for a breach of covenant set forth in the previous sentence shall be made only for the incremental Losses due to the failure to comply with such covenant (and not for Losses due to the breach of the underlying representation and warranty). During the same period, Purchaser will promptly notify Parent of the occurrence of any breach of any covenant of Purchaser in this 31 36 Article 5 or of the occurrence of any event that it believes may make the satisfaction of the conditions in Article 7 impossible or unlikely. ARTICLE 6. JOINT COVENANTS AND AGREEMENTS Section 6.1. Support of Transaction. (a) Each of Parent and Purchaser agree to cooperate with respect to the notices and filings to be made in connection with the consents, approvals, waivers and authorizations required in connection with the transactions contemplated hereby. Each of Parent, Sellers and Purchaser shall (i) use its best efforts to assemble, prepare and file any information (and, as needed, to supplement such information) as may be necessary to obtain as promptly as practicable all governmental and regulatory consents required to be obtained by it in connection with the transactions contemplated hereby (including in respect of any Gaming Law), (ii) use its reasonable best efforts to obtain all material consents and approvals of third parties that any of Parent, Sellers, Purchaser or their respective Affiliates is required to obtain in order to consummate the transactions contemplated hereby, and (iii) take such other action as may reasonably be necessary or as another party may reasonably request to satisfy the conditions of Article 7 or otherwise to comply with this Agreement. In connection therewith and not in limitation thereof, each party shall take or cause to be taken all actions reasonably necessary in relation to (i) obtaining of all necessary waivers, consents, authorizations and approvals from Governmental Authorities and the making of necessary registrations and filings and the taking of all steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by, any Governmental Authority, and (ii) the defending of any legal proceedings challenging the consummation of any of the transactions contemplated by this Agreement. (b) In furtherance of the foregoing, Purchaser agrees that it will comply with any requirements imposed by Governmental Authorities as a condition of Purchaser's obtaining any Regulatory Authorizations required to be obtained by it in order to consummate the transactions contemplated hereby which requirements would not (either individually or in the aggregate) have a material adverse effect on the business, operations or financial condition of Purchaser and its Subsidiaries taken as a whole, including without limitation divestiture of any Non-Primary Properties. (c) In furtherance of the foregoing, Parent agrees that it will use its reasonable best efforts to obtain consents required under Contracts, or other third party consents required to consummate the transactions contemplated hereby ("Third Party Consents"), and Purchaser will cooperate in all reasonable respects, and work together with Parent to obtain such Third Party Consents; provided, however, that Parent shall not be required to make any material expenditures to obtain such Third Party Consents and Purchaser shall not be required to agree to any material modifications to Contracts in order to obtain such Third Party Consents. 32 37 Section 6.2. Section 338 Election. (a) Except as set forth in Section 6.2(b), neither Parent, Sellers, Purchaser or their respective Affiliates shall make, or allow to be made, an election under Section 338 of the Code and any corresponding elections permitted under state, local or foreign law with respect to the acquisition of the Companies and each of their Subsidiaries. (b) Notwithstanding Section 6.2(a), Parent, SDIC, Purchaser and their respective Affiliates agree to join in making Section 338(h)(10) Elections with respect to the acquisition of Tunica and each of its Subsidiaries that is a corporation so long as such election does not require a corresponding election regarding Caesars World and its Subsidiaries. Purchaser, Parent and SDIC shall exchange completed and executed copies of Internal Revenue Service Form 8023, required schedules thereto, and any similar state, local and foreign forms as soon as practical after the Closing. The Purchase Price and all other capitalized costs shall be allocated among the Interests and Shares (other than the Tunica Shares) and the assets of Tunica. In connection therewith, Purchaser, Parent and Sellers shall attempt in good faith to agree to an allocation of the Purchase Price and all other capitalized costs among the Shares (other than the Tunica Shares), the Interests and the assets of Tunica as soon as reasonably practical after the Closing. Section 6.3. Approvals. Each of Purchaser, Parent, Sellers and the Companies shall as promptly as practicable, but in no event later than 30 days following the execution and delivery of this Agreement, file or submit any applications, filings and other submissions required by applicable laws or by Governmental Authorities in connection with obtaining all necessary regulatory consents, approvals, waivers and authorizations required to be obtained prior to the Closing (the "Regulatory Authorizations") and to respond to any requests from Government Authorities and promptly file any additional information required in connection with such filings as promptly as practicable after receipt of requests therefor. Each of Purchaser and Parent agrees to cooperate with and promptly to consult with, to provide any reasonably available information with respect to, and to provide the other party (and its counsel) advance drafts and copies of all presentations and filings to be made in connection with the Regulatory Authorizations. In addition, each of Purchaser, Parent, Sellers and the Companies shall, and shall cause each of its Subsidiaries to (and shall use its reasonable efforts to cause each of its Affiliates other than each of its Subsidiaries to), if it is necessary to obtain any regulatory approval for the consummation of the transactions contemplated hereby, disassociate themselves from any Person or Persons deemed, or reasonably likely to be deemed, unsuitable by any Gaming Commission. Purchaser, Parent, Sellers and the Companies shall keep each other apprised of the status of any communications with, and any inquiries or requests for additional information from, the Gaming Commissions and shall comply promptly with any such inquiry or request. Section 6.4. Certain Employee Benefits Matters. (a) Savings Plans. (i) As soon as is practicable after the Closing Date, but effective as of such date, Purchaser shall adopt or designate a 401(k) Savings Plan (the 33 38 "Purchaser Savings Plan") and shall establish a trust pursuant thereto (the "Purchaser Savings Trust"). As soon as is practicable after the Closing Date, Purchaser shall furnish to Parent a determination letter finding the Purchaser Savings Plan and the Purchaser Savings Trust to be qualified and tax-exempt under Sections 401(a) and 501(a) of the Code. (ii) As soon as practicable after Parent's receipt of a copy of such letter, Parent, shall cause the Parent Savings Plan and the Trust pursuant thereto (the "Parent Savings Trust") to transfer to the Purchaser Savings Plan and Purchaser Savings Trust the accounts under the Parent Savings Plan and the Parent Savings Trust (and the assets and liabilities therein) attributable to any employee of the Companies or any Subsidiary as of immediately prior to the Closing Date or any employee of Parent or Sellers or any of their affiliates, in any case, who will continue their employment with or shall become an employee, of Purchaser or any of its affiliates as of the Closing Date (the "Employees"). Seller shall cause all of such accounts to be fully vested upon such transfer. Such transfer shall be made in the form of cash except that to the extent that such accounts are invested in Parent, Sellers or the Companies' (as the case may be) stock the transfer shall be made in the form of such stock. Such transfer shall satisfy the requirements of Code Sections 401(a)(12) and 414(l) and the regulations pursuant thereto. Prior to such transfer, Purchaser will provide Parent with such documents and other information as Parent shall reasonably request to assure itself that the Purchaser Savings Plan and the Purchaser Savings Trust contain participant loan provisions and procedures necessary to effect the orderly transfer of participant loan balances associated with the transfer of assets. Prior to such transfer, Parent will provide Purchaser with such documents and other information as Purchaser shall reasonably request to assure itself that the Parent Savings Plan and Parent Savings Trust are qualified and tax-exempt under the provisions of Code Sections 401(a) and 501(a) respectively as of the date of such transfer. The Purchaser Savings Plan shall preserve for the Employees all benefits, rights and features applicable to such transferred accounts, including but not limited to those rights and features protected under Section 411(d)(6) of the Code and participant loans, and such Plan shall provide for future participant loans from current account balances. Parent shall provide to Purchaser copies of such personnel and other records of Parent pertaining to the Employees and such records of any agent or representative of Parent, in each case pertaining to the Parent Savings Plan and Parent Savings Trust and as Purchaser may reasonably request in order to administer and manage the accounts and assets transferred to the Purchaser Savings Plan and Purchaser Savings Trust. Upon such transfer, the Purchaser Savings Plan shall assume all liabilities and obligations whatsoever with respect to all amounts transferred from the Parent Savings Plan and Parent Savings Trust to the Purchaser Savings Plan and Purchaser Savings Trust in respect of the Employees and each of Parent and its affiliates and the Parent Savings Plan and Parent Savings Trust shall be relieved of all such liabilities and obligations. Purchaser and Parent shall cooperate in the filing of documents required by the transfer of assets and liabilities described herein. (iii) The Purchaser Savings Plan shall provide to the Employees all of their benefits accrued under the Parent Savings Plan as of the date of transfer. The Purchaser Savings Plan shall also provide that an Employee's period of employment with 34 39 Sellers, Parent, the Companies, any of their Subsidiaries or any predecessor thereof (as applicable) for which credit was given under the Parent Savings Plan shall be given equivalent credit under the Purchaser Savings Plan to the effect that if any Employee becomes an employee of Purchaser as of the Closing Date, or thereafter by reason of recall, no interruption in participation, benefit accrual or vesting service shall be deemed to have occurred for such Employee under the Purchaser Savings Plan by reason of the change in employment contemplated by this Agreement. The Purchaser Savings Plan shall further contain all such provisions as are necessary for the transfer not to cause Parent Savings Plan to fail to satisfy requirements of Code Sections 401(a) or 401(k). (iv) As soon as is practicable after the Closing Date and prior to the transfer contemplated under this Section 6.4(a), Sellers and Purchaser shall make such filings as are required under Code Section 6058(b) with respect to such transfers including the filing of form 5310-A. (b) Severance. Except as provided in Section 6.5(a), Purchaser shall become responsible for payment, to any employee of the Companies or any Subsidiary thereof and any other Employees listed on Section 6.4(b) of the Parent Disclosure Letter other than any such employee retained by Parent or its Affiliates following the Closing, of any severance or other similar compensation and benefits under any Employee Plan which are or may become payable as a result of the termination of any such employee by Purchaser, the Companies or their Subsidiaries as of and following the Closing or which are or may become payable solely as a result of the transactions contemplated hereby. Purchaser shall be entitled to any tax deductions or other tax benefits attributable to any severance or other similar compensation or benefit payments for which Purchaser is responsible pursuant to this Section 6.4. (c) Welfare Arrangements. Subject to obligations under applicable law and the terms of any collective bargaining agreements or other Contracts with any labor union or other labor organization covering Employees, Purchaser agrees that, for a period of one year from and after the Closing, it shall, or shall cause its Affiliates to, provide the Employees with employee welfare and retirement plans and programs which provide benefits that are substantially similar to those provided to similarly situated employees of Purchaser or such Affiliates. From and after the Closing Date, Sellers shall remain responsible for any and all liabilities with respect to the employees, directors, officers or consultants of the Companies and Subsidiaries thereof or their beneficiaries or dependents that are incurred by such individuals on or prior to the Closing Date under the applicable Employee Plans for health, life, accidental death and dismemberment, supplemental employment compensation, dental, fringe benefits, expense reimbursement, accident, sickness and disability benefits. For purposes of this Agreement, (i) a claim for health benefits (including, without limitation, claims for medical, prescription drug, dental, and vision care expenses) will be deemed to have been incurred on the date on which the related medical service was rendered to the claimant; (ii) a claim for sickness or disability benefits will be deemed to have been incurred on the date such sickness or disability occurs, except that no claim shall be deemed to have occurred prior to the Closing Date unless such claim is filed within nine months of the Closing Date; and (iii) in the case of any claim for benefits other than health benefits (e.g., life insurance benefits), a claim will be deemed to have been incurred upon the occurrence of the event giving rise to such claims. Purchaser shall be responsible for all claims that are incurred by 35 40 Employees on or after the Closing Date under the applicable benefit plans, policies or arrangements providing health, life, accidental death and dismemberment, supplemental employment compensation, dental, fringe benefits, expense reimbursement, accident, sickness and disability benefits and which are maintained by Purchaser, any Company or any Subsidiary thereof. (d) Service Credit. Following the Closing, Purchaser shall cause all employee benefit plans of Purchaser or its Affiliates to provide that a Employee's period of employment with Sellers, Parent, the Companies, any Subsidiary thereof or any predecessor thereof (as applicable) shall be treated as service for Purchaser, or its Affiliates, as applicable, for purposes of eligibility and vesting and, to the extent that Purchaser receives assets equal in value to the liability thereby assumed (or such liability is reflected as a liability on the balance sheet of the Companies prepared in the ordinary course in accordance with GAAP), for purposes of benefit accrual. Any and all pre-existing condition limitations and eligibility waiting periods under any group health plan shall be waived with respect to the Employees and their eligible dependents, and Employees shall be given credit for amounts paid under any Welfare Plan during the same period for purposes of applying deductibles, co-payments and out-of-pocket maximums as though such amounts had been paid in accordance with the terms and conditions of the employee welfare plans maintained by Purchaser or its Affiliates. (e) Purchaser agrees to assume, honor, maintain and perform, and to cause its affiliates to assume, honor, maintain and perform in accordance with their respective terms, without deductions, counterclaims, interruptions or deferments (other than withholding under applicable law), the employment and severance agreements and arrangements, as amended through the date hereof or as contemplated hereby, that are set forth on Section 6.4(e) of the Parent Disclosure Letter. Purchaser shall, or shall cause its affiliates to, honor and discharge all obligations under any collective bargaining agreement or other Contract with any labor union or other labor organization covering Employees or former employees of the Companies or any of their Subsidiaries in effect as of the date hereof until their expiration; provided, however, that this undertaking is not intended to prevent Purchaser or its Affiliates from exercising their rights with respect to such collective bargaining agreements and in accordance with their terms, including any right to amend, modify, suspend, revoke or terminate any such contract, agreement, collective bargaining agreement or commitment or portion thereof. (f) Purchaser agrees to bear, and indemnify and hold harmless Parent and Seller from and against, all direct and indirect costs, expenses and liabilities arising from or relating to claims made by or on behalf of the Employees in respect of all notices, payments, fines or assessments due to any government authority pursuant to any applicable foreign, federal, state or local law, common law, statute, rule or regulation with respect to the employment, discharge or layoff of Employees, including, but not limited to the Worker Adjustment and Retraining Notification Act, and any rules or regulations as have been issued in connection with any of the foregoing, and for any liability or benefit continuation obligation under Section 4980B of the Code and Sections 601-609 of ERISA. 36 41 Section 6.5. Employment Agreements and Severance Obligations. (a) Purchaser will assume each of the employment, severance and similar agreements set forth on Section 6.5 of the Parent Disclosure Letter, and all liabilities thereunder (provided that Parent and Purchaser will each pay for one-half of all severance and change of control payments owing to Peter Boynton (and related tax gross-ups)) . (b) Except for severance plans (as provided in Section 6.4(b)) or as otherwise expressly provided in this Article 6, Parent and Sellers shall remain solely responsible for any liability incurred with respect to any Employee under any Employee Plan sponsored, maintained or contributed to by Parent or any of the Sellers, including, without limitation, the ITT Corporation Salaried Retirement Plan and ITT Corporation Excess Savings Plan. Sellers shall also be solely responsible for any liability to make payments pursuant to the Caesars Retention Bonus Program. Section 6.6. Closings Under Certain Circumstances. (a) In the event that, on or after November 1, 1999, the conditions set forth in Sections 7.1(c) and 7.2(c) have been satisfied with respect to the Primary Properties, but not with respect to one or more Non-Primary Properties, then (subject to satisfaction of the other closing conditions contained in Article 7) the parties will proceed to close the transactions contemplated by this Agreement in accordance with this Section 6.6. (b) In the event that a conveyance of the Shares and Interests under the circumstances set forth in Section 6.6(a) in accordance with this Agreement would not result in a violation of law or requirements of a Governmental Authority in either case resulting in a material liability or a material impairment of a Contract required to be listed on Section 2.8 of the Parent Disclosure Letter (the "Adverse Consequences"), then the Shares and Interests shall be conveyed in accordance with this Agreement, notwithstanding the fact that Purchaser, the Companies or their Subsidiaries may be required to obtain consents or approvals with respect to a Non-Primary Property after Closing and/or divest a Non-Primary Property after Closing. (c) In the event that a conveyance of the Shares would create Adverse Consequences but such Adverse Consequences would not occur if the operations of a Non-Primary Property of the Companies or their Subsidiaries were placed in a trust beneficially owned by the Companies or their Subsidiaries, then the parties shall use all reasonable efforts to establish such a trust so as to permit the conveyance of the Shares. If it is not reasonably possible to establish such a trust prior to Closing, then, prior to Closing, such Non-Primary Property (or applicable portion thereof) shall be transferred to a wholly-owned special purpose Subsidiary of Parent (a "Special Purpose Sub"); provided, however, that such transfer shall encompass only the minimum assets, liabilities and operations necessary to avoid the Adverse Consequences and shall be effected in a manner that minimizes expenses and tax cost to Parent and its Subsidiaries in connection with such transfer. Purchaser shall promptly reimburse Parent or its Affiliates for its Taxes, Losses and reasonable costs in transferring such assets, liabilities and operations to the Special Purpose Sub in connection with the transactions contemplated by the foregoing (it being 37 42 understood and agreed that for purposes of this Section 6.6, costs shall include the reasonable value of reductions in net operating losses of Parent and its Affiliates). (d) In the event that the conveyance of the Interests would create Adverse Consequences but such Adverse Consequences would not occur if the Interests were conveyed to a trust beneficially owned by Purchaser and/or its wholly-owned Subsidiaries, then the parties shall use all reasonable efforts to establish such a trust and convey the Interests to such trust at Closing. If it is not reasonably possible to establish such a trust prior to the Closing, then the Interests shall continue to be held by Sellers subject to the provisions of this Section 6.6. Purchaser shall reimburse Parent or its Affiliates for its Taxes, Losses and reasonable costs in connection with the transactions contemplated by the foregoing. (e) Any assets, liabilities and operations transferred to a Special Purpose Sub pursuant to Section 6.6(c), and/or MEG and its assets, liabilities and operations if the Interests are retained by Sellers pursuant to Section 6.6(d), are referred to herein as "Retained Operations." The parties will continue to use their reasonable best efforts following the Closing to obtain the consents and approvals necessary to permit the conveyance of the Retained Operations to Purchaser without creating Adverse Consequences, and promptly upon obtaining such consents and approvals, with respect to any Retained Operations, shall convey such Retained Operations to Purchaser in a manner consistent with the provisions of this Agreement. Pending such conveyance or a disposition pursuant to Section 6.6(f), (i) Parent shall use its reasonable efforts to ensure that such Retained Operations are conducted in the ordinary course consistent with the provisions of this Agreement, (ii) to the extent legally permissible, such Retained Operations shall be conducted for the economic benefit of Purchaser and any net cash flow from such Retained Operations shall be remitted to Purchaser monthly (or, if the foregoing is not permitted consistent with avoiding Adverse Consequences, then such net after tax cash flow shall be segregated by Parent and remitted to Purchaser concurrent with the conveyance to Purchaser, or disposition pursuant to Section 6.6(f), of such Retained Operations), and (iii) Purchaser shall be responsible for funding (or, if not permitted to fund directly, shall promptly reimburse Parent for funding) any net cash shortfalls of the Retained Operations, and shall promptly reimburse Parent or its Affiliates for any other Taxes, Losses and reasonable costs incurred by it in connection with the Retained Operations. If any assets, liabilities or operations are placed in a trust pursuant to Section 6.6(c) or (d), then Purchaser shall promptly reimburse Parent or its Affiliates for any Taxes, Losses or reasonable costs incurred by it in connection with the operation or holding thereof. (f) In the event that, within six months after the Closing, the parties have been unable to obtain the consents and approvals necessary to permit the conveyance of any Retained Operations to Purchaser or its Subsidiaries without creating Adverse Consequences, then, at Purchaser's direction, (i) such Retained Operations shall be conveyed to Purchaser or its Subsidiaries notwithstanding such Adverse Consequences or (ii)(x) such Retained Operations will be sold to a third party buyer designated by Purchaser, (y) Parent will cooperate with Purchaser in all reasonable respects in effecting such third party sale (provided that Parent or its Affiliates shall not be required to incur any liability in connection with such sale) and (z) Purchaser shall promptly reimburse Parent or its Affiliates for all of its Taxes, Losses and reasonable costs incurred in connection with such third party sale. The net after tax proceeds of such sale shall be 38 43 remitted to Purchaser promptly following such sale. Purchaser agrees to direct Parent to take action with respect to the foregoing within six months after the Closing. Section 6.7. Ancillary Agreements. At Closing, the parties shall enter into the following agreement (each an "Ancillary Agreement"): (a) a License Agreement, in a form to be mutually agreed to by the parties, pursuant to which (i) Parent and/or its appropriate Affiliates will license the Company and/or its appropriate Affiliates, on a royalty-free basis for a period of ten years from the Closing Date, to use the "Sheraton" name and any related marks in connection with Gaming Facilities currently using such marks, in a manner consistent with such current use, and (ii) the Company and/or its appropriate Affiliates will license Parent and/or its appropriate Affiliates, on a royalty-free basis for a period of ten years from the Closing Date, to use the "Caesars" name and any related marks in connection with the Excluded Assets and the Excluded Companies, in a manner consistent with current use. (b) a Transition Services Agreement, in a form to be mutually agreed to by the parties, providing for the provision of required transitional services by Purchaser for the benefit of Parent or Parent for the benefit of Purchaser, as applicable, on a cost reimbursement basis, for a period of no more than one year. Section 6.8. Post-Closing Cooperation. After the Closing, upon reasonable written notice, Purchaser and Parent shall furnish or cause to be furnished to the other party and its employees, counsel, auditors and representatives access, during normal business hours, such information and assistance relating to the Companies and their Subsidiaries and the Business as is reasonably necessary for financial reporting and accounting matters, the preparation and filing of any Tax Returns, reports or forms or the defense of any Tax audit, claim or assessment. Each party shall reimburse the other for reasonable out-of-pocket costs and expenses incurred in assisting the other pursuant to this Section 6.8. Neither party shall be required by this Section 6.8 to take any action that would unreasonably interfere with the conduct of its business or unreasonably disrupt its normal operations. Parent shall cooperate with Purchaser in connection with any filings required to be made by Purchaser with Governmental Authorities after the Closing. Section 6.9. Resignations. Parent shall provide, as of the Closing, the resignations and releases of the officers and directors of the Companies and their Subsidiaries who are employees, officers or directors of Parent and its Affiliates (other than any such persons who will continue as employees of the Companies or their Subsidiaries following the Closing). Section 6.10. Bank Accounts. Parent shall procure, as of the Closing, appropriate documentation effectuating the transfer and substitution of representatives of Purchaser with respect to the Companies' bank accounts and security arrangements. Section 6.11. Form of Instruments, Etc. to be Reasonably Satisfactory. The parties agree that the form and substance of all actions, proceedings, instruments and documents required 39 44 to consummate the transactions contemplated by this Agreement shall be subject to the reasonable approval of each party and their respective counsel. ARTICLE 7. CONDITIONS TO OBLIGATIONS Section 7.1. Conditions to Obligations of Purchaser, Parent, Seller and the Companies. The obligations of Purchaser, Parent, Sellers and the Companies to consummate, or cause to be consummated, the transactions contemplated hereby are subject to the satisfaction of the following conditions, any one or more of which may be waived in writing by such parties: (a) All waiting periods under the HSR Act applicable to transactions contemplated hereby shall have expired or been terminated. (b) There shall have been obtained, (i) all material permits, approvals, clearances, and consents of, and all filings with, Governmental Authorities required to be procured by Purchaser, Parent, Sellers or the Companies under Gaming Laws required in order to consummate the transactions contemplated by this Agreement and (ii) all other Regulatory Authorizations the failure of which to procure would reasonably be expected to have a Material Adverse Effect; provided, however, that from and after November 1, 1999, the foregoing condition shall apply only with respect to such permits, approvals, clearances, consents, filings and other Regulatory Authorizations required in connection with the Primary Properties. (c) There shall not be (i) in force any order or decree, statute, rule or regulation restraining, enjoining or prohibiting the consummation of the transactions contemplated hereby, or (ii) any material suit or proceeding by a Governmental Authority to restrain or enjoin the consummation of the transactions contemplated hereby or to nullify or render ineffective this Agreement if consummated. Section 7.2. Conditions to Obligations of Purchaser. The obligations of Purchaser to consummate, or cause to be consummated, the transactions contemplated by this Agreement are subject to the satisfaction of the following additional conditions, any one or more of which may be waived in writing by Purchaser: (a) Each of the representations and warranties of Parent, Sellers and the Companies contained in this Agreement shall be true and correct in all material respects both on the date hereof and as of the Closing, as if made anew at and as of that time (except that representations and warranties that are made as of a specific date need be true and correct in all material respects only as of such date), except in each case for changes after the date hereof which are expressly contemplated or permitted by this Agreement, and each of the covenants and agreements of Parent, Sellers and the Companies to be performed as of or prior to the Closing shall have been duly performed in all material respects. (b) Parent, Sellers and the Companies shall have delivered to Purchaser a certificate signed by an officer of Parent, Sellers and the Companies, dated the Closing, 40 45 certifying that the conditions specified in Section 7.1, as they relate to Parent, Sellers and the Companies, and subsection 7.2(a) have been fulfilled. (c) Any notice to, or consent or approval of, any party to any Contract required to be listed on Section 2.8 of the Parent Disclosure Letter hereto required for the consummation of the transactions contemplated hereby or for the continued enjoyment by the Companies and their Subsidiaries of the benefits of any such Contract after the Closing shall have been given or obtained, except to the extent that the failure to give any such notices or obtain any such consent or approval would not, either individually or in the aggregate, have a Material Adverse Effect; provided, however, that from and after November 1, 1999, the foregoing condition shall apply only with respect to such notices, consents and approvals required in connection with the Primary Properties. (d) Parent, Sellers and the Companies shall have executed and delivered to Purchaser each of the Ancillary Agreements to which each is a party. Section 7.3. Conditions to the Obligations of Parent, Sellers and the Companies. The obligations of Parent, Sellers and the Companies to consummate the transactions contemplated by this Agreement are subject to the satisfaction of the following additional conditions, any one or more of which may be waived in writing by Parent, Sellers or the Companies: (a) Each of the representations and warranties of Purchaser contained in this Agreement shall be true and correct in all material respects both on the date hereof and as of the Closing, as if made anew at and as of that time (except that representations and warranties that are made as of a specific date need be true and correct in all material respects only as of such date), except in each case for changes after the date hereof which are expressly contemplated or permitted by this Agreement, and each of the covenants and agreements of Purchaser to be performed as of or prior to the Closing shall have been duly performed in all material respects. (b) Purchaser shall have delivered to Parent and Sellers a certificate signed by an officer of Purchaser, dated the Closing, certifying that such officer, the conditions specified in Section 7.1, as they relate to Purchaser, and subsection 7.3(a) have been fulfilled. (c) Purchaser shall have executed and delivered to Parent each of the Ancillary Agreements to which it is a party. ARTICLE 8. TERMINATION Section 8.1. Termination. This Agreement may be terminated and the transactions contemplated hereby abandoned: (a) By mutual written consent of the parties at any time prior to the Closing. (b) Prior to the Closing, by written notice to Sellers from Purchaser, if (i) there is any breach of any representation, warranty, covenant or agreement on the part of 41 46 Parent, Sellers or the Companies set forth in this Agreement, or if a representation or warranty of Parent, Sellers or the Companies shall be untrue, in either case, such that the condition specified in Section 7.2(a) hereof would not be satisfied at the Closing (a "Terminating Seller Breach"), except that, if such Terminating Seller Breach is curable by Parent, Sellers or the Companies through the exercise of its reasonable best efforts, then, for a period of up to 30 days, but only as long as Parent, Sellers or the Companies continues to use its reasonable best efforts to cure such Terminating Seller Breach (the "Seller Cure Period"), such termination shall not be effective, and such termination shall become effective only if the Terminating Seller Breach is not cured within the Seller Cure Period; (ii) the Closing has not occurred on or before the Final Date, other than as a result of a breach of a representation, warranty, covenant or agreement of Purchaser; or (iii) consummation of any of the transactions contemplated hereby is permanently enjoined, prohibited or otherwise restrained by the terms of a final, non-appealable order or judgment of a court of competent jurisdiction. (c) Prior to the Closing, by written notice to Purchaser from Sellers, if (i) there is any breach of any representation, warranty, covenant or agreement on the part of Purchaser set forth in this Agreement, or if a representation or warranty of Purchaser shall be untrue, in either case, such that the condition specified in Section 7.3(a) hereof would not be satisfied at the Closing (a "Terminating Purchaser Breach"), except that, if such Terminating Purchaser Breach is curable by Purchaser through the exercise of its reasonable best efforts, then, for a period of up to 30 days, but only as long as Purchaser continues to use its reasonable best efforts to cure such Terminating Purchaser Breach (the "Purchaser Cure Period"), such termination shall not be effective, and such termination shall become effective only if the Terminating Purchaser Breach is not cured within the Purchaser Cure Period; (ii) the Closing has not occurred on or before the Final Date, other than as a result of a breach of a representation, warranty, covenant or agreement of Parent, Sellers or the Companies; or (iii) consummation of any of the transactions contemplated hereby is permanently enjoined, prohibited or otherwise restrained by the terms of a final, non-appealable order or judgment of a court of competent jurisdiction. Section 8.2. Effect of Termination. In the event of termination of this Agreement pursuant to Section 8.1, except as set forth in the last sentence of this Section 8.2, this Agreement shall forthwith become void and have no effect, without any liability on the part of any party hereto or their respective Affiliates, officers, directors or stockholders; provided, however, that nothing in this section 8.2 shall relieve or limit the liability or obligations hereunder of any party (the "Defaulting Party") to the other party or parties on account of a material breach of a covenant or agreement contained herein, or any fraudulent representation or warranty contained herein by the Defaulting Party. The provisions of Sections 8.2, 12.5, 12.6 and 12.12 hereof shall survive any termination of this Agreement. ARTICLE 9. INDEMNIFICATION Section 9.1. Survival of Representations and Warranties. Subject to the limitations and other provisions of this Agreement, the representations and warranties of the parties contained herein shall survive the Closing and shall remain in full force and effect, regardless of any 42 47 investigation made by or on behalf of Parent, Sellers or Purchaser, for a period of eighteen months after the Closing Date; provided, however, that (i) the representations and warranties set forth in Section 2.19 ("Taxes") shall survive for a period equal to the applicable statute of limitations (with extensions) with respect to the matters addressed in such Sections and (ii) the representations and warranties in Sections 2.1, 2.2, 2.3, 2.4, 2.5, 3.1 and 3.2 shall survive indefinitely. Section 9.2. Indemnification by Purchaser. (a) Purchaser agrees, subject to the other terms and conditions of this Agreement, to indemnify Parent, Affiliates of Parent and their respective officers, directors, agents or employees, and their respective successors and assigns (each a "Seller Indemnified Party") against and hold each Seller Indemnified Party harmless from all Losses (without duplication) to such Seller Indemnified Party arising out of (i) the breach of any representation or warranty of Purchaser herein, (ii) the breach of any covenant or agreement of Purchaser herein or (iii) the Company Liabilities (other than such Liabilities for which Parent is required to indemnify Purchaser pursuant to Section 9.3). Anything in Section 9.1 to the contrary notwithstanding, no claim may be asserted nor may any action be commenced against Purchaser for breach of any representation or warranty contained herein, unless written notice of such claim or action is received by Purchaser describing in reasonable detail the facts and circumstances with respect to the subject matter of such claim or action on or prior to the date on which the representation or warranty on which such claim or action is based ceases to survive as set forth in Section 9.1, whether or not the subject matter of such claim or action shall have occurred before or after such date. (b) (i) The indemnification obligations of Purchaser pursuant to Section 9.2(a)(i) shall not be effective until the aggregate dollar amount of all Losses that would otherwise be indemnifiable pursuant to Section 9.2(a)(i) exceeds $15 million (the "Purchaser's Threshold Amount"), at which point such obligations shall be effective only as to the amount of such Losses in excess of the Purchaser's Threshold Amount, subject to the limitation in Section 9.2(b)(ii); and (ii) the indemnification obligations of Purchaser pursuant to Section 9.2(a)(i) shall be effective only until the dollar amount paid in respect of the Losses indemnified against under Section 9.2(a)(i) aggregates to an amount equal to $400 million; provided that the foregoing limitations shall not apply with respect to any breach of the representations and warranties set forth in Section 3.1, 3.2, 3.6 or 3.7. (c) Parent agrees to give, and cause each Seller Indemnified Party to give, Purchaser written notice of any claim, assertion, event or proceeding by or in respect of a third party as to which it may request indemnification hereunder or as to which Purchaser's Threshold Amount may be applied as soon as is practicable and in any event within 30 days of the time that such Seller Indemnified Party learns of such claim, assertion, event or proceeding; provided, however, that the failure to so notify Purchaser shall not affect rights to indemnification hereunder except to the extent that Purchaser is actually prejudiced by such failure. Within 30 days after receipt of such notification, Purchaser may elect to direct, through counsel of its own choosing reasonably acceptable to the Seller Indemnified Party, the defense or settlement of any such claim or proceeding at its own expense; provided, that no settlement will be made without 43 48 the consent of the Seller Indemnified Party (not to be unreasonably withheld or delayed). If Purchaser elects to assume the defense of any such claim or proceeding, the Seller Indemnified Party may participate in such defense, but in such case the expenses of the Seller Indemnified Party shall be paid by such Seller Indemnified Party. Parent shall provide, or cause such Seller Indemnified Party to provide, Purchaser with access to its records and personnel relating to any such claim, assertion, event or proceeding during normal business hours and shall otherwise cooperate with Purchaser in the defense or settlement thereof, and Purchaser shall reimburse Parent or the Seller Indemnified Party for all its reasonable out-of-pocket expenses in connection therewith. If Purchaser elects to direct the defense of any such claim or proceeding, the Seller Indemnified Party shall not pay, or permit to be paid, any part of any claim or demand arising from such asserted liability, unless Purchaser consents (which consent is not to be unreasonably withheld) in writing to such payment or unless Purchaser, subject to the last sentence of this Section 9.2(c), withdraws from the defense of such asserted liability, or unless a final judgment from which no appeal may be taken by or on behalf of Purchaser is entered against the Seller Indemnified Party for such liability. If Purchaser shall not be entitled to direct the defense, or fails to defend, or if, after commencing or undertaking any such defense, Purchaser fails to prosecute or withdraws from such defense, the Seller Indemnified Party shall have the right to undertake the defense or settlement thereof, at Purchaser's expense. If the Seller Indemnified Party assumes the defense of any such claim or proceeding pursuant to this Section 9.2(c) and proposes to settle such claim or proceeding prior to a final judgment thereon or to forego appeal with respect thereto, then Parent or Seller shall give, or cause such Seller Indemnified Party to give, Purchaser prompt written notice thereof and Purchaser shall have the right to participate in the settlement or assume or reassume the defense of such claim or proceeding. Section 9.3. Indemnification by Parent and Sellers. (a) Parent and Sellers agree, jointly and severally, subject to the other terms and conditions of this Agreement, to indemnify Purchaser, Affiliates of Purchaser, and each of their respective officers, directors, agents or employees, and their respective successors and assigns (each a "Purchaser Indemnified Party") against and hold each Purchaser Indemnified Party harmless from all Losses (without duplication) to such Purchaser Indemnified Party arising out of (i) the breach of any representation or warranty of Parent, Sellers or the Companies herein (other than the breach of any representation or warranty set forth in Section 2.19, which is addressed in Article 10), (ii) the breach of any covenant or agreement of Parent, Sellers or the Companies herein or (iii) the Retained Liabilities. Anything in Section 9.1 to the contrary notwithstanding, no claim may be asserted nor any action commenced against Parent or Sellers for breach of any representation or warranty contained herein, unless written notice of such claim or action is received by Parent or Sellers describing in detail the facts and circumstances with respect to the subject matter of such claim or action on or prior to the date on which the representation or warranty on which such claim or action is based ceases to survive as set forth in Section 9.1, whether or not the subject matter of such claim or action shall have occurred before or after such date. (b) (i) The indemnification obligations of Parent and Sellers pursuant to Section 9.3(a)(i) shall not be effective until the aggregate dollar amount of all Losses that would otherwise be indemnifiable pursuant to Section 9.3(a)(i) exceeds $15 million (the "Seller's 44 49 Threshold Amount"), at which point such obligations shall be effective only as to the amount of such Losses in excess of the Seller's Threshold Amount, subject to the limitation in Section 9.3(b)(ii); and (ii) the indemnification obligations of Parent and Sellers pursuant to Section 9.3(a)(i) shall be effective only until the dollar amount paid in respect of the Losses indemnified against under Section 9.3(a)(i) aggregates to an amount equal to $400 million; provided, that the foregoing limitations shall not apply with respect to any breach of the representations and warranties set forth in Sections 2.1, 2.2, 2.3, 2.4, 2.5 or 2.23. (c) Purchaser agrees to give, and to cause each Purchaser Indemnified Party to give, Parent written notice of any claim, assertion, event or proceeding by or in respect of a third party as to which it may request indemnification hereunder or as to which Seller's Threshold Amount may be applied as soon as is practicable and in any event within 30 days of the time that such Purchaser Indemnified Party learns of such claim, assertion, event or proceeding; provided, however, that the failure to so notify Parent shall not affect rights to indemnification hereunder except to the extent that Parent is actually prejudiced by such failure. Within 30 days after receipt of such notification, Parent may elect to direct, through counsel of its own choosing reasonably acceptable to the Purchaser Indemnified Party, the defense or settlement of any such claim or proceeding at their own expense; provided, that no settlement will be made without the consent of the Purchaser Indemnified Party (not to be unreasonably withheld or delayed). If Parent elects to assume the defense of any such claim or proceeding, the Purchaser Indemnified Party may participate in such defense, but in such case the expenses of the Purchaser Indemnified Party shall be paid by such Purchaser Indemnified Party. Purchaser shall provide, or cause the Purchaser Indemnified Party to provide, Parent with access to its records and personnel relating to any such claim, assertion, event or proceeding during normal business hours and shall otherwise cooperate with Parent in the defense or settlement thereof, and Parent shall reimburse Purchaser or the Purchaser Indemnified Party for all its reasonable out-of-pocket expenses in connection therewith. If Parent elects to direct the defense of any such claim or proceeding, the Purchaser Indemnified Party shall not pay, or permit to be paid, any part of any claim or demand arising from such asserted liability unless Parent consents (which consent is not to be unreasonably withheld) in writing to such payment or unless Parent, subject to the last sentence of this Section 9.3(c), withdraws from the defense of such asserted liability or unless a final judgment from which no appeal may be taken by or on behalf of Parent is entered against the Purchaser Indemnified Party for such liability. If Parent shall not be entitled to direct the defense, or fails to defend, or, if after commencing or undertaking any such defense, Parent fails to prosecute or withdraw from such defense, the Purchaser Indemnified Party shall have the right to undertake the defense or settlement thereof, at the expense of Parent. If the Purchaser Indemnified Party assumes the defense of any such claim or proceeding pursuant to this Section 9.3(c) and proposes to settle such claim or proceeding prior to a final judgment thereon or to forego any appeal with respect thereto, then the Purchaser Indemnified Party shall give Parent prompt written notice thereof and Parent shall have the right to participate in the settlement or assume or reassume the defense of such claim or proceeding. Section 9.4. Losses Net of Insurance and Tax Benefits. (a) The amount of any and all Losses indemnified under this Agreement shall be determined net of any amounts recovered by or to which the indemnified party is entitled 45 50 under insurance policies, indemnities or other reimbursement arrangements with respect to such Losses. The amount of any and all Losses indemnified under this Agreement shall be computed to take into account and to deduct therefrom (i) any prior or subsequent recovery in respect of part or all of a claim by a Seller Indemnified Party or a Purchaser Indemnified Party, as the case may be, whether by payment, discount, credit, offset or otherwise and (ii) the amount of any provision reflected as a current liability in the Closing Balance Sheet in respect of matters giving rise to such Losses. (b) If the amount with respect to which any claim is made under any of Sections 9.2 or 9.3 of this Agreement (an "Indemnity Claim") gives rise to a currently realizable Tax Benefit (as defined below) to the party making the claim, the indemnity payment shall be reduced by the amount of the Tax Benefit available to the party making the claim. To the extent such Indemnity Claim does not give rise to a currently realizable Tax Benefit, if the amount with respect to which any Indemnity Claim is made gives rise to a subsequently realized Tax Benefit to the party that made the claim, such party shall refund to the indemnifying party the amount of such Tax Benefit when, as and if realized. For the purposes of this Agreement, any subsequently realized Tax Benefit shall be treated as though it were a reduction in the amount of the initial Indemnity Claim, and the liabilities of the parties shall be redetermined as though both occurred at or prior to the time of the indemnity payment. For purposes of this Section 9.4 a "Tax Benefit" means an amount by which the tax liability of the party (or group of corporations including the party) is reduced (including, without limitation, by deduction, reduction of income by virtue of increased tax basis or otherwise, entitlement to refund, credit or otherwise) plus any related interest received from the relevant taxing authority. Where a party has other losses, deductions, credits or items available to it, the Tax Benefit from any losses, deductions, credits or items relating to the Indemnity Claims shall be deemed to be realized only after the utilization of such other losses, deductions, credits or items. For the purposes of this Section 9.4, a Tax Benefit is "currently realizable" to the extent it can be reasonably anticipated that such Tax Benefit will be realized in the current taxable period or year or in any tax return with respect thereto (including through a carryback to a prior taxable period) or in any taxable period or year prior to the date of the Indemnity Claim. In the event that there should be a determination disallowing the Tax Benefit, the indemnifying party shall be liable to refund to the indemnified party the amount of any related reduction previously allowed or payments previously made to the indemnifying party pursuant to this Section 9.4. The amount of the refunded reduction or payment shall be deemed a payment under Sections 9.2 and 9.3 of this Agreement and thus shall be paid subject to any applicable reductions under this Section 9.4. (c) The parties agree that any indemnification payments made, and/or any payments (or adjustments) made with respect to a Tax Benefit, pursuant to this Agreement shall be treated for all Tax purposes as an adjustment to the Purchase Price, unless otherwise required by applicable law, in which event payments shall be made in an amount sufficient to indemnify the party on a net after-Tax basis. Section 9.5. No Right of Contribution. Notwithstanding anything to the contrary contained in this agreement, the Company and its Subsidiaries shall have no liability to indemnify any Seller Indemnified Party on account of the breach of any representation or warranty or 46 51 unfulfillment of any covenant of the Company, and no Seller Indemnified Party shall have any right of contribution against the Company or any of its Subsidiaries. Section 9.6. Exclusive Remedy. Except for any claim (a) grounded in fraud or (b) seeking equitable relief or remedial action, the parties hereto acknowledge and agree that, from and after the Closing Date, the indemnification provisions of this Article 9 shall be the exclusive remedy of Purchaser, on the one hand, and Parent and Seller, on the other hand, with respect to the transactions contemplated by this Agreement. With respect to actions grounded in fraud or seeking equitable relief or remedial action, (y) the right of a party to be indemnified and held harmless pursuant to the indemnification provisions of this Article 9 shall be in addition to and cumulative of any rights of such party at law or in equity and (z) no such party shall, by exercising the remedy available to it under this Article 9, be deemed to have elected such remedy exclusively or to have waived any other remedy, whether at law or in equity, available to it. No Purchaser Indemnified Party or Seller Indemnified Party shall be entitled to seek punitive damages pursuant to this Article 9. Section 9.7. Limitation on Liability Following Notice of Breach. Notwithstanding anything to the contrary in this Agreement, following the Closing, (a) neither Parent nor any Seller shall be liable to any Purchaser Indemnified Party in respect of any breach of a representation or warranty by Sellers or the Companies if (i) such breach is disclosed to Purchaser prior to Closing pursuant to Section 4.5, (ii) such breach would constitute a failure of a condition of Purchaser's obligation to close, and (iii) notwithstanding such notification, the Closing shall have occurred and (b) Purchaser shall not be liable to any Parent Indemnified Party in respect of any breach of a representation or warranty by Purchaser if (i) such breach is disclosed to Parent prior to Closing pursuant to Section 5.3, (ii) such breach would constitute a failure of a condition to Sellers' and Parent's obligation to close and (iii) notwithstanding such notification the Closing shall have occurred. ARTICLE 10. TAX ALLOCATION AND INDEMNIFICATION Section 10.1. Preparation and Filing of Returns. (a) By Seller. To the extent not filed prior to the close of the Closing Date, Sellers shall prepare and timely file (or cause to be prepared and timely filed): (i) all federal Income Tax Returns and Combined Income Tax Returns of the Parent Group (including the Companies or any member of the Company Group for all Pre-Closing Taxable Periods) and all Separate Income Tax Returns of the Companies and the Subsidiaries of the Companies for all Pre-Closing Taxable Periods; (ii) all Other Tax Returns and Information Returns of the Companies and the Subsidiaries of the Companies for all Pre-Closing Taxable Periods; and (iii) all federal, state, local and foreign Tax Returns and Information Returns of the Parent Group (excluding the Companies and the Subsidiaries 47 52 of the Companies for their Taxable Years beginning after the Closing) for all Post-Closing Taxable Periods. (b) By Purchaser. Purchaser shall prepare and timely file (or cause to be prepared and timely filed): (i) all federal state, local and foreign Income Tax Returns of the Companies and the Subsidiaries of the Companies for all Straddle Periods and Post-Closing Taxable Periods; and (ii) all Other Tax Returns and Information Returns of the Companies and the Subsidiaries of the Companies for all Straddle Periods and Post-Closing Taxable Periods. Section 10.2. Payment of Taxes. (a) By Sellers. Except to the extent specifically provided by any other provision of this Agreement, Sellers shall pay (or cause to be paid) all Taxes shown to be due and payable on all Tax Returns filed (or caused to be filed) by Sellers pursuant to Section 10.1(a) hereof and, subject to the other provisions of this Agreement, all Taxes that shall thereafter become due and payable with respect to such Tax Returns. (b) By Purchaser and the Company. Except to the extent specifically provided by Section 10.2(d) or any other provision of this Agreement, Purchaser and the Companies shall pay (or cause to be paid) all Taxes shown to be due and payable on all Tax Returns filed (or caused to be filed) by Purchaser pursuant to Section 10.1(b) hereof, and all Taxes that shall thereafter become due and payable with respect to such Tax Returns. (c) Information and Other Tax Returns. Any party required to file any Information or other Tax Return pursuant to this Article 10 shall pay any related fees or charges (including any such fees or charges that shall thereafter become due and payable with respect to such Information or other Tax Return) and shall indemnify and hold the other party harmless against any related interest and penalties, as well as any such fees or charges which are assessed against such party as the result of a failure by the party responsible for such failure to file any Information Return in a timely and accurate manner. (d) Straddle Periods. For purposes of this Agreement, Income Taxes shown on a Tax Return for a Straddle Period prepared consistent with past tax practice and accounting methods shall be allocated between the Pre- and Post-Closing Straddle Periods on the basis of the actual Taxable income for each such Period, determined by (i) an interim closing of the books at the close of the Closing Date (or such other allocation method as the Parties may agree to in writing), and (ii) as to each Straddle Period, treating each member of the combined group that is includable in a Combined Income Tax Return for the entire Straddle Period as included in such Combined Income Tax Return, and by treating any member of the combined group that is not includable in such Combined Income Tax Return for the entire Straddle Period as includable in a Separate Income Tax Return for such Straddle Period. Any dispute between the 48 53 Purchaser and Sellers regarding the amount of Taxes allocated to the Pre-Closing Straddle Period shall be resolved in accordance with the principles of Section 10.6(e) of this Agreement. Sellers shall pay to Purchaser the excess of any amount allocated (based upon the undisputed amount of Tax shown on each executed Income Tax Return for a Straddle Period) to the Pre-Closing Straddle Period over the amount of any estimated Income Taxes previously paid by Sellers or the Companies prior to the Closing Date; or Purchaser shall pay to Seller the excess of the amount of any estimated Income Taxes previously paid by Sellers or the Companies prior to the Closing Date over the undisputed amount of Tax shown on such Tax Return allocated to such Period. Other Taxes shall be allocated between the Pre- and Post-Closing Straddle Periods (i) in the case of real and personal property Taxes, on a per diem basis and (ii) in the case of all other Taxes, on the basis of the actual activities of the applicable entity. Sellers shall pay to Purchaser and Purchaser shall pay to Sellers, as the case may be, any amount due under this Section 10.2(d) upon the later of (i) five days before the filing date of the Tax Return for a Straddle Period upon which such payment is based or (ii) ten days after receipt by the Seller of the executed Tax Return upon which such payment is based. Section 10.3. Refunds. (a) Sellers. Sellers shall be entitled to any refund of Taxes of the Companies and the Subsidiaries of the Companies for any Pre-Closing Taxable Period or any Pre-Closing Straddle Period (other than any refund of Taxes attributable to a carryback of a net operating loss or other item or attribute in accordance with Section 10.5 from a Post-Closing Taxable Period to a Pre-Closing Taxable Period). The amount of any refund for any Straddle Period shall be allocated between the Pre-Closing Straddle Period and the Post-Closing Straddle Period using the principles described in Section 10.2(d) of this Agreement. (b) Purchaser. Purchaser and the Companies shall be entitled to any refund of any and all Taxes of the Companies and the Subsidiaries of the Companies for all Post-Closing Straddle Periods and Post-Closing Taxable Periods and to any refund of Taxes attributable to a carryback of a net operating loss or other item or attribute in accordance with Section 10.5 from a Post-Closing Taxable Period to a Pre-Closing Taxable Periods. The amount of any refund for any Straddle Period shall be allocated between the Pre-Closing Straddle Period and the Post-Closing Straddle Period using the principles described in Section 10.2(d) of this Agreement. (c) Transmittal of Refunds To Which Recipient Is Not Entitled. If Sellers receive a Tax refund to which Purchaser, the Companies, a Subsidiary of a Company or any member of the Company Group is entitled pursuant to this Agreement, Sellers shall pay the amount of such refund (including any interest received thereon) to Purchaser within ten (10) days after receipt thereof. Conversely, if Purchaser, the Companies, a Subsidiary of a Company or any member of the Company Group receives a Tax refund to which Sellers are entitled pursuant to this Agreement, Purchaser, the Companies or such Subsidiary or member of the Company Group, as the case may be, shall pay the amount of such refund (including any interest received thereon) to Seller within ten (10) days after receipt thereof. 49 54 Section 10.4. Amendments to Tax Returns. Sellers shall be entitled to amend any Tax Return filed (or caused to be filed) by Sellers pursuant to Section 10.1(a) hereof, and Purchaser, the Companies, the Subsidiaries of the Companies and any member of the Company Group shall be entitled to amend any Tax Return for any Taxable Period filed by any of them pursuant to Section 10.1(b) hereof; provided however that amendments by Purchaser, the Companies, the Subsidiaries of the Companies or any member of the Company Group of any Tax Return for a Straddle Period shall be consistent with past tax practice and accounting methods previously used in preparing such Tax Returns. Section 10.5. Carrybacks. Without the prior written consent of Sellers, which shall be in the sole and absolute discretion of Sellers, none of Purchaser, the Companies, the Subsidiaries of the Companies or any member of the Company Group shall carry back any net operating loss or other item or attribute from a Post-Closing Taxable Period to a Pre Closing Taxable Period. Purchaser and the Companies agree to reimburse Sellers for any reasonable costs connected therewith, including, but not limited to, a reasonable cost of time spent preparing such carryback Tax Returns and any adjustment to Taxes for which Parent or its Affiliates are liable that result from such carryback. Section 10.6. Indemnification for Taxes. (a) In General. Parent and Sellers shall, jointly and severally, indemnify and hold harmless each Purchaser Indemnified Party from and against without duplication (i) any and all Income Taxes of any Taxpayer or for which any Taxpayer is liable (including the Companies, each Subsidiary of a Company and each member of the Company Group) for any and all Pre-Closing Taxable Periods and all Pre-Closing Straddle Periods, (ii) any and all Other Taxes of any Taxpayer or for which any Taxpayer is liable (including the Companies, each Subsidiary of a Company and each member of the Company Group) for any and all Pre-Closing Straddle Periods and all Pre-Closing Periods and (iii) any and all Taxes payable as a result of a breach of any representation or warranty set forth in Section 2.19. (b) Member Liability. For the avoidance of doubt, Parent and Sellers shall, jointly and severally, indemnify and hold harmless each Purchaser Indemnified Party from and against each and every liability for Taxes of the Parent Group under Treasury Regulation Section 1.1502-6 or any similar law, rule or regulation administered by any Taxing Authority. (c) Asset Sale Amount. Notwithstanding anything herein to the contrary, Parent and Sellers, jointly and severally, shall indemnify and hold harmless each Purchaser Indemnified Party against any Taxes resulting from Section 338(h)(10) Elections in accordance with Section 6.2(b) of this Agreement. (d) Indemnification by Purchaser and the Companies. Purchaser shall indemnify and hold harmless each Seller Indemnified Party from and against (i) any and all Taxes of the Companies and each Subsidiary of a Company for any and all Straddle Periods (except to the extent of payments required by Seller pursuant to Section 10.2(d) with regard to amounts shown on Income Tax Returns for Straddle Periods or as a result of any recomputation or adjustment of such amount, or to the extent of payments required by Seller pursuant to Section 50 55 10.6(a)) and Post-Closing Taxable Periods of the Companies or any Subsidiary of a Company and (ii) any and all Taxes of the Companies or any Subsidiary of a Company arising out of any transaction including, but not limited to, a Code Section 338 election or any corresponding state, local or foreign election recognized by any other Taxing Authority in connection therewith (but not including any Code Section 338 election contemplated by Section 6.2(b) hereof), not in the ordinary course of its business that occurs after the Closing and on the Closing Date. (e) Indemnification Procedure. Purchaser (or Seller, as the case may be) shall notify Sellers (or Purchaser) of any Taxes paid by the Purchaser Group or any member thereof (or Parent Group or any member thereof) which are subject to indemnification under this Article 10. Any notification contemplated by this Article 10 shall include a detailed calculation (including, if applicable, separate allocations of such Taxes between Pre- and Post-Closing Taxable Periods and supporting work papers) and a brief explanation of the basis for indemnification hereunder. Whenever a notification described in this Article 10 is given, the notified party shall pay the amount requested in such notice to the notifying party within twenty (20) days, but only to the extent that the notified party agrees with such request. To the extent the notified party disagrees with such request, it shall, within twenty (20) days, so notify the notifying party, whereupon the parties shall use their best efforts to resolve any such disagreement. If the parties cannot resolve such disagreement within 15 days of the date of consultation, Purchaser and Sellers shall jointly select a nationally recognized accounting firm, which has not performed any audit services or acted as a primary tax advisor in the last five years for Purchaser, Sellers or their respective Affiliates (the "Neutral Auditor"), to act as an arbitrator to resolve all points of disagreement concerning such dispute. If the parties cannot agree on the selection of a Neutral Auditor, then such Neutral Auditor shall be selected by the American Arbitration Association. All fees and expenses related to the work of the Neutral Auditor shall be borne equally by Purchaser and Sellers. To the extent not otherwise provided for in this Article 10, any payment made after such 20 day period shall include interest at the Overdue Rate beginning on the date the original notice was given by the notifying party. Section 10.7. Post-Closing Audits and Other Proceedings. Parent and Sellers, on the one hand, and Purchaser, on the other hand, agree to give prompt notice to each other of any proposed adjustment to Taxes for periods ending on or prior to the Closing Date or any Pre-Closing Straddle Period. Parent, Sellers and Purchaser shall cooperate with each other in the conduct of any audit or other proceedings for such periods and each may participate at its own expense, provided Parent and Sellers shall have the right to control the conduct of any such audit or proceeding for which Parent and Sellers agree that any resulting Tax is covered by the indemnity provided in Section 10.6(a). Notwithstanding the foregoing, with respect to the settlement of any such claim, suit or proceeding, if such settlement would be legally binding on the Purchaser or an Affiliate of Purchaser with respect to a subsequent period, Sellers may not settle or otherwise resolve such claim, suit or proceeding without the consent of Purchaser, such consent not to be unreasonably withheld, provided, however, that if Purchaser withholds its consent, then Purchaser shall reimburse Sellers for (i) any professional fees and other administrative costs reasonably incurred by Sellers in connection with defending such claim on or after the date that Purchaser rejects the settlement and (ii) any interest payable by Sellers to a Taxing Authority in connection with such claim that accrues on or after the date that Purchaser rejects the settlement. 51 56 Section 10.8. Transfer Taxes. The parties agree that all sales and transfer taxes and fees incurred in connection with this Agreement and the transactions contemplated hereby will be borne 50% by Purchaser, on the one hand, and 50% by Parent and Sellers, on the other. Section 10.9. Cooperation. Parent and Sellers, on the one hand, and Purchaser, on the other hand, agree to furnish or cause to be furnished to each other, upon request, as promptly as practicable, such information and assistance (including access to books and records) relating to the Company and shall make available such knowledgeable employees of Parent, Purchaser or their respective Affiliates as is reasonably necessary for the preparation of any return for Taxes, claim for refund or audit, and the prosecution or defense of any claim, suit or proceeding relating to any proposed adjustment. For a period of seven years from and after Closing, Purchaser shall maintain and make available to Parent and its representatives, on Parent's reasonable request, and Parent and shall maintain and make available to Purchaser, on Purchaser's reasonable request, copies of any and all information, books and records referred to in this Section 10.8. After such seven-year period, Purchaser and Parent may dispose of such information, books and records provided that prior to such disposition, Purchaser shall give Parent the opportunity to take possession of, and Parent shall give Purchaser the opportunity to take possession of, such information, books and records. Section 10.10. Limitations. The limitations with respect to Parent's and Seller's obligations to indemnify a Purchaser Indemnified Party set forth in Section 9.3(b) and with respect to Purchaser's obligations to indemnify a Seller Indemnified Party set forth in Section 9.2(b) shall not apply to this Article 10. This Article 10 shall survive the Closing indefinitely. The indemnification and payment obligations of Parent and Sellers and of Purchaser pursuant to Article 10 shall not be effective until the aggregate dollar amount of all Taxes that would be indemnifiable or payable pursuant to Article 10 exceeds $100,000 (the "Tax Deductible"), at which point such obligations shall be effective only as to the amount of such Taxes in excess of the Tax Deductible. ARTICLE 11. CERTAIN DEFINITIONS As used herein, the following terms shall have the following meanings: "Action" means any action, suit, arbitration or other proceeding by or before any Governmental Authority. "actual value" has the meaning specified in Section 1.4(c). "Adverse Consequences" has the meaning specified in Section 6.6(b). "Affiliate" means, with respect to any specified Person, any Person that, directly or indirectly, controls, is controlled by, or is under common control with, such specified Person, through one or more intermediaries or otherwise. "Affiliated Group" means an affiliated group of corporations within the meaning of Code Section 1504(a) for the Taxable Period or, for purposes of any state, local or foreign 52 57 income tax matters, any consolidated, combined or unitary group of corporations within the meaning of the corresponding provisions of tax law for the state or other jurisdiction in question. "Affiliated Parties" has the meaning specified in Section 2.24. "Agreement" has the meaning specified in the Preamble. "Ancillary Agreements" means the agreements specified in Section 6.7. "Annual Financial Statements" has the meaning specified in Section 2.7(a). "Antitrust Authority" means the Antitrust Division of the United States Department of Justice, the United States Federal Trade Commission or the antitrust or competition law authorities of any other jurisdiction (whether United States, foreign or multinational). "Applicable Rate" shall mean a 7% per annum interest rate. "Auditor" has the meaning specified in Section 1.4(c). "Base Price" has the meaning specified in Section 1.2(a). "Base Working Capital" has the meaning specified in Section 1.4(a). "Benefit Arrangement" shall mean any employment, consulting, severance or other similar Contract, arrangement or policy and each plan, arrangement (written or oral), program, agreement or commitment providing for compensation or other benefits, including, without limitation, insurance coverage (including without limitation any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, life, health, disability or accident benefits (including without limitation any "voluntary employees' beneficiary association" as defined in Section 501(c)(9) of the Code (as defined below) providing for the same or other benefits) or for deferred compensation, profit-sharing bonuses, stock options, stock appreciation rights, stock purchases or other forms of incentive compensation or post-retirement insurance, which (A)(1)(a) is not a Welfare Plan, Pension Plan or Multiemployer Plan (each as defined below), (b) is entered into, maintained, contributed to or required to be contributed to, as the case may be, by the Company or an ERISA Affiliate (as defined below), and (c) covers any current or former employee, director, officer or consultant of the Company or any Subsidiary thereof (with respect to each's relationship with such entities), or (2) under which the Company or any Subsidiary thereof may incur liability; or (B) any plan covering any current or former employee, director, officer or consultant of any Foreign Subsidiary (as defined below) (with respect to each's relationship with such entity) which if maintained or administered in or otherwise subject to the laws of the United States would be described in paragraph (A). 53 58 "Business" means: (i) the business of operating gaming facilities, and related hotel, convention, retail and entertainment operations, conducted under the Caesars name, including all trademark rights and goodwill related to the Caesars name; (ii) the ownership and operation of the Gaming Facilities, including all business operations ancillary thereto; and (iii) all other activities and operations of the Companies and their Subsidiaries (other than those of the Excluded Companies and the Excluded Assets). "Business Day" means any day that is not a Saturday, Sunday or other day on which banks are required or authorized by law to be closed in New York, New York. "Caesars World" has the meaning specified in the Preamble. "Caesars World Common Stock" has the meaning specified in the Recitals. "Capital Expenditure Adjustment Amount" has the meaning specified in Section 1.2(a). "Charter Documents" means as to any Person, such Person's (i) articles of incorporation, certificate of incorporation, certificate of formation or equivalent organizational documents and (ii) bylaws, partnership agreement, operating agreement, limited liability company agreement or equivalent document. "Closing" has the meaning specified in Section 1.3(a). "Closing Balance Sheet" has the meaning specified in Section 1.4(b). "Closing Date" has the meaning specified in Section 1.3(a). "Closing Date Purchase Price" means (i) the Base Price plus (ii) the Estimated Net Working Capital Adjustment Amount (which may be a positive or negative number), minus (iii) the amount of Existing Capitalized Leases, plus (iv) the Estimated Capital Expenditure Adjustment Amount (which may be a positive or negative number). "Closing Net Working Capital" has the meaning specified in Section 1.4(b). "Code" means the Internal Revenue Code of 1986, as amended. "Combined Income Tax Return" means any state, local or foreign Income Tax Return in which Caesars World or any member of the Company Group is or may be included in a consolidated, combined, unitary or similar Tax Return with an Affiliate (other than another member of the Company Group) for state, local or foreign Tax purposes. "Common Stock" has the meaning specified in the Recitals. "Companies" has the meaning specified in the Preamble. "Company" has the meaning specified in the Preamble. 54 59 "Company Capital Plan" means the 1999 schedule of monthly capital expenditures delivered by Parent to Purchaser prior to the date of this Agreement. "Company Group" means Caesars World and each corporation which would join Caesars World in filing a consolidated federal income tax return if Caesars World was the common parent of an affiliated group, as defined in Code Section 1504, for the applicable Taxable Period. "Company Liabilities" means the liabilities of the Companies and their Subsidiaries, other than Retained Liabilities. "Confidentiality Agreement" has the meaning specified in Section 12.8. "Contracts" means any contracts, agreements, leases, subleases, licenses or other understandings or commitments, written or oral. "CWI Shares" has the meaning specified in the Recitals. "Defaulting Party" has the meaning specified in Section 8.2. "Defeasance Amount" has the meaning specified in Section 1.2(b). "Deficit Amount" has the meaning specified in Section 1.4(d). "Determination Date" has the meaning specified in Section 1.4(c). "Dollars" and "$" shall mean lawful money of the United States of America. "Delaware Gaming Laws" means gaming laws of the State of Delaware applicable to the Companies' operations at Dover Downs. "Employee Plans" shall mean all Benefit Arrangements, Multiemployer Plans, Pension Plans and Welfare Plans. "Employees" has the meaning specified in Section 6.4(a). "Environmental Laws" means any and all foreign, Federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, legally binding decrees, or other requirements of any Governmental Authority (including, without limitation, common law) regulating, relating to or imposing liability or standards of conduct concerning protection of the environment, human health or safety or relating to exposure of any kind of Hazardous Materials, as have been, are now, or may at any time hereafter be, in effect (including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, as amended, the Resource Conservation and Recovery Act, as amended, the Clean Air Act, as amended and the Hazardous Materials Transportation Act). "Environmental Permits" means any and all permits, licenses and registrations, required under any Environmental Law. 55 60 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" shall mean any entity (whether or not incorporated) which is (or at any relevant time was) a member of a "controlled group of corporations" with, under "common control" with, or a member of an "affiliated service group" with, the Companies as defined in Section 414(b), (c), (m) or (o) of the Code, or under "common control" with the Companies, within the meaning of Section 4001(b)(1) of ERISA. "Estimated Capital Expenditure Adjustment Amount" has the meaning specified in Section 1.4(a). "Estimated Closing Net Working Capital" has the meaning specified in Section 1.4(a). "Estimated Net Working Capital Adjustment Amount" has the meaning specified in Section 1.4(a). "Excluded Assets" means the assets of the Excluded Companies, the interests of the Parent and its Affiliates in the Atlantic City Convention Center Sheraton Hotel and assets of Parent and its Affiliates (other than the Companies or their Subsidiaries) primarily relating to hotel reservation systems, hotel sales and administration and other operations other than the Business. "Excluded Companies" shall mean Cove Haven, Inc., Pocono Palace, Inc., Paradise Stream, Inc., Brookdale Resorts, Inc., Romantic Tours, Inc. and Romantic Advertising, Inc. "Existing Capitalized Leases" means the existing slot machines leases which are accounted for as capitalized leases on the Reference Balance Sheet. The amount of the Existing Capitalized Leases as of any date shall be determined consistent with the accounting principles used in capitalizing such leases on the Reference Balance Sheet. "Facility" means any Leased Real Property, any Owned Real Property or any property otherwise operated by the Company or any of its Subsidiaries. "Final Date" means January 31, 2000. "Financing Obligations" means (i) indebtedness of the Company or any of its consolidated Subsidiaries for borrowed money, (ii) obligations of the Company or any of its consolidated Subsidiaries evidenced by bonds, notes, debentures, letters of credit, or similar instruments, (iii) obligations of the Company or any of its consolidated Subsidiaries under capitalized leases, (iv) obligations of the Company or any of its consolidated Subsidiaries under conditional sale, title retention or similar agreements or arrangements creating an obligation of the Company or any of its consolidated Subsidiaries with respect to the deferred purchase price of property (other than customary trade credit), (v) interest rate and currency obligation swaps, hedges or similar arrangements and (vi) all obligations of the Company or any of its consolidated Subsidiaries to guarantee any of the foregoing types of obligations on behalf of others. 56 61 "Foreign Gaming Laws" shall mean the laws, rules and regulations promulgated by the applicable Governmental Authorities of the Philippines, South Africa, Canada or any political subdivisions thereof or any other relevant foreign jurisdiction relating to casino gaming. "Foreign Subsidiary" shall mean any Subsidiary of the Company organized under the laws of or doing business in any country other than the United States. "FRA Note" has the meaning specified in Section 1.1(b). "GAAP" has the meaning specified in Section 1.4(b). "Gaming Commissions" shall mean, with respect to Parent, Seller, the Company or Purchaser, as applicable, the Indiana Gaming Commission, the Mississippi Gaming Commission, the Nevada Gaming Commission, the Nevada State Gaming Control Board, the New Jersey Casino Control Commission, the New Jersey Department of Law and Public Safety, Division of Gaming Enforcement, the Nova Scotia Gaming Control Commission, and the Ontario Gaming Control Commission, and any similar commission that regulates or enforces the Gaming Laws. "Gaming Facilities" means (a) Caesars Palace in Las Vegas, Nevada; (b) Caesars Tahoe in Stateline, Nevada; (c) Caesars Atlantic City in Atlantic City, New Jersey; (d) the Caesars "Glory of Rome" riverboat casino in Harrison County, Indiana; (e) the Sheraton Casino & Hotel in Robinsonville, Mississippi; (f) Dover Downs in Dover, Delaware; (g) the "S.S. Crystal Harmony" and the "S.S. Crystal Symphony"; (h) Casino Windsor in Windsor, Canada; (i) Sheraton Casino Sydney in Cape Breton, Canada; (j) the Sheraton Halifax Hotel and Casino in Halifax, Nova Scotia; (k) Caesars Gauteng in Kempton Park, South Africa; and (l) Caesars Manila in Manila, Philippines. The parties acknowledge that with respect to the foregoing Gaming Facilities, the Companies' and their Subsidiaries' interests in certain of the foregoing Gaming Facilities represent interests in leased real property, admiralty and management contracts and not ownership of the real or personal property associated with such facility. "Gaming Laws" shall mean, with respect to Parent, Seller, the Company or Purchaser, as applicable, Foreign Gaming Laws, Indiana Gaming Laws, Mississippi Gaming Laws, Nevada Gaming Laws and the New Jersey Gaming Laws. "Governmental Authority" means any Federal, state, municipal or local government, governmental authority, Gaming Commission, regulatory or administrative agency, governmental commission, department, board, bureau, court, tribunal, arbitrator or arbitral body. "Governmental Permits" has the meaning specified in Section 2.21(a). "Hazardous Materials" means any hazardous substance, gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products, polychlorinated biphenyls, ureaformaldehyde insulation, asbestos or asbestos-containing materials, pollutants, contaminants, radioactivity, and any other materials or substances which are defined as hazardous, toxic or a pollutant or contaminant or are otherwise regulated under any Environmental Law. "high value" has the meaning specified in Section 1.4(c). 57 62 "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. "Income Tax(es)" means any and all Taxes based upon or measured in whole or in part by gross or net income (regardless of whether denominated as an "income tax," "franchise tax" or otherwise and including any Tax imposed on alternative bases, one of which is net income), imposed by any Taxing Authority, together with any interest, penalties and other additions thereto. "Income Tax Return(s)" means all Tax Returns relating to, or required to be filed in connection with, any payment or refund of any Income Tax. "Increase Amount" has the meaning specified in Section 1.4(d). "Indemnity Claim" has the meaning specified in Section 9.4(b). "Indiana Gaming Laws" shall mean the Indiana Gaming Control Act and the rules and regulations promulgated thereunder. "Information" has the meaning specified in Section 4.11. "Information Return(s)" means any and all reports, returns, declarations or other filings (other than Tax Returns) required by, or to be furnished to, any Taxing Authority. "Intellectual Property" has the meaning specified in Section 2.11. "Interests" has the meaning specified in the Recitals. "IRS" means the United States Internal Revenue Service. "Interim Financial Statements" has the meaning specified in Section 2.7(a). "ITT Sheraton" has the meaning specified in the Preamble. "Joint Venture" has the meaning specified in Section 2.4(c). "Joint Venture Interest" has the meaning specified in Section 2.4(c). "Knowledge of the Companies" shall mean, the actual knowledge of the individuals identified on Section 11.02 of the Parent Disclosure Letter. "Knowledge of Purchaser" shall mean the actual knowledge of any of the executive officers of Purchaser. "Leased Real Property" means material real property leased by the Company or any of its Subsidiaries as tenant and, to the extent (but only to the extent) leased by the Company or any of its Subsidiaries, all buildings and other structures, facilities or improvements currently or hereafter located thereon, all fixtures, systems, equipment and items or personal property of the Company or of any of its Subsidiaries attached or appurtenant thereto, and all easements, licenses, rights and appurtenances relating to the foregoing. 58 63 "Licensed IP Rights" has the meaning specified in Section 2.11. "Lien" means any mortgage, deed of trust, pledge, hypothecation, encumbrance, security interest or other lien of any kind. "Losses" of a Person means any and all losses, liabilities, damages, diminutions in value, claims, awards, judgments, costs and expenses (including, without limitation, the costs of reasonable attorneys' fees) actually suffered or incurred by such Person. "low value" has the meaning specified in Section 1.4(c). "Material Adverse Effect" shall mean a material adverse effect on the business, operations or financial condition of the Companies and their Subsidiaries taken as a whole, but shall exclude any effect to the extent resulting from (i) any condition or event which adversely affects the gaming industry generally, the gaming industry in Nevada, New Jersey, Indiana, or Ontario, Canada, (ii) general economic conditions, (iii) the implementation of California Proposition No. 5. or the proposal, passage or implementation of any similar law or initiative, (iv) the proposal or passage of any law or other initiative restricting or adversely affecting the conduct of gaming operations generally or (v) fluctuations in the earnings of financial condition of the Gaming Companies during the period from December 31, 1998 to the Closing Date that result from gaming winnings so long as the Gaming Companies have been operating on a basis consistent with their existing policies concerning extensions of credit and setting of gambling limits. "MEG" means Metropolitan Entertainment Group, a Canadian partnership. "Mississippi Gaming Laws" shall mean the Mississippi Gaming Control Act and the rules and regulations promulgated thereunder. "Multiemployer Plan" shall mean (A) any "multiemployer plan," as defined in Section 4001(a)(3) of ERISA, (1) which the Companies or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or, within the six years prior to the Closing Date, maintained, administered, contributed to or was required to contribute to, or under which the Companies or any ERISA Affiliate may incur any liability and (2) which covers or has covered any current or former employee, director, officer or consultant of the Companies or any ERISA Affiliate (with respect to each's relationship with such entities, or (B) any plan covering any current or former employee, director, officer or consultant of any Foreign Subsidiary (with respect to each's relationship with such entity) which if maintained or administered in or otherwise subject to the laws of the United States would be described in paragraph (A). "Net Working Capital" means current assets minus current liabilities, excluding, however, (i) any Excluded Assets or Retained Liabilities, (ii) any provisions for Taxes or Tax refunds, (iii) the intercompany accounts eliminated pursuant to Section 4.7 and (iv) any accruals 59 64 or write-ups of assets attributable to consummation of the sale of Shares and Interests. For purposes of the foregoing, 50% of any cash that is in excess of the $10 million (Canadian) required to be retained by Windsor Casino Limited and is held by Windsor Casino Limited distributable in accordance with the terms of Windsor JV Agreement (whether or not subject to the approval of the parties thereto) shall be included as a current asset, minus any Canadian withholding taxes that would be payable upon the distribution thereof. "Net Working Capital Adjustment Amount" has the meaning specified in Section 1.4(d) hereto. "Neutral Auditor" has the meaning specified in Section 10.6(e). "Nevada Gaming Laws" shall mean the Nevada Gaming Control Act and the rules and regulations promulgated thereunder, the Clark County, Nevada Code and the rules and regulations promulgated thereunder, the City of Reno, Nevada Code and other applicable local law. "New Jersey Gaming Laws" shall mean the New Jersey Casino Control Act and the rules and regulations promulgated thereunder. "Non-Primary Properties" means the Gaming Facilities other than the Primary Properties. "Nova Scotia Gaming Laws" shall mean the Nova Scotia Gaming Control Act and the rules and regulations promulgated thereunder. "Ontario Gaming Laws" shall mean the Ontario Gaming Control Act, 1992 and the rules and regulations promulgated thereunder. "Other Tax Return(s)" means all Tax Returns relating to, or required to be filed in connection with, any payment or refund of any Other Tax. "Other Tax(es)" means any and all Taxes, other than Income Taxes, together with any interest, penalties and other additions thereto. "Overdue Rate" means the rate (compounded annually) specified under Code Section 6621(a)(2) (or any successor provision) for the underpayment of tax. "Owned Real Property" means all material real property owned by the Companies or any of their Subsidiaries, together with all buildings and other structures, facilities or improvements located thereon, all fixtures, systems, equipment and items of personal property attached or appurtenant thereto and all easements, licenses, rights and appurtenances relating to the foregoing. "Panel" has the meaning specified in Section 12.12. "Parent" has the meaning specified in the Preamble hereto. 60 65 "Parent Disclosure Letter" has the meaning specified in Article II. "Parent Group" means Parent and each corporation that joins with Parent in filing a consolidated federal income tax return for the applicable Taxable Period. "Parent Savings Plan" has the meaning specified in Section 2.13(b). "Parent Savings Trust" has the meaning specified in Section 6.4(a). "PBGC" shall mean the Pension Benefit Guaranty Corporation. "Pension Plan" shall mean (A) any "employee pension benefit plan" as defined in Section 3(2) of ERISA (other than a Multiemployer Plan) (1) which the Companies or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or, within the six years prior to the Closing Date, maintained, administered, contributed to or was required to contribute to, or under which the Companies or any ERISA Affiliate may incur any liability and (2) which covers or has covered any current or former employee, director, officer or consultant of the Companies or any ERISA Affiliate (with respect to each's relationship with such entities), or (B) any plan covering any current or former employee, director, officer or consultant of any Foreign Subsidiary (with respect to each's relationship with such entity) which if maintained or administered in or otherwise subject to the laws of the United States would be described in paragraph (A). "Permitted Liens" means (a) mechanics', carriers', workers', repairers', materialmen's, warehousemen's and other similar Liens arising or incurred in the ordinary course of business, (b) Liens for non-delinquent Taxes or Taxes which are being contested in good faith through appropriate proceedings, (c) any covenants, conditions, restrictions, reservations, rights, Liens, easements, encumbrances, encroachments and other matters affecting title to real property which are shown as exceptions on title insurance policies and/or title commitments or reports or other documents which have been made available to the Purchaser, (d) any other covenants, conditions, restrictions, reservations, rights, non-monetary Liens, easements, encumbrances, encroachments and other matters affecting title to real property which would not, in the aggregate, be reasonably expected to materially impair the continued use of the property subject thereto for the use currently being made thereof, (e) Liens which will be released or otherwise terminated on or prior to the Closing and (f) Liens set forth in Section 11.3 of the Parent Disclosure Letter. "Person" means any individual, firm, corporation, partnership, limited liability company, incorporated or unincorporated association, joint venture, joint stock company, governmental agency or instrumentality or other entity of any kind. "Personnel" has the meaning specified in Section 2.10(d). 61 66 "Post-Closing Straddle Period" means with respect to any Straddle Period, the period beginning the day after the Closing Date and ending on the last day of such Taxable Year. "Post-Closing Taxable Period(s)" means any Taxable Year that begins after the close of the Closing Date; in addition, solely with respect to the Parent Group as a whole and not with respect to the Companies, their Subsidiaries, or any member of the Company Group, the term shall also include the Taxable Year of the Parent Group that includes the Closing Date and ends after the close of the Closing Date. "Pre-Closing Claims" has the meaning specified in Section 12.14(a). "Pre-Closing Straddle Period" means with respect to any Straddle Period, the period beginning on the first day of such Taxable Year and ending at the close of the Closing Date. "Pre-Closing Taxable Period(s)" means any Taxable Year that ends at or before the close of the Closing Date. "Preliminary Transfers" has the meaning specified in Section 1.1(b). "Primary Properties" means the Gaming Facilities located in Nevada, New Jersey, Indiana and Windsor (Ontario), Canada. "Proposed Acquisition Transaction" has the meaning specified in Section 4.4. "Purchase Price" has the meaning specified in Section 1.2(a). "Purchaser's Threshold Amount" has the meaning specified in Section 9.2(b). "Purchaser" has the meaning specified in the Preamble hereto. "Purchaser Cure Period" has the meaning specified in Section 8.1(c). "Purchaser Group" means Purchaser and each corporation that joins with Purchaser filing a consolidated federal income tax return for the applicable Taxable Period. "Purchaser Indemnified Party" has the meaning specified in Section 9.3(a). "Purchaser Savings Plan" has the meaning specified in Section 6.4(a). "Purchaser Savings Trust" has the meaning specified in Section 6.4(a). "Reference Balance Sheet" means the December 31, 1998 combined balance sheet included in the Annual Financial Statements. "Regulatory Authorizations" has the meaning specified in Section 6.3. 62 67 "Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment or the workplace of any Hazardous Materials, or otherwise as defined in any Environmental Law. "Retained Liabilities" means (i) all Financing Obligations of the Companies and their Subsidiaries, except the Existing Capitalized Leases and other Financing Obligations to the extent an adjustment to the Purchase Price has been made with respect to such liabilities pursuant to Section 1.2(b), (ii) liabilities arising from operations (whether presently or formerly conducted) of Parent, Sellers and their respective Affiliates, other than the operations of the Companies and their Subsidiaries, (iii) liabilities of the Excluded Companies and the Atlantic City Convention Center Sheraton Hotel, (iv) liabilities for which Parent or Sellers have expressly assumed liability under this Agreement and (v) liabilities relating to the "Intelnet" lawsuit. "Retained Operations" has the meaning specified in Section 6.6(e). "Section 338(h)(10) Election" means an election under Section 338(h)(10) of the Code and any corresponding election permitted or required under State, local or foreign law (regardless of the name or designation of such election under local law) but only if Parent and/or its Affiliates is not subject to taxation in such jurisdiction on both the sale or exchange of the capital stock of the corporation with respect to which such election is made (or deemed made) and the deemed sale or exchange of the assets of the corporation with respect to which such election is made (or deemed made). "Sellers" has the meaning specified in the Preamble hereto. "Seller Cure Period" has the meaning specified in Section 8.1(b). "Seller Indemnified Party" has the meaning specified in Section 9.2(a). "Seller's Threshold Amount" has the meaning specified in Section 9.3(b). "Separate Income Tax Return(s)" means any state, local or foreign Income Tax Return for any Company or any member of the Company Group other than a Combined Income Tax Return. "Shares" has the meaning specified in the Recitals. "South Africa Gaming Laws" shall mean the laws and regulations governing casino gaming in South Africa. "Special Purpose Sub" has the meaning specified in Section 6.6(c). "Starwood Canada" has the meaning specified in the Preamble. "Straddle Period" means any Taxable Period of any of the Companies or any member of the Company Group that begins before and ends after the close of the Closing Date. 63 68 "Subsidiary" means, with respect to any Person, a corporation or other entity of which 50% or more of the voting power or economic value of the equity securities or equity interests is owned, directly or indirectly, by such Person, or the operations of which are otherwise consolidated with those of such Person under GAAP. "Tangible Personal Property" has the meaning specified in Section 2.16. "Tax" or "Taxes" mean any and all taxes, charges, fees, levies or other assessments, including income, gross receipts, excise, real or personal property, sales, withholding, social security, retirement, unemployment, occupation, use, service, license, net worth, payroll, franchise and transfer and recording, imposed by the Internal Revenue Service or any taxing authority (whether domestic or foreign, including any federal, state, county, local or foreign government or any subdivision or taxing agency thereof (including a U.S. possession)), whether computed on a separate, consolidated, unitary, combined or any other basis; and such term shall include any interest whether paid or received, fines, penalties or additional amounts attributable to, or imposed upon, or with respect to, any such taxes, charges, fees, levies or other assessments. "Tax Benefit" has the meaning specified in Section 9.4. "Tax Deductible" has the meaning specified in Section 10.10. "Tax Return" or "Tax Returns" means all reports, returns, declarations, claims for refund or statements of any kind or nature relating to Taxes, and any schedule or attachment thereto and any amendment thereof. "Taxable Period(s)" means one or more Pre- or Post-Closing Taxable Period or Pre- or Post-Closing Straddle Period. "Taxable Year(s)" means one or more taxable years (which may be shorter than a full calendar or fiscal year), years of assessment or periods with respect to which any Tax may be imposed or for which a Tax Return is required to be filed. "Taxing Authority" means the Internal Revenue Service or any other domestic or foreign governmental authority responsible for the administration, imposition or collection of any Tax. "Taxpayer" means (i) the Companies, (ii) each Subsidiary of the Companies, (iii) each member of any affiliated group of corporations, within the meaning of Section 1504 of the Code, of which the Companies or any of their Subsidiaries is a member, and (iv) each member of any group of corporations with respect to which the Companies or any of their Subsidiaries files a combined or unitary Tax Return. "Terminating Purchaser Breach" has the meaning specified in Section 8.1(c). "Terminating Seller Breach" has the meaning specified in Section 8.1(b). 64 69 "Third Party Consents" has the meaning specified in Section 6.1(c). "Tunica" has the meaning specified in the Preamble. "Tunica Common Stock" has the meaning specified in the Recitals. "Tunica Shares" has the meaning specified in the Recitals. "Welfare Plan" shall mean (A)(i) any "employee welfare benefit plan" as defined in Section 3(1) of ERISA, (a) which the Companies or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, and (b) which covers any current or former employee, director, officer or consultant of the Companies or any Subsidiary thereof (with respect to each's relationship with such entities), or (2) under which the Companies or any Subsidiary thereof may incur any liability; or (B) any plan covering any current or former employee, director, officer or consultant of any Foreign Subsidiary (with respect to each's relationship with such entity which if maintained or administered in or otherwise subject to the laws of the United States would be described in paragraph (A). "Year 2000 Problem" has the meaning specified in Section 2.25. ARTICLE 12. MISCELLANEOUS Section 12.1. Waiver. Either party to this Agreement may, at any time prior to the Closing, waive any of the terms or conditions of this Agreement or agree to an amendment or modification to this Agreement by an agreement in writing executed in the same manner as this Agreement. Section 12.2. Notices. All notices and other communications among the parties shall be in writing and shall be deemed to have been duly given when (i) delivered in person, or (ii) five (5) days after posting in the United States mail having been sent registered or certified mail return receipt requested, or (iii) delivered by telecopy and promptly confirmed by delivery in person or post as aforesaid in each case, with postage prepaid, addressed as follows: (a) If to Purchaser, to: Park Place Entertainment Corporation 26 Main Street Chatham, New Jersey 07928 Fax: (973) 701-1972 Attn: Clive Cummis, Esq. 65 70 with a copy to: Latham & Watkins 1001 Pennsylvania Avenue Washington, DC 20004 Fax: (202) 637-2001 Attn: Bruce E. Rosenblum, Esq. (b) If to Parent or Sellers, to: Starwood Hotels & Resorts Worldwide, Inc. 777 Westchester Avenue White Plains, New York 10604 Fax: (914) 640-8260 Attn: Thomas C. Janson, Jr., Esq. with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, New York 10022 Fax: (212) 735-2000 Attn: Stephen F. Arcano, Esq. or to such other address or addresses as the parties may from time to time designate in writing. Section 12.3. Assignment. No party hereto shall assign this Agreement or any part hereof without the prior written consent of the other parties. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns. Notwithstanding the foregoing: (i) Purchaser may assign any of its rights and obligations under this Agreement to a direct or indirect wholly-owned Subsidiary of Purchaser (so long as such assignment does not materially delay the Closing or impose material costs on Parent), provided that such assignment will not release Purchaser from its obligations hereunder; and (ii) Purchaser may assign its rights under this Agreement to its lenders as security. Without limiting the generality of the foregoing, the parties anticipate that Purchaser will assign to a wholly-owned Canadian subsidiary its rights to acquire the Interests. Section 12.4. Rights of Third Parties. Nothing expressed or implied in this Agreement is intended or shall be construed to confer upon or give any Person, other than the parties hereto, any right or remedies under or by reason of this Agreement. Section 12.5. Expenses. Except as otherwise provided in this Agreement, each party hereto shall bear its own expenses incurred in connection with this Agreement and the transactions herein contemplated whether or not such transactions shall be consummated, including, without limitation, all fees of its legal counsel, financial advisers and accountants. 66 71 Section 12.6. Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of New York, including Sections 5-1401 and 5-1402 of the New York General Obligations Law, except to the extent that the provisions of applicable Gaming Laws shall be mandatorily applicable to the transactions contemplated by this Agreement. Section 12.7. Captions; Counterparts. The captions in this Agreement are for convenience only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 12.8. Entire Agreement. This Agreement (including the Schedules, Exhibits and Annexes to this Agreement, which, although they may be bound separately, constitute part of this Agreement) and that certain Confidentiality Agreement between Purchaser the parties relating to the transactions contemplated hereby (the "Confidentiality Agreement") constitute the entire agreement among the parties and supersede any other agreements, whether written or oral, that may have been made or entered into by or among any of the parties hereto or any of their respective Subsidiaries relating to the transactions contemplated hereby. No representations, warranties, covenants, understandings, agreements, oral or otherwise, relating to the transactions contemplated by this Agreement exist between the parties except as expressly set forth in this Agreement and the Confidentiality Agreement. Section 12.9. Amendments. This Agreement may be amended or modified in whole or in part, only by a duly authorized agreement in writing executed in the same manner as this Agreement and which makes reference to this Agreement. Section 12.10. Publicity. All press releases or other public communications of any nature whatsoever relating to the transactions contemplated by this Agreement, and the method of the release for publication thereof, shall be subject to the prior mutual approval of Purchaser and Sellers which approval shall not be unreasonably withheld by any party; provided, however, that, nothing herein shall prevent any party from publishing such press releases or other public communications as such party may consider necessary in order to satisfy such party's legal or contractual obligations after such consultation with the other parties hereto as is reasonable under the circumstances. Section 12.11. Construction. This Agreement is a result of negotiations among, and has been reviewed by Sellers, Parent, the Companies, Purchaser, and their respective counsel. Accordingly, this Agreement shall be deemed to be the product of all parties hereto, and no ambiguity shall be construed in favor of or against Sellers, Parent, the Companies or Purchaser. Section 12.12. Dispute Resolution. Except with respect to any claim seeking equitable relief to enforce any covenant of a party hereunder, the parties hereby agree that, in order to obtain prompt and expeditious resolution of disputes under this Agreement, each claim, dispute or controversy of whatever nature, arising out of, in connection with, or in relation to the interpretation, performance or breach of this Agreement (or any agreement contemplated by or related to this Agreement), including without limitation any claim based on contract, tort or 67 72 statute, or the alleged breach hereof or thereof, shall be settled, at the request of any party of this Agreement, by final and binding arbitration conducted in New York City, New York, administered by a panel of three arbitrators, one chosen by Purchaser and one by Parent and Seller and the third to be selected by the two arbitrators so chosen (the "Panel"), in accordance with the then existing Rules of Practice and Procedure of the American Arbitration Association, and judgment upon any award rendered by the Panel may be entered by any state or federal court having jurisdiction thereof. The arbitration procedures shall follow the substantive law of the State of New York, including the provisions of statutory law dealing with arbitration, as it may exist at the time of the demand for arbitration, insofar as said provisions are not in conflict with this Agreement and specifically excepting therefrom sections of any such statute dealing with discovery and sections requiring notice of the hearing date by registered or certified mail. The Panel shall determine the prevailing party and shall include in its award that party's reasonable attorney's fees and costs. Section 12.13. Non-Hire. (a) If the transactions contemplated hereby are consummated, neither Parent, any of its Subsidiaries or any of their respective Affiliates shall, directly or indirectly, for itself or on behalf of any other individual or entity, hire any Personnel at any time prior to the third anniversary of the Closing Date; provided, however, that the foregoing shall not apply to any employee who is terminated by Purchaser or is notified by Purchaser that Purchaser will not continue to employ such employee following the Closing. (b) The covenants and undertakings contained in this Section 12.13 relate to matters which are of a special, unique and extraordinary character and a violation of any of the terms of this Section 12.13 will cause irreparable injury to Purchaser, the amount of which will be impossible to estimate or determine and which cannot be adequately compensated. Therefore, the Companies and Purchaser will be entitled to an injunction, restraining order or other equitable relief from any court of competent jurisdiction in the event of any breach of this Section 12.13. The rights and remedies provided by this Section 12.13 are cumulative and in addition to any other rights and remedies which the Companies and Purchaser may have hereunder or at law or in equity. Section 12.14. Insurance. (a) The parties shall take all reasonable actions to ensure that, following the Closing, the Companies and their Subsidiaries shall have access to the insurance policies maintained by Parent and its Affiliates for their benefit prior to Closing, with respect to claims relating to pre-closing occurrences ("Pre-Closing Claims"). To the extent reasonably feasible, Parents and Sellers shall assign to Purchaser or the Companies the right to directly pursue claims under such policies. To the extent it is not feasible to do so, then Parent and Sellers shall use their reasonable best efforts to pursue such Pre-Closing Claims on behalf of Purchaser and the Companies to the extent losses relating to such Pre-Closing Claims are recoverable under such insurance policies. Any insurance proceeds actually recovered by Parent, Sellers or such Affiliates with respect to such claims shall be deemed the property of Purchaser and the Companies and shall be remitted to Purchaser promptly following receipt thereof. Purchaser shall 68 73 be obligated to reimburse Parent for any reasonable costs or expenses incurred by Parent, Seller or their Affiliates in connection with the performance of their obligations under this Section 12.14. (b) Following the Closing (i) Purchaser shall submit to the appropriate insurer, with a copy to Parent, all claims under the fixed cost insurance policies listed in Section 12.14. of the Parent Disclosure Letter as promptly as practicable after receipt of notice such claim, and (ii) Purchaser shall notify Parent of all claims under the loss sensitive insurance policies listed in Section 12.14 of the Parent Disclosure Letter, in each case, as promptly as practicable after such time as the costs associated with such claim exceed 50% of the applicable retention amount for such policy set forth in Section 12.14 of the Parent Disclosure Letter. Notwithstanding the foregoing, Parent shall not be required to institute litigation pursuant to this Section 12.14 (unless Purchaser provides Parent and Sellers with indemnification arrangements for all costs and expenses reasonably satisfactory to Parent incurred by Parent and Sellers in connection therewith and unless such litigation is reasonable under the circumstances). Section 12.15. Specific Performance. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement required to be performed prior to the Closing were not performed in accordance with the terms hereof and that, prior to the Closing, the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at Law or in equity. Section 12.16. Effectiveness. This Agreement shall become effective immediately upon execution of this Agreement by Parent and Purchaser, and Parent agrees to cause the Sellers and Companies to execute this Agreement promptly following execution by Parent hereof. This Agreement shall be deemed effective with respect to all parties hereto as of the date this Agreement is executed by Parent and Purchaser. 69 74 IN WITNESS WHEREOF the parties have hereunto caused this Agreement to be duly executed as of the date first above written. STARWOOD HOTELS & RESORTS WORLDWIDE, INC. By: /s/ Barry Sternlicht --------------------------------- Name: Barry Sternlicht Title: Chairman and Chief Executive Officer ITT SHERATON CORPORATION By: /s/ Barry Sternlicht --------------------------------- Name: Barry Sternlicht Title: President and Chief Executive Officer STARWOOD CANADA CORP. By: /s/ Fred Kleisner --------------------------------- Name: Fred Kleisner Title: President CAESARS WORLD, INC. By: /s/ Peter Boynton --------------------------------- Name: Peter Boynton Title: Chairman and Chief Executive Officer SHERATON DESERT INN CORPORATION By: /s/ Marc H. Rubinstein --------------------------------- Name: Marc H. Rubinstein Title: Senior Vice President and General Counsel SHERATON TUNICA CORPORATION By: /s/ Betty M. Wilson --------------------------------- Name: Betty M. Wilson Title: Treasurer PARK PLACE ENTERTAINMENT CORPORATION By: /s/ Arthur M. Goldberg --------------------------------- Name: Arthur M. Goldberg Title: President and Chief Executive Officer 70 EX-10.6 6 EX-10.6 1 EXHIBIT 10.6 SEPARATION AGREEMENT THIS SEPARATION AGREEMENT (this "Agreement"), dated as of April 30, 1999, is by and between STARWOOD HOTELS & RESORTS WORLDWIDE, INC., a Maryland corporation having offices at 777 Westchester Avenue, Suite 400, White Plains, New York 10604 (the "Company"), and RICHARD D. NANULA ("Employee"). RECITALS WHEREAS, pursuant to an Amended and Restated Employment Agreement dated as of April 15, 1998, between the Company and the Employee (the "Employment Agreement"), Employee is employed by the Company as its President and Chief Operating Officer and serves as a director of the Company; and WHEREAS, Employee desires to resign his employment with the Company and his position as President and Chief Operating Officer and all other director, officer and employee positions, if any, held by Employee in the Company or any of its subsidiaries effective as of April 30, 1999 (the "Termination Date"); and WHEREAS, the parties desire to set forth their respective rights and obligations in respect of Employee's resignation from the above positions; NOW, THEREFORE, in consideration of the covenants and conditions set forth herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties, intending to be legally bound, agree as follows: AGREEMENT 1. Resignation. (a) Effective as of the Termination Date, Employee will resign from his position as President and Chief Operating Officer, and all other director, officer and employee positions held by Employee in the Company or any of its subsidiaries. It is agreed by the parties that, on and as of the Termination Date, all rights and obligations of Employee and the Company with respect to such employment shall terminate. (b) On the Termination Date, Employee will deliver to the Company a letter of resignation in the form of EXHIBIT A hereto and a certificate of release in the form of EXHIBIT B hereto, and the Company will deliver a certificate of release in the form of EXHIBIT C hereto. 2. Benefits. In consideration of the agreements of Employee herein, Employee will be entitled to the benefits set forth in this Section 2. 2 (a) Salary. On the Termination Date, the Company shall wire transfer to an account specified by Employee $1,175,000. In addition, the Company will pay Employee $48,958.33 per month for a period of 24 months from and after the Termination Date, such amount to be payable in accordance with the Company's regular payroll policies as in effect from time to time. All payments to Employee under this Section 2(a) will be less applicable withholdings for federal, state and local taxes. (b) Stock Options. Options to purchase up to 250,000 shares of the Company's common stock at $24 per share previously awarded to the Employee shall vest on the Termination Date and be exercisable by Employee at any time prior to the close of business on December 31, 1999. Any and all other stock options, awards, warrants or similar rights to purchase the Company's common stock previously awarded to the Executive under the Company's Long-Term Incentive Plan, the Employment Agreement or otherwise shall terminate on, and be null and void after, the Termination Date. (c) Restricted Stock Units. Nothing in this Agreement shall be construed to in any way modify, impede or impair Employee's rights in respect of the 300,000 Restricted Stock Units awarded to Employee under the Company's 1995 Long-Term Incentive Plan pursuant to the terms of the Employment Agreement, and each provision of the Employment Agreement relating to such Restricted Stock Units shall, notwithstanding any other provision of this Agreement, continue in full force and effect as though incorporated herein by reference and made a part hereof. (d) Office. For a period of one year from and after the Termination Date, or until the date Employee becomes employed by an entity other than the Company, whichever occurs first, the Company will provide Employee with reasonable office space at a location in Greenwich, Connecticut to be determined by the Company and reasonable attendant office services such as telephone, telecopier, computer and office supplies, together with the services of one full-time secretary who shall not be an employee of the Company, who shall be compensated by the Company at the current base salary of the Employee's current secretary, and which secretary must be reasonably acceptable to Employee. Notwithstanding the foregoing, Executive may elect at any time by written notice to the Company to maintain his office in his home, in which case the Company shall, in lieu of providing Executive with an office and paying the expenses of attendant office services, pay Executive a monthly stipend on the fifteenth day of each calendar month of $3,500. (e) Directors and Officers Insurance/Indemnification. Employee will continue to be covered under the Company's directors and officers insurance policy for the period during which he served as an officer or director of the Company, and shall be entitled to such other indemnification as is required by applicable law. (f) Expenses. The Company shall reimburse Employee for any reasonable business expenses incurred in the performance of his duties for the Company prior to the Termination Date in accordance with the Company's generally applicable policies, subject to appropriate documentation and review. -2- 3 (g) No Other Benefits. Employee acknowledges that he is not entitled to receive benefits from the Company other than as set forth in this Section 2, except for any benefits afforded Employee by applicable law (including, without limitation, Section 601 et.seq. of ERISA). 3. Termination of All Existing Agreements. Except as otherwise expressly provided herein, all rights and obligations of the Company and the Employee under the Employment Agreement, and any other agreement, arrangement or understanding between the Company and the Employee are hereby canceled and terminated as of the Termination Date without liability of any party thereunder. 4. No Solicitation. Employee hereby represents and warrants that during the six month period preceding the date of this Agreement he has not (i) solicited any customers of the Company or induced any customer of the Company to enter into a business relationship with Employee or any other person or (ii) solicited for employment or induced any person currently employed by the Company to terminate employment. The provisions of Section 4.03 of the Employment Agreement, entitled "Inducing of Company Employees", shall, notwithstanding any other provision of this Agreement, continue in full force and effect as though incorporated herein by reference and made a part hereof. 5. Retained Property. Within five (5) business days of the Termination Date, Employee shall return all property of the Company in his possession, including, but not limited to, credit cards, security key cards, telephone cards, car service cards, computer software or hardware, Company identification cards, Company records and copies of records, correspondence and copies of correspondence and other books or manuals issued by the Company. Employee also warrants that he has no debts to or loans from the Company. Notwithstanding the foregoing, Employee shall have the right to retain all personal property of the Employee located on the premises of the Company. Notwithstanding the foregoing provisions of this Section 6, Employee shall be entitled to retain any business equipment made available for his use at his personal residence and any other portable business equipment furnished for his use by the Company, and upon execution of this Agreement, Employee will reimburse the Company for the reasonable cost of such equipment, as determined by the Company. 6. Confidentiality. Employee acknowledges that he has had and through the Termination Date will continue to have access to Confidential Information (as hereinafter defined) of the Company. Except to the extent required pursuant to any law, court order or similar process (based on the written opinion of counsel). Employee agrees not to disclose, communicate or divulge to, or use for the direct or indirect benefit of, any person (including Employee), firm, association or other entity (other than the Company or its affiliates) any Confidential Information. "Confidential Information" includes, but is not limited to, customer and vendor lists, database, computer programs, frameworks, models, marketing programs, sales, financial, marketing, training and technical information, business methods, business policies, procedures, techniques, research or development projects or results, trade secrets (which Employee agrees include the Company's customer and prospective customer lists), pricing policies, business plans, computer software, intellectual property, information concerning how the Company creates, develops, acquires or maintains its products and marketing plans, targets -3- 4 its potential customers, and operates its retail and other businesses, other than information which is otherwise available in the public domain (other than by reason of the breach by Employee of any confidentiality agreement with the Company) or which was known to Employee prior to the date as of which he commenced employment with the Company. If any person (including any government employee) requests the disclosure or release of Confidential Information, Employee shall (i) promptly notify the Company of such request so that the Company may pursue any available remedies to prevent the disclosure or release of such Confidential Information and (ii) furnish the Company a copy of all written materials pertaining to such request for Confidential Information as the Company shall deem appropriate. 7. Non-Disparagement. Employee covenants and agrees not to engage in any act or say anything that is intended, or may reasonably be expected, to harm the reputation, business, prospects or operations of the Company, its officers, directors, stockholders or employees. The Company agrees that its sole remedy for the breach of this Section 7 by Employee shall be to withhold any benefits remaining to be paid to Employee under Section 2 hereof from and after the date of such breach. The Company and Barry S. Sternlicht, the Company's Chairman of the Board and Chief Executive Officer, agree that they will not engage in any act or make any announcement which is intended to harm the reputation, business or prospects of Employee. However, nothing in this Agreement shall restrict the Company or Mr. Sternlicht from making disclosure or taking any action required by law. The Company will notify its directors and officers, in writing, of the agreement between the Company, the Employee and Mr. Sternlicht as set forth in this Section 7 and will advise such directors and officers not to engage in any act or say anything that is intended to harm the reputation, business or prospects of Employee. The parties hereby agree that any reasonable comments or statements that are necessary or appropriate to correct or refute any statement made by the other party or any of its affiliates which is in breach of such other party's covenants and agreements under this Section 7 shall not be deemed in breach of the provision of this Section 7 or the provisions of Section 14. 8. No Inducements. Employee warrants that he is entering into this Agreement voluntarily, and that, except as set forth herein, no promises or inducements for this Agreement have been made, and he is entering into this Agreement without reliance upon any statement or representation by any of the Company and its affiliates, and its and their present and former stockholders, directors, officers, employees, agents, attorneys, successors and assigns or any other person, concerning any fact material hereto. 9. Arbitration. In the event of any controversy, dispute or claim arising out of or related to this Agreement or Executive's employment by the Company (including, without limitation, any dispute or claim under Section 7 hereof), the parties shall negotiate in good faith in an attempt to reach a mutually acceptable settlement of such dispute. If negotiations in good faith do not result in a settlement of any such controversy, dispute or claim, it shall, except as otherwise provided for herein, be finally settled by expedited arbitration conducted by a single arbitrator selected as hereinafter provided (the "Arbitrator") in accordance with the National Rules, subject to the following (the parties hereby agreeing that, notwithstanding the provisions of Rule 1 of the National Rules, in the event that there is a conflict between the provisions of the National Rules and the provisions of this Agreement, the provisions of this Agreement shall control): -4- 5 (a) The Arbitrator shall be determined from a list of names of five impartial arbitrators each of whom shall be an attorney experienced in arbitration matters concerning executive employment disputes, supplied by the American Arbitration Association chosen by Executive and the Company each in turn striking a name from the list until one name remains (with the Company being the first to strike a name). (b) The Arbitrator shall assess the costs of the proceeding, including the prevailing party's reasonable attorneys' fees on any unsuccessful party to the extent the Arbitrator concludes that such party is unsuccessful unless he or she concludes that matters of equity or important considerations of fairness dictate otherwise. (c) The Arbitrator shall determine whether and to what extent any party shall be entitled to damages under this Agreement; provided that no party shall be entitled to punitive or consequential damages (including, in the case of the Company, any claim for alleged lost profits or other damages that would have been avoided had Executive remained an employee), and each party waives all such rights, if any. (d) The Arbitrator shall not have the power to add to nor modify any of the terms or conditions of this Agreement. The Arbitrator's decision shall not go beyond what is necessary for the interpretation and application of the provision(s) of this Agreement in respect of the issue before the Arbitrator. The Arbitrator shall not substitute his or her judgment for that of the parties in the exercise of rights granted or retained by this Agreement. The Arbitrator's award or other permitted remedy, if any, and the decision shall be based upon the issue as drafted and submitted by the respective parties and the relevant and competent evidence adduced at the hearing. (e) The Arbitrator shall have the authority to award any remedy or relief (including provisional remedies and relief) that a court of competent jurisdiction could order or grant; provided, however, that if the Company brings any action against Executive (whether or not pursuant to the provisions of Section 10 hereof) based in whole or in part upon any action or omission alleged to have occurred prior to the date hereof, and the arbitrator finds that the action was frivolous, in bad faith or without any factual basis, then, in addition to any other relief the arbitrator determines to award, the arbitrator shall order the Company to pay to Executive the balance, if any, remaining to be paid under Section 2(a) in a single lump sum within 5 business days of the date of the arbitrator's ruling in favor of Executive and such payment shall in no respect modify or otherwise limit in any respect any obligation of the Company to Executive under any provision of this Agreement other than Section 2(a). The Arbitrator's written decision shall be rendered within sixty days of the closing of the hearing. The decision reached by the Arbitrator shall be final and binding upon the parties as to the matter in dispute. To the extent that the relief or remedy granted by the Arbitrator is relief or remedy on which a court could enter judgment, a judgment upon the award rendered by the Arbitrator shall be entered in any court having jurisdiction thereof (unless in the case of any award of damages, the full amount of the award is paid within 10 days of its determination by the Arbitrator). Otherwise, the award shall be binding on the parties in connection with their continuing performance of this Agreement and in any subsequent arbitral or judicial proceedings between the parties. (f) The arbitration shall take place in New York, New York. -5- 6 (g) The arbitration proceeding and all filing, testimony, documents and information relating to or presented during the arbitration proceeding shall be disclosed exclusively for the purpose of facilitating the arbitration process and in any court proceeding relating to the arbitration, and for no other purpose, and shall be deemed to be information subject to the confidentiality provisions of this Agreement. (h) The parties shall continue performing their respective obligations under this Agreement notwithstanding the existence of a dispute while the dispute is being resolved unless and until such obligations are terminated or expire in accordance with the provisions hereof. (i) The parties may obtain a pre-hearing exchange of information including depositions, interrogatories, production of documents, exchange of summaries of testimony or exchange of statements of position, and the Arbitrator shall limit such disclosure to avoid unnecessary burden to the parties and shall schedule promptly all discovery and other procedural steps and otherwise assume case management initiative and control to effect an efficient and expeditious resolution of the dispute. At any oral hearing of evidence in connection with an arbitration proceeding, each party and its counsel shall have the right to examine its witness and to cross-examine the witnesses of the other party. No testimony of any witness, or any evidence, shall be introduced by affidavit, except as the parties otherwise agree in writing. (j) Notwithstanding the dispute resolution procedures contained in this Section 9, either party may apply to any court sitting in the County, City and State of New York (i) to enforce this agreement to arbitrate, (ii) to seek provisional injunctive relief so as to maintain the status quo until the arbitration award is rendered or the dispute is otherwise resolved, (iii) to confirm any arbitration award, or (iv) to challenge or vacate any final judgment, award or decision of the Arbitrator that does not comport with the express provisions of this Section 9. 10. Reservation of Rights. Notwithstanding anything in this Agreement, if the Company reasonably determines after the Termination Date that the Employee in the course of his employment with the Company has acted in bad faith or taken any other actions that are dishonest, illegal, a breach of the duty of loyalty or ultra vires and any such actions could reasonably harm the Company, the Company may, in lieu of making any cash payments required to be made to Executive hereunder, deposit such amounts in escrow with a bank having assets in excess of $100,000,000, and commence an arbitration proceeding pursuant to Section 9. The escrow agent shall invest all amounts held by it in high quality short-term investments with the objective of preserving principal. If the arbitrator finds in favor of the Company on the question of whether Executive has engaged in such improper acts, the arbitrator shall direct the escrow agent promptly to pay the Company the amounts held in escrow (including, without limitation, any earnings thereon) and the Company shall have no obligation to make any further payments to Executive under any provision of Section 2 of this Agreement other than Sections 2(c) and (e). If the arbitrator finds in favor of Executive on such question, the arbitrator shall direct the escrow agent promptly to pay Executive the amounts held in escrow (including, without limitation, any earnings thereon). -6- 7 11. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersedes any and all prior agreements or understandings between the parties arising out of or relating to the Employee's employment and the cessation thereof. This Agreement may only be changed by written agreement executed by the parties. 12. Governing Law. This Agreement shall be governed by the laws of the State of New York, without giving effect to the conflicts of law principles thereof. 13. Representations and Warranties. (a) Each party represents and warrants to the other party that (i) the execution and delivery of this Agreement has been duly authorized and all actions necessary for the due execution of this Agreement have been taken, (ii) this Agreement constitutes the legal, valid and binding obligation of the party, and (iii) this Agreement has been executed and delivered as its own free act and deed and not as the result of duress by the other party hereto. (b) Employee specifically represents and warrants to the Company that (i) on the date hereof he is, and on and as of the Termination Date he will be, less than 40 years of age, and (ii) that he has consulted legal counsel prior to executing this Agreement. 14. Public Announcement. Employee is required to request and receive approval of the Company of the content of any voluntary statements, whether oral or written, to be made by Employee to any third party or parties regarding Employee's termination of employment, including, without limitation, any press release or other statements to the press, except that this Section shall not apply to any statements required to be made by reason of law, regulation, or any judicial or other similar proceeding or order. Employee hereby covenants and agrees not to make any public statements to any third party, including, without limitation, to any representative of any news organization, which is inconsistent in any material respect with the agreed upon statements to the public. 15. No Admissions. Nothing contained in this Agreement shall be considered an admission by either party of any wrongdoing or liability under any Federal, state or local statute, public policy, tort law, contract law, common law or otherwise. 16. Expenses. Except to the extent otherwise provided in Section 9, each party shall pay its own costs incident to the negotiation, preparation, performance, execution, and enforcement of this Agreement, and all fees and expenses of its or his counsel, accountants, and other consultants, advisors and representatives for all activities of such persons undertaken in connection with this Agreement. 17. Cooperation. Upon reasonable written notice and during reasonable business hours taking into account Employee's business commitments, Employee agrees to cooperate reasonably with the Company and its affiliates in the defense of any claim asserted against them and as to which Employee has, or may have, knowledge. The Company agrees to reimburse Employee for any regular and ordinary expenses incurred in connection with such cooperation. -7- 8 18. No Third Party Claims. Employee represents and warrants that no other person or entity has, or to the best knowledge of Employee, claims, any interest in any potential claims, demands, causes of action, obligations, damages or suits pursuant to this Agreement; that he is the owner of all other claims, demands, causes of action, obligations, damages or suits pursuant to this Agreement; that he has full and complete authority to execute this Agreement; and that he has not sold, assigned, transferred, conveyed or otherwise disposed of any claim, demand, cause of action, obligation or liability subject to this Agreement. 19. No Third Party Beneficiaries. Except as expressly stated herein, the parties do not intend to make any person or entity who is not a party to this Agreement a beneficiary hereof, and this Agreement should not be construed as being made for the benefit of any person or entity not expressly provided for herein. 20. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall be one and the same instrument. 21. Future Employment. Employee hereby waives any right to reinstatement or future employment with the Company following the Termination Date. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. STARWOOD HOTELS & RESORTS WORLDWIDE, INC. By: /s/ Barry S. Sternlicht ------------------------------------------- Name: Barry S. Sternlicht Title: Chairman and Chief Executive Officer EMPLOYEE /s/ Richard D. Nanula ----------------------------------------------- Richard D. Nanula -8- EX-27.1 7 EX-27.1
5 EPS HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO. 128, AND BASIC AND DILUTED EPS HAVE BEEN ENTERED IN THE PRIMARY AND FULLY DILUTED LINE ITEMS, RESPECTIVELY. 0000316206 STARWOOD HOTELS & RESORTS WORLDWIDE, INC. 1,000,000 U.S. DOLLARS 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1 180 0 519 54 58 787 3,648 920 13,137 1,478 6,183 148 0 4 3,437 13,137 0 851 0 708 0 0 120 17 942 (925) (7) 0 0 (932) (4.90) (4.90)
EX-27.2 8 EX-27.2
5 EPS HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO. 128, AND BASIC AND DILUTED EPS HAVE BEEN ENTERED IN THE PRIMARY AND FULLY DILUTED LINE ITEMS, RESPECTIVELY. 0000048595 STARWOOD HOTELS & RESORTS 1,000,000 U.S. DOLLARS 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1 0 0 2,678 0 0 57 4,627 187 8,656 203 645 148 0 2 7,727 8,656 0 184 0 44 0 0 15 125 1 124 0 0 0 124 0.65 0.61
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