Item 1. Business.
General
Starwood is one of the world’s largest hotel and leisure companies. Starwood’s status as one of the leading hotel and leisure companies resulted from the 1998 acquisition of Westin Hotels & Resorts Worldwide, Inc. and certain of its affiliates (“Westin”) (the “Westin Merger”) and the acquisition of ITT Corporation (the
“ITT Merger”), renamed Sheraton Holding Corporation (“Sheraton Holding”). The Company conducts its hotel and leisure business both directly and through its subsidiaries. The Company’s brand names include St. Regis®, The Luxury Collection®, Sheraton®, Westin®, W® and Four Points® by Sheraton. Through these brands, Starwood is well represented in most major markets around the world.(1)
The Company’s revenue and earnings are derived primarily from hotel and leisure operations, which include the operation of the Company’s owned hotels; management fees earned from hotels the Company manages pursuant to long-term management contracts; the receipt of franchise fees; and the development, ownership and operation of vacation ownership resorts, marketing and selling VOIs in the resorts and providing financing to customers who purchase such interests.
The Company’s hotel and leisure business emphasizes the global operation of hotels and resorts primarily in the luxury and upscale segment of the lodging industry. Starwood seeks to acquire interests in or management rights with respect to properties in this segment. At December 31, 2001, the Company’s portfolio included owned, managed and franchised hotels totaling 743 hotels with approximately 224,000 rooms in over 80 countries and 15 vacation ownership resorts, all in the United States. The hotel portfolio is comprised of 165 hotels that Starwood owns or leases or in which Starwood has a majority equity interest (substantially all of which hotels Starwood also manages), 265 hotels managed by Starwood on behalf of third-party owners (including entities in which Starwood has a minority equity interest) and 313 hotels for which Starwood receives franchise fees.
The Trust was organized in 1969, and the Corporation was incorporated in 1980, both under the laws of Maryland. Sheraton Hotels & Resorts, Starwood’s largest brand, has been serving guests for more than 60 years.
The Company’s principal executive offices are located at 1111 Westchester Avenue, White Plains, New York 10604, and its telephone number is (914) 640-8100.
For a discussion of the Company’s revenues, profits, assets and geographical segments, see the notes to financial statements of this Joint Annual Report. For additional information concerning the Company’s business, see Item 2, “Properties,” of this Joint Annual Report.
Competitive Strengths
Management believes that the following factors contribute to the Company’s position as a leader in the lodging industry and provide a foundation for the Company’s business strategy:
Brand Strength. Starwood believes that it has strong brand leadership in major markets worldwide based on the global recognition of the Company’s lodging brands. The strength of the Company’s brands is evidenced, in part, by the superior ratings received from the Company’s hotel guests and from industry publications. For example, Starwood was again designated as the “World’s Best Global Hotel Company” by Global Finance magazine in their September 2001 issue. Also, for the third year in a row, Starwood brands took top honors in Business Travel News’ 2001 Survey of Top Hotel Chains. W Hotels and Westin Hotels & Resorts earned first and second place in the upscale category, and Four Points by Sheraton was voted number one in the mid-price category. With the Company’s well known lodging brands, Starwood benefits from a luxury and upscale branding strategy that provides strong operating performance from new customer penetration and customer loyalty. During 2001, Starwood converted four of its owned hotels, which had been operated on a non-branded or non-proprietary-branded basis, to proprietary brands owned by the Company. These conversions have enhanced and expanded the Company’s global presence and brand recognition. In 2001, the Company also added an additional 48 hotels with approximately 9,800 rooms to its branded hotel system. In total, approximately 1,500 rooms were added to the W brand in 2001.
(1)
The Company owns or has rights to various 	trademarks, trade names and service marks used in our business, 	including those listed above, and related logos. This Joint 	Annual Report also includes trademarks, trade names and service 	marks owned by other companies. 	
Frequent Guest Program. The Company’s loyalty program, Starwood Preferred Guest® (“SPG”), was awarded the 2000 Hotel Program of the Year for the second year in a row by consumers via the prestigious Freddie Awards. SPG, despite being the newest hotel loyalty program in the industry, also received awards for Best Customer Service, Best Web Site, Best Elite-Level Program and Best Award Redemption. SPG, deemed unique in the hotel and leisure industry for its policy of no blackout dates and no capacity controls, enables members to redeem stays when they want and where they want, a feature not offered by competitors.
Significant Presence in Top Markets. The Company’s luxury and upscale hotel and resort assets are well positioned in North America, Europe, Asia, Latin America and Africa. These assets are primarily located in major cities and resort areas that management believes have historically demonstrated a strong breadth, depth and growing demand for luxury and upscale hotels and resorts, in which the supply of sites suitable for hotel development has been limited and in which development of such sites is relatively expensive.
Premier and Distinctive Properties. Starwood controls a distinguished and diversified group of hotel properties throughout the world, including The St. Regis in New York, New York; The Phoenician in Scottsdale, Arizona; the Hotel Danieli in Venice, Italy; and the Westin Palace in Madrid, Spain. These are among the leading hotels in the industry and are at the forefront of providing the highest quality and service. The Condé Nast Traveler Magazine 2002 Gold List Readers’ Choice Poll included 56 Starwood properties as part of the top hotels to stay at in the world. Starwood owns or manages more Gold List winners than any other hotel company in the world.
Scale. As one of the largest hotel and leisure companies focusing on the luxury and upscale full-service lodging market, Starwood has the scale to support its core marketing and reservation functions. The Company also believes that its scale will contribute to lowering its cost of operations through purchasing economies in such areas as insurance, energy, telecommunications, employee benefits, food and beverage, furniture, fixtures and equipment and operating supplies.
Diversification of Cash Flow and Assets. Management believes that the diversity of the Company’s brands, market segments served, revenue sources and geographic locations provides a broad base from which to enhance revenue and profits and to strengthen the Company’s global brands. This diversity limits the Company’s exposure to any particular lodging asset, brand or geographic region.
While Starwood focuses on the luxury and upscale portion of the full-service lodging market, the Company’s brands cater to a diverse group of sub-markets within this market. For example, the St. Regis hotels cater to high-end hotel and resort clientele while Four Points by Sheraton hotels deliver extensive amenities and services at more affordable rates. Management believes that the diversity of the Company’s brands and customer base reduces the likelihood of competition for customers at any one of the Company’s hotels from other hotels within its portfolio. Instead, management believes that this diversity serves to increase the Company’s market share within markets where Starwood operates more than one brand.
Starwood derives its cash flow from multiple sources, including owned hotels, management and franchise fees, and VOI sales, and is geographically diverse with operations on six continents. The following table reflects the Company’s properties by revenue source as of December 31, 2001:
(a)
Includes wholly owned, majority owned and leased 	hotels. 	
The following table shows the Company’s geographical presence by major geographic area for the year ended December 31, 2001:
(a)
Excludes 15 vacation ownership resorts. 	
Business Segment and Geographical Information
Incorporated by reference in Note 21, “Business Segment and Geographical Information,” in the notes to financial statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data.”
Business Strategy
The Company’s primary business objective is to maximize earnings and cash flow by increasing the profitability of the Company’s existing portfolio; selectively acquiring interests in additional assets; increasing the number of the Company’s hotel management contracts and franchise agreements; acquiring, developing and selling VOIs; and maximizing the value of its owned real estate properties, including selectively disposing of non-core hotels and “trophy” assets that may be sold at significant premiums. The Company plans to meet these objectives by leveraging its global assets, broad customer base and other resources and by taking advantage of the Company’s scale to reduce costs. The September 11 Attacks and their aftermath make financial planning and implementation of our strategy more challenging.
Growth Opportunities. Management has identified several growth opportunities with a goal of enhancing the Company’s operating performance and profitability, including:
•
Continuing to expand the Company’s role as a 	third-party manager of hotels and resorts. This allows Starwood 	to expand the presence of its lodging brands and gain additional 	cash flow generally with modest capital commitment; 	
•
Franchising the Sheraton, Westin and Four Points 	by Sheraton brands to selected third-party operators, thereby 	expanding the Company’s market presence, enhancing the 	exposure of its hotel brands and providing additional income 	through franchise fees; 	
•
Expanding the Company’s internet presence 	and sales capabilities to increase revenue and improve customer 	service; 	
•
Continuing to grow the Company’s frequent 	guest program, thereby increasing occupancy rates while 	providing the Company’s customers with benefits based upon 	loyalty to the Company’s hotels; 	
•
Enhancing the Company’s marketing efforts by 	integrating the Company’s proprietary customer databases, 	so as to sell additional products and services to existing 	customers, improve occupancy rates and create additional 	marketing opportunities; 	
•
Optimizing the Company’s use of its real 	estate assets to improve ancillary revenue, such as restaurant, 	beverage and parking revenue from the Company’s hotels and 	resorts; 	
•
Continuing to build the “W” hotel brand 	to appeal to upscale business travelers and other customers 	seeking full-service hotels in major markets; 	
•
Refining the positioning of the Company’s 	brands to further its strategy of strengthening brand identity. 	By re-branding certain owned hotels to one of Starwood’s 	proprietary brands, Starwood will seek to further solidify its 	brand reputation and market presence, leading to enhanced 	revenue per available room (“REVPAR”), which we 	consider to be a meaningful indicator of our performance, as it 	measures the period-over-period growth in rooms revenue for 	comparable properties; 	
•
Developing additional vacation ownership resorts 	near select hotel locations, thereby allowing us to leverage our 	hotel assets; and 	
•
Becoming the first hospitality company in the 	world to embrace Six Sigma, the internationally recognized 	program that dramatically accelerates and maximizes business 	performance. This initiative is expected to deliver significant 	long-term financial benefits. 	
Starwood intends to explore opportunities to expand and diversify the Company’s hotel portfolio through minority investments and selective acquisitions of properties domestically and internationally that meet some or all of the following criteria:
•
Luxury and upscale hotels and resorts in major 	metropolitan areas and business centers; 	
•
Major tourist hotels, destination resorts or 	conference centers that have favorable demographic trends and 	are located in markets with significant barriers to entry or 	with major room demand generators such as office or retail 	complexes, airports, tourist attractions or universities; 	
•
Undervalued hotels whose performance can be 	increased by re-branding to one of the Company’s hotel 	brands, the introduction of better and more efficient management 	techniques and practices and/or the injection of capital for 	renovating, expanding or repositioning the property; 	
•
Hotels or brands which would enable the Company 	to provide a wider range of amenities and services to customers; 	and 	
•
Portfolios of hotels or hotel companies that 	exhibit some or all of the criteria listed above, where the 	purchase of several hotels in one transaction enables Starwood 	to obtain favorable pricing or obtain attractive assets that 	would otherwise not be available. 	
Starwood may also selectively choose to develop and construct desirable hotels and resorts to help the Company meet its strategic goals, such as the development of the W Times Square, the conversion of the Days Inn Chicago to the W Lakeshore and the conversion of the Midland Hotel to the W Chicago, all completed in the second half of 2001.
Competition
The hotel and leisure industry is highly competitive. Competition is generally based on quality and consistency of room, restaurant and meeting facilities and services, attractiveness of locations, availability of a global distribution system, price and other factors. Management believes that Starwood competes favorably in
these areas. Starwood’s properties compete with other hotels and resorts, including facilities owned by local interests and facilities owned by national and international chains, in their geographic markets. The principal competitors of Starwood include other hotel operating companies, ownership companies (including hotel REITs) and national and international hotel brands.
Starwood encounters strong competition as a hotel and resort operator and developer. While some of the Company’s competitors are private management firms, several are large national and international chains that own and operate their own hotels, as well as manage hotels for third-party owners, under a variety of brands that compete directly with the Company’s brands. In addition, hotel management contracts are typically long-term arrangements, but most allow the hotel owner to replace the management firm if certain financial or performance criteria are not met.
Environmental Matters
Starwood is subject to certain requirements and potential liabilities under various federal, state and local environmental laws, ordinances and regulations (“Environmental Laws”). For example, a current or previous owner or operator of real property may become liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of hazardous or toxic substances may adversely affect the owner’s ability to sell or rent such real property or to borrow using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic wastes may be liable for the costs of removal or remediation of such wastes at the treatment, storage or disposal facility, regardless of whether such facility is owned or operated by such person. Starwood uses certain substances and generates certain wastes that may be deemed hazardous or toxic under applicable Environmental Laws, and Starwood from time to time has incurred, and in the future may incur, costs related to cleaning up contamination resulting from historic uses of certain of the Company’s current or former properties or the Company’s treatment, storage or disposal of wastes at facilities owned by others. Other Environmental Laws require abatement or removal of certain asbestos-containing materials (“ACMs”) (limited quantities of which are present in various building materials such as spray-on insulation, floor coverings, ceiling coverings, tiles, decorative treatments and piping located at certain of the Company’s hotels) in the event of damage or demolition, or certain renovations or remodeling. These laws also govern emissions of and exposure to asbestos fibers in the air. Environmental Laws also regulate polychlorinated biphenyls (“PCBs”), which may be present in electrical equipment. A number of the Company’s hotels have underground storage tanks (“USTs”) and equipment containing chlorofluorocarbons (“CFCs”); the operation and subsequent removal or upgrading of certain USTs and the use of equipment containing CFCs also are regulated by Environmental Laws. In connection with the Company’s ownership, operation and management of its properties, Starwood could be held liable for costs of remedial or other action with respect to PCBs, USTs or CFCs.
Environmental Laws are not the only source of environmental liability. Under the common law, owners and operators of real property may face liability for personal injury or property damage because of various environmental conditions such as alleged exposure to hazardous or toxic substances (including, but not limited to, ACMs, PCBs and CFCs), poor indoor air quality, radon or poor drinking water quality.
Although Starwood has incurred and expects to incur remediation and other environmental costs during the ordinary course of operations, management anticipates that such costs will not have a material adverse effect on the operations or financial condition of the Company.
Seasonality and Diversification
The hotel and leisure industry is seasonal in nature; however, the periods during which the Company’s properties experience higher revenue activities vary from property to property and depend principally upon location. Other than 2001, which was dramatically impacted by the September 11 Attacks, the Company’s
revenues and EBITDA(1) historically have been lower in the first quarter than in the second, third or fourth quarters.
Comparability of Owned Hotel Results
Starwood continually updates and renovates its owned, leased and consolidated joint venture hotels. While undergoing renovation, these hotels are generally not operating at full capacity and, as such, these renovations can initially negatively impact Starwood’s revenues and EBITDA.
Employees
At December 31, 2001, Starwood employed approximately 115,000 persons at its corporate offices, owned and managed hotels and vacation ownership resorts, of whom approximately 42% were employed in the United States. At December 31, 2001, approximately 34% of the U.S.-based employees were covered by various collective bargaining agreements providing, generally, for basic pay rates, working hours, other conditions of employment and orderly settlement of labor disputes. Generally, labor relations have been maintained in a normal and satisfactory manner, and management believes that the Company’s employee relations are good.
Item 2.
Item 2. Properties.
Starwood is one of the largest hotel and leisure companies in the world, with operations in over 80 countries. Starwood considers its hotels generally to be premier establishments with respect to desirability of location, size, facilities, physical condition, quality and variety of services offered in the markets in which they are located. Although obsolescence arising from age and condition of facilities can adversely affect the Company’s hotels and resorts, Starwood and third-party owners of managed and franchised hotels expend substantial funds to renovate and maintain their facilities in order to remain competitive. For further information, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Capital Expenditures,” in this Joint Annual Report.
The Company’s hotel and leisure business included 743 owned, managed or franchised hotels with approximately 224,000 rooms and 15 vacation ownership resorts at December 31, 2001, predominantly under six brands. All brands are full-service properties that range in amenities from luxury, upscale hotels and resorts to more moderately priced hotels:
St. Regis Hotels & Resorts (luxury full-service hotels and resorts) deliver the most discreet, personalized and anticipatory level of service to high-end leisure and business travelers. St. Regis hotels typically have individual design characteristics to accentuate each individual location and city. Most St. Regis hotels have spacious, luxurious rooms and suites with highly designed, residential surroundings and include a 4- or 5-Star restaurant on premise.
The Luxury Collection (luxury full-service hotels and resorts) is a group of unique hotels and resorts offering exceptional service to an elite clientele. The Luxury Collection includes some of the world’s most renowned and legendary hotels. These hotels are distinguished by magnificent decor, spectacular settings and impeccable service.
Sheraton Hotels & Resorts (upscale full-service hotels and resorts) is the Company’s largest brand serving the needs of upscale business and leisure travelers worldwide. Sheraton hotels offer the entire spectrum of comfort, from full-service hotels in major cities to luxurious resorts. These hotels typically feature a wide
(1)
EBITDA is defined as income before interest 	expense, income tax expense, depreciation and amortization. 	Special 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 accounting 	principles generally accepted in the United States, 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. 	
variety of on-site business services and a full range of amenities including rooms that feature generous work spaces, allowing business travelers to stay productive on the road.
Westin Hotels & Resorts (luxury and upscale full-service hotels and resorts) are first-class, signature hotels that typically make up an integral part of a city or region in which the hotels are located. Westin hotels deliver unmatched comfort to affluent professional business and leisure travelers.
W Hotels (stylish boutique full-service urban hotels) was first established in December 1998 with the opening of the W New York. W hotels provide a unique hotel alternative to business travelers. W hotels feature modern, sophisticated design with custom-made furnishings and accessories, fully wired rooms with the most advanced technology in the industry, and unique, high-quality signature restaurants and bars.
Four Points by Sheraton (moderately priced full-service hotels) deliver extensive amenities and services such as room service, dry cleaning, fitness centers, meeting facilities and business centers to frequent business travelers at reasonable prices. These hotels provide a comfortable, well-appointed room, which typically includes a two-line telephone, a large desk for working or in-room dining, comfortable seating and full-service restaurants.
Owned Hotels
The following table summarizes REVPAR(1), average daily rates (“ADR”) and average occupancy rates on a year-to-year basis for the Company’s 155 owned, leased and consolidated joint venture hotels (excluding 2 hotels under significant renovation in 2001, 8 hotels without prior year results and 10 hotels sold during 2000 and 2001) (“Same-Store Owned Hotels”) for the years ended December 31, 2001 and 2000:
During the years ended December 31, 2001 and 2000, the Company invested approximately $477 million and $544 million, respectively, for capital improvements primarily at owned hotel assets. These capital expenditures included significant new growth investment for the acquisition of a second fully-entitled site adjacent to the San Francisco Museum of Modern Art. Other major expenditures during 2001 included the development of the W Times Square, the conversion of the Days Inn Chicago to the W Lakeshore and the conversion of the Midland Hotel to the W Chicago. During 2000, the Company also expanded the Westin Mission Hills Resort and completed significant renovation work at the Sheraton Bal Harbour and Westin Maui. Internationally, during 2000 the 100-room expansion of the Westin Turnberry Resort in Scotland, including the addition of a second golf course and the Colin Montgomerie links golf academy, was completed.
(1)
REVPAR is calculated by dividing rooms revenue, 	which is derived from rooms and suites rented or leased, by 	total room nights available for a given period. REVPAR may not 	be comparable to similarly titled measures such a revenues. 	
Hotel Management and Franchising
Hotel and resort properties in the United States are often owned by entities that neither manage hotels nor own a brand name. Hotel owners typically enter into management contracts with hotel management companies to operate their hotels. When a management company does not offer a brand affiliation, the hotel owner often chooses to pay separate franchise fees to secure the benefits of brand marketing, centralized reservations and other centralized administrative functions, particularly in the sales and marketing area. Management believes that companies, such as Starwood, that offer both hotel management services and well-established worldwide brand names appeal to hotel owners by providing the full range of management and marketing services.
Managed Hotels. Through its subsidiaries, Starwood manages hotels worldwide, usually under a long-term agreement with the hotel owner (including entities in which Starwood has a minority equity interest). The Company’s responsibilities under hotel management contracts typically include hiring, training and supervising the managers and employees that operate these facilities. For additional fees, Starwood provides reservation services and coordinates national advertising and certain marketing and promotional services. Starwood prepares and implements annual budgets for the hotels it manages and is responsible for allocating property-owner funds for periodic maintenance and repair of buildings and furnishings. At December 31, 2001, Starwood managed 265 hotels worldwide under long-term agreements.
Management contracts typically provide for base fees tied to gross revenue and incentive fees tied to profits. In the Company’s experience, owners seek hotel managers that can provide attractively priced base, incentive, marketing and franchise fees combined with demonstrated sales and marketing expertise and operations-focused management designed to enhance profitability. Some of the Company’s management contracts permit the hotel owner to terminate the agreement when the hotel is sold or otherwise transferred to a third party, as well as if Starwood fails to meet established performance criteria. In addition, many hotel owners seek equity, debt or other investments from Starwood to help finance hotel renovations or conversion to a Starwood brand so as to align the interests of the owner and the Company. The Company’s ability or willingness to make such investments may determine, in part, whether Starwood will be offered, will accept, or will retain a particular management contract. During 2001, the Company signed management agreements with 23 hotels with approximately 4,500 rooms.
Brand Franchising. Through its subsidiaries, Starwood franchises its Sheraton, Westin and Four Points by Sheraton brand names and generally derives licensing and other fees from franchisees based on a fixed percentage of the franchised hotel’s room revenue, as well as fees for other services, including centralized reservations, sales and marketing, public relations and national and international media advertising. In addition, a franchisee may also purchase hotel supplies, including brand-specific products, from certain Starwood-approved vendors. Starwood approves certain plans for, and the location of, franchised hotels and reviews their design. At December 31, 2001, there were 299 franchised properties with approximately 76,000 rooms operating under the Sheraton, Westin and Four Points by Sheraton brands. During 2001, the Company signed franchise agreements with 25 hotels with approximately 4,600 rooms.
Vacation Ownership Interest
The Company currently has 15 interval ownership resorts in its portfolio with 10 currently selling VOIs, two under construction and three that have sold all existing inventory. The Company invested $49 million and $114 million in 2001 and 2000, respectively, on vacation ownership resort construction. Two and three new interval ownership resorts were added in 2001 and 2000, respectively.
Item 3.
Item 3. Legal Proceedings.
Incorporated by reference to the description of legal proceedings in Note 20, “Commitments and Contingencies,” in the notes to financial statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data.”
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrants
See Part III, Item 10, of this Joint Annual Report for information regarding the executive officers of the Registrants, which information is incorporated herein by reference.
PART II
Item 5.
Item 5. Market for Registrants’ Common Equity and Related Stockholder Matters.
Market Information
The Shares are traded on the New York Stock Exchange (the “NYSE”) under the symbol “HOT.” The Class A Shares are all currently held by the Corporation and have never been traded.
The following table sets forth, for the fiscal periods indicated, the high and low sale prices per Share on the NYSE Composite Tape.
Holders
As of March 15, 2002, there were approximately 20,000 holders of record of Shares and one holder of record (the Corporation) of the Class A Shares.
Distributions Made/ Declared
The following table sets forth the frequency and amount of distributions made by the Trust to holders of Shares for the years ended December 31, 2001 and 2000:
(a)
The Trust declared distributions for the fourth 	quarter of 2001 and 2000 to shareholders of record on 	December 31, 2001 and 2000, respectively. The distributions 	were paid in January 2002 and 2001, respectively. 	
The Corporation has not paid any cash dividends since its organization and does not anticipate that it will make any such distributions in the foreseeable future.
As a consequence of the Reorganization, holders of Class B Shares are entitled, subject to certain conditions, to receive a non-cumulative annual dividend, which was set at an initial rate of $0.60 per Share for 1999, to the extent the dividend is authorized by the Board of Trustees of the Trust. The annual dividend was increased to an annual rate of $0.69 and $0.80 per Share in 2000 and 2001, respectively. We intend to shift from paying a quarterly dividend to holders of Shares to paying an annual dividend. The final determination of the amount of the dividends will be subject to economic and financial consideration, as well as approval by our Board of Trustees of the Trust. Unless dividends for the then current dividend period have been paid on the Class B Shares, the Trust is not permitted to pay a dividend on the Class A Shares (except in certain circumstances). Under the terms of the Company’s Senior Credit Facility, the Trust may pay unlimited dividends to the Corporation or any wholly owned subsidiary thereof and during any period of twelve consecutive calendar months, the Trust may pay cash dividends to its shareholders (excluding the Corporation and any wholly owned subsidiary) in an aggregate initial amount not to exceed the lesser of (a) $150,000,000 in 1999 and increasing 20% annually thereafter and (b) 10% of EBITDA as defined in the Senior Credit Facility. In September 2001 and November 2001, the Company obtained waivers of this dividend restriction from its lenders, allowing the Company to pay its regularly scheduled dividends for the third and fourth quarters of 2001.
Conversion of Securities; Sale of Unregistered Securities
During 2001, the Trust consented to the exchange of approximately 1,939,000 shares of Class B Exchangeable Preferred Shares (“Class B EPS”) by certain stockholders for an equal number of shares of Class A Exchangeable Preferred Shares (“Class A EPS”). Additionally, the Trust consented to the exchange of approximately 2.0 million shares of Class A EPS for an equal number of Shares.
During 2001, the Company exchanged approximately 1.8 million limited partnership units of the Realty Partnership and the Operating Partnership held by third parties for Shares on a one-for-one basis.
Item 6.
Item 6. Selected Financial Data.
The following financial and operating data should be read in conjunction with the information set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the
consolidated financial statements of the Company and related notes thereto appearing elsewhere in this Joint Annual Report and incorporated herein by reference. The historical information represents the historical results of Sheraton Holding up to the date of the ITT Merger, because the ITT Merger was treated as a reverse purchase for accounting purposes. This income statement and operating data excludes the results of the discontinued lines of business, which include the Company’s gaming operations, ITT Educational Services, Inc. (“Educational Services”) and ITT World Directories (“WD”), all of which were substantially disposed of in 1999 and 1998.
(a)
Excludes approximately $3.0 billion of 	consideration paid to Sheraton Holding stockholders in 	connection with the ITT Merger. 	
The following table presents a reconciliation of operating income to EBITDA (in millions):
(a)
Includes the Company’s share of depreciation 	expense of unconsolidated joint ventures. 	
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and costs and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments, including those relating to revenue recognition, bad debts, inventories, investments, plant, property and equipment, goodwill and intangible assets, income taxes, financing operations, frequent guest program liability, self-insurance claims payable, restructuring costs, retirement benefits and contingencies and litigation.
Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions and conditions.
On December 20, 2001, the Securities and Exchange Commission (“SEC”) requested that all registrants list their most “critical accounting policies” in MD&A. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of the Company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company believes that the following accounting policies fit this definition:
Revenue Recognition. The Company’s revenues are primarily derived from the following sources: (1) hotel and resort revenues at the Company’s owned, leased and consolidated joint venture properties; (2) management and franchise fees; (3) vacation ownership revenues; and (4) other revenues which are ancillary to the Company’s operations. Generally, revenues are recognized when the services have been rendered. The following is a description of the composition of revenues for the Company:
•
Owned, Leased and Consolidated Joint 	Ventures - Represents revenue primarily derived from 	hotel and leisure operations, including the rental of rooms and 	food and beverage sales, from a worldwide network of owned, 	leased or consolidated joint venture hotels and resorts operated 	primarily under the Company’s proprietary brand names 	including St. Regis, The Luxury Collection, Sheraton, Westin, W 	and Four Points by Sheraton. Revenue is recognized when rooms 	are occupied and services have been rendered. 	
•
Management and Franchise Fees - 	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 by Sheraton 	brand names. Management fees are comprised of a base fee, which 	is generally based on a percentage of gross revenues, and an 	incentive fee, which is generally based on the property’s 	profitability. Base fee revenues are recognized when earned in 	accordance with the terms of the contract. For any time during 	the year, incentive fees are recognized for the fees due as if 	the contract was terminated at that date, exclusive of any 	termination fees due or payable. Franchise fees are generally 	based on a percentage of hotel room revenues and are recognized 	in accordance with Statement of Financial Accounting Standards 	(“SFAS”) No. 45, “Accounting for Franchise 	Fee Revenue,” as the fees are earned and become due from 	the franchisee. Management and franchise fees are recognized in 	other hotel and leisure revenues in the consolidated statements 	of operations. 	
•
Vacation Ownership - The Company 	recognizes revenue from VOI sales in accordance with SFAS 	No. 66, “Accounting for Sales of Real Estate.” 	The Company recognizes sales when a minimum of 10% of the 	purchase price for the VOI has been received, the period of 	cancellation with refund has 	
expired and receivables are deemed collectible. 	For sales that do not qualify for full revenue recognition as 	the project has progressed beyond the preliminary stages but has 	not yet reached completion, all revenue and profit are initially 	deferred and recognized in earnings through the 	percentage-of-completion method. Vacation ownership revenues are 	recognized in other hotel and leisure revenues in the 	consolidated statements of operations. 	
Goodwill and Intangible Assets. Goodwill and intangible assets arise in connection with acquisitions, including the acquisition of management contracts, and are amortized using the straight-line method over the useful life of the asset. Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” In accordance with this guidance, the Company will cease amortizing goodwill and intangible assets with indefinite lives. Intangible assets with finite lives will continue to amortize on a straight-line basis over their respective useful lives. The Company will also review all goodwill and intangible assets for impairment by comparisons of fair value to book value annually, or upon the occurrence of a trigger event. Impairments, excluding those in the year of adoption, will be recognized in operating results. In connection with the adoption of this standard, the Company has completed its initial recoverability test on goodwill and intangible assets, which did not result in any impairment write-downs. Estimates based on existing goodwill and intangible assets indicate that adoption will result in an annual increase in net income of approximately $64 million in 2002.
Frequent Guest Program. SPG is the Company’s frequent guest incentive marketing program. SPG members earn points based on their spending at the Company’s properties and, to a lesser degree, through participation in affiliated partners’ programs, such as those offered by airlines. Points can be redeemed at most Company owned, leased, managed and franchised properties; however, points cannot be redeemed for cash.
SPG is provided as a marketing program to the Company’s properties. The cost of operating the program, including the estimated cost of award redemption, is charged to properties based on members’ qualifying expenditures. Revenue is recognized by participating hotels and resorts when points are redeemed for hotel stays.
The Company, through the services of third-party actuarial analysts, determines the fair value of the future redemption obligation based on statistical formulas which project timing of future point redemption based on historical experience, including an estimate of the “breakage” for points that will never be redeemed, and an estimate of the points that will eventually be redeemed. These factors determine the required liability for outstanding points. The Company’s management and franchise agreements require that the Company be reimbursed currently for the costs of operating the program, including marketing, promotion, communications with, and performing member services for the SPG members. Actual expenditures for SPG may differ from the actuarially determined liability.
The liability for the SPG program is included in other long-term liabilities and accrued expenses in the accompanying consolidated balance sheets. The total actuarially determined liability as of December 31, 2001 and 2000 is $159 million and $137 million, respectively.
Valuation of Long-Lived Assets and Investments. The Company evaluates the carrying value of each of the Company’s long-lived assets for impairment. The expected undiscounted future cash flows of the assets are compared to the net book value of the assets. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value is charged to current earnings. Fair value is based upon discounted cash flows of the assets at a rate deemed reasonable for the type of asset and prevailing market conditions, appraisals and, if appropriate, current estimated net sales proceeds from pending offers.
The Company also assesses the carrying value of its long-term investments. The fair market value of investments is based on the market prices for the last day of the period if the investment trades on quoted exchanges. For non-traded investments, fair value is estimated based on the underlying value of the investment, which is dependent on the performance of the companies or ventures in which the Company has invested, as well as the volatility inherent in external markets for these types of investments.
In assessing potential impairment for these investments, the Company will consider these factors as well as forecasted financial performance of its investees. If these forecasts are not met, the Company may have to record impairment charges. Thus, the carrying value of investments at December 31, 2001 approximates fair value based on market prices and the value of the underlying collateral.
The following discussion presents an analysis of results of our operations for the years ended December 31, 2001, 2000 and 1999.
Year Ended December 31, 2001 Compared with Year Ended December 31, 2000
Continuing Operations
The Company’s operating results for 2001 were dramatically impacted by the continued weakening of the general global economy and, in particular, the U.S. economy which was exacerbated by the September 11 Attacks, leading to an unprecedented decline in industry-wide demand in the U.S. and internationally. The initial closing of all airports in the United States and the significant decline in business and leisure travel following the September 11 Attacks resulted in significant decreases in revenues and earnings for September and the fourth quarter of 2001 when compared to the same periods in 2000. Immediately following the September 11 Attacks, the Company began developing operating plans commensurate with the reduced demand levels and began implementing cost reduction plans at all owned and managed hotels worldwide as well as corporate and division offices.
Revenues. Total revenues decreased 8.7% from $4.345 billion to $3.967 billion for the year ended December 31, 2001 when compared to the corresponding period in 2000. The decrease in revenues reflects an 8.6% decrease in revenues from the Company’s owned, leased and consolidated joint venture hotels to $3.343 billion for the year ended December 31, 2001 when compared to $3.659 billion in the corresponding period of 2000 and a slight decrease in other hotel and leisure revenues to $624 million for the year ended December 31, 2001 when compared to $686 million in the corresponding periods of 2000 due primarily to a decline in management and franchise fees, offset by a slight increase in revenues from the sale of VOIs.
The decrease in revenues from owned, leased and consolidated joint venture hotels is due primarily to decreased revenues at the Company’s hotels owned during both periods (“Comparable Owned Hotels”) (157 hotels for the year ended December 31, 2001, excluding 10 hotels sold and 8 hotels without comparable results during 2000 and 2001). Revenues at the Company’s Comparable Owned Hotels decreased 10.8% to $3.211 billion for the year ended December 31, 2001 when compared to the same period of 2000 due primarily to a decrease in REVPAR. REVPAR at the Company’s Same-Store Owned Hotels decreased 11.3% to $101.98 for the year ended December 31, 2001 when compared to the corresponding 2000 period. The decrease in REVPAR at these 155 Same-Store Owned Hotels was attributed to a decrease in occupancy to 65.1% from 71.2% in the year ended December 31, 2001 when compared to the same period of 2000. ADR decreased slightly to $156.73 for the year ended December 31, 2001 when compared to $161.59 in the corresponding 2000 period. REVPAR at Same-Store Owned Hotels in North America decreased 11.9% for the year ended December 31, 2001 when compared to the same period of 2000 due to the weakening of the U.S. economy which was exacerbated by the September 11 Attacks, resulting in an unprecedented decline in industry-wide demand, particularly in New York City, where the Company has seven owned hotels with a total of approximately 3,900 rooms. REVPAR at the Company’s international Same-Store Owned Hotels, which decreased by 9.6% for the year ended December 31, 2001 when compared to the same period of 2000, was also impacted by the September 11 Attacks as international travel from the U.S. declined dramatically. The unfavorable effect of foreign currency translation and adverse political and economic conditions, primarily in countries like Argentina and Australia, also contributed to these declines in REVPAR. REVPAR for Same-Store Owned Hotels in Europe, the Company’s largest international presence, decreased 1.0% excluding the unfavorable effect of foreign currency translation.
EBITDA. Total Company EBITDA decreased $343 million to $1.230 billion as of December 31, 2001, primarily due to EBITDA declines at the Company’s owned, leased and consolidated joint venture hotels. EBITDA for the Company’s owned, leased and consolidated joint venture hotels decreased $248 million to $978 million for the year ended December 31, 2001 when compared to the corresponding period in 2000. This
decrease was primarily due to a $255 million or 21.0% decrease in EBITDA at the Company’s Comparable Owned Hotels, with North America accounting for most of this decline, due to a $209 million decrease in EBITDA over the same period in 2000 resulting primarily from the weakening U.S. economy and the September 11 Attacks. As mentioned above, the Company’s significant presence in New York contributed to the decline as EBITDA at seven owned hotels in this city decreased $73 million in 2001 when compared to 2000. The sale of nine hotels during 2000 and early 2001 and the effective closure of two hotels in Chicago which were being converted to W hotels also contributed to the decline in EBITDA.
Selling, General, Administrative and Other. Selling, general, administrative and other expenses were $411 million and $403 million for the years ended December 31, 2001 and 2000, respectively. The increase in selling, general, administrative and other expenses is due primarily to increased expenses associated with Starwood Vacation Ownership, Inc. (“SVO”) in connection with increased sales, offset by a $24 million foreign exchange gain as a result of the devaluation of the Argentinean Peso and reduced corporate overhead, including a $14 million pretax gain resulting from the termination of a pension plan.
Restructuring and Other Special Charges. During the year ended December 31, 2001, the Company recorded $70 million in restructuring and other special charges related primarily to the September 11 Attacks and the resulting decline in industry-wide demand.
Immediately following the September 11 Attacks, the Company began analyzing and implementing a cost reduction plan and began reviewing the carrying value of certain assets for potential impairment, resulting in restructuring and other special charges aggregating approximately $47 million. These charges consisted primarily of severance and retention costs (approximately $25 million); bad debt expense associated with receivables no longer deemed collectible (approximately $17 million); and impairments of certain investments and other assets (approximately $5 million). Approximately $14 million of these special items represent cash charges, with the remaining amount being non-cash. In addition, during the year ended December 31, 2001, the Company recorded a charge to write down the Company’s investments in various e-business ventures by approximately $23 million.
These charges were offset in part by the reversal of a $20 million bad debt charge taken in 1998 relating to a note receivable which is now fully performing.
Depreciation and Amortization. Depreciation and amortization expense increased to $433 million and $93 million, respectively, in the year ended December 31, 2001 compared to $391 million and $90 million, respectively, in the corresponding period of 2000. The increase in depreciation expense for the year ended December 31, 2001 was primarily attributable to the additional depreciation resulting from capital expenditures at many of the Company’s owned, leased and consolidated joint venture hotels over the past two years.
Net Interest Expense. Interest expense for the years ended December 31, 2001 and 2000, which is net of interest income of $11 million and $19 million, respectively, and discontinued gaming operations allocations of $6 million in the year ended December 31, 2000, decreased to $358 million from $420 million. This decrease was due primarily to lower interest rates compared to 2000 due to reduced LIBOR rates and the impact of certain financing transactions, including the issuance of zero coupon convertible debt in May 2001. The Company’s weighted average interest rate was 5.10% at December 31, 2001 versus 7.44% at December 31, 2000.
Gain (Loss) on Asset Dispositions, Net, and Asset Impairments. Due to the September 11 Attacks and the weakening of the U.S. economy, the Company conducted a comprehensive review of the carrying value of certain assets for potential impairment. As a result, the Company recorded a net charge relating primarily to the impairment of certain investments in the fourth quarter of 2001 totaling $57 million.
Income Tax Expense. The effective income tax rate for the year ended December 31, 2001 decreased to 23.2% compared to 33.0% in the corresponding period in 2000. The Company’s effective income tax rate is determined by the level and composition of pretax income subject to varying foreign, state and local taxes and other items. The decrease from prior year is due to the combination of lower pretax income in 2001 due primarily to the weakening U.S. economy and the September 11 Attacks, while maintaining the Company’s normal dividend level.
Year Ended December 31, 2000 Compared with Year Ended December 31, 1999
Continuing Operations
Revenues. Total revenues increased 13.5% to $4.345 billion for the year ended December 31, 2000 when compared to the corresponding period in 1999. The increase in revenues was due to the 7.9% increase in revenues for the Company’s owned, leased and consolidated joint venture hotels to $3.659 billion for the year ended December 31, 2000 when compared to $3.391 billion in the corresponding period of 1999 and the increase in other hotel and leisure revenues to $686 million for the year ended December 31, 2000 when compared to $438 million in the corresponding period of 1999.
The increase in revenues from owned, leased and consolidated joint venture hotels is due primarily to the increased revenues at the Company’s 158 Comparable Owned Hotels (excluding 16 hotels sold or without comparable results during 1999 and 2000) and the addition of four hotels, including a full year of operations at the W hotels in San Francisco, California and Seattle, Washington, which opened in May 1999 and September 1999, respectively. These increases were offset by the loss of revenues on 12 hotels sold since April 1999 and the impact of hotels with rooms out of service due to significant renovations. The increase in revenues was further offset by currency weaknesses, primarily in the Euro.
Revenues at the Company’s Comparable Owned Hotels increased 6.7% to $3.527 billion for the year ended December 31, 2000 when compared to the same period of 1999 due primarily to an increase in REVPAR. REVPAR at 122 Same-Store Owned Hotels increased 7.3% to $114.90 for the year ended December 31, 2000 when compared to the corresponding 1999 period. The increase in REVPAR at these hotels was attributed to the increase in ADR of 4.5% to $160.55 for the year ended December 31, 2000 when compared to the corresponding 1999 period. Occupancy for these 122 Same-Store Owned Hotels rose to 71.6% from 69.7% in the year ended December 31, 2000 when compared to the same period in 1999. REVPAR at Same-Store Owned Hotels in North America increased 11.0% for the year ended December 31, 2000 when compared to the same period of 1999. REVPAR at the Company’s international Same-Store Owned Hotels, which decreased by 0.3% for the year ended December 31, 2000 when compared to the same period of 1999, was impacted primarily by the unfavorable effect of foreign currency translation.
The increase in other hotel and leisure revenues resulted primarily from the acquisition of SVO in October 1999. The increase is also due to 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.
EBITDA. Total Company EBITDA increased $221 million to $1.573 billion as of December 31, 2000 primarily due to EBITDA increases at the Company’s owned, leased and consolidated joint venture hotels. EBITDA for the Company’s owned, leased and consolidated joint venture hotels increased $148 million or 13.7% to $1.226 billion for the year ended December 31, 2000 when compared to $1.078 billion in the corresponding period in 1999. Most of this increase resulted from the Company’s Comparable Owned Hotels, which increased $115 million or 10.7% to $1.186 billion. These results were strongest in North America, where the Company has its largest concentration of hotels, offset by weak results internationally due primarily to unfavorable political and economic conditions. The addition of four hotels, including a full year of operations at the W hotels in San Francisco, California and Seattle, Washington, which opened in May 1999 and September 1999, respectively, contributed to the overall increase, offset by the sale of seven hotels since December 31, 1999.
Selling, General, Administrative and Other. Selling, general, administrative and other expenses were $403 million and $220 million for the years ended December 31, 2000 and 1999, respectively. The increase in selling, general, administrative and other expenses is due primarily to a full year of costs associated with the vacation ownership operations due to the acquisition of SVO in October 1999.
Depreciation and Amortization. Depreciation and amortization expense increased to $391 million and $90 million, respectively, in the year ended December 31, 2000 compared to $370 million and $82 million, respectively, in the corresponding period of 1999. The increase in depreciation expense for the year ended December 31, 2000 was primarily attributable to the acquisition of SVO in October 1999, the addition of four new hotels, including a full year of depreciation on the W hotels in San Francisco, California and Seattle,
Washington, which opened in May 1999 and September 1999, respectively, and the additional depreciation resulting from an extensive renovation program, offset, in part, by the suspension of depreciation on hotels held for sale and hotels sold during the year.
Net Interest Expense. Interest expense for the years ended December 31, 2000 and 1999, which is net of interest income of $19 million and $16 million, respectively, and discontinued gaming operations allocations of $6 million and $163 million, respectively, decreased to $420 million from $484 million. This decrease was due primarily to the paydown of debt with approximately $3.3 billion of cash proceeds from the Caesars World, Inc. (“Caesars”) and the Desert Inn Resort & Casino (the “Desert Inn”) sales (interest reflected in discontinued operations and thereby excluded from net interest expense in 1999 was limited to $2.1 billion of allocated debt) and cash repatriation from overseas, partially offset by additional borrowings during 1999 and 2000 for Share repurchases, capital expenditures and the acquisition of the CIGA minority interest.
Income Tax Expense. The effective income tax rate for 2000 was 33.0%. As a result of the Reorganization, the tax provision for the year ended December 31, 1999 included a $936 million one-time charge to establish a deferred tax liability related to the difference between the book and tax basis in the assets of the Trust. Excluding this charge, a one-time tax benefit of $37 million attributable to the resolution of certain employment related contingencies and other one-time pro forma comparable adjustments, the Company’s effective tax rate for the year ended December 31, 1999 was 36.5%. The Company’s effective income tax rate is determined by the level and composition of pretax income subject to varying foreign, state and local taxes and other items.
Minority Equity in Net Income. In June 2000, the Company completed the acquisition of the minority ownership interest of CIGA not previously owned by Starwood. The aggregate purchase price of the incremental shares was approximately $312 million. This acquisition resulted in an increase in net income of $10 million in 2000 when compared to 1999, excluding the minority interest in the gain on the sale of CIGA’s investment in Lampsa, SA, a Greek company that owned the Grande Bretagne Hotel in Athens, Greece.
Discontinued Operations
During the first quarter of 1999, the Company provided for estimated after-tax losses on the gaming dispositions of $180 million ($158 million pretax), which included anticipated operating results through the expected closing date. In addition, the Company recorded, on an after-tax basis, a $173 million gain on the sale of the Company’s remaining interest in Educational Services during the first quarter of 1999.
Due to the sale of Caesars in December 1999 and the Desert Inn in June 2000, results for the Company’s gaming operations are included in discontinued operations in the years ended December 31, 1999 and 2000. Results for the Desert Inn are included in discontinued operations through June 23, 2000 and for Caesars through December 30, 1999. The gaming operations net loss of $8 million and $27 million for the years ended December 31, 2000 and 1999, respectively, includes the allocation of pretax corporate interest expense of $6 million and $163 million, respectively.
Gaming revenues decreased to $57 million for the year ended December 31, 2000 when compared to $1.541 billion in the corresponding period of 1999, and operating income (loss) for year ended December 31, 2000 decreased to a loss of $3 million when compared to operating income of $154 million for the same period of 1999. The decreases in 2000 were due to the sales of Caesars and the Desert Inn in December 1999 and June 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Based upon the current level of operations, management believes that the Company’s cash flow from operations, together with available borrowings under the Company’s domestic and international revolving facilities (approximately $487 million at December 31, 2001) and capacity with additional borrowings, 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. Starwood had a
substantial amount of indebtedness and a working capital deficiency of $690 million at December 31, 2001, including $332 million of current maturities of long-term debt. The Company continues to monitor the credit markets and in light of the possibility of a portion of the zero coupon convertible notes being put back to the Company at a price of approximately $202 million in May 2002 and the maturities of certain existing credit facilities totaling $2.187 billion in 2003, Starwood expects to access the credit markets this year as well as enter into a new senior bank facility to refinance this indebtedness. There can be no assurance, however, that the Company will be able to refinance the indebtedness and if refinanced, whether it can do so on favorable terms, nor can there be any assurance 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 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 and leisure industry and to general economic, political, financial, competitive, legislative and regulatory factors beyond the Company’s control, including the duration and severity of the current economic downturn exacerbated by the September 11 Attacks. 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. Since the September 11 Attacks, the Company successfully amended certain terms of its Senior Credit Facility. The amendment gives the Company greater financial flexibility by modifying various financial covenants until the expiration of the facility in early 2003. The amended provisions include adjustments to the Company’s combined leverage ratio and interest coverage ratio as well as modification of the timing of amortization payments. See “Debt Financing” in Part I for risks.
The Company has been adversely affected in the aftermath of the September 11 Attacks. Since the attacks, the Company’s owned hotels have experienced significant short-term declines in occupancy compared to the prior year. At present, it is not possible to predict either the severity or duration of such declines in the medium- or long-term range, or the potential impact on the Company’s results of operations, financial condition or cash flows. However, as a result of the significant short-term declines in occupancy, the Company has taken steps to reduce costs, including reductions in force. The Company has undertaken a comprehensive analysis of its cost structure including, among other things, overall staffing levels and facilities related costs. Furthermore, the Company has evaluated hotel financial performance subsequent to the September 11 Attacks and its impact on the Company’s investments and contingent obligations. Impairments to investments in hotel management contracts, receivables or other investments due to declines in hotel profitability and reduced management and franchise fees have been reviewed and recognized where considered necessary. The outcome of the Company’s analysis has resulted in write-downs through restructuring and other special charges and losses on asset dispositions as discussed in Notes 9 and 4, respectively, in the notes to financial statements filed as part of this Joint Annual Report.
Capital Expenditures
Starwood incurs capital expenditures for upgrading and, in some cases, repositioning its owned hotels and for ongoing maintenance of acquired and existing hotels in accordance with the Company’s standards. During the year ended December 31, 2001, the Company spent approximately $526 million on improving and upgrading its owned hotels and resorts and VOI construction, including costs to convert two hotels in Chicago to W hotels, expenditures at the W Times Square which opened in December 2001, continuing construction of the St. Regis San Francisco and land in Maui for a VOI project. Due to the September 11 Attacks and the continued weakening of the worldwide economies, the Company reevaluated its planned capital expenditures, significantly reducing these expenditures until signs of the economic recovery become evident.
Cash Flow from Operating Activities
Cash flow from operating activities is the principal source of cash to be used to fund the Company’s operating expenses, interest expense, capital expenditures and distributions. Starwood anticipates that cash
flow provided by operating activities will be sufficient to service short-term indebtedness, fund maintenance capital expenditures and meet operating cash requirements, including distributions to shareholders. Other general economic considerations, such as those experienced after the September 11 Attacks, may have a negative impact on the Company’s results of operations.
In addition, while our vacation ownership operations generate strong operating cash flow, annual amounts are affected by the timing of cash outlays for the acquisition and development of new resorts and cash received from purchaser financing and asset securitizations. Cash proceeds from asset securitizations in 2001 were $202 million. See Note 5 in the notes to financial statements filed as part of this Joint Annual Report.
Cash Flow from Investing and Financing Activities
In limited cases, the Company has made loans to owners or partners in hotel or resort ventures whereby the Company has a management or franchise agreement. Loans outstanding under this program totaled $155 million at December 31, 2001. The Company evaluates these loans for impairment, and at December 31, 2001, believes these loans are collectible. Unfunded commitments aggregating $26 million were outstanding at December 31, 2001, of which $11 million are expected to be funded in 2002 and $13 million are expected to be funded in total. These loans typically are secured by pledges of project ownership interests and/ or mortgages on the projects.
The Company participates in programs with unaffiliated lenders in which the Company may partially guarantee loans made to facilitate third-party ownership of hotels that the Company manages or franchises. At December 31, 2001, loan guarantees totaled $153 million relating to three projects: the St. Regis in Monarch Beach, California, which opened in mid-2001; the Westin Kierland hotel in Arizona, which is scheduled to open at the end of 2002; and the Westin in Charlotte, North Carolina, which is scheduled to open at the end of 2002. With respect to the Westin Kierland, the guarantee is joint and several with another equity partner. The Company does not anticipate any funding under these loan guarantees in 2002, as all projects are well capitalized.
Furthermore, in order to secure management and franchise contracts, the Company may provide performance guarantees to third-party owners. Most of these performance guarantees allow the Company to abandon a contract rather than fund shortfalls if certain performance levels are not met. In limited cases, the Company is obliged to fund shortfalls in performance levels. As of December 31, 2001, the Company had six management contracts with performance guarantees with possible cash outlays of up to $68 million, $50 million of which, if required, would be funded over a period of 25 years. Many of the performance tests are multi-year tests, are tied to the results of a competitive set of hotels, and have exclusions for force majeure clauses and acts of war and terrorism. The Company does not anticipate any funding under the performance guarantees in 2002. Lastly, the Company does not anticipate losing any significant management or franchise contracts in 2002.
The Company had the following contractual obligations outstanding as of December 31, 2001 (in millions):
(a)
$2.187 billion due on February 23, 2003. 	
(b)
The Company’s owned, managed and franchised 	hotels participate in various national purchasing agreements. As 	these agreements do not require specific purchasing thresholds 	for the Company or the Company’s owned, leased and 	consolidated joint venture hotels, no such amounts are reflected 	above. 	
The Company had the following commercial commitments outstanding as of December 31, 2001 (in millions):
In April 2001, the Company completed the acquisition of the remaining 50% interest not previously owned by the Company in the 1,377-room Sheraton Centre Toronto for $75 million Canadian dollars (approximately U.S. $48 million based on exchange rates at the time). Additionally, in April 2001, the Company completed the acquisition of 44% of an entity which owns the Royal Orchid Hotel in Bangkok, Thailand for $27 million.
In addition to cash flow from operating activities, Starwood intends to finance the acquisition of, or investment in, additional hotels and resorts, hotel renovations and capital improvements and provide for general corporate purposes through the Company’s 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. In January 2002, the Company announced that it has initiated the formal sale process of the CIGA portfolio of 25 luxury hotels, land, golf courses and marinas potentially encumbered by the Company’s management contracts in whole or in part. Deutsche Bank, Jones Lang LaSalle Hotels and J.P. Morgan are advising the Company on the disposition of this portfolio and have begun actively marketing these assets. The Company began reviewing preliminary indications of interest in the first quarter of 2002.
Loans and Credit Facilities. Following is a summary of the Company’s debt portfolio as of December 31, 2001:
(a)
Excludes approximately $300 million of the 	Company’s share of unconsolidated joint venture debt. 	
On February 23, 1998, Starwood entered into two credit facilities with Lehman Brothers, Bankers Trust Company, The Chase Manhattan Bank and other financial institutions. The Senior Credit Facility and the Senior Secured Notes Facility comprise Starwood’s primary existing credit facilities. In September 1998, the Company increased its borrowings under the Senior Secured Notes Facility with a $1 billion, five-year term borrowing facility (“Tranche II Loans”). In December 2000, the Company increased the amount available under the Senior Credit Facility by $172.5 million (“Term Loan Add-on”). In January 2001 and May 2001, the Company completed add-on financings to its Term Loan Add-on of $150 million and $100 million, respectively. The proceeds from the Term Loan Add-ons were used to reduce the amount outstanding under the Company’s Revolving Credit Facility. In November 2001, the Company successfully amended certain terms of its Senior Credit Facility. The amendment gives the Company greater financial flexibility by modifying various financial covenants until the expiration of the facility in early 2003. The amended provisions include adjustments to the Company’s combined leverage ratio and interest coverage ratio as well as modification of the timing of amortization payments.
In January 1999, the Company completed a $542 million long-term financing (the “Mortgage Loan”), secured by mortgages on a portfolio of 11 hotels. The Mortgage Loan is due in February 2009, and the proceeds from the Mortgage Loan were used to pay down the one-year term loan under the Senior Credit Facility, which has subsequently been paid off.
In July 2000, the Company entered into a one-year, Euro 270 million loan (approximately $252 million based on exchange rates at the time) at an initial average interest rate of Euribor plus 112.5 basis points for
the first six months and increasing to Euribor plus 137.5 basis points for the remaining six months. The loan was subsequently extended through July 2002. In December 2001, the Company entered into an 18-month Euro 450 million loan (approximately $399 million based on exchange rates at the time) with an interest rate of Euribor plus 195 basis points. The proceeds of the Euro 450 million loan were drawn down in two tranches: the first 270 million Euros was drawn down in December 2001 and used to repay the previously outstanding Euro 270 million facility and the remaining 180 million Euros was drawn down in January 2002, and the proceeds were used to repay a portion of the Company’s Revolving Credit Facility.
In May 2001, the Company sold an aggregate face amount of $816 million zero coupon convertible senior notes due 2021 (the “Notes”). The Company received gross proceeds from these sales of approximately $500 million, which were used to repay a portion of its Tranche II Loans that bore interest at LIBOR plus 275 basis points. The Notes have an initial blended yield to maturity of 2.35%. The Notes, consisting of two series, are convertible, subject to certain conditions, into an aggregate 9,657,000 Shares. On May 25, 2002, each Series A holder may require the Company to purchase the notes, subject to certain conditions. Series A notes that may be presented to the Company in May 2002 total approximately $202 million. These Series A notes have been included in long-term debt at December 31, 2001 based upon the Company’s ability and intent to refinance them with availability under the Revolving Credit Facility. Series B holders may first present their aggregate notes to the Company in May 2004 for approximately $330 million.
During each of the quarters of 2001, the Trust paid a distribution of $0.20 per Share, a 16% annual increase over 2000. Total dividends paid in 2001 and 2000 were $156 million and $134 million, respectively. In 2002, the Company intends to shift from a quarterly dividend to an annual dividend. The final determination of the amount of the dividend will be subject to economic and financial considerations and Board approval in the fourth quarter of 2002.
Stock Sales and Repurchases
At December 31, 2001, Starwood had outstanding approximately 197.7 million Shares and 1.6 million partnership units and 1.6 million exchangeable preferred shares outstanding, which are convertible into Shares. Approximately 1.1 million of the Class B EPS can be put to the Company at $38.50 per Share in 2003.
In 1998, the Board of Directors of the Company approved the repurchase of up to $1 billion of Shares under a Share repurchase program (the “Share Repurchase Program”). On April 2, 2001, the Company’s Board of Directors authorized the repurchase of up to an additional $500 million of Shares under the Share Repurchase Program, subject to the terms of the Senior Credit Facility. Pursuant to the Share Repurchase Program, Starwood repurchased 3.2 million Shares in the open market for an aggregate cost of $96 million during 2001. As of December 31, 2001, approximately $633 million remains available under the Share Repurchase Program.
During 2001, the Trust consented to the exchange of approximately 1,939,000 shares of Class B EPS into an equal number of shares of Class A EPS. Additionally, the Trust consented to the exchange of approximately 2.0 million shares of Class A EPS for an equal number of Shares.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company seeks to reduce earnings and cash flow volatility associated with changes in interest rates and foreign currency exchange rates by entering into financial arrangements intended to provide a hedge against a portion of the risks associated with such volatility. The Company continues to have exposure to such risks to the extent they are not hedged.
Interest rate swap agreements are the primary instruments used to manage interest rate risk. The Company currently has five outstanding long-term interest rate swap agreements under which the Company pays a fixed interest rate and receives variable interest rates. At December 31, 2001, the Company also has three long-term interest rate swap agreements under which the Company pays a variable interest rate and
receives a fixed interest rate. The following table sets forth the scheduled maturities and the total fair value of the Company’s debt portfolio:
Foreign currency forward transactions are used by the Company to hedge exposure to foreign currency exchange rate fluctuations. The gains or losses on the forward contracts are largely offset by the gains or losses of the underlying transactions, and consequently, a sudden significant change in foreign currency exchange rates would not have a material impact on future net income or cash flows on such underlying transactions. The Company monitors its foreign currency exposure on a monthly basis to maximize the overall effectiveness of its foreign currency hedge positions. As of December 31, 2001, the Euro and the British Pound were the principal currencies hedged by the Company. Changes in the value of forward foreign exchange contracts designated as hedges of foreign currency denominated assets and liabilities are classified in the same manner as changes in the underlying assets and liabilities. At December 31, 2001, the notional amount of the Company’s open forward foreign exchange contracts protecting the value of the Company’s foreign currency denominated assets and liabilities was approximately $366 million. Of these contracts, $353 million matured in January 2002. A hypothetical 10% change in currency exchange rates under the remaining contracts would result in an increase or decrease of approximately $1.2 million to the fair value of the forward foreign exchange contracts at December 31, 2001, which would be offset by an opposite effect on the related hedged positions.
The Company enters into a derivative financial arrangement only to the extent it meets the objectives described above, and the Company does not engage in such transactions for trading or speculative purposes.
See Note 18 in the notes to financial statements filed as part of this Joint Annual Report and incorporated herein by reference for further description of derivative financial instruments.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data required by this Item are included in Item 14 of this Joint Annual Report and are incorporated herein by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10.
Item 10. Directors, Trustees and Executive Officers of the Registrants.
The Board of Directors of the Corporation and the Board of Trustees of the Trust are currently comprised of 11 members, each of whom is elected for a three-year term. The following table sets forth, for each of the members of the Board of Directors and the Board of Trustees as of the date of this Joint Annual Report, the class to which such Director or Trustee has been elected and certain other information regarding such Director or Trustee.
Name (Age)
Principal Occupation and Business Experience
Service Period
Directors and Trustees Whose Terms Expire at 	the 2003 Annual Meeting
Jean-Marc Chapus (42) 	
Group Managing Director and Portfolio Manager of 	Trust Company of the West, an investment management firm, and 	President of TCW/ Crescent Mezzanine L.L.C., a private 	investment fund, since March 1995. Mr. Chapus is a director 	of MEMC Electrical Materials, Inc. He also serves as a director 	of several privately held companies, including Magnequench 	International, Inc. and TCW Asset Management Company. 	
Director from August 1995 to November 1997; since April 1999
Trustee since November 1997
Thomas O. Ryder (57) 	
Chairman of the Board and Chief Executive Officer 	and a Director of The Reader’s Digest Association, Inc. 	since April 1998. Mr. Ryder was President, American Express 	Travel Related Services International, a division of American 	Express Company, which provides travel, financial and network 	services, from October 1995 to April 1998. 	
Director since April 2001
Trustee since April 2001
Barry S. Sternlicht (41) 	
Chairman and Chief Executive Officer of the 	Company since September 1997 and January 1999, respectively. 	Mr. Sternlicht has served as Chairman and Chief Executive 	Officer of the Trust since January 1995. Mr. Sternlicht 	also has been the President and Chief Executive Officer of 	Starwood Capital and its predecessor entities since its 	formation in 1991. Mr. Sternlicht was Chief Executive 	Officer of iStar Financial, Inc. (“iStar”), a real 	estate investment firm, from September 1996 to November 1997 and 	served as the Chairman of the Board of Directors of iStar from 	September 1996 to April 2000. Mr. Sternlicht has been a 	Director (or Trustee, as applicable) of iStar since September 	1996. Mr. Sternlicht is a member of the Urban Land Institute and 	of the National Multi-Family Housing Council. 	Mr. Sternlicht is a member of the Board of Directors of the 	Juvenile Diabetes Research Foundation and the Council for 	Christian and Jewish Understanding. He is a member of the Young 	Presidents Organization and is on the Board of Directors of 	Junior Achievement for Fairfield County, Connecticut and the 	Board of Trustees of Thirteen/WNET. 	
Director since December 1994
Trustee since December 1994
Directors and Trustees Whose Terms Expire at 	the 2002 Annual Meeting
Charlene Barshefsky (51) 	
Senior International Partner at the law firm of 	Wilmer, Cutler & Pickering, Washington, D.C. From April 1996 	to January 2001, Ambassador Barshefsky was the United States 	Trade Representative, the chief trade negotiator and principal 	trade policy maker for the United States and a member of the 	President’s Cabinet. Ambassador Barshefsky is a director of 	The Estee Lauder Companies, Inc., American Express Company and 	serves on the Corporation Policy Advisory Board of Intel 	Corporation. 	
Director since October 2001
Trustee since October 2001
Name (Age)
Principal Occupation and Business Experience
Service Period
Bruce W. Duncan (50) 	
President of Equity Residential Properties Trust 	(“EQR”) effective April 8, 2002, the largest 	publicly traded apartment company in the United States. From 	April 2000 until March 2002, he was a private investor. From 	December 1995 until March 2000, Mr. Duncan served as 	Chairman, President and Chief Executive Officer of The Cadillac 	Fairview Corporation Limited, a real estate operating company. 	Mr. Duncan is a trustee of Amresco Capital Trust, a 	director of EQR and a member of the Partnership Committee of the 	Rubenstein Company, L.P., a real estate operating company 	focused on office properties in the mid-atlantic region. In 	addition, Mr. Duncan is a member and past trustee of the 	International Council of Shopping Centres. 	
Director since April 1999
Trustee since August 1995
Stephen R. Quazzo (42) 	
Managing Director, Chief Executive Officer and 	co- founder of Transwestern Investment Company, L.L.C., a real 	estate principal investment firm, since March 1996. From April 	1991 to March 1996, Mr. Quazzo was President of Equity 	Institutional Investors, Inc., a subsidiary of Equity Group 	Investments, Inc., a Chicago-based holding company controlled by 	Samuel Zell. Mr. Quazzo is an advisory board member of City 	Year Chicago and a trustee of The Latin School of Chicago. 	
Director since April 1999
Trustee since August 1995
Raymond S. Troubh (75) 	
Financial Consultant and a former Governor of the 	American Stock Exchange. He was also a general partner of Lazard 	Frères & Co., an investment banking firm. 	Mr. Troubh is a director of ARIAD Pharmaceuticals, Inc., 	Diamond Offshore Drilling, Inc., General American Investors Co., 	Inc., Gentiva Health Services, Inc., Health Net, Inc., Hercules 	Incorporated, Triarc Companies, Inc. and WHX Corp. and is a 	trustee of Petrie Stores Liquidating Trust. Mr. Troubh was 	appointed to the Enron Corp. board of directors on 	November 27, 2001 after the events that led to its 	filing for bankruptcy. Mr. Troubh is one of the co-authors of 	The Powers Report which investigated these events. 	
Director since April 1999
Trustee since April 1998
Executive Officers of the Registrants
The following table includes certain information with respect to each of Starwood’s current executive officers.
Barry S. Sternlicht. Mr. Sternlicht has been Chairman and Chief Executive Officer of the Corporation since September 1997 and January 1999, respectively. Mr. Sternlicht has served as Chairman and Chief Executive Officer of the Trust since January 1995. Mr. Sternlicht also has been the President and Chief Executive Officer of Starwood Capital and its predecessor entities since its formation in 1991. Mr. Sternlicht was Chief Executive Officer of iStar, a real estate investment firm, from September 1996 to November 1997 and served as the Chairman of the Board of Directors (previously the Board of Trustees) of iStar from September 1996 to April 2000. Mr. Sternlicht has been a Director (or Trustee, as applicable) of iStar since September 1996.
Robert F. Cotter. Mr. Cotter has been the Chief Operating Officer of the Corporation since February 2000 and a Vice President of the Trust since August 2000. From December 1999 to February 2000, he was President, International Operations, and from March 1998 to December 1999, he served as President, Europe, of the Company. Prior to joining the Company, Mr. Cotter was President, Sheraton Europe Division, from June 1994 to March 1998 and previously held various other positions with Sheraton including President, Sheraton Asia-Pacific Divisions, and numerous sales and marketing positions in the United States and Asia.
Ronald C. Brown. Mr. Brown has been the Executive Vice President and Chief Financial Officer of the Corporation since March 1998 and has served as Vice President, Chief Financial Officer and Chief Accounting Officer of the Trust since January 1999. From July 1995 to March 1998, he was the Senior Vice President and Chief Financial Officer of the Trust.
Kenneth S. Siegel. Mr. Siegel has been the Executive Vice President and General Counsel of the Corporation and Vice President and General Counsel of the Trust since November 2000. In February 2001, he was also appointed as the Secretary to both the Corporation and the Trust. Mr. Siegel was formerly the Senior Vice President and General Counsel of Gartner, Inc., a provider of research and analysis on information technology industries, from January 2000 to November 2000. Prior to that time, he served as Senior Vice President, General Counsel and Corporate Secretary of IMS Health Incorporated, an information services company, and its predecessors from February 1997 to December 1999. Prior to that time, Mr. Siegel was a Partner at Baker & Botts, LLP.
David K. Norton. Mr. Norton has been the Executive Vice President-Human Resources of the Corporation and Vice President-Human Resources of the Trust since May 2000. Prior to joining the Company, Mr. Norton held various positions with PepsiCo, Inc. from September 1990 to April 2000 including
Senior Vice President, Human Resources, of Frito-Lay, a division of PepsiCo, from November 1995 to April 2000 and Senior Vice President, Human Resources, of PepsiCo Food Systems from December 1994 to October 1995.
Steven R. Goldman. Mr. Goldman has been the Executive Vice President, Acquisitions and Development, of the Corporation and a Vice President of the Trust since January 1999. He was Executive Vice President of the Trust from March 1998 to January 1999. From September 1996 March 1998, he was the Senior Vice President of the Trust and from March 1995 to September 1996, he served as Senior Vice President of the Corporation.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that Directors and executive officers of the Company, and persons who own more than 10 percent of the outstanding Shares, file with the SEC (and provide a copy to the Company) certain reports relating to their ownership of Shares and other equity securities of the Company.
To the Company’s knowledge, based solely on a review of the copies of these reports furnished to the Company for the fiscal year ended December 31, 2001, and written representations that no other reports were required, all Section 16(a) filing requirements applicable to its Directors, executive officers and greater than 10 percent beneficial owners were complied with for the most recent fiscal year.
Item 11.
Item 11. Executive Compensation.
The information called for by Item 11 is incorporated by reference from the information under the following captions in the Proxy Statement: “Compensation of Directors and Trustees,” “Summary of Cash and Certain Other Compensation,” “Executive Compensation,” “Option Grants,” “Option Exercises and Holdings,” “Employment and Compensation Agreements with Executive Officers,” “Compensation Committee Interlocks and Insider Participation” and “Certain Relationships and Related Transactions.”
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for by Item 12 is incorporated by reference from the information under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Policies of the Board of Directors of the Corporation and the Board of Trustees of the Trust
The policy of the Board of Directors of the Corporation and the Board of Trustees of the Trust provides that any contract or transaction between the Corporation or the Trust, as the case may be, and any other entity in which one or more of its Directors, Trustees or officers are directors or officers, or have a financial interest, must be approved or ratified by the Governance Committee (which is comprised of Senator Mitchell and Messrs. Ryder and Youngblood) or by a majority of the disinterested Directors or Trustees in either case after the material facts as to the relationship or interest and as to the contract or transaction are disclosed or are known to them.
Starwood Capital
General. Barry S. Sternlicht, Chairman, Chief Executive Officer and a Director of the Corporation, and Chairman, Chief Executive Officer and a Trustee of the Trust, controls and has been the President and Chief Executive Officer of Starwood Capital since its formation in 1991. Prior to joining Starwood in 1995, Steven R. Goldman was an employee of Starwood Capital, and he continues to own an interest in a portfolio investment of Starwood Capital.
Trademark License. An affiliate of Starwood Capital has granted to Starwood, subject to Starwood Capital’s unrestricted right to use such name, an exclusive, non-transferable, royalty-free license to use the
“Starwood” name and trademarks in connection with the acquisition, ownership, leasing, management, merchandising, operation and disposition of hotels worldwide, and to use the “Starwood” name in its corporate name worldwide, in perpetuity.
Starwood Capital Noncompete. In connection with a restructuring of the Company in 1995, Starwood Capital agreed that, with certain exceptions, Starwood Capital would not compete directly or indirectly with the Company within the United States and would present to the Company all opportunities presented to Starwood Capital to acquire fee interests in hotels in the United States and debt interests in hotels in the United States where it is anticipated that the equity will be acquired by the debt holder within one year from the acquisition of such debt (the “Starwood Capital Noncompete”). During the term of the Starwood Capital Noncompete, neither Starwood Capital nor any of its affiliates is permitted to acquire any such interest, or any ground lease interest or other equity interest, in hotels in the United States. The Starwood Capital Noncompete continues until no officer, director, general partner or employee of Starwood Capital is on either the Board of Directors of the Corporation or the Board of Trustees of the Trust (subject to exceptions for certain restructurings, mergers or other combination transactions with unaffiliated parties). Several properties owned or managed by the Company, including the Westin Innisbrook Resort (the “Innisbrook Resort”), the Westin Mission Hills Resort and the Turnberry Hotel, were opportunities brought to the Company or its predecessors by Starwood Capital. With the approval in each case of the Audit Committee of the Board of Directors of the Corporation and the Board of Trustees of the Trust, from time to time the Company has waived the restrictions of the Starwood Capital Noncompete in whole or in part with respect to particular acquisition opportunities in which the Company had no interest.
Portfolio Investments. An affiliate of Starwood Capital holds an approximately 25% non-controlling interest in Troon Golf (“Troon”), a golf course management company that currently manages over 100 high-end golf courses. Mr. Sternlicht’s indirect interest in Troon held through such affiliate is approximately 12%. Troon is the largest third-party manager of golf courses in the United States. In 2001, Troon managed thirteen golf courses at resorts owned or managed by the Company. The Company paid Troon a total of $911,000 ($432,000 of which represents management fees and payments for other services and $479,000 of which represents reimbursement of expenses), $1,003,000 ($458,000 of which represents management fees and payments for other services and $545,000 of which represents reimbursement of expenses) and $950,000 ($454,000 of which represents management fees and payments for other services and $496,000 of which represents reimbursement of expenses) in 2001, 2000 and 1999, respectively, for the golf courses at the two resorts owned by the Company. In January 2002, after extensive review of alternatives and with the unanimous approval of the Governance Committee, the Company entered into a Master Agreement with Troon covering the United States and Canada whereby the Company has agreed to have Troon manage all courses in the United States and Canada that are owned by the Company and to use reasonable efforts to have Troon manage courses at resorts that the Company manages and franchises. The Company believes that the terms of the Troon agreement are at or better than market terms. Mr. Sternlicht did not participate in the negotiations or the approval of the Troon Master Agreement.
An entity in which Mr. Sternlicht has a 38% interest owned the common area of the Sheraton Tamarron Resort, which the Company managed until December 2001. As of the date of this filing, management fees earned and paid were $197,000, $219,000 and $240,000 relating to 2001, 2000 and 1999, respectively. In addition, approximately $620,000 of reimbursable expenses were also paid. The Company has outstanding receivables of approximately $314,000, which arose as a result of the termination of the Tamarron management agreement. The Company believes that the terms of the Tamarron agreement were at or better than market terms.
In addition, a subsidiary of Starwood Capital is a general partner of a limited partnership which owns approximately 45% in an entity that manages over 40 health clubs, including one health club and spa space in a hotel owned by the Company. In 2001, the Company paid approximately $84,000 to the management company for such management. The Company believes that the terms of the management agreement are at or better than market terms.
Other Management-Related Investments. Mr. Sternlicht has a 38% interest in an entity (the “Innisbrook Entity”) that owns the common area facilities and certain undeveloped land (but not the hotel) at the Innisbrook Resort. In May 1997, the Innisbrook Entity entered into a management agreement for the Innisbrook Resort with Westin, which was then a privately held company partly owned by Starwood Capital and Goldman, Sachs & Co. When the Company acquired Westin in January 1998, it acquired Westin’s rights and obligations under the management and other related agreements. Under these agreements, the hotel manager was obligated to loan up to $12.5 million to the owner in the event certain performance levels were not achieved. Management fees earned under these agreements were $716,000, $885,000 and $907,000 in 2001, 2000 and 1999, respectively. The Innisbrook Entity, the Company and other lenders are currently in discussions regarding the terms and timing of payments owed to the Company and such other lenders. The discussions relate to approximately $9 million in loans by the Company which funded resort operations and approximately $5 million of deferred management fees and reimbursable expenses as well as amounts owed by the Innisbrook Entity to other parties. Any settlement of this matter would be subject to the approval of the Governance Committee.
Aircraft Lease. In February 1998, the Company leased a Gulfstream III Aircraft from Star Flight LLC, an affiliate of Starwood Capital. The term of the lease was one year and automatically renews for one-year terms until either party terminates the lease upon 90 days’ written notice. The rent for the aircraft, which was set at approximately 90% of fair market value (based on two estimates from unrelated third parties), is (i) a monthly payment of 1.25% of the lessor’s total costs relating to the aircraft (approximately $123,000 at the beginning of the lease with this amount increasing as additional costs are incurred by the lessor), plus (ii) $300 for each hour that the aircraft is in use. Payments to Star Flight LLC were $1,682,000, $840,000 and $910,000 in 2001, 2000 and 1999, respectively.
Other
Starwood has made non-interest-bearing loans to Steven R. Goldman, Executive Vice President, Acquisitions and Development, and Ronald C. Brown, Executive Vice President and Chief Financial Officer, during 1999 and to David K. Norton, Executive Vice President of Human Resources, during 2000. Each of these loans was made in connection with such executive’s employment and is secured by a second mortgage on such executive’s home. These loans had initial principal amounts of $525,000, $600,000 and $500,000, respectively. The loans to Messrs. Goldman and Norton are currently outstanding. These loans are due five years from the date of issuance or, generally, upon the individual’s termination. The loan made to Mr. Brown was repaid in 2001.
In 2001, Starwood retained the law firm Verner, Liipfert, Bernhard, McPherson and Hand, of which Senator George J. Mitchell, a Director of the Corporation and Trustee of the Trust, serves as Chairman. We expect that this firm will continue to provide services to the Company in 2002.
PART IV
Item 14.
Item 14.
Exhibits, Financial Statements, Financial 	Statement Schedules and Reports on Form 8-K.
(a)
The following documents are filed as a part of 	this Joint Annual Report: 	
1.
The financial statements and financial statement 	schedules listed in the Index to Financial Statements and 	Schedules following the signature pages hereof. 	
2. Exhibits:
(1)
Management contract or compensatory plan or 	arrangement required to be filed as an exhibit pursuant to 	Item 14(c) of Form 10-K. 	
(2)
Filed herewith. 	
(b)
Reports on Form 8-K. 	
During the fourth quarter of 2001, Starwood filed a Joint Current Report on Form 8-K dated November 20, 2001, reporting under Items 5 and 7 the amendment of its Senior Credit Facility. In addition, the Company reported that it will shift from a quarterly dividend to an annual dividend beginning in 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
STARWOOD HOTELS & RESORTS
WORLDWIDE, INC.
By:
/s/ RONALD C. BROWN 	
Ronald C. Brown 	
Executive Vice President and 	
Chief Financial Officer 	
Date: March 27, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
STARWOOD HOTELS & RESORTS
By:
/s/ RONALD C. BROWN 	
Ronald C. Brown 	
Vice President, Chief Financial Officer 	
and Chief Accounting Officer 	
Date: March 27, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Starwood Hotels & Resorts Worldwide, Inc. and Starwood Hotels & Resorts:
We have audited the accompanying consolidated balance sheets of Starwood Hotels & Resorts Worldwide, Inc. (a Maryland corporation) and its subsidiaries (the “Company”) and Starwood Hotels & Resorts (a Maryland real estate investment trust) and its subsidiaries (the “Trust”) as of December 31, 2001 and 2000, and the related consolidated statements of operations, comprehensive income, equity and cash flows of the Company for each of the three years in the period ended December 31, 2001 and the consolidated statements of income and cash flows of the Trust for each of the three years in the period ended December 31, 2001 as set forth in the accompanying Index to Financial Statements and Schedules. These financial statements and schedules are the responsibility of the Company’s and Trust’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company and the Trust as of December 31, 2001 and 2000, and the results of the Company’s and the Trust’s operations and cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the Index to Financial Statements and Schedules are presented for purposes of complying with the Securities and Exchange Commission’s rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP 	
New York, New York
January 30, 2002
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
The accompanying notes to financial statements are an integral part of the above statements.
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per Share data)
The accompanying notes to financial statements are an integral part of the above statements.
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
The accompanying notes to financial statements are an integral part of the above statements.
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In millions)
(a)
As of December 31, 2001, this balance is 	comprised of $457 million of cumulative translation 	adjustments, $21 million of cumulative unrealized losses on 	derivative instruments, $1 million of cumulative unrealized 	losses on securities and $5 million of cumulative minimum 	pension liability adjustment. 	
The accompanying notes to financial statements are an integral part of the above statements.
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
The accompanying notes to financial statements are an integral part of the above statements.
STARWOOD HOTELS & RESORTS
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
The accompanying notes to financial statements are an integral part of the above statements.
STARWOOD HOTELS & RESORTS
CONSOLIDATED STATEMENTS OF INCOME
(In millions)
The accompanying notes to financial statements are an integral part of the above statements.
STARWOOD HOTELS & RESORTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
The accompanying notes to financial statements are an integral part of the above statements.
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 December 31, 2001 and 2000 and the consolidated statements of operations/income, comprehensive income, equity and cash flows for the years ended December 31, 2001, 2000 and 1999 represent (i) Starwood Hotels & Resorts Worldwide, Inc. and its subsidiaries (the “Corporation”), including Sheraton Holding Corporation and its subsidiaries (“Sheraton Holding”) (formerly ITT Corporation) and Starwood Hotels & Resorts and its subsidiaries (the “Trust” and, together with the Corporation, “Starwood” or the “Company”), and (ii) the Trust.
In the first quarter of 1998, Starwood completed two major transactions: the acquisition of Westin Hotels & Resorts Worldwide, Inc. and certain of its affiliates (“Westin”) (the “Westin Merger”) and the acquisition of ITT Corporation (the “ITT Merger”), currently Sheraton Holding, and as a result is one of the largest hotel companies in the world and the Trust is one of the largest real estate investment trusts (“REITs”) in the United States. The Company’s principal business is hotels and leisure, which is comprised of a worldwide hospitality network of more than 700 full-service hotels as well as vacation ownership resorts primarily serving two markets: luxury and upscale. The Company’s hotel operations are represented in nearly every major world market.
The Trust was formed in 1969 and elected to be taxed as a 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.
During 1998, Congress enacted tax legislation that had the effect of eliminating the grandfathering for certain interests in real property acquired after March 26, 1998 by a formation of a “paired share REIT.” 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 Trust became a subsidiary of the Corporation, which indirectly holds all outstanding shares of the new Class A shares of beneficial interest in the Trust (“Class A Shares”). 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 trade together 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. Unless otherwise stated herein, all information with respect to Shares refers to Shares on or 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. 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.
The Corporation, through its subsidiaries, is the general partner of, and held, as of December 31, 2001, an aggregate 97.8% partnership interest in, SLC Operating Limited Partnership (the “Operating Partnership”). The Trust, through its subsidiaries, is the general partner of, and held an aggregate 97.1% partnership interest in, SLT Realty Limited Partnership (the “Realty Partnership” and, together with the Operating Partnership, the “Partnerships”) as of December 31, 2001. The units of the Partnerships (“LP Units”) held by the limited
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS - (Continued)
partners of the respective Partnerships are exchangeable on a one-for-one basis for Shares. At December 31, 2001, there were approximately 5.9 million LP Units outstanding (including 4.3 million LP Units held by the Corporation). 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.
Note 2.
Significant Accounting Policies
Principles of Consolidation. The accompanying consolidated financial statements of the Company and the Trust and their subsidiaries include the assets, liabilities, revenues and expenses of majority-owned subsidiaries over which the Company and/or the Trust exercise control, and for which control is other than temporary. Intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Inventories. Inventories are comprised principally of vacation ownership interests (“VOIs”) and hotel operating supplies. VOI inventory is carried at cost, which is lower than fair value less cost to sell. Operating supplies are generally valued at the lower of cost (first-in, first-out) or market. Potential losses from obsolete and slow-moving inventories are provided for in the current period.
Investments. Investments in partnerships and joint ventures are accounted for using the equity method of accounting when the Company has a 20% to 50% ownership interest or exercises significant influence over the venture. If the Company’s interest exceeds 50% and the Company exercises control over the venture, the results of the partnership or joint venture are consolidated herein. All other investments are generally accounted for under the cost method.
Equity in earnings of unconsolidated subsidiaries accounted for on the equity basis was $20 million, $37 million and $32 million in 2001, 2000 and 1999, respectively, and is included in hotel and leisure revenues in the accompanying consolidated financial statements.
The fair market value of investments is based on the market prices for the last day of the period if the investment trades on quoted exchanges. For non-traded investments, fair value is estimated based on the underlying value of the investment, which is dependent on the performance of the companies or ventures in which the Company has invested, as well as the volatility inherent in external markets for these types of investments.
In assessing potential impairment for these investments, the Company will consider these factors as well as forecasted financial performance of its investees. If these forecasts are not met, the Company may have to record impairment charges. Thus, the carrying value of other investments approximates fair value based on market prices and the value of the underlying collateral.
Plant, Property and Equipment. Plant, property and equipment, including capitalized interest of $7 million, $3 million and $8 million in 2001, 2000 and 1999, respectively, applicable to major project expenditures, are recorded at cost. The cost of improvements that extend the life of plant, property and equipment are capitalized. These capitalized costs may include structural improvements, equipment and fixtures. Costs for normal repairs and maintenance are expensed as incurred. Depreciation is provided on a straight-line basis over the estimated useful economic lives of 15 to 40 years for buildings and improvements; 3 to 10 years for furniture, fixtures and equipment; and the lesser of the lease term or 40 years for leasehold improvements. Gains or losses on the sale or retirement of assets are included in income when the assets are sold provided there is reasonable assurance of the collectibility of the sales price and any future activities to be performed by the Company relating to the hotel assets sold are insignificant.
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The Company evaluates the carrying value of each of the Company’s assets for impairment. For assets in use, the expected undiscounted future cash flows of the assets are compared to the net book value of the assets. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value is charged to current earnings. When assets are identified by management as held for sale, the Company discontinues depreciating the assets and estimates the fair value of such assets. If, in management’s opinion, the fair value of the assets which have been identified for sale is less than the net book value of the assets, the carrying value of the assets is reduced to fair value. Fair value is determined based upon discounted cash flows of the assets at rates deemed reasonable for the type of property and prevailing market conditions, appraisals and, if appropriate, current estimated net sales proceeds from pending offers.
Goodwill and Intangible Assets. Goodwill and intangible assets arise in connection with acquisitions, including the acquisition of management contracts, and are amortized using the straight-line method over the useful life of the asset. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” In accordance with this guidance, the Company will cease amortizing goodwill and intangible assets with indefinite lives. Intangible assets with finite lives will continue to amortize on a straight-line basis over their respective useful lives. The Company will also review all goodwill and intangible assets for impairment by comparisons of fair value to book value annually, or upon the occurrence of a trigger event. Impairments will be recognized in operating results. In connection with the adoption of this standard, the Company has completed its initial recoverability test on goodwill and intangible assets, which did not result in any impairment write-downs. Estimates based on existing goodwill and intangible assets indicate that adoption will result in an annual increase in net income of approximately $64 million in 2002.
Frequent Guest Program. Starwood Preferred Guest® (“SPG”) is the Company’s frequent guest incentive marketing program. SPG members earn points based on their spending at the Company’s properties and, to a lesser degree, through participation in affiliated partners’ programs, such as those offered by airlines. Points can be redeemed at most Company owned, leased, managed and franchised properties; however, points cannot be redeemed for cash.
SPG is provided as a marketing program to the Company’s properties. The cost of operating the program, including the estimated cost of award redemption, is charged to properties based on members’ qualifying expenditures. Revenue is recognized by participating hotels and resorts when points are redeemed for hotel stays.
The Company, through the services of third-party actuarial analysts, determines the fair value of the future redemption obligation based on statistical formulas which project timing of future point redemption based on historical experience, including an estimate of the “breakage” for points that will never be redeemed, and an estimate of the points that will eventually be redeemed. These factors determine the required liability for outstanding points. The Company’s management and franchise agreements require that the Company be reimbursed currently for the costs of operating the program, including marketing, promotion, communications with, and performing member services for the SPG members. Actual expenditures for SPG may differ from the actuarially determined liability.
The liability for the SPG program is included in other long-term liabilities and accrued expenses in the accompanying consolidated balance sheets. The total actuarially determined liability as of December 31, 2001 and 2000 is $159 million and $137 million, respectively.
Derivative Financial Instruments. Effective January 1, 2001, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” which established new accounting
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rules and disclosure requirements for most derivative instruments and hedging activities. The adoption of SFAS No. 133, as amended, resulted in an initial reduction of other comprehensive income of approximately $6.2 million but did not impact earnings. The Company enters into interest rate swap agreements to manage interest rate exposure. The net settlements to be paid or received under these agreements are accrued consistent with the terms of the agreements and are recognized in interest expense over the term of the related debt. The related fair value of the swaps is included in other liabilities or assets.
The Company enters into foreign currency forward contracts and foreign currency swaps as a means of hedging exposure to foreign currency fluctuations. All foreign currency forward contracts have an inverse correlation to the hedged items and are designated as, and considered effective as, hedges of the underlying assets or liabilities. Changes in the value of the derivative instruments designated as hedges of foreign currency denominated assets and liabilities are classified in the same manner as the classification of the changes in the underlying assets and liabilities. Discounts or premiums related to the contracts are recognized in income over the life of the contract.
The Company does not enter into derivative financial instruments for trading or speculative purposes and monitors the financial stability and credit standing of its counterparties.
Foreign Currency Translation. Balance sheet accounts are translated at the exchange rates in effect at each year-end and income and expense accounts are translated at the average rates of exchange prevailing during the year. The national currencies of foreign operations are generally the functional currencies. Gains and losses from foreign currency translation and the effect of exchange rate changes on intercompany transactions of a long-term investment nature are generally included as a separate component of stockholders’ equity. Gains and losses from foreign currency translation of intercompany receivables and payables that are not of a long-term investment nature are reported currently in costs and expenses and amounted to a gain (loss) of $27 million, $(7) million and $3 million in 2001, 2000 and 1999, respectively. The $27 million gain in 2001 includes a $24 million gain recorded in selling, general, administrative and other expenses related to the translation of U.S. dollar intercompany receivables in Argentina as a result of the devaluation of the Argentine Peso. Gains and losses from foreign currency transactions are reported currently in costs and expenses and were insignificant for all periods presented.
Income Taxes. Under the asset and liability method of accounting for income taxes, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets, including net operating loss carryforwards, and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the new rate is enacted.
The Trust has elected to be treated as a REIT under the provisions of the Code. As a result, the Trust is not subject to federal income tax on its taxable income at corporate rates provided it distributes annually all of its taxable income to its shareholders and complies with certain other requirements.
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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):
(a)
Class A Exchangeable Preferred Shares. 	
(b)
Class B Exchangeable Preferred Shares. 	
(c)
For the period ended December 31, 1999, 	8 million Class A and B EPS and 1 million stock 	options were excluded from the computations of diluted earnings 	per Share as the effects were antidilutive. 	
In April 2001, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) issued Topic No. D-95, “Effect of Participating Convertible Securities on the Computation of Basic Earnings Per Share.” EITF Topic No. D-95 clarifies SFAS No. 128, “Earnings Per Share,” as it relates to convertible securities that participate in the Company’s dividends. The EITF Topic notes that these securities should be included in the computation of basic earnings per share, if dilutive. Prior to the adoption of this Topic, the Company included these securities (Class A and B EPS) in the computation of diluted earnings per share. Prior periods affected by this EITF Topic have been restated. The adoption of this Topic had no effect on diluted earnings per share.
Revenue Recognition. The Company’s revenues are primarily derived from the following sources: (1) hotel and resort revenues at the Company’s owned, leased and consolidated joint venture properties; (2) management and franchise fees; (3) vacation ownership revenues; and (4) other revenues which are ancillary to the Company’s operations. Generally, revenues are recognized when the services have been rendered. The following is a description of the composition of revenues for the Company:
•
Owned, Leased and Consolidated Joint 	Ventures - Represents revenue primarily derived from 	hotel and leisure operations, including the rental of rooms and 	food and beverage sales, from a worldwide network of owned, 	leased or consolidated joint venture hotels and resorts operated 	primarily under the Company’s proprietary brand names 	including St. Regis, The Luxury Collection, Sheraton, 	Westin, W and Four Points by Sheraton. Revenue is recognized 	when rooms are occupied and services have been rendered. 	
•
Management and Franchise Fees - 	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 by Sheraton 	brand names. Management fees are comprised of a base fee, which 	is generally based on a percentage of gross revenues, and an 	incentive fee, which is generally based on the property’s 	profitability. Base fee revenues are recognized 	
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when earned in accordance with the terms of the 	contract. For any time during the year, incentive fees are 	recognized for the fees due as if the contract was terminated at 	that date, exclusive of any termination fees due or payable. 	Franchise fees are generally based on a percentage of hotel room 	revenues and are recognized in accordance with SFAS No. 45, 	“Accounting for Franchise Fee Revenue,” as the fees 	are earned and become due from the franchisee. Management and 	franchise fees are recognized in other hotel and leisure 	revenues in the consolidated statements of operations. 	
•
Vacation Ownership - The Company 	recognizes revenue from VOI sales in accordance with SFAS 	No. 66, “Accounting for Sales of Real Estate.” 	The Company recognizes sales when a minimum of 10% of the 	purchase price for the VOI has been received, the period of 	cancellation with refund has expired and receivables are deemed 	collectible. For sales that do not qualify for full revenue 	recognition as the project has progressed beyond the preliminary 	stages but has not yet reached completion, all revenue and 	profit are initially deferred and recognized in earnings through 	the percentage-of-completion method. Vacation ownership revenues 	are recognized in other hotel and leisure revenues in the 	consolidated statements of operations. 	
Self-Insurance. Through its captive insurance company, the Company provides insurance coverage for workers’ compensation, property and general liability claims arising at hotel properties owned or managed by the Company through policies written directly and through assumed reinsurance arrangements. Estimated insurance claims payable represent outstanding claims and those estimated to have been incurred but not reported based upon historical loss experience. Actual costs may vary from estimates based on trends of losses for filed claims and claims estimated to be incurred but not yet filed. Estimated costs of these self-insurance programs are accrued, based on the analysis of third-party actuaries.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications. Certain reclassifications have been made to the prior years’ financial statements to conform to the current year presentation.
Impact of Recently Issued Accounting Standards. In response to a FASB staff announcement in November 2001, the Company is in the process of reviewing the reporting of the reimbursement of costs incurred on behalf of managed hotel property owners and franchisees. The Company expects to record the reimbursements received as revenues and the costs incurred on behalf of managed hotel property owners and franchisees as expenses commencing in the first quarter of 2002. These costs relate primarily to payroll costs at managed properties where the Company is the employer. Although the Company is in the process of summarizing such amounts, it estimates that revenues and expenses would have been between $700 million and $900 million higher had the change been made in 2001. The impact on years prior to 2001 is still being accumulated since such information is not readily determinable from the Company’s existing financial reporting systems. Upon application of this staff announcement, comparative financial statements for prior periods will be reclassified to conform with the presentation in the 2002 financial statements. Since the reimbursements are made based upon the costs incurred with no added margin, the adoption of this guidance will have no effect on the operating income, total or per Share net income, cash flows or financial position of the Company.
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The new rules apply to the classification and impairment analysis conducted on long-lived assets other than intangible assets and became effective January 1, 2002. The new rules provide a single
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accounting treatment for the impairment of long-lived assets and implementation guidance regarding impairment calculations. This statement also modifies accounting and disclosure requirements for discontinued operations. The adoption of SFAS No. 144 is not anticipated to have a material impact on the Company.
Note 3. Acquisitions
Acquisition of Sheraton Centre Toronto. In April 2001, the Company completed the acquisition of the remaining 50% interest not previously owned by the Company in the 1,377-room Sheraton Centre Toronto for $75 million Canadian dollars (approximately U.S. $48 million based on exchange rates at the time). The Company accounted for the acquisition as a step acquisition in accordance with Accounting Principles Board (“APB”) Opinion No. 16, “Business Combinations.” The results of the acquisition have been included in the accompanying consolidated financial statements since the acquisition date.
Acquisition of Royal Orchid Hotel. In April 2001, the Company completed the acquisition of 44% of an entity which owns the Royal Orchid Hotel in Bangkok, Thailand for $27 million.
Acquisition of CIGA S.p.A. In June 2000, the Company completed the acquisition of the minority ownership interest of CIGA S.p.A. (“CIGA”) not previously owned by Starwood. The aggregate purchase price of the incremental shares was approximately $312 million. The Company accounted for the acquisition of the outstanding CIGA shares as a step acquisition in accordance with APB Opinion No. 16, resulting in an allocation to property and goodwill of approximately $102 million. The results of the acquisition have been included in the accompanying consolidated financial statements since the acquisition date.
Acquisition of Starwood Vacation Ownership, Inc. On October 1, 1999, the Company completed the acquisition of Starwood Vacation Ownership, Inc. (formerly Vistana, Inc.) (“SVO”), whereby SVO merged with and into a subsidiary of the Corporation and thereby became a wholly owned subsidiary of the Corporation. The Company financed the acquisition of SVO with cash of approximately $110 million, the assumption of approximately $280 million of debt and the issuance of approximately 10.1 million Shares. SVO’s principal operations include the acquisition, development and operation of vacation ownership resorts; marketing and selling VOIs in the resorts; and providing financing to customers who purchase such interests. The Company accounted for the acquisition of SVO as a purchase in accordance with APB Opinion No. 16. As such, the carrying values of the assets acquired (including net cash of approximately $35 million) and liabilities assumed were recorded at fair market value, resulting in goodwill of approximately $256 million. The results of SVO’s operations have been included in the accompanying financial statements since the acquisition date.
The pro forma effect on the Company’s revenues, net income and earnings per Share, as though these acquisitions occurred as of January 1 of the respective years, is not material.
Note 4. Gain (Loss) on Asset Dispositions, Net, and Asset Impairments
Due to the September 11, 2001 terrorist attacks in New York, Washington, D.C. and Pennsylvania (the “September 11 Attacks”) and the weakening of the U.S. economy, the Company conducted a comprehensive review of the carrying value of certain assets for potential impairment. As a result, the Company recorded a net charge relating primarily to the impairment of certain investments in the fourth quarter of 2001 totaling $57 million.
In September and October of 1999, the Company sold its 52.8% stake in Lampsa, SA, a Greek company that owns the Grande Bretagne Hotel in Athens, Greece. The Company owned its interest in Lampsa, SA through its then 70.3% ownership of CIGA. The Company received gross proceeds (before minority interest) of approximately $287 million as a result of this sale and recorded a pretax gain (before minority interest) of $276 million.
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During 2001 and 2000, the Company sold one and seven hotels, respectively. The Company recorded a net gain on these sales of $2 million in 2000, which includes an impairment write-down of the hotel subsequently sold in early 2001.
Note 5. Asset Securitizations
The Company accounted for asset securitizations as sales under SFAS No. 125, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” through March 31, 2001 and accounts for these transactions under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a Replacement of FASB Statement No. 125,” thereafter.
During 2001, the Company sold, without recourse, through a bankruptcy-remote qualified special purpose entity (“QSPE”), notes receivable originated by the Company’s vacation ownership operations in connection with the sale of VOIs. The Company continues to service the notes. The Company retains interests in the securitizations in the form of over-collateralization and interest-only strips (“Beneficial Interests”), both of which provide credit enhancement to the third party investors in the QSPE. The Company’s right to receive cash flows from these Beneficial Interests is limited to cash available after paying the QSPE’s financing expenses, program fees and absorbing the QSPE’s credit losses. Gains from the sales of notes receivable totaled $12 million in 2001 and are included in other hotel and leisure revenues in the consolidated statements of operations.
At the date of securitization and at the end of each reporting period, the Company estimates the fair value of the Beneficial Interests using a discounted cash flow model. The Beneficial Interests are debt securities that are accounted for under the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and classified as either “available-for-sale” or “trading.” The Company has elected to classify the Beneficial Interests as “trading” securities with changes in fair values reported through operating results. During the year ended December 31, 2001, the Company recognized a $2 million gain, included in gain (loss) on asset dispositions, net, and asset impairments relating to changes in the fair value of these Beneficial Interests. The key assumptions used in measuring the fair value of the Beneficial Interests at the time of securitization and at the end of each reporting period during the year ended December 31, 2001, were as follows: discount rate of 16.0%; annual prepayment rate based upon a curve, which yields an average expected life of prepayable notes receivable of 70 months; and expected annual gross credit losses of 1.7%. The key assumptions are based on historical experience. To date, actual results compared with the assumptions used at the time of securitization have not materially affected the carrying value of the Beneficial Interests.
Cash flows between the Company and the QSPE during the year ended December 31, 2001 were as follows: net proceeds to the Company from new securitizations of $202 million, servicing fees received of $1 million and cash flows received on Beneficial Interests of $10 million.
At December 31, 2001, $192 million of principal remains outstanding in all securitizations in which the Company has a Beneficial Interest. Delinquencies of more than 90 days at December 31, 2001 amounted to $5 million. The Company has been able to resell vacation ownership units underlying repurchased loans without incurring material losses.
The Company has completed a sensitivity analysis on the net present value of the Beneficial Interests with the objective of measuring the change in value associated with independent changes in individual key variables. The methodology used applied unfavorable changes that would be considered statistically significant for the key variables of prepayment rate, discount rate and expected gross credit losses. The net present value of the Beneficial Interests was $31 million at December 31, 2001, before any sensitivity analysis changes were applied. An increase of 100 basis points in the annual prepayment rate would decrease the year-end valuation by $0.3 million, or 1.0%, and an increase of 200 basis points in the annual prepayment rate would decrease the
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year-end valuation by $0.6 million, or 1.9%. An increase of 100 basis points in the discount rate would decrease the year-end valuation by $0.4 million, or 1.3%, and an increase of 200 basis points in the discount rate would decrease the year-end valuation by $0.9 million, or 3.0%. An increase of 100 basis points in the expected gross annual rate of credit losses would decrease the year-end valuation by $2.1 million, or 6.8%, and an increase of 200 basis points in the expected credit losses would decrease the year-end valuation by $4.3 million, or 14.0%. These estimates should not be considered predictions of how the value of the Company’s Beneficial Interests would actually change in the future as they do not consider the interaction of these factors which may move independently of each other.
The Company also periodically sells, without recourse, through special purpose entities (“SPEs”), notes receivable originated by the Company’s vacation ownership operations in connection with the sale of VOIs. The Company continues to service the notes. The Company also holds retained interests in these mortgage-receivable sales (“Retained Interests”). The Company’s right to receive cash flows from these Retained Interests are limited to cash available after paying the related SPE’s financing expenses, program fees and absorbing the related SPE’s credit losses. Gains from such sales totaled $0 in 2001, $14 million in 2000 and $6 million in 1999 and are included in other hotel and leisure revenues in the consolidated statements of operations. In connection with the 2001 securitization, the Company repurchased all existing receivables under the SPEs.
Note 6. Discontinued Operations
Gaming. On December 30, 1999, the sale of Caesars World, Inc. (“Caesars”) was completed. On June 23, 2000, the sale of the Desert Inn Resort & Casino (the “Desert Inn”) was completed (together with the sale of Caesars, the “Gaming Dispositions”). The Company received approximately $3.3 billion in proceeds from the Gaming Dispositions which was used to pay off $2.5 billion of increasing rate notes and to reduce its bank revolver. These sales constituted the disposition of Starwood’s gaming operations.
As a result of the Gaming Dispositions, the accompanying consolidated financial statements were restated in 1999 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 $165 million for the year ended December 31, 1999 and the related interest expense of $6 million and $163 million for the years ended December 31, 2000 and 1999, respectively, to the discontinued gaming operations. These allocations were 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 gaming operations of $180 million ($158 million pretax), which included anticipated operating income of approximately $50 million prior to the disposal. In the fourth quarter of 1999, the Company provided for additional losses on the sale of its gaming operations in the amount of $55 million (including tax of $9 million), primarily due to the delay in the closing of the sale, lower than estimated operating profits prior to the sale and certain adjustments to the sale price made at closing. Additionally, the Company provided for additional losses on the disposal of the Desert Inn of $9 million (net of a $5 million tax benefit), primarily as a result of additional anticipated operating losses prior to the sale. During 2000, the Company reversed $5 million (after-tax) of the amount previously provided related to these dispositions following the finalization of the purchase price with the buyers.
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Summary financial information of the discontinued gaming operations is as follows (in millions):
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 and sold 1.5 million shares of common stock at $32.73 per share directly to Educational Services. 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. The Company recognized a gain of $272 million, before income taxes of $99 million, on the sale.
Note 7. Goodwill and Intangible Assets
Goodwill and intangible assets consisted of the following (in millions):
Prior to the adoption of SFAS No. 142, goodwill and trademarks and trade names were amortized on a straight-line basis over a 40-year period. Commencing January 1, 2002, goodwill and trademarks and trade names, which are deemed intangible assets with an indefinite life, are no longer amortized. Intangible assets associated with management and franchise contracts are amortized on a straight-line basis over the initial life of the respective contract.
Note 8. Extraordinary Item
During the second quarter of 2001, the Company prepaid $500 million on the Tranche II Senior Secured Notes Facility, resulting in an extraordinary loss on the early extinguishment of debt of $9 million (pretax).
During the first quarter of 2000, the Company prepaid $28.4 million on a mortgage loan resulting in an extraordinary loss on the early extinguishment of debt of $3 million (pretax).
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In December 1999, the Company used the proceeds from the sale of Caesars to pay off $2.5 billion of increasing rate notes. This early extinguishment of debt required termination fees of $38 million and the write-off of $10 million of deferred loan fees associated with this debt. This $48 million (pretax) charge was recorded in December 1999 as an extraordinary loss on the early extinguishment of debt.
In August 1999, Caesars redeemed its senior subordinated notes for an aggregate payment of $152 million, recognizing an extraordinary loss of $3 million (pretax).
Note 9. Restructuring and Other Special Charges
At December 31, 2001, the Company has remaining accruals related to restructuring and other special charges, described below, of $98 million, $21 million of which is included in other long-term liabilities in the accompanying 2001 consolidated balance sheet. These accruals consist of $65 million for certain litigation costs and $33 million primarily related to severance payouts in connection with the 2001 reduction in force and remaining lease commitments which expire through 2006.
2001 Restructuring and Other Special Charges. During 2001, the Company recorded restructuring and other special charges of $70 million (pretax), primarily related to the September 11 Attacks and the resulting decline in industry-wide demand, including a $23 million (pretax) write-down of the Company’s investments in various e-business ventures. These charges were offset by the reversal of a $20 million (pretax) bad debt charge taken in 1998 related to a note receivable, which is now fully performing.
Due to the September 11 Attacks and the weakening of the U.S. economy, the Company began analyzing and implementing a cost reduction plan and conducted a comprehensive review of the carrying value of certain assets for potential impairment, resulting in restructuring and other special charges aggregating approximately $47 million. These charges consisted primarily of severance and retention costs (approximately $25 million); bad debt expense associated with receivables no longer deemed collectible (approximately $17 million); and impairments of certain investments and other assets (approximately $5 million). Approximately $14 million of these special items represent cash charges, with the remaining amount being non-cash.
1999 Restructuring and Other Special Charges (Credits). During 1999, the Company recorded restructuring charges of $5 million (pretax) attributed to the rationalization of one of its technology centers. In addition, the Company recorded other special charges of $13 million attributed to severance benefits for the former President and Chief Operating Officer of the Corporation and $75 million attributed primarily to an accrual for certain litigation costs related to an unfavorable judgment in a matter involving the former Sheraton hotel in Washington, D.C. as well as expected legal costs associated with the Intelnet International Corporation (“Intelnet”) dispute (see Note 20).
ITT Merger-Related Charges (Credits). In connection with the ITT Merger, the Company recorded restructuring and other special charges totaling $172 million (pretax) in 1998 for ITT Merger-related costs and the write-down of certain assets. During 1999, the Company reversed $8 million of these charges as the ITT Merger costs were less than originally anticipated.
During 1997, Sheraton Holding recorded special charges as a result of the ITT Merger for conversion of the accounting of Sheraton Holding’s stock option plan to variable accounting due to limited stock appreciation rights subject to exercise and related charges for tax reimbursements to employees of $404 million. During 1999, the Company reversed approximately $50 million in accruals related to the resolution of certain employment related contingencies.
Other Sheraton Holding Restructuring and Other Special Charges (Credits). During 1997, Sheraton Holding recorded pretax charges totaling $236 million to restructure and rationalize operations at its world
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headquarters and the headquarters of its field operations. During 1999, the Company reversed $32 million of these charges, as the costs were less than anticipated.
Note 10. Plant, Property and Equipment
Plant, property and equipment consisted of the following (in millions):
As of December 31, 2000, the Company identified six hotels totaling $70 million as non-core assets and classified them as held for sale. These hotels were included in plant, property and equipment in the accompanying 2000 consolidated balance sheet. In January 2001, the Company sold one hotel for proceeds of $21 million. As a result of the September 11 Attacks and the economic climate in the United States at the end of 2001, the Company determined that it was not prudent at this time to sell the remaining hotels. The Company has reclassified the hotels from held for sale to in-service plant, property and equipment as of December 31, 2001.
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Note 11. Income Taxes
Income tax data from continuing operations of the Company is as follows (in millions):
No provision was made for U.S. taxes payable on undistributed foreign earnings amounting to approximately $117 million since these amounts are permanently reinvested.
Deferred income taxes represent the tax effect of the differences between the book and tax bases of assets and liabilities. Deferred tax assets (liabilities) include the following (in millions):
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At December 31, 2001, the Company has net operating loss and tax credit carryforwards of approximately $591 million and $24 million, respectively, for federal income tax purposes. Substantially all operating loss carryforwards, which are expected to provide future tax benefits, expire between 2018 and 2021.
In February 1998, the Company disposed of ITT World Directories. The Company provided for income taxes of $524 million on this transaction, which are included in deferred income taxes in the accompanying consolidated balance sheets. While the Company strongly believes this transaction was completed on a tax deferred basis, this position is currently under review by the Internal Revenue Service. The results of such a review are unpredictable. If this transaction were deemed fully taxable in 1998, then the Company’s tax liability would be approximately $524 million, the amount of deferred income tax indicated above, plus interest, and would be partially offset by the Company’s net operating loss discussed above. The Company plans to vigorously defend its position in this matter.
A reconciliation of the tax provision of the Company at the U.S. statutory rate to the provision for income tax as reported is as follows (in millions):
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Note 12. Debt
Long-term debt and short-term borrowings consisted of the following (in millions):
Aggregate debt maturities for each of the years ended December 31 are as follows (in millions):
On February 23, 1998, Starwood entered into two credit facilities with Lehman Brothers, Bankers Trust Company, The Chase Manhattan Bank and other financial institutions. The Senior Credit Facility and the Senior Secured Notes Facility comprise Starwood’s primary existing credit facilities. In September 1998, the Company increased its borrowings under the Senior Secured Notes Facility with a $1 billion, five-year term borrowing facility (“Tranche II Loans”). In December 2000, the Company increased the amount available under the Senior Credit Facility by $172.5 million (“Term Loan Add-on”). In January 2001 and May 2001, the Company completed add-on financings to its Term Loan Add-on of $150 million and $100 million, respectively. The proceeds from the Term Loan Add-ons were used to reduce the amount outstanding under the Company’s Revolving Credit Facility. In November 2001, the Company successfully amended certain terms of its Senior Credit Facility. The amendment gives the Company greater financial flexibility by modifying various financial covenants until the expiration of the facility in early 2003. The amended provisions
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include adjustments to the Company’s combined leverage ratio and interest coverage ratio as well as modification of the timing of amortization payments.
In January 1999, the Company completed a $542 million long-term financing (the “Mortgage Loan”), secured by mortgages on a portfolio of 11 hotels. The Mortgage Loan is due in February 2009, and the proceeds from the Mortgage Loan were used to pay down the one-year term loan under the Senior Credit Facility, which was subsequently paid off.
In July 2000, the Company entered into a one-year, Euro 270 million loan (approximately $252 million based on exchange rates at the time) at an initial average interest rate of Euribor plus 112.5 basis points for the first six months and increasing to Euribor plus 137.5 basis points for the remaining six months. This loan was extended through July 2002. In December 2001, the Company entered into an 18-month Euro 450 million loan (approximately $399 million based on exchange rates at the time) with an interest rate of Euribor plus 195 basis points. The proceeds of the Euro 450 million loan were drawn down in two tranches: the first 270 million Euros was drawn down in December 2001 and used to repay the previously outstanding Euro 270 million facility and the remaining 180 million Euros was drawn down in January 2002, and the proceeds were used to repay a portion of the Company’s domestic Revolving Credit Facility.
In May 2001, the Company sold an aggregate face amount of $816 million zero coupon convertible senior notes due 2021 (the “Notes”). The Company received gross proceeds from these sales of approximately $500 million, which were used to repay a portion of its Tranche II Loans that bore interest at LIBOR plus 275 basis points. The Notes have an initial blended yield to maturity of 2.35%. The Notes, consisting of two series, are convertible, subject to certain conditions, into an aggregate 9,657,000 Shares. On May 25, 2002, each Series A holder may require the Company to purchase the notes, subject to certain conditions. Series A notes that may be presented to the Company in May 2002 total approximately $202 million. These Series A notes have been included in long-term debt at December 31, 2001 based upon the Company’s ability and intent to refinance. Series B holders may first present their aggregate notes to the Company in May 2004 for approximately $330 million.
The Company has the ability to draw down on its Revolving Credit Facility in various currencies. Drawdowns in currencies other than the U.S. dollar represent a natural hedge of the Company’s international net assets. At December 31, 2001, the Company had $43 million drawn in Canadian dollars, with the remaining $621 million drawn in U.S. dollars.
Repayment of amounts borrowed under the Senior Credit Facility is guaranteed by the Trust, the Company and substantially all their respective significant subsidiaries (including the Partnerships) other than foreign subsidiaries and joint venture entities (the “Guarantor Subsidiaries”) to the extent such entities are not borrowers or co-borrowers, and is secured by a pledge of primarily all the capital stock, partnership interests and other equity interests of the Guarantor Subsidiaries.
The Company maintains lines of credit under which bank loans and other short-term debt are drawn. In addition, smaller credit lines are maintained by the Company’s foreign subsidiaries. The Company had approximately $487 million of available borrowing capacity under its domestic and international facilities as of December 31, 2001.
The Company is subject to certain restrictive debt covenants under its short-term borrowing and long-term debt obligations including defined financial covenants, escrow account funding requirements for capital purchases, tax payments and insurance premiums, limitations on capital expenditures and on the Company’s right to incur further debt and restrictions on transactions with affiliates and related persons, among other restrictions. Under the terms of the Company’s Senior Credit Facility, the Trust may pay unlimited dividends to the Corporation or any wholly owned subsidiary thereof and during any period of twelve consecutive
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calendar months, the Trust may pay cash dividends to its shareholders (excluding the Corporation and any wholly owned subsidiary) in an aggregate initial amount not to exceed the lesser of (a) $150,000,000 in 1999 and increasing 20% annually thereafter and (b) 10% of EBITDA as defined in the Senior Credit Facility. In September 2001 and November 2001, the Company obtained waivers of this dividend restriction from its lenders, allowing the Company to pay its regularly scheduled dividends for the third and fourth quarter of 2001. The Company was in compliance with all of the short-term borrowing and long-term debt obligation covenants, as amended, at December 31, 2001.
The weighted average interest rate for short-term borrowings was 4.85% and 6.04% at December 31, 2001 and 2000, respectively, and their fair values approximated carrying value given their short-term nature. These average interest rates are composed of interest rates on both U.S. dollar and non-U.S. dollar denominated indebtedness.
For adjustable rate debt, fair value approximates carrying value due to the variable nature of the interest rates. For fixed rate debt, fair value is determined based upon discounted cash flows for the debt at rates deemed reasonable for the type of debt and prevailing market conditions and the length to maturity for the debt. The estimated fair value of debt at December 31, 2001 and 2000 was $5.3 billion and $5.4 billion, respectively, and was determined based on quoted market prices and/or discounted cash flows.
Note 13. Employee Benefit Plans
Pension and Postretirement Benefit Plans. The Company and its subsidiaries sponsor numerous pension plans, including the ITT Corporation Salaried Retirement Plan and the ITT Sheraton Corporation Pension Plan for Hourly Employees (“ITT Plans”), the Starwood Hotels & Resorts Worldwide, Inc. Retirement Plan for Foreign Service Employees and the Westin Supplemental Executive Retirement Plan. Effective January 1, 2000, the ITT Plans were merged and the ITT Corporation Salaried Retirement Plan (“Salaried Plan”) name was retained. Immediately after the merger, the merged Plans spun off an allocated portion of assets and liabilities to form the ITT Sheraton Corporation Ongoing Retirement Plan (“Ongoing Plan”). Additionally, the Company filed a request for an Internal Revenue Service determination letter concerning the termination of the Salaried Plan as of July 31, 2000, which was approved in April 2001.
Due to the termination of the Salaried Plan, all plan liabilities have been settled either as lump sum disbursements, annuity purchases, transfers to the Ongoing Plan or transfers to Pension Benefit Guaranty Corporation for the missing participants. Termination lump sum distributions of $85 million and an additional $10 million of disbursements in the normal course of operations are reflected in the 2001 activity in the table below. The Company recorded $14 million of settlement gains as a result of the Salaried Plan’s termination primarily from the annuity purchases and lump sum distributions. As of December 31, 2001, the Ongoing Plan assets included approximately 348,000 Shares of the Company’s common stock.
The Ongoing Plan is funded; assets are comprised primarily of fixed income investments. The Westin Supplemental Executive Retirement Plan is a non-contributory, non-qualified plan that provides benefits for certain executives. The plan is unfunded apart from general assets of the Company. The non-U.S.-based plans are funded, except in certain countries where funding is not required.
The Company also sponsors the ITT Sheraton Post-Retirement Welfare Program. The plan provides health care and life insurance benefits for certain eligible retired employees. The Company has prefunded a portion of the health care and life insurance obligations through trust funds where such prefunding can be accomplished on a tax effective basis. The Company also funds the health plan on a pay-as-you-go basis.
The following table sets forth the benefit obligation, fair value of plan assets, and the funded status of the Company’s pension and other benefit plans, amounts recognized in the Company’s consolidated balance sheets
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at December 31, 2001 and 2000, and the principal weighted average assumptions inherent in their determination (amounts are in millions):
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For measurement purposes, a 5.50% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2001. The rate was assumed to decrease gradually to 5.00% in 2002 and remain at that level thereafter. Assumed health care cost trend rates can have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would not have a material effect on the total of service and interest cost components or on the postretirement benefit obligation.
Defined Contribution Plans. The Company sponsors the Starwood Hotels & Resorts Worldwide, Inc. Savings and Retirement Plan (“Retirement Plan”), which is a voluntary defined contribution plan allowing participation by employees on U.S. payroll who meet certain age and service requirements. On July 1, 2001, the defined contribution plan maintained by SVO was merged into the Retirement Plan. Each participant may contribute on a pretax basis between 1% and 18% of his or her compensation to the plan subject to certain maximum limits. The plan also contains additional provisions for matching contributions to be made by the
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Company which are based on a portion of a participant’s eligible compensation. The amount of expense for matching contributions totaled $15 million in 2001, $17 million in 2000 and $19 million in 1999.
Note 14. Leases and Rentals
The Corporation leases certain equipment for the hotels’ operations under various lease agreements. The leases extend for varying periods through 2038 and generally are for a fixed amount each month. In addition, 16 of the Corporation’s hotels are subject to leases of building facilities from third parties which extend for varying periods through 2064 and generally contain fixed and variable components. In September 2001, the Company entered into a building lease of the Westin Dublin hotel in Dublin, Ireland. The lease term is 25 years with fixed annual payments of $3 million. In December 2001, the Company entered into a building lease of the W Times Square hotel in New York City. This lease has a term of 25 years with fixed annual lease payments of $16 million.
The Company’s minimum future rents at December 31, 2001 payable under non-cancelable operating leases with third parties are as follows (in millions):
Rent expense under non-cancelable operating leases was $75 million, $64 million and $41 million in 2001, 2000 and 1999, respectively.
The Trust owns equity interests in 91 hotels, all of which are leased to the Corporation as of December 31, 2001. The leases between the Trust and the Corporation are generally for three-year terms and provide for annual base, or minimum rents, plus contingent, or percentage rents based on the gross revenues of the properties and are accounted for as operating leases. The leases are “triple-net” in that the lessee is generally responsible for paying all operating expenses of the properties, including maintenance, insurance and real property taxes. The lessee is also generally responsible for any payments required pursuant to underlying ground leases. Total rental expense incurred by the Corporation under such leases with the Trust was approximately $457 million for the year ended December 31, 2001, of which approximately $139 million related to percentage rent. The Trust’s rents receivable from the Corporation relating to leased hotel properties at December 31, 2001 and 2000 was $35 million and $34 million, respectively.
The Corporation’s minimum future rents at December 31, 2001 payable under non-cancelable operating leases with the Trust, as if existing leases were extended under their original terms, are approximately $335 million per year.
Note 15. Equity Put Options
In November 1999, in connection with the termination of a certain executive’s employment, the Company granted this executive the option to cause the Company to purchase from the executive 566,166 Shares for a purchase price of $34.25 per Share. This option was exercisable in the fourth quarter of 2000 at which time the executive sold 366,166 of these Shares on the open market and put the remaining 200,000 Shares to the Company at a total cost of $6.9 million. The Company recorded the fair market value of the options as compensation expense of $6.7 million in 1999.
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Note 16. Stockholders’ Equity
Share Repurchases. In 1998, the Board of Directors of the Company approved the repurchase of up to $1 billion of Shares under a Share repurchase program (the “Share Repurchase Program”). On April 2, 2001, the Company’s Board of Directors authorized the repurchase of up to an additional $500 million of Shares, subject to the terms of the Senior Credit Facility. Pursuant to the Share Repurchase Program, through December 31, 2001, Starwood has repurchased 19.0 million Shares (including 500,000 Shares under equity put option contracts) in the open market for an aggregate cost of $618 million. As of December 31, 2001, approximately $633 million remains available under the Share Repurchase Program.
Exchangeable Preferred Shares. During 1998, 6.3 million shares of Class A EPS and 5.5 million shares of Class B EPS were issued by the Trust in connection with the Westin Merger. Class A EPS have a par value of $0.01 per share and are convertible on a one-for-one basis (subject to certain adjustments) to Shares. Class B EPS have a liquidation preference of $38.50 per share and provide the holders with the right, from and after the fifth anniversary of the closing date of the Westin Merger which will begin on January 2, 2003, to require the Trust to redeem such shares at a price of $38.50. Shares of Class B EPS are convertible on a one-for-one basis (subject to certain adjustments) to Class A EPS. During 2001, the Trust consented to the conversion of approximately 1,939,000 shares of Class B EPS by certain stockholders into an equal number of shares of Class A EPS. Additionally, the Trust consented to the exchange of approximately 2.0 million shares of Class A EPS into an equal number of Shares. At December 31, 2001, the Trust had 150 million preferred shares authorized and approximately 550,000 and 1.1 million of Class A EPS and Class B EPS outstanding, respectively.
Note 17. Stock Incentive Plans
In 1999, the Company adopted the 1999 Long-Term Incentive Compensation Plan (“1999 LTIP”) which superseded the 1995 Share Option Plan (the “1995 LTIP”) and provides for the purchase of Shares by Directors, officers, employees, consultants and advisors, pursuant to option grants. In August 2001, the Company amended the 1999 LTIP for certain retiree provisions. Although no additional awards will be granted under the 1995 LTIP, the 1995 LTIP will continue to govern awards that have been granted and remain outstanding under the 1995 LTIP. The aggregate number of Shares subject to non-qualified or incentive stock options, performance shares, restricted stock or any combination of the foregoing which are available to be granted under the 1999 LTIP at December 31, 2001 was approximately 9.7 million.
The Company applies APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations; accordingly, compensation cost is not recognized for grants of stock options at market price. Had compensation cost for grants been determined based on the fair value of the options at the grant dates consistent with SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income (loss) would have been negatively impacted by $67 million ($0.33 per basic Share), $60 million ($0.30 per basic Share) and $49 million ($0.26 per basic Share) in 2001, 2000 and 1999, respectively. The fair value of each option grant used in the 2001, 2000 and 1999 pro forma amounts was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2001, 2000 and 1999, respectively: dividend yield of 2.2%, 2.4% and 2.9%, expected volatility of 47.0%, 46.1% and 41.9%, risk-free interest rates of 4.3%, 6.5% and 6.3% and an expected life of three years for all options.
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The following table summarizes stock option activity for the Company:
The following table summarizes information about outstanding stock options at December 31, 2001:
During 2001, the Company granted restricted stock awards for 1,232,339 Shares. Restricted stock awards outstanding as of December 31, 2001 totaled 1,060,079 Shares, and approximately 95,193 Shares were vested. Compensation expense of approximately $17.5 million, $3.8 million and $0.6 million was recorded during 2001, 2000 and 1999, respectively, related to restricted stock awards. The 2001 compensation expense includes an $11 million special charge related to the accelerated amortization of 50% of restricted stock awards granted in February 2001. The vesting was accelerated to enhance employee retention efforts following the September 11 Attacks.
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Note 18. Derivative Financial Instruments
The Company enters into interest rate swap agreements to manage interest rate risk. The Company’s objective is to manage the impact of interest rate changes on the results of operations, cash flows and the market value of the Company’s debt. At December 31, 2001, the Company had five outstanding interest rate swap agreements under which the Company pays a fixed rate and receives variable rates of interest. These swaps (the “Cash Flow Swaps”) are classified as cash flow hedges and mature through 2003. The Company adjusts the Cash Flow Swaps to current market value through other comprehensive income as they are effective in offsetting the interest rate exposure of the interest payments being hedged. The Company anticipates that the Cash Flow Swaps will continue to be effective but will recognize the unrealized loss related to these contracts immediately into the results of operations if they are deemed to be no longer effective. The aggregate notional amount of the Cash Flow Swaps was approximately $947 million and the estimated unrealized loss on these interest rate swaps was approximately $31.1 million at December 31, 2001.
At December 31, 2001, the Company also had three outstanding interest rate swap agreements under which the Company pays a floating rate and receives a fixed rate of interest (the “Fair Value Swaps”). The aggregate notional amount of the Fair Value Swaps was approximately $450 million. The Fair Value Swaps hedge the change in fair value of certain fixed rate debt related to fluctuations in interest rates and mature in 2005. The Fair Value Swaps modify the Company’s interest rate exposure by effectively converting debt with a fixed rate to a floating rate. The fair value of the Fair Value Swaps was a liability of approximately $840,000 at December 31, 2001.
The Company also enters into forward foreign exchange contracts to hedge the potential volatility of earnings and cash flow associated with changing foreign exchange rates and the effects on the Company’s foreign currency denominated assets and liabilities. At December 31, 2001, the Company had seven forward foreign exchange contracts outstanding with a dollar equivalent of the contractual amounts of these hedges at December 31, 2001 of approximately $366 million. The aggregate fair value of these contracts outstanding at December 31, 2001 was $162,000. These contracts matured in the first quarter of 2002.
The counterparties to the Company’s derivative financial instruments are major financial institutions.
Note 19. Related Party Transactions
General. Barry S. Sternlicht, Chairman, Chief Executive Officer and a Director of the Corporation, and Chairman, Chief Executive Officer and a Trustee of the Trust, controls and has been the President and Chief Executive Officer of Starwood Capital Group, L.L.C. (“Starwood Capital”) since its formation in 1991. Prior to joining Starwood in 1995, Steven R. Goldman was an employee of Starwood Capital, and he continues to own an interest in a portfolio investment of Starwood Capital.
Trademark License. An affiliate of Starwood Capital has granted to Starwood, subject to Starwood Capital’s unrestricted right to use such name, an exclusive, non-transferable, royalty-free license to use the “Starwood” name and trademarks in connection with the acquisition, ownership, leasing, management, merchandising, operation and disposition of hotels worldwide, and to use the “Starwood” name in its corporate name worldwide, in perpetuity.
Starwood Capital Noncompete. In connection with a restructuring of the Company in 1995, Starwood Capital agreed that, with certain exceptions, Starwood Capital would not compete directly or indirectly with the Company within the United States and would present to the Company all opportunities presented to Starwood Capital to acquire fee interests in hotels in the United States and debt interests in hotels in the United States where it is anticipated that the equity will be acquired by the debt holder within one year from the acquisition of such debt (the “Starwood Capital Noncompete”). During the term of the Starwood Capital Noncompete, neither Starwood Capital nor any of its affiliates is permitted to acquire any such interest, or any
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ground lease interest or other equity interest, in hotels in the United States. The Starwood Capital Noncompete continues until no officer, director, general partner or employee of Starwood Capital is on either the Board of Directors of the Corporation or the Board of Trustees of the Trust (subject to exceptions for certain restructurings, mergers or other combination transactions with unaffiliated parties). Several properties owned or managed by the Company, including the Westin Innisbrook Resort (the “Innisbrook Resort”), the Westin Mission Hills Resort and the Turnberry Hotel, were opportunities brought to the Company or its predecessors by Starwood Capital. With the approval in each case of the Audit Committee of the Board of Directors of the Corporation and the Board of Trustees of the Trust, from time to time the Company has waived the restrictions of the Starwood Capital Noncompete in whole or in part with respect to particular acquisition opportunities in which the Company had no interest.
Portfolio Investments. An affiliate of Starwood Capital holds an approximately 25% non-controlling interest in Troon Golf (“Troon”), a golf course management company that currently manages over 100 high-end golf courses. Mr. Sternlicht’s indirect interest in Troon held through such affiliate is approximately 12%. Troon is the largest third-party manager of golf courses in the United States. In 2001, Troon managed thirteen golf courses at resorts owned or managed by the Company. The Company paid Troon a total of $911,000 ($432,000 of which represents management fees and payments for other services and $479,000 of which represents reimbursement of expenses), $1,003,000 ($458,000 of which represents management fees and payments for other services and $545,000 of which represents reimbursement of expenses) and $950,000 ($454,000 of which represents management fees and payments for other services and $496,000 of which represents reimbursement of expenses) in 2001, 2000 and 1999, respectively, for the golf courses at the two resorts owned by the Company. In January 2002, after extensive review of alternatives and with the unanimous approval of the Governance Committee, the Company entered into a Master Agreement with Troon covering the United States and Canada whereby the Company has agreed to have Troon manage all courses in the United States and Canada that are owned by the Company and to use reasonable efforts to have Troon manage courses at resorts that the Company manages and franchises. The Company believes that the terms of the Troon agreement are at or better than market terms. Mr. Sternlicht did not participate in the negotiations or the approval of the Troon Master Agreement.
An entity in which Mr. Sternlicht has a 38% interest owned the common area of the Sheraton Tamarron Resort, which the Company managed until December 2001. As of the date of this filing, management fees earned and paid were $197,000, $219,000 and $240,000 relating to 2001, 2000 and 1999, respectively. In addition, approximately $620,000 of reimbursable expenses were also paid. The Company has outstanding receivables of approximately $314,000, which arose as a result of the termination of the Tamarron management agreement. The Company believes that the terms of the Tamarron agreement were at or better than market terms.
In addition, a subsidiary of Starwood Capital is a general partner of a limited partnership which owns approximately 45% in an entity that manages over 40 health clubs, including one health club and spa space in a hotel owned by the Company. In 2001, the Company paid approximately $84,000 to the management company for such management. The Company believes that the terms of the management agreement are at or better than market terms.
Other Management-Related Investments. Mr. Sternlicht has a 38% interest in an entity (the “Innisbrook Entity”) that owns the common area facilities and certain undeveloped land (but not the hotel) at the Innisbrook Resort. In May 1997, the Innisbrook Entity entered into a management agreement for the Innisbrook Resort with Westin, which was then a privately held company partly owned by Starwood Capital and Goldman, Sachs & Co. When the Company acquired Westin in January 1998, it acquired Westin’s rights and obligations under the management and other related agreements. Under these agreements, the hotel manager was obligated to loan up to $12.5 million to the owner in the event certain performance levels were
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not achieved. Management fees earned under these agreements were $716,000, $885,000 and $907,000 in 2001, 2000 and 1999, respectively. The Innisbrook Entity, the Company and other lenders are currently in discussions regarding the terms and timing of payments owed to the Company and such other lenders. The discussions relate to approximately $9 million in loans by the Company which funded resort operations and approximately $5 million of deferred management fees and reimbursable expenses as well as amounts owed by the Innisbrook Entity to other parties. Any settlement of this matter would be subject to the approval of the Governance Committee.
Aircraft Lease. In February 1998, the Company leased a Gulfstream III Aircraft from Star Flight LLC, an affiliate of Starwood Capital. The term of the lease was one year and automatically renews for one-year terms until either party terminates the lease upon 90 days’ written notice. The rent for the aircraft, which was set at approximately 90% of fair market value (based on two estimates from unrelated third parties), is (i) a monthly payment of 1.25% of the lessor’s total costs relating to the aircraft (approximately $123,000 at the beginning of the lease with this amount increasing as additional costs are incurred by the lessor), plus (ii) $300 for each hour that the aircraft is in use. Payments to Star Flight LLC were $1,682,000, $840,000 and $910,000 in 2001, 2000 and 1999, respectively.
Note 20. Commitments and Contingencies
The Company had the following contractual obligations outstanding as of December 31, 2001 (in millions):
(a)
The Company’s owned, managed and franchised 	hotels participate in various national purchasing agreements. As 	these agreements do not require specific purchasing thresholds 	for the Company or the Company’s owned, leased and 	consolidated joint venture hotels, no such amounts are reflected 	above. 	
The Company had the following commercial commitments outstanding as of December 31, 2001 (in millions):
Guaranteed Loans and Commitments. In limited cases, the Company has made loans to owners or partners in hotel or resort ventures whereby the Company has a management or franchise agreement. Loans outstanding under this program totaled $155 million at December 31, 2001. Unfunded commitments aggregating $26 million were outstanding at December 31, 2001, of which $11 million are expected to be funded in 2002 and $13 million are expected to be funded in total. These loans typically are secured by pledges of project ownership interests and/or mortgages on the projects.
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The Company participates in programs with unaffiliated lenders in which the Company may partially guarantee loans made to facilitate third-party ownership of hotels that the Company manages or franchises. At December 31, 2001, loan guarantees totaled $153 million relating to three projects: the St. Regis in Monarch Beach, California, which opened in mid-2001; the Westin Kierland hotel in Arizona, which is scheduled to open at the end of 2002; and the Westin in Charlotte, North Carolina, which is scheduled to open at the end of 2002. With respect to the Westin Kierland, the guarantee is joint and several with another equity partner. The Company does not anticipate any funding under these loan guarantees in 2002, as all projects are well capitalized.
Furthermore, in order to secure management and franchise contracts, the Company may provide performance guarantees to third-party owners. Most of these performance guarantees allow the Company to abandon a contract rather than fund shortfalls if certain performance levels are not met. In limited cases, the Company is obliged to fund shortfalls in performance levels. As of December 31, 2001, the Company had six management contracts with performance guarantees with possible cash outlays of up to $68 million, $50 million of which, if required, would be funded over a period of 25 years. Many of the performance tests are multi-year tests, are tied to the results of a competitive set of hotels, and have exclusions for force majeure clauses and acts of war and terrorism. The Company does not anticipate any funding under the performance guarantees in 2002. Lastly, the Company does not anticipate losing any significant management or franchise contracts in 2002.
Litigation. The Sheraton Corporation (“Sheraton Corp.”) (formerly ITT Sheraton Corporation), a subsidiary of the Company, is a defendant in certain litigation relating to Sheraton Corp.’s management of a hotel. The case is titled 2660 Woodley Road Joint Venture v. ITT Sheraton Corporation, Civil Action No. 97-450-JJF (U.S.D.C., D. Del.). In December 1999, following trial, the jury returned a verdict finding that Sheraton Corp. had violated its contractual obligations to the hotel owner and awarded contractual damages totaling $11 million. The jury also found for the plaintiff on certain common law and other claims and awarded compensatory and other damages of $2 million and punitive damages of $38 million. These amounts were fully reserved for as of December 31, 1999. The jury found for Sheraton Corp. and rejected the plaintiff’s additional claims that Sheraton Corp. had violated the Racketeer Influenced and Corrupt Organizations Act (“RICO”), and that Sheraton Corp. had engaged in fraud. Sheraton Corp. believes that the jury’s determination against it on liability issues was erroneous as a matter of law, and that the damage awards were excessive and not supported by the evidence. Sheraton Corp. sought to have the verdict set aside in the trial court. In response to Sheraton Corp.’s motion, the court, in January 2002, amended the judgment and reduced the punitive damages award from $38 million to $17 million; the court also trebled the jury’s $750,000 award for Robinson-Patman Act violations to $2.25 million on the basis of the court’s interpretation of that statute. The amount of the judgment, as a result, will be $31.4 million. Sheraton has filed a Notice of Appeal with the United States Court of Appeals and plaintiffs have filed a Cross-Notice of Appeal. There can be no assurance that Sheraton Corp. will be successful in having the verdict set aside, overturned or reduced on appeal, or that other owners of properties managed by Sheraton Corp. will not seek to assert similar claims.
The Corporation, Sheraton Corp. and Sheraton Holding are defendants in certain litigations arising out of purported contracts allegedly requiring the purchase of telecommunication, video and power services from Intelnet. The first suit was commenced in late 1997 by Intelnet, alleging that Sheraton Corp. violated what Intelnet claimed were Intelnet’s exclusive rights to provide telecommunications and other services to Sheraton Holding and its affiliates. The complaint sought injunctive relief to enforce alleged exclusivity rights and unquantified monetary damages. The complaint was subsequently amended in November 1998 to seek specific monetary and unspecified punitive damages. Sheraton Holding and Sheraton Corp. served an answer denying Intelnet’s claims, and asserting counterclaims seeking damages and a declaration that the purported contracts at issue were unenforceable.
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NOTES TO FINANCIAL STATEMENTS - (Continued)
In June 1999, Intelnet commenced a second lawsuit naming Boardwalk Regency Corp. (formerly a subsidiary of the Corporation) and the Corporation. The claims in this case are similar in nature to those made in the first suit, and relate to an alleged breach of a purported exclusive contract to provide certain services to the Caesar’s Atlantic City hotel and casino. The two suits have been consolidated and were in mediation until 2001. The mediation ended during the first half of 2001 and the parties are now proceeding with discovery. The Company believes that Intelnet’s claims are meritless and will continue to contest them vigorously. The Company does not expect that the resolution will have a material adverse effect on the consolidated results of operations, financial position or cash flows.
In November 2001, the Corporation, Sheraton Holding and Sheraton Corp. commenced a separate litigation in the United States District Court for the District of New Jersey, asserting claims arising under RICO as well as fraud claims against the principals of Intelnet.
The Company is involved in various other legal matters that have arisen in the normal course of business, some of which include claims for substantial sums. Accruals have been recorded when the outcome is probable and can be reasonably estimated. While the ultimate results of claims and litigation cannot be determined, the Company does not expect that the resolution of all legal matters will have a material adverse effect on its consolidated results of operations, financial position or cash flow.
Environmental Matters. The Company is subject to certain requirements and potential liabilities under various federal, state and local environmental laws, ordinances and regulations. Such laws often impose liability without regard to whether the current or previous owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Although the Company has incurred and expects to incur remediation and other environmental costs during the ordinary course of operations, management anticipates that such costs will not have a material adverse effect on the operations or financial condition of the Company.
Captive Insurance Company. Estimated insurance claims payable at December 31, 2001 were $54 million. At December 31, 2001, standby letters of credit amounting to $28 million had been issued to provide collateral for the estimated claims. The letters of credit are guaranteed by the Company’s captive insurance company.
ITT Industries. In 1995, the former ITT Corporation, renamed ITT Industries, Inc. (“ITT Industries”), distributed to its stockholders all of the outstanding shares of common stock of ITT Corporation, then a wholly owned subsidiary of ITT Industries (the “Distribution”). In connection with this Distribution, ITT Corporation, which was then named ITT Destinations, Inc., changed its name to ITT Corporation.
For purposes of governing certain of the ongoing relationships between the Company and ITT Industries after the Distribution and spin-off of ITT Corporation and to provide for an orderly transition, the Company and ITT Industries have entered into various agreements including a spin-off agreement, Employee Benefits Services and Liability Agreement, Tax Allocation Agreement and Intellectual Property Transfer and License Agreements. The Company may be liable to or due reimbursement from ITT Industries relating to the resolution of certain pre-spin-off matters under these agreements. Based on available information, management does not believe that these matters would have a material impact on the consolidated results of operations, financial position or cash flows.
For discussion of certain other matters, see Note 11, “Income Taxes.”
Note 21. Business Segment and Geographical Information
The Company has one operating segment, hotels and leisure. The hotels and leisure segment represents a worldwide network of owned, leased and consolidated joint venture hotels, VOIs and resorts operated primarily under the Company’s proprietary brand names including St. Regis, The Luxury Collection,
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS - (Continued)
Sheraton, Westin, W and Four Points by Sheraton hotels and resorts which are managed or franchised under these brand names in exchange for fees. Also included are earnings and losses from the Company’s interest in unconsolidated joint ventures.
The performance of the hotels and leisure segment is evaluated primarily on operating profit before corporate selling, general and administrative expense, interest, gains on the sale of real estate, investments and restructuring and other special charges. The Company does not allocate these items to the segment.
The following table presents revenues, operating income, assets and capital expenditures for the Company’s reportable segment (in millions):
(a)
The following costs are not allocated to hotel 	and leisure in evaluating operating income (in millions): 	
There were no individual international countries which comprised over 10% of the total revenues and long-lived assets of the Company as of December 31, 2001, 2000 or 1999.
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 22.
Quarterly Results (Unaudited)
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 23.
Subsequent Event
We have initiated the formal sale process for the CIGA portfolio of 25 luxury hotels, land, golf courses and marinas, potentially encumbered by our management contracts in whole or in part. The Company began reviewing preliminary indications of interest in the first quarter of 2002.
SCHEDULE II
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
VALUATION AND QUALIFYING ACCOUNTS
(In millions)
(a)
Charged to/from other accounts: 	
(b)
Includes reversals of prior years’ 	restructuring and other special charges reserves of 	$90 million. 	
S-1
SCHEDULE III
STARWOOD HOTELS & RESORTS
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(In millions)
[Additional columns below]
[Continued from above table, first column(s) repeated]
(a)
As of December 31, 2001, land, building, 	furniture, fixtures and equipment and construction in progress 	have a cost basis of $391 million, $2,262 million, 	$197 million and $12 million, respectively, for 	federal income tax purposes. 	
(b)
Building and improvements include amounts 	allocated for leasehold interest in land. 	
S-2
SCHEDULE III (Continued)
STARWOOD HOTELS & RESORTS
REAL ESTATE AND ACCUMULATED DEPRECIATION
(In millions)
A reconciliation of the Trust’s investment in real estate, furniture and fixtures and related accumulated depreciation is as follows:
S-3
SCHEDULE IV
STARWOOD HOTELS & RESORTS
MORTGAGE LOANS ON REAL ESTATE
December 31, 2001
(In millions)
(a)
As of December 31, 2001, the aggregate cost 	(before allowance for loan losses) for federal income tax 	purposes is not significantly different from that used for book 	purposes. 	
(b)
Payment of principal and interest due monthly and 	based upon an 18-year amortization schedule with interest rate 	of 9% per annum. Principal and all accrued and unpaid interest 	are due June 1, 2002. 	
(c)
Interest only payable monthly; interest 	calculated based upon 11.5% interest rate, $1.8 million 	principal balance and actual/365-day basis. Principal and all 	accrued and unpaid interest are due June 4, 2003. 	
(d)
Interest only payable monthly; principal and all 	accrued and unpaid interest due October 1, 2006. 	
(e)
Interest only payable monthly; interest based on 	current principal balance and 10% interest rate. Principal 	balance comprised of initial advance of $105 million with 	additional advances up to $121 million available. Principal 	and all accrued and unpaid interest are due January 2006. 	
(f)
Interest only payable monthly; principal and all 	accrued and unpaid interest are due December 2004. 	
(g)
Interest only payable monthly; principal and all 	accrued and unpaid interest are due December 2005. 	
(h)
Interest only payable monthly; principal and all 	accrued and unpaid interest are due February 2014. 	
(i)
Interest only payable monthly; principal and all 	accrued and unpaid interest are due February 2014. 	
S-4
SCHEDULE IV (Continued)
STARWOOD HOTELS & RESORTS
RECONCILIATION OF MORTGAGE LOANS
(In millions)
(a)
Per mortgage loan agreements, the Westin 	Regina - Cancun, Mexico, Westin Regina - Los 	Cabos, Mexico and Westin Hotel - Turnberry, Scotland 	are not required to pay monthly interest if the cash flows are 	insufficient. Thus, the Trust has accrued interest on the notes. 	
S-5
EXHIBIT INDEX
(1)
Management contract or compensatory plan or 	arrangement required to be filed as an exhibit pursuant to 	Item 14(c) of Form 10-K. 	
(2)
Filed herewith.