Item 1. Business.
General
Starwood is one of the world’s largest hotel and leisure companies. The Company conducts its hotel and leisure business both directly and through its subsidiaries. The Company’s brand names include Sheraton®, Westin®, The Luxury Collection®, St. Regis®, 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. 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, currently Sheraton Holding Corporation (“Sheraton Holding”), (the “ITT Merger”). For further discussion of the ITT Merger and the Westin Merger, see the notes to financial statements of this Joint Annual Report. At December 31, 2000, the
(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.
Company’s portfolio of owned, managed and franchised hotels totaled 738 hotels with approximately 227,000 rooms in 80 countries. This portfolio is comprised of 162 hotels that Starwood owns or leases or in which Starwood has a majority equity interest (substantially all of which hotels Starwood also manages), 263 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. Additionally, the Company is currently selling VOI inventory at 12 resorts.
The Trust was organized in 1969, and the Corporation was incorporated in 1980, both under the laws of Maryland.
The Company’s principal executive offices are located at 777 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 designated as the “World’s Best Global Hotel Company” by Global Finance magazine in their September 2000 issue. Also, for the second year in a row, Westin was named number one in the upper-upscale category of Business Travel News’ 2000 Survey of Top Hotel Chains. 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 2000 and 1999, Starwood converted five and six, respectively, 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 2000, the Company also added an additional 76 hotels with approximately 17,981 rooms to its branded hotel system. In total, approximately 1,327 rooms were added to its newest brand, W. The W San Francisco recently won Hospitality Design Magazine’s 2000 Gold Key Award as best in the “Lobby/ Reception” category and was a finalist in the “Guestroom” category.
Frequent Guest Program. The Company’s loyalty program, Starwood Preferred Guest® (“SPG”), was awarded the 1999 Hotel Program of the year 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 2000 Gold List Readers’ Choice Poll included 33 Starwood properties as
part of the top 462 places to stay 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 caters to high-end hotel and resort clientele while Four Points by Sheraton hotels deliver amenities 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, 2000:
(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, 2000:
(a)
Excludes 12 vacation ownership resorts.
Business Segment and Geographical Information
Incorporated by reference in Note 19, “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.
Growth Opportunities. Management has identified several growth opportunities with a goal of enhancing the Company’s operating performance and profitability, including:
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	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”) performance;
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	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;
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	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;
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	Expanding the Company’s Internet presence and sales 	capabilities to increase revenue and improve customer service;
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	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;
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	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;
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	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;
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	Continuing to build the new “W” hotel brand to appeal 	to upscale business travelers and other customers seeking 	full-service hotels in major markets;
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	Developing additional vacation ownership resorts near select 	hotel locations, thereby allowing us to leverage our owned hotel 	assets; and
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	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:
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	Luxury and upscale hotels and resorts in major metropolitan 	areas and business centers;
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	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;
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	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; 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 expected to be 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. There are over 500 hotel management companies in the United States, including several that operate more than 100 properties. 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. 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, 2000, Starwood employed approximately 129,000 persons at its corporate offices, owned and managed hotels and vacation ownership resorts, of whom approximately 47% were employed in the United States. At December 31, 2000, approximately 33% 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 80 countries around the world. 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 effect the Company’s hotels and resorts, Starwood expends substantial funds to renovate and maintain its 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 738 owned, managed or franchised hotels with approximately 227,000 rooms at December 31, 2000, predominantly under six brands: St. Regis (luxury full-service hotels and resorts), The Luxury Collection (luxury full-service hotels and resorts), Westin (luxury and
(1)
EBITDA is defined as income before interest 	expense, income tax expense, depreciation and amortization. 	Non-recurring items and gains and losses from sales of real 	estate and investments are also excluded from EBITDA as these 	items do not impact operating results on a recurring basis. 	Management considers EBITDA to be one measure of the cash flows 	from operations of the Company before debt service that provides 	a relevant basis for comparison, and EBITDA is presented to 	assist investors in analyzing the performance of the Company. 	This information should not be considered as an alternative to 	any measure of performance as promulgated under 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.
upscale full-service hotels and resorts), Sheraton (upscale full-service hotels and resorts), W (stylish boutique full-service urban hotels) and Four Points by Sheraton (moderately priced full-service hotels). At December 31, 2000, 162 of these hotels were owned or leased by Starwood or an entity in which Starwood has a majority equity interest, 263 were managed by Starwood on behalf of third-party owners (including entities in which Starwood has a minority equity interest) and 313 were owned and operated by franchisees using one of the Company’s brands or were otherwise represented by Starwood. Additionally, Starwood is currently selling VOI inventory at 12 resorts.
The following table sets forth the Company’s 162 owned, leased and consolidated joint venture hotels by geographic region:
(a)
Excludes 12 vacation ownership resorts.
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, 2000, Starwood managed 263 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.
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.
As of December 31, 2000, there were 302 franchised properties with approximately 77,000 rooms operating under the Sheraton, Westin and Four Points by Sheraton brands.
Growth
The following table summarizes average occupancy rates, average daily rates (“ADR”) and REVPAR on a year-to-year basis for the Company’s 122 owned, leased and consolidated joint venture hotels (excluding 36 hotels under significant renovation in 2000, 4 hotels without prior year results and 12 hotels sold during 1999 and 2000) (“Same-Store Owned Hotels”) for the years ended December 31, 2000 and 1999:
In addition, during the year ended December 31, 2000, the Company invested approximately $544 million for capital improvements primarily at owned hotel assets, continuing the renovation program on its largest brand, Sheraton, and vacation ownership resort construction. These capital expenditures included significant new growth investment for the acquisition of land for vacation ownership project construction adjacent to the Westin Kierland Resort in Scottsdale, Arizona and 14 acres on the island of Maui, as well as the acquisition of a second fully-entitled site adjacent to the San Francisco Museum of Modern Art. Other major expenditures during 2000 and continuing into 2001 include 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, 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. In 2000, the Company also signed management and franchise agreements for 75 hotels with approximately 16,800 rooms under its brands and began selling VOIs at four properties.
Item 3.
Item 3. Legal Proceedings.
Incorporated by reference to the description of legal proceedings in Note 18, “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 23, 2001, there were approximately 21,000 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, 2000 and 1999:
(a)
The Trust declared distributions for the fourth 	quarter of 2000 and 1999 to shareholders of record on 	December 31, 2000 and 1999, respectively. The distributions 	were paid in January 2001 and 2000, 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 per Share in 2000. The Company increased the Trust dividend 16% in February 2001 to an annual rate of $0.80 per Share and expects to increase the Trust dividend 15% per year thereafter. Unless dividends for the then current quarterly 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 current credit facilities, 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 (increased to $180,000,000 in 2000 and increasing by 20% annually thereafter) and (b) 10% of EBITDA.
Conversion of Securities; Sale of Unregistered Securities
During 2000, the Trust consented to the exchange of approximately 508,000 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 3.1 million shares of Class A EPS for an equal number of Shares.
During 2000, the Company exchanged approximately 2.2 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”).
(a)
Excludes approximately $3.0 billion of 	consideration paid to Sheraton Holding stockholders in 	connection with the ITT Merger.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
The following discussion presents an analysis of results of our operations for the years ended December 31, 2000, 1999 and 1998.
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 hotels (excluding 16 hotels sold or without comparable results during 1999 and 2000) (“Comparable Owned Hotels”) 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 Starwood Vacation Ownership, Inc. (formerly Vistana, Inc.) (“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. 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. This increase was primarily due to an increase in EBITDA at 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 increases in depreciation and amortization 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%. 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 was $8 million and $27 million for the years
ended December 31, 2000 and 1999, respectively, including 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.
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Continuing Operations
Revenues. Revenues increased 16.7% to $3.829 billion for the year ended December 31, 1999 when compared to the corresponding period in 1998. The increase was primarily due to the 13.7% increase in revenues for the Company’s owned, leased and consolidated joint venture hotels to $3.391 billion for the year ended December 31, 1999 when compared to the corresponding period of 1998. The increase resulted primarily from the 5.3% increase in revenues at the Company’s Comparable Owned Hotels to $3.335 billion for the year ended December 31, 1999 when compared to $3.167 billion in the same period of 1998. The increase also resulted from the acquisition, in July 1999, of the Westin hotel in Maui, Hawaii (the Company previously had a 95% non-controlling interest in this property), the opening of the 423-room W hotel in San Francisco, California in May 1999 and the 426-room W hotel in Seattle, Washington in September 1999 and the reopening of the W hotel in New York, New York in December 1998, which was partially closed during most of 1998 due to significant renovation and conversion from the former Doral Inn. The increase in revenues for the year ended December 31, 1999 was offset, in part, by a $39 million decrease in revenues as a result of the sale of nine hotels in May 1998 and the sales of The Westin Central Park South in New York, New York in July 1999 and the Ritz Carlton in Kansas City, Missouri in November 1999. The increase in revenues at the Same-Store Owned Hotels resulted from an increase in REVPAR at these hotels of 4.3% to $106 for the year ended December 31, 1999 when compared to the same period of 1998. The increase in REVPAR at these hotels was attributed to an increase in ADR of 3.1% to $150 for the year ended December 31, 1999 when compared to the corresponding 1998 period. Occupancy for Same-Store Owned Hotels rose to 70.7% from 69.9% in the year ended December 31, 1999 when compared to the same period in 1998. REVPAR at Same-Store Owned Hotels in North America increased 4.9% for the year ended December 31, 1999 when compared to the same period of 1998. REVPAR at the Company’s international owned, leased and consolidated joint venture hotels increased 3.0% for the year ended December 31, 1999 when compared to the same period of 1998.
Other hotel and leisure revenues increased by $140 million for the year ended December 31, 1999 to $438 million. The increase was primarily due to the acquisition of SVO on October 1, 1999. VOI sales in the fourth quarter of 1999 increased 4.9% when compared to VOI sales reported by SVO in the same period of 1998.
EBITDA. EBITDA at the Company’s owned, leased and consolidated joint venture hotels rose approximately 13.1% to $1.078 billion for the year ended December 31, 1999 when compared to the same period in 1998. This increase is due, in part, to the addition of the Westin hotel in Maui, Hawaii and the W hotels in San Francisco, California and Seattle, Washington and the reopening of the W hotel in New York, New York discussed previously, offset by an approximate $13 million reduction in EBITDA as a result of the sale of nine hotels in May 1998 and The Westin Central Park South in New York, New York in July 1999 and the Ritz Carlton in Kansas City, Missouri in November 1999. EBITDA for the Company’s Same-Store Owned Hotels increased to $924 million for the year ended December 31, 1999 from $849 million for the year ended December 31, 1998. The EBITDA improvement at the Same-Store Owned Hotels was due primarily to the increase in ADR discussed previously.
Selling, General, Administrative and Other. Selling, general, administrative and other expenses increased 4.8% to $220 million for the year ended December 31, 1999 when compared to $210 million in the corresponding period of 1998, due primarily to the acquisition of SVO in October 1999.
Depreciation and Amortization. Depreciation and amortization expense increased to $370 million and $82 million, respectively, in the year ended December 31, 1999 compared to $297 million and $81 million, respectively, in the corresponding period of 1998. The increase in depreciation expense for the year ended December 31, 1999 was primarily attributed to the addition of the Westin hotel in Maui, Hawaii and the opening of the W hotels in San Francisco, California and Seattle, Washington, offset by a reduction in depreciation expense as a result of the sale of nine hotels in 1998 and two hotels in 1999. The increase in depreciation expense for the year ended December 31, 1999 was also attributed to the completion, in December 1998, of a significant renovation of the W hotel in New York, New York.
Net Interest Expense. Interest expense for the years ended December 31, 1999 and 1998, which is net of interest income of $16 million and $26 million, respectively, and discontinued operations allocations of $163 million and $175 million, respectively, was $484 million and $424 million, respectively. The increase relates primarily to the full year of interest on debt incurred to finance the ITT Merger and Westin Merger and the repurchase of Shares and capital expenditures, offset by the reduction in debt with approximately $6.8 billion in proceeds from dispositions of non-core assets since February 1998. In addition, 1998 interest expense included a $40 million non-recurring charge associated with the settlement of certain forward interest rate swap agreements.
Discontinued Operations
Results for the Company’s gaming operations and former investments in WD and Educational Services are included in discontinued operations in the years ended December 31, 1999 and 1998. Net loss from discontinued operations was $0 and $80 million for the years ended December 31, 1999 and 1998, respectively. These results include the allocation of pretax corporate interest expense of $163 million and $175 million in the years ended December 31, 1999 and 1998, respectively.
The after-tax loss on the disposition of discontinued operations for the year ended December 31, 1999 was $71 million and includes, on an after-tax basis, a $173 million gain on the sale of the Company’s remaining interest in Educational Services, offset by a $183 million loss on the sale of Caesars and an estimated $61 million loss on the planned disposition of the Desert Inn. After-tax gains of $1.162 billion were recognized in the year ended December 31, 1998 in connection with the majority sale of Educational Services and the disposition of WD.
Revenues from discontinued gaming operations increased 11.9% to $1.541 billion for the year ended December 31, 1999 when compared to the corresponding period of 1998. Costs and expenses from discontinued gaming operations for the year ended December 31, 1999 increased 3.0% to $1.191 billion when compared to the same period of 1998. Costs and expenses in 1998 include a third quarter restructuring charge of $55 million relating to a write-down of certain receivables and an investment in a shared services center established by Sheraton Holding. The increase in revenues and costs and expenses resulted primarily from the opening of Caesars Indiana in November 1998. The results of the discontinued gaming operations from April 1, 1999 (date of announcement of the formal plan to dispose of gaming operations) through December 31, 1999 are included in the net loss on the disposition of discontinued operations for the year ended December 31, 1999 as noted previously.
EBITDA from discontinued gaming operations for the year ended December 31, 1999 was $350 million compared to $276 million in the corresponding period of 1998. EBITDA excludes the third quarter 1998 restructuring charge of $55 million discussed above. The increase in gaming EBITDA resulted from improved performance at Caesars Atlantic City and the opening of Caesars Indiana.
LIQUIDITY AND CAPITAL RESOURCES
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, 2000, the Company spent approximately $544 million on improving and upgrading its owned hotels and resorts, as well as the acquisition of land for vacation ownership development in Maui, Hawaii and Scottsdale, Arizona.
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.
Cash Flow from Investing and Financing Activities
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. The Company has announced the expectation to market the CIGA portfolio of 22 hotels for sale, potentially encumbered by the Company’s management agreements, in whole or in part during 2001. Since February 1998 through the date of this filing, Starwood has completed over $7.1 billion of asset sales and dispositions, the proceeds of which were used primarily to reduce debt. During 2000, net cash used for financing activities included the $700 million paydown of the Sheraton Holding public debt.
Loans and Credit Facilities. Following is a summary of the Company’s debt portfolio as of December 31, 2000:
In December 2000, the Company increased the amount available under the Senior Credit Facility by $172.5 million (“Term Loan Add-on”). Additionally, in January 2001, the Company further increased the amount available under the Senior Credit Facility by an additional $150 million. The proceeds from the Term Loan Add-on were used to further reduce the amount outstanding under the Company’s Revolving Credit Facility.
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 proceeds from this loan were used to reduce the amount outstanding under the Company’s Revolving Credit Facility.
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.
On February 23, 1998, Starwood entered into two credit facilities ($5.6 billion in total) with Lehman Brothers, Bankers Trust Company, The Chase Manhattan Bank and other financial institutions to fund the cash portion of the ITT Merger consideration, to refinance a portion of the Company’s existing indebtedness and to provide funds for general corporate purposes. 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”). Starwood completed the sale of Caesars on December 30, 1999 and completed the sale of the Desert Inn on June 23, 2000 for aggregate net proceeds of approximately $3.3 billion. The proceeds from these sales were used to repay $2.5 billion of the Senior Secured Notes Facility and to reduce the amount outstanding under the Revolving Credit Facility.
Starwood has a substantial amount of indebtedness and a working capital deficiency of $757 million at December 31, 2000, including $585 million of current maturities of long-term debt. Based upon the current level of operations, management believes that the Company’s cash flow from operations, together with available borrowings under the Senior Credit Facility (approximately $435 million at December 31, 2000) 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. There can be no assurance, however, that the Company’s business will continue to generate cash flow at or above current levels or that currently anticipated improvements will be achieved. If Starwood is unable to generate sufficient cash flow from operations in the future to service the Company’s debt, the Company may be required to sell assets, reduce capital expenditures, refinance all or a portion of its existing debt or obtain additional financing. The Company’s ability to make scheduled principal payments, to pay interest 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. 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. See risk relating to debt financing.
During each of the quarters of 2000, the Trust paid a distribution of $0.1725 per Share. The Trust’s annual dividend increased 16% in February 2001 to an annual rate of $0.80 per Share. Total dividends paid in 2000 and 1999 were $134 million and $116 million, respectively.
Stock Sales and Repurchases
At December 31, 2000, Starwood had approximately 194 million Shares, 7.7 million partnership units and 3.6 million exchangeable preferred shares outstanding.
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”). Pursuant to the Share Repurchase Program, in 2000, Starwood repurchased 2.5 million Shares in the open market for an aggregate cost of $69 million. As of December 31, 2000, approximately $230 million remains available under the Share Repurchase Program.
During 2000, the Trust consented to the exchange of approximately 508,000 shares of Class B EPS into an equal number of shares of Class A EPS. Additionally, the Trust consented to the exchange of approximately 3.1 million shares of Class A EPS for an equal number of Shares.
OTHER MATTERS
European Union Currency Conversions
On January 1, 1999, the Participating Countries established fixed conversion rates between their existing sovereign currencies and the Euro. Following the introduction of the Euro, the legacy currencies of the Participating Countries will remain legal tender during a transition period ending on January 1, 2002. During the transition period, both the legacy currency and the Euro will be legal tender in the respective Participating Countries. During the transition period, currency conversions will be computed by a triangulation with reference to conversion rates between the respective currencies and the Euro. The Company currently operates in substantially all of the Participating Countries. The effect on the Company of the adoption of the Euro by the Participating Countries in which it operates is currently uncertain. However, it is possible that the Euro adoption will result in increased competition within the European market. In addition, a number of the Company’s information systems are not currently Euro compliant. The Company is currently in the process of updating its information systems to make them Euro compliant. As of the date of this filing, five properties have converted to the Euro without any significant impact to the properties’ operations or information systems; however, there is no assurance that the Company or third-party vendors of applications used by the Company will successfully bring all of its systems into compliance. Failure of the Company to do so could result in disruptions in the processing of transactions in Euros or computed by reference to the Euro.
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 fluctuation affecting the Company’s variable rate debt. 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. 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. 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, 2000, the Euro, the Polish Zloty and the French Franc 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, 2000, 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 $44 million. These contracts mature in June, July and September of 2001. A hypothetical 10% change in currency exchange rates would result in an increase or decrease of approximately $5 million to the fair value of the forward foreign exchange contracts at December 31, 2000, 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 Notes 13 and 16 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 currently comprise 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.
Directors and Trustees Whose Terms Expire at the 2003 Annual Meeting
Name (Age)
Principal Occupation and Business Experience
Service Period
	Jean-Marc Chapus (41)
	Managing Director and Portfolio Manager of Trust Company of the 	West, an investment consulting firm, and President of TCW/ 	Crescent Mezzanine L.L.C., a private investment fund, since 	March 1995. Mr. Chapus is currently a member of the 	Board of Directors of Magnequench International, Inc., Auto 	Town, Inc. and Petco Animal Supplies, Inc.
	Director from August 1995 to November 1997; since 	April 1999
	Trustee since November 1997
Name (Age)
Principal Occupation and Business Experience
Service Period
	Barry S. Sternlicht (40)
	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 Financial, Inc. 	(“iStar”) 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. 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 Foundation International and the Council for 	Christian and Jewish Understanding, is a member of the Young 	Presidents Organization and is on the Board of Directors of 	Junior Achievement for Fairfield County, Connecticut.
	Director since December 1994
	Trustee since December 1994
Directors and Trustees Whose Terms Expire at the 2002 Annual 	Meeting
	Bruce W. Duncan (49)
	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 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 of the Urban Land 	Institute and a member and past trustee of the International 	Council of Shopping Centres.
	Director since April 1999
	Trustee since August 1995
	Stephen R. Quazzo (41)
	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
Name (Age)
Principal Occupation and Business Experience
Service Period
	Earle F. Jones (74)
	Co-Chairman since 1988 of Mississippi Management, Inc., d/b/a 	MMI Hotel Group, a hotel company, and is the Co-Chairman of MMI 	Dining Systems. Mr. Jones is also President of MM 	Louisiana Inc. (a wholly owned subsidiary of Mississippi 	Management, Inc.), Inn of Lake City, Inc., Seas, Inc., Orlando 	Plaza Hotel Corp. and Cabot Lodge, Inc. He is a general partner 	of Gainesville Cabot Lodge, Ltd., Jackson North Cabot Lodge Ltd. 	and Hattiesburg Cabot Lodge, Ltd. Mr. Jones is also a 	general partner of Orlando Plaza Suite Hotel, Ltd-A, which filed 	a petition under Chapter 11 of the U.S. Bankruptcy 	Code in May 1996. An order confirming the debtor’s 	plan of restructuring was issued by the court on 	January 27, 1997. Mr. Jones is a member of the board 	of trustees or directors for each of the Jackson Municipal 	Airport Authority, Greater Jackson Foundation, Public Education 	Forum of Mississippi, Millsaps College, First American Bank 	(Jackson, MS) and Jackson 2000, and is Co-Chairman of the 	Mississippi Olympic Committee. He was the Chairman of the Board 	of Directors of the Corporation from February 1989 to 	September 1997.
	Director since September 1985
	Trustee since April 1999
	George J. Mitchell (67)
	Special Counsel to the law firm of Verner, Liipfert, Bernhard, 	McPherson and Hand since January 1995. He served as a 	United States Senator from January 1980 to 	January 1995, and was the Senate Majority Leader from 1989 	to 1995. From 1995 to 1997, Senator Mitchell served as the 	Special Advisor to the President of the United States on 	economic initiatives in Ireland. At the request of the British 	and Irish Governments, he served as Chairman of the peace 	negotiations in Northern Ireland. Senator Mitchell serves as a 	director of The Walt Disney Company, Federal Express 	Corporation, Xerox Corporation UNUMProvident Corp., Casella 	Waste Systems, Inc., Unilever N.V., and Staples, Inc. In 	addition, Senator Mitchell serves as President of the Economic 	Club of Washington.
	Director since April 1999
	Trustee since November 1997
Name (Age)
Principal Occupation and Business Experience
Service Period
	Daniel W. Yih (42)
	Principal-Portfolio Management with GTCR Golder Rauner, 	LLC, a venture capital firm, and interim Chief Financial Officer 	of U.S. Aggregates, Inc. From June 1995 until 	March 2000, Mr. Yih was a general partner of Chilmark 	Partners, L.P., an investment advisory firm. Mr. Yih has 	been a director of U.S. Aggregates, Inc. and Esquire 	Communications, Ltd.
	Director since August 1995
	Trustee since April 1999
Executive Officers of the Registrants
The following table includes certain information with respect to each of Starwood’s current executive officers.
Name
Age
Position(s)
	Barry S. Sternlicht
	Chairman, Chief Executive Officer and a Director of the 	Corporation and Chairman, Chief Executive Officer and a Trustee 	of the Trust
	Robert F. Cotter
	Chief Operating Officer of the Corporation and a Vice President 	of the Trust
	Ronald C. Brown
	Executive Vice President and Chief Financial Officer of the 	Corporation and Vice President, Chief Financial Officer and 	Chief Accounting Officer of the Trust
	Kenneth S. Siegel
	Executive Vice President, General Counsel and Secretary of the 	Corporation and Vice President, General Counsel and Secretary of 	the Trust
	David K. Norton
	Executive Vice President-Human Resources of the Corporation 	and Vice President-Human Resources of the Trust
	Steven R. Goldman
	Executive Vice President, Acquisitions and Development, of the 	Corporation and a Vice President of the Trust
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 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. Prior to joining the Company, Mr. Brown was President of Sonoran Hotel Advisors, L.L.C., a hotel REIT advisory firm, and held various positions with Doubletree Corporation, a hotel operating company, including Chief Financial Officer and President.
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. 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, 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. Prior to joining the Company, Mr. Goldman was a Vice President of Starwood Capital, specializing in hotel acquisitions and hotel asset management, and was the Senior Development Manager of Disney Development Company, the real estate investment development and management division of The Walt Disney Company.
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 Securities and Exchange Commission (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, 2000, 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, except that Messrs. Eilian (a former Director of the Company) and Grose each failed to timely file one Form 4 with respect to one transaction; Mr. Goldman failed to timely file two Forms 4 with respect to two transactions; and Mr. Cotter failed to timely file a Form 3 and one Form 4 with respect to one transaction. The Directors who have elected to defer receipt of their directors’ fees failed to report on Forms 5 receipt of phantom stock units as a result of such elections. The number of such late filings were three for each of Messrs. Duncan and Mitchell, two for Mr. Troubh and one for each of Messrs. Eilian, Hippeau and Yih.
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 Audit Committee 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. In addition, Madison F. Grose is a Senior Managing Director of, and holds direct and indirect interests in, Starwood Capital and Jonathan D. Eilian (a former Director of the Corporation and Trustee of the Trust) holds direct and indirect interests in Starwood Capital. Prior to joining Starwood, Steven R. Goldman was an employee of Starwood Capital, and he continues to own an interest in certain portfolio investments 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 the Restructuring, 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 managed by the Company, including the Westin Innisbrook Resort (the “Innisbrook”), the Westin Savannah Harbor Resort and the Turnberry Hotel, were opportunities presented to the Company 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 a golf course management company that currently manages over 40 golf courses, including seven golf courses that are amenities to resorts that the Company manages. An entity in which Messrs. Sternlicht, Eilian and Grose have indirect interests owns the common area of the Sheraton Tamarron Resort which the Company manages. In addition, an affiliate of Starwood Capital has an indirect interest of approximately 50% in an entity that manages over 40 health clubs, including health club and spa space in a hotel owned by the
Company. In 2000, the Company paid approximately $140,000 to the management company for such management and operating cash advances.
Other Management-Related Investments. Individuals affiliated with Starwood Capital, including Messrs. Sternlicht, Eilian and Grose, own indirect interests in an entity (the “Innisbrook Entity”) that owns the common area facilities and certain undeveloped land at the Innisbrook. In May 1997, the Innisbrook Entity entered into a management agreement for the Innisbrook property 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 this management agreement. The Company is currently attempting to resolve a disagreement with the Innisbrook Entity relating to various payment and other provisions of the management agreement.
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.
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, all of which are currently outstanding. These loans are due five years from the date of issuance or, generally, upon the individual’s termination.
In 2000, 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, is Special Counsel. Such firm was paid approximately $370,000 for services rendered during 2000. We expect that this firm will provide services to the Company in 2001.
During 2000, the Company retained the services of Waveland International (“Waveland”), an executive search firm, of which the husband of Susan Bolger, a former executive officer of the Company, is an employee. The Company paid Waveland $70,000 for such services.
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.
No reports on Form 8-K were filed during the fourth quarter of 2000.
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.
Date: March 29, 2001
By:
	/s/ BARRY S. STERNLICHT
	Barry S. Sternlicht
	Chairman and Chief Executive Officer
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
Date: March 29, 2001
By:
	/s/ BARRY S. STERNLICHT
	Barry S. Sternlicht
	Chairman and Chief Executive Officer
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, 2000 and 1999, and the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2000 of the Company and the consolidated statements of operations and cash flows for the years ended December 31, 2000 and 1999 and the period from February 23, 1998 to December 31, 1998 of the Trust 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 at December 31, 2000 and 1999, and the results of the Company’s operations and cash flows for each of the three years in the period ended December 31, 2000 and the Trust’s operations and cash flows for the years ended December 31, 2000 and 1999 and the period from February 23, 1998 to December 31, 1998 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 a 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
February 7, 2001
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)
[Additional columns below]
[Continued from above table, first column(s) repeated]
(a)
Represents common stock of Sheraton Holding prior 	to the ITT Merger and the Corporation’s common stock and 	the Trust’s shares of beneficial interest subsequent to the 	ITT Merger.
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 OPERATIONS
(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, 2000 and 1999 and the consolidated statements of operations, comprehensive income, equity and cash flows for the years ended December 31, 2000, 1999 and 1998 represent (i) Starwood Hotels & Resorts Worldwide, Inc. (the “Corporation”) and its subsidiaries, 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. Because the Company’s acquisition of Sheraton Holding (the “ITT Merger”) was treated as a reverse purchase for financial accounting purposes, the statements of operations, comprehensive income, equity and cash flows for the year ended December 31, 1998 include the accounts of the Company and the Trust for the period from the closing of the ITT Merger on February 23, 1998 through December 31, 1998 and the accounts of Sheraton Holding for the year ended December 31, 1998.
The Company 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.
At December 31, 1998, the combined Corporation and Trust entity was a “paired share REIT” under the grandfathering provisions of the Code. During 1998, Congress enacted tax legislation that has the effect of eliminating this grandfathering for certain interests in real property acquired after March 26, 1998. In response to this legislation, a reorganization of the Corporation and the Trust (the “Reorganization”) was proposed by the Company and was approved by the Corporation and Trust shareholders on January 6, 1999. As a result of the Reorganization, the 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, 2000, an aggregate 95.3% partnership interest in, SLC Operating Limited Partnership (the “Operating Partnership”). The Trust, through its subsidiaries, is the general partner of, and held an aggregate 96.3% partnership interest
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS - (Continued)
in, SLT Realty Limited Partnership (the “Realty Partnership” and, together with the Operating Partnership, the “Partnerships”) as of December 31, 2000. The units of the Partnerships (“LP Units”) held by the limited partners of the respective Partnerships are exchangeable on a one-for-one basis for Shares. At December 31, 2000, there were approximately 7.7 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 were $37 million, $32 million and $20 million in 2000, 1999 and 1998, respectively.
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. 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 $3 million, $8 million and $14 million in 2000, 1999 and 1998, respectively, applicable to major project expenditures, are recorded at cost. 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 leasehold 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.
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, a loss reserve is established. Fair value is determined based upon
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS - (Continued)
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 arose in connection with acquisitions, including the acquisition of management contracts, and are amortized using the straight-line method over 2 to 40 years. Accumulated amortization was $249 million and $154 million at December 31, 2000 and 1999, respectively. The Company continually reviews the carrying value of goodwill and intangible assets to assess recoverability from future operations using undiscounted cash flows. Impairments would be recognized in operating results if a permanent diminution in value is deemed to have occurred.
Frequent Guest Program. The Company accrues for the cost of redeeming points awarded to members of the frequent guest program at the time the points are awarded. This accrual is based on the discounted expected costs of redemption. The liability for this program is included in other long-term liabilities and accrued expenses in the accompanying consolidated balance sheets. Revenue is recognized by participating hotels and resorts when the points are redeemed for hotel stays.
Derivative Financial Instruments. The Company enters into interest rate swap agreements to manage interest rate exposure. The differential to be paid or received under these agreements is accrued consistent with the terms of the agreements and is recognized in interest expense over the term of the related debt using a method that approximates the effective interest method (the accrual accounting method). The related amounts payable to or receivable from counterparties are 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 into income over the life of the contract.
The Company does not enter into these derivative financial instruments for trading or speculative purposes and closely 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 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 beginning with the 1995 calendar year. As a result, the Trust will not be subject to federal income tax on its taxable income at
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS - (Continued)
corporate rates provided it distributes annually 100% of its taxable income to its shareholders and complies with certain other requirements.
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):
Employee stock options totaling approximately 1 million Shares were not included in the computation of diluted earnings per Share for the year ended December 31, 1999 as the effects were antidilutive. Class A Exchangeable Preferred Shares (“Class A EPS”) and Class B Exchangeable Preferred Shares (“Class B EPS”) of the Trust totaling approximately 8 million Shares were not included in the computation of diluted earnings per Share for the years ended December 31, 1999 and 1998 as the effects were antidilutive. Additionally, equity put options totaling approximately 1 million Shares were not included in the computation of diluted earnings per Share for the year ended December 31, 1998 as the effects were antidilutive.
Revenue Recognition. 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 Sheraton, 	Westin, St. Regis, The Luxury Collection, Four Points by 	Sheraton and W.
•
	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 generally 	based on a combination of a percentage of gross revenues and an 	incentive fee, and franchise fees are generally based on a 	percentage of hotel room revenues.
•
	Other-Represents primarily the Company’s interest in 	unconsolidated joint ventures and the sale and financing of 	VOIs. VOI sales are included in revenue when minimum down 	payment requirements (at least 10%) have been met.
The Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) 101, “Revenue Recognition in Financial Statements,” in December 1999. SAB 101 summarizes certain of the SEC staff’s views in applying accounting principles generally accepted in the United States to revenue recognition in financial statements. The Company adopted SAB 101, as amended, in the fourth quarter of 2000 and
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS - (Continued)
determined that it did not have a material impact on annual earnings or the timing of revenue and profit recognition between quarters during the year.
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, including the reclassification of equity earnings from joint ventures in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-1, “Investor Balance Sheet and Income Statement Display under the Equity Method for Investments in Certain Partnerships and Other Ventures.”
Impact of Recently Issued Accounting Standards. In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” In June 1999, the FASB issued SFAS No. 137, which deferred the effective date of SFAS No. 133. This was followed in June 2000 by the issuance of SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” which amends SFAS No. 133. SFAS No. 133 and SFAS No. 138 establish new accounting rules and disclosure requirements for most derivative instruments and hedging activities. SFAS No. 133 and SFAS No. 138 require all derivatives to be recognized as assets or liabilities at fair value. Fair value adjustments are made either through earnings or equity, depending upon the exposure being hedged and the effectiveness of the hedge. The Company has adopted these standards effective January 1, 2001. The initial adoption of these standards will result in a reduction of other comprehensive income of approximately $6.2 million. The adoption will also impact asset and liabilities recorded on the balance sheet; however, it will not impact earnings.
Note 3. Acquisitions
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 Accounting Principles Board (“APB”) Opinion No. 16, “Business Combinations,” resulting in a preliminary allocation to property and goodwill of approximately $102 million.
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 for 1999 and 1998, as though the acquisitions occurred as of January 1 of each year, was not material.
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS - (Continued)
ITT and Westin Mergers. On January 2, 1998, Starwood acquired Westin Hotels & Resorts Worldwide, Inc. and certain of its affiliates (“Westin”) for approximately $2.0 billion in cash and debt assumed (the “Westin Merger”). On February 23, 1998, pursuant to an Amended and Restated Agreement and Plan of Merger dated as of November 12, 1997, the Company acquired Sheraton Holding. The aggregate value of the Sheraton Holding acquisition in cash, Shares and assumed debt was approximately $14.6 billion.
The Company accounted for the ITT Merger as a reverse purchase in accordance with APB Opinion No. 16. Although the Company issued Shares to Sheraton Holding stockholders and survived the ITT Merger, the Trust and the Corporation are considered the acquired companies for accounting purposes since the prior Sheraton Holding stockholders held a majority of the outstanding Shares immediately after the ITT Merger was consummated. As such, the carrying value of the assets and liabilities of the Corporation and Trust (inclusive of Westin) was recorded at fair market value, resulting in goodwill and identified intangibles of approximately $2.5 billion.
Because the ITT Merger was treated as a reverse purchase for financial accounting purposes, the statements of operations, comprehensive income and cash flows for the year ended December 31, 1998 include the accounts of the Trust and the Corporation for the period from the closing of the ITT Merger on February 23, 1998 through December 31, 1998 and the accounts of Sheraton Holding for the entire year ending December 31, 1998. Historical stockholders’ equity of the Company prior to the ITT Merger has been retroactively restated for the equivalent number of shares received in the ITT Merger after giving effect to the difference in par value between Starwood’s and Sheraton Holding’s stock. Unless otherwise indicated, all references herein to the number of Shares and per Share amounts have been restated to reflect the impact of the reverse acquisition at the conversion factor of 1.543 Shares for each Sheraton Holding share acquired. Additionally, each Sheraton Holding stock option (“Sheraton Stock Option”) became a fully exercisable option pursuant to the number of Shares determined by applying the 1.543 conversion factor.
Unaudited Pro Forma Results. The following unaudited pro forma information reflects the ITT Merger, the Westin Merger and certain asset sales as if they occurred at the beginning of each period presented and does not purport to present what actual results would have been had such transactions, in fact, occurred at the beginning of each period presented, or to project results for any future period (in millions, except per Share data):
Note 4. Dispositions
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.
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 5. 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 have been restated to reflect the results of operations and net assets of the gaming segment as a discontinued operation. This restatement includes the allocation of long-term debt of $165 million and $2.1 billion for the years ended December 31, 1999 and 1998, respectively, and the related interest expense of $6 million, $163 million and $161 million, for the years ended December 31, 2000, 1999 and 1998, 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. Summary financial information of the discontinued gaming operations is as follows (in millions):
ITT Educational Services, Inc. In June 1998, the Company sold approximately 13.0 million shares of ITT Educational Services, Inc. (“Educational Services”) in a public offering for net proceeds of approximately $304 million. The Company recorded a gain of $253 million before income taxes of $93 million. Subsequent to this sale, the Company was a minority holder in Educational Services and, as such, accounted for its remaining interest under the equity method by recording its proportionate share of net losses totaling
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$1 million for the period from June 1, 1998 to December 31, 1998. Summary financial information of Educational Services is as follows (in millions):
In February 1999, the Company completed the sale of its remaining interest in 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.
ITT World Directories. In February 1998, the Company disposed of ITT World Directories (“WD”), the subsidiary through which Sheraton Holding conducted its telephone directories publishing business, to VNU International B.V., a leading international publishing and information company based in the Netherlands, for gross consideration of $2.1 billion. The Company recorded a gain of $1.0 billion, net of income taxes of $514 million, on the disposition. Interest expense and debt related to the disposition of WD was allocated to discontinued operations. Summary financial information of WD is as follows (in millions):
Note 6. Extraordinary Item
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).
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 pretax loss of $3 million.
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Note 7. Restructuring and Other Special Charges
At December 31, 2000, the Company has remaining accruals related to restructuring and other special charges, described below, of $100 million, $22 million of which is included in other long-term liabilities in the accompanying balance sheet. These accruals consist of $72 million for certain litigation costs and $28 million primarily related to remaining lease commitments which expire through 2006.
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. (see Note 18).
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.
In addition, during the third quarter of 1998, the Company recorded a non-recurring charge to selling, general and administrative expense of approximately $30 million primarily associated with the vesting, during the quarter, of certain restricted stock granted earlier in the year to the then President and Chief Operating Officer of the Corporation in connection with his appointment.
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 1998 and 1999, the Company reversed approximately $23 million and $50 million, respectively, 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 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 8. Plant, Property and Equipment
Plant, property and equipment consisted of the following (in millions):
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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 are included in plant, property and equipment in the accompanying 2000 consolidated balance sheet.
Note 9. 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 $32 million since these amounts are permanently reinvested.
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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):
At December 31, 2000, the Company has net operating loss and tax credit carryforwards of approximately $478 million and $22 million, respectively, for federal income tax purposes. Substantially all operating loss carryforwards, which are expected to provide future tax benefits, expire in 2018.
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 10. Debt
Long-term debt and short-term borrowings consisted of the following (in millions):
Aggregate debt maturities for each of the years ending December 31 are as follows (in millions):
In December 2000, the Company increased the amount available under the Senior Credit Facility by $172.5 million (“Term Loan Add-on”). Additionally, in January 2001, the Company further increased the amount available under the Senior Credit Facility by an additional $150 million. The proceeds from the Term Loan Add-on were used to further reduce the amount outstanding under the Company’s Revolving Credit Facility.
On July 25, 2000, the Company entered into a one-year, Euro 270 million loan (approximately $252 million). The interest rate on this loan at December 31, 2000 was Euribor plus 112.5 basis points. The proceeds from the loan were used to reduce the amount outstanding under the Company’s Revolving Credit Facility.
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 bears interest at a blended rate of 6.98%. 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.
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On February 23, 1998, Starwood entered into two credit facilities ($5.6 billion in total) with Lehman Brothers, Bankers Trust Company, The Chase Manhattan Bank and other financial institutions to fund the cash portion of the ITT Merger consideration, to refinance a portion of the Company’s existing indebtedness and to provide funds for general corporate purposes. 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”). Starwood completed the sale of Caesars on December 30, 1999 and completed the sale of the Desert Inn on June 23, 2000 for aggregate net proceeds of approximately $3.3 billion. The proceeds from these sales were used to repay $2.5 billion of the Senior Secured Notes Facility and to reduce the amount outstanding under the Revolving Credit Facility.
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 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 $435 million of available borrowing capacity under the Revolving Credit Facility as of December 31, 2000.
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 and 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. The Company was in compliance with all of the short-term borrowing and long-term debt obligation covenants at December 31, 2000.
The weighted average interest rate for short-term borrowings was 6.04% and 6.47% at December 31, 2000 and 1999, 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, if appropriate, the length to maturity for the debt. The estimated fair value of long-term debt at December 31, 2000 and 1999 was $5.4 billion and $5.6 billion, respectively, and was determined based on quoted market prices and/or discounted cash flows using the Company’s incremental borrowing rates for similar arrangements.
Note 11. 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”), and the Westin Supplemental Executive Retirement Plan. The ITT Plans are funded, except in some countries outside the U.S. where funding is not required. The ITT Plans’ 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.
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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.
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. Since the Internal Revenue Service has not yet approved the request, the plan termination has not been reflected below. The Ongoing Plan purchased a group annuity for all participants retired prior to January 1, 2000, for approximately $80.9 million. The ending balance of the fair value of plan assets for the Salaried and Ongoing Plans reflects lump sum payments made to former terminated vested participants in 2000. The total payment was approximately $23.6 million from the Salaried Plan. As of December 31, 2000, the Ongoing Plan assets included approximately 348,000 Shares of the Company’s common stock.
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 at December 31, 2000 and 1999, and the principal weighted average assumptions inherent in their determination (amounts are in millions).
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For measurement purposes, a 6.10% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000. 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.
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Defined Contribution Plans. The Company sponsors the Starwood Hotels & Resorts Worldwide, Inc. Savings and Retirement Plan, which is a voluntary defined contribution plan allowing participation by domestic employees that meet certain age and service requirements. Each participant may contribute on a pretax basis between 1% and 18% of his or her compensation to the plan. The plan also contains additional provisions for matching contributions to be made by the Company which are based on a portion of a participant’s eligible compensation. The amount of expense for matching contributions totaled $17 million in 2000, $19 million in 1999 and $15 million in 1998.
Note 12. Leases and Rentals
At December 31, 2000, the Trust owned equity interests in 99 hotels, of which 90 properties were owned and 9 were held pursuant to long-term leases.
All of the Trust’s hotels are leased to the Corporation as of December 31, 2000. The leases between the Trust and the Corporation are generally long-term 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 was approximately $520 million for the year ended December 31, 2000, of which approximately $169 million related to percentage rent.
The Corporation’s minimum future rents (inclusive of various ground leases) at December 31, 2000 payable under non-cancelable operating leases with the Trust and with others for the years ended December 31 are as follows (in millions):
The Corporation and the hotels lease certain equipment and facilities 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. Future minimum lease payments under the non-cancelable operating leases are included in the other minimum future rents above.
Rent expense under other non-cancelable operating leases was $64 million, $41 million and $37 million in 2000, 1999 and 1998, respectively.
The Trust’s rents receivable from the Corporation relating to leased hotel properties at December 31, 2000 and 1999 was $34 million.
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Note 13. Equity Put Options
As a part of its Share repurchase program (see Note 14), the Company sold equity put options during 1998 for $1.8 million, which entitled the holder, at the expiration date, to sell one million Shares to the Company at contractually specified prices. During 1999, the Company repurchased 500,000 Shares for $16 million under a portion of the equity put option contracts and the remaining equity put option contracts expired.
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.
Note 14. 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”). Pursuant to the Share Repurchase Program, through December 31, 2000, Starwood has repurchased 15.8 million Shares (including 500,000 Shares of equity put option contracts) in the open market for an aggregate cost of $521 million. Additionally, the Company repurchased 6.8 million Shares for an aggregate cost of $385 million as settlement of the forward equity transactions described below.
Forward Equity Transactions. Pursuant to a Purchase Agreement dated October 10, 1997, the Company sold to UBS Limited (“UBS Ltd.”) 2.185 million Shares (“UBS Shares”) at a cash price of $57.25 per Share, and paid to Warburg Dillon Read LLC (formerly UBS Securities LLC), an affiliate of UBS Ltd., a placement fee equal to 2.5% of the gross proceeds to the Company from such sale of Shares. Concurrently therewith, the Company entered into an agreement that provided for a settlement payment to be made, in the form of Shares or cash, by the Company to an affiliate of Union Bank of Switzerland, London Branch, or by that affiliate to the Company, based on the market price of the Shares over a specified “unwind period,” as compared to a “forward price.” The Company settled its obligations under this agreement in September 1998 by repurchasing the UBS Shares for approximately $130 million in cash. As a result of this settlement, the Company has no further obligations under this agreement and Shares were reduced by approximately 2.185 million.
On February 24, 1998, the Company sold an aggregate of 4.641 million Shares to Merrill Lynch International, NMS Services, Inc., Lehman Brothers Inc. and certain affiliates for a cash purchase price per Share of $52.798, which price reflected a 2% discount from the last reported sale price of the Shares on the date of the purchase. Concurrently with these sales, the Company entered into three separate agreements with these purchasers and/or certain of their affiliates pursuant to which each of these purchasers or their respective affiliates agreed to sell, as directed by the Company in an underwritten fixed price offering or other specified methods, a sufficient number of the Shares to achieve net sales proceeds equal to the aggregate market value of the Shares purchased in February 1998, plus a forward accretion component, minus an adjustment for dividends paid on the purchased Shares. Additional Shares were required to be delivered by the Company as security in the event the market prices of the Shares dropped below certain specified levels. In October 1998, the Company settled its obligations under these agreements by repurchasing all of the Shares issued to these purchasers for an aggregate of approximately $255 million in cash. As a result of this settlement, the Company has no further obligations under these agreements and Shares outstanding were reduced by approximately 7.379 million (4.641 million original Shares issued and 2.738 million Shares previously issued as security).
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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, 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 2000, the Trust consented to the conversion of approximately 508,000 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 3.0 million shares of Class A EPS into an equal number of Shares. At December 31, 2000, the Trust had 150 million preferred shares authorized and 610,000 and 3.0 million of Class A EPS and Class B EPS outstanding, respectively.
Note 15. 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. 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, 2000 was approximately 15.9 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 would have been reduced by $92 million ($0.47 per basic Share), $76 million ($0.40 per basic Share) and $86 million ($0.46 per basic Share) in 2000, 1999 and 1998, respectively. The fair value of each option grant used in the 2000, 1999 and 1998 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 2000, 1999 and 1998, respectively: dividend yield of 2.4%, 2.9% and 2.6%, expected volatility of 46.1%, 41.9% and 47.6%, risk-free interest rates of 6.5%, 6.3% and 4.5% and an expected life of three years for all options.
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The following table summarizes stock option activity for the Company, including stock options granted to the gaming operation employees:
(a)
Represents Company options of 17,055,147 	outstanding at February 23, 1998 (the ITT Merger date) and 	shares granted by the Company during 1998.
(b)
Represents options exercised during 1998, 	including the Sheraton Stock Options which were exercised upon 	the occurrence of the accelerated exercisability event (the ITT 	Merger).
The following table summarizes information about outstanding stock options at December 31, 2000:
During 2000, the Company granted restricted stock awards for 197,089 Shares. Total restricted stock awards outstanding as of December 31, 2000 totaled 434,323 Shares, and approximately 44,948 Shares were
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vested. The remaining restricted stock awards vest at varying rates over four years from the award grant date. Compensation expense of approximately $3.8 million, $0.6 million and $16 million was recorded during 2000, 1999 and 1998, respectively, related to restricted stock awards.
Note 16. Derivative Financial Instruments
The Company enters into interest rate swap agreements to manage interest rate fluctuations of its variable rate debt. The Company currently has five outstanding interest rate swap agreements under which the Company pays a fixed rate and receives variable rates of interest. The aggregate notional amount of these interest rate swaps was approximately $1.052 billion and the estimated unrealized loss on these interest rate swaps was approximately $3.2 million at December 31, 2000. The unrealized loss represents the amount the Company would pay upon the termination of the swap agreements based on market rates.
The Company enters into forward foreign exchange contracts to hedge the foreign currency exposure associated with the Company’s foreign currency denominated assets and liabilities. The Company currently has four forward foreign exchange contracts outstanding with a dollar equivalent of the contractual amounts of these hedges at December 31, 2000 of approximately $44 million. These contracts mature in 2001.
During 1998, the Company delayed a long-term debt offering due to market conditions and the Reorganization. As a result, certain of the Company’s forward interest rate swaps with a notional amount of $500 million no longer correlated with this anticipated indebtedness. In accordance with the Company’s accounting policies, these forward interest rate swaps were marked to market by the Company and, as such, the Company recognized a loss of $40 million during 1998, which is included in interest expense. These contracts were terminated by the Company in 1998.
Note 17. 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. In addition, Madison F. Grose is a Senior Managing Director of, and holds direct and indirect interests in, Starwood Capital and Jonathan D. Eilian (a former Director of the Corporation and Trustee of the Trust) holds direct and indirect interests in Starwood Capital. Prior to joining Starwood, Steven R. Goldman was an employee of Starwood Capital, and he continues to own an interest in certain portfolio investments 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 the Restructuring, 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
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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 managed by the Company, including the Westin Innisbrook Resort (the “Innisbrook”), the Westin Savannah Harbor Resort and the Turnberry Hotel, were opportunities presented to the Company 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 a golf course management company that currently manages over 40 golf courses, including seven golf courses that are amenities to resorts that the Company manages. An entity in which Messrs. Sternlicht, Eilian and Grose have indirect interests owns the common area of the Sheraton Tamarron Resort which the Company manages. In addition, an affiliate of Starwood Capital has an indirect interest of approximately 50% in an entity that manages over 40 health clubs, including health club and spa space in a hotel owned by the Company.
Other Management-Related Investments. Individuals affiliated with Starwood Capital, including Messrs. Sternlicht, Eilian and Grose, own indirect interests in an entity (the “Innisbrook Entity”) that owns the common area facilities and certain undeveloped land at the Innisbrook. In May 1997, the Innisbrook Entity entered into a management agreement for the Innisbrook property 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 this management agreement. The Company is currently attempting to resolve a disagreement with the Innisbrook Entity relating to various payment and other provisions of the management agreement.
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.
Employee and Officer Loans. In connection with specific employees’ and officers’ relocation to Starwood headquarters in 2000, 1999 and 1998, Starwood made non-interest bearing loans to certain individuals. The original loan amounts totaled approximately $15 million and the amount outstanding at December 31, 2000 was approximately $13 million. These loans are generally due five years from the date of issuance or upon the individual’s termination.
Note 18. Commitments and Contingencies
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 plaintiff on certain common law and other claims and awarded compensatory and other damages of $2 million and punitive damages of $38 million. The jury found for Sheraton Corp. and rejected plaintiff’s additional claims that Sheraton Corp. had violated the Racketeer Influenced and Corrupt Organizations Act, 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
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AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS - (Continued)
the damage awards were excessive and not supported by the evidence. Sheraton Corp. has sought to have the verdict set aside in the trial court and, if necessary, will appeal to the United States Court of Appeals. There can be no assurance that Sheraton Corp. will be successful in having the verdict set aside or overturned or reduced on appeal, or that other owners of properties managed by Sheraton Corp. will not seek to assert similar claims.
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. Through its captive insurance company, which was acquired in connection with the Westin Merger, 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 insurance claims payable at December 31, 2000 was $33 million. At December 31, 2000, standby letters of credit amounting to $25 million had been issued to provide collateral for the estimated claims. The letters of credit are guaranteed by the predecessor owner of Westin and Bankers Trust Company.
Guaranteed Loans and Commitments. The Company issues guarantees to lenders and other third parties in connection with financing transactions and other obligations. These guarantees were limited, in the aggregate, to approximately $82 million at December 31, 2000, including guarantees involving major customers. Additionally, the Company manages certain hotels for others under agreements that provide for payments or loans to the hotel owners if stipulated levels of financial performance are not maintained.
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.
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 19. 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 Sheraton, Westin, The Luxury Collection, St. Regis, 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 profit, 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 profit (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, 2000, 1999 or 1998.
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 20. Quarterly Results (Unaudited)
The following unaudited quarterly results for 2000 and 1999 have been restated from amounts previously reported by the Company for the reclassification in accordance with EITF Issue No. 00-1 (see Note 2).
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 21. Supplementary Financial Information (Unaudited)
The following table presents a reconciliation of operating income to EBITDA(1) (in millions):
(1)
EBITDA is defined as income before interest 	expense, income tax expense and depreciation and amortization. 	Non-recurring items and gains and losses from sales of real 	estate and investments are also excluded from EBITDA as these 	items do not impact operating results on a recurring basis. 	Management considers EBITDA to be one measure of the cash flows 	from operations of the Company before debt service that provides 	a relevant basis for comparison, and EBITDA is presented to 	assist investors in analyzing the performance of the Company. 	This information should not be considered as an alternative to 	any measure of performance as promulgated under 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.
(2)
Includes depreciation expense of unconsolidated 	joint ventures.
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, 2000
(In millions)
[Additional columns below]
[Continued from above table, first column(s) repeated]
(a)
As of December 31, 2000, land, building, 	furniture, fixtures and equipment and construction in progress 	have a cost basis of $451.8 million, $2,486.2 million, $533.7 	million and $24.9 million, respectively, for federal income tax 	purposes.
(b)
Building and improvements include amounts 	allocated for leasehold interest in land and net assets held for 	sale.
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, 2000
(In millions)
(a)
As of December 31, 2000, 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 on demand.
(f)
Interest only payable monthly; principal and all 	accrued and unpaid interest are due December 2005.
(g)
Interest only payable monthly; principal and all 	accrued and unpaid interest are due on demand.
(h)
Interest only payable monthly; principal and all 	accrued and unpaid interest are due February 2005.
(i)
Interest only payable monthly; principal and all 	accrued and unpaid interest are due February 2005.
S-4
SCHEDULE IV (Continued)
STARWOOD HOTELS & RESORTS
RECONCILIATION OF MORTGAGE LOANS
(In millions)
INTERCOMPANY MORTGAGE ROLLFORWARD
December 31, 2000
(In millions)
(a)
Per mortgage loan agreements, the borrowers 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.