Starwood 2004 Annual Report Download - page 113

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS Ì (Continued)
this property was funded with signiÑcant equity and subordinated debt Ñnancing, if the Company's loan
guarantee was to be called, the Company could take an equity position in this property at a value signiÑcantly
below construction costs.
Additionally, during the second quarter of 2004, the Company entered into a long-term management
contract to manage the Westin Boston, Seaport Hotel in Boston, Massachusetts, which is under construction
and scheduled to open in 2006. In connection with this agreement, the Company will provide up to $28 million
in mezzanine loans and other investments ($13 million of which has been funded) as well as various
guarantees, including a principal repayment guarantee for the term of the senior debt (four years with a one-
year extension option), which is capped at $40 million, and a debt service guarantee during the term of the
senior debt, which is limited to the interest expense on the amounts drawn under such debt and principal
amortization. Any payments under the debt service guarantee, attributable to principal, will reduce the cap
under the principal repayment guarantee. The fair value of these guarantees of $3 million is reÖected in other
liabilities in the accompanying balance sheet as of December 31, 2004. In addition, Starwood has issued a
completion guarantee for this approximate $200 million project. In the event the completion guarantee is
called on, Starwood would have recourse to a guaranteed maximum price contract from the general
contractor, performance bonds from all major trade contractors and a payment bond from the general
contractor. Starwood would only be required to perform under the completion guarantee in the event of a
default by the general contractor that is not cured by the contractor or the applicable bonds. The Company
does not anticipate that it would be required to perform under these guarantees.
Surety bonds issued on behalf of the Company as of December 31, 2004 totaled $38 million, the majority
of which were required by state or local governments relating to our vacation ownership operations and by
insurers to secure large deductible insurance programs.
In order to secure management contracts, the Company may provide performance guarantees to third-
party owners. Most of these performance guarantees allow the Company to terminate the contract rather than
fund shortfalls if certain performance levels are not met. In limited cases, the Company is obliged to fund
shortfalls in performance levels through the issuance of loans. As of December 31, 2004, the Company had
nine management contracts with performance guarantees with possible cash outlays of up to $76 million,
$50 million of which, if required, would be funded over a period of 25 years and would be largely oÅset by
management fees received under these contracts. Many of the performance tests are multi-year tests, are tied
to the results of a competitive set of hotels, and have exclusions for force majeure and acts of war and
terrorism. The Company does not anticipate any signiÑcant funding under the performance guarantees in
2005. In addition, the Company has agreed to guarantee certain performance levels at a managed property
that has authorized VOI sales and marketing. The exact amount and nature of the guaranty is currently under
dispute. However, the Company does not believe that any payments under this guaranty will be signiÑcant.
The Company does not anticipate losing a signiÑcant number of management or franchise contracts in 2005.
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 Ñnding that
Sheraton Corp. had violated its contractual obligations to the hotel owner and awarded contractual damages
totaling $11 million. The jury also found for the plaintiÅ on certain common law and other claims and awarded
compensatory and other damages of $2 million and punitive damages of $38 million. These amounts were fully
reserved for as of December 31, 1999 through a charge to restructuring and other special charges, net. The
jury found for Sheraton Corp. and rejected the plaintiÅ's additional claims that Sheraton Corp. had violated
the Racketeer InÖuenced and Corrupt Organizations Act (""RICO''), and that Sheraton Corp. had engaged in
fraud. Sheraton Corp. believes that the jury's determination against it on liability issues was erroneous as a
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