Starwood 2004 Annual Report Download - page 36

The increase in vacation ownership and residential sales and services primarily resulted from the increase
in VOI sales of 30.7% to $361 million in 2003 compared to $276 million in 2002. Contract sales of VOI
inventory increased 23.2% in the year ended December 31, 2003 when compared to the same period in 2002,
primarily as a result of sales at the Westin Ka'anapali Ocean Resort Villas in Maui, Hawaii, which sold out the
Ñrst phase prior to the opening, as well as strong demand reÖected in our resorts in Scottsdale and Orlando in
the latter part of the year.
The decrease in management fees, franchise fees and other income of $10 million was primarily due to
reduced interest income and increased insurance claims at our captive insurance company oÅset, in part, by an
increase in management and franchise fees.
Other revenues and expenses from managed and franchised properties increased to $851 million in 2003
when compared to $780 million in 2002, primarily due to the addition of hotels to our portfolio of managed
and franchised hotels. These revenues represent reimbursements of costs incurred on behalf of managed hotel
properties and franchisees and relate primarily to payroll costs at managed properties where we are the
employer. Since the reimbursements are made based upon the costs incurred with no added margin, these
revenues and corresponding expenses have no eÅect on our operating income and net income.
Operating Income. Our total operating income (which includes $9 million of restructuring and other
special credits in 2003 and $7 million of restructuring and other special credits and $30 million of foreign
exchange gains related to the devaluation of the Argentine Peso in 2002) was $427 million for the year ended
December 31, 2003 compared to $551 million in the same period of 2002. Excluding depreciation and
amortization of $429 million and $488 million for the years ended December 31, 2003 and 2002, respectively,
operating income decreased 17.6% or $183 million to $856 million for the year ended December 31, 2003
when compared to $1.039 million in the same period in 2002, primarily due to the decline in operating income
at our owned, leased and consolidated joint venture hotels as a result of the weakened global economies, the
war in Iraq and its aftermath and the SARS epidemic and the absence of the revenues and corresponding
operating income from the sold properties discussed above. Operating income at our owned, leased and
consolidated joint venture hotels was $445 million for the year ended December 31, 2003 compared to
$589 million in the same period of 2002. These hotels were also negatively impacted by increased energy,
workers compensation insurance and other health beneÑts related costs and reduced cancellation and
telecommunication fees in 2003 when compared to 2002. In addition, our total operating income in 2003 was
adversely impacted by the nonrecurring Argentina foreign exchange gains in 2002 of $30 million.
Operating income for the vacation ownership segment was $89 million in the year ended December 31,
2003 compared to $69 million in 2002 primarily due to the increased sales from the vacation ownership
projects discussed above.
Restructuring and Other Special Credits, Net. During 2003, we received $12 million in a favorable
settlement of a litigation matter. This credit was oÅset by an increase of $13 million in a reserve for legal
defense costs associated with a separate litigation matter. Additionally, we reversed a $9 million liability that
was originally established in 1997 for the ITT Excess Pension Plan and is no longer required as we Ñnalized
the settlement of its remaining obligations associated with the plan and reversed $1 million related to the
collection of receivables previously deemed impaired. During the year ended December 31, 2002, we reversed
$7 million of previously recorded restructuring and other special charges primarily related to adjustments to
the severance liability established in connection with the cost containment eÅorts after the events of
September 11, 2001, sales of our investments in certain e-business ventures previously deemed impaired and
the collection of receivables which were previously deemed uncollectible.
Depreciation and Amortization. Depreciation expense decreased to $410 million in the year ended
December 31, 2003 compared to $473 million in the corresponding period of 2002. Additional depreciation
resulting from capital expenditures at our owned, leased and consolidated joint venture hotels was more than
oÅset by the reduced depreciation expense from fully depreciated furniture, Ñxtures and equipment, as we
reached the Ñve year anniversary of the merger with ITT Corporation in February 2003 and the 16 non-core
domestic hotels, and the four Costa Smeralda hotels which were initially classiÑed as held for sale and
depreciation suspended eÅective March 31, 2003. Amortization expense increased to $19 million in the year
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