Starwood 2005 Annual Report Download - page 108

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS Ì (Continued)
$50 million of which, if required, would be funded over several 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
2006. 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. In
connection with the acquisition of the Le Mπeridien brand in November 2005, the Company assumed the
obligation to guarantee certain performance levels at one Le Mπeridien managed hotel for the periods 2007
through 2013. This guarantee is uncapped and the Company is still evaluating the potential impact. The
Company does not anticipate losing a signiÑcant number of management or franchise contracts in 2006.
In connection with the purchase of the Le Mπeridien brand in November 2005, the Company was
indemniÑed for certain of Le Mπeridien's historical liabilities by the entity that bought Le Mπeridien's owned
and leased hotel portfolio. The indemnity is limited to the Ñnancial resources of that entity. However, at this
time, the Company believes that it is unlikely that it will have to fund any of these liabilities.
Litigation. The Corporation, Sheraton Corporation and Sheraton Holding (""Company Defendants'')
are defendants in certain litigations arising out of purported contracts allegedly requiring the purchase of
telecommunication, video and power services from Intelnet International Corporation (""Intelnet''). The Ñrst
suit was commenced in late 1997 by Intelnet in the Superior Court of New Jersey Law Division: Camden
County, alleging that Sheraton Corporation violated what Intelnet claimed were Intelnet's exclusive rights to
provide telecommunications and other services to Sheraton Holding and its aÇliates (""First Suit''). The
complaint sought injunctive relief to enforce alleged exclusivity rights and unquantiÑed monetary damages.
The complaint was subsequently amended in November 1998 to seek speciÑc monetary and unspeciÑed
punitive damages. Sheraton Holding and Sheraton Corporation served an answer denying Intelnet's claims,
and asserting counterclaims seeking damages and a declaration that the purported contracts at issue were
unenforceable.
In June 1999, Intelnet commenced a second lawsuit in the Superior Court of New Jersey Law Division:
Camden County, naming Boardwalk Regency Corporation (formerly a subsidiary of the Corporation) and the
Corporation (the ""BRC Action''). The claims in this case are similar in nature to those made in the First Suit,
and relate to an alleged breach of a purported exclusive contract to provide certain services to the Caesar's
Atlantic City Hotel and Casino. The two suits have been consolidated and were in mediation until 2001. The
mediation ended during the Ñrst half of 2001. In late 2003, the Company Defendants Ñled several dispositive
motions on various grounds. In February 2004, the court granted the Company Defendants' motion for
summary judgment dismissing Intelnet's claims under one of the agreements at issue. The court denied
summary judgment on the claims under the principal contract at issue, but directed a trial solely on the issue
of whether that contract was valid and enforceable or fraudulently executed. A non-jury trial commenced in
March 2004. At the conclusion of the evidentiary hearing, the court found that the principal contract was not
signed until after the allegedly breaching event. Accordingly, the court dismissed all of the claims alleged by
Intelnet against the Company Defendants under the principal contract. In June 2004, the court dismissed all
of the remaining claims asserted against the Company Defendants. The Company Ñled a motion for summary
judgment seeking dismissal of all claims pending in the BRC Action. On August 24, 2004, Intelnet agreed to
sever and dismiss with prejudice the BRC Action in its entirety, with the condition that if its claims in the
First Suit are reinstated on appeal, the BRC Action will be reinstated. On August 19, 2004, Intelnet Ñled a
notice of appeal with respect to the First Suit. The Company has accrued for the expected legal costs
associated with the dispute and does not expect that the resolution will have a material adverse eÅect on the
consolidated results of operations, Ñnancial position or cash Öows.
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