Starwood 2006 Annual Report Download - page 104

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 significant funding under these performance guarantees in 2007. In
connection with the acquisition of the Le Méridien brand in November 2005, the Company assumed the obligation
to guarantee certain performance levels at one Le Méridien managed hotel for the periods 2007 through 2013. This
guarantee is uncapped. However, the Company has estimated its exposure under this guarantee and does not
anticipate that payments made under the guarantee will be significant in any single year. The estimated fair value of
this guarantee of $6 million is reflected in other liabilities in the accompanying consolidated balance sheet at
December 31, 2006. The Company does not anticipate losing a significant number of management or franchise
contracts in 2007.
In connection with the purchase of the Le Méridien brand in November 2005, the Company was indemnified
for certain of Le Méridien’s historical liabilities by the entity that bought Le Méridien’s owned and leased hotel
portfolio. The indemnity is limited to the financial 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.
In connection with the sale of 33 hotels to Host in 2006, the Company agreed to indemnify Host for certain
liabilities, including operations and tax liabilities. At this time, the Company believes that it will not have to make
any material payments under such indemnities.
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 telecom-
munication, video and power services from Intelnet International Corporation (“Intelnet”). The first 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 telecommu-
nications and other services to Sheraton Holding and its affiliates (“First Suit”). The complaint sought injunctive
relief to enforce alleged exclusivity rights and unquantified monetary damages. The complaint was subsequently
amended in November 1998 to seek specific monetary and unspecified punitive damages. Sheraton Holding and
Sheraton 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 first half of 2001. In late 2003, the Company Defendants filed 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 filed 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 filed a notice of appeal with respect to the First Suit. On May 9, 2006, oral
argument was held in the Superior Court of New Jersey, Appellate Division (“Appellate Division”) on Intelnet’s
appeal of the decision in the First Suit. On August 4, 2006, the Appellate Division issued its opinion relating to the
First Suit, affirming the trial court’s rulings in favor of the Company that dismissed all of Intelnet’s claims. Intelnet
elected not to appeal the Appellate Division’s decision to the New Jersey Court of Appeals. A final judgment in
F-43
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)