Starwood 2006 Annual Report Download - page 37

York City. In addition, we recorded a gain of $17 million on the sale of approximately $133 million of vacation
ownership receivables in 2006. The gain on the sale of VOI notes receivable in 2005, prior to our adoption of
SFAS No. 152, “Accounting for Real Estate Time-Sharing Transactions,” of $25 million was reflected in a separate
line in the consolidated statement of income, below operating income. Contract sales of VOI inventory, which
represents vacation ownership revenues before adjustments for percentage of completion accounting and rescission,
increased 19.2% in the year ended December 31, 2006 when compared to the same period in 2005. These increases
were offset by a decrease in residential sales associated with the residences at the St. Regis Museum Tower in
San Francisco which sold out in the first half of 2006.
Other revenues and expenses from managed and franchised properties increased to $1.585 billion from
$1.070 billion for the year ended December 31, 2006 and 2005, respectively. These revenues represent reim-
bursements 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 were made based upon the costs
incurred with no added margin, these revenues and corresponding expenses had no effect on our operating income
and our net income.
Selling, General, Administrative and Other. Selling, general, administrative and other expenses, which
includes costs and expenses from our Bliss spas and from the sale of Bliss products, was $470 million in the year
ended December 31, 2006 when compared to $370 million in 2005. The increase was primarily due to the impact of
stock-based compensation, including stock option expense of $47 million. The remaining increase includes
investments in our global development capability and costs associated with the launch of our new brands, aloft and
Element, as well as the addition of the Le Méridien business.
Operating Income. Our total operating income was $839 million in the year ended December 31, 2006
compared to $822 million in 2005. Excluding depreciation and amortization of $306 million and $407 million for
the years ended December 31, 2006 and 2005, respectively, operating income decreased 6.8% or $84 million to
$1.145 billion for the year ended December 31, 2006 when compared to $1.229 billion in the same period in 2005,
primarily due to the lost income from the 45 wholly owned hotels sold or closed during 2006 and approximately
$47 million of stock option expense recorded in 2006 as a result of the implementation of SFAS No. 123(R), “Share-
Based Payment, a revision of the FASB Statement No. 123, Accounting for Stock-Based Compensation,” on
January 1, 2006. These items were offset, in part, by the increase in management fees, franchise fees and other
income discussed above.
Restructuring and Other Special Charges (Credits), Net. During the twelve months ended December 31,
2006, we recorded $20 million in net restructuring and other special charges primarily related to transition costs
associated with the Le Méridien Acquisition in November 2005 and severance costs primarily related to certain
executives in connection with the continued corporate restructuring that began at the end of 2005. These charges
were offset, in part, by the reversal of accruals for a lease we assumed as part of the merger with Sheraton Holding
Corporation (“Sheraton Holding”) and its subsidiaries (formerly ITT Corporation) in 1998 as the lease matured at
the end of 2006 and the accruals exceeded our maximum remaining obligation under the lease.
During the twelve months ended December 31, 2005, we recorded $13 million in restructuring and other
special charges primarily related to severance costs in connection with our corporate restructuring as a result of our
planned disposition of significant real estate assets and transition costs associated with the Le Méridien Acquisition.
Depreciation and Amortization. Depreciation expense decreased $107 million to $280 million during the
year ended December 31, 2006 compared to $387 million in the corresponding period of 2005 primarily because,
beginning in November 2005, we ceased depreciation on the hotels included in the Host Transaction, partially offset
by additional depreciation expense resulting from capital expenditures at our owned, leased and consolidated joint
venture hotels in the past 12 months. Amortization expense increased to $26 million in the year ended December 31,
2006 compared to $20 million in the corresponding period of 2005 primarily due to amortization of intangible assets
that we acquired in connection with the Le Méridien Acquisition in November 2005.
Gain on Sale of VOI Notes Receivable. Gain on sale of VOI receivable was $25 million in 2005, primarily
due to the sale of approximately $221 million of vacation ownership receivables during the year ended Decem-
ber 31, 2005. In 2006 we recorded a $17 million gain on sale of VOI notes receivable related to the sale of
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