Starwood 2011 Annual Report Download - page 162

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS
outstanding under this program totaled $13 million at December 31, 2011. The Company evaluates these loans
for impairment, and at December 31, 2011, believes these loans are collectible. Unfunded loan commitments
aggregating $19 million were outstanding at December 31, 2011, none of which is expected to be funded in the
future. These loans typically are secured by pledges of project ownership interests and/or mortgages on the
projects. The Company also has $94 million of equity and other potential contributions associated with managed
or joint venture properties, $48 million of which is expected to be funded in 2012.
Surety bonds issued on behalf of the Company at December 31, 2011 totaled $21 million, the majority of
which were required by state or local governments relating to the Company’s vacation ownership operations and
by its insurers to secure large deductible insurance programs.
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 obligated to fund shortfalls in
performance levels through the issuance of loans. 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 significant funding under performance guarantees or losing a significant
number of management or franchise contracts in 2012.
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 2014. During the year ended December 31, 2010, the Company reached an agreement with the owner of
this property to fully release the Company of its performance guarantee obligation in return for a payment of
approximately $1 million to the owner. Additionally, in connection with this settlement, the term of the
management contract was extended by five years. As a result of this settlement, the Company recorded a credit to
selling, general, administrative and other expenses of approximately $8 million for the difference between the
carrying amount of the guarantee liability and the cash payment of $1 million.
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 in 2006, the Company agreed to indemnify the buyer 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 Company is involved in various legal matters that have arisen in the normal course of
business, some of which include claims for substantial sums. Accruals have been recorded when the outcome is
probable and can be reasonably estimated. While the ultimate results of claims and litigation cannot be
determined, the Company does not expect that the resolution of all legal matters will have a material adverse
effect on its consolidated results of operations, financial position or cash flow. However, depending on the
amount and the timing, an unfavorable resolution of some or all of these matters could materially affect the
Company’s future results of operations or cash flows in a particular period.
In August 2009, Sheraton Operating Corporation (“Sheraton”) filed a lawsuit as plaintiff in the Supreme
Court of the State of New York (the “Court”) against Castillo Grand LLC (“Castillo”) asserting claims arising
out of a dispute over a hotel development contract. Two earlier lawsuits arising out of the same hotel
development contract filed by Castillo against Sheraton in federal court had been dismissed for lack of subject
matter jurisdiction. Castillo filed counterclaims in the state court action alleging, among other things, that
Sheraton’s breach of contract resulted in design changes and construction delays. The matter was tried to the
Court and, on November 18, 2011, the Court issued its Post Trial Decision ruling in favor of Castillo on some
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