10-K 1 p75014e10vk.htm 10-K e10vk
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-K
 
     
 
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Fiscal Year Ended December 31, 2007
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Transition Period from          to          
 
Commission File Number: 1-7959
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
(Exact name of Registrant as specified in its charter)
 
Maryland
(State or other jurisdiction
of incorporation or organization)
 
52-1193298
(I.R.S. employer identification no.)
 
1111 Westchester Avenue
White Plains, NY 10604
(Address of principal executive
offices, including zip code)
 
(914) 640-8100
(Registrant’s telephone number,
including area code)
 
Securities Registered Pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, par value $0.01 per share
  New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
Note:  Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and smaller reporting company in Rule 12b-2 of the Exchange Act.
 
             
Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller Reporting company o
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of June 30, 2007, the aggregate market value of the Registrant’s voting and non-voting common equity (for purposes of this Annual Report only, includes all Shares other than those held by the Registrant’s Directors and executive officers) was $14,035,246,740.
 
As of February 15, 2008, the Corporation had outstanding 188,283,937 shares of common stock.
 
For information concerning ownership of Shares, see the Proxy Statement for the Company’s Annual Meeting of Stockholders that is currently scheduled for April 30, 2008 (the “Proxy Statement”), which is incorporated by reference under various Items of this Annual Report.
 
Document Incorporated by Reference:
 
         
Document
  Where Incorporated
 
Proxy Statement
    Part III (Items 11, 12, 13 and 14 )
 


 

 
TABLE OF CONTENTS
 
                 
        Page
 
        Forward-Looking Statements     1  
      Business     1  
      Risk Factors     9  
      Properties     17  
      Legal Proceedings     22  
      Submission of Matters to a Vote of Security Holders     22  
        Executive Officers of the Registrants     22  
 
      Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     23  
      Selected Financial Data     26  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     26  
      Quantitative and Qualitative Disclosures about Market Risk     40  
      Financial Statements and Supplementary Data     41  
      Changes In and Disagreements with Accountants on Accounting and Financial Disclosure     41  
      Controls and Procedures     41  
 
PART III
      Directors, Executive Officers and Corporate Governance     44  
 
Item 11.
    Executive Compensation     47  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     48  
 
Item 13.
    Certain Relationships and Related Transactions and Director Independence     48  
      Principal Accountant Fees and Services     48  
 
      Exhibits, Financial Statements, Financial Statement Schedule and Reports on Form 8-K     49  
 EX-10.7
 EX-10.35
 EX-10.49
 EX-12.1
 EX-21.1
 EX-23.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


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This Annual Report is filed by Starwood Hotels & Resorts Worldwide, Inc., a Maryland corporation (the “Corporation”). Unless the context otherwise requires, all references to the Corporation include those entities owned or controlled by the Corporation, including SLC Operating Limited Partnership, a Delaware limited partnership (the “Operating Partnership”), which prior to April 10, 2006 included Starwood Hotels & Resorts, a Maryland real estate investment trust (the “Trust”), which was sold in the Host Transaction (defined below); all references to the Trust include the Trust and those entities owned or controlled by the Trust, including SLT Realty Limited Partnership, a Delaware limited partnership (the “Realty Partnership”); and all references to “we”, “us”, “our”, “Starwood”, or the “Company” refer to the Corporation, the Trust and its respective subsidiaries, collectively through April 7, 2006. Until April 7, 2006, the shares of common stock, par value $0.01 per share, of the Corporation (“Corporation Shares”) and the Class B shares of beneficial interest, par value $0.01 per share, of the Trust (“Class B Shares”) were attached and traded together and were held or transferred only in units consisting of one Corporation Share and one Class B Share (a “Share”). On April 7, 2006, in connection with a transaction (the “Host Transaction”) with Host Hotels & Resorts, Inc., its subsidiary Host Marriot L.P. and certain other subsidiaries of Host Hotels & Resorts, Inc. (collectively, “Host”), the Shares were depaired and the Corporation Shares became transferable separately from the Class B Shares. As a result of the depairing, the Corporation Shares trade alone under the symbol “HOT” on the New York Stock Exchange (“NYSE”). As of April 10, 2006, neither Shares nor Class B Shares are listed or traded on the NYSE.
 
PART I
 
Forward-Looking Statements
 
This Annual Report contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in several places in this Annual Report, including, without limitation, the section of Item 1. Business, captioned “Business Strategy” and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Such forward-looking statements may include statements regarding the intent, belief or current expectations of Starwood, its Directors or its officers with respect to the matters discussed in this Annual Report. All forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements including, without limitation, the risks and uncertainties set forth below. Starwood undertakes no obligation to publicly update or revise any forward-looking statements to reflect current or future events or circumstances.
 
Item 1.   Business.
 
General
 
We are one of the world’s largest hotel and leisure companies. We conduct our hotel and leisure business both directly and through our subsidiaries. Our brand names include the following:
 
St. Regis®  (luxury full-service hotels, resorts and residences) are for connoisseurs who desire the finest expressions of luxury. They provide flawless and bespoke service to high-end leisure and business travelers. St. Regis hotels are located in the ultimate locations within the world’s most desired destinations, important emerging markets and yet to be discovered paradises, and they typically have individual design characteristics to capture the distinctive personality of each location.
 
The Luxury Collection®  (luxury full-service hotels and resorts) is a group of unique hotels and resorts offering exceptional service to an elite clientele. From legendary palaces and remote retreats to timeless modern classics, these remarkable hotels and resorts enable the most discerning traveler to collect a world of unique, authentic and enriching experiences indigenous to each destination that capture the sense of both luxury and place. They are distinguished by magnificent decor, spectacular settings and impeccable service.
 
W®  (luxury and upscale full service hotels, retreats and residences) feature world class design, world class restaurants and “on trend” bars and lounges and its signature Whatever\Whenever® service standard. It’s a sensory multiplex that not only indulges the senses, it delivers an emotional experience. Whether it’s “behind the scenes”


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access at Whappenings, or our cutting edge music, lighting and scent programs, W hotels delivers an experience unmatched in the hotel segment.
 
Westin®  (luxury and upscale full-service hotels, resorts and residences) is a lifestyle brand competing in the upper upscale sector in nearly 30 countries around the globe. Each hotel offers renewing experiences that inspire guests to be at their best. First impressions at any Westin hotel are fueled by signature sensory experiences of light, music, white tea scent and botanicals. Westin revolutionized the industry with its famous Heavenly Bed® and Heavenly Bath® and launched a multi-million dollar retail program featuring these products. Westin is the first global brand to offer in-room spa treatments at every hotel and the first to go smoke-free in North America. Westin guests stay in shape at WestinWORKOUT® Powered by Reebok (SM). The new Westin Superfoods® menu is the latest way we bring renewal to guests, with foods considered best for providing disease-fighting and health-enhancing benefits due to their high nutrient and antioxidant content.
 
Le Méridien®   (luxury and upscale full-service hotels, resorts and residences) is a European-inspired brand with a French accent. Each of its hotels, whether city, airport or resort has a distinctive character driven by its individuality and the Le Méridien brand values. With its underlying passion for food, art and style and its classic yet stylish design, Le Méridien offers a unique experience at some of the world’s top travel destinations.
 
Sheraton®   (luxury and upscale full-service hotels and resorts) is the Company’s largest brand serving the needs of luxury and upscale business and leisure travelers worldwide. We offer the entire spectrum of comfort. From full-service hotels in major cities to luxurious resorts by the water, Sheraton can be found in the most sought-after cities and resort destinations around the world. Every guest at Sheraton hotels and resorts feels a warm and welcoming connection, the feeling you have when you walk into a place and your favorite song is playing — a sense of comfort and belonging. Our most recent innovation, the Link@Sheratonsm with Microsoft, encourages hotel guests to come out of their rooms to enjoy the energy and social opportunities of traveling. At Sheraton, we help our guests connect to what matters most to them, the office, home and the best spots in town.
 
Four Points®  (select-service hotels) delights the self-sufficient traveler with a new kind of comfort, approachable style and spirited, can-do service — all at the honest value our guests deserve. Our guests start their day feeling energized and finish up relaxed and free to enjoy little indulgences that make their time away from home special.
 
Aloftsm  (select-service hotels), a brand introduced in 2005 with the first hotel expected to open in 2008, provides new heights, an oasis where you least expect it, a spirited neighborhood outpost, a haven at the side of the road. Bringing a cozy harmony of modern elements to the classic American on-the-road tradition, aloft offers a sassy, refreshing, ultra effortless alternative for both the business and leisure traveler. Fresh, fun, and fulfilling, aloft is an experience to be discovered and rediscovered, destination after destination, as you ease on down the road.
 
Elementsm  (extended stay hotels), a brand introduced in 2006 with the first hotel expected to open in 2008, provides a modern, upscale and intuitively designed hotel experience that allows guests to live well and feel in control. Inspired by Westin, Element hotels promote balance through a thoughtful, upscale environment. Decidedly modern with an emphasis on nature, Element is intuitively constructed with an efficient use of space that encourages guests to stay connected, feel alive, and thrive while they are away. Element is the smart, renewing haven for extended stay travel.
 
Through our brands, we are well represented in most major markets around the world. Our operations are grouped into two business segments, hotels and vacation ownership and residential operations.
 
Our revenue and earnings are derived primarily from hotel operations, which include management and other fees earned from hotels we manage pursuant to management contracts, the receipt of franchise and other fees and the operation of our owned hotels.
 
Our hotel business emphasizes the global operation of hotels and resorts primarily in the luxury and upscale segment of the lodging industry. We seek to acquire interests in, or management or franchise rights with respect to properties in this segment. At December 31, 2007, our hotel portfolio included owned, leased, managed and franchised hotels totaling 897 hotels with approximately 275,000 rooms in approximately 100 countries, and is comprised of 74 hotels that we own or lease or in which we have a majority equity interest, 415 hotels managed by


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us on behalf of third-party owners (including entities in which we have a minority equity interest) and 408 hotels for which we receive franchise fees.
 
Our revenues and earnings are also derived from the development, ownership and operation of vacation ownership resorts, marketing and selling vacation ownership interests (“VOIs”) in the resorts and providing financing to customers who purchase such interests. Generally these resorts are marketed under the brand names described above. Additionally, our revenues and earnings are derived from the development, marketing and selling of residential units at mixed use hotel projects owned by us as well as fees earned from the marketing and selling of residential units at mixed use hotel projects developed by third-party owners of hotels operated under our brands. At December 31, 2007, we had 28 owned vacation ownership resorts and residential properties, including sites held for development, in the United States, Mexico, and the Bahamas.
 
The Corporation was incorporated in 1980 under the laws of Maryland. Sheraton Hotels & Resorts and Westin Hotels & Resorts, Starwood’s largest brands, have been serving guests for more than 60 years. Starwood Vacation Ownership (and its predecessor, Vistana, Inc.) has been selling VOIs for more than 20 years.
 
Our principal executive offices are located at 1111 Westchester Avenue, White Plains, New York 10604, and our telephone number is (914) 640-8100.
 
For a discussion of our revenues, profits, assets and geographical segments, see the notes to financial statements of this Annual Report. For additional information concerning our business, see Item 2. Properties, of this Annual Report.
 
Competitive Strengths
 
Management believes that the following factors contribute to our position as a leader in the lodging and vacation ownership industry and provide a foundation for the Company’s business strategy:
 
Brand Strength.  We have assumed a leadership position in markets worldwide based on our superior global distribution, coupled with strong brands and brand recognition. Our upscale and luxury brands continue to capture market share from our competitors by aggressively cultivating new customers while maintaining loyalty among the world’s most active travelers. The strength of our brands is evidenced, in part, by the superior ratings received from our hotel guests and from industry publications.
 
Frequent Guest Program.  Our loyalty program, Starwood Preferred Guest® (“SPG”), made headlines when it launched in 1999 with a breakthrough policy of no blackout dates and no capacity controls, allowing members to redeem free nights anytime, anywhere. Since then, the program has grown to include more than 41 million members and continues to be cited for its hassle-free award redemption, outstanding customer service, dedicated member website and innovative promotions and benefits for elite members. The program yields repeat guest business by uniting a world of distinctive hotels and rewarding customers with the rewards and recognition they want — from points that can be used for free hotel stays, indulgent experiences and airline miles with 32 participating airlines.
 
Significant Presence in Top Markets.  Our luxury and upscale hotel and resort assets are well positioned throughout the world. These assets are primarily located in major cities and resort areas that management believes have historically demonstrated a strong breadth, depth and growing demand for luxury and upscale hotels and resorts, in which the supply of sites suitable for hotel development has been limited and in which development of such sites is relatively expensive.
 
Premier and Distinctive Properties.  We control a distinguished and diversified group of hotel properties throughout the world, including the St. Regis in New York, New York; The Phoenician in Scottsdale, Arizona; the Hotel Gritti Palace in Venice, Italy; and the St. Regis in Beijing, China. These are among the leading hotels in the industry and are at the forefront of providing the highest quality and service. Our properties are consistently recognized as the best of the best by readers of Condé Nast Traveler, who are among the world’s most sophisticated and discerning group of travelers.
 
Scale.  As one of the largest hotel and leisure companies focusing on the luxury and upscale full-service lodging market, we have the scale to support our core marketing and reservation functions. We also believe that our scale will contribute to lower our cost of operations through purchasing economies in areas such as insurance,


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energy, telecommunications, technology, employee benefits, food and beverage, furniture, fixtures and equipment and operating supplies. We feel we are well-positioned for significant growth based on our headcount. We currently have approximately half of the base of rooms compared to our major competitors, and as a result, as we increase our room count, our economies of scale should provide a favorable impact to our operations given our existing cost structure.
 
Diversification of Cash Flow and Assets.  Management believes that the diversity of our brands, market segments served, revenue sources and geographic locations provide a broad base from which to enhance revenue and profits and to strengthen our global brands. This diversity limits our exposure to any particular lodging or vacation ownership asset, brand or geographic region.
 
While we focus on the luxury and upscale portion of the full-service lodging, vacation ownership and residential markets, our brands cater to a diverse group of sub-markets within this market. For example, the St. Regis hotels cater to high-end hotel and resort clientele while Four Points by Sheraton hotels deliver extensive amenities and services at more affordable rates. The aloft brand will provide a youthful alternative to the “commodity lodging” of currently existing brands in the select-service market segment, and the Element brand will provide modern, upscale hotels for extended stay travel.
 
We derive our cash flow from multiple sources within our hotel and vacation ownership and residential segments, including owned hotels’ operations, management and franchise fees and the sale of VOIs and residential units. These operations are in geographically diverse locations around the world. The following tables reflect our hotel and vacation ownership and residential properties by type of revenue source and geographical presence by major geographic area as of December 31, 2007:
 
                 
    Number of
       
    Properties     Rooms  
 
Managed and unconsolidated joint venture hotels
    415       140,800  
Franchised hotels
    408       109,100  
Owned hotels(a)
    74       24,700  
Vacation ownership resorts and residential properties
    28       7,400  
                 
Total properties
    925       282,000  
                 
 
 
(a) Includes wholly owned, majority owned and leased hotels.
 
                 
    Number of
       
    Properties     Rooms  
 
North America (and Caribbean)
    472       160,200  
Europe, Africa and the Middle East
    261       63,800  
Asia Pacific
    136       46,100  
Latin America
    56       11,900  
                 
Total
    925       282,000  
                 
 
Business Segment and Geographical Information
 
Incorporated by reference in Note 23. Business Segment and Geographical Information, in the notes to financial statements set forth in Part II, Item 8. Financial Statements and Supplementary Data.
 
Business Strategy
 
We have implemented a strategy of reducing our investment in owned real estate and increasing our focus on the management and franchise business. In furtherance of this strategy, during 2006 and 2007 we sold a total of 51 hotels for approximately $4.6 billion, including 33 properties to Host for approximately $4.1 billion in stock, cash and debt assumption. As a result, our primary business objective is to maximize earnings and cash flow by increasing the number of our hotel management contracts and franchise agreements; acquiring and developing


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vacation ownership resorts and selling VOIs; and investing in real estate assets where there is a strategic rationale for doing so, which may include selectively acquiring interests in additional assets and disposing of non-core hotels (including hotels where the return on invested capital is not adequate) and “trophy” assets that may be sold at significant premiums. We plan to meet these objectives by leveraging our global assets, broad customer base and other resources and by taking advantage of our scale to reduce costs. The implementation of our strategy and financial planning are impacted by the uncertainty relating to geopolitical and economic environments around the world and their consequent impact on travel in their respective regions and the rest of the world.
 
Growth Opportunities.  Management has identified several growth opportunities with a goal of enhancing our operating performance and profitability, including:
 
  •  Continuing to build our brands to appeal to upscale business travelers and other customers seeking full-service hotels in major markets by establishing emotional connections to our brands by offering signature experiences at our properties. We plan to accomplish this in the following ways: (i) by continuing our tradition of innovation started with the Heavenly Bed® and Heavenly Bath®, the Westin Heavenly Spa, the Superfoods® menu, the Sheraton Sweet Sleepersm Bed, the Sheraton Service Promisesm and the Four Points by Sheraton Four Comfort Bed SM, (ii) with such ideas as Westin being the first major brand to go “smoke-free” in North America, aloft’s “see green” program created to introduce and promote ecologically friendly programs and services; our newest innovation, the Link@Sheratonsm; and (iii) by placing Bliss® Spas, Remèdesm Spas and their branded amenities, including the Sheraton Shine® by Bliss bath product line, and upscale restaurants in certain of our branded hotels;
 
  •  Renovating, upgrading and expanding our branded hotels to further our strategy of strengthening brand identity;
 
  •  Continuing to expand our role as a third-party manager of hotels and resorts including through the roll out of our new brands, aloft and Element, and the introduction of other new brands. This allows us to expand the presence of our lodging brands and gain additional cash flow generally with modest capital commitment;
 
  •  Franchising certain of our brands to third-party operators and licensing certain of our brands to third parties in connection with luxury residential condominiums, thereby expanding our market presence, enhancing the exposure of our hotel brands and providing additional income through franchise and license fees;
 
  •  Expanding our internet presence and sales capabilities to increase revenue and improve customer service;
 
  •  Continuing to grow our frequent guest program, thereby increasing occupancy rates while providing our customers with benefits based upon loyalty to our hotels, vacation ownership resorts and branded residential projects;
 
  •  Enhancing our marketing efforts by integrating our proprietary customer databases, so as to sell additional products and services to existing customers, improve occupancy rates and create additional marketing opportunities;
 
  •  Increasing operating efficiencies through increased use of technology;
 
  •  Optimizing use of our real estate assets to improve ancillary revenue, such as restaurant, beverage and parking revenue from our hotels and resorts;
 
  •  Establishing relationships with third parties to enable us to provide attractive restaurants, programs and other amenities at our branded properties such as our partnering with Jean Georges Vongerichten and his world-class restaurant concepts, the opening of Adour with Alaine Ducasse at the St. Regis New York and establishing the LM 100, a group of cultural innovators and artists who will offer their creativity and develop original and interactive programs for Le Méridien hotels ;
 
  •  Developing additional vacation ownership resorts and leveraging our hotel real estate assets where possible through VOI construction or conversion and residential sales; and
 
  •  Leveraging the Bliss and Remède product lines and distribution channels, most recently unveiling our Sheraton Shine® by Bliss bath product line.


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We intend to explore opportunities to expand and diversify our hotel portfolio through internal development, minority investments and selective acquisitions of properties domestically and internationally that meet some or all of the following criteria:
 
  •  Luxury and upscale hotels and resorts in major metropolitan areas and business centers;
 
  •  Hotels or brands which would enable us to provide a wider range of amenities and services to customers or provide attractive geographic distribution;
 
  •  Major tourist hotels, destination resorts or conference centers that have favorable demographic trends and are located in markets with significant barriers to entry or with major room demand generators such as office or retail complexes, airports, tourist attractions or universities;
 
  •  Undervalued hotels whose performance can be increased by re-branding to one of our hotel brands, the introduction of better and more efficient management techniques and practices and/or the injection of capital for renovating, expanding or repositioning the property; and
 
  •  Portfolios of hotels or hotel companies that exhibit some or all of the criteria listed above, where the purchase of several hotels in one transaction enables us to obtain favorable pricing or obtain attractive assets that would otherwise not be available or realize cost reductions on operating the hotels by incorporating them into the Starwood system.
 
We may also selectively choose to develop and construct desirable hotels and resorts to help us meet our strategic goals, such as the construction of a dual hotel campus in Lexington, Massachusetts featuring both an aloft hotel and an Element hotel.
 
Competition
 
The hotel industry is highly competitive. Competition is generally based on quality and consistency of room, restaurant and meeting facilities and services, attractiveness of locations, availability of a global distribution system, price, the ability to earn and redeem loyalty program points and other factors. Management believes that we compete favorably in these areas. Our properties compete with other hotels and resorts in their geographic markets, including facilities owned by local interests and facilities owned by national and international chains. Our principal competitors include other hotel operating companies, ownership companies (including hotel REITs) and national and international hotel brands.
 
We encounter strong competition as a hotel, residential, resort and vacation ownership operator and developer. While some of our competitors are private management firms, several are large national and international chains that own and operate their own hotels, as well as manage hotels for third-party owners and develop and sell VOIs, under a variety of brands that compete directly with our brands. Our timeshare and residential business depends on our ability to obtain land for development of our timeshare and residential products and to utilize land already owned by us but used in hotel operations. Changes in the general availability of suitable land or the cost of acquiring or developing such land could adversely impact the profitability of our timeshare and residential business.
 
Environmental Matters
 
We are subject to certain requirements and potential liabilities under various federal, state and local environmental laws, ordinances and regulations (“Environmental Laws”). For example, a current or previous owner or operator of real property may become liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of hazardous or toxic substances may adversely affect the owner’s ability to sell or rent such real property or to borrow using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic wastes may be liable for the costs of removal or remediation of such wastes at the treatment, storage or disposal facility, regardless of whether such facility is owned or operated by such person. We use certain substances and generate certain wastes that may be deemed hazardous or toxic under applicable Environmental Laws, and we from time to time have incurred, and in the future may incur, costs related to cleaning up contamination resulting from historic


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uses of certain of our current or former properties or our treatment, storage or disposal of wastes at facilities owned by others. Other Environmental Laws require abatement or removal of certain asbestos-containing materials (“ACMs”) (limited quantities of which are present in various building materials such as spray-on insulation, floor coverings, ceiling coverings, tiles, decorative treatments and piping located at certain of our hotels) in the event of damage or demolition, or certain renovations or remodeling. These laws also govern emissions of and exposure to asbestos fibers in the air. Environmental Laws also regulate polychlorinated biphenyls (“PCBs”), which may be present in electrical equipment. A number of our hotels have underground storage tanks (“USTs”) and equipment containing chlorofluorocarbons (“CFCs”); the operation and subsequent removal or upgrading of certain USTs and the use of equipment containing CFCs also are regulated by Environmental Laws. In connection with our ownership, operation and management of our properties, we could be held liable for costs of remedial or other action with respect to PCBs, USTs or CFCs.
 
Environmental Laws are not the only source of environmental liability. Under the common law, owners and operators of real property may face liability for personal injury or property damage because of various environmental conditions such as alleged exposure to hazardous or toxic substances (including, but not limited to, ACMs, PCBs and CFCs), poor indoor air quality, radon or poor drinking water quality.
 
Although we have incurred and expect to incur remediation and various environmental-related costs during the ordinary course of operations, management anticipates that such costs will not have a material adverse effect on our operations or financial condition.
 
Seasonality and Diversification
 
The hotel industry is seasonal in nature; however, the periods during which our properties experience higher revenue activities vary from property to property and depend principally upon location. Generally, our revenues and operating income have been lower in the first quarter than in the second, third or fourth quarters.
 
Comparability of Owned Hotel Results
 
We continually update and renovate our owned, leased and consolidated joint venture hotels. While undergoing renovation, these hotels are generally not operating at full capacity and, as such, these renovations can negatively impact our owned hotel revenues and operating income. Other events, such as the occurrence of natural disasters may cause a full or partial closure or sale of a hotel, and such events can negatively impact our revenues and operating income. Finally as we pursue our strategy of reducing our investment in owned real estate assets, the sale of such assets can significantly reduce our revenues and operating income.
 
Regulation and Licensing of Gaming Facilities
 
We have a minority interest in the gaming operations of the Planet Hollywood Hotel & Casino, a Sheraton Resort in Las Vegas, Nevada and we and certain of our affiliates and officers have obtained from the Nevada Gaming Authorities (herein defined) the various registrations, approvals, permits and licenses required to engage in these gaming activities in Nevada. The casino gaming licenses are not transferable and must be renewed periodically by the payment of various gaming license fees and taxes. The gaming authorities may deny an application for licensing for any cause which they deem reasonable and may find an officer or key employee unsuitable for licensing or unsuitable to continue having a relationship with us in which case all relationships with such person would be required to be severed. In addition, the gaming authorities may require us to terminate the employment of any person who refuses to file the appropriate applications or disclosures.
 
The ownership and/or operation of casino gaming facilities in the United States where permitted are subject to federal, state and local regulations which under federal law, govern, among other things, the ownership, possession, manufacture, distribution and transportation in interstate commerce of gaming devices, and the recording and reporting of currency transactions, respectively. Our Nevada casino gaming operations are subject to the Nevada Gaming Control Act and the regulations promulgated thereunder (the “Nevada Act”), and the licensing and regulatory control of the Nevada Gaming Commission (the “Nevada Commission”) and the Nevada State Gaming Control Board (the “Nevada Board”), as well as certain county government agencies (collectively referred to as the “Nevada Gaming Authorities”).


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If it were determined that applicable laws or regulations were violated, the gaming licenses, registrations and approvals held by us and our affiliates and officers could be limited, conditioned, suspended or revoked and we and the persons involved could be subject to substantial fines for each separate violation. Furthermore, a supervisor could be appointed by the Nevada Commission to operate the gaming property and, under certain circumstances, earnings generated during the supervisor’s appointment (except for reasonable rental value of the affected gaming property) could be forfeited to the State of Nevada. Any suspension or revocation of the licenses, registrations or approvals, or the appointment of a supervisor, would not have a material adverse effect on us given the limited nature and extent of the investment by us in casino gaming.
 
We are also required to submit certain financial and operating reports to the Nevada Commission. Further, certain loans, leases, sales of securities and similar financing transactions by us must be reported to or approved by the Nevada Commission. We have a Nevada “shelf” approval for certain public offerings that expires in November 2008. We intend to apply for a renewed Nevada shelf approval to become effective in November 2008 for a two year period.
 
The Nevada Gaming Authorities may investigate and require a finding of suitability of any holder of any class of our voting securities at any time. Nevada law requires any person who acquires more than 5 percent of any class of our voting securities to report the acquisition to the Nevada Commission and we also must report the acquisition within ten days of becoming aware of this fact. Any person who becomes a beneficial owner of more than 10 percent of any class of our voting securities must apply for finding of suitability by the Nevada Commission within 30 days after the Nevada Board Chairman mails a written notice requiring such filing. The applicant must pay the costs and fees incurred by the Nevada Board in connection with the investigation.
 
Under certain circumstances, an “institutional investor,” as defined by the Nevada Act, that acquires more than 10 percent but no more than 19 percent of our voting securities may apply to the Nevada Commission for a waiver of such finding of shareholder suitability requirements if such institutional investor holds the voting securities for investment purposes only. An institutional investor will not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as a institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of either our Board of Directors, any change in our corporate charter, bylaws, management, policies or operations or any of our casino gaming operations, or any other action which the Nevada Commission finds to be inconsistent with holding our voting securities for investment purposes only. The Nevada Commission also may in its discretion require the holder of any debt security of a registered company to file an application, be investigated and be found suitable to own such debt security.
 
Any beneficial owner of our voting securities who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Commission or by the Chairman of the Nevada Board may be found unsuitable. Any person found unsuitable who holds, directly or indirectly, any beneficial ownership of our debt or equity voting securities beyond such periods or periods of time as may be prescribed by the Nevada Commission may be guilty of a gross misdemeanor. We could be subject to disciplinary action if, without prior approval of the Nevada Commission, and after receipt of notice that a person is unsuitable to be an equity or debt security holder or to have any other relationship with us, we either (i) pay to the unsuitable person any dividend, interest or any distribution whatsoever; (ii) recognize any voting right by such unsuitable person in connection with such securities; (iii) pay the unsuitable person remuneration in any form; (iv) make any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction; or, (v) fail to pursue all lawful efforts to require such unsuitable person to relinquish his securities including, if necessary, the immediate purchase of such securities for cash at fair market value.
 
Regulations of the Nevada Commission provide that control of a registered publicly traded corporation cannot be changed through merger, consolidation, acquisition or assets, management or consulting agreements, or any form of takeover without the prior approval of the Nevada Commission. Persons seeking approval to control a registered publicly traded corporation must satisfy the Nevada Commission as to a variety of stringent standards prior to assuming control of such corporation. The failure of a person to obtain such approval prior to assuming control over the registered publicly traded corporation may constitute grounds for finding such person unsuitable. Such regulations may impact the timing of consummating any such transaction.


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Regulations of the Nevada Commission also prohibit certain repurchases of securities by registered publicly traded corporations without the prior approval of the Nevada Commission. Transactions covered by these regulations are generally aimed at discouraging repurchases of securities at a premium over market price from certain holders of more than 3 percent of the outstanding securities of the registered publicly traded corporation. The regulations of the Nevada Commission also require approval for a “plan of recapitalization.” Generally a plan of recapitalization is a plan proposed by the management of a registered publicly traded corporation that contains recommended action in response to a proposed corporate acquisition opposed by management of the corporation if such acquisition would require the prior approval of the Nevada Commission.
 
Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively “Licensees”), and who proposes to become involved in a gaming operation outside the State of Nevada is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the Nevada Board of the Licensees’ participation in such foreign gaming. The revolving fund is subject to an increase or decrease in the discretion of the Nevada Commission. Once such revolving fund is established, the Licensees may engage in gaming activities outside the State of Nevada without seeking the approval of the Nevada Commission provided (i) such activities are lawful in the jurisdiction where they are to be conducted; and (ii) the Licensees comply with certain reporting requirements imposed by the Nevada Act. Licensees are subject to disciplinary action by the Nevada Commission if they (i) knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation; (ii) fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations; (iii) engage in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees; or, (iv) employ a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. We manage gaming operations at the Sheraton Cairo Hotel, Towers & Casino in Gaza, Egypt.
 
Employees
 
At December 31, 2007, approximately 155,000 people were employed at our corporate offices, owned and managed hotels and vacation ownership resorts, of whom approximately 37% were employed in the United States. At December 31, 2007, approximately 33% of the U.S.-based employees were covered by various collective bargaining agreements providing, generally, for basic pay rates, working hours, other conditions of employment and orderly settlement of labor disputes. Generally, labor relations have been maintained in a normal and satisfactory manner, and management believes that our employee relations are satisfactory.
 
Where you can find more information
 
We file annual, quarterly and special reports, proxy statements and other information with the Securities & Exchange Commission (“SEC”). Our SEC filings are available to the public over the Internet at the SEC’s web site at http://www.sec.gov. Our SEC filings are also available on our website at http://www.starwoodhotels.com/corporate/investor relations.html as soon as reasonably practicable after they are filed with or furnished to the SEC. You may also read and copy any document we file with the SEC at its public reference rooms in Washington, D.C. Please call the SEC at (800) SEC-0330 for further information on the public reference rooms. Our filings with the SEC are also available at the New York Stock Exchange. For more information on obtaining copies of our public filings at the New York Stock Exchange, you should call (212) 656-5060. You may also obtain a copy of our filings free of charge by calling Investor Relations at (914) 640-8165.
 
Item 1A.   Risk Factors.
 
Risks Relating to Hotel, Resort, Vacation Ownership and Residential Operations
 
We Are Subject to All the Operating Risks Common to the Hotel and Vacation Ownership and Residential Industries.  Operating risks common to the hotel and vacation ownership and residential industries include:
 
  •  changes in general economic conditions, including the severity and duration of any downturn in the US or global economy;


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  •  impact of war and terrorist activity (including threatened terrorist activity) and heightened travel security measures instituted in response thereto;
 
  •  domestic and international political and geopolitical conditions;
 
  •  travelers’ fears of exposures to contagious diseases;
 
  •  decreases in the demand for transient rooms and related lodging services, including a reduction in business travel as a result of general economic conditions;
 
  •  decreases in demand or increases in supply for vacation ownership interests;
 
  •  the impact of internet intermediaries on pricing and our increasing reliance on technology;
 
  •  cyclical over-building in the hotel and vacation ownership industries;
 
  •  restrictive changes in zoning and similar land use laws and regulations or in health, safety and environmental laws, rules and regulations and other governmental and regulatory action;
 
  •  changes in travel patterns;
 
  •  changes in operating costs including, but not limited to, energy, labor costs (including the impact of unionization), food costs, workers’ compensation and health-care related costs, insurance and unanticipated costs such as acts of nature and their consequences;
 
  •  disputes with owners of properties, including condominium hotels, franchisees and homeowner associations which may result in litigation;
 
  •  the availability and cost of capital to allow us and potential hotel owners and franchisees to fund construction, renovations and investments;
 
  •  foreign exchange fluctuations;
 
  •  the financial condition of third-party property owners, project developers and franchisees, which may impact our ability to recover indemnity payments that may be owed to us and their ability to fund amounts required under development, management and franchise agreements and in most cases our recourse is limited to the equity value said party has in the property; and
 
  •  the financial condition of the airline industry and the impact on air travel.
 
We are also impacted by our relationships with owners and franchisees. Our hotel management contracts are typically long-term arrangements, but most allow the hotel owner to replace us if certain financial or performance criteria are not met and in certain cases, upon a sale of the property. Our ability to meet these financial and performance criteria is subject to, among other things, the risks described in this section. Additionally, our operating results would be adversely affected if we could not maintain existing management, franchise or representation agreements or obtain new agreements on as favorable terms as the existing agreements.
 
We utilize our brands in connection with the residential portions of certain properties that we develop and license our brands to third parties to use in a similar manner for a fee. Residential properties using our brands could become less attractive due to changes in mortgage rates and the availability of mortgage financing generally, market absorption or oversupply in a particular market. As a result, we and our third party licensees may not be able to sell these residences for a profit or at the prices that we or they have anticipated.
 
General Economic Conditions May Negatively Impact Our Results.  Moderate or severe economic downturns or adverse conditions may negatively affect our operations. These conditions may be widespread or isolated to one or more geographic regions. A tightening of the labor markets in one or more geographic regions may result in fewer and/or less qualified applicants for job openings in our facilities. Higher wages, related labor costs and the increasing cost trends in the insurance markets may negatively impact our results as wages, related labor costs and insurance premiums increase.
 
We Must Compete for Customers.  The hotel, vacation ownership and residential industries are highly competitive. Our properties compete for customers with other hotel and resort properties, and, with respect to our


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vacation ownership resorts and residential projects, with owners reselling their VOIs, including fractional ownership, or apartments. Some of our competitors may have substantially greater marketing and financial resources than we do, and they may improve their facilities, reduce their prices or expand or improve their marketing programs in ways that adversely affect our operating results.
 
We Must Compete for Management and Franchise Agreements.  We compete with other hotel companies for management and franchise agreements. As a result, the terms of such agreements may not be as favorable as our current agreements. In connection with entering into management or franchise agreements, we may be required to make investments in or guarantee the obligations of third parties or guarantee minimum income to third parties.
 
Any Failure to Protect our Trademarks Could Have a Negative Impact on the Value of our Brand Names and Adversely Affect our Business.  We believe our trademarks are an important component of our business. We rely on trademark laws to protect our proprietary rights. The success of our business depends in part upon our continued ability to use our trademarks to increase brand awareness and further develop our brand in both domestic and international markets. Monitoring the unauthorized use of our intellectual property is difficult. Litigation has been and may continue to be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resources, may result in counterclaims or other claims against us and could significantly harm our results of operations. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. From time to time, we apply to have certain trademarks registered. There is no guarantee that such trademark registrations will be granted. We cannot assure you that all of the steps we have taken to protect our trademarks in the United States and foreign countries will be adequate to prevent imitation of our trademarks by others. The unauthorized reproduction of our trademarks could diminish the value of our brand and its market acceptance, competitive advantages or goodwill, which could adversely affect our business.
 
Significant Owners of Our Properties May Concentrate Risks.  Generally there has not been a concentration of ownership of hotels operated under our brands by any single owner. Following the acquisition of the Le Méridien brand business and the Host Transaction, single ownership groups own significant numbers of hotels operated by us. While the risks associated with such ownership are no different than exist generally (i.e., the financial position of the owner, the overall state of the relationship with the owner and their participation in optional programs and the impact on cost efficiencies if they choose not to participate), they are more concentrated.
 
The Hotel Industry Is Seasonal in Nature.  The hotel industry is seasonal in nature; however, the periods during which we experience higher revenue vary from property to property and depend principally upon location. Our revenue historically has been lower in the first quarter than in the second, third or fourth quarters.
 
Third Party Internet Reservation Channels May Negatively Impact our Bookings.  Some of our hotel rooms are booked through third party internet travel intermediaries such as Travelocity.com®, Expedia.com® and Priceline.com®. As the percentage of internet bookings increases, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us. Moreover, some of these internet travel intermediaries are attempting to commoditize hotel rooms by increasing the importance of price and general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification. These agencies hope that consumers will eventually develop brand loyalties to their reservations system rather than to our lodging brands. Although we expect to derive most of our business from traditional channels and our websites, if the amount of sales made through internet intermediaries increases significantly, our business and profitability may be significantly harmed.
 
We Place Significant Reliance on Technology.  The hospitality industry continues to demand the use of sophisticated technology and systems including technology utilized for property management, brand assurance and compliance, procurement, reservation systems, operation of our customer loyalty program, distribution and guest amenities. These technologies can be expected to require refinements, including to comply with legal requirements such as privacy regulations and requirements established by third parties such as the payment card industry, and there is the risk that advanced new technologies will be introduced. Further, the development and maintenance of these technologies may require significant capital. There can be no assurance that as various systems and technologies become outdated or new technology is required we will be able to replace or introduce them as


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quickly as our competition or within budgeted costs and timeframes for such technology. Further, there can be no assurance that we will achieve the benefits that may have been anticipated from any new technology or system.
 
Our Businesses Are Capital Intensive.  For our owned, managed and franchised properties to remain attractive and competitive, the property owners and we have to spend money periodically to keep the properties well maintained, modernized and refurbished. This creates an ongoing need for cash and, to the extent the property owners and we cannot fund expenditures from cash generated by operations, funds must be borrowed or otherwise obtained. In addition, to continue growing our vacation ownership business and residential projects, we need to spend money to develop new units. Accordingly, our financial results may be sensitive to the cost and availability of funds and the carrying cost of VOI and residential inventory.
 
Real Estate Investments Are Subject to Numerous Risks.  We are subject to the risks that generally relate to investments in real property because we own and lease hotels and resorts. The investment returns available from equity investments in real estate depend in large part on the amount of income earned and capital appreciation generated by the related properties, and the expenses incurred. In addition, a variety of other factors affect income from properties and real estate values, including governmental regulations, insurance, zoning, tax and eminent domain laws, interest rate levels and the availability of financing. For example, new or existing real estate zoning or tax laws can make it more expensive and/or time-consuming to develop real property or expand, modify or renovate hotels. When interest rates increase, the cost of acquiring, developing, expanding or renovating real property increases and real property values may decrease as the number of potential buyers decreases. Similarly, as financing becomes less available, it becomes more difficult both to acquire and to sell real property. Finally, under eminent domain laws, governments can take real property. Sometimes this taking is for less compensation than the owner believes the property is worth. Any of these factors could have a material adverse impact on our results of operations or financial condition. In addition, equity real estate investments are difficult to sell quickly and we may not be able to adjust our portfolio of owned properties quickly in response to economic or other conditions. If our properties do not generate revenue sufficient to meet operating expenses, including debt service and capital expenditures, our income will be adversely affected.
 
Hotel and Resort Development Is Subject to Timing, Budgeting and Other Risks.  We intend to develop hotel and resort properties, including VOIs and residential components of hotel properties, as suitable opportunities arise, taking into consideration the general economic climate. In addition, the owners and developers of new-build properties that we have entered into management or franchise agreements with are subject to these same risks which may impact the amount and timing of fees we had expected to collect from those properties. New project development has a number of risks, including risks associated with:
 
  •  construction delays or cost overruns that may increase project costs;
 
  •  receipt of zoning, occupancy and other required governmental permits and authorizations;
 
  •  development costs incurred for projects that are not pursued to completion;
 
  •  so-called acts of God such as earthquakes, hurricanes, floods or fires that could adversely impact a project;
 
  •  defects in design or construction that may result in additional costs to remedy or require all or a portion of a property to be closed during the period required to rectify the situation;
 
  •  ability to raise capital; and
 
  •  governmental restrictions on the nature or size of a project or timing of completion.
 
We cannot assure you that any development project, including sites held for development of vacation ownership resorts, will in fact be developed, and if developed, the time period or the budget of such development may be greater than initially contemplated and the actual number of units or rooms constructed may be less than initially contemplated.
 
Environmental Regulations.  Environmental laws, ordinances and regulations of various federal, state, local and foreign governments regulate our properties and could make us liable for the costs of removing or cleaning up hazardous or toxic substances on, under, or in property we currently own or operate or that we previously owned or operated. These laws could impose liability without regard to whether we knew of, or were responsible for, the


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presence of hazardous or toxic substances. The presence of hazardous or toxic substances, or the failure to properly clean up such substances when present, could jeopardize our ability to develop, use, sell or rent the real property or to borrow using the real property as collateral. If we arrange for the disposal or treatment of hazardous or toxic wastes, we could be liable for the costs of removing or cleaning up wastes at the disposal or treatment facility, even if we never owned or operated that facility. Other laws, ordinances and regulations could require us to manage, abate or remove lead or asbestos containing materials. Similarly, the operation and closure of storage tanks are often regulated by federal, state, local and foreign laws. Certain laws, ordinances and regulations, particularly those governing the management or preservation of wetlands, coastal zones and threatened or endangered species, could limit our ability to develop, use, sell or rent our real property.
 
International Operations Are Subject to Special Political and Monetary Risks.  We have significant international operations which as of December 31, 2007 included 261 owned, managed or franchised properties in Europe, Africa and the Middle East (including 21 properties with majority ownership); 53 owned, managed or franchised properties in Latin America (including 9 properties with majority ownership); and 136 owned, managed or franchised properties in the Asia Pacific region (including 4 properties with majority ownership). International operations generally are subject to various political, geopolitical, and other risks that are not present in U.S. operations. These risks include the risk of war, terrorism, civil unrest, expropriation and nationalization as well as the impact in cases in which there are inconsistencies between U.S. law and the laws of an international jurisdiction. In addition, some international jurisdictions restrict the repatriation of non-U.S. earnings. Various other international jurisdictions have laws limiting the ability of non-U.S. entities to pay dividends and remit earnings to affiliated companies unless specified conditions have been met. In addition, sales in international jurisdictions typically are made in local currencies, which subject us to risks associated with currency fluctuations. Currency devaluations and unfavorable changes in international monetary and tax policies could have a material adverse effect on our profitability and financing plans, as could other changes in the international regulatory climate and international economic conditions. Other than Italy, where our risks are heightened due to the 9 properties we owned as of December 31, 2007, our international properties are geographically diversified and are not concentrated in any particular region.
 
Risks Relating to Operations in Syria
 
During fiscal 2007, Starwood subsidiaries generated approximately $2 million of revenue from management and other fees from hotels located in Syria, a country that the United States has identified as a state sponsor of terrorism. This amount constitutes significantly less than 1% of our worldwide annual revenues. The United States does not prohibit U.S. investments in, or the exportation of services to, Syria, and our activities in that country are in full compliance with U.S. and local law. However, the United States has imposed limited sanctions as a result of Syria’s support for terrorist groups and its interference with Lebanon’s sovereignty, including a prohibition on the exportation of U.S.-origin goods to Syria and the operation of government-owned Syrian air carriers in the United States except in limited circumstances. The United States may impose further sanctions against Syria at any time for foreign policy reasons. If so, our activities in Syria may be adversely affected, depending on the nature of any further sanctions that might be imposed. In addition, our activities in Syria may reduce demand for our stock among certain investors.
 
Debt Financing
 
As a result of our debt obligations, we are subject to: (i) the risk that cash flow from operations will be insufficient to meet required payments of principal and interest and (ii) interest rate risk. Although we anticipate that we will be able to repay or refinance our existing indebtedness and any other indebtedness when it matures, there can be no assurance that we will be able to do so or that the terms of such refinancings will be favorable. Our leverage may have important consequences including the following: (i) our ability to obtain additional financing for acquisitions, working capital, capital expenditures or other purposes, if necessary, may be impaired or such financing may not be available on terms favorable to us and (ii) a substantial decrease in operating cash flow or a


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substantial increase in our expenses could make it difficult for us to meet our debt service requirements and force us to sell assets and/or modify our operations.
 
Risks Relating to So-Called Acts of God, Terrorist Activity and War
 
Our financial and operating performance may be adversely affected by so-called acts of God, such as natural disasters, in locations where we own and/or operate significant properties and areas of the world from which we draw a large number of customers. Similarly, wars (including the potential for war), terrorist activity (including threats of terrorist activity), political unrest and other forms of civil strife and geopolitical uncertainty have caused in the past, and may cause in the future, our results to differ materially from anticipated results.
 
Some Potential Losses are Not Covered by Insurance
 
We carry insurance coverage for general liability, property, business interruption and other risks with respect to our owned and leased properties and we make available insurance programs for owners of properties we manage. These policies offer coverage terms and conditions that we believe are usual and customary for our industry. Generally, our “all-risk” property policies provide that coverage is available on a per occurrence basis and that, for each occurrence, there is a limit as well as various sub-limits on the amount of insurance proceeds we will receive in excess of applicable deductibles. In addition, there may be overall limits under the policies. Sub-limits exist for certain types of claims such as service interruption, debris removal, expediting costs or landscaping replacement, and the dollar amounts of these sub-limits are significantly lower than the dollar amounts of the overall coverage limit. Our property policies also provide that for the coverage of critical earthquake (California and Mexico), hurricane and flood, all of the claims from each of our properties resulting from a particular insurable event must be combined together for purposes of evaluating whether the annual aggregate limits and sub-limits contained in our policies have been exceeded and any such claims will also be combined with the claims of owners of managed hotels that participate in our insurance program for the same purpose. Therefore, if insurable events occur that affect more than one of our owned hotels and/or managed hotels owned by third parties that participate in our insurance program, the claims from each affected hotel will be added together to determine whether the per occurrence limit, annual aggregate limit or sub-limits, depending on the type of claim, have been reached and if the limits or sub-limits are exceeded each affected hotel will only receive a proportional share of the amount of insurance proceeds provided for under the policy. In addition, under those circumstances, claims by third party owners will reduce the coverage available for our owned and leased properties.
 
In addition, there are also other risks including but not limited to war, certain forms of terrorism such as nuclear, biological or chemical terrorism, political risks, some environmental hazards and/or acts of God that may be deemed to fall completely outside the general coverage limits of our policies or may be uninsurable or may be too expensive to justify insuring against.
 
We may also encounter challenges with an insurance provider regarding whether it will pay a particular claim that we believe to be covered under our policy. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel or resort, as well as the anticipated future revenue from the hotel or resort. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property.
 
Acquisitions/Dispositions and New Brands
 
We will consider corporate as well as property acquisitions and investments that complement our business. In many cases, we will be competing for these opportunities with third parties who may have substantially greater financial resources or different or lower acceptable financial metrics then we do. There can be no assurance that we will be able to identify acquisition or investment candidates or complete transactions on commercially reasonable terms or at all. If transactions are consummated, there can be no assurance that any anticipated benefits will actually be realized. Similarly, there can be no assurance that we will be able to obtain additional financing for acquisitions or investments, or that the ability to obtain such financing will not be restricted by the terms of our debt agreements.
 
We periodically review our business to identify properties or other assets that we believe either are non-core, no longer complement our business, are in markets which may not benefit us as much as other markets during an


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economic recovery or could be sold at significant premiums. We are focused on restructuring and enhancing real estate returns and monetizing investments and from time to time, may attempt to sell these identified properties and assets. There can be no assurance, however, that we will be able to complete dispositions on commercially reasonable terms or at all or that any anticipated benefits will actually be received.
 
We have developed and launched two new hotel brands, aloft and Element, and may develop and launch additional brands in the future. There can be no assurance regarding the level of acceptance of these brands in the development and consumer marketplaces, that the cost incurred in developing the brands will be recovered or that the anticipated benefits from these new brands will be realized.
 
Investing Through Partnerships or Joint Ventures Decreases Our Ability to Manage Risk
 
In addition to acquiring or developing hotels and resorts or acquiring companies that complement our business directly, we have from time to time invested, and expect to continue to invest, as a co-venturer. Joint venturers often have shared control over the operation of the joint venture assets. Therefore, joint venture investments may involve risks such as the possibility that the co-venturer in an investment might become bankrupt or not have the financial resources to meet its obligations, or have economic or business interests or goals that are inconsistent with our business interests or goals, or be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives. Consequently, actions by a co-venturer might subject hotels and resorts owned by the joint venture to additional risk. Further, we may be unable to take action without the approval of our joint venture partners. Alternatively, our joint venture partners could take actions binding on the joint venture without our consent. Additionally, should a joint venture partner become bankrupt, we could become liable for our partner’s share of joint venture liabilities.
 
Our Vacation Ownership Business is Subject to Extensive Regulation and Risk of Default
 
We market and sell VOIs, which typically entitle the buyer to ownership of a fully-furnished resort unit for a one-week period (or in the case of fractional ownership interests, generally for three or more weeks) on either an annual or an alternate-year basis. We also acquire, develop and operate vacation ownership resorts, and provide financing to purchasers of VOIs. These activities are all subject to extensive regulation by the federal government and the states in which vacation ownership resorts are located and in which VOIs are marketed and sold including regulation of our telemarketing activities under state and federal “Do Not Call” laws. In addition, the laws of most states in which we sell VOIs grant the purchaser the right to rescind the purchase contract at any time within a statutory rescission period. Although we believe that we are in material compliance with all applicable federal, state, local and foreign laws and regulations to which vacation ownership marketing, sales and operations are currently subject, changes in these requirements or a determination by a regulatory authority that we were not in compliance, could adversely affect us. In particular, increased regulations of telemarketing activities could adversely impact the marketing of our VOIs.
 
We bear the risk of defaults under purchaser mortgages on VOIs. If a VOI purchaser defaults on the mortgage during the early part of the loan amortization period, we will not have recovered the marketing, selling (other than commissions in certain events), and general and administrative costs associated with such VOI, and such costs will be incurred again in connection with the resale of the repossessed VOI. Accordingly, there is no assurance that the sales price will be fully or partially recovered from a defaulting purchaser or, in the event of such defaults, that our allowance for losses will be adequate.
 
Privacy Initiatives
 
We collect information relating to our guests for various business purposes, including marketing and promotional purposes. The collection and use of personal data are governed by privacy laws and regulations enacted in the United States and other jurisdictions around the world. Privacy regulations continue to evolve and on occasion may be inconsistent from one jurisdiction to another. Compliance with applicable privacy regulations may increase our operating costs and/or adversely impact our ability to market our products, properties and services to our guests. In addition, non-compliance with applicable privacy regulations by us (or in some circumstances non-


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compliance by third parties engaged by us) or a breach of security on systems storing our data may result in fines, payment of damages or restrictions on our use or transfer of data.
 
Ability to Manage Growth
 
Our future success and our ability to manage future growth depend in large part upon the efforts of our senior management and our ability to attract and retain key officers and other highly qualified personnel. Competition for such personnel is intense. Since January 2004, we have experienced significant changes in our senior management, including executive officers (See Item 10. “Directors, Executive Officers and Corporate Governance” of this Annual Report). There can be no assurance that we will continue to be successful in attracting and retaining qualified personnel. Accordingly, there can be no assurance that our senior management will be able to successfully execute and implement our growth and operating strategies.
 
Over the last few years we have been pursuing a strategy of reducing our investment in owned real estate and increasing our focus on the management and franchise business. As a result, we are planning on substantially increasing the number of hotels we open every year and increasing the overall number of hotels in our system. This increase will require us to recruit and train a substantial number of new associates to work at these hotels as well as increasing our capabilities to enable hotels to open on time and successfully. There can be no assurance that our strategy will be successful.
 
Tax Risks
 
Failure of the Trust to Qualify as a REIT Would Increase Our Tax Liability.  Qualifying as a real estate investment trust (a “REIT”) requires compliance with highly technical and complex tax provisions that courts and administrative agencies have interpreted only to a limited degree. Due to the complexities of our ownership, structure and operations, the Trust is more likely than are other REITs to face interpretative issues for which there are no clear answers. We believe that for the taxable years ended December 31, 1995 through April 10, 2006, the date which Host acquired the Trust, the Trust qualified as a REIT under the Internal Revenue Code of 1986, as amended. If the Trust failed to qualify as a REIT for any prior tax year, we would be liable to pay a significant amount of taxes for those years. Subsequent to the Host Transaction, the Trust is no longer owned by us and we are not subject to this risk for actions following the transaction.
 
Evolving government regulation could impose taxes or other burdens on our business.  We rely upon generally available interpretations of tax laws and other types of laws and regulations in the countries and locales in which we operate. We cannot be sure that these interpretations are accurate or that the responsible taxing or other governmental authority is in agreement with our views. The imposition of additional taxes or causing us to change the way we conduct our business could cause us to have to pay taxes that we currently do not collect or pay or increase the costs of our services or increase our costs of operations.
 
Our current business practice with our internet reservation channels is that the intermediary collects hotel occupancy tax from its customer based on the price that the intermediary paid us for the hotel room. We then remit these taxes to the various tax authorities. Several jurisdictions have stated that they may take the position that the tax is also applicable to the intermediaries’ gross profit on these hotel transactions. If jurisdictions take this position, they should seek the additional tax payments from the intermediary; however, it is possible that they may seek to collect the additional tax payment from us and we would not be able to collect these taxes from the customers. To the extent that any tax authority succeeds in asserting that the hotel occupancy tax applies to the gross profit on these transactions, we believe that any additional tax would be the responsibility of the intermediary. However, it is possible that we might have additional tax exposure. In such event, such actions could have a material adverse effect on our business, results of operations and financial condition.
 
Risks Relating to Ownership of Our Shares
 
Our Board of Directors May Issue Preferred Stock and Establish the Preferences and Rights of Such Preferred Stock.  Our charter provides that the total number of shares of stock of all classes which the Corporation has authority to issue is 1,200,000,000, consisting of one billion shares of common stock and 200 million shares of preferred stock. Our Board of Directors has the authority, without a vote of shareholders, to establish the preferences


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and rights of any preferred or other class or series of shares to be issued and to issue such shares. The issuance of preferred shares or other shares having special preferences or rights could delay or prevent a change in control even if a change in control would be in the interests of our shareholders. Since our Board of Directors has the power to establish the preferences and rights of additional classes or series of shares without a shareholder vote, our Board of Directors may give the holders of any class or series preferences, powers and rights, including voting rights, senior to the rights of holders of our shares.
 
Our Board of Directors May Implement Anti-Takeover Devices and our Charter and By-Laws Contain Provisions which May Prevent Takeovers.  Certain provisions of Maryland law permit our Board of Directors, without stockholder approval, to implement possible takeover defenses that are not currently in place, such as a classified board. In addition, our charter contains provisions relating to restrictions on transferability of the Corporation Shares, which provisions may be amended only by the affirmative vote of our shareholders holding two-thirds of the votes entitled to be cast on the matter. As permitted under the Maryland General Corporation Law, our Bylaws provide that directors have the exclusive right to amend our Bylaws.
 
Our Shareholder Rights Plan Would Cause Substantial Dilution to Any Shareholder That Attempts to Acquire Us on Terms Not Approved by Our Board of Directors.  We adopted a shareholder rights plan which provides, among other things, that when specified events occur, our shareholders will be entitled to purchase from us a newly created series of junior preferred stock. The preferred stock purchase rights are triggered by the earlier to occur of (i) ten days after the date of a public announcement that a person or group acting in concert has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of our outstanding Corporation Shares or (ii) ten business days after the commencement of or announcement of an intention to make a tender offer or exchange offer, the consummation of which would result in the acquiring person becoming the beneficial owner of 15% or more of our outstanding Corporation Shares. The preferred stock purchase rights would cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our Board of Directors.
 
Item 2.   Properties.
 
We are one of the largest hotel and leisure companies in the world, with operations in approximately 100 countries. We consider our hotels and resorts, including vacation ownership resorts (together “Resorts”), generally to be premier establishments with respect to desirability of location, size, facilities, physical condition, quality and variety of services offered in the markets in which they are located. Although obsolescence arising from age, condition of facilities, and style can adversely affect our Resorts, Starwood and third-party owners of managed and franchised Resorts expend substantial funds to renovate and maintain their facilities in order to remain competitive. For further information see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources in this Annual Report.
 
Our hotel business included 897 owned, managed or franchised hotels with approximately 275,000 rooms and our owned vacation ownership and residential business included 28 vacation ownership resorts and residential properties at December 31, 2007, predominantly under seven brands. All brands (other than the Four Points by Sheraton and the newly announced aloft and Element brands) represent full-service properties that range in amenities from luxury hotels and resorts to more moderately priced hotels. We also lease three stand-alone Bliss Spas, two in New York, New York and one in London, England and have leased Bliss Spas in five of the W Hotels. In addition, we own, lease or manage Remède Spas in four of the St. Regis hotels.


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The following table reflects our hotel and vacation ownership properties, by brand as of December 31, 2007:
 
                                 
    Hotels     VOI and Residential(a)  
    Properties     Rooms     Properties     Rooms  
 
St. Regis and Luxury Collection
    70       12,300       4       100  
W
    20       6,000              
Westin
    153       61,900       12       2,500  
Le Méridien
    116       31,200              
Sheraton
    399       138,900       8       4,500  
Four Points
    128       22,000              
Independent / Other
    11       2,300       4       300  
                                 
Total
    897       274,600       28       7,400  
                                 
 
 
(a) Includes sites held for development.
 
Hotel Business
 
Managed and Franchised Hotels.  Hotel and resort properties in the United States are often owned by entities that do not manage hotels or own a brand name. Hotel owners typically enter into management contracts with hotel management companies to operate their hotels. When a management company does not offer a brand affiliation, the hotel owner often chooses to pay separate franchise fees to secure the benefits of brand marketing, centralized reservations and other centralized administrative functions, particularly in the sales and marketing area. Management believes that companies, such as Starwood, that offer both hotel management services and well-established worldwide brand names appeal to hotel owners by providing the full range of management, marketing and reservation services.
 
Managed Hotels.  We manage hotels worldwide, usually under a long-term agreement with the hotel owner (including entities in which we have a minority equity interest). Our responsibilities under hotel management contracts typically include hiring, training and supervising the managers and employees that operate these facilities. For additional fees, we provide centralized reservation services and coordinate national advertising and certain marketing and promotional services. We prepare and implement annual budgets for the hotels we manage and are responsible for allocating property-owner funds for periodic maintenance and repair of buildings and furnishings. In addition to our owned and leased hotels, at December 31, 2007, we managed 415 hotels with approximately 141,000 rooms worldwide. During the year ended December 31, 2007, we generated management fees by geographic area as follows:
 
         
United States
    39.8 %
Europe
    18.8 %
Asia Pacific
    17.6 %
Middle East and Africa
    16.0 %
Americas (Latin America, Caribbean & Canada)
    7.8 %
 
Management contracts typically provide for base fees tied to gross revenue and incentive fees tied to profits as well as fees for other services, including centralized reservations, sales and marketing, public relations and national and international media advertising. In our experience, owners seek hotel managers that can provide attractively priced base, incentive and marketing fees combined with demonstrated sales and marketing expertise and operations-focused management designed to enhance profitability. Some of our management contracts permit the hotel owner to terminate the agreement when the hotel is sold or otherwise transferred to a third party, as well as if we fail to meet established performance criteria. In addition, many hotel owners seek equity, debt or other investments from us to help finance hotel renovations or conversions to a Starwood brand so as to align the interests of the owner and the Company. Our ability or willingness to make such investments may determine, in part, whether we will be offered, will accept, or will retain a particular management contract. During the year ended December 31,


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2007, we opened 25 managed hotels with approximately 7,000 rooms, and 22 managed hotels with approximately 5,000 rooms left our system. In addition, during 2007, we signed management agreements for 83 hotels with approximately 27,000 rooms, a portion of which opened in 2007 and a portion of which will open in the future.
 
Brand Franchising and Licensing.  We franchise our Sheraton, Westin, Four Points by Sheraton, Luxury Collection, Le Méridien, aloft and Element brand names and generally derive licensing and other fees from franchisees based on a fixed percentage of the franchised hotel’s room revenue, as well as fees for other services, including centralized reservations, sales and marketing, public relations and national and international media advertising. In addition, a franchisee may also purchase hotel supplies, including brand-specific products, from certain Starwood-approved vendors. We approve certain plans for, and the location of, franchised hotels and review their design. At December 31, 2007, there were 408 franchised properties with approximately 109,000 rooms operating under the Sheraton, Westin, Four Points by Sheraton, Luxury Collection and Le Méridien brands. During the year ended December 31, 2007, we generated franchise fees by geographic area as follows:
 
         
United States
    60.6 %
Europe
    15.5 %
Americas (Latin America, Caribbean & Canada)
    12.8 %
Asia Pacific
    10.2 %
Middle East and Africa
    0.9 %
 
In addition to the franchise contracts we retained in connection with the sale of hotels discussed earlier, during the year ended December 31, 2007, we opened 42 franchised hotels with approximately 12,000 rooms, and 11 franchised hotels with approximately 4,000 rooms left our system. In addition, during 2007, we signed franchise agreements for 115 hotels with approximately 20,000 rooms, a portion of which opened in 2007 and a portion of which will open in the future.
 
Owned, Leased and Consolidated Joint Venture Hotels.  Historically, we have derived the majority of our revenues and operating income from our owned, leased and consolidated joint venture hotels and a significant portion of these results are driven by these hotels in North America. However, in 2006 and 2007 we have sold 51 wholly owned hotels which has substantially reduced our revenues and operating income from owned, leased and consolidated joint venture hotels. The majority of these hotels were sold subject to long-term management or franchise contracts. Total revenues generated from our owned, leased and consolidated joint venture hotels worldwide for the years ending December 31, 2007 and 2006 were $2.429 billion and $2.692 billion, respectively (total revenues from our owned, leased and consolidated joint venture hotels in North America were $1.587 billion and $1.881 billion for 2007 and 2006, respectively). The following represents our top five markets in the United States by metropolitan area as a percentage of our total owned, leased and consolidated joint venture revenues for the year ended December 31, 2007 (with comparable data for 2006):
 
Top Five Metropolitan Areas in the United States as a % of Total Owned
Revenues for the Year Ended December 31, 2007 with Comparable Data for 2006(1)
 
                 
    2007
    2006
 
Metropolitan Area
  Revenues     Revenues  
 
New York, NY
    13.1 %     12.6 %
Phoenix, AZ
    5.6 %     5.1 %
San Francisco, CA
    5.2 %     4.3 %
Maui, HI
    4.5 %     3.8 %
Chicago, IL
    3.8 %     3.2 %


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The following represents our top five international markets by country as a percentage of our total owned, leased and consolidated joint venture revenues for the year ended December 31, 2007 (with comparable data for 2006):
 
Top Five International Markets as a % of Total Owned Revenues
for the Year Ended December 31, 2007 with Comparable Data for 2006(1)
 
                 
    2007
    2006
 
Country
  Revenues     Revenues  
 
Italy
    8.6 %     7.9 %
Canada
    8.0 %     6.3 %
Mexico
    5.1 %     4.5 %
Australia
    4.3 %     3.0 %
United Kingdom
    3.3 %     3.0 %
 
 
(1) Includes the revenues of hotels sold for the period prior to their sale.
 
Following the sale of a significant number of our hotels in the past two years, we currently own or lease 74 hotels. Our owned, leased and consolidated joint venture hotel revenues and operating income is generated substantially from the following hotels:
 
                 
Hotel
 
Location
  Rooms
 
U.S. Hotels:
               
The St. Regis Hotel, New York
    New York, NY       229  
St. Regis Resort, Aspen
    Aspen, CO       179  
The Phoenician
    Scottsdale, AZ       647  
W New York — Times Square
    New York, NY       507  
W Chicago Lakeshore
    Chicago, IL       520  
W San Francisco
    San Francisco, CA       410  
W Los Angeles Westwood
    Los Angeles, CA       258  
W Chicago City Center
    Chicago, IL       369  
W New York — The Court and Tuscany
    New York, NY       318  
W Atlanta at Perimeter Center
    Atlanta, GA       275  
The Westin Maui Resort & Spa
    Maui, HI       759  
The Westin Peachtree Plaza, Atlanta
    Atlanta, GA       1068  
The Westin Horton Plaza San Diego
    San Diego, CA       450  
The Westin San Francisco Airport
    San Francisco, CA       397  
Sheraton Manhattan Hotel
    New York, NY       665  
Sheraton Kauai Resort
    Kauai, HI       394  
Sheraton Steamboat Springs Resort
    Steamboat Springs, CO       312  
The Boston Park Plaza Hotel & Towers
    Boston, MA       941  
International Hotels:
               
St. Regis Grand Hotel, Rome
    Rome, Italy       161  
Grand Hotel
    Florence, Italy       107  
Hotel Gritti Palace
    Venice, Italy       91  
Park Tower
    Buenos Aires, Argentina       181  
Hotel Alfonso XIII
    Seville, Spain       147  
Hotel Imperial
    Vienna, Austria       138  
The Westin Excelsior, Rome
    Rome, Italy       319  


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Hotel
 
Location
  Rooms
 
The Westin Resort & Spa, Los Cabos
    Los Cabos, Mexico       243  
The Westin Resort & Spa, Puerto Vallarta
    Puerto Vallarta, Mexico       279  
The Westin Excelsior, Florence
    Florence, Italy       171  
The Westin Resort & Spa Cancun
    Cancun, Mexico       379  
The Westin St. John Resort & Villas
    St John, Virgin Islands       175  
Sheraton Centre Toronto Hotel
    Toronto, Canada       1377  
The Park Lane Hotel, London
    London, England       302  
Sheraton On The Park
    Sydney, Australia       557  
Sheraton Buenos Aires Hotel & Convention Center
    Buenos Aires, Argentina       739  
Sheraton Rio Hotel and Resort
    Rio de Janeiro, Brazil       559  
Sheraton Maria Isabel Hotel & Towers
    Mexico City, Mexico       755  
Sheraton Gateway Hotel in Toronto International
               
Airport
    Toronto, Canada       474  
Le Centre Sheraton Montreal Hotel
    Montreal, Canada       825  
Sheraton Paris Airport Hotel & Conference Centre
    Paris, France       252  
Sheraton Brussels Hotel and Towers
    Brussels, Belgium       511  
Four Points by Sheraton Sydney
    Sydney, Australia       630  
 
An indicator of the performance of our owned, leased and consolidated joint venture hotels is revenue per available room (“REVPAR”)(1), as it measures the period-over-period growth in rooms revenue for comparable properties. This is particularly the case in the United States where there is no impact on this measure from foreign exchange rates.
 
The following table summarizes REVPAR, average daily rates (“ADR”) and average occupancy rates on a year-to-year basis for our 66 owned, leased and consolidated joint venture hotels (excluding 56 hotels sold or closed and 8 hotels undergoing significant repositionings or without comparable results in 2007 and 2006) (“Same-Store Owned Hotels”) for the years ended December 31, 2007 and 2006:
 
                         
    Year Ended December 31,        
    2007     2006     Variance  
 
Worldwide (66 hotels with approximately 22,000 rooms)
                       
REVPAR
  $ 160.38     $ 145.57       10.2 %
ADR
  $ 222.03     $ 203.31       9.2 %
Occupancy
    72.2 %     71.6 %     0.6  
North America (35 hotels with approximately 14,000 rooms)
                       
REVPAR
  $ 160.87     $ 149.95       7.3 %
ADR
  $ 217.20     $ 202.77       7.1 %
Occupancy
    74.1 %     73.9 %     0.2  
International (31 hotels with approximately 8,000 rooms)
                       
REVPAR
  $ 159.52     $ 138.05       15.6 %
ADR
  $ 230.97     $ 204.33       13.0 %
Occupancy
    69.1 %     67.6 %     1.5  
 
 
(1) REVPAR is calculated by dividing room revenue, which is derived from rooms and suites rented or leased, by total room nights available for a given period. REVPAR may not be comparable to similarly titled measures such as revenues.


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During the years ended December 31, 2007 and 2006, we invested approximately $211 million and $245 million, respectively, for capital improvements at owned hotels. These capital expenditures include the renovations of the Westin Maui Resort in Maui, Hawaii, the Phoenician in Scottsdale, Arizona, the W Los Angeles in Los Angeles, California and the W San Francisco in San Francisco, California. Additionally, in 2007 we acquired the Sheraton Steamboat in Steamboat Springs, Colorado, for $58 million.
 
Vacation Ownership and Residential Business
 
We develop, own and operate vacation ownership resorts, market and sell the VOIs in the resorts and, in many cases, provide financing to customers who purchase such ownership interests. Owners of VOIs can trade their interval for intervals at other Starwood vacation ownership resorts, for intervals at certain vacation ownership resorts not otherwise sponsored by Starwood through an exchange company, or for hotel stays at Starwood properties. From time to time, we securitize or sell the receivables generated from our sale of VOIs.
 
We have also entered into arrangements with several owners for mixed use hotel projects that will include a residential component. We have entered into licensing agreements for the use of certain of our brands to allow the owners to offer branded condominiums to prospective purchasers. In consideration, we typically receive a licensing fee equal to a percentage of the gross sales revenue of the units sold. The licensing arrangement generally terminates upon the earlier of sell-out of the units or a specified length of time.
 
At December 31, 2007, we had 28 residential and vacation ownership resorts and sites in our portfolio with 16 actively selling VOIs and residences, 8 sites being held for possible future development and 4 that have sold all existing inventory. During 2007 and 2006, we invested approximately $448 million and $411 million, respectively, for vacation ownership capital expenditures, including VOI construction at Westin Ka’anapali Ocean Resort Villas North in Maui, Hawaii, and the Westin Princeville Resort in Kauai, Hawaii and the purchase of a leasehold interest in land in Aruba.
 
In late 2004, we began selling residential units at the St. Regis Museum Tower in San Francisco, California which opened in November 2005. We recognized revenues of approximately $53 million in 2006 related to the sale of these residential units which were sold out in the first half of 2006. In 2006 we began selling residential units at the St. Regis Hotel in New York, New York and recognized revenues of approximately $3 million and $41 million in 2007 and 2006, respectively. During 2007 and 2006, we invested approximately $19 million and $23 million, respectively, for residential inventory.
 
Item 3.   Legal Proceedings.
 
Incorporated by reference to the description of legal proceedings in Note 22. Commitments and Contingencies, in the notes to financial statements set forth in Part II, Item 8. Financial Statements and Supplementary Data.
 
Item 4.   Submission of Matters to a Vote of Security Holders.
 
Not applicable.
 
Executive Officers of the Registrants
 
See Part III, Item 10. of this Annual Report for information regarding the executive officers of the Registrants, which information is incorporated herein by reference.


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PART II
 
Item 5.  Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Market Information
 
The Corporation Shares are traded on the New York Stock Exchange (the “NYSE”) under the symbol “HOT.”
 
The following table sets forth, for the fiscal periods indicated, the high and low sale prices per Corporation Share (and Share until April 7, 2006) on the NYSE Composite Tape(a).
 
                 
    High     Low  
 
2007
               
Fourth quarter
  $ 62.83     $ 42.78  
Third quarter
  $ 75.45     $ 52.63  
Second quarter
  $ 74.35     $ 65.35  
First quarter
  $ 69.65     $ 59.63  
2006
               
Fourth quarter
  $ 68.00     $ 56.22  
Third quarter
  $ 61.85     $ 49.68  
Second quarter
  $ 68.87     $ 52.41  
First quarter
  $ 68.50     $ 58.99  
 
 
(a) On April 7, 2006, in connection with the Host Transaction, the Shares were depaired and the Corporation Shares became transferable separately from the Class B Shares of the Trust. As a result of the depairing, the Corporation Shares now trade alone on the NYSE. Starwood shareholders received approximately $2.8 billion in the form of Host common stock valued at $2.68 billion and $119 million in cash for their Class B Shares. Based on Host’s closing price on April 7, 2006, this consideration had a per — Class B Share value of $13.07. As of April 10, 2006 neither Shares nor Class B Shares are listed or traded on the NYSE.
 
Holders
 
As of February 15, 2008, there were approximately 18,000 holders of record of Corporation Shares.
 
Distributions and Dividends Made/Declared
 
The following table sets forth the frequency and amount of distributions made by the Trust and dividends made by the Corporation to holders of Corporation Shares (and Shares until April 7, 2006) for the years ended December 31, 2007 and 2006:
 
         
    Distributions/Dividends
 
    Declared  
 
2007
       
Annual distribution
  $ 0.90 (a)
2006
       
Fourth quarter
  $ 0.42 (b)
First quarter
  $ 0.21 (c)
First quarter
  $ 0.21 (d)
 
 
(a) The Corporation declared a dividend in the fourth quarter of 2007 to shareholders of record on December 31, 2007, which was paid in January 2008.
 
(b) The Corporation declared a dividend in the fourth quarter of 2006 to shareholders of record on December 31, 2006, which was paid in January 2007.


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(c) In connection with the Host Transaction, the Trust declared a distribution of $0.21 per Share in March 2006 to shareholders of record on March 27, 2006, which was paid in April 2006.
 
(d) In connection with the Host Transaction, the Trust declared a distribution of $0.21 per Share in February 2006 to shareholders of record on February 28, 2006, which was paid in March 2006.
 
Conversion of Securities; Sale of Unregistered Securities
 
In 2006, we completed the redemption of the remaining 25,000 outstanding shares of Class B Exchangeable Preferred Shares of the Trust (“Class B EPS”) for approximately $1 million in cash. Also in 2006, in connection with the Host Transaction, we redeemed all of the Class A Exchangeable Preferred Shares of the Trust (“Class A EPS”) (approximately 562,000 shares) and Realty Partnership units (approximately 40,000 units) for approximately $34 million in cash. SLC Operating Limited Partnership units are convertible into Corporation Shares at the unit holder’s option, provided that the Company has the option to settle conversion requests in cash or Corporation Shares. In 2006, we redeemed approximately 926,000 SLC Operating Limited Partnership units for approximately $56 million in cash, and there were approximately 179,000 of these units outstanding at December 31, 2007 and 2006.
 
Issuer Purchases of Equity Securities
 
Pursuant to the Share Repurchase Program, Starwood repurchased 29.6 million Corporation Shares in the open market for an aggregate cost of $1.787 billion during 2007. The Company repurchased the following Corporation Shares during the three months ended December 31, 2007:
 
                                 
                      Maximum Number (or
 
                      Approximate Dollar
 
                Total Number of Shares
    Value) of Shares
 
          Average
    Purchased as Part of
    that May Yet Be
 
    Total Number of
    Price Paid
    Publicly Announced Plans
    Purchased Under the
 
Period
  Shares Purchased     for Share     or Programs     Plans or Programs  
                      (In millions)  
 
October
    2,325,000     $ 59.16       2,325,000     $ 18  
November
    6,103,600     $ 52.59       6,103,600     $ 697  
December
    1,968,600     $ 53.13       1,968,600     $ 593  
                                 
Total
    10,397,200     $ 54.16       10,397,200          
                                 
 
In November 2007, the Board of Directors of the Company authorized an additional $1 billion of Share repurchases under our existing Share repurchase authorization.
 
Information relating to securities authorized for issuance under equity compensation plans is provided under Item 12 of this Annual Report and is incorporated herein by reference.


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STOCKHOLDER RETURN PERFORMANCE
 
Set forth below is a line graph comparing the cumulative total stockholder return on the Corporation Shares (and Shares until April 7, 2006) against the cumulative total return on the S&P 500 and the S&P 500 Hotel Index (the “S&P 500 Hotel”) for the five fiscal years beginning December 31, 2002 and ending December 31, 2007. The graph assumes that the value of the investments was 100 on December 31, 2002 and that all dividends and other distributions were reinvested. In addition, the Share prices for the periods prior to the Host Transaction on April 10, 2006 have been adjusted based on the value shareholders received for their Class B shares. The comparisons are provided in response to SEC disclosure requirements and are not intended to forecast or be indicative of future performance.
 
 
                                                             
      2002       2003       2004       2005       2006       2007  
Starwood
      100.00         155.17         255.54         283.15         347.52         249.78  
S&P 500
      100.00         126.38         137.75         141.88         161.20         166.89  
S&P 500 Hotel
      100.00         150.11         216.39         217.05         245.55         211.55  
                                                             


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Item 6.   Selected Financial Data.
 
The following financial and operating data should be read in conjunction with the information set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto appearing elsewhere in this Annual Report and incorporated herein by reference.
 
                                         
    Year Ended December 31,  
    2007     2006     2005     2004     2003  
    (In millions, except per Share data)  
 
Income Statement Data
                                       
Revenues
  $ 6,153     $ 5,979     $ 5,977     $ 5,368     $ 4,630  
Operating income
  $ 858     $ 839     $ 822     $ 653     $ 427  
Income from continuing operations
  $ 543     $ 1,115     $ 423     $ 369     $ 105  
Diluted earnings per Share from continuing operations
  $ 2.57     $ 5.01     $ 1.88     $ 1.72     $ 0.51  
Operating Data
                                       
Cash from operating activities
  $ 895     $ 500     $ 764     $ 578     $ 766  
Cash from (used for) investing activities
  $ (215 )   $ 1,402     $ 85     $ (415 )   $ 515  
Cash used for financing activities
  $ (712 )   $ (2,635 )   $ (253 )   $ (273 )   $ (979 )
Aggregate cash distributions paid
  $ 90     $ 276     $ 176     $ 172     $ 170  
Cash distributions and dividends declared per Share
  $ 0.90     $ 0.84 (a)   $ 0.84     $ 0.84     $ 0.84  
 
 
(a) In connection with the Host Transaction, in February and March 2006, the Trust declared distributions totaling $0.42 per Share. In December 2006, the Corporation declared a dividend of $0.42 per Corporation Share.
 
                                         
    At December 31,  
    2007     2006     2005     2004     2003  
    (In millions)  
 
Balance Sheet Data
                                       
Total assets
  $ 9,622     $ 9,280     $ 12,494     $ 12,298     $ 11,857  
Long-term debt, net of current maturities and including exchangeable units and Class B preferred shares
  $ 3,590     $ 1,827     $ 2,926     $ 3,823     $ 4,424  
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and costs and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments, including those relating to revenue recognition, bad debts, inventories, investments, plant, property and equipment, goodwill and intangible assets, income taxes, financing operations, frequent guest program liability, self-insurance claims payable, restructuring costs, retirement benefits and contingencies and litigation.
 
Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions and conditions.


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CRITICAL ACCOUNTING POLICIES
 
We believe the following to be our critical accounting policies:
 
Revenue Recognition.  Our revenues are primarily derived from the following sources: (1) hotel and resort revenues at our owned, leased and consolidated joint venture properties; (2) vacation ownership and residential revenues; (3) management and franchise revenues; (4) revenues from managed and franchised properties; and (5) other revenues which are ancillary to our operations. Generally, revenues are recognized when the services have been rendered. The following is a description of the composition of our revenues:
 
  •  Owned, Leased and Consolidated Joint Ventures — Represents revenue primarily derived from hotel operations, including the rental of rooms and food and beverage sales from owned, leased or consolidated joint venture hotels and resorts. Revenue is recognized when rooms are occupied and services have been rendered. These revenues are impacted by global economic conditions affecting the travel and hospitality industry as well as relative market share of the local competitive set of hotels. REVPAR is a leading indicator of revenue trends at owned, leased and consolidated joint venture hotels as it measures the period-over-period growth in rooms revenue for comparable properties.
 
  •  Vacation Ownership and Residential — We recognize revenue from VOI sales and financings and the sales of residential units which are typically a component of mixed use projects that include a hotel. Such revenues are impacted by the state of the global economies and, in particular, the U.S. economy, as well as interest rate and other economic conditions affecting the lending market. Revenue is generally recognized upon the buyer demonstrating a sufficient level of initial and continuing involvement, the period of cancellation with refund has expired and receivables are deemed collectible. We determine the portion of revenues to recognize for sales accounted for under the percentage of completion method based on judgments and estimates including total project costs to complete. Additionally, we record reserves against these revenues based on expected default levels. Changes in costs could lead to adjustments to the percentage of completion status of a project, which may result in differences in the timing and amount of revenues recognized from the projects. We have also entered into licensing agreements with third-party developers to offer consumers branded condominiums or residences. Our fees from these agreements are generally based on the gross sales revenue of units sold.
 
  •  Management and Franchise Revenues — Represents fees earned on hotels managed worldwide, usually under long-term contracts, franchise fees received in connection with the franchise of our Sheraton, Westin, Four Points by Sheraton, Le Méridien and Luxury Collection brand names, termination fees and the amortization of deferred gains related to sold properties for which we have significant continuing involvement, offset by payments by us under performance and other guarantees. Management fees are comprised of a base fee, which is generally based on a percentage of gross revenues, and an incentive fee, which is generally based on the property’s profitability. For any time during the year, when the provisions of our management contracts allow receipt of incentive fees upon termination, incentive fees are recognized for the fees due and earned as if the contract was terminated at that date, exclusive of any termination fees due or payable. Therefore, during periods prior to year-end, the incentive fees recorded may not be indicative of the eventual incentive fees that will be recognized at year-end as conditions and incentive hurdle calculations may not be final. Franchise fees are generally based on a percentage of hotel room revenues. As with hotel revenues discussed above, these revenue sources are affected by conditions impacting the travel and hospitality industry as well as competition from other hotel management and franchise companies.
 
  •  Revenues from Managed and Franchised Properties — These revenues represent reimbursements of costs incurred on behalf of managed hotel properties and franchisees. These costs 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 effect on our operating income and our net income.
 
Frequent Guest Program.  SPG is our frequent guest incentive marketing program. SPG members earn points based on spending at our properties, as incentives to first time buyers of VOIs and residences and through participation in affiliated programs. Points can be redeemed at substantially all of our owned, leased, managed and


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franchised properties as well as through other redemption opportunities with third parties, such as conversion to airline miles. Properties are charged based on hotel guests’ qualifying expenditures. Revenue is recognized by participating hotels and resorts when points are redeemed for hotel stays.
 
We, through the services of third-party actuarial analysts, determine the fair value of the future redemption obligation based on statistical formulas which project the timing of future point redemption based on historical experience, including an estimate of the “breakage” for points that will never be redeemed, and an estimate of the points that will eventually be redeemed as well as the cost of reimbursing hotels and other third parties in respect of other redemption opportunities for point redemptions. Actual expenditures for SPG may differ from the actuarially determined liability. The total actuarially determined liability as of December 31, 2007 and 2006 is $536 million and $409 million, respectively. A 10% reduction in the “breakage” of points would result in an estimated increase of $71 million to the liability at December 31, 2007.
 
Long-Lived Assets.  We evaluate the carrying value of our long-lived assets for impairment by comparing the expected undiscounted future cash flows of the assets to the net book value of the assets if certain trigger events occur. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value is charged to current earnings. Fair value is based upon discounted cash flows of the assets at a rate deemed reasonable for the type of asset and prevailing market conditions, appraisals and, if appropriate, current estimated net sales proceeds from pending offers. We evaluate the carrying value of our long-lived assets based on our plans, at the time, for such assets and such qualitative factors as future development in the surrounding area, status of expected local competition and projected incremental income from renovations. Changes to our plans, including a decision to dispose of or change the intended use of an asset, can have a material impact on the carrying value of the asset.
 
Assets Held for Sale.  We consider properties to be assets held for sale when management approves and commits to a formal plan to actively market a property or group of properties for sale and a signed sales contract and significant non-refundable deposit or contract break-up fee exist. Upon designation as an asset held for sale, we record the carrying value of each property or group of properties at the lower of its carrying value which includes allocable segment goodwill or its estimated fair value, less estimated costs to sell, and we stop recording depreciation expense. Any gain realized in connection with the sale of a property for which we have significant continuing involvement (such as through a long-term management agreement) is deferred and recognized over the initial term of the related agreement. The operations of the properties held for sale prior to the sale date are recorded in discontinued operations unless we will have continuing involvement (such as through a management or franchise agreement) after the sale.
 
Legal Contingencies.  We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies,” requires that an estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position or our results of operations.
 
Income Taxes.  We provide for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” and Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns.


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RESULTS OF OPERATIONS
 
The following discussion presents an analysis of results of our operations for the years ended December 31, 2007, 2006 and 2005.
 
Year Ended December 31, 2007 Compared with Year Ended December 31, 2006
 
Continuing Operations
 
Revenues.  Total revenues, including other revenues from managed and franchised properties, were $6.153 billion, an increase of $174 million when compared to 2006 levels. Revenues reflected a 9.8% decrease in revenues from our owned, leased and consolidated joint venture hotels to $2.429 billion for the year ended December 31, 2007 when compared to $2.692 billion in the corresponding period of 2006, a 20.4% increase in management fees, franchise fees and other income to $839 million for the year ended December 31, 2007 when compared to $697 million in the corresponding period of 2006, a 2.0% increase in vacation ownership and residential revenues to $1.025 billion for the year ended December 31, 2007 when compared to $1.005 billion in the corresponding period of 2006, and an increase of $275 million in other revenues from managed and franchised properties to $1.860 billion for the year ended December 31, 2007 when compared to $1.585 billion in the corresponding period of 2006.
 
The $263 million decrease in revenues from owned, leased and consolidated joint venture hotels was primarily due to lost revenues from 56 wholly owned hotels sold or closed in 2007 and 2006. The sold or closed hotels had revenues of $121 million in the year ended December 31, 2007, compared to $570 million in the corresponding period of 2006. The decrease in revenues from sold or closed hotels was partially offset by improved results at our remaining owned, leased and consolidated joint venture hotels. Revenues at our Same-Store Owned Hotels (66 hotels for the year ended December 31, 2007 and 2006, excluding 56 hotels sold or closed and 8 hotels undergoing significant repositionings or without comparable results in 2007 and 2006) increased 9.1%, or $173 million, to $2.068 billion for the year ended December 31, 2007 when compared to $1.895 billion in the same period of 2006 due primarily to an increase in REVPAR. REVPAR at our Same-Store Owned Hotels increased 10.2% to $160.38 for the year ended December 31, 2007 when compared to the corresponding 2006 period. The increase in REVPAR at these Same-Store Owned Hotels was attributed to a 9.2% increase in ADR to $222.03 for the year ended December 31, 2007 compared to $203.31 for the corresponding 2006 period and due to a slight increase in occupancy rates to 72.2% in the year ended December 31, 2007 when compared to 71.6% in the same period in 2006. REVPAR at Same-Store Owned Hotels in North America increased 7.3% for the year ended December 31, 2007 when compared to the same period of 2006. REVPAR growth was particularly strong at our owned hotels in Kauai, Hawaii, New York, New York, San Francisco, California and New Orleans, Louisiana. REVPAR at our international Same-Store Owned Hotels increased by 15.6% for the year ended December 31, 2007 when compared to the same period of 2006. REVPAR growth was particularly strong at our owned hotels in Australia, Austria and Italy. REVPAR for Same-Store Owned Hotels internationally increased 7.8% excluding the favorable effects of foreign currency translation.
 
The increase in management fees, franchise fees and other income of $142 million was primarily a result of a $123 million increase in management and franchise revenue to $687 million for the year ended December 31, 2007. The increase was due to the strong growth in REVPAR at existing hotels under management and the net addition of 34 managed and franchised hotels to our system. The increase in management and franchise fees also resulted from the full year impact of revenues from the 33 hotels sold to Host in the second quarter of 2006. Management fees from these hotels in the year ended December 31, 2007 totaled $63 million, as compared to $44 million in the same period of 2006. Revenues from the amortization of the deferred gain associated with the Host Transaction was $49 million in the year ended December 31, 2007, as compared to $34 million in the corresponding period of 2006. Other income increased $19 million and includes $18 million of income earned in the first quarter of 2007 from our carried interest in a managed hotel that was sold in January 2007. These increases were partially offset by lost fees from contracts that were terminated in the last 12 months.
 
The increase in vacation ownership and residential sales and services of $20 million was primarily due to the revenue recognition from ongoing projects under construction in Hawaii which are being accounted for under percentage of completion accounting. This net increase was offset, in part, by a decrease in residential sales as the


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year ended December 31, 2007 included $3 million of revenues from the sale of residential units at the St. Regis in New York compared to 2006 which included $94 million in revenues from the sale of residential units at the St. Regis Museum Tower in San Francisco, which sold out in 2006, and at the St. Regis in New York, where only a few residential units remained available for sale in 2007. Additionally, during the year ended December 31, 2006, we recorded a gain of $17 million on the sale of $133 million of vacation ownership receivables. We did not sell any such receivables in 2007 and therefore no gain was recognized.
 
Originated contract sales of VOI inventory, which represents vacation ownership revenues before adjustments for percentage of completion accounting and rescission, decreased 3.8% in the year ended December 31, 2007 when compared to the same period in 2006 as the mix of products sold during 2007 differed from that sold in 2006. Additionally, sales and profits in Hawaii were negatively impacted by a decline in closing rates (the percentage of tours that were converted to actual sales of vacation ownership intervals) in the second half of 2007 due to the impending sell out of our project on Maui, partially offset by higher sales and profits at other timeshare projects.
 
Other revenues and expenses from managed and franchised properties increased to $1.860 billion from $1.585 billion for the year ended December 31, 2007 and 2006, respectively, primarily due to an increase in the number of our managed and franchised hotels. These revenues represent reimbursements of costs incurred on behalf of managed hotel and vacation ownership 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 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 $513 million in the year ended December 31, 2007 when compared to $470 million in the same period in 2006. The increase was primarily due to investments in our global development capability and costs associated with the launch of our new brands, aloft and Element, and other brand initiatives.
 
Restructuring and Other Special Charges, Net.  During the year ended December 31, 2007, we recorded $53 million in net restructuring and other special charges primarily related to accelerated depreciation of property, plant and equipment at the Sheraton Bal Harbour in Florida (“Bal Harbour”) and demolition costs associated with our redevelopment of that hotel. Bal Harbour was closed for business on July 1, 2007, and the majority of its employees were terminated. The hotel was demolished and we are in the process of building a St. Regis hotel along with branded residences and fractional units.
 
During the year ended December 31, 2006, we recorded $20 million in net restructuring and other special charges primarily related to transition costs associated with the acquisition of the Le Méridien brand and management and franchise business (“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.
 
Depreciation and Amortization.  Depreciation expense was $280 million during the year ended December 31, 2007, consistent with the corresponding period of 2006. We sold or closed 45 wholly owned hotels during 2006. However, the majority of these hotels were classified as held for sale as of December 31, 2005 and consequently, no depreciation was recognized for either the year ended December 31, 2007 or 2006 for those hotels.
 
Amortization expense was $26 million in the year ended December 31, 2007, consistent with the corresponding period of 2006.
 
Operating Income.  Operating income increased 2.3% or $19 million to $858 million for the year ended December 31, 2007 when compared to $839 million in the same period in 2006, primarily due to the increase in management fees, franchise fees and other income, partially offset by the restructuring and other special charges and the decline in revenues from owned, leased and consolidated joint venture hotels discussed above.


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Equity Earnings and Gains and Losses from Unconsolidated Ventures, Net.  Equity earnings and gains and losses from unconsolidated joint ventures increased to $66 million for the year ended December 31, 2007 from $61 million in the same period of 2006 partially due to our share of gains on the sale of several hotels in an unconsolidated joint venture during 2007.
 
Net Interest Expense.  Net interest expense decreased to $147 million for the year ended December 31, 2007 as compared to $215 million in the same period of 2006, primarily due to $37 million of expenses recorded in the first quarter of 2006 related to the early extinguishment of debt in connection with two transactions whereby we defeased and were released from certain debt obligations that allowed us to sell certain hotels that previously served as collateral for such debt. The decrease was also due to an increase in capitalized interest related to vacation ownership projects under construction and a decrease in our overall interest rate. Our weighted average interest rate was 6.52% at December 31, 2007 versus 6.97% at December 31, 2006.
 
Loss on Asset Dispositions and Impairments, Net.  During 2007, we recorded a net loss of $44 million, primarily related to a net loss of $58 million on the sale of eight wholly owned hotels, $20 million of which related to four hotels that closed in the fourth quarter. These losses were offset in part by $20 million of net gains primarily on the sale of assets in which we held a minority interest and a gain of $6 million as a result of insurance proceeds received for property damage caused by storms at two owned hotels in prior years.
 
During 2006, we recorded a net loss of $3 million primarily related to several offsetting gains and losses, including the sale of ten wholly-owned hotels, which were sold unencumbered by management agreements, impairment charges related to various properties, including the Sheraton Cancun which was damaged by Hurricane Wilma in 2005, and an adjustment to reduce the previously recorded gain on the sale of a hotel consummated in 2004 as certain contingencies associated with the sale became probable in 2006. These losses were primarily offset by a gain of $29 million on the sale of our interests in two joint ventures and a $13 million gain as a result of insurance proceeds received as reimbursement for property damage caused by Hurricane Wilma.
 
Income Tax Expense.  We recorded income tax expense from continuing operations of $189 million for the year ended December 31, 2007 compared to a benefit of $434 million in the corresponding period of 2006. The 2007 expense was favorably impacted by a $114 million benefit related to the reversal of capital loss valuation allowance, a $28 million benefit associated with the Company’s election to claim foreign tax credits generated in 1999 and 2000 and a $35 million benefit associated with the utilization of capital losses. Offsetting these benefits were a $97 million charge associated with the Host Transaction and a $13 million charge associated with interest accrued for uncertain tax positions. The 2006 tax benefit includes a one-time benefit of approximately $524 million realized in connection with the Host Transaction, a $59 million benefit due primarily to the completion of various state and federal income tax audits of prior years, a $34 million benefit associated with Company’s election to claim foreign tax credits in 2006 and 2005 and a $32 million benefit associated with the Trust prior to its acquisition by Host.
 
Discontinued Operations
 
For the year ended December 31, 2007, the loss on disposition represented a $1 million tax assessment associated with the disposition of our gaming business in 1999. For the year ended December 31, 2006, the loss on disposition represented a $2 million tax assessment associated with the disposition of our gaming business in 1999.
 
Cumulative Effect of Accounting Change, Net of Tax
 
On January 1, 2007, we adopted FIN 48 and recorded a benefit of $35 million to the beginning balance of retained earnings.
 
On January 1, 2006, we adopted SFAS No. 152 and recorded a charge of $70 million, net of a $46 million tax benefit, in cumulative effect of accounting change.


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Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
 
Continuing Operations
 
Revenues.  Total revenues, including other revenues from managed and franchised properties, were $5.979 billion, an increase of $2 million when compared to 2005 levels. Revenues reflected a 23.5% decrease in revenues from our owned, leased and consolidated joint venture hotels to $2.692 billion for the year ended December 31, 2006 when compared to $3.517 billion in the corresponding period of 2005, a 39.1% increase in management fees, franchise fees and other income to $697 million for the year ended December 31, 2006 when compared to $501 million in the corresponding period of 2005, a 13.0% increase in vacation ownership and residential revenues to $1.005 billion for the year ended December 31, 2006 when compared to $889 million in the corresponding period of 2005, and an increase of $515 million in other revenues from managed and franchised properties to $1.585 billion for the year ended December 31, 2006 when compared to $1.070 billion in the corresponding period of 2005.
 
The decrease in revenues from owned, leased and consolidated joint venture hotels of $825 million was primarily due to lost revenues from 45 wholly owned hotels sold or closed during 2006. These hotels had revenues of $384 million in the year ended December 31, 2006 compared to $1.299 billion in the corresponding period of 2005. The decrease in revenues from sold hotels was partially offset by business interruption insurance proceeds received in 2006 of approximately $33 million, primarily related to Hurricane Katrina and Hurricane Wilma in 2005, and by improved results at our remaining owned, leased and consolidated joint venture hotels. Revenues at our Same-Store Owned Hotels (74 hotels for the years ended December 31, 2006 and 2005, excluding 56 hotels sold or closed and 11 hotels undergoing significant repositionings or without comparable results in 2006 and 2005) increased 8.8%, or $157 million, to $1.942 billion for the year ended December 31, 2006 when compared to $1.785 billion in the same period of 2005 due primarily to an increase in REVPAR. REVPAR at our Same-Store Owned Hotels increased 10.1% to $136.33 for the year ended December 31, 2006 when compared to the corresponding 2005 period. The increase in REVPAR at these Same-Store Owned Hotels was attributed to increases in occupancy rates to 71.2% in the year ended December 31, 2006 when compared to 69.9% in the same period in 2005, and an 8.2% increase in ADR to $191.56 for the year ended December 31, 2006 compared to $177.04 for the corresponding 2005 period. REVPAR at Same-Store Owned Hotels in North America increased 10.2% for the year ended December 31, 2006 when compared to the same period of 2005. REVPAR growth was particularly strong at our owned hotels in Chicago, Illinois, Boston, Massachusetts, and Seattle, Washington. REVPAR at our international Same-Store Owned Hotels increased by 10.0% for the year ended December 31, 2006 when compared to the same period of 2005. REVPAR for Same-Store Owned Hotels internationally increased 9.5% excluding the favorable effects of foreign currency translation.
 
The increase in management fees, franchise fees and other income of $196 million was primarily a result of a $202 million increase in management and franchise revenue to $564 million for the year ended December 31, 2006 due to the addition of new managed and franchised hotels. The increase included approximately $44 million of management and franchise fees from the 33 hotels sold to Host, as well as approximately $34 million of revenues from the amortization of the deferred gain associated with the Host Transaction. The increase was also due to $58 million of management and franchise fees from the Le Méridien hotels in 2006 as compared to $5 million in 2005. We acquired the Le Méridien brand and related management and franchise business in November 2005. Additionally, improved operating results at the underlying managed and franchised hotels, increased revenue from our Bliss spas and from the sale of Bliss products and income associated with the settlement of a dispute related to an agreement to manage a hotel contributed to the increase in 2006. These increases were partially offset by lost fees from contracts that were terminated in the last 12 months and by lost income on the Le Méridien debt participation which was used to fund a portion of the Le Méridien Acquisition.
 
The increase in vacation ownership and residential sales and services of $116 million was primarily due to increased sales at ongoing projects in Hawaii and Orlando as well as sales of $41 million at a new project in New 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


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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 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 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, Net.  During the year 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 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 year 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 December 31, 2005. In 2006 we recorded a $17 million gain on sale of VOI notes receivable related to the sale of approximately $133 million of vacation ownership receivables during 2006. However, as discussed above, the gain is now included in vacation ownership and residential sales and services revenue.


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Equity Earnings and Gains and Losses from Unconsolidated Ventures, Net.  Equity earnings and gains and losses from unconsolidated joint ventures decreased to $61 million for the year ended December 31, 2006 from $64 million in the same period of 2005.
 
Net Interest Expense.  Net interest expense decreased to $215 million for the year ended December 31, 2006 as compared to $239 million in the same period of 2005, primarily due to interest savings from the reduction of our debt with proceeds from the asset sales discussed earlier offset in part by increased interest rates. In addition, we recorded interest income in 2006 of approximately $13 million in association with the full payment of principal and interest on a loan receivable which was previously reserved. The decrease was partially offset by $37 million of expenses related to the early extinguishment of debt in connection with two transactions completed in the first quarter of 2006 whereby we defeased and were released from certain debt obligations that allowed us to sell certain hotels that previously served as collateral for such debt. These transactions also resulted in the release of other owned hotels as collateral, providing us with flexibility to sell or reposition those hotels. Our weighted average interest rate was 6.97% at December 31, 2006 versus 6.27% at December 31, 2005.
 
Loss on Asset Dispositions and Impairments, Net.  During 2006, we recorded a net loss of $3 million primarily related to several offsetting gains and losses, including the sale of ten wholly-owned hotels, which were sold unencumbered by management agreements, impairment charges related to various properties, including the Sheraton Cancun which was damaged by Hurricane Wilma in 2005, and an adjustment to reduce the previously recorded gain on the sale of a hotel consummated in 2004 as certain contingencies associated with the sale became probable in 2006. These losses were primarily offset by a gain of $29 million on the sale of our interests in two joint ventures and a $13 million gain as a result of insurance proceeds received as reimbursement for property damage caused by Hurricane Wilma.
 
During 2005, we recorded a net loss of $30 million primarily related to the impairment of a hotel and impairment charges associated with the Sheraton Cancun in Cancun, Mexico which was demolished in order to build vacation ownership units. These losses were offset by net gains recorded on the sale of several hotels in 2005.
 
Income Tax Expense.  We recorded an income tax benefit from continuing operations of $434 million for the year ended December 31, 2006 compared to an expense of $219 million in the corresponding period of 2005. The 2006 tax benefit includes a one-time benefit of approximately $524 million realized in connection with the Host Transaction, a $59 million benefit due primarily to the completion of various state and federal income tax audits of prior years, a $34 million benefit associated with Company’s election to claim foreign tax credits in 2006 and 2005 and a $32 million benefit associated with the Trust prior to its acquisition by Host. The income tax expense for the year ended December 31, 2005 included the recognition of $47 million of tax expense as a result of the adoption of a plan to repatriate foreign earnings in accordance with the American Jobs Creation Act and the recording of an additional provision of $52 million related to our 1998 disposition of ITT World Directories. The income tax expense for the year ended December 31, 2005 also included a net tax credit of $15 million related to the deferred gain on the sale of the Hotel Danieli in Venice, Italy, an $8 million benefit related to tax refunds for tax years prior to the 1995 split-up of ITT Corporation, and a $64 million benefit associated with the Trust. Our effective income tax rate is determined by the level and composition of pre-tax income subject to varying foreign, state and local taxes.
 
Discontinued Operations
 
For the year ended December 31, 2006, the loss on disposition represented a $2 million tax assessment associated with the disposition of our gaming business in 1999. For the year ended December 31, 2005, the loss from operations represented a $2 million sales and use tax assessment related to periods prior to our disposal of our gaming business, offset by a $1 million income tax benefit related to this business.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Cash From Operating Activities
 
Cash flow from operating activities is generated primarily from management and franchise revenues, operating income from our owned hotels and sales of VOIs and residential units. It is the principal source of


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cash used to fund our operating expenses, interest payments on debt, capital expenditures, dividend payments and share repurchases. Our day-to-day operations are financed through a net working capital deficit, a practice that is common in our industry. The ratio of our current assets to current liabilities was 0.87 and 0.74 as of December 31, 2007 and 2006, respectively. Consistent with industry practice, we sweep the majority of the cash at our hotels on a daily basis and fund payables as needed by drawing down on our existing revolving credit facility. We believe that our existing borrowing availability together with capacity for additional borrowings and cash from operations will be adequate to meet all funding requirements for our operating expenses, principal and interest payments on debt, capital expenditures, dividend payments and share repurchases in the foreseeable future.
 
State and local regulations governing sales of VOIs and residential properties allow the purchaser of such a VOI or property to rescind the sale subsequent to its completion for a pre-specified number of days. In addition, cash payments received from buyers of products under construction are held in escrow during the period prior to obtaining a certificate of occupancy. These payments and the deposits collected from sales during the rescission period are the primary components of our restricted cash balances in our consolidated balance sheets. At December 31, 2007 and 2006, we had short-term restricted cash balances of $196 million and $329 million, respectively.
 
Cash From Investing Activities
 
In limited cases, we have made loans to owners of or partners in hotel or resort ventures for which we have a management or franchise agreement. Loans outstanding under this program, excluding the Westin Boston, Seaport Hotel discussed below, totaled $34 million at December 31, 2007. We evaluate these loans for impairment, and at December 31, 2007, believe these loans are collectible. Unfunded loan commitments aggregating $69 million were outstanding at December 31, 2007, of which $1 million are expected to be funded in 2008 and $51 million are expected to be funded in total. These loans typically are secured by pledges of project ownership interests and/or mortgages on the projects. We also have $100 million of equity and other potential contributions associated with managed or joint venture properties, $28 million of which is expected to be funded in 2008.
 
During 2004, we entered into a long-term management contract to manage the Westin Boston, Seaport Hotel in Boston, Massachusetts, which opened in June 2006. In connection with this project, we agreed to provide up to $28 million in mezzanine loans and other investments (all of which was funded). In January 2007, this hotel was sold and the senior debt was repaid in full. In connection with this sale, the $28 million in mezzanine loans and other investments, together with accrued interest, were repaid in full. In accordance with the management agreement, the sale of the hotel also resulted in the payment of a fee to us of approximately $18 million, which is included in management fees, franchise fees and other income in the consolidated statement of income for the year ended December 31, 2007. We continue to manage this hotel subject to the pre-existing management agreement.
 
Surety bonds issued on our behalf at December 31, 2007 totaled $99 million, the majority of which were required by state or local governments relating to our vacation ownership operations and by our insurers to secure large deductible insurance programs.
 
To secure management contracts, we may provide performance guarantees to third-party owners. Most of these performance guarantees allow us to terminate the contract rather than fund shortfalls if certain performance levels are not met. In limited cases, we are obliged to fund shortfalls in performance levels through the issuance of loans. At December 31, 2007, excluding the Le Méridien management agreement mentioned below, we had six management contracts with performance guarantees with possible cash outlays of up to $74 million, $50 million of which, if required, would be funded over several years and would be largely offset 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. We do not anticipate any significant funding under these performance guarantees in 2008. In connection with the Le Méridien Acquisition, discussed below, we 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, we have estimated the exposure under this guarantee and do not anticipate that payments made under the guarantee will be significant in any single year. The estimated present fair value of this guarantee of $7 million and $6 million is reflected in other liabilities in the


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accompanying consolidated balance sheet at both December 31, 2007 and 2006, respectively. We do not anticipate losing a significant number of management or franchise contracts in 2008.
 
In November 2005, we completed the Le Méridien Acquisition for a purchase price of approximately $252 million. The purchase price was funded from available cash and the return of funds from our original purchase of an interest in Le Méridien debt in late 2003. In connection with the Le Méridien Acquisition, we were 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, we believe that it is unlikely that we will have to fund any of these liabilities.
 
In connection with the sale of 33 hotels to Host in 2006, we agreed to indemnify Host for certain liabilities, including operations and tax liabilities. At this time, we believe that we will not have to make any material payments under such indemnities.
 
During the second quarter of 2007, we purchased the Sheraton Steamboat Resort & Conference Center for approximately $58 million in cash from a joint venture in which we held a 10% interest.
 
During the first quarter of 2007, we entered into a joint venture that acquired the Sheraton Grande Tokyo Bay Hotel. This hotel has been managed by us since its opening and will continue to be operated by us under a long-term management agreement with the joint venture. We invested approximately $19 million in this venture in exchange for a 25.1% ownership interest.
 
In December 2006, we completed a transaction to, among other things, purchase real assets from Club Regina Resorts (“CRR”) in Mexico. These assets included land and fixed assets adjacent to The Westin Resort & Spa in Los Cabos, Mexico and terminated CRR’s rights to solicit guests at three Westin properties in Mexico. In addition to the purchase of these assets, the transaction included the settlement of all pending and threatened legal claims between the parties and the exchange of a new issue of CRR notes with a lower principal amount for notes we previously held from an affiliate of CRR. Total consideration of approximately $41 million was paid by us for these items. The portion related to the legal settlement was expensed.
 
In May 2006, we partnered with Chef Jean-Georges Vongerichten and a private equity firm to create a joint venture that will develop, own, operate, manage and license world-class restaurant concepts created by Jean-Georges Vongerichten, including operating the existing Spice Market restaurant located in New York City. The concepts owned by the venture will be available for Starwood’s upper-upscale and luxury hotel brands including W, Westin, Le Méridien and St. Regis. Additionally, the venture may own and operate freestanding restaurants outside of Starwood’s hotels. We invested approximately $22 million in this venture for a 32.7% equity interest.
 
We intend to finance the acquisition of additional hotel properties (including equity investments), hotel renovations, VOI and residential construction, capital improvements, technology spend and other core and ancillary business acquisitions and investments and provide for general corporate purposes (including dividend payments and share repurchases) through our credit facilities described below, through the net proceeds from dispositions, through the assumption of debt, through the issuance of additional equity or debt securities and from cash generated from operations.
 
We periodically review our business to identify properties or other assets that we believe either are non-core (including hotels where the return on invested capital is not adequate), no longer complement our business, are in markets which may not benefit us as much as other markets during an economic recovery or could be sold at significant premiums. We are focused on enhancing real estate returns and monetizing investments. In the second quarter of 2006, in connection with the Host Transaction, we completed the sale of 33 hotels and the stock of certain controlled subsidiaries to Host for consideration valued at $4.1 billion which consisted of approximately $2.8 billion in the form of Host common stock and cash paid directly to our shareholders and $1.3 billion of consideration paid to Starwood, including $1.2 billion in cash, $77 million in debt assumption and $61 million in Host common stock. During the year ended December 31, 2006, we sold ten additional owned hotels and interests in nine unconsolidated joint ventures for gross proceeds of approximately $588 million in cash. During the year ended December 31, 2007, we sold eight additional owned hotels and interests in four unconsolidated joint ventures for gross proceeds of approximately $209 million in cash. There can be no assurance, however, that we will be able to complete future dispositions on commercially reasonable terms or at all.


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Cash Used for Financing Activities
 
The following is a summary of our debt portfolio (including capital leases) as of December 31, 2007:
 
                         
    Amount
             
    Outstanding at
    Interest Rate at
       
    December 31,
    December 31,
    Average
 
    2007(a)     2007     Maturity  
                (In years)  
    (Dollars in millions)              
 
Floating Rate Debt
                       
Bank Debt
  $ 1,787       5.47 %     2.5  
Mortgages
    38       7.30 %     2.0  
Interest Rate Swaps
    300       9.14 %        
                         
Total/Average
  $ 2,125       6.02 %     2.5  
                         
Fixed Rate Debt
                       
Senior Notes
  $ 1,641 (b)     7.34 %     5.5  
Mortgages
    127       7.55 %     10.4  
Other
    2       9.11 %     22.6  
Interest Rate Swaps
    (300 )     7.88 %        
                         
Total/Average
  $ 1,470       7.25 %     5.9  
                         
Total Debt
                       
Total Debt and Average Terms
  $ 3,595       6.52 %     4.2  
                         
 
 
(a) Excludes approximately $572 million of our share of unconsolidated joint venture debt, all of which is non-recourse.
 
(b) Includes approximately $(6) million at December 31, 2007 of fair value adjustments related to existing fixed-to-floating interest rate swaps for the Senior Notes.
 
Fiscal 2007 Developments.  On September 13, 2007, we completed a public offering of $400 million 6.25% Senior Notes due February 15, 2013 (“6.25% Notes”). We received net proceeds of approximately $396 million, which were used to reduce outstanding borrowings under our Revolving Credit Facility. Interest on the 6.25% Notes is payable semi-annually on February 15 and August 15. At any time, we may redeem all or a portion of the 6.25% Notes at a price equal to the greater of (1) 100% of the aggregate principal plus accrued and unpaid interest and (2) the sum of the present values of the remaining scheduled payments of principal and interest discounted at the redemption rate on a semi-annual basis at the Treasury rate plus 35 basis points, plus accrued and unpaid interest. The 6.25% Notes rank parri passu with all other unsecured and unsubordinated obligations. Upon a change in control of Starwood, the holders of the 6.25% Notes will have the right to require repurchase of the 6.25% Notes at 101% of the principal amount plus accrued and unpaid interest. Certain covenants in the 6.25% Notes include restrictions on liens, sale and leaseback transactions, mergers, consolidations and sale of assets.
 
On June 29, 2007, we entered into a credit agreement that provides for two term loans of $500 million each. One term loan matures on June 29, 2009, and the other matures on June 29, 2010. Each loan has a current interest rate of LIBOR + 0.50%. Proceeds from these loans were used to repay balances under our Revolving Credit Facility (established under the 2006 Facility referenced below), which remains in effect. We may prepay the outstanding aggregate principal amount, in whole or in part, at any time. The covenants in this credit agreement are the same as those in our existing Revolving Credit Facility.
 
On April 27, 2007 we amended our Revolving Credit Facility to both reduce the interest rate (from the original rate of LIBOR + 0.475% to LIBOR + 0.400%) and increase commitments by $450 million, to a total of $2.250 billion. Of this commitment, $375 million will expire on April 27, 2008, and the remaining $1.875 billion


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will expire in February 2011. On May 1, 2007 we borrowed on our Revolving Credit Facility to finance the redemption of $700 million of the 7.375% Senior Notes.
 
Fiscal 2006 Developments.  On March 15, 2006, we completed the redemption of the remaining 25,000 outstanding Class B EPS for approximately $1 million in cash. On April 10, 2006, in connection with the Host Transaction, we redeemed all of the Class A EPS and Realty Partnership units for approximately $34 million in cash. In the year ended December 31, 2006, we redeemed approximately 926,000 SLC Operating Limited Partnership units for approximately $56 million in cash.
 
In February 2006, we closed a five-year $1.5 billion Senior Credit Facility (“2006 Facility”). The 2006 Facility replaced the previous $1.45 billion Revolving and Term Loan Credit Agreement (“Pre-2006 Facility”) which would have matured in October 2006. Approximately $240 million of the Term Loan balance under the Pre-2006 Facility was paid down with cash and the remainder was refinanced with the 2006 Facility. The 2006 Facility is expected to be used for general corporate purposes. The 2006 Facility matures February 10, 2011 and had an original interest rate of LIBOR + 0.475%. We currently expect to be in compliance with all covenants of the 2006 Facility.
 
During March 2006, we gave notice to receive additional commitments totaling $300 million under our 2006 Facility (“2006 Facility Add-On”) on a short-term basis to facilitate the close of the Host Transaction and for general working capital purposes. In June 2006, we amended the 2006 Facility such that the 2006 Facility Add-On would not mature until June 30, 2007.
 
In the first quarter of 2006 in two separate transactions we defeased approximately $510 million of debt secured in part by several hotels that were part of the Host Transaction. In one transaction, in order to accomplish this, we purchased Treasury securities sufficient to make the monthly debt service payments and the balloon payment due under the loan agreement. The Treasury securities were then substituted for the real estate and hotels that originally served as collateral for the loan. As part of the defeasance, the Treasury securities and the debt were transferred to a third party successor borrower that is responsible for all remaining obligations under this debt. In the second transaction, we deposited Treasury securities in an escrow account to cover the debt service payments. As such, neither debt is reflected on our consolidated balance sheet as of December 31, 2006. In connection with the defeasance, we incurred early extinguishment of debt costs of approximately $37 million which was recorded in interest expense in our consolidated statement of income.
 
In the second quarter of 2006, we gave notice to redeem the $360 million of 3.5% convertible notes, originally issued in May 2003. Under the terms of the convertible indenture, prior to the redemption date of June 5, 2006, the note holders had the right to convert their notes into Shares at the stated conversion rate. Under the terms of the indenture, we settled the conversions by paying the principal portion of the notes in cash and the excess amount by issuing approximately 3 million Corporation Shares. The notes that were not converted prior to the redemption date were redeemed at the price of par plus accrued interest, effective June 5, 2006.
 
In connection with the Host Transaction, a total of $600 million of notes issued by Sheraton Holding were assumed by the Corporation. On June 2, 2006, we redeemed $150 million in principal amount of these notes which had a coupon of 7.75% and a maturity in 2025. The stated redemption price for these notes was 103.186%. We borrowed under the 2006 Facility and used existing unrestricted cash balances to fund the cash portions of these transactions.
 
Other.  Based upon the current level of operations, management believes that our cash flow from operations and asset sales, together with our significant cash balances (approximately $366 million at December 31, 2007, including $204 million of short-term and long-term restricted cash), available borrowings under the Revolving Credit Facility (approximately $1.330 billion at December 31, 2007), available borrowing capacity from international revolving lines of credit (approximately $37 million at December 31, 2007), and capacity for additional borrowings will be adequate to meet anticipated requirements for scheduled maturities, dividends, working capital, capital expenditures, marketing and advertising program expenditures, other discretionary investments, interest and scheduled principal payments and share repurchases for the foreseeable future. However, there can be no assurance that we will be able to refinance our indebtedness as it becomes due and, if refinanced, on favorable terms. In addition, there can be no assurance that our continuing business will generate cash flow at or above historical levels,


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that currently anticipated results will be achieved or that we will be able to complete dispositions on commercially reasonable terms or at all.
 
We maintain non-U.S.-dollar-denominated debt, which provides a hedge of our international net assets and operations but also exposes our debt balance to fluctuations in foreign currency exchange rates. During the year ended December 31, 2007, the effect of changes in foreign currency exchange rates was a net increase in debt of approximately $5 million. Our debt balance is also affected by changes in interest rates as a result of our interest rate swap agreements under which we pay floating rates and receive fixed rates of interest (the “Fair Value Swaps”). The fair market value of the Fair Value Swaps is recorded as an asset or liability and as the Fair Value Swaps are deemed to be effective, an adjustment is recorded against the corresponding debt. At December 31, 2007, our debt included a decrease of approximately $6 million related to the fair market value of current Fair Value Swap liabilities. At December 31, 2006 our debt included a decrease of approximately $17 million related to the unamortized gains on terminated Fair Value Swaps and the fair market value of current Fair Value Swap liabilities.
 
If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to sell additional assets, reduce capital expenditures, refinance all or a portion of our existing debt or obtain additional financing. Our ability to make scheduled principal payments, to pay interest on or to refinance our indebtedness depends on our future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the hotel and vacation ownership industries and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control.
 
We had the following contractual obligations(1) outstanding as of December 31, 2007 (in millions):
 
                                         
          Due in Less
    Due in
    Due in
    Due After
 
    Total     Than 1 Year     1-3 Years     3-5 Years     5 Years  
 
Debt
  $ 3,593     $ 5     $ 1,048     $ 1,590     $ 950  
Capital lease obligations(2)
    2                         2  
Operating lease obligations
    1,144       82       160       136       766  
Unconditional purchase obligations(3)
    114       43       49       19       3  
Other long-term obligations
    4                   4        
                                         
Total contractual obligations
  $ 4,857     $ 130     $ 1,257     $ 1,749     $ 1,721  
                                         
 
 
(1) The table below does not reflect unrecognized tax benefits of $469 million, the timing of which is uncertain. Refer to Note 13 of the Consolidated Financial Statements for additional discussion on this matter.
 
(2) Excludes sublease income of $2 million.
 
(3) Included in these balances are commitments that may be satisfied by our managed and franchised properties.
 
We had the following commercial commitments outstanding as of December 31, 2007 (in millions):
 
                                         
          Amount of Commitment Expiration Per Period  
          Less Than
                After
 
    Total     1 Year     1-3 Years     3-5 Years     5 Years  
 
Standby letters of credit
  $ 133     $ 133     $     $     $  
 
On July 26, 2006, Standard & Poor’s upgraded our rating to BBB- from BB+ and revised their outlook from positive to stable.
 
On August 28, 2006, Moody’s Investors Service upgraded our rating to Baa3 from Bal and revised their outlook from positive to stable.
 
On October 24, 2006, Fitch’s Investors Service upgraded our rating to BBB- from BB+ and revised their outlook from positive to stable.
 
A distribution of $0.90 per Share was paid in January 2008 to shareholders of record as of December 31, 2007. In connection with the Host Transaction, on February 17, 2006, the Trust declared a distribution of $0.21 per Share to shareholders of record on February 28, 2006, which was paid on March 10, 2006. In addition, on March 15, 2006, the Trust declared a distribution of $0.21 per Share to shareholders of record on March 27, 2006, which was paid on


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April 7, 2006. In December 2006 the Corporation declared a dividend of $0.42 per Corporation Share to shareholders of record on December 31, 2006, which was paid in January 2007.
 
Stock Sales and Repurchases
 
Share Repurchases.  In April of 2007, the Board of Directors authorized an additional $1 billion in Share repurchases under our existing Corporate Share Repurchase Authorization (the “Share Repurchase Authorization”). In November 2007, the Board of Directors of Starwood further authorized the repurchase of up to an additional $1 billion of Corporation Shares under the Share Repurchase Authorization. During the year ended December 31, 2007, we repurchased 29.6 million Corporation Shares at a total cost of $1.8 billion. As of December 31, 2007, approximately $593 million remains available under the Share Repurchase Authorization.
 
On March 15, 2006 we completed the redemption of the remaining 25,000 shares of Class B EPS for approximately $1 million in cash. In April 2006, in connection with the Host Transaction, we redeemed all of the Class A EPS (approximately 562,000 shares) and Realty Partnership units (approximately 40,000 units) for approximately $34 million in cash. SLC Operating Limited Partnership units are convertible into Shares at the unit holder’s option, provided that we have the option to settle conversion requests in cash or Shares. In the year ended December 31, 2007, there were no redemptions. At December 31, 2007, we had outstanding approximately 191 million Corporation Shares and 179,000 SLC Operating Limited Partnership units.
 
Off-Balance Sheet Arrangements
 
Our off-balance sheet arrangements include retained interests in securitizations of $40 million, letters of credit of $133 million, unconditional purchase obligations of $114 million and surety bonds of $99 million. These items are more fully discussed earlier in this section and in the Notes to Financial Statements and Item 8 of Part II of this report.
 
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk.
 
In limited instances, we seek to reduce earnings and cash flow volatility associated with changes in interest rates and foreign currency exchange rates by entering into financial arrangements intended to provide a hedge against a portion of the risks associated with such volatility. We continue to have exposure to such risks to the extent they are not hedged.
 
Interest rate swap agreements are the primary instruments used to manage interest rate risk. At December 31, 2007, we had two outstanding long-term interest rate swap agreements under which we pay variable interest rates and receive fixed interest rates. At December 31, 2007, we had no interest rate swap agreements under which we pay a fixed rate and receive a variable rate.
 
We enter into a derivative financial arrangement to the extent it meets the objectives described above, and we do not engage in such transactions for trading or speculative purposes.
 
See Note 21. Derivative Financial Instruments in the notes to financial statements filed as part of this Annual Report and incorporated herein by reference for further description of derivative financial instruments.


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The following table sets forth the scheduled maturities and the total fair value of our debt portfolio:
 
                                                                 
                                              Total Fair
 
    Expected Maturity or Transaction Date
          Total at
    Value at
 
    At December 31,           December 31,
    December 31,
 
    2008     2009     2010     2011     2012     Thereafter     2007     2007  
 
Liabilities
                                                               
Fixed rate (in millions)
  $ 4     $ 5     $ 5     $ 6     $ 798     $ 952     $ 1,770     $ 1,848  
Average interest rate
                                                    7.36 %        
Floating rate (in millions)
  $ 1     $ 538     $ 500     $ 786     $     $     $ 1,825     $ 1,825  
Average interest rate
                                                    5.50 %        
Interest Rate Swaps
                                                               
Fixed to variable
                                                               
(in millions)
  $     $     $     $     $ 300     $     $ 300          
Average pay rate
                                                    9.14 %        
Average receive rate
                                                    7.88 %        
 
Item 8.   Financial Statements and Supplementary Data.
 
The financial statements and supplementary data required by this Item are included in Item 15 of this Annual Report and are incorporated herein by reference
 
Item 9.   Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
 
Not applicable.
 
Item 9A.   Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures
 
The Company’s management conducted an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2007. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in alerting them in a timely manner to material information required to be included in the Company’s SEC reports.
 
Management’s Report on Internal Control over Financial Reporting
 
Management of Starwood Hotels & Resorts Worldwide Inc. and its subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) or 15(d)-15(f). Those rules define internal control over financial reporting as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”) and includes those policies and procedures that:
 
  •  Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
 
  •  Provide reasonable assurance that the transactions are recorded as necessary to permit the preparation of financial statements in accordance with GAAP, and the receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
 
  •  Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.


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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
 
The Company’s management assessed the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2007. In making this assessment, the Company’s management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment and those criteria, management believes that, as of December 31, 2007, the Company’s internal control over financial reporting is effective.
 
Management has engaged Ernst & Young LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K, to attest to the Company’s internal control over financial reporting. Its report is included herein.


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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Shareholders of Starwood Hotels & Resorts Worldwide, Inc.
 
We have audited Starwood Hotels & Resorts Worldwide, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2007 and 2006, and the related consolidated statements of income, comprehensive income, equity, and cash flows of the Company for each of the three years in the period ended December 31, 2007 and our report dated February 22, 2008, expressed an unqualified opinion thereon.
 
/s/  Ernst & Young LLP
 
New York, New York
February 22, 2008


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Changes in Internal Controls
 
There has not been any change in our internal control over financial reporting identified in connection with the evaluation that occurred during the year ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, those controls.
 
Item 10.   Directors, Executive Officers and Corporate Governance.
 
The Board of Directors of the Company is currently comprised of 10 members, each of whom is elected for a one-year term. The following table sets forth, for each of the members of the Board of Directors as of the date of this Annual Report, certain information regarding such Director.
 
         
Name (Age)
 
Principal Occupation and Business Experience
 
Service Period
 
Frits van Paasschen (46)
  Chief Executive Officer of the Company since September 2007. From March 2005 until September 2007, he served as President and CEO of Molson Coors Brewing Company’s largest division, Coors Brewing Company. Prior to joining Coors, from April 2004 until March 2005, Mr. van Paasschen worked independently through FPaasschen Consulting and Mercator Investments, evaluating, proposing, and negotiating private equity transactions. Prior thereto, Mr. van Paasschen spent seven years at Nike, Inc, most recently as Corporate Vice President/General Manager, Europe, Middle East and Africa from 2000 to 2004.   CEO and Director since September 2007
Adam M. Aron (53)
  Chairman and Chief Executive Officer of World Leisure Partners, Inc., a leisure related consultancy, since 2006 From 1996 through 2006, Mr. Aron served as Chairman and Chief Executive Officer of Vail Resorts, Inc. (an owner and operator of ski resorts and hotels). Mr. Aron is also a director of FTD Group, Inc., Rewards Network, Inc. and Marathon Acquisition Corp.   Director since August 2006
Charlene Barshefsky (57)
  Senior International Partner at the law firm of Wilmer Cutler Pickering Hale & Dorr LLP, Washington, D.C. since 2001. From March 1997 to January 2001, Ambassador Barshefsky was the United States Trade Representative, the chief trade negotiator and principal trade policy maker for the United States and a member of the President’s Cabinet. Ambassador Barshefsky is a director of The Estee Lauder Companies, Inc., American Express Company and Intel Corporation. Ambassador Barshefsky also serves on the Board of Directors of the Council on Foreign Relations.   Director and Trustee(1) since October 2001
Jean-Marc Chapus (48)
  Group Managing Director and Portfolio Manager of Trust Company of the West, an investment management firm, and President of TCW/ Crescent Mezzanine L.L.C., a private investment fund, since March 1995.   Director from August 1995 to November 1997 and since April 1999; Trustee(1) since November 1997


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Name (Age)
 
Principal Occupation and Business Experience
 
Service Period
 
Bruce W. Duncan (56)
  Private investor since January 2006. From April to September 2007, Mr. Duncan served as Chief Executive Officer of the Company on an interim basis. From May 2005 to December 2005 Mr. Duncan was Chief Executive Officer and Trustee of Equity Residential (“EQR”) the largest publicly traded apartment company in the United States. From January 2003 to May 2005, he was President, Chief Executive Officer and Trustee, and from April 2002 to December 2002, President and Trustee of EQR. From April 2000 until March 2002, he was a private investor. From December 1995 until March 2000, Mr. Duncan served as Chairman, President and Chief Executive Officer of The Cadillac Fairview Corporation Limited, a real estate operating company.   Chairman of the Boards since May 2005; Director since April 1999; Trustee(1) since August 1995
Lizanne Galbreath (50)
  Managing Partner of Galbreath & Company, a real estate investment firm, since 1999. From April 1997 to 1999, Ms. Galbreath was Managing Director of LaSalle Partners/Jones Lang LaSalle where she also served as a Director. From 1984 to 1997, Ms. Galbreath served as a Managing Director then Chairman and CEO of The Galbreath Company, the predecessor entity of Galbreath & Company.   Director and Trustee(1) since May 2005
Eric Hippeau (56)
  Managing Partner of Softbank Capital Partners, a technology venture capital firm, since March 2000. Mr. Hippeau served as Chairman and Chief Executive Officer of Ziff-Davis Inc., an integrated media and marketing company, from 1993 to March 2000 and held various other positions with Ziff-Davis from 1989 to 1993. Mr. Hippeau is a director of Yahoo! Inc.   Director and Trustee(1) since April 1999
Stephen R. Quazzo (48)
  Managing Director, Chief Executive Officer and co- founder of Transwestern Investment Company, L.L.C., a real estate principal investment firm, since March 1996. From April 1991 to March 1996, Mr. Quazzo was President of Equity Institutional Investors, Inc., a subsidiary of Equity Group Investments, Inc.   Director since April 1999; Trustee(1) since August 1995
Thomas O. Ryder (63)
  Retired as Chairman of the Board of The Reader’s Digest Association, Inc. on January 1, 2007. Prior to his retirement, Mr. Ryder was Chairman of the Board of Reader’s Digest Association, Inc. since January 1, 2006 and Chairman of the Board and Chief Executive Officer from April 1998 through December 31, 2005. Mr. Ryder was President, American Express Travel Related Services International, a division of American Express Company, which provides travel, financial and network services, from October 1995 to April 1998. He is a director of Amazon.com, Inc.   Director and Trustee(1) since April 2001

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Name (Age)
 
Principal Occupation and Business Experience
 
Service Period
 
Kneeland C.
Youngblood (52)
  Managing partner of Pharos Capital Group, L.L.C., a private equity fund focused on technology companies, business service companies and health care companies, since January 1998. From July 1985 to December 1997, he was in private medical practice. He is Chairman of the Board of the American Beacon Funds, a mutual fund company managed by AMR Investments, an investment affiliate of American Airlines. He is also a director of Burger King Holdings, Inc. and Gap, Inc.   Director and Trustee(1) since April 2001
 
 
(1) Prior to the Host Transaction, the Trust was a subsidiary of the Corporation and directors may have also served as Trustees of the Trust. On April 10, 2006, in connection with the Host Transaction, the Trustees resigned.
 
Executive Officers of the Registrants
 
The following table includes certain information with respect to each of the Company’s executive officers.
 
             
Name
  Age    
Position
 
Frits van Paasschen
    46     Chief Executive Officer and a Director of the Corporation
Matthew A. Ouimet
    49     President, Hotel Group
Vasant M. Prabhu
    48     Executive Vice President and Chief Financial Officer of the Corporation
Kenneth S. Siegel
    52     Chief Administrative Officer, General Counsel and Secretary of the Corporation
Raymond L. Gellein Jr.
    60     Chairman of the Board and Chief Executive Officer of Starwood Vacation Ownership and President of the Global Development Group
 
Frits van Paasschen. See Item 10. Directors, Executive Officers and Corporate Governance above.
 
Matthew A. Ouimet.  Mr. Ouimet has been President, Hotel Group since August 2006. Prior to joining the Company Mr. Ouimet spent 17 years at The Walt Disney Company, most recently serving as President of the Disneyland Resort. Mr. Ouimet joined The Walt Disney Company in 1989 and began his career there in a variety of finance and business development roles. During his tenure with Disney, Mr. Ouimet served as Executive General Manager of Disney’s Vacation Club; President of Disney’s Cruise Line and, most recently President of the Disneyland Resort.
 
Vasant M. Prabhu.  Mr. Prabhu has been the Executive Vice President and Chief Financial Officer of the Corporation and has served as Vice President and Chief Financial Officer of the Company since January 2004. Prior to joining the Company, Mr. Prabhu served as Executive Vice President and Chief Financial Officer for Safeway Inc., from September 2000 through December 2003. Mr. Prabhu was previously the President of the Information and Media Group at the McGraw-Hill Companies, Inc., from June 1998 to August 2000, and held several senior positions at divisions of PepsiCo, Inc. from June 1992 to May 1998. From August 1983 to May 1992 he was a partner at Booz Allen Hamilton, an international management consulting firm.
 
Kenneth S. Siegel.  Mr. Siegel has been the Chief Administrative Officer, General Counsel and Secretary of the Corporation since March 2006 and Executive Vice President and General Counsel of the Corporation from November 2000 to March 2006. In February 2001, he was also appointed as the Secretary to the Corporation. Mr. Siegel was formerly the Senior Vice President and General Counsel of Gartner, Inc., a provider of research and analysis on information technology industries, from January 2000 to November 2000. Prior to that time, he served as Senior Vice President, General Counsel and Corporate Secretary of IMS Health Incorporated, an information services company, and its predecessors from February 1997 to December 1999. Prior to that time, Mr. Siegel was a Partner in the law firm of Baker & Botts, LLP.

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Raymond L. Gellein Jr.  Mr. Gellein has been Chairman and Chief Executive Officer of Starwood Vacation Ownership, Inc. (formerly Vistana, Inc.), our vacation ownership division, since 1980. He was appointed President of the Global Development Group in July of 2006. Mr. Gellein has announced his retirement from the Corporation effective March 31, 2008.
 
Corporate Governance
 
The Company has an Audit Committee that is currently comprised of directors Thomas O. Ryder (chairman), Kneeland C. Youngblood and Lizanne Galbreath. The Board of Directors has determined that each member of the Audit Committee is “independent” as defined by applicable federal securities laws and the Listing Requirements of the New York Stock Exchange, Inc. and that Mr. Ryder is an audit committee financial expert, as defined by federal securities laws.
 
The Company has adopted a Finance Code of Ethics applicable to our Chief Executive Officer, Chief Financial Officer, Corporate Controller, Corporate Treasurer, Senior Vice President-Taxes and persons performing similar functions. The text of this code of ethics may be found on the Company’s web site at http://starwoodhotels.com/corporate/investor relations.html. We intend to post amendments to and waivers from, the Finance Code of Ethics that require disclosure under applicable SEC rules on our web site. You may obtain a free copy of this code in print by writing to our Investor Relations Department, 1111 Westchester Avenue, White Plains, New York 10604.
 
The Company has adopted a Worldwide Code of Conduct applicable to all of its directors, officers and employees. The text of this code of conduct may be found on the Company’s website at http://starwoodhotels.com/corporate/investor relations.html. You may also obtain a free copy of this code in print by writing to our Investor Relations Department, 1111 Westchester Avenue, White Plains, New York 10604.
 
The Company’s Corporate Governance Guidelines and the charters of its Audit Committee, Compensation and Options Committee, Governance and Nominating Committee are also available on its website at http://starwoodhotels.com/corporate/investor relations.html.
 
The information on our website is not incorporated by reference into this Annual Report on Form 10-K.
 
We have submitted the CEO certification to the NYSE pursuant to NYSE Rule 303A.12(a) following the 2007 Annual Meeting of Shareholders.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that Directors, Trustees and executive officers of the Company, and persons who own more than 10 percent of the outstanding Shares, file with the SEC (and provide a copy to the Company) certain reports relating to their ownership of Shares and other equity securities of the Company.
 
To the Company’s knowledge, based solely on a review of the copies of these reports furnished to the Company for the fiscal year ended December 31, 2007, and written representations that no other reports were required, all Section 16(a) filing requirements applicable to its Directors, executive officers and greater than 10 percent beneficial owners were complied with for the most recent fiscal year.
 
Item 11.   Executive Compensation.
 
The information called for by Item 11 is incorporated by reference to the information under the following captions in the Proxy Statement: “Executive Compensation,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Summary Compensation Table,” “Grants of Plan-Based Awards,” “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards,” “Outstanding Equity Awards at Fiscal Year-End,” “Option Exercises and Stock Vested,” “Nonqualified Deferred Compensation,” “Potential Payments upon Termination or Change-in-Control,” and “Director Compensation.”


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Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
Equity Compensation Plan Information-December 31, 2007
 
                         
                (c)
 
                Number of
 
                Securities
 
    (a)
          Remaining Available
 
    Number of
          for Future Issuance
 
    Securities to be
    (b)
    Under Equity
 
    Issued Upon
    Weighted-Average
    Compensation Plans
 
    Exercise of
    Exercise Price of
    (Excluding
 
    Outstanding
    Outstanding
    Securities
 
    Options, Warrants
    Options, Warrants
    Reflected in Column
 
    and Rights     and Rights     (a))  
 
Equity compensation plans approved by security holders
    18,547,156     $ 25.21       70,242,819 (1)
Equity compensation plans not approved by security holders
                 
                         
Total
    18,547,156     $ 25.21       70,242,819  
 
 
(1) Does not include deferred share units (that vest over three years and may be settled in Shares) that have been issued pursuant to the Executive Annual Incentive Plan (“Executive AIP”). The Executive AIP does not limit the number of deferred share units that may be issued. This plan has been amended to provide for a termination date of May 26, 2009 to comply with new NYSE requirements. In addition, 10,740,292 Corporation Shares remain available for issuance under our Employee Stock Purchase Plan, a stock purchase plan meeting the requirements of Section 423 of the Internal Revenue Code.
 
The remaining information called for by Item 12 is incorporated by reference to the information under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.
 
Item 13.   Certain Relationships and Related Transactions and Director Independence.
 
The information called for by Item 13 is incorporated by reference to the information under the captions “Certain Relationships and Related Transactions” and “Corporate Governance” in the Proxy Statement.
 
Item 14.   Principal Accountant Fees and Services.
 
The Audit Committee has adopted a policy requiring pre-approval by the committee of all services (audit and non-audit) to be provided to the Company by its independent auditors. In accordance with that policy, the Audit Committee has given its approval for the provision of audit services by Ernst & Young LLP for fiscal 2007. All other services must be specifically pre-approved by the full Audit Committee or by a designated member of the Audit Committee who has been delegated the authority to pre-approve the provision of services.
 
Fees paid by the Company to its independent auditors are set forth in the proxy statement under the heading “Audit Fees” and are incorporated herein by reference.


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PART IV
 
Item 15.   Exhibits, Financial Statements, Financial Statement Schedule and Reports on Form 8-K.
 
(a) The following documents are filed as a part of this Annual Report:
 
  1-2.  The financial statements and financial statement schedule listed in the Index to Financial Statements and Schedule following the signature pages hereof.
 
  3.   Exhibits:
 
         
Exhibit
   
Number
 
Description of Exhibit
 
  2 .1   Formation Agreement, dated as of November 11, 1994, among the Trust, the Corporation, Starwood Capital and the Starwood Partners (incorporated by reference to Exhibit 2 to the Trust’s and the Corporation’s Joint Current Report on Form 8-K dated November 16, 1994). (The SEC file numbers of all filings made by the Corporation and the Trust pursuant to the Securities Exchange Act of 1934, as amended, and referenced herein are: 1-7959 (the Corporation) and 1-6828 (the Trust)).
  2 .2   Form of Amendment No. 1 to Formation Agreement, dated as of July 1995, among the Trust, the Corporation and the Starwood Partners (incorporated by reference to Exhibit 10.23 to the Trust’s and the Corporation’s Joint Registration Statement on Form S-2 filed with the SEC on June 29, 1995 (Registration Nos. 33-59155 and 33-59155-01)).
  2 .3   Master Agreement and Plan of Merger, dated as of November 14, 2005, among Host Marriott Corporation, Host Marriott, L.P., Horizon Supernova Merger Sub, L.L.C., Horizon SLT Merger Sub, L.P., Starwood Hotels & Resorts Worldwide, Inc., Starwood Hotels & Resorts, Sheraton Holding Corporation and SLT Realty Limited Partnership (the “Merger Agreement”) (incorporated by reference to Exhibit 10.1 to the Corporation’s and the Trust’s Joint Current Report on From 8-K filed November 14, 2005).
  2 .4   Amendment Agreement, dated as of March 24, 2006, to the Merger Agreement (incorporated by reference to Exhibit 2.1 of the Joint Current Report on Form 8-K filed with the SEC on March 29, 2006).
  3 .1   Articles of Amendment and Restatement of the Corporation, as of May 30, 2007 (incorporated by reference to Appendix A to the Corporation’s 2007 Notice of Annual Meeting and Proxy Statement).
  3 .2   Amended and Restated Bylaws of the Corporation, as amended and restated through April 10, 2006 (incorporated by reference to Exhibit 3.2 to the Corporation’s Current Report on Form 8-K filed with the SEC on April 13, 2006 (the “April 13 Form 8-K”).
  4 .1   Termination Agreement dated as of April 7, 2006 between the Corporation and the Trust (incorporated by reference to Exhibit 4.1 of the April 13 Form 8-K).
  4 .2   Amended and Restated Rights Agreement, dated as of April 7, 2006, between the Corporation and American Stock Transfer and Trust Company, as Rights Agent (which includes the form of Amended and Restated Articles Supplementary of the Series A Junior Participating Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Stock as Exhibit C) (incorporated by reference to Exhibit 4.2 of the April 13 Form 8-K).
  4 .3   Amended and Restated Indenture, dated as of November 15, 1995, as Amended and Restated as of December 15, 1995 between ITT Corporation (formerly known as ITT Destinations, Inc.) and the First National Bank of Chicago, as trustee (incorporated by reference to Exhibit 4.A.IV to the First Amendment to ITT Corporation’s Registration Statement on Form S-3 filed November 13, 1996).
  4 .4   First Indenture Supplement, dated as of December 31, 1998, among ITT Corporation, the Corporation and The Bank of New York (incorporated by reference to Exhibit 4.1 to the Trust’s and the Corporation’s Joint Current Report on Form 8-K filed January 8, 1999).
  4 .5   Second Indenture Supplement, dated as of April 9, 2006, among the Corporation, Sheraton Holding Corporation and Bank of New York Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.3 of the April 13 Form 8-K).
  4 .6   Indenture, dated as of May 25, 2001, by and among the Corporation, as Issuer, the guarantors named therein and Firstar Bank, N.A., as Trustee (incorporated by reference to Exhibit 10.2 to the Corporation’s and the Trust’s Joint Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001 (the “2001 Form 10-Q2”)).


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Exhibit
   
Number
 
Description of Exhibit
 
  4 .7   Indenture, dated as of April 19, 2002, among the Corporation, the guarantor parties named therein and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Corporation’s and Sheraton Holding Corporation’s Joint Registration Statement on Form S-4 filed on November 19, 2002 (the “2002 Forms S-4”)).
  4 .8   Indenture dated May 16, 2003 between the Corporation, the Trust, the Guarantor and U.S. Bank National Association as trustee (incorporated by reference to Exhibit 4.9 to the July 8, 2003 Form S-3) (Registration Nos. 333-106888, 333-106888-01, 333-106888-02) (the “Form S-3”).
  4 .9   First Indenture Supplement, dated as of January 11, 2006, between the Corporation, the Trust, the Guarantor and U.S. Bank National Association as trustee (incorporated by reference to Exhibit 10.1 to the Trust’s and the Corporation’s Joint Current Report on Form 8-K filed January 17, 2006).
  4 .10   Indenture, dated as of September 13, 2007, between the Company and the U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed September 17, 2007 (the “September 17 Form 8-K”)).
  4 .11   Supplemental Indenture, dated as of September 13, 2007, between the Company and the U.S. Bank National Association, as trustee Incorporated by reference to Exhibit 4.2 to the September 17 Form 8-K”).
        The Registrants hereby agree to file with the Commission a copy of any instrument, including indentures, defining the rights of long-term debt holders of the Registrants and their consolidated subsidiaries upon the request of the Commission.
  10 .1   Third Amended and Restated Limited Partnership Agreement for Operating Partnership, dated January 6, 1999, among the Corporation and the limited partners of Operating Partnership (incorporated by reference to Exhibit 10.2 to the 1998 Form 10-K).
  10 .2   Form of Trademark License Agreement, dated as of December 10, 1997, between Starwood Capital and the Trust (incorporated by reference to Exhibit 10.22 to the Trust’s and the Corporation’s Joint Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the “1997 Form 10-K”)).
  10 .3   Credit Agreement, dated as of February 10, 2006, among Starwood Hotels & Resorts Worldwide, Inc., Starwood Hotels & Resorts, certain additional Dollar Revolving Loan Borrowers, certain additional Alternate Currency Revolving Loan Borrowers, various Lenders, Deutsche Bank AG New York Branch, as Administrative Agent, JPMorgan Chase Bank, N.A. and Societe Generale, as Syndication Agents, Bank of America, N.A. and Calyon New York Branch, as Co-Documentation Agents, Deutsche Bank Securities Inc., J.P. Morgan Securities Inc. and Banc of America Securities LLC, as Lead Arrangers and Book Running Managers, The Bank of Nova Scotia, Citicorp North America, Inc., and the Royal Bank of Scotland PLC, as Senior Managing Agents and Nizvho Corporate Bank, Ltd. as Managing Agent (the “Credit Agreement”) (incorporated by reference to Exhibit 10.1 to the Corporation’s and the Trust’s Joint Current Report on Form 8-K filed February 15, 2006).
  10 .4   First Amendment, dated as of March 31, 2006, to the Credit Agreement (incorporated by reference to Exhibit 10.1 of the Joint Current Report on Form 8-K filed with the SEC on April 4, 2006).
  10 .5   Second Amendment, dated as of June 29, 2006, to the Credit Agreement (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on July 6, 2006).
  10 .6   Third Amendment dated as of April 27, 2007, to the Credit Agreement (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 30, 2007).
  10 .7   Fourth Amendment, dated as of December 20, 2007, to the Credit Agreement(2)
  10 .8   Credit Agreement, dated as of June 29, 2007, among Starwood Hotels & Resorts Worldwide, Inc., Bank of America, N.A., as administrative agent and various lenders party thereto (incorporated by reference to Exhibit 10.01 to the Company’s Current Report on Form 8-K, filed with the SEC on July 5, 2007).
  10 .9   Loan Agreement, dated as of January 27, 1999, among the Borrowers named therein, as Borrowers, Starwood Operator I LLC, as Operator, and Lehman Brothers Holding Inc., d/b/a Lehman Capital, a division of Lehman Brothers Holdings Inc. (incorporated by reference to Exhibit 10.58 to the 1998 Form 10-K).
  10 .10   Starwood Hotels & Resorts Worldwide, Inc. 1995 Long-Term Incentive Plan (the “Corporation 1995 LTIP”) (Amended and Restated as of December 3, 1998) (incorporated by reference to Annex E to the 1998 Proxy Statement).(1)

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Exhibit
   
Number
 
Description of Exhibit
 
  10 .11   Second Amendment to the Corporation 1995 LTIP (incorporated by reference to Exhibit 10.3 to the 2003 10-Q1).(1)
  10 .12   Form of Non-Qualified Stock Option Agreement pursuant to the Corporation 1995 LTIP (incorporated by reference to Exhibit 10.26 to the 2004 Form 10-K).(1)
  10 .13   Starwood Hotels & Resorts Worldwide, Inc. 1999 Long-Term Incentive Compensation Plan (the “1999 LTIP”) (incorporated by reference to Exhibit 10.4 to the Corporation’s and the Trust’s Joint Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999 (the “1999 Form 10-Q2”)).(1)
  10 .14   First Amendment to the 1999 LTIP, dated as of August 1, 2001 (incorporated by reference to Exhibit 10.1 to the Corporation’s and the Trust’s Joint Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001).(1)
  10 .15   Second Amendment to the 1999 LTIP (incorporated by reference to Exhibit 10.2 to the 2003 10-Q1).(1)
  10 .16   Form of Non-Qualified Stock Option Agreement pursuant to the 1999 LTIP (incorporated by reference to Exhibit 10.30 to the 2004 Form 10-K).(1)
  10 .17   Form of Restricted Stock Agreement pursuant to the 1999 LTIP (incorporated by reference to Exhibit 10.31 to the 2004 Form 10-K).(1)
  10 .18   Starwood Hotels & Resorts Worldwide, Inc. 2002 Long-Term Incentive Compensation Plan (the “2002 LTIP”) (incorporated by reference to Annex B of the Corporation’s 2002 Proxy Statement).(1)
  10 .19   First Amendment to the 2002 LTIP (incorporated by reference to Exhibit 10.1 to the 2003 10-Q1).(1)
  10 .20   Form of Non-Qualified Stock Option Agreement pursuant to the 2002 LTIP (incorporated by reference to Exhibit 10.49 to the 2002 Form 10-K filed on February 28, 2003 (the “2002 10-K”)).(1)
  10 .21   Form of Restricted Stock Agreement pursuant to the 2002 LTIP (incorporated by reference to Exhibit 10.35 to the 2004 Form 10-K).(1)
  10 .22   2004 Long-Term Incentive Compensation Plan (“2004 LTIP”) (incorporated by reference to the Corporation’s 2004 Notice of Annual Meeting of Stockholders and Proxy Statement, pages A-1 through A-20).(1)
  10 .23   Amendment No. 1 to the Starwood Hotels & Resorts Worldwide, Inc. 2004 Long-Term Incentive Compensation Plan (incorporated by reference to Exhibit 99.2 of the April 13 Form 8-K).(1)
  10 .24   Amendment to the Starwood Hotels & Resorts Worldwide, Inc. 2004 Long-Term Incentive Compensation Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2007).(1)
  10 .25   Form of Non-Qualified Stock Option Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.4 to the 2004 Form 10-Q2).(1)
  10 .26   Form of Restricted Stock Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.38 to the 2004 Form 10-K).(1)
  10 .27   Form of Non-Qualified Stock Option Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.2 to the Corporation’s and the Trust’s Joint Current Report on Form 8-K filed February 13, 2006 (the February 2006 Form 8-K”)).(1)
  10 .28   Form of Restricted Stock Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.1 to the February 2006 Form 8-K).(1)
  10 .29   Form of Amended and Restated Non-Qualified Stock Option Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.1 to the Corporation’s Quarterly Report on Form 10-Q for the period ended June 30, 2006 (the 2006 Form 10-Q2”)).(1)
  10 .30   Form of Amended and Restated Restricted Stock Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.2 to the 2006 Form 10-Q2).(1)
  10 .31   Starwood Hotels & Resorts Worldwide, Inc. 2005 Annual Incentive Plan for Certain Executives (incorporated by reference to Appendix A to the Corporation’s 2005 Proxy Statement).(1)
  10 .32   Amendment No. 1 to the Starwood Hotels & Resorts Worldwide, Inc. Annual Incentive Plan for Certain Executives (incorporated by reference to Exhibit 99.3 of the April 13 Form 8-K).(1)

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Exhibit
   
Number
 
Description of Exhibit
 
  10 .33   Starwood Hotels & Resorts Worldwide, Inc. Annual Incentive Plan, dated as of November 3, 2005 (incorporated by reference to Exhibit 10.1 to the Corporation’s and the Trust’s Joint Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005 (the “2005 Form 10-Q3”)).(1)
  10 .34   First Amendment to the Starwood Hotels & Resorts Worldwide, Inc. 2005 Annual Incentive Plan, amended as of November 3, 2005 (incorporated by reference to Exhibit 99.5 of the April 13 Form 8-K).(1)
  10 .35   Starwood Hotels & Resorts Worldwide, Inc. Amended and Restated Deferred Compensation Plan, effective as of January 22, 2008.(1)(2)
  10 .36   Form of Indemnification Agreement between the Corporation, the Trust and each of its Directors/Trustees and executive officers (incorporated by reference to Exhibit 10.10 to the 2003 Form 10-K).(1)
  10 .37   Employment Agreement, dated as of November 13, 2003, between the Corporation and Vasant Prabhu (incorporated by reference to Exhibit 10.68 to the 2003 10-K).(1)
  10 .38   Letter Agreement, dated August 14, 2007, between the Company and Vasant Prabhu (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 17, 2007 (the “August 17 Form 8-K”)).(1)
  10 .39   Employment Agreement, dated as of September 20, 2004, between the Corporation and Steven J. Heyer (incorporated by reference to Exhibit 10.1 to the Trust’s and the Corporation’s Joint Current Report on Form 8-K filed with the SEC on September 24, 2004).(1)
  10 .40   Amendment, dated as of May 4, 2005, to Employment Agreement between the Corporation and Steve J. Heyer (incorporated by reference to Exhibit 10.1 to the Corporation’s and Trust’s Joint Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005).(1)
  10 .41   Separation Agreement and Mutual General Release of Claims between the Corporation and Steven J. Heyer (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 2, 2007).(1)
  10 .42   Form of Non-Qualified Stock Option Agreement between the Corporation and Steven J. Heyer pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.70 to the 2004 Form 10-K)(1)
  10 .43   Form of Restricted Stock Unit Agreement between the Corporation and Steven J. Heyer pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.71 to the 2004 Form 10-K).(1)
  10 .44   Employment Agreement, dated as of November 13, 2003, between the Corporation and Kenneth Siegel (incorporated by reference to Exhibit 10.57 to the Corporation’s and Trust’s Joint Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (the “2000 Form 10-K”)).(1)
  10 .45   Letter Agreement, dated July 22, 2004 between the Corporation and Kenneth Siegel (incorporated by reference to Exhibit 10.73 to the 2004 Form 10-K).(1)
  10 .46   Letter Agreement, dated August 14, 2007, between the Company and Kenneth S. Siegel (incorporated by reference to Exhibit 10.1 to the Corporation’s Current Report on Form 8-K filed August 17, 2007 (the “August 17 Form 8-K”)).(1)
  10 .47   Employment Agreement, dated July 18, 1999, between Starwood Vacation Ownership and Raymond Gellein, Jr. (incorporated by reference to Exhibit 10.45 to the Corporation’s Annual Report on Form 10-K for the period ended December 31, 2006 (the “2006 Form 10-K”)).(1)
  10 .48   Form of cash bonus award between the Company and Raymond L. Gellein, Jr. (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007 (the 2007 10-Q3).(1)
  10 .49   Amendment agreement, dated December 6, 2007, among Starwood Vacation Ownership, the Company and Raymond Gellein, Jr.(1)(2)
  10 .50   Employment Agreement, dated as of September 21, 2006, between the Corporation and Matthew A. Ouimet (incorporated by reference to Exhibit 10.1 to the Corporation’s and Trust’s Joint Current Report on Form 8-K filed with the SEC on September 27, 2006).(1)
  10 .51   Letter Agreement, dated August 14, 2007, between the Company and Matthew A. Ouimet (incorporated by reference to Exhibit 10.2 to the August 17 Form 8-K).(1)

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Exhibit
   
Number
 
Description of Exhibit
 
  10 .52   Employment Agreement, dated as of August 2, 2007, between the Corporation and Bruce W. Duncan (incorporated by reference to Exhibit 10.5 to the Corporation’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2007).(1)
  10 .53   Form of Restricted Stock Unit Agreement between the Corporation and Bruce W. Duncan pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.2 to the 2007 Form 10-Q1).(1)
  10 .54   Employment Agreement, dated as of August 31, 2007, between the Company and Frits van Paasschen (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 4, 2007).(1)
  10 .55   Form of Non-Qualified Stock Option Agreement between the Company and Frits van Paasschen pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.5 to the 2007 Form 10-Q3).(1)
  10 .56   Form of Restricted Stock Unit Agreement between the Company and Frits van Paasschen pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.6 to the 2007 Form 10-Q3).(1)
  10 .57   Form of Restricted Stock Grant between the Company and Frits van Paasschen pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.7 to the 2007 Form 10-Q3).(1)
  10 .58   Form of Severance Agreement between the Corporation and each of Messrs. Ouimet, Siegel, Gellein, and Prabhu (incorporated by reference to Exhibit 10.3 to the 2006 Form 10-Q2.(1)
  12 .1   Calculation of Ratio of Earnings to Total Fixed Charges.(2)
  21 .1   Subsidiaries of the Registrants.(2)
  23 .1   Consent of Ernst & Young LLP.(2)
  31 .1   Certification Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 — Chief Executive Officer — Corporation.(2)
  31 .2   Certification Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 — Chief Financial Officer — Corporation.(2)
  32 .1   Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code — Chief Executive Officer — Corporation.(2)
  32 .2   Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code — Chief Financial Officer — Corporation.(2)
 
 
(1) Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(a)(iii) of Form 10-K.
 
(2) Filed herewith.

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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
  By: 
/s/  FRITS VAN PAASSCHEN
Frits van Paasschen
Chief Executive Officer and Director
 
Date: February 22, 2008
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
 
             
Signature
 
Title
 
Date
 
         
/s/  Frits van Paasschen

Frits van Paasschen
  Chief Executive Officer and Director   February 22, 2008
         
/s/  Bruce W. Duncan

Bruce W. Duncan
  Chairman and Director   February 22, 2008
         
/s/  Vasant M. Prabhu

Vasant M. Prabhu
  Executive Vice President and Chief Financial Officer (Principal Financial Officer)   February 22, 2008
         
/s/  Alan M. Schnaid

Alan M. Schnaid
  Senior Vice President, Corporate Controller and Principal Accounting Officer   February 22, 2008
         
    

Adam M. Aron
  Director   February   , 2008
         
/s/  Charlene Barshefsky

Charlene Barshefsky
  Director   February 22, 2008
         
    

Jean-Marc Chapus
  Director   February   , 2008
         
/s/  Lizanne Galbreath

Lizanne Galbreath
  Director   February 22, 2008
         
/s/  Eric Hippeau

Eric Hippeau
  Director   February 22, 2008


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Signature
 
Title
 
Date
 
         
    

Stephen R. Quazzo
  Director   February   , 2008
         
/s/  Thomas O. Ryder

Thomas O. Ryder
  Director   February 22, 2008
         
/s/  Kneeland C. Youngblood

Kneeland C. Youngblood
  Director   February 22, 2008


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Shareholders of Starwood Hotels & Resorts Worldwide, Inc.
 
We have audited the accompanying consolidated balance sheets of Starwood Hotels & Resorts Worldwide, Inc. (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
As discussed in Note 2 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109, on January 1, 2007, Statement of Financial Accounting Standards (“SFAS”) No. 152, Accounting for Real Estate Time-Sharing Transactions, and SFAS No. 123 (revised 2004), Share-based Payment, on January 1, 2006 and SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, on December 31, 2006.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2008 expressed an unqualified opinion thereon.
 
/s/ Ernst & Young LLP
 
New York, New York
February 22, 2008


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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
CONSOLIDATED BALANCE SHEETS
 
                 
    December 31,  
    2007     2006  
    (In millions, except share data)  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 162     $ 183  
Restricted cash
    196       329  
Accounts receivable, net of allowance for doubtful accounts of $50 and $49
    616       593  
Inventories
    714       566  
Prepaid expenses and other
    136       139  
                 
Total current assets
    1,824       1,810  
Investments
    423       436  
Plant, property and equipment, net
    3,850       3,831  
Assets held for sale
          2  
Goodwill and intangible assets, net
    2,302       2,302  
Deferred tax assets
    729       518  
Other assets
    494       381  
                 
    $ 9,622     $ 9,280  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
Short-term borrowings and current maturities of long-term debt
  $ 5     $ 805  
Accounts payable
    201       179  
Accrued expenses
    1,175       955  
Accrued salaries, wages and benefits
    405       383  
Accrued taxes and other
    315       139  
                 
Total current liabilities
    2,101       2,461  
Long-term debt
    3,590       1,827  
Deferred income taxes
    28       31  
Other liabilities
    1,801       1,928  
                 
      7,520       6,247  
                 
Minority interest
    26       25  
                 
Commitments and contingencies Stockholders’ equity:
               
Corporation common stock; $0.01 par value; authorized 1,000,000,000 shares; outstanding 190,998,585 and 213,484,439 shares at December 31, 2007 and 2006, respectively
    2       2  
Additional paid-in capital
    868       2,286  
Accumulated other comprehensive loss
    (147 )     (228 )
Retained earnings
    1,353       948  
                 
Total stockholders’ equity
    2,076       3,008  
                 
    $ 9,622     $ 9,280  
                 
 
The accompanying notes to financial statements are an integral part of the above statements.


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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
CONSOLIDATED STATEMENTS OF INCOME
 
                         
    Year Ended December 31,  
    2007     2006     2005  
    (In millions, except per Share data)  
 
Revenues
                       
Owned, leased and consolidated joint venture hotels
  $ 2,429     $ 2,692     $ 3,517  
Vacation ownership and residential sales and services (including note sale gains of $0 in 2007 and $17 in 2006)
    1,025       1,005       889  
Management fees, franchise fees and other income
    839       697       501  
Other revenues from managed and franchised properties
    1,860       1,585       1,070  
                         
      6,153       5,979       5,977  
Costs and Expenses
                       
Owned, leased and consolidated joint venture hotels
    1,805       2,023       2,634  
Vacation ownership and residential
    758       736       661  
Selling, general, administrative and other
    513       470       370  
Restructuring and other special charges, net
    53       20       13  
Depreciation
    280       280       387  
Amortization
    26       26       20  
Other expenses from managed and franchised properties
    1,860       1,585       1,070  
                         
      5,295       5,140       5,155  
Operating income
    858       839       822  
Gain on sale of VOI notes receivable
                25  
Equity earnings and gains and losses from unconsolidated ventures, net
    66       61       64  
Interest expense, net of interest income of $21, $29 and $19
    (147 )     (215 )     (239 )
Loss on asset dispositions and impairments, net
    (44 )     (3 )     (30 )
                         
Income from continuing operations before taxes and minority equity
    733       682       642  
Income tax benefit (expense)
    (189 )     434       (172 )
Tax expense on repatriation of foreign earnings under the American Jobs Creation Act of 2004
                (47 )
Minority equity in net income
    (1 )     (1 )      
                         
Income from continuing operations
    543       1,115       423  
Discontinued operations:
                       
Loss from operations, net of tax benefit of $0, $0 and $(1)
                (1 )
Loss on dispositions, net of tax expense of $1, $2 and $0
    (1 )     (2 )      
Cumulative effect of accounting change, net of tax
          (70 )      
                         
Net income
  $ 542     $ 1,043     $ 422  
                         
Earnings (Losses) Per Share — Basic
                       
Continuing operations
  $ 2.67     $ 5.25     $ 1.95  
Discontinued operations
          (0.01 )      
Cumulative effect of accounting change
          (0.33 )      
                         
Net income
  $ 2.67     $ 4.91     $ 1.95  
                         
Earnings (Losses) Per Share — Diluted
                       
Continuing operations
  $ 2.57     $ 5.01     $ 1.88  
Discontinued operations
          (0.01 )      
Cumulative effect of accounting change
          (0.31 )      
                         
Net income
  $ 2.57     $ 4.69     $ 1.88  
                         
Weighted average number of Shares
    203       213       217  
                         
Weighted average number of Shares assuming dilution
    211       223       225  
                         
Distributions and dividends declared per Share
  $ 0.90     $ 0.84     $ 0.84  
                         
 
The accompanying notes to financial statements are an integral part of the above statements.


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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
                         
    Year Ended December 31,  
    2007     2006     2005  
    (In millions)  
 
Net income
  $ 542     $ 1,043     $ 422  
                         
Other comprehensive income (loss), net of taxes:
                       
Foreign currency translation adjustments
    84       72       (60 )
Recognition of accumulated foreign currency translation adjustments on sold hotels
          29        
Pension liability adjustments(a)
    3       2       (6 )
Unrealized holding losses
    (6 )     (1 )     (1 )
                         
      81       102       (67 )
                         
Comprehensive income
  $ 623     $ 1,145     $ 355  
                         
 
 
(a) Includes actuarial gain of $1 million and amortization included in net periodic pension cost of $2 million for the year ended December 31, 2007.
 
The accompanying notes to financial statements are an integral part of the above statements.


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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
CONSOLIDATED STATEMENTS OF EQUITY
 
                                                                                   
                                                      Accumulated
    Retained
 
    Exchangeable Units and
                              Additional
          Other
    Earnings
 
    Class B EPS       Class A EPS     Shares     Paid-in
    Deferred
    Comprehensive
    (Accumulated
 
    Shares     Amount       Shares     Amount     Shares     Amount     Capital(b)     Compensation     Loss(a)     Deficit)  
    (In millions)  
Balance at December 31, 2004
        $         1     $       209     $ 4     $ 5,121     $ (14 )   $ (255 )   $ (68 )
Net income
                                                            422  
Stock option and restricted stock award transactions, net
                              12             542       (39 )            
ESPP stock issuances
                                          12                    
Share repurchases
                                (4 )           (253 )                  
Conversion or redemption and cancellation of Class A EPS, Class B EPS and Partnership Units
                                          (10 )                  
Foreign currency translation
                                                      (60 )      
Minimum pension liability adjustment
                                                      (6 )      
Unrealized loss on securities, net
                                                      (1 )      
Distributions declared
                                                            (184 )
                                                                                   
Balance at December 31, 2005
                  1             217       4       5,412       (53 )     (322 )     170  
Net income
                                                            1,043  
Implementation of SFAS No. 123(R)
                                          (53 )     53              
Disposition of the Trust(c)
                                          (2,368 )                 (83 )
Stock option and restricted stock award transactions, net
                              15             588                    
ESPP stock issuances
                                          7                    
Share repurchases
                              (22 )           (1,263 )                  
Redemption of convertible debt
                                  3                                
Conversion or redemption and cancellation of Class A EPS, Class B EPS and Partnership Units
                  (1 )                 (2 )     (37 )                  
Foreign currency translation
                                                      72        
Recognition of accumulated foreign currency translation adjustments on sold hotels
                                                      29          
Minimum pension liability adjustment
                                                      2        
Implementation of SFAS No. 158, net
                                                      (8 )        
Unrealized loss on securities, net
                                                      (1 )      
Distributions declared
                                                            (182 )
                                                                                   
Balance at December 31, 2006
                              213       2       2,286             (228 )     948  
Net income
                                                            542  
Stock option and restricted stock award transactions, net
                              7             358                    
ESPP stock issuances
                                          7                    
Share repurchases
                              (29 )           (1,787 )                  
Tax adjustments related to the disposition of the Trust
                                          4                    
FIN 48 implementation
                                                            35  
Foreign currency translation
                                                      84        
Unrealized loss on securities, net
                                                      (6 )      
Pension adjustments
                                                      3        
Distributions declared
                                                            (172 )
                                                                                   
Balance at December 31, 2007
        $             $       191     $ 2     $ 868     $     $ (147 )   $ 1,353  
                                                                                   
 
 
(a) As of December 31, 2007, this balance is comprised of $114 million of cumulative translation adjustments and $33 million of cumulative pension adjustments.
 
(b) Stock option and restricted stock award transactions are net of a tax benefit of $65 million, $143 million and $66 million in 2007, 2006 and 2005, respectively.
 
(c) As part of the Host Transaction, the Company sold the Class A Shares of the Trust and shareholders sold the Class B Shares of the Trust. The book value of the Trust associated with this sale was removed through retained earnings up to the amount of retained earnings that existed at the sale date with the remaining balance reducing additional paid-in capital. See Note 1 for additional information on the Host Transaction.
 
The accompanying notes to financial statements are an integral part of the above statements.


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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                         
    Year Ended December 31,  
    2007     2006     2005  
    (In millions)  
 
Operating Activities
                       
Net income
  $ 542     $ 1,043     $ 422  
Adjustments to net income:
                       
Discontinued operations:
                       
Loss on dispositions, net
          2        
Other adjustments relating to discontinued operations
    1             11  
Cumulative effect of accounting change
          70        
Stock-based compensation expense
    99       103       31  
Excess stock-based compensation tax benefit
    (46 )     (87 )      
Depreciation and amortization
    306       306       407  
Amortization of deferred loan costs
    4       5       12  
Non-cash portion of restructuring and other special charges (credits), net
    48       (7 )     (3 )
Non-cash foreign currency losses (gains), net
    11       (8 )     2  
Amortization of deferred gains
    (81 )     (62 )     (12 )
Provision for doubtful accounts
    43       25       6  
Minority equity in net income
    1              
Equity earnings, net of distributions
    10       (30 )     (7 )
Gain on sale of VOI notes receivable
          (17 )     (25 )
Loss on asset dispositions and impairments, net
    44       3       30  
Non-cash portion of income tax (benefit) expense
    (142 )     (620 )     (110 )
Changes in working capital:
                       
Restricted cash
    134       (35 )     50  
Accounts receivable
    (23 )     49       (152 )
Inventories
    (143 )     (82 )     105  
Prepaid expenses and other
    (2 )     (11 )     (8 )
Accounts payable and accrued expenses
    177       12       157  
Accrued income taxes
    210       (64 )     (135 )
VOI notes receivable activity, net
    (242 )     (138 )     (40 )
Other, net
    (56 )     43       23  
                         
Cash from operating activities
    895       500       764  
                         
Investing Activities
                       
Purchases of plant, property and equipment
    (384 )     (371 )     (464 )
Proceeds from asset sales, net
    133       1,515       510  
Collection of notes receivable, net
    45       95       11  
Acquisitions, net of acquired cash
    (74 )     (25 )     (242 )
Proceeds from investments
    63       191       47  
Proceeds from senior debt
                221  
Other, net
    2       (3 )     2  
                         
Cash from (used for) investing activities
    (215 )     1,402       85  
                         
Financing Activities
                       
Revolving credit facility and short-term borrowings, net
    341       73       333  
Long-term debt issued
    1,400       2       9  
Long-term debt repaid
    (799 )     (1,534 )     (583 )
Distributions paid
    (90 )     (276 )     (176 )
Proceeds from employee stock option exercises
    190       380       405  
Excess stock-based compensation tax benefit
    46       87        
Share repurchases
    (1,787 )     (1,287 )     (228 )
Other, net
    (13 )     (80 )     (13 )
                         
Cash used for financing activities
    (712 )     (2,635 )     (253 )
                         
Exchange rate effect on cash and cash equivalents
    11       19       (25 )
                         
Increase (decrease) in cash and cash equivalents
    (21 )     (714 )     571  
Cash and cash equivalents — beginning of period
    183       897       326  
                         
Cash and cash equivalents — end of period
  $ 162     $ 183     $ 897  
                         
Supplemental Disclosures of Cash Flow Information
                       
Cash paid during the period for:
                       
Interest
  $ 164     $ 247     $ 274  
                         
Income taxes, net of refunds
  $ 128     $ 249     $ 447  
                         
 
The accompanying notes to financial statements are an integral part of the above statements.


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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
NOTES TO FINANCIAL STATEMENTS
 
Note 1.   Basis of Presentation
 
The accompanying consolidated financial statements represent the consolidated financial position and consolidated results of operations of Starwood Hotels & Resorts Worldwide, Inc. and its subsidiaries (the “Corporation”). Unless the context otherwise requires, all references to the Corporation include those entities owned or controlled by the Corporation, which prior to April 10, 2006 included Starwood Hotels & Resorts (the “Trust”). All references to “Starwood” or the “Company” refer to the Corporation, the Trust and its respective subsidiaries, collectively through April 7, 2006. As a result of the Host Transaction (as defined below) in April 2006, the financial statements for the Trust are no longer required to be consolidated or presented separately, nor are we required to include a guarantor footnote containing certain financial information for Sheraton Holding Corporation (“Sheraton Holding”), a former subsidiary of the Corporation.
 
Starwood is one of the world’s largest hotel and leisure companies. The Company’s principal business is hotels and leisure, which is comprised of a worldwide hospitality network of almost 900 full-service hotels, vacation ownership resorts and residential developments primarily serving two markets: luxury and upscale. The principal operations of Starwood Vacation Ownership, Inc. (“SVO”) include the acquisition, development and operation of vacation ownership resorts; marketing and selling vacation ownership interests (“VOIs”) in the resorts; and providing financing to customers who purchase such interests.
 
The Trust was formed in 1969 and elected to be taxed as a real estate investment trust under the Internal Revenue Code. In 1980, the Trust formed the Corporation and made a distribution to the Trust’s shareholders of one share of common stock, par value $0.01 per share, of the Corporation (a “Corporation Share”) for each common share of beneficial interest, par value $0.01 per share, of the Trust (a “Trust Share”).
 
Pursuant to a reorganization in 1999, the Trust became a subsidiary of the Corporation, which indirectly held all outstanding shares of the new Class A shares of beneficial interest of the Trust (“Class A Shares”). In the 1999 reorganization, each Trust Share was converted into one share of the new non-voting Class B Shares of beneficial interest in the Trust (a “Class B Share”). Prior to the Host Transaction discussed below and in detail in Note 5, the Corporation Shares and the Class B Shares traded together on a one-for-one basis, consisting of one Corporation Share and one Class B Share (the “Shares”).
 
On April 7, 2006, in connection with the transaction (the “Host Transaction”) with Host Hotels & Resorts, Inc., its subsidiary Host Marriot, L.P. and certain other subsidiaries of Host Hotels & Resorts, Inc. (collectively, “Host”) described below, the Shares were depaired and the Corporation Shares became transferable separately from the Class B Shares. As a result of the depairing, the Corporation Shares trade alone under the symbol “HOT” on the New York Stock Exchange (“NYSE”). As of April 10, 2006, neither Shares nor Class B Shares are listed or traded on the NYSE.
 
On April 10, 2006, in connection with the Host Transaction, certain subsidiaries of Host acquired the Trust and Sheraton Holding from the Corporation. As part of the Host Transaction, among other things, (i) a subsidiary of Host was merged with and into the Trust, with the Trust surviving as a subsidiary of Host, (ii) all the capital stock of Sheraton Holding was sold to Host and (iii) a subsidiary of Host was merged with and into SLT Realty Limited Partnership (the “Realty Partnership”) with the Realty Partnership surviving as a subsidiary of Host.
 
Note 2.   Significant Accounting Policies
 
Principles of Consolidation.  The accompanying consolidated financial statements of the Company and its subsidiaries include the assets, liabilities, revenues and expenses of majority-owned subsidiaries over which the Company exercises control. Intercompany transactions and balances have been eliminated in consolidation.
 
Cash and Cash Equivalents.  The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.


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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
Restricted Cash.  Restricted cash primarily consists of deposits received on sales of VOIs and residential properties that are held in escrow until a certificate of occupancy is obtained, the legal rescission period has expired and the deed of trust has been recorded in governmental property ownership records. At December 31, 2007 and 2006, the Company had short-term restricted cash balances of $196 million and $329 million.
 
Inventories.  Inventories are comprised principally of VOIs of $620 million and $472 million as of December 31, 2007 and 2006, respectively, residential inventory of $33 million and $38 million at December 31, 2007 and 2006, respectively, hotel inventory and Bliss inventory. VOI and residential inventory is carried at the lower of cost or net realizable value and includes $37 million, $22 million and $15 million of capitalized interest incurred in 2007, 2006 and 2005, respectively. Hotel inventory includes operating supplies and food and beverage inventory items which are generally valued at the lower of FIFO cost (first-in, first-out) or market. Hotel inventory also includes linens, china, glass, silver, uniforms, utensils and guest room items. Significant purchases of these items are recorded at purchased cost and amortized to 50% of their cost over 36 months. Normal replacement purchases are expensed as incurred. Bliss inventory is valued at lower of cost or market.
 
Loan Loss Reserves.  For the hotel segment, the Company measures loan impairment based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or the estimated fair value of the collateral. For impaired loans, the Company establishes a specific impairment reserve for the difference between the recorded investment in the loan and the present value of the expected future cash flows or the estimated fair value of the collateral. The Company applies the loan impairment policy individually to all loans in the portfolio and does not aggregate loans for the purpose of applying such policy. For loans that the Company has determined to be impaired, the Company recognizes interest income on a cash basis.
 
For the vacation ownership and residential segment, the Company provides for estimated mortgages receivable cancellations and defaults at the time the VOI sales are recorded with a charge to vacation ownership and residential sales and services. The Company performs an analysis of factors such as economic condition and industry trends, defaults, past due aging and historical write-offs of mortgages and contracts receivable to evaluate the adequacy of the allowance.
 
Assets Held for Sale.  The Company considers properties to be assets held for sale when management approves and commits to a formal plan to actively market a property or group of properties for sale and a signed sales contract and significant non-refundable deposit or contract break-up fee exist. Upon designation as an asset held for sale, the Company records the carrying value of each property or group of properties at the lower of its carrying value which includes allocable segment goodwill or its estimated fair value, less estimated costs to sell, and the Company stops recording depreciation expense. Any gain realized in connection with the sale of a property for which the Company has significant continuing involvement (such as through a long-term management agreement) is deferred and recognized over the initial term of the related agreement (See Note 11). The operations of the properties held for sale prior to the sale date, if material, are recorded in discontinued operations unless the Company will have continuing involvement (such as through a management or franchise agreement) after the sale.
 
Investments.  Investments in joint ventures are accounted for using the guidance of the revised Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities,” for all ventures deemed to be variable interest entities (“VIEs”). See additional information regarding the Company’s VIEs in Note 22. All other joint venture investments are accounted for under the equity method of accounting when the Company has a 20% to 50% ownership interest or exercises significant influence over the venture. If the Company’s interest exceeds 50% or in certain cases, if the Company exercises control over the venture, the results of the joint venture are consolidated herein. All other investments are generally accounted for under the cost method.
 
The fair market value of investments is based on the market prices for the last day of the period if the investment trades on quoted exchanges. For non-traded investments, fair value is estimated based on the underlying value of the investment, which is dependent on the performance of the investment as well as the volatility inherent in external markets for these types of investments. In assessing potential impairment for these investments, the


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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
Company will consider these factors as well as forecasted financial performance of its investment. If these forecasts are not met, the Company may have to record impairment charges.
 
Plant, Property and Equipment.  Plant, property and equipment, including capitalized interest of $10 million, $5 million and $10 million incurred in 2007, 2006 and 2005, respectively, applicable to major project expenditures are recorded at cost. The cost of improvements that extend the life of plant, property and equipment are capitalized. These capitalized costs may include structural improvements, equipment and fixtures. Costs for normal repairs and maintenance are expensed as incurred. Depreciation is provided on a straight-line basis over the estimated useful economic lives of 15 to 40 years for buildings and improvements; 3 to 10 years for furniture, fixtures and equipment; 3 to 7 years for information technology software and equipment and the lesser of the lease term or the economic useful life for leasehold improvements. Gains or losses on the sale or retirement of assets are included in income when the assets are sold provided there is reasonable assurance of the collectibility of the sales price and any future activities to be performed by the Company relating to the assets sold are insignificant.
 
The Company evaluates the carrying value of its assets for impairment. For assets in use when the trigger events specified in Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” occur, the expected undiscounted future cash flows of the assets are compared to the net book value of the assets. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value is charged to current earnings. Fair value is based upon discounted cash flows of the assets at rates deemed reasonable for the type of asset and prevailing market conditions, appraisals and, if appropriate, current estimated net sales proceeds from pending offers.
 
Goodwill and Intangible Assets.  Goodwill and intangible assets arise in connection with acquisitions, including the acquisition of management contracts. In accordance with the guidance in SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company does not amortize goodwill and intangible assets with indefinite lives. Intangible assets with finite lives are amortized on a straight-line basis over their respective useful lives. The Company reviews all goodwill and intangible assets for impairment by comparisons of fair value to book value annually, or upon the occurrence of a trigger event. Impairment charges, if any, are recognized in operating results.
 
Frequent Guest Program.  Starwood Preferred Guest® (“SPG”) is the Company’s frequent guest incentive marketing program. SPG members earn points based on spending at the Company’s properties, as incentives to first-time buyers of VOIs and residences, and through participation in affiliated partners’ programs such as co-branded credit cards. Points can be redeemed at substantially all of the Company’s owned, leased, managed and franchised properties as well as through other redemption opportunities with third parties, such as conversion to airline miles. Properties are charged based on hotel guests’ expenditures. Revenue is recognized by participating hotels and resorts when points are redeemed for hotel stays.
 
The Company, through the services of third-party actuarial analysts, determines the fair value of the future redemption obligation based on statistical formulas which project the timing of future point redemption based on historical experience, including an estimate of the “breakage” for points that will never be redeemed, and an estimate of the points that will eventually be redeemed as well as the cost of reimbursing hotels and other third parties in respect of other redemption opportunities for point redemptions. The Company’s management and franchise agreements require that the Company be reimbursed currently for the costs of operating the program, including marketing, promotion, communications with, and performing member services for the SPG members. Actual expenditures for SPG may differ from the actuarially determined liability.
 
The liability for the SPG program is included in other long-term liabilities and accrued expenses in the accompanying consolidated balance sheets. The total actuarially determined liability as of December 31, 2007 and 2006 is $536 million and $409 million, respectively, of which $182 million and $132 million, respectively, is included in accrued expenses.


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Table of Contents

 
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
Legal Contingencies.  The Company is subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. SFAS No. 5, “Accounting for Contingencies,” requires that an estimated loss from a loss contingency be accrued with a corresponding charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. The Company evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact the Company’s financial position or its results of operations.
 
Derivative Financial Instruments.  The Company enters into interest rate swap agreements to manage interest rate exposure. The net settlements paid or received under these agreements are accrued consistent with the terms of the agreements and are recognized in interest expense over the term of the related debt. The fair value of the swaps is included in other liabilities or assets.
 
The Company enters into foreign currency hedging contracts to manage exposure to foreign currency fluctuations. All foreign currency hedging instruments have an inverse correlation to the hedged assets or liabilities. Changes in the fair value of the derivative instruments are classified in the same manner as the classification of the changes in the underlying assets or liabilities due to fluctuations in foreign currency exchange rates.
 
The Company does not enter into derivative financial instruments for trading or speculative purposes and monitors the financial stability and credit standing of its counterparties.
 
Foreign Currency Translation.  Balance sheet accounts are translated at the exchange rates in effect at each period end and income and expense accounts are translated at the average rates of exchange prevailing during the year. The national currencies of foreign operations are generally the functional currencies. Gains and losses from foreign exchange and the effect of exchange rate changes on intercompany transactions of a long-term investment nature are generally included in other comprehensive income. Gains and losses from foreign exchange rate changes related to intercompany receivables and payables that are not of a long-term investment nature are reported currently in costs and expenses and amounted to a net loss of $11 million in 2007 and net gains of $8 million and $2 million in 2006 and 2005, respectively. Gains and losses from foreign currency transactions are reported currently in costs and expenses and amounted to a net loss of $4 million in 2005. Gains and losses from foreign currency transactions were insignificant in 2007 and 2006.
 
Income Taxes.  The Company provides for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns.
 
Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the new rate is enacted.
 
Revenue Recognition.  The Company’s revenues are primarily derived from the following sources: (1) hotel and resort revenues at the Company’s owned, leased and consolidated joint venture properties; (2) vacation ownership and residential revenues; (3) management and franchise revenues; (4) revenues from managed and franchised properties; and (5) other revenues which are ancillary to the Company’s operations. Generally, revenues are recognized when the services have been rendered. Taxes collected from customers and submitted to taxing authorities are not recorded in revenue. The following is a description of the composition of revenues for the Company:
 
  •  Owned, Leased and Consolidated Joint Ventures — Represents revenue primarily derived from hotel operations, including the rental of rooms and food and beverage sales, from owned, leased or consolidated


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Table of Contents

 
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
  joint venture hotels and resorts. Revenue is recognized when rooms are occupied and services have been rendered.
 
  •  Vacation Ownership and Residential — The Company recognizes revenue from VOI and residential sales in accordance with SFAS No. 152, “Accounting for Real Estate Time Sharing Transactions,” and SFAS No. 66, “Accounting for Sales of Real Estate,” as amended. The Company recognizes sales when the buyer has demonstrated a sufficient level of initial and continuing involvement, the period of cancellation with refund has expired and receivables are deemed collectible. For sales that do not qualify for full revenue recognition as the project has progressed beyond the preliminary stages but has not yet reached completion, all revenue and profit are initially deferred and recognized in earnings through the percentage-of-completion method. Interest income associated with timeshare notes receivable is also included in vacation ownership and residential sales and services revenue and totaled $40 million, $30 million and $24 million in 2007, 2006 and 2005, respectively. The Company has also entered into licensing agreements with third-party developers to offer consumers branded condominiums or residences. The fees from these arrangements are generally based on the gross sales revenue of the units sold.
 
  •  Management and Franchise Revenues — Represents fees earned on hotels managed worldwide, usually under long-term contracts, franchise fees received in connection with the franchise of the Company’s Sheraton, Westin, Four Points by Sheraton, Le Méridien, St. Regis, W and Luxury Collection brand names, termination fees and the amortization of deferred gains related to sold properties for which we have significant continuing involvement, offset by payments by the Company under performance and other guarantees. Management fees are comprised of a base fee, which is generally based on a percentage of gross revenues, and an incentive fee, which is generally based on the property’s profitability. Base fee revenues are recognized when earned in accordance with the terms of the contract. For any time during the year, when the provisions of the management contracts allow receipt of incentive fees upon termination, incentive fees are recognized for the fees due and earned as if the contract was terminated at that date, exclusive of any termination fees due or payable. Franchise fees are generally based on a percentage of hotel room revenues and are recognized in accordance with SFAS No. 45, “Accounting for Franchise Fee Revenue,” as the fees are earned and become due from the franchisee.
 
  •  Revenues from Managed and Franchised Properties — These revenues represent reimbursements of costs incurred on behalf of managed hotel properties and franchisees. These costs relate primarily to payroll costs at managed properties where the Company is the employer. Since the reimbursements are made based upon the costs incurred with no added margin, these revenues and corresponding expenses have no effect on the Company’s operating income or net income.
 
Insurance Retention.  Through its captive insurance company, the Company provides insurance coverage for workers’ compensation, property and general liability claims arising at hotel properties owned or managed by the Company through policies written directly and through reinsurance arrangements. Estimated insurance claims payable represent expected settlement of outstanding claims and a provision for claims that have been incurred but not reported. These estimates are based on our assessment of potential liability using an analysis of available information including pending claims, historical experience and current cost trends. The amount of the ultimate liability may vary from these estimates. Estimated costs of these self-insurance programs are accrued, based on the analysis of third-party actuaries.
 
Costs Incurred to Sell VOIs.  The Company capitalizes direct costs attributable to the sale of VOIs until the sales are recognized. Selling and marketing costs capitalized under this methodology were approximately $6 million and $21 million as of December 31, 2007 and 2006, respectively, and all such capitalized costs are included in prepaid expenses and other assets in the accompanying consolidated balance sheets. Costs eligible for capitalization follow the guidelines of SFAS No. 152. If a contract is cancelled, the Company charges the unrecoverable direct selling and marketing costs to expense and records forfeited deposits as income.


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Table of Contents

 
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
VOI and Residential Inventory Costs.  Real estate and development costs are valued at the lower of cost or net realizable value. Development costs include both hard and soft construction costs and together with real estate costs are allocated to VOIs and residential units on the relative sales value method. Interest, property taxes and certain other carrying costs incurred during the construction process are capitalized as incurred. Such costs associated with completed VOI and residential units are expensed as incurred.
 
Advertising Costs.  The Company enters into multi-media ad campaigns, including television, radio, internet and print advertisements. Costs associated with these campaigns, including communication and production costs, are aggregated and expensed the first time that the advertising takes place in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) No. 93-7, “Reporting on Advertising Costs.” If it becomes apparent that the media campaign will not take place, all costs are expensed at that time. During the years ended December 31, 2007, 2006 and 2005, the Company incurred approximately $116 million, $135 million and $117 million of advertising expense, respectively, a significant portion of which was reimbursed by managed and franchised hotels.
 
Retained Interests.  The Company periodically sells notes receivable originated by our vacation ownership business in connection with the sale of VOIs. The Company retains interests in the assets transferred to qualified and non-qualified special purpose entities which are accounted for as over-collateralizations and interest only strips. These retained interests are treated as “available-for-sale” transactions under the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The Company reports changes in the fair values of these Retained Interests through the accompanying consolidated statement of comprehensive income. The Company had Retained Interests of $40 million and $51 million at December 31, 2007 and 2006, respectively.
 
Use of Estimates.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Reclassifications.  Certain reclassifications have been made to the prior years’ financial statements to conform to the current year presentation.
 
Impact of Recently Issued Accounting Standards.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115.” This standard permits entities to choose to measure financial instruments and certain other items at fair value and is effective for the first fiscal year beginning after November 15, 2007. SFAS No. 159 must be applied prospectively, and the effect of the first re-measurement to fair value, if any, should be reported as a cumulative — effect adjustment to the opening balance of retained earnings. The adoption of SFAS No. 159 is not expected to have a material impact on the Company’s consolidated financial statements.
 
In June 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force of the FASB (“EITF”) in Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” Under this consensus, a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees under certain equity-based benefit plans should be recognized as an increase in additional paid-in capital. The consensus is effective in fiscal years beginning after December 15, 2007 and should be applied prospectively for income tax benefits derived from dividends declared after adoption. The adoption of EITF 06-11 is not expected to have a material impact on the Company’s consolidated financial statements.
 
In December 2007, the FASB issued SFAS No. 141 (revised 2007) (SFAS 141(R)), “Business Combinations,” which is a revision of SFAS 141, “Business Combinations.” The primary requirements of SFAS 141(R) are as follows: (I.) Upon initially obtaining control, the acquiring entity in a business combination must recognize 100% of


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Table of Contents

 
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
the fair values of the acquired assets, including goodwill, and assumed liabilities, with only limited exceptions even if the acquirer has not acquired 100% of its target. As a consequence, the current step acquisition model will be eliminated. (II.) Contingent consideration arrangements will be fair valued at the acquisition date and included on that basis in the purchase price consideration. The concept of recognizing contingent consideration at a later date when the amount of that consideration is determinable beyond a reasonable doubt, will no longer be applicable. (III.) All transaction costs will be expensed as incurred. SFAS 141 (R) is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008. Adoption is prospective and early adoption is not permitted. The Company is currently evaluating the impact that the adoption of SFAS 141 (R) will have on its consolidated financial statements.
 
In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51, or SFAS No. 160.” SFAS No. 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company does not believe that SFAS 160 will have a material impact on the consolidated financial statements.
 
In December 2007, the EITF reached a consensus on EITF issue No. 07-6 “Accounting for the Sale of Real Estate Subject to the Requirements of FASB Statement No. 66 When the Agreement Includes a Buy-Sell Clause”(“EITF 07-6”). EITF 07-6 establishes that a buy-sell clause, in and of itself does not constitute a prohibited form of continuing involvement that would preclude partial sales treatment under FASB Statement No. 66. EITF 07-6 will be effective for new arrangements entered into in fiscal years beginning after December 15, 2007 and interim periods within those fiscal years. The Company does not believe the adoption of EITF 07-6 will have a material impact on the consolidated financial statements.
 
In November 2006, the EITF reached a consensus on EITF Issue No. 06-8, “Applicability of the Assessment of a Buyer’s Continuing Investment under FASB Statement No. 66, Accounting for Sales of Real Estate, for Sales of Condominiums” (“EITF 06-8”). EITF 06-8 will require condominium sales to meet the continuing involvement criterion of SFAS No. 66 in order for profit to be recognized under the percentage of completion method. EITF 06-8 will be effective for annual reporting periods beginning after March 15, 2007. The cumulative effect of applying EITF 06-8, if any, is to be reported as an adjustment to the opening balance of retained earnings in the year of adoption. The adoption of EITF 06-8 will not have a significant impact on the Company’s financial statements or require a cumulative effect adjustment.
 
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R),” which requires plan sponsors of defined benefit pension and other postretirement benefit plans (collectively, “Benefit Plans”) to recognize the funded status of their Benefit Plans in the consolidated balance sheet, measure the fair value of plan assets and benefit obligations as of the date of the fiscal year-end statement of financial position, and provide additional disclosures. On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158. The effect of adopting SFAS No. 158 on the Company’s financial condition at December 31, 2006 has been included in the accompanying consolidated financial statements. SFAS No. 158 has been applied prospectively and does not impact the Company’s prior year financial statements. SFAS No. 158’s provisions regarding the change in the measurement date of Benefit Plans are not applicable as the Company currently uses a measurement date of December 31 for its benefit plans.
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which provides enhanced guidance for using fair value to measure assets and liabilities. SFAS No. 157 establishes a common definition of fair value, provides a framework for measuring fair value under U.S. generally accepted accounting principles and expands disclosure requirements about fair value measurements. SFAS No. 157 is effective for financial statements issued in fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not believe that the adoption of SFAS No. 157 will have a material impact on the consolidated financial statements.


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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). This interpretation, among other things, creates a two step approach for evaluating uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions, and it has expanded disclosure requirements. The Company adopted FIN 48 on January 1, 2007, and recorded an increase of approximately $35 million as a cumulative-effect adjustment to the beginning balance of retained earnings. See Note 13 for additional information.
 
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140,” which amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 156 changes SFAS No. 140 by requiring that Mortgage Servicing Rights (“MSRs”) be initially recognized at their fair value and by providing the option to either: (1) carry MSRs at fair value with changes in fair value recognized in earnings; or (2) continue recognizing periodic amortization expense and assess the MSRs for impairment as originally required by SFAS No. 140. This option may be applied by class of servicing asset or liability. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, with early adoption permitted. As the Company’s servicing agreements have been negotiated at arms-length based on market conditions, the Company has not recognized any servicing assets or liabilities. As such, SFAS No. 156 has no impact on the Company.
 
In December 2004, the FASB issued SFAS No. 123(R), “Share Based Payment,” a revision of FASB Statement No. 123, “Accounting for Stock Based Compensation.” It requires all share-based payments, including grants of employee stock options, to be recognized in the income statement based on their fair value. Proforma disclosure is no longer an alternative. In accordance with the transition rules, the Company adopted SFAS No. 123(R) effective January 1, 2006 under the modified prospective method. The Company recorded $23 million and $47 million of stock option expense for the years ended December 31, 2007 and 2006, respectively, net of the estimated impact of reimbursements from third parties.
 
In December 2004, the FASB issued SFAS No. 152, which amends SFAS No. 66, and SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects,” in association with the issuance of AICPA SOP 04-2, “Accounting for Real Estate Time-Sharing Transactions.” These statements were issued to address the diversity in practice caused by a lack of guidance specific to real estate time-sharing transactions. Among other things, the standard addresses the treatment of sales incentives provided by a seller to a buyer to consummate a transaction, the calculation of accounting for uncollectible notes receivable, the recognition of changes in inventory cost estimates, recovery or repossession of VOIs, selling and marketing costs, associations and upgrade and reload transactions. The standard also requires a change in the classification of the provision for loan losses for VOI notes receivable from an expense to a reduction in revenue.
 
In accordance with SFAS No. 66, as amended by SFAS No. 152, the Company recognizes sales when the period of cancellation with refund has expired, receivables are deemed collectible and the buyer has demonstrated a sufficient level of initial and continuing involvement. For sales that do not qualify for full revenue recognition as the project has progressed beyond the preliminary stages but has not yet reached completion, all revenue and associated direct expenses are initially deferred and recognized in earnings through the percentage-of-completion method.
 
The Company adopted SFAS No. 152 on January 1, 2006 and recorded a charge of $70 million, net of a $46 million tax benefit, as a cumulative effect of accounting change in its 2006 consolidated statement of income.


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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
Note 3.   Earnings per Share
 
The following is a reconciliation of basic earnings per Share to diluted earnings per Share for income from continuing operations (in millions, except per Share data):
 
                                                                         
    Year Ended December 31,  
    2007     2006     2005  
                Per
                Per
                Per
 
    Earnings     Shares     Share     Earnings     Shares     Share     Earnings     Shares     Share  
 
Basic earnings from continuing operations
  $ 543       203     $ 2.67     $ 1,115       213     $ 5.25     $ 423       217     $ 1.95  
Effect of dilutive securities:
                                                                       
Employee options and restricted stock awards
          8                     9                     8          
Convertible debt
                              1                              
                                                                         
Diluted earnings from continuing operations
  $ 543       211     $ 2.57     $ 1,115       223     $ 5.01     $ 423       225     $ 1.88  
                                                                         
 
Approximately 1 million Shares, 2 million Shares and 4 million Shares were excluded from the computation of diluted Shares in 2007, 2006 and 2005, respectively, as their impact would have been anti-dilutive.
 
On March 15, 2006, the Company completed the redemption of the remaining 25,000 shares of Class B Exchangeable Preferred Shares of the Trust (“Class B EPS”) for approximately $1 million. In April 2006 the Company completed the redemption of the remaining 562,000 shares of Class A Exchangeable Preferred Shares of the Trust (“Class A EPS”) for approximately $33 million. For the period prior to the redemption dates, 157,000 shares of Class A and Class B EPS are included in the computation of basic Shares for the year ended December 31, 2006. Approximately 1 million shares of Class A EPS and Class B EPS are included in the computation of the basic Share numbers for the year ended December 31, 2005.
 
Prior to June 5, 2006, the Company had contingently convertible debt, the terms of which allowed for the Company to redeem such instruments in cash or Shares. The Company, in accordance with SFAS No. 128, “Earnings per Share,” utilized the if-converted method to calculate dilution once certain trigger events were met. One of the trigger events for the Company’s contingently convertible debt was met during the first quarter of 2006 when the closing sale price per Share was $60 or more for a specified length of time. On May 5, 2006, the Company gave notice of its intention to redeem the convertible debt on June 5, 2006. Under the terms of the convertible indenture, prior to this redemption date, the note holders had the right to convert their notes into Shares at the stated conversion rate. Under the terms of the indenture, the Company settled conversions by paying the principal portion of the notes in cash and the excess amount of the conversion spread in Corporation Shares. For the period prior to the conversion dates, approximately 1 million Shares were included in the computation of diluted Shares for the year ended December 31, 2006.
 
At December 31, 2005, approximately 400,000 Shares issuable under the above described convertible debt were included in the calculation of diluted Shares as the trigger events for conversion had occurred.
 
In connection with the Host Transaction, Starwood’s shareholders received 0.6122 Host shares and $0.503 in cash for each of their Class B Shares. Holders of Starwood employee stock options did not receive this consideration while the market price of our publicly traded shares was reduced to reflect the payment of this consideration directly to the holders of the Class B Shares. In order to preserve the value of the Company’s options immediately before and after the Host Transaction, in accordance with the stock option agreements, the Company adjusted its stock options to reduce the strike price and increase the number of stock options using the intrinsic value method based on the Company’s stock price immediately before and after the transaction. As a result of this adjustment, the diluted stock options increased by approximately 1 million Corporation Shares effective as of the closing of the Host Transaction. In accordance with SFAS No. 123(R), this adjustment did not result in any incremental fair value, and as such, no additional compensation cost was recognized. Furthermore, in order to preserve the value of the contingently convertible debt discussed above, the Company modified the conversion rate of the contingently convertible debt in accordance with the indenture.


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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
Note 4.   Significant Acquisitions
 
Acquisition of the Sheraton Steamboat Resort and Conference Center
 
During the second quarter of 2007, the Company purchased the Sheraton Steamboat Resort & Conference Center for approximately $58 million in cash from a joint venture in which the Company held a 10% interest. The sale resulted in the recognition of a gain by the joint venture, and the Company’s portion of the gain was approximately $7 million, which was recorded as a reduction in the basis of the assets purchased by the Company.
 
Acquisition of interest in a Joint Venture that Purchased the Sheraton Grande Tokyo Bay Hotel
 
During the first quarter of 2007, the Company entered into a joint venture that acquired the Sheraton Grande Tokyo Bay Hotel. This hotel has been managed by the Company since its opening and will continue to be operated by the Company under a long-term management agreement with the joint venture. The Company invested approximately $19 million in this venture in exchange for a 25.1% ownership interest.
 
Acquisition of Certain Assets from Club Regina Resorts
 
In December 2006, the Company completed a transaction to, among other things, purchase certain assets from Club Regina Resorts (“CRR”) in Mexico. These assets included land and fixed assets adjacent to The Westin Resort & Spa in Los Cabos, Mexico, and terminated CRR’s rights to solicit guests at three Westin properties in Mexico. In addition to the purchase of these assets, the transaction included the settlement of all pending and threatened legal claims between the parties and the exchange of a new issue of CRR notes with a lower principal amount for notes the Company previously held from an affiliate of CRR. Total consideration of approximately $41 million was paid by Starwood for these items. The portion related to the legal settlement was expensed.
 
Development of Restaurant Concepts with Chef Jean-Georges Vongerichten
 
In May 2006, the Company partnered with Chef Jean-Georges Vongerichten and a private equity firm to create a joint venture that will develop, own, operate, manage and license world-class restaurant concepts created by Jean-Georges Vongerichten, including operating the existing Spice Market restaurant located in New York City. The concepts owned by the venture will be available for Starwood’s upper-upscale and luxury hotel brands including W, Westin, Le Meridien and St. Regis. Additionally, the venture may own and operate freestanding restaurants outside of Starwood’s hotels. Starwood invested approximately $22 million in this venture for a 32.7% equity interest.
 
Acquisition of Le Méridien
 
In November 2005, the Company acquired the Le Méridien brand and the related management and franchise business for the portfolio of 122 hotels and resorts (the “Le Méridien Acquisition”). The purchase price of approximately $252 million was funded from available cash and the return of funds from the Company’s original purchase of an interest in Le Méridien debt in late 2003. The Company has accounted for this acquisition under the purchase method in accordance with SFAS No. 141 and has allocated $114 million of the purchase price to goodwill with the remainder assigned to the estimated fair value of the assets acquired and liabilities assumed.
 
Note 5.   Asset Dispositions and Impairments
 
During 2007, the Company recorded a net loss of $44 million, primarily related to a net loss of $58 million on the sale of eight wholly owned hotels which were sold in multiple transactions, $20 million of which related to four hotels that closed in the fourth quarter. These losses were offset in part by $20 million of net gains primarily on the sale of assets in which we held a minority interest and a gain of $6 million as a result of insurance proceeds received for property damage caused by storms at two owned hotels in prior years. Other activity resulted in a loss of $12 million.


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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
During the second quarter of 2006, the Company consummated the Host Transaction whereby subsidiaries of Host acquired 33 properties and the stock of certain controlled subsidiaries, including Sheraton Holding and the Trust. The stock and cash transaction was valued at approximately $4.1 billion, including debt assumption (based on Host’s closing stock price on April 7, 2006 of $20.53). In the first phase of the transaction, 28 hotels and the stock of certain controlled subsidiaries, including Sheraton Holding and the Trust, were acquired by Host for consideration valued at $3.54 billion. On May 3, 2006, four additional hotels located in Europe were sold to Host for net proceeds of approximately $481 million in cash. On June 13, 2006, the final hotel in Venice, Italy was sold to Host for net proceeds of approximately $74 million in cash. In connection with the first phase of the transaction, Starwood shareholders received approximately $2.8 billion in the form of Host common stock valued at $2.68 billion and $119 million in cash for their Class B shares. Based on Host’s closing price on April 7, 2006, this consideration had a per     Class B share value of $13.07. Starwood directly received approximately $738 million of consideration in the first phase, including $600 million in cash, $77 million in debt assumption and $61 million in Host common stock. In addition, the Corporation assumed from its subsidiary, Sheraton Holding, debentures with a principal balance of $600 million. As the sale of the Class B shares involved a transaction with Starwood’s shareholders, the book value of the Trust associated with this sale was treated as a non-reciprocal transaction with owners and was removed through retained earnings up to the amount of retained earnings that existed at the sale date with the remaining balance reducing additional paid in capital. This portion of the transaction was treated as a non-cash exchange by Starwood and, consequently, was excluded from the consolidated statement of cash flows. The portion of the transaction between the Company and Host was recorded as a disposition under the provisions of SFAS No. 144. As Starwood sold these hotels subject to long-term management contracts, the calculated gain on the sale of approximately $962 million has been deferred and is being amortized over the initial management contract term of 20 years. This transaction also generated a capital loss, net of carry back and 2006 utilization, of $2.4 billion for federal tax purposes. The entire tax benefit of the loss was offset by a valuation allowance due to the uncertainty of realizing the tax benefit of this capital loss carryforward before its expiration in 2011. See Note 13. The Company sold all of the Host common stock in the second quarter of 2006 and recorded a net gain of approximately $1 million.
 
During 2006, the Company sold ten additional hotels in multiple transactions for approximately $437 million in cash. The Company recorded a net loss of approximately $7 million associated with these sales. In addition, the Company recorded a $5 million adjustment to reduce the gain on the sale of a hotel consummated in 2004 as certain contingencies associated with that sale became probable in 2006.
 
Also in 2006, the Company recorded a loss of approximately $23 million primarily in connection with the impairment of two properties, one of which has been demolished and is being rebuilt under the aloft and Element brands and another which represents land that was sold to a developer who is building two Starwood branded hotels on the site. This loss was offset by a gain of approximately $29 million on the sale of the Company’s interests in two joint ventures.
 
Also during 2006, the Company recorded an impairment charge of $11 million related to the Sheraton Cancun in Cancun, Mexico that was damaged by Hurricane Wilma in 2005 and will now be completely demolished in order to build additional vacation ownership units. This impairment charge was offset by a $13 million gain as a result of insurance proceeds received primarily for the Sheraton Cancun and the Company’s other owned hotel in Cancun, the Westin Cancun, as reimbursement for property damage caused by the same storm.
 
In September 2006, a joint venture, in which the Company has a minority interest, completed the sale of the Westin Kierland hotel in Scottsdale, Arizona and the Company realized net proceeds of approximately $45 million. The Company continues to manage the hotel subject to a newly amended, long-term management contract. Accordingly, the Company’s share of the gain on the sale of approximately $46 million was deferred and is being recognized in earnings over the remaining 21 years of the management contract.
 
In December 2005, the Company sold the Hotel Danieli in Venice, Italy for approximately 177 million euros (approximately $213 million based on the exchange rate at the time the sale closed) in cash. The Company


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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
continues to manage the hotel subject to a long-term management contract. Accordingly, the gain on the sale of approximately $128 million was deferred and is being recognized in earnings over the 10-year life of the management contract.
 
The Company sold four additional hotels for approximately $53 million in cash during 2005 and recorded losses totaling approximately $13 million associated with these sales. The Company had recorded impairment charges of $17 million in 2004 related to one of these properties.
 
Also during 2005, the Company sold three hotels unencumbered by long-term management contracts for approximately $171 million in cash and recorded gains totaling approximately $38 million associated with these sales.
 
In August 2005 the Company completed the sale of the St. Regis hotel in Washington D.C. for approximately $47 million in cash. The Company continues to manage the hotel subject to a long-term management contract. Accordingly, the gain on the sale of approximately $32 million was deferred and is being recognized in earnings over the 15-year life of the management contract.
 
In April 2005, the Company completed the sale of the Sheraton Lisboa Hotel and Towers in Lisbon, Portugal for approximately $31 million in cash. The Company continues to manage the hotel subject to a long-term management contract. Accordingly, the gain on the sale of approximately $6 million was deferred and is being recognized in earnings over the 20-year life of the management contract.
 
The Company recorded an impairment charge of approximately $17 million in 2005 associated with the Sheraton Cancun that was demolished to build vacation ownership units. The Company also recorded an impairment charge of approximately $32 million in accordance with SFAS No. 144 in order to write down one hotel to its fair market value.
 
The hotels sold in 2007, 2006 and 2005 were generally encumbered by long-term management or franchise contracts, and therefore, their operations prior to the sale date are not classified as discontinued operations.
 
Note 6.   Assets Held for Sale
 
In October 2006, the Company closed on the sale of land near the Montreal Airport to a developer who is building two Starwood branded hotels on the site. The purchase agreement contains a provision that may allow, but not obligate, Starwood to repurchase the land for the purchase price it received less a non-refundable amount if the hotels are not built. As a result of this provision, the Company had not treated this transaction as a sale, and the Company classified this asset as held for sale at December 31, 2006. As discussed in Note 5, the Company also recorded an impairment charge of approximately $5 million in 2006 related to this land. During the third quarter of 2007, the hotels reached the stage of development that terminated Starwood’s right to purchase the land in accordance with the purchase agreement. As such, the sale has now been recognized.


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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
Note 7.   Plant, Property and Equipment
 
Plant, property and equipment, excluding assets held for sale, consisted of the following (in millions):
 
                 
    December 31,  
    2007     2006  
 
Land and improvements
  $ 714     $ 760  
Buildings and improvements
    3,589       3,603  
Furniture, fixtures and equipment
    1,690       1,566  
Construction work in process
    221       153  
                 
      6,214       6,082  
Less accumulated depreciation and amortization
    (2,364 )     (2,251 )
                 
    $ 3,850     $ 3,831  
                 
 
Note 8.   Goodwill and Intangible Assets
 
The changes in the carrying amount of goodwill for the year ended December 31, 2007 are as follows (in millions):
 
                         
          Vacation
       
    Hotel
    Ownership
       
    Segment     Segment     Total  
 
Balance at January 1, 2007
  $ 1,470     $ 241     $ 1,711  
Purchase price adjustments related to the Le Méridien Acquisition
    (6 )           (6 )
Cumulative translation adjustment
    17             17  
Asset dispositions
    (16 )           (16 )
                         
Balance at December 31, 2007
  $ 1,465     $ 241     $ 1,706  
                         
 
Intangible assets consisted of the following (in millions):
 
                 
    December 31,  
    2007     2006  
 
Trademarks and trade names
  $ 320     $ 315  
Management and franchise agreements
    310       291  
Other
    90       81  
                 
      720       687  
Accumulated amortization
    (124 )     (96 )
                 
    $ 596     $ 591  
                 
 
The intangible assets related to management and franchise agreements have finite lives, and accordingly, the Company recorded amortization expense of $26 million, $25 million and $19 million, respectively, during the years ended December 31, 2007, 2006 and 2005. The other intangible assets noted above have indefinite lives.


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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
Amortization expense relating to intangible assets with finite lives for each of the years ended December 31 is expected to be as follows (in millions):
 
         
2008
  $ 28  
2009
  $ 26  
2010
  $ 26  
2011
  $ 24  
2012
  $ 24  
 
Note 9.   Other Assets
 
Other assets include notes receivable of $414 million and $293 million, net of allowance for doubtful accounts, at December 31, 2007 and 2006, respectively. Included in these balances at December 31, 2007 and 2006 are the following fixed rate notes receivable related to the financing of VOIs (in millions):
 
                 
    December 31,  
    2007     2006  
 
Gross VOI notes receivable
  $ 484     $ 296  
Allowance for uncollectible VOI notes receivable
    (68 )     (31 )
                 
Net VOI notes receivable
    416       265  
Less current maturities of gross VOI notes receivable
    (50 )     (25 )
Current portion of the allowance for uncollectible VOI notes receivable
    7       2  
                 
Long-term portion of net VOI notes receivable
  $ 373     $ 242  
                 
 
The current maturities of net VOI notes receivable are included in accounts receivable in the Company’s balance sheets.
 
The interest rates of the owned VOI notes receivable are as follows:
 
         
    December 31,
    2007   2006
 
Range of stated interest rates
  0% - 18%   0% - 18%
Weighted average interest rate
  11.8%   11.9%
 
The maturities of the gross VOI notes receivable are as follows (in millions):
 
                 
    December 31,  
    2007     2006  
 
Due in 1 year
  $ 50     $ 25  
Due in 2 years
    35       22  
Due in 3 years
    38       24  
Due in 4 years
    50       26  
Due in 5 years
    56       28  
Due beyond 5 years
    255       171  
                 
Total gross VOI notes receivable
  $ 484     $ 296  
                 


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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)