10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 

For the Quarterly Period Ended September 30, 2000

OR

[   ]  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	Commission File Number: 1-6828
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. (Exact name of Registrant as specified in its charter)	STARWOOD HOTELS & RESORTS (Exact name of Registrant as specified in its charter)
Maryland (State or other jurisdiction of incorporation or organization)	Maryland (State or other jurisdiction of incorporation or organization)
52-1193298 (I.R.S. employer identification no.)	52-0901263 (I.R.S. employer identification no.)
777 Westchester Avenue White Plains, NY 10604 (Address of principal executive offices, including zip code)	777 Westchester Avenue White Plains, NY 10604 (Address of principal executive offices, including zip code)
(914) 640-8100 (Registrant’s telephone number, including area code)	(914) 640-8100 (Registrant’s telephone number, including area code)

      Indicate by check mark whether the Registrants (1) have 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 Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.  Yes  [X]  No  [   ]

      Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

      193,108,180 shares of common stock, par value $0.01 per share, of Starwood Hotels & Resorts Worldwide, Inc. attached to and traded together with 193,108,180 Class B shares of beneficial interest, par value $0.01 per share, of Starwood Hotels & Resorts, and 100 Class A shares of beneficial interest, par value $0.01 per share, of Starwood Hotels & Resorts, all outstanding as of November 8, 2000.

TABLE OF CONTENTS

			Page
PART I. FINANCIAL INFORMATION
Item  1.	Financial Statements
	Starwood Hotels & Resorts Worldwide, Inc.:
		Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999		3
		Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2000 and 1999		4
		Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2000 and 1999		5
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999		6
	Starwood Hotels & Resorts:
		Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999		7
		Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2000 and 1999		8
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999		9
	Notes to Financial Statements			10
Item  2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item  3.	Quantitative and Qualitative Disclosures about Market Risk			21
PART II. OTHER INFORMATION
Item  1.	Legal Proceedings			21
Item  2.	Changes in Securities and Use of Proceeds			21
Item  6.	Exhibits and Reports on Form 8-K			22

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

      The following unaudited consolidated financial statements of Starwood Hotels & Resorts Worldwide, Inc. (the “Corporation”) and Starwood Hotels & Resorts (the “Trust” and, together with the Corporation, “Starwood” or the “Company”) are provided pursuant to the requirements of this Item. In the opinion of management, all adjustments necessary for fair presentation, consisting of normal recurring adjustments, have been included. The consolidated financial statements presented herein have been prepared in accordance with the accounting policies described in the Company’s Joint Annual Report on Form 10-K for the year ended December 31, 1999 filed on March 30, 2000. See the notes to financial statements for the basis of presentation. The consolidated financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein. Results for the three and nine months ended September 30, 2000 are not necessarily indicative of results to be expected for the full fiscal year ending December 31, 2000.

2

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

			September 30,			December 31,
			2000			1999
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	242		$	436
	Accounts receivable, net of allowance for doubtful accounts of $50 and $62			547			468
	Inventories			227			167
	Prepaid expenses and other			118			92
		Total current assets		1,134			1,163
Investments				425			442
Plant, property and equipment, net				7,642			7,787
Goodwill and intangible assets, net				2,927			2,872
Other assets				448			557
Net assets of discontinued operations				—			104
			$	12,576		$	12,925
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	198		$	205
	Accrued expenses			758			812
	Short-term borrowings and current maturities of long-term debt			1,270			988
	Accrued taxes and other			318			300
		Total current liabilities		2,544			2,305
Long-term debt				4,247			4,643
Deferred income taxes				1,424			1,470
Other liabilities				448			434
				8,663			8,852
Minority interest				51			228
Equity put options				13			19
Class B exchangeable preferred shares of the Trust, at redemption value of $38.50				120			136
Commitments and contingencies
Stockholders’ equity:
	Class A exchangeable preferred shares of the Trust; $0.01 par value; authorized 30,000,000 shares; outstanding 1,119,452 and 3,669,546 shares at September 30, 2000 and December 31, 1999, respectively			—			—
	Corporation common stock; $0.01 par value; authorized 1,050,000,000 shares; outstanding 193,342,947 and 189,271,522 shares at September 30, 2000 and December 31, 1999, respectively			2			2
	Trust Class B shares of beneficial interest; $0.01 par value; authorized 1,000,000,000 shares; outstanding 193,342,947 and 189,271,522 shares at September 30, 2000 and December 31, 1999, respectively			2			2
	Additional paid-in capital			4,804			4,785
	Deferred compensation			(5	)		(5	)
	Cumulative translation and marketable securities adjustments			(386	)		(238	)
	Accumulated deficit			(688	)		(856	)
		Total stockholders’ equity		3,729			3,690
			$	12,576		$	12,925

The accompanying notes to financial statements are an integral part of the above statements.

3

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per Share data)

(Unaudited)

		Three Months						Nine Months
		Ended						Ended
		September 30,						September 30,
		2000			1999			2000			1999
Revenues
Owned, leased and consolidated joint venture hotels		$	926		$	855		$	2,740		$	2,496
Other hotel and leisure			188			103			533			285
			1,114			958			3,273			2,781
Costs and Expenses
Owned, leased and consolidated joint venture hotels			616			587			1,834			1,709
Selling, general, administrative and other			97			37			312			123
Restructuring and other special credits			—			—			—			(41	)
Depreciation and amortization			127			117			373			353
			840			741			2,519			2,144
			274			217			754			637
Interest expense, net of interest income of $5, $3, $14 and $9			(109	)		(127	)		(332	)		(370	)
Gain (loss) on sales of real estate and investments, net			(2	)		(8	)		—			22
Miscellaneous expense			—			—			—			(15	)
			163			82			422			274
Income tax expense			(54	)		(28	)		(145	)		(999	)
Minority equity in net income			(6	)		(10	)		(7	)		(14	)
Income (loss) from continuing operations			103			44			270			(739	)
Discontinued operations:
	Loss from operations, net of tax benefits of $0 in all periods		—			—			—			—
	Gain (loss) on dispositions, net of tax and minority interest of $0, $0, $2 and $(121)		—			—			5			(7	)
Extraordinary item, net of tax benefit			—			(2	)		(3	)		(2	)
Net income (loss)		$	103		$	42		$	272		$	(748	)
Earnings Per Share — Basic
Continuing operations		$	0.51		$	0.23		$	1.36		$	(3.98	)
Discontinued operations			—			—			0.02			(0.04	)
Extraordinary item			—			(0.01	)		(0.01	)		(0.01	)
Net income (loss)		$	0.51		$	0.22		$	1.37		$	(4.03	)
Earnings Per Share — Diluted
Continuing operations		$	0.50		$	0.23		$	1.32		$	(3.98	)
Discontinued operations			—			—			0.02			(0.04	)
Extraordinary item			—			(0.01	)		(0.01	)		(0.01	)
Net income (loss)		$	0.50		$	0.22		$	1.33		$	(4.03	)
Weighted average number of Shares			198			186			196			186
Weighted average number of Shares assuming dilution			207			195			205			186

The accompanying notes to financial statements are an integral part of the above statements.

4

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

		Three Months					Nine Months
		Ended					Ended
		September 30,					September 30,
		2000			1999		2000			1999
Net income (loss)		$	103		$	42	$	272		$	(748	)
Other comprehensive income, net of taxes:
Foreign currency translation adjustments —
	Foreign currency translation arising during the period		(66	)		9		(138	)		(85	)
Unrealized losses on securities, net —
	Unrealized holding losses arising during the period		(4	)		—		(10	)		—
			(70	)		9		(148	)		(85	)
Comprehensive income (loss)		$	33		$	51	$	124		$	(833	)

The accompanying notes to financial statements are an integral part of the above statements.

5

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

		Nine Months
		Ended
		September 30,
		2000			1999
Operating Activities
Net income (loss)		$	272		$	(748	)
Exclude:
Discontinued operations, net			(5	)		7
Extraordinary item, net			3			2
Income (loss) from continuing operations			270			(739	)
Adjustments to income (loss) from continuing operations:
	Depreciation and amortization		373			353
	Amortization of deferred loan costs		9			13
	Non-cash portion of restructuring and other special credits		—			(46	)
	Non-cash portion of Reorganization		—			936
	Provision for doubtful accounts		15			6
	Minority equity in net income		7			14
	Equity income, net of dividends received		(15	)		(23	)
	Gain on sales of real estate and investments, net		—			(22	)
Changes in working capital:
	Accounts receivable		(65	)		(86	)
	Inventories		(42	)		(7	)
	Accounts payable		2			24
	Accrued expenses		31			(43	)
Accrued and deferred income taxes			21			(28	)
Other, net			(28	)		(48	)
	Cash from continuing operations		578			304
	Cash from (used for) discontinued operations		3			(53	)
	Cash from operating activities		581			251
Investing Activities
Purchases of plant, property and equipment			(330	)		(310	)
Proceeds from asset sales, net			239			502
Collection of notes receivable, net			36			53
Acquisitions, net of acquired cash			(287	)		—
Investments			(36	)		(62	)
Other, net			(13	)		(11	)
	Cash from (used for) investing activities		(391	)		172
Financing Activities
Revolving credit facility and short-term borrowings, net			(26	)		(823	)
Long-term debt issued			38			636
Long-term debt repaid			(261	)		(56	)
Settlement of forward equity contracts			—			(16	)
Dividends paid			(99	)		(87	)
Share repurchases			(40	)		(42	)
Other, net			29			3
	Cash used for financing activities		(359	)		(385	)
Exchange rate effect on cash and cash equivalents			(25	)		—
Increase (decrease) in cash and cash equivalents			(194	)		38
Cash and cash equivalents — beginning of period			436			157
Cash and cash equivalents — end of period		$	242		$	195
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
	Interest	$	288		$	441
	Income taxes, net of refunds	$	139		$	98

The accompanying notes to financial statements are an integral part of the above statements.

6

STARWOOD HOTELS & RESORTS

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

			September 30,			December 31,
			2000			1999
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	14		$	1
	Receivable, Corporation			52			34
	Prepaid expenses and other			2			7
		Total current assets		68			42
Investments, Corporation				848			848
Investments				45			47
Plant, property and equipment, net				4,276			4,293
Long-term receivables, net, Corporation				1,815			1,658
Goodwill and intangible assets, net				241			246
Other assets				16			16
			$	7,309		$	7,150
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	1		$	5
	Accrued expenses			57			65
	Short-term borrowings and current maturities of long-term debt			35			105
		Total current liabilities		93			175
Long-term debt				485			496
				578			671
Minority interest				42			32
Class B exchangeable preferred shares, at redemption value of $38.50				120			136
Commitments and contingencies
Stockholders’ equity:
	Class A exchangeable preferred shares; $0.01 par value; authorized 30,000,000 shares; outstanding 1,119,452 and 3,669,546 shares at September 30, 2000 and December 31, 1999, respectively			—			—
	Class A shares of beneficial interest; $0.01 par value; authorized 5,000 shares; outstanding 100 shares at September 30, 2000 and December 31, 1999			—			—
	Trust Class B shares of beneficial interest; $0.01 par value; authorized 1,000,000,000 shares; outstanding 193,342,947 and 189,271,522 shares at September 30, 2000 and December 31, 1999, respectively			2			2
	Additional paid-in capital			7,629			7,612
	Accumulated deficit			(1,062	)		(1,303	)
		Total stockholders’ equity		6,569			6,311
			$	7,309		$	7,150

The accompanying notes to financial statements are an integral part of the above statements.

7

STARWOOD HOTELS & RESORTS

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions)

(Unaudited)

	Three Months						Nine Months
	Ended						Ended
	September 30,						September 30,
	2000			1999			2000			1999
Revenues
Unconsolidated joint ventures and other	$	1		$	—		$	3		$	9
Rent and interest, Corporation		182			187			518			552
		183			187			521			561
Costs and Expenses
Selling, general and administrative		—			—			2			—
Depreciation and amortization		49			43			141			132
		49			43			143			132
		134			144			378			429
Interest expense, net of interest income of $0 in all periods		(10	)		(10	)		(29	)		(36	)
Gain (loss) on sales of real estate and investments		(2	)		(40	)		1			(40	)
Income tax expense		(1	)		(1	)		(1	)		(2	)
Minority equity in net income		(1	)		(1	)		(2	)		(2	)
Net income	$	120		$	92		$	347		$	349

The accompanying notes to financial statements are an integral part of the above statements.

8

STARWOOD HOTELS & RESORTS

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

		Nine Months
		Ended
		September 30,
		2000			1999
Operating Activities
Net income		$	347		$	349
Adjustments to net income:
	Depreciation and amortization		141			132
	Minority equity in net income		2			2
	Equity income, net of dividends received		2			(3	)
	(Gain) loss on sales of real estate and investments		(1	)		40
Changes in working capital:
	Receivable, Corporation		(18	)		3
	Accounts payable		(4	)		5
	Accrued expenses		(14	)		18
Other, net			2			(2	)
	Cash from operating activities		457			544
Investing Activities
Additions to plant, property and equipment			(157	)		(176	)
Proceeds from asset sales, net			32			61
Investments			(1	)		(6	)
Collections of notes receivable			—			56
Long-term receivables, Corporation			(145	)		(242	)
Other, net			9			(2	)
	Cash used for investing activities		(262	)		(309	)
Financing Activities
Revolving credit facility and short-term borrowings, net			—			(421	)
Long-term debt issued			23			291
Long-term debt repaid			(104	)		(6	)
Dividends paid			(99	)		(87	)
Other, net			(2	)		(16	)
	Cash used for financing activities		(182	)		(239	)
Increase (decrease) in cash and cash equivalents			13			(4	)
Cash and cash equivalents — beginning of period			1			12
Cash and cash equivalents — end of period		$	14		$	8
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
	Interest	$	28		$	24
	Income taxes	$	1		$	2

The accompanying notes to financial statements are an integral part of the above statements.

9

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

AND STARWOOD HOTELS & RESORTS

NOTES TO FINANCIAL STATEMENTS

Note 1.  Basis of Presentation

      The accompanying consolidated balance sheets as of September 30, 2000 and December 31, 1999 and the consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2000 and 1999 and cash flows for the nine months ended September 30, 2000 and 1999 represent (i) Starwood Hotels & Resorts Worldwide, Inc. (the “Corporation”) and its subsidiaries, including Starwood Hotels & Resorts and its subsidiaries (the “Trust” and, together with the Corporation, “Starwood” or the “Company”), and (ii) the Trust.

      The Trust was formed in 1969 and elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code (the “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”). Until January 6, 1999, the Corporation Shares and Trust Shares were paired on a one-for-one basis and, pursuant to an agreement between the Corporation and the Trust, could be held or transferred only in units (“Paired Shares”) consisting of one Corporation Share and one Trust Share.

      During 1998, Congress enacted tax legislation that had the effect of eliminating this grandfathering for certain interests in real property acquired after March 26, 1998. In response to this legislation, a reorganization of the Corporation and the Trust (the “Reorganization”) was proposed by the Company and was approved by the Corporation and Trust shareholders on January 6, 1999. As a result of the Reorganization, the Trust became a subsidiary of the Corporation, which indirectly holds all outstanding shares of the new Class A shares of beneficial interest in the Trust. Each outstanding 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”). The Corporation Shares and the Class B Shares trade together on a one-for-one basis, and pursuant to an agreement between the Corporation and the Trust, may be transferred only in units (“Shares”) consisting of one Corporation Share and one Class B Share. The Reorganization was accounted for as a reorganization of two companies under common control. As such, there was no revaluation of the assets and liabilities of the combining companies. Unless otherwise stated herein, all information with respect to Shares refers to Shares since January 6, 1999 and to Paired Shares for periods before January 6, 1999.

      During the first quarter of 1999, the Company recorded pretax charges of $15 million for costs directly attributable to the Reorganization, including legal, accounting and investment banking fees. As a result of the Reorganization, the Company also recorded a one-time charge of $936 million to establish a deferred tax liability relating to the difference between the book and tax basis in the assets of the Trust.

      The Company is one of the largest hotel and leisure companies in the world and the Trust is one of the largest REITs in the United States. The Company’s principal business is hotel and leisure, which is comprised of a worldwide hospitality network of more than 725 full-service hotels as well as vacation ownership resorts primarily serving two markets: luxury and upscale. The Company’s hotel operations are represented in nearly every major world market.

      The Corporation, through its subsidiaries, is the general partner of, and held, as of September 30, 2000, an aggregate 93.0% partnership interest in, SLC Operating Limited Partnership (the “Operating Partnership”). The Trust, through its subsidiaries, is the general partner of, and held an aggregate 95.5% partnership interest in, SLT Realty Limited Partnership (the “Realty Partnership” and, together with the Operating Partnership, the “Partnerships”) as of September 30, 2000. The Realty Partnership principally owns, directly or indirectly, fee, ground lease and mortgage loan interests in hotel properties. The units of the Partnerships (“LP Units”) held by the limited partners of the respective Partnerships are exchangeable on a one-for-one basis for Shares. At September 30, 2000, there were approximately 9.2 million LP Units outstanding (including 4.3 million LP Units

10

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

AND STARWOOD HOTELS & RESORTS

NOTES TO FINANCIAL STATEMENTS — (Continued)

held by the Corporation). For all periods presented, the LP Units are assumed to have been converted to Shares for purposes of calculating basic and diluted weighted average Shares outstanding.

Note 2.  Significant Accounting Policies

      Earnings Per Share. The following reconciliation of basic earnings per Share to diluted earnings per Share for income (loss) from continuing operations assumes the conversion of LP Units to Shares (in millions, except per Share data):

		Three Months Ended September 30,
		2000							1999
		Earnings			Shares		Per Share		Earnings			Shares		Per Share
Income from continuing operations		$	103						$	44
Dividends on Class A EPS and Class B EPS			(1	)						(1	)
Basic earnings			102			198	$	0.51		43			186	$	0.23
Effect of dilutive securities:
	Employee options		—			4				—			1
	Class A EPS and Class B EPS		1			5				1			8
Diluted earnings		$	103			207	$	0.50	$	44			195	$	0.23

		Nine Months Ended September 30,
		2000							1999
		Earnings			Shares		Per Share		Earnings			Shares		Per Share
Income (loss) from continuing operations		$	270						$	(739	)
Dividends on Class A EPS and Class B EPS			(3	)						(3	)
Basic earnings (loss)			267			196	$	1.36		(742	)		186	$	(3.98	)
Effect of dilutive securities:
	Employee options		—			3				—			—
	Class A EPS and Class B EPS		3			6				—			—
Diluted earnings (loss)		$	270			205	$	1.32	$	(742	)		186	$	(3.98	)

      As a result of antidilutive effects, approximately 7.7 million Class A Exchangeable Preferred Shares (“Class A EPS”) and Class B Exchangeable Preferred Shares (“Class B EPS”) of the Trust and approximately 1.4 million employee options and other common stock equivalents were not included in the computation of diluted earnings per Share for the nine months ended September 30, 1999.

      Recently Issued Accounting Standards. In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” In June 1999, the FASB issued SFAS No. 137, which deferred the effective date of SFAS No. 133. This was followed in June 2000 by the issuance of SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” which amends SFAS No. 133. SFAS No. 133 and SFAS No. 138 establish new accounting rules and disclosure requirements for most derivative instruments and hedging activities. SFAS No. 133 and SFAS No. 138 require all derivatives to be recognized as assets or liabilities at fair value. Fair value adjustments are made either through earnings or equity, depending

11

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

AND STARWOOD HOTELS & RESORTS

NOTES TO FINANCIAL STATEMENTS — (Continued)

upon the exposure being hedged and the effectiveness of the hedge. The Company will adopt these standards effective January 1, 2001. The adoption of these standards could increase volatility in earnings and other comprehensive income or result in certain changes in the Company’s business practices; however, the adoption of these standards is not expected to have a material effect on the Company’s consolidated financial statements.

      The Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) 101, “Revenue Recognition in Financial Statements,” in December 1999. SAB 101 summarizes certain of the SEC staff’s views in applying accounting principles generally accepted in the United States to revenue recognition in financial statements. In June 2000, the SEC issued SAB 101B, which delays the implementation date of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The Company does not believe that adoption of this SAB will have a material impact on annual earnings or the timing of revenue and profit recognition between quarters during the year.

      Reclassifications. Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.

Note 3.  Discontinued Operations

      In April 1999, management developed a formal plan to dispose of the Company’s gaming operations. On December 30, 1999, the sale of Caesars World, Inc. (“Caesars”) was completed. On June 23, 2000, the sale of the Desert Inn Resort and Casino (the “Desert Inn”) was completed (together with the sale of Caesars, the “Gaming Dispositions”). Proceeds from these sales totaling approximately $3.3 billion were used to repay $2.5 billion of increasing rate notes and to reduce the Company’s bank revolver.

      The accompanying consolidated financial statements reflect the results of operations and net assets of the gaming segment as a discontinued operation. Interest expense of $0 and $42 million for the three months ended September 30, 2000 and 1999, respectively, and $6 million and $122 million for the nine months ended September 30, 2000 and 1999, respectively, was allocated to the discontinued operation. This allocation was based upon the ratio of net gaming segment assets to the Company’s total capitalization. During 1999, the Company provided for the estimated loss on disposal of the gaming segment, which included estimated operating losses through the disposal date. Upon completion of the sale of the Desert Inn, the Company recorded an adjustment to reverse the excess amount of estimated losses provided in 1999 for the Gaming Dispositions. This reversal resulted in a gain of $5 million ($7 million pretax) for the nine months ended September 30, 2000. Summary financial information of the discontinued gaming operations is as follows (in millions):

		Three Months					Nine Months
		Ended					Ended
		September 30,					September 30,
		2000		1999			2000			1999
Income Statement Data
Revenues		$	—	$	402		$	57		$	1,164
Operating income (loss)		$	—	$	53		$	(3	)	$	131
Interest expense:
	Allocated debt	$	—	$	(42	)	$	(6	)	$	(122	)
	Other	$	—	$	(2	)	$	—		$	(10	)
Income tax (expense) benefit		$	—	$	(1	)	$	1		$	(3	)
Minority equity		$	—	$	—		$	—		$	2
Income (loss) of discontinued operations		$	—	$	8		$	(8	)	$	(2	)

12

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

AND STARWOOD HOTELS & RESORTS

NOTES TO FINANCIAL STATEMENTS — (Continued)

Note 4.  Restructuring and Other Special Charges

      At September 30, 2000 and December 31, 1999, the Company had remaining accruals related to restructuring and other special charges of $103 million and $121 million, respectively, of which $19 million and $34 million, respectively, are included in other liabilities in the accompanying consolidated balance sheets. These accruals consist of $74 million and $75 million at September 30, 2000 and December 31, 1999, respectively, for certain litigation costs and $29 million and $46 million at September 30, 2000 and December 31, 1999, respectively, primarily related to remaining lease commitments which expire through 2006.

Note 5.  Derivative Financial Instruments

      The Company enters into interest rate swap agreements to manage interest rate fluctuations on its variable rate debt. At September 30, 2000, the Company had five outstanding interest rate swap agreements under which the Company pays a fixed rate and receives variable rates of interest. The aggregate notional amount of these interest rate swaps was approximately $1.1 billion and the estimated unrealized gain was approximately $18 million at September 30, 2000. The unrealized gain represents the amount the Company would receive upon the termination of the swap agreements.

      From time to time, the Company enters into forward foreign exchange contracts to hedge the foreign currency exposure associated with the Company’s foreign currency denominated assets and liabilities. The Company had five forward foreign exchange contracts outstanding with a U.S. dollar equivalent of the contractual amounts of these hedges at September 30, 2000 of approximately $50 million. These contracts mature through July 2001.

Note 6.  Business Segment Information

      The Company has one operating segment, hotel and leisure. The hotel and leisure segment represents a worldwide network of owned, leased and consolidated joint venture hotels and vacation ownership resorts operated primarily under the Company’s proprietary brand names including Sheraton, Westin, St. Regis, The Luxury Collection, Four Points and W. This segment also includes hotels and resorts operated or flagged under these brand names in exchange for management and franchise fees. Also included are earnings from the Company’s interest in unconsolidated joint ventures and from the development and sale of vacation ownership interests (“VOIs”).

      The performance of the hotel and leisure segment is evaluated primarily on operating profit before corporate selling, general and administrative expense, interest expense, and gains (losses) on the sales of real estate and investments. The Company does not allocate these items to the segment.

      The following table presents revenues, operating profit, assets and capital expenditures for the Company’s reportable segment (in millions):

	Three Months				Nine Months
	Ended				Ended
	September 30,				September 30,
	2000		1999		2000		1999
Revenues	$	1,114	$	958	$	3,273	$	2,781
Operating profit(a)	$	292	$	231	$	823	$	655
Capital expenditures	$	104	$	120	$	330	$	310

13

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

AND STARWOOD HOTELS & RESORTS

NOTES TO FINANCIAL STATEMENTS — (Continued)

		September 30,		December 31,
		2000		1999
Assets:
	Hotel and leisure	$	12,448	$	12,653
	Corporate		128		168
	Discontinued operations		—		104
		$	12,576	$	12,925

^(a) The following costs are not allocated to hotel and leisure in evaluating operating profit:

	Three Months				Nine Months
	Ended				Ended
	September 30,				September 30,
	2000		1999		2000		1999
Corporate selling, general and administrative	$	18	$	14	$	69	$	59
Restructuring and other special credits	$	—	$	—	$	—	$	(41	)

14

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

      Forward-looking statements contained herein include, but are not limited to, statements relating to the Company’s objectives, strategies and plans, and all statements (other than statements of historical fact) that address actions, events or circumstances that the Company or its management expects, believes or intends will occur in the future. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated at the time the forward-looking statements are made, including, without limitation, risks and uncertainties associated with the following: the continued ability of the Trust to qualify for taxation as a REIT; Starwood’s ability to attract and retain personnel; completion, terms and timing of future acquisitions and dispositions; the availability of capital for acquisitions and for renovations; execution of hotel renovation and expansion programs; the ability to maintain existing management, franchise or representation agreements and to obtain new agreements on favorable terms; competition within the lodging industry and from emerging technologies; the cyclicality of the real estate business and the hotel business; foreign exchange fluctuations and exchange control restrictions; general real estate and national and international economic conditions; political and financial conditions and uncertainties in countries in which Starwood owns property or operates; and the other risks and uncertainties set forth in the annual, quarterly and current reports and proxy statements of the Trust and Starwood. Starwood undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

RESULTS OF OPERATIONS

      The following discussion presents an analysis of results of our operations for the three and nine months ended September 30, 2000 and 1999.

Three Months Ended September 30, 2000 Compared with Three Months Ended September 30, 1999

Continuing Operations

      Revenues. Total revenues increased 16.3% to $1.114 billion for the three months ended September 30, 2000 when compared to the corresponding period in 1999. The increase in revenues included an 8.3% increase in revenues from the Company’s owned, leased and consolidated joint venture hotels to $926 million for the three months ended September 30, 2000 when compared to $855 million in the corresponding period of 1999 and the increase in other hotel and leisure revenues to $188 million for the three months ended September 30, 2000 when compared to $103 million in the corresponding period of 1999.

      The increase in revenues from owned, leased and consolidated joint venture hotels is due primarily to increased revenues at the Company’s 161 hotels (excluding 11 hotels sold or without comparable results during 1999 and 2000) (“Comparable Owned Hotels”) and the addition of three hotels, including the opening of the W hotel in Seattle in September 1999. These increases were offset by the loss of revenues on eight hotels sold since June 30, 1999, the impact of hotels with rooms out of service due to significant renovations and the political and economic conditions in Fiji, Europe and Latin America.

      Revenues at the Company’s Comparable Owned Hotels increased 8.4% to $900 million for the three months ended September 30, 2000 when compared to the same period of 1999 due primarily to an increase in revenue per available room (“REVPAR”). REVPAR at the Company’s owned, leased and consolidated joint venture hotels (excluding hotels under significant renovation or for which comparable results do not exist) (“Same-Store Hotels”) increased 10.5% to $118.37 for the three months ended September 30, 2000 when compared to the corresponding 1999 period. The increase in REVPAR at these 155 Same-Store Hotels was attributed to an increase in average daily rate (“ADR”) of 6.9% to $157.21 for the three months ended September 30, 2000 when compared to the corresponding 1999 period. Additionally, occupancy for these 155 Same-Store Hotels rose to 75.3% from 72.9% in the three months ended September 30, 2000 when compared to the same period in 1999. REVPAR at Same-Store Hotels in North America increased 14.2% for the three months ended September 30, 2000 when compared to the same period of 1999. REVPAR at the Company’s international Same-Store Hotels,

15

which increased by less than 1% for the three months ended September 30, 2000 when compared to the same period of 1999, was impacted primarily by the unfavorable effect of foreign currency translation.

      The increase in other hotel and leisure revenues resulted primarily from the acquisition of Starwood Vacation Ownership, Inc. (previously named Vistana, Inc.) in October 1999. As of September 30, 2000, the Company operates 12 vacation ownership resorts, with 10 in active sales.

      Consolidated Hotels EBITDA.⁽¹⁾ EBITDA for the Company’s owned, leased and consolidated joint venture hotels increased $42 million or 15.7% to $310 million for the three months ended September 30, 2000 when compared to $268 million in the corresponding period in 1999. This increase was primarily due to an increase in EBITDA at the Company’s Comparable Owned Hotels, which increased $38 million or 14.5% to $302 million. This increase is due to the 23.3% increase in EBITDA over the same period in 1999 at the Company’s Comparable Owned Hotels in North America, offset by weaker results internationally due primarily to unfavorable political and economic conditions. The addition of three hotels, including the opening of the W hotel in Seattle, also contributed to this increase, offset, in part, by the sale of eight hotels.

      Selling, General, Administrative and Other. Selling, general, administrative and other expenses were $97 million and $37 million for the three months ended September 30, 2000 and 1999, respectively. The increase in selling, general, administrative and other expenses is due primarily to the costs of the timeshare operations included in the Company’s results for the three months ended September 30, 2000, due to the acquisition of Starwood Vacation Ownership, Inc. in October 1999.

      Depreciation and Amortization. Depreciation and amortization expense increased to $127 million in the three months ended September 30, 2000 compared to $117 million in the corresponding period of 1999. The increase in depreciation and amortization expense for the three months ended September 30, 2000 was primarily attributable to the acquisition of Starwood Vacation Ownership, Inc. in October 1999, the addition of three new hotels, including the opening of the W hotel in Seattle in September 1999, and the additional depreciation resulting from an extensive renovation program, offset, in part, by the suspension of depreciation on hotels held for sale since December 31, 1999 and hotels sold.

      Net Interest Expense. Interest expense for the three months ended September 30, 2000 and 1999, which is net of interest income of $5 million and $3 million, respectively, and discontinued gaming operations allocations of $0 and $42 million, respectively, decreased to $109 million from $127 million. This decrease was due primarily to the paydown of debt with approximately $3.3 billion of cash proceeds from the Caesars and Desert Inn sales (interest on $2.1 billion of allocated debt was reflected in discontinued operations and thereby excluded from net interest expense in 1999) and cash repatriation from overseas, offset, in part, by an increase in interest rates and additional borrowings during 1999 and 2000 for Share repurchases, capital expenditures and the acquisition of the CIGA S.p.A. (“CIGA”) minority interest.

      Income Tax Expense. The effective income tax rate for the third quarter of 2000 decreased to 33.1% compared to 34.1% in the corresponding quarter in 1999. The Company’s effective income tax rate is determined by the level and composition of pretax income subject to varying foreign, state and local taxes and other items.

Discontinued Operations

      Due to the sale of Caesars in December 1999 and the Desert Inn in June 2000, results for the Company’s gaming operations are included in discontinued operations in the three months ended September 30, 1999. The gaming operations net income was $8 million for the three months ended September 30, 1999, including the

(1)  EBITDA is defined as income before interest expense, income tax expense and depreciation and amortization. Non-recurring items and gains and losses from sales of real estate and investments are also excluded from EBITDA as these items do not impact operating results on a recurring basis. Management considers EBITDA to be one measure of the cash flows from operations of the Company before debt service that provides a relevant basis for comparison, and EBITDA is presented to assist investors in analyzing the performance of the Company. This information should not be considered as an alternative to any measure of performance as promulgated under accounting principles generally accepted in the United States, nor should it be considered as an indicator of the overall financial performance of the Company. The Company’s calculation of EBITDA may be different from the calculation used by other companies and, therefore, comparability may be limited.

16

allocation of pretax interest expense of $42 million. There were no gaming revenues or gaming operating income (loss) in the three months ended September 30, 2000 compared to $402 million and $53 million, respectively, in the corresponding period of 1999.

Nine Months Ended September 30, 2000 Compared with Nine Months Ended September 30, 1999

Continuing Operations

      Revenues. Total revenues increased 17.7% to $3.273 billion for the nine months ended September 30, 2000 when compared to the corresponding period in 1999. The increase in revenues was due to the 9.8% increase in revenues for the Company’s owned, leased and consolidated joint venture hotels to $2.740 billion for the nine months ended September 30, 2000 when compared to $2.496 billion in the corresponding period of 1999 and the increase in other hotel and leisure revenues to $533 million for the nine months ended September 30, 2000 when compared to $285 million in the corresponding period of 1999.

      The increase in revenues from owned, leased and consolidated joint venture hotels is due primarily to the increased revenues at the Company’s Comparable Owned Hotels and the addition of four hotels, including the opening of the W hotels in San Francisco and Seattle in May 1999 and September 1999, respectively. These increases were offset by the loss of revenues on ten hotels sold since December 31, 1998, the impact of hotels with rooms out of service due to significant renovations and the political and economic conditions in Fiji, Europe and Latin America.

      Revenues at the Company’s Comparable Owned Hotels increased 8.1% to $2.644 billion for the nine months ended September 30, 2000 when compared to the same period of 1999 due primarily to an increase in REVPAR. REVPAR at 127 Same-Store Hotels increased 8.8% to $116.01 for the nine months ended September 30, 2000 when compared to the corresponding 1999 period. The increase in REVPAR at these hotels was attributed to an increase in ADR of 5.0% to $159.13 for the nine months ended September 30, 2000 when compared to the corresponding 1999 period. Occupancy for these 127 Same-Store Hotels rose to 72.9% from 70.4% in the nine months ended September 30, 2000 when compared to the same period in 1999. REVPAR at Same-Store Hotels in North America increased 12.7% for the nine months ended September 30, 2000 when compared to the same period of 1999. REVPAR at the Company’s international Same-Store Hotels, which increased by less than 1% for the nine months ended September 30, 2000 when compared to the same period of 1999, was impacted primarily by the unfavorable effect of foreign currency translation.

      The increase in other hotel and leisure revenues resulted primarily from the acquisition of Starwood Vacation Ownership, Inc. in October 1999. The increase is also due to the addition of hotels to the Company’s management and franchise system and the stronger performance at the Company’s existing managed and franchised hotels.

      Consolidated Hotels EBITDA. EBITDA for the Company’s owned, leased and consolidated joint venture hotels increased $119 million or 15.1% to $906 million for the nine months ended September 30, 2000 when compared to $787 million in the corresponding period in 1999. This increase was primarily due to an increase in EBITDA at the Company’s Comparable Owned Hotels, which increased $89 million or 11.4% to $875 million. These results were strongest in North America, the largest concentration of hotels, offset by weak results internationally due primarily to unfavorable political and economic conditions. The addition of four hotels, including the opening of the W hotels in San Francisco and Seattle in May 1999 and September 1999, respectively, contributed to the overall increase, offset by the sale of ten hotels since December 31, 1998.

      Selling, General, Administrative and Other. Selling, general, administrative and other expenses were $312 million and $123 million for the nine months ended September 30, 2000 and 1999, respectively. The increase in selling, general, administrative and other expenses is due primarily to the costs of the timeshare operations included in the Company’s results for the nine months ended September 30, 2000, due to the acquisition of Starwood Vacation Ownership, Inc. in October 1999.

      Depreciation and Amortization. Depreciation and amortization expense increased to $373 million in the nine months ended September 30, 2000 compared to $353 million in the corresponding period of 1999. The increase in depreciation and amortization expense for the nine months ended September 30, 2000 was primarily

17

attributable to the acquisition of Starwood Vacation Ownership, Inc. in October 1999, the addition of four new hotels, including the opening of the W hotels in San Francisco in May 1999 and Seattle in September 1999, and the additional depreciation resulting from an extensive renovation program, offset, in part, by the suspension of depreciation on hotels held for sale since December 31, 1999 and hotels sold.

      Net Interest Expense. Interest expense for the nine months ended September 30, 2000 and 1999, which is net of interest income of $14 million and $9 million, respectively, and discontinued gaming operations allocations of $6 million and $122 million, respectively, decreased to $332 million from $370 million. This decrease was due primarily to the paydown of debt with approximately $3.3 billion of cash proceeds from the Caesars and Desert Inn sales (interest on $2.1 billion of allocated debt was reflected in discontinued operations and thereby excluded from net interest expense in 1999) and cash repatriation from overseas, partially offset by increased interest rates and additional borrowings during 1999 and 2000 for Share repurchases, capital expenditures and the acquisition of the CIGA minority interest.

      Income Tax Expense. The effective income tax rate for the first nine months of 2000 was 34.5%. As a result of the Reorganization, the tax provision for the nine months ended September 30, 1999 included a $936 million one-time charge to establish a deferred tax liability related to the difference between the book and tax basis in the assets of the Trust. Excluding this charge and a one-time tax benefit of $37 million attributable to the resolution of certain employment related contingencies, the Company’s effective tax rate for the nine months ended September 30, 1999 was 36.7%. The Company’s effective income tax rate is determined by the level and composition of pretax income subject to varying foreign, state and local taxes and other items.

Discontinued Operations

      During the first quarter of 1999, the Company provided for estimated after-tax losses on the Gaming Dispositions of $180 million ($158 million pretax), which included anticipated operating results through the expected closing date. In addition, the Company recorded, on an after-tax basis, a $173 million gain on the sale of the Company’s remaining interest in ITT Educational Services, Inc. during the first quarter of 1999.

      Due to the sale of Caesars in December 1999 and the Desert Inn in June 2000, results for the Company’s gaming operations are included in discontinued operations in the nine months ended September 30, 1999. Results for the Desert Inn are included in discontinued operations through June 23, 2000. The gaming operations net loss was $8 million and $2 million for the nine months ended September 30, 2000 and 1999, respectively, including the allocation of pretax corporate interest expense of $6 million and $122 million, respectively.

      Gaming revenues decreased to $57 million for the nine months ended September 30, 2000 when compared to $1.164 billion in the corresponding period of 1999, and operating income (loss) for the nine months ended September 30, 2000 decreased to a loss of $3 million when compared to operating income of $131 million for the same period of 1999.

Seasonality and Diversification

      The hotel and leisure industry is seasonal in nature; however, the periods during which the Company’s properties experience higher hotel revenue activities vary from property to property and depend principally upon location. The Company’s revenues historically have been lower in the first quarter than in the second, third or fourth quarters.

Same-Store Hotels Results

      Starwood continually updates and renovates its 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 Starwood’s hotel revenues. Starwood expects to continue renovating its owned, leased and consolidated joint venture hotels in 2000 as it pursues its brand and quality strategies.

      The following table summarizes average occupancy, ADR and REVPAR for the Company’s Same-Store Hotels for the three and nine months ended September 30, 2000 and 1999. The results for the three and nine months represent results for 155 and 127 owned, leased and consolidated joint venture hotels, respectively

18

(excluding 17 and 47 hotels, respectively, that were sold, under significant renovation or for which comparable results are not available).

	Three Months Ended
	September 30,
	2000		1999		Variance
Worldwide (155 hotels with approximately 52,000 rooms)
REVPAR	$	118.37	$	107.14		10.5	%
ADR	$	157.21	$	147.06		6.9	%
Occupancy		75.3%		72.9%		2.4
North America (111 hotels with approximately 39,000  rooms)
REVPAR	$	115.66	$	101.26		14.2	%
ADR	$	148.83	$	136.12		9.3	%
Occupancy		77.7%		74.4%		3.3
International (44 hotels with approximately 13,000  rooms)
REVPAR	$	127.03	$	126.00		0.8	%
ADR	$	187.95	$	185.54		1.3	%
Occupancy		67.6%		67.9%		(0.3)

	Nine Months Ended
	September 30,
	2000		1999		Variance
Worldwide (127 hotels with approximately 41,000 rooms)
REVPAR	$	116.01	$	106.67		8.8	%
ADR	$	159.13	$	151.60		5.0	%
Occupancy		72.9%		70.4%		2.5
North America (85 hotels with approximately 29,000  rooms)
REVPAR	$	113.46	$	100.69		12.7	%
ADR	$	151.63	$	141.76		7.0	%
Occupancy		74.8%		71.0%		3.8
International (42 hotels with approximately 12,000  rooms)
REVPAR	$	122.56	$	122.05		0.4	%
ADR	$	180.30	$	177.76		1.4	%
Occupancy		68.0%		68.7%		(0.7)

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow Provided by Operating Activities

      Cash flow from operating activities is the principal source of cash used to fund the Company’s operating expenses, interest payments on debt, capital expenditures and distribution payments by the Trust. The Company anticipates that cash flow provided by operating activities will be sufficient to service short-term and long-term indebtedness, fund maintenance requirements and capital expenditures and meet operating cash requirements, including all distributions to shareholders by the Trust. The Trust’s annual dividend increased 15% in 2000 to $0.69 per Share. The third quarter dividend of $0.1725 per Share was paid in October 2000 to shareholders of record as of September 30, 2000.

      As a result of the Reorganization, Starwood pays significantly more in federal income taxes and has the ability to retain significantly more earnings than previously the case. Starwood anticipates its enhanced ability to retain earnings will allow it to utilize cash flow from operating activities to fund maintenance, capital expenditures and acquisitions.

19

Cash Flow from Investing and Financing Activities

      In addition to cash flow from operating activities, the Company intends to finance the acquisition of additional hotel properties (including equity investments), hotel renovations, capital improvements and other core business acquisitions and provide for general corporate purposes through its credit facilities described below, through the net proceeds from dispositions of certain non-core assets and, when market conditions warrant, through the issuance of additional equity or debt securities.

      In December 1999, the Company completed the sale of Caesars for approximately $3.0 billion in cash; in June 2000, the Company completed the sale of the Desert Inn for approximately $270 million in cash. The Company used these cash proceeds and cash repatriated from overseas operations to immediately pay off $2.5 billion of increasing rate notes and to reduce its bank revolver by approximately $770 million, offset by additional borrowings used to complete the acquisition of the CIGA minority interest and other investing and financing activities.

      Cash proceeds from non-core asset sales will be used to retire debt, repurchase Shares and provide for general corporate purposes. During the nine months ended September 30, 2000, in addition to the sales of Caesars and the Desert Inn disclosed above, the Company sold five hotels for aggregate proceeds of approximately $34 million.

      Following is a summary of the Company’s debt portfolio as of September 30, 2000:

		Amount					Interest Rate at
		Outstanding at					September 30,			Average
		September 30, 2000			Interest Terms		2000			Maturity
		(Dollars in millions)
Floating Rate Debt
Senior Credit Facility:
	Five-Year Term Loan	$	950			LIBOR+0.625%		7.24	%		2.4 years
	Revolving Credit Facility		40			LIBOR+0.625%		7.24	%		2.4 years
Senior Secured Notes Facility:
	Tranche II Loans		1,000			LIBOR+2.75%		9.37	%		2.4 years
Mortgages and other			600			Various		7.04	%		2.7 years
Interest rate swaps			(1,000	)				7.24	%		—
Total/average		$	1,590					8.50	%		2.5 years
Fixed Rate Debt
ITT public debt		$	1,996					6.79	%		6.9 years
Mortgages and other			931					7.31	%		11.7 years
Interest rate swaps			1,000					6.64	%		—
Total/average		$	3,927					6.87	%		8.4 years
Total Debt
Total debt and average terms		$	5,517					7.34	%		5.6 years

      Starwood has a substantial amount of indebtedness and had a working capital deficiency of $1.4 billion at September 30, 2000. Other than $700 million of outstanding ITT Bonds maturing in 2000 and the Euro 270 million loan due in July 2001, Starwood has no significant debt maturing until 2003. Based upon the current level of operations, management believes that the Company’s cash flow from operations, together with available borrowings under the Senior Credit Facility (approximately $1.0 billion at September 30, 2000), capacity from additional borrowings and proceeds from non-core asset sales, will be adequate to meet anticipated requirements for working capital, capital expenditures, marketing and advertising program expenditures, other discretionary investments, interest and scheduled principal payments for the foreseeable future, including at least the next three years. There can be no assurance, however, that the Company’s business will continue to generate cash flow at or above current levels or that currently anticipated improvements will be achieved. If Starwood is unable to generate sufficient cash flow from operations in the future to service the Company’s debt, the Company may be

20

required to sell assets, reduce capital expenditures, refinance all or a portion of its existing debt or obtain additional financing. The Company’s ability to make scheduled principal payments, to pay interest on or to refinance the Company’s indebtedness depends on its future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the hotel and leisure industry and to general economic, political, financial, competitive, legislative and regulatory factors beyond the Company’s control. There can be no assurance that sufficient funds will be available to enable Starwood to service its indebtedness or to make necessary capital expenditures, marketing and advertising program expenditures and other discretionary investments.

Stock Sales and Repurchases

      Pursuant to the 1998 Board-approved Share repurchase program (the “Share Repurchase Program”), the Company repurchased 1,469,000 Shares in the open market at an average purchase price of $27.16 during the nine months ended September 30, 2000. Under the Share Repurchase Program, at September 30, 2000, the Company had approximately $259 million remaining authorization to repurchase Shares.

OTHER MATTERS

European Union Currency Conversions

      On January 1, 1999, 11 of the 15 member countries of the European Union (the “Participating Countries”) established fixed conversion rates between their existing sovereign currencies and the Euro. Following the introduction of the Euro, the legacy currencies of the Participating Countries will remain legal tender during a transition period ending on January 1, 2002. During the transition period, both the legacy currency and the Euro will be legal tender in the respective Participating Countries. During the transition period, currency conversions will be computed by a triangulation with reference to conversion rates between the respective currencies and the Euro. The Company currently operates in all 11 of the Participating Countries. The effect on the Company of the adoption of the Euro by the Participating Countries in which it operates is currently uncertain. However, it is possible that the Euro adoption will result in increased competition within the European market. In addition, a number of the Company’s information systems are not currently Euro compliant. The Company is currently evaluating and updating its information systems to make them Euro compliant; however, there is no assurance that the Company or third-party vendors of applications used by the Company will successfully bring all of their systems into compliance. Failure of the Company or such third parties to do so could result in disruptions in the processing of transactions in Euros or computed by reference to the Euro.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

      There were no material changes to the information provided in Item 7A in the Company’s Joint Annual Report on Form 10-K regarding the Company’s market risk.

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings.

      The Company is involved in various claims and lawsuits arising in the ordinary course of business, none of which, in the opinion of management, is expected to have a material adverse effect on the Company’s consolidated financial position or results of operations.

Item 2.  Changes in Securities and Use of Proceeds.

      Pursuant to the Share Repurchase Program, the Company repurchased approximately 1,469,000 Shares in the open market at an average purchase price of $27.16 during the nine months ended September 30, 2000.

21

Item 6.  Exhibits and Reports on Form 8-K.

(a)  Exhibits

Exhibit
Number		Description
	10.1	Employment Agreement, dated as of June 27, 2000, between the Corporation and Robert F. Cotter.(1)
	27.1	Financial Data Schedule for the Corporation.(1)
	27.2	Financial Data Schedule for the Trust.(1)

(1)  Filed herewith.

(b)  Reports on Form 8-K

      No reports on Form 8-K were filed during the third quarter of 2000.

22

SIGNATURES

      Pursuant to the requirements of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

STARWOOD HOTELS & RESORTS WORLDWIDE, INC	STARWOOD HOTELS & RESORTS
By: /s/ RONALD C. BROWN Ronald C. Brown Executive Vice President and Chief Financial Officer	By: /s/ RONALD C. BROWN Ronald C. Brown Vice President and Chief Financial and Accounting Officer
Date: November 14, 2000

23

EXHIBIT INDEX

Exhibit
Number		Description
	10.1	Employment Agreement, dated as of June 27, 2000, between the Corporation and Robert F. Cotter.(1)
	27.1	Financial Data Schedule for the Corporation.(1)
	27.2	Financial Data Schedule for the Trust.(1)

(1)  Filed herewith.

EX-10.1

   1
                                                                  EXHIBIT 10.1



June 27, 2000


Robert F. Cotter
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
777 Westchester Avenue
White Plains, New York  10604

Dear Bob:

I am delighted to confirm the compensation arrangements associated with your
responsibilities as Chief Operating Officer, Starwood Hotels & Resorts
Worldwide, Inc. ("the Company").

The specifics of these arrangements are outlined below:

POSITION AND EFFECTIVE DATE:

Subject to the terms of this letter, your appointment as Chief Operating Officer
is effective February 15, 2000.

You will report directly to the Company's Chief Executive Officer and you shall
perform such duties and services as are assigned to you by the Company from time
to time. You acknowledge that your employment will be subject to all policies
and practices of the Company as may currently exist or as may be curtailed,
modified or implemented from time to time. Further, you shall devote your full
time and attention to the affairs of the Company and to your duties as Chief
Operating Officer.

BASE SALARY:

For 2000 and in effect from the date of your appointment, February 15, 2000,
your base salary will be $600,000 annually, paid in semi-monthly intervals of
$25,000, and subject to applicable withholdings for FICA, local, state and
federal taxes, and Medicare. Your annual base salary will be adjusted to
$650,000 effective January 1, 2001.

ANNUAL INCENTIVE (BONUS):

You will continue to participate in the Starwood Annual Incentive Plan (AIP).
For performance year 2000, your target incentive opportunity is 100% of base
salary. Your actual incentive payout will be based upon achieving specified
performance criteria to be established and approved with the Chief Executive
Officer, and may be awarded solely at the Company's discretion. For performance
year 2001, your target incentive opportunity will be moved to 112% of base
salary. Any annual bonus shall not be deemed earned by you until the Company has
determined your entitlement to such bonus and only if you are employed by the
Company at the time such bonuses are payable in accordance with the AIP and the
Company's practices.
   2
BENEFITS:

You will continue to participate in the Starwood Benefits Plan as an expatriate
until such time as you and your family permanently move to the U.S. at which
point you and your family will be covered on a regular U.S. payroll basis.

LONG TERM INCENTIVE:

You will continue to participate in the Starwood 1999 Long Term Incentive
Compensation Plan ("LTIP"). This plan provides for the award of stock options at
the Company's discretion to high performing executives. For 2000, you have been
awarded a stock option grant of 316,400 Starwood options under the terms of the
1999 LTIP, effective as of the April 1, 2000 meeting of the Starwood Board of
Directors. For 2001, you will be awarded 454,000 Starwood options. This grant
date will be the date the Company's 2001 stock option grants are approved by the
Compensation & Option Committee of the Board.

CONTINUATION OF EXPATRIATE STATUS:

Since your family will not be relocating to the U.S. until the summer of 2001,
you will continue to receive your expatriate benefits and legal commitments
under Starwood's expatriate policy. In particular the following benefits will
apply until July 2001:

a.       AREA COST ALLOWANCE

         You will continue to receive an Area Cost Allowance to compensate you
         for certain costs associated with your family's living in Brussels. The
         amount of the Area Cost Allowance is based on cost of living surveys
         conducted by independent consultants and will be US$ 36,605 per annum
         for the balance of 2000. This amount will be paid in 12 equal
         installments in local currency and may fluctuate depending on foreign
         exchange and cost of living trends. Also, please note that this stated
         amount is based on current policy and might be amended based on
         Starwood's expatriate policy, which is currently being reviewed. The
         exchange rate used in converting your compensation and your Area Cost
         Allowance from US$ to BF may be subject to modification at Company
         discretion should present policies be revised.

b.       INCOME TAXES

         Your Company sourced income will continue to be tax protected in the
         U.S. A Company provided tax consultant will prepare your tax returns.
         It is the Company's responsibility to reimburse you for Belgian, and
         excess U.S., taxes incurred. It is, of course, understood that you will
         continue to be responsible for all reporting and filing of personal
         income tax returns as required by the local tax authorities.

c.       TRANSPORTATION

         You will continue to be eligible for one fully maintained Company car
         for business and personal use, as per European car policy application
         in Belgium.

d.       HOME LEAVE

         On an annual basis your family will continue to be entitled to one
         round trip full fare business class airfare between Brussels and
         Boston. If you elect to utilize the home leave benefit to a point other
         than Boston, you may do so provided the airfare costs do not exceed
         those of your normal entitlement. In addition the cost of two round
         trip economy


                                       2
   3
         airfares (between U.S. college locations and Brussels) per year for
         your dependents attending college in the U.S. will be reimbursed. The
         Human Resources Department must approve all home leave travel in
         advance.

e.       EDUCATIONAL ASSISTANCE

         While your dependents are permanently residents in Brussels, the
         Company will continue to pay all reasonable costs associated with their
         attendance at a local international school.

f.       RELOCATION

         Starwood will pay the reasonable, out-of-pocket costs of relocating
         your family and household furnishings from Brussels to the New York
         metropolitan area in accordance with the provisions of Starwood's
         Relocation Program - Plan I. Greg Waldron is available to review the
         details of this program with you at your convenience.

         In the event that you accept the offer and relocation expenses are paid
         to you or on your behalf, you agree that if you voluntarily terminate
         your employment within one year after your relocation, you will repay
         all relocation expenses, reduced by 1/12 for each full calendar month
         actually worked. In addition, eligibility for reimbursement of any and
         all relocation expenses will cease on the last day of employment and
         any relocation expenses incurred after that date will not be reimbursed
         by Starwood and will be your responsibility.

g.       HOME LOAN

         Upon your move to the New York metropolitan area, Starwood will assist
         you in the purchase of a new principal residence by making a second
         mortgage home loan available to you in an amount of $600,000. The loan
         proceeds must be used by you to purchase your new principal residence.
         The loan will be non-transferable and non-interest bearing prior to
         maturity and will mature on the earlier of (a) five years from the date
         of the first advance of the loan to you, (b) voluntary or involuntary
         termination of your employment with Starwood, or (c) your sale of the
         residence. The loan shall be evidenced by a note in the amount of the
         loan and shall be secured by a second mortgage lien on your new
         residence. The second mortgage is to be executed by all persons having
         an ownership interest in the new residence. This loan will be funded at
         the closing of the purchase of your new residence through an escrow
         account established for this purpose acceptable to Starwood. No advance
         of the loan will be made unless documents evidencing and securing the
         loan acceptable to Starwood are signed and delivered by the appropriate
         parties.

EXCLUSIVE DISPUTE RESOLUTION PROCEDURE:

Any and all disputes relating to this offer letter, your employment with
Starwood or the termination of that employment will be resolved solely and
exclusively through binding arbitration pursuant to the employment rules of the
American Arbitration Association. Accordingly, you acknowledge and agree that
this offer of employment as Chief Operating Officer and the benefits provided
herein are contingent upon your execution of the Arbitration Agreement provided
to you herewith.

                                       3
   4
EMPLOYMENT TERMS & SEVERANCE:

The term of this Agreement (should you accept this offer) is two years
commencing on February 15, 2000. You understand and agree that your employment
with the Company is "at will." As such, you agree that either you or Starwood
may end the employment relationship at any time, with or without cause upon 30
days' notice. By signing below you understand and acknowledge that except for
this letter, there is not any written contract between you and the Company
concerning this offer employment as Chief Operating Officer. This Agreement
supercedes any previous agreements between you and the Company relating to your
employment.

In the event that Starwood terminates your employment for any reason other than
"cause," Starwood will pay to you the greater of (i) 12 months of your then
current base salary or (ii) your current base salary through the remainder of
the term of this Agreement (the "Severance Period"), in a lump sum less all
applicable withholdings, and will reimburse you for your COBRA expenses minus
your last level of contribution for the Severance Period commencing on the
termination date (the "Termination Payments"). You will not be entitled to any
Termination Payments if you resign your employment with the Company. As a
condition for, and prior to, your entitlement to and receipt of any Termination
Payments, you must enter into a written waiver and release of any and all claims
against Starwood arising out of or relating to your employment with Starwood, in
such form that Starwood may reasonably require.

For purposes of this paragraph, "cause" shall mean (i) any material breach by
you of any of the duties, responsibilities or obligations of your employment, or
any of the policies or practices of Starwood; (ii) any willful failure or
refusal by you to properly perform (as determined by Starwood in its reasonable
discretion and judgment) the duties, responsibilities or obligations of your
employment, or to properly perform or follow (as determined by Starwood in its
reasonable discretion and judgment) any lawful order or direction by Starwood;
(iii) any acts or omissions by you that constitute (as determined by Starwood in
its reasonable discretion and judgment) fraud, dishonesty, breach of your duty
of loyalty, gross negligence, civil or criminal illegality, or any other
misconduct in your employment or which could tend to bring Starwood into
disrepute, could create material civil or criminal liability for Starwood or
could adversely and materially affect Starwood's business or interests.

OTHER CONDITIONS AND OBLIGATIONS:

As a further condition of this offer of employment as Chief Operating Officer
and your right to receive any of the benefits detailed herein, you agree to
execute and be bound by the Confidentiality, Non-solicitation Agreement provided
to you herewith.

INTEGRATED AGREEMENT:

This offer letter represents the sole and complete understanding between you and
the Company relating to your employment and there are no other written or oral
agreements, understandings or representations relating to this offer of
employment. The terms of your employment, including the at-will nature of the
employment, may be amended only through a written instrument signed by you and
the General Counsel or Chief Executive Officer of Starwood Hotels & Resorts
Worldwide, Inc. This Agreement is not intended to supercede or diminish in any
way your rights under the Severance Agreement entered into with you for the
purpose of providing certain protections in the event of a change in control of
the Company.


                                       4
   5
By signing and returning this letter, you confirm that this letter accurately
sets forth the understanding between you and Starwood and that you accept and
agree to the terms as outlined.

Best regards,



       /s/ David K. Norton
- ------------------------------------
         David K. Norton
         Executive Vice President
         Human Resources

cc:  Barry S. Sternlicht
       Personnel File



ACCEPTED AND AGREED TO:

       /s/ Robert F. Cotter
- --------------------------------------------
         Robert F. Cotter

                                       5

EX-27.1

 

<ARTICLE> 5
<CIK> 0000316206
<NAME> STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS

                             
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-2000
<PERIOD-START>                             JAN-01-2000
<PERIOD-END>                               SEP-30-2000
<EXCHANGE-RATE>                                      1
<CASH>                                             242
<SECURITIES>                                         0
<RECEIVABLES>                                      597
<ALLOWANCES>                                        50
<INVENTORY>                                        227
<CURRENT-ASSETS>                                 1,134
<PP&E>                                           9,010
<DEPRECIATION>                                   1,368
<TOTAL-ASSETS>                                  12,576
<CURRENT-LIABILITIES>                            2,544
<BONDS>                                          5,517
<PREFERRED-MANDATORY>                              120
<PREFERRED>                                          0
<COMMON>                                             4
<OTHER-SE>                                       3,725
<TOTAL-LIABILITY-AND-EQUITY>                    12,576
<SALES>                                              0
<TOTAL-REVENUES>                                 3,273
<CGS>                                                0
<TOTAL-COSTS>                                    2,519
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                 332
<INCOME-PRETAX>                                    415
<INCOME-TAX>                                       145
<INCOME-CONTINUING>                                270
<DISCONTINUED>                                       5
<EXTRAORDINARY>                                    (3)
<CHANGES>                                            0
<NET-INCOME>                                       272
<EPS-BASIC>                                       1.37
<EPS-DILUTED>                                     1.33


 

EX-27.2

 

<ARTICLE> 5
<CIK> 0000048595
<NAME> STARWOOD HOTELS & RESORTS
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS

                             
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-2000
<PERIOD-START>                             JAN-01-2000
<PERIOD-END>                               SEP-30-2000
<EXCHANGE-RATE>                                      1
<CASH>                                              14
<SECURITIES>                                         0
<RECEIVABLES>                                    1,867
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                                    68
<PP&E>                                           4,714
<DEPRECIATION>                                     438
<TOTAL-ASSETS>                                   7,309
<CURRENT-LIABILITIES>                               93
<BONDS>                                            520
<PREFERRED-MANDATORY>                              120
<PREFERRED>                                          0
<COMMON>                                             2
<OTHER-SE>                                       6,567
<TOTAL-LIABILITY-AND-EQUITY>                     7,309
<SALES>                                              0
<TOTAL-REVENUES>                                   521
<CGS>                                                0
<TOTAL-COSTS>                                      143
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                  29
<INCOME-PRETAX>                                    348
<INCOME-TAX>                                         1
<INCOME-CONTINUING>                                347
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                       347
<EPS-BASIC>                                          0
<EPS-DILUTED>                                        0